[vc_row][vc_column width=”1/6″][/vc_column][vc_column width=”2/3″][dt_fancy_title title=”(The whole article is prepared based on a $10 sports shoes (Factory Price) retailed $50)” title_align=”left” title_color=”custom” separator_style=”disabled” title_bg=”enabled” separator_color=”custom” custom_title_color=”#000000″ custom_separator_color=”#c9c9c9″][vc_column_text]This time, let’s start with some quick practical case from the perspective of price,[dt_gap height=”30″ /]
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?).[dt_gap height=”30″ /]
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).
“The price competitiveness is defined only on ≈15% of FOB.
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.[dt_gap height=”30″ /]
Retailers price breakdown: $50
[/vc_column_text][vc_column_text][dt_gap height=”30″ /]
So, now let’s start with LOH; To calculate LOH, we need 3 information,[dt_gap height=”30″ /]
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)
[dt_gap height=”30″ /]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.[/vc_column_text][vc_raw_html]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[/vc_raw_html][vc_column_text]
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.[dt_gap height=”30″ /]
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)[/vc_column_text][vc_column_text]
c. Efficiency of the factory
The percentage ratio of ‘useful’ minutes to make the shoe and ‘used’ minutes.[dt_gap height=”30″ /]
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.[/vc_column_text][vc_raw_html]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[/vc_raw_html][vc_column_text]So, the LOH for this specific model in this Bangladeshi factory will be,[dt_gap height=”30″ /]
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….
[dt_gap height=”30″ /]NOW, let’s do a comparative pricing between Bangladesh and China,
(considering BOM, tooling cost and profit margin are same for both the countries)[dt_gap height=”30″ /]
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”
[dt_gap height=”30″ /]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.[/vc_column_text][vc_column_text]References:
–https://solecollector.com/news/2014/12/how-much-it-costs-nike-to-make-a-100-shoe
–https://www.sneakerfactory.net/2019/05/cost-to-make-a-sneaker/
–https://ordnur.com/garments-2/calculate-garments-cost-of-making/
–https://www.onlineclothingstudy.com/2011/09/4-how-to-calculate-efficiency-of.html
–https://www.everycrsreport.com/reports/RL33663.html
https://www.idc-cdi.com/the-eu-needs-to-appreciate-cambodias-role-and-voice/[/vc_column_text][vc_column_text][dt_gap height=”30″ /]
(This article is the part of Author’s upcoming e-book ‘Defining competitive advantage of Bangladesh for Footwear’)
Author
Hossain Tawhid Imam
A manufacturing industry passionate working as STRATEGIC INDUSTRIAL BUYER with the responsibility to build and deploy worldwide mid and long-term purchasing strategy for Footwear Industrial Division of DECATHLON.[/vc_column_text][/vc_column][vc_column width=”1/6″][/vc_column][/vc_row]