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Order-Cancelling Retailers Could Send Asian Factories into a Tailspin

Retailers are slashing second-quarter apparel orders, and prolonged reductions in production for the back half of 2020 could mean factories across Asia may see closures similar to the levels last seen in the Great Recession.

As store closures that were once billed as temporary, two-week measures are now set to drag on ad infinitum, fashion retailers have been canceling orders to keep cash in their coffers and align inventory to demand while shoppers shelter in place amid the coronavirus pandemic. But retailers are also beginning to finalize back-to-school orders as holiday open-to-buy season is right around the corner.

“We think retailers have already begun to cut second half orders to preserve cash based on suppliers’ commentary,” Rafe Jadrosich, Bank of America Securities apparel supply chain analyst, said.

It’s too late to cancel second-quarter shipments without a penalty, Jadrosich said, but retailers still have some flexibility to adjust second-half receipts– either through negotiations with factories to delay receipts or extend payable terms. Vendor payment terms are usually 30 days to 60 days, and brands usually pay for inventory 45 days or so after they take ownership, he noted.

Jadrosich cautioned that there may be limits to what factories can do to help.

“Many factories are facing their own liquidity challenges, which could limit the amount of support they can provide their customers. A prolonged period of weak orders could result in factory closures across Asia similar to the 2008 to 2009 recession,” Jadrosich said.

According to Jadrosich’s timeline, fall and back-to-school purchase orders are finalized mid-March, with deliveries beginning in early July to distribution centers and payments for goods coming due in August and September. Meanwhile, the first set of holiday purchase orders is due early April, and the last ones typically make it into vendors’ hands in late June. Deliveries to the distribution center are typically slated for late September, while payments for holiday goods are due in October and November.

And the later a brand cancels, the bigger the penalty, Jadrosich pointed out, presuming that the earliest orders that can be canceled without a fee would be for merchandise that’s slated for delivery to distribution centers in late June or July.

“Brands have flexibility if they cancel prior to raw material preparation, usually three to four months before delivery to the distribution center. Brands that frequently cancel orders could damage their relationship with factories making it more difficult to find reliable sourcing partners,” Jadrosich cautioned.