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A beginners guide to apparel manufacturing

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Getting Started

An apparel manufacturer's success depends on market research, capable management, adequate capital - and luck.

 


The beginning apparel manufacturer faces the same problems associated with any new small business, plus many peculiar to the industry: the increasing efficiency and marketing ability of big firms; diminishing availability of skilled labor; fierce competition from other small manufacturers, and rapid changes in trends and styles.  Perhaps one out of ten new manufacturers can overcome these problems and succeed; over 50% of new firms go out of business in their first year.

 

MARKET RESEARCH

A beginning manufacturer must know what she wants to manufacturer and if there is a market for her proposed product. She must produce clothes that will please two sets of buyers: the retail store buyers and the customers who will ultimately wear the garment.

 

Once she has chosen a specialty, the manufacturer must survey the competition in that line and price category. Workmanship, quality of fabric, and styling must be of comparative values. Retailers should be surveyed to determine their specific needs. Close ties with retail sources can provide the manufacturer with first-hand information about firms already engaged in the proposed specialty as well as data on customer buying patterns. The prospective manufacturer should also be aware of other firms' efforts to market the product she is considering; if they failed, she should find out why.

Salesmen in the field, trade associations and buying offices are often good sources of information. Trade papers and industry directories also provide market information for the new manufacturer.

 

LOCATION

Apparel manufacturing is traditionally a "downtown" business, particularly for smaller women's wear manufacturers. In California, over 80% of apparel companies are located in the Los Angeles metropolitan area and about 16% are headquartered in the San Francisco Bay Area.

In recent years, congestion in downtown areas has made expansion difficult. Costs and crime rates have risen. These problems have influenced some firms to move their plants to fringe urban areas or to cities far from the industry centers.

Smaller firms need to locate where they are:
* Accessible to a plentiful labor supply
* Convenient to buyers, textile suppliers or their sales agents
* Close to other manufacturers to observe trends and exchange information
* Near a wide choice of financial organizations

 

THE FACTORY

The manufacturer planning to lease his own factory space must anticipate rental costs which, in San Francisco and Los Angeles, presently run from $1.00 to $2.00 per square foot a month. Costs vary considerably depending on demand, facilities offered, condition and location of the building. Factory space further from downtown areas usually costs between $.50 and $1.00 per square foot.

Lease agreements often require first and last months' rent in advance. The manufacturer should check to see if heat, light, air-conditioning and other facilities are provided under the terms of the lease. Before signing, the manufacturer should go over the lease with her attorney to be sure that the terms of the agreement are clearly understood.

 

EQUIPMENT

Expenditures for rental or purchase of factory machinery will depend on the type and scope of operation being planned. Basics to start with include a cutting table, a cutting machine, sewing machines, pressing equipment, and facilities for inventory storage and shipping. Most manufacturers maintain their business offices on the factory premises. In such cases, the expense of office equipment, furniture and supplies must also be considered.


INSURANCE

To protect the manufacturer's physical assets, adequate insurance coverage is mandatory and should be discussed with a knowledgeable insurance agent. Many trade associations have group rate policies tailored especially for the industry. The prospective small manufacturer should consider the following:

*     Fire and Property - Improvements and betterments insurance to cover value added to the premises not covered by landlord's property insurance. Inventory, machinery, goods in transit can also be covered.

*     Liability and Product Liability - To protect against claims by the public for injury received on the manufacturer's property and from goods produced by the manufacturer.

*     Automobile/Truck Insurance - For all company-owned cars and their drivers; also for employees driving their own cars on company business.

*     Workers Compensation - Required by law to cover employees injured on the job.

*     Health, Dental and Life - In recent years, intense competition for qualified labor has necessitated the implementation of basic health insurance coverage for virtually every employee.

The quality and scope of the health plans offered varies. HMO's are popular with small businesses because of their relaxed underwriting guidelines for small companies and their relative affordability. Most apparel manufacturers cover a percentage of their employee's health premium (typically 50%), the employee picking up the balance.

 

PERMITS AND TAXES

An apparel manufacturer is responsible for federal, state and local taxes. If the business is a partnership or sole proprietorship, personal estimated federal income taxes must be prepaid or paid four times a year. In San Francisco taxes must also be paid on payroll.

The new manufacturer should apply to the Internal Revenue Service for an Employer's Identification number (EIN). Federal income and social security taxes withheld from employees' wages must be paid monthly, semimonthly or quarterly, depending on the amount of money due.

 

Unemployment insurance tax is collected by the California Department of Human Resources Development. All manufacturers who employ one or more people and pays wages during a calendar quarter must register with the Department.

 

Manufacturers in California are required to file with the State Board of Equalization for a seller's permit or resale license. A bond may be required. The manufacturer must pay tax on any items that are not for resale, such as patterns, markers and grading services.

Building codes and local zoning departments should be checked for regulations governing machines, textile quantities on hand and fabric dust. Information about local fire department rules applicable to this area of maintenance should also be obtained. OSHA regulations should be checked for rules related to fabric toxicity, environmental hazards and safety regulations. Request a payroll or gross receipts "Business Tax" reporting form from the tax collector's office of the City and Country of San Francisco, City Hall. Pay appropriate tax when due.


GARMENT INDUSTRY REGISTRATION LAW

All California manufacturers and contractors must pass a state administered examination regarding labor laws. All must register with the Labor Commissioner of the State of California and pay an initial fee that is set by the Labor Commissioner annually. Possession of a valid workers compensation insurance policy must be demonstrated. The examination covers basic regulations concerning work place health and safety and industry labor law compliance. There are stiff penalties for California manufacturers who do not register with the State Department of Industrial Relations (Labor Department). A manufacturer can be held jointly liable for fines and civil penalties if she is found to be doing business with a sub-contractor who is operating without a valid registration certificate. A manufacturer should take great care in choosing her sub-contractors and check them regularly to ensure that all of their registration requirements are being met.


FEDERAL TRADE COMMISSION REGULATIONS

The manufacturer must apply to the FTC for a registration number. The Textile Fibers Act requires that this number, or the manufacturer's name, appear on every label or identifying hang-tag. FTC registration helps insure that other companies do not use the same name on their products.

The manufacturer is required to label his garments with a general description of fiber content (usually in percentages). A pin ticket, hang-tag, or sewn in cloth label may be used.  Continuing guarantees, based on guarantees received from textile suppliers should be filed with the FTC pertaining to the following:

 

Flammable Fabrics Act - the material will not ignite.
Wool Products Labeling Act
- correct identification of all garments containing wool.
Fur Products Labeling Act - identification of country of origin and any dyeing of product.

 

METHODS OF ENTRY

Many businesses in the apparel industry are family owned -- started by a husband and wife and passed on to succeeding generations. It is not unusual for a salesman who has always dreamed of having his own line, to set up a small company, contracting out all facets of production. His wife handles the billing and shipping, while he continues to sell other manufacturers' lines until his own firm requires all his efforts.  This type of operation may be started with as little as $40,000 since the salesman has other earnings to support him until his own business becomes successful. His sales experience and contacts will help his own product gain acceptance.

 

It is also possible to begin by working with a specific retailer who agrees to buy the designs the firm intends to produce. With sales assured, the new manufacturer can cautiously start with comparatively low risk.

 

More commonly, an apparel company is started by a combination of an "inside person" (production, designer, cutter) and an "outside person" (salesman, former retail buyer) who join forces and finances to open a business. The "inside man" heads production, and the salesman often acts as business manager.

 

In order to compete with larger firms, a new manufacturer must have experienced personnel to share in the management and insure that design, production and sales departments function smoothly together. Often, a financial manager is needed to coordinate the three. At least one of the principal's should have a thorough knowledge of textiles, since the introduction of new fabrics continually changes this aspect of the business.

 

CAPITAL REQUIREMENTS

Because of the diversity of ways to begin a new apparel operation, it is virtually impossible to set a minimum amount of required and starting capital. In California today, $0-50K would be considered a "shoestring" investment. This amount would be barely adequate for a firm that intends to rent all its equipment, use a free lance designer or copy styles, contract all production and hire commission salesmen with no advances. Industry observers estimate that 100K would be a more realistic starting investment.

For example, trade sources estimate that one set of samples for a medium-priced sportswear line (from design to finished garment) may cost as much as 10K. Each duplicate set can cost at least half that much. A manufacturer intending to begin with five salesmen and a line of fifty dresses would have to produce 250 garments before he would actually be in business. If each individual sample cost $20 and a new line were presented for each of the five seasons, sample costs alone for the first year would amount to over 25K.

 

There are brilliant and talented exceptions to all the rules for starting an apparel company. to quote one industry observer: "What do you need to open a shop? One month's deposit on a loft. You sell on 30-day terms, buy on 60-day terms, and you're in business. Small manufacturers come into the industry with nothing and pull out in a couple of seasons with a million".

 

Unfortunately, these success stories tempt the inexperienced and undercapitalized to enter the field. And while it is possible for the manufacturer to begin with relatively little capital, he still needs substantially more to stay in business and grow. Ideally, he should have enough money to run his company for two or three years. It ordinarily takes that long to acquire a reputation for fit, delivery and customer acceptance. Few manufacturers show a profit the first year. The manufacturer must anticipate sour seasons and perhaps one bad year out of every two or three. Stability will depend on adequate capital to ride out economic storms or a losing streak.


WORKING CAPITAL

The amount of working capital a manufacturer will need depends on his sales volume, expenses, and receipt of income. The minimum should cover regular monthly cash expenditures, not including materials and purchases, for about four months.

Monthly costs will differ considerably, depending on the size and type of operation. Generally, the manufacturer should consider the following when estimating his operating expenses: Cost of Sales; Materials; Freight In; Sales; Salesmen's salaries or commissions; Auto, travel and entertainment; Advertising, promotion, trade shows; Selling expenses; Freight out and delivery; Administrative; Executive salaries; General office salaries; Employee benefit costs; Legal and audit fees; Insurance - General business and owned vehicles; Interest charges, financing fees; Bad debt losses; Telephone, postage, office supplies; Dues and subscriptions; Taxes; Factory; Design expense; Samples, patterns, markers; Direct or indirect labor; Maintenance of premises and equipment; Factory clerical and supervisory salaries; Benefit and insurance costs; Rent; Vehicles; Shipping labor and materials; Pilferage

 

The manufacturer must be certain that his company grows at a speed at which production and capital can keep pace. Adjusting to larger orders means expanding facilities and hiring more labor. As they grow, some manufacturers do not recognize the continuing need for working capital and, consequently, cannot pay their bills. Accepting larger orders than one can produce, "overtrading", is one of the principal causes of garment business failures. Some financial experts advise having approximately two dollars of working capital for each dollar of monthly sales.


OPERATING RATIOS

The multitude of specialties and methods of operation within the apparel industry make typical operating ratios difficult to compile.

 

According to Dun and Bradstreet, the apparel industry's net profit on sales continues to be one of the lowest of all manufacturing businesses. In today's highly competitive market with razor thin profit margins, an after tax "bottom line" of 5% is considered average. A highly unusual 10% net profit would be considered an outstanding result.

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2003 SFFI
 

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                           NEW YORK FLATOW FASHION TRAINING
                                      2255 Benson Avenue Suite 3L
                                        Brooklyn, New York, 11214
                                               tel; 718-266-5035

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