Global economic debacle strikes the Bangladesh textile and apparel industry in the demand side; crisis for energy hits the supply side on the other. The demand shrinks in the country’s leading apparel export destinations i.e., Europe, USA due to the record high inflation, Russia-Ukraine war and the global energy crisis. Export orders have been decreasing at an alarming rate for the last two months.
Factories are now struggling to settle the yarn import bills due to numerous crushing issues, among those are cloths worth approximately $1.5 billion being stuck in warehouses, deferred shipments, and payment delays up-to 180 days from buyers. A bulk of ready-to-ship clothes are stuck in warehouses having no clue as to when those will be shipped.
Moreover, the price of cotton has fallen by 46 percent in a span of five months, it was $1.43 per pound in May which is now $0.84 (10 November). Many local spinning millers have bought cotton at higher price which still remain in their warehouses. Since the price of cotton has been falling, most of the buyers have kept their orders on hold to renegotiate the clothing prices.
Factories, with big production capacities, feel the heat of crises even most. Instead of getting panicked, factories should enquire as to how they can set their strategies.
In Search of Big Volume – A Trap or Opportunity?
Factories were running after big volume to make a big turn over putting less eyes on the profitability. Many factories in some ways have fallen into the ‘big volume trap’ that can even cause a threat to their existence. Bigger the size stronger the need to feed them so that they survive. Prompt expansion of production capacity shows a counter-productive outcomes to the apparel manufacturing business. Very few companies are performing well in spite of their capacity of big volume production.
Though, curtailing a business scope seems to be heartbreaking for an entrepreneur. Yet, hunger for the big volume of factories makes them more vulnerable in business. Streamlining the capacity of apparel & textile factories could be an utmost strategy now to address current crises.
The factories could see only the figure of the total apparel market size in the globe. This number game made the factory owners allured to expand more and more production capacity and manpower as well. Time dictates to tame the allure of big volume.
Why do companies get tempted with big volume that eventually turned into a headache?
- Mathematical fallout of the “advantage from unit cost reduction”
It is simply noteworthy idea that an increase number of production may push production cost downward. This is a common advantage in many manufacturing operations. Fixed cost primarily remains same between the lines if production increases. Upto a certain level, increase of production decreases the unit cost of a product which begets a cost advantage. The question is how long this advantage on unit cost continues.
- Illusive perception of demand hype
Say buyer ‘x’ wants to place an order of 1 lac piece of T-shirt. The buyer knocks five manufacturers to take an order. Four factories could not take it due to their existing production load. The fifth manufacturer took the order. The demand of 1 lac piece had been approached to five manufactures. It would create 80% illusive hopes to increase production order to the rest four manufacturers. Everybody wished – if they had capacity they could make more business. Here only 20 % real order creates more 80% false desire to the factory leaders.
- Economies of scale on the big volume
Unit costs fall as output increases from one stage to next stage (here Q to Q2). It continues upto the level of Q2. The unit costs start to rise above Q2 on the cost curve. LRAC (Long Run Average Cost) increases with the increase of investment and expansion. Here the prior cost advantage turns into a cost burden of the new expansion and investment.
- Counter-benefits of expansion on the Supply Chain
Some of the expansion decision were taken to improve the overall supply chain of the business proved negative. Companies thought they could improve efficiency of supply chain if they add allied and related production units.
Even, some of the factories built factories to produce the trims and accessories to mitigate delay of ‘on time receive of accessories’. Eventually, they did not fetch any positive outcome to the supply chain. The new expanded units themselves must have their own supply chains as they require their raw materials.
- Discounted the principle “diminishing marginal return on big volume”
In the textile and apparel industry, the proportionate return from an additional capacity was overlooked somehow.Composite factories get prone to composite burden and, liability to banks. Turkish and Chinese factories, for example, were being compact rather than being composite.
Here the graph depicts the different situation of investments below:
- Most conducive stage: More inputs lead to more positive returns on the investment.
- Diminishing return stage: Each added input leads to a decreasing rate of increase as output. It is the best time to stop expansion somewhere within this stage.
- Negative returns stage: The more you expand the more you get proportionately negative return on the investment.
- Financial institutes wound the factories more
Banks, in addition, tempted factory owners, who were in a good profit mode, to borrow and expand capacity. Many of the factories were seen profitable and assumed sustainable when they were smaller in their size and capacity. Those previously profitable small factories have fallen in a terrible trouble because of the incurring excessive fixed costs. Ultimately, they compelled to do order with loss due to feeding their big capacity. Even though, those who did not borrow from banks they also fell into the consequences as the bank borrowers also play in the competition.
In the last 10 years, more than ninety five textile and apparel companies have raised capital from the stock market through IPO and right-share either to expand capacity or to repay banks’ loan. Almost all the companies are incurring losses; random expansion couldn’t benefit them notably.
(Here, we only discuss few reasons and consequences of expansion those lead to profit crunch whereas several other issues are also liable).
Cost of getting panicked
The prevailing panic drives the industry leaders at a loss. Many factories may not survive without the minimum order and, production due to the impact of recession and energy crisis. Besides the macroeconomic instabilities in the western countries, buyers usually seek for advantage in the price negotiation with factories. It is clear that Bangladesh still stays competitive in some parameters and, is preferred by most of the exporting countries. Getting panicked was proven heavily costlier in negotiation of pricing.
Some factories are running after orders with ‘whatever the prices’ due to getting panicked. Many factories were executing orders with loss or next to loss or, with cost price just to survive. Many of them continue to take orders below the cost price in the hope that if future would be bright! Remember. Future would be tougher if the current mindset and business strategy remain alike. Out of panic, we should not run after only volume sacrificing the profitability.
The buyers may discover no better alternative than that of Bangladesh shortly, though, Cambodia and Vietnam are reportedly taking orders with abnormally tight prices. Competing countries are facing the similar or more global and local macro-economic issues. The appreciated dollar rate and, reduced price of raw materials can benefit the Bangladeshi manufacturers.
How the panic installs
Indeed, there are number of dreadful anxieties in the macro-economic realities all over the world. Bangladesh also gets severely affected due to the energy and dollar shortages. Governments at home and abroad fall in the serious fear of getting toppled from the power. To release their own fear, they (governments) inflict fear among industries and people so that people accept such crises as the globally descended phenomenon. They pretend as if they were liable for nothing to these economic crises. To relieve their burden, they penetrate a fear from the top which creates a panic automatically.
Though the work orders have downed by 30% to 40%, factories are yet to execute this orders due to severe electricity and gas shortages. Factories are facing 3 to 4 hours of power outage in a day. Wrong macroeconomic policies are depleting the country’s foreign reserve fast that hampers the imports. Some RMG makers and input suppliers are facing trouble in opening LC to import raw materials – are these issues triggering only due to the global crisis?
What are coming next?
For Bangladesh, despite all the negative outlooks in the west and issues arising at home, apparel export and its’ business will continue to move-up. Though there prevails a number of economic issues in the western consumer markets, the Bangladesh apparel industry will continue to shine more in the near future. Although a continued uncertainty of European and US retail markets will pose in the years to come, they will remain the major markets for Bangladesh. At present, apparel exports to Europe 62 % and the US 18 % of the total export value – may increase more.
We should embark on a strategy that can attain more profit with less volume. Rightsizing of business connotes a right strategic decision both in investment security and profitability. Factories should now seek the orders with little big margin by reduced volume. Diversification for both the market and product is an utmost call of time now. Without proper sizing of manufacturing capacity business would continue to bleed and, this is the buyer’s side who generally takes advantages out of big volume.
The writer is an Innovation Strategist.
