How to evaluate correct manufacturing cost in apparel manufacturing

In the late ’90s and early 21st century India, many apparel manufacturing companies collapsed due to no information on the actual cost incurred during the manufacturing of certain products. At that time, the margins were more and without even knowing the correct cost, companies were profitable and flourishing. When we manufacture garments in a factory, the workmanship of each style differs and when mixed with many styles running parallel with different quantities, it is very difficult to know the correct cost of each style or product manufactured. Pre-budgeting for every process cost through correct work measurement is therefore very important for survival. This information also helps us to improve the weaker areas and keep the organisation healthy besides maintaining a healthy balance sheet.

Many companies which have developed correct cost measurement methods are surviving and growing. Correct cost information helps to control the bad performing areas and enables selling of products at the actual cost incurred along with profit.

We have discussed herewith the basic methodologies to know the correct manufacturing costs:

Process-wise work measurement and cost information

In any garment manufacturing company, the most complex and essential aspect is to calculate the accurate work measurement in all its processes so that the company minimises its chances of incurring any errors. The details of the garment manufacturing stages and their respective work measurement calculations have been described below:

Sewing: Almost every company has developed measurements for sewing workmanship through SAM / SMV methodology. Many ERP and system-oriented methodologies are already being adopted by companies. The companies which do not have the processes till date, need to start IE (Industrial Engineering) department function and measure workmanship time at the time of making samples:

1. Cycle time (pick part + sewing + keeping back), for example, is equal to 60 minutes
2. Basic time = cycle time x operator performance rating (compared to sample making, mass production will be at faster pace because of repetitive limited work, therefore performance rating needs to be added), i.e. = 60 per cent x 80 per cent considering mass production will be with 20 per cent higher efficiency = 48 minutes
3. For complete SAM, add bundle handling allowances: 10% + machine and personal fatigue allowances = 20% on basic time
4. Therefore final sewing SAM = 48 + 4.8 + 9.6 minutes = total 62.4 minutes
5. SAM may be calculated every part-wise in the above methodology and finally added to get total. This is IE department function and this information we get in ‘operation bulletin chart’

Now monitor actual per SAM sewing cost with the help of output data and SAM produced data through production report, manpower used and their wages with OT by HR and accounts generated report.

During production output and cost incurred analysis, daily cost analysis is calculated by taking into account output vs. every micro process, how many employees work, their salary + wages divided by month days. Refer to the chart below for better understanding.

Table 1: Monitoring of sewing department actual cost

Table 2: Example of sewing cost analysis

Cutting: Nowadays sewing process work measurement and cost monitoring is done by almost all companies. In fact, many ERPs have been developed to monitor sewing function. However work measurement of cutting and performance monitoring is being done by only a few companies. One basic idea about the same is explained below:

Table 3: Process and pre-budget cost allocation by production file preparing technical team (at the time of sampling and style file preparation based on guidelines)

Upon analysing further, it is found that the cutting cost per piece is Rs. 3.86 if 42 employees are used on Day-1 with OT hours of 89.50. The same costs around Rs. 2.58 per piece if 41 employees are used with no OT on Day-2.

Finishing: Similar to cutting, many companies till date are not able to develop work measurement and cost idea for finishing. One idea is to break down all the finishing processes into micro-processes and based on historical expenses, budget may be allocated for every process. Motion and time study of process through IE also may help to freeze process time.

The finishing costs are divided into three categories based on the length of the garments, i.e., up to 1 metre, more than 1 metre but up to 2 metres and more than 2 metres.

‘Issue Receive/Internal Transportation’ refers to the cost of transporting the garments within the factory. For garments up to 1 metre in length, this cost is Rs. 0.50, for garments between 1 and 2 metres, the cost is Rs. 0.75, and for garments longer than 2 metres, the cost is Rs. 1.

The second service is ‘Buttoning’ which involves attaching buttons to the garment. For garments up to 1 metre in length, the cost is Rs. 0.25. For garments longer than 1 metre, the cost is calculated based on the number of buttons required.

The third service is ‘Washing’ which refers to the cost of washing the garments. For a simple softener wash, the cost is Rs. 2 for garments up to 1 metre in length, Rs. 3 for garments between 1 and 2 metres in length and Rs. 4 for garments longer than 2 metres.

The fourth service is ‘Finishing’ which involves giving various finishing touches to the garment. For garments up to 1 metre in length, the cost is Rs. 10, for garments between 1 and 2 metres, the cost is Rs. 15, and for garments longer than 2 metres, the cost is Rs. 20.

The fifth service is ‘Quality/Audits’ which refers to the cost of checking the quality of the garments. For garments up to 1 metre in length, the cost is Rs. 5, for garments between 1 and 2 metres, the cost is Rs. 6, and for garments longer than 2 metres, the cost is Rs. 7.

The sixth service is ‘Finishing IE’ which involves the cost of finishing the garment using industrial engineering methods. The cost for all three length categories is Rs. 1.

The seventh service is ‘Pressing’ which refers to the cost of pressing the garment. For garments up to 1 metre in length, the cost is Rs. 5, for garments between 1 and 2 metres, the cost is Rs. 6, and for garments longer than 2 metres, the cost is Rs. 7.

The eighth service is ‘Alterations’ which involves the cost of making alterations to the garment. For garments up to 1 metre in length, the cost is Rs. 1, for garments between 1 and 2 metres, the cost is Rs. 1.50, and for garments longer than 2 metres, the cost is Rs. 2.

The ninth and final service is ‘Packing’ which refers to the cost of packing the garment. For garments up to 1 metre in length, the cost is Rs. 4, for garments between 1 and 2 metres, the cost is Rs. 5, and for garments longer than 2 metres, the cost is Rs. 6.

The total unit cost for all services for garments, therefore, stands at Rs. 28.75 for garments up to 1 metre in length, Rs. 38.25 for garments between 1 and 2 metres, and Rs. 48 for garments longer than 2 metres.

At the time of sampling, the pre-manufacturing technical analysis department (R&D and IE) may freeze with pre-budget and process needs of style. While issuing every style file to bulk production unit, it should have all the processes needed for the style with pre-budgeted cost. Refer to Table 4 below.

Table 4: At the time of making samples and production file for style X and Y / pre-budget

Let’s see a style-wise report of finishing planned vs. actual cost analysis:

For example, the collected dataset provides information about the manufacturing and revenue generation of two styles (Style X and Style Y) over two days.

Manufacturing Information:

• Pack in 2 days: 9220 pcs (5000 pcs of Style X and 4220 pcs of Style Y)
• Total manufacturing cost incurred: Day 1 – Rs.1,32,319, Day 2 – Rs 1,48,322, Total cost – Rs. 2,80,641

Revenue Generation:

• Style X: 5000 pcs X Rs. 29.75 (Pre-budget cost given in production file) = Rs. 1,48,750
• Style Y: 4220 pcs X Rs. 35.25 (Pre-budget cost given in production file) = Rs. 1,48,755
• Total revenue generated: Rs. 2,97,505

Profitability:

• Operational expenditure: Rs. 2,80,641
• Revenue generated: Rs. 2,97,505
• The positive difference between revenue generated and operational expenditure is Rs. 16,864 in two days.

This collected dataset provides information about the manufacturing and revenue generation of two styles over two days and highlights that the revenue generated is higher than the operational expenditure, resulting in a profit of Rs. 16,864 in two days.

This is how with 3-step simple methodology, one may monitor any process in manufacturing. If one particular process goes beyond the target limit, then analysis needs to be done to control the same.

Similar to the three major manufacturing processes explained above, remaining processes like Store, R&D, Admin, HR, IT, LAB can also be measured. The number of employees in each department and their daily cost with OT divided by the final output of that particular day will provide information on cost.

The final cost calculation method will be as:

Factory cost: With the above methodology, one can see every process cost incurred on a garment.

Per SAM cost = Total cost / Total SAM = Rs.1,57,57,630 (for example month’s total cost) / 2542608 SAM (in entire month) = Rs. 6.19

Per piece cost: For example, month’s total cost of Rs. 1,57,57,630 / total output of 13,1161 pcs = Rs. 120.14

Add: Remaining all cost of factory such as

1. Chemical cost
2. Power cost (Electricity bill + Diesel)
3. Any bills related to workmanship in factory

Raw material cost (Fabric + Trims): Now many ERPs work for style-wise bill of materials booking and against that style-wise material purchase.

Overhead cost: Many miscellaneous costs like below may be added for overheads:

1. Transportation
2. Marketing
3. Sampling

Total cost = Factory cost + Raw materials cost + Overheads

Conclusion:

Per garment cost is an older idea and a company which manufactures product mix with fluctuating workmanship may not have a correct idea of the cost incurred on low-workmanship or high- workmanship product. Therefore, cost of product based on workmanship measurement is key to booking future orders on correct price. This methodology keeps the organisation in good health as the major part of garment manufacturing cost goes into raw material. Last but not the least, the above explained formats are only ideas and companies may practise in their own format. The main motto is to develop control by having the correct cost information.