We will be touching on supply chain and inventory-management in this post - and we’ve drilled this topic down as much as possible for the broadest audience.
The COVID19 pandemic has thrown the proverbial wrench into supply chains around the globe especially in industries like fashion, where labor, materials, and customers are often not co-located. Today, we are looking specifically at the fashion apparel supply chain and why localizing production can be the least risky and most sustainable option to keep fashion brands not only operating but innovating (even before pandemics).
At, N.A.bld we talk a lot about on-demand production in the USA. On-demand can mean different things to different people. We define “on-demand” production as quick-turn, small batch production local to the end consumer. It can be one-off customized items but it can also be rule-based batching.
Let’s talk cost. In the below case study, we are going to look at landed costs for a global supply chain and true costs in a local, on-demand supply chain. What do we mean by these?
On-demand local supply chain costs: Key elements include materials and component pricing, labor, overhead, packaging, taxes, insurance and any warehousing.
Landed cost, global supply chain costs: The same costs as the local supply chain but with additional factors like freight, import duty, customs clearance fees, import duty and taxes, insurance, inventory holding and currency conversion.
In addition to these costs, we also want to look at the environmental cost of each supply chain. We will be measuring this in two ways 1) water to produce an item and 2) carbon emissions from freight or shipment of finished goods.
Brand A submits a production order for 10,000 blouses from a supplier located internationally in Country X at $3.52 per unit, for a total of $3,520. The tariff to import materials from international Country Y to Country X for assembly is 5%, and the duty to import assembled products to the US is 20%. 10,000 units fit in one freight and the entire freight shipment is $3,250 plus $1,650 in material taxes, and $7,040 in import taxes. Once the items get to the USA, they must be warehoused for a monthly cost of $1,496 and shipped to the warehouse for $5,000. Once they are in the warehouse and the sales begin this product has a 60% sell through rate with a cost of $3/item (let’s assume there is unit for every order — you can see where this calculation gets tricky) to ship direct-to-consumer. The landed cost with sell through of this item is $20.52/item.
Alternatively, Brand B decides to pursue an inventory-free model with on-demand production. After developing the product, the sales begin and Brand B is only producing what sells so this product has a 100% sell-through. Brand B batches its sales and submits a production order to a USA based factory for 100 blouses at $13 per unit, for a total of $1,300. The tariff to import materials from international Country Y to the USA is included in the increased cost of the materials for that item, and there is no duty to import assembled products since they are assembled locally. The 100 units are drop-shipped from the factory to the end consumer for $4.50/item with shipping (let’s assume there is a unit for every order). The landed cost with sell-through of this item is $32.61/item.
You can see, comparing the per unit labor and materials cost solely, that USA production is three times as much as producing outside of the country. However, when you add in the additional landed costs, the per unit cost edges closer. Here is a summary of the math:
But where you really see the two supply chains come to a head is the margin on each product. When you include calculations on speed to market, sell-through and mark-downs and the cost of capital. The per unit margin is almost the same.
Where the two models truly differ is in their sustainability. The domestically produced, on-demand model generates less than 1% of the CO2 emissions than the internationally produced product.
These numbers are just examples, but they give a good overview of the costs associated with utilizing globally based supply chains versus localized supply chains for apparel manufacturing.
In any model, it’s hard to capture all the factors. Here’s what we have omitted for the sake of simplicity:
This model doesn’t include any calculations of socio-economic impacts from labor conditions or fair labor laws - such as deaths due to environmental working conditions. Poor, unregulated, working conditions in countries like Bangladesh have resulted in hundreds of deaths in unmonitored facilities while in the USA, many labor laws include educational training grants to improve workforce mobility.
There are also a number of environmental effects in the lifecycle of a garment can have that are not included such as water use from dyeing fabric, non-renewable energy use, agricultural land occupation of fabric inputs, freshwater toxicity and eutrophication, toxicity in humans (carcinogen and otherwise), air pollution, acidification, and more. We’ve limited our discussion to a per unit approximation of C02 during production (shipment and assembly) transportation only.
Here are three ways your brand can start reducing risk and waste in your supply chain:
Innovation in the supply chain starts at the moment of creation. Challenge your design team to create pieces that reduce waste from pattern creating and material selection forward. Once design is done, you can start collecting data around costs and decisions early on in the process to automate a lot of the work and savings moving forward.
Materials are a large part of the core cost of your apparel product and often its uniqueness. Try to source from mills or distributors local to your production center to reduce waste around the shipping of components. Look for materials with sustainable attributes that can be resourced easily. Consider custom on-demand printing resources to reduce the need to over-print custom branded materials. While not ALL components are made locally, we encourage you to go deeper in your materials sourcing and planning. You can check out some of our no-minimum, local and sustainable resources here.
Nearshore or re-shore your production partners. As the math above proves, when you combine no-minimum local production with a successful product and a low-to-no-inventory model, the costs end up being almost the same as landed costs of the same item produced in larger volumes abroad even with a higher cost of labor, with a lower product return rate.
Now, more than ever it's important for companies to be nimble. Now, with COVID-19 halting production in Asia and elsewhere, the decision to re-shore production is not only about environmental sustainability but also about business continuity. N.A.bld is a plug-and-play supply chain, connecting brands and retailers to a network of low minimum USA based manufacturers that can manufacture on-demand in 4-6 weeks. At N.A.bld, we’ve helped over 2,000 brands worldwide employ the above strategies to do more with less and operate sustainably - financially and environmentally. Limited inventory and more cash flow allows brands to test products, increase productivity and creativity, and bring beautiful products to market made locally to the end consumer.
On-demand local small batch production may not be for everyone but if you think it could be a strength for your brand, talk to us to learn more.