Revamping fashion sourcing: Speed and flexibility to the fore
Even as some countries recover from a catastrophic pandemic, apparel sourcing faces a perfect storm of challenges: demand volatility, supply chain disruptions, rising costs, and profit pressure. These challenges have thrust the supply chain to the top of the agenda of fashion chief executives around the world. To address them, a fundamental shift toward a sourcing model that is flexible, fast, sustainable, digitally enhanced, and consumer-centric is required. This transformation will need to span all areas of the product development process.
A transformation is underway
Half the companies surveyed by McKinsey, have embarked upon major transformations, jump-started by the pandemic: they are changing up their operational and design processes, their sources, and their ways of working. Assortment decisions are shifting, with brands using advanced analytics and virtual pretesting to refine their product lines. Design adoption rates are set to rise, with reduced product complexity. Fabric consolidation, platforming, and fabric prebooking will become even more common. Sustainable materials and 3D design are significant trends, while designs developed by vendors or in-house in sourcing offices will also play a greater role. Due to travel restrictions and supply chain disruptions, there’s been a surge of alternative approaches to sampling. Nonphysical sample approval is here to stay, with virtual sampling proving more popular than video sample assessment. Apparel companies are also looking to change their sourcing-country mix, turning their attention to reshoring, and particularly nearshoring, to secure the supply chain. Overall, the focus on speed and flexibility is leading to more diversified and complex strategies: dual or multicountry sourcing to increase in-season reactivity, and analytical sourcing decision making. It has become vital to forge strategic links with trusted suppliers, especially those that invest in digitization, and are fast and flexible regarding production cycles and batch sizes. Long-term, committed relationships with key suppliers are increasingly favored. Digitization has emerged as a vital element of success.
The industry has made clear progress here: digitizing interfaces, introducing advanced analytics, improving operational and design processes, and aiding transparency. Companies need completely new operating models to manage the increased complexity. They are working to overcome siloed structures and the tendency to prioritize cost concerns over net product margin.
Supply-chain disruptions are here to stay
The challenges facing the apparel sourcing sector—demand volatility, logistical disruptions, cost pressures— are tougher than ever. Most players in the sector recognize a need for more consumer-centric and sustainable operating models, and the ramped-up speed and flexibility these require. While discussion around demand driven supply models has been going on for years, only a select number of brands and retailers have transitioned to the agile, digitally and analytically enhanced sourcing models best matched to current conditions. COVID-19, however, has brought greater urgency. Pandemic disruption put immense strain on brands’ and retailers’ sourcing organizations, as well as on manufacturers. This brought sourcing issues to the fore: for the first time, supply-chain concerns are mentioned as the numberone challenge by global CEOs and executives.
Supply-chain stumbling blocks
Shipping disruptions: Harbor shut downs, port congestion, container shortages, and capacity issues in sea and air freight have all contributed to delays .For example, the availability of container vessels is down 11 percent from last year. Demand surges have only added to the strain. These issues will persist into 2022, and potentially beyond: consolidation in the shipping industry might lead to reduced fleets, while in the medium term, more restrictive EU regulation of ship engines may result in selective bans of vessels in certain ports.
Volatility of demand: Uncertainty in the apparel sector has been prevalent for some years. Now, post-COVID-19, we see uneven recovery and demand spikes. European and US consumers’ pent-up clothes-spending power has been released, straining production and transport capacities. At the same time, a growing income gap is putting even more pressure on mid-price segments.
COVID-19: The pandemic as one of CPOs top five impacting factors: Whole country manufacturing bases are still ramping up, or down, in its wake. Uneven global recovery vaccination rates will continue to impact business for at least the next year, as will the shift from pandemic to endemic disease conditions.
Raw materials: The main Asian sourcing countries are beset with supply issues, as the flow of raw material from China is hampered by longer lead times, the Xinjiang cotton block, and power shutdowns. Other countries, too, fear energy or power shortages and price hikes hitting the textiles industry. Beyond Asia, a shift to nearshoring is made difficult by limited raw-material supply, and, at times, hefty price markups. Regarding sustainable materials, one in three CPOs surveyed by McKinsey say they plan for more than 90 percent of their product to be made with sustainable fibers by 2025, and two-thirds put this figure at half at least—but a broad industry shift to more sustainable raw materials is increasing feedstock uncertainty.
Online sales: During COVID-19, there was a surge in online sales and digital adoption rates, with many new users added. Even with stores reopening across the US and Europe, this change is here to stay: Online sales will not fully revert to prepandemic levels. At the same time, the new generation of online fast-fashion players is growing: in the US, Chinese company Shein has more than doubled its market share, taking the fast-fashion lead in 2021. These are not simply short-term disruptions, and they are challenging the fashion industry to undergo fundamental changes. Future demand forces and supply risks will only accelerate the transformation.
Costs on the rise
The end of the era of sourcing-cost deflation was never as apparent as it is today.For the first time in ten years, shipping costs are the leading driver of this concern, followed by raw-material costs—a shift from the 2019 focus on forex rates and labor costs. High demand and supply-chain disruptions have pushed up ocean price-spot rates by a factor of four to five.
Shipping prices are expected to stay high: Capacity will remain limited, and further consolidation of shipping companies may lead to more pricing discipline. Traditional freight forwarders are at risk due to the enhanced capabilities of shipping companies, as well as digital attackers. Additionally, the cost of CO2 certificates for fuel is expected to increase transport costs.
Recently, raw-material prices have been surging, with cotton and polyester prices increasing by more than 30 percent within the last year. Looking at longer-term price trends reveals, that this is partially a reset after a dip. Prices aren’t at historic levels. Further price increases are expected, due to a shift to more sustainable materials as well as price markups on materials in nearshore markets. Labor costs received less attention, as many sourcing countries put wage rises on hiatus during the pandemic. This is coming to an end, with the preCOVID-19 trend toward increased wages reasserting itself. Given this inflationary environment, many sourcing executives are unconvinced that changes to their sourcing strategy will contribute significantly to cost reduction.
Also evident is a gradual shift of focus from input cost to net product margins. Nearly three out of ten companies are planning for a five- to ten-percentage-point increase in the share of products sold at full price. However, this will require more than just better planning, shorter lead times, and more in-season reactivity to cut down overstocks. Slashing markdowns will not be enough to safeguard margins. Higher retail prices are required as well—which means companies need to work that much harder to convince consumers once again of the enduring value of fashion.
A set of bold moves to cope with ever-changing customer demand is proposed by business strategists. The successful organization of the future will completely revamp their operating model when it comes to tools, capabilities, and processes—and the role of their sourcing teams. CPOs can take responsibility for turbo charging the adoption and ownership of digital tools, while filling the digital skills gap. Flexibility and speed can be maximized, while protecting margins, with a strong network of supplier partners. And finally, with improved calendar management, an end-to-end (E2E) mindset can be enabled across the organization, presenting solutions for the apparel industry of today—and for the uncertain years ahead
Source: McKinsey Apparel CPO Survey 2021