FASHION'S NEW MUST- HAVE: SUSTAINABLE SOURCING AT SCALE - MCKINSEY APPAREL CPO SURVEY 2019
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Apparel, Fashion & Luxury Group
Fashion’s new must-
have: sustainable
sourcing at scale
McKinsey Apparel CPO Survey 2019
October 2019
Contents
Introduction...................................................................... 2
Apparel sourcing in a time of trade tensions:
the macrostate at play................................................... 4
Spotlight on sustainable sourcing.............................. 10
Embracing sustainable materials............................... 20
Driving transparency and traceability....................... 28
Turning supplier relationships into strategic
partnerships..................................................................... 34
Reinventing purchasing practices............................. 40
Conclusion........................................................................ 47
Authors
Achim Berg
Saskia Hedrich
Patricio Ibanez
Sara Kappelmark
Karl-Hendrik Magnus
Marie Seeger
1
Introduction
McKinsey’s 2019 Chief Purchasing Officer (CPO) survey, the fifth in the series since In the years ahead, apparel companies must shape a robust sustainability agenda
2011, focuses on sustainable sourcing at scale—fashion’s new must-have. The that addresses both social and environmental imperatives. And they must deliver
survey finds that social and environmental sustainability has become a burning it at speed and scale, harnessing innovations in technology, standards, processes,
priority for apparel companies, just as it is becoming an increasingly important materials, and communication. Our survey sheds light on companies’ preparedness,
issue for consumers and governments. plans, and progress in four key areas of that sustainable-sourcing transformation:
A skeptic might ask: does this spotlight on sustainability represent a move towards —— Embracing sustainable materials. The share of products containing sustainable
long-term transformation of the industry or is it simply the fashion of the season? material remains low today, but CPOs envisage a major scale-up in the next
The clear majority of survey respondents expect the industry to transition to a much few years. The majority of those surveyed aspire to source at least half of their
more sustainable model by 2025. They foresee wider use of sustainable materials, products with sustainable materials by 2025. That won’t be easy: CPOs cite
an improved ecological footprint, increased transparency, and strengthened supplier several obstacles to implementation, including availability, cost, and quality
relationships and purchasing practices. But most apparel companies will need to of materials.
shift current practices dramatically if they are to deliver on such bold expectations.
—— Driving transparency and traceability. Apparel companies are under increasing
Our survey reflects the perspectives of 64 participating sourcing executives, who are pressure to create transparency on their supply chains and to share that information
responsible for a total sourcing value of over USD 100 billion. These respondents with consumers—but few companies have yet achieved that transparency. Eight
cover the full spectrum of the market, including vertical apparel retailers, hybrid in ten CPOs surveyed have ambitious plans to step up transparency by 2025. Six
wholesalers, and sportswear companies. We supplemented the survey findings in ten plan to go further and share information about their suppliers at the point
with proprietary analyses of sustainable apparel offerings, powered by EDITED; of purchase. Again, the change required will be dramatic.
street interviews with young consumers in four European cities; and background
—— Turning supplier relationships into strategic partnerships. In supplier relation-
interviews with sourcing executives and industry experts. Highlights of four of those
ships, social and environmental sustainability is taking on much greater importance:
interviews are included in this report.
two-thirds of CPOs surveyed said it would likely become a top factor in their supplier
This report presents respondents’ and interviewees’ outlooks on the future of apparel ratings. This is encouraging garment manufacturers to invest proactively in
sourcing, interwoven with our own interpretation and experience from our client environmental sustainability, worker well-being, and fair wages. CPOs recognize
work. McKinsey is deeply committed to supporting greater sustainability in the that more is needed: collaboration across the value chain is key to achieving an
fashion industry. industry-wide transformation in sustainability.
This report makes it clear that it will be challenging to deliver true progress in the —— Reinventing purchasing practices. Our survey underlines the fact that sustainable
complex arena of sustainability. Indeed, the industry lacks a common language on and responsible sourcing has significant implications for purchasing practices,
sustainable sourcing, let alone a shared set of standards. But our findings leave from planning to negotiation to order placement. Two-thirds of CPOs expect
no doubt that sustainable sourcing at scale is a must for apparel companies over sustainable sourcing to add between 1 and 5 percent to their costs, with most
the next five years—and that consumer demand for sustainable fashion is growing agreeing that this is an investment in building competitive advantage. That said,
rapidly. At the same time, margin pressure is making it even more important for there are important opportunities to improve the efficiency of internal product-
companies to improve the efficiency of end-to-end product development and development processes.
sourcing processes. As our survey shows, executives see no conflict between this
imperative and the drive for sustainability.
We also point out that companies need to make progress on sustainability while
navigating a volatile, fast-changing environment. Our survey underlines the impact
of “Trade 2.0”—increasing trade tensions exemplified by the US- China trade war,
which is amplifying country shifts in apparel sourcing. That, combined with ongoing
demand volatility, is pushing companies towards a more flexible, demand-driven
sourcing model.
2 McKinsey Apparel CPO Survey 2019 Introduction 3
Apparel sourcing in a
time of trade tensions:
the macrostate at play
Process improvements are demand for sustainable sourcing is
Ongoing demand volatility is top of mind for sourcing rising. In addition, increased volatility
pushing companies towards a and resulting gross margin losses
executives
more flexible, demand-driven from markdowns are pushing apparel
sourcing model. At the same time, Trade 2.0 and the associated shift away
companies to shift from a focus on mini-
it is increasingly important that from China might have made headlines,
mizing the price of supply to a focus
companies improve the efficiency but these are, in fact, not the biggest
on customer-centric, agile product
and sustainability of their end- concern of sourcing executives. In our
development to meet customer demand.
to-end product development and 2019 apparel-sourcing survey, the
priorities CPOs cited most often when Our discussions with sourcing executives
sourcing processes—both because
addressing macrotrends were internal make it clear that there has been too
margins are under pressure and
process improvements. More than little focus on process improvement to
the search for cheaper sourcing
40 percent of respondents named date. There is, therefore, considerable
locations is running out of steam.
digitization of sourcing processes, room to improve the cost, speed,
Added to these challenges is
consolidation of supplier base, and flexibility, and sustainability of end-to-
Trade 2.0: increasing trade ten-
end-to-end process efficiency as the end product development and sourcing
sions, exemplified by the United
top three priorities in which action processes in the apparel industry. In
States-China trade war, are
was needed in their companies. More particular, there are three key focus
accelerating the shift out of
than 50 percent of respondents put areas for process improvement.
China as a sourcing country.
sustainability and transparency in the First, companies need to digitize processes
top three (Exhibit 1).1 to drive efficiencies and effectiveness.
The focus on internal process improve- Digitization is the core enabler today
ments is a reminder that there are for the improvement of end-to-end
diminishing returns from the old model process efficiency and is a must-have
of moving continually from one low-cost for sourcing executives. Since our
sourcing country to the next, as cost 2017 CPO survey on digitization, some
gaps between countries are narrowing. companies have set out on a broader
Indeed, shifting sourcing countries was digital transformation journey, but most
near the bottom of the list of priorities have picked individual solutions, such
identified in our survey, with only 20 as upgrading their product lifecycle
percent of respondents naming it a top management systems or introducing
three priority. That was a steep decline virtual sampling to support more stream-
from the 2017 CPO survey,2 when it was lined processes. Advanced analytics is
ranked third among key focus areas. still in its early stages in the industry,
“There are diminishing returns from At the same time, there are several
trends driving greater focus on
as is the move towards supporting
multimodal sourcing models—both key
elements of “intelligent sourcing.” There
the old model of moving continually
process improvements. For one thing,
is also increasing focus on achieving
technological innovation offers new
greater agility and flexibility.
solutions and, at the same time, customer
from one low-cost sourcing country
to the next.” 1
It is possible that the number-one ranking of sustainability and transparency was influenced by the fact that our overall survey topic was sustainable sourcing.
Apparel sourcing executive 2
Digitization: The next stop for the apparel-sourcing caravan, McKinsey & Company, September 2017.
4 McKinsey Apparel CPO Survey 2019 Apparel sourcing in a time of trade tensions: the macrostate at play 5
To support the transformation, CPOs decision points, joint KPIs, and Trade 2.0: increasing trade The increasing impact of Trade 2.0 The State of Fashion 2019, published It is not surprising, then, that our 2019
are looking to attract future talent, shift integrated data systems as a “single tensions are accelerating the is reflected in McKinsey’s Economic by The Business of Fashion and apparel-sourcing survey found that
mindsets, and develop capabilities in source of truth.” shift from Chinese sourcing Conditions Snapshot, which surveys McKinsey.6 The report showed that many CPOs expected sourcing costs to
sourcing departments. That points to global executives each quarter across fashion companies face a shake-up of increase significantly in the years ahead.
Last but not least, apparel companies Since our 2017 survey, a new trend has
a second key area of focus: strength- industries. In June 2019, 75 percent global value chains—bringing both Two-thirds of surveyed companies
need to embark on ambitious supplier- emerged in apparel sourcing: Trade 2.0.
ening and simplifying cross-functional of respondents cited increased trade new barriers and new opportunities— expect prices to increase (Exhibit 2).
partnership programs. Greater col- Many companies, especially those based
collaboration within the sourcing organ- conflict as a key risk to economic as trade agreements are disputed or CPOs in the premium and sportswear
laboration and connectivity with fewer in North America, face an environment
ization and beyond. Internal handover growth over the next 12 months—up renegotiated. As the report noted: categories and those with sourcing value
suppliers will be needed to deliver of increasing trade tensions.3 In our 2019
and decision-making processes through- from 63 percent in March 2019.4 of more than USD 1 billion, expected
greater speed and flexibility, improve survey, CPOs from these companies “A sharp rise in trade tensions
out the merchandising and product- above-average price increases. For
sustainability, and improve cost and said they expected the more challenging Such trade tensions are likely to affect between the US and other large
development process are still a key hurdle North American respondents, shifting
efficiency across the value chain. More trade environment to have a strong apparel more than most other indus- economies seems set to increase
in cutting down lead times. To enable trade agreements are the number-one
sophisticated suppliers are already impact on sourcing cost development tries. In the US, for example, the fashion costs for some companies and
closer cross-functional collaboration, driver for the cost increase, whereas
benefitting from stronger partnerships over the next year, adding to the margin industry accounts for 6 percent of increase the risk of disruption.
companies need to achieve greater European CPOs see exchange rates
and are innovating more effectively. pressure coming from consumers. imports but pays 51 percent of tariff At the same time, new trade agree-
clarity of roles, responsibilities, and as the key factor.
receipts. 5 Indeed, Trade 2.0 was one ments promise better trading
of the top ten trends identified in conditions in certain instances.”
4
McKinsey Economic Conditions Snapshot, June 2019.
5
Russell, Michelle, “AAFA again calls for swift resolution to tariff dispute”, Just-Style, August 22, 2018, https://www.just-style.com/news/aafa-again-calls-for-swift-
3
Use of the term “trade war” in the industry publication Sourcing Journal increased 2.4 times in January to July 2019 versus prior year (January to July 2018: 74; resolution-to-tariffdispute_id134314.aspx.
6
January to July 2019: 175) mostly focusing on the trade dispute between the US and China. The State of Fashion 2019, The Business of Fashion and McKinsey & Company, November 2018.
6 McKinsey Apparel CPO Survey 2019 Apparel sourcing in a time of trade tensions: the macrostate at play 7Shifts in sourcing countries are Among European companies, of the companies surveyed said they What about near- and reshoring?
therefore a core concern for North however, the shift away from Chinese planned to increase the value of There is evidence that the combination
American apparel firms, with a focus sourcing is much less pronounced: sourcing from Bangladesh by more than of Trade 2.0 and increased demand
on finding alternatives to China; today, only 15 percent of European CPOs 10 percentage points over the coming volatility is catalyzing the development of
the label inside the typical garment surveyed planned a reduction of more year, while four in ten said the same a more flexible, demand-driven sourcing
sold in the US reads “Made in China.” than 10 percentage points. To some about Vietnam. 8 In fact, the growth model that is multimodal and smartly
On average, respondents’ companies extent, European companies are of these two countries is so rapid uses nearshoring among its levers.
sourced 36 percent of their sourcing benefitting from the exodus of their US that some buyers are starting to face With the cost gap between proximity
value from China—double the value counterparts from China and are taking capacity issues. sourcing and key Asian sourcing
of the next-largest sourcing country, advantage of the capacity becoming countries closing, more companies are
It is worth noting that excitement
Bangladesh. The countries with the available as competition between considering shifting volumes closer to
about Ethiopia seems to be abating
next-largest shares of sourcing value Chinese suppliers heats up. That is home. Among respondents in our 2019
somewhat. In our 2017 CPO survey,
were Vietnam at 14 percent and India unlikely to be more than a blip, however, CPO survey, almost half expected to
Ethiopia was the second most highly
at 10 percent. as Chinese manufacturers already increase proximity sourcing by more
rated country in terms of its growth
have high levels of efficiency and will than three percentage points, and a
prospects; it is now ranked fourth.
“The challenge with near-
not be able to finance price-driven small minority expected an increase of
That is a reminder that building up
competition for long. more than ten percentage points over
Ethiopia’s garment industry is a long-
the coming year. On the other hand,
shoring is not higher wages—
Which countries will be the beneficiaries term undertaking.
reshoring values are expected to remain
of the shift out of China? Bangladesh is
All in all, the continued attractiveness of largely stable. In the US, for example, the
still seen as a highly attractive country,
it’s the fabric production.”
these countries as sourcing destinations “buy local” movement has had limited
but Vietnam is following close behind
is a reminder that lower-cost labor is still impact, despite US-China trade tensions,
and narrowing the gap, according to our
a priority for apparel sourcing. in part because of a lack of capacity in
2019 survey (Exhibit 3). More than half
Apparel sourcing executive US apparel manufacturing.9
But that picture is already changing:
China’s and Hong Kong’s share of total
garments exported globally has declined
continuously since 2013. Even in terms
of absolute value, there has been a
pronounced shift away from China.
The value of China’s exports of woven
garments fell from USD 30 billion in the
first half of 2016 to USD 26 billion in
the first half of 2019, while its exports of
knitted garments fell from USD 29 billion
to USD 27 billion over the same period.7
A further acceleration of sourcing shifts
away from China by US companies is
on the horizon. In our 2019 survey, more
than half of the executives from North
America were planning to reduce their
sourcing value from China by more than
10 percentage points over the coming
year. When we last surveyed sourcing
executives in 2017, only 27 percent of
US respondents planned to reduce
sourcing from China on a similar scale.
7 8
China Customs Statistics, HKTDC Research, http://china-trade-research.hktdc.com/resources/MI_Portal/Article/ff/2012/05/450059/1564112975328_ There are differences between North American executives, who prefer Vietnam, and their European counterparts, more of whom rate Bangladesh highly.
9
GarmentsExportJun2019.pdf. For further discussion on this topic, see Is apparel manufacturing coming home? McKinsey & Company, October 2018.
8 McKinsey Apparel CPO Survey 2019 Apparel sourcing in a time of trade tensions: the macrostate at play 9Spotlight on sustainable
sourcing
Why sustainable apparel Multilateral action on sustainable
Consumer demand for sourcing is a must apparel has been matched by action
sustainability is increasing, as by national governments in the main
The question is no longer whether but
are societal expectations of the production countries and consumer
how to scale social and environmental
fashion industry. But it is no easy markets. For example, China continues
sustainability in apparel sourcing.
matter to drive progress in this to tighten its environmental policies
Sustainable fashion is picking up
complex arena: to begin with, as part of the 13th Five Year Plan
rapidly among consumers, is starting
there is no common, objective 2016–2020. In France, a circular-
to become a real driver of purchasing
industry standard on sustainable economy law is expected to come into
decisions, and is likely to be critical for
sourcing. Apparel companies force as early as 2021; it will prohibit
competitive success in the near future.
must shape a robust sustainability clothing companies from destroying
As an indicator of growing public concern
agenda addressing social and overstock. And in Turkey, the Zero
about the topic, internet searches for
environmental issues—and deliver Waste Campaign was extended to
“sustainable fashion” tripled between
it at speed and scale. textile products in 2019. There are
2016 and 2019. Hits on the Instagram
similar initiatives underway in many
hashtag #sustainablefashion quintupled
5x
other countries.
between 2016 and 2019 in both the US
and Europe.10 That is an indicator that A McKinsey analysis powered by
sustainable fashion is becoming part of EDITED shows that apparel companies
a broader movement, driven, in part,by still have a long way to go to meet
the concern, activism, and rising spending the demand for sustainability. The
increase in number of sustainable power of Generation Z consumers. analysis scanned fashion products
fashion products launched over the launched at 235 online shops of brands
At the same time, political action has
past two years* and retailers in France, Germany,
changed the framework within which
the United Kingdom, and the US in
apparel companies operate, and
the first half of 2019. It found that,
regulations have become stricter.
among mass-market apparel brands
The UN Sustainable Development
and retailers, only 1 percent of new
Goals adopted in 2015, is now the core
products launched during this period
framework guiding the implementation
were tagged “sustainable” in online
of sustainability strategies. The 2015
shops. But that offer has increased
G7 Leaders Declaration agreed to
fivefold since 2017. At the same time,
“promulgate industry-wide due diligence
specialized sustainability players,
standards in the textile and ready-
such as Allbirds and Everlane, have
made garment sector,” which drove the
shown rapid growth.
2017 OECD Due Diligence Guidance
for Responsible Supply Chains in the
Garment and Footwear Sector. Most
“The willingness and ability to change
recently, the 2019 G7 summit ushered
in the Fashion Pact, with 32 major
apparel companies agreeing to a set
is what’s going to be the distinguishing of shared environmental-sustainability
objectives.
characteristic of the winners and
the losers in the next ten years.” 10
Chua, Jasmin Malik, “Use of #SustainableFashion hashtag spiking on Instagram,” Sourcing Journal, July 18, 2019, https://sourcingjournal.com/topics/
sustainability/instagram-sustainable-fashion-heuritech-160617/.
Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel * Powered by EDITED
10 McKinsey Apparel CPO Survey 2019 Spotlight on sustainable sourcing 1156%
No common language for sustainable Frequently, articles titled “What is The sourcing function: driver or doer?
fashion sustainable fashion?” are published in Given growing consumer and regulatory
Sustainability is likely to be one of general-interest magazines. However, focus on the topic, sustainability is
the predominant themes of the fashion these typically focus on sustainable- increasingly seen as a competitive
industry in the years ahead, but the of CPOs agree that responsible and materials options, without providing advantage in the apparel industry. This
topic is complex and multifaceted. sustainable sourcing is considered a measures of sustainability or covering the places sustainability at the heart of
To begin with, there is no common key strategic part of doing business, broader issues involved. The breadth and the C-suite agenda: more than half the
language to define sustainable fashion. as is apparent from its position as top complexity of sustainability cannot be sourcing executives in our 2019 survey
Although initiatives such as the 10 priority on the CEO agenda today communicated to the consumer in terms agreed that sustainable sourcing is
Sustainable Apparel Coalition’s Higg of the garment’s price, size, or material— on their companies’ CEO agenda. This
Index have made a start in this regard, simpler ways must be found to signal a finding differed markedly by region,
it is still difficult for industry practition- garment’s degree of sustainability. however. In Europe, 70 percent of
ers to talk about sustainability with companies fully agreed that responsible
This speaks to a broader issue: a lack
a shared vocabulary, let alone forge a and sustainable sourcing was on the
of standardization of sustainability in
joint understanding. CEO agenda—compared to just 35
apparel sourcing across the industry.
percent of North American companies.
Standardization and objective criteria for
“Sustainability issues
measuring sustainability are needed— Our survey respondents reported that
for example, in the mix of sustainable the influence of the sourcing function in
materials. Our conversations with apparel- company-wide sustainability strategy is
are complex… and they sourcing executives point to an increasing
recognition that greater standardization is
mixed. Just under half the CPOs surveyed
said they had the responsibility to deliver
are hard to simplify.”
needed to align the industry and inform the on sustainability targets but lacked
consumer. One example is David Savman, decision-making power. But just over half
General Manager Global Production at the CPOs saw themselves as shapers of
David Savman, General Manager Global Production, H&M Group the H&M Group, who said the following the broader sustainability agenda. The
(see page 32 for the full interview): tension between the operational and
strategic role of the sourcing function
“Sustainability issues are complex
Moreover, sustainability encompasses is tangible.
… and they are hard to simplify. As
a vast breadth of topics. Claims of
an industry, we have work to do in
sustainability can relate to anything
understanding all the elements and
from individual lighthouse projects or
collaborating with many different
capsule collections to fully-fledged,
stakeholders across different para-
integrated sustainability strategies.
digms to meaningfully engage with
It is no surprise, then, that consumers these issues.”
lack a clear picture of what sustainable
fashion is all about. We conducted
“We don’t yet have the
street interviews with 16- to 25-year-
olds in four major cities in Europe—
Cologne, London, Madrid, and Paris—
which showed that young consumers
are unsure what sustainability means vocabulary or language to
explain what we are doing
or how to identify which brands or
retailers are more sustainable than
others. This is despite the fact that
fashion magazines have been trying to
educate the consumer with initiatives
to increase visibility and understanding
at the consumer level.”
Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel
of sustainability. The consumers we
interviewed want more and better
communication on sustainability from
fashion companies themselves.
12 McKinsey Apparel CPO Survey 2019 Spotlight on sustainable sourcing 13Environmental sustainability is The most frequently mentioned social- transformation are also at the top The future of sustainable transformed at the same time. It point of sale, to give consumers
the top focus sustainability initiatives focused on fair or of the agenda for some sourcing apparel sourcing remains to be proved that companies transparency on suppliers, the
In our 2019 survey, we asked sourcing living wages (11 percent of respondents), executives. One in five respondents can achieve the change management situation of workers, and raw
executives to identify their top three social responsibility more broadly (8 said their companies were working on Our 2019 CPO survey suggests that needed to shift mindsets, embed new materials. To date, many mass-
sustainable-sourcing initiatives for the percent), and decent work (8 percent). a sustainable transformation, in sustainable apparel sourcing has ways of working across functions and market companies have not shared
next five years. While the key initiatives Our survey makes it clear that industry- which they aimed to integrate end the potential to disrupt the industry with suppliers, and upskill staff—all any product-specific supplier
mentioned spanned a broad field, en- level collective bargaining relating to to end sustainability throughout the significantly, driven by innovations in by 2025. information beyond publishing
vironmental-sustainability initiatives living wages is not yet widely popular. organization and drive cultural change. technology, standards, processes, supplier lists, and they typically focus
materials, and communication. —— Social auditing. Respondents
were mentioned two to three times more One-third of respondents reject such Fourteen percent of respondents on basic information about materials
were equally optimistic about
often than social-sustainability initiatives. initiatives and say they are not planning said they were working on digital Four innovation-led disruptions (see next section).
globally harmonized standards for
The most frequently mentioned topics on future participation. transformation across their supply chains, The executives we surveyed believed social auditing. The launch of the —— Recycled fiber content. Sourcing
were resource efficiency (particularly starting with a reduction in physical that the following four innovation-led
It seems that two factors are influencing Converged Assessment Framework executives are highly optimistic
for water), transparency, and sustainable samples, including analytics-driven disruptions would become prevalent
the increased focus on environmental of the Social & Labor Convergence about the industry transforming to
materials (Exhibit 4). buying decisions and Industry 4.0. throughout the apparel industry by
issues. First, sustainability is often used Project and its integration in the use at least 30 percent recycled
Almost one-third of the sourcing by the broader public as synonymous 2025 (Exhibit 5): Higg.org platform opens the way fiber content in every new garment.
executives mentioned initiatives to with environmental sustainability only. —— Virtual sampling. A staggering for reducing audit fatigue. However, They are less bullish about expanded
improve resource efficiency, and nearly Second, as one sourcing executive 83 percent of respondents believed some sourcing executives are use of innovative materials, such as
one-quarter mentioned transparency told us, environmental sustainability that physical samples would be used still cautious about the speed of low-carbon synthetics, however.
as one of the top three initiatives they initiatives are easier to implement. less often than virtual samples by implementation, waiting to see what We discuss company plans on the
are working on. This was followed 2025. This reflects the high interest moves auditing companies make. sustainable-materials transformation
Besides these targeted initiatives, two
by sustainable materials, identified by virtual sampling is attracting in in the next section.
themes of overarching organizational —— Transparency at the point of sale.
21 percent of respondents. the industry today. However, the A major push will be needed to
full value of virtual samples can be achieve the target of product-
Exhibit 4 achieved only when processes are specific communication at the
Sourcing executives work on a broad set of sustainability-related topics
“What are the key sustainable apparel sourcing topics at the top of your agenda for the next 5 years?”
Percentage of respondents, n = 64 Size of circle = Percent of respondents
Decent
work
Organic
Social materials
responsibility
Carbon
footprint
Sustainable materials Resource
Plastic and
efficiency packaging
Zero discharge
Digitization
Traceability Fair or
living wages
Transparency
Supplier Sustainable
selection Speed
transformation Compliance
Recycled
Animal
materials welfare
SOURCE: McKinsey Apparel CPO Survey 2019
14 McKinsey Apparel CPO Survey 2019 Spotlight on sustainable sourcing 15Exhibit 5
The future of sustainable apparel sourcing by 2025
“Please indicate the likelihood that the following industry-wide sustainability disruption will occur by 2025.”
Percentage of respondents, n = 64
There will be a substantial share of recycled fibers in every new garment produced (>30%)
Sustainable materials
New, sustainable man-made textiles (incl. biobased materials) will replace at least 20%
of current textiles
Product-specific communication on suppliers and raw materials (from fiber to store) will be
seen at the majority of POSs (on-/offline)
Transparency and
traceability
The majority of retailers and brands (>50%) will achieve radical transparency on Tier 3+ suppliers
Globally harmonized standards for social auditing will make audit collaboration across
companies the norm
Sustainability will be the dominant selection criteria on for on-boarding new suppliers
Supplier relationships The norm will be for fashion brands to co-invest with suppliers in sustainability improvements
Industry-level wage agreements will be in place, with a living-wage basis implemented across
the industry
Automation will replace at least 50% of manual jobs, leading to worker displacement
Virtual samples will be used more than physical samples
Overproduction will be cut in half by improved usage of consumer insights and more agile supply
chains (incl. on- demand)
Purchasing practices
E2E efficiency and collaboration will lead to the elimination of late orders and order revision frenzy
(< 5% of orders)
There will be no price premium to produce sustainably and/or to work with sustainable
manufacturers and/or use sustainable materials
Hazardous chemicals will no longer be used
Ecological footprint Waterless processing will be the norm (>50% of production)
Suppliers are on track to reach the targets set in Fashion Charter for Climate Action for
GHG emissions (-30% by 2030)
16 McKinsey Apparel CPO Survey 2019 Spotlight on sustainable sourcing 17What impact will all these sustainability- agile supply chains. 11 For the sourcing Shaping and delivering Our report sheds light on companies’
related innovations have on sourcing function, it will be crucial to build a a robust agenda for preparedness, plans, and progress in
costs? The jury is out on this question, multimodal sourcing model and change sustainable sourcing these four key areas of sustainable-
and our survey findings and interviews from a pure focus on FOB price to sourcing transformation. Each is the
show there are two opposing views on integrating final product margins and In our 2019 CPO survey, we asked focus of a subsequent chapter of
the answer. One sourcing executive sustainability impact into intelligent respondents to identify the three key this report. Together, action on these
who believes that sustainability will not sourcing decisions. sustainable-apparel-sourcing topics priorities will contribute to a robust
increase costs told us, “a lot depends at the top of their agendas for the next sustainability agenda that addresses
Companies also need to consider how five years. The top ranked topic by far
on having the right partners.” Other both social and environmental issues.
to advance their purchasing practices was sustainable materials (Exhibit 6).
sourcing executives, however, associate In the years ahead, apparel companies
in areas such as industry-level living- Other key priorities were transparency
additional cost with sustainability. In will need to deliver that agenda at speed
wage agreements, eliminate late and traceability, supplier relationships,
the next section, we set out findings on and scale—harnessing innovations
orders and frequent order revisions, and purchasing practices.
actual cost mark-up levels and on the in technology, standards, processes,
and achieve climate change targets
price increase that sourcing executives We should note that, although initiatives materials, and communication.
together with suppliers.
are willing to accept for sustainable on improving ecological footprint were
materials. We discuss sustainability- mentioned by two-thirds of executives
related costs more broadly in the final among their top three initiatives, most
section of this report. mentioned them in second or third place.
“A lot depends on having
the right partners.”
Apparel sourcing executive
Look before you leap: the basics must Exhibit 6
be in place
Alongside the high-profile innovations
Key areas sourcing executives plan to work on
discussed above, there are areas
that received less attention from “What are the 3 key sustainable apparel sourcing topics at the top of your agenda for the next 5 years?”
apparel-sourcing professionals in our Top 8 topics aggregated, n = 64
survey. But we believe that these are
nonetheless important enablers of
sustainable sourcing—as our interviews
with sourcing executives confirmed.
One key enabler will be to embrace a 1 Sustainable materials
2
more flexible, demand-led model—which Transparency and traceability
can help to rein in the wastefulness of
overproduction. That wastefulness has
been amplified by shorter fashion cycles, 3 Supplier relationships
consumer demand for novelty, and the
volatility of demand. 4 Purchasing practices
5
Though only 11 percent of survey
Ecological footprint
respondents see the transformation
to a flexible, demand-led model as
highly likely, almost 60 percent believe 6 Circular economy
in it to some degree. To bring this
change to life, companies will need to 7 Plastics and packaging
transform the go-to-market process,
embrace digitization and analytics,
leverage consumer insights, and shape
8 Sustainability
transformation
11
Measuring the fashion world, McKinsey & Company, October 2018.
18 McKinsey Apparel CPO Survey 2019 Spotlight on sustainable sourcing 19Embracing sustainable
materials
Broadening the sustainable- These plans for use of more sustainable
Among the apparel companies we product offering: the scale- options show that the industry is
surveyed, the share of products starting to move away from sustainable
up ahead
containing sustainable materials capsule collections or sublines to broad
remains low today—but CPOs Though the share of products with
use of sustainable materials. Only a
envisage a major scale-up in the sustainable material is still low, mass-
few of the companies surveyed have
next few years. That won’t be market apparel companies have
the minimal goal of less than a ten-
easy: CPOs cite several obstacles broadened their product offering
percent share of products sourced with
to implementation, including made with more sustainable material
sustainable materials.
availability, cost, and quality options. In recent years, the two largest
global apparel retailers—Inditex and Larger companies with at least USD 1
of materials. An even greater
H&M—have both made bold public billion in sourcing value will drive the
challenge will be to foster cross-
pledges on sustainable materials. industry shift. Four out of five of these
functional implementation of
Many other companies have done companies plan to source at least half
efforts to increase the share of
the same, committing to a significant of their assortment from products made
sustainable material. Companies
share of sustainable materials in their with sustainable materials, while two out of
will also need to invest in new
sustainability pledges. And retailers five plan to source more than 75 percent
manufacturing capacity and
and brands, as well as portals such as of their assortment from such products.
technological innovation—but
most sourcing executives Asos or Zalando, have started to make Several of the executives we interviewed
surveyed remain cautious about it easier for consumers to find these underlined the fact that companies have
making such investments. products on their websites. a long way to go if they are to realize these
Both organic cotton and products made ambitions. For example, Edwin Keh, CEO
from recycled materials are being used of the Hong Kong Research Institute of
55%
more widely. An EDITED analysis of 235 Textiles and Apparel, made the following
online shops conducted exclusively remarks (see full interview on page 26):
for this report found that, in the mass “Many companies say they are moving
market, 2.6 times more products were to sustainable materials, but that is
being tagged as made with organic quite a loose term at present. And
of companies aim to source at least cotton than in 2017. Over the same we don’t yet have the vocabulary or
half of their products with sustainable period, 3.3 times more products were language to explain what we are doing
materials by 2025 tagged as made with some recycled at the consumer level. Brands will be
materials. Nonetheless, absolute challenged to become more radical
volumes are still low. Products made in how they behave and what type of
with some organic cotton account for materials they use. Moving away from
3 percent of all products made from petroleum-based raw materials will
cotton. Only 2.3 percent of t-shirts certainly be a major step. Moving away
offered on online shops are made with from very water-intensive, chemical-
organic cotton and only 0.7 percent of intensive materials or traditional cotton
“Brands will be challenged to become
jeans are made with recycled fibers. is also a big opportunity. And there will
Our survey suggests that, in the coming be much more recycled content: there
more radical in how they behave and
years, there will be a significant scale-up is so much useful material that we are
in offerings that use sustainable materials. either landfilling or incinerating that
Among participating executives, 55 provides areas for opportunity.”
what type of materials they use.” percent said their companies wanted at
least half of their products to be made
with sustainable materials by 2025.
Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel
20 McKinsey Apparel CPO Survey 2019 Embracing sustainable materials 21Our survey findings spotlight the Finally, 45 percent of companies Availability, cost, and quality 95 percent of them rank it among the top more of these companies see the need
recycling opportunity. Three-quarters surveyed are looking to integrate more are the biggest bottlenecks three topics and three-quarters see it as for upskilling in their design departments
of companies are planning to include innovative bio-based materials, on par the number-one hurdle (Exhibit 7). While and the sourcing organization.
Our survey shows that availability, cost,
recycled polyester from plastic waste, with recycled nylon or responsible or almost 90 percent of these companies
and quality of materials are seen as the Internal knowledge of the sourcing
whereas two-thirds are aiming to include recycled wool. Considerable innovation see cost as second within the top three,
biggest bottlenecks for the scale-up organization and design are mentioned
recycled polyester from post-consumer is taking place in this area, much of it only 21 percent rate cost as the number-
of sustainable materials. Additionally, by a more limited number of sourcing
garment waste. The latter seems an partnership-driven. Examples include one issue. The quality of materials
the question of cross-functional executives. The scale-up plan certainly
ambitious target given the current status the most recent Adidas and Stella available currently is a less pronounced
implementation of sustainability arises raises questions of capability and shared
and the additional hurdles to overcome McCartney dress and Bestseller's joint issue for these companies.
as a “moment of truth” for scaling incentives across design/product deve-
in closed-loop processes, such as venture with biotech company Pond.12 In
up sustainable materials. Reaching This differs from companies with less lopment, merchandising, and sourcing.
availability of the right post-consumer 2019, a number of outdoor companies
the declared targets for sustainable than USD 1 billion in sourcing value, The level of integration of sustainability
waste, return logistics hurdles, scale-up, started to develop products integrating
materials will require significant scaling as they rate costs as a more decisive across functions and all processes will be
and cost-competitiveness of chemical PrimaLoft biodegradable insulations.13
up. However, availability of material limiting factor that they will need to a moment of truth for the shift towards
recycling technologies. Meanwhile, the leading sourcing and
is a major bottleneck: 46 percent of overcome to scale up sustainable- sustainable materials at scale.
production trade shows are adapting to
Given the current level of true closed- companies surveyed rank this as the materials usage. As a third topic within
the increased demand for sustainable-
loop recycling, the high focus on top hurdle. Only when looking at the top the top three, 44 percent of the
materials innovation with new concepts
recycled polyester from closed loops three topics together is it overtaken companies within the group with less
or focus areas.
and recycled cotton warrants a closer by the cost of materials. than USD 1 billion in sourcing value
look at what will be needed to reach identify their current supplier base,
Companies with more than USD 1 billion
these targets—as we discuss in detail followed only by quality of material.
in sourcing value see the availability
on page 27. Compared to the larger companies,
of materials as even more critical, as
In cotton, however, survey respondents
expressed a preference for responsible
cotton over virgin organic cotton or
recycled cotton. In the more recent
sustainability pledges, preferred cotton
fibers, rather than organic cotton,
are the go-to solution for the broader
commitments.
“There is no silver bullet; rather, there
will be a combination of a lot of small
innovations and a few radical changes .”
Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel
12
“Visionary partnership with biotech pioneer,” Bestseller, May 7, 2018,
https://about.bestseller.com/news/visionary-partnership-with-biotech-pioneer;
“Adidas by Stella McCartney debuts performance apparel prototypes in continued push to create a more sustainable future for sport,” Adidas, July 5, 2019, https://
news.adidas.com/tennis/adidas-by-stella-mccartney-debuts-performance-apparel-prototypes-in-continued-push-to-create-a-more-/s/987619ca-079c-48de-
85c2-6958f77349fd.
13
PrimaLoft Bio, http://primaloft.com/primaloftbio; Henkel, Regina, “PrimaLoft Bio: With micro-organisms against microplastic,” Ispo.com, January 29, 2019, https://
www.ispo.com/en/trends/fighting-microplastics-primaloft-develops-first-biodegradable-synthetic-fiber.
22 McKinsey Apparel CPO Survey 2019 Embracing sustainable materials 23Given the widespread concern about At some of those brands the average Closed loop: big gaps remain The high share of companies aiming
cost, it is worth highlighting the divided price of organic options is half that of to focus their sustainable-materials
Looking at the share of companies
view among survey respondents on non-organic ones. On the other hand, strategy on recycled polyester or cotton
planning to focus on recycled materials
the acceptability of price premiums for recycled jeans are on average 1 percent from post-consumer waste warrants
from used and discarded garments, the
sustainability and sustainable materials. more expensive than non-recycled. a closer look into potential hurdles
question of availability of materials is
Some of this divide is visible in the price The price variation differs widely across for sourcing closed-loop materials.
even more pronounced. The industry has
premium that sourcing executives are retailers and brands, however—some Sourcing executives believe that invest-
much work to do to solve the logistics
willing to pay for sustainable materials. offer organic options at an average ments into building manufacturing
involved in consumers returning clothes
Almost half the respondents would price premium of up to 60 percent and capacity would be required to boost
for recycling. Likewise, greater effort
accept a price premium of 3 to 5 percent, recycled options at a premium of up to the availability of material.
and innovation is needed to design
almost one-third would accept only 70 percent.
circularity into products. And expediting As investments are seen as the biggest
increases of 1 to 3 percent, while about
technological innovation in recycling will hurdle for implementation and only
one-fifth are not willing to pay even up
be paramount to fulfill new demand. 26 percent of companies are likely
to 1 percent more.
to invest, this issue seems unlikely to
In particular, the solutions to support
Benchmarking prices of sustainable be solved within the next five years.
high-volume conversion of post-
against conventional options in stores We should note, however, that large
consumer waste into raw materials
shows that, on average, consumers companies are more likely to invest
are currently underdeveloped—which
do not have to pay more for sustainable to gain a competitive advantage from
makes that conversion overly costly.
options. Any cost increase on the circular-economy leadership. In addition,
It would therefore be a smart move
sourcing side therefore has to be miti- partnerships are evolving between
for manufacturers to invest in the
gated. Consumer price strategy varies brands/retailers or their foundations and
development of according technology
significantly between companies, manufacturers, fiber firms, and start-ups.
ahead of increased demand for re-
however. When comparing the average
cycled materials. Despite this need,
price of cotton t-shirts and jeans of ten
however, our survey found that the
UK mass-market brands and retailers
majority of sourcing executives are not
based on EDITED data, on average
yet willing to make capex investments
organic cotton t-shirts are 10 percent
or co-investments and collaborate with
cheaper than non-organic (Exhibit 8).
new types of partners (Exhibit 9).
“Do you expect your organization to (co-)invest in / develop own assets to create closed loop systems (post- “Do you expect your organization to (co-)invest in / develop own assets to create closed loop systems (post-
consumer) in the next 5 years?” consumer) in the next 5 years?”
1
24 McKinsey Apparel CPO Survey 2019 Embracing sustainable materials 25Edwin Keh for recycling: we opened a recycling mill in Hong Kong last September to process
post-consumer waste, turning it back into usable yarn for manufacturing. In fact,
CEO, Hong Kong this yarn is now selling at a discount to comparable virgin yarn. If a recycling mill can
Research Institute operate in the most expensive economy in the world, there is no city in the world
that has a reason not to recycle.
of Textiles and
Apparel (HKRITA) There is a lot of creative thinking in sustainability. But there is no silver bullet; rather,
there will be a combination of a lot of small innovations and a few radical changes.
Moving away from petroleum-based raw materials will certainly be a major step.
Moving away from very water-intensive, chemical-intensive materials or traditional
cotton is also a big opportunity, as is moving into processing—using more benign,
less resource-intensive materials. And there will be much more recycled content:
there is so much useful material that we are either landfilling or incinerating that
provides areas for opportunity.
Many companies say they are moving to sustainable materials, but that is quite a
loose term at present. And we don’t yet have the vocabulary or language to explain
what we are doing at the consumer level. But certainly, brands will be challenged
to become more radical in how they behave and what type of materials they use.
Also, there’s the problem of scaling up the use of recycled materials. This is no
longer a science challenge—it is a reverse-logistics challenge. Our entire global
supply chain is optimized to produce in the East and consume in the West. But
most of the recyclable material exists in the consumption economy, not in the manu-
facturing economy. There are several possible solutions to this, the first being
onshore manufacturing in the West. The other possibility is to process waste back
into raw material to be transported offshore for manufacturing.
Finally, tackling mental hurdles and changing mindsets is a major challenge to
sustainability. We have to overcome the focus on short-term goals. We need
The good guys will win to change how targets are set and how targets are integrated into the business.
There has been progress in the sustainability of apparel supply chains over the past Aspirational goals are good, but we need clear working plans on how we are going
few years. Companies have made commitments and there is a lot more accountability to get there and smarter ways to integrate these decisions. Also, we need to look
about meeting targets and timelines—companies are moving from vague long-term at who is missing from the room when decisions are made—notably the people who
promises to actually operationalizing sourcing strategies. have to implement sustainability issues in manufacturing and in the supply chain.
Engaging suppliers and integrating them into the whole ecosystem is going to be
I am hopeful that in three to five years we will be talking about the positive things more and more critical.
that the supply chain can do—such as contributing to improving social benefits,
improving societies and the environment, and driving positive change. In the future, Essentially, what made us successful in the past could be the thing that kills us
supply chains will take on more of a competitive advantage and will no longer be in the future. The willingness and ability to change is what’s going to be the dis-
based on the old model of risk. Already, suppliers realize that they have to move tinguishing characteristic of the winners and the losers in the next ten years.
away from a labor-intensive to a more capital-intensive business. The only way to
retain their customers is to become a source of innovation and to have intellectual
property that keeps the customer with them.
I think it is apparent to everybody right now that we have too much of everything—
too many brands, and too many manufacturers consuming too much material and
producing too much waste. There will be a zero-sum game where the good brands
and the good manufacturers will win at the expense of the ones that are not as
prepared and have not moved along the track as fast. Consumers will start picking
sides—and the good guys will win.
At HKRITA, we have three themes which guide our research agenda—sustainability,
Industry 4.0, and social good. The traditional research methodology is an eight to
ten-year timeline but, for sustainability, that pace is too slow. We are looking to disrupt
this and move to a faster cycle in which we do a lot of things in parallel—comparable
to software development in how it flows very quickly from an idea to industry scale.
The new working model involves collaborative platforms where we engage with
multistakeholders and multidomain experts. Once we have proof of concept, then
the appetite to do more is there. For example, we recently proved the business case
26 McKinsey Apparel CPO Survey 2019 Embracing sustainable materials 27Driving transparency
and traceability
The urgency of greater —— Bangladesh. Between 2013
Apparel companies are under transparency and 2018, factory mapping was
increasing pressure to create undertaken, auditing and tracking
transparency on their social and The apparel industry is under increasingly the remediation status by Accord
environmental sustainability urgent pressure to create transparency on Fire and Building Safety in
performance internally, and internally and share the information with Bangladesh and the Alliance for
to share that information with consumers. Transparency, of course, is Bangladesh worker safety. In
consumers. Few companies not an end in itself. It allows consumers addition, a four-year research
have achieved that transparency to make more informed decisions at the project, Mapping in Bangladesh,
today, but eight out of ten CPOs point of purchase, helps to identify social was launched in April 2017 to
surveyed have plans to step up or environmental issues and risks in provide a digital map with accurate
transparency by 2025 in the form the supply chain, holds all stakeholders and credible information on fact-
of supplier lists on their corporate accountable, and is a starting point for ories in Bangladesh. 14
social responsibility websites. improvement. Authentic and provable
information will require investments —— China. The IPE Green Supply Chain
Six in ten plan to go further and
in traceability. Almost one-quarter of Map, linking supplier information to
increase the level of product-
sourcing executives plan to focus on environmental data, was launched
specific information on their
transparency as a core sustainability in 2018—mapping suppliers of 6
suppliers at the point of purchase.
initiative within the next five years. apparel retailers and brands, which
Again, the change required will
had been extended to 11 at the time
be dramatic. For example, only The Rana Plaza disaster in 2013, in of writing.15
one in ten companies today which over 1,100 people died when a
share details on the properties, multistory apparel factory collapsed Supply-chain transparency has garnered
origin, and value chain of their in Bangladesh, triggered a new drive additional business interest with the
sustainable fibers. for transparency in the industry. change from the “sourcing caravan”
Fashion Revolution, which was founded model to end-to-end efficiency improve-
after the disaster, published its fifth ments to manage sell-through and
59%
transparency report in 2019, which product margins, rather than intake cost
focused on transparency of business only. More recently, the trend towards
practices of apparel brands and transparency and traceability has been
retailers more broadly—going beyond further fueled by consumers’ demand
supplier mapping. for “radical transparency.” 16 A mere
of sourcing executives expect to see supplier list on the sustainability
an increase in the level of information Over the last decade, increasing section of the website is not enough to
on suppliers at the point of sale numbers of apparel companies have answer consumers’ questions. This is
started to publish their supplier lists a reminder that transparency is not
on their websites; most often these an end in itself: consumers are asking
“Reaching internal alignment
are focused on tier 1 suppliers, though for more information at the point of sale
some have also started to include to make informed decisions and they
tier 2 suppliers.
on the need to be more transparent
are asking for authentic information
Broader country-wide supplier- to be able to hold apparel brands and
mapping initiatives are underway in retailers accountable.
is much easier than obtaining the
Bangladesh and China:
information required...” 14
Mapped in Bangladesh, https://mappedinbangladesh.org/.
15
Green Supply Chain Map, http://wwwen.ipe.org.cn/MapBrand/Brand.aspx?q=6
Cameron Bailey, EVP Global Supply Chain, VF Corporation 16
See description of the radical transparency trend in The State of Fashion 2019, The Business of Fashion and McKinsey & Company, November 2018.
28 McKinsey Apparel CPO Survey 2019 Driving transparency and traceability 29You can also read
