The Evolution of the US Based Textile Supply Chain and the Growing Importance of Total Cost of Ownership

US based supply chains are becoming a powerful tool in the mission to improve the textile and apparel marketplace.  The industry has a rapidly evolving set of tools, technology, expertise, leadership and passion.  Made in the USA means much more than a patriotic label and a heritage of quality products.  Fundamentally, it provides a change in the way retailers can delight consumers. 

I am a stubborn optimist; this character trait has been a blessing and somewhat of a curse, especially given that my chosen profession is textiles and apparel.  Yes, I am in love with an industry that has been quite volatile since I began my career 30 years ago.  The objective of this article is to provide perspective on an evolving trend in the industry, and connect it to my personal history.  The hardest part of my career has been witnessing the closure of so many factories and the loss of so many jobs.  However, as a stubborn optimist, these challenges provide inspiration to continue on and find a way to rebuild. 

In a 2018 article, Keith Hoover did a great job of describing our conundrum in textile & apparel industry with a call to action:

Hoover, Keith. "The Meta Vertical Apparel Model." Medium.com https://medium.com/@BlackSwanText/the-metavertical-apparel-model-e377323315c0#_edn3

To summarize: Recent data shows that 97.5% of all US consumed apparel is imported versus 2.5% produced domestically.  This is a number that became significant starting in 1998 when the industry witnessed a period of a 72.6% decline in US apparel industry employment from 1998 to 2012.  However, this is a trend that can be reversed with the right approach to technology and process.

I started my career in Textiles in 1990 at the age of 16 and I immediately fell in love.  It was so important to me, I gave up my weekends for the next 6 years to work the night shift on Friday and Saturday nights, a move that baffled most of my friends.  At the time, one of the most significant free trade agreements was in the works; NAFTA went into effect in January of 1994.  In late 1995, I graduated from Clemson University with a degree in Textile Science and by January of 1996 I was living in El Salvador. I moved there to immerse myself into the early stages of offshoring and experienced first hand the process of creating longer supply chains.  I spent over a decade of my career helping companies move massive amounts of apparel production out of the USA to Latin America.  Yes, I am writing an article in support of resurgence of US based textiles and apparel after spending so many years doing the opposite.    

In the 90's; the vast majority of textiles consumed in the US were still dominated by basic categories.  These are items that were easily produced in bulk and experienced low demand volatility.  The US based consumers loved it, more for less.  The idea of buying American made products quickly gave way to the demand for cheaper goods. 

Retail buyers and wholesalers realized significant payback for offshoring efforts.  Seasonal markdowns were manageable, with supply and demand matching up relatively well.  It all seemed to make sense, even with a longer supply chain and increased inventory holding costs; the reduction in manufacturing costs drove the total cost of ownership down.  That is, until demand began to shift.  Basic economics tells us that once you over supply a need, consumers have a funny way of way of losing interest.  

The Shift at Retail

Fueled by rapid adoption of Ecommerce, consumers gained access to remote markets and unique products.  The era of new brand and product discovery was quickly embraced.  Brands could launch products in a direct to consumer model without relying on brick and mortar placement, and consumers could find an exponential amount of product options. 

The industry was faced with a changing landscape that did not fit well with the efforts from the previous decade of offshoring.  As a result, total cost of ownership began to steadily increase.  The supply chain had been disrupted in such a way that shifting back to shorter lead-time models proved very difficult. 

Deloitte published an article in 2016 highlighting the major shift in retail volatility.  

Lobaugh, Kasey and Bruun-Jenson, Jacob.  "Deloitte Retail Volatility Index, How 100 Years of conventional wisdom is being disrupted." https://www2.deloitte.com/us/en/pages/consumer-business/articles/beyond-trends-retail-volatility-index.html

Lobaugh and Bruun-Jenson did a great job of presenting the data around the reaction from retailers and industries.  Even citing how industry attempted to "operate" its way out of the softness at retail.  Exponential advancement of technology, most notably Ecommerce and the adoption of this by the US consumer base, created major shifts.  This is perhaps my favorite passage from the article – 

"What we found was that the major force at play was not the consolidation of the market that we had experienced in the US over the last 100 years.  Instead, starting in 2009, something interesting changed as we shifted to fragmentation of the retail industry.  Since then, we've seen a marked acceleration of fragmentation, with significant acceleration in 2015.  Smaller, more nimble players are stealing market share from larger, more traditional, at-scale retailers, creating a volatile environment of winners, losers, and head scratchers." 

We are seeing the rules and players change, enabled by new technology.  Large brands and retailers struggled to make the shift.  Smaller companies, now unencumbered by barriers to entry, are innovating at a rapid pace.  Desire for more things at lower prices began to shift towards fewer things with greater value and higher prices.  This is not something our industry, as a whole, saw coming.

By the time this started in 2009, I was well into the process of transitioning my career from a manufacturing professional to merchandising and sales.  After contributing significantly to the industry's desire to "operate" out of the softness at retail, I began working with retailers to solve for it.  

Total Cost of Ownership (TCO)

The concept of TCO relies heavily on the ability for groups of professionals to think holistically and understand the trade offs of major supply chain decisions.  Driving apparel production offshore reduces labor costs, but increases many other costs.  Some of the costs are easy to measure, like transportation.  Other costs prove more difficult to predict: inventory carrying costs, markdowns, supply risk, etc.  Perhaps the most significant of the difficult to measure costs are centered on reaction times.  If you are operating a supply chain that requires development to be initiated 12-18 months out, your ability to see the future is a critical requirement for success.  The last time I checked, crystal balls were not a real thing.  Guessing exactly what consumers will want 12 to 18 months out is next to impossible and there are real costs associated with that.  

With the drastic changes at retail and increasing volatility, the guessing game is becoming even more difficult.  This is causing the TCO concept to gain significant traction.  The barrier to understanding has been difficult due to complex, fragmented supply chains.  Specialization of labor helps with efficiencies, but often clouds holistic thinking.

All categories are not created equal.  The TCO calculation for large volume basic items is relatively easy to complete.  These predictable items, which still represent large amounts of consumer demand, are actually great candidates for offshore production.  On the other hand, premium items with more volatile and seasonally driven demand pose a much more complex problem.  Traditional costing methods struggle with indirect costs while many manufacturers and retailers provide performance metrics that optimize certain parts of the cost model.  Merchandising teams often focus on gross profit and initial mark up (IMU) targets to make buying decisions.  Gross Profit and IMU targets rely on consistent inventory carrying costs and end of season markdown exposure.  Guessing wrong on a 12-18 month development timeline is a costly endeavor.  Just take a look at the clearance section at your nearest large apparel retailer.  Many brands now rely on the off price channel to help them convert the growing amounts slow moving and obsolete goods.   

This brings me back to my decision to get into merchandising and sales.  Just as I baffled my teenage friends by giving up my weekends, I also baffled many co-workers along the way.  My counterparts from my manufacturing days were confused about my decision to join the ranks of merchants and sales teams.  The merchant and sales teams most often labeled me as the "manufacturing" guy.  It was a trying time, but the experience I gained by working in multiple areas of our industry is what enhanced my understanding of TCO.

Enter Crisis Mode

Today's crisis is COVID-19, it is the most significant economic event of our generation.  Supply chains were nearly shut down overnight due to store closures and "stay at home" orders.  Unemployment claims are off the charts and we now face major shortages of medical textiles.  Masks and gowns are being rationed and now state and local governments are scrambling to tap into US based manufacturers for help.  Revisit the statistics from earlier, the US based apparel industry employs roughly a quarter of what we used to.  That makes for a limited ability to react to this crisis domestically.  For inspiration, take a look at what the Industrial Sewing and Innovation Center (ISAIC) is doing to rebuild our industry and support the needs for healthcare PPE.  The teams at ISAIC are heroes; they are working diligently on re-developing much of the workforce the US based industry lost.  https://www.dhirubhai.net/company/isaic-industrial-sewing-and-innovation-center/

Additionally, we have begun to see a shift towards US based manufacturing as noted in the recent Re Shoring index report by Kearney.  Note that investments in digitization, workforce development and automation in the US will be key factors for success.   https://www.kearney.com/operations-performance-transformation/us-reshoring-index

What now?

Manufacturers, brands and retailers are at a critical point.  Now is a good time to rethink how TCO factors into business decisions.  Supply chain diversification and the concept of US based production is now becoming more of a reality for textiles and apparel.  Moving your entire supply chain back to the USA would be a bold move, but it does not have to be all or nothing.  Identify which parts of your business would benefit the most from a shorter supply chain and development time line. 

As Ecommerce enables major shifts in retail activity, digital development technology is the next big shift for the textile industry.  If we have learned anything in the last couple of months, being able to collaborate virtually is the new norm.  Virtual prototyping for textiles is now a reality, it has enabled a digital to production model.   Nimble supply chains driven by digital technology will change the game. Enhancing that further will be a robust feedback loop from POS analysis. Imagine the ability to react to demand signals in season, we have the tools to make this happen.

Stubborn optimism, it has certainly been a blessing to me, both professionally and personally.  As I have written about in the last 6 months, my personal battle against cancer did not appear to be a blessing at first.  I now consider it a gift.  Hardships give us perspective and endurance in the face of challenge.  The textile and apparel industry has the tools to compete more effectively; we can make a difference, even in the face of one of the greatest challenges of our lifetimes.