Another year, another outmoded supply chain.
Despite desperate calls for digitized, speedier, shorter cycle supply chains, the industry is still treading water.
In fashion retail, 2018 was a time of moderately renewed optimism after several chastening years under the shadow of Amazon, store closures, bankruptcies, startups and executive changes. The economy was on trend, reflected in the S&P index, helping executives make the case for the year’s new promise, new design leadership and business turnaround.
In 2019, that optimism—with few exceptions—has evaporated.
New designs for Calvin Klein fell out, Macy’s did not reinvent the store experience, and Gap Inc. is still defending its future. So what happened to these and dozens of other retailers?
Fashion does not suffer any lack of diagnostics by experts. Most come in the form of ’10 trends’ or ‘essentials for winning strategies.’ One report, however, was a notable breakaway from consensus. Its investor thesis is singularly focused: speed = value.
That perspective belongs to Cowen & Company, in an unusual analysis called, “Ahead of the Curve.” Its lead analysts, John Kernan and Oliver Chen, called out the conventional supply chain model as “dead,” and downgraded PVH for the first time in eight years. Calvin Klein grew sales by $876 million since 2013 but profit declined by $20 million. PVH’s inventory turns hit all-time lows while inventory hit all-time highs. Sales growth based on increasing inventory risk is no longer acceptable to investors. What matters now is speed and agility, virtues Cowen & Co sees beyond cycle times.
Citing Stanford-based work with Warren H. Hausman, the critical metric is capital and how to link retail supply flexibility to market value. This new model is built on process innovation and forecast accuracy due to rapid responsiveness, not just cutting weeks of time.
The benefit of being fast is de-risking fashion and taking cash out of the working capital cycle. As such, the source of financial value and advantage is in the first mile of the supply chain.
Cowen demonstrates that modest change in speed equates to gross margin improvement for a $50 Nike shoe, a model which can be projected across the sector and to clothing and accessories. The scale for multi-year benefit is significant.
Where the supply chain is getting it wrong
Gap Inc. is illustrative of industry transformation, or maybe lack of it.
The emergence of fast fashion is often blamed for Gap’s inability to compete, even if Zara’s U.S. presence is minimal. Since 2006, Gap’s sales (with Old Navy) have stalled at or near $16 billion through four CEO’s while Inditex (Zara) sales doubled to $32 billion, and Inditex’s profit margin increased by 28 percent while Gap dropped.
More sales and more profit. Therein lies the lesson.
Speed is not only cycle time and store turns; it is less inventory, markdowns and lost sales. That capital productivity is what eludes Gap, a retailer that deeply resists and resents comparisons of this kind. In 2019, splitting Old Navy from Gap Inc. is a shareholder strategy, with a business fix pushed further to the future.
Nike is another example where primacy of speed has been declared but not achieved.
The company’s “triple double” initiative calls for doubling speed-to-market capability, alongside 2X product innovations and 2X direct-to-consumer sales. A sourcing partnership with Flex brought high expectations for automation and location together in Mexico, but it failed due to excessive losses at Flex, and Nike’s inflexibility to adapt design and volume to more automated manufacturing. Flex, adept at making Apple Macs, could not accommodate footwear, or maybe Nike could not adapt its cost-first culture to Flex. Regardless, the magnitude of losses for each is a cautionary tale for anyone who thinks near-shoring and automation will be achieved smoothly or quickly. Nike’s third attempt to source in Mexico is beginning anew, a telling example that the obstacles to speed and agility are more than resources and talent.
If speed is the essential catalyst of market value, according to Cowen & Co, what are the elements to fully achieve it?
In fact, there are three: speed, science and social impact.
This capability must be understood in depth versus just a soundbite. It is not, “do what you do faster,” or even “be like Zara.” It is not see now/buy now, weekly drops in store or online, or orders off the runway. Critically, it is reduction of uncertainty, high forecast accuracy, and neutral or negative working capital.
Metrics for this kind of performance are not in the order book or same store sales; rather, it is full price selling, replenishment in season at 90 percent or better, and financial incentives shared across supplier partners. These metrics are not conventional or even commonly measured, but they are the new scorecard for a horserace based on speed.
Speed, in sum, is not an operational challenge to the sourcing team. It is firm-wide cultural change to reduce risk, to be responsive to trends, and to synchronize and share value across partners.
Let’s be clear what data science is not. It is not digitalization. Digital connectivity for visibility and transaction management is to invest in a failing, inflexible process which minimizes costs.
Bill Gates, of all people, said it best: “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”
The inefficiency of low cost sourcing is evident. The goal in speed is to remove excessive risk and capital forced upon relationships in each tier of the supply chain, and to ensure digital assets match to physical benefits. Translated, that means more margin (numerator) at less inventory (denominator), thus delivering substantial ROI in an industry too willing to accept its low-tech, low-growth and low-profit reputation.
Data science is also not software automation, as if speed and agility were standardized execution. Rather, it is iterative mining of data to achieve insights of how a business can excel or transform. Trend data from predictive analytics may offer insight into buyer intent, but value is limited without an ability to react. What good is real time sales or search data when product development is still 40+ weeks?
What data science represents is capability to reduce uncertainty across the supply chain by processing seeds and signals for insight which directly link to responsive, real time capability of suppliers. Speed and science are applied end-to-end via postponement in what we call Lead Time Optimization (LTO):
Cowen analysts align speed with consumer change. Why, and how? Millennial demands for product sustainability, transparency and zero waste are driving purchase decisions and loyalty. Speed is the key to de-risk high costs of uncertainty and to unlock capital to invest in sustainability and worker lives. In an industry that is the most globalized, least efficient and yet largest employer of women worldwide, that becomes social potential for women and supplier communities. Women also account for 85 percent of fashion purchases, so the new narrative is more than CSR—it’s the new basis for brand difference and meaning.
Cowen’s report notes that retail’s financial status quo is unsustainable, and that the sector is desperate for a fresh strategic or investor narrative.
Endless surveys of disruption are highly qualitative, yet meaningful and quantifiable metrics to create value are missing. When so few retailers dominate industry profitability, and Amazon alone takes 50 percent of e-commerce growth, speed is value.
Fashion will right itself by recognizing that digitalization or experience or curation or personalization are lagging the consumer’s own pace of change. What is underway is not generational transfer to new shoppers and styles, but rather a magnitude of social change not limited to fashion alone. This generation demands that product value and values not be separate. A Change Generation seeks to share technology, its access and benefits widely as common good. The Millennial is both consumer and employee out to change the business of business. Together, they are a social movement.
Fashion must be the same.
John S. Thorbeck, chairman of Chainge Capital LLC, is an expert on the application of Fast Fashion business principles at retailers and brands. He has collaborated extensively with industry leaders, including Warren H. Hausman, professor of management science and engineering, Stanford University. Thorbeck is a former CEO of Rockport (Adidas) and G.H. Bass & Co. (PVH), and senior marketing executive for Nike, Timberland and the Aspen Skiing Company. He is a graduate of Harvard Business School.