Costing and RFQ’s for the Apparel Industry

May 10, 2013 8:52 pm

 

The costing for apparel and other soft goods has always been a critical process in the product life cycle, even though it has evolved quite a bit over the last couple of decades.  It used to be that you had an engineer estimate standard allowed minutes for each labor operation, calculate material cost, add in some overhead and it resulted in a pretty firm cost.  Today costing is complicated by the fact that most apparel is made overseas and costs must come from your agents or vendors.  In addition, costing can and probably should occur at various times in the life cycle; the design phase, the vendor allocation phase with RFQ’s, the PO phase, and the actual invoicing phase.   This article will focus on the best practices in the vendor allocation phase as this is the most labor intensive, and arguably the most critical phase. 
 
When the apparel industry shifted away from buying their own materials or even  owning factories in the early 1990’s, the new “full package” or “FOB” approach to costing seemed to be much simpler.  Many companies felt they could treat the costing for full package apparel like any hard good.  Ask the vendor for the price, pick the lowest cost vendor, start the development process and then issue the PO.  It did not play out that way for most companies however.  They began to realize they could not justify costs coming from the vendors because they did not necessarily control every component. Additionally labor costs varied by country and the margins that were built into the vendor’s cost were all over the board.  As a result, companies had to take a more aggressive approach in order to attain the best possible margins without sacrificing quality, vendor compliance, and delivery. 
 
Using this as a background, let’s take a look at the three main approaches that are being used in the costing and RFQ process for full package apparel and soft goods in recent years and the pros and cons of each.   Also a screen shot of how each approach would look in our Intellimas software application has been posted as well.
 
  • Shotgun approach – Send out RFQ’s to many different vendors for each style in order to attain the best price.  You minimize your risk of getting high quotes from your vendors by getting as many quotes as possible for each style.  This includes asking for quotes with many different scenarios (various fabrics, substitute trims, etc.) for each style.  Because of the volume of quotes and the number of vendors quoting, you typically do not need to get any detailed cost breakdowns from the vendors.
    • Pros
      • No need to look at the cost of every material component cost with this approach as the volume of quotes should result in a decent price
      • No need to look at the cost of every material component cost with this approach as the volume of quotes should result in a decent price
    • Cons
      • Doesn’t enable strong partnerships with vendors
      • Managing the back and forth of all these quotes can be labor intensive
      • Not fair to the vendors to have to put in a lot of work to estimate costs if they will not win most of the bids

 

Cost1 
      
  • No stone left unturned – Have the vendor submit a detailed bill of materials (BOM) for every quote which would include the cost and yield of each component.  Analyze all quotes and BOM costs in great detail to ensure that the costs are accurate and nothing is missed so that you have no surprises later.
    • Pros
      • You can determine, down to the component level, what is affecting costs and margins
      • You can determine if a vendor is building in too much for labor or his own margin
    • Cons
      • This can be a tremendous amount of detail to pore through when analyzing costs and a large burden on the vendors
      • One can argue that this approach establishes a better partnership with the vendor because no stone is left unturned, but it really gives the vendor a feeling that they are not trusted because they won’t get the business unless they reveal everything that goes into their cost structure.

 

Cost4

   

  • Establish vendor partnerships and sophisticated target costing – Establish strategic partnerships with key vendors where you communicate cost guidelines and establish standard vendor margins.   Develop a sophisticated process of determining target costs before quotes are sent out.  Receive quotes without a detailed breakdown.  Measure the quote against the target cost.  Narrow down your vendor base to the partners whose quotes are consistently within the range of the targets.
    • Pros
      • Lowest amount of overhead to run through this process
      • Allows for better vendor relationships
    • Cons
      • Doesn’t work unless you can trust the vendor.  It may take several years of working with them to get to this point.
      • Cannot happen if you do not have a mechanism to calculate the targets and the expertise to know they are right

Cost3
 
Any of the above will work and many companies are using a hybrid of all of them as they feel it better fits their business.  The recommendation here is approach 3 as it gives you the most streamlined process, which is highly desired in order to achieve speed to market.  When you have a costing and RFQ process that takes many weeks to get through, it does you no favors.  In approach 3 your target costs can become more and more accurate as time goes on, especially if you use a strong system to handle the process.  A good system will allow you to back into your target landed cost based on the price and target margin.  Then it should back into a target FOB based on table driven freight, duty, commission, overhead, etc..  Now that you have the target FOB, you can compare it to the quote when it comes in to see if you get the desired margin.  Many companies are doing this already.  The sophisticated part is to determine if the target FOB makes sense before the quote is sent out.  Your target FOB is made up of materials, labor, and vendor margin.  Hopefully you have a solid BOM at this point in the process so the system should be able to roll up those costs.  The vendor margin should be predetermined based on the strategic vendor negotiations.  Lastly your system should be able to determine expected labor costs with table driven variables such as silhouettes, product types, model types, pattern type,  etc..  Also, as you build up cost history and as you build the expertise of your costing specialists, they should eventually be able to estimate labor costs on their own.  Therefore, estimating your material, labor, and vendor margin costs will give you a true target FOB to help you vet the quote that comes in from the vendor. 

 


On the subject of systems, most companies manage costing and RFQ’s in spreadsheets. This gives them flexibility and spreadsheets can be sent all over the world to gather quote data. However spreadsheets will not allow you to build the target costing process mentioned previously.  Spreadsheets also do not allow for a standardized process and the building of good, easily retrievable history which is crucial to improving your process and lowering your margins.  At the end of the day, make sure the system you have or want to have can handle any costing and RFQ approach you feel is best for your business.  Contact us if you would like to see if our Intellimas software could be a fit for your costing process.  Our specialty is eliminating spreadsheets.