SOLVING A SQUEEZE PLAY ON COSTS
Byline: Dianne M. Pogoda
NEW YORK — Manufacturers are in a wrestling match with prices.
The battle to hold the line on wholesale prices and expenses has intensified for small-to-medium-sized ready-to-wear firms that do not benefit from the economies of scale like larger commodity-based companies. Nor do they generally have the capital to invest in state-of-the-art equipment.
Much of the pressure to maintain or cut prices is coming from major retailers — who have become bigger and more demanding players through consolidation — and from today’s increasingly price-conscious and value-oriented consumer.
Add to that the rising costs of operations, raw materials and labor, and makers are caught in a vise that has resulted in a variety of belt-tightening strategies.
Among the steps vendors are taking to control overhead — which many makers cite as the top issue facing the industry in 1995 — are:
* Adjusting production arrangements.
* Reevaluating fabric sourcing.
* Trimming staff through consolidations and layoffs.
*20Upgrading computer systems and overall technology for better efficiency.
Tom Puls, president of the dress house Donna Ricco, said consolidating production resources is one of the steps his firm is taking to contain costs.
“If you consolidate to fewer shops, you can get better prices, because you can guarantee the shops more work and a steady flow,” he said. “Also, it’s important to work with the best shops that give you the least number of rejects. Some people don’t realize that if you get a better price and save a quarter on a dress, but incur more damages, you’re actually losing money.”
Donna Ricco manufactures mostly in the U.S., with a small percentage in 807 Caribbean Basin or Asian facilities.
Puls said fabric costs are also a factor in rising expenses, but the true problem is maintaining quality. The company is always looking for better resources, and tries to buy more yardage from fewer mills.
Technology also plays a role in keeping costs down.
Puls said several major accounts already place orders through electronic data interchange, and now Donna Ricco is in discussions to invoice through EDI. The company electronically transfers invoices with its banks and factors via computer disc, so the information is entered only once, saving time, reducing paper usage and gaining efficiencies.
On the downside, Puls said there is a certain cost to implement and staff this equipment, and that’s the same for a $1 million company or a $40 million company.
“But we’ve embraced the technology because we think it sets us apart from our competitors, helps us to be more efficient and ultimately will help us to grow,” he said.
Gaining operating efficiencies is the key for many makers.
Richard Sims, president of Scarlett Juniors, said that even though his company has been faced with fabric increases of 4 to 8 percent and labor hikes of 5 to 6 percent, it has been able to lower wholesale prices by 3 to 5 percent this year through streamlining operations, maintaining its fixed costs and working on tighter margins.
Sims noted that as department stores consolidate, their buying leverage becomes greater, putting more pressure on manufacturers. Using better operating systems has helped alleviate some of that pressure.
“Automation has helped us in analyzing our business, improving communication with our accounts and being more efficient in general,” said Sims, whose company is linked up with retailers such as J.C. Penney for order replenishment and tracking systems.
While technology plays a key role in reducing expenses, manufacturers must be careful about what they are upgrading.
For example, Bud Konheim, president of Nicole Miller Ltd., had purchased a high tech marking and grading machine for his dress firm, but found it was creating a bottleneck in production, since it was the only machine the company had, and everyone was waiting to use it.
Now, Nicole Miller farms out such functions to services that have many machines and can turn orders quickly and more efficiently.
Konheim said as prices of labor and raw materials rise, the only options a manufacturer has are lowering overhead and markup.
“Price is part of the style today,” he said. “In the Eighties, the style carried the price. But now, even if the style is terrific, but the value isn’t there, the customer will wait until you figure out a way to make it cheaper.”
He said one result of the pressure on prices and value is selling more units at lower prices and fewer at the higher prices.
Glenn Schlossberg, president of Jump Apparel, said technology is helping to lower costs, and his firm is striving to automate as much as possible.
After the initial investment, he said, the computer “is basically a free employee — it can work around the clock and gets no sick days or benefits.”
His dress company is linked to major accounts via computer, and does its invoicing, ordering and transmission of shipping instructions through EDI.
Like Konheim, he subcontracts many operations, such as cutting, packing and shipping. It is more cost-effective to pay by the piece to companies that specialize in these functions than it is to have workers on his payroll, pay storage fees, and have to lay off workers during down times or scramble to find workers in busy periods, he said.
“Because they specialize in these areas, these companies are also much more efficient,” he said. “For example, a packing and shipping company makes sure an order goes out on time, and that it conforms to the specifications of the stores. They take the time to read a 50-page shipping manual from a big retailer and do everything according to the rules so I don’t get fined by the store.”
Schlossberg said he has been able to hold prices steady. The pressure to maintain prices, however, ultimately comes from the consumer.
Sally Krieger, vice president of Augustus Clothiers, said the price of raw materials, particularly wool, has been the biggest culprit in escalating costs.
“We’re working more closely with our customers,” she said, “and we’re trying to work more with American mills. We’re finding that they’re coming up with some beautiful fabrics. But they, too, are faced with increased yarn costs.”
Krieger said the department stores have not been any more demanding now than in the past, noting stores are also faced with the problems of controlling overhead costs as consumers demand sharper prices.
One manufacturing executive, speaking on condition of anonymity, said, “Department stores have always beaten up manufacturers on price. Most of the time, they don’t turn the screws on the initial price, but then they get you with chargebacks and markdown money. When something isn’t a big seller, they hit you for markdown money. But when something is hot, there’s no such thing as markup money.”
Another executive said there is no choice but to take the increases in external elements out of the wholesale margins.
“I can raise prices all I want,” the maker said, “but if the stores won’t buy, it doesn’t matter.”