COMMENT: Coping with the high cost of raw materials

19 May 2011 | Features & Interviews | Source: just-style.com

Today's fashion and retail supply chains face relentless cost pressure on every front. But with higher input prices here to stay, what options do they have to respond? According to Mark Burstein, president of sales and marketing at NGC Software, PLM has a key role to play, not only in optimising materials management, but also reducing markdowns and improving speed to market.

The escalating cost of cotton, along with leather, polyester and other raw materials, leaves apparel and fashion companies in a precarious position.

Companies that don't properly manage their raw materials commitments can get caught in the spiral of escalating prices and end up losing money on the merchandise they sell. Both private-label and branded fashion companies may be unable to pass along these increased prices to their retail customers, as retailers are reluctant to raise prices.

As just-style summarised in a recent article: "Rising wages, worker shortages, higher freight rates, currency hikes and surging cotton and synthetic fibre prices are among a cocktail of costs currently combining to end more than a decade of price deflation in the apparel industry."

How can your supply chain respond?
At a recent sourcing event, Kevin Burke, president and CEO of the American Apparel and Footwear Association (AAFA), pointed out that rising commodity and labour prices account for just a small percentage of a product's value.

And as just-style noted: "While the bad news is that higher costs look set to stay, the good news is that there is still plenty of room to offset them by introducing new efficiencies into the apparel supply chain."

This is exactly where PLM comes into play as a strategic technology to help companies combat escalating costs by radically improving design and production efficiency, optimising lead times, and injecting new discipline and cost controls into materials management.

PLM helps control costs, reduce markdowns
Today's web-based PLM systems help companies control their raw materials with sophisticated materials management capabilities that allow instant visibility into materials requirements, purchases and inventory at remote locations.

One retailer, for example, uses PLM from NGC Software to forecast raw material requirements, place commitments with multiple suppliers, and draw down the commitments as POs are issued and the materials are consumed.

As a result, this retailer has reduced the risk of holding too much or too little inventory to meet downstream demand, or holding unused inventory for unacceptable lengths of time. The results speak for themselves, as this retailer has improved speed to market by three weeks, is able to lock in raw materials costs for each season, and posted record profit in 2010.

Driving full-price sales protects profit margins
At a time when rising costs are squeezing profit margins, full-price sell-through is more important than ever. If retailers misjudge consumer trends and have to resort to deep discounting, they could be in serious trouble.

Here, too, PLM can be a strategic asset to help companies increase margins by allowing companies to delay their final production decisions until the last possible minute. The most sophisticated PLM systems can track sales at the SKU level in real time through built-in interfaces to ERP, POS and other enterprise systems.

By using the latest sales figures and postponing their final production decisions until the last minute, companies can instantly shift materials and production resources to their best-selling products. This greatly increases sales velocity, full-price sales and margins - which are more critical than ever for protecting profit margins when other costs are at all-time highs.

Extended PLM is a competitive advantage
Today's fashion and retail supply chains are under greater inflationary pressure than any time in the past decade, but PLM provides a competitive advantage in every phase of the design/production lifecycle.

While many companies may think of PLM primarily for design, they can actually realise the greatest benefits when PLM is fully integrated with sourcing and production - what NGC calls extended PLM.

Helping companies handle the details of materials management and implement just-in-time sourcing practices are just two examples of the many benefits of extended PLM, which is essential in positioning apparel brands for sustained growth and profitability.

Fashion companies who have implemented extended PLM consistently see margin improvements ranging from 5% to 20% and have reduced cycle times up to 40% - while improving efficiency, controlling costs and improving product quality.

Improving performance in all of these areas can be the best strategy for driving profitability and growth in today's business climate.