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Is Poor Sourcing To Blame for Recent Retail Bankruptcies?

I have little doubt this article will cause stress among the sourcing community—but I’m not writing it for them.

This is for all the C-level executives, the boards of directors and the investor communities involved in the apparel space. This is to get everyone outside of the supply chain to start thinking about how companies source.

The apparel industry is going through a massive transformation today, and in the not-so-distant future it will be completely unlike what we’ve known for so many years. That’s not to say that as a society we’ll stop wearing pants and shoes, but how, when and where we purchase our clothing is changing faster than most retailers anticipated, or are prepared for. It’s almost as if the apparel industry is still selling cassettes when everyone around them is streaming music.

There’s no shortage of news out there about the challenging retail environment, consumers’ changing preferences and shopping habits and the creeping online retail takeover. We can track certain metrics, like mall traffic, weather patterns, retail hiring and firing, comparable sales and profitability to get a feel for what’s going on, but we haven’t yet been able to measure good design, efficient product development and good sourcing.

It could be that millions of dollars in margin are left on the table each year because of poor sourcing, and most retailers would be none the wiser.

No company is going to admit to having a bad supply chain. In fact, most will brag about their process and their systems, but it’s those very processes and supply chain structures they praise that I credit for their demise.

Companies use impressive buzzwords like “fast fashion,” “fabric platforming,” “local sourcing offices” to give investors a sense that they are following best practices and making the right supply chain improvements to stay competitive. But, for most brands, these buzzwords are hardly backed with any substance. But how would anyone know that?

Just because a company says it’s going to start purchasing more fabric upfront, does that make them more agile and flexible? Do they now have a supply chain that can compete with today’s fast fashion retailers?

The answer is no.

Rigid supply chain systems are often put in place and enforced so that sourcing executives feel that they have control over the chaos. However, there’s a fine line between processed and over-processed, and in my opinion, over-processing will be the silent killer of many organizations.

Over-processed companies become bogged down with bureaucracy; too many layers of approvals and rigid decision making. It stifles entrepreneurial thinking and protects inefficient, mid-level managements jobs. What makes so many of the European fast fashion powerhouses successful is their culture, how they empower their merchants to travel overseas, create and find great product, make necessary changes and close the deals without layer after layer of approval.

Companies can use all the buzzwords they want, but too many traditional retailers are afraid of change and risk. Instead of trying to reinvent themselves, they’d rather go through a slow and painful death while young innovative companies figure out how to deliver the product people want via the right channels and at the right prices. It’s the slow decision-making process and old way of thinking that’s preventing any meaningful change.

The first fundamental problem with so many companies is a sole reliance on company-owned and operated overseas offices.

If all sourcing is channeled through company-owned offices, there’s little incentive for anyone to work harder. At the core, the office is staffed with employees. The sourcing department and product development teams are comprised of company employees. There is no incentive for staff to find new suppliers, or travel to less than desirable countries, or to challenge the status quo at the risk of losing their job, just to potentially save the company money.

Whenever a retailer was interested in engaging my sourcing services, if the next step was for me to work with their Hong Kong or local overseas office, I would politely (though still somewhat aggressively) tell them it wasn’t going to work.

How could it?

Let’s say I was able to source better than their own local team overseas. If my pitch wasn’t a lie and I could save them 20 percent more than their own team could, how would that make them look?

As soon as any local office would realize I exposed their inefficiencies, their jobs would be on the line. So naturally, that office would find any excuse not work with me. Price quotes started taking too many days, lab dips had to be resubmitted twice before approval. It was anything they could conjure up to make their team back in America feel obligated to stop working with me.

So if you really want to create healthy competition in your organization, you can’t let the competing party control the match.

Ever wonder why companies like Zara have both local offices and use agents? Because it creates healthy competition, provides market intelligence and broadens their product development base. It’s a win-win.

Next time you ask a company whether they use agents and they reply, ‘No, we don’t need them, we have our own office,’ consider their motivation.

This storyline isn’t just for overseas offices. Most people, if given the choice between sourcing in China, Vietnam, Pakistan, Bangladesh or Ethiopia, probably wouldn’t rush to pick Pakistan, Bangladesh or Ethiopia. Companies go there to add margin to their bottom line.

More than a dozen times in my career despite being able to save more than 20 percent for companies by bringing their production to places outside of China, I was forced out after one or two seasons.

Management would bring me in on a third-party consultants’ recommendation, suggesting they diversify to cheaper regions outside of China. And at first I would become the golden child. Ten dollar fleece out of China became $7.50 fleece out of my office in Karachi. Management was pleased with the savings, but the sourcing execs were all but pleased about me making them look bad and complicating their lives.

Imagine for a retailer making millions of units a year what a savings of even $0.50 plus duty would mean for them over a few years. But employees aren’t benefitting from that $0.50 per garment savings, and if it means longer days, more travel overseas, late night Skype calls, challenging communication, and more rounds of submissions—why would they put themselves through that aggravation?

Then there’s the fear. With such a tough retail climate, what if a sourcing executive suggests changing a vendor in an effort to save the company money or increase speed to market, and it all goes wrong? Will they be fired?

Sourcing is a very flawed, chaotic and stressful job, and so many things are out of most people’s control. But have retailers created stagnant environments because fear, rather than innovation, dominates?

Complacency is also tied to another very sensitive issue: corruption and bribery.

I can understand nominating a fabric supplier if you are making fine Italian silk shirts or a premium denim line, but backdoor arrangements shouldn’t be keeping suppliers around that will charge $1.95 for the same 40s poplin I could source for $1.50. Nominated suppliers should ensure consistency and quality, but they should also provide the same—if not cheaper—costs because of economies of scale.

If the team or person you empowered to make your sourcing decisions is corrupt, then your supply chain is toxic. Even if you can find and bring in new resources, the gate keeper responsible for managing these partners will keep them out and shut them down as quickly as possible. Companies need stringent checks and balances within their supply chains, and having them is more critical than most companies understand or care to think about.

Overpaying on duty is another issue companies fail to address. When a company requires fabric testing or factory audits, these services aren’t free. You can either pay for these services separately or as part of the FOB costs. If it’s added to the FOB, you are actually paying duty on those tests, which you aren’t required to do. Some uncouth companies will tell you they don’t have a budget or that’s not the policy or—my personal favorite—that’s the factory’s expense to bear.

Either way, if it’s factored into the FOB, you are paying for it, so stop the insanity. Have companies become so rigid and inflexible that logic has been lost? How much money is being thrown away here?

Now while some companies are so stuck in their ways, there’s another extreme. Some companies only think about cost and jump factory to factory, season to season, to save a nickel, which is another disastrous way of doing business.

Whenever I worked with a company only interested in the lowest price, I’d know I was destined for a short working relationship. I would hardly have the time to perfect the systems, workflow and product development before some random guy with a suitcase would under quote me by a quarter and snag the business.

You will never build a loyal vendor base with quality suppliers or benefit from any working relationships if you are transaction based. And let me be clear, I am not contradicting what I said earlier. There is a difference between healthy competition, keeping your team on their toes, and having a short-term, short-sighted view of your supply chain.

This all comes down to whether your supply chain is learning.

There is only one reason people will tell me they don’t read Sourcing Journal. They don’t have the time. What? Does a billion-dollar hedge fund manager not have time to read the Wall Street Journal or the Financial Times? No time? You will have plenty of time when your company closes shop.

And this isn’t a pitch for Sourcing Journal. This is a pitch for knowledge acquisition.

Are you up to date on SOLAS? Are you keeping up with currency fluctuations? Are there new technologies available that can improve your supply chain efficiency that you aren’t using? Are you meeting with new suppliers and traveling to new markets to do discovery work? Do you really understand TPP and the yarn forward component? What’s lean manufacturing?

Nothing remains still, and if you and your knowledge base are staying stagnant, then you have a real problem.

It’s more than just too many stores, too-high retail rents and bad weather that brings a company down. Retailers will complain they have too much inventory and are hurting from the discounts required to move through it. But no one told them to buy so much. Maybe it’s not weak mall traffic that’s the problem, but a weak design team. Maybe it’s that companies haven’t figured out how to bring in fewer units quicker and replenish faster.

Are you making your 12-gauge basic sweaters during off-peak production times in Bangladesh? Of course not, because you can’t plan that far ahead, right? Well, that’s your loss because your competitor is taking advantage of that off-peak pricing.

The list of lost opportunities is a long one. But everything boils down to one concept: if you cannot design, source and procure product effectively, it doesn’t matter whether people shop on their phones, iPads, at the mall, or in outer space—you won’t succeed.

More emphasis should be placed on good product and how to get it into the stores. Next time a retailer files Chapter 11, will the article mention the lousy job their supply chain or design team did? Imagine if there were a formula to track that, is that something you would want Wall Street to know? Are you confident in your own supply chain stock?

 

By Edward Hertzman

New York native Edward Hertzman earned a degree in economics from NYU and then spent more than a decade working as a top executive and decision maker for major global sourcing companies, including Synergies Worldwide and Pearl Global. In addition to being founder and publisher of Sourcing Journal, he continues to consult widely on sourcing and supply chain matters.

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