alternative pricing strategies in the forms of pricing models and some ...... In FOB II arrangement, the apparel company receive garment samples from buyers.
PRICING STRATEGY AUDITING FOR GARMENT MANUFACTURING COMPANIES IN SRI LANKA
By S. M. Pathirana
A thesis submitted to University of Moratuwa for the Degree in Master of Science
Research Supervised by Dr. N. K. Heenkenda
DEPARTMENT OF TEXTILE AND CLOTHING TECHNOLOGY UNIVERSITY OF MORATUWA SRI LANKA December 2010
ABSTRACT
ABSTRACT The Sri Lankan garment manufacturing industry needs to become competitive in terms of pricing with the phasing out of the Multi Fibre Agreement and threat of losing the GSP+ advantage. However, it is difficult for the garment manufacturing companies to identify their weaknesses in pricing due to lack of information on competitor’s prices and thus it is difficult to improve the pricing area. This study focuses on Sri Lankan apparel manufacturing industry and it reviews the pricing practices in garment manufacturing industry. The current pricing process of the garment manufacturing industry was identified using literature review, interview, questionnaire and observational studies and discussed in the thesis. This also includes the analysed data of the questionnaire survey which was designed to identify the current pricing methods and it was concluded that the Sri Lankan garment manufacturers are using either purely cost plus pricing or a hybrid pricing system with cost plus pricing with slight market based approach. Further this thesis includes a SWOT analysis which was used to identify the weaknesses and the possible improvement in existing pricing system, when developing the alternative pricing strategies. The study identifies some possible alternative pricing strategies in the forms of pricing models and some detailed cost estimation models to use with them. Further the study builds a pricing audit system which facilitates the garment manufacturing companies to identify their current pricing strategies and to identify the areas of improvement.
i
ACKNOWLEDGEMENT
ACKNOWLEDGMENT Throughout the research leading to the completion of this thesis, I have gratitude to many people, who have provided me with tremendous help and support in one way or another, which I think I cannot possibly acknowledge in full measures. First and foremost, I would like to express my sincere thanks to Dr. Nilanthi Heenkenda, my supervisor, for her insightful suggestions and useful guidance throughout the thesis works. Sincere appreciations are also to the review panel members for their propositions, valuable comments, and constructive suggestions which were substantial value to this study. I am also immensely grateful to the Head of the Department of Textile and Clothing Technology for permitting me to use of the resources of the department which indeed facilitated me to carry out my work unhindered. I would like to express my gratitude to the computer laboratory staff and Ms. T. S. D. Yapa for supporting and motivating me in carrying out the research work. I thank all my colleagues for the numerous supports they have given me for the fulfillment of this challenging task. I extend my gratitude to the University of Moratuwa Senate Research Fund for financial assistance provided for my research work. Finally, I am profoundly grateful to my parents and my brother, who have been always with me in every situation. My warm gratitude is for my husband who always stood by me during difficult moments and for nourishing my mind with hope.
S. M. Pathirana
ii
DECLARATION
DECLARATION This thesis is a report of research carried out in the Department of Textile and Clothing Technology, University of Moratuwa, between April 2009 and October 2010. Except where references are made to other work, the contents of this thesis are original and have been carried out by the undersigned. The work has not been submitted in part or whole to any other university. This thesis contains 110 pages.
.......................................... S. M. Pathirana, Department of Textile and Clothing Technology, University of Moratuwa. Sri Lanka.
.......................................... Supervisor Dr. N. K. Heenkenda, Department of Textile and Clothing Technology, University of Moratuwa. Sri Lanka.
iii
CONTENTS
CONTENTS Abstract …………………………………………………………………………... i Acknowledgement ……………………………………………………………......
ii
Declaration ……………………………………………………………………...... iii Contents …...……………………………………………………………………...
iv
List of Figures ……..……………………………………………………………... viii List of Tables ……………………………………………………………………..
ix
List of Graphs …………………………………………………………………….
xi
List of Abbreviations …………………………………………………………......
xii
Chapter 1 : Introduction 1.1 Background of the study ….……………………………………….................. 1 1.2 Significant of the problem ……………….. ………………………………….
1
1.3 Objectives of the Study ………………………………………………………. 2 1.4 Thesis structure ………………. ……………………………………………... 3
Chapter 2 : Literature Review 2.1 Global Apparel Manufacturing Industry …………………………………….
5
2.2 Apparel manufacturing industry in Sri Lanka ……………………………….
8
2.3 Pricing in the Apparel Manufacturing Industry ……………….……………... 12 2.4 Cost competitiveness of Sri Lankan Garment Industry ……………………… 17 2.4.1 Cost structure of the Apparel Manufacturing Industry ……………....... 17 2.4.1.1 Macro costs ………………………………………………………. 18 2.4.1.2 Indirect costs ……………………………………………………... 18 2.4.1.3 Direct costs ……………………………………………………….
19
2.4.2 Cost competitiveness of the Sri Lankan Apparel Manufacturing 20 Industry ……………………………………………………………….. 2.4.2.1 Labour cost ……………………………………………………….
20
iv
CONTENTS
2.4.2.2 Power cost …………………………….………………………….. 21 2.4.2.3 Interest cost ………………………..….………………………….. 22 2.4.2.4 Corporate tax …..................………..……………………………..
22
2.4.2.5 Inland transportation and handling cost ………………………….. 23 2.4.2.6 Overall cost competitiveness compared to Bangladesh, Vietnam and India …………………………………………………………
23
2.5 Factors considered by garment buyers when selecting the garment 24 manufacturing companies …………………………………………………… 2.6 Pricing decision approaches ………………………………………………….
26
2.7 Pricing Strategies …………………………………………………………….. 29 2.7.1 Cost based pricing ……………………………………………………..
29
2.7.2 Market based pricing …………………………………………………..
30
2.7.2.1 Competitive based pricing ………………………………………..
31
2.7.2.2 Perceived value pricing …………………………………………..
32
2.8 Pricing Strategy Applications of various industries ………………………….
34
Chapter 3 : Methodology 3.1 Methods used to collect data ………………………………………………....
39
3.1.1 Primary data …………………………………………………………… 39 3.1.2 Secondary data ………………………………………………………… 39 3.2 Preparation and distribution of the questionnaire ……………………………. 39 3.2.1 Survey sample …………………………………………………………
39
3.2.2 The target respondents ………………………………………………… 40 3.2.3 Questionnaire designing ……………………………………………….
40
3.2.4 Pre-test ………………………………………………………………… 41 3.2.5 Pilot survey ……………………………………………………………. 41 3.2.6 Survey research ………………………………………………………..
41
3.3 Method of analysis …………………………………………………………… 42 3.4 Development of alternative strategies ………………………………………..
42
3.5 Pricing strategy audit …………………………………………………………
42 v
CONTENTS
3.6 Action Plan …………………………………………………………………...
43
Chapter 4 : Pricing process of the garment manufacturing companies in Sri Lanka 4.1 Departments involved in pricing function ……………………………………
44
4.1.1 Work study department ………………………………………………..
44
4.1.2 Pattern making section ………………………………………………...
45
4.1.3 Marker making section ………………………………………………...
46
4.1.4 Merchandising department …………………………………………….
46
4.1.5 Finance department ……………………………………………………
47
4.1.6 Sample room …………………………………………………………..
47
4.2 Elements in the garment price quoted by the garment manufacturing company ……………………………………………………………………..
50
4.2.1 Raw material cost ……………………………………………………...
50
4.2.1.1 Fabric cost ………………………………………………………..
50
4.2.1.2 Accessories cost ………………………………………………….. 53 4.2.2 Process cost ……………………………………………………………
54
4.2.2.1 Garment dyeing cost ……………………………………………... 54 4.2.2.2 Garment washing cost ……………………………………………
55
4.2.2.3 Garment printing cost …………………………………………….
55
4.2.2.4 Embroidery cost ………………………………………………….. 56 4.2.3 Cut and make cost ………………………………………………….….
56
4.2.4 Finance charge ………………………………………………………… 56
Chapter 5 : Data analysis – Questionnaire surrey 5.1 Factors considered in setting price …………………………………………...
57
5.2 Responding time ……………………………………………………………..
60
5.3 Pricing method ……………………………………………………………….. 61 5.4 Handling new buyers …………………………………………………………
66
vi
CONTENTS
Chapter 6 : Analysing the pricing situation of the Sri Lankan garment Manufacturing industry using SWOT analysis 6.1 Human Resource ……………………………………………………………... 67 6.2 Raw materials ………………………………………………………………...
69
6.3 buyers’ image ………………………………………………………………...
70
6.4 Product cost and pricing ……………………………………………………
72
6.5 Markets ……………………………………………………………………….
73
6.6 new trends in the industry ……………………………………………………. 74 6.7 Competitors …………………………………………………………………..
75
Chapter 7 : Alternative strategy formulation 7.1 Pricing Models .. ……………………………………………………………... 77 7.2 Detailed cost analysis models ………………………………………………... 84
Chapter 8: Pricing strategy audit 8.1 Pricing audit questionnaire …………………………………………………...
89
8.2 Pricing audit sheet ……………………………………………………………
89
Chapter 9 : Conclusion …………………………………………………………
95
References ……………………………………………………………………….. 97 Appendix 1 : Questionnaire to identify current pricing situation …………...
102
Appendix 2 : Pricing Audit Questionnaire ……………………………………. 107
vii
LIST OF FIGURES
LIST OF FIGURES Figure
Description
Page
Figure 2.1
Global Textile and Apparel Trade Shift
5
Figure 2.2
Prices in the Apparel Industry
12
Figure 2.3
FOB and CIF comparison
14
Figure 2.4
FOB Classification according to the production flow and
14
functional process Figure 2.5
Selection of suppliers using AHP
25
Figure 2.6
Standard Linear Approach
26
Figure 2.7
Strategy Matrix approach
27
Figure 2.8
Market based pricing
35
Figure 2.9
Value based pricing
37
Figure 3.1
Method of sample selection
40
Figure 4.1
Relationship between marketing department and other supportive departments
48
Figure 4.2
Information issued by marketing department to supportive departments Breakdown of the garment price quoted by garment manufacturer
49
Figure 7.1
Pricing Model 1
78
Figure 7.2
Pricing Model 2
79
Figure 7.3
Pricing Model 3
80
Figure 7.4
Pricing Model 4
81
Figure 7.5
Pricing Model 5
82
Figure 7.6
Pricing Model 6 (Pricing new products)
83
Figure 7.7
Detailed cost estimation Model 1
85
Figure 7.8
Detailed cost estimation Model 2
86
Figure 7.9
Detailed cost estimation Model 3
87
Figure 8.1
Pricing Audit sheet
90
Figure 8.2
Example Pricing Audit sheet
93
Figure 4.3
50
viii
LIST OF TABLES
LIST OF TABLES
Table
Description
Page
Table 2.1
FOB Classification according to the production flow and functional process
15
Table 2.2
Influence of Macro costs on landed duty price
18
Table 2.3
Taxonomy of pricing strategies
28
Table 5.1
Factors affecting the cost per minute value
59
Table 5.2
Factors affecting responding time for a pricing inquiry
60
Table 5.3
Pricing method of the company
62
Table 5.4
How the companies quote price when the target price can be met
62
Table 5.5
How the companies respond if the target price cannot be met
63
Table 5.6
Possible discounts in garment industry
63
Table 5.7
Reasons for giving discounts
63
Table 5.8
How the companies respond for an inquiry from a new buyer
66
Table 5.9
How the companies respond for an inquiry from a buyer who continuously sends inquiries without giving any order
66
Table 6.1
SWOT Terminology for Human Resource in Garment Manufacturing Industry
69
Table 6.2
SWOT Terminology for Raw Materials in Garment Manufacturing Industry
70
Table 6.3
SWOT Terminology for Buyers’ Image in Garment Manufacturing Industry.
71
Table 6.4
SWOT Terminology for Product cost in Garment Manufacturing Industry.
73
Table 6.5
SWOT Terminology for New Markets in Garment Manufacturing Industry
74
Table 6.6
SWOT Terminology for New Trends in Garment Manufacturing Industry
75
ix
LIST OF TABLES
Table 6.7
SWOT Terminology for Competitors in Garment Manufacturing Industry.
76
Table 7.1
Pricing Matrix
88
Table 8.1
Percentages of elements for each colour
91
Table 8.2
Margins of the overall performance
92
x
LIST OF GRAPHS
LIST OF GRAPHS
Description
Page
Change in Apparel export value to US during 2/2009 to 2/2010
7
Graph Graph 2.1
period Graph 2.2
Change in Apparel export value to EU during 2007 to 2008 period
7
Graph 2.3
World export of apparel at the end of 2008
8
Graph 2.4
Total Apparel Export value of Sri Lanka
10
Graph 2.5
Apparel Export value to USA from Sri Lanka
10
Graph 2.6
Apparel Export value to EU from Sri Lanka
11
Graph 2.7
Apparel Export Markets of Sri Lanka
11
Graph 2.8
Comparison of Labour cost per hour of several countries
21
Graph 2.9
Comparison of Power cost per Kwh of several countries
21
Graph 2.10
Comparison of Interest cost of several countries
22
Graph 2.11
Comparison of Corporate tax of several countries
22
Graph 2.12
Comparison of Inland transportation & handling cost of several countries Cost Competitiveness compared to India, Bangladesh and Vietnam
23
Graph 5.1
Factors considered in setting the price
57
Graph 5.2
The responsible person for deciding cost per minute value
58
Graph 5.3
Factors affecting the finance charge
59
Graph 5.4
Average responding time for a pricing inquiry
60
Graph 5.5
The pricing objective of the company
61
Graph 5.6
The areas of competitive advantage of the company
64
Graph 5.7
The method of obtaining competitive information
65
Graph 5.8
Method of representing the final price
65
Graph 2.13
24
xi
LIST OF ABBREVIATIONS
LIST OF ABBREVIATIONS
Abbreviation
Description
AHP
Analytical Hierachy Process
ANP
Analytical Network process
ATC
Agreement on Textile and Clothing
C
Competitor’s Price
CIF
Cost, Insurance and Freight
CM
Cut and Make
CMT
Cut, Make and Trim
CP
Company Price
EU
European Union
EVA
Economic Value Analysis
EVC
Economic Value to the Customer
FOB
Free On Board
GDP
Gross Domestic Product
gsm
Grams per square meter
GSP plus
Generalized System of Preferences
JIT
Just In Time
LDP
Landed Duty Paid
MFA
Multi Fibre Agreement
PFD
Prepared For garment Dye
QP
Quoted Price
ROI
Return On Investment
SMV
Standard Minute Value
SWOT
Strengths, Weaknesses, Opportunities and Threats
xii
LIST OF ABBREVIATIONS
TP
Target Price
US
United States
VAT
Value Added Tax
WS
Work Study
WTO
World Trade Organization
YY
Yardage Yield
xiii
INTRODUCTION
CHAPTER 1 INTRODUCTION 1.1 BACKGROUND OF THE STUDY The garment manufacturing industry in Sri Lanka has risen from modest beginnings to become an important driver of the economy in terms of its contribution to industrial production, foreign exchange earnings and employment generation. Currently the garment industry contributes about 40% of the industrial production of the country and is the largest contributor to the economy, accounting for 8% of the Gross Domestic Product (GDP) (Wijayasiri & Dissanayake 2008). The export markets for Sri Lanka include US, EU, Canada, Norway, Sweden and Finland etc. and have established a prestigious customer base by manufacturing garments for international brand names such as Marks and Spencer, GAP, Nike, Victoria’s Secret and Ralph Lauren. During the past two decades Sri Lanka has enjoyed a relatively assured export market for garments mainly in US due to the Multi-Fibre Agreement (MFA). After abolition of MFA in 1st January 2005, the quota based system of textile and clothing exports was ended and the industry is no longer protected under a system that ensures market access which made Sri Lanka to compete with giant competitors like China and India. In 2005 Generalized System of Preferences (GSP plus) was introduced to Sri Lanka and was the only country in Asia and only 15 countries in the world that enjoys that unilateral trade concession with the EU. This system encourages more value addition in Sri Lanka and therefore encourages backward integration, which results in setting up of new industries, thus creating substantial employment in the country (EUDSM, n. d). 1.2 SIGNIFICANCE OF THE PROBLEM The Sri Lankan garment industry needs to become competitive in terms of pricing in order to face the quota free global challenges. (Jayaratne, n.d.). One reason for the poor competitiveness of Sri Lanka in the global garment industry is that Sri Lanka is not competitive in terms of pricing (Omar & Cooray 2005). 1
INTRODUCTION
In the global economic crisis all the export industries are facing tough time. Today the fundamental objective of the industry is to maintain the markets and competitiveness. The customer asks $ 2-3 discount for each piece that is sold at $6 earlier and if Sri Lankan companies fail to supply at requested price they will move to other markets such as Bangladesh or Vietnam. Getting an order depends on the quality of garments, compliance and the price. However in an economic crisis situation price plays a vital part in wining the order as the buyers need the garments at very low prices. In 2006 US held 56% share and EU only accounted for 39% of Sri Lankan garment exports (JAAFSL 2009), and due to the removal of the MFA and economic crisis the US share has reduced to 41% in 2009. After receiving the GSP+ concessions the EU share has increased, and in 2009 it was 52% (JAAFSL 2009). As if GSP+ advantage is also lost, there is a possibility of reduction of exports to EU if Sri Lankan garment companies fail to offer the required price of the buyers. Sri Lanka is already in a good position in terms of quality of the garments and compliance but still lacking competitive in pricing due to various reasons. The garment manufacturing companies fail to identify their weaknesses in pricing as they have lack of information regarding the pricing of other manufacturing companies in the industry and thus it is difficult to improve the pricing area. Due to the above reasons it is clear that there should be a clear pricing strategy for the garment manufacturing companies and a proper method to audit the same in order to facilitate the companies to identify their current strategies and to identify the areas of improvement.
1.3 OBJECTIVES OF THE STUDY In view of the above considerations, the study is focused on,
Assessing the current pricing strategies of Sri Lankan garment manufacturing companies,
Developing appropriate alternative strategies and
Developing a method to audit the current pricing strategies. 2
INTRODUCTION
1.4 THESIS STRUCTURE
Chapter 1 – Introduction Chapter 1 presents an overview of the thesis, justifying the research problem under investigation.
Chapter 2 – Literature Review Chapter 2 explains about the global and Sri Lankan garment industry and the pricing systems used in garment industry. In addition this includes the pricing decision approaches and pricing strategies both theoretical frameworks and applications.
Chapter 3 – Methodology Chapter 3 presents the methodology of the research. The types of data collection methods, data analysis methods, methods of developing alternative strategies, conducting pricing strategy audit and an action plan is discussed in this chapter.
Chapter 4 – Pricing process of the garment manufacturing companies in Sri Lanka Chapter 4 presents the departments involved in pricing process and their inter relationships and elements of garment price.
Chapter 5 – Data Analysis – Questionnaire Survey Chapter 5 analyses and interprets data from the questionnaire in order to identify the current pricing practices in the Sri Lankan garment manufacturing industry.
Chapter 6 – Analyzing the pricing situation of the Sri Lankan garment manufacturing industry using SWOT Analysis Chapter 6 presents a SWOT analysis of the pricing situation in terms of human resource, raw materials, buyers’ image, product cost and pricing, markets, new trends in the industry and competitors. 3
INTRODUCTION
Chapter 7 – Alternative strategy formulation
Chapter 7 describes the alternative strategies developed during the study. The alternative strategies are graphically represented and described in detail. In addition to alternative strategies, some detailed cost estimation models are also discussed in this chapter.
Chapter 8 – Pricing strategy audit
Chapter 8 discusses how to carry out a pricing strategy audit to evaluate the pricing system of the company. The audit sheet and the pricing audit questionnaire are explained in detail in this chapter.
Chapter 9 – Conclusion
Chapter 9 presents the conclusion of the research. Also it contains limitations of the research and further research areas.
4
LITERATURE REVIEW
CHAPTER 2 LITERATURE REVIEW 2.1. GLOBAL APPAREL MANUFACTURING INDUSTRY The apparel manufacturing is an important industry in global economy as many developing countries and few least developed countries were able to step onto the development ladder on the basis of their apparel manufacturing industry. In these countries millions of people, mostly women are employed in this industry. Also this industry has very low entry barriers as entry does not require huge capital outlay and factories can be set up with workers with relatively low skills. Therefore the competition in this industry is very high.
The global apparel manufacturing industry was based on the consumption centres of United States (US), Europe and Japan until middle 1970‟s and with the development of economies in US and Europe the apparel industry became uncompetitive in these countries. Therefore some newly industrialized economies such as Hong Kong, Taiwan and Korea set apparel bases in their countries taking advantage of this opportunity. After introducing the Multi Fibre Arrangement (MFA) the textile and clothing industry in developed countries faced more competition from developing nations. This has resulted in introduction of quota restrictions and bilateral arrangements.
Source: Technopac, 2007 Figure 2.1: Global Textile and Apparel Trade Shift 5
LITERATURE REVIEW
After the formation of the World Trade Organization (WTO) MFA was replaced by the Agreement on Textile and Clothing (ATC). The most prominent development of the ATC was the emergence of China due to the low labour cost, government incentives and increasing investment in textile and apparel. In this regime other countries like India, Bangladesh, Sri Lanka and Indonesia also appeared as major textile and apparel bases (Figure 2.1). Availability of quotas, labour cost and availability of raw material were the main criteria of apparel sourcing during this period. (Technopak, 2007) After the phasing out of quota in 1st January 2005, China and India reported extremely high growth rates of the export value to US and European Union (EU). Since the value of exports from China grew significantly, the US and EU governments came to some agreements with China to control the imports of garments to their countries. Bangladesh, Cambodia, Indonesia, Sri Lanka, Pakistan and Thailand also showed good performance after the removal of MFA. However the countries like Mexico, those in Central America and the Caribbean and other Asian economies mostly stagnated or declined from 2004 to 2005. (Yamagata, 2007) This situation changed due to the global economic crisis appeared in 2008 and the impact of the crisis on global textile and apparel industry was dramatic. Since June 2008, over 8200 factories have been closed in the world and an estimated 11.8 million workers lost their jobs (Saheed, 2010). Demand for textile and garments dropped considerably specially in US, EU and Japan due to falling consumer confidence and rising unemployment. Many consumers in these countries are now focusing more on prices and the demand is shifting to lower priced products.
Except few export oriented nations of clothing such as China and Vietnam, most are suffering from reduction in orders. According to graph 2.1, the total apparel export value to US has been reduced by 0.86% during the period of February 2009 to February 2010. China reported 14.46% growth and for Vietnam it is 6.81%. In the US market all the other Asian major apparel exporting countries suffered decline in exports during this period; Bangladesh- down by 11.72%, India-down by 4.94%, Pakistan down by 12.40%, Sri Lanka-down by 14.05% and Indonesia-down by 0.93%. 6
LITERATURE REVIEW
Source: ITS, 2009 Graph 2.1: Change in Apparel export value to US during 2/2009 to 2/2010 period However as per the graph 2.2, the apparel exports to EU have been increased over the 2007 to 2008 period. China reported 23% growth where Vietnam had 18% growth in exports. Indonesia, Pakistan, India, Sri Lanka also has increased the apparel exports to EU during this period. (ITS, 2009)
Source: ITS, 2009 Graph 2.2: Change in Apparel export value to EU during 2007 to 2008 period
7
LITERATURE REVIEW
In the global apparel manufacturing industry China is the biggest exporter with 33.15% share, followed by EU with a 31.05% share of world garment exports. Although all other countries lag far behind; Turkey, Bangladesh, India, Vietnam, Indonesia, Mexico, Thailand and Pakistan all feature among the top 15 clothing exporters. Whole Asia accounted for 52% of world clothing exports in 2008. The major importers of clothing are the EU and the US, with Japan trailing in third place. (Graph 2.3)
Source: ITS, 2009 Graph 2.3: World export of apparel at the end of 2008
2.2. APPAREL MANUFACTURING INDUSTRY IN SRI LANKA The apparel manufacturing industry in Sri Lanka experienced phenomenal growth after the introduction of free trade in 1977, mainly as a result of quota-hoping East Asian garment exporters attracted by the country‟s liberal trade regime, and being able to relocate their already well-established garment businesses to Sri Lanka. This encouraged local entrepreneurs to start their own garment companies to exploit the market which was guaranteed by quotas. The MFA quotas helped Sri Lanka to develop its apparel manufacturing industry by protecting it from direct competition from established producers. Sri Lanka did not have a well-developed textile or apparel 8
LITERATURE REVIEW
accessories base at this time and the value addition was lower as 30% as the garment production was based on imported inputs (Kelegama, 2005). By the early 1980‟s the garment industry was growing rapidly and by 1986 garments accounted for the largest share (27%) of all the exports. In 1992 the apparel export value was US$ 400 million and it became the largest foreign exchange earner in the country, overtaking other traditional exports like tea and rubber (Kelegama, 2005). By this time Sri Lanka‟s garment exports have been largely governed by the MFA. In 1995, Agreement on Textiles and Clothing (ATC) was introduced by WTO and according to the new rules, the MFA was phased out in four phases over a period of ten years. Before the expiry of MFA the total export was US$ 2.68 billion and of this US$ 1.55 billion was generated from exports to US and US$ 996 million from exports to the EU (JAAFSL, 2009). The MFA was totally removed in 1st January 2005 and while there was serious concern as to the fate of the industry in the post MFA phase, what happened was an increase in exports and the generation of total revenue of US$ 2.7 billion. Then the US exports were US$ 1.6 billion and over US$ 1 billion from EU. 66% of the total exports were shipped under the Generalized System of Preferences (GSP+) scheme. In 2008, the industry hit a new height of 3.3 billion dollars in export revenue. The decrease in exports to the US continued recording 1.5 billion dollars and from EU 1.6 billion dollars. However, in 2009, 3.15 billion dollars was generated as total revenue from apparel exports. The share from US was 1.3 billion dollars and from EU was 1.646 billion (JAAFSL, 2009). Currently the apparel manufacturing industry has an important place in Sri Lanka‟s economy being the country‟s largest single industry contributing to 40% of industrial production (Wijayasiri & Dissanayake, 2008). Total value of export earnings in the sector was at US$ 3158 million (JAAFSL 2009) accounting for 42% of the total export earnings (The Nation, 2009) in 2009. There are around 270 garment factories in Sri Lanka (Fibre2Fashion, 2009) employing about 270000 people directly and the incidentally the apparel sector accounts for 33% of the manufacturing employment of the country (JAAFSL, 2009a).
9
LITERATURE REVIEW
Export Value US$ million
Total Apparel Export value of Sri Lanka 3500 3000 2500 2000 1500 1000 500 0 2003
2004
2005
2006
2007
2008
2009
Year
Source: JAAFSL, 2009 Graph 2.4: Total Apparel Export value of Sri Lanka
Apparel export value to USA from Sri Lanka
Export Value US$ million
1800 1600 1400 1200 1000 800 600 400 200 0 2004
2005
2006
2007
2008
2009
Year
Source: JAAFSL, 2009 Graph 2.5: Apparel Export value to USA from Sri Lanka Sri Lanka‟s Apparel Manufacturing Industry is dependent on two major markets, the EU and US. Both of these markets have been hit very badly by the economic crisis 10
LITERATURE REVIEW
and the clothing retailers based on the US and EU are struggling to survive with many filing for bankruptcy and others consolidating, cutting costs and downsizing. The main export market for Sri Lankan garments is now EU overtaking US in 2008. The apparel export value to US has been reducing since 2005 because of the MFA phase out and the economic crisis. The apparel export value to USA has been reduced by 5.48% during 2007 to 2008 period and by 2009 the decline was 13.95%. (Graph 2.5)
Export Value US$ million
Apparel Exports to EU from Sri Lanka 1800 1600 1400 1200 1000 800 600 400 200 0 2004
2005
2006
2007
2008
2009
Year
Source: JAAFSL, 2009 Graph 2.6: Apparel Export value to EU from Sri Lanka
The apparel export value to EU has been growing since 2005 and it is increased by 10.79% during 2007 to 2008 period and by 2009 the growth rate was 2.62 %.( Graph 2.6) Others, 6.75% USA, 41.10%
EU, 52.15%
Source: JAAFSL, 2009 Graph 2.7: Apparel Export Markets of Sri Lanka
11
LITERATURE REVIEW
In 2009, the EU market accounted for 52.15% of the total garment exports. The second most important market is the US market with 41.1% while all the other countries have a smaller share of 6.75% (JAAFSL, 2009). The other importers accounting for the remaining 6.75% of garment exports are Canada, Switzerland, Australia, Japan and South Korea. Among the EU countries, the United Kingdom buys majority of the exports and the other EU countries are Germany, Belgium, France, Netherlands and Italy (Graph 2.7).
2.3. PRICING PRACTICES IN THE APPAREL MANUFACTURING INDUSTRY Once the apparel manufacturer receives an inquiry from the apparel buyer, the manufacturer asks the raw material suppliers to quote the raw material price. In some cases the buyer itself contacts the raw material supplier and obtains the raw material price information and gives it to the apparel manufacturer. After the necessary calculations the apparel manufacturer quotes the price to the buyer. If that price is acceptable the buyer adds some margin and set the retail price. (Figure 2.2)
Raw Material Manufacturer‟s Price
Apparel Manufacturer‟s Price
Retailer‟s Price
Figure 2.2: Prices in the Apparel Industry There are some specific terms used by the raw material manufacturers, apparel manufacturers and the buyers. Some of them are CIF (Cost, Insurance and Freight) price, CM (Cut and Make) price, CMT (Cut, Make and Trim) price, FOB (Free On Board) price and LDP (Landed Duty Paid) price. The raw material supplier quotes the prices as CIF or FOB price where the apparel manufacturer quotes as CM, CMT or FOB price. LDP is the price paid by the buyer to import the garment.
The CIF or FOB price terms are normally used when the raw material supplier is a foreign supplier. CIF is a trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier (Investopedia, 2010). Therefore if the 12
LITERATURE REVIEW
price is CIF the price will include the insurance and all other charges up to the named port of destination. In the early stages, the most common ways of quoting prices by the apparel manufacturing companies are CM and CMT. CM price is the Cut and Make price and CM includes purely outsourcing activity of relatively simple operations. The buyer typically provides design specs, furnishes all the materials, handles compliance with norms and standards, and markets and distributes the finished goods to the end consumer. Therefore the Apparel manufacturing company has to calculate only the standard minute value, labour and other overhead costs and the profit margin to quote the CM price. The company which is stuck in this stage can claim no more than 15%25% value input per garment (Ohta & Goto, n.d.). Cost per minute
=
Labour cost + Overhead cost + Profit margin
CM price
=
Cost per minute x Standard Minute Value (SMV)
CMT is the Cut, Make and Trim cost and everything that applies to the CM stage applies for CMT as well except the apparel manufacturing company has some responsibility in the purchase of secondary material (Nathan & Werner, 2007). Under this system the input materials including textiles are supplied to the apparel manufacturers by buyers and the main characteristic in this system is the apparel manufacturing company faces relatively small risk in the production and distribution of garments (Minor & Feeney, 2007).
The Free On Board (FOB) price refers to the price that a supplier is paid for a garment or raw material and it does not include the cost of delivery or insurance for the garment (SOMO, 2003). However this indicates the cost of the good, including all transportation and insurance cost from the manufacturer to the port of departure, as well as the costs of loading the vessel. Therefore the buyer has to bear all costs and risks of loss of or damage to the goods from that point. If the raw material supplier quote FOB price, the apparel manufacturing company have to add the cost of insurance and transport cost to the raw material price when quoting the garment price (Figure 2.3). 13
LITERATURE REVIEW
Figure 2.3: FOB and CIF comparison In FOB pricing, the buyer can nominate the fabric supplier or the apparel manufacturer can take the sourcing decision. However in true FOB pricing the apparel manufacturing company is responsible for sourcing fabric. The apparel exporters get in touch with their fabric sources, negotiate prices, and the buyer need not to know the actual negotiated fabric price between the apparel manufacturer and the fabric mill. This allows for some buffers to be kept with the garment exporters, which benefits them. On the other end the buyers also benefit because, they are able to get a much better garment FOB price as compared to garment based on nominated fabric sources. (Gopalakrishna, n.d.). When quoting FOB price the apparel producer may receive a better price for the product due to the enhanced level of service. However the apparel manufacturer will take a higher level of financial risk and can incur significant losses when an order is not completed as planned. (Minor & Feeney, 2007) According to Goto (2007) there are three types of FOB arrangements in apparel manufacturing industry.
Product Design & Branding
Sourcing Strategies
Procurement of material
CMT
Distribution and Marketing
CMT FOB I FOB II FOB III
Source:GOTO, 2007 Figure 2.4: FOB Classification according to production flow and functional process 14
LITERATURE REVIEW
As per Figure 2.4, FOB I arrangement, the apparel manufacturing companies have to purchase input materials for processing from suppliers that are designated by buyers. Therefore the difference between this and CMT is very small. The buyers specify not only the exact specifications and color of the textile and accessories that the garment company must procure, but also from which producers they must procure. Also the buyer pre-determines the matters related to production including output volume, prices and delivery schedules. The apparel manufacturing company must reflect the prices of the materials prescribed by buyers into the garment FOB price, where the profits that could be accrued by handling purchasing operations is only marginal. In FOB II arrangement, the apparel company receive garment samples from buyers and based on the samples the company produces similar garments using materials that they must procure somewhere without any directions from buyers. Therefore in this pricing system the garment companies have some level of flexibility to develop their own supply bases and create value added through sourcing input materials. Under FOB III the garment manufacturing companies initiate production of garments based on their own design with no prior commitment of any kind from foreign buyers.
Table 2.1: FOB Classification according to the production flow and functional process US $
Fabric cost
4.5
Accessories cost
1.2
Process cost (Washing , Printing , Dyeing , etc)
0.5
CM
3.8
FOB price Insurance, freight etc. (Ex. 10%)
10 1
CIF price
11
Duty (Ex. 12%)
1.3
LDP
12.3
Wholesaler‟s mark-up (Ex. 50%)
6.2
Wholesale price
18.5
Retailer‟s mark-up (Ex. 300%)
55.5
Retail price, excluding Value added tax (VAT )
74
VAT (Ex. 25%)
18.5
Selling price to consumer
92.5
Source: Garments – A survey of the market for Garments in Denmark 15
LITERATURE REVIEW
Many Sri Lankan apparel manufacturing companies quote prices as CM, CMT or FOB. When the price includes the insurance and freight cost, it is called CIF price. After including the duty fees the price named as Landed Duty Paid (LDP). This will be the price paid by the buyer to import the product. If the product is imported by the wholesaler then a wholesaler markup also will be added and then the price will become Wholesaler‟s price. After adding retailer‟s markup and tax the Retail price or the selling price to the consumer will be obtained. The detail breakdown and an example will be presented in the following table. When referring table 2.1 it is clear that a large amount of price is added due to the intermediaries. Therefore in recent years the tendency has been to reduce the number of intermediaries in order to keep prices down. Many large retailers skip the wholesaler and buy directly from the garment manufacturing company or agents and handle import formalities themselves. (DIPP, 2008)
One of the new trends in the apparel industry is the continuous price reduction. Therefore the customers respond by buying more cloths and by changing the way in which they buy them. This creates a pressure for the retailer to introduce something new in store every month. Fast fashion has entered the market and the consumers expect the latest styles very quickly after they first appeared on the catwalk, at prices which they can wear the garment once or twice and then replace it (Mather, 2006).
Pricing should not only be based on cost levels and mark-ups. Ultimately the price has to be competitive with the other garment manufactures in the market. (DIPP, 2008) While the consumers expect lower prices, the price paid by buyers to the apparel manufacturing companies is falling down, especially by the low cost retailers who compete on price. The buyers make the apparel manufacturing companies to play off against each other, forcing them to compete against each other to fulfill the contract cheapest and fastest. Sometimes this is played out in real times, using online reverse auctions where suppliers „bid‟ against each other over the internet. In addition to that some buyers force the apparel manufacturing companies to open up their accounts so the buyer can examine them and find ways to cut cost (LBL, 2006). In this case the manufacturing company has to separately mention the fabric consumption per 16
LITERATURE REVIEW
garment, trim consumption per garment, fabric and trim prices, wastage amount, finance cost and even the Standard Minute Value (SMV) and the cost per minute value. Some cases they request for the mini markers of the style and the SMV break down to check whether those can be reduced further.
An average apparel manufacturing company takes minimum 5 days to revert on costing and that too after being chased for it. Before setting at agreeable prices the companies go through three-four rounds of hard negotiations. The apparel manufacturing companies quote the highest possible prices hoping to get a better price than the target price. Buyers complain that the garment companies quote unrealistic prices and the apparel companies complain that the target price given by the buyer is unachievable. However this higher price quoting will not work in the future as the buyer will choose the supplier with lowest bid as there will not be any time for negotiations with the buyers. In the online reverse auction not only the responding time for the inquiry reduce but also the companies will have to quote the best price which is closer to the target given by the buyer.
2.4. COST COMPETITIVENESS OF SRI LANKAN GARMENT INDUSTRY 2.4.1. COST STRUCTURE OF THE APPAREL MANUFACTURING INDUSTRY
Competition is very high in the apparel manufacturing industry since there is an ever increasing number of apparel suppliers in more and more countries, which are able to supply Western retailers and brands. Also the mass market retailers and brands try to attract customers by offering lower market prices. Although the consumers do not complain about the lower prices, the garment manufacturing companies have to pay a price for these discounts. In order to lower the price quoted by the manufacturing company, it is required to reduce the costs included in the price. Birnbaum (2000, cited in Merk, 2003) argues that it is required to identify all the costs involved in producing garments prior to reduce the costs. Therefore he has introduced a method called Full Value Cost Analysis in the garment industry. This is done through separating costs into three different categories: macro costs, indirect costs and direct costs.
17
LITERATURE REVIEW
2.4.1.1 MACRO COSTS
There are some macro costs which can be controlled by the exporting country and some macro cost cannot be controlled. The macro costs are the costs related to the country where the production process takes place. According to Birnbaum (2000, cited in Merk, 2003) this is the most important factor which determines the total garment cost. The macro costs mainly depend on the facilities of the country such as having educated workforce to handle managerial positions, having integrated transport system to move materials to the garment factories and to take finished garments out of the country and the reliability of the commercial legal system. Also it is influenced by the way of government involve in the industry ie. taxes and fees, trade, banking and monetary policy, how the government control capital flows, foreign direct investments and minimum wages or prices. Definitely these costs can be controlled by the country and these regulations can be time consuming and expensive which may incur large cost. However some macro costs such as quotas, duties, country of origin, antidumping policies and trade disputes cannot be controlled by the country.
As in the example given in table 2.2 the FOB value of Mexico is very high than China. However due to the influence of some indirect costs such as quota, duty, freight and clearance fees, the LDP value of China is higher than Mexico. Since LDP is the cost for the buyer Mexico has a competitive advantage.
Table 2.2: Influence of Macro costs on landed duty price
Country
FOB
Quota
Duty
Freight
Clearance
LDP
China
$5.75
$1.5
$0.94
$0.40
$0.15
$8.74
Mexico
$8.13
0
0
$0.15
$0.15
$8.43
Source: Brinbaum, 2000, cited in Merk, 2003 2.4.1.2 INDIRECT COSTS
Indirect costs are the costs that are related to the factories and agents making the garment. Indirect labour cost, manufacturing overhead, general and administrative 18
LITERATURE REVIEW
expenses, merchandising design and product development expenses can be given as some examples for indirect costs. Birnbaum (2000, cited in Merk, 2003) argues that the indirect cost represents a great part of the manufacturing process. This factor commonly comes to consideration by the buyers when placing an order with the companies. When the buyers keep patternmakers they need to pay a higher wage cost and if they can find a factory with pattern making facilities it would save a considerable amount of money on their direct cost although the price quoted by that company is greater than the price quoted by the company which doesn‟t have pattern making facilities.
The apparel manufacturing companies has been differentiated according to the indirect cost functions they are handling. Birnbaum (2000, cited in Merk, 2003) differentiates between three kinds of factories: zero service factories, normal service factories and full service factories. While a zero service factory would only do assembling of imported input, a full service factory has moved towards a full package supply. These factories would be able to take over most of the business functions on the flow chart without any problems. Quality standards and reliability at these factories will be high. This reduces the need for controls. The main point is that only large retailers, agents or brands can afford to have a large staff of skilled production people who can do these business tasks efficiently. Smaller companies can better rely on a skilled factory to save costs.
2.4.1.3 DIRECT COSTS
After having weighted the cost of doing business in one country against another (macro cost) the byer selects the factory which is capable to provide the necessary facilities, which help the buyer to reduce the indirect cost. Then the buyer concentrates on the cost of the garment which is known as direct cost. The direct cost includes the material cost (fabric and trim), making cost (cutting, sewing, finishing, pressing and packaging etc) and agent‟s commission.
Some factories become a trader rather than a marketer and give no specification of costs and provide only a single price with no breakdowns. This specially happens 19
LITERATURE REVIEW
when the companies do not want the buyer to know how much their fees are. However it will be difficult to negotiate on direct costs without any knowledge about any direct cost breakdowns. Currently many buyers request the companies to open up their accounts to quote the price with detailed cost breakdown. The direct cost breakdown includes material, making and agent‟s commission and of these the material comprises by far the largest portion where the fabric often represents 60% of the FOB price. (Brinbaum, 2000, cited in Merk, 2003) Fabric is therefore the largest direct cost and money can be saved here. However the question is who pays for the fabric: the buyer (CMT) or factory (FOB) and there are some risks involved in handling the sourcing of fabric. Many small factories do not want to own the fabric because they lack the capital or fear that the order can be cancelled.
2.4.2.
COST COMPETITIVENESS OF MANUFACTURING INDUSTRY
THE
SRI
LANKAN
APPAREL
There are some key drivers of cost competitiveness. The first one is the duties and taxes which include import duties on raw materials, corporate tax rates, local taxes and duties and their cascading impact. Labour includes the labour cost and labour productivity. Another key driver is other costs such as power cost and availability of power and finance costs. Infrastructure cost is also a key driver and it includes infrastructure issues such as delays in port clearance and high freight rates etc. The final driver is the preferential market access and it includes trade agreements with the global markets. (IMACS, 2009)
2.4.2.1. LABOUR COST
Sri Lanka has lower labour cost compared to India, China and Turkey which would be a competitive advantage, however the labour cost is higher compared to the emerging competitors like Vietnam and Bangladesh which is a competitive disadvantage (Graph 2.8).
20
LITERATURE REVIEW
Source: IMACS, 2009 Graph 2.8: Comparison of Labour cost per hour of several countries
2.4.2.2. POWER COST
Source: IMACS, 2009 Graph 2.9: Comparison of Power cost per Kwh of several countries
As shown in graph 2.9, power cost in Sri Lanka is the second highest among the low cost countries. The power cost in India and Turkey is higher than Sri Lanka and the cost in Vietnam, Bangladesh and China is lesser than Sri Lanka which is a competitive disadvantage.
21
LITERATURE REVIEW
2.4.2.3. Interest cost
Source: IMACS, 2009
Graph 2.10: Comparison of Interest cost of several countries
Sri Lanka has the highest interset cost among the 6 countries and it is a competitive disadvantage for the country (Graph 2.10). 2.4.2.4. CORPORATE TAX
Source: IMACS, 2009 Graph 2.11: Comparison of Corporate tax of several countries
Sri Lanka has the highest corporate tax among the 6 countries and it is a competitive disadvantage for the country (Graph 2.11). 22
LITERATURE REVIEW
2.4.2.5. INLAND TRANSPORTATION AND HANDLING COST
Source: IMACS, 2009 Graph 2.12: Comparison of Inland transportation & handling cost of several countries
The Inland transportation cost in Sri Lanka is higher only compared with china and when compared with the other countries the cost is very much lower which create a competitive advantage (Graph 2.12).
2.4.2.6. OVERALL COST COMPETITIVENESS COMPARED TO BANGLADESH, VIETNAM AND INDIA
When considering Bangladesh, Vietnam and India, Sri Lanka has competitive advantage in terms of cost only against Bangladesh and has a great competitive disadvantage when compared to Vietnam and India. When considering overall cost competitiveness of Sri Lanka, India is 6% competitive than Sri Lanka and Vietnam is 4.2% competitive than Sri Lanka. Since Vietnam is an emerging competitor for Sri Lanka it is required to consider this threat and should take action to improve the cost competitiveness of Sri Lanka (Refer graph 2.13).
23
LITERATURE REVIEW
Source: IMACS, 2009 Graph 2.13: Cost Competitiveness compared to India, Bangladesh and Vietnam
2.5. FACTORS CONSIDERED BY GARMENT BUYERS WHEN SELECTING THE GARMENT MANUFACTURING COMPANIES
In the existing literature there are mainly two supplier selection methods, the analytical hierarchy process (AHP) (Saaty, 1980 cited in Teng & Jaramillo, 2005; Hill and Nydick, 1992 cited in Teng & Jaramillo, 2005; Barbarosoglu and Yazgac, 1997 cited in Teng & Jaramillo, 2005) and analytical network process (ANP) (Saaty, 1996 cited in Teng & Jaramillo, 2005). AHP is a simple method that anticipates hierarchical relationship among factors considered by decision makers such as quality, flexibility and cost, (See Figure 2.5) but it is weak in determining interrelationship among factors (Sarkis and Srinivas, 2002 cited in Teng & Jaramillo, 2005).
24
LITERATURE REVIEW
Selection of criteria from literature and experts
Rating of criteria by using Questionnaire filled by experts
Development of Hierarchy
Synthesis of priorities
Measurement of consistency
Selection of supplier
Source : Sanjay, 2009 Figure 2.5: Selection of suppliers using AHP
Therefore Saaty developed the ANP model to overcome certain difficulties in AHP models by including the information of relationships between factors in the decision making process. The ANP is a coupling of two parts. The first consists of a control hierarchy or network of criteria and sub-criteria that control the interactions in the system under study. The second is a network of influences among the elements and clusters (Saaty, 2001a cited in Bayazit, et al., 2006 pp. 566-579). ANP model provides a better solution but the determination of the correlation factors makes it a more complex and time-consuming process (Teng & Jaramillo, 2005). Min (1994, pp.24-33) proposed a multiple attribute utility theory approach for international supplier selection. In his research, Min considered financial stability, quality assurance, perceived risks, service performance, buyer-supplier partnerships, trade restrictions, and cultural and communication barriers as the critical factors in the supplier selection process. The adequacy of these models lies in the possibility of performing sensitivity analyses for “what-if” scenarios. Teng & Jaramillo (2005) has developed a supplier evaluation model for textile-apparel supply chains using Analytical hierarchy process and multiple attribute utility theory approach. The model is designed according to a hierarchical structure with several layers of decision-making activities. The first level of the hierarchy is for the most critical areas in global sourcing for textile/apparel supply chains, which consists of five areas that include delivery, flexibility, cost, quality and reliability. The delivery cluster consists of four factors that include geographic location, freight terms, trade restrictions, and total order cycle time. The flexibility cluster is evaluated in terms of a supplier‟s capacity to respond to unexpected customer demands. Researchers have identified six component of flexibility that includes production 25
LITERATURE REVIEW
flexibility, market flexibility, logistics flexibility, supply flexibility, organizational flexibility and information systems flexibility. Third cluster- cost has great influence on the supplier selection process. The three factors considered in the evaluation of this cluster are the supplier‟s selling price, internal cost, and the cost for ordering and invoicing. The quality cluster includes four factors that consist of continuous improvement, certifications, customer service, and percentage of on-time deliveries. Reliability of a supplier‟s operations to fulfill supply chain activities includes four factors, the feeling of trust, the country‟s political situation, the currency exchange situation, and the warranty. Teng & Jaramillo (2005)
2.6. PRICING DECISION APPROACHES Most pricing practices and pricing models found in the literature are highly case specific such as Hotel Industry (Chieochankitkan, n.d.), construction industry (Skitmorel and Hedley, 2007; Mochtar and Ardit, 2000; Mochtar, 2002; Mochtar and Ardit, 2001; Allan, et al., 2008), Airline industry (Knorr and Zigova, 2004) and Recycling industry (Owen, 1998). For general overview on special characteristics in pricing Tellis (1986), Noble and Gruca (1998), Duke (1994) can be studied.
Most normative research on pricing concentrate on only one or two narrow aspects of the situation and have attempted to distrill pricing decision making into a linear model that progresses one step at a time towards pricing decisions. (See figure 2.6) This has been introduced to pricing decision making in order to permit a delineation of the various pricing issues so that the authority for the action can be distributed within organization. (Kotler and Keller 2006)
Company Pricing Objective
Company Policy
List price
Discounts
Adjustments
Final price
Source: Duke, 1994 Figure 2.6: Standard Linear Approach
26
LITERATURE REVIEW
The standard linear approach is the conventional pricing strategy framework, and it is started with determining the company pricing objective. The objective of the company depends on the philosophy of the company, which is used to determine prices. Those philosophies can be profit maximization, sales volume, market share, target return on investment level and survival. The pricing policies are some plans or course of action for achieving pricing objectives. These include price skimming, penetration pricing, life cycle pricing, above/ at / below competitors and customer value. (Duke, 1994)
Using these objectives and policies, the list price (base price) is developed and for the list price development cost based, competitive based or demand based methods of calculations are used. This list price is reduced by the discounts made to different customers depending on the situation. Finally adjustments are made for geographic considerations and the final price is decided. (Duke, 1994)
The major disadvantage of this approach is that it does not bring all of the pricing issues together under a cohesive framework that coordinates the pricing process (Duke, 1994). In order to minimize the disadvantages of the above approach a strategy approach to pricing was introduced. In this approach the firm‟s pricing objectives are developed and are then refined by constraints placed on the firm from external environment and consumer characteristics (Figure 2.7). Considering the above aspects a set of pricing issues are identified which are effective or appropriate in specific situations.
X
Company objectives And Competitive situation Y
Z
A Customer Characteristics
B C
Appropriate pricing issues and alternatives
Source: Duke, 1994 Figure 2.7: Strategy Matrix approach
27
LITERATURE REVIEW
In order to prepare strategy based pricing it is required to select a framework and the price strategy matrix proposed by Tellis (1986) is used as the basis for the discussion in this chapter. Tellis has done a comprehensive literature review on pricing and developed a framework that highlights the similarities and differences among wide range of pricing strategies. Two dimensions of shared economies available to a firm and the consumer characteristics necessary to exploit these economies, determine which of nine pricing strategies adopted by the firm.
The table 2.3 shows the pricing strategy matrix developed by Tellis. In this matrix the two dimensions are objective of firm and characteristics of consumers. Tellis has identified the objectives of the firms as varying prices among consumer segments, exploiting competitive position and balance pricing over product line. Also the characteristics of consumer has been identified as those have high search costs, those have low reservation price and all having special transaction costs. Tellis has identified separate pricing strategies for each pricing objective, matching with the each customer characteristic. For if the objective of the firm is to exploit competitive position and if the consumers have high search costs the pricing strategy which should be followed is “Price signaling”.
Table 2.3: Taxonomy of pricing strategies Objective of Firm Characteristics of
To vary prices
To exploit
To balance pricing
consumers
among consumer
competitive
over product line
segments
position
Some having high
Random
Price signaling
Image pricing
search costs
discounting
Some having low
Periodic
Penetration pricing
Price bundling
reservation price
discounting
Experience curve
Premium pricing
pricing All having special
Second market
transaction costs
discounting
Geographic pricing
Complementary pricing
Source: Tellis, 1986 28
LITERATURE REVIEW
2.7. PRICING STRATEGIES
Price is the only element of marketing mix that produces revenue where all the other elements (product, place and promotion) produce costs. (Mochtar and Ardit, 2000). Many researchers have argued that basically there are only two extreme pricing strategies: cost based pricing and market based pricing (Best, 1997 cited in Mochtar and Ardit, 2000; Skitmorel and Hedley, 2007; Knorr and Zigova, 2004). Best, (1997 cited in Mochtar and Ardit, 2000) has stated that any other pricing strategies are always in between these two extremes.
2.7.1. COST BASED PRICING
The cost information can play a key role in determining the selling price and therefore organizations consider it in setting their selling prices. (Drury, 2000; Horngren et al., 2000; Langfield-Smith et al., 1998. cited in Guilding et al, 2005). The cost based pricing starts by establishing the total cost of making product (Mochtar and Ardit, 2001 pp. 405 – 415). According to Mochtar and Ardit (2000 pp. 56-64) the most elementary cost based pricing method is to add a standard markup to the product cost (Cost plus pricing). Another cost pricing approach is target return pricing. The firm determines the price that would yield its target rate of return on investment (ROI)
In cost plus pricing, all the costs of making the good are added up and then a mark-up is added. Cost plus pricing is used when the company focuses on cost and return on sales and when market share and profit are the objectives. The markup must be large enough to provide a sufficient profit, but should not exceed what customers are willing to pay. (Giddens, et al., 2002).
The literature studies reports that the cost plus pricing, often using full costs is widely used. Mills (1988, cited in Guilding et al, 2005) and Govindarajan and Anthony (1983, cited in Guilding et al, 2005) has done some studies considering UK and US companies and found out that companies used some form of full cost as a basis for the mark up when setting selling price. Also Joye and Blayney (1990, cited in Guilding et al, 2005) identified that the product cost was an important determinant of price. 29
LITERATURE REVIEW
However small firms operating in an industry where prices are set by the dominant market leaders will have little influence over the prices of products. For these price taking firms the possibility for cost based pricing is limited and the cost information is viewed primarily as a key factor to be considered when optimizing the output and mix with the given market price. According to Mochtar & Ardit (2000 pp. 56-64) and Kerin & Peterson (1998, cited in Chieochankitkan ,n.d.) the main problem associated with cost based pricing is over and underpricing. Since the price is set based on internal cost and margin requirements, the resulted price could be too high or too low, relative to competing products of comparable quality and reputation. What generally happens in these situations is that the product is overpriced relative to customer benefits and the price of competing products.
Many companies still believe cost based pricing is the best pricing strategy because most pricing strategy models require input information about competitors and information about the customers which are not readily available. Mochtar and Ardit (2000 pp. 56-64) further argues that cost based pricing make sense and need to be used when competitors face the same cost of supply and in competitive bidding markets, where pre-qualified bidders are selected on the basis of low price.
2.7.2. MARKET BASED PRICING
Mochtar and Ardit (2001 pp. 405 – 415) states that, when the price is set based on internal cost and margin requirements, the price that results could be too high or too low relative to competitors‟ price. Had the pricing started with market (customer, competitors and product position) the company would know what cost reductions would be needed to achieve a desired level of profit. Then if those cost targets could not be met at the market based price either an alternative strategy will be developed or the project or pricing inquiry will not be pursued (Best, 1997 cited in Mochtar and Ardit, 2001 pp. 405 – 415)
According to Mochtar and Ardit (2000 pp. 56-64) different market price strategies would be developed in response to different customer needs. Further, the goal of 30
LITERATURE REVIEW
market based pricing is to create a price based on a superior customer value in terms of either real economic value compared to competitors‟ cost or customers‟ perceived benefits. Therefore the market based pricing can be divided in to two main sections as competition based pricing and perceived value based pricing.
2.7.2.1. COMPETITION BASED PRICING
In competition based pricing (also called as going rate pricing) the companies pay less attention to its own costs or demand and base their prices largely on competitors‟ prices. The company charges the same, more or less than its major competitors (Giddens, et al., 2002). The competitive based pricing is quite popular when costs are difficult to measure or competitive response is uncertain (Evans and Berman, 1987 cited in Mochtar and Ardit, 2000 pp. 56-64). This is also common where companies submit sealed bids for jobs. The company bases its price on expectations of how competitors will price rather than considering about cost or demand. The company needs to win the contract or order and winning normally requires quoting a lower price than competitors (Mochtar and Ardit, 2000 pp. 56-64).
Giddens, et al. (2002) stated that examples for competitive pricing are predatory pricing, benchmarking and loss leader pricing. In predatory pricing the company sets a price that is deliberately lower than that of the competitor with the objective of removing the competition. Once the competitors have been driven out of business the company will raise its prices. Of course, the other companies may retaliate by also cutting their prices, leading to a price war. In benchmarking the company decides to model its product on the benchmark product in the market. The benchmark product is the product recognized by the industry and consumers alike as representing the standard product with a reputation for features and reliability. The company decides to imitate this product and set its price at a similar level. In loss leader pricing one product in a mix of products is sold below cost in order to create orders for other products. Some shop keepers sell one well-known brand of goods at a loss in order to attract customers to their shops.
31
LITERATURE REVIEW
2.7.2.2. PERCEIVED VALUE PRICING
Shapiro and Jackson (1978, cited in Thompson & Coe, 1997) argued, in order to meet the demand of customers seeking value the seller must understand value from the buyer‟s point of view and use that information in determining price. To face the competitive market situation, it is necessary to go for profitable customer driven pricing procedures instead of old cost driven pricing strategies.( Forbis and Mehta, 1981; Shapiro and Jackson, 1978, cited in Thompson & Coe, 1997). The perceived value pricing can be easily used when only a few competitors exist, barriers to entering the market are relatively high and potential customers value the benefits provided by the product. A company should select a value pricing method when its product has a competitive advantage that is unsustainable because of the likelihood that competitors will enter the market. (Giddens, et al., 2002) An increasing number of companies are basing their price on the product‟s perceived value. They see the buyers‟ perception of value not the seller‟s cost, as the key of pricing (Mochtar and Ardit, 2000 pp. 56-64). Although many researchers (Gross, 1978; Monroe, 1990; Nagle,1987; Shapiro and Jackson, 1978, cited in Thompson & Coe, 1997) have identified the importance of perceived value pricing, the techniques for pricing industrial products based on customers‟ perceptions of value are rare. Economic Value Analysis (EVA) is an important technique which is currently employed for setting prices based on industrial buyer‟ perception of value. EVA attempts to set price based on the perceived economic value of the seller‟s product offer relative to closely competing products. (Nagle, 1987, cited in Thompson & Coe, 1997). A most recognized EVA pricing technique is the Economic value to the customer (EVC) model proposed by Forbis and Mehta (1981, cited in Thompson & Coe, 1997). The fundamental logic of EVC model is given in the equation 2.2. Product Y constitutes the reference product against which the seller‟s product (Product X) is compared. Sellers begin by estimating total lifecycle costs (LCCY) for the reference product (Y). These life-cycle costs are the sum of the purchase price (Py), start-up costs (STCy), and any post-purchase costs (PPCy) (equation 2.1)
32
LITERATURE REVIEW
Total life-cycle costs
STC
start-up costs – Installation , training , design services
PPC
post-purchase costs - service contracts, periodic maintenance and repairs.
P
total price the buyer pays for the product – Actual purchase price , Freight, set up charges, initial technical training
IV
incremental value – Additional features, Benefits , image
SC
seller‟s costs – seller‟s direct variable cost
TM
target margin
LCCY = STCY + PPCY + Py Maximum possible price
Pmaxx = LCCY – STCx – PPCx + IVx Minimum possible price
Pminx = SC + TM X
Sellers Product
Y
Reference Product
Source: Thompson & Coe, 1997 Equation 2.1: EVC Model by Forbis and Mehta
However the above model does not take into account any uncertainty associated with pricing variables such as fluctuations in market prices, limited information, variation in life cycle costs, general environmental uncertainty and variance in the sellers own costs. In order to minimize the above limitations the Stochastic Economic Value Analysis model was introduced (Thompson & Coe, 1997). The equation 2.2 represent the Stochastic EVA model.
P optimal = P [ Max( f ( P min x )
X
f( P max x ))]
where,
P optimal f ( P min x ) f( P max x )
= Optimal value-based price; = Cumulative frequency distribution for P min x = Cumulative frequency distribution for P max x
Source: Thompson & Coe, 1997 Equation 2.2: Stochastic Economic Value Analysis model
33
LITERATURE REVIEW
2.8. PRICING STRATEGY APPLICATIONS OF VARIOUS INDUSTRIES Although the availability of literature on pricing strategies in garment industry is very poor, many applications can be found in other industries. Among the other industries, the construction industry takes an important part as its pricing system is quite similar to the garment manufacturing industry. In both industries the competitors‟ prices are unknown and the pricing process is started after receiving the inquiry in most cases. Therefore the pricing literature in construction industry is more important than the other industries.
When considering the construction industry, the contracting is conducted through the competitive bidding process so that pricing mostly takes place in the bidding process. According to Skitmorel and Hedley (2007) there are two conceptual techniques for setting the final price as cost or market oriented ones. Cost oriented techniques used in construction industry are mark-up pricing, target return on investment and early cash recovery. Market oriented techniques are perceived value pricing and going rate pricing.
As per Mochtar and Ardit (2000 pp. 56-64), pricing strategies in construction industry are predominantly based on cost based approaches. Basically the models attempt to optimize cost based mark up in terms of either expected monetary values or expected utility to the bidder. Most models assume that clients select the lowest bidder. Most models make use of historical and current data about the bidder and other information about competitors and the overall industry. Since most pricing strategy models in construction are basically set to optimize markup, the objective is to come up with a bid price that is not too high or too low. Too high a bid price fails to get the contract and causes loss of time and money spent on preparing the proposal. Too low a bid price succeeds in getting the contract, but will force the company to undertake the job at a price far lower than necessary (Mochtar and Ardit, 2000 pp. 56-64).
Considering the problems with that cost based approach Mochtar and Ardit (2000 pp. 56-64) has developed a market based pricing model for use in the construction industry. Figure 2.8 illustrates the proposed market based pricing model by Mochtar 34
LITERATURE REVIEW
and Ardit (2000 pp. 56-64). Unlike in the traditional practices, this model suggests that the cost estimating function is not necessary at all. Main information used in this model is market data collected through marketing intelligence, combined with the company's strengths and weaknesses.
Market data
Market price
Bidding Offer
(Threats and opportunities)
Market Intelligence
Company‟s strength and weaknesses
Source: Mochtar and Ardit, 2000 pp. 56-64 Figure 2.8: Market based pricing
Planned marketing intelligence practices include establishing internal marketing information/decision support systems, conducting marketing research projects, collecting and analyzing competitors‟ past bids, training the company‟s staff in marketing/sales issues, searching market information on the Internet, searching and analyzing the owner‟s and competitors‟ information during bid preparation, reading trade publications and research journals, searching information about current and prospective clients, subcontractors and suppliers, talking to managers within the company, purchasing information from research agencies, and monitoring and analyzing rumors (Mochtar and Ardit, 2000 pp. 56-64).
A factors that affect a company's strengths and weaknesses include the type of project pursued, the geographic location of projects undertaken, the amount of work subcontracted on an average job, the amount of promotion/marketing expenditure compared to overall sales, the annual contract value of the projects undertaken, the orientation of the company in terms of marketing (competitive or negotiated bid), the market segment in which the company operates (public or private), equipment policy (owned or leased/rented), level of technological sophistication, level of past experience, and the company‟s marketing intelligence capabilities (Mochtar and Ardit, 2000 pp. 56-64). 35
LITERATURE REVIEW
Mochtar (2002 pp 86-87) also has developed series of market based pricing models for use in the construction industry.
Model 1 - This is a purely cost-based pricing strategy model. The typical procedure in cost-based pricing involves estimating the project cost based on project documents, then applying a markup for profit. (Mochtar, 2002 pp 86) Model 2 – This is a hybrid-pricing model which is a variation of the purely cost-based pricing approach. The cost optimization process in this model involves adjusting the estimated costs to fit the price range allowed by the market. In this model, detailed project cost estimating tasks are performed independently of market data collection. A decision is then made whether to bid or not to bid, based on whether the company can achieve cost levels that are within the market price range. Once a decision to bid is made, the risk policy of the company is decided. The company could decide whether to skim or penetrate the market. (Mochtar, 2002 pp 86) Model 3 – This is another version of a hybrid-pricing model. The main information of this model is market data collected through marketing intelligence so that a cost target can be set based on the market price range. Approximate cost estimates are calculated based on historical data and bidding documents. Cost analysis and adjustments are performed to optimize the cost and see if it fits within the market price range. Finally a decision to bid or not to bid the project is made. (Mochtar, 2002 pp 86) Model 4 – This is a purely market-based pricing model. The main information used in this model is market data collected through marketing intelligence. This model suggests that the cost estimating function is not necessary at all. The decision is always to bid the project, fully based on collected market information through marketing intelligence. Cost analysis and adjustment are performed only after winning the project, before the construction phase begins. The big assumption of Model 4 is the belief that the company will always be able to find ways and methods to construct the project below the market price with a reasonable profit. (Mochtar, 2002 pp 87)
Competition based pricing has been used to propose a suitable strategy for information products by Kanliang (n.d.). The common used generic competition strategies include 36
LITERATURE REVIEW
product differentiation and cost leadership. Kanliang (n.d.) further mentions that the traditional pricing strategy (cost plus) cannot be followed for this industry due to its unique cost structure and characteristics and product differentiation strategy will be very much suitable. The Pigou‟s typology of price discrimination was used as the analytical framework of pricing strategy for information product. Pigou‟s typology is presented in three areas as Individualization (Sell same product at different prices for every customer), Group pricing (A same information product is offered to different segment at different prices) and Versioning where the companies offer a series of products with different features from which customers may choose one that fit them best and they are willing to pay for it.
Previously in airline industry the companies were not allowed to set their ticket prices at will. Rather, the fares were set on a cost plus basis in order to guarantee airlines a minimum return and all the fares had to be approved by government bodies. This lead to two adverse consequences: on the one hand, airlines had no incentive to reduce costs by streamlining operations and increasing productivity. On the other hand fare levels in general were extremely high. After the deregulation, the airlines were permitted to set their own prices and the American Airlines introduced value pricing and it is an attempt to maximize overall profits by allocating a perishable commodity in limited supply among differentiated customers (Knorr and Zigova, 2004)
Chieochankitkan (n.d.) has proposed that value based pricing strategies are more suitable for the hotel industry. Armstrong & Kotler (2000 cited in Chieochankitkan, n.d.) say that in value based pricing (buyer based pricing) company sets its target price based on customer perceptions of the product value. The targeted value and price then drive decisions about product design and what costs can be incurred. As a result, pricing begins with analyzing consumer needs and value perceptions, and price is set to match consumers‟ perceived value. (See Figure 2.9)
Custome r
Value
Price
Cost
Product
Source: Chieochankitkan, n.d. Figure 2.9: Value based pricing 37
LITERATURE REVIEW
According to Chieochankitkan‟s study if the perceived value pricing was effectively used, it will result in good room sales and smooth management. In addition to that he mentioned about three main stakeholders of distribution channel; the principles, the intermediaries and the customers and analyzed if they were impacted as a result of the employment of the perceived value pricing. The examination showed that all of the considered parties were impacted from perceived value pricing both negatively and positively. The negative effects includes high expectation towards products and Difficulty in marketing management and some of the positive effects will be more variety for product selection and flexibility in running business.
In the hospital industry some of the major pricing practices which were developed in response to consumer demands are rate rationalization, integrated systems pricing tiers, fixed payment arrangements, and aggressive rate reduction strategies (Wichmann et al. 2009). Wichmann further states that organizations should develop dynamic pricing migration strategies that are customized based on the market and the organization's competitive position and that incorporate three critical factors: costs, comparative market data, and payment.
38
METHODOLOGY
CHAPTER 3 METHODOLOGY 3.1. METHODS USED TO COLLECT DATA The study used two main sources of data: primary and secondary data. 3.1.1. PRIMARY DATA
This source includes questionnaires, interviews and observational studies. Questionnaires were filled by executives, managers, or directors who are responsible for garment costing in garment manufacturing company either through email survey or by visiting the companies to get the questionnaire filled. The interviews were conducted when the companies were visited and sometimes there were possibilities for observational study as well. The results from this survey stage helped to check the variables and content validity of the developed questionnaire and to have an overall understanding about the pricing process of the garment manufacturing industry.
3.1.1. SECONDARY DATA
The data on garment industry and pricing strategies obtained through books, trade magazines, trade policy reports and journal articles.
3.2. PREPARATION AND DISTRIBUTION OF THE QUESTIONNAIRE
3.2.1. SURVEY SAMPLE
Currently there are around 270 garment manufacturing companies in Sri Lanka. How ever since some factories have been closed down there is no evidence on the correct population size for the study. From this population, the companies handle only the subcontract orders were ignored as they don’t quote their prices to the buyers or buying offices. From the other companies only the centres which has the pricing function was selected as most of the companies have one centre for the pricing function. Since there is no evidence about the number of centres and considering the 39
METHODOLOGY
difficulty of obtaining information it was decided to select a small sample. Therefore among these centres a sample of 30 garment manufacturing companies was selected representing various garment types and various buyers and different geographical areas. (See Figure 3.1)
All garment manufacturing companies in Sri Lanka (~ 270)
Centers handle pricing function
Companies handle only sub contracts
Sample (30)
Companies handle direct orders and orders from buying offices
Figure 3.1: Method of sample selection
3.2.2. THE TARGET RESPONDENTS
The target respondents are the Costing executives / Marketing managers who are employed in Garment manufacturing companies. They are the people who are responsible for quoting Garment prices to the buyers.
3.2.3. QUESTIONNAIRE DESIGNING
Questionnaire was designed to study the current pricing methods of Sri Lankan apparel manufacturing industry. When designing the questionnaire, a great deal of thought was given to its comprehensiveness and length. A short questionnaire was prepared as it is desirable for the respondent. The questionnaire consists of a series of
40
METHODOLOGY
questions that shown in Appendix 1. In order to ensure accuracy, the questionnaire was developed through the process as follows. 1. Reviewed the academic literature, text and research articles and identified the variables that related to the study.
2. Interviewed some costing executives to get some idea about pricing practices in the garment manufacturing industry in Sri Lanka.
3. Questionnaire was drafted based on the review of literature and the interviews. 3.2.4. PRE TEST
In order to investigate whether the survey could achieve its intended purposes, a pre test was done in consultation with some industry people, in order to improve the questionnaire so that it would be able to achieve the goals originally intended for the effectiveness of the study.
3.2.5. PILOT SURVEY
Pilot studies were conducted based on the rough draft of the questionnaire for more complete validity verification. For the pilot survey 4 companies were selected considering the easiness of getting the feedback from them. Based on the results and the feedback from the pilot survey the number of questions was reduced and some questions requesting confidential data was removed.
3.2.6. SURVEY RESEARCH
After pretesting and modifying the questionnaire, they were distributed among 30 garment manufacturing companies. Questionnaires for 14 companies were emailed to the managing director or the person who handles the garment pricing process. The other 16 companies were visited and the marketing managers were requested to fill the hard copy of the questionnaire. Out of the 30 companies, 27 companies responded by filling out the questionnaire.
41
METHODOLOGY
3.3. METHOD OF ANALYSIS
Main objective of the data analysis was to identify the current pricing practices and current pricing issues. In the questionnaire there were two question types. In the question type 1, 1-5 marks were given based on the importance and relevance of the answer to the given question (1- not important at all to 5 - very important). In the question type 2 the participant had to select one or several answers from the given answers. In order to analyze the answers of question type 1, SPSS software was used to calculate mean and standard deviation. In the question type 2 the answers were analyzed by calculating the percentage of the responds for a given answer out of all responds.
3.4. DEVELOPMENT OF ALTERNATIVE STRATEGIES In order to develop alternative strategies, the knowledge on current strategies in the garment industry and the knowledge from other industries were used. A SWOT analysis was conducted in order to decide the aspect that should be considered in developing the new strategies. From the other industry applications it was identified what they have gained from those strategies and the factors they have used to develop those strategies. Considering above information, set of alternative strategies were developed according to pricing objectives and customer characteristics. When developing the alternative strategies it was considered how to apply those strategies to the garment industry and when that particular strategy can be used.
3.5. PRICING STRATEGY AUDIT
For the pricing strategy auditing a pricing audit sheet was prepared. In order to obtain the information for the audit sheet, a pricing audit questionnaire was also prepared. Then some methods for evaluating individual pricing elements of the pricing process and overall performance of the pricing process were designed. 42
METHODOLOGY
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
3.6. ACTION PLAN
Literature Review Questionnaire Development Distributing Questionnaire Data analysis Developing Alternative Strategies Pricing Strategy Audit
43
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
CHAPTER 4 PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA The aim of this section is to present an overall idea about the garment pricing function of the various companies. These data has been collected by literature survey, visiting garment manufacturing companies and interviewing the merchandising directors, merchandising managers, merchandisers, work study executives and finance executives.
4.1. DEPARTMENTS INVOLVED IN PRICING FUNCTION
The person who is preparing the garment price differs from company to company. In some companies there is a separate costing executive to calculate the price and in other companies, product development merchandiser, merchandiser or merchandising manager prepares the price. This person coordinates the whole process of the pricing inquiry up to confirmation of the order. When a pricing inquiry is received from the buyer or the buying office the merchandiser or the costing executive has to get some information from some departments or sections to calculate the price. (For that it is required to pass some information to those departments or sections as well). The departments or sections involved in pricing function are Work study department, Sample room, Pattern making section, Marker making section, Merchandising department and Finance department.
4.1.1. WORK STUDY DEPARTMENT
The main information received from the Work study (WS) department is the Standard Minute Value (SMV) to produce a particular garment. This SMV value is required by the costing executive or merchandiser to calculate the Cut and Make (CM) cost. In order to calculate SMV the work study executive needs a sample, sketch or image and it will be provided by the costing executive (or merchandiser in some companies). If the provided information is not enough the WS executive requests the costing 44
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
executive to communicate with the buyer and get additional information required. Normally the SMV given in this stage is not the actual SMV and it may include some allowances, since sometimes it is calculated even without looking at the garment.
After receiving the SMV value, the costing executive compares it with the previous similar styles and if there is any variation he contacts the WS department and asks to recheck the value and analyze the reasons for variations. After the price is quoted to the buyer they may ask to reduce the price to get the order. In such cases if the costing executive cannot reduce the cost to get required price he may discuss with WS department to find out possible options to reduce the SMV and then those options will be given to the buyer. Another main task of the WS department in pricing function is to check the production feasibility of the particular style. They check the availability of the machinery and skilled labour to produce that garment and the degree of difficulty of the style. If the style is not feasible to produce, they inform the costing executive regarding this and then the inquiry will be rejected and it will be informed to the buyer.
4.1.2. PATTERN MAKING SECTION
The main task of the Pattern making section is preparing patterns to draw the markers. In order to prepare patterns the costing executive should provide the measurement specification, sketch or sample. In some cases the buyers provide the patterns which are produced only for the costing purposes. In that case the pattern making section has to grade the patterns and add the allowances and prepare patterns for additional parts which are not given in the set of patterns. In addition to the above information the costing executive must provide the washing, dyeing, and fabric details in order to determine the allowances such as shrinkage. Another task of the Pattern making section is to issue the pattern instruction to the marker making section. In order to issue the pattern instruction the costing executive has to provide the information on the colour and fabric type of each garment type to the pattern making section. After preparing the patterns the pattern maker informs the
45
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
storage area of the patterns and pattern instructions (garment way, number of pieces from each pattern, colour of each part etc.) to the marker maker. If there is any issue regarding the given patterns or if the given information is not enough to prepare the patterns the pattern making section informs the costing executive and he communicates with the buyer and provide the additional information required.
4.1.3. MARKER MAKING SECTION
The marker making section prepares mini markers in order to calculate the fabric consumption for the price calculation. This fabric consumption is normally named as Yardage Yield (YY) in the industry. The costing executive has to provide the information such as “cuttable width” or “finish width” of the fabric, the stripe or plaid repeat length and the colour of each fabric if necessary. Then the marker making section prepares the mini markers using those information and the patterns and pattern instructions provided by the pattern making section.
In some companies the marker making section calculates the YY and sends to the costing executive and in some companies they send only the mini markers so that the costing executive needs to calculate the YY. When drawing the mini markers if a problem arise, the marker making section communicate with the pattern making section to clarify the problem. If the problem cannot be solved by themselves, they contact the costing executive and ask to take necessary action.
4.1.4. MERCHANDISING DEPARTMENT
In some companies the merchandising department is separate from the costing section and the pricing is done by a separate costing executive, where in other companies the pricing is done by the merchandising department it self. If the merchandiser does not calculate the price the costing executive has to get the information such as the issues of the current suppliers, current negotiated raw material pricing details and the
46
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
information of the previous similar styles (ie. Whether the style is profitable, which suppliers are used, actual fabric and trim consumptions, actual SMV etc)
4.1.5. FINANCE DEPARTMENT
The finance department calculates the overhead cost of the company. If the costing executive needs the overhead cost detail he can get it from the finance department. In some companies the finance department calculates the cost per minute value using the overhead cost details and pass the information to the costing section.
4.1.6. SAMPLE ROOM
Some buyers request samples in addition to the pricing details. If the sample of the particular style has been prepared, the costing executive can identify the additional trim requirement to produce that garment and cost according to that. In addition it is possible to get the exact washing, printing, embroidery pricing details if they have already been developed in those plants. If the buyer does not request a sample at the pricing stages, some times for a difficult style where the SMV cannot be determined by just referring a sketch, the WS executive asks sample room to prepare a mock up sample to check the time taken to complete the operation and whether it is feasible to produce.
The relationship between the above discussed departments is graphically illustrated in Figure 4.1 and Figure 4.2.
47
Work Study Department Exchange the ideas on the construction of the garment
Give SMV to calculate CM value Check whether the style is production feasible Availability of Machinery and skilled labour The degree of difficulty of the style Marketing Department (Costing Section)
Pattern Making Section Clarify issues Prepare the patterns Give Pattern instructions Clarify the issues Regarding Patterns
Send the Mini markers Calculate YY
Prepare mock up samples if it is difficult to determine the SMV by just referring the sketch
Sample Room Requirement of the additional trims and accessories
Overhead cost details
Information of the previous similar styles Supplier issues
Marker Making Section
Merchandising Department
Finance Department
Figure 4.1: Relationship between marketing department and other supportive departments.
Work Study Dept Provide Measurement Specification or the patterns for grading Provide the sketch or the sample Provide washing / dyeing / fabric details to determine the shrinkage allowance Information on the colour and fabric type of each garment part. Communicate with the buyer and provide additional information required by pattern maker
Pattern Making Section
Provide the information on the colour , fabric type and fabric width information of the each garment part. Provide the repeat length of the fabric Discuss the variation in YY by analyzing the previous similar styles. Discuss whether the given fabric width is sufficient to draw the markers without pattern alteration.
Marker Making Section
Give the sketch / image / sample to calculate the SMV Discuss the possible options to reduce SMV and suggest it to the buyer Communicate with the buyer and provide additional information required by the work study department Discuss the variation in SMV by analyzing the previous similar styles
Marketing Dept (Costing Section)
Provide the low cost supplier details Provide the confirmed costing details
Merchandising Department
Figure 4.2: Information issued by marketing department to supportive departments.
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
4.2. ELEMENTS IN THE GARMENT PRICE QUOTED BY THE GARMENT MANUFACTURING COMPANY
The main elements in garment price are Raw Material cost, Process cost, Cut and Make (CM) cost and Finance charge. The breakdown of the above mentioned elements is given in the Figure 4.3 below.
Garment Price
Raw Material cost
Process cost Printing
Fabric cost Accessories cost
Embroidery
+
Packing Accessories cost
Garment washing / Dyeing
+
Cut and Make cost
+
Finance Charge
Heat Transferring
Figure 4.3: Breakdown of the garment price quoted by garment manufacturer
4.2.1
RAW MATERIAL COST
The raw materials which are used to produce a garment are Fabrics, Accessories and Packing accessories. 4.2.1.1 FABRIC COST
The main and the largest cost element in the garment price is the fabric cost. The fabric cost normally consists of three elements as fabric price, wastage and fabric consumption. Some buyers nominate the suppliers for the style and some buyers give 50
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
the freedom for the garment company to select the suppliers. The buyer can nominate only one supplier or they can nominate range of suppliers. If a range of supplier list is given by the buyer or if the garment manufacturing company has the freedom to select the suppliers, the company has to select one supplier from them. For this purpose following criteria should be considered.
Fabric price
Fabrics from different suppliers may have different widths and prices. Therefore in order to determine the fabric with the best price the markers are drawn for all the widths and consumption is calculated. Then the fabric cost is calculated by multiplying consumption by fabric price. Then the supplier with the lowest fabric cost can be determined.
Fabric Width
In order to cut some garment pieces the fabric should have certain width and if it is less than that, the design can be changed. In such cases it is necessary to select the suppliers who have the required fabric width.
Fabric Quality
The garment manufacturing company must achieve the fabric quality requested by the buyer. If it is really difficult to achieve the required quality they have to negotiate with the buyer to produce with a closer quality. Quality of the fabric mainly categorized in to several sections as; required weight (eg. 140 grams per square meter (140 gsm)), required composition (eg. 100% cotton) and type of fabric (eg. Single jersey), quality of finish (eg. Sueded, brush back, etc). In addition if the company has dealt with the particular supplier before, they can consider the past records of defects as well. Sometimes the buyers ask the fabric should meet some quality standards such as testing standards. In such cases the company should select the suppliers which have the certain quality certificate.
51
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
Other fabric requirements
If the particular garment consists of several fabrics it would be better if all the fabrics can be purchased from one supplier. Therefore when selecting suppliers, the company has to check whether it is possible to purchase all or most of the fabrics from one supplier.
Minimum order quantity
All the fabric suppliers have a minimum order quantity for the fabric since there is a minimum amount they can produce. For example; if the minimum order quantity is 500m, and if the company needs only 300m, the company may need to purchase all the 500m if the company selects that supplier. This problem mainly arises when the garment has a very small part which is not produced in the shell fabric and the order quantity is very small. If they cannot find the supplier with that required order quantity they need to take the total cost of the minimum fabric order quantity and divide it by the expected order quantity to take the fabric price instead of directly taking the fabric price per meter given by the supplier.
Country of origin of the supplier
Certain buyers request the companies to purchase from specific countries to get some benefits. For example in order to get the GSP+ benefit the companies have to purchase from the SARRC region. The main disadvantage when the supplier is nominated by the buyer is that the company can only compete in fabric consumption and cannot compete in price although they have low cost customer base. However if the supplier name is given the responding time for the pricing inquiry can be reduced as the searching time can be minimized.
When the garment manufacturing company has the freedom to select the suppliers, the company gets an opportunity to identify new cheap suppliers and they can buy from local suppliers which will be more reliable and reduce the lead time as well.
52
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
Wastage
The percentage of waste mainly depends on the type of garment and type of fabric. In addition some buyers do not allow adding wastage and some give a maximum percentage. Therefore the wastage percentage depends on the buyer as well.
Fabric Consumption
The fabric consumption is calculated referring the mini marker. The consumption can be more than or less than the actual amount due to various reasons. Since in this stage the markers are prepared only for pricing purposes the marker makers keep some buffers in preparing markers and the pattern makers also keep large allowances. However if those allowances are very high the fabric consumption can be increased and the total fabric cost can be affected. When preparing the markers and patterns some human errors can be occurred such as missing some garment parts etc. In such cases the consumption will be lower than the actual amount and the price quoted to the buyer can be low, which cannot be increased after the price is confirmed. Sometimes the patterns and markers are drawn without having much information about the fabric, such as the shrinkage, repeat lengths etc. and this also can mislead the fabric consumption.
Finally the fabric cost will be calculated as below. Fabric Cost
= Fabric Price x (1 + Wastage %) x Consumption
4.2.1.2 ACCESSORIES COST
These accessories can be garment accessories (Buttons, Elastic, Ribbon, Rivets, Eyelets, Cords, etc) or packing accessories (Labels, Tags, Stickers, Poly bag, Carton, etc). The accessories cost also can be divided in to three as price, wastage and consumption. For accessories also the buyer can nominate suppliers or the company may have freedom to select the suppliers. The supplier selection is based on price, quality, previous experience, availability of the required design and size and the minimum order quantity. 53
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
For certain accessories the consumption is measured in meters or yards (Elastic, Ribbon, Cords) and for some it is measured in pieces (Buttons, Labels, Zippers). The consumption which is measured in pieces is normally included in the sketch or it is possible to find referring the sample. For packing accessories the consumption can be decided using previous experience if it is not given in the sketch or sample. If the consumption is measured in meters or yards then the pattern maker can give the consumption by measuring the pattern or the WS executive will provide that information. In some cases the buyer mention the consumption in the design sheet and the company should use it for calculations. The accessories cost can be calculated as below. Accessories Cost = Accessories Price x (1 + Wastage %) x Consumption
4.2.2
PROCESS COST
4.2.2.1 GARMENT DYEING COST
Garment dyeing is the process of dyeing garments subsequent to manufacturing as opposed to the conventional method of manufacturing garments from pre-dyed fabrics. One of the major factors affecting the garment dyeing price is the type of dye used in dyeing the garment. The type of dye can be pigment dye, direct dye and reactive dye etc. The price is different for each dye type as dyes are priced at different rates and the cost of dyeing process for each dye type can be different. The weight of the garment is important in garment dyeing price as the price is increased when the weight of the garment is increased. In garment dyeing Prepared For garment Dye (PFD) fabrics should be used and normally cotton knit or woven fabrics are used. However several other fabrics can be found in the whole or in part such as wool, nylon, silk, acrylic, polyester etc and when the fabric is very difficult to dye the fall out rate can be high and the dyeing cost can be increased. The term fall out refer to garments that are unacceptable after dyeing and they may be streaked, blotchy, uneven, off-shade etc. When quoting a price to the 54
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
garment buyer the garment manufacturing company should mention the dyeing fall out rate as well. Eg. FOB – US$ 11.02/piece (US$10.70/piece + 3% fall out) There is a minimum quantity that the dyeing plant can produce. If the order quantity is below that level, the cost per one garment can be increased compared to the normal order quantity. However if the order quantity is very large then the dyeing cost per one garment can be reduced. In addition to those factors it is considered whether the washing process also can be done at the same plant. Also since there can be conflicts between fabric mill and the dyeing plant, it would be better to dye the garment from the fabric mill itself if possible.
4.2.2.2 GARMENT WASHING COST
The customers request different types of garment washing for garments and fabrics. The denim fabric may require heavy garment washes like enzyme wash and sand wash where lighter garments may require soft wash. The garment washing cost mainly depend on the type of garment washing and since the washing type depends on the type of garment and type of fabric those factors also affect the washing cost as well. In addition washing time and temperature affect the garment washing cost heavily.
When the garments are unacceptable after garment washing they are called as fall outs. This may be caused by dirty, stained, discoloured and possibly torn garments. Normally if the fall out rate is higher than 2% it is better to find another supplier. 4.2.2.3. GARMENT PRINTING COST
The most common garment printing types are Screen printing, Digital printing, Thermal transfer printing and Sublimation transfer printing, and the garment printing cost mainly depends on the type of printing method. The number of colours is also important as the cost will be increased with the number of colours. In addition the type of printing agent, artwork or design of the print, the printing position and the print size and the number of locations printed also affect the printing price. The fabric quality and the colour also play a major part in printing price. The printing on dark garments is problematic as the dye in the garment migrates in to the ink 55
PRICING PROCESS OF THE GARMENT MANUFACTURING COMPANIES IN SRI LANKA
causing a dull dark print. When a bright colour on black dark garments is required, a process called underbasing and flashing need to be done and this process leads to additional cost. 4.2.2.4 EMBROIDERY COST
The embroidery cost per garment mainly depends on the stitch count (number of stitches per inch) on each location as most of the embroidery plants quote the embroidery cost based on the stitch count. In addition the type of thread also affects the embroidery cost as for some designs metallic threads has to be used and they are expensive than normal embroidery threads. The cost depends on the embroidery design as well. The size of the design, the complexity of the design and the machine requirement will be considered in the embroidery costing.
The type of fabric also affects the cost since for some fabrics the embroidery process is difficult to achieve and therefore will cause more damages. Hence the cost will be increased. The placement of embroidery design on the garment and number of location and the total order quantity are the other factors affecting the embroidery price. 4.2.3
CUT AND MAKE (CM) COST
This area is mostly covered through the questionnaire. The cut and make cost is calculated by multiplying the SMV by the cost per minute value. The cost per minute value contains the labour cost, overhead cost and the profit. Some buyers request only this cut and make cost instead of FOB price. 4.2.4
FINANCE CHARGE
The finance charge is normally calculated as a percentage of fabric cost. This is represented in the pricing calculation either as a percentage or as the direct figure. The factors affecting the finance charge is discussed under chapter 5.
56
DATA ANALYSIS QUESTIONAIRE SURVEY
CHAPTER 5 DATA ANALYSIS - QUESTIONNAIRE SURVEY The purpose of this section is to analyze and interpret data from the questionnaire in order to identify the current pricing practices in the Sri Lankan garment manufacturing industry. Data in this part have been organized into different types according to the distinctive characteristics of the variables under consideration. 30 questionnaires were delivered and consequently the researcher got back 27 completed questionnaires, leading to a response rate of 90%. Out of the 27 companies 7 were small or medium sized companies (Number of employees are less than 1000) and 20 were large companies (Number of employees are greater than 1000).
5.1. FACTORS CONSIDERED IN SETTING PRICE
Graph 5.1: Factors considered in setting the price
57
DATA ANALYSIS QUESTIONAIRE SURVEY
As depicted in graph 5.1, the findings from the questionnaire were indicated that there are several factors considered in setting the price in garment manufacturing industry. Most of the respondents (96.3%) have mentioned that the product cost is the most important factor when setting the price. Secondly 88.89% of the respondents have marked order quantity and the buyer’s target price as the second most important factor. However they have mentioned that the inflation rate and the season are the least important factors when setting the price.
As the product cost is the most important factor, it is necessary to identify how the companies consider the cut and make cost and the finance charge since this totally depends on the company unlike the raw material cost. The cut and make cost is calculated by multiplying the cost per minute value and standard minute value (SMV). The decision on cost per minute value is taken by different people in different companies. As illustrated in graph 5.2, majority of the respondents (74.07%) have stated that the cost per minute decision is taken by the top management. 29.63% of the respondent state that the merchandising manager also takes the decision. Only one respondent from all the 27 respondents has mentioned that the buyer gives a maximum cost per minute value and the company cannot negotiate even their cost per minute value is more than the buyer’s maximum value. Since this only has 3.7% of respond percentage this can be given a very lower priority or can be even neglected.
Graph 5.2: The responsible person for deciding cost per minute value
58
DATA ANALYSIS QUESTIONAIRE SURVEY
Through the questionnaire it was expected to identify the factors affecting the cost per minute value as well. The result is given in the table 5.1 and the respondents have stated that all the factors are important. The top ranks of those factors were dominated by difficulty of operation and order quantity with mean 4.11 and 3.41 respectively.
Table 5.1: Factors affecting the cost per minute value n= 27 Mean
Std. Deviation
Order Quantity
3.41
1.34
Buyer
3.19
1.44
Factory
3.22
1.31
Difficulty of Operation
4.11
1.19
Note: 1 = Least Important; 5 = Most Important
|From the questionnaire, it was identified that the company’s financial position is the most important factor affecting the finance charge gaining 51.85% of the response percentage. 48.15% of the companies charge same percentage for every buyer. It was identified that some companies charge higher percentage for new buyers to cover the risk and some buyers give a maximum limit for the finance charge. The results are illustrated in graph 5.3.
Graph 5.3: Factors affecting the finance charge
59
DATA ANALYSIS QUESTIONAIRE SURVEY
5.2. RESPONDING TIME In the competitive environment, responding time plays a major role in getting the order. Although the company can provide a better price than competitors if they cannot quote price quickly, the opportunity of getting order may be lost as the order may have been already confirmed to another competitor. Therefore the companies should try to quote the price as soon as possible while calculating the best price. In the questionnaire it was aimed to find the most important factors affecting the responding time for the pricing inquiry and the results are illustrated in table 5.2.
Table 5.2: Factors affecting responding time for a pricing inquiry n = 27 Mean
Std. Deviation
Information given by the buyer
4.15
1.20
Buyer's urgency
3.85
1.10
Responding time of suppliers
3.70
1.23
Note: 1 = Least Important; 5 = Most Important
It can be clearly seen that the most important factor is the information given by the buyer with mean 4.15 and it can be concluded that the other factors; buyer’s urgency and responding time of suppliers are also important. Also the questionnaire was prepared to identify the average responding time for the inquiry. According to the graph 5.4 most of the companies (44.44%) quote the price within one day and 37.04% of the companies quote price within 2 to 3 days. Very few companies (11.11%) quote price within 10 hours.
Graph 5.4: Average responding time for a pricing inquiry 60
DATA ANALYSIS QUESTIONAIRE SURVEY
5.3. PRICING METHOD
When studying the pricing practices in the garment manufacturing industry, it is necessary to identify the pricing decision approach and the pricing method of the companies. According to standard linear approach which was discussed under literature survey, the pricing decision is started by determining the pricing objective of the company. Therefore a question was designed to identify the pricing objectives in the industry and according to graph 5.5, the main pricing objectives of the companies are growth in sales, achieve the target return and profit maximization (74.07%, 70.37% and 70.37% of responds respectively). However many respondents have marked several objectives and it is clearly seen that they do not have a one clear pricing objective but have several objectives.
Graph 5.5: The pricing objective of the company
After identifying the objectives, the pricing method of the company needs to be identified. As per the results of the questionnaire survey the most common pricing method is starting with the cost plus pricing and finally getting the required target with mean 3.85 (Table 5.3). The second important method is the cost plus pricing which has a mean of 3.33 and the price depends on the order quantity as well (mean 3.22). However the respondents have given less priority for considering competitors’ price and starting with target price with mean 2.26 and 2.85 respectively. 61
DATA ANALYSIS QUESTIONAIRE SURVEY
Table 5.3: Pricing method of the company n = 27 Mean
Std. Deviation
Cost Plus
3.33
1.49
Depends on Order Quantity
3.22
1.25
Consider Competitor's Price
2.26
1.26
Start with Target price
2.85
1.43
Start with Cost plus to get Target
3.85
1.29
Note: 1 = Least Important; 5 = Most Important
According to table 5.4, when the garment manufacturing companies can meet the required target price, in most cases the target price is quoted (mean 3.48). A price more than target price is quoted very rarely and quoting a price less than target is almost not happening.
Table 5.4: How the companies quote price when the target price can be met n = 27 Mean
Std. Deviation
Less than target price
1.74
1.13
Target price
3.48
1.50
More than target price
2.85
1.54
Note: 1 = Least Important; 5 = Most Important
As per the table 5.5, when the companies cannot meet the required target price of the buyer, the most common practice is quoting their best possible price and giving options to reduce the price (Mean 3.96). For example if the particular garment contains a welt pocket, the company may give an option to convert the pocket to a patch pocket. Since the SMV of the garment is reduced the company can quote a lesser price for the garment. The other important practices followed by garment manufacturing companies are quoting best price and giving reasons for inability to achieve the target and quoting the best price without mentioning anything (Mean 3.63 & 3.26 respectively). 62
DATA ANALYSIS QUESTIONAIRE SURVEY
Table 5.5: How the companies respond if the target price cannot be met n = 27 Mean
Std. Deviation
Inform Its Imposible
2.52
1.45
Quote Best price
3.26
1.43
Quote Best price and Give Reasons
3.63
1.47
Quote Best price and give options
3.96
1.37
Note: 1 = Least Important; 5 = Most Important
After identifying the pricing method, the list price is calculated based on that method. The list price is subjected to change due to the discounts made depending on the situation. According to table 5.6 the most common and only important discount considered in apparel manufacturing industry is the discount offered by raw material supplier to the apparel manufacturing company. (Mean 3.00). The discounts offered by apparel company to buyer or supplier to buyer are less important to the respondents
Table 5.6: Possible discounts in garment industry n = 27 Mean
Std. Deviation
By Supplier to Garment Company
3.00
1.30
By Supplier to Buyer
2.44
1.42
By Garment Company to Buyer
2.59
1.34
Note: 1 = Least Important; 5 = Most Important
Table 5.7: Reasons for giving discounts n = 27 Mean
Std. Deviation
Large order Quantity
3.56
1.34
Agreements with buyers
2.89
1.31
Economic Recession
2.74
1.29
Long term Relationship with supplier
2.96
1.45
Note: 1 = Least Important; 5 = Most Important
63
DATA ANALYSIS QUESTIONAIRE SURVEY
The main reason for giving discounts is the large order quantity (Table 5.7). However a long term relationship with buyers also can be a reason for giving discounts.
According to the strategy matrix approach discussed in literature survey the competitive situation also should be identified when determining the price. Therefore a question was introduced to identify the areas of competitive advantage of the company in terms of pricing. Most important areas of competitive advantage of the garment companies in Sri Lanka are the reliability due to long term relationship with buyer and the higher product quality (96.3% and 81.48% of responds respectively). However the companies are still lacking competitive in terms of lower SMV, lower CM value and green manufacturing (29.63%, 40.74% & 40.74% of responds). (See graph 5.6)
Graph 5.6: The areas of competitive advantage of the company
In order to determine the competitive situation of the company, there should be a method for obtaining the competitive information. As per graph 5.7, 48.15% of the 64
DATA ANALYSIS QUESTIONAIRE SURVEY
companies obtain the competitive information through buyer or buying office and 25.93% get it through another third party. Also 40.47% have not tried to get the competitive information.
Graph 5.7: The method of obtaining competitive information
The final step of pricing is developing the final price. In 62.96% cases the companies round off the final price to two decimals. E.g. if the actual price is US $ 6.358 then they quote the price as US $ 6.36. In 59.26% companies the price is quoted by rounding off the end to 5 or 0, i.e. if the price is US $ 6.33, the price is quoted as US$ 6.35. Making the price an odd number or rounding off to the nearest integer is almost not found in the garment manufacturing industry. (See graph 5.8)
Graph 5.8: Method of representing the final price
65
DATA ANALYSIS QUESTIONAIRE SURVEY
5.4. HANDLING NEW BUYERS
Dealing with new buyers is always bear a risk as the companies do not have any experience with the particular buyer and do not have much information about their requirements. Therefore two questions were included in the questionnaire to identify how the companies handle new buyers. As per table 5.8, when an inquiry is received from a new buyer the companies mostly quote the price after obtaining information on target price (Mean 3.65). If it is possible they carry out a detail analysis and quote the price (Mean 3.38).
Table 5.8: How the companies respond for an inquiry from a new buyer n = 27 Mean
Std. Deviation
Quote Experimental price
2.81
1.44
Quote as per similar buyer
2.77
1.27
Quote after obtaining information on target price
3.65
0.94
Carry out Detail analysis and Quote
3.38
1.81
Do not consider
1.42
1.06
Note: 1 = Least Important; 5 = Most Important
If a certain buyer continuously sends inquires and none of the previous inquiries are successful the most common thing the company does is changing the pricing method (Mean 3.33). Ignoring the buyers or giving them negative feedback rarely happens. (See table 5.9)
Table 5.9: How the companies respond for an inquiry from a buyer who continuously sends inquiries without giving any order.
n = 27 Mean
Std. Deviation
Inform buyer - will not work
1.93
1.11
Ignore the inquiries
1.37
0.93
Quote very high price
1.63
1.15
Continue same pricing method
2.59
1.50
Change the pricing method
3.33
1.47
Note: 1 = Least Important; 5 = Most Important
66
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
CHAPTER 6 ANALYZING THE PRICING SITUATION OF THE SRI LANKAN GARMENT MANUFACTURING INDUSTRY USING SWOT ANALYSIS In order to analyze the pricing situation of the industry and as a basis for developing the alternative strategies SWOT analysis was used. This analysis has been performed on the basis of responses given by the interviewed respondents and the questionnaire survey, and using literature survey.
During the literature review, interview process and from the questionnaire it was identified that, several factors (Human resource, Raw materials, Buyer’s Image, Product cost and pricing, Markets, New trends in the industry and Competitors) effect significantly on the pricing situation in the apparel manufacturing industry. Therefore the SWOT analysis was conducted considering the situation of these factors.
6.1. HUMAN RESOURCE The main characteristic of the Sri Lankan human resource is, having a higher level of literacy. Also the people in Sri Lanka have better English language skills compared to China where the buyers can communicate with the companies easily. Since the Sri Lankan people understand international business and can adopt ethical, reliable business practices, it will be easier for the buyers to work with them on pricing inquiries (LMD, 2005). Many has identified that the Sri Lankan labour force is well disciplined, qualified and well trained (Bothejue, 2005; LMD, 2005). Further Sri Lanka has relatively cheap and abundant labour force (Arunatileka, 2002) as labour cost in Sri Lanka is just $0.43/Hr, where it is $0.51/Hr and $0.55/Hr in India and China respectively in 2008 (ICRA, 2009).
67
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
However it is evident that cheap labour for production, which was the main advantage for Sri Lanka, is no longer being crucial in achieving competitive advantage. There are other countries such as Vietnam, Madagascar that are emerging with lower labour costs in the region (Botejue, 2005). The rising cost of labour will act as a negative factor for Sri Lankan apparel manufacturing industry and will cause to reduce the level of price competitiveness. Labour costs have been steadily increasing and currently constitute between 15 - 30 % of the total production costs in the average Sri Lankan garment manufacturing companies (Kelegama & Epaarachchi, 2002). Apart form the rising labour cost, the average productivity of the Sri Lankan worker is also lower compared with other competitive nations such as China. Although the labour cost of Sri Lanka is lower than those countries, their strengths lie particularly in their high level of productivity (Kelegama & Epaarachchi, 2002). One of the primary complaints of firm managers is that the productivity of Sri Lankan workers is not only low compared to that of regional competitors, but also lower than in firms abroad that employ emigrant Sri Lankans. This low productivity impedes competitiveness and is a significant problem in responding quickly to new orders (Kelegama, 2009). Currently the industry is facing a higher labour shortage and most of the labour is under trained. Majority of the labour force are young aged girls and the labour turnover and absenteeism is very high among these workers. This can be a major reason for the reduction of productivity in Sri Lankan garment industry as the companies cannot hold the skilled employees for a long time period (Waleed, 2006). Table 6.1 gives the summery of the situation of the human resource as a SWOT analysis.
68
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
Table 6.1: SWOT Terminology for Human Resource in Garment Manufacturing Industry. Strengths
Weaknesses
Opportunities
Threats
Lower labour cost compared to India and China High level of literacy English language skills Understand international business and can adopt ethical, reliable business practices Well disciplined, qualified and well trained work force Increasing labour cost Higher labour cost compared to Cambodia, Bangladesh, Vietnam, Madagascar etc. Lower Productivity High labour shortage High labour turnover and absenteeism Increasing the labour productivity against increasing labour cost. Losing the competitive advantage of low cost labour
6.2. RAW MATERIALS
Lack of solid raw material base is a major weakness for Sri Lankan apparel manufacturing industry since large amounts of raw materials (Fabrics and Accessories) are imported (Dheerasinghe, 2003). The country’s small textile industry does not possess the capacity to supply quality fabric inputs to the garment industry. Therefore the industry is heavily dependent on imports of textiles and accessories (Kelegama, 2009). In 2001, over 80% of fabric requirements and 70% of other accessories needed for Sri Lankan apparel manufacturing industry were imported. However in 2004, the import of fabrics has been 57% of the total requirements which have come down slightly with the expansion of the domestic capacity in textile and accessory. This makes a positive factor, since it gives evidence about the growth of local raw materials base for Sri Lankan apparel industry. (Thilakarathna, 2006) Since fabrics and accessories account for more than 70% of the cost of production, lack of backward linkages is a major constraint to the development of this industry. In 69
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
today’s context where lead time plays a major role in international competitiveness, availability of raw materials in the close proximity is an essential factor (Dheerasinghe, 2003). The SWOT terminology for the raw materials is given in table 6.2.
Table 6.2: SWOT Terminology for Raw Materials in Garment Manufacturing Industry. Strengths
Expansion of domestic textile industry
Weaknesses
High dependence on imported raw material Lack of organized supply chain and proper textile infrastructure
Opportunities
Backward integration in to fabric production or creating raw material base Joint ventures with raw material suppliers
Threats
The countries which have own raw material base, like India and China can increase their competitiveness though lower product cost. Reduced the price competitiveness due to higher fabric cost
6.3. BUYERS’ IMAGE
According to the results of the questionnaire survey conducted, Sri Lankan garment manufacturing companies have a great competitive advantage in terms of reliability and higher product quality. Many researchers have pointed out that, one of the Sri Lanka’s biggest competitive strength is that Sri Lanka has already established itself as a reliable manufacturer of quality garments (Kelegama, 2009; Botejue, 2005). LMD (2005) reports that Sri Lankan garment companies have a reputation of manufacturing good quality product not only in the sample stage, but also in the bulk manufacturing. Further, according to Botejue (2005), Sri Lankan garment companies provide on time delivery of standard “all season” products.
70
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
Sri Lanka has a good image among apparel buyers (Arunatileka, 2002). Compliance with international labour and environmental standards has benefited Sri Lanka, as increasing number of buyers demand that standards of health, labour, environment and occupational safety be met by manufacturing countries (Kelegama, 2009; LMD, 2005; Botejue, 2005).
Also Sri Lankan garment industry has a well reputed international customer base. In order to take the advantage from these strengths Sri Lanka has to promote it as a socially responsible manufacturer of apparels (Botejue, 2005). However the loss of GSP+ advantage can create a negative image on the buyers and the possibility of receiving the orders from EU countries will be reduced due to the increased LDP price. The SWOT analysis of buyers image is given in table 6.3. Table 6.3: SWOT Terminology for Buyers’ Image in Garment Manufacturing Industry. Strengths
Reputation of being a quality apparel manufacturer GSP+ Advantage On-time delivery Compliance with health and safety standards Compliance with International Labour regulations Reputed International Customer base
Weaknesses
Loss of GSP+ advantage
Opportunities
Promote Sri Lanka as a socially responsible manufacturer of apparel Promote Sri Lanka as a quality apparel manufacturer.
Not being competitive in low price market
Threats
71
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
6.4. PRODUCT COST AND PRICING
It was identified that the high and ever increasing cost of production is a great competitive disadvantage for Sri Lankan apparel manufacturing industry. Utilities, transport facilities and transactions are relatively expensive in Sri Lanka compared to its Asian competitors. Poor infrastructure such as roads, telecommunications, water, electricity and fuel further contributes to high production costs (Kelegama & Epaarachchi, 2002; Botejue, 2005; LMD, 2005). The overhead cost is increased with the infrastructure cost. Therefore the cost per minute value which is used to calculate the CM cost also increases. Since SMV in Sri Lankan garment companies is high (As per the questionnaire survey and interviews) the overall CM cost increases. This will directly affect the not only the CM price but also the FOB price, and creates a competitive disadvantage in terms of pricing. In addition to the higher product cost, the difficulty in providing accurate costing quotes is one of the main weaknesses. The inability of firms to provide accurate quotes is a problem since, if the quote is too high they lose potential customers, but if the quote is too low they lose potential profit (Kelegama, 2009). Also the average responding time for the pricing inquiry is around one to two days (According to the questionnaire survey).
Higher responding time results in losing the orders as the garment buyers expect a quick response from the companies, and if a competitor has accepted the buyer’s target price the Sri Lankan company may lose the order. Some large apparel manufacturing companies have already implemented some process improvement programs to reduce the costs.
To be competitive as an industry this should be implemented by the other small companies as well. Further new pricing strategies should be implemented rather than using traditional cost based approaches or with little market based approaches. The summery of product cost and pricing is given in the SWOT analysis in table 6.4.
72
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
Table 6.4: SWOT Terminology for Product cost in Garment Manufacturing Industry. Strengths
Lower labour cost compared to other countries Ongoing process improvement programs in large garment manufacturing companies
Weaknesses
Increasing cost of production Relatively expensive utilities, transport facilities and transactions compared to Asian competitors Higher SMV and CM cost Difficulty of providing accurate costing quotes Higher responding time for pricing inquiries
Opportunities
Threats
Implementing process improvement and process management principles in all the garment manufacturing companies in Sri Lanka New pricing strategies to improve the pricing area
Lacking competitive advantage due to expensive utility. Losing orders due to higher response time
6.5. MARKETS According to JAAFSL (2009) the main markets for Sri Lanka are EU (52.15%) and US (41.1%). The apparel export value to US has been reducing since 2005 because of the MFA phase out and the economic crisis. The apparel export value to EU has been increasing since 2005 due to GSP+ scheme. However due to the threat of losing the GSP+ advantage there can be a reduction in the export value to EU as well. This is clearly seen as the apparel export value of the first quarter of 2010 is less than the value of the first quarter of 2009. Depending heavily on those two markets is a major weakness of Sri Lankan apparel manufacturing industry and it is necessary to explore new markets to minimize the risk (Kelegama, 2009).
Currently the Sri Lankan apparel exporters are looking for new markets like India, China and Japan as demand slows down in established markets. In 2007 the companies has done about US$ 4 – 5 million worth of apparel exports to India. The government also is trying to help the industry to penetrate these markets using 73
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
bilateral deals to get around existing trade barriers (LBO, 2009). The SWOT analysis for new markets is given in table 6.5.
Table 6.5: SWOT Terminology for New Markets in Garment Manufacturing Industry. Strengths
Weaknesses
Government intervention to help the industry through bilateral deals Already entered the Indian market
Deteriorating the US market Reduction in apparel export value of the 1st quarter of 2010 compared to 2009 Heavily depending on only EU and US markets
Opportunities
Enter new markets like India, Japan and China
Threats
Losing the GSP+ advantage
6.6. NEW TRENDS IN THE INDUSTRY One of the major trends in the global garment industry is mass customization against mass production (Arunatileka, 2002). Due to the mass customization, the style variation is higher and the order quantity per style is lower. The buyer will request higher quality and quick response as the styles change quickly. However these styles may require higher SMV due to lesser order quantity, and the final price quoted to the buyer will also increase. In addition the buyers may have applied JIT (Just In Time) concepts which may request the companies to respond just in time (Arunatileka, 2002). Since the responding time for pricing inquiry is higher in Sri Lankan garment manufacturing companies, it would be a threat as there is a possibility of losing orders. The competitors are using high technology E-commerce and information technology in pricing process. Sometimes the buyers also conduct online bidding and the garment companies may have a little time to quote the price. In this case the companies need to have costing software and updated information base on the suppliers’ prices. The SWOT terminology for new trends in the industry is shown in table 6.6.
74
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
Table 6.6: SWOT Terminology for New Trends in Garment Manufacturing Industry. Strengths
The companies trying to adopt JIT principles
Weaknesses
Higher responding time Lack of usage of new technology for pricing inquiries
Opportunities
Introduce E-business to get competitive edge
Threats
Mass customization against mass production Emerging quick response systems Competing countries using hi-tech E-commerce and Information Technology
6.7. COMPETITORS Sri Lanka faces stiff competition from other developing countries of South and SouthEast Asia where production cost is low, like India, Bangladesh, Pakistan, Indonesia, Cambodia, Laos and Vietnam (Kelegama & Epaarachchi, 2002; Dheerasinghe,2003). The main competitor for Sri Lankan apparel industry is China. The growing power of China in the global apparel market poses a threat to the future of the Sri Lankan garment industry that cannot be set aside. China’s growing volume of garment exports prove, that they could swallow up the share of exports of other developing countries. This competitive advantage is supplemented by low wage structure, economies of large scale production and coordination of many transactional corporations in their apparel sector. The US and EU governments try to gain significant control over the anti-dumping regulation from 2005 – 2015. However the US and EU quotas on imports from China from January 1, 2010 has been removed which can be a threat for the countries like Sri Lanka (Martin, 2007).
Central and Eastern Europe specially, Bulgaria, Hungary, Poland, Romania and the Czech Republic are gradually becoming important suppliers to the European market. Some factories in these countries with ultra-modern technology enable them to produce articles complying with European quality standards (Botejue, 2005). They are capable of competing with western counterparts. Morocco, Mauritius, Tunisia and more recently, Madagascar have become important garment producers. Vietnam has 75
ANALYSING THE PRICING SITUATION USING SWOT ANALYSIS
become a major competitor with Sri Lanka in the US market in 2002. Vietnam textiles and garments exports to USA picked up remarkably and overtook Sri Lanka in the first quarter of 2003. Table 6.7 gives a SWOT analysis for the competitors in the garment industry.
Table 6.7: SWOT Terminology for Competitors in Garment Manufacturing Industry. Strengths
Higher competitiveness due to high quality products
Weaknesses
Less competitive in the low price product market due to increasing product cost.
Opportunities
Imposing anti-dumping regulation from 2005 – 2015 to China by US and EU government
Threats
High competition from China The former socialist countries and the East European nations have potential to become major supplier for the EU market. New entrants to the industry Removal of US and EU quotas on import from China from 1st January 2010
76
ALTERNATIVE STRATEGY FORMULATION
CHAPTER 7 ALTERNATIVE STRATEGY FORMULATION As discussed in Chapter 6 SWOT analysis, some alternative pricing strategies should be developed to improve the pricing area. By introducing new pricing strategies it is expected to enable the companies to be successful despite of the weaknesses such as higher infrastructure cost, increasing labour cost and higher raw material price and to make a proper use of their strengths (higher product quality, on time delivery and compliance with safety and labour standards etc.). It is also expected to minimize the weaknesses such as higher responding time for the pricing inquiry and lack of proper pricing policy. For the development of alternative pricing strategies for the apparel manufacturing industry; the information gathered through the questionnaire survey, literature survey and SWOT analysis were used. The pricing strategies proposed by Mochtar (2002 pp 86-87) were used as the basis for the alternative strategy development and new models were added and modifications were done according to the specifications in the industry. As discussed in Chapter 2, the orders are received by the garment manufacturing companies after a competitive price quotation. The evaluation systems used by the buyers should indeed determine pricing activity and strategy in apparel manufacturing industry. According to the questionnaire survey results, it was identified that the most common pricing strategies used in the garment manufacturing industry are purely cost based pricing and cost based pricing which slightly considers market conditions. Considering the problems with a cost based strategy and benefits of more market oriented concepts, a series of market based pricing models were developed.
7.1. PRICING MODELS Pricing Model 1 (Figure 7.1) is a purely cost based pricing strategy model, which can be used in highly fashionable, low price sensitive segment. In this model after the pricing inquiry is received, detailed cost estimation is done. Subsequently the risk policy is determined; i.e. whether it is skimming (Quote higher price expecting a higher profitability) or penetration (Quote lower price expecting higher volume). 77
ALTERNATIVE STRATEGY FORMULATION
Pricing Inquiry Information & specifications
Detailed Cost Estimation Company’s Strengths and Weaknesses
Risk Policy
Quoted Price
Win
No
Stop
Yes
Proceed with the order Figure 7.1: Pricing Model 1
Pricing Model 2 (Figure 7.2) is a mix of Cost based pricing and market based pricing strategies. The first step is to carry out the detailed cost estimation as in the Pricing Model 1. According to this model the company should obtain information about target price of the buyer and if it is not available, it is required to estimate the target price using market information or historical data. If the company price is less than the target price, according to the risk policy, the company can determine the price to be quoted. The decision taken whether to skim or penetrate is based on the competitive advantages and disadvantages over the other competitors in terms of delivering the buyer’s most important requirements and providing the buyer with best value. If the company price is greater than the target price, it is required to check whether the optimization is possible. If it is possible the company can revise the detail cost and if it is not, it is required to check whether any options available to make the company price lesser than the target price. If the optimization is done, based on the new information the detail cost is calculated and the new price is quoted. 78
ALTERNATIVE STRATEGY FORMULATION
However when quoting prices to the buyer with options it is required to quote the actual price that can be achieved for the actual requirement and the price for the options. If any of the above does not work, the company will have to quote the price which is calculated based on the actual requirements.
Pricing Inquiry Information & specifications
Detailed Cost Estimation Yes
Company Price (CP)
Optimization Possible No
Target Price (TP)
CP > TP Yes No
Company’s Strengths and Weaknesses
Risk Policy
Options Available
No
Yes
Quoted Price
No
Win
Stop
Yes
New Information for the Options
Proceed with the order
Figure 7.2: Pricing Model 2
79
ALTERNATIVE STRATEGY FORMULATION
The Pricing Model 3 (Figure 7.3) considers the competitive situation in the industry. This is a mix of a variation of market based pricing (Competition based pricing) and cost based pricing. The main difference between Pricing Model 2 and Pricing Model 3 is Pricing Model 3 compares the company price with competitor’s price where Pricing Model 2 compares it with the target price. However in this model, the options are not generated if optimization is impossible as competitors price is not the buyer’s price.
Pricing Inquiry Information & specifications
Detailed Cost Estimation Yes
Company Price (CP)
Optimization Possible No
Competitor’s Price (C)
CP > C Yes No
Company’s Strengths and Weaknesses
Risk Policy
Quoted Price
No
Win
Stop
Yes
Proceed with the order
Figure 7.3: Pricing Model 3
80
ALTERNATIVE STRATEGY FORMULATION
Pricing Model 4 (Figure 7.4) has a more market based approach compared to the above mentioned three models. This model starts with the market data; opportunities and threats in the industry and target price of the buyer. A rough cost estimation is done according to the specifications and pricing information, using historical data. If proper costing software is available this can be done easily. If the target price is lesser than the estimated cost it is decided whether to inform the buyer that the target is impossible or to quote the best price. The Pricing Model 4 can be used in a case where the company has to respond the pricing inquiry very urgently.
Market data (Opportunities and Threats)
Inform buyer that the target is impossible
Target price
Pricing Inquiry Specifications & Information
Rough cost estimation Yes
Feasible
Possible to inform buyer
No
Historical Data Yes No
Company’s Strengths and Weaknesses
Best Price
Risk Policy
Quoted Price
No
Win
Stop
Yes
Proceed with the order
Figure 7.4: Pricing Model 4 81
ALTERNATIVE STRATEGY FORMULATION
The Pricing Model 5 (Figure 7.5) can be used when the company’s pricing objective is survival. This model is a purely market based pricing approach. Once the market data about opportunities and threats are obtained, after considering the target price, the price is quoted without carrying out any cost estimation. In this model the decision is always to quote the price for the inquiry, fully based on market information and target price. The detail cost calculation is carried out only after the order is confirmed. The main assumption of this model is the company is always able to find ways and methods to do the order with the given target price. In some tough times in economic crisis situations garment manufacturing companies can use this model to maintain existing order quantities and to keep the existing buyers even at a loss. Market data (Opportunities and Threats)
Target price Company’s Strengths and Weaknesses
Risk Policy
Quoted Price
Win
No
Stop
Yes
Pricing Inquiry Specifications & Information
Detailed cost estimation Yes
Profitable No
Supplier Negotiation Possible
Yes
Proceed with the order
No
Figure 7.5: Pricing Model 5
82
ALTERNATIVE STRATEGY FORMULATION
Pricing Inquiry Information & specifications Stop No
Can obtain detailed information
New Information for the Options
Risk taking No Yes
Yes
Detailed Cost Estimation according to the requirements
Yes
Options Available
TP, specification available
Yes
No
No
Similar styles & buyers available
Company Price (CP) No
Yes
Stop
Detailed Cost Estimation according to the available buyer
Yes Yes
Optimization Possible
CP > TP No
Target Price (TP)
No
Risk Policy Company’s Strengths and Weaknesses
Quoted Price
No
Win
Stop
Yes
Proceed with the order Figure 7.6: Pricing Model 6 (Pricing new products)
83
ALTERNATIVE STRATEGY FORMULATION
The Pricing Model 6 (Figure 7.6) is to be used when quoting prices to the new buyers. The first thing to do is to carry out a detailed investigation about the new buyer, such as; the stability and economic situation of the buyer, economic situation of the country of the buyer, future growth potential, profitability of the orders, normal order quantities, target prices, special requirements (samples and testing requirements) and characteristics of the buyer (price sensitiveness etc.). As per the interview, few companies have a face to face meeting with the buyers and discuss about their requirements and majority of the companies do not consider about it. If detailed information can be obtained, the company can carry out pricing process as in the Pricing Model 2. If that information is not available, the company has to take a risk if they quote a price for that inquiry. Although they are willing to take that risk it is better to have at least the information like target price and the specifications they require. If those information also not available they have to check whether there are previous similar buyers and similar orders to that inquiry. If those are also not available it is better not to consider the inquiry.
7.2. DETAILED COST ESTIMATION MODELS In most of the above pricing models it is mentioned about detailed cost estimation. The detailed cost estimation differs according to the situation. Therefore three detailed cost estimation Models were prepared with the pricing Models. The Detailed cost estimation Model 1 (Figure 7.7) is used with the Pricing Model 1 as both do not depend on either competitors’ price or target price. This model starts with the information and specifications of the pricing inquiry and they will include the raw material and process information, sample or sketch and minimum order quantity. Using that information the supplier’s prices are obtained and raw material consumptions and Standard Minute Value (SMV) will be calculated. A minimum cost per minute value should have been calculated for every order quantity before and based on the given minimum order quantity, the company can select the minimum cost per minute value for the given inquiry.
84
ALTERNATIVE STRATEGY FORMULATION
Every order contains a risk based on the buyer, specifications and the difficulty of operations. Based on these risks a markup will be determined and this will be added to the minimum cost per minute value to get the final cost per minute value. Using those calculations the raw material and process cost and cut and make cost are calculated which will be used to get the company price.
Pricing Inquiry Information & specifications
Raw Materials & Processes
Supplier’s Price
Sample / Sketch
Consumption
Minimum Order Quantity
SMV
Minimum cost/min
Detailed cost estimation Model 1
Markup based on risk
Raw Material & Process cost
Cut and Make cost
Cost/min
Company Price Figure 7.7: Detailed cost estimation Model 1
The Detailed cost estimation Model 2 (Figure 7.8) can be used with the Pricing Model 2 and Pricing Model 3 as these consider target price or competitors’ prices. This model is similar to the Detailed cost estimation Model 1, if the company price is lesser than the target price or competitor’s price. If it is greater than the target or the competitor’s price and, if the optimization is possible, the company should try to negotiate with the suppliers to bring the cost down. If it is not possible they have to 85
ALTERNATIVE STRATEGY FORMULATION
remove the buffers kept in pattern making, marker making and SMV calculation. If they are not enough the only possible option is to reduce the markup kept in cost per minute value. Pricing Inquiry Information & specifications
Detailed cost estimation Model 2
Detailed Cost Estimation Model 1
Yes
Can reduce markup No
No Yes
Can reduce consumption/ SMV
Can negotiate with suppliers
Yes
No
Company Price (CP) Yes
CP > TP Or CP > C No
Yes
Optimization Possible No
Risk Policy Figure 7.8: Detailed cost estimation Model 2 86
ALTERNATIVE STRATEGY FORMULATION
The Detailed cost estimation Model 3 (Figure 7.9) is to be used with the Pricing Model 5, where at the time of the cost estimation the order already has been placed. In this case the estimation starts with finding raw material and process prices, consumptions, SMV and minimum cost per minute value. Using the minimum cost per minute value, minimum cut and make cost is calculated and from these information the minimum company price is determined. If the minimum company price is greater than the quoted price the company should check whether the supplier negotiation is possible. Pricing Inquiry
Raw Materials & Processes
Sample / Sketch
Consumption
Supplier’s Price
Minimum Order Quantity
SMV
Minimum cost/min
Detailed cost estimation Model 3
Raw Material & Process cost Minimum Cut and Make cost
Minimum Company Price (MCP)
Yes
Supplier negotiation possible
Yes
MCP > QP* No
No
Proceed with the order * QP = Quoted Price Figure 7.9: Detailed cost estimation Model 3 87
ALTERNATIVE STRATEGY FORMULATION
Table 7.1: Pricing Matrix
Pricing Objective
Characteristic of the buyer
Profit / Maximizing Revenue Market share Maximization and Sales
Price Sensitive
Pricing Model 2 with Skimming
Detailed cost estimation Model 2
Pricing Model 2 with Penetration
Detailed cost estimation Model 2
Meeting Survival competition Pricing Model 3
Pricing Model 5
Detailed cost estimation Model 2
Detailed cost estimati on Model 3
Short term (Urgent) Pricing Model 4
Pricing Model 1 Price Insensitive Detailed cost estimation Model 1
Using the above models a matrix (Table 7.1) has been developed to illustrate how to use these models in different customer characteristics and different pricing objectives. Pricing model 1 is used for price insensitive buyers where all the other pricing models are used for price sensitive buyers. The Pricing Model 2 is used with two pricing objectives. If the pricing objective is revenue or profit maximization the Pricing Model 2 should be used keeping the risk policy as skimming. If the pricing objective is maximizing the market share and sales, the Pricing Model 2 should be used keeping the risk policy as penetration. The Pricing Model 3 is based on the competitor’s information and thus can be used when the pricing objective is meeting competition. The Pricing Model 5 is used in survival conditions and the Pricing Model 4 is to be used only in emergency situations and this will be a short term objective.
88
PRICING STRATEGY AUDIT
CHAPTER 8 PRICING STRATEGY AUDIT There should be a proper method to check whether the pricing strategy is matching with the objectives of the company and all the elements in pricing are performing well. In this chapter it is expected to describe how to carry out a pricing strategy audit to evaluate the pricing system of a particular company. For this the “World class pricing – Pricing Diagnostic chart” (Pricing Solutions, 2007) was used as a basis. Using the above, a Pricing Audit Sheet was prepared and to obtain information for the sheet, a pricing audit questionnaire was also prepared.
8.1. PRICING AUDIT QUESTIONNAIRE The Pricing Audit Questionnaire (Appendix 2) was designed such that the answers can be directly used in filling the pricing audit sheet. For each and every question there are three answers to check whether that particular process or practice is “Not working”, “Opportunity for improvement” or “Performing well”. The question numbers are similar to the item numbers in the Audit Sheet. It is observed that this questionnaire cannot be filled by one person as this requests information on various different areas. Therefore it is suggested to conduct a brainstorming session, in every 6 months or in a specific period, with the participation of top management, marketing and merchandising managers and relevant executives. During the brainstorming session the correct answers for the questionnaire will be determined and the solutions to improve those conditions will be discussed. Since the decisions for improvements are taken considering the ideas of all the relevant parties, the implementation will be easier and productive.
8.2. PRICING AUDIT SHEET The Pricing Audit Sheet (Figure 8.1) facilitates a self-evaluation of the company’s pricing process. This sheet enables the company to examine more than 20 dimensions of pricing process performance and drill into the detail of each dimension to gain an accurate understanding of current performance. Also this summarizes major issues and quantifies opportunities. 89
21 22
12
Pricing decision making process
Key performance indicators
Roles and responsibilities
Strategic management roles
New product / New buyer pricing
Link to business strategy
4
5
6
7
8
9
12 1
Opportunity for improvement Performing well
Figure 8.1: Pricing Audit Sheet
9
Number of Elements
Costing software
Industry knowledge
Not Working / Non existent
16
Customer profit and losses 15
Discounting policy
20
19
18
Price change process
14
3
Margin analysis
11
17
Training Initiatives
Competitive intelligence
2
13
Cost calculation
10
Pricing Policy
1
Competition
Cost
Company
Pricing Audit Sheet
Overall performance
Buying process knowledge
Price fences
Value measurement tools
Value based segmentation
Price band analysis
Research
Customer
PRICING STRATEGY AUDIT
90
PRICING STRATEGY AUDIT
The audit sheet comprises of four main audit areas; company, cost, competition and customer. In order to fill the audit sheet the questionnaire should be filled first. Based on the answers given in the questionnaire the elements in the audit sheet will be coloured according to traffic light system. If the particular practice is not working, then the colour will be red. If there are opportunities for improvement the colour will be yellow, while the green colour will be used if the practice is performing well. The answers of the questionnaire are also adjusted in the order of traffic light system. Therefore if the answer for a particular question is first one, the colour of the relevant element is Red. The colour will be Yellow if the answer is second one and it will be Green if the answer is third one. To clarify this more the first question in the questionnaire has given as an example.
Ex.
1. Does the company have a pricing policy? No – There is no definite pricing policy. Yes – But the pricing policy needs to be improved.
Yes – The Company have a good pricing policy.
According to this example since the answer of the question (first question) is the second one, the first element in the audit sheet (Pricing Policy) should be coloured in Yellow. After applying colours to all the elements the number of elements having that colour should be counted. Each colour is given separate marks and based on the overall marks the overall performance of the pricing process of the company is determined.
Table 8.1: Percentages of elements for each colour
Colour
Marks for one element
100% (All 22 elements)
75%
50%
25%
Red
1
22
16.5
11
5.5
Yellow
2
44
33
22
11
Green
3
66
49.5
33
16.5
91
PRICING STRATEGY AUDIT
According to the audit sheet each red element is given 1 mark, yellow element 2 marks and green element 3 marks. Therefore the marks allocated for the percentages of the elements are as Table 8.1. The margins of the overall performance are taken as in the Table 8.2. Table 8.2: Margins of the overall performance Performance
Percentages used for margins
Marks at margins
Not working
75% Red + 25% Yellow
27.5
Opportunity for improvement
50% Yellow + 50% Green
55
Performing well
100% Green
66
Therefore the margins for the performances are set as below. Marks < 27.5
Not working
27.5 < Marks < 55
Opportunity for improvement
55 < Marks < 66
Performing well
In order to describe the function of the audit sheet further, an example Audit sheet was prepared (Figure 8.2) using the data of a company where the most amount of data was obtained. According to this particular company, the number of elements with each colour is as follows.
Red (Not Working / Nonexistent)
9
Yellow (Opportunity for improvement)
12
Green (Performing well)
1
According to this data, the total marks for the company will be 36 (9x1 + 12x2 + 1x3). Since this mark is between 27.5 and 55, the overall performance of the company can be determined as “Opportunity for improvement”.
92
21 22
12
Pricing decision making process
Key performance indicators
Roles and responsibilities
Strategic management roles
New product / New buyer pricing
Link to business strategy
4
5
6
7
8
9
12 1
Opportunity for improvement Performing well
Figure 8.2: Example Pricing Audit Sheet
9
Number of Elements
Costing software
Industry knowledge
Not Working / Non existent
16
Customer profit and losses 15
Discounting policy
20
19
18
Price change process
14
3
Margin analysis
11
17
Training Initiatives
Competitive intelligence
2
13
Cost calculation
10
Pricing Policy
1
Competition
Cost
Company
Pricing Audit Sheet
Opportunity for improvements
Overall performance
Buying process knowledge
Price fences
Value measurement tools
Value based segmentation
Price band analysis
Research
Customer
PRICING STRATEGY AUDIT
93
PRICING STRATEGY AUDIT
It is possible to identify several advantages of using this pricing audit sheet to assess the pricing practices. The pricing audit sheet helps the garment manufacturing companies to conduct a self-assessment of the current pricing practices and to identify the areas that need improvements. Normally the management has lack of time to think about the areas of improvement or the weaknesses in their pricing system. So this sheet provides the management 22 pricing activities to check whether they are functioning well. Since this questionnaire is filled by the internal employees of the respective company no external consultant is needed to carry out the auditing exercise. Therefore the pricing data will remain confidential.
94
CONCLUSION
CHAPTER 9 CONCLUSION In order to face the challenges of removal of quota and loss of GSP+ advantage, the Sri Lankan garment industry needs to become competitive in terms of pricing. Although the competitiveness of Sri Lanka is higher in terms of quality, it has been identified that the overall competitiveness of Sri Lanka is lower as it is not competitive in terms of pricing. Today the fundamental objective of the industry is to maintain the markets and face the competitiveness. If it is impossible to give the price requested by the buyer, they will move to other suppliers such as Bangladesh or Vietnam. This research had three main objectives as identifying the current pricing strategies of the Sri Lankan garment industry, developing alternative pricing strategies and developing a method to audit the pricing strategies. The current pricing strategies were identified through the literature review, interviews and questionnaire. In the questionnaire survey it was found that the product cost, buyer’s target price and order quantity are the most important factors considered in setting the price. It was also identified that most of the companies respond to a pricing inquiry within 1 day and most of the others respond within 2 to 3 days. According to the literature it was identified that quick response to the inquiries is essential to win the orders today in the competitive environment and the situation of Sri Lanka needs to be changed. The most common pricing objectives of the companies are growth in sales, achieve target return and profit maximization. According to the questionnaire survey results, it was also identified that the most common pricing strategies used in the garment manufacturing industry are purely cost based pricing which slightly consider market conditions. Furthermore the main competitive advantage areas are reliability due to long term relationship with buyer and higher product quality. When the companies receive an inquiry from a new buyer in most cases the price is quoted after obtaining information on target price. During the SWOT analysis it was emphasized that new pricing strategies should be introduced to improve the pricing area. Therefore a series of pricing models were developed during the study in order to reduce the responding time for the inquiry, to 95
CONCLUSION
enable the companies to select strategies based on their pricing objective, to deviate from traditional cost based approach and to make use of the competitive advantages. These six pricing models were developed to match with certain pricing objectives and customer characteristics. Pricing Model 1 is a purely cost based approach where it can be used for highly fashionable, low price sensitive segment. Pricing Model 2 considers the target prices of the buyer while Pricing Model 3 considers the competitors’ price in setting their prices. The Pricing Model 4 can be used in a case where the company has to respond the pricing inquiry very urgently while Pricing Model 5 can be used when the company’s pricing objective is survival. A separate Pricing Model 6 has been developed to give an idea how to quote prices to new buyers. In addition to these pricing models three detailed cost estimation models were developed to be used with them. In order to facilitate the company to self-evaluate their pricing process a Pricing Audit Sheet was developed. This sheet enables the company to examine more than 20 dimensions of pricing process performance and drill into the details of each dimension to gain an accurate understanding of the current performance. Also this summarizes major issues and quantifies opportunities.
LIMITATIONS AND FURTHER RESEARCH
The main limitation of the research was poor response from the apparel manufacturing organizations. Since it was identified that the response for large questionnaire is very poor; the questionnaire was limited to 17 questions and most data was obtained during interview, which is difficult to analyze. The population size was not available and the number of centres also could not be found and in order to have better response rate, convenience sampling was used instead of random sampling. Another limitation was that many respondents did not answer it with what they do, but with what they should do. Further research could be done developing norms to identify the best practices of the companies for the pricing performance in the audit sheet and allow the companies to bench mark them against relevant norms.
96
REFERENCES
REFERENCES Arunatileka, S., 2002. E-transformation strategy for garment industry of Sri Lanka. [Online]. Available at: http://www.cit.uws.edu.au/research/conference02/slides/Ar unatileka.ppt. [Accessed 02 August 2009] Botejue, J., 2005. Weaving the fabric of Reagional cooperation for a competitive garment sector. Sri Lanka Apparel Exporters Association. [Online]. Available at http://www.unescap.org/tid/mtg/tradenv_s6sl.pdf. [Accessed 04 August 2009]. Chieochankitkan, A., Perceived Value Pricing Strategy in the Hotel Industry : A Critical Analysis of Its Implication on the Hotel Supply Chain. [Online]. Available at: http://www.ttresearch.org/pdf/040908/5.pdf. [Accessed 29 December 2009] Dheerasinghe, R., 2003. Challenges, Prospects and Strategies for the Garment Industry in Sri Lanka. Staff studies: Central Bank of Sri Lanka. [Online]. 33 (1 & 2). pp. 33-72. Available at: http://www.cbsl.gov.lk/pics_n_docs/10_pub/_docs/research _studies /staff_studies_vol_35_2005-No1&2.pdf. [Accessed 13 September 2009] DIPP (Danish Import Promotion Programme). 2008. Garments – A Survey of the Market for Garments in Denmark. [Online] Available at: http://www.dipp.eu/ dox.en/Garments.2008.09.02.pdf. [Accessed 04 February 2009]. Duke, C.R., 1994. Matching Appropriate Pricing Strategy with Markets and Objectives. Journal of product & Brand Management. 3 (2). pp. 15-27 Fibre2Fashion. 2009. Interview-Mr. Kumar Mirchandani, Chairman, Sri Lanka Apparel. [Online] Available at: http://www.fibre2fashion.com/face2face/jaff/mrkumar-mirchandani.asp. [Accessed 15 March 2010]. Giddens, N. et. Al., 2002. Selecting an Appropriate pricing strategy. [Online]. Available at: http://extension.missouri.edu/explorepdf/agg. [Accessed 07 August 2009] Gopalakrishna, A., Apparel Industry - Encounters with Truth. [Online]. Available at: http://www.fibre2fashion.com/industry-article/pdffiles/20/1977.pdf?PDFPTOKEN= 05948d01f0b0b453083631433e47d59f282d2f36|1272530754#PDFP. [Accessed 06 August 2009]. Goto, K., 2007. Industrial Upgrading of the Vietnamese Garment Industry: An Analysis from the Global Value Chains Perspective. Working Paper. Ritsumeikan Center for Asia Pacific Studies (RCAPS). 7 (1). Guilding, C. et al., 2005. An empirical investigation of the importance of cost-plus pricing. Manageiral Auditing Journal. 20(2). pp. 125-137
97
REFERENCES
ICRA Management consulting services. 2009. Study on Impact of economic slowdown of Indian Textile and clothing industry. [Online]. Available at: http://www.citiindia.com/pdf/Detail-Report-Study.pdf. [Accessed 02 August 2009] IMACS. 2009. Study on Impact of economic slowdown on Indian textile and clothing industry. [Online] Available at: http://www.aepcindia.in/files/Exceutive_ Summary .pdf. [Accessed 05 August 2009]. International Trade Statistics (ITS). 2009. World Trade Organization. [Online] Available at: http://www.wto.org/english/res_e/statis_e/its2009_e/its09_toc_e.htm. [Accessed 11 March 10]. Investopedia. 2010. Cost, Insurance and Freight - CIF. [Online] Available at: http://www.investopedia.com/terms/c/cif.asp . [Accessed 07 May 10]. Jayaratne, S.M., Enhancing export competitiveness through trade facilitation: The experience of Sri Lanka. [Online]. Available at: www.unescap.org/tid/pu blication/tipub2543_jayaratne.pdf. [Accessed 20 March 2010]. Joint Apparel Association Forum (JAAFSL). 2009. Industry Performance. [Online] Available at: http://www.jaafsl.com/tconcessions.cfm?ip . [Accessed 07 April 10]. Joint Apparel Association Forum (JAAFSL). 2009a. Sri Lanka pushes for ethical purchasing. [Online] Available at:http://srilankaapparel.com/index.php?option =com_content&task=view&id=238&Itemid=2. [Accessed 07 April 10]. Kanliang, W., Pricing strategies for information products: A review. [Online].Available at http://www.computer.org/plugins/dl/pdf/proceedings/ceceast/ 2004/2206/00/22060345.pdf?template=1&loginState=2&userData=University%2Bof %2BPeradeniya%253AUniversity%2Bof%2BPeradeniya%253A192.248.8.106. [Accessed 25 November 2009]. Kelegama, S. & Epaarachchi, R., 2002. Garment Industry In Sri Lanka. Garment Industry in South Asia: Rags or riches?. South Asia Multidisciplinary Advisory Team (SAAT). [Online]. Available at: http://www.scribd.com/doc/17704903 /Garment-Industry. [Accessed 04 February 2010] Kelegama, S., 2005. Ready-Made Garment Industry in Sri Lanka: Preparing to Face the Global Challenges. Asia-Pacific Trade and Investment Review. 1(1) Kelegama, S., 2009. Ready-made Garment Exports from Sri Lanka. Journal of Contemporary Asia. 39 (4). pp. 579–596 Knorr, A. & Zigova, S. 2004. Competitive Advantage Through Innovative Pricing Strategies: The Case of the Airline Industry. [Online]. Available at: http://www.iwim.uni-bremen.de/publikationen/pdf/b093.pdf. [Accessed 11 June 2009] 98
REFERENCES
Kotler, P. and Keller, K. L., 2006. Marketing Management.12th ed. Prentice-Hall, Upper Saddle River, NJ. Lanka Business Online (LBO). 2009. Sri Lanka apparel exporters look East as Western markets slow down?. [Online]. Available at: http://www.lankabusinessonline .com /fullstory.php?nid=1238609510. [Accessed 17 September 09]. Lanka Monthly Digest (LMD). 2005. Apparel Industry Bright Beyond 2005?. [Online] Available at: http://www.lmd.lk/2005/November/cov1.htm. [Accessed 18 August 09]. LBL (Labour Behind the Label). 2006. Who pays for cheap cloths. [Online] Available at: http://www.labourbehindthelabel.org/resources/20/123-5questions?format=pdf. [Accessed 16 May 2009]. Mather, C., 2006. Five questions low cost retailers must answer. Clean Clothes Campaign Newsletter. [Online]. 22. Available at www.cleanclothes.org/document s/ccc_newsletter_22.pdf . [Accessed 04 December 2009]. Merk, J., 2003. Birnbaum’s Global Guide to Winning the Great Garment War: A critical review. [Online]. Available at: http://www.cleanclothes.org/documents/ Birnbaum.pdf. [Accessed 15 March 2009]. Miller, S., 2008. Pricing power: Using price strategy road maps and tools to maximize bottom-line result. CMA Management. [Online]. Available at: http://www. managementmag.com. [Accessed 12 May 2009]. Minor, P. & Feeney, D., 2007. Factory level value chain analysis of Cambodia’s Apparel Industry. Nathan Associates Inc. [Online]. Available at: http://www.usad.gov/ kh/documents/cambodia. [Accessed 15 August 2009]. Mochtar, K & Ardit, D., 2000. Alternative pricing strategies in construction. Dimensi Teknik Sipil. 2 (1). pp. 56-64. Mochtar, K & Arditi, D., 2001. Pricing strategy in the US construction industry. Construction Management and Economics. 19 (4). pp. 405 – 415. Mochtar, K., 2002. Pricing Strategies in the Indonesian construction industry. DimensiTeknikSipil. 4 (2). pp. 85-93. Nathan Associates Inc. and Werner International. 2007. Factory level value chain analysis of Cambodia’s Apparel Industry. [Online]. Available at: http://www.usaid. gov/kh/documents/Cambodia_ValueChain_Garment_Industry_2008.pdf. [Accessed 05 May 2009].
99
REFERENCES
Noble, P.M. & Gruca, T. S., 1998. An Empirically validated framework for industrial pricing. [Online]. Available at : http://isbm.smeal.psu.edu/library/working-paperarticles/1998-working-papers/copy_of_09-1998-an-emprically-validated-framework .pdf [Accessed 17 November 2009] Omar, A. & Cooray, T., 2005. Apparel Industry Private Sector Perspective. Sri Lanka Development Forum. [Online]. Available at: www.erd.gov.lk/devforum/ Treasury/ paper-16.pdf. [Accessed 20 March 2009]. Owen, K. C., 1998. A Pricing Strategy for a Recycling Industry. Corporate environmental strategy. 5 (2). pp. 42 – 50. Pricing solutions. 2007. Pricing Audit. [Online]. Available at: http://www.slideshare .net/LoicAtPSL/pricing-audit. [Accessed 03 February 2010] Saheed, A.H.H., 2010. World recession and the impact on the global textile and apparel industry. [Online]. Available at: http://www.ptj.com.pk/web-2010/01-10/Jan2010-PDF/AHH-Saheed.pdf. [Accessed 09 April 2010]. Sanford, L. & Gebeke, J.E., 2007. Outsourcing, Wealth Creation, and Smes: The Internationalization of Services within The Global Textiles and Apparel Industry: Eastern Europe and South Africa – 1989-2004. [Online]. Available at: http://www.unige.ch/ses/istec/EBHA2007/papers/Gebeke.pdf. [Accessed 10 August 2009]. Skitmorel, M. & Hedley, S., 2000. Pricing construction work: A marketing viewpoint. [Online]. Available at: http://www.eprints.ucl.ac.uk/4640/1/4640.pdf. [Accessed 01 September 2009]. SOMO (Centre for Research on Multinational Corporations). 2003. SOMO Bulletin on Issues in Garments & Textiles: Pricing in the global garment Industry. Somo Bulletin on Garments & Textiles. 1(1). [Online]. Available at: www.somo.nl. [Accessed 06 April 2009]. Technopak. 2007. Global Textile and Apparel Industry : Vision 2015. International Textile and Apparel Congress, [Online] Available at: http://www.technopak.com/ resources/fashion/ITAC%20Report%202007.pdf. [Accessed 15 October 2009]. Tellis, G.J., 1986. Beyond the Many Faces of Price: An Integration of Pricing Strategies. Journal of Marketing. 50 (October). pp. 146-60. The European Union’s Delegation to Sri Lanka and the Maldives (EUDSM). n.d. Generalised System of tariff Preferences. [Online]. Available at: http://www.dellka.ec.europa.eu/en/eu_and_srilanka/trade/gsp.htm [Accessed 12 October 2009].
100
REFERENCES
The Nation. 2009. Economic consequences of the withdrawal of GSP+. [Online] Available at: http://www.nation.lk/2009/11/08/newsfe5.htm. [Accessed 11 April 2010]. Thompson, K.N. & Coe, B.J., 1997. Gaining sustainable competitive advantage through strategic pricing: selecting a perceived value price”. Pricing Strategy & Practice, 5 (2), pp.70-79. Thompson, K.N. & Coe, B.J., 1997. Gaining sustainable competitive advantage through strategic pricing: selecting a perceived value price. Pricing Strategy & Practice. 5 (2). pp.70-79. Tilakaratne, W. M., 2006. Phasing Out of MFA and The Emerging Trends in the Ready Made Garment Industry in Sri Lanka. Mayumi Murayama ed. Employment in Readymade Garment Industry in Post-MFA Era: The Case of India, Bangladesh and Sri Lanka. Chiba: Institute of Developing Economies. pp. 1-30 Waleed, H., 2006. Eight major Asian textile players share many weaknesses [Online]. http://www.dailytimes.com.pk/default.asp?page=2006\01\24\story_24-1-006_pg5_13. [Accessed 13 August 2009] Wichmann, R. et. al., 2009. Developing a defensible pricing strategy: hospital pricing is a science, not an art. Healthcare Financial Management. [Online]. Available at: http://www.allbusiness.com/health-care-social-assistance/3910880-1.html. [Accessed 22 December 2009] Wijayasir, J. & Dissanayake, J., 2008. The ending of the multi-fibre agreement and innovation in Sri Lankan Textile and Clothing Industry. [Online]. Available at: http://www.oecd.org/dataoecd/18/55/41091122.pdf [Accessed 13 October 2009]. Yamagata, T., 2007. Prospects for Development of the Garment Industry in Developing counties: What Has Happened Since the MFA Phase-Out?. Discussion Paper. Institute of Developing Economies JETRO, 101.
101
APPENDIX 1
APPENDIX 1 QUESTIONNAIRE TO IDENTIFY CURRENT PRICING SITUATION Company Reference Number: PS_CC Please read all the answers and allocate marks from 1 – 5 for each answers based on the importance. 5 marks – Very Important 4 marks – Important 3 marks – Average 2 marks – Less Important 1 mark – Not Important Please tick () the correct answer
Please indicate the approximate number of employees in your company
1. The cost per minute (which is used to calculate CM value) can be varied based on Order quantity Buyer The factory the style would be running Difficulty of operation
2.
2 2 2 2 2 2
3 3 3 3 3 3
4 4 4 4 4 4
5 5 5 5 5 5
What are the factors affecting the responding time after receiving an inquiry?
Information given by the buyer Buyer's urgency Responding time of suppliers
3.
1 1 1 1 1 1
1 1 1 1 1
2 2 2 2 2
3 3 3 3 3
4 4 4 4 4
5 5 5 5 5
1 1 1 1
2 2 2 2
3 3 3 3
4 4 4 4
5 5 5 5
1
2
3
4
5
1
2
3
4
5
What is the pricing method of your company?
Calculate the total cost and add profit mark up The price depends on the order quantity Consider the competitors' price Start from the buyer's target price and see whether they can get sufficient profit Calculate the total cost and add profit mark up and check whether they can reduce the cost to meet the target price
102
APPENDIX 1
4.
If you can meet the target price your price quotation would be
Less than target price Target price More than target price 5.
1 1 1
2 2 2
3 3 3
2 2 2
3 3 3
4 4 4
5 5 5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1 1
2 2
3 3
4 4
5 5
1
2
3
4
5
1 1 1 1
2 2 2 2
3 3 3 3
4 4 4 4
5 5 5 5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1 1
2 2
3 3
4 4
5 5
What are the reasons for giving discounts?
Large order quantity Agreement with certain buyers Economic recession Long term relationship of Garment Company and the supplier
8.
1 1 1
What are the possible discounts?
Discounts offered by supplier to the garment manufacturing company Discounts offered by supplier to the buyer Discounts offered by the garment manufacturing company to the buyer
7.
5 5 5
If unable to meet the target price
Inform the buyer that the target is impossible Quote the best possible price without considering the target Quote the best possible price explaining them the reasons for not meeting the target Quote the best possible price giving options to reduce the price to the target
6.
4 4 4
When receive an inquiry form a new buyer;
Quote an experimental price based on estimated order quantity and normal quality standards Choose existing similar buyer and cost according to that buyer Obtain some information about target price and quality requirements about the buyer and quote a price Carry out a detail analysis of the new buyer, their requirements, growth potential, profitability of the orders and cost according to that Do not consider inquiries from new buyers
103
APPENDIX 1
9.
If a certain buyer continuously sends inquiries and any of previous inquiries could not meet the required target
Inform the buyer that this will not work Ignore the inquiries Quote a very high price without doing much calculation Continue the same pricing method hoping they will give some orders in the future Try to change the pricing method by reducing cost by eliminating allowances and try to achieve the required target.
1 1 1 1
2 2 2 2
3 3 3 3
4 4 4 4
5 5 5 5
1
2
3
4
5
1
2
3
4
5
Please tick () to select the correct answer / answers
10.
Who decides the final cost per minute that is used to calculate the CM value?
Top management Merchandising manager Merchandiser Finance Department Buyer has given a maximum amount an cannot negotiate
11.
What are the factors considered in determining finance charge?
Charge same percentage for every buyer Charge higher percentage for new buyers Buyer gives a limit for the finance charge Company's financial position
12.
What are the factors mainly considered in setting the price?
Product cost Competitor's price Competitive Advantage Price sensitivity of the buyer Buyer's target price Order quantity Inflation rate Exchange rate fluctuation Discounts Season Pricing objective of the company
104
APPENDIX 1
13.
The areas of competitive advantage of your company;
Low cost suppliers Having own suppliers for the raw materials Lower CM value Lower SMV Higher product quality On time delivery Quick response Improved technology Reliability due to dealing with the buyer for a long period of time Ability to produce smaller quantities at a shorter period of time Having good labour standards and better working conditions Using improved information systems Green manufacturing Good marketing team
14.
What is the pricing objective of the company?
Survival Profit maximization Achieve the target return Growth in sales Growth in market share Meeting competition Non price competition
15.
What is the responding time for an inquiry? Minimum
Average
Maximum
Less than 5 hrs less than 10hrs Within 24hrs Within 2-3days Within 1 week Within 2 week Within 1 month 16.
How do you consider competitor's prices?
Obtain those information through buyer / buying office Obtain those information through another third party Cannot get competitor's information Have not tried yet to get competitor's information
105
APPENDIX 1
17.
When you set the final price
Always try to round off the end to 5 or 0 ($9.75 instead of $9.73) Round off to nearest integer ($9 instead of $9.20) Round off to two decimals ($9.73 instead of $9.7321) Make it an odd number ($9.99 instead of $10)
Thank you very much for your time and cooperation
106
APPENDIX 2
APPENDIX 2 PRICING AUDIT QUESTIONNAIRE 1. Does the company have a pricing policy? No – There is no definite pricing policy. Yes – But the pricing policy needs to be improved. Yes – The Company have a good pricing policy.
2. Does the company conduct training programs about the pricing function? No – There are no training programs. Yes – But the training programs needs to be improved. Yes – The Company conduct good training programs.
3. How is the price change process of the company? Company do not change the prices The process needs to be improved. The company has a good price changing process.
4. How is the pricing decision making process of the company? Company do not have a clear pricing decision making process. The process needs to be improved. The company has a good pricing decision making process.
5. Does the company have key performance indicators (KPIs) for pricing? No – KPIs are not defined. Yes – But the KPIs needs to be improved. Yes – The Company have effective KPIs.
6. Does the company allocate specific roles and responsibilities for people? No – No specific responsibilities. Yes – But needs some improvements. 107
APPENDIX 2
Yes – The Company effectively allocates roles and responsibilities. 7. How is the involvement of strategic management in pricing? Do not involve. Involve – But there are more areas to be involved. Strategic management effectively involve in pricing.
8. How is the new product or new buyer pricing systems of the company? Do not have a proper system. The system needs to be improved. The company has an effective new product and new buyer pricing systems.
9. Does the pricing strategy link to the business strategy? No – They are independent. Yes – But needs some improvements. Yes – The pricing strategy very well linked to the business strategy.
10. How is the cost calculation system of the company? Do not have a proper system. The system needs to be improved. The company has an effective cost calculation system.
11. How is the method of determining the profit margin of the products? Do not have a proper method. The method needs to be improved. The company has a method of determining profit margin. 12. Does the company consider about customer’s profits and losses? No Yes – But needs some more information. Yes – The Company considers well about customer’s profits and losses. 108
APPENDIX 2
13. Does the company have a competitive intelligence process? No – There is no need / cannot obtain competitive information Yes – But needs some improvements. Yes – Company has a very effective competitive intelligence process.
14. How is the discounting policy of the company? Do not have a proper policy. The policy needs to be improved. The company has an effective discounting policy.
15. How is the knowledge about industry? Do not have sufficient knowledge. Have some knowledge – But need to be improved. The company has good knowledge about the industry.
16. Does the company have costing software? No – Costing is done manually. Yes – But needs some improvements. Yes – The Company has well advanced costing software.
17. Does the company conduct researches about customers? No Yes – But the researches are not effective. Yes – The Company conduct researches effectively.
18. Does the company have any idea about price bands of the products? No Yes – But needs to analyze further. 109
APPENDIX 2
Yes – The Company have a good idea about price bands.
19. Does the company segment the customers based on the value? No Yes – But needs some improvements. Yes – There is a clear segmentation.
20. Does the company have value measurement tools for the buyers? No Yes – But needs some improvements. Yes – The value measurement tools are effective.
21. Does the company have price fences? No Yes – But needs some improvements. Yes – The Company have identified and applied some price fences effectively. 22. Does the company have knowledge about the customers’ buying process? No Yes – But needs more information. Yes – The Company has a good knowledge and effectively uses them.
110
