Merchandising: Risk Sharing in Fashion

The Status Quo

Traditionally, most clothing and shoe vendors work on a seasonal calendar. This typically results in buyers viewing samples of the product 6 months before launch, placing a pre-order and then receiving the agreed upon volume of each article at launch. This allows vendors a 6-month lead time to generate enough volume for all the orders placed.

What are the challenges with this?

Once the order has been placed, the risk now sits mainly with the buyer, they need to sell this item to the consumer and if they are unable to, they may need to discount the item to the customer or try to negotiate with the vendor to send items back at a partial or full refund. On the flip side, if a product sells out, it can be difficult to acquire more product as the  lead time for production is too long, and if there is a pool of excess product it can turn into a race between buyers to try and secure what remains from the vendor.

So overall long lead times can lead to; excess inventory taking up valuable warehouse space, unprofitable sales while trying to clear excess inventory or a loss of potential sales if there is not enough inventory pre-ordered.

What are buyers doing about this?

A trend from large buyers has been to attempt to make the buying process more dynamic and order based on short term demand forecasts for staple products, rather than a 6-month estimate on performance.

There are a few monetary advantages of this; firstly, there is less risk placed on the buyers, they can order small quantities and if it begins to sell through well, they can quickly order more. Secondly, they do not have as much dead or unhealthy inventory, or the costs associated with holding large volumes of stock. Ultimately this process can result in less unprofitable sales and less negotiated vendor returns.

The environmental impact of making the process more dynamic may be another reason for buyers to push for it. If stock being produced is closer to customer demand this means that there is less waste produced in the supply chain from excess production as well as lower liquidation/destruction rates of dead stock items.

In order to make this happen however, it is heavily reliant on a vendors ability to have a dynamic demand planning process where they can consume regular demand forecasts and produce items accordingly, the buyer also needs to have an effective forecasting system to supply accurate forecasts to vendors.

Why would a vendor partake in this?

The obvious downside for vendors is the smaller upfront orders placed by buyers and therefore the increased risk and uncertainty that provides. In addition, vendors often need to meet a certain order quantity (Minimum Order Quantity, MOQ) in order to produce a product at a favourable cost. If this MOQ is not met, they risk not being able to produce this product.

What this style of buying does provide, however (if they can match the lead time requirements) is it allows for sales based off performance throughout the season which can result in higher sales for articles that would typically sell out early in the season as it increases the availability to the consumer.

It also prevents buyers from marking down items, which many vendors dislike for 2 main reasons; firstly it can damage a brands image being priced so low and secondly if buyers begin to believe a brand will only sell at a certain price they begin to pressure vendors for more favourable cost prices.

How are they doing this?

Amazon  has been trying to increase risk sharing by setting targets for all their buyers in fashion to try and move the % of their total buy more towards re-orders (in-season demand-based orders) from the usual pre-orders (6-month pre-season fixed-orders).

A framework that is currently being deployed is the ‘block’ which is a predetermined fixed amount that is allocated to a buyer, but sits with the vendor, the buyer can then call off (order) quantities from the block based on the in season demand but is not obligated to if the consumer demand is not there.

Another framework being deployed is the ‘never out of stock (NOS)’ ranges, where buyers and vendors align a set number of articles that tend to always be in the seasons line up and agree to only order these items based on demand. Buyers provide regular demand forecasts and vendors adjust their supply planning accordingly. This model works better on items with a lot of sales history and the forecasts therefore have higher accuracy.

As it stands, Amazon views these both as transition frameworks until vendor lead times can be shortened.

Conclusion

In conclusion, while pressure from buyers is motivated to reduce their risks, this may push vendors throughout the industry to assess their current production systems and drive real innovation in efficiency. If successful vendors (and buyers) will be able to realise previously missed sales (due to lack of availability) as well as exert more control over their price point in the marketplace without the risk of seeing their brand discounted.

There is also a very real possibility however, that buyers will ultimately be unsuccessful in transitioning fashion to an entirely customer demand-based system or that they will experience some down-sides from the transition. There is a risk that this results in a loss of bargaining power and lower costs prices that large retailors typically enjoy from placing large upfront orders and helping vendors hit MOQ targets.

Paul Padda