London, United Kingdom – Halfway through our MBA at Stanford GSB, we decided to start a clothing brand. We both started making small lines of simple, high-quality dresses. One of the first steps in product development is factory sourcing. We quickly found that what appeared to be a simple exercise proved challenging, and even more so now with the Covid-19 attack.
During this time, we were working on a research project at Stanford that explored the manufacture of apparel. Our findings, taken from interviews with more than a dozen new and well-established brands, confirm that in this industry, what we find frustrating in finding our factory sources is actually the norm. At present, the source of factories for clothing and soft goods is largely done the old-fashioned way: word of mouth and industrial connections. Leading manufacturers usually cannot be found through search engines. They usually don’t list their services and prices on user-friendly websites. Lack of transparency makes it difficult for brands, large and small, to find factories. Smaller brands like us struggle to find factories that can understand and carry out their ideas, produce in low order quantities, meet price requirements, and meet reasonable schedules. For larger players like Nike, the requirements are more demanding, which involves sophisticated techniques, greater capacity, and higher standards of compliance. Sourcing and evaluating each lead from the start is time-consuming and inefficient.
After using our industrial connections to start conversations with dozens of factories, we finally made a set with which we enjoyed working. But a few weeks later, when Covid-19 closed our factories based in China and California, we were overwhelmed by the prospect of starting the process of finding a new source.
That the entire industry was affected. Everyone needs move workloads from affected to less affected areas The larger the business, the more complex the transition. During stable times with lower factory turnover, these challenges were less pronounced, but now, the pain from reallocation work is more common than before.
That makes us wonder: why is there no global market to connect retailers to factories? There is a moat around making clothes, depending on connections, intermediaries, and insider knowledge. The market can eliminate the need for middlemen and make the capability and availability of factories transparent. The plant will have a reliable and unbiased machine to find new leads and fill excess capacity. Brands can more easily look for tin for new products and higher capacities, resulting in a more flexible supply chain.
The global supply chain will be flexible, not broken, given the massive disruption: once a country is closed, demand will be balanced across geographical areas. To do this, the plant must be approved, meeting basic standards and requirements. Retailers also need to know which factories are capable of taking on projects. Therefore, the market must provide information about reputation, price, trust and availability. Ideally, in the same way that technology companies can dynamically measure the servers they use around the world using services such as AWS, clothing manufacturers can redistribute their production flexibly.
There is a moat around making clothes, depending on connections, intermediaries, and insider knowledge.
So, if the market can solve all these problems, why hasn’t it happened? We have found that inertia in this industry is strong for all players. First, existing brands with established factory relationships benefit from barriers to entry: transparency makes them nervous. At least half of our calls, our interviewees will nervously confirm confidentiality when mentioning the factory. Second, intermediaries that establish relationships between brands and factory partners need the industry to remain opaque to keep doing business. The market can replace it. Third, factories are so focused on manufacturing with low margins that they don’t have the bandwidth to market themselves to new audiences. The effect is circular: brands and middlemen hide the factory, and without the bandwidth to find and filter new businesses themselves, the factory continues to rely on personal references to work.
However, a number of large capital companies began to disrupt the status quo. In wholesalers, Joor, which has raised more than $ 30 million in venture capital, connects clothing brands to online retailers, replacing large showroom sales representatives. Faire, which is supported by the VC company Sequoia, offers a digital market for unique wholesale goods, which are trying to displace trade shows. Indeed, the actual production of apparel and soft goods requires collaboration beyond just buying and selling finished products. Does that make it too complicated? Probably not. We see similar activities in other complex spaces. In the real estate field, a company called Astorian has created a platform for building managers to find and manage contractors. This relationship mimics that between factories and retailers, and is potentially even more complex than designing and producing clothing.
Efforts in this space illustrate the increasing demand for disruptions. However, the existing markets are regional, non-standard, opaque, or very expensive. Maker’s Row is a market that only focuses on production in the US. Zilingo is focused on Southeast Asia, and has not been able to create an open and standardized market. Alibaba has created a market that stretches from China to Turkey, but does not have strong standards for inspecting factories. As a result, the quality of service is not reliable. Li & Fung, a large manufacturing intermediary, is trying to improve intermediary services, but conceals the identities of its factories from its brand partners, causing confusion when brands accidentally use factories that previously failed to work with. Cala offers a new technology platform for design assistance, factory sourcing, and task management. However, it is very expensive, imposing steep membership fees and 20 percent or more of revenue that cannot be set aside by new brands. In short, none of this market has enough appeal to create a “new normal” to depend on the brand.
Now it’s time for markets that are global, standard, transparent and affordable so they can foster the accessibility desired by small brands and the flexibility needed by big brands. With Covid-19, the importance of supply chain flexibility becomes clear. Factory turn off; item not made. Shipments are slowing down, and items are more difficult to receive. This is the first time this has happened in China. Then Italy. Then US. Three strongholds of global soft goods production.
This problem will not disappear in the near future. That is also not new. Even before Covid-19, producers struggled to match their supply chains with tariff wars. Year after year, production managers who work with Chinese factories plan to reduce productivity during the Lunar New Year holiday. Factors ranging from economic development to natural disasters also threaten sensitive shipping schedules. Amid these challenges, can market solutions be the key to helping an ancient and struggling industry rise?
Maxine Lim is an MBA Candidate at the Stanford Graduate School of Business and a former technology entrepreneur and product manager.
Becca O’Leary is an MBA Candidate at the Stanford Graduate School of Business and a former trader at Urban Outfitters and Saks Off Fifth.
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