Supply Chain Solutions No.15 – Cost to Price for a Value Win
There are a few ways you can go about achieving your margin objectives. You can engineer the product cost to price, negotiate to price or a combination of both. Below we are going to explore engineering product cost to gain a winning price.
The objective of any development is to develop a product that is innovative, on-trend, exudes brand value and delivers margin to the business and happiness to the customer. To achieve this brand, design, sourcing, development functions and the vendor all need to collaborate to get that winning result, one team cannot do it on their own.
In the beginning, the brand manager will build a collection plan detailing what the aeroplane view of the collection will look like, categories and the number of styles, price points and target margins. The brand designer then workers their magic across current trends to create excellent concepts. Concepts whose cost structure conceptually should fall within RRP price points based on yarn or fabric prices, embellishments, manufacturing and other direct and indirect costs.
For private label, the process is similar to a collection, but with less flexibility on the RRP, which is set by a buyer as opposed to the brand manager. Design still need to work their magic on creating outstanding concepts that deliver high retail sell through achieving both wholesale and retail margins.
Fabric, sourcing and development teams then work their magic with the developer taking the lead; known costs are collected to form an estimated cost to ensure margin is achievable. Where cost reaches target margin, allocate to a supplier and move into the prototype phase. If the cost doesn’t achieve margin by a high percentage revert to the brand manager and discuss increasing the RRP, if untenable, work with design, fabric and sourcing to find alternative options for fabrications, styling or manufacturing sources that reduce cost.
Now that the base work is complete allocate to a vendor. The supplier needs to present you with an open cost so you can check their pricing to margin versus your estimates. Getting initial prices within the first 24-48 hours will help ensure there are no hidden surprises down the track and that you will achieve margin objectives. Doing so reduces delays through the development process where the product doesn’t achieve margin, needs to be redeveloped or cancelled.
Once the first sample is complete, you must get a full open cost from the vendor detailing fabric consumption and cost, embellishment cost, CMT, logistics, overhead and margin. The open costing gives you a tool to further refining the price. It gives you knowledge about the vendor’s operations and a benchmarking tool to negotiate on later in the process. I suggest not negotiating on the price until fit samples are approved and final fabric or yarn consumption has been calculated. Now the price must now be finalised.
It is faster to finalise the price with private label orders because you know the buy quantity, knowing the cost, quantity and target price you then negotiate to get the best margin result possible for the business.
For collections this is different, you have the RRP and wholesale, you know the cost so you can calculate the margin, but you don’t have the quantity until the collection has completed its selling cycle. Your initial price estimate from the supplier would be based on an average sell quantity assumption. Collection sales to internal or external retailers the same rules apply as private label, you will know the quantity.
Once selling has completed, and quantities are firm, this is the point to negotiate the price entirely. If you negotiate at every point of the costing cycle vendors will just cost in a buffer that they then give back at each point as they become familiar with the costing reporting period. Negotiation must be based on the cost breakdown and quantity focusing on over costed areas and total cost reduction as much as viably possible.
If you negotiate purely on price without knowing the cost, this can affect the quality and your overall brand value. Example; if the cost is 40% too high versus margin, you won’t be able to negotiate the price down without the vendor making substitutes through the process. Working with engineering cost to product price ensures you know and understand the cost components. If the margin is not achieved you have three choices, re-engineer, accept lower margin or increase RRP.
Are you achieving margin objectives in your collection or private label programs? Is your team and supply base delivering a compliant, fit for the market product at a value price?
ID Global Concepts are experts in supply chain management. We add value to your supply chain through consultancy or management contract to ensure the business has the best practice systems that are the right fit for your business, customer and meet your value expectations.