Comment: The cheap labour myth
By David Birnbaum | 27 January 2014
Successful garment exporters are taking a more academic approach to sourcing product. Instead of moving to the latest cheap labour country, their strategy is to reduce overhead by increasing worker productivity, training, and capital investment in cutting edge machinery. David Birnbaum explains why.
Contemporary garment export industry management can be divided into two distinct groups.
- Group I: The traditional manager/owners who believe that factory success is based on low labour rates.
- Group II: The professional managers who believe that Group I is a bunch of incompetents, stuck in the 19th century.
Statistically, the Group I people yell the loudest, while Group II is taking over the industry.
The reality is that labour rates have little to do with wage costs, and wage costs have even less to do with FOB price. In today's world where customers negotiate prices directly with material and trim suppliers, all that remains to factory negotiation is CM (cut-make) and that is negotiated on the basis of cost per standard minute.
Imagine you have a factory located in a cheap labour country:
- The FOB price of the garment is $6.00
- Your customer pays 6¢ per standard minute
- You look to achieve 5% net profit (30¢)
- Your sewers are paid $120 per month; based on ten hours a day, a six-day week, which works out to 46¢ an hour, or 0.8¢ per second.
- The garment requires 30 standard minutes
|Cheap labour factory|
|Overhead per unit||$1.27|
|Ratio overhead to labour||5.5|
If we compare labour cost with overhead - that is, wages paid to everyone that physically handles the garment, with all other wages, salaries and expenses (other than material and trim) - we see that overhead is 5.5 times labour.
This seems like a pretty hefty number until we consider the following:
- The lower the wage, the higher the ratio;
- It costs a lot more money to turn on the lights in Dhaka or Phnom Penh than in New York or London.
Now imagine you add some labour saving capital equipment and perhaps provide greater training to your people, with the result that productivity increases by 20%. Let's assume, that being a good guy, you give that 20% to workers as increased wages.
- The FOB price of the garment is still $6.00
- Your customer still pays CM $1.80
- Your sewers are now paid $144 per month; based on ten hours a day, a six-day week; which works out to 46¢ an hour, or 0.9¢ per second.
- The garment now requires 24 standard minutes
Your workers earn 20% more, but your overhead has fallen by 20%, a saving of 25¢ on overhead. Your cost reduction is greater than total labour cost.
|Cheap labour factory w/20% productivity increase|
|Overhead per unit||$1.02|
|Ratio overhead to labour||4.58|
- Your ratio of overhead to labour is now 4.58%
- Your profit has increased from 5% to 9.4%
Now imagine you have moved your factory to China, to a factory with the latest equipment and very well trained workers.
- The FOB price of the garments is still $6.00
- You customer still pays CM $1.80
- Your sewer is paid $525 per month, 3.25 times the worker in your previous cheap labour factory; which works out as $2.02 per hour or, 3¢ per minute
- But the garment requires 15 standard minutes: half of the time required in your previous cheap labour factory.
|China factory based high productivity|
|Overhead per unit||$0.63|
|Ratio overhead to labour||1.26|
- Your ratio of overhead to labour is now 1.26%
- Your profit is now 11%
The Group II, giant transnational factories are not rushing to the latest cheap labour countries. They are rather spending their time, effort and money in advanced training and cutting edge capital equipment.
They are the stayers and they are taking over the garment export industry, because they understand the industry and can add up the numbers.
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Comment: The cheap labour myth