Squeezing Suppliers for Lower Costs Cannot Make Up For Clearance Losses

Time to Reverse Rules of Supply and Demand

We live in exciting times as the world changes around us and we learn to deal with the fire-hose of information that continues to reshape our lives and decision making institutions. The Information Age is accelerating the replacement of the old maxims

that guided business and the economy through the Industrial Revolution. Many of the standards that were based on the time delays inherent in communications, transportation and manufacturing are disappearing with the revolutionary effects of digital technology and automation. One of the first to go is the age old marketing axiom of the quantitative relationship between supply and demand and market equilibrium. The concept is sound but the order of event needs to be reversed. The relationship is used to create wholesale and retail price targets, plant capacities and financial risk decisions. The ultimate effect is to create an unsustainable price driven retail economy and a cost based sourcing environment. This is an environment that limits entrepreneurs, innovation and ultimately competition. The Internet is providing a window to the product value based retail and manufacturing economy of the Information Age. The collective inventory and comparative shopping screens of agents like Amazon, Alibaba and others have turner shoppers into searchers and made the product’s features into critical factors in purchase decisions. This ability to search unlimited inventories (there are over 30 thousand scarf designs on Amazon alone) leave retailers with their fixed high-risk inventories at a dangerous disadvantage. This supply in search of demand strategy is only viable in an expanding market base. The U.S.A. apparel market base is not an expanding. Solving this inevitable circling of the drain for apparel, fashion and the apparel manufacturing sectors requires a change in the basic paradigm to real time demand based sourcing and production.

Starting this February SOURCING at MAGIC will introduce Demand Sourcing to begin the process of educating the tens of thousands of attendees in the spring and fall MAGIC shows in Las Vegas. Understanding and demonstrating the details of this strategic market change is a goal of SOURCING at MAGIC, the market leader in apparel and fashion opportunity. Demand Sourcing is integrated directly with the Demand Micro-Factories that SOURCING at MAGIC has demonstrated at the 2018 spring and fall shows. Digital

demand design and production is a key ingredient of bringing clean highly profitable manufacturing back to the United States. Demonstrations will feature retail “Endless Aisle” Augmented Reality (AR) kiosks integrated with Virtual Inventories produced on-site by the top 3D design companies. Selected product will then be colored and manufactured and finished on site in an Integrated Micro-Factory using the latest digital technology and currently available equipment from the top manufacturers. SOURCING at MAGIC is uniquely positioned to link Demand Sourcing with Demand Manufacturing since it is the largest retail and brand show in the Americas. This is opportunity for thousands of retailers, e-tailers and brands to witness a demonstration of the new “Demand and Supply” paradigm that is the future of clean high profit apparel manufacturing.

The law of “Supply and Demand” has been the root concept of our economic structure for years. Most business plans, company strategic plans, an even nation’s economic policies have been based on this simple concept. For years demand was considered a product of price and therefore the sourcing the product was dependent on cost. This concept led us to believe that the term was actually supply then demand because the price at retail was going to be determined by the cost of manufacturing. This relationship was understandable because the Industrial Revolution and manufacturing technology was based on efficiency of production and the resulting lower cost per product. At the time, the ability to make product at an efficient and low cost rate was always acceptable because the world markets were ever expanding. In the apparel trades the consumer’s agents the retailer and brand, not the actual consumer, always determine the demand and product feature portion of the supply and demand maximum. The retailers job was to consolidate the demand of all the consumers that they served and to correctly forecast months if not years in advance the products that would satisfy that demand and therefore represent the

supply portion of the equation. The accuracy of that prediction was the key to the success of reaching the magical point of market/price equilibrium or product on hand at the correct price to stimulate sales. The inherent danger of the time gap between the quantification of the supply and the actual sale of the demand created great risk for both the retailer and the supplier. To mitigate this risk brands then agglomerate demand from many retailers and attempt reduce the risk of oversupply and the consequence of losing the price equilibrium and requiring the dumping of product. This concept of third party demand forecast driving a supply first business sourcing decision can cause dangerous inventory constipation like H&M’s reported $4.3 billion pile of unsold inventory and resulting profit loss.

We are now seeing the effect of a new paradigm driven by the change in both the content and speed of information at every level of the supply and demand equation. This change in information is driven by access to huge volumes of product choice available to the consumer. This information directly affects demand and the ability for retailers and brands to consolidate forecast information accurately as a basis for long-range purchases. This increased risk because of the inability to actually quantify demand by store location, product design, local competitive price and availability of competing products has been exacerbated by the change from consumers physically shopping to consumers searching the Internet before purchase whether online or in-store. This change from shoppers to searchers has driven a huge and detrimental impact on the retail apparel market. In an effort to bring the last mass merchandising opportunity out of the antiquated supply and demand concepts of the Industrial Revolution retailers have turned to price as a value determinant to stimulate demand. As we know from reading the news for many retailers have not been able to absorb this artificial incentive for consumers to provide the sales required to save their retail locations.

For second let's examine the side effects of this attempt to use the supply and demand concept in this new age of information. First let's talk about the requirement to drive down cost in order to be able to support lower retail prices driving cost down by finding new suppliers with lower labor costs and lower contract production costs normally has three ultimately detrimental affects. First driving down supplier costs often requires contractors to initiate bad and sometimes inhuman labor practices. Second, suppliers need to lower the cost of raw product often resulting in quality deficiencies in the finished product. Third, suppliers in order to save pennies and nickels often shortcut environmental standards resulting in dangerous working conditions and ultimately damage to the ecosystem. Unfortunately, driving down cost through mass manufacturing efficiencies usually has one or more of these inherent detrimental effects. The real problem is overproduction caused by driving down costs by manufacturing efficiency coupled with the inherent risks of the long lead-time forecasting which is now out of sync with the traditional retailer and brand data-gathering process.

While retailers and brands have been consolidating, closing stores and trimming margins, millions of dollars are being spent in another silo where technology has been developed to produce product on demand without the requirement for long lead times and huge reserve inventories. This digital manufacturing capability has created the opportunity to produce one or many without the expensive preparation costs that have been inherent in traditional mass manufacturing for years. Simply stated the technology is in position to make what we need, when we need it, on demand. In addition to the manufacturing technology 3-D software, printing and design capabilities are now in place to produce huge virtual inventories available to the searching consumer so they can have what they want, when they want it, on demand. This integration of product development and product manufacturing technologies is available today and integrated micro-and macro factories capable of producing both individual product and replenishment at speeds capable of matching consumer take away. In short we are ready to realize the retailer and brand dream of never overstock and never out of stock maximized profits. The commitment to education and demonstration of this important structural change by SOURCING at MAGIC will help hundreds of retailers and brands understand solutions for the changing market environment.

In summary, the fundamental difference between “supply and demand” and “demand and supply” is that supply and demand is based on cost and demand and supply is based on profits. While operating on the antiquated theory that price is the primary driver of value; retailers, e-tailers and brands will continue to fail to address the giant profit eating monsters of oversupply, lack of choice, and damaging profit sucking clearances required in today's cost based structure. The huge technological adaption on the supply side is still gambling on the implementation of the demand side of the equation. We are all waiting for retailers, e-tailers and brands to recognize their responsibility to integrate Demand Sourcing by developing real-time POS, ERP and PLM software. That motivates suppliers to adopt the new technologies and end the cycle of forecast, manufacture, stock, discount and dump. Until then we will continue to follow the supply and demand maxims of the Industrial Revolution while we try to negotiate the opportunities of the Information Revolution.

E-mail me at bgrier@am4u.com for further information or with questions about Demand Sourcing or SOURCING at MAGIC.

Principle 8: Unit Manufacturing Requires Seller and Supplier Integration

Making Big Profits from Demand Sourcing

Real time vertical integration of retail sales, manufacturing and fulfillment is critical.  Reporting sales by SKU in real-time is the key to charting, aggregating and formulating of actual Days-of-Supply requirements to insure maximum sell-through of on-hand inventory for retailers, e-tailers, brands and manufacturers.  Sharing POS information and making it available to the sourcing participants requires technology and tools to guarantee all parties the profit boost available from Demand Manufacturing?

Critical Retail Sales Data History

The first UPC marked item ever scanned at a retail checkout was June 24, 1974, at the Marsh supermarket in Troy, Ohio. At 8:01 that fateful June morning, shopper Clyde Dawson grabbed a 10-pack (50 sticks) of Wrigley's Juicy Fruit gum from his shopping cart at the Marsh supermarket, and cashier Sharon Buchanan made the first UPC scan. The cash register rang up 67 cents (three bucks in today's money). Retail history was made. Before this moment in history every item in the supermarket had to have a price sticker or the price had to be memorized or noted on a large price list available to the cashier at the checkout counter. Although this technology was instituted to automate the checkout process, the real impact was that active sales data and continuous inventory information was now available to store management. The historic pack of Juicy Fruit itself is now displayed at the Smithsonian Institution's National Museum of American History.

Why is a Supermarket Milestone Important to the Apparel World?

Since that historic event in 1974 retailers have had the opportunity to access real time POS information by SKU. Armed with this tool grocery retailers were able to closely manage the over 18,000 SKU’s in the modern supermarket. The grocery retailers knew they had powerful new information that they could use to control their inventory and product sourcing. However, this critical selling information was kept highly confidential for years until a series of merchandising tactics from the brands made it beneficial for the retailers to share real time sales data with their suppliers. The immediate effect of this information integration was the saving of millions of dollars worth of over production and the advent of a level of sourcing efficiency, which increased profits for all the participants. Not all industries understood or participated in the paradigm shift from forecasting to real time sourcing. Some industries like the apparel trades were late to adopt the UPC as an inventory management tool and in most cases retailers still do not share this information in real time. Some companies however have

recognized the value of real-time reporting. Vertical fast fashion brand Zara recognizes the profit value of real time product sales data and provides the UPC code information in the scan on their hangtags. Brands could use the information as a sourcing tool or a stocking placement tool, but instead brand sourcing relies on long-range forecasts for planning and purchasing and brand status for store projections. These forecasts rely on trend analysis, competitor intelligence and luck. Then they use this combination of intuitive data and precognition to ultimately project individual seasonal orders of SKU’s expected in the store in 10-18 months. The problem is that the time gap alone creates massive risk in the age of instant trend setting social media. This inherent risk combined with limited product adjustment flexibility and expensive conventional prepress, labor and transportation costs reduces the number of color and decoration choices available for ultimate sale. This further reduction in choice increases the risk attached to each final choice. Minimum volumes and related surcharges cause buyers to "round up" to larger unit volumes to reduce perceived cost per unit further increasing risk. As purchasing from off-shore sources continues to increase in pursuit of lower costs and better deals the decreasing sell-through of on-hand inventory and resulting clearance at the retail level drive continuing loss of profits. The glut of unsold inventory at retail drives both the profit stealing clearance sales and the overstock availability of lower cost products online. Retailers have no recourse but to regurgitate these losses back up the sourcing path to brands and manufacturers leading to contracted production unshipped and unilateral chargebacks reducing payments. Squeezing costs no matter how tasty a deal is negotiated does not offset the overflowing pool of loss from unsold excess production. In fact, the current sourcing system for apparel is simply not built to operate in the information age. 

Until Demand Sourcing and Demand Manufacturing are fully integrated with real time information the extraordinary technology that allows for the visual design and digital production of apparel is limited to equipment shows, expensive talking heads conferences and textile technology magazines. The current unsustainable business formula is: Savings based on volume causes Losses based on clearance and Profit is the victim.

Demand Sourcing Linked to Demand Manufacturing

Alright, now that we have outlined the problem let’s talk about solutions.
Given that our current sourcing system is just not built to operate in the real time world of the information age. The question is what do we have to do to create the tools that enable actual Demand Sourcing and Demand Manufacturing. First we must understand the two types of Demand Sourcing and manufacturing that are successful in the information age. One type of Demand Sourcing that we see every day is the example provided by direct sales companies like Vista Print and custom garment printers like Custom-T’s and others.

These companies are demonstrations of one type of Demand Sourcing called Purchase Activated Manufacturing, which in the demand world is called PAM. Businesses, which operate in a PAM structure, produce custom orders on demand from an individual customer whether that's business cards, t-shirts or tailored apparel each order is produced individually using digital Demand Manufacturing. The advantage of PAM is the direct relationship with the customer produces a personalized product with higher intrinsic value and generally a higher price. If the product was produced using Demand Manufacturing technology the cost of production compared to consumer value produces much higher profits.

The other type of Demand Sourcing is called Demand Replenishment or DR for short. DR is focused on replenishing the stores on hand inventory based on real-time point-of-sales information also known as POS data. This DR sourcing is currently used by online e-tailers that wish to hold a minimum inventory to promote fast shipment. Many online sellers however are still holding significant on-hand inventory because is often a requirement of selling through large marketers like Amazon or Alibaba. These massive online marketers require their licensed suppliers to hold sufficient inventory to protect the selection and fulfillment advantage that these indirect marketers have over retailers. Online retailers who use these giant marketers generally believe that the exposure and sales velocity they gain through these sites will offset the excess inventory they are required to hold. Developing a direct Demand Sourcing relationship with a supplier can increase profits dramatically while preserving their marketing relationship.

Access to POS data whether it comes from an individual consumer or from a retailer’s replenishment need is the lifeblood of integrated Demand Sourcing and manufacturing. Developing the tools needed to collect and encourage the reporting of this information is a critical missing piece to the adoption of all the digital technology that has been developed to provide Demand Manufacturing. In short Demand Manufacturing cannot operate without real-time Demand Sourcing.

Lessons From Retail History

When the UPC code entered the retail world through the inventory control needs of the modern supermarket, food retailers had no intention of sharing this treasure trove of stocking and positioning information with the grocery brands they stocked everyday. They believed that the brands would share this highly classified information with their competitors. Meanwhile, I can tell you from personal experience, brands continued to produce based on forecasts and plant capacity. They continued to gamble that they had guessed correctly about the retail sales of each of the thousands of SKUs of cereal and dessert and other short shelf life grocery products. This disconnect resulted in hundreds of thousands of cases of grocery products simply buried in the ground when their sell by date was reached. For the brands it was terribly frustrating to know that the data required synchronize sales and production was sitting just out of reach. The question was what could the brands and the manufacturers do to entice the retailers into providing real-time POS information. Food manufacturers and brands came up with three working solutions; the first strategy was to focus on in store promotions with attached wholesale price discounts based on retail sales targets.

End-of-Aisle Promotion

The plan was to encourage retailers to dedicate the end of their aisle or space in their lobby to a specific product which would have a scaled wholesale price discount based on sales performance. This would force the retailer to provide the sales data in order to qualify for the performance price reductions. The second was to create brands that were tied directly to the retail chain. In the apparel industry we call those private labels but, in the grocery industry initially they were generics and they later became house brands. Since the retailer or the chain was receiving a specially labeled product they had to provide sales information and product turns to the manufacturer or the brand producing the product specifically for them. The third solution was to take full responsibility for stocking the product by buying the shelf space in the store and providing the stocking service to fill the shelf based on demand. We see this solution every day in the snack and soda section as well as the bakery section of our local supermarket. This solution is known in the grocery industry as "rack jobbing" since the jobber (usually the delivery driver) buys the product from the manufacturer and fills the shelf based on personal knowledge of the consumer sales. This solution has limited value for brands since it does not provide actual retail POS information to the manufacturer but is based instead on the jobber’s interpretation of how to fill the space in the stores shelf plan-o-gram. The rack job solution however may be viable for direct manufacturer sales to retail; the problem is that this tactic requires a high velocity product with sufficient margin to provide income for the delivery service.

Tools for Demand Sourcing

Based on this history here are some variations on the grocery solution that will work for micro merchandising in the apparel industry. In order for any Demand Sourcing solution to work there must be automated real-time POS information available to both the brand and or the manufacturer. Therefore, the solution must have sufficient incentives to put this information stream in place with a positive impact for the retailer, the brand and the manufacturer.

The first solution requires the development of tools that provide the retailer with low risk and high sales per square foot. The technology must fit a promotional time schedule and provide at least 80% sell-through at retail price. Fast fashion vertical brands tout the traffic building statistic of their constantly rotating product selection and the lean reactive stocking levels that support their product. Meeting these criteria provides high profit to all three parties and because the product is demand manufactured the on hand initial inventory is minimal and replenishment is driven by actual sales. A variation of this stock rotation strategy is the apparel promotional pop-up of the endless aisle kiosk, which can provide

Augmented Reality mirrors are a key technology in Demand Sourcing

a short-term promotion for everything from back-to-school, to local events or recreational programs and teams. It can also be used to promote a seasonal apparel silhouette like swimwear with unlimited size/shape or print and color choices. This is an extremely small dedicated sales space backed up by huge virtual inventory available to the consumer on-demand. For instance, leggings and racer tops with hundreds of different coordinated prints and colors in 50 different shapes and sizes available for store pickup or sent directly to the consumer's residents in just five days.

In the second solution the same endless aisle kiosk could be used to introduce a new private label store brand using real-time sales information to determine popular colors and prints for stocking in different regions or stores. This ability to real-time test or promote store brands requires a dedicated production facility prepared to provide replenishment on demand within five days or less. Currently the tools required to provide the customer a customizable interface are limited to online sales, which for the most part operate from held inventories just like retail stores. This requirement to decide on promotional items so far in advance that they may not be timely in relation to current popular events is one of the reasons that stores avoid the risk of printed apparel tied to certain licensed events like movies or sports events. The ability to create a private-label tied directly to specific events or popular movies and/or sports championships is directly related to the ability to provide purchase activated inventory type by print to such an event. In addition stores can focus private label on local opportunities like schools, clubs or local festivals. The problem has always been that prints are the riskiest of all inventories. Guessing in advance the color and print that will be most popular with participants in a local event is a high-risk gamble if the store must depend on conventional production.

This situation leads us to the third solution in which a retail location partners with a local demand printer to offer direct to garment printed, embroidered and/or appliqué products delivered in less than a day on-site for consumers to pick up. Only the print on demand T-shirt market and other limited specialty products are prepared to provide personally customized product on-site on-demand. In most cases when ordered online this product is pulled from an already printed inventory portrayed in an online catalog and usually takes more than five days to deliver and is normally imprinted on an already sewn apparel item. These direct to garment printing machines are becoming easier and simpler to operate and could easily backup an in-store kiosk to provide on-site customized product. Just as an example, one idea might be to provide a week of “Pet Days” in the store and which customers can bring in their favorite picture of their pet and have it printed on a blanket or a shirt while they wait. This kind of traffic builder can be used without long-term consequence to the inventory situation that the store normally experiences with mass-produced goods. In order for this selling space to be as efficient and financially viable there must be an integrated selling point in the store with the ability to send files to the queue for the printer to produce on site. Personalized athletic wear, yoga wear, and artwork can always be sold for full retail price. The problem is it is almost impossible to stock in advance of the individual custom customer request. Many of the stores that supported this type of printed or unique apparel produced by conventional screen-printing have bankrupted because they were choked to death by excess inventory. This solution can also be used to create on site licensed apparel from a huge choice of pre-approved art.

Current Obstructions to Adopting Demand Sourcing

Many retail/e-tail and Demand Manufacturing solutions are available today in component form the problem is we can't expect retail buyers, focused totally on product cost, to do the work to integrate a new paradigm in the in-store shopping experience. Brands and manufacturers hands are tied unless they can find the tools that motivate retailers to save themselves with Demand Sourcing. Retailers expect brands to supply them with product that sells its self but, in the information age the tables are turned and it's time to find the product that sells and then supply it. The scourge of volume based pricing and the ugly up front inventory cost left over from the industrial revolution limit choice. The longer we encourage mass manufacturing the profit losses and pollution of waste will continue to limit economic growth. Retailers and brands need to see the tools available and understand their use in the current selling environment.

It is very important for the technology, apparel design, digital manufacturing and the online and instore marketing suppliers to demonstrate integrated solutions to the retailers and brands. Currently, the proliferation of shows, workshops, and seminars are limited to theoretical discussions of the strategy of demand manufacturing. The technology shows feature equipment from different suppliers who are only concerned about their specific technology silo. Demonstrating the integrated symbiotic relationship between Demand Sourcing and Demand Manufacturing is critical to both the entrepreneurial and traditional players in the apparel economic sector. Integrating and incubating actual examples of these two key strategies operating together will produce levels of profit in an industry plagued by tiny margins and bad economic strategies. In a free economy profit is the most dependable catalyst for change we just need to demonstrate the profitable impact of using demand has a basic sourcing strategy in the information age.

Integrated Merchandising and Manufacturing is the First Step to Sustained Profits

Merchandising and Manufacturing become one at SOURCING AT MAGIC this August

The Zund Cutter is one of the technologies featured in the Merchandising Integrated Micro-Factory in SOURCING AT MAGIC

August 12th thru the 15th, the Made in USA section of SOURCING AT MAGIC in the North Hall of the Las Vegas Convention Center will introduce a working model of the world’s first Merchandising Integrated Micro-Factory on the convention floor. This factory developed by AM4U, Inc. enables Demand Manufacturing for instant in-season replenishment of hot fashion sellers or replacement of slow movers. Real-time merchandising adjustments that long lead times from foreign suppliers make impossible. "No out of stock and no overstock" is a merchandiser’s dream! Featuring equipment from the top digital manufacturing vendors integrated by AM4U, Inc. the factory will produce apparel on demand displayed and ordered from an Endless Aisle merchandising kiosk.  SOURCING AT MAGIC attendees can select apparel or accessories from a Virtual Inventory displayed in high definition.  The digital SKU’s appearing on the screen in 3D will then be transformed from white fabric into colored actual finished apparel using the on site Integrated Micro-Factory.  

The Integrated Micro-Factory is one of the new technologies developed by AM4U to revitalize the apparel sector of the US economy by providing product choice, increased profitability and thousands of sustainable jobs. Risk free product choice from "change-on-the-fly" digital manufacturing technology, increased profitability by reducing the almost 60% overproduction driven by overseas lead times and sustainable jobs as demonstrated by the reproducible non-polluting Integrated Micro-Factories on the convention center floor.  

Witness History

For the first time anywhere, SOURCING AT MAGIC will link actual working Integrated Micro Factories to a Retail “Endless Aisle” virtual inventory merchandising portal. The Endless Aisle merchandising pop-up allows brands and retailers the ability to offer a massive a Virtual Inventory with the additional on-site benefits of fabric feel and trial fitting. Connecting merchandising to manufacturing in a real-time model is the key factor in creating profitability of the new era of Demand Sourcing.  The ability to tie retail product merchandising movement directly to replenishment product manufacturing can increase retail sell-through to levels that assure profitability at normal mark-ups.  SOURCING AT MAGIC understands that for many product groups and retailers the technology and application of Virtual Inventories and digital manufacturing is ready for commercial application.  In addition this environmentally clean technology with its ability to change colors and prints on the fly without minimums or long lead times is the ultimate in lean manufacturing.  One of the impediments to implementation is that many brands and retailers have not seen an Integrated Micro-Factory in operation and those that have seen a working factory are still unclear about the integrated merchandising strategies available.

Linking the retail “Endless Aisle” kiosk with a Virtual Inventory filled with SKU’s from on site state of the art visual design systems creates and risk free unlimited inventory.  These SKU’s exist only in digital form until selected from the Endless Aisle visual catalog and transformed into physical high quality apparel in the Integrated Micro-Factory.  The integration of manufacturing with replenishment based on actual sales allows the retailer to operate with a minimum of actual product in a localized distribution pipeline while drawing from an endless aisle of virtual product stored a no risk in digital form.

SOURCING AT MAGIC Plans to Provide a Path for Made in USA Apparel Recovery

SOURCING AT MAGIC a part of UBM’s biannual MAGIC Apparel Show the largest apparel show in the western hemisphere is unveiling a plan to return apparel manufacturing to the U.S.  The plan is based on sustainable digital manufacturing technology integrated with Demand Sourcing based on real-time point of sale replenishment.  The proven manufacturing technology will be driven by actual product sales with change-on-the-fly adjustment and or replacement for fast selling or non-selling items. SOURCING AT MAGIC will begin in August to feature more and more U.S. companies using digital manufacturing and Integrated Micro-Factories to provide this next generation of merchandising to brands and retailers.

The Plan will have the overall goal of raising full retail price sell through above an average of 60% of on hand inventory.  Since current sell through at retail price is less than 25% this increase will allow the lowering of average consumer price while almost doubling the gross sales profit for manufacturers, brands and retailers.  In addition since the inventory is stored digitally until sold the upfront costs of factoring or financing and the cost and risk of warehousing are eliminated.  SOURCING AT MAGIC understands that the only incentives for change that work in a market driven economy are profit and risk reduction, which are the principal goals of this project.  SOURCING AT MAGIC believes that pursuing this growth plan will provide needed financial incentive to the popular “Buy American” and “Made in the USA” programs we hear about every day.

More information about the key Principals of Demand Manufacturing can be found at AM4U.com

Principle 7: Retail Profit is Based on Cost per Units Sold NOT Cost per Unit Made

The New Sourcing Paradigm "Demand and Supply" NOT "Supply and Demand"

What is the future of apparel marketing and manufacturing in the digital age? Where is the solution to the loss of over 97% of jobs in one of the countries largest manufacturing sectors?  It’s obvious after decades of “Buy American” political platitudes, questionable sourcing promises and bogus promotions, that the answer has evaded the current establishment.  In fact, importing overseas manufactured apparel continues to increase and U.S. retail sales are up, so what could be wrong with this picture?  This makes no sense, how can sales be up yet, retail stores are closing at record rates?  The popular answer is to blame on-line sales even though they represent only about 15% of sales.  Article after article on the “retail apocalypse” blames the demise of malls and traditional retail on the impact of on-line purchases but if sales are hitting records how can stores be failing.  Blaming online sales for this situation, simply ignores the glut of excess inventory caused by the pursuit of lower cost of goods in an economically unsustainable sourcing system.

Inventory Kills Profit

Although supply versus demand may be a viable predictor of future economic sourcing trends it is no longer a viable maxim for predicting profits.  Citing mass production efficiencies and negotiating a requirement for lower costs to support profit projections, is old school logic with disastrous results.  The disconnect between sourcing and selling causes merchandisers have to compensate with excessive retail pricing markups, to allow for the deep discount clearance sales required to clear the excess inventory. The systemic problem is maintaining any retail margin, since according to Accelerated Analytics, less than 25% of the inventory is actually sold at the retail price.  When wholesale buying decisions have to be made and financed months in advance the odds of matching inventory to sales are not good.  When you factor in inventory multipliers like color, print and size variables the chances of selling out an entire line of apparel at the projected profit are probably only slightly better than actually winning the lottery.

Fix the System

The greatest difficulty in the world is not for people to accept new ideas, but to make them forget about old ideas

—   John Maynard Keynes

Every day new “next big ideas” are touted as the biggest opportunity to capture the future.  Most of the time this brilliant break through is tied to a stratospheric idea like cell regeneration or artificial intelligence.  This future enterprise is soul stirring and often wallet building for the one-percent club, but it does little today for building the working base of our economy.  Jobs in today’s economy have been under assault by big business for years through the constant pursuit of bigger and bigger market share and market sector competitive control.  The top financial tier’s rationalization of ambition as an acceptable definition of greed has exacerbated the divide between Wall Street and Main Street.

Big business and big finance have made a huge error that ultimately could swing control back to local entrepreneurs and domestic manufacturing.  That error of cost based leveraging of mass manufacturing is almost totally dependent on business’s outdated concept of the industrial revolution.  The out dated maxim that if you can make it cheaper based on efficient mass production and the belief that the market will always expand to match production is over.  Today’s version of market expansion is to make it cheap and discount the price to create perceived consumer value.  Ultimately this strategy erodes profits and creates waste.  The retail truth is discounts raise sales but lower profits, higher sales at lower profit directly affect store operating margins and eventually close stores.  Sooner or later, less selling locations causes lower volumes and drives up manufacturing costs.  This trend looses jobs and further inhibits bringing back manufacturing.

Consumers are Driving a Paradigm Change

Article after article reinforces the change that a consumer driven formula of product/value is replacing the risky merchandising formula of price/value.  As consumer’s closets fill up from sale priced deals, product selectivity replaces price seduction and value shifts from price to product.  This shift in consumer purchasing paradigm is shifting the sourcing model to smaller orders and faster style shifts. Why should a shopper search their local store when the entire product universe is available online? Ultimately, this merchandising shift is further accelerated by the speed and selection offered on line.  The path of change is defined by the statistics that illuminate the decision to buy process for consumers. Although consumers still purchase about 85% of their apparel in stores and only about 15% online, the decision on where and what to purchase is influenced by a web search over 80% of the time, a trend that is growing every year.  This multi-channel purchase approach forces retailers to offer greater choice, theoretically increasing the number of SKU’s in the store’s floor space.  Retailers and brands that still buy based on the mass production principle of “volume = lower cost” are doomed to a “buy-stock-discount-dump” merchandising cycle.  Current strategies of “lean” inventory volume or selection are just band-aids since the influence of online choice continues to expand.  Under the current structure of mass manufacturing, reducing inventory volume increases production cost and increasing inventory choice can explode the pre-manufacturing and merchandising costs and drive higher manufacturing contract minimums.

Finding a Profit Sustainable Solution

Is there a “silver bullet”? Sure, there is always a silver bullet, solution.  The trouble is that everyone’s definition of their silver bullet is in the mind of the beholder.  However, there is one common denominator that seems to meet the definition of a solution that spans the economic goals of both Wall Street and Main Street.  That common goal is sustainable profits.  Years of experience and leadership responsibility have taught me that the simplest path to a common goal is to find the intersection of common tasks.  Reviewing the paths of retail stores, apparel brands and product manufacturing the task intersection required by all three is the holding of inventory.  So what happens if we get rid of the common requirement of holding inventory, does this create profits?  What if every product manufactured was already sold?  What if every product a retailer sold was replaced in real-time from a virtual inventory instead of warehouse full of mass produced apparel ordered months in advance, financed by factors and ultimately sold at discount or dumped in a landfill. 

The Profit Guarantee of the Virtual Inventory

Selling, ordering, manufacturing and fulfilling orders in real time from a digital SKU in a Virtual Inventory (VI) is no longer a technological reach.  We can now design, visualize, color, customize, sell, pick, produce and fulfill in hours or days depending on the SKU.  AM4U and its predecessors have spent 18 years and millions of dollars learning how to design, build and integrate demand factories capable of producing finished permanently colored apparel from a roll of greige fabric in just hours.  These Integrated Micro-Factories (IMF’s) use a customer’s purchase information to pull a digital SKU from a VI cloud and convert binary code into a finished custom retail apparel garment that matches the shopper’s selection.

Applications for Increased Retail Profits from Virtual Inventory

The Virtual Inventory dramatically affects the profits of all three tiers of the supply chain.  The Manufacturer sells and ships everything he makes, the Brand gets full mark-up and avoids tariffs and warehouse charges and the Retailer sells more goods at full price.  Here are examples of the impact at the manufacturing, brand and consumer retail levels.  Each tier of the sourcing and merchandising path has multiple concurrent strategies that can be used to balance production and to optimize profits for manufacturing and integrate multiple merchandising paths for brands and retail. 

Integrated Micro Factory Income/Profit Applications

Each of the four basic production strategies creates a different balance between volume and income.  This is because of the variation in production speeds for each station.  Balancing the productivity of the stations is a critical factor in optimizing both operational cost and maintaining customer deadlines.  Once the SKU is selected from the VI the digital printers and the heat press stations can produce the highest volume while the cutting and sewing stations produce the lowest volume per hour but the highest value added per unit.  

            Self Branded Online Sales

The highest profit application of the VI in manufacturing is self branded online sales, however this is also the highest risk application since it requires a manufacturing entity to design, market and fulfill it’s own product line.  These skills, cost and risk are not usually core capabilities of a production facility.

            Purchase Activated Manufactured Product Fulfillment

Partnering with an established product marketer in the retail and/or the online selling space can reduce risk and cost while increasing profit substantially.  Care is required to maintain silhouette discipline and to adopt other longer lead or partial production products to level the demand on internal sewing assets.  This relationship is a true profit sharing agreement with the marketing partner because of assurance of sell-through at retail price since the manufacturer is only producing pre sold product.  Two of the best apparel products to start are fast food uniforms and athletic wear.

            Roll 2 Roll Demand Fabric

This application is most often used to balance the load between coloring and cut/sewing.  The profit available is determined by the speed differential between the digital coloring station and production’s cut and sew stations.  Since the speed and labor cost of fabric coloring using digital technology is continuing to improve the disparity between digital print and dye productivity and the productivity of custom cutting and sewing continues to be a major roadblock to full purchase activated integration.  The most successful strategy to capitalize on this growing speed gap is to focus the additional productivity of the coloration station by producing printed fabric for traditional cut and sew contractors.  These contractors will increase their income by providing their clients with higher quality prints with no required minimums or expensive setup charges.  Since this service has more flexible deadlines that one-off pre-paid production it can be used to balance the production stations in the micro-factory.  Even though the profit level difference between PAM and demand fabric is often eight times higher for PAM the volume for demand roll 2 roll can produce income to at least cover operations and G&A costs.

            Wholesale Demand Replenishment

This income stream is the ultimate Demand Sourcing strategy, it is also the most difficult to employ.  Demand replenishment is the real time production of finished goods based on actual sales transactions at retail and online outlets.  Daily production is based on the quantity and velocity of goods needed to maintain the Days of Supply (DOS) projected by the retail customer.  This strategy is most effectively employed at the brand level or at retail and online sellers that can make consolidated daily inventory projections.  The biggest risk in this income source is the accuracy of the POS data that drives the calculation of the DOS daily production.  The key to deploying this strategy is to build from a single cut pattern that depends on decoration to define customer value.  Licensed character products like children’s pajamas and entertainment promotional item are a good place to start.  The value of this strategy is the ability of digital production to change prints on the fly to support hot items or change slow movers to a new image with out dumping non-selling conventional overproduction.

Demand Sourcing Brand Profit Applications

Brand level demand strategies are designed increase the percentage of sell through by creating a vertical control path between the retailer and the manufacturer or the consumer and the brand acting as a retailer.  These strategies free the brand to design and test many different prints and colors without risk.  The brand can also offer the retailer a number of high profit low risk “store within a store” options like the Endless Aisle.

             Brand Store Demand Replenishment

True Brand stores and Factory Outlet locations have the advantage of levels of operational control and reporting transparency.  This relationship can provide some measure of real time inventory management, the key ingredient for Demand Sourcing.   With some brands these locations are the perfect site for on site customizing with Direct-to-Garment (DTG) printing.

            Purchase Activated Direct Online Sales

Brand operated online sites which are now often used to clear excess inventory are much more profitable as custom fitted and custom decorated consumer sites.  They can also be used to reality test new products and designs using actual consumer transactions to measure sales potential.  Using a Virtual Inventory to support this site and products removes the risk and cost of development and preproduction costs and minimums.

            Wholesale Demand Replenishment

Demand replenishment of the brand’s retail locations allows a number of new relationships to be developed.  One such contractual change is the a “Style purchase” contract which allows the retailer to change the decoration and color of a product that is not selling while still offering the entire style selection on line or through the “Endless Aisle”.  The Style contract take advantage of digital printing’s key opportunity, the ability to change colors and designs on the fly.  The Style contract limits the pattern to the cuts and grades in production but allows for real time changes in print or colors based on POS results. Currently the biggest risk to DR is the inability of retailers to collect and report daily sales by SKU and to predict DOS and style corrections based on actual sales.  Brand verticality and POS data consolidation and prediction algorithms in PLM software can resolve this risk.  Style contract integrated with real time product sales history can optimize individual store offerings to fit local demand.

Demand Sourcing Consumer Sales Profit Applications

Purchase Activated Manufacturing (PAM) and POS based Demand Replenishment (DR) can replace risky single mass purchase forecast based sourcing for high-risk print based apparel.  Now that the technology is in place and production ready the missing piece to working demand sourcing is consolidated daily POS reporting.  The addition of sales DOS algorithms to PLM software can add this missing piece.  Demand Sourcing allows retailers to efficiently focus on customer product value by offering unlimited choice and/or personal customization. 

            Demand Replenishment

The demand replenishment strategy allows retailers and online sellers to use actual sales data to establish a product life path for each SKU.  By using algorithms based on test market and actual sales.  Weekly replenishment allows for constant adjustment and even product revision or replacement.  The sourcing team becomes much more of an inventory manager than a purchase negotiator.  The ultimate goal of “Never overstocked and never out of stock” becomes a retail reality.

            Purchase Activated Direct Online Sales

Purchase Activated Manufacturing (PAM) is an integrated sourcing and merchandising strategy that allows retailers to compete with online sellers with the advantage of previous live personal contact and huge virtual inventories. Retailers are able to offer customized and personally fitted product with almost no inventory risk as compared to online only stores which can face up to a 35% return rate.  Since retailers can establish a customer’s previous in store try-on purchase record they can customize previous purchases to new colors or prints or use sizes to offer new product to member customers.

            The “Endless Aisle” Merchandising Solution

The “endless aisle” (EA) is a term for the integration of the Virtual Inventory with consumer merchandising.  In an EA scenario the consumer can directly pick and customize product in a 3D/360° visualization from a vast inventory of production ready products stored in digital form.  To simplify the scale of this concept think of a hundred thousand square foot warehouse packed with apparel that can be digitally replicated on your laptop.  The EA cannot stand alone, it only functions if the VI is directly linked to a PAM factory that can produce and fulfill the consumer’s purchase on demand. The EA however has the advantage of both a physical in store consumer experience for local shoppers and an unlimited online choice for remote shoppers anywhere on the Internet.  Boutiques and store-within-a-store specialty retailers depend on consumer loyalty to produce the repeat customers they need to exist. The ability of the EA to provide choice and personal experience can ultimately be used to morph the virtual inventory into a personally tailored set of custom choices for each store patron.

 Summary

These sustainable profit strategies allow retailers and brands to compete in the world wide market while retaining the advantage of the customer reach in their geographic location.  These strategies require a level of cross-functional integration that is not currently the norm in most retail organizations, therefore it is recommended that the implementation should be specific to product lines that have the highest history of clearance discounts or overstock risk.  Many brands and retailers have tried to implement programs using digital printing or visual design software without complete integration of merchandising and sourcing so far most have been spectacularly unsuccessful.  AM4U has spent almost twenty years and millions of dollars developing the integration bridges, physical equipment and factory trials that have allowed us to experience most of the roadblocks and incorporate most of the successes of the Demand Revolution.  We are available to share that knowledge at bgrier@am4u.com.