The ‘Zero Inventory’ Solution | Intelligence, BoF Professional

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NEW YORK, United States — Nearly everything sold by Stòffa, a Manhattan-based maker of classic luxury menswear, is made-to-order or made-to-measure. Other than a few accessories, nothing Co-Founders Agyesh Madan and Nicholas Ragosta produce — not their $600 u-neck cashmere sweaters, or their $2,200 plonge-leather asymmetrical jackets — is made before a customer pays for it. Over 90 percent of their revenue is generated this way, meaning they have largely eliminated the risk of holding inventory that may not sell.

Madan and Ragosta came up with the idea for Stòffa while working at Italian suiting label Isaia, which sold made-to-measure suits but relied heavily on department stores to drive the majority of its sales. The duo says single-unit production offers more control: they’ve managed to turn a profit every year since launching in 2014, with no external funding until the end of 2019, when they raised a small seed round (less than $300,000) from friends and family.

Building such a business takes time and patience. First, they had to establish relationships with manufacturers and suppliers in Italy that were willing to work this way. Then, they had to build up a client base, which they did through their own networks and city-by-city trunk shows. (In 2019, they opened a permanent, by-appointment showroom space in New York.) Finally, they had to hire and train sales people who were able to help fit clients for garments in a convincing and authoritative way.

Because 90 percent of Stòffa’s products are made-to-measure and fit precisely for each client, consumers are more willing to accept the wait times that inevitably come with on-demand production. However, the company’s growth has also been far slower than it may have been if its founders had gone the traditional wholesale route, which requires a label to gamble on inventory that may or may not sell. In some years, Stòffa has grown 60 or 70 percent; in others, it has been just 25 to 30 percent. Annual sales are still well below $10 million. “We’re doing this with the understanding that growth is slower but the lifetime value of the client is higher,” Ragosta said.

In a world like fashion, efficiency can sometimes be a dirty word. But one of the biggest business problems the industry faces is the cost of excess inventory that goes unsold at the end of the season, resulting in waste that erodes profit margins. Dead inventory costs the US retail industry as much as $50 billion a year, retail consultant Haley Smith Recer wrote in a 2017 op-ed for BoF. In 2020, when pandemic-induced lockdowns and a recession have left retailers with even more stuff than usual, that number is set to be even higher.

And it’s not just unsold inventory that’s a problem, but the costs associated with holding inventory in the first place.

“Inventory doesn’t help anyone,” said Shan Reddy, a financial consultant for small and medium-sized fashion brands. “It’s cash tied up.”

In a trend-driven sector like fashion, perfectly aligning supply and demand is nearly impossible, especially when you have to place bets on product up to 9 months before it hits the sales floor. For years, industry peers have marvelled at the inventory efficiency of Zara, which tracks and responds to customer demand signals in close to real-time, often creating and delivering garments within just two to three weeks.

But what if you could shift entirely from a “push” system — where a brand forecasts how much product it needs, pays for it upfront and pushes it out to shoppers — to a “pull” system, where a brand is led by consumer demand, only making what it knows it can sell, through customer pre-orders, on-demand manufacturing and the use of real-time data? And what if this was something brands of all sizes could put into place? Is it really possible to get to zero inventory?

In the past, having a bit of excess product at the end of each season could be a good thing: an event sale offered customers unable to pay full price an entry point to a brand. But as the years went on, and pressure to increase revenues grew, many brands resorted to markdowns to drive volume. Soon enough, brands were making excess inventory in order to get the lowest cost-per-piece on production runs, hoping they could sell it at some point down the line. This way of working can result in a vicious cycle of end-of-season fire sales and reduced margins, driving many companies into debt, others into insolvency and some to close down.

Stòffa’s is just one approach to solving the inventory problem. Technology like production software PlatformE exists to help make the logistics of made-to-order run more smoothly. New York-based venture Resonance, backed by investor Lawrence Lenihan, offers management software and services, but also makes product on-demand at its three factories in the Domincan Republic, with a turnaround time of just six days. Currently, there are 17 brands operating on the platform — including Pyer Moss and Tucker — with plans to open a sewing factory in New York City by November 2020 and a “heavily automated” material and cutting factory in the state early next year.

Lenihan says this way of working benefits designers who trade on original ideas and personality over commodity basics, and allows them to develop new products without betting their own cash on the end result. “Traditionally, you run the risk of it being a miss,” he said. “If you miss something, then you’re stuck with inventory.”

But moving towards zero inventory — or close to it — can have other disadvantages. “There are going to be sacrifices…it puts some constraints…you can’t have any single material in the world,” Lenihan said.

Stanley Szeto, executive chairman of Chinese fashion supply chain manager Lever Style — which works with a mix of digital startups, including Everlane and Bonobos, and more traditional contemporary labels, including Theory and Vince — said that one of the biggest challenges in getting brands to convert to a lower-inventory model are the restrictions on fabrics. One of the keys to Zara’s success is that the company buys grey fabric ahead of time, garment dyeing or printing it when it’s ready to be used. For designers that pride themselves on developing custom fabrics, this can be a serious blocker that they aren’t able to get past.

“A lot of high-end designers say, ‘I don’t like that garment-dyed effect, I want a yarn-dye based fabric,’” Szeto said. “If you have that attitude, then you’re stuck in the old world.”

Viewing your factories as partners, rather than suppliers, can help alleviate some of this tension, and allow you to negotiate better rates on materials.

“Brands must break down and break through the adversarial bargaining that is focused on the price of finished goods out of the factory,” said John Thorbeck, chairman of supply chain analytics firm Chainge Capital. “What I mean by that is: you need to collaborate and cooperate on the components of finished goods in order to create flexibility, which in turn creates value that can be shared among the partners.”

Katie Demo, chief executive of Boston-based direct-to-consumer women’s apparel line Brass, said that her factory in China has been “adaptable to us ordering just the inventory we need.” For instance, Demo projects her ponte pant will sell a certain number of units each year, but she usually can’t afford to pay that up front. Instead, she lays out the cadence — how much she thinks she’s going to need, and when she thinks she’s going to need it — at the beginning of the year so that both sides can plan ahead without a 100 percent commitment.

Brass pays more per piece than if she ordered everything in advance, but it’s worthwhile if she is able to sell through more garments at full price.

“You have to look at the broader math,” Reddy said. “How much is going to go onto discount? How does that impact the perception of your brand? Are you training people to wait for the sale?”

Reddy also suggests rethinking where you base your production. (Increasingly, companies from Zara to Nike are working with factories across the globe to shorten turnaround times.)

“Depending on the set up, local manufacturers can turn things around quite quickly,” he said. “It’s a lot easier to move or augment your production locally.”

But is zero inventory scalable? Zara has managed to operate more efficiently because it was built this way from the ground up; and it still has excess at the end of the season. Lenihan’s Resonance can churn out products on a fast-moving basis. For many brands, however, transforming their supply chain still feels like too big of a risk.

“If you’re depending on the fact that Saks will buy $8 million worth of goods next year or Neiman Marcus will buy $12 million [in order to fund operations], then I’m not sure you can realign the whole process,” said Stòffa’s Ragosta. “The bigger unlock is being structured like this from the start.”

Perhaps the pandemic, which has wiped out so much of fashion’s sales, is an opportunity to rejigger. Lever Style’s Szeto is a good reminder that it’s possible to achieve speed-to-market and minimise inventory even when you are an established player. He first became interested in “lean” or “just-in-time” manufacturing — a system popularised by Toyota — about 15 years ago. But it wasn’t until Lever Style began working with newer brands that he transformed the way the company was managed and operated by focusing less on achieving minimums with one large brand and more on servicing many brands in a more efficient manner. Today, 50 percent of Lever Style’s sales come from brands that require quicker turnaround and smaller runs of product. Some of the companies he works with generate just a few million dollars a year in sales.

Last year, Lever Style’s gross margin was 29 percent; higher than the industry average for a manufacturer that doesn’t have its own consumer brands. In November 2019, the company made its debut on the Hong Kong stock exchange.

Szeto believes that it’s not too late for fashion to become more efficient. “A shirt takes 20 to 30 minutes of labour time,” he said. “So why does it take a month to make?”

Related Articles:

What to Do With All That Excess Inventory

Inside H&M’s $4 Billion Inventory Challenge

The New Fundamentals of Manufacturing

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