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We are living in the extraordinary times of the advancing Covid-19 virus, with general store closures in more and more countries, which is now also being followed at the individual retailer level. Media headlines for non-food retail include: 'Entire season disappears' and 'Coronavirus costs the luxury sector up to 40 billion euros in 2020.' Everyone's health is, of course, the top priority, but from a business perspective, it is also very worrisome. How long this crisis will last is difficult to predict. However, we must consider that the reality after the crisis will not be the same as before. Relying solely on the temporary government safety net provides no structural solution. We need to use this time for reflection. Reflection on what we did, how we are dealing with the current situation, and how we want to move forward, or how we will adapt. This blog focuses on the anticipated collaboration between multibrand fashion retailers and their suppliers (fashion brands) in that context.
Moderetail sees black snow: 'Entire season disappears.' The fashion sector is one of the hardest-hit industries by the coronavirus crisis, as calculated by Moody's. The spring collection in clothing stores remains behind closed doors, while deliveries are not taking place and/or there is no money for fall orders, according to an article from March 20th on www.retaildetail.nl. Downright intense
Personal shopping sessions, significant discounts, and creative actions might still bring in some money in the short term, but we also need to prepare for the new reality after the crisis: less physical contact, less travel, fewer trade shows, more digital. While stores will never disappear, the way in which stores collaborate with their suppliers can be much better organized for most. This message is not new. In recent years, many brands have implemented this new way of working together. Successful brands in this regard include PME, OPUS, YAYA, NZA, Profuomo, Garcia, StreetOne, State of Art, and the brands of Bestseller, to name a few. More and more retailers have found this approach to be very pleasant (delegating responsibilities) and lucrative (better returns). Notable examples include Berden and Van Tilburg Mode & Sport, as well as numerous small retailers with a store on the corner.
What is the crux of the VMI collaboration strategy referred to here? (Vendor Managed Inventory)?
The key characteristic of this model is that the supplier acts as a chain director, not only for basics but also for seasonal items. Based on structured, automatically provided inventory and sales data at a detailed level (article/color/size per shop floor per day), the supplier learns to recognize trends and patterns of sales for each shop floor of its retail partners. By aggregating this data at higher levels (retail chain, region, country, style, product group) and combining it with the availability of products per article/color/size, the supplier is able to better align the offering on the shop floor of its customer with the consumer's needs in that store. The supplier can draw from various sources, such as free stock, stock in the pipeline, stock in its monobrand stores, stocks in its online channel, and presumed excess stock at other retail customers. This increases turnover, reduces markdowns, resulting in better returns for both parties and improved availability for the consumer. A win-win-win scenario..
Preconditions for VMI
The key prerequisite for a VMI (Vendor Managed Inventory) strategy is mutual trust. If the supplier fills the shop floor of its VMI partner with random excess stock, the outcome on the shop floor will be poor, and the retailer may not want to continue the model in subsequent seasons. Without structured and automated data exchange (EDI), the model is unlikely to work. The supplier needs tools to manage the VMI model; a traditional wholesale system is simply not suitable for managing retail data. Furthermore, the supplier needs retail know-how (or better: retail blood) to act effectively as a chain director. Last but not least, the supplier must have confidence in its own collection and show a willingness to take back slow-moving items. The retailer's cost price is much higher than the supplier's cost price. Chain thinking and chain efficiency call for addressing the pain where the cost price is lowest. The VMI supplier would do well to establish an alternative channel for slow-moving items, such as a physical outlet store or an online distribution channel in another geographical market, to avoid disrupting the regular channel.
As the supplier gets to know the individual shop floors of its VMI retail partners better, based on statistical figures and trends, the VMI model not only works for replenishment during the season but can also prove its worth in the pre-order process of new collections. Combining data and trends from the shop floor with knowledge of the new collection and the right tools provides the supplier with a sophisticated opportunity to create an intake proposal for the new collection at the article/color/size level per shop floor. The retailer's need to visit every supplier and detail every collection at the shop floor level decreases as the supplier can demonstrate, at the end of the season, that it has actually achieved a higher return on that shop floor as a chain director.
Alternatives
Variants that come close to VMI are Consignment, Automated Ordering, and Automated Replenishment. Unlike Consignment, the supplier is paid for what they deliver in VMI. Consignment is not a win-win model but a one-sided risk model for the supplier. Automated Ordering is the model in which the retailer automatically places orders with the supplier based on min/max settings per SKU for never out-of-stock items. Automated Replenishment is the same but initiated from the supplier's system. The disadvantage of these models compared to VMI is that they are not well-applicable to the collection of goods.
Tijdens en na de crisis
A Vendor Managed Inventory (VMI) strategy, in my opinion, is the best strategy for a healthier future of the relationship between a multibrand retailer and a fashion supplier. Chains (connections between brands and retailers) that effectively implement VMI will inevitably outperform those sticking to traditional methods. However, adopting VMI as a strategy requires significant efforts from an organization: vision, staffing, implementation of systems and procedures, and the establishment of structured data exchange. This entails an investment in knowledge, time, and money. Perhaps this crisis period provides an opportunity for you to invest in knowledge. We at FashionUnited eBusiness understand that this discourse is rather technical, and we would be happy to engage in a conversation with you to delve into the possibilities and opportunities for your organization. During the crisis, we are pleased to offer you a 50% discount on a remote VMI workshop, which will be interactive with your company, and a substantial discount on the implementation of EDI. Sign in here and discuss the possibilities with you. This way, you can emerge stronger from the crisis, enabling the recovery of the incurred damage sooner, and most importantly, establishing a more structurally balanced way of collaborating with your trading partners.
Lots of strength and wisdom in these special times, but above all good health!