Operating a Successful Small and Medium Size Factory in a World of Giants

On 11 November, I posted a note on birnbaumgarment.com for readers to suggest topics of special interest.

Here is the first request

Dear David
Glad to hear your proposal; always a bit afraid to ask, knowing your tight schedule….
Here is something I will like your to see your point of view: You frequently talked about the big suppliers to macro international factories with capacities in many countries and one buying office for all, like Hong Kong. What do you think of the rest of us (suppliers) small suppliers should do? Do you think we will be swallowed just like Walmart has done with all the small retailers in the US; or do you think we will have hope working with smaller customers that could not reach the minimum of this macro factories?
All the best ! Love the blog
Jaime

Operating a Successful Small and Medium Size Factory in a World of Giants

An average small and medium size factory cannot work with a large customer:

1.    The large customer cannot afford to work with the small supplier because the customer’s overhead costs would be too great.  The factory that ships 100,000 units annually requires the same follow-up as the factory that ships 1,000,000 units annually, with the result that the cost per unit working with the small factory is 10 times greater than working with the large factory.

2.    The large customer working with the small factory will destroy the small factory.  The customer may not mean to do so, but the nature of the industry makes this virtually inevitable.  Two issues here; put them together and they spell bankruptcy:

a.    Every product in our industry, from anoraks to underpants has a high season and a low season.
b.     Customers have two groups of suppliers:
i.    Strategic suppliers that are given reasonably steady business every month;
ii.    Everybody else that is given what is left.

For example.  Men’s cotton woven shirts would appear to be a year round item, but is in fact seasonal.  Looking back over the past 5 years, we can see a very clear trend:

May is the lowest point, about 36% less than the high point in October.  This is a substantial difference. Even allowing for a 25% high season increase due to overtime, the difference would still be 19%.

Factor in the strategic suppliers and the problem spirals out of control.  Assume the customer allocates one-third of orders to the strategic suppliers and two-thirds to everybody else.  This is the new trend:

Once again, May the lowest point, is now 44% less than the high point in October.  This is a substantial difference. Even allowing for a 25% high season increase due to overtime, the difference would still be 30% — an impossible difference to overcome.
However, the bad news shown above, leads to some good news — or at least a strategy for small and medium size factory survival.

We have learned something of importance: To survive the factory must be a strategic supplier.  If you make basic T-Shirts and want WalMart as you customer, annual $100 million at FOB makes you a strategic supplier. If you are not in the $100 million plus category, you must look elsewhere.

There are in fact four possible strategic solutions:

1.    Move up market to higher quality

Imagine you are in the cotton T-shirt business and want to stay there.  The average price of a cotton T-shirt  is $1.89.  Honduras is even cheaper at $1.43 as are Bangladesh $1.61, Nicaragua $1.62,  El Salvador $1.68 — definitely no the people you want to compete with.

However, there is another side.  The average FOB price for a cotton T-shirt from Italy is $11.36. We might argue that Italy can charge more because Italy is Italy.  However, the average FOB price for a made-in-Peru T-Shirt is $5.96; perhaps not in the Italy price range, but still over 3 tines world average.

Why Peru and not you?

The answer is quality.
•    Fine Pima cotton
•    Double mercerized
•    Quality make

If you want to see made-in-Peru T-shirts, go to Ralph Lauren or Giorgio Armani:

Which leads us to the next strategic solution.

2.    Move up market to a higher quality customer

Higher quality and higher priced customers have special problems.  They too cannot deal at the WalMart level.  They have small orders, many more styles and high quality standards.  They need special suppliers.  With a little work, you too can become GARMENT MAKER TO THE STARS.

3.    Move upmarket to higher paid product:

A factory is a room with two doors:  materials arrive through first door and garments exit through the second door.  With some few exceptions such as knit-to- shape sweaters, there is little difference in the required skill sets.  Furthermore, unlike the commodity people, fashion factories require only a limited number of expensive machines. The most important change is the factory layout — not insurmountable.

About 7 years ago, I was working for a client producing T-shirts.  His mandate was:  I AM IN THE T-SHIRT BUSINESS.  I WILL REMAIN IN THE T-SHIRT BUSINESS.  DO NOT TALK TO ME ABOUT ANYTHING MORE THAN T-SHIRTS.

Not a problem.

Of course, we are not talking about T-shirt lengths.  The machine does not care if the T-Shirt is 24” or 44”.
Of course we are not talking about T-Shirt printing.  Both panel printing and fabric printing are equally okay.
Of course we are not talking about synthetic v cotton.  Both are acceptable in the T-Shirt business

Welcome to the world of polyester engineered-printed dresses.

Do you know the FOB price difference between a cotton T-shirt and an engineered-printed polyester dress?

It is all T-Shirts

4.    Move to a smaller customer:

This is the most obvious strategy.  The medium and small importer/retailer faces the identical problem as the medium and small factory.

Working together both will prosper.  Alone the factory may still succeed, but the customer will eventually fail.

The question is, how do they find each other

Go to industry shows Bad idea. 10,000+ people show up.  Perhaps ½ of 1% may be of some interest. Like finding the proverbial needle in the haystack.

Better idea: arrange to meet 10 potential customers, appointments made in advance.

Four strategies any one or combination thereof can work.  It is up to you

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This entry was posted in Customer Strategies, Factory Strategies, Garment Factories, Garment Prices, Garment Sourcing. Bookmark the permalink.

5 Responses to Operating a Successful Small and Medium Size Factory in a World of Giants

  1. Jaime says:

    Thank you David for the insight view. As small factory in Thailand I am currently producing some famous brands and that seems to be the proper strategy at the moment.

    I just got your last book and some ideas there are quite interesting to be pursued!

    All the best
    Jaime

  2. Keerthi Abe says:

    Is up market = down, volume?

    • admin says:

      I am not sure I understand. Trade is usually measured in $. There are some pretty large up market companies.
      Can you be a little more clear.
      Best
      DAVID

  3. Hi David
    Good to see you remember quiet well Peru. Hope everything is going well. We are still doing the Ralph Lauren, Lacoste and Armani products.

    • admin says:

      Dear Fernando:
      Good to hear from you.
      My work goes on much as before. Much of it is now for governments and institutions.
      I have always been dissatisfied with the my results in Peru.
      I should have tried harder.
      With a little bit of effort, today Peru would be home to one of the great niche industries.
      Let me tell you, Peru would have been a lot easier and very much rewarding than India.
      Anyway stay in touch
      And, if I can be of any assistance, let me know
      Best
      DAVID

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