Dive Brief:
- Buyers in the U.S. and European Union canceled at least $16.2 billion in orders placed with garments manufacturers between April and June, according to a report from the Workers Rights Consortium and the Penn State Center for Global Workers’ Rights released last week.
- In the early weeks of the pandemic, apparel buyers in the U.S. and Europe canceled $40 billion in orders, the WRC and the CGWR estimated.
- The analysis shows that apparel exports to the U.S. have been declining in quantity and in price per unit‚ leading the authors to conclude that buyers have secured retroactive discounts on wares already ordered. "This loss in value translates into suppliers dramatically reducing operations, suspending operations, or even going out of business," according to the report.
Dive Insight:
Apparel buyers' quick-draw cancellations and refused orders when demand began to drop in March stoked concerns about the future of people and entities in apparel-producing countries. The analysis from the WRC gives a fuller account of the magnitude of the impact.
From April to June, U.S. buyers took possession of $9.7 billion less in apparel than the same period one year prior, representing a 49% drop YoY.
Throughout the pandemic, the WRC has been tracking brands' commitments to pay suppliers for garments already produced, or lack thereof.
A diverse list of brands, from Sears and Kohl's to Oscar de la Renta, have made no commitment to do so. Urban Outfitters even declared force majeure in March, writing to suppliers that it would not accept nor pay for undelivered orders and would discount en-route orders 30%, according to a report from Draper's.
The report concluded that the 49% drop in apparel exports to the U.S. between April and June consisted largely of finished or in progress goods, meaning suppliers had already fronted the cost of materials and labor. The welfare of garment workers and the health of the apparel-producing supplier base in countries such as Indonesia, India, Vietnam and Bangladesh suffer from these shortfalls.
"This behavior was enabled by the existing payments structure in the apparel industry, under which suppliers bear the up-front cost of production and buyers pay nothing until weeks or months after the factory ships the goods," reads the report.
Fashion industry analysts say the business needs a complete overhaul of supplier relations to stop the bullwhip effect from jeopardizing the livelihoods of garment workers every time there is an unanticipated drop in demand. And beyond garment worker furloughs and lost wages, when manufacturers go out of business, apparel companies lose the suppliers on which they rely in more normal circumstances.
The 2008 global financial crisis caused a noticeable drop in manufacturing capacity in countries such as China and Indonesia after a 10% demand drop, according to industry experts. The coronavirus demand drop and resulting bullwhip effect is, and will continue to be, more severe.
More collaboration and new ordering and payment structures are possible solutions. McKinsey recommended shorter lead times and smaller lot sizes with more frequent replenishment orders to give more assurances that orders placed will be wanted when ready. The firm also recommended bringing suppliers into the ordering process in the spirit of partnership over transaction.
