All of the materials used in producing athletic footwear are readily available on the open market. There are some 250 different suppliers worldwide who have the capability to furnish interior lining fabrics, waterproof materials for external use, rubber and plastic materials for soles, shoelaces, and high-strength thread. It is substantially cheaper for footwear manufacturers to purchase these materials from outside suppliers than it is to manufacture them internally in the relatively small volumes needed. Delivery times on all materials are usually less than 48 hours. Suppliers have ample capacity to furnish whatever volume of materials that manufacturers need; no shortages have occurred in the past. Just recently, suppliers confirmed they would have no difficulty in accommodating increased materials demand in the event footwear-makers build additional plant capacity to meet growing worldwide demand.
Suppliers offer two basic grades of materials: standard and superior. The qualities of superior and standard materials are the same no matter who supplies them. All suppliers charge the going market price because of the commodity nature of both standard and superior materials. The use of superior fabrics and shoe sole materials improves shoe quality and performance, but shoes can be manufactured with any percentage combination of standard and superior materials. All footwear-making equipment in present and future plants accommodates whatever percentage mix of standard and superior components that management opts to use.
The "base prices" for materials, which are subject to change over time, are currently $6 per pair for footwear made of 100% standard materials and $12 for footwear made of 100% superior materials. However, the prevailing base prices are adjusted up or down according to the percentage mix of standard-superior materials usage and the strength of demand for footwear materials:
The going market prices of standard and superior materials in any one year deviate from their respective base prices whenever the percentage mix is anything other than 50% for standard and 50% for superior materials. The going market price of either type of material (standard or superior) will rise 2% above the base for each 1% that worldwide use of that type of material exceeds 50%. Simultaneously, the global market price of a given material will fall 0.5% for each 1% that the global usage of that category of materials falls below 50%. For example, worldwide materials usage of 60% superior with 40% standard materials will result in a global market price for superior materials that is 20% (60%-50%=10% at 1:2 is a 20% increase) above the prevailing $12 base price for superior materials and a global market price for standard materials that is 5% below (40-50%=-10% at 1:0.5 is 5%)the prevailing $6 base price for standard materials. Greater than 50% usage of superior materials widens the price gap between superior and standard materials, and greater than 50% usage of standard materials narrows the price gap.Greater than 50% usage of superior materials widens the price gap between superior and standard materials, and greater than 50% usage of standard materials narrows the price gap.
Materials prices fall whenever global production levels drop below 90% of global production capacity and materials prices rise when global production levels rise above 110% of global plant capacity. Should global shoe production fall below 90% of the footwear industry's global plant capacity (not counting overtime production capability), the market prices for both standard and superior materials will drop 1% for each 1% that global shoe production is below the 90% capacity utilization level. Such price reductions reflect increased competition among materials suppliers for the available orders. On the other hand, when global production levels exceed 110% of the industry's global plant capacity (reflecting use of overtime production), the prices of both standard and superior materials will go up 1% for each 1% that global production levels exceed 110% of global production capacity. Thus once overtime production exceeds a global average of 10% of installed plant capacity worldwide, then material suppliers are able to exert pricing power and can command higher prices. In the event global production reaches the 20% overtime maximum, the prices of standard and superior materials will be 10% higher than they would otherwise be.
All of the materials used in producing athletic footwear are readily available on the open market. There are some 250 different suppliers worldwide who have the capability to furnish interior lining fabrics, waterproof materials for external use, rubber and plastic materials for soles, shoelaces, and high-strength thread. It is substantially cheaper for footwear manufacturers to purchase these materials from outside suppliers than it is to manufacture them internally in the relatively small volumes needed. Delivery times on all materials are usually less than 48 hours. Suppliers have ample capacity to furnish whatever volume of materials that manufacturers need; no shortages have occurred in the past. Just recently, suppliers confirmed they would have no difficulty in accommodating increased materials demand in the event footwear-makers build additional plant capacity to meet growing worldwide demand.
Suppliers offer two basic grades of materials: standard and superior. The qualities of superior and standard materials are the same no matter who supplies them. All suppliers charge the going market price because of the commodity nature of both standard and superior materials. The use of superior fabrics and shoe sole materials improves shoe quality and performance, but shoes can be manufactured with any percentage combination of standard and superior materials. All footwear-making equipment in present and future plants accommodates whatever percentage mix of standard and superior components that management opts to use.
The "base prices" for materials, which are subject to change over time, are currently $6 per pair for footwear made of 100% standard materials and $12 for footwear made of 100% superior materials. However, the prevailing base prices are adjusted up or down according to the percentage mix of standard-superior materials usage and the strength of demand for footwear materials:
The going market prices of standard and superior materials in any one year deviate from their respective base prices whenever the percentage mix is anything other than 50% for standard and 50% for superior materials. The going market price of either type of material (standard or superior) will rise 2% above the base for each 1% that worldwide use of that type of material exceeds 50%. Simultaneously, the global market price of a given material will fall 0.5% for each 1% that the global usage of that category of materials falls below 50%. For example, worldwide materials usage of 60% superior with 40% standard materials will result in a global market price for superior materials that is 20% (60%-50%=10% at 1:2 is a 20% increase) above the prevailing $12 base price for superior materials and a global market price for standard materials that is 5% below (40-50%=-10% at 1:0.5 is 5%)the prevailing $6 base price for standard materials. Greater than 50% usage of superior materials widens the price gap between superior and standard materials, and greater than 50% usage of standard materials narrows the price gap.Greater than 50% usage of superior materials widens the price gap between superior and standard materials, and greater than 50% usage of standard materials narrows the price gap.
Materials prices fall whenever global production levels drop below 90% of global production capacity and materials prices rise when global production levels rise above 110% of global plant capacity. Should global shoe production fall below 90% of the footwear industry's global plant capacity (not counting overtime production capability), the market prices for both standard and superior materials will drop 1% for each 1% that global shoe production is below the 90% capacity utilization level. Such price reductions reflect increased competition among materials suppliers for the available orders. On the other hand, when global production levels exceed 110% of the industry's global plant capacity (reflecting use of overtime production), the prices of both standard and superior materials will go up 1% for each 1% that global production levels exceed 110% of global production capacity. Thus once overtime production exceeds a global average of 10% of installed plant capacity worldwide, then material suppliers are able to exert pricing power and can command higher prices. In the event global production reaches the 20% overtime maximum, the prices of standard and superior materials will be 10% higher than they would otherwise be.
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