It’s not exactly a secret that the global pandemic has thrown a wrench in manufacturing, so let’s talk about how to thrive despite the circumstances. This post will focus on supply chain and inventory management, and we’ll try to keep it simple and understandable without getting bogged down by technical jargon. That will surely be a challenge.
Our focus in this article is on the fashion apparel supply chain and why localizing production is the least risky and most sustainable option to keep fashion brands not only operating but innovating (even before pandemics). It may be a bit dry, but the best information usually is, so bear with us as we consider the advantages of bringing your manufacturing process closer to home while sourcing local materials.
Let Me Begin By Saying…
A lot of our discussions here at PlatformE are about on-demand production in Europe. On-demand means different things to different people. In our definition, "on-demand" production is fast-turn, small batch production local to the end consumer. This can be a one-off customized item or a rule-based batch order.
Now let's talk about costs. We are going to compare landed costs for a global supply chain and on-demand costs in a local supply chain in the following case scenario. First, let’s clarify what these terms mean.
Costs associated with on-demand local supply chains: These include materials and component pricing, labor, overhead, packaging, tax, insurance, and warehousing.
Landed costs, global supply chains: Similar to local supply chains, but with additional costs for freight, customs clearance fees, import duty and taxes, insurance, inventory holding, and currency conversion.
As a part of these costs, we will also take into account the environmental costs of each supply chain. As we measure this, we will look at 1) water used to create an item and 2) carbon emissions from freight or shipment of finished goods.
Okay, Now for Some Math…
An international supplier located in Country X is tasked with producing 1,000 blouses for Brand A at a cost of $3.52 per unit, totalling $3,520.
This international supplier imports raw materials from Country Y to assembly. Considering taxes, customs clearance and freight costs, Brand A has roughly $4,815 to add on top of the merchandise cost. Landed cost at Country X is then $8.335 for the 1,000 blouses, which represents $8,34 per unit.
The items must first be warehoused in Country X for $1,496 monthly and shipped to the warehouse for $5,000. When the product is in the warehouse and the sales begin, it has a 60% sell through rate and a distribution cost of $3/item (let's assume every order has one unit and sales run for one month) to ship directly to consumers. This item has a final cost of $21.85 per item when sold through.
As an alternative, Brand B decides to operate an on-demand model without an inventory. When Brand B starts selling its product, it produces only what sells, so this product has a 100% sell-through rate. Brand B orders 100 blouses from a Portugal-based factory for $13 per unit, for a total of $1,300. Materials imported from international Country Y to Portugal are subject to a tariff that is included in the increased cost of the materials used for that item, and assembled products are not subject to a duty since they are assembled locally. For $4.50/item with shipping, 100 units are dropped-shipped from the factory to the end-user (assume there is one unit per order). This item has a landed cost of $17.50/item with 100% sell-through.
By comparing only the labor and materials cost per unit, Portugal production costs two times what it does in low cost labour regions. However, adding in the landed costs to the equation closes the gap.
In the end, where you see the differences between the two supply chains is the margin on each product, the speed to market, the sell-through, the mark-downs, and the cost of capital.
When we analyze the per unit margins we see that they are almost identical. However, it's their sustainability that really sets them apart. On-demand, domestically produced products generate less than 1% of the CO2 emissions of international products. It’s amazing how much carbon you can save by not shipping items over vast distances.
For apparel manufacturing, these numbers provide a good overview of the costs associated with using global versus local supply chains.
When talking about manufacturing in Portugal, the advantages are that the country is geographically positioned in a privileged location to produce and distribute to both the European and American markets. As the westernmost country in Europe, and boasting a strong and innovative textile industry, Portugal is an exceptional example to follow for nearshoring and on-demand production.
Where Does This Model Fall Short?
There is no model that can account for all factors. For simplicity's sake, we have omitted these points:
We have left out calculations of socio-economic impacts from labor conditions, for example, deaths linked to work environment hazards. While many Portuguese labor laws include educational training grants to improve workforce mobility, poor and unregulated working conditions in countries such as Bangladesh have caused hundreds of deaths in the past. Needless to say, it’s a major advantage when your work force is not in mortal danger at all times.
Other environmental effects of the lifecycle of clothes are also not included, such as water use for dyeing, non-renewable energy use, industrial land occupation, freshwater toxicity, toxicology in humans (carcinogens and such), air pollution, acidification, and more. During this discussion we have only considered C02 during production (shipments and assembly) transportation.
Ways to Cut Down on Risk and Waste
There are three ways your brand can reduce waste and risk in the supply chain:
1. Develop a Process for Reducing Waste, Collecting, and Automating Data
Supply chain innovation begins at the moment of creation. Create pieces that minimize waste by challenging your design team to reduce waste in pattern making and material selection. As soon as you have the design done, you can collect data pertaining to costs and decisions, automating a lot of the work and resulting in savings down the line.
2. Identify Materials Needed for Inventory and Plan Sourcing
Your apparel product's core cost, and often its distinctiveness, is determined by its materials. To reduce waste and shipping costs, seek out mills or distributors that are close to your production facility. Consider materials with sustainable properties that can be reclaimed easily. You can reduce overprinting of custom printed materials by choosing custom on-demand printing resources. Although not EVERY component is locally made, we encourage you to go deeper in your planning and sourcing of materials.
3. Invest in Local Production
Bring your production partners closer or re-shore them. If you combine no-minimum local production with a successful product and a low-to-no-inventory method, the costs end up being nearly the same as landed costs of the same item produced in larger quantities abroad even if the labor costs are higher.
When and How Will You Take Action?
Now more than ever it is important for companies to remain agile. With COVID-19 disruptions halting production in Asia and elsewhere, reshoring production is not just about setting a sustainable path for the future but also about maintaining continuity.
PlatformE is a tech ecosystem that connects your point-of-sales to the supply chain, connecting brands and retailers to a network of low minimum manufacturers that can manufacture on-demand in 2-3 weeks. Our team at PlatformE has helped hundreds of brands worldwide leverage the above strategies to become more sustainable both financially and environmentally. Because of limited inventories and more cash flow, brands can test concepts, boost productivity, drive creativity, and showcase beautiful services and products to end users.
If you think that on-demand local small batch production could be add value to your brand, you may want to learn more about it. Come talk to us!