The fashion & apparel industry has been the stalwart of growth & profitability for several years now. Brands that understand key trends in fashion and have an adaptive supply chain have garnered exponential growth. Since the inventory has practically unlimited shelf-life, as far as the distributors and retailers can maintain their goods’ quality, they can move them even at discounted prices to keep the cashflows consistent.
With 2020, things took a sharp turn for the global fashion industry. The global fashion market witnessed a decline of over 12% in its CAGR and dropped the annual sales by over $4 billion to reach $31.4 billion. The pandemic paused the supply chains and made consumers reconsider their discretionary spending.
The key observation in this grim analysis is the forecast for the near future. The same market is expected to cross the $38 billion thresholds by 2023, growing at a CAGR of 6.7%. Nike, Inditex (Zara), and LVMH are expected to be the most profitable companies at scale in the industry. Their growth is attributable to extensive product innovation and optimized supply chains and access to celebrities, and often a commanded price premium. For all other brands, B2B eCommerce platforms, and sellers, profits and growth would be a function of the inventory management practices.
Here is a list of the inventory management best-practices, which can help tackle the most pressing issues in the apparel supply chain.
The Landscape of Challenges in the Fashion Supply Chain
A few years ago, academic research was published to understand the key challenges in running fashion supply chains. Here were the four significant issues highlighted after a comprehensive qualitative study and quantitative analysis:
- Disparity between the inventory and demand trends: Unlike the commodities, fashion products have a unique challenge – the demand can be asymmetrical within the same product categories, SKU clusters, and even among variants in the same product line. For instance – a black shirt may sell more than a blue shirt, or the other way round. This makes it challenging to match the inventory with the demand trends.
- Manufacturer-driven overstocking: The apparel supply chain is densely populated by fragmented manufacturing units since the entry barriers for fashion manufacturing are relatively lower than other products. This way, the manufacturers who have economies of scale can strong-arm the buyers to order larger quantities that do not match the necessary inventories.
- Inaccurate forecast-driven overstocking: While a considerable amount of inventory decisions are made based on intuitive decision-making, the more organized sellers tend to use more sophisticated demand analytics systems to have a logical basis for reordering or replenishing inventories. However, as most analysts in the space would vouch, forecasting is not always accurate. Minor changes in the assumptions can give faulty outputs leading to overstocked inventory that is difficult to move. Also, you can explore the OrderCircle Inventory Management Software, which can help you forecast stock requirements over both short term and long term.
- Replenishment issues: Fashion & apparel remains one of the few segments where replenishment is also a key challenge. SKUs and product variants that are quickly moving in the supply chain will often have high demand throughout the supply chain, leading to longer manufacturing lead times.
10 Inventory Management Best Practices for the Fashion & Apparels Business
- Use pre-orders to leverage limited stocking capacity: Limited stocking capacity is a challenge pertinent to all significant fashion sellers, both online and offline. While this poses an operational hurdle for the business, you can leverage it at the beginning of the season to conduct test-runs. You can offer a limited range of products at higher prices to test the SKUs that are performing well. Later, even if the price has to be dropped to keep the demand consistent, you will have a reasonable basis for reordering specific units.
- Perform ABC analysis at the SKU level: ABC analysis is a simple mechanism that can be used by both brick & mortar retailers and fashion B2B eCommerce website operators. Under this method, you divide your SKUs into three segments where Category A is the highly profitable units with low sales frequency. Category B is the average profitable units with a balanced sales frequency, and Category C is the units with low profitability but high sales frequency.Category A SKUs are of great importance to you, and hence you should focus on immediately using the inventory at hand. The First-in-First-Out method can help you keep the prices under control, even as you place orders ahead in the calendar. The Category C SKUs should be run with the Last-In-First-Out method, which allows you to have some inventory on hand for quick sales. As the margins are already thin on this category, you can afford to have some inventory get cold.
- Use SKU analytics for high-level trends: Do not perform trend-analysis on the product categories. Ideally, the SKUs serve as the accurate bifurcation for understanding which product variants are doing well in which season. This principle will work only for the sellers who have incorporated seasonal identifiers in their SKUs. For instance, it would help you know that you are selling yellow scarfs in Spring more than it would help you know that you are selling scarfs in the Spring. SKU analytics help you keep product variant orders under control and help attain economies of scale.
- Use external data for trend analysis: Most vendors in the fashion & apparel supply chain use internal data for forecasting. In reality, a more accurate method for forecasting trends would entail using both the internal data and the external perspective. Social media, fashion publications, and even popular media can have a significant impact on upcoming trends. Irrespective of whether you are directly interfacing with the end-users, you should have a high-level understanding of forthcoming trends. Social media influencers can serve as considerable data-points for this analysis.
- Streamline the picking & packing processes for a lightweight operation: In the backend, packaging and sorting are the significant overheads for the inventory management process. With apparel, you generally don’t need excess carrying costs like cold-storage or specialty storage. On top of this, if you can keep the packaging simple, it would help you run a lightweight operation with better cash flow.
- Create a threshold for filtering cold inventory: Some B2B eCommerce platform operators prefer looking into reports to determine which SKUs or product variants are not performing well. While the method tends to work, it also leaves room for subjectivity and is largely reactive. Instead, you should categorize the product’s lifecycle into hot, warm, and cold categories. The hottest products would be quickly flying off the shelf; the warm ones would require some nudges in the form of campaigns and offers, while the cold ones would be sitting there despite all efforts. Make sure you have a quantitative threshold establish to filter cold inventory. This inventory should be pushed off as soon as possible since it occupies the holding space that could’ve been utilized for more in-demand products.
- Establish rollover benchmarks for the calendar year: It is common to use quarters, months, or weeks as the ideal rollover periods for the SKUs. In reality, a more optimal way to handle rollover periods would be the ones that consider consumer behavior. This process begins with answering the question – when do your consumers prefer buying the product? The entire fashion supply chain will operate on this data. And hence, all rollover decisions must be made based on this benchmarking.
- Have a contingency plan with your suppliers: Have contingency plans for product returns due to manufacturing defaults and reordering needs. Your business will not be able to accurately forecast the demand for each unit of product. It would help you to have OTC option agreements with your suppliers that give you the right but not the obligation to buy certain inventory in the near future at a pre-determined price. The supplier may charge some additional commission to enter such an agreement, but it can help hedge sudden demand spikes and understocking situations.
- Audit your inventory management system: You should have an excellent enterprise-grade inventory management system that comes with comprehensive support and at least 99% uptime. In case you do not have such a reliable system, you should make sure to conduct audits on all your inventory levels with manual counts to establish any systemic errors. Using platforms like OrderCircle Inventory Management software can eliminate the need to perform such extraneous tasks, as the it seamlessly integrates with the overall system.
- Keep minute or hourly inventory updates: If you are running a B2B eCommerce Platform, you should have a minute or hourly inventory update with automated alerts on potential out-of-stock situations. Ideally, when you are left with only 10-15% of inventory, you should get automated attention highlighting the urgency for replenishment.
Fashion is a fast-moving category along with SKU-level demand variance. With the here-mentioned best practices, all B2B eCommerce website owners and physical store operators can augment their margins by making their inventory management processes more efficient and customer preference-sensitive. To know more about how you can streamline your inventory management practices for optimal cost and availability, get in touch with the OrderCircle team.