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This is What Fashion’s Future Supply Footprint Should Look Like, McKinsey Says

The global pandemic that is COVID-19 has pulled the rug out from under fashion businesses the world over, and now, it seems, necessity may finally breed reinvention for supply chains.

Apparel sourcing will have to be systematically reshaped to better balance risk, cost and flexibility, according to a new report informed by a McKinsey & Company survey done in collaboration with Sourcing Journal.

The complex supply chain that has long provided low-cost benefits thanks to cheap labor in further flung countries is the same supply chain that has now brought the industry to its knees. Mass store closings have curbed the need for new product that’s often ordered six to nine months in advance and is now idling in factories with nowhere to go. For factories, that pileup of product can’t pay the bills some retailers now feel at liberty to leave unsettled.

All of this has shed a keen light on the paltry partnerships and exposed cracks in the supply chain, and the only way forward may be to rethink the whole thing. Post-pandemic, retailers will need to shrink their supplier base to a more manageable size, while still ensuring the stability and timeliness of their supply.

“The crisis will force brands to do both—engage into more long-term planning of capacities and product types with their suppliers, while at the same time increasing flexibility to commit even later and re-allocate as needed,” McKinsey senior partner Karl-Hendrik Magnus said.

With a critical need to improve agility, two things will happen in the next supply chain: a slowed scale-back on sourcing in China, and nearshoring may finally catch on as more than a capsule-only concept.

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As lockdowns spread in line with the virus, forcing factories closed, fashion had to face its ongoing reliance on China, as even non-China manufacturing bases had to halt production without the raw materials supply that still largely emerges from what was once considered the world’s factory. What’s more, China’s quick bounce back from the pandemic-prompted standstill reiterated the country’s ability and agility, and, combined, the dual factors could see more companies staying the course in China.

A pre-COVID-19 McKinsey survey found no respondents intending to increase their sourcing from China over the next five years. Now, 13 percent in the McKinsey and Sourcing Journal survey said they plan to ramp up.

“This underlines the assessment by the broader stakeholder group that the trend to move volume out of China has been slowed slightly by COVID-19,” McKinsey said.

By the same token, however, the pandemic has also served as a wake-up call for companies that hadn’t already been working to lessen their dependence on China. Many of these companies, according to the survey, may look more to Southeast Asia and away from Bangladesh.

Fifty-percent of respondents in the survey said they would decrease or strongly decrease their China sourcing. Thirty-two percent said they’d source less in Bangladesh, compared to the 11 percent that said they’d manufacture more, and 37 percent will scale back on sourcing in India, versus the 10 percent planning to scale up. Vietnam and other Southeast Asian countries will gain share of fashion sourcing, with 24 percent expecting to increase sourcing in the former, 19 percent in the latter.

“So far, Southeast Asian sourcing markets have been less disrupted and are expected to gain share compared to the pre-COVID-19 five-year trend,” McKinsey said. “In contrast, COVID-19 has led to a reversal of the medium-term trends in Bangladesh with about a third expecting volume decreases.”

More than ever, remapping the sourcing mix will be about establishing greater control over the supply chain to shore it up against risk.

Nearshoring necessity

With COVID-19 closing borders globally, grounding air travel and keeping most people confined to their quarters, the world has been forced to value local over most else. And for fashion, bringing things back home will mean having a greater handle on what’s happening.

Whereas brands and retailers had lightly embraced nearshoring as an option for certain, smaller product ranges, 46 percent of sourcing executives now expect the proximity sourcing trend to increase.

“To leverage the speed and flexibility opportunities inherent in nearshoring, companies will need to set up an integrated value chain to avoid delays and disruptions in raw material supply, balance higher labor cost, and take advantage of potential sustainability gains,” McKinsey said. “For this to happen, fabric and garment supply chains will have to be co-located nearshore, but there may be inertia in making this move and scaling up production. Full speed and flexibility will likely be reached once fabric production follows CMT.”

The sourcing model may benefit European fashion players sooner than their North American counterparts as, capacity allowing, 43 percent of survey respondents said they plan to increase the value of product sourced in Turkey, which already has a fairly robust supply chain in place.

Naturally, nearshoring will be easier considered than done, but the next normal may demand the investment of time to build capacity and implement the necessary changes, including securing local fiber supply and generating the capital to do it.

“We’re not going to be independent unless we recreate the infrastructure of fashion manufacturing here,” Gary Wassner, CEO of U.S. factoring and financial services firm Hilldun, said during an Omnilytics-hosted webinar Tuesday.

From a cost perspective, nearshoring could also best position brands for recovery from both the loss of revenue and time.

With nearshoring, Wassner said, “We eliminate the two weeks on the water, we eliminate the cost of airfare…we eliminate the indecision and indecisiveness of bringing a supply chain from overseas.”

On the sustainability front—which will continue to be of critical importance for moving fashion forward—McKinsey added, “nearshoring reduces shipping and enables regional efforts to close the loop.”

Future facing

Whatever the right sourcing mix, the next normal for supply chains will demand a level of innovation and invention that previously may not have been required. And because innovation is largely driven by suppliers, brands and retailers will have to co-invest to ensure future capacity, which will mean forging deeper partnerships.

“Co-investing in suppliers is not about merely securing production capacity or helping suppliers make it through the current shakeout,” McKinsey said. “It is about supporting the innovation needed for a demand-driven and sustainable sourcing transformation.”

Part and parcel with supplier partnerships may also be a reconsideration of the role a middleman could play in helping fashion get its boots on the ground to drive the speed, flexibility and agility it requires.

“Managing your supply base in normal times is one thing. In a crisis, as now, the value a middleman can bring really shows,” Magnus said. “Their scale and breadth of relationships allow for more flexibility and tightness of supply management that especially smaller brands simply cannot match.”

The relationship between retailers and their suppliers further up the supply chain—middleman or not—has been unbalanced, Wassner said, and the structure of the fashion businesses has to change if more retailers hope to avoid going the way of J.Crew and the others soon to follow on the path to bankruptcy.

“Unless we can control the supply chain, we’re always going to be victims,” Wassner said.