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.