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McKinsey CPO Survey: Digitize Supply Chains or Die

Apparel sourcing executives know the old paradigms must shift and are looking to technology as a catalyst, yet they are slow to embrace change.

A new McKinsey study, “Digitization: The Next Stop for the Apparel-Sourcing Caravan,” describes the traditional method in effect for decades–a shirt manufactured in a far-away country based on a months-old design and then shipped for weeks across the ocean before reaching a retailer. Then the consumer might eventually buy it at half price in an end-of-season sale—a routine event in an industry whose long lead times and big batches give it little flexibility to adapt production to shifting consumer demand.

Apparel sourcing executives virtually all agree that this must change and they are looking to digitization as a major enabler of the transformation needed to improve its disappointing returns, please increasingly choosy consumers and compete with nimble start-ups, McKinsey notes.

Yet, as the study shows, apparel remains an industry that has not yet fully embraced digital technologies. The company surveyed chief purchasing officers from 63 of the world’s leading apparel companies, and the majority rated their organizations’ digitization maturity as low or very low. They had the same view of their suppliers.

“Five years from now, sourcing executives hope to see a very different picture: in an industry forever in search of the next sourcing country, digitization will be the sourcing caravan’s next stop,” the report said.

More than 80 percent of CPOs in the survey expect digitized end-to-end process management, including centralization of product development and procurement processes in one cloud-based system. More than two-thirds of sourcing executives expect to have digitally enabled capacity planning in place, helping them to allocate production capacity more efficiently and spot bottlenecks earlier. A similar number expect to have digital portals up and running to foster transparency and collaboration with external suppliers and internally.

Automation, Speed and Efficiency

The majority of CPOs surveyed aspire to reduce their average lead time by two to eight weeks, helping them achieve the agility needed in a demand-driven market. Most of them are also targeting cost reduction of at least 2.5 percent through digitization alone.

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Pioneering companies are already providing a glimpse of this future. For example, businesses that have implemented 3-D design and virtual sampling report shortening the sampling process by two weeks or more, and they often see reductions of 50 percent in the number of samples needed and the cost involved. Apart from reducing the time and cost of the design process, this is also reducing the environmental footprint of production, the study stated.

“As robotics technology grows in sophistication, widespread automation of apparel production is also becoming a real prospect,” said the study, authored by McKinsey’s Achim Berg, Saskia Hedrich, Tim Lange and Karl-Hendrik Magnus. “More than 60 percent of CPOs in our survey believe that automation will become a major driver of sourcing decisions by 2025. But automation will coexist with manual production in low-cost countries such as established sourcing markets Bangladesh and Ethiopia, where apparel companies are building major new facilities and training thousands of workers.”

Executives expect a “multispeed model” to emerge. High-end, quick-turn products will be produced in semi-automated plants in developed markets, while longer-lead-time commodity products will be produced in low-cost countries where technology will support, not replace, the workforce.

[Read more about quick response manufacturing: Speed and Decision Making are Key in Western Hemisphere Sourcing]

Sourcing Drivers

In a more general sense, respondents expected that the major drivers of sourcing costs in the year ahead would include exchange rates and the costs of raw materials. The impact of labor costs was rated lower–3.0 out of 5 in the 2017 survey, down from 3.5 in 2015–despite the continued rise to minimum wages in key sourcing markets. McKinsey said this is likely due to overcapacities in some sourcing markets, a shift in volume to low-cost countries and increased focus on total cost of ownership in the industry in recent years.

End-to-end process efficiency was seen as the single most important organization-facing lever, ranked as the number one opportunity by 41 percent of respondents. Supply-chain flexibility was cited as the second most important priority for sourcing executives, followed by supplier collaboration and development.

The survey also showed that the search for the caravan’s next stop is as active as ever, but there are new dynamics at play. Some traditional low-cost countries seem to be losing their attractiveness, while international sourcing executives are showing keen interest in the newer low-cost markets, particularly Myanmar and Ethiopia.

With apparel companies under pressure to step up their agility, there is also fresh focus on proximity sourcing and re-shoring. Meanwhile, factors other than price–strategic collaboration with suppliers and end-to-end process management–are becoming increasingly important considerations for sourcing executives.

The China Conundrum

China appears to have passed its zenith as a low-cost sourcing country, due to increased local demand and a reduction in size of the available workforce, the survey noted. Even as Chinese export capacity comes under increasing pressure, though, McKinsey expects that China will remain indispensable. For one thing, the sheer size of its apparel-manufacturing sector will make China a dominant player for years to come. Moreover, initiatives of the Chinese government–One Belt, One Road and Made in China 2025–will help modernize the sector and boost its global relevance.

Bangladesh, Vietnam and India, despite a slowdown in growth, are expected to remain sourcing hotspots.

But digitization of sourcing processes was ranked among the top three focus areas for almost half of the sourcing executives surveyed and 21 percent pinpointed it as their most important topic. This includes using technology to create transparency throughout the supply chain, adopting advanced analytics and artificial intelligence, redesigning and digitizing processes, and making greater use of automation.

Digital printing was cited as the most advanced aspect of digitization in apparel manufacturing. Together with automated cutting, this technology can dramatically reduce production time, increase flexibility, and reduce waste. Digital printing can also “democratize” design by creating the flexibility to run multiple small batches, the study said.

Another area gaining ground is automatic order processing and real-time re-planning, which can lower costs in logistics through automation of manual tasks, higher reliability due to granular feedback, and superior customer experience through immediate and reliable responses.

Another digitization opportunity to watch is blockchain technology, which McKinsey said has the potential to completely transform the way information and transactions are captured, owned, stored and shared among companies and radically increase transparency across the supply chain.

“As our study makes clear, digitization must not be seen as an end in itself,” the McKinsey team wrote. “Rather, it is a powerful enabler of progress in all the main drivers of future success in apparel sourcing, including the continued optimization of sourcing-country strategy, strategic supplier partnerships, better environmental and labor compliance and a doubling down on end-to-end efficiency. Apparel players have a major transformation ahead of them, spanning all these elements. Effective digitization will help them deliver that transformation faster and with much greater impact.”