Finance & Accounting for the enterprises

Finance & Accounting

What is Accounting? Accounting is a system company uses to measure its financial performance by noting and classifying all the transactions like sales, purchases, assets and liabilities in a manner that adheres to certain accepted standard formats. It helps to evaluate a Company’s past performance, present condition, and future prospects.

Purchase Order A Purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. Acceptance of a PO by a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the PO is accepted.

Credit Memo A credit note or credit memorandum (memo) is a commercial document issued by a seller to a buyer. The seller usually issues a Credit Memo for the same or lower amount than the invoice, and then repays the money to the buyer or sets it off against a balance due from other transactions.

Debit Memo Debit memo - When a company fails to pay or short-pays an invoice, it is common practice to issue a debit memo for the balance and any late fees owed. In function debit memos are identical to invoices.

Finance & Accounting (F&A) Invoice Receipt and Matching Dispute Resolution Vendor Payment Setup Accounts Payable 1 Remittance Exception Tracking & Resolution (Cash) Deduction Management Collections Recoveries Receivables Management 2 G/L Closing Consolidation Fixed Assets Ledger Reconciliations Accrual and Reserve Account Reconciliation Accounting 3 Bank Operations Cash Forecasting Treasury 4 G/L Closing SEC and U.S GAAP Reporting Treasury Valuation Tax Filing Mgt Reporting Closing & Reporting 5 Base Cost, P&L, Balance Sheet and Cash Flow Analysis Budget Planning Variance and Issue Analysis Competitor Analysis Financial Planning & Analysis 6

AP Accounts Payable (AP) also called Procure-to-Pay “We bought something, now we have to pay for it” AP-cycle: Creation of a purchase order (PO) for vendor Receipt of goods, items are booked into inventory Receipt of the invoice from the supplier Reconciling the purchase order, the receipt or receipts and the invoice and submitting payment on the invoice Issuing check to vendor

AR Accounts Receivable (AR) also called Order-to-Cash “We sold and delivered something, now we need to get paid” AR cycle Receiving orders Sales order process and approval Fulfilling order Invoicing for the orders Collecting payment Cash application (reconciling payment to order and cost center)

Function of the AP department Purpose The accounts payable department’s job is to pay company’s bills. Functions Verify that the product was ordered by us and has been received in full What is it and who ordered it ? Enter General Ledger (G/L coding) Verify who ordered the goods and how much has to be paid ? Verify that there is no fraud occurring either by the vendor or by an employee Determine when to pay for it (early pay discounts) Schedule payment

Benefits of Accounts Payable Paper free environment Optimal resource management Processed within the set timelines. Faster way of processing Storage and retrieval at any point of time Online Approval

3 Ways That Companies Buy Things – Number 1 - PO Purchase order (produces PO invoice) Contract for purchase, “I will buy these at this price, under these terms” We know who ordered it, we know where the cost will be charged to (cost center) Requires no approval of invoice as long as items have been received, and prices match A/P function is primarily matching Non-matches create exceptions that have to be worked by AP department Work flow only required for exceptions

3 Ways That Companies Buy Things – Number 2 - Non-PO No purchase order (produces Non-PO invoice) Not a pre-approved purchase, typically for services, rush items, or orders that come from the field Requires approval of invoice which requires the invoice to be routed Has less control and can allow ordering of unwanted items or items that have not been pre-approved AP department has to confirm item is okay to pay the ordering party – quantity has been received – price is right – no fraud is occurring Work flow required for approving

Non-PO Process Order Something Ship Item or Deliver Service

3 Ways That Companies Buy Things – Number 3 - P-Card Purchasing card or P-card (produces a statement) Works just like a credit card except cards only allow only certain types of purchases and dollar amounts No invoice is generated…just a credit card statement. Typically used for smaller purchases under $2,000 A/P still needs to get the line items on the statement approved by manager AND this significantly reduces the number of paper invoices

ERP Enterprise Resource Planning (ERP) System Integrated set of applications to run the business Ties together inventory management, material management, plant operations, purchasing, payments, human resources, payroll, etc , through different modules Ideally company wants everything to be in one system Large amounts of money being spent to integrate these operations with system integrators Most common ERP companies

Data Entry Data entry is performed to capture customer information and to prepare the check for payment. The initial information is entered in by an operator and is checked by an auditor. Both of these positions require a high level of speed and accuracy.

Shipment Once data is been captured, its been shipped back to customer's database. There are two types of Shipment 1) Completed documents will be directly shipped to customer's database. 2) Rejected documents will be shipped back to Scanning team to perform Re-scan or will attach hard copies for customer's.

What if We Don’t Do Our AP Accounting Correctly? If we don’t know our expenses: We won't have profits We can’t close our books correctly We will have to go back and restate earnings later Restatement of earnings can damage our stock values Things will be coded incorrectly and our taxes will be incorrect If the government finds we are hiding things, then we could go to jail

Cost & Management Accounting

Information supplied by financial accounting is P & L Account Balance Sheet Cash Flow Statement Limitations of Financial Accounting: 1. Shows only overall performance 2. Historical in nature 3. No performance appraisal 4. No material control system 5. No labor cost control 6. No proper classification of costs 7. No analysis of losses 8. Inadequate information of price fixation 9. No cost comparison 10.Fails to provide useful data to management Financial Accounting

Cost Accounting : Accounting from the point at which expenditure is incurred to the establishment of its ultimate relationship with cost centers and cost units. It includes: – Collecting, classifying, recording, allocating and analyzing costs – Preparation of periodical statements and reports for ascertaining and controlling costs – Application of cost control methods – Ascertainment of profitability of activities carried out or planned. Cost Accounting is the processing and evaluation of monetary and non-monetary data to provide information for internal planning, control of business operations, managerial decisions and special analysis. Cost Concepts Cost Unit –It is a unit of product / service / time in terms of which costs are expressed. It is unit of measurement of cost. Example: - a tonne of steel, a meter of cloth, a ream of paper, a bale of cotton, a barrel of petrol etc. (for unit of production) passenger miles, cinema seats, consulting hours etc.( for unit of services for unit of services)

Responsibility Centers – is the function of an organization under the control of a manager who has direct responsibility for its performance. Example: - Cost Center, Revenue Center, Profit Center, Investment Center. Cost Object – any product, service, process or activity for which a separate measurement of cost is required. Example: - Car, Taxi service, weaving process, purchasing raw material etc. Cost Center – Is a location / person / item of equipment for which costs may be ascertained and used for the purposes of cost control. Types of Cost Centers: ◦ Personal Cost Center – person or group of persons ◦ Impersonal Cost Center – location or equipment ◦ Production Cost Center – where actual production takes place ◦ Service Cost Center – departments which render service to other cost centers Cost ascertainment ( Computation of actual costs incurred ): It refers to the methods and processes employed in ascertaining costs. Actual cost is useful to know unprofitable activities, losses and inefficiencies occurring in the form of idle time, excessive scrap etc. Cost estimation: It is pre-determination of cost of goods or services. Estimated costs are definitely the future costs and depends upon the past actual costs adjusted for anticipated future. • It is useful in making price quotations, bidding for contracts, preparation of budgets, evaluating performance, preparing projected financial statements and controlling etc.

Cost Ascertainment: In cost accounting, cost of each unit of production, job, process, or department etc. Is ascertained. Costs are also predetermined for various purposes Cost control and cost reduction: It aims to improve profitability by reducing and controlling costs. For this various specialized techniques like standard costing, budgetary control, inventory control etc. are used. Guide to business policy: Cost data provide guidelines for various managerial decisions like make or buy, selling below cost, utilization of idle plant capacity, introduction of a new product etc. Determination of selling price: It provides cost information on the basis of which selling prices of products or services may be fixed. In order to realize these objectives, the data provided by cost accounting may have to be re-organized and supplemented by other relevant business data from outside the formal cost accounting system Objectives of Cost Accounting Factor Financial Accounting Cost Accounting Objective Financial performance and position Ascertain cost and cost control Costs and profits Shows overall costs and profit / Shows details for each product, process, job, contract, etc Control / Report Emphasis on reporting Emphasis on control and reporting Decision making Limited use Designed for decision making Responsibility Does not fix responsibility Can effectively fix responsibility Time frame Focus on historical data Focus on present and future Type of reports General reports like P&L, Account, Balance Sheet, Cash, Flow Statement Can generate special reports and analysis Legal need Statutory requirement Voluntary, except for some cases Transactions Records external transactions Records internal and external transactions

Elements of costs Direct Material Cost =Prime Cost Direct Labour Cost Direct Expenses Cost Indirect Material Cost =Overheads Indirect Labour Cost Indirect Expenses Cost

Material Cost: The cost of commodities and materials used by the organization. It includes cost of procurement, freight inwards, taxes, insurance etc. Direct Material Cost – all raw materials, either purchased from outside or manufactured in house, that can be conveniently identified with and allocated to cost units. It generally becomes part of the finished product. However in many cases a material becomes part of finished product but not considered as direct material because the value of such material is so small that it is quite difficult and futile to measure it. e.g. nails in furniture, thread in garments etc. Example: Cotton used in a textile firm, Clay in bricks, leather in shoes Cloth in garments, Timber in furniture etc. Indirect Material Cost – Material which cannot be identified with the individual cost center, assist the manufacturing process and does not become an integral part of finished goods. These are minor in importance i.e. small and relatively inexpensive items which may become the part of finished product. Example: -Consumable stores, pins, screws, nuts and bolts, thread etc., also those items which do not become part of finished product e.g. coal, Cotton, oils and lubricants, stationary material, sand paper etc.`

Labor Cost: The cost of remuneration (wages, salaries, bonus, commission etc.) paid to the employees of the organization. Direct Labor Cost : Identified with the individual cost center i.e. it can be conveniently identified with a particular product, job or process and is incurred for those employees who are engaged in the manufacturing process. Indirect Labor Cost: Cost which cannot be identified with the individual cost center and is incurred for those employees who are not engaged in the manufacturing process but only assist. Example: wages paid to foreman/storekeeper, salary of works manager, Accountant/Personnel dept. salaries etc. Expenses: This is the cost of services provided to the organisation and the notional cost of assets owned. Direct Expenses Cost: Expenses which can be identified with and allocated to individual cost centers or units. Also known as chargeable expenses Hire charges of machinery/equipment for particular job, cost of defective work, cost of patent rights, experimental cost, cost of special design, drawings, layout, royalty, depreciation on plant etc. Indirect Expenses Cost: Expenses which cannot be identified by individual cost centers. Rent , Telephone expenses, Insurance, Lightening , Advertising, repairs etc.

Overheads- Classification: Production/ Manufacturing/Factory / Works Overheads Consist of all overhead costs incurred from the stage of procurement of material till the production of finished goods. Indirect material such as Consumable stores, Cotton waste, oils and lubricants, stationary material etc. Indirect labor cost such as wages paid to foreman/storekeeper, salary of works manager, Accountant/Personnel dept. salaries, salaries of factory office staff etc. Indirect Expenses cost such as Carriage inward cost, Factory lightening/power expenses, rent/ Insurance /repairs for factory building/machinery, depreciation on factory building or machinery etc. Office and Administrative Overheads: These overheads consists of all overheads costs incurred for the overall administration of the organization. i.e. planning and controlling the functions, directing and motivating the personnel etc. Indirect material such as stationary items, office supplies , broom, brush etc. Indirect labor cost such as salaries paid to account and administrative staff, office staff, Director’s remuneration, etc. Indirect expenses such as postage/telephone, depreciation on office building, legal/audit charges, Bank charges, Rent/insurance / repairs in offices etc. Selling and Distribution Overheads: Selling cost is the cost of promoting sales and retaining customers. Distribution cost consist of all overhead costs incurred from the stage of final manufacturing of finished goods till the stage of sale of goods in the market and collection of dues from customers. Indirect material such as packaging material, samples , catalogues, oil, grease for delivery vans etc. Indirect labour like salaries paid to sales personnel, commission paid to sales manager, salary of warehouse staff, salary of driver of delivery vans etc. Indirect expenses like carriage outward, warehouse charges, advertisement, bad debts, repairs and running of distribution van, discount offered to customers , insurance of goods in transit etc.

Cost Classification Meaning Example Direct Material Cost Which can be directly allocated to a product, job or process Basic raw material, primary packing material Indirect Material Cost Which cannot be directly allocated to a product, job or process Stores, consumables, some low value items some low value items Direct Labour Cost Labor directly engaged for a specific job, contract or work order. Shop floor labor Indirect Labour Cost Labor not directly engaged for a specific job, contract or work order. Staff departments Direct Expenses All direct costs other than materials and labor costs. Processing charges, machine hire charges, excise duty, etc Indirect Expenses All indirect costs other than indirect materials and indirect labor costs. Rent, repairs, telephones, electricity, utility costs, insurance, depreciation Factory Overheads Sum of indirect material, indirect labor and indirect expenses for the factory. Administration Overheads Sum of indirect material, indirect labour and indirect expenses for the office. Selling Overheads Sum of indirect material, indirect labor and indirect expenses for selling. Distribution Overheads Sum of indirect material, indirect labor and indirect expenses for distribution. Cost Component Description Prime Cost Direct Material Cost + Direct Labor Cost + Direct Expenses (Direct Material Cost = Opening. Stock of RM + Net Purchase Cost – Closing. Stock of RM) Works or Factory Cost Prime Cost + Factory Overheads + Opening. Stock of WIP – Closing. Stock of WIP Cost of Production or Cost of Goods Produced Factory Cost + Admin Overheads Cost of Goods Sold Cost of Production + Opening. Stock of FG – Closing. Stock of FG Cost of Sales Cost of Goods Sold + Selling & Distribution Overheads

No. Particulars Amount Per Unit A Direct Material Cost = Opening Stock of Materials =+ Purchases =+ Expenses on Purchases (on number of units produced) =- Purchase Returns =- Closing Stock of Materials =- Value of Normal Scrap of Direct Materials B Direct Labour Cost = Direct Labour Cost Paid (on number of units produced) =+ Outstanding / Payable =- Prepaid C Direct Expenses (on number of units produced) D Prime Cost = (A + B + C) (on number of units produced) E Works / Factory Overheads = Factory Overheads Paid (on number of units produced) =- Value of Normal Scrap of Indirect Materials =+ Opening Stock of WIP =- Closing Stock of WIP F Works or Factory Cost = (D + E) (on number of units produced) G Office and Admin Expenses (on number of units produced) H Cost of Goods Produced = (F + G) (on number of units produced) I FG Stock Adjustment =+ Opening Stock of FG =- Closing Stock of FG J Cost of Goods Sold = (H + I) (on number of units sold) K Selling & Distribution Expenses (on number of units sold) L Cost of Sales = (J + K) (on number of units sold) M Profit (on number of units sold) N Sales = (L + M) (on number of units sold)

Statement of Cost / Cost Sheet $ $ Raw Materials Opening stock of Raw materials Raw Material purchased P Cost of Materials available for use P Less : Closing stock of raw Materials (P) Cost of Raw materials used / Consumend P Direct labour Wages Other Direct charges Prime Cost Factory Overheads: Indirect materials Indirect Labour Depreciation on factory Building Depreciation on Factory equipments Insurance Repairs and maintenance Other factory overheads Gross Factory Cost Add : Work-in-progress (Opening) Less: Work-in-progress (Closing) Factory cost Office and Administrative overheads Office salaries Office rents, Insurance Other office overheads Office Cost / Cost of Production Add : Opening Stock of Finished goods Goods available for sale Less: Closing Stock of Finished Goods Cost of Goods sold Selling and Distibution Expenses Cost of Sales Profit sales

Output or Unit Costing (Cost Sheet): Unit costing is a method of cost ascertainment which is used in industries where production consist of a single or few variety of same product with variation in size, shape, color etc. It is a statement which is prepared periodically to provide detailed cost of a cost center or cost unit. A cost sheet not only shows the total cost but also the various components of the total cost. Expenses excluded from Costs: Income tax Dividend to share holders Commission to partners, managing agents etc. Capital Loss Interest on Capital Interest paid on debentures Capital expenses etc. Cost concepts: Income Measurement Profit Planning Cost Control Special Situations COST CONCEPTS RELATING TO INCOME MEASUREMENT Product Costs and Period Costs Absorbed Costs and Unabsorbed Costs Expired Costs and Unexpired Costs Joint product Costs and Separable Costs

( i ) Product costs and Period costs: Production costs are costs which identified with goods produced/purchased for resale. Period costs are costs which are not necessary for production and are incurred even if there is no production and matched against the revenue of the current period. (ii) Absorbed costs and Unabsorbed costs Absorbed costs are defined as those costs, which have been charged to production. Costs, which remain uncharged to production are referred to as unabsorbed costs. (iii) Expired costs and Unexpired costs An expired cost is one which cannot contribute to the production of future revenues. An unexpired cost has the capacity to contribute to the production of revenue in future, for example, inventory. (iv) Joint product costs and Separable costs Joint product costs are the costs of a single process/series of processes that simultaneously produce two or more products of significant sale value. Separable costs refer to any cost that can be attributed exclusively and wholly to a particular product/process/division/department.

Absorbed, Under absorbed and Over absorbed Costs. Example: Suppose that fixed costs are Rs 30,000 and the normal production is 15,000 units. The standard fixed overhead rate (SFOR) of recovery is Rs 2 per unit (Rs 30,000 ÷ 15,000 units). In other words, every unit of production absorbs Rs 2 of fixed costs. If the company produces 10,000 units, the total absorbed costs will be Rs 20,000 (10,000 units × Rs 2, SFOR). Obviously, Rs 10,000 constitutes unabsorbed costs (Rs 30,000, actual cost – Rs 20,000, absorbed costs). In contrast, over absorbed costs represent the positive difference of fixed costs charged to production and actual fixed costs. Such a situation will arise if actual production is more than the normal production. In the above example, if the company produces 16,250 units, the costs charged to production will be Rs 32,500 (16,250 units × Rs 2, SFOR). The over absorbed cost will be Rs 2,500 [Rs 30,000, actual fixed costs (AFC) – Rs 32,500 charged to production]. Figure 1 portrays these relationships. Absorbed costs = Units produced × SFOR Unabsorbed costs = [AFC – (Units produced × SFOR)] Over absorbed costs = [Units produced × SFOR) – AFC]

COST CONCEPTS RELATING TO PROFIT PLANNING

Costing in Apparel Manufacturing

Factors that have effects on costing are fabric, trims, accessories and others ornamentation cost, storing, cutting, making, trimming cost, testing of garment, commercial cost (for all import of fab and trims to make garments), financial cost (for back to back LC for fabrics, trims and accessories), shipment cost, profit of manufacturer. Fabric is the most important component to make a particular garment. Approximately 50% cost is required for fabric

Wash Required There are two (dry and wet) processes for denim washing. Dry process -hand stand, grinding, whisker, crinkle, laser whisker, 3-D crinkle, destroy, PP rubbing, PP spray, resin spray, tagging, heat pressing, pocket marking, center crease, seam marking, crease mark all over, tint, blowout, patch attaching, chevron/knee star. These are the commonly used dry washes for a denim pant. In the study only use hand stand, whisker, PP spray, tint. Wet process: rinse wash, cold pigment wash, cellulose wash, ice-or snow was, enzyme wash, tinting, enzyme stone with bleach, net bleach, caustic wash, resin wash, acid wash, milk wash, random bleach wash, and tie wash. These are the commonly used wet processes for a denim pant. In the study was used only enzyme stone with bleach. Test Required for Denim Pant Physical test and lab test, two types of testing are required for denim pant. Physical test- fabric count, seem slippage, yarn count, fabric weight, colorfastness to crocking, crease retention, colorfastness to rubbing, stretch & recovery, colorfastness to water, abrasion resistance, colorfastness to sea water, soil release, colorfastness to phenolic yellowing, cpsia , colorfastness to non-chlorine bleach, spiraled/twisting, seem twist (spirality test), tear strength, smoothness retention, tensile strength, pilling resistance, button attachment strength. Lab test- formaldehyde, absorbency test, PH, moisture test, AZO. Formaldehyde, PH and AZO test Washing Cost for a Denim Pant Washing cost for this particular pant: hand sand $0.25, PP spray $0.20, tint $0.15, whisker $0.25, enzyme stone with bleach $0.55. So, total washing cost $1.40.

Poly and Cartoon Consumption for Denim Pant 1 piece of polybag is needed per garment. Total area of a carton: Formula (L + W) × (W + H) × 2/100 × 100 Sq.mt. Normally one cartoon contains twelve pieces of garments. So, total cartoon is required for 50,000 pieces are 50,000 ÷ 12 + 2% wastage = 4250 pieces’ cartoons

Cost of Making Charge (CM) The name of the factory which was used in this study for denim manufacturing was ignored for the point of economical view. The factory per month direct & indirect cost $250,000, total line 10, number of machine per line 60, total number of machine 600, number of working days per month 26, per hour per line output 150 pcs, daily working hour 8 hours. So, our CM cost is as following,

1. How is the Price Set?

The worker gets only 50 cent for producing a jeans. That’s 1 % of the selling price – Who gets all the other money? – That’s not fair! – Somebody is making a fortune! – Can’t you pay just 50 cent more? – The working time to sew a jeans is only 20 – 25 minutes – A lot of traders, investors, workers are involved in the production chain, all of them are giving their input and all of them want their piece of the cake. That’s the structure of international labour division – How can labour standards be implemented for all workers/employees of the value added chain? What will this cost?

Main Principle of Price Setting The selling price is determined by the market To increase the profit a company must lower the costs With low costs and a low selling price the company has a competitive advantage

Who makes the profits? 􀂃 Everybody in the supply chain is acting more or less in this way and is trying to lower the costs 􀂃 Profits in garment industry are generally low compare to other industries 􀂃 The one who has the strongest (market)power makes the biggest profits 􀂃 This system ends at the workers – Their power is limited and very often restricted

A closer look at the retailing company The buying department is traditionally seen as the heart of a retailing company The buyer decides where to source products The mayor task of the buyer is to increase profits – his/her success is directly linked with the profit The main criteria's are – Buying prices – Delivery times – Quality – Styles The counter part of the buyer is the supplier The buyer and supplier negotiate the price – The price is determined by the market The supplier’s aim is to reduce costs to be able to offer the lowest price and to increase profits To calculate the FOB* the supplier must think about the cost factors: – Direct costs – Indirect costs – Macro costs

Following parameters need to be counted for garments costing:  Quantity of garments  Fabric consumption  Nature of fabric  Knitting pattern  Yarn content  Yarn count and type  Yarn cost per kg.  Cost of accessories like hangers, cartons, ply-boards, poly-bags etc.  Cost of trims likes hangtags, labels, badges, buttons, bows, twill tapes, etc.  Other operational charges like heat seal, print, embroidery, washing etc.  CMT charges.  Design and pattern of garments  Packing method and assortment  Any restriction on use of dyes and chemicals  Tolerance in dye lot and shade variation  Type of dyes and chemicals to be used  Number of garments to be packed per poly, blister and carton box  Quality of carton box, type and thickness of poly bag

Following factors should be considered while doing garments costing:  Details of printing, embroidery, and lab test requirement  Number of color and size in the order including lab test requirement for all colors  Government cash incentive  Factory variable cost  Direct labor  Indirect labor  Depends on shipping method  Depends on MOQ  Level of AQL & inspection authority  Amount of raw materials used  Production lead time  Payment terms  Miscellaneous cost  Bank liability  Profit margin  Total utility cost  Sales and distribution cost  Office and administrative cost  Any hidden charges  Transport cost including freight and insurance

Common Over Heads of a Garment Factory  Building Rent  Salary of the stuffs and associate pay role cost  Electricity Bill  Gas Bill  Others Utility Bill  Transport expenses  Expenses on consumable (Diesel, Chemicals etc )  Administration Cost  Employee welfare expenses  Professional and Legal expenses  House keeping  Stationary and Printing Cost  Over Time expenses

Cost Statements • Total Cost of Production of Garments • Total Cost of Sales of Garments • Cost of Material Consumed: (a) Yarn (b) Fabric (c) Accessories (d) Chemicals Garment Costing Variable Function: a. Fabric Consumption b. Fabric Cost c. Accessories Cost d. Print/Embroidery/Washing Charge e. C.M. f. Freight (C & F) g. Payment mode (at sight deferred payment 60days or 90 days or 120 days, TT, Sales Contract)

Basic Requirements Of Garments Costing Are: • CM Of Particular Styles • Fabric Consumption • Printing Cost • Embroidery Cost • Wash Cost • Trims Cost(zipper, Button, Label, Tape Etc ) • Accessories Cost (Tag Pin, Hanger, Price Ticket, Hang Tag Etc) • Transport Cost After the Satisfaction Of Buyer In Both Samples And Costing They Will Confirm The Order

Shipping Terms 1. CM: Cost of making/ cutting and making 2. FOB: Freight on board 3. C & F: Cost and freight / Clearing and forwarding 4. CIF: Cost, insurance and freight 5. CIFI: Cost, insurance, freight and interest 6. CIFE: Cost, insurance, freight and exchange 7. COD: Cash on delivery 8. CWO: Cash with order 9. FOW: Free on wagon 10.Franco: (…Named Port of Shipment) 11.FOB: Free on Board (…Named Port of Shipment) 12.CFR: Cost and Freight (…Named Port of Destination) 13.CIF: Cost, Insurance and Freight (…Named port of Destination) 14.CPT: Carriage Paid To (…Named Place of Destination) 15.CIP: Carriage and instruction paid to (…Named Place of Destination) 16.DAF: Delivered at frontier (..Named Place) 17.DES: Delivered Ex Ship (…Named Port of Destination) 18.DEQ: Delivered Ex QUAY (…Named Port of Destination) 19.DDU: Delivered Duty Unpaid (…Named Place of Destination) 20.DDO: Delivered Duty Paid (…Named Place of Destination)

Sea Freight and Air Freight Although most orders for garments are placed by buyers on FOB basis, with buyers to pay for freight at the shipping destination, it is still necessary for the shipper or the agent to know how to calculate sea freight and air freight as buyers always need to know how much freight the merchandise cost per dz. If you are required to sell on CIF basis, (with the shipper to prepay for freight at the shipping port) you will need to calculate the freight accurately for your own costing. 1. Sea freight: Sea freight is usually charged based on volume—how much per CBM (cubic meter)—very rarely by weight as “density cargo”. In fact ANERA (Asia North America eastbound rate agreement) has designed the freight tariff more based on the usual value of the type of goods, than the usual weight of them, taking into consideration that for low value merchandise they should give a low freight rate in order to make it possible for the importers to buy goods overseas. However, for high value merchandise, they should charge a high freight rate, as it is believed that the buyer can afford to pay more on freight. The have designed the freight tariff in such a way that everybody can do business and there is sufficient profit for the shipping lines. Container size Calculated Capacity Practical capacity Container FCL rate FCL rate for CBM LCL Rate per CBM 20' Capacity 29.5 cbm 27 cbm 3500 130 160 40' Capacity 61.32 cbm 54 cbm 5000 92 160 40' hi-cube 69.15 cbm 62 cbm 6500 92 160 Note: FCL: Full container Loading LCL: Loose container Loading If you ship very heavy goods as loose cargo because the size of the shipment is very small, the shipping lines will charge you by weight or by volume whichever is higher. 1 CBM (100 cm X 100 cm X 100 cm) = 1000 Kg

2. Air freight: Unlike sea freight, the airlines have decided to charge for the heavy merchandise (high density goods) by weight, and lightweight merchandise (low density goods) by volume. However, as airplanes can take less weight than ocean liners, the way they Set the standard, in the garment industry, when you ship goods by air, you have a 70% chance to be charged by weight, about 30% chance by volume. The followings are the relationship between weight and volume as set by IATA ( International air transport association). a. From most shipping locations in the Far east to the U.S. destinations and Canada 7000 cubic cm = 1 kilo. b. From certain locations in the Far east to the U.S. destinations and Canada 6000 cubic cm = 1 kilo Therefore when you have low density goods to ship by air, in order to determine if you should try to make the cartons as small as possible to save freight. First you check with the local air forwarding agent by asking him in the country where you are, how many cubic cm is considered 1 kilo in weight. They will tell you either 7000 or 6000. This is the answer you need. Then you physically check the weight and measurements of the good s packed for the air shipment. Now we have the 3 answers as follows, for example: a. The country is Bangladesh and the formula is 6000 cubic cm = 1 kilo b. The measurements of the cartons are 50cmX 60cmX 40cm c. The gross weight of the cartons are 16 kilo per carton. Now let us find out if we should try to make the cartons smaller to save air freight by doing the following calculation, Multiply 5 by 60 by 40 = 120000 cubic cm. 120000 cubic cm divided by 6000= 20 kilo Now you know, by volume the one carton is of 2 kilo, but by actual weight the carton is of only 16 kilo. You also know the airline will charge whichever is higher, in this case, they will charge you for 20 kilo, by volume. If the air freight rate is 2.80 per kilo this carton will cost you $ 56.00. Now, in order to save some money, let us try to make the carton smaller, usually by cutting the height of the carton. Lets say we have succeeded in cutting down the height by 5 cm, and see how much money we can save. ** Original size of the carton: 50 X 60 X 35 cm (=20 kilo) ** Now cut down to 50 X60 X 35 cm= 105000 cubic cm. 105000 / 6000 = 17.5 kilo Now by using the new carton, we have saved 2.5 kilo and this carton will cost only $ 49.00 (17.5 Kilo X 2.80)

Cost elements of manufacturing and selling woven apparel Element % of sales value % of manufacturing cost Wholesale selling price 100 133 Materials 40 53 Trims 5 7 Sewing Labor 20 27 Direct manufacturing cost 65 - Over Heads Manufacturing Labor 10 13 Administrative Labor 10 - Property and equipment 10 - Total Overheads 30 - Profit 5 - Materials and trims comprise 45% of the selling price and 60% of the manufacturing cost. Sewing and other manufacturing labor (which means cutting, pressing, and inspection) comprises 30% of the selling price and 40% of the manufacturing cost. Administration, property, equipment and profit are only 25% of the selling price . It is difficult to influence: - Material cost, because fabric is sold in a global market, and volume discounts are the only way to gain a benefit and these are relatively small; - fixed overheads, because by their nature they are fixed in the short term Consequently, most management attention, since clothing became a “serious” industry, has been concentrated on two things intended to decrease cost and squeeze up the profit. They are: 1. Cutting the direct labor (sewing) cost 2. Improving the materials (fabric) utilization

Table shows how small changes in these costs can have big effects on profit. Element Before % of sales value Improvement % After % of sales value Wholesale selling price 100 100 Materials 40 2.5 39 Trims 5 5 Sewing Labor 20 10 18 Direct manufacturing cost 65 65 Over Heads Manufacturing Labor 10 10 Administrative Labor 10 10 Property and equipment 10 10 Total Overheads 30 30 Profit 5 8 Decreasing sewing costs and improving fabric utilization If a business can make: -a 2.5% improvement in the use of fabric; -a 10% improvement in the cost of sewing labor; then it turns its 5% profit into 8% , which is a massive 60% improvement in profit for the owners.

changes in labour costs affect total costs Wage Rate 100% 125% 150% 200% 75% 50% Wages per day $ 6.60 $ 8.25 $ 9.90 $ 13.20 $ 4.95 $ 3.30 Sewing cost per unit $ 0.55 $ 0.69 $ 0.83 $ 1.10 $ 0.41 $ 0.28 FOB (incl. Quota) $ 8.00 $ 8.14 $ 8.27 $ 8.55 $ 7.86 $ 7.73 Amount of Change $ - $ 0.14 $ 0.27 $ 0.55 $ (0.14) $ (0.27) Sewing Cost as pct of FOB 6.9% 8.4% 10.0% 12.9% 5.2% 3.6% 􀂃 Trying to hold the line on wages to reduce FOB cost is a waste of time 􀂃 Even when if the supplier would pay the worker nothing at all, total reduction on FOB would only be 6.9% (in this case)

Wage Rate 100% 125% 150% 200% 75% 50% Landed-duty-paid (LDP) $ 10.00 $ 10.18 $ 10.35 $ 10.68 $ 9.84 $ 9.68 Sewing costs as % of LDP 5.5% 6.8% 8% 10.3% 4.2% 2.8% Whole Sale Price $ 20.00 $ 20.35 $ 20.70 $ 21.36 $ 19.68 $ 19.36 Sewing costs as % of Wholesale 2.7% 3.4% 4.0% 5.1% 2.1% 1.5% Retail price (based on 55% mark-up and rounded off) $ 44.00 $ 45.00 $ 46.00 $ 47.00 $ 43.00 $ 43.00 Sewing cost as % of retail price 1.30% 1.50% 1.80% 2.30% 1.00% 0.60% Retail Price Change - $ 1.00 $ 2.00 $ 3.00 $ (1.00) $ (1.00) The reduction or the retail price would be only 6.8% in case the workers wouldn’t be paid at all How changes in labor costs affect total costs Case Study: A men’s shirt produced in the Philippines Reduce labour costs per unit by reducing working time Weekly Working Time Output / week Output / Hr Labor Costs/pc (Regular Working time) Labor Costs/pc (Overtime) 48 h 100% 100% 100% 54 h 103% 88% 113.60% +12% +3% -12% +13.6% +127.2 to 240.8%

Most suppliers are focusing on direct cost/wage rates 􀂃 It is more easy to calculate 􀂃 It is more easy to avoid paying wages than the electricity bill 􀂃 The supplier has no influence in reducing macro costs 􀂃 But high influence in reducing indirect costs 􀂃 The problem is a lots of suppliers haven’t any knowledge about the relation between labour costs, direct costs, indirect costs, and macro costs – From designing a garment to ship the garment there are round about 100 steps to complete, but only 15% of the steps are linked to direct costs How to reduce indirect Costs Cut Lead Times 􀂃 The direct working time to produce a jeans is 20 – 25 minutes 􀂃 It needs between 3 and 6 weeks from the raw material income to the shipment – Either the supplier is paying indirect costs like overhead, rent, electricity or interest for 3 weeks or for 6 weeks – With short lead times it is possible to reduce indirect costs (in this case some indirect costs would be reduced by 50% per piece) – An additional benefit: The profit will be available for reinvestment much earlier Short lead times are based on an undisturbed work flow – High skilled and motivated workers – Excellent working conditions – Good top management – Low accident rate – Long term planning – Good relationship between workers and management

The traditional buyer dominated supply chain

Vertical Integration of the supply chain 􀂃 Investment in the suppliers production sites and/or close contracting 􀂃 Centralised production planning 􀂃 Short product cycle – E.g Zara (Inditex): design 1 day, manufacturing 8 days, delivery 1-2 days, selling 1 – 3 days 􀂃 Positive potential concerning social standards – Sufficient information to identify production sites – Close communication between retailer and management of the production sites – Infrastructure ( centralised production planning) could be used for social management systems

Use of B2B Platforms for sourcing 􀂃 Negative Auctions lower the FOB at least 10% 􀂃 High market pressure on the individual supplier – Limited time to bid (e.g. 3 hours) – Real Time information about the bid of the competitors

to open up the traditionally closed world of garment costing by examining how brands and retailers can make their labor costs visible ‘standard’ allowed minutes or SAMs are the necessary missing variable in determining the actual labour cost. Of course, these vary per garment style and in practice per factory line efficiency. Yet despite the use of the term ‘standard,’ there is no common methodology for determining garment times. standard allowed minutes for a particular garment are known, it should then be possible to more accurately pinpoint the upcharge necessary to meet the new wage compliance cost for purchase orders moving forward. Knowing this value should also provide a basis for calculating the extent to which the labour element of a cost price is sufficient to cover a worker’s basic needs and allow for an element of discretionary income against any given living wage benchmarks. Where labour minute values are calculated following an industrywide collective agreement, this should define the rate for the job – part of the price which alongside the cost of fabric can be inserted into the contract between buyer and supplier. Sourcing decisions should then be based on other indicators—quality, efficiency and social compliance rather than the price of labour .

Since the labour cost is part of an overall cost price which includes fabric, trim, overhead and factory margin, ensuring that it is not offset against these other cost elements will be a major new challenge for buyers since it will essentially shift the focus to the question of how wage increases are to be funded outside of the CMT section of the value chain.

Brand X, which sells directly to the consumer and sources directly from the factory, sets a target margin of 60% for a specific item of apparel in its negotiation with Supplier Y. For the supplier, fabric and trim can constitute up to 70% of the manufacturing cost. Let us say labor costs are 15 %, overheads are 5 % and the factory margin is 10%.

Assuming the brand wishes to maintain its margin but the wages go up as a result of a national minimum wage increase and overhead costs rise in line with inflation, the supplier’s margin will be reduced.

Assuming the brand wishes to maintain its margin but material prices go up as a result of rising commodity prices in line with negative impact of foreign exchange rates but also the supplier wanting to keep his margin abuse of labor cost could occur. The above graphic is used as an example only.

This means that in terms of the overall projected value of the garment, 40 per cent will be production cost. Of this cost, 70 per cent is taken up by material and trim, labour covers 15 per cent, with overhead and factory margin at five and ten per cent, respectively. Assuming the brand wishes to maintain its target margin, if the minimum wage goes up through a one per cent increase in labour costs and overhead (overhead containing indirect labour costs, etc.), then all other things being equal the factory margin must decrease if the unit manufacturing price does not increase. Similarly, if fabric costs increase as a result of a negative exchange rate fluctuation and the factory needs to maintain its margin to sustain in the market, then labour costs must adjust downward accordingly. From a compliance point of view, the issue then becomes how this can be managed without resulting in code violations. Any supplier wishing to maintain their own margin in circumstances such as this must logically make adjustments to their operating costs. In a full business model (FOB) scenario they may seek to do this by compromising on the quality of the garment, either by finding cheaper fabric or by reducing the workmanship. This is a particular risk as these quality issues can result in cost price reductions and/or fines. Alternatively, suppliers can seek to reduce the cost of labour in some way—either through job cuts, running unpaid overtime, increasing line speed or measured day work targets (always with the possibility of the accompanying threat of physical and/or verbal abuse by line management) or by unauthorised subcontracting. Empirical research suggests that minimum wage non-compliance is often caused by adverse practices on the part of buyers: poor planning, extension of payment schedules or late changes to style

one third of suppliers have sold below cost in order to maintain a level of orders from the buyer in question. Moreover, when asked what percentage of buyers was unwilling to increase prices to cover the cost of a minimum wage increase, suppliers reported that 75 per cent of buyers were unwilling to do this.

CURRENT COSTING PRACTICES Because cost price negotiations are highly sensitive commercially, we are not aware of any extensive empirical data as to the range of approaches to determining the cost of labour . These findings are based on data from existing costs sheets, as well as experience in buying and manufacturing (knowledge gained by industry consultants). As we have seen above, supplier experience of cost price negotiations suggests a diversity ranging from tendering to simple face-to-face bargaining to some degree of what is termed ‘open costing.’ However, because ‘open costing’ continues to remain a double-edged sword that generally works to the advantage of the buyer, there would appear to be wide variations in procedures and processes, especially when it comes to transparency in price negotiations. Our starting point for understanding existing costing practice must be the two principal buying models in the sector: Cut Make and Trim (CMT) and the Full Business Model (aka Free on Board or FOB).

CUT-MAKE-TRIM (CMT) Under the CMT model, the buyer pays the factory for CMT only, which means the factory is just selling labour . The materials, such as fabric, accessories and trims are sourced and provided by the buyer. In the CMT model, the buyer keeps most of the development process under his control and outsources the labour to CMT factories. Because CMT manufacturers are supplied with the raw materials and are not heavily involved in the development and sourcing part, they tend to have a cost structure with higher direct labour than factories supplying under the full business model. This is because their core strength is in the manufacturing process rather than development and sourcing.

FULL BUSINESS MODEL (FOB) The Full Business Model (FOB) is an official Incoterm under which the buyer purchases ready-made garments from the factory, meaning that the factory is much more involved in the development and sourcing process. This model demands a much higher skill set and capabilities from the factory’s staff in addition to a certain financial stability and strength to develop, source and pre- finance the necessary materials. Full business factories therefore present a different cost structure when it comes to direct and indirect labour , due to the additional tasks for development, sourcing and purchasing of the needed raw materials. In both cases, price negotiations can often be quite simple in that the buyer and factory are only discussing one overall figure for the garment in question. For a T-Shirt, this could be as follows: CMT PRICE FOR T-SHIRT > $0.95 USD per piece Ex Works FULL BUSINESS PRICE for T-Shirt > $6.25 USD per piece FOB

All prices are FOB Honduras - Based on 5000 units per style This approach to garment costing and negotiation is the least transparent since it does not allow us to see any details about real costs and where these costs are allocated. A conscious buyer would have to assume that these costs are sufficient to cover the factory’s labour costs. A more transparent costing model is where the costs of the product are specified in more detail. The key elements that would normally be opened up are as follows: • material input > Material cost (fabric cost and consumption, trims, embellishment, accessories…) • the labour cost • overhead • factory Mark-up

MATERIAL INPUT This cost, also known as BOM (Bill of Materials), contains the total material cost including the consumption per garment and a certain percentage for wastage. Both the factory and the brand would normally have detailed knowledge of these costs since they constitute the largest cost component and therefore are very important in the price determination. Moreover, they are important in the design process of choosing the right fabric to reach a target price. Knowledge of fabric cost can also deliver room for negotiation, since changes in fabric price and design input can have a direct impact on product price. LABOUR COST Simply defined, the labour cost is the price for labour usually expressed as a monetary time value multiplied by the amount of labour time taken to manufacture the garment in question. In Figure 2 above, the labour cost has been quoted. The dominant time value in labour costing has become the ‘sewing or working minute’ with garment styles timed either using work study (whereby the whole assembly is observed and timed in factory) or predetermined time and motion studies (a synthetic approach based on the off-site systematic study of manual operations required to make particular garment styles). The required sewing minutes are generally termed the SAM or Standard Allowed Minutes. Since it is generally only possible to measure the working time of those workers employed directly on the assembly line, a distinction in manufacturing is made between direct labour costs, which apply to those employees or workers who are directly involved in production of goods or services, and indirect labour costs, which relate to those employees such as supervisors, security, office staff, maintenance who are not directly involved in the production of goods or services, but who make their production possible or more efficient.

OVERHEAD Overhead costs are costs required to run a business but which cannot be directly linked to any specific product or business activity. There is a diversity in the industry in the way that management defines and therefore allocates indirect labour in the overhead category. Excluding indirect labour , the overhead would normally include such elements as rent, insurance, energy, office supplies and depreciation. THE FACTORY MARGIN The factory margin is what the manufacturer retains after all manufacturing costs have been deducted. Buyers, of course, are interested in this open costing approach—and it is generally only opened up in one direction—namely upstream in the value chain and often for less than benign reasons (i.e. to see where further cuts can be made from the manufacturing cost or the fabric and trim usage). The resulting cat-and-mouse game has created a diversity of approaches in the way costs can be presented.

example of partial open costing:

Example of open costing

an example of garment costs, including a working minute cost and its standard allowed minutes.

Total lump sum price for the garment • Lump sum for labour • A composite cost covering labour , overhead and profit (calculation with SAM undertaken internally but not revealed) • A CMT price = working minute cost x SAM • A CMT quote = working minute price x SAM first three examples demonstrate no transparency over the labour cost and therefore have no basis to assess whether or not the price paid covers wage compliance costs. Our fourth example demonstrates the use of what is known as working minute cost. In calculating the working minute cost of a factory, the entire (annual) operating costs (direct labour , indirect labour and overheads) are taken and divided by the total capacity minutes of the factory. Capacity minutes are calculated based on the number of sewing machine minutes annually available (based on the standard working time of the country in question).

The working minute cost can be visualised as follows: The working minute cost arguably shows the factory’s real manufacturing cost when making a garment and is applied in the discerning the cost by multiplying the working minute cost by the SAM time. This should not be confused with the term working minute price which includes this working minute cost plus the additional mark-up amount from the factory. Where this degree of open costing exists, some variation of working minute cost/price is likely to be quoted within the CMT/FOB manufacturing cost quote. The working minute cost helps in determining the labour cost of a garment, but we can achieve further clarity by removing the overhead from the calculation, which provides us with a labour minute cost.

Example using an adult pair of jeans: Fabric type 100% cotton twill solid dyed Fabric width/GSM 315 GSM Main Fabric Cost $2.09 Usage $1.36 Total Fabric Cost $2.84 Trim Cost $0.75 P & P Cost $0.20 Total $3.79 CM Cost SAMs 16 Cost per SAM £0.090 CM Cost $1.44 Other Costs Ancillary $0.17 Shipping per kg $0.02 Shipping Cost $0.03 Export Rebate Total $0.22 Direct Cost $5.45 Overhead $0.20 Margin $0.28 % age 8.10% Contribution $0.48 Supplier Cost $5.93

Achieving a degree of transparency in how the cost information is presented tells us nothing about whether the values themselves deliver on compliance. In the next section we examine the elements necessary to determine whether a cost is ‘wage compliant’. ACHIEVING GREATER TRANSPARENCY IN LABOUR COST In comprehensive labour costing, it is necessary for buyers and suppliers to know all the elements of labour cost. Four key variables need to be opened up: • the specific elements of the labour cost • elements of the direct and indirect labour cost expressed as a minute value • the SAM • the factory’s efficiency ELEMENTS OF THE LABOUR COST There are accepted conventions as to what constitute the elements of compensation. The Fair Labor Association recently engaged in a project to enumerate possible elements of labour cost (see annex).Each country will have a different set of elements that are deemed mandatory as part of national minimum wage legislation. Moreover, each factory will have developed, over and above these mandatory wage elements, bonus schemes and/or extra wage benefits for the purposes of production incentive and to retain labour where local labour markets are volatile. While a formal distinction can be made between mandatory and non-mandatory elements for the purpose of determining statutory wage compliance, in practice non-mandatory wage elements at factory level are necessary to enable a supplier to deliver the product to the buyer.

DIRECT AND INDIRECT LABOUR COSTS EXPRESSED AS A MINUTE VALUE To determine the actual labour minute value to compare with the mandatory labour minute value the supplier would need to take their direct and indirect operating costs for the previous accounting year and divide these by their available annual capacity minutes. Achieving transparency on actual labour cost for wage compliance will require a supplier to separate out their indirect labour costs from their overhead and add this to direct labour costs for the purposes of establishing the labour minute value. Total Labor Cost per worker = LMV* Capacity minutes

IMPLEMENTING LABOUR COST TRANSPARENCY The national mandatory labour minute value and can be used to verify the plausibility of the factor’s labour pricing in cost price negotiations. • establishing whether existing prices are sufficient to meet wage compliance costs. We would suggest that without full open costing this is the most difficult objective to achieve. • determining the magnitude of price increase necessary to cover a minimum wage increase. This is achievable with partial open costing. • identifying the ‘wage gap’ between the current prevailing wage and a desired wage based on a given living wage benchmark. • defining a labour minute value or the price of a labour minute can be the tool by which buyers commit to funding wage increases under industry-wide or multi-employer bargaining. However, we must remember that the labour ‘price’ is but one part of the labour cost the other key elements being the SAM and the factory’s efficiency. We look at these in turn. SAMS In the same way that it is possible to externally generate a mandatory labour minute value for a sourcing country/province, SAMs can be synthetically constructed using predetermined motion and time systems. 19 Although such times have been rigorously assembled and build in allowances for relaxation and downtime, they serve as targets against which actual production can be measured and improved. In factory SAMs will generally be captured using work study although some suppliers have adopted systems such as GSD to generate their target times. Standard Allowed Minutes on different garment products

EFFICIENCY However, to calculate the actual labour cost in the manufacturing of a garment, the real factory efficiency also needs to be taken into consideration since the SAM will only deliver the time needed to produce a garment based on optimal circumstances. Every factory and every line within a factory will have a different production reality and therefore efficiency factor which needs to be taken into consideration. If a factory operates on 50% efficiency, which is not uncommon, then it will take double the SAM target time to produce a garment calculated by the SAM. This extra time needs to be considered in the factory’s costing process, otherwise it cannot sustain in the mid- to long term. Miscalculations of actual efficiency or failure to include this in the quotation of the working minute cost could lead to excessive overtime in the fulfilment of the buyer’s delivery deadline and/or pressure on workers to meet an unrealistic production target. We must assume that suppliers/ factories factor efficiency into their costs/SAMs but given the extent of excessive overtime in the industry we must conclude that this is not done systematically. If buyers are engaging in crude bargaining with little knowledge of a factory’s efficiency, and the factory in turn is failing to build the actual efficiency into its costing, the non-compliances will be

This example shows the impact of the 33% NMW increase in Myanmar from $60 to $90 US per month on the labour cost of a number of different garment (SAMs) based on a factory efficiency of 40%. Note that the values here are based on the minimum contracted wage. The same calculation can be carried out based on a median wage or the actual wage costs of a factory. This would obviously lead to a higher but comparably low value

Typical Costing Module

Raw Materials Cost which is mainly contributed by Fabric & trims is 49%, direct labor through which the value addition happens is 12% indirect labor contribute to 9%. Fixed and miscellaneous expenses which include power and fuel, depreciation, testing charges, consumables contribute to 13%. Prime Costs are raw materials, direct labor which is 48%, while overhead cost s include, indirect labor and fixed and miscellaneous expenses which is 25%. Total Cost of Goods Produced is sum of Prime costs and Overhead costs which is 83%. This is area of concentration of quality cost program. Total Revenues is sum of Cost of goods produced (81%) + General and administrative costs (10%), Marketing costs (2%) + Profit (5%).

WH O A R E T H E C U S T OM ER S ?

WH O A R E T H E C U S T OM ER S ? U S A IS THE MAJOR MARKET F O R W O VEN GARME N T S EU IS TH E MAJOR MARKET F OR KN I T GARME N T S

A ppa r e l Mer c handi s in g Is Di r ectly R elate d T o N ego t iat i n g O rde r s , Buyi n g A n d Sellin g Go o d s T rough Main t a i nin g B ette r R elatio n A nd Lia iso n With B o th Bu y e r s , Suppl i e r s A s W el l A s F ac t o r y M anagement

M e r c h a ndi s e r s A r e C on s i d ere d A s K e y P e r s on s I n A ppa r e l Ind u s t r y F o r Th e i r R e s p on s ibili t i e s

M e r c h a ndi se r s Sho u l d H a v e K n o w l e d g e Abo u t Bas i c T e x t il e s  R a w M a t e r i a l s O f T e x t il e s  D i ff e r e n t P ro ces s I n T e x t il e s P ro d uc i n g  S hou l d Kno w A b ou t Y arn , F a b r i c , D y e i n g P ro ce d ur e s Et c  Kno w l e dg e A b ou t D i ff e r e n t F ash i ona b l e G arm e n t s A s W e l A s Bas i c I t em s  D i ff e r e n t C ons t ru c t i ona l Kno w l e dg e O f G arm e n t s F a b r i cs , T r i m s A n d A ccess or i e s C os t A n d P ro d uc t i o n L e a d T i m e  B e tt e r C ommun i ca t i o n Sk i l A n d G oo d P e r sona li t y  Goo d C o mman d I n En g li s h I n B ot h O r a l A n d W r i tte n

P rim e S i x R o le s O f A M er c h a nd i s e r Prod uct D ev elopmen t And Oder Negot i at i ons Doin g C on s u m pt i on And C o s t i ng Sa m pl e Making And S u bm i ss i o n F or A p p r o v al Making T N A Cha r t And Prop er F i ling N ego t i a t i o n Wi t h S u ppl i e r s F or B ookin g And B u y e r s F o r F u r t her Appr o v al Att en d t o PPM & C o - ord i na t i o n W i t h F a c t o r y K e y R espon s i b i lit i e s And Othe r s

What Happen s D ur i ng Produc t D e v elopment A s G i v e n B y B u y e r F u l l B i ll Of M a t e r i a l s A T y p i c al M e a s u r ement C h a r t A G a r m e nt S p e c i f icati on S h e et S o m etime s B l o c k P a t t e rn

Bil l O f M a t e ri a l s

Bil l O f M a t e ri a l s BOM Contains Fabric D e t a ils

Bil l O f M a t e ri a l s BOM Contains Thre a d De t ails

Bil l O f M a t e ri a l s BOM Contains T rims Det a ils

Bil l O f M a t e ri a l s BOM C ontains W a s h D et a ils

Mea sur eme n t C h a r t

Mea sur eme n t C h a r t M C Contains D e s c riptio n of E a ch Point of Me a s ure

Mea sur eme n t C h a r t M C Contains Size R a nge

Mea sur eme n t C h a r t M C Contains T ol e r anc e Limit

Mea sur eme n t C h a r t M C Contains Diffe r ent Me a sur e m e nts for Diffe r en t Sizes

G a r me n t S pe ci f ic a t io n Sh ee t

G a r me n t S pe ci f ic a t io n Sh ee t Stitchin g D e tails A r e Complet e ly Sho wn By A T ypi c a l GSS

What Happen s D ur i ng Produc t D e v elopment A s M a d e B y F a c t o r y D e v e l o p P a t t e r n A s P e r M C a n d B l o c k P a t t e rn S e l e c t F a b r i c a n d T r i ms A s P e r B OM C u t T h e F a b r i c s a s P e r P a t t e rn S e w in g S am p l e s a s P e r GS S

S AMPL E S Sa m ple s A r e V e r y I m po r t an t Elements F o r Bulk Production . Sa m ple Making As W el l As Getting A pp r o v al F ro m B u y e r s I s V e r y I m po r t an t J o b F or Mer c handi s e r s

S AMPL E S Sa m ple s A r e V e r y I m po r t an t Elements F o r Bulk Production . Sa m ple Making As W el l As Getting A pp r o v al F ro m B u y e r s I s V e r y I m po r t an t J o b F or Mer c handi s e r s  P r o t o S a m pl e  D e v e lo pme n t S a m p l e  S ale s me n s a m ple s o r pr o m o t i o na l s a m ple s  F i t s a m ple s  S iz e S e t S a m p l e s  C o unte r s a m ple s o r re f eren c e s a m ple s o r app r o v a l s a m ple s  W a s h te s t / La b te s t s a m ple s  F a s hi o n s h o w s a m p l e s  S h ad e B an d S a m ple s  P re-pr o du c t i o n s a m ple s  T ag /S eale r S a m pl e  P r od u c ti o n s a m p l e s  S hi pmen t s a m ple s T y pe s O f Sa m ple s :

D i f f e r e n t T y pe s O f S a m p l e s Ar e As k e d B y D i f f e r e n t B u y e r s Bu t F . ou r B a si c T yp e O f S a m p l e s Ar e As k e d B y M o s t O f Th e B u y e r

F i t s a m p l e s Fit Sa m ple s Or Si ze Se t Sa m ple s A re M ad e By F ol l o wing A ctual Measure ments . These Sa m ple s A re Fitted T o Dum m y F o r Ch e c k i ng Fittings A s W ell

Fit Sa m ple s Or Si ze Se t Sa m ple s A re M ad e By F ol l o wing A ctual Measure ments . These Sa m ple s A re Fitted T o Dum m y F o r Ch e c k i ng Fittings A s W ell F i t s a m p l e s C h ara c ter i st i c s  Al l Meas u re m ent s hi t th e M C & wi t hin Tolerance  Construc t io n an d Sti t ch i n g shoul d as pe r GSS  Sampl e M u s t Follo w T h e F ul l Styl i ng Designe d B y Technici a n  Fabric s u s e mus t act u a l bu t trims ma y no t b e a ctual

P P Sa m p l e s P P Sa m ple s A re Made By F oll o wing F ul l W ork m anship. T h i s I s An I m po r t an t Sa m ple F o r Bulk Production

P P Sa m ple s A re Made By F oll o wing F ul l W ork m anship. T h i s I s An I m po r t an t Sa m ple F o r Bulk Production P P Sa m p l e s C h ara c ter i st i c s  Sample s M us t Follo w F ul l Workman s hip  Actua l F a bi r c s a s we l l a s trim s u sed  Stitchin g a n d Desig n mu s t b e a s p er specific a ti o n sheet  I n Bul k P ro d uctio n F o ll o w This Sampl e s t ri c tly

Lab T e s t Sa m ple s Are N o t As k e d By Bu y er s F or Appr o v al. L a b T e s t Sa m ple s

T h is S a m p les A r e T h e R e q ui rem e nt F o r A L e g a l I ss ue T h a t T h ere A r e N o t P r es e nce A n y S u b s tance H a r m f u l F o r W e ar e r A n d S a f e ty O f P r oducts L a b T e s t Sa m ple s

T h is S a m p les A r e T h e R e q ui rem e nt F o r A L e g a l I ss ue T h a t T h ere A r e N o t P r es e nce A n y S u b s tance H a r m f u l F o r W e ar e r A n d S a f e ty O f P r oducts L a b T e s t Sa m ple s C h ara c ter i st i c s  Sample s M ak e Wit h Ac t ua l Fabric s And Trims  Mak e I t R ea d y Fo r Te s ti n g A s Buy e rs Specific a ti o n  Sample s S ho u l d No t F a i l A t An y P o int  Tes t Rep o rt s I s Requ i re d T o Rele a se Inspecti o n C ertifica t e A s Well

W h o T e s t T h e s e S a m p l e s ?

T o p Of P roduct i o n (TOP ) Are Th e S a m ple s As k e d By Bu y ers At Bulk Produc t io n S t ag e T o Ma k e Sur e Tha t F acto r y I s Doin g Right Th i ng T o p/ P rodu c t io n Sa m p l e s

T o p Of P roduct i o n (TOP ) Are Th e S a m ple s As k e d By Bu y ers At Bulk Produc t io n S t ag e T o Ma k e Sur e Tha t F acto r y I s Doin g Right Th i ng T o p/ P rodu c t io n Sa m p l e s C h ara c ter i st i c s  Sample s A r e Collecte d F r o m Bulk Thes e A r e T h e Sampl e s F ocus Origina l Vi e w O f Mas s P r oduction  Befor e G o in g T o Shi p Ou t These Sample s A r e Sen t T o B uy e rs Approva l F r o m Th e E n d O f Buyer s Is Require d T o Shi p Th e Fi n a l Goods

Co n s u m p t io n C a l cu l at io n Th i s Is The R e q ui r ed Amo un t Of F a b ri c T o M a k e A Garme n t

C on s u m p t io n C a l c u l a t io n F o r mu l a F o r K ni t T o p (M eas u reme n t i n C M ) B . L + S.L . + A l o w a n ce ) X 1 / 2 C h es t X 2 X G S M X 1 2 ÷ ( 1000 X 1000 ) k g/d z H ere , B. L - B od y Leng t h S. L - S lee v e Leng t h A l o w an c e - A l o w an c e w oul d ha v e c on s ide r e d f o r bo t h B. L an d S. L G S M - G r a m P e r S qua r e Me t e r 1000 mean s c m i s c on v e r t e d in t o me t e r 100 m ean s g r a m i s c on v e r t e d in t o k g

C on s u m p t io n C a l c u l a t io n F o r mu l a F o r K ni t T o p (M eas u reme n t I n In c h ) (B . L + S.L . + A l o w a n ce ) X 1 / 2 C h es t X 2 X G S M X 1 2 ÷ ( 1550 X 1000 ) k g/d z H ere , B. L - B od y Leng t h S. L - S lee v e Leng t h A l o w an c e - A l o w an c e w oul d ha v e c on s ide r e d f o r bo t h B. L an d S. L G S M - G r a m P e r S qua r e Me t e r 155 mean s in c h i s c on v e r t e d in t o me t e r ( 1 in c h = 39 . 37 " w he r e in c h s qua r e w i l b e 39 . 37 "X 39 . 37 " ) 100 m ean s g r a m i s c on v e r t e d in t o k g

Con su m p ti o n Ca lc u l a ti o n F or m u l a F o r W o v e n B o tt o m Ba s i c C o nsump tio n F o r mu l a F o r W o v e n B otto m : L e ng t h x W i d t h x 1 2 ( F a b r i c W i d t h x U n i t )

Con su m p ti o n Ca lc u l a ti o n F or m u l a F o r W o v e n B o tt o m A T y p i c a l E xa mp l e : S o m e M e a su re m e n t s W a i s t - 35" O u t sea m - 42" Insea m - 3o " T h i g h - 26" H i p - 44" Bo tt o m O p e n i n g - 18" F a b r i c c u t a b l e w i d t h - 56"

Con su m p ti o n Ca lc u l a ti o n F or m u l a F o r W o v e n B o tt o m A T y p i c a l E xa mp l e : T o ta l Le n g a n d W i d t h V al u e s : L e n g t h = 42 " + 2 " ( W a i s t Ban d H e i g h t ) + 3 " ( A l ) = 45 " ( I h a v e cons i d e r e d ou t sea m f o r l e n g t h b u t y o u ca n cons i d e r i n sea m a l on g w i t h b ac k r i s e l e n g t h an d w a i s t b an d l e n g t h f o r t o t a l l e n g t h ) W i d t h = 26 " + 3 " ( A l ) = 29 " ( I n cas e o f 1 / 2 t h i g h c i r cu l a r t h e f ormu l a w i l b e mu l t i p li e d b y 4 )

Con su m p ti o n Ca lc u l a ti o n F or m u l a F o r W o v e n B o tt o m A T y p i c a l E xa mp l e : F a b r i c re qu i re d f o r m a k i n g o n e d z p a n t : (Le ng t h x W i d t h x 12 ) / (F a b r i c W i d t h x U n it ) = (45 " x 29 " x 12 ) / (56 " x 36 " ) = 15 . 8 8 y ar d s / d z = cons i d e r a s 1 6 y ar d s / d z C ons i d e r i n g 5 % w as t a g e = 16 + . 8 y ar d s / d z = 16 . 8 y ar d s / d z

A f t e r A l l C A D C o n s u m p t i o n I s P e r f e c t F o r F a b r C i A c D C B o n o s u o m k p t i i o n n g C o n t a ins A l l S i z es Pa t t e r n S o E f f ic i e n cy W i l l H ig h W i t h M i n i m a l W a s t a g e s

C o n su m p t i o n C alc u la t i o n O f S e w i n g Th r ea d s Me r c h a ndi se r s H a v e N o t E no u g h Ti m e F o r T h r ea d C on s u m p t i o n B e c au s e I t I s V e r y T i m e C on s um in g J o b

Wh a t W e R ea ll y D o ? Most o f the Mer c handise r s F oll o w a C omm o n C o ns u m ption V a l ue L i k e T his Cha r t C o n su m p t i o n C alc u la t i o n O f S e w i n g Th r ea d s

C o s t i n g Bu y e r s A r e As k e d F or Cost i n g A f ter Getting D e v elopme n t Sa m ples F ro m F acto r y . S o met i me s Th e y Might B e A s k e d F o r It J u st A f ter G i v in g A T e c h P a c k T o Co m pa r e With O t he r s F actor i es.

C o s t in g T h e B a s i c R eq u i r e m e n t s O f G a r m e n t s C o s ti n g Ar e : C M O f P a r tic u la r S t y l e s F a b r i c C o nsump tio n P r i n ti n g C os t E mb r oi d er y C o s t Wa s h C os t T r i m s C o s t ( z i pp er , B u tto n , L a b e l , Ta p e E t c ) Acc e ss o r i e s C o s t ( Ta g Pi n , H a ng er , P r i c e Ti c k e t , H a n g Ta g E t c ) T r a nsp o r t C o s t

A T y p i c a l C o s t S h ee t

A T y p i c a l C o s t S h ee t It Con t ains F a b ric C o s t

A T y p i c a l C o s t S h ee t It Contai n s T o t a l T rims Co s t

A T y p i c a l C o s t S h ee t It Con t ains W as h Co s t

A T y p i c a l C o s t S h ee t This is The Fi n a l F OB

A f t e r T h e S at is f act io n O f B u y e r I n Bo t h S a m p l e s A n d Co s t i n g T h e y Wil l Co n f ir m T h e Or d e r

A O rd e r C on f irm a t io n M a i l loo k s li k e T h a t

A O rd e r C on f irm a t io n M a i l loo k s li k e T h a t N o w T h e O r d e r i s C o n f irm e d

sample costs of production of a typical pair of denim jeans, direct labor accounts for 39% of the final cost exfactory of a pair of denim jeans.

Cost Reduction Strategies: Focus and Techniques for NAPM-Wichita presented by Thomas L. Tanel, C.P.M., CTL, CCA President and CEO CATTAN Services Group, Inc. College Station, TX © 2009 CATTAN Services Group, Inc.

COST CONTROL & COST REDUCTION 161

CIMA, London has defined cost control as “ the regulation by executive action of the cost of operating an undertaking particularly where action is guided by cost accounting ” Cost Control is a process which focuses on controlling the total cost through competitive analysis. It is a practice which works to maintain the actual cost in accordance with the established norms. It ensures that the cost incurred on an operation should not go beyond the pre-determined cost. Cost Control involves a chain of functions, which starts from preparation of the budget in relation to the operation, thereafter evaluating the actual performance, next is to compute the variances between the actual cost & the budgeted cost and further, to find out the reasons for the same, finally to implement the necessary actions for correcting discrepancies. 162

Establishing norms: The first step in cost control is to set norms or standards which may serve as yardsticks for measuring performance. these standards are set on the basis of past performance adjusted for changes in future and on the basis of studies conducted. Comparison with actual: The actual cost incurred are compared with established standard costs to know the level of achievement. The variations are analysed so as toy arrive at the causes which are controllable. Corrective Action: Remedial measures are taken to avoid the recurrence of variation in future and for revision of standards wherever necessary Steps in Cost control 163

Cost Reduction is a process, aims at lowering the unit cost of a product manufactured or service rendered without affecting its quality by using new and improved methods and techniques. It ascertains substitute ways to reduce the cost of a unit. It ensures savings in per unit cost and maximisation of profits of the organisation. Cost Reduction aims at cutting off the unnecessary expenses which occur during the production, storing, selling and distribution of the product. To identify cost reduction, the following are the major elements: • Savings in per unit cost. • No compromise with the quality of the product. • Savings are non-volatile in nature. 164

Key Differences Between Cost control and Cost Reduction 165

The activity of maintaining cost as per the established norms is known as cost control. The activity of decreasing per unit cost by applying new methods of production in such a way that it does not affect the quality of the product is known as cost reduction. Cost Control focuses on decreasing the total cost while cost reduction focuses on decreasing per unit cost of a product. Cost Control is temporary in nature. Unlike Cost Reduction which is permanent. The process of cost control is completed when the specified target is achieved. Conversely, the process of cost reduction has no visible end as it is a continuous process that targets for eliminating wasteful expenses. Cost Control does not guarantee quality maintenance, however 100% quality maintenance is assured in case of cost reduction. Cost Control is a preventive function as it ascertains the cost before its occurrence. Cost Reduction is a corrective action. 166

Cost control is the achievement of pre- determined targets of costs. Cost reduction is the achievement of the real and permanent reduction in costs. Cost control tends to assume a static state of affairs and that standard once set are not challenged. Cost reduction assumes the existence of concealed potential saving in the standards or pre- determined costs set for cost control and that these standards are always subject to challenge. Cost control is concerned with predetermining costs, comparing it with actual costs, analysing the variances and taking corrective measures. Cost reduction is not concerned with maintenance of performance according to predetermined targets. it is rather concerned with finding out new product design, methods,etc Cost control is a part of cost accounting function Cost reduction may be achieved even when no cost accounting system is in operation Cost control lacks dynamic approach to cost improvement Cost reduction is more dynamic approach to cost improvement 167

BASIS OF COMPARISON Meaning COST CONTROL A technique used for maintaining the costs as per the set standards is known as Cost Control COST REDUCTION A technique used to economise the unit cost without lowering the quality of the product is known as Cost Reduction Savings in Total Cost Cost Per Unit Retention of Quality Not Guaranteed Guaranteed Nature Temporary Permanent Emphasis on Past and Present Cost Present and Future Cost Ends when The pre-determined target is achieved No end Type of Function Preventive Corrective Comparison Chart 168

Scope and Areas of Cost Reduction 169

(1)Product Design #One area in which manufacturers are finding ways to meet this challenge is the often-overlooked area of product design.The design of the product provides the greatest scope for cost reduction. #There are two basic points that need to be remembered while effecting cost reduction in product design (a) the product should perform all the functions for which it was intended, and (b) the product should retain its esteem or asthetic value. 170

For example, HTC Sweden, a global flooring systems company whose diamond grinding machines turn ordinary concrete floors into luminous work surfaces, has used "digital prototyping" to cut product development costs by approximately 97%. The previous method -- building physical models of new products -- cost HTC up to $500,000 per prototype, with some products requiring five such models. With digital prototyping, HTC created a computer-based workflow where conceptual design, engineering, manufacturing, and procurement teams are connected by a single digital model. This digital model simulates the complete product, and gives HTC engineers the ability to design, visualize, and simulate their products digitally. 171

Improvement in product design may result in cost reduction as illustrated below : (a) Material Cost: change in design of the product may result in saving the material cost. Economical substitution for existing material may also be considered. Eg: in manufacturing kitchen utensils, brass may be substituted with cheaper alloys.in curtain rings, metal may be substituted with plastic. (b) labour cost: improvement in design may result in reduced operating time. (c) factory overhead: reduce labour time will also reduce factory overhead. (d) packing and transporting: compact design will reduce cost. (e) cost of tools jigs and fixtures can be reduced. 172

(2) Organisation Cost reduction may also be achieved by improving factory organisation in the form of clear-cut lines of authority and responsibility, well-defined channels of communication, co-ordination and co-operation conductive to efficiency 173

(3) Production A cost reduction programme should make a study of sequence of operations to find out the best one, to use the most suitable machines for the work, to use jigs and fixtures to reduce operating time, to reduce idle time, to reduce scrap by the use of better quality tools ,to provide better working conditions conductive to efficiency 174

(4) Administration An organisation should make efforts to reduce the cost of administrative expenses, as there is ample scope to do so. A company may evaluate and reduce the cost of following expenses, but not the cost of efficiency: Modifying range of discounts Modifying internal and external communication Telephone expenses Travelling expenses Salary by reducing staff Reduction in cost of stationeryPostage and Telegrams Eliminate Subscriptions and Memberships 175

(5) Marketing I n this function, costs can be reduced by revising the methods of remuneration of salesmen, re-arrange territorial responsibilities of sales representatives, modifying current methods of advertising, improving product design and production quality so as to reduce after sales service, economising channels of distribution,improving packing etc. 176

(6) Finance Finance is an important area where cost reduction is possible through the following measures 1) control over utilisation of finance meant for both working capital and fixed capital needs. 2) proper evaluation of investments in new projects. 3)appropriate control of capital expenditure. 4) profitable employment of capital with the objective of maximum return. 177

Tools and techniques of cost Reduction and cost control 178

(1) Standard Costing Standard costing is one of the prominently used systems of cost control. It aims at establishing standards of performance and target costs which are to be achieved under a given set up working conditions. It is a pre-determined cost which determines what each product or service should cost under certain situation. Standard costing is defined as the preparation and use of standard costs, their comparison with actual costs and the measurement and analysis of variances to their causes and points of incidence. Standard costs should be obtained under efficient operations. 179

It starts with an estimate of what a product should cost during a future period given reasonable efficiency Standard costs are established by bringing together information collected from various sources within the company. The degree of success is measured by a comparison of actual performance and standard performance 180

Advantages of Standard Costing (i) It helps in establishing a yardstick with which the efficiency of performance is measured that helps to exercise control. (ii) It provides how the clear goal is to be achieved by providing incentive and motivation to work. (iii) It provides the management the basic information to fix selling price, transfer pricing, etc. (iv) It facilitates delegation of authority and fixation of responsibility. (v) It helps in achieving optimum utilisation of plant capacity. (vi) It provides means for cost reduction. (vii) Variance analysis and reporting is helpful for taking corrective measures. 181

Limitations of Standard Costing (i) Application of standard costs is quite difficult in practice. (ii) Frequently, standards become rigid over time and do not keep pace with changes in conditions. (iii) If the standards are outdated, loose, inaccurate and unreliable, they are more harmful. (iv) It standards set are higher than reasonable, they act as discouraging factor. (v) When there are random factors, it is difficult to explain variance properly. (vi) Standard costing may be found to be unsuitable and costly in the case of firms dealing in non-standard products. (vii) It is difficult to distinguish between controllable and non-controllable variances. (viii) Setting the standard costing are highly technical and mechanical. 182

(2) Budgetary Control Budgetary control is a system of controlling costs through preparation of budgets. budgeting is thus only a part of the budgetary control Characteristics (a)Establishment of budget for each function/department of the organisation (b)comparison of actual performance with the budgets on a continuous basis (c)Analysis of variation of actual performance from that the budgeted performance to know the reasons (d) Taking suitable remedial action,where necessary (e)Revision of budgets in view of changes in condition 183

Objective of Budgetary Control (1) Planning (2)Co-ordination (3)Communication (4)Motivation (5)Control (6)performance evaluation

Limitations of budgetary control (1)The budget plan is based on estimates (2)Danger of rigidity (3)Budgeting is only a tool of management (4)Opposition from staff (5)Expensive technique

(3) Inventory Control ICAI defines inventory as tangible property held, i) for sale in ordinary course of business. ii) in the process of production for such sale. iii) in the form of maintenance and supplies to be consumed in the process of production. Meaning of inventory control. The process whereby the investment in materials and parts carried in Stock is regulated within predetermined limits set in accordance with the inventory policy established by management. 186

It involves : i) fixation of limits within which inventory is to be held. ii) laying down of inventory policies. iii) setting out the investment pattern. iv) Examining the work of inventory policy and effecting changes when needed. 187

Techniques of inventory control i) min max plan ii) two bin system iii) order cycling system iv) ABC analysis. V) VED analysis vi) inventory turnover ratios

(4) Production Planning and Control Production planning is a plan for the future production, in which the facilities needed are determined and arranged.A production planning is made periodically for a specific time period, called the planning horizon. It can comprise the following activities: Determination of the required product mix and factory load to satisfy customers needs. Matching the required level of production to the existing resources. Scheduling and choosing the actual work to be started in the manufacturing facility" Setting up and delivering production orders to production facilities. 189

In order to develop production plans, the production planner or production planning department needs to work closely together with the marketing department and sales department. They can provide sales forecasts, or a listing of customer orders. Different types of production methods, such as single item manufacturing, batch production, mass production, continuous production etc. have their own type of production planning. Production planning can be combined with production control into production planning and control, or it can be combined and or integrated into enterprise resource planning. Production planning is used in companies in several different industries, including agriculture, industry, amusement industry, etc. 190

The planning process, then, provides for two types of control mechanisms: feedforward, which provides a basis for control at the point of action (the decision point); and feedback, which provides a basis for measuring the effectiveness of control after implementation. Management's role is to feedforward a futuristic vision of where the company is going and how it is to get there, and to make clear decisions coordinating and directing employee activities. Management also oversees the development of procedures to collect, record, and evaluate feedback. 191

(5) Standardisation and Simplification Simplification is a process of product analysis through which unnecessary varieties and designs are eliminated.Only a limited number of grades, types and sizes of the product are retained. Standardisation is the second step after simplification towards interchangeable manufacturing. Having selected the varieties and grades of the products to be retained as much of its manufacturing details are standardised as possible. 192

Since manufacturing involves a large number of decisions from selection of raw material to the process used for finishing, standardisation of some of these items reduce unnecessary repetition of work. Use of standard components reduces inventory costs, ensures interchangeability and makes future maintenance easier. It also reduces component cost since standard components are manufactures by mass production methods and are cheaper. 193

Selection of standard materials ensures physical performance and guarantees failure-free operation. Use of standard methods of production enables comparisons to be made of the standard and actual manufacturing time The purpose of standardisation is, therefore, on one hand, efficiency and economy in the use of human effort and on the other economy of material varieties and stock quantities and therefore reduction in cost and increase in turnover. 194

The Zero-Based Standardisation Approach This is a very effective technique to reduce the number of different parts (part types) by standardising on certain preferred parts. The zero based approach, literally, starts at zero and adds only what is needed, as opposed to reducing parts from a overwhelming list. An analogous situation would be cleaning out the most cluttered drawer in a desk, a purse, or a glove compartment; removing unwanted pieces would take much effort, and still not be very effective. The more effective zero-based approach would be to empty everything, and add back only the items that are essential. Where the "clutter" ends up is the difference in the approaches: in the drawer, purse or glove compartment or in the garbage can. 195

Similarly, parts reduction efforts have to work hard to remove the clutter (excess part variety) in the system, whereas zero-based approaches exclude the clutter from the beginning. The clutter is the unnecessary parts that would have not been needed if products were designed around common parts. Not only do these excess parts incur overhead costs to administer them, they also lower plant efficiency and machine utilization because of the setup caused by product that are designed to have more parts than can be distributed at every point of use. 196

COST SAVINGS FROM STANDARDISATION Purchasing Leverage. Being able to order larger quantities of standard parts and materials provides purchasing leverage where buyers can benefit from suppliers economies-of-scale and arrange more frequent deliveries, to support just-in-time operations. Lowering Material Overhead. There is far less material overhead to procure standard parts and materials, which are more common, more readily available, and have more sources. Spontaneous Resupply Possible. Many costs can be reduced by arranging spontaneous resupply of parts and materials, instead of the more expensive forecast-based purchase orders and holding inventories. 197

STANDARDISATION BENEFITS Cost Reduction Purchasing costs reduced through purchasing leverage Inventory cost reduction Floor space reduction BOM/MRP/ordering expense avoided when common parts are simply drawn as needed from spontaneous resupply Overhead cost reduction Quality: Product quality Continuous Improvement Vendor reduction 198

Flexibility: Eliminating setup Inventory reduction Simplify supply chain management Internal material logistics Flexible manufacturing Responsiveness: Build-to-Order Parts availability Quicker deliveries from vendors 199

(6) Operational research and statistical techniques The Operation Research approach is particularly useful in balancing conflicting objectives (goals or interests) where there are many alternative courses of action available to the decision-makers. In a theoretical sense, the optimum decision must be one that is best for the organization as a whole it is often called the global optimum. A decision that is best for one or more sections of the organization is usually called suboptimum decision. Operation Research attempts to resolve the conflicts of interest among various sections of the organization and seeks the optimal solution which may not be acceptable to one department but is in the interest of the organization as a whole. 200

(7) Value analysis Value analysis is an approach to cost saving that deals with product design. Here, before buying any equipment or materials, a study is made as to what purpose these things serve? Would other lower- cost design work as well? Is there a cheap material which can serve the same purpose? So value analysis is a procedure which specifies the function of products or components, establishes appropriate costs, determines the alternatives and evaluates them. Thus the objective of value analysis is the identification of such costs in a product that do not in any manner contribute to its specification or functional value. Thus, it is the process of reducing the cost without sacrificing the predetermined standards of performance. It is a supplementary device in addition to the conventional cost reduction methods. Value analysis is closely related to Value Engineering. It is very helpful in industries where production is done on a large scale and in such cases even a fraction of savings in cost would help the firm significantly. 201

(8) Automation Automation is certainly a means of reducing costs. It also reduces human interaction. It is the advance of automatic techniques which has changed the face of industry and commerce. The proportion of people working in manual and semi-skilled jobs has been drastically reduced. Automation is the use of automatic control equipment to operate and control machines. Automation is being used at an increasing speed, spurred on by the development of the large scale integrated circuits printed on to silicon chips. The next stage in the development of automated controls was the use of analogue computers. It is a machine designed to process electronic signals. 202

There are three tasks for which automatic equipment can be used to replace the human being. They are: (a) Measurement, (b) Control, and (c) Data Processing. There are a variety of reasons for introducing automation among which is the following: (i) To reduce costs, (ii) To increase quality, and (iii) To meet shortages in skilled people. 203

(9)Job evaluation and Merit rating job evaluation is the process of analysis assessment of jobs to ascertain their comparative labour worth. Each job factor is given a relative weightage and is allotted a number of points.depending upon its nature and requirement of different factors in its performance, a job secures a number of points. 204

Merit Rating is the comparative appraisal of individual merits of an employee. it is the qualitative or quantitative assessment of an employee’s performance or his personality made by his supervisor or any other competent person

Importance of Job evaluation (1) Fixation of structure (2) Discloses Anomalies (3)Helps in Recruitment of New workers (4)Improves Labour Relations

Importance of Merit Rating (1) it helps in ascertaining the suitability of the worker for a particular job. the objective is achieved by linking merit rating with job evaluation (2)it helps in ascertaining an employee’s merit for grant of promotion, increment etc (3)it helps in introducing a system for incentive, wage payment and simplification of the wage structure (4)it analyses the worker’s defects and bring out the strong points and special abilities

Factors taken into account for Merit Rating Purposes (1) Quality of work done (2) Quantity of work done (3) initiative (4) Reliability (5) Integrity (6) Sense of Responsibility (7)co-operation and Discipline (8) Sense of judgement (9) Knowledge and Skills (10) Punctuality Each of the above factors is assigned points and the employees are ranked in order of the points.

(10)Work Study Work Study is the systematic examination of the methods of carrying out activities such as to improve the effective use of resources and to set up standards of performance for the activities carried out. • A generic term for those techniques, particularly method study and work measurement, which are used in the examination of human work in all its contexts, and which lead systematically to the investigation of all the factors which affect the efficiency and economy of the situation being reviewed, in order to effect improvement. 209

210

Method Study Method-study concerned with “the way in which work is done (i.e., method)”. It is used to simplify the way to accomplish a work and to improve the method of production. Method-study results in a more effective use of material, plant, equipment and manpower. Method study is essentially concerned with finding better ways of doing things. It adds value and increase the efficiency by eliminating unnecessary operations, avoidable delays and other forms of waste 211

Work Measurement is the application of techniques designed to establish the time for a qualified worker to carry out specified jobs at a defined level of performance or at a defined rate of working. Technique of work measurement: a) Time study: short cycle repetitive jobs b) Work sampling: Long cycle jobs c) Predetermined motion time standards: manual operations confined to one work centre. 212

Objective To analyse the present method of doing a job, systematically in order to develop a new and better method To measure the work content of a job by measuring the time required to do the job for a qualified worker and hence to establish standard time To increase the productivity by ensuring the best possible use of human, machine and material resources and to achieve best quality product/ service at minimum possible cost 213

Benefits Increased productivity and operational efficiency Reduced manufacturing costs Improved work place layout Better manpower planning and capacity planning fair wages to employees Better working conditions to employees improved work flow Reduced material handling costs provides a standard of performance to measure labour efficiency Better industrial relations and employee morale Basis for sound incentive scheme provides better job satisfaction to employees 214

(11) Organisation and Methods study Organisation and Methods are defined as, “The systematic examination of activities in order to improve the effective use of human and other material resources”. It is generally accepted to be concerned with improving the administrative work, the way it is organised and the way methods and procedures are used. 215

О & M services include the following activities (i) Organisation analysis (ii) Activity analysis (iii) Information analysis (iv) Interviewing (v) Systems design (vi) Flow charting (vii) Form design (viii) Paper work flows. 216

(12) Quality Control Quality Control refers to all those functions or activities that must be performed to fill the company's Quality objectives. Quality Control aims at investigating the root cause for defects indentified by inspection and take corrective action to overcome the defects for future production. Quality Control helps to minimize the cost of Inspection and Rejection. Quality Control is an approach to prevent the defects rather than detecting the defects. The ultimate aim is to provide products which are dependable, Satisfactory, Economical. 217

CONCLUSION The two techniques cost control and cost reduction are used by many manufacturing concerns to diminish the cost of production Cost Reduction has a larger scope than cost control as cost reduction is applicable for all the industries, but cost control is applicable only to the industries where pre- optimisation of the cost which is not yet incurred is possible. Cost Control works as a road map for the organization to incur costs as per the set standard. On the other hand, cost reduction challenges the established standards by decreasing the costs and increasing the profit. 218

COST CONTROL VS. COST REDUCTION Presented by AMIYA KUMAR SAHOO PGDM,1 St year student INNOVATION-The B School At- Muktapur,Po - Khurda

COST CONTROL Executive Action by given members of an undertaking to maintain the cost with budget and/or standards established. According to CIMA “ it is the regulation by an executive action of the costs of operating an undertaking particularly where such action is guided by cost accounting. Requires close monitoring and management

Cost Control Process Establishment of a Budget and/or standards. Appraisal of performance Corrective Action Planning Again

Importance of cost control Enables firm to achieving defined objective Proper utilization of firm’s resources Growth and survival of a firm Make the organisation efficient

Cost Reduction It is a systematic effort to improve profit margins by eliminating all forms of waste and unnecessary expenses without, at the same time, impairing the generation of revenue.

Importance of cost reduction Improves the competitive capabilities and ensures survival, growth and prosperity Optimum utilization of the resources Provides reasonable prices to consumers Preservation of the nations scarce resources Keeps the price under control charges to consumer Helps govt in controlling inflation.

Difference COST CONTROL Prevention action(Tries to keep costs confined to the limits set by norms) It is the means to an end, namely cost reduction Emphasis the present and past behavior of cost Lack of dynamism COST REDUCTION Corrective Action(permanent reduction in the unit cost of goods mfg.) It begins where cost control ends It emphasizes partly on present costs and mainly on future costs It is a dynamic concept

Contd… Cost control e)Establishing budget and/or standard and initiating remedial action where there is a deviation of actual results f)Limited applicability g)Tools of technique-budgetary control, standard costing Cost Reduction e)Establishing by improving upon the standards and the methods of production f)Universal applicability g)Tools of technique-value engineering, work study, operation research

Industrial Engineering Aiming at Reduction of Costs and increasing profit using

Tolerance Analysis Functional Products SMED Job Costing Specialty Process Jigs and Fixtures Poka Yoke Cost element relations Layout Analysis OEE ECR Assignment of persons Transport Machine Speed Time Study Fatigue Analysis Material Handling Industry 4.0 Replacement

Cost Reduction – New Products For every organization for growth and survival cost reduction of existing products and new products and new product introduction are essential strategic activities every year Industrial Engineering has multiple techniques for cost reduction / productivity improvement

Cost Reduction Teams Members or Sub-teams of the cost reduction can take up one technique each and explore its current state of theory and practice and then make pilot projects Once pilot project are successful, the technique can be rolled out in the organization with planned cost reduction figures

1.Tolerance Analysis Value Engineering Put a dollar sign on tolerances Is the cost necessary? Does it add value?

2.Specialty processes Value Engineering Do you know specialty process in your discipline ? Even good companies take 5 years to become aware of specialty processes

3.Functional Products Value Engineering Many Vendors sell more complex parts as functional products Have you developed a list of functional products sold by vendors in your line of products?

4. Jigs and Fixtures Design Motion Study principles Use of jigs and fixtures to increase human effort productivity Modular fixtures – Are they more cost effective ?

5.SMED Shigeo Shingo’s Innovation Will lead to lower batch quantities and low inventory /Lean Manufacturing

6. Poke Yoke Shigeo Shingo’s Innovation Will reduce mistakes and thus reduce defects Helps in low inventory manufacturing / processes

7.Job costing Value Analysis Technique Get all available costs To do cost reduction, industrial engineers must have to cost figures in various classifications Understanding the job costing system in details and examining how the cost of each job and its parts was arrived will show opportunities for cost reduction

8.Cost element relations – Cost drivers Activity based cost break up What drives the activity volume What characteristics drive the cost of the activity each time it is performed ?

9. Layout Analysis Layouts – increase in transportation Layout reviews to find opportunities for reduction of transportation of the material

10. OEE – Equipment Utilization Analysis Doing work Sampling to find the utilization of machines Defects produced by machines Taking steps to improve utilization and reduce defects as well as losses of machine time

11. Eliminate, Combine, Rearrange analysis (ECR) Process Analysis – Method Study For each operation find out its purpose Does it needs to be done ? Examine operation breakup

12.Transportation Model – OR - Analysis The OR model of transportation indicates that the present transport arrangements can be analyzed to find cost reduction opportunites

13. Assignment of persons to jobs – OR - Analysis The OR Model of assignment indicates the current job assignments to various persons can be changed to increase output in the organizations Are people given the jobs or tasks where they can contribute maximum?

14. Machine Speed Optimization This is the oldest industrial engineering work done by F.W.Taylor Presently a neglected activity in Industrial Engineering Needs to be explored and extended to new manufacturing processes like 3D Printing A task with high potential run – cost reduction

15. Time Study – Elemental time study of multiple persons Methods improvement and work measurement Taylor did element level time study of multiple persons to identify best practice of mechanic trades and developed his scientific ideas on work of the trade Needs to be done periodically to improve work practices as well as standard time estimates by incorporating learning curve effects

16. Fatigue Analysis If workers and employees feel fatigue, productivity will come down. A questionnaire based data collection can be done to find the feelings of fatigue This can be verified by physiological parameters subsequently and actions can be taken to reduce fatigue and increase productivity

17. Material Handling – Existing Methods – Cost – Modern Alternatives -Cost Material Handling is a significant cost item Material Handling in the organization and its equipment and techniques are to be investigated and improved Like manufacturing processes, material handling process can also be investigated and improved

18. Industry 4.0 – Exploration – Productivity Opportunities According to top consultants, industry 4.0 offers immense productivity improvement / cost reduction potential Industrial engineering / Cost reduction teams have to understood these potentials as described by the consultants and examine their operations internally to implement them

19. Replacement studies for existing equipment in the organization Companies neglect replacement No Systematic studies are done Hence extra cost are incurred Systematically all equipment can be subjected replacement analysis studies

20. Blast, Create, and refine Value analysis technique Examine the basic raw materials of the current design Are there any low cost alternatives for this raw material? Creative redesign from the lowest cost raw material

21. Assembly work station / Work bench Arrangement Principles of Motion economy The Work Station arrangement has an effect on productivity A well arranged and maintained work place increases productivity All work areas can be studied for improving the work place arrangement

Agenda Topics Cost Reduction Strategies and Ideas Price and Cost Analysis--Applied Total Cost of Ownership and Total System Cost Use of “Should” Cost Models Innovative Thought and Ideas Solicitation Value Analysis and Engineering Target Cost Analysis and Target Pricing Low (Best) Cost Country Sourcing Summary

Cost Reduction Strategies Cost Savings Cost Avoidance Cost Containment Value Enhancement

Cost Reduction Terminology Product cost savings Defined as obtaining and realizing a lower unit price on the same item than the unit price was in the last contract period. A cost saving is valid for as long as the comparative that generated the saving is; but it is not to exceed the end of the contract period in which the saving was produced. On the first day of the next contract period the old price becomes the baseline against which any future cost savings are measured.

Cost Reduction Terminology Revenue generation New financial sources that can be used to leverage or increase monies/resources available to an activity. Revenue generation is a quantifiable monetary benefit. Non-monetary benefit A benefit that cannot be measured in terms of finances or resources, such as better quality of services; improved health, safety or quality of life; enhanced security; enterprise-wide consistency; or contribution to achieving supplier diversity goals. Return on investment Monetary benefit from an investment as a ratio or percentage of the amount invested.

Cost Savings Cost Savings—definition A cost reduction that can be specifically identified and will be made to a budget or program, resulting from implementing a specific alternative in lieu of continuing the present system. The result of a planned or deliberate action taken by Purchasing Savings are a quantifiable monetary benefit There must be a direct activity reduction for a savings to occur; thus, benefits are considered as savings only if the estimate identifies benefits that start accruing during the budget/activity’s fiscal year.

Cost Avoidance Cost avoidance—definition Financial or economic benefits that result from an initiative but do not permit a monetary reduction to a funded activity or budget. Is a quantifiable monetary benefit Usually addresses the reduction or elimination of a future cost Does not lower the cost of materials purchased when measured against historical results, but it does minimize or avoid entirely the negative impact on net income that a price increase would have.

Cost Containment Cost containment—definition The process of maintaining organizational costs within a specified budget; restraining expenditures to meet organizational or project financial targets. Measures taken to reduce expenditure or the rate of growth of expenditure, or the unit cost of goods/materials/supplies/services. When an organization keeps costs low, or within a limit that has been planned.

Value Enhancement Value enhancement—definition Value which affects the whole-life costs or whole-life income and its required functionality . Value For any service or offering to have financial value , the organization must have been willing to pay for it out of pocket or must have already been paying for it in a way that can be measured on the organization’s income statement . This definition is a requirement for any discussion of legitimate cost avoidances. For example, in practicing sustainable environmental management, we may reduce the environmental impact; while at the same time achieve cost reduction and create environmental friendly conservation added value.

The Difference between Price and Cost “Price” . . . is a sales and purchasing concept. “Cost” . . . is an accounting concept.

The Difference between Price and Cost Price =Cost of Material + Labor + Overhead + General & Administrative Expenses + Selling Expense + Profit Cost =Cost of Material + Labor + Overhead + General & Administrative Expenses + Sales Expense

Comparability Factors for Prices Comparative price analysis involves the comparison of the current proposed price with quotes or prices for the same or similar items.

Total Cost of Ownership (TCO) TCO – the sum of all costs associated with any given supply stream Source: The Executive Guide to Supply Chain Management , David Riggs/Sharon Robbins = Purchase Cost + Logistics Inland Freight Ocean/Air Freight Transfer charges Customs Duties & Fees Taxes VAT Incentives + Other Costs Quality Safety Stock Supplier Development Currency + + TCO

ACQUISITION COST OPERATING COSTS TRAINING COSTS MAINTENANCE COSTS WAREHOUSING COSTS ENVIRONMENTAL COSTS SALVAGE VALUE Traditional Supplier Cost and Price Structure Typical Negotiation Focus Cost Reduction Opportunities Cost Reduction and Negotiation

Total System Cost (TSC) Total System Cost (TSC) – the sum of the buyer’s costs, supplier’s costs and interaction cost between the two

Traditional Strategic TSC Savings Price Savings Focus Buyer Costs Interaction Costs Profit Supplier Costs Buyer Costs Interaction Costs Profit Supplier Costs Total System Cost

Elements of Cost Selling Price and Margin Cost of Goods Sold

Drive Out Costs Creatively Considering alternative products, designs, concepts, and services, or looking at different or alternative solutions to existing services, processes or applications, requires a multi-disciplined approach, making use of internal customers or subject matter experts as well as first-tier suppliers or prime contractors. Remember to create an arena that is friendly and open to suggestion, change, and innovation. When defining the elements of cost, focus on cost reduction opportunities .

The Creativity Formula CREATIVITY = Imagination + Inspiration + Illumination Remember: Most of the opportunities to reduce costs occur during the design, SOW, or conceptual stage for products and services— not after .

Should Cost Technique “Should Cost” as a price challenge technique: Provides cost analysis to buyers to be used for negotiations and determining price reasonableness Provides cost analysis in responding to price challenges and pricing issues from your internal customers and management Should costs are independent analytical estimates to determine the cost for manufacturing an item.

Building a Total Cost Model Profit /Fee Total Price of Contract Total Cost of Contract Costs to Meet Contract Requirements G & A Expenses Product Costs Other Direct Costs Direct Costs Indirect Costs (Other Allocable Costs Plus Overhead) Direct Labor Plus Direct Material (Allocation of Overhead to Labor and Material)

Should Cost—Supplier Cost Decomposition What is in a typical “Should Cost” report: A detailed description of the item. A list of references used in the analysis. A break down of cost and labor burden rates. Estimated unit prices for specified quantities. A break down of the material and associated cost and minimum economic buys.

Material—Terms & Definitions Term Definition Raw materials Materials in a form or state requiring further processing before they can be used Parts Items that, when joined with other items, are not subject to disassembly without destruction or impairment of use Subassemblies Self-contained units of an assembly that can be removed, replaced, and repaired separately Components Relatively simple hardware items which are listed in the specifications for an assembly, subassembly, or end item Manufacturing supplies Items that are required by or in support of the manufacturing process Inbound transportation and in-transit insurance Freight, express, cartage, insurance, and postage for goods purchased, in process, or delivered, which can be added to the cost of an item or as an Other Direct Cost (ODC)

Direct Labor—Terms & Definitions Term Definition Direct Labor Work performed by individuals which is directly related to a specific cost objective. This work is readily identifiable with a particular product or service. Indirect Labor Work performed by individuals which is not identifiable with a single final cost objective but is identified with two or more final cost objectives or an intermediate cost objective. One example of indirect labor is the work expended by the Controller of a company. The Controller’s work is not directly identifiable in the production of a specific product or service, since his or her work includes several projects or tasks. Labor Hour The unit of time by which direct labor activity is measured. Labor Rate The dollar amount paid to an individual per a given amount of time in consideration of work accomplished. Labor Cost The product (i.e., result) of multiplying labor hours by appropriate labor rates. Labor Category A grouping of workers with similar skills or expertise or trade classification. Labor Mix The combination of functional skills and levels of worker experience required to accomplish a given task. Basis of Estimate (BOE) A statement of the rationale used by a supplier/contractor to generate a cost estimate for a specific task or item to be produced.

Indirect Costs—Terms & Definitions Term Definition Indirect Costs Any cost that cannot be directly identified with a single final cost objective but can be identified with two or more final cost objectives or an intermediate cost objective Overhead Indirect costs related to specific operations, such as general product lines, organizational groups, and groups of contracts. Overhead is a type of indirect cost pool that is related to the specific operations of the firm. The three major types of overhead are material, labor, and fringe benefit (if not included in labor overhead). The three overheads differ in regard to which costs they include and how they are allocated. General & Administrative Any management, financial, and/or other expense incurred by or allocated to a business unit for the general management and administration of the business unit as a whole Business Unit Any segment of an organization, or an entire business not further divided into segments Home Office Expense The expenses of an office responsible for directing or managing two or more, but not necessarily all, segments of an organization Indirect Cost Pool A logical grouping of incurred costs identified with two or more objectives but not specifically with any final cost objective Cost Objective A function, organizational subdivision, contract, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of processes, products, jobs, capitalized projects, etc.

Profit—Terms & Definitions Term Definition Profit Represents the excess of revenue over applicable costs of performance and is associated with fixed-price type contracts Fee Represents a flat charge paid as compensation for services or supplies provided and is associated with cost reimbursement contracts Risk The level of uncertainty associated with specific factors regarding contract performance

SUPPLIER PART COST BREAKDOWN WORKSHEET—Part A SUPPLIER NAME: CONTACT: E-MAIL: PART NUMBER: VOLUME QUOTED: QUOTE NO: DESCRIPTION: EST. TOOL LIFE: DATE: DRAWING ISSUE: TOOLING CAPACITY @ Hrs/day: @ Days/Week: EXCHANGE RATE: RAW MATERIALS & PURCHASED COMPONENTS CURRENCY: # Item Descriptions (1) Item ID (2) Unit of Measure (3) Unit Cost (4) Total Cost (5) 1 2 3 4 5 6 7 Total Material Cost

SUPPLIER PART COST BREAKDOWN WORKSHEET—Part B LABOR AND OVERHEAD Labor Details Machine Data Overhead Detail # Operations Process Descriptions (6) Labor Rate (7) Std Hrs (8) Labor Cost (9) Op. (10) Mach. Size (11) Mach. Type (12) Var. Cost (13) Fixed Cost (14) Total Cost (15) 1 2 3 4 Total Labor Cost Total Overhead Cos t Total Manufacturing Cost (material + labor + burden) (16) Selling, General and Administration Expenses (17) Selling Price FROM TOOLING COST BREAKDOWN—TOTAL TOOLING COST QUOTED

Meeting the Competitive Demands of Supply Management through Supplier Ideas Solicitation If you don't ask, then you don't get. D T A

Meeting the Cost Reduction Mandate through Innovative Thought and Supplier Ideas Solicitation EPI and Concurrent engineering VMI/SMI/SOMI/ISM Cycle or lead time reduction Addition or elimination of value-added services Standardization Change procurement method/instrument Volume and forecasts Inbound freight and packaging Relaxed specification, material substitution, or service level improvements

Competitive Bidding— Use Ceteris Paribus Buyers normally look at the price (total cost) as stated on each bid to determine which supplier should be awarded the PO or contract. If there are any differences, for a fair evaluation, then allowances must be made for the differences in performance and pricing. When comparing performance or prices the buyer should use Ceteris Paribus assumptions (everything else held constant) so you compare “an apple to an apple, not an apple to an orange.”

Value is the for an or at the with the required and LEAST COST ESSENTIAL FUNCTION SERVICE DESIRED TIME and PLACE, and QUALITY RELIABILITY

What Is Value?—Four Distinct Kinds Exchange Value Cost Value Esteem Value Use Value

Value Analysis and Engineering (VA/VE) An organized creative approach to cost reduction Emphasis on function or use Identifies areas of excessive or unnecessary costs Eliminates non-value added activities

VA/VE Job Plan—Philips Example

Value Equation Value = Quality/Worth Cost

How To Get Started in VA/VE Identify what is it and what does it do? Obtain and review all available cost information Try to anticipate roadblocks Promote cooperation with VA/VE effort Seek guidance from those in management that assigned study

VA Is the Way—Ten Ways to Reduce Co $ t Use it to reduce cost in design, concept, or SOW Use cross-functional teams to approve product or service offering changes Consolidate supplier base using full service partners Reduce paperwork with supply base by using more EDI/E-Com Bundle any engineering changes or project scope changes quarterly Move towards common, simple methods and standard items or services used at multiple sites or facilities Use returnable dunnage or containers instead of non-returnable Identify and eliminate unnecessary testing, measuring and diagnostics Reduce the number of prototypes or models Consolidate “A” type purchases with suppliers’ if possible

Process of Determining Target Costs Target Costs = Cost subject to cost reduction activities + Costs not subject to cost reduction activities

Target Costing Process

Target Cost Breakdown and Impact

Target Pricing A reduction in the direct costs of a supplier’s cost profile has more impact on your bottom line than a major percentage discount in the supplier’s price. Negotiation based on cost allows you to challenge the logic of each element of the price.

Vendor Preferred Supplier Marketing, Purchase Orders, Proposals, Variations in Quality Partner/Alliance Redundant Capabilities in Systems, Activities that Add No Value, Approval Processes, Contracts, Excessive Communications and Controls, etc. Cost to Serve Cost to Serve Cost to Serve Profit Profit Profit Competitive Bidding Based upon Variable Profit Redefined (Streamlined) Process Reduces Cost and Yields Acceptable Profit Reengineered Process through Close Relationship; Maintains Profit and Greater Cost Reduction

Target Pricing Perspective— An Example For a service contract, the total quoted price was $260,565 . A 1% reduction on the price is one thing, but reducing each of the cost elements by 1% yields an actual price reduction of more than 2.5% . Individual cost elements are more vulnerable to argument than the price as a whole

Elements of Cost-Services Profit and Margin Other Services/Overhead Service Labor Materials and Supplies Occupancy Equipment and Technology COSP

Opportunity Knocks Sometimes the buyer has a chance to gain the upper hand. This occurs when the supplying industry’s margins are healthy because selling prices rose faster than their costs escalated. The ultimate objective is to maximize the value of each purchase spend dollar.

Low (Best) Cost Country Sourcing (LCCS) Near Sourcing Domestically Outsourcing Overseas Indigenous Localization Transfer business to provide materials or services by swapping out overseas suppliers for closer proximity to home country Transfer internal dept,activity or process to more capable suppliers or contractors to lower cost of ownership Find and develop local indigenous sources to support country markets for low cost country plants and distribution facilities Adapted in part from Ariba’s Executive Overview on this subject

LCCS and Supply Chain Risk Although significant cost savings opportunities exist , the risk may be greater when dealing with unfamiliar suppliers, different business protocols, language barriers and new cultures.

Landed Cost LC = TSC  SU Note: Total Selling Cost (TSC) and Selling Unit (SU)

Let’s save ,We can do. Suggestion by MIS according to Cost Reduction Plan Rohm Electronics(Thailand) MIS 307

Cost Reduction Plan Employee, As importance Human resources for Business Everyone has the right to success in their way. Everyone also has helping hand to help Business grow up and efficiency. To Save our time and supply are the way to help company growth. Rohm Electronics(Thailand) MIS 308

Factor to Consider as Primary Factor Supply it made cost (Direct) Stationeries Plain papers for printing Ink cartridge for Laser printer and Facsimiles Re-think ,may be unnecessary to uses them a lot. Did you use them as usual? Rohm Electronics(Thailand) MIS 309

Factor to Consider as Secondary Factor Electrical Power Water Supply Communication Charge M/C, Equipment maintenance Times and Times Used less,Save more. Turn off ,when go for lunch.. Rohm Electronics(Thailand) MIS 310

Direction Plan Education Participation Application Rohm Electronics(Thailand) MIS 311

Education To promote and reinforce employee realized about to uses every resource for the best efficiency and productivity. To reduce times, supply and prevent any lost as best as we can. To educate users can be use equipments or machines correctly Rohm Electronics(Thailand) MIS 312

Participation To promote users for brain storming or suggestion to company according to How to save energy? Save supply or material. Reward for anyone who give the better way to save and possible when operates Rohm Electronics(Thailand) MIS 313

Try this way,Please ! Change Our Habits when intend to print any to Printer. Remind Ourselves ,When we print to printer ,you are using Electrical Power , Machine maintenance fee , Plain papers , Ink Cartridge and our times when walk to printer and wait. Rohm Electronics(Thailand) MIS 314

Analysis When we print. Rohm Electronics(Thailand) MIS 315 Your Times Electrical Power Plant to paper Your Brain Ink Cartridge

Did You see ,they eat many things Do we have another way to reduce cost by “paperless concept”? Yes,We have . Unless you still do it as usual. Just looking for other way. Rohm Electronics(Thailand) MIS 316

Have you ever do like this? Rohm Electronics(Thailand) MIS 317 You always print every job to printer? You might be paid a lot of money for Plain papers supply, Ink cartridge, Maintenance fee, Electrical Power What? You always note on printed paper? You have the right to do, Sometime is the good idea to mark importance thing, But not good for You need to send this document by fax to outside..If you have another way.. You always send documents by fax? You have the right to do also, Sometime we cannot avoid to send by Fax (because receiver got only Fax M/C), Then you have to dial, wait until establish connection, and transmits. .sometime your documents have not successfully transmit after you left fax m/c to your desk…Hur wasted my time…

You have ever did,Yes me too . You are in the most people. don't worry. But It’s never too late for change the way… We considered our office Equipment and resource can be response this way as well. Rohm Electronics(Thailand) MIS 318

First of All, When you’re going to print…. Change your way of thinking , separated the job which can’t avoid print out to printer and paper. Maintaining your way but ensure and ask yourselves what “You really need to print out!?” Try to print preview and use print document to file like “PDF ”,Many application can do it. (pdf –portable documents format) This way can save your paper, Ink,electrical power and your time to walk to printer(if you’re closed printer ,it’s ok) Rohm Electronics(Thailand) MIS 319

Easy to print by “PDF printer” When your PC has been installed application like “Adobe Acrobat standard ”(not acrobat reader – this one only read can’t print) You could select printer to “pdf ” (if not installed call mis) In case of not allow anyone edit your data Rohm Electronics(Thailand) MIS 320

Also easy to send by e-mail. When you have successfully printed to pdf File . You could open it by Adobe Acrobat reader to view your result, or Print if you need (finally) Or, attached e-mail to people have e-mail address. Rohm Electronics(Thailand) MIS 321

Suggestion#1 MIS has been prepare simple system for manage document. Multifunction Machine as Ricoh which we know and use well for copy document. Other function they can store document as image or scan image/document and send to client PC. Rohm Electronics(Thailand) MIS 322

Process Flow (present) You need to send information as image and report as table from MS Excel (printed) Rohm Electronics(Thailand) MIS 323 users PC Printer Fax

Analyses your job Print to printer (1) Walk to printer (may stop to talk your colleague)(2) To find and pick up your paper,stop to consider your out put (3) Oh..paper jam, try to released it (4) Ok. Excellent printed, Then just write down some comment in paper (5) Finally ,walk to Fax ..waiting someone dial(wrong number) (6) It’s my turn,,You insert your paper and dial no.(7) OH O ,line busy try again(8) Ok ..transmitted. Go back to your desk and sit(completed) Rohm Electronics(Thailand) MIS 324

Your printed was terrific.. A lot of step before you successfully got your printed material. Right? You don’t know anything happen. Rohm Electronics(Thailand) MIS 325

Process Flow (soon) You’ll feel better. Rohm Electronics(Thailand) MIS 326 You could use above m/c when you need to print or fax ,finally but not frequently uses it. Internet You can send and received information from your PC Intranet

Process Flow (soon) You’ll feel better. Rohm Electronics(Thailand) MIS 327 You could use above m/c when you need to print or fax ,finally but not frequently uses it. Internet You can send and received information from your PC Intranet

Key area where you can implement cost reduction methods with significant results. 1. Raw material procurement: 2. Logistics-Inbound and Outbound: 3. Warehouse and Stores: 4. Manufacturing Process (Production) : 5.Energy, fuel & Water 6.Information Management 7. Finance 8. Human Resources 8. Sales & marketing

FEW BASIC IDEAS PROCUREMENT IT CAN BE DIVIDED INTO TWO MAJOR GROUP A. PRODUCT B. SERVICES Raw material purchases constitute around 60-65% of the cost of product; hence any savings on this front would be significant for profit of the organization.

1. BULK BUYING: A. The company which has units spread across the geography can negotiate better price when the volumes are high, instead of buying for individual units its recommended to have central buying policy. B. You can negotiate better price if you can put your entire annual consumptions to a vendor and ask him for annual rate contracts. Bulk buying should be supported by bulk handling and storage system. 2. OPPORTUNITY BUYING: Most of commodities and raw material has seasonal Cycle of prices they peak and fall in intervals hence you have to look for the lowest price to buy in bulk and get the price advantage.

LOCAL VENDORS: Vendors should be located in close vicinity of the manufacturing area that helps lower freight charges and keeping low inventory. Only when it becomes economical to source from international market . eg crude oil from Middle east, Palm oil from south east Asia . 4. PARTNERSHIP WITH VENDORS: It is highly recommended to have partenership with vendors in either having equity or technical collaboration so as any savings on their part would be passed on to customer. 4. E-PROCUREMENT: Putting up Tenders on Internet and setting up auction for the quantity to wider vendor base. Cutting cost on conventional way of asking tenders etc

LOCAL VENDORS: Vendors should be located in close vicinity of the manufacturing area that helps lower freight charges and keeping low inventory. Only when it becomes economical to source from international market . eg crude oil from Middle east, Palm oil from south east Asia . 4. PARTNERSHIP WITH VENDORS: It is highly recommended to have partnership with vendors in either having equity or technical collaboration so as any savings on their part would be passed on to customer. 4. E-PROCUREMENT: Putting up Tenders on Internet and setting up auction for the quantity to wider vendor base. Cutting cost on conventional way of asking tenders etc. for the material. In Reverse auction where you ask the higher bidder to supply items. Many companies have fulltime dep’t for e-sourcing. 5. BUYING FROM TAX EXEMPTED AREA: In Several countries the federal Government have certain tax exempted area where they allow manufacturers to set up their plants. In common parlance its called Tax holidays. Look out for regions and source material from such places. 6. REMOVING INTERMEDIARIES: Wherever possible buy from the OEM, directly from manufacturer not for any agent, distributors or commission agents.

7. NON – BRANDED ITEMS: Look out for non – branded items for non-critical areas as branded items charge premiums for their product. 8 RECYLING AND REUSE OF PACKING ITEM: All items comes into some form of secondary packaging out of which some of the items can be reused or recycled .Ask vendor tot reuse/recycle packing item to recycle or re use them for next items eg pallets, sacks & bottles, trays etc 9 CONVERSIONS: Buying primary material then giving it to processor instead of buying directly from the manufacturer. E.g. CBB conversion in FMCG industry.

10. ECONOMICAL ORDER QUANTITY (EOQ): The most basic principle of placing an order is to place an EOQ for material, which would reduce inventory. This figure can be arrived with your ERP software. 11. MAKE AND BUY DECISION: Certain items can be made in house rather than buying from out side . 12. NEGOTIATIONS: The price should always be negotiated with all information with you. Prices are reduced when you are informed and are aware of prices in the market. Always have an alternate quote for items negotiated. 13. INSPECTION: By eliminating inspection at factory and asking vendors to provide materials as per standards and completing inspections at their end we can eliminate delays and manpower used in these kind of activities. 14. SCRAP MANAGEMENT : Segregation of scrap generated in a manufacturing unit is important . It has been observed that all scrap are sold as lot to scrap merchant who in turn segregate in different items and sells it at higher rates . You can increase the sale price by asking several vendors to bid for the same lot .

15. SERVICES: All organization has certain services to be performed for smooth functioning of unit. E.g. hygiene, security, maintenance, safety & pest control, plumbing and building repair, which can’t by wished away and add cost to operations. In earlier days of factory operations company employees did these but now savings can be generated if these activities are out sourced. Critical areas can be negotiated into some form of annual contracts and rest should be kept for call basis services.

LOGISTICS Raw material and finished goods are to be transported either into the factory or from the factory to other destination. Transportation charges contribute significantly to cost of product. MAP ROUTES: By mapping all routes and then decide on the shortest route for both inbound material and out bound material. IN TRANSIT DAMAGES : Check for In – transit damages report Improve upon the secondary packing and the way boxes are filled into he container LOADABILITY: Check the load ability of products into containers. i.e. utilizing most of space into container. Load ability is term used for calculation of no of boxes per unit is of container. ANNUAL RATE CONTRACTS FOR TRANSPORTATION : Always go for annual rate contract with transporter STORE AND WARE HOUSE : SPACE: Racks and shelf or pallets should be arranged in such manner that material could identified and can be loaded or unloaded easily manually or with forklifts . If space is constrain then you can have mezzanine floor or folding racks where the pallets can be kept. Always stack material on pallets; this helps in easy movement of material systematic. Always standardize your stack height so as to avoid any falling of material. FIFO: Generally the items has to be placed in such a manner that the first in material should be first to move out.

LOW INVENTORY: Check all slow moving items or obselete items segregate them and scrap them .Use EOQ for ordering. Having vendor in near factory vicinity helps in maintaining low inventory . As they can be negotiated for volumes. Materials with low lead times can have minimum inventory . PRODUCTION MAJOR AREA OF IMPROVEMENT HAS TO BE IN FOLLOWING AREA 1.LABOUR PRODUCTIVITY. HANDLING: The handling of product and raw material should be reduced either putting of conveyors or automatic transfer to the machine. MOVEMENT: To have minimum movement of manpower for getting materials, tools, shifting etc. REWORK : To have zero defectives and rework as it is nothing but pure waste . The first step towards elimination is to adopt standards like ISO –9000 & GMP or in-house benchmark.

PHYSICAL STRESS : Study the positions of worker while working eleminate stress generating position , environment which would help in better productivity . 2. MACHINE PRODUCTIVITY. CHANGEOVERS: When you have batch process and have large product mix then you would have change over .To avoid change over time have automated change over or should have ready made spare to be fitted into machine in place. OEE ( OVERALL MACHINE EFFICIENCY): Overall machine efficiency should be calculated recorded and machine with least efficiency should investigated for improvement. It is highly recommended to go for TPM. A manufacturing plant should always have a schedule maintenance program. PRODUCT :Savings can be generated if the product design / shapes or INGREDIENTS are slightly modified and presented in the same packaging . PACKAGING : Savings can be generated in primary and secondary packaging Check the cut of length of Wrapper/laminates/sheets and check the product dimension you would see that there are large tolerances provided by manufacturer you can reduce the cut off length hence can have substantially savings . Avoid excessive packaging. Secondary packaging like CBB can be checked for their bursting strength and lower ply CBBS can be used for Packing.

WASTE REDUCTION : All leakages , spillages should be plugged . Under/overweight of product to be monitored so as to reduce the material variance .check weigher ‘s can be installed for this purpose . USAGE OF BYPRODUCTS : Certain items which are by product of process can by recycled , reused and sold for some good value . ENERGY Energy plays an critical role in cost of production in some places the cost of electrical and fuel cost are very high for such unit it becomes crucial to adopt energy saving techniques and save energy . AWARENESS DRIVE : Launch awareness program in the establishment, promoting ideas in house and awarding people / dept for implementing energy saving ideas. Switching of equipment not in use is the best method to reduce electricity consumption. LIGHTING: Low wattage lighting are now available in ratings of 18/20 watts with good lux ratings and can be retrofitted with minimum cost . You can replace the conventional tubelight with them. Buildings or workplace should be designed in such a way that it have maximum period of sunlight exposure during day time .

MOTORS: All manufacturing units have various types of motors. Conduct a study for ratings, current during load and compare with the ratings, you would surprised to find that for most of the places the motors installed have current load below the ratings, these motors can be replaced by energy efficient lower hp motor. BELT DRIVE: Where ever possible replacing belt drive or chain drive with geared motor would result in savings. VARIABLE FREQUENCY DRIVE: Add variable frequency drives to variable load application like blowers, Motors, Air compressors. PUMPS: Check the load/quantity of discharge of pump and compare it with motor rating just by reducing the impeller dia you can save electricity. AIR COMPRESSORS: We can save energy by having VFD installed for motor; reducing intake air temp also reduces the electricity. Detecting leakages in compressed air pipeline also saves energy. Also removing excess bends and dropping s in pipeline layout reduces load on compressor. You can ask comp manufacturer to install motor stop arrangement on no load requirement. DISCONNECT: Disconnect power to all idle machinery in plant. AIR CONDITIONING: Proper setting of temperature can results in savings of power. Putting up films on windows can reduce heat load. You can put vapor absorption unit instead of motor driven compressor for Central air conditioning. Spot cooling instead central air conditioning also results in saving

COOLING TOWERS: FRP blades could be used instead of aluminum cast blades to reduce load on motor for cooling tower fan s. Thermostat can be installed in cooling towers for unnecessary running of cooling tower when the desired temp has been achieved. OVENS & FURNANCES: Heat loss from the oven results in increase of fuel consumption hence proper insulation is required for prevention of heat loss. Waste heat can be utilized for preheating air, feed water or general purpose heating. This results in significant saving of power. FUEL EFFICIENT BURNERS: Conventional burners can be replaced by high-pressure monoblock burners, which are fuel-efficient. ALTERNATE SOURCE: Alternate source of energy can be used to reduce cost of Energy. Solar energy can be utilized for lighting, heating water etc. Wind energy can be used for ventilators Alternate fuel like bio fuel/bio mass gas can be used in some applications. LDO /HSD can be easily replaced by LNG / CNG. WATER: Water used from municipality sources are charged for some industry they are major component of production like beverages, power plants etc. Replace water-cooled systems to air-cool type eg Air conditioning system. Replace natural draught type cooling tower to forced close type cooling towers. Re cycle wastewater after ETP OR STP to be utilized for gardening or flush system of urinals. Washings to be replaced by mopping to clean the floors. Put sensors in place at bathrooms, urinals etc for conservation of water.

INFORMATION TECHNOLOGY: On advent of newer technology and software storage of data, sharing, transferring data have become much easier. Now decisions are made more fast and accurate by installation of ERP software. These software are boon for banking institution etc. By in stalling ERP software like SAP R/3,R/5, BAAN, and ORACLES etc we can save much of our time from locating and analyzing data’s. Package covers modules for Materials management. Production planning. Production records. Finance Module Sales Module. Etc Similarly by installing Internet and intranet facility inter office communications can be improved drastically which have in turn resulted in higher productivity and saved on stationeries eg letter pads, memo etc. HUMAN RESOURCES While doing important jobs like hiring, training, Appraisal etc HR plays important in decisions of outsourcing certain activities which can be done by third party thus reducing manpower and generating savings Activities, which can be outsourced, are 1. Security 2. Catering or canteen services 3. Hygiene 4. Loading and unloading of materials 5. Maintenance (fire fighting, Utilities, Admin, Air conditioning units, Telephones, Computers etc ) 6. Building Repairs.

ACCOUNTS AND FINANCE Basic contribution of accounts to cost reductions are basically linked to following major activity. BUDGETING: Budgeting is prime function of accounts and finance where things are budgeted for a financial year and activities are then monitored through out the years any negative variance are highlighted in monthly reviews. COSTING: Prepare or calculate price of product taking into all cost involved in production as well as other overheads. Decides when to increase the price or lower the price of the product. HANDLING PAYMENTS/SALARIES AND RECEIVABLES FROM SALE: Enter into an arrangement with any reputable bank for disbursement of payments through their channel instead through company Personnel. This results in savings in terms of manpower and delays in manual disbursement.

SALES AND MARKETING : ADVERTISEMENT : Instead of huge billboards and tele advertising you should try internet , targeted customer ,inviting customer to the shop floor like school children , setting up effective customer care office . Hirirng outsourced people for marketing after giving them short PRODUCT MIX : Larger product mix eats up own market share hence reducing and focusing few mega brands would generates more profits. DISTRIBUTION CHANNELS: Distribution channels like AWS and Retailers should be selected in such a way that the products reaches the shelves on shortest Period .

20 keys for production development; reduce time and cost

The system 20 keys include Key 1: Because lot of textile materials was on the floor near cutting machine and sewing machine cleaning and organizing workspace is necessary. Workers in cutting room and sewing room must have clean and ergonomic workspace with specially tools for sewing (for sewing different seams and border). Key 2: The rationalize system is "natural“ work flow of manufacturing with a lot of the different products (shirts, blouses, skirts and work wear) and description of the new technological specifications for each products. The technological specifications are very big problem in our garment industry Key 3: All the employed must be activity ideas and experience. The small group of workers must talk about problems and quality of product. Key 4: The work in progress in not desirable, because new system reduction of good stocks

11 Q ual i t y assu r an ce sys t em 10 Time control and commi tme nt 12 Dev el o ping your supp liers 16 Pr oducti o n Scheduling 5 Q uick c hange o v er t ec hn o l o gy 4 Reducing inven t o r y 8 C oupled ma nu f ac turin g 15 S k ill Vers a tility a nd cr o ss t ra ining 13 Elim inating w as t e ( “t reasu r e map”) 19 C o nser ving energy a nd ma t eria ls 18 U sing in f o rma ti o n sy s t ems 17 E ff ic iency c on t r ol 6 Manu f ac turin g v a lue a nalysi s 14 Em p ow er ing w o r k ers 7 Ze r o m oni t o r ma nu f ac turin g 9 Main t a ining equipment Bet t er (Q u a l i t y ) C h ea p e r ( c ost) Faster (m a nu fac t u ri n g Time) 2 R a ti o nalizing the sy s t em/ ma nagement of objectiv es 1 C lea ning a nd o r ganizing 20 Lea ding t ec hn o l o gy/ Si t e t ec hn o l o gy 3 Improv ement t eam ac tivi t ies 20 K e ys

Key 5: The new technology for garment production needs flexibility for manufacture in accordance with market requirements. Fast changes in technology as well as customers' expectations make a producer keep improving his fashion products and quality in order to keep his position on the market. Markets researches, consumers’ wishes, requests, and criteria mean inevitable and dominant task for a producer of garments, because by obtaining all these information a production can be directed, business planned with advanced defined aims and strategies. Marketing enables greater flexibility and better organization for more successful reaction to market demands. Market analyses are perhaps difficult procedures for fashion industry, because they need time to see strong sides and opportunities although they are too eager to identify weaknesses and threats. It is important to be aware that once when weaknesses are identified, some steps to change them can be taken by training, so there is possibility to make it a strong side. That's why BSC, SWOT (on the table 1) and Ansoff's matrix are useful techniques used to find out strong and weak points in a fashion industry, on the figure 3.

Strength Weakness Advantage of geographical location 2 Liquidity 5 Size of garment manufactures 2 High production expenses 3 Development of infrastructure 3 Calculation methods 3 Range of production programme 3 Problems with sale 2 Industrial tradition in region 2 Low level of technology 3 Production capacity 2 Profit trend 2 High quality of garments 3 Structure of capital 3 Stability of suppliers 2 Decision - making speed 5 Energetic collecting of all resources 4 Lack of market information 4 Harmonization of production programme 2 Difficult enter to new markets 3 Total value 26 Total value 33 Alternative strategy of SWOT - Analysis of Opportunities and Threats (mark 1to 5)

Key 6: Implementation kaizen is working for the better productivity. In garment industry is lot of orders for many different kinds of clothing, the different colour and textile materials. Every technological operation must to analyze (study of work). In the table 2 is analyze of the working on automat for sewing button hole with MTM (Methods Time Measurement) Key 7: Zero defect in manufacturing with new sewing automat machine Key 8: Reduction of good stocks Key 9: The preventive maintaining cutting and sewing machine and tools (Total Production Maintenance) Key 10: Control time of manufacturing Key 11: A Poka-Yoke device is one that prevents incorrect parts from being made or easily identifies a flaw or error. Error proofing is a manufacturing technique of preventing errors by designing the manufacturing process, equipment, and tools so that an operation literally cannot be performed incorrectly (CAD&CAM, CNC sewing machine for on-line monitoring of seam quality). Key 12: Co-operation and reliability between the customers and suppliers Key 13: The manufacturing without failures Key 14: The team work and motivates all employees Key 15: Training of the employees. Educating the personnel about the new process and training the workers in the usage of new technology and training the management to offer support to the employees. Key 16: Definition of the new work flow and modelling the steps of the process. Implementation of new organizational structures lake as European Modular System, in the figure 4

matrix in a our garment industry Product Market Today New Today Market Penetration 1.More orders by existing customers and consumers 2.Winning customers and consumers over From competitors 3.Converting of nonusers to users 4.Opening of new shops/stores 5.Extension of working hours of shops/stores 6. Price reduction Development of fashion product 1.Modification of garments 2.Different quality levels of garments 3.New design of garments 4.Strong retail brand 5.Spreading of garment range 6.Eco- tags on clothing New Development of fashion market 1.New segments of marketing 2.New channels of distribution 3.New geographical region Diversification 1.New supply on a new market 2.New shops on a new market

Key 17: Control tact time on every 2 hour in sewing room Key 18: One of the most important conditions for successful carrying out the production procedure is a good organized technical preparation of work. Creation of the plan of activities with CPM or PERT methods or with computer (like as Primavera Project Planner in the figure 5), project and construction preparation of clothes with CAD system and cutting textile materials with CAM system, on the figure 1. Key 19: Reduce energy and textile material (CAD\CAM) Key 20: Transfer to the new technology with benchmarking and research and development new fashion produce

Fashion companies that do not invest in the development of products and production technology get into danger and can't "keep place" with fashion trend although they try hard. Also, our garment companies must exploit the breaking power of technology and its capability to break the rules on which the traditional hierarchical organizational structure is built. The companies must search for new ways of working in a creative and innovative way. find answers to questions such as: - Where are we today? - Where do we want to be in a few years? - How do we go about making the changes happen in manufacturing? - Who will follow through with the plan of changes? - How much or how many and which sources do we need? Etc.

The analysis of method 20 Key in our company for men's and women's wear in this paper demonstrate us one of way for change organization in our garment manufacturing, because: - reflects and supports target attainment and quality values for short-term and longterm periods, - development and engagement of all employees for improvement within the organization, - resources of an organization (finance, IT, height-tech textile material and new cutting and sewing technologies) are coordinated with the quality of garment and organization values, - overview of all processes in a garment company and change of the existing combination of processes, emphasis on shortening the technological time, - indirect connection with customer satisfaction, - organization will be successful only if it adequately motivates its employees, - quantitative evaluation as better quality, increase of productivity and reduced stocks.

Finance & Accounting for the enterprises

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Finance & Accounting for the enterprises