Apparel and footwear chief procurement officers (CPOs) are putting greater emphasis on efficiency and supply chain resilience, as well as closer collaboration with their suppliers.
The PCOs have been re-evaluating their supplier strategies post COVID after flaws were exposed in a sprawling footprint strategy that was once thought to lower the chances for disruption. And the thinking also includes a move beyond just transactional relationships with their supplier base. Moreover, looking ahead, Bangladesh, India, and Vietnam are the countries where the PCOs plan to increase their sourcing efforts.
Fashion firms face a challenging landscape as they grapple with a range of issues across the value chain. Those issues include supply disruptions resulting from demand shifts, material price volatility, geopolitics, global trade issues, rising competition and regulatory changes.
McKinsey & Co. said fluctuations in market demand can create disruption across the value chain. It’s often referred to as the bullwhip effect when small fluctuations in retail cause larger shifts upstream at the wholesale, distributor, manufacturer and raw materials supplier levels. The result is inaccurate demand forecasting, leaving fashion firms with out-of-stocks and missed sales opportunities.
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The unique problem in fashion is that demand signals may not reach tier-two and tier-three suppliers for months. When demand drops, suppliers with canceled orders on their hands end up with excess inventory. On the flip side, a pull back at the upstream level usually results in supply shortages when demand rebounds.
The five trends
A McKinsey survey of PCOs indicated five key themes reshaping apparel and footwear sourcing: efficiency amid demand volatility, footprint rebalancing, restructuring strategic relationships, sustainability ambitions, and using digital solutions to enable efficiency and collaboration.
Efficiency amid demand volatility
End-to-end process efficiency is the top sourcing consideration for 51 percent of CPO respondents—up from fourth place in 2019—as they seek to combat demand volatility, geopolitical tensions and inflation in shipping and raw-material costs.
Sustainability and transparency was in second place, followed by digitalization of sourcing processes, transparency and traceability and consolidation of the supplier base. And nearly 70 percent of respondents said they expect to improve sourcing costs in the near term, such as via lower product costs, reduced sourcing expenses and accelerated go-to-market processes.
The management consulting firm cited a U.S. sportswear firm that used analytics to examine product cost breakdowns, such as improving fabric unit cost and material consumption and trimming costs of their footwear and apparel. That led to a competitive sourcing process across incumbent and new vendors that included structuring mutually beneficial agreements “with a reduced number of more strategic suppliers.” And data-driven platforms led to informed sourcing decisions, as well as collaborations with suppliers to pinpoint cost savings opportunities, McKinsey said.
Footprint rebalancing
As brands rebalance their global sourcing footprint, they’re now OK with creating redundancy to diversify and avoid an over-reliance on a single location. Some are pursuing nearshoring so production can be closer to local markets to reduce lead times, shipping and import costs, and to react faster to trends to keep inventory levels down.
And CPOs said that as they recalibrate their footprint, Bangladesh, India, and Vietnam are the “hotspots for future operations,” McKinsey said, noting that more than 40 percent of survey respondents plan to increase sourcing in these markets.
China still remains one of the largest global apparel producers, accounting for 28 percent and 21 percent of total imports by value in 2023 to the European Union and United States, respectively. In contrast, nearshoring countries such as Central America and Mexico have remained flat since 2018. Challenges include expenses associated with shipping product from nearshoring manufacturers to the U.S., as well as lower labor productivity in the region and challenges with yarn and fabric availability. Moreover, the supplier bases are limited to the array of products they can manufacture. These concerns are expected to be addressed in the coming years. McKinsey said local suppliers and Asian companies with a presence in Central America and Mexico have invested in improving productivity and building local capacity for making yarns and fabrics.
Despite the challenges, the management consultancy said companies should still evaluate nearshoring, even if it means having to build integrated supply chains. The focus doesn’t have to be just on cost advantages. Companies should consider nearshoring as a margin play, particularly as faster speed-to-market, responsiveness to trends, and potential for reductions in inventory and markdowns can lead to economic value and a competitive advantage.
Restructuring strategic relationships
Seventy-one percent of respondents said they will be emphasizing long-term strategic partnerships in the next five years. These deeper relationships, including long-term volume commitments and shared strategic three-to-five year plans, currently represent 43 percent of apparel’s total supplier base, up from 26 percent in 2019. That percentage could reach 51 percent by the end of 2028. Three-quarters of survey respondents said they prioritize suppliers based on reliability and performance.
Sustainability ambitions
Compliance efforts will grow as more sustainability regulations emerge. That means reducing emissions in fashion will require brands to work closely with manufacturers and upstream suppliers. Over 80 percent of respondents said that environment, social and governance certifications plays a role in supplier selection.
But poor data transparency is a huge problem. About 70 percent of emissions are from tier-two producers and above. Most brands have direct relationships only with their tier-one suppliers. And brands that want to track emissions upstream into tier-two suppliers and beyond have to rely on industry averages to provide approximations. McKinsey said brands need to collaborate with suppliers to implement tech tools to capture emissions data.
Using digital solutions: efficiency & collaboration
Over 80 percent of fashion firms use digital innovation for product design—such as 3D modeling and digital sampling—and shipping-logistics cost efficiency. To make sure investment returns don’t fall short, companies need to re-evaluate and redesign existing processes from time to time.
McKinsey said fabric libraries that lack detailed technical information beyond basic descriptions can hinder efforts connected to material consolidation, standardization and platforming. And the consultancy cited a footwear firm that used digital solutions to change its supply chain operations. After implementing a labor-overhead-profit model that provided precise cost estimations, it developed a comprehensive material consumption playbook. Its embrace of digital tools allowed the firm to boost efficiency across the value chain, from design to negotiation, and operations, McKinsey said.
Three strategies to thrive
So, how can brands succeed?
McKinsey suggests that brands evaluate the benefits of energy-efficient machinery and technologies, renewable energy sources, and circular economy principles to reduce operational costs, improve resource efficiency, and obtain general environmental benefits. The analysis will allow firms to make informed decisions that meet their sustainability goals and generate economic value over the long term.
Companies can also engage in fact-based price discussions with suppliers, which can help brands increase transparency and promote innovation on design. Value-sharing agreements can set clear baselines to measure improvement. And using this collaborative approach becomes a win-win: brands get value-backed sourcing that’s matched with a supplier’s expertise in product design, resulting in cost reduction without compromising performance.
And finally, closer collaboration provides mutually beneficial relationships between brands and suppliers. Brands can lock in reliable and consistent supply, which helps with supply chain stability, better cost management and increased responsiveness to market demands. And a deeper commitment between the parties can include joint financing on shared investments in projects and infrastructure, and well as brand guidance to suppliers on technology adoption and the sharing of knowledge for market trends.