Proximity is a cash and markdown argument, not a freight argument

Distance stopped being expensive and started being slow

Ask why a near origin costs more and almost everyone answers freight. It is the wrong answer, and it has been the wrong answer for most of a working lifetime. Moving a jacket a long way in a box on a ship is cheap; the container system saw to that. What distance costs now is days, and days are expensive for two reasons that never appear on a freight invoice.

Aldermist's two live candidates for ALD-2210 land within eight cents of each other, so the choice is decided entirely on what follows.

42 days. Now price them, three ways, and watch the sizes.

The freight argument, which is the small one

Freight and insurance on the jacket are USD 0.62 from Halbrent and USD 0.41 from Tolvane. The difference is USD 0.21 a jacket, or USD 10,080 across the order.

That is the number the whole industry quotes and it is the smallest of the three.

The cash argument, which is bigger and still small

Aldermist pays for the goods when they ship and receives money when they sell. Every extra day in the pipeline is a day its money is inside a jacket instead of inside its bank. Aldermist's own facility costs it 9.4% a year, which is Aldermist's rate rather than a market fact.

cash cost of the extra days
  = delivered cost x rate x days / 365
  = 25.42 x 9.4% x 42 / 365
  = USD 0.27 a jacket

USD 0.27, or USD 13,197 on the order. Slightly bigger than the freight difference, and still not the argument.

Together freight and cash come to USD 0.48 a jacket. If that were all, the near origin would have to be within half a dollar on price, and on this order it is — the delivered gap in lesson 1 was USD 0.078.

The markdown argument, which is the whole thing

Here is what the 42 days actually buy.

With a 104-day pipeline, Aldermist must commit the entire 48,000 before the season opens, on a forecast. With a 62-day pipeline, it can commit part of the buy and hold the rest until it has seen three weeks of real sales, then place a repeat that still arrives inside the selling window.

Aldermist has measured what that is worth on its own range, over four seasons. These are Aldermist's numbers, from Aldermist's own markdown records, and they are the single most important thing a factory can ask a buyer for.

• Units committed blind, before any sales evidence, clear at an average 24.0% off.
• Units committed against three weeks of actual sales clear at 9.0% off.
• With a 62-day pipeline, 32.0% of the buy can wait — 15,360 jackets.

The jacket retails at USD 89.00.

markdown avoided per late-placed jacket
  = (24.0% - 9.0%) x 89.00 = USD 13.35
on 15,360 jackets                  = USD 205,056
spread across the whole 48,000     = USD 4.27 a jacket

USD 4.27 a jacket, against USD 0.48 of freight and cash together. The markdown argument is 8.8 times the other two combined, and it is invisible on every document in the sourcing file, because it happens in a shop months later and is recorded by a different department.

Add it up. Tolvane is USD 0.078 dearer delivered and worth USD 4.76 more in total, so on this style Tolvane wins by USD 4.68 a jacket — and a sourcing meeting looking only at landed cost would have called it a coin toss.

Now the same arithmetic on a different jacket, and it reverses

Aldermist also buys ALD-1180, a plain black quilted jacket in its fourth season. Same factories, same freight, same duty, same pipeline days. Run both quotes at the same 48,000 units and the same late-placeable share, so the comparison is like for like.

Everything that changed is in one line. On a carry-over that has sold four seasons, Aldermist's blind markdown is 7.0% and its evidence-based markdown is 5.0% — because there is nothing to learn in three weeks about a jacket it already knows. Two points of markdown on a third of the buy is USD 0.57 a jacket, and the option collapses.

The near origin does not win the buyer. It wins the uncertain part of the buyer's range. And the far origin wins the certain part, which is usually the larger part, and is the part with the repeat orders in it.

Price the option, because the buyer has not

The late repeat only exists if the factory can actually take it. Holding four weeks of capacity open for 15,360 jackets is not free, and the factory is currently giving it away.

15,360 jackets x 38.5 standard minutes  =   591,360 standard minutes
at 1,512 standard minutes a line hour    =     391.1 line hours
unavoidable overhead at USD 48.30 an hour = USD 18,891
per reserved jacket                       = USD 1.23

USD 1.23 a jacket is what the reservation costs the factory if the repeat never comes. Against a buyer benefit of USD 13.35 a jacket on the same units, there is a wide range of prices at which both sides are better off — and no conversation happens, in most factories, because nobody has costed either side of it.