April 2, 2020
Fashion companies are faced with new challenges affecting their supply chains unlike any before. With the unprecedented impacts of COVID-19, retailers and suppliers have to choose whether to cooperate under these new circumstances to preserve partnerships, or instead think of their own survival in the short term, no matter the cost. Peter Maerevoet, global chief financial officer and senior executive officer at financial firm Tradewind, places his confidence in trust and collaboration between retailers and suppliers as the key to viability over other immediate fixes that can break down companies in the long run. The following article was written and published by Sourcing Journal, a renowned textile and apparel publication serving a global readership of sourcing executives, supply chain executives, and others within the industry.
As companies throughout the fashion supply chain are focused on financially surviving the COVID-19 pandemic, the way in which they handle the crisis and communicate with their partners will have a longstanding impact on their relationships.
In light of the pressures surrounding the health emergency, established partnerships are being put to the test, calling for companies to operate with transparency to maintain trust and their reputations. Whether it is store closures or production delays, any changes need to be discussed so that partners can plan accordingly.
“We’re all impacted and as a result of this, there’s going to be complete transparency in how we actually collaborate and coordinate to get through it,” said Jim Barnes, CEO of enVista, a supply chain and unified commerce consulting firm.
During a crisis, businesses have to balance their desire to portray themselves as competent and stable with conveying truths that may be hard to swallow. Firms may be tempted not to be candid with their partners, as their focus at the moment is more on self preservation than potential legal ramifications.
“I’m not sure that liability is as big a concern today as survivability,” said Ronn Torossian, CEO of 5W Public Relations. “I don’t think there’s many companies today who are really afraid of being sued. I think companies today are afraid of remaining in business. Liability matters, survivability matters more.”
However, with the widespread, unprecedented international impact of this pandemic, companies should not be afraid of sharing their challenges and how they are adjusting to cope with them. “The reality is that whatever business you’re in, your business is going to be disrupted,” Torossian said. “You have to deal with that, you have to own up to that. I think you need to overcommunicate your challenges, your issues and what’s going on and not to hide from them.”
Indeed, the frequency of communications across supply chains has already ramped up.
“People who usually speak four times a year are now sometimes speaking four times a day,” Torossian said. With the situation changing from day to day, companies can be hard pressed to offer long-term outlooks, plans or promises.
Experts agree that firms should be forthright if they don’t currently have a concrete answer to a particular question posed by a supply chain partner rather than fabricating a response.
Even if companies are maintaining an open and honest communication with their partners, they still may have to contend with competitors painting a picture that is rosier than reality. Without explicitly calling them out, firms can communicate the truth of the situation and the fact that it extends beyond a single company to potentially save their contract and spare the client from being taken advantage of.
In a global crisis situation such as the one the industry is facing now, many suppliers could be caught in the middle holding onto raw materials or finished goods, as orders or shipments are cancelled or delayed. Meanwhile, as production shuts down in certain nations, suppliers may not be able to deliver on time. This will lead to conversations between retailers and their suppliers to adjust to these changes.
“It’s going to require us to be more compassionate,” Barnes said. “It’s going to require us to have more understanding and understand the fact that we’re in a situation that we’ve never seen before, and the rules of engagement are going to change.”
Jeff Trexler, attorney and associate director of the Fashion Law Institute, noted that many firms are now likely focusing on their contracts, particularly the force majeure clauses that cover unforeseen circumstances, looking to see whether they include stipulations for pandemics. These could be different for various relationships and contracts in the same supply chain. For instance, a retailer’s contract might allow it to cancel its factory orders, while the factories cannot cancel their raw material deliveries.
Even if firms have legal ground to stand on, experts caution against either suppliers or retailers reneging on agreements or taking legal action during the crisis. According to Peter Maerevoet, global chief financial officer and senior executive officer at financial firm Tradewind, companies that take drastic measures and default on commitments to stay afloat in the short-term, such as not accepting shipments, may see long-term hits to their reputation. This could make it more difficult to find suppliers in the future.
“[Supply chain partners] will learn definitely who they can trust. They will see which suppliers or which retailers manage this crisis professionally, and which ones are becoming victims of panic or half measures…I think there will be a major cleanup of supply chain relationships,” Maerevoet said, adding that some partnerships will be terminated due to a sense of “betrayal” from either party.
Instead of completely cancelling on suppliers, one option would be to collaboratively work to extend payment terms, which Maerevoet says can keep retailers going during store closures while also ensuring that suppliers eventually get paid. Sellers that cannot take on full orders due to lessened demand can buy a portion of orders, or they can make commitments for future orders.
Retailers may choose to absorb some costs, if they can afford to, in order to keep their supply chain intact. This is particularly important in developing nations whose economies rely heavily on the fashion business.
“People are thinking about the viability of their supply chain. As much as it could hurt…to lose several million dollars in honoring certain orders or even sort of in swallowing some product along the line, it could hurt even more if the country from which you get most of your goods collapses in anarchy and factories close,” Trexler said. “Then you have to remake your supply chain from scratch.”
Another option is to renegotiate contracts and terms, such as allowing more partners to keep the lights on by temporarily shrinking margins.
“As panicky and scared as everybody is about not making the numbers they had before, there is, or there should be at least, a sense of mutual understanding that we’re all caught up in this, that it’s changed the conditions for everyone, and that everyone should be prepared to come to some kind of new agreement based on the current circumstances,” Trexler said. “The more people give each other a little bit of slack to work through this together, it could strengthen relationships for the long term.”
How companies navigate this disruption may depend a lot on how their relationships were established in the first place, with transactional business being the most likely to be in jeopardy. The coronavirus may also impact the types of partnerships that companies enter into going forward.
“Relationships with mutual trust have a much better chance to survive crises than some opportunistic or tactical price-driven relationships,” Maerevoet said. “I think that’s something you will see in the next couple of months that a lot of these opportunistic relationships…will stop forever or at least for a couple of years. And those strategic relationships where people have had mutual trust for many years will survive the crisis and they’ll even be stronger.”
For more information on Tradewind, please visit www.tradewindfinance.com.
• Sarah Jones, Sourcing Journal
Compliments of Tradewind Finance International Inc. – a member of the EACCNY.