BUSINESS PLANNING
IN THE APPAREL INDUSTRY--
IT'S A WHOLE NEW BALL GAME

By Ira Weissman

The apparel industry is in a state of flux, characterized by change being the rule rather than the exception. A relatively stable environment has been replaced by constant threats of consolidations, mergers, reorganizations, and liquidations. The only thing certain is that the industry will never be the same.

During the last several years, the American economy developed a trickle-down effect which altered the perceptions of the consumer, and consequently the retailer and wholesaler, about wearing apparel in terms of priorities, needs, and desires. The unsettled times of the 90s changed the buying habits of the American consumer, who has become more aware of style and pricing considerations.

The demand for wearing apparel has been affected by considerations, including the following:

* Downsizing and the prospects of downsizing have diminished the disposable income consumers are willing to allocate to apparel purchases.

* Many new products and services, such as computer hardware and software, are competing for consumer disposable income.

* Corporate America's increasing trend to relaxed dress code standards in the
workplace.

Consumer behavior patterns have, in turn, significantly altered the way in which both the retailer and the wholesaler conduct their business strategies.

Until recently, it did not appear that retailers were aware of these consumer behavior shifts. They continued to conduct business as usual and ultimately found themselves in a precarious position. Higher than anticipated investments in inventory caused them to alter their merchandising strategies and offer more frequent and earlier promotional sales. This created lower gross retail margins causing a severe decline in the financial viability of the retail apparel environment. The result was a need for retailers to consolidate, merge, or reorganize in order to survive. To lessen the impact, retailers prevailed upon the wholesale community to share in their problems by offering price concessions (markdowns). Reliance by retailers on the wholesale community for financial assistance continued to weaken the already unstable financial status of many wholesalers.

During the 90s, retailers embarked upon a new type of relationship with their suppliers. They attempted to form discrete business alliances with wholesale vendors and establish what has been referred to as "informal business partnerships." In order to achieve this result, retailers have been consolidating their vendor relationships by eliminating uncooperative or unprofitable vendors. Retailers are demanding that for suppliers to remain business partners, they must comply with the following:

* Offer unique stylized products.

* Utilize sharp pricing tendencies.

* Agree to just-in-time inventory
commitments.

* Guaranty margin protection via markdown agreements.

The end result is that the burden is being passed on to the party of last resort, the manufacturer. The manufacturer is being asked to tie up working capital in inventory and operate on depressed gross margins. Under these conditions, how does the manufacturer survive? The answer is planning. In most cases, conventional planning wisdom only encompasses the financial considerations which do not answer some other real questions. A manufacturer in this environment cannot hope to survive without a comprehensive business planning strategy.

The Approach to Business Planning

The approach to developing a business plan for the 90s is to integrate a company's objectives by bringing together operational factors such as purchasing, manufacturing, marketing, and selling and the financial aspects of cash flows, inventory levels, and available borrowing capacity of a middle-market enterprise. The basic aspect which separates this plan from what generally exists, is establishing a management discipline that creates accountability and control over the operational aspects of inventory control and pricing strategies.

Business Plan Philosophy

The business plan philosophy centers around the concept of monitoring anticipated sales bookings and relating them to commitments for raw materials and subsequent manufacturing schedules. The plan also establishes costing models for the entire sourcing mixture, which might encompass both domestic and off-shore business activity. In addition, the structure of the plan helps educate the management on the essentials for proper product-line pricing that takes into account the dilution factors that erode and diminish initial gross margins resulting in the ultimate sustained gross margins. Throughout the process, operational and financial considerations are always totally integrated. The ultimate objective is to balance the two objectives of remaining profitable and remaining liquid by the use of one dynamic model.

The total business plan concept could be adapted to any middle market activity outside the apparel industry and can, in fact, also be geared toward a traditional textile environment. The configuration of this plan will help enlighten senior as well as middle management as to what it takes to control their business. In addition, the plan creates a benchmark for third-party financing institutions and the trade to maximize their lending resources to meet their customer needs. The plan also helps outside investors or their outside accountants to comprehend the nuances of the
businesses.

Data Gathering for Business Plan

The basic plan begins with a review of the results of operations for the last fiscal year and year-to-date interim financial statements. In addition, it would be prudent to review historical operational information in order to establish the appropriate relationships between operational and financial data. The premise in business planning is to understand that no two companies are exactly alike. Meaningful results come from a total understanding of the nuances of individual organizations.

The next step in the process is to interview various members of the organization at senior and selected middle-management levels. These individuals can present market conditions so that appropriate relationships between sales and production activities are established.

The business environment of today is under constant change. Therefore, in developing the plan, the preparer would not be able to rely solely on the past as the model for assessing future company needs and target goals. The initial phase of gathering the basics for the plan preparation would conclude with a visual tour of the entire company operation. Upon completion of this process, the data gathered is assimilated into a spreadsheet model and the basic report for submission to management is prepared.

Components of the Business Plan

The report itself begins with a narrative presentation on the integral marketing and product considerations as well the financial constraints and assumptions used in developing the basic business plan. It would contain the basic monthly financial statements--balance sheet, income statement, and cash flows. In addition, the income statements would be recast on a profit-center basis, denoting segmentation by selling entity, distribution center, and factory as well as on a product-line basis where applicable. It would also include a monthly cost-center analysis of operating overhead. The plan would include a projection of weekly sales bookings which would be correlated to a production plan that would establish open-to-buy activities and the schedule for manufacturing and receipt of the finished product. The plan would also contain planned inventory levels by component established by month on both a unit of measure and dollar basis. The unique aspect of the plan would be to develop defined relationships between customer sales order bookings and planned open-to-buys.

The plan becomes an operating tool when, on a daily basis, these relationships are reviewed so that if business conditions change, the appropriate measures are taken to adjust the production cycles. This ability to set off the alarms will ensure that unplanned working capital investments in inventory are kept under control.

With the rapidly changing retail climate, it is of paramount importance that the wholesaler stay in tune with the events of the day. The current success factor in the apparel business is tied in large part to remaining as liquid as possible.

In the 90s, financial institutions are most concerned about the liquidity of their clients. The total integration of the operational and financial aspects of the business in a properly designed plan provides insights and a degree of comfort that the liquidity will not be threatened. The report should also include sales margin recaps and set up costing models for domestic and foreign operations where applicable.

A seasonal presentation of personnel requirements by department would accompany an organizational chart establishing clear lines of responsibility.

The Business Plan--A Working Tool

After completing the business plan, management must be educated on how to read and use this as a daily working tool. Levels of authority for its administration and accountability must be developed. Proper weekly performance reports summarizing the key operational and financial check points must be developed. The plan is only valuable if it becomes an integral tool for the daily administration of the business. It must be viewed as a flexible tool which can be adjusted to pattern shifts in the business as they become known.

The comprehensive business plan is designed to answer the basic question of how to best employ capital to enhance the company's goal of running a profitable operation, which minimizes risk and maximizes cash flow. As a witness to the business climate of the 90s, "survival of the fittest" will best be served by those middle market entrepreneurs who understand that comprehensive integrated business planning is a necessary step to remaining in tune with the dynamism of the apparel industry marketplace. *

Ira Weissman, CPA, is a management consultant to the apparel industry (currently associated with Lawrence Stevens), an adjunct professor at Baruch College of the City University of New York and Rutgers University, and an instructor at Fox-Gearty CPA review programs.

Editor:
Michael Goldstein, CPA
The CPA Journal