- Mitigating footwear sourcing risks in Vietnam
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05/10/2015
As the second largest footwear supplier to the US, Vietnam is already an important part of the production portfolio for many US footwear companies. But with growth being fuelled by the possible Trans-Pacific Partnership (TPP), companies eyeing the country as a sourcing destination should also be navigating potential risks.
Of a total of 2.3bn pairs of shoes imported into the US in 2014, the 273.6m pairs shipped by Vietnam accounted for an 11.7% share of the market – a rise of 19% over the year before.
This is a “pretty good chunk,” according to Matt Priest, president of the Footwear Distributors and Retailers of America (FDRA) trade association, who notes that imports from Vietnam in the seven months to July are currently running 21% ahead of the same period last year.
Yes, there might be a precipitous gap compared with China, which sits in the top footwear import slot with 79% of US imports by volume – coming in at a staggering 1.84bn pairs – but faced with rising labour costs in China, retailers and brands are continuing to diversify their supply-chains.
And the “narrative is not changing; the data points to continued growth and success in Vietnam,” Priest told a recent webinar organised by the FDRA on ‘Mitigating global supply chain risks: a Vietnam case in focus.’
“As Vietnam becomes more important to our sourcing dynamic, in five years from now the rest of the world will lose US footwear import market share to Vietnam while China falls.” Indeed, Vietnam’s share of the US footwear market by volume is forecast to rise from 12% in 2014 to 22% in 2019, while China slips from 79% to 67%.
Role played by TPP
A key question, of course, is how does the TPP play into the potential growth and attractiveness of Vietnam as an alternative for the China-centric footwear business?
The country is one of 12 – including the US and Canada – that have been negotiating the trade pact for the past five years. While the reality is that a deal is probably still some way off, “we hope that were nearing the end,” Priest says.
He concedes, though, that even if negotiations can be finalised in the next few weeks, the agreement would have to be submitted to Congress for later consideration, “so were not quite sure exactly when that will happen and what the presidential/political counter will do to this process.” If not signed in the next two months, it may even have to wait until the American Presidential campaign is concluded in November 2016.
On top of this, even if TPP is negotiated and signed it will take some time to be implemented as each of the negotiating countries has its own internal processes to go through, “so that will have an impact on the actual start date.”
“We havent negotiated a trade agreement with a country of such significance in the realm of footwear production since NAFTA,” explains Priest, “and so theres been a lot of interest when it comes to how footwear can be liberalised and we can find duty savings from TPP countries once this agreement is complete.”
In terms of potential duty savings, FDRA calculates that in 2014, US footwear imports incurred total duties of $2.7bn. Of this, $448.75m was paid in duties on footwear from TPP countries – with $445.85m coming from Vietnam alone.
Priest also notes the likely rules of origin (ROO) governing the materials and components sourced in Vietnam for shoes produced there and exported to the US under the trade pact, “havent been put down on paper yet.”
However, “we expect it to have a regional value content rule, probably 55%, and the upper will have to originate from Vietnam or one of the countries within the TPP in order to get duty-free treatment.
“Its very similar to the NAFTA ROO, but different from NAFTA in that if the inputs you bring in from outside of the agreement – for example, if you bring in rolls of leather from China or India into Vietnam – then that falls outside of the footwear chapter from a classification perspective, [which] means that footwear would not be required to have a regional value content rule because the value of that input from outside the chapter 64 would not be taken into account.
“Until its put out there publicly we cant confirm 100%. But yes, there will be a ROO and you will be required to meet it, and there will be obligations on your part and your factories part to have records that indicate that you meet the ROO and those records will have to be housed for five years.”
But its not just added paperwork. As Vietnam becomes more important to the sourcing dynamic, there are also new supply chain risks to navigate. These range from its customs, laws and regulations to adapting to western manufacturing methods and standards – all of which pose the potential for supply chain disruption.
Other variables to consider include the possibility of a run on capacity – after all, Vietnam doesnt have the workforce that China has – and the likely impact on prices.
Supply chain migration: risks and opportunities
“When you look at the movement of production to a developing industry sector in a developing economy, there are five dimensions of risk,” explains Randal Rankin, vice president for CSR Services at Bureau Veritas Consumer Products Services.
These are:
Production capability: are there facilities with the ability to make your products?
Resource availability: are materials available locally or do they have to be imported? How does that affect lead times and the ability to make your product? Is labour readily available? Can you get the equipment that you need in-country, and keep it up and running?;
Production expertise;
Regulatory compliance;
Infrastructure support: is there the ability to get product delivered to market, to the places where it is sold?
“In terms of best practice, the first track is knowing and understanding the market,” he says. “Beyond the macro, country level, the next bit is knowing and understanding your supply chain partners; identifying and mapping where production is happening.
“What are the dynamics of those facilities? Which factory is producing the product? Can they actually make the product youre looking for them to make? Do they have the capacity to produce the volumes youre looking for? And if they cant do it, youre likely to be stepping into an environment where there is likely to be subcontracting.”
Sharing Bureau Veritas factory assessments of 275 apparel and footwear facilities in Vietnam over the last 24 months, Rankin suggests “common issues to be sensitive to” include the fact that 38% of the facilities had issues with sufficient lighting; 37% had issues with machine calibration; and 32% did not have records of that calibration.
“These are fundamental things that help determine that youre going to get the product that you want. 15% of the facilities we inspected did not conduct internal inspection in a way that was consistent with the customers requirements. Your expectation here ought to be that they own quality and theyre inspecting that quality themselves to make sure that what theyre manufacturing for you meets your expectations.”
He also notes, “there was a high failure to pay mandated benefits. Vietnam, like many other countries in Asia, has a very rich social system in terms of benefits, and many companies do not meet the requirements for paying these benefits. Its a big add-on to your base labour costs and something to be aware of.”
Leveraging technology
Travis Darrow, senior manager at MetricStream, which provides Governance, Risk and Compliance (GRC) software solutions, suggests technology can add workflow and security to supply chain management.
“The key issues that we see in managing suppliers are the lack of holistic supplier information and inefficient on-boarding of new suppliers,” as well as siloed departmental information, “another big risk area” where information about a specific supplier isn’t shared within a firm.
Also, failure to “communicate changes in processes, materials, specifications in terms of production of your product, is a pretty real risk around non-conformance and product rejection.”
Suppliers that don’t conform with contract and service-level agreements (SLAs) “can create loss of profit, higher costs, potential recalls and lawsuits. You also have supplier non-compliance delays, which lead to loss of revenue and loss of market share. And lack of a consolidated view of supplier quality risks can lead to penalties, fines from regulatory bodies, and supply chain disruption.”
Darrow also identifies five key elements for an effective supply chain management programme: supplier information management, supplier risk management, supplier and factory audits, compliance monitoring, and supplier performance management.
Much of this can be managed centrally by technology, which can also help automate audits and surveys (compliance, safety, quality and security audits).
“The return on investment and the upside of using technology is you can make better decisions with a centralised view of your supplier risks, you can integrate risk and compliance into your decision-making policies, you can reduce your risk overall when you can map these. Protecting your reputation and your brand is what it all comes down to.”
Source: http://www.just-style.com
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