Financial Express :: Financial Newspaper of Bangladesh http://www.thefinancialexpress-bd.com/print.php?ref=MjBfMDdfMD...

Thursday, 04 July 2013

Garment costing - the deciding factor in textile business

Nazmut Tarek

The ready-made garment (RMG) sector in Bangladesh has practically grown from nothing since the 1970's, increasing by 20
per cent per annum. Despite concerns over the end of the quotas in 2005, the RMG industry in the post-MFA (Multi-Fibre
Arrangement) era has prospered instead of declining. The country has remained a successful producer-exporter of low-basic
items of clothing and is positioned among the leading garment exporting nations of the world.

The skyrocketing labour wages in China are pushing the apparel retailers to consider alternative options, which can open
more windows of opportunity for Bangladesh. But we shall still have to compete with India, Indonesia, Cambodia, Vietnam
and some other countries.

The competitive prices, low costing, the regional advantage of labour, customer services, grey market, adoption of new
fashion trends, best logistics and the transportation system have made the customers more choosy. If you ask higher
prices, you may lose business. On the other hand, if you ask less, then also you may be a loser.

So, it is a great challenge for the people who get involved in textile business to keep their garment cost in the proper range
to continue the business and make profit.

Garment costing: Garment costing is the deciding factor in fixing prices and what is important to do in all stages is to
proceed with caution about purchase, production, marketing, sales etc. It encompasses all the activities like purchase of
fabrics and accessories, processing and finishing of fabrics, sewing and packing of garments, transport and conveyance,
shipping, banking charges and commissions etc.

We must be aware that there are always fluctuations in costs of raw materials, yarns and charges of different finishing
processes.

To find out the exact costing of a garment, the following things should be taken into consideration-fabric consumption, fabric
cost per kg or yard, fabric cost per garment, trims and accessories cost, cost of making, print embroidery and washing cost
and other charges including lab charges, courier charges, buying commission etc.

Fabric consumption: In garment business, the issue of fabric consumption is very much important as it is the saving point in
the cost sheet. For knit and sweater garments, consumption is calculated in kg and for woven garments the consumption is
calculated in yard. How much fabric is required to produce a garment can be determined applying the mathematical system
and the marker planning system.

The mathematical system is a system of rough estimation. Consumption of a sample garment or consumption as per
measurement sheet is calculated mathematically by measuring the area of length and width of each part of each piece of a
garment.

The marker planning can be done manually or by applying the CAD/CAM system. Now-a-days, the CAD/CAM system is
followed in the manual marker planning. With use of the CAD/CAM system on an experimental basis it can be observed that
about 10 per cent of materials are saved compared to the manual method.

In the cost sheet preparation, which consumption system should we follow-mathematical system or CAD/CAM system?

The old concept is to use the mathematical system in the cost sheet and the CAD/CAM system in bulk fabric booking after
order confirmation. It will cause some savings in fabric costs.

1 of 4 7/9/2013 12:51 PM
Financial Express :: Financial Newspaper of Bangladesh http://www.thefinancialexpress-bd.com/print.php?ref=MjBfMDdfMD...

Observation shows it is far better if we use the CAD/CAM consumption system in the cost sheet, because, if we know the
actual fabric consumption as well as fabric prices, it is easier for us to hit the target price at the first shot.

Fabric cost: Fabrics cover 60-70 per cent of the total garment cost. Fabric cost depends on certain elements like fibre
content and spinning process, Fabric GSM, knitting or weaving process, types of dye used, finishing process, shrinkage and
the percentage of wastage.

In case of different fibre contents and yarn count, the yarn prices will be different. Besides, because of different spinning
processes, the yarn prices will vary. For example, in case of same fibre contents and yarn count the combed yarn is costlier
than carded yarn.

Fabric GSM (Gram Square Meter) plays an important role in knit fabric costing. For woven fabrics the EPI-PPI (Ends Per
Inch-Picks Per Inch) plays a more important role than GSM. And even when GSM is similar, the cost of voile fabric with finer
yarn is more than PPI.

Weaving (for woven fabrics) and knitting (for knit fabrics) also play a part in the fabric cost. The weaving cost is influenced
by the beam size - if the beam is small in length, the cost will be more. Different weaves like plain, twill, satin etc and
different machines are used. Similarly, in case of knitting the cost is effected by different fabric types and different machines
used and their configuration.

In the dyeing process, if the dyes are lighter in shade then cost will be low. Some dyes are more expensive than others. For
example, Vat Dyes are more expensive than reactive dyes. Within the same dye class, some colours are more expensive
than others. For example, turquoise and red are more expensive.

Finishing cost depends on the final performance required from the fabrics. For example, if we want wrinkle-free
performance from fabrics, then wrinkle-free finishing cost must be added to the finishing cost.

Shrinkage and wastage are the integral part of fabric cost. Generally, a minimum shrinkage of 5-7 per cent is acceptable.

Trims and accessories cost: Except fabrics, the items which are attached to garments are called trims and the items which
are used for the finishing purpose are called accessories.

In most cases, the trims and accessories cost plays the most important role in garment costing and right assumption of
trims and accessories-run smooth business.

Trims and accessories are mainly considered in view of the trim sheet or accessories overview. At times all the items are
listed on the bill of material provided by the buyer, but you are going to need them eventually in making the garments. The
examples are packing items, interlinings, buttons, thread etc.

In a garment there may be some local trims and may be some other trims which we have to source from overseas. In that
case, we must consider C&F (cost and freight) price or Air Freight Charge with the unit price.

Cost of making: The cost of making (CM) is a global factor in textile business. Buyers always choose those countries that
can keep their CM within a reasonable margin. Due to the rising labour cost, high import duties and the rising Yuan against
Dollar, China may lose the 'Cheap' tag. Their rising CM could open the gate for other Asian counterparts like Bangladesh, if
we could keep a strong backward linkage.

Different factories follow different methods to determine their CM. To find out the cost of making, most of the factories
follow the rules below:

Cost of making = {(Monthly total expenditure of the factory/26) / Quantity of the running machine of the factory of the
following month) x (the number of machines to complete the layout)}/[{(Production capacity per hour from the existing
lay-out, excluding alert and rejection)x8}]x12/ the dollar conversion rate.

In a rough estimation, the cost of making = Overhead machine cost x required machine / Produce Quantity x 12 / the dollar

2 of 4 7/9/2013 12:51 PM
Financial Express :: Financial Newspaper of Bangladesh http://www.thefinancialexpress-bd.com/print.php?ref=MjBfMDdfMD...

conversion rate.

However, normally in Bangladesh we calculate the CM of any item considering the overhead sewing machine cost at Tk 2500
to 3000 for a non-compliance factory and Tk 3500 to 4000 for a compliant factory.

In Bangladesh, CM is considered with the targeted profit. So, the Final CM is the addition to the Targeted Profit and the Cost
of Making. The most important thing in the Final CM is to know the Buyers' Margin. If we know the Buyers' Margin or the
Buyers' Market segment, we can quote the CM correctly.

Print, embroidery and washing cost: If there is washing, print or embroidery work, then it will not only include the individual
cost but at the same time create an impact on fabric costs. For washing, print and embroidery of fabrics the process loss
increases to 1-2 per cent, 3.0 per cent and 3-4 per cent respectively.

Washing cost depends on the type of washing technique applied to a garment. Print cost depends on the types of print, the
size of print and the number of colours used in print. For embroidery, costs are considered for the number of unit (1 unit
=1200 stitches) and the number of colours used.

Other cost: Except regular costs, there are some other costs which need to be considered to protect the cost sheet. These
are freight charge, testing charge, commercial and courier cost, buying commission, deferred payment (if applicable) etc.

The freight charge depends on shipping terms, the commercial cost depends on payment terms while testing and courier
costs are also variable with the buyers' market segment.

Things that have to be considered in garment costing: To err is human, but in garment costing there is no scope for making
error. Here, small mistakes can cost a big amount of money. Even small mistakes in typing can cost thousands of dollars.

Micro detailing is crucial in preparing cost sheets. Knowing the competitor is the secret for becoming an astute negotiator.
All businessmen make it their business to know the competitors they are dealing with. This knowledge gives them an extra
edge while quoting the prices to the buyers. Are they competing with suppliers within their own geographical location or are
players from other parts of the globe vying for the same orders? We need to quote the right price in short, and we have to
be accurate. If we over-quote, we run the risk of losing the business to another supplier, and if we under-quote, we will lose
money.

An understanding of the buyers' margins can help us hit the buyers' targets more accurately in one go. More often than not,
we may end up getting a higher price than we aimed at in the first place, and still make customer happy by meeting their
targeted margin goals. You need to know what level of market your customer operates in, e.g., luxury segment, middle
segment or mass market and what margin of profit they need to make to run a profitable business.

If our price quote is still not satisfactory enough in view of the buyer's target price, by all means we should make an
alternative proposal to the buyer. Give options with suggestions to, maybe, delete a trim or change the fabric source or
whatever it may be. But give alternative suggestions to meet the customer's requirement in a way which is a win-win
situation for both parties.

To meet this challenge, an organisation should focus on continuous development. They must practise the SWOT (strength,
weakness, opportunity, target) analysis to assess the financial health of the organisation. They should keep on negotiating
prices with clothing suppliers, accessories suppliers considering past relationship. They should keep on watching market
trends, fashion cycle, customers' habit and budget.

Last but not the least, we should always keep in mind that competition makes us realise the importance of innovation and
research. Innovation and research are essential to lead time reduction and quality development. Timely research and
innovation can keep the organisation up-to-date to minimise the risk of being out of market or competition.

The writer is an engineer.

tarek_tex32@yahoo.com

3 of 4 7/9/2013 12:51 PM
Financial Express :: Financial Newspaper of Bangladesh http://www.thefinancialexpress-bd.com/print.php?ref=MjBfMDdfMD...

Copyright © 2012
International Publications Limited.
All rights reserved

4 of 4 7/9/2013 12:51 PM