just-style management briefing: Apparel supply challenges in 2011
4 May 2011 | Features & Interviews | Source: Leonie Barrie
Among the biggest challenges facing global apparel supply in the year ahead are rising raw material costs, the changing business climate in China, upward pressure on retail prices, fragile consumer demand, and the need to have the right inventory at the right place at the right time, according to industry experts consulted by just-style.
Bob McKee, industry strategy director for fashion, Lawson Software
Perhaps the biggest challenge facing global apparel supply in 2011 will be for companies to better analyse their business models and make appropriate changes in order to keep their organisations relevant to the industry as we go through fundamental and dynamic changes. Clinging to the same old ways of doing business may not be enough to survive.
2011 is also going to have to be all about inventory control - the right inventory, at the right place, at the right time has never been more true. Retailers and their supply chain partners will have to work in concert to make every effort to achieve the right inventory balance. Today, and into the foreseeable future, consumers are in control, but many retailers don't seem to have understood this shift in dynamics. "You can't sell what you don't have" and "You don't make any money selling close outs/markdowns". Inventory has to be pulled - not pushed. The traditional "Buyer Push" model will not optimise either profits or inventory turns, and the market is likely to become increasingly competitive.
Rising sourcing costs are of course another major challenge. Is your global sourcing costing too much? Are your garment sourcing costs rising? What can you do? You can start looking for the next low cost destination and regularly move, rebuilding your supplier relationships from scratch each time, or you can take a more strategic approach. There are three main options:
- Develop and build on existing strategic relationships - ensure quality, reduce costs, total supply chain solutions;
- Look for a new low cost destination - reduce costs for a time; or
- Consider moving some or all production closer to the point of consumer demand - shorter lead-times, lower inventory, faster response.
'Super Freak'n Fashionomics': the new economics of fashion. As the world starts to emerge from the global economic crisis, there is a new playing field with new rules. A fundamental change in the structure of the industry has taken place over the past two years and is impacting how the industry needs to adapt and respond going forward.
The following are changing the structure of the fashion industry:
- Escalating cotton prices
- Appreciation of the yuan
- A high Consumer Price Index in China that is fuelling inflation (5% in Dec 2010)
- Increasing logistic costs and a shortage of workers means that China is no longer a low cost manufacturing destination
- The economic slowdown and the resulting mergers and acquisitions around the globe
Companies are looking for new channels to the consumer. Manufacturers are developing their own brands, moving into retail and deploying multi-channel sales strategies. There is pressure for greater investment in R&D to provide more value to the consumer. New lean supply chain strategies and inventory policies are being deployed by companies to gain a competitive advantage. International brand owners are eyeing up the Chinese domestic market as a growth opportunity against the stagnating Western markets. Many companies are looking to technology to build a competitive advantage.
Simon Blower, director at SD Retail Consulting
Inflation in raw material costs: Increases in diesel, cotton and steel prices will pile on the pressure to look at all the options for sourcing: buyers and merchants will have to look at ways to improve the cost efficiency of the supply chain and/or to consider alternatives sources. Either way, understanding the impact of these movements in material prices is crucial, as is having open and collaborative dialogue with suppliers to consider ways and means of mitigating the increases.
Upward pressure in retail prices: For the last 15 years or so there has been fairly constant deflation in cost prices for apparel: the rate of exchange for buying in bulk from emerging low cost economies such as China and India. Growing domestic demand in these locations is in part causing the inflation in raw material costs. Perhaps for the first time in a generation, merchants are going to have to increase retail prices in home markets which are facing soft demand due to the economic slowdown in many developed countries. Being able to accurately gauge demand in these conditions is going to be very tough.
Mitigation of risk: Spreading the sourcing net further to capture lower sourcing costs brings with it risk. Really understanding and factoring this risk into buying decisions will be a key challenge. Buying from new and emerging locations brings the challenges of ethical sourcing. Understanding factory and labour conditions are issues that brands can no longer ignore: today's consumer demands that retailers demonstrate social and ethical responsibility in buying decisions. More sourcing from emerging economies brings significant risk; getting a good buying price brings risk of variable quality and an unreliable supply chain. Factoring these into buying decisions will be crucial as part of the overall value chain
Fragile and unpredictable demand: Consumer confidence in most industrial nations is weak, fickle and rapidly changing. To meet these demands, buyers and merchants will need to be able to spot and exploit trends rapidly and effectively. In today's market the whip handle is with the consumer: being able to move quickly, effectively and reliably will turn in good profits. The cost of misjudgement will be high.
Susan Olivier, director of retail, footwear and apparel market development, Dassault Systèmes Enovia
The fashion industry continues to face enormous challenges in today's economic climate. Just as fashion brands and vertical retailers have finally managed to get inventories back in line with reduced consumer demand, they are being hit with increased supply chain costs in the form of higher prices on raw materials, labour and transportation. At the same time, increasingly savvy consumers expect more fashion newness, technical innovation and better prices each year. Add consumer expectations for eco-friendly products and increased government oversight of regulatory and compliance elements, and you have the perfect storm.
All of this has the effect of stretching supply chains even further; chasing both the best sources of innovation for design-for-cost and design-for-environment plus the sources of best cost for materials and finished goods. Increasingly, winning brands and retailers have proven better return-on-investment implementing solutions that allow them to plan in collaboration with their strategic global supply chain partners and then execute to the plan.
Philippe Ribera, group software marketing director, Lectra
The biggest challenge for the apparel industry is how to bounce back in a recovering economy and build the right foundations for a profitable and sustainable future.
What we have seen so far is ever-increasing worldwide demand for raw materials - metals, oil, textiles, food - driven by demand from Asia to sustain high growth in China and India. Looking at textiles, sustained growth coupled with lower worldwide stocks are pushing raw material prices higher and higher. As shipping represents another big share of the total garment cost, the compound effect of an increase in oil price will add to the total cost of a garment.
More than half of a garment's cost is raw material - textiles - so rising raw material prices will push up consumer prices. At the same time, pressure to keep prices low remains a fact of apparel retail life. As consumer spending, confidence and unemployment in key countries such as US are still recovering, companies need to consider drastic reorganisation if they want to retain healthy profit margins.
The only way to soften the impact of these additional costs is by maximising productivity, reducing material wastage during spreading and cutting, streamlining processes to make them more efficient, and enhancing collaboration in order to make better business decisions, more quickly and more effectively. This is essentially a damage/cost control situation.
Another challenge for apparel companies is to differentiate themselves through better quality and design, better negotiating power, superior business forecasting and overall planning, and shortened time-to-market.
For instance, for garments such as children's nightwear, there are different regulatory standards in France, the UK and US: large 'flares' are outlawed in the UK (to prevent them from igniting on an open fire) but there is no similar restriction in France. Likewise, the regulations on drawstring length vary between the three countries, and fire regulations (flammability tests on the raw material used) are also completely different.
Managing these challenges will lead to higher protected margins, lower controlled costs, and reduced redundancy across all layers of the business, not just the supply chain.
This is not just a post-crisis transition, but rather a permanent change as we enter a new era redefining the importance of value for money. Pre-crisis processes and business drivers are now part of a past to which the fashion industry will never return. More than ever before, those businesses will harvest the benefits of a fashion-specific PLM designed precisely for these new efficiency-based business drivers.
Chris Groves, president and CEO, Centric Software
The changing business climate in China is one of the biggest challenges facing the global supply chain this year. Rising production and labour costs, quality control and appreciation of the Chinese currency are creating new challenges for what has been an offshore mainstay.
Suppliers now are choosing with whom who they want to do business, and reliability is increasingly a concern. Vendors will confirm delivery dates, but then push them out (sometimes repeatedly). Or they may accept orders, but won't confirm pricing for 90 days or more. Finding suppliers who can meet commitment dates and help hold input costs as steady as possible is critical.
Infrastructure problems are also concerning. Many factories have unreliable power supplies. Skilled labour is at a premium, labour rates are rising, and some factories can't find or keep staff.
Managing in the global economic recovery will also be a challenge. The economy is recovering, but that recovery is still tentative in consumer-based markets. It is hardly robust enough that companies can pass along straight-through price increases on non-essential goods such as apparel and many fast-moving consumer goods.
An urgent and ongoing need to do more with less will continue to drive business. Pressure will continue for staff to become ever more productive and efficient. Companies will be pressed further to conduct planning with up-to-the-minute information. In the past, for pre-product launch planning, it was sufficient for management to use dated information (at best, information that was two to four weeks out of date; at worst, the previous year's supply chain information).
With shifts in the supply chain and razor-tight margins, managers today much plan with a firmer understanding of the season at hand. Time lags for worldwide partners to update information via multiple spreadsheet versions and e-mail messages will no longer be acceptable.
Mark Burstein, president of sales, marketing and R&D, NGC Software
Apparel supply chains face cost pressure on multiple fronts in 2011. Raw materials prices have soared, with cotton reaching an all-time high in February. Wild fluctuations in the cost of materials can leave apparel and fashion companies in a precarious position. Companies that don't properly manage their raw materials commitments can get caught in the spiral of escalating prices and end up losing money on the merchandise they sell. Private-label apparel companies may be unable to pass along these increased prices to their retail customers, and retailers are very reluctant to raise the price to consumers.
Skyrocketing fuel prices are another key concern. Oil is hovering near $100/barrel and is headed higher, driven by the turmoil in the Middle East. This means that companies must carefully manage their design and production timelines; if schedules slip, expedited shipments will be much more expensive than before.
These problems are further compounded by the rise in labour costs, which forced many apparel companies to rethink their sourcing mix last year.
Charles Benoualid, vice president, research and development, Visual 2000 International
The reduced availability and corresponding large scale increases in the price of raw materials are among the biggest challenges. Product costs are rising at a time when passing cost increases along to consumers is a risky proposition. All supply chain participants are working to minimise the impact of these materials supply and cost challenges.
In addition, labour costs are rising in China and elsewhere along with the standard of living in these regions. Fashion companies are challenged in an environment where rising costs and political unrest make it more difficult to find new sources of labor. As China's economy booms, it will clearly take some time to bring new and capable workers to fill the sourcing gap.
Paul Magel, president, Applications Solutions Group, CGS
Increasing raw materials costs are clearly top of mind for many retailers, brands, and full package manufacturers. A 180% increase in the cost of cotton has the power to change the business. But other rising costs such as the cost of labour in China and global shipping rates have companies rethinking everything from the fabric content of their products to alternative sourcing locations.
The cost issue does not stop there. Many fashion goods companies are also challenged with the increasing costs of compliance. Perhaps most noteworthy are the costs of complying with changing governmental product safety regulations. As retailers work to push more of the cost equation upstream, suppliers struggle with increasing informational compliance chargeback penalties.
Retail compliance is one part of a larger supply chain challenge to achieve and maintain a timely and accurate flow of information across the entire product lifecycle. Today's compressed cycle times and cost constraints leave little room for errors and delays anywhere in the supply chain. All supply chain partners are challenged to improve their ability to share information and provide the visibility needed to improve collaboration and enable warnings of all product issues or process delays.
In a highly competitive market, we expect to see continued and increasing consolidation at both the retail and wholesale levels. This is perhaps most acute for mid-size companies that are challenged to compete with larger companies that enjoy greater brand recognition and economies of scale in supply chain operations. Not only must they become more innovative with their products, they are challenged to more clearly identify their role in the supply chain and the fashion industry.
Andy Lynn, vice president business development, RLM Apparel Software
We believe that gaining better control over fabric and sample design costs is a popular issue for 2011. As companies bounce back from the recession, many of them are working to avoid making some of same mistakes they made in the past. This means doing things differently, such as planning sample and design budgets better and increasing supply chain visibility to eliminate unexpected and unnecessary costs.
On the front end of the business, suppliers are challenged to adapt to a new set of retail requirements. Many retailers, especially the large internet players, are adding greater supplier compliance requirements to help increase their own efficiency. This and other pressures are helping small and midsize wholesalers recognise that technology needs to be at the forefront of their day to day operations.
Paul A Friedman PhD, founder and chief visionary, Fashionware Technologies
2011 is all about the usability of software in the workplace, including the design room, sample room, factory floor, and cutting room. Software is no longer about building applications that are desk-oriented, or static, that require users to sit at a desk to work. That's why we offer PLM software that runs on touch-screen tablets.