Cost reduction as a strategy in apparel factories is a prevailing and continuous practice. As businesses are experiencing serious dent in their cash-flow and are finding it hard to survive in the longer run, the need for cost reduction will increase post COVID-19. However, the factory owners need to understand that there are various ‘hidden’ costs in apparel manufacturing business which eat the profitability drastically; therefore these ‘hidden’ costs need to be identified as early as possible.
Various global researches are indicating that consumers will be more price-conscious, and thus, buyers will offer sharper prices. There is no option but to rationalise costs in the post-COVID-19 world. According to Dr. Rajesh Bheda, MD, Rajesh Bheda Consultancy, India, ‘Money saved is money earned’ and all non-value added activities must be eliminated or minimised for cost reduction. However, it’s pertinent to discuss here why factory owners fail to control cost and under which all processes. Traditionally, many factory owners have been dependent on labour contractors who make it difficult to use modern and scientific management techniques for managing production. Most of the production heads have learned through experience and have grown with inefficiencies.
“So, there is a lot of resistance to change. Very few owners, barring exception, themselves get deeply involved in production engineering and manufacturing management, thus they find it difficult to control manufacturing costs,” opined Rajesh.
While, on the other hand, Frank Schaefer, Owner, Modern Engineering, Germany, firmly believes that it’s all because factory owners trust and believe the wrong manpower. It is seen that the management in-charge generally has no (or less) experience to execute cost monitoring. “KPIs are not available or even if these are available, it’s mostly incorrect. Blindfolded management leads to disastrous know-how for benchmarking which hampers a regular monitoring process of the company status,” emphasises Frank.
‘Cost reduction’ or ‘cost cutting’ – What to opt and why?
When profit margins are squeezed, buyers ask for discounts and push for deferred payments in post-COVID-19 business scenario. It’s significant to know whether factories need cost reduction or cost cutting to survive. It depends on how different people in different cultures understand these terms. The cost cutting is generally understood as a short cut, short sighted and ruthless method to reduce costs. This may mean using inferior quality low cost materials, reducing workers’ salaries, not spending money on compliance etc., whereas cost reduction or cost optimisation would focus on driving out wasteful expenses.
“Believe me, every organisation has a lot of such expenses that can be reduced. As Ratan Tata and Jack Ma rightly said recently – We have to be in survival mode during these times. And there is no option but to conserve cash and eliminate waste,” explains Rajesh.
In general, it is believed that cost cutting is not a hampering practice if carried out on correct database and including any cost. Frank believes cost cutting is a necessary activity that usually follows a negative event – COVID-19 is just one example and lost competitiveness due to various internal reasons might be another. “Continuous cost monitoring and benchmarking is definitely better than cost cutting. But this needs external help. A serious benchmarking is difficult to execute internally, as the view from outside is requested,” says Frank.
The areas that offer largest potential of cost optimisation are: 1) Fabric savings: This can be about 2 to 5-6 per cent depending on the baseline level, 2) Cut to ship loss: This again can be .05 to 5-7 per cent of sales depending on the products and number of value-adding processes involved like printing, embroidery, beading, washing, over dyeing, etc., 3) Cost of rework levels across the processes including sample resubmission rate, 4) Production losses due to delayed arrival of materials, trims and approvals, 5) Losses due to high absenteeism and worker turnover, 6) Poor methods and ill trained workers. “All these areas offer significant improvement potential for cost reduction,” suggests Rajesh.
Apart from these, three areas which factories need to give serious consideration are customer penalties, Cost of Poor Quality (COPQ) and overtime of workers which seem like regular activities but impact heavily on the overall profitability of a factory. Most of the projects in factories start with the demand of productivity increase, but the first step is to reduce quality cost in: rejections, repairing, recut.
“In many cases, it is the wrong setting of priorities. It is a downward spiral starting from wrong budget, wrong capacity planning, continuing with massive overtime and ending up in high absenteeism, low productivity, low quality issues and penalties for delayed deliveries and poor product quality. Next reason might be low qualification of employees! The factory owners now need to focus on these areas more than ever,” Frank strongly.
Particularly, COPQ is a prolonged issue and even some of the Fortune 500 companies did not or do not know the amount of money lost by them due to poor quality. A very few companies understand the importance of cost of quality and know how much is the cost of poor quality in their organisations. Cost of poor quality measurement is neither a part of financial accounting nor the standard management curriculum. Unless the management tries to learn about it, they tend to underestimate the amount of money lost by them, and hence, do not act on it. “My research on COPQ is the only national level research for apparel industry across the globe as per my knowledge, which concluded that an average apparel factory in India could save almost 8 per cent sales through the right first-time quality across processes,” claims Rajesh.
Role of effective ‘Workplace Engineering’
Engineered methods are a critical component of improving efficiency and reducing cost. This cannot be achieved without effective workplace engineering including workplace layout, use of work aid and attachments, reducing motion economy, improved ergonomics. The results of such interventions can be unbelievable and can result in a few per cent to more than 100 per cent improvement in individual operation productivity, and thus, reduction in costs.
“In one of our projects with a leading apparel manufacturer group from Sri Lanka, with a high maturity level of management systems and performance, 18 operations of cargo manufacturing were improved using workplace engineering principles. The average improvement in the capacity of these operations improved by 20 per cent and the overall SAM of the garment could be reduced by 10 per cent. During Sudokkho project in Bangladesh supported by the UK and Swiss Governments, where our company has supported 110+ factories, over 9,000 existing workers’ capacity was improved by over 30 per cent. Workplace engineering was one of the major contributors for this improvement,” Rajesh explains the significance of workplace engineering.
Improvising the design of the workplace, especially of a sewing operator, through a systematised ergonomic methodology improves the operator’s productivity and quality to a great extent, saving enormous amount of indirect costs. However, there are processes to be followed to change one’s existing workplace into an ergonomically designed workstation to reap in enhanced benefits in the work methods and production system. Endorsing the implementation of workplace engineering, Frank says he has implemented this concept almost in every part of the world (including Americas, Europe, Asia as well as Africa) with significant before/after results. In his projects, Frank has taken the productivity of factories from less than 30 per cent to more than 50 per cent.
“In one of the trouser manufacturing companies based out of Romania and Ukraine, I took a project in 2016 which went on till 2019. Apart from line setups, the most effective outcome was the productivity improvement and on-time delivery performance which went up to more than 90 per cent. This is what effective workplace engineering can do to your factory,” corroborates Frank.
Reduce WIP for profitability
It’s a proven fact that WIP is not less than poison for factory profitability which eats margins gradually but strongly. WIP needs to be reduced and that’s a prolonged need for the fashion industry even from pre-COVID-19 times. Frank suggests that a capacity planning based on actual headcount, productivity and attendance is a great idea to reduce WIP. “Follow up of implemented workflow system, no matter if SPW or bundle system; a certain number of multi-skilled operators to execute a functioning line balancing; in-line QC system in full function; bonus systems including WIP targets are some of the best methods to reduce WIP, and hence, step up to have better profitability in businesses in 2020 and onwards,” insists Frank.
Supporting the same, Rajesh adds that Kanban needs to be implemented effectively, and for this to work well, the management must balance the lines as per the Takt time and ensure abnormalities are eliminated fast to maintain flow. “In sewing lines and finishing departments, we have been able to bring down the WIP by over 50 per cent in a large number of cases,” comments Rajesh.
Digitisation and team building go hand-in-hand
Undoubtedly, digitisation can certainly help in making information available when needed, in the right form. This can also improve the ability of timely and pinpointed actions to address abnormalities of deviations from the standard. This helps bring in transparency and helps everybody to objectively focus on the performance. Managers can guide the team in a timely manner and avoid costly mistakes. Digitisation of pre-production areas like 3D pattern making and E-Fit simulation is the crying need of the hour. Shop floor control systems will also help in cost efficiencies, especially in the post-COVID-19 world to reform the devastated shop floor systems.
However, there are different opinions on the use of digitisation in the apparel manufacturing factories. A blind investment is not at all recommended. “Before investing a huge amount of money in digitisation, invest money in your employees, basic workplace engineering which is a low cost concept, automation (based on ROI) and regular monitoring with external support. This will give improvement of minimum 25 per cent and I assume much more than this,” thinks Frank, adding, “Treating employees, especially direct workers, as the biggest treasure can do wonders. Select, build and train them up continuously to make an effective team. Do not believe too much in certificates and belts, but in practical engineering.”