Developing a Cost Model for Sourcing Products for Different Distribution Channels

Abstract

Apparel sourcing operations are extremely complex due to the intricacies of a global supply chain. Sourcing decisions should not be made without an exhaustive analysis of supply chain cost structures. Landed costs must be analyzed for sourcing decisions, but they must be complemented by information of the effects of supplier lead times and consumer-retail interactions, which are critical to overall supply chain performance. A focus on cost of goods alone gives insufficient importance to the negative effects related to forecast errors when sourcing from regions with long lead times. A supply chain cost model has been developed in this study. The model looks at cost structures for the entire supply chain from fiber to retail. The cost model shows the accrual of costs throughout each processing step within the textile and apparel industry. It also identifies costs related to international trade, including transportation costs and duties paid upon entry to the United States. The study examines the supply chain processes and costs for producing t-shirts and denim jeans in distinct regions of the world. Trade agreement duty provisions, world cotton market price competitiveness, export tax rebates, and labor rates significantly affect a countries’ competitiveness in the textile and apparel industry. The study helps identify the cost makeup of each process and the resources consumed. This model can assist companies to look outside their area of operation and have an appreciation of costs related to upstream and/or downstream processes within their supply chain. They can identify broad issues related to their strategic partnerships with suppliers and customers and investigate these in more detail. By combining supply chain costs, transportation time, and manufacturing responsiveness, analyses can be performed to identify scenarios where responsiveness is more critical than cost effectiveness. This study has found that a responsive supply chain can outweigh a lower cost but less responsive supply chain in certain sourcing environments.