“You cannot ‘incrementalize yourself’ into what’s happening in the industry today. It isn’t operational improvement; it’s a new business model.”
That was the message delivered by Chainge Capital chairman John Thorbeck to a packed crowd of retail executives at last week’s Sourcing Journal 2015 Summit in New York.
The “it” Thorbeck refers to is the process by which fast fashion pioneer Zara achieves more full-priced sales, lower inventory and significantly improved cash flow than any other company in the fashion space.
Thorbeck, who coined the phrase “The Zara Gap,” and who works with companies in style-related markets to improve their speed to market, said this is an extraordinarily important time in which we are “seeing a sea change in the industry.”
For many years, retailers and brands have tapped into lowest-cost sourcing and distribution strategies to enhance profits and grow sales, but these improvements have begun to show diminishing marginal returns. The next big frontier will be to make major improvements in product speed and flexibility, as Zara has so successfully done, making it the benchmark player of fast fashion.
Companies need to focus on the flexibility part of the equation from which many of the gains in earnings will be realized. In fact, Thorbeck said that by focusing on product speed and supply flexibility rather than on just margin and turn, fashion companies can tap into a huge opportunity to significantly improve profitability and increase market capitalization.
There are several steps companies should take for lead time optimization, including staging capacity, hedging materials so that you can improve forecasts during the selling season, and postponement, or the delaying of the transformation of a product into its final form at the latest moment possible.
Though a well-known concept in supply chain management, postponement is rare in fashion companies. However, since demand for apparel and other fashion-driven products is difficult to forecast, postponement is an ideal model for the sector, since retailers and brands suffer significant margin erosion due to both markdowns and stockouts.
By implementing its speed to market process, Zara has been able to mark down far fewer of its products than retailers employing traditional sourcing strategies. Those items that Zara does mark down are discounted at a much lower rate.
Companies practicing lead time optimization should be able to improve speed to market from 90-120 days to 14-21 days, a 90 percent reduction. Thorbeck said that companies can achieve better forecast accuracy, because of shorter lead times, and huge improvements in working capital utilization, presumably taking advantage of the longer payment terms from suppliers as compared to when payment is received from customers. “Most of the industry is a cash user, of 145 days of working capital, Zara’s got -45 days. They are a bank. They are generating cash, not using it.”
Thorbeck said that in Europe, retailers are becoming attuned to supply flexibility, but that U.S. retailers need a bigger culture change to make this happen.
He challenged the executives in the audience to think about their concept of change, and whether the changes going on in their companies are incremental experiences, helping them move up its existing life cycle s-curve, or transformational change, which results in a dramatic shift to a completely new s-curve.
Companies also need to think about innovation in a new way. Thorbeck identified three kinds of innovation: those that are sustaining, those that drive improved efficiencies, and those that are disruptive.
Disruptive innovations, or product or services that transform an existing market by introducing simplicity, convenience, accessibility and affordability, have, not surprisingly, the most positive impact on a company.
Fast Fashion, defined by Thorbeck as the rapid translation of design trends into multi-channel volume, certainly qualifies as a disruptor, if not the most important disruptor in the industry today.
“If fast fashion hasn’t convinced you,” he said, “wait till Primark makes an impact here in the U.S. market.”
Judith Russell, Sourcing Journal