Building Domestic Apparel Manufacturing
By Bill Grier
bgrier@am4u.com
There are hundreds of excuses for why the U.S. has fallen so
far behind in the manufacturing of apparel. Regulations like the ‘Clean Air and
Clean Water Acts” in the 1970’S and the Demand Manufacturing Apparel
Architecture project of the 1990’s that spent over $220 million taxpayer
dollars to enhance production control which ultimately facilitated the movement
of over 90% of apparel production off shore.
Make no mistake,
whatever the theory or well-meaning government program we have fallen behind
and are not catching up. Excuses range from conspiracy theories about
international corporations, money in politics, media bias, international trade agreements
and many more. Most manufacturers, brands and retailers site labor costs as the
primary cause of the loss of manufacturing. No matter what theory is the
current viral thinking, we need to step
back and look at the forest instead of
our favorite tree. In this case the industries favorite “tree” is cost of goods
(COG) while the “forest” is loss of potential profits from discounted and unsold goods.
Fundamentally, we are all dealing
with the transition from the mechanical systems of the industrial revolution to
an information based digital age. Sometimes these historical macro-evolutions
are obscured by scale or the camouflaging details of daily business. One of the
most stubborn and widely damaging effects of this evolution is the continued
dedication of major world economies to the out dated dependence on mass
production. This protection of
the status quo has caused increasing failures at the brand and manufacturers
level and now increased more public failures at retail where profit losses and
additional costs can no longer be covered buy creating volume through discounts
and clearance.
Big finance and big companies, whose very life depends on
maintaining the structure of mass production, have dominated this transition
with its many ups and downs. They have invested tremendous amounts of capital,
personnel, and international agreements into the perpetuation of this outdated
manufacturing system.
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| Cost based mass production sourcing is blocking profits and job growth... |
The Fatal Flaw in Cost-Based Manufacturing
The basic premise of this system is that if you manufacture
a lot of something efficiently, the cost savings from economy of scale will
insure you make a profit. This concept was valid when markets were all in an
expansion mode during the industrial revolution and later after the world wars,
because no matter how much product you made you could always find a customer
looking for it. Mass distribution and the increased reach of international
marketing, have made it difficult to find large enough new markets to justify
the scale of mass production required to support the level of efficiency
required to insure a profit. In fact the argument that new technology produces
new expansion markets has lost its credibility because of the ability to reach
markets with competitive product at velocities never before possible. In fact
every new product introduction becomes a share market almost immediately. The inability to dominate the market with the
new products that are produced with the flawed mass manufacturing concepts
that, scale produces cost efficiency, which produces profit, has created a glut
of inventory in most product categories and destroyed the concept of supply and
demand in its traditional form. The
current economic Maxim is no longer “supply and demand”, it’s “supply and
discount”. Product differentiation is
too slow under this mass paradigm to keep up with the information age. The risk of mass production
inventory has not been mitigated at all by new “time-to-market” digital
technology, in fact is has exacerbated the losses by encouraging more
pre-production costs and inventory sku’s.
We've now have replaced the uniqueness of the product with simply
the price of the product. This change in marketing and merchandising is
designed to capitalize on the only remaining positive this manufacturing
strategy offers. Large brands can flood the market with a volume of product,
using discount structures to drown their competition. The scale of mass
manufacturing and its requirement to drive profit through cost makes this
product difference (price) really only available to mass retailers and
marketers who merchandise on the basis of product movement not on the basis of
product difference. This large-scale approach creates huge amounts of inventory
which in turn equal huge amounts of risk. Risk that can only be minimized by
volume merchandising, high-level financing, bulk shipping and international
trade agreements which capitalize on low labor costs in developing countries.
Collateral costs like environmental protection, worker safety, health insurance
and other benefits can destroy the profits in a cost-based system. All the
flag-waving, job building and “Buy American” speeches, promotions and promises
cannot change this basic strategy of profit based on cost structure. Since
these large companies and their financial partners depend on mass manufacturing
and self-perpetuating theories of profit-based primarily on driving costs down
we cannot expect a change. In fact, we can expect massive failures of iconic
brands and retailers as the cost/risk dynamics collapse the current sourcing
structure for many players and eventually all but a few high volume discount
“box” stores and omnibus online marketers.
Attacking cost with mass production has four logical outcomes: first,
massive inventories without guaranteed sales that must be discounted. Second, securing the lowest labor cost, which
usually means bad working conditions.
Third, lowest cost manufacturing technology, which means highest water
use and toxic pollution and collateral permanent environment damage and finally, fourth,
eventual degradation of quality.
All of these negative outcomes are the impact of one feature
of the current sourcing strategy the pseudo belief that large inventories cost
less and are the foundation of profits and sustainability. Often, the object or
goal of the previous structure turns out to be at the center of the actions
required to affect the change. Since the ultimate goal of mass manufacturing is
to create an environment with the lowest possible costs of production.
Therefore, reducing the unit cost of the available inventory that is offered
for sale. The byproduct of this drive for efficiency and lower costs is an
increase in the size of the inventory related to cost not sales. This
disconnect between the payout of funds for production and incoming funds
resulting from sales creates the risk that is unsustainable.
The simplest
solutions to this conundrum are either, make less and charge more or make more
and sell more for less. In fact this decision about whether to position
the selling proposition based on quality or quantity is at the center of the
basic inventory decisions, which, drive the manufacturing scheme. The way in which a company handles inventory
risk is the driving decision-maker in every choice from their accounting system
to their personnel structure. Inventory drives required capital for start up;
inventory drives financing and the level of risk; inventory drives product
selection and inventory on hand drives advertising and marketing. When a
company decides between holding a limited exclusive inventory at high price or
a massive fast moving discounted inventory they place themselves at either end
of a decision-making spectrum. Once that decision about inventory management
size has been made the rest of the decisions about organization and marketing
traditionally have been cast in stone.
Purchase Activated Manufacturing (PAM)
No Physical Inventory= No Risk
Companies have had success at either end
of this simple linear solution, there is however, a third nonlinear answer,
which can provide increased profit and jobs and relief from the risk of both of
these positions. That solution is simply not to make it until after it has
sold! This manufacturing concept is
called Purchase Activated Manufacturing (PAM) and it is characterized by a
structure in which, the product is purchased before it is manufactured. This
solution attacks discount and overproduction dumping losses while limiting cost
to product sold.
The industry should continue to look for efficiency in
manufacturing, but until we attack the loss side of the equation we will not
enjoy sustainable domestic manufacturing.
The pursuit of demand then supply
has been a goal of the forward thinkers in the business for years, but the
business climate and the technology have not been in place to accomplish that
goal. Both are in place now, sales,
merchandising, coloring, cutting, production and fulfillment technology has
been tested and integrated making wholesale demand and even consumer purchase
activated inventory goals a reality. Smaller and larger retailers, brands and
manufactures who are willing test and embrace this strategy, will be the
survivors as market shifts from the industrial age to the information age of
integrated business models and efficiency through agility.
Comparison of PAM and Standard Inventory Bulk Purchase
Data Entries: Number of units: 10,000 XS –
XXL Markup from LDP cost: 1.5x Retail Price $25.00 Standard purchase unit
cost (Landed, Duty Paid) LDP: $10.00 PAM
FOB cost $13.00
Potential GP
|
$50,000
|
$75,000
|
$100,000
|
$125,000
|
$150,000
|
$175,000
|
$200,000
|
$225,000
|
Unit Sell Through %
|
20%
|
30%
|
40%
|
50%
|
60%
|
70%
|
80%
|
90%
|
COGS Standard LDP
|
$100,000
|
$100,000
|
$100,000
|
$100,000
|
$100,000
|
$100,000
|
$100,000
|
$100,000
|
Actual GP Standard
|
($50,000)
|
($25,000)
|
$0
|
$25,000
|
$50,000
|
$75,000
|
$100,000
|
$125,000
|
Actual GP PAM
|
$24,000
|
$36,000
|
$48,000
|
$60,000
|
$72,000
|
$84,000
|
$96,000
|
$108,000
|
The key features are:
- Cost of goods is a product of actual purchases not inventory stocking.
- Virtual inventory limits or eliminates prefinancing or factoring of manufacturing
- All sizes sell out no odd sizes or orphans
- Never out of stock and never over stock
- YOU ALWAYS MAKE A PROFIT
 |
|
A working PAM factory capacity up to
1500 individually sized, colored or printed and finished units per day,
|
1. Follow the Money… All funds ultimately originate from the consumer
making consumer demand the fundamental element of success and the first element
of building an integrated system.
Tracking these funds on the path to your bank account determines the
real losses available to recover from inventory bloat at every level.
2. Efficiency = Manufacturing Agility…
Manufacturing agility must match variable demand
in speed and scale. Creating a demand
Days-of-Supply (DOS) baseline to maintain predictable scheduling while insuring
demand response times.
3.
All
Marketing Starts with the Individual… Micro
Merchandising integrates production throughput with consumer value. Integrating information, merchandising and
manufacturing technology to produce consumer value that matches or exceeds full
retail price.
4.
Inventory
= Turns not Volume… Since the inventory
is virtual stocking decisions are based on velocity not space, storage cost or
salvage value.
5.
Consumer/Buyer
Participation Determines Product Value… Direct
integration with the consumer/buyer sales offer creates value through
participation in product selection and individualization. Consumers have individualized product and
buyers can create/test exclusive apparel without inventory risk.
6.
Manufacturing
Capacity is Set by Distribution Path… Manufacturing
scale and path is a function of distribution lead time and customer type (wholesale,
retail or direct consumer) can determine through-put and line structure.
7.
Income
is Based on Cost per Unit Sold NOT Cost per Unit… Percentage of sell-through to the consumer is the key
determinant of success at every level. Never over stock, Never out of stock is
the rule at every level.
8.
“Unit
Manufacturing” requires seller and supplier integration… Real time vertical integration of retail sales,
manufacturing and fulfillment is critical.
9. Test Markets are Multi-Platform… Test markets must include platform choices and product
variations. Testmarket results can be
based on actual purchases and collect kenetic, demographic and decision data.
10. Total Quality Manufacturing Depends on
Team Building… Production errors must be
reduced to near zero through integrated data paths, team design and total
quality management. Team design and language independent quality control is
critical.
Links:
Video Resource: https://www.youtube.com/playlist?list=PL6-7JyTp2U9-O0qFLSAm0N_6bvQeGJxJq
Resources for Virtual Inventory Manufacturing:
http://virtualinventorymanufacturingalliance.blogspot.com/
https://www.epa.gov/laws-regulations/summary-clean-water-actVideo Resource: https://www.youtube.com/playlist?list=PL6-7JyTp2U9-O0qFLSAm0N_6bvQeGJxJq
Resources for Virtual Inventory Manufacturing:
http://virtualinventorymanufacturingalliance.blogspot.com/
Videos: https://www.youtube.com/playlist?list=PL6-7JyTp2U9-O0qFLSAm0N_6bvQeGJxJq
