If there’s one phrase that’s going to define sourcing in 2018, according to Sourcing Journal president Edward Hertzman, it’s: “back office is the new black.”
Gone are the days of focusing solely—or at least overwhelmingly—on things like cost of goods sold and creating a style based on what did well the year before. Today, sourcing is about how to deliver the right style at a pace that’s in keeping with consumers’ now lofty demands.
“We have to look at people’s business models—like Amazon, Walmart, Zara. Their business models are about responding to a style or trend,” Hertzman said. “It’s not about creating the next new product but responding to a particular style and bringing that to market with efficiency and speed.”
Without that knowledge and the ability to actually act on—and deliver on—those demands, ill-prepared brands will continue to suffer.
“We are going to see an acceleration of last year’s successes and failures,” Hertzman said. “The amplified cost of complacency has increased, so those that are being complacent are going to become obsolete quicker than ever before.”
The battles ahead
When it comes to costs, companies set for success will have figured out that looking at total margin might be more beneficial than focusing on first cost, and that looking further upstream and responding faster to what the market says it wants will ultimately reduce liabilities, like excess inventory that will only move when deeply discounted.
With wages rising, compliance and sustainability costs adding to the bill, companies digging deeper into their pockets to invest in technology and innovation, and the need to build transparency into the supply chain—it’s safe to say sourcing costs are rising.
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But companies will have to reframe the way they see costing and find more effective ways to cut back.
“Let’s look at how much we are wasting by inefficient sourcing and inefficient buying, not at how we are paying 50 cents more an hour to a laborer, or how much more we are paying at an FOB cost,” Hertzman explained. “We have to really look at the final margin to understand cost in a more holistic manner.”
In a word of warning, Hertzman said, “I would caution brands that have been unethical in how they label, invoice or pay for their product as a means to lower cost, that more transparency and more investigations into the supply chain will happen. And as companies and consumers alike begin to get a better understanding of true costs, those that have relied on cheating as a de facto business practice will be exposed. Which means the retailers they work with will also be at risk.”
As it pertains to factories, agencies and manufacturing groups, the thing many are losing sleep over right now—above even costs—is maintaining their supply chain relationships and relevancy at a time when most companies are consolidating and focusing more on their key suppliers and less on the supplemental ones.
“We are going to see people that want to reduce their footprint in the amount of people they work with, so key relationships are going to be more important,” Hertzman said, adding that companies will have to hone in on what sets them apart and focus on acing that. Companies, like Walmart, and recently Topshop owner Arcadia, have been finding ways to push back on suppliers, like tightening up on delivery restrictions or paying them less for orders, so it will be survival of the fittest for sourcing and the supply chain.
“For one, LC’s are quickly becoming a thing of the past, and how brands and vendors finance their orders is going to become another critical piece of the supply chain puzzle,” Hertzman said “Brands will need to have more cash on reserve and be able to move inventory out quicker to be in a cash flow positive position, or they’ll have to rely on banks and financing to support their procurement. Factories will also need to find other ways to finance their orders as brands are looking for terms and credit as they don’t have the liquidity they once had.”
What’s more, with ongoing pressure at retail, there may soon be fewer retailers to supply garments to anyway.
“We are going to see consolidation from a retailer’s perspective,” Hertzman said. “Retailers are going to close down, typical brick-and-mortar is going to see continued contraction.”
But don’t confuse this warning as fueling the retail demise storyline.
“I’m a little tired of hearing this ‘retail apocalypse’ and ‘retail’s death.’ I think this is a little bit exaggerated,” Hertzman said. “I think what is true is that there’s a consolidation in depth and a changing of the guard. Yes, some of the conventional retailers that have been around for decades and more are facing a problematic time, and many of them will be bankrupt or out of business. On the flipside, however, we are seeing an era where there is a whole new group of retailers and brands that are coming into play that are taking market share.”
Startups that have nailed one niche or another, influencers that have turned themselves into not just a brand but a line of clothing, and direct-to-consumer brands that have cut bureaucracy out of their supply chains to deliver exactly what their shopper wants right away, are some of those savvy new companies snagging apparel market share.
“We have to focus on what these companies are doing right,” Hertzman said. “We need to not just sensationalize headlines and talk about problems; we have to look at the successes of these companies and figure out how these old and traditional brands can pivot. Or if they can’t pivot, they are going to be replaced.”
Where sourcing is headed
Sourcing has long since followed the chasing cheap ethos, but that can’t hold in a market where cost is becoming less important than product and ethics is rising up in relevance across the board. It also can’t hold at a time when companies are shortening their supply chains to quicken their delivery times, and the bulk of the low-cost sourcing locales are far off from the countries consuming the goods.
“As the need for speed continues to become more important, nearshoring or onshoring is going to become more relevant. More investment will be made in bringing the supply chain closer to home,” Hertzman said. “We have to not only look at America as a hub, we have to look at every country and what’s near to where they are.”
Automation will be another thing that drives supply chains into the future this year, and there will be greater investments for all the things that automation affords: on-demand manufacturing, mass customization, true speed to market.
“Automation doesn’t just mean a robot. It could be a machine that does laser finishing on denim or attaches pockets to jeans. Instead of having eight people involved in physically sewing the pocket on, now it’s one operator operating the machine,” Hertzman explained. “What those machines represent is less rejection, more accuracy, less people. But there’s a huge capital investment, which is going to further divide the haves and the have nots of the factory world. The big platers that have the money to invest will be able to bring in this technology, and those that don’t will likely forgo working with better brands.”
Buzzwords aside, supply chains are really becoming more digital, however slowly for some, but companies can’t expect to “put a tech overlay on an analogue model” and expect it to work, according to Hertzman.
“All you have to do is walk the floor of places like NRF’s Big Show, and you will quickly find a solution for any problem you may have with the increased amount of service providers and technology solutions out there. However, unless there’s a willingness to change and implement the technology, and get all stakeholders in the supply chain on board, this technology will end up just being another expensive line item on your P&L,” Hertzman said.
Having said that, he added, companies that aren’t getting on board with making these investments, have already been left behind.
“Whether it’s cryptocurrency, fintech, on-demand manufacturing, automation, or data analytics, all of these are going to really start to change the game,” Hertzman said. “But first we have to get our ducks in a row, and we need process innovation first.”
The silver-ish lining
Though the outlook may appear bleak with some legacy brands flailing, trade deals up in the air and a tax code change that could have unforeseen impacts on businesses, there’s fortune ahead for companies that will work for it.
“Everything we know or have known may be completely different in a very short period of time,” Hertzman said. “It’s a period of opportunity. It’s a period of innovation. And it’s actually a period of excitement if we can get past some of the negative press that we hear about on the day to day. It’s not a time for complacency or the status quo.”