Strategies for Success in aStrategies for Success in aGlobal Sourcing EnvironmentGlobal Sourcing Environment

Prepared For:

National Textile Association151st Annual MeetingAmelia Island, Florida

November 7, 2005

JASSIN ~ O’ROURKE GROUP48 W. 38th Street, New York, NY 10018 212-382-0045 (o) 917-567-3540 (c) morourke@jassinorourke.com

Consumer / Retailers / Traditional Brand OwnersConsumer / Retailers / Traditional Brand Owners Market Dynamics ~ Supply Chain HavocMarket Dynamics ~ Supply Chain Havoc

Consumer Confidence Level Discretionary Spending / Non-Apparel

Growth Sluggish Mall Traffic to E-tail Growth Profound Consumer Demographic Changes Explosion of Focused Lifestyle Brands Private Label eating Brand Share Fast Fashion/Chase/Replenishment Models Consumer Value Merchandising/Marketing Unabated Price Pressure Sourcing Uncertainties . . .

Retailers and Brand-Owners’ FocusRetailers and Brand-Owners’ Focus

Bottom Line Growth: Maximize Margin & Profit– Reduce Sourcing Costs

• Quota-free 2005– Last shift to lower cost needle countries– Sourcing administration/overhead consolidation

• Analysis shift to raw material cost impacts, rather than inputs– Fabric price per yard, transitioning to fabric cost per garment– Typical Garment Fabric Yield Specifications, impacted by

• Sourced-fabric seconds history• Apparel manufacturers’ cutting technology use• Apparel manufacturers’ history of finished garment seconds

• FOB versus “To Store or Distribution Center” Garment Cost Competitiveness– After duty, shipping, brokers fees– Seconds extraction/refurbishment– Sourcing capital timeline– Full package terms; elimination of letter of credit

Variables – Cutting AutomationVariables – Cutting Automation Yield Impacts Net Fabric Cost/Garment Yield Impacts Net Fabric Cost/Garment

1.3 1.4 1.5 1.6 1.7 1.8

Mexico

Colombia

Brazil

Turkey

Italy

China

Bangladesh

Yards/Garment

Automated Cutting /Productivity/Planned YieldAutomated Cutting /Productivity/Planned Yield Impact on Planned Fabric Use/Yards Per GarmentImpact on Planned Fabric Use/Yards Per Garment

Variable Cost ImpactsVariable Cost ImpactsTypical % Seconds Experienced by Cotton Apparel ImportersTypical % Seconds Experienced by Cotton Apparel Importers

0 1 2 3 4 5 6

CBI/Andean

Turkey

AGOA

China/HK

Vietnam

Bangladesh

% Seconds

Retailers and Brand-Owners’ FocusRetailers and Brand-Owners’ Focus

Bottom Line Growth: Maximize Margin & Profit– Identify/Fast Track High Margin Opportunities

• Rapid Response to Key Fashion Trend Items– Style– Fabrication

• Consumer-Desirable/Marketable, Innovative Products– Performance– Comfort– Carefree

• Fashion Replenishment Programs – Signature Items– Color

Regional Apparel Sourcing Prospects . . . . Regional Apparel Sourcing Prospects . . . .

Safeguards sustain regional markets short term Long term stability and growth dependent on:

– Lead time improvement/advances• Single greatest opportunity• Pre-production elements most critical

– Private label market share advances• Leaner merchandising calendar for PL• Forcing traditional brands into more seasons/product

lines• Specialty stores adopting fast fashion business models

and core fashion replenishment programs– Innovation

• Where performance is the key value proposition– Communicating Cost Competitiveness

• Return on Sourcing Capital Employed

China’s Mega-Investments Are Paying OffChina’s Mega-Investments Are Paying Off

Expansion-driven, foreign investment for apparel export entities– 70% of China’s exported apparel production is under non-mainland

control• foreign-owned• joint ventures• equity partnerships

– Mainly HK, Taiwan, S. Korea, Japan, Singapore-headquartered apparel vendors

– Quality increasing with equipment / technology choices, improved methods and through better use of equipment and training

Significant focus on IT systems and logistics– Better customer communication– Noticeable lead time reduction

• Pre-production through delivery Cost reduction through process streamlining

Brand-owners transferring more “authority”– To their own Asian-based sourcing management– To Asian vendors

Some China Fast Facts . . . Some China Fast Facts . . .

Guangdong Province, for example:• Closest to Hong Kong, led by the cities of Shenzhen,

Dongguan and Guangzhou.• 40% of China’s knit apparel exports or more than 5

billion pieces• Dominated by circular knit apparel output, from

sportswear t-shirts to better quality, fine gauge knit cotton shirts (though this fabric is largely imported).

• Third largest province for knit machinery imports; many vertical knit/sew operations, small to large.

• Third largest cotton fabric-producing province, including some 200 million meters denim.

• Largest importer of cotton apparel fabrics, representing some 1.7 billion meters.

– 60% of export apparel production from this province uses imported fabrics

• Mainly due to dyeing quality• Adds to lead time.

China’s Labor Issues impact Brand Owner Margins China’s Labor Issues impact Brand Owner Margins

China is not the lowest labor cost source in Asia.– Rates can be as low as $.55 per hour, to as high as $2.10 in

some Shenzhen factories.– Labor availability is an increasing problem in the key coastal

areas.• Competition from higher wage industry sectors has

escalated, with the more skilled workers exiting the industry.

• Proportionately more migrant workers• Extremely high turnover; higher training costs.

– Deliveries running late– Excessive short-shipments due to seconds and labor

turnover

Average Apparel Labor Costs - AsiaAverage Apparel Labor Costs - Asia

0.23

0.29

0.25

0.28

0.30

0.40

0.41

0.55 - 1.70

1.10

1.20

4.20

4.53

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

BANGLADESH

CAMBODGIA

INDONESIA

VIETNAM

PAKISTAN

CHINA-INLAND

INDIA

CHINA -COASTAL

THAILAND

MALAYSIA

KOREA S.

TAIWAN

Asia - Apparel Labor Costs US $/Hour

Pre-production Lead Time Advances - AsiaPre-production Lead Time Advances - Asia

Initial fabric sampling– 2 to 5 days

Fabric lab dip samples– 4 to 7 days

Knit down samples– 5 to 8 days

Yarn dyes– 10 days

Pre-production Lead Time AdvancesPre-production Lead Time Advances

Pre-production garment sample cost quote– Same day to 24 hours

Concept garment samples – Completed in 5 days or less

Fit sample garments and corrections– 4 to 8 days

Salesman samples– 2 to 3 weeks

Fabric and garment testing– 1 week or less

Conclusions Conclusions

West can compete with East– Knit cotton basics: underwear, tees, polos– Simple make, knit sportswear tops– Basic jeans (women’s stretch more vulnerable)– Performance bottoms (replenishment/no-iron/fast

fashion color)– Performance activewear– Swimwear (women’s upper moderate &

competitive)– Daywear fast fashion (color) & Shapewear– Corporate Workwear

Strategies for Success Strategies for Success

Identify Retailers/Brand-Owners Pre-Disposed to Regional Sourcing– Research/identify their consumer value proposition– Determine how your product aligns with it

Develop marketing spin on the true cost of sourcing; cost reduction/margin enhancement– Fabric yields, seconds, short shipments, etc– Landed price versus f.o.b.

Target Signature Tee Programs/Color Quick Ship Target Specialty Store Private Labels and E-tail QR Items Fabric sourcing knowledge among regional apparel manufacturers is

critical– Create sample libraries for key manufacturers– Quote pricing within 24 hours– Deliver lab dips in 4 days– Partner with apparel manufacturers who quote garment cost 24

hours Investigate Partner/Fireman/QR sourcing with Asians

And Selling To China – The Emerging Market And Selling To China – The Emerging Market

Top line revenue growth strategies drive brands and retailers into the Chinese market; local / unlimited sourcing will facilitate market access

2% of the population can afford any Western product– Apparel purchase focus almost exclusively on Western designers

and brands, mainly the EU luxury price points. Another 13%, the emerging middle class, can afford product ranging from

a Wal-Mart quality to department store brands.– This consumer covets Western brands today– They are status-conscious, and will mix one or two visible Western

brands, with top Hong Kong brands, among their growing wardrobe of top China brands

Major US brands targeting market development today– Requires whole new approach, merchandising, product adaptation,

body measurements, sizing to color– Will add another layer of complexity to managing process

How are you positioning to take advantage of China as a market???

Landed US Cost Analysis 2005 - US $Landed US Cost Analysis 2005 - US $

Jr. 96% Cotton / 4% Spandex Knit SKIRT & T-TOP, Print, Combed, Ring – US $ / Landed

Garment made in: Mexico Peru China

Fabric cost per garment 10.70 10.30 9.35

Trim cost per garment (incl. Pocketing/Thread) 1.80 1.80 1.60

Cut / Make / Finish Cost per garment 3.66 3.19 2.90

Average profit per garment 1.62 1.53 1.38

Average shipping cost per garment 0.09 0.11 0.12

Duty Cost into US where applicable-2005 0.00 0.00 1.44

Total Landed US Cost- estimated-2005 17.86 16.93 16.78

Importers/Brand Owner Price to Retailer 21.97 20.82 20.64

Retail List Price Before Discounting or Markdowns 59.00 59.00 59.00

Required CHINA Landed Cost to Represent Competitive Threat - $ ( 16.08 )

China – Raw Material Cost ImpactChina – Raw Material Cost Impact Women’s Jean v. Textured Poly Pant Women’s Jean v. Textured Poly Pant

4.52

2.40

$1.14

0.8

0.39

2.56

2.15

$0.29

0.31

1.54

1.65

Duty

Shipping

Profit

Cut/Make

Finish

Trim

Fabric

CHINA 2005 CHINA 2005

7.43

63%Raw

Materials

Textured Poly PantDenim Jean

10.63

70%

Raw Material

&

Finishing

US Apparel Source of Supply - ProjectedUS Apparel Source of Supply - Projected

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US Apparel Market Supply Billion Square Meter Equivalents

Domestic Americas ROW

Minor Regional

Surge

Quota-Free: Most Supplier MarketsChina Quotas Likely 2005 - 2008

US Production

Regional Supply– Canada, Mexico, CBI and Andean

CHINA

REST OF

WORLD