Optimisation within the supply chain is the answer to solving fashion's inflation problem, writes apparel industry expert, Roit Kathiala.

Even with the closest look into history it would be hard to find parallels to the current economic environment. Never have we seen before an environment with high inflation, recessionary interest rate hikes, plunging stock markets, high commodity prices and still high job growth all rolled into one, but optimisation as opposed to globalisation will be the solution to fashion’s current inflation problem.

While the reasons driving these are numerous – pent up demand from the pandemic, a shrinking working age population for numerous countries, coming off historically low interest rates, lose monetary policies from the central banks, the Russia-Ukraine war and the resultant high food and energy prices, the impact on fashion companies is profoundly clear and it has led to increasing costs and decreasing demand.

Customers are prioritising spending towards food and energy and away from discretionary products like fashion and are looking for more value in the products they buy.

Fashion’s go-to levers for managing cost increases while offering consumers value for money

This poses a big challenge for fashion companies – how to manage product cost increases and still offer great value to an increasingly price sensitive customer.
The playbook to do so was written in the early 90s and has had a few levers but the most consistent of them that have been used again and again are:
• Move production to a cheaper region or country
• Re-engineer, the product i.e., redesign or simplify the styling (and reduce cost)
• Reduce overheads especially related to selling, general and administrative costs

This playbook usually has been reasonably effective to reduce cost of goods but applying this old playbook this time may not yield the full expected results in this upcoming slowdown due to a few unique factors in play at this time:

a) New Sourcing regions: There isn’t a “one size fit all” new low-cost country that is beginning to emerge and can be utilised to lower cost of goods at scale. As per US Apparel Import data over the past few years the migration of apparel production from China has been underway and all the usual suspects like Vietnam, Bangladesh, Cambodia, Pakistan, ASEAN countries, India have been steadily picking up market share of the US apparel market.

b) Reliability of shipping connections: The shipping congestion of the last two years has exposed the vulnerability of “fringe countries” as a choice for apparel sourcing. These countries have low wages and cost of production was vulnerable due to their low penetration in global trade and hence importers from these countries faced cancellation of sailings at a much higher pace during the “Great Supply Chain Congestion”. While congestion is now starting to ease this vulnerability remains.

c) New Trade Pacts and the coming shifts in Least Developed Country (LDC) status: Trade deals being signed since 2009 are shifting the dynamics of just considering low production costs. Each with a complex set of rules of origin which need careful scrutiny for compliance and avail duty benefits.

In addition two low wage countries that have gained from cost pressures in other countries are expected to emerge from their current LDC status, Bangladesh in 2026 and Cambodia in 2028 which could have downstream impacts on their competitiveness especially for markets that rely on their Duty free status e.g. EU, UK Canada etc.

d) “Sky -High” commodity prices: Typically when the world looks at a recession there is a drop in demand and hence the commodity prices like oil, natural gas, cotton, wool, polyester / nylon, grain etc. start to soften.

Unique factors like:

Russia-Ukraine war: This war has impacted supplies from both Russia and Ukraine. Russia is a leading global supplier of oil, gas, metals and grains and even though the western sanctions have avoided touching commodities, but due to reputational and business risk various banks, insurers, shipping companies and trading partners are effectively reducing their exposure to commodities from Russia and hence reducing supply and impacting price increases in those commodities.
Further Russia and Ukraine account for just under 30% of global grain exports and this has caused food prices to surge to unprecedented levels.

It’s the Environment: Whether it is record high temperatures or unprecedented and disrupted rain, global weather is seeming more and more disrupted. It is projected that due to extreme heat waves and dry weather harvests of potatoes, onions, sugar beet, apples and hops are expected to fall short by 10-50% in the UK. While for EU forecasts are for the harvest to be down by 16% for grain maize, 15% for soybeans and 12% for sunflowers.
While monsoons in Pakistan brought in the most rainfall in 20 years which submerged a third of the country and with it around 40-45% of the cotton crop and numerous other standing crops.

To add to this, the US, which is the world’s largest exporter of cotton, expects production declines of 28%. In the Southwest, the largest cotton producing region in the US where even though the planting season was the highest in three years, drought conditions and the resulting abandonment means the actual harvested area is expected to be considerably lower.

Food vs Clothes: As hard as it may sound, such are the trade offs being made by numerous farmers in developing countries as they choose between planting food crops vs cash crops that support manufacture of fibres like cotton. With global food prices soaring many small and marginal farmers reallocate their land to plant more food crops that they and their families can also consume and step away from cash crops that they will need to find markets for.

These unique challenges are likely to persist for some time and even if the Russia-Ukraine war ends, the resultant destruction of infrastructure and its downstream impact on supply of commodities could take years to come back to normalised levels.

Hence the challenges for fashion companies who are already going through an unprecedented disruption towards digital and e-commerce is to retain their customers, still provide great quality, value, and service despite these challenges and continue to make investments to meet the ongoing disruption.

To meet these objectives purely leaning on a cost of goods optimisation may not yield expected results unless the current buying or procurement model have huge gaps and opportunities.

Fashion companies could benefit by taking a three pillars optimisation approach to their supply chain

1) Digitization: Replacing, optimising, and automating current process can be an immediate opportunity. The fashion industry has been a victim of carrying on “business as usual” legacy in terms of how supply chains from yarn mills to customers are set up., There are numerous inefficiencies and blackholes of communication which cause either excess productions or scarcity in various parts of the supply chain as communication and planning cannot flow through in a frictionless and transparent way through the supply chain.

2) Responsiveness: In times of fast changing demand and supply cycles, the legacy way of upfront and far out planning to get lower costs needs to evolve to newer ways of working that involve agility, dynamic forecasts, transparent end-to-end planning that match supply and demand more perfectly avoiding piled up inventory and lost revenue opportunity from shortages. The resultant responsive supply chains are also more apt at handling shifts in fashion trends and flash trends that only last for a short while.

3) Supply chain design: Using a consumer slowdown to look at the design of the entire supply chain from raw material vendor locations, vendor’s factories, country sourcing footprint, trade agreement penetration, the number of intermediaries like agents/traders being relied in the supply chain, shipping routes, DC locations, transport solutions and allocation of operational costs vis-a-vis cost of goods / sourcing cost competitiveness.

These optimisation initiatives layered in with the usual fashion sector initiatives on product costs, reducing selling, general and administrative costs and redesigning of styles will help fashion companies emerge from this downturn not just leaner but stronger and more long term efficient than how they entered it.

By: Just Style