96. knitted underwear

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96. PROFILE ON PRODUCTION OF KNITTED

UNDERWEARS


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TABLE OF CONTENTS

PAGE

I. SUMMARY 96-3

II. PRODUCT DESCRIPTION & APPLICATION 96-3

III. MARKET STUDY AND PLANT CAPACITY 96-4

A. MARKET STUDY 96-4B. PLANT CAPACITY & PRODUCTION PROGRAMME 96-8

IV. MATERIALS AND INPUTS 96-9

A. RAW & AUXILIARY MATERIALS 96-9

B. UTILITIES 96-10

V. TECHNOLOGY & ENGINEERING 96-11

A. TECHNOLOGY 96-11B. ENGINEERING 96-12

VI. MANPOWER & TRAINING REQUIREMENT 96-15A. MANPOWER REQUIREMENT 96-15

B. TRAINING REQUIREMENT 96-15

VII. FINANCIAL ANALYSIS 96-16A. TOTAL INITIAL INVESTMENT COST 96-16

B. PRODUCTION COST 96-17

C. FINANCIAL EVALUATION 96-18D. ECONOMIC BENEFITS 96-19

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I. SUMMARY

This profile envisages the establishment of a plant for the production of knitted under

wear with a capacity of 125,000 dozens per annum.

The present demand for the proposed product is estimated at 2.26 million dozen

per annum. The demand is expected to reach at 3.69 million dozen

by the year 2017.

The plant will create employment opportunities for 23 persons.

The total investment requirement is estimated at about Birr 3.29 million, out of which

Birr 1.67 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 32 % and a net

present value (NPV) of Birr 3.43 million discounted at 8.5 %.

II. PRODUCTION DESCRIPTION AND APPLICATION

One of the necessities of human beings is cloth. Knitted fabric is the major product

which covers this need. It is a fabric made of wool, polyester and cotton yarn by kinking

the yarn into loops which are subsequently interlinked with previously kinked loops to

form a fabric with less close structure than most woven fabric.

The project is resource based. Moreover, the country imports a large quantity of the

product annually. Therefore, the project is aimed at substituting import. There is also a

substantial export potential.

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textile sector had various problems. Domestic textile products were facing stiff

competition from illegal imports and consequently the demand for domestic products was

depressed.

However, the situation is changing currently. This is mainly due to the measures taken

by the government to curb illegal trade as well as the opportunities created for export of

textile goods in Europe and the U.S.A. As a result the domestic textile sector is expected

to revive with in a short period of time and to grow in the future.

On the other hand due to shortage of underwears from domestic sources, the country has

been importing a substantial amount annually. The historical supply of underwears

origination from import is shown in Table 3.2.

Table 3.2

IMPORT OF UNDER WEARS (DOZENS)

Year

Men's Or Boys' Under

Pants & Briefs 1Singles & Other

Vests 2Women's Or Girl's

Panties & Briefs 3 Total

1999 11,550 179,080 16,564 207,194

2000 66,156 299,396 43,426 408,9782001 68,315 416,896 68,480 485,211

2002 108,468 426,872 62,836 598,176

2003 225,704 1,005,559 240,403 1,471,666

2004 106,641 1,003,781 98.282 1,208,704

2005 191,102 1,578,358 39,085 1,808,545

2006 198,465 1,335,065 80.919 1,614,449

Source:- Compiled from Customs Authority.

Note:- 1.Refers to men's or boys under pants & briefs of cotton man made fibers and other textiles knitted

or crocheted2. Refers to undershirts ( sleeveless or other) of cotton and other textiles knitted or crocheted

3. Refers to women's or girls briefs and panties of cotton, manmade fibers and other textile

As could be seen from Table 3.2, the official import statistics for underwears is showing

an increasing trend. The annual average level of import during the period 1999-2002 was

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about 425 thousand dozens. During the period 2003-2004, annual average level of

import has sharply increased to about 1,340 thousand dozens which is almost three times

higher than the previous periods. Similarly, import of underwears has shown an

increasing trend in the two consecutive years. Import of underwears during 2005 and

2006 was 1,808,545 dozen and 1,614,440 dozens, respectively.

As stated earlier, the officially registered import figure does not represent the total

quantity imported to the country. Knowledgeable people in the area estimate that the

officially imported quantity represents about 75%.

Due to the above reasons, the study has adapted the following assumption in order to

arrive at the present effective demand for underwears.

Domestic production is assumed to increase by about 6% per annum in the

past three years, i.e., 2004/05 - 2006/07. Accordingly, current domestic production

is calculated to be about 45,492 dozens.

The arrange quantity imported in the past recent two years, i.e., 2005-2006 is

assumed to reflect the demand from import. Hence, it is calculated to be 1,711,492

dozens.

As official import represents, only 70% import of the past two years average

is raised by 30%. Accordingly, total officially and an official import is estimated at

2,224,940 dozens, i.e., about 513,448 dozens is imported illegally.

By adding the estimated domestic production and import (official and illegal), the

present effective demand for underwear in the country is estimated at 2,269,940 dozens.

2. Projected Demand

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The demand for underwears is mainly related with population growth and income.

Considering the combined effect of the two factors, demand is forecasted by taking a 5%

annual average growth rate. The total projected demand and the supply gap is shown in

Table 3.3.

Table 3.3.

TOTAL PROJECTED AND UNSATISFIED DEMAND FOR

UNDERWEAR ( DOZENS)

Year Total Demand Domestic Production Unsatisfied Demand

2008 2,383,437 45,000 2,338,437

2009 2,502,609 45,000 2,457,609

2010 2,627,774 45,000 2,582,7742011 2,759,126 45,000 2,714,126

2012 2,897,025 45,000 2,852,025

2013 3.041,937 45,000 2,996,937

2014 3,194,033 45,000 3,149,033

2015 3.353.735 45,000 3,308,735

2016 3,521,422 45,000 3,476,422

2017 3,697,493 45,000 3,652,493

The unsatisfied demand for underwear will increases from about 2.34 million dozens in

2008 to about 2.85 million dozens and 3.65 million dozens by the year 2012 and 2017,

respectively.

3. Pricing and Distribution

The price of underwear depends on the quality of the raw material used as well as the

model. Assuming the project will produce underwear that are demanded by the lower

and middle income of the population an average price of Birr 40 per dozen is adopted.

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The product will find its market outlet through the existing garments and clothing

distributing enterprises.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

As shown in Table 3.3 above, the demand projection for knitted under wears indicates

that for the year 2008, the demand will be 2.34 million dozens. This figure is shown to

grow to 3.31 million dozens in 2015. Considering the location of most of the zonal towns

of SNNPRS, their urbanization level and the challenges that the market would face due to

the competition from imports and other entrants, the market share of the envisaged plant

is proposed to be 5%. Accordingly, the annual production capacity of the plant will be

125,000 dozens of knitted under wears for men, ladies, children, boys and girls. The

plant will operate single shift of 8 hours a day and 300 days a year. Production can be

increased by operating the plant double shift without making any change in fixed

investment.

2. Production Programme

Production build-up will be made by considering slow growth of market outlets in the

SNNPRS and provision of sufficient time to develop the required skill of producing

competitive items. It is, therefore, proposed that the plant will operate at 65% of the

installed capacity during the first year of plant operation, and then will increase to 75%,

85% and finally to 100% during the second, third and fourth year and then after,

respectively. Production programme is shown in Table 3.4 below.

Table 3.4

PRODUCTION PROGRAMME

Year 1 2 3 4 and above

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Capacity utilization (%) 65 75 85 100

Production (dozens) 81,250 93,750 106,250 125,000

IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The major raw material required for the production of knitted under wears is cotton yarn.

The raw material can be procured from local textile factories.

Auxiliary materials required for the production of knitted under wears consist of chemical

used to oil the yarn, packing materials such as polypropylenes sheets, carton and labels.

Except chemical all the other auxiliary materials required are locally available.

Annual requirement of raw and auxiliary materials at full capacity operation and the

corresponding cost is shown in Table 4.1 below.

Table 4.1

ANNUAL REQUIREMENT OF RAW AND AUXILIARY MATERIALS AT FULL

CAPACITY PRODUCTION

Sr.

No.

Description Qty Cost (000 Birr)

LC FC TC

A. Raw Material

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1 Cotton yarn (ton) 125.2 3,161.30 - 3,161.30

Sub-total - 3,161.30 - 3,161.30

B. Auxiliary Materials

1 Chemicals Req. - 110.0 110.0

2 Packing materials (pp

sheets, carton, labels)

Req 120.0 - 120.0

Sub-Total - 120.0 110.0 230.0

Total 3281.3 110.0 3391.30

B. UTILITIES

Utilities required by the plant include water and electricity. Electricity is required to

create motive power for running production equipment, and for lighting and power

sockets. Water is used for human consumption and other purposes.

The annual requirement of electricity is 100,000 kWh, and that of water is 500 m3. At the

rate of Birr 0.474 per kWh for electricity and Birr 10 per m3 for water, annual

expenditure on electricity and water will be Birr 52,400.

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V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The following unit of operations are involved in the production of knitted underwears;

Winding,

Knitting,

Inspection, and

Cutting and stitching.

a) Winding

The raw material, cotton yarn, which has been delivered, is wound on a cone which is

most suitable for knitting. The yarn is oiled while being wound on to the cone. Oiling

will make the yarn to slide well and prevent damage during knitting.

b) Knitting

The wound yarn is set on a knitting machine and is knitted into circular fabric. In circular

knitting the latch needle is enclosed in the needle groove. The needle is moved up and

down or horizontally by the circular rotation of a can. Loop is knitted, automatically.

c) Inspection

After the knitting is completed, the fabric will be inspected for knitting damage and other

flows. Fabrics which have defect will be mended.

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d) Cutting and Stitching

Finally, the fabric will be cut into different sizes and then stitching will be done.

2. Source of Technology

The technology of knitted underwear production can be supplied from machinery

suppliers in Europe, China, India and the Far East (including Japan). Address of

machinery supplier is given below.

APEX ENGINEERING WORKS

Tel. 91-161-2498732

Fax 91-161-2500621

E-mail: [email protected]

WEBSITE: www. Apexnanhray.com

B. ENGINEERING

1. Machinery an Equipment

Table 5.1 below indicates the list of machinery and equipment required for knitted

underwear production plant. The investment cost required for plant machinery is

estimated at Birr 1.672 million, of which Birr 1.552 million is required in foreign

currency, while the remaining is in local currency. All of machinery and equipment

required have to be imported.

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Table 5.1

MACHINERY AND EQUIPMENT REQUIREMENT & COST

Sr.

No.

Description Qty. Cost (000 Birr)

LC FC TC

1 Single knitting machine (non-

jacquard, pile jacquard)

2 460 460

2 Double knitting machine (non

jacquard & jacquard)

1 450 450

3 Winding machine 2 330 330

4 Stitching machine 8 192 1925 Fabric inspecting m/c 1 120 120

6 Total FOB price 1,552 1,552

Freight, insurance inland transport

bank charge, etc.

- 120 120

Total Landed Cost - 1,552 120 1,672

2. Land, Building and Civil Works

The total land requirement include land for plant building, for administration, utility and

general purpose buildings. Considering land area for expansion, gardening, internal

roads and pathways and other open spaces, the total land site area required for the

envisaged plant will be about 1,000 m2, of this a total of 300 m2 will be covered by

buildings.

The cost of land leasing, at the rate of Birr 1 per m2 for 80 years of land holding, will be

Birr 80,000. Considering a unit cost of birr 1500 per m2 for building, the investment

requirement for building will be Birr 450,000. It means that total investment cost for

land, building and civil works assuming that the total land lease cost will be paid in

advance is estimated at Birr 530,000.

3. Proposed Location

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The purpose of location selection is to identify locations suitable for a project based on

specific requirements. In general the choice of suitable location requires an assessment of

inter alia, the availability of critical project inputs such as;

- Raw material,

- Market conditions,

- Availability of infrastructure such as road net work, power, water etc

- Technology and process complexity, and

- Availability of skilled manpower.

Although the above factors are important to all manufacturing firms, their relative

importance is different from firm to firm. In the case of knitted underwear

manufacturing plant the raw material (cotton yarn) required have to be obtained from

local textile factories while the target market of the project is mainly the urban

population. Moreover, there is also export potential.

Therefore, as the envisaged plant have to transport raw material and finished products

access to road network is a critical factor in location selection. Moreover, availability of

other infrastructures such as power and water is also important.

Accordingly, on the basis of the above discussions the capital of Damot Galle, Bodity

town, is selected as the best location. The town is located about 372 km from Addis Ababa

and about 147 km from the regional capital, Awassa.

VI. MANPOWER AND TRAINING REQUIREMENTS

A. MANPOWER REQUIREMENT

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The plant requires a total of 23 employees which comprise an expert trained in textile

technology, machinery operators and technicians & administrative staff, which includes

Factory Manager, Accountant, Secretary, etc. Table 6.1. below gives the manpower

requirement and annual labour cost of the plant.

Table 6.1

MANPOWER REQUIREMENT AND LABOUR COST

Sr.

No.

Description Req

No.

Salary (Birr)

Monthly Annual

1 Factory manager 1 1,800 21,600

2 Secretary 1 500 6,000

3 Textile technologist 1 800 9,600

4 Operators & technicians 10 420 50,400

5 Laborers 3 200 7,200

6 Clerk 1 400 4,800

7 Cashier 1 600 7,200

8 General service 3 250 9,000

9 Guard 2 250 6,000

Sub-Total 23 - 121,800

Employee benefit (25% of BS) - 30,450

Total Salary 23 - 152,250

B. TRAINING REQUIREMENT

Training of operators, technologies and technicians will be carried out during the

commissioning period of the plant, with an estimated cost of Birr 20,000. Two weeks

duration will suffice to conduct the training programme.

VII. FINANCIAL ANALYSIS

The financial analysis of the knitted under wear project is based on the data presented in

the previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30% equity

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70% loan

Tax holidays 3 years

Bank interest 8.5 %

Discount cash flow 8.5 %

Accounts receivable 30 days

Raw material local 30 days

Work in progress 2 days

Finished products 30 days

Cash in hand 10 days

Accounts payable 30 days

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr

3.29 million, of which 21 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.

Table 7.1

INITIAL INVESTMENT COST

Sr.

No.

Cost Items

Total Cost

(000 Birr)

1 Land lease value 80.0

2 Building and Civil Work 450.0

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3 Plant Machinery and Equipment 1,672.0

4 Office Furniture and Equipment 50.0

5 Vehicle 450.0

6 Pre-production Expenditure* 284.6

7 Working Capital 306.6

Total Investment cost 3,293.2

Foreign Share 21

* N.B Pre-production expenditure includes interest during construction ( Birr 172.03 thousand )

training (Birr 20 thousand ) and Birr 92.6 thousand costs of registration, licensing and formation of the

company including legal fees, commissioning expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 4.12

million (see Table 7.2). The material and utility cost accounts for 83.51 per cent, while

repair and maintenance take 2.57 per cent of the production cost.

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %

Raw Material and Inputs 3,391.30 82.24Utilities 52.4 1.27

Maintenance and repair 106 2.57

Labour direct 97.65 2.37

Administration Costs 54.6 1.32

Total Operating Costs 3,701.95 89.78

Depreciation 307.22 7.45

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Cost of Finance 114.37 2.77

Total Production Cost 4,123.54 100

C. FINANCIAL EVALUATION

1. Profitability

According to the projected income statement, the project will start generating profit in the

first year of operation. Important ratios such as profit to total sales, net profit to equity

(Return on equity) and net profit plus interest on total investment (return on total

investment) show an increasing trend during the life-time of the project.

The income statement and the other indicators of profitability show that the project is

viable.

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2. Break-even Analysis

The break-even point of the project including cost of finance when it starts to operate at

full capacity ( year ) is estimated by using income statement projection.

BE = Fixed Cost = 48 %

Sales Variable Cost

3. Pay Back Period

The investment cost and income statement projection are used to project the pay-back

period. The projects initial investment will be fully recovered within 4 years.

4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 32 % and the net

present value at 8.5 % discount rate is Birr 3.43 million.

D. ECONOMIC BENEFITS

The project can create employment for 23 persons. In addition to supply of the domestic

needs, the project will generate Birr 1.63 million in terms of tax revenue. The

establishment of such factory will have a foreign exchange saving and earning effect to

the country by substituting the current imports and exporting its product.

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96. knitted underwear

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