This article first appeared in The State of Fashion 2022, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, click here.

It’s difficult to imagine the challenges that faced Joseph Phi when he was promoted to group chief executive of Li & Fung in October 2020. Not only was a pandemic raging, causing untold complications in global supply chains, but his company had only just delisted from the Hong Kong stock exchange after 28 years of public trading. Now, supply chain stressors, including port shutdowns, a container shortage and the rapid rise in freight costs, are front of mind for both Phi and the fashion executives who rely on him to provide solutions for international sourcing, production and logistics.

In 2022, responsible supply chain management means expecting even more of these unexpected shocks. Future-proofing supply chains requires sustainable diversification, technological innovation and a wholesale reframing of the concept of “value,” he says. Instead of trying to wring out every ounce of cost from the chain, value should be captured by decreasing complexity, shrinking lead times and reducing the financial cost of doing business while also reducing the cost that the fashion industry inflicts on people and the planet.

BoF: In 2021, there were port closures, shipping container shortages, freight cost surges and more. How long will this last and which challenges do you foresee carrying over into 2022?

Joseph Phi: Brand owners, retailers, consumers, I think, even suppliers, are starting to adapt to this so-called new normal. The irony is that this [consumption] rebound is adding pressure to a supply chain that’s already under a lot of stress. Now the containers and the capacity, they are in the wrong place and this imbalance has resulted in a phenomenal rise in freight rates, which together with a shortage of containers and lack of vessel space, will slow down this global economic recovery, unfortunately. My opinion is that these frustrations will continue until at least the second half of 2022, if Covid is under control, and if the ports and the factories are operating with some sort of normalcy. If things are not under control, then this may even extend to 2023.

BoF: To what extent do you think some of these problems would have hit the fashion industry, regardless of the pandemic?

JP: There were some unforeseen external shocks, just like the [March 2021] Suez Canal closure and the driver shortage in the UK following Brexit. During normal times, frankly, we can withstand these shocks, but this time around they had an out of proportion impact because the whole supply chain is running at full capacity. So what this pandemic has done is expose vulnerabilities across the entire supply chain.

BoF: Do you think businesses will look back at this period as a point at which they made significant changes in the running of the global supply chain?

JP: I truly believe so. The pandemic has shaken the very core and the very foundation of how the fashion supply chain has been built. It was built on efficiency by squeezing every ounce to make it cost effective. There is a need for a new equilibrium, and this will include diversification of the sourcing base, instead of putting all of your eggs in one basket. In the past, brand owners rarely needed to think about supply routes. Now, you’ve got to think of the trade lanes that you should be in. Of course, people need to think about the whole digitalisation of the supply chain too and you’ve got to make it more transparent so that it can facilitate decision-making.

BoF: What is the most important takeaway for brands?

JP: I think brand owners and retailers need to rethink the relationship between themselves and the suppliers. You’ve got to treat them as partners; you’ve got to treat them as a critical component of the entire ecosystem. In a supply ecosystem, you are only as strong as the weakest partners.

BoF: Your parent company the Fung Group was one of 30 global fashion and textile industry companies to first sign on to the G7 Fashion Pact in 2019, committing to key environmental goals. What kind of tangible progress have you made so far?

JP: We need to address the environmental impact of the fashion supply chain. Li & Fung’s technology spin-off, LFX, recently launched 3D-as-a-service through a company we call UNIFi3D. In the past, a lot of products were air freighted for approval, back and forth [until they are approved]. Essentially, the whole thing now can be done in a 3D manner, so you eliminate waste during this process. The shortening of the whole product development cycle also means companies can give themselves more time to read the market, and with better intelligence develop products that have the highest probability of success, reducing the number of SKUs. So this reduces inventory, and then reduces inventory waste. It’s going to be game-changing, in my opinion, because inventory [waste] is the biggest cost to the brand owners and retailers as well as [one of the] biggest negative impacts on the environment.

BoF: What do you think the fashion industry has learned from the Suez Canal blockage?

JP: In the past, brand owners defined value in a way that was always skewed towards the demand, downstream side of the chain. My sense is that the Suez Canal incident is highlighting to everybody that we need to start investing in solutions that manage the upstream supply side, and form greater partnerships with your suppliers and vendors, your freight forwarders and your shipping lines.

BoF: What about the potential for conflict in the South China Sea, is that a geopolitical factor the fashion industry needs to consider?

JP: I’ve lived in this region nearly my entire life [and] my sense is that the probability of a conflict is low [and the] cost of a conflict is very high. Having said this, when we talk about probability, we are playing with chance. So we really need to think about if it happens, how do you then rebalance your supply chain? How would you ensure that the flow of goods is not disrupted? Certainly, as we think about our three-year plan, it will be on my agenda, and I think it should be on the agenda of every chief executive in a company that has exposure in this region.

BoF: Are there viable alternatives to these sea routes that are maritime chokepoints?

JP: I may not have said this 20 months ago, but given what’s going on, overland freight is definitely a viable alternative. My guess is that the future road and rail costs may be similar to the current ocean rates, but take half the lead time of the ocean route, which means that it’s actually faster to ship by land. Earlier this year, our logistics business, LF Logistics, signed an agreement with a local company in Chongqing [to leverage the] growing railway network linking China and Europe along the New Silk Road, which basically connects Chongqing with the port city of Duisburg in Germany. This agreement will definitely accelerate our expansion into Eurasia. For me, and for us as a company, that’s the way to go.

BoF: Despite recent waves of offshoring from China and international trade disputes involving China, many fashion companies are still reliant on Chinese suppliers. In this new, more diversified era of sourcing, which trade agreements are most important for the industry moving forward?

JP: A very important agreement is the Regional Comprehensive Economic Partnership [RCEP]. It’s the largest multilateral trade agreement in the whole world and impacts 30 percent of the world’s population. It has the potential to be at the core of the reconstruction of the global supply chain. RCEP is possibly the only trading block that has both the production capacity and the consumer demand, so my sense is that it’s going to dramatically facilitate the regional trade and investment within Asia.

BoF: What does the conversation about hedging supply chain risk look like as we look ahead to 2022?

JP: Given everything that we have learned from the pandemic, it’s very important to diversify our sourcing base, but it should not be blind diversification. In my opinion, the export share of China will gradually reduce by design. The finishing part of production can then move to ASEAN [Association of Southeast Asian Nations markets]. Because of RCEP, the movement of raw materials, the fabric, components, they can enter ASEAN countries largely duty-free, so it softens the cost of movement and transport.

BoF: Do you think there’s an overall decreased appetite for riskier sourcing locations, such as Ethiopia and Myanmar, even if they are lower cost?

JP: As a company, we have started to look at Africa. In particular, we’re talking about Egypt, Ethiopia, Kenya, Madagascar and the like because they’re duty-free countries to America. Realistically, I think we possibly need to wait until this whole pandemic stabilises for us to have a really thorough assessment of whether we want to scale up or not, because there is some risk there.

BoF: How can brands make themselves more resilient in this new sourcing era?

JP: You’ve got to be mobile. You cannot be tied to a particular location and geography. Secondly, I think it’s about time that we seriously look at our business continuity and contingency plans. The third thing is that shipping costs are sky-high — my goodness — so brands need to find ways of offsetting this increased cost through increasing productivity. I think the exercise of value engineering is therefore very important. By reducing the number of players between myself, as the chief executive, to the lowest rank and by delayering, you reduce your costs. At the same time, you improve your customer service because things get done faster. You remove bureaucracy. I think a lot of companies should pay attention to that.

This interview has been edited and condensed.

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