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 two partners 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 serving other 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 administrative operations. 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 to negotiate 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 reduction would only return a marginal 10 – percent gross profit. She tapped on the window and signaled Carmela 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 barely cover 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 size because 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 cousins agreed 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 also borrowed 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.

” 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. Metro Manila was plagued with 10-12 hour brownouts. CyGy was considered an important relationship to keep not only because of its loyalty to SM but also because of the consistent good quality. Eventually. dictating the designs. The cousins agreed to give them this privilege since they did expect larger volumes from SM. It turned out that SM wanted to be a trendsetter and not just a follower. revised. Fairmart. Robinsons. This was strongly emphasized but no written agreement was made to formalize it. SM though. they insisted that CyGy give a 60-day payment term. SM assured them that they would be ordering from CyGy regularly in volumes that would average around 100 pieces per style. tank-tops. Nevertheless. This compelled CyGy to purchase a generator to continue their operations. including SM. CyGy orders expanded to 200-250 pieces/style and averaged 4 to 5 styles per week. and that CyGy must not sell to other department stores. During this time. and altered designs from magazines. two styles a week but SM requested a 5-percent discount since they would pay COD. Although Robinsons and Fairmart. They deemed it more favorable since they would be supplying the SM branches in Manila. would pay “cash-on-delivery. and Makati. Though SM was forced to streamline their supplier base. They attributed these improved orders not only to the opening of SM Sta. They all especially mentioned the excellent quality of their products and the company's eventual competence over other makers. Fairmart. and television. They deemed this worthwhile since orders from SM were improving considerably. stores. The early to middle 2000s were especially challenging years for the company. Mesa and Megamall but also to the increased traffic in the malls brought about by the brownouts. In the early 2000s. This was the time when the Philippines economy experienced a slump. The loyalty manifested by CyGy affirmed the relationship between both parties. showed interest in their products. they were employing 35 workers and were making revenues of about p24 million per year. The department stores commended them for a successful first delivery. The Philippines Economy and CyGy Garments Business has not always been rosy for CyGy Garments. which then increased their tendency to shop. This special interest was not just because SM provides better payment terms but also because they seemed to be more professional. The finished garments consisted of coordinated blouse. As SM opened more malls. CyGy Garments underwent their first expansion by acquiring industrial machines and hiring more sewers. By the end of 2001. Cubao. CyGy moved their operations to a bigger factory that could house the additional machinery and additional workforce they acquired to support SM's increasing orders. and pants made of a very hip fabrics”. more entrepreneurs began to venture into garments manufacturing and more ladies wear manufacturers became SM suppliers. and punctual delivery of merchandise. up-to date designs. and accepted their clothes and ordered a total of about 100 pieces. . CyGy continued to service SM exclusively even though orders and revenues were at their lowest and most of SM's suppliers were giving up. concentrating their efforts on SM. These items were created for stores such as Robinsons. copied . They focused their production on making SM's private label ladies wear brands for low to middle class end customers. the cousins decided to focus on SM and give up the other department stores.The cousins researched. and Shoemart (SM). People found malling a worthwhile activity for cooling off. All businesses at that time were realizing the toughest revenues. By 1997. Their business grew further with the growth of SM. SM rejected their collection but suggested a new set of designs that they wish to be prototyped.

These subcontractors also work in the underground economy. finishers. and given that their relationship with SM had been firmly established since 1996. The local garment manufacturers have a number of choices for customers. CyGy maintained its prices despite the increasing price trend of some of its competitors and thus. and dealer's profit. CyGy Garments previously requested for an official receipt from fabric dealers. embroidery. However. Among the department stores in the country. remained small. Local garment makers prefer to use imported fabrics that are priced lower on top of the manufacturing costs. Specialty boutiques are also a growing . However. and direct consumers. The Philippine Garment Industry The local garments industry could be classified as part of the underground economy. printing. and others. Beginning with the raw materials. Most big buyers like SM have made efforts to make the local garment industry sprout from the underground economy properly declaring withheld taxes from sources and by requiring complete business permits from its suppliers before delivery of goods. SM is the biggest with 15 operating branches located strategically around the highly populated cities of the country. Rustans. and Ever Gotesco. most makers maintained just a few machines for sampling and the in house workforce composed of cutters. Carmela and Guia found themselves very fortunate until a sharp increase in raw materials and labor. pushing the cost of goods up by 30 percent and leaving CyGy with very thin margins. Labor wages had also increased by 10 percent. under-the-table costs. 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. China. they considered the 10 percent up-charge of fabric dealers substantial savings for a mere receipt. Thus. Lucia.With the economy improving. The Philippines also manufactures fabrics about the same price but these often do not meet the quality buyers look for. competition only became tougher as imports flooded the market and new suppliers with low prices entered the SM business. SM building more malls. Thus. and a few sewers. However. There are the department stores. outsourcing parts of production has become a common trend. Isetann. specialty boutiques. Sta. These fabrics are often illegally imported from fabric producing countries like Taiwan. many factors still prevent each suppliers to become completely transparent. because of the tight price competition in SM .440 pieces per month) and construct any additional requirements outside the company. and Thailand. This is an industry where buyers and sellers are not compelled to declare their revenues and profits. packers. The other department store players are Robinsons. bazaar stall owners. Korea. shipping costs. prospects of better profitability increasing. Many suppliers had no choice but to increase their prices to keep their business going. SM was prompted to consider buying imported goods to replace the local ones they could no longer afford. Because the industry was labor intensive on account of the unique production process involved. a well-known bargain trading district in Manila. The garment manufacturers were supported by a growing pool of subcontractors performing sewing. Indonesia. Hong Kong. thus. CyGy internally manufactures only up to the capacity of its 8-machine sewing line (1. was able to continue supplying SM. 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. among other things. most local garments manufacturers purchase their fabrics from dealers in Divisoria.

However. All these potential customers have 30 to 60. 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 garment manufacturing firm. Some suppliers attach their attractive hangtags on conspicuous parts of the garments. finds the time to supervise the design choices for that week. SM merchandisers are college graduates with s flair for fashion. but they can make good fashion forecasts and buying decisions . the factory shuts down for short breaks. the SM merchandisers are introduced to hundreds of enterprising individuals hoping to become new SM suppliers. submit samples that are color coordinated. Because of the increasing number of samples submitted by SM suppliers. Bayo. these boutiques order in volumes equal or greater than some of the department stores. Since CyGy only manufactures ladies wear. Each department is assigned Tuesday as their sampling day. Bench. They are not necessarily knowledgeable about the technical details of garments making. Christmas season is a peak for all product lines.market considering that they also locate themselves inside all the malls. Men's wear and ladies wear peak during March. Thus. However. .” thus. The SM buying function are set up such that a merchandiser handles a specific department (see exhibit 3). it is a constant challenge to get the merchandiser's attention. Penshoppe. Prices among local garment manufacturers vary depending on the cost of goods and specially the customer's target prices. or when no jobs are available. in time for job hunting season and summer. Rarely does the merchandiser talk to a “wanna-be supplier” unless his/her samples have been held for ordering. or place large price labels in front of the garment. These specialty boutiques are Kamiseta. However. its lean month have been spent making subcontracted clothes for bazaar owners. Many opportunities face the local garments industry. the cousins have strategically begun to submit their collection on pink-colored hangers. in time for summer and school opening. respectively.day payment terms. Giordano. Monday is the most stressful day for CyGy Garments as the cousins prepare their new collection for Tuesday morning's sampling day. many still choose to specifically penetrate the SM business because it is recognized as the “customer that can make any supplier rich. weekly. 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. 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. CyGy has initiated supplying Bench and Kamiseta but found the terms of payment too long and burdensome for their internal cash requirements. Garment manufacturing peak seasons vary for each product line. Children's wear and teens wear peak during during February and May. there are rare occasions when the owner's daughter. SM Sampling Procedures Becoming an SM supplier for ladies wear is not a hard process. 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. The merchandiser is the usual decision-maker in SM's buying process. Fila etc. Because CyGy has been one of the pioneer suppliers in SM. Surprisingly. Tessie Sy-Coson.

These consultations called for by the merchandiser were normally to negotiate prices or to prototype a design. they have noticed that the number of ordered styles and volumes have been declining. never forgets to pick out some designs on a pink hanger. The samples CyGy submitted were frequently being rejected or when the samples were on hold. however. CyGy captures.5 to 1 percent of that budget. China. Guia noticed that orders from SM were slowly dwindling. 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. Indonesia. Yet orders seemed to be further slowing. business relationships have been purely transactional. 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. This budget covers the 6 different product line categories of ladies wear. SM's buying budget for the ladies wear line averages about P40 million a month and reaches P60 million for the Christmas season. Year 2010 Over the past few months. Lately. about 0. The products have to sell themselves when it comes to doing business with SM. Thailand. If they go without a call merchandiser. Although the number one decision factor for an SM order is price. 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. a 40 percent mark-up. SM asked for lower prices. of which SM adds. 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.Ms. . they receive orders regularly. Either cousin goes for personal consultation but only when the merchandiser has called for an appointment. on average. Because SM instituted a no-gift policy from any supplier to any SM employee. Thus. the cousins never fail to submit the newest designs they can find in their weekly research activities. Furthermore. Sy-Coson. This bothered the cousins since the economy was supposed to be improving and orders should likewise be increasing with the improving buying power. In 2005. and Hong Kong. Despite the rare visits of the cousin s to the SM head office for consultation. the cousins have given a lot of effort to making the products right from sampling day. they have to wait until all other suppliers with appointments are consulted. the cousins expected that the ordered volumes should increase with new malls in operations. on the average.

5 yard per fabric) to the factory Monday • 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. • First step of production (cutting) can be initiated on this day depending on the availability of the contracted cutter. .CyGy Weekly Marketing Activities Sunday • Competitive Research-mall hopping. delivery dates. The unturned samples are usually the ones that SM will order. TV viewing-is conducted. branches. and other details of the purchase. magazine scans. Thursday • Driver again goes to SM head office to pick up the rest of the samples which should have. Wednesday • Driver goes to SM head office to pick up the rejected samples before 12 PM. the order worksheet indicating quantities and colors. Guia calls fabric supplier to reserve the fabrics used in the samples that were not returned. Friday/Saturday • Fabrics are delivered to the factory by the suppliers and are inventoried by the staff. • Before 3 PM. attached to them. • The driver goes directly to Divisoria and meets with the fabric supplier to purchase the fabrics. • Fabric suppliers deliver newest fabric samples(2. either Carmela or Guia goes to the SM head office by 2 PM to consult with the merchandiser. • Occasionally. • Production scheduling.