The New Holitistic Supply Chain: Where is it:?

A request from John

Thanks for your investment in writing the blog.  I would like to see an address of why sourcing is a strategic area for the buyer.  Often there is such a laser-like focus on “who can make this widget” rather than the holistic view that an existing supplier partner could possibly make the widget and thus be more significant in the buyer’s overall supply chain.  Any experience you could share or decision-making methods for this type of scenario would be welcome.

For the past twenty years, I have been struggling with this problem.

I still have no answer, but I am getting close.

The answer clearly lies with costs.  The customer wants to buy the right garment at the lowest cost.

The problem is that most customers are unable to add-up the numbers

Let me start at the beginning.  Part I

The industry began with garment buying: The customer’s buyer came to the factory with a sample.  The job of the factory was to supply the materials and labor.

About 20 years ago customers shifted to garment sourcing.  The customer’s sourcing-specialist, broke the garment down to its constituent materials and processes.  The sourcing specialist sourced the material; selected the material and trim suppliers, negotiated prices, and instructed the factory who to buy from and how much to pay.  In the new garment sourcing world, the factory still shipped FOB; however, all factory profit was derived from the CM (making charge).

Part II

In our world retail prices average 6-10 times FOB.

From the garment buyer’s point of view: a garment with $5 FOB price typically retails for between for  $30-$50.  To put it another way FOB costs accounts for 10%-17% of retail price

From the garment sourcer’s point of view:  CM typically equals 30% of FOB —for the garment with $5.00 FOB price, about $1.50.  Again to put it another way, CM accounts for 3%-5% of retail price.

Now we come to John’s question:

Why would anyone in their right mind, spend their careers fighting over 3%-5% of cost, while disregarding the other 95%-97%.

The answer is:  the major garment costs were never included in the garment cost calculations.  Because they were not in the garment cost sheets, they were never seen as garment costs.

Two examples:

1.  Preproduction:  Product development

The initial work such as design, material souring, etc. is quite expensiveMore importantly, the preproduction cost is unrelated to the number of units sold.  The cost per sold unit depends entirely on the number of units sold.

To make matters worse, most of the designs are discards never to be used.

Imagine the cost of design = $10,000

Two out of three designs are discards raising the cost to $30,000 per sold style

The cost per sold-unit depends on how many units are sold.

At the extremes the cost is quite reasonable.

On the mass-market side, WalMart jeans sells 100,000-500,000 per style has a preproduction cost 3¢-6¢ per sold unit which at an average price of $14 per unit works out at 0.4%-2.1% per sold unit.

At the highest level, Madam Haute Couture who sells 100-200 pieces of her little black dress has a preproduction cost $150-$300 per sold unit but with an average price of $5000 per sold-unit works out at reasaonable 3%-6% per unit, which is why M. Haute Couture can well afford to locate her design studio on 57th Street off 5th Avenue NYC.

It is the guy in the middle that gets killed.  If you sell between 5000-10,000 pieces per style, you have a preproduction cost of $3.00-$6.00 per sold unit, and with an average price of $60 per unit works out at 5%-10% per unit.

The cost of product development can be markedly reduced, by transferring much of the process from the customer’s home country to the Asian supplier’s country.  Paying a few extra cents to the factory saves dollars in home-country costs.

Here comes the killer: Since virtually no one includes product development in their garment cost sheets, they cannot calculate the tangible benefits of transferring the process to their Asian supplier’s country.

2.  Markdowns:  The difference between the price listed on the hangtag and the amount actually received after all sales and discounts.

Markdown is by far the largest garment cost factor.  Today retail prices are 6-10 times FOB.  Markdowns can average 35% of retail price.

A garment with an FOB price of $10 will retail between $60-$100

A 35% markdown will result in a cost of $21-$35.

Once again we have the same problem.

The greatest factor determining markdown is time.  In an industry where leadtimes from first-designer-sketch to in-store-stock-delivery is often between 42-48 weeks and reorders almost impossible, severe markdowns are inevitable.

However, by bringing the supplier into the process, first with product development and then with speed-to-market the same process which now requires 45 weeks can be reduced to 45 days.

This creates a new paradigm which cuts markdown by more than two-thirds

  • Trial orders which enables the customer to predetermine which will be the best selling styles
  • Fast delivery of stock
  • Reorders on a 30 day basis (by air)

Here comes the same killer: Since virtually no one includes markdowns in their garment cost sheets, they cannot calculate the tangible benefits of transferring the process to their Asian supplier’s country.

Now comes the real question:  Why is the industry stuck in this dysfunctional mode?

Here is the answer: I am not sure.

However, I do see change.

  1. Both Zara and H&M have models which sharply reduce lead times.  It is no accident that they are the world’s largest garment retailers
  2. There is a nascent garment industry, built entirely around the internet. The structure of this new industry is very different than the traditional model. One point is clear:  Retail prices are less than one-third those of the traditional players.  The players are very small, but their numbers are rapidly growing. Most importantly they meet the needs of the new fashion consumer.
This entry was posted in Customer Strategies, Factory Strategies, Garment Costs, Garment Prices, Internet and tagged , , , . Bookmark the permalink.

One Response to The New Holitistic Supply Chain: Where is it:?

  1. Keerthi Abe says:

    It is NOT the guy in the middle that got killed; but the weakest link in Dhaka.

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