Fashion Production Has a Costing Problem

Marsha Dickson, president and co-founder of Better Buying Institute, says she’s glad she’s been sitting on the costing data the purchasing practices platform collected in 2021 as long as she’s had. She’s developed a deeper and more nuanced understanding of the issue of price, as it pertains to both fashion buyers and suppliers, in the ensuing years, she said, meaning it would have “been quite a different report” if she had pushed to publish earlier.

Even so, Dickson can’t help but conclude that brands and retailers still have a long way to go when it comes to accurate costing that doesn’t place an undue financial burden on their manufacturing partners. This was already evident in the findings she gleaned from the platform’s 2024 Better Buying Purchasing Practices Index, which revealed that fewer than half (48.9 percent) of the suppliers polled said that all orders were priced for compliant production, meaning that they were being paid for everything the buyer was asking for and were still able to make a profit. Of those whose total costs were not covered, more than eight out of 10 (81.9 percent) said the prices paid by their buyers failed to cover basic production needs such as the cost of raw materials, components and labor.

Published Wednesday, the perspectives of the 2021 roundtable, made up of more than 110 suppliers across 23 countries, including Bangladesh, China and Vietnam, further underpin the precarity that the so-called “race to the bottom” has begot. Detailed cost breakdowns provided to buyers by suppliers are sometimes used in “nefarious ways” to pit suppliers against each other and result in “too low” prices, the report found.

Ring-fencing labor costs also does precious little when manufacturers are forced to squeeze everything else, meaning there’s a more vital need to make the total cost paid a priority, rather than those earmarked for workers, Dickson said. As one supplier said, using an acronym for free on board, “Workers’ wages are dependent on the total FOB price, not just labor cost.”

While a great deal of effort has been poured into improving efficiency rates and extracting waste from manufacturing, for instance by implementing leaner production, there remains an existential conflict between the opposing goals of “wanting to have the cheapest price and wanting to pay a living wage,” she said. “And so we really just have to have to have the supplier and buyer come together to figure out how do we do this?”

What’s also clear to Dickson is that current costing models don’t cover all the costing variables, especially if they were developed without supplier input. One supplier noted, for instance, that it’s legally obligated to pay menstruation leave and production target and attendance allowances, which are never accounted for in costing frameworks. At times, a single model is used to determine the costs incurred by suppliers making completely disparate product types. Other inaccuracies might result from overestimated efficiency rates or outdated data on minimum wages and benefits.

Open-book costing can also be a mixed bag. On the one hand, it can be useful for negotiating a fair price. On the other, buyers could abuse the information to play off one supplier against another to whittle already sliver-thin margins further. The manufacturers Better Buying interviewed said they would be more willing to be transparent about costing details if buyers committed to long-term future business, shared sustainability goal-setting and consistently engaged with their concerns about price and product details.

What’s missing, Dickson said, are guardrails to ensure that the solutions brands are employing aren’t creating unexpected negative consequences for suppliers.

These include the high-pressure negotiation strategies that nearly half of the manufacturers Better Buying interviewed have reported. According to the 2024 Better Buying Purchasing Practices Index, more than 52 percent of the buyers rated employed what suppliers say is the most popular tack: “take it or leave it.” Equally common are demands for the same price from year to year without consideration for inflation (49.8 percent), comparisons between suppliers on price rather than capabilities (44 percent) and the sharing of competitors’ bids, including from different countries, to further depress costs (42.6 percent).

“We’ve got to get used to paying enough for all the products—enough to not just pass on the wages to workers, but to make sure that the supplier is financially sound in the meantime,” she said. “Because if they can’t earn a profit, there’s no reason for them to be in business, but it’s understandable for so many that bad business is better than no business.”

One solution for improving costing: better communication. One supplier said that if buyers want to be fairer, they need to “listen to the factory’s comments about why there is a price difference among their suppliers.” Another said that good dialogue revolves around being “more of a strategic partner, forming a relationship with your vendor versus it being transactional.” This supplier added: “There’s a reason people use the phrase “you get what you pay for.”

“There’s more work to be done, and we’ve got to bring the supplier in on that work to make sure that their concerns are heard, that their concerns are addressed and that the work that goes forward will meet the shared goals,” Dickson said. “I think everybody understands that the customer wants low prices. So how do we do that and pay workers well enough and make sure the suppliers are financially sound? This gives some ideas, I think, to start to have that conversation.”