ARTICLE
18 April 2024

Luxury Fashion's Inventory Balance: Threading A High-cost Needle To Balance Brand Value And Waste

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AlixPartners

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AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges.
The essence of luxury is scarcity. Luxury brands face the complex task of amplifying their global presence and ensuring their collections reach their loyal clientele.
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The essence of luxury is scarcity. Luxurybrands face the complex task of amplifying their global presence and ensuring their collections reach their loyal clientele, all while carefully balancing the need to avoid overproduction and preserve the exclusivity that underpins their brand's allure.

Excess inventory, typically associated with fast fashion's cyclical waste, is a growing concern for luxury brands. Regulations around the destruction of unsold goods have changed the calculus for the old model of overstocking to meet demand, but shedding excess inventory through discounting puts brand value at risk. Luxury brands face a unique challenge: They must meticulously balance production with demand and navigate evolving ethical and regulatory complexities. The Fashion Transparency Index 2023 found that88% of major fashion brands don't disclose their production volumes, but we are seeing companies like Hermès and LVMH get creative about waste reduction. AI tools, enhanced network planning, gamification of forecasting, and small-batch production each have a role in the solution, alongside other key approaches.

Luxury brands must, therefore, introspect and innovate to sustainably address surplus inventory without compromising brand positioning.

Excess inventory wasn't always a problem

In luxury fashion, it has historically been more profitable to produce in excess rather than face a shortage, as missing out on full-priced sales can have a substantial negative impact. High product margins cushion this approach, which is also reinforced by the economics of luxury branding and marketing investments—costs associated with upholding brand prestige and market position exceeding the profits companies could make from liquidating excess stock in the long run.

With tightening regulations, especially the European Union'sfirmstance against destroying unsold goods, and evolving consumer awareness signaling a pressing need for change, luxury brands are increasingly compelled to reconsider their strategies, pairing the industry's storied exclusivity with sustainable, economically sound practices.

Eliminating inventory destruction is a crucial step forward and alternatives are already within reach.

Efficient production in luxury fashion hinges on strategically optimizing the end-to-end product value chain—crafting key strategies to optimize production volumes through the three phases: pre-production, production, and post-production.

Pre-production

These strategies begin with precise category and assortment planning, distinguishing between seasonal and seasonless items to accurately demand forecast and mitigate stock excesses.

Tailoring assortment planning: Brands must adopt a tailored assortment approach, shifting from a one-size-fits-all model to finely segmenting their product categories.The risk of obsolescence varies significantly within a product portfolio, especially for seasonal items and variations of classic pieces. These items are highly time-sensitive and prone to rapid shifts from shortage to excess in the fast-paced fashion cycle. A sophisticated assortment architecture strategy is crucial for production forecasting, ensuring production forecasts capture product risks within categories.

Leveraging precision AI:Luxury fashion is in an AI revolution to enhance trend prediction and inventory management. One clear use case leverages enhanced data analytics for more qualitative insights such as sentiment analysis, emerging fashion trends, consumer behaviors, social-media dynamics, and rapid sales data-processing.

This data can then be used to enable precise demand predictions, guiding brands to make informed decisions on production volumes down to the most granular level.

Amplifying salesforce and client advisor insights:Luxury brands have a goldmine in their client advisors. Their direct engagement with clientele offers real-time insights into preferences and trends. These frontline insights can also be used to refine production plans and align forecasts with predicted consumer demand.

Companies can capitalize on this knowledge by integrating gamification into the forecasting process. With an intuitive digital platform, luxury brands can empower their staff to input sales predictions, market insights, and inventory recommendations. The platform could reward accuracy with points or perks, fostering a competitive yet collaborative environment that motivates front-line staff to share precise and actionable data, transforming their observations into a strategic tool for enhancing inventory precision.

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During-production

After the essential groundwork paves the way for a tailored production, critical inputs can match up-to-the-minute market demand.

Adopting smaller batches and on-demand production: By adopting smaller batch production and on-demand manufacturing, luxury brands can more precisely meet real-time consumer demand, minimizing overproduction and surplus stock. Integrating virtual sampling is crucial, facilitating digital prototypes that expedite the design phase, trim time to market, and curtail waste. Such shifts demand a flexible supply chain, supported by strong predictive analytics and nimble suppliers, to quickly adapt to changing demands.

AI tools can also integrate real-time data analytics to adjust production schedules, optimize supply chains, and even tailor marketing campaigns to anticipated consumer trends, ensuring optimal product availability.

Designing for zero waste: From the initial design to the atelier's floor, embracing zero-waste principles ensures maximum material utilization, marrying artisanal craftsmanship with sustainability to reduce pre-consumer textile waste. Innovations like AI-powered design software can revolutionize material use, particularly in zero-waste pattern cutting, embedding sustainability into the manufacturing process.

Instilling creative repurposing, aka "scrap couture": Integrating scrap fabrics into luxury collections, the innovative concept of scrap couture offers an avant-garde blend of sustainability and high fashion. This approach challenges designers to creatively repurpose surplus materials, transforming them into unique, luxurious pieces that resonate with eco-conscious consumers.

Showcasing these upcycled masterpieces in prestigious runway shows makes a powerful statement, elevating the brand's status while spotlighting its commitment to innovation and sustainability. It also provides an opportunity to elevate brand positioning and showcase design capabilities.

A prime example of this practice in action isHermès'Petit h Studio. Celebrated as a creative atelier within the esteemed luxury house, Petit h breathes new life into scrap materials and leftovers, ingeniously repurposing them into fashionable and home accessories.

Solving for sustainable raw material deadstock: The resale of high-end deadstock fabrics is emerging as a sustainable and economically viable avenue for managing excess raw material. One notable enterprise leading this initiative is the LVMH-backedNona Source, which capitalizes on repurposing excess high-quality materials and providing creatives and emerging designers with access to high-end circular materials from top luxury houses and reports that it has upcycled up to 100 tons of textile since creation.

Platforms such as these cater to diverse needs, offering exclusive trims, leather offcuts, and specialized fabrics. They broaden emerging designers' resource pool and present a sustainable solution to managing surplus raw materials.

Post-production

This phase zeroes in on the crucial elements of strategic supply chain planning and agile inventory management to meet seasonal demand efficiently, ensuring products reach customers before the fashion season transitions to a new collection.

Honing assortment allocation: Luxury brands must utilize in-depth market insights to tailor product assortments to regional preferences, strategically navigating the dynamics between trendsetting regions and trend consumers. This strategy employs a reverse bullwhip effect to streamline production and meet market demand efficiently.

Timing and distribution agility are particularly critical for seasonal wear, requiring swift product delivery to stores to exploit fleeting market trends and seasonal demand spikes. Customizing assortments according to regional tastes is crucial. A strong understanding of diverse market preferences will enable strategic product variation—in colors and designs—to ensure alignment with local fashion sensibilities.

Creating an omnisupply: To mitigate discrepancies in product availability, efficient synchronization between demand and supply across retail stores, wholesale, and omnichannel is vital. Enhanced network planning, mini depots, and flexible regional logistics strategies are critical. Integrating a digitized, real-time inventory monitoring system across channels also optimizes demand.

Charting a sustainable path ahead

In the fashion and apparel sector, where the pace of change outstrips nearly every other industry, deploying state-of-the-art forecasting technologies still falls short of achieving absolute precision in demand forecasting.

The dynamic nature of consumer preferences and the rapid turnover of trends render stockouts and surplus inventories a persistent challenge, notwithstanding the adoption of pre-order models designed to mitigate these issues. Thus, the imperative for fashion brands is not merely to minimize excess stock but to pioneer and adopt sustainable strategies for inventory management. These strategies must adeptly balance the imperative of maintaining the brand's value in the eyes of the consumer with the necessity of adhering to increasingly stringent regulatory standards.

Still stuck with excess inventory? Consider the 3 Rs

Rent:Collaborating with or establishing rental platforms extends the lifecycle of luxury items, keeping them in circulation, reducing waste, and aligning with sustainable consumption trends.

Resale: Developing certified pre-owned programs or partnering with luxury resale platforms can ensure the longevity and relevance of luxury items and support a sustainable, waste-reducing ecosystem.

Re-release: Storing select collections for future re-release taps into the power of consumer nostalgia, offering luxury brands an opportunity to repurpose past inventories while maintaining the allure of exclusivity and timeless appeal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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