In the past year the prices of many commodities—including cotton and oil—have fallen 30 to 50 percent. That should be good news for most apparel and footwear companies, since these are key raw materials for the production of yarns and the synthetic rubbers used in footwear. Companies are asking themselves how these price falls will translate into cost reductions from their suppliers, and how fast that will happen.
The basic estimates look promising. In a typical, mid-priced knit garment, raw cotton represents around 50 to 60 percent of the total cost of cotton yarns, yarn accounts for about 60 percent of fabric, and fabric for about 50 to 60 percent of the cost of a finished garment. Therefore, given the 30 percent drop in the price of raw cotton in the past year (Exhibit), a buyer might expect a 5 to 7 percent drop in apparel cost, depending on the complexity of the garment. The picture is similar in synthetics, with the price of PET dropping around 25 percent between March 2014 and February 2015.
With plunging oil prices, the price of polyester may continue to fall.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at:
Few apparel and footwear companies have captured significant commodity-related savings from their suppliers, however. Some companies don’t have a structured process in place to ask for supplier cost reductions when commodity prices fall; others don’t know what cost reduction to ask for when they do. Of those that do ask, many receive small reductions of 1 to 2 percent from some suppliers, while others receive no savings at all.
When pressed to offer commodity-related cost reductions, suppliers may argue that the effects of raw material prices on their own costs have been smaller than estimated, have been diluted by other players in the value chain, or have yet to trickle through to them. (In practice, changes in cotton yarn prices typically lag commodity prices by one to three months.) Without a deep understanding of the whole value chain and such facts at their fingertips, companies find it very hard to counter these points.
Would you like to learn more about our
To claw back the full savings potential offered by commodity price drops, companies need to develop a detailed picture of the end-to-end value chains of their products, and of the way input cost fluctuations percolate through that chain. That is a complex business, requiring an understanding of the underlying chemistry of key raw materials, the structure of the industries that produce those materials, and the evolution of supply and demand over time. The sidebar below (“From oil to polyester”) describes some of the complexities surrounding the production of PET, one of the most important apparel inputs. A similarly complex value chain exists for many important polymers used in the footwear industry, like EVA (ethylene-vinyl acetate), PU (polyurethane) and SBR (styrene-butadiene rubber).
Companies that have taken such a fact-based and structured approach to supplier negotiations in the response to commodity price changes have been able to capture savings of 4 to 6 percent from their suppliers in a wide range of categories. One large apparel retailer did this by building a “rapid response system” based on detailed analysis of the effect of commodity price changes on the costs of different yarn and fabric types. Significant swings triggered assertive communications with its suppliers, asking for price adjustments within 30 days. The company was able to support subsequent negotiations with the data from its analyses.
The bigger picture
Beyond the specific opportunities related to a better understanding of commodity price effects, a procurement approach built on a deeper understanding of the whole value chain has the potential to offer more than just quick wins. It can also help the industry meet some of its most enduring challenges. For a decade or more, apparel companies have been fighting rising costs, driven by increasing labor, raw material and energy prices, as well as compliance costs in Asia. Their main weapon in this war against inflation has been to move production to lower cost countries and regions. But this strategy has many drawbacks: Supply chains must be reconfigured, and companies need to expend time and effort ensuring new suppliers meet the required standards of quality and environmental and social responsibility. Worse, by focusing so much on
where their products are manufactured, these companies may not be paying enough attention to how they are made—and to the opportunities to reduce costs, manage risk and improve efficiency in their existing value chains.
There is also a significant opportunity for the apparel sector to make use of procurement best practices from other sectors. For example, the automotive and electronics industries for years have used advanced sourcing approaches such as Design to Value (DTV) teardowns, cleansheet “should cost” modeling and supplier collaboration. We will show in subsequent articles how these approaches can be adapted for apparel and footwear companies, and how leading players have driven 10 to 20 percent savings through their use.