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Pre-Feasibility Study
DENIM JEANS STITCHING UNIT
Small and Medium Enterprises Development Authority Government of Pakistan
www.smeda.org.pk
HEAD OFFICE 6th Floor LDA Plaza Egerton Road, Lahore
6. CURRENT INDUSTRY ANALYSIS ............................................................ 8 6.1. EXPORT MARKET......................................................................................... 8
8. PRODUCTION PROCESS FLOW ............................................................. 11 8.1. RAW MATERIAL......................................................................................... 12
Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
11.. EEXXEECCUUTTIIVVEE SSUUMMMMAARRYY The proposed Denim Jeans Stitching unit is a project of the Textile Sector, producing standard five pocket jeans trouser. The unit will cater to the local as well as export denim market. The jeans produced will be of export, high quality fabric. Through the use of high-tech equipment and modern techniques the company can produce jeans of latest trends without compromising on quality. The process flow includes purchase of raw material, cutting, stitching, washing, finishing, pressing and packing. Quality control checks will be taken care of through out the process.
Pakistan has become denim hub in the region in less than a decade and is considered as one of the leading supplier of quality denim fabric to the world's known brands. Pakistan's denim is second to none. There has been a phenomenal increase in the production capacity of denim mills in Pakistan and at present numerous denim mills are in operation. The denim industry is contributing substantially towards exports creating job opportunities and has invested billions in the denim sector. The denim industry is not only fully catering to the needs of the local apparel industry but is also catering to the foreign market and earning valuable foreign exchange for the country.
This particular stitching unit is proposed to have an installed capacity for producing 1000 denim jeans per day. The unit’s initial capacity utilization is kept at 70%, which eventually goes up to 90% in the fifth year. A Denim Garment Stitching Unit with an installed capacity to produce 1,000 pieces per day needs an investment estimated at Rs. 14.150 million. The project is financed through 50% debt and 50% equity. Projected IRR, Net Present Value and Payback of this project are 71.11%, Rs. 165.680 million and 3.71 years respectively. The legal business status of this project is proposed as ‘Sole Proprietorship’.
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
22.. IINNTTRROODDUUCCTTIIOONN TTOO SSMMEEDDAA
The Small and Medium Enterprises Development Authority (SMEDA) was established with the objective to provide fresh impetus to the economy through the launch of an aggressive SME support program.
Since its inception in October 1998, SMEDA had adopted a sectoral SME development approach. A few priority sectors were selected on the criterion of SME presence. In depth research was conducted and comprehensive development plans were formulated after identification of impediments and retardants. The all-encompassing sectoral development strategy involved recommending changes in the regulatory environment by taking into consideration other important aspects including finance, marketing, technology and human resource development.
SMEDA has so far successfully formulated strategies for sectors including, fruits and vegetables, marble and granite, gems and jewellery, marine fisheries, leather and footwear, textiles, surgical instruments, transport and dairy. Whereas the task of SME development at a broader scale still requires more coverage and enhanced reach in terms of SMEDA’s areas of operation.
Along with the sectoral focus a broad spectrum of business development services is also offered to the SMEs by SMEDA. These services include identification of viable business opportunities for potential SME investors. In order to facilitate these investors, SMEDA provides business guidance through its help desk services as well as development of project specific documents. These documents consist of information required to make well-researched investment decisions. Pre-feasibility studies and business plan development are some of the services provided to enhance the capacity of individual SMEs to exploit viable business opportunities in a better way.
This document is in the continuation of this effort to enable potential investors to make well-informed investment decisions.
33.. PPUURRPPOOSSEE OOFF TTHHEE DDOOCCUUMMEENNTT The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs to facilitate investment and provide an overview about Garment Stitching Unit. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document covers various aspects of the business concept development, start-up, production, marketing, and finance and business management.
This particular pre-feasibility is regarding “Garment Stitching Unit” which comes under “Textile” sector.
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
• There is a “ready made” market for this product. • Relatively low labour costs • Ample available work force. • Well-situated industrial estate with all major facilities available.
44..22.. WWeeaakknneesssseess
• The requirement of credit and/or delay of payments from customer side might cause disturbance in the cash cycles.
• Very small base of available skilled machinists. • Lack of trained technicians and line / middle management. • Uncertain investment climate
44..33.. OOppppoorrttuunniittiieess
• WAPDA/KESC will provide “off peak hour rates” and “bulk rates” for industrial consumers to lower the electricity cost of manufacturing.
• Manufacturers-cum-exporters are allowed to import samples of each kind or quality having value up to US$ 100 at zero duty rates.
• Two special export zones focusing on textile sector particularly in dyeing, processing and finishing sectors will be established at Karachi and in one of the industrial cities of Punjab.
44..44.. TThhrreeaattss
• Skilled operators in the denim garments are quite unorganized. Stitching expertise is not available at the best possible level. This restricts the industry to the basic garments and only limits the entry into the manufacturing of high quality garments.
• Cost of doing business may increase as the energy, raw material prices, wages and mark up rates may rise.
55.. PPRROOJJEECCTT PPRROOFFIILLEE
55..11.. OOppppoorrttuunniittyy RRaattiioonnaallee During the last decade, the usage of denim garments, especially denim jeans, has been on a rise in the international as well as the local markets. This has led to a rise in the demand of denim garments. The competitive edge of Pakistan in this field stems from the ready availability of cotton yarn required to weave denim fabric i.e.
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
NE 7/1 to NE 14/11. During the past few years, the denim fabric manufacturing capacity has also been enhanced that has provided the opportunity to industry to strengthen. The export of denim garments from Pakistan has also been on a rise.
55..22.. PPrroojjeecctt BBrriieeff The proposed project presents an investment opportunity in manufacturing of denim jeans. The project profile has been prepared for a standard five pocket jeans trouser. The proposed stitching unit will be having the potential for its own manufacturing and supply for the local market as well as for the export market. However washing will be outsourced.
55..33.. PPrrooppoosseedd CCaappaacciittyy The proposed capacity of the unit is 1000 garments per day.
55..44.. TToottaall PPrroojjeecctt CCoosstt The cost of project has been estimated as Rs.14.150 million including machinery and office equipment.
TTaabbllee 55--11 PPrroojjeecctt IInnvveessttmmeenntt Capital Investment Rs. 5,981,220Working Capital Rs. 8,169,111Total Investment Rs. 14,150,331
The proposed pre-feasibility is based on the assumption of 50% debt and 50% equity. However this composition of debt and equity can be changed as per the requirement of the investor.
The project seems to be viable with the following returns on investment.
TTaabbllee 55--22 PPrroojjeecctt RReettuurrnnss
Internal rate of return (project) 71.11%Net Present Value @ 20% Rs. 165,680,748Payback period – based on cash inflows 3.71 years
55..55.. PPrrooppoosseedd BBuussiinneessss LLeeggaall SSttaattuuss The proposed legal structure of the business entity is either sole proprietorship or partnership. Although selection totally depends upon the choice of the entrepreneur but this financial feasibility is based on a Sole Proprietorship.
1 yarn count
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
55..66.. PPrrooppoosseedd LLooccaattiioonn The proposed locations for a garment manufacturing unit will be
55..77.. KKeeyy SSuucccceessss FFaaccttoorrss The total commercial viability of this proposed stitching unit depends on the regular orders for the purchase of the finished product. This requires aggressive marketing efforts at the entrepreneur's end.
Following are other key points that are important for the successful operation of the proposed stitching unit.
• Surety of high consistent quality • Surety of on time delivery • Competitive rates • Cost efficiency • Better services to the customer. • Better communication development with customers
66..11.. EExxppoorrtt MMaarrkkeett Pakistan’s export of denim jeans is increasing over the years. Pakistan’s denim exports increased rapidly in the last years, due to a series of advantages including a falling currency, cotton fibre and yarn availability, modern equipment and strong incentives from the government. The country has progressively built a wealthy denim industry, allowing progressive denim apparel production and direct denim fabric exports to other Asian countries and to Turkey.
Turkey and Bangladesh are the major countries importing Pakistani denim products. Other major export markets are Italy, Syria and Egypt. Total Export of Pakistan in the year 2009 was USD 55.748 million, which shows approximately a 100% increase as compared to the export of USD 25.776 million in 2008
Major partners are given in the table below:
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
Country Trade Value (USD) Turkey 179,156,828 China 117,011,111 China, Hong Kong SAR 115,373,606 Colombia 102,077,109 Mexico 87,067,153 Others 449,304,425 Total Import 1,049,990,232
FFiigguurree 66--11 TToopp EExxppoorrtteerrss
World's Top Importers
47%
14%
9%
6%
4%
20%ChinaChina, Hong Kong SARTurkeyPakistanItalyOthers
Country Trade Value (USD) China 683,592,128 China, Hong Kong SAR 211,100,320 Turkey 126,434,925 Pakistan 81,524,928 Italy 64,217,277 Others 290,755,006 Total Export 1,457,624,584
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
77.. MMAARRKKEETT AANNAALLYYSSIISS Major concentration of the denim garment stitching industry is in Karachi and Lahore. Other important hubs are Sialkot, Faisalabad and Gujranwala.
The average production capacity of majority of small and medium sized jeans manufacturing units is about 1,000 jeans per day. However, large size manufacturers are producing as much as 30,000 jean trousers per day.
77..11.. DDoommeessttiicc MMaarrkkeett Almost all the established manufacturers are catering solely to the export market. Only the B-Class products are sold in the domestic market. The size of the manufacturers, whose primary market is domestic, is quite small.
77..22.. TTaarrggeett CCuussttoommeerrss In case of direct exports, the customers are retail chain stores, direct distributors and wholesalers. The export can either be through buying houses and/or through direct customers.
88.. PPRROODDUUCCTTIIOONN PPRROOCCEESSSS FFLLOOWW The proposed business is stitching denim jeans. The process will involve purchasing of raw material from the market i.e. denim fabric, which will be put through the process. Washing of the fabric will be outsourced as washing in house requires a plant which is expensive and will greatly increase the project cost. Therefore, it is
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
recommended that the proposed project should outsource washing. Washing cost per piece is taken as Rs. 30. The production process flow is given in figure 8-1.
88..11.. RRaaww MMaatteerriiaall The proposed business will be using the raw material listed in the Table 8-1.
TTaabbllee 88--11:: RRaaww MMaatteerriiaall
Raw Material Consumption/ Piece Rate (Rs.) Fabric (Metre) 1.30 200 / m Pocket Lining (Metre) 0.2 100 / m Stitching thread (Metre) 350 10 / piece Imported buttons 1 3 / unit 4.5 YG Zip 1 15 / unit Main label 1 5 / unit Care and size label 1 2 / unit Rewet per unit 6 9 / unit Packing cost 1 15 / piece
88..11..11.. PPaacckkiinngg CCoosstt Packing cost includes one poly bag and one small carton for the packing of each finished garment. Total cost of packing for one piece is taken as Rs. 15.
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
99.. HHUUMMAANN RREESSOOUURRCCEE RREEQQUUIIRREEMMEENNTTSS For a garment-stitching unit of 32 stitching machines, following manpower is required:
1100..11.. MMaacchhiinneerryy LLiisstt Following combination of stitching machines is required for manufacturing 1,000 denim jeans per day. Approximate prices for Japanese origin machinery are given below:
Machinery Quantity Unit cost (Rs.) Total cost (Rs.) Cutting Machine 2 108,500 217,000Lock Stitch (Single Needle) 15 28,500 427,500Lock Stitch (Double Needle) 3 133,000 399,000Safety Stitching Over lock 1 46,500 46,500Safety Stitching Over lock 1 50,000 50,000Feed Off Arm 2 40,500 81,000Bar Tracking 3 318,000 954,000Waist Belt Machine 1 136,000 136,000Eyelet Machine 1 1,055,000 1,055,000Button Stitching Machine 1 320,000 320,000Loop Making Machine 1 156,500 156,500Snap Fastener 1 50,000 50,000Total machinery cost 32 3,892,500
Other Equipment Steam Boiler 1 138,320 138,320Other tools Lumpsum 25,000 25,000Machine Installation and wiring 32 4,000 128,000Total other equipment cost 291,320Total Cost 4,183,820
1100..22.. FFuurrnniittuurree aanndd EEqquuiippmmeenntt LLiisstt Furniture and Equipment requirement for the Administration and Factory building is given in the table below:
1111..11.. LLaanndd//BBuuiillddiinngg RReeqquuiirreemmeenntt Approximately, 4,900 square feet of total covered area is required to establish the proposed stitching unit with a management building. The allocation of the space requirement is as follows:
Space Requirement Required area (sq. ft) Fabric & Accessories inventory Store 1,000Cutting Room 400Stitching Room 1,250Inspection Room 850Packing Room 750Finished Garment Store 850Total factory area 5,100Management Building 650Total Area Required (sq. ft.) 5,750
1111..22.. RReeccoommmmeennddeedd MMooddee
It is recommended that this project should be started in a rented building. As the initial capital cost of the project will be less. An appropriate premise is normally available in many commercial/industrial areas of under mentioned clusters.
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
1111..33.. SSuuiittaabbllee LLooccaattiioonnss The clusters of stitching industry exist predominantly in Lahore, Karachi, Faisalabad and Sialkot. Most of the garment manufactures are based in these major cities, so it is recommended that such unit should be started in these cities. Basic raw material i.e. denim cloth, is also conveniently available in these cities.
1111..44.. UUttiilliittiieess RReeqquuiirreemmeennttss It is assumed that the following utilities will already be available at the proposed building to be rented out:
• Electricity • Water • Gas • Telephone • Fax
1122.. PPRROOJJEECCTT EECCOONNOOMMIICCSS
TTaabbllee 1122--11:: PPrroojjeecctt CCoossttss
Project Costs Total (Rs.)Machinery & equipment 4,183,820Furniture & fixtures/Equipment 1,041,900Pre-operating costs 755,500Total Capital Costs 5,981,220 Stocks- Raw Material 3,951,360Equipment spare part inventory 2,092Upfront for building rental 1,800,000Upfront insurance payment 261,286Cash 2,154,373Total Working Capital 8,169,111Total Investment in the Project 14,150,331
Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
1144.. KKEEYY AASSSSUUMMPPTTIIOONNSS
TTaabbllee 1144--11 MMaacchhiinneerryy AAssssuummppttiioonnss Number of Machines Installed 32 Installed capacity 100% Initial year capacity utilization 70% Maximum capacity utilization 90% Capacity utilization growth rate 5% Defective garment rate (of total finished garments) 2% Total Production per day 1000
TTaabbllee 1144--22 OOppeerraattiinngg AAssssuummppttiioonnss Shifts operational per day 1Hours operational per shift 8Days operational per year 300
TTaabbllee 1144--44 CCaasshh FFllooww AAssssuummppttiioonnss Accounts Receivable cycle (in days) 45Accounts payable cycle (in days) 30Raw material inventory (in days) 15Equipment spare part inventory (in days) 30
TTaabbllee 1144--55 RRaaww MMaatteerriiaall AAssssuummppttiioonnss Raw material cost growth rate (Year 1-4) 5%Raw material cost growth rate (Year 5-10) 10%Washing cost Rs. 30Washing cost growth rate 5%
TTaabbllee 1144--66 RReevveennuuee AAssssuummppttiioonnss Sales Price per unit USD 6.2Defected garment sales price Rs. 150Sales Price growth rate 10%
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)
Administrative overhead (% of Sales) 1%Office expenses (stationery, entertainment etc) 20% of admin expenseFreight expense 1% of raw materialMachine maintenance (per month) 5% of machinery costMachine maintenance growth rate 5%Pre-paid building Rent (months) 12Pre-paid insurance (months) 12Admin and Factory overhead 0.75% of revenueInsurance rate (% of net fixed assets) 5%Spare part inventory 0.05% of machine costRent growth rate 10%Tax rate3 25%
Project life (years) 10Debt 50%Equity 50%Interest rate on long-term debt 16%Interest rate on short term debt 14%Debt tenure (years) 5Debt payments per year 1Discount rate (weighted avg. cost of capital for NPV) 20%
3 Tax rate is fixed through out the project since the income falls in 25% tax deduction slab
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Pre-Feasibility Study Garments Stitching Unit (Denim Jeans)