Global supply chains are in turmoil, and it’s hurting fashion companies. Nike missed analysts' expectations in its latest financial results because of supply bottlenecks, and Puma and Adidas are talking about similar problems.

Where are the current disruptions happening and what can fashion companies do in the short and long term to optimize their supply chain?

Peter Rinnebach, managing director of retail product and sourcing strategy at consulting firm Accenture, shared his insights during an interview.

What is the cause for the disruptions in the supply chains of the fashion industry?

It is basically a story that started at the beginning of last year. At the beginning of the Covid crisis, we had all the shutdowns in China, then in the other production countries. Everybody was worried about being able to get the supplies in the first place. No one thought Corona would even reach the European and American markets. After everyone struggled very hard to get their supplies and products in line with their budgets, the tables turned. All of a sudden, demand in the target markets was gone and brands tried to reduce and cancel existing orders. Since then, the situation has not really stabilized.

And where are we today?

It has now turned around again. Now it's a matter of how do I get the goods in the first place? That's led to us basically struggling with delays and problems at all parts of the fashion supply chain up until now.

Peter Rinnebach is global head of retail product development and sourcing at Accenture Strategy. Picture: Accenture

The global supply chain is extremely complex, but could you provide an overview of the current bottlenecks?

One very key issue here is container shipping. There have been port closures, such as in Yantian, China, causing delays throughout the supply chain. Ships are jamming up at ports, and there is not enough processing capacity to make up for the delays. At the same time, it's causing congestion of ships off US ports now, where there's not enough capacity.

This leads to delays just from the transport. Containers are tied up on waiting ships and in ports where they are not unloaded in time. That's why the container capacity isn't there that would be needed. Which is why container prices have skyrocketed so much on the main routes to the US and Europe.

And it doesn't stop at the congestion on the shipping routes...

As long as I'm not looking at vertical sourcing markets, but sourcing markets where the material is not local, the shipping problems also have an impact on material availability for production. On the production side, there is also the rather strict handling of the Covid crisis in China, where lockdowns are already imposed in cities when there are only a few cases, which means that production is temporarily down. In Zhejiang, 160 factories were down for several weeks in September.

Something like this also has a direct impact. The delay in production translates back into the transportation delay. Basically, there's a whole lot of interdependent uncertainty factors coming together along the entire chain.

Are there any other remaining bottlenecks when you look at the entire supply chain?

There are shortages of staff in warehouses in key markets, driven by the rapid online growth during the Corona pandemic. This is also true on the "last mile”, where there are bottlenecks in shipping out of the warehouse to the customer.

The UK is a special case. Gas stations running out of gas and empty supermarket shelves should rather be seen in the Brexit context. UK drivers often came from Eastern Europe, and they are now unavailable.

Peter Rinnebach has worked with the management of many global fashion companies - from vertical retailers to luxury brands - to optimize their global supply chains for 20 years. Accenture supports about two-thirds of all major fashion companies in projects focused on digitizing the value chain.

Does this mean that within continental Europe and Germany we don't have to worry about empty shelves?

At the moment, we don't have a situation where goods are no longer getting to the end customer. The situation from the warehouse to the "last mile" is covered, although it may be tight during the Christmas season. I'm curious to see to what extent promises in the web stores of the big brands and retailers can be kept. We already saw last year that there were significant challenges there. We expect it to be difficult to deliver according to promises this year as well.

That means the challenges exist primarily on the way to the warehouse, in the upstream supply chain?

A lot of the companies we work with are facing significant delays with deliveries from Asia at the moment. That's a massive problem in a setting where brands are bringing in monthly drops that aren't on the store floor for 24 weeks like they used to be, but just 12 weeks. Anything that I don't have now basically loses the opportunity to sell on the floor.

The fundamental problem right now is that all of the supply chain challenges, these instabilities, are colliding with a model that has been optimized tremendously for efficiency and leaves very little room for deviation. Safety stock levels in warehouses have been reduced in recent years, and product development cycles have been cut significantly - from 52 weeks from concept to store to 30 to 40 weeks or even less.

Which regions see the most delays right now?

The major delays are in Far East sourcing. We just did an analysis on how sourcing volumes changed last year, the "Corona year." There was talk for a long time that near-sourcing would come back. But it never came back; the Far East share and the share of the European periphery in sourcing have remained relatively constant.

Now, if you look at the import distributions - for example, in Europe - you see that the Far-East sourcing shares have suffered much more. You see for the first time that imports from Asia are down more than from Tunisia, Morocco or Eastern Europe.

Could you also quantify this development?

Last year, sourcing volumes from China to Europe fell by 34 percent - from Tunisia by only 19 percent and Bulgaria by 24 percent. Of course, everyone suffered within the context of Corona when demand was no longer there, but China was affected more severely. In a recent survey of chief sourcing officers, 72 percent responded that they expected near-sourcing to increase.

In the case of China, it has also been a prolonged trend: Last year, there was a 25 percent sourcing share for Europe; ten years ago, the share was 40 percent. We now expect this trend to continue, but that the share China loses will not go to low-cost Far East sourcing, but will also partly return - in order to be able to cover time-critical needs. For basics or never-out-of-stock items, it's not so critical, I can work with safety stock there.

This means fashion companies are now working actively to bring sourcing closer to demand?

This is a current discussion: Companies are trying to eliminate these uncertainty factors now. There are examples where brands have announced they will charter ships themselves. I think those are more the exceptions. The broader discussion is really: do I manage to bring goods that are more seasonal closer to take some of the uncertainty out of the supply chain.

How do you currently advise companies to deal with supply issues?

If the goods are already in port and cannot be shipped or cannot be offloaded from the ship, there is little that can be done. That makes the issue of supply chain transparency - being aware in the first place that something is at risk of going wrong - all the more important.

If I realize that I have a risk in the Far East, I can react proactively and, for example, use alternative near-sourcing suppliers or move goods forward in time to complete my offer. Another option is to work with more safety stock.

Are brands also taking long-term precautions now against situations such as those we are currently experiencing?

One of the main themes is supply chain transparency, where immense investments are currently being made in the context of digitalization. Another theme is stronger value chain control. That doesn't mean that everyone is going back to using PLV or cut-make-trim models versus finished product sourcing, which has been the big development in recent years.

We can already see that we’re moving away from a transactional way of cooperation, where suppliers are changed season after season in order to save a few cents. There is a much stronger trend toward entering into long-term partnerships and making joint investments - whether in sustainability or occupational safety.

At the beginning of the pandemic, companies had to use more seafreight after flights were canceled. Then container prices soared. Are apparel companies now relying more on air freight instead of ocean freight again?

Some brands have actually had more air freight in the past than they do today. Air Freight is not being used as a solution to fix the container crisis now. International air traffic is also not at the level it was before. Air Freight prices have also gone up and capacity is limited.

There is another issue, CO2 reduction and sustainability. Most brands have been setting ambitious targets towards 2025 and beyond for a while now. Air freight is a major driver of CO2 emissions. Thus, returning to high air freight budgets is not a strategic option.

Will there be a point where higher transportation costs will also be reflected in the price of fashion merchandise?

44 percent of chief sourcing officers expect initial margins in purchasing to narrow. If those decline, I'm faced with the choice that my overall Ebitda margin will decline or I'll pass it on to the customer as a price increase. We're already assuming that from the customer's perspective, we're going to see price increases.

We're also going to see that in part through fewer markdowns. When you talked to brands before the pandemic, in many cases, about 20 to 25 percent price markdowns were made because there was little targeted buying in large quantities. I don't think there will be discounting battles for the customer to the extent there have been in the past. Customers will buy more at full price than at discounted prices.

Do you already see fashion brands raising their wholesale prices for retailers?

That's not an easy question to answer. It depends on the distribution of power between the brand and the retailers. Against the really big retailers, a lot of brands - except very big sporting goods brands, for example - don't really have much leeway. With the big ones, the brand tends to absorb it; with the medium and smaller ones, they tend to try to balance it out as well.

That's incredibly difficult to gauge, and will also depend on how policymakers in each country continue to deal with Corona. On the production side, it's relatively hard to predict; from a transportation perspective, it's estimated that the situation will probably ease by the middle of next year. But there are also forecasts that say it will be with us for longer.

Finally, one last question: is the Christmas business safe?

This is the question that always ends up in the media headlines (laughs). I don't think there will be empty shelves in fashion retail in Europe, but the brands will have to fight quite hard to ensure the availability of goods. And they will certainly have to work with some tricks - whether it's extending the periods of existing merchandise on the sales floor or bringing back merchandise that has been held back onto the sales floor. Especially when it comes to top sellers, it could be quite tight.