Breaking the Overproduction Cycle: Causes, Effects, and Solutions
May 3, 2022
Overproduction is a common obstacle in retail. The harmony between supply and demand is never perfect. On one side, running out of stock comes with its own set of problems. The idea of watching customers leave for competing companies produces enough anxiety for brands to err on the safe side and accept a certain amount of potential waste. But when does overproduction start to cause excessive harm to both your bottom line and the environment? And how do you strike the right balance?
Each year, the retail industry discards enough textile waste to fill 500,000 Boeing 787 Dreamliners. While the right production balance for each company varies, most retailers can agree that vast improvements are needed. But how can you limit waste without cutting it too close? The overproduction issue can be tackled in multiple ways—better understanding of customer preferences, data-informed product creation and merchandising strategies, streamlining of processes, and the ability to respond quickly to fluctuations.
The route your brand takes depends on the challenges it's facing. Let's dive deeper into the problems associated with overproduction and the driving forces behind it to find the best possible solutions to reduce waste and boost profit margins in your company.
Problems with Overproduction
Overproduction threatens the success of businesses, the health of the environment, and even the strength of global economies. Four of the most pressing concerns for the retail industry are outlined below.
Unrealized Profit Margins
Of the 100 billion clothing items produced annually, only 60 to 70% are actually sold to consumers, and only 30 to 40% of items sold fetch the full retail price. Most retailers that suffer from overproduction issues need to provide substantial markdowns to get their inventory out the door. Many more items end up as deadstock that fails to sell—even to discount stores like TJ Maxx, Ross, and Marshalls.
Overproduction significantly reduces a company’s ability to achieve its revenue and profit margin goals. As the apparel industry grows at a rapid rate that hasn't been seen in over two decades, we can expect this problem to worsen. Retail grew by 7% in 2020 and 14% in 2021 and is expected to sustain a 6 to 8% growth rate in 2022. Garment production overall has more than doubled over the past ten years, but the industry growth rate hasn’t reflected the same boom, which is the first sign of trouble. Waste caused by overproduction is a glaring cause of this misalignment.
The good news is that brands that identify effective strategies to reduce overproduction and mitigate related issues will be well-positioned to jump ahead of the competition. Your company can be one of them, successfully managing one of the biggest hurdles in the industry, and your profit margins, employees, and customers will reflect this accomplishment.
A garbage truckload of clothes is burnt or dumped in a landfill every second. That’s a nearly unfathomable amount of waste, and we’re just talking about clothing—not shoes, accessories, household goods, or any other items in the retail market. Worse, the waste is not limited to discarded products. The end-to-end process of creating each item requires a combination of natural, mechanical, and human resources that go to waste, along with the pieces that are never sold. The production of each item involves equipment, technology, water, energy, fossil fuels, and materials that are not reusable. For example, just to grow enough cotton for one pair of blue jeans requires 1,800 gallons of water! That doesn’t include the water and power needed to transform that cotton into a finished product.
When one-third of all production goes to waste, the retail industry is facing a severe problem that requires a radical and immediate change. Not only does this impact the environment, which we’ll discuss in a minute, but it amounts to $400 billion in waste every year for companies. Resolving this waste issue should be a top priority for an industry that continually struggles to chase profit margins and compete for revenue. If resources can be used more efficiently and redirected to activities that result in actual profit, the future will be much brighter for businesses and the environment.
Increased Pollution & Environmental Degradation
At this point, we know that the fashion industry leaves a sizable environmental footprint, ranking among the largest polluters globally. Textile production not only uses valuable natural resources, as discussed, but the process also emits a range of pollutants. Synthetic pesticides and fertilizers are commonly used in farming source materials like cotton. Fossil fuels are burned throughout the production process—from farming to manufacturing and delivery. And the runoff from such activities further impacts the soil, groundwater, and oceans. In recent years, public concern has grown over issues related to microplastics resulting from the manufacturing and disposal of non-organic materials like polyester.
All of these issues are created in the production process alone. Throughout the lifecycle of a garment, it can contribute to the release of toxic chemicals at every stage—from growing as a source material (e.g., cotton plant) to manufacturing, transportation, and destruction after it sits on the shelf for too long. When items don’t sell, they are commonly discarded in landfills or incinerated, and burning the clothing doubles down on greenhouse gas emissions.
Journalists have many overproduction statistics. To latch onto for a juicy story, given everything listed here. When a company becomes the focal point for an exposé on the fashion industry, as has happened to brands like Burberry, Forever 21, and H&M, the negative publicity can have a significant effect. When it was revealed that Burberry destroyed $36.8 million of its merchandise, shoppers threatened to boycott, and the British government deliberated on how to take action against those types of practices. Ultimately, Burberry announced it would no longer destroy excess products.
4 Primary Causes of Overproduction & Real-World Solutions
The cycle begins with brands overproducing merchandise to meet the anticipated demand. Inaccurate forecasting often leads retailers to order too much inventory, which results in overproduction and waste. While this may be expected for first-time product orders or new companies, businesses that have long-term sales data available should be able to narrow the margin of error over time.
Retail technology helps brands leverage historical data and forward-looking consumer demand data to make more accurate predictions of their supply needs. Investing in data upfront will enable savings throughout the product’s lifecycle and earn larger profit margins for your brand.
Seasonal Changes & Fast Fashion
With the emergence of fast fashion, retailers have pushed to meet shoppers’ demands to produce new styles and get them to market as quickly as possible. This evolution has contributed to substantial growth in the number of garments on the racks—doubling each year since 2000. Brands like Zara now release 24 collections per year, a dramatic shift from the four seasonal collections that fashion has traditionally revolved around.
Constant turnover means that clothes are often only worn a few times before they go out of style, encouraging consumers to buy (and waste) more. Due to this continuous flux, the overproduced items often go unsold, leading brands to resort to markdowns and sales. Ultimately, this strategy diminishes the value of their products and causes profit margins to plummet.
The solution to fast fashion is a community effort, requiring participation from consumers and retailers alike. Brands that embrace a slow fashion mentality, a conscientious production approach, and sustainable manufacturing, selling, and recycling principles can make these values work for their companies. By building them into your brand mission, you can attract buyers who share your perspective and may even pay up to participate in a better path forward for the fashion industry. Keep tabs on your consumers' interests and values to ensure you're targeting the right audience and creating the best products to suit them.
Failing to Meet Consumer Needs & Desires
Speaking of consumer interests, creating a consumer-obsessed approach to product development and merchandising will result in products that resonate with your target audience and more robust sales. This is the missing component for many businesses that deal with overproduction issues. If companies don't detect shifts in consumer preferences quickly enough, they tend to make mistakes when developing and ordering the right products in the right quantities. They may also miss critical design details in new product development that force consumers to find what they need elsewhere. Identifying and fulfilling consumers' wishes is the key to moving large quantities of products at full price.
Build a brand that values open and transparent communication with your customers. Allow them to show you their preferences through feedback surveys, social sharing, and ratings. Sometimes behavior speaks louder than self-reported data, which is where your team can leverage consumer behavior analytics.
All of that information will be far too much to process manually, so building the right tech stack will become essential to your company’s strategy. Comprehensive and integrated tools will help your team make sense of the data so you can make the best strategic decisions. The functionality should enable you to create and maintain a consumer-obsessed approach, quickly analyze data within a user-friendly interface, and execute strategies based on the findings, so you eliminate the guesswork. Let your consumers tell you which items and features they want so you can boost sales and significantly reduce the number of items left on the shelf.
Ineffective Assortment Management
When consumer desires and behavior are not fully understood, it can lead to ineffective assortment management. That typically translates into either having too many products to sell (over assortment) or having products that are too similar to each other, which leads to the cannibalization of SKUs.
By better understanding the issues outlined above, you can take a fresh look at your product catalog to see which items add the most value to your consumers, bring in the highest profit margins for your company, and result in the least waste. Then, your company can halt production of the competing products that add the least value, cut items with limited reach, and drive greater SKU productivity and line efficiency.
Overproduction plagues the retail industry and leads to devastating effects on our environment and the global economy. It is critical to address these issues now because the problems will only exacerbate as this sector continues to grow year over year. Taking an informed approach to production, starting with a better understanding of your customers’ needs, will significantly impact your bottom line and help mitigate the ramifications of retail overproduction. But this challenge is too large for one person or team to handle alone. Careful strategy, overarching changes to business practices, and the adoption of intelligent purpose-built technologies will all be vital to changing the trajectory of your business and its impact.
Related Blog Posts
Curbing Fashion’s Overproduction Problem With Consumer Obsession
MakerSights Co-Founder and President Matt Field recently sat down with Sourcing Journal to discuss why curbing overproduction could have a greater impact on reducing carbon emissions than any other sustainability lever – and how consumer obsession is the key to getting us there.