Halfway through our MBAs at Stanford GSB, we decided to start a clothing brand. The two of us set out to manufacture a small line of simple, high-quality dresses. One of the first steps in product development was sourcing factories. We quickly found that what seemed to be a simple exercise proved challenging, and even more so now with the onslaught of Covid-19.
During this time, we were working on a research project at Stanford exploring apparel manufacturing. Our findings, drawn from interviewing over a dozen new and established brands, confirmed that in this industry, what we found frustrating in sourcing our factories was in fact the norm. Today, sourcing factories for apparel and soft goods is largely done the old-fashioned way: by word of mouth and industry connections. Reputable factories are not typically discoverable through search engines. They don’t usually list their services and prices on user-friendly websites. This lack of transparency makes it hard for brands, large and small, to source factories. Smaller brands like ours struggle to find factories that can understand and execute on their ideas, produce at low order quantities, meet price requirements, and deliver on a reasonable timeline. For bigger players like Nike, requirements are even more demanding, involving advanced techniques, larger capacity, and higher standards for compliance. Sourcing and evaluating each lead from scratch is time-consuming and inefficient.
After using our industry connections to start conversations with dozens of factories, we finally cobbled together a set with whom we were happy to work. But a few weeks later, when Covid-19 shut down our China- and California-based factories, we were overwhelmed by the prospect of starting the sourcing process anew.
The entire industry was impacted. Everyone needed to move workloads from affected to less affected areas. The bigger the business was, the more complex the transition became. During stable times with lower factory turnover, these challenges were less pronounced, but now, the pain of reallocating work was more prevalent than ever.
It made us wonder: why doesn’t a global marketplace exist to connect retailers with factories? There is a moat around apparel manufacturing, reliant on connections, middlemen, and insider knowledge. A marketplace could remove the need for middlemen and make factory ability and availability transparent. Factories would have a reliable and unbiased engine to source new leads and fill excess capacity. Brands could more easily source leads for new products and higher capacity, resulting in a more flexible supply chain.
The global supply chain would flex, not break, in light of a massive disruption: once one country shut down, the demand would balance across geographic regions. In order to do this, factories must already have been approved, meeting baseline standards and requirements. Retailers also need to know which factories are capable of taking on the project. Therefore, the marketplace must provide information on reputation, price, trust, and availability. Ideally, in the same way that a tech company can dynamically scale the servers they use around the globe using services like AWS, clothing manufacturers could redistribute their production as flexibly.
There is a moat around apparel manufacturing, reliant on connections, middlemen, and insider knowledge.
So, if a marketplace could solve all these problems, why hasn’t one come about yet? We’ve found that inertia in this industry is strong for all players. First, existing brands with established factory relationships benefit from the barrier to entry: transparency makes them nervous. On at least half of our calls, our interviewees would nervously confirm confidentiality when mentioning factories. Second, middlemen who broker relationships between brands and factory partners need the industry to remain opaque to stay in business. A marketplace could replace them. Third, factories are so focused on low-margin manufacturing that they don’t have bandwidth to market themselves to new audiences. The effect is circular: brands and middlemen keep factories hidden, and without the bandwidth to find and screen new business themselves, factories continue relying on personal referrals for work.
However, a number of well-capitalised companies are beginning to disrupt the status quo. In wholesale, Joor, which has raised over $30 million in venture capital, is connecting apparel brands to retailers online, replacing large showroom sales reps. Faire, backed by VC-firm Sequoia, offers a digital marketplace for unique wholesale merchandise, attempting to displace trade shows. Granted, the actual production of apparel and soft goods requires collaboration beyond simply buying and selling finished products. Does that make it too complicated? Perhaps not. We are seeing similar activity in other complex spaces. In real estate, a company called Astorian has created a platform for building managers to source and manage contractors. This relationship mimics that between the factory and the retailer, and is potentially even more complex than designing and producing garments.
Attempts in this space illustrate rising demand for disruption. However, existing marketplaces either are regional, unstandardised, opaque, or prohibitively expensive. Maker’s Row is a marketplace focused only on production in the US. Zilingo is focused in Southeast Asia, and it hasn’t yet been able to create an open, standardised marketplace. Alibaba has created a marketplace spanning China to Turkey, but it doesn’t have strong standards for vetting factories. As a result, the quality of the services are unreliable. Li & Fung, a major manufacturing middleman, is trying to scale up its brokering services, but it hides the identities of its factories from its brand partners, causing confusion when brands inadvertently engage a factory it previously failed to work with. Cala offers new brands a tech platform for design assistance, factory sourcing, and task management. However, it is prohibitively expensive, charging both a steep membership fee and 20 percent or more of revenue that emerging brands can’t spare. In short, none of these marketplaces have gotten enough traction to create a “new normal” for brands to rely on.
The time is now for a marketplace that is global, standardised, transparent and affordable so that it can foster both the accessibility that small brands want and the flexibility that big brands need. With Covid-19, the importance of supply chain flexibility became clear. Factories shut down; goods were not being made. Shipping slowed, and goods were more difficult to receive. This first happened in China. Then Italy. Then the US. Three bastions of global soft goods production.
This problem isn’t going away anytime soon. It’s also not new. Even before Covid-19, manufacturers struggled to adapt their supply chain to the tariff wars. Year after year, production managers working with Chinese factories plan for lowered productivity during the Chinese New Year holiday. Factors from economic development to natural disasters also threaten sensitive delivery timelines. In the wake of these challenges, could a marketplace solution be the key to helping an antiquated and struggling industry rise to its feet?
Maxine Lim is an MBA Candidate at the Stanford Graduate School of Business and a former tech entrepreneur and product manager.
Becca O’Leary is an MBA Candidate at the Stanford Graduate School of Business and a former merchant at Urban Outfitters and Saks Off Fifth.
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