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Costing . . . Why this tsunami of cost increases?

Costing . . . Why this tsunami of cost increases?. 2011 AAPN Annual Meeting Miami, Florida May 2, 2011 Mary T. O’Rourke. Recent Price Increases. Unprecedented Limited relief in sight Global scale Regional implications. Key Drivers. Increase in global fiber demand

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Costing . . . Why this tsunami of cost increases?

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  1. Costing . . .Why this tsunami of cost increases? 2011 AAPN Annual Meeting Miami, Florida May 2, 2011 Mary T. O’Rourke O'Rourke Group Partners LLC

  2. Recent Price Increases . . . • Unprecedented • Limited relief in sight • Global scale • Regional implications O'Rourke Group Partners LLC

  3. Key Drivers . . . • Increase in global fiber demand • Recession interrupted / masked the trend • For example, China: • Per capita fiber consumption rises from 15 to 33 pounds over the last decade • Less arable land available for cotton • More needed to feed developing populations • Food equals 40 – 60% of household income • Widespread weather issues O'Rourke Group Partners LLC

  4. Fabric Prices . . . • Significant rise in raw material price inputs • Cotton fiber nearly triples over six months • Polyester staple fiber up 40% • Price per yard gap East/West narrows • Fabric cost component of garment increases • Disproportionately to other component costs O'Rourke Group Partners LLC

  5. Other Factors . . . • Fabric availability tighter, increasing lead times • Asian labor cost increases in key countries • Less available labor in China (for apparel) • Fuel increases drive up transport costs • Increasing energy demand and costs in Asia • New financing terms • Deposits and/or fabric pre-paid • More Letters of Credit • East/West garment price LDP narrowed and/or eliminated in various apparel categories O'Rourke Group Partners LLC

  6. Average Apparel Manufacturing Hourly Labor Costs – US $ Fully loaded, including social charges – Q4 2010/Q1 2011 O'Rourke Group Partners LLC

  7. Labor Productivity Matters . . . Some as high as 75% Inland factories at 55% -65%; Improvement emphasis. Some at 60-65% 35-45% more typical but targeting 50% + with USAID program. 40-45% not uncommon; improvements are slow. O'Rourke Group Partners LLC

  8. Comparative Lead Time – DaysOrder to US Distribution Center Some reporting 42 – 50 days. O'Rourke Group Partners LLC

  9. Basic Denim Pricing DifferentialsAsia v. Regional (February 2011) 10% Denim gap to Asia 15 – 20% Basic Cotton Twills 18 - 20% Cotton Knit Jersey 23 – 25% Woven Textured Poly O'Rourke Group Partners LLC

  10. Men’s Basic 100% Cotton Denim Jean CostJune 2010 v. February 2011 13.75 oz. OE/OE, medium 8.96 8.40 7.31 7.07 Garment: China NICARAGUA China NICARAGUA Fabric: China Mexico China Mexico O'Rourke Group Partners LLC

  11. Product Sourcing ImplicationsPoly/Cotton Twill Pant / $ 10.40 10.57 10.47 10.37 9.57 9.91 O'Rourke Group Partners LLC

  12. Selected Uniform MarketsEstimated % Regional Sourcing 85% 70% CBI/CAFTA 65% 60% 50% 45% MEXICO USA O'Rourke Group Partners LLC

  13. Regional opportunities abound. . • Everyone is re-evaluating costs and suppliers. • All cotton-dominant categories • Highest fabric yield-required categories • Jeans • Trousers • Greatest quality and highest in-stock program requirements • Uniforms O'Rourke Group Partners LLC

  14. Regional Competitiveness in Apparel Manufacturing • Degree of regional cost competitiveness takes many by surprise. • Synthetics getting another look regionally • Increased demand for speed to market. • Leaner inventories required at retail. • More replenishment program shifts. • More frequent, faster fashion deliveries. • Cycle compression in pre-production facilitating and providing more cost reduction. • Must improve sampling turnaround for basic fashion items. O'Rourke Group Partners LLC

  15. Other Important Trends • Big box retailers and major brand owners involved in fabric cost negotiation. • Asian garment shifts to West but trim and findings often remain Asian-sourced. • Buyers want to delay associated “new source” product testing and approval process. • Regional capacity limitations emerge. • Who will lead expansion? O'Rourke Group Partners LLC

  16. For further information: O’Rourke Group Partners, LLC Mary T. O’Rourke Managing Director morourke@ORourkeGroupPartners.com (917) 567-3540 www.ORourkeGroupPartners.com

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