Editor’s note: This story is the second installment of a series exploring global trade shifts. Read the previous story here.
When Barbara Buhr joined DXL Group’s sourcing segment six years ago, the men’s apparel company — like countless clothing sellers — had a China conundrum.
At the time, DXL sourced more than a third of its merchandise from China, with just a few factories accounting for a significant amount of production.
This was even before the Trump administration had imposed new tariffs on apparel imports from China in 2018, and well before the supply chain travails created by COVID-19. Buhr was focused then on how more common disasters could disrupt DXL, such as the effect a fire or earthquake at one of the China-based factories could have on the company’s supply.
“You come in and you look at it from a risk perspective, and we really needed to de-risk and set up options,” Buhr, today DXL’s SVP of sourcing, told Supply Chain Dive in an interview.
By the time DXL started addressing sourcing in its 10-Ks, beginning with fiscal year 2018, the bulk of its private label merchandise came out of Southeast Asia, specifically Vietnam, Bangladesh, Cambodia and India.
The company has since embarked on a diversification journey that would lead to sourcing more from the Western Hemisphere. Today, China’s share of DXL production is in single digits, while the company has shrunk its footprint in Asia by roughly a third from the pre-pandemic years as it seeks to move production nearer to home, according to CEO Harvey Kanter.
“We have instrumentally moved into Central America,” Kanter told Supply Chain Dive in an interview, citing Nicaragua and Mexico.
In addition, Buhr noted that DXL is currently testing a sourcing program in the Dominican Republic and Guatemala, while exploring the other countries included in the Central America-Dominican Republic Free Trade Agreement.
Sourcing from Central America has several advantages for DXL and others, including shorter lead times and faster speed-to-market. But there are also challenges — both policy-related and economic — that DXL and other apparel companies have run into as they look to source closer to their operations and customer base.
Seeking agility
There are plenty of reasons why DXL, which is based in Massachusetts, would want to shift more production closer to home. Yet the company also has several priorities it is always working to balance.
“DXL has a very strong desire to turn their goods faster, have the highest quality product we can get, and balance risk, timelines and costs,” Kanter said.
The time elements tied to geography are a big factor in nearshoring’s attraction, as DXL has seen in production from Mexico.
“There's 45 days to get goods from Asia to here, and there's a certain cost associated with it,” Kanter said. “It takes one week to get goods from Mexico. Mexico costs more money, but we have more agility to chase goods, and we have deep relationships.”
In recent years, DXL has, for example, started sourcing more production from Mexico that uses luxury suiting fabrics, with the higher product price points helping it take more advantage of duty-free savings, Buhr noted. The proximity helps the company order closer to the size range it needs with less risk of out-of-stocks or over-ordering for any given SKU thanks to shorter lead times — a major plus for a big-and-tall clothing seller for whom precise fitting is a key competitive advantage.
On the whole, shorter lead times can have a positive impact on a retailer or apparel brand’s entire business. Being quicker to market means the company can pursue in-demand products as they see demand signals pop up. They can also hold less inventory and re-stock more quickly. Meanwhile, leaner inventories allow for smoother store and warehouse operations, and reduce the risk of overstocks and markdowns.
“There's 45 days to get goods from Asia to here, and there's a certain cost associated with it. It takes one week to get goods from Mexico. Mexico costs more money, but we have more agility to chase goods, and we have deep relationships.”
Harvey Kanter
CEO, DXL Group
However, Kanter cautions that there is no “silver bullet” to its sourcing needs. The company has multiple ways of pursuing merchandise with speed.
“It's moving goods up, moving goods down, buying more, buying less, holding inventory, holding raw materials, buying greige goods — all with the intent to be agile and provide DXL the greatest opportunity to source the right product at the right place at the right cost at the right quality to support the needs of our underserved customer,” Kanter said.
As DXL has increased the countries and factories it sources from, seeking more agility, it has made more revenue on lower inventory levels. DXL ended FY2022 with $545.8 million in sales and $93 million in inventory. That’s a sizable improvement from 2018, when it made $473.8 million in sales and finished with $106.8 million in inventory.
A “chicken-and-egg” problem in fabric production
Asked if DXL would like to move even more production to Central America, Buhr replied with an enthusiastic, “Sure.”
She’s not alone. Given its benefits, many are eying the Central America region for apparel production. In the fashion industry, there is “robust excitement about increasing apparel sourcing” from CAFTA-DR countries, according to a report from the U.S. Fashion Industry Association published earlier this year.
USFIA’s member survey found that over 80% of respondents had sourced from CAFTA-DR countries in 2023, up from 60% a few years ago.
A third of respondents had increased their sourcing from the region by more than 10%, also up from years past, and 40% said they planned to ramp up their CAFTA-DR sourcing in the next two years.
But there challenges in ramping up sourcing from Central America. “It's hard,” Buhr added. “There's a price associated with it.”
She pointed to the higher labor costs relative to Southeast Asian countries, as well as financial and logistical obstacles related to CAFTA-DR.
To take advantage of duty exemptions in the trade agreement — which help offset the higher relative labor costs — garments shipped out of those countries must be made with fabrics also manufactured in the U.S. or CAFTA-DR countries.
“The fabrics coming out of those countries, they're few and far between. There's investments that have been made, but those investments are going to take at least another three years to really get it to where it needs to be.”
Barbara Buhr
SVP of Sourcing, DXL Group
The rule of origin specifications are known as the “yarn-forward” standard, stipulating that yarn spinning and later operations such as fabric weaving or knitting, along with apparel assembly, occur in either the U.S. or the CAFTA-DR region.
The challenge for DXL and other apparel brands is the relatively small supply of fabrics that are made in the U.S. and Central America compared to Asia. Just to give some idea of the differences in scale, the U.S. imported about $24.2 million worth of fabrics from CAFTA-DR countries in 2022 — compared to $1.3 billion from China alone, according to International Trade Administration data.
“The fabrics coming out of those countries, they're few and far between,” Buhr said. “There's investments that have been made, but those investments are going to take at least another three years to really get it to where it needs to be.”
As Beth Hughes, VP of trade and customs policy at the industry group American Apparel & Footwear Association, explains, heavy automation makes fabric production a capital-intensive enterprise, while cut-and-sew operations are labor-heavy. Central America has the labor to make garments, but it doesn’t have capital investments yet to support large-scale fabric production.
“For investors to come in and say we're going to put up a yarn or fabric facility, they have to know that the demand is there,” Hughes said. “But the brands can't make orders if they don’t know the supply is there. So it’s a chicken-and-egg problem.”
A trade agreement that has slowed trade
DXL is by no means alone in facing those barriers to nearshoring more production to Central America.
Researchers at Texas A&M University estimate that apparel exports from CAFTA-DR are actually down by more than half compared to what they would have been without the trade agreement, according to a paper published in August.
"Though trade agreements aim to expand trade, there are often huge divergences in their effects," the researchers wrote in a blog post. "Stringent requirements in a free trade agreement with the US, for instance, actually led to a 58% contraction of apparel exports for Central American countries."
By contrast, the researchers found that the North American Free Trade Agreement increased apparel trade among the U.S., Canada, and Mexico by about 640%.
“For investors to come in and say we're going to put up a yarn or fabric facility, they have to know that the demand is there. But the brands can't make orders if they don’t know the supply is there. So it’s a chicken-and-egg problem.”
Beth Hughes
VP of Trade and Customs Policy, American Apparel & Footwear Association
Hampering more apparel production in CAFTA-DR countries are the rules of origin requirements in the trade agreement, which are much more restrictive than other trade deals, according to Raymond Robertson, a professor at Texas A&M and director of the Mosbacher Institute for Trade, Economics and Public Policy, who co-authored the Texas A&M study.
In the long run, more fabric production may ultimately come to Central America, given the advantages.
“It tightens up the supply chain, rather than shipping your fabrics over the Pacific,” Robertson said. “But you have to let the demand grow first.” And doing that means growing garment manufacturing in the region.
Complicating things even more are changing tastes in clothing, among them the appetite for more stretch in fabric, which requires spandex or other specialized materials.
There are exceptions given to the rules of origin restrictions tied to specific products and materials. Granting more of these could help in the short term, Robertson said. “The deeper fix is obviously to revise the rules of origin per se.”
Aside from geopolitical tensions with China, creating more Central American jobs in apparel — historically an industry that is a gateway for economic development, Robertson notes — could improve regional economies and reduce cross-border migration.
There have been pushes to revise the CAFTA-DR rules in the past, but the yarn-forward standard also has staunch supporters. Last year, the U.S. textile industry group the National Council of Textile Organizations warned of a “devastating impact” from loosening the rules of origin in CAFTA-DR.
The organization cited a Werner International study that estimated 105,000 U.S. jobs would be directly lost without the rules, while the CAFTA-DR region would suffer job losses by opening up textile sourcing beyond the agreement’s parties.
Other costs to sourcing from Central America
CAFTA-DR isn’t the only obstacle apparel companies face.
Wages tend to be higher in the region, as Central American countries on the whole have higher GDP per capita and smaller labor pools than some of the large apparel manufacturing nations in Asia.
At the same time, Central American countries generally have better labor conditions than many Asian countries, thanks in part to a stronger labor union culture, Robertson said.
While that might contribute to higher labor costs, it can also raise a company’s reputation and sustainability profile as well as that of their products — things that consumers are paying ever more attention to.
“When I was in Nicaragua, I was touring garment factories, and one of the things that they consistently said was, ‘We have all these people that can sew, but we don't have people that can fix the sewing machine.’”
Raymond Robertson
Texas A&M Professor and director of the Mosbacher Institute for Trade, Economics, and Public Policy
Electricity costs also tend to be higher in Central America than Asia, something Robertson attributes in part to national policies as well as the need for more infrastructure.
Training is another issue. “When I was in Nicaragua, I was touring garment factories, and one of the things that they consistently said was, ‘We have all these people that can sew, but we don't have people that can fix the sewing machine,’” Robertson said.
And while the country’s government had programs to train mechanics and engineers, those who spoke with Robertson said that the specific skills they needed at their shops weren’t in the curriculum. “You really need a lot more communication and coordination between the private sector and the government.”
Growing interest, and competition for supply
For DXL, a new sourcing partner — wherever they might reside — is a major investment in time and resources. Kanter noted it takes around a year to onboard a new supplier.
That is partly because of the company’s sizing needs, which takes specialized equipment and skills, as well as its environmental and human rights audits.
“There’s not, like, hundreds of factories to go to in our view, based on quality and cost and human rights issues,” Kanter said. “It’s tens, not hundreds and hundreds.”
The limits to duty-free importing combined with the growing industry interest with sourcing closer to home means competition for manufacturers in Central America.
“It's not easy,” Buhr said. “They start filling up capacity pretty quickly.”
