Profile on Production of Socks & Stocking

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					108.   PROFILE ON PRODUCTION OF
          SOCKS & STOCKING
                         108-2


                      TABLE OF CONTENTS


                                                  PAGE


 I.    SUMMARY                                    108-3


II.    PRODUCT DESCRIPTION & APPLICATION          108-3


III.   MARKET STUDY AND PLANT CAPACITY            108-4
       A. MARKET STUDY                            108-4
       B. PLANT CAPACITY & PRODUCTION PROGRAMME   108-6


IV.    RAW MATERIALS AND INPUTS                   108-7
       A. RAW & AUXILIARY MATERIALS               108-7
       B. UTILITIES                               108-8


V.     TECHNOLOGY & ENGINEERING                   108-9

       A. TECHNOLOGY                              108-9
       B. ENGINEERING                             108-11


VI.    MANPOWER & TRAINING REQUIREMENT            108-13
       A. MANPOWER REQUIREMENT                    108-13
       B. TRAINING REQUIREMENT                    108-13


VII.   FINANCIAL ANALYSIS                         108-14
       A. TOTAL INITIAL INVESTMENT COST           108-15
       B. PRODUCTION COST                         108-16
       C. FINANCIAL EVALUATION                    108-17
       D. ECONOMIC BENEFITS                       108-18
                                   108-3


I.      SUMMARY


This profile envisages the establishment of a plant for the production of       socks and
stockings with a capacity of 100 tonnes ( 1.2 million pairs ) per annum.


The present demand for the proposed product is estimated at 954 tonnes         per annum.
The demand is expected to reach at 1,798 tonnes by the year 2020.


The plant will create employment opportunities for 62 persons.


The total investment requirement is estimated at about Birr 6.21 million, out of which
Birr 3.45 million is required for plant and machinery.


The project is financially viable with an internal rate of return (IRR) of 23 % and a net
present value (NPV) of Birr 3.67 million discounted at 8.5%.


II.     PRODUCT DESCRIPTION & APPLICATION


Socks are protective knitwear for the foot which are exhibited by elastic and plastic
characteristics. Socks could be knitted from natural fiber (cotton, wool), textured yarn of
nylon, mixed spun yarn of synthetic fiber and natural fiber, and mixed knit of synthetic
filament textured yarn and spun yarn of natural fiber. Socks are mostly used by men of
all ages.


Stockings are long knitted coverings for leg and foot, usually worn by women of all ages.
They can be produced from nylon wool, silk, etc. As the technology of knitted fabrics is
improving from time to time the quality of socks and stockings is also improving. This
has given rise to the growth in demand of the knitted items.


All of the raw materials required for production of socks and stockings have to be
imported. However, there is an established domestic market for the product as evidenced
                                   108-4


by the quantity of the product annually imported. Therefore, the envisaged project is
aimed at substituting the current import.


III.   MARKET STUDY AND PLANT CAPACITY


A.     MARKET STUDY


1.     Present Demand and Supply


The local demand for socks and stockings is met through imports. The amount of imports
of the products during 2000 – 2006 is shown in Table 3.1. As can be seen from Table 3.1,
the level of imports was erratic. During the period under reference, imports varied from
259.28 tones in 2000 to 1028.82 tones in 2005. Imports averaged 748 tones during the
period the period under consideration.


                                         Table 3.1
                 IMPORT OF SOCKS AND STOCKINGS (TONES)


                                    Year      import
                                     2000       259.28
                                     2001       628.32
                                     2002       596.07
                                     2003       891.55
                                     2004       821.43
                                     2005     1028.82
                                     2006     1,011.02


                            Source; External Trade Statistics


In estimating the demand for the products the supply of the product, which constitutes
imports is considered as a proxy for demand. However, due to the erratic nature import
                                    108-5


data the last three years average import is assumed to fairly approximate present ( 2007)
demand for the product. Accordingly, the current effective demand for socks and
stockings is estimated to be 954 tones.
2.     Demand Projection


The demand for socks and stockings is mainly influenced by urban population growth
and income rise. Hence, an annual average growth rate of 5% is taken to forecast the
future demand (see Table 3.2)


                                          Table 3.2
                         DEMAND PROJECTION ( TONNE)


                             Year               Projected Demand
                             2008                     1,001
                             2009                     1,052
                             2010                     1,104
                             2011                     1,159
                             2012                     1,217
                             2013                     1,278
                             2014                     1,342
                             2015                     1,409
                             2016                     1,480
                             2017                     1,554
                             2018                     1,631
                             2019                     1,713
                             2020                     1,798
                                    108-6



3.     Pricing and Distribution


The price of socks and stockings varies according to their material. Cotton socks and
stockings to be produced could be either plain, colored printed etc. For the purpose of
this project average price Birr 7 per pair is adopted.


Currently distribution of fabrics is undertaken by long established whole sellers, most of
them located in Markoto area of Addis Ababa and other big towns. The envisaged plant
can also adopt the existing distribution system.


B.     PLANT CAPACITY AND PRODUCTION PROGRAMME


1.     Plant Capacity


The market study indicates that demand of socks and stockings in 2008 will be 1001
tonnes. This figure will grow to 1409 tonnes and 1798 tonnes in 2015 and 2020,
respectively. Based on demand projection (Table ) and economy of scale of socks and
stockings production, it is proposed that the envisaged plant will have annual production
capacity of 100 tonnes or 1211970 pairs or about 101,000 dozens. The plant will operate
single shift 8 hours a day and for 300 days a year.


2.     Production Programme


In order to provide adequate time for production skill development and establish market
outlets, the plant will be made to operate at lower capacity (75%) during the first year of
operation. Then production build-up will be 85% and 100% during the 2nd year, the 3rd
year and thenafter, respectively.


Table 3.3 below shows production build-up programme.
                                    108-7


                                        Table 3.3
                            PRODUCTION PROGRAMME


             Year               1               2              3 and above
     Capacity utilization      75               85                 100
     (%)
     Production (dozens)     75750            85850              101,000


IV.        MATERIALS AND INPUTS


A.         RAW AND AUXILIARY MATERIALS


The major raw materials required for the production of socks and stockings are dyed
nylon stretch (nylon 110/2 denier), acrylic yarn and rubber thread latex. These materials
are not produced locally and will have to be imported from countries like Korea, Taiwan,
China, India, etc. Annual consumption of these materials at full capacity operation and
related costs are shown in Table 4.1 below.


Auxiliary materials required for the production of socks and stockings include sewing
thread, lubricating oil for production equipment, labels, packing materials, etc. Annual
requirement of these items at full capacity production is given in Table 4.1 below.
                                      108-8


                                          Table 4.1
         ANNUAL REQUIREMENT OF RAW AND AUXILIARY MATERIALS
                                   (AT FULL CAPACITY)


  No.                Description               Qty        Unit            Cost (‘000 Birr)
                                              (ton)    Price         LC           FC         TC
           A. Raw materials
     1     Nylon stretch (nylon 110/2 49.5            56,000     -            2772      2772
           denier)
     2     Acrylic yarn                       49.5    56,000     -            2772      2772
     3     Latex (Rubber thread)              3.0     75,000     -            226.25    226.25
           Sub total                          102.0              -            5770.25 5770.25
           B. Auxiliary materials
     1     Sewing thread                      Reqd    -          5.0          -         5.0
     2     Lubricating oil                    Reqd    -          5.0          -         5.0
     3     Labels                             Reqd    -          6.0          -         6.0
     4     Packing materials (pp sheets, Reqd         -          10.0         -         10.0
           carton, hard paper, etc)
           Sub total                                  -          26.0         -         26.0
           Total                                      -          26.0         5770.25 5796.25


B.        UTILITIES


Utilities required in the process of stocks and stockings production consist of electricity,
water, steam, fuel oil and lubricating oils. Electricity is required to operate production
equipment, for power sockets and lighting points.           Water is required for drinking,
sanitation and for steam production. Fuel oil is used as source of energy in the operation
of boiler. The boiler generates steam required by the plant. Lubricating oil is applied on
yarn winding machine to facilitate easy sliding of the yarn. Annual requirement of
utilities with related costs is given in Table 4.2 below.
                                        108-9


                                            Table 4.2
                         ANNUAL REQUIREMENT OF UTILITIES


              No.             Description                  Qty       Cost (Birr)
          1         Electricity (kWh)                     10,000               4740
          2         Water (M3)                             8,000             80,000
          3         Fuel Oil (litres)                      6,000              32460
          4         Lubricating oil (kg)                As reqd                2,000
                    Total                                        -           119200


V.        TECHNOLOGY AND ENGINEERING


A.        TECHNOLOGY


1.        Production Process


The production process of socks and stockings consist of the following operations:


     a)        Raw material preparation
     b)        Winding of raw material into cones
     c)        Knitting operation on a knitting machine
     d)        Linking operation
     e)        Cleaning products from stains and dust
     f)        Dyeing
     g)        Setting and finishing
     h)        Inspection
     i)        Matching size, color and pattern (design)
     j)        Attaching, labeling and packing
     k)        Dispatching to market.
                                   108-10


The manufacturing process begins with raw material preparation, and then winding of the
raw materials, yarn into cone will take place. In order to make the yarn slide easily it is
necessary to apply oils during winding operation. The yarn is then set on the designated
sock knitting machine and is knitted into either sock or stocking shape. The open part of
the stock that come out of the knitting machine is then linked in a linking machine.


Socks which have gone through the various processes will have oil stains and dust.
Hence, to begin with they are washed to get rid of oil stains and dust. Then the process
of dyeing takes place. The dyed socks (stockings) subsequently undergo the setting and
finishing process inorder to assume their final shape and good link.


Finally, the socks which pass final inspection are arranged into pairs by matching their
size, color and pattern and then packed into boxes.


2.        Source of Technology


Knitting machines are widely manufactured and supplied by companies in Korea, Japan,
China, Taiwan and India. Address of one such machinery supplier in China is given
below.


Jiangsu victor machinery Co. Ltd
No. 33 Nanjing Road, Tangqiao
Zhangjiagang
Jiangsu
China 215611
Tel.      (86512) 5844 1397
          (86 512) 5844 1018
Fax:      (86 512) 58 44 1012
          (86 512) 5844 1980
                                    108-11


B.       ENGINEERING


1.       Machinery and Equipment


The list of machinery and equipment required to produce socks and stockings is given in
Table 6.1 All the machinery and equipment required have to be imported.


                                           Table 6.1
                  LIST OF PLANT MACHINERY AND EQUIPMENT


 No.     Description                         Qty             Cost (‘000 Birr)
                                                       LC          FC             TC
     1   Single cylinder double welt                    -          770            770
         socks knitting machine 4-14         14
         pairs/hr each
     2   Double       cylinder     sock      14         -          700            700
         knitting      machine,     4-8
         pairs/hr each
     3   Cone winder                          1         -          240            240
     4   Linking      machine,     2-20       8         -          280            280
         pairs/hr each
     5   Setting machine, 240 pairs/hr        2         -          840            840
     6   Dyeing         machine,      50      1         -          120            120
         kg/operation
     7   Steam Iron                           4         -          0.80           0.80
     8   Boiler for steam generation        1 unit      -          200            800
         FOB price                            -         -        3150.80        3150.80
         Freight,    insurance,    bank,      -        300           -            300
         customs, material handling
         CIF landed cost                               300       3150.80        3450.80
                                     108-12


2.      Land, Building and Civil Works


Land is required for factory buildings, administration building, internal road and
pathways, and for future expansion. Accordingly the total land requirement for socks and
stockings producing plant is estimated to be 1000 m2. At the rate of Birr 1.0 per m2 and
for a period of 80 years, the total land lease value will be Birr 80,000. Of the total area of
land the built-up area will be 400 m2. At the rate of Birr 2000 per m2, the building cost
will be Birr 800,000.       Therefore, the investment on land, building and civil works will
then be Birr 880,000.


3.      Proposed Location


A manufacturing enterprise that has to import raw materials required such as the
envisaged one prefer location which is near to port or that has easy access to port.
Moreover, availability of infrastructures such as power and nearness or easy accesses to
major markets is also additional critical factors. Accordingly, due to the availability of
the following facilities;

      Road net work that connect to major towns within the region and other regions
      Availability of Infrastructure such as power and water
      Communication facilities ( telephone, fax, internet, etc.)
      Relatively large market

Arbaminch Zuria, Awassa Zuria and Wonago woredas are selected as a possible location for
the envisaged plant.

Moreover, after analysing the comparative advantages and disadvantages of the selected
woredas and the requirements of the envisaged project the capital of Wonago woreda i.e.
Dilla town is selected as the best location due to the fact that in addition from fulfilling the
above criteria the town is is connected to the Addis Ababa through good quality asphalt
road. Addis Ababa apart from being the biggest market for the envisaged product it is also a
major distribution centre of goods to other regions.
                                  108-13


VI.    MANPOWER AND TRAINING REQUIREMENTS


A.     MANPOWER REQUIREMENT


The plant will employ both production workers and administrative staff. Production
workers will consist of skilled and unskilled workers. The details of manpower and
related monthly and annual salaries are given in Table 6.1 below.


B.     TRAINING REQUIREMENT


The production head and machinery operators will have to be trained on knitted and
dyeing technology. It is proposed that an expert from machinery supplier will provide
the training programme during erection and commissioning of the plant. A total of Birr
10,000 is allotted to execute the training programme. It is proposed that the training
programme will be included in contractual agreement for the supply of machinery.
                                   108-14


                                       Table 6.1
                              MANPOWER REQUIREMENT


    No.                Job Title                Nos        Monthly         Annual Wages
                                                            Salary
           A. Administration
1          Plant manager                           1              2,000           24,000
2          Secretary                               1                 600           7,200
3          Personnel                               1              1,000           12,000
4          Sales man                               1                 800           9,600
           Store man                               1                 600           7,200
5          Cashier                                 1                 600           7,200
6          Clerk                                   1                 400            4800
7          General services                        4                 250          12,000
           Sub total                            11                                 84000
           B. Production
1          Production head                         1              1200            14,400
2          Skilled workers                      40                   600          288000
3          Unskilled workers                    10                   250          30,000
           Sub total                            51                     -          332400
           Workers’ benefit (25% BS)               -                              104100
           Total                                62                                520500




VII.      FINANCIAL ANALYSIS


The financial analysis of the socks and stocking project is based on the data presented
in the previous chapters and the following assumptions:-


Construction period                  1 year
Source of finance                    30 % equity
                                  108-15


                                     70 % loan
Tax holidays                         3 years
Bank interest                         8%
Discount cash flow                   8.5%
Accounts receivable                  30 days
Raw material local                   30 days
Raw material, import                 90 days
Work in progress                     5 days
Finished products                    30 days
Cash in hand                         5 days
Accounts payable                     30 days


A.     TOTAL INITIAL INVESTMENT COST


The total investment cost of the project including working capital is estimated at Birr
6.21 million, of which 53    per cent will be required in foreign currency.


The major breakdown of the total initial investment cost is shown in Table 7.1.
                                        108-16


                                               Table 7.1
                                 INITIAL INVESTMENT COST


               Sr.                                                    Total Cost
               No.                  Cost Items                        (‘000 Birr)
              1        Land lease value                                     80.0
              2        Building and Civil Work                            800.0
              3        Plant Machinery and Equipment                    3,450.8
              4        Office Furniture and Equipment                     125.0
              5        Vehicle                                            200.0
              6        Pre-production Expenditure*                        482.5
              7        Working Capital                                  1,078.8
                       Total Investment cost                            6,217.1
                                  Foreign Share                               53




* N.B Pre-production expenditure includes interest during construction ( Birr      332.52     thousand )
training (Birr 10 thousand ) and Birr    140   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                         7.44
million (see Table 7.2).         The material and utility cost accounts for          79.48 per cent,
while repair and maintenance take 2.42           per cent of the production cost.
                                     108-17


                                         Table 7.2
          ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)


                          Items                   Cost                %
              Raw Material and Inputs                5,796.25             77.88
              Utilities                                119.2                1.60
              Maintenance and repair                     180                2.42
              Labour direct                            436.5                5.86
              Factory overheads                        94.18                1.27
              Administration Costs                        84                1.13
              Total Operating Costs                  6,710.13             90.15
              Depreciation                            467.58                6.28
              Cost of Finance                         265.28                3.56
              Total Production Cost                  7,442.99                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.


2.        Break-even Analysis


The break-even point of the project including cost of finance when it starts to operate at
full capacity ( year 3) is estimated by using income statement projection.
                                    108-18



                               BE =          Fixed Cost       =   57 %
                                      Sales – Variable Cost


3.     Pay Back Period


The investment cost and income statement projection are used to project the pay-back
period. The project’s initial investment will be fully recovered within 5 years.


4.     Internal Rate of Return and Net Present Value


Based on the cash flow statement, the calculated IRR of the project is 23 % and the net
present value at 8.5% discount rate is Birr 3.67 million.


D.     ECONOMIC BENEFITS


The project can create employment for 62 persons.             In addition to supply of the
domestic needs, the project will generate Birr 2.56 million in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.

				
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