Nearshore Apparel Production: DXL Group's Supply Chain Strategy Shift to Central America

Six years ago, when Barbara Buhr joined DXL Group's sourcing department, the menswear company, like many apparel sellers, was facing a "China problem." At the time, more than a third of DXL's merchandise was sourced from China, with a significant portion of production concentrated in a few factories. This was before the Trump administration imposed new tariffs on Chinese apparel imports in 2018, and well before the supply chain crisis triggered by the COVID-19 pandemic. What concerned Buhr then was how more common disasters—such as a fire or earthquake at a Chinese factory—might affect the company's supply.

"You look at it from a risk perspective, and we really needed to de-risk and build alternatives," Buhr, now DXL Group's senior vice president of sourcing, told Supply Chain Dive.

By the time DXL began disclosing its sourcing strategy in its 10-K filings, starting in fiscal 2018, most of its private-label merchandise came from Southeast Asia, particularly Vietnam, Bangladesh, Cambodia, and India. Since then, the company has embarked on a path of diversification, gradually increasing sourcing in the Western Hemisphere. Today, China's share of DXL's production has dropped to single digits, while the company has reduced its footprint in Asia by about a third compared to pre-pandemic levels, seeking to move production closer to home, CEO Harvey Kanter said.

"We've actually moved into Central America," Kanter told Supply Chain Dive, mentioning Nicaragua and Mexico. Additionally, Buhr noted that DXL is currently testing sourcing projects in the Dominican Republic and Guatemala, while exploring other countries covered by the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR).

Sourcing from Central America offers multiple advantages for DXL and other companies, including shorter lead times and faster time to market. But there are also challenges—both policy-related and economic—that DXL and other apparel companies have encountered when seeking to source closer to their operations and customer base.

Pursuing agility

Massachusetts-based DXL has many reasons to want to move more production closer to home. However, the company has also been balancing multiple priorities.

"DXL is very eager to speed up merchandise turnover, get the highest quality product possible, and balance risk, timelines, and cost," Kanter said.

The time advantage from geography is a key source of nearshoring's appeal, something DXL has experienced in its production in Mexico.

"Shipping from Asia takes 45 days and comes at a cost," Kanter said. "Shipping from Mexico takes a week. Mexico is more expensive, but we have greater flexibility to chase orders, and we have deep relationships."

In recent years, DXL, for example, has begun sourcing more products made with luxury suiting fabrics from Mexico, where higher price points allow it to better leverage duty savings, Buhr noted. Geographic proximity allows the company to place orders closer to the needed size range, reducing the risk of stockouts or overordering for specific SKUs due to shorter lead times—a significant advantage for a big-and-tall apparel seller, where precise fit is a key competitive strength.

Overall, shorter lead times can have a positive impact on a retailer's or apparel brand's entire business. Faster time to market means companies can chase hot products as demand signals emerge, while holding less inventory and replenishing more quickly. Additionally, leaner inventory helps store and warehouse operations run more smoothly and reduces the risk of excess stock and markdowns.

"Shipping from Asia takes 45 days and comes at a cost. Shipping from Mexico takes a week. Mexico is more expensive, but we have greater flexibility to chase orders, and we have deep relationships."

— Harvey Kanter, CEO of DXL Group

However, Kanter cautioned that there is no "silver bullet" for sourcing needs. Companies have multiple ways to quickly obtain merchandise.

"Whether it's pulling goods forward or pushing them back, increasing or decreasing buys, holding inventory or raw materials, buying greige goods—all of it is about staying agile and giving DXL the maximum opportunity to source the right product at the right price, right quality, and right place to meet the needs of our underserved customer," Kanter said.

As DXL has added sourcing countries and factories to seek greater agility, the company has achieved higher revenue with lower inventory levels. DXL ended fiscal 2022 with sales of $545.8 million and inventory of $93 million. Compared to 2018, that's a significant improvement—when sales were $473.8 million and ending inventory was $106.8 million.

The 'chicken-and-egg' problem in fabric production

When asked whether DXL would like to move more production to Central America, Buhr responded enthusiastically: "Absolutely."

She is not alone. Given its advantages, many companies are targeting Central America for apparel production. In the fashion industry, according to a report released earlier this year by the United States Fashion Industry Association, there is "strong interest" in increasing apparel sourcing from CAFTA-DR countries. The USFIA member survey found that in 2023, over 80% of respondents had sourced from CAFTA-DR countries, up from 60% a few years earlier. A third of respondents increased sourcing from the region by more than 10%, also higher than in previous years, and 40% said they plan to increase CAFTA-DR sourcing in the next two years.

But there are challenges to increasing sourcing from Central America. "It's hard," Buhr added. "It involves cost."

She noted that labor costs in Central America are higher relative to Southeast Asian countries, and there are also financial and logistical hurdles related to CAFTA-DR. To take advantage of the tariff exemptions in the trade agreement—which help offset relatively higher labor costs—apparel exported from these countries must use fabric made in the U.S. or CAFTA-DR countries.

"These countries produce very little fabric. Investments are underway, but they will take at least another three years to truly reach the needed level."

— Barbara Buhr, Senior Vice President of Sourcing at DXL Group

The rules of origin requirement, known as the "yarn forward" standard, stipulates that yarn spinning and subsequent operations such as weaving or knitting, as well as garment assembly, must occur in the U.S. or the CAFTA-DR region.

The challenge for DXL and other apparel brands is that the supply of fabric produced in the U.S. and Central America is relatively limited compared to Asia. Just looking at scale, according to International Trade Administration data, the U.S. imported about $24.2 million worth of fabric from CAFTA-DR countries in 2022, while imports from China alone reached $1.3 billion.

"These countries produce very little fabric," Buhr said. "Investments are underway, but they will take at least another three years to truly reach the needed level."

As Beth Hughes, vice president of trade and customs policy at the American Apparel & Footwear Association, an industry group, explained, highly automated fabric production is capital-intensive, while cut-and-sew operations are labor-intensive. Central America has the labor to make garments, but not yet enough capital investment to support large-scale fabric production.

"Investors need to come in and say 'we're going to build a yarn or fabric factory,' and they need to know demand exists," Hughes said. "But brands can't place orders if they don't know supply exists. So it's a chicken-and-egg problem."

A trade agreement that actually slows trade

DXL is not alone in facing these nearshoring obstacles. Researchers at Texas A&M University estimate that CAFTA-DR apparel exports have actually fallen by more than half from what they would have been without the trade agreement, according to a paper published in August. "Although trade agreements are designed to expand trade, their effects often vary widely," the researchers wrote in a blog post. "For example, strict requirements in the U.S. free trade agreement actually caused apparel exports from Central American countries to contract by 58%." In contrast, the researchers found that NAFTA increased apparel trade between the U.S., Canada, and Mexico by about 640%.

"Investors need to come in and say 'we're going to build a yarn or fabric factory,' and they need to know demand exists. But brands can't place orders if they don't know supply exists. So it's a chicken-and-egg problem."

— Beth Hughes, Vice President of Trade and Customs Policy at the American Apparel & Footwear Association

What holds back more apparel production in CAFTA-DR countries are the rules of origin requirements in the agreement, which are much stricter than in other trade pacts, said Raymond Robertson, a professor at Texas A&M University and director of the Mosbacher Institute for Trade, Economics, and Public Policy, who co-authored the study.

In the long run, given the advantages, more fabric production could eventually move to Central America. "It would tighten the supply chain rather than shipping fabric across the Pacific," Robertson said. "But you have to get demand to grow first." And to do that means expanding garment manufacturing in the region.

Complicating matters further are changes in apparel tastes, including demand for more stretch fabrics, which require spandex or other specialty materials. The rules of origin restrictions include exceptions for specific products and materials. Robertson said granting more such exceptions could help in the short term. "The deeper solution is clearly to modify the rules of origin themselves."

Beyond geopolitical tensions with China, creating more apparel industry jobs in Central America—which Robertson noted has historically been a gateway industry for economic development—could improve regional economies and reduce cross-border migration.

There have been past pushes to modify CAFTA-DR rules, but the "yarn forward" standard also has staunch supporters. Last year, the National Council of Textile Organizations, a U.S. textile industry group, warned that relaxing CAFTA-DR rules of origin would have a "devastating impact." The group cited a study by Werner International estimating that without these rules, the U.S. would directly lose 105,000 jobs, and the CAFTA-DR region would also suffer job losses from opening textile sourcing beyond the agreement's parties.

Other costs of sourcing from Central America

CAFTA-DR is not the only obstacle apparel companies face. Wages in the region tend to be higher because Central American countries generally have higher GDP per capita than some of Asia's major apparel manufacturing countries, and the labor pool is smaller. Meanwhile, labor conditions in Central American countries are generally better than in many Asian countries, partly due to a stronger union culture, Robertson said.

While this may push up labor costs, it can also enhance a company's and its products' reputation and sustainability image—factors consumers increasingly care about.

"When I visited garment factories in Nicaragua, one thing they repeatedly said was: 'We have so many people who can sew, but no one who can fix the sewing machines.'"

— Raymond Robertson, Professor at Texas A&M University and Director of the Mosbacher Institute

Electricity costs also tend to be higher in Central America than in Asia, Robertson said, partly attributing this to national policies and infrastructure needs. Training is another issue. "When I visited garment factories in Nicaragua, one thing they repeatedly said was: 'We have so many people who can sew, but no one who can fix the sewing machines,'" Robertson said. Although the country's government has programs to train mechanics and engineers, those Robertson spoke with said the specific skills their factories need are not in the curriculum. "You really need more communication and coordination between the private sector and the government."

Growing interest, increasing competition for supply

For DXL, a new sourcing partner—wherever it is located—is a significant investment of time and resources. Kanter noted that bringing on a new supplier takes about a year. Part of the reason is the company's sizing needs, which require specialized equipment and skills, as well as its environmental and human rights audits.

"In our view, based on quality, cost, and human rights issues, there aren't hundreds of factories to choose from," Kanter said. "It's dozens, not hundreds."

The restrictions on duty-free imports, combined with growing industry interest in nearshoring, mean Central American manufacturers face competition. "It's not easy," Buhr said. "Their capacity fills up quickly."