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How Sustainable Are You if Your Inventory Is Out of Control?

No amount of 2020 goals, science-based targets or fur bans can solve the apparel industry’s sustainability issue if it can’t get the inventory equation right.

And as consumers clamor for more sustainable fashion, uniting the two pain points will prove critical in overhauling a supply chain playbook that hasn’t kept pace with the changing times, and has contributed to a pile-up of inventory the industry can’t bear.

The first step is admitting there’s a problem.

In a no-holds-barred call-out of the apparel industry’s false sense of progress, particularly where sustainability is concerned, Sourcing Journal founder and president Edward Hertzman said during opening remarks at Sourcing Summit New York last week, “It seems like a lot of effort is going into the fibers and dyes we use, the water treatment facilities and laser machines we purchase and operate, but isn’t it a little ironic that an industry so obsessed with sustainability has unsustainable amounts of inventory damaging both their businesses and the planet?”

To claim sustainability as an industry, the apparel sector has to reach a point where it’s making the right amount of product for the right consumer at the right time, and ultimately figure out how to incorporate discarded garments back into the supply chain and recycle or upcycle them for reuse in a model that’s truly circular.

That utopia, however, may be a long way off.

But aligning efforts to improve inventory positions and environmental impact could prove a major step forward in the journey to get there.

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“Inventory and sustainability are inseparable,” said John Thorbeck, chairman of Chainge Capital, a consultancy focused on building speed-to-market analytics for retail supply chains. “You must solve the issue of excess inventory before sustainability has any potential at all.”

Most companies, Thorbeck explained, have so much capital tied up on the inventory side—largely stemming from the traditional more growth = more stores + more inventory model that got the industry into its current conundrum—that they have little left to unlock for investments on the sustainability side.

There’s a silver lining of sorts, though, according to Thorbeck.

“The good news is that there’s a tremendous amount of inefficiency that really does not condemn this industry to always being perpetually low profit and low growth, so that the opportunity to recapture that margin can certainly be done. I think it starts with process innovation,” he said. “But this idea that I’m going to switch over from inventory to sustainability without a solution set that embraces both is both hypocritical and, I think, very distracting.”

It’s a sentiment that resonates with suppliers that are getting it right, too.

Esquel Group, a Hong Kong-headquartered vertical apparel manufacturer, prides itself on making product with a minimal impact on the environment, and its approach to sustainability centers on process.

“We actively respond to the environmental challenges in relation to energy, water, air quality, chemicals and waste by optimizing our process management,” Esquel vice chairman Teresa Yang said in McKinsey & Company’s Apparel CPO Survey, “Fashion’s new must-have: sustainable sourcing at scale,” which launched at the Sourcing Summit. “Through better forecast and resource planning, we reduce waste along our supply chain with a focus on minimizing defects and overproduction, which in turn reduce inventory and extra processing.”

While it sounds straightforward enough for the collective industry to embrace, too many are missing the mark. Gap admits to being one of them.

At its most recent analyst day, the company addressed its plans to improve sustainability, pointing largely at inventory to get them there.

Inventory productivity, Gap president and CEO Art Peck said, is “the industry’s dirty little secret,” which the company is “committed to tackling.”

“One of the biggest elements of waste in our industry is not the clothing that’s bought, it’s the clothing that is bought but unwanted and the long tail that we and many other companies have that end up sad and lonely in the clearance section of the store,” he said. “And the good news is that limiting that waste also improves our inventory productivity, our margins and our working capital efficiency.”

After its surplus inventory led to elevated promotional activity to clear it in the second quarter, Peck said, “We’ve adjusted back half inventory buys to better match the traffic trends that we’re seeing, adjusting Q3 as much as possible and even more aggressively adjusting Q4.”

From an analyst’s perspective, Jefferies vice president and equity analyst for apparel and footwear retail, Janine Stichter, said, referring to Gap, “If they can improve their supply chain, have a more flexible supply chain, and ultimately reduce the amount of mistakes they make in their buying process, that makes for a more sustainable footprint for them over time.”

That, as Thorbeck noted, comes down to embracing a more sustainable business model, rather than focusing solely on things like more sustainable materials finished with less impactful chemicals.

While he finds it encouraging that sustainability has now become a C-suite priority, Thorbeck thinks securing the capital in an already pressured market will prove the next big struggle for companies in the coming year.

“This is an industry that’s a going-out-of-business industry, and you really have to understand when you’re adding cost, you’re dealing with all of the uncertainties,” he said. “Where is the capital going to come from to invest in that new business when your highest growth channel [online] is also your most expensive channel?”

The cost of competing with Amazon, plus demand for free, fast shipping and returns when things don’t work out, is taking a sizable chunk out of the financial pie.

“The capital really isn’t there to support the kind of transformation that the industry has an ambition to achieve,” Thorbeck said. “If you don’t have some understanding of that and if you’re not able to interpret that into C-level language, then you’re going to be simply doomed to incremental operational improvements that aren’t going to deal with an industry that’s actually in distress.”