I: In the Beginning
The post-war global garment industry is about 60 years old. For most of that period, the industry was in the hands of marauding garmentos who preyed on supplying factories to win the lowest FOB price at any cost. The garmento was assured he had achieved the lowest cost only when his supplier went broke.
It was all a game; but a game with no rules.
One of the most often used cons was THE MULTIPLE ORDER SCAM.
The garmento would place identical orders with two or more factories, knowing that if the style did not live up to expectation, he would reject the unwanted orders for bad quality.
Another favorite con was the LC HAS BEEN OPENED SCAM.
a. The garmento places an enormous order — with a medium size factory — with a very strict delivery date.
b. The factory anxiously waits for the LC before buying material
c. As time elapses without an LC, the factory owner is placed in an increasingly difficult position. He has already blocked his space and therefore desperately needs the order but is afraid to take the risk of buying material without an LC. At the same time the customer is pushing him to get the material, threatening to cancel the order unless the factory owner buys the material
d. At the very last minute when the factory owner has all but given up hope, the garmento proudly announces, “The LC has been opened, buy the fabric!”
e. The factory owner rushes to open his own LC for the material
OF COURSE THERE IS NO LC: THUS BEGINNING PHASE II
f. The garmento, having waited until the factory has bought the, now notifies the factory that at the very last minute, the order has been canceled.
g. The now nearly-ruined factory owner begs the gamento to help.
h. After much toing-and-froing, the garmento proudly announces that he has been able to force his boss to reinstate the order (I told them, if they do not take your goods, I will quit), with only a 40% discount on the FOB price.
The era of the garmento marauders has passed. Attrition has taken its toll. Naïve, first generation factory owners have gone out of business, while at the same time the old-timer marauding garmentos have gone to that great buying office in the sky, where the all powerful QC carries out the ultimate final inspections, and does not take kickbacks.
II: After the Flood
The end of the garmento-marauder era brought great change. Both the old self- taught garmento and his equally self-taught factory-owner were replaced by younger more open and far better educated professionals.
For the first time professionals looked at their own industry objectively; and what they found brought the beginning of the great change .
Most importantly they discovered that much of what their old generation mentors had taught them was nonsense.
• While it was true that customers negotiated hard with their suppliers for the lowest FOB price, factories were not selected on the basis of low FOB prices, neither were supplying countries
• The race-to-the-bottom — the concept that customers sourcing decisions are based on low labor rates ¬— was myth totally unsupported by the data.
• Sourcing decisions were based on three criteria of which direct cost (FOB price) was the least important
o MACRO-COSTS: The cost of doing business in any particular country was by far the most important factor. During the quota period (1963-2005) when the quota premiums for strategic products often exceeded the total FOB price, labor cost (CM) counted for very little. The move from countries with developed garment export industries to those with less developed industries was motivated not by cheap labor but rather by quota-free exports. Besides quota, good infrastructure, local upstream suppliers, educated management, good logistics, minimal bureaucratic interference, and to some degree free trade agreement (FTA) and/or trade preference agreements (TPA) were also important factors.
o INDIRECT COSTS: The ability of factory suppliers was the second most important until the 2005 quota phase out, at which point it became more important than Macro-Costs
o DIRECT COSTS: FOB: This includes material, trim and CM.
As customers began to recognize the greater importance of Macro-Costs and Indirect Costs, the more knowledgeable customers began to concentrate their orders in countries and regions, which offered advantages in these areas. By 2006, 48% of all garment exports were produced by four major supplier regions: China, Hong Kong, EU, and Turkey . If we factor in intra-EU exports that figure rises to 68% .
In 2005, when quotas were finally phased out, customers turned their attention to INDIRECT COSTS, which brought a revolutionary change.
After fighting for FOB for so many years, customers realized that the largest garment cost factors were not intrinsic (directly related to any specific style) but were rather extrinsic:
The greatest extrinsic factors were:
• Product Development: Customers add about 20% to the DDP price to cover product development.
• Markdowns: The difference between the price listed on the garment hangtag and the average selling price after all sales and discounts — about 35% of the retail price.
The recognition of the importance of INDIRECT COSTS changed everything. No longer were factories kept to the level of product makers, they were now service suppliers. The era when the factory that produced a decent garment, shipped on time, at a competitive price was guaranteed a customer was gone forever. Factories were suddenly pushed into new and unknown areas
• Pre-production (product development);
• Production services such as speed-to-market, small orders, increasing number of styles, etc.;
• Post Production such as DDP, open account, export-credit.
Suppliers that were unable to meet customers’ new requirements were either pushed to the level of commodity makers or worse, pushed to the wall altogether. The new mantra was, If all you can offer is cheap labor, do not be surprised that we fight for the lowest CM.
Suppliers that embraced these new requirements, not only survived but prospered; some showing exponential growth. It was at this point that the TRANSNATIONAL FACTORIES first became a major factor in the industry and today have become billion dollar operations.
IV: The Enlightenment
The move away from FOB-only strategies to reduced INDIRECT COSTS has proven to be only the first step in a revolution that will change our industry.
At first major importers and their buying offices searched out supplying factories that offered low INDIRECT COSTS; however, about seven years ago some customers began to take a pro-active approach .
Customers, through their buying offices began to send their own engineers and specialists to supplying factories to increase productivity, create grater services, increase sustainability, etc.
Thus was born COOPERATIVE STRATEGIES. Customers realized that to reduce costs they required the active cooperation their suppliers. They fully understood — and this is the ENLIGHTENMENT — that any skills they brought to their factories would be made available to their competitors by those same factories. Nevertheless they recognized that benefits for all was more profitable than benefits for none
The move from marauding garmento to civilized partner has taken only 53 years — a mere instant when compared with the 2,000,000-year reign of the earlier generations of troglodytes.
However, there is even better to come. The Bangladesh disasters and more recent difficulties in Cambodia have brought a revived interest in MACRO COSTS and with that new interest; competing customers have joined to together to form COLLABORATIVE STRATEGIES
This new strategy was first introduced in 2010, with the formation of The Global Apparel and Footwear Initiative (GAFTI), a Hong Kong based organization of senior sourcing executives who cooperate in areas of mutual concerns and benefits. In 2010, fourteen GAFTI members traveled to Dhaka to try to induce the Bangladesh government to impose greater compliance and worker safety in their garment industry. These efforts failed, as we later saw in the Tazreen and Sana disasters.
However, the concept of COLLABORATIVE STRATEGIES was established.
More recently COLLABORATIVE STRATEGIES have been used by competing importers working together with governments and nascent local garment factories to establish sustainable garment industries in AGOA and elsewhere.
The new paradigm of COOPERATIVE STRATEGIES and COLLABORATIVE STRATEGIES are in the early stages of development. However, even at this opening period we can see how they will change the way garment exporters and their customers will do business.