The Multiplier Effect: Pricing, Commodities, & the Supply Chain

This is the sort of thing that seems like common sense to us:

“GLOBAL[sic], WHY ARE THE YARN PRICES RISING? IT IS BECOMING EXTREMELY DIFFICULT TO MATCH TARGET PRICES. GOING FORWARD, I THINK SOME OF THIS INCREASE WILL HAVE TO BE PASSED TO THE CONSUMER.”

After a couple of years of difficult weather resulting in massive decreases in the cotton crop harvest; a decrease in the number of hectares of cropped cotton; an increase in the cost of a barrel of oil (one of, if not the, major multipliers in the garment production supply chain); civil unrest causing disruption in the labor pool…why yes, prices are in fact going to rise.

This is just common sense.  Manufacturers commonly handle increases in supply chain costs by cutting corners in production rather than passing those costs directly to the consumer. However, at a certain point, manufacturers can no longer cut corners without the product they are making (whatever it may be, glass bottles, t-shirts, ink pens, etc.) becoming so shoddy that either it can’t be shipped without too much loss in shipping or the customer will no longer accept it and will stop buying it in the stores.

We’ve seen this in both local and big box stores, where the quality of the textiles they are using for garments has decreased.

Let’s take the apocryphal t-shirt, worn the world over, loved and hated by many, owned by most, a basic commodity garment if ever there was one.   We have t-shirts we purchased five years ago from a big box retailer for the exact same cost as t-shirts from the same retailer in store this year, but the ones manufactured five years ago are much higher quality.  The yarn is heavier, and hence the t-shirt itself is heavier, better quality, and will last longer.   This year’s version uses a yarn with a much thinner denier, lower percentage of cotton, and physically weighs less than the older t-shirt. The newer model is also cut ‘skinnier’ or more form-fitting, which may  have been a design option, but we’re willing to bet it may also have been a price point decision that was passed along to Design.  A lot of textile was cut out in moving from a  standard boxy t-shirt to the more form-fitting one.

What will be cut out of next year’s t-shirt to the hit the price point, or will this retailer increase its prices?  The retailer in question is known for price pointing, so we wonder if it will squeeze its manufacturers, or if there will be a price increase.

It is a very interesting question, will manufacturers ‘have’ to pass along some of the increased costs of manufacturing?  Some retailers have already started: the cost of basic cotton shirts have increased US$1-2 per shirt so it is a matter of time before others follow.  We hope that as this happens, two things occur: that retailers and manufacturers don’t attempt to skimp on the supply chain to produce inferior goods and that consumers will demand a better quality product that will last.

In the developed world, we are too accustomed to cheap goods. Perhaps it is time we changed our focus to higher quality goods that will last, and for which we pay a higher up-front cost.

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