(The whole article is prepared based on a \$10 sports shoes (Factory Price) retailed \$50)

This time, let’s start with some quick practical case from the perspective of price,

#### CASE1:

If a purchaser is asking you to be competitive by 10% from his existing source, that means he is asking you to reduce the LOH by 80% at least.

Is that even practically possible?> Yes, you have to give up your margin (Don’t you do that today?).

#### CASE2:

Factory Y is paying 3 times more average LABOR wage compared to Factory X. Yet, Factory Y is competitive by 2% in FOB.

Is that even practically possible?> Yes. factory Y has to be efficient by +30% than factory X

(same as Bangladesh (X= 45% overall efficiency) and China (Y=75% overall efficiency) today).

#### Any factory barely have any control over rest ≈85%.”

Means, >85% of the price is already fixed (measurable and comparable with competition), and only part to make a difference is 15% of the total; i. e, Labor and overhead cost (competitive advantage). Surprising? Well let’s have a look into the full story.

## Retailers price breakdown: \$50  So, now let’s start with LOH; To calculate LOH, we need 3 information,

### a. Cost of a minute in the factory

Total cost of the factory for a month (fixed + variable)/ number of working minutes in a month* = Cost of a minute

*timeline can be chosen as per the need (you can consider month or year or even a day)

EXAMPLE:

If there are 270 direct and 30 indirect worker (manager/ supervisor..) in the factory; the total working minutes of the factory is 270 direct workers X 25 working days in a month X 8 working hours every day X 60 minutes in a hour = 3,240,000 minute.

 Salary = (3,000,000/3,240,000) = 0.93 Taka/Minute Interest = (1,200,000 /3,240,000) = 0.37 Taka/Minute Depreciation = (1,000,000/3,240,000) = 0.31 Taka/Minute Rental Expense = (700,000/3,240,000) = 0.22 Taka/Minute Transportation = (500,000/3,240,000) = 0.15 Taka/Minute Repair & Maintenance = (1,000,000/3,240,000) = 0.31 Taka/Minute Utility Expense = (800,000/3,240,000) = 0.25 Taka/Minute Total cost of Minute = 2.53 Taka/Minute (a=\$0.03)

### b. SAM of a model

Number of working minutes needed to produce a pair of shoe or, the time a single worker will take to make the pair.

EXAMPLE (I will use the simplified version to keep the ‘sense’ useful for all):

Measure the time of each operation by a stop watch,

operation A+ operation B+ operation C+ . . . . .  .+ operation Z= SAM of a specific design   (b= 25min)

### c. Efficiency of the factory

The percentage ratio of ‘useful’ minutes to make the shoe and ‘used’ minutes.

EXAMPLE:

270 workers in a line (cut to pack) works for 8 hours a day produced 2,000 prs and SAM of the shoe is 25 minutes.

 Total minutes produced = (2,000 x 25) = 50,000 minutes Total minutes attended = (270 operator x 8 hours x 60) = 129,600 minutes Efficiency = ((50,000 x100)/129,600)% = 38.58% (c = 38.58%)

So, the LOH for this specific model in this Bangladeshi factory will be,

### LOH= a X (b / c) =0.03 X (25 / 38.58%) = \$1.944

I know this is boring, but it’s going to be interesting from here….

NOW, let’s do a comparative pricing between Bangladesh and China,

(considering BOM, tooling cost and profit margin are same for both the countries)

Reality of today: *CPM is based on country economy and labor market; factory has hardly any control over it.

**SAM is based on type of article/ design of the product; and it’s same for a product in all factories.

***EFFICIENCY, the only factor inside LOH that can be improved with right intention and investment.

“Today we are saved by the ‘kindness of God(s)’; GSP (generalized system of preference). A factor we don’t control. A factor depends on the geo-political polarization!”

This is my dream of tomorrow: “Efficiency is our ‘industrial God’ of future; our saviour for next decades”

An improvement of 5% in efficiency will allow a factory to save more than 2% of FOB; 11% of LOH! A savings of \$0.21 in each pair*! How difficult is it? Bad news is, we are bad at efficiency; and the good news is, we have an ocean to improve.