Can Fashion Unlock Capital for Sustainability Investments?

Creating a more sustainable fashion system is going to take capital. There is a financial cost to everything from sourcing innovative raw materials to raising worker wages.

According to Christian Birky, founder of investment firm Because Capital, a path to free up funds to make these investments is improving inventory management. The industry’s current model is highly wasteful, with roughly 20 to 30 percent of apparel produced being shredded or landfilled without ever reaching the end consumer. And often what does make it to retail is sold at a discount, contributing to shrinking operating margins that today can hover around 10 percent or even less. “When you’re throwing away a big chunk of what you’re buying…that is bad math,” said Jennifer Guarino, president and CEO of the Industrial Sewing and Innovation Center (ISAIC).

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Despite this “bad math,” it has been tough to break fashion out of the “outdated, broken and wasteful” status quo. At Sourcing Journal’s Los Angeles Sustainability Summit, Birky—who is also an ISAIC board director—and Guarino laid out the business case for transitioning fashion from its current high-volume, long-lead production models toward more responsive manufacturing. By ensuring that what gets produced is sold, companies can lift their profit margins while simultaneously reducing waste.

Part of why inventory calculations are often incorrect is that planning happens six to nine months out from the actual selling season. This not only leads to overproduction but also causes lost sales if brands underestimate demand.

One strategy to shorten lead times and allow for more demand-driven orders is to move production closer to the end consumer. Reshoring often comes at a higher cost, however not everything needs to be reshored. Birky noted that companies should differentiate between what is predictable and unpredictable from a sales perspective. If a retailer is confident a particular product is going to sell, they can keep manufacturing offshored and produce in bulk. For styles that are less certain—which might be 5 or 10 percent of SKUs—companies can bring production closer to home. He has seen this strategy lead to a 150 percent increase in profit. For an industry that often focuses on first costs, Birky noted financial analysis shows that the initial price of a good matters less than how long it is held as inventory or whether it sells at full price or is marked down.

As fashion production moved overseas in recent decades, apparel’s skilled workforce dwindled in the United States. Detroit-based organization ISAIC is working to bring back these skills by training people on areas such as sewing, cutting and pattern making. Guarino noted that alongside manufacturing innovation, there also must be a transformation in how the work of garment production is valued to encourage people to enter the field.

Another hurdle in U.S. production is a lack of investment in infrastructure, which stems from domestic factories’ precarious financial position. “Manufacturers in the U.S. are doing business with one foot on a banana peel, meaning they are close to going out of business every day, and this is because the margins are just not there,” said Guarino. She added that these skimpy margins leave little left over for facility improvements. To turn this around, brands and retailers need to be “at the table” supporting and partnering with these local manufacturers, giving them the confidence to make investments and try new models.

“We need brands and retailers who are the ones who are absorbing the cost of markdowns and write-offs, but also the ones that have the power in the industry to drive change,” said Birky. “There’s been a disconnect between manufacturers working on some of these issues and a belief that it’s ‘If you build it, they will come,’ and the reality of, even if you build it, it’s hard to get brands to change how they think.”

Some brands have been willing to take this step. For instance, ISAIC ran a pilot in partnership with Carhartt that included custom automation, AI inspection and an incentive structure for operators. After successfully testing this profitable model with Carhartt, it is now being rolled out to other manufacturers.

This real-world testing is an important component of bringing new models to actual factory floors. “[ISAIC is] closing the gap between ideas in a lab and the production floor,” said Birky. “There’s so many ideas that aren’t ready to be put into a U.S. factory right now, and the U.S. factories don’t, frankly, have the resources to take a risk on something, and so we help derisk that.”

In addition to piloting innovations, ISAIC is developing an idea for a matching fund supported by brand and retailer investors. Interested recipients would pitch pilots, and the winners would receive equivalent funds to the investment they already secured.

“It’s not one policy, it’s not one investment, it’s not one innovation, it’s not one company, it’s not one institute—it’s a lot,” said Guarino. “So collective action is important.”