GARMENT COSTING GARMENT COST FACTORS

COSTING A GARMENT
In this topic we will explore the relationship of all cost factors related to the wholesale price. In addition, we will examine the product developer as a skilled and experienced negotiator and the importance of being well versed in all of the phases of the garment costing process.

GARMENT COSTING

COSTING FOR PROFIT The product developer must understand the costing process, it is in fact his/her responsibility to obtain all price quotes from the apparel manufacturer, factory, or contractor for all styles in the product line. The price quoted by the apparel manufacturer, factory, or contractor is what the product developer will pay for each of the garments the retailer will produce. In order to give you a better understanding of the importance of factory and fabric sourcing I want you to carefully review this basic overview: Fabric Cost - The cost of the fabric(s) in a garment is generally about 60% of the price. The garment yield is the amount of fabric consumed for each garment made i.e. a simple womans polo shirt yield is between .9 to 1 yard of fabric. The fabric consumption in dollars is then determined by calculating the garment yield multiplied by the fabric price per yard (Yield x Fabric Price Per Yard) Fabric Consumption in Dollars (womans polo): 1 yard x $3.50 per yard = $3.50 worth of fabric is used for each garment the retailer will produce.
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Labor Cost - The cost of the operations that the manufacturer will perform on the fabrics (pattern and maker making, cutting, sewing, assembly of garment) plus the cost of any basic ndings (zippers, buttons) trims (lace, ribbons) generally amounts to about 40% of the price. The manufacturer's (factory) prot will be included in this cost. As you can imagine, product developers that place very large orders for private label retailers i.e. Wal-Mart, Target, GAP, Ann Taylor, Anthropologie, etc. will go through a rigorous negotiation process with the factory and/or textile mill. The PD will have a thorough knowledge of all of the components related to the garment cost with the factory and textile mill to make sure they get the best product for the retailer at the best price. The goal is to ensure the nal product will be offered to the consumer at the best possible price. In light of the recent tragedies in Bangladesh, I do want to point out that I am referring to a fair labor price that is protable to all. During my visit to Premiere Vision last year, many Western European mills and factories are already in economic crisis mode due to low cost imported textiles. The textile suppliers are trying to create strategies to sell their products to PD at a competitive price, but it is quite difcult because the labor rates in Europe are much higher than other areas of the world. While this is unfortunate in regard to the global economy it will generate a great discussion for this week's topic. Recently, Ive had many discussions with the textile mills, factories, designers, and merchandisers and most stated that they were all worried that PD, merchandisers and designers will respond to the economic crisis by being very conservative with their purchasing and sourcing decisions in order

to keep their retailers product line competitively priced. The outlined sales and negotiation process gives you a basic understanding of the product developers responsibilities when he/she sources new vendors (textile or factory suppliers).

I. THE NEGOTIATION PROCESS: Prior to meeting with the potential vendor to negotiate it is always helpful to get to know them and to familiarize yourself with the following: Who are you meeting with? What are their names and titles? Are they experienced negotiators?

How long have they worked for the company? Based on their competitor's product line, what can you nd out about the price range and spread of similar products? What is the market demand for the product that is being negotiated? I.e. if linen is the fabric trend you will need o know how many mills sell linen and how high is the demand this season. Does the negotiator have the authority to make the nal ruling regarding price and delivery quotes? If not you might politely request that the owner or manager join the meeting.

Before you sit down to negotiate keep in mind: 1. Your ideal offer (how much are you willing to pay for the product) 2. Your realistic offer (this is based on the merchandiser's analysis of product demand) 3. Your highest offer (how much you or your company is willing to pay while still being protable) In addition to a reasonable price that is cost feasible for his/her company the PD must negotiate: FACTORY OR MILL DELIVERY DATE: 1. x-factory - the date the merchandise is scheduled to ship from the factory. 2. x-country - the date the merchandise is scheduled to export from the country.

FABRIC AND GARMENT PRICING: CIF: the price quoted includes cost, insurance, freight; basically the price of the product once it arrives in the country of import LDP: landed duty paid; the price of the product includes shipping, paying duty, etc. The importer is responsible for claiming the merchandise once it clears customs FOB: the price quoted includes the value of the merchandise when it is loaded on the carrier COMMON GARMENT PRICING STRUCTURES: CMT:(Cut, Make, Trim); the factory is quoting you a price, which includes cutting fabric, apparel sewing, trim (usually basic trims). This price does not include fabric.
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 CM: (Cut, Make); the factory is quoting you a price, which includes cutting fabric, apparel sewing, this does not include the price of trim or fabric. A buyer will sometimes select this pricing method if they are trying to source specialized trim and fabric elsewhere MT: (Make and Trim); the factory is quoting you a price, which includes apparel sewing, and trim this does not include the price of fabric or cutting. A buyer will sometimes select this pricing method if they are trying to source specialized fabric else where and perhaps buy USA fabric and have it cut in the states and sewn in the Caribbean FULL-PACKAGE (sometimes referred to as FOB GARMENT PACKAGE); the buyer will use this method of sourcing when they are condant that the apparel contractor can not only act as a production facility, but they can also source

fabric.The factory is quoting you a price, which includes fabric, cutting fabric, apparel sewing, trim.

SHIPPING METHODS Shipping methods and whom will absorb the cost of shipping the merchandise. I am going to include the links to a few websites that specialize in shipping so you can get visual reinforcement www.maerskline.com/link/: air sea truck

PAYMENT METHOD Overseas shipments usually require a Letter of Credit (L/C), but it is important that the PD make certain this is the agreed method of payment between the buyer and seller. A Letter of Credit (L/ C) is a written commitment to pay, by the product developers (importers) bank (called the issuing bank) to the sellers (or exporters) bank (or paying bank). A L/C guarantees payment of a specied sum in a specied currency, provided the seller meets precisely all conditions detailed in the L/C within a xed timeframe. The PDs purchase order, which is conrmed by the sellers pro-forma invoice usually outlines the negotiated agreement between both. Also included in the L/C document are the prescribed documents needed. These documents always include a commercial invoice, a clean bill of lading (or airway bill), and certicate of origin. You will study more about this process in your Import Export course.

curred during the product development process) the PD will need to consider in order to calculate a garment pre-cost sheet: Overseas Agents Fees In many cases the retailer will contract a local company within the overseas region they are manufacturing their product to oversee their production. The overseas agent will act as U.S. Product Developers liaison with the factory - they act as their eyes and ears within that region. The are usually contracted based on their experience with apparel and textile manufacturing within a specic region. The agent can be either an extension of the retailers U.S. operation or an independently owned facility that is paid by a commission percentage of the products produced in that country. The PD must include the cost incurred into the garment cost sheet. Transportation Costs Merchandise manufactured offshore will have to be transported back to the PDs home country for resale. This will be accomplished in several different stages. If the FOB point is the offshore factory then the PD is responsible to cover local carting charges from the factory to the air or seapor The charges incurred by shipping the product via air or sea Sea Freight longer shipping time, but lower cost. Shipping time from several parts of Asia to the US can take 3-4 weeks, but only costs about 35 cents per garment Air Freight Shorter shipping time, but higher cost. The shipment can arrive from Asia to the US within 2-4 days, but cost an additional $1.25 per garment.

CALCULATING A PRE-COST SHEET It is important the PD understands how to cost a garment in order for the product line to be protable and cost feasible. Since the vast majority of apparel products sold in the United States are not made in the United States the PD must accurately calculate the additional costs involved in inspecting, transporting, and entering the product into the United States through U.S. Customs and Border Protection Department of Homeland Security. There are a wide-range of pricing structures listed in this topic; however, there are additional costs involved in the garment importing process. Some cost factors (expenses in-

 Duties and Customs charges upon arrival in the United States. Merchandise made overseas and then imported to the United States is subject to U.S. import duties (tariffs) as explained earlier. Duties on imported merchandise were originally established to be uniform, regardless of the country of origin. However, as special trade incentive agreements are negotiated around the world individual countries and regions now have specic duty rates. Import duty rates fall between 5% - 20% (with some exceptions). There is a long-range plan to reduce duties on imported apparel worldwide through agreements made with the members of the World Trade Organization. The agreement will slowly drop or eliminate these taxes between member countries. Local Transportation: after clearing customs, there are additional local transportation costs incurred from getting the merchandise from either the air or seaport to the retailers distribution center Other cost factors: if the PD is purchasing their product line using another pricing structure (not CMT), then the retailer might incur other charges related to importing the product line to the United States: Patternmaking Cutting Sewing Trim Notions Fabric As advised, the cost sheet happens in two major phases, the rst is the Pre-Cost Sheet and the last is the Final Cost Sheet:

The Pre-Cost Sheet is created by the PD and is an estimate of the garment cost using estimated price quotes from the factory and vendors of raw materials. The Final Cost Sheet is created by someone within the retailer's nancial or accounting department. The nal cost of the garment is calculated using actual amounts incured by importing the garment. It will allow the retailer and the PD to analyze the actual cost required to manufacture each of the garments in the product line. There are a number of variables that will impact the garments protablility i.e.: 1. The PD might have created a Pre-Cost Sheet using an estimate for shipping the garment via sea freight. HOWEVER, due to delays in information being sent to the factory by the PD the retailer was forced o ship the prouct to the US by air. This additional expense will be reected in the Final Cost Sheet. The prot margin will be lower in the Final Cost Sheet. 2. Another example; the Pre-Cost Sheet was created by the PD using a fabric price of $1.40 a yard and an estimate that the retailer will produce 10,000 units. HOWEVER, the retailer loves the proposed product and increases the units to 25,000 - therefore, the PD now has greater buying power and will go back to the textile vendor and factory to "re-negotiate" the price per yard and per unit due to the new units. This positive change will get reected in the Final Cost Sheet and will have a positive impact on the prot. First Cost is a term used to express the cost of the garment charged by the factory. Basically, the FOB garment price at the door of the factory.

The landed garment cost is a term used to express the cost of the garment, which includes, the rst cost, overseas agent's fee, transportation costs, and customs duties and fees. The fabric cost is generally 60% of the garment price. Therefore, it is important the the PD understands the importance of an accurate garment yield. The Garment Yield refers to the amount of fabric consumed per garment - if the garment yield is calculated as 1 3/4, it means we will use 1 3/4 yards of fabric to create the garment. Fabric Consumption in dollars is the amount of money spent on fabric for each style. It is calculated by multiplying the garment yield by the price of the fabric per yard. 1. Blouse Style #F09825 Fabric Price per yard $2.25 and the Garment Yield 1 1/2 (yards of fabric needed to create the

style) $2.25 x 1.5 = $3.38 FABRIC CONSUMPTION IN DOLLARS 2. Pant Style #F09701 Fabric Price per yard $1.85 and the Garment Yield 2 1/4 (yards of fabric needed to create the style) $1.85 x 2.25 = $4.16 FABRIC CONSUMPTION IN DOLLARS 3. Floral Print Dress Style #F09650 Fabric Price per yard $2.25 and the Garment Yield 2 1/4 (yards of fabric needed to create the style) $2.25 x 2.25 = $5.06 FABRIC CONSUMPTION IN DOLLARS 4. Geometric Print Dress Style #F09651 Fabric Price per yard $2.25 and the Garment Yield 2 (yards of fabric needed to create the style) $2.25 x 2 = $4.50 FABRIC CONSUMPTION IN DOLLARS
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ADDITIONAL INFORMATION REGARDING LETTERS OF CREDIT (YOU WILL LEARN ABOUT L/Cs in IMPORT EXPORT): Letters of credit are used for the following reasons: To protect against buyer risk. If the buyer is of unknown creditworthiness, then the seller has the security of the bank's payment undertaking. To protect against country risk. The buyer may be willing and able to pay; but economic or political conditions in the buyer's country may prevent or delay payment. This is a real concern when dealing with less developed countries and/or countries with foreign exchange shortages. To protect against these risks, a conrmed letter of credit will be neces-

sary - a bank in the seller's country will (for a fee) add its own payment undertaking to that of the Issuing bank. Letters of credit are also used as part of exchange control or import control regimes operating in the buyer's country. In such cases the use of a letter of credit is mandatory, even if not required by the seller for security reasons. A letter of credit is a banking mechanism which allows importers to offer secure terms to exporters