Case CyGy Garments.docx

8/14/2019 Case CyGy Garments.docx

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CyGy Garments

CyGy Garments is a family corporation that exclusively supplied RTW clothes to SM

Department Stores. However, the entry of cheap manufactured clothes from China was squeezing the

margins of CyGy Garments as SM demanded that it match the prices of the cheaper imports. The twopartners were discussing what strategies to pursue in light of these developments in the Philippines

garments industry. They were also re-evaluating the exclusive supply arrangement with SM by servingother customers.

Guia watched the factory workers from her office window overlooking the plant floor. She

noticed her cousin and business partner, Carmela, consulting with the production supervisors. Carmela

was in charge of production and operations while Guia was mostly responsible for administrativeoperations. However, both cousins managed the marketing aspects pf the business.

The fax machine rang and printed out a message from their sole client, Shoemart (SM), the

biggest department store and mall operator in the Philippines. The Ladies Wear merchandiser wanted tonegotiate prices for the samples they had submitted the day before. Guia remembered that she had just

agreed to decrease the prices of the same designs last week and recalled that the recent price reductionwould only return a marginal 10percent gross profit. She tapped on the window and signaledCarmela to meet with her.

I've had enough of these negotiations! an exasperated Carmela shrieked after reading the

facsimile message. Don't they know how much fabrics cost nowadays? The prices they want barelycover the price of the fabric. I have been doing the best I can, to make operations more cost efficient

just to meet their target prices but they can never seem to find comfort in any price.

They will be opening up more stores in the near future, Guia argued . We have always been

loyal to SM throughout the 24 years of CyGy existence and I'm very sure they will not forget to

consider the quality of goods we supply when those new branches open. We have grown to this sizebecause we stuck with SM.

Other department stores are growing as well, Carmela replied . Maybe it's time for us to

move on.

Maybe it's time for us to face the challenge, Guia answered. Don't be personal about it. This

is business!

Precisely, this is business!

The company

CyGy Garments is a partnership between two cousins,Guia Collantes and Carmela Santos. The

business was established in June 1996 after the cousins graduated from the University of the

Philippines Colleges of Business Administration and Home Economics, respectively. Both cousinsagreed to form a ladies wear manufacturing business because both were interested in fashion since their

high school home economics class.

Both cousins took a loan of P50,000 each from their parents to start the business. Carmela alsoborrowed a manual Singer sewing machine from her mother and Guia hired a dressmaker who knew

everything from pattern making to the final construction of ladies garments.


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The cousins researched, copied , revised, and altered designs from magazines, stores, and

television. The finished garments consisted of coordinated blouse, tank-tops, and pants made of a very

hip fabrics. These items were created for stores such as Robinsons, Fairmart, and Shoemart (SM).Robinsons, Fairmart, and accepted their clothes and ordered a total of about 100 pieces. SM rejected

their collection but suggested a new set of designs that they wish to be prototyped. It turned out that

SM wanted to be a trendsetter and not just a follower. Although Robinsons and Fairmart, showedinterest in their products, they insisted that CyGy give a 60-day payment term. SM though, dictating

the designs, would pay cash-on-delivery. This prompted both Carmela and Guia to design two

collections: one based on SM's suggested designs and another set based on their personal designs.

The department stores commended them for a successful first delivery. They all especially

mentioned the excellent quality of their products and the company's eventual competence over other

makers, concentrating their efforts on SM. This special interest was not just because SM provides betterpayment terms but also because they seemed to be more professional. SM assured them that they would

be ordering from CyGy regularly in volumes that would average around 100 pieces per style, two styles

a week but SM requested a 5-percent discount since they would pay COD. The cousins agreed to give

them this privilege since they did expect larger volumes from SM, and that CyGy must not sell to otherdepartment stores. This was strongly emphasized but no written agreement was made to formalize it.

Eventually, the cousins decided to focus on SM and give up the other department stores. Theydeemed it more favorable since they would be supplying the SM branches in Manila, Cubao, and

Makati. By 1997, CyGy Garments underwent their first expansion by acquiring industrial machines and

hiring more sewers. Their business grew further with the growth of SM. By the end of 2001, they wereemploying 35 workers and were making revenues of about p24 million per year. They focused their

production on making SM's private label ladies wear brands for low to middle class end customers.

The Philippines Economy and CyGy Garments

Business has not always been rosy for CyGy Garments. The early to middle 2000s were

especially challenging years for the company. This was the time when the Philippines economyexperienced a slump. All businesses at that time were realizing the toughest revenues, including SM.

Nevertheless, CyGy continued to service SM exclusively even though orders and revenues were at their

lowest and most of SM's suppliers were giving up. The loyalty manifested by CyGy affirmed the

relationship between both parties. Though SM was forced to streamline their supplier base, CyGy wasconsidered an important relationship to keep not only because of its loyalty to SM but also because of

the consistent good quality, up-to date designs, and punctual delivery of merchandise.

As SM opened more malls, CyGy orders expanded to 200-250 pieces/style and averaged 4 to 5

styles per week. During this time, more entrepreneurs began to venture into garments manufacturing

and more ladies wear manufacturers became SM suppliers.

In the early 2000s, Metro Manila was plagued with 10-12 hour brownouts. This compelled

CyGy to purchase a generator to continue their operations. They deemed this worthwhile since orders

from SM were improving considerably. They attributed these improved orders not only to the openingof SM Sta. Mesa and Megamall but also to the increased traffic in the malls brought about by the

brownouts. People found malling a worthwhile activity for cooling off, which then increased their

tendency to shop. CyGy moved their operations to a bigger factory that could house the additionalmachinery and additional workforce they acquired to support SM's increasing orders.


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With the economy improving, SM building more malls, prospects of better profitability

increasing, and given that their relationship with SM had been firmly established since 1996, Carmela

and Guia found themselves very fortunate until a sharp increase in raw materials and labor. Laborwages had also increased by 10 percent, thus, pushing the cost of goods up by 30 percent and leaving

CyGy with very thin margins.

Many suppliers had no choice but to increase their prices to keep their business going. Thus,

SM was prompted to consider buying imported goods to replace the local ones they could no longer

afford. CyGy maintained its prices despite the increasing price trend of some of its competitors andthus, was able to continue supplying SM. However, competition only became tougher as imports

flooded the market and new suppliers with low prices entered the SM business.

The Philippine Garment Industry

The local garments industry could be classified as part of the underground economy. This is an

industry where buyers and sellers are not compelled to declare their revenues and profits. Most big

buyers like SM have made efforts to make the local garment industry sprout from the undergroundeconomy properly declaring withheld taxes from sources and by requiring complete business permits

from its suppliers before delivery of goods. However, many factors still prevent each suppliers to

become completely transparent.

Beginning with the raw materials, most local garments manufacturers purchase their fabrics

from dealers in Divisoria, a well-known bargain trading district in Manila. These fabrics are oftenillegally imported from fabric producing countries like Taiwan, Korea, China, Hong Kong, Indonesia,

and Thailand. The Philippines also manufactures fabrics about the same price but these often do not

meet the quality buyers look for. Local garment makers prefer to use imported fabrics that are priced

lower on top of the manufacturing costs, shipping costs, under-the-table costs, and dealer's profit,among other things. It was rare for an official receipt to be voluntarily given with a purchase in

Divisoria unless the customer was willing to pay an extra 10 percent to cover for the government's

value -added tax. CyGy Garments previously requested for an official receipt from fabric dealers.However, because of the tight price competition in SM , they considered the 10 percent up-charge of

fabric dealers substantial savings for a mere receipt.

Because the industry was labor intensive on account of the unique production process involved,outsourcing parts of production has become a common trend. The garment manufacturers were

supported by a growing pool of subcontractors performing sewing, embroidery, printing, and others.

Thus, most makers maintained just a few machines for sampling and the in house workforce composedof cutters, finishers, packers, and a few sewers, remained small. CyGy internally manufactures only up

to the capacity of its 8-machine sewing line (1,440 pieces per month) and construct any additional

requirements outside the company. These subcontractors also work in the underground economy.

The local garment manufacturers have a number of choices for customers. There are the

department stores, specialty boutiques, bazaar stall owners, and direct consumers. Among the

department stores in the country, SM is the biggest with 15 operating branches located strategicallyaround the highly populated cities of the country. The other department store players are Robinsons,

Rustans, Isetann, Sta. Lucia, and Ever Gotesco.

Industry forecast state that department stores will continue to grow as long as they remain

located within the malls that are opening up around the country. Specialty boutiques are also a growing


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market considering that they also locate themselves inside all the malls. Surprisingly, these boutiques

order in volumes equal or greater than some of the department stores. These specialty boutiques are

Kamiseta, Bayo, Bench, Penshoppe, Giordano, Fila etc. CyGy has initiated supplying Bench andKamiseta but found the terms of payment too long and burdensome for their internal cash requirements.

All these potential customers have 30 to 60- day payment terms.

Prices among local garment manufacturers vary depending on the cost of goods and specially

the customer's target prices. However, most local manufacturing firms try to meet at least an average

gross profit margin of 20 to 40 percent that is estimated to cover the going expenses of a garmentmanufacturing firm. CyGy maintains an average gross profit margin of 25 to 30 percent to cover their

operating expenses and allowance for growth as well as to support their product strategy of quality

merchandise.

Garment manufacturing peak seasons vary for each product line. Children's wear and teens wear

peak during during February and May, in time for summer and school opening, respectively. Men's

wear and ladies wear peak during March, in time for job hunting season and summer. Christmas season

is a peak for all product lines. Since CyGy only manufactures ladies wear, its lean month have beenspent making subcontracted clothes for bazaar owners, or when no jobs are available, the factory shuts

down for short breaks.

Many opportunities face the local garments industry. However, many still choose to specifically

penetrate the SM business because it is recognized as the customer that can make any supplier rich.

thus, weekly, the SM merchandisers are introduced to hundreds of enterprising individuals hoping tobecome new SM suppliers.

SM Sampling Procedures

Becoming an SM supplier for ladies wear is not a hard process. An interested entrepreneur

simply submits a collection of clothes during the sampling day and then comes back the next day to

find out if some samples are held for discussion or for ordering. Rarely does the merchandiser talk to awanna-be supplier unless his/her samples have been held for ordering. The challenge for interested

entrepreneurs is to offer a product that will interest the merchandiser more that the other collections

that are submitted by hundreds of other suppliers. Some suppliers attach their attractive hangtags on

conspicuous parts of the garments, submit samples that are color coordinated, or place large pricelabels in front of the garment.

Monday is the most stressful day for CyGy Garments as the cousins prepare their newcollection for Tuesday morning's sampling day. Because of the increasing number of samples submitted

by SM suppliers, it is a constant challenge to get the merchandiser's attention. Thus, the cousins have

strategically begun to submit their collection on pink-colored hangers.

The SM buying function are set up such that a merchandiser handles a specific department (see

exhibit 3). Each department is assigned Tuesday as their sampling day.

SM merchandisers are college graduates with s flair for fashion. They are not necessarily

knowledgeable about the technical details of garments making, but they can make good fashion

forecasts and buying decisions . The merchandiser is the usual decision-maker in SM's buying process.However, there are rare occasions when the owner's daughter, Tessie Sy-Coson, finds the time to

supervise the design choices for that week. Because CyGy has been one of the pioneer suppliers in SM,


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Ms. Sy-Coson, never forgets to pick out some designs on a pink hanger.

SM's buying budget for the ladies wear line averages about P40 million a month and reachesP60 million for the Christmas season. This budget covers the 6 different product line categories of

ladies wear. CyGy captures, on the average, about 0.5 to 1 percent of that budget.

Because SM instituted a no-gift policy from any supplier to any SM employee, business

relationships have been purely transactional. The products have to sell themselves when it comes to

doing business with SM. Thus, the cousins have given a lot of effort to making the products right fromsampling day. Although the number one decision factor for an SM order is price, of which SM adds, on

average, a 40 percent mark-up, the cousins never fail to submit the newest designs they can find in their

weekly research activities.

Communication between CyGy and SM had been limited to fax messages or telephone calls

because of the numerous suppliers that the ladies wear merchandiser has to consult with. Either cousin

goes for personal consultation but only when the merchandiser has called for an appointment. If they

go without a call merchandiser, they have to wait until all other suppliers with appointments areconsulted. This sometimes reaches as late as six or seven o'clock in the evening-a waste of precious

time that could have been spent managing the factory. These consultations called for by the

merchandiser were normally to negotiate prices or to prototype a design.

Despite the rare visits of the cousin s to the SM head office for consultation, they receive orders

regularly. Lately, however, they have noticed that the number of ordered styles and volumes have beendeclining.

A recent visit to the SM stores reveals that CyGy is faced with threats not only from the

emerging local garment manufacturers but also from the emerging garment importers from Taiwan,China, Thailand, Indonesia, and Hong Kong. In 2005, more than half of the garment racks that CyGy

used to occupy in the SM selling floor are being used to display goods from other local and imported

garment manufacturers.

Year 2010

Over the past few months, Guia noticed that orders from SM were slowly dwindling. Thesamples CyGy submitted were frequently being rejected or when the samples were on hold, SM asked

for lower prices. This bothered the cousins since the economy was supposed to be improving and

orders should likewise be increasing with the improving buying power. Furthermore, the cousinsexpected that the ordered volumes should increase with new malls in operations. Yet orders seemed to

be further slowing.


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CyGy Weekly Marketing Activities

Sunday Competitive Research-mall hopping, magazine scans, TV viewing-is conducted. Fabric suppliers deliver newest fabric samples(2.5 yard per fabric) to the factoryMonday

New samples are designed and sewed.Tuesday:SM LADIES WEAR SAMPLING DAY Driver submits the samples to the SM head office before the 11 AM deadline.Wednesday Driver goes to SM head office to pick up the rejected samples before 12 PM. The unturnedsamples are usually the ones that SM will order.

Before 3 PM, Guia calls fabric supplier to reserve the fabrics used in the samples that were notreturned.

Occasionally, either Carmela or Guia goes to the SM head office by 2 PM to consult with themerchandiser.

Thursday

Driver again goes to SM head office to pick up the rest of the samples which should have,attached to them, the order worksheet indicating quantities and colors, delivery dates, branches, andother details of the purchase.

The driver goes directly to Divisoria and meets with the fabric supplier to purchase the fabrics.Friday/Saturday Fabrics are delivered to the factory by the suppliers and are inventoried by the staff. First step of production (cutting) can be initiated on this day depending on the availability of thecontracted cutter. Production scheduling.

Documents

Case CyGy Garments.docx