Dive Brief:

• Most apparel sourcing organizations are taking a mixed approach to the demand shock dealt by the coronavirus pandemic, reducing order frequency and size and in some cases canceling orders of finished goods, according to a McKinsey report released Wednesday. In a survey of 116 apparel sourcing executives administered by the consultancy, 49% of respondents said they had canceled less than 25% of upcoming orders and 22% said they had canceled none.
• North American apparel companies are more likely to have canceled orders with suppliers in the name of inventory management than their European counterparts. McKinsey partially attributes the discrepancy to more geographically varied sourcing habits on the part of European buyers, “including significant nearshoring options.”
• The survey predicts a drawdown in orders in the third and fourth quarters presenting long-term struggles for suppliers and an imperative for a long view on the industry stress brought by COVID-19. 

Dive Insight:

Proactively managing financial risk in partnership with suppliers is the way to ensure the health of the global apparel industry long term, but internal pressures in a crisis can easily overshadow the greater good. 

“Sourcing executives are under pressure to optimize their cash flow, navigating trade-offs between cash position, profit and loss impact, and ensuring supplier stability,” the report reads. Non-payment or partial payment is one result. McKinsey stated one-fifth of respondents reported paying for 75% or more of their orders as originally agreed — 18% are paying no vendors as agreed. Between those two extremes are a handful of options that take into account worker wages and/or materials that suppliers may have already paid for even if original contracts may not be honored in full. 

Order cancellations and non-payment gain impact as they travel upstream in what is often called the “bullwhip effect.” Mitigating such an impact is key to avoiding humanitarian suffering stemming from mass unemployment, and ensuring future apparel supply, according to McKinsey. 

This chain reaction has already begun with 45% of respondents expecting more than half of their suppliers to be in financial distress within six months. 

Beyond collaborative and proactive management of cash flow and commitments with suppliers, McKinsey recommends sourcing organizations look to their internal operating costs for cuts. More than half of the surveyed organizations have already made temporary cuts to staffing or staff compensation — 9% have made permanent cuts.