Agile management is usually associated with software development, but it is having equally transformational effect on the US fashion industry under the label, “fast fashion.”
The leader in fast fashion, the Spanish firm Zara [Inditex: BMAD: ITX], along with international retailers such as Uniqlo [TYO: 9983], Topshop and
A pair of articles in Sourcing Journal by John S. Thorbeck document the financial gains of the
Fast fashion has been around for some time. When Harvard Business Review looked at Zara in 2004, it called Zara’s management practices “questionable, if not downright crazy.” That was because “Zara defies most of the current conventional wisdom about how supply chains should be run.” And yet, strangely, even then, the performance was there: “The company can design, produce, and deliver a new garment and put it on display in its stores worldwide in a mere 15 days. Such a pace is unheard-of in the fashion business, where designers typically spend months planning for the next season.”
The "Zara Gap”
Now Dr. Warren H. Hausman, professor of management science and engineering at Stanford University, has quantified the financial value of fast fashion to reduce unwanted markdowns and lost sales, or stockouts, enabling firms to increase profits by as much as 28 percent. Zara, says Hausman, achieves four times more profitability than most apparel retailers, by combining higher turn and margins, and lower inventory risk in a highly uncertain business.
Hausman analyzed public data available from 53 retail and short-product lifecycle businesses. His research shows what he calls the “Zara Gap,” namely, Zara’s ability to significantly outperform category averages for department stores, wholesale brands, specialty retailers and athletic brands:
The fashion industry obviously faces extraordinary challenges. The industry that is mercurial and trend- driven. Zara’s fast fashion business model exploits consumer and cultural changes, with dramatically improved financial results. The key is the familiar Agile technique of “postponement:” transforming a product into its final form at the latest possible moment.
“Because demand for short-life-cycle products or fashion goods is extremely hard to forecast, retailers and brand owners chronically suffer from costly markdowns (price reductions to move merchandise unsold at full price) and stockouts (lost sales due to sellouts of popular styles). Estimates of the costs of markdowns alone range widely, some as high as 33 percent of retail sales…. Companies employing ‘fast fashion’ tend to have significantly lower markdowns (both in items and in magnitude of markdown) than other classes of retailers.”
Whereas Zara’s markdowns are typically around 15%, the markdowns at US apparel retailers and department stores are typically in the 50-70% range. These markdowns and stockouts are very costly for fashion companies.
“Fast fashion is a business model tailor-made for the multi-channel ‘I want it now’ Internet-driven buyer of today. It offers significant business value to a range of retail companies whose product cycles are accelerating and influenced by celebrities, luxury brands, and media hype. The long and guarded industry process of translating fashion design into street wear—or from elite runway shows to department store floors—is now completely transparent to sophisticated ‘fashionistas,’ young people whose purchase influence is 24/7 mobile access to stores, stars and sources that truly reflect demand- driven impulses.”
Fast fashion links upstream inventory commitments with a brand’s downstream profitability. The critical elements include postponing commitments on finished goods to reduce lead times and inventories; using real-times sales to determine production during the selling season; optimizing total profit to include the financial impact of markdowns, and offering fresher and more frequent new products.
Over the past 25 years, retailers and brands have obviously exploited sourcing and distribution efficiencies. What is different about retailers like Zara, H&M and Uniqlo is that they combine low cost production with speed to market and customer-focused agility. The key is to combine improved speed and efficiency across the entire product cycles driven by what customers actually want, not just inward-looking cost-savings in part of the supply chain.
US retailers: living in "retail denial"
The superior performance of agile management in fast fashion is now well-documented. Yet as in other sectors, many US managers are still in the grip of traditional management thinking and are slow to respond.
Thorbeck cites the example of “one of the largest specialty apparel retailers that had completed a pilot trial for supply flexibility, certainly one of the first in the industry. The success and returns of the pilot were dramatic, driven by a 90-day lead time reduction. The executive vice president leading the initiative was convinced of speed-to-market benefits where demand forecasts improve with time. However, the case experience was not rapid roll out of the pilot, but rather the description of organizational rigidity, which confronted the EVP. The proven ‘pot of gold’ was not enough to motivate consensus and change across company functions.”
Thorbeck lists the excuses that US retail executives offer:
“That’s not our customer. We don’t worry about getting from the catwalk to the stores in the same way.”
“Our factories don’t have that capability. We’re not vertical.”
“Speed-to-market is something we’re thinking about for next year.”
Thorbeck suggests that the appropriate quote is from Pogo: “We have met the enemy and he is us.” Instead of embracing a better way, the US fashion industry asks “why?” and “how much will it cost?”
In effect, they are still living in the world of traditional management, with the vertical mindset of shareholder value and command-and-control. The more agile, horizontal mindset with a total focus on delighting customers through continuous innovation has yet to take a hold in an industry that is crying out for it.
Astonishingly, they have not yet entered the Creative Economy. The Copernican revolution in management mindsets in which the customer is the center of the corporate universe has yet to take place.
Yet as in other sectors, the economics is forcing the change. The choice for these US fashion firms is simple: change or die. So far, Thorbeck is suggesting, the US fashion industry still shows signs of opting to die.
And read also:
Salesforce CEO Slams The World’s Dumbest Idea
The Surprising Reasons Why U.S. Lost Its Competitiveness
Why The World’s Dumbest Idea Is Finally Dying
The five surprises of radical management
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Follow Steve Denning on Twitter @stevedenning
