Remove a tier and the risk goes somewhere

The rule

Five lessons, one order, and one sentence underneath all of it.

A tier's price is the sum of the work it does and the risks it absorbs. Remove the tier and both are still there. The work gets re-homed loudly. The risk gets re-homed silently, onto whoever is least able to refuse it.

Everything in this course is an example of that sentence.

• Halvedge nominated the mill and Verrick bought the fabric. The decision and the exposure were re-homed separately, and the shade loss went to the party holding title.
• The repeat was cut correctly, and the write-off went to the party holding dyed fabric.
• Marchbanks was removed on paper, and USD 17,320.32 of credit and claims moved onto Verrick without ever appearing on a document.

None of those was a breach. All three landed on the same company. That is not bad luck. It is a prediction you could have made in advance, with one question.

The refusal test

For any risk in a chain, ask each party: if you said no, what would happen to you?

Rank the answers. The risk lands on the bottom of that ranking, whatever the contract says, because a party that cannot afford to refuse will eventually accept.

Verrick is bottom, and Verrick carried the shade loss, the fabric write-off and the credit line. One question predicted three separate events across three separate lessons.

Run this on your own largest customer before you read any further. It takes ten minutes, and it is the single most useful thing in this course.

Three things a factory is asked to absorb, and what each is worth

Being at the bottom of the refusal ranking does not mean accepting everything for nothing. It means pricing what you accept. Here are the three requests Verrick meets most often, each with the arithmetic that turns it into a number.

The nominated mill

Halvedge chooses the fabric supplier. Verrick buys, owns and claims. The nominated fabric on this order is 74,400 pieces at USD 3.63, which is USD 270,072.

Verrick's own record over three years: uncovered claims on nominated materials have run at 2.1% of nominated value. So the allowance that belongs in the quotation is 270,072 times 2.1%, which is USD 5,671.51, or USD 0.076 a piece, or 0.85% of an FOB of USD 8.90.

Verrick's FOB contains none of it.

And an honest note before you use that number. The shade fault alone cost USD 34,560, which is 6.1 times the whole year's allowance consumed in one order. An allowance is an average, and a bad year is not an average. It is the right number to put in a price and the wrong number to rely on as protection.

The delivered-terms request

Halvedge asks Verrick to quote delivered to the distribution centre rather than free on board. That means Verrick pays the freight, the duty and the inland movement, and owns whatever goes wrong on the way. Those costs are USD 1.34 a piece, which Verrick can look up and add.

What it cannot look up is the tail. Verrick's own record: 3 of 41 delivered shipments in twenty-four months ran up demurrage, which is the charge for containers left sitting too long. The average was USD 2,840, which is USD 207.80 a shipment expected, and this order moves in three shipments — USD 623.41, or USD 0.0084 a piece. Small, and easy to price.

The one that is not small is customs classification. Halvedge's broker files HV-3110 at a rate that, on this order, is an illustrative USD 0.71 a piece in this invented market. It is not a rate to quote anywhere. If the goods are re-classified one heading across, the rate moves by USD 0.24 a piece, which is USD 17,856 on this order. Under free on board that is Halvedge's problem. Under delivered terms it is Verrick's, and Verrick has no relationship with the customs administration deciding it.

The right answer to a delivered-terms request is rarely no. It is: yes, with the duty stated separately and adjusted at actual.

The indicative quantity

Lesson 3 priced this one. A repeat of 38,000 that became 30,200 left USD 16,408.55 of fabric written off. An indication a factory must buy against is not an indication. Either it carries a floor, or the fabric is bought in two blocks, or its cost belongs in the price.

The Monday sheet

One page, five columns, for your largest customer. Nothing here needs a system.

1. The risk. One line each: nominated material quality, indicative quantities, shade approval, delivered-terms duty, payment days, testing failures, late trim approvals.
2. Who decides it.
3. Who pays for it today.
4. What it has cost, over the last twelve orders. Look it up. Do not estimate it.
5. What it is worth per piece, which is column four divided by the pieces in those twelve orders.

The fifth column is the one that changes a conversation, because it is the only form in which a risk can be put into a price. We carry your nominated-mill claims and it costs us USD 0.076 a piece is a negotiable sentence. Your nominated mill causes us problems is not.

What this course did not cover, and where it goes

This course was about structure: who is in the chain, what each party owns, and where a risk goes when a tier is removed. It deliberately stopped short of three things that belong elsewhere in this track.

• What changes commercially when you move between cut-make-trim, free on board, own-design manufacture and private label is course 11.3. That is a change in which tier you are, and the arithmetic here is the groundwork for it.
• How a buyer actually decides, inside its own calendar and its own money, is course 11.4.
• What the demand outlook is worth and how to read one is course 11.5.

What you should be able to do now is narrower and more useful than any of those. Take one purchase order. Name every party to it. Say who owns the goods and who chose the supplier at each step. Find the party who cannot afford to refuse. Then put a per-piece number on every risk that lands there without a price attached.

Act as a sourcing structure analyst. I want ONE purchase order mapped into its parties, and then I want to know where an unpriced risk will land. The order: buyer [BUYER], style [STYLE CODE], product [DESCRIBE THE GARMENT AND ANY SUBCONTRACTED OPERATION SUCH AS PRINT, EMBROIDERY OR WASH], quantity [TOTAL] split as [COLOUR: QTY], price [FOB OR OTHER TERM AND AMOUNT], shelf price if known [AMOUNT], ex-factory [DATE], in store [DATE]. The parties, one a line: [NAME, WHAT STAGE IT PERFORMS, WHO CHOSE IT, WHO PAYS ITS INVOICE, WHETHER IT TAKES TITLE TO THE GOODS, WHAT SHARE OF ITS YEAR I AM, WHAT SHARE OF MY YEAR IT IS]. Do the following. First, draw the chain as two separate lists — the order in which TITLE to the goods passes, and the party that CHOSE the supplier at each stage — and name every stage where those two are different parties. Second, for each such gap, say what would happen if the goods from that stage were defective: who would carry the cost after the usual contractual limits, and why. Third, run a refusal test: for every party, say what happens to it if it refuses to absorb a cost, and rank them from most able to refuse to least. Fourth, name the party at the bottom of that ranking and list every risk on this order that is likely to settle on it. Fifth, for each of those risks, tell me what evidence I would need from my own records to put a per-piece price on it. Do not recommend renegotiating anything yet; I want the map first. Where I have not given you a field, say so and treat it as unknown rather than assuming it is fine.