We just witnessed a strong holiday sales season, a bit of welcome relief from the harmful effects of the global pandemic. But, as everyone knows, the surge in consumer demand that made the season such a success also outstripped the ability of our industry’s supply chains to deliver goods on time, if at all.
Will the problems with supply chains ever end? Of course, but it will take a little time. Even so, we need to take a step back and ponder the last few months of reported retail sales data, the growth of which slowed markedly since the run-up to the holiday season. Indeed, a flattening in sales growth is not uncommon after a big holiday sales season, but this time something feels different. This leads me to fret that the slowdown may signify even weaker growth as the year unfolds.
For sure, I can be proven wrong. But the fundamentals point toward slowing retail sales. First up, we have inflation. Prices are rising. Next, wages have gone up, but inflation—running at an annualized rate of seven percent—has gone up faster than wages. Which has left many consumers with a net decline in their income. No wonder so many complain about higher prices.
But complaints quickly turn into changes in consumer behavior. For our industry, that may result in weaker demand. And, of course, supply chain bottlenecks still plague the industry. So what happened to the good old days? Somehow, I feel the sourcing world resembles a party where everyone suddenly left. Talk about a hangover!
The consequences of policy decisions
Indeed, suppose consumer demand remains weak in 2022. In that case, it will only underscore how policy decisions made during the pandemic have had unforeseen consequences. However, the broader question is if weak consumer demand will hang around for a while or if it’ll be a short-lived problem. The jury is still out, so it’s hard to know the outcome this early in the year. Nevertheless, it’s helpful to retrace our tracks in considering consumer demand.
During the pandemic, the government poured money into people’s pockets. So, is it surprising that inflation has spiked? It shouldn’t be. After all, it’s a government action taken from the Keynesian playbook: when the private sector struggles, the government steps in with resources to keep the economy afloat and give the private-sector time to get back on its feet. It’s sensible, then, to expect that when the economy struggles, like during the pandemic, the government should print money and dole it out accordingly. But, of course, the question is, for how long? Indeed, the economic stimulus has faded, but its effects linger.
And now, the Federal Reserve intends to raise interest rates to help tame inflation. The funny thing about higher interest rates and higher inflation is that both can result in weaker consumer demand. The cost of borrowing money to buy stuff, which costs more because of inflation, results in consumers thinking twice before buying new clothes. This not only depresses economic activity from the demand side but, in turn, ripples back to adversely affect suppliers. Weakening demand raises the prospect of an economic recession.
A shift in supply chain power?
There’s another point worth making. For the past 30 or more years, buyers of clothing and textiles have leveraged suppliers. Why? Well, there are so many suppliers and a limited pool of buyers. Nevertheless, if you feel you own your suppliers, think again. In practice, as a brand or retailer, you’re owned by your supply chain. Let that sink in a minute. I’m not saying that you’re owned by your suppliers, but you are owned by how your supplier’s products are delivered to you. That transportation and logistics element is the Achilles heel of globalized supply chains.
What to do? First, as a buyer, you must come to terms with reality, but next, you need to limit your risk exposure. How? By diversification. And you’ll have to work hard and think more creatively than you may have had to in the past. The balance of power has shifted. Learning to manage supply chains more effectively is the most important thing anyone can do.
Ah, the good ole’ days
For so many years, buyers were content with simply placing an order with someone in Hong Kong or elsewhere. And then, almost miraculously, the finished product would be delivered on a dependable schedule at a mutually agreed price and level of quality. Indeed, if that didn’t happen, the orders would have been canceled. Hence the power of buyers.
A case in point: the mess caused by the pandemic when supply chains ceased, and so many orders were canceled by buyers because the economy tanked. In so many cases, suppliers were kicked to the curb. Gee, such great relationships. It illustrates what’s broken with global business and exposes a model flaw. Supply chains that wrap around the globe are inherently risky. We’re just lucky that for so long, the risk was tempered–before the pandemic. But today, it’s a different story. Inflation is up, the economy is uncertain, consumers are fickle, and the effectiveness of what worked before has been called into question.
Is recession around the corner? Let’s hope not, but also, let’s not kid ourselves either. We live in tenuous times that require deliberate, careful planning and, in many instances, a rethink of how business was conducted before the pandemic. We’re not even at the post-pandemic stage yet. So how do we predict the future? Not well. And that’s the rub for everyone in the apparel business. But that also begs the question: is it time to bag global supply chains? Of course not. Yet it’s time for a reevaluation, a reassessment of what works, what doesn’t, and what’s risk-worthy.
We can clamor for the good ole’ days, but those days are over. It’s time to think ahead and use new tools to make supply chain procurement less risky and more solid. Of course, technology will play a central role, but so will common sense. Your noggin.