Skip to Content

Stanford Business magazine

 
  • Email
  • Print
  • Share

Slow Boat from China Misses Bigger Profit

Trendy designs and quick distribution keep fashion prices higher, a study finds.

by Marguerite Rigoglioso

Most companies in the fashion industry are entrenched in a business model that involves outsourcing production and distributing products through cheaper, "slow boat" channels. New research, however, suggests that while this approach seems to make economic sense, it may actually create gross inefficiencies that cause companies to miss out on significant profits.

Robert Swinney, assistant professor of operations, information, and technology at the Stanford Graduate School of Business, and Professor Gérard P. Cachon of the Wharton School of Management say fashion companies are best off when they combine highly fashionable, trendy product designs with short production and distribution lead times -- in many cases producing goods closer to home. By getting goods into shoppers' closets when they are in demand, and not producing leftover unneeded inventory that will be dumped onto a sale rack, retailers are more likely to get customers to buy early at full retail price. The profit margin increase under this combined scenario is exponential, they write in "The Value of Fast Fashion: Quick Response, Enhanced Design, and Strategic Consumer Behavior," a Stanford Research Paper available at http://www.stanford.edu/-swinney/FastFashion.pdf.

Using the more traditional outsourcing models requires long production lead times -- generally six to nine months -- handicapping success because producers may miss trends or changes in consumer tastes. By timing production to take place a few weeks before the selling season rather than half a year or more, a company can capitalize on more accurate estimates of demand.

When both rapid production and enhanced design are done together -- allowing the latest merchandise to get into the hands of consumers quickly and with little overstock -- a company's profits increase by up to twice the sum of the extra profits that would have been earned from each activity alone, the researchers say.

"For example, say a firm were to earn 10% more through creating trendy products alone, and 10% more by achieving rapid production," Swinney says. "If that company were to accomplish both together, it would earn much more than a 20% increase in profits. In fact, it would earn something more like a 40% increase. Fast fashion is thus more than the sum of its independent components."

The fast fashion system circumvents one particular problem that has long plagued the apparel industry: consumers who wait for end-of-season sales. "This phenomenon hurts retailers," Swinney says. "Fast fashion trains customers not to expect that highly desirable items will be left on the clearance rack." Because supply is more accurately tied to demand, the good stuff doesn't linger.

The model shows that combining high fashion with rapid production works extremely well to induce even the most sale-oriented individuals to buy early. In fact, a company's profits can spike up as much as 350% among this die-hard group.

Fast fashion is not just good for retailers, the researchers say, but also for consumers. "From a social point of view, 75% of the time fast fashion leads to greater overall welfare. People get a premier item that they value highly," Swinney says. "Because production times are short, they get it when they need it. Plus, there's less overproduction and waste."

Most apparel companies do not choose the fast fashion approach because it appears to cost more money than it's worth. Zara, which may well be the exemplar of this type of system, according to the investigators, is a Europe-based retailer that produces most of its designs in costly European and North African factories. Production is therefore far more expensive than it would be if the company outsourced more of it to Asia. Moreover, the retailer employs trend spotters, continuously monitors inventory levels in stores, and is not afraid of using expedited shipping if necessary, rather than cheaper sea shipping, all of which mean higher operational costs.

But Zara's success also exemplifies what Swinney and Cachon's model demonstrates: Profits still significantly outweigh costs. "Zara can take a design from the drawing phase to the storefront in a few weeks. If they outsourced, this process would take half a year or more," Swinney says. "The approach allows them to anticipate, spot, and take advantage of consumer needs and trends, and tag production to actual demand. They do very, very well using this strategy."

The paper, therefore, has important implications for apparel companies that outsource their production. "Firms might want to reevaluate the supposed economic utility of this practice," Swinney says. "It may be that it's better to have production facilities closer by so that it takes less time to get your merchandise from point A to point B."