“The future is all about consumers deciding what is fashion and what they want the product to look like. Instead of a push to inventory, it’s really a pull from the consumers, ” said Jose R. Suarez, CEO at Impactiva, a supply chain optimization solution provider.

Instead of chasing cheap labor and trying turn over more products, brands and retailers have to start maximizing their net margins.

“The key factor that impacts net margin is the average sale price after discounts. Retailers like Zara only discount 20 percent, whereas most retailers discount 30-50 percent. This is because most retailers are producing inventory instead of producing in response to consumer pull,” said Mr. Suarez.  The goal is to have shorter, more agile production runs so that you carry less inventory and thus reduce the need to discount in order to clear stock.

“Achieving higher net margins rather than just turning products should really be the goal for all retailers.  Retailers are trying very hard to find suppliers that can make products for 5 or 10 cents cheaper, however, when you look at the discount, it is so much bigger. Normally, FOB is times five is the retail price. However, if you discount 30 percent or sometimes 50 percent of your products by various percentages, the amount you lose through discounting is so much bigger what you saved by finding a cheaper factory to save 10 cents per piece,” Mr. Suarez told Inside Fashion.

Lower inventories translate into better return on equity.

“What shareholders are looking for is return on equity, which is profit divided by the capital required to run the business -  and inventory levels essentially determine the capital required to run the business. A better strategy would be to find reliable suppliers that have the agility to align production with market demand,” said Mr. Suarez.   

 

Measure the Process

“The traditional manufacturing model spends 80 percent of the time putting out fires. Most factories don’t have clear metrics for quality and ‘productivity vs. target’ for each style,” Mr. Suarez told Inside Fashion.

“There are not many factories that look at data on an hour by hour basis and manage the factory using those numbers. This is called managing by daily improvement,” explained Mr. Suarez. The goal is to use data to understand where one stands today, set targets for next month, three months, or next year, and then start to train one’s staff for continuous improvement.

Many factories are spending millions of dollars on new machinery, however very few suppliers understand the importance of building new management and leadership systems.

“Let’s say that a project costs US$200, 000 dollar over a 6 month period and we are going to transform two lines, including all the stitching. In the end, the factory can improve productivity by 35 percent and reduce production time by 10 days. The payback is six months and the internal rate of return is 15 percent per month,” said Mr. Suarez.

“Managers need to ask: ‘What is the cause of the defect that made me rework 500 shirts today?’  The need to analyze where it happened and why it happened, then teach the staff how to avoid it in the future.  That’s when factories start to enter into a continuous improvement mentality,” said Mr. Suarez.

“It’s shocking how easy it is to save money… boosting productivity by 15-20 percent and reducing lead times is relatively easy to achieve in many factories, he told Inside Fashion.

 

Cultural Shifts Make Change Stick

With factory transformation, 70 percent of the effort should be on changing management, and only 30 percent is on changing tools.

“Changing management includes creating a different culture in the factory, which depends on accountability, discipline, transparency, and experimentation,” said Mr. Suarez.

“Factories can hire an engineer to do the line balancing and save 20 percent after three months, but that is totally worthless if you don't change the culture and values of management,” he explained. “In our transformation, we spend a lot of time teaching supervisors and managers the new behaviors and habits they need to execute everyday to create the values that will drive success.”

“Factories have to foster a culture that says ‘we destroyed two hundred garments today, let’s find out why and correct it so that tomorrow we only destroy 10.’ This is a huge shift in mentality.  If you get people to behave differently, it creates new habits, the new habits create new value, and eventually the new values create a new culture, “said Mr. Suarez