With logistics costs continuing to rise and the economic outlook uncertain, brands and retailers can keep their balance sheets healthy by making supply chain efficiencies
When sales and profits were steadily rising, many fashion retailers were happy to turn a blind eye to the hidden costs in the supply chain. Today, understanding the real price of bringing the latest styles to the shelves can make the difference between profit and loss.
Talk to most supply chain consultants and analysts and it becomes clear it is time to “think the unthinkable” when it comes to sourcing and distribution. The accepted economic model of manufacturing in low-cost countries and shipping finished goods halfway around the world is not the standard practice it once was.
For starters, traditional low-cost countries are experiencing rapid wage inflation; add to that dramatic increases in freight charges, a need to reduce time to market, and globalisation of brands and outlets and it becomes clear that not only are new distribution models needed but fashion retailers need far greater insights into the cost options. Can the use of air freight be justified in terms of reduced markdowns, for example? Or is it better to switch production to Europe and save on transport costs? Equally, how much pre-retail preparation can be moved further up the supply chain?
“If you can pick-and-pack to store level at source then you can pick for any store globally, so why not direct ship to the store rather than having everything coming into a UK distribution centre?” says Greville Lushington, head of brand logistics and multichannel at Aurora Fashions, which owns retailers including Karen Millen and Oasis.
Jonathan Pilbro, business director, fashion, at logistics firm DHL Supply Chain, sees global retail growth as a key driver for change. “Retailers are moving into markets like China where they manufacture, so it makes sense to have distribution facilities in these countries and direct ship,” he says.
And if you do direct ship, how does that impact store costs? “Most fashion retailers have a big black hole in their analytics when it comes to understanding the true cost to serve,” says Judy Blackburn, senior manager at retail consultancy Kurt Salmon Associates. “They also need a different mindset to plan allocations early so that goods just need to be cross-docked at the port for direct delivery rather than going to a distribution centre for three or four weeks. And if you do direct ship to store, then what is the cost of preparing those goods for the shelves?”
As Pilbro points out, most merchandisers are “obsessed with the product, not how it travels”, but by adapting packaging or using hanging systems within containers it is possible to reduce the amount of “resuscitation” a garment needs on arrival at its destination. Even so, is it more cost-effective for store staff to unpack and remove packaging or deliver floor-ready merchandise from a central warehouse?
Handle with care
“Fashion retailers need to understand the true costs of handling products,” says Blackburn. “If they don’t tell their suppliers the best way to deliver products, then extra handling is bound to add to the costs.”
Shifting pre-retail activities further up the supply pipeline can bring significant savings. Nick Fox, logistics and operations director at World Design & Trade (WDT) - owner of the Fullcircle, Firetrap and SC51 (formerly Sonneti) labels - estimates that the business has cut costs by 20% to 25% since 2008 by moving pick-and-pack to China with the help of its freight-handling firm, Geodis Wilson. “There were teething problems, inevitably, especially as we produce our software in-house and so the IT system is in English, but we’ve made the Chinese operation paperless with extensive use of handhelds that depend only on numbers, so that gets around the language problems,” says Fox.
Importantly, too, as the Chinese economy matures, is that WDT’s warehouse - based in the developing port of Yantian, close to the major Shenzhen economic zone - has a stable workforce and high operating standards. “Five years ago, it would have been very difficult to do as the infrastructure was lacking,” says Fox. “But China has changed enormously in the past couple of years.”
Having moved pick-and-pack to China, WDT is now looking to push quality control further up the pipeline too.
Aurora Fashions has pick-and-pack in China on the agenda and plans to set up operations in Hong Kong or Shanghai by the end of this year. Lushington believes that greater collaboration between retailers on filling container loads from China should also be possible. “If there is mutual gain, then why shouldn’t we share containers with our competitors?”
Razat Gaurav, senior vice president for customer operations at supply chain software firm i2, believes retailers should get more involved with shipping at country of origin rather than leaving it all to third parties. “Freight forwarders are paid by container so have no incentive to fill containers efficiently and not all retailers have an idea of how much you can pack into a standard 40ft container,” he says.
“Traditionally, retailers haven’t managed freight at the port of origin but we’re now seeing a shift in international commercial terms with retailers taking control from the port of supply.”
By improving freight consolidation, optimising container usage and routing and adopting best practices to source transport capacity and negotiate rates, Gaurav believes retailers could save between 5% and 20% of their freight costs. “Global transport management is still in its early stages,” he says. “Traditionally, retailers have outsourced much of this activity but as import volumes grow they really need to get better at understanding the costs involved.”
Transport costs are just the start; understanding costs throughout the supply chain is essential if they are to be controlled and managed efficiently. “Many fashion companies lack visibility across the supply chain,” says Andrew Dalziel, marketing director, fashion, at business IT firm Lawson Software. “They need integrated systems to provide both up-to-date information on their inventory position and related financials to see delivery costs and other hidden charges in order to monitor margins.”
Even such basic concepts as consolidating loads and shared container use could bring rapid rewards. According to Grant Liddell, key account development director at shipping firm Uniserve, freight charges from the Far East are likely to hit $5,000 (£3,290) a container within weeks. “Last year, prices fell to $500 (£329) a container from about $3,000 (£1,974) in early 2008,” he says. “But they were back to $4,000 (£2,633) at the start of this year and are still rising.”
Consolidating loads is an established way to cut costs and one that high street retailer Reiss has adopted during the recession. “We have 15 suppliers in the Far East and we try to get at least 10 of them to ship together,” says head of group logistics Paul Petts. “We’re dealing in small quantities of each line and timing is critical, so we use more air freight with pre-retail at source. Although quality control is in the UK - we could move that up the pipeline as well.”
The need for in-time deliveries has tended to mean that expensive air freight can be balanced by low production costs but with costs in China set to rise and little sign that freight charges will fall, moving production closer to home to cut shipping costs begins to look ever more attractive.
Key strategies to consider
- Speed is expensive - improve forward planning and demand forecasting to reduce the need for expensive fast ship or air freight.
- Think about packaging options to ensure garments arrive in the best condition.
- Collaborate - work with others to consolidate loads or share distribution capacity and warehousing.
- Learn from other sectors - supermarkets share sales data with suppliers to cut lead times, so why shouldn’t fashion retailers?
- Improve supply chain visibility so you know exactly how much inventory you have - in store, at the warehouse, in transit and on order.
- Do the sums - unit cost is just the start.