As the fashion recovers from historic disruption, the industry faces perhaps its greatest challenge and, arguably, one of its most potent opportunities: rearchitecting supply chains to be more transparent, sustainable, and resilient. In many ways this is nothing new; fashion has long faced calls to provide greater visibility into the materials and labour components of its products, and recent backlash against fast fashion’s reliance on overproduction has underlined the pre-existing demand for a more environmentally-sound industry.
But more sweeping changes are now happening; consumers are scrutinising the sustainability credentials of the companies they buy from more than ever, and both regulators and financial backers are applying greater stringency to their enforcement and investment approaches.
This month, Serai and KPMG China released a new report – Moving The Needle – that aims to benchmark the extent to which the fashion industry is prepared to respond to these new expectations for supply chain visibility, and sets out the vital role that technology is going to play in delivering transparency. The Interline sat down with two of the primary authors of the report – Vivek Ramachandran, CEO of Serai, and Anson Bailey, Head of Consumer and Retail, ASPAC, for KPMG China – to discuss its implications.
The Interline: Your research defines sustainability neatly, as a way to meet the needs of today without the process being so destructive, energy-intensive, or reliant on non-renewable inputs that it can’t be repeated indefinitely. That’s a clarity of definition that often gets lost when sustainability is put into practice, with many brands and retailers seeming to concentrate on very narrow slices – typically beginning and ending with materials – of what is an all-encompassing challenge. Why, in your opinion, has the apparel industry taken such a piecemeal approach to sustainability?
Vivek Ramachandran: The apparel industry is extremely complex. There are several tiers of manufacturers and suppliers involved in making one single garment. It is also still very traditional with more than half of respondents for the Moving the Needle report saying that they rely on manual processes to store supply chain data.
This opacity makes end-to-end traceability difficult. This lack of transparency is one of the biggest hurdles to fulfilling sustainability goals. We’ve found that many large brands have difficulty tracing beyond their tier 1 or 2 suppliers. A couple of other factors adding to this are the low digital quotient some of the manufacturers have and lack of incentives to be more transparent in their supply chain.
Anson Bailey: Consumer demand for cheap fashion over the last few decades means the industry is geared towards minimising costs and improving operational efficiencies, rather than focusing on the bigger picture of sustainability. There is a perception in the industry that becoming more sustainable and increasing transparency will drive up costs. High initial investment costs were also flagged up as the main barrier towards achieving transparency in our global survey.
The Interline: As well as being large enough to feel potentially unmanageable, sustainability is also a moving goal. As your research points out, today’s most pressing issue is the provenance of fibres and the spectre of forced labour in the raw material supply chain, but there are any number of other areas where a lack of visibility could easily translate into uncomfortable exposure. How can fashion reframe sustainability to be less a case of responding to a crisis when it’s uncovered, and more a proactive, systemic change?
Vivek Ramachandran: This is slowly changing. Regulators are already asking for stricter legislation around supply chain transparency. Consumers are increasingly demanding transparency and are even willing to pay more for sustainable products. Companies are realising that they have to be transparent to stay ahead. Brands such as H&M, Gap and Patagonia are pioneers in this area but we’ve had several brands and manufacturers approach us in the last six months, who want to build transparency in their supply chains. The more companies make public pledges around sustainability, the more it will become a requirement for the industry to be transparent. In fact, two-thirds of respondents for our report said that supply chain transparency was “extremely important” for their business.
Anson Bailey: We are seeing an increasing number of consumers take an interest in the sustainability credentials of fashion brands – particularly younger Gen Z consumers. These are critical consumers that will not easily be swayed by marketing speak. They want to see companies take real action and prove that they can live up to their promises. It will be important for brands and retailers to align their values with those of their customers. Any company that does not sign up to a more sustainable agenda now risks losing out to competitors that have already moved forward on this issue.
The Interline: You list two components of transparency: visibility and traceability. The second of those we’ll talk about in detail shortly, but the first, visibility, is one that, in a lot of ways, runs counter to how the fashion value chain has operated for a long time. So much of what happens in costing, sourcing, sampling, production, shipping and so on has been kept close to the fashion industry’s chest or completely out of sight, and we suspect that for many brands, the idea of an open book (or at least a slightly more open book) is, frankly, scary. How do you see brands and suppliers overcoming that hesitance to know more – and reveal more – about something that’s historically been hidden?
Vivek Ramachandran: The fashion industry has traditionally viewed its supply chain as their ‘secret sauce’. However, this mindset is not sustainable. Even companies that are hesitant would be forced to be transparent about their supply chain if they want to export to countries such as the United States, Germany or elsewhere in Europe, which have introduced supply chain legislations. Even if they are not, consumers, especially the Gen Z, are more concerned about where their garments come from. Any negative publicity around this can damage a company’s reputation. The industry recognises this as corporate reputation was chosen as the top driver of supply chain transparency by our survey respondents.
The major challenge companies have in achieving transparency are lack of resources and high initial investment in implementing transparency solutions. However, what companies need to know is that the technology to help exists and is affordable. There needs to be a shift in mindset in that transparency is not going to harm but provide a competitive edge. Brands like Adidas, Puma and H&M are proof of this.
Anson Bailey: An interesting finding in our survey was actually that investment costs, obtaining and managing data, and insufficient resources were the most significant barriers towards achieving transparency. A fear of disclosing sensitive information to competitors was only mentioned by a quarter of respondents. I think it is very encouraging to see that this issue is ranked at the bottom of the list – it means that the apparel industry is not as protective of information as many may have thought previously. They now realise the need to be more collaborative in order to achieve change.
The Interline: One of the largest roadblocks to greater transparency is, arguably, the requirement to gather data at the source – which is often a place where objective data is in short supply, and where abstractions in relationships between brand and supplier (as filtered through an intermediary or manufacturing coordinator) make objective data difficult to gather. You found that only 19% of respondents had full visibility to all the stakeholders in their multi-tier value chains – which is higher than we would have expected – and that even fewer, just 15%, have full traceability of materials. There is, to put it mildly, a serious data gap to be overcome, and it’s one that needs to start with the right data foundations. How can the apparel industry bridge that data gap?
Vivek Ramachandran: The major problem is the industry’s reliance on manual systems to gather and store this data. Over half of respondents still use manual processes to track visibility and traceability. Adoption of technology to gather and digitise the vast amount of supply chain data is key.
Another area that technology can help is the standardisation of this data. While companies face difficulty in obtaining data from their supply chain partners, once they do, this data comes in various formats, making it hard to manage. There is technology that exists today that can help companies consolidate data from various sources and present it in a standardised format. There is no need to wait for a universal data standard.
The Interline: A big part of gathering better data will be establishing and obtaining buy-in from the entire value chain for common standards. What work is being done in this area today, and what are the hopes for the use of standards to help align different stakeholders behind a shared objective?
Vivek Ramachandran: There are a few organisations that are focused on this. The Sustainable Apparel Coalition is one example. They are an industry-wide group of brands, retailers, manufacturers, non-governmental organizations, academic experts, and government organisations. They developed the Higg Index, a tool that enables standardised measurement of value chain sustainability. Recently, the Responsible Business Coalition, Accenture and Vogue came together to create the Impact Index, a digital label that consumers can scan to find out the sustainability credentials of a garment. Major brands and retailers including Saks Fifth Avenue, J.Crew, JCPenney, Ralph Lauren and Gap were involved in creating this index.
While more needs to be done in pushing such standards to a majority of the industry, we are on the right path. Large brands and retailers supporting such initiatives is setting a good precedent for change.
The Interline: A big concern when it comes to sustainability is heightened costs of goods and the associated erosion of margin. Your research indicated quite the opposite – that making more sustainable products can actually lead to an improvement in net profit – which is obviously encouraging, but it does raise the broader question of pricing. How do you see brands, retailers, and supplier competing for consumer and B2B business against counterparts who trade on lower prices alone? Will that discrepancy be addressed by markets evolving to place greater scrutiny on all parties, making non-sustainable alternatives non-competitive, or will sustainable fashion actually become more profitable on a per-product basis before that happens?
Anson Bailey: There have been various KPMG research studies that not only point towards consumers taking a greater interest in the origins and sustainability credentials of clothing, but that they are also willing to pay more based on a company’s ethics.
KPMG’s own analysis shows that the price differential does not necessarily have to be high in order to preserve margins. Companies that are sustainable can benefit from lower costs in some areas. As an example, the current shift towards ESG investing means apparel companies can potentially benefit from lower costs of capital from banks if they can prove how sustainable they are. In the future, financing will become more expensive for companies that do not have a sustainable agenda. Becoming more sustainable and transparent therefore needs to be seen as an opportunity rather than a cost.
The Interline: It was interesting to see that regulatory pressure emerged as a relatively low-priority driver for sustainability in your survey, with just 15% of brands and retailers considering it a major force behind their environmental and ethical strategies. This seems set to change, since the era of the apparel industry being left to self-regulate is being slowly superseded by greater intervention from governments and NGOs. How – and how quickly – do you see that regulatory pressure increasing?
Vivek Ramachandran: We’ve seen several European countries introduce regulations around supply chain transparency in the last six months. Governments in Asia are also increasing their focus on a sustainable apparel industry. In its 14th Five Year Plan, covering the period up to 2025, China set growth targets for its apparel and textile industry and promoted a shift towards smart manufacturing and the introduction of green textiles. Vietnam is taking the environmental impact into account when granting approval for foreign direct investment in textile projects. Other major apparel manufacturing countries such as Sri Lanka are expected to follow with tighter regulations of their own. We expect regulatory pressure to be a much bigger driver towards transparency in the next year.
The Interline: We’ve grown used to seeing sustainability targets set on a 5-10 year horizon, and to treating those targets as being quite distant. The various forces you’ve identified in your research are conspiring to place a lot of pressure on those targets being delivered, and, frankly, 2025 and 2030 are no longer that far away. Your survey revealed that 80% of brands, retailers and suppliers want to implement a comprehensive transparency solution within the next six years, but it feels as though there’s a lot of foundational work that needs to be done before then. How realistic do you believe those climate and humanitarian targets are, and how can the apparel industry stand the best chance of reaching them in time?
Anson Bailey: The COP26 climate conference has underlined the need for the apparel industry to take action. It is now time to walk the talk. Technology will be a key enabler to achieve change – our survey indicated that over 80% of the industry plans to have a transparency solution in place by 2027. However, it is also worth pointing out that nearly 20% already have such a solution in place and a further third plan to do so in the next three years. The hope is that over the coming years more companies will speed up their efforts as they see others tackling this issue. In the future, businesses will be increasingly competing on trust and transparency and have a focus on community and purpose. Consumers will be asking if you really are a purpose-led business.
The Interline: Finally, there’s also a lot that needs to happen from a technology implementation and adoption point of view – especially in light of the fact that the work you’ve undertaken revealed that more than half of all the essential metrics and variables that the industry needs to monitor and control are currently tracked manually. What does it mean to systematise, automate, and generally digitise that tracking – especially when deploying technology in the supply chain means extending access to partners who might be more familiar with spreadsheets (and even fax machines) than sharing access to live data?
Vivek Ramachandran: While technology such as Serai’s is easy to implement and scalable, there still needs to be more education around getting suppliers and manufacturers to embrace it. Companies need to see the benefit that digitisation brings. This is part of the work that Serai has been doing with the supply chain partners of our clients. However, as companies start seeing the benefits of using technology such as improved efficiency and reduced man hours, we believe that they would be more open to digitisation and sharing their data.