Managing Director & Senior Partner
F&L companies can ensure access to key materials and components without raising costs or reducing responsiveness.
Fashion and luxury (F&L) supply chains have never had it so hard. The pandemic, extreme weather events, and geopolitical uncertainty—combined with growing demand for sustainability—have constrained supply, increased costs, and made responsiveness much tougher to achieve. Unless F&L companies dramatically transform where and how they source products, these supply chain management challenges are likely to grow worldwide.
Yet adapting the sourcing footprint is not an easy task. The options are limited, the time needed to make changes in the sourcing network is lengthy, and after decades of using the same suppliers, organizations are generally inexperienced and ineffective at implementing new strategies.
To make a real difference, it’s critical that fashion companies take a bold and more holistic approach that may seem counter to traditional logic. Three moves are key. Organizations need to simplify their products and the overall portfolio, modernize their production system, and geographically diversify their sources of supply.
Although few supply chains have escaped the events of the past two years unscathed, the supply chains of F&L companies have been especially hard hit because of their inherently long product lead times and geographic concentration of suppliers.
According to BCG research, the product lead time of average companies is 37 to 45 weeks. While many players have announced efforts to shorten lead times over the past ten years, progress so far has been relatively modest.
And the geographic concentration of suppliers has only exacerbated this challenge. Ten years ago, more than half of F&L sourcing took place in China owing to the low cost of manufacturing there. (See Exhibit 1, which uses US data for representation purposes.) As costs in China rose, many companies diversified their sourcing network, partnering with suppliers in Vietnam, Indonesia, Latin America, and Eastern Europe. Even so, over 50% of total volume today comes from just two countries: China and Vietnam.
It’s fair to assume that F&L supply chains will remain constrained, costly, and inflexible long after COVID-19 and current geopolitical tensions are resolved. Three levers will be critical for improving performance.
Reducing the complexity associated with the product assortment, both the number of products and the number of components required for each, will be essential for lowering supply chain costs and risk. That’s because product complexity translates directly into manufacturing complexity—the number of processes, systems, and so on. And greater manufacturing complexity constrains productivity and, by extension, diversification given that the per-item investment needed for moving smaller volumes is higher. A few key strategies can help:
While none of these strategies is new, they have assumed a greater level of urgency as supply continuity, resilience, and sustainability become critical necessities.
F&L companies have let their partners determine the setup of facilities without providing much guidance. Consequently, most facilities produce many kinds of products, ranging in volume and innovativeness. A highly assorted product mix makes it easier for partners to keep their facilities fully loaded, but it lowers overall productivity because facilities can’t focus on any one segment. Additionally, there is little standardization between facilities, so it’s difficult to launch new ones rapidly in new locations—a vital prerequisite for greater productivity and diversification. To remedy these issues, companies should:
Companies that implement the line operating system well should see their entire network of facilities operate in a consistent and highly capable way.
With the savings generated by facility modernization, companies can diversify their sourcing networks geographically, which is a much more challenging task than it used to be. In the past, this effort required balancing costs and production capacity while maintaining a certain level of quality. Today, many more criteria must be factored into the equation, including access to raw materials, low tariffs, the ability to meet sustainability targets, and respect for human rights.
Our analysis of more than 30 popular locations found that none, in fact, meets all these different criteria. (See Exhibit 2.)
Many companies try to address these challenges with near-sourcing. Historically, this was a way to manage demand for product categories where the demand was more volatile and harder to predict. Putting production nearby reduced lead times, lost demand, and inventory costs. It was also a way to decrease the use of long-haul transportation that can raise a product’s carbon footprint.
To make the best diversification decisions, five levers are key:
None of this is easy: organizational inertia, the unsuitability of existing partners for new locations, and the lack of viable new partners all pose challenges. Consequently, building capabilities in new locations requires considerable and consistent investment. Large-scale transitions can take five to ten years to complete—and that’s when only a few countries are involved. Companies that try to source in too many new countries at once won’t see results for even longer.
To mitigate these challenges, we recommend that companies:
Companies that underreact to the challenges could see further deterioration in their contribution margins and risk profile. But overreacting carries its own set of caveats. Relocating to too many relatively expensive countries can damage the company’s competitive cost position and excessively raise capital expenditures.
For example, companies should resist the temptation to move their sourcing entirely out of China. Although labor costs in the country are rising, China has distinct structural advantages, so it will likely continue to be the manufacturing innovation leader. The F&L sector there has deep experience and receives abundant external funding. Moreover, many Chinese conglomerates own their own plants abroad.
At the same time, it’s important to keep in mind that diversification to low-cost countries is not a panacea. Companies need to use technology innovation to get more from their existing partners.
The future of fashion sourcing will look very different than it does today. It will be less complex, increasingly capable, and more geographically diversified. The players that make the effort to forge that future now will be the ones that win tomorrow.