The apparel supply chain is among the most vulnerable to feeling the pangs of a prolonged economic downturn, according to Stuart Roberts, North American head of trade and managing director of global Transaction Services at Citi, and those who fail to manage their supply chains properly during difficult times can compound their difficulties.
This story first appeared in the March 18, 2008 issue of WWD. Subscribe Today.
“We believe that the apparel garment supply chain is the most exposed to a global credit crunch of all of the supply chains that we cover,” said Roberts.
The apparel industry faces several disadvantages compared with other industries when it comes to its supply chain. First and foremost is that, unlike purchasing a laptop computer or an iPod, apparel purchasers generally need to see and feel the product before they buy. The lifespan of the product is significantly shorter than electronics and the number of suppliers is much larger. Consolidation of suppliers is one area that has seen progress in recent years, according to Roberts.
“You’re probably the last supply chain to go through this rationalization amongst your suppliers,” he said.
But the industry is facing pressure on three fronts. The cost of capital is rising, as is the cost of commodities. Meanwhile, demand in the U.S. is slackening and is expected to continue down that road. Roberts expects the U.S. market to “remain volatile” for the next 18 months. Not surprisingly, a slowdown in the U.S. is seen having a larger impact on the world’s economies.
“The global economy is going to slow, but it’s not going to slow enough to reduce dramatically commodity prices,” said Roberts.
The value of the dollar versus foreign currencies also shows no signs of halting its decline. As a result, keeping supply chains properly funded is expected to be a mounting challenge.
“Apparel suppliers globally face a massive liquidity crunch,” Roberts said. “They’ve got the U.S. dollar pressure, their own cost pressures…and they’ve got U.S. retailers telling them, ‘No price increases.'”
In better economic times, brands and retailers may have been able to find ways to pay their suppliers in advance or pay sooner in order to keep the factories running, a situation Roberts believes will be unlikely going forward.
“Buyers can no longer afford to bank your own supply chain like you have in the past,” he said.
Mismanaging the funding of the supply chain can have just as large an impact as mismanaging the supply chain itself. Stuart said financial mismanagement often leads to supply shortage, increased risk to the balance sheet and declines in share prices among publicly traded companies.
For those publicly traded companies, the punishment doled out by investors for mismanaged operations is hefty. Stuart said that studies conducted by Citi found that companies that missed guidance as a result of macroeconomic pressures saw average share price declines of about 8 percent. However, for those that missed guidance as a result of supply chain issues, share prices plunged about 13 percent.
“So, you can’t afford to have a supply chain disruption as being the main issue,” he said.