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Why Upstream Agility Will Separate the Winners and Losers

The last mile has gotten a lot of play in the press lately, and judging from the frequency with which retailers are rolling out new fulfillment options, it is preoccupying the minds of a lot of industry executives, too.

But while store chains are focused on catching up with Amazon and its dogged commitment to convenience, they just might be missing something.

That was the message from John Thorbeck at this month’s Sourcing Summit in Hong Kong. While the chairman of Chainge Capital acknowledged that fulfillment is an important piece of the puzzle, he warned that last mile alone won’t transform a turtle into a rabbit, using the terminology employed earlier in the day by Li & Fung group CEO Spencer Fung.

“Amazon has made last mile a critical success factor. If I’d said to you five to seven years ago that last mile would be the killer [angle for] Amazon, would you have believed it?” Thorbeck posed, before adding the kicker. “That’s where first mile is today.”

Thorbeck said that just as Amazon has cornered the market on getting goods to consumers fast at the tail end of the supply chain, Zara’s dominance is at the beginning of the process. The fast fashion player, he said, has developed a nimble strategy for design, sourcing and production that allows it to react to current demand.

And that last bit, he said, is the important part.

While there are plenty of avenues for amassing data on consumer preferences like analyzing sales metrics, gleaning information from Google search patterns and capturing insights through social media, the problem, he said, is that most companies are at a loss for how to capitalize on those insights.

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“Upstream manufacturing, where we sit today, is an enormous untapped opportunity, and it is the basis of speed and flexibility in a global industry,” Thorbeck said.

Juan Penagos, CEO of International Trading Fashion & Apparel Services Limited, who also participated in the panel, agreed that the only way to close the so-called Zara Gap is to fine tune that first mile.

“Internally, we have our own slogan that is ‘speed is life,’” Penagos said. “The speed of boats and airplanes aren’t faster for Zara. They’re the same speed, so where we make the difference is at the beginning.”

To that end, Penagos is rethinking all upstream operations. For instance, he said, in the manufacturing process, his team has created modular cells that work autonomously together to solve problems and make decisions in timely manner.

Along with processes, Penagos is working with his people as well, trying to help them see things differently and recognize the need to work in new ways. “The biggest change we need to do is the transformation of the culture,” he explained. “If you don’t have that willingness of people to change, to adapt to new ways of working and acknowledge that their role is not the same today, then that change is not going to come.”

One old mindset that needs to be dispensed with immediately? First cost as the sole focus.

“When we talk about cost, it’s important to look at it as total cost,” Penagos said, adding the margin he makes off of limited-edition goods more than makes up for the higher costs of making and expediting them to stores.

“It comes down to higher margin at less risk,” Thorbeck said. “It’s not an efficiency argument. It’s really a completely different model built on speed and flexibility, and that requires a different process and different metrics.”

For the companies that get it, he said, there’s hope—hope in the form of surging market capitalizations in the 30 percent to 40 percent range like you see in the electronics industry. And for the brands that fail to adapt? For them, Thorbeck predicts a continuation of the meager 1 percent to 2 percent growth that’s currently plaguing the industry.

“So how do we get there? You integrate macro trend data into design, postponing and staging capacities and hedging materials and postponing finished goods commitments to reduce lead times in inventory in and through the season and optimizing around total profit,” Thorbeck said. While he acknowledges that the laundry list is daunting, he said it’s necessary in order to emulate the success of Zara. “Is that an incremental change? Are they a faster turtle? No, they’re a very different animal.”