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The Zero Inventory Solution | Intelligence, BoF Professional

NEW YORK, United States – Nearly everything sold by Stòffa, a Manhattan-based maker of classic luxury menswear, is made to order or custom. Aside from a few accessories, nothing that co-founders Agyesh Madan and Nicholas Ragosta produce – not their $ 600 u-neck cashmere sweaters, or their $ 2,200 plonge leather asymmetric jackets – is made before a customer pays for it. More than 90 percent of their revenue is generated in this way, which means they have largely eliminated the risk of holding stocks that may not be sold.

Madan and Ragosta came up with the idea for Stòffa while working for the Italian costume label Isaia, which sold tailored suits but relied heavily on department stores for the majority of its sales. The duo say single unit production offers more control: they’ve managed to turn a profit every year since launch in 2014, with no outside funding until the end of 2019, when they have a small seed round (less than $ 300,000) gathered with friends and family.

Building such a business takes time and patience. First, they had to establish relationships with manufacturers and suppliers in Italy who were willing to work this way. Then they had to build a customer base, which they did through their own networks and city-by-city trunk shows. (In 2019, they opened a permanent showroom space by appointment in New York.) Finally, they had to hire and train salespeople who were able to help customers try on clothes in a convincing and authoritative way.

Because 90 percent of Stòffa’s products are tailor-made to fit each customer exactly, consumers are more willing to accept the waiting times that inevitably accompany on-demand production. However, the company’s growth has also been much slower than it could have been if the founders had gone the traditional wholesale route, which requires a label to gamble on stocks that may or may not sell. In some years, Stòffa has grown by 60 or 70 percent; in other cases it was only 25 to 30 percent. Annual sales are still well below $ 10 million. “We do this with the realization that growth is slower, but the customer’s lifetime value is higher,” said Ragosta.

In a world like fashion, efficiency is sometimes a dirty word. But one of the biggest business problems facing the industry is the cost of excess inventory that goes unsold at the end of the season, resulting in waste that erodes profit margins. A deadstock costs U.S. retail as much as $ 50 billion a year, retail consultant Haley Smith Recer wrote in a 2017 op-ed for BoF. In 2020, when pandemic-induced lockdowns and a recession have left retailers with even more stuff than usual, that number will be even higher.

And it’s not just unsold inventory that’s a problem, but the costs associated with keeping inventory in the first place.

“Inventory helps no one,” said Shan Reddy, a financial advisor to small and medium fashion brands. “It’s cash tied up.”

In a trend-driven sector like fashion, it is almost impossible to match supply and demand perfectly, especially when you have to bet on a product up to 9 months before it reaches the sales floor. For years, peers have marveled at Zara’s inventory efficiency, tracking and responding to customer demand signals in near real-time, often manufacturing and delivering clothing in just two to three weeks.

But what if you could switch completely from a ‘push’ system – where a brand predicts how much product it needs, pays for it upfront and sends it to shoppers – to a ‘pull’ system, where a brand is guided through consumer demand, only creating what it knows it can sell, through customer pre-orders, on-demand production, and using real-time data? And what if this were something that brands of all shapes and sizes could enter? Is it really possible to get to zero stock?

In the past, it could be a good thing to have a little excess product at the end of each season: An event sale offered customers who weren’t able to pay full price a gateway to a brand. But as the years passed and the push to increase revenues, many brands turned to price cuts to boost volume. Soon, brands were running out of stock to get the lowest cost per unit for production runs, in the hope that they could sell it at a later date. This way of operating can result in a vicious cycle of end-of-season fire sales and lower margins, causing many businesses to go into debt, others to bankruptcy and some businesses to close.

Stòffa’s is just one way to solve the stock problem. Technology such as production software PlatformE exists to make the logistics of made-to-order run more smoothly. New York-based Resonance, backed by investor Lawrence Lenihan, offers management software and services, but also makes on-demand products at its three plants in the Dominican Republic, with turnaround times of just six days. Currently, 17 brands are active on the platform – including Pyer Moss and Tucker – with plans to open a sewing plant in New York City by November 2020 and a “highly automated” material and cutting plant in the state by November 2020.

Lenihan says that this way of working benefits designers who act on original ideas and personality over basic principles of basic products, and allows them to develop new products without putting their own money into the end result. “Traditionally, you run the risk of it going wrong,” he said. “If you miss something, you’re stuck with inventory.”

But the move to zero inventory – or close to it – can have other drawbacks. “There will be sacrifices … it imposes some restrictions … you can’t have any material in the world,” Lenihan said.

Stanley Szeto, executive chairman of China’s fashion supply chain manager Lever Style – which works with a mix of digital startups, including Everlane and Bonobos, and more traditional contemporary labels, including Theory and Vince – said one of the biggest challenges is To convert brands to a model with a lower inventory are the restrictions on fabrics. One of the keys to ZaraThe success is that the company buys gray clothing fabric in advance, dye or print clothing when ready to use. For designers who take pride in developing custom fabrics, this can be a serious block they can’t get past.

“A lot of high-end designers say, ‘I don’t like that dyed effect, I want a yarn-based fabric,’” said Szeto. “If you have that attitude, you are stuck in the old world.”

By seeing your factories as partners rather than suppliers, you can reduce this stress somewhat and negotiate better prices for materials.

“Brands need to break and break with the hostile negotiations aimed at the price of finished goods leaving the factory,” said John Thorbeck, chairman of supply chain analytics firm Chainge Capital. “What I mean by that is you have to work and collaborate on the components of end products to create flexibility, which in turn creates value that can be shared between the partners.”

Katie Demo, CEO of Brass, the Boston-based direct-to-consumer women’s clothing line Brass, said its factory in China is “adaptable to us to order only the stock we need.” For example, Demo projects that her ponte pants will sell a certain number of units each year, but she usually can’t afford to pay for that up front. Instead, she explains the cadence – how much she thinks she’ll need and when she thinks she’ll need it – at the start of the year so that both parties can plan ahead without a 100 percent commitment.

Brass pays more per piece than ordering everything in advance, but it’s worth it if she is able to sell more garments at full price.

“You have to look at the broader math,” Reddy said. “How much is the discount going to be? How does that affect the perception of your brand? Do you train people to wait for the sale? “

Reddy also suggests rethinking where you base your production. (Companies from Zara to Nike are increasingly partnering with factories around the world to reduce turnaround times.)

“Depending on the setup, local manufacturers can change things pretty quickly,” he said. “It’s much easier to relocate or expand your production locally.”

But is zero inventory scalable? Zara has managed to work more efficiently because it has been built this way from the ground up; and at the end of the season there is one too many. Lenihan’s Resonance can produce products quickly. However, for many brands, transforming their supply chain still feels like too much of a risk.

Assuming that Saks will buy $ 8 million worth of goods next year, or that Neiman Marcus will buy $ 12 million [in order to fund operations], then I’m not sure if you can retune the whole process, ”said Stòffa’s Ragosta. “The larger unlock is structured this way from the start.”

Perhaps the pandemic that has wiped out so much of fashion sales is an opportunity to rejigate. Lever Style’s Szeto is a great reminder that it is possible to get to market quickly and minimize inventory even if you are an established player. About 15 years ago he first became interested in “lean” or “just-in-time” manufacturing – a system popularized by Toyota. But it wasn’t until Lever Style started working with newer brands that he changed the way the business was run and managed by focusing less on achieving minimums with one big brand and more on serving many brands more efficiently. Today, 50 percent of Lever Style’s sales come from brands that need faster turnaround times and smaller product runs. Some of the companies he works with generate only a few million dollars a year in sales.

Last year, Lever Style’s gross margin was 29 percent; higher than the industry average for a manufacturer that does not have its own consumer brands. The company made its debut on the Hong Kong Stock Exchange in November 2019.

Szeto believes it is not too late to make fashion more efficient. “A shirt takes 20 to 30 minutes of working time,” he said. “So why does it take a month to make?”

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What to do with all that surplus stock

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The new basics of manufacturing