Skip to main content

Kearney: Brands Must Evolve to Overcome Supply Chain Challenges

Sometimes enough is enough.

Despite the fact that shoppers appear poised to spend on shoes and apparel, supply chain troubles could stymie a true recovery. At least according to Kearney. Rising prices on raw materials and logistics could cost North American apparel and footwear brands—which typically rake in about $400 billion total annual revenue—between $9 and $17 billion in lost earnings in 2022.

Kearney dug into the revenues, cost of goods sold and general administrative costs across the apparel and footwear sector in the U.S. and Canada with data from Statista and Euromonitor, and found that these enterprises were especially vulnerable to supply and demand shocks over the past year. The global management consulting firm’s analysis noted that during 2021, the price of cotton ballooned by 40 percent, while container shipping prices skyrocketed by up to 300 percent. Labor shortages led to wage hikes, while expenses for warehousing and transportation also spiked.

“All apparel and footwear businesses—manufacturers, brands, and retailers—face the threat of ongoing disruptions in both supply and demand,” analysts wrote, “as well as the likelihood of continued cost spikes across vital components of the supply chain.”

These conditions are unlikely to fully resolve over the next 12 months, analysts wrote, and there is no guarantee that profitable growth will resume, even as shopper demand returns to 2019 levels. But brands can take action to arm themselves against future disruption by promoting resilience across their supply chains.

The task is a tall one for most North American footwear and apparel companies, which are highly reliant on overseas manufacturing in countries like China that are fraught with trade tensions. In the long term, Kearney analysts see companies making a real effort to nearshore and reshore operations, rendering their supply chains less vulnerable and more efficient due to proximity to their end markets.

Related Stories

Those investments take time, however, and in the near term, the group recommended a strategy of complexity reduction, including reducing the number of SKUs available, and fully digitizing product development to reduce reliance on sampling. Fresh inventory management tactics, like shifting to AI demand planning, could streamline the development process and ensure that replenishment of goods is as timely as possible. Brands can also optimize ocean shipping by reexamining their product flows with vessel capacity in mind, the group wrote.

These three areas—sourcing geography, demand planning and inbound transportation—were characterized by Kearney as North American brands’ areas of lowest resilience. Analysts also pinpointed vulnerabilities in sourcing relationships, as many brands still lack control and understanding of suppliers beyond the tier 1 level. Many are still largely in the dark about upstream operations and where their goods originate. Limited visibility has led to a lack of transparency and traceability, hurting brands’ efforts to manage risk for key commodities, like cotton.

Nike’s ‘Sole Train’ strategy

“The last two years have presented unique challenges for all companies,” Nike said earlier this month, but the athletic wear titan seized the opportunity to enact a seismic shift across its supply chain operations, with the goal of serving shoppers more directly. The acceleration of e-commerce necessitated the evolution, it added—but pandemic-era priorities have fed the brand’s future-facing strategy.

“We believed that the immediate and significant shifts we were seeing in consumer engagement would be systemic,” chief operating officer Andrew Campion said. “So we took decisive action and began building a digital-first supply chain to power Nike’s more direct, faster and precise service of consumers, all while prioritizing sustainability.”

Pre-pandemic, Nike operated “almost entirely” through national distribution centers in Memphis, Tn., which served the country at large. But in addition to revamping those DCs into omnichannel facilities, Campion said the brand has opened new regional service operations across the U.S. The “multi-node” network features locations outside of Los Angeles to serve the West Coast, in Bethlehem, Pa. to serve the East, and in Dallas, Tex. to serve the South. Nike also opened a service center in Madrid to serve as a complement to its European logistics campus in Belgium.

“As we continue building a digital-first supply chain globally to serve consumers more directly at scale, we have already tripled our capacity to serve digital consumers in North America and Europe, the Middle East, and Africa over just the past two holiday seasons,” Campion said.

The centers have been outfitted with new technology, too, including demand-sensing and inventory optimizing platforms that help the company predict its needs. AI and machine learning tools allow the company to put popular products in easily accessible positions so that they can be picked and packed quickly. Nike has also welcomed more than 1,000 robots into its ranks, which assist with sorting, packing and moving goods. Campion said the effort increases speed and allows workers to focus on “higher-value” activities, in addition to promoting their safety.

Efficient fulfillment has also been aided by the adoption of buy online, pick up in store (BOPIS), and ship-to-store options. Shoppers concerned with sustainability can select no-rush shipping for their online purchases, which relies on ground-only transportation instead of more carbon-intensive air-freighting. And while many shoppers value speed and convenience above all else, the localized service nodes significantly reduce the distance that goods have to travel to make it into the hands of consumers.

Investments in infrastructure and processes, while driven by the events of the past two years, will serve the brand in the post-Covid world, Campion believes. “From early in the global pandemic, we knew that our recovery and return to growth would neither be linear nor intuitive,” he said.