Introduction

What does a successful business for textilemanufacturers depend on?

The very fundamental precondition for a successfultextile business is a product that meets the expectations of the market.Products fulfilling the quality expectations of customers enable higher salesvolumes and revenues. Generally speaking, profits increase significantly withhigh sales prices, low operating cost and low raw material prices. This iscommon place and nothing new. But in today's market environment only a smallnumber of companies succeed in yielding a significant advantage in sales priceon the market-or to buy the raw material at a much lower price than thecompetitors. Most of the companies hardly have a margin for prices of textileproducts which are almost commodities. Neither have most textile producersufficient market power on the procurement to yield a cost advantage bydiscounts or alternative sources of supply for cotton, other fibres or rawmaterials. Therefore, the success of these companies will substantially dependon the quality of the textile products and the excellence as well asreliability of the manufacturing process-the fundamental know how of a textilecompany. And a fundamental aspect of the manufacturing process are its' costs.

How precisely do textile manufacturers know theirscosts and cost structures?

International experience proves that the use ofmeaningful accounting methods is not common practice within the textileindustry. In a more and more frequently and more and more dramatically changingbusiness environment, the textile industry will be confronted with the problem of forecasting the consequences of entrepreneurial decisions on the cost side. But thereis a wide-spread lack of clear knowledge about the attribution of the costsaccording to the cause-and-effect-chain.

Production Cost Comparison 2008: Total Cost for ringyarn
Source: ITMF

Often it becomes evident, that cost structures areinadequately known and that no reliable empirical values are at hand. But, onlythose who really know their costs are able to realistically understand theconsequences of their decisions. Standard practice in most mills, however, isdifferent, unfortunately. Within the textile industry the indirect costs aregenerally calculated by multiplication with a factor that is added to themanufacturing costs. The disadvantage of this method is considerably increasedby the fact that there is a big knowledge gap with regard to the manufacturingcosts.

Background of the Life Cycle Cost approach

The approach to the principle of life cyclewith regard to the manufacturing costs came up in the 1980's and 1990s. Thattime, data processing departments inside the companies were established veryquickly. And very soon it became apparent that the overall costs of dataprocessing within the usual period of utilization exceed 5 to 8 times the costsof acquisition. Therefore, the users of this technology analysed the life cyclecosts of the data processing systems in order to better evaluate the effectiveoverall costs before taking investment decisions.

Today it is clear that during the entire lifetime of an investment good, but as well for a shorter time, the "life cycle" for the intended use of a machine the investment costs represent only about 10-50% of the overall costs (depending on the kind of machine, its usage rate, etc.). Therefore, it is so important to look at the accumulating costs over the life cycle in a textile mill. Having a look in a product life cycle, one realizes that there are many expense factors to examine. First of all, there are the costs for acquisition, installation and start-up. While these costs could be determined quite clearly in the beginning of a negotiation, there are many costs which are often not transparent at first glance: Costs for maintenance, service and repair - but also for energy and operating, the influence on costs for raw materials like fibers and yarns and the production waste, environmental costs (for certificates and special filters), costs for unscheduled repair, disposal, staff and so on.

This phenomenon is comparable with an iceberg-only its top is visible from above the water surface while the real iceberg lies underneath.

Conclusion

An investment decision includes not only the acquisition price, but also the costs for operation and maintenance which lies five to tenfold higher. A good analysis brings out the "hidden" or non-obvious ownership costs that might otherwise be overlooked in making purchase decisions or planning new textile products or preparing budgets.

With the life cycle approach, the mill management examines all costs from acquisition to sale or disposal in a way that every important cost item is included and that everything irrelevant is excluded.

Industry Standards help to compare, VDMA 34160

To ease the utilization and the comparability of life cycle calculations internally or with the suppliers there is a necessity of clear definitions. The industry needs Standards or Specifications. VDMA has set up such a standard, called Forecasting Model for Life Cycle Cost of Machines and Plants [VDMA-Specification 34160] on the basis of long standing experience: with a network of 3000 industry experts the association is a major player for German DIN standards as well as European EN and international ISO standards. In addition, for more than 40 years it has published so-called VDMA-specifications. By now, VDMA has elaborated about 200 specifications in more than 30 different machinery branches.

The VDMA model for life cycle costs of machines and industrial plants describes a standardized calculation tool for forecasting life cycle costs. The model shall support investors to find and operate a suitable machine or plant in accordance with its intended use. It structures direct production or process parameters and the 4 aspects

• material,
• maintaining the functionality,
• product and
• utilization.

To calculate the life cycle costs for a machine or plant, process factors like the availability, the annual operating hours and specifications must be considered. Beside quality and costs of raw material, tools, the expenses for maintaining the functionality-like repairs (scheduled and especially unscheduled), training and inspections-play an important role, too. Required floor space, energy, tools etc. are aspects of the utilization.

All factors together build the basis for the cost calculation in the operation phase.

Summarized, the advantage of such an approach lies in the systematic forecast of after-sale costs, in the identification of saving potentials and (indirectly) in the enhancement of productivity. By this, the quality of a machine is monetary assessable.

Limitations of life cycle cost

The life-cycle cost method is an important tool for textile mills but cannot eliminate the risks of an entrepreneur. Advanced technology provides unique strategic chances which can hardly be calculated by any method.

Strictly speaking, life cycle cost pays no attention to business benefits other than cost savings. When this approach is used in decision support, there is a very important assumption made: benefits from all alternatives are considered more or less equal, and choices differ only on the cost side.

In an always faster changing business environment, options like machine flexibility often are strategic values. A sophisticated machine or manufacturing plant may secure business opportunities which are not clearly visible as of today. But only the investor, the textile producer can decide according to his strategy on the economic value of such business opportunities.

As shown, up to 90 % of all costs for an investment decision come within the scope of the operation phase. Therefore, it is essential to consider the whole product life cycle.

The VDMA standard provides the necessary structure for calculations and input of experienced data as well as valuations. To enter into the life cycle method one may decide for a simplified approach using basically the structure of VDMA 34160 without calculating all the cost items and preferably using proper estimates. By and by, the life cycle cost approach will almost automatically become a more precise and professional management tool. The life cycle cost calculation does not replace the good sense for future markets and product chances. But it supports decision-making for the right investment.

About the Author

The author is managing director of the VDMA Textile Machinery Association. Some 3000 companies are member of VDMA, the branch occupies ~ 800.000 employees and generates a turnover of more then 170bn. . The VDMA Textile Machinery Association represents the 125 most important German textile machinery producers, the turnover accounts to more than 3bn., with a 90%-share of exports on average the branch is internationally leading amongst German Engineering. www.vdma.org/textile