Protecting The Supply Chain: Why Brands and Suppliers Must Work Together
Fashion suppliers and manufacturers are still reeling from the COVID-19 crisis aftermath. Closed stores and slow sales have prompted retailers to cancel billions of dollars worth of orders, effectively paralysing the fashion supply chain.
In Dhaka, the manufacturing centre for most fast fashion retailers, more than USD $3 billion worth of orders were either cancelled or put on hold. A similar situation was experienced by factories in China, who produce for retailers like Zara, H&M and Primark. Overall, apparel manufacturing in the nation has reduced by 2.51 billion pieces in February compared to last year’s and garment exports have also shrunk by 20%.
This wave of order cancellations will not only jeopardise future productions in the pipeline but also displace millions of workers. For countries like Bangladesh that employ over 4 million garment workers working on minimum wage, the consequences will be detrimental.
With many questioning how the fashion supply chain will be able to survive this turmoil, it is critical for brands and manufacturers to start working together to protect the supply chain as one cannot exist without the other.
Legalities Behind Order Cancellations
We must emphasise that a purchase order is a legally binding contract. Before an order cancellation from either party is agreed upon, reevaluate all contracts or agreements to determine if there are any clauses that allow a party to be ‘relieved from liability’ should circumstances beyond the party’s control prevent the party from fulfilling their end of the contract.
These force majeure clauses should apply for cancellations, delays or differences in payment. Meaning, by cancelling an order, your company could be breaching a contractual obligation which makes you liable for any damages as a result of this breach.
Furthermore, should your contract include a clause for any pandemics or quarantines to fall under a force majeure, there are still many factors that require clarification and the extent of the terms may also vary on a case-by-case basis.
In the event that your company is subjected to a cancellation, it is paramount that all actions, responses and documentation in regards to COVID-19 are recorded to support any claims or provide proof that all other contractual obligations have been complied with. This is an important step to ensuring each party fulfils their responsibilities.
However, a cancellation does not mutually benefit either party. For brands, no product means no cash flow. Any brand that has halted their production, has also functionally cut the lifeline of their business and most of us in the industry understand how difficult it can be to restart this engine. Not only will this ruin ties with your stakeholders but it will also affect business continuity after the economy regains balance.
The first priority in this current scenario should be opening negotiations with all your stakeholders. To prevent invoking a force majeure, explore every possible option whereby all parties can be satisfied.
The impact of the COVID-19 has affected every single link of the supply chain and no party is excluded. Never say yes to an outright cancellation, instead, identify ways to renegotiate the terms of your contract. For merchandisers and buyers, assess your current line sheet and future OTB for the next three months. With the category shifts at play in the market, it is practical to adjust SKU allocation to items with higher demand and prepare for replenishments of these products.
To determine the optimal SKU count, we analysed the three top British high-street retailers with similar assortment sizes. Based on the performances of these retailers in March, approximately 3000 – 4000 SKUs is the market average for product sell-out.
Deep diving into the performance of the tops category, we can see 518 SKUs out of 789 of the total sold out items at full price is allocated to t-shirts and crop tops. This data indicates where consumer demand lies and what sub-categories should go into production.
The same chart also shows that 74% of the sell-out for blouses are driven via discounts, which tells us seasonal items or occasion wear are not suitable for the current season. In this situation, work together with manufacturers to find an effective MOQ, renegotiate price or delay the delivery to the next season. Consider reimbursing the loss from this order by adding SKU allocations for highly demanded styles or increasing restock units. At this stage, margins will be compromised but try to find the middle ground that both parties can mutually agree on.
For brands that have only bought fabric, there is still an opportunity to pivot the fabric allocation in your line sheet. In the video below, our Director of Fashion Analytics, Barry Ooi explains how to repurpose fabric ordered for a specific style and use it for a more demanded category instead.
Handling Committed Stocks
For committed stocks that are already in transit, it is critical to come up with a strategy to maintain healthy inventory levels. Taking account of your current stock and warehousing capabilities, break down your new-ins into groups of products that can be launched first and which should be delayed.
If the number of off-season stocks starts to pile up, liquidate as many of these products as possible. Opt for deeper discounting now before needing to discount more in future, however, be careful not to make this a habit. Rampant discounting will affect cash flow in the long run.
Constantly watch stock movement and study what your competitors are doing – even during this time, consumer sentiments can shift day by day. Understanding present market conditions and consumer demand is key to detecting that inflection point when spending makes a rebound. You will need to be prepared with the right stock at the right time.
What Lies Ahead
Ultimately, both brands and manufacturers should take responsibilities in preserving the supply chain. Ethically, negotiating better terms to keep all parties functioning is a far better option than simply finding an easy exit. The livelihood of millions is at stake – be flexible to offer discounts and sacrifice high margins so we can reap the benefits of tomorrow.
The economy will eventually repair itself, and until then, we must lay down the groundwork for the road to recovery. The fashion industry constantly preaches about collaboration and sustainability, this crisis is the perfect opportunity to put those values in practice.
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