The Stock Inefficiency
The cost of inventory that cannot be sold is no longer the largest inefficiency of the fashion industry alone. It is a phenomenon that contributes to social and environmental crises, with immense pressure for low cost production and inappropriate disposal of unsold items.
In an era where consumers are constantly being exposed to and influenced by new trends, not just by their peers, but by the entire world through a single click, brands are expected to surprise every other week. This new reality does not resonate with the traditional structure of the apparel industry, which focuses on a “push”-based supply chain: producing inventory in accordance with historical consumption patterns, pushing products on the customer through marketing, and offering discounts if necessary.
By working on a collection for months in advance, sometimes even for longer than one year, fashion brands aim for high volume with low unit costs. Some retailers knowingly overproduce to achieve the lowest cost-per-piece, hoping they will be able to sell it down the road. However, this framework can result in a vicious cycle of end-of-season markdowns, driving many companies into debt or even into closing operations.
The high-volume low-cost production most retailers work for may just be mirage. At the beginning of the sales cycle, they may be enthusiastic about the 60 to 70 percent margins. However, after all the markdowns and push activities, eroded profit margins end up at 1 to 2 percent. In the US alone, dead inventory costs the retail industry as much as $50 billion a year, without even taking into consideration the costs associated with holding inventory in the first place.
On this subject, the fashion industry seems to be falling behind, maintaining the same operational principles for decades. For years, the inventory efficiency of Zara has been the odd one out, responding to customer demand signals as close to real-time as possible, delivering new products every two weeks. The call for more agile supply chains is evident, the hard part is knowing where to start.
Creating Valuable Supply Chains
The first step to moving away from pushing product into the market, hoping it will sell, into having the customer pulling the product from the brand, is to gather information from the market. More than ever, technology now allows us to have close and frequent contact with potential customers, gathering insights on what their preferences are. Here is where the powerful insights lay, letting brands know exactly what will sell, instead of guessing. With the use of augmented reality, customers can even try on virtual garments even before a sample is created. Just recently, Zalando has acquired a software company whose body-scanning app includes a virtual dressing room to help buyers easily judge whether a garment will be the right size for them. These solutions can drastically decrease product development time and speed up time-to-market, contributing to a more accurate bet on the products that the client will buy. Moreover, customers are willing to accept the wait times that come with on-demand production, so we find ourselves in a win-win scenario.
With the right information in mind, and with the confidence of having already tested the market, design and development teams should organise themselves in design cells. This work methodology creates multidisciplinary teams that work together in short design-test sprints, delivering finished products in record times. This is one of the secrets for the 15-day Lead Time of Inditex’s development teams. Reducing development time by more than 90% will give brands a significant competitive advantage in the market.
Having improved customer interactions and sped up the development process, it is now time to focus on production and delivery. The traditional strategy to search for low cost production facilities can take brands into distant geographies, resulting in increased transportation costs, and reduced flexibility when it comes to batch sizing and short-notice productions. With that said, when moving towards a pull system, sourcing localism takes on an important role. Not only will retailers save in shipping and duty fees, but they will also reduce turnaround time.
It is important to notice that suppliers need to become partners, as balancing risk and rewards is key to unlock the full potential of the supply chain. Developing suppliers so that they can deliver a better service will be a winning deal for both parties. Just-in-time production will be possible if manufacturers are able to create flow in their operations, allowing for capacity and flexibility of skills. Following this trend, Louis Vuitton was able to shrink the production time of a handbag from eight days to one, by clustering craftspeople in cells instead of assembly lines. This allows for faster response to customer demand and replenishment based on consumption.
Another important aspect is the timing for product differentiation. Postponing this differentiation can help speed up turnaround time without the risk of finished product stocking. By purchasing raw fabric and only differentiating it when production is scheduled, Inditex saves weeks in development and reduces trapped capital.
Suppliers should become long term partners, growing together with their clients. As a response to the recent crisis, some companies managed to reduce stock-in-trade by almost 20 percent at the end of July 2020, by taking advantage of flexible purchasing agreements that allow the company to rapidly adapt to changes in demand. This is an example of how these partnerships can help in managing uncertainty.
It is clear that punctual and silo improvements are not going to transform the fashion industry. There needs to be a change movement in the total length of the supply chain that allows for the creation of an efficient ecosystem that delivers more value to all stakeholders, from suppliers, to retailers and customers.
The supply chain transformation requires moving the focus away from the cost-per-unit out of the factory, and into a collaborative structure that considers every step of the process, taking the most out of each transaction. Breaking down all the components of the finished product and its operations will be key to finding the most flexible and valuable solution. This is not only a process transformation journey, but also a cultural one, which is only possible with clear goals, strong leadership, engagement, and alignment of all stakeholders.
By witnessing and driving success stories with a 40% decrease in total inventory coverage, 60% decrease in turnaround time and 3 percentage points increase in market share, we are led to believe in a made-to-order business model, focussing on the elimination of waste and on sustainability, guaranteeing the success of the fashion ecosystem.
In an uncertain economy, with trends and technology changing at lightning speed, those who are able to adapt quickly will certainly be the ones to succeed. Agility and flexibility has never been more urgent for fashion industry players. The need is clear, the next step is to start the change engine.