Private label is a different business, not a further rung

Nothing moved, and everything changed

Pellworth is a German discount chain. It wants CN-5140 under its own brand: 180,000 pieces a year, replenished every month against a rolling forecast.

Run lesson 1's five questions and almost nothing moves. Pellworth pays for nothing. Nabhani buys the cloth, exactly as it does under FOB — FOB means the factory buys the materials and sells a finished garment. Nabhani chooses within an approved list, carries the fabric fault, and works to Pellworth's design. Only the fifth question changes: whose name is on the label.

On the tidy version of the ladder, that should be a small step. It is the largest change in this course. Four obligations arrive that none of the other three models carry, and none of them is about garments:

1. A forecast instead of an order. The 180,000 is what Pellworth expects to sell. It is not what Pellworth has bought.
2. A service level. Pellworth requires 98% availability against a four-week call-off. A call-off is the order the retailer sends when it wants stock delivered. A missed call-off is a gap on a shelf, and a gap on a shelf is the one thing a discount retailer genuinely cannot tolerate.
3. Stock, held at the supplier's expense. To meet 98% on a four-week call-off, Nabhani holds safety stock. In its own warehouse. Funded by its own bank facility.
4. A compliance regime. The retailer's own brand is on the label, so the retailer is the party a regulator or a consumer comes to. It audits, it tests, and it wants a technical contact who answers the same day.

You are no longer selling capacity. You are selling availability. And availability is a promise about the future, not a piece of work.

On paper it is the best business in the course

Lesson 2 costed it. At programme volume the fabric comes on contract at USD 4.12 a metre. The trims fall to USD 0.86. By the second repeat the standard minutes fall from 24.5 to 22.8 — standard minutes are the sewing time allowed for one garment — so a line makes 550 pieces a day instead of 480.

• Cost USD 8.598, price USD 9.98, margin USD 1.382. That is 13.85%.
• Take off the cost of the money, USD 0.3121. Take off the programme overhead — the technologist, the audits, the testing and the safety stock — at USD 0.4382.
• Margin after everything: USD 0.6318 a piece, or USD 347.47 a line-day.

That is the best number in this course, 65.1% better than FOB. Pellworth's programme would fill about 327 line-days a year at that rate. That is the other half of the attraction. A contracted line-day is a line-day that is not idle, and what an idle one costs is course 14.4.

Year one

Pellworth called off 147,000 of the 180,000. That is 81.67% of the forecast.

Nothing went wrong at Nabhani. The service level was met. The audits passed. The quality was accepted. Pellworth simply sold less chino than it expected. That happens to retailers every season, and it is the reason they forecast rather than order.

But Nabhani's fabric contract was written on 180,000, and the factory had produced ahead to hold the service level. At the end of the year it was holding 33,000 pieces of commitment nobody wanted:

• 12,000 already cut and sewn — the safety stock, plus a December call-off that was withdrawn. Sold to a clearance buyer at USD 4.20 against a cost of USD 8.598. A loss of USD 52,776.00.
• Cloth for another 21,000 pieces, 31,920 metres, written down from USD 4.12 to USD 1.85 a metre. A loss of USD 72,458.40.

That is USD 125,234.40 of losses, against earnings of USD 92,869.79 on the pieces that were called.

The best margin per line-day in the course delivered minus USD 121.09 a line-day. The arithmetic in lesson 2 was not wrong. It was right, for every piece Pellworth actually called. The problem is a different one: the model does not transfer an order. It transfers a forecast, and a forecast is a guess that can come out low.

The number to calculate before signing

Nabhani could have worked this out in the meeting, from figures it already had.

Each called piece earns USD 0.6318. Each uncalled piece costs USD 3.7950, on the blend of finished stock and cloth. Break-even is where the two cancel out:

• Earnings on what is called must equal losses on what is not.
• That happens at 154,311 pieces. That is 85.73% of the forecast.

Nabhani needed 85.73% and got 81.67%. Four points of forecast error, on somebody else's forecast, in a business it had no way to influence.

Here is a sentence you can use in any programme negotiation: every uncalled piece costs me six times what a called piece earns me, so I need six out of every seven forecast pieces just to stand still. Then ask for the three things that move that number, in this order:

1. A committed minimum, below which the buyer pays for the fabric. This is the whole negotiation. Everything else is decoration.
2. Buyer-owned fabric on the contract minimum. That turns the tail of the programme back into something closer to CMT — CMT means the buyer supplies the fabric and the factory only cuts, makes and trims.
3. A shorter call-off horizon, or a lower service level. Either one cuts the stock you have to hold on a guess.

Act as a commercial analyst for a garment factory that has been offered a private-label programme. I want the call-off rate at which it breaks even, before I sign anything. A call-off is the quantity the retailer actually takes against the forecast. The offer: retailer [NAME], forecast [QUANTITY] a year of [STYLE], price [AMOUNT] a piece, call-off horizon [WEEKS], service level asked for [PERCENT], contract minimum on fabric [QUANTITY OR NONE], committed minimum on finished goods [QUANTITY OR NONE]. My costs at that volume: materials [AMOUNT] a piece, conversion [AMOUNT], other direct [AMOUNT]. My programme overheads a year: technical staff [AMOUNT], audits and certification [AMOUNT], testing [AMOUNT a piece]. My safety stock requirement [PERCENT OR QUANTITY]. My facility rate [PERCENT] a year, and the cash cycle on this programme [DAYS]. If the programme stops, my finished stock clears at about [AMOUNT] a piece, and my uncut fabric drops in value from [PRICE] to about [PRICE] a metre, at [METRES] a piece. Now do six things. First, give me the margin per called piece after the cost of the money and after the programme overheads, both per piece and per line-day. Second, give me the loss per uncalled piece, split between finished stock and cloth, then the blended figure. Third, solve for the call-off quantity where the two cancel out, and show it as a percentage of the forecast. Fourth, state the ratio of loss per uncalled piece to margin per called piece as one plain sentence I can use in the meeting. Fifth, run the result at call-off rates ten points either side of break-even and show me the money. Sixth, tell me what a committed minimum of each of [THREE QUANTITIES] would be worth to me, so I know what to ask for and what to give away. Ask me for the retailer's own record of call-offs against forecast, and tell me what you would conclude if I cannot get it.

So which model should a factory be in

This is the end of the course, and the answer is not a preference.

Here is Nabhani's answer, from its own numbers:

• FOB: about 8.0% of the factory. Not because the margin is bad — it is the second best per line-day. Because the bank facility carries only two orders a year, and the mill is four days away. Lesson 3.
• ODM: not at 17.65%. Raise the hit rate above 18.20%. Or sell design as paid development. Or win the exclusivity clause worth USD 241.76 a line-day. Lesson 5.
• Private label: not without a committed minimum. The programme is the best business in the course above 85.73%, and the worst below it. This lesson.
• CMT for the rest. Last by margin per line-day, and the only model Nabhani's balance sheet can run at full volume today.

Read that list and see what decided every line: the bank facility, the mill base, the hit rate and the forecast commitment. Not one of them is about how well the factory sews. Not one of them is about ambition.

The right model is a property of the factory's balance sheet and its supply base. Both of those change, so the answer changes too. A bigger facility. A mill within a day's drive. A second FOB customer to spread the fabric risk. A design department with a proven hit rate. A buyer who will commit a minimum. Each one moves a line in the list, and each is worth more than moving up a rung — because there is no rung to move up.

What to take away

1. Private label changes only the fifth question — whose label — and brings four obligations no other model carries: a forecast, a service level, stock, and a compliance regime.
2. A programme transfers a forecast, not an order. Nabhani's best margin per line-day in the whole course, USD 347.47, produced minus USD 121.09 in its first year.
3. Every programme has a break-even call-off rate, and it is arithmetic you can do in the meeting. Here it was 85.73% against an actual 81.67%.
4. The committed minimum is the whole negotiation. Price, terms and lead time are all worth less than the quantity the buyer will pay for whether or not it sells.
5. The right model is a property of the balance sheet and the supply base, not of ambition — and it is worth working out again every time either of those changes.