Change Necessary in the Fashion Industry

The Fashion Industry in general is facing the following problems and symptoms:

– Relatively Low Turnover

– Relatively High Inventories

– Relatively High Level of Obsolescence ( End-of-Season Sales/Uitverkoop/Opruiming)

– Relatively High Level of Sold-Outs ( Uitverkocht )

– Relatively High Level of Working Capital

All of these problems and symptoms are preceived as a given fact for most people within the fashion industry. The result is that due to the low turnover and high level of working capital, purchasing parties are frequently pricing their products at three or more times of the purchase price from the selling party. For example, if one starts with a purchase price of $1 for the Brand Company than he will sell it for $5 to the wholesaler. The wholesaler/ distributor will subsequently sell the product for $15 to the retail shop which subsequently will sell the product for $45 to the final consumer. The result is a seven-fold final price compared to the original purchase price.  

The one and most important reason for these high inflated prices is the fact that the turnover is too low and hence the working capital is too high. Another major reason is the fact that the cost of obsolete products must be recovered from the (product) margin.

In order to overcome some of these problems and symptoms, companies have started to increase the number of collections. The idea behind this is that consumers would like to have new products all the time. This may be the case, but it does not eliminate the relatively low turnover, high level of obsolescence and the high level of stock-outs. In other words, increasing the number of new collections does not eliminate the real root causes of the problems the fashion industry is facing.

Some other companies have increased the number of shipments, whether or not in combination with new collections. However, in most cases this replenishment mode of operandum did achieve the objective of reduced working capital, but did not achieve the objective of higher turnover, lower levels of obsolescence and stock-outs.

All these symptoms and realities prevent a Brand Company (e.g. Supertrash, Marlies Dekkers, etc) to expand significantly. It may be possible to grow very fast in a relatively short time, but eventually, after a few years, it will be running against the biggest obstacle in his expansion/growth path, which is (working) capital. Expanding fashion companies are usually having high levels of accounts receivables, high levels of inventories, high levels of accounts payables and hence high levels of working capital. As one therefore can imagine is working capital one of the main reasons that Brand Entrepreneurs may be losing control of his/her company. We have seen this with Marlies Dekkers and I know of one or more companies facing the same dilemma as well. This dilemma is very simple:

The generic dilemma for the brand company is very simple. Its goal in the end is making money now and in the future. In order to make money now and in the future it must be able to expand. However, in order to be able to expand we need high level of working capital. On the other hand, in order for the brand company to be able to make money now and in the future it must be profitable. In order to be able to be profitable it must have low levels of working capital.

As one can see from the above shown dilemma, is increasing the number of collections and/or shipments just a compromise and we all know that compromises result in loss-loss situations and definitely not in a win-win situation. On top of that going for the believe that high levels of working capital is required to be able to expand will jeopardize the stake of the (original) shareholders as well as the profitability of the company.

The only win-win situation is one that both satisfies the requirement for being able to expand as well as the one for being profitable.

In order to satisfy both requirements, the fashion industry must be willing to change its mode of operandum. The fashion industry is a very traditional industry in which the brands are more or less dictating what gets designed, produced, distributed and sold in the shops. Only those fashion companies which are willing to change will be able to achieve both requirements and will become a profitable and expanding company.


About iCPM Solutions

This is a blog in which I am presenting my thoughts about integrated Constraints-based Performance Management Solutions. I would appreciate any feedback, comments and tips around a topic. I am working on developing a full integrated framework for CPM based on a synthesis of various theories and common best practices. However, the most important inputs will be based on the TOC concepts, since those are dealing with constraints and as we all know constrainst are preventing us from reaching our goals. Hence the reason for the name Constraint-based Performance Management. This blog is part of my website You can reach me through my email, LinkedIn Profile and Website. I hope you all enjoy reading my blogs.
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