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Fashion’s Supply Chain Disruptions: What You Need to Know

While retailers in western markets have been the visible victims of the current crisis, behind the scenes the nuts and bolts of fashion’s supply chain are facing a bleak future.
Source: Supply Compass

LONDON, United Kingdom — At the start of the month, Hilmond Hui was feeling optimistic.

The vice president of Hong Kong-based fashion group PFGHL, which manufactures garments and textiles in factories based in Hong Kong and the mainland, was seeing business return to normal after an extended shutdown to stem the spread of Covid-19 in China following Chinese New Year. Then, the virus hit western markets.

“That was going well for a little bit, but then very quickly Italy got hit, and then the US,” said Hui. “Customers in the US are changing or holding orders, changing from air to sea shipment or cancelling orders altogether.”

It’s a scenario playing out across fashion’s supply chain as the industry adjusts to the abrupt and devastating effect of Covid-19’s rapid spread. Around the world, it’s hitting manufacturing with alarming force.

In just the last two weeks, concerns about delays and disruptions caused by China's slowdown in February have switched into a full-blown financial crisis. The bottom has fallen out from demand as retailers shuttered across western markets, cancelling and delaying orders.

"It's a bloodbath right now," said Sanjeev Bahl, founder of Vietnam-based denim manufacturer Saitex. "The buying community is taking the supply chain for granted and creating long-term collateral damage."

To make matters worse, many in fashion’s supply chain are experiencing a triple threat: disruptions to both supply and demand now compounded as a growing number of the industry’s manufacturing hubs fall victim to the virus’ spread. In Italy, almost all factories have closed. India, which is a major garment and textile manufacturer, went into lockdown last week. Other countries are following.

It's a bloodbath right now.

The impact of such shutdowns has been masked by the more immediate fallout from retail’s collapse, but it raises significant longer term questions about how the industry will recover.

"The disruption is now, but the effects will be really visible in the next months," said Simone Cipriani, founder and chief executive of the UN's Ethical Fashion Initiative, which connects marginalised artisan communities with international brands.

Demand Destruction

As retailers across western markets have closed one by one, the blow back on suppliers has been swift and devastating.

“I have received emails from clients just asking me to stop shipments,” said Mostafiz Uddin, managing director of Bangladesh-based Denim Expert Ltd. “How can I pay my workers and take care of them… How do I pay the raw material supplier?”

Cut-and-sew manufacturers usually pre-order materials to fulfil customers’ demands, leaving them on the hook for substantial payments when orders are cancelled. According to the Bangladesh Garment Manufacturers and Exporters Association, or BGMEA, nearly $2.9 billion worth of orders had been cancelled or suspended across the country, one of the world’s biggest garment manufacturing hubs, by Monday.

“A prolonged epidemic will certainly [worsen] the situation further,” said BGMEA President Rubana Huq. “Brands' refusal to take the goods will cause us to have no recourse but to lay our factories off. We are an export oriented industry totally dependent on export.”

The impact has been felt on the luxury end of the market too, with factories across Italy seeing orders cut before they were shut down. Now, suppliers are bracing to receive no payment for outstanding debts, said Danny d'Alessandro, general manager of Italian leather industry association Assopellettieri.

Some brands have been transparent and collaborative in how they approach their supply partners, seeking solutions that would allow both parties to survive the current turmoil, manufacturers said. But many are simply cancelling orders, even if they have already been completed, leaving manufacturers and their employees in an extremely precarious position.

The blow back on suppliers has been swift and devastating.

“It’s very reckless behaviour,” said Bahl. Brands and retailers are “creating shockwaves in the system by cancelling orders and not paying… [suppliers are] being slammed with shotgun decisions.” Saitex is currently working at a 25 percent reduced capacity. By June, Bahl expects it to be down to 50 percent.

It’s a systemic shock taking place against a backdrop of looming longer-term economic pain.

While Chinese consumption is beginning to return to normal again after February's shutdown, that is not nearly enough to offset new declines elsewhere. Burberry said last week it expects sales to plummet 70 to 80 percent in the final days of March, compared to the same period a year earlier. Zara-owner Inditex wrote off nearly €300 million-worth of inventory ($336 million).

UK retailer Primark said it would cancel all new orders, an extraordinary declaration that sent a clear signal the company is expecting a protracted and deep downturn.

“We have large quantities of existing stock in our stores, our depots and in transit, that is paid for and if we do not take this action now we will be taking delivery of stock that we simply cannot sell,” Primark Chief Executive Paul Marchant said in a statement. “This is unprecedented action for unprecedented and frankly unimaginable times.”

Primark has at least committed to paying for existing orders and provided its supply partners with clarity on its strategy. But if other retailers follow suit, manufacturers are looking at a lost season at best. “It’s the death knell for the industry,” said Bahl. If there’s little or no production between July and September, “I don’t know what the hell will happen.”

More worrying still is the prospect of a damaging wave of retail bankruptcies if things don't pick up. UK retailer Laura Ashley has already filed for administration as the fallout from the pandemic dealt its business a death blow. And US luxury retailer Neiman Marcus is in talks with lenders, according to a Bloomberg report. A wave of liquidations would leave manufacturers lumbered with huge amounts of bad debt.

We don't know how long this will last and how many brands will go into Chapter 11.

“That’s been our concern: we don’t know how long this will last and how many brands will go into Chapter 11 or Chapter 7,” said Roger Lee, chief executive of apparel manufacturing giant TAL group. If a retailer goes under with debts outstanding for garments under production, “that liability would kill most manufacturers.”

A New Reality

Meanwhile, manufacturers are adjusting to new realities on the ground, as governments implement tough policies to contain the spread of the disease.

Uddin made the difficult decision to close his factory in Bangladesh Wednesday. “My workers need to be safe,” he said, adding that his employees will receive paid leave through the closure.

So far, Bangladesh’s moves to contain the virus have left room for garment manufacturers to continue operating, though Huq said the BGMEA has now recommended all factories shut and most have done so.

While worker safety should be paramount, such initiatives put still more strain on the supply chain. Many manufacturers don’t have the balance sheet to support weeks or even months of labour costs with orders also getting cancelled.

Larger players are better placed to manage the costs, but the situation is still painful. TAL Group’s factories in Malaysia are facing at least a four-week government mandated shut down. The company will continue to pay all its 5,000 local employees. Next week, it’s planning to close its production in Vietnam for seven days because of reduced order volumes, again maintaining payroll for its 8,000 employees on the ground.

Where manufacturers are allowed to continue to operate, it’s often with new constraints and regulations intended to protect workers. In Africa, the Ethical Fashion Initiative’s partners have gone back to implementing processes last used when Ebola stalked the continent, including hand washing facilities everywhere and regular sanitation of all surfaces. PFGHL’s factories now supply all employees with gloves and masks.

Shifts in the supply chain could cause more problems for vulnerable workers down the line.

In Vietnam, Saitex checks the temperature of every person that enters the factory. No outside visitors are allowed. The facilities are disinfected every week, with toilets and common-use areas disinfected every day. The company has also put in place counselling services and an education programme to encourage frequent hand washing and other preventative steps.

Many worry about the state of play elsewhere in the industry.

“Factories are a place where ventilation is often not good, work spaces are very close and goods need to pass from one workspace to another,” said Koen Oosterom, country manager for Bangladesh and Myanmar at nonprofit Fair Wear Foundation. “It could be really disastrous.”

A Precarious Lifeline

Things could get worse still. The sharp dip in demand is hiding mounting pressure on fashion’s supply chains as countries close factories and borders. The long-term impact is unpredictable, as closures and quarantines subject fashion’s complex and opaque networks to butterfly effect-disruptions.

“Supply chains are disrupted, and even if only one wing is disrupted all the others suffer,” said Ethical Fashion Initiative’s Cipriani. “Wherever we are, operations are disrupted.”

In Afghanistan, where the initiative works with silk producers, exports have been delayed because of under-staffing at the customs office caused by illness. Work in Eritrea has temporarily ground to a halt after the European overseers at the production facilities the initiative works with flew home amid mounting anxiety about the escalating crisis.

If e-commerce gets shut down, that is extremely scary.

With India in lockdown, "no work can be carried out either in sampling or in production," said Vinod Dhawan, a factory owner and former president of India's Garment Exporters Manufacturing Association. "This has significantly affected current orders that are stuck in different stages of production, but also future collections which we should be sampling for."

Manufacturers in China that had been struggling to cope with the stresses caused by the country’s years-long trade war with the US may be at least temporary winners. The country’s current success in beating back the virus has allowed many factories to return to near full capacity as other regions shut down.

“We’re trying to juggle the supply chain to bring back a lot of orders placed outside of China back into China,” said Yossi Nasser, chief executive at intimates manufacturer Gelmart. Orders that are already placed with Bangladesh and India will go ahead, but the company is shifting new production programmes to open Chinese facilities.

Labour rights organisations worry that such shifts in the supply chain could cause more problems for vulnerable workers down the line.

Gelmart is working to ensure employees at its own operated facilities are protected and paid through any downturn. “These employees are extremely crucial to us,” Nasser said.

Meanwhile, all-important logistics systems are under unprecedented pressure. The wholesale cancellation of huge numbers of passenger flights has thrown into disarray the business of air freight, much of which travels in the hold of passenger planes, rather than on cargo jets. Costs are escalating.

“The airlines have gone from lots of capacity to almost cargo-only capacity,” said David Emerson, vice president for sales and marketing for Europe, the Middle East and Africa at Seko Logistics. “That cargo-only capacity is in massive demand and prices are sky high.”

Even e-commerce, which remains a lifeline for many retailers and a glimmer of hope for manufacturers, is under threat. Efforts to ensure social distancing is enforced among the teams on the ground, and restricted hours to allow time for thorough and regular disinfecting, is slowing the pace at which packages can be processed. Increased demand for essential items is being prioritised over more discretionary goods like apparel.

It's increasing the cost to operate the supply chain.

“By and large, everyone’s seeing increased volumes and reduced capacity to operate safely, and as a consequence, some goods are pushed out to elongated delivery times,” said Zach Thommann, executive vice president and general manager at e-commerce solutions provider PFS. “It’s increasing the cost to operate the supply chain.”

Some companies have already made the decision to close their delivery systems altogether. Stella McCartney and French footwear brand Veja are among those that have shut warehouses and halted deliveries. Even luxury e-commerce giant Net-a-Porter has had to close distribution centres.

“If e-commerce gets shut down, that is extremely scary,” said TAL Group’s Lee.

Survival

Few in the industry believe that everyone will make it out the other side of this crisis, but those that do are trying to ensure a more resilient future.

Companies are looking to the partners that are supporting them now, and seeking to build constructive ongoing relationships. Many believe those who maintain transparent and open conversations now will be best-placed to hit the ground running when things stabilise again, while also giving their manufacturers the information they need to plan and manage their businesses effectively through the current turmoil.

“There’ll be customers that stopped everything, and customers making decisions now that recognise that when the market starts again, you’ll need goods and it takes months of planning and manufacturing,” said PFGHL’s Hui. “Brands need to look into their supply chain and really talk to their suppliers and customers and really be transparent about the situation.”

Those who are optimistic, hope that a reset could result in a more responsible and ethical supply chain down the line. The current crisis is throwing into even sharper relief long-standing issues, from poor buying practices to wasteful inventory management and bloated and opaque supply chains that leave companies blind to areas of risk.

Consumers are not stupid and they'll reward companies with vision and leadership.

“At the moment brands are really in crisis mode of how do we immediately protect business continuity,” said Elisa Niemtzow, vice president at nonprofit consultancy BSR. But “as we are in crisis mode, we also need to simultaneously be thinking about extended supply chains and how this will affect developing countries. Very soon... that will be everyone’s problem.”

Niemtzow said brands should be carefully assessing their buying practices and making concerted effort to be as fair as possible. Close partnerships with suppliers that allow companies to really understand how manufacturers and their employees may be affected, as well as any support local governments are putting into place, will be important too.

Some brands are already beginning to act. For instance L’Oréal has committed to shorten payment times to small business suppliers most exposed to the economic crisis caused by the pandemic.

“Consumers are not stupid and they’ll reward companies with vision and leadership,” Niemtzow said.

We’re tracking the latest on the coronavirus outbreak and its impact on the global fashion business. Visit our live blog for everything you need to know.

Editor's Note: This article was revised on 31 March 2019. An earlier version of this article stated that Hilmond Hui was Director of Development at PFGHL. That is incorrect. He is Vice President.

Building Resilience and Value in Fashion's Supply Chain.

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