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Op-Ed: A Look at Costing from 30,000 Feet

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Apparel costing is one of the most important and least understood aspects of garment design, development and production. It covers a host of issues ranging from fabric weight, construction and country of origin to labor costs—from garment complexity to manufacturing speed and factory efficiency, to reliability of local infrastructure and electrical power to tariffs, quotas and duties.

Understanding costing in greater depth can help apparel brands, manufacturers and retailers reduce costs and improve profitability, plus empower their sourcing and buying professionals to negotiate more effectively.

Costing decisions can have a major impact on a garment’s price and profitability, although today we live in a world of price-led costing where we try to buy at a particular cost in order to achieve a target IMU (initial markup).

Since many buyers are negotiating a “package” buy at a fully-landed final cost, they pay less and less attention to the component parts of that cost. If they do dig into the costing, it’s easy to focus on one or two costing components while overlooking other critical items. What’s more, costing is not simply about identifying the lowest-cost option. Instead, it entails achieving margin objectives, optimizing delivery timeline and maintaining brand quality and reputation.

Many brands, retailers and even sourcing organizations only have baseline knowledge of costing, and because of this, miss the hidden or potentially “padded” costs in a product cost breakdown (PCB).

There is a tremendous need for a more in-depth knowledge of costing in the industry, and the good news is that it can be attained with some specific and focused training at multiple points in the design, merchandising, buying, product development and sourcing areas.

For these reasons, it would very important for all organizations to review their buying/margin/costing strategies periodically and make sure they are aligned with supply chain partners’ strategies and with industry best practices.

Costing’s components

Costing generally refers to the sum total of all components and factors involved in the production of the garments specified and ordered, including:

  • Base fabric cost; yardage yield
  • Size scale of a particular order
  • Financing and transportation costs for fabric
  • Trims (including secondary fabrics such as linings)
  • Garment style, pattern and construction requirements
  • Garment embellishments
  • Special techniques like wet processing
  • Labor costs, direct and indirect (factory overheads)
  • Inspection, audit costs
  • Production line speed, throughput (overall factory or line efficiency)
  • Reliability of local infrastructure and electrical power (affects overall throughput)
  • Freight, duties, insurance

The most significant costing component is usually fabric cost, which can account 50 percent to 60 percent of total garment cost. Fabric cost is driven by the fabric type and origin, fabric width and the amount of material needed for each garment. Of course there are additional garment components like trims, including thread, interlinings, buttons, closures and zippers. Trims can account for 10 percent to 30 percent of total cost.

Variable vs. fixed costs

While many costs are fixed, others can vary depending on the garment type and scale of the production units. Those who are involved in the costing analysis or negotiations would often do well to focus the bulk of their attention on variable costs, which may provide the best opportunity to boost profitability.

The most variable cost component is labor, which usually ranges from 10 percent to 40 percent of overall costs. This includes the decision of where to base production. Wage rates vary widely by country but countries with the lowest wages often have more infrastructure challenges, fewer skilled workers and less overall efficiency resulting in longer lead times. There are also costs related to social and environmental compliance which can be significantly higher in lower wage countries.

The complex, multifaceted nature of costing makes collaboration among supply partners essential. Issuing cost directives to supply partners like “we must reduce our costs by 10 percent” is likely to fail. It’s better to work with transparency to set common cost/margin goals based on the quality and delivery timelines required and then work collaboratively to achieve them.

Refining skills

There are ample opportunities today for costing-related education and professional development. Apparel consulting firms have developed a variety of seminars that allow costing professionals to refine their skills and enhance their knowledge. This type of training can occur over a one- or two-day time frame that covers the key costing fundamentals and technical choices that may be available related to apparel design and production.

Attendees learn to perform important and sometimes difficult calculations such as fabric rate conversions and standard allowed minutes. Another popular seminar topic is fabric consumption, utilization and the variability of apparel markers, which are guides used in the apparel cutting process.

Exercises are conducted using pattern pieces for a garment laid on variable widths, including all sizes needed for a given style. The pieces need to be arranged in a way that optimizes fabric utilization within the constraints of the fabric characteristics and quality standards. Performing this hands-on exercise and visualizing the results is a great way to increase awareness and understanding of this key cost component.

It may be time to review your organization’s costing IQ. Increasing the knowledge of designers, merchants, buyers and product developers can help them achieve both the quality and margin goals by making better choices at the front end. They also become more savvy communicators and collaborators with their sourcing teams, vendors and factories.

The results: the right product at the best cost in the shortest possible time—what every retailer and brand needs more than ever.

 

About the Author

Don Howard, Executive Director, Alvanon (The Global Apparel Business Expert) and creator of Alvanon’s Professional Development Series. don.howard@alvanon.com Visit: www.alvanon.com

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