California Apparel News

The recent rise in raw-material prices has manufacturers looking for alternatives—and answers. California Apparel News asked several industry insiders for strategies to leverage the supply chain to offset rising costs. Their suggestions are featured in the Supply Chain + Tech Focus special section in this week’s issue.

Extended coverage of the interviews with the experts appears below.

The experts:Steve Ritchey, President, Seattle Pacific Industries Inc.Mark Burstein, President of Sales and Marketing, New Generation ComputingJade Howe, Creative Director, HoweDavid Sasso, Vice President of International Sales, Buhler Quality Yarns

The question: With raw-material prices expected to increase, what can apparel makers do to secure and tighten their supply chain to keep costs manageable?

Mark BursteinPresident of Sales and Marketing,New Generation Computing

I have customers who have told me, “I took an order from Target eight months ago and I quoted them a price. They didn’t get me the order for three months. Now raw materials have jumped 30 percent. I originally made a 25 percent margin on the order. Now I’m making literally nothing on the order because the fabric prices have increased so much. I go back to Target and they say, “No, you’re not allowed to raise the price. If you raise the price on me, you will never do business with Target again.” So, they have to go out there and produce this order, go through all this work and heartache and tie up all this capital—and make nothing.

People are going out and buying cotton yarn and positioning cotton yarn because they don’t know what fabrications they’re going to produce—whether it’s a jersey, a rib or a piqueacute;. Other companies are committing to particular base fabrics and having it knit and waiting until the last minute to dye it into colors and what styles to cut it up into.

Our line-planning tool has the ability to forecast by style and by color. It all ties into the bill of materials, which has yields on it. When they put together a line plan, it will generate a raw-material requirement for a particular season. They go out and place that commitment with the mill—whether or not they’re buying it. With our system, they have the ability to create purchase orders and manage the inventory and then, as those goods are consumed, to have perpetual inventory at any warehouse in the world. They can look at a warehouse in Hong Kong and see what their inventories are, what has been allocated into cut tickets already and then what their open inventory is. So they can transfer between warehouses.

Other companies are nominating mills, giving them commitments. But they’re not the ones who are buying it—it’s the vendors that are actually buying it. They’ll go to a company and say I’m going to commit to you 800,000 yards and my vendors are going to be purchasing against the commitment, so my customer needs to know what the drawdown is. So they need to see what is my open liability. As they issue cutting tickets or P.O.s to their vendors, it automatically looks at the yield for that style and gives them a draw down.

[They know] what each vendor should be buying from each mill, and they’ll know whether or not the vendor is buying from each mill. Because people might nominate certain fabrics, but the factories might have friends who [say they] can get it for them at a better price. This prevents all those substitutions. You explain to the factory that this is our base fabric. This is the fabric we’ve approved. We’ve already dipped these five colors. We have an assortment within the collection, and your garment has to match all the other production that’s coming in. Besides, we have 10 different factories drawing off of this production. You can’t decide to go to another mill because we’ve already nominated this one and have done all this work.

Lead-time optimization is one way to help with costs. It’s waiting until the very last minute to make decisions. It goes back to the ’80s with the Japanese Just-in-Time manufacturing. The end goal here is to make sure the products that end up at retail are what the consumer wants to buy. It ties back to speed-to-market, also.

For retailers, one thing that’s finite is the amount of retail floorspace. They can go and borrow more capital and they can try to turn goods quicker, but they only have X amount of floorspace. What they want on that floorspace are goods that are turning quickly and are selling at full price. They don’t want slow-moving goods. They don’t want the floor taken up with a bunch of markdowns. And the brands don’t want to have slow-moving merchandise that people aren’t reordering and that they’re eventually going to have to close out. They don’t want that clogging up their warehouses and D.C.s.

[With lead-time optimization, you] position the raw materials and wait until the last minute to dye the colors that are required, wait for the last minute to determine which styles to cut and which size breaks to cut them into. Then you have visibility into production if things need to be expedited, if the stores are blowing out. They don’t want a lot of inventory; they want to operate very lean. [With lead-time optimization], you have the ability to see that and give direction to the factories and produce the most immediate goods as quickly as possible.

It’s even cheaper if goods are not selling and are at risk of cancellation. Don’t even bring the goods in. Tell the factory to liquidate them and take a $2 or $3 loss. It’s much cheaper than trying to bring the goods in and going through all the motions on it.

People are also booking capacities. They’re saying I know I’m going to have five or six production lines. It’s cheaper to book those production lines and have them waiting for you rather than to wait until the last minute, when those lines are sold out.

When I was doing business for The Limited, I used to do a lot of private label. My base fabric with them was a 225- gram cotton Lycra jersey. For the season, we were running it in a tank, a short sleeve and a long sleeve. They gave me the order so far in advance that I went out and bought the raw materials, booked the capacity, and bought the trims and everything. Every Monday, they would ask me to send them the WIP [work in process] report. “Show me what you have in process for all three styles,” I would sent it to them on Monday in an Excel spreadsheet. They would receive 400 Excel spreadsheets every Monday. They had three people who would spend a week consolidating all this information into one massive spreadsheet. The following week, they would look at it and see what’s happening in sales and then maybe see what they could get out of. So, two weeks after I sent them the spreadsheet, they’d call and say, “Listen, Mark, the red long-sleeve, we’ve already marked it down. Don’t cut those goods. Put the piece goods into the shortsleeve because we only have two weeks to supply them.”

I’d tell them, “Two weeks ago, I could have done that. But today, those goods have already shipped.”

There’s nothing that you could do because you didn’t have visibility then.

It’s not just our system. There are other web-based systems that provide the visibility where you can see what’s happening in production. [Our system] also ties into calendaring— where the materials are supposed to be in-house by this date, the goods are supposed to be cut by this date and the goods are supposed to be sewn by this date.

There’s so much time and energy wasted searching for problems. I had one customer that had a spreadsheet that they looked at and updated every day—it had 18,000 cells on it. They spent all day updating the spreadsheet. At the end of the day, they’d find out what the problems are—instead of having a system that will tell you, “This is what you should fix right now.”

If you have visibility into real-time information, you can make decisions on what is happening at that very point in time.

One other thing that is becoming really important is to have people go in and do an inspection on the quality of the goods before they leave the factory. And have a way to track and manage all those details. Because if the goods leave the factory, by the time they get over to the states and if they’re in the warehouse or they hit a D.C. and someone does a quick audit, it’s too late to do anything. Whoever is in the states doesn’t have the resources to do the sort or to repair the goods. It’s going to cost a lot of money to bring an outside company to come in to repair the goods. The factory has the incentive to make sure that those goods pass the inspection— because they’re not allowed to ship if they don’t have that inspection certificate. They’re the ones who have all the machines and all the labor. They’ll work all day and all night to get out the order. Inspecting it over there is a huge win as opposed to hoping it shows up with the right quality.

Bruce BertonExecutive Vice President and Chief Operating Officer,Roochi Traders Inc.

Some people who are in the cot ton business, like we are, are trying to find the best price for the raw materials, mainly yarn, and purchasing it upfront and warehousing it at their vendors. The problem is yarn [suppliers] used to accept everything on letters of credit. Now they are requiring cash. A lot of the mid-sized and smaller people, we cannot afford to have our cash tied up—and the banks are not going to front it.

The only thing we can try to do is get orders in earlier, take the goods earlier and hope that the person that we’re selling to will keep their orders. The retailer can easily cancel or say, “Hold back.” The trick is, you’re going to have to buy earlier and gamble on the price.

People who had 30 SKUs on the line may have to drop it down to 20 SKUs. Just deal with the core base products rather than making the total line and spreading it out and not selling it all. But that’s a gamble, too.

We buy almost a year upfront prior to what’s going to be sold. We buy the yarn, then we put it into greige goods, hold the greige goods, and have it cut and sewn and shipped in as we need it. We own the goods. That’s the difference. We are acting as a distributor or a wholesaler that sells to the people who sell to the retailer. We haven’t presold it to them—all we do is we have it in-house, and they call up when they need it. What we’ve done in order to try to keep up with the raw-materials issues is we’ve knocked our SKUs way down. We’ve also cut our color selection down. We’re just working in our core products and making sure we’re servicing our existing customers the best we possibly can and purchasing both yarn and greige goods and holding it until the vendor asks that we chop it up and send it.

Most of the businesses here in California that sell to retailers are just trying to meet certain season dates. It’s tough for them to get quotes and then gather orders. By the time they go to place the order, the raw-material prices are so much higher that they’re working on a lot less gross margins. Normally, a firm would make the samples and they would go out to various trade shows. A lot of times, they wait until they [sell] 80 percent of the minimums—or whatever they thought they would buy was sold up—and then they place the order. I think they’re going to have to gamble. Say they’re 50 percent sold up and they’ve got a halfway decent price. They know the market is going up and they buy it earlier. The risk factor is less is unsold at the time they’re buying it. But they may own it at a better price. And they could bring it in earlier and ship it earlier. If you really have faith in your sales crew and you know your market, what’s the difference? If you wait, you might not get it on time—or you might get a higher price. You buy it all at the 50 percent sold price rather than the 80 percent sold price—that might give you 30 days of grace period.

If [the manufacturer doesn’t] need it, if they bought on time, they can have their freight forwarder go to the cheaperprice vessel. That’s one way of saving a little bit of money. When the container ships are not really full, sometimes they get a break. A lot of times, the vessel is leaving twice a week and one vessel is loaded to the gills and the other vessel is half-loaded.

Also, a lot of the guys here are buying everything landed duty paid, which means they have no control over the freight. The person they’re buying it through is making the money on the freight—not them. Over the last five or six years, everybody got a little lazy and everybody said, “I don’t want to have the risk factor. I don’t want to have the import problem. I don’t want to have the QC problem. I’m going to buy it landed duty paid through the Chinese or Indian broker.” They don’t realize that that broker is making commission on the freight portion and they’re making money from the vendor themselves.

I advise [manufacturers] do not buy landed duty paid, they deal directly with the manufacturer or the agent of the manufacturer and work out a quick response. They can firm up the order, get it produced, get it here, they work with their own freight broker. That should save them quite a few pennies. They could save themselves 10 percent or 15 percent, maybe.

The other [option] is there are free-trade zones in various areas—or what they call in bond. It’s usually only for large companies. If they are buying early, they can bring in the goods and put it in a bonded storage area. They have to pay rent on [the bonded storage], but they don’t have to pay the applicable duties until they are ready to ship it out. That’s another way—if you can get a good rate—of not having to put up the anywhere from 5 percent to 30 percent duties on apparel until you need it. But unless you’re a big boy, it might not be cost-effective.

David SassoVice President of International Sales,Buhler Quality Yarns

Large brands and retailers really stop at the fabric level. They expect that the knitters are going to do their job and source yarns and know everything about yarns that they need to know to make the correct fabric. We all know that’s not [always] the case. Everybody is looking after their own interest, and they’ll do things that will not necessarily improve efficiencies or improve quality. [They’ll say,] “Yes, we want to improve efficiencies, but we’re not going to buy the raw materials to do so.” As long as the price keeps being pushed down, the raw materials that are used will continue to deteriorate in order to absorb the rising cost.

A better solution is to look at the supply chain with a magnifying glass and in the spirit of learning and being more efficient and streamlining your communication and avoiding pitfalls. [Instead of saying,] “We did it this way because this is the way we used to do it or nobody cared that we did it that way.” Being able to communicate up and down the supply chain to produce a better quality, we want to see how utilizing better raw materials and best practices offset the cost of goods. But everyone tends to look at what’s the price of yarn and what’s the cost of knitting. When you get to the garment level and you put it on the table, you say, “We’ve got so many rejects here.” When you get it up to the garment level, that’s very expensive. It tends to be overlooked—particularly when things are very, very cheap.

People should be looking at their pennies and look at producing a better product. And hopefully, if you do the right things, you produce a better product without increasing costs.

I think the mentality of a lot of consumers is if they pay more, they expect more. The problem is, people have been paying more and not really receiving more. I can’t tell you how many failures some of these top brands have had with their product—mainly because they are [saying], “I need it cheaper this year than it was last year. We’re trying to get more margins.” There’s a lot of junk product out there in the expensive category.

If a yarn spinner is allowed to do the right thing ... I remember the days when bonuses were based on quality. Now, if bonuses are based on quality, it’s not how good quality you can make, it’s can you slide this stuff just barely under the radar, where customers don’t complain. There’s quality that’s real, and there’s quality that’s just good enough. But that was a closed market; we didn’t have to be looking over our shoulder at what the Chinese were doing.

In companies we do business with, you’ll see knitting machines running at 30 percent to 40 percent higher production rates. We ask why they run at higher production rates. [They say,] “We expect a lot out of Buhler, and we expect a lot out of Supima. We find we can get a higher efficiency, higher throughput with less defects than a cheap yarn.” Thirty percent increase in productivity at the knitting level—that’s substantial.

Retailers have no idea what goes on behind the scenes.

But these are real, real costs. If you have less defects on the fabric and higher throughput, normally that means you’re doing proper blending of your fiber, you’re getting consistent dye uptake on your fabric, you have less barres and fabric hairiness and shrinkage. All these issues tend to be minimized when you use better raw materials. And that’s a huge reduction in costs right there.

Retailers have been God for a long time. Unfortunately, there are people out there that do a lot of crazy things when they’re desperate and trying to provide jobs and feed families. So, [they’ll say,] “Whatever you want, U.S. retailers, we’ll do it.”

Those attitudes have changed. What we’re seeing now in Asia is they’re saying, “I don’t care about your big volumes, U.S. retailer, we are making money in Asia.”

That’s why I like Peru. This is a great opportunity for us to diversify and not look at U.S. retailers as the only business that we have. We need options; we don’t need a monopoly.

The key thing is quality can reduce—and, in many cases, overcome—the rising costs through improved efficiencies. But you definitely have to spend the money on quality raw materials. Quality is not cheap from that standpoint. But it is cheap when you have the right structure for manufacturing and people who are empowered to say, “This is not any good. We need to stop right here and correct the problem.” Allowing the supply chain to look at quality from every aspect can overcome a lot of expenses.

Jade HoweCreative Director,Howe, a division of Seattle Pacific Industries

My backers run a vertical operation. We own—or have strong position in—factories, fabric mills, wash houses and so on. We make long-term greige commitments to cover our product flow. We have many longstanding relationships with suppliers. However, we are not impervious to the increases in cost of raw materials.

SPI negotiates for the entire company on fabric commitments. We are buying cotton earlier. We are quoting line item prices to retailers. However, if the retailer misses the order in deadline, for the first time in my 25-year career, we are requoting new pricing based upon market value. We’re trying to do it on a seasonal basis to avoid a yo-yo effect—as well as potentially having different pricing on the retail floor for the same item.

We’ve soaked up a lot of these increases over the last 18 months. That is rapidly evaporating. We’ll have to relieve the pressure on unacceptable margins in certain categories and start passing that on to the consumer. For example, we have a short in our line and we’ve seen our cost increase 60 percent this season (Spring 2011). But we only passed on a 25 percent increase to the consumer. Cotton pricing is changing—mostly increasing—on a daily basis. Let’s say we had a sweater that retailed for $140 last year. Today, it’s approaching $220 to $240. You have to decide if you have a market for it.

We have not gone as radical as saying we’re trading cotton for rayon. All fibers are going up in price—whether they deserve to or not. In America, in general, clothing is going to cost a lot more money than it has for the past two decades. Come Fall/Holiday 2011, definitely by Spring 2012, increased pricing will be passed on to the consumer—much like food, coffee, labor and everything else that is experiencing price increases. Overall, pricing for apparel in the last 10 years is lower than it was in the 1980s. Lower-priced apparel has dominated in America for the last 10 to 15 years.

Increased cotton pricing will push everybody to adjust their business models. There will be a strong push to create and innovate in order to stand out—from fiber on up. This may not end up being a bad thing—unless you’re a knockoff company that was undercutting the market based on a lowerprice business model. Those people are absolutely going to feel the squeeze as margins continue to erode. It’s not going to be as easy to knock it off at a cheaper price.

Our team in Hong Kong is saying that cotton pricing has peaked now. They’ve said prices should start to moderate over the next 8 to 12 months. We shall see.

Here’s what’s interesting. Many of our key specialty retailers have been requesting more aspirational product, higherquality goods. In New York, Boston, Las Vegas, certain parts of Arizona, Orange County [Calif.] and Los Angeles, they want the party jacket again, the premium T-shirt. There’s a certain segment of the market that will always reward innovation and quality product no matter what the price.

There’s no doubt this economic crisis has created a major shift in fashion. Guys are wearing simpler clothing, and they’re mixing pieces high to low. They’re wearing their clothes longer and not responding to trend-driven items as quickly. They’re investing more of their disposable income on the explosion of culinary experiences—from food, wine, whiskey, farm to table, organic farmers markets and the like. Just walk into a Whole Foods and you know what I’m talking about.

At Howe, we have our key item business that we sell day in and day out. Yet to remain relevant, we’re making much cooler product that is reminiscent of the clothes I designed when I launched Howe 10 years ago. Price was not a major consideration in the design process. It was aspirational. The cooler it is, the more guys want it and the more we can charge for it. I’m not talking about price gouging. I’m talking about staying in business.

In all my travels around the world, America is, by far, the most competitively priced market for all consumer goods— by far. Those days are over. Get ready, America. We’re about to experience a long-overdue price adjustment. Cotton and gas are just the beginning.

Steve RitcheyPresident, Seattle Pacific Industries Inc.

The one thing that I haven’t really heard too many people talk about is the issue with the devaluation of currency [in China] and the inflation in the domestic market—not just in China but also in Cambodia and Vietnam, where most of the ready-to-wear sportswear is being produced. Cotton is one thing—it’s commodity based, but you’re also having to increase labor costs. We’re also having to compete with domestic markets that we normally never had to before.

Our strategy isn’t necessarily to do things cheaper—it’s more how to keep the supply chain moving with the right quality and the right suppliers.

We’ve absorbed up to 50 percent [of the price of raw materials]. Possibly, we’re now able to pass on some [of those increases]. The stores are now testing increased retail prices. In the event that it doesn’t go over well, they’re going to be going backwards [to their vendors], and we’re going to be going backwards [to ours].

We’ve chosen to stay with what we’ve normally been doing. We’re not mixing our fabrics with nylon or ramie. We think that leads to an inferior product.

We’ve been dealing with the same [factories] year after year. We don’t jump around. We’re not moving out of China, where a lot of people are trying to get out there. We know it will bounce back. We certainly want to ensure that the production we have out of countries such as Vietnam or Cambodia are protected and that we’re not losing ground to the people willing to pay more for the short term. It takes a lot of communication and a lot of execution to make it work.

We’ve spent quite a bit of time looking at South America. For a few of our brands, we make some things down in Peru (mainly premium knitwear), where we haven’t seen the kind of increase as suddenly as we have in Asia—but it’s starting to happen. Domestically, we manufacture the majority of our screen-printed tees still in Los Angeles. Although the knit itself is coming from different spots, it’s being assembled and printed and finished in L.A., and that’s been fairly stable and fairly competitive.

Our main business is bottoms. The majority of our production is done with heavier fabrics because we put a lot of finish on them, so we get extremely hit hard with weight. There’s no real substitute for that. In menswear, the trend had gotten to be a little lighter and softer. But you get too light and all of a sudden you’re busting seams.

The minute you get too light, you can switch over to Tencel. It’s a really nice quality, and it’s a lot stronger than 10- oz. denim. But it’s more for a luxury aspect.

We are just now looking at Tencel for Saltaire, which is our premium division, but mainly to provide the luxury softness, not so much the weight. We have [used Tencel] in the past. It went away, and now it’s slowly starting to come back. We’re adding a little bit of spandex, too, so it’s a comfort thing. That’s been a really neat deal. Guys are just digging it.

Our bet for all of our divisions is that the consumer is going to want more for their money. Even though [prices are] going up, they’re going to want more, not less.

Remember, it hasn’t really hit yet. The product that’s hitting the floors now is a result of previous commitments. Fall is really the first season when all of this is really going to hit.

There’s just a lot of stuff that’s coming through that looks really bad. You’re seeing short staple cotton being mixed together to fake long—and that’s all great until it hits the washing machine, and then it looks like crap. Not everyone is doing that. But certainly, you see people entering the market with ridiculous prices being quoted. You know what labor is. You know what materials cost.

Things are going to settle down, but it never goes back to the way it was. It just keeps changing. Fortunately for us, fashion changes, so you’re not going to be sitting here forever trying to figure out how to work on low margin and deliver a high quality. Things will change, and the cycle will start up again. It’s a really good time to be in the apparel business. There’s a lot of innovation. You’re getting closer to your customers and consumers to make things work. It’s a really interesting time if you can take advantage of it.