The China (Sourcing) Syndrome

Significant changes are afoot in China’s economy. The cost of goods imported from China is rising quickly, affecting many U.S. retailers who source products either directly or indirectly from China. These changes are quickly driving up retail prices in the U.S.

It’s helpful to understand the factors behind these rapid cost increases and examine the inventory planning solutions available to help offset their effects.

At the 2011 Direct Tech User Conference, Lisa Zoet, president of CFL Wisconsin, an apparel sourcing company working with the Chinese manufacturing industry, was one of the keynote speakers. Zoet's presentation offered an inside look at the forces shaping the Chinese economy:

• Labor shortages: With a growing economy trending away from manufacturing, under-staffing is common in factories.
• Higher wages: The scarcity of workers, a new national minimum wage and more stringent labor laws are pushing employee costs upward.
• Surging energy costs: The same fuel increases plaguing the U.S. are affecting factory operating and freight transport costs in China.
• Appreciation of Chinese currency: Gains against the U.S. dollar continue to reduce domestic buying power.
• Banking restrictions: With the economy shifting away from manufacturing, banks are dictating tighter credit terms to factories.
• Tighter regulation: As many as 2,000 Chinese factories will close in 2011 due to social and/or environmental noncompliance.
• Higher tax rates: Tax rates for apparel manufacturers have increased from 15 percent to 25 percent.
• Rising cotton prices: World cotton consumption rose by 16 percent in 2010, while production dropped by 17 percent.

Clearly, as Zoet pointed out, there are many factors feeding the quick rise in Chinese pricing. So what can be done to mitigate the effects of these surging costs?

One key strategy U.S. retailers can use to offset the higher costs is to make sound improvements in their inventory demand forecasting. Accurate forecasting through the use of dedicated software and best practices can help reduce costs while enhancing sales and profits. Key benefits of forecast accuracy include:

• the ability to buy the right inventory and have it on hand when the customer wants it, increasing top-line sales;
• reduced overstocks and the markdowns that go with them (for a typical $50M business, a 2 percent reduction in overstocks can increase annual profit by $200,000);
• improved inventory turnover and cash flow as buyers can schedule as needed rather than delivering early “just in case,” lowering carrying costs;
• enhanced staff efficiency, leading to significant labor savings; and
• reduced back orders (the cost to process and ship a back order can run as high as $10 to $20 per transaction; fewer back orders means lower operating expenses).

There's no single solution that will allow domestic retailers to fully recover the surging supply costs resulting from the rapidly evolving Chinese economy. It makes good business sense, however, to include accurate inventory forecasting as a key component of your solution strategy.