How can the world of fast fashion exploit lessons gleaned from the Automotive Industry? The answer lies in design-to-cost, says Dominic Jephcott, co-founder and Managing Partner.
In a rapidly-shifting industry, it is imperative that fashion retailers adapt their business models to react swiftly to consumer preferences and ensure products are in front of their target audience as efficiently as possible.
In fact, the McKinsey Global Fashion Index forecasts growth of 3.5% to 4.5% in 2019, slightly below 2018 figures. As such, the need for retailers to identify and drive change to ensure they get a slice of the GBP32bn pie (in the UK alone according to the British Fashion Council) is more urgent than ever, particularly as new entrants are already exercising their agility and taking a significant portion of the market share.
Design-to-cost makes cost a central element of the creative process and can help retailers to increase margins and further speed the way to market
We first saw the need to adapt business models around customisation, reducing production batches and standardisation in the automotive industry. Car manufacturers opted to encourage consumers to ‘design’ their own vehicles, personalising combinations of all the features from colour, to wheels, upholstery, accessories and more. By allowing them to design their own vehicle from a standardised set of options and in effect, pricing their own vehicle they ensured a number of pricey, pre-designed cars with the wrong pre-selected feature-set were not sat on lots collecting dust, only to be replaced by a newer model the following year. This world of high-value manufacturing, characterised by just-in-time production, shorter production cycles and lean management processes, has helped to reduce overstock and drive value, while allowing customers a healthy degree of customisation.
So, how can the world of fast fashion exploit lessons gleaned from the automotive industry? The answer lies in design-to-cost.
There is a huge disconnect in fast fashion between the voracious appetite to compete on price and speed, with the increasingly-detailed intelligence sought from the sales data. This, when combined with a fundamental lack of understanding of the true total cost of a product, can lead to paper-thin (if any) margins. Design-to-cost is a method of cost management that would allow retailers to increase margins and further speed the way to market. It all comes down to the design brief and making cost a central element of the creative process.
How does it work?
The key to maximising the opportunities that lie behind design-to-cost is understanding where cost lies in the production process and making sure that each product delivers a healthy margin, while hitting the price expectations of the market
A simple example of this is designing a shoe box. When working with a manufacturer of high-end footwear recently, our team found that a simple re-design of the shoe box, to reduce waste and facilitate use of a smaller printing press for the same-sized boxes, resulted in a 40% reduction in the total cost of the packaging.
In another instance, our team explored the production of a midsole. They discovered that moving from sequential operations on multiple moulding machines, to instead utilising a rotary table production process, would significantly reduce cycle time and costs. A 25% reduction in total manufacturing costs was realised within four months.
In other examples, the trend has been used to streamline the design process, based on cost and market considerations. This includes breaking down each product into materials or features and attributing a cost to each. For example, a specific length of stitching thread or material would have a defined cost, as would features that might be appended to the garment, such as fasteners, buttons or decorative elements. Using this detailed cost data to pre-negotiate prices, the retailer can then design products parametrically, according to the materials and features included.
The key to maximising the opportunities that lie behind design-to-cost is understanding where cost lies in the production process and making sure that each product delivers a healthy margin, while hitting the price expectations of the market. It is important to recognise that consumers understand the price they previously paid for a product, but rarely understand true product cost. And with fashion trends increasingly set by consumers, rather than by fashion editors and designers, many retailers have responded by near-shoring and switching to short, small-batch production cycles. As well as speeding up time to market, such business models mean they can switch product lines more quickly and offer consumers greater opportunity for customisation. Retailers such as Zara, Boohoo and Asos are among those to adopt this model successfully, but now slower growth and higher manufacturing costs are forcing them to review their production efficiency.
Transparency is key
Vital to a successful and more importantly, sustainable cost engineering programme, is the transparency of any given product’s true total cost and the partnership between a buyer and its suppliers.
Typically, when the true product cost is mutually understood and agreed amongst all parties, and the buyer is mature enough to commit to ensuring a sensible margin for its suppliers, then relations are positively maintained, and we witness more stability in the total current and future costs of products.
However, more often than not, we see many buyer-supplier relationships built on secrecy, so as to better command as much of the end-to-end supply chain profit as is individually achievable. Design-to-cost programmes, if done collaboratively, will underpin true partnering and certainly improve the stability of a product’s total costs. It’s also very likely to decrease the net cost of the product.
In considering Asia specifically, pricing has traditionally taken very little account of costs. When growth was high, business was won on an incremental margin basis; however, as growth flattened, problems arose. An important consideration when building supply chains in Asia is a buyer’s ability to ensure suppliers understand their business. Design-to-cost ensures much safer pricing practices and stability in a buyer’s supply chain. Prices that are too low are just as detrimental to long-term security of supply as prices that are too high.
Without understanding and managing all costs, retailers will continue to struggle. There is enormous executive attention on trimming rent and other operational overheads, as well as addressing front-end issues such as digital transformation, sales data and intelligence, and trying to compete on logistics with shorter and shorter delivery cycles. However, there is a fundamental lack of understanding of what is happening in the supplier factories and how product costs are managed into the final price.
Executives need to take a granular view of their entire cost base. The opportunities are significant as are the risks of not doing so.
Read the full article, featured on Just Style here.