When demand drops at the consumer level, the blow dealt to the supply chain gains force the closer it gets to the source. It's a phenomenon called the "bullwhip effect" and with an 89% drop in U.S. apparel sales in April year over year, the industry is in the midst of a bullwhip for the ages.
"Global clothing supply chains have unraveled in just a few short weeks, as has the trust and goodwill between many buyers and manufacturers," said Leonie Barrie, apparel analyst at GlobalData, in emailed comments.
How apparel retailers and brands react to falling demand will directly affect the amount and variety of manufacturing capacity available in major apparel producing countries when demand returns, and therefore the future of fashion sourcing.
Cancellations prime the bullwhip effect
In the early weeks of the pandemic when nonessential retail was quite suddenly shut, apparel companies were faced with tough decisions: honor orders in production and postpone upcoming orders, or refuse incoming merchandise and cancel future orders.
There's a spectrum of purchasing behavior between those two extremes, and where purchasing organizations land may impact the industry for years.
North American purchasers canceled more orders than their European counterparts — 11% of North American companies canceled more than half of their orders compared to 2% of European companies.
"Global clothing supply chains have unraveled in just a few short weeks, as has the trust and goodwill between many buyers and manufacturers."
Apparel Analyst, GlobalData
On the other side of the equation, a Boston Consulting Group survey of over 500 apparel suppliers in major apparel manufacturing countries found 86% of manufacturers have experienced order cancellations and 40% are struggling to pay employees due to COVID-19.
Cancellations may be the predominant pandemic inventory management strategy, but several big names have made public pledges to accept and pay for existing orders and work with vendors to reschedule other orders. H&M, Nike, Target, VF Corp, Inditex and PVH have made such commitments.
"It is in the developing world, where healthcare systems are often inadequate and poverty is rife, that people will be hit the hardest. For workers in low-cost sourcing and fashion manufacturing hubs such as Bangladesh, India, Cambodia, Honduras and Ethiopia, extended periods of unemployment will mean hunger and disease," wrote McKinsey analysts in a coronavirus update to its annual State of Fashion report.
Major apparel producing countries also often lack the elements of a social safety net, like unemployment assistance, available to U.S. apparel industry workers. The health of the industry is only assured by the health of the people who keep it running.
"Factory closures set off a series of devastating consequences from which the entire apparel industry supply chain will struggle to rebound – from inability to manufacture products, to difficult supplier selection, to mistrust across industry partners," wrote BCG researchers.
Future production capacity at risk
Apparel manufacturers may not survive the shock of evaporating demand, just as many retailers won't. Capacity will fall as manufacturers close their doors for good, which will depend on how long they are shut down and what work is still viable when they return, according to Omer Abdullah, co-founder of procurement risk management platform The Smart Cube.
So where is the bullwhip likely to crack the hardest? As of February, the top five countries exporting apparel to the U.S. were China, Vietnam, Bangladesh, India and Indonesia, according to the U.S. Department of Commerce's Office of Textiles and Apparel.
The past may offer lessons on capacity drain. "There's always been this assumption that there's another factory and I can play one off against another … Well after 2008 a lot of that excess capacity evaporated because a lot of factories went out of business," said John Thorbeck, chairman of Chainge Capital.
"Even for companies that are diversified … there's really no place that you can move."
President, United States Fashion Industry Association
The apparel industry saw a 10% year-over-year drop in global demand in the first quarter of 2009, according to a 2010 working paper from the World Bank Development Research Group — considerably less than the 30% or more dip analysts and early estimates suggested.
"In the financial crisis the rest of the world was not necessarily affected the same as we are. And right now we have the global impact of the slowdown so that even for companies that are diversified … there's really no place that you can move," said United States Fashion Industry Association President Julia Hughes.
The magnitude and scale of the problem is much more dramatic today. As of April 29, Bangladesh garment factories have seen order cancellations totaling more than $3 billion representing nearly one billion garments, according to the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
Some major purchasing organizations have demonstrated an understanding for the implications of short-term thinking when it comes to canceling orders and delaying manufacturer payments.
"We are well aware that the suppliers, and their employees, are extremely vulnerable in this situation. We are in a close dialogue with several partners and industry stakeholders to see how we can and should support in this difficult situation and we aim for finding a joint industry solution involving several stakeholders," an H&M spokesperson told sister publication Supply Chain Dive via email.
The future is collaborative
Thorbeck and others argue it's not the geographic concentration of apparel sourcing in Asia, but the priorities behind that phenomenon that need to change to better weather the next pandemic. McKinsey describes the pervasive sourcing model — by its interpretation, a pre-pandemic problem — as one with long lead times, maximized order sizes and relatively low flexibility.
These are the elements of prioritizing cost above all else, said Thorbeck. "The lowest cost of goods does not compensate for the high cost of uncertainty," said Thorbeck.
To correct these weaknesses, McKinsey sees two trends emerging from the pandemic. The first is nearshoring — defined as moving production closer to home (not necessarily all the way home).
"Fashion players need to re-map their sourcing mix to better balance risk, cost, and flexibility of supply," McKinsey analysts wrote.
"We should expect to see more localized to regional sourcing, and I am not sure any single country will benefit, but rather a host of them will," said Abdullah. McKinsey and an ongoing survey of financial leaders from PwC concur that while wholesale geographic sourcing shifts are less likely, diversification is in the future.
"The lowest cost of goods does not compensate for the high cost of uncertainty."
Chairman, Chainge Capital
Hughes cautioned that while she supports production in the U.S., calls for the industry to move to 100% domestic production immediately for political points don't reflect the complexity of the global apparel industry.
"I say shame on them, because that's not something that's going to happen overnight," she told Supply Chain Dive.
The second change McKinsey recommends is demand needs to drive fashion supply chains — rather than depending on merchandisers to drive it based on the styles with big buys behind them. That means shorter lead times, smaller lot sizes with transparent, data-driven decision making free from operational silos.
A prudent first step is bringing vendors into the planning and ordering process.
"Brands should monitor sales data and exchange insights with their vendors and suppliers, then review their merchandising plans for the fall and holiday 2020 and spring 2021 seasons," according to McKinsey.
This could look like working with suppliers to agree upon initial smaller order sizes, followed by more frequent, smaller replenishment orders triggered by demand, Ronen Lazar, CEO of Inturn, an off-price channel and inventory management software company, described. Full, accurate inventory visibility, up to the minute data and a deep understanding of demand signals are necessary, however, to make this collaboration worthwhile.
"It's understanding signals and understanding them in real time," Lazar said. Such demand-driven operations may require more collaboration within apparel businesses too, he added, since inventory and sales data will be more closely linked to procurement processes.
Some buyers may be leaning in this direction since nearly half of the 116 purchasing organizations McKinsey surveyed are coordinating with suppliers to reduce overall operational costs and the level of investment in inventory that may not sell. The extent to which that behavior lasts will, in part, decide the outcome of the next pandemic-level shock before it happens.