A factory that does not supply fabric or trim is called a CM (cut-make) factory, or in Latin America, a maquila. These are terms which will gradually disappear from the apparel industry vocabulary because in the post-2005 era, there will no longer be factories exporting garments on a CM basis. Working under CM terms, the risks to the buyer are simply too great. The moment the customer hands over raw materials which they have already purchased, the customer and their order become hostage to the factory.
Material costs are normally 70% of the total FOB price. If the factory has the customer’s material, the customer is trapped. If the factory is late, the customer must accept late delivery. If the finished garment quality is not up to standard, the customer must accept poor quality. The customer cannot just cancel the order as the factory has already received the equivalent of 70% of the order’s value. Any cancellation leaves the factory with a 30% loss but the customer with a 70% loss. In the pre-2005 world where cheap labour and low FOB were the sole determinants of cost, some customers were willing to take this risk. In the post-2005 world, any customer who continues to hand over raw materials to a CM factory is simply inviting disaster.
Factories all over the developing world already know their only road to real profits is in full package production where they pay for raw materials. However, paying for fabric is not the same as sourcing material. In fact, there are three levels of material purchase. Each is different; each provides the customer with different levels of services; and each puts a different level of responsibility on the factory. The greater the level of service, the more important the factory becomes to the customer. At the same time, each increase in services creates greater potential risk to the factory.