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The Limits of a Lean Supply Chain

The pandemic exposed the weakness of the global manufacturing and distribution networks adopted by most big fashion brands. Executives need to change how they think and talk about supply chains to replace a culture of cost.
Brendan Smialowski/AFP.
Closed factories, clogged ports, no truck drivers -- up and down the global supply chain there are problems. (Brendan Smialowski/AFP)

Supply chain language in our industry is designed to make the unglamorous, hidden world of making and shipping fashion sound benign, neutral and efficient. Anyone who has worked in the business of fashion long enough is familiar with phrases like just-in-time, lean manufacturing, outsourcing, compliance and enterprise systems. What do these terms have in common? All betray embedded bias to control, reduce and enforce costs. Lean management, for all of its claims to virtues of efficiency, is at its heart about producing and moving goods at the lowest possible cost.

And that philosophy in textiles and apparel became a kind of school for globalisation. But the limits of lean are evident in the post-Covid world: shipping costs have spiked amid scarce capacity, material prices and wages are rising in Asia, and so are costs of compliance and transparency. These pandemic pressures are now intensified because of end-to-end under-investment in sustainable practices and products. Lean techniques cannot counter these relentless demands which, together, continue to undermine standard contracts, terms and trust between Western retailers and global suppliers.

We have reached the limits of lean to lower or control costs. The language of lean is just as important. The famed philosopher of language Ludwig Wittgenstein said, “The limits of my language are the limits of my world. All I know is what I have words for.”

In other words, if the terminology of cost (and legacy systems, metrics and incentives) is the narrow basis of contracts and executive wisdom, how is change possible? Countless PowerPoints have circled this question, but the tipping point to transition a cost culture is now upon us.

An Unequal Playing Field

In the rough passage of 2021, the supply shock of Covid evolved to a demand shock. The uncomfortable, lasting effect is that the balance and burden of risk were shared unequally by retailers and suppliers.

The old arbitrage of lowest cost sourcing was to cushion volatile and uncertain demand, permitting retailers to absorb high unplanned markdowns year after year. That one-sided “system” is discredited as overly reliant on an unfair burden of financial risk by suppliers. In 2020, that imbalance was demonstrated in painful retailer cancellations, denials of delivery, revised terms and deferred payments. In cases of retail bankruptcy, inventory was accepted to generate cash and never paid. Even if motivated by survival, these buyer behaviours complicated recovery by factories once orders and demand began to return.

Is there a formula — and language — to replace the systemic stranglehold of cost?

This concern is industry-wide regarding an adversarial bargaining culture, now challenged by generational demands to become more sustainable and transparent. What is a new relational formula to establish consumer and investor confidence that fashion can live up to its pledges for sustainability, humane and responsible supply chains, and worker well-being and living wages? The answer is both financial and non-financial standards, which together are required to create market and social value.

The recent COP26 gathering in Glasgow, where fashion finally arrived to participate alongside other industries in UN Goals for 2030, also shone a bright light on laggard status. High profile commitments to sustainability targets abound in a CEO chorus of forums, agreements and acronyms, but how will common business logic, data and metrics unite famously fragmented designers and brands? The answer is arising in the global supplier community.

The conclusion of worldwide textile manufacturers is that they cannot rely on retailer initiatives to transition the fashion system. Indeed, post-COVID terms have tightened in pricing and definitions (such as expanded triggers for force majeure). In the case of a major athletic brand, a cost formula is being readied across key factories regardless of their track record. Apple’s practices in electronics often influence a large brand’s drive to control profit margins and are a shadow over its best suppliers.

How will the global supplier voice be heard? In 2020, six nations in Asia that normally compete for production volume banded together over a common experience, coordinated by the International Apparel Federation in Amsterdam. Six (China, Vietnam, Cambodia, Myanmar, Bangladesh and Pakistan) became nine (Indonesia, Turkey and Morocco), and now it is a consortium of twelve (India, Egypt and Korea) that represents 75 percent of global apparel production. The result of their cooperation is a report called, “The Sustainable Terms of Trade Initiative (STTI),” recommending minimum standard behaviour in supplier-buyer negotiations. Just as significant as new expectations is the ambition of the alliance to align and amplify the pre-competitive interests of global apparel manufacturers.

Others have taken note to encourage this emerging community as a force for good in fashion transformation, such as the ILO, EuraTex (The EU’s Textile and Clothing Industry), and the EU’s Ministry for Internal trade. The International Trade Center, the UN’s trade agency in Geneva, is attentive to the potential for productivity in the world’s most globalised industry. (Full disclosure: I am the lead consultant for the UN/ITC to analyse process innovation and to recommend new approaches toward a systemic shift in total value chain profitability).

Untying the Knot

With limits of lean management as a system now evident, declarations for partnership have a new and more meaningful two-way dimension. The formula for supplier-buyer productivity is shared risk equals shared purpose. The shared purpose is to reduce and share risk over cost alone. It is collaboration to create value beyond transactional, seasonal negotiations, beginning in these ways:

1. Levers to reduce excess production and inventory are upstream. Supply flexibility is joint management of raw materials, capacity, production and transportation. Together, these components of the first mile reduce risks of finished goods inventory, long lead times and high volumes. This transfer of risk, time and cost across all tiers of the supply chain is substantial.

2. Inventory and sustainability compete for scarce capital. With 96 percent of a fashion brand’s footprint in its manufacturing supply chain (according to the World Resource Institute), suppliers must have incentives and access to capital for mutual investment in sustainability. Internal capital, via productivity, is the most accessible and promising source to accelerate investment where product and social impact is greatest.

3. Inventory can be considered a lack of prediction; it is the uncertainty of demand. The capability to quantify risk projects new metrics for end-to-end performance: production closer to and in season (lead times), forecast accuracy, lower finished goods levels, neutral or negative working capital and lower markdowns and lost sales. Data science is the advanced technology that captures and links options for profitability to both retailer and supplier.

The good news for fashion is that the global supplier community is an emerging engine of process and data innovation for a broken supply chain. Supplier-led capabilities exist to supersede cost-driven practices for inflexible lean practices and lowest prices. The real essence of partnership is equal commitment to create a more productive, profitable and sustainable industry. The key to these imperatives to de-risk a needlessly high-risk business resides upstream in global manufacturing, regardless of geography. The high cost of low-cost fashion is no longer affordable or sustainable — and too costly to continue.

Building Resilience and Value in Fashion's Supply Chain.
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