Across the clothing industry accounting for 60% of the world's textile waste, less than 1% of the used products undergo closed-loop recycling enabling the use for equal-value applications. This highlights the problem of a highly linear supply chain in the textile industry, where textiles are produced, used and mainly disposed of. This project contributes to the current debate on transforming the textile industry into a circular economy. Taking into account the challenges of a highly seasonal industry with high demand uncertainties, we combine inventory management practices to reduce waste with a systematic analysis of the economic and environmental impacts of different sustainable sourcing labeling regulations. In the analysis, we incorporate the effect of the manufacturer’s purchasing decisions and governmental regulations about sustainable sourcing labeling on consumer demand driven by consumer environmental awareness. We derive the manufacturer’s optimal sourcing and production quantities and analyze their impact on economic and environmental key performance indicators.