Supercharge purchasing for fashion: Reduce time to market with multi-level contract enablement

Fashion Businesses need agility in their supply chains to strike a balance between long procurement lead times, short sales window, quick changing consumer demand, and assuring firm purchasing commitments to vendors to meet the demands of today’s consumer that expects fast adoption of trends, always available inventory and low prices. Further, this delicate balance is highly vulnerable to the supply chain disruptions observed recently. Striking this balance has become even more challenging now, especially with Fast Fashion where we are typically seeing many seasons within the year and not just the usual spring, summer, fall, and winter. 

Fast fashion has created such a system that instead of the traditional two seasons, Spring/Summer and Fall/Winter, we now have around 52 micro-seasons a year, which means the stores have something new coming in every week - The Good Trade [1]

Transport capacity, Inflation of shipping costs, Availability of raw materials, Port closures and disruptions, Geopolitical trade tensions, and other factors negatively impacted supply chains in 2022 leading to delayed orders - McKinsey [2]

Businesses are thus tasked with optimizing their procurement practices to make it possible for companies to become more accurate in forecasting and to manage their vendor relationships better, whilst ensuring they get the products delivered to meet customer demands on time.

The Multi-Level Contract Enablement solution from SAP makes this a reality. It enables fashion businesses to engage vendors sooner in the procurement cycle by drawing high-level contracts with generic details, without getting into the nitty-gritty of the exact order details. As time progresses, merchants can give in-depth specifics of their requirements and flesh out the contract in more detail. Businesses can thus start detailing their procurement closer to their sales seasons, without worrying about delays or causing vendor frustrations.

Let’s dive a little deeper and understand the sequence of steps involved in a fashion season.

Business process overview

The fashion season calendar, or critical path, typically involves several steps, beginning with product design several months before the actual season. During this phase, designers develop a variety of designs, which are then refined and evaluated based on factors such as market trends, consumer preferences, and production feasibility. Later on, a select number of designs are chosen and enriched with additional information such as style, color, size offerings, commodity codes, barcodes, supplying vendors, prices, transportation, and other relevant details.

The demand for the season is initially estimated at a high level, often at the product group level. As the season progresses, this initial estimate is refined further, first at the style level and then at the color and size level, to better align with consumer demand and market trends. Once all the details are finalized, including the final destination, packing, and shipping details, a purchase order is issued to the supplying vendor. The vendor then begins the process of manufacturing and delivering the products to the distribution center or directly to the customer.

Why do Fashion businesses struggle?

Businesses in the Fashion industry are characterized by huge churn in their SKUs. Most companies change their entire assortment every season and refresh entire product lines every year. Also, the demand needs to be forecasted at the correct style/color/size level. Furnishing all this information in time with high accuracy for such a high product churn is extremely difficult.

Additionally, the procurement cycle today spans months, and purchase orders are based on a forecast that is totally out of date by the time the product is received. This can either lead to stock-outs or unsold inventory in the wrong style, color, size, season, or place.

In just 5 years, some of the world’s best-known fashion businesses have burned £90 million worth of undesired goods, while many fashion brands have billions of dollars’ worth of unsold inventory - Fashinza [3]

To mitigate this, several businesses build time cushions at every step and wait until a certain date in the fashion planning calendar by which all the requisite details are expected to be finalized and only then start issuing purchase orders to vendors in a big bang approach.

However, there are practical inefficiencies with this approach as discussed below:

• For issuing a purchase order, the exact quantities for every color & size being ordered, the destination, and packaging information is required. However, these details are not known until much later in a season calendar leading to purchase orders being issued based on low confidence forecasts.
• The product data enrichment needs to be synchronized across several systems for a large number of new products. Any data sync issues are uncovered only when issuing a purchase order resulting in delays and long lead times.
• As information is scattered across several systems and many teams are simultaneously working on it, product owners do not have a systematic way to monitor the progress & readiness for an upcoming season. 
• Before receiving a purchase order, the vendor does not have any insight into the requirement for the upcoming season to be able to plan for raw material and production on their side.

Additionally, several other details may be required to create a purchase order like Ticketing, labeling, commodity codes, barcodes, duties, and more. The inability to pass on such precise information in the earlier phases about the required goods, delays order placement and increases the lead time on the vendor’s end. Fashion businesses can’t afford to operate this way in today’s competitive climate to meet consumer expectations.

Thankfully, there is an elegant solution to mitigate this issue – Multi-Level Contract Enablement.

How does Multi-Level Contract Enablement help?

Businesses can overcome the above challenges through the Multi-Level Contract Enablement process. It enables businesses to create tiers of contracts representing the granularity of information available at the time with each subsequent level referencing the contract created before.

The higher-level contracts are created with generic details and every subsequent lower-level contract has more specific information that draws down or consumes quantity from its parent contract. With this capability, businesses can reserve the vendor’s capacity early in the planning phase having visibility to very few details. At a later point in time, the exact quantities to be produced for each color and size can be specified in the final contract.

This can be best demonstrated with an example:

• Level 1 contract: In the First stage, businesses start with basic details, and create a contract at a product category level. This gives the vendor a fairly basic idea and allows them to reserve a capacity based on the supplied details. The level 1 contract won’t dive into the details and will largely focus on surface-level information received from the sourcing team.
• Level 2 contract: In the Second stage, fashion companies finalize styles for the season and have a better understanding of the demand, allowing them to furnish more details about the requirements - tying into the generic material defined at the style level. This stage, therefore, reinforces the earlier details, secures the deal, and gives a tighter commitment to the vendor for raw material procurement in close collaboration with the product team.
• Level 3 contract – In the Third stage, businesses hand out more granular details about the order. Businesses at this stage are armed with fairly accurate details about the relevant products, allowing more specificity in their requirements. They can easily pass on variant details around the color and size, based on inputs received from the planning team. This serves as the go-ahead for the vendor who can now proceed with dyeing and fabric cutting.
• Contract call-off Purchase Order – The fourth and final stage, here in the fashion business has all the required information, down to the Destination (DC/Store/Customer), material/Packaging variant, region-specific labeling & ticketing, Commodity Code, Barcode, shipping instructions, and more, making it easier to pass on concrete details to get the final finished packaged products to their final destinations.

Faster Time to Market with Multi-Level Contracts

Significant advantages of Multi-Level Contract Enablement

Multi-level contracts allow businesses to establish a hierarchy of agreements, enabling them to manage complex supply chain relationships with vendors and customers. This helps improve supply chain efficiency and procurement processes, while also reducing the risk of stock out or excess stock. Let’s look at some of the key advantages below:

• Purchase commitment gets an opportunity to mature all along the season calendar without compromising on supply security. Also, as purchase orders are deferred until the later stages of the season, they are issued with more accurate information and are aligned with the latest requirements.
• Systems across the landscape get more time to synchronize data and quality is ensured as it is automatically checked every time a lower-level contract is created with more granular details.
• Visualizing the progress of a season is very easy and intuitive. Every level of the contract acts as a stage gate with open quantities representing work remaining at that stage. And the movement of quantity between different levels represents handover between different teams.
• Vendor is contractually engaged early in the season calendar allowing them to better plan their production operations. This enables vendor operation timelines to run in parallel to the rest of the season timelines instead of the sequential approach or off-system excel spreadsheets. 
• Additionally, as decisions about shipping destinations can be delayed till the creation of purchase orders, the direct shipping process can be leveraged more often thereby reducing Distribution Center (DC) operation costs.

Conclusion

Multi-Level Contract Enablement in SAP can be further enhanced with advanced analytics and UX designs to better monitor progress for a season, have metrics around the steps delaying the procurement process and make procurement management much easier.

This combined with other features from an earlier blog describing high-level features of Flexible Purchase Commitment, Direct Ship Flexibility, season workbench, segmentation, value-added services, etc. provides a comprehensive solution for fashion businesses that were just not available before.

In conclusion, this solution provides fashion companies with the opportunity to reimagine their supply chain thereby reducing the time to market, right-sizing procurement, improving process efficiency, forming close partnerships with vendors, and ultimately improving profitability & customer satisfaction.