COMMON MISTAKES FASHION SUPPLY CHAINS ARE MAKING THAT GET IN THE WAY OF PROFITABILITY

This is the first in a series of blogs which covers the common mistakes that fashion supply chains are making, which not only adversely impact profitability, but also are not sustainable practises over the long term.

This first article talks about portfolio management.

PORTFOLIO MANAGEMENT

Does this picture look familiar?  Does your product portfolio have two very similar products for sale concurrently with only slight differences in, say, colour?  Does your fashion business develop new collections several times a year without taking into consideration the inventory that is already available in your warehouse from the last season?  This is a snapshot taken recently from the online web-shop of a sustainable fashion brand.

Driven by thinking that offering consumers lots of choice, newness, innovation and design each season, will boost sales and profitability, Fashion businesses develop hundreds of new references per collection and have ever more frequent collections.  

For most fashion businesses that lack highly responsive supply chains and who care about sustainability, this is a mistake.  Why? Well firstly, it encourages consumers to buy new more often, wear items less times before throwing them away.  This is the controversial, linear, fast fashion model that has been widely criticized and is just not sustainable for our planet.  Secondly, left unchecked the lack of portfolio management significantly reduces profitability, because the physically slow infrastructure of most fashion supply chains, requires purchases way ahead of the points of sale.  Also, more choice doesn’t necessarily increase sales.

Imagine the consumer is presented with the above scenario.  There are two slightly different blue polo shirts, priced the same.  Will this really incite them to buy more polo shirts, rather than just choose one colour over the other?  Unless there is a price incentive to buy more shirts, it is questionable whether they will buy more than one shirt.  And, if there is a price discount to buy more shirts, does that really increase sales revenue?

In terms of profitability there is a massive difference in effort and cost to manage two references over one.  Let me explain what happens behind the scenes in this scenario.

Having two different blues for the same polo shirt, rather than just one, will cost more because of added complexity in managing S, M, L or XL sizes multiplied by 2 blues.  That is 8 stock keeping units (SKUs) in this example, which need to be designed, forecast, sourced, produced, shipped, stocked, distributed and sold.  

Often, to develop a new collection, a positive multiplier is applied to the number of samples required to achieve a given number of references per collection.  This action is driven by thinking that decision makers need plenty of choice (do they?) to determine which references are the best for the new collection.  To produce samples to decision makers; vendors are asked to develop a variety of fabrics and haberdashery, which will be couriered across the globe at great expense to planet and purse, to be approved and selected or just dropped by product development teams.  In the case of the blue polo shirts, we can be sure that at least 2, if not more samples, could be produced to end up with the chosen one.  Therefore, the greater the duplication of polo shirts from one season to the next, the greater the waste.  

Once design is approved, a sales Forecast per reference needs to be provided to the sourcing team.   It is a known statistical fact; the higher the level of granularity of demand across SKUs and sales channels, the higher the likelihood of error.  

In the sourcing and production phase, economies of scale will be lost e.g. in the dying process, because of the two different shades of blue required, or because of differences in fabric mixes between shirts.  Minimum order quantities of different fabrics may become a challenge, which often adversely affects price and profitability.

In distribution, inventory levels will be inflated to offset stock imbalances of keeping 8 SKUs rather than 4, across all the different stocking points (boutiques, on-line store, wholesaler, countries etc.).  Some sales will be lost, because not all sizes will be available in the right place, at the right time, although stock of any given item may well be available elsewhere in the network.  To offset this, some stock rebalancing may occur between stocking points; all at additional cost.  At the end of the season, because the forecast will have been wrong, despite significant effort and despite amazing statistical tools available today, there will invariably be stock left-over, which will need to be sold off at a mark down (loss of revenue) risking erosion of demand on a successor reference; or written off (donated, dumped).

In the past 20-years, I have seen this problem exist across a multitude of industries; be it in window fashions, Christmas cards or gifts.  This problem is inherent with long product lead times for supply, coupled with instantaneous gratification demanded by consumers and the lack of a responsive supply chain.  Unless you have a very responsive supply chain like e.g. Zara, it is very costly to the business.  More importantly for our planet, however, whatever your supply chain model, ever increasing new product development damages the environment through pollution, chemicals, CO2 emissions, waste and duplication.  Fundamentally, is it right to keep developing new collections to such an extent that it encourages consumers to throw more away?

A few years ago, I worked for an organisation sold Christmas cards and gifts consumers across the globe via a network of sales entities. Each year a completely new collection was designed, forecast and sourced from low cost countries.  Due to system inadequacies, each new collection was developed without any consideration or regard for the inventory which was left unsold from the previous season.  Over the years, a significant level of unsold inventory had built up.  It took a strong focus and directive at a senior level to reduce inventory.  As a result, it was proposed to make the next seasons sales using only the available inventory, without any new product development.  This proposal was met by strong opposition from sales and marketing teams alike.  They claimed it was not possible to achieve the sales targets by presenting consumers with references from past collections.  Newness was required and customer expected fresh creativity, etc. And so, the negotiations began until an agreement was reached. Seventy percent of references would be from stock and 30% would be from new product development.    A very close collaboration between all teams (creative, product development, sales and marketing, supply chain and finance) began to match stock with the required sales portfolio per country.  Efforts were coordinated by the Supply chain team. Feasibility studies were made for inventory to be reworked, repackaged, redisplayed.  New products were sourced using a more responsive supply model.  Cross selling strategies were implemented.  At the end of the season the sales objectives were reached plus a significant inventory reduction of 25% had been achieved.  It was a major and satisfactory achievement of something that had at first appeared impossible!

Portfolio management is a fundamental process to safe-guard profitability and to keep in check operational complexity and stop it spiralling out of control.  The above example is based a personal experience, but there are many other organisations that benefit from consistently revisiting and rationalising the product portfolio e.g. Lego (“the extensive product portfolio is around 250 different brick sets which are continuously optimized and renewed, as LEGO`s initiative is 60% novelty in their portfolio year by year”[i])

Although the examples given have primarily been profit driven, the case for and motivation to reuse, repackage, resell, repair, recycle, upcycle are even more important now in light of environmental and social wake-up call, inciting businesses to become more responsible.  

Portfolio management is a fundamental strategy that supply chain leaders should drive into the organisation.  Supply chain leaders are key players who should drive the agenda and influence the debate for change.  They are instrumental in driving the required cultural DNA changes inside organisations.  Supply chain leaders are best place to come up with the numbers and the solutions to make their business more profitable, responsive and sustainable, so that they are fit for business in the 21st century.  

At Altrubi we train supply chain leaders to deliver on this mandate by helping them become more respected, influential and a driver of change and innovation inside and outside their business.  We provide the tools and the leadership skills for them to impact and make the circular fashion a reality.

Our vision a world of fashion doing good for our planet economically, socially and environmentally, with a strong sense of purpose reflected in both brand and supply chain.


[i]http://apppm.man.dtu.dk/index.php/Product_development_and_portfolio_management_processes_at_LEGO#Portfolio_optimizing_and_risk

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