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Bangladesh RMG sector needs a proper cost analysis to push up earnings


Bangladesh RMG sector needs a proper cost analysis to push upThe second-largest apparel supplier to the global apparel market, Bangladesh might soon lose its coveted title to Vietnam as its apparel exports declined to just 0.44 per cent against 7.30 per cent export growth achieved by Vietnam in 2019. Since the last few years, the Bangladesh readymade garments sector has been facing multiple challenges such as rise in production costs, labor wages and utility rates. This is making survival difficult for small and medium factories as price of their products does not match production costs. This prevents exporters from covering their operational cost leading to a drastic decline in profit margins.

For the last few years, Bangladesh RMG exporters have been focusing more on product costs to achieve desired profit margins. However, buyers recently introduced the open costing approach for price fixation. As per this approach, manufacturers in the ‘A’ category bargain for fair price whereas those in the ‘B’ category bargain for lower price targeting their unused capacity utilization. This makes the product a loss making proposition and shortens its lifecycle in the Bangladesh market.

Identify cost drivers

Every Bangladeshi RMG company has its own cost structure involving cost elements like material cost, salary and wages, utility cost,Bangladesh RMG sector needs a proper cost analysis to push up earnings depreciation of assets, spare part and repair maintenance, other manufacturing overhead, administrative and selling expenses, finance cost, etc. incurred in different cost centers responsible for making the company cost-effective.

Hence, it is important for the owners of these cost centers to identify their cost drivers. They need to price their products through a standard costing procedure like the CPU (cost per unit) which has a basic formula that says that total cost of production plus total output is equal to cost per unit.

Combine techno-finance knowledge

Bangladesh RMG factories also need combine techno-finance knowledge for perfect costing of their products. For this, manufacturers need to train non-finance professionals in finance and financial professionals in technical issues. A combination of techno finance knowledge will make the price bargain with buyers.

Some buying houses have introduced open costing approach. This entails standard, buyers to have a costing team having technical and finance people. However, not just the technical people deal with open costing from the buyers’ side. The query and format of these technical people is not up to the standard of company cost structure and accounting standard procedure. Hence, buying houses should have a costing team having technical and finance professionals to make the open costing procedure smooth and acceptable for garments manufacturer.

In Bangladesh, all marketing professionals should know the actual cost of their factory. Actual cost shows the actual output, wastage, actual cost structure. Every company should compare the standard cost and actual cost frequently and identify for continuous improvement through process innovation. From the principal of CPU (cost per unit) to optimize the cost, Bangladesh has to work on efficiency. Higher efficiency will help the country absorb the fixed cost resulting in lower CPU.

Involve government and professionals institutes

One drawback of the Bangladesh RMG sector is the lack of proper future analysis. As buyers deal with a number of manufacturers simultaneously for capacity building and future order placement, they usually opt for cheaper products. Hence, most of the RMG factories do not get the expected orders which leads to underutilization of factories. In such a situation, factories opt for low cost products to make maximum utilization of the plant.

Industry professionals in Bangladesh are aware of this costing issue. They need to engage government and professional training institutes to change this training or education system. Their target-oriented initiatives will help the industry to overcome these challenges.