The prevailing belief in the Western world is that the apparel industry is inherently corrupt, with buyers and retailers exploiting lower wages in manufacturing countries and manufacturers taking advantage of the labor force. Media and campaign groups in the Western world firmly assert that buyers in Western countries are responsible for the low wages paid to apparel industry employees.
Sustainable Labour Costing
This article aims to investigate these allegations and understand the extent to which pricing strategies and costing methods in the industry are fair, balanced, and sustainable, reflecting the true cost of producing a garment.Michael Porter of Harvard Business School, in his widely acclaimed book "Competitive Strategy," outlined three strategies to gain a competitive edge.
- Focus
- Differentiation
- Price Leadership.
While Focus and Differentiation require innovation and investment, Price Leadership is the predominant strategy adopted by most apparel retailers to stay ahead of the competition.
As Europe and the USA recover from the recession, customers remain price-sensitive, seeking bargains. Brand loyalty has given way to the allure of everyday low prices offered by retailers like Walmart and Kmart. Social media and e-commerce further drive prices down, challenging traditional pricing structures.
The inflation-income gap in developed countries, coupled with changing expenditure priorities, has intensified the pressure on buyers. They must maintain margins while adhering to predetermined retail prices and covering the FOB (Free on Board) costs requested by suppliers. Suppliers often find themselves on the receiving end of unfavorable deals. Understanding the mechanism of apparel costing is crucial to forming an informed opinion about the fairness of pricing strategies. The FOB costing of a garment primarily comprises five elements: Fabric, Accessories & Trims, Prints/Embroidery, Other (Development cost/Transport), and Labour cost.
Buyers increasingly nominate fabric and trim suppliers, leaving little room for error in calculating the fabric required for each garment. Print, embroidery, and other value-added items follow clear-cut pricing formulas. Transport and courier costs are nominal, posing minor concerns.
This leaves us with the contentious issue of labor costs, which constitute less than 25% of the overall garment costing in most cases. To comprehend labor costs fully, we need to explore how they are calculated. The formula is as below.
SMV (Standard Minute Value) x SMR (Standard Minute Rate) = Labor cost or CMT (Cut Make and Trim cost).
SMV, or Standard Minute Value, represents the time it takes to sew a garment from start to finish. Calculating SMV correctly is crucial, constituting 75% of sustainable labor costing. Two popular methods are used:
- Time study (manual, using a stopwatch)
- PMTS system (Predetermined Motion Time Study).
Buyers and manufacturers must fully understand the importance of establishing a well-defined mechanism to calculate SMR. Pricing disagreements often arise due to a lack of knowledge in calculating SMV. Open communication about the costing process can foster trust between parties, ensuring long-term sustainability. Buyers would likely be willing to pay a few extra pennies if manufacturers are transparent about the costing process. In multiple orders and millions of pieces, those few pennies can translate into significant gains for the company and its employees.