Sharing risk and reward in a vertically integrated fashion business
This wasn’t the post we expected to be writing today but...we just found out last night that Phnom Penh will be on lockdown and thus our workshop will be closed until the end of April due to a spike in Covid cases. While this will definitely be difficult, and we’ll need some extra support, it won’t crush us, and the tonlé team will be paid on time and in full. So it's a good time to talk about why it’s important that our brand and production are integrated and share risk.
First, here’s how this would play out in a typical business, where the brand doesn’t do it’s own production:
The production business would reach out to the brand or retailer to tell them that they can’t complete their orders. The brand or retailer won’t have to pay, since most brands don’t pay until they’ve been delivered or even after, so it won’t affect their cashflow much. The brand or retailer might do a bit of shuffling to buy products elsewhere, and might lose some orders, but will likely already have inventory that they can sell, so will continue to make money while costs will be lower because they aren’t buying new inventory.
On the other hand, the factory will lose all of their revenue for the entire period that they are closed, and they won’t be able to re-cover it later because their revenue is directly tied to their capacity. Since factories already make tiny margins, they may not have money set aside to pay their employees for that period of time during which they can’t work. It will fall on the factory to pay their employees who they are directly responsible for even though they are never given enough margin by the brands to set aside money for hard times.
This unequal distribution of risk and reward already existed previous to the pandemic - but Covid 19 has only highlighted the disparities and the unequal systems have enabled brands to push the entire burden of caring for workers during a tough time on factories, while at the same time blaming them for not doing enough. That is why, throughout the pandemic, we have been talking about systemic problems that created these inequities.
Back in March of last year - we faced a similar situation on the demand side. Brands and retailers cancelled their orders because their stores were closed, and although we could operate production because Cambodia was not seeing a spike in Covid cases at the time, we had so many cancelled orders that it was tough to scrape together enough money to pay everyone (we made it work, but it was hard.) Retailers across the fashion industry pushed the majority of their risk onto factories. And garment workers, but also factory owners and managers, paid the biggest price.
At tonlé, because our brand, design, marketing, and production are integrated, all of our systems are designed to benefit our makers first. If a marketing campaign isn’t good for our team, we won’t do it. If a product is too hard to make, we’ll change the design to fit the needs of production. If we can’t get certain fabric, we choose something different. And if we have to stop production, we’ll move margin from the brand side of the equation over to the production side to cover extra costs incurred by extraordinary events like the Covid-19 pandemic.
Being vertically integrated from a business perspective is what is keeping us alive when facing both sales risks and production risks. Having our own direct to consumer sales along with key retailers who took their orders anyway because they believed in sharing the risk with us - was what kept us afloat and allowed us to pay our team despite the risks to our business on both the sales side and the production side.
At this time - we can essentially stop work for two weeks and make sure people get paid - because the margin we’d normally set aside for marketing will go towards paying people instead and because we can still sell inventory we have on hand that would normally be owned by a brand. In months that we can produce more and sell more - margin will go into marketing to help us build the brand, so that the brand can carry production costs during a tough time.
This is how design, marketing, sales, and production operate synergistically, and create mutual benefit for all involved, allowing us to weather tough storms while ensuring our business has long term sustainability, and most importantly, that the people who are most critical to our success, the tonlé makers, can still get paid.