Determining Garment Piece Rate Based on Standard Time – An Introduction

It was a knits factory. Garments are made by a group of operators. Progressive Bundle System (PBS) doesn’t exist there. Operators are paid in the piece-rate system. Piece rates are decided by past work experience of the manager, market rate, and mutual negotiation between the factory and operators. The factory is looking for a solution to this problem caused due to the piece-rate system. As a new operations head, he likes to bring good systems into the factory.

He wants to determine the piece rate based on operation SAM. But he knows little about measuring garment SAM. He was wondering if I knew about such things. 

Here SAM means Standard Minute. As per the US Department of Labor, “A piece rate fixes a wage payment on each completed unit of work”. SAM-based piece rate is a method of deriving the piece rate of operations based on operation SAM and hourly operator rate. 

In layman’s language, setting piece rate (making the rate of each operation) based on the standard time of sewing operation. In other words, operators would be paid based on standard minutes produced by them. SAM-based costing can be used in both environments – for salaried as well as piece-rate employees.

By the way, I got an interesting topic for discussion. I am preparing a draft for further discussion. This explains how to introduce SAM Based costing, its benefits, and extended benefits if the factory introduces SAM-based costing for sewing operators. I am sharing an introduction here. 

Benefits of SAM-Based Piece Rate:

Piece Rate negotiation with sewing operators: 

In the piece-rate environment, piece-rate negotiation of operations goes on for two to three days after the loading of a style. Until the rate is fixed for each operation, operators work at a slower speed than their actual capability. The reason is to show they can’t earn much money if the piece rate is not set higher. As a result, most of the time the factory spends excess money on operators’ payroll. This is the problem.

The solution for this problem is determining the garment piece rate based on standard time.

• Measure the standard time of operations, and categorize operations based on difficulty level and machine type 
• Set per minute rate for each category considering the line efficiency factor. 
• If operators disagree with the piece rate, you need to explain and show them how much time to be taken to complete their operations. And how many pieces they can produce in a day if they work in full effort.
• While finalizing the piece rate, consider order quantity, style run, and product difficulty level.

By this method, you can set the Piece Rate on the first day of production start. And can avoid initial production loss. (Note: Factory needs to gain experience on IE things to implement this method effectively) .

Accuracy in product costing for direct labour cost part

Direct labour cost is a very important part of product costing as a lot of labours are involved in making a piece of garment. When you calculate a piece rate based on your past experience, you are not always sure if your calculation is accurate. Sometimes you might give your operators an excess rate, which subsequently increases product costing. (Indirect labour costs and overhead costs are calculated based on direct labour cost). Your estimation might also be lower than the actual cost. 

This will cause high product costing or low product costing. If you cost too high you might lose the order. On the other hand, if your cost is too low, you will earn less by processing the order. Secondly, you might need to pay more to your workers than your estimation. 

Solution: You need to work smartly. While making the product cost sheet use accurate direct labor cost figures derived from product SAM. Thus you will make more accurate product costing.

Cost negotiation with buyers

Now buyers ask for open costing for orders. Buyers are aware of the minimum labor wages in your region. And they can derive direct labor costs for a product. You might not have a technical team but they have to analyze product construction and estimate standard time. In such an environment, you will find difficulty adding much margin in various cost categories. 

If you know the standard time of a product, factory performance (efficiency), and minimum labor wages you can easily derive the direct labor cost of a product (without having Industrial Engineer or work-study team you would not get figures for the first two). In case buyer pushes you too much to reduce labor cost, you can tell them confidently what is possible and what is not. 

This is not only used in preparing product prices for buyers but it helps you to understand if you are making a profit from the order in advance.

Other Benefits of SAM-Based Costing

There are many other benefits of introducing a SAM-based piece rate. 

When you plan to implement SAM-based costing, you are actually setting up Industrial Engineering Cell in your factory. An IE will also perform other tasks of the IE department rather than just said objective. As a result, you can take advantage of the industrial engineering department in many ways. Some of those are

1. You can set a standard time for products and operations 
2. It would help you in planning manpower and machines in advance 
3. You can measure factory performance and individual operator performance accurately, benchmark your performance level
4. IE tools and methods can be used for productivity and quality improvement 
5. Having product SAM, you can estimate production capacity, do better line planning, and production planning 

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Related article: Roles of Industrial Engineers in Garment Production Management.

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Action Plan

The next important thing one need to take action on following areas while planning to implement SAM based piece rate setting.

• Understanding Industrial Engineering concepts, and use of Standard Minute in apparel production
• Hire experienced Industrial Engineer and set Industrial Engineering department and IE team. 
• Set Key Responsibility Areas for the IEs
• Develop SOP for IE activities 
• Establish database for operation SAM by measuring time study method or you can consider purchasing MTS based SAM calculating software. 
• Set labour cost per standard minute

The idea is not new but even factories that have established the Industrial Engineering department do not practice SAM based piece rate. If like this idea you can introduce this technique in your factory.