There is a general acceptance that our generation is experiencing three crucial and irreversible transitions that will have profound consequences on businesses, economies, industries, countries and societies at large.
Digitalization and AI: Rapid advancements and integration of digital technologies and artificial intelligence (AI), which are transforming every aspect of life and society.
Clean Energy Transition: Movement in the global energy landscape toward cleaner, more sustainable sources after generations of reliance on fossil fuels.
Supply ChainEvolution: A reshaping of how goods and services are sourced, produced, moved and delivered.
While it took a global pandemic to illuminate the importance of navigating shifting supply chain dynamics and associated challenges, it may only be the start of the transition. The supply chain evolution is slowly but surely transforming how fashion and luxury brands serve their customers, changing an age-old industry. The playbook for success is being rewritten.
Whether described as “nearshoring,” “friendshoring,” “localization,” “shifting sea routes,” “realigning of trade blocks,” there is no doubt that the return to normal we were expecting with the end of the pandemic isn’t coming—and the new normal is starting to look very different to what the industry was used to.
When globalization started, fashion was the among a handful of industries that shifted manufacturing from more expensive countries to low-cost countries, making supply chains truly international and paving the way for many other industries to follow. Even today, an average fashion company likely works with more countries around the world as compared to a company of a similar size in any other industry. Now as we are starting to see new shifts, fashion supply chains are once again emerging as a focal point. These changes touch every aspect of fashion supply chains as we know them, from sourcing fabrics and raw materials to delivering finished products to consumers.
Let’s delve into some of these shifts, the reasons behind them, and how they stand to impact the fashion industry.
Reshoring and Localization: Building Resilience
The pandemic laid bare the vulnerabilities of the fashion industry’s globalized supply chains. Disruptions in shipping and transportation, factory closures and logistical challenges highlighted the risks associated with over-reliance on distant manufacturing hubs. The impact on costs and availability of goods was huge. The post-pandemic world witnessed surging raw material and production costs, untenable air freight prices, the rerouting of long-trusted shipping and air routes and the realigning of countries into new blocs amid surging trade and geopolitical tensions.
In this environment, the fashion supply chain model established in the 1990s, which was heavily reliant on globalization, did not prove as reliable when it came to mitigating risks, being cost-competitive or delivering expected value. The parallel shifts in consumer behavior included the preference for more customization and choices and a deepening affinity for digital commerce. A long-forgotten model of on-demand fast and local manufacturing with reduced lead times, short-cycle planning, lower waste and shallower purchasing was able to serve this new demand with more agility. With other factors like tariff uncertainty as a backdrop, the benefits of purchasing based on actual demand versus forecasted demand, and the reduced risk of sitting on obsolete inventory, have solidified the business case for “Make here, Sell here.”
Reshoring and localization bring production back to domestic or nearby markets while also diversifying sourcing and manufacturing locations to minimize risks. These concepts are now key elements in building fashion supply chain resilience. Long-range product planning and forecasting, which go hand-in-hand with having a globalized supply chain, have been shown to offer less and less accuracy. Fashion companies are seeing more benefits to making product and supply decisions as close to the actual selling time as possible, which will in turn strengthen the shift towards reshoring and localization in their supply chains.
Data, Social Retail and Age of Radical Transparency: A Paradigm Shift
It was believed that in 2020 that 90 percent of the world’s total data at the time was created in the previous two years ie. between 2018 to 2020. It was also believed that in every two years time the volume of data across the world doubles in size and that by 2025 the speed of data doubling would be a mere 12 hours. With so much information being created and made readily accessible around the world, there are no secrets in the digital age. The success of a fashion business, or any business, will be directly proportionate to its ability to harness this data into meaningful insight, strategy and action.
In terms of increased transparency, fashion businesses now deal with customers who are completely aware of their choices and have access to in-depth information and peer reviews for the brands they choose to buy from. They are now also able to better execute on their preferences to shop with preferred brands that display the values they share. This is prompting a rethink in the industry’s approach to supply chains, as information is finding its way from the relative obscurity of a low-cost manufacturing country to the limelight of consumers’ mobile phones. Consumer discourse and opinion-sharing on online platforms can both build and erode brands.
Digitalization and Harnessing Technology
We have never lived in a time with so many transformative technologies. Technologies like Artificial Intelligence (AI) including machine learning, robotics, blockchain, Internet of Things (IoT) and the Metaverse are touching every business in every industry. Because of the rapid pace of change, every fashion business must now think of itself as a tech company as much as a fashion company.
These technologies already have applications in fashion supply chains, and many new applications are emerging every day that translate to enabling greater efficiency, productivity or traceability.
Blockchain, for instance, provides a decentralized and immutable ledger that records every transaction along the supply chain, ensuring transparency and authenticity. This technology enables brands to verify the origin and authenticity of materials, track the production process and authenticate products, thereby combating counterfeiting, ensuring product integrity and digital traceability.
AI-driven analytics tools are also revolutionizing supply-chain planning and forecasting, enabling brands to anticipate demand, optimize inventory levels and improve production efficiency. By analyzing vast amounts of data, including sales trends, consumer behavior and market dynamics, and reducing the impact of human biases, AI algorithms can generate accurate demand forecasts, enabling brands to better align production with customer demand and reduce excess inventory.
Narrowing Wage Gaps
The East-West wage gap argument is not as compelling as it once was. At the turn of the century, when our traditional fashion supply chain was configured and built, an average Chinese worker was earning ¥9,333 a year (about $1,127), according to the Beijing National Bureau of Statistics. An average U.S. worker, by contrast, was earning $30,846 a year, according to the Social Security Administration—almost 30 times the average earning of the Chinese worker.
By 2021 this wage gap had narrowed to a multiple of just 3.5 times, with an average American worker earning $58,120 a year compared to an average Chinese worker earning ¥105,000 a year (about $16,153). While the wage gap is still large, it has significantly diminished.
Rapid changes in technology, including robotic and semi-robotic manufacturing, faster machines and automation technology is improving productivity of fashion manufacturing and constantly reducing the percentage of cost of labor that goes into manufacturing fashion goods. It is becoming increasingly apparent that labor costs are a less important consideration in investing in fashion manufacturing or allocating business to a particular country.
Trade Protectionism and Supply Chain Security
After the golden era of free trade, there is an increasing tendency toward trade protectionism. Every country for one reason or the other has made protectionist decisions—whether be it to protect national security interests or protect vulnerable local businesses from international competition, among other reasons. Some examples of this shift include the U.S. tariffs on China-made goods, China’s incentives and subsidies to it’s local companies, India and Brazil protecting their domestic industries like electronics and agriculture and the EU’s carbon border tax. The list goes on.
In addition to countries’ increasing protection of their own industries from foreign competition, there is tendency to align trade and supply chains based on security blocs of countries sharing a common goal or interest. This is giving rise to new trade alignments based on security realignments in an increasingly multi-polar world.
As we see in these listed reasons, fashion and its supply chains are being impacted by profound transformation with reconfiguring, reshoring, localization, technology, digitization, and increased transparency. These shifts are continually forcing changes to fashion companies’ approaches to production, sourcing, and distribution and silently ushering in a new era with new configurations, resilience and alignments better suited to serve shorter and dynamic product lifecycles.
However, that said, globalization didn’t happen overnight. These shifts will take time to touch every fashion business and have dependencies on multiple factors like new investments, building new capacities, transfer of skill sets and knowledge, reconfiguration of backward integration, new transportation routes and improved integration and servicing of localized consumer demand. One thing is assured: in a more digitalized and connected world, these changes will be a lot more rapid. And until fashion supply chains adjust to this changing paradigm, the post-Covid “return to normal” may feel elusive.
Roit Kathiala has held executive roles with leading retailers across North America, Europe and Asia and is the architect and advisor to leading companies on their business, digital, operations, supply chain and product strategies.
