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Li & Fung Says Supply Chains Haven’t Been Built for Today’s Demands at Retail

What’s happening in sourcing today could be likened to trying to play MP3s on a record player—it doesn’t work because what’s necessary now can’t be managed with a system that wasn’t designed to handle it.

That’s the message that’s been loud and clear from sourcing executives moving past the gloom and doom that’s been hovering over retail and now looking to retool their supply chains. And at the Mazars 2017 Consumer Products Forum in New York City Tuesday, Li & Fung executive director Rick Darling drove that point home.

E-commerce has continued to drive out brick-and-mortar, he said, and it has produce a consumer that now dictates what companies produce and how they source that product—and that’s led to an evolution across the board.

“Amazon quantities, Kohl’s quantities, Macy’s quantities, are all coming down per style and their SKU counts are all broadening, some more extreme than others. And that’s not being driven by their choice to control inventory, it’s being driven by consumers’ demand to get things faster, quicker and more unique than they ever had in the past,” Darling said. “And the reality is, while that’s happening and retailers buy less product and they need to do it faster and they need to do it in smaller quantities, none of us, and I will say none of us—including Li & Fung, who’s supposed to be the supply chain leader—really has a supply chain that’s been built for that.”

[Read more about outmoded supply chains: Your Supply Chains Are Out of Date and This is the Tech That’s Taken Over]

It’s an entirely new retail world that companies need to catch up to in extremely short order. The bad news (or good news, depending on how you look at it) is the bulk of the industry’s traditional players are equally behind when it comes to the supply chain of the future. The other bad news is: Amazon.

The market share snatchers

E-commerce has drastically changed the way the world consumes everything—clothing included—and Amazon, which is seemingly bent on taking over that world, has been snagging more and more market share with every new move.

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“It’s one thing for Amazon, let’s say, to come in and take $8 billion of apparel sales; it’s another thing for them to come in and take $300 billion of market cap,” Darling said. Looking at Amazon’s market capitalization today, it stands at about $480 billion, according to Darling, who added, “Since 2006 the change in their cap is about $350 billion, and the top 20 retailers in America lost $300 billion in market share. So not only have they lost market share, they’ve also lost the ability to actually fight back and invest in the kinds of things that they need to invest in order to turn things around.”

If Walmart has it’s way, however, Amazon won’t be the only e-commerce giant that keeps other retailers up at night.

“I don’t think there’s any question that they are not sitting back and letting Amazon easily take that market share,” Darling said. “They also have the resources to put behind making an acquisition like and doing things that are very, very different.”

The industry is being changed “profoundly” now, according to Darling, and it’s either putting retailers in a position to reinvent themselves or to rethink the value of their real estate and make different decisions about what to do with physical space—the kind of thinking that led Lord & Taylor to sell is flagship store to WeWork.

“Amazon buys Whole Foods, that’s about the supply chain, it’s about having a food business that they can rely on and it’s about physicality,” Darling said. “So as Amazon starts talking about private label and physical space, Walmart’s talking about a bigger e-commerce business. So the whole industry is now beginning to transform the way we reach the consumer and the way we talk to them.”

The retail apocalypse isn’t happening

The whole sector may be upended as it tries to morph from a caterpillar to a butterfly, but the retail apocalypse many have been cowering in the face of, isn’t actually happening, according to Darling.

“What we’re really seeing is a changing of the guard. I don’t think it’s the end of the world,” he said. “For all of us it’s a little confusing and it might be difficult but there’s going to be winners and there’s going to be losers, and the winners are going to be incredibly strong five or 10 years from today.”

The question companies should be asking themselves now, is how to close the gap and go after those that have already positioned themselves as likely winners. How are those companies talking to consumers? How do they get their product to that consumer? How do they entertain and delight that consumer when they do go into a store?

“Why is it that going on a site like Amazon and buying an apparel product feels better than going into one of our traditional brick-and-mortar customers? That should have never happened,” Darling said. “It’s quick and it can be very rewarding because I get it the next day, but it certainly isn’t an experience.”

The challenges facing retailers won’t abate anytime soon as the transition is ongoing, but the wholesale side will have to figure out how to adjust to it.

Supply chains have to think smaller

Sourcing has never had as much of the spotlight as it has today, considering the bulk of the changes the consumer is driving have to be made in the supply chain, and solving for the future will be a big task since supply chains will need to accommodate smaller everything.

“For 40 years, most of us that have been big in wholesale, or on this side of the business, have built a big to big supply chain: big orders a few times a year, big factories, big retailers that were constantly looking for their million unit seller or the two billion unit seller,” Darling explained. That led to stores flooded with product at sky-high markups in heightened retail spaces because no one could risk out-of-stocks at a 75 percent markup.

That model made for massive global supply chains geared toward delivering big quantities at a pretty slow pace to big retailers commanding that demand. And the wholesale side was doing the same thing.

“We designed for the idea to get a big buy or order. Whether it was from Walmart or Target or Macy’s or Kohl’s, we wanted the big order. And those days are gone,” Darling said. “I think the biggest challenge that any wholesaler faces today is how do you build a supply chain that can do 500 or 800 or 1,000 pieces at a time, 30 times a week and deliver it very, very quickly and do it sustainably?”

As the industry stands, Darling said, there isn’t really a solid, sustainable supply chain that’s built to be able to do a lot more styles a lot more quickly, in small quantities and at prices that are still competitive at retail.

“Maybe Inditex has a supply chain that’s built for something similar, but even their quantities are bigger than what most people are talking about today,” he said.

The supply chain needs to be radically reinvented

Innovation is in high demand these days when it comes to supply chain reinvention, and automation is leading the way.

Adidas, for one, will soon be making 800,000 T-shirts a day using solely sewbots.

Tianyuan Garments, a Chinese company that produces for Adidas recently invested $20 million in a factory in Little Rock, Arkansas slated to open in 2018. The factory will employ 21 robotic production lines, using automated technology from SoftWear Automation. According to Darling, those T-shirts could cost as little as 31 cents each.

Beyond bots, 3-D will be key to the whole product development process.

“Today, retailers are actually talking about demanding that wholesalers present their product lines through 3-D versions versus physical sampling…virtual fit, virtual sampling and virtual delivery of product,” Darling said. “Not for the feint of heart. You’re talking about layering significant amounts of technology to be able to do that.”

Those are the kinds of new realities that will divide winners from losers based on who can best adapt to demands and invest in the tech to get them there.

Wholesalers must redefine their roles

Wholesalers have to consider whether they’ll need to look at their businesses differently, their relationships differently or pull together with other companies to do things cooperatively—or some combination of the three.

“The retail requirements of less inventory, more styles, digital design and capability, and logistics assistance, drop shipping directly for their stores, is changing what we all do and it’s changing the skillsets that we all need. And frankly, it’s changing the money that we make,” Darling said.

Looking ahead, Darling said there’ll be serious new players taking big portions of market share and wholesalers will have to start thinking of their customer as a stopping off point to a consumer they’ll need to get closer to and understand better.

“Wholesalers and suppliers need to really think about and redefine their role between the maker, your supplier and the consumer and not think about your business to your retailer. I think that’s what we’ve done for the last 20 or 30 years,” Darling said. “But the business today is who I have on the making side, who am I ultimately giving my products to through whatever channel I happen to be selling them to, and how do I build a supply chain and a business that deals with both sides of that equation?”