Shift to At-Once Orders Rattles Soft Goods Industry
By Tom Ryan
While the shift toward
at-once programs, or just-in-time inventory, has been going on for years
in the apparel and footwear industry, it is clearly accelerating due to
the tightened credit market and consumer slowdown. But vendors remain concerned
about how the counter trend toward fewer pre-season buys is reshaping futures
programs.
For retailers, it’s become
even more necessary to keep inventories to a minimum to preserve cash flow
and meet lender requirements in today’s troubled economic climate. Increasingly,
many retailers are foregoing the often deep discounts offered in pre-season
bookings to avoid being stuck with huge markdown risks at the end of the
season, retailers told Sporting Goods Business.
But stores have been
pushing for better at-once programs for years because buying closer to
the season and even in-season leads to more accurate buys around consumer
demand instead of waiting up to nine months for futures orders. Working
on leaner inventories also enables retailers to chase hot product instead
of waiting for last-seasons’ slow-sellers to clear of the sales rack. Finally,
frequent in-season deliveries help stores manage their cash better.
But many retailers claim
vendors have been reluctant to share the inventory risks and build up adequate
in-season inventories to meet their fill-in needs.
"The retailers have
to have more support from the manufacturers on having replenishable merchandise
rather than up front orders where the retailer takes all the risk and financing
responsibility," stated a head merchant at a major regional full-line
sporting goods chain who declined to be named.
Said an assistant GM
at an independent sporting goods store, "Many product categories can
get into an over-inventory situation using futures orders. The more we
can use fill-ins and at-once orders the better control we can have."
While vendors clearly
don’t want the inventory risk, they also note that futures programs enable
the discounts that bring the coveted high-margin buys to retailers. Many
also believe the shift away from futures programs will ultimately hurt
product development and bringing new ideas to market.
"The industry will
see less demand, which will mean less of a buy with our factories,"
said Brian Good, senior manager of credit and A/R at Puma. "When or
if the product becomes in demand and the customers want to do at-once business,
they will be unable to fill in due to the decreased buy which will affect
all…Only those companies that have lines that repeat every year will be
in stock. Brands that have new styles year after year will become very hard
to get a hold of."
Brad Gruber, national
sales manager at Grendha Shoes Corp, said that with vendors being forced
to forecast narrow and deep, there will be little differentiation between
retailers and margins will consequently suffer.
Said Eric Tung, president
of FERA Intl. Corp., "There are limits to how fast product can be
packed, shipped, delivered, and out on the floor. So there is greater risk
for the retailer of lost sales."
Discussion Question:
What are the merits of at-once versus futures programs in the soft goods
industries? What are the risks of increasingly relying on quick-response
programs to meet inventory needs?
Well, with just-in-time you run the risk that product won’t be there just in time. However, you have to balance that with the cost of carrying excess inventory at a time when consumer purchasing has slowed to a trickle.
J-I-T can be particularly dangerous in soft goods and apparel. The fashion angle makes it essential to get product into the stores as quickly as possible to take advantage of trends in products which have a relatively short “shelf life.”
The volume of product now manufactured in Asia brings up a lot of supply chain issues and makes just-in-time problematic. This is why a number of European fashion houses have returned to production in Eastern Europe. It’s closer and often just as economical as using facilities in China.
As retailers continue to reduce their inventories, the only way that this can possibly benefit them is if they get significantly better at forecasting. But that most likely will not happen. So what we will have is more out-of-stocks on-shelf, resulting in slower sales, and then a drop in sales, which will result in more product sitting in someone’s warehouse.
The fact is, whether a product is sitting in the manufacturer’s warehouse, or the retailer’s warehouse, as long as it is not out on the floor, it is not going to sell. That is why Costco works so well. There is no warehouse. Product ships from the manufacturer and ends up in the store, and ends up being sold. Inventory belongs on-shelf. When the retailer starts to forget this, the retailer loses their value proposition.
Zara does design, order, and on the floor in 3 weeks. That means it is possible. Of course their supply chain is different, so the communication between retailer and contractor works well. With collaboration, that kind of communication can at least get close to this. Without collaboration and trust between vendors and suppliers this process won’t work and the market will go to those companies who do make it work.
The fundamental issue being discussed in this article is the fact that no one, neither retailer nor manufacturer want to be stuck with excess inventory nor do they want to risk losing a sale when the retail shelf is empty. Supply chains are pretty darn efficient at taking an order and getting it to the retailer once the need to place an order has been recognized. Sure, more collaboration between retailers and manufacturers could result in some incremental efficiencies but nothing revolutionary. The case for a revolutionary change is discussed in the following article titled “RFID Ready For Takeoff.”
These two discussions should be linked. Just-in-time delivery of merchandise to the retail floor is only as good as the accuracy and timeliness of the consumer demand signal. Significantly high levels of out-of-stocks exist because POS systems will never be good enough to support J.I.T. Item level RFID can tell everyone in the supply chain, from the retail store manager all the way back to the manufacturer’s production team, what is selling now. Where is it selling. What inventory is available to replenish against that demand. And perhaps most importantly, provide the timely and accurate data needed to feed the analytic and predictive analytic engines being used to model and predict consumer demand and production forecasts.
Who cares if 2008 is or is not the year when RFID turned the corner? The real issue is whether RFID can be an enabling technology for a retail industry ready to embrace J.I.T.
Camille is right. It is possible to shave off significant time, provided you make appropriate adjustments in the supply chain. In soft goods, that might mean going to gray goods and then adding color on demand. But, in this economy, the choice of running out-of-stock is the lesser of two evils when compared to the cost of holding inventory nobody wants.
The problem here is that manufacturing and delivery lead time for the vast majority (99%?) of CPG vendors exceeds the order lead time most retailers want to work under. Yes, JIT ordering for retailers IS the answer. And with an immense amount of cooperation, planning and mutually beneficial self interest, it can be accomplished. But not on the scale it would require for retailers.
The problem isn’t with the “vendors,” it’s with reengineering the supply chain. The CE industry has tried to do this for the past decade, with limited success (partially as a result of the geographic location of finished goods production). The auto industry accomplished this…by developing a completely domestic supply chain shared by the Big 3 and supported by them. The entire supply chain had to be reconfigured so that the flow of materials from one stage to the next was managed and no one single point had to bear the inventory risk beyond its capability.
Given that the vast majority of products are manufactured overseas, the complexities of building a JIT supply chain which delivers to multiple product categories are beyond the skills, resources, and economic interests of most vendors. Mattel has tried…and failed. Liz Claiborne has tried…and failed. For a retailer to effectively institute JIT ordering, ALL of its vendors would have to be reconfigured to support the new demands.
Using Zara as an example is simplistic. Zara doesn’t manufacture according to the shifting demand of a portfolio of retailers…the Zara system is based on assessing consumer responsiveness and leveraging the relatively flexible nature of apparel manufacturing. This model DOES NOT APPLY across all product categories, or even across an apparel model covering multiple demographic and lifestyle segments.
In other words…this is just not going to happen.
I could go to NYC today and by the end of next week have competitive goods in my store and the right brands for any segment of the apparel business. That is not true every season but being a merchant means adjusting to the conditions that exist today and using leverage with vendors when you have it just like they always do when the market favors them. Apparel, unlike some other retail categories, is too quick and too cut throat for collaboration with and win win with vendors…it is survival of the fittest (and quickest). Buyers who understand turnover and how to properly use OTB win and those who go to trade shows twice a year and buy 90% of a season six months in advance generally die real fast unless they are in Idaho with no competitors for 60 miles in any direction.
Too bad energy costs rise so sharply from time to time. If energy stayed cheap, air freight from Asia would make everyone’s supply chain issues much easier. Yes, no one wants the inventory risk and no one wants to lose a sale. But everyone has a choice: either employ “hot buyers” or do some low-cost simple market research to test new assortments. Do both those things and you’ll be great for a long time. Do one or the other, and you’ll probably survive. Do neither, and unless you’re lucky, say goodbye.