The global pandemic may have felled global supply chains, but it may also prove the shove the manufacturing sector needed to shirk its bygone behaviors.
If the B.C. (before coronavirus) supply chain could be likened to a discus thrower—fixed, firm and focused on linear movement—a surviving A.C. supply chain will more closely resemble a contortionist.
And the evolution will be swift.
“It’s a decade of acceleration that is happening within the course of a few months,” Dame Carolyn Fairbairn, director general of the Confederation of British Industry, said during the session, ‘Dealing with Dislocation: Manufacturers, Retailers and Their Supply Chains—What Now? What Next?’ at the Financial Times Global Boardroom digital conference Tuesday.
The list of the supply chains’ foul-ups is exhaustive, but now survival hinges on brands’ and retailers’ ability to finally execute on the transformation the sector needed, but, in many cases, hadn’t acted on quickly or efficiently enough. What the COVID-19 crisis has perhaps most keenly exposed in fashion supply chains, is the often complete lack of demand visibility. Now, most retailers are paying the price for their blindness.
For too long, fashion players have been relying on an oft-deadly combo of Excel spreadsheets + gut feeling to determine their seasonal buys, and even before the pandemic swept in and cancelled spring/summer ‘20 (and potentially fall ’20), that ill-informed equation was contributing to crippling markdowns and inventory waste because few had any concept of what the consumer really wanted and when they were willing to buy it.
At present, the problem has escalated to unprecedented proportions across all links in the supply chain.
Manufacturers are sitting on unshipped orders because retailers have cancelled product for which there’s no outlet and little demand. For orders that factories are set to complete, a shortage of raw materials has contributed to shipping delays. Despite some delayed shipments, clothing is piling up at ports because it’s either going unattended, unclaimed or unpaid. And as the logistics sector reckons with wildly fluctuating demand as retail strives to resurface, shipping costs, in many cases, are climbing.
“This can only be described as a devastating crunch,” Fairbairn said. “There’s been a six-week delay, a six-week lag, and we are beginning to see the unfolding of supply chains.”
Reawakening the sector—in more ways than one
Science and the ongoing threat of rising coronavirus cases aside, retailers and factories are embracing phased reopenings in the hopes of restarting the economy. And with volatility and unpredictability of demand expected to settle in and stay a while, companies will have to quickly pivot from putting out fires in their supply chain to finally figuring out how best to have better visibility into it.
“For companies that had not created a lot of digital visibility in their end-to-end supply chain…you’ll see a lot of heroics and human intervention to get visibility,” Katy George, a senior partner at McKinsey & Company, said. A lot of what had been done to deliver on visibility in the past had been based on algorithms, but, as she noted, “the algorithms cannot help you predict what is an unprecedented” phenomenon.
Flexibility and agility—concepts that have been bandied about as new supply chain buzzwords in recent years—will now be forced to the fore of the conversation. Bureaucracy, silos and lack of common sense will all have to be broken down so fashion can make connections with consumers, create the interesting product they want, and deliver it with minimal social or environmental impact.
“What we’re going to see is innovation that allows us to have agility, and therefore, resilience without the costs that the old supply chain would have imposed,” George said. Supply chains will adopt more technologies that create more flexibilities to deliver that resilience against risk. “It’s the first time that we’ve seen that we don’t have to have the same trade-offs that we’ve had in the past between flexibility and cost.”
Smart, strategic sourcing will serve as the foundation for future supply chains.
“I think you will see resilience built in in hundreds of micro-ways,” Fairbairn added. Value will be reevaluated, new ownership patterns will emerge, and governments may intervene to support more regionalized manufacturing.
Local love, federated supply chains
Global trade, as much as it has been pushed for and praised, may start to wane as the winning way to do things.
“We’ve actually hit a peak in terms of global trade as a percentage of total GDP, and we see much more regional trade than global trade,” George said. Fashion may begin to align with the more local supply chains the food sector embraces, and technology will largely be what facilitates that trade. “Competitiveness will be based on technology, not just labor cost as it was in the old days.”
When McLaren Automotive, which manufactures luxury, high-performance sportscars, had to halt manufacturing because its China-based suppliers couldn’t deliver components, the company started focusing on its ability to respond—which largely meant homing in on its U.K. supply base.
“That local sourcing has been a benefit to us in this,” McLaren Automotive CEO Mike Flewitt said.
Stockpiling, as fashion does with apparel, wasn’t part of McLaren’s planning, so inventory glut isn’t a problem the company is facing now. Nor will it be going forward.
“You manage your supply chain and your inventories as almost a science to have them as lean as possible with as little inventory,” Flewitt said. “I don’t think we will start building big inventories. Not only is it a poor use of cash in the business, but it drives obsolescence.”
Lack of cash tied up in sitting inventory also means more on hand to work through unforeseen challenges. And shorter supply chains means orders can be placed closer to deliveries without hampering them.
“I think we will be less likely to source so remotely with such long supply chains in the future,” Flewitt said.
China plus one strategies for diversifying supply chains have been at play in fashion for years as companies looked—little by little—to lessen their reliance on the world’s factory. But now, as with other transformations in the industry, the pace will be picked up on that shift.
“I think we will continue to see that kind of global capacity planning in a way that reflects a concern about geopolitical risk, and that’s why I think we’re going to see shortening of supply chains accelerated,” George said.
In some ways, apparel companies may have protected themselves against the full blow of COVID-19 by backing off of China in recent years to shore up against trade risks amid the ongoing U.S.-China battle that has largely been fought with tariffs.
That desire for diversification coupled with the current crisis may finally, fully, give rise to the federated supply chains Peter F. Drucker addressed in ‘The Practice of Management’ in 1954.
“Any organization requires both strong parts and a strong center. The term ‘Decentralization’ is actually misleading—though far too common by now to be discarded. Federal decentralization requires strong guidance from the center through the setting of clear, meaningful and high objectives for the whole. The objectives must demand both a high degree of business performance and a high standard of conduct throughout the enterprise,” Drucker wrote.
And three years ago, reinforcing the management consultant’s concept in ‘The Living Supply Chain: The Evolving Imperative of Operating in Real Time’ published in 2017, Robert Handfield, Ph.D. and Tom Linton said “federated” networks would emerge as key to global competition.
“Federation implies common operating procedures, established standards, driving aligned supply chain processes and tacit understanding of how things work,” Handfield wrote. “Suppliers that work for a larger company in a federated supply chain are generally pretty happy. The suppliers I’ve interviewed at federated supply chains like Honda, John Deere, Intel, and Flex don’t want to leave, as they feel like they are treated as equals, and assured a steady revenue, and also understand that they are in it for the long haul. Over time, suppliers’ loyalty towards the dominant firm grows.”
The concept is one that will have to play out as retailers look to repair supplier partnerships tainted by their knee-jerk reactions at the onset of the COVID-19 pandemic. And it will be what allows fashion brands to execute buying decisions closer to, or in season, with shorter supply chains that will make it all possible quickly—meaning secured supply, fewer markdowns and less wasted inventory at the end of a season.
“There will be federated supply chains,” Girish Rishi, CEO of digital fulfillment platform Blue Yonder, said during FT’s Global Boardroom event. Setting up and designing from Silicon Valley or New York City and manufacturing much further afield, he said, won’t be the way forward. Companies will focus on shortening their supply chains and establishing more local warehousing to fulfill local demand.
“Building exclusively in another country thousands of miles away, I believe that model is going to be monolithic,” Rishi said.