Originally posted, May 7, 2020
The coronavirus outbreak has battered the global fashion industry, creating mass upheaval for both buyers and suppliers. But it is also giving companies a much-needed opportunity to look closely at their supply chain relationships and business models for the future. There is a phenomenal amount of uncertainty in the industry at present; brands and retailers have been hit hard by lockdown measures applied across most nations forcing them to shutter stores, furlough staff and take steps to shore up their liquidity. For some, the virus has proved to be the final straw, with UK household names Debenhams and Laura Ashley collapsing into administration. In the US, J.Crew Group is the latest to file for Chapter 11 bankruptcy protection as part of an agreement that will hand over control to its top lenders. Suppliers have also been hit hard, with millions of dollars worth of orders cancelled, prompting factory closures and worker layoffs. Six major garment exporters – Bangladesh, Pakistan. Cambodia, Vietnam, Myanmar and China – have come together to call upon global brands and retailers to consider the potential impacts on workers and their supply chains when making purchasing decisions. "The industry in general is looking pretty grim. This is unchartered territory. A supply shortage turned into over-supply virtually overnight – and if the virus and store closures linger on for much longer, there will be a bloodbath amongst many Asian factories," explains Stanley Szeto, executive chairman at fashion supply chain manager Lever Style. But is the real challenge yet to come? Once the recovery gets underway, what will the supplier/buyer relationship look like? Supply chain mapping Flora Davidson, co-founder of SupplyCompass, a product development and production management platform for the fashion industry, says it would have been almost impossible to factor the Covid-19 pandemic into a contingency plan. Even so, "there is the opportunity to mitigate some of the risk in these situations, and that comes from really knowing your supply chain inside out." Many businesses, she believes, still do not know much about their supply chains beyond their tier-1 producers. "Some don't even know where that final production is happening. That's what has really been highlighted in this situation. "Brands and retailers should be taking this time to get to know and map their supply chains – not just for the final production unit, but tier-2 and tier-3 also. In India, some states were worse hit than others at the beginning [of the coronavirus outbreak], and if you didn't know where your cotton farm or spinning unit was, then you didn't know where you could be impacted because it could be spread all over the country. The same applies in China; it's a very large country and, of course, a lot of big retailers will have very complex supply chains where they are moving things all around the world." Exposure to risks Heather Canon, vice president of capacity building at Elevate, a Hong Kong-based sustainability and supply chain services specialist, agrees now is the ideal time to identify exposure to risks in the supply chain. Currently, the drop in order volumes means one practice that is likely to have declined among supplier factories is subcontracting to smaller, unregistered facilities, often where labour abuses go undetected. It is a good time to map and assess your entire supply chain and explore whether such practices are occurring, she says. "Once orders pick up, and if they do so suddenly, subcontracting to smaller, unregistered players might start up again. At a time when suppliers are desperately going to be trying to hold on to orders, such practices may become a long-term thing. You might have suppliers that don't ordinarily subcontract but because of this unique situation, they do. In the wake of Covid-19 it is even more important to manage subcontracting risk at this granular level." Equally important is the treatment and management of suppliers during this crisis. While it is "an incredibly challenging time" for brands and retailers, Davidson says ultimately the people that end up worst affected are those with the lowest income. "Not being paid for a month or two is the difference between them being able to eat or not....you have a responsibility to your supply chain." Cancelling finished orders or orders where production had started, is a controversial practice that has emerged during the pandemic, as buyers try to tackle their own cash flow problems. "If you place an order with a factory, you are entering into a contract," Davidson explains. "Delaying taking receipt is fine as long as you communicate that well with your factory. A lot of the factories we deal with don't think ill of brands that have delayed orders, but those that are leaving stock at ports or factories and refusing to collect and pay for it is really not acceptable in this supply chain setup." However, Szeto notes that while "a lot of the stronger players are trying to support their suppliers as their corporate reputations are on the line, if you're bankrupt, you have no money, you just can't pay suppliers. It's not a matter of whether you're trying to do good or not when you don't have cash in your pockets...do you pay your workers, do you pay your landlords, do you pay your suppliers? Everybody's got to prioritize, and those who don't have the financial resources to take care of their liabilities have to pick and choose." The power rebalance Current relationships between suppliers and buyers have operated predominantly on trust. That, Davidson believes, is likely to change. "What this pandemic has highlighted is who has the power in the supply chain. It is really challenging for factories to stop bad behavior: it is based on trust and trust can be broken. That's the sad thing; there's no contract with trust. It does come back again to these longstanding relationships, and if you have a great relationship with a factory and you've weathered difficult times before then perhaps you weather this time too. "At the end of the day, your supply chain is really part of your company even though you're outsourcing your product, they are making your products and so they are an extension of your business. Treat them as you treat your own employees. How you behave during this period will really stay with you as a business and the reputation around your business going forward. But I do think factories will need to bring in contracts and stricter procedures too." Jeff Streader, the CEO of ModCloth, the US-based online retailer of indie and vintage-inspired women's clothing, says Covid-19 has left the industry in a "horrible predicament," with business having dropped between 25-75% across the global retail landscape. "Everyone has excess inventory – from retailers to brands to factories and mills. No-one is immune to the pandemic. The most important thing is for companies to work together on a solution that provides some relief to all parties: shared reduction in revenue, shared markdowns, and shared profits and commitments to the future. This is how we are working with our suppliers – as partners – for our future, together. " Production shifts To mitigate the risk of such challenges in the future, ModCloth is reducing its reliance on a single sourcing destination. Until now, its supply chain was China-centric, largely driven by the country's impressive fabric pipeline and responsive garment capabilities. "Although cheaper sources of supply are available in Vietnam, Bangladesh and India, the overall value proposition was much higher in China." However, "we are rebalancing our supply chain and China will become an insignificant source of supply. Our new supply chain will have a greater emphasis on near-sourcing and alternative Asian countries." Szeto agrees there's likely to be a diversification of production countries. "In the past, people have really been relying on China – but now, after all the supply chain disruption, they don't want to put all their eggs in one basket, so they're using Vietnam, India, Myanmar, Ethiopia and other places in Africa." Sitting "one step upstream from the brands" with an asset-light business model, "where we don't own any factories ourselves," Lever Style is consolidating its supplier base and "supporting the ones we feel are strategic partners by pushing more of the orders there to keep them going." But he doesn't see a rise in reshoring "because the costs in the US and Europe are just so much higher. It's been decades since apparel manufacturing has been taking place there on a meaningful scale. Also there's not the talent; how are you going to recruit the sewing workers? What might be reshored is essential items or national security items, such as food, medical supplies like making face masks or ventilators. But fashion is a non-essential, discretionary item." Davidson also says reshoring has its own challenges, not least of which is the fact most supply countries have been affected in some way by the Covid-19 outbreak, even European sourcing hotspots such as Italy, Spain, Turkey and Portugal. "Often people look immediately to reshoring as a short-term thing," says Davidson. "Ultimately if you reshore the entire supply chain, you need to ask yourself what you want to get out of the exercise. Is it to reduce lead times? Or is it a control and visibility issue? If the latter, why is that not something you can have in your overseas production? "Reshoring is an important part of diversification, but it's not about reshoring your entire supply chain; I just don't think that is realistic. If you're working with polyester organic cotton, your raw materials are going to come from India or China, so the chances are you're going to be impacted further up the line. So for me, it is important at times like this you stick with your supply chain. Think about diversification but don't leave your partners. It's about building those great supply chain relationships" A new normal It could take anything from between six months and two years for the industry to return to some form of normality, Streader believes: six months to return to a year-on-year consistency and two years to regain lost profits. But it is likely to be a whole new kind of "normal." With many consumers furloughed or out of jobs, there will be less money to spend on non-essentials like garments. Streader also suggests that once the virus is contained and retail stores reopen, the dynamic of the high street is likely to have changed too, with fewer brands and retailers in the market. "This equates to reduced demand by the buyers (brands and retailers), and manufacturers (suppliers) will have to adjust to a new paradigm with new customers and efficiencies." Lever Style's Szeto believes that during lockdown, consumers have done more shopping online, "so the e-commerce portion will become even more important coming out of this." He also notes that "even in a depressed economy, people will still buy clothes, but at a reduced level," which will lead to a rebalancing of supply capacity. "Say overall apparel consumption crashes, there will be a reduction in capacity that will equate to that drop in demand. Those who survive will do fine and they'll gain market share, even though it's a smaller pie." "On the supply side, "what's going to change is the brands are going to want to buy things in smaller volumes, and in quick lead times. If they don't know what sales are going to be like, then there's more reason to react quickly and buy in small batches so that you don't have obsolete inventory. So I think brands are going to be ordering in smaller volumes at a time, requiring shorter and shorter lead times." Having recently completed an IPO on the main board of the Hong Kong stock exchange, "we're in a cash-rich position, ready to take advantage of acquisition opportunities, which are now becoming a lot more appealing in terms of valuation." One thing Davidson is hopeful of is a more united industry, with a sense of community, less secrecy and competition. "The fashion industry is so fast-paced. No-one has had a chance to slow down in years or think whether their approach is the right approach, whether it can be done differently. This could be a really powerful catalyst for change. Bringing in your factory owners and tier-2/3 suppliers and saying we want to do this with you and mitigate future risk." One approach is for the industry to be more creative in trying to repurpose or redeploy its unsold inventories. "Ultimately, stock needs to be sold. It would be the worst thing for the environment if it lays unsold and destroyed. How do we get creative about trying to sell this stock? Is it that we sell this summer's stock next summer? Perhaps this will have a huge change on the industry. Maybe consumers will be happy to buy this year's trends next year if brands position it in the right way. "It's an opportunity. There will be some new innovative businesses to arrive from this selling of dead stock or old stock garments. That's where the conversation needs to be happening. A pretty summer dress this summer is still going to be a pretty summer dress next summer. And really ordering the right quantity and amount for huge multinational retailers – a new challenge – could make larger organizations much leaner." Sustainability is another area ripe for reinvention. "It's something everyone is trying to do. They say it's a bit hard for me to do this season, maybe I can squeeze it into next season...Now everyone is in a position where they are able to make concrete goals and work out how to meet them. This situation has given them time to reflect upon current practices and explore opportunities they might not have considered before."
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