Global value chain suppliers are our connection to SMEs

 
SME connectors can boost the supply chains of apparel, and other industries (Credit: India Kangaroo, Flickr Creative Commons)

This is the second post in the “Supply Chain Junkie" series, which gives personal insights on supply chains- -the “new normal" of doing business that is currently being prioritized by IFC.

Fashion is about constant change and that holds true for the business strategies of apparel Global Value Chains (GVCs) in response to customer preferences and global developments. The global economic crisis has played a major role in the biggest changes to the operational model of these chains, forcing them to cut costs by further consolidating their operations through long-term strategic decisions on supplier countries and supplier firms.
 

As a result of these changes, most apparel lead firms have significantly reduced the size and scope of their supply chain and limited their operations to a few reliable suppliers strategically located near major global markets who can offer consistent quality, reliable delivery, large scale production, flexibility and competitive pricing. This change has led to the concentration of their activities and the consolidation of the number of suppliers from whom they purchase.  The firms went further by asking those suppliers to provide more comprehensive offerings in addition to clothing lines, such as shoes and accessories, to enable the supply of a whole new “life experience” and fashion package for the customer to experience as sold by the fashion magazines.   

 In my previous blog, I wrote about the importance of the IFC approach to partner with “lead” firms to address value chain impediments in certain industries, such as apparel, in order to generate direct and indirect positive spillovers into the local economy with a particular focus on small and medium enterprises (SMEs).

One effective means to achieve this goal, in light of the current shifting in supply chain practices, would be to target those GVC suppliers who connect directly with local markets and local SMEs on the one side and with lead firms on the other. If supported properly, such suppliers could create significant backward linkages into the local economy and increase the value captured by local SMEs through sourcing, assembling, and shipping products to final destinations. This would require coordinated joint action with a number of lead firms.  The first step would be to identify their main suppliers in a specific geographic and product market.  The next step would be to work with those suppliers in identifying the chain “pain points” in meeting the lead firm demands.  The third step would be to work jointly on an action plan to address these points through improved use of better adapted local SMEs. In this exercise, our unique role and ability to provide value and incentives to lead firms and their suppliers should be emphasized. I believe that an adaptable lead firm willing to embrace change would be eager to champion such collaboration, especially, as it may have a real benefit for its bottom line. However, its suppliers might not be as eager to change again as they have already navigated their way around the chain “pain points” and included associated time and cost in their calculations. Thus, any proposed solutions have to be jointly devised and tested to gauge other chain players’ reactions and adjust the current industry configurations resulting from the presence of more SMEs “in the game.”  
 
Comprehensive and targeted support to the chain suppliers, once agreed upon and sequenced, could revolve around offerings to be packaged and rolled out in partnership with all the chain participants such as:  

• Offering relevant financial solutions to address the suppliers’ credit shortage and reduce their financial dependency on lead buyers. In the new era, financially stable suppliers have an edge over others. IFC -Global Trade Supplier Finance (GTSF) program has been instrumental in helping suppliers access various financial solutions to meet demands in the same way as many banks and lead buyers (such as Walmart) who have responded by offering their own financial support programs . Coordinated work with local banks to extend credit to those sector suppliers would guarantee them a role within the chain thereby benefiting local SMEs and service providers.
• Cementing suppliers’ capabilities to meet new demands for quality, flexibility, visibility, and governance compliance. More and more, suppliers will have to acquire the full package of capabilities to give them a competitive edge whilst at the same time enabling them to share their newly acquired capabilities with other sectors in order to maximize spillovers and sectorial linkages. Due to intense competition in the apparel sector upgrading support strategies for skills, technology transfer and innovation are extremely important for suppliers to maintain and improve their role within the chain.¹

• Promoting and mainstreaming the next generation of value chain requirements must focus on a philosophy of sustainable production practices. Competition will not be limited to traditional factors of cost and quality but will extend to governance, social and environmental credentials (whether imposed by law or best practices). Countries and suppliers who incorporate such sustainable practices will not only have a contemporary appeal in the industry but will also be rewarded by increasingly conscious millennial consumers.

• Explicitly supporting the chain’s low end SMEs who already provide inputs to the identified suppliers while simultaneously supporting promising SMEs who could eventually integrate and add value to the chain. A crucial chain constraint is the limited existence of local firms capable of absorbing potential spillovers so the need to nurture and upgrade relevant skills cannot be overestimated.  This work would be naturally combined with the development of suitable government policies to develop effective regulatory frameworks that promote SME growth.

The targeted support outlined above could be provided through the IFC’s products - with some reconfiguration - through coordinated and sequenced programs in some of the GVC hubs. GVCs are shaping the apparel industry in their own fashion and we too need to quickly adapt our response model, move fast and keep “á la mode” if we want to contribute to the prosperity of SMEs through partnership with suppliers who managed to survive the last season. ¹ According to a research by Duke university, global leads  can influence functional upgrading in countries where large and integrated suppliers are based, and where domestic pressures for economic upgrading is strong, but they do not promote upgrading in countries where factories engage only in assembly activities.