The McKinsey&Company report ‘Sourcing in a volatile world: The East Africa opportunity’ describes an emerging shift in apparel sourcing from Asia towards East Africa. In this blog we review the report and discuss what has brought about this shift and the implications for Chief Procurement Officers (CPOs). – Clyde Buntrock, VP Allport Cargo Services.
Increasing wages across Asia, fluctuating exchange rates, global retail trends, political turmoil, labour disputes and changing consumer behaviours all intensify the sourcing challenge. The rise of omnichannel further increases the need for innovation and flexibility. Two-thirds of CPOs questioned expect costs to rise and, ultimately, this means rethinking sourcing and supply chains. This opens up opportunities for developing countries to become new sourcing locations.
China has long been a “powerhouse of apparel”, which is reflected in the level of garment exports. But in the last few years companies have sought alternatives to China in order to de-risk sourcing. India has benefited, but the most notable countries have been in South East Asia, with Vietnam figuring prominently. The nature of the industry means that CPOs are always on the look-out for next sourcing opportunity. Although there’s no ‘next China’, some global brands are turning to, or at least considering, East Africa.
Of all sub-Saharan nations, East Africa has the preferred mix of dynamism and sophistication, especially Kenya and Ethiopia. These countries show signs of growth as companies implement a strategy of balancing garment sourcing across multiple countries. Favourable exchange rates, labour costs and the cost of raw materials are the top three top-of-mind issues for European players, which makes East Africa all the more attractive. After the disaster at the Rana Plaza complex in Bangladesh, Ethiopia is now on the list of top up-and-coming buying locations for the first time.
The report found that proximity is becoming more important for European CPOs. Allport Cargo Services recognises the strategy of ‘dual sourcing’ to de-risk amongst retailers. It’s becoming more commonplace for first buys or range launches to come from further afield, with second buys or replenishment sourced closer to home. Although many still haven’t adopted this strategy, opting instead to use one supplier for one product. Strong product lifecycle management and critical path is required to manage the additional complexity. McKinsey suggests four strategies to adopt when analysing sourcing strategies. Gaining a balance between all four levers is always going to be key in forming an effective sourcing strategy:
Recent development partnerships with Turkey and Germany have boosted growth and generated a buzz about Ethiopia, with European players starting to source and US players exploring the opportunities. Buyers chose Ethiopia for basic, large-volume items, such as t-shirts.
Ethiopia is landlocked and relies the port at Djibouti for all sea-going exports. It takes cargo two to three days to get from factory to port and then seven days wait to clear customs, which is a pain point for buyers. A number of other countries have similar issues, where the manufacturing base is a long distance from the export sea port. Often this gives rise to increased air freight as it’s easier and more local. However, it is possible if well managed; a case in point is Delhi, which is 1,400 km from the factories to Nhava Sheva Port. But Ethiopia also needs to overcome the skills gap, improve efficiency and infrastructure.
When we think of Ethiopia we think of the appalling images from the 1984 drought and famine. Even today, according to the UN, Ethiopia is experiencing its worst drought in 30 years largely due to El Nino and two failed rains. It is still the third poorest country in the world. This reality is ingrained in all our consciousness. A strong school of thought is that enabling trade with East Africa could enhance its economy and then raise standards generally. The question is how to do this ethically?
The global clothing companies who have turned to Ethiopia in the past two years are encouraging ethical development, since they recognise its potential. There are organisations already operating in Ethiopia who are approaching development from an ethical stand point, using learnings from the past. Ethical Apparel Africa is creating a network of ethical and competitive factories in Ethiopia. Karen Long, CEO and Founder, said in a blog: “For business it has some way to go, but get in early and you will be rewarded with loyalty and the opportunity to ensure we build an industry not just governed by foreign investment, but built with ethics in mind to benefit workers, suppliers and retailers – so it doesn’t become another Bangladesh.”
A good supply chain is cost efficient and responsive, but how can Ethiopia hope to achieve this? TradeMark East Africa is funded by development agencies with aim of growing prosperity in East Africa through trade. The organisation recognises that logistics is critical for growth, however transport and freight costs are the highest in the world. Freight logistics expenditure more than 50% higher per km than in Europe or US, largely due to the lack of infrastructure, technology and expertise.
There is definitely potential in East Africa. However, whether the potential is great – as indicated in the report – and how far away it is from becoming great would be in doubt, particularly as countries like Ethiopia face famine and natural disaster.