“Speed-to-market” has inherent value in increasing profits for brands and retailers. But can you truly measure the value of time and its impact on your bottom line? It all comes down to accuracy: delivering the right product at the right time.
The sell-through rate for brands and retailers is one measurement of accuracy, while the percentage of markdowns is a measure of inaccuracy. In the past, brands and retailers have used lowest Initial Mark Up (IMU) as the metric for accuracy, and the cost of inaccuracy was minimized by discounting. However, this is not working and today’s mobile-enabled “on demand” consumer is further challenging the industry.
Selling more product at full price should lead to higher profits and minimize costly unwanted inventory. The “Zara model” has been reported widely by the press as the king of sourcing models with 85 percent full-price sell-through and high inventory turns. While not everyone wants to be fast fashion, brands and retailers can all benefit from solving the puzzle of accuracy and delivering the right product at the right time.
COTTON USA, in collaboration with WWA Advisors, has taken on this challenge of helping the textile and apparel supply chain develop a metric for increasing accuracy to help decision-makers evaluate the value of time in making product development, merchandising and sourcing decisions. We believe that if brands can make the final decision on a product’s fabric, color, cut and style closer to the selling point, they can more accurately predict consumer demand and thus increase their sell-through rate and better manage inventory levels.
The key to this is identifying what point in time is close enough to accurately forecast true consumer demand; therefore, resulting in the desired sell-through percentage. In lieu of made-to-measure, a brand and/or retailer must balance when they feel they have the best forecast of consumer demand to maximize accuracy, and at what cost to achieve desired profits. While it may cost more upfront, sourcing closer to known demand can increase sell-through, offset that premium, and generate more profits over time via a more responsive retail that reacts to demand, reducing markdowns and stock-outs.
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Quantifying inventory mismatch costs with specificity is next to impossible; however, COTTON USA, working with WWA Advisors, found a model that we believe will help brands/retailers improve their accuracy for today’s “see now, buy now” mobile consumer. The model is based on the Cost Differential Frontier by the University of Lausanne’s Operations Lab.
On COTTON USA’s behalf, WWA applied this model to the apparel sourcing world to help brand and retailer executives evaluate the price range that can be paid in relation to the time of product commitment. Brands must determine what that product commitment point is for them (given their product development, merchandising, sourcing and distribution center efficiencies).
To use this model, brand and/or retailer executives must determine six things:
- How accurate do they want to be (i.e., the percentage of desired full-price sell-through)?
- What point in time they can achieve the desired accuracy (i.e., when commitment is made)?
- Full retail sales price of product?
- Estimated product demand?
- Cost of product from long lead time source (assume this is the lowest cost)?
- Mark-down value?
Applying this model to your business offers a simple solution to manage inventory mismatch (too much of the wrong product or too little of the right product). We put this model to the test, and found that paying more upfront to decrease the lead time ultimately led to increased profits.
In the following two examples, the retailers want to have a 75 percent full-price sell-through and believe they can achieve this if they make the commitment 50 days out.
In the first instance, a retailer sold fashion T-shirts with a retail price of $14.99 over a 10-week period, including two peak sales times that are twice the average weekly sales. The long lead-time (over 100 days) cost is $6.90. The retailer can pay up to 12.5% more (or up to $0.86 over the long lead time cost) from a nearby supplier who can meet the 50-day commitment. If the order size is 100,000 units, the profits are increased 11 percent by reducing the lead times despite paying more for the product.
In another example, a retailer sold men’s polo shirts with a retail price of $30 over a 10-week period, including a Father’s Day promotion that is triple the average weekly sales. The long lead time cost is $9, or they can pay up to 21 percent more (or up to $1.47 over the long lead time cost) from a nearby supplier who can meet the 50-day commitment. If the order size is 100,000 units, the profits are increased 6 percent by reducing the lead times despite paying more for the product (vs. a 30 percent sell through because of inaccuracy with the longer lead times).
It is important to note that in order to meet the 50-day commitment, communication with the entire supply chain was critical in order for the yarn, fabric and garment suppliers to be available and prepared to meet the required cycle time. Product development and merchandising sales data collaboration with product sourcing is crucial to decreasing cycle time.
Accuracy in evaluating the value of time in making product development, merchandising, and sourcing decisions is critical in helping brands and retailers improve their sell-through rate and manage inventory. Today’s volatile consumer market demands a change from “selling what has been made” to “making what is selling.” Using the “Value of Time” formula from COTTON USA could help a retailer or brand in this organizational transformation to maximize their bottom line.
By Vaughn Jordan, Cotton Council International deputy director and director Western Hemisphere, and Walter Wilhelm, WWA Advisors.
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