March 2008

A Delicate Balance

Distributors have a sometimes-sticky decision to make: Does it make sense to buy products from overseas or send decorating abroad? Here’s how some distributors are handling it.

By Betsy Cummings

Fulfilling orders overseas can be cumbersome. Take Wayne Martin’s latest ordeal. To complete a recent apparel request – one with strict fabric and design demands – Martin had to see the order through four different Asian factories.

“The customer specified the fabric had to be Adidas Clima Dry fabric, moisture wicking, easy to travel in and wrinkle free,” says Martin, vice president of sales operations, vendor relations, for American Solutions for Business (asi/120075), a distributor in Glenwood, MN. That meant pinpointing the right yarn. He found it in Taiwan. That yarn then moved to Vietnam to be woven properly and later dyed. Its journey far from over, the fabric traveled to a third factory to be cut. Then, it continued on to a final facility to be decorated.

All of this was fine with Martin. But it illustrates the intricacies of apparel orders overseas and the degrees to which American promotional products firms will go to meet end-user needs at an attractive price point. Each stop, of course, adds potential complications in the way of factory functionality, production scheduling and product quality, among other issues.

In the balance
With such a large majority of apparel manufacturing taking place offshore, the industry’s companies are continuously balancing the benefits of overseas production (namely cheap production costs) with concerns about foreign production (quality control, aboveboard labor practices, product safety). Then there are shipping concerns: “It’s for volume operators that can afford all the extra costs of customs and shipping,” says Howard Kaplan, a retired industry executive. “You never can be sure of your costs over an ocean.”

That may be, but the logistics of production abroad far outweigh the cost issues, suppliers and distributors say. Martin’s quest for the perfect fabric and fit are evidence of that. And he’s not alone. Martin takes comfort when he looks down production lines in seeing retail clothing lines from Target and Ralph Lauren being sewn in the same factory where his are being assembled. He knows large orders – like one recently for more than $500,000 – require in-person visits to the factories to make sure production quality is the highest it can be. Not everyone has the luxury to make in-house visits, of course, and knowing who to trust with precious orders can be tricky, especially when every U.S.-based supplier says his importing connections and record are impeccable.

To be sure, factories in countries such as China and India are digging deep to provide the lowest per-piece prices they can to attract foreign (certainly American) business. A vast labor pool, cheaper equipment and low wages make production costs plummet. Take decorating, for example. Plenty of suppliers decorate products largely overseas simply because margins are higher when they do.

“Products are generally cheaper to decorate because of the extensive labor forces, combined with cheaper machinery and also because of the lower rates of labor,” says Neville Gabrielle Appanna, owner of E-fect Promotion, a digitizing and embroidery software company based in Durban, South Africa. But at what cost? Due to plentiful labor pools and “unemployment,” Appanna says, “it’s possible … to have laborers work at substantially lesser rates over extended hours to give the internationally accepted impression of ‘more affordable goods.’”

Be Prepared Think overseas production is the way to quality apparel and low prices? It often is. But that cheap production can also mean subpar labor practices, cutting corners on production and unsatisfactory factory conditions. Other than inspecting factories themselves (which some do), there are lots of questions distributors can ask in conducting due diligence on offshore vendors. 1. Get references. It’s not enough to trust your supplier’s good word – no matter how reliable he seems. Instead, ask him for references, and then ask those references for additional contacts to get a more rounded (and hopefully objective) picture of how the company does business. 2. Start small. Want an inexpensive, overseas vendor to handle the big 100,000-piece orders? Start with small orders that are one-tenth that size first. That way, you’re testing the production capabilities of a factory on an order that can be more easily reproduced should something go wrong. 3. Request samples. Not sure of a factory’s quality? Check it out before an order comes in. During slow times of the year, experts say, distributors should be asking for hats, say, at several different price points, to see exactly what level of work will be done for a $1 hat versus a $5 hat from that particular production center. 4. Build a network. Trade shows are for more than scoring business. For distributors and suppliers, they’re a great opportunity to ask questions about various overseas factories, quality control issues in various cities abroad and other concerns. 5. Get legal. It sounds crazy, but if you have an $800,000 order, sending it off with a hope and a prayer to a seemingly professional outfit in China may or may not come back to haunt you. If necessary, ask your attorney to draw up a contract to solidify the details of the deal, says Nick Mirabile, group director of merchandising and licensing for Octagon (asi/286685), a distributor based in Norwalk, CT. It’s worth it, he says, “to put out a few hundred dollars to write out exactly what you expect from them.”

Decorating dilemmas
But decorating apparel products overseas is also key for certain processes that can’t or won’t be done by U.S. decorators, says Nick Mirabile, group director of merchandising and licensing for Norwalk, CT-based distributor Octagon (asi/286685). Factories overseas, he says, are sometimes more progressive in how they’ll decorate, say, a cap – dying and adding designs before the cap is sewn, for example, a process he says he can’t seem to find domestically.

The size of the decorating order also often dictates where it’s best decorated, Mirabile says. For NASCAR, one of his clients, a small order of 24 custom-designed team outfits is better decorated stateside. But “when doing events in 10,000-, 20,000-, sometimes 100,000-piece orders, it doesn’t make sense to do it domestically,” he says, noting that American pricing simply can’t compete.

Social compliance
How can distributors and suppliers make sure that affordable doesn’t mean unethical or illegal? Child labor is certainly still a concern in many factories around the world. For distributors, it can be hard to know “how thoroughly operations are checked out to be deemed aboveboard,” Appanna says. “So many stark situations arise that show otherwise.”

Enough dubious evidence exists regarding factories that tout expensive machinery and “instant turnarounds [with] unrealistic prices”; that should raise red flags among distributors and suppliers, he says. “Most never investigate or even do the simple math” it would require to determine that such factories would require “investments exceeding $1 million in many cases for such operations to exist,” Appanna says. “It should be obvious that no such high investments were ever made, but reason is lost in the effort to make the quickest buck.”

Go to the source
None of these concerns – decrepit factories, child labor issues, poor production, cutting corners – go unnoticed by distributors and suppliers stateside. But ensuring all will go well can take some effort. Sometimes that means traveling to the source, says Kevin Scharnek, president of 14 West LLC (asi/197200), a distributor in Wales, WI.

To keep its options open, the company imports from China, for example, four different ways, Scharnek says – using U.S.-based manufacturers and importers in addition to using Hong Kong-based traders and working directly with Chinese manufacturers. “We don’t like to spread ourselves too thin on the supplier side,” Scharnek says, instead spreading its swath of Fortune 500 business across a surplus of vendors based in the U.S. and abroad. To stay on top of factories and their manufacturing practices, Scharnek says, he visits multiple factories, paying for those tours by partnering with other domestic and foreign-based manufacturers to help absorb some of those travel costs.

But even distributors lucky enough to visit those factories in person need to know the right questions to ask to properly vet the facilities and their owners. Do they have proper insurance? How do they ensure inks aren’t tainted with a lead base? How old are the employees who work there? How new is the factory’s equipment? All of these are crucial questions that require not just answers, industry experts say, but proof in the way of legal documents or in-factory tours.

Investment Managers Question China Trade Agreements A deluge of recalls prompted the U.S. and China to sign new trade agreements in December 2007 that provide better safeguards for China-made products. However, the Investor Environmental Health Network (IEHN) said the agreements don’t yet go far enough. This collaborative partnership of investment managers is calling for companies that import products from Asia to take a more active role in ensuring that the products they produce aren’t toxic to American consumers. “We’re making the argument to companies that they should be adopting safer chemicals policies,” says Richard Liroff, executive director for IEHN, whose membership manages $34 billion in investments. “If companies don’t have full knowledge of the chemicals in their products, they can place shareholder value at risk over the long term.” He cited the hit the RC2 Corp.’s stock price took because of the Thomas & Friends Wooden Railway Toys recall. “It’s a clear example of what can happen,” says Liroff. This pertains to promotional products as well, he says. “Any company handing out freebies better be careful,” he says. “It’s a popular way of gaining good public relations, but the last thing the company wants to have is mud on its face because the freebie has lead or some other nasty chemical in it.” Liroff says companies should be leery of any plastic products containing PVC or Bisphenol A, as well as items that may have batteries containing mercury. John Carpenter, owner of Printed Results (asi/397070), says that among his customer base, price concerns still far outweigh health concerns. And this is making it difficult to focus his business on the safety of promotional products, because of the increased cost involved in adequately testing them. “In the Michigan economy it is still price-driven,” he says. “I haven’t even had one client even ask about toxicity. Price is the main concern. We have to buy from China to stay competitive.” Still, the specter of potential problems is beginning to weigh heavily on the minds of some distributors. “In this day and age, everything is made in China. The toy industry was the biggest one affected at the moment, but you have to wonder if there are similar paints on other stuff,” says Lori Gilson, owner of Award Depot and Promotions (asi/128021). “Everything that comes out of there has something on it. Theoretically the risk is there for anyone.” While clients have not yet voiced concerns to him, Carpenter admits he has started to question the makeup of some of the products in the ad specialty market. “I did a self-promo with travel mugs, and I wondered,” he says. The liability issue of a recall is enough to keep any distributor up at night, Gilson says. “Everyone is suing everyone these days,” she says. “I’m just the middleman, and all of a sudden I could be held liable. That’s what’s scary to me. As a small businessperson, I don’t think I could defend against it.” – KH

BETSY CUMMINGS is a senior writer for Wearables.