Fashion Retail Subcontracting Challenges

How do you manage the risk? In the past, there’s been issues with sub-contracting of suppliers, especially in the Far East. How do the retailers manage that sub-contracting risk today?

Sub-contracting is a reality that you cannot avoid in this type of industry. You mentioned the Far East, but it is also true in places like Turkey, for instance, where it is vey much alive. It’s something that just happens. It is impossible to avoid and it is pretty much impossible to control 100%. You’d have contracts, typically, with your principle factories, your principle suppliers and if you are a Mango or a Zara, you always ask them to disclose, entirely, their sub-contracting base. Whether that is done by the supplier or not, it’s not always transparent because, sometimes, the supplier needs some kind of flexibility, based on the demand that they end up finding themselves with, at a particular time. Obviously, you’re not going to find a factory that’s going to give you 100% production at all times; they will need this flexibility.

There’s always going to be an element of risk. What you should try to do to manage it is, first of all, you need to be able to partner with reliable, long-term, well-established suppliers and pretty much pray for the best. As I said, it’s not something that you can control as a retailer. It’s just something that you can make very, very clear to your principle suppliers, that you need a lot of transparency and then try to make sure that the transparency exists, as much as possible.

When exactly do they sub-contract? Is it the mistake on the supplier’s behalf, because they’ve booked in too much capacity and they can’t deal with it? Or is it the retailer that books in late?

It can be a whole number of reasons. Typically, it’s not the supplier’s mistake, although it can be. Normally, it’s just the set up of the industry. The fashion industry has peaks and troughs, so you don’t want to have a factory set up so that you can use their whole production, when you have peaks, because then when you have troughs, you will be severely under capacity and that can hurt a factory, financially. You want to find the sweet spot if you are a factory, so when the periods of troughs come around, you are under producing, but not that much. Then when the peaks come along, you have this flexibility given to you by sub-contracting, to be able to fulfil the demand from the retailer.

It’s something that’s built in, on how things work. It’s just the way it’s done. Also, for an emergency situation, like you mentioned, there may be times when there are mistakes made or there may be times, and this often happens, when a Mango or a Zara will arrive at the last minute, just because a fashionable item has taken off and you want to make five different variations of it and you need them for tomorrow. Of course, factories already have a plan of production. They might not have immediate capacity. They need to shift a few things around; they need help from the outside. That’s also when sub-contracting comes in.

So the suppliers are scrambling, all year round, to book capacity, to utilise their fixed assets and, therefore, to be able to charge a lower price. That puts pressure on them to take orders, to fill capacity, which could lead to sub-contracting?

It needs to lead to sub-contracting because, as you say, this is what they need to do to survive. But at the same time, when you are dealing with big retailers, such as Mango or Zara, if you promise you are going to take on a big order, then you have to fulfil it. If you take on too many orders, more than you can actually produce, then you’re in trouble. You cannot say no to Mango or Zara, otherwise you risk never working with them again. You need to be able to have a little bit of flexibility there.