We’re reaching the final two articles of my 14-part series dissecting the McKinsey State of Fashion 2024 128-page report.  We’re now introduced to the “bullwhip effect,” as defined by pending challenges in fashion’s supply chain.  In the report section “Bullwhip Snaps Back,” this article unpacks McKinsey’s insights into how demand volatility is impacting suppliers, the risk of labor abuses, and strategies for resilience in a rapidly changing industry.

Unpacking the Bullwhip Effect: Fashion’s Supply Chain Turmoil 2024

The bullwhip effect, a term borrowed from the world of physics, refers to the phenomenon where small changes in consumer demand ripple through the supply chain, and creating significant fluctuations. The fashion industry has experienced its fair share of this phenomenon in recent years, with profound consequences.

McKinsey reports a disproportionate impact of demand volatility on upstream suppliers. Factories that once operated at full capacity in 2021 now find themselves running at 30 percent to 40 percent below their potential in 2023. This has translated into widespread layoffs and delayed investments as the bullwhip effect takes a hold.

Beyond the balance sheets and profit margins, the fashion industry’s supply-chain volatility has unveiled a humanitarian crisis. Many textile and garment workers, often already living on meager wages, are facing new hardships. The stress on factories and reduced demand have increased the risk of labor abuses, including wage theft and union busting.

Countries with substantial textile industries are not inoculated from the bullwhip effect. In China, the world’s largest textile producer, worker strikes and protests surged in 2023, with more than 700 factory strikes occurring in the first half of the year alone. Pakistan, another textile powerhouse, lost cotton crops due to floods, shifts in production, and lower exports, resulting in over a million textile workers losing their jobs.

No Respite in Sight

As much as we’d like to believe the bullwhip effect turmoil will soon subside, the report suggests otherwise. A September 2023 survey of chief procurement officers revealed a staggering 73 percent expect demand volatility to be one of the top challenges affecting supplier relationships over the next five years. The industry is bracing for a prolonged period of uncertainty.

While 2024 Q3 might bring some relief  in terms of capacity improvements, the consequences of the bullwhip effect will likely continue to linger. Layoffs and delayed investments mean the industry might be ill-prepared to scale up production quickly when needed. This poses a significant challenge that threatens the industry’s just-in-time production model.

Preparing for an Uncertain Future

As we look to the year ahead, it’s clear that fashion brands and retailers need to adopt new strategies to weather the bullwhip effect storm. Resilience in the face of uncertainty is paramount, and several strategies emerge from the report:

1. Transparency and Communication: One key factor in navigating market turmoil is improved transparency and communication among all stakeholders in the supply chain. Sharing information and enhancing demand forecasting can help mitigate the bullwhip effect.
2. Strategic Partnerships: Cultivating strategic partnerships with key suppliers, including tier two, tier three, and tier four partners, can provide stability against the bullwhip effect. Long-term contracts can ensure cash flow for vital industrial and sustainability improvements.
3. Championing Workers’ Rights: Ensuring fair wages, job protection, safe working conditions, and professional development for factory workers is essential. Initiatives like worker hotlines and representative workplace committees can foster better communication and undermine the bullwhip effect’s humanitarian crisis.

The disruptions rocking the fashion industry in recent years have exposed vulnerabilities making clear the interdependence of brands, retailers, and suppliers. Navigating the bullwhip effect and ensuring supply chain resilience must be a collective effort.

As we move into 2024, fashion companies should view these challenges as opportunities for transformation. Resilient supply chains, ethical practices, and a commitment to workers’ well-being are the cornerstones of a more sustainable and compassionate fashion industry. Good business practices means reversing the influence of the bullwhip effect on the supply chain.

KEY TAKEAWAYS ON THE BULLWHIP EFFECT

1. Bullwhip Effect in Fashion Supply Chain: The fashion industry is experiencing the “bullwhip effect,” where changes in consumer demand cause significant fluctuations in supply chain orders, leading to operational challenges for suppliers.
2. Impact on Upstream Suppliers: Demand volatility has disproportionately affected upstream suppliers, with many factories operating well below their full capacity in 2023, significantly lower than in 2021.
3. Long-term Challenge for Supplier Relationships: Chief procurement officers anticipate that demand volatility will be a major challenge affecting supplier relationships over the next five years, with 73 percent expecting this to be a top concern.
4. Delayed Recovery for Textile Factories: Textile factories may not see improvements in capacity until at least the third quarter of 2024, indicating a prolonged period of disruption and uncertainty.
5. Humanitarian Crisis in Textile-Producing Countries: The supply chain volatility exacerbates humanitarian issues, including potential labor abuses and job losses, in textile-producing countries.
6. Increased Worker Strikes and Protests: In major textile-producing countries like China and Pakistan, there have been increased worker strikes and protests due to job losses and shifts in production.
7. Strains on Manufacturing and Investment: The bullwhip effect has led to widespread layoffs, a sharp decline in factory utilization, and delayed investments, particularly impacting smaller manufacturers.
8. Necessity for Supply Chain Resilience and Transparency: Brands and retailers need to focus on improving supply chain resilience and transparency, cultivating strategic partnerships, and ensuring fair labor practices to navigate these disruptions effectively.