Depending on your industry whether a manufacturer, distributor/wholesaler or retailer, we are all dependent on a supply chain. As the world shrinks, the supply chain becomes increasingly complex from reliability, risk, costs, regulation and consumer demand. The channels of supply and demand are also increasing. One basic need which is more applicable today than it was twenty years ago is the ability to manage costs but more importantly manage margins. Once a product is produced and literally hits the road from the factory, additional costs are added from storage and distribution, but the cost of the product is essentially complete. At this point the game has shifted from managing costs to managing margins. The difference between managing costs and managing margins is cost only has one element of control and that is to minimize additional cost contributing to the “landed/delivered” cost of the product (e.g. fuel, logistics, warehousing, etc.). When a business shifts its perspective to managing margin, a whole new world of levers and control is opened since margin is a factor of revenue less your cost. Therefore, managing margin becomes a process of controlling costs while also maximizing revenue. This process is ever more apparent in the Fashion and food industry. In the food industry, especially with perishables and products with a shorter shelf life, once the product is produced it continually loses value/margin until it is sold/consumed or inevitably a total loss if disposed. As Heidi Klum points out in the reality show Project Runway, “In Fashion one day you’re in and the next day you’re out!” sums up the fickle trends and changes in consumer opinions which could destroy margins and send your products to the outlet stores. The demands in the fashion industry are far greater than creating a repeatable product such as an electric motor or switch. However, by studying a more complex process one can learn a significant more about best practices to better manage their supply chain in a rapidly changing world. For instance, many fashion and apparel manufacturers have moved manufacturing or outsourced to low cost labor markets such as China, Thailand, Vietnam, etc. to reduce the cost of the product and compete in a world of tighter margins. The challenge for the industry however becomes managing a long lead time of creating new designs, forecasting demand, procuring textiles, which can be months, then producing a product to ship for the next summer or winter season depending on the apparel. The problem is by this time it could be too late because fashion trends may have changed and you already produced a product which will not appeal to the consumers tastes and you must take large hits in your margins to clear the pipeline of merchandise.
Nike has built a strong brand over the years and constantly falls victim to this dilemma. Their solution was to outsource manufacturing to low cost markets and produce a larger variety of styles with a shotgun approach to having some high margin product mixed with some inevitable losers. In addition, like many manufacturers they applied technology as the solution by deploying SAP to improve their supply chain and better manage their costs. SAP is probably one of the most advanced products on the market in this area and they have shown to produce a strong ROI for Nike in their technology investment. However, this only tackles the one and most simple dimension of the supply chain in managing product costs and not necessarily managing or maximizing margin. Take for example the retail chain Zara. Zara is one of the fastest growing fashionable retail chains in the world. Unlike many other retailers, Zara is vertically integrated from design, production and retail. It is headquartered in Spain and actually procures much of their product locally in Spain, Portugal, Africa, Eastern Europe and Turkey with minor supply coming from China and other Asian countries. True the cost of the product may not be the lowest, however Zara’s success is understanding the fashion industry in that it is about matching fashion to consumer demand to maximize margin by looking at the big picture rather than producing a low cost product. The company produces a far more number of skus than competitors and can have a new product in stores in 4-5 weeks and modify items in 2 weeks,increasing sell through of its merchandise. Fashion in Zara is treated as perishable as a banana in a grocery store.
This strategy works well because the fashion is now seen as trendy and not seasonal which increases the number of trips a customer makes to the store to see what is new. The company has grown to over $7 billion operating in over 73 countries. Sagin has worked with companies like Zara to bridge the gap between process and technology to implement forward solutions. Managing the supply chain is more than applying the right technology. It is about understanding the whole supply chain and managing margin. When a product leaves the factory a world class company uses its tools and processes to redirect shipments to higher demand markets with greater mark-ups and deploys promotional and demand management strategies to maximize margins and the flow of merchandise. Now that is Fashion Forward Thinking.
Contact Rich Sypniewski at email@example.com