While the apparel industry is mired in the day-to-day challenges related to overcoming the production and logistics disruption brought on by the COVID-19 outbreak, it also needs to take a big-picture look at why the supply chain is so vulnerable to a near-complete shutdown.
Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel, says the industry must do a better job of mitigating risks, especially since apparel—like other sectors—has experienced threats it should have learned from in the past.
Here, he discusses how the industry is weathering “the perfect storm,” the questions the C-Suite needs to ask itself now, and why the apparel industry is likely to miss the opportunities the outbreak presents.
Sourcing Journal: What is this novel coronavirus revealing about the apparel supply chain?
Edwin Keh: The coronavirus points out a couple of interesting opportunities for brands. And the first is that you need a supply chain disruption contingency plan. As far back as SARS people dealt with this and sort of forgot about it, and then came all this conversation around the Japanese tsunami with automobiles. There is a sole supplier in Japan that can provide [the one component that car makers need], and all of a sudden, no cars for anybody. It’s the same here.
We are now in the middle of the perfect storm. We have just gone through a year of trade wars, so everybody’s kind of battered and beaten up already. Everybody’s margins got even slimmer because they have to eat some of the additional duties. And what they’re finding is that they can go to Vietnam and places like that, but it turns out that building an end-to-end supply chain is difficult because you can move a couple of sewing machines anywhere you want to in the world, but where’s the fabric going to come from? Where are the buttons going to come from?
And so, the coronavirus is pointing out more the tier two, tier three challenges that people are facing…If most people take an honest look at their supply chain, it’s basically the same tier one suppliers. [They] just move their sewing floor to another country. So what they need to do is to begin to look at that system and understand what is enough insurance for me.
And for most people, the perfect storm we have here right now is that it’s not only supply that’s shut off but demand. For a lot of brands, their second biggest and the fastest growing marketplace is China. So now, how do I develop a more cohesive and more sustainable international strategy that puts me in the right countries and the right marketplaces? How do I have fulfillment channels that are more robust?
SJ: So what are the options for production, and how should companies evaluate them?
EK: Onshoring is more expensive but I get things faster, and it’s a much less complex supply chain. [We should be looking at] developing new supply chains which are shorter, so nearshoring. Thoughts like that should be going through people’s minds. The challenge for a lot of brands, is that they are not Walmart or Zara or H&M, so they don’t have the scale yet to think about how can I spread myself across multiple supply chains? How do I have backup plans?
The three supply chains you have to think about is your information supply chain, your financial supply chain and your physical supply chain. Financially [you have to think about] how much money you’re making on the backend, where your money is coming on from on the frontend and whether you have enough resources to ride this one out. And then, the question is do you know where things are? This is your data. Do you know as much as you should know about your supply chain, which is where the buttons are coming from, where the zipper is coming from, where plastic bags are coming from and the single points of failure that you need to be concerned about?
SJ: What are you seeing as this disruption unfolds? Are companies along the supply chain banding together to find solutions?
EK: As an industry we’ve been talking about partnerships and using words like that for a long time and yet on a day-to-day basis, we are still rewarding ourselves on margins—very short term measurements of how well we perform. If we’re going to be robust enough to weather storms and deal with unexpected opportunities and risk, then we truly need much stronger more stable partnerships, because if you think about it, most brands are already financing their inventory with from their suppliers. Their payment terms are such that they hope they sell everything within 60 to 90 days so that they can turn around and pay those suppliers. So you need to get good true partners from the not sexy part of your supply chain, your distributors, your manufacturers and your suppliers. Everybody has skin in the game. Everybody needs to figure out how to keep everybody else healthy.
I recall after 9/11, a software company that I knew actually went and pre-paid all of their suppliers that were going to ship in the next 30 days. And the reason for that was to reassure suppliers that they’re going to stay in business and to make sure that there is no cashflow disruption for these guys and that bought 10 years of goodwill. Thirty days was a couple million dollars but that brought in billions of dollars of goodwill, and they became the customer of choice for a lot of suppliers.
Here we are in the middle of an opportunity. How do we use this to secure partnerships and demonstrate partnerships with our suppliers and just create some goodwill and trust?
SJ: As the rate of new cases of COVID-19 seem to be slowing down in China, they’re ramping up elsewhere, including the U.S. What does this mean for the market, given that for a lot of brands and retailers, the U.S. is their biggest market?
EK: From my perspective overseas, the U.S. is woefully unprepared for the coronavirus. Look at what’s happening in Korea and Italy, and the dramatic steps they and even China are taking. You close down cities. You close down schools. The CDC is talking about getting a couple hundred thousand test kits out now. China is testing over a million cases a day. Seeing how fast this developed in Korea and how fast Italy fell, this is going to have some major market disruptions. God forbid this gets worse, but you can imagine, shopping malls drying up.
One example is everybody sort of shut off all air travel to China. All of a sudden I noticed there’s this huge spike in airfreight space in Hong Kong, and it’s now like triple the costs to get airfreight because everybody is shipping things to and from China via Hong Kong. Because everybody has cutoff passenger flights to China, there is no free space available and the knock on effect on things like this are things that we haven’t considered yet.
SJ: What can the industry learn from what it’s experiencing now?
EK: It’s an opportunity as well as a risk because I think that in marketplaces like this, if you can figure out the fulfillment channels that makes sense for people and if you can step into the breach with a lot more services, there’s an opportunity.
There’s a lot of things that we can repurpose. There’s a lot of self-cleaning and self-sterilizing materials that we use already. Nike and Adidas use those things every day to make us not stink after we go to the gym. Think about these types of germ and virus barriers. They will become much more in demand. If you commute on the subway, you’d say, ‘It’d be great if I had gloves that are germ and virus barriers or a scarf that doubles as a face mask.’ So stuff like that is going to be coming up so there are lots of opportunities if we just get ahead a little bit.
I find that especially for a lot of operators in our industry, we really are on one hand very slow. We’re still in the 12-to-18 month development cycle. And on the other hand, we don’t see too far. We don’t venture out very far to the opportunities that we just haven’t explored or are not good at or failed at in the past. We just don’t have that tenacity. If Nike had figured out how to serve women, there wouldn’t be a Lululemon.