Costing for the Fashion Industry

Nathalie Evans, Michael Jeffrey, Susan Craig

• Publisher: Bloomsbury Visual Arts
• Year: 2020
• ISBN:
  9781350078925
• Edition: 2
• Topic: Business
• Subtopic: Industria tessile e della moda
• Index: Business

Costing for the Fashion Industry is a practical, easy-to-use guide to the manufacture, sourcing and risk management methods essential to make a new fashion business venture financially viable. Each chapter focuses on a theme, such as entrepreneurship, time constraints, global awareness and new markets and sourcing, alongside practical exercises and detailed industry case studies to put the theory into context. This second edition explores capital investment decisions, the changing nature of cost and the importance of global awareness and new markets, as well as expanded coverage of internationalization strategies for SMEs.

1 Small and medium-sized (SMEs) clothing businesses

Introduction

The literature on UK entrepreneurs and SMEs is abundant; however, none of it focuses on clothing suppliers. Clothing suppliers in this context are businesses who buy goods from factories/agents overseas and sell them to the retailers either directly or via agents/distributors. This chapter combines findings from case study research on three UK SMEs clothing suppliers with common themes presented in the literature. The results of the studies revealed that individuals start and manage businesses for various reasons such as wanting more independence, seeking personal achievement, achieving financial gain and/or earning recognition. However, the need for a regular income, fear of loss of or having no capital, aversion to risk and doubts about one’s own ability to succeed can be off-putting. A business start-up may not be suited to everyone because it requires resilience, confidence, self-reliance, business acumen and specific characteristics. One thing is for sure: entrepreneurs are tenacious and resourceful.

As SME is the focus of this chapter, it is necessary to be clear on what is meant by micro, small and medium-sized enterprises. There is no absolute definition; however, the consensus is that micro-sized enterprises employ no more than ten people, small-sized enterprises employ no more than fifty people and medium-sized enterprises employ no more than 250 people.

Leadership in SMEs

The SME sector is diverse and characterized by individuals with different personalities, skill sets and practices. This means that leadership and management styles vary, affecting business performance. This section examines some entrepreneurs’ main traits, while the next focuses on strategy.

Entrepreneurs pursue opportunities irrespective of the resources available and often overcome obstacles because they see possibilities rather than problems. They are agents for change who combine people, money and other resources to create openings. Additionally they have an agile mindset; they are opportunistic, are strong networkers and possess an ability to employ the right people. They build dynamic capabilities because they recruit and nurture talent so when new prospects occur, they can focus and relinquish some responsibilities while remaining fully in control of their business. The workplace tends to be informal and can appear chaotic but because entrepreneurs are intuitive and possess an inherent sense of who should work in their business, this set-up appears successful.

Entrepreneurs are reactive which, combined with their networks, enables them to take advantage of opportunities quickly. Because of these abilities, they can build strong relationships with people such as suppliers. For example, they can negotiate reduced lead times and costs, because of the trust established which creates competitive advantages.

Not all entrepreneurs are born managers and vice versa. Entrepreneurs are innovative and risk-takers but do not always possess an in-depth knowledge of all aspects of their business as they often rely on their staff to deal with the day-to-day enquiries. They tend to focus on the big picture rather than the detail, which can lead to haphazard decision-making. Two entrepreneurs with the same resources, threats and opportunities will not have the same level of success because internal and external environments differ. This means that entrepreneurs need to manage change but acknowledging that there may be a need for change will depend on the entrepreneur leadership style. Some entrepreneurs are authoritative and adopt a top-down approach, others create informal structures which encourage collective efforts and still others believe that employees should be empowered and rewarded based on their performance. The leadership style affects the business performance, staff turnover and strategy for growth.

Business strategy

It is common for SME clothing suppliers to seek opportunities outside the UK. The economic climate within the domestic market, the need for growth or market saturation may trigger overseas expansion plans. Some SMEs start up with global ambitions and export goods from their inception; this is facilitated by e-tailing. However, most traditional SMEs clothing suppliers operate in the domestic market for many years then gradually progress into international markets. This pattern is changing because more and more students and graduates start businesses. This is because they are familiar with the latest technology, they possess a business global mindset and their universities support their entrepreneurial endeavours. For traditional businesses, however, one popular market-entry mode is via intermediaries such as agents or distributors. This is because they are local and familiar with the culture, they understand their home market and how product ranges will fit within it, which provides a significant business advantage. Interestingly, these business contacts are often made haphazardly, perhaps during a chance encounter at a specialist trade fair, and are seen as a low-risk opportunity. SMEs owners have ambitions and goals that are set through strategic planning; however, decision-making is affected by volatile trading environments.

Even though the global market place is increasingly homogenized, selling goods abroad necessitates a degree of adaptation to meet local market conditions. Packaging and labelling and occasionally product ranges need altering necessitating additional resources, which is why adaptations should be minimized.

Bricks-and-mortar fashion retailers are struggling and so they are more demanding with their suppliers. On the one hand, retailers have to satisfy consumers’ appetite for constant wardrobe updates by selling exciting product ranges. On the other hand, they have sales targets and margins to achieve to afford to keep their shops running. SME clothing suppliers are suffering because retailers are placing smaller order quantities; they are demanding shorter lead times and are more aggressive with price negotiations. As a result, clothing suppliers need to make strategic management decisions to evaluate where they are, where they want to be and how they will get there. As part of their strategic planning, they may decide to internationalize their operations. To do this, they could carry out a PESTEL (Political, Economic, Social, Technological, Environmental and Legal) analysis to scan the market environments of the countries they wish to enter. Specialized organizations such as AT Kearney and Euromonitor provide KPIs (key performance indicators) on market attractiveness, ease of doing business, corruption, GDP, technological advancements and so forth. This knowledge, combined with a SWOT (strength/weaknesses [internal] opportunities/threats [external]) analysis of the organization, will help businesses achieve their internationalization goals. Additionally, businesses can maintain a competitive advantage and extend their products’ longevity through innovative designs, packaging and branding.

Processes, products and services

This relates to the SMEs clothing suppliers’ design, management and improvement of processes to satisfy and generate increasing value for customers.

Research shows that business objectives and processes are developed in accordance with sales forecasts extracted from past and present performances. The busi ness strategy is often developed with and communicated to sales teams but not necessarily to other employees who tend to find information out via word-of-mouth. To inform the sales strategy, the entrepreneur keeps abreast of current affairs and monitors labour costs, exchange rates, cotton prices, development on the high street, mergers and acquisitions. Consultations with customers facilitate the forecasting of order sizes so that factories’ capacity can be booked in advance. This initiative enables businesses to prepare cash flow forecasts. This is key because financing and cash flow are areas where small businesses struggle.

Getting hold of the correct sampling is another issue for fashion SMEs. The difficulty relates to obtaining salesman samples that are commercially viable to be presented to buyers. Initially the sales team will show buyers computer aided designs (CADs) of the collection; buyers will select some products and request samples before finalizing orders. If samples are not almost identical to the goods that will be sold, buyers will not select them in their range plan resulting in no orders being placed. It is not uncommon for factories to send size set samples (sizes of samples are checked against the size specification chart) instead of salesman samples to avoid the costly production of additional samples. If samples do not reflect the CADs produced by designers, sales opportunities will be lost. Typically samples take four to six weeks to arrive in the UK; they are often in the incorrect fabric, colour and with trims clashing with the rest of the garment. Factories often complain that they cannot produce correct samples because production has not started leaving them with little choice other than purchasing components from the market. Samples are not free of charge but they are an investment that can generate sales. However, factories are reluctant to produce them because they necessitate high labour costs and are not profitable but if they got their sampling strategy right, more orders would follow resulting in a win-win situation.

One of the businesses scrutinized in the case studies had great difficulties supplying a well-known online retailer who required an average of 300 samples per season. This was difficult to manage because the business relied on the factories to produce photographable samples for their customer’s transactional websites. They did not have control of the supply chain, as they were reliant on intermediaries to pressurize factories to produce sales samples. Additionally, this situation was time-consuming for the over-deployed staff force who had to constantly follow, return or order additional samples. Therefore businesses should implement a sampling strategy to increase sales opportunities, decrease staff workload and improve cash flow. The other company examined understood that top-quality sales samples would result in sales increase and better relationships with existing customers. Therefore, the business strategy was to set up offices in the manufacturing country where they had better control of the supply chain. In doing so, they gained a competitive advantage by producing sales samples within two weeks, resulting in improved sales figures.

Fashion business owners multitask, and therefore lack time, resources and cash flow. Also, they do not always have time to strategize, particularly if the market is so uncertain that they need to be reactive. For example, Paul from Company A is an opportunist who constantly looks for avenues to sell his stock. Because of the different leadership styles and set-up of the three businesses, not all owner-managers recognized and endorsed the need for change in their organization (Hoyle, 2006).

Exercises

This section contains case studies relating to three SMEs clothing suppliers located in the UK; one is referred to as Company A, the other as Company B and the last as Company C. These exercises are to be considered for discussion purposes only. Points for consideration are available in the ‘Answers to Exercises’ section. The case studies questions should be considered once you have read Chapters 1–4.

Company A

The business was founded in the early 1990s as an importer of value-for-money clothing in the sportswear and childrenswear sector. The business supplied babywear and childrenswear clothing both within and outside the UK. The manufacturing process was overseen by intermediaries operating mainly in the Far East. The company had relationships with partners who included retail chains, agents, licensees and distributors. Licensed products extended into a diverse range of categories including clothing, footwear, eyewear, stationery, sports equipment, giftware and toys.

In 1997 sportswear company was created to manufacture and distribute internationally renowned brands (having acquired licences) as well as brands created in-house. The Group had an experienced management team as well as staff whose focus was building brand distribution in the UK and worldwide.

In 2002, another company was created to manufacture and distribute babywear and childrenswear brands created in-house. The business employed twenty-seven people full-time plus two freelance designers.

At that point, the business became a Group and comprised three companies. It employed 100 people and had a turnover of £38 million. It traded with the value and discounted end of the high street as well as mail order catalogues. Goods were sold in many retail outlets in the UK and other parts of Europe. They supplied TK Maxx, Ethel Austin, Intersport, Auchan, Carrefour, The Burton Group, C&A, Matalan, Galleries Lafayette, JD Sports, Littlewoods, Tesco and Topshop. Over the years, the company acquired a reputation for excellent customer service and strived to maintain strong relationships with agent manufacturers. The business lost focus and direction and started to struggle. It regai...