Impact of cost on profit in spinning mills

The effect of changes in cost parameters viz, raw material cost (RMC), yarn selling price (YSP), power cost, packing materials etc., and operational parameters like production rate, spindle utilisation, yarn realisation, saleable wastes etc., on profit is estimated and expressed in cost so that the importance will be more significant, says S Mariappan.

Textile mills are facing problems due to un-remunerative yarn prices and reduced demand in domestic markets. In export market due to competition from other developing countries like Indonesia, Vietnam, Bangladesh, Philippines etc., the export of yarns have slowed down and also prices were lower than the local market. For the survival of a mill, it has to improve various operational parameters like production per spindle and machine utilisation, increasing yarn realisation by reduction of saleable wastes (like card waste, comber noil, hard waste, etc). Besides the mills have to use optimally its resources reducing energy consumption by taking a detailed energy audit, reducing unit power cost by outsourcing cheaper power, eliminating excess employment of operatives/staff, reducing packing material cost etc. If the impact of changes in operational and cost parameters is expressed in terms of cost, it would be more appealing.

The impact of various cost and operational parameters on profit was estimated and given in this paper. While estimating the impact of various operational and cost parameters, production rates achieved in good mills have been assumed.

Impact of cost factors on profit
Impact of increase in yarn selling price by Rs 1 per kg on profit: Yarn selling price (YSP) has got a great influence on the profitability of a spinning mill. Increase of Re 1 per kg in yarn selling price (YSP) can help a mill to realise as much as Rs 82 lakh more in 20s K count and Rs 10 lakh more in 100s C count in sales turnover per year having 30,000 spindle capacity (Table 1).

Consistent yarn quality, good cotton purchasing efficiency, prudent management of financial resources and better marketing methods are some of the important factors that help a mill to realise higher yarn selling price. Besides producing value added yarns like fancy/ lycra /mélange yarns would also help the mill to realise higher yarn selling prices.

Impact of higher mixing cost by Re.1/kg on profit: Cotton cost being the major component of cost of production, the impact of cotton cost is more over riding than any other single element of cost. Increase in mixing cost even by Rs 1 per kg. would reduce the profit by Rs.94 lakhs in 20s K and Rs.13 lakhs in 100s C for a 30,000 spindle mill (Table 2). To offset the higher mixing cost, it is required to increase the production rate by about 10 per cent in 20s and 2 per cent in 80s C and 100s C .

Power cost
Impact of increase in power cost by 10 paise per unit on profit: Energy cost accounts for 10% to 15% of yarn selling price in counts up to 40s and 16 per cent to 18 per cent of yarn sales in finer counts. It ranks the highest component of conversion cost. Hence conservation of energy has assumed tremendous significance. Table 3 shows the impact of increase in power cost/unit by 10 paise on profit per annum for various counts for a 30,000 spindle mill.

It is seen from Table 3 that for every 10 paise increase in power cost per unit, the power cost will increase by Rs 17 lakh in 20s K and Rs 11 lakhs in 100s C per annum for a 30,000 spindle mill. To offset the increase in power cost, either the yarn selling price has to be increased by about 0.2 per cent or the production per spindle per shift in ring frames must be increased by about 2 per cent.

Impact of 10 paise reduction in packing materials cost on profit: In spinning mills, cone yarns are packed in any forms viz., bag or carton or pallet depending upon end use/customers requirement whereas hank yarns are packed in bale form. Packing materials cost per kg of yarn is largely influenced by number of items per package, unit cost of materials and individual package weight (i.e., cone weight)

Even a 10 paise reduction in packing materials cost per kg of yarn for a 30,000 spindle mill would result in an annual saving of Rs.8.2 lakhs in 20s K and Rs 1 lakh in 100s C (Table 4). In view of the substantial savings in the reduction of packing material cost, the mills must explore possibilities of reducing packing materials cost.

Impact of one day extra for collection of yarn sales on interest cost: It is very important to reduce various input costs for improving the performance. Reducing collection period for yarn sales and number of days of yarn stock held are some of the major means to reduce working capital interest. Even one day extra period for collection of yarn sales would increase the interest cost by about Rs 6 lakh to Rs 2 lakh per annum for a 30,000 spindle mill depending upon the average count maintained by the mill (Table 5).

Impact of operational parameters on profit
Machine productivity: Machine productivity in ring spinning is the most important factor that influences the conversion cost of fibre to yarn. This is because not only a high spindle utilisation leads to a reduction per unit production in every item of conversion costs – overheads, depreciation, interest, stores, power and wages – but also increases profits consequent to the higher volume of production and sales turnover. Since the profit margin is on average about 3 per cent of sales turnover, a very high spindle utilisation is of vital important to profitability.

Impact of 1% increase in spindle utilisation on profit: Table 6 shows savings expected for 1 per cent increase in spindle utilisation in ring frames. It is seen from Table 6 that 1 per cent increase in spindle utilisation will give a saving of about Rs 28 in 20s K and Rs 26 in 100s C per spindle per year. It would mean a saving of about Rs 8.4 lakh in 20s K and 7.8 lakh in 100s C per year for a 30,000 spindle mill.

Impact of 1% increase in production per spindle on profit: It was observed that production per spindle in ring frames varies very widely between mills to the extent of over 100 per cent. Lack of modernisation of machinery particularly that of ring frames and use of lower quality raw material explain only about half of this inter-mill variation. Operational deficiencies such as poor machinery condition because of not taking up routine maintenance, unnecessary stoppages of ring frames, inadequate patrolling by operatives together explain the rest of variation in production per spindle.

The above implies that there is a scope for improving the production rate even for existing spindle speeds by improving operational deficiencies. In such cases, the savings per spindle per year for every 1 per cent increase in production rate will be Rs 31 to Rs 28 in various counts (Table 7). It is to be noted that these savings are marginally higher than savings obtained due to higher spindle utilisation, since there will be no need to engage additional operatives (ring frame tenters and other indirect operative) for the increased production.

Impact of one ring frame idle per day on profit: The amount of losses that would arise due to lower utilisation of a ring frame for a 30,000 spindle mill manufacturing 40s carded yarn, are given in Table 8

Labour productivity
Impact of reduction 1 operative/shift on profits: The mills should strictly follow the agreed work assignments and no excess operatives should be engaged. Engagement of even 1 excess operative per shift would reduce the profit by Rs.4.3 lakhs per annum. Hence a mill should ensure that operatives are engaged as per the agreement.

Savings due to higher yarn realisation: Higher yarn realisation would reduce the raw material cost and thus brings in substantial savings to a mill. It is possible to improve the yarn realisation by controlling incidence of various process wastes and invisible loss.

Table 9 shows the savings expected from 1 percentage point increase in yarn realisation for various counts. It is seen from Table 9 that for every 1 percentage point increase in yarn realisation, the expected savings would be Rs.75 lakhs per year in 20s K to Rs.16 lakhs per year in 100s C counts.

Impact of 1 per cent increase in card waste on profit: Card waste extracted is normally in the range of 6 per cent to 7 per cent depending upon the type of cards and mixing used. Between the same type of cards and mixing run, the individual card waste percentage should not vary more than ± 0.5 per cent from the average value. If the actual card waste exceeds the standard waste in more number of cards, the overall average card waste is also higher. This would lower yarn realisation and hence profit of a mill. Table 10 gives impact of 1 per cent higher card waste per card on profit.

It is seen from Table 9 that 1 per cent increase in card waste would result in reduction of profit to the tune of Rs.5.2 lakhs in 20s K and Rs.2.2 lakhs in 100s C per annum per card.

Impact of 1% increase in comber waste on profit: Normally comber waste extraction depends upon the yarn quality requirements and it is about 15 per cent to 18 per cent for warp counts and 12 per cent to 15 per cent for hosiery counts. Higher noil extraction should be taken only in such cottons in which end use requirement needed very high yarn quality. It is very important that the variation in noil percentage between combers must be maintained within ±0.5 per cent. The impact of higher comber waste by even 1 per cent per machine would reduce a mill’s profit by about Rs.4 to 3 lakhs per machine per annum in various counts. (Table 11).

Impact of 0.1 per cent increase in yarn waste on profit: Yarn waste obtained from ring spinning and winding department is categorised as saleable waste and it is not reused in the process. These wastes are also known as hard waste. Higher yarn waste of even 0.1 per cent would lead to a loss of about Rs 13 lakh in 20s K and Rs 4 lakh in 100s C per annum for a 30,000 spindle mill (Table 12).

A higher yarn waste is an indication of poor machinery condition and wrong work practices of operatives. Vibrating spindles, spindle out of centre, soft cops, oil stain on yarn, improperly built cop bottom etc. in ring spinning, left over yarn in cops in winding and operatives using excess length of yarn during piecing in cone winding are some of the major causes for the higher yarn waste.

Usable wastes
Usable wastes or soft wastes in a spinning mill are lap bits, sliver waste in preparatory departments, roving ends and pneumafil waste in ring spinning. It should not normally exceed 3 per cent to 4 per cent (percentage based on mixing issued). Incidence of higher proportion of soft waste (than the standard) and mixing the same quantum in spinning process would increase neps and hairiness of yarn besides increase in conversion cost.

Impact of 1% increase in pnenumafil waste on profit: It is seen from Table 13 that increase of 1% pneumafil waste would reduce the profit by Rs 30 lakh in 20s K and Rs 19 lakh in 100s C per annum for a 30,000 spindle mill. In some mills, spindle speeds were increased to increase the production per spindle even though pneumafil waste would exceed the standard.