Shein’s playbook to supply chain domination

Online fashion retailer Shein is a fascinating company for plenty of reasons. The Chinese firm had a valuation of US$10 billion at one point, is expected to hit US$20 billion in gross merchandise value in 2022, and has taken the fast fashion industry by storm.

But the thing that intrigues me the most about Shein is the supply chain side of its business. In fact, the firm’s success in this arena is bringing fashion supply chain management toward the endgame.

The importance of inventory

Fashion companies sell products that typically have at least 70% gross margins but most still lose money because inventory is difficult to manage. If you produce too much, then you need to heavily discount or even destroy some of it. If you produce too little, you stock out and then by the time you produce more, the season may have changed.

It’s hard to consistently calculate how much to produce and you can destroy your balance sheet if you get it wrong for one season. This is why the company that manages inventory the best will win in the long term.

Managing inventory well is a function of four components, which are simple to explain but hard to master:

• Assortment – This means the variety of what you produce. To make clothing, you need data to figure out what is popular, you need buyers to decide what to make, and you need designers to produce your offerings.
• How much to produce – To determine how much to produce, you need good data on past sales as well as forward-looking data that helps you account for what demand will look like. You also need factories that can produce it and raw materials on hand.
• Speed of production – This depends on how quickly you can design, source the raw materials, complete production, and be ready to ship.
• How quickly you replenish – This is a function of how quickly you can access more materials, how fast the factory can prioritize and then produce your offerings, and how soon you can ship it out to market. Generally, three months is the fastest most fashion brands can do this.

How Shein tackles the four components

Let’s take a look at how Shein handles each of these key components to successful inventory management.

Assortment

It is estimated that Shein launches about 5,000 to 8,000 stock-keeping units (SKUs) and 200 or so new styles daily. This is in a completely different league from the way even the best fashion players like Zara did it earlier. But the key is in how Shein does it.

First, Shein doesn’t rely on its own designers. Instead, the company seems to be providing the data on what is selling well to its supplier base, which is comprised of:

• “Free on board” suppliers – There are about 500 of these and they make designs that aren’t their own (i.e., these designs come from either Shein or an influencer that the firm uses).
• “Original design” suppliers – There are 20,000 to 30,000 of these and they operate by sending pictures of the designs to Shein’s internal buyers. If these designs are approved, the suppliers then send samples, and if these samples are approved, they get a production order.

If an order is approved, it is typically very small at 50 to 100 pieces – far less than the minimum order quantity that most companies get from Chinese suppliers.

How much to produce

When Shein makes an initial order of 50 to 100 pieces, this is almost always loss-making for the supplier. So why are they willing to work like this?

The simple answer is if the SKU performs well, then they can expect massive follow-up orders, which will then make it profitable. In addition, Shein shares data with these suppliers that helps them make smarter decisions on everything – including raw materials, design capacity, and production.

Speed of production

How quick to replenish

The deep moat around Shein’s supply chain

The supply base

Systems

Data

Design

Negotiating power

Endgame