To reach this goal, factories must take on much greater responsibilities in the manufacturing process and invest very large sums of money.

However, since the product cost sheet does not include markdowns, the customer cannot see that the increased FOB price is more than offset by the reduced markdown.

The supply chain with its associated dysfunctional cost sheet moves the customer in the opposite direction-towards increasingly higher costs. Each time the sourcing specialist "reduces" supply chain costs, he is in fact raising full-service garment costs.

The solution is to scrap the entire supply chain process and go back to basics.

First we redefine cost as full-value cost: Cost = Listed Retail Price (the number on the hang-tag) minus Profit.

Second we restate the basis of supplier selection.

The customer works with the factory which provides the product at the lowest cost- which is the same as: the customer works with the factory where they make the most money.

To achieve this end, the customer combines the manufacturing process (pre-production and production) with post-production to form the product cycle, which begins at the point when the designer selects sample fabric and ends when every last piece of that style has been sold in retail.

All reorders are included in the product cycle. The product cost sheet becomes the product full-value cost sheet, and every step in the product cycle is listed separately.

When the customer carries out that step, the customer's cost is listed. When the factory carries out that step, the listed cost becomes 0, because it becomes part of the CMT.

This may appear obvious, but when you think about it, it changes the entire basis of garment sourcing. The customer no longer cares about CMT, FOB, or DDP. The customer cares only about NET.

The factory becomes responsible for in-store delivery dates, quality, etc. The customer no longer cares why the style did not sell well. The problem may be poor design, poor quality, late delivery, high retail price, etc. All of these are irrelevant.

Periodically, the customer evaluates its suppliers- which supplier provided the customer with the highest per cent profit and which did not.

The good suppliers are given more business. The not-good suppliers are given less business or no business at all.

The full value cost system is simple, transparent and most important realigns the relationship between customer and supplier.

Instead of competing, both sides work to achieve a common goal profit for the customer. The customer does well and in situations where the factory has made the investment in capital and systems, its profit has the potential to rise tremendously.

Originally published in The Stitch Times: March 2009