Coronavirus has exposed many shortcomings in the way the fashion industry does business, but none more so than the strained and fraying relationship between retailer and supplier.
Faced with closed stores, a glut of unsold stock and new-season product already on the way, many retailers quickly cancelled orders as the crisis took hold. Several suppliers warned Drapers that they could be forced out of business, and that it could take until 2021 for capacity to recover following a raft of cancellations across the supply chain.
High street giants such as New Look cancelled all orders and pushed back payments “indefinitely” and Philip Day’s Edinburgh Woollen Mill Group cancelled all pending and future orders until further notice. Much of the industry followed suit.
New Look was among the brands and retailers to cancel orders amid the pandemic
Experts tell Drapers the lasting impact of the virus will increase the need for strategic relationships, a demand-driven and more flexible supply chain, and to more near- and on-shore manufacturing. Consumers will also become more discerning about sustainability and retailers should not slack in upholding their corporate social responsibility values when trying to limit costs.
The supply chain has now reached an absolute limit of being treated as the fall guy in every respect
Brand Supplier
Ultimately, Covid-19 has served to accelerate much of the change that was already happening across fashion retail’s supply and sourcing base.
A matter of trust
Many manufacturers and suppliers have been left with catastrophic levels of cancelled orders, as well as trust issues over future partnerships. This has exposed a legacy of stress points in supplier and retailer relationships that can no longer be ignored.
“The supply chain has now reached an absolute limit of being treated as the fall guy in every respect,” says one brand supplier. “It’s always the supplier that gets hit, and that is on top of what is already very competitively negotiated prices on the high street.”
Suppliers argue that the model needs to move away from purely transactional relationships in favour of strategic ones, where retailers invest in their suppliers to regain trust, and suppliers invest in infrastructure to drive productivity.
One buying and merchandising expert explains: “As the retailer starts creating revenue again, if it is a truly established partnership and with longevity between the two, then the retailer should be looking to invest a large sum of money back into that manufacturing facility.”
Right-sizing a business is not just your shop estate or your buy. It’s the number of relationships you need and can manage effectively
High street chief executive
He notes that manufacturers will want to reserve some capacity for securing new clients, but adds “the power of the profitable retailer and the strategic partnership will bear fruit in the long run”.
One high street chief executive fears that “transactional supply base relationships will become more challenging” as many businesses “rationalise how many suppliers they need”: “We won’t have the teams to interact with them. Right-sizing a business [after Covid-19] is not just your shop estate or the size of your buy – it’s right-sizing the number of relationships you need and can manage effectively.”
However, while the industry agrees that strategic partnerships are of crucial importance to the future of the supply chain, consultancy firm McKinsey & Co suggests that large retailers are not willing to directly invest in suppliers’ businesses.
In April, McKinsey conducted a survey of 116 sourcing executives from retailers and brands, mostly in the US and Europe, who between them manage more than $120bn (£98bn) in sourcing value. Almost half (46%) of retail sourcing bosses said it was highly unlikely that their organisation would co-invest in suppliers to secure future capacity, compared with 17% who found it somewhat or highly likely.
The core element of a stronger partnership is an increase in productivity
Achim Berg, McKinsey
Instead, the necessary transition to strategic partnerships will include support in the form of future binding commitments, more exchange on retail data, and formal documentation of agreements, says Achim Berg, senior partner at McKinsey, who advises global clothing clients on topics including supply chain and sourcing.
“We have been telling everyone for a couple of years now that the days of transactional relationships are long gone,” Berg explains. “They need to be seriously investing into partnerships. The core element of a stronger partnership is an increase in productivity where you can jointly invest into all your processes and also into the production process to make it more efficient.”
Contracts will inevitably come under greater scrutiny from manufacturers.
“The issue is that there are a lot of verbal commitments [rather than written contracts between retailers and suppliers], which is incredibly risky,” UK Fashion and Textile Association chairman and global manufacturing consultant Nigel Lugg tells Drapers. “Previously, all the risk was on the supplier side. It’s my personal feeling that that will change. The contracts are going to be verified much more strongly.”
Terms and conditions will now be challenged more routinely, one UK sourcing director suggests, adding: “The key is the payments, though. A lot of factories in Bangladesh were producing garments purely on cashflow and, the moment the production stopped, they realised they made no money at all.
“They weren’t really focusing on the profitability and a lot of corrections will take place on that basis. Manufacturers will look at their own resilience.”
A united front of manufacturers would present a stronger front to customers and enable them to more readily withstand unrealistic demands
Mostafiz Uddin, Denim Expert
Mostafiz Uddin
One positive result of the pandemic could be the emergence of an internationally recognised regulatory body for clothing manufacturers and their partners.
Multiple experts suggested to Drapers that such a body could act to collate information on retailers to create a rating system of who is reliable to work with, produce best-practice guidelines and facilitate negotiations.
“There is no reason why, once the pandemic subsides, manufacturers in geographical regions should not consider the formation of a unified apparel manufacturing body,” says Mostafiz Uddin, managing director of Bangladeshi manufacturer Denim Expert.
Uddin explains: “A united front of manufacturers would present a stronger front to customers and enable them to more readily withstand unrealistic demands.”
The customer is always right
Across almost every sector of the industry, the coronavirus crisis has led to the acceleration of change that was much needed and often happening at a painfully slow pace.
No one quite knows what customer demand is going to look like when the world begins to return to some form of “normality”. However, experts tell Drapers that one thing is for certain: the industry needs to move rapidly to a demand-driven model.
“When you look at supply chain resilience, it is traditionally very rigid with little agility,” says one UK sourcing director. “The model is very flawed. The new normal will be that the brand or retailer has to orbit the consumer. They are the ones who will decide what the demand is going to be.”
This will mean a much more reactive model, incorporating smaller order volumes, vertical working processes, and the benefits of dual-location and near-shore sourcing to enable retailers to better react to customer data and analytics.
We are on the cusp of major growth in digitalisation in areas such as sample development and product approval
Peter Walsh, former Primark sourcing director
It will also involve further digitalisation of the supply chain, and maintaining in the long term some of the digital practices that sourcing teams have had to adapt to when working from home and unable to travel during lockdown.
“A lot of the business processes that existed [such as buyer meetings and long-distance travel for garment approval], you have had to re-engineer quickly just to survive,” says Mike Mikkelborg, former New Look and Gant supply chain director, and founder of sustainable brand Nu-In. “A large portion of those are not in place just for the crisis situation – actually those are better processes and will carry you forward.”
Video conferencing tools such as Zoom and Skype are now being used much more universally. Together with the continued developments in technologies such as 3D modelling, they provides the opportunity for reduced travel and more dynamic garment production.
“We are on the cusp of major growth in digitalisation in areas such as sample development and product approval,” says Peter Walsh, former global sourcing director at Primark, who now runs his own consultancy. “With 3D graphics, 3D sampling and 3D image quality becoming more commonplace, it allows a lot more of that sample development and approval to be done remotely.”
Design processes can be streamlined with the use of artificial intelligence and 3D sampling, and consultation processes can be cut down via video appointments and virtual approvals, enabling better team integration.
The global merchandising manager of one high street retailer tells Drapers simple things such as videos of garments in development phases could make all the difference in speeding up the currently laborious process: “When Asos introduced its Virtual Catwalk [in June 2019], it gave a much better insight as to how the garment moves and fits on the person versus a flat photograph. How can suppliers learn from that and develop catwalks or showrooming so you can select in a virtual environment?
“Without a shadow of a doubt, technologies being used now to cope with coronavirus will be adopted in the long term. Digitalisation is certainly going to kick in, in terms of how we communicate and how we work smarter.”
Asos Virtual Catwalk
Closer to source
Retailers will also seek to remap their sourcing strategies as part of this transition to a reactive model and to ensure they are not overly reliant on a single market, should a second wave of the virus create future production headaches.
Nigel Lugg
Coronavirus has caused “a tsunami across the global supply chain”, UKFT’s Lugg tells Drapers: “The industry has gone out [internationally] for cheap labour, and we’re now realising that the exposure and distance of that, and to shut it down in the event of a pandemic, has catastrophic impacts.”
At the outset of the crisis, western retailers were left scrambling to secure stock as factories in China shut down, not anticipating the virus would spread. However, as the epidemic turned into a pandemic, the danger to the UK public started to dawn as the UK government ordered the closure of non-essential stores. Retailers rushed to cancel orders.
The pandemic has heightened everyone’s awareness and concern about having such a large reliance on international shores
Sourcing expert
This has caused retailers to evaluate their international sourcing mix and over-dependence on certain regions as they attempt to better balance risk, flexibility and cost in their future supply chains.
“The pandemic has heightened everyone’s awareness and concern about having such a large reliance on international shores when something happens that you can’t control and your business becomes very fragile,” says one sourcing expert. “The mix between regions is undoubtedly going to change.”
The most likely result is going to be an acceleration of the shift to near-shore and some on-shore sourcing, which provides benefits in terms of shorter lead times.
The global merchandising manager of one high street retailer tells Drapers the business would be moving “considerable amounts” of product that “was on long lead time from Asia and the rest of the world back closer to home”.
He said key categories such as knitwear and shoes would move back to a predominately European sourcing base, as the retailer aims to “source close to season” and adapt to trends more reactively.
As part of its ongoing transformation programme, Marks & Spencer has also said that it will concentrate its supplier base and develop a faster, near-shore supply chain to enable the reorder of seasonal lines.
Walsh, ex-Primark sourcing director, tells Drapers the crisis may “be the impetus retailers and brands need to make sure that their risk is balanced across sourcing regions”: “It may cause them to introduce a cap on the proportion of any one product sourced out of one region to really work at developing strategic sourcing in new areas and in new countries.” He adds that Ethiopia, for example, is “developing strongly as a result of significant amounts of textile and apparel development” driven by big supply groups.
What this has exposed is how little manufacturing we have here
Brand supplier
This growth of near-shore sourcing puts locations such as Turkey, north Africa and eastern Europe in “a more favourable situation”, says McKinsey’s Berg: “Retailers have realised and experienced how difficult it is if you are too dependent on one or a few markets, and that will have a lasting effect. They will diversify their risk, but China will continue to be an important player [because of its sourcing legacy and market share].
“Suppliers in Sri Lanka, China and Bangladesh have tried to mitigate the disadvantage by creating flexible set-ups to stay in business.”
This includes solving issues in sourcing certain fabrics, and holding increased stock to make more flexible offers.
When considering new sourcing locations, Mikkelborg says retailers should look at who has dealt with the current pandemic most effectively: “That’s where you need to start looking [for sourcing] because those countries have not only managed the current crisis well, they will manage any future outbreaks well again and again. We know who has dealt with it well so far: China, Singapore, South Korea and Germany.”
Limited capacity in UK factories means retailers are unlikely to rely on UK resources for a large proportion of production in the future, although experts tell Drapers there will be some resurgence of on-shore manufacturing.
“What this has exposed is how little manufacturing we have here,” one brand supplier tells Drapers. “At least if we were manufacturing at home, we could ride out storms far better at a retail level than we do currently.
“However, the government has a role to play here as well – investment is required, and the government needs to create funding for new manufacturing businesses to establish themselves and avoid taking huge overdrafts.”
The sourcing director of one UK-based brand tells Drapers the business was investigating “the adoption of micro-factories to bring production back to the UK and closer to source”, and considering owning some of these factories itself to have increased flexibility.
He adds: “There will be a global correction within 18 months, and a lot of retailers will be looking at having a fragmented supply chain so it’s not dependent on any one particular country.”
Sustainability sells
The coronavirus pandemic has also accelerated a consumer focus on ethics and sustainability within the fashion industry’s supply chain.
When deciding how to spend their – probably reduced – clothing budget after the pandemic and faced with the choice between a sustainable and non-sustainable product or company, customers are likely to opt for the former, experts tell Drapers.
Sustainability has not dropped off the agenda of the consumer, and actually is even more important now than before
Karl-Hendrik Magnus, McKinsey & Co
In another survey conducted by McKinsey in April, two-thirds of UK customers said it was now even more important to limit retail’s impacts on climate change: 65% of consumers indicated that they would be sticking with brands they know, and highlighted the importance of trust and transparency during the crisis and beyond.
“While [sustainability] has dropped off the agenda of many executives, it has not dropped off the agenda of the consumer, and actually is even more important now than before,” says Karl-Hendrik Magnus, a partner at McKinsey who specialises in retail supply chain and sourcing. “Executives need to be quick in reprioritising this on the agenda.”
Another supply chain expert agrees that, although “sustainability and compliance may not be the biggest priority of businesses in the short term, they aren’t going to be able stray from it for very long, as the consumer awareness and demand is strong and will continue to grow”.
The short-term approach to social sustainability in the supply chain has varied across the market as retailers navigate the immediate stock conundrum.
After initial criticism, Primark established a fund to cover the wages of workers in the developing world who were producing now-cancelled orders. Suppliers tell Drapers that players such as Asos, Zalando and M&S have also treated them positively.
However, widespread order cancellations across the industry have left countries such as Bangladesh – and its workers – devastated. The Bangladesh Garment Manufacturers and Exporters Association says 59 garment factories had closed permanently as of 29 April, and 25,900 workers had lost their jobs as a direct result of deferred payments and cancelled orders.
Total clothing exports from Bangladesh will be down $4.9bn (£3.9bn) from March to May. The figures paint a disturbing picture of the impact on the country, and one of which consumers are becoming increasingly aware during the crisis.
In the McKinsey survey, when asked how fashion brands could help society to deal with impact of Covid-19, 40% of consumers said a contribution to helping low-paid workers in their factories in Asia was a top priority.
“If you link sustainability to corporate social responsibility [CSR], it’s going to play an even bigger part in people’s lives,” says one supply chain expert. “With job security at risk for some many people, they will be thinking twice about what they spend their money on. Businesses are going to have to make sure they are ticking the human and emotional boxes with consumers with all of these CSR points.”
Former sourcing director Mikkelborg agrees: “In all crises, there is an opportunity and I think sustainability is a big one here. It will be even more powerful going forward.”
When the retail industry emerges from this crisis, damaged relationships with suppliers will be the first bridge to rebuild. From there, retailers must seek to minimise risk within their sourcing structures and not dismiss any underlying issues – such as an overreliance on one country – that the pandemic has exposed. Out of adversity comes opportunity, and the industry should take this chance to build a flexible and reactive supply chain model, suited to the modern consumer and their spending habits.
After the coronavirus pandemic, the world will not be the same again, and the fashion industry cannot afford to be either.
