Fashion is faced with its most critical reckoning yet – demand for apparel is volatile, and the industry is being called upon to answer for its widespread adverse impact on the environment. In a time when takers are few and far between, garment manufacturers are left with the challenge of burning cash on large capacities to meet uncertain demand  –  all for deplorable returns.

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Factories are forced to operate below capacity

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During the COVID-19 pandemic, restrictions on movement resulted in delayed order fulfilment. To cope with inventory shortages, retailers resorted to stockpiling orders. Manufacturers responded to this spurt in demand by increasing capacities on the shop floor.

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However, once the pandemic subsided in 2022 and economic uncertainty arose, demand took a dip. Retailers were left with unsold stockpiles worth billions, and cancelled or reduced orders for the upcoming season.

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To make matters worse, geopolitical tensions across the world have rattled the global apparel supply chain. Global trade – including apparel shipping – hangs in the balance as the ongoing Red Sea crisis has impacted Suez Canal traffic. Containers shipped from manufacturing hubs in the east to western markets are being routed along the entirety of the African coastline via the Cape of Good Hope. The shipments are not only becoming longer, but also more expensive.

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Apparel manufacturers are experiencing uncertainty from both demand and supply sides. This has all but thrown capacity planning into mayhem – manufacturers are left with disproportionately large capacities (built during the pandemic to keep up with large orders) across raw material, fabrics, factory rent, labour, packaging, labelling, and more. The challenge they face is this – how long can they survive with high costs of labour, raw material and overheads without robust demand, and therefore, accurate projection of profits?

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A culture of cost-cutting is sweeping garment production

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The instinct of apparel manufacturers struggling with uncertainty is to reduce costs. Manufacturing costs are split into fixed ones like rent of the factory space, insurance, taxes, compliance costs, machinery and equipment – costs that are not affected by fluctuations in demand. Variable costs – that are directly linked to changes in production – are often reduced by manufacturers to cope with demand slumps. Here are some of the areas across which manufacturers often incur and reduce costs:

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1. Fabric

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Fabric forms a major chunk of the costs to apparel manufacturing. It can make up to 65-70% of the total cost of a garment manufactured as per some estimates. For manufacturers looking to curb costs, reductions in fabric costs are the most obvious and easy choice to make. 

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However, skimping on fabric quality might have dire repercussions later. If poor quality fabric is flagged during quality checks, manufacturers will be obligated to expend resources to produce another batch. From a sustainability perspective, poor quality fabric has a shorter life, and is more difficult to recycle.

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2. Labour

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According to the International Labour Organisation (ILO), labour accounts for 50-60% of the total costs in apparel manufacturing. So, lay-offs are a quick and easy way for manufacturers to keep costs in check amid current uncertainties. 

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However, in the face of erratic demand, this might be a risky proposition. Manufacturers may find it difficult to reassemble a workforce to fulfil unanticipated orders after a spell of poor demand. For example, in Vietnam, workers displaced from apparel manufacturing are flocking to other industries like tech or toy suppliers that are expanding their operations in the country. Apparel manufacturers will find it difficult to recover from this skill loss, resulting in longer production times and order delays. 

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3. Machinery and technology

Investment in machinery is considered to be a capital expenditure in apparel manufacturing. It may be expensive, but is necessary for efficiency, and improved quality and consistency. Machines and equipment help reduce downtime, defects, and wastage. They also help reduce the adverse environmental impact of manufacturing.

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Machinery is also linked to software tools like manufacturing execution systems (MES) and enterprise resource planning (ERP) software. This delivers real-time insight into production processes and helps streamline decision making. Combined, machinery and software solutions have become mission-critical to apparel manufacturing and help factories deal with competition.

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Are manufacturers failing to evaluate the consequences of shrinking capacities?

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Cutting variable costs in areas critical to manufacturing volumes and velocity may resolve short-term financial crunches, but can be detrimental to the manufacturer in the long run. Let’s take a look how:

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1.   The sustainability imperative

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2024 is the year sustainability will no longer be an option for all players within the fashion supply chain. Manufacturing, in particular, will feel the pressures of keeping up with widespread sustainability regulation in addition to the demand and logistical challenges that have unfolded over the last year.

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For example, the European Union rolled out its Strategy for Sustainable and Circular Textiles in 2023. The entire global fashion supply chain will be expected to adhere to these guidelines – especially manufacturers in Asia who fulfil 70% of the EU’s textile demand. The region’s Ecodesign for Sustainable Products Regulation requires designers to bake recyclability, reusability, repairability and durability into individual products. This will have a far reaching impact on the manufacturers’ decisions around the quality of inputs used, from fabric to trims, accessories, and packaging.

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Sustainability regulations for fashion have also been introduced in other large markets like the US. The New York Fashion Sustainability and Social Accountability Act, for example, requires due diligence, ESG disclosures, and greater supply chain transparency.

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In addition to top-down regulation, changing consumer behaviours will also dictate production. The disastrous environmental impact of fast fashion is no news – according to UNEP, the fashion industry is the second largest consumer of water and is responsible for 2-8% of global carbon emissions. It doesn’t help that the average consumer buys 60% more clothing than they did 15 years ago, and keeps them for only half as long.

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Fashion consumers are becoming increasingly cognisant of their indirect carbon footprint. This is evident in the rise of sustainable, home-grown brands. These brands operate on smaller scales, use sustainable (often traditional) materials, and compensate their workers fairly – all of which results in higher quality output.

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2. The cost of quality

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Diminished capacities are bound to create unfavourable operational conditions for manufacturers in the long run. Cutting corners on apparel inputs by using poor quality fabrics and accessories, and frugality when it comes to labour expenses will inevitably impact downstream operations like quality checks conducted by retailers, and the end-customer experience.

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Picture this – a manufacturer thins the workforce by introducing mass lay-offs during a spell of lean demand. The factory suddenly receives a large order to be fulfilled in a shorter lead time than its capacities can handle. The retailer pays extra for expedited delivery to avoid delays, and the manufacturer is forced to spend on temporarily inflating capacities through overtime compensation or renting additional warehouse space. However, such rushed production carries the risk of increased quality issues.

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The short-term consequences are serious. If the end product quality fails to meet the retailers’ – and by extension, the end customers’ – quality checks, the manufacturer may be forced to recall entire orders, running the risk of not breaking even, let alone earning profits. Even if the end product passes quality checks and reaches the end user, manufacturers and retailers will have exposed themselves to lasting reputational risks that could impact demand in the future. 

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The impact of rush production will be felt even more acutely in the long run. According to a McKinsey survey of chief procurement officers, 54% of executives reported that they expected reshoring or nearshoring of apparel production in 2024. Some are also considering sourcing finished goods from multiple countries, instead of relying solely on large manufacturing hubs. This would be catastrophic for entire garment industries established and operating in major Asian production centres.

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The way ahead

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The culture of cost-cutting speaks to a larger behaviour – since the bullwhip snapped after the pandemic, manufacturers are once bitten, twice shy. Those who fail to see the big picture are extremely conservative about investing in raw materials, labour, machinery, or even tech. The truth is, they need to build strong foundations to tide over this crisis sustainably. Here’s how:

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• Cost review: Manufacturers must review their fixed costs to understand spend on areas independent of production like rent and utilities. They must take stock of variable costs to gauge expenditure on costs that vary with output. 

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• Evaluate value addition: It might be tempting to agree to large orders during low demand. However, manufacturers must review their past activities and product lines to determine financial returns from each product line. They must decline requests for products that have historically not been as profitable in order to avoid cash burn.

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• Invest in areas that promise a lasting ROI: Manufacturers must maintain a healthy and agile workforce proportionate to the scope of their operations. This number should allow for flexibility and scalability in production, without compromising on product quality and working conditions. The cost of labour should be balanced with the expected returns it could generate. 

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Similarly, manufacturers should follow in the steps of new-age sustainable brands and invest in quality inputs. This would help them fulfil their sustainability imperatives by producing garments that have a longer life and are recyclable. Moreover, it would act as a long-term investment in their reputation and attract more business in the future.

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Investment in machinery and equipment helps increase efficiency, shorten lead times, and helps share the burden on labour. Even though it might be considered a variable cost, machinery can be critical in fulfilling orders on short notice. It also allows manufacturers to curtail last-minute costs on overtime.

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While maintaining these capacities can help manufacturers absorb shocks and better deal with headwinds, another missing piece of the puzzle is tech solutions that help with managing capacities and resource allocation. Shop floors equipped with advanced MES and ERP software, and data analytics can help manufacturers predict sales, and allow foresight into production. 

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Uncertainty is the buzzword in fashion today.  The impulse to shrink capacities by hacking down on critical costs might protect manufacturers in times of production lull. But it is critical that they understand what uncertainty entails – demand will ebb and flow, and the shipping challenges caused by current geopolitical turmoil could be resolved unexpectedly. Therefore, the best course of action is to maintain capacities pragmatically – and not take investment in critical variable costs for granted.

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