Apparel industry supply chains struggle to maintain performance in the face of ever-changing sourcing plans. Most of the apparel industry leaders are adapting to changing labor costs in Asia and changeable regulations affecting global trade. With short lifecycles, fickle consumer tastes, and long supply chains, the apparel manufacturer needs to be good at merchandising, demand shaping, and reading market demand.
So how does the apparel industry stack up against other industries? Who has the best-managed supply chains? To answer these questions, we developed a methodology to measure supply chain excellence. While it sounds simple, supply chain excellence is not easy to define. It is even harder to compare companies across industries. In 2014, Supply Chain Insights developed the Supply Chain Index to quantify not just supply chain excellence, but also supply chain improvement in a meaningful and objective manner. We found that improvement (defined as the rate of change) when coupled with performance (current capabilities) and compared within a peer group was a good measurement of supply chain excellence.
To test the model, we studied balance sheet patterns for over 2,000 public companies and shared those results with over 150 executive teams. The metrics we selected are based on correlation to market capitalization: growth, inventory turns, operating margin, and return on invested capital (ROIC). (For more details about the Supply Chain Index and its associated metrics, see "The Supply Chain Index: A new way to measure value" in the Q3/2014 issue of CSCMP's Supply Chain Quarterly.)
We believe supply chain excellence is based on the ability to improve the portfolio of metrics. In this article we apply the methodology to the apparel industry. In Figure 1, we list apparel peer-group companies for the period of 2006-2013. As seen in most industries, companies with the greatest improvement are usually the worst performers. The reason? As performance improves, incremental improvement in the supply chain is tougher to achieve. The best performers that are still making improvements will normally be found mid-way in the improvement rankings.
With a focus on both performance and improvement, which company did best? In the apparel industry, Nike and Ralph Lauren posted the best performance, delivering on a balanced metrics portfolio and distancing themselves from their competitors. Nike is the clear winner in both performance and improvement, while Ralph Lauren's improvement in the 2006-2013 period was strong but slowed against the peer group in the last four years. The Gap posts high numbers on performance but lacks improvement. VF Corp. (owner of more than 20 brands, including Wrangler, The North Face, and Nautica) shows solid performance in operating margin and inventory turns and also shows improvement, but the company is not equal to its peer group in delivering return on invested capital (ROIC).
What can we learn about the apparel industry from this analysis? It is hard for this industry segment to deliver against a balanced scorecard. With long, global supply chains and increasing challenges in regard to merchandising, this industry has struggled to improve. Average inventory turns have declined over the past decade and margins remain flat despite numerous improvement programs.