COVID-19 has sent shockwaves through the fashion industry’s global sourcing and production operations. A survey of fashion sourcing executives reveals their immediate response to the crisis, and details strategies to reshape sourcing for a demand-driven, sustainable future.
The fashion industry’s sourcing operations have been hit hard by COVID-19. Businesses are scrambling to ensure their survival while also facing humanitarian challenges for both their own employees and those of their suppliers and partners.
Our large-scale survey, conducted between April 14 and April 22, 2020, draws on the perspectives of 116 sourcing executives predominantly in North America and Western Europe; among them, they manage more than $120 billion in sourcing value. We also included insights from more than 230 other Sourcing Journal subscribers, who are stakeholders across the value chain, including suppliers, agents, and academics.
Sourcing executives indicate that the crisis has already led to steep cuts in sourcing volumes. The impact will hit hardest in the second quarter of 2020, when two-thirds of fashion-sourcing executives expect a cut in volumes of at least 20 percent (Exhibit 1).
In our recent McKinsey Global Fashion Index review, we estimate that revenues for the apparel and footwear sectors will contract by 27 to 30 percent in 2020 year on year with even deeper declines in some subsectors and geographies following five years of positive growth.1 This is in contrast to our pre-COVID-19 growth forecast of 3 to 4 percent. Retailers and brands are facing lost sales owing to store closures and shifts in consumer sentiment, and many will experience inventory misalignment, with excess spring and summer product requiring additional discounting.
Fashion’s interconnected global value chain has been severely disrupted, with suppliers moving into distress and millions of workers in some of the poorest countries facing loss of income. Fashion retailers and brands need to act with responsibility in this time of crisis while also ensuring the survival of their businesses.
Sourcing executives have four key priorities in their immediate response to the crisis
Our survey finds that sourcing executives are focusing on four key areas.
Securing inventory and managing the ramp-down and ramp-up of supply chains. Sourcing executives are negotiating a delicate balancing act to minimize inventory buildup, ensure newness in assortment, and secure future supply—all while being mindful of the financial and humanitarian impact of these actions in the countries of production.
Most sourcing executives are adopting a mixed approach to managing existing orders, including reducing the number of orders, reducing quantities per order, and canceling finished-goods orders. Suppliers, meanwhile, face difficulties in fulfilling orders because of shutdowns, shortages of raw materials, lack of labor, cash-flow issues, and difficulties in reaching shipping ports. More than half of the sourcing executives reported that their suppliers are only partly able to deliver orders in the second quarter of 2020 while seven percent indicated that suppliers cannot fulfill orders now.
Optimizing cash flow along the supply chain and ensuring the optimal trade-off between cash position, profit impact, and supplier stability. Sourcing executives have indicated a variety of responses when it comes to making payments. Only a fifth are paying for more than 75 percent of their orders as agreed. More than half are taking responsibility for raw-material liabilities and others are renegotiating terms or deferring payment on more than half of their orders. Some brands and retailers have committed to paying production workers’ wages, with 13 percent doing so for more than half of their orders.
Proactively managing financial risk across the entire supply chain, with an approach tailored to suppliers. Cancellations and order reductions are putting suppliers into financial distress. Most fashion-sourcing executives report that at least 25 percent of their suppliers are facing financial distress now and anticipate that more than half will be in this position in six months’ time, putting millions of jobs and livelihoods at risk.
Many well-known fashion brands and retailers are taking steps to manage the financial risk of their critical supplier base proactively, though 22 percent of sourcing executives report that they are not taking any support measures. Some sourcing executives are providing prepayment for orders, a larger share are taking responsibility for payment of raw material and fabrics, while the majority are focusing on collaborative cost-reduction efforts.
Adjusting internal costs, including open commitments and operating expenses of the sourcing function. More than half of sourcing executives have applied temporary staff measures to help manage operating costs, including salary reductions, furlough, temporary layoffs, and deferred compensation. Permanent layoffs were mentioned by less than 10 percent of respondents.
Beyond immediate crisis management, the industry needs to use the opportunity for change
In recent years, the industry has started to change its out-of-date sourcing model characterized by long lead times, maximizing order sizes, and relatively low flexibility. The COVID-19 pandemic offers an opportunity to accelerate transformation toward a demand-driven supply-chain model and sustainable sourcing.2
Our survey reveals that 76 percent of the international sourcing community, including Sourcing Journal readers, believe that the COVID-19 crisis will accelerate flexibility and speed over the next year. Crucial ingredients in a demand-driven supply chain include segmented assortments with smaller batch sizes, increased transparency, removal of functional silos, utilizing highly efficient processes supported by tools and analytics, and making use of dual sourcing and nearshoring.
With consumerism put to question and COVID-19 laying bare the social impact on the value chain, the time is also ripe for reshaping a course for sustainability in the fashion industry. The majority of fashion stakeholders believe that some core sustainability trends have been accelerated by the current crisis. More than 70 percent see closer partnerships with suppliers increasing and more than 60 percent believe that sustainable materials will become mainstream.
There are four elements that fashion companies need to tackle to enable the systematic reshaping of apparel sourcing:
Remapping the sourcing mix to better balance risk, cost, and flexibility. Fashion stakeholders and sourcing executives indicate that sourcing volume will likely shift from China to other Asian countries over the next year. At the same time, the need for agility and risk reduction is boosting nearshoring and regional supply-chain development. Some 60 percent of the broader group of fashion stakeholders expect at-scale and highly capable apparel-manufacturing clusters to emerge more quickly in nearshore markets, for example, in Eastern Europe and Central America.
Forging stronger supplier partnerships to drive innovation and secure supply. The industry will see a move away from purely transactional relationships. Almost three-quarters of sourcing stakeholders and Sourcing Journal subscribers expect to forge closer relationships with suppliers, partnering on issues like end-to-end process improvement, finding new investment models, and making industry-wide progress toward social and environmental sustainability.
Digitizing the value chain, and keeping many of the recent innovations as common practice after the crisis. During the crisis, companies have been forced to scale up innovation along the entire fashion value chain, including design (3-D design, artificial-intelligence planning), merchandising and planning (virtual sampling, video signoffs), B2B sell-in (digital sell-in, virtual showrooms), sourcing and supply chain (nearshoring, vendor integration), and consumer engagement (virtual shows, social selling). Two-thirds of the broader group of fashion stakeholders believe that the wide adaptation of intelligent sourcing will accelerate over the next year and almost 40 percent of sourcing executives plan to hardwire predictive analytics for capacity and production planning into their processes.
Adapting operating models—and mindsets. People, organizations, and partners will need support to move toward new ways of working. Roles and organizational models may need to be readjusted and many of these changes will require a rethinking of corporate culture and measures to drive accountability and incentivize change. Most importantly, companies should redouble their efforts to develop ecosystems with innovation partners and experiment with new collaboration models.
To succeed in the next normal, beyond COVID-19, fashion players need to join hands with suppliers and invest in strategic partnerships and innovation. Tough questions need to be asked and answered to understand exactly how this next normal operates in practice (Exhibit 2), but executives should not waste this opportunity to completely reshape sourcing practices for the long term.