Introduction

After a severe blow to the fashion retail industry during the COVID-19 pandemic, pent-up consumer demand finally spilled into the market starting early 2021. But within a year and half, slowing demand owing to high inflation and the cost-of-living crisis, combined with a bias towards over-stocking to mitigate supply chain disruption risk, has left brands with high levels of inventory which is now being sold at deep discounts or disposed.

Whilst some best-in-class brands have returned to normalized inventory position in early 2023, others may need an additional six to 12 months. Add to that the risk of a potentially softening labor market affecting consumer demand moving forward, a tepid recovery in China, and hyperinflation in key apparel sourcing locations such as Turkey, and the industry is again in a precarious position.

Mega trends exacerbate complexity

Beyond current macroeconomic conditions, broader industry trends are exacerbating pressure on fashion retail supply chains. Major climate change-driven events have come to the forefront and are directly impacting the upstream raw materials supply chain. One example is how the flooding in Pakistan in 2022 created a crisis in cotton supply.

Meanwhile, demand for sustainable materials has only accelerated – this is in direct conflict with the increased need for more affordable products due to inflationary pressures. Finally, acceleration of omnichannel strategies is adding to the complexity of stock visibility, with impacts on the end-to-end supply chain and inventory build-up. The increase in digital sales since the pandemic has also resulted in record high return rates for retailers.

Therefore, the ability to build supply chain resilience and respond quickly to market dynamics – all while maintaining healthy margins – are once again at the forefront of industry concerns.

An End-to-End Lens to COGS transformation

In fashion retail, cost of goods sold (COGS) can contribute 50% or more of the business’ cost base; with manufacturing largely being outsourced, a majority or all of COGS is direct materials. 

A common pitfall in COGS transformation is treating direct materials procurement as being synonymous with price squeeze negotiations but that is no longer enough and certainly not optimal when there is an increasing need for a reliable ecosystem of long-term, strategic partners to enable a robust, resilient supply chain.

But even when taking a “price squeeze” view, direct negotiations and/or market tendering exercises such as an RFP is where such traditional procurement conversations typically stop. It is only a means to an end – it is an approach. It is the “how” when the cost-creep is truly due to sub-optimal supplier pricing, but before the “how”, it is critical to get at “what” and “why” to truly drive value – “what” do we believe the opportunity is, “what” does the resulting category strategy need to be, and “why” is it not currently being captured. A holistic COGS diagnostic, if done right, should answer this.
 

What is the size of the prize?

• How to optimize cost versus benefit of a complex SKU portfolio and its resulting impact on procurement, manufacturing and supply chain agility?
• How to devise a global sourcing strategy for increased optionality in light of geopolitical uncertainty, supply chain disruptions, and speed to market?
• How to pursue product innovation given the sustainability agenda?
• How to collaborate with and develop new suppliers in nascent markets?
• How to optimize supply chain flows for the ever evolving tariffs and duties landscape?

These are the type of questions that the procurement organizations of today are faced with. Some of these are simply pre-requisites to a sourcing event, others require longer-term planning and investments. This is why a COGS diagnostic is critical before going full steam ahead with an execution focused on third-party supplier negotiations. 
 

Some of the benefits of conducting a holistic diagnostic first include:

1. Avoiding a myopic view where long-term risk is ignored / de-prioritized for more short-term initiatives, less complex procurement initiatives; 
2. Preventing wasted time and resources where the business case / ROI may not be as strong 
3.Expanding the breadth and depth of execution approaches being considered;
4. Enabling cross-functional collaboration on more complex decisions early doors;
5. Holding people accountable against a robust, bottoms-up business case. 
 

“Why”: understanding the root cause to determine the best strategy

Moving in logical lockstep with the “what,” is also understanding the “why”. For example, why is the cost base sub-optimal and why do we believe there is an opportunity? 

Just because the price is above the “should-cost” does not necessarily mean that the supplier is padding their margins – there may well be something broken in their supply chain and/or manufacturing, or in our upstream design and planning. Maybe the supplier doesn’t have the right upstream source of supply or need support with joint upstream negotiations. Perhaps the supplier has fallen behind competitors on capital investment or innovation. 

It could also be that our Sales, Inventory & Operations Planning (SI&OP) process is broken, putting strain on the raw material procurement. This will result in process inefficiencies and waste, as well as added logistics costs at the supplier level, for example due to sub-optimal minimum order quantity (MOQs).

Another reason for systematic cost creep is the lack of a robust operating model. This assessment should include questions such as: is the right team in place in terms of structure, number and capabilities? Are the processes optimized and robust? Is there sufficient governance and KPIs in place for appropriate controls and ongoing performance management? An optimized operating model can not only sustain value but limit the need for future such big bang events – it enables getting ahead of the curve on potential controls and corrections instead of correcting events and impacts post-mortem. 

In short, a COGS reduction program cannot be looked at in a traditional, siloed view of direct procurement and supplier pricing. Stress-testing the root causes of a sub-optimal cost base through an end-to-end perspective is critical to capturing total value.
 

The A&M approach to driving down COGS

You have built a robust business case, believe in the size of the prize, and have a robust set of levers after stress-testing the “why.” Maybe one of your approaches is direct negotiations after all. On the surface, this may seem like a straight-forward activity, and you may get some of the targeted savings, but without the appropriate preparation and execution rigor, money can get left on the table. In addition, you also run the risk of doing more harm than good if such complex set of initiatives are not appropriately managed with the wider external stakeholder group and the external ecosystem of partners.

This is how A&M can add value to the process:

• End-to-end approach: Without an end-to-end supply chain lens taking a total cost of ownership, cost reduction can only deliver so much. Our supply chain service offering spans strategic sourcing and procurement, logistics and distribution, manufacturing and operations, supplier management and third-party risk, SI&OP planning, and order fulfilment and service delivery management. We specialise in complex end-to-end problems to reduce costs, improve performance and transform organizations. We focus on delivering total value across the board and consider all interdependencies instead of restricting ourselves to a functional view.
   
• Consulting and industry operator experience: Our team is comprised of senior experts and hands-on operators who have both consulting and industry experience. We bring the speed, deep analytical rigour and complex transformation experience from our broad client base. Meanwhile, having been in the drivers’ seat ourselves, we have a pragmatic, bias-towards-action approach as opposed to theoretical points of views.
   
• Deep operational expertise: Our expertise and insights across the supply chain don’t just stop within your four walls, they expand to the broader industry. Our team of seasoned retail operators provide deep operational expertise in supplier relationship management, product development and garment manufacturing, merchandising, margin management, assortment planning, merchandise financial planning, demand forecasting, volume and margin management, open-to-buy and channel operations. This retail mindset and exceptional industry knowledge ensures we consider all aspects of the value chain when identifying cost reduction opportunities.

If you want to maximize cost optimization in your supply chain by truly unpacking all aspects of your COGS, all while future-proofing your supplier relationships and broader resiliency against industry headwinds, then contact our team.