1. 

2. The current operating cycle for Star Textiles starts with securing quotes from intermediaries, which act as a link between manufacturers and Star Textiles. Then products of potential suppliers are checked, orders are placed, the cloth is received, sales are made to retailers, suppliers are paid, and eventually receivables are collected from the buyers.

   Buying finished products from the intermediaries was a relatively simple process. Amir had to contact vendors for acquiring quotes and then visit them to negotiate the specifics of the order. Before placing the order, samples had to be sent to Star Textiles to be reviewed by management. This process would take a couple of days. The seller then delivered the order to Star Textiless warehouse.

   Depending on the availability of the desired quality and colors, the average lead time from placing an order to receiving the cloth was about seven days. The cloth was bought at credit terms of about six weeks after receipt of the cloth. Star Textiles could order in quantities of 1,000 meters and specify quality and colors within one order. Inventory was kept at the warehouse or at the shop for 15 days on average before being sold.

   The market was competitive, and businesses needed to order well in advance to ensure better-quality cloth ahead of busy seasons. The per-meter price of cloth varied by the quality and colors involved. For example, a 70-by-60 cloth with light colors could be bought at 78 Indian rupees (INR) per meter (1 INR = US$0.013). (Note: 70-by-60 is an example of thread count, which refers to the number of threads woven together in a square inch. Its counted both lengthwise, called warp threads (70 in this case), and widthwise (60 in this case), called weft threads. The higher the thread count, the higher the quality of fabric and the smoother the finish.)

   The company had to arrange transportation of cloth to its warehouse, and such transportation costs average around 1 INR per meter. On average, such cloth was usually sold to retailers at a markup of about 10%, with credit terms of one month.

   MANUFACTURING THE FABRIC

   Over the last few weeks, Amir had pieced together information for Star Textiles to have its cloth manufactured instead of buying it from intermediaries. Amir had already contacted his bank, which was willing to finance his venture at an interest rate of 12%.

   The operating and cash conversion cycle for manufacturing cloth differs from that for buying cloth. To have the cloth manufactured, Star Textiles would have to:

3. Contact the broker for purchasing greige fabric (greige, or gray, fabric is unfinished woven fabric that has yet to be dyed or bleached),
4. Order greige,
5. Pay the greige supplier,

6. Receive greige cloth,

7. Send the cloth to a dyeing plant,
8. Pay the dyeing bill
9. Receive the dyed cloth,
10. Make the sale, and
11. Receive money from the buyers.

12. The first step in the process of getting Star Textiless fabric manufactured was to buy the greige fabric from weaving mills. Weaving mills procure yarn from spinning mills and weave it into greige fabric, typically on order. If new to the market, a buyer would search for a well-reputed broker who can get greige fabric that matches the buyers requirements. The broker would charge the company 1% on the per-meter price of the greige fabric.

    Buying greige wasnt an easy task because the quality of the cloth from the loom weavers was inconsistent. For example, the weavers could claim that the thread they had used was of great quality, but, based on the look and feel of the fabric, customers could tell that the thread quality wasnt as good as claimed. Because the looms require up-front payments, neither the weaver nor the broker would pay heed to claims made by the purchaser. A few existing big buyers in the market could retain a portion of the payment until the lot was dyed, and, if the fabric indicated any discrepancy from the specifications, the weaver would likely offer a discount. It was rare for a buyer to return the whole lot and get the cash reimbursed.

    Another way to curb the problem of inconsistency was to hire a greige checker who would visit the loom facility and check the greige before it was sent for dyeing. A checker typically charged 0.20 INR per meter. Checkers, however, could turn out to be corrupt, as they might make a deal with the weaver to approve a defected lot.

    The factors affecting greige costs include:

13. Thread count (including warp and weft) of the greige.
14. Quality of thread used. The quality depends on the manufacturer of the yarn and the composition of yarn (for example, 80% polyester and 20% viscose).
15. The width of greige. Typically, 61 inches of greige was used, which shrinks to 54 inches after being dyed. A single suit requires about 4 meters of 54-inch-wide fabric.
16. The quality of loom used to weave the cloth. The loom is a machine that weaves the cloth using yarn, and the quality of the cloth produced heavily depends on the technological features of the loom. A power loom is the cheapest, whereas an air jet is the most expensive type of loom used in India. Other commonly used types of looms include shutterless and rapier.
17. Brand name of the cloth manufacturer. Some weaving mills sell greige cloth under their brand name, but others manufacture unbranded cloth for dyeing and finishing mills on order. Brand name has significant impact on the price of the cloth since customers could expect relatively greater consistency in quality compared to unbranded cloth.

18. The whole process of placing the order with the looms and receiving greige cloth takes about a week. The greige cloth is then sent to the dyeing plants. The cost of getting the cloth dyed was one of the most significant costs after acquiring the greige. There were hundreds of dyeing plants in Nashik, Mumbai, and Gujarat, which offered different prices for different types of greiges. The dyeing cost typically varied with thread count of the greige and required color of the dyed fabric.

    The difference in rates for a specific greige could also be enormous, depending on the quality of dyeing plants. For a certain greige, Al-Rahim Dyeing of Nashik (arguably the best dyeing plant in Nashik) charges 27 INR per meter. For the same greige, Lakhany Dyeing of Gujrat (the best dyeing plant in Maharashtra for wash-and-wear clothing) charges 60 INR per meter. Superior-quality greiges, woven by air jet looms, were sent to Lakhany. Greiges of power and shutterless looms were sent to Nashik dyeing plants.

    The dyeing plants take orders in batches of 1,000 meters and demand payment up front. During the process, the cloth also experiences a shortage(i.e., shrinkage), which is the approximate percentage of cloth length thats lost during the dyeing process. If the anticipated shortage is 10%, for example, then 100 meters of cloth will shorten to 90 meters after the processing. Shrinkage in width doesnt matter since the greige cloth is manufactured at a width that anticipates it.

    Dark colors (i.e., black, dark blue, or dark gray) are reactive, which means theyre relatively more expensive to dye and also end up with greater shortage compared to light-colored fabrics. In case the manufacturer wanted to produce the product in vat colors, which can endure more washes, the dyeing rate could increase up to 40 INR per meter. Finally, the dyed cloth is brought to the warehouse, where its checked for quality and packed into thaans (20- to 24-meters of cloth packaged into a roll around a piece of cardboard) for sale to retailers.

    The process of dyeing the cloth takes about a week. A single bundle of summer wash-and-wear cloth is about 700 meters. But a single lot of 10 colors will be no less than 10,000 meters. A typical single production run of dyeing ranges from 1,000 to 1,400 meters for one color depending on the dyeing facility. Sometimes, the dyed cloth reveals poor fiber quality or damage received during the weaving or dyeing processes. Buyers have little recourse in these situations and have to take a financial hit by selling this cloth as damaged product.

    All this effort could result in greater margins than buying cloth from vendors, which could also lead to better prices for customers. When Amir requested several quotes from weavers and dyeing units for their pricing, however, he claimed that he wanted to sell quality cloths rather than generic pieces of cloth.

19. Amir considered the two processes (see Figure 1). He estimated that other costs would remain more or less similar for the cloth he was going to get manufactured except for:

20. A 50% increase in packaging cost per meter;
21. Transportation costs, which would double (because the cloth has to move to several locations before being brought to the shop); and
22. A 50% increase in sampling costs per meter. Sampling refers to the cost of a few pieces of cloth sent to current and potential customers for business development. Sometimes the buyers would send an experienced person to verify quality of the merchandise, and the buyer and seller would share the cost.

23. Amir was also aware of the fact that, at least for an initial period, he might not be able to sell the manufactured cloth at the same price and would need to offer a discount of about 2.5%. He would also need to hire two assistants, each at a salary of 20,000 INR per month, to help with the added workload. Considering that these costs werent substantial compared with the cost of goods sold, it seemed sensible to go ahead with the plan. But he wanted to go through the numbers in detail before he made a decision.

    Amir also knew that he may not be able to increase the total number of meters sold to customers in the coming year, but things might change once customers recognize the improved quality of his offerings. He has asked your help in analyzing the financial and nonfinancial considerations of getting cloth manufactured rather buying it from suppliers.

24. Please Answer this Question: Use Table 1 to calculate the profit per meter if Amir decides to get the amount of the cloth shown in Table 2 manufactured instead of buying it from suppliers.

TABLE 1: 2018 FINANCIAL PERFORMANCE OF STAR TEXTILES, GROUPED BY QUALITIES OF CLOTH SOLD Thread count (Colors) Sales (meters) Price (INR) Sales (INR) Purchased Total 70x60 76x64 80x72 76x64 80x80 (light) (light) (light) (dark) (dark) 540,000 460,000 280,000 210,000 230,000 1,720,000 86 102 120 115 46,440,000 46,920,000 33,600,000 24,150,000 30,360,000 181,470,000 132 Cost of Sales Allocation Basis Purchase price Cut piece* Meters Packaging Actual Freight in Actual Total Cost of Sales 42,120,000 41,860,000 29,680,000 21,420,000 26,450,000 1,026,000 874,000 532,000 399,000 437,000 540,000 460,000 280,000 210,000 230,000 520,000 430,000 260,000 202,000 220,000 44,206,000 43,624,000 30,752,000 22,231,000 27,337,000 161,530,000 3,268,000 1,720,000 1,632,000 168,150,000 Gross Profit 2,234,000 3,296,000 2,848,000 1,919,000 3,023,000 13,320,000 655,233 254,070 25,000 Administrative Expenses Salaries Meters Rent Meters Sampling Actual Electricity Meters Telephone Meters Debt recovery Meters Maintenance Meters Porter Meters Miscellaneous Meters Total Administrative Expenses Net Profit 769,186 298,256 30,000 122,442 91,047 97,953 28,884 106,744 34,535 1,579,047 654,953 104,302 77,558 83,442 24,605 90,930 29,419 1,344,559 1,951,441 398,837 154,651 15,000 63,488 47,209 50,791 14,977 55,349 17,907 818,209 2,029,791 299,128 115,988 10,000 47,616 35,407 38,093 11,233 41,512 13,430 612,407 1,306,593 327,616 127,035 20,000 52,151 38,779 41,721 12,302 45,465 14,709 679,778 2,343,222 2,450,000 950,000 100,000 389,999 290,000 312,000 92,001 340,000 110,000 5,034,000 8,286,000 Profit per Meter 1.21 4.24 7.25 6.22 10.19 Note: Some numbers might not add exactly due to rounding. * Cut piece is the cost of odd-length cloth that needs to be disposed of because retailers wouldn't buy it. TABLE 2: QUOTES FOR DIFFERENT QUALITIES OF GREIGE CLOTH AND COST OF DYEING 76 64 Light 80 72 Light 76 64 Dark 80 80 Dark 61 61 61 61 10% 10% 12% 12% Quality Specifics Warp 70 Weft 60 Colors Light Width of greige 61 (inches) Shortage 10% Cost (per meter) Greige 44 Dyeing 20 Estimated meters to be manufactured and 200,000 sold next year Currently: Cost of purchasing 78 finished cloth per meter Current sale price per meter 86 51 24 60 27 54 30 63 32 150,000 100,000 80,000 80,000 91 106 102 115 102 120 115 132 TABLE 1: 2018 FINANCIAL PERFORMANCE OF STAR TEXTILES, GROUPED BY QUALITIES OF CLOTH SOLD Thread count (Colors) Sales (meters) Price (INR) Sales (INR) Purchased Total 70x60 76x64 80x72 76x64 80x80 (light) (light) (light) (dark) (dark) 540,000 460,000 280,000 210,000 230,000 1,720,000 86 102 120 115 46,440,000 46,920,000 33,600,000 24,150,000 30,360,000 181,470,000 132 Cost of Sales Allocation Basis Purchase price Cut piece* Meters Packaging Actual Freight in Actual Total Cost of Sales 42,120,000 41,860,000 29,680,000 21,420,000 26,450,000 1,026,000 874,000 532,000 399,000 437,000 540,000 460,000 280,000 210,000 230,000 520,000 430,000 260,000 202,000 220,000 44,206,000 43,624,000 30,752,000 22,231,000 27,337,000 161,530,000 3,268,000 1,720,000 1,632,000 168,150,000 Gross Profit 2,234,000 3,296,000 2,848,000 1,919,000 3,023,000 13,320,000 655,233 254,070 25,000 Administrative Expenses Salaries Meters Rent Meters Sampling Actual Electricity Meters Telephone Meters Debt recovery Meters Maintenance Meters Porter Meters Miscellaneous Meters Total Administrative Expenses Net Profit 769,186 298,256 30,000 122,442 91,047 97,953 28,884 106,744 34,535 1,579,047 654,953 104,302 77,558 83,442 24,605 90,930 29,419 1,344,559 1,951,441 398,837 154,651 15,000 63,488 47,209 50,791 14,977 55,349 17,907 818,209 2,029,791 299,128 115,988 10,000 47,616 35,407 38,093 11,233 41,512 13,430 612,407 1,306,593 327,616 127,035 20,000 52,151 38,779 41,721 12,302 45,465 14,709 679,778 2,343,222 2,450,000 950,000 100,000 389,999 290,000 312,000 92,001 340,000 110,000 5,034,000 8,286,000 Profit per Meter 1.21 4.24 7.25 6.22 10.19 Note: Some numbers might not add exactly due to rounding. * Cut piece is the cost of odd-length cloth that needs to be disposed of because retailers wouldn't buy it. TABLE 2: QUOTES FOR DIFFERENT QUALITIES OF GREIGE CLOTH AND COST OF DYEING 76 64 Light 80 72 Light 76 64 Dark 80 80 Dark 61 61 61 61 10% 10% 12% 12% Quality Specifics Warp 70 Weft 60 Colors Light Width of greige 61 (inches) Shortage 10% Cost (per meter) Greige 44 Dyeing 20 Estimated meters to be manufactured and 200,000 sold next year Currently: Cost of purchasing 78 finished cloth per meter Current sale price per meter 86 51 24 60 27 54 30 63 32 150,000 100,000 80,000 80,000 91 106 102 115 102 120 115 132