Step 1: Selection of Innovator

A brand first selects the next-gen innovator that it intends to work with based on several factors, e.g:

• Technical specifications and material quality
• Ability to meet required sourcing volumes.
• Pricing relative to conventional materials.
• Existing relationships with the brand’s current Tier 1-4 suppliers.
• Environmental and social sustainability credentials.

Step 2: Defining Target Sourcing Volumes

The brand and innovator should agree on a target volume of next-gen material (e.g., pulp) to be used in garments over a set period (e.g., one year). This volume calculation requires establishing:

• The expected order volumes of these garments (in pcs)
• The weight of the intended garments (in grams)
• The percentage of next-gen material in the total composition
• The level of wastage at different levels through the supply chain (in percentage)

One of the key decisions is the % blend of the next-gen material (e.g., next-gen pulp) in the final garment. Standardizing this blend can help innovators, brands, and suppliers improve efficiency when integrating next-gen materials into the supply chain. 

Wastage, particularly at Tiers 3 and 4, may be higher for next-gen materials due to integration complexities. Brands can obtain wastage data from the innovator, a traceability provider, or through engagement with relevant suppliers (Tiers 1-4).

Step 3: Determining Required Funding

The brand and innovator calculate the total funding required from the brand to achieve price parity at both the Innovator (Tier 5) and Fibre Producer (Tier 4) levels. This funding should cover two premiums:

1. Innovation Premium: The cost difference between the Next-Gen product (pulp) and conventional alternatives.
2. Integration Premium: The additional processing costs Tier 4 incurs when using the Next-Gen material (if applicable).

The final funding amount is subject to fluctuations based on order volumes (from Step 2).

Step 4: Determining Funding/Fee Structure

Once the total funding is set, the brand and innovator structure the payments, typically using one or a combination of the following:

Product Fee: A volume-based payment (price per tonne/kg). This is often the simplest approach.

Service Fee: A fixed payment for specific services provided by the innovator (paid upfront, upon completion, or split). Services could include: R&D (refining the product, process upgrades), Supply Chain Engagement/Traceability (working with Tiers 1-4, implementing platforms), Advisory/Impact Reporting.

Combining both options: In some cases, this might reduce overall cost, e.g., a Service Fee  could help innovators lower their production costs, which.might lower the Innovation Premium, reducing the necessary Product Fee.

Note on Customs: Brands should be aware that volume-based payments (Product Fees) and certain royalty/licensing fees should likely be included in the customs value of the finished garments, whilst some Services Fees generally can be excluded. 

Step 5: Setting the Payment Terms: Brand and Innovator

Brands and innovators should agree on a payment schedule that accounts for the innovator’s working capital needs, since brands typically pay for garments months after material production.

To enable the retrospective payment, a third-party financing vehicle is being explored. This vehicle could provide the necessary upfront working capital to the innovator and then recover the funds from the brand upon garment receipt. While this involves a small additional financing cost, it allows the brand to integrate the PPT cost as a small premium into their regular sourcing budget and payment timelines.

Step 6: Engaging and Mapping the Supply Chain (Tiers 1-4)

The brand and innovator should collaborate to identify and onboard all necessary suppliers (Tiers 1-4) for the garments. A single or multiple suppliers at each tier can be nominated for resilience. An optional requirement for all participating suppliers can be to establish an agreement  not to charge a premium for processing the material (per the ‘Should Cost’ guidance in step 9). All chosen tiers should be onboarded onto the necessary traceability platform.

Step 7: Agreeing Payment Terms with Tier 4 Supplier(s)

The Tier 4 supplier (Fibre Producer) may incur an ‘Integration Premium’ (extra processing costs due to small volumes or technical difficulties) in addition to the ‘Innovation Premium’ paid for the next-gen material itself. To ensure the fibre is sold at price parity, the Tier 4 supplier should be compensated for this.

It is recommended that all funds are received from the brand by the innovator, and the innovator is then responsible for transferring a portion of these to relevant Tier 4 suppliers. This transfer can be structured in two ways:

1. Option 1: Separate Fee: The innovator pays the Tier 4 supplier a separate fee (e.g., volume-linked or a service payment, independent of the next-gen material sale).
2. Option 2: Sale Discount: The innovator sells the next-gen material to Tier 4 at a discounted price, directly offsetting the Integration Premium. This option may reduce the administrative burden for both parties.

Step 8: Agreeing on use of a traceability platform

Robust traceability is integral to the Price Parity Toolkit (PPT) mechanism because it serves as the crucial verification and accountability layer for the financial investment. It closes the loop between the payment made by the brand and the physical material received in the product. There are a range of digital traceability platforms available such as Textile Genesis, Retraced and TrusTrace.

In the example of Textile Genesis, a Fibercoin technology is used, assigning a digital token per kilogram of fibre, to trace materials from their origin through to the final garment. When brands upload purchase orders, the platform delivers real-time insight into next-gen fibre inventory and wastages across all supply chain tiers (Tier 1-4). Additionally, the platform provides supplier training throughout the supply chain and offers supply chain discovery and real-time fibre movement tracking for brands that may not have complete supplier information.

Step 9: Developing “Should Cost” Guidance for Suppliers

The goal is to ensure the price parity benefit achieved at Tiers 5 and 4 extends through the rest of the supply chain by preventing additional, unjustified price hikes at Tiers 3 and 2.

It is recommended for the innovator to develop a ‘Should Cost’ guidance for Tiers 2, 3 and 4 (and potentially Tier 1) that outlines the typical or expected pricing for materials incorporating their next-gen material. The guidance can provide benchmark data to suppliers outlining the typical or expected pricing for similar materials, referencing reputable market sources and identifying valid points of cost increase (like the Integration Premium at Tier 4). It should also account for factors such as quality and order volume.

Brands and innovators could formalise the commitment to minimise price increases with participating suppliers (Tiers 1-4) through a Memorandum of Understanding or similar agreement.

Step 10: Finalising Order Processes and Timelines

This step streamlines the process for the innovator to produce next-gen material under the brand agreement, despite orders coming from the Tier 4 suppliers.

First, the brand and innovator should agree on a list of ‘approved’ Tier 4 suppliers. When an order is received from one of these suppliers, the innovator should notify the brand.

The next action depends on the funding mechanism agreed in Step 5:

• Option 1: If the brand provided upfront funding, the innovator requests permission to ‘spend down’ a portion of that committed funding.
• Option 2: If the brand pays per-order, the innovator requests payment from the brand for the specific order.
• Option 3: If a brand pays retrospectively, the innovator receives payment after order fulfillment. Alternatively, the innovator can be paid upfront by a Special Purpose Vehicle (SPV), which is then reimbursed by the brand.

Finally, all fulfilled orders should be uploaded to the traceability platform (Step 8) within a specified timeframe (e.g., 15 days).

Step 11: Finalising and Signing the PPT Agreement

After completing the preceding steps, the PPT Premium Decoupling Agreement terms should be finalised and can be incorporated into the provided brand<>innovator agreement template. This formalises the price parity mechanism, along with other details (e.g., marketing, confidentiality).

Once the brand<>innovator agreement is signed, related contracts should also be finalised:

• Innovator and Tier 4 supplier agreements (per Step 7).
• Supplier onboarding onto the traceability platform (per Step 8).
• ‘Should Cost’ guidance issued to Tiers 2 and 3 (per Step 9).

The brand then confirms its initial order with the Tier 1 supplier, triggering the supply chain process down to the innovator at Tier 5.