Birnbaum on Strategy: The Guide to Cost Value Analysis

Preface

Accountant to Garmento:

Murray, your selling price for this style is less than your material cost.

How do you expect to make a profit?

Garmento to Accountant:

No problem!

I will make it back on volume.

We are third and fourth-generation garmentos. Morris Birnbaum, our second generation, operated a factory in Hong Kong during the 1950s, at the dawn of today’s global garment export industry. Those were the days when made-in-Hong Kong garments were at the very bottom of the market: in my father’s case, that meant men’s cotton woven shirts at FOB $7.50 a dozen. (Yes, you could make money at those prices provided you bought 40 count yarn-dyed cotton fabric at 20¢ a yard and paid your worker $50 per month).

All things considered the old man ran a pretty good operation, particularly when you compare his factory in 1955 with the same factory in Bangladesh in 2019 (the world’s second-largest exporter of men’s cotton woven shirts). His 600 machines produced 1000 dozen a day, which was a lot higher productivity than the same guy in Bangladesh, and $50 a month in today’s money is over five times what a worker in Bangladesh is paid.

There was one area where he did not do a good job: garment costings. In this regard, my father was very much old school. In his defense, let me say that in those early days, old school was probably new school or more to the point the only school. 

Be that as it may, the Morris Birnbaum school of garment costing was based on the money-in-the-pocket principle. In those early days before the advent of what is known today as garment sourcing, customers still bought their garments and factories not only produced the goods, but also sourced the fabric and trim. The Birnbaum method was very simple and practical: if the fabric cost 20¢ a yard, my father’s costing read 22¢; 30 yards a dozen became 33 yards a dozen. Every trim item – buttons, interlining, thread, labels – carried its own markup.

The customers, on the other hand as represented by their own garmento marauders, were governed by the no-bottom-price principle. This too was very simple. Whatever FOB price the factory quoted was unacceptable. If the factory quoted $7.00 a dozen, the garmento marauder demanded $6.50. If $6.50, the demand was for $6.00. This process continued until the true bottom price had been reached, often breaking the factory in the process.

In this highly competitive environment, the actual costing played little or no role whatsoever. In the course of negotiations my father invariably forgot the actual costs, while the customer never knew or cared about the actual cost. Eventually, my father and his generation went to that great buying-office-in-the-sky where the ultimate QC manager separates out the rejects.

Times changed. People changed. New tools, new systems and new structures evolved. The old tussling between money-in-the pocket and no-bottom-price never completely died out. We can still see it sometimes today albeit dressed up in a suit of modern technology.

But for the most part, on both the customer and supplier sides, the industry has moved on.  The third-generation following after Morris Birnbaum’s money-in-the-pocket generation are still garmentos although operating in a very different industry. Meanwhile our fourth-generation garmento is a specialist in a garment industry still in its nascent stage which will become mainstream in a few years.

David Birnbaum

Emma Birnbaum