Facing up to fashion's supply chain challenges
By Petah Marian | 16 March 2012
From left back row: Mike Flanagan, Clothesource; David Hawkswell, Freudenberg Nonwovens LP UK; Stephen Scott, Matalan; Ian Burns, HSBC Bank plc; Terry Milner of Terry Milner Limited; and Simon Allitt, UL-STR UK Front row: Paul Boland, Torque; Mike Sharp, Per Una; Maureen Hinton, Verdict Research Analysis; Sara Honeywell, SDG; and Maurice Bennett CBE
The UK retail sector is under increasing pressure from continuing weak consumer confidence and rising costs. With many of the factors at play largely out of retailers' control, having a strong supply chain is key, according to speakers at a seminar organised yesterday by the ASBCI on 'Facing Fashion's Supply Chain Challenges'.
Slowing sales growth at UK retailers is largely driven by price increases rather than consumers buying more, says Verdict lead retail analyst Maureen Hinton.
In the value fashion channel in particular, there has been lots of consolidation she says, with some 90% of volumes going through the top ten value chains. Demographic shifts are also set to challenge the sector further, with the number of people in the 65+ and 0-14 age groups set to grow, but a bleak outlook for those in the 15-24 and 25-34 age groups.
However, opportunities still remain, Hinton believes, with international expansion still an attractive option, private labels for retailers, as well as encouraging groups like men and older consumers to spend more.
Against this backdrop, Maurice Bennett, the joint chairman of Long Tall Sally, Kookai UK, and chairman of Austique, describes the sector as being "under siege" from many sides.
Management of the supply chain is "more crucial than ever," he says, to control issues like rising raw material costs, the devaluation of the pound and rising transport costs.
Bennett is calling for increased co-operation between buyers and suppliers - saying that it is up to buyers to find the right factories, with the skills and logistics to meet their requirements. He laments that some buyers' only training consists of negotiating skills to beat down prices, and that their "knowledge of the manufacturing process is often deficient".
An "understanding of the processes and technical knowledge of production make it possible for discussion to take place on how to create the best looking garments, while keeping costs within budget."
Bennett also emphasises the importance of having a replenishment policy for winning products, which can "easily add another 20% to sales".
However, he emphasises that the life of garments is getting "shorter and shorter", and that replenishments ideally need to be back in store within four weeks. Yet this is only possible if the raw materials have been purchased in advance, or in the unlikely event that the fabric supplier holds stock.
Collaborating with suppliers
A strong and stable supplier base is key in the mail-order market, when catalogues are with consumers for up to six months, explains Shop Direct Group (SDG) supplier relationship manager Sara Honeywell.
The company has a rigorous supplier selection process, with SDG taking steps to ensure that its suppliers are financially stable before featuring them in its catalogues.
But the retailer also continues to monitor and support them through the supply process, with a financing scheme, post-shipment finance for companies in the Far East and working with credit insurers to ensure that suppliers have appropriate limits.
It also monitors supplier risk scores on a weekly basis, which enables it to spot problems before they become critical - and work with the supplier to resolve potential issues. Honeywell says the retailer has seen a "massive reduction in supplier failure over the past 18 months", adding that it doesn't "want to have a hand in putting suppliers out of business".
Changing financing strategies
While Shop Direct Group is working with suppliers to help them with financing, HSBC senior international business manager Ian Burns also says "banks are looking to lend" - although the type of finance banks will give suppliers and retailers is changing.
He describes how HSBC has seen several large corporate buyers working to assist their suppliers by signing up to supplier invoice financing. With this type of scheme, a buyer enters into an agreement with the bank to finance named suppliers.
"These suppliers will then send invoices as usual to the buyer, who will approve them and send them to the bank who provides the finance to the supplier". As the invoices are pre-approved, this reduces a number of risks, allowing the funding at lower costs.
Burns notes there has been a shift in the way banks are lending, with a preference to have some form of "structure for the facilities rather than using an overdraft".
Banks may now look to be included early in discussions with their customers to understand the trade cycle and provide a finance option which suits the individual client's requirements by bridging the gap between paying a supplier and receiving the proceeds from a sale, he says.
Following the internationalisation of the Chinese Renminbi, there is also an opportunity for buyers to negotiate a discount for paying for goods in yuan rather than US dollars.
"It is believed that historically suppliers would add 3-7% to invoices to cover the conversion from USD to RMB so there is a real possibility that UK buyers can negotiate a discount for this option," says Burns.
However, he adds that some suppliers may be reluctant to acknowledge that they can accept these payments as there is a theory that they are "hiding a bit of profit in the exchange rates".
With much debate over the future of Chinese sourcing, Clothesource CEO Mike Flanagan emphasises the difficulties of predicting the next "sourcing hotspot".
He says the number of sourcing locations has fallen in recent years, with the top 20 countries accounting for 74.3% of clothing exports in 2004, with that number increasing to 91.2% in 2010.
While China has "never been cheapest or fastest", it has become "relatively more competitive" due to its experience in the sector and reliability. "When they turn the lights on they stay on," he says.
He argues that while China's dominance as an apparel supplier is not guaranteed forever, it will remain with us for a "good few years yet".
Flanagan recommends having a diverse sourcing base. "Buyers need the widest sourcing radar, both nearshore and in the Far East," he says.
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