Innovations in Sourcing, Part Three:
What’s one of the most exciting trends in sourcing?
Well, for me, it’s how some companies are using just-in-time manufacturing to produce their goods and usher in a new era of inventory management.
Let’s see what’s happening.
Wanted: Inventory Management for the Digital Age
Take a look at last quarter’s earnings calls, and you’ll feel like you’re reading the retail version of A Tale of Two Cities. For some retailers, it was the best of times because they mastered managing their inventories, but for others, it was the worst of times because they struggled with excessive markdowns.
The moral of this story is clear. No longer can retailers regard effective inventory planning as a “nice-to-have” or as a way to “add value.” To stay competitive, perhaps even survive, retailers must continue to narrow their inventories and shrink their markdown rates in unprecedented ways.
There’s no question that ERP systems can support this work. But these systems must also be powered by sound strategies for managing inventory. That is, retailers need to select the proper assortments, know where to go deep, and know which items their customers will be compelled to buy.
Still, even with the most finely-tuned tools and strategies, this approach to inventory management—a supply-side, retailer-knows-best modus operandi—is destined to come up short in an age where customers demand more speed, transparency, and personalization.
A new way of thinking must be adopted instead.
Inventory Management Redefined
So, what does it mean to “manage inventories effectively” when the whole retail world is being disrupted? Well, in addition to the usual decisions around systems, inventory management now includes questions about where those inventories should be located and how they should be created.
Or as the McKinsey team recently put it, ”Is it time for apparel manufacturing to come home?”
McKinsey has concluded that retail, especially mass retail apparel, cannot survive if it chooses to do business as usual:
“To meet customers’ needs, apparel companies need to focus on nearshoring, automation, and sustainability. Tomorrow’s successful apparel companies will be those that take the lead to enhance the apparel value chain on two fronts: nearshoring and automation. Both must be addressed, and in a sustainable way. Apparel brands and retailers in Europe and the United States can no longer do business as usual and expect to thrive.”
Even though the McKinsey white paper focused on the current shortcomings of the apparel and accessories sectors, I’d encourage you to read the entire report. There are great lessons for hard goods and consumables businesses, too.
From Supply-Side to Demand-Side Production
With its call for more nearshoring and automation, McKinsey is urging retailers to invent a new model for sourcing and replenishment, one that will move them far away from excessive inventories and markdowns.
This new model will embrace radically new approaches for production . . . operate locally, driven by consumer demand . . . and emphasize speed, agility, and personalization.
Let’s see what such a model might look like.
In demand-driven manufacturing, companies will use data and automation to produce consumer goods in a just-in-time fashion. That is, once a customer makes a purchase, the manufacturing process itself will be activated, often in small production facilities located across the country, like here, here or here.
This transformation is being enabled by powerful new technology:
- 3D printing is particularly promising for producing hard goods made of a single material. Even better, these printers are dropping quickly in price.
- On-demand manufacturing and purchase activated manufacturing are already being used in the apparel industry. Once an order is placed, a textile printer produces the fabric and sends it to a cutter, which sends the cut pattern pieces to be sewn. And it’s all automatic.
When companies have technology like this at their disposal, not only can they produce hard and soft goods much more efficiently, but they also can sell them at full price without heavy discounting. Demand-driven production means there’s no real need to “manage” inventories, and therefore no need to engage in costly markdowns. There is also a happy benefit in building some insulation to the vacillating trade policies that are part of the current state of our economy.
Once again, Direct-to-Consumer (DTC) businesses are leading this demand-driven, manufacturing model. For the most part, mass-market retailers have not yet adopted this approach, but it’s hard to see how they can stay on the sidelines much longer.
Give Demand-Driven Production a Try
My thoughts for retailers and suppliers? Dip your toe into the waters of demand-driven production. Test a few lines of product and try some new technology.
The companies that test and innovate will be best positioned to leapfrog over the competition and stay relevant in the marketplace. Those that choose to wait and see will only be marking time, and the longer they wait to jump in, the harder it will be to pivot.
Deal with the disruption and embrace the evolution.
Lastly, consider how local logistics can also bring you to new markets – online platforms are continuing to scale and those that are able to permeate those marketplaces be partnering with phenomenal 3rd party logistics teams will have increased exposure and likelihood to meet their customers where they are and get the sale.
- Use expertise and resources of others, especially when starting out
- These changes might not be where your clients are looking to go just yet – but those that don’t risk not being able to learn and test enough to stay relevant.