Is low cost of labor the only variable that fashion companies have to be competitive?
Of course not.
There are other very important variables that companies must identify in order to work on them, so as to apply improvements that will create a higher value.
Generating efficiency in the entire supply chain.
The sphere of influence of most clothing companies has historically been limited to end products. Most fashion companies spend the largest part of their time, energy and other means in advertising their brands in the market and, naturally, in sales.
Meanwhile, once they received the designs, the suppliers have enjoyed relative autonomy; they are the farthest away from the strategic reach of the fashion brand during the first stages of production.
Collaborating actively with suppliers is a significant first step towards compensating for higher cost of labor. It is possible to create more opportunities by boosting the performance and speeding up improvements towards the other end of the supply chain.
Usually, the cost of labor has represented approximately 5 to 10 % of the total cost of a finished piece of clothing. But the first stages of production, the moment when commodities are purchased and handled, are the highest cost drivers, representing 60 to 70% of the total.
The leading companies in the industry have started to actively manage their commodities, generally through one or more main ways that I will list next.
Excellence in materials engineering
Transparency regarding the value of the product cost allows clothing companies to work with their providers in the supply chain to optimize the selection of materials. Thus, companies get a better understanding of how their selection of materials and manufacturing techniques impact the total cost of the clothing item, which allows them to make decisions to save money during the process of product development and in the first stages of production. These decisions include, for example, the type of fibers, their color and the technology used to produce the greige fabric and to dye or print the material.
Making the product portfolio less complex
The sophistication of products in the clothing industry is particularly costly both from a perspective of quantity and of time, and this complexity drives up the costs of production for the company.
These days, the leading companies in clothing manufacture face this challenge by consolidating their orders, using fewer fibers and weight categories, and by reducing the sophistication of their range of products.
With the development of fabric usage standards it was possible to reduce the fabric expenses by 20% during the spring and summer months, and by 40% during the fall and winter months. These measures included, for example, making sure that each fabric was used in at least 50.000 items per season, and that standard materials represented 80% of the total supply volume, among other requirements.
Organizing the value chain
In a similar way, some companies make significant cost reductions by planning their orders to balance loads during the course of a year. They let the supplier know this so that he can program the annual production process and take any necessary measures to make it more efficient.
By letting the providers boost their production during the usual low season and resell their productive capacity during the peak month, the order planning guarantees capacity utilization 24/7 all year round.
And there are more additional benefits. An early purchase of fiber packs helps to reduce all the costs of the product. The use of greige fabric and dye is reduced. There are fewer fiber leftovers and the reworking of costs due to defective fibers tends to decrease. A more efficient usage of the factory’s capabilities allows you to reduce the cost of labor related to overtime, the cost of turning the machines on and off, and to limit the use of water and chemical products.
Integrated supply chains.
Although the above points help fashion companies in terms of their basic costs, many of them need to continue to put their reaction capabilities to test in order to reach the market with their new models because of how fast trends change.
The value associated to planning depends on which of the three specialized strategies has been adopted by the brand.
Winners achieve success by suggesting fashion garments with a fair and attractive price, which is an excellent value proposition.
Winners achieve success because they respond quickly to market trends with short cycles, which is possible thanks to a supply chain that is flexible and responsive.
Complete brand identity
Winners are experts in creating a thorough brand experience and a devoted community of consumers based on the meaningful activity of the brand.
Although planning is not as important for companies based on value or on total brand experience, those who adhere to fast fashion fail or succeed depending on their ability to react to new trends. Their business model forces them to consider new ways of integrating their supply chain in order to be able to increase the production or speed up the transition to other styles to keep the pace with fashion and trends.
Nowadays, clothing manufacturers are analyzing costs related to inefficiency in production, insufficient skilled labor, social-political instability in the manufacturing countries; and they are researching the ever-changing advantages of the cost of labor and the costs related to shipping the finished production.
Technology innovation and the development of new production strategies are creating a new source of cost efficiency. Transparency in the value of the product cost makes it possible to collaborate with providers to create basic parameters for comparison and to change productions among countries.
As marketing speed is so important these days –and it will probably be even more so in the future—we must leave behind the widespread fallacy that cost of labor is the only strength of a competitive textile industry. The goal is to keep creating value in the entire supply chain.
Until next time!
Article published in Directivos & Gerentes