Apparel Must Look to Outside Sectors if There’s Any Hope of Transformation

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Sourcing Summit 2017

If the traditionally low-tech and stubbornly low-growth apparel industry could start taking lessons from sectors outside of itself, it will likely happen upon a vast trove of inspiration surrounding performance improvement.

That was the key point raised by a trio of thought leaders at a session called “Outside In: Tapping Other Industries for Innovation + Change,” at the recent Sourcing Journal Summit in New York City.

The apparel industry is notoriously bad at taking cues from other industries, always pointing to reasons why apparel is different and why those cues can’t be similarly applied. However, had traditional retailers been paying attention to some of the trends in electronics, books, entertainment and transportation, it might have been better prepared for the disruption upending stores and supply chains today.

Many of the savvy players, however, have finally started stepping outside the box and appling principles from other verticals to improve financial results.

How does Zara do it?

John Thorbeck, author of “The Zara Gap,” and an authority on how companies can enhance profitability by improving flexibility and speed to market, said while speaking on the Sourcing Summit panel that although many apparel brands and retailers are talking about reducing the time from design to selling floor, very few have managed to move significantly in that direction—even a decade after Zara showed the industry it can be done in 21 days.

Although companies including H&M, L Brands, Gap and Amazon have managed to improve speed to market, they have failed to take the difficult and costly—but necessary—steps to completely change their culture to make reduction of lead times and uncertainty not just an operational issue, but also a merchandising, marketing and consumer issue.

Zara’s business model, in which most of its product is manufactured close to its stores and reaches the selling floor within three weeks of being designed, is based on the concept of postponement modeled after the production process first perfected in the electronics industry. The financial benefits are huge, with profitability that is many orders of magnitude higher than the next closest competitor.

The opportunity to significantly improve economic performance is available to any apparel retailer today, provided they are willing to change their sourcing practices and mindset. For example, making product speed and supply flexibility, instead of margin and turn, key performance indicators will help focus an organization on the right metrics.

“In an environment when everyone is thrilled with 1-2 percent growth, market caps have a 30-40 percent potential, even in an industry so out of favor as apparel,” Thorbeck said. “This is a dramatic point of view that comes from outside the industry.”

Be like Nike

Another view from outside came from Mike Dennison of supply chain solutions giant Flex, Ltd., a $26 billion tech company with 100 owned factories employing 200,000 people in twelve different industries including health care, automotive, consumer products, aerospace and energy.

Two years ago, Flex, no stranger to sharing technology across industries (it used micro-dosing from the medical field to introduce new flavors at Pepsi) partnered to take on Nike’s manufacturing in Mexico.

“What we saw when we looked at our partner Nike was a company going through a manufacturing revolution, realizing their consumer had changed and wanted something different, with a manufacturing solution that couldn’t keep up with new design and changing technology,” Dennison said.

Using its Sketch to Scale process, Flex helped Nike get design and production to work more closely together to streamline tasks like design, sample-making and production, and to cut out a lot of dead time between steps, allowing Nike to respond in region “within days, rather than weeks.”

“This isn’t a speed factory, this is a speed factory on steroids. A million square feet, 7,000 people, 15-20 million pairs per year,” Dennison said. “This is where the supply chain is going. It starts in Asia, but is localized in Mexico.”

He added, “We think the disruption will continue. We think we can take Nike to a whole new place. And we believe when this matures that we can bring this technology to the broader apparel industry. And this is where the game starts to change.”

Flexibility + speed = fashion excitement

Citi Research’s Kate McShane, a leading retail stock analyst, was a bit ahead of her time when she first took a keen interest in supply chain as a route to growth. What started out as a reduction in cost of goods sold began to be recognized as a way to supply the right product at the right time in the right place.

“For a long time it was a margin conversation, which isn’t really very sexy, but now we’re starting to see speed to market and flexibility having an impact on product line and merchandise,” she said. “We are really at the beginning stages of what could be a very exciting time for the retail industry.”

McShane admitted that retail investors today are in the doldrums, discouraged by the secular changes in the industry, and fearful of the impact that Amazon is having on hardline and broadline merchants and the brands that supply them.

However, by adopting some of the new technologies available, brands and retailers can keep merchandise on-trend and exciting, stimulating consumer demand.

“We all know that fashion is driven by the next thing, and by innovation, so you need something new and refreshing,” McShane said. “New technologies that innovate at the supply chain level offer the potential to see an uptick in unit velocity. Tightening the demand/supply equation while giving the opportunity for newness is very exciting.”

Miles of startups

Another disruptive force is what Thorbeck called the “tsunami of startups” that have entered the retail space in the past half-decade.

“Between in-store, retail tech, AI, subscription, direct-to-consumer and other models, over $9 billion has been invested in 1,270 of these new companies over the past five years,” he said.

Among these new entrants that want their place at the table and are trying to take market share from incumbents, there will certainly be winners.

The potential to survive and thrive, however, may lie in which type of “mile” a startup addresses. Here’s how Thorbeck defined the types of “miles,” which correspond to stages in the product-to-market journey.

The “last mile” refers to getting goods to their final destination, or the consumer’s home. If a company’s specialty is in this high cost area in which Amazon excels, it will run into formidable competition.

Another difficult area is the “mid-mile,” the interim step of moving goods from vendor to a huge network of stores cheaply, efficiently and quickly. This is where Walmart dominates, with its distribution center-to-store advantage.

In the “magic mile,” offline and online brands must create magic to attract and engage consumers. The economics are risky and challenging. Companies in this space focus on store experience, social media and other initiatives that drive traffic—all important, but hard to make money.

According to Thorbeck, the economic potential of the “first mile,” which lives in the product supply chain, dwarfs that of the others.

How will retail be defined going forward? The successful merchant of the future may very well be a hybrid of an apparel company with a seemingly unrelated company outside the industry.

“We’ll see more tech companies merging with fashion players. This has moved way beyond wearables. The lines between fashion, entertainment, art and technology are blurring,” said Dennison, who cited the recent collaboration between Flex and musician and entrepreneur Will.i.am for i.am+, which is aimed at created fashionable wearables, as an example of how fashion and technology are intersecting with other spaces, a trend he feels will intensify going forward.

Whichever the path, nimbleness will be key.

“The game has changed. Many of yesterday’s small startups are rapidly becoming $50 – $100 million dollar businesses,” McShane said. “Stitch Fix, MM LaFleur, LeTote, they have different business models, but are taking share from the existing players who must respond quickly if they want to survive.”

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