Shein: the ultimate demand driven supply chain?

“Shein's algorithms relentlessly scoured social media to identify social trends for Shein’s 250 designers to shape into garments. Orders are then placed automatically across its network of more than 5000 exclusive suppliers all connected via a proprietary system that enable the fashion group to see their available production capacity.”?

Shein is now China's largest cross-border fast fashion e-commerce company. Selling to consumers in over 150 countries including the US and the UK, profits last year were $2 billion on a turnover of $45 billion, an increase of five-fold in the last 3 years.?

Their success can be attributed in large part to their supply chain strategy, and in particular their ability to predict and respond to emerging demand trends, in close to "real time" - as little as 7 days from product inception to listing for sale. The transformational model of Fast Fashion pioneered by Zara, is further transformed by Shein into “Instant Fashion”.?

Shein was founded in 2012 by Sky Xu a Chinese entrepreneur while in his late twenties. He remains the CEO today. According to Sam Chambers writing in the Times "In 2020, covid presented a golden opportunity. Housebound teenagers lapped up his cheap clothes, posting videos of themselves on social media, tyring on their "Shein Haul". Shein's algorithms relentlessly scoured social media to identify social trends for Shein’s 250 designers to shape into garments. Orders are then placed automatically across its network of more than 5000 exclusive suppliers all connected via a proprietary system that enable the fashion group to see their available production capacity."?

Today this process supports a breathtaking rate of new product introduction - up to 2,000 new items every day! Clearly, this process cannot be driven by historical sales. It has to rely on "outside-in" market signals, and Shein excel at curating and exploiting this data. The Shein app with over 260 million downloads in 2023 (up from 68 million in 2019) is an immense source of customer information.?

The TikTok hashtag #Shein had over 80 billion views in 2023, and an army of fashion bloggers support the brand with videos of their Shein Haul, and a constant stream of coupons and discount codes drive sales.

On YouTube the strategy is similar, with affiliate programs paying for referrals. Shein's sheer range of items sold through the store and the fact that not everything is always in stock create a somewhat gamified experience. Customers are happy to film themselves unpacking their clothes to try them on and show how they found these inexpensive goods. Not surprisingly, cost conscious Gen-Z is the most important target consumer (equally unsurprisingly, Shein's brand collaborators include Katy Perry, Lil Nas X, Rita Ora, Nick Jonas, and Hailey Bieber).?

In supply chain terms, the rest is relatively straight forward. Orders placed on their apps are fulfilled from a single, huge warehouse in China, shipped by air direct to consumers in around 2-3 weeks - much longer than Amazon, but also much cheaper. Designers will typically commission trial runs of as little as 100 pieces, with visibility of supplier production capacity they receive products in weeks not months. If the algorithms monitoring buying patterns and social media detect that an item is selling it will be reordered. Scarcity in fashion can fortunately be an advantage so short term out of stock are not seen as a disadvantage, and in fact can enhance the brand.?

There are some anomalies in this model which can't be ignored. The fashion industry is the second most polluting industry on the planet. Shein's argument that producing only what is in demand reduces waste, is true, but doesn't negate the temptation to replace rather than reuse - the scourge of fast fashion. The cost of shipping by air (itself environmentally damaging) is offset by a tax anomaly - Shein's sells clothes cheaply, and customer orders are shipped individually to avoid paying VAT, which is only levied on imports over ￡135. Finally, sourcing ethically, at low cost from over 12,000 factories inevitably presents challenges and raises questions.?

In summary, Shein has built their business on a remarkable and very modern supply chain model. They carry out an extraordinary amount of demand sensing across social media platforms, which drives a barely believable level of new product introduction. Manufacturing is closely coupled to the design process. Short lead times, small batch sizes and frequent reordering minimise stock. Since customers pay in advance and suppliers are paid in arrears, working capital will be exceptionally low. Small batch sizes aligned with demand will minimise mark-downs and write-offs.?

The Shein demand driven model may not be applicable to every supply chain, but it’s disruptive potential is being felt around the world.?