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Post shipment analysis – a strategic tool for fashion export house

A fashion apparel export house generally works for the buyers/brands based in other part of the world and produces garments and other fashion products as per the need of the buyer. The Fashion Brands normally place the orders to the export house in order to leverage benefits ranging from low cost labour, improved quality to product and service innovation. In today’s world the drivers of outsourcing are often more strategic, and fashion brand’s focus is on carrying out core value-adding activities in-house where brand can best utilize its own core competencies.

On the same line, fashion export house also needs to concentrate on their core competency and also needs to put some strategy to increase their profit. Profit is defined as additional revenue after resources necessary for production are utilized. Profit is important because it is the bottom line of a business which helps grow a business and it makes its owners become more economically stable. Fashion export house which provides a fashion product to its buyer/brand is hoping to keep customers happy while being compensated for their efforts. Careful research and planning must occur after shipping the garments because lack of co-ordination or poor management can lead to lower profits.

In normal circumstances, an export house works for numbers of buyers, which depends upon the capabilities and capacity of an export house, further every individual buyer place the order for various styles by giving the purchase orders. For example, if an export house is working with, say, 10 buyers and on an average every buyers places approximately 10 purchase orders every season then, total numbers of purchase orders for export house will be around 100 purchase orders in three months.

In such a situation, assuming an export house is earning 10% profit of the total turnover at the end of the year, such a situation is giving the picture of overall performance of the export house for that given period this export house is earning 10% profit, in which a particular order execution may be very profitable and on the other hand in other order execution the export house may be losing money, such a situation can never be accepted by any management because it just provides overall information which makes decision making a difficult task for the management.

The above situation gives rise to the following issues before the management of an export house:

  1. What should be done so that the management of an export house have a clear approach about each and every buyer and also about each order received from them?
  2. How the management of an export house decide, what direction should be taken about how individual account should be managed or how each order should be managed?
  3. Which buyer is profitable for the company and where company is making losses?
  4. How to decide with which buyer an export house need to continue the work and with whom it can discontinue to work?

In the absence of exact informations about profitability of individual buyer it becomes very difficult to run an export house profitably, for example suppose at the time of accepting orders at a profit margin of 15% but at the end, if earnings are only around 10% then it is very important to understand from where actually the losses are coming. Here, export house must do the profit analysis of not only of individual buyers but an individual purchase order is also need to be analysed.

Post Shipment Analysis:

The export houses accept order on mutually agreed price from the buyer; this price is generally calculated by the export house after doing the costing of a product at the time of sampling. Normally, these estimates are based upon the experience and theoretical calculations and it may not be exact when order is executed.

In order to counter above mentioned situations the export house does the analysis of every order once it is successfully executed to know whether a particular order was profitable or not, this analysis is known as Post Shipment Analysis (PSA), in some export houses, it is also known as Order Closure Report. Processing of an order is not complete until PSA is made and submitted to cost accounting department. Profit from an order after shipment of goods can be assessed only when PSA is made.

The post shipment analysis gives the status whether execution of a particular order was profitable or not. It helps the management to overcome the situations mentioned above and presents the appropriate situation which should be known to the export house so that better decision can be taken next time to make the profit.

Generally Production Planning Department do post shipment analysis. But management can give responsibility to any other department or a person. It does not matter who do the analysis. Important point is that correct and complete information must be collected from departments those involved in making the order.
The main objective of this PSA is to:

  • Find out the deviation in expenses and their effect on profits as initially calculated. In other words calculating the actual production cost Vs. Planned production cost.

The other sub objectives are: –

  • Find out number of pieces which are shipped against order quantity? Primary target is to ship 100% of order quantity. But in case buyer agrees to accept extra quantity with same price, manufacturers try to ship extra pieces upto buyer’s acceptance limit. In case factory shipped less quantity that ordered, buyer may charge for penalty.
  • Find out number of pieces which are shipped against cut quantity? Garment manufacturing normally cut extra unit of garments than order quantity as there is chance of producing defective garment. Extra cutting means excess cost incurred in raw materials and manufacturing.
  • Find out whether shipment is sent on time or not as the sending of shipment on time is very important part of terms and condition of letter of credit, and based upon the delivery schedule, payments are released.
  • Find out number of garments which are rejected or damaged in a given order.
  • Check the stock level of raw materials after shipment: Stock of fabrics and other raw material are measured. Planned average of fabric and trims consumption is compared with actual consumption used in the order.

Calculated figures the above parameters determine performance level of the Factory. Factory can also sets its own benchmark or target level for each performance criteria. Figure tells how factory manages its inventory, quality of the product etc. On time delivery and full order quantity delivery is very good sign for good and long term relationship with buyers.

Process of Post Shipment Analysis

The main starting point for doing the PSA starts from the costing (which is an estimate only) made at the time of sampling and ends after analysing each stage right from sampling till shipment (actual expenses) is sent, PSA is done in order to see the deviation from estimate made to actual expenses incurred.
Steps in post shipment analysis

  • Identification of most significant factors
  • Classification of factors on the basis of their origin
  • Comparison of actual verses plan
  • Reasons of variation
  • Cause and affect diagram

The process of Post Shipment Analysis can be illustrated with the help of one basic example. When costing of a particular product is done, merchandiser calculate the various costs e.g. material cost (fabric and trims) including wastage of material, manufacturing costs, packing costs, transport cost, overhead cost etc. and finally profit margin is added and then the final cost of the particular product is quoted to the buyer.

When an order is accepted by the export house on agreed cost either for sampling or production the finance department gives it a number which is known as Cost Code or order number. The objective of giving this cost code is to keep track of the expenses incurred for the execution of that particular order e.g. one order is received from XYZ Buyer for production of 5,000 shirts the cost code given would be CC-XYZ/2014. This number shall be used by the merchandiser in the beginning on all BOMs (Bills of material) and the purchase & sourcing department will do all the buying for this cost code only as per BOM, this help keeping an account of all purchasing done for a particular order. Moreover when the order goes to the production department this cost code is written on the files and the Production Manager also keep record of the resources allotted for the particular cost code.

For example, for a shirt the cost break-up is as follows

Particular Estimated Price/piece
Fabric Cost INR 80
Trims Cost INR 15
Manufacturing Cost INR 25
Packing Material INR 05
Overheads INR 20
Transportation Cost INR 05

The total cost would be INR 150 per shirt and assuming an export house works at a profit margin of 20% the price offered to buyer would be INR 180 and at this price buyer gives the order of 5,000 shirts and the total value of order becomes INR 9,00,000 and profit amount is INR 1,50,000. In any circumstances now the export house will get only INR 9 Lakhs from the buyer after successful completion of the order.

Now to see whether an export house is earning 20% profit as estimated, it is necessary to analyse the each cost component separately for that particular order. The post shipment analysis is generally done by a senior person in an export house because to do the analysis, it is important to have the accurate information about the price and consumptions of raw material, manpower and total time to produce 5000 shirts, and this information needs to be collected from various department e.g. Merchandising, Purchase/Sourcing, Stores, Production, and shipping Department, and if it is not done by someone in command the real picture will not come out as other department may not give the exact information.

Now, if it is considered that in the above example the order was successfully completed and for the purpose of doing PSA the actual information received from various departments is as mentioned below:

Particular Estimated Price/piece (INR) Actual Price/piece (INR)
Fabric Cost 80 84.6
Trims Cost 15 14
Manufacturing Cost 25 28
Packing Material 05 07
Overheads 20 24
Transportation Cost 05 06
Total 150 163.6
Profit 30 16.4
Price to Buyer 180

As per actual amount spend in execution of this order cost is INR 163.6 and the profit earn is only approx 10% against estimate of 20% as the price to buyer is constant. This information is very vital from management point of view because the management can see that there is a clear deviation from the estimates revenue and the actual revenue earned from a particular order, also the way in which the export house is working is not correct and there are areas which need to be improved.
Reasons Identification

  • To have more profit in future
  • To reduce price for better marketing
  • To know the potential loss

Based on the PSA, departments those are responsible for mistakes or lowering the factory performance can learn from their mistakes and can correct in the same in subsequent orders. Now, from above example it is very clear that the extra money was spent in Fabric, Manufacturing, Packing, Overheads and transportation and money was saved only in trims, the management can analyse the reasons for these deviations in order to avoid the in future orders. The various norms may be set and regular checks can put in place so that all the future orders can executed profitably.
Elements of Post shipment analysis

  • Reasons of variation
  • Remedies for variation
  • Future planning
  • Records of previous shipments
  • Meeting on order closing
  • Involvement of whole team
  • Distribution of information to all persons concerned

Conclusion

Post Shipment Analysis is very helpful in finalizing the strategies for fashion export house. The information received after doing PSA of each order an export house management may clearly decide the course of action on the questions asked in the beginning of this article. Further to this, it can be stated that PSA serves as a very important tool for making the decisions for accepting the orders and at what price and also with which buyer the company should work and with whom it may discontinue if the company has buyers which can feed the export house with orders sufficient to keep the export house working for a year or so.

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