VMI as the most profitable cooperating strategy for fashion brands with multibrand retailers - during and after the crisis

With Covid-19, we live in bizarre times. With overall store closings in more and more countries which is being followed at individual retailer level here in the Netherlands. With media headlines for non-food retail like ‘Full season falls away’ and 'Corona virus costs the luxury sector to 40 billion euros in 2020’. Of course everyone's health comes first, but commercially it is very worrisome. How long this crisis will last is difficult to predict. We must however keep in mind that the reality won’t be the same after the crisis as it was before. Temporary safety nets of governments don't provide structural solutions. We must use this time as a reflection. Reflection on what we did, how we deal with the current situation and decide how we want to go on later on, or how we will adapt. This blog is about the future collaboration between multi-brand fashion retailers and their suppliers (fashion brands) in that context.

Fashion Retail sees black snow ‘Full season falls away’. The fashion industry is one of the sectors hardest hit by the crisis corona, as calculated by Moody's. The new spring collection hangs behind closed doors, while new supplies don’t reach the shop floors and/or there is no money for the autumn orders, according to an article on March 20th at www.retaildetail.nl. Big impact!

Personal shopping sessions, hefty markdowns and creative actions might bring in some money, but we also need to sort out the new reality after the crisis: less physical contact, less travel, fewer scholarships, more digital. Stores will never disappear; the way of cooperation between stores and their suppliers should be better organized however. This message is not new. Read the first blog of this series (October 2012) there once again: http://fashionedi.blogspot.com/2012/10/de-cirkel-is-rond-edi-is-noodzaak-proven.html. Fashion brands like PME, OPUS, YAYA, NZA, Profuomo, Garcia, Street One, Puma, G-Star, Vila and more have implemented this new way of working together with retail partners in recent years very successfully. More and more retailers have experienced this as very pleasant (relieve of workload) and more profitable (structurally better performance). Sounding examples are Breuninger, Berden Mode & Wonen, KaDeWe, Van Tilburg Fashion & Sport, El Corte Ingles as well as many small retailers with a single shop. Just to mention some.

So what is the crux of the here referred VMI cooperation strategy (Vendor Managed Inventory)?

The main characteristic of this model is that the supplier takes the lead in acting like a chain manager; not only in terms of the basics, but also for seasonal items. Based on structured and automatically supplied inventory and sales data at a detailed level (product / color / size by shop floor per day), the supplier learns to recognize trends and patterns by sales per shop floor of its retail partners. By aggregating this data at higher levels (store, region, country, style, product) and combining it with the availability of products by style / color / size, the supplier is enabled to balance the stock on the external shop floor better with the needs of the consumers in that store. The supplier can act from a variety of sources, such as free stock, inventory in the pipeline, stock in mono brand stores, stocks in its online channel and alleged surplus stocks at other retail customers. As a result of this, the turnover rate at the shop floors will go up and markdowns can be reduced with a better profit for both of them, with also a greater availability to consumers. So: win-win-win accordingly.

Preconditions for VMI

The main precondition for a VMI strategy is mutual trust. If the supplier overloads the shop floor of his VMI partner with any bad remaining stocks, the result on that shop floor will turn out badly and the respective retailer will not want to continue the model in subsequent seasons. Without structured and automated electronic data interchange (EDI), the model definitely won’t work. The supplier needs tools to steer the VMI model properly; a traditional wholesale system is just not suitable for managing retail data. Furthermore, the supplier needs to have retail know-how in order to be capable to function well as chain director. Last but not least the supplier must have confidence in his own collection and the supplier has to show willingness to take back poorly performing items. Retailer’s cost price of an item happens to be many times higher than the cost price of the supplier. Supply chain efficiency thinking calls for the pain to drop there, where the cost price is lowest; of course with respect to each other. Long term thinking and acting. The VMI supplier does well to set up an alternative channel for slow-moving items, for example in the form of a physical outlet store or online sales channel in another geographic market, so the regular channel is not thereby disturbed.

The more insights of the shop floor the supplier gets from statistical figures and trends provided by the retailer, the VMI model works not only for replenishment during the season, but the model is also very suitable for the pre order process of new collections. Having detailed data and trends from the shop floor, combined with knowledge of the new collection and the right tools, the vendor should be able to create the perfect proposal per shop floor, for the new season stock on item / color / size level. The need for the retailer to visit each supplier will decrease if the supplier can prove at the end of the season that his replenishment actions resulted in a higher profitability for the retailer.

Alternatives

Variants that come close to VMI are Consignment, Automated Ordering and Automated Replenishment. Unlike Consignment, in the VMI model the supplier gets paid for what he delivers. Consignment is not a win-win model, but a one-sided risk model for the supplier. Automated Ordering is the model where the retailer automatically places re-orders for never out of stock items at the supplier, based on min / max settings per SKU. Automated Replenishment is the same, but then initiated from the vendor's system. The disadvantage of these models with respect to VMI is that they are not well suitable for the replenishment of fashionable goods.

During and after the crisis

A VMI strategy is in my opinion the best strategy for a healthier future of the relationship between multi-brand fashion retailer and supplier. Chains (connections between brands and retailers) applying VMI very well will win from the actors who will go on in the traditional way. However, a VMI strategy requires quite a lot of organizations: vision, staffing, implementation of systems and procedures and the implementation of structured data exchange. This requires an investment in knowledge, time and money. Perhaps this crisis offers an opportunity to invest time in knowledge to presort for better times.

We understand that this paper is rather a technical story and we like to discuss with you to zoom in on the concrete possibilities and opportunities for your organization. During the crisis we will provide you with a 50% discount on a VMI workshop on distance with interaction with you and your people via an electronic blackboard. Implementation of EDI can be done in cooperation with us or with your local partner. Express your interest and we will contact you to discuss the possibilities for your company. In this way you might get stronger out of the crisis with regards to supply chain cooperation with your business partners.

I wish you strength and wisdom in these bizarre times, but above all: good health!