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Sourcing Scoop: Luen Thai CEO Says Horizontal Supply Chains Must be Run Vertically

As sourcing evolves into its new and improved self, whether supply chain players are ready or not, there’s been much to navigate and little that’s certain.

What is certain, however, is threefold—startups are superseding traditional players and growing into their own, companies not caught up on supply chain connectivity will likely meet their demise, and process, not product, is king. But above all of that, Luen Thai CEO Raymond Tan believes the apparel industry’s biggest hurdle has been trying to connect the supply chain with transparency. Once companies are able to do that, they’ll be able to start managing horizontal supply chains vertically—which is the answer, according to Tan, to solving some of the industry’s ills.

“I think our traditional model has a very, very difficult challenge to be connected with transparency and I think that’s the single biggest challenge. I would say almost all the brands cannot solve this problem,” said Tan, who leads the family run Hong Kong-based consumer goods supply chain group.

Even companies that manage both their stores and their manufacturing have faced obstacles in simply taking orders and getting the factory to make it and deliver it, Tan explained. And it’s a general unwillingness to connect that’s to blame.

“The supply chain requires transparency and connectivity between the brands and the manufacturer, but at this moment, no brand owns manufacturing in a way that’s meaningful enough for them to build this new supply chain model,” Tan said.

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The wave of outsourcing to Asia that reshaped sourcing some decades ago, meant brands and retailers let go of their supply chains, and they’ve been hard pressed to “get them back,” in terms of at least knowing where their product is being made, how and by whom.

And that’s where new startups increasingly stealing market share in the sector pose an even greater threat: most of them can see what’s going on across their entire supply chains.

“Because they will start small, they might be able to just work with very few small manufacturers and build their business model with a new set of rules and engagement which require transparency and connectivity,” Tan explained. “The challenge for this industry is really its inability to connect the supply chain with transparency and what I call linking the big data with the small data.”

Companies have continued to chase big data as the buzzword entered the fray, oftentimes finding themselves bogged down by it and at a loss for what to do with the slew of info. What many have missed in their efforts to get big data to tell them what their consumers want, is the so-called small data that the factories are sitting on—which, according to Tan, should be valued just as equally.

“You can find out what the customer wants to buy so you can decide what to make and when to make it, but it’s no good if after you get all that information you can’t supply that to them and reduce all the risk. Which is mainly the inventory risk, the return risk,” he said. “That, for me, is something that many brands will have the challenge to deal with, the startups that are able to execute a model where they can connect the supply chain with transparency.”

And the ability to execute this more efficient, forward-thinking supply chain model, is going to take talent with more efficient, forward-thinking mindsets, which means traditional players with traditional thought-processes and attachments to staid models, will likely hold up the mission.

The workaround may mean, according to Tan, that companies have to bring in a younger executive team that understands the market and that is willing to “totally transform whatever they have now.”

“I think the existing management team will always have an emotional attachment to those senior executives who have brought the business where it is today,” he added.

The balance for companies will be leveraging new business models using what they’re already very good at, Tan said, which is where the new talent and the veterans can collaborate.

“That’s what I’m trying to do with my own company. I can’t shut down all my own factories and think that I can just build a new business model,” he said. “But at the same time I know that automation is not the only answer.”

While automation will drive a lot of what’s ahead for tomorrow’s supply chains, Tan said companies need to think beyond individual machines that automate one process.

The definition of the traditional supply chain is purposeful transformation of input and output, Tan explained. But in a vertical supply chain, much of that transformation of input to output will be automated and decided by technology systems.

“The systems will learn and as they learn, the traditional definition and way of work will change. So you no longer need to manage the supply chain horizontally because information keeps going back and forth within a split second,” he said.

In this scenario, the role of a merchandiser, for one, may start to look different from the costing, product allocation, delivery tracking and price negotiation tasks we now know.

“The future supply chain might not need this because it’s able to have all this information about how much each process costs, the availability of capacity, the availability of the raw material, and a PO will be generated from demand automatically to the respective party,” Tan said. “So instead of being an automated factory, it’s an automated supply chain. When you do that, then you really start to talk about managing your supply chain vertically.”