ANGORA TEXTILES LIMITED: PRODUCT MIX DECISION In November 1995 Khurram Zafar, Director Operations, Angora Textiles Limited, was approached by Asim Hussain, a former employee who was now enrolled in an MBA programme. Asim suggested using Linear Programming to make product mix decisions and volunteered to develop the model for Khurram. (Besides, Asim had been asked to develop such a model for his Quantitative Methods class and needed the data). Khurram was responsible for the production planning decisions and monitoring of daily progress of the work orders. He normally accepted any order that was above his minimum price and scheduled it to the earliest possible date subject to available capacity (after keeping some reserve capacity for urgent orders). Angora Textiles Limited, a vertically integrated knitwear unit with combined facilities for knitting, dyeing, finishing, cutting, sewing and packing facilities, was established in 1989. Its products were aimed at the higher quality end of the international market. Being a vertically integrated unit, Angora could exercise better control of product quality and on-time delivery. Over the years, the value of sales at Angora had gone up by about 15 times, although the volume of sales itself was only eight times higher. This was mainly due to the company strategy of continuously developing higher value products and targeting customers at the higher-end. Production Process The production process started with the procurement of yarn from spinning mills. The production stages included knitting, dyeing of fabric, cutting, stitching and finishing. Finally the product was packed and exported. Figure 1 gives the main stages of production Figure 1: Production Process Knitting Dyeing Cutting Stitching Yarn Shipment Exported Packaging Finishing Knitting Department The knitting department at Angora had five circular machines for knitting fabric and two flat- knitting machines for knitting accessories such as collars and arm-bands. After yarn was procured, it was handed over to the knitting department along with the construction details of the fabric. The fabric knitted at Angora could be broadly divided into three types based on the structure and the subsequent finishing of the fabric. Table 1 lists the rate of production per machine, for different types of fabrics. Table 1 Simple Knit Fabrics 350 Texturized Fabrics 200 Blended Fabrics 175 Rate of Production (Kgs/day) Complexity of fabric Examples Simple Jersey, pique, interlock more complex Thermal, waffle french terry most complex fleece, sherpal The estimated cost of knitting for different fabric types is given in Table 2. A major portion of the cost was depreciation and labour charges. The labour in the Knitting area was on regular wages. Table 2 Cost of Knitting for different fabric types (Rs per kg). Single Jersey Single Jersey light weight heavy weight Fleece light weight Fleece heavy weight Textured fabrics light weight 18.60 Textured fabrics heavy weight 20.60 10.00 16.70 25.80 28.90 Since the production capacity of the knitting department was not enough, a lot of the knitting work was also subcontracted to outside vendors. Although these vendors' cost of knitting was cheaper than that of Angora, Khurram had instructed the knitting section to fully load their own machines before resorting to subcontracting. Also to make his calculations simpler, Khurram had decided to assume the same costs for getting the knitting done through subcontracting as he had for getting it done in-house. Dyeing and Finishing Department The dyeing and fabric finishing department at Angora consisted of eight dyeing machines of various capacities with a total output of 5000 kg per day for all fabrics, and a multitude of finishing machines with a total capacity of 6000 kgs per day if only Single Jersey light weight (SJL) fabric was processed. The light weight and simpler fabrics like Jersey and Pique could be finished more easily whereas the heavier fabrics required more complicated finishing processes like raising, sueding, peaching, and re-dipping etc. The first row in Exhibit 1 lists the difficulty factors for other fabric types in comparison to SJL fabric. If the difficulty factor for a fabric is 2 then the finishing capacity for that fabric is only half that for SJL fabric. Thus the Dyeing and Finishing department could finish 6000 kg of SJL fabric or 6000/1.2 kg of Fleece Light Weight (FL) fabric per day (or it could also finish any other combinations of the different fabrics in the ratios dictated by their difficulty factors). The costs associated with the finishing of fabric were primarily depreciation costs. The major portion of the dyeing cost was the cost of chemicals used in the dyeing process and the depreciation of the machines. Angora could meet all its dyeing requirements in-house. Cutting Department Do 0 0 0 0 0 0 0 0 0 0 0 0 In this department the fabric was cut into pieces according to size and style and stocked in the form of bundles. The manpower employed in this department was paid piece rate wages and could be retained or laid-off according to the production requirement. All accessories like collar, placket, yoke, and panels were cut and added to the bundles. The department comprised eight cutting bays, having a total capacity of 9600 SJL pieces per day. The rate of cutting for Jersey fabric was much higher as compared to heavy Fleece as many more layers of Jersey fabric could be cut at the same time whereas Fleece being heavier and thicker, required more time and effort. Another factor that determined the output of the department was the complexity of the style being cut. The more complex the style, the lesser the output and vice versa (see Exhibit 1 for the difficulty factors of other fabric types). The amount of fabric (kilograms) required for a dozen garments also varied according to the type of fabric being used (see Exhibit 2). Stitching Department The stitching department had 350 stitching machines laid out in seven lines. The capacity of the stitching department itself was about 14880 SJL pieces per day (31000 dozens/month). The capacity of the department was governed by the product mix and the number of set-ups needed to complete the order. In case of heavier fabrics and complex styles there was a significant decrease in the production capacity as these garments required not only more stitching time but also more set-ups. However Khurram observed that the average output of Different finishing operations, performed on fabric to enhance the feel and visual effect. 3 the Stitching department was 8640 pieces per day. The labour in this department too was paid piece rate wages and was added or laid off according to the production requirements. The difficulty factors associated with stitching of the garments are presented in Exhibit 1. Finishing & Packing Department Stitched garments were passed on to the finishing and packing department, where, after their loose threads were cut, the garments were inspected, pressed, packed and made ready for final inspection. Garments were folded according to specific instructions from the buyers after hang tags and price tickets were attached. Finishing and packing was a predominantly manual operation and given the low level of skill required, workforce for this section was readily available. The difficulty factors associated with finishing and packing of the garments and the costs associated with sundries' are given in Exhibit 1. Marketing Constraints C Angora, an export oriented company was subject to the rules and regulations of the government, putting a constraint (through quotas) on the quantity of particular garment type that it could manufacture and export in a given year. Angora had a quota of 18000 dozens for the year 1996 and could purchase more quota if needed at an average cost of Rs 1000 per dozen. Furthermore Angora had to meet the whole mix of a particular order from a buyer which might include 100 dozen Single Jersey garments, 65 dozen Texturized Fabric garments and 40 dozen Fleece garments. Thus Khurram felt that at least 20 percent of the production capacity should be allocated to each of the three (Single Jersey, Textured and Fleece) product categories. Also, given the company strategy of aiming for higher value garments, Khurram wanted at least 60 percent of his production be of garments valued at six dollars or more each. The orders already booked by Angora for the coming season are given in Exhibit 3. The average prices that the different garments fetched are given in Exhibit 4. The costs associated with the different manufacturing processes are given in Exhibit 5. Since piece rates were set keeping in view the difficulty in manufacturing a garment, the cost associated with the different fabric types were generally directly proportional to the level of difficulty of production for that particular fabric. For calculating the contribution each product gave, Khurram used the difficulty factors (Exhibit 1), fabric weight per dozen garments (Exhibit 2), price of garment (Exhibit 4) and the cost data (Exhibit 5). An example of the contribution calculation for producing one dozen garments of Light Texturized fabric is given in Exhibit 6. As Asim started to develop a model to determine the best product mix, he reminded himself that the knitwear industry was subject to unforeseen changes in prices and any plan that he made would have to be flexible to these changes. Sundries include items such as collar tags, hang tags, buttons and price tickets. For category 338 4 Process Exhibit 1 ANGORA TEXTILES LIMITED: Product Mix Decision Difficulty factors of the various fabric types Single Single Textured Textured Fleece Jersey Jersey fabrics fabrics heavy light light heavy light weight weight weight weight weight Fleece heavy weight Dyeing & 1.00 1.10 1.05 1.15 1.20 1.35 Finishing Cutting 1.00 1.05 1.05 1.15 1.35 1.55 Stitching 1.00 1.10 1.20 1.10 1.30 1.40 Finishing & 1.00 1.10 1.05 1.15 "1.20 1.35 Packing Sundries 1.00 2.00 1.50 2.00 3.00 4.00 Source: Asim Hussain, Hasnain Ali and Sohail Hassan, MBA Class of 1998. Student Project Report. Exhibit 2 ANGORA TEXTILES LIMITED: Product Mix Decision Kg of fabric per dozen garments for different fabric types Fabric Type Kg/doz Single Jersey / Pique light weight 3.6 6.0 Single Jersey / Pique heavy weight Textured Fabrics light weight Textured Fabrics heavy weight 6.7 7.4 Fleece light weight 9.3 Fleece heavy weight 10.4 Source: Asim Hussain, Hasnain Ali and Sohail Hassan, MBA Class of 1998. Student Project Report 5 Exhibit 3 ANGORA TEXTILES LIMITED: Product Mix Decision Orders in Hand for 1996 In dozens 900 1080 200 Fabric Type Single Jersey / Pique light weight Single Jersey / Pique heavy weight Textured Fabrics light weight Textured Fabrics heavy weight Fleece light weight Fleece heavy weight Total 250 180 990 3600 Source: Asim Hussain, Hasnain Ali and Sohail Hassan, MBA Class of 1998. Student Project Report Exhibit 4 ANGORA TEXTILES LIMITED: Product Mix Decision Price per Garment (US $) Fabric Types Average Price per Garment in $ 4.10 5.75 6.30 Single Jersey / Pique light weight Single Jersey / Pique heavy weight Textured Fabrics light weight Textured Fabrics heavy weight Fleece light weight Fleece heavy weight 6.90 8.25 9.50 Source: Asim Hussain, Hasnain Ali and Sohail Hassan, MBA Class of 1998. Student Project Report. * Exchange rate was Rs 40 to US $1 in November 1995. 6 Exhibit 5 ANGORA TEXTILES LIMITED: Product Mix Decision Cost Data Based On Single Jersey Light Weight Fabric (30/S Yarn) Process Cost (in Rupees) Yarn 105 per kg of yarn Knitting | 10 per kg for light weight Single Jersey Dyeing 55 per kg for all types of fabric Cutting 24 per dozen for light weight Single Jersey Sundries 264 per dozen for light weight Single Jersey Stitching 150 per dozen for light weight Single Jersey Finishing 15 per dozen for light weight Single Jersey Overheads 400 per dozen for all fabric types Source: Asim Hussain, Hasnain Ali and Sohail Hassan, MBA Class of 1998. Student Project Report Note: It was an industry practice to calculate and quote costs and prices in dozens. 7 Exhibit 6 ANGORA TEXTILES LIMITED: Product Mix Decision Contribution Calculations for One dozen light weight Texturized fabric Process Total Revenue Cost of Yarn Cost of Knitting Cost of Dyeing Cost of Cutting Cost of Sundries Cost of Stitching Cost of Finishing Overhead cost Total Cost Contribution Cost Calculation in Rupees 6.3 * 12 * 40 = 3024.00 6.7 * 105 = 703.50 6.7 * 1.86 * 10 = 124.62 6.7 * 55 = 368.50 1.05 * 24 = 25.20 1.5 * 264 = 396.00 1.2 * 150 = 180.00 1.05 * 15 = 15.75 400.00 2213.57 810.43 Source: Asim Hussain, Hasnain Ali and Sohail Hassan, MBA Class of 1998. Student Project Report 8 Assignment Questions 1. If Angora were to produce Single Jersey light weight fabric garments only, how many garments. (doz) could Angora produce and what would be the contribution? 2. State in mnagerial terms, the optimal product mix for Angora. How much in contribution will Angora stand to make with this product mix. 3. A stitching unit has offered to sell Angora its stitching capacity of 100 doz/day (SJL) at a cost of Rs 160 per dozen. Should Angora accept this offer? 4. What would be the optimal product mix if the dyeing capacity was increased to 6,000 kg/day? What would be the new total contribution? 5. What is the minimum additional contribution required for Single Jersey light weight garments to make it economically feasible to increase its production. 6. The R&D department of angora has developed a new fabric. The table below gives the production perimeters of this fabric Process Difficulty Factors Kg/doz 12.5 Knitting 3.2 Dyeing 11.5 Finishing 1.3 Cutting 1.5 Stitching 1.6 Price / doz $ 132.00 What should its contribution be to make it economically feasible?