This article first appeared in The State of Fashion 2022, a comprehensive report on the global fashion industry, co-published by BoF and McKinsey & Company. For more information and to download a copy of the report, Click here.
It’s hard to imagine the challenges Joseph Phi faced when he was promoted to CEO of Li & Fung Group in October 2020. Not only was a pandemic raging, causing untold complications in global supply chains, but his company had just dropped from the list. Hong Kong Stock Exchange after 28 years of listing. Now, supply chain stressors, including port closures, a container shortage and rapidly rising freight costs, are central concerns for Phi and the fashion executives who rely on him. to provide international sourcing, production and logistics solutions.
In 2022, responsible supply chain management means expecting even more of these unexpected shocks. Future-proof supply chains require sustainable diversification, technological innovation and a comprehensive reframing of the concept of “value”, he says. Instead of trying to take every ounce of cost out of the chain, value must be captured by decreasing complexity, reducing lead time, and lowering the financial cost of doing business while reducing the cost the fashion industry inflicts. people and the planet.
BoF: In 2021, there have been port closures, shortages of shipping containers, increases in freight costs and more. How long will this last and what challenges do you plan to postpone in 2022?
Joseph Phi: Brand owners, retailers, consumers, I think, even suppliers, are starting to adjust to this so-called new normal. The irony is that this [consumption] the rebound is putting more pressure on an already stretched supply chain. Now containers and capacity are in the wrong place and this imbalance has resulted in a phenomenal increase in freight rates which, together with a shortage of containers and a lack of space for ships, will unfortunately slow down this economic recovery. global. My opinion is that these frustrations will continue at least until the second half of 2022, if Covid is under control, and if the ports and factories are operating with some sort of normalcy. If things are not under control, it could even extend until 2023.
BoF: To what extent do you think some of these issues would have affected the fashion industry, regardless of the pandemic?
JP: There were unforeseen external shocks, just like the [March 2021] Closure of the Suez Canal and shortage of drivers in the United Kingdom following Brexit. Normally, frankly, we can withstand those shocks, but this time around they’ve had a disproportionate impact as the entire supply chain is operating at full capacity. This pandemic has therefore exposed vulnerabilities throughout the supply chain.
BoF: Do you think companies will view this period as a time when they made significant changes in the functioning of the global supply chain?
JP: I really believe it. The pandemic has shaken the heart and the very foundation of building the fashion supply chain. It was built on efficiency in squeezing every ounce to make it profitable. A new balance is needed, and that will include diversifying the supply base, instead of putting all your eggs in one basket. In the past, brand owners rarely needed to think about sourcing routes. Now you need to think about what trade lanes you should be in. Of course, people also need to think about the whole supply chain digitization and you need to make it more transparent so that it can make decision-making easier.
BoF: What’s the most important thing for brands to remember?
JP: I think brand owners and retailers need to rethink the relationship between them and suppliers. You have to treat them like partners; you have to treat them as an essential part of the whole ecosystem. In a supply ecosystem, you are only as strong as the weaker partners.
BoF: Your parent company, the Fung Group, was one of 30 global companies in the fashion and textile industry to first sign the G7 Fashion Pact in 2019, pledging to achieve key environmental objectives. What kind of tangible progress have you made so far?
JP: We need to tackle the environmental impact of the fashion supply chain. Li & Fung’s tech spin-off LFX recently launched 3D as a service through a company we call UNIFi3D. In the past, many products were shipped by air for approval, round trip [until they are approved]. Basically this can now be done in a 3D way, so you are removing the waste in that process. Shortening the entire product development cycle also means that companies can give themselves more time to read the market and, with better intelligence, develop products that have the highest likelihood of success, thereby reducing the number. by SKU. So this reduces inventory and then reduces inventory wastage. This will be a game-changer, in my opinion, because the inventory [waste] represents the highest cost to brand owners and retailers as well as to [one of the] the greatest negative impacts on the environment.
BoF: What do you think the fashion industry has learned from the blockade of the Suez Canal?
JP: In the past, brand owners defined value in a way that was always demand driven, down the chain. I feel like the Suez Canal incident is a clear signal to everyone that we need to start investing in solutions that manage upstream sourcing and forge closer partnerships with your suppliers and vendors, your freight forwarders and your shipping companies.
BoF: What about the potential for conflict in the South China Sea, is that a geopolitical factor that the fashion industry needs to consider?
JP: I have lived in this region most of my life [and] my feeling is that the probability of a conflict is low [and the] the cost of conflict is very high. That said, when we talk about probability, we play with chance. So we really need to think about whether this is happening, how do you rebalance your supply chain then? How would you ensure that the flow of goods is not disrupted? Certainly, as we reflect on our three-year plan, that will be on my agenda, and I think it should be on the agenda of every CEO of a company that has an exhibition in this region.
BoF: Are there viable alternatives to these maritime routes which are maritime bottlenecks?
JP: I might not have said it 20 months ago, but considering what’s going on, ground freight is definitely a viable alternative. I’m assuming future road and rail costs may be similar to current ocean tariffs, but take half the time to ship the sea route, which means it’s actually faster to ship overland. Earlier this year, our logistics company, LF Logistics, signed an agreement with a local company in Chongqing [to leverage the] Growing rail network connecting China and Europe along the New Silk Road, which essentially links Chongqing to the port city of Duisburg in Germany. This agreement will certainly accelerate our expansion in Eurasia. For me, and for us as a company, this is the way to go.
BoF: Despite recent waves of outsourcing from China and international trade disputes involving China, many fashion companies still depend on Chinese suppliers. In this new era of more diverse sourcing, which trade agreements are most important to the future of the industry?
JP: A very important agreement is the Comprehensive Regional Economic Partnership [RCEP]. It is the largest multilateral trade agreement in the world and it affects 30% of the world’s population. It has the potential to be at the heart of the reconstruction of the global supply chain. RCEP is perhaps the only trading bloc that has both productive capacity and consumer demand, so I have a feeling it will significantly facilitate regional trade and investment in Asia.
BoF: What does the conversation about supply chain risk coverage look like to 2022?
JP: Given all that we have learned from the pandemic, it is very important to diversify our supply base, but it should not be blind diversification. In my opinion, China’s export share will gradually decline on purpose. The finishing part of the production can then move to ASEAN [Association of Southeast Asian Nations markets]. Due to RCEP, movement of raw materials, fabric, components, they can enter ASEAN countries largely duty free, reducing movement and transportation costs.
BoF: Do you think there is an overall drop in appetite for riskier sourcing sites, like Ethiopia and Myanmar, even though they are cheaper?
JP: As a company, we started to take an interest in Africa. In particular, we are talking about Egypt, Ethiopia, Kenya, Madagascar, etc., because they are tax-free countries to America. Realistically, I think maybe we have to wait until this whole pandemic stabilizes so that we have a really in-depth assessment of whether or not we want to expand, because there is a risk there.
BoF: How can brands become more resilient in this new era of sourcing?
JP: You have to be mobile. You cannot be tied to a particular place and geography. Second, I think it’s high time we took a serious look at our business continuity and contingency plans. The third thing is that shipping costs are outrageous – my gosh – so brands have to find ways to offset this increased cost by increasing productivity. So I think the exercise of value engineering is very important. By reducing the number of actors between me, as general manager, at the lowest rank and delaying, you reduce your costs. At the same time, you improve your customer service because things get done faster. You are removing bureaucracy. I think a lot of companies should pay attention to it.
This interview has been edited and condensed.