During the COVID-19 pandemic, the apparel industry underwent an interesting phenomenon – movement disruptions caused delays in shipments to retailers. Retailers responded to this by ordering too much stock to better serve demand. However, inflationary pressures and economic uncertainty rose after the pandemic, resulting in billions of dollars worth of unsold goods.
Retailers cancelled or reduced their order volumes for the upcoming 2023 season. As a result, upstream manufacturers saw fabric exports dropping by 20%, yarn exports falling by 40%, and a 30-40% reduction in factory capacities. This was also followed by layoffs, worker strikes, and a massive skills loss – hurting manufacturers’ abilities to meet renewed demand as inflation subsided.
This is a classic case of the bullwhip effect sending tremors up the apparel supply chain. This blog discusses the bullwhip effect, its impact on the fashion supply chain, and the case for collaboration to minimise its detrimental impact on apparel manufacturers.
Understanding the bullwhip effect
The bullwhip effect occurs when small changes in demand at the retail end become amplified as it moves up the supply chain towards manufacturing. This happens when a retailer reduces the order volume from their wholesaler or manufacturer based on small changes in demand. These changes could be real or predicted.
As a result, information about the demand changes does not reach the manufacturers in time. They may often respond to such speculative demand changes by disproportionately increasing production.
The bullwhip effect in the fashion supply chains could be caused by several reasons like:
- Order batching: Retailers often place orders in bulk rather than in small, more frequently delivered batches. Orders are placed once enough demand has accumulated. This means that orders aren’t placed uniformly, and therefore, retailers may order more or less compared to the demand. Any misinterpretation of this information can lead to the creation of the bullwhip effect.
- Communication issues: Lack of proper communication can lead to overestimation of demand on ground. Manufacturers may end up producing more, resulting in excess inventory.
- Ration gaming: In case the manufacturer’s inventory is scarce, retailers and other downstream players may often place larger orders and beef up their own stocks to meet their customers’ demand. This throws a wrench in the entire supply chain, as manufacturers may increase production to meet this inflated demand.
- Long lead times: In case of delays in the production time, manufacturers may not be able to keep up with actual demand, creating a bullwhip effect.
- Unforeseen exigencies: Movement restrictions, like the ones caused by the COVID-19 pandemic and trade route disruptions in the Suez canal due to geopolitical tensions, can cause demand uncertainty which could take a long time to be communicated to the manufacturers.
The bullwhip effect impacts the already fragile fashion supply chain negatively. It is characterised by a disconnect between demand and supply, which can result in:
- Excess inventory which is expensive to store due to high holding costs;
- Stockouts which makes it difficult to fulfil orders and require manufacturers to rev up production; and
- Inefficiencies in production because of inability to adjust factory capabilities to changing demand.
Manufacturers must collaborate with other actors in the supply chain to minimise the effects of the bullwhip effect.
Importance of collaborative supply chain planning
Some of the major reasons for the creation of the bullwhip effect are information asymmetry and communication lags. Therefore, it is important for manufacturers, suppliers, and retailers to engage and communicate with one another. They must foster collaboration through better communication and alignment to encourage:
- Inventory management: Enhanced visibility across the supply chain allows for better monitoring of inventory levels at different stages of the supply chain. This ensures that stock is available where it is needed most. Collaborative tech tools facilitate automated and efficient replenishment processes, ensuring that inventory is maintained at optimal levels without manual intervention.
- Demand visibility: Collaborative supply chains use insights from various partners, including retailers, manufacturers, and suppliers to get a holistic view of demand data across the entire supply chain. Shared access to sales data, inventory levels, and market trends ensures that all stakeholders have the same up-to-date information, reducing information asymmetry.
- Strong supplier relationships: Better communication and collaboration between supply chain stakeholders ensures that their goals and objectives are aligned, and facilitates joint identification and management of risks such as supply disruptions or demand fluctuations. It builds trust over time as stakeholders see a consistent commitment to working together towards mutual success.
- Transparency: A McKinsey survey showed that 70% of chief procurement officers believe that improving demand transparency with upstream suppliers is important to deal with current turmoil in the market. Timely and reliable information sharing from the demand end of the supply chain helps manufacturers plan inventory and capacities optimally.
Enhancing demand forecasting through collaboration
Suppliers and manufacturers are often far-removed from on-ground demand – geographically and operationally. In times of volatile demand, supply chain collaboration and communication help with more accurate forecasting. Here’s how:
- Data sharing: Data across the apparel supply chain exists in silos with retailers, manufacturers, suppliers, and stores. Downstream players have higher visibility into changing demand volumes and trends, and this needs to be communicated to garment manufacturers on time. Likewise, manufacturers must share information around supply surplus or constraints, allowing for better logistical planning.
- Joint forecasting: Once all supply chain players agree to data sharing, it is important to consolidate their diverse perspectives through multiple data sets to sharpen demand forecasting. This super dataset can be modelled to benefit from lower estimation variance and better predictions. Data sourced from multiple players can help identify patterns and trends that might not be derived from a single source. Moreover, data from multiple sources can make forecasting more precise by identifying relationships between different variables across datasets.
- Tech tools: Data forms the bedrock on which tech tools can operate. Integrated ERP, MES, and cloud solutions can provide manufacturers and players visibility into the data of various stakeholders.
Streamlining inventory management
Agile and well-informed inventory management is key to combating the bullwhip effect. Manufacturers, in collaboration with other supply chain actors, can consider the following approaches to inventory management:
- Vendor-managed inventory: Manufacturers may maintain inventory on the basis of insights from the retailer in a predetermined manner, even after the supplies have reached the retailer’s warehouses. The manufacturer becomes responsible for minimising overstocking or stockouts, determining order sizes, times, and frequencies. The manufacturer combines this data with information around projected lead times, shipping schedules, and production levels to make sure that inventory levels remain optimum. This approach gives the manufacturer and retailer insight into demand and supply.
- CPFR: Collaborative planning, forecasting, and replenishment is a technique where the retailer, manufacturer and other supply chain partners interact with each other to conduct collaboration arrangement, formulate a joint business plan, forecast sales, plan orders, generate and fulfil orders, manage exceptions, and assess performance. This approach helps to create agile inventory and improves synchronisation among players.
- JIT inventory: Just-in-Time (JIT) inventory management is a strategy designed to improve efficiency and reduce waste by receiving goods only as they are needed in the production process. It helps manufacturers reduce holding costs and obsolescence of outdated stock, ship orders at a quicker turnaround time, and with greater flexibility in responding to demand.
Leveraging technology for better collaboration
Pieces of supply chain management technology can be useful in streamlining processes, improving communication, and fostering greater efficiency and responsiveness.
- Digital supply chains: Supply chain digitisation requires the use of technology and cloud solutions for handling large volumes of data; predictive and prescriptive tools that help forecast demand and manage resources; automation of routine tasks like order processing, inventory management, and reporting to reduce errors; integrated ERP systems to streamline all processes from procurement to sales and provide a single source of truth; MES systems to bridge the gap between the shop floor and the enterprise level; and CRM systems integrated with supply chain processes for insights into customer preferences and buying patterns.
- IoT and Blockchain: IoT devices such as sensors and RFID tags can be attached to materials, products, and transportation vehicles to provide real-time data on their location, condition, and movement. Blockchain technology makes every transaction time-stamped and linked to the previous transaction, creating a clear and traceable audit trail. This enhances accountability and makes it easier to verify the authenticity of data.
- AI/ML: AI and ML algorithms analyse historical sales data, market trends, social media, and other external factors to predict future demand more accurately. These predictive tools help optimise inventory levels to the right amount of stock at each stage of the supply chain. ML algorithms also detect anomalies and deviations in supply chain processes.
Building stronger supplier relationships
Manufacturers have a lot to benefit from a strategic relationship-building perspective, in addition to the strategic use of technology. They must cultivate relationships with supply chain players to ensure better collaboration.
- Partnership approach: The current uncertainties and upheavals in the fashion industry have shown that retailers and suppliers rely on each other immensely. So, instead of treating manufacturers as vendors, they must be treated as partners. This can help both parties foster enough trust to find long-term solutions, form stable relationships in an overcrowded industry, and view reality with transparency and in complete agreement with one another.
- Long-term contracts: Long-term contracts between retailers and manufacturers could pave the way for establishing trust for data-sharing, stable demand, more confidence of returns on investment in capital, and brand stability.
- Performance metrics: Manufacturers and retailers must formulate a set of performance metrics to keep each other accountable. These could include on-time delivery rate, fill rate, order accuracy, inventory turnover, return rate, defect rate, scrap rate, and sustainability metrics like carbon footprint and water usage.
Challenges and solutions in implementing collaborative planning
Implementing tech solutions to bring in collaboration in supply chain planning is no mean feat. Players are encircled by several challenges that need resolving before they can benefit from such collaboration.
- Data privacy: There is a risk of misuse or leakage of sensitive data such as sales forecasts, inventory levels, pricing strategies, and production schedules. Companies may be concerned about intellectual property protection and competitive advantage. Moreover, they may face regulatory action if they fail to comply with rules like the GDPR in Europe. Ensuring data privacy and clarifying data ownership and accountability among supply chain partners is both critical and difficult to achieve. Players may use secure collaboration tools with built-in security features like access controls, encryption, and authentication mechanisms to safeguard shared data.
- Tech barriers: Adoption and implementation of tech solutions in creating more collaborative supply chains can run into several issues like incompatibility with legacy systems and infrastructure, integrating data from different silos, hesitation to allocate resources to technology projects without a clear understanding of the potential ROI, and lack of industry-wide standardisation and best practices.
- Resistance to change: Resistance to change among employees and stakeholders is a common barrier to technology adoption. People may be comfortable with existing processes and reluctant to embrace new tools or workflows. Overcoming resistance to change requires effective change management strategies, communication, and training programs.
Future trends in collaborative supply chain planning
- Emerging technologies:
- Evolving practices: Companies are implementing agile supply chain strategies to respond quickly to market changes and consumer demands, and adopting on-demand manufacturing models to reduce overproduction and waste. Collaborative practices and the use of technology could shrink the supply chain that is geographically fragmented, inform players on the losing side of information asymmetry, and narrow the gap between demand and supply to make apparel manufacturing more profitable, efficient, and sustainable.
- Sustainability: Apparel companies are increasingly focusing on sustainability by adopting circular economy practices such as recycling, upcycling, and designing for longevity. Collaboration with suppliers to ensure sustainable and ethical sourcing of materials, reducing the environmental impact and improving supply chain transparency.
Conclusion
In a shrinking world, the woefully fragmented fashion supply chain is also coming together. Never in history have its players been better placed to knit these fragments together – retailers, suppliers, and manufacturers have unprecedented communication and intelligence technologies at their disposal today.
The opportunity is ripe for these players to make the most out of collaboration, which will define their fate in an industry struggling with upheavals and uncertainties. Apparel manufacturers must strategically use technology solutions, in addition to building smart partnerships and business collaborations to thrive, or even survive, in these unpredictable and turbulent times.