Posted on: September 11, 2021 Posted by: Michele Harris Comments: 0

Balancing the Act

A brand’s perspective on sourcing and supply chain strategy in facing covid-19 challenges.

The late 19th century saw the birth of brands and retailers such as Harrods (1849), Levi´s (1853), Macy´s (1858), Lanvin (1889), or Chanel (1910). But retail hasn´t changed much since then.

When I started working in the fashion industry 20 years ago, companies were organized according to a seasonal and “stable” calendar. Retail companies’ operations and their networks (brands, suppliers, distribution) were based on a linear and sequential supply chain model. The retail calendar was very basic—meaning that there was a full-price sales season and a sales period. Furthermore, in some countries, government regulations restricted promotions or special marketing campaigns. As a result, the product lifecycle curve that goes from introduction, growth, maturity, and decline phases had a predictable pattern. In case of overstocking due to an unexpected change in demand, companies leveraged distribution channels to get rid of excess stock. The most illustrative examples are outlets stores.

Trade liberalization started in the 1970s and China’s accession to the World Trade Organization (WTO) in 2001 boosted global trade. Since then, many companies have moved their production to offshore countries, extending their supply chain and management complexity. Longer lead times connected to a make-to-stock strategy weren’t perceived as a risky business. A stable demand pattern, high gross margin (revenues: cost of goods sold–COGS) and a global retail footprint was a formula for business success.

Therefore, western firms began offshoring to China, Vietnam, Bangladesh, Sri Lanka, or India looking to reduce labor costs and shaping lower cost structures to compete in a global economy. If US and European mainstream brands moved their production to Asia, luxury players’ differentiation strategy led them to manufacture in Europe while investing in vertical integration to ensure quality and supply of materials.

The Roots of New Retail

Retail supply chains did dramatically change in the past decade. Today, in retail, it’s not only about the “what” (the product) but about the “how” (the product/customer journey and experience). It’s not a sequential approach but a configuration, like a Rubik’s cube. Digital customers, Millennials and Gen Z, are changing the world of retail; so, the traditional marketing funnel is dead. The customer journey is not any more linear, but continuous and dynamic. Customer touchpoints have grown exponentially empowered by digitalization while smartphones give access to the largest store ever and the long tail economy.

The consumer-product connection changed, and customers want to know the story of a product, not only from a front-end (e.g. marketing) but also back-end (e.g. supply chain) perspective. Customer expectations have changed and societies too: the economy, politics, healthcare, lifestyle, climate, technology. The latest news shows how unpredictable and volatile events are in a world that is hyperlinked and globalized. Brexit, terrorism, Trump, hurricanes, or social riots are a few examples.

The economic impact and implications for businesses during the covid-19 period are difficult to predict. From retaining talent to managing inventories, sourcing, and financial costs, uncertainty is the new normal. Supply chains need to adapt to the current conditions, being a key business asset in the omnichannel era. The traditional model mentioned should orchestrate other business options such as make-to-order, customizations, renting, capsules, and so on. It’s a customer-centric approach that requires a responsive and demand-driven supply chain.

Supply Chain Adaption to Uncertainty

Coronavirus, another unforecastable event, is accelerating many trends previously mentioned and boosting e-commerce sales. Retailers are struggling to face uncertainty and sales plummeted during the lockdown. Many retailers canceled orders from Asian factories while defining a short-term strategy to face uncertainty, overstocking and negative cashflows. A business that is based on inventory turns and cash flow is king and needs a fast and flexible structure. Today, the coronavirus is impacting and challenging each phase in the value chain, from design to retailing.

A business strategy to overcome covid-19 could be focusing on product freshness to increase inventory turnover and shorten the working capital cycle. From a design perspective, it means increasing the rate of production, launching more products more often. European fashion retailers and brands are redefining their supply chain and sourcing strategies to adapt to the new situation. A few decades ago, Benetton’s postponement and Zara’s (Inditex) fast fashion strategies already faced seasonality, a type of uncertainty, by developing competitive advantages. Today, there is a higher level of uncertainty. It�s a new normal business scenario.

So, what is the impact of such transformation in supply chains?

As Zara did many years ago, supply chains are aligning product assortment lifecycles to manufacturing locations. In other words, segmenting supply chains according to nearshore or offshore outsourcing. Speed to market requires shorter lead times, easy communications, and the possibility of ordering small batches of clothing. Therefore, brands and retailers in Europe are relocating their trendiest items, due to the increasing complexity of forecasting, too close-to-home locations. Also, offshore markets experience economic growth and rising labor costs. Note, China is already the world’s top patent filer and that the US had been leading the ranking for the last 40 years. Manufacturing is gradually returning to Europe and the US when technology is accelerating the competitive advantages of nearshore outsourcing. Another important trend that impacts nearshoring is sustainability and how companies are investing on