Building a Virtual Inventory Purchase Activated Manufacturing Structure. Capturing lost profits from discounted and unsold inventory.
Saturday, March 25, 2017
For many the concepts of manufacturing efficiency and mass production will be difficult to change. To understand the requirement for change we need to first understand the theoretical basis for efficiency in mass manufacturing. For Henry Ford, who is often given credit for developing the first highly efficient assembly line, the underlying motive was to capture total control. Workers banked at the Ford bank, lived in Ford housing shopped at Ford stores. Ford controlled everything, from control of the sales force to control of the suppliers to ultimately control and uniformity of the product. The final outcome of this universal control approach was a high degree of efficiency and ultimately a low-priced product.
As we all know the limitation was you could have any Model T you wanted as long as it was black. This high degree of efficiency became the model for assembly lines all over the world. These assembly lines became the embodiment of the industrial revolution they produced massive amounts of product for constantly expanding markets, and that was the key, the markets were expanding.
Now 100 years later the expanding market basis for the mass production assembly line as for the most part run its course. New expanding markets are mostly driven by new technology opportunities and the huge retail base and online marketing makes access to these technologies universally available, which shortens the period of time that they are in a phase of expansion. Once a product is finished its expansion phase it enters a share phase, a phase, which is described as a pie of a known size which is divided into pieces which constantly change in size based on the popularity of a version of the original product. Each version of the original product must demonstrate some kind of differentiation in order to capture a larger share of the pie. This need for product differentiation conflicts directly with the underlying philosophy of the traditional assembly line where efficiency was designed around the sameness of product and the controlled cost of repetitive movements in manufacturing.
The Computer is not a Copying Machine
The quest for lower labor costs and production efficiency has lead to a misguided romance with the computer and single task robotic automation and an extension of the rules of mass production. Building data driven single task robotic automation to replace humans on the assembly line is an extension of the Industrial Revolution deep into the Information Age. Vast amounts of money have been spent to harness the power of the computer to group and measure predetermined automated manufacturing actions to creating the simulated information driven manufacturing system. Although experts have coin numerous names like “Digital”, “Lean” or even variations of “Demand” the process is still tied us firmly to pre sale inventory and the accompanying risks and costs. Back in the 1960’s the first attempt at demand manufacturing was euphemistically called, ”just in time” (JIT) production. Although JIT seemed to integrate much more efficient communication systems through the supply lines, and ultimately the Internet, the goal was to reduce inventory to a few “days-of-supply” (DOS) for the final manufacturer. The basic purpose of JIT was to reduce the cost and risk of inventory on hand for large corporations. Since the smaller sub assembly and parts manufacturers were required to meet the product specifications dictated by their contract and hold the inventory until needed. There was no real reduction in either the cost or risk in sourcing or new opportunity for truly quick response. In fact, they put an undue burden on the sub-assembly and small manufacturers who now have to hold inventory in order to supply the final assembly point “just in time” components. If the specs changed the smaller players were left holding the inventory. This inherent cost of inventory losses forced these companies to become importers rather than manufacturers costing millions of manufacturing jobs and erasing a major segment of the economy.
Self Inflicted Wounds
In 1992 the DOE and Wall Street spent hundreds of millions of taxpayer and investment dollars on developing the B2B communication systems, the infrastructure and ultimately the software that spanned oceans and borders. Expenditures like the Demand Activated Manufacturing for Apparel (DAMA Project) spent $220,000,000 taxpayer dollars to create an internet driven sourcing system. The tragedy was that in the end this shortsighted 1990’s government expenditure promoted the movement of small manufacturing and sub assembly jobs including 90% of apparel manufacturing offshore. Breakthroughs in efficiency produce less cost and could produce more profits if they had been linked to full price sales, but since there was such a major fundamental disconnect between the supply side and the sales side bulk retailers and financiers use this new found importing efficiency and cost reduction to support even more promotional discounting and sameness and product.
No matter how much money was spent on developing their communications and better analytical software the inventory dinosaur was still in the room. Developing faster time-to-market software did not relieve either actual production time or the risk of inventory forecasting, in fact, it increase the pressure to create more products. The net effect of these internet and communication advances was even more aggressive pursuit of cost reduction and a whole new requirement for dumping excess product. Since almost all of these projects dealt with cost and risk there was little incentive for the industry to make the massive change from supply to demand-based manufacturing. What was needed was a new initiative that was based on product value profit not discount sale margin.
Efficiency = Agility
True efficiency and manufacturing can be defined in two words, “no minimum”. The capability to build individual product or multiple products without slowing down the assembly line is true efficiency and that efficiency comes from the agility of the technology you employ. The ability to substantially change the product on-the-fly is the key ingredient to linking the agility of the virtual world with the reality of the physical world. Any technology, which promotes this link, is an important piece of creating the ultimate efficiency of agility. Unfortunately most of these technologies were created independent from each other and often unknown to each other. Finding a way to link these silos of opportunity is the key to creating an integrated PAM.
The word integration in this case does not just refer to the assembly line but to the development of the software that links the customer’s virtual inventory choices produced through modern DTG, CAD and 3-D technology with the physical inventory produced for sale from the PAM site. That key software bridge can allow a direct link to consumers or to buyers which because of the agility of the manufacturing system can provide exact replenishment or individual product that provides ultimate value in the form of profit to the buyer and perfect fit, color, print and shape for the consumer. Since the manufacturing plant is capable of producing one or hundreds the assembly line can be tied directly to purchases at both retail and the individual level.
Sell-Through is True Efficiency
Efficiency can always be measured in time and motion but the true measurement requires that the total production is measured against the source of income and how much it satisfies that source. Satisfying that source of income, the consumer, is an individual task requiring levels of production agility that are generally available only through online services. One exception is the aforementioned paint counter at your local hardware/home center. The development of the digital inventory of millions of colors and the ability to access and produce that inventory through low-cost spectrophotometry has changed the paint and industry from a high inventory risk to the efficient profit engine it is today. Everyday consumers buy paint to match their personal taste instead of settling for premixed colors dictated by cost and trend analysis at the brand or manufacture. This consumer demand final assembly creates profit and consumer value for the retailer and the supplier’s brand and saves the manufacturer millions in regulatory, environmental and production costs. This strategy capitalizes on establishing a key building block of demand manufacturing close to the consumer as thereby allowing consumer participation to increase intrinsic product value.
The Key is the POA
This building block called the “point of agility” or POA is the critical determinant of the efficiency of marketing and manufacturing integration. Without a clear and disciplined POA there is loss of production focus and the merchandising chaos that follows causes almost certain failure of purchase integration and collapse of the virtual inventory. The book definition of the product POA is that it is the last point in the production process where a generic raw product can be customized to fit the demand of an individual consumer. In accounting terms this is the point when low risk multi-use inventory becomes a high risk SKU awaiting sale. In the textile and apparel supply chain it is when white fabric is colored or printed. It is important to remember that the POA can only be defined by the intersection of generic mass produced product and integrated “change-on-the-fly” technology linked to virtual inventory, purchase activated by a B2B customer or retail consumer. Understanding the POA is easiest by examining three different current business examples each of these examples as a unique demand integration point between marketing and manufacturing.
Onsite Consumer PAM
|At the paint counter the consumer creates the SKU awaiting sale.|
First, is the example of the previously cited consumer driven paint counter. Matching colors with the personal choice of a consumer can be a tricky proposition. Oddly enough this capability is the perfect integration of two widely diverse silos of technology. The story behind this development integrates low-cost spectrophotometers originally designed to detect counterfeit currency and the highly accurate pumps used in lifesaving surgical procedures. Integrating these two technologies and adding color identification software along with stored virtual inventory mixing recipes created a massive virtual inventory of colors that could be detected or requested and manufactured at the consumers demand.
Once the digital detect and mix on demand manufacturing counter was installed the inventory was reduced to supply of primary and secondary colors stored in the machine. The only requirement for space was the anonymous white base that provided much of the volume to the paint being sold. This anonymous white base was the last point in the manufacturing path where mass production made sense. So the process of providing just the color paint the consumer wanted on demand became a customization of the white paint base, which made it the POA of the paint manufacturing business. This establishment of the basic POA allowed the industry to focus on other features beyond just color such as durability, application ease and other features we see today in the indoor and outdoor paint market. In addition the merchandising side of the paint industry was now free to license any color or any emotional hook from Disney to Martha Stewart and have the capability without inventory risk to provide a unique and differentiated product to the market. This unleashing of the constraints on product design and merchandising themes without the risk of guessing wrong is one of the most important side benefits of creating retail, supplier (brand) and manufacturing demand integration.
|Virtual inventory frees designers
and marketers to create product
difference without inventory risk.
Often the selection is emotional and complicated and depends on a previous color or previous attitude about color. The ability for the paint counter mixing station to match the exact demand of the consumer depended on the ability to either detect or mix (from an obscure description) the exact color that satisfied the consumer and possibly other parties involved in the decision. Before the digital detection and mixing station was invented, hardware stores had to stock pre mixed white base and primary colors as well as many seasonal and trend colors. This process of stocking the shelves was often the product of trend analysis, sales history, and simply guessing what hot color should be produced in this round of production. The stocking level and the shelf life of the paint inventory created a huge loss of selling space and ultimately a loss in unsold inventory. Stores that sold paint and agreed to mix custom colors were often defined by the expertise and the personal selling relationship of the person who mixed the paint. This skill set and the dependent relationship with the huge dedicated inventory space made the paint section of any hardware store a required but high-risk department.
Third Party Post Sale POA
Second, is the example of the smart phone with its unique POA that integrates customization with third party vendors. The smart phone represented a huge risk in inventory because it depends on expensive high technology to produce a consumer interface, which could easily become the key competitive feature as the market became one of shared expansion. This ability to control the key variables that would determine long-term survivability in a viciously competitive share-market required innovative integration design between manufacturer’s base unit and the applications that would drive consumers to purchase the product. So in the smartphone market the POA is the basic phone and the custom element that drive sales is often the applications that third parties have provided to be used on the phone. Building these applications into the basic phone or POA can be a risky business but using third parties to test the viability of a feature reduces that risk. A perfect example of this is the map feature that is built into almost every phone. Specialized third-party GPS application producers developed the intrinsic capabilities of the map application. Attempts by the base producers of the phones to capture and update their own version of these map applications before the application was clearly defined by consumer use often required huge R&D outlays and produced a number of embarrassing errors exploited by competitors.
These integration hiccups with huge amounts of capital on the line where the result of a dangerous agile-manufacturing pitfall. This is the case of “ we’re going to make it because we can!” this loss of discipline can destroy the integration between manufacture, supplier and seller. One company (Apple) that survived these growing pains built a structure of integration because they were the manufacture, the supplier and the seller. Ultimately, even Apple suffered from over production as competitors divided the market into shares. Other companies which were unable to control their application customization have suffered a number of both financially and reputation embarrassing failures. One example is the recent attempt to add more features to the POA (base phone) instead of tightly controlled vendor supplied applications. Many believe this overloads the basic phone structure and in at least one product recall case caused dangerous and explosive life-threatening repercussions. Keeping a tight rein on changes in the POA protects the efficiency of the manufacturing process and reduces risk from a fundamental failure that can affect a multitude of products which are produced as a customization of the POA. The unique case of the smartphone and its ability to produce a cornucopia of features at the user’s demand is a perfect example of moving the POA as close to the consumer as possible. The distance between the POA and the final consumer product has a direct relationship to risk and ultimately loss of profit, the closer, the safer and the higher the consumer value and profit.
Customer Design Activated POA
The third example of manufacturing agility occurs in one of the most immobile and complex industries to adapt. The apparel industry is characterized by massive inventories driven by the variables of color, pattern design, prints, fabric selection, sizes and fashion trends. The traditional mass manufacturing solution to creating a profit while dealing with these complex variables is to try to predict trends and colors then present them to potential consumers as “the look” through the vehicles of fashion shows, lifestyle magazines, and more recently online fashion blogs. By creating this demand in the market merchandisers hope to protect the inventories they had to buy to cover minimums or get the lowest possible cost per unit. As the industry has moved to more casual apparel and away from off-the-shelf fashion the opportunity to apply purchase activated manufacturing has intersected with new technologies in manufacturing and new opportunities to reach the consumer in online merchandising.
Retailers in specialty apparel shops, are closing all over the country, over 1400 are listed in a Forbes, March 22, article. Many of these stores are dying from inventory “constipation” because they can’t turn the volume of inventory are forced to by months in advance to hit cost targets. In short the have nothing new to offer because the can’t create value other than price reduction and subsequent profit loss.
“The answer lies in one critical point, which is that consumers are looking for personal style,” says Richard Passikoff, founder of marketing research firm Brand Keys.
|On site garment printing can eliminate the
risk of size, color and print inventory mistakes
while providing instant consumer gratification.
|With a simple display and touchscreen retailer could
offer unlimited choice with instant on site product from
Retailers have dictated the market through trend merchandising for years while the requirement for personalization slowly erodes their base. Now consumers can buy direct using their own choices, causes and style from “Direct To Garment” (DTG) and other digital demand printers of apparel. The shame is that any one of these collapsing retail icons could have dedicated a space the size of the paint counter at a local home canter and produced purchase activated product from a huge virtual inventory while the customer is shopping. DTG printers and sublimation stations can produce fully printed apparel in minutes with just the decoration the customer has selected on a touch screen on a purchase the consumer can take home immediately. Retail stores can offer instant gratification a selling feature that online sellers cannot match but retailers remain mired in the “supply, discount and dump economic model.
Building a PAM Supply Chain
Making apparel is a complex process often involving many different manufacturers in many different locales. A recent NPR feature tracking the production of a white T-shirt move through five continents from cotton fields to the retail sale. Making this chain of events into agile integrated manufacturing is a huge undertaking that requires more than a linear time-to-market solution. The current approach is to focus on the design prototype, sample, production and market time segment. This focus has produced some progress but is still similar to the JIT strategy of other large brands and retail solutions in that it punishes the supplier by increasing risk without sharing benefits. This solution does not address transportation cost, labor conditions or environmental impact, which are all contributors to the fundamental risk of overproduction and profit loss through clearance and dumping.
The apparel industry is like many other manufacturing segments is incredulously resistant to fundamental change. Part of this resistance is based on the inability to link the manufacturing stations on the track from raw production to the sale of the finished goods. Some companies have worked diligently to coordinate a vertical production/retail path only to meet regulatory and tariff barriers that block the process with impossible standards or unreasonable costs. One example is the Clean Water Act of 1972 and the evolving standards, which it make it very difficult to traditionally color or print fabric in the US, the EU and other countries concerned about pollution and water use. This reasonable concern is based on the excessive use of water and the resulting toxic waste created by conventional textile dye and printing processes.
Another barrier to change is the huge amount of sunk capital and process protocols dedicated to reducing cost through aggressive sourcing and reducing risk through trend and market forecasting. These jobs represent the human cost of the fundamental system change to true demand manufacturing. The reality facing the defenders of these barriers is that, change is happening piece-by-piece all around them every day and will eventually erode the current unsustainable structure at every level, not just the retail failures occurring today.
The apparel industry like many others is in the eye of the perfect storm. The combination of instant information, new manufacturing technologies and multi-platform selling strategies has eroded the dominance of retail control. Retailers no longer own the only place where the consumer meets the product, brands are selling through factory outlet stores and manufacturers are beginning to realize that they can reach the consumer directly online. This new multi-platform and multi-source selling environment demands an overall change in the relationship between sellers, suppliers and manufacturers. Strategically the players need to recognize the change in leverage that is a result of consumer access at all three levels of the production/sales path.
In this chapter the focus is on the manufacturer and the changes and opportunities of adopting agile Purchase Activated Manufacturing (PAM). The first step is to review all the materials and functions of the manufacturing path especially the timelines and actual costs of outside services that add time and transportation to the product production. The purpose of this review is to establish what materials can continue to be produced in mass and which materials and production steps will contribute the most to reducing inventory and promoting consumer value. This process is extremely complex and may require outside help to avoid the entry of company politics and change friction that can influence the information required to implement change. Identifying the production path will require detailed knowledge of sourcing, transportation, manufacturing technology, distribution, outside contractors and consumer or customer fulfillment. Mapping this path and the associated actions with an accurate and detailed status of the product at each location will provide a diagram all the actions required to produce your finished product.
The Complete Production Path
Most of the key management personnel in the apparel trades have very little idea what it takes to make a garment. Even sourcing managers often have little knowledge about the processes outside of their direct purview. This lack of detailed knowledge makes it difficult to compare new technology without intimate knowledge of the current methods. An important example is the printing of fabric. Printers or converters as they are often called in the industry operate with special charges for minimum runs and/or surcharges to color fabric. Coloring and specifically printing fabric requires a number of time consuming and costly prepress tasks before the first meter of fabric can be printed.
|Each color requires a separate printing station. Separation of colors
from the original composite design is a major cost in prepress.
Proofing the initial test print also can involve all the prepress tasks of color separation, cylinder exposing or engraving, fabric prep, image registration, drying and post treatment.
|Individual color cylinders must be made,
installed and registered for each print job.
Remember if your print multiple colors each one must be separated, imaged on a cylinder, placed
in the printer and registered with all the other colors before you can see the first test print. Once the printer is loaded and registered it can take hours to setup the next print job. All these time and materials cost contribute to the calculation of minimums and surcharges. Since there is one setup that can be amortized over thousands of meters of printed fabric, cost is calculated on the basis of volume. The more you print the lower the cost per meter. If however these thousands of meters of fabric don’t sell the total cost of all that printing can be a huge loss. This relation to volume/cost/income is the risk equation of mass manufacturing. If you win the production bet you can be rich if you forecast wrong your gone.
The comparison is digital printing with very little prepress cost, no separation, no color cylinders, one setup to start the day and no stoppage between printing jobs.
|Digital textile and apparel printers come in
all sizes and technologies. Choosing the correct
equipment is the last step in planning a
Cost is based on area of print and there are no minimums. Capital expense is much less but volume is set to match direct purchases or distribution system days of supply or orders in hand. The important detail is that digital printing is completely different than conventional volume printing, the main difference is the color in the printer never changes, but the color you see on the fabric is unlimited. Digital printing gets its change-on-the-fly capability from using a technique called process color just like the printer on your desktop never changes ink color but the output can be any color. The logical question is why don’t we use digital printing now? The two main reasons other that resistance to change are: first, our current supply and demand structure rewards volume as a measure of productivity and digital printing is designed to support a demand and supply structure based on high sales volume not just production volume cost savings. The second disconnect, is sunk capital in current equipment and experience supporting mass production at every level from retail to supplier to manufacturer.
|Consistent color reproduction in digital
printing requires understanding and
control of all of the variable that produce
the final color.
Digital printing is not difficult but is does require training and discipline, when a device can make any color it takes knowledge to make the color you want consistently. It sometime difficult for experience in one technology to transfer to a new approach, but moving from spot color to process color shares many common steps as illustrated in this Color Cone training representation of the steps needed to reproduce the desired process color consistently.
Knowing this path in detail is critical to establishing the POA at a point in the path that will allow the most efficient application of technology and marketing skills to reduce the inventory to zero or at least the minimum that can be delivered in a timely manner. After you have identified and plotted product path it is possible to then apply both cost and marketing information to identify the most strategic point to locate the POA on the product map. There are many points along the path that can be used as a POA, remember the afore mentioned examples of the paint counter, the smart phone and apparel. The paint counter was closest to the consumer and therefore reduced requirement for variety in the inventory and left the final decision and therefore value in the hands of the consumer. The smart phone however did not reduce the manufacturing technology required however it did simplify the inventory and therefore lower risk because even though the manufacturing cost was still significant the final value of the product was added by the consumer through the form of apps which they chose that were not required to be inventoried but still provided some income. The comparison between these two, the paint counter with its low-cost and simple production of white base and tints added on demand versus the high cost smart phone which still may only have one base version with multiple memory chips seems to create very different POA’s. The advantage of both of these examples is however fulfillment and delivery time both create almost instant value and gratification through the participation of the consumer. The apparel example is much more complicated because it occurs farther away from the consumer and requires much more activity to create a product differentiation and therefore the personal value to the consumer. Remember, value to the consumer the ultimate source of all funds is a key ingredient to producing the demand to sustain an inventory free consumer demand PAM production strategy. By establishing POA as close to the consumer as possible you can be assured of the most agile manufacturing and the most flexible value-producing product.
Establishing a product POA is only part of creating maximum manufacturing agility. Finding and integrating agile manufacturing equipment is also a key to the agility required for consumer demand manufacturing. Reducing preparation time by finding equipment that requires only digital information to perform a task is a key ingredient to creating the virtual inventory required to feed agile manufacturing. This can take the form of digital optical cutting which does not require detailed patternmaking or peace placement or it could be digitally driven assembly robots which can create custom finished products by selecting different parts and assembling individual products. One of the most common agile tools is digital printing used every day in home and office environments. This tool is taken for granted today but not so long ago typing and typesetting as well as page makeup, stencil making and volume pagination were all prepress steps required to produce a printed page in volume. As digital printing, evolved to new substrates beyond paper it became a critical piece of point-of-purchase advertising, book printing, labeling and now textiles and apparel. The latest breakthrough is the development of 3-D printing. Although it is now in its earliest stages of development 3-D printing offers huge opportunities to expand the reach of virtual inventories through both finished product and key assembly pieces. From car parts the buttons to finish shoes 3-D printing can provide a critical link in expanding the reach of consumer driven manufacturing.
Finding the POA is the responsibility of a cross functional team made up of sourcing, production/manufacturing, marketing, merchandising, accounting and sales. With the team as diverse as this group reaching a decision would require setting a priority to the key elements of the POA. The first task is to find the point where the greatest number of individual products can be created from a dependable technology modifying a common source. Once you’ve determined the point of greatest variety the second element is to look at that point from the point of view of the consumer and the value of their participation in making the product unique for themselves. Once those two points have been determined the next step is to determine the technological feasibility. The mistake many companies make is to focus on technology instead of value. Technology especially in the digital age is a constantly moving target, finding the technology that can be adapted to create the most valuable for products from your POA is often a product of research of the marketplace and adaption and integration of current tools that may be used to create other products. In summary, first look for choice, second look for consumer participation value, then, look for the technology to produce the product.
Manufacturing agility allows companies to focus on product differentiation without the risk of meeting mass production minimums and the resulting risk of losses from dumping an unsuccessful product variation. Adopting agile manufacturing machinery and technology also allows a company to test product for success and scale production and investment to meet product success. It is important to remember however, that successful agile production must be driven by demand from the ultimate source of funds, the consumer. One of the dangerous aspects of agile manufacturing is that it is easy to loose focus and loose the production/profit emphasis and chase product because you can make it not because it’s what the system was designed to make. Agility can become production chaos if the demand based system becomes pure product testing. Agility produces significantly higher profits if production and quality discipline is built into the design and integration of the demand process.
Lessons Learned about “Efficiency through Manufacturing Agility”
Four basic structures must be built into the agile manufacturing design:
Step One: Using a cross functional team establish the critical Point of Agility “POA” for the product.
Step Two: Integrate purchase and production information with virtual inventory product selection.
Step Three: Select manufacturing equipment that is Mass-parallel scale-able.
Scale-able workforce: Build a production path that requires minimum high tech training and facilitates flexible employee movement between production stations.
U.S. Customs and Border Protection recently provided to the American Apparel and Footwear Association the following information on the results of CBP textile production verification team visits conducted in fiscal year 2016 (Oct. 1, 2015, through Sept. 30, 2016). TPVTs visit textile and apparel exporting countries to review company records and operations to determine if illegal transshipment or improper shipping under trade preference programs or free trade agreements is occurring.
According to the AAFA, the FY 2016 figures show that about twice as many targeted factories reported some sort of illegal transshipment-related problem as in FY 2015. In addition, the FY 2016 figures for trade preference violations were the highest since FY 2007.
CBP states that shipments from closed or high-risk factories (those unable to provide production records to satisfy CBP of the origin of the goods) will be scrutinized and validated by CBP.
Illegal Transshipment Verifications
|Factories Visited||Closed||Evidence of Transshipment||High Risk||Refused Admission/Docs|
|Nicaragua – 05/16||17||0||0||0||0|
|Peru – 05/16||21||3||0||7||0|
|Ghana – 05/16||6||1||0||0||0|
|Kenya – 07/16||19||2||0||2||0|
|Dominican Rep. – 07/16||22||3||0||2||0|
|El Salvador – 08/16||22||0||0||1||0|
|Guatemala – 08/16||20||0||0||0||0|
|Lesotho – 09/16||8||0||0||0||0|
|Morocco – 09/16||14||6||0||1||0|
Verifications under FTAs or Preference Programs
|Factories Visited||Violating Preference Programs||Insufficient Docs to Support Program Claims||
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Friday, March 10, 2017
Building Domestic Apparel Manufacturing
By Bill Grier
There are hundreds of excuses for why the U.S. has fallen so far behind in the manufacturing of apparel. Regulations like the ‘Clean Air and Clean Water Acts” in the 1970’S and the Demand Manufacturing Apparel Architecture project of the 1990’s that spent over $220 million taxpayer dollars to enhance production control which ultimately facilitated the movement of over 90% of apparel production off shore.
|Unsold mass production is killing industry profits
at every level of the supply chain.
Make no mistake, whatever the theory or well-meaning government program we have fallen behind and are not catching up. Excuses range from conspiracy theories about international corporations, money in politics, media bias, international trade agreements and many more. Most manufacturers, brands and retailers site labor costs as the primary cause of the loss of manufacturing. No matter what theory is the current viral thinking, we need to step back and look at the forest instead of our favorite tree. In this case the industries favorite “tree” is cost of goods (COG) while the “forest” is loss of potential profits from discounted and unsold goods.
Fundamentally, we are all dealing with the transition from the mechanical systems of the industrial revolution to an information based digital age. Sometimes these historical macro-evolutions are obscured by scale or the camouflaging details of daily business. One of the most stubborn and widely damaging effects of this evolution is the continued dedication of major world economies to the out dated dependence on mass production. Big finance and big companies, whose very life depends on maintaining the structure of mass production, have dominated this transition with its many ups and downs. They have invested tremendous amounts of capital, personnel, and international agreements into the perpetuation of this outdated manufacturing system. This protection of the status quo has caused increasing failures at the brand and manufacturers level and now increased more public failures at retail where profit losses and additional costs can no longer be covered buy creating volume through discounts and clearance.
The Fatal Flaw in Cost-Based Manufacturing
The basic premise of this system is that if you manufacture a lot of something efficiently, the cost savings from economy of scale will insure you make a profit. This concept was valid when markets were all in an expansion mode during the industrial revolution and later after the world wars, because no matter how much product you made you could always find a customer looking for it. Mass distribution and the increased reach of international marketing, have made it difficult to find large enough new markets to justify the scale of mass production required to support the level of efficiency required to insure a profit. In fact the argument that new technology produces new expansion markets has lost its credibility because of the ability to reach markets with competitive product at velocities never before possible. In fact every new product introduction becomes a share market almost immediately. The inability to dominate the market with the new products that are produced with the flawed mass manufacturing concepts that, scale produces cost efficiency, which produces profit, has created a glut of inventory in most product categories and destroyed the concept of supply and demand in its traditional form. The current economic Maxim is no longer “supply and demand”, it’s “supply and discount”. Product differentiation is too slow under this mass paradigm to keep up with the information age. The risk of mass production inventory has not been mitigated at all by new “time-to-market” digital technology, in fact is has exacerbated the losses by encouraging more pre-production costs and inventory sku’s. We’ve now have replaced the uniqueness of the product with simply the price of the product. This change in marketing and merchandising is designed to capitalize on the only remaining positive this manufacturing strategy offers. Large brands can flood the market with a volume of product, using discount structures to drown their competition. The scale of mass manufacturing and its requirement to drive profit through cost makes this product difference (price) really only available to mass retailers and marketers who merchandise on the basis of product movement not on the basis of product difference. This large-scale approach creates huge amounts of inventory which in turn equal huge amounts of risk. Risk that can only be minimized by volume merchandising, high-level financing, bulk shipping and international trade agreements which capitalize on low labor costs in developing countries. Collateral costs like environmental protection, worker safety, health insurance and other benefits can destroy the profits in a cost-based system. All the flag-waving, job building and “Buy American” speeches, promotions and promises cannot change this basic strategy of profit based on cost structure. Since these large companies and their financial partners depend on mass manufacturing and self-perpetuating theories of profit-based primarily on driving costs down we cannot expect a change. In fact, we can expect massive failures of iconic brands and retailers as the cost/risk dynamics collapse the current sourcing structure for many players and eventually all but a few high volume discount “box” stores and omnibus online marketers. Attacking cost with mass production has four logical outcomes: first, massive inventories without guaranteed sales that must be discounted. Second, securing the lowest labor cost, which usually means bad working conditions. Third, lowest cost manufacturing technology, which means highest water use and toxic pollution and collateral permanent environment damage and finally, fourth, eventual degradation of quality.
All of these negative outcomes are the impact of one feature of the current sourcing strategy the pseudo belief that large inventories cost less and are the foundation of profits and sustainability. Often, the object or goal of the previous structure turns out to be at the center of the actions required to affect the change. Since the ultimate goal of mass manufacturing is to create an environment with the lowest possible costs of production. Therefore, reducing the unit cost of the available inventory that is offered for sale. The byproduct of this drive for efficiency and lower costs is an increase in the size of the inventory related to cost not sales. This disconnect between the payout of funds for production and incoming funds resulting from sales creates the risk that is unsustainable.
The simplest solutions to this conundrum are either, make less and charge more or make more and sell more for less. In fact this decision about whether to position the selling proposition based on quality or quantity is at the center of the basic inventory decisions, which, drive the manufacturing scheme. The way in which a company handles inventory risk is the driving decision-maker in every choice from their accounting system to their personnel structure. Inventory drives required capital for start up; inventory drives financing and the level of risk; inventory drives product selection and inventory on hand drives advertising and marketing. When a company decides between holding a limited exclusive inventory at high price or a massive fast moving discounted inventory they place themselves at either end of a decision-making spectrum. Once that decision about inventory management size has been made the rest of the decisions about organization and marketing traditionally have been cast in stone.
Purchase Activated Manufacturing (PAM)
No Physical Inventory= No Risk
Companies have had success at either end of this simple linear solution, there is however, a third nonlinear answer, which can provide increased profit and jobs and relief from the risk of both of these positions. That solution is simply not to make it until after it has sold! This manufacturing concept is called Purchase Activated Manufacturing (PAM) and it is characterized by a structure in which, the product is purchased before it is manufactured. This solution attacks discount and overproduction dumping losses while limiting cost to product sold.
The industry should continue to look for efficiency in manufacturing, but until we attack the loss side of the equation we will not enjoy sustainable domestic manufacturing. The pursuit of demand then supply has been a goal of the forward thinkers in the business for years, but the business climate and the technology have not been in place to accomplish that goal. Both are in place now, sales, merchandising, coloring, cutting, production and fulfillment technology has been tested and integrated making wholesale demand and even consumer purchase activated inventory goals a reality. Smaller and larger retailers, brands and manufactures who are willing test and embrace this strategy, will be the survivors as market shifts from the industrial age to the information age of integrated business models and efficiency through agility.
Comparison of PAM and Standard Inventory Bulk Purchase
Data Entries: Number of units: 10,000 XS – XXL Markup from LDP cost: 1.5x Retail Price $25.00 Standard purchase unit cost (Landed, Duty Paid) LDP: $10.00 PAM FOB cost $13.00
|Unit Sell Through %||20%||30%||40%||50%||60%||70%||80%||90%|
|COGS Standard LDP||$100,000||$100,000||$100,000||$100,000||$100,000||$100,000||$100,000||$100,000|
|Actual GP Standard||($50,000)||($25,000)||$0||$25,000||$50,000||$75,000||$100,000||$125,000|
|Actual GP PAM||$24,000||$36,000||$48,000||$60,000||$72,000||$84,000||$96,000||$108,000|
The key features are:
- Cost of goods is a product of actual purchases not inventory stocking.
- Virtual inventory limits or eliminates prefinancing or factoring of manufacturing
- All sizes sell out no odd sizes or orphans
- Never out of stock and never over stock
- YOU ALWAYS MAKE A PROFIT
|A working PAM factory capacity up to 1500 individually sized, colored or printed and finished units per day,|
Over the last twenty years our team has succeeded, failed, invented and learned most of the elements required to implement this evolution to purchase based manufacturing based on integration, information and virtual unlimited inventory. Although the final structure of the process needs to be tuned for each company’s specific needs there are ten principles that serve as a road map for the decisions along the way. These principles can be interpreted in different ways but they all must be included in some form to ensure success. Over the next ten weeks they will be covered in detail, but here is a look ahead to the subjects that will be included.
- Follow the Money… All funds ultimately originate from the consumer making consumer demand the fundamental element of success and the first element of building an integrated system. Tracking these funds on the path to your bank account determines the real losses available to recover from inventory bloat at every level.
- Efficiency = Manufacturing Agility… Manufacturing agility must match variable demand in speed and scale. Creating a demand Days-of-Supply (DOS) baseline to maintain predictable scheduling while insuring demand response times.
- All Marketing Starts with the Individual… Micro Merchandising integrates production throughput with consumer value. Integrating information, merchandising and manufacturing technology to produce consumer value that matches or exceeds full retail price.
- Inventory = Turns not Volume… Since the inventory is virtual stocking decisions are based on velocity not space, storage cost or salvage value.
- Consumer/Buyer Participation Determines Product Value… Direct integration with the consumer/buyer sales offer creates value through participation in product selection and individualization. Consumers have individualized product and buyers can create/test exclusive apparel without inventory risk.
- Manufacturing Capacity is Set by Distribution Path… Manufacturing scale and path is a function of distribution lead time and customer type (wholesale, retail or direct consumer) can determine through-put and line structure.
- Income is Based on Cost per Unit Sold NOT Cost per Unit… Percentage of sell-through to the consumer is the key determinant of success at every level. Never over stock, Never out of stock is the rule at every level.
- “Unit Manufacturing” requires seller and supplier integration… Real time vertical integration of retail sales, manufacturing and fulfillment is critical.
- Test Markets are Multi-Platform… Test markets must include platform choices and product variations. Testmarket results can be based on actual purchases and collect kenetic, demographic and decision data.
- Total Quality Manufacturing Depends on Team Building… Production errors must be reduced to near zero through integrated data paths, team design and total quality management. Team design and language independent quality control is critical.
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