Fashion-Specific Supply Chain Challenges and Fast Fashion as a Suitable Solution

Inhaltsverzeichnis

1. Introduction

2. Specific Challenges
2.1. Perishability
2.2. Demand Volatility
2.3. Lead Times
2.4. Conclusion

3. Fast Fashion
3.1. Origins and Elements
3.2. Responsiveness and Sourcing
3.2.1. Cost Types
3.2.2. Cost and Performance
3.2.3. Conclusion
3.3. Agile Supply Chains
3.3.1. Agile Design
3.3.2. Leagility
3.3.3. Conclusion
3.4. Quick Response
3.4.1. Introduction
3.4.2. Inventory Control
3.4.3. Product Planning
3.4.4. Barcoding / RFID
3.4.5. Electronic Data Interchange
3.4.6. Performance Review and Conclusion
3.5. Conclusion

4. Zara: Fast Fashion in Practice

5. Closing Remarks

Literature Overview

1. Introduction

Imagine a stranger approaches you with an investment opportunity. For a substantial amount of your assets you can purchase his Mintmelon farm and enter the business of growing and selling Mintmelons. Mintmelons are an entirely new creation. The man says they taste delicious, but unfortunately he doesn’t have any left for you to try. Hence it will take a full year’s effort to grow them - Mintmelons are immensely complicated plants. And if that wasn’t enough, they can only be harvested in July and remain edible until August. Thereafter, the Mintmelons rot away and are only good as organic waste. You would have to work on the Mintmelon farm for an entire year without knowing whether anybody in the world would actually like or want to buy Mintmelons. And if you don’t manage to sell them off within a few weeks, you are ruined. So, does becoming a Mintmelon-farmer sound like a good idea to you?

The fashion industry has a lot in common with the cultivation of Mintmelons. Its main supply chain challenges are exceptional in their combination. Few industries are to such an extent subject to change, insecurity and external influence like the fashion industry. Recent developments caused a great rise in pace and instability. The development and implementation of modern supply chain approaches is becoming increasingly inevitable. In the last decades a set of strategies emerged that may have the capabilities to address these challenges and even turn them into competitive advantages. All of them essentially aim at increasing responsiveness and agility.

The currently most comprehensive strategy in that area is called “Fast Fashion”. The purpose of this paper is to explain how Fast Fashion evolved, what sub-strategies constitute it and how it can solve the problems of the industry. The focus hereby is on strategic aspects of Supply Chain Management.

To highlight as many facets as possible a wide range of literature was reviewed, from highly theoretical articles and quantitative models to rather practical papers and case studies.

Firstly, specific challenges of the fashion industry will be discussed. After that, Fast Fashion and the way it functions is explained in detail. In the end, a short case study is presented to illustrate how Fast Fashion works in practice and what results it can generate.

2. Specific Challenges

Due to the nature of its product and market the fashion industry faces a set of supply chain challenges which in such combination are of rather unique severity. This chapter discusses the three main issues when dealing with fashion supply chains.

2.1. Perishability

Christopher et al. describe the term “Fashion” as encompassing “any market or product where there is an element of style which is likely to be short- lived.”¹ The value-advantage of a fashion product over an ordinary commodity lies within its novelty and exclusiveness. This advantage does only exist as long as the product corresponds to the latest trend and has certain uniqueness, meaning demand is not already saturated by knock-offs. If the value advantage is lost, the item can only be sold for a substantially lower “salvage” price. A study in the U.S. by Pashigian shows that these markdowns amounted to almost 20 per cent of total fashion sales in 1984².

Fashion moves in cycles that are crucial for the success of a product. Generally, two types of apparel products with limited lifecycles can be distinguished: “Fashion” and “Seasonal” products with a lifecycle of approximately 10 weeks and 20 weeks respectively³. Traditionally, there are two seasons for apparel: Spring/Summer and Autumn/Winter. The main trends are created by high-end designer brands and presented at fashion shows more than half a year before the season starts. These trends are then translated into mass market products by the design departments of the apparel companies. However, nowadays these two common seasons are diverged into as much as twelve sub-seasons⁴. Along with the erosion of the traditional two seasons, the importance of high-end fashion shows diminishes. Many inter-seasonal shows launched⁵, often being more commercial than the traditional ones, meaning they show apparel closer to the actual mass product.

Possibly even more important than upstart fashion shows are the changes brought by the widespread use of social media. Everybody can start his or her own fashion blog and reach an unlimited audience. The latest styles are exchanged all over the world in real time and reach the remotest places without any delay. Today’s fashion trends are not defined twice a year, but can be created any time. As soon as the corresponding products are on the market, the older ones become obsolete and lose their value-advantage.

The break-up of pre-defined cycles makes it much more difficult to estimate the point in time a certain product will perish.

2.2. Demand Volatility

A fashion product is, by definition, new to the market. There is no experience and no sales data for this particular product. This renders reliable sales forecasts nearly impossible for fashion products. Demand uncertainty is one of the largest cost factors in the apparel industry. Underestimated demand causes lost sales and leaves unhappy customers. Lost sales are especially problematic for fashion products, because a great portion of fashion sales are impulse purchases. The impulsive customer is impatient and unlikely to return when the product becomes available⁶.

Overestimated demand leads to excess stock. Fashion is a highly perishable commodity, products lose most of their value when they become “out of fashion”. Thus, excess stock can only be sold for a relatively low salvage price.

Such demand uncertainty is one of the largest cost factors in the apparel industry. According to Fisher and Raman losses incurred by demand misjudgement exceed the cost of manufacturing⁷. Haines estimates that more than 33 per cent of all fashion items have to be sold at mark-down price. Pashigian discovered that mark-downs amounted to as much as 20 per cent of total fashion sales in 19842. Fisher states that the average margin of error in sales forecasts for innovative products, including fashion apparel, is between 40 and 100 per cent across all industries⁸. Sull and Turconi quote a study by Bain & Company which estimates the industry average markdown ratio at about 50 per cent⁹.

Not only is the quantity of demand difficult to predict, but also its development. A great portion of fashion sales is incited by extrinsic factors that are impossible to anticipate. These are especially any kinds of cultural phenomenon, such as movies, concerts, celebrities. As has been stated in the previous section, fashion can perish and new trends can be born at virtually any time, resulting in dramatic shifts in demand. Overall uncertainty is likely to aggravate, because the share of fashion products in total apparel sales tends to grow, along with the share of markdowns2. This suggests that conventional supply chains are becoming increasingly inept to cope with the challenges of demand uncertainty.

2.3. Lead Times

Starting in the early 1980s there has been a massive shift of clothing and textile manufacturing away from the main fashion markets Western Europe and North America towards offshore, low-wage economies. Initially, the relocation focused on regions nearby such as Turkey, North Africa, Mexico. More recently, manufacturing started to move to the Far East where labour costs are even lower, with USD 0.43 per hour in China versus USD 1.36 in Morocco in 2001¹⁰. China became the biggest exporter of clothing to the European Union¹⁰ and the United States¹¹.

Increasing cost-pressure throughout the industry led to a bias towards physical supply chain costs. While additional costs for logistics and inventory caused by greater geographical distance are usually overcompensated for by labour cost savings, the market costs and the so-called “hidden costs” are mostly neglected4. A detailed discussion of this topic will follow in section 3.2., “Responsiveness and Sourcing”.

The single most important driver of market costs are higher lead times incurred by greater distance, lower productivity and flexibility in East Asian low-wage countries. There are several definitions of lead times in the fashion supply chain, but the most crucial one is the “Time-to-Market”. It defines the time an enterprise needs from recognizing an opportunity to converting it into a product, to offering it to their customers on the market¹. Haines expects the average total Time-to-Market for a traditional apparel company seeking lowest manufacturing price to be between 20 and 29 weeks⁴. Given a life- cycle of 10 weeks for fashion and 20 weeks for seasonal products, this means that the traditional enterprise has to decide two to three cycles in advance what fashion products they want to offer. As has been stated before, fashion is highly perishable. Quicker competitors with a shorter Time-to- Market can deliver the latest trends much earlier, skimming the price premium for having exclusively the most up-to-date merchandise. The slower enterprise will then find itself in the position of a late entrant. In subsequent cycles, these products are neither very fashionable nor exclusive anymore. There will be numerous knock-offs on the market and a fashion-premium will not be achievable.

Quickness is essential in the apparel business and is becoming more so with the growing overall-share of fashion products, shortening life-cycles and increasing demand volatility.

2.4. Conclusion

The fashion apparel supply chain faces a remarkably unfavourable combination of challenges. The common fashion company decides half a year beforehand to offer a product that is supposed to capture the latest trend of that future period. This trend may only last a couple of weeks. Nonetheless, exact timing is crucial. To gain the fashion price premium the product must possess exclusiveness, so the company has to be among the first movers. There is no reliable method to forecast whether or not anyone will actually want to buy a particular fashion-product and what the total demand will be. Consequences of wrong forecasts are rather severe. Excess stock blocks shelve space and perishes quickly, being worth next to nothing after its season ends. Shortages, on the other hand drive off the impulsive and impatient consumers of fashion.

It is obvious that these challenges exacerbate each other, leaving a vast potential for supply chain optimization. It does not make much sense to tackle every issue on its own. An integrated approach is needed to align the entire supply chain with the fitting strategy regarding product and market conditions. The next chapter discusses one such approach known as “Fast Fashion”.

3. Fast Fashion

Cachon and Swinney define Fast Fashion as a “system (that) combines quick response production capabilities with enhanced product design capabilities to both design ‘hot’ products that capture the latest consumer trends and exploit minimal production lead times to match supply with uncertain demand.”¹² This chapter discusses the origins, development and elements of Fast Fashion and how this system can improve the fashion supply chain and increase the profitability of the fashion company.

3.1. Origins and Elements

It is impossible to trace back the creation of the term “Fast Fashion” to one single innovator. It rather evolved in common usage since the beginning of the noughties with companies such as Zara being its pioneers⁴. Fast Fashion was not simply invented, but rather developed and composed from a number of earlier concepts.

Before the development of concepts associated with Fast Fashion, the fashion industry concentrated on minimizing so-called “physical costs” throughout the supply chain. It particularly focused on manufacturing price as the largest factor of physical costs. Thus, the industry moved manufacturing to low-wage regions far away from the actual fashion markets. The increased physical costs of logistics and storage were dwarfed by the savings in manufacturing.

The industry mostly ignored the “non-physical” costs of its supply chains.

They are defined as “Inflexibility Costs” and “Hidden Costs”. Inflexibility costs in the fashion industry are especially those associated with the industry’s specific challenges. These are expenses incurred by demand misjudgement, product shortages, excess stock and obsolete products. Hidden costs can be increased administrative, transaction- and search-expenses. They are called “hidden”, because it is difficult to quantify and to assign them to a single stock-keeping unit1. In the fashion industry, non-physical costs usually exceed savings in labour if relying solely on efficient manufacturing. Eventually, the simplistic “cheap” approach proved to be incapable to cope with the specific challenges of highly fashionable goods because of its inflexibility and inertness.

Hence, the first step towards Fast Fashion was realizing the value of responsiveness and the impact of specific market costs in the fashion industry. This led to the partial return of manufacturing from faraway places back to regions close to the main fashion markets, at the expense of higher labour cost.

The benefit of producing in factories close to the markets is that demanded product can be transported to the stores in much less time. But this is only one part of the solution. If solely manufacturing location is chosen according to the responsiveness paradigm to accelerate logistics, but other steps such as buying, development and production are designed to be as cheap as possible, the entire supply chain will still remain rather unresponsive. To obtain higher responsiveness it is necessary to achieve flexibility in manufacturing capacity and product type to properly serve a volatile demand.

A supply chain that provides these capabilities is named the “Agile Supply Chain”, as opposed to the prevailing “Lean Supply Chain”, that focuses on minimizing physical costs. A hybrid approach called “Leagile” is suggested to merge the benefits of both concepts. A supply chain can be partly agile and partly lean, with a so-called decoupling point separating the cheap from the flexible system.

An agile supply chain provides the ability to alter product type and quantity on short notice according to the latest information from both market and supplier side. The concept of “Quick Response” focuses on obtaining this information and spreading it throughout the supply chain. It makes use of new technologies that allow the collection, processing and distribution of large amounts of data in real-time. Quick Response emphasizes a collaborative approach between supply chain partners to make use of this data. Quick Response capability is one of the two key elements of a Fast Fashion system.

The other element of Fast Fashion, Enhanced Design, comes from a different angle. It focuses on product development. The ultimate goal of Enhanced Design is to increase the customer’s willingness-to-pay. Partly it achieves this by innovative methods to actually design a better product, offering higher value to the customer. But it primarily takes the specific challenges of the fashion market and turns them into the Fast Fashion company’s favour. Enhanced Design aims to accelerate fashion-cycles, frequently bringing the latest products to the market, thus exploiting the weaknesses of traditional, slower apparel companies. Enhanced Design will not be discussed in detail since the focus of this chapter is on supply chain strategies. It will be explained further in chapter 4, “Zara: Fast Fashion in Practice”. The following sections will examine the three supply chain concepts that led to Fast Fashion.

3.2. Responsiveness and Sourcing

This section deals with sourcing decisions from the perspective of serving a high-income market in either Western/Central Europe or the U.S.

One of the most important factors of the fashion supply chain is the location of manufacturing. There are basically three options: 1st, sourcing locally and domestically in a high-wage country, for example the US, UK, Germany. 2nd, geographically and logistically close to the market in a nearby low-wage country, for example Morocco or Mexico. And 3rd, off-shore in a low-wage East Asian country. This section compares these location strategies concerning cost and performance and explains how they affect the fashion supply chain.

3.2.1. Cost Types

When evaluating sources one has to carefully consider all types of costs associated with them. Some cost types are obvious and simple to quantify. They can be allocated to a single stock-keeping unit and thus easily taken into account when making strategic decisions. Other cost types are rather obscure, such as opportunity costs of lost sales or transaction costs.

Generally, there are three main types of cost factors associated with the fashion supply chain. Physical costs are the obvious expenses of manufacturing, logistics and inventory⁸. But they are not the only ones to be taken into consideration. Christopher et al. emphasize the importance of “hidden” and inflexibility costs. Hidden costs are the expenses of finding, establishing and maintaining an external source of labour or product. These can include staff training, quality checks, travelling, loss of labour efficiency as well as risk of delays, unexpected taxes and fines and many more other cost factors that are difficult to estimate and to assign to a single stock- keeping unit. Additionally, “soft” factors such as employee dissatisfaction due to relocations, the ethical concern and reputational danger of poor working conditions and environmental hazard have to be considered¹.

Inflexibility costs are incurred by the incapability to adjust supply to demand that diverges from initial expectations. They include opportunity costs of lost sales, inventory costs of excess stock and cost of obsolesce. Inflexibility costs are especially relevant in the fashion industry.

The structure of these cost types differs heavily between domestic, local and off-shore sources. Hines and Bruce developed the “Iceberg Theory of Costs and Opportunity”⁴. The theory states that physical costs are usually higher for domestic high-wage suppliers (from the UK in their example) than for off- shore sources. These costs are obvious and represent the tip of the iceberg above the waterline. However, Hines argues that hidden and inflexibility costs can be significantly larger for low-wage off-shore suppliers. Those are non- transparent and therefore form the lower part of the iceberg beneath the waterline. He concludes that the tip of the iceberg is usually larger for domestic suppliers, but the part underwater can be huge when sourcing from off-shore. On first-look, the off-shore option seems the most cost-efficient. But a close assessment of all cost factors, including hidden and inflexibility costs, is needed to make an informed decision.

3.2.2. Cost and Performance

This sub-section compares cost and performance of different sourcing strategies. The most obvious cost factors are physical costs, especially for labour. All current estimates come to the same conclusion. Domestic high- wage production has by far the highest labour cost. Local low-wage and off- shore manufacturing are much cheaper, with off-shore being significantly cheaper than local low-wage countries. Stengg states the wage costs for the high-wage country Germany as USD 18 per hour, which makes it 13 to 18 times more expensive than low-wage local labour in Morocco (1.36) or Romania (1.04). East-Asian offshore sources China (0.43) and Vietnam (0.22) prove to be even cheaper. Note that these are purely wages. Other labour cost factors such as overtime compensation are likely to even increase the gap between low and high wages, with German total labour cost at USD 21.5 per hour. But cost alone is not sufficient for the assessment of a source. Productivity has also to be taken into account. Germany has a thirty times higher hourly value added per employee than China, but forty-two times higher wages. Even in an analysis of value-added per labour cost China would come out as more efficient¹⁰. However, this is a very simplistic measurement and does not consider that special skills or technologies necessary to produce certain high-value items might be unavailable in low- wage countries.

Apparently labour cost is the one relevant cost factor when considering physical costs from a fashion company’s point of view. Long-distance shipping costs via sea-freight are not perceived as significantly larger compared to short-distance shipping costs via sea, rail or road. They only are relevant as risk-factors, for example if short-term delivery via air-freight becomes necessary or unexpected tariffs are imposed. These risk factors are by common definition not physical, but rather “hidden” or inflexibility costs.

To estimate inflexibility costs, one has to analyse how the sourcing strategies compare in crucial performance factors such as lead time and customer service level.

According to Lowson, domestic suppliers have the shortest lead times on average (6-12 weeks in case of the UK), followed by European sources (12- 24 weeks). Orders from Asia take by far the longest, 48-60 weeks on average. Off-shore suppliers also proved to be very inflexible concerning order changes during a season. Only 14% of Asian suppliers would accept changes in order-mix, versus 72% of domestic and 59% of European suppliers¹³.

Lowson then conducted an empirical examination of three fashion retailers with different sourcing strategies: domestic-only, combined and off-shore only. For all supply chain performance indicators (e.g. service level, lost sales, inventory turns, unwanted stock) the domestic-only retailer scored the highest, followed by the combined strategy. The off-shore only strategy came last¹³. Mattila et al. show similar results comparing possibility and duration of replenishment in different sourcing strategies and their impact on lost sales¹⁴.

Another study by Lowson¹³ explores the effects of upstream supply performance increases on customer service level by surveying executives from the fashion industry. Two types of sources were distinguished, “Domestic, Responsive, Flexible” (high-cost) and “Off-Shore Low Cost”. The study indicates that the optimal customer service level (corresponding cost of inventory taken into account) is higher for domestic than for off-shore suppliers. Correlation between improvements in lead time, supplier service level and supplier service time on one side and resulting customer service level and inventory on the other were significantly higher for domestic suppliers. The same goes with innovations in operations and technology¹³. The positive effects of these innovations were higher for domestic than for off-shore suppliers.

It is shown that domestic sourcing is the most effective way to avoid inflexibility costs. But these studies do not put this in proportion with total costs. Neither do they give information about the profitability of the examined retailers. The performance level of the combined-strategy is quite close to the one of domestic-only. Along with the fact that Zara, one of the most responsive, radical and successful Fast Fashion companies still produces 34% of its merchandise in East Asia, this suggest that a mixed sourcing strategy is the most promising one.

3.2.3. Conclusion

It becomes evident that when choosing sourcing locations for apparel it has to be strictly distinguished between product types. Basic apparel has very long or unlimited life-cycles and stable, well-known demand. Forecasts are accurate. Therefore it is easy to determine output far in advance. Sourcing these basic products domestically would reduce inflexibility costs only marginally, if at all. Savings in co-ordination effort and logistics could not make up for the significantly higher manufacturing costs of local sources.

This is entirely different for fashion products with short life-cycles and volatile demand. High lead times lead to severe inflexibility costs. Having available a local source that can satisfy short-term demand massively decreases inflexibility costs. These savings exceed the higher cost of manufacturing. A reasonable strategy could be to source from offshore a certain base-demand that one is very certain to achieve, while keeping the option to use quick local sources to meet additional demand on short notice.

Two other factors come into play when not simply discussing “local” suppliers (geographically/logistically close to the market), but specifically domestic suppliers in a high-wage economy. It is shown that improvements in lead time, processing time and service level on the supply-side seem to have a greater effect on customer service level when applied by domestic sources rather than offshore sources. This effect is amplified when innovative strategies and technologies are introduced which aim at enhanced supply chain responsiveness. It appears that domestic high-wage suppliers are more capable aligning with innovation. Along with the growing share of fashion products in the apparel market this could mean that in the future these domestic sources will regain competiveness relative to off-shore suppliers.

However, one major factor has been neglected so far: The importance of integration between retail and supply. A large portion of hidden and inflexibility costs is likely to be caused by lacking integration and inadequate communication. Perhaps these costs could be minimized by improving interfaces between supply chain partners and implementing new methods of information sharing. The next two approaches, Agile Supply Chains and Quick Response, offer solutions by taking the bird’s-eye view over the entire supply chain.

3.3. Agile Supply Chains

For decades, the “Lean”-approach was predominant when designing and optimizing supply chains. It emphasized cost-efficiency achieved by level scheduling and reduction of waste such as unused capacity and non- essential variety. More recently the view emerged that lean supply chains are not optimal for certain product types such as fashion and the principle of agility should be taken as a target for successful supply chains in these areas.

3.3.1. Agile Design

As with the sourcing location, first and foremost it has to be understood what type of product the supply chain should process. Product type determines in what area the supply chain must excel. As mentioned before in this paper, the main distinction is between fashion products (unstable demand, short life- cycle, high variety) and commodities (stable demand, long life-cycle, low variety)⁸. Mason-Jones et al. identify a set of “Market Qualifiers” and “Market Winners” for both product types. Market qualifiers have to be provided at an acceptable level as a prerequisite to compete on the market. Market winners are the fields a product has to excel in in order to become the market leader. The market winner for fashion products is service level - the ability to offer the customer a wide range of products without delay¹⁵. A lean supply chain focuses on price as a market winner and neglects service level by levelling schedules and reducing variety. But certain elements regarded as waste by Lean Thinking are essential for an effective fashion supply chain. A fashion supply chain must be able to cope with great variety and hold extra capacity available to meet unexpected demand. It is commonly called “Agile” because it utilizes flexibility and responsiveness to perform in an unstable environment. To set up a successful agile supply chain it is necessary to minimize system-induced uncertainty. One common consequence of system- induced uncertainty is inefficiency caused by the so-called “Bullwhip Effect”, where demand becomes more and more volatile as it flows from the market upstream the supply chain and information quality deteriorates along the way¹⁶. This is mainly caused by insufficient communication and transparency throughout the supply chain. The section “Quick Response” describes strategies to reduce this uncertainty by emphasising information-sharing, cooperation and integration.

3.3.2. Leagility

Agile and lean supply chains follow a very different approach, but that does not mean they cannot be combined. It is possible to design a supply chain that joins the advantages of each strategy and is both lean and agile.

Mass market fashion products usually share the same basic elements, which are modified and combined to create the final unique product. That means that the further upstream you are, the more basic the elements become that form the fashion product as they flow downstream. So it seems reasonable to separate the supply chain into two parts: A lean, cost-efficient part upstream, where the product is a basic commodity with little variety and thus has a stable demand. And an agile part downstream, where it becomes a specific fashion product with volatile demand. Naylor et al. describe such design as “Leagile”, a hybrid between lean and agile¹⁷. The point where the supply chain shifts from the forward-planned lean part to the market-driven (responsive) agile part is called the “decoupling point”. The decoupling point serves as a buffer and ensures that unexpected demand can be satisfied without interfering with the lean, even-scheduled upstream supply chain. It should be placed at the threshold where a product changes from basic to special. The further downstream it is placed, the more stages become lean and cost-efficient. But at the same time the buffer size increases that is needed to achieve a high service level on the market. This again increases costs and leads to other risks, such as obsolesce. The right placement of the decoupling point is crucial for the success of the Leagile strategy.

3.3.3. Conclusion

To achieve responsiveness and a high service level in an efficient manner, a supply chain perspective is necessary. The entire chain with all its different players and interest groups has to work congruently according to a common strategy to eventually be successful on the consumer market. The agile and Leagile strategies specify how a both responsive and cost efficient supply chain should be designed. But they do not describe in detail what is necessary to set up and maintain such a supply chain. Quick Response, the topic of the next section, gives answers to this.

3.4. Quick Response

Quick Response is a supply chain strategy that focuses on flexibility and demand-driven supply. Fisher and Raman define Quick Response as an “apparel industry initiative intended to cut manufacturing and distribution lead times through a variety of means, including information technology, (…) logistics improvements (…) and improved manufacturing methods (…).”⁷ The first sub-section discusses the origin of Quick Response and its main components.

3.4.1. Introduction

Quick Response is a strategy introduced by the U.S. apparel industry in the mid-1980s to regain competitive advantage against low-cost Asian rivals¹⁸. It is capacitated by the introduction and widespread availability of modern information technology. Quick Response enables the retailers to plan their production and ordering closely in time to the selling season and gives them the opportunity for replenishment, thus reducing the effects of demand uncertainty and perishability and at the same time decreasing inventory costs. Widespread availability and distribution of information is the key to a successful Quick Response system.

Quick Response is originally defined by three broad principles: communication and exchange of information between supply chain partners, reduction of time and inventory throughout the pipeline and responsiveness to the consumer’s demand¹⁹. An empirical study by Kincade et al. specifies these principles and derives five components of Quick Response: Inventory Control, Information Sharing, Barcoding, Product Planning and Shade Sorting¹⁹. These components except from Shade Sorting, which will not be discussed in this paper, each correspond to at least one of the three broad principles. They include operational procedures and technologies and constitute the strategy which is referred to as “Quick Response”. The components are described below, concluded by an overview of research results on the performance of Quick Response systems.

3.4.2. Inventory Control

One of the key elements of Quick Response is reduction of lead time and inventory size across the supply chain. Inventory control is characterized by short production cycles, high turnover rates, small lot orders and reduced waiting time²⁰. This can only be achieved in an agile and responsive supply chain following a Quick Response strategy with high volume and short product life-cycle. Empirical research²¹ as well as quantitative models²² show that a Quick Response strategy results in significantly more inventory turns and less product in the pipeline than a traditional strategy.

3.4.3. Product Planning

Product Planning in Quick Response consists of two parts. The first focuses on interaction between the design, manufacturing and retailing parts of the fashion supply chain. The second one aims at improving the general production process²³. To achieve this, Quick Response uses information technologies commonly referred to as Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM). CAD allows performing most design operations without the time-intensive creation of samples. A textile product can be modelled and analysed digitally. The software recognizes weak points such as deformations and strains, therefore shortening the development process as well as improving overall quality. CAD also makes it easier to design clothes from drafts such as photos or drawings, helping to meet consumer’s demands more accurately. However, CAD is most significant at the interface between design and manufacturing. Traditionally, the design department has to create samples and ship them to the manufacturing locations. In case of suboptimal coordination the sample has to be sent back and forth, often several times before manufacturing can be commenced. CAD not only allows sending samples online, reducing lead times. It also allows designing products from the very beginning that are optimized for a given manufacturing infrastructure. The actual manufacturing process is enhanced by CAM. It includes higher levels of automation, allowing workers to operate several multi-functional machines simultaneously. CAM also enables the implementation of Flexible Manufacturing Systems and Manufacturing Resource Planning²³.

3.4.4. Barcoding / RFID

To achieve Quick Response, it is crucial to obtain digital information about all material flows and locations throughout the supply chain²⁰. All units processed in the chain are equipped with a barcode that identifies them and feeds information about the unit into a central data system. This information can be manifold and range from type to location to payment status.

An emerging alternative or supplement to Barcoding is Radio-Frequency Identification (RFID) technology. It uses radio transmitters instead of barcodes. In the fashion supply chain it serves a similar purpose as Barcoding, but has significantly higher performance, automation and capability²⁴.

Combined with an Electronic Data Interchange (EDI) system and CAD/CAM systems, digital information stored in barcodes or RFID chips about all types of stock in all points of the supply chain can be made available in real time across the entire chain. This can enormously facilitate material flow. Incoming shipments can be scanned, checked against purchase orders and paid within seconds. Discrepancies between order and shipment are easily identified. The immense quickening of such processes reduces lead times, which in itself already enhances responsiveness. Responsiveness can be further improved by making real-time sales data available by sophisticated EDI systems. EDI systems are closely linked to Barcoding and RFID and are discussed below.

3.4.5. Electronic Data Interchange

Electronic Data Interchange is defined as the “transmission of business data in structured formats between firms who normally do business together”²⁵. It helps achieving Quick Response in two ways. EDI can be used to effectively forecast sales, plan replenishment and accelerate order fulfilment²⁵. Sales are forecasted using point of sale data. The single stock-keeping-unit (SKU) with all its relevant information is captured by Barcoding (or RFID) and fed to an electronic data system which estimates sales, computes demand for replenishment and sends an order directly to the manufacturing part of the supply chain. Detailed point of sale data can also be used to improve design in future product cycles, meeting consumer’s needs more accurately. This method is referred to as “Micromarketing”²⁶.

Once the replenishment order is sent upstream to manufacturing and produced, EDI systems accelerate order fulfilment from factory to point of sale. All necessary processing can be handled by EDI systems, including shipping notice, invoice and payment. Advanced EDI systems in the field of container logistics²⁷ make it even possible to transport the merchandise directly from the factory to the sales floor without further handling²⁸.

There are two main types of EDI systems used by an apparel manufacturer/retailer according to Riddle et al.: customer related and supplier related. Customer related EDI systems receive and process data from downstream the supply chain. Applications can include processing point of sale data, computing sales forecasts, receiving orders as well as sending shipping notices and order affirmations. Supplier related EDI systems work upstream and can be used to send orders and track deliveries, as well as to receive information for production planning and inventory control²⁵.

All these systems have in common that they demand a high level of cooperation and/or integration. This has been rather uncommon in the apparel industry before the emerging of Quick Response. To be effective, EDI systems have to be able to communicate in both directions. The involved supply chain partners have to agree on a uniform data structure²⁹. Instead of placing large orders well in advance, the retailer now places smaller orders throughout the season. He has to rely on the manufacturer to fulfil these orders on relatively short notice. Otherwise he runs out of stock. To effectively calculate replenishment needs, a common variable model has to be developed. This model must contain sensible information about both partners’ internal operations. A lot of trust is required between the parties. The forecasting model is fed by detailed point of sale data. Before Quick Response, such data normally did not leave the retailing business. The implementation of order fulfilment directly from factory to point of sale by delivering floor-ready merchandise requires a lot of reliance and control by the retailer concerning consistency and scheduling.

It is evident that the introduction of EDI means a large investment into a retailer-supplier relationship. To pay off, these relationships must last longer than in the past. The partners have to assure stability by keeping the relationship fair and beneficial for both. Fully and partially implemented relationships between vendor and retailer are developing rapidly as a result of the widespread use of Quick Response systems²⁹.

3.4.6. Performance Review and Conclusion

Since Quick Response comprises a great variety of components, it is important to first analyse how intensively they are in use. A survey on the use of Quick Response components²⁹ in manufacturing and retail exposes large discrepancies. While 84 per cent of Quick Response users employ electronic point of sale equipment, only 13 per cent use automatic demand forecast. 52 per cent use Barcoding, only 20 per cent utilise it for shipping containers. When discussing performance impacts of Quick Response systems one has to keep in mind the great heterogeneities among practical users.

Fisher and Rahman modelled a Quick Response system that emphasizes on the importance of replenishment within an on-going sales period. After observing the first 20 per cent of a sales period, forecast accuracy for the rest will be between 80 and 90 per cent in a normally very volatile sales environment. Profit was expected to increase by 60 to 127 per cent. These findings were confirmed by the application to Sport Obermeyer, an apparel company specialized in seasonal sports fashion⁷.

Perry et al. studied the outcomes of the so-called “Quick Response Program” funded by the Australian government to raise the competitiveness of the country’s Textile, Clothing and Footwear Industry. Results were consistently positive in all areas. The percentage of orders arriving by due date nearly doubled from 53 to 93 per cent. Inventory turnover and percentage of business with the immediate customer doubled as well²¹. The massive growth of fashion companies implementing Quick Response such as Zara and H&M also indicates that Quick Response is a successful strategy.

Quick Response is not a separate strategy to agile supply chain design or responsive sourcing decisions. In fact it emerged from these supply chain strategies that aim at responsiveness as a means to tackle the challenges of the fashion market.

3.5. Conclusion

This chapter described the focus and development of supply chain strategies into Fast Fashion. It explained how Fast Fashion gives answers to the challenges that are natural to the fashion business. Responsiveness proved to be the key concept behind Fast Fashion. Because of the focus on responsive supply chain strategies two important factors of Fast Fashion were not discussed in detail: the product perspective and the impact of integration. They are described in the following chapter by a short case study about Zara, the world’s leading Fast Fashion brand.

4. Zara: Fast Fashion in Practice

Zara is the main brand of the Spanish Inditex Corporation and one of the global market leaders in fashion. It is regarded as one of the most radical champions of the Fast Fashion concept.

In the chapter above the need for close interaction throughout the supply chain became evident when discussing Fast Fashion. Zara’s concept depends on quick and smooth exchange of information. The entire company is designed according to that principle³⁰. It possesses a supply chain with a level of integration that is unique in the industry. In contrast to almost all its competitors, Zara owns most of its manufacturing. 60 per cent of Zara’s merchandise is produced in its own factories³¹, 50 per cent in locations close to the core markets. Zara even owns 90 per cent of its stores⁹. Design and distribution are centralized around the headquarters. All designs are created in a single design centre³⁰, all manufactured products shipped to a single distribution hub in A Coruña before being sent to stores world-wide. Zara places more emphasis on quickness by vertical integration than on manufacturing efficiency³². This results in a great flexibility regarding product variety, amount and frequency. While most competitors have to carry out production well in advance, Zara produces 85% of its stock constantly over the whole season³².

To make full use of this immense responsiveness Zara plans its product accordingly and turns the industry challenges into competitive strength. Zara rushes the wheel of fashion by turning products from solid commodities into fast-moving consumer items. 11,000 articles in 12-16 collections are introduced to the market every year³³. Quickness is essential because Zara does not strive to create new trends, but follows emerging ones. Often Zara introduces these trends earlier to the market than the high fashion companies that create them³⁴. Thus, Zara is able to skim first-mover advantage without taking the risk of being an innovator.

Although having all the capabilities, Zara does not replenish sold-old items. They rather use the gathered information to refine upcoming product lines. This strategy creates “a climate of scarcity and opportunity”³⁵ among consumers, which is rather unusual for a mass-market brand. As a result, Zara’s number of remaining unsold items is only half the industry average³⁰. Consumers know that there is always something new in store. Zara stores are visited four times more often by the same consumers than stores of its competitors. A useful side-effect is less need for promotion, which results in very low advertising costs compared to industry average³⁰.

Like no other brand Zara represents successful Fast Fashion. This is confirmed by financial data. The number of Zara stores more than tripled from 2001 to 2011, turnover almost quadrupled^{36 37}. Inditex reported a net income of two billion Euros in 2011³⁷.

5. Closing Remarks

This thesis illustrated the main supply chain challenges of the fashion industry. These proved to be volatile demand, rapid perishability and long lead times. The concept of Fast Fashion offers a set of solutions to these issues. All of them emphasise responsiveness and agility. They involve the shift of manufacturing back to locations close to the actual markets, widespread availability and distribution of information and upkeep of reserve capacity. Reviewed literature proves in theoretical models as well as practical studies that these sub-strategies can be very effective. The success of the Zara brand suggests that Fast Fashion is a seminal and profitable new concept in the fashion business.

However, current research lacks financial facts that could be reliably correlated to Fast Fashion and its sub-strategies. Further research is needed to determine how exactly the implementation of Fast Fashion and its components affect the profit of an enterprise. What are the prerequisites for a successful transformation to Fast Fashion and what problems occur in practice? What does it cost and when can one expect to break even? A concluding assessment of Fast Fashion will only be possible by close examination of its financial impact.

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[...]

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¹ Christopher et al. (2004).

² Pashigian (1988).

³ U.S. Congress, Office of Technology Assessment (1987) p. 16.

⁴ Hines and Bruce (2007).

⁵ Emling (2006).

⁶ Christopher and Peck (1997).

⁷ Fisher and Raman (1996).

⁸ Fisher (1997).

⁹ Sull and Turconi (2008).

¹⁰ Stengg (2001).

¹¹ Sen (2004).

¹² Cachon and Swinney (2011).

¹³ Lowson (2003).

¹⁴ Mattila et al. (2002).

¹⁵ Mason-Jones et al. (2000).

¹⁶ Lee, H. et al. (1997).

¹⁷ Naylor et al. (1999).

¹⁸ Choi and Chow (2008).

¹⁹ Kincade et al. (1993).

²⁰ Kincade (1995).

²¹ Perry et al. (1999).

²² Caro and Martinez de Albeniz (2007).

²³ Collier, B. and Collier, J. (1990).

²⁴ Lachhwani and Chaurasia (2011).

²⁵ Riddle et al. (1993).

²⁶ Ziliani and Bellini (2004).

²⁷ Lee, T-W. et al. (2000).

²⁸ Birtwistle et al. (2003).

²⁹ Fiorito et al. (1995).

³⁰ Ferdows et al. (2004).

³¹ Craig et al. (2004).

³² Ghemawat and Nueno (2006).

³³ Tokatli (2008).

³⁴ Merkle (2008).

³⁵ Kumar and Linguri (2006).

³⁶ Inditex S.A. (2002).

³⁷ Inditex S.A. (2012).