Balancing responsiveness and commitment in supply chains

Supply chains offer an almost unlimited number of points of conflict. Unquestionably, there are opportunities for partners to jointly increase revenue or lower costs. But it is almost always easier for one party to identify ways to lower his costs at the expense of other supply chain members. Even if there are programs that increase the overall pie, there is still the question of how to split the resulting gain. As the Wall Street Journal tells it, there is currently a lot of tension in apparel supply chains as retailers demand more responsiveness from suppliers while suppliers are leery of ramping up capacity without greater commitment from retailers (Tug-of-War in Apparel World, Jul 16).

Tension is rising in the apparel industry, as retailers push garment makers for faster turnaround on smaller orders ahead of the key Christmas holiday season. The old model—where retailers placed orders six to nine months in advance and suppliers ramped up factories to produce high volumes cheaply—has been thrown out the window after a recession that left stores swamped with unsold clothes and idled factories.

To lower the risk of a fashion miss, more retailers and apparel companies are pressing their suppliers to crank out a small order quickly—allowing them to test styles in stores—and then fill re-order requests even faster, a tactic known as chasing, says Josh Green, chief executive of Panjiva, an international trade data service.

Greater responsiveness is obviously a great thing for retailers and apparel brands; they get to acquire more information before having to lay out cash for items on store racks. It is even better in that it forces risk onto suppliers. They are the ones that need to line up workers etc who may be left twiddling thumbs if a particular retailer ends up with no outstanding hits this season.

But shorter lead times mean more uncertainty for factories that have been burned when orders were scaled back or, in some cases, canceled altogether. Wary of bringing capacity back too fast, some manufacturers are keeping some production lines off line and turning down even established customers rather than risk having workers sitting around doing nothing.

The resulting scramble is pushing up retailers’ supply costs and leaving some wondering how they’re going to keep styles in stock. “There’s a real jockeying by these companies at different places within the supply chain to figure out who is going to absorb risk and who is going to absorb costs,” says Panjiva’s Mr. Green. “It’s not just convincing their suppliers to take smaller orders. It’s convincing them to take orders in a totally different way.”

Some retailers have already been burned by overestimating the flexibility of their supply chain (or, equivalently, overestimating their vendor’s tolerance for being jerked around). Ann Taylor had a dress that sold out in four days but could only come up with an extra 100 units when it tried to get resupplied.

There an aspect of this that seems to be the inevitable fall out of last holiday season. Two years ago, the economy stunk and retailers all had too much stuff. Last year, retailers ordered conservatively and the economy bounced back and discounting was limited (see, for example, this post from December). This year, the economy appears stronger but there are always risks in retailing.  The Ann Taylors of the world want to catch the upside but they like avoiding discounting. And supply chain conflict is born.

Clearly, if it is physically possible to replenish a hot moving item at a reasonable cost in a matter of weeks, the supply chain as a whole would be better off and should find a way to make it happen. This is one of the instances in which players can make the pie bigger if they can agree on how to slice it. One possibility is to use options. Let the brand or retailer pay to reserve capacity and then pay a reduced amount if the capacity is actually used. (The article suggests that some firms are already doing this by booking factory time while delaying specifying how they want that capacity used.) This at least allows the retailer to assume some of the risk from the factory while still having the benefit of greater responsiveness.