Monday, April 2, 2018

Profit Building Demand Sourcing Strategies for Today's Retail Apparel Market


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

Wednesday, February 28, 2018

Learn the Vocabulsry of Demand Manufacturing


Demand Manufacturing Glossary


The most important aspect of today’s evolutionary shift from the mass manufacturing of the “Industrial Age” to the advent of the “Digital Age” is the promise of Demand Manufacturing and Sourcing which captures sustainable high profits through a digital “Virtual Inventory” (VI). This opportunity to tie production directly to sales minimizes wasteful over production and the resulting environmental impact while providing a quantum jump in product choice and wholesale and retail profits.
Demand Manufacturing is divided into two production paths that are defined by the customer. Individual pre-paid consumer custom products are produced using Purchase Activated Manufacturing (PAM) and wholesale production that replaces actual retail product sales in store or on line is called Demand Sourcing (DS). 
An Integrated Mini-Factory (IMF) is capable of both manufacturing paths. Demand Sourcing allows the online or brick and mortar retailer to operate in the dream state of "never out of stock and never over stock"

Now that the technology is tested and available it's time to define the terms used to describe the elements of Demand Manufacturing:


Active Tunnel Infusion (ATI)

A permanent coloring process developed and patented by AM4U, Inc. that uses clean physics with no water instead of chemistry to dye and/or print fabric.

Color Space

Display monitor screens are portrayed in pixel based Red Blue Green (RGB) color space. Digital printing appears as dot arrays of Cyan, Magenta, Yellow and Black (CMYK) color space.

Color Cone

A graphic representation of all the factors required to be in alignment to reproduce matching colors job to job and/or between digital printers.

Color Profile

An ICC profile is a RIP translation table that provides RGB, CMYK or Lab color values directions to the nearest CMYK printable value for each color. Profiles are not used for color correction on a file-by-file basis.

Configurator

Software used online to modify an image or product. Usually used to change the color and/or embellishment on an item pictured in a catalog or customizing display.

Cost of Goods Sold (COGS)

The cost of product is calculated as the total cost of wholesale products actually sold and shipped or retail products actually purchased at full or promotional price. “Cost of goods sold” replaces “cost of goods”

Cost of Units Sold (COUS)

In demand manufacturing units are not produced until after they have been sold. Since there is no pre-financed physical inventory the cumulative cost per unit is calculated as product is produced. “Cost of units sold” replaces “cost per unit”

Custom Stock Unit (CSU)

This inventory designation represents a personalized product appropriate for sale to a specific individual or individuals. In unit manufacturing there are very few situations where a CSU exists without the actual sale already in place. Forecast based CSU’s that remain unsold represent the largest risk of inventory liability.         

Days of Supply (DOS)

The speed of product throughput and shipping determines how many days of supply the production line needs to manufacture to successfully manage the consumer available inventory so that at least one of every offered SKU is available during the selling cycle. DOS replaces “inventory levels”

Demand Sourcing (DS)

Buyer’s restocking order caused by retail sales rate and DOS

Digital Core

The digital core of a product is the descriptive binary data that never changes whatever process; assembly or logistics instructions are attached as variable instructions to the digital core. This is part of the Tech Pack for apparel.

Digital SKU

Once products have completed the design and development process they are registered with a design number and stored in a digital folder of SKU marker sizes. Once a production style is in the digital inventory it is ready to be assign a search path and added to the Virtual Inventory (VI) for production on demand.

Digital Support Instruction (DSI)

The DSI for a product is all the supporting materials inventory information required to produce one or many of that particular SKU. In order for the DSI to be to quickly available to the active scheduling roster, the integrated GSU status and ERP (see below) must be current.

Digital Twin

The “Digital Twin” is a sophisticated virtualization model developed by Black Swan Textiles to compare and facilitate existing systems. A factory utilizing the Digital Twin methodology has modeled all manufacturing equipment, operators, and processes, enabling it to simulate the operations necessary to assemble any particular product.

Direct to Garment (DTG) & Direct to Fabric (DTF)

Printing machines that print directly on finished garments (DTG) or directly on fabric roll goods (DTF).

“Endless Aisle” Retailing

A retail display using a touch screen, body scanner and video mirror to offer endless VI choices to a consumer. Displays can include a try-on product that can be visually customized and produced for delivery through store pickup or home.

Generic Stock Unit (GSU)

This inventory designation is normally used for items that can be assembled into a number of different products. Although GSU's are usually roll goods or parts in their basic form (greige or PFP fabric) the designation is also used for items, which are partially assembled but still may be used for many products.

“Grays”

The sewn and finished blanks used to confirm the fabric, fit, production speed and process steps for a specific silhouette. Grays are often part of an “endless aisle” display or are used as a merchandising tool to reduce returns in swimwear

Integrated Mini Factory (IMF)

One of the key features of an Integrated Mini Factory is that all of the coloring, printing, cutting, sewing and fulfillment are under one roof. This allows for the ultimate in “lean” manufacturing because the minimum can be one custom unit or a multi unit retail replenishment order that matches consumer sales.

Job Tracker

An optical reader and / or a RFID signal track each job and piece through the production path.

Landed/Duty/Paid Cost (LDP) 

Actual cost of imported products including: materials, labor, transportation, duties, forwarding, warehousing and internal distribution.

Linearization

Linearization is an iterative process used to control dot placement for each color for a particular device, ink and substrate using software and press settings. This process balances the primary colors and dot placement. It is performed before ICC color profiling.

Micro Merchandising

Using social media and other online aggregation tools to identify and target specific silhouettes, colors, fabric and decorations at special interest individuals and groups.

Point of Asset (POA)

Point in the production path when a GSU is transformed into an irreversible SKU awaiting sale. Items passing this point are a liability until finished and shipped even if they are pre-purchased.

Purchase Activated Manufacturing (PAM)

A pre-paid purchase order, usually individualized, that triggers a production event.

Process Integration

Building the bridges between separate technologies to produce a demand-based seamless path between product design, sales and marketing, coloration, cutting, assembly, finishing and fulfillment. Connecting these developed products requires technology, technique and field experience.

Product Cycle

Once a style folder is registered, the product cycle can begin, usually with sales samples followed by initial stocking orders. Replenishment orders follow based on actual consumer “take away” until the product can no longer sustain the merchandise turns to maintain its place in the retail store inventory.  Depending on the terms of the replenishment contract the style may remain in a digital catalog for individual ordering.

Product Performance Index (PPI)

The predetermined index of product velocity (turns) times gross profit that a current product must meet to remain active (e-tail) or on the shelf (retail). If a product does not meet this index its “digital instruction” in the Virtual Inventory is retired but still available on order. Maintaining a continuous table of PPI tracking by SKU is the key to increasing sell-through and maximizing profits.

Raster Image Processor (RIP)

The RIP is the Raster Image Processor software that translates the pixel based RGB color on the display screen to printable CMYK color and resolution for actual production.

Replenishment Contract

The basic document that describes the criteria for production of a particular style is the replenishment contract. This document sets the DOS standards for order content and logistics timing as well as finishing, packaging and order fulfillment.

Style Cycle

Design and development of a Style Group (see below) involves the traditional process of pattern making and new process of fabric building. Pattern making is the traditional process of determining the shape and look of the garment and then the grading and reduction of the garment to a digital cutting marker for production. Fabric building is the selection of the white fabric style (silhouette) and the printing of decorations and colors to determine the print choices, which will comprise the style group.

Style Group

A Style Group is a single or group of garment silhouettes that occur in preset graded sizes on the same white fabric. The customer can choose from preset or custom print or color. Since process color cost is constant, one of the key merchandising advantages of digital production is the ability to change colors and prints on the fly without additional cost in a single style group. This allows the brand sales force to offer exclusive prints to each retail buyer.

Style Contract

A Style Contract set a total purchase volume then allows a buyer to change the decoration and color of a SKU within the Style Group on short notice without penalty. This flexibility allows merchandisers to correct for a slow or non-selling SKU.

Stock Keeping Unit (SKU)

This inventory designation is the first product cost point on the consumer side of the POA (see above). Products at the SKU stage can represent assets if they still can be customized to add significant value, but they generally represent the first level of inventory liability.

Selling Cycle

The period of time a retail product is on the shelf before it is retired because it cannot maintain the predetermined PPI.

SMART Book

The Style Marker ART (SMART) book is a manufacturing quality control tool that contains all the customer approved process samples needed to check the production quality at each station in the manufacturing value chain.

Tracking ID (TID)

The TID is an order number assigned by the ERP or PLM schedule software that appears on each piece of a garment and is removed when sewn. The TID creates a continuous reference to the VI data (see below) and the product tracking dashboard.

Virtual Inventory (VI)

The VI is the searchable digital warehouse of SKU's and configurator resources.

For more detail and information click: http://virtualinventorymanufacturing.blogspot.com/2017/03/building-domestic-apparel-manufacturing.html