Reimagining the apparel value chain amid volatility

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The apparel and footwear industry’s standard playbook for managing global supply chains has been overtaken by recent events and rising complexity. The sprawling footprint of global supply chains was supposed to the lower the chance for disruption, but the pandemic and resulting dramatic demand shifts punctured that veil. With volatility looking more and more like the rule rather than the exception, brands face the task of reimagining their supplier strategies—and the faster they do, the better.

Our latest global survey of apparel chief procurement officers (CPOs) finds that organizations grasp the urgency. They are putting greater emphasis on efficiency, supply chain resilience, and sustainability (see sidebar “About the research”). Since suppliers are critical to all three goals, brands are reevaluating their supplier relationships and engagement strategies to achieve closer collaboration and enhance transparency and resilience.

Our survey uncovered five themes reshaping apparel and footwear sourcing. For some themes, CPOs have already begun translating intention into action. Others require an unprecedented level of cooperation and engagement between brands and suppliers. Brands that can move beyond a relatively transactional relationship with their supplier base will be better positioned to boost performance across the value chain.

A challenging landscape for apparel companies

Sourcing has become ever more difficult for global apparel and footwear companies: they are confronting a range of issues across the value chain, including ongoing supply disruptions caused by shifting demand, material price volatility, geopolitics, global trade issues, rising competition, and regulatory changes. In parallel, a landscape characterized by accelerating change and fierce competition is forcing brands to adapt.

Challenging dynamics across the value chain

Over the past few years, we have hosted an annual apparel sourcing roundtable that has become a pivotal gathering for global executives to discuss the latest trends and share their insights. At our most recent event in December 2023, participants expected demand volatility and global uncertainty to continue. The market’s demand fluctuations and resulting bullwhip effect1 have had a disruptive impact across the value chain, especially upstream.

Compared with industries such as consumer packaged goods, where disruptions are usually felt within days or weeks, demand signals in apparel may not reach tier-two and -three suppliers for months. At the peak of consumer demand during pandemic lockdowns, suppliers struggled to add capacity fast enough. When consumer demand dropped over the past year, retailers and wholesalers found themselves with massive excess inventory, while suppliers faced order cancellations and struggled to deal with low utilization. McKinsey’s latest State of Fashion report suggests the industry could endure the peak impact of ongoing demand shifts this year.2The State of Fashion 2024: Finding pockets of growth as uncertainty reigns, McKinsey, November 29, 2023. This delay heightens the risk of potential supply shortages and disruptions when demand rebounds.

This trend is further amplified by the demand fluctuations and bullwhip effect. Across seven of the world’s biggest textile-exporting countries,3 yarn export value dropped approximately 11 percent in 2023 compared with the previous year.4 This volatility has resulted in low fabric exports and overcapacity, with factory utilization decreasing from 100 percent in 2021 to 60 to 70 percent in 2023.

Other factors have contributed to the relatively muted outlook. For example, consumer purchasing habits have been declining coming out of the pandemic. In third quarter of 2023, net intent to purchase (the share of consumers planning to increase spending minus those planning to decrease spending) rose 7 percent with Chinese consumers but decreased among US and European consumers by 25 percent and 29 percent, respectively.5The State of Fashion 2024: Finding pockets of growth as uncertainty reigns, McKinsey, November 29, 2023. Operational challenges, such as logistics disruptions in the supply chain, also increase pressure on brands.

Regulatory pressure and fierce competition

External forces, such as maturing regulation and heightened competition, are raising industry standards for sustainability, speed, and digitalization capabilities.

On regulation, in the European Union alone, as many as 16 pieces of legislation spanning the entire fashion value chain—from product design to marketing—were under discussion in late 2023. Some are slated to come into force in 2024, such as the EU’s Waste Framework Directive, which requires brands to pay for end-of-life waste treatment. Others are set to go into effect in 2025: for example, the Ecodesign for Sustainable Products Regulation (ESPR) establishes minimum design standards for all individual products sold within the European Union (including requirements related to recyclability, durability, reusability, reparability, and the use of hazardous substances).6The State of Fashion 2024: Finding pockets of growth as uncertainty reigns, McKinsey, November 29, 2023.

Competition will also likely become even fiercer. Brands such as Shein and Temu have been growing at record rates by deploying new tactics focused on speed, pricing, and customer experience. According to our conversations with industry experts, Shein has developed an industry-leading tech backbone to sync its systems with a sizable supplier base, reducing lead time from concept to customer to just 15 to 21 days (compared with approximately four to six weeks for the top fast-fashion players).

What do these twin complications mean in practice? Brands need to fundamentally rethink how they operate.

Five major themes for apparel and footwear sourcing

Addressing these challenging market dynamics requires brands to have an efficient sourcing model—flexible, fast, sustainable, tech-driven, and consumer-centric. Our analysis of survey responses identified five major themes shaping sourcing in the industry.

1. Aiming for efficiency amid demand volatility

Brands have shifted their focus as they seek to combat demand volatility, geopolitical tensions, and inflation in shipping and raw-material costs. End-to-end process efficiency is now the top sourcing consideration for roughly half of all survey respondents, up from fourth priority in 2019 (Exhibit 1).

Process efficiency is now the top priority for most chief procurement officers.

Meanwhile, nearly 70 percent of respondents report expecting to improve sourcing cost in the near term. That has led to a reassessment of how to further improve efficiency across all facets of sourcing, including lower product costs, reduced sourcing expenses, and accelerated go-to-market processes. These elements are crucial for enhancing competitiveness and generating enduring growth in today’s dynamic market.

Brands are already acting. In 2021 and early 2022, the industry withstood significant cost increases from escalating freight charges, volatile commodity prices, and unprecedented supply chain constraints, among other factors. To address these challenges, some organizations implemented strategic initiatives combining data and AI, more-competitive sourcing practices, and enhanced negotiation strategies and execution. These capabilities have enabled organizations to reduce costs substantially, streamline their operations, and strengthen their relationships with key suppliers.

For example, a leading US sportswear company used analytics to examine its product cost breakdowns, identify opportunities to improve fabric unit costs and material consumption, and trim costs of their footwear and apparel. With these insights, they pursued a more competitive sourcing process across their incumbent and new vendors, looking to structure mutually beneficial agreements with a reduced number of more strategic suppliers.

The company used digital platforms and data-driven insights to inform sourcing decisions and collaborated with suppliers (including those vertically integrated in manufacturing and material productions) to pinpoint cost savings opportunities. By emphasizing trust and full transparency, the company deepened strategic partnerships with core suppliers, cooperated with innovative niche suppliers, and systematically rebalanced their supply base. The company also strengthened its relationships with remaining suppliers, which benefited from increased business. These moves dramatically changed their performance trajectory and resulted in a more robust, resilient, and agile supplier base.

2. Rebalancing the footprint

Geopolitical instability and its impact on sourcing relocation was one of the top concerns of fashion executives at our last roundtable. This is a shift from prior years: the supply chain and inflation were the most popular responses in 2021 and 2019, respectively.

Understanding why requires looking at sourcing trends over the past 25 years. In the 2000s and early 2010s, many companies developed global supply chains to capitalize on lower labor rates in regions such as Southeast Asia and subsequently in South Asia (which includes Bangladesh, India, and Sri Lanka). Once rates in those regions started to rise, many companies explored parts of Africa in the second half of the 2010s. However, this strategy became less and less effective over time: suppliers in China and Southeast Asia as well as South Asia started to make significant investments in enhancing their productivity by introducing lean manufacturing and automation to maintain their competitiveness.

Today, brands are grappling with the complex challenge of rebalancing their global sourcing footprint. First, they want to diversify to enhance supply chain resilience by creating redundancy and avoiding an overreliance on a single location. Second, brands are pursuing nearshoring to improve speed, cost, and agility. By locating production closer to consumer markets, they can reduce lead times and shipping and importing costs while responding more swiftly to trends and decreasing inventory.

As an example, apparel and footwear companies looking to diversify their supply footprint prefer countries within Southeast Asia. The region currently accounts for 33 percent of the total sourcing value across geographies, a figure projected to rise over the next five years (Exhibit 2). Meanwhile, South Asia experienced the fastest growth since 2019—reaching 32 percent of the market in 2023. As brands continue to recalibrate their footprint, Bangladesh, India, and Vietnam are hotspots for future operations: more than 40 percent of survey respondents plan to increase sourcing in these markets.

Chief procurement officers overwhelmingly favor Asian countries for sourcing.

Despite these ongoing efforts, redistributing sourcing has been slower than expected because of capacity constraints, a common theme in our surveys since 2013. China remains one of the largest global apparel producers: in 2023, it accounted for 28 percent and 21 percent of total apparel imports by value to the European Union and United States, respectively (Exhibit 3).

While brands are relying less on China for sourcing, nearshoring options have been flat.

Nearshoring has been among the top priorities for executives in our CPO survey since 2016. While its benefits are clear, the share of imports to Europe and the United States from nearshoring countries such as Central America and Mexico has remained basically flat since 2018 as a result of several challenges. First, the total landed cost (the expenses associated with shipping a product) from manufacturers in nearshoring countries to the United States is usually on par with that of Asian imports at best; in most cases, the landed cost in these countries is slightly higher despite their competitive labor rates, lower shipping costs, and advantages in tariffs and inventory. This is because of lower labor productivity in the region and challenges with yarn and fabric availability, a gap they fill with imports from Asia. Second, the supplier bases in nearshoring countries can manufacture a more limited array of products.

We expect these challenges will be addressed in coming years. For example, both local suppliers and Asian companies with a presence in Central America and Mexico have invested in improving their productivity and building local capacity for making yarns and fabrics.

In the interim, companies should still carefully evaluate nearshoring, which is not without its challenges, such as the need to build integrated supply chains. The benefits of nearshoring tier-one suppliers would be limited if they couldn’t handle all fabric production. Instead of looking for cost advantages, companies should consider it as a margin play. If they factor in all the benefits resulting from faster speed to market, including the ability to be more responsive to trends and the potential to reduce inventory and markdowns, nearshoring can generate not only economic value but also a dramatic competitive advantage. Further benefits include reducing their carbon footprint by shortening their supply chain and decreasing waste.

For example, a leading North American apparel company has successfully increased sourcing from nearshore countries by developing and implementing a comprehensive road map. To do so, it evaluated about 15 countries on nearly 100 parameters for specific sourcing categories, put out a detailed request for information to hundreds of suppliers, and modeled costs based on a range of inputs, including trade agreements. In just two years, the company increased nearshoring’s share twofold, cut lead times by up to 60 percent, improved flexibility and resilience, and created a dynamic cost modeling tool to gauge the impact of nearshoring products.

3. Restructuring strategic relationships with manufacturers and suppliers

Brands are rethinking their approach to manufacturers and suppliers, with an emphasis on long-term strategic partnerships to improve demand and production planning, resilience, and efficiency. Consolidating the supplier base is a natural part of this shift: 71 percent of brands consider it a medium to high priority for their strategy in the next five years. Our survey respondents also reported deeper relationships (including long-term volume commitments, shared strategic three- to five-year plans, and collaboration partnerships) represent 43 percent of apparel’s total supplier base, up from 26 percent in 2019 (Exhibit 4).

Brands are increasingly forming long-term relationships with suppliers.

As brands continue to alter how they engage with suppliers—long-term strategic partnerships could reach 51 percent of the total supplier base by the end of 2028—supply chain resilience and cost competitiveness remain key criteria for their preferred suppliers. Three-quarters of our survey respondents indicated they prioritize suppliers based on reliability and performance.

Brands would need to balance developing long-term strategic partnerships with pursuing cost optimization in operations. Such partnerships require a more balanced set of strategic sourcing priorities beyond cost alone. Indeed, cost savings can come with trade-offs, such as reduced short-term flexibility, and could lead brands to shift volume to suppliers that offer the lowest costs but that may lack co-innovation capabilities. Brands would also need to reinforce the value of strategic partnerships with their core suppliers.

For several years, we have seen deeper partnerships taking shape between leading brands and manufacturers, though progress has been slower than expected. One Asian apparel manufacturer set up multiple factories in other regions (including Africa and Latin America) in close collaboration with some of its anchor customers. This approach offers its suppliers greater certainty on utilization while improving lead times, diversifying its sourcing footprint, and increasing its profits by benefiting from the tariffs of different countries.

Apparel brands and suppliers may be more cautious in making joint investments compared with other industries because of several factors. The highly competitive nature of the apparel market means brands and suppliers may prioritize simpler, faster initiatives over long-term partnerships that require significant time and effort to manage. Collaborative endeavors demand extensive cross-functional engagement from both parties as well as new operational models. Yet deeper supplier collaboration is now imperative for organizations looking to enhance procurement efficiency because conventional methods are approaching their limits. Effective supplier collaboration calls for brands to forge active relationships with suppliers and both parties to shift their mindset toward sustained value creation. Practices to foster joint efforts include strategic alignment on objectives, development of a compelling business case, methodical scope definition, value measurement, and clear value-sharing mechanisms.

4. Reaching sustainability ambitions and pressures

Brands are doubling down on compliance efforts as more sustainability regulations emerge. Reducing emissions in apparel will likely require working closely with manufacturers and upstream suppliers in areas such as energy-intensive material production, preparation, and processing, which represent 70 percent of emissions for apparel players.

More than 80 percent of survey respondents said that environmental, social, and governance certifications; transparency and traceability; and sustainable material usage have become prerequisites in supplier selection. Brands are ensuring suppliers adhere to sustainability standards primarily by using scorecards (92 percent of respondents) and third-party audits (78 percent). The result is an industry with an increasing need for data transparency on sustainability.

At the same time, brands are raising their targets for sustainable materials: for example, in 2023, 86 percent of respondents said they would use recycled polyester in the next five years, an increase of 19 percentage points since 2019 (Exhibit 5). Yet while brands are prioritizing sustainable materials, their willingness to pay more remains unproven.

Brands aim to increase their use of sustainable materials in the coming years.

While ethical sourcing should be a simple matter of tracing goods back to their point of origin, poor data transparency remains a major bottleneck. Approximately 70 percent of emissions are generated by tier-two production and above. Setting emissions baselines and measuring impact are complex tasks requiring primary data that is currently inaccessible. Most brands maintain direct relationships only with their tier-one suppliers. When brands want to track emissions upstream into tier-two suppliers and beyond, they have to rely on industry averages to provide approximations. Yet our research found up to a 20 percent difference in emissions calculated using primary and secondary data for life cycle assessments.

Brands are not the only ones focused on sustainability goals: manufacturers and suppliers are also embracing these practices to stay competitive (see sidebar “Views from manufacturers and suppliers”). Supply chain players offering sustainable products without compromising on performance, quality, or price are poised to gain a first-mover advantage, although such practices are likely to become standard in the future.

In all cases, brands need to collaborate with suppliers to implement tech tools to effectively capture emissions data and smooth compliance, given that suppliers have limited available resources because of the persistent bullwhip effect.

One global fashion brand, for example, incorporated an impact measurement and supply chain decarbonization solution to gather and analyze primary data specific to its tier-one to tier-four operations. This data provides a more accurate view of potential decarbonization levers and how the brand can partner with suppliers and manufacturers to mobilize a bottom-up transition.

5. Enabling efficiency and collaboration through digital solutions

A wave of innovation has swept companies in recent years. Sourcing organizations had typically resisted digital transformation efforts, but the challenge of the pandemic compelled them to swiftly adapt. Organizations could build on this momentum to pursue further transformation across their operations.

Brands have accelerated the integration of digital innovation in areas such as product design and shipping-logistics cost efficiency: for example, more than 80 percent of organizations use 3D modeling and digital sampling (Exhibit 6). Through digital and analytical tools, players across the value chain can not only improve their operational performance (for example, in product development by defining at-cost solutions that maintain quality) but also use data transparency to support fact-based decision making.

Brands have implemented a range of digital and analytics tools to support sourcing.

While many brands have made substantial investments in digital systems, returns often fall short, primarily as a result two factors. Implementing new digital systems without reevaluating and redesigning existing processes can limit impact, and inadequate attention to cleaning up and enriching data can undermine effectiveness.

Fabric libraries lacking detailed technical information beyond basic descriptions, for instance, are hindered in their efforts of material consolidation, standardization, and platforming. Similarly, companies implementing product life cycle management (PLM) systems without a robust underlying relational database structure may reduce these systems to mere file repositories.

To unlock the full potential of digital technologies, organizations need to prioritize process redesign, data quality enhancement, and the integration of systems to enable efficient operations. For example, a leading footwear company used digital solutions to revolutionize its supply chain operations, with a strong focus on improving data quality and optimizing processes. It implemented a sophisticated labor-overhead-profit (LOP) model for precise cost estimations and developed a comprehensive material consumption playbook.

Its embrace of digital tools was critical to boosting efficiency across the value chain (from design to negotiation) and operations. For instance, to enhance the original standardized PLM system, it established a single material ID library with more than 30,000 materials from approximately 300 suppliers. It also incorporated digital tools that could aggregate more than 6,000 cost sheets in less than a minute. Such initiatives reduced manual work across spending forecasts on materials, audits of material consumption, and pricing while facilitating cost savings.

How brands can thrive

As brands seek to balance costs while fostering partnerships with suppliers, they must revisit their sourcing strategies. We have identified three near-term practices critical to creating value across the supply chain.

Making data-driven goals and decisions on sustainable sourcing

Organizations can make informed decisions that not only meet their sustainability goals but also generate long-run economic value by using primary data to conduct cost–benefit analysis of sustainable sourcing practices. For instance, brands can evaluate the economic benefits of energy-efficient machinery and technologies, renewable energy sources, and circular economy principles to reduce operational costs, improve resource efficiency, and generate environmental benefits.

Embracing analytically driven, digitally enabled sourcing methods

Pursuing value-backed sourcing—a collaborative decision-making approach—can benefit both consumers and suppliers. For example, the combination of a brand’s design-to-value and cost methodologies with a supplier’s expertise in optimizing product design and specifications can reduce costs without compromising performance. Similarly, material innovation, which involves brands and suppliers jointly selecting sustainable and cost-effective materials, can meet environmental goals and achieve sourcing excellence.

By engaging in fact-based price discussions with suppliers—with should-cost analysis, for example—brands can increase transparency and promote innovation on design and processes. This approach also supports value-sharing agreements, enabling the setting of clear baselines to measure improvement.7Taking supplier collaboration to the next level,” McKinsey, July 7, 2020. Brands can also work closely with suppliers to streamline manufacturing processes, reduce waste, optimize material consumption, and improve operational efficiency.

Establishing enduring, mutually beneficial relationships with suppliers

Closer collaboration between brands and suppliers can generate a range of benefits. For example, brands can pursue value-sharing models to lock in reliable and consistent supply—a deeper level of commitment and partnership delivering improved supply chain stability, better cost management, and increased responsiveness to market demands. Brands can also partner to enhance the skills and knowledge of their suppliers (for example, providing guidance on technology adoption and process improvements and sharing knowledge for market trends, quality standards, and compliance requirements) to meet evolving needs and drive improved performance and competitiveness.

Joint financing and business planning represents a deeper level of coordination. Shared investments in projects and infrastructure can distribute the financial burden and result in mutually beneficial outcomes. Meanwhile, a collaborative planning process to align on short- and long-term business objectives, mutual targets, and plans can formalize this arrangement.8Taking supplier collaboration to the next level,” McKinsey, July 7, 2020. Brands and suppliers can also partner to launch large-scale sourcing-excellence programs.

Despite the current apparel and footwear landscape, brands and suppliers have a path forward—one built on greater efficiency, collaboration, and transparency. Digital solutions and data will be critical enablers. Now is the time for brands to reinvent their supply chain by making bold moves and doubling down on supplier relationships.

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