Working as an Interim Manager for an European garments importer with a focus on the mass & discount market. My focus is on the purchase side of the business, while purchase prices fuel selling prices. The primary trend at importers is to source in low cost countries like India, China and Bangladesh. In these countries you look for a factory which offers the lowest price in order to meet the the customer’s price pressure. The question is; does the supplier with the lowest price also give the highest margin?
Most of the times these ‘low pricing’ factories are not well organized; the quality of staff and equipment is poor and they depend on many subcontractors. That means that the whole production process is cut into pieces and subcontracted to several suppliers. So two main risks occur immediately:
1. Quality Assurance is not centralized coordinated and interpretation of the a quality standard is different at each subcontrator.
2. Delivery Assurance is depending on the efficiency & production planning of the subcontractors and the exposure to external factors is high, while the goods are transported from subcontractor to subcontractor.
As always; for quality you pay! If you do not want your order to be exposed to these risks, you search for a factory which is vertically organized. This means that all production processes take place at one factory compound/building. To establish a vertical organized factories requires serious capital investments in machinery; construction; staff and workers. These costs will be calculated in your purchase price. In return you will get less risks. Of course you have many quality grades in vertical organized factories as well, but that is a next choose to be made. Attached movie I made in a A-grade vertical organized factory in Bangladesh.
The reality tells us that the low purchase price brings the higher risks. Unless you are a gambler, high risks asks for more attention. So either you are willing to accept quality claims or air shipment costs, or you are facilitating all involved parties in the order process in order to supply in time and in the ordered quality. Facilitating means costs for travelling, agent fees, more staff to follow-up etc.
So vertical- or non vertical organized factory. Choose your margin!