Managing risk in the apparel industry: Top 5 areas to consider

September 29, 2020

COVID-19 caught apparel suppliers off guard. Order cancellations, reduced order volumes, extended payment terms and shipping delays left many in the industry in a situation of financial uncertainty, if not actual distress. The result has been an urgent interest in what constitutes effective risk management and how suppliers can adapt to survive.

Getting serious about risk management

The crisis has made risk management an imperative for the apparel industry. In a report by Better Buying, only 17% of suppliers had some form of insurance for guaranteeing order payments in the event of a cancellation. In Bangladesh, some 80% of suppliers reported losing a portion of their account receivables due to such occurrences.

Conducting risk analysis is a way for apparel suppliers to better understand their operations and risk exposure. There are five key areas to consider:

1) Operational risk

The scope of operational risk covers areas like product quality, the health and safety of workers, regulatory compliance and the management of externalities. Monitoring work processes and factory conditions are ways to gauge the risk exposure of a particular operation and make improvements where needed.

2) Financial risk

There is a variety of financial risks that suppliers face, from negotiating weak contracts to being too lenient on payment terms. Care needs to be taken to ensure the highest likelihood of payment for goods delivered, which suppliers can do through a variety of means including requiring advanced payments, obtaining bank guarantees, securing trade credit insurance coverage and using invoice factoring. Also, as a preventative measure, regularly checking the risk scores of prospective and existing customers can help minimise the chance of non-payment.  

3) Supply chain risk

The Institute for Supply Management found that nearly 75% of companies had experienced supply disruptions since the start of the pandemic, resulting in a renewed focus on how to mitigate supply chain risks. Increasing transparency in the sharing of information between buyers and suppliers is a necessary first step and can help improve supplier performance.

4) Compliance risk

To manage compliance risk, apparel suppliers should be meticulous in understanding the regulations applicable to their industry, evaluating their level of adherence with each one, identifying any gaps in control and taking corrective action where needed. Adopting these measures will help prevent the kind of reputational damage that can result from non-compliant operations.

5) Industry risk

Zooming out to the wider industry environment, suppliers need to closely follow shifts in trade policies, macroeconomic developments and disruptions to the competitive landscape. Monitoring for changes to import and export controls is also necessary, especially in today’s context where adjustments happen quickly and frequently. Staying on top of these risk factors can help suppliers anticipate developments in the market and adapt their business strategies accordingly.  

Making risk management work

Once the range of risks facing apparel suppliers is known and has been analysed, it can begin to be managed. The management approach should be determined by the likelihood of a given risk’s occurrence and the severity of its consequences. For example, for low-priority risks, a supplier may choose to accept or retain them; but for high-priority risks, action may be taken to avoid the risk altogether or at least reduce the chances of it materialising. Focusing on measures that would minimise the negative impact should a risk occur is also valuable.

For risk management to be effective over the long-term, a robust and thoughtful monitoring and review process is required. This ensures that suppliers accurately understand their risk exposure over time and are efficient in identifying new risks and optimising their response strategies.

Additionally, diligent records should be kept of all risk management policies and procedures, to serve as a reliable reference and guide for action. Inadequate documentation can itself become a factor, as it can compromise risk management performance due to misunderstandings about protocol.

If you’re interested in learning more about risk management and other topics related to the apparel industry, registered companies can join Serai today. Click join, submit some basic information about your company and get started.

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