Increase your profits by understanding your Costs



June 16, 2020

Whether you are a designer developing a new collection or a buyer shopping for wholesale or retail , it really is important to understand the cost breakdown of the product or products you are purchasing.

Too many designers rush into the product development process without planning in detail for the costs of their products. To understand  the make-up cost of your garment means to clearly understand the target customer and market position you have identified for your brand and designs. Ultimately this will be reflected in your profits. By having a clearly defined range strategy and a price point hierarchy you can map out your cost projections and profit estimates before any final orders decisions are made. As you develop your designs and ideas this plan can be adjusted until you are happy with the final range.

If you are buying wholesale, ensure you set your buying plan and budget in advance. Working with an open to buy budgets will help you to keep a track of your merchandise spend per classification. Your buy plan should include a price point hierarchy within each merchandise category to make your buying decisions much clearer and work within your budget.

A common mistake made by designer entrepreneurs starting out is focusing too heavily on the creative side preparing designs, getting samples made and producing small quantities of items without planning the full process from end to end. it is an expensive process to produce a multi piece collection without any confirmed orders to finance this.

Let’s look at the cost breakdown for a single item. Bear in mind that if you are purchasing your materials in bulk , the vendor may be in a position to offer some is always worth asking.  Another good reason for a range plan strategy prepared in advance is that it allows  time to review and make adjustments where necessary – the more you can work out in advance the better. This includes reviewing your designs in detail on paper ( or screen !) before committing to getting samples made.

The elements that make up the direct cost of the product for a manufacturer can be broken down as follows

  1. Direct Materials 
  2. Direct Labour
  3. Direct Expenses

Direct Materials are all the materials included that become the garment e.g., fabric, thread, lining, buttons, zips, trims etc… in clothing manufacture this is the largest element of the cost on average about 50%. Knowledge of fabric composition, cost per metre and required trims should be taken into consideration during the design process. Direct Labour refers to the wages costs of those people engaged in making the garments. This includes the lay planners and cutters , sewing machine operators , pressing and packing staff etc.. These costs are on average 20% of the total cost. This will vary according to the country where the goods are produced and also depending on how intricate the design of the garment may be. The overhead costs refer to  the direct expenses associated with the production of the product e.g. additional hand embroidery where it is sub contracted to an external factory or a specific washing finish that also needs to be sub contracted to an external factory.

The indirect costs for a manufacturer are all the other costs of running a factory. these represent 30% approx. of the total cost, in some cases it may be less or it may be more.

These overheads relate to production and non-production. An example of production overheads include the cost of running the factory or manufacturing unit and covering costs for machinery, repairs, replacement parts, additional staff not included in the direct manufacturing process such as office staff and management and business rates such as gas , water, electricity, telephone and equipment. The non-production overheads can include the administration, finance, marketing and distributions costs of the business.

When a garment cost is presented to you it is important to understand the production process and the stages involved to arrive at the quotation cost for your design. this is the cost that you work with and apply your overhead costs to before you fix your wholesale and retail price. 

For buyers engaged in private label product development it is also important to understand the components of cost make up to support your buying decisions and fit in with your buy plan. 

For buyers purchasing at wholesale stage the importance of understanding your target market , customers and price-points help to determine what you can afford to pay  to allow you the achieve your target profits after the retail price is applied. 

Working closely with a manufacturer on sample development is an advantage when it comes to breaking down the cost of  new garments. Remember sample costs for one off pieces will always be higher than a production run. Likewise small quantities will not yield high discounts either.

The elements that make up the cost of the product for the designer/entrepreneur can be broken down as follows

  1. Direct Costs

This is  cost to produce the product which will include the materials , trimmings , labour, the packaging, transportation

  • Indirect Costs
    These are all the other business costs such as rent, insurance, utility bills, marketing, travel, website maintenance, etc… The entrepreneur needs to know what the yearly cost will entail to cover these expenses so the company will at least break even . The break-even point is when sales cover both the direct and indirect expenses. 

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meet elisabeth

Meet  Elisabeth, the driving force behind The Design Directive. With over 25 years of experience in the fashion industry, Elisabeth has honed a unique skillset that combines fashion design, buying, and business management. As a passionate advocate for fashion retailers, she empowers businesses to innovate and grow by providing expert strategies and fashion buying know-how. Elevate your brand’s success with her guidance today!

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