6. Case Examples
Apparel Co.: Apparel in Africa
Madagascar’s low labour costs and duty-free status make the African nation competitive in the apparel industry. Yet as other countries eliminate tariffs, persistent supply chain barriers threaten to erode the economy’s competitive edge. Inadequate infrastructure and border administration hurdles cause delays that render the supply chain unreliable, costing apparel manufacturers business in a global industry that values speed.
Labour-intensive, low-skill apparel manufacturing is a ferociously competitive industry in which Madagascar struggles to maintain an advantage due to its low labour costs. The African island nation benefits from other conditions favourable to its competitiveness (see figure). For one thing, many nearby African countries produce high-quality cotton with desirable fibre characteristics, offering the potential to integrate supply chains regionally. Also, apparel production is concentrated in a specially designated free zone, which facilitates imports and exports through electronic customs declarations and procedures that fast-track clearance. Preferential trade agreements give Madagascar apparel companies access to major world markets.
Nevertheless, apparel is a time-sensitive business, and a manufacturer’s supply chain must be fast and reliable to remain competitive. This is where Madagascar struggles. Supply chain barriers undermine the competitiveness of Madagascar companies like Apparel Co., particularly relative to Asia-based rivals. Most apparel firms source production in Asia, despite the higher labour costs and the tariffs Asian apparel manufacturers still face. Indeed, Apparel Co. itself sources 85% of its shipments from Asia, even though its near neighbour Mauritius is an abundant producer of good-quality raw materials. As more countries eliminate trade duties with the US and Europe, Apparel Co.’s preferential trade advantages will erode.
Apparel Co. encounters two barriers in particular that impede the smooth functioning of its supply chain – border administration delays and inadequate infrastructure. Even with electronic document processing, Madagascar’s border administration procedures present operational problems that result in significant delays. Because there is no comprehensive strategy to protect against risk, each outbound container needs to be scanned. Long queues and wait times and unpredictable random checks can hold up a shipment for two additional days, on average. And because customs offices are open only during short operating hours, some 70% of shipments arrive when customs is closed, further driving up costs and delays.
Magnifying border-crossing problems, poor local infrastructure is an even bigger source of supply chain unreliability. Shipping services in Madagascar’s small market are limited by low trade volumes with just one outbound ship sailing each week. Moving goods the 530 kilometres from Apparel Co.’s mill to port over Madagascar’s deficient roads takes 14 hours, resulting in high fuel costs and accident risks. Given these rough conditions, even just a one-day border administration delay can add a full week to a shipment. Together, operating costs resulting from administrative and infrastructure barriers cut into Apparel Co.’s total revenues by 3.2%.
Apparel Co. tries to compensate by holding buffer inventory that increases operating costs and impinges on working capital, further undermining the company’s competitiveness. In order to be able to respond quickly to customer demands when goods are delayed in transit, Apparel Co. keeps some six weeks extra stock on hand, equivalent to 0.7% of company revenues (see figure).
Even backup inventory, however, cannot overcome supply chain barriers that limit Apparel Co.’s access to some of the industry’s most attractive markets. With its 14% annual growth rate, for example, the high-turnover fast-fashion segment now makes up almost 20% of the apparel market – a segment of which Madagascar cannot capture a significant share. With inventory turns every two to eight weeks, fast fashion companies, like Zara and H&M, depend critically on reliable deliveries. Apparel Co. pays a high cost for its late shipment rate of about 10%, adding up to anywhere between 0.5% to 9% (according to benchmarks) in air freight, penalties, lost sales due to cancellations or returns. But the largest opportunity cost comes from limiting market opportunities. To put it in perspective, each additional 1% gain of the fast-fashion segment would yield the Madagascar economy an additional US$ 54 million in revenues.
Figure 25: Madagascar has labour-cost and free-trade advantages but supply chain barriers erode competitiveness
Source: Euromonitor 2011 data for labour costs; Bain analysis; company interview.
Figure 26: Supply chain barriers raise Apparel Co.’s operating costs by approximately 4% of total revenue
Note: Freight costs are only inbound since garments are cold free on board. Inventory costs consider financing costs of inventory, warehouse rent, insurance and obsolescence costs.
Source: Company interview; company data.