Whereas prices were once the prime pain point for apparel sourcing executives, new supply chain needs are now commanding more of their attention.
For one, conversations are increasingly centered on how to do things smarter rather than solely on how to do them cheaper. And more than that, it’s about how to reach operational efficiency and still deliver on margins.
“I clearly see price deflation going on,” Guido Schlossman, president and CEO of Synergies Worldwide said speaking at the Sourcing Journal Summit in Hong Kong earlier this month. “There’s a lot of price-driven campaigns happening in the market at the moment, but really the challenge is how to work smarter in your own operation in order to avoid the cost increase happening. And I think that’s the challenge we are facing.”
What’s more, Schlossman said, “We have to do things smarter, to do things faster to make sure that we can still actually generate the margin that we need in a price deflationary environment.”
To Raymond Tan, CEO of leading Hong Kong-based consumer goods supply chain group Luen Thai Holdings, micro cost has been outmoded.
“It’s really about your sell-through margin,” Tan said. “It’s about your speed and everything focused with that, so it’s really not about the micro cost anymore.”
What will drive the supply chain to consider sell-through margins over solely price, according to Tan, will be to manage what’s been a horizontal supply chain in a vertical way.
“Just think about that,” Tan said. “How are our brands, our customers, ourselves participating in managing a horizontal supply chain vertically through digitization?”
Sure, brands can hone in on the micro cost and give that the lion’s share of attention, but if they’ve saved $1 on a $5 garment and can’t sell it, they’ve wasted $4.
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“So, the question is not about whether you want to save that dollar, the question is about are you able to sell that garment at the sell-through margin. The ability to have your organization—whether you are an agent, whether you are a manufacturer—to have your data available to integrate the horizontal supply chain so that it can be managed vertically, becomes very critical in the future,” Tan said.
The challenge of reconciling dated ways of thinking about pricing with the new demands of the modern supply chain, is one the entire industry has faced—Li & Fung included.
And naturally, speed has been the biggest bane in the efforts to rejigger the supply chain.
“Speed is definitely a key factor with respect to improved margins, because if you’re faster, you’re leaner, you’re not as layered, so there’s an operational cost efficiency associated in that,” said Robert Sinclair, president of supply chain solutions at Li & Fung.
Chasing a lower price has been the M.O. for supply chains for decades, Sinclair said, and though that won’t ever really go away, the key for moving forward will be to really look at the supply chain holistically. And brands and retailers won’t come away unscathed in fessing up to support the modern supply chain.
“Expecting the supplier to always be the only entity or stakeholder in the supply chain to come up with that lower price is no longer realistic,” Sinclair said. “Everyone has to do their part and our clients are needing to change.”
To get there, it won’t be about speed just for speed’s sake, but speed initiatives that are designed to be leaner and more efficient. If they are, Sinclair said, the need to drop prices and be more promotional becomes somewhat mitigated as more gets sold through at targeted margins.
“Yes, there’s going to be those layers in the market that are coming out with competitively-priced product, but as Raymond [Tan] rightly pointed out, just because it’s cheap doesn’t mean it’s going to sell. It has to be relevant and it has to be what the customer wants at a fair price.”
While it seems simple enough, traditional players set in their traditional ways are still stuck for embracing the new mindset.
“I guess the biggest challenge in this environment is…we have too much of the old historical reasons for not being able to transform ourselves,” Tan offered, adding however, “I’m not going to look at the micro cost, I’m just going to look at how do I manage my supply chain vertically.”