Value Is Everything

Value- It is a word we have used hundreds of times. The definition of value (there are several) as it relates to economics:  “a measure of the benefit that may be gained from goods or service” or for marketing: “the difference between a customer’s evaluation of benefits and costs.”

It is significant that both definitions imply some finite mathematical calculation- “difference.” Or “measure.” In some cases this may be immediately quantifiable, in other cases true value can only be known after benefits are given or revealed.

Neither of these finite measurable is the case in the apparel world. Other than the difference of the same item from one store to the next (or one web site to the next), most of value perception in apparel purchase decisions is subjective.  There are a lot of abstract comparisons to be made:

1.     Price of not same but similar item in same shop- 2 pair of jeans, for example. Same content, different price. Based on what do you make purchase decision?

a.     Brand perception

b.     Price

c.      Aesthetics- hand feel, colour, FIT.

d.     Whether this is a need purchase or impulse. If value comparison not clear in your mind, you can choose to do nothing.

2.     Price of similar items in different shops-All of the above, plus the “believability” factor- Do you believe the sale is real, and will the price be reduced 5 minutes after you walk out the door?

3.     Magnitude of discount or comparative price value- IF you felt the original price was a good value, a smaller discount will get your attention. IF you felt the original discount was too high or just a template for further discounts, you will need a higher discount to overcome your price objection.

4.     Function/urgency for the purchase- Interview suit vs. sweatpants. Again, price will be a consideration, but there is much, much more in the decision based solely on PERCEPTION- of the brand, the item itself and how you perceive it makes you look, etc.

So yes, you can calculate the price difference in price between item a and b that you are considering to purchase, but is that the major factor in purchase decisions? It is not. I believe;

1.     The final decision is based on VALUE, not PRICE. Price may figure in the decision, but in almost every case it is not the deal maker or breaker.

2.     There is a complex set of PERCEPTIONS combined with calculations which tips the scale toward purchase. Most especially this is the case because pure mathematics cannot provide the answer. These perceptions are as strongly related to the seller as they are to the item itself.

Value is critical in another area: human resources. If you pay $100,000 per year to an individual that can run an entire business for you (virtually mistake-free), versus paying $50,000 to 3 individuals who do the same job (at that level, expect mistakes and omissions), you are not paying too much- you are creating VALUE.  Now let’s say you populated an entire office with this type of individual, you have the perfect scenario: a. your business is run smoothly and efficiently b. your expense is minimized and c. your fixed cost is insulated for business downturns OR may not need to be increased when business grows.

Not everything takes a village, and, if you operate under the principle of Think Big but Be Small, you have every chance to have a low-cost, sustainable business and a damn good staff (whom, if you keep paying well and empowering to operate as they are capable of, will probably stick around)

All over the world today, companies are guilty of hiring lower-paid staff (maybe due to inexperience rather than incompetence) rather than spend more on someone who can do the job with maturity as well as anticipate or handle problems, thus reducing cost and risk. The consequences are far-reaching, and we see companies get into trouble and even disappear, but nobody changes the way things are done. Why?

The fish stinks from the head. Management is responsible and guilty. What is the main reason for this? As always, fear. Fear of change, fear of risk, fear of changing the way things have been done since forever. Clearly, this fear is brought on by the prospect of holding the bag if change doesn’t work. But, with all due respect, that makes no sense. Why? Because if you do nothing, you are holding a worse-smelling bag than if you tried and it didn’t work out as planned. That being said, if you think it through and hire the right people, simplify and streamline your procedures, there is no reason it shouldn’t work. I have done it repeatedly and it has never failed.

I always love the idea of Creative Destruction, which finds its roots in the Hindu Trinity: For something to be born, something must die (Hindu: typically Brahma the creator, Vishnu the preserver, and Shiva the destroyer/regenerator- see https://en.wikipedia.org/wiki/Trimurti ) What that means for us, for it is eternally true and we see it in our world and markets in vivid color, anybody or any business that fails to change with the markets or the world cannot be regenerated, thus dies (see: Sears). So the choice is simple: change or die. That is a no brainer for me-you?

Another relevant cliché: lead, follow, or get out of the way.

Is Your Sourcing Working For You or Against You? Sourcing Strategy Optimization

To some, sourcing seems so simple. Just choose a factory that makes your product and meets your price. It seems simple to such a degree that many companies choose and even give money to factories without proper due diligence or thinking the process through. Why? In many cases, companies have no real understanding of sourcing strategy or one that is wrongfooted.

What I have learned and put into practice is that, to be successful, it is necessary to not only have a strategy, but an optimized strategy for your particular product and requirements for you and your customers. While each situation is different, there are some general principles to follow that will lead to successful development and execution of your product.

Here are a few key principles:

1.     Choose the right partner for you. In China or any overseas country, there are many levels of factories, each built to serve a different type of customer. If your business is mid-level and you choose a low-level factory because they can meet your target price from the getgo, you will probably regret that decision in terms of quality, delivery, communication, etc.

2.     Product first, price second. A bit of a restatement, but many people cannot avoid being seduced. Every factory that wants an order will promise they can do your work perfectly. But you need to see more for yourself. With what product and for which customers have they been successful? Walking through the production line is not always the most effective, because factories make most products to their customers’ requirements. So see some finished, packaged product samples.

3.     The first price you pay to a factory should be the highest you ever pay. When you are a new customer or placing a test order, you cannot expect the factory to shave its profit to the bone-they don’t know your requirements and cannot be sure the order will go smoothly. This is not to say you should not negotiate-you should- but recognize where to set the bar for the initial order. As your volume and relationship grows, you can work with the factory and streamline cost. Over time, it will come down. In my experience, the reduction can be significant.

4.     Factory is your partner, not your servant. Without a factory that really cares about not only your business but your relationship, you cannot be successful.  There is no place for ethnocentrism in this relationship. Everyone is trying to make a buck, no matter who or where they are. Only with this genuine relationship can you develop a sustainable sourcing base.

5.     Communication and attention to detail is as important as product or price. If a factory can make a good product but they cannot communicate effectively or pay attention to details (such as developing product quickly and efficiently ordering accessories from quality suppliers in a timely manner), they are worthless to you. Your efforts and relationship will not end well. So meet and interview the person who will be in charge of your account, not just the boss.

6.     Your process must facilitate cost reduction or you should recognize that a more complex process requires more cost. If your process creates extra work or labor on the factory’s part, you cannot expect your costs to go down. Or, if your home office lack of efficiency, timely development/approval creates delays or stop/start on the factories part, you can expect not only delays but possibly quality issues or price increases.

7.     Keep it simple, do what is necessary and adds value. Forcing your factory to spend a lot of time on reports or activities that don’t add value is wasting both your home office and the factory’s time and money. My favorite example here is the PSR (Production Status Report). If you have 100 styles in the factory, do you seriously want someone to input when each style fabric is received, is cut, into sewing, etc. or do you want to know if your order will be shipped on time and what if any problems have arisen that will delay it? Micromanaging a factory will inevitably make them feel that the burden of following production has shifted to you-on the other hand, if they are fully responsible for managing these details, all problems are squarely on their shoulders.

8.     Use a calendar for a guide. This is especially relevant for product development. You cannot expect to start late and end on time.

9.     Know where the factory’s red line is-your targets should be based on the realities of your product, not magical thinking or your customer’s pressure. Sometimes a factory will accept a price lower than their minimum profit or even at a loss because they need or want an order at that time. If they do, it is not a victory for you but a smoking gun. No factory can stand to lose money, and the more they make at a loss, the more they lose (so standing on the idea that, because your order size is large, the factory has to lower its price to meet your price idea is fallacious and dangerous thinking-volume can produce cost reduction, but not always as low as what is in your mind-know the realities). If you don’t pay heed to this way of thinking and insist on and get your price below the factory’s red line, something may come out of your product.

10. If there are multiple factories, each factory should be positioned for their strengths. Even within a single product area, each factory will have strengths and weaknesses depending on their experience and supplier relationships. Your strategy should account for this and your sourcing puzzle should be a smooth fit between the pieces.

11. That being said, have a backup plan. Stuff happens. Each factory should be primary for its strongest category, and secondary for another.

12. Don’t stuff your factory too full. You don’t want to push a factory to capacity. Imagine this: You have filled the factory with your orders. One significant fabric is rejected as the mill made a mistake and will take 2-4 weeks to redo. Even if the factory agrees to pay air freight for the missing part, not only will the absence of that fabric will leave a giant hole in their production, but when the replacement fabric comes in and all lines are full, you will have to make some bad choices.

The dirty dozen pointers above are only part of the picture. Each product and product category has its own issues and needs to be looked at specifically and constantly. But if your company’s mindset, starting with top management, is committed to a responsible and diligent sourcing process, you will have a much better chance of sustainable success and many fewer headaches.

Think Big, Be Small

Think Big, Be Small

Many apparel companies, both retail and brands, are facing diving profits and rising costs. There is no doubt that the dramatically and quickly changing retail landscape is responsible for the bulk of this problem. But, given the way things are, how do you position yourself for survival and future growth (once you figure out how) if you can’t get out of your own way?

Whether your business is rising or falling, your philosophy should be “think big, be small.” But small does not mean ruthlessly dump people who have helped you succeed. It means to reorganize and refocus the way you do everything. It means to ruthlessly examine your process to discover duplication, overkill and processes that are, simply, not necessary or don’t add value.

Here’s an example so you can see what I am saying. Recently, I managed the entire overseas process from product development to shipment for a startup company that grew in exports from zero to a projected $10 million in 3 years. Here’s what is important about this: I did this with only myself and one more very, very productive person.

This is in the past tense because this company was bought over by another company (growth and ability to get orders ran away from the ability to finance those orders) who had no use for our business model. In the future, it will take many more people and thousands more emails and meetings to accomplish what we two did.

During the transition process, it became very clear to me how we managed so much with so little. Here are some key points:

1.     Most important- IF you hire people who are smart, have a great work ethic (say: do the job right, don’t finish until it’s done as opposed to get through the day) and can handle a large volume of work without mistakes, you have just added value and reduced cost- even if you have to pay more to hire and retain those staff. Companies, especially in China, can be notoriously stupid by setting the lowest possible value on compensation for a position. Well, you get what you pay for.

2.     Empower people to make decisions at the lowest possible level. IF your company is organized like Kafka’s Castle, where every decision has to run all the way up the flagpole, not only will you waste cost and time (time is money), but you will tend to hire people who are not willing or able to make decisions on their own. Even if you mistakenly hire someone capable, you will waste their talent and discourage them in such an environment-if they don’t quit. BUT, if you hire the right people, you can give them as much responsibility as it makes sense to handle.

3.     Don’t overthink the process-be realistic about what is necessary and what is not. Keep it simple. For example: many companies insist on doing inline inspection for all orders, new or repeat. Why? IF you have a good factory in the first place and you have trained them well, they will take responsibility for producing a product that meets quality expectations. And if they don’t, they will be responsible. This thought will get their attention and they will take care. Most important-let’s calculate the money spent on inline inspection of repeat orders versus the money saved by maybe catching a critical error. Simple math. It is not worth it.

4.     Keep your paperwork and reports simple but assiduous.  PLM and other systems are suitable for keeping records of thousands of styles, but they don’t work if the time required for inputs is more than the value of a simple spreadsheet. So many companies waste so much time with IT that takes dozens of hands, where it could be vastly simplified. Let’s take the PSR (Production Status Report) as an example. The amount of time it takes to input small details for every styles is usually a total waste of time. If the cutting date is one or two days later, does that mean the order will be late? This can be managed much more simply by a. letting the factory take responsibility for the delivery date if they accept and holding them accountable to let you know any changes that would affect that date; and b. keeping track of the process step by step (PP samples, fabric approvals, etc.) and updating delivery where delays from the given date (given by factory) occur. 95% of the time (at least) if no delays occur in the critical processes, the factory knows how (again, factory choice is key here) to ship an order when required. The bottom line here is that the time and attention required for producing and reviewing these reports is significantly higher than the time required to deal with the issues when they do arise. And, trust me, most of those issues will not appear on a PSR report.

What is required, which I understand is difficult for larger companies that have been mired in this overkill forever, is to totally overhaul, first your way of thinking about the business and how it is done. Do- what works and adds value. Don’t do- what does not get the results needed compared to what time and cost it takes to do it. MOST IMPORTANT- you need the right people, even if they cost more, to get this done.

I have found that, without exception, companies hire people in their own image. So clearly the above requires a complete brainwashing on the part of management to become those who are committed to getting things done in the most cost-effective way. OR a replacement of executives and managers who can’t or won’t commit themselves. No need to be scared of this if you have the right boots on the ground to execute.

The Death of (Apparel) Retail (As We Knew It)-Part I- The Survivors

Let’s start with the survivors. Knowing where we are today will help to understand how we got here.

Who are they and why are they emerging while others are dead or dying? 

Some of them: Inditex (Zara, Massimo Dutti, Zara Home), Uniqlo, H&M, Primark, Amazon, Costco, Sam’s Club.

Why are they growing while others (like Macy’s, JC Penney) are dying slow and painful deaths?

1.     Is it because of the growth of online shopping? Not totally, as everyone is selling online today. Certainly Amazon has led the way to an online revolution, but everyone has online sites today, some better than others, so let’s consider that a push.

2.     Fashion basics- Here we go back for a moment into the past- Does anyone remember the Gap Pocket T? Then CEO of Gap Mickey Drexler believed in the mantra of Narrow and Deep, which found its best execution in the pocket T-many colours- one style, planned promotion, BUT every day low price (more about this bit of history later).

It is this concept that today’s Masters of the Retail Universe have embraced. Customers know that when they need a pair of pants to wear around the house, or to work out, they can go to Uniqlo and find them-no shame (count me in that group).  Look around Uniqlo- not hard to tell what they believe in, whether it is Linen Shirts or Chino Pants, the store is stocked with Fashion Basics, surrounded by go-with pickup item. Inditex stores show the same philosophy. Try that in Macy’s…

3.     Fast Fashion- Let’s use Inditex as an example. Stores and merchandise are changed many times each season so you can revisit the store regularly and not see the same thing you saw a couple weeks ago.  The last offering is either taken off the floor or isolated as sale merchandise. So the store always looks great, not confusing or a mess.

4.     Price pointing- You can see that there are many fewer price points in a Uniqlo or Massimo Dutti/Zara store than there are items. This differs from traditional department stores, who pay no attention to the customer’s value thinking and just mark the item where the (inflated) markup numbers take them.  This price pointing simplifies shopping for the consumer, as well as creating the impression of every day value.

5.     Sales are REAL (or at least it looks that way)- Consumers have caught on to the department store world’s game and can tell you when discounts, more discounts, further discounts, and discounts upon the discounts will happen. And they KNOW it is a game, therefore the value perception of original price is nil.  And time is on the consumer’s side.

If original price value perception is believable, smaller discounts have more value-thus 20% in Uniqlo is more exciting than 40% in Macy’s.

Lastly, why buy something at original price if you know it will be available at a discount? The keywords here are: if you know. If you see something in Massimo Dutti that you like and just a few pieces available in your size, maybe it will disappear before you have a chance to buy. No such worry in overassorted and overstocked Macy’s etc.

6.     Most brands in the world have lost or diluted their value perception as store brands’ is growing- If you can remember back to the 70’s and 80’s, brands were king (or queen). We worshipped the names and paid too much for them, rejoiced when we could find them on sale. Very few of those brands have endured, if at all, with anything like their past aura (ok, name some).  I don’t want to get sued so won’t name names. You and they know who I am talking about.

At the same time, store brands are gaining the confidence of consumers for what they are- no tricks. Massimo Dutti or Uniqlo means ok quality and a value price for that quality. Not good if you are entertaining the Queen or her relatives, but perfect for every day wear.

7.     Sourcing- As global brands, they have built sourcing organizations and resources which are  close to their store concentrations, and can mix/match offerings from different regions as long as their colour stories are consistent-which they are. Most important: they can move quickly! Neither the skill or the strategy of today’s department store buyers can match the nimble resourcing power of today’s brand fashion kings, nor the nimbleness of their global operations.

8.     Global equity- IF you go to a Massimo Dutti store in Shanghai, New York, or Rome, you will find the price points are very similar, and I am sure that is not by accident. Shop brands or designers in different locales, and you will find the prices are dramatically different=multiples in some cases.

So let’s be clear- the imminent expiration of the world of Macy’s et al. is NOT due to PRICE.  Macy’s can get down and dirty with the best of them. It is about VALUE. The brand value which deparment stores used to represent and which differentiated them from the discounters is gone- eroded by the overdistribution  of brands, Since brand worship is dead, department stores are resorting to promotion to bring in consumers (while at the same time killing the manufacturers by making them pay for the buyer’s incompetence and the stores errant philosophy). Most important, losing the TRUST and respect of the consumer.

There was a time when self-respecting middle class America did not want to be seen shopping at, or wearing product from “the mass market.” Now there is no distinction about shopping in Macy’s- it is a confusing and discouraging experience- and no shame to shopping at the new normal.  If you go to Uniqlo, Massimo Dutti, or sit home and shop from Amazon, it is a satisfying experience- can it also be a badge of honor?

Next- Part 2 and 3- The Way We Were and How Extinction Can Be Avoided.