As world commerce recovers from COVID-19, apparel sourcing still faces a storm of challenges: demand volatility, logistics jams, rising costs, and more. As never before, the supply chain has been thrust to the top of executives’ agendas. And it’s clear that supply-chain disruptions—in particular, the price of shipping and raw materials and strains on capacity—are here to stay.
A fundamental shift toward a sourcing model that is flexible, fast, sustainable, digitally enhanced, and consumer-centric is required. Our 2021 Apparel CPO Survey—drawing on the reflections of chief procurement officers (CPOs) at 38 international brands and retailers—assesses the industry’s progress on this journey, looks ahead to 2025, and offers some strategies for staying the course.
Our findings confirm that dramatic change is underway. Half the companies surveyed have embarked on organizational transformations by revamping their sourcing and design processes, their ways of working, and their commercial priorities.
Supply-chain stumbling blocks
The road ahead will not be easy, however. There are many obstacles in the way of today’s sourcing executives:
- Shipping disruptions: Harbor shutdowns, port congestion, container shortages, and capacity issues have all contributed to delays.
- Volatility of demand: Post-COVID-19, we see uneven recovery and demand spikes. Consumers’ pent-up spending power has been released, straining production and transport capacities.
- COVID-19: Whole country manufacturing bases are still ramping up, or down, in the wake of COVID-19. Uneven global recovery rates will continue to affect business for at least the next year.
- Raw materials: The industry is beset with supply issues due to the slowed flow of raw materials from China. A shift to nearshoring is hampered by limited raw-material supply and hefty price markups.
- Online sales: During COVID-19, there has been a surge in online sales—which are not set to revert to prepandemic levels. At the same time, competition from the new generation of online fast-fashion players is growing.
Costs on the rise
The end of the era of sourcing-cost deflation has never been clearer. For the first time in ten years (since our very first Apparel CPO Survey), hikes in shipping costs are a leading concern for sourcing executives (Exhibit 1). This, too, is not going to go away anytime soon: further consolidation of shipping companies may worsen capacity limits, and costs are expected to stay high.
Raw-material prices are surging, and further price increases are expected. Price markups in nearshore markets are contributing to the trend. Many companies plan to accelerate their shift to more sustainable fibers—but this will increase the probability of feedstock uncertainty.
Jolted into the speed and flexibility transformation
These are not simply short-term disruptions, and they are challenging the fashion industry profoundly. Adjustments will be substantial, and internal barriers to organizational transformation persist (Exhibit 2).
Apparel companies have been jolted into a new trajectory, prompted to boost agility, shorten lead times, and pivot toward demand-driven supply chains, among other trends:
Simplifying the assortment: The majority of companies are planning for dramatic change in their assortment planning and design decisions, shifting toward reduced product complexity. Many will follow a “less is more” approach, with greater in-season reactivity and reduced options.
Focusing on efficiency in design and product development: Fabric consolidation, platforming, and prebooking are continuing to grow. Virtual design is a boom technology, enabling speed and flexibility, cutting development time, and boosting cost efficiency.
Deciding sourcing-country mix: Apparel companies are shuffling their sourcing-country mix, looking to reshoring, and particularly nearshoring, to secure the supply chain. The right balance between reliability and flexibility must be found: diversified strategies for flexibility and speed include accessing a larger number of source countries and more frequently using dual or multicountry sourcing.
Forging partnerships: Companies are collaborating strategically with trusted suppliers—especially those that invest in digitization and upskilling and are fast and flexible regarding production cycles and batch sizes. Long-term, committed relationships with a consolidated number of sophisticated suppliers are increasing, with clear winners emerging. Suppliers that continue to rely on old ways of working are facing headwinds, as almost half of the companies surveyed plan to cut their supply base by up to 25 percent.
Smartening up sourcing with digitization: Digitization of the supply chain has emerged as a vital element of success, enabling speed and flexibility, both in analytics and in process. Much has changed on this front, with the pandemic accelerating the use of virtual sampling, digitized interfaces, analytical decision making, and improved operational and design processes. As companies embark on more holistic digital transformations, further investment is needed.
Moving to a new operating model: Sourcing teams are taking on more roles and will develop different skills. At the same time, many companies are planning to increase their number of sourcing offices. What is clear in this reshuffle is the decreasing importance of Hong Kong as sourcing hub.
End-to-end (E2E) product-development processes are in focus. Successful organizations are rethinking internal structures, tools, capabilities, and processes. With the increasing emphasis on full-price sell-through and net-product margin, companies are starting to adapt their targets for sourcing organizations.
Accelerating for success
What these trends have in common are new ways of working for product teams and suppliers; a need for internal upskilling and for more skilled suppliers; a shift in the role of sourcing offices; and a holistic change in organizational structures to fit customer demands. Prominent obstacles that persist are siloed structures, a tendency to prioritize cost over product margins, and a lack of digital tools and skills.
We propose a set of strategies to help the industry overcome the sourcing hurdles ahead and achieve a new trajectory for success.
1. Turbocharge digital tools and capabilities
Sourcing executives are at the forefront of the digital transformation, driving skills development and ensuring that ownership of these tools resides in the organization. Investment in internal digital upskilling, new tech developments, and other capabilities is paramount. A fully integrated setup is necessary: rather than focusing on selected tools, we urge apparel companies to work on full-scale digital and analytics transformation.
2. Optimize sourcing strategy for net margin
The organization of the future will define calendars that allow for healthy margins: Many calendars are too vague or not granular enough. Investing in the role of calendar manager and clarifying roles and responsibilities will unlock significant value.
It will be vital to develop strategic nearshoring capacities. A clear vision of the requirements of different product types, as well as the development potentials of each sourcing country, is crucial. Setting proper guidelines and KPIs for sourcing organizations, not just for cost but for flexibility and net margin, will help drive the change.
3. Create a (virtual) ecosystem
Partnering with a set of key suppliers is crucial to achieving flexibility and aids transparency. Onboarding suppliers onto the product life-cycle management (PLM) system pays off very quickly, as does achieving full transparency on manufacturing and delivery timelines. At the same time, building the ecosystem beyond tier 1 to ensure sufficient and flexible raw-material supply is becoming more important. Creating a (digital) ecosystem will not only improve speed and flexibility, but also provide assurance that products are sustainable and ethically produced.
4. Align the organization with new incentives and roles
Many organizations struggle with misaligned incentives and priorities. We strongly believe that mapping joint KPIs across functions is necessary to achieve the required E2E alignment. Beyond purely financial concerns, a lack of process and planning focus, including poor calendar discipline, has long-term repercussions. We advise including these factors in organizational targets.
The successful sourcing organization will ensure focus is not simply on the best cost price and rethink the responsibilities of sourcing offices. As sourcing teams spend less time on traditional tasks like order management, they will improve in other areas, including supplier-relationship management and digital and analytics skills.
Achieving a new trajectory based on speed and flexibility will require a full-blown transformation of apparel sourcing. To maximize the bottom line while meeting shoppers’ needs, organizations must focus on both internal and external factors. Keys to success will be a digitization turbocharge, as well as a full operating-model overhaul, including improved calendar discipline and an integrated, E2E mindset; these are radical changes that can help jump-start the brand and keep driving it into 2025 and beyond.
Download “Revamping fashion sourcing: Speed and flexibility to the fore,” the full report on which this article is based (PDF–7MB).
