• Industry expert Udena Wickremesooriya on supply chain revolution in global fashion industry

Brandix Lanka Director Udena Wickremesooriya

By Charumini de Silva The Chartered Institute of Logistics and Transport Sri Lanka (CILTSL) last week held an evening lecture by Brandix Lanka Ltd. Director Udena Wickremesooriya on ‘Supply Chain Revolution in Global Fashion Industry’ exclusively for its Corporate Partners at The Kingsbury, Colombo. Wickremesooriya, an icon in the apparel industry, highlighted the importance of adopting innovative steps and changing stakeholder mindsets to focus on the next generation era, which could lead to a revolution globally. The event was followed by a Q&A session, which saw many other issues being brought into focus. Commencing the discussion, he said that the whole structure of the apparel business model would be broken very soon. “If you look at how this has happened, from the very beginning of the barter system to the industrial revolution, industries were pretty much self-sufficient, everything happens in-house. As the world changed and the whole service mindset started to grow, labour cost in the developing markets increased. It came to a point where the bigger corporations looked outside for cheaper sources of material and labour. As a result, the apparel industry in Sri Lanka and South Asia today are the beneficiaries of that, because all we had to offer at the early stage was cheap labour as leading brands and large corporations started looking at the competitive advantage. Is this model going to work into the future? Is competitive advantage the model we are looking for or not? This is what I’m going to present today.” Stating that he would outline his speech with an industry which was completely unrelated — photography – Wickremesooriya said that there had been an explosion of photographs taken. “When I was going to school I was in the photography club and you had to go through a long process to develop photographs. Yes, I’m that old, but being a photographer was a specialised art and there was a science behind it. But today, all of us are photographers of some nature due to social media and we get comments free too.” Noting that the transformation of technology triggered this explosion of photographs taken, he said that in 1930, a billion photographs were taken all over the world and it took 30 years to double that number; over the next 10 years it tripled, reaching seven billion photographs being taken. In the next 20 years it doubled, yet in the next 10 years it remained almost flat. This was just like calm before the storm, he said. Kodak case study The period of 2000-2010 is when the digital revolution started having an impact and the world saw the Canon PowerShot, the first simple digital camera coming out, the iPhone came in 2007, Instagram came in 2010 and the increase of photographs taken was tenfold, he stated, adding that over 294 billion photos were taken during that period of time. “Now, think of what happened to the business models that were around the photography business – supply chain, logistics and transportation. There was no transportation of film rolls and chemicals to support the industry and so forth. It didn’t affect Kodak alone but also affected everybody associated with it. “I still remember the Head of Boston Consulting Group (BCG) Asia who actually led the Kodak strategy review at this stage, who insisted to Kodak that ‘your business model is dead’. Unfortunately at that time 90% of its profit came from physical film-based business, so they refused to accept this and refused to make a shift to digital, so they died. I’m saying we are not very far away in terms of total business models where Kodak was at that stage and that’s why I’m speaking particularly about this subject. Apparel and its supporting industries shouldn’t have such a ‘Kodak mindset’. During this period, if you don’t shift into digital, your business models will be desperate.” Wickremesooriya also quoted a paragraph that had stayed in his mind from the book ‘Only the Paranoid Survive’ by the Chairman of Intel: “When you are at this juncture, where new technology comes in, you don’t know which technology really works and you back it until you come out on the other side victorious or not, you are in this black hole.” Connecting his story to the apparel industry from which he hails, Wickremesooriya said: “Taking a comparison on the price change, the Polaroid in 1948 took $ 2 for a photograph and the camera cost about $ 900. Then came the 35mm Canon camera which cost about $ 2,700. Then came the first digital camera which cost around $ 1,700. But by this time the most interesting aspect was the film and photography became digital, the cost for photograph became zero! The cost of saving that photograph via the internet revolution became zero, getting comments for those photographs via social media is zero. Think of 25 years before that, someone takes a photograph, develops it and prints it. In 1975 when Gaddafi came, I wanted a picture of him so I had to go to Lake House, fill a form, and come again in three weeks to collect the photograph. Comparing 1975, you can see how technology has changed it. Today if you have an iPhone for a cost of $ 500, the cost of a photograph is zero,” he said. It’s the same darn shirt! Referring to a presentation, Wickremesooriya showed that a Brooks Brothers shirt in 1950 cost $ 3 at the time and the present value of the shirt is $ 30. A pair of Levis pants cost $ 10 in 1970 and the present value is $ 56. “Think of the shirt and the pants you are wearing. Have you seen any evolution? Think of what your father wore, your grandfather wore and think of what your children are wearing. It is the same darn shirt! If we research the same shirt, in fact the quality has deteriorated. If you look at the price in 2010, that shirt which should cost $ 30 cost $ 79.50. If you look at the photography industry, with technology coming in, the cost of the photograph came down, the cost of the camera came down, but the cost of the shirt went up. Same brand, same pattern. So the two industries – photography and clothing – have gone in exact opposite directions. If an industry has remained the same for 60, 75 or 100 years, something is wrong! Something needs to be changed dramatically and fast,” he explained. Drawing attention to the supply chain, logistics and transportation aspects Wickremesooriya said that if you look at the challenges of this industry, first of all a product that is completely undifferentiated is a commodity. “You walk into a supermarket to buy a kilo of sugar, we wouldn’t really ask for a brand. But in this industry we have, interestingly, a commoditised product with a substantial brand value. It’s the person’s superiority in the brand structure. Something you may not very familiar with, especially in the fashion sector, is that ‘no single brand can forecast demand accurately’. “If you look at our industry, we run in four seasons and a season lasts for 13 weeks. Given industry dynamics, competition hits intensively and forecasting becomes a challenge. The lifespan of a product line is about 10 weeks effectively. What does this do? It brings substantial pressure on price. If your product is commoditised and it’s undifferentiated, you can’t really forecast the demand,” he noted. Looking at the general FOB to retail equation in the apparel industry, Wickremesooriya said it was about $ 1-$ 5. However, he said no entity across the value chain within a brand in the wholesale or supply chain partner makes a double digit margin, because almost on average base 40%-50% of the product is bought on discount, which is why any retailer has a 40%-60% discount. Now clothing is not a perishable product that’s going on discount. “Most brands supply what the consumer does not want. In this equation, with the price pressure, what did the brands do? They wanted to buy cheap! What did they do to buy cheap? They went offshore. When they went offshore, what happened? Yes, they got cheap price, cheaper FOB in the fashion business, which is completely counterproductive to the logic of fashion. So we still have 30%-40% of our products being imported. You have decision making in one place and supply chain fragmented and all of these are made in the cheap labour countries. Therefore, it did not need the application of new technology.” Wickremesooriya said that during the past 10-15 years all the machinery was made by the Japanese, but they were sold to cheap labour countries, where labour was much cheaper than machines. As a result, there was no interest in applying new technology, even in the manufacturing process. “Looking at this logic, this makes a great opportunity for logistics companies to be in a dream world. Think about what this does from an overall logistics point of view – markets being located further away from where the goods are made resulted in a transport and logistics dream world.” “The product is waiting to be disrupted because ultimately we are discounting an unperishable product. We have been serving the EU and US as primary markets, but there are regional markets like India and China. Looking at many of the brands in the Indian and Chinese portion, a lot of them have been migrating out of China as they want to delist Chinese exposure. But if you talk to the Chinese manufacturers, servicing Chinese brands are more profitable than servicing American brands. Therefore, the market logic and dynamics are changing. The centres of gravity are no longer Europe and the US. The supply chain model is full on pace but the product is waiting for a restructure.” Way forward Reverting to his photography case study, Wickremesooriya questioned how the product, model and would industry. “What may happen?” he asked, noting that there was substantial opportunity for innovative products and for activated demand for forecasting. “If we put that together, there’s huge scope for big data analysis and big scope for product equation, which would make substantial progress. I’m not talking about change in geographies in terms of market place. There’s also opportunities for integrated supply chain and application of technology across the chain, which will enable us manufacturing closer to the markets. Even today the manufacturing model is ‘one machine, one woman’. In other industries, you see a lot of machinery, a lot of robots, and it is certainly not ‘one man, one machine’ logic. Hence, it will move the decision making process and the physical making process closer to each other, while eliminating duplication and enabling substantially low prices.” Wickremesooriya asserted that the primary model he wanted to emphasise was that the industry was waiting to be disrupted and actually be sold at less than half the price it is being sold today. “Discount in structure will go away, prices will come down and there will be more innovative products available. So will there be business for us to be based in this country, making this country an entrepôt for our products? I doubt it!”   Next generation clothing How long will it take for this change? “If we think like Kodak maybe five to seven years… I think the revolution should happen sooner rather than later and if you are paranoid about it, then you better be. When I look at the industry I see this physical form of product being eliminated and I say it for a number of different reasons. You grow cotton, harvest it, clean it, make yarn, go through a substantial fabric-making process, the consumption of natural resources, water and energy is enormous. You ship somewhere to consumers. If you look at how technologies are evolving, there are multiple horizons and 3D printing is certainly possible. “I think holographic clothing is not too far away, virtual clothing is not too far away. I’m not an Archimedes, but I’m betting my dollar on this! Think about possibilities. I am looking at what clothing would look like, and this is not research-based, this is pure perspective. In 2014 the majority proportion was traditional manufacturing with a small portion for customised clothing and very small percentage of 3D printing as well. I’m saying customised clothing is proportionately increasing. By 2020, in the first expected revolution, customised clothing will proportionately increase.” Wickremesooriya said by 2030 holographic clothing would start to appear. “Look at the entertainment industry. You look at virtual people on stage. You look at holographic presentations, you look at the media using holography. Why should we limit it to that? What does holographic clothing do? It gives ability. Clothing is about fashion and its expression. We change clothes for different occasions and it’s messy to change. Why not be virtual? What would 3D printing do to this industry, supply chain, transport and logistics? It will wipe out industries. What if there is clothing that doesn’t need to be washed, or to be ironed? What will happen to the washing machine industry, washing powder industry, iron manufacturers? It depends on how your model sees it. The argument is, what would the apparel supply chain look like in the world of 3D printed clothing?” Describing next generation clothing, Wickremesooriya said in 2011 the 3D industry which was almost bankrupt was worth nearly $ 2 billion and two years from now by 2017 it is estimated to be a $ 5 billion industry. “It hasn’t still got into its exponential pace, but it’s getting there. 3D printing is coming for sure! I don’t know how it will happen or when it will happen, but it will surely happen. Approximately 90% of clothing worn today is traditional, with the other 10% claimed by customised clothing such as non-iron. The balance will gradually shift in favour of customised clothing, and then 3-D printing will become dominant. It will have greater acceptance once the present latex-like feel of 3D printed material is sorted out. The current models will be disrupted. Our logic from a business perspective is that it’s certainly time for a new model.” Wickremesooriya asserted that Sri Lanka could meet the challenge by becoming an ‘apparel isle’ similar to Silicon Valley by getting ahead of the innovation curve. “Innovation has been the key driver. If we can create something like Silicon Valley in this country because we have risk capital and knowledge in this industry, we can create the same type of eco system, then we could be leading this revolution globally. Therefore, I conclude by saying that this is the time for a new business model. The essential story that I try to present today is that the model that we are so used to – from product, demand forecasting, supply to consumption – is nearly dead. And it will happen much faster than we expect!” he concluded.   Pix by Upul Abayasekara