Six Product Cost
Breakthroughs for India’s
Apparel Retailers
How apparel retailers in the subcontinent can
improve margins and increase value—without
altering product quality.
Six Product Cost Breakthroughs for India’s Apparel Retailers
1
High Costs are Damaging India’s Apparel Retailers
From designer brands to department store private labels, apparel retailers in India are struggling
to keep their margins up. Deeper discounts and rising costs—from raw materials and wages to
rent and store operations—are causing turmoil throughout the industry. Product costs comprise
up to 70 percent of overall costs, and because of stiff competition and the rise of online shopping,
retailers have been unable to pass these costs on to consumers. These, combined with less
brand-loyal consumers, threaten to steal the shirt off the back of established apparel brands.
No strangers to belt tightening, Indian retailers have made cost optimization a prerequisite
for improving profitability. Many of the larger retailers have undertaken multiyear cost-reduction
programs with targets incorporated into their annual budgets. So far the programs have had
minimal success in improving efficiencies, largely because the approaches are more tactical
than strategic.
A product cost breakthrough can
reduce expenditures and deliver
up to 10 percent in additional value.
Whether retailers manufacture apparel or contract out production, what is felt most acutely
is higher costs for raw materials and labor—a minimum wage increase of 10 percent or more
in several states has been eating away at profit margins over the past two years. Add competition
from international brands that offer more variety and the growing threat of online retailers
with a wider selection of products, around-the-clock access, lower prices, and deep discounts,
and Indian retailers are in trouble.
To protect profits and performance in this environment requires a relentless focus on product
costs. What follows is a product cost breakthrough that can reduce expenditures and deliver
up to 10 percent in additional value.
A Product Cost Breakthrough
Apparel retailers in India have deployed all of the established cost-cutting approaches with
limited success. At first glance, it is difficult to believe there are any untapped areas to capture
more cost savings, at least not without altering product quality. Yet, we have a systematic
approach to reduce product costs without affecting quality (see figure 1 on page 2). The
following are six ways to a product cost breakthrough:
1. Empower designers, discuss the impact design decisions have on costs
Common practice. A large part of product costs are determined by the material and specification
choices of designers. Many tend to use higher-count or double-ply fabric with exquisite finishes,
but fail to add a commensurate increase to the product’s final price. Designers do not realize the
impact their choices have on the final cost. For example, a first inclination in designing a shirt is
to use expensive Giza cotton. But opting to use standard Indian cotton could keep the final cost
Six Product Cost Breakthroughs for India’s Apparel Retailers
1
Figure 1
Six imperatives for India’s apparel retailers
Traditional practice
Cost breakthrough
Benefits
Designers unaware of how
their design choices affect
the final cost of product
Empower designers,
discuss the impact design
decisions have on costs
• 25 to 30 percent reduction in fabric
base complexity
Vendors’ commercial
terms not transparent
Uncover hidden costs;
make suppliers’
commercial terms
more transparent
• 4 to 6 percent savings on addressed spend
• 2 to 3 percent savings on fabric
• 10 to 15 percent savings on outsourced costs
• 2 to 3 percent cuts to job-work and
margin spend
Limited focus on low-spend
categories such as trim
Remember—no category
is too small to challenge
• 15 percent savings on trim
Targets for costing and
vendor negotiations
unscientific, and visibility
into total buy limited
Use analytics in
negotiations and
vendor allocation to
improve efficiency
• 4 to 5 percent savings from negotiations
Synergies overlooked
in large organizations
that keep brands in silos
Tap into oftenoverlooked synergies
Procurement has limited
bandwidth to focus on
strategic sourcing
Create a dedicated
strategic sourcing cell
for a growth advantage
• 2 to 3 percent volume discounts
• Payment terms (standardized)
• Specifications (harmonized)
• Structured sourcing process
• Business share allocation strategy
• Final rate contracts at negotiated prices
Source: A.T. Kearney analysis
in check without impacting the consumer’s perceived value of the item. Also, in pursuit of product
variety, designers tend to increase the number of designs but not the order quantities. Yardage
orders below a fabric mill’s minimum requirement are hit with up to a 30 percent upcharge.
Product cost breakthrough. Costs can be reduced in conversation—by simply talking to
designers and letting them know the impact of their decisions:
• Standardize designs. Provide designers with the right tools to identify and take advantage
of opportunities to reduce costs by standardizing designs without affecting product quality or
variety. For example, ready reckoners are a simple library of standardized specs that designers
can refer to when making product decisions. Our client used ready reckoners to reduce
fabric-base complexity by 25 to 30 percent.
• Collaborate across functions. Collaborate to review fabric designs and identify “value adds”
on base raw material such as finishes, weaves, and double-ply fabric. Review fabric yardages
with a cross-functional team of design, sourcing, and product managers. Collaborating with
fabric mills can help expedite sample development for faster decision making and shorter
lead times. These best practices can capture savings of 4 to 6 percent.
Six Product Cost Breakthroughs for India’s Apparel Retailers
2
• Use innovative packaging. Packaging is available that eliminates the need for select trims
such as back support, collar support, or tissue paper, and can result in significant savings. Get
buy-in from channel partners before implementing.
2. Uncover hidden costs, make suppliers’ commercial terms more transparent
Common practice. Commercial terms between retailers and garment vendors can lack
transparency, with costs often negotiated on the overall cost of the garment. There are several
pitfalls here (see figure 2). First, cost is bundled and not split to the right level of granularity,
with hidden costs accounting for as much as 50 percent of the total cost. There is little transparency in fabric costs, and vendors do not itemize outsourcing costs such as transportation,
dyeing, and washing. Further, retailers pay margins as a percentage of total product cost, not
the vendor’s basic value addition.
Figure 2
Garment suppliers’ terms lack transparency
Hidden bundled costs
• Cost not split to
the right level
of granularity
• Limited visibility
on cost breakup
among different
trim categories
• Reconciliation
of costs not
done regularly
• Limited visibility
on actual fabric
cost breakup
Cost for outsourced
activities (transportation,
dyeing, washing) not
transparently shared
by vendors
Margins paid as a
percentage of total
vendor cost, not
basic value addition
provided by vendor
Fabric
Trim
Cut, make,
or job-work
Value-added
process
and rejection
Margin
Transportation
Total
production cost
Source: A.T. Kearney analysis
Product cost breakthrough. Restructuring commercial terms with suppliers can uncover
significant savings, and a few best practices can alleviate some typical pitfalls. For example,
unbundle hidden costs by dissecting the costs to a level of detail that best suits the retailer,
and then negotiate at the base component level. An emerging market apparel retailer used
this approach and reduced fabric costs by 2 to 3 percent.
To better understand costs at multiple levels, we recommend nominating vendors and rates for
activities outsourced by the garment vendor. Other industries do this all the time. For example,
automotive OEMs often designate key raw materials to their commodity tier 1 vendors, including
a forging-grade steel source for gear manufacturers, and some of the world’s largest beverage
manufacturers rely on designated vendors for sugar and other raw materials. This best practice
can reduce outsourced costs by 10 to 15 percent, and use of nontraditional payout structures,
including fixed-margin payouts and job-work models, can cut costs by another 2 to 3 percent.
Six Product Cost Breakthroughs for India’s Apparel Retailers
3
3. No category is too small to challenge
Common practice. When looking for ways to cut costs, retailers tend to focus on large cost
buckets and ignore low-spend categories such as trim (see figure 3). For instance, specifications
of non-visible trim, such as interlining and pocketing fabric, often exceed the required
functions. Lack of price discovery limits visibility into underlying cost drivers, which means
the retailer has no basis for decisions to induct new, more cost-effective vendors or challenge
incumbents’ prices. Also in the mix is overemphasis on service levels, lack of attention to the
total cost of procurement, and over-engineered specifications that cause a spike in stock
keeping units (SKUs).
Figure 3
Retailers often miss small but powerful ways to lower costs
15–20%
3–5%
Cut, make,
and job-work
Value-added
process
and rejection
12–15%
55–60%
Fabric
Trim
Product cost
Source: A.T. Kearney analysis
Product cost breakthrough. An optimal design process and a structured price-discovery
process for trim and other low-spend categories can have an immediate impact, as much as 15 to
20 percent savings. The process begins with questioning every trim piece by assessing its value
to the consumer. For instance, is a branded button necessary on a garment or will an unbranded
button suffice as the customer does not consider buttons in her purchasing decision?
E-auctions are ideal for trim categories,
reducing costs by 12 to 14 percent.
The process questions incumbent pricing, and considers viable alternatives for obtaining trim
pieces and other low-spend items. A review of alternatives is performed in reverse auctions
and through negotiations based on should-cost or fact-based justifications. E-auctions are
especially effective for trim categories as costs can fall by 12 to 14 percent. Reviewing servicelevel norms and the cost implications can uncover even more savings.
Another seemingly small category is shipment packaging, including back support and clips,
which are usually discarded at the store. Eliminating certain components can cut costs and
have no effect on the efficient delivery of apparel.
Six Product Cost Breakthroughs for India’s Apparel Retailers
4
4. Use analytics in negotiations and vendor allocation to improve efficiency
Common practice. Analytics are among the best tools to improve vendor efficiencies. But
retailers that use analytics tend to use them sporadically, set unscientific targets for costing
and vendor negotiations (based on the negotiator’s best guesses or preferences), and fail to
gain insight into the total buy, especially for nominated categories.
To gain insight into the total buy, a spend
cube alleviates the gray areas in all key
buying categories.
Product cost breakthrough. Two best practices can support more efficient negotiations. First,
retailers that use a multivariate regression model and scientifically index rate contracts for
various components to price raw material trends, can lower costs by 4 to 5 percent during
negotiations. In a recent client engagement, we developed a fabric-predictive model to assess
the should-cost of different fabric types (see figure 4). The model was used to determine the
target cost for each type of fabric, provide input for fabric-base rationalization, and conduct
structured, fact-based negotiations with fabric mills.
Second, to gain insight into the total buy, a spend cube alleviates the gray areas in all key buying
categories, including nominated ones. We recently used the spend cube to help a large apparel
retailer establish a comprehensive spend profile for fabric, trim, transportation, and job work—
ultimately increasing transparency and resulting in more efficient, fact-based negotiations. This
practice should be revisited and refreshed every year.
Figure 4
A predictive model is used to identify fabric costs
Illustrative
Actual rate (INR per meter)
240
<5% variance
220
5–10% variance
200
>10% variance
180
160
140
R = f (count, construction, weave,
finish, pattern, order quantity)
120
100
100
120
140
160
180
200
220
240
Predicted rate (INR per meter)
Note: The equation is illustrative; number of data points = ~1,400; R (sq.) = 85 percent.
Source: A.T. Kearney analysis
Six Product Cost Breakthroughs for India’s Apparel Retailers
5
5. Tap into often-overlooked synergies
Common practice. Synergy can get lost in large multi-brand organizations where brands tend to
reside in silos and decisions are made independent of an overall strategic vision. The decisions
may be optimal for a single brand but not at a consolidated brand level. Organizations with
weak or nonexistent synergy suffer from lack of ownership, drive, and concerted effort, which
affects all cost elements, including margins and raw materials, and can lead to price variations
across brands (see figure 5).
Figure 5
Overlooked synergies hold a wealth of value
Unsynchronized sourcing strategies
Extent of nomination
Price variations across brands
Different fabric types
100%
100
106
–6%
60-80%
20-30%
0%
Threads
Brand 1
Brand 2
0%
Pocketing
0%
Brand 1
Brand 2
Brand 3
Note: Numbers are sanitized
Source: A.T. Kearney analysis
Product cost breakthrough. Organization-wide synergy results from a concerted effort and
comprehensive medium- and long-term planning. One of our retail clients in India tried
instituting its own synergy program, but faltered largely because no one owned the effort.
When brands reside in silos, the solution is usually found in centralized sourcing, volume
consolidation, joint negotiations, and harmonization of specs across brands. We helped one
retailer take these steps and achieve volume discounts of 2 to 3 percent; standardized
payment terms and harmonized specs saved another 15 to 20 percent.
Process overlaps can be addressed by benchmarking areas such as sourcing, IT, and human
resources. Realigning the network footprint, a basis shift in supplier base, can achieve aggregated
savings of 2 to 3 percent.
6. Create a dedicated strategic sourcing cell for a growth advantage
Common practice. Procurement functions have limited bandwidth to focus on strategic sourcing,
largely because of the seasonal nature of the apparel business and the constant pressure to cut
lead times and inventory. For large retailers, the sourcing function must manage three seasons at
the same time: bulk delivery of product for the immediate season, sample development for the
next season, and design and ideation for the season after that. Juggling all three means limited
focus on strategic sourcing for one season or longer term for future seasons.
Six Product Cost Breakthroughs for India’s Apparel Retailers
6
Product cost breakthrough. A dedicated strategic sourcing cell is essential for realizing the
benefits of all the imperatives we have discussed so far (see figure 6). This cell can sharpen the
focus on strategic initiatives, including providing a structured sourcing process that culminates
in effective price discovery, a business-share allocation strategy, and a means to finalize rate
contracts at negotiated prices.
Figure 6
A strategic sourcing cell can sustain cost savings
Sourcing
3-4%
Fabric
Illustrative
10-12%
Retail
fixtures
5%
Yarn
sourcing
Typical benefits from structured sourcing
Strategic
sourcing cell
Lead structured
sourcing process
and strategic
initiatives
Procurement
operations
Lead day-to-day
operations, including
delivery and sample
development
3%
2%
Season 1
Season 2
Sourcing cell
incorporated
4%
-3%
Season 3
Season 4
Season-on-season growth in fabric cost
Source: A.T. Kearney analysis
A Run for the Money
Apparel brands in India had counted on established cost-cutting programs and were disappointed. Hungry for another way, retailers turned to a power combination of cost cutting,
negotiations, and procurement. At the heart of breakthrough cost reductions is a strong, central
hand finding previously hidden cost savings, identifying synergies, and using analytics to
realize the largest possible cost savings. The rewards have been immediate: Retailers not only
realize cost savings but also gain a stronger competitive stance that will give the competition—
including India’s fast-growing online retailers—a run for their money.
Authors
Kaushika Madhavan, partner, Mumbai
[email protected]
Neelesh Hundekari, partner, Mumbai
[email protected]
Siddharth Jain, principal, Mumbai
[email protected]
Karan Dhall, consultant, Mumbai
[email protected]
The authors wish to thank Sriram Ananthapadmanabhan and Gaurav Gupta for their valuable help in developing this paper.
Six Product Cost Breakthroughs for India’s Apparel Retailers
7
A.T. Kearney is a leading global management consulting firm with offices in more
than 40 countries. Since 1926, we have been trusted advisors to the world's foremost
organizations. A.T. Kearney is a partner-owned firm, committed to helping clients
achieve immediate impact and growing advantage on their most mission-critical
issues. For more information, visit www.atkearney.com.
Americas
Atlanta
Bogotá
Calgary
Chicago
Dallas
Detroit
Houston
Mexico City
New York
Palo Alto
San Francisco
São Paulo
Toronto
Washington, D.C.
Asia Pacific
Bangkok
Beijing
Hong Kong
Jakarta
Kuala Lumpur
Melbourne
Mumbai
New Delhi
Seoul
Shanghai
Singapore
Sydney
Taipei
Tokyo
Europe
Amsterdam
Berlin
Brussels
Bucharest
Budapest
Copenhagen
Düsseldorf
Frankfurt
Helsinki
Istanbul
Kiev
Lisbon
Ljubljana
London
Madrid
Milan
Moscow
Munich
Oslo
Paris
Prague
Rome
Stockholm
Stuttgart
Vienna
Warsaw
Zurich
Middle East
and Africa
Abu Dhabi
Doha
Dubai
Johannesburg
Manama
Riyadh
For more information, permission to reprint or translate this work, and all other
correspondence, please email: [email protected].
The signature of our namesake and founder, Andrew Thomas Kearney, on the cover
of this document represents our pledge to live the values he instilled in our firm and
uphold his commitment to ensuring “essential rightness” in all that we do.
A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea.
A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited,
a company organized under the laws of England and Wales.
© 2015, A.T. Kearney, Inc. All rights reserved.