APPAREL-INDUSTRY (COSTING & SOURCING)

      Hello Everyone!!!! Welcome you all once again . I hope you are now very much clear about apparel industry concept. Today we are going to discuss two of  the very important aspect of apparel segment. Costing and sourcing, if we are more precise in these 2 skills then we can able to scale our business with more profits.   Let’s see in detail.

COSTING

Costing is the procedure of determination of production and marketing cost of each product in the line. Costing decisions include every functional division of an industry. Pricing is the process of determination of selling price of the products that are manufactured. It is based on information given in the costing process, the value customers will place on the product, and the competition in the retail market. Under the circumstances of untainted contest, the supply and demand of the particular product decides the cost/price of the product. In the apparel business sector, product pricing is the responsibility of the manufacturer. An industry’s success is mostly decided by the top management’s perception of the company’s cost structure, the market, pricing options and source of profit.

Garment costing is one of the most important and complex task. There are many factors which are involve in pricing of single piece of clothing. Garment costing includes all the activities like purchase of raw materials and accessories, knitting fabrics, processing and finishing of fabrics, sewing and packing of garments, transport and conveyance, shipping, over heads, banking charges and commissions, etc. The merchandiser and the top management of a company are actively involved in deciding the cost of a garment. 

Purpose of ascertaining cost:
For the determination of cost, the entire industry should be segregated into small elements of sections and every small section should be taken as a cost centre, to which costing has to be done. A cost centre may be a locality or machinery for which the assessment of costing should be carried out and which is utilised for cost control. The main purpose of determination of cost of a cost centre is cost control. 

Cost estimation is concerned with the calculation of actual costs. Ascertainment of actual costs uncovers nonprofitable exercises or activities and losses. Cost evaluation is the process of foreordaining expenses of products or services. The costs are estimated in advance of manufacture of the product.

Manufacturing costs: 
The cost accounting structure is normally planned by cost centres; hence, the unit costs for every operation can be estimated. Manufacturing costs comprise all the expenditures that are involved in the production of a final product. These costs are called ‘cost of goods manufactured’ on the income statement. Manufacturing costs are split up into three parts such as raw material cost, direct labour cost and factory overhead.

Raw materials like fabric, sewing thread and trim are called direct variable costs. Direct labour costs in most of the garment units comprise wages of supervisors and employees who work on an incentive, piece rate or hourly wage basis. Factory overhead includes both variable and nonvariable indirect manufacturing costs. Factory overhead costs are exclusive to each industry; however, they are normally subdivided into (1) indirect labour, (2) factory occupancy costs and (3) other overhead.

Indirect labour includes quality control, service personnel, material handlers, maintenance workers, industrial engineers and security. The job of these persons is vital to efficient production of a product line. Nonvariable factory tenancy costs comprise rent, depreciation, insurance, property taxes and security. Machine parts and repairs and needles are examples of variable factory costs and other overhead costs include machinery and equipment costs, materials management and cost of compliance with regulations.

General working cost/expenses or administrative overhead are indirect costs that incorporate the costs of working the offices and all departments that are not directly concerned with the working of the industry but are important to the operation of the firm. Cost centres such as the accounting department, computer programming, management information systems, secretarial and clerical staff, personnel office, design and merchandising, marketing and sales and management could be considered as part of administrative overhead.

Methods of Garment Costing: 
Costing is the operation for ascertaining the total resource investment essential to manufacture and market a product. Costing includes: 

1.        Determination of variable and nonvariable material cost and labour cost necessary to manufacture a product

2.        Overhead required to operate the industry

3.        General operating cost

For efficient costing, information related to cost must be specific and accurate. Inaccurate costing could lead to cancellation of an order having good profit potential. Management in an organisation utilises costing to estimate 

1.        The producibility of a style within an established price range

2.        The profit potential in a style

3.        To decide whether a style could be added to the line

Costing could also be used to defend the procurement of new machinery or the extension of production facilities. The method of costing indicates the systems and processes involved in the estimation of costs and it depends on the type and nature of manufacturing activity. 

The two basic methods of costing are: 

1.        Job costing: This is the cost estimation for a particular work order where the estimation of cost was carried out separately.

2.        Process costing: This method is practiced in bulk manufacturing units where cost is accumulated for each department.

Product costing needs in-depth knowledge in materials, product development, production processes and plant operations. The costs involved in manufacturing a product are only taken into account in product costs. Two kinds of product costing are generally used in the garment industry, such as absorption costing and direct costing. Manufacturing costs are separated between variable manufacturing costs and nonvariable manufacturing costs.

Direct costing and absorption costing are included in variable manufacturing costs, but only absorption costing is included in nonvariable manufacturing costs.

Absorption garment costing:
Absorption costing comprises every single manufacturing cost, both variable and nonvariable, to be product costs that should be allocated to products. Overhead is generally calculated as a percentage of direct labour. The estimation of a sensible overhead application rate is a major drawback in absorption costing. Further, it is also difficult to concentrate on the actual variable costs and profit prospective related to a particular product. Factory overhead costs that do not differ with deviations in volume are included as part of cost of products produced with absorption costing. Industries repeatedly project the anticipated total overhead for the particular period based on the past year’s costs and expected changes.

The risks connected with using absorption costing are the dependency of the costing system on the accuracy of the estimation of direct labour and the determination of the overhead application, which is arbitrary. For these two reasons, direct costing is mostly recommended for cost ascertainment in place of absorption costing.

Direct garment costing: 
Marginal cost is the increase in the total production cost that results from manufacturing one more unit of output and variable costs. Direct costing is a theory that takes into account only the variable costs like labour, material costs and sales commission to be product costs. Nonvariable costs, namely, manufacturing and nonmanufacturing, are treated as time period costs.

A direct costing system gives information about costing in a way that can be easily understood and used by management. Since the individual product costs are obviously identified, direct costing makes it easier to evaluate the cost of production and the contribution of product to nonvariable sewing and administrative costs and profit. Direct costing makes it easier to categorise the product styles with the highest contribution rate and the most profit potential.

Stages of Garment Costing:
Costing could be carried out at various stages of production, like 

·              Preliminary or precosting, which is carried out during product development before samples are made.

·              Final costing, which is done before the production and price fixing.

·              Recosting is done where there is a change in machinery, production processes, materials or garment components.

·              Actual costs are determined during production.

Preliminary costing: 
The preliminary costing could be useful for the fashion product manufacturers, who can use it in the development stage to come to a conclusion of whether the fashion design developed by the designers is reproducible and merchantable within the established cost range. Generally, it provides only a rough assessment of costs of manufacturing a specific garment style based on determination of raw materials cost as well as labour costs of previously produced similar styles. Costing at this early phase of development of product is especially crucial for the manufacturer because of the wider range of ideas the designer could use.

Cost estimating:
Cost estimating, which is done just prior to price setting and production, requires a detailed analysis of garment components and the specific assembly procedure for each style. Cost estimating determines the expected investment in materials, direct labour and overhead required to produce a single unit of a style. It requires more detail and greater accuracy than preliminary costing. Costing at this stage is based on production samples and standard data.

Materials costing:
Direct costs of fabric, trim and materials for a particular product are based on estimates arrived in the process of sample manufacturing. The initial step in materials costing is to estimate the yardage and materials required for the production of one garment. Industries with computerised design systems use the data entered for each product to estimate the required fabric yardage for a single garment. Other direct materials costs like inspecting and shading of fabrics are figured on a per yard basis.

Materials costs are influenced by the rate of utilisation and it relies on quantity of material, which is used compared to the total purchased. Poor use can originate from inadequately engineered designs, inconsistent widths, imprudent cutting etc. Many industries have setup benchmarks for fabric utilisation.

Labor costing: 
The time is the origin of production standards and labour costing and hence it should be determined beforehand if it can be controlled and managed. A production standard reveals the normal time necessary to finish one operation using a particular method that will give predictable quality. Production standards are set up as a measure of productivity of labour and operators under standard conditions. Production standards aid to develop consistency of an operator and to discover the most cost-effective method of production.

Production standards used for estimation of labour costing are generally based on work measurement techniques such as predetermined time (PMTS), standard data and time studies. The time values are normally expressed in terms of standard allowed minutes (SAM). An operation breakdown represents the complete list of all the sequence of operations involved in sewing a specific garment style. Each operation is recorded in the sequence in which it will be performed along with SAM of every operation. The costing of each operation has to be done independently and could be then converted to dollars per unit. In the garment industry which gives hourly wages to the operators, production could be based on production standards representing what an operator is anticipated to finish in a definite period of time.

While estimating the direct labour cost, the production standard stipulates the SAM to finish one cycle. The direct labour cost could be estimated by multiplying the quantity or volume that could be produced in one hour and base rate and divided by the actual quantity produced in an hour. The certain percentage of benefits like insurance, sick leave and vacations should be added to the above cost. Machine time is regularly determined separately from handling time which is almost the same when an operation is done. But, the total of time required to complete a line of stitching differs with the seam length, stitches per inch (SPI) and the machine speed. The stitching time may be calculated by taking into account the time variations that may occur with the stitching process.

                                   Seam length x Stitches per inch
SAM for stitching = ------------------------------------------------------------------
                                         Machine speed (rpm)

Recosting: 
Recosting is determined after garments are put in the production line and the working patterns are developed. At this stage, alterations could be done to cut down the fabric and sewing time. In a few circumstances, the pattern maker could normally advise an increase in costs in order to improve the quality level.

Actual costs:
Actual costs are estimated by the collection of information from the production department. After a particular style has reached the assembling section, an industrial engineer could face some rates that are too tight and that more time is needed to complete specific operations. If a rate adjustment is required, it will certainly influence the costs.

SOURCING

The impact of global trade in apparel manufacturing has evolved the concept of fast fashion in a scenario where apparel is produced quickly with a low cost and with the ‘chic look’ now dominating the retail world. Fast fashion is mass-produced, reasonable in price for most consumers and easy to obtain, making it simple for anyone to look stylish. However, to become dominant in this retail business sector, sourcing has become a pivotal stage in the manufacturing process. 

Sourcing is defined as the process of determining how and from where manufactured goods or components will be procured. The main motivation of the sourcing process is to obtain high satisfaction with the low-cost. Materials essentially incorporate piece products that will be cut and converted into the garments. In the case of raw material, it is also important that the raw material is available (both in quality wise and quantity wise) when it is needed along with the suitability of the material for garment design and end use. Sourcing essentially decides the most cost-effective merchant of materials, finds out where the material can be generated from and from where the completed products at the pre-determined quality be bought. It is one of the integral part of merchandiser’s responsibility. Sourcing department along with merchandiser assumes the fundamental part of executing the order and shipment of them at lowest price. Merchandiser must ensure that all approvals related to the fabric and trims ought to be composed of the sourcing division in allotted time. Lead time, fabric and trim approval process, logistics expense and international commercial (INCO) terms are the essential parameters that need to be considered while choosing the sourcing strategies for a specific order.

In order to source any material, the steps illustrated in Figure-1 must be followed. Once, the purchase requisition (the request raised by a division for a material or a service) is given, the sourcing process starts. Based on the request, the merchandiser and sourcing manager start the process of supplier selection. After identifying the potential suppliers / vendors, the company creates a Request for Quote (RFQ) and sends it to the suppliers for getting quotation which is a document prepared by the supplier stating the description of the goods or services they are providing and the price along with the terms and conditions. 

Once the quotations are received from various suppliers, merchandiser or sourcing manager compare the quotations received from various suppliers and select any one supplier based on varying factors such as quality of good or service, price, negotiations, etc. If the order quantity is high and time for getting the material for production is less, then two or more suppliers may also be selected depending upon the need. After the selection process, the manufacturing firm raises a purchase order to the service or raw material offering supplier. Based on the purchase order, the supplier sends the material after accepting the terms and conditions of both the parties. Once the goods are received at the receiving dock or warehouse by the buyer, the buyer creates a goods received note (GRN) after checking the quality of materials as per the specification. If materials don’t meet the standards, they are rejected and sent to the supplier. If materials meet the quality specifications, then they are updated in stock and a receipt copy is provided to the supplier as a proof of supplying the goods. The supplier also sends invoice requesting payment for the goods provided. The buyer makes the payment based on the invoice and supplier gives the receipt for receiving funds and the process gets completed. After all these formalities are completed, the buyer evaluates the suppliers’ services based on various factors such as quality of goods provided, timeliness of supply and adherence to terms and conditions, etc. The above-mentioned steps are followed in every sourcing process. 

Figure-1: Sourcing cycle in apparel industry

Classifications of sourcing process:
Different strategies are adopted for the procurement of raw material for the apparel industry. The following are the various types of sourcing process based on the requirements.

·              Local manufacturer - Fabric is manufactured locally, with local infrastructure

·              Traditional export - Local fabric is exported to garment manufacturing countries

·              International sourcing - Fabric is made locally, but raw yarn or fiber is sourced from other countries

·              Global sourcing - Fabrics are made with parts sourced from abroad as part of global sourcing strategy

·              Off-shoring - Raw material is exported first i.e., yarn or fiber, then fabric is re-imported to meet the demand

·              Global manufacturing - Fabric is manufactured in other country.

Out of the above-mentioned methods, the local manufacturing process is most commonly used by all the manufacturers. In case where there is no adequate infrastructure available in local market, the manufacturers shift to off-shoring or global manufacturing methods, especially for fabrics. These decisions of sourcing must be performed by merchandiser along with higher authority consultation. However, the role of the merchandiser in this decision- making process is very vital. Because the merchandiser is the only person in the company who will be aware of the status from the vendor or manufacturing side and also about the exact needs and requirements of the customer.

Sourcing Strategies for Decision Making: 
A basic decision in sourcing is to decide whether to make or to buy the desired product.

(i) Make or buy decisions: 
This decision arises when there is a need for the development of new products, desire to reduce cost, need for specialised types of equipment and skills, unsatisfactory supplier or contractor performance and increase or decrease in demand for established product.

Other than these factors, the make or buy decision will be taken based on the following situations as detailed.

a) Manufacturing / raw material cost:
The first factor which has a significant influence on the sourcing decision is cost. The direct cost estimate for the sourcing process includes the cost of materials, direct labour cost and variable costs of factory such as training, packaging, etc. The cost estimate for making the product is compared with a price quote from the prospective supplier. The supplier uses the product specifications to determine the price quote for the product. Based on this comparison, the make or buy decision will be made. To get the realistic picture of the buying cost, during this process, the items total cost must be included with broker or agent cost, tariffs, insurances, transportation and quality management costs.

b) Production capacity: 
While making sourcing decision, there are two details which we need to consider with respect to the production capacity of the factory.

·              Required capacity – The output required for that order

·              Demonstrated capacity – It is the volume of the output that the plant can actually produce. The production capacity of any manufacturing plant depends on the availability of the machines, technical skills of the workers and quality control procedures followed in the unit. The make or buy decision also arises when the required capacity of the plant does not meet with the production capacity while approving new styles.

c) Quality: 
Quality standards and quality requirements of products are often the major influencing factor in sourcing decision. Most of the time, based on the availability and capacity of the factory, one can estimate the mode of sourcing. Selecting a source that normally produces goods at a quality and desired cost level is more convenient than attempting to change the mode of operation or capacity of the plant.

d) Timing: 
In apparel and fashion industry, timing is critical to both manufacturers and retailers. Timing affects the placement and volume of orders as well as production deadlines. When the proportion and importance of fashion aspects increase in the apparel, it results in lesser expected response time. Basically, retailers prefer less investment in inventory, so they place small orders close to the time of sale on the retail floor and get faster replenishment of latest products. Hence, even though the manufacturing firms have the capacity, if they are not able to produce the products on time, they may lose the order. In that case, the company will decide to buy from outside vendors and outsource the merchandise in any level, as per their requirements.

(ii) Make to stock or make to order: 
The fundamental business policy reflected in a sourcing plan is the decision to make to stock or make to order. Basic goods have traditionally been made to stock, while fashion goods have been made to order. But a company can choose one or both the strategies based on their product line and target market.

a) Make to stock: 
Make to stock literally means to manufacture products for stock based on demand forecasts. This method is used to prevent opportunity loss due to stock out. Excess inventory resulting from using this method can be avoided by following accurate forecasts. The process of make to stock relates the sales forecast and inventory levels.

·              The sourcing plan for make to stock is based on forecast and the difference between the initial finished inventory and desired final finished goods inventory

·              The firm using this method must invest lots of money in inventory

·              This method motivates to achieve maximum production capacity in terms of labour and machine in any firm

·              The important factor which decides the effectiveness of the method is the accuracy of the forecasting process and their result.

b) Make to order: 
Make to order strategy is generally a process of demand management. By this strategy, a product is specifically manufactured for a sale order or customer order. There is no forecasting involved. Sale order or customer order will be the trigger point for production. The fundamental aim of this strategy is not to maintain any inventory in the firm. The factory should have zero inventories at the beginning and end of any order. This make to order strategy reduces the risk of creating unwanted inventory.

This strategy is useful when applied in the following situations in the industries: 

1.        The product is a very slow moving one in the market.

2.        One cannot anticipate the future forecast of the product

3.        Product is newly launched in the market

4.        The product is very costly and one cannot afford to keep the inventory or stock in the plant.

Stages of Sourcing Process in apparel industry: 
The stages in sourcing process are very subjective and dynamic; they differ for each and every order based on specific requirements. Hence, the merchandiser cannot have pre-determined standard operating procedure. In the same way, the lead time for each process will also vary depending upon the raw material even though the vendor remains same. The typicalsourcing process of fabric / trims / other raw material sourcing in an apparel industry can be described as:

Stage 1: Proto sample approval

Stage 2: Approval process for material 

·              Trim card – for trims

·              Artwork – for prints and embroidery

·              Lab dips – for dyed fabric

·              Desk loom – for fabric

·              Print strike-off – for print colour and quality.

Stage 3: Approval / rework / correction of material and results from buyer

Stage 4: Purchase order development

Stage 5: Sample fabric / trims / lab dips for testing as per requirements

Stage 6: Approval from the customer / buyer

Stage 7: Bulk production and in-house.

In this process, the material refers to fibre, yarn, fabric interlinings, buttons, zippers and other required items. The main objective of the sourcing process is to search and identify the target material anywhere in the world, negotiate for product quality and price and source the material at required time and quantity. Strong and supportive relationship with the vendor is essential for the successful execution of any merchandising process. The development, selection and sourcing are the responsibility of the creative and technical designer of the factory along with the merchandiser.

This material sourcing process must be initiated well ahead as per the forecasting and line development process. In most of the cases, since the customer requires the samples in the original fabric, the fabric orders are the one which will be initiated very first in the line development process. Since the availability at the right time and right quantity is the vital factor in the case of fabric along with design and end use requirements, it is ordered at very initial stage. In the same way, the accessories and findings are also sourced little earlier in the production process, however, the risk associated with the product requirements remain same like, in terms of cost, quality requirements and also the matching and suitability.

Factors Affecting Sourcing Process: 

Lead time: 
Lead time of the products varies with respect to different points like 

·              Point of origin

·              Mode of transportation

·              Open stock material or specifically made items

·              Performance test requirements

·              Imported or domestic.

In case of the imported product, the goods may require 6–9 months’ time based on the location. Moreover, this also depends on the shipping methods used for transportation. In the same way, open stock materials are often available and delivered within few days due to its availability. Open stock are the materials which the producer / vendors make and stock based on the anticipation of demand. Fabric, trims and other materials sourcing is a very time-consuming process which includes desk loom and lab dip approvals, trim and artwork approval, FPT approval. The approximate lead time for different processes are provided here: 

·              For fabric sourcing – 1–2 months

·              Yarn dyed fabric – 1.5 months

·              Fibre dyed material – 2 months

Based on the order requirement, the merchandiser needs to choose the particular vendor from the huge list of vendors, where he has to mind the quality and cost factors along with the lead time. Among the vendors, there are differences in lead time based on their manufacturing facility and capacity. Merchandiser should be aware of all those factors and should choose the correct supplier for the product.

Minimum order quantity (MOQ):
Minimum order quantity or order minimum is the smallest quantity a vendor will sell on a single purchase order. This is one of the important factors that affect the sourcing process. Every supplier requires a certain minimum order quantity to produce the fabric and trim economically; otherwise, the cost of production will be higher if production is below minimum order quantity. If garment exporter places the order of raw material below minimum order quantity, then generally, cost will be more for that. Hence throughout the supply chain minimum order quantity is maintained in order to achieve the appropriate cost of production.

However, with respect to the apparel and fashion industry, the minimum order quantity or reasonable minimum quantity cannot be optimised. The firms often receive order with bare minimum quantity which may be due to several reasons like limited editions (designers clothing), technical difficulties, focused on a particular group of customers, etc. In that case, the concept of order minimum is a serious issue in case of apparel manufacturing. In those situations, merchandisers will use open stock materials, which is very widely available.

Logistics facilities: 
Logistics is one of the main factors which affect the fabric sourcing lead time drastically. There are several aspects with respect to it which are given below: 

1.        Time required for transportation

2.        Infrastructure for logistics

3.        The cost of logistics.

A merchandiser needs to evaluate the logistic facilities and create an association with logistics firms also. After manufacturing the required quantity of the product on time, delays in shipping due to logistics would lead to losses in effort and money involved in the manufacturing process. The cost of logistics will directly affect the cost of a garment; hence, merchandiser should be well aware of these aspects of logistics and then place the order for fabric and trims.

Quality parameters: 
As the purpose of sourcing process demands high quality product for low cost, the need for the quality products increases in the market. Providing cheaper products with higher quality will lead to a better relationship with the buyer and also increases the profit margin of the firm. The profit is another important driving factor for companies to outsource products in domestic and also in overseas companies. Though outsourcing is an effective way to do business, it may sometimes lead to losses when materials supplier like fabric and trims supplier does not meet the quality parameters thereby creating trouble for apparel merchandiser to execute the export order.

The ability of vendor to produce or manufacture the require quality of product depends on a number of factors as given below: 

·              Workforce or skill of the operator

·              Worker’s flexibility to work with wide range of products

·              The technology used to develop product quality.

·              These are the indirect factors which have more influence on the quality of the product. Merchandiser should also be aware of this information of a specific vendor before issuing the order. Additionally, the accuracy of written communications and instructions received from the garment manufacturer/ apparel merchandiser is also another important factor to get the required quality in the end product.

Sourcing costs: 
The cost is the foremost and highly influencing phenomena, in a sourcing decision. The merchandiser always seeks for low-price manufacturers in the market without compromising the product’s quality requirements. Generally, the cost of manufacturing a higher quality product is costlier than the low-quality product, due to the cost of raw material and manufacturing technologies implied, hence, the merchandiser needs to identify an optimum mix between the quality and the cost. The cost of the sourcing process depends on following factors: 

·              Labour wages

·              Manufacturing cost

·              Cost of logistics/transportation

·              INCO term negotiated (for international sourcing)

THE END