This is a guest contribution from Charm Rammandala. The purpose of this article is to discuss what labour costing is and its importance to the sustainability of the apparel manufacturing industry and image of the retail industry.
The increasingly held belief in the Western world is that the apparel industry is fundamentally corrupt and buyers and retailers are taking advantage of lower wages in manufacturing countries and the manufacturers themselves are exploiting the labour force. It is evident that media and campaign groups in the western world are of the firm belief that buyers in western countries are to blame for the low wages paid to apparel industry employees.
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Michael Porter of Harvard business school wrote in his widely acclaimed book, “Competitive Strategy” that there are three different strategies to get ahead of the competition.
- Focus
- Differentiation
- Price leadership
Focus and differentiation need innovation and investments to get ahead of the competition. Super brands such as Gucci, Prada, and Vivienne Westwood are always ahead of the competition as they have unique products and a niche customer base where price is not the main deciding factor.
However vast majority of apparel retailers are following the Price Leadership strategy to get ahead of the peers and increase their market share by competing based on the price. This is the easiest, most economical marketing tactic and the strategy they use to stay ahead.
Europe and USA are just recovering from the recession and majority of the customers are still price sensitive, and seek for bargains. Brand loyalty has been replaced by everyday low prices of Walmart, Kmart et al. This is understandable as disposable income of the customers have been decreasing steadily.
Social media and e-commerce also pushing the prices down putting extra pressure on the traditional pricing structure.
Inflation is higher than the increase in income in most of the developed countries and priorities of the household expenditure are changing from fashion towards social media consumption. Customer perception of designer brands has also changed. Five years ago spending $80 on an evening dress was a good deal because you won't be able to find a similar designer look and feel on a lesser price item. However over the last 5 years, companies who were competing on price, have managed to deliver the same catwalk designs for much cheaper prices. George, Primark, C&A, H&M are some of such pioneer brands.
Buyers and sourcing managers of most of the brands understood this trend and started providing catwalk designs for very much lesser prices. This is one of the main reasons why designer outlet stores continue to pop up in every mall in United States.
All these changes of buying patterns and attitudes put tremendous pressure on the buyers. They have to keep the margins and stick to the pre-determined retail price while paying the landed cost or FOB price supplier asks for. Obviously it is very difficult to achieve all price points without disappointing somebody. Most often suppliers are in the receiving end of the bad bargain.
Mechanism of Apparel Product Costing
It is vital to understand the mechanism of apparel costing to make an informed opinion about how the pricing strategy works.If you break down a FOB costing of a garment, it mainly comprises of five main elements. Namely,
- Fabric (Body fabric and other fabrics)
- Accessories & trims (Buttons/ Lining, Labels etc)
- Prints, Embroidery/ sequence etc.
- Other (Development cost/Transport)
- Labour cost
Out of the 5 components required to complete a costing of a garment, it is very easy to come to an agreement on four areas. No media or any other campaigner accused the apparel industry over the first four items mentioned above.
Increasingly, buyers are nominating the fabric and trims suppliers, leaving apparel manufactures having to buy from the nominated sources. The amount of fabric utilized to make each garment is calculated through various software leaving little or no room for errors.
Print, embroidery and other value-added items are also pretty much clear cut as pricing formulas are used to calculate the figure.
Other costs such as transport and courier are nominal fees generally not more than .01 per garment so are not major concerns.
This leaves us with the labour cost. This is the major price point in costing which creates much discussion. However, it is important to note that labour cost is less than 25% of the overall costing in most of the garments in production [1].
If we can understand the labour cost fully, in-terms of how it is calculated, what numbers goes in to it, how scientific it is and how well we could explain how the prices are calculated, then any retailer could claim they have mastered sustainable labour costing and clear up the negative stigma attached to low cost sourcing model.
So how is the labour cost calculated? Shortest answer is SMV x SMR = Labour cost or CMT (Cut Make and Trim cost)
What is SMV?
SMV stands for Standard Minute Value; and is known as SAM (Standard Allowed Minutes), in North America. This simply means how many minutes it takes to sew a garment from start to finish. If we are able to calculate this item correctly, 75% of sustainable labour costing is complete.How can we calculate SMV? – SMV calculation comes under industrial engineering. This is a discipline one has to learn following a taught programme, though there are some IE executives in the industry who only have work experience. However, to be fluent in the subject it is necessary to have a good background so that final results could be explained in a scientific way.
There are two popular ways to calculate SMV
- Time study (manual method using a stopwatch)
- Using PMTS system (Predetermined Motion Time Study)
The University of Manchester, UK in a recent publication recognized three PMTS systems, namely General Sewing Data (GSD), MODAPTS of USA and SewEasy of Sri Lanka; apparel software systems for Sustainable Labour Costing. A link to the said publication is at the end of this paper, which discusses deeper into our topic.
SMR stands for Standard Minute Rate. This figure is very important to the factory management as it contains several important cost factors. SMR consists of overhead cost of operations such as electricity/ water/ head office operations/ marketing and so on. Also it contains direct and indirect labour cost.
The typical way of calculating this Standard Minute Rate is, by looking at the total operational cost of the factory divided by available working minutes. This will determine how much money they need to operate each minute. It is important to add all expenses when calculating the important figure. Any mistake may result in a higher SMR which would make the company too expensive and under calculation would incur losses to the company.
What is important is for buyers as well as manufactures to fully understand the importance of establishing and agreeing on a properly established mechanism to calculate Standard Minute Rate. Most of the time, the reason for pricing disagreements is due to the lack of knowledge in how to calculate the SMV. As a result, one party feels taken advantage of and risks long term sustainability.
Buyers would be happy to pay a couple of pennies extra if the manufactures are open and clear on how the costing is done. After all, few pennies in multiple orders and millions of pieces means more money for the company and its employees.
Reference:
[1] Miller, Doug, Towards Sustainable Labour Costing in UK Fashion Retail (February 5, 2013). Available at SSRN: http://dx.doi.org/10.2139/ssrn.2212100
About the Author: Charm Rammandala is the founder & CEO of IStrategy USA. He counts over two decades in the fashion supply chain in diverse roles as Lean Manager and Model himself. He is an expert in rolling out programs in Lean apparel manufacturing and Sustainable labour costing. His former positions included being the first Lean Technologist at George Sourcing Services UK Ltd.
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