Introduction

Time and time again a familiar scenario plays out across the apparel industry: Retailers and brands push more new products to consumers across multiple channels and different geographic regions in the hope of striking a sale – yet increasingly volatile and unpredictable demand means they often have to turn to markdowns and other promotions to shift high levels of unsold stock.

This all-too-common problem of rising inventories, falling sales and aggressive discounts erodes both merchandise margins and profitability. After all, it is a basic but often overlooked fact that every markdown to make a sale is less profit. But less well documented is that bloated inventories increase costs, trap capital and hamper cash flow at every step along the supply chain.

Indeed, some estimates suggest there is US$3 trillion of inventory tied up worldwide in the fashion supply chain and at retail.

That said, there’s also a fine balance to be struck. By its very nature the apparel industry is inventory-intensive – just consider the complex matrix of fashion colours, sizes and fits that firms have to cater for. But while it’s true that fashion businesses cannot sell what they cannot get, the flipside of too much stock is that too little is just as likely to lead to lost sales and lost customers.

Not surprisingly the transition to an omni-channel world is making the equation ever more complicated. E-commerce, mobile commerce and social media all offer new opportunities to reach consumers, but they also bring new challenges too when it comes to making sure the right products are available in the right place and at the right time.

Too many companies are still hampered by silos of inventory reserved for different channels. This results in a situation where a garment might be in stock in-store, yet is not available on the brand's website; which is far from the multi-dimensional buying experience today's consumers are demanding.

There’s also a shift in the balance of power. Instead of the traditional ‘supply push’ approach as brand owners, retailers, distributors, manufacturers and supply chain partners push products into the marketplace, there is increasingly a ‘demand pull’ by consumers who have new social media tools to compare products and prices, share their thoughts with friends, and ultimately know exactly what they’re shopping for.

And in line with this, there’s increasing pressure on the supply chain to cater for more and smaller shipments, and new delivery tools like ‘click and collect’ which require more capabilities at the warehouse level. There’s also more complexity from the pre-season push versus in-season replenishment for an increasing number of collections.

If the benefits of an aggressive approach to controlling inventory are so clearly linked to optimised cash flow and improved business performance, then what are the solutions to getting there?

One of the keys is the need for global inventory visibility, coupled with an efficient and well-run supply chain. And the right supporting software systems have a crucial role to play in providing this view, as well as unlocking the efficiency and collaboration to move inventory ever faster through the process.

Product lifecycle management (PLM) technology can help shorten development times by improving collaboration between creative designers, technical designers and commercial teams, reducing repetitive tasks, and providing the agility to respond quickly to change.

And enterprise resource planning (ERP) systems provide accurate, up-to-date information on the manufacture and movement of goods and resources – specifically quantity and location – helping to reduce total inventory levels, minimise stockout situations and shorten delivery lead times. By taking this one step further and integrating the e-commerce system that takes an order with the ERP solution that satisfies it, fashion businesses can solve one of the biggest issues to threaten profitability: the inability to deliver on an order.

An order before you source it – think of the made-to-measure model perhaps – or at least build a process with so few steps that products are sent directly from manufacturing to customer, with no-one in the chain any the wiser. And the pay-off for adapting to this new environment is not just survival, it is healthy growth, with enough capital freed up to enable the business to move faster and sharper than the competition.

This industry perspective looks at the apparel industry inventory intensive model, and some of the things to consider, including:

• The chain of added value
• The inventory intensive model
• Supply push versus demand pull
• Multi-channel trading
• Trends and potential strategies

The chain of added value

This paper suggests that the connected value chain is far more critical than many members of the apparel supply chain believe. Typically, they work in silos concentrating on themselves, not on the total picture. Silo such as:

• Fabric weavers and knitters, who see garment manufacturers as the customer, and sometimes brands and retailers as the specifier of their fabric
• Garment manufacturers, who see either brands or own label retailers as the customer
• Brands, who see retailers as the customer, and manufacturers as the supplier
• Retailers, who either buy from brands, or create their own label ranges, and then source them from manufacturers

Few members of the supply chain really exploit the integrated nature of the inventory intensive model, because they concentrate on part of it, not on the whole of it. Very few managers in the industry are taking an integrated holistic view of the chain.

The total picture can be viewed as a chain of added value, and a chain of inventory, and hence capital investment and cash flow risk. The added value chain is shown in Table 1. For one garment, sold to the final consumer for US$108 the added value chain is likely to be of the order of:

Although this chain is connected, for most of the participants it is an adversarial process. They are trying to beat or control the next person up or down the chain, rather than trying to optimize the entire value chain and align with consumer demand.

The inventory intensive model – retailers’ perspective

As can be seen from the above table, most of the added value in US$ in the connected chain, is in the hands of the retailer. But so is most of the inventory cost and risk. Most apparel retailers hold between eight and 17 weeks of stock, with a typical average being 13 weeks.

But it is not just stock. It is cash flows in and out, payments and receipts. That stock has to be funded. Most purchases in today’s apparel retail industry are made from low cost countries. They are paid using letters of credit at the point when the manufacturer obtains export documentation at the port of shipment. A purchase order for garments which will start to be sold on 1st February (Spring/Summer phase 1 merchandise) will be shipped and paid for towards the end of November. US$40 will be paid two months before the merchandise starts to be sold. If there is 13 weeks of stock then 40% of the merchandise will not have been sold until the end of the first week of March. This is a funding requirement, before the purchase order value is covered of 14-15 weeks.

In addition, if any of the merchandise cannot be sold at the full sales price, and has to be marked down, there will be an additional unplanned mark-down loss.

In some circumstances, the cash outflow is of even greater duration. Retailers that buy the fabric and “give” it to the manufacturer or wholesaler may pay for it as early as September for product that will not start to sell before February.

The inventory intensive model – wholesale brands’ perspective

The same extended timetable, with its emphasis on long lead times and a slow critical path, also applies to brands. In fact, the branded critical path is even longer. A typical brand in the US or Europe sells to its retail customers for a Spring/Summer season following trade shows that take place in July and August. The orders are taken on a back to back basis. This means that the brand obtains its customer sales orders before it commits to its purchase manufacturing orders. The advantage of this for the brand is that it knows what it has sold.

But most brands do not get paid until at least the end of the month following the month of delivery. And some retailers enforce even longer payment terms. So it is highly likely that the inventory and cash flow payment pipeline looks like the example given in Figure 2.

The inventory intensive model – manufacturers’ and weavers’ perspective

Finally, the same issues affect the manufacturers. If a manufacturer agrees to make for either a brand or a retailer, and if it agrees to do so “fully factored”, then it has a similar inventory intensive model.

The nature of bulk garment manufacturing is such that, even though each garment may have only 30 minutes sewing work content in it, it will probably take a minimum of two weeks to “progress” through the 20 or so sewing operations required to complete it. Most of this time is not adding value. It is just sitting in a work-in-progress queue.

Supply push versus demand pull

Each of the apparel models mentioned here are “supply push”. Each member of the connected chain is working on the “must have it in stock, therefore must pay for it” principle. Sometimes the traditional supply push approach is referred to as “seduce the customer with the merchandise, but manage the supply chain”.

Luxury

Most of the luxury sector remains stuck in a time warp. It still works on a two-season forward order method that requires retail customers to order what they want six months in advance of delivery so that manufacturing and fabric weaving can be organized on the back to back method. Unless vertically integrated, the luxury brand takes its customer orders before it places its manufacturing supplier orders, thus reducing the inventory risk. They know what they have sold before they buy or make it. However, although their gross margin is high (typically around 70% at retail or 40% at wholesale), stock turn is slow (typically around 3 times per year or 17 weeks of stock).

This marketing approach results in a long lead time critical path. Typically it takes about a year to bring merchandise to market. Merchandise for Spring/Summer 2015 will be designed and the fabrics chosen during Spring/Summer 2014.

Department stores

There are two points of differentiation for department stores, from other retailers. Both of them offer opportunities for their suppliers. They are:

1. Department stores today normally offer a mix of brands and own label. It is their choice how that mix is assorted in percentage terms.
2. Within the branded segment, the merchandise can be bought either wholesale or on a concession basis. Concessions allow the brand to have a “corner” in the store. It is a store within a store. Wholesale, the retailer makes an impressive gross margin. Concession buying is about eliminating inventory risk. As the stock remains the property of the concession brand, if it does not sell, it is the brand’s problem. In the concession method, gross margins are much lower than in wholesale.

A brand’s profit opportunities with department stores (or specialty stores that are happy to operate a concession method) are substantial, but so are merchandise write off risks and capital employed inventory dangers. The main reason being, that the inventory remains the property of the concession brand until it is sold to the consumer.

Specialty store chains

Specialty store retailers are typically split between:

• those operating their own private label model
• those operating a multi-brand model

Unless the private brand designs and sources directly, these retailers operate the wholesale buying method, and take the stock risk. Own label tends to make a higher gross profit margin, because the merchandise ranges are created by the retailer. However, there is an associated cost of creating, planning and managing own label ranges, and specialty chains may not wish to do this, in which case they may wish to work with brands.

Opportunities exist for wholesaler brands with creative design skills to offer specialty stores exciting merchandise which allows the retailer to avoid the creative risks. The wholesaler will attempt to offer a lead time critical path of around three to four months from sample collection to bulk delivery to allow the retailer to be “on trend”. Although a few are quicker, this is the norm, meaning that inventory remains high.

Mail order and internet sellers

In some markets, traditional mail order (big book paper catalogues posted to consumers) has already been almost totally replaced by the internet as an order-placing method. Fashion retail sales on the internet have grown from effectively zero % in 1999 to about 9% of total retail sales in 2014.

This figure is a developed world estimate. The UK is the leader in this respect with over 10% of internet sales. In contrast, the US has about 8%. Western Europe lags with approximately 6% of online sales.

One could argue that online sales pose the biggest threat to today’s bricks and mortar retailers, however some traditional retailers have responded with “click and collect” and online home delivery models, to get the advantage of both the internet and their traditional assets, the stores. Wholesale brands can also “jump over” the retailer and reach the consumer directly by selling on the internet, if they have the creative design skills and a brand that resonates with the consumer.

The “jump-over” model works best for wholesale brands if they:

• acquire the status of a consumer brand (that is to say, become desired as a consumer label)
• avoid selling to retail customers altogether, and hence obtain the margin of the retailer, by selling direct to the consumer
• avoid retail customers altogether and obtain the margin of the retailer

Discounters

As far as the supply chain is concerned, because price is the ultimate issue in this model, discounters will tend to buy direct from manufacturers. However, some discounters value the creativity of a wholesale brand that can provide them with regularly updated and on trend merchandise.

Grocery and supermarkets

The grocery and supermarket fashion retail sector behaves similarly to discounters, but they come at it from a different perspective. Food retailers first got into apparel because the gross margins were better than they could achieve in food. They calculated that, as they already possessed the shops, staff, warehouses, lorries, computer systems and head offices, they could add apparel to their offer at relatively little incremental cost, and therefore price it cheaply. Many retailers are now evolving with their own design and sourcing operations, butthe CPG sector can still be an attractive sector for wholesale brands to sell into, because the volumes are high. However, prices will be low and margins will be tight, and the label on the merchandise will likely be that of the supermarket’s brand.

Over the last few years, the supply push model, as explained above, has been declining as the financial attractions of demand pull become more obvious. Demand pull will reduce the inventory intensive model, but requires a clear view of the entire supply chain, which in the view of this paper, is the future.

Multi-channel selling causes complications

The fashion industry buzzword of the last three years has been multi-channel (or omni-channel). The assumption has been, that, whether you are a retailer, a brand, a wholesaler or all of these, you have to offer today’s savvy and knowledgeable consumer, what they want, when they want it and through whatever channel (or combination of channels) they want to purchase it.

Is the multi-channel retailer operating push or pull? If it is push, it will hold stock either in stores or in dedicated on-line warehousing, not knowing where the customer’s orders is to be fulfilled from. Even worse, it will hold enough stock to satisfy multi channels. If it is pull, theoretically, it will have one “stock-pot” but will have to move stock (incurring physical costs) between different physical dispatch areas. Clever systems are needed to manage these situations effectively.

Closing thoughts: trends and potential strategies for brands and suppliers

The “clever” systems have to integrate design, product development, manufacturing and distribution.

just-style sees no future for a brand or retailer that does not possess both design capability and the understanding of where the consumer is going.

Brands and retailers today need to work closer with their manufacturers. This does not necessarily mean owning them, but it does mean having enough control over a reasonable share of their production capacity, so that your influence matters. A brand that does not understand garment manufacturing is a brand with neither power nor influence.

If you control your manufacturing capability, you will have control over the value chain, as the Chinese supply chain giant Li and Fung, or the Spanish own label retailer Zara does. If you do not manage the supply chain, then you have no added value to offer to your customers. You are just a resource supplier, not a supplier of added value.

Any brand or retailer that is not capable of satisfying different customers’ requirements through its distribution network will be rejected for one that can. A distribution network that can reach multi-channel retailers or the consumer directly is essential for a modern successful business. However, as many brands have discovered, supplying distribution to retailers in bulk is a different proposition from supplying to consumers in individual units.

Finally, an important skill that a modern day business must possess is the ability to “jump over” its industry customer, and to reach the ultimate consumer. In order to do this, it is necessary to create a “consumer” brand, one that the individual consumer can relate to and trust. This requires more than just the creation of apparel merchandise. It requires the creation of a consumer story. Examples of believable consumer stories are:

• The Apple computer (a design over functionality triumph)
• Disney (a suspension of disbelief)
• Toyota cars (trust in functionality and belief in robustness)

If an apparel brand can achieve that, then it can transcend sales at wholesale values, and reach sales at end consumer values, which are approximately 2.5 to 3 times greater than wholesale, as long as the inventory risk is considered worthwhile.