Four factors that might end outsourcing

Many of my friends were shocked when they heard that our photo printing business made everything in New Zealand instead of China. People couldn't believe that, with all of our automation, we can provide the same service in New Zealand 25% cheaper than getting them done in Shanghai --- this doesn't even include the international shipping cost yet.

The common belief is that outsourcing is an inevitable trend. Small countries like New Zealand can't do anything about it, except just following along and hoping for the best.

I disagree. I have the evidence to believe that there are certain types of businesses that'd be better off manufacturing in New Zealand, to stay close to their market.

Bloomberg recently published a long opinion piece on this topic called Your Clothes Could Be Made in the USA Again. The article has done an excellent job describing the key factors that are causing apparel production jobs to move back to local markets or neighbouring countries (Like Mexico for the US).

Here are the four key reasons for brands to make the move.

  1. Stress their heritage and increase control over supply chains.

    Burberry and other British fashion labels have moved some of their production as “Made in England” became attractive to luxury buyers after an import boom in the 1990s and early 2000s. Hugo Bosss, the German fashion label, has started selling a “Made in Germany” collection, produced completely (except for some fabrics) in Metzingen, the company’s corporate seat.

  2. Speed beats marginal cost advantage and basic compliance is upgraded to an integrated sustainability strategy.

    Failure to respond to demand for an item consumers have seen on Instagram may mean huge volumes of unsold clothing. Unable to tell consumers what they should wear, producers must treat short lead times as the No. 1 priority. Fast fashion is giving way to ultra-fast fashion, as practiced by online retailers such as Boohoo, Asos and Lesara. This doesn’t work well with shipping from Asia: Delivery to big Western markets takes about 30 days by sea.

  3. Shortened lead time increases gross profit margin.

    But as lead times gain importance, shortening them compensates for some of the labor cost disadvantage by increasing the share of clothes sold at the full price. Raising it by 6.1 percent for a garment that takes 60 minutes to produce would justify the transfer of production from China to the U.S., McKinsey calculated.

  4. Automation and robotics drive down production cost.

    Automation can drive down the cost in Western countries. Now, sewing a pair of jeans takes an average of 19 minutes, more than half of the total production time. McKinsey and RWTH Aachen figure robotics can cut that time by 40 percent to 90 percent. At another important step, distressing the jeans, technology exists to cut the time necessary from about 20 minutes to 90 seconds: Levi’s does it with lasers.