How to Check Health of a Garment Unit by Measuring Manufacturing 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 the 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 that 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 calculate the cost per piece, you need to know the 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 Changeover
	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 Changeovers 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 on 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 to calculate the average cost per piece for a single product category. If you are working with multiple product categories, compare it with the cost per standard minute.

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 jumps in manpower shortage or abundance.

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Post updated on: 10/05/2023

Publication date: 15/09/2020