August 10, 2022

The fashion supply chain crisis- how did we get to this point?

Theren Moodley
Theren Moodley
Co-Founder

The first 6 years of my career was spent in the fashion supply chain industry, trying to make sourcing and shipping for apparel brands quicker, cheaper and more efficient.

In those days (pre 2020), we aimed to fill containers with as much product as possible (therefore, a lower shipping cost per cube), build store fulfilment centres to be agile and adaptive, and most importantly digitize the whole product lifecycle, so that vendors, buyers and everyone in-between had complete visibility of the process.

It was work that few people knew, but played a part in keeping shelves filled and consumers with the latest products.

Now, fast forward two years, and supply chains seem to be everywhere in the news, with everyone having an opinion.

So, what I thought I’d do in this blog, is explain a little bit about how we got here, what brands and retailers can do to mitigate the risks, and where I see the industry going in 2023 and 2024.

😱 A crisis many years in the making

Shipping is the world's second oldest industry. No points for guessing what’s the first 😉. As long as there’s been the demand for products produced on the other side of the world, there's been services to move those products to the end customer.

One could even argue that the world's first incorporated company back in the 17th century, the Dutch East India company, was a logistics business, transporting products such as, spices from the East Indies back to Europe.

a ship from the dutch east india company
The worlds first major company was a logistics company

A cynic could argue the industry hasn't evolved much since then, and although the transportation and speed of production has certainly improved, the process has not.

An example being, a Bill of Lading 🧾 This is the official contract of ownership between, buyer, seller and freight forwarder. However, despite it’s importance, this doc is still principally created in paper document form and couriered from the port of origin to destination, in order for the cargo to be customs cleared and delivered to the final destination…...let that sink in for a moment 🙃

😷 Covid + the economy opening and closing = the perfect storm

What’s unique about this crisis is it’s link to both the demand and supply side of the economy.

Fashion and apparel have spent years outsourcing the production of products to various countries to benefit from cheaper production, higher quality and specialisation at scale. However, it’s this same sourcing strategy that has left brands in a rigid, inflexible position for when a perfect storm like covid stuck 🌪

First, let’s talk about supply

When Covid hit the West and lockdown induced economies ground to a halt, the production facilities in Asia slowed down production to match demand 🏭

This knock-on effect meant that carriers (cargo ships) had excess demand and space in their ships, that they struggled to fill 🛳 In order to protect profits and continue to operate, all of these carriers reduced the number of services they offered and took vessels out of circulation.

This move meant freight rates remained steady, supply matched demand and carriers were able to continue to keep cash flowing through the books 📖

The sledgehammer of demand

However, just as suppliers in Asia were adjusting to these new norms, the economies of the west began opening up again, fuelled with consumers who had months of lockdown savings and cash from covid induced government support schemes 💸

This lead to huge rise in demand for household products from those same factories in Asia 📈

And while those factories has a better chance of coping with the spike in demand, the carriers didn’t, with almost all keeping sailings at a minimum in order to maximise profits. The result was a jump in demand for freight with no change in supply, which resulted in freight costs rising to over $10k a container, up from $2k to year before 🤯

The knock on effect of this price hike was passed onto end consumers, causing the inflationary pressures we're seeing today.

freight rates are more than 10x their prices 2 years ago
The only way is up

Now, back to supply

Just when you thought things couldn't get much more volatile, throw into this mix the factory of the world, China, perusing a policy of zero covid, meaning brands have to deal with lockdowns, factory closures and production running at minimal capacity.

All of which adds furthers pressure to the bottom line and means that a landed product (a product price including freight and customs) is almost double the price it was pre covid 🥲

The situation now

This wack a mole approach means that shipping a product in a $10k container is the easy part. Finding a service still available, finding space on that service and ensuring that the product is going to arrive at destination in the agreed time is near on impossible.

For an industry that has relied on just-in-time production and moving products to shelves for certain promotions, this new norm is hard to stomach.

🧐 What can brands do to mitigate the risks, and what are the longer term trends for sourcing

Diversification

Unfortunately, for brands heavily reliant on one sourcing country there’s not much that can be done in the short term, apart from smaller MOQs and micro managing the tracking of shipments.

In the longer term however, brands have learnt that putting their eggs in one basket is a mistake.

A more diverse sourcing strategy with more vendors, suppling from multiple origins may be required to mitigate the risks of another black swan event, and a world that appears to be de-globalising 🌍

This will mean winners in countries such as Bangladesh and Vietnam, but also more expense for brands that will no longer benefit from the economies of scale of using one or two vendors, or the efficiency of moving product out of a developed economy like China 🇨🇳

Graph showing how much China exports
The world's reliance of China for exports

Near shoring

When I first joined the logistics world in 2014, it seemed like near shoring was just around the corner, with countries like Mexico and Turkey seeming likely to benefit and serve their close respective markets of the EU and North America 🇪🇺

That wasn’t however the case.

China was still cheap, efficient and almost as fast given the variety of shipping services available💨

That world is no more.

With landed product prices over double what they were, shipping services vastly unreliable and the West's de-coupling from the China, near shored countries will benefit.

It will also spur investment in production and supply chain capabilities in these countries, that will bring down landed costs and ensure future competitiveness 🧹

Visibility

Now, more than ever companies who have visibility of their supply chain are the ones who are benefiting the most 💻

From production and shipping, to customs clearance and final delivery, milestone tracking has always been an essential component of the industry, but more so in a world where a factory could go into lockdown any minute or a vessel that has a 50% chance of being delayed.

Logistics has many players, agendas and moving parts, and this crisis is only going to speed up the need for digitisation and building out the processes and systems to enable that to take place.

✌️The future

The future supply chain for fashion brands, at least in the medium term will be more expensive, time consuming and brittle, while new sourcing countries and vendors are found and systems implemented 💪

However, as brands settle into the new norms and adapt to the newly fragmented world, those who have diversified and invested in technology will come out on top.

Brands that are smaller, more agile and look for the opportunities out of the chaos, will become the leaders of tomorrow 📆

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