As they continue to grapple with the impact of the coronavirus pandemic, retail companies around the world are facing the herculean task of adapting their business models to reduce risk in uncertain times.
The industry, which has long relied on low-cost sourcing volume and pricing, is now more seriously considering the concept of supply flexibility — also known as postponement — where the manufacturer produces a generic product that can be modified in later stages before it’s delivered to the consumer.
The model, according to Chainge Capital LLC chairman John Thorbeck, reduces the risk in finished goods by transferring that risk into materials. This allows the manufacturer to stock up on product with minimal labor costs before it puts in time and money to create merchandise based on unpredictable demand and variable forecasts.
Thorbeck, who spoke at FN’s sister publication Sourcing Journal’s “Fashion Business Model for Sustainability” summit, suggested that the adoption of supply flexibility could push a company’s market capitalization up in the range of 30% to nearly 40%.
“The goal here is sell more and less risk and invest in sustainability,” he explained. “If we don’t pursue something like that — if that advantage to unlock capital is something we don’t achieve — then we’re staying in the same cycle of discounting and pricing and commodity and volume, and that’s not a cycle that we want to return to.”
Thorbeck cited Amazon as an example: The e-commerce behemoth has made an asset out of its last-mile logistics, with outsized distribution centers located within short distances of major metropolitan cities and large consumer populations. Such facilities, due to their size and proximity to major cities, allow the company to make quick and fast deliveries of millions of products across its marketplace.
He also called out Zara, which he said is more “focused” on its factories in Spain and across Europe rather than the postponement model — leaving it with a “significant opportunity” to create capital, which can then be used toward practicing sustainability across its business.
“The source of value in sustainability and in profitability is upstream, and we’re not really going to invest in sustainability unless we have the capital to do it… especially now at a time when we have lost demand,” Thorbeck added. “So instead of focusing on price, price, price and lowest cost, we’ve got to focus on productivity, and that productivity benefits both sustainability and profitability.”