Digitisation – The next apparel sourcing hotspot?
14 September 2017 | Features & Interviews | Source: Leonie Barrie
So far, the promise of digitisation in the apparel industry remains largely unfulfilled. But with opportunities for new cheap supplier countries nearly exhausted, it is now seen as offering sourcing executives untapped potential to lower costs, shorten lead times and increase transparency. A new survey takes a deep dive into unlocking digitisation's potential.
The numbers are eye-opening. More than 80% of apparel company chief purchasing officers (CPO) surveyed for the latest in-depth study from global management consultant McKinsey & Company say they expect digitised end-to-end process management to have the greatest impact on sourcing in the next five years.
This includes integration of product-development and procurement processes (including assortment planning, design, and production) in a single cloud-based system.
Yet the 63 international executives who took part in the survey and between them manage approximately US$137bn in sourcing value, also acknowledge their companies' digitisation maturity is still low or very low. And they have the same view of their suppliers.
Five years from now, the picture may be very different: more than two-thirds of sourcing executives expect to have digitally enabled capacity planning in place, helping them to allocate production capacity more efficiently and spot bottlenecks earlier.
A similar number expect to have digital portals up and running to foster transparency and collaboration both with external suppliers and internal colleagues.
The push to digitise the core sourcing process is being driven by pressure to transition from a focus on supply to a focus on consumer-centricity and demand.
However, the research report, 'The apparel sourcing caravan's next stop: Digitization,' also points out the apparel industry still has some catching up to do and the goal of becoming fast, transparent, and flexible by 2030 requires significant investments and a real mindset shift.
"Fashion retail is seeing sinking profit margins, increasing overstocks, and massively changing consumer behavior. Clothing companies need to become quick and flexible when it comes to satisfying the consumers' demands," says Achim Berg, senior partner and leader of McKinsey's fashion consulting group.
"Digitisation offers great potential to shorten lead times and give consumers the products they want to have. This is the case whether it involves selecting on of production locations using advanced analytics, technological collaboration with suppliers, or producing virtual prototypes."
The business impact of these digitally enabled sourcing solutions could be exciting. A majority of the CPOs say they expect digitisation will help reduce their lead times by two to eight weeks, helping them achieve the agility needed in a demand-driven market.
Most are also targeting cost reduction – as a percentage of FOB price – of at least 2.5% through digitisation alone.
Digitisation is also seen to have the largest impact on end-to-end process management: 83% anticipate that it will lead to quicker decision making, fewer errors, and increased customer orientation.
Pioneering companies are already providing a glimpse of this future. For example, those that have implemented 3-D design and virtual sampling report shortening the sampling process by two weeks or more, and they often see reductions of 50% in the number of samples needed and the cost involved.
And apart from reducing the time and cost of the design process, this is also reducing the environmental footprint of production.
The digital impact
McKinsey believes the potential for digitisation to deliver in the apparel industry lies not in applying digital solutions to manual sourcing processes, but instead evolving the industry's entire approach to sourcing and product development.
This includes using technology to create transparency throughout the supply chain, adopting advanced analytics and artificial intelligence, redesigning and digitising processes, and making greater use of automation.
Only by adopting an end-to-end perspective, fostering collaboration across functions, and strategic partnerships with suppliers will companies be able to deliver the agility and flexibility needed to give customers what they want, when they want it, where they want it, and at the right quality.
The four largest digitisation opportunities highlighted in the survey are:
- End-to-end process management (rated as a high-impact area by 83% of respondents). Replacing Excel and e-mail by centralising information and processes in one cloud-based system can deliver "one truth," real-time information visibility, increased decision-making speed, reduction of errors, clarification of roles and responsibilities, streamlined supplier collaboration, overall reduction of time to market, and real customer-centricity.
- Capacity planning (71%). As companies adopt multi-country, multi-vendor, dual-sourcing strategies, digitally enabled capacity planning can help identify constraints earlier in the process and accelerate allocation decisions. However, it will also require closer collaboration with suppliers – so companies will need to integrate their systems closely.
- Business and supplier collaboration portals (67%). Early involvement with internal customers and suppliers is critical for good sourcing – as are digital platforms that enable internal and external partners to jointly challenge demand forecasts, design specifications, and legacy processes. New solutions specifically geared towards the requirements of strategic sourcing are also expected to challenge existing assumptions on what, where, and how to source – and thus unlock time savings, improved accuracy, and better decision making.
- Integration of should-cost in design-to-value (62%). Digitisation can support companies in integrating real-time cost information right into the design process, as well as provide more detailed knowledge of cost elements across the organisation.
What stands in the way of digitisation?
Given the widespread use of e-mail and Excel sheets in managing the apparel value chain, the three main barriers to greater investment in digitisation are: system architecture, interfaces with suppliers, and data quality.
Where more advanced tools are used, these are seldom integrated across product development stages, thus limiting their full potential, the report says.
To truly improve performance, it suggests companies need to move beyond simply applying technologies to existing manual processes – for example, integrating PLM and ERP systems. Other barriers identified in the survey include in-house capabilities and talent management.
Companies are also advised that in addition to developing new skillsets, they must foster a true mindset shift across sourcing departments and suppliers, product development, production and logistics if they are to transform from a transactional approach to supplier relationships to true strategic partnerships.
Perhaps not surprisingly, suppliers also have a long way to go in the digitisation capabilities too. The two biggest issues identified by sourcing executives are interface management and tracking and tracing in manufacturing and upstream.
Among supplier countries, China was rated higher in sourcing digitisation than any other country, followed by Turkey and Bangladesh.
The survey also identifies opportunities for digitisation in predictive analytics in production and demand planning, 3D design and virtual prototyping, digital printing, automatic/dynamic inbound planning, and radio frequency identification (RFID) in manufacturing and the inbound supply chain.
Among these, predictive analytics is seen delivering greater impact potential than any other digitisation lever. Beyond assortment planning or allocation, it can leverage machine learning to strengthen trend forecasting, optimise decision making in the creative processes, and improve design performance. Companies can also use predictive analytics to analyse hundreds to thousands of internal and external variables that influence demand, such as weather, trends from social networks, and sensor data.
3D design and virtual prototyping is another game-changer, cutting several weeks from the sampling process and often halving the number of samples needed and the cost involved. Together with integrated fabric or ingredients libraries, companies can integrate real-life costing into the process. Some solutions link the 3D sample directly to marker efficiency, and thus drive improved efficiency and waste reduction in automated cutting processes. At the same time, 3D design and virtual prototyping enables closer collaboration throughout the production development process as well as with suppliers. The applications possible at these later stages include virtual showrooms and virtual catwalks.
Digital printing, meanwhile, is rated the most advanced aspect of digitisation in apparel manufacturing and, together with automated cutting, can dramatically reduce production time, increase flexibility, and reduce waste. Digital printing can also "democratise" design by creating the flexibility to run multiple small batches. However, it should be seen as part of a fluent digitised process that includes 3D design, virtual grading, virtual size fits, and costing, the researchers say.
Another digitisation opportunity to watch is blockchain technology, which has the potential to transform the way information and transactions are captured, owned, stored, and shared among companies and whole ecosystems – and thus radically increase transparency across the supply chain. In addition, it will enable much easier end-to-end tracking of products along the value chain.
Robotics and automation
Hand-in-hand with the impact of digitisation on the apparel industry, the survey also looks at automation in production.
As robotics technology grows in sophistication, widespread automation of apparel production is becoming a real prospect. More than 60% of CPOs in the survey believe automation will become a major driver of sourcing decisions by 2025.
But automation will coexist with manual production in low-cost countries such Bangladesh and Ethiopia, where apparel companies are building major new facilities and training thousands of workers.
Executives therefore expect a "multispeed model" to emerge. High-end, quick-turn products will be produced in (semi)automated plants in developed markets, while longer-lead-time commodity products will be produced in low-cost countries – where technology will support, not replace, the workforce.
Automation as an opportunity for reshoring
Automation in production will also be instrumental in generating a new orientation in sourcing. More than half of the survey respondents expect sourcing locations to be decided for reasons of automation, not just on costs. But another 30% assume this may not be the case until 2030.
"Automation also shines new light on proximity sourcing, meaning sourcing in a geographically closer location. Every second CPO agreed that proximity sourcing will become more important, also in being able to satisfy the wishes of customers with more quickly available products," explains Saskia Hedrich, co-author of the report.
Every third European sourcing executive expects that the trend of reshoring (bringing production back to the home market) will become even stronger due to automation; among US American CPOs, this is believed by even more respondents – about 50% of them.
However, one-fifth of respondents see the building up of production capacity in Europe or the US via automation within the next five years as a fantasy.
Looking to the future, nearly 90% of the executives surveyed say they see significantly higher investments in technology between now and 2030, and a large majority expect significant reductions in lead time and increased flexibility in production and product allocation.
Most respondents also foresee a reduction in the number of suppliers owing to increased requirements in digital capabilities and closer supplier relationships.
Among large companies, greater agility in production is seen as one of the greatest prizes of digitisation. In addition, several executives expect major changes in the role and setup of the sourcing office of the future, driven by end-to-end digitisation.
Digitally enabled collaboration and partnerships will enable more direct interactions between designers, buyers, and suppliers. At the same time, automation of manual processes could mean reduced headcount in apparel companies' sourcing offices.
However, the study also emphasises that digitisation must not be seen as an end in itself. Rather, it is a powerful enabler of progress in all the main drivers of future success in apparel sourcing – including the continued optimisation of sourcing country strategy, strategic supplier partnerships, better environmental and labour compliance, and a doubling down on end-to-end efficiency.
Apparel players have a major transformation ahead of them, spanning all these elements. Effective digitisation will help them deliver that transformation faster and with much greater impact.
Click on the following link to read other findings from the report, 'The apparel sourcing caravan's next stop: Digitization,' including why China is set to remain the dominant player in apparel sourcing.