FlixStudio

A Handbook on Fashion Supply Chain Risks

The global apparel industry as of 2021 was valued at $1.5 trillion. This figure encompasses all kinds of clothing and the entire value chain. Apparently, after the initial hit of COVID-19 in 2020, demand for apparel is on the rise again, predicted to reach $2 trillion by 2026, with the US and China leading the charge. The pent up demand from the pandemic – a back to office or back to school or just back outside wardrobe change is likely to drive sales en masse, industry wide. 

While better days are around the corner, the industry faces one major, multi-faceted, continuous risk. Supply chain disruptions. 

These disruptions could take place anywhere in the value chain – from sourcing, to manufacturing, to retail. At best, businesses in the world of fashion can prepare themselves and have a contingency plan to keep disruption to a bare minimum because supply chain risks and disruptions are not only abundant, they are inevitable and come from both, the demand and supply side.

The Problem 

The Supply End

Fashion works like any other product driven industry. There is but one way to survive and grow when there are multiple costs and only one major direct source of revenue – moving inventory

Supply chain risks, thus, when left unchecked, can negatively impact the bottom line, the reputation, or both. With some of these factors in the external environment being beyond the control of a business, the response in these cases ought to be defensive. 

Soaring prices of raw cotton, a core raw material for the fashion industry is one such example. This rising cost of raw materials is eating away at margins or is being passed on to the consumer if the manufacturer and retailer are in a dominant position where they can dictate pricing. 

While businesses have become increasingly global, this has come at the cost of accounting (or planning) for more variables. Moreover, the economic, social, or political pressure in a country- where an important business function is based- affects the entire value chain. This is evident with factory closures in Vietnam and China, causing delays in the creation and delivery of finished products. 

Hindrances in the chain tend to have a domino effect, negatively impacting the next steps as well. Distribution backlogs and bottlenecks are a prime example of ready merchandise losing value because it was not made available at the right place at the right time.

Even the example of cotton pricing above can be attributed to protectionist views around yarn in India, calling for fulfilment of local needs before looking at exports. Surprisingly, India accounted for about 10% of global exports of all cotton products in 2020 according to UN Comtrade data, including 14% of cotton yarn exports [^1]

Another example contributing to a fashion enterprise’s woes is that of logistics congestion. To ensure that seasonal products are available on time, retailers may have to occasionally opt for expensive air freight as opposed to more economical (but slower) ocean-based shipping. 

The Demand End

On the demand side, shocks come in the form of demand volatility. Fast fashion may have introduced opportunities to introduce new collections fortnightly, but it comes at the expense of not being able to accurately forecast how long something will trend. Making too much of an SKU may mean selling at markdowns or dumping for a loss, making too little would be to leave dollars on the table.

Not just in fashion, life cycles of all products and consumables are becoming shorter as customers switch preferences swiftly. Music and video entertainment have become shorter, with deliveries being expected within a day, and fashion is no exception. 

Finding a Solution

While most of the aforementioned pressures can only be reacted to, preemptive, offensive measures in areas that a business can control will only help it become more resilient to such challenges.

Bracketing

For instance, enterprises can tackle the issue of bracketing, or the practice of buying items in bulk to try at home and then return some later. This is a major inventory management and environmental issue. Often a result of customer action, but in a ‘customer is king’ world it is the brand’s responsibility to ensure that they are ESG compliant. 

Bracketing may be attributed to size and fit issues that can be easily addressed with better, or easily accessible information. Customers (especially those under 30 or those buying luxury goods) treat bracketing as normal, and ‘low-risk’ since retailers offer free deliveries and hassle free returns but this practice eats into a brand’s bottom line and is a logistical and environmental pain-point especially for fashion e-tailers, because the process still costs resources to the business. ($10-20, excluding shipping) 

From an inventory management standpoint, bracketing also creates artificial shortages. Multiple variants of a product get removed at the same time and companies cannot determine what is likely to be returned, making inventory management difficult. 

Fashion and Industry 4.0

There is no absolute fix to bracketing but it can be reduced with an AI-enabled photo studio that projects merchandise on models of different types to reduce size and complexion based returns. This can be further augmented by coupling it with the new AR enabled ‘online fitting rooms’. Providing (displaying) all relevant product information such as sizing charts, product specifications, photos, descriptions, and reviews can collectively guide the customer to make the right choice the first time around, reducing the load on returns. 

Bracketing is also a result of suboptimal purchase experience, a customer will buy in bulk and return what they don’t want because it is easier than making an entirely new order. Introducing swaps and exchanges is a more efficient way to move inventory without running into return based bottlenecks. 

According to an article published by Kearney [^2], there are things a company can do to become resilient to supply chain shocks like reducing complexity and SKUs, ocean shipping optimization, building redundancy into sourcing, revamping inventory management to include AI demand planning and sharing data with suppliers. This lean period may be viewed as an opportunity to rethink processes. Digitization is the common denominator amongst the most resilient businesses. 

Businesses tend to look at unit costs. The approach is understandable but transport costs, taxes, and other costs in moving from factory to warehouse to shelf ought to be accounted for. Nearshoring and working with multiple suppliers is a logical middle path approach to keeping costs low while also planning for consistent flow of merchandise. Digital transformation presents an opportunity.

The pandemic which brought out so many radical changes has also forced businesses to adopt digital first solutions to grow, or stay afloat. In 2022, the market value of AI in fashion worldwide stands at $861 million. By 2027, this figure is predicted to reach $4.3 billion.

The Solution

AI enabled photo-studios like Flix Studio are part of the multi-level solutions to solve supply chain issues. 

In order to remain competitive, a business must meet these expectations and quicken their go-to-market strategy. As per a McKinsey Report, top performers, with the power of data analytics in their toolbox are able to deliver products to market in less than 6-8 weeks while the typical lead time in the industry is 40 weeks, or 5 times longer and slower in keeping up with changing consumer preferences. 

As mentioned by Kearney, and referenced above, simplifying SKUs and processes to make the organisation leaner helps reduce costs and increase profitability. In-house traditional teams doing photoshoots are expensive (costing about $678k a year), outsourced traditional photo studios don’t solve for lead times. Traditional setups are no longer justifiable in the world of fast fashion where product life cycles are short. Time is of the essence. Not being able to move and manage inventory fast enough leads to the vicious cycle of permanent markdowns that eat into the top line while bracketing, and other operational expenses erode the bottom line. AI enabled photo studios are part of the digital transformation journey that fashion enterprises embark on to remain competitive. 

Additionally, a number of market leaders are adopting the ‘metaverse’ as a way to engage with their customers and discover new opportunities too. Gen-Z, the ones most excited about the metaverse, already spend 8+hours on a screen. For them, it is the logical next step to where we stand. Their digital life is not separate from their physical one.  

From the fashion industry’s perspective, the metaverse may be seen as a combination of a new avenue for sales, a new experience, or it could be treated as the product, like Ralph Lauren’s digital apparel for digital avatars. There are no supply chain disruptions to deal with when pushing an intangible, all-digital good. Digital goods may be considered a fad today, but they have established a proof of concept. Gucci Garden in Roblox saw 19 million visitors. Fashion is primed to grow, but so is gaming and the digital creator economy that saw fast-tracked adoption because of the pandemic. Ultimately, there is an opportunity to capture value at the crossroads of fashion and the metaverse. 

Blockchain technology also brings with it supply chain visibility and traceability solutions help mitigate such risks. 

The future is digital first. AI in fashion is set to contribute across the board, be it from suggestions to product design and display, to trendspotting, and even supply chain automation and management. Introducing, leveraging and scaling with the help of Web3 and Industry 4.0 solutions like AI will steer your brand and company in a direction, which will help reduce these fashion supply chain risks and enable you to keep a healthy revenue graph.

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Arunava Acharjee

(Product Marketing Manager)