Impact of Order Quantity on Manufacturing Cost per Piece

Impact of order quantity on garment cost per piece
In the earlier post, I covered checking the health of a garment factory by measuring the Cost Per Minute (CPM). In this article, I will show you how to check the health of a garment factory by measuring the cost per piece. 

We will also assess the impact of order quantity and frequent style changeovers on product costing using a case.

What is Cost Per Piece?

Cost per piece is the total cost incurred by a factory for producing a garment. It is a KPI used to monitor profit/loss in order execution. It is highly applicable in factories which are doing job work. In that case, they are paid Cost of Making which includes cutting, sewing, finishing, and packing. Trim cost is also included sometimes if the vendor is responsible for ordering trim. The cost per piece for an order is calculated using this formula.

Cost /Piece = Cost of Making of full Order/ Total Order Qty

Garment cost components:

To calculate the total cost incurred in an order and then calculating cost per piece, you need to know cost components. The primary cost components in garment costing are shown here. In this article, we will show the activity based costing (ABC) method for calculating cost per garment.  

Cost Components (General):

  1. Cost of Cutting
  2. Cost of Sewing
  3. Cost of Finishing
  4. Cost of Packing
  5. Trim Cost
  6. Overhead Cost (Fixed & Variable)

Cost Components (Order Specific)

  1. Changeover Cost/Time
  2. Learning Curve and Efficiency Loss due to it
  3. NSR Trainings
  4. Testing
  5. Quality Training
  6. Operator Hire & Training

Activity Based Costing

This is a much more realistic approach than the above two. Every activity creates a cost, and these costs can be associated directly with the product, customer, or supplier for which the activity is being done. All the factory overheads here as allocated to activity centers like design, MIS, merchandising, quality, and distribution.

Example: Cost per piece calculation
We will discuss the first approach with a hypothetical example. Here I have taken cost elements of manufacturing and daily production. Considering 25 days in a month.

Case 1- No style change over

 

Daily Production (Trousers)

2544

 

Average SAM per Piece

36

 

Daily Minutes Produced (Daily production x SAM)

91584

 

Daily Minutes Available (Manpower x Shift hours x 60)

128000

 

Average Daily Efficiency

72%

 

 

 

Expense Heads

Total Monthly Expenses (INR)

1

Labour Charges

3886862

2

Over Time

573291

3

Incentive

159000

4

Retention Bonus

25649

5

Consumable

69281

6

Hire Charges

6680

7

Power and Fuel (Electricity & DG)

623168

8

Repair & Maintenance (Machine, DG, etc.)

80058

9

Personal Expenses

953842

10

Finance Expenses

55375

11

Administration Expenses - Allocate 85 %

161604

 

 

 

 

Total

6594808

12

Production Quantity (per line per month)

63,600

13

Cost Per Piece (Production)

103.69


In the second scenario, I will take multiple orders in a month since there are frequent order changes. I have tried to demonstrate the implications of small orders in manufacturing and why there is a need for MOQ (minimum order quantity). While planning or budgeting we need to consider losses due to changeover, otherwise plan vs actual will have a huge gap.
 

Case 2- 10 style Change Overs in a Month

 

Daily Production (Trousers)

2104.89

 

Average garment SAM

36

 

Daily Minutes Produced

75776

 

Daily Minutes Available

128000

 

1st Day Efficiency after CO (Line Setting & Learning Curve)

40%

 

 Average Efficiency (Month)

59%

 

 

 

Expense Heads

Total Monthly Expenses (INR)

1

Labour Charges

3886862

2

Over Time

573291

3

Incentive

159000

4

Retention Bonus

25649

5

Consumable

69281

6

Hire Charges

6680

7

Power and Fuel (Electricity & DG)

623168

8

Repair & Maintenance (Machine, DG, etc.)

80058

9

Personal Expenses

953842

10

Finance Expenses

55375

11

Administration Expenses - Allocate 85 %

161604

 

 

 

Total

6594808

12

Production Quantity (per line per month)

52,622

13

Cost Per Piece (Production cost)

125.32



Conclusion: 

This is prominent from above the examples that style changeover is a high factor impacting manufacturing cost and productivity in a factory. In a factory, when there are smaller orders, there will be more style changeover. So, you can relate the impact of order volume in garment cost per piece.

If you are checking the health of a factory, you can compare the monthly cost per piece for the running orders with the benchmark cost per piece. It would be easier calculating the average cost per piece for a single product category. If you are working with multiple product categories, compare it with cost per standard minutes.

Less the cost per piece better the heath of a factory and vice versa.

Cost per piece and line changeover time need to be closely monitored. Style loading sequence must be planned by PPC so that similar styles come one after another. This will reduce the need for new machines and new skills. It will also reduce sudden jump in manpower shortage or abundance.

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