Reprinted with permission from StitchWorld June 2007 1

Cost of Manufacturing: Are We Still Competitive?

Prabir Jana and Y P Garg

Running cost for an average apparel manufacturing unit is becoming important in the era of
global competition. It is generally expressed as cost per machine per shift or cost per
machine per minute. Even two companies having similar kind of technology levels and
labour charges may have huge difference in their running expenditure due to the aforesaid
factors. In response to the recent concern over increasing cost of manufacturing SW has
spoken to various companies in NCR and Southern India to find out what is the actual cost
per machine shift for different factories. The authors acknowledge Pratyush Nawani of
Asmara India, Akhilesh Anand of NCC and Dr. A.K. Agarwal for their invaluable input.

The difference in cost per m/c shift of two companies is not only due to difference in degree
of automation or cost of labor charges only, but also due to the cost of utilities, cost of quality,
cost of compliance, cost of downtime cost of overheads, cost of borrowing and most
importantly duration of years in business.

The importance of cost per machine per shift can be explained with the help of following
example. Consider two companies A & B running same style (Blouse: 5000 pcs runs) at both
the companies. Productivity of A is 15 pcs per machine per shift and that of B is 10 pcs per
machine per shift. But cost per machine shift of A is USD 25 and that of B is USD 15, and say
cost of manufactring that the Buyer is giving for that garment is USD 1.5 per pc. So cost
incurred (cost of manufacturing per machine) per piece for company in USD is 1.66 and that
of company B is USD 1.5. So, company A despite of higher productivity will be in losses and
cannot survive in the long run. Therefore productivity seen in isolation, doesn't gives the
correct picture of manufacturing competitiveness of a company. Only when both Cost per
machine shift and productivity per mc shift are viewed together we get the real picture.

There are no written international benchmarks available in respect of cost per machine shift,
but according to some sources [1] cost per machine shift is around USD 13-15 in south Asian
countries. Table A acts as a guideline for parameters to be considered for calculating capital
cost (fixed cost) and running cost (recurring), because of the norms prevailing. At the end we
have tried to establish a benchmark by indicating proportion of cost in different heads.

Lets imagine a model factory having following parameters
No. of sewing machines 400
No. of total staff (operator to CEO all inclusive) 1000
Total area reqd. 4000 sq. meters
Land area (covered area 50%, three floors, utilities is 500 sq. mt.
Approximately 1350 sq. mt per floor) 3200 sq. meters
Power reqd. (1 KW per machine inclusive of light, a/c, machine and
utilities) 400 kw
Working hours per day 10
Working days per month 25

Reprinted with permission from StitchWorld June 2007 2

Table A: cost for the model factory above

Parameters Assumption
Capital
Cost
Running
cost per
month
Plant and Machineries
Include utilities i.e. generator,
compressed air etc. 30000000
Land @ Rs. 5000 per square metre 16000000
Building @ Rs. 5000 per square metre 20000000

Salaries and wages (operator
to CEO)
@ avg. 3500 per month for all
employees 3500000
Statutory benefits (ESI, bonus
etc.)
25% of salary approximately
900000
Overtime (for 600 employees)
2 hours per day, 25 days a
month, (2x25x600) = 30000
hours @ double overtime 750000
Interest on capital (@ 1% per month) 660000
Depreciation on plant and
machineries
(@15% per annum)
166666
Depreciation on building (@ 2% per annum) 33333
Maintenance
(3% on building and
machinery) 125000
Consumables 50000
Power & Fuel (400 kw all inclusive) 550000
Cost of Communication 150000
Conveyance 500000
Travel (international) 200000
Postage & Couriers 70000
Product Development 400000
Insurance & Legal 100000
Staff welfare recreation 50000
Unforeseen 150000
Total Cost (including depreciation) 66000000 8563300
Running cost per machine per day
(based on total cost)

856.33
Total Cost (excluding depreciation) 8155000
Running cost per machine per day
(based on total cost)

815.5
Total cost of labour includes wages for operator, supervisor up to manager in factory; salary
of office and support staff up to CEO level and overtime charges paid to non-managerial
staffs. The typical break up of sewing-finishing; QA and cutting employees are 81%, 6% and
13% respectively. The actual average salary for a unit in NCR is approximately Rs. 3850 per
month.
Reprinted with permission from StitchWorld June 2007 3
Capital cost includes cost of land, building and machineries, furniture and fixtures. Cost of
infrastructure is calculated as a percentage of the capital cost equivalent to cost of borrowing
the capital cost. While the depreciation of machineries to be taken into account, the
appreciation of land and building is ignored for the reason that it does not affect the cost of
manufacturing and profitability. Depreciation of plant and machineries is calculated at 10%
per annum while depreciation of building is calculated as 2% per annum. It is interesting to
note that depreciation component for many factories (where plant and machinery is 10 years
and above) is either zero or negligible. If we ignore interest on borrowing capital and
depreciation component for above model factory then the running cost per month is Rs. 815
per machine.

Table B: Break up of total Running cost


The variation in cost is because of lack of standardization among factories. Some factories
take only labour component of production while some go to the other extreme of taking even
merchandising cost. The factory cost should include only the cost incurred in the conversion.
The cost approximately could be divided as follows-
Parameters Company A Company C
Avg No. Of Tailors/Day 375 240
Shifts per day 1 2
Cost of Labour
Factory Wages 40.00
Overtime 7.00
Office and Support Staff 4.75
Total 51.75 (81%) 73.13 (77%)
Operational Expenses
Power and Fuel 2.00
Rent & Establishment 2.00
Security 1.25
Telephone 0.20
Repairs, Spare Parts & Maintenance 2.50
Transportation and Logistics 0.30
Hire Charges 0.50
Office Supplies and Stationery 0.15
Factory Miscellaneous 0.10
Conveyance 0.15
Other Consumables 0.50
Service Tax and Levies 0.15
Other Admin 2.25
Total 12.05 (19%)

Total Cost (Rs. Lacs Per Month) 63.80 94.5

Cost Per Machine (25 working days) 680.53 787.50
Reprinted with permission from StitchWorld June 2007 4
When you work on two shifts, overheads cost tends to spread out and come down. A two
shift operation should give a cost reduction of approximately 10%.But it has it's own
challenges.
Total cost per month for company A above is 63.8 lakhs per month for running 375 machines.
At 100% efficiency 375 machines can produce 46.8 lakhs minutes of work, which means cost
per SAM is Rs. 1.36. However no company can work at 100% efficiency, as efficiency drops
cost per SAM increases and also company incurs loss as shown in the table below. For
Efficiency
%
Total cost
per month
SAM
Produced
Cost per
SAM in Rs.
Loss in Rs.
100%
6380000
4680000 1.36
90%
6380000
4212000 1.51 638000
80%
6380000
3744000 1.70 708888.889
70%
6380000
3276000 1.95 797500
60%
6380000
2808000 2.27 911428.571
50%
6380000
2340000 2.72649573 1063333.33

Lets take the case of best factory. At 50% efficiency cost per SAM is INR 2.72 for company
A. Suppose the company is making shirt, then a shirt of 25 SAM would require Rs. 68 (2.72 x
25) as conversion cost to break even! Leave aside making profit.!!!

Cost per SAM of some of the best factories in India is Rs. 3.00 at 100% efficiency. Even if the
company performs at 70% efficiency effective cost per SAM is Rs. 4.28; which means a
whooping 107 Rs. Conversion cost for a shirt!!! Are the factories actually making profit? How
are we surviving? Why people are still putting up big factories in India?

In search of a benchmark
The cost heads may be categorized in seven heads namely [1] Cost of Labour, [2] Cost of
Infrastructure, [3] Cost of Utilities, [4] Cost of Quality, [5] Cost of Downtime, [6] Cost of
Compliance, [7] Operational Expenses. However in reality it is difficult to measure cost of
quality/downtime due to lack of data. The data more often is available in the four headings,
namely 1) Labour-50%, 2) Cutting-10-15%, 3) Energy-10%, 4) overheads-25-30%. Based on
above factory can self-evaluate where they are spending more and where cost control is
required.


D E S C R I P T I O N V A L U E
S A L A R Y / W A G E S 4 2 . 6 1 %
O T . 1 0 . 1 0 %
C U T T I N G C O S T 1 0 . 8 6 %
P C S R A T E P A Y M E N T 3 . 3 8 %
R E S T 3 3 . 0 3 %