VMI conclusions for fashion brands and retailers - November 2023

November 10th, the fourth get together of fashion brands in 2023 about VMI as the alternative  business model, took place at WAIR's office in Amsterdam. VMI stands for Vendor Managed Inventory, being the business model with the brand in control of the merchandise in the overall value chain (from manufacturer to consumer).

Much has been said in previous blogs about the VMI committee and the VMI business model.

Let's be clear how to define the VMI business model: where the retailer has control over the combination of brands on its shop floors and the number of available square meters per brand per shop floor, the brand controls the seasonal replenishment of the goods, based on daily accurate stock and sales figures per SKU from the corresponding store floors. The retailer pays for the goods delivered to its distribution center or preferably directly to its sales floors. With the VMI model in place, the brand can take responsibility of the goods throughout the total value chain. 

In the run-up to the meeting on November 10, experts from the fashion industry have carefully calculated 8 financial models. Each one from the basics, i.e. turnover minus cost price = margin. And that for the brand and the retailer separately, but also for the sum of those two VMI partners (the value chain).

With two variants: an initial mark-up factor of 2.5 versus an initial mark-up of 2.0 (definition of the mark-up factor = consumer turnover including VAT divided by the retailer's cost price excluding VAT).

Both variants have been calculated in four scenarios, where scenario 1 concerns the traditional wholesale model and scenario 4 represents the VMI model (scenario 2 and scenario 3 are the two models in between).

Findings based on the extensive calculations of 8 variants:

• We should no longer think in percentages and surcharges, but in Euros earned (Euros earned provides a completely different picture and is much better for a clear assessment and good comparison).
• The VMI scenario (scenario 4) is only slightly less positive for the brands than the traditional wholesale model (scenario 1). However, there are more compelling advantages:
• Better customer loyalty / intensification of the relationship with retailers
• More control over the flows of goods
• True partnership with retail partners > bottom line more euros in margin
• Better able to take full chain responsibility (more sustainable through overall supply chain orchestration by the brand)
• Even with a markup of only 2.0, the VMI scenario for a retailer is better compared to scenarios 1, 2 and 3 with a markup of 2.5
• The VMI scenario offers room for a lower starting margin for the retailer, which means a better final margin in euros is achieved by both the brand and the retailer.

Conclusion 

The final conclusion is very clear: 

The VMI scenario is much better for strengthening the overall value chain!!!

The 4 scenarios, compared with a markup factor of 2.5

The 4 scenarios, compared with a markup factor of 2.0

The conditions for the modelling with the different markup factors

The characteristics of the 4 scenarios

The underlying spreadsheet data is available upon request.

Note that by injecting AI-based sales forecasts per SKU into the VMI model, the outcome of this model can actually be significantly better compared to the traditional wholesale model (https://wair.ai/the-ai-replenisher/).

FashionUnlocked: concept for a sustainable VMI platform

In the vibrant fashion world, where margins are under increasing pressure and companies strive for innovation, a unique committee met several times in Amsterdam in 2023, for the first time at @Fashion For Good. The faces behind the brands - Arjan Maat of Simplicity Networks GmbH, Harry van der Zee representing Profuomo, Robbert Slaats from Just Brands, Thom Timmer of My Jewellery and others - converged for an event that could shape the future of the industry.

This assembly, known as the VMI-committee 2023, brought together minds from various corners of the fashion realm, including Patrick Draijer of YAYA, Jort Jeursen from State of Art, Jeroen Dijkema from King Louie, Jorrit Weekenborg from Fabienne Chapot, Rob Schalker from A Fish Named Fred, and Wendy Kok of No-Excess. As the discussions unfolded, a consensus emerged: the fusion of Artificial Intelligence (AI) and Vendor Managed Inventory (VMI) was the path forward, as concluded by the VMI think tank in the summer of 2023.

The committee recognized the impact of AI on fashion, acknowledging its complexity and elusiveness. WAIR, spearheading a concrete AI launching program, had already demonstrated practical success with retailers and brands like DAKA, OFM., Shoeby, Ter Stal, and vDAL. The timing of this collaboration proved crucial in a world grappling with post-corona challenges, inflation, cost hikes, and dwindling consumer confidence. Mismatches on the shop floors (supply versus demand) have to be minimized in order to avoid waste boost full price sell through.

In response to these challenges, the committee championed the integration of VMI, not as a replacement for pre-orders but as a complementary strategy. The agility of VMI, particularly its in-season replenishment capabilities, proved essential in times of uncertain consumer behavior and market fluctuations.

The transition from a traditional model to a VMI model, as revealed by the committee, promised substantial benefits: a potential uplift of 25%-75% in sales growth and a 20-25% increase in gross margin revenue after markdowns. Multi-brand fashion retailers were urged to focus on strategic elements like location, qualified personnel, and an optimal shopping experience, allowing brands to take control of goods and ensure timely availability.

As the summer of 2023 unfolded, the industry grappled with questions about the future. How would fashion transition into an era where VMI became the new standard? The Financieel Dagblad (FD) in August 2023 laid out a prerequisite for success for a sustainable fashion industry: multi-party collaboration through end-to-end digital, AI-driven process orchestration and visibility. Data and consumer first. 

Enter the concept of FashionUnlocked.com – a non-commercial, digital, AI-driven collaboration platform designed to rebalance the value chains of the fashion industry (a cooperative, 50% owned by the brands and 50% by the retailers). The platform aimed to connect brands, retailers, distributors, and solution providers, fostering radical collaboration. A unified, generative AI-driven data model (by WAIR.ai) and adherence to RGM principles (https://www.microsoft.com/en-us/industry/blog/consumer-goods/2023/08/14/generative-ai-will-revolutionize-revenue-growth-management/ , August 14th, 2023 by Microsoft Corporation) formed the core of FashionUnlocked.com.

The vision was clear – to democratize AI in fashion, addressing challenges like data speed, accuracy, and sustainability. The platform envisioned a seamless flow from producer to consumer, with brands taking control of merchandise and sustainability throughout the value chain. This would create a more sustainable fashion sector with better profitability for multi-brand retailers.

However, the journey toward this vision required more than technological innovation. The call for radical collaboration echoed through the presentation. ERP's, solution providers, distributors, agents, and sector organizations should be invited to join the platform, contributing to its growth while following established rules.

The value proposition for brands and retailers was compelling. For brands, FashionUnlocked.com offered co-ownership, full control of the merchandise throughout the supply chain and other collaboration tools to align for optimal VMI and to manage risks. Retailers, on the other hand, could benefit from streamlined processes, just in time deliveries, minimize overstocks and boost full price sell through ratios. Despite a lower start margin factor for the retailers, they will have higher end margins and more earnings per square meter. 

As the presentation concluded, the emphasis on sustainability and collaboration remained at the forefront. FashionUnlocked.com isn't just a platform; it’s a way of thinking toward a more sustainable, interconnected, and innovative future for the fashion industry.

The call is to embrace radical collaboration, leverage AI, and join hands for a brighter future. In other words: take action to unlock the potential of a more profitable and sustainable fashion sector. 

At the heart of the FashionUnlocked concept lies a revolutionary approach to fashion industry collaboration, seamlessly integrating data connectivity, generative AI, and supply chain principles. The core elements include a unified, generative AI-driven data model that ensures daily updates and alignment of product data. FashionUnlocked facilitates Retailer Growth Management (RGM) through digital VMI contracts, upfront merchandise planning, and daily accurate reporting based on POS transactions. The platform democratizes generative AI, offering tools for inventory management and product descriptions (WAIR.ai). 

FashionUnlocked extends its support to customers in various aspects, including Product Data Management (PDM), Supplier Relationship Management (SRM), Customer Relationship Management (CRM), and Supply Chain Management (CSM). Moreover, the platform seamlessly integrates Vendor Managed Inventory (VMI), offering end-to-end solutions for handling restock, meeting contractual obligations, and ensuring financial transparency. With an automatic payment system at delivery, FashionUnlocked emerges as a comprehensive, AI-driven collaboration platform, transforming the fashion industry into a dynamic, interconnected ecosystem.

Please note: it has not yet been decided whether and when this platform will actually be realized. Let this concept be an inspiration and discussion piece for more people. So feel free to leave your thoughts or comments here or follow #FashionUnlocked on LinkedIn.