Fashion enters 2026 in an environment roiled by persistent volatility, rising costs and unpredictable consumer behavior. And the industry’s traditional operating model is breaking under these conditions, according to McKinsey’s State of Fashion 2026 report.
“For much of the last decade, fashion companies relied on scale, low sourcing costs and tactical promotions to grow profit,” the report authors said. “Today, these levers no longer provide the same advantage.”
The erosion of these levers has exposed deeper structural issues across the value chain, particularly for the upstream partners responsible for sourcing, production and material development. Suppliers and manufacturers are operating in an environment of higher input costs, shifting compliance requirements and tighter expectations around speed and flexibility.
The pressure is most visible in sourcing, which 45 percent of executives surveyed in the report identify as the area under the greatest economic strain, followed by pricing and inventory management. This reality is accelerating investment in digitized workflows, clearer costing models, and tools that bring production, planning and product development into tighter alignment.
In this shifting economic landscape, efficiency has moved beyond an operational goal to a strategic priority, especially where upstream partners have the most direct influence. Brands, therefore, are working to modernize the systems that connect product development, planning and production but are encountering integration challenges when it comes to scaling these operations.
“Up to 90 percent of transformative AI projects are stuck at pilot stage, constrained by structural and cultural barriers,” noted the report.
This gap has created an opportunity for suppliers with stronger digital capabilities, more reliable data outputs and the ability to support faster workflows that reduce waste and improve decision making.
Efficiency Through Upstream Modernization
Efficiency now depends on how well suppliers and manufacturers can connect data, systems and production workflows across the value chain. To that end, brands are looking for suppliers who can support that shift through digitized sampling, more accurate costing and real-time visibility into capacity and timelines. These capabilities are becoming central to stabilizing development cycles and reducing wasted effort as product complexity and market uncertainty continues to rise.
“Many are linking technology solutions with PLM and ERP tools, as well as algorithms and AI agents, to automate workflows and improve foundational processes used for sourcing and production,” the report noted.
The practical impact of these tools is felt inside production environments, where factory teams, now armed with streamlining mechanisms, can make decisions earlier in the process and with a higher degree of accuracy. That level of clarity reduces back-and-forth with brand partners and limits the kinds of delays that can compound later in the cycle. It also gives suppliers a firmer grasp of upcoming demand so they can allocate labor, materials and machine time with fewer disruptions.
A higher level of visibility is becoming essential as brands work to balance production plans with fluctuating demand. Unpredictable buying patterns have created longer development cycles and uneven order volumes, making it harder for suppliers to plan capacity with confidence.
The McKinsey report points to this growing instability, noting that “the number of days fashion companies held inventory before turning it into sales rose 4 percent from 2023 to 2024, inflating warehousing and logistics expenses.” The upstream implications are immediate, with factories needing firmer projections and earlier signals from brands to plan their workflows with fewer disruptions.
Brands exploring more demand-led models are turning to suppliers who can adjust production with fewer delays and smaller batches. Shorter order cycles and unpredictable sell-through have made rigid planning less workable, and factories with flexible lines or digital printing capabilities are better positioned to respond.
McKinsey highlights why these adaptations matter, noting that “demand-driven inventory optimization is one way to protect margins.” For suppliers, this approach requires a production environment that can respond quickly to incoming orders and adjust capacity without disrupting other commitments.
Accountability for Excess
Regulation is adding another layer of complexity, raising the stakes for production decisions that fall out of sync with demand. New requirements, such as the EU’s Ecodesign for Sustainable Products Regulation and the Responsible Textile Recovery Act in California, are changing how brands manage unsold inventory and the responsibilities they carry once products leave the factory.
These laws introduce new accountability for goods that do not sell through, making excess inventory more than a financial concern. Penalties tied to unsold products and the addition of take-back or recycling requirements mean brands must think more carefully about how much they produce and when they produce it.
That pressure is pushing planning teams to tighten their forecasts and work more closely with manufacturers, since any gap between projected demand and finished output can add new compliance costs to an already strained system.
The result is a supply chain that rewards upstream partners able to operate with greater precision. Factories that can adjust production without prolonged lead times, maintain cleaner data across their systems, and relay up-to-date information on capacity are seeing stronger demand from brands looking to avoid the costs of misaligned inventory.
Efficiency now reflects a supplier’s ability to translate planning signals into dependable output, limit exposure to excess inventory, and provide the level of operational discipline that helps brands navigate uncertain conditions. As 2026 approaches, the suppliers that can meet these expectations consistently will be the ones best positioned to strengthen their relationships and capture more stable business.
