How to Avoid the Next Supply Chain Shock

LONDON, United Kingdom — Like so many fashion brands during the pandemic, Los Angeles-based apparel manufacturer Ari Jogiel pivoted to making face masks. They were the only thing possible to produce when non-essential factories were shut down, and there was no shortage of demand. But there was an unexpected problem: the elastic needed was in short supply.

“I feel like we bought all the elastic left in LA,” Jogiel said. “We just have to keep expanding to try to find suppliers in Mexico or overseas or on the East Coast.”

Jogiel is not alone in discovering that the pandemic had turned sourcing once-common materials into a game of whack-a-mole. Manufacturers from China to Italy to California abruptly shut down as the coronavirus spread, creating ripple effects across global supply chains. Even when supplies were available, getting them to the right place was difficult, as shippers prioritised medical equipment and ports struggled to keep cargo moving.

While a demand shock precipitated by the retail lockdowns in key western markets has overshadowed these problems in the months immediately following the start of the pandemic, not knowing when — or if — crucial supplies will arrive is making it harder for the industry to recover as lockdowns are eased in many countries. Canadian designer Hilary MacMillan said she was facing as much as a nine-week delay to import fabric for her collection from some mills in Italy.

Fashion supply chains are being reorganised and further consolidation is likely.

Even as factories come back online, new problems are constantly emerging. Brands are changing how they approach their supply chains in ways that will resonate long after the crisis. In many cases, flexibility is now a top priority. So is transparency, as the ability to keep tabs on where fabric and raw materials are at any given moment can now make or break a business.

Alpargatas, the Brazilian maker of Havaianas and other brands, has added more rubber suppliers, for starters.

“The goal is to preserve the ecosystem,” said Chief Executive Roberto Funari. “We believe one of the… main competitive advantages we have going forward is this resilient supply chain.”

Supply Shock

Even today, many suppliers remain closed, or are working at reduced capacity because of new social-distancing requirements. Shipping is still slower than it was before the pandemic. Over half of respondents to a McKinsey & Co. survey of sourcing executives said their suppliers are only able to deliver part of their orders this quarter.

Manufacturers have problems of their own, including cancelled orders from brands that had to close stores and are now stuck with warehouses full of unsold spring clothes. Tal Group, which manufactures products for brands including Michael Kors and Patagonia, expects order volumes to be down between 40 and 50 percent for the rest of the year. In April, it announced it would close operations at its two factories in Malaysia.

Fashion supply chains are being reorganised and further consolidation is likely. Some are moving operations to new countries they see as better-positioned to handle the stresses of the pandemic.

“It’s accelerated our move out of higher-cost countries,” said Tal Group Chief Executive Roger Lee. The company closed operations at two Malaysian factories in April and is eying acquisition targets in less-expensive locations.

We're all going through trial periods to try and be flexible and try new things.

Some brands are moving their manufacturing out of China. This was a trend before the pandemic, due to rising costs and a simmering trade war with the US. In the McKinsey survey, around 60 percent of respondents said they expected manufacturing clusters to develop more quickly in markets like Eastern Europe and Central America that are closer to customers in the US and Western Europe.

“People just don’t want to be caught like last year when we had a thirty-day notice that tariffs were going to increase without being able to plan effectively,” said Yossi Nasser, chief executive at intimates manufacturer Gelmart. The company is doubling down on investments it’s made in the Philippines and looking at longer-term investments in high-tech manufacturing nearer to its core US market.

Deeper Partnerships

There are signs that the relationship between brands and their suppliers could also change, even as many crumble as a result of the financial havoc caused by the pandemic. Though many companies have cancelled orders and refused to make payments with devastating impact on garment workers, others are taking steps to protect and support key manufacturers.

Alpargatas has added new suppliers, but it's also shortening payment terms for some manufacturers who are heavily dependent on its business. Gucci this week announced it will extend a partnership with bank Intesa Sanpaolo to make it easier for small and medium-sized Italian manufacturers in its supply chain to gain access to loans at favourable rates.

Manufacturers are also racing to adapt their offerings to meet new demands. Hong Kong-based PFGHL has shifted some of its factory capacity to focus on producing face masks and loungewear in response to shifting demand.

“We’re all going through trial periods to try and be flexible and try new things,” said PFGHL Vice President Hilmond Hui. “The flexibility of certain facilities will be key.”

Digital Transformation

For many, embracing new technology will be central to adapting to the demands of a post-Covid world. Already, the disruptions caused by the pandemic have forced brands to take on digital tools to allow for things like virtual samples that previously struggled to gain traction.

“For years, every brand found a lot of reasons why virtual samples weren’t possible,” said McKinsey Senior Partner Karl-Hendrik Magnus. “In Covid, these bottlenecks had to be wiped away because there was no other way.... There’s real change that won’t be reversed.”

The dividing line between winners and losers are the ones who will be able to adapt fast and in an intelligent way.

Sourcing platform SupplyCompass has seen a 400 percent increase in inquiries about its services in the last month, as brands scrambled to manage sudden holes that had appeared in their supply chain or looked to find new manufacturing partners who could help them pivot to more relevant product categories.

“Trying to develop all these things using Excel and Zoom isn’t fit for purpose,” said co-founder Flora Davidson. “It’s highlighted overnight these processes everyone knew weren’t ideal.”

Manufacturers are also doubling down on investment in new technology and automation. Alpargatas is raising its spending plans to $90 million this year, from $40 million in 2019.

Resonance, an integrated fashion group based around a technology that allows for on-demand manufacturing, is looking to open up a manufacturing facility in New York and has moved up plans to break ground on a materials factory in the US. By focusing on automation and producing on demand, Resonance believes it can be competitive within the US market.

But while the crisis is driving change, for many, real transformation will be a struggle.

“It is a trend that was already there and it’s getting accelerated, but we think it will be hyper-accelerated,” said Funari. “The dividing line between winners and losers are the ones who will be able to adapt fast and in an intelligent way.”