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Moving Local-For-Local to the Top of the Agenda
Moving LocalFor-Local to the Top of the Agenda
THE COVID CRISIS UNDERSCORED CHALLENGES INHERENT IN OVERSEAS PRODUCTION, BUT IS NEARSHORING THE SOLUTION?
GLENN TAYLOR
The apparel supply chain has been inundated with some major obstacles in recent years, including a trade war between China and the U.S., a global pandemic that first suffocated supply and then demand, as well as shipping delays due to congestion at major ports. All of these factors have increased the challenges related to inventory management, As a result, an increasing number of retailers and brands at least consider the idea of bringing more manufacturing operations closer to home.
And apparel focused firms aren’t alone. According to a September 2020 study from the Capgemini Research Institute, 65 percent of retailers and consumer product firms are investing in regionalizing and localizing their supplier base, while 58 percent of retailers and 72 percent of consumer product firms say they are investing in regionalizing and localizing their manufacturing base.
The one obvious benefit that brands have in nearshoring their manufacturing operations is that the product is much closer to the end consumer. That alone cuts down air and sea freight costs and production lead times, enabling brands to capitalize on trends rapidly, or ship product to customers quickly upon purchase. Additionally, brands may be more apt to embrace nearshoring as a means of creating smaller batches, madeto-order goods or customizable product to boost sell-throughs.
“It’s about being able to react in season if a product goes viral or demand goes down, such as in the case of Covid,” said Gabi Ledesma, vice president of consumer products and retail at Capgemini. While Ledesma said these reasons for nearshoring were prevalent prior to Covid, “they have since accelerated because of the dominance of the online sale over the last 12 months.”
Local sourcing also better for sustainability, which is becoming more of a consumer imperative, he said.
“When it comes to sustainability, countries like the U.S. have a better reputation than those in Southern Asia, for instance,” said Ledesma. “Consumers are going to look at that, and also the impact on emissions. Sourcing locally produces a lot less CO2 in the atmosphere
than having to ship things in from far away.”
And local-for-local production doesn’t necessarily mean reshoring in the United States. American brands, for example, can bring more of their operations to Central America and South America in hubs like Mexico, Peru, Colombia, Honduras and Guatemala, among others.
Peru-based vertical manufacturer World Textile Sourcing (WTS) couples its all-under-one-roof operations with a focus on sustainability. The company partners with Lenzing to use fibers such as viscose and modal, and Unifi, using cotton certified by BCI and the U.S. Cotton Trust Protocol. This gives its apparel clients transparency over the type of materials in the process that might not be guaranteed in China or Vietnam.
Elayne Masterson, the Peru-based company’s vice president of sales and business development, said that since WTS spins its own yarn instead of importing it, it could take a preemptive approach to gauging client demand, especially throughout the pandemic.
“The fiber is there in Peru for our customers that need it,” Masterson said. “We are not scraping in order to find it. So that kind of preemptive position is very attractive to people. Also, in these times when staffs may be leaner, our in-house materials innovation and design teams can help to support client product development design.”
CALCULATING THE BENEFITS
Having resources on hand enhances WTS’ speed to market, which is a major benefit of producing locally even if there isn’t price parity with overseas costs.
“I think brands have learned that [end consumers] prefer to pay, let’s say 50 cents more, but guarantee the goods are in on time, than just look for the cheapest price and not get the goods on time,” said Luis Antonio Aspillaga, founder and CEO of WTS. “We have been doing reorders in three or four weeks. I remember shipping some Christmas pajamas in the middle of November and we got the order in October, so that was very fast.
I think more clients are just looking to have the goods when they need or want them.”
Satisfying consumer demand is one major argument for local production. It’s a major reason why Walmart has committed to spending $250 billion on U.S.-made products by 2023. John Furner, president and CEO of Walmart U.S., has said, “It matters to our customers— more than 85 percent of which have said it’s important for us to carry products made or assembled in the U.S. And most of all, because of the jobs it brings, it matters to American communities and the people who live in them.”
But despite the benefits, it’s not always easy to just jump into nearshoring given that investments extend beyond more expensive labor costs, according to Murali Gokki, a managing director in the retail practice at AlixPartners. Capital has to be invested in other ancillary areas, namely compliance.
“Our standards when it comes to environmental laws, usage of water and access to natural resources are all going to come at a higher cost than what you’ll probably find globally,” Gokki said. “One of the things that we are looking for constantly is, ‘What kind of innovation is happening in the States?’ That is fundamental to positioning nearshoring as an advantage by means of innovation in manufacturing, innovation in supply chain transparency, innovation in sustainability. As I see it, that’s a key to making nearshoring a reality for this industry.”
BALANCING RISKS & REWARDS
While the costs of local labor combined with the investment into new warehouses, infrastructure and upgraded technology might deter some brands and retailers from considering nearshoring, they would be wise to reconsider. Overseas manufacturing often comes with hidden costs. For instance, producing volumes to hit minimums can result in overstocks that deplete margins.
Further, supply chain disruptions are only exacerbated the further away a manufacturing operation is from the end consumer.
While there’s unlikely to be another pandemic, risks lurk everywhere—and the next crisis could mean the end for fashion firms that fail to insulate themselves. A September 2020 McKinsey & Company survey, The State of Fashion, highlighted that over the course of a decade, companies in most industries can expect a single production shock in which manufacturing shuts down for 100 days. This would wipe out nearly 40 percent of one year’s EBITDA for the average textile and apparel company.
Before retailers decide whether shortening their supply chains through nearshoring is an appropriate strategy, they must consider their assortments. Products with healthy profit margins are better suited for local production, according to Ledesma.
“For the apparel companies that have slim margins, they’re going to be very challenged to move production here today,” Ledesma said. “The second criteria would be the type of product, and how easily it is to automate that product. Depending on the fabrics and fabrication of that product, it may be better suited for local sourcing, versus some others that require more labor-intensive production.”
Gokki noted that categories in which need or trends spike—like personal protective equipment—are the best categories to locally manufacture.
“Think about licensed sports merchandise, where you see a spike in demand that needs to be met pretty fast. Nearshoring production helps brands and retailers meet that demand in a very short timeframe and fine-tune and adjust,” Gokki said. “In terms of mainstream fashion, however, I would say nearshoring still continues to be aspirational.”
“More clients are just looking to have the goods when they need or want them.” — Luis Antonio Aspillaga, WTS
Automate Inventory Management, Reduce Handling Costs, and Optimize Cash Flow
OPTIMIZING SELL-THROUGHS BEGINS WITH UNIFIED INVENTORY MANAGEMENT
For retailers, being able to pinpoint exactly how much inventory they have and where it is—at every second of every day—can be intimidating, but it’s absolutely vital to optimizing a cross-channel business with multiple store locations, e-commerce and social selling, and possibly multiple warehouses.
According to a recent survey, NetSuite found that 70 percent of attendees find conducting a physical inventory count to be a painful process, and 15 percent don’t conduct one at all. Meanwhile, 43 percent of small businesses either track inventory manually (without any software) or not at all.
But, manual only gets you so far. E-commerce has become an increasingly important channel for retailers already selling online and those driven into it during the pandemic, and the intangibility of virtual goods adds another layer of complexity to the mix. Yet research shows that many small and mid-size businesses aren’t using a formal system and can’t accurately track what they have in stock, said Abby Jenkins, NetSuite’s product marketing manager for supply chain, including inventory and order management. “A Census report states that many retailers have $1.40 in inventory for every $1 in sales.”
Here, Jenkins explains the role Covid-19 played in intensifying the industry’s inventory problem, the reputational risks inherent in stockouts and why overstocks are just a symptom of a much larger problem.
SJ: The pandemic changed how consumers shopped, how orders were fulfilled, and what people now expect. How did it accelerate retailers’ push toward real-time inventory visibility?
AJ: Retailers learned they need to be more flexible and meet customers where they want to shop. A year ago, retail shut down with so much inventory sitting in stores. Companies that had the visibility to see what they had in different locations, fulfill online orders from store locations or route customers to the right store for curbside pickup saw a huge boost. The visibility allowed companies to use that inventory, so it didn’t become obsolete. Fashion might not be perishable like food, but it does have a shelf life.
What’s the weak link in inventory management across multiple channels and warehouses?
AJ: It really breaks down with inventory being stored in multiple locations and not being able to see a holistic view of that inventory. That could be an East Coast and West Cost warehouse, or across your 10 store locations. If I can only fulfill my online orders from my warehouse and the warehouse is out of something, I might order more, not realizing one of my stores has a surplus of that item. That’s a cost redundancy, resulting in me holding extra inventory, tying up cash or missing an online sale due to a (false) stockout. There’s also the added cost of rushing something to a customer from the supplier, when in fact it was available at another location.
How can retailers balance keeping inventory lean while preventing stockouts?
AJ: If you can see and fulfill your inventory across multiple selling channels and multiple locations, you can keep overall inventory levels lower. It all depends on strategy. Some retailers don’t discount and there is a cachet to a product that sells out, but it does leave money on the table. The key here is being able to see inventory across all locations and channels and being able to fulfill orders from any location. In this way you’re able to diversify your inventory but have a sort of safety net at the same time.
How can fulfilling orders be more intelligent?
AJ: An order management system should give you the ability to be more intentional about how you are fulfilling orders. When an order comes in, the system can see where the order is going and automatically dispatch it to the closest fulfillment center for the cheapest shipping, like a warehouse in Ohio for a New York order versus the Arizona one for LA. It also considers overall profit—not just the least amount of miles, but trying to get multiple orders into the fewest amount of shipments to the same address.
How does real-time visibility boost customer service?
AJ: It can reduce stockouts by preventing retailers from double allocating merchandise orders—like selling seven when you only have five. It also gives customers options. If a store is sold out, a sales associate can look it up on an iPad and send that customer to a nearby door that has it. If something is sold out online from the warehouse, with NetSuite, you wouldn’t even need that conversation because it would automatically ship from a store. The customer wouldn’t even need to know. Failure to fulfill makes for a bad customer experience that results in canceled orders, complaints or your brand getting slammed on social media. Customers have a lot of options and thus power—they don’t want to hear excuses. In fact, 70 percent of customers will go somewhere else versus waiting for a product to come back in stock, even if they’re loyal to your brand. Plus, sites like Pinterest will show them similar items with links to buy.
When is real-time visibility the most critical in making strategic designs?
AJ: In the seasonal calendar. If a seasonal item isn’t selling at one store, you can shuffle inventory around with others. If it just isn’t selling through anywhere, you can put an immediate 20 percent discount on it before you’re stuck with an obsolete item two months later. The issue of returns is critical, too. If a customer returns something mid or end of season, having all your channels see that the returned item is back in inventory gives you the best chance to sell it before the season is over. Since all channels talk to each other with NetSuite’s real-time inventory visibility, it doesn’t even matter where the item is returned.
How can retailers calculate how much money is wasted each season due to obsolete inventory? “Failure to fulfill makes for a bad customer experience that results in canceled orders, complaints or your brand getting slammed on social media.”
AJ: To me, obsolete inventory is not the problem, it’s the symptom of not properly forecasting and demand planning. If it’s happening season after season, you need to ascertain where the system is breaking down—and that ultimately comes down to your inventory system. To be able to properly forecast, you need to understand historical sales and seasonality, as well as take into account sales forecasts and historical promotions. That alongside understanding the market are crucial so that you can understand and predict your future demand. After the fact, you need to be flexible and proactive. Mistakes happen and you must react before it’s too late. You need to be able to transfer merchandise to a location where it will sell through before you have to discount or it becomes obsolete.
How does integrating inventory with financials to track and optimize key metrics like inventory turns, carrying costs and inventory age help a business?
AJ: The bigger handle you have on all this, the better you can properly plan for the future. Plus, always knowing where your inventory is helps you understand how much cash you have. Do you have money to run that marketing program or buy a new machine for operations? What about bringing in an item that’s trending because of a celebrity? You don’t want to wait till the end of the financial quarter to realize you could’ve acted quicker.
What are the biggest challenges here?
AJ: A system is only as good as the data you put into it. You must be meticulous setting up your SKUs in the system. Otherwise, price changes won’t be seamless and merchandise you receive won’t properly show up in your inventory record.
