New analysis by Kearney shows that continued supply chain disruptions could cost the North American apparel and footwear industry between $9 billion and $17 billion in lost EBITDA (earnings before taxes, depreciation and amortization) in 2022.
The consultancy said it calculated this estimate shortly before the Omicron COVID-19 variant emerged and is likely conservative. The report puts the size of the American apparel and footwear industry at $400 billion in total annual revenue.
“Back-to-back years of a global pandemic have forced North American apparel and footwear brands and retailers into a strategically tenuous waiting game,” said Kearney in the report. “At some point over the next 6-to-18 months, they should be able to harvest renewed growth from pent-up demand. People will resume spending more evenings out, return to offices and schools and otherwise be out in the world where they will want to look their best. But the industry was also hit by major supply chain challenges in 2021 that could be an ongoing obstacle to profitable growth.”
These include a wide range of unanticipated increases in 2021, including the cost of cotton (up 40 percent), transpacific container shipping (up 300 percent), air freight (up 50 percent), and OTR freight (up 20 percent), while labor shortages drove up logistics, warehousing and retail wages.
The study found apparel brand networks remain susceptible to a wide range of supply chain demand shocks, including:
- Potential factory shutdowns due to geopolitical reasons (Ethiopia, Haiti, Myanmar) and health risks (Vietnam, India COVID shutdowns)
- Lack of control of tier-two suppliers (fabrics) or directed buys leading to an inability to produce;
- Potential Human rights violations or environmental concerns damaging brand reputation;
- Brands inability to source cotton from the Xinjiang region in China unless proven to be produced without forced labor;
- Non-controlled DCs could shut down due to labor violations (working hour limits);
- Ocean freight is crucial to a brand’s multi-region sourcing strategy and tends to have variable costs;
- DCs may not have the capabilities to support recent channel shifts to DC or re-commerce efficiently;
- COVID-related government stimulus temporarily increases consumer spending;
- Poor forecasting leads to insufficient transportation capacity and service issues;
- Work from home shifted demand to different product categories;
- Parcel and last-mile still adjusting to explosive e-commerce growth, leading to increased cost and lower service levels
Kearney benchmarked hundreds of supply chain preparedness to absorb unexpected challenges in ways that maintain reliability and minimize costs, ranking firms on a trait the consultancy defined as “resilience.”
Kearney wrote in the report, “Resilience means being able to rapidly flex or repurpose assets across your supply chain in response to unanticipated supply shocks or competitive shifts, such as new customer requirements, emerging channels and innovative, tech-savvy challengers.”
Resiliency was measured based on the World Economic Forum report, a study of more than 400 organizations collaborating with Kearney. The study found that only 12 percent of companies qualify as “resilience leaders” who have rigorously prepared to cope with supply chain disruptions profitably.
According to Kearney’s study, what sets resilience leaders apart includes:
- Fifty-eight percent of leaders actively redesign product portfolios to drive simplification and create modular assortment architectures.
- Eighty-seven percent of leaders ensure financial agility through capital and variable costs access.
- Forty-four percent adapt distribution methods to ensure supply chain continuity.
- Sixty-four percent actively design owned brand supply networks to create multi-tier visibility and increase resilience.
- Seventy-eight percent place focuses on risk management and scenario planning on corporate scorecards.
- Sixty-eight percent invest in connecting end-to-end partners into a single digital ecosystem to ensure information reliability and speed.
Suggestions in the intermediate term for vendors include:
- Complexity reduction: Reduce the long tail of SKUs fully digitize product development.
- Optimize ocean shipping: Rethink global product flows and carrier strategy to acquire capacity and improve service levels.
- Fresh sourcing strategies: Build redundant supply bases with strategic partners, preposition materials, book, and guarantee capacity, eliminate samples.
- Inventory management: Shift to AI demand planning to sense and respond quickly to changes in demand and share sell-through data with suppliers in real-time to position materials and capacity and anticipate replenishment.
Kearney wrote, “Longer term, we see companies improving resilience via nearshoring and reshoring, to make their supply lines less vulnerable, while also building up regionalized supply chains within their existing footprint. Platforming could also have a big impact, as we often find high levels of fabric commonality and interchangeability across underleveraged brands. Apparel and footwear companies can use that commonality to reduce costs and flexibly prioritize within their product portfolio when disruption strikes. The overall goal is to deliver products on time reliably, to the customer’s complete satisfaction and at a highly competitive cost. But the approach is fundamentally different—melding planning and execution into a simultaneous process.”
The read the study, go here.
Photo courtesy Adidas