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How Does Fashion Organize for Real Change?

Join the U.S. Cotton Trust Protocol webinar on July 15 at 11 am ET to learn about the findings of a COVID-19 and sustainability survey and how the protocol aids better transparency and reporting.

Proposals, manifestos and CEO agendas are circulating among fashion elites, trade groups, activists and philanthropies. The creative community seeks designer support, synchronized sales calendars, and commitment to sustainability. In COVID-19, each group wants to restore order and pricing in an industry that was already suffering from a plague of inventory and profitless business.

In Asia and the Americas, the pain is primal.

Cancelled retailer orders have deferred or denied supplier payments that barely bridged the inefficiencies of high-volume, long-lead-time and low-price production. The inequities and shortcomings of global sourcing are exposed and transparent in full human cost and despair. The Potemkin village of fashion is falling. In economics, that is an external façade made to impress, hiding undesirable conditions behind it. In art, the style is trompe l’oeil, to deceive the eye. In business, it is a digital front and analog back. It is a fragile system, in any language.

And the collective cri de Coeur is unifying. No one wants a return to normal. The empire of cotton, the very sector that schooled the world in globalization, is being sacrificed among a virus, tariffs and a trade war.

Let’s not criticize any proposal, like lobbyists competing for clients, scarce benefits and greater good. They are all true, sincere and desperate. But in advocating for consensus, where can we agree and where does real transformation begin?

For starters, we are all sharing the same enemy, and that’s the uncertainty that undermines profitable business. That unceasing challenge has created fashion’s adversarial culture, one which seeks every distant advantage to shelter risk and margins. It is the core reason why an industry is so low profit, low growth and lagging in innovation. Industry financial statements affirm it, yet understate the degree of liability kept off balance sheets. The insights on fashion’s dismal finances have been made elsewhere, especially by McKinsey & Co. We owe them thanks for heavy doses of performance reality.

The antidote to uncertainty, though, is speed and flexibility. That perspective has been mightily resisted, or given lip service, for decades.

First, it was Quick Response (QR) to help U.S. textiles compete. Then, it was response to the rapid rise of fast-fashion retailers. More recently, it aligns with sustainability to confront excess inventory and waste. At each evolution, results have never matched rhetoric. Now, in a retail era of lost growth, the ultimate case for speed is liquidity from internal capital. Indeed, industry revival and relevance depend on it. With demand prospects so uncertain, productivity is the primary path to becoming profitable.

In Stanford-based work for the past decade, Warren H. Hausman and I have researched, modeled and demonstrated the benefits of supply flexibility. We wanted to know–and quantify–how alternatives from other industries, especially electronics, applied to fashion. The answer we uncovered bears repeating: first, supply flexibility is directly linked to market capitalization; and second, achievable improvement is between 30 percent and 40 percent in total market value. There is no alternative of similar financial magnitude.

What seemed academic a decade ago is now a roadmap to share economic benefit across all tiers of the supply chain. In other words, supply flexibility creates value and does not extract it in a partner shell game. This approach supersedes lowest-cost sourcing with process innovation to reduce markdowns, lost sales, finished goods and working capital. It is a business model that generates capital via shared value and risk.

Amazon, Apple and Toyota are prominent examples of how to distribute and mitigate risk, and Walmart to a lesser degree. In fashion, it is Inditex. Our conviction holds that global postponement–yet achieved by no one–is the greatest financial opportunity for an industry that must build an ecosystem around uncertainty. This degree of transformation is achievable in the near term, versus incremental over the long term.

Daniel Kahneman, who was awarded a Nobel Prize for his groundbreaking work in applying psychological insights to economic theory, reminds us that nobody makes a decision based on numbers alone, no matter how compelling. Executive resistance of the past decade affirms his behavioral insight. What matters is the narrative. And the new consumer narrative is for products with purpose. That demand has no hiatus or timeout, even in a crisis.

In accepting an imperative for change, forced by crisis and customers, how does fashion leadership, from Prada to Primark, organize real change? How can the most globalized industry become a business that is more equitable, sustainable and profitable? There are five areas, each of which is a component to conquer the common enemy of uncertainty.

“Architectural innovation,” which Harvard University’s Rebecca Henderson, author of “Reimagining Capitalism in a World on Fire,” defines as how pieces of the puzzle are fitted together in a new way, will be part of the framework to get there. In application to fashion, that means process change across all tiers of the supply chain–from first to last mile. A lowest-cost business model that is no longer competitive has been superseded by a process that leverages postponement to delay production commitment closer to and into season. This “upstream” approach to supply flexibility unlocks internal capital to invest in growth and sustainability.

For investors, Cowen & Co has noted three inseparable issues that must be unlocked: Inventory, sustainability, and capital/liquidity. Those retailers seeking to change the relationship from low cost/low profit to collaboration for speed and flexibility will also be motivated by new environmental, social and governance (ESG) metrics, including sustainability. Retailers and brands that pay greater attention to upstream relationships are the model of the future. It is where risk and value are shared among brands and factories, driving a return to profitability.

In assessing obstacles to large-scale organizational or system change, Henderson, a keynote speaker at the upcoming Fashion’s Business Model for Sustainability event, recognizes shared purpose over shared value (advantage) and innovation (disruption) as the prime motivator to real transformation and impact. Fashion’s imperative is to catalyze end-to-end interests and integration as shared purpose. It is the basis of relational contracts that replace purchase orders and seasonal transactions with incentives for mutuality and trust.

Values scale, especially when aligned in collective action. For example, what if H&M and Zara join hands to deploy talent and tools? Their family, founder and European values are closer than you think. What if Target and AFM (the $100 billion private family holding company in France) join hands across complementary merchandise and two global networks? These four account for $250 billion in fashion goods, more than Amazon and Walmart combined. These new collectives will amplify and accelerate practices and products that deliver market and social impact.

And individuals will increasingly matter as fashion navigates this transformation. The CEO is the new chief supply chain officer because the company’s future depends on supplier communities. That requires skills to adapt strategy and culture to a new business model to reduce brand uncertainty in exchange for shared risk and value. Speed and flexibility, not location and cost of goods sold, are the key to superior performance. This leadership mindset replaces adversarial bargaining with mutual incentives for responsiveness, forecast accuracy and sales upside. Capital productivity is the flywheel for supplier and retail recovery, replacing the frictions and flawed rationality of lowest cost.

The supplier community can’t continue to absorb the endless margin degradation of discounts, terms and interim financings.

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.

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