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Report: Rising Sourcing Costs Will Demand Deeper Supply Chain Involvement from Brands

Cost increases may be expected elements of doing business, but when they come in conjunction with increased competition and a consumer who refuses to pay full price more often than not, cost increases can mean major margin pressure.

Right now, a sizeable number of fashion brands are facing high inventories and sell-throughs that are hardly optimal, as addressed in a report released last week by Kurt Salmon, part of Accenture Strategy, titled, “From Cost Focus to True Value Creation—on the Road to Analytical Sourcing & Supply Chain.”

“Full-price sell-throughs between 65 percent and 80 percent and stock turns above 4.0 to 5.0 have been more a rule than an exception in the past,” the report noted. “Today both commercial fashion brands and premium/luxury brands struggle to maintain comparable levels. Often, even total sell-through falls to levels below 70 percent, causing inevitable margin losses from skyrocketing markdowns far beyond benchmark levels of 12 percent to 15 percent.”

Adding to the struggle, apparel and footwear production costs have been steadily increasing in the last two years, and it’s been more challenging to find a sourcing market with stable costs as many places making apparel have been increasing wages—and often in sudden spurts.

“The higher labor costs are not only rooted in rising minimum wages in developing markets, but also in strengthening competition for skilled factory workers and growing alternative work offers especially in China,” according to the report.

Though some companies have been of the belief that continuously moving to the lowest-cost country could help them skirt the “gross margin trap,” the report says the effects of doing that have proven limited.

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Taking an item that sells for $100 at retail, with a $20 cost of goods sold, labor cost would typically be somewhere between $6 and $10 (30 percent to 50 percent of COGS). As the report explains, a 10 percent reduction in labor cost, would only impact costs between 60 cents and $1, or less than 1 percentage point in gross margin improvement.

“The shift from one sourcing country to another won’t be a long-term answer, as almost all current sourcing countries are getting more and more expensive,” according to the report.

The two biggest keys in combating increasing competition, factoring in sourcing pressures, will—not surprisingly—be product innovation and speed to market. And that’s what’s made sourcing more relevant than it’s been in years past.

“In markets with an abundance of brands and less and less differentiating products, product development and sourcing capabilities move back into the strategic focus of fashion retailers. It’s the key enabler for differentiation in the competitive environment,” the report noted. “Access to deep technical expertise and unique handwriting of product groups that are critical for brand building as well as curated supplier portfolios with the true ability to drive innovation, evolve to an indispensable asset to drive top line as well as markdown and margin performance.”

What’s coming down the supply chain pipeline now is a return to deeper value chain involvement from brands, which Kurt Salmon says will mean the importance of overseas buying offices will increase. These overseas offices, or even agents, will be needed to facilitate things like supplier search, prototyping, quality management and technical R&D capabilities.

[Read more about supply chain facilitation through agents: What Sourcing Executives Really Think About Using Agents]

Value chains will have to be set up to accommodate innovation, reasonable quickness to market and supply responsiveness as it relates to consumer demand.

“Differentiated supplier capabilities must be leverages and developed in close collaboration along the entire value chain, from planning, through design and development, material management, costing, down to logistics,” the report noted. “Intensified collaboration will also mean more common standards, definitions and KPIs.”

Managing these differentiated supply chains, according to the report, will come down to adequate transparency-supporting technology and greater analytical capabilities.

“Orchestrating the respective sourcing and supply chain capabilities will increasingly leverage digital interactions across all value chain partners, advanced predictive models, and emerging artificial intelligence capabilities to enable optimized decision making in volatile environments and on short timelines,” the report noted.