Report from the port! It appears supply chain bottlenecks that plagued the apparel industry over the past year are easing. Good news, right? Not so fast. Report from the stores! Holiday sales of clothing were robust. Good news, right? Not so fast. Report from Ukraine! Russian troops on the border. Bad news, right? You bet.
And our industry is caught in the middle of this maelstrom. So, let’s unpack some of the details beginning with the port situation. Things may be marginally better (the Port of Long Beach, for example, reports record clearing of cargo), but the high costs of shipping freight globally remain a severe problem.
Next, despite the sense of relief for many in the trade with strong US holiday sales figures, retail sales of clothing have pulled back over the last few months. Normal seasonality or early signs of a weakening economy? It’s hard to say; as it’s too early in the year to know.
What’s more, consumers have returned much of the clothing purchased during the holiday season. Why? Consumers embraced “bracketing” for online clothing purchases: buy three sizes of the same garment, keep one that fits and return the other two. Not great for the bottom lines of retailers or the environment. Many of these returns will end up burning in a landfill.
And then there’s the standoff between Russia and Ukraine. What’s prompted Russia to amass more than 100,000 troops on its border with Ukraine? Innocent military drills? Unlikely. A prelude to war? Let’s hope not. All this saber-rattling comes when the world has had to cope with a pandemic, so it may be a calculated risk that aggression could work while the world is preoccupied.
More bad news for apparel supply chains: Inflation
The bad news keeps coming, folks. For example, in the US, the Federal Reserve may raise its benchmark rate as many as four times this year in a bid to tame inflation. Indeed, suppose the Fed is aggressive in its determination to tame inflation. In that case, there will be dire implications for our industry.
Why? The funny thing about higher interest rates and higher inflation is that both result in weaker consumer demand. This is because the cost of borrowing money to buy products, which costs more because of inflation, results in consumers thinking twice before buying new clothes.
And if borrowing costs go up, what does that mean for apparel businesses that need lines of credit to fund their operations? A lot. The days of low-interest easy money are over. The cost of doing business? It’s gone up already. So, get braced for even higher prices.
What’s more, Europe is facing higher inflation, too. The European Central Bank has said it won’t raise interest rates to curb a recent spike in inflation, but that’s also what the Fed said last year when inflation first gained steam. In either case, higher inflation will result in higher interest rates.
Apparel supply chains – the problems
In a way, supply chain bottlenecks are analogous to the difficult times we live in. Things that worked well in the past don’t work so well anymore. Blame it on Covid, sourcing complacency, or just bad luck, but here we are. The world has changed – and change is often hard to stomach.
However, we can learn from change, adjust, and rethink previous assumptions. For sure, there are gaps in the system of global supply chains, including apparel. Still, there are some solutions worth exploring to fill those gaps and rebalance supply and demand while identifying the best ways of conducting business in this new world.
In considering the state of global supply chains, it’s prudent to review some of the problems that continue to plague our industry today. For sure, some of these problems can be solved in the short term, while others will require more careful consideration.
So, here are some problems directly affecting supply chains:
First, there’s the unknown. The pandemic is still on the loose and continues to cause all sorts of logistical problems as worker shortages and port slowdowns affect both exporting and importing countries.
Second, higher shipping costs remain the most significant cause of higher prices of goods for companies. Container rates from China to the US are still running at rates many times higher than pre-pandemic.
Third, backlogs remain a problem at both importing and exporting ports. Which begs the question, how will brands sell products released to them after being delayed at ports for a season or more? From an environmental perspective, these products may end up acting like some bad direct-to-cable movie or, more properly expressed, the direct-to-landfill business.
Fourth, rising raw material costs rival the rising cost of container shipments. All fibre prices have increased in line with sharply higher cotton prices. In turn, this causes a trickle-down effect down the supply chain as each segment raises prices to crawl back some margin. However, the net impact on brands and retailers is sharply higher aggregated costs for their imported products.
Fifth, a higher cost of goods typically translates into higher prices for consumers. Hence, the run-up in inflation. However, prolonged inflation will inevitably result in weaker demand by consumers put off by higher prices. What’s ironic, though, is that pent-up consumer demand after months under lockdown during the pandemic soared, which helped to create the supply chain problem in the first place. Only now that recovery may stall if inflation remains a persistent problem. Either way, brands, and retailers are caught in the middle between their customers and suppliers.
Apparel supply chain solutions – learn from our problems
So, those are some of the problems. What can we learn from those? Plenty. Here are some suggestions to solve these supply chain issues:
First, diversify sources of supply to increase production and delivery options. Problems with supply chains boil down to a supply-demand imbalance that the market has struggled to rebalance. And an over-reliance on one or two big suppliers. Get over it. It’s time to diversify.
Next, explore suppliers closer to consuming markets or suppliers located in consuming markets to either shifts ports of entry into consuming countries or avoid such ports altogether. Again, this may require a shift in focus away from exporting for the sake of exporting. A more nuanced approach where speed-to-market helps brands serve consumers more efficiently. And it has an environmental benefit by eliminating the carbon-spewing tens-of-thousands-of-miles long supply chains that typify much of today’s global trade.
Further, experiment with different fibre blend levels to maintain consumer appeal, which mitigates fibre costs. With everything going on in the world today, along with the potential for weather-reduced cotton crops, tensions over Xinjiang cotton, and continued trade friction between the US and China, synthetic fibres may provide a cushion against higher cotton prices. Polyester is still cheaper than cotton. As we saw when cotton topped US$2.00/lb a decade ago, it may be time to embrace clothing made with more synthetic fibres.
Finally, adopt a comprehensive risk management strategy to hedge company exposure to unforeseen price spikes and maximise declines in costs when possible. It’s puzzling to realise that many brands lack a risk management strategy. Sure, many understand risks associated with sourcing, but that’s where any mention of risk often ends. Moreover, brands often don’t understand commodity risk management, let alone hedging tools that exist for transportation and energy costs.
War is no one’s friend
An additional point is worth making about supply chain disruption: The potential of war. It’s hard to ignore the headlines these days. A standoff between Russia and the US over Ukraine – with Europe caught in the middle – has implications for the apparel industry’s supply chains and cost structure.
For instance, if we think inflation is a problem now, a shooting war will only exasperate that problem. And then there’s China, a likely supporter of Russian goals in Ukraine. Should the US and its NATO allies impose crippling economic sanctions if Russia invades Ukraine, China could test Western resolve by offsetting those financial penalties.
After all, there is precedent for this: when Russia annexed Crimea back in 2014, China made a huge purchase of Russian natural gas. By doing so, China helped to soften the impact of Western economic sanctions against Russia.
Moreover, China has a motive to pal up with Russia to test the mettle of Western leaders and, in particular, US military capabilities around the world. Indeed, should circumstances find the US stretched militarily, what could happen in the Taiwan Straits? It’s a scary prospect.
By definition, global supply chains are intertwined with geo-political, great power rivalry. Besides the horrors of lost lives and destroyed property, shooting wars disrupt the normal flow of goods and services.
A final kicker: The problems that knotted-up supply chains for months may be further complicated by disruptions at China’s ports due to Omicron outbreaks and the Chinese government’s zero-tolerance policy. The fact China is hosting the Winter Olympics this month only makes matters more complicated.
Downhill skiing, anyone?