The coronavirus moment is turning out to be a watershed moment for fashion. Businesses ranging from fast fashion to luxury are being stress-tested on their models and resilience in every area of their operation. One question that has become the hallmark for businesses during these times of disruption is:
How risk-proof is your supply chain?
On March 8 when Italy’s government put 26 provinces in the country’s northern region under quarantine, it brought to forefront the long-standing dependence luxury fashion supply chains have on Italy. This quarantined area alone was home to more than half the country’s textile and apparel factories. With Italy, France and Spain manufacturing reeling under the fierce impacts of the virus, luxury brands are seeing their supply chain disrupted like never before. This pressure is further exasperated as now their Asian stores are opening and online shopping kept going through the shutdown.
Traditional risk conversations and strategies in fashion supply chains have been more focused on supplier risks than a country or a region risk. And arguably so, as in living memory when has a whole country or region anywhere in the world shut down let alone Western Europe.
Companies usually measure disruption risk in comparison to their home country where the decision-makers sit. The underlying assumption being local conditions being the regular risk of doing business and then they overlay how does an overseas country or supplier compare to that. As this crisis has shown us, even the “strongest can fall.”
In a globalized world where sales are global and supply chains extremely complex there are undeniable heavy global inter-dependencies. A disruption in one country impacts supply chains across the world. It is no longer a factor of where the final product is assembled — every little component can be its weak link.
A good illustration of this was at the start of this pandemic when regions in China went under quarantine. As Chinese factories and mills struggled to operate, global supply chains around the world dependent on China for components started grinding to a halt — despite having no restrictions on operations in their own countries at that time.
As it’s said, “a supply chain is only as good as its weakest link.”
The pandemic is a hard reminder for the need to diversify and shockproof the supply chain and align it to your customer’s needs — an important ingredient for success.
The need to diversify luxury supply stems from a few key factors, all of which are expected to intensify and accelerate in the post-COVID-19 world:
1) Luxury Market Growth and Manufacturing Capacity:
The luxury personal goods market has been witnessing rapid growth and expansion over the years with increasing spend on luxury products, the rise of China and a burgeoning affluent class in many developing countries. The last decade has seen an increase of 91 percent in this market from 147 billion euros in 2009 to 281 billion euros in 2019.
The risk of concentrating supply for this growing industry from just one country or region exposes the brands to large risks but also makes it hard for the industry to replicate a similar growth for the next decade. In addition, most brands have been facing capacity constraints in their Europe centric supply chains which has meant that they have had to either make large capital investments to own factories to secure needed capacity increasing their business complexity and asset intensity and/or make a collection and material decisions far out to maximize the available capacity adding pressure to their product calendars.
2) Reduced Tourism and Trade Protectionism:
The world entered this crisis with increased rhetoric of protectionist tariffs and Brexit. This crisis hasn’t been the best example of collaboration and solidarity between countries, with each country looking out for themselves. Recessions and economic stress in history has shown a preference for increased tendencies for protectionism.
In addition, the tourism industry is widely expected to be one of the most affected making it important for luxury brands to serve their customers where they are.
A diversified supply chain mirrored closer to how customers are spread helps side-step challenges coming from shifts in customer locations, trade protectionism while helping capitalize on duty preferences from global trade blocs.
3) Online Shopping and Customization:
Online shopping percentage for luxury personal goods is currently around 12 percent. As per Bain’s research, it is expected to reach 25 percent by 2025. Will this trajectory remain as is or will the “stay at home” shock of the virus lockdowns accelerates this change? Only time can tell.
From what we do know more and more, luxury personal goods customers are exploring, interacting and purchasing luxury personal goods online.
Also, the general trend in the industry on delivery is getting shorter and shorter with some brands managing to deliver within the same day and next day.
Whether it is the speed of delivery or of response to unplanned demand or having country or region focused collections or extra services of repair and maintenance — a dispersed and globalized supply base closer to the end customer is better equipped at serving a global customer.
4) Sustainability and Reduced Markdowns:
Producing only what is needed closer to where it is needed not just is good for reducing markdown volume but also is a sustainable practice.
A global supply base closer to the customer reduces cycle time and helps produce based on closer and more realistic demand versus at “far out anticipated” demand.
In fashion like in all products, the longer and more capacity constrained is the supply chain the more initial inventory is needed — hence more the risk of unsold inventory and/or markdowns. A shorter and close to customer supply chain improves inventory investment, leftover markdown volume while having a positive impact on reducing the need for unsustainable practices like the destruction of overruns and reduction in distribution miles to air or ship from far off factories to stores.
The fashion industry has long struggled to align the timing of seasonal collection launches with when clients were wearing those clothes. There are large variances on how seasons play out by country and history and convention have held back breaking away from this mistiming.
A more dispersed and globalized supply chain with local ready to produce inventory has a better chance of adjusting to local taste, timings and demand vs a centralized supply model.
These benefits of a more globalized supply approach add up to a significant case for the luxury industry to diversify their supply chains and build agility and flexibility to serve their customers in a fast-changing world.
Going down this path will need to address some issues that have long-held back the industry:
1) The “Made in Country“ Perception:
The “Made in Country” label and it’s perceived connection to quality and luxury has been a challenge for diversifying luxury supply chains. Years of smart marketing has positioned a Made in Italy or France or Europe synonymously with quality or luxury.
In addition, product labeling rules that evolved have required the country of origin to be mentioned on the product.
With the changes happening in customers’ expectations of consumer and luxury goods there are additional associations between where products are made that are desirable and can also be used to premium positioned products with customers.
An example would be Made in Fairtrade factories or zero-effluent or carbon-neutral factories or in factories with strong social or sustainability programs in place are extremely desirable with the customers. These labels are now available for leverage to luxury brands to reduce the risk of Made in Country perception.
2) Intellectual Property Infringement:
Luxury personal goods have long been targeted by counterfeiters who have made lookalikes of their latest designs and sold them at a fraction of the price of original goods. Where in an original is picked up from a store and within weeks fakes start being circulated. A diversified supply chain with IT-enabled traceability, control and security features and shorter concept to customer times will not enhance this risk but may actually reduce the overall risk of IP infringement.
3) Quality and Workmanship:
It has been long believed that the quality of artisan workmanship needed to make luxury products is not replicable outside a few countries. In a world with high dependence on manual tools, this could be true to some extent, even though the looming question always is whether all workers being skilled equally and extremely highly in any factory is an impossible task, no matter in which country.
The evolution and automation of production techniques have been consistently reducing reliance on skilled labor alone to produce high-quality products. Looking at other industries, when key suppliers were asked by their customers to globalize their operations, they have been able to up-skill workers in their global factories to bring them at par with their main factory so that no matter where a product is shipped its quality is consistent.
With the Millennial luxury customer forcing a rethink of everything from styling, shopping behavior, channels it is now time to configure luxury supply chains to align with this changing world.
That day is closer than we think when goods with Vicuña and Alpaca could be made in Peru, Pashmina and embroidery made in India, baby cashmere made in Mongolia, Mulberry Silk from China, linen made in Belgium, and Sea Island Cotton made in Barbados augment the classic Italian, French or Spanish goods and enhance the delight of luxury shoppers while diversifying the supply risk of luxury companies.
Roit Kathiala has led product and supply chain teams of the leading fashion companies in Europe, Asia and North America and advises companies on their product, supply chain and digital strategies.