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, where the garment would place an enormous order with a medium size factory and a very strict delivery date. The factory waited for the LC before buying material, but as time elapses, the factory owner is placed in an increasingly difficult position.
He already blocked his space and therefore desperately needed the order, but was afraid to take the risk of buying material without an LC. At the same time, the customer pushed for him to get the material, threatening to cancel the order unless the factory owner bought it. At the last possible minute, when the factory owner had all but given up hope, the garmento announced, “The LC has been opened. Buy the fabric.”
Of course there is no LC and the garmento canceled the order after the material was purchased, forcing the nearly-ruined factory owner to ask for the garmento’s help. After much debate and negotiation, the garment would proudly announce that he was able to force his boss to reinstate the order, but only with a 40 percent discount on the FOB price.
The era of the garmento marauders has passed. Attrition has taken its toll. NaÃ¯ve, 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 powerful QC carries out the ultimate final inspections, and does not take kickbacks.
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 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 the supplying countries.
Sourcing decisions were based on three criteria of which direct cost (FOB price) was the least important: macro-costs, indirect costs, and direct costs, which included materials, trim and CM.
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 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.
The factory suppliers’ ability was the second most important factor until the 2005 quota phase-out, at which point it became more important than macro-costs.
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 percent of all garment exports were produced by four major supplier regions: China, Hong Kong, E.U. and Turkey. If we factor in intra-E.U. exports, that figure rises to 68 percent.
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. Some factors included product development, which customers add about 20 percent to the DDP price to cover; and markdowns, the difference between the price listed on the hangtag and the average selling price after all sales and discounts–about 35 percent 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 like product development and production services including speed-to-market, small orders and an increasing number of styles. They were also faced with post-production responsibilities, like DDP, open account and export-credit.
Suppliers who were unable to meet customers’ new requirements were either pushed to the level of commodity makers or, worse, pushed to the wall altogether. It was at this point that the transnational factories became a major factor in the industry and today have become billion dollar operations.
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 greater services and increase sustainability.
Thus was born cooperative strategies. Customers realized that to reduce costs they required the active cooperation of 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-million-year reign of the earlier generations of troglodytes.
However, there are even more improvements to come. The Bangladesh disasters and more recent difficulties in Cambodia have brought a revived interest in macro-costs, and with that renewed interest, competing customers have joined 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, 14 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.
David Birnbaum began his career as a patternmaker in the United States and later managing and building factories in Asia and Latin America. He started Third Horizon (THL), a strategic development organization specializing in garment production and sourcing. His clients included major factories as well as brand importers and retailers.