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.
