Dua Lipa’s chart-busting single ‘Physical’- complete with peppy undertones of ‘Y2K’ beats and monochrome ensembles won the internet in several ways. Her sartorial choices, with special mention for the bejeweled tweed corsets and neon lace boots have eventually found their way on several racks (physical and online) for leading retailers. However, much like the gravity-defying antics of the song’s climax, sustaining a successful business in the fashion industry is very much like dancing on a revolving platform; what works today may whirl out of favor tomorrow.
The apparel industry is host to some of the world’s largest and most rapidly growing companies. Mass produced goods and fast fashion are rampant, but there is enough competition in the industry across the entire value chain to keep these players on their toes. According to Statista, the global apparel industry was worth $1.5 trillion back in 2020, when the world was struck with Covid-19. Just like the rest of the industries in the global market, the fashion industry is still in the process of recovery. However, growth beyond the pandemic seems promising and the global apparel industry is set to grow at a CAGR of 7% to ~$842 billion by the end of 2025. The world can count on China, USA and Japan to lead this growth. However, whether these numbers signify real growth beyond pandemic recovery gains is yet to be meaningfully defined.
The secret sauce for survival as well as future scale will lie in the efficiency of the supply chain.
Managing the global supply chain
An effective supply chain strategy ensures sustained customer satisfaction, increased demands that are consistently met through a streamlined product flow. Understandably so, this is a system heavily dependent on every department to function effectively, reduce operating costs, improve cash flow, in addition to efficiently sourcing and procuring consistently to keep the wheels churning. Which is why supply chain inefficiencies have enormous impacts on the bottom line. Once these are in line and moving at the required speed, companies can accurately forecast demand and plan in advance to ensure demands are met. Improved financial metrics means happy suppliers and labour, since companies will know what and how much is required to meet a certain production and sales target.
From sourcing to merchandising to last-mile delivery, most large labels in the industry have supply chains that span the globe. A plethora of aspects about the industry like the labor involved, logistics/materials, costs of mass production of raw material and apparel, its effects on countries and how they meet global demands remain largely camouflaged.
Moreover, the business is highly seasonal, with different styles being popular at different times of the year. A robust supply chain is handed the difficult task of responding to these fluctuations. To make matters significantly more challenging, the industry is also very fragmented, with a large number of small and medium-sized businesses. This can impact coordination and collaboration within the supply chain and cause unforeseen delays.
Supply chain issues can be identified in the form of various parameters – Ranging from issues such as demand and production volatility, lead times, costs, raw material, supplier quality and performance to the most important being waste, perishability and environmental concerns. To top it all, the fast fashion phenomenon has led to larger obstacles for companies to overcome and many are scrambling to increase supplies to meet higher demands.
We’ve compiled a list of complexities that impact the assembly line of the industry:
- Roadblocks in the demand process lifecycle
For starters, it may help to think of the industry as a monetized art-form; it’s not about pure commerce. Demand is inversely proportional to availability & at times directly proportional to price.
Apparel consumers not only want to see freshness every season, but they expect this in their overall shopping experience as well. This alone gives the industry its own set of challenges. This fast moving nature and fickle mindedness of consumers requires companies to act fast on trends right away. Needless to say, brands must maintain relevance with their consumers, whether it’s in store or online. What makes this even more difficult for established players in the field is the entry of smaller businesses, both online and offline that not only offer freshness, but also come with the “conscious” tag, making them seem more environment friendly whilst making the consumer feel like an active participant as someone who is contributing to the welfare of the environment. H&M is leading this movement, through a global sustainability effort, which is a big win at least in the fast fashion world, or so we think.
- Raw material shortages
Volatility in availability as well as prices for raw materials are a constant challenge in the fashion industry. The price of cotton, for example, has soared up 21% year-on-year to $1.99 per kilogram. To mitigate these risks, most companies have established a diversified supplier base as well as adopted best practices to build strong relationships with suppliers. Since most brands source from China and Southeast Asia, it is also important to have a good understanding of the political and economic situation in these regions, since these changes often lead to unforeseen disruptions. Another way to mitigate risk is to develop a vertically integrated supply chain, where the company has more control over the different stages of production. This can be done by either owning or investing in manufacturing facilities, or by working closely with suppliers- although this model can prove to be heavy on the Capex side. It is also important to have a good forecasting system in place to anticipate changes in demand and plan production accordingly. Fashion brands often use consumer data and analytics to help with this.
- Evolution of the target market
The fashion cycle begins at the customer and ends there. It is extremely vital for companies to understand their target audience, not just their likes and dislikes, but also understand their spending capacities, and how it evolves over time. Considering the lifetime value of change in target audience is a tremendous contributor to uncertainty for many companies, to be able to keep up with the world’s rapidly growing population and their increasing purchasing power not just in western markets but outside of it too. Guangzhou, in China, has experienced increased purchasing power in men, as more Chinese men become interested in clothing and fashion, with the demand in men’s fashion increasing at an annual compound rate of 6.8% over the last decade. In addition to this, brands have to manage the demand of new customer profiles of those who migrate to newer cities or countries.
- Emphasis on Sustainability, Recycling and Support for Local Production
Sustainability is becoming increasingly important to consumers becoming more environmentally conscious. A notable pioneer of this trend is Stella McCartney who has let go of using animal leather in her bags and shoes. Environmentally friendly products aren’t very cost friendly and companies steer away from this to optimize on their costs, but this trend is in the process of taking over across all generations. According to a McKinsey report titled Fashion on Climate, the fashion industry produced around 2.1 billion tonnes of GHG emissions in 2018, equalling 4% of the global total. But brands have become more aware of their carbon footprint, and are ramping up fashion with an aim to reduce theirs and be environmentally conscious organizations of the world.
- Forecasting trends accurately to fastrack time-to-market
Nike, Zara, H&M have emerged as key players in the world dominion of fashion – it’s always about making a statement and let’s face it, for today’s generation they’re IT. Luxury brands like Burberry and Ferragamo have already picked and targeted their consumers, they’ve built this image across decades and their aspirational brand identity has attracted loyal (read : rich) patrons. Beyond this, brands today can delve into learning how trend forecasting can be used within the product development process. A key factor pivotal to this growth is helping consumers purchase products as close to the season as possible, irrespective of segment targeted, because customers at every price point wish to get their hands on what’s trending. The supply chain management is put under pressure when it fails to deliver newness on time. Companies and their consumer research branches need to forecast trends and demands as accurately as possible – from the neckline that’s going to be “fetch” to the color that’s going to dominate the season – all of this will impact the logistics and turn-around time for companies. To sum it up, capitalizing on often unpredictable consumer preferences would require you to take a goal of time to market of 40 days.
- The Bullwhip effect
Talking about inefficiencies, the Bullwhip effect (and its effects) on supply chain management systems in various fashion brands takes prominence. This phenomenon in the chain is caused by small fluctuations in demand, mostly at the retail level. It is vital to tackle this at the grassroot level to avoid larger and more progressive fluctuations at the wholesale, distributor and manufacturing levels. This will obliterate delays and imply cohesion between consumers and distributors. The indispensability also reflects through each element in the chain influencing the other, much like a domino. Fast fashion brands like M&S and Primark must optimize this trinity of
- maintaining data-based stock inventory,
- forecasted pre-ordering, and
- preemptive logistic management
- Consumer buying behaviors
With the fashion industry influencing no less than 3 billion people worldwide, it becomes imperative for consumer fashion brands to study the consumer buying behavior as closely as a sociologist. Each individual in this huge set is affected by social identification and social comparison, and in turn affects his own buying behavior. Their age, income, locality, and availability of funds become decisive factors for their fashion preferences. However, their buying behavior is also dependent on whether they have similar clothes in their wardrobe, as people hardly buy things that resemble those they have once purchased. A research published in the EA Journals has concluded that ‘marketing managers should adopt market segmentation strategy and segment their clothes markets on the bases of demographic variables such as age, income, and gender since they were all found to have great degree of influences on clothes buying decisions. This will give their customers a sense of belonging and comfort with their chosen clothes’.
- Forced price markdowns
Clearing inventory and increasing sales might lead to a one-stop solution- discounts or price markdowns. But considering this to be a simple solution and applying this throughout the range can likely create a dent in the profits while recoiling. However, for a population quite used to the idea of ‘end-of-season sales’, discounts have become a corollary to retail shopping. Brands have mastered this by using advanced analytics to make real-time course corrections and predicting how much will sell, when it will sell, and how much it will sell for, ensuring a financially appealing ritual (of sales and discounts) for everyone involved.
The cause and effect relationship between demand and supply are the foothold of better management and partnerships with all stakeholders including operations and distributors. Companies must be aware that the supply chain ends successfully when customers receive the product and by making this a robust strategy a priority in their business models they can carve out a competitive advantage against those who still haven’t been able to pinpoint inefficiencies.
Do traditional supply chains need an overhaul?
The short answer is yes. The good news is that if these aforementioned dominos are held in place and balanced effectively, companies might also see a snowball effect – a sweet spot where they can identify and improve inventory management leading to customer satisfaction, more demand and more cash flow and revenue. The question is how? The answer may lie in what is being termed as the Hybrid Supply Chain Model.
Here are two facets of the same:
- Lean Supply Chain
Lean supply chains are ideal if the goal is to produce increased volumes at decreased rates. The aim is to create best value outcomes for consumers, at extremely minimal costs. The strategy depends on reliability and predictability so companies can plan production in advance and develop partnerships with suppliers with the promise of increased business at all ends, to deliver what they need to deliver.
- Agile Supply Chain
On the other hand, Agile supply chain strategies are based on the business model that allows companies to be more flexible and receptive to market fluctuations. This means, companies depend heavily on the idea of postponement to be extremely sure what direction they would want to proceed with in terms of production and scale and directly respond to real-time demand rather than risk over production.
Can businesses sustain with the hybrid approach?
The answer is probably not that simple, but taking from Zara’s example – Zara knows what and how many items they will be able to sell in a particular season. They follow what is called a ‘just-in-time production’ model wherein up to 50% of its clothes are designed and manufactured smack in the middle of the season. Although, they may not be able to tell in advance what the color of the season might be. Their simple yet effective resolution to this is mass producing these pieces at low costs under their lean approach and later dyeing them into the season’s dominant colors as part of their agile approach.
This system may hit home for some, and may not work at all for others. But before companies take a call, it is important for them to ask certain questions that evaluate the pros and cons of the hybrid approach – From asking themselves what they produce, how consistent their sales have been across a financial year, researching and knowing their audience and preferences, how quickly these preferences change, how quickly can they adapt to these changes, how quickly their suppliers can adapt to these changes and lastly what their current supply chain look like?
Can tech prove to be a worthy answer to these woes?
Digitization and channel convergence has led to the birth of digital platforms and online stores that not only sell, but provide information on trends, exchange of experiences and competitive prices with social media playing a pivotal role in the growth of digital convergence in the fashion industry. Especially with the increase in customer data, manufacturers, retailers and service providers are optimizing on all touch points to be able to reach out to their consumers and keep them updated in real time with the help of personalized advertising and product offerings.
Urbanization has led to an increase in the share of countries outside of Europe and USA, primarily the faster growing markets of Asia – China and India.
Source: Industry Reports, Deloitte AnalysisAgainst the backdrop of these fast moving trends, and changing preferences of consumers, companies will need to break down their processes and re-develop newer patterns to be able to grow further and remain relevant in lost ground. For some it will be easier – Zara and H&M have been relying on their uniform brand identity, but at the same time consumers are also demanding more from local brands and products. It is this bittersweet reality that keeps larger brands vigilant and work on how to constantly improve for much more agile competitors, whether they like it or not.