The basic garment cost sheet is a breakdown of costs for each material and step. But retailers and brand customers do not care about supplier costs – and the factories have nothing to learn from them, says David Birnbaum. Instead, he suggests data is the tool to make the best decision.

If the purpose of our businesses is to make PROFIT – and if profit equals Price less Cost – the tools we use, as well as our entire decision-making process, makes no practical sense.

Before going any further, let me say this is not some academic theory, nor worse, some philosophical exposition. This is simple fact.

To start at the beginning, take our basic cost sheet. In the garment industry, we have fabric, trim, CM (which includes labour, overhead and profit). This is our tool and has been for the past 50 years.

Our retailers and brand customers do not care about supplier costs. Let’s face it nobody cares about supplier costs. When you go to buy toothpaste or an automobile, you not ask yourself, ‘What did Colgate or the Ford Motor Company pay for the materials and manufacturing costs?’ All you care about is whether thing is worth the price. What is true of the customer buying toothpaste or a car is equally true of the customer buying 50,000 woven shirts. Is the thing worth the price? Think about this and ask yourself: ‘What purpose does this costing serve?’

On the factory supplier side, the basic cost sheet tells us nothing about the costs. If you are the factory, think back. You made up the cost sheet at the very beginning of the process. The customer came to you, showed the garment (or provided a sketch, swatch, spec-sheet and tech-sheet) and asked: ‘How much?’ Perhaps you went so far as to make a first sample, but truth be told you really did not know the actual costs because you cannot know the actual costs until you have completed bulk production. And even then, you will not know the actual costs unless you do a job costing; and since in our industry we normally do not do job costings, we never know the actual cost of any of products we make.

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To go a step further, ask yourself – whether you are the factory, the customer, the government or the World Bank – how do you make your decisions concerning products and industry?

• If you are the factory, do you ask yourself, ‘Which customer gives me the greatest profit?’
• If you are the customer, do you ask yourself, ‘Which factory gives me the greatest profit?’
• If you are government, do you ask do you ask yourself ‘Which policy and which investment gives us the most successful national industry?’
• If you are the World Bank, do you ask yourself, ‘Which grants, or loans will give the greatest benefit?’

For the most part, we follow the ask-cousin-Phil method.

• Cousin Phil may be a single person; a trusted specialist with great experience: ‘If you increase wages, your workers will drive you out of business.’
• Cousin Phil may be a multinational consultancy: ‘We have carried out extensive research (see attached 2000-page report) and we have concluded that consumers do not consider ethical behaviour when purchasing products.’

For the person responsible for making the decision, the ask-cousin-Phil method, has two great advantages:

#1: Since cousin Phil has all the answers, the person responsible for the ultimate decision need not have any knowledge of the subject under consideration.
#2: Should the decision prove to be fatally wrong, the person responsible for the decision can show that having selected the very best consultant and having followed that consultant’s advice, the person responsible is not responsible. 

Using data to make the best decision

The alternative is somewhat more difficult, which is why so few senior executives go that way: Take responsibility; follow the data; use that data as a tool to make the best decision.

Ironically, almost all the necessary data is in-house. 

• From the factory side, to determine the most profitable customer you need only the job costing for each order, and the net profit of that order, together with the customer’s name.
• From the customer side, to determine the most profitable factory you need only the gross profit for each style (or model) and the name of the factory that produced the order.

What is true for microeconomic decisions is equally true for macroeconomic decisions. 

For government planning to invest in a particular industry, you look at different options and in each case quantify the added cost to the added value. For example, increasing productivity, capital investment vs worker training; basic commodities vs fashion; fast turn and quick response, etc – the data exists and, for the most part, is free. For institutions planning to provide grants and or loans, again look at the basics. 

For example, the option may well be comparing added cost with added employment – that is, the cost as measured in aggregate worker wages. Funding where costs equal aggregate wages for two years is not as attractive as funding where costs equal aggregate wages for one year. 

Provided the people retained to develop the strategy are required to implement their strategy, the decision-making process becomes simplified. Neither government nor institutions care why the results were below expectations, they care only that the organisation retained failed to meet their commitments. 

Where do we go from here?

We start back at the beginning, with the cost sheet. The new Full Value Cost Sheet must include three factors

• All costs.
• The correct value for each cost.
• Quantified cost for each additional item, together with quantified value provided by that item.

The next article will look in more detail at The Cost Sheet.

Birnbaum On Costings: A new book by David and Emma Birnbaum is scheduled for release in March 2020.