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Flexible Supply Chain Strategy Key to Sourcing From Long-Lead Time Countries

Fast fashion retailers have changed traditional operating models by speeding up time to market and adopting flexible supply chain strategies to cope with longer lead times in some parts of the world. Companies such as Inditex and H&M use a flexible, multi-pronged strategy to cope with many of the challenges retailers face.

European fast fashion retailers have split their supply chain in a very smart way, said Munir Mashooqullah, chief executive of Synergies Worldwide. Both Inditex and H&M source fashion items that require a fast turnaround and quick replenishment in countries closer to home like Turkey, Morocco, Portugal and Tunisia. But the companies also incorporate the cost-conscious Asian powerhouse countries into their broader strategy, manufacturing basics that change less frequently in countries like Bangladesh, Vietnam, China and Pakistan.

“Academics like to refer to the garment trades as ‘chasing the lowest cost of needle.’ While this is true to some degree, the modern retailer has become much more strategic in their thinking about where geographically to place apparel orders,” said Rick Helfenbein, president, Luen Thai USA. “With labor generally comprising only one third of a typical garment cost, a 50 percent lower weekly wage rate only yields  about a 16.5 percent lower garment cost, and can add weeks to the transit time – if made in a remote location – thus reducing the accuracy of getting the right apparel item to the right location, at the right price, in the right color, at the right time.”

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Helfenbein said great retailers look at their sourcing matrix, particularly for private label products, as a “strategic puzzle.” They source the basic items at the best quality for the best price and place orders early to allow for as much lead time as possible. But for the fashion items strong retailers source the best quality at the quickest turnaround time in order to “improve the odds for getting it right,” he said.

This dual strategy allows apparel companies to make the necessary fabric and production commitments that keep operating costs in check, while simultaneously maintaining a nimble stance that can shift to meet rapidly evolving consumer demands. Along with basic items, the so-called fast fashion retailers can also source garments that are more expensive to make closer to home, for example outerwear and denim, from countries where costs are low enough to make the model successful.

This category by category decision making is enabled by flexible, diverse and well organized merchant organizations, Mashooqullah said.

“It’s a quite straightforward way they have segmented their production,” Mashooqullah noted. The less structured, flexible approach to sourcing allows for both longer lead times and quick turnarounds. There are no U.S. companies doing this yet, he added.

The proximity of source countries to the ultimate destination of certain products is a key component of European retailers’ success, said Joanne Kane Offerman, an assistant professor of Fashion Merchandising Management at the Fashion Institute of Technology in New York.

“American retailers are sourcing much further away from their home bases and their retail stores, specifically further than the European companies are. Proximity is a definite advantage for companies like [Inditex-owned] Zara and H&M,” Offerman said, but key items don’t require speed because they rarely change. “The American retailer is a very different animal. They invested a lot of time and money to vet the sources in the countries where they’re producing goods. It’s an important step they can’t skip because it ensures working conditions, etc.”

Successful European companies are also using a hybrid purchasing strategy that makes use of their own in house resources, along with agents and buying directly from factories. That hybrid strategy is the result of staying open to new ideas, a stance that used to be characteristic of many of the world’s top merchants, Mashooqullah said.

“[Europe’s fast fashion retailers] are not just reliant on one channel of the supply chain,” he said. “The traditional merchant in the good old days was open to ideas instead of making ideas subservient to the process…Companies still have to be good merchants and merchandisers. The whole fashion business can’t just be processes.”

No U.S. companies have adapted this model yet, sources said. In order to effectively compete with the European fast fashion retailers companies need to implement more flexible sourcing models and decision making, they noted.

“U.S. companies need quicker decisions and the authority to take a little risk and really be a merchant,” Mashooqullah said.

Forever 21 could be a retailer to watch in the future, he added, noting that the company is notoriously private about its business and operating model. Similarly, Espirit could also be trying to look to emulate the successful fast fashion business model. The retailer hired a former Inditex executive as its chief executive in August 2012.

“The consumer of today is more demanding than ever. The consumers want what they want, and they want it now. Consumers also are more informed as the internet has given them access to a world of choice that never before existed,” Helfenbein said. “Today’s apparel retailer has to take a stand on what they feel is correct for their targeted consumer. The retailer then has to lure that consumer in, and be able to provide the right size and color, or for sure, they will lose the sale to a competitor or to the internet. Sourcing executives know this, and are striving to maintain the needed flexibility in their supply chains, to be sure that the customer is satisfied. Failure to provide right product is not an option.”