A commodity face mask is educating the world on textile supply chains, and the high cost of low-cost sourcing and production. Neither face masks nor fashion will ever be the same after COVID-19.
Unfortunately, the plague of inventory was already threatening fashion’s viability before the virus surfaced. Now, the financial and human chaos resulting from it is confronting an industry screaming for change.
If this pandemic isn’t the case for fashion’s transformation, nothing is. If this calamity doesn’t elevate shared risk and value over the empty advantage of adversarial bargaining, nothing will.
Fashion, like the disposable $1 face mask, is reliant on countries with low cost and low-tech factories. The system goal is efficiency, built on lowest-cost labor and materials to absorb extreme uncertainty in timing, pricing, discounting and cycling volume inventory. The supreme rationality of seeking high margins obscures fashion’s real costs of inefficiency: markdowns, lost sales, working capital, lead times and endless work-in-process financings or work-arounds.
The markdowns alone–from initial margin of 65 percent to 70 percent, to single-digit profit (if any)–are a proxy for high costs of uncertainty. Only now are resilience and responsiveness considered vital in an industry that consistently chose to deny or to double down on its low-profit, low-growth track record.
In a health crisis, is fashion a non-essential industry? Textiles and fashion are essential beyond face masks and PPE apparel. It is the world’s most globalized industry, its largest employer of women, the first rung on the economic ladder and an engine of consumer spending that’s 70 percent of GDP in the U.S. and Europe. Fashion matters and that is why its global supply chain must be reinvented as a creator of value, and no longer its most relentless extractor. It is where market and social impact intersect at a scale unmatched by any other industry.
To recover from the havoc wreaked by this pandemic, fashion must first restore confidence in itself and its business model. The supply shock in its factories now supersedes the demand shock that followed. Post-virus, demand will not reflect past recessionary cycles and rise with returning consumers. In COVID-19, the recovery will be constrained because supply capacities and capabilities are being severely diminished by a system that was already bent beyond anyone’s benefit. The very countries that have shielded global brands from their fully exposed risk and uncertainty have sharply limited prospects for revival without capital resources and cultural change.
So, what does an essential supply-led recovery look like?
It’s going to take “architectural innovation,” or fitting puzzle pieces together in a new way, as Rebecca Henderson, John and Natty MacArthur University professor at Harvard, discusses in Reimagining Capitalism in a World on Fire, set for release next week. The aptly titled book for today’s crisis outlines essential business strategy toward a more sustainable, equitable and humane future. In fashion, that means looking at an inverted industry:
- Industry upside is upstream; that is, untapped value is in the ‘first mile’ closest to factories, materials and workers. It is where levers for speed and flexibility deploy to significantly reduce risk and uncertainty that is now burning down the house. These levers are key to higher profitability with less inventory risk.
- No one should expect investors or lenders to rush back into fashion without confidence in a new model to build, sustain and protect value. All the intermediaries to finance orders, materials and supply chain debt will be scarce or expensive. Working capital, therefore, must be generated via productivity, pivotal for the substantial value it can create and share.
- Market and brand value will be judged on social as well as financial metrics. Process innovation will define end-to-end risk, responsiveness and responsibility as the basis of investor and consumer value.
In an industry that lionizes (and exhausts) merchants, designers and marketers as demand creators, this is inversion. The greatest leverage–and opportunity–is now in the hands of sourcing, operations and HR executives, because no level of style, promotion or discounting will fix what plagues this industry. That point has been proven for a decade, with few exceptions. The inverted organization looks like this:
- Sourcing is the engine for speed and flexibility that distributes risk and uncertainty. We call this Lead Time Optimization (LTO), in which options for agility supersede price alone. A decade of Stanford-based experience documented lessons of the electronics industry applied to fashion.
- Merchandising creates brand value by fresh, frequent and fast design in season-less product flows for higher forecast accuracy and profitability.
- Finance embraces Environmental Social Governance (ESG) investor criteria versus conventional store and ROI metrics. Growth driven by inventory investment is wholly discredited, even if shielded from balance sheet impacts and liabilities.
- Marketing integrates social impact with product value.
Above all, fashion’s mantra is now purpose.
A shared mission (brand, consumer and employee) is the only beacon to guide chronic industry uncertainty to resilience and relevance. Indeed, Henderson says, citing extensive experience, that “shared purpose” is more powerful in motivating performance than competitive advantage and disruptive innovation. Retail results of the past decade amplify this insight–clearly. CEO strategies led by data programs, pricing, store reinvention or re-sizing, and digitization have all failed to be meaningful. In direct-to-consumer (DTC) ventures, the same is true. In renewal, supply chain teams must be inverted from support cast to primary role.
If an industry cannot rewind, how can it fast forward?
Supplier communities are the very basis of a creative, sustainable revival. The new business contract is this: We will reduce brand uncertainty in exchange for shared risk and value. Speed and flexibility, not location and COGS, are the key to superior end-to-end performance.
Such a scenario replaces adversarial bargaining and exploitation, and realigns incentives. Its untapped capital is now lifeblood to supplier and retail partnership. It is also a new narrative for investors and consumers no longer tolerant of an opaque system that holds face masks and fashion hostage to the flawed rationality of lowest cost.
In its state of necessity, does fashion have a vision for itself? Is its future to wring more discounts, payment terms and deeper debt out of lean production? Or, is it the proven alternative of process innovation, analytics and mutual incentives to generate working capital over margin?
Executives who make a difference will be those accelerating collaboration over competition, system over firm change, and social over solely financial impact. These values will scale to restore fashion to the leading edge of the most globalized industry. Only then can the fashion industry say ‘we are all in this together.’
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.