Citation
(2006), "Domestic vs offshore manufacturing fact or fiction that offshore=cheaper…?", Journal of Fashion Marketing and Management, Vol. 10 No. 2. https://doi.org/10.1108/jfmm.2006.28410baa.001
Publisher
:Emerald Group Publishing Limited
Copyright © 2006, Emerald Group Publishing Limited
Domestic vs offshore manufacturing fact or fiction that offshore=cheaper…?
Domestic vs offshore manufacturing fact or fiction that offshore=cheaper…?
Article Type: Note from the publisher From: Journal of Fashion Marketing and Management, Volume 15, Issue 1
Labor rates and efficiencies
Many individual studies have been conducted into the comparative labor rates and efficiencies between countries/factories – usually comparing one offshore source with another. The analysis is usually based on specifics, i.e. Factory X in China vs Factory Y in Saipan vs Factory Z in Vietnam1. Due to the size and scale of each factory (i.e. productivity), and the different labour rates in each country, they have generally been compared with one entity against another2.
Nonetheless, we have established some “guidelines” that can be used generically: such as Vietnam cost of CM (Cut and Make) is generally 50 percent that of Saipan cost of CM, for Cut and Sew Knits (i.e. t-shirts/tank tops/camisoles). The cost of labor in Vietnam is considerably less than 50 percent of the cost of labor in Saipan (approximately $100/month in VNM vs $700/month in SPN). However, due to the size/scope of the factories used for analysis, and their relative efficiencies (with Saipan being more efficient in terms of output), the overall cost of CM in Vietnam comes out to approximately 50 percent per unit, over cost of CM in Saipan3.
Fewer comparative studies have been undertaken between offshore cost of CM and cost of CM in the USA. For one, productivity is less measurable in USA factories, due to fluctuating output. Many factories operate on “half-steam”, with available machines/workforce for when the orders increase. Thus, productivity and efficiency are less stable.
What is clear is that the labor rate in the USA is significantly higher than in any country the majority of mass-market apparel retailers would potentially source from. The federal minimum wage in the USA is $5.15 per hour, as per provisions contained in the Fair Labor Standards Act (FLSA)4.
2 Not all about labor cost …?
The argument for domestic manufacturing, from a cost perspective, seems to be around the “additional”, or some may say hidden, costs of overseas manufacturing. This argument frequently seems to assume that we are focusing on the offshore production of CM (or labour only) – at Limited this is not the case. Let’s take a look at the additional direct costs incurred in offshore manufacturing vs domestic manufacturing:
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Quota charges – for Non-WTO countries, such as Vietnam.
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User fees – such as Saipan’s 3.75 percent tax on exports.
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Finance/bank costs – letters of credit (LCs).
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Shipping costs – including freight costs, harbor fees, and customs entries, etc.
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Duty – up to 34 percent, depending on garment category.
On the flip side, we must also look at the additional direct costs incurred in Domestic Manufacturing, outside of labour: higher raw materials/trim costs.
OK, so there are not many additional “direct” costs. But how about “indirect” costs …?:
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Managing “Western Hemisphere” mentality – basically, like for like, there are more man-hours invested in managing domestic manufacturing. I can elaborate on the “Western Hemisphere mentality” separately, but the argument that there are more $s involved in managing offshore production does not hold weight. Operating on a “quality built in” model, any perceived costs associated with managing QA/QC teams and or inspections are negated. Therefore, as long as we are commited to a belief in built-in quality at all times we will always have to bear the cost of a QA/QC team irrespective of source – in fact the cost of such a team would be higher domestically.
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Longer lead-times. Productivity, at both raw materials (fabric weaving or knitting) and garment manufacturing stages, is lower. We have proven time and time again that we can turn (deliver) product quicker, from a standing start, offshore. Disclaimer – with positioned dyed fabric, and approved screens ready, I have run a successful “quick-turn” printed T-Shirt program from a California factory. Cost per unit was approximately $2.00-2.50 higher than Vietnam cost however.
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On-time delivery – less reliable domestically than offshore. In my experience I can expect about 80 percent on time domestically versus high 90s from established offshore sources. This translates to lost sales $s. Our product is usually directed towards a specific “floor-set” – which usually has a six week selling window. When late, product has less time to sell and is either pulled from the floor in order to set the next floor-set, or is “marked-down”.
Western hemisphere mentality
This is a term used in many US sourcing/production offices. It can be summarized into attributes of service and attitude. Service from offshore suppliers is often speedier, and more comprehensive. Despite the declining domestic manufacturing industries, their offshore counterparts are usually more enterprising, and hungry for business. This ultimately translates into better service …
Domestic attitude is more of a cultural difference. In my experience, the domestic suppliers are never at fault. It could be the mill, it could be the washhouse, and it could be the buyer! But someone is always to blame. This may be attributed to the mentality of operating on a CM contract basis. Traditionally many domestic manufacturers operated on a CM contract basis only, as opposed to delivering “full package” – which is how the majority of offshore suppliers operate (bar any developing countries in close proximity to the buying market. Case in point – we are investigating sourcing in Morocco, due to the impending duty free agreement with the US. Most factories operate on a contract CM basis for European customers with their own buying offices. They are evolving into full package suppliers, but most are not there yet).
4 “Final cost” analysis
Final cost being the Delivered Duty Paid cost (DDP) of delivering product to our Distribution Center (DC). I have purposely selected the closest costing domestic vs offshore that I have encountered, to show that even the least constructed garments (lowest CM – lowest labour) are less expensive offshore. The more constructed the garments, the more disparity between domestic and offshore due to the increased labour content.
Nonetheless, let’s look at most basic of basic (outerwear) styles. A cotton tank-top; four seams, self-binding at armholes and neckline, and a turned-back/double-needled hem. This involves about nine sewing operations, including sewing-in labels. So, the cost comparison is as shown in Table I.
Table I
It must be appreciated that this difference of $1.30 (DDP) is significant. As a percent of the lower cost it is 25 percent. The impact on IMU is 8 percent points (73 vs 66 percent) – this has a significant impact on final mark up. Finally, a saving of $1.35 per garment in an order of (say) 100,000 presents a significant amount of money.
5 The value proposition
When rating and evaluating supply sources/factories, we rate based on our “Ten Guiding Principles” …
- 1.
IMU – Initial Mark Up (cost as percent of retail price of, in this case, $19.50)).
- 2.
Consistency.
- 3.
Flexibility (the ability for change course in mid-stream).
- 4.
Agility (the ability to move fast from a standing start).
- 5.
Fulfillment.
- 6.
On-time delivery.
- 7.
Risky (ethical).
- 8.
Scale.
- 9.
Leverage (influence over supplier).
- 10.
Potential (go-forward potential of a business partner).
Will not elaborate on each, as they are pretty self-explanatory. Suffice to say, all are important to a mass retailer who own their own channels of distribution. Across the board, offshore suppliers rank higher. Attached is a snapshot of our rankings; highest ranking Offshore Cut and Sew Knit factory, versus the highest ranking domestic factory (see Table II).
Table II
There is tremendous value in each of these attributes. Therefore, in terms of added value we consider that our offshore suppliers score higher across the board.
Therefore, the argument could be made to the contrary: that there are in fact more than just cost advantages to offshore sourcing. There is also additional “added value” in a variety of dimensions not related to low labour costs.
XXX FTY and YYY FTY is the “best” factory in Saipan and USA.
The blank lines are simply the factories in other countries, such as Vietnam.
The numbers on the left are simply order numbers.
In the table higher numbers represent better performance.
AcknowledgementsAny referenced studies have been conducted in the normal course of day-to-day operations by Alan Fogarty as Manager for Production and Sourcing for Limited Stores.
Alan FogartyProduction and Sourcing for Limited Stores, New York, USA