The pandemic has been a painful pill to swallow for apparel supply chains woefully unprepared to absorb such a seismic shock.
And with these severe disruptions occurring more frequently, fashion must take a dive deep into the many rungs of its supply systems to sniff out vulnerabilities and rebalance their operations where necessary.
Globally, the manufacturing sector has slowly but steadily adopted cutting-edge digital technologies while goods-producing value chains have become more regionally concentrated. But with events like natural disaster, cyberattacks and geopolitical instability roiling businesses every 3.7 years on average and lasting more than one month, according to McKinsey & Company, planning for the future must be part of every fashion company’s playbook.
The apparel sector is particularly exposed to pandemics, heat stress and flood risk. “Practices such as just-in-time production, sourcing from a single supplier and relying on customized inputs with few substitutes amplify the disruption of externals shocks and lengthen companies’ recovery times,” according to McKinsey’s report, “Risk, resilience and rebalancing in global value chains.”
Futureproofing apparel and textiles
“For lower-margin businesses, this is a big deal,” said Edward Barriball, a co-author on the McKinsey report, adding that companies across the board lose about 40 percent of a year’s profits on average every decade, though apparel and textiles firms come in just under that mark. And whatever investments are made over the same period to improve production time could see the equivalent of one year’s earnings wiped out due to a single severe event that disrupts production for 100 days, which occurs every five to seven years on average.
“The biggest risk for company, small enterprises or large, is to get through this and get back to doing business as they have been and then a month from now, or a year, the next significant shock occurs and they are once again put in a place of recovering from a significant disruption,” he said. Planning might require more work, but companies should do the tough stuff now to lay an operational roadmap for five years into the future, he added.
So how should firms rethink supply-chain resilience?
Apparel and textile companies can take steps to strengthen their risk-management capabilities, build redundant supplier and transportation network and keep more inventory on deck. They can also simplify their product makeup, create production that can flex across different sites as needed and bolster their bottom-line financial and operational capacity to quickly respond and react to supply-chain shocks.
Barriball suggests companies consider dual sourcing raw materials and expanding their supplier base. Some firms took these steps years ago when rising labor wages in China spurred their diversification to countries including Vietnam, Cambodia and Bangladesh, fueling a regional manufacturing hub in Southeast Asia.
Covid-19 is also encouraging some companies to bring sourcing and production closer to home, and fashion would be wise to consider nearshoring, Barriball said. Investments in digital supply chain management should be a priority because that can show firms where everything is located so they can “rapidly pivot to move goods or take advantage of online sales” and make quick deliveries, he added.
“Digital investments help firms pivot marketing with strategic promotions on in-stock items that they can get to their customer. That type of investment is one many companies haven’t done yet, but should start to think about,” he said.
The irony is that companies moved to just-in-time production to shorten lead times, be closer to when customers are ready to purchase, and respond quickly to fashion trends. It was a move to help save time and money so they don’t end up with product made nine months to a year ahead of time, making decisions based on guesses about what consumers might want and how much to make, and then end up having to deal with markdowns on prices for goods that consumers reject.
Planning for redundancies is sure to increase the costs of production between dual storage of inventory or inputs, renting or buying warehouses and distribution centers for storage and even dropshipping to fill e-commerce orders.
“The supply chains were designed with a certain global context in mind, and didn’t address issues such as rising cyber attacks and climate change. That wasn’t envisioned back then, [and] no one focused on getting all the costs out. It was about how to get lower prices this quarter from suppliers versus [what they need to do now, which is] how to make arrangements for a sustainable business over the next five to ten years,” Barriball said.
He also advised that companies doing their analysis engage in realistic scenario planning that takes into account a variety of variables, and how to sustain the company for each possibility. “If a company relies on their [existing] supply chain and a certain event impacts 25 percent of revenue, can a company sustain a miss over one quarter? They should bring a qualitative edge to how they make their risk decisions,” Barriball said.
And while making changes sounds expensive when Covid-19 is forcing most to cut costs, Barriball believes companies should instead think about using the moment to break away from the old way of doing business. “Some are still reliant on legacy tools and they should be thinking about [how the use of] technology in the supply chain can make them more efficient, [and create] better working arrangements with their top suppliers. They should also work with data they already have that’s probably buried in places that’s not readily accessible,” he said.
Sourcing by the numbers
As for where apparel and textiles manufacturers are based, the McKinsey report also noted that China still accounts for 29 percent of the apparel sold globally, but it’s looking to modernize manufacturing capabilities to move into higher-value production, and wages are rising compared with the rest of the emerging world. Moreover, the burgeoning middle class is flexing its new spending power, and with fashion one of the country’s biggest markets, upgraded production capabilities can serve soaring domestic demand.
“In 2005, China exported 71 percent of the finished apparel goods it produced. By 2018, that share was just 29 percent,” the report said, noting that industry economics will continue to drive shifts, driven by labor arbitrage and proximity to markets to reduce production lead times and shipping costs.
Recent technological advances in apparel manufacturing have opened the door for global production in higher-wage countries, thanks in large part to automation. Textile production is still highly concentrated, with China accounting for 35 percent of all exports, followed by India at 6 percent. China also has over half of all exports of specific products, such as synthetic and cotton fabrics.
But China, whose exports in 2019 totaled $332 billion, has also posted the slowest rate of growth among all emerging countries between 2014 to 2019. Using a baseline of 100 percent in 2014 for all emerging countries having apparel and textiles production, McKinsey’s data showed that China’s growth slid from 100 percent in 2014 to up 88 percent in 2017 and then down further to about 75 percent in 2018 before rising slightly to 78 percent last year.
For the other emerging markets that have captured apparel and textiles market share, the top exporter after China was Vietnam, which had $72 billion in exports in 2019, followed by Italy at $63 billion, Germany at $48 billion, Bangladesh at $44 billion, India at $39 billion, Turkey at $28 billion, the Netherlands at $26 billion, and Spain at $24 billion. Indonesia at $17 billion, Poland at $14 billion, Cambodia at $11 billion, Thailand at $8 billion and Mexico at $7 billion rounded out the list
But just because countries have a decent amount of exports doesn’t mean they’re growing on the manufacturing front. Among the emerging markets, McKinsey said Cambodia had the highest growth rate between 2014 to 2019, up 192 percent in the period. Three other countries are growing too, with Vietnam up 188 percent and Bangladesh up 160 percent. Poland grew148 percent over the period. The other emerging countries with sizable apparel and textile export market shares showed varying rates of declines in growth under the 100 percent baseline.
And Ethiopia and Myanmar were cited by chief procurement officers in the McKinsey study as potential locales—joining Bangladesh and Vietnam—that could see growth as well as companies diversify their sourcing away from China.