-'--l ‘5” This is to certify that the dissertation entitled The Use and Productivity of Short-Term Credit in Smai] Scaie Cement Product and Ready-Made Garment Firms in Thailand presented by Saroj Aungsumaiin has been accepted towards fulfillment of the requirements for Ph.D. degree in Agricultural Economics (Jam; 4 $44,; Major professor Date 07 .. l )- MS U is an Affirmative Action/Equal Opportunity Institution 0-12771 E: m E ; a a i Michigan 8mm Ufiverslty f mvw-rv A ‘rvvx‘T-r'. v wwwvv- ININIHIHHHIIll[UNIUNIIIHIIHIHHIJHIHIllllllllli 312293 10443 8472 RETURNING MATERIALS: IVIESI_J Place in book drop to remove this checkout from 4::::;::::_ your record. FINES wiii be charged if book is returned after the date stamped beiow. W71) JUN 3 o. 2008 THE USE AND PRODUCTIVITY OF SHORT-TERM CREDIT IN SMALL-SCALE CEMENT PRODUCT AND READY-MADE GARMENT FIRMS IN THAILAND By Saroj Aungsumaiin A DISSERTATION Submitted to Michigan State University in partial fulfiiiment of the requirements for the degree of DOCTOR OF PHILOSOPHY 1982 ABSTRACT THE USE AND PRODUCTIVITY OF SHORT-TERM CREDIT IN SMALL SCALE CEMENT PRODUCT AND READY-MADE.GARMENT FIRMS IN THAILAND By Saroj Aungsumalin Previous studies regarding small-scale industries in developing countries did not provide quantitative measurement of the amount and tim- ing of short-term credit needs from commercial banks. This study has at- tempted to fill this void. In response to this need, a generalized linear programming model was constructed that can be applied to any small-scale industry providing certain essential data are available. For this study the model was adapt- ed for analyzing the need for short-term credit by firms in the cement product and the ready-made garment industries in Thaiiand. The genrealized linear programming model has the following character- istics: (l) multiperiod to analyze one l2 month production cycle; (2) separate production and marketing activities with input prices and wage vary by seasons; (3) a differentiation between cash and credit transac- tions for input purchases and product sales; (4) a finished product in- ventory by product in physical terms by season adjusted by production, sales, and carryover phenomenon; (5) a seasonal cash flow and financial accounting (row activitY); and (6) an objective function to maximize net Saroj Aungsumalin return to fixed assets, family labOr, and equity capital subject to de- mand, inventory, machinery, borrowed capital, and other financial constraints. Results of the analysis of short-term credit needs can be summarized as follows: (1) the amount of credit needed from commercial bank sources varies directly with the level of total production, the percentage of production costs paid in the form of cash, the amount of trade credit provided to buyers and the inventory maintained for finished product; (2) it appears that the credit needs and timing of these needs of small-scale firm varies substantially among firms even for those of comparable size and produce line; (3) shadow prices of borrowed capital varies widely by season according to the production, inventory, input acquisition and sale strategies of the firm as they relate to the lending policies of commer- cial banks; and (4) when the firm expands (other things equal), the amount of credit needed in any period will increase or decrease depending on the type of expansion, raw material acquisition policy, and the credit sales policy which the firm chooses to follow. To my wife, Nipada, and our parents ii ACKNOWLEDGMENTS I wish to express my deepest gratitude to Dr. Warren Vincent, my major professor and thesis advisor for his continuing interest, guidance, encouragement and friendship throughout the graduate program and especial— ly during the preparation of this dissertation. I am indebted to Dr. John Brake for his guidance, encouragement, mental stimulation, and friendship. Dr. Brake served as my major pro- fessor and thesis adviser while Dr. Vincent worked in the Philippines prior to his move to Cornell University to become W.I. Myers Professor of Agricultural Finance. I also want to thank other members of my committee, Dr. Donald Mead, Dr. Ralph Hepp and Dr. Michael Weber for their contributions and assis- tance. I wish to thank Dr. Tongroj Onchan who encouraged me to continue my graduate study and persuaded me to join the Rural Off-Farm Employment Assessment Project (ROFEAP) in Thailand. I wish to thank the Agricultural Development Council, Inc. for fi- nancial support throughout my graduate program and the ROFEAP for finan- cial support during the survey period in Thailand. Thanks go to the small-scale cement product and ready-made garment firms which were so cooperative during the field surveys. Finally, I want to express my heartfelt appreciation to my wife, Wipada, for her help, encouragement, patience, understanding and lost— weekends throughout the preparation of this dissertation and to my parents who have so generously made all of this possible. iv TABLE OF CONTENTS Lass Dedication ........................... ii Acknowledgements ........................ iii List of Tables ......................... xi List of Figures ......................... XXI Chapter I. INTRODUCTION ...................... I 1.1 Problem ...................... I 1.2 Objectives ..................... 6 1.3 Research Approach ................. 7 1.4 Related Research .................. 7 1.4.1 Studies Related to Credit of Small- Scale Industries .............. 7 1.4.2 Studies Related to Modelling of the Firm .................... 9 1.5 Data Sources ..................... 1‘ l.5.l ROFEAP Objectives and Sponsorship ...... 12 1.5.2 Project's Components ............ 12 1.5.3 Study Areas ................. 13 1.5.4 Data Collection ............... 13 1.5.5. Sample Selection .............. 16 1.5.6 The Sample of Cement Product and Ready- Made Garment Firms ............. 18 1.5.7 Types of Questionnaires ........... 19 1.6 Organization of the Study ............. 20 II. THE GENERALIZED LINEAR PROGRAMMING MODEL ........ 2] 2.1 Introduction .................... 21 2.2 The Model ..................... 21 2.2.1 Assumptions ................. 21 2.2.2 The Objective Function ........... 22 2.2.3 The Activities ............... 23 2.2.4 The Constraints ............... 24 2.3 The Mathematical Model ............... 28 2.4 The LP Tableau ................... 33 Chapter III. IV. CHARACTERISTICS OF CEMENT PRODUCT INDUSTRY ....... 3.1 Introduction .................... 3.2 Market Outlets for the Cement Product Firms . . . . 3.3 Types of Products Produced ............. 3.4 Raw Materials ................... 3.4.1 Types of Raw Materials ........... 3.4.2 Acquisition of Raw Materials ........ 3.4.3 Cash Purchases and Credit Purchases of Raw Materials .............. 3.4.4 Terms of Credit Purchases .......... 3.4.5 Fluctuation in Raw Material Prices ..... 3.5 Techno logy ..................... 3.5.1 Types of Machines .............. 3.5.2 Production Capacity ............. 3.6 Labor Used ..................... 3.6.1 Family Members ............... 3.6.2 Accountants and Sales Workers ........ 3.6.3 Production Workers ............. 3.6.4 Labor Requirement .............. 3.6.5 Wages .................... 3.7 Production ..................... 3.7.1 Production Pattern ............. 3.7.2 Value of Production ............. 3.7.3 Overhead Cost ................ 3.8 Sales ....................... 3.8.1 Gross Sales ................. 3.8.2 Sales and Sales Pattern of Individual Products .................. 3.8.3 Inventory and Inventory Pattern of Individual Product ............. 3.8.4 Output Channel and Implication on Cash Sales .................... 3.8.5 The Percentage of Credit Sales ....... 3.8.6 Prices of Products ............. 3.9 Financial Characteristics ............. 3.9.1 Debt Outstanding .............. 3.9.2 Rate of Interest .............. 3.9.3 Size of Loan ................ 3.9.4 Collateral ................. 3.9.5 Assets ..... - .............. THE BASIC MODEL OF CEMENT PRODUCT INDUSTRY ....... 4.1 Modification of the Generalized LP Model ...... 4.1.1 Sources of Credit .............. 4.1.2 Level of Credit ............... 4.1.3 Number of Periods to be Used in the Model .................... Vi Chapter 4.2 The Basic Model .................. 4.3 4.2.1 Products Produced and Sold ......... 4.2.2 Constraints ................. cuc- nan) ->cu 4.2.2.1 Inventory Constraint ........ Expected Demand Constraint ..... Machinery Constraint ........ Fixed Financial Commitments . . . . Borrowing Constraint ........ Credit Sales Constraint ...... ective Function ........... oefficients ............. Production Activities ....... Selling Activities ......... Cost of Hiring Labor Activities . . Interest Payment and Interest Receive Activities ......... Pattern of Cash Flows Under the Liberal and the Conservative Approaches ............. b H:- o o o N NNNND'CDNNNNN h h-h-b-D‘SONNNNN e «D b-b-D-DO—{h-h-Dh-h U1 hum-409.5101wa The Result ..................... 4.3.1 4.3.2 Some Expectations .............. LP Results for the Basic Model ....... V. THE EXTENDED MODEL ................... Extensions to the Basic Model ........... Modifications in the Basic Model .......... 5.1 5.2 5.3 5.4 5.5 5.2.1 5.2.2 3 2. om 3.1 3. 2 3. 3 3. 4 P Res 4.1 4.2 4 5. So 5. 5. 5. 5. L 5. 5. 5. 3 C Constraints ............ ..... The Objective Function ....... -. . . . Activities ................. e Expectations . . . . ............. Net Return ....... , .......... Timing of Credit Needs ........... Amount of Credit Needs ........... Savings ................... ults for Alternative Situations ....... Results for Situation 1 ........... Results for Situation 2 ........... Results for Situation 3 ........... omparison of the Basic Model with Expanded Models ....................... 5.5.1 5.5.2 5.5.3 Comparison of the Basic Model with Expanded Demand Model (Situation 1) ..... Comparison of the Basic Model with Firm Expanded Through Increased Product Line (Situation 2) ......... Comparison of the Basic Model with Firm Expanded Through Both Increased Demand and Increased Product Line (Situation 3) ................ vii 142 143 Chapter . Page 5.6 Constraints Facing the Cement Product Firms . . . . 144 5.7 Summary of Findings ................ 144 5.7.1 Level of Credit ............... 144 5.7.2 Seasonal Credit Needs ............ 145 5.7.3 Rate of Interest .............. 145 VI. CHARACTERISTICS OF READY-MADE GARMENT INDUSTRY ..... 146 6.1 Introduction .................... 146 6.2 Classification and Distribution of Ready-Made Garment Firms ................... 146 6.3 Types of Product Produced ............. 147 6.4 Raw Materials ................... 149 6.4.1 Type of Raw Materials ............ 149 6.4.2 Acquisition of Raw Materials ........ 149 6.4.3 The Payment for Raw Materials ........ 152 6.4.4 Percentage of Cash Purchases ........ 155 6.4.5 Rate of Interest Charged by Input Suppliers .................. 157 6.4.6 Raw Material Prices ............. 150 6.5 Techno logy ..................... 160 6.5.1 Types of Machines .............. 160 6.5.2 Machinery Requirement ............ 160 6.5.3 Capacity of Machine ............. 161 6.6 Labor Used ..................... 164 6.6.1 Family Members ............... 164 6.6.2 Sales Workers ................ 167 6.6.3 Production Workers ............. 167 6.6.4 Subcontract Workers ............. 172 6.6.5 Wage Rate per Day of Skilled and Unskilled Workers .............. 174 6.6.6 Labor Requirement .............. 177 6.7 Production ..................... 179 6.7.1 Production Pattern of Individual Products .................. 179 6.7.2 Value of Production ............. 185 6.7.3 Non-Allocatable Costs of Production ..... 185 6.8 Sales ................. - ...... 190 6.8.1 Gross Sales ................. 190 6.8.2 Sales Pattern of Individual Products . . . . 192 6.8.3 Inventory Pattern of Individual Products ......... . ......... 196 6.8.4 Output Channels and Implications for Cash Flow .................. 207 6.8.5 Credit Sales ................ 210 6.8.6 Prices of Product .............. 210 6.9 Financial Characteristics ............. 213 6.9.1 Debts and Assets .............. 214 6.9.2 Rate of Interest . . . .' .......... 215 viii Chapter VII. VIII. THE BASIC MODELS OF THE READY-MADE GARMENT INDUSTRY. . . 7.1 The Basic Models .................. 7.1.1 Types of Products in the Basic Models. . . . 7.1.2 The Constraints ............... 7.1.3 The Objective Function ........... 7.1.4 Other Coefficients ............. 7.2 Some Expectations ................. 7.2.1 Expectations Within a Type of Basic Ready-Made Garment Firm ........... 7.2.2 Expectations Among Types of Basic Ready-Made Garment Firms .......... 7.3 The Results .................... 7.3.1 The Exporting Ready-Made Garment Firm. . . . 7.3.2 The D-C Ready-Made Garment Firm ....... 7. 3. 3 The D- W/R Ready- Made Garment Firm ...... 7.4 Comparison Between Expectations and Actual Results ...................... 7.4.1 Comparison of Expectations and Actual Results Within a Type of Basic Ready- Made Garment Firm .............. 7.4.2 Comparison of Expectations and Actual Results Among Types of Basic Ready- Made Garment Firms ............. THE EXTENDED MODEL FOR THE READY-MADE GARMENT INDUSTRY . 8.1 The Extension of the Basic Model .......... 8.2 Modification of the Basic Model .......... 8.2.1 Constraints ................. 8.2.2 The Objective Function ........... 8.2.3 Activities .................. 8.3 Some Expectations ................. 8.3.1 Expectations Concerning Net Return . . .-. . 8.3.2 Expectations About Timing of Credit Needs .................... 8.3.3 Expectations About AmoUnt of Credit Needed ................... 8.3.4 Expectations About Savings ........ . 8.4 The Linear Programming Results of the Extended Model ....................... 8.4.1 The Exporting Ready-Made Garment Firm. . . . 8.4.2 The D-C Ready-Made Garment Firm ....... 8.4.3 The D-W/R Ready-Made Garment Firm ...... 8.5 Comparisons Among the Basic Models and the Extended Models .................. 8.5.1 The Exporting Ready-Made Garment Firm. . . . 8.5.2 The D-C Ready-Made Garment Firm ....... 8.5.3 The D-W/R Ready-Made Garment Firm ...... ix Page 217 217 217 218 222 224 228 228 231 233 233 233 238 238 241 242 243 243 244 244 245 248 252 252 255 256 257 257 265 269 274 280 283 285 Chapter Page 8.6 Comparison Between Expectations and Actual Results ...................... 287 8.7 Constraints Facing the Ready-Made Garment Firms . . 288 8.8 Summary of the Findings .............. 289 IX. SUMMARY AND CONCLUSIONS ................. 291 9.1 Research Methodology ................ 291 9.1.1 General Features of the Model. . . .‘. . . . 291 9.1.2 Limitations of the Model .......... 292 9.1.3 Application of the Model .......... 294 9.1.4 Data Sources ................ 295 9.2 Short-Term Credit Needs of Cement Product and Ready-Made Garment Firms .............. 295 9.2.1 Credit Needs from the Commercial Bank of Cement Product Firm ........... 296 9.2.2 Credit Needs from the Commercial Bank of Ready-Made Garment Firms ......... 297 9.2.3 Credit Needs as Demand Increase for a ' Given Product Line ............. 293 9.2.4 Credit Needs as Product Line Increase, Given Demand ................ 298 9.3 Shadow Prices When Credit is a Constraint ..... 299 9.4 Overall Conclusions ................ 300 9.5 Suggestions for Further Research. .1 ........ 301 APPENDICES ........................... 305 BIBLIOGRAPHY .......................... 309 .10 .11 .12 LIST OF TABLES Project Research Areas ................ Firms in Town Survey Sample, By Location ....... The Actual Number of Some Rows and Columns of Figure 2.1 ...................... Acquisition of Raw Materials of Cement Product Firm ......................... Relative Importance of Raw Material Suppliers . . . . Percent Cash Purchase of Cement Product Firms . . . . Rate of Interest and Carrying Charges Paid to Raw Material Suppliers of Cement Product Firms. . . . Fluctuation of Raw Material Prices of Cement Product Firms .................... Types of Machines in the Production of Cement Blocks and Wind Blocks of Cement Product Firms. . . . Production Capacity of Machines of Cement Product Firms .................... Number, Number of Days, Number of Man-Days Worked of Male and Female Family Members of Cement Product Firms ................. Number of Man-Days Worked of Sales, Skilled and Unskilled Workers of Cement Product Firms ...... Labor Requirement of Cement Product Firms ...... Wage Rate per Day of Skilled and Unskilled Workers of Cement Product Firms . . . ........ Production Seasonality of Individual Products of Cement Product Firms, Number of Pieces and Percent of Annual Average .............. xi Page 15 17 35 42 44 45 47 49 51 52 54 57 61 62 65 .13 .14 .15 .16 .17 .18 .19 .20 .21 .22 Value of Production of Cement Product Firms ....... Overhead Cost per 1 Baht of Value of Production of Cement Product Firms ................. Sales per Firm by Month of Cement Product Firms ..... Sales Seasonality of Individual Products of Cement Product Firms, Number of Pieces and Percent of Annual Average by Month ........... Inventory and Cumulative Inventory of Individual Products of Cement Product Firms, Number of Pieces, and Percent of Annual Average, by Month ..... Distribution and Types of Sales of Products, Number of Firms, by Channel ............... Percentage of Sales by Channel of Cement Product Firms ...................... Total Sales, Credit Sales, and Percentage of Credit Sales by Firm ........... . ...... Prices of Individual Products by Month of Cement Product Firms .................. Debt-Assets Structure (February 1981) of Cement Product Firms .................. Inventory, Expected Demand and Machinery ' Constraints of the Basic Cement Product Firm ...... Fixed Financial Commitments, Borrowing Constraint and Credit Sales of the Basic Cement Product Firm. . . . Raw Material Costs per Unit Cash Price and Credit Price of the Basic Cement Product Firm ......... Labor Requirement, Overhead Cost and Tax Expenses Per Unit of Product of the Basic Cement Product Firm .......................... Wage Rate per Man-Day and Interest Rate of the Basic Cement Product Firm ................ Coefficients of Cash Flow Constraint of the Basic Cement Product Firm Under the Liberal and the Conservative Approaches ................. xii Page 68 69 71 73 76 79 81 82 85 87 100 102 105 107 109 110 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Basic Cement Product Firm, Conservative Approach . . . . Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Basic Cement Product Firm, Liberal Approach ........................ Demand Increased 10 Percent for Basic Model Products ........................ Inventory, Expected Demand and Machinery Constraints of the Products Added to the Basic Cement Product Model .......................... Relaxed Demand Constraints for Products Added to the Basic Model (Situation 3) .............. Raw Material Cost Per Unit, Cash Prices and Credit Prices of the Products Added to the Basic Cement Product Model ...................... Labor Requirement, Overhead Cost and Tax Expenses per Unit for the Products Added to the Basic Cement Product Model .................. Cash F1ow Constraints for Products Added to the Basic Model for both the Liberal and the Conservative Approaches ................. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Cement Product Firm, Situation 1, Conservative Approach ........................ Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Cement Product Firm, Situation 1, Liberal Approach .................... Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Cement Product Firm, Situation 2, Conservative Approach ............. . .......... xiii 112 114 119 121 122 123 124 126 130 132 134 .10 .11 .12 .13 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: Cement Product Firm, Situation 2, Liberal Approach .................... Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: Cement Product Firm, Situation 3, Conservative Approach ........................ Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Cement Product Firm, Situation 3, Liberal Approach .................... Saving, Lending and Net Return for the Cement Product Firm: The Basic Model Compared with Increased Demand and Product Line Situations ...... Acquisition of Raw Materials of Ready-Made Garment Firms .......................... Payments for Raw Materials of Ready-Made Garment Firms .......................... Percentage of Cash Purchases of Ready-Made Garment Firms ........................ Carrying Charge and Rate of Interest Charged by Input Suppliers ..................... Seasonal Variation of Price of Fabric of Ready- Made Garment Firms ................... Machinery Requirement, Time Required to Finish Edge of the Fabric per Unit of Product of Ready- Made Garment Firms ................... Production Capacity of Machine to Finish Edge of the Fabric of Ready-Made Garment Firms ......... Number, Number of Days, and Number of Man-Days Worked of Family Members of Ready-Made Garment Firms .......................... Number of Sales Workers, Number of Days, and Number of Man-Days Worked by Type of Ready- Made Garment Firms ................... xiv . O Page 136 138 139 141 151 153 156 158 159 162 163 165 168 .10 .11 .12 .13 .14 .15 .16 .17 .18 .19 .20 .21 .22 .23 .24 .25 Number of Man-Days Worked of Skilled and Unskilled Workers of Ready-Made Garment Firms ..... Number of Subcontract Workers of Ready-Made Garment Firms by Month and Type of Firm ........ Wage Rate per Day of Skilled and Unskilled Workers of Ready-Made Garment Firms .......... Labor Requirement per Unit of Product in the Production of Some Ready-Made Garments by Type of Firm ..................... Monthly Production of Individual Products of the Exporting Ready-Made Garment Firms ........ Monthly Production of Individual Products of the D-C Ready-Made Garment Firms ............. Monthly Production of Individual Products of the D-W/R Ready-Made Garment Firms ............ Monthly Value of Production of the Ready-Made Garment Firms ..................... Overhead Cost per One Baht of Value of Production of Ready-Made Garment Firms .............. Monthly Sales of Ready-Made Garment Firms ....... Monthly Sales of the Exporting Ready-Made Garment Firms ..................... Monthly Sales of the D-C Ready-Made Garment Firms. . . . Monthly Sales of the D-W/R Ready-Made Garment Firms ......................... Inventory of Individual Products of the Exporting Ready-Made Garment Firms ............... Inventory of Individual Products of the D-C Ready- Made Garment Firms .................. Inventory of Individual Products of the D-N/R Ready-Made Garment Firms ............... XV Page 169 173 175 178 180 183 186 188 189 191 194 197 199 203 204 \Ime .26 .27 .28 .29 .30 Ratio of Monthly Inventory/Annual Monthly Average of Ready-Made Garment Firms ............... Output Channel and Pattern of Payment of Ready- Made Garment Firms ................... Trade Credit Provided by Ready-Made Garment Firms. . . . Prices of Products of Ready-Made Garment Firms ..... Debt-Assets Structure of Ready-Made Garment Firms. . . . Inventory, Expected Demand, and Machinery Constraints of the Basic Ready-Made Garment Firms. . . . Fixed Financial Commitments, Borrowing, and Credit Sales Constraints of the Basic Ready-Made Garment Firms .......................... Raw Material Cost per Unit, Cash Price, and Credit Price of the Basic Ready-Made Garment Firms ....... Labor Requirements, Overhead Costs and Tax Expenses per Unit of Output of the Basic Exporting Ready- Made Garment Firm .................... Labor Requirements, Overhead Costs and Tax Expenses per Unit of Output of the Basic D-C and D-W/R Ready-Made Garment Firms ................ Wage Rate and Interest Rate of the Basic Ready- Made Garment Firms ................... Coefficients of Production, Cash Selling, and Credit Selling Activities of Cash Flow Constraint of the Basic Exporting Ready-Made Garment Firm ..... Coefficients of Production, Cash Selling and Credit Selling Activities of Cash Flow Constraint of the Basic D-C and D-W/R Ready-Made Garment Firms. . . Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Basic Exporting Ready-Made Garment Firm, Conservative Approach ........................ xvi Page 205 208 211 212 215 219 220 223 225 226 227 229 230 234 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: Basic Exporting Ready-Made Garment Firm, Liberal Approach ................. 235 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: Basic D—C Ready-Made Garment Firm, Conservative Approach ........................ 236 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Basic D-C Ready-Made Garment Firm, Liberal Approach .................... 237 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: Basic D-W/R Ready-Made Garment Firm, Conservative Approach ........... g ............ 239 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Basic D- W/R Ready-Made Garment Firm, Liberal Approach . . . . . . . . . ........... 240 Demand Increased 10 Percent for Basic Model Products ........................ 245 Inventory and Expected Demand of the Products Included in the Extended Ready-Made Garment Models . . . 245 Related Demand Constraint for Products Added to the Basic Model (Situation 3) .............. 247 Raw Material Cost per Unit, Cash Price and Credit Price of the Extended Ready-Made Garment Models ..... 249 Labor Requirement and Overhead Cost per One Unit of Output of the Extended Ready-Made Garment Models ......................... 250 Tax Expenses per One Unit of Output of the Extended Ready-Made Garment Models ................ 251 Coefficients of Production, Cash Selling Activities in Cash Flow Activities of the Extended Ready-Made Garment Models: Conservative Approach ......... 253 xvii 8.8 8.9 8.12 8.14 Coefficients of Production, Cash Selling, and Credit Selling Activities in Cash Flow Activities of the Extended Ready-Made Garment Models: Liberal Approach ........................ Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Returnz» Exporting Ready-Made Garment Firm, Situation 1, Conservative Approach .................. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Exporting Ready-Made Garment Firm, Situation 1, Liberal Approach .............. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: Exporting Ready-Made Garment Firm, Situation 2, Conservative Approach ........... Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Exporting Ready-Made Garment Firm, Situation 2, Liberal Approach .............. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: Exporting Ready-Made Garment Firm, Situation 3, Conservative Approach ........... Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: Exporting Ready-Made Garment Firm, Situation 3, Liberal Approach .............. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: D-C Ready-Made Garment Firm, Situation 1, Conservative Approach .................. Quarterly CaSh Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: D-C Ready-Made Garment Firm, Situation 1, Liberal Approach .................... Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: D-C Ready-Made Garment Firm, Situation 2, Conservative Approach .................. xviii Page 254 258 259 261 262 263 264 266 267 268 .18 .19 .20 .21 .22 .23 .24 .25 .26 .27 .28 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: D-C Ready-Made Garment Firm, Situation 2, Liberal Approach .................... Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: D-C Ready-Made Garment Firm, Situation 3, Conservative Approach .................. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: D-C Ready-Made Garment Firm, Situation 3, Liberal Approach .................... Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: D-W/R Ready-Made Garment Firm, Situation 1, Conservative Approach .................. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: D-W/R Ready-Made Garment Firm, Situation 1, Liberal Approach .................... Quarterly Cash Flow Statement, Shadow Price of ' Borrowed Capital, Accounts Payable and Net Return: D-W/R Ready-Made Garment Firm, Situation 2, Conservative Approach .................. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: D-W/R Ready Made Garment Firm, Situation 2, Liberal Approach .................... Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: D-W/R Ready-Made Garment Firm, Situation 3, Conservative Approach .................. Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: D-W/R Ready-Made Garment Firm, Situation 3, Liberal Approach .................... Borrowing, Savings, Lending, and Net Return of the Exporting Ready-Made Garment Firms ........... Borrowing, Savings, Lending, and Net Return of the D-C Ready-Made Garment Firms .............. xix Page 270 271 272 273 275 276 277 278 279 281 284 Page 8.29 Borrowing, Savings, Lending, and Net Return of the D-N/R Ready-Made Garment Firms ............. 286 XX a a 1 \J‘ .3 vs“. 0.3. 1.; .nuufll§*lmfiuurlfla* r4»dd.§!!-Ilrn Jrnfl.=—~.i1i'—Liotrh.hh Sn --.-»_'=1!.14.I‘51.ca’n...,-._Hh..p.13flail.—»Rn‘ Ina—im-lfiry .albw‘howp..4-J.t.v 454qust Kb Pd Fir..- fi rim-.5. o, a an. in. Hut; «1 cudl‘lu.‘ t! Isliirii1gpili , . . .. v u t . . . . . . . . . . . O . . . . .. . .. IL...||11|.| II III: r ll .IIIII . Ill-I1 II- 1. . .. __ l... e I u .1. 1: ll-i r11» i.:- 2..a:.r.=r._.‘ilww .5: 147:... .w y .. «NapieLLpna 25.1.7.2. ELLE. .51»; , . . a. a '94.. . p HIV. 7. u, AMI. .13 .1 . . .uulu ., a. q.1.¢u.¢.tfl..fl.t Er . *1, ftm UdV‘Itwflk‘luillii: e. E3 , . . _ , . . , , , . . A . . ._... Z, . .4.. 2.. 4.... e e. r LIST OF FIGURES Map of Thailand with Study Areas Identified ....... LP Tableau of the Generalized Linear Programming Model .......................... Months when Production was at Least 10 Percent Above Annual Average of Individual Cement Products . . . Months when Sales were at Least 10 Percent Above Annual Average of Individual Cement Products ...... Months when Inventory were at Least 10 Percent Above Annual Average of Individual Cement Products . . . Cement Product Firm Situations for Analysis ....... Months when Production was at Least 10 Percent Above Annual Monthly Average of the Exporting Ready-Made Garment Firms .......... . ..... Months when Production was at Least 10 Percent Above Annual Monthly Average of the D-C Ready- Made Garment Firms ................... Months when Production was at Least 10 Percent Above Annual Monthly Average of the D-W/R Ready- Made Garment Firms ................... Months when Sales were at Least 10 Percent Above Annual Monthly Average of the Exporting Ready- Made Garment Firms ................... Months when Sales were at Least 10 Percent Above Monthly Average of the D—C Ready-Made Garment Firms ...................... Months when Sales were at Least 10 Percent Above Annual Monthly Average of the D-W/R Ready-Made Garment Firms ................ Months when Inventory were at Least 10 Percent Above Annual Monthly Average .............. xxi Page 14 34 66 74 77 118 181 184 187 195 198 200 206 CHAPTER 1 INTRODUCTION 1.1 Problem Thailand, like many other LDC's, faces complex problems of rural poverty. Rural incomes are extremely low in absolute terms and are low relative to urban incomes. Inequality between and within regions in many cases is substantial. Rural incomes in the North and Northeast Regions are much lower than incomes in the South and Central Regions. Furthermore, within individual regions the gap between rich and poor households has widened. Unemployment and underemployment is assumed to exist everywhere, particularly in rural areas. At the formulation stage of the Fourth Five-Year Plan (1977-1981) the Rural Thai Government (RTG) was faced with the following problems: A slow down in industrial and agribusiness growth. An increased level of unemployment and underemployment, particu- larly in rural areas. A greater concentration of industrial activities in the Bangkok area with consequent urban migration problems. Low income in rural areas. Continued uneven income distribution between urban and rural areas. Continued dependence on exports of unprocessed primary commodities. (NESDB. 1977) The RTG has tried to solve these problems in several ways. Attempts are being made to increase agricultural incomes through changes in 1 technologies and introduction of new crops, intensification of cropping through irrigation, improvements in the supply of financial and market- ing services, and investment in social infrastructure. In addition to the above alternatives, the government has tried very hard to develop the industrial sector. Yet the emphasis of the government industrial programs has been largely placed on the promotion of large-scale "modern" enterprises, particularly those with foreign capital investment. The value added of the manufacturing sector as a percent of gross domestic product has raised from 10 percent in the early 1960's to 22 percent now. The expansion of the industrial sector in terms of value added is quite impressive. Other performance measures, however, tell an opposite story: 1) The proportion of manufacturing employment in the labor force has remained at a small 7 percent, imply- ing the relatively low ability of the sector to create employment. 2) A dualistic structure has emerged in the sector. On the one hand, there is a modern portion consisting mainly of large firms which enjoy several types of incentives and privileges. On the other hand, there is an un- organized portion, with mostly small-scale firms, producing low quality products, often using poorly paid child and female workers, working in appalling conditions, with little or no access to industrial incentives and privileges. 3) The concentration of industries in and around Bangkok has created a serious congestion in Bangkok. 4) The ownership and con- trol of industrial production and distribution has been concentrated in relatively few families and multinational corporations (Akrasenee, 1980). With the above disappointing performance of past industrial and ag- ricultural development policy and the low capability of absorption of labor from the agricultural sector, the government has become increasingly aware of and interested in the role that small-scale enter- prises might play in its income and employment generation capacities. This is because research on small scale industries in other countries have shown that small-scale industries compared with large scale, "modern industries" have the following desirable characteristics. They: l) are more geographically dispersed; 2) are less capital intensive; 3) offer more opportunities for unskilled and.family labor; 4) have greater linkages with the agricultural sector; and 5) have greater export poten- tial than frequently assumed (Meyer, 1978; Liedholm, 1976). Therefore, small scale industries might be a good candidate for promotion to help solve the problems of low income, unemployment, and underemployment of rural households. The following items, taken from the Fourth Five-Year Plan, illus- trate that the Royal Thai Government has shown strong interest in the promotion of small-scale, labor-intensive industries. "To alleviate the unemployment problem in general and seasonal unemployment and rural underemployment in particu- lar, rural projects must be as labor intensive as possible ....incentive must be given to cottage industries, these processing agricultural commodities, and industries that manufacture goods to meet the needs of rural farmers." TThe Government will encourage the development of small-scale industries which are important in generating employment." "In order to achieve this growth rate, output expan- sion in the import substitution industries, agro-industries, and labor-intensive small-scale industries in particular have to be accelerated." "The investment promotion act will be revised to give more incentive to investment in labor-intensive industries. More information on the possibilities and viability of adopting labor-intensive techniques of production will be provided to investors. Small-scale labor-intensive indus- tries will receive additional privileges so that they can compete more effectively vis-a-vis large scale industries." It is clear that the Royal Thai Government is deeply interested in rural small-scale enterprises as a means to raise income and employment levels. In Thailand, many institutions have been created to help and promote small-scale enterprises. These institutions are: 1. Small Industries Finance Office (SIFO) to provide credit facilities; 2. Industrial Service Institute (151) to provide technical advisory services; 3. Thailand Management Development and Productivity Center (TMDPC) to provide management advisory services; and 4. the creation of a marketing center in Bangkok. The creation and implementation of these institutions, however, is reported to have not helped the small-scale industries very much. Many problems such as lack of funds, poor accounting, inadequate quality control of finished product and raw materials, and poor personnel management still remain with the small-scale enterprises (Sangwanruang, et. a1., 1978). This is to say that if the small-scale industry is to be used as one of the vehicles to increase income and reduce unemployment of rural households, many problem areas have to be studied to seek appropriate solutions. All problem areas cannot receive attention in a single study. To keep this study to manageable size, the emphasis will be directed primarily to the study of credit needs of small-scale firms. The study of credit needs of small-scale firms can be divided into the study of long-term credit needs and the study of short-term credit needs. However, the study of long-term credit needs of the small-scale firms involves interaction with the acquisition of fixed assets. The kind of questions the firms raise when they consider the acquisition of new fixed assets are: 1) Should the investment be made and what are the expected benefits of the investment? 2) How should the investment be financed? 3) What is the firm's capacity for loan repayment? 4) What would be the appropriate timing for the schedule of repayment? etc. This study is concerned primarily with short-term credit needs which are related to the firm's current operation and the management of cash. Cash for current operation may be obtained internally from profits and externally through borrowings. That is, if cash generated internally is not enough to finance current operation to the desired level, the firm could borrow some cash from sources outside the firm. However, before making any agreement to borrow cash from outside sources, the following relevant questions should be answered. 1) How much credit should the firm obtain? If the firm has already borrowed, the firm must decide whether an increase in the level is required, if so what would be the size of the required increase? 2) When should the credit be obtained? 3) What rate of interest can the firm afford to pay for the proposed borrowings? These questions are of particular importance if the firm management contemplates expansion through an increase in the volume of production of existing product lines, or changes its level or mix of existing products, changes the technology of production being used or introduces a new product line. This study has particular interest in these questions as they re- late to short-term credit needs of the firm. A more complete understanding of short-term credit needs would be very useful to both the firms themselves and to financial institutions. The firms could use the information when agreements are made with lenders with respect to amount of credit and rate of interest as they attempt to maximize the firms return to equity capital. Financial institutions could use the information to estimate roughly the demand for credit from small-scale industries. Knowledge of the seasonal demand for credit of different small-scale industries could help facilitate the mobilization of credit among the credit institutions. The information on returns to borrowed capital would give financial institutions, especially govern- ment supported institutions, and the legislators ideas about the rate of interest which would best serve national development goals. The small-scale firms in rural areas are very diverse in terms of products and in structure. A thorough analysis of each would be unmanage- able in a single study. To provide some of the diversity as well as to permit in-depth case study analyses, the cement product industry and ready-made garment industries are chosen to be studied. 1.2 Objectives The specific objectives of this research are as follows: 1. Using data obtained from actual firms, develop a linear pro- gramming model which can be used to analyze seasonal short-term credit needs of small-scale industries. 2. To evaluate net return, borrowings, savings, lending and pro- ductivity of borrowed capital of the firm under various marketing systems subject to different assumptions pertaining to expansion in size of firm in relation to given levels of other resources. 3. 'n) interpret the analysis for their implications for small- scale firm management and institutional credit policies affecting such firms. 1.3 Research Approach 1. The selected firms are classified according to marketing charac- teristics. 2. Production, marketing, and financial characteristics of selected firms of the cement product and ready-made garment industries are de- scribed. 3. The information from No. 2 above is used to construct represen- tative firms which can be analyzed with a linear programming model. 4. The basic linear programming models developed in No. 3 above are extended to perform some analyses with respect to the expansion in size of the firms. 1.4 Related Research There are two areas of related research. The first area includes studies related to credit aspects of small-scale industries, and the second area includes studies related to modelling of the firm. 1.4.1 Studies Related to Credit of Small-Scale Industries The issues specified in studies related to credit of small-scale industries were divided into two groups, i.e., those related to supply of credit and those related to demand for credit. The issues related to supply of credit, mentioned in a number of studies such as Khambata, et. al. (1981), Lim (1977), Lim (1979), Meyer (1978), Sam (1980) and Wilson (1981), were: 1) What would be the appro- priate delivery channels for providing financial services to small-scale industries, e.g., development bank, commercial bank, specialized insti- tutions, etc.? 2) What would be the appropriate incentives to persuade existing financial institutions to provide more credit, both short-term and long-term, to small-scale industries? 3) What is the role of infor- mal lenders? 4) What would be the appropriate rate of interest given high administrative costs on the financial institutions side, and high business and financial risks on the firm side? 5) What would be the appropriate lending procedure, i.e., should the amount lended be based on the value of collateral pledged or should it be based on pro-forma cash flow, balance sheet, and income statement? The main issues related to demand for credit mentioned in various studies were: 1) What would be the amount of credit needs? 2) Was the credit needed primarily for short-term investment in working capital or long-term investment in fixed assets? However, none of the studies which were reviewed, except those reviewed in the modelling section, pro- vide estimates of the amount of credit needed by small-scale firms. Some studies pose the question as to whether the firms really need credit at all (Child, 1977; Haggblade, et. al., 1979; Harper, 1975; Harper, 1976; Somerset and Harris, 1972; Wilcock, 1981; Fisseha and Davies, 1981). These studies approached the issue of demand for credit by asking the firms to identify the most important constraints facing their opera- tions. The focus was on whether the perception of the firms manager re- vealed that lack of credit or lack of capital was the major constraint. Credit constraints were not measured in terms of credit needs. The methodological question raised in this research was whether the percep- tion was real or illusory. Some studies (Liedholm and Chuta, 1976; Haggblade, et. al., 1979; Child, 1977) have attempted to demonstrate that the managers' perception might be true and the amount of credit needs might be quite large since the "average" rate of return on capital of the firms were quite high. Some other researchers have taken the opposite position and have tried to show that the perception was illusory by showing that mismanagement of inventory, lack of demand, or managerial incompetance, etc. were the actual constraints (Harper, 1975; Harper, 1976). Chuta and Liedholm (1979) pointed out also that the amount of credit needed might be slight because of their observation from other studies (Haggblade, et. al., 1979; Steel, 1977; Ahmed, et. al., 1979) revealed that most of initial capital and capital for expansion came from personal savings and retained earnings. The present study will address several credit issues not included in the above studies including timing of credit needs, seasonal credit needs, how credit needs change when there is a change in product mix and level of demand, etc. 1.4.2 Studies Related to Modelling of the Firm Charnes, Cooper and Miller (1959) were the first group of researchers to modify the single product warehouse linear programming model original- ly developed by Cahn (1948) to include: 1) financial constraints of purchasing, inventory, and selling activities; 2) the treatment of trade credit provided by suppliers as a source of funds; and 3) the addition of borrowing and lending activities. In other words, Charnes, Cooper and Miller were the first group of researchers who tried to incorporate financial activities into a multiperiod linear programming model. After Charnes, Cooper and Miller there were many researchers who developed linear programming models to help improve cash flow management of the firms and for many other purposes. Without considering any production, inventory, and marketing activi- ties, Robicheck, Teichroew and Jones (1965) developed a linear 10 programming model designed to help the manager to finance seasonal credit needs from various sources in the cheapest way. Mao (1968) used their original idea to formulate a model in a slightly different way to make the model easier to understand. Unsatisfied with Robicheck, Teichroew and Jones' model which operated under certainty surroundings, Pogue and Bussard (1972) developed a linear programming model to answer the same kind of questions, yet operate under uncertainty circumstances. Ijiri, Levy and Lyon (1963) went in a different direction to develop a single period financial model (no marketing activities) by combining linear programming and accounting together through "spread sheet" con- vention. The ordinary linear programming variables, then, were trans- formed into balance sheet variables which reflected transaction flows among items in a balance sheet. To overcome a shortcoming in the Charnes, Cooper and Miller's multi- period model which had not explicitly included production and labor hiring activities and the shortcoming of Ijiri, Levy and Lyon's model which was a single period financial model, Baker and Damon (1973) de- veloped the multiperiod model which had production, including inventory and labor hiring activities, and financial activities. Even though Baker and Damon's model showed an improvement over Charnes, Cooper and Miller's model by showing production and labor hiring activities expli- citly, or showed an improvement over Ijiri, Levy and Lyon's model by making it a multiperiod model, the model still had a deficiency. Unlike Charnes, Cooper and Miller's model in which the purchasing, inventory and selling activities are expressed in terms of physical units, Baker and Demon's model (like Ijiri, Levy and Lyon's model) expressed 11 activities in terms of monetary values which were difficult to convert back into physical units. This makes it difficult for the firm's manager to understand. Unsatisfied with the other models which treated marketing activities as given, Damon and Schramm (1972) developed a nonlinear model which treated marketing decision endogenously. Burton, Damon and Obel (1979) thought that the analysis of multi- period short-term planning was just one aspect of financial management of the firm. They then combined the ideas of Charnes, Cooper and Miller and Weingartner (1967) together and developed a model containing both short-term and long-term financial activities The present study has benefited from the modelling efforts of the researchers mentioned above. Their work has been adapted to fulfill the study objectives by incorporating selected features to produce a model containing the following general characteristics: 1) multi-period t0' analyze one 12-month production cycle; 2) separated production and selling activities with input prices varying by season; 3) a differen- tiation between cash and credit transaction for input purchases and pro- duct sales; 4) finished product inventory by product in physical terms by season adjusted by production, sales and carryover phenomenon; and 5) a seasonal cash flow and financial accounting reflecting sales, borrowing, accounts receivable, purchases and other cash outflows and accounts payable of the firm. 1.5 Data Sources An understanding of the data base for this study requires first some appreciation for the Rural Off—Farm Employment Assessment Project 12 (ROFEAP)1 of Thailand of which the present study is an integral part. The following brief description of the ROFEAP provides the research set- ting in which the present effort was conducted. l.5.l ROFEAP Objectives and Sponsorship The Project was funded by the Thailand Mission of the U.S. Agency for International Development. The overall objective of the Project was to provide information to the Royal Thai Government, USAID, and other international donors to be used to identify and develop appropriate policies and programs for the rural nonfarm sector in Thailand. The Project began in August 1979, and lasted for 2 1/2 years. In addition to Kasetsart University, Chiang Mai University and Khon Kaen University were involved in data collection. Michigan State University and Ohio State University provided technical assistance to the Project. 1.5.2 Project's Components The Project was divided into three major components, namely rural nonfarm enterprises, farm level surveys, and rural financial markets (Onchan, et. a1. 1979). Since this study was a portion of the study of rural nonfarm enterprises, then the following discussion on study areas, data collection strategy, sample selection, and types of questionnaires will primarily focus on this component of the Project. The discussion on the same issues of the other components of the Project were discussed in detail in Mead and Meyer (1981). 1Many working papers and other published reports describing and providing empirical results from this project are available by contacting the Center for Applied Economic Research, Kasetsart University, Bangkok 10900, Thailand. 13 1.5.3 Study Areas Based on some criteria (see Mead and Meyer, 1981) four provinces were selected for study: Khon Kaen and Roi Et in the Northeast; Chiang Mai in the North; and Suphan Buri in the Central Region. Figure 1.1 shows the locations of these provinces. Within these four provinces, four provincial capitals and seven other district capitals were chosen to be included in the town surveys or the survey of rural nonfarm enter- prises (Table 1.1). 1.5.4 Data Collection There were three steps involved in the collection of data: the Phase I town surveys; the pre-town surveys; and the Phase II town sur- veys. The Phase I town survey was designed to provide preliminary infor- mation on the magnitude, type and spatial distribution of rural nonfarm activities in the study areas. Some limited information was also collect- ed about the nature of these activities such as type of workshop, level of employment, and use of machines. The information was used to generate a list of the "universe" of firms found in the study areas, from which a sample for the Phase II survey was drawn. Since information in the Phase I questionnaire provided little know- ledge of the Operations of the industries which were candidates for in- clusion in the survey, the pre-town survey was implemented to provide a further understanding of the structure and future potential of a number of different industries. The pre-town survey was administered to approx- imately 230 enterpreneurs in 21 industries. 14 4’ ////h;ang Mai // / NORTH - f NORTHEAST UPHANBURI 1 ” CENTRAL O BANGKOK Map of Thailand with Study Areas Identified Figure 1.1 15 Table 1.1 Project Research Areas Region Province District North Chiang Mai l. Chiang Mai (Muang)a 2. San Kamphaeng 3. San Pa Tong Northeast Khon Kaen 1. Khon Kaen (Muang) 2. Ban Phai 3. Chonnabot 4. Nam Phong Roi Et 1. Roi Et (Muang) 2. Chaturaphak Phiman Central Suphan Buri 1. Suphan Buri (Muang) 2. Don Chedi aMuang means city or municipality. 16 On the basis of the pre-town survey eight industries were selected for more detailed study. (See the first column of Table 1.2.) The Phase II survey was designed to collect detailed information concerning pattern of production, marketing, finance and management in a sample of firms in selected industries in the study areas. This in- formation in turn was used to help explore questions concerning the future prospects for these industries, and the types of projects, policies, and programs which may be needed to facilitate and encourage the growth of employment and income in these industries. 1.5.5 Sample Selection The sample firms in each industry were chosen on the basis of the recommendations of the industry supervisors (a project staff who super- vised data collection and performance subsequent analysis of the indus- try) to reflect the diversity of firm size, product type, production technology and location. Therefbre, in some cases, the selection was based on random choice within particular groups of firms; more often, it was a purposive choice reflecting the industry supervisor's search for representativeness and diversity, in the dimension specified above, along with the respondent‘s willingness to cooperate by participating in this study. The distribution of sample firms in each selected indus- try is shown in Table 1.2 17 m¢_. Np mN mp N, N NF. om 4 wee Haste .m mp m 1 N m N 1 o muozuoea ucoemu .N m 1 1 1 1 1 1 m mxowem .P pouch “one: was; mump acmmzasmg mzmaz 1:0;0 cam mean: cam cam mean: .MM1Mmm. eeex eeex we: mee_eu :owuauod am .mpaEmm xm>esm ezee ea weave N.P e.gee 18 1.5.6 The Sample of Cement Product and Ready-Made Garment Firms A. Cement Product Industry. Of the 19 sample firms, 3 of them were more advanced firms,1 3 of them were specialized cement block-making firms and the rest of them were typical cement product firms (both large and small). Since during the survey period 1 typical and 1 specialized firm went out of business and another specialized firm refused to cooper- ate, the number of firms in the sample dropped to 16. Of these 16 firms, all 3 more advanced firms, the specialized firm and a typical firm in Roi Et Province provided incomplete data. Therefore, the sample size of cement product firms dropped down to 11 firms and all of them were typi- cal cement product firms. 8. Ready-Made Garment Industry. At the beginning of the survey period, the Project planned to collect information from 31 ready-made garment firms. Since 5 of the firms refused to provide data after the survey started for 2 or 3 months, then the actual sample reduced to 26 firms. Five of these firms were in Khon Kaen and the rest of them were in Chiang Mai. Since this study required data from many sets of question- naires (see the following section), the number of firms having complete data dropped to 17 firms. Four of them were in Khon Kaen and the rest of them were in Chiang Mai. The four firms in Khon Kaen correspond to type III of ready-made garment firm (provincial level mass consumption) and the 13 firms in Chiang Mai correspond to the type I (provincial level ex- port quality) and type II (provincial level, medium quality) or ready-made garment firms as classified by Onchan (1980). 1See Aungsumalin (November 1980) for the detailed characteristics of the more advanced, specialized, and typical cement product firms. 19 1.5.7 Types of Questionnaires Besides a monthly questionnaire, the Project has 5 other special sets of questionnaires, i.e., labor force questionnaire, entrepreneurship questionnaire, marketing questionnaire, profitability (production cost) questionnaire, and finance questionnaire. However, the data used in this study were drawn from the monthly questionnaire and the last three sets of special questionnaires just mentioned. The monthly questionnaire was designed to provide information on the pattern of the seasonality of production, sales, prices, labor used and wages. The other special sets of questionniares were designed to capture detailed information about particular aspects of the firm. A brief description of the contents of each of the special sets of questionnaires follows: A. Marketingz. input procurement pattern, and problem associated with obtaining needed inputs. Marketing pattern for products and market- ing problems. This set of questionnaires was administered in August, 1980. B. Profitability: raw material, labor and machinery costs per unit of producing each up to four specific products made by the firm. Overhead costs for the month of September. This set of questionnaires was administered in October, 1980. C. Finance: constraints to expand production, whether finance or otherwise. Fixed assets, current assets, and debt outstanding at the time of the survey. Barriers to entry, goals of the firms, government assistance received by the firm, and regulations which affect them. This set of questionnaires was administered in March, 1981. 20 1.6 Organization of the Study The remainder of the thesis will be presented in the following order. The generalized analytical model to be used in this study will be de- scribed in Chapter 2. The following three chapters deal with the cement product industry. The first chapter (Chapter 3) describes the production, marketing and financial characteristics of the industry. This informa- tion will be used to provide coefficients for the activities, constraints, and objective function for the basic model described in the first part of Chapter 4. Another part of Chapter 4 presents the results of the basic linear programming model. The basic model will then be used to evaluate the consequences of changes in level of demand and product mix, with the results of the analysis presented in Chapter 5. The analysis of the ready-made garment industry will follow the same ordering as that used for the cement product industry. Description of the industry appears in Chapter 6. The linear programming analysis of basic firms occurs in Chapter 7. Analysis of extensions to the basic ready-made garment firm takes place in Chapter 8. The thesis concludes with a summary and implications of the study in Chapter 9. CHAPTER 2 THE GENERALIZED LINEAR PROGRAMMING MODEL 2.1 Introduction The first part of this chapter describes the generalized linear programming model regarding assumptions, the objective function, the activities, and the constraints. The second part presents the model in mathematical form followed by a matrix of the generalized linear pro- gramming model. In this chapter, none of the specific activities for either the cement products industry or the ready-made garment industry are shown. The former will be done in Chapters 4 and 5 and the latter will be done in Chapters 7 and 8. For each case, one chapter will be devoted to a "basic" model with coefficients for the objective function and row and column activities given followed by a presentation of basic model linear programming results. A second chapter will present modifications in the basic model and corresponding results. 2.2 The Model 2.2.1 Assumptions 1. The model assumes that the market for products, raw materials, and labor are perfectly competitive, i.e., the firm can buy and sell an unlimited number of units at the going market prices. 21 22 2. Sales are made from inventory on hand at the start of any period and/or from the production of that period. However, there is no inven- tory of product at the beginning of the first period, and the firm does not carry any inventory of product at the end of the last period. 3. Although firms do carry raw material inventories in reality, this aspect of firm behavior is omitted from the model for lack of needed data. Therefore, the firm does not carry inventory of raw materials. Materials and supplies are purchased as needed for production. 4. There are no accounts receivable at the beginning of the first period. 5. The firm has no marketable securities and ignores short-term investment opportunities. 6. Because of the focus of this study on short-term credit needs, there are no expenditures or receipts for plant and equipment during the planning horizon. 7. The firm cannot borrow an unlimited amount of money at a con- stant rate of interest. 2.2.2 The Objective Function The objective function of the firm is assumed to maximize return to fixed assets, family labor, and equity capital subject to the constraints to be identified later. This return equals the difference between reve- nue and expenses, including taxes. Revenue consists of sales and interest income. Sales is the result of the multiplication of constant price and variable quantity sold, for both cash and credit sales. Since the firm is assumed to put excess cash above cash requirement in a savings account, then the firm may have some interest income. This interest income equals 23 the rate of interest on saving account times the amount in savings. Ex- penses consist of raw material costs, labor costs, overhead costs and interest costs. Raw material cost is the result of the multiplication of variable raw material costs per unit and units of product produced. Labor expenses includes the expenses for skilled and unskilled labor. Labor expenses are found by multiplying amount of labor used by wages which vary by period. Besides raw material and labor costs, the firm has some other expenses; gasoline, electricity, etc. These other ex- penses are added together under overhead cost expenses, and are calcu- lated as a fraction of total value of production. Since the firm is permitted to borrow from sources outside the firm, some interest cost may be incurred, which for each period is equal to rate of interest times amount of debt outstanding. The firm is assumed to pay taxes which is calculated as a percentage of gross sales. 2.2.3 The Activities Activities are divided into four groups, i.e., production activities, selling activities, labor hiring activities and financial activities. Production activities indicate the kinds of products and amount produced (unit=l piece) in each period. Similarly, selling activities indicate amount sold of each product in each period. However, selling activities are further divided into cash selling activities and credit selling ac- tivities. The inclusion of labor hiring activities is to permit the firm to hire both skilled and unskilled labor to do production jobs. The rest of the activities which affect cash position of the firm are gathered together under financial activities. In each period, the firm has to pay for overhead costs, dividends, taxes, interest and principal on 24 outstanding long-term debts. On the one hand, if beginning cash on hand, cash from sales and interest receipts is greater than cash expenses of raw materials, labor, and overhead but less than other financial expenses above, the firm has to borrow some cash from outside sources, and has to pay some interest too. On the other hand, if the surplus of cash from beginning cash balance, interest income and sales minus cash expenses for raw materials, labor, and overhead is greater than other financial expenses, the firm can deposit the excess amount in the bank and earn some interest. Therefore, in each period, the model contains all the financial activities mentioned above. 2.2.4 The Constraints 1. Inventory Constraint Since the firm executes sales from inventory and production, there are two constraints related to inventory for each product of the firm. a) The net addition to inventory cannot exceed the space available. Actual space available for products by firms was not available from the survey. The average monthly amount of product kept in inventory for each product was computed from the survey. The month showing the maximum average was taken as the space avail- able constraint. b) Cumulative sales cannot exceed cumulative production plus initial inventory. 2. Demand Constraint Quantity sold of each product in each period cannot exceed a cer- tain level. This constraint is to restrict the firm from producing and 25 selling products which have high margins but limited demand. It was established by taking the average amount sold by all firms for each pro- duct by period. 3. Credit Sales Constraint Since credit prices are usually higher than cash prices, there is a tendency for credit sales to be greater than cash sales. But, in real- ity, the percentage of cash sales exceeds that of credit sales. There- fore, a restriction is imposed that credit sales be a constant proportion of cash sales. 4. Cash Needed to Hire Skilled Labor The calculation for the cash needed to hire skilled labor consists of two steps. First, the amount of required skilled labor is determined and this requirement is then converted into monetary value. The amount of skilled labor required is found by first adding together the require- ments production for all products. Then, the monetary value is the re- sult of the multiplication of wage rate and the amount of labor needed. 5. Cash Needed to Hire Unskilled Labor The calculation of cash needed to hire unskilled labor is done in the same way as the calculation of cash needed to hire skilled labor. Under this construction, labor (both skilled and unskilled) is unconstrained, but since cash is needed, the amount of labor hired may be limited by the cash constraint. 6. Machinery Constraint A machinery constraint is expressed in terms of number of units which can be produced by the machine. The constraint does not permit the units produced to exceed the maximum number of units which can be produced by the machine. 26 7. Cash Needed to Pay for Overhead Cost Overhead cost is calculated separately from other kinds of produc- tion costs. It is calculated as a fixed percentage of the value of pro- duction. 8. Cash Needed to Pay for Taxes Taxes are calculated on gross sales rather than net profit. The firm is assumed to pay taxes every period, instead of paying them entire- ly in the last period. 9. Cash Needed to Pay for Dividends The firm is assumed to pay dividends every period. "DividendS" re- fers basically to a cash drain out of the business for household consump- tion. The amount paid is determined outside the model. 10. Interest Payment and Principal Repayment of Outstanding Long- Term Debt The firm is assumed to pay interest on outstanding long-term debt in every period, and pay 1/10 of the outstanding long-term debt in the last period. (The firm is assumed to repay all their outstanding long- term debts in 10 years.) 11. ‘Savings In the accounting for a three month period, whenever cash on hand is greater than cash requirement, the firm would put the excess cash in a savings account. The firm can withdraw cash from this account in any period as needed. Therefore, the savings account balance in the present period would equal the carryover of that in an earlier period plus de- posits minus withdrawals of the current period. Earned interest income in the present period equals the rate of interest on savings account times the ending balance in the savings account for the previous period. 27 12. Borrowing Whenever cash expenses are greater than cash income generated plus withdrawals from savings account. the firm borrows at interest from outside sources. The interest cost in the present period is calculated on the outstanding debt of the previous period. The amount of the re- payment can be equal to or less than the outstanding balance of the earlier period. The outstanding balance of the present period, however, equals the outstanding balance in the earlier period plus borrowings minus repayment of the present period. The amount which the firm can borrow in a period is restricted to a predetermined amount which cannot be exceeded taking into account outstanding debt of an earlier period and repayment in the present period. 13. Initial Cash on Hand This constraint indicates the initial cash on hand at the beginning of the first period which is available to the firm for use in the first period. The amount of initial cash on hand is determined outside the model. 14. Cash Balance In each period, cash inflows including borrowings must equal cash outflows including savings. Cash inflows in addition to borrowings, consist of cash from cash sales, interest income savings from an earlier period and collection of accounts receivable from credit sales in an earlier period. Cash outflows are raw material expenses, labor expenses, overhead costs, dividend payments, tax payments, interest payments and principal repayments of short-term and long-term debt . Whenever cash 28 outflows exceed cash inflows, the firm will borrow to balance the short- age. On the other hand, whenever cash inflows exceed cash outflows, the excess cash is deposited in the savings account. 2.3 The Mathematical Model Mathematically, the linear programming model can be expressed as follows: 1 Max: - z z b. X. + z z p. S. + z z p. T. - 2 SC t i 1t 1t t i 1t it t i 1t 1t t t - 2 USC - z OHC - z TAX - z 2 IP. + 2 IR - 2 IL t t t t t t t j jt t t t t where: t = period t i = product i j = source of borrowing j Xit = production of product i in period t Sit = cash sales of product i in period t Tit = credit sales of product i in period t SCt = cost of hiring skilled labor in period t USC = cost of hiring unskilled labor in period t OHC TAX = overhead cost expenses in period t = tax expenses in period t d-d-d' IPjt = interest payment to source j in period t IRt = interest income in period t ILt = interest payment on outstanding long-term debt in period t bit = cash cost of raw material per one unit of product i in period t Pit = cash price of product i in period t Pit = credit price of product i in period t 29 subject to: - 2 S. - 2 T. < B. - A (1) For each i and t: z X t 1t t 1t __ 1 i it t where: Bi = maximum amount of product i which can be kept in inventory A. = initial inventory of product i at the beginning of the first 1 period (2) For each 1 and t: - E Xit + i Sit + i Tit i-Ai (3) For each 1 and t: 'Sit + C Tit = 0 where: C = ratio of quantity sold of cash sales to quantity sold of credit sales (4) For each i and t: Sit + Tit f-Dit where: D.t = maximum quantity of product i which is expected to sell in 1 period t (5) For each per1od t: g Ait Xit - SKRt = 0 where: Ait = man-day of skilled workers required in the production of one unit of product i in period t SKRt = skilled labor required in period t (6) For each period t: -Wt SKR + SCt = O t where: Wt = wage rate per man-day of skilled workers in period t . 1 _ = (7) For each period t. g Ait Xit USKRt O 30 where: Ait = man-day of unskilled workers required in the production of one unit of product i in period t USKRt = unskilled labor required in period t ' USKR + usct = o (8) For each period t: - Wt t where: W1 = wage rate per man-day of unskilled worker in period t (9) For each mach1ne 1n each per1od t: g Ximt §_MAmt where: X production of product i using machine m in period t imt MAmt = maximum amount which can be produced by machine m in period t (10) For each per1od t: g (ohc)pit xit - OHCt = 0 where: ohc = overhead cost per one baht of value of production . . 1 (11) For each per1od t. t tpit Sit + g tpit Ti 1 - TAXt = 0 t where: t = tax rate (12) For each period t: DIVt = Ct where: DIVt dividend payment in period t Ct - dividends the firm has to pay in period t (13) For each period t: ILt = It where: It = interest on outstanding long-term debt the firm has to pay in period t 31 (14) BEC1 = IC1 where: BEC1 = initial cash on hand at the beginning of period 1 IC1 = cash on hand the firm has at the beginning of period 1 (15) PLTDn = Pn where: PLTDn = principal repayment of outstanding long-term debt in period n Pn = of outstanding long-term debt the firm has to repay in period n (16) S01 3_0 where: $01 = savings deposit in period 1 (17) BORj] :_Yj 1 where: BORj1 = borrowing from source j in period 1 Y.1 = maximum amount of loan which the firm can borrow from 3 source j in period 1 (18) For each t: 2 BO. 1 < M .1 3" ‘ where: BOjt = short-term debt outstanding at sources j in period t M = maximum level of outstanding short-term debt which the firm can borrow without jeopardizing financial position 180 = BOR 1'1 .il 32 1 (19) For each t = 2, ...n : IRt - (R) SOt_1 = 0 where: SOt = savings outstanding in period t rate of interest on savings account (20) For each t = 2, ...n : SWt - SOt_ §_O 1 where: SWt = savings withdrawal in period t (21) For each t = 2, ...n : SDt :_0 where: SDt = savings deposit in period t (22) For each t = 2. ...n : SOt - SDt - SOt_l + SWt = O (23) FOr each t = 2, ...n : IPjt - rj BOjt_1 = 0 where: rj = rate of interest on capital borrowed from source j (24) For each t = 2, ...n : REBjt - BOjt-l §_O where: REBjt = repayment of short-term debt to source j in period t (25) For each t = 2, ...n : BORjt - REBjt + Bojt-l §_th where: BORjt = short-term borrowing from source j in period t (26) For each t = 2, ...n : BO. at = 0 - 80Rjt + REBjt - Bojt_1 1 - . 1 1 (27) For each t. t dtbit xit + g dt-l bit-l Xit-l - 1 pit Sit 1 - 1 pit-1 Tit-l + SCt + USCt + OHCt + TAXt + DIVt + ILt - IRt - SWt + SDt + IPjt + REBjt - BORjt §_O where: dt = percentage of cash purchases of raw materials in period t d1 = percentage of credit purchases of raw materials in period t bit = credit cost of raw material per one unit of product i in period t 2.4 The LP Tableau The figure has 43 rows and 34 columns. Row 1 contains coefficients (CJ's) of the activities in the objective function. Row 3 indicates all the activities of the model. Row 5 to row 43 are the constraints of the model. Each row corresponds to each equation indicated in the mathe- matical model which is shown in column 1. For example, row 5 and row 43 correspond to equations No. (l) and No. (27) of the mathematical model respectively. Column 2 to column 32 contain the coefficients of each activity (aij's) indicated in row 3. Column 33 indicates the signs of the con- straints. Column 34 is the right hand side values (RHS's) of the con- straints. The LP tableau presented in Figure 2.1 is very condensed and may appear to understate its actual size. Table 2.1 can be used with Figure 2.1 to facilitate the visualization of the actual size of the tableau. The row number and column number indicated in the first column of Table 2.1 comes from Figure 2.1. 34 a: .—ou vn an N» —n '$zeoeoeoegbza (Q N OJLadiorkeaoooor D p p e 2 2...! o o e :8 ...a e: :8 i111|1|||11|1|||||1|l|l1||111l|1 on em cu .1aquan era—cu so. nueo.u.~.oou as» on. onus. .1: .... .n u 9 cos: a p1aam ens—co so. nuco.o.-oou use as. cause .1: .... .n u u cog: - Claw ~16 a... .NIU\M pun: “N on mu cu nN NN —N am on o. up 0— m— :8. =5 .3. .8 .8 .3 .5 :8. .9. AIIIIIIIIII-«I: .1...NIUIIII|V —e p1 —¢ _.N ee=m_e Paco: wavegugmoea saucy; umNPPmEmcmw o. n. u— .p o— a o s a m o n N — .1“. .1a 1 a 1 _ uflm 0—51 0.5a! fl .1». .19 1 a a. a. _ a. a m... 33:32. a a . N: _- 2.... z... _ : .- as... 09 .- ynn a". .I U.- o o p1 =1 _1 —o u—x E—NM' ONO en: .8. a: a»: .5: use .8: ee. «3 a N m: “I ‘u... o—lfl. .. .- _- _. .- uc—uuunceo er a: 12... 3.52.2, LEQP wee ee eeepeee a; 35 .mmem aces m>ms mpozuoca one 4_ venom: wee mcopunupmpuoe esomm x NF 0... acP x N, H... .m ex m _.N eczema mo .02 Sam N” a... “mm QOP x QN «00. «FN x ON .... .mp x NF 00.. am x e .m .N F.N mesmwu 4o .oz caspoo muopgma 4o .oz weave zgmc_;umz 4o mmaxp mcvccmg 4o mmogaom 4o .oz llmcwucmg 4o N macwz muo_gma mcowema mmogaom 4o mcowgoa yo .oz 4o .oz .oz mwe_k 4o .oz mmepp N1muowgma madauoea 4o .oz mo .oz —.N szmwm $0 mcEzpou UCM mSOm mEom we LwnEzz szuu< mzh P.N mpnwh 36 Table 2.1 indicates that the actual number of columns of each of columns 2, or 3, or 4 in Figure 2.1 is equal to the number of products times the number of periods. The actual number of columns of each of columns 5, 6,..., 12 is equal to the number of periods. The actual num- ber of rows of each of rows 20, 30 and 40 is equal to the number of sources of lending. The actual number of rows 13 is equal to the number of types of machinery times the number of periods. The actual number of the remaining rows and columns can be interpreted in the same way. CHAPTER 3 CHARACTERISTICS OF CEMENT PRODUCT INDUSTRY 3.1 Introduction The main purpose of this chapter is to provide information about the cement product industry--some of which will be used as a basis for constructing the linear programming models to be used for further analy- sis. This description includes the criteria used to classify firms, the market outlets for cement product firms, the kinds of products produced, raw material used, use of labor, production, sales and other financial characteristics. Firms, in any industry, can be classified according to several criteria. For example, the firms can be classified according to size, production characteristics, marketing characteristics, etc. Size can be measured by number of product produced, amount produced, value of production, sales, level of assets, number of workers etc. Production characteristics may be measured by types of technology used. The firm may use hand or simple machine or advanced machine or combination of them in the production of a product. Marketing characteristics may be classified according to final destination of the product, i.e., foreign markets or domestic markets, or marketing channels, etc. These charac- teristics do affect cash flows of the firm and therefore affect size of credit the firm should obtain as well as rate of interest the firm can afford to pay. 37 38 The main purpose of the classification of the firms is to define mutually exclusive groups which can facilitate comparative analysis. An operational classification of firms was needed also to construct basic models to be used in quantitative analysis. As one can expect, if mUlti- ple criteria, i.e., size and/or production characteristics and/or market- ing characteristics are using to classify the firms, a very large sample of firms would be needed to represent each sub-class. For the purposes of this study, a single criterion, i.e., marketing characteristics will be used to classify the firms. They will be classified as to whether the firms sell all of their products in domestic markets or whether the firms sell their products in both domestic and foreign markets. Those firms which sell 100 percent of their products in domestic market is further subdivided into two groups, i.e, those which sell the majority of their products to consumers (retail sales) and those which sell the majority of their products through wholesalers and retailers. 3.2 Market Outlets for the Cement Product Firms All 11 cement product firms studied, produced exclusively for the domestic market.1 Even though some firms sold some products through wholesalers and retailers, the majority of their products were sold di- rectly to consumers. Therefore, this discussion of the firms in the ce- ment product industry will pertain to a single category; namely, the group of firms selling the majority of their products directly to con- sumers in domestic markets. 1There were data collected from 16 firms, 5 of which were excluded for lack of complete records. 39 3.3 Types of Products Produced The products produced by the cement product firms are high quality drainage pipes, ordinary drainage pipes, shallow pipes, house posts, fence posts, well pipes, cement blocks, wind blocks, toilet heads, spirit houses, stoves, table sets, water tanks, water containers, well pipe covers, bricks, roof tiles, floor slabs and connection pipes. No firm produces all of the products mentioned above (Appendix B, Table B-l). The main products produced by nearly all the firms are cement blocks, wind blocks, drainage pipes, well pipes and house posts including fence posts. Cement blocks and wind blocks are typically 3 or 4 inches thick. All firms produce the 3 inches thick blocks and the 4 inches thick are produced when there are orders for them. The drainage pipes have several sizes measured by the diameter of the pipe, which range from 20 centimeters to 100 centimeters. The length of the pipes is usually 100 centimeters. The size of house posts ranges from 4 inches x 4 inches to 8 inches x 8 inches in varying lengths, starting at 1 meter and in- creasing in .5 meter increments to the longest length of 4 meters. The standard length of well pipe is .5 meter with a 1 meter diameter. Some firms, however, produce well pipes which are either 80 centimeters or 120 centimeters in diameter. Of course, other products have several sizes and several forms (shapes) too. 3.4 Raw Materials In this section, besides the description of several types of raw material used by cement product firms, there will be a description of channels through which the firms buy the raw materials, how the firms 40 pay for them, the terms of credit for credit purchases, and finally, a discussion of the fluctuation in raw material prices. 3.4.1 Types of Raw Materials Raw materials used in the production of cement products are cement, sand, stone or gravel, stone dust, wire, and steel rod. The production of blocks does not need wire or steel rod. However, some firms add stone dust to the cement and sand in the production of blocks. The pro- duction of house posts needs steel rods and wire for reinforcement. Well pipes are produced without reinforcement rods but a reinforcement metal collar is used at each end of the pipe. The firms producing drainage pipe by hand do not use rods and wire to make the smaller size of drain- age pipes (10-30 centimeters diameter) or the medium size drainage pipes (40-60 centimeter diameter). All other kinds of cement products have rod and wire in their ingredients for production except for shallow pipes and connection pipes which use asbestos. For those products using rods and wire, the amount needed, of course, varies with the size and shape of the products. , 3.4.2 Acquisition of Raw Materials Since data on total purchases were not available, this discussion is limited to a frequency distribution of firms. However, the section which deals with the payment for the acquisition of raw material will give some general idea on cash outflow to several sources of suppliers. 3.4.2.1 Raw Material Suppliers Firms may buy raw materials from factories and/or wholesalers of construction materials and/or retailers of construction materials. In 41 other words, the firm may buy raw materials from more than one source. The frequency distribution of firms by raw material and source is shown in Table 3.1. Retailers are the source mentioned most frequently for acquiring cement and steel rods and is the least mentioned source for stone. The number of firms that purchased a particular raw material from each source is not necessarily an appropriate indicator of relative im- portance of each source of supplier. The percentage of total purchase from each source of supplier which is a better indicator of relative im- portance of each source of supplier will be shown after the following section. 3.4.2.2 The Payment for Raw Material Table 3.1 indicates also how the firm paid for raw material pur- chased from each source. For example, when the firms bought cement di- rectly from factories, they paid cash at time of purchase. For the firms which bought cement from wholesalers, most of the firms paid cash, but there was one firm which obtained trade credit from wholesalers. However, for the firms which bought cement from retailers, nearly 50 per- cent of the firms obtained trade credit from retailers. Around 60 per- cent of the firms which bought sand from factories paid cash at time of purchase. This condition occurred also with the firms purchasing sand from retailers. However around 50 percent of the firms which bought sand from wholesalers made cash purchases. Column 4 and 5, 7 and 8, and 10 and 11 of Table 3.1 present the findings for the purchase of stone and steel rod also. 42 meweccowummza m:_umxgmz ”muezom N N m P N m o o o Pp com meum o N N m m o N m m _p mcoum N m m _ — N N m m F_ team m e N p m a o e 8 pp acmemu :: 8: E E E a: E E E E E . emeu + emeu + . name + ELLE eaeeeu emeu .eeee e_eeeu name Page» e_eeeu swag .eeee Le .oz .epeeeez Lm—wmpmm gmpmmm—ozz Agopumu pouch 3mm mae_eueee= meL_u uoauoga acmemo mo mpmwgmumz 3am 4o :o_u_m?:co< —.m mpnmh 43 3.4.2.3 Percentage of Raw Material Purchases from Each Supplier Table 3.2 summarizes the percentage of total purchases being bought from factories, wholesalers and retailers respectively for cement, sand, stone and steel rod. It can be observed that factories and retailers were the most important sources of cement and sand. Factories and wholesalers were the most important sources of stone, and more firms purchased steel rods from retailers than from wholesalers. Remembering that most of the firms paid cash when they purchased cement, sand, stone from factories and steel rod from retailers, it might be expected that the percentage of cash purchases to total purchases would be quite high. This question will be explored next. 3.4.3 Cash Purchases and Credit Purchases of Raw Materials Cash purchases and credit purchases affect cash outflows as well as demand for credit of the firms. The information from this section will be used to specify the percentage that cash purchases are of total raw material costs for the firm in the linear programming models. Table 3.3 shows that the percentage of cash purchases to total pur- chases of Cement product firms ranged from 20 percent to 100 percent. Since the amount of total purchases of each firm was not equal, weighted average of cash purchases was calculated. Since the total purchases of each firm was not known, the weights were calculated by using value of production as a proxy of total purchases. This weighted average indi- cates that 82 percent of total purchases are in the form of cash leaving a residual of 18 percent of total purchases as credit purchases. Table 3.2 Relative ImportanCe of Raw Material Suppliers 44 UnitzPercenta Matgi¥als Raw Material Supplier Factory Wholesaler Retailer Cement 53 10 37 Sand 49 6 45 Stone 44 45 11 Steel Rod -- 26 74 Source: Marketing Questionnaire administered to 11 firms. aPercent of all input purchased by all firms (estimated). 45 Table 3.3 Percent Cash Purchases of Cement Product Firms Percent Cash Purchases Firms to Total Purchases Weights 241110 100 .01 241211 100 .02 242116 70 .03 243121 60 .06 243122 80 -06 242219 20 .05 241212 80 .07 241108 85 .10 242218 100 .15 242114 100 .31 242115 50 -14 Weighted Average 82. Source: Finance and Monthly Questionnaires 46 3.4.4 Terms of Credit Purchases Terms of credit refers to the length of time given the firm to make the payment and rate of interest plus carrying charges for risk of de- fault or delay in payment. This information will be used in the speci- fication of rate of interest the firm has to pay to input suppliers in the linear programming model, if credit purchases are made by the firm. The information from the survey revealed that the length of time given the firm to make the payment was one month for every kind of raw material. However, the difference between cash prices and credit prices which reflect rate of interest and carrying charges for risk of default or delay in payment among raw material were not the same. Credit prices of cement, sand, stone and steel rod were 4 percent, 10 percent, 6 per- cent, and 5 percent higher than cash price, respectively. Therefore the firm paid 48 percent, 120 percent, 72 percent and 66 percent rate of in- terest plus carrying charges to input suppliers when the firms bought cement, sand, stone and steel rod on credit respectively (Table 3.4). 3.4.5 Fluctuation in Raw Material Prices The information on raw material prices was gathered from three dif- ferent special sets of questionnaires, not through the monthly question- naires. Therefore, the information was reported only in the months of June, September and February when these questionnaires were administered. Between June and September, the price of cement was quite stable. However, by February, the price of cement had risen 25 percent over September. For sand the price was lowest in June, 70 baht per cubic meter, increasing to the highest level in September, 112 baht per cubic meter, and decreasing to a lower level in February. Prices of stone 47 Table 3.4 Rate of Interest and carrying Charges Paid to Raw Material Suppliers of Cement Product Firms Unit:Percent Matgiyal Percent Price Rate of Interest and Difference Carrying Charges Cement .04 48 Stone .06 72 Steel Rod .05 50 Source: Finance Questionnaire 48 increased continuously from June to February. Price in September and February were nearly the same, yet price in September was around 15 per- cent higher than price in June (Table 3.5). Since it was observed that prices of raw materials varied over the year, then this variation was modeled in the linear programming model. 3.5 Technology This section contains information on kinds of machines as well as their production capacity in the production of cement products. This information will be used in the specification of types of machine and production capacity (RHS) in the linear programming models. 3.5.1 Types of Machines There are two basic kinds of technology in the production of cement products. They can be produced either by hand or by machine. However, machines may have various levels of sophistication. As a result, several levels of technology might exist in the production of cement products. In rural towns of Thailand, the production of house posts, well pipes, toilet heads, spirit houses, table sets, stoves, water tanks and water containers are usually made by hand using the simplest technology. Drainage pipes can be produced either by hand or by one of many different types of machine. However, in the study survey, there was only one firm using a machine to produce drainage pipes. Therefore, for the purposes of this study, only two kinds of technology are assumed to exist in the production of drainage pipe. The classification of levels of technology in the production of blocks is more diffiCult since they can be produced either by hand or by machine and several types of machines are found. If the classification 49 Table 3.5 Fluctuation of Raw Material Prices of Cement Product Firms UnitzBaht Raw Month Mater1al June September February Cement 54 56 70 Sand 70 112 95 Stone 184 211 214 Source: Marketing, Profitability, and Finance Questionnaires 50 of the levels of technology are made on the basis of the prices of ma- chines, it can be concluded, from the survey, that there are four rough classes of technology in the production of cement blocks (and wind blocks) as follows: (1) by hand; (2) by simple machine; (3) by sophisticated machine; and (4) by more sophisticated machine (Table 3.6). 3.5.2 Production Capacity Production capacity was reported under two groups: capacity per day and capacity per month. Production capacity per day was the average capacity of all the firms that reported the information. Production ca- pacity per month was computed by multiplying production capacity per day by 26. It was assumed that the firms used the machines only 26 days a month. Both production capacity per month and production capacity per day are shown in Table 3.7. 3.6 Labor Used This section contains the information on number, number of days worked and number of man-days worked of family members, number of man- days worked of accountants and sales workers, and production workers, labor requirement per one unit of production and wages. Even though this information is not needed in the construction of the LP model, it is in- cluded in order to let the reader have general understanding of use of labor of the firms. However, the labor requirement is used in the spe- cification of labor needed in the production and wages is used in the calculation of labor cost in the linear programming models. 51 Table 3.6 Types of Machines in the Production of Cement Blocks and Wind Blocks of Cement Product Firms Price Range Type of Machine (baht) Hand 300-4,000 Simple Machine 2 5,000-50,000 Sophisticated Machine 250,000-500,000 More Sophisticated Machine 900,000 Source: Profitability and Finance Questionnaires 52 Table 3.7 Production Capacity of Machines of Cement Product Firms Unit:Pieces Machine Capacity Capacity Per Day Per Month Cement Block, Wind Block Mold 240.0 6,240 Simple Machine 750.0 19,500 Sophisticated Machine 3000.0 78,000 More Sophisticated Machine 6000.0 156,000 Drainage Pipe Small (Mold) 2.3 60 Medium (Mold) 2.4 62 Medium (Machine) 40.0 1,040 Large (Machine) 25.0 650 Well Pipe (Mold) Small 2.6 66 Large 2.5 65 House Post (Mold) Small 2.2 58 Medium 2.5 65 Large 2.2 58 Roof Tile 500.0 13,000 Toilet Head 1.0 26 Table Set 1.0 26 1.0 26 Spirit House Source: Profitability Questionnaire 53 3.6.1 Family Members The administrative functions include the decision making on produc- tion, acquisition of raw materials, selling strategies, setting prices, hiring and firing workers and managing cash flows. These are male func- tions usually performed by the owner or head of the family. Nevertheless, the other members of the family, including his spouse, children and some- times his brothers or sisters, also help with jobs such as keeping re- cords, preparing some accounts, selling, supervising workers, etc. On the average over the year there were 2.09 family members working with the business each month (Table 3.8). The number of male family members working in the business was about twice the number of female family members. Therefore, on the average there were 1.31 male and .78 female family members participating in the business each month (Table 3.8). During March to September there were an average of 1.36 male family members working with the business each month. During October to February the average number of males worked with the business each month was 1.27 male, except in November and December when there were just 1.18 male each month. Therefore there might be some male family members who left the business for good since October and in November some who left the business to work in other places yet come back to work at the firm again in January. The trend in number of female family members was an increase from the beginning toward the end of the survey period. On the average, there was .64 female, .82 female and .91 female family members working with the business during March to May, July to November and December to January, respectively. In other words, there were more female family 54 mswm==o_amo=o x_;u:o: "mugsom NN oN mN mN pm NN _m NN oN on .N NN mN m_esma NN oN NN oN mN mN NN mN oN NN eN NN NN m_ez mama yo topaz: m_.NN Nm.mN me.mN mN.mN me.mN mo.NN mN.NN Nm._N om._N Nm._N NN.m_ mm.N_ «N.N_ apnea; Nm.mm om.mm mN.¢m mm.em ac.¢m mn.mm NN.Nm m¢.mm mm.mm mo.mm Nm.Nm ao.Nm NN.Nm m_ez maco1cmz an. .m. _m. .m. Na. Na. MN. Nm. Nm. NN. em. co. em. mpeemd _m._ NN._ NN._ NN.. m... m_._ NN._ mm._ om.p me._ on._ em.p em._ ope: consaz .o>< .amm .cme .ooo .>oz .uuo .uaom .m:< ,x_:w mesa he: .LQ< .cm: magwm nuance; pszwu 4o mamasmz appEmm mFmEmd use ope: 4° umxgoz mxmo1cmz 4o Loae=z .mxma 40 Logan: .emnszz m.m w_awh 55 members working with the business during the last nine months than the first three months of the survey period. Some of these additional female members just graduated from school and came back to help their parents. On the average over the year the number of days worked for both male and female was around 27 days a month. The range in number of days worked by female family members was from 26 days to 31 days, and the range of number of days worked by male family members was from 26 days to 29 days. In other words, male family members took 2 days to 4 days off each month. However in some months, female family members worked every day and some months took 1 day to 4 days off. Given the number of male and female family members and the number of days worked, the number of man-days worked in a month of male family members fluctuated between 32.82 man-days in May and 39.09 man-days in June with the average over the year of 35.57 man-days. The number of man-days of female family members fluctuated between 13.27 man-days in May and 25.73 man-days in December, with the average over the year of 22.13 man-days. The number of man-days worked was higher in December than in May because both the number of days worked in the months and the number of female members were higher as described earlier. 3.6.2 Accountants and Sales Workers Most of the firms did not hire any permanent accountants for the following reasons: (1) Most of the firms were household firms (sole proprietors) not needing to file any accounts to the government offices. Therefore they did not need an accountant. (2) The size of business of most of the firms was not big enough to require hiring a permanent accountant. Large firms either hired permanent accountants or paid for 56 outside professional accountants to prepare their accounting records as the needs arose. The above discussion regarding the typical firm should A not imply that accounting records for their business decisions were not kept at all. Actually the owner or other family member kept simple re- cords which, although they might not meet certain accounting standards, do contain enough information to help the owner make some management de- cisions. There were two groups of workers under the sales subcategory. The first group did "selling" without making deliveries. This group of workers might seek new customers, get in tough with old customers, try to sell the firm's products, quote prices, etc. Only big firms have this group of workers. For most of the firms, this selling function was done by the owners and their family members. The second group of workers is composed of one or two drivers who received permanent salaries, and some unskilled workers who loaded and unloaded merchandises from the truck. These unskilled workers were not permanently hired. Their wages were paid on a daily basis or were paid 'based on the number of deliveries performed. The total number of man-days worked of sales workers was more than 100 percent of annual monthly average during March to May, dropped gra- dually, reached the lowest level in July, increased gradually, reached the highest level in September, decreased gradually until November, then increased gradually toward the end of the year (Table 3.9). This seasonal fluctuation of total number of man-days worked of sales workers conformed to the seasonal fluctuation of sales. For example, during March to May, and August and September when sales were high, the total 57 wepmccopumwso Apnoea: "oucsom cop m.mmN oo_ m.moN cop o.mm cop m.mm mmmgm>< Nap m.mpe m¢_ ¢.mom mNF N.opp pm m.om agazcnmd Nmp F.mwm Nm_ o.mNN Pmp _.N__ mm m.¢m agencmn Nop ¢.OOm cop m.N_N Na m.Nm mm N.mo Longbow: Nm m.oNN mm ..em— om m.oN mm N.mm Lmnem>oz ca m.moN mm m.vm_ mm «.mN mm o.mo Lmnoaoo om m.mwN om N.mm~ mm _.em FPP ¢.¢N Lonempamm mm ¢.NmN No. N.m_N No o.m~ mop o.~N umsms< em m.oNN Nm m..m_ cop m.mm mm o.mm xpsq on o.mNN mm e.mm_ —o~ m.mw pm N.pm mesa No N.oNN mm ¢.Nm_ ow m.mN NNF m.Pm an: mm o.mmN mm «.omp ow m.mN Nop N.wo ngq< pm m.moN Nm N.Nm_ mm m.MN opp N.om cote: mmmgm>< xmo1cmz mmmem>< Nac1=oz mmmgm>< 1Nma1coz mmmgm>< xmo1cm: spec: Poace< Peacc< Peacc< _m=::< yo N 4° N 4° a we a Pouch cmppwxmca um—pwxm meexeez ee__exme= new ee__axm meexeez wepem mac“; nusuoea acmEmu 4o mgwxgoz ompppxmca new umpFFxm .mmFam 4o umxeoz mxmo1cmz 4o sensaz o.m «pack 58 number of man-days worked were more than 100 percent of annual monthly average, during June, July and November when sales were low, the total number of man-days worked of sales workers was around 85 percent to 91 percent of annual monthly average. During December to February sales were increasing, the total number of man-days worked of sales workers was increasing too. In April and February the total number of man-days worked of this group of workers was low because there was Song Kran Festival in April and many workers stopped working during the festival, while the owner chose to close the firm during February for a few days to celebrate Chinese New Year. 3.6.3 Production Workers The last group of workers includes the workers who did the produc- tion jobs. The owners or their family members usually did not perform the production jobs. .The owner just did the demonstration, supervised and told the workers what, how and how much to produce. From direct observation, most of the production workers were men and the range of age was from teenage to middle age. Since the production of cement pro-. ducts requires a lot of strength, there were no elderly workers. The production workers were also classified as to whether they were skilled or unskilled. The distinction between skilled and unskilled workers was done on the basis of wage rates paid. Within a group of workers who produce the same product, skilled workers usually got higher wage rate than those who were unskilled. However, rate differed among different groups of workers who produced different products. On the average skilled workers worked 85.55 man-days each month, while unskilled workers worked around 208 man-days each month (Table 3.9). 59 Therefore both skilled and unskilled workers worked around 294 man-days each month. This statistic indicated that the production of the firm relied more on unskilled workers than skilled workers. It can be observed from Table 3.9 that the total number of man-days worked was around 90 to 99 percent of annual monthly average during the first nine months of the survey period, except in April and June. In April there was Song Kran Festival to celebrate traditional Thai New Year, and because many workers stopped working for 3-4 days or sometimes a week during the festival, the total number of man-days worked dropped to around 88 percent of annual monthly average. June was the time at the beginning of rainy season when workers who come from farm households went back to their fields to grow crops. Since there were not many workers around to be hired, production of many products dropped to the lowest level and the total number of man-days worked dropped to around 76 percent of an- nual monthly average. December, January, and February were the three months when the total number of man-days worked were greater than 100 percent of the annual monthly average.. The reduction in the production of cement blocks and wind blocks which were produced by machine and the increment in the production of house posts, drainage pipes and some other products which were produced by hand and therefore required a lot of manual work is the explanation of such phenomenon. 3.6.4 Labor Requirement In contrast to the above sections which indicated the total amount of labor used by the firm in its production of all products, this section indicates the amount of skilled labor and unskilled labor needed in the production of one unit of a specific product. This labor requirement in 60 the production of one unit of a specific product is shown in Table 3.10. However, the amount of labor needed was converted into per 1000 units of production instead of per 1 unit of production. 3.6.5 Wages The wage rate per day of unskilled workers was around 73 percent of the wage rate per day of skilled workers. On the average over the year, wage rate per day of unskilled and skilled labor were 35 baht and 48 baht respectively (Table 3.11). The pattern of fluctuation of wage rate per day of these two groups of workers were nearly the same, except in September when wage rate per day of skilled workers went down, but wage rate per day of unskilled workers went up. Therefore, there will be only one description of the fluctuation of wage rate per day of both skilled and unskilled workers. June and July were the months at the beginning of rainy season when farmers spent most of their time growing crops. Therefore the supply of workers in these two months for nonagricultural aCtivities was usually lower than earlier periods. Since the production of cement products in July was higher than the production in June, demand for workers in July was greater than demand for labor in June. Given the condition above, wage rate per day of workers in July was higher than those in June. In August, demand for labor increased as a result of higher level of produc- tion, yet supply of labor might increase more than the increment in de- mand since the growing period hadpassed already, therefore wage rate per day dropped from a higher level in July to a lower level in August. In September, since the total number of man-days required dropped down and workers were still available to be hired, wage rate per day dropped 61 Table 3.10 Labor Requirement of Cement Product Firms UnitzMan-Day/looo Pieces Pr°dUCt Skilled Unskilled Cement Block, Wind Block Hand 5 2 Simple Machine 1 4 Sophisticated Machine 1 2 More Sophisticated Machine .5 1.5 Drainage Pipe: Hand Small 41 72 Medium 92 114 Drainage Pipe: Machine Large 52 188 Well Pipe: Hand Small 36 64 Large 45 74 House Post Small 37 109 Medium 55 97 Large 60 130 Roof Tile 2 O Toilet Head 49 115 Table Set 1167 333 Spirit House 1394 606 Source: Profitability Questionnaire 62 Table 3.11 Wage Rate per Day of Skilled and Unskilled Workers of Cement Product Firms UnitzBaht Month Skilled Unskilled June 39 33 July 48 35 August 45 33 September 43 34 October 50 36 November 51 41 December 50 37 January 49 33 February 51 34 Average 48 35 Source: Monthly Questionnaire 63 down a little bit. In October, total number of man-days required de- creased but supply of labor might decrease greater since workers had to spend more time to take care of their crops before the harvest period arrived, wage rate per day increased to a higher level. In November higher total number of man-days required as well as the reduction in supply of labor during harvesting season drove up wage rate per day to higher level. In December even total numbers of man-days required in- creased to a higher level, but some of the workers had already harvested their crops and more time could be sold out to the firms, wage rate per day dropped down below the level in December. In January more1and more workers were available since most of the crops were already harvested in December, therefore wage rate per day went down even below the level in December. In February the increment in total number of man-days re- quired drove up wage rate per day to a higher level than those of January. 3.7 Production This section contains the information on production pattern, value of production and overhead cost. The description of production pattern tries to visualize the combination of the production of products over the survey period and therefore is not used directly in the construction of the model. Yet it can be used to compare with production pattern of the model. The usefulness of the description of value of production and overhead cost is mentioned at the beginning of their sections. 3.7.1 Production Pattern For present purposes all products are divided into two_groups: (l) the main product‘ lines, which were the products produced by every 64 firm; and (2) the rest of the products which were not produced by all the firms. Table 3.12 contains the amount produced of every product in every month and the first five products, i.e., cement block, wind block, house post, drainage pipe and well pipe are the main product lines of the ce- ment product firm. Using the data from Table 3.12, Figure l. is develop- ed to facilitate the visualization of the production pattern. For the main product line, it could be observed that the firm em- phasized the production of cement blocks and well pipes during March to May. During June to August the firm emphasized in the production of drainage pipe and house post. During the last six months of the survey period there was not a clear pattern. The firm seemed to emphasize the production of cement block, wind block and house post during September to November, while during December to February the emphasis was on the production of wind block, house post and drainage pipe. The production of the rest of the products scattered over the year. The firm did not produce concrete slab, shallow pipe, connection pipe, water tank and well pipe cover at all during the first four months of the survey period. The highest production level of these products were scattered during July to November. For brick, toilet head, roof tiles, table set and spirit house which the firm produced nearly every month, their productions were at the highest level during March to May except spirit house which was in October. 3.7.2 Value of Production Value of production is not used directly in the construction of the linear programming model. The value of production is used in the 65 mouwps 1 mos mspuccopumosc mpgasoz "mugsom cop mmp No No No No NmN o mmm c o o o mmmcm>< No a m.p N p p p p e o m o o o o mos ”wasp; soppuascou cop o NN oN em NN pMN mee moN o c o o ommgw>< No a m.N o e N m o . mp mm pN o o o o mug "wasps zoppmsm ocp o com o o Now a o c o o o o waocm>< No a m. o m o o e o o c o o o o mus "mxcmp Loam: cop mmp oep eop mpN pmN Nep no op cp c o o mmagm>< No a m.m mp ep op pN NN mp m p p c c o mus "mem>ou maps ppm: cap a o c cmN o a omN c o omN omN cmN wmmgm>< No a e. c c o p o c p c o p p p was ”mm>oum cop me ps mN MN mem Nmp mN MN c mN mmp pm mmmgw>< No a e.e N e p p eN a p p o p m e mus "momsoz «pepsm cop cm ppp mm mm mm ppp Nop cm a ppp NNN NNN mmagm>< No N m.p p N p p p N m p o N e e was "mumm.mpnoN cop cop mpp o mN mmp pm o mm mmp Nmp Nmp mop ammgm>< No N mme com cam o mom NNo eme o NNN NNN mos mom mem mus Hmmprp poem cap a ppp o mm mmp o mm o mm NN NNN NNe mmwco>< we a m.e o m s e N c e c e p sp mp mug "meme: peppop cop Ncp Nw Ncp Nop Nop mpm MNp o NN o c o ommgm>< No a mee eme mom eme eme eme NNNN mem o mpm c o 0 mos "mnmpm mamgucoo cop pmp mop No mN mm me me mm mm pmp oep oep mmmgms< po N mpNe memo meme mpr NNNm NNNN NNNN NNNN omen omom memo momm momm mus “mxupgm cop mm mm mm no cm as No me Nap eNp pop wmp mango>< No a amp eNp omp mpp mw «Np mop em pm mep NNN mpN mpN mus "wasps ppm: cap Npp mm omp mop mm Nm mpp Nep eNp mm mm cm asagm>< po u emp. mpN owp emN esp pcp oNp ppN poN NNN mop Nep mm was ”wasps space cap ppp Npp as on opp app om NNp oN No cop Nm ommgm>< 4o u meN moN mNN mmN oNp pmN mmN emN mom oNp NNN NeN NNN mus ”mamas oso: cop Np pmp NNN opN mm Nmp pm m Np om mp mop mmaem>< No a comp NNN moeN mon wmmN NNpp ooeN mpe me NNN eoa moN moep mus "mxuopm esp: cop mm pN mm oNp oep emp Nm Nw mN pr Npp Npp mamgm>< we a mmNNp pmeN mmom omNe mommp NNmNp eomMN emeop omopp Nmom NNemp moomp pemep mus Hmxuopm “cosmu m>< no; sea um: >mz «up newlsuswnd mpsnl msse am: Let em: Hostess spec: an mmugm>< pmscc< No acmugmm use mmumpa No amass: .meLpN possess accede No maussocm pmsup>pccp we puppmcommom copuuseoca Np.m mpamh 66 Product Month Mar Apr IHay June July Aug Sept Oct Nov Dec Jan Feb Cement Blocks Wind Blocks House Posts Drainage Pipes Well Pipes Bricks Concrete Slabs Toilet Heads Roof Tiles Table Sets Spirit Houses Well Pipe Covers Shallow Pipes Connection Pipes _L.. 11" I II Above Annual Average of Individual Cement Products Months when Production was at Least 10 Percent Figure 3.1 67 calculation of initial cash on hand at the beginning of the first period. Since there was no data on the amount of initial cash on hand, then the amount to be specified in the linear programming model was calculated as a percentage of the annual monthly average of value of production. This annual monthly average was shown in Table 3.13. Production patterns as measured by value of production by period varies widely among firms (Appendix B, Table B-2). However, on the average, value of production in periods 1 and 4 (March to May and Decem- ber to February) were nearly the same. Value of production was the lowest and the highest in the second (June to August) and third (September) periods, respectively. Value of production was 25 percent, 22 percent, 29 percent, and 24 percent of total value of production over the year in periods 1, 2, 3 and 4, respectively. 3.7.3 Overhead Cost Besides raw materials, labor costs, the firms had to pay some over- head costs which included electricity, gasoline, gas, wood, coal, water, food expenses for workers who stayed and ate at the firm, insurance ex- penses, sales expenses, office supply expenses, salaries of accountants, secretaries, managers and communication expenses. The overhead cost per one baht of value of production is shown in Table 3.14 which ranged from .0644 to .1428, with the average of .1042. 3.8 Sales This section contains the description of gross sales, sales and in- ventory pattern of individual products, distributing channels, cash sales vs. credit sales, and prices of products. 68 Table 3.13 Value of Production of Cement Product Firms UnitzBiht Month Value of Production March 93,947 April 100,627 May 113,261 June 74,185 July 104,182 August 88,690 September 138,966 October 103,924 November 107,481 December 95,838 January 108,150 February 89,709 Average 101,580 Source: Monthly Questionnaire 69 Table 3.14 Overhead Cost per 1 Baht of Value of Production of Cement Product Firms Firm Overhead Cost 241110 .1257 241211 .1428 242116 .1185 243121 .1363 243122 .0644 242219 .0944 241212 .0826 241108 .1138 242218 .0815 242114 .0969 242115 ’ .0894 Average .1042 Source: Profitability Questionnaire 70 3.8.1 Gross Sales Gross sales is the result of the summation of price times quantity sold of every product. Costs of raw materials and other expenses have not been deducted. Quantity sold includes only those for which the de- liveries have been made. Even if some of the sales are credit sales, gross sales still give some ideas about cash inflows into the firm in each particular period. The information on gross sales is not used in the construction of the linear programming model. On the average, over the year, monthly gross sales of the cement product firms were around 84,500 baht (Table 3.15). It can be observed from Table 3.15 that June to October was the period when gross sales were below annual monthly average, except in September. Gross sales during the period were around 72 percent to 90 percent of the average. During March to May and November to February gross sales were around 100 percent to 120 percent and 100 percent to 118 percent of the average, respectively. Therefore there might be some possibility that the firms had difficulty balancing cash inflows to cash outflows during the middle of the survey period. Sales by period of each of the cement product firms are shown in Appendix B, Table B-2. It can be observed that each firm has distinct sales pattern with little similarity among firms. 3.8.2 Sales and Sales Pattern of Individual Products Sales seasonality of individual product will provide two important information in the constructions of the model. First it indicates de- mand for individual products in each period. Second, when sales and 71 Table 3.15 Sales per Firm by Month of Cement Product Firms Month Sales % of Annual Average March 81,999 97 April 85,592 106 May 101,267 120 June 65,283 77 July 60,903 72 August 72,307 86 September 97,648 116 October 76,484 90 November 92,990 110 December 83,593 99 January 90,852 108 February 100,103 118 Average 84,418 100 Source: Monthly Questionnaire 72 production of individual products are compared it will provide informa- tion on size of inventory as well as inventory pattern of each product. Quantity sold of each product in each month was shown in Table 3.16. As was the case of production seasonality, Figure 2 was developed to better visualize sales pattern of each product. Sales of well pipes were high during the first three months of the survey period. Sales of cement blocks seemed to move in opposite direc- tion to sales of drainage pipes. Whenever sales of cement blocks were high, sales of drainage pipes were low except in September when sales of both products were high. Since sales of cement blocks were high dur- ing March to May and September to November, therefore sales of drainage pipes were high during June to September and December to February. Sales of wind blocks were high during the second half of the survey period except in October. Sales of house posts were at the highest level in May and there were two other periods, i.e., July and January and February, when sales of house posts were also high. For the products which were produced nearly all year round, such as toilet heads, roof tiles, table sets, and spirit houses, there seemed to have three periods when sales were high. The first period was during March and April, except roof tiles which high level of sales continue into May. The second and third periods were during August to November and in January, respectively. For the products not produced during the first four months of the survey period: shallow pipes and connection pipes was a product group which high level of sales occurred during July to September, and concrete slabs and well pipe covers was another product group which high level of sales occurred during the second half of the survey period. 73 mmoemss poscca No gametes mp possess some 40 ospp vacuum ospe mspussopumoso xpgpso: ”mugsom oop eep mpp eep eep Nm mmN mNp pop epm eme emm eme eme NNN mom mem mpm .- 1- .- msepm «accuses cop Nmp omp om map Nm mN Nm mm eop Nm mmp amp comm emmm meme mpmN mNNm mpmp NNNN mpmp emmp mmmm mpmp scam momm mxupgm cop oN oN pep oN cN NmN mme e.. p p N p p e N weeps eepseeeeeu cop cm mm mm cop omN com mNN m -1 N N N m N. on e. - - - - weeps zeppeem sop NpN Nmp Npp Nmp NNN mNp Nm m Np mp m mp NN ep m 11 1- 11 1- .1- msm>ou maps ppm: cop omp cm om com om omp omp N N p p Np p N N menses spepem cop cop omp om cop cm cmp omp cm oop om amp omp N N m p N p m m p N p m m mawm opsap cop mm mep mmp ppp ee Nm NNN NNN mmp mse mmm cam NNm eme pmp NNN mom mom mem moppp Noam cop mep epp epp Nm Nm ocN epm m.m m e e N N N mp memo: uuppop sop mm ea mN mm mm mm am pm Nsp emp emp pmp eNp mpp Npp em NN mm mm mN mm mNp eoN mNN eNN wasps ppm: cop mmp mpp mep pm Nm mN mNp pr mep mm Ne mm Nmp moN NNp NNN mmp Nm epp sop emp NpN pmp pN mm weeps «seepees sop NNp NNp mm mm mop sop em mpp mm Nmp psp Na NON NmN mmN eoN Nmp eNN mON mNp mmN Nmp eNN ppN mmp mumoa mmsoz sop emp pmp meN msN Ne emp pm Np NN me am me mNmp meoN eoeN emNm mmNN NNm emoN oNe mmp emn mmm mmm com mxuopm.e:p: sop mm mm me amp mmp mNp me mm mN pep mmp NNNp Nmoop emmm ocem pmme mpoop NNmmp mmmNp pome NNmm emmN moNep NNmmp ommNp mxuopm usmeoo .m>< .smm .sae .umo .>oz .uuo .usom .ms< xpse mesa an: .Ls< .gs: possess spec: pa ommgo>< pascc< No ucmugma use mmuwpa 4o amassz .meme posses; undamu po mpusuoga pmsep>pecp No puppwcommmm mopem mp.m mpamp 74 Product Month Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Cement Blocks Wind Blocks House Posts Drainage Pipes Well Pipes Bricks Concrete Slabs Toilet Heads Roof Tiles Table Sets Spirit Houses Well Pipe Covers Shallow Pipes Connection Pipes Months when Sales were at Least 10 Percent Above Annual Average of Individual Cement Products Figure 3.2 75 3.8.3 Inventory and Inventory Pattern of Individual Products Inventory of a product in any period is the difference between pro- duction and sales of the product in that particular period. Cumulative inventory of a product is the summation of inventory of the product over the periods. The comparison of inventory of a product in a period to the annual monthly average will tell inventory pattern, i.e., over the year it will indicate those months when the firm seems to be accumulating inventory the most. The information on cumulative inventory tells the maximum level of inventory of the product carry over by the firm. This maximum level would be used to specify the right hand side of inventory of products in the linear programming model. Cumulative inventory of each product is shown on the second line of each product in Table 3.17. To facilitate visualization of the inventory pattern, Figure 3 was developed using information on the third line of each product from Table 3.17. For the main product lines of the firm, i.e. cement blocks, wind blocks, house posts, drainage pipes and well pipes, July to December seemed to be the period when the firm accumulated inventory the most. During this period the accumulation of inventory was at least 10 percent percent above the annual monthly average. The accumulation of inventory for the remaining products was high during June to November, except for table sets. For this item, March to May was the period when the accumulation of inventory was high. The accumulation of inventory of bricks was high in May too. 76 Table 3.17 Inventory and Cumulative Inventory of Individual Products of Cement Product Firms, Number of Pieces and Percent of Annual Average, by Month Product ”99th ' ”<:15§;- Mir. Apr. liy June July ”Aug. Sipt. TOct. Nov. ’Dec. Jan. . Ave. Cement Blocks a 1981 1337 1263 1033 4763 5953 5545 4555 -704 -425 2636 ~1373 2213.67 0 1981 3318 4581 5614 10377 16330 21875 26430 25726 25301 27937 26564 c 89 60 57 47 215 269 250 206 -32 -19 119 -62 Wind Blocks 863 -454 268 -127 -118 -2 555 500 132 509 59 -2178 .58 863 409 667 550 . 432 430 985 1485 1617 2126 2185 7 1479 -778 459 -218 -202 -3.4 951 857 226 872 101 -3734 House Posts 30 31 ~51 38 72 59 80 57 38 34 20‘ 12 35.00 30 61 10 48 120 179 259 316 354 388 408 420 85 88 146 109 206 169 229 163 109 97 57 34 Drainage Pipes 10 36 32 ll 77 21 56 14 56 67 8 9 33.08 10 46 78 89 166 187 243 257 , 313 380 388 397 30 109 97 33 233 63 169 42 169 202 24 27 Well Pipes -9 -5 27 19 -2 ll 24 38 113 21 13 1 20.92 -9 ~14 13 32. 30 41 65 103 216 237 250 251 43 24 129 91 -10 53 115 182 540 100 62 5 Toilet Heads 1 3 1 Z O 2 O 3 O O O 0 1.00 l 4 5 7 7 9 9 12 12 12 12 12 100 300 100 200 O 200 0 300 0 O 0 0 Roof Tiles 0 O O 0 91 O O O 363 0 O 137 49.25 0 O O O 91 91 91 91 454 454 454 591 0 0 O 0 185 O O 0 737 0 O 278 Bricks O O 4545 O 2772 909 O 909 0 0 O 0 719.00 0 0 4545 4545 6817 7726 7726 8635 8635 8635 8635 8635 0 O 632 0 316 126 O 126 O 0 O 0 Concrete Slabs - - - 0 O O 1363 181 O O O 0 128.67 - - - O 0 0 1363 1544 ~1544 1544 1544 1544 0 0 O O 1059 140 O O 0 0 Table Sets 1 1 l -2 0 O -l O -1 O -l -l - 25 2 2 3 l 1 l 0 0 -l -1 -2 -3 400 400 400 800 O O ~4OO O -400 O —400 -400 Spirit Houses 1 3 1 O 0 l 8 12 1 O 3 -2 2.24 l 4 5 5 5 6 14 26 27 27 3O 29 . 41 124 41 O O 41 330 496 41 0 124 41 Well Pipe Covers 0 O O 1 l 1 2 O 8 1 l 2 1.42 O o O 1 2 3 5 5 13 14 15 17 O O O 70 7O 70 141 0 S65 70 70 141 Connection Pipes 0 O 0 0 8 -7 O O O -1 O l .08 O 0 O O 8 l l l l 0 0 l O O 0 O 9600 -8400 O O O -8400 O 1200 Shallow Pipes 0 0 O O 7 5 3 O 3 3 0 1.75 O 0 O O 7 12 15 15 18 18 21 21 0 O O O 400 285 1.71 O 1.71 0 1.71 O 4 a I production - sales; 6 I cumulative inventory; c ' percent of annual average 3 a/annual average 77 Product Month Mar Apr May Jund Jul Sep Oct Nov Jan Feb Cement Blocks Wind Blocks House Posts Drainage Pipes Well Pipes Roof Tiles Toilet Heads Table Sets Spirit Houses Bricks Concrete Slabs Connection Pipes Shallow Pipes 1—1 t P lilllfl IIIIIIIIIILIIIII IIII! a.“ .3 1... — '_1 ‘ r— L. h—F-I—Iq— I L. 1 [ Months when Inventory were at Least 10 Percent Above Annual Average of Individual Cement Products Figure 3.3 78 Since production and sales patterns vary among firms, one can expect inventory patterns of the firms to be dissimilar. The accumulation of inventory, in monetary terms, of each individual firm by period is shown in Appendix B, Table B-2. 0n the average, however, the accumulation of inventory in period 3 was the highest (83,000 baht) and was around 20 percent higher than the accumulation of inventory in period 2. While the average accumulation of inventory in period 1 was around 1/2 of that ' in period 2, it was nearly 2 times greater than the accumulation of in- ventory in period 4. 3.8.4 Output Channel and Implication on Cash Sales This section identifies the channels through which cement products pass and describe the nature of sales as to whether they are cash or credit for each channel. However, the presentation is in terms of num- ber of firms rather than in terms of monetary value. Table 3.18 shows that all 11 of the cement products firms sold their cement blocks or wind blocks, directly to consumers of these, 3 firms sold some of the products through retailers, six sold some of their pro- ducts through building contractors and six firms sold some of the pro- ducts to institutions such as temples, schools, government offices, etc. Columns 3, 6, 9, and 12 in Table 3.18 can be interpreted in the same way for other products. In general, for a particular product few firms sold the products through retailers, about half of the firms sold the product through building contractors and/or institutions, and all the firms sold some of the products directly to consumers. Table 3.18 indicates also that when the products are sold directly to consumers, most of the firms asked their customers to pay cash .muuswoga cmcuo mEOm ouauoca mELFF FF Fo use mEgFm Fm mLszcoFummzo mcFwacmz ”muezom 79 v F m F i F m n m N m F FF mgmgpo m F o m m o m u m m w FF FF memo; mmzo: e F m N v o F i F F m m FF mmaFa Fsz F F m m m o m - m m m FF FF mmaFa mmecFeco . mxqum u=_z m F o m m o m s m m m FF FF .mxooFm acmEmu cmmqmfl smug + :mmu + smmu + mELFm e_umeu smog Fmeoe senate smog Fepoe “Femcu swag FaeoF sFumeo smug FeHOF co :oFuaqumcF Louomgucou ngqumm cmsamcoo HMMfiHz pounce; chcmso chcmsu x5 .mEcFl mo gmaszz .muuzuocm do mmFom we mmgxh use :oFuancmeo mF.m mFaMH 80 immediately and only a few firms provided trade credit to consumers. However, all of the firms provided trade credit to retailers. About half of the firms which sold their products through building contractors, asked the contractors to pay cash immediately and the other half of the firms provided them with trade credit. More than 80 percent of the firms provided trade credit when they sold to institutions. From Table 3.18 it can be concluded that the more the sales to con- sumers, the faster cash flows into the firms. Table 3.19 indicated that depending on product, sales as a percent of total sales ranged from 58-64 percent being sold to consumers from 7 to 9 percent were sold through retailers and from 10 to 14 percent and 16 to 21 percent of total sales were sold through contractors and to institutions respectively. 3.8.5 The Percentage of Credit Sales The percentage of credit sales to total sales for each firm ranged from 0 percent to 80 percent (Table 3.20). However, when weighted by total sales of each firm, which was not equal, the percentage of credit sales was around 40 percent of total sales. This information is used to specify the ratio of cash sales to credit sales in the construction of the linear programming model. 3.8.6 Prices of Products Prices of products were collected from cooperating firms monthly as part of the year-round research activities. This information will be used in the specification of prices of products in each period in the linear programming model. 81 Table 3.19 Percentage of Sales by Channel of Cement Product Firms Output Channel Product . Consumer Retailer Contractor Institution Cement Blocks 64 7 13 16 Wind Blocks House Posts 64 7 13 16 Drainage Pipes 58 7 14 21 Well Pipes 64 7 13 16 Other 60 9 10 21 Source: Marketing Questionnaire 82 Table 3.20 Total Sales, Credit Sales and Percent of Credit Sales by Firm Credit Sales Firm Total Sales (8) Baht % of Total 241110 83,425 0 0 241211 198,898 19,890 10 242116 236,833 11,841 5 253121 676,066 33,803 5 253122 744,083 0 0 242219 383,501 115,050 30 241212 1,066,805 53,340 5 241108 1,248,190 624,095 50 222218 1,525,870 1,120,696 80 242114 3,307,115 1,984,269 60 242115 1,672,581 501,774 30 Total 11,143,367 4,564,758 Percent 100 41 Source: Monthly and Finance Questionnaires 83 Prices of products reported in the following table are weighted average price. Mathematically the weighted average prices can be ex- pressed as follows: n n pa = z pai qai / z qai i=1 i=1 = value of sales of product A/summation of quantity sold of product A where: pa = weighted average price of product A pai = price of product A size 1 qai = quantity sold of product A size i Practically the firm kept the price of a specific product constant over the period of a year. Any change in price usually occurred after Chinese New Year, in the middle of February. In some cases there were producer associations which specified prices of products for their mem- ber firms. For those firms which were not members of the producer asso- ciations or which were located in other areas, the firms usually had a fixed price per unit varying according to size. For example 4 x 4 house posts would be priced at 40 baht per meter, while a 5 x 5 post would be priced at 50 baht per meter. From direct observation, the firm tried to maintain these prices even if there were some changes in demand and in the cost of production over the year. The evidence from the survey data, more or less, supports this ob- servation. For example, the prices of the following products, i.e., brick, connection pipe, concrete slab, well pipe cover, roof tile and cement block for which each product has only one size had nearly the same 84 prices all year round. If prices of some of these products fluctuated at all the prices remained within :_10 percent of the yearly average prices (Table 3.21). Given this observation, the changes in weighted average prices from month to month of the rest of the products which have different sizes or design would reflect the change in the combination of the quantity sold of the product of different sizes rather than the change in product prices. 3.9 Financial Characteristics This section contains the information on outstanding short-term and long-term debt at various sources, rate of interest paid to lenders, size of loan, collateral and assets. The information on long-term debt outstanding will be used to cal- culate the principal repayment of long-term debt as well as interest on outstanding long-term debt. These were some of the financial commitments the firm had to keep and therefore were specified in the linear program- ming model. The information on debt outstanding at commercial bank, both short- term and long-term, was used to specifiy the size of loan the firm could borrow from commercial bank. The information of current assets and current liabilities would be used to specify the maximum amount of outstanding short-term debt from commercial bank the firm could make in each period. The information on fixed assets and equity are presented in order to have a full picture of financial structure of the firm. ‘Information on rate of interest is used directly in the construction of the model to calculate interest payment in each period. 85 mcFoccoFummzc anucoz "mucaom NFmFm oomoe . oooom oocme . . ccoov ooomm . commm ecooM oooom mm>cam mmFm . ccmm comm mace come comm omoc omen . u s n monFa chFusm ocmF ocmF oomF cemF oomF comF ommF oomF . . u u u. . mmaFa coFaumccou ocmm comm ommm comm cemm comm comm ccmm comm comm . s . mgo>om 88F; FFoz mmmcv comFm ococe mcmFm ooomm mmume emcee ocean ocme . ommmm ocmmm ocmmm momsoz chFgm «memo ooomm ommme mmmmF mommF ocoem cocme comaF cocmn ccoom ocoom mmmmm mmmmm muwm wFamF mmm omm omm cmm omm omm mmm omm - mom i i 1 manm mumcucoo Fm mm mm mm mm mm mm mm mm mm on on on mongm mF mm om . i as mF . mF mm mF mF cm mmFFF Foam mmma . ooooF . ocomF coem . mNFe . coon ocomF ocmoF oomoF memo: quFoF ooFm ome ommm ommm mmcm eemm FmFm mme FFem mme ammo mnmm ocmm mang Fsz vaNF memF «momF memmF mmemF Fme FNmNF meoF cFFm Fme omemF oommF mNcFF mmaFm omen—ace mmma oFmoF ommoF mmmoF mmmFF FNFoF oech omem mes cnca ommm mmmm comm mama; mmao= mmm com com mum mFm mFN mam cmw mmm mmm omm mmm mmm mxooFm ucF: «em oFm emu mew mew mam mew mew cmm omm mew mew mew mxooFm «cosmu .o>< .nmm .zcm .omo .>oz .uuo .ummm .m=< aFam maze .Nm: .ca< .cmmli gaze: “canoe; 1Fm=mumm ooFuwmmm.va=mummncha mEcFm pounce; “cmemu Fo spec: An muuzuogm Fmst>Fc=F Fo mmoch FN.m anmh 86 Information on size of loan is not used in the construction of the model. This information is provided in order to have some idea on the supply side of loan. The collateral section will provide some idea of what the firm can use to pledge as collateral in their borrowings. 3.9.1 Debt Outstanding Outstanding short-term and long-term debt was measured at the end of the survey period. The maturity of the debt or the length of time the firm expected to repay the debt was used as a criteria to classify whether the debt was short-term debt or long-term debt. If the debt was due within one year, it was a short-term debt, otherwise it was a long- term debt. Under this definition long-term debt might become short-term debt if the maturity date is less than a year. At the end of the survey period, February, the total debt outstand- ing was 670,364 baht (Table 3.22). Of this amount, 47.84 percent or 320,727 baht was short-term debt. Surprisingly, only .28 percent of the outstanding short-term debt, 909 baht, was owed to commercial banks. Nearly 80 percent of the outstanding short-term debt, 288,182 baht, was borrowed from credit association and the rest of the outstanding short- term debt was borrowed from friends and relatives, and input suppliers. Of total debt outstanding, 349,637 baht (52 percent) was long-term debt. Two sources of outstanding long-term debt were commercial banks and friends and relatives. However, commercial banks were the major source of long-term debt. At the end of the survey 75 percent of total outstanding long-term debt, 263,273 baht, was borrowed from commercial 87 Table 3.22 Debt-Assets Structure (February 1981) of Cement Product Firms Assets Liabilities and Owner's Equity Current Assets Short-Term~Debt Accounts Receivable 135,000 Commercial Banks 909 Inventories Credit Associations 288,182 Finished Products 359,182 Friends and Relatives 15,454 Raw Materials 63,147 Ipput Suppliers 16,182 Total Current Assets 557,329 Total Short-Term Debt 320,727 Fixed Assets Long-Term Debt Land 545,371 Commercial Banks 263,273 Building 225,421 Friends and Relatives 86,364 Vehicle 335,577 Total Long-Term Debt 349,637 Machinery 318,932 Total Fixed Assets 1,425,301 Total Debt 670,364 Equity 1,312,266 Total 1,982,630 Liabilities and Equity 1,982,630 Source: Finance Questionnaire 88 banks. The outstanding short-term, long-term and total debt of each individual firm is shown in Appendix B, Table B-2. It should be mentioned that term loans provided by commercial banks or other financial institutions are rarely available to small firms in rural areas. It is common procedure for the commercial banks to lend money to firms by letting them open overdraft accounts at the banks. The banks and the firms will negotiate the size of the overdraft account, i.e., the maximum amount of money the firms are allowed to withdraw from the account. There is no specification on the repayment date. However, the firms have to pay interest every month based on the amount outstanding at the end of that month. Neither is there any restriction on the use of the money. The firms can use the borrowed money either for invest- ment in fixed assets or for working capital or in household consumption or combination of them. Originally the overdraft account was designed to help release the short-term operating capital needed of the firms. Since there are no restrictions, the firms then also use money available from overdraft accounts for long-term investment. Since there is no attempt or intention from the bank to force the firms to repay the prin- cipal as long as the firm keeps on paying interest and since the firms invest some of the money in fixed assets which cannot generate enough additional profit to repay the amount borrowed within a short period of time, a large percentage of money borrowed from commercial banks cannot be repaid within a one-year period and therefore is classified as long- term debt. It should be observed also that capital borrowed from credit asso- ciation is classified as short-term debt only. The reasons may be: (1) 89 the rate of interest is very high (information on rate of interest will be discussed later); and (2) credit association is usually organized within a group of few close friends only. Every month a group of these few close friends put a specified amount of money in a pot and each of them can bid for the money in the pot. Those who have won the bids can- not bid again in later months, yet they have to put the specified amount of money in the pot every month until everyone gets the pot. Since it is organized within a circuit of few close friends, money borrowed from this kind of association is usually classified as short-term debt. Ac- tually when the first round of bidding ends (when everyone gets the pot), a new round can be started again and again, unless the majority of the members agree to break the association. (The cycle of the bidding may last more than a year if more than 12 members are involved. If this is the case the debt would become long-term debt when they started playing. As the bidding goes on, the number of times each member has to put in the pot becomes smaller and smaller. The long-term debt earlier, therefore, becomes short-term debt when time goes on. Coincidently when the inter- view occurred, the final payment is due within one year, and the outstand- ing was classified as short-term debt. 3.9.2 Rate of Interest Commercial banks charged their customers an annual rate of 18 per- cent interest, the maximum rate allowed by the law. This rate was applied to both short-term and long-term loans. As mentioned earlier, there was no sharp distinction between short-term and long-term loans borrowed from commercial banks because the long-term loans were actually the short-term loans which the firms were unable to pay all of the 90 principal outstanding back within a year. Therefore, there was no sur- prise when the firms reported that they paid 18 percent rate of interest for both short-term and long-term loans borrowed from commercial banks. It should be mentioned also that the firm may pay just 14 percent rate ; of interest if the firms use saving deposit in the.bank to pledge as col- lateral and the amount of loans do not exceed the amount of saving deposit. However, it was surprising to learn that the firms pay 18 percent rate of interest to their parents, friends, or relatives from whom they bor- rowed money. If the opportunity cost of money of parents, friends or relatives was equal to the saving rate of interest, the interest rate to be paid should be 8 percent to 14 percent which were the rates of in- terest of saving or time deposits (Onchan, 1981). The reason that the firm paid 18 percent rate of interest to this group of lenders may be because if the firm was unable to borrow more from commercial banks, for whatever reasons, then the firms might ask their parents, or rela- tives, or friends to borrow from commercial banks and relend to them. Therefore, the firms had to pay the same rate as what was being charged by the banks. However, the firms did not have to pledge any fixed assets as collateral against the borrowings. Rate of interest charged by input suppliers varied from zero per- cent to 72 percent, with the average rate of 33.26 percent. The firms had the privilege to pay no interest to input suppliers because they had been regular customers of the input suppliers for a long time. Good reputation and credit worthiness had been established and maintained at very high levels. Not every firm could enjoy this special privilege. Nor was this special privilege provided by every supplier either. If the firms which paid zero rate of interest to input suppliers were not 91 counted in the calculation of the average rate of interest, the average rate of interest charged by input suppliers would be around 55 percent. The rate of interest charged by credit associations was much more difficult to calculate, and depended on how the members organized the bidding. Unfortuantely data collected was inadequate to do the calcula- tion. Of course, the rate should be higher than the rate charged by commercial banks. However, it was very difficult to estimate the average rate on the upperside. On the one hand, it might be argued that the rate should not be higher than that charged by input suppliers; because, if so why would the firms not borrow from input suppliers. On the other hand, if good reputation or credit worthiness have not been created, it is very difficult to get credit from input suppliers. Under this condi- tion, if the firms were really short of money and had access to credit association, they might bid the pot at a higher rate of interest than the average rate being charged by input suppliers. Therefore, the rate of interest charged by credit association was left undetermined. 3.9.3 Size of Loan Loans from commercial banks: the maximum size of loan which the firm can borrow from commercial banks is determined from size of the bank and value of collateral. Maximum size of loans which local banks can offer without asking for approval from the main office in Bangkok varies from 50,000 baht for the smallest bank (total lending is less than 50 million baht) to 1,000,000 baht for the largest banks (total lending is more than 150 million baht). However, whether the banks would lend up to the maximum limit or not, depends also on the value of col- lateral the firms use to pledge against the borrowings. The larger 92 banks are more liberal as they will provide credit at higher percentage of the value of the collateral, 60-70 percent. Small and medium size banks give only 30-50 percent of total value of the asset (Onchan, June 1981 ). The maximum size of loans which can be borrowed from parents, relatives or friends depends on the financial position of these people and their willingness to help the firms. The maximum size of loan which can be borrowed from credit associations depends on the number of members and the amount of money the members agree to put in the pot for the bid- ding. The maximum size of loan which can be borrowed from input suppliers depends on financial position of the suppliers, the length of time they have been doing business together and the credit worthiness of the firms. Given the data at hand, maximum size of loans from the last three groups of lenders cannot be quantified. 3.9.4 Collateral Of the various sources of credit mentioned above, only the borrow- ing from commercial banks needs tangible assets to be pledged as col- lateral (to guarantee the security of loans). Land and buildings are the most important types of collateral. Deposits within the bank, government bonds, stocks, letter of credit and construction contracts are other forms of collateral. For small loans, a person with good reputation may also guarantee the loans (Onchan, June 1981 ). The cement product firms do not have difficult access to commercial banks. Yet the firms some- times mentioned that the maximum amount of money allowed to withdraw from overdraft accounts was not enough. 93 3.9.5 Assets Assets to be described in this section are the assets as of the end of February, 1981. Assets are divided into two groups, i.e., current assets and fixed assets. Current assets are inventory of raw materials, inventory of products,1 and accounts receivable. There is no information on cash in hand, bank accounts, or investment in securities. Investment in securities is not an important item in current assets since securities are rarely traded or not available outside Bangkok. Fixed assets are land, building, vehicle and machinery. The value of fixed assets report- ed is the book value of the assets adjusted by an inflation index to re- flect more realistic (current) book values. Straight line depreciation method is used in the calculation. The useful life of the assets are those reported by the firms. At the end of February 1981, the total assets of the firms, on the average, were valued at 1.98 million baht. Current assets were .56 mil- lion baht or 28.11 percent of total assets. Within the group of current assets, 64.45 percent of current assets or .36 million baht was inventory of finished product. Values of accounts.receivable and inventory of raw materials were 135,000 baht and 63,147 baht or 22.22 percent and 11.33 percent of current assets, respectively (Table 3.22).2 The firms invested around 1.42 million baht or 72 percent of total investment in fixed assets. Even though some firms rented some or all 1The value of inventory were those reported by the firms. The firms made the estimation by multiplying the quantity left by current prices. The firm did not use either LIFO or FIFO method in the estima- tion of inventories. 2See page 87 . 94 of their land, this form of investment was still the largest item in fixed assets. Land value averaged .545 million baht or 38 percent of the total investment in fixed assets. The second biggest item in fixed assets was vehicle. All firms had at least one vehicle to transport their merchandise; some had 5 or 6 vehicles. The investment in vehicles was around .33 million baht or 23.45 percent of total value of fixed assets. Building represented the smallest value among the fixed assets. Buildings, here, included only the house where the owner stayed and a section of the house where the owners used as their business offices.' The firms did not construct storage to store finished products because they were stored at the appropriate places on an open ground. The sample firms included in this study did not have a separated business office either as may have been reported in other studies. The average value of building was around .225 million baht or 15.81 percent of total invest- ment in fixed assets. Machinery owned by the firms can be classified as follows: (1) the machine to mix cement, sand, stones and water together; (2) various kinds of cement product molds; and (3) machines to produce specialized products. Most of the products are produced by using molds with the ex- ceptions of cement blocks, wind blocks and drainage pipes. Also there are many kinds of block making machines. However, the number of cement block making machines averages less than 1 machine per firm with an average value of 156,931 baht. Just one firm had the machine to make drainage pipes the average value of this machine was 6471 baht. The average value of the rest of the machines (molds) are reported in Table 3.22. Altogether the average value of machines was 318,932 baht, or 95 22.39 percent of total investment in fixed assets. Total assets of in- dividual firms are shown in Appendix B, Table B-2. CHAPTER 4 THE BASIC MODEL OF CEMENT PRODUCT INDUSTRY This chapter has three parts. The first part deals with the modi- fication of the generalized linear programming model presented in Chapter 2 to fit the circumstances in the cement product industry. The second part is the presentation of the basic model and the last part presents the results of analysis. 4.1 Modification of the Generalized LP Model The modification includes a definition of the credit constraint (sources and level of credit) based on the findings of the previous chap- ter and the specification of number of periods to be used in the model. 4.1.1 Sources of Credit It was shown in section 3.8.1 that the firm borrows capital from four sources, i.e., commercial banks, credit associations, friends and relatives, and input suppliers. The borrowing from friends and relatives was found to have the same interest charge as for money borrowed from the commercial bank (18%), but they do not require collateral. This form of credit is activated after the firm has already borrowed to its limit from the commercial bank. Since the borrowing from friends and relatives is assumed to be an indirect form of borrowing from the commercial bank, no special category is defined in the model for this credit soarce. 96 97 The borrowing from credit associations is also excluded from the model because of the difficulty in specifying it. Even though the firm makes repayment with equal payments for a certain period of time, it differs from installment borrowing in that the firm makes some install- ment payments to the association in advance of borrowing any money at all. The amount to be paid is determined by the members, and is a con- stant proportion of amount to be borrowed which is unknown. The rate of interest depends on when the firm wants to borrow and therefore changes over time. Since it is very difficult to specify these uncertain con- ditions, credit associations as a source of credit are excluded from the linear programming model. However, if the firm borrows from all sources up to the maximum limits, the model will indicate the shadow price for additional borrowings from any credit source, including Credit associa- tions. Therefore in the model, the firm is allowed to borrow from two sources, i.e., commercial banks and input suppliers. 4.1.2 Level of Credit The determination of the amount of credit the firm will borrow from commercial banks depends on whether trade credit is obtained from input suppliers or not. If the firm obtains as much trade credit as it can from input suppliers, then additional loans will be obtained from the commercial bank as needed. The amount the firm borrows from the commer- cial bank under this condition, then, is the minimum amount of credit the firm would obtain from the commercial bank. The maximum amount is deter- mined by letting the firm borrow from the c0mmercial'bank only. 98 The amount of credit the firm needs also depends on whether the firm sells all the products in cash or whether credit is extended to its cus- tomers. EVerything else being held constant, cash inflow into the firm is less when the firm provides trade credit than when the firm sells everything in cash. Therefore, a firm needs more credit if it extends trade credit than if it sells everything in cash. Therefore at one extreme,.the minimum amount of credit the firm should obtain from the commercial bank is determined when the firm ob- tains trade credit as much as it can from input suppliers and when it sells everything in cash. This alternative is named "the conservative approach." On the other extreme, the maximum amount of credit the firm will ob- tain from the commercial bank occurs when the firm does not receive any trade credit from input suppliers (borrows only from the commercial bank) and when it provides trade credit to its customers. This alternative is named "the liberal approach." Therefore there will be two basic models. One is under the conser- vative approach and another one is under the liberal approach. 4.1.3 Number of Periods to be Used in the Model The survey period of one year was divided into four three month periods. The first period is from March to May, the second, third and fourth periods are from June to August, September to November, and Decem- ber to February, respectively. These quarterly periods correspond very roughly to the peaks and troughs for production of the major cement pro- ducts. 99 4.2 The Basic Model As mentioned earlier, the basic model is decomposed into the basic model under the conservative approach and the basic model under the li- beral approach. This section will first specify types of product pro- duced and sold by the basic firm. Then the basic model under both ap? proaches will be described. 4.2.1 Products Produced and Sold It is assumed that the basic firm, under both the conservative and the liberal approaches, produced the following products: cement blocks, wind blocks, small and medium drainage pipes, small and large well pipes, and small, medium and large house posts. These are the cement products found under production by every firm. Other products will be introduced. into the "extended" model in the following chapter. Cement blocks and wind blocks are assumed to be produced by simple machine and the rest of the products are assumed to be produced by hand. 4.2.2 Constraints 4.2.2.1 Inventory Constraint This constraint is to restrict the net addition to inventory of every product so that it will not exceed available space in inventory. The available space is the difference between maximum space available and in- itial inventory. Initial inventory is assumed to be zero for every pro- duct. The maximum space available is the maximum level of cumulative in- ventory the firm has had.(see section 3.7.3). The information on maximum inventory for every produCt is shown in Table 4.1. 100 Table 4.1 Inventory, Expected Demand and Machinery Constraints of the Basic Cement Product Firm ’Constraint Expectedi Product Period, Inventory Demand_ Machinery Cement Block 1 28,000 40,500 2 28,000 13.500 3 28,000 47,400 4 28,000 20,100 58.500 Nind Block 1 2,200 1,950 58,500 2 2,200 1.050 58.500 3 2.200 5.400 58.500 4 2,000 7,800 58,500 Small Drainage Pipe 1 129 1,260 2 258 1.260 3 155 1.260 4 350 258 1,260 Medium Drainage Pipe 1 350 138 1,330 2 350 276 1.330 3 350 166 1.330 4 276 1.330 Small Nell Pipe 1 383 1,200 2 157 1.200 3 139 1.200 4 250 191 1.200 Large Nell Pipe 1 250 277 1,200 2 250 113 1.200 3 250 98 1.200 4 139 1,200 Small House Post 1 338 1,700 2 265 1.700 3 279 1.700 4 400 353 1.700 Medium House Post 1 400 304 2.000 2 400 238 2.000 3 400 251 2.000 4 317 2.000 Large House Post 1 48 1,700 2 38 1.700 3 40 1,700 4- 50_ 1.700 101 4.2.2.2 Expected Demand Constraint The maximum quantity of any product which the firm is expected to sell in any period is also shown in Table 4.1. This expected demand is equal to the average observed quantity sold of the products as described in section 3.7.2. 4.2.2.3 Machinery Constraint The maximum units of product which can be produced by machines or molds in any period is shown in Table 4.1. These maximum units of pro- duct are calculated by using the production capacity per month reported in section 3.4.2 times the average number of machines or molds the firm has and to convert production capacity per month to production capacity per period, this product is multiplied by 3. 4.2.2.4 Fixed Financial Commitments 4.2.2.4.1 Dividends Dividends are considered to be the cash drain from the business for household consumption. It was assumed that the firm would withdraw from business proceeds, 2000 baht per month or 6000 baht per period in the form of dividends (Table 4.2). Such information was not available from the small scale industry study. It was based on studies of consumption expenditure by farm households in the area (Priebprom, 1982 and Jaisaad 1981). 4.2.2.4.2 Principal Repayment on Long-Term Debt It is assumed thatthe firm will repay all its outstanding long-term debt within ten years. This led to an estimated 32,000 baht loan 102 Table 4.2 Fixed Financial Commitments, Borrowing Constraint and Credit Sales of the Basic Cement Product Firm . Level of Constraint Fixed Financial Commitments 1. Interest on Long-Term Debt 13,950 2. Principal Repayment of Long-Term Debt 32,000 3. Dividends 6,000 Borrowing Constraint 1. Commercial Bank 60,000 2. Total Outstanding 160,000 Credit Sales l.l Percentage of Credit Sales to Total Sales .40 . 103 repayment in the last period (Table 4.2). Debt-assets structure of the basic cement product firm is shown in Appendix A, Table A-1. 4.2.2.4.3 Interest Payment on Long-Term Debt Even though it was assumed that the firm would repay principal of outstanding long-term debt once a year in the last period, payment of interest on the outstanding debt was assumed payable every period at a rate of interest of 18 percent a year. The interest payment on long-term debt was set at 13,950 baht in each period (Table 4.2). 4.2.2.5 Borrowing Constraint 4.2.2.5.1 Commercial Bank In any period the firm is allowed to borrow not greater than 25 per- cent of total debt outstanding at the bank (both long-term and short-term) at the beginning of the year. This amount was established at 60,000 baht (Table 4.2). The amount of total loan outstanding at the bank can be observed from Appendix A, Table A-1. 4.2.2.5.2 Input Suppliers The firm following the conservative approach would seek credit first from input suppliers with a limit on this credit source not to exceed 20 percent of total raw material costs. This limit is equal to the percent- age of credit purchases indirectly mentioned in section 3.3.3. Firms following the liberal approach would borrow none from input suppliers. 4.2.2.5.3 Total Short-Term Credit Outstanding In any period, the total amount borrowed from commercial bank cannot exceed 50 percent of total current liabilities which is equal to 160,000 baht (Table 4.2). 104 4.2.2.6 Credit Sales Constraint It is assumed that credit sales are 40 percent of total sales. This is the level which was observed in section 3.7.3. 4.2.3 The Objective Function The firm is assumed to maximize net return to fixed assets, family labor and equity capital. The net return equals the difference between sales, both cash and credit and expenses such as raw material expenses, labor expenses, overhead cost expenses, interest expenses, and taxes. The information on cash prices which would be used to calculate cash sales is shown in Table 4.3. The information on cash price is drawn from section 3.7.6 of Chapter 3 and profitability questionnaire. Since there was no information collected with respect to credit prices, it was assumed that credit prices are higher than cash prices at least to the opportunity cost of capital. In Thailand, if the firm puts money in savings account, the firm will receive 4.5 percent rate of interest. Rate of interest on time deposits is higher than rate of interest on saving deposit. The firm will get 8 percent and 12 percent rate of interest on time deposits under the condition that the firm has to keep money in the bank without with- drawing for six months and twelve months respectively. Given these rates of interest, it is assumed that credit prices are 10 percent higher than cash prices. Credit prices of products are shown in Table 4.3 too. In keeping with the results presented in Chapter 3, it is assumed that the firm keeps prices of products constant over the year. It is assumed that the physical combination of raw materials is the same in every period for all products based on data obtained from the pro- fitability questionnaire which was administered in September. Cost of 105 Table 4.3 Raw Material Costs per Unit Cash Price and Credit Price of the Basic Cement Product Firm Raw Material Cash A Credit Product Period Cost. ‘ PriCe Price Cement Block 1 1.32 .2.42 2.48 2 ' 1.15 2.42 2.48 3 1.27 2.42 2.48 4 1.51 2.42 2.48 Nind Block 1 1.71 2.85 2.92 2 1.55 2.85 2.92 3 1.71 2.85 2.92 4 1.88 2.85 2.92 Small Drainage Pipe 1 29 94 47.86 49 06 2 27 84 47.86 49 06 3 31 04 47.86 49 O6 4 33 87 47.86 49 06 Medium Drainage Pipe 1 80 71 132.50 135 81 2 71 44 132.50 135 81 3 79 93 132.50 135 81 4 89 38 132.50 135 81 Small Nell Pipe 1 31 90 51.07 52 35 2 28 92 51.07 52 35 3 31 47 51.07 52 35 4 34 87 51.07 52 35 Large Nell Pipe 1 76 49 130.00 133 25 2 7O 53 130.00 133 25 3 76 67 130.00 133 25 4 82 45 130.00 133 25 Small House Post 1 60 78 86.87 89 O4 2 57 25 86.87 89 O4 3 6O 19 86.87 89 04 4 64 32 86.87 89 04 Medium House Post 1 72 71 99.86 . 102.35 2 68 60 99:96 ‘ 102.35 3 71 70 99.86 102.35 4 76 83 99.86 102 35 Large House Post 1 68 24 114.57 117 43 2 63 47 114.57 117 43 3 67.75 114.57 117.43 4 1 73.62. _ . 114.57, 117.43 106 production per unit could vary seasonally, however, because the price of raw materials might vary from period to period (see section 3.5). The information on cost of raw materials for each product in each period is shown in Table 4.3. 4.2.4 Other Coefficients This section provides the information on the coefficients (a '5) ii which are not equal to plus one or minus one for production, selling and other activities. The coefficients which are equal to plus one or minus one can be observed directly from linear programming tableau (Figure 2.1). 4.2.4.1 Production Activities Labor requirement and overhead cost per one unit of product produced are the a1 coefficients of the production activities which are not equal 3 to :_l. The coefficients of labor requirement and overhead cost per one unit of each product in each period are shown in Table 4.4. The informa- tion on labor requirement and overhead cost are drawn directly from sec- tion 3.5.4 and 3.6.3 respectively. 4.2.4.2 Selling Activities The firm is assumed to pay 2.2 percent tax on gross sales, for both cash sales and credit sales. The information on tax rate is drawn from Sangwanruang, et. a1. (1978). The amount of tax the firm has to pay per one unit of each product in each period is shown in Table 4.4. 4.2.4.3 Cost of Hiring Labor Activities The information on wage rate per man-day the firm has to pay to skilled and unskilled workers is shown in Table 4.5. This information is 107 Table 4.4 Labor Requirement, Overhead Cost and Tax Expenses per Unit of Product of the Basic Cement Product Firm Labor Requirement Over- Tax Expenses Un- head Cash Credit Period Skilled Skilled “Cost Sales Sales Product Cement Block 1 2 .001* .004* .23* .048* .054* 3 4 Wind Block 1 p. 2 .001* .004* .30* .063 .064* 3 4 Small Drainage Pipe ' l _ 2 .041* .072* 4.99* .052* 1.080* 3 ' 4 Medium Drainage Pipe 1 2 .092* .114* 13.81* .950* 2.990* 3 4 Small Nell Pipe 1 ~2 .036* .064* 5.32* .123* 1.150* 3 4 Large Nell Pipe 1 2 .045* .074* 13.55* .860* 2.930* 3 4 Small House Post 1 2 .037* .109* 9.05* .910* 1.950* 3 4 Medium House Post 1 * 2 .055* .097* 10.40* .200* 2.250* 3 4 Large House Post 1 2 .060* .130* 11.94* .520* 2.580* 3 4 *The same in each period 108 drawn from section 3.5.5 of Chapter 3. Nage rate in the first period is the average of wage rates in the second and fourth period. 4.2.4.4 Interesthayment and Interest Receive Activities Rate of interest the firm has to pay to its lenders and rate of in- terest the firm receives from its savings account is shown in Table 4.5. Information on rate of interest paid to lender is drawn from section 3.3.4 and 3.8.2. Some information on rate of interest on deposits is described in section 4.2.3. 4.2.4.5 Pattern of Cash Flows Under the Liberal and the Con- servative Approaches It should be mentioned again that under the liberal approach the firm provides trade credit to customers, pays for raw materials in cash and borrows only from commercial bank , while under the conservative ap- proach the firm does not provide any trade credit to customers (sales are 100 percent cash), receives trade credit from a raw material supplier as well as borrows from a commercial bank. When the firm operates under different situations, the pattern of cash inflows and cash outflows of the two situations differ. The pattern of cash inflows and cash outflows under both approaches are shown in Table 4.6. 4.3 The Result This section presents some expectations and results from the analysis of the basic model firm under the conservative and the liberal approaches. 4.3.1' Some Expectations 1. The amount borrowed from the commercial bank under the liberal approach is greater than that for the conservative approach. 109 Table 4.5 Nage Rate per Man-Day and Interest Rate of the Basic Cement Product Firm ' Period 1 2" 3 ' ‘ 4 Nage Rate per Day Skilled 47 44 48 50 Unskilled 34 33 37 35 Interest Borrowing .045 .045 .045 .045 Bank .12 .12 .12 .12 Input Suppliers .011 .011 .011 .011 Savings 110 Table 4.6 Coefficients of Cash Flow Constraint of the Basic Cement Product Firm Under the Liberal and the Conservative Approaches Liberal Conservative Cash Inflow from Sales. Raw Material Raw Cash Inflow Prodgct Period Material Cash Credit Cash Credit from Sales Cement Block 1 1.32 2.42* - 1.06 2.42* 2 1.15 2.48* .92 .29 3 1.27 1.02 .26 4 1.51 1.21 .28 Wind Block 1 1.71 2.85* - 1.37 2.85* 2 1.55 2.92* 1.55 .38 -3 1.71 1.37 1.24 4 1.88 1.50 .38 Small Drainage Pipe 1 29.84 47.86* - 23.95 47.86* 2 27.84 ' 49.06* 22.27 6.71 3 31.04 24.83 6.24 4 33.87 g 27.10 6.95 Medium Drainage Pipe 1 80.71 132.50* - 64.57 132.50* 2 71.44 135.81* 57.15 18.08 3 79.93 63 94 16.00 4 89.38 71.50 17.90 Small Nell Pipe 1 31.90 51.07* - 25.52 51.07* 2 28.92 52.35* 23.14 7.14 3 31 47 25 18 6.48 4 34 87 27 90 7.05 Large Hell Pipe 1 76.49 130.00* - 61.19 130.00* 2 70.53 133.25* 56.42 17.13 3 76.67 61.34 15.80 4 82.45 65.96 17.17 Small House Post 1 60.78 86.87* - 48.62 86.87* 2 57.25 89.04* 45.80 13.61 3 60.19 48.15 12.82 4 64.32 51.46 13.48 Medium House Post 1 72.71 99.86* - 58.17 99.86* 2 68.60 102.35* 54.88 16.29 3 71 70 57.36 15.37 4 76.83 61.46 16.06 Large House Post 1 68.24 114.57* . 54.59 114.57* 2 63.47 117.43* 50.78 15.28 3 67.75 54.20 14.22 4 73.62 58.90 15.18 *The same in each period 111 2. The level of available credit may be more of a constraint for the firm under the liberal approach than for the firm under the conserva- tive approach. Consequently, in a period when credit from the commercial bank is a constraint, shadow price of borrowed capital of the firm under the liberal approach is greater than that of the firm under the conser- vative approach. 3. The second and third periods of both approaches are the periods when credit from commercial bank might be a binding constraint since sales are low in both periods and the firm has to keep production at high level to fulfill expected demand in the periods as well as to ac- cumulate inventory to be sold in the fourth period. 4. Net return of the firm under the liberal approach is higher than net return of the firm under the conservative approach since expected demand and amount produced under the two approaches are the same, yet rate of interest on borrowed capital of the firm under the conservative approach is higher than that of the firm under the liberal approach. 4.3.2 LP Results for the Basic Model Under the conservative approach, the firm requires trade credit from input suppliers in every period (Table 4.7). In the first period sinCe the firm sells every product in cash and receives trade credit from input suppliers, cash inflow from sales and beginning cash on hand is greater than cash outflow. The firm does not borrow from the commercial bank. Instead, the firm has a balance of about 71,000 baht for savings (Table 4.7). In the second period, even though the firm still utilizes trade credit from input suppliers, cash inflow from sales and interest income is less than cash expenses 112 Table 4.7 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Product Firm, Conservative Approach Basic Cement UnitzBaht Period 1 2 3 4 Cash Inflows Cash Sales 248.409 158.200 232.801 215,560 Credit Sales Interest Income 782 Beginning Cash 10,000 Total 258,409 158.982 232.801 215.560 Cash Outflows RMa: Cash 120,657 152.953 97.660 31.808 Credit 33,784 42,827 27,345 Skilled Worker 5,583 7,778 4,925 1,393 Unskilled Worker 10,622 13,669 10,251 2,648 Subcontract Worker Overhead Cost 25,034 35,296 20,304 5.920 Tax 5,465 3,480 5.122 4,742 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,950 13,950 13,950 13,950 Repayment of LTD 32,000 Interest on STDc 1,657 302 Total 187.311 266.910 202.696 126.108 Balance Borrowing 36,830 6,725 Repayment d 36,830 6,725 Outstanding 0 36,830 6,725 0 Savings Deposit 71,098 82,727 Savings Withdrawal 71,098 Savings Outstanding 71,098 0 82,727 Shadow Price 0 0 O 0 Net Return 120,704 Accounts Payable 8,906 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 60,000 baht 113 including the repayment of trade credit from the earlier period. The firm withdraws all of the money saved in the first period and borrows around 37,000 baht from the commercial bank. In the third period, cash inflow from sales is greater than cash outflow including repayment of trade credit. The firm repays some of the outstanding debt at the com- mercial bank, but there is around 6,700 baht still outstanding at the end of the third period. In the fourth period, cash inflow from sales is much greater than cash expenses including the payment on long-term debt. The firm repays all outstanding debt at the commercial bank and has around 83,000 baht for savings. It should be noted that in this fourth period the firm still obtains around 9,000 baht of trade credit from input suppliers. At the end of the year, net return to fixed assets, family labor and equity capital is around 120,000 baht. Under the liberal approach, the firm pays for all expenses in cash and provides some trade credit to customers. In the first period, cash inflow from sales and beginning cash on hand is less than cash expenses and the firm borrows nearly 53,000 baht from the commercial bank (Table 4.8). In the second period cash inflow from sales and collection of ac- counts receivable is less than cash expenses and the firm is unable to repay outstanding debt. Instead it borrows up to the maximum limit. In this second period the shadow price of capital indicates that if the firm wants additional bdrrowings the firm can pay up to 36 percent rate of interest. In the third period, cash expenses exactly equal cash inflow from sales and collection of accounts receivable. Outstanding debt at the commercial bank is still at the maximum level. The shadow price for borrowed capital is >08 baht. In other words, the firm can pay around 32 percent rate of interest for an additional 1 baht of borrowing. In the 114 Table 4.8 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital. Accounts Receivable and Net Return: Product Firm, Liberal Approach Basic Cement UnitzBaht Period 1 2 37 4 Cash Inflows Cash Sales 150,257 95,737 140,774 130,403 Credit Sales 100.171 63.824 93.850 Interest Income Beginning Cash 10,000 Total 160,257 195,908 204.598 224.253 Cash Outflows RMa: Cash 146.458 136,380 135.962 88.420 Credit Skilled Worker 5,583 5,976 5,285 3,064 Unskilled Worker 10,622 9,799 12,093 4,948 Subcontract Worker Overhead Cost 25,034 25,011 23,445 13,064 Tax 5,509 3,510 5,162 4,781 Dividends b 6,000 6,000 6.000 6,000 Interest on LTD 13,950 13,950 13,950 13,950 Repayment of LTD 32,000 . Interest on STDC 2,380 2,700 2,700 Total 213,156 203,009 204,598 168,927 Balance Borrowing 52,899 7,101 60,000 4,674 Repayment 60,000 60,000 Outstanding 52,899 60,000 60,000 4,674 Savings Deposit Savings Withdrawal Savings Outstanding Shadow Price 0 .09 .08 0 Net Return 124,734 Accounts Receivable 86,935 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 60,000 baht 115 fourth period, cash inflow from sales and collection of accounts receiv- able is greater than cash expenses, and the firm is able to repay some of the outstanding debt. At the end of the fourth period around 4,700 baht is outstanding at the commercial bank, and the firm has around 87,000 baht outstanding as accounts receivable too. Net return to fixed assets, family labor and equity capital is around 125,000 baht. Results from the analysis of the two approaches with the basic model indicate that all expectations were confirmed. These basic LP results will be used to compare with the results of its extensions in the follow- ing chapter. CHAPTER 5 THE EXTENDED MODEL The features of the basic model of the cement product firm and the results of the linear programming results were presented in Chapter 4. This chapter will explore what would happen to: (l) the net return to family labor, to fixed assets, and to equity capital; (2) the demand for short-term credit; (3) the timing of the demand for credit; and (4) the shadow price of borrowed capital, if the following changes occur: (1) the firm produces more products; (2) the demand for products included in the basic model increases by 10 percent; and (3) the demand for products in the extended model increases by 10 percent. The discussion starts with the extensions and needed modifications to the basic model followed by a comparison of the above situations in terms of expectations and results. 5.1 Extensions to the Basic Model Given certain marketing characteristics of the firm, the demand for short-term credit of the firm might vary when the firm adopts new tech- nology to produce some of its products or when size of the firm expands. The adoption of new technology might be in the form of new machines which use less labor and/or reduce raw material costs. It can be expect- ed that when a new technology is adopted, the demand for short-term cre- dit will decrease and its net return will increase. In other words, 116 117 demand for credit when the firm uses old, or less advanced technology is higher than for demand for credit when the firm adopts new technology. The data base for analyzing the advanced technology are rather sketchy. Therefore, for this study firm expansion analysis is restricted to in- creasing number of products, increasing demand and increasing the labor force for a given plant capacity for the typical small scale firm. Expansion of the firm can occur with: (1) an increase in the level of production as the demand for products increases; (2) an increase in the number of products produced/sold; and (3) a combination of both (1) and (2). Since each expansion option affects the demand for credit of the firm, all three options will be analyzed as reasonable extensions of the basic model. Each will differentiate between the conservative approach and liberal approach as defined earlier. Situation 1 is the basic model with a 10 percent increase in demand across the board (Figure 5.1). Situation 2 is an addition in the product line from the basic model with no change in demand. The additional products include large drainage pipe, roof tile, toilet head, table set and spirit house. Situation 3 is the basic model expanded to include a 10 percent in- crease in demand plus the additional products proposed for Situation 2. 5.2 Modifications in the Basic Model 5.2.1 Constraints 5.2.1.1 Demand Constraints For Situation 1, the level of demand for all products in the basic- model are increased by 10 percent. The revised RHS values for these pro- ducts are shown in Table 5.1. 118 Experiment Basic Situation Situation Situation Model 1 2 3 Approach C L C L C L C L Demand 0 0 +10% +10% 0 0 +10% +10% Products A A A A B B B B C = Conservative L = Liberal A = The products included in the basic model (see Chapter 4). B = The products included in the basic model plus roof tile, toilet head, table set, and spirit house. Figure 5.1 Cement Product Firm Situations for Analysis 119 Table 5.1 Demand Increased 10 Percent for Basic Model Products1 Product Period 1 2 3 4 Cement Block 44,550 14,850 52,140 22,110 Wind Block 2,145 . 1,155 5,940 8,580 Small Drainage Pipe 142 284 170 284 Medium Drainage Pipe 152 304 183 304 Small Well Pipe 421 173 153 210 Large Well Pipe 305 124 108 153 Small House Post 372 291 307 388 Medium House Post 334 262 276 349 Large House Post 53 . 42 . 44 _55 1These demand constraints apply to Situation 1 and 3 for these products. 120 The initial expected demand for the five products added to the basic model are shown in Table 5.2. These are the constraints imposed for Situation 2. When demand is increased by 10 percent for these products, we have the constraints for Situation 3 (Table 5.3). 5.2.1.2 Inventory and Machinery Constraints For the products added to the product line of the basic model, RHS values for the inventory constraint and the machinery capacity constraint were developed from survey data and are presented in Table 5.2. These constraints apply to both Situation 2 and Situation 3. 5.2.1.3 Other Constraints No further modifications on the RHS of the basic model are required. 5.2.2 The Objective Function Extension of the basic model to include additional products re- quires cj values for raw material cost and selling price (both cash and credit sales) by period for each product respectively. These are shown in Table 5.4 5.2.3 Activities 5.2.3.1 Production Activities Extension of the basic model to include additional products requires aij coefficients for labor requirements and overhead cost per unit of output by period for each product respectively. These are presented in Table 5.5. These coefficients apply to Situations 2 and 3. 121 Table 5.2 Inventory, Expected Demand and Machinery Constraints of the Products Added to the Basic Cement Product Model1 Expected Product Period Inventory Demand Machinery Large Drainage Pipe 1 350 33 1,260 2 350 66 1,260 3 350 39 1,260 4 350 66 1,260 Roof Tile 1 6,500 25,000 39,000 2 6,500 5,000 39,000 3 6,500 12,400 39,000 4 6,500 10,500 39,000 Toilet Head 1 44 90 156 2 44 15 156 3 44 30 156 4 44 18 156 Table Set 1 5 13 156 2 5 11 156 3 5 11 156 4 5 11 156 Spirit House 1 44 16 156 2 44 3 156 3 44 33 156 4 44 14 156 1Expected demand represents the initial demand for these products and are the demand constraints for Situation 2. The inventory and machinery capacity constraints apply to both Situations 2 and 3. 122 Table 5.3 Relaxed Demand Constraints for Products Added to the Basic Model (Situation 3)1 Product Period 1 2 3 4 Large Drainage Pipe 36 72 42 72 Roof Tile 28,600 5,5001 13,640 11,550 Toilet Head 99 16 33 20 Table Set 14 12 12 12 Spirit House 18 3 36 15’ 110 percent higher than the demand constraints shown in Table 5.2. 123 Table 5.4 Raw Material Cost per Unit, Cash Prices and Credit Prices of the Products Added to the Basic Cement Product Model Raw Material Cash Credit Product Period Cost Price Price Large Drainage Pipe 1 235.04 300.00 307.50 2 213.66 300.00 307.50 3 230.20 300.00 307.50 4 256.43 300.00 307.50 Roof Tile 1 .34 .75 .77 2 .29 .75 .77 3 .34 .75 .77 4 .39 .75 .77 Toilet Head 1 19.85 30.00 30.75 2 17.19 30.00 30.75 3 19.30 30.00 30.75 4 22.53 30.00 30.75 Table Set 1 274.75 600.00 615.00 2 267.00 600.00 615.00 3 274.75 600.00 615.00 4 282.59 600.00 615.00 Spirit House 1 296.45 900.00 922.50 2 276.69 900.00 922.50 3 287.43 900.00 922.50 4 316.22 900.00 922.50 124 NN.cN om.mF mo.¢m mem.F com. 4 mN.ON om.mF mo.sm Nem.F moo. m mN.oN om.mF mo.so Nsm.F woe. N mN.ON om.mF mo.em mem.F com. F maze: NFLFam mm.NF oN.mF Nm.Ne oNe.F one. a mm.mF ON.NF Nm.No eNe.F One. N mm.mF ON.NF Nm.Ne oNe.F one. N mm.NF 0N.mF Nm.Ne cNe.F one. F New «FnaF Ne. we. NF.N mFF. sec. 4 No. we. NF.N mFF. mac. N Ne. we. NF.N mFF. Nee. N No. we. NF.m mFF. sec. F new: meFOF No. No. me. o Noe. s No. No. me. o Noe. N NC. No. me. o Noe. N No. No. No. Q Noe. F mFFF Foam eN.e oe.e eN.Fm NNF. Nmo. e 8N.e oe.m eN.Fm NNF. Nmo. m 8N.e oe.e eN.Fm mmF. Nmo. N eN.e oe.e eN.Fm mmF. Nmo. F maFa ameeFaaa mates mmFam mmFam Smog emFFFxmca eoFFFem eoFeaa Hostage a 25.5 5.30 ummcgm>o mmmerMu xeh acmemgrzmmm Loam; quoz nuance; “edema umem us» ca emuu< nausea»; one cow FF== can mmmcoaxu xmh use umou unogcm>o .ucmEmchcom gone; m.m anmF 125 5.2.3.2 Selling Activities The payment of tax by the firm is a function of the level of sales. The amount of tax paid per unit of product sold in each period for each of the products is added to the basic model product line as shown in Table 5.5 5.2.3.3 Cash Balance (Row) Activity This activity manages the cash flow equation for each period. All elements in the equation carry either +1 or -1 a. coefficient (depend- 13 ing on whether the column activity subtracts from or adds to the cash balance) except for the raw materials purchasing activity which reduce the period cash balance and the selling activities which increase the period cash balance. The amount that the cash balance is effected by raw material pur- chases depends on whether the firm follows the liberal or the conserva- tive approach. For the liberal approach, raw materials are purchased without borrowing from the input supplier. Consequently, the a.. coef- lJ ficients are identical to the cj coefficients for this activity. (Com- pare Table 5.4 with Table 5.6). For the conservative approach, the aij's for raw material cash purchase activity are 20 percent less than the corresponding values for the liberal approach, indicating the proportion of purchases made with credit provided by the input supplier (Table 5.6). However, this proportion carries with it a penalty for a credit purchase resulting in a higher cost per unit of raw material for the conservative approach than for the liberal approach. The credit component of raw material purchases enters the cash flow equation in a period later than cash purchases. 126 oo.ooo mm.¢m ,mm.NmN. cm.NNm oo.oom NN.mFm e oo.oom mm.Fm em.mNN om.NNm co.oom m¢.FmN m oo.oom ov.mm mm.FNN om.NNm oo.oom mm.mFN N oo.oom mF.FMN oo.oom m¢.mmN F mmzo: chan oo.ocm em.Fm Fo.mNN oo.mFm oo.oom mm.NmN e oo.oom Fm.mm om.mFN oo.mFm oo.oom mF.¢FN m oo.oom em.Fm om.mFN oo.mFm oo.oom oo.FmN N oo.oom om.mFN oo.oom mF.eFN F pom aneF oo.om Nm.¢ No.mF mF.om oo.om mm.NN v oo.om mm.m ee.mF mF.om oo.om om.mF m oo.om m¢.¢ mF.mF mF.om oo.om mF.FF N oo.om mm.mF oo.om mm.mF F emu: FmFFoF mF. Fo. Fm. FF. mF. mm. c mF. mo. FN. FF. mF. em. m mF. mo. mN. FF. mF. mN. N mF. FN. mF. em. F mFFF Foam oo.oom mF.mm «F.mON om.Fom co.ocm m¢.mmN e oo.oom mm.F¢ mF.¢mF om.Fom oo.oom eN.omN m oo.oom mm.Nm mm.oFF om.Fom oo.oom mm.mFN N oo.oom _ mo.mmF oo.oom ec.mmN F 88F; mmecFmeo mace; mmme some mommzogaa monocugaa mmFem mmme FmFemumz quLma Foster; 3oFFcF pFumgm swam chmeu swam 3am ammo FoFFmFez 36m seem 3oFFcF :meu m>Fum>me=oo FaemaFg ugmmucha mmsomoeaa< m>Fue>me -zou as“ use FocmnFq mep neon FoF quoz umem on» cu nmoc< muoaeogg com mchmLchoo 3oFu swam m.m mFamF 127 The cash balance by period is also effected by the selling strategy of the firm. The conservative approach has all sales made in cash, while the liberal approach sells with both cash and credit. The aij's for the cash sales component for the liberal approach are the same as those for all sales made Under the conservative approach for all products and periods respectively. The aij's for the credit component of the sales under the liberal approach are 2 1/2 percent higher than the cash com- ponent and are advanced one period. 5.3 Some Expectations 5.3.1 Net Return Assuming that the net return should increase with firm expansion, we should expect Situation 3 to generate the greatest increase in net return compared with the basic model because it contains expansion from an increased product line and from an increased demand. However, it is difficult to say in advance whether an increased demand for a given pro- duct line (Situation 1) or an increase in product line with given demand (Situation 2) would yield the highest net return. These generalizations apply for both the conservative and liberal approaches. 5.3.2 Timing of Credit Needs Because the basic model contains all of the main products with a high level of year-round production, there is no reason to expect the timing of credit needs to be altered with an increase in demand, an in- creased product line or a combination of both. This conclusion should hold for both the conservative and the liberal approaches. 128 5.3.3 Amount of Credit Needs . 5.3.3.1 Conservative Approach Raw materials are purchased on credit and products are sold entirely for cash. The basic model credit needs were directed largely toward in- ventory accumulation (in periods 2 and 3). Inventory levels are con- strained by period and by product. An increase in demand for a given product line (Situation 1) would estimate sales from current production resulting in a higher cash inflow level and a reduction in credit needs. For the situation where the firm expands its product line with no change in demand (Situation 2) one might expect minimum inventory accumu- lation for the additional products. If this is the case, cash inflows would be increased and the firm's dependence on credit would be decreased accordingly. Therefore, comparing this situation with the basic model, credit needs are expected to be less. If credit needs are expected to decrease for Situation 1 and Situa- tion 2 taken separately, it is reasonable to expect that credit needs would decrease for Situation 3 where their respective conditions are com- bined. 5.3.3.2 Liberal Approach When production is increased from increased demand for a given pro- duct line (Situation 1) it is expected that the need for credit would in- crease in period 1.because the credit needs per unit of product do not change. Therefore, when the quantity produced increases, the amount of credit needed should increase. However, in the case where the firm ex- pands its product line for a given demand level (Situation 2) it is dif- ficult to say whether the amount of needed credit would increase or 129 decrease in period 1 since the firm under the liberal approach provides a lot of trade credit. Therefore, it is difficult to say whether the amount of credit needs in period 1 would increase or decrease when both demand and production line increase (Situation 3). In periods 2, 3 and 4 it is expected that the amount of credit needs of the firm in Situation 1, 2 and 3 would be less than that of the basic firm based on the same reasoning given for the conservative approach. 5.3.4 Savings 5.3.4.1 Conservative Approach When the firm expands either by an increased production of the exist- ing product line by increasing demand, or by adding more product lines or both, it is expected that savings would increase. 5.3.4.2 Liberal Approach It is expected that the firm in Situations l, 2 or 3 may have some savings in period 4. 5.4 LP Results for Alternative Situations 5.4.1 Results for Situation 1 5.4.1.1 Conservative Approach The firm under the conservative approach asks for trade credit from input suppliers and sells every product in cash. In the first period, cash inflows from sales exceed cash expenses and the firm deposits about 80,000 baht in savings (Table 5.7). In the second period, sales decrease while the firm increases pro- duction to take the advantage of low wages and raw material costs re- sulting in inventory accumulations, cash inflow becomes less than cash 130 Table 5.7 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: Cememt Product Firm, Situation 1, Conservative Approach lUnit:Baht Period 1 2' 3 4 ‘ Cash Inflows Cash Sales 273,305 175,411 256,140 237,190 Credit Sales Interest Income 871 55 Beginning Cash 10,000 Total 283,305 176,282 256,140 237,245 Cash Outflows RMa: Cash 132.746 161.220 112.043 39,065 Credit 37,169 45,141 31,372 Skilled Worker 6,143 8,182 5,641 1,739 Unskilled Worker 11,685 14,302 11,752 3,240 Subcontract Worker Overhead Cost 27,543 37,194 23,381 7,256 Tax 6,013 3,859 5,635 5,218 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,950 13,950 13,950 13,950 Repayment of LTD 32,000 Interest on STDc 1,186 Total 204,080 281,874 224.731 139.840 Balance Borrowing 0 26,367 0 Repayment 26,367 Outstanding 0 26,367 0 0 Savings Deposit 79,225 5.042 102,447 Savings Withdrawal 79,225 5,042 Savings Outstanding 79,225 0 5,042 102,447 Shadow Price 0 O O 0 Net Return 138,590 Accounts Payable 10,938 aRM = purchases of raw materials bLTD = long-term debts c5T0 = short-term debts dMaximum borrowing limit = 60,000 baht 131 expenses, all money in savings is withdrawn, and borrowed money from the commercial bank amounts to 26,000 baht. In the third period, sales increase to a higher level and the pro- duction level decreases to a lower level than that in the second period. This results in more cash inflow than cash expenses. The firm repays all of its debt outstanding at a commercial bank, and has some cash left to deposit in a savings account. In the fourth period, sales remain high while production drops to the lowest level. This results in more cash inflow than cash expenses with additional deposits made to savings. At the end of the fourth period, the firm has approximately 102,500 baht in the savings account. At the end of the year, the firm under the conservative approach has approximately 138,000 baht as net return to fixed assets, family labor and equity capital. This firm owes a little less than 11,000 baht to input suppliers. 5.4.1.2 Liberal Approach The firm using the liberal approach pays for all expenses in cash while providing some trade credit to customers. For this case, the LP results show that cash expenses exceed cash receipts from sales and the firm borrows about 57,000 baht from a commercial bank (Table 5.8). Be- cause the firm accumulates inventory with a reduction in sales, cash in- flows from sales and collection of accounts receivable are less than cash in the 2nd period. It must then increase borrowing from the commercial bank up to the maximum limit. Since wages and raw material costs are lower in the third period than in the fourth period, the firm will accumu- late as much inventory as possible. Therefore, cash inflow from sales 132 Table 5.8 Quarterly Cash Flow Statement, Shadow Prices of Borrowed Capital. Accounts Receivable and Net Return: Cement Product Firm, Situation 1, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 165,316 105,340 154,887 143,488 Credit Sales 110,211 70,226 103,258 Interest Income Beginning Cash 10,000 Total 175,316 215,551 225.113 246.746 Cash Outflows RMa: Cash 161.132 147,658 151.527 98.139 Credit Skilled Worker 6,143 6,386 5,981 3,417 Unskilled Worker 11,685 10,847 13,171 5,501 Subcontract Worker Overhead Cost 27,543 27,076 26,105 14,510 Tax 6,061 3,862 5,679 5,261 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,950 13,950 13,950 13,950 Repayment of LTD 32,000 Interest on STDc 2,574 2,700 2,700 Total 232,514 218.353 225.113 181.518 Balance Borrowing 57,198 2,802 60,000 Repayment 60,000 60,000 Outstanding 57,198 60,000 60,000 0 Savings Deposit 5,228 Savings Withdrawal Savings Outstanding 5,228 Shadow Price 0 .10 .08 0 Net Return 143,006 Accounts Receivable 95,659 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts dMaximum borrowing limit = 60,000 baht 133 and collection of accounts receivable is all used up as cash expenses and the debt outstanding at commercial banks still remains at the maximum limit. Shadow prices of borrowed capital in the second and third periods indicate that additional borrowed money at the margin would return around 40 percent and 32 percent in the second and third periods respectively. In the fourth period, when production drops to the lowest level, cash in- flows from sales and collection of accounts receivable are enough to pay for all cash expenses, repay outstanding debts at the commercial bank, and yield an excess of around 5,000 baht for deposit in the savings account. The net return to fixed assets, family labor and equity capi- tal of the firm under the liberal approach is nearly 143,000 baht. This firm has 95,659 baht outstanding as accounts receivable. 5.4.2 Results for Situation 2 5.4.2.1 Conservative Approach The firm under the conservative approach asks for trade credit from input suppliers and sells every product in cash. Cash inflows exceed cash outflows in period 1 and the firm deposits nearly 92,000 baht in the savings account (Table 5.9). In the second period when sales drop and the firm tries to fulfill expected demand as well as accumulate in- ventory, cash inflows from sales are not enough to meet cash expenses including repayment of outstanding trade credit from the first period. The firm must withdraw all the money from savings and borrow a little more than 28,000 baht from a commercial bank. In the third period, sales_again increase to a higher level. Cash inflow exceeds cash out- flow and the firm repays the commercial bank loan with a surplus of around 14,000 baht for savings. Some of the products sold in the 134 Table 5.9 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Cement Product Firm, Situation 2, Conservative Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 302,118 191.387 290.719 262.736 Credit Sales Interest Income 1,009 153 Beginning Cash 10,000 Total 312,118 192,396 290,719 262,889 Cash Outflows RMa: Cash 141,549 182,768 120,104 35,976 Credit 39,634 51,175 33.629 Skilled Worker 8,796 9,124 8,088 2,027 Unskilled Worker 12,657 15,323 13,871 3,165 Subcontract Worker Overhead Cost 30,745 41,266 27,850 6,944 Tax 6,647 4,210 6,396 5,780 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,950 13,950 13,950 13,950 Repayment of LTD 32,000 Interest on STDc 1,265 Total 220,344 312,275 248,699 139,471 Balance Borrowing 0 28,105 0 Repayment d 28,105 Outstanding 0 28,105 0 0 Savings Deposit 91,774 13,915 137,333 Savings Withdrawal 91,774 13,915 Savings Outstanding 91,774 0 13,915 137,333 Shadow Price 0 O 0 0 Net Return 174,080 Accounts Payable 10,073 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts dMaximum borrowing limit = 60,000 baht 135 fourth period were produced in the second and third periods making it possible for cash inflows to exceed cash outflow by as much as 137,000 baht. Net return to fixed assets, family labor and equity capital of the firm under the conservative approach are ar0und 174,000 baht at the end of the year, with arOund 10,000 baht owed to input suppliers. 5.4.2.2 Liberal Approach The firm under the liberal approach pays for all eXpenses in cash and provides some trade credit to customers. Cash inflow is less than cash expenses in the first period and the firm borrows about 57,000 baht from the commercial bank (Table 5.10). In the second and third periods, with product inventory accumulating, sales and collection of accounts receivable are still less than cash expenses. The firm borrows from the commercial bank up to the maximum limit of 60,000 baht. Shadow prices indicate a marginal return to borrowed money of 36 percent and 32 per- cent in the second and third periods respectively. It should be noted that the shadow price does not tell how much should be borrowed nor what returns would be obtained with large additions. In the fourth period, sales and collection of accounts receivable are much greater than cash expenses. The firm can repay all outstanding debts at the commercial bank and still have about 33,000 baht left for savings. At the end of the year, the firm under the liberal approach has about 106,000 baht outstanding as accounts receivable. Net return to fixed assets, family labor and equity capital of the firm under the liberal approach is 180,000 baht in round numbers. 136 Table 5.10 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Cement Product Firm, Situation 2, Liberal Approach Uhit?Baht Period 1 2 3 4 Cash Inflows Cash Sales 182,112 116,017 176.307 159.034 Credit Sales 121,408 77,345 117,538 Interest Income Beginning Cash 10,000 Total 192,112 237,425 253,652 276,572 Cash Outflows RMa: Cash 171,096 164,049 171,713 97,789 Credit Skilled Worker 8,768 7,665 7,691 4,054 Unskilled Worker 12,305 11,707 14,547 6,231 Subcontract Worker Overhead Cost 30,463 30,081 30,587 15,336 Tax 6,677 4,254 6,464 5,831 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,950 13,950 13,950 13,950 Repayment of LTD 32,000 Interest on STDC 2,572 2,700 2,700 Total 249.259 240.278 253.652 183.891 Balance Borrowing 57,147 60,000 60,000 Repayment 57,147 60.000 60.000 Outstanding 57,147 60,000 60,000 0 Savings Deposit 32,681 Savings Withdrawal Savings Outstanding 32,681 Shadow Price 0 .09 .08 0 Net Return 180,225 Accounts Receivable 106,022 9’ I'— 50 -1 3 D II II long-term debts cSTD = short-term debts purchases of raw materials dMaximum borrowing limit = 60,000 baht 137 5.4.3 Results for Situation 3 5.4.3.1 Conservative Approach In the first period, cash inflow from sales under the conservative approach is greater than cash outflow by about 102,000 baht (Table 5.11). In the second period cash expense exceeds cash inflow because of inven- tory accumulation and reduced sales causing the firm to withdraw all money from savings and borrow around 17,000 baht. In the third period, when inventory and production are both high and when sales increase to a higher level, cash inflow is greater than cash expenses. The surplus is sufficient to repay the loan obtained in period 2 and to have around 29,000 baht left for savings. In the fourth period, when sales are still high and production is at the lowest level, cash inflow from sales is 133,000 baht greater than cash expenses providing a savings balance at the end of the fourth period of around 162,000 baht. At the end of the year, net return to fixed assets, family labor and equity capital of the firm under the conservative approach is 196,391 baht. The firm owes roughly 12,600 baht to input suppliers at the end of the year. 5.4.3.2 Liberal Approach In the first period, the value of sales of the firm under the liberal approach is less than cash expenses.requiring a bank loan up to the maxi- mum limit. Yet this borrowing is insufficient for the firm to produce enough of every product to satisfy the demand. Production is curtailed for some products. A shadow price of 100 percent for borrowed capital in this period indicates the severity of this constraint (Table 5.12). 138 Table 5.11 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: Cement Product Firm,Situation 3, Conservative Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 332,371 210,545 319.850 289.056 Credit Sales Interest Income 1,122 321 Beginning Cash 10,000 Total 342,371 211,667 319,850 289,377 Cash Outflows RMa: Cash 155,523 193,283 135,638 45,146 Credit 43,546 54.119 37.978 Skilled Worker 9,874 9,587 9,056 2,577 Unskilled Worker 13,923 16,097 15,681 3,875 Subcontract Worker Overhead Cost 33,824 43,553 31,429 8,697 Tax 7,312 4,632 7,037 6,359 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,950 13,950 13,950 13,950 Repayment of LTD 32,000 Interest on STDC Total 240,406 330,648 273,676 156,582 Balance Borrowing 0 17,016 0 Repayment d 17,016 Outstanding 0 17,016 0 0 Savings Deposit 101,965 29,158 132,795 Savings Withdrawal 101,965 - - Savings Outstanding 101,965 0 29,158 161,953 Shadow Price 0 O O 0 Net Return 196,391 Accounts Payable 12,640 aRM = purchases of raw materials bLTD = long-term debts CSTD = short-term debts dMaximum borrowing limit = 60,000 baht 139 Table 5.12 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: Cement Product Firm,Situation 3, Liberal Approach Unit:Baht Period _ 1 2 3 4 Cash Inflows Cash Sales 196,778 127,631 193,973 174,873 Credit Sales 131,186 85,087 129,316 Interest Income Beginning Cash 10,000 Total 206,778 258,817 279.060 304.189 Cash Outflows RMa: Cash 183,705 177,881 190,663 108.657 Credit Skilled Worker 9,598 8,241 8,568 4,567 Unskilled Worker 13,411 12,769 16,115 6,861 Subcontract Worker Overhead Cost 32,899 32,596 33,952 17,053 Tax 7,215 4,680 7,112 6,412 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,950 13,950 13,950 13,950 Repayment of LTD 32,000 Interest on STDC 2,700 2,700 2,700 Total 266,778 258,817 279,060 198,200 Balance Borrowing 60,000 60,000 60,000 Repayment 60,000 60,000 60,000 Outstanding 60,000 60,000 60,000 Savings Deposit 45,989 Savings Withdrawal Savings Outstanding 45,989 Shadow Price .25 .09 .08 0 Net Return 203,647 Accounts Receivable 116,582 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts dMaximum borrowing limit = 60,000 baht 140 In the second period, sales are lower than that of the first period, while the firm accumulates products in inventory. Therefore, debts out- standing at the commercial bank remain at the maximum limit and the firm accumulates inventory as much as capital permits. In the third period, sales increase to a higher level, but since products are still being accumulated in inventory, debts outstanding at the commercial bank stay at the maximum limit. Shadow prices indicate that the firm can afford to pay 36 percent and 32 percent rates of interest for additional borrow- ed money at the margin in the second and third periods respectively. Since sales are still at a high level and production drops to the lowest level in the fourth period, cash inflow from sales and collection of accounts receivable are greater than cash expenses. The firm can repay all the outstanding debts at a commercial bank and have nearly 46,000 baht for savings. The net return to fixed assets, family labor and equity capital for the firm under the liberal approach is approximately 203,000 baht. End of year accounts receivable were computed at 116,582 baht for this situation. 5.5 Comparisdn of the Basic Model with Expanded Firm Models 5.5.1 Comparison of the Basic Model with Expanded Demand Model (Situation 1) This comparison will show what would happen to borrowing, saving, lending, and net return if the firm keeps the same product line, but with the condition that demand for the product lines increases 10 per- cent across the board. From the comparison, it can be seen that the firm in Situation 1 has more savings in the first period, and therefore less borrowing in the second period (Table 5.13). In the third period, the firm in Situation 141 a we: FeuFaeu umzoegon cos: voFemq aFco on» mF N costa .qunzoe mm: FFEFF mchocFon Eaeere cog: .FFe; m ozone cmuanme we: moFea zocmgm use use .FcFmeumcoo a .Feee ooo.oe u FFeFF meroeeoe aseerze FeLonFm u 4 Fm>FFe>mecou u o Fee.moN me.emF mNN.omF omo.eFF eoo.meF omm.mmF mmF.eNF eoF.ONF e eeseem as: .e Nmm.eFF - NNo.eoF - www.mm - Nwm.NN - e dFeesFeeea apesouo< .m mem.me Nmm.FeF FN8.NN NNN.FNF mNN.m Fee.NoF - eNF.NN e - NmF.mN - mFo.mF - Fso.m - - m - - - - - - - - N - mem.FoF - eFF.Fo - mNm.mF - Nmo.FF F mmerem .N - eNN.FF - emm.m - eeF.m - Nma.F e - Nom.mm - eNo.om - oFo.NN - mFe.eN m - eNm.me - Nae.me - mom.oe - NNN.mN N - omm.mm - Fem.mm - eNF.mm - eeF.om F meroeeom emFFaazm unacF N.F - - - - - - - - e No. - mo. - mo. - No. - m so. - so. - oF. - No. - N mN. - - - - - - - F eeeFea zoeeem - - - - - - «Fe.e - e ooo.oe - ooo.oe - ooo.oe - ooo.oe mNF.e m coo.oe mFo.NF ooo.oe moF.NN ooo.oe Fem.eN ooo.oe omm.em N ooo.oe - NeF.Fm - mmF.Fm - mam.Nm - F emereeeom xcmm meosmfiuoo F.F mchoLFom .F A u s o F u 4 u eoFeea m eeFFesme N eeFFeseFm F eoFFeseFm Feeoz eFmem SFF; eeeeaeou Fees: eFmem eeF mcoFueauFm mcFm nuanced ecu unmade commmeucF "ELF; Nuance; u:mEmo.m;F eoF eczema uwz was mcFucmm .m:F>em mF.m aneF 142 1 can repay all debts outstanding from the earlier period and still have savings. This is not possible for the basic model firm. In the fourth period, the firm in Situation 1 has higher net return and higher savings, accompanied with higher debt outstanding to input suppliers, than is the case for the basic model firm. Under the liberal approach when demand increases, the firm needs to increase production in the first period and therefore has to borrow more money from a commercial bank. In the second and third periods, both the basic model firm and the firm in Situation 1 borrows from a commercial bank up to the maximum limit. However, the shadow price in the second period indicates that capital constraint is more serious for the expanded firm than for the basic model firm. In period four, the firm in Situation 1 can repay all debts outstanding at the commercial bank and have cash remaining in savings while the basic model firm cannot repay all of its outstanding debts. Since expected demand in Situation 1 is higher than that in the basic model, net return and outstanding accounts receivable of the firm in Situation 1 are higher than those of the basic model. 5.5.2 Comparison of the Basic Model with Firm Expanded Through Increased Product Line (Situation 2) Under the conservative approach it can be observed that when the firm expands its product line, savings in the first period are higher than in the basic model (Table 5.13). Therefore borrowing in the second period is less. Furthermore, in the third period, instead of borrowing some cash from a commercial bank, the firm has some cash for savings. In the fourth period, for Situation 2 there are more savings and higher net return than the basic model, yet it owes more to input suppliers. Unde exDandS 1 In the 56 under Si‘ and thei to sell all debi savings all deb and a h ”'1. and ne tlme E expan thEre Peric and | borr line 5311‘] SEC( COm bag 143 Under the liberal approach, it can be observed that when the firm expands its product line, it needs to borrow more in the first period. In the second and third periods, both the basic model firm and the firms under Situation 2 borrow from the commercial bank up to the maximum limit, and their shadow prices are identical. In period 4, with more products to sell by the firm than by the basic model firm, the former can repay all debts outstanding at the commercial bank and have some cash for savings, while the basic model firm does not have enough cash to repay all debts outstanding. The firm in Situation 3 has a higher net return and a higher outstanding accounts receivable than the basic model firm. 5.5.3 Comparison of Basic Model with Firm Expanded Through Both Increased Demand and Increased Product Line (Situation 3) This comparison shows what would happen to borrowing, saving, lending and net return if the firm expands its product lines and at the same time expected demands for its products increases. It was observed that when the firm under the conservative approach expands either by adding more product lines or by increasing demand, there is more saving in the first period, less borrowing in the second period, some saving in the third period, more saving in the fourth period and higher net return. Therefore, it can be expected that the above borrowing and saving pattern are magnified when both demand and product line are increased together. In other words, there is a higher level of savings in the first, third and fourth periods, less borrowing in the second period, and a higher level of net return in the fourth period. The firm in Situation 3 under the liberal approach borrows from commercial banks in the first period up to the maximum limit, while the basic model firm borrows around 88 percent of the maximum limit. However, 144 the shadow prices of borrowed capital in the second and third periods indicate that the problem of capital constraint is the same for the firm under Situation 3 as in the basic model firm. In the fourth period, the Situation 3 firm has some savings, while the basic model firm has none. It can be seen that both net return and outstanding accounts re- ceivable of the firm in Situation 3 are higher than those of the basic model firm. 5.6 Constraints Facing the Cement Product Firms Under the conservative approach, LP results indicate that demand is a constraint in every period. Inventory is a constraint in periods 2 and/or 3. Machine capacity is not fully utilized in any period; nor is credit from the commercial banks. Under the liberal approach, LP results indicate that demand is a constraint in every period. The firms keep some product in inventory, yet inventory is rarely a constraint. Periods 2 and/or 3 are the most likely periods when inventory may become a constraint. Machine capacity is not fully utilized in any period except the machine to produce blocks which becomes a constraint in period 3 under the situation where demand for basic product increases by 10 percent (Situation 1). Credit from commercial banks is a constraint in periods 2 and 3. However when both product mix and demand increase together credit becomes a constraint in period 1 also. 5.7 Summary of Findings 5.7.1 Level of Credit The analysis above indicates that a 60,000 baht ceiling for bank credit is enough for any firm under the conservative approach. 145 If the firm operates under the liberal approach, however, a higher credit limit would be advantageous. The above analysis however, does not indicate what that upper limit should be. It becomes apparent that if sufficient credit cannot be obtained from the commercial bank the firm should seek financing from other sources. 5.7.2 Seasonal Credit Needs Under the conservative approach, the second period is when the firm needs the most credit. Some is needed in the third period, but none is needed in the first or the fourth periods. Under the liberal approach, credit is needed in the first three periods, but is not needed in the fourth period. The need for credit is (most) pronounced in the second and third periods. 5.7.3 Rate of Interest It should be reminded that capital is not a constraint under the conservative approach, assuming that the firm pays 18 percent and 48 per- cent rate of interest respectively, to input suppliers. Under the liberal approach, capital is a constraint in that money is borrowed up to the assumed maximum for all firm situations analyzed resulting in a shadow price for borrowed money as high as 36 percent and 32 percent in the second and third periods respectively. For the case when the firm expands the product lines accompanied by an increased de- mand for all products, the shadow price rose to 100 percent in the first period for the credit limits assumed. CHAPTER 6 CHARACTERISTICS OF THE READY-MADE GARMENT INDUSTRY 6.1 Introduction The main purpose of this chapter is to describe the ready-made gar- ment industry with special attention to those aspects needed to construct the linear programming model which will be used for further analysis. The description of the industry corresponds to that undertaken for the cement product industry and includes a classification of ready-made gar- ment firms, a description of products produced, raw material used, use of labor, production, sales and other financial characteristics of the firms in the sample survey. 6.2 Classification and Distribution of Ready-Made Garment Firms Altogether there are 17 ready-made garment sample firms used in this study. When these firms are classified according to marketing characteristics, there are 8 exporting ready-made garment firms, 5 firms selling most of their products directly to final consumers (retail sales) and 4 firms selling the majority of their products through wholesalers and retailers. Henceforth, the firms which sell most of their products to final consumers will be called "D-C ready-made garment firms" and the firms which sell most of their products through wholesalers and re- tailers will be called "D-W/R ready-made garment firms." 146 147 The classification above is based on the channel through which the majority of the products for individual firms pass. The exporting ready- made garment firms will sell a large percentage of its sales to other countries. Yet some of their products may be sold in domestic markets directly to final consumers and/or through wholesalers and retailers. The 0-0 ready-made garment firms sell also some of their products through wholesalers and retailers and the D-W/R ready-made garment firms sell also some of their products directly to consumers. In other words, no firms are confined to a single market outlet. 6.3 Types of Product Produced 6.3.1 Products of the Exporting Ready-Made Garment Firm There is a wide range of products produced by this group of firms. They include products for men, women and children but most of them are produced for women. Men's products are chiefly short sleeved shirts. Children's products include shirts, blouses and dresses. A kind of pants which resemble those used by native people who live on the mountains is made for use by either men or women. There are many different pro- ducts made for women. They include short and long sleeved shirts or blouses, winter coats, short midi and maxi skirts, short and long dresses and night gowns. All these products for men, women and children have many sizes and designs. Sometimes the style or pattern is the same but different fabric or colors are used. Most of the products are embroidered. If not em- broidered, the products are dyed or painted with different colors and patterns; sometimes with different dyeing techniques. Thus, products of the same design and that use the same kind of fabric might have different 148 styles of dyeing or different embroidery works. Besides making special- ized garments for men, women and children, the firms also produce many other kinds of cloth products such as bags, scarves, hats, pillowcases, dolls, etc. These miscellaneous products are usually made from small pieces of fabric left unused from the production of men, women and children.garments. 6.3.2 The 0-0 Ready-Made Garment Firm The main product line of this group of firms is several kinds of men's shirts. These men's shirts can be classified into three groups. The first group is comprised of nondenim shirts made in several designs and sizes and most of them have short sleeves. The second group of men's is denim shirts. Most of the shirts in this group are of a cer- tain design called "safari," and therefore from now on will be called safari shirts. The last group is the locally-made denim shirts. Be- sides men's shirts, the firms diversify their production into other pro- duct lines such as pants, long skirts, short dresses, children shirts, children dresses and T-shirts. 6.3.3 The D-W/R Ready-Made Garment Firm This group of firms also produce several kinds of products, but the number is much less than those of the exporting ready-made garment firms. There are products for men, women and children. The men's products are short sleeved shirts and pants, both for work and dress. The work shirts and pants are called "farmers" shirts and "farmer" pants. The women's products are skirts and shirts. Children products can be divided into two groups: school uniforms and other garments for children. School unifbrms include shirts, pants and skirts. The other garments include 149 children's shirts and dresses. Since the products are produced from in- expensive fabric, products produced by this group of firms are considered as being of low quality (Onchan, 1980). 6.4 Raw Materials In this section, types of raw materials will be described first. Next, there will be a description of how the firm acquires the raw ma- terials and pays for them. Finally, the price variation of raw material over the year will be discussed. 6.4.1 Type of Raw Materials Fabric is the most important raw material in the production of ready-made garments. The firms use several designs and colors of fabric. Fabric prices vary widely by type of textile such as calico, cotton, linen, silk, cotton and polyester, denim, etc. Other raw materials used in the garment industry include thread, zippers, buttons, dyeing paints, dyeing threads for embroidery work, etc. 6.4.2. Acquisition of Raw Materials This discussion of the raw materials acquisition is concerned with their source and manner of payment for the acquisition. The type of data available limits the description to number of firms, rather than in terms of money. However, the section dealing with raw materials payment (sec- tion 4.3) will give some general idea on cash outflow to several sources of suppliers. For simplicity, raw materials are divided into two groups: fabric and accessories. Sources of raw materials include factories which pro- duce raw materials, wholesalers, retailers and those who order merchan- dise from the firms. 150 6.4.2.1 The Exporting Ready-Made Garment Firm 6.4.2.1.1 The Acquisition of Fabric 0f the eight exporting ready-made garment firms, six (or 75 percent) purchased fabric from wholesalers and four (or 50 percent) purchased fab- ric from retailers.(Tab1e 6.1). One firm received fabric from those who placed orders and two firms made their purchases directly from factories. The total number of firms purchasing fabric when added by source was greater than the total number of the exporting ready-made garment firms because a firm could buy fabric from one or more sources. 6.4.2.1.2 The Acquisition of Accessories All firms bought needed accessories from retailers. Five firms out of eight bought some from wholesalers and one firm bought accessories from a factory. Those who placed orders for merchandise did not supply accessories to the firm. 6.4.2.2 The D-C Ready-Made Garment Firm 6.4.2.2.1 The Acquisition of Fabric Of the five D-C ready-made garment firms, three bought fabric from factories while four bought from wholesalers (Table 6.1). The number of firms purchasing fabric from retailers was the same as those purchasing from wholesalers. None of the firms acquired fabric from those who placed orders. 6.2.2.2.2 The Acquisition of Accessories Four out of five firms bought some of their accessories from re- tailers, two bought from wholesalers and only one bought directly from the factory. 151 Table 6.1 Acquisition of Raw Materials of Ready-Made Garment Firms 'Unit3Number of Firms Number Channel Type Raw of Fac- Whole- Re- of Firm Material Firm tory saler tailer Order A) Exporting 8 Fabric 2 6 4 1 Accessories 1 5 8 O B) D-C 5 Fabric 3 4 4 0 Accessories 1 2 4 0 C) D-W/R 4 Fabric 4 O O 0 Accessories 2 2 4 O Source: Marketing Questionnaire “h C.) m fact r from rate All sories f salers. The portanc tion do them 1 both 1 Which Three trade Sale 6.2) 152 6.4.2.3 The D-W/R Ready-Made Garment Firm 6.4.2.3.1 The Acquisition of Fabric All four firms in this group purchased their fabrics exclusively from factories (Table 6.1). None of their fabric needs were purchased from retailers or wholesalers. 6.4.2.3.2 The Acquisition of Accessories All four D-W/R ready-made garment firms bought some of their acces- sories from retailers and half of them also bought from factory or whole- salers. The source of raw materials has been indicated but the relative im- portance of each source is not indicated because the available informa- tion does not show the amount or value purchased from each source. 6.4.3 The Payment For Raw Materials 6.4.3.1 The Exporting Ready-Made Garment Firm 6.4.3.1.1 Fabric For the two firms which purchased fabric from the factory, one of them paid cash for the merchandise in advance, and the other firm used both cash and credit to pay for fabricpurchased (Table 6.2). All firms which purchased some fabric from wholesalers received trade credit. Three out of the four firms which purchased fabric from retailers used trade credit. 6.4.3.1.2 Accessories The firms which purchased accessories from either factories or whole- salers indicated that they paid for all the merchandise in cash (Table 6.2). Six out of eight firms which purchased accessories from retailers 153 meFeceoFummzc mcFumxeez "moezom NF- N!— F— mmFLommouo< oFenem e z\=-o F8 mmFeommmuu< oanwd m 8-: Fm mmFeommmuu< chnmm m mcFFLoaxm F< FFeweu emeo FFeeeu emeu cmFFeme “Feweu edge FFeeeu emeu LmFemmFogz FFeweu emeu FFeeeu ewes moce>c< heaven; amass: mEeFu Fo consazuqua chcmgu FeFLmumz e...» a. F Fo mmazh wee ELF; Fo mmaxF mEFFF acmEme mueznzcema Fo mFeFLmsz :em LOF mucmexmm N.m anwF 154 also indicated that they paid for the merchandise in cash. However, two firms out of eight firms asked for trade credit from retailers. Therefore, the exporting ready-made garment firm usually asked for trade credit when they purchased fabric and usually paid cash when they purchased accessories. 6.4.3.2 The D-C Ready-Made Garment Firm 6.4.3.2.1 Fabric One out of three firms which purchased fabric from factories paid for its merchandise in advance and the other two firms paid for the mer- chandise in cash when the deliveries were made (Table 6.2). For the firms which purchased some of their fabric from wholesalers, half of them paid for the fabric in cash and half of them obtained trade credit from wholesalers. When the firm purchased some of their fabric from re- tailers, all the firms paid for the fabric in caSh and half of them ob- tained trade credit from wholesalers. Those firms that purchased some of their fabric from retailers paid for the fabric in cash. 6.4.3.2.2 Accessories Half of the firms which purchased accessories from wholesalers paid for the merchandise in cash and the other half of the firm used trade credit (Table 6.2). When the firms purchased accessories either from factory or retailers, the firms always paid cash for the merchandise. Therefore the D-C ready-made garment firms tended to pay for both fabric and accessories in cash. 155 6.4.3.3 The D-W/R Ready-Made Garment Firm 6.4.3.3.1 Fabric All the firms purchased their fabric from factories. One out of four firms paid cash for the fabric purchased while the other firms used both cash and credit for their purchases (Table 6.2). 6.4.3.3.2 Accessories All the firms which purchased accessories either from wholesalers or retailers paid for them in cash. Half of the firms which purchased accessories from factories paid cash immediately, while the other half asked for extensions for the payment. Therefore the D-W/R ready-made garment firm usually used trade cre- dit when they purchased fabric and usually paid in cash when they pur- chased accessories. 6.4.4 Percentage of Cash Purchases The second column in Table 6.3 indicates the percentage that cash purchases were of the total purchases for all kinds of raw materials. Since total purchases vary by firm, a weighted average is used to indi- cate the ratio of cash purchases to total purchases instead of using a simple average. The calculation of weights should be done by using the total purchases of each firm. But since, the information on total pur- chases were not available, weights were calculated on the basis of value of production as a proxy for total purchases. These weights are shown in column 3, Table 6.3 Although the range was from zero to 100 percent, the weighted aver- age for exporting ready-made garment firms was 47 percent of total 156 Table 6.3 Percentage of Cash Purchases of Ready-Made Garment Firms Types Percent Cash of Firm Firm Purchases Weights A) Exporting 581216 0 .18 571218 80 .36 571221 20 .08 581222 25 .22 561223 75 .07 561224 50 .03 561225 20 .04 571227 100 .04 Weighted Average 47 B) 0-0 511103 50 .08 521105 50 .20 521106 40 .51 521107 100 .07 521208 15 .14 Weighted Average 43 C) D-W/R 562101 100 .18 562102 10 .45 562103 90 .27 562104 100 .09 Weighted Average '56 Source: Finance Questionnaire and Monthly Questionnaire 157 purchases of raw materials in cash. The D-C and D-W/R ready-made garment firms averaged 43 percent and 56 percent of total purchases in cash pay- ment for raw materials respectively. This information will be used to specify the percentage of total raw material costs to be paid in cash by the firm in the linear programming model. 6.4.5 Rate of Interest Charged by Input Suppliers Input suppliers usually charged some carrying charges and interest to the firms obtaining trade credit. The rates of interest including carrying charges which were included in the purchase price by input sup- pliers are shown in Table 6.4. The term of trade credit received was from one to three months. This information will be used in the specifi- cation of rate of interest to be paid by the firm to input suppliers in the linear programming model for the cases where credit is employed for purchasing raw materials. 6.4.6 Raw Material Prices Information on fabric prices was obtained from a questionnaire ad- ministered in June, September and February (Table 6.5). Other informa- tion on prices of other raw materials was incomplete. It can be observed that for all three groups of ready-made garment firms, the price of fabric was slightly lower in September than in either June or February. A low level of demand for fabric might be the factor which explains the lower price level in September. The seasonal variation in fabric price will be reflected in the pro- duction cost per unit of output in the linear programming model. 158 Table 6.4 Carrying Charge and Rate of Interest Charged by Input Suppliers Unit:Percent Types Ra" Rate of Int - - erest and of Firm Material Carrying Charge Exporting Fabrics 53 Accessories 52 D-C Fabric 54 Accessories 89 D-W/R Fabric 47 Accessories 22 Source: Finance Questionnaire 159 Table 6.5 Seasonal Variation of Price of Fabric of Ready-Made Garment Firms Unit=Baht/Yard Type Raw. Month Of Firm Material June September February Exporting Fabric l5 l3 13 0-0 Fabric 22 22 23 D-W/R Fabric 16 14 15 Source: Marketing Questionnaire, Profitability Questionnaire and Finance Questionnaire. 160 6.5 Technology This section provides information on different types of machines, machinery requirement per unit of product, and production capacity of machinery. This information will be used to specify types of machines, coefficients of production activities, and right hand side for the ma- chinery constraint in the linear programming model. 6.5.1 Types of Machines The difference in technology used in the production of ready-made , garments may be explained by the difference in the complication of dif- ferent kinds of machines used. There were four kinds of machines in- volved in the production of ready-made garments; ordinary sewing machine, machine to make button holes, sewing machine to finish edge of the fab- ric and electric scissors. All of the ordinary sewing machines are the same, although some are operated manually while others are operated elec- trically. There are two kinds of machines to make button holes. The first is simply a button hole attachment to the sewing machine. The se- cond one is a specialized machine designed specifically to make button holes and cannot be used for any garment. Similarly there are two kinds of machines to finish edge of the fabric. That is, either an attachment to a sewing machine or a specialized machine. However, most of the firms used specialized machines in their production. Either ordinary scissors or electric scissors can be used to cut fabric. Firms producing many garments, however, usually use electric rather than ordinary scissors. 6.5.2 Machinery Requirement It can be argued that since the ready-made garment firms used several kinds of machines in the production process, they should all be specified in the linea gnly the NA< 1. Se vmiers. 1 data on llUl sewing mac mum capaC' :Mng mode 2. machine availabl the lin not all 3 oi the There: of ca out c Iabr fly“ 01 161 in the linear programming model. However, for the following reasons, only the machine to finish edge of the fabric was specified in the model. 1. Sewing machine: Most of the sewing machines were owned by the workers. The firms owned only a few machines but there was no accurate data on number of workers (especially those subcontracted) or number of sewing machines owned by workers, it is not possible to specify the maxi- mum capacity of the right-hand side of the machine in the linear program- ming model. 2. Machines to make button holes: The main reason to drop this machine from the linear programming model was incomplete data which were available on only some products. It would be inappropriate to develop the linear programming model showing machinery requirement for some but not all products. 3. Electric scissors: Electric scissors were used by the owners of the firms. Their use was not related to the use of hired labor. Therefore, the use of electric scissors was not involved in the management of cash flow of the model and could be left unspecified in the model with- out disturbing the determination of demand for credit. The information on the amount of time needed to finish edge of fabric of specific products of all three groups of ready-made garment firms is presented in Table 6.6. 6.5.3 Capacity of Machine Capacity of machines to finish edge of fabric is presented in terms of the total amount of time available to be used in each period (Table 6.7). It is assumed that the machines could work 60 minutes an hour, 8 hours a day, and 25 days a month. Table 6.6 Hmems Long Dre Men's 81 Childrel Nightgo‘ Local J Bags Famer‘ Women's School School Jean 3; Safari pants Short \ 162 Table 6.6 Machinery Requirement, Time Required to Finish Edge of the Fabric per Unit of Product of Ready-Made Garment Firms UnitzMinuteilo Pieces Types of Firms Product Exporting D-C D-W/R Women's Shirts 35 50 Long Dresses 75 100 Men's Shirts 30 50 26 Children's Shirts 17 Nightgowns 50 Local Jean Shirts 24 Bags - Farmer's Shirts 24 Women's Skirts 60 School Girls' Skirts 50 School Girls' Shirts 30 Jean Shirts 55 Safari Shirts 60 Pants ‘ 100 25 Short Dresses " 62 163 Table 6.7 Production Capacity of Machine to Finish Edge of the Fabric of Ready-Made Garment Firms Unit:Minute Types Capacity 0f Firm Per Month Per Period Exporting 36,000 108,000 D-C 12,000 36,000 D-W/R 24,000 72,000 Source: Profitability Questionnaire 164 6.6 Labor Used This section contains information on the number of days worked and employment levels for family members and hired accountants and sales workers, production workers and subcontract workers. The number of workers, number of working days per month and number of man-days worked per firm per month are not used in the construction of the model because it is assumed that employment levels are not constrained. ‘However, the reported labor wages and requirements will be used for the specification of labor cost in the linear programming model. 6.6.1 Family Members There were more female than male family members participating in the business. However, available data did not permit a detailed breakdown of activities of the division of labor according to sex. These family mem- bers performed administrative jobs including the acquisition of input, marketing output, hiring and firing workers and subcontractor agents, keeping records, managing cash flows, and performing some steps in the production process such as designing the pattern, cutting the fabric, controlling the quality of the products, etc. 6.6.1.1 The Exporting Ready-Made Garment Firm On the average, over the year there were .8 male and 1.8 female family members participating in the business each month. The number of male family members fluctuated between 1.2 males during March to May and .4 male in November and January, while the number of female family members fluctuated between 2.2 females during March to May to 1.4 females in December (Table 6.8). Table 6.8 Number, Number of Days and Number of Man-Days Worked by Family Member of Ready-Made Garment Firms Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Ave Mar A) Exporting ooooccpcnr-o I-Q'NSOQLD NNo—Q’BO LDNOOONLON FO‘Q’O‘IO‘O‘ r-N 00¢ Q'SDOONLON Fall-ONCE F-N Q’Q' LDVCONI‘C FNNPI‘O" NNF-MQ' Q’LDCOVO‘DM P0505005 NN 00¢ OLDOOOQ'Q' r-Q'LDLONN NNF-MLD \DLOCONON PNQMO‘N NNF-MLD GNOOOLOQ' plow—mo NNNQ'N QNQCO‘LDQ' r-LDQo—mc NNNQ'N O‘OCONNLD NVQI—LANO NNNLDN NNOCI-z-NOS r-NLdKéu—Cd NN 40M NNOCLDCLO gNQ'oogf; QM NNOCNI’tC gNLOKéF-‘F; NN $0M 21.1—21.1..sz Number of Days Number of Man-Days Number 8) D-C 165 NCOOLOLOO 0- [\O‘Q’NN NNMI—LO NOOONONON l- 1.0905611) NNNF-Q' NQOOONQ r- OOKOQ'O MMMNO NQOOONN F- O‘OLDQ’O‘ NMMNLO NQOOOSOSO I'- mdvgp: NNMt—LD NQOOCDNC r- mafia—LO NNMI—Q' NQIOOSDOSD F'- C0063” MMMI—Q’ NOOQ‘CQ: :— CO©®¢ MMMF-LO NGOOQ’OQ’ !— OOKDQQ MMMN‘O NQOOOQO r- CCWNQ MMMPQ’ NQOOYNSO 0- ”QMNO Nle-‘m NOODN‘OQ '— MQNOM NNNo—Q’ NQCCQNO 0- ”GMNO NNMI—LO ELLEN—£13.1— Number of Days Number of Man-Days Number C) D-W/R MQOOQI-Oi F-F-NT‘Q’MN NNMQ’N NLOOONNO u—r-LOQ'F-CDCD NNMMQ NmCCl-DIEN o—r—‘OC';T\.C";¢- MNMQ'Q NLDCOIOOLO PPOO‘LDN ”MM?” NLOOOl-OOLO c-zr—OCNLDN MMMQ’Q Nl-OCOl-OIEN v-v-OQNIO'L— MNMVQ LOLOOOLDI-DO r-F-LDLONNLD NNMMN NNOOLDIDC i-:t-LO.|\N!\.O NMQ'Q NNOCIOLOC F-F-QNNNQ NNMQ'Q NLOOOLDLDO a-o—r—«o-axtoq- NNMMN NNCOLDLOO FF‘ONNKO NN ”cm NLOOONQO épmkdggo NNQCLOLOO F-r-tONNNO NNMQ’Q ELI-21.521.51- Number of Days Number of Man-Days Number M = Male; F = Female; T = Total Man-Days ionnaire Monthly Quest' Source 166 On the average, male family members worked around 24 days a month while female family members worked around 27 days a month. Given the number of males and females and the number of days worked a month, on the average, female family members per firm averaged 48 man-days of work a month while male family members averaged 17. 6.6.1.2 The 0-6 Ready-Made Garment Firm In contrast to the exporting ready-made garment firm, the number of male family members participating in the business in this D-C ready-made garment firm was higher than the number of female family members. 0n the average, there was an average of 1.2 male family members participating in the business each month while the number of female family members average was .6 (Table 6.8). Days of work per month averaged 27 days for males and 29 days for females. Converting the number of family members and number of days worked into number of man-days, the total man-days for family members was 34.5 man-days a month and for female family members 17.5 man-days a month. 6.6.1.3 The D-N/R Ready-Made Garment Firm Ordinarily there were 1.3 males and 1.6 females working with the business each month (Table 6.8). However, in some months when production was high, the number of male or female family members increased. For example the number of male family members increased to 1.7 males and 1.5 males in June and September, while the number of female family members increased to 1.7 females in March, May, July and August. The average number of days worked a month for both male and female family members was 27. Converting the number of family members and 167 the number of days worked a month into the number of man-days worked, the male family member average was 35 man-days a month and the female family member average was 43 man-days a month. 6.6.2 Sales Workers The 0-0 ready-made garment firms did not hire sales workers and the D-N/R ready-made garment firms did not hire any sales workers during the first half of the survey period (Table 6.9). Sales workers were, however, hired during the second half of the survey period when sales were general- ly low. The exporting ready-made garment firms were the only group of ready-made garment firms hiring sales workers all year round. The num- ber of sales workers varied according to sales. There were around .5 sales workers during March to May, becoming even fewer from then to November, increasing gradually to January and February. 0n the average these sales workers worked around 20 days a month, except for November when only 15 days were worked. These sales workers might have been in- volved in the crop harvesting activities of their family. 6.6.3 Production Norkers 6.6.3.1 The Exporting Ready-Made Garment Firm The firm used an average of 289 man-days of work from production workers, both skilled and unskilled, each month (Table 6.10). Of this total 95 percent was provided by skilled workers with the remaining 5 percent being provided by unskilled workers. Therefore this group of ready-made garment firms relied primarily on skilled workers for garment production. 168 egweecewumeeo xpsueez "euczem NON l-LDF' NM wheouce: we mama we mxeeueez we man: we maneuee: we exec we geese: geese: geese: 3.1. 8 sense: geese: Leesez e5 3 geesez geeazz seesez mewugeexm A< e>< emu eon measuaeeem we mew» he eexgez mAeoucez we geesez ece mxeo we geese: mscwu newsgeo .mcexcez mewem we Leesez m.m e—eew 169 eeweeeewemoeo zpcueez “eegeem ee— em. e—p em em cm me. e—— o__ mm opp me_ we .e>< peeee< we a eem wen «mm emu em— wow wow New New cc. mmw wmm emu weeew um. map mNp mm _m em “up mew mew mm mmm vow mm_ ee—wwxmez mm mm. mop cc. N_— m__ cm mm mm mm mm mm mm emwpwxm «\3-o Au cop mm— we me me vs we pup on. we so me we .e>< _e==:< we a we mm me No me we we mep mop pm me we mm peuew N em e e e o e e o o e e e eep—wxmea No me me No me we pe me_ me_ _e me me am eeppwxm Que Am cop mm mm, mm we em. 05 mm mm mm— N__ “w. m__ .e>< peeee< we a mmm mmm mmm mmm om. com m—N mmm mmm mem mmm mmm mem peuew e. «p e mm m mm m e o pm om om ow ee_—wxm== mwm mem mam we. um. mmm «pm mmm mmm mmm mwm m—m «mm emp—wxm aewugeexm A< e>< eel see eea >ez ueo new me< wee cue xez Lm< Le: gaze: gee mxeoueez mawwm eeeagew meezuxeeex we memxeoz em___xm== ecu emppwxm we emxgoz m»mg-=mz we gensaz op.e m_nmw Duri days work 117 perce when wome During Ju man-day n numer of During Ja February Ievels it total nur that in I lower th tuted pr Thi their p1 unskill the sur 0n workerS Ski]1e( 98 in \ 66 to - bEr‘ an. 170 During March to May when production was very high the number of man- days worked by both skilled and unskilled production workers was around 117 percent of monthly annual average. In June this index rose to 126 when women's shirts (the main product line) was in full production. During July to December production was generally low, as indicated by man-day monthly indices from 47 to 83, except for October when the total number of man-days worked was around 124 percent of annual average. During January, production was 33 percent higher than average whereas February was an average month. It can be observed that while production levels in October and January were less than that from March to May, the total number of man-days worked was higher. One possible explanation is that in October and January the number of subcontract workers was much lower than that during March to May. In other words, the firms substi- tuted production workers for subcontract workers in October and January. 6.6.3.2 The D-C Ready-Made Garment Firm This group of ready-made garment firms used only skilled workers in their production during the first ll months of the survey period. Some unskilled workers were employed, however, in February, the last month of ~the survey period (Table 6.10). On the average, over the year, the firm used 62 man-days of skilled workers each month. The seasonal index of number of man-days worked for skilled workers was 95 in March, 68 in April and May. It increased to 98 in June to 166 in July and l76 in August. It dropped to the range of 66 to 75 in the period of September to November and rose to 100 in Decem- ber and further to lll in February. This worked bi producti< duction ' melae days wor Pgain,i workers Co ready-n workers worker: worker T WOrker cent a SPeCt‘ Augus- FESper with fluct on th June "Orke 171 This pattern of the fluctuation of the total number of man-days worked by skilled workers seemed to correlate directly with the level of production, except during March to May. In general, the level of pro- duction was higher at that time than in June, and at least as high as the level of production in July and August; yet the total number of man- days worked during the period was lower than during June to August. Again, the explanation may be based on a larger number of subcontract workers being utilized during March to May than during June to August. 6.6.3.3 The D-M/R Ready-Made Garment Firm Contrary to other groups of ready-made garment firms, the D-W/R ready-made garment firms relied more on unskilled workers than skilled workers. Of the total monthly average of 244 man-days of production workers employed by these firms, 64 percent was contributed by unskilled workers (Table 6.lO). The total number of man-days worked of both skilled and unskilled workers was 97 percent of annual monthly average in March, was l05 per- cent and ll6 percent of annual monthly average during April and May, re- spectively, dropped to 57 in June and rose llO percent during July to August, and fell to 79 percent to 94 percent in October and December, respectively. Above-average production was found in January and February with 116 and 126 indices for these months respectively. This pattern of fluctuation correlated directly with the pattern of production. However, on the basis of production level the total number of man-days worked in June was lower than might be expected. It can be observed from Table 6.lO that the number of man-days worked by unskilled workers are at low levels during the months when fanning 6' these mon by using worked of in other 6.6. The ever, it contract (Onchan, lhmm knu nany wor data rep that the number c WOFKEd l So hired 5 case, t the fab ed to i 172 farming activities are high, i.e., in June, November and December. During these months the firm might have resolved the shortage of unskilled labor by using more skilled workers. In those months, the ratio of man-days worked of skilled labor to unskilled workers was greater than l while in other months it was less than 1. 6.6.4 Subcontract Workers1 6.6.4.1 The Exporting Ready-Made Garment Firm The firms used many subcontract workers to do embroidery work. How- ever, it was very difficult to get accurate data on the number of sub- contract workers since the firm did not have direct contact with them (Onchan, 1980). The firms arranged for workers through agents. The firms know how many agents they had, but they did not know exactly how many workers were working with each agent. Given this difficulty, the data reported in Table 6.ll may be only rough estimates. Mead estimated that the number of subcontract workers was around five to ten times the number of workers employed in the factory. All subcontract workers who worked with this group of ready-made garment firms resided in villages. 6.6.4.2 The D-C Ready-Made Garment Firm Some firms hired subcontract workers only for sewing, yet some firms hired subcontract workers for all production processes. In the latter case, the firms specified the pattern and size of the garment and provided the fabrics to the workers. When the product was finished, it was deliver- ed to the firm, at which time the workers received their wages. 1For more details, see Mead l981. 173 eeweeeewumeeo xwgeeez ”eugeem e.N e.m e.m m. o m.N e.m N.N N.N N.N m._ m.w m.— weuew m. o o o o o m._ o e m.e o o o eeewpw> m._ e.m e.m m. e m.N m.~ N.N N.N N.m m.— m.— m._ ezew "Hengeeeeeem ¢\z-e Ne w._ o e._ N.N e. w.N N.m e o. N.F o.m o.m o.m .euew e. e. e N. e; e; e; 23:; m._ o e._ a.. e. m.N N.m o o. a.. e._ e.w e.— :zew "peeeueeeeem eA. a m.N m. a.. o.— N.— a.. _.— N. N. e.m N.e a.e m.e peuew m.N m. e._ o._ N.F e._ p._ N. N. o.e N.e m.e m.e emewpw> o o e e e o e e o o e o o ezew "eeegaeeeeem mcwueeexm A< e>< new :ee eeo >ez poo new me< wee eee he: ee< Le: gaze: sew; we eexw new case: we msewm weeaceo eeezizeeem we meexeez ueegpeeeeem we geese: Fp.o mpeeh 0n the each month sided in a workers du‘ tion of tr ably high the produ‘ The garment Producti located On each mo in vill seemed June 1 highes especi the f: IEap wWk: Uhsk. 174 On the average, over the year the firm hired l.7 subcontract workers each month of which 73 percent resided in town and the rest of them re- sided in a village (Table 6.ll). The number of reported subcontract workers during the first five months seemed consistent with the produc- tion of the firm. Yet the number of subcontract workers seemed unreason- ably high in September, October and December and was inconsistent with the production pattern of the firm during these months. 6.6.4.3 The D-M/R Ready-Made Garment Firm The subcontract workers who worked with this group of ready-made garment firms usually performed only the sewing, while the rest of the production processes were done by the owners of the firms and workers located at the factories. On the average over the year the firms hired 2.4 subcontract workers each month of which 80 percent resided in towns while the rest resided in villages. The numbers of subcontract workers hired by the firms seemed consistent with the production pattern of the firm except in June. June is one of the months when agricultural activities were at the highest level and it would be very difficult to find subcontract workers, especially in the village. Yet the information available indicates that the firm hired 4.5 subcontract workers who resided in villages in June. 6.6.5 Mage Rate Per Day of Skilled and Unskilled Workers 6.6.5.l The Exporting Ready-Made Garment Firm The average wage rate per day of skilled workers for most of the year was at least two times the average wage rate per day of unskilled workers. Skilled workers received an average daily wage of 35 baht while unskilled workers received l5 baht (Table 6.l2). 175 zeeeeeew ece zeeeeee ew meexgez eewpwxmee we eyes eeez emeee>e meeegeee eee xgeeeee cw meexeez eeP—wxm we ewes emez emeee>e x ee——wxme= we eyes ewe: u ee—pwxm we eye; emez _ eecoa cw cone. ewee—_e>< uez u .<.z eeweeeewumeec xpgeeez _ gazes cw gone. "eeeeem "eueeweme u u N. aw m_ m— up Np m— o— o_ ow ee—pwxmea mN NN NN NeN NeN ueN m..mN umN mmN NMN eew—wxm «\3ia Au <.z ee—pwxmez mm mN —m cm om <.z om me no em ee___xm e-e he .2 m— 3 5 3 mp m— m: 3 ON 3:52: mm mm mm oe oe om mN em mm . mm eew—wxm meweeeexu A< e>< new :ee eeo >ez ueo mem me< wee gee sueez msewu acesgew eeezuxeeem we mgexeez eewwwxme: eee eewwwxm we xeo gee eeea emez Np.m eweew The w labor was In July a! level bee; ing Septe level bec to be hir cultural level. workers creased The at l5 bl 0v 55 bahi ricultl nearly ber, 3 tural mOOths Still Tate , agrlc baht 176 The wage rate of skilled labor was high in June because demand for labor was high for both agricultural and small scale industry production. In July and August the wage rate decreased despite a high production level because more workers were free from agricultural activities. Dur- ing September and October, wage rate of skilled labor was at the lowest level because production level was low and more workers were available to be hired. In November and December production increased, when agri- cultural activity was also high, and wage rate increased to the highest level. During January and February, production was still high, yet more workers were free from agricultural activities; thus, the wage rate de- creased a little bit from the highest level in the previous period. The wage rate of unskilled workers was 20 baht in June and remained at 15 baht for the rest of the survey period. 6.6.5.2 The 0-0 Ready-Made Garment Firm Over the year, the average wage rate per day of skilled workers was 55 baht (Table 6.12). During June and July when both industrial and ag- ricultural activity was high, wage rate per day of skilled workers was nearly at the highest level, 64-66 baht a day. During August and Septem- ber, since production decreased and more workers were free from agricul- tural activities, wage rate dropped to 3D baht to 45 baht a day for these months respectively. During November and December when production was still at a low level and agricultural activities were high again, wage rate rose to at least 50 baht a day. Since more workers were free from agricultural activities in January, the wage rate dropped slightly to 51 baht a day. In February, high production level drove wage rates up to an average of 75 baht a day. 177 Since this type of firm rarely used unskilled labor in its produc- tion, the data collected was not enough to trace out the seasonal varia- tion of wage rate per day of this group of workers. 6.6.5.3 The D-N/R Ready-Made Garment Firm On the average, wage rate per day of skilled workers was nearly 1 1/2 times the wage rate per day of unskilled workers. On the average unskilled workers received 17 baht and skilled workers received 25 baht a day (Table 6.12). Reported wage rates per day of workers for this group of firms shows little variation from month to month. Since wage rate per day of skilled and unskilled workers of all these three groups of ready-made garment firms varied over the year, wage rate per day of skilled and unskilled labor to be used in the model were adjusted accordingly. 6.6.6 Labor Requirement The number of man-days required per one unit of output of the pro- ducts produced by the exporting ready-made garment firms does not include the number of man-days worked of subcontract workers to do embroidery work. (The project did not collect this kind of data.) However, the cost per unit of product for subcontract work in baht is presented. The number of man-days required per one unit of output for the other two groups of ready-made garment firms cover the whole production process which was done by either workers who worked at the factories or by sub- contract workers at home. Since they have already been noted there is not a separate column to show the numbers of man-days required or unit cost for subcontract workers in Table 6.13. It should be mentioned that 178 Table 6.13. Labor Requirements per Unit of Product in the Production of Some Ready-Made Garments by Type of Firm Unit:Man-Days/lOOFPieces Type of Firm Product Exporting D-C D-M/R Un- Sub-* Un- Un- Skill- skill- Con Skill- skill. Skill- skill- ed ed tract ed ed ed ed Women's Shirts 9 6 31 l 1 Long Dresses 16 1 12 33 Men's Shirts 9 4 36 5 3 Children's Shirts 4 2.5 Nightgowns lO 6 Local Jean Shirts 9 0 Bags 6 Farmer's Shirts 4 5 Women's Skirts 4 3 School Girls' Skirts 7 School Girls' Shirts 6 Jean Shirts 25 Safari Shirts 30 Pants 33 Short Dresses, 31 *Unit = baht/piece Source: Profitability Questionnaire 179 this study paid more attention to the labor required to finish a whole production process than to the number of man-days performed by individual groups of workers. 6.7 Production 6.7.1 Production Pattern of Individual Products This information on the production patterns for individual products will not be used directly in the construction of the LP model because it will determine its own production behavior. As was the case for the ce- ment product industry, diagrams were prepared to facilitate the visuali- zation of the pattern. 6.7.1.1 The Exporting Ready-Made Garment Firm The firms produced pants only in November, and October was the only month when girls' skirts were produced (Table 6.14, Figure 6.1). The production of short dresses for women occurred only in July, August and October. Excepting men's shirts and denim shirts production was at the highest level for all products during March to May and lowest during June to August. Production levels were very low during the rest of the survey period. For men's shirts, June to August and February were the periods when production was lower than the annual monthly average and was above average in other months. The production of denim shirts was at a low level at the beginning of the survey period and increased gradually toward the end of the survey period. However, none were produced during July to August and November to December. llmrwmielwh, "191w leillillIllilll mELvn. veg—Eco wvéixvemm mcwuLoaxu 93 we muUJUCLQ pea—ew>:e:~ we :oquDUOLl \23262 vw .m mice; 180 ew.eeee.emeeo a.=ueez "eeweem eeewe>e x.ae:es .eaeee oo. x me.em x.=u:es m. peeeewe :eee wew xeee. co. .em NNm em. NN Ne N. N. eN N. N. N. xeee. N.¢ NeN.N emm.. new no eoN o mN mN Na mN mN mN segue co. N. xeee. m . me meewxm .m.wwe co. .eN.. xeee. . N. meeee co. me em Nm N. N. N. m m m mmN cNm m.m xeee. m.N mm mN mN. Nm Nm Nm m. w. m. mNo N.m Nam mmem co. N. mm .e N .N m. m. m. m. .em .mm .em xeec. emN me mm we. eN om ow oe cc we mNm omm mNm m..ee oe. me Nm Nm co. «o. co. co. em. we. xeee. eN Nm o No No a o mN. mN. mN. mN. mN. mN. memmewe m.eewe..gu co. me N- we. mN m.N eNN eNN eNN xeee. oN. mN. N. omN o mN. mNm Nmm Nam Nam www.cm e.gewe..:u oo. .N. mN mN mN mm Ne. Ne. Ne. Ne. Ne. Ne. xeee. me mN N. N. o N. Na No No No No Ne Ne eczemugewz co. m. me mm Nm me. me. me me. mm. Nm. xeee. emm o mN. o N.e N.m mNm eoe.. moo.. wa.N m.e.. Noe.. ome.. mawwnm e.gesez ee. mem NNm NNm xeee. mN mN. o mN mN memmewo ewesm co. .m. cN o. .e. .e .o m.N m.N m.N m.N xeee. NeN e mNm Ne o mN mNm me. me. com com oem com mewwxm co. eNe eem eN. em em em NN we xeee. ve. Nme mNm o o mN. Nm o e No Na mN em muwwgm meeee ea. em .m. we. on. mm. .m. o o mN we. mm. m.. xeee. Nm oN mN. Nw N.. N.. mN. o o Na Na N.. we muwwsm e.gez e>< new :ee eea >ez ueo mem m=< .ee gee xez wm< cez gene: weeeewe meeeweuuwea maeww eeeeeee eeez-eeeeg ee_eeeexe eee we eeeeeeew .eeeweeeew we eeweeeeeee N.eeeez e..e eweew 181 ..e eeeeww mswww peeELew eeez-»eeem mewpeeexm esp we emege>< e.gueez .e=::< e>ee< uceewee o. «wee; we me: eeweeeeewe sec: mspeez Tea-VI L...) r .- are 'u. . w . e. :e I... f ,l.~r..vl‘ |r£f$9 uiu.I . . e . 5:... C ’SlllOwaas (- it.’ ...l.'~fv.4w V) .1... mewwxm .m.g.w meeee mmem m..ee memmege m.eege..gu mew.:m m.eewe..=u mezeeeemwz mee.;m m.eeee= memmewe.uee;m muwwxm mugwgm eeee www.cm m.eez eew :ee eee >ez eee _ “we“ wee .ee eee we: ee< eez eeeeewe The F divided rc includes 1 pants and limited p and T-shi The seemed tc in the p high dur to six m (Table 6 0f safav months a The las PrOduce Th 1‘11 larg dlrect‘ in Opp during the SL 182 6.7.1.2 The D-C Ready-Made Garment Firm The production of ready-made garments of this group of firms can be divided roughly into two groups according to output level. One group includes the production of men's shirts, safari shirts, denim shirts, pants and short dresses in large quantity and the other includes a limited production of long skirts, children's shirts, children's dresses and T-shirts. The production of products which were produced in large quantity seemed to have three different patterns. The first pattern was where, in the production of men's shirts and denim shirts, the production was high during the first five to six months, was low during the next five to six months and was high again in the last month of the survey period (Table 6.15, Figure 6.2). The second pattern was where in the production of safari shirts and pants, the production was low during the first seven months and was high during the last five months of the survey period. The last pattern was where in the production of short dresses, they were produced only during the first seven months of the survey period. The production of the rest of the products which were not produced in large quantity were scattered over the periods as can be observed directly from Table 6.15. 6.7.1.3 The D-W/R Ready-Made Garment Firm The production pattern for men's shirts and farmer's shirts moved in opposite directions. While the production of men's shirts was low during the first six months and was high during the last six months of the survey period, the production of farmer's shirts was high during the first seven months and was low during the last five months of the survey ew.eeee.umeeo ».;uee: emewe>e >.;u=es .eeeee "eeweem co. x me.em x.;eeea m. weeeewe :eee wew xeee. ee. mm. emm New xeee. e N. em em weave ee. Nee mNm e mm. mm. mm. xeee. e oN e. e e e o megwgmuw co. mmm mmm xeee. N e. o. _ memmege m.:eee..:u ee. m.m Nem Nem xeee. . m e e e e muwwem e.gewe..:u ee. eON we we Nm. eN eeN oeN xeee. .. «N o. e. e. mN eN mN memeewe “seem co. m. mNm mmN mNm xeee. m e e. : e. 3..me 9.3 co. mm. mmN .m. we we. we em em e me mN me xeee. .N ow Ne Nm e. NN eN eN eN e m e e meeee oe. N.. me. me e .m NN .m .N. we me. me. me. xeee. ee em we eN e on Nm em em Ne mN eN mN mewwgm eeee co. NeN com eeN Ne em. mm m m N. xeee. eN em mm mm .N we eN N N m mew.gm .Lewem ee. .. we . mm .m we mm em. N.. mm. eN. N.. em. xeee. em co. on am we Ne em cc. we. .N. m.. Ne. Ne. maewzm m.ee: e>< new :ee eee >ez wee eem mm< .ee see we: mm< we: sweet eeeeeee meeewenuwea me.w «seawew eeez-»eeea uuo esp we mueeeewe .e:e.>.ee. we eewueeeewe N.eeeez m..e e.eew 184 N.e eeeeww mawww weeELeo eeez-»eeem ole enu we emene>< ».neeez .e::e< e>en< weeewew o. emeen we me: :ewweeeeww >.neeez zen: mnueez mugwnmuw memmewa m.eewe..nu meewem e.eeee.wee memmenn ewenm . mewwxm meen -z..:.,-.l:.s.. .ruuuHHHMJ mecew an l i . 3.. ..nm :eee a j 3:5 .288 33% Jilin]! menwnm m . :ez new new eea >ez woo eem rm=< .ee new me: new we: neeez weeeenw T85 period (Table 6.16, Figure 6.3). The production of student-related pro- ducts, such as school girls' skirts, school girls' shirts, and students' uniforms, occurred only in the first half of the survey period. As was the case of men's shirts, the production of women's shirts was high to- ward the end of the survey period. Actually, the firm produced women's shirts only during December to February. The production pattern of other products can be observed directly from Table 6.16. 6.7.2 Value of Production Information on the value of production is not used directly in the construction of the model because the model generates its own product flow. Yet the value of production is used to figure out the assumed value of initial cash on hand by the firm at the beginning of the first period. The annual monthly average of value of production of the three groups of ready-made garment firms are reported in Table 6.17. 6.7.3 Nonallocatable Costs of Production Besides raw material costs, labor costs, interest cost, and taxes, the firm had to defray other expenses, such as electricity, gasoline, gas, water, food expenses for those workers who ate at the firm, insur- ance expenses, sale expenses, office supply expenses, etc. These costs were allocated to individual products by weighting the annual total costs accordingly to the respective value of production for individual products and then converting them to unit costs. These costs per baht of production value of the three groups of ready-made garment firms is shown in Table 6.18. This information is to be used as one of the com- ponents in the LP model. 186 emene>e ».;wees resecm ew.ee=ewume=c >.neeez “eeweem on. x :e.ueeeene x.nwees mw ueeeese neee new xeee. oe. .mm mmN emm .mN xeee. mN ¢.. ON co. mN wenuo cc. mm... xeee. cu. m manewwen m.ueeeeum co. Nm Nm NmN Nm xeee. . m m o m m mewwxm .m.w.w oe. NNN NNN .N. .N. NNN .N. xeee. v o. e. N N o. N mewwnm .m.www co. e m mN mm Ne Ne. Nm. Ne. mNN ee. co. Ne. xeee. mm N m m. oN on Na em Nm mN. .w .N Na muwwnm e.geswew co. mN me xeee. m oe eN memmewo m.eewe..nu co. m.. xeee. Ne. m mawwnm m.:ewe..no cc. ¢.N ewe xeee. .mm. o N e o . muwwxm m.eese2 co. m.N mN. on. co. co. mNm xeee. m e v o m m m .. meeew co. Nem NNm mmN mm. mm. NeN N. N. . Nm N. xeee. m. on No Ne wN NN we N N o e. N o menwnm m.ee= e>< new new een >ez poo mww me< .36 :ee mm: we< Le: nueez ueeeeww eeNeonawez . wEeww eeegeee eeez-Neeex mwz-e eee we meeeeewe .eeew>.ee_ we eeweeeeeee Nweeeez e..e eweew .3 : c2 I'll 11111.11" l'l‘lllll _ m.e eeeeww msgww peeaneu eee21>eeem w\z-o ene we emewe>< >.necez .e:=e< e>en< uceewew o. emeen we me: eewueeeeww N.np:ez zen: mnpee: 187 I; " 5.1....12Dv6- U. .N.}. ...I}. .trii: ~:I~€le maeewwee e.eeeeeem meewem .ewewe muwwnm .m.www mewwnm m.wesnew memmenn m.eeee..no mugwnm m.:ese.w:o mwwwnm m.eeEez mewwxm m.eeaez mueew eeewem e.eez eee. .ea :ee Ne: ee< we: eeeeeww 188 Table 6.17 Monthly Value of Production of the Ready-Made Garment Firms Type of Firm Month Exporting D-C D-W[R March 165,523 33,012 33,870 April 171,296 26,882 36,123 May 162,973 29,518 42,545 June 184,395 21,930 56,685 July 76,477 30,420 33,917 August 75,352 27,400 32,987 September 66,052 16,820 46,411 October' 91,548 16,120 31,699 November 45,923 11,670 30,886 December 55,349 32,960 35,878 January 141,539 43,220 50,540 February 153,407 32,740 46,970 Average 115,819 26,891 39,876 189 Table 6.18 Overhead Cost per One Baht of Value of Production of Ready- Made Garment Firms Type of Firm Firm Overhead Cost A) Exporting 581216 .0185 571218 .0465 571221 .0085 581222 .0288 561223 .1193 561224 .1364 561225 .0876 571227 .0640 Average .0637 B) 0-0 511103 .0455 521105 .0563 521106 .0425 521107 .0091 521208 .1031 Average .0513 C) D-W/R 562101 .0569 562102 .0715 562103 .0435 562104 .0837 Average .0639 Source: Profitability Questionnaire 190 6.8 Sales This section contains the information on gross sales, sales and in- ventory patterns of individual products, output channels, percentage of cash sales, and prices of products. 6.8.1 Gross Sales As was mentioned in Section 3.7.1, gross sales was computed as the summation of quantity sold times cash price of every product in every period. The information on gross sales is not being used directly in the construction of the model. However, it provides some idea about what would likely be the pattern of cash inflow into the firm in each period. One should be reminded that some of the sales include credit sales. The deliveries of the products may have been made yet the firm may not have received cash from the sales until a later period. In other words, if there were some credit sales, gross sales might overestimate cash inflow into the firm for a particular period. 6.8.1.1 The Exporting Ready-Made Garment Firm The annual monthly average of gross sales of the exporting ready- made garment firms was slightly less than 116,000 baht (Table 6.19). Seasonally, gross sales were highest during March to June, averaging about 140 percent of the annual monthly average. July to December sales were light, dropping to around 38 percent to 64 percent of annual monthly average, excepting October when gross sales were 20 percent above average. Sales increased sharply to around 120 percent to 130 percent of annual monthly average again during January and February. Given this pattern it could be expected that the firms would have adequate cash during the first four months of the survey period. 191 Table 6.19 Monthly Sales of Ready-Made Garment Firms Type of Firm Exporting D-C D-N/R Month Sale fivgf Sale fivgf Sale ivgf March 162,776 140 18,973 85 32,970 95 April 163,733 141 28,345 127 32,790 94 May 159,439 137 23,388 104 40,226 115 June 172,510 149 17,570 78 33,359 95 July 74,758 64 21,961 98 30,584 88 August 73,633 63 20,181 90 29,654 85 September 52,051 45 14,735 65 40,818 117 October 139,227 120 12,495 56 32,979 95 November 44,585 38 11,364 51 32,214 92 December 58,688 51 31,110 139 27,611 79 January 141,003 122 39,040 174 45,410 130 February 152,927 132 29,200 130 .39,209‘_ (.113 Average , 115,944 100 22,365 100 34,819 - 100 Source: Monthly Questionnaire a% of Ave. = percent of annual monthly average. 192 6.8.1.2 The 0-0 Ready-Made Garment Firm Over the year, gross sales of the 0-0 ready-made garment firms averaged 22,365 baht per month (Table 6.19). Above average gross sales occurred during April to May, and December to February, especially during December to February when gross sales were at least 30 percent above average. For the rest of the survey period, gross sales were from 51 percent to 91 percent of annual monthly average. Therefore it could be expected that the firms would have sufficient cash during the last quarter of the survey period. 6.8.1.3 The D-W/R Ready-Made Garment Firm Over the year, gross sales of the D-W/R ready-made garment firm averaged 34,819 baht per month (Table 6.19). May, September, January and February were the four months when gross sales were at least 115 percent of the annual monthly average. For the rest of the survey period gross sales were from 79 percent to 95 percent of annual monthly average. Cash inflow for these firms seemd to distribute quite evenly over the year. 6.8.2 Sales Pattern of Individual Products Sales seasonality of individual products will provide two important kinds of infOrmation needed for the construction of the LP model. First, it indicates expected demand for individual products in each period. Second, when sales and production of individual products are compared, it will provide information on size of inventory and inventory patterns of each product. 193 6.8.2.1 The Exporting Ready-Made Garment Firm Quantity sold of each product is shown in Table 6.20. Figure 6.4 was developed by using information from Table 6.20 in order to facili- tate the visualization of sales pattern of each product. For the products which the firm did not produce and sell in large quantity such as pants, girls' skirts, and short dresses, the timing of production and sales were the same. That is, the sales of pants and girls' skirts occurred only in November and October respectively, and the sales of short dresses occurred in July, August and October. For the rest of the products which were produced and sold in large quantity, sales of the products, except men's shirts and denim shirts were at the highest level during March to May, were at a lower level during June to August and were at the lowest level during the rest of the survey period, September to February. For men's shirts, sales were high during March to May and October to January. Unlike the sales pattern of other pro- ducts, sales of denim shirts were at a low level during the first 10 months and were at a very high level during the last two months of the survey period. 6.8.2.2 The D-0 Ready-Made Garment Firm Quantity sold of each product in each month is shown in Table 6.21. There seemed to be patterns of sales of the products which the firms produced and sold in large quantity, such as men's shirts, denim shirts, safari shirts, pants and short dresses. For men's shirts and short dresses, high levels of sales concentrated during the first half of the survey period. For safari shirts and pants, high levels of sales concen- trated during the last four months of the survey period. Unlike other 194 ewweeeewemeec a.nuee= emewe>e ».nuees rmeeee ”eeweem co. x me.em N.nuees m. ueeeewe neee new xeee. co. eNm w.m ow. .N mN. o N. N. m e m e xeee. N.wNw emN.N ewm.. Nwe om Nmm o mN mN mm NN NN NN weneo co. eON.. xeee. e.m ww meewxm .m.w.c oe. eoN.. xeee. a.. N. meeew eo. mw wm Nm N. N. N. N m m mmN eNm m.m xeee. e.m.N we mN mN. Nm Nm Nm m. m. m. mNm N.w New mmem co. N. mm Nm N NN N. N. N. m. Nwm Nwm Nwm xeee. m.mwN ww Nm .m oN mm .m .m .m mw omm emm emw m..ee co. ow e Nm Nm e e we. we. we. we. we. we. xeee. o.mN Nm e No Ne e o mN. mN. mN. mN. mN. mN. memmewo m.eewe..no oo. mN m Nw. e «N eNN eNN eNN eNN xeee. m.ee. mN. e. omN. o . mN. mNm wwm wmm wmm muwwnm m.:ewe.wnu ee. eoN mm mm o mm oe. mm. mm. mm. mm. mm. mm. xeee. e.Nm mN N. N. e N. Ne em em em em em em eezeeeee.z co. e m. e ww mm mm No. No. mmN .m. mm. Nm.. xeee. N.w.m o mN. o N.w N.w N.w Nmm Nam N.w.N Nmm.. me.. omw.. muwwnm m.:ese: eo. mwm e NNm NNN . xeee. m.NN mN. e mN mN memmewe .eenm ea. c me. NN e N. w mm mm m.N m.N m.N m.N xeee. m.mNN o mNm Ne o NN .. mm. mm. com com com com menwxm co. me Nom e e Ne on e e .e mm MN mw xeee. ..No. wa mNm e e co. Nm o o No Nw mN om muwwnm eeee ee. mm Ne. mN. we. .w. .N o e we wN. mm. mm. xeec. N.cN Ne m.. Nm wN co. on e e No Nm N.. we mwnwnm m.ee= .e>< new .eee eeo >ez poo eem. me< .ee see New nm< Le: meeewwuewez peeeeww me.w eeeaeee eeez-Neeee ee.eeeexe eee we we.em N.eeee= eN.e e.ee. w.m ewemww mswww wceewew eeezqaeeez mewwweexw enw we emewe>< x.nn=e: .e::=< e>en< weeewew o. wmeen we ewe: me.em :en: mnwee: 195 mwwwxm .m.w.u eweew mmem m..e: meemewo m.eewe.wnu eewwem e.eewe..ee E . _ . 3.309...me wwwwnm m.eese: memmewe wwenm -- . eewwwm . eewwem eeee - ewewem e.eez new :ee eee >ez woo — eem me< .ee :ee Ne: we: we: nwee: . weeeeww product! and the were 00' example childre! August. directl. 6.22. firms p Product high du months the fir survey Quarter Februar Skirts, April t d1rectl Ir 501d. maleun 196 products, sales of denim shirts were high during the first two months and the last month of the survey period. Sales of other products which were not produced and sold in large quantity were irregular. For example, sales of long skirts were high during March to May. Sales of children's shirts and children's dresses were high during July and August. Sales of patterns of the rest of the products can be observed directly from Table 6.21 and Figure 6.5. 6.8.2.3 The D-W/R Ready-Made Garment Firm Quantity sold of each product in each period is shown in Table 6.22. Farmer's shirts and men's shirts were the products which the firms produced and sold in large quantity. Sales patterns of these products moved in opposite directions. Sales of farmer's shirts were high during the first seven months and were low during the last five months of the survey period, while sales of men's shirts were low during the first six months and were high during the last six months of the survey period. Sales of women's shirts occurred only during the last quarter of the survey period. Sales of pants were high in June and February. Sales of student-related products such as school girls' skirts, school girls' shirts and students' uniforms concentrated during April to August. Sales patterns of the other products can be observed directly from Table 6.22 and Figure 6.6. 6.8.3 Inventory Pattern of Individual Products Inventory is the difference between quantity produced and quantity sold. Cumulative inventory is the summation of monthly inventory. The maximum level of cumulative inventory of each product is used as a proxy 197 ewweeeewweeec N.nw:e: eOewe>e m.nwees .eeeee "eeweem OO. x me.em :.nw:ea m. weeeewe neee wew xeee. OO. OON wOm N.w ON xeee. N.O N. ON wN w wenwO OO. wa O OO ONN O mw. mw. mw. xeee. O.m O. O m O. O O O m mwwwnmiw OO. OOO OOO xeee. O.N N. N. memmewO m.:ewe..nu OO. OON OO. OO. O O OON O OON O OON xeee. O.. N . . . O O w O N O N mwwwnm m.eewe..nO OO. NN. .N .N NN. wwN OON OON xeee. 0.0 N. N N N. wN ON ON memmewO wwenm OO. ON. NON Omw NON xeee. w... e e. m. e. 838.. eeen OO. OON OOm Om. ON. OO. OO OO OO O ON ON ON xeee. 0.0N Ow OO Om wN ON O. O. O. O O w w mweew OO. wN. wO. wm NN .N mO. NO OO. OO wO. Om. OO. xeee. 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O wwwwnm e.ge: .e>< new new eeO >ez weO eem Oe< .ee new we: we< we: nwee: weeeeww new.w eeeewee eeez-weeem wwz-e eee we ee.em N.eeee= NN.e ewee. 200 e.e eweeww Oswww weesweO eeezuaeeew ON3-O enw we eOewe>< m.nw:e: .eeec< e>en< weeewew O. wmeen we ewe: me.em wen: mnwee: 1.1 Oswewwea m.weee=wm www.8m .e.w.e mewwem .e.w.e mwwwnm m.weEwew eemmewO.m.=ewe..nO mew.em e.eewe..ee mwwwnm m.eeeez mwwwxm m.eeee: mweew eewwem m.eez eew eeO eeO >ez qu Oe< .2. eee me: .~ wmm we: eeeez weeeeww for the space 11 1h carried dresses For the of inve survey the las Figure 11 firms 2 However her (T; T-shir' 1nd tn 0f the to Decl Produc Survey 201 for the maximum inventory space of the product. This maximum inventory space is used as one of the constraints in the linear programming model. 6.8.3.1 The Exporting Ready-Made Garment Firm There were five products out of 13 products for which the firm carried no inventory during the survey period. These products were short dresses, children's dresses, bags, pants, and girls' skirts (Table 6.23). For the rest of the products, except men's shirts, the accumulation of inventory was concentrated during the first seven months of the survey period. The accumulation of men's shirts was concentrated during the last five months of the survey period (see also Table 6.26 and Figure 6.7). 6.8.3.2 The D-C Ready-Made Garment Firm These firms carried inventory of all the products produced. The firms accumulated pants in inventory nearly every month over the year. However, the firms liquidated many of the pants from inventory in Novem- ber (Table 6.24). For the rest of the products, except safari shirts and T-shirts, the accumulation of the products in inventory concentrated dur- ing the first six months of the survey period. The firm liquidated some of the denim shirts and children shirts from inventory during September to December. For safari shirts and T-shirts, the accumulation of the products in inventory concentrated during the last six months of the survey period (see also Table 6.26 and Figure 6.7). 6.8.3.3 The D-W/R Ready-Made Garment Firm Student's uniforms and pants were the two products for which the firm carried no inventory (Table 6.25). Women's skirts, children's 202 ewweeeewwmeeo :.nwee: .Nwew:e>e. e>.we.:§=e O. weeeewe neee we eew. eeeeem en. "eeweem n .me.em eee eewweeeewe eee:wen eeeewewwwe enw m. weeeeww neee we eew. wmwww enwe N..m.- O.Nm.- m..w.- O.Nw.- N.Ow.-. m..O. m..O. m..O. O.Nw. 0.00 O.Nw 0.0 O.m N.. N.m O.wmm- O O 0.0w O.Nw O.Nw O.Nw wenwO O mwwwxm .m.w.O O O Oweew O O O O O O O O O O O O O O O O O O O O O O O O. OOeO m.OO. m.OO. m.OO. m.OO 0.00 w.ON 0.0N 0.00 N..O 0.00 0.0N 0.0N O O 0.0N m. O. w.O w.O w.O N.. 0.0N O 0.0N m..eO O O O O O O O O O O O O O O O O menmewO m.eewe...nO O... 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Inventory of Individual Products of the D-C Ready-Made Garment Firms Table 6.24 ieces P Unit Month Product Apr May, Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 203 OQOOCV N mmoccl-OOQ’ CQCOOQ‘ON Q'l-OQQ’QQNQ' a: N C l-' P F COCO VON mFNQOPNN m l— O F- F P OQOOQQZON Nowgii—oo PIN CPI- F- I—Dl Q'QCCONON O mammogmoow P P VOCQNQ’N OOOQ’O COLDNDNNwOQ'NN 1.0 105 :— P61 P I 1.0 OO O éOOG OOO ODNO‘ COCO. (“PONON Cacacac: maes:. e>.we.:see m. weeeeww neee we eew. eeeeem en. "eeweeO n .me.em eee eewweeeewe :eezwen eeeewewwwe enw m. weeeewe neee we ee.. wmwww en.e P N.wO N.OO O.Nm 0.0N 0.0N N..m O.N. 0.0~ wenwO O O Oswewwea m.weeeewO ..- w.N ... N.- m.. m.. O.N- m.. m.. O..- O m.. mwwwwm .m.w.O 0.0N O.NN O.N. O.N. 0.0. 0.0 O.N- 0.0 0.0 O.N 0.0 0.0 mwwwnm .m.w.O 0.00 0.00 0.00 O.mO O.NO O.NN O.NN N.OO O.NO w.O N.w O O O O.N O.. N.w m.O m.w m.O. 0.0w N.w N.w O mwwwnm m.weswew O.N. O.NN- 0.0 O.NN- memmewO m.:ewe..nO 0.0¢. 0.0. O 0.0. mwwwnO m.eewe...nO m.O m.O O.N O.m N.N O.N mwwwnm O.wesez O.N- O. 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Ow.O- OO.. mO.N mO.N mO.N O Om.m OO.. NN.w mweew OO.N ON.. OO.. O O..- ON.. mN.- ON. ON.. ON. ow.w .O.m mO.. mwwwnm :eeO mO.N mO.m mO.N .N. .N. ON.. ON.. Om. Om. O mwwwnm .weweO NO.N. NO.. NN. ON. OO. mO. O Om.N NN. .O.. OO. NO.. O0.0 www.nO m.ee: e-.. a O mww.wO .m.w.O O Oweew O mOeO NN.O wO.N mO. NO. NO.. NO.. NO.. w.. wO.N wO.N m..eO O memmewO m.Oewe..nO OO. wO.N O..m O..m O..m mwwwnO m.eewe.wnu ON.O N N N N N N 2.33%.: ON.Nm mO.. OO. OO. NN.O NO. O... mwwwnm "....552: O OemmewO wwenm mw.m mN.- OO.N wO.N wO.N mwwwxm OO.N N. www.nO eeeO Nw.O Om.. O... O..N Om.N mwwwnm m.ee: Oewwweexw .< e>< new :eO eeO >ez weO seem Oe< .eO eee Omar, OOO: we: 5.5: 838.. mew.w weesweO eeexixeeew we eOewe>< N.Owee: .e::ee. N.nw=e: we ewwez ON.O e.ne. A) Expertir Ian‘s St Jean Sn Skirts Short 3 women's Sn‘rt hiqncgo Chi‘dre Shirt Cbi‘drs ‘1 .1 «PBS: 30115 Skirts Short Chlid! 5011 Chl‘di 3reg T-Shil Cl D-d/Q Ehi‘d '- - u thig Girls Glrls Smce \l‘. Sour 206 Month Product C. C 3 Mar Apr May Jul Aug ,Sgp Oct Nov Dec Jan 1 A) Exporting Men's Shirts — Jean Shirts Skirts Short Dresses Women's Shirts Nightgowns Children's Shirts Children's 0011:5583 H d w — Bags Pants Girls' Skirts a) D-C Men‘s Shirts A _ L Safari Shirts Jean Shirts Pants Skirts Short Dresses hild ' cw??? "1 - Children's ossss —— T-Shirts C) D-H/R Men's Shirts fl _ Pants Women's Skirts Women's Shirts Children's Shirts Children's Dresses Farmer's Shirts __ Girls' Shirts Girls' Skirts Student's Uniforms Source: Calculate from table~6.26. Months When Inventory was at Least 10 Percent Above Annual Monthly Average Figure 6.7 207 shirts, children's dresses, and school girls' skirts were the products which the liquidations were greater than the accumulation. In other words, the net accumulation of inventory of these products were negative. Some of the amount sold were withdrawn from inventory carried over from the previous year. The liquidation of the products concentrated during September to November. For the rest of the products, the accumulation of farmer's shirts and school girls' skirts in inventory concentrated during the first five months of the survey period and the accumulation of men's shirts and women's shirts in inventory concentrated during the last four months of the survey period (see also Table 6.26 and Figure 6.7). 6.8.4 Output Channels and Implications for Cash Inflow This section tries to identify what the important channels of ready- made garment products are, as well as the content of cash sales, credit sales, and down payments of each channel. This information is not used in the construction of the linear programming model. Yet it provides some clues about cash inflow into the firm through each channel. As was the case for the discussion of the acquisition of raw materials, the pre- sentation is in terms of number of firms, not in terms of monetary values. Besides selling products in domestic markets directly to consumers, through wholesalers and retailers, some group of ready-made garment firms sold some of their products to foreign export markets (Table 6.27). For each channel the sales transactions may be classified into 3 types: cash, combination of cash and credit, and down payment with cash on delivery. Cash means the buyers paid cash for the full value of the product purchased at time of purchase. Cash and credit means that the ZCNB ew.e=ce.wme=O Oewwexwe: Neeweem v—MNN PP MNNNF- NV.— F-PNNP MNPFNP PP.- PQ'NNo—u— MNI-v—NI- mum—m ”NNN—II- mmcv-Nv— MVMF—M ”Kaine—— mwueeeww O.weeeewm new.em e.eewe..ee mew.em e.ee2e3 eewwem e.weewew new.em e.ee= w u Ewww we wensez .ewOH "ON3uO NO eewwem m.eewe..ee Oweew OemmewO eewwem .wewem eewwem eeee mewwem e.eez O u Ew.w we wensez .ewe» "Ono .O m..eO OOeO mwwwnO O.wewe..ne mwwwnm m.ee: mwwwnm m.eeee3 memmewO O u Ewww we wenE=z .ewe. "Oewwweexm .< eer + eeee e.eewe eewe smeu ::eO + nmeu w.Oewu OOMO ezeO eeee game eweewe eewe eeee ::eO + nmeu e.ewwe eeee geee wwerO LO—pcuwx we.eme.enz wesemeeu .eeeenu eewweq Iwz Ew.w we .ez Oeeee -eww Ew.w we .ez wueeeww Oswww weesweO eeezuxeeew we weesxew we ewewwew One .eeeenO weeweo NN.O e.neN 209 firms provided some trade credit to buyers. The buyers paid for some of the full value of the merchandise in cash on the purchased date and paid for the rest later. The down payment with cash payment on delivery is self-explanatory. 6.8.4.1 Output Channel In terms of number, consumer, wholesalers and export are the main channels of the exporting ready-made garment firms. Consumers were the most important channel of the D-C ready-made garment firms, and whole- salers and retailers were the most important channels of the D-W/R ready-made garment firms (Table 6.27). 6.8.4.2 Implication on Cash Inflow 6.8.4.2.1 The Exporting Ready-Made Garment Firm All the sales directly to consumers were made in cash. Most of the firms which sold some of their products through wholesalers and retailers provided trade credit to both wholesalers and retailers. The firms usually asked for some down payments from buyers when they exported pro- ducts to other foreign markets. Therefore, the more the sales were made directly to consumers and/or to the export outlets, the higher the level of cash inflow into the firms. 6.8.4.2.2 The D-C and D-W/R Ready-Made Garment Firms Marketing channels for these firms had very little impact on the inflow of cash into the firm since all the sales that were made directly to consumers and through wholesalers were made in cash and very small number of firms provided trade credit to retailers (Table 6.27). 210 6.8.5 Credit Sales The previous section indicated that the D-C and D-W/R ready-made garment firms rarely provided trade credit to their buyers, while the exporting ready-made garment firms provided some trade credit to the wholesaler and export customers. This section presents the share of total sales that were in the form of credit. This information will be used in the LP model specification for the combination of credit sales and cash sales which affected cash inflow into the firms as well as de- mand for credit in the construction of the model. In this presentation, credit sales as a share of total is computed for all firms which amounted to an average weighted by the total sales of each firm. For exporting firms 22 percent of total sales were credit sales, and 13 percent and 9 percent of total sales of the D-C and D-W/R ready-made garment firms were credit sales respectively (Table 6.28). Therefore, the demand for credit of the exporting ready-made garment firms appears higher than for the other two groups of ready-made gar- ment firms. 6.8.6 Prices of Product This section describes the seasonal variation in the prices of a specific product over the survey period. This information will be used in the specification of prices for specific products in each period in the linear programming model. Price of products produced by the exporting, D-C and D-W/R ready- made garment firms are reported in Table 6.29. As was the case for the cement product firms, prices reported here are weighted average prices. Since the weights, i.e. size, design and 211 Table 6.28 Trade Credit Provided by Ready-Made Garment Firms Percentage of Credit Sales to Type of Firm Firm Total Sales Weights A) Exporting 581216 5 .21 571218 30 .35 571221 20 .07 581222 35 .22 561223 10 .07 561224 10 .02 561225 20 .03 571227 0 .04 Weighted Average 22 B) D-C 511103 0 .07 521105 10 .21 521106 20 .49 521107 0 .07 521208 10 .16 Weighted Average 13 C) D-W/R 562101 40 .17 562102 5 .43 562103 0 .32 562104 0 .09 Weighted Average 9 Source: Finance Questionnaire and Monthly Questionnaire 212 .eeNee wee eewwwe ewweeeewwmeec x.nwee: "euweeO OOO meew.e= O.weeeewm OOm OOm .OOm OOm OOm OOm www.3O .m.w.O OO. OO. OO. OO. OO. OO. OO. «wwwnm .O.w.O OO. OO. mO. 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OwwwnO :eeO ON mm OO NO NN ON Nw Nw Nw www.nO m.ee: Oe.eweexe w< I‘ll,l eew 5.. wee can to New ease .2. :12. we: LN< we: weeeeww euewONwzeONwwcz Oswww weeeweO eeeziNeeex we Oweeeeww we meewww ON.O e.new 213 material used, changed over time, it was impossible to detect seasonal. price variations of a specific product. However, there was evidence that the firms kept the price of the product of the same design, material and size constant for a period of time or for as long as the supply of a particular garment lasted. 6.9 Financial Characteristics This section contains information on outstanding short-term and long-term debt at various sources, assets and rate of interest paid to lenders. The information on long-term debt will be used later in the research to calculate the principal repayment of long-term debt as well as the interest on outstanding long-term debt. They represent financial com- mitments of the firm which also seem important; therefore, they are specified in the linear programming model. The information on debt outstanding at the commercial bank for both short-term and long-term (loans) is used to specify the size of loan the firm is able to borrow from the commercial bank. The information on current assets and current liabilities is used to provide guidance for specification of the constraint for borrowed money in each period. The information on fixed assets and equity are presented to further describe the financial structure of the firm. Information on the rate of interest is used directly in the construc- tion of the model to calculate interest payment in each period. 214 6.9.1 Debt and Assets Total investment or total assets of the D-W/R ready-made garment firms was around 3 times and 4 times the total assets of the D-C and the exporting ready-made garment firms respectively (Table 6.30). Whereas 80 percent of the total investment of the D-C and D-W/R garment firms were in the form of fixed assets, only 60 percent of the total invest- ment of exporting ready-made garment firms was in the form of fixed assets. The ratio of total debt/total assets indicates that 35 percent, 49 percent and 57 percent of total investment of the D-W/R, D-C, and ex- porting ready-made garment firms respectively were financed by borrowings. The ratio of long-term debt/total debt indicates that while 80 percent of total debt outstanding of the D-W/R ready-made garment firms was long-term, around 70 percent and 40 percent of total outstanding debt of the exporting and the D-C ready-made garment firms were long- term. Most of the long-term debt of the exporting and the D-W/R ready-made garment firms was outstanding to the commercial bank, while most of the long-term debt of the D-C ready-made garment firms was outstanding to friends and relatives. In other words, excluding equity capital, the commercial bank provided the most important source of long-term capital for the exporting and D-W/R ready-made garment firms, while friends and relatives were the most important source of long-term capital for the D-C ready-made garment firms. The ratio of short-term debt/total debt indicates that 60 percent of total debt outstanding of the D-C ready-made garment firms was 2155 we wwee e ewe: Oewweweew enw emeeeen Oewe..=n eee use. we .eeeeewmew O.weew enw ee.e> enw wweeew we: ewe Oswww enw we eEeOe ewweeeewwmeeo ee:e:.w "eeweem OO. O.. NO. OON.wmw OO NN0.0e. Ow eeee.ON NN Oe.e..ee eON.N.. e. eem.ee we eN.m.ww .w eeee .wwv Oeeem< eexww eem.eeN ee. Nee.NO ee. .ON.NN. ee. .eee. OOm.eN Om Nee... wN OOO.ON O. .e.weee= 2e: ONN.NO ON eeN.NO .O ONO.we OO eeeeewe “wweeeeee. eON..N em eee.e. ON NOO.N. O. e.ee>.eee¢ Oeeeeeew (O. OweOO< weewweu ee.e> N ee.e> w ee.e> N «NO-m e-e Neweweexe Ewww we emah OEw.w weeEweO eee:-»eeew we eweweewwm OweOOeO ON.. 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The r gmnent f“ rate of 11 shown in ' from sect comes frc Cas the so-c the patt selling cash cu: aPproac Table 7 are sho 7.2 gr II firm t. appTOe Under 228 7.1.4.4 Interest Paid and Interest Received Activities The rate of interest per period of each of the basic ready-made garment firms paid to the commercial bank and input suppliers, and the rate of interest per period the firm receives on its savings account are shown in Table 7.6. The information on rate of interest paid is derived from sections 6.4.5 and 6.9.2, and rate of interest received from savings comes from the discussion in section 4.2.3. 7.1.4.5 Coefficients for Production, Cash Selling and Credit Selling Activities in Cash Flow Constraint Cash flow behavior for the basic firm differs according to whether the so-called conservative or the liberal approach is followed because the pattern of cash payment for raw materials and cash inflow from cash selling and credit selling differ. The coefficients of cash inflow and cash outflow per unit of product produced and sold under the different approaches of the basic exporting ready-made garment firm are shown in Table 7.7 and those of the basic D-C and D-W/R ready-made garment firms are shown in Table 7.8. 7.2 Some Expectations In this section, expected results for individual types and among firm types will be discussed. 7.2.1 Expectations Within a Type of Basic Ready-Made Garment Firm 1. It is expected that the firm which operates under the liberal approach will borrow more from a commercial bank than the firm operating under the conservative approach. Ewww weeEweO eeezimeeem chwweexm ewmeO ecw we ec.ewemcoe zo.w weee we we.ew>.eo< ee...em eweewe eee .ch..em emee .wo.woeeeee we Oeeewowwweee N.N eNeeN 229 ON.ON O0.0 O..O ON..N ON.ON NO.N. w ON.ON NO.N O..O ON..N ON.ON NO.N. O ON.ON ON.N ON.O ON..N ON.ON ow.m. N ON.ON Ow.O ON.ON OO.N. . mwwwnm m.OewO..nO O0.0w OO.m. OO.N. O..Ow O0.0w OO.wN w OO.mw ON.O. OO.N. 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Nc.mm N¢.mN cm.N__ OO.m—p oo.mm N oo.m__ NN.mN oo.m__ o_.Nm _ mug.;m m.=mz N-N A< éjgjgfljwig 82$ 339: sag; 3o_$=_ uwvmgu smog a_emgu gmmu 3mm smog papgmuu: 3am song sopu:_ gmau o>pum>gwmcoo —mgmn_4 mag.“ acmagao muuz-auaom N\z-a tam N-N u_m~m mgu No »=_mgum=oo so.“ smog No mm_u.>_uo< NeN—.mm N.cmgu ago .a:.__om smog .=o_uu=coga No muco.u_NNoou N.N o_nah 23] Comparing both approaches, if the firm does not borrow from a com- mercial bank, the amount saved by the firm under the conservative approach is greater than that by the firm under the liberal approach. 2. Under the conservative approach, it is expected that savings will be very high in the first period, decrease gradually in the second and third periods and increase to a higher level again in the fourth period. 3. Under the conservative approach, period 3 is when the firm may need the most credit since cash inflow is low due to a low level of sales and cash outflow is high as the firm takes the advantage of low wages and raw material costs to accumulate inventory for sale in period 4. Under the liberal approach the firm may need the most credit in periods 1 and 3. In period 1, cash outflow is high as a result of a high level of production and cash inflow may not be as high as caSh out- flow since the firm under this approach provides some trade credit to customers. The intent to accumulate inventory is the main reason to ex- plain why the firm is expected to need credit in period 3. 4. The firm under the conservative approach borrows some funds from input suppliers who charge very high interest rates, while the firm under the liberal approach does not borrow from input suppliers. It is expected that the net return of the firm which operates under the liberal approach will be higher than that of the firm which operates under the conservative approach. 7.2.2 Expectations Among Types of Basic Ready-Made Garment Firms l. It is expected that net return of the basic exporting ready-made garment firm will be the highest and that of the D-w/R ready-made garment 232 firm will be the lowest since net margin (cash price-raw material cost) and the amount of products produced by the basic D-N/R ready-made garment firm are smaller than those of the basic exporting ready-made garment firms. Net return of the D-C ready-made garment firm is expected.to be greater than that of the D-N/R ready-made garment firm, even though the amount produced and sold is smaller, because the net margin of the pro- ducts produced by the D-C firms are much higher than those of the D-W/R ready-made garment firm. 2. The amount of funds borrowed from the commercial bank by the exporting ready-made garment firm is expected to be the highest since the amount produced and the percentage of credit sales are the largest. The amount of funds borrowed from the commercial bank source of the D-W/R ready-made garment firm is expected to be more than that of the D-C ready-made garment firm since the amount of products produced and fixed financial commitments of the D-N/R ready-made garment firms are larger than those of the D-C ready-made garment firms. 3. Given expected demand, wage rate, raw material cost per unit and inventory constraint in each period of each of the basic ready-made garment firms, it is expected that period 1 and 3 Will be the periods when the basic exporting ready-made garment firm needs credit the most. In period 3 the basic D-C ready-made garment firm will need credit the most and in periods 3 and 4 the D-W/R ready-made garment firm will need credit the most. 7.3 The 7.3 1. from th' the fir and drc fourth return specti 2 limit the se to sa' PErio dppro PGric margi capr row end tive deer baht 13,5 233 7.3 The Results 7.3.l The Exporting Ready-Made Garment Firm l. Under the conservative approach: the firm needs no credit from the commercial bank. Savings drop from approximately 130,000 baht in the first period to slightly more than l20,000 baht in the second period; and drop sharply to roughly 64,000 baht and 35,000 baht in the third and fourth periods, respectively (Table 7.9). At the end of period 4, net return and accounts payable are arbund 44,000 baht and 14,600 baht, re- spectively. 2. Under the liberal approach:. the firm borrows up to the maximum limit from the commercial bank in the first period. The outstanding in the second period is around 55,000 baht (Table 7.10). The firm is able to save around 30,000 baht in the third and 36,000 baht in the fourth period. At the end of period 4, net return and accounts receivable are approximately 68,000 baht and l0,500 baht, respectively. In the first period, shadow prices indicate that the firm can afford to pay at the margin more than a 200 percent rate of interest for additional borrowed capital. 7.3.2 The D-C Ready-Made Garment Firm 1. Under the conservative approach, the firm does not need to bor- row from the commercial bank. Net return and accounts payable at the ,end of the period 4 is approximately 45,000 baht and 5,300 baht, respec- tively (Table 7.ll). Savings in period 2 are higher than in period l,‘ decrease to the lowest level in period 3, and increase to around 23,000 baht at the end of period 4. 2. Under the liberal approach the firm borrows slightly less than 13,500 baht in period 3 (Table 7.l2). Savings increase from around l,200 Table 7 Cash 1: Casi 234 Table 7.9 Quarterly Cash Flow Statement, Shadow Price of Borrowed : Basic Exporting Ready-Made Garment Firm, Conservative Approach Capita1, Accounts Payable and Net Return Unit:Baht Period 1* 2 3 4 Cash Inflows Cash Sales 355,300 285,775 108,752 52,325 Credit Sales Interest Income 1,460 1,353 701 Beginning Cash 12,000 Total 367,300 287,235 110,105 53,026 Cash Outflows RMa: Cash 113,519 82,123 32,294 12,952 Credit 128,277 92.799 36.492 Skilled Worker 28,372 18,603 8,230 3,201 Unskilled Worker 198 99 10 47 Subcontract Worker 50,875 35,180 15,942 5,560 Overhead Cost 24,201 16,736 7,680 2,602 Tax 7,106 5,715 2,175 1,046 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 4,300 4,300 4,300 4,300 Repayment of LTD 9,500 Interest on STDc TOtal 234,571 296,943 169,430 81,700 Balance Borrowing Repayment d Outstanding Savings Deposit 132,729 Savings Withdrawal 9,708 59,325 28,674 Savings Outstanding 132,729 123,021 63,696 35,022 Shadow Price 0 0 0 0 Net Return 44,332 Accounts Payable 14,227 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 22,000 baht Table Cash 1 Ca: Cr: Be: 235 Table 7.10 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: Basic Exporting Ready-Made Garment Firm, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 234,264 229,692 87,397 42,094 Credit Sales 58,566 57,423 21,849 Interest Income 321 Beginning Cash 12,000 Total 246,264 288,258 144,820 64,264 Cash Outflows ' Cash 172,593 177,664 66,583 24.775 Credit Skilled Worker 21,790 20,351 8,230 3,201 Unskilled Worker 112 105 10 47 Subcontract Worker 38,999 38,330 15,942 5,560 Overhead Cost 18,614 18,242 7.680 2,602 Tax 5,856 5,742 2,185 1,052 Dividends b 6,000 6,000 6.000 6,000 Interest on LTD 4,300 4,300 4,300 4,300 Repayment of LTD 9.500 Interest on STDc 990 246 Total 268,264 271,724 110,176 57.037 Balance Borrowing 22,000 Repayment 16,534 5,466 Outstanding 22,000 5,466 0 Savings Deposit 29,178 7,227 Savings Withdrawal Savings Outstanding 29,178 36,405 Shadow Price .51 O 0 0 Net Return 68,433 Accounts Receivable 10,524 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 22,000 baht Table '. Sha Net Acc 236 Table 7.11 Quarterly cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: Basic D-C Ready-Made Garment Firm, Conservative Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 46,800 45,615 26,835 60,810 Credit Sales Interest Income 220 254 39 Beginning Cash 2,700 Total ' 49,500 45,835 27,089 60,849 Cash Outflows RMa: Cash 9,858 9.660 13,471 3,819 Credit 13.672 13.400 18.687 Skilled Worker 7,947 7,766 7,438 2,805 Unskilled Worker Subcontract Worker ' Overhead Cost 2,401 2,340 3,460 1,037 Tax 936 912 537 1.216 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 2,350 2,350 2,350 2,350 Repayment of LTD 5,190 Interest on STDc Total 29,492 42.700 46,656 41,104 Balance Borrowing Repayment Outstanding Savings Deposit 20,008 3,135 23,321 Savings Withdrawal 19,567 3,576 Savings Outstanding 20,008 23,143 3,576 23,321 Shadow Price 0 O 0 0 Net Return 45,151 Accounts Payable 5,297 m :0 3 II purchases of raw materials r— ... D II long-term debts cSTD = short-term debts Maximum borrowing limit = 18,000 baht 237 Table 7.12 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Basic D-C Ready-Made Garment Firm, Liberal Approach Unit:Baht Period 1 2 3 4* Cash Inflows Cash Sales 40,909 38,918 22,892 51,874 Credit Sales, 7,219 6,868 4,040 Interest Income 13 72 Beginning Cash 2.700 Total 43,609 46,150 29,832 55,914 Cash Outflows RMa: Cash 22,480 21,463 29,942 8,472 Credit Skilled Worker 8.160 7,766 7,438 2,805 Unskilled Worker Subcontract Worker Overhead Cost 2,460 2,340 3,460 1,037 Tax 962 916 539 1.220 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 2,350 2,350 2,350 2,350 Repayment of LTD 5.190 Interest on STDC 602 Total 42,412 40.835 49.729 27.676 Balance Borrowing 13,385 Repayment d 13,385 Outstanding 13,385 0 Savings Deposit 1,197 5,315 14,853 Savings Withdrawal 6,512 Savings Outstanding 1,197 6,512 0 14,853 Shadow Price 0 O O 0 Net Return 50,495 Accounts Receivable 9,154 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 18,000 baht 238 baht in period 1 to slightly more than 6,500 baht in period 2, drop down to 0 in period 3, and is roughly 15,000 baht in period 4. At the end of period 4, net return and accounts receivable are approximately 50,500 and 9,100 baht respectively. . 7.3.3 The D-W/R Ready-Made Garment Firm 1. Under the conservative approach: the firm borrows nearly 30,500 baht from the commercial bank in period 4 (Table 7.13). Savings increase from around 13,400 baht in period 1 to nearly 17,400 baht in period 2, then drop gradually to 0 in period 4. Net return and accounts payable at the end of period 4 are approximately 6,600 baht and 13,300 baht, respec- tively. 2. Under the liberal approach: the firm is not able to save in any period. Debt outstanding at the commercial bank increases gradually from around 4,500 baht in period 1 to slightly more than 5,600 in period 3, then increases sharply to around 42,000 baht in period 4 (Table 7.14). At the end of period 4, net return and accounts receivable are approxi— mately 15,000 baht and 6,800 baht, respectively. It should be noted that borrowings from the commercial bank is the highest in the fourth period because the firm has to repay 1/10 of its outstanding long-term debts in that period. 7.4 Comparison Between Expectations and Actual Results This comparison will follow the format used in the discussion of the expectations. The first part will be the comparison within a group of basic ready-made garment firms and the last part will be the comparison among each of the basic ready-made garment firms. 239 Table 7.13 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return : Ready-Made Garment Firm, Conservative Approach Basic D-W/R Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 97,585 94,975 85.175 67.630 Credit Sales Interest Income 148 191 83 Beginning Cash 4,000 Total 101,585 95,123 85,366 67,713 Cash Outflows RMa: Cash 50,663 24,616 42.431 17.831 Credit 37,825 18,377 31,679 Skilled Worker 4,374 1,879 3,973 1,778 Unskilled Worker 3,254 1,459 2,270 845 Subcontract Worker Overhead Cost 8,410 3,971 6,935 2,845 Tax 1,952 1,899 1,703 1.353 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,500 13,500 13,500 13,500 Repayment of LTD 30.000 Interest on STDc Total 88,153 91.149 95.189 105.831 Balance Borrowing 30,535 Repayment d Outstanding 30,535 Savings Deposit 13,432 3,974 7,583 Savings Withdrawal 17,406 7,583 Savings Outstanding 13,432 17,406 7,583 0 Shadow Price 0 O O 0 Net Return 6,622 Accounts Payable 13,312 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts dMaximum borrowing limit = 62,500 baht 240 Table 7.14 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: Basic D-W/R Ready-Made Garment Firm, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 88,087 85,733 76,846 61,210 Credit Sales 9,787 9,526 8,538 Interest Income Beginning Cash 4,000 Total 88,087 95,520 86.372 69.748 Cash Outflows RMa: Cash 59,203 63,111 55,257 45,695 Credit Skilled Worker 3,267 2,898 3.097 2.737 Unskilled Worker 2,425 2,239 1,822 1,939 Subcontract Worker Overhead Cost 6,274 6,107 5,459 4,335 Tax 1.957 1,905 1,708 1.360 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,500 13,500 13,500 13,500 Repayment of LTD 30,000 Interest on STDc 204 224 255 Total 92.626 95.964 87.067 105.821 Balance Borrowing 4,539 4.983 5,678 41,751 Repayment 4,539 4,983 5,678 Outstanding 4,539 4,983 5,678 41,751 Savings Deposit Savings Withdrawal Savings Outstanding Shadow Price 0 O O 0 Net Return 15,052 Accounts Receivable 6,801 aRM = purchases of raw materials b LTD = long-term debts CSTD d short-term debts Maximum borrowing limit = 62,500 baht 241 7.4.1 Comparison of Expectations and Actual Results Within a Type of Basic Ready-Made Garment Firm It was expected that the firm operating under the liberal approach would have higher borrowings from the commercial bank and would have higher net returns than the firm operating under the conservative approach. These expectations (1 and 4) are accepted without modification. Expec- tation 2 regarding the savings behavior of firms is accepted for only the basic exporting and D-C ready-made garment firms. For the basic D-W/R ready-made garment firm, savings in period 4 go down to zero because the firm repays some of the principal of its outstanding long-term debt. The expectation that period 3 would be a time of high credit needs (expectation 3) is accepted without any modification for the conservative approach. However, under the liberal approach, the expectation of timing of credit needs in period 1 is accepted for only the exporting ready-made garment firm. The other two groups of ready-made garment firms do not need to borrow from the commercial bank in the first period. These groups of firms provide less trade credit to customers than the exporting ready- made garment firm. The expectation of timing of credit needs in period 3 is accepted for the D-C ready-made garment firm. The exporting and the D-W/R ready-made garment firms do not need much credit in the third period because inventory is small relative to expected demand. In other words, not too many units can be produced and stored in inventory in the third period. Therefore, cash outflow to pay for production expenses and cre- dit needs are not as high as expected. 242 7.4.2 Comparison of Expectations and Actual Results Among Types of Basic Ready-Made Garment Firms Expectations 1, 2 and 3 are accepted. However, the net return of the exporting and the D-C ready-made garment firms under the conservative approach are nearly the same. High interest payments to input suppliers is the main factor which makes the net return of the exporting ready-made garment firm just a little below that of the D-C ready-made garment firm. CHAPTER 8 THE EXTENDED MODEL FOR THE READY-MADE GARMENT INDUSTRY This chapter contains a description of the extension of the basic model, and needed modifications, some expectations in the results, and the results compared with the expectations. 8.1 The Extension of the Basic Model As is the case for the cement product industry, the extended model of the ready-made garment industry examines what would happen to: (1) net return to fixed assets, family labor, and equity capital: (2) amount of credit needs; (3) timing of credit needs; and (4) shadow price of borrowed capital when the firm expands. Since short-run expansion by the firm can be by: (1) increasing production of the existing products as demand for the products expand; (2) adding products to the existing product line; and (3) combining both; the analysis will consider these three options. Three situations will be analyzed as reasonable extensions of the basic model. Each will differentiate between the conservative approach and liberal approach as defined earlier. Situation 1 is the basic model with a 10 percent increase in demand across the board. Situation 2 is an addition to the product line of the basic model with no change in de— mand. Situation 3 is the basic model with expanded demand plus the ad- ditional products proposed for Situation 2. 243 244 The additional products which are added to the existing product lines of the basic model of each type of ready-made garment firms are shown in the first column of Table 8.2 8.2 Modification of the Basic Model 8.2.1 Constraints 8.2.1.1 Demand Constraints For Situation 1, the level of demand for all products in the basic model increases by 10 percent. The revised RHS values for these products of each type of the ready-made garment firms are shown in Table 8.1. The initial expected demand for additional products added to the basic model of each type of ready-made garment firms is shown in Table 8.2. These are the constraints imposed on Situation 2. When these de- mand levels are increased by 10 percent, we have the applicable coeffi- cients for Situation 3 for these products (Table 8.3). 8.2.1.2 Inventory Constraint For the products added to the product line of the basic model, RHS values for the inventory constraint for each type of ready-made garment firms are presented in Table 8.2. These values are derived from informa- tion presented in section 6.8.3. These constraints apply to both Situa- tion 2 and Situation 3. 8.2.1.3 Other Constraints No further modifications on the RHS values of the basic model are required. 245 Table 8.1 Demand Increased 10 Percent for Basic Model Productsa Period 1 2 3 4 A) Exporting Men's Shirts 330 66 247 297 Long Dresses 1,650 847 44 484 Women's Shirts 4,702 5,060 2,255 137 Children's Shirts 1,265 550 313 O B) D-C Men's Shirts 308 323 102 234 Jean Shirts 165 115 80 135 Safari Shirts 0 7 73 198 C) D-W/R Men's Shirts 126 27 1,320 1,861 Women's Shirts 0 O O 990 Farmer's Shirts 3,190 3,190 1,705 247 aThese demand constraints apply to Situations 1 and 3 for these products. 246 .m use N meoppm:9_m neon cu mmppaam “cweeumcoo agap=m>cw m:# .N copumsupm Lo; mucwmcumcou Oceamu use men use mpuzuoeq amen» so» Ocesmv Pmpuwcv map mpcmmmcamg Ocesmu negomaxue .O Om OOP OO— O O O O mace; O Om O__ OO Om Om Om Om mugpxm .WFLPO Poosum O Om OO_ OO. oom OOm OOm OOm mucpzm.m.:mguppsu O OO O_ O O O O O mpcpxm m.cmeoz m\3-0 Au NOF mo Om mp ON ON ON ON mace; O Np NN PO m m m m mammch O O O on NN NN NN NN mmmmch mac; 0.: Am OOm Opp OO ON..N O O O O mmmm OOO oep OO ONN O_ Op O_ O_ mucwgm :mmO page; 2: 8 9: 8. fl 2 2 S 2,588 .2 mcpacoqu A< e m N p e m N P OcmsmO Ompumnxm aeoacm>=a mmpmnoz acmEceO mOezuaOmmx Omucmuxm as» cw Omuzpuca muesuocm use yo OceEmO Omuumaxu use acopcm>cH N.O mpgmh Table 8. A) Expo Ni Lc Ba 81 D-C Lc Dr Pa 247 Table 8.3 Related Demand Constraint for Products Added to the Basic Model (Situation 3)a Period 1 2 3 4 A) Exporting Nightgowns 165 165 55 110 Local Jean Shirts 242 66 154 880 Bags 2,337 66 126 330 B) D-C Long Dresses 40 O 7 O Dresses 89 3O 13 0 Pants 17 4O 69 145 C) D-H/R ' Women's Skirts O 18 66 0 Children's Shirts 198 198 33 0 School Girls' Skirts 99 121 33 0 Pants 154 198 55 89 alO percent higher than the demand constraints shown in Table 8.2. 248 8.2.2 The Objective Function Extension of the basic model to include additional products requires Cj values for raw material cost and selling price (both cash and credit sales) by period for each product respectively. These Cj values for each type of the ready-made garment firms apply to Situations 2 and 3 and are shown in Table 8.4. 8.2.3 Activities 8.2.3.1 Production Activities Extension of the basic model to include additional products requires Aij coefficients for labor requirements and overhead cost per unit of output by period for each product respectively. These Aij coefficients for each type of ready-made garment firms apply to Situations 2 and 3 and are presented in Table 8.5. 8.2.3.2 Selling Activities The payment of taxes by the firm is a function of the level of sales. The amount of tax paid per unit of product sold in each period for each of the products added to the basic model product line for each type of ready-made garment firms are shown in Table 8.6. These coefficients ap- ply to Situations 2 and 3. 8.2.3.3 Cash Balance (row) Activity The coefficients of cash outflow to pay for purchases of raw materials per unit of output and coefficients of cash inflow from cash sales and credit sales per unit of output of either the conservative or the liberal approach in each period for the products added to the basic model product N ego N m=o_uaau.ma 249 c_.O_ ¢_.Op O..OF ¢—.O— NO.mp mm.O— NO.mp NO.mp OO.m— OO.N— Om.m. OO.m_ magma OO.mN wO.mN mw.ON wO.mN ON ON ON ON me.¢— pm.ep Om.m— Om.Op mugpxm .m—LFO —oo:um Om.m. Om.m— Om.m. Om.mp m— m— mp m— Om.m Om.m m_.O Nw.O magwgm m.Ochpvsu OO.mm OO.mm OO.mm Om.mm mm mm mm mm OO.MN NO.MN O—.mN mw.ON mugpxm m.:mEo= ¢\:-O AO «O. «Op «Op «O. OOp OOP OO. OO— Om.OO ON.NO Ow.OO mm.OO mace; map mm— map mO— OO. OO. OO_ OO— OO.NO O¢.pO OP.NO «O.NO mummng mON OON mON mON OON OON OON OON mm.O—— Om.m—— m—.mp_ OO.m_— mommch Ono; A 0-0 O Om.mm OO.mm Om.mm OO.mm mm mm mm mm OO.m— O0.0_ Om.O_ ON.O_ mOmO OO.mm OO.mm OO.mm OO.mm NO.Nm mm.Om NO.NO NO.Nm OP.eN NO.mN NO.mN mw.ON mucwgm cemO Faun; ON._m ON.—m ON.—m ON.pm O0.0m O0.0m O0.0m O0.0m Ow.Om Om.Om O_.¢m NO.Nm mczomugm_z . . mcvugoaxu A< v m N p e m N — e m N _ oupem a—Omgu mupga gmeu umou pepgmuez 3oz am_muoz peaseau meaz-aeemm eaueoaxu ago ea «OPEN p_eacg use mowca gmau .»_:= Ema Hmou _a_cm»az 2am ¢.N a_nwh 25C) m use N m=o_uesuvmm O_._ Op.— O_.— Op.— NmO. NmO. NOO. NOO. O—O. OPO. OPO. OPO. magma OO._ OO.— OO.. OO.. ONO. ONO. nNO. mNo. O O O O «ON.Nm .mpc.O poosum OO. OO. OO. OO. NOO. NOO. NOO. NOO. O O O O mugpsm m.=ch—_;O ON.N ON.N ON.N «N.N mmO. mmO. mmo. mmo. OOO. eeO. OOO. OOO. mucwxm m.:msoz ¢\=-o Au —N.O .N.O FN.O —N.O - u I - Omm. Omm. Omm. Omm. mace; ON.O ON.O «N.O ON.O . - l - Opm. O.m. O.m. Opm. mmmmmco ON.OP ON.O_ ON.O— ON.OP - - l . Omm. Omm. Omm. Omm. mammch one; 8;. Am MN.N ON.N ON.N nN.N . l - . NOO. NOO. NOO. NOO. mOmm OO.N OO.N OO.N OO.N . - l 1 _OO. .OO. —OO. —OO. mug_;m cemO .muod O_.m O_.m Op.m O..m . l u - cop. «Op. «Op. «Op. mczomusmvz Ocpucoaxm A< e m N p e m N p e m N — umou Oemzcm>O Om—p_gm:O Om___xm newsmcpacmz cone; emFmOoz “cmscmw mum: -xuemm omccmuxm mg» No HOONOO we “we: mco can umou Ommcgm>o use “cosmewzcmm cone; m.O mpnmp 251 m new N meowpmauvma Om. Om. Om. Om. Nm. Nm. Nm. Nm. mecca NO. Pm. NO. NO. Om. Om. Om. Om. mugmxm .mNL_O _oo;um Fm. pm. pm. pm. Om. Om. Om. Om. mucvsm m.:wLONN;O NN. NN. NN. NN. ON. ON. ON. ON. mucwxm m.=maoz m\3-0 NO ON.m ON.m ON.m ON.m ON.m ON.m ON.m ON.m mpcea OO.m OO.m OO.m OO.m OO.m OO.m OO.m OO.m mmmmch ON.O ON.O ON.O ON.O OO.¢ OO.¢ O0.0 OO.¢ mommmco mac; O-N Am NN. NN. NN. NN. ON. ON. ON. ON. mOmm NO. NO. NO. NO. mO. mO. mO. mO. mpepcm cemO Face; mO.N mO.N mO.N mO.N OO.. OO.N OO.N OO.N mczomucmwz chpgonxm N< e m N N e m N N mmpmm u_OmLO mm_em cmmO mmmcmmmO xmm Ompmcoz acmsgmw muezlzvemm Omucouxm mgu No azauzo mo ups: mco Log mmmcmOxO me O.O ONOON 252 line' for each type of ready-made garment firms are shown in Tables 8.7 and 8.8. These coefficients apply to Situations 2 and 3. For a detailed discussion of this cash balance (row) activity, see section 5.2.3.3. However, the percentage of purchases of raw material on credit, and percentage of credit sales in the cement product industry and the ready-made garment industry are not the same. These percentages for each type of ready-made garment firms are specified in sections 7.1.2.4 and 7.1.2.5. 8.3 Some Expectations The following are the expectations of the linear programming results of Situations l, 2 and 3 when compared with the linear programming results of the basic model. They focus on net return, timing of credit needs, amount of credit needs, and amount of savings. 8.3.1 Expectations Concerning Net Return Assuming that net return should increase with a short-run expansion of the firm, it is expected that the firm in Situation 3 of each type of ready-made garment firms will generate the greatest increase in net re- turn compared With the basic model, since it contains expansion from an increased product line and from an increased demand. However, it is dif- ficult to say in advance whether an increased demand with given product line (Situation 1) or an increase in product line with given demand (Situa- tion 2) would yield the higher net return. These generalizations apply for both the conservative and liberal approaches. 253 m ecu N mea_»~=u_ma NO.m. NO.m— N0.0_ NO.mp OO.m NN.O m0.0 - NO.N ON.N Om.O N0.0 muse; OO.mN OO.mN OO.mN OO.mN N¢.O Nw.O Om.O - O0.0 Om.O ON.O m0.0 OHLNOO .m—L_O poogum OO.m. OO.m_ OO.m. OO.mp NO.m OO.¢ NO.m . O..m N..m Oe.m Nm.m mugpgm m.:ch__=O OO.mm OO.mm OO.mm OO.mm Om.O. NN.—p O0.0_ . ON.O— NN.O. OO.m_ mO.ep OHOFOO m.=meo3 . ¢\=-a Au 0.00_ 0.00_ 0.00N 0.00_ OO.Ne ON.Ne ON.mc - OO.—m ON.Om ON.Om ON.Nm mace; 0.00_ 0.00_ 0.00N 0.00_ OO.Nm mO.Nm NN.Nm . NO.Ne m—.—e NO.NO wO.—e mommch. 0.00N 0.00N 0.00N 0.00N mw.ON OO.—N NO.NN . Nm.Nm OO.—m Nw.—m ON.Nm mmmmocO Ocoa A Ono m OO.mm OO.mm OO.mm OO.mm «O.m Om.m ON.O - O0.0 O0.0 ON.O O..O mOmO NO.Nm NO.Nm NO.Nm NO.Nm NO.m— mw.ON mO.¢p . mO.N— OO.N. ON.NN NO.NN mucvgm cumO Named O0.0m O0.0m O0.0m O0.00 mO.N. .m.O_ Om.O_ . mw.O— m¢.m_ OO.NP ON.ON mczomugmwz mcpugoaxm A< e m N — c m N N e m N p mmpam :muO memesugam uvumgu mamesogag gmeO Sosa :opN:_ gmeu .a..auaz 2am coeoeaa< m>Nue>gmmcoO "OONmOoz HOOELOO mvwzumuemx Omocmexm use No mmwpp>Nuu< zopm :mmu ON mmNpN>Nuu< chppmm ammo .cowuuzuogm No mucmwummmmoo N.O mpneh m can N meo.uesu_ma 254 ON.O. O..ON ON.ON . NO.mp NO.mp NO.mp N0.0— wO.mN OO.NN OO.mN OO.mN mace; mO.mN mO.mN OO.mN . OO.mN OO.mN OO.mN OO.mN mm.O. pm.¢~ Om.m— Om.O. mucpxm .m_LNO poogum Om.mp Om.m. Om.mp - OO.mN OO.mN OO.mN OO.mN Om.O m0.0 m..O N0.0 mugpsm m.:mLO—_;O OO.mm OO.mm OO.mm . OO.mm OO.mm OO.mm OO.mm OO.mN mO.mN ON.mN mw.ON musvxm m.OwEoz «Nle NO OO.¢ON OO.:ON OO.mON - O0.00_ O0.00— O0.00N O0.00— Om.OO ON.NO OO.mO mm.OO magma OO.mON OO.mON OO.mON . O0.00N O0.00— O0.00N O0.00_ mO.NO OO.NO O—.NO OO.NO mmmmch OO.mON OO.mON OO.mON . O0.00N O0.00N O0.00N O0.00N Ow.O—N OO.mN. O—.m__ OO.mNp mmmmeO OOOO A OlO O OO.mm OO.mm OO.mm . OO.mm OO.mm OO.mm OO.mm O0.0_. O0.0— Om.ON ON.ON mOOO OO.mm OO.mm OO.mm . - NO.Nm NO.Nm NO.Nm NO.Nm ON.ON NO.mN NO.mN mw.ON OHLNOO :OOO page; ON.Nm ON.Nm ON.—m . O0.0m O0.0m O0.0m O0.0m mm.Om mm.Om ON.Om NO.Nm mczomugOpz Ocpucoaxu A< e m N p v m N p e m N — ma_am u.eatu mopam gnaw Bog; zoNNOO :mOO pmpgmuez 3mm 141 sumoLOQ< NeemONO ”mmNmOoz acmsLeO ovezlmuemm Omncmpxu exp No mmwew>Fuu< zo_m name =_ ma_u_>_pu< m=2__am p_emco ecu .mcwppam swag .cowpazeoca ea mpemwaweeaou O.m a_naN 255 8.3.2 Expectations About Timing of Credit Needs A) The Exporting Ready-Made Garment Firm It is expected that the firm which operates under the liberal ap- proach in Situations 1, 2 and 3 will need some credit in the first period. This is because cash outflow is very high (due to a high production level) and cash inflow is curtailed by the provision of trade credit. For the firm which operates under the conservative approach it is expected that the savings is the greatest in period 3 when sales are down and the firm has to repay principal and interest to the input sup- plier. B) The D-C Ready-Made Garment Firm In Situations 1, 2 and 3 it is expected that the firm, under the liberal approach, will need some credit in period 3 since the firm will try to accumulate inventory resulting in cash outflow being greater than cash inflow. For the firm which operates under the conservative approach instead (If needing credit the most in period 3, the withdrawal from savings is the greatest in period 3. C) The D-W/R Ready-Made Garment Firm In Situations l, 2 and 3 it is expected that the firm, under the 7 iberal approach will need credit in all periods. The firm which operates Under the conservative approach, will withdraw a large amount of savings in period 3, and will need some credit in period 4. 256 8.3.3 Expectations About Amount of Credit Needed A) The Exporting Ready-Made Garment Firm A.l) Comparison of Situation 1 with the Basic Model It is expected that the firm in Situation 1 needs more credit than the firm in the basic model, since cash expenses increase as production level increases. A.2) Comparison Between the Basic Model and Situation 2 Since some of the products added, such as bags and local denim shirts, do not need embroidery work, the production and sales of these products provides additional cash inflow into the firm. Therefore it is expected that the amount of credit needed by the firm in Situation 2 will be less than that in the basic model. A.3) Comparison Between the Basic Model and Situation 3 Given the expectation of the pattern of demand for credit in sections [4.1 and A.2 above it is difficult to say in advance whether the amount caf'credit needed by the firm in Situation 3 is greater or smaller than that of the basic firm. However, it is expected that the amount of cre- cj'id needed by the firm in Situation 3 will be less than that of the firm inn Situation 1, but greater than that of the firm in Situation 2. B) The D-C Ready-Made Garment Firm Since, in period 3, cash inflow of the firm in Situations l, 2 and 3 ”i s greater than cash inflows of the basic firm, when cash outflow needed to accumulate inventory remains unchanged from the basic firm, it is ex- PeC ted that the amount of credit needed by the firm in Situations l, 2 0‘" 3 will be less than that of the basic firm. 257 C) The D-W/R Ready-Made Garment Firm In Situations 1, 2 and 3 it is expected that cash inflow increases as the firm expands its size and therefore the amount of credit needed will be less than that of the basic firm. 8.3.4 Expectation About Savings It is expected that savings pattern of the firm in all situations will be the same as that of the basic firm, and it is expected also that the amount of savings of the firm in all situations will be greater than that of the basic firm. It is difficult to state in advance whether the amount saved by the firm in Situation 1 will be greater or less than that of the firm in Situation 2, yet it is expected that the amount saved by the firm in Situation 3 will be the greater. 8.4 The Linear Programming Results of the Extended Model 8.4.1 The Exporting Ready-Made Garment Firm A) Situation 1 Under the conservative approach: the firm does not borrow from the conmercial bank and therefore the shadow price equals zero (Table 8.9). .111 other words, there is slack in the borrowing constraint. Saving is highest in the first period (147,068 baht) and drops every period to about 42,500 baht in the fourth period. At the end of period 4, net re- tZLJt‘rI is 50,472 baht and the firm owes 16,158 baht to input suppliers. Under the liberal approach: in the first period the firm borrows 1='“<31n the commercial bank up to the maximum limit and the shadow price is 6““<>land 200 percent annual rate per period (Table 8.10). The firm is un- 6“)1 e to save in the first two periods. but does save 33,462, baht in the 258 Table 8.9 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Exporting Ready- Made Garment Firm, Situation 1, Conservative Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 390,807 314,352 119,601 57,535 Credit Dales Interest Income 1,618 1.506 795 Beginning Cash 12,000 Total 402,807 315,970 121,107 58.330 Cash Outflows RMa: Cash 124,223 90,916 35,441 14,299 Credit 140.372 102.735 40.048 Skilled Worker 31,040 20,621 9,007 3,573 Unskilled Worker 217 109 ll 53 Subcontract Worker 55,664 38,993 17,450 6,196 Overhead Cost 26,479 18,550 8,407 2,901 Tax 7,816 6,287 2,392 1,151 Dividends b 6,000 6,000 6,000 6.000 Interest on LTD 4,300 4,300 4,300 4,300 Repayment of LTD 9,500 Interest on STDc Total 255,739 326,148 185,743 88,021 Balance Borrowing Repayment Outstanding Savings Deposit 147,068 Savings Withdrawal 10,178 64,636 29,691 Savings Outstanding 147,068 136,890 72,254 42,563 Shadow Price 0 O O 0 Net Return 50,472 Accounts Payable 16,158 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 22,000 baht 259 Capital, Accounts Receivable and Net Return: Ready-Made Garment Firm, Situation 1, Liberal Approach Table 8.10 Quarterly Cash Flow Statement, Shadow Price of Borrowed Exporting Unit:Baht Period ,1 T1 2 3 4 Cash Inflows Cash Sales 243,596 252,661 96,116 46,286 Credit Sales 60,899 63,165 24,029 Interest Income 368 Beginning Cash 12,000 Total 255,596 313,560 159.281 70.683 Cash Outflows RMa: Cash 178,507 195,432 71,753 27,612 Credit Skilled Worker 22,778 22,386 9,007 3,573 Unskilled Worker 97 115 ll 53 Subcontract Worker 40,469 42,163 17,450 6,196 Overhead Cost 19,355 20,067 8,407 2,901 Tax 6,090 6,316 2,403 1,157 Dividends b 6,000 6,000 6,000 6.000 Interest on LTD 4,300 4,300 4,300 4,300 Repayment of LTD 9,500 Interest on STDc 990 279 Total 277,596 297.769 119.610 61.292 Balance Borrowing 22,000 Repayment d 15,791 6,209 Outstanding 22,000 6,209 0 Savings Deposit 33,462 9,391 Savings Withdrawal Savings Outstanding 33,462 42,853 Shadow Price .51 O 0 0 Net Return 75,929 Accounts Receivable 11,571 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 22,000 baht 260 third and 42,853 baht in the fourth period. At the end of the year, ex- tended trade credit is ll,57l baht, and net return is 75,929 baht. B) Situation 2 Under the conservative approach: the firm borrows only from the input supplier. Saving is the highest in the first period, 182,398 baht, and is the lowest in the fourth period, 84,250 baht (Table 8.11). At . the end of period 4, outstanding debt at input suppliers is 28,252 baht and net return is 81,222 baht. Under the liberal approach: the firm borrows 18,773 baht from the commercial bank (Table 8.12). This is less than the maximum limit, con- sequently, the shadow price is zero. The firm. starts saving in the se- cond period (27,556 baht). In the fourth period savings, trade credit provided, and net return are 73,346 baht, 18,873 baht, and 113,740 baht respectively. C) Situation 3 Under the conservative approach: savings amount to 201,931 baht iii the first period, and diminish to 96,838 baht in the fourth period ('Table 8.13). In period 4, outstanding short-term debt to input suppliers and net return are 31,447 baht and 91,056 baht respectively. Under the liberal approach: the firm borrows 20,822 baht from the commercial bank in period 1 and none in other periods resulting in zero Shadow prices in all periods (Table 8.14). Savings begin in period 1 (:3'3 ,‘154 baht) and increase to the maximum level in period 4 (84,554 baht). "13 12he end of period 4 net return and accounts receivable (trade credit provided) are 126,833 baht and 20,755 baht respectively. 261 Table 8.11 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Exporting Ready- Made Garment Firm, Situation 2, Conservative Approach Unit:Baht Period 2* 1 2 3 4 Cash Inflows Cash Sales 444,325 297,325 119,827 93,825 Credit Sales Interest Income 2,006 1,691 1,050 Beginning Cash 12,000 Total 456,325 299.331 121.518 94.875 Cash Outflows RMa: Cash 137,292 84,489 37.006 25.001 Credit 155,140 95.473 41.817 Skilled Worker 34,887 19,165 9,311 6,831 Unskilled Worker 198 99 10 47 Subcontract Worker 52,225 35,630 16,692 5,710 Overhead Cost 30,138 17,214 8,649 5.002 Tax 8,886 5,946 2,396 1,876 Dividends b 6,000 6,000 6,000 6.000 Interest on LTD 4,300 4,300 4,300 4,300 Repayment of LTD 9,500 Interest on STDc Total 273.927 327,983 179,803 106.086 Balance Borrowing Repayment d Outstanding Savings Deposit 182,398 84,250 Savings Withdrawal 28,652 58,285 95,461 Savings Outstanding 182,398 153,746 95,461 84,250 Shadow Price 0 O O 0 Net Return ' 81,222 Accounts Payable 28,252 aR11 = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 20,000 baht 262 Table 8.12 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: Exporting Ready-Made Garment Firm, Situation 2, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 357,259 238,986 96,309 75,490 Credit Sales 89,315 59,747 24,077 Interest Income 303 678 Beginning Cash 12,000 Total 369,259 328.301 156.359 100.245 Cash Outflows Cash 258.897 185.318 74.860 49,307 Credit Skilled Worker 32,716 21,219 9,311 6,831 Unskilled Worker 192 105 10 47 Subcontract Worker 48,625 39,230 16,692 5,710 Overhead Cost 28,371 18,980 8,649 5,002 Tax 8,931 5,975 2,408 1,887 Dividends b 6,000 6,000 6,000 6.000 Interest on LTD 4,300 4,300 4,300 4.300 Repayment of LTD 9,500 Interest on STDC 845 Total 388,032 281.972 122.230 88,584 Balance Borrowing 18,773 Repayment 18,773 Outstanding 18,773 0 Savings Deposit 27,556 61,685 11,661 Savings Withdrawal 27,556 Savings Outstanding 27,556 61,685 73,346 Shadow Price 0 O O 0 Net Return 113,740 Accounts Receivable 18,873 aRM = purchases of raw materials bSTD = long-term debts cSTD = short-term debts dMaximum borrowing limit = 22,000 baht Table 8.1 263 Table 8.13 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: Exporting Ready- Made Garment Firm, Situation 3, Conservative Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 488.717 327,057 131.784 103.185 Credit Sales Interest Income 2,221 1,879 1.181 Beginning Cash 12,000 Total 500,717 329,278 133.663 104.366 Cash Outflows ' Cash 150,235 93.759 40.347 27.856 Credit 169,765 105.947 45.592 Skilled Worker 38,173 21,271 10,168 7,600 Unskilled Worker 217 109 11 53 Subcontract Worker 57,104 39,533 18,230 6,406 Overhead Cost 32,983 19,101 9,446 5,567 Tax 9,774 6,541 2,636 2,064 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 4,300 4,300 4,300 4,300 Repayment of LTD 9,500 Interest on STD Total 308,786 360,378 197.085 114.936 Balance Borrowing Repayment Outstanding Savings Deposit 201,931 Savings Withdrawal 31,100 63,422 10,570 Savings Outstanding 201,931 170,831 107,408 96,838 Shadow Price - O O O 0 Net Return 91,056 Accounts Payable 31,477 aRM = purchases of raw materials bLTD = long-term debts CSTD = short-term debts d Maximum borrowing limit = 22,000 baht 264 Table 8.14 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: Exporting Ready-Made Garment Firm, Situation 3, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 392,953 262,885 105,918 83,022 Credit Sales 98,238 65,721 26,480 Interest Income 343 777 Beginning Cash 12,000 Total 404.953 361.123 171.982 110.279 Cash Outflows RMa: Cash 284,765 203,851 81,702 54,855 Credit Skilled Worker 35,985 23,341 10,168 7.600 Unskilled Worker 211 115 ll 53 Subcontract Worker 53,484 43,153 18,230 6,406 Overhead Cost 31,206 20,878 9,446 5,567 Tax 9,824 6,572 2,648 2,075 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 4,300 4,300 4,300 4,300 Repayment of LTD 9,500 Interest on STDc 937 Total 425,775 309,147 132.505 96.356 Balance Borrowing 20,822 Repayment d 20,822 Outstanding 20,882 0 Savings Deposit 31,154 70,631 13,923 Savings Withdrawal 31,154 Savings Outstanding 31,154 70,631 84,554 Shadow Price 0 O O 0 Net Return 126,833 Accounts Receivable 20,755 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts dMaximum borrowing limit = 22,000 baht 265 8.4.2 The D-C Ready-Made Garment Firm A) Situation 1 Under the conservative approach: the firm does not borrow from the commercial bank and the shadow prices are all zero (Table 8.15). Savings are highest in periods 2 and 4 (27,136 and 30,449 baht, respectively) and lowest in periods 1 and 3 (23,232 and 7,955 baht, respectively). In the fourth period net return and outstanding debt at the input suppliers are 50,840 baht and 6,925 baht, respectively. Under the liberal approach, the firm saves 1,882 baht and 8,570 baht in the first and second periods, respectively (Table 8.16). But, in period 3, savings drop to zero when it is necessary for the firm to borrow around 10,000 baht from the commercial bank. In period 4, savings, accounts receivable, and net return are 19,931 baht, 10,065 baht and 56,484 baht, respectively. B) Situation 2 Under the conservative approach: no borrowings from the commercial bank results in zero shadow prices in all periods (Table 8.17). Savings increase from 35,022 baht in the first period to more than 37,000 baht in the second period, dropped sharply to a little above 22,000 baht in the third period, and more than doubled in the fourth period to 51,800 baht. At the end of period 4 net return and outstanding debt at input suppliers (accounts payable) are 69,348 baht and 10,156 baht, respectively. Under the liberal approach: the firm is able to save in each period. Savings start at 5,549 baht in the first period and increase to about 17,000 baht in the second period. drop to less than 700 baht in the third 266 Table 8.15 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: D-C Ready-Made Garment Firm, Situation 1, Conservative Approach 'lf Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 52,745 50,176 29,654 66,859 Credit Sales Interest Income 255 298 87 Beginning Cash 2,700 Total 55,445 50.431 29.952 66.946 Cash Outflows ° Cash 11.126 10.624 14.072 4,992 Credit 15,434 14,737 19,521 Skilled Worker 8,976 8,542 7,765 3,726 Unskilled Worker Subcontract Worker Overhead Cost 2,706 2,574 3,616 1,336 Tax 1,055 1.003 593 1.337 Dividends b 6,000 6,000 6.000 6,000 Interest on LTD 2,350 2,350 2,350 2,350 Repayment of LTD 5,190 Interest on STDc Total 32.213 46.527 49.133 44.452 Balance Borrowing Repayment d Outstanding Savings Deposit 23,232 3,904 22,494 Savings Withdrawal 19,181 Savings Outstanding 23,232 27,136 7.955 30,449 Shadow Price 0 O O 0 Net Return 50,840 Accounts Payable 6,925 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts dMaximum borrowing limit = 18,000 baht 267 Table 8.16 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: D-C Ready- Made Garment Firm, Situation 1, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 45,000 42,809 25,297 57,034 Credit Sales 7,941 7,555 4,464 Interest Income 21 94 Beginning Cash 2,700 Total 47,700 50.771 32.946 61.498 Cash Outflows ° Cash 24.727 23.609 31.273 11.086 Credit Skilled Worker 8,976 8,542 7,765 3,726 Unskilled Worker Subcontract Worker Overhead Cost 2,706 2,575 3.616 1,336 Tax 1.059 1.007 595 1.342 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 2,350 2,350 2,350 2,350 Repayment of LTD 5.190 Interest on STDc 454 Total 45.818 44.083 51.599 31.484 Balance Borrowing 10,083 Repayment d 10,083 Outstanding 10,083 0 Savings Deposit 1.882 6,688 19,931 Savings Withdrawal 8,570 Savings Outstanding 1.882 8,570 0 19,931 Shadow Price 0 O O 0 Net Return 56,484 Accounts Receivable 10,065 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 18,000 baht 268 Table 8.17 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: D-C Ready-Made Garment Firm, Situation 2, Conservative Approach Ufitflfln Period 1 2 T? 4 Cash Inflows Cash Sales 71,790 56,505 40.395 81.930 Credit Sales Interest Income 385 408 246 Beginning Cash 2,700 Total 74.490 56.890 40.803 82.176 Cash Outflows RMa: Cash 15,577 11,886 16,785 7.321 Credit 21.609 16.488 23.284 Skilled Worker 10,422 8,940 8,762 5,023 Unskilled Worker Subcontract Worker Overhead Cost 3,683 2,899 4,320 1,957 Tax 1,436 1,130 808 1,639 Dividends b 6,000 6,000 6.000 6,000 Interest on LTD 2,350 2,350 2,350 2,350 Repayment of LTD 5,190 Interest on STDc Total 39,468 54,814 55,513 52,764 Balance Borrowing Repayment d Outstanding Savings Deposit 35,022 2,076 22,388 51,800 Savings Withdrawal 37,098 22,388 Savings Outstanding 35,022 37,098 22,388 51,800 Shadow Price 0 O O 0 Net Return 69,348 Accounts Payable 10,156 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 18,000 baht 269 period and increase sharply to over 38,000 baht in the fourth period (Table 8.18). In period 4, accounts receivable and net return are 12,334 baht and 77,050 baht, respectively. C) Situation 3 Under the conservative approach: the amount for savings is 28,748 baht, the lowest level, in period 3 and is 61,847 baht, the highest level in period 4 (Table 8.19). Net return and accounts payable at the end of period 4 are 77,457 baht and 12,354 baht, respectively. 52 Under the liberal approach: as in the case of the firm which oper- E ates under the conservative approach, savings are at the lowest and high- ‘ est levels in the third and fourth period, respectively. At the end of I period 4, savings, accounts receivable and net return are 45,487 baht, F 13,560 baht, and 85,532 baht, respectively (Table 8.20). 8.4.3 The D-W/R Ready-Made Garment Firm A) Situation 1 Under the conservative approach: savings increase from 17,984 baht in the first period to 23,601 baht in the second period, and dr0p to 14,671 baht in the third period (Table 8.21). In period 4 instead of having some savings, the firm borrows 22,641 baht from the commercial bank. Net return and accounts payable at the end of period 4 are around 12,817 baht and 15,145 baht, respectively. Under the liberal approach: cash inflow from sales and collection of accounts receivable above cash outflow for production expenses is not enough to pay for financial commitments. The firm has to borrow in each period and the amount borrowed is the greatest in period 4 since the firm has to repay some part of the outstanding long-term debt in that period. 270 Table 8.18 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: D-C Ready- Made Garment Firm, Situation 2, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 62,226 48,207 34,460 69,892 Credit Sales 10,981 8,507 6.081 Interest Income . 61 188 7 Beginning Cash 2,700 Total 64,926 59,249 43,155 75,980 Cash Outflows RMa: Cash 35,187 26,413 37,301 16,260 Credit Skilled Worker 10,634 8,940 8,762 5,023 Unskilled Worker Subcontract Worker ~ Overhead Cost 3,742 2,899 4,320 1,957 Tax 1,464 1,134 811 1.644 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 2,350 2,350 2,350 2,350 Repayment of LTD 5,190 Interest on STDc Total 59,377 47,736 59,544 38,424 Balance Borrowing Repayment Outstanding Savings Deposit 5,549 11,513 673 38,229 Savings Withdrawal 17,062 673 Savings Outstanding 5,549 17,062 673 38,229 Shadow Price 0 O O 0 Net Return 77,050 Accounts Receivable 12,334 aRM = purchases of raw materials b LTD = long-term debts cSTD short-term debts dMaximum borrowing limit = 18,000 baht 271 Table 8.19 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: D-C Ready-Made Garment Firm, Situation 3, Conservative Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 80,295 62,276 44,484 90,059 Credit Sales Interest Income 438 468 316 Beginning Cash 2,700 Total 82.995 62.714 44.952 90.375 Cash Outflows RMa: Cash 17.436 13.401 17,636 8.906 Credit 24,185 18,171 24,466 Skilled Worker 11,703 9,847 9,188 6,201 Unskilled Worker Subcontract Worker Overhead Cost 4,119 3,195 4,541 2,362 Tax 1,606 1.245 890 1.801 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 2,350 2,350 2,350 2,350 Repayment of LTD 5,190 Interest on STDC Total 43,214 59,923 58,776 57,276 Balance Borrowing Repayment Outstanding Savings Deposit 39,781 2,791 28,748 61,847 Savings Withdrawal 42,572 28,748 Savings Outstanding 39,781 42,572 28,748 61,847 Shadow Price 0 O O 0 Net Return 77,457 Accounts Payable 12,354 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 18,000 baht 272 Table 8.20 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: D-C Ready- Made Garment Firm, Situation 3, Liberal Approach Unit:Baht Period ! 1 2 3 4” Cash Inflows Cash Sales 68,500 53,125 37,952 76,840 Credit Sales 12,088 9,375 6,697 Interest Income 73 222 61 Beginning Cash 2,700 Total 71,200 65,286 47,549 83,598 Cash Outflows RMa: Cash 38,743 29,103 39,196 19,795 Credit Skilled Worker 11,703 9,847 9,188 6,201 Unskilled Worker Subcontract Worker Overhead Cost 4,119 3,195 4,541 2,362 Tax 1,612 1,250 893 1.808 Dividends b 6,000 6,000 6,000 6.000 Interest on LTD 2,350 2,350 2,350 2,350 Repayment of LTD 5,190 Interest on STDc Total 64.527 51.745 62,168 43,706 Balance Borrowing Repayment Outstanding Savings Deposit 6,673 13,541 45,487 Savings Withdrawal 14,619 5,595 Savings Outstanding 20,214 5,595 45,487 Shadow Price 0 O O 0 Net Return 85,532 Accounts Receivable 13,560 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 18,000 baht Table 8.21 273 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Payable and Net Return: D-W/R Ready- Made Garment Firm, Situation 1, Conservative Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 107,329 104,472 93,692 74,371 Credit Sales Interest Income 198 260 161 Beginning Cash 4,000 Total 111,329 104.670 93.952 74.532 Cash Outflows - Cash 54,457 28,382 46,017 20,286 Credit 40,657 21,189 34,357 Skilled Worker 4,704 2,166 4,305 2,025 Unskilled Worker 3,497 1,682 2,470 959 Subcontract Worker Overhead Cost 9,041 4,577 7,527 3,230 Tax 2,146 2,089 1,874 1,487 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,500 13,500 13,500 13,500 Repayment of LTD 30,000 Interest on STDC Total 93.345 99,053 102.882 111.844 Balance Borrowing 22,641 Repayment Outstanding 22,641 Savings Deposit 17,984 5,617 14,671 Savings Withdrawal 23,601 14,671 Savings Outstanding 17,984 23,601 14,671 0 Shadow Price 0 O O 0 Net Return 12,817 Accounts Payable 15,145 alRM = bLTD = long-term debts cSTD = short-term debts purchases of raw materials dMaximum borrowing limit = 62,500 baht 274 At the end of period 4, outstanding debt at the commercial bank, accounts receivable and net return are around 35,060 baht, 7,453 baht and 22,397 baht, respectively (Table 8.22). B) Situation 2 Under the conservative approach: savings increase from 15,336 baht in period 1 to around 21,910 baht in period 2, drop to 12,430 baht and O baht in periods 3 and 4, respectively (Table 8.23). In period 4, borrow- ings from the commercial bank, borrowings from input suppliers and net return are 26,018 baht, 13,388 baht and 10,666 baht, respectively. 5 Under the liberal approach: in period 4, borrowings from the commer- cial bank, accounts receivable and net return are 36,889, 6,951 baht and 20,066 baht, respectively (Table 8.24) ' C) Situation 3 Under the conservative approach: savings pattern of the firm in Situation 3 is the same as that for other situations. However, in period 2, the amount saved is 28,617 baht which is the greatest amount among the situations (Table 8.25). In period 4, the firm borrows 17,668 baht and 15,656 baht from the commercial bank and input suppliers, respectively. Net return at the end of period 4 is 17,327 baht. Under the liberal approach: the firm borrows 2,443 baht in the first period, is able to save 963 baht in the second period, neither bor- row nor save in the third period, and borrows 29,870 baht in the fourth period (Table 8.26). At the end of period 4, accounts receivable and net return are 7,619 baht and 27,753 baht, respectively. 8.5 Comparisons Among the Basic Models and the Extended Models This section describes what would happen to net return, demand for credit (amount of credit needed), timing of credit needs and shadow price 275 Table 8.22 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: D-W/R Ready- Made Garment Firm, Situation 1, Liberal Approach E1 Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 96,882 94,307 84,531 67,081 Credit Sales 10,765 10,478 9,392 Interest Income Beginning Cash 4,000 Total 100.882 105.072 95.009 76,473 Cash Outflows RMa: Cash 69,512 69,422 60,784 50.732 Credit Skilled Worker 3,593 3,188 3,407 2,998 Unskilled Worker 2,667 2,463 2,004 1,468 Subcontract Worker Overhead Cost 6,900 6,718 6,005 4,751 Tax 2,153 2,096 1,878 1.491 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,500 13,500 13,500 13,500 Repayment of LTD ' 30,000 Interest on STDc 155 86 25 Total 104,325 103,542 93.664 110.965 Balance Borrowing 3,443 1,913 568 35.060 Repayment 3,443 1,913 568 Outstanding 1.913 568 35.060 Savings Deposit Savings Withdrawal Savings Outstanding Shadow Price 0 O O 0 Net Return 22,397 Accounts Receivable 7.453 aRM = purchases of raw materials bLTD = long-term debts c3Tb = short-term debts d Maximum borrowing limit = 62,500 baht 276 Table 8.23 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: D-W/R Ready-Made Garment Firm, Situation 2, Conservative Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 105,125 104,315 87,400 69,129 Credit Sales Interest Income 169 241 137 Beginning Cash 4,000 Total 109.125 104.484 89.641 69.266 Cash Outflows RMa: Cash 54,758 27,362 44,521 17,932 Credit 40.882 20.428 33.239 Skilled Worker 4,409 1,937 4,048 1,799 Unskilled Worker 3,906 1,746 2,379 921 Subcontract Worker Overhead Cost 9,114 4,397 7,157 2,941 Tax 2,102 2,086 1,788 1,382 Dividends b 6,000 6.000 6,000 6.000 Interest on LTD 13,500 13,500 13,500 13,500 Repayment of LTD 30,000 Interest on STDc Total 93.789 97.910 99.121 107,714 Balance Borrowing 26,018 Repayment Outstanding 26,018 Savings Deposit 15,336 6,574 12,430 Savings Withdrawal 21,910 12,430 Savings Outstanding 15,336 21,910 12,430 0 Shadow Price 0 O O 0 Net Return 10,666 Accounts Payable 13,388 aRM = purchases of raw materials bLTD = long-term debts C5Tb = short-term debts d Maximum borrowing limit = 62,500 baht 277 Table 8.24 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Receivable and Net Return: D-W/R Ready- Made Garment Firm, Situation 2, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 94,891 94,162 80,659 62,563 Credit Sales 10,543 10,462 8,962 Interest Income Beginning Cash 4,000 Total 98.891 104.705 91.121 71.525 Cash Outflows RMa: Cash 68.002 69.323 57.999 47.339 Credit Skilled Worker 3,302 2,955 3,172 2,758 Unskilled Worker 2,850 2,705 1,966 1,415 Subcontract Worker Overhead Cost 6,757 6,706 5,730 4,432 Tax 2,109 2,092 1,792 1,390 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,500 13,500 13,500 13,500 Repayment of LTD 30,000 Interest on STDC 163 106 68 Total 102,520 103.444 90.265 106,902 Balance Borrowing 3,629 2,368 1,512 36,889 Repayment d 3.629 2,368 1,512 Outstanding 2,368 1,512 36,889 Savings Deposit Savings Withdrawal Savings Outstanding Shadow Price 0 O O 0 Net Return 20,066 Accounts Receivable 6,951 aRM = purchases of raw materials bLTD = long-term debts c5Tb = short-term debts d Maximum borrowing limit = 62,500 baht 278 Table 8.25 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capita1, Accounts Payable and Net Return: D-W/R Ready-Made Garment Firm, Situation 3, Conservative Approach Unit:Baht Period 1* 2 3 4 Cash Inflows Cash Sales 115,623 114,760 98,340 76,018 Credit Sales Interest Income 221 315 220 Beginning Cash 4,000 Total 119,623 114,981 98,655 76,238 Cash Outflows RMa: Cash 58,934 31,408 47.572 20.969 Credit 43.999 23.449 35.518 Skilled Worker 4,742 2,230 4,388 2,048 Unskilled Worker 4,211 1,998 2,593 1.042 Subcontract Worker Overhead Cost 9,811 5.047 7,776 3,336 Tax 2,312 2,295 1,967 1,520 Dividends b 6,000 6,000 6,000 6,000 Interest on LTD 13,500 13,500 13,500 13,500 Repayment of LTD 30,000 Interest on STDc Total 99.510 106.477 107,245 113,933 Balance Borrowing 17,668 Repayment d Outstanding 17,668 Savings Deposit 20,113 8,504 20,027 Savings Withdrawal 28,617 20,027 Savings Outstanding 20,113 28,617 20,027 0 Shadow Price 0 O O 0 Net Return 17,327 Accounts Payable 15,656 aRM = purchases of raw materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 62,500 baht 279 Table 8.26 Quarterly Cash Flow Statement, Shadow Price of Borrowed Capital, Accounts Receivable and Net Return: D-W/R Ready- Made Garment Firm, Situation 3, Liberal Approach Unit:Baht Period 1 2 3 4 Cash Inflows Cash Sales 104,367 103,590 88,725 68,567 Credit Sales 11.596 11.510 9,858 Interest Income 10 Beginning Cash 4,000 Total 108,367 115.186 100.245 78.425 Cash Outflows RMa: Cash 74,793 76.264 67.137 48.512 Credit Skilled Worker 3,631 3,251 3,659 2,837 Unskilled Worker 3,135 2,976 2,293 1.409 Subcontract Worker Overhead Cost 7,432 7,377 6,647 4,513 Tax 2,319 2,302 1,972 1,524 Dividends b 6,000 ' 6.000 6,000 6,000 Interest on LTD 13,500 13,500 13,500 13,500 Repayment of LTD 30,000 Interest on STDC 110 Total 110,810 111,780 101,208 108,295 Balance Borrowing 2,443 0 29,870 Repayment d 2,443 Outstanding 2.443 O 0 29,870 Savings Deposit 963 Savings Withdrawal 963 Savings Outstanding 963 0 Shadow Price 0 O O 0 Net Return 27,753 Accounts Receivable 7,619 aRM = purchases of rwa materials bLTD = long-term debts cSTD = short-term debts d Maximum borrowing limit = 62,500 baht 280 of borrowed capital when the firm expands as expected demand increases, when the firm adds some new products to the existing ones, or when both demand and product line increase. Comparisons are made between the li- near programming results of the basic model to those of the extended model under different situations. The comparison between the basic model and Situation 1 of the extended model, tells what would happen if the firm increases its production as expected demand increases. The comparison between the basic model and Situation 2 of the extended model tells what would happen if the firm expands its size by adding new products to the existing ones, and the comparison between the basic model and Situation 3 of the extended model tells what would happen if the firm expands by both adding new product lines as well as increasing level of production of both existing and new products in response to an increased demand. 8.5.1 The Exporting Ready-Made Garment Firm 8.5.1.1 Comparison Between the Basic Model and Situation 1 of the Extended Model When the firm can produce and sell more as demand increases, net re- turn as well as savings increases (Table 8.27). This conclusion is true for both the conservative and the liberal approach. However, under the liberal approach, in period 1, the basic firm and the firm in Situation 1 both borrow from the commercial bank up to maximum limit, and the peridd shadow price of borrow capital is the same, .51. Even though shadow prices are the same, when the borrowing limit was removed, the firm in Situation 1 would borrow 34,000 baht while the basic firm would borrow 31,000 baht. Therefore it can be concluded that for this type of ready- made garment firm, when production level increases as demand increases, the firm needs more credit in the first period. 281 .oeee NN_.em a. eoeooe e_eoeo co oesoEe.e=eexe=o .eeee ONm.om we eoeooe o.eoeo co oe=OEe saeexez m a .oeee ooc.NN a. o.e._ ae.zeeeee e=e_xaze —mewav4 u ONO mo>_ue>com:ou u coo mmO.ON_ OwO.—a oeN.m._ NNN._m ONm.mN NNe.om mme.mm Nmm.ee e eeeoom “oz mmN.oN - NNO.N_ - _Nm.__ - mNm.c_ - e opeeseooom woeseoo< emm.em mmO.Oe Oem.mN eeN.em Nmm.Ne NOm.Ne mce.em .No.mm e .mm.oN mee.No_ eNO._O .Oe.me Nee.mm emN.NN ON..NN mmO.NO m mm_._m on.cN_ Omm.NN OeN.mm_ c emm.em_ c .No.mN_ N o ..NN..ON o mem.Nm. o meo.Ne_ e eNN.NN. _ mmeesem - mOO.NN - _oc.mN - eNN.e_ - ome.N_ e - mem.oe - moo.Nm - pee.mm - eeN.Nm m - mmN.mm - eme.em - mpe.om - NN_.NO N - eMN.om_ - NeN.Nm_ - NNN.eN_ - m.m.a.. _ meow—eeam oaee_ o e o o o o o c e o c c o o o o o m o o o o o o o o N o o o o .m. o Pm. o _ oo_ea zoeaem - - - - - - - - e I I I I I I I I m . - - - - - - - - N NNN.¢N - MNN.N_ - oooo.NN - eooo.NN - _ exeem .e.oeoeeoo acpzogcom e_4 ecu nee ecu e_o ecu ace ecu ee_eaa m covumzuvm N copuwaupm _ ee_oe=o_m None: uNOeO macwm pameLOO muezlmuemm Ocpecoaxm mep co cezumm am: new O:_O:m4 .mO=N>em .Ocezoccom NN.O ONOOP 282 8.5.1.2 Comparison Between the Basic Model and Situation 2 of the Extended Model When the firm adds to its product line, savings as well as net re- turn, under both conservative and liberal approaches, increase, and the amount increased is greater than those in Situation 1 (Table 8.27). Furthermore, the firm in Situation 2 starts savings in period 2, but not in period 3 as is the case for the basic firm and the firm in Situation 1. In period 1, unlike the firm in Situation 1 where demand for credit is higher than that of the basic firm, demand for credit of the firm in T‘ Situation 2 is lower than that of the basic firm. In other words, com- - paring the basic firm with the firm in Situations 1 and 2 indicates that in period 1, demand for credit increases for the former and decreases i for the latter situation. 8.5.1.3 Comparison Between the Basic Model and Situation 3 of the Extended Model Table 8.27 also shows that when expected demand and production of both existing and additional products increase by 10 percent, net return and savings increase. As would be expected for this short-run adjustment, net return and savings of the firm in Situation 3 are the greatest among the other Situations, including the basic one. It was observed from the comparison between the firm in Situation 1 and the basic firm that when expected demand and production of the same set of products increase, de- mand for credit, in period 1, increased. Therefore, it is not surprising that the demand for credit of the firm in Situation 3 is greater than that of the firm in Situation 2. However, the amount of credit needed by the firm in Situation 3 is much lower than that of the firms in Situation 1 and the basic firm. 283 The borrowings from input suppliers were not discussed in the com- parisons above since the amount borrowed from input suppliers is fixed at a certain percentage of total raw material costs. Therefore, the amount borrowed increases as the firm increases production level of existing products or adds more product line or both. 8.5.2 The D-C Ready-Made Garment Firm 8.5.2.1 Comparison Between the Basic Model and Situation 1 of the Extended Model When expected demand as well as production of the same set of pro- ducts increase, net return as well as savings increase. Since the firm in Situation 1 is able to save more than the basic firm, then the amount- borrowed by the firm in Situation 1 is less than that of the basic firm. It can be seen in Table 8.28 that, in period 3, the amount borrowed from the commercial bank by the firm in Situation 1 is less than that of the basic firm. Since the firms in both situations do not borrow up to the maximum limit, shadow prices of borrowed capital are all zero. 8.5.2.2 Comparison Between the Basic Model and Situation 2 of the Extended Model Given the same level of demand for the existing products, when the firm produces and sells additional products, net return as well as savings increase. It can be observed from Table 8.28 that, under the liberal ap- proach, in period 3, instead of borrowing some capital from commercial banks, the firm in Situation 2 is able to deposit some money in the savings account. The amount saved and net return of the firm in Situation 2 are greater than those of the firm in Situation 1, and the basic firm. Sha- dow prices of the firms under both situations are the same and equal zero. 284 .23 8c? .... 5.: 9.25:3 5.2.3 Nacmnpg u ONO mm>vue>cmm=ou n :ou Nmm.mO Nm¢.NN OOO.NN Oem.OO mOe.Om OO0.0m OO¢.Om pm—.mv c agape: umz Nmm.m— . mmm.Np . OO0.0N - emp.O - e wpae>vmumm mucaouu< NO¢.me OwO.—O ONN.Om OOO._O Om0.0_ Oee.Om mmO.e— ONm.mN e OOm.m NeN.ON mNO NOm.NN O emm.N O mNm.m m «NN.ON NNm.Ne —OO.N— NOO.Nm OO0.0 mm_.NN N—m.O Ne_.mN N mN0.0 —ON.Om Oem.m NNO.mm NOO.— .mN.mN NO.._ NO0.0N — mmcp>em - mO0.0_ . OO0.0 . OO_.O . OOO.¢ e . Nmm.—N . O.m.ON - NON.N— . mOe.ON m . NN0.0— . ONO.¢— . OOO.N— - NOO.—p N . ONm.—N . N¢0.0— . OOm.m— . OOO.N_ p cop—Oaam uaqcm O O O O O O O O c O O O O O O O O m O O O O O O O O N O O O O O O O O N nope; zoeozm I I r I I I I I V - r l - mO0.0_ . eOm.m_ - m I I I I I I I I N _ u l r - u l l u _ oxeom _epueoeeou Oevzoeeom ONO :oO ONO :ou O_O coo ONO coO cargo; m copuezupm N coeuezuwm _ :oFue=a_m Nova: UNmeO mace; NewELeO mcozrmuemm 0-0 on» No eczema pmz new OONOOOO .mO:_>Om .O:_3occom ON.O ONOOH 285 8.5.2.3 Comparison Between the Basic Model and Situation 3 of the Extended Model Given the comparisons above, it is not surprising to conclude that net return and savings of the firm in Situation 3 are much greater than those of the basic firm. Actually net return and savings of the firm in Situation 3 is the greatest among the situations (Table 8.28). As for the case of the firm in Situation 2, the firm in Situation 3 never bor- rows from the commercial banks. As in the case for the exporting ready-made garment firm, borrowings from input suppliers are fixed at a certain percentage of total raw ma- terial costs, therefore the borrowings increase as the firm expands. 8.5.3 The D-W/R Ready-Made Garment Firm 8.5.3.1 Comparison Between the Basic Model and Situation 1 of the Extended Model As is true for the other types of ready-made garment firms, when ex- pected demand for and production of the products increase, net return and savings increase. The increment in savings is reflected in the increment of amount saved by the firm under the conservative approach and the re- duction in the amount borrowed of the firm under the liberal approach (Table 8.29). Therefore, for this type of ready-made garment firm, de- mand for credit decreases as expected demand for and production of pro- ducts increase. Since the amounts borrowed never reached the maximum limit, shadow prices of borrowed capital in both situations are all zero. 8.5.3.2 Comparison Between the Basic Model and Situation 2 of the Extended Model As indicated in Table 8.29, given the same level of demand for existing products, when the firm produced and sells additional products, 286 .oeee com.Ne aN “NeN. meNzeeeee ase.xeze NecmaNO u ONO mm>Nue>cmm=ou u :ou NmN.NN NNm.NN OO0.0N OO0.0N OOm.NN ONO.NN Nm0.0N NN0.0 e sesame uoz ONO.N I NO0.0 I mm¢.N O NO0.0 O O mNne>Noum¢ mucaouu< O O O O . O O O O c O ON0.0N O ON¢.NN O ONO.¢N O NOm.N m mOO ON0.0N O ONO.NN O NOO.mN O mOe.NN . N O mNN.ON O mmm.mN O «OO.NN O Nme.mN N mO=N>em I OOO.mN I OOO.NN I Omm.mN I mOO.NN e I ONN.Nm I NO0.0N I OO0.0m I OON.ON m I Om0.0N I NON.ON I NN0.0N I ONe.ON N I OON.Om I OOm.Om I mOm.Om I NNN.mm N cmNNOazm uzch O O O O O O O O c O O O O O O O O m O O O O O O O O N O O O O O O O O N ouNLN :oeegm ON0.0N OOO.NN OO0.0m NN0.0N OOO.mm OOO.NN NmN.N¢ «mm.Om e I I NNm.N I NOm I ONO.m I m I I OOm.N I ONO.N I NOO.¢ I N mee.N I ONO.m I m¢¢.m I Omm.e I N excom NeNucmeeou OONzoccom ONO :ou ONO :oO ONO coo ONO coo OoNLmN m :oNumauNm N :oNueauNm N :oNuezuNm Nova: uNmom meLNN NOOELOO mOezImOemm m\zIO on» No eczema uoz use Oancm4 .mO:N>em .OONzoccoO ON.O ONOON 287 net return and savings increase. As for the case of the firm in Situa- tion 1, the increment in savings reflects in the increment in the amount saved of the firm under the conservative approach and the reduction in the amount borrowed of the firm under the liberal approach. However, the comparison between the firm in Situation 2 and the firm in Situation 1 shows that net return and savings of the firm in Situation 2 are less than those of the firm in Situation 1. These findings are contrary to the re- sults in the other two types of ready-made garment firms in which net re- turn and savings of the firm in Situation 2 are greater than those of the firm in Situation 1. Therefore it is not necessarily true that net return and savings of the firm which expands its production line are greater than those of the firm which increase the production level of the existing product line. 8.5.3.3 Comparison Between the Basic Model and Situation 3 of the Extended.Model Given the comparisons above, it can be concluded that net return and savings of the firm in Situation 3 must be higher and demand for credit must be lower than those of the basic firm. Actually, the firm in Situa- tion 3 has the highest net return and savings and the lowest demand for credit among the firms in other situations (Table 8.29). 8.6 Comparison Between Expectations and Actual Results This section presents the comparison between the expectations of the results discussed in section 8.3 and the actual results discussed in sec- tions 8.4 and 8.5. Since the expectations were stated in relative rather than absolute levels, nearly all outcomes were as expected. However, the expectation 288 that the D-C ready-made garment firms in Situations l, 2 and 3 would need some credit in period 3 was only partially realized. It was found that the firm in Situation 1 needs some credit while the firms in Situa- tions 2 and 3 need no credit. 8.7 Constraints Facing the Ready-Made Garment Firms 8.7.1 The Exporting Ready-Made Garment Firm Under the conservative approach, in all situations, for each pro- duct expected demand is a constraint in each period. Inventory is a con- straint in period 1 and/or period 3. Under the liberal approach, in all situations, inventory is a con- straint in period 3. In Situations 2 and 3, expected demand for each product is a constraint in every period. In Situation 1, expected demand for each product is a constraint in every period, except expected demand for men's shirts and long dresses in period 1. In this Situation 1, cre- dit is a constraint in period 1. 8.7.2 The D-C Ready-Made Garment Firm Under both approaches, in all situations, for each product demand is a constraint in every period. Inventory is a constraint in period 3, and credit is never a constraint. 8.7.3 The D-W/R Ready-Made Garment Firm Under both approaches, in all situations, for each product, demand is a constraint in every period. Under the conservative approach, in- ventory is a constraint in period 1 or 3, yet under the liberal approach, inventory is not a constraint in any period. - rarest-fl 289 8.8 Summary of the Findings This section will summarize only the findings with regard to the amount of credit needs, timing of credit needs, and rate of interest paid or can afford to pay. 8.8.1 Credit Needs from Commercial Bank Source For the exporting ready-made garment firms: under the conservative approach when the firms borrow as much as they can from input suppliers, they need no credit from commercial banks. Under the liberal approach, it has been shown that the firm should obtain around 35,000 baht or an increase of around 15 percent of total outstanding debts at the commer- cial bank. For the D-C ready-made garment firms: under the conservative approach when the firms borrow as much as they can from input suppliers, they need no credit from commercial banks. Under the liberal approach, the amount of credit the firm should obtain from commercial banks is around 14,000 baht which is less than the limit specified in the model. For the D-W/R ready-made garment firms: the amount of credit the firm should obtain from commercial banks under the conservative and 1i- beral approaches are around 31,000 baht and 42,000 baht, respectively. These amounts are also less than the limit specified in the model. 8.8.2 Timing of Credit Needs Results of the above analysis indicate that timing of credit needs varies according to the type of ready-made garment firm. The exporting readyemade garment firms need credit in the first period. The D-C ready- made garment firms need credit in the third period, and the D-W/R ready- made garment firms need credit in every period. 290 8.8.3 Rate of Interest There are two aspects of rate of interest. The first one is the rate of interest the firm actually pays. The second one is the rate of interest the firm can afford to pay to other lenders when the borrowings level from commercial banks is constrainted. The rate of interest the firm can afford to pay is indicated by the shadow price of borrowed capi- tal. In the above analyses the exporting, D-C and D-W/R ready-made gara ment firms pay 52 percent, 54 percent and 48 percent rate of interest to input suppliers respectively, and pay 18 percent rate of interest to com- mercial banks. The shadow price of borrowed capital of the exporting ready-made garment firm, in period 1 only, indicates that the firm could pay up to around 200 percent annual rate of interest for additional borrowings. Of course, as borrowings increase the shadow price is made smaller. CHAPTER 9 SUMMARY AND CONCLUSIONS 9.1 Research Methodology 9.1.1 General Features of the Model Previous studies regarding small scale industries in developing countries did not provide quantitative measurement of the amount and timing of short-term credit needs from commercial banks. This study has attempted to fill this void. I In response to this need, a generalized linear programming model was constructed that can be applied to any small scale industry providing certain essential data are available. For this study, the model was adapted for analyzing the need for short-term credit by firms in the cement product and the ready-made garment industries in Thailand. The generalized linear programming model has the following charac- teristics: (l) multiperiod to analyze one 12 month production cycle; (2) separate production and marketing activities with input prices and wages varying by season; (3) a differentiation between cash and credit transactions for input purchases and product sales; (4) a finished pro- duct inventory by product in physical terms by season adjusted by pro- duction, sales, and carryover phenomenon; (5) a seasonal cash flow and financial accounting (row activity) reflecting sales, borrowing, accounts receivable, purchases, other cash outflows and accounts payable of the 291 292 firms; and (6) an objective function fo maximize net return to fixed assets, family labOr, and equity capital subject to demand, inventory, machinery, borrowed capital and other financial constraints. The following variables are determined from the model: (1) produc- tion flow by product and by period; (2) accumulation and liquidation of inventory of product. by product and by period; (3) amount sold in cash and on credit by product and by period; (4) the use of machinery by pro- duct and by period; (5) the use of labor and labor cost of skilled and unskilled labor by period: (6) tax, dividends, overhead cost, interest payment and interest income by period; (7) borrowing, repayment, and outstanding by source and by period; (8) savings deposit, withdrawal, and balance by period; and (9) net return to fixed assets, family labor, and equity capital. Technically, the savings activity in the model is merely a term to balance the cash flow equation by forcing cash inflows to equal cash out- flows in periods when there is a computed cash surplus. In reality, this surplus for investment and family consumption would take on a different pattern if the cash flow management behavior of the firm departs from the assumptions imposed on this model. Nevertheless, the inforamtion on savings provides some measure of the ability of the firm to repay out- standing short-term debt and to make long-term investment. 9.1.2 Limitations of the Model Despite these many features of the model, there are many things not provided that might be of interest. For example, the model does not answer the following questions: (1) To what extent is the availability of labor a constraint in small scale industries? The model could be 293 modified to answer this question but it was assumed that all needed labor could be obtained from the local labor market. (2) What is the optimum inventory of finished product to be maintained throughout the year and especially as the firm enters a new production cycle? (3) What is the optimum inventory of raw materials to be maintained throughout the year and especially as the firm enters a new production cycle? Data were lacking to model this feature adequately and if they were available, it would have added much more complexity to an already very complex model. (4) What is the optimum technology for use by firms of differing size and market conditions for inputs and products? This is an important question I and has an important bearing on firm credit use. However, there are so many facets to this question that it can be regarded as a major study by itself. (5) What is the optimum size of small scale firm? This question would be considering long-term investments which were considered beyond the scope of this study. (6) What is the nature of the expansion path to be followed by a firm as it adjusts to an expanded market or increases its product line? (7) What are the ramifications of making decisions as to the number and timing of products to produce? This question is ap- proached in the LP methodology but matters having to do with unique situa- tions for input availability and market accessibility have not been con- sidered. (8) What is the potential for market development for individual products and what would be the effect on credit utilization resulting from a change in the ratio of prices in the product line? These apparent shortcomings in the model will be addressed later as matters for potential future research. The brief summary of the results to follow is cognizant of the fact that the findings in any linear 294 programing analysis are contingent upon the specification of the model, 'its explicit assumptions and the adequacy of the data base needed for the analysis. 9.1.3 Application of the Model The generalized model was modified as needed to analyze total amount of credit needs, seasonal credit needs, timing of credit use, and margi- nal productivity of borrowed capital for each type of cement product and ready-made garment firm. A basic model firm was defined from data obtained from the selected sample firms of both cement product and ready-made garment industries. The firms were classified according to marketing characteristics, yield- ing one type of cement product firm (which sells the majority of its products directly to consumers in domestic markets) and three types of ready-made garment firms; namely, the exporting, the domestic-consumers (D-C), and the domestic-wholesalers/retailers (D-W/R) ready-made garment firms. These basic firms for each type of cement product and ready-made garment manufacturer were synthesized from the average of all the sample firms in each group. Since the basic firm was constructed from the I average firm, it did not necessarily characterize any particular firm I since it contains some aspect of every sample firm. The products spe- cified in the basic model are not those being produced by all sample firms. They represent those products produced by most of the sample firms for which sufficient data were available to carry out the LP analy-‘ sis. Instead of estimating credit needs for the basic firm under average conditions, an approach was used to examine commercial bank credit use 295 behavior at extreme ends of the spectrum. A conservative approach where- in trade credit available from input Suppliers combined with all product sales in the form of cash would suggest minimum borrowings from the bank. A liberal approach wherein no credit was obtained from input suppliers in combination with a reasonable proportion of product sales in the form of credit would suggest maximum borrowing from the bank. These alternative strategies were examined for all basic firms and all basic firms assumed to extend short-term credit requirements through an increase in product demand and/or an increase in the number of products produced. 9.1.4 Data Sources Data used in the study were obtained from surveys conducted as part of the Thailand Rural Off-Farm Employment Assessment Project during the period May 1980 through April 1981. The surveys took place in San Patong, San Kamphang, and Muang dis- tricts in Chiang Mai Province, Ban Phai and Muang districts in Khon Kaen Province, and Muang district in Roi Et Province. Chiang Mai is in the Northern Region and Khon Kaen and Roi Et are in the Northeastern Region. (“Muang" refers to the district within which the provincial capital is located.) Sample firms were selected by using procedures to provide randomness within groups. However, there were purposive elements in the sampling procedure employed by the industry research supervisors in order to in- sure diversity of firm size, product type, production technology and lo- cation along with the willingness of entreprenuers to cooperate in the study. All firms did not supply all requested information. Since this 296 study required complete data from all sources, the actual number of sam- ple firms used in the analysis was about 60 percent of the total number of sample firms. 9.2 Short-Term Credit Needs of Cement Product and Ready-Made Garment Firms 9.2.1 Credit Needs from the Commercial Bank of Cement Product Firm These are some of the general conclusions drawn from the linear pro- gramming analysis of cement product firms. In the first period, the firm may not need any credit from the com- mercial bank if the firm obtains trade credit from input suppliers. How- ever, if the firm does not obtain trade credit from input suppliers and also provides some trade credit to customers, the firm needs some credit from the commercial bank. In the second period, the reduction in sales, the accumulation of inventory and the payment to input suppliers require the firm to borrow from the commercial bank. In the third period, even though sales pick up, yet as a result of continued inventory aceumue- lation, the firm still needs some credit from the commercial bank. In the fourth period, on the one hand, if the firm can accumulate a lot of inventory in the second and third periods and liquidate them in the fourth period, the firm needs no credit from the commercial bank. On the other hand, if borrowed capital is a constraint in the second and third periods which does not permit the firm to accumulate a lot of inventory in the second and third periods, the firm may have to produce more in the fourth period when raw material prices and wages are higher than in the earlier two periods. In this case, the firm will need some credit from the com- mercial bank. 297 The analysis reveals that the amount of credit needed is the highest in the second period. Credit needs in the third period is only a little lower than that of the second period. Credit needs in the first period is about 1/2 of the amount needed in the third period. The amount of credit needed in the fourth period, if needed, is very small. 9.2.2 Credit Needs from the Commercial Bank of Ready-Made Garment Firms As a result of high level of production, and the accumulation of in- ventory, the exporting ready-made garment firm that does not obtain cre- dit from input suppliers and provide trade credit to customers has to borrow some money from the commercial banks in the first period. Given the assumptions of this analysis, this is the only occasion when the ex- porting ready-made garment firm requires commercial bank credits. The accumulation of inventory and the reduction in sales requires the D-C ready-made garment firm to borrow from the bank in the third period if it does not obtain credit from input suppliers and provides some trade credit to.customers. This is the only occasion when the D-C ready-made garment firm needs some credit from the commercial bank. The repayment of some portion of outstanding long-term debt requires the D-W/R ready-made garment firm that obtains some credit from input suppliers to borrow some money from the commercial bank in the fourth period. Interest payment on a high level of outstanding long-term debt is one of the main factors which requires the D-W/R ready-made garment firm that does not obtain credit from input suppliers and provide some trade credit to customers to borrow from the commercial bank in every period. For this situation, the amount of credit needed is the greatest 298 in the fourth period when some part of the outstanding long-term debt must be repaid. 9.2.3 Credit Needs as Demand Increase for a Given Product Line The following conclusions apply to both the cement product and ready-made garment industries. In the first period, the provision of trade credit and the increase in cash expenses require the firms which do not obtain credit from input suppliers to borrow more from the commercial bank than before a demand increase. In the second and third periods, cash expenses for the accumulation of inventory are the same regardless of the demand assumptions. But, be- cause there are more sales in these periods with an increase in product demand, the requirements for credit from the commercial bank decrease, if needed at all. In the fourth period, additional cash inflow from the added incre- ment in sales reduces the amount of credit needs (if needed) from the commercial bank. 9.2.4 Credit Needs as Product Lines Increase, Given Demand Again these conclusions apply to both industries under study. Attention is drawn to the first period for those firms that do not obtain trade credit from input suppliers. If net cash margin of the ad- ditional product lines after taking into account the provision of trade credit to consumers is positive, the addition of some products to the product line decreases the demand for credit from the commercial bank. 0n the other hand, if net cash margin of additional product lines after 299 taking into account the provision of trade credit is negative, the pro- duction of additional products increases the demand for credit from the commercial bank (if needed). In the second and third periods, the production of additional pro- ducts can increase or decrease the amount of credit needed. On the one hand, if the firm accumulates a large inventory of the additional pro- ducts, demand for credit from the commercial bank may increase. 0n the other hand, if the firm does not accumulate inventory of additional pro- ducts, demand for credit from the commercial bank may decrease. In the fourth period, liquidation of inventory make cash inflow greater than cash outflow and therefore reduces the demand for credit from the commercial bank (if needed) in this period. 9.3 Shadow Prices When Credit is a Constraint Given the assumptions specified in the model, credit from the com- mercial bank is never a constraint for the D-C and D-W/R ready-made garment firms. Therefore, the shadow price for borrowed money is zero. However, credit from the commercial bank is a constraint for the cement product and exporting ready-made garment firms which do not obtain cre- dit from input suppliers and provide some trade credit to customers. Whenever credit from the commercial bank is a constraint, shadow price of borrowed capital is well above commercial bank rate of interest. The shadow prices range from 32 to 200 percent on an annual basis when this situation occurred. The shadow price was greater than zero more frequently for situa- tions analyzed in the cement product industry than for similar situations 300 analyzed in the ready-made garment industry. This is true, even though the maximum borrowing limit was at a higher level for the former industry than for the latter. 9.4 Overall Conclusions 1. It appears that the credit needs and the timing of those needs of small scale industry firms can vary substantially among firms even for those of comparable size and product line. 2. The shadow prices indicated that the marginal return to capital varies widely by season according to the production, inventory, input acquisition and sales strategies of the firm as they relate to the lend- ing policies of commercial banks. 3. The amount of credit needed from commercial bank sources varies directly with the level of total production, the percentage of production costs paid in the form of cash, the amount of trade credit provided to buyers and the level of inventory maintained for finished products. 4. Periods with critical credit requirements associated with rigid lending institution policy result in shadow prices for borrowed money well above commercial interest rates. 5. When the firm expands (other things equal): (a) the amount of credit needed in any period will increase or decrease depending on the type_of expansion, raw material acquisition strategy, and the credit sale policy which the firm chooses to follow. (b) the timing of credit needs may change. Net income growth for the firm may replace the need for short term credit. (c) an increase in net return and savings may be expected. 301 6. The above conclusions with respect to the maximum amount of credit needs, seasonal credit needs, timing of credit needs, and shadow price of borrow capital for the basic firms as well as the extended firms should be of vital interest to financial institutions. The need for fi- nancial institutions to have a good understanding of the management prob- lems in the industries they serve, is apparent, if the needs of those industries are to be adequately served. The results of the study suggest that commercial banks or other financial institutions should not fix the maximum borrowing limit of the firm to a certain percentage of value of collateral pledged. (In this study, it is implicitly assumed that for a certain percentage of value of collateral, the banks do not allow the L“ firms to make additional borrowings more than 25 percent of the existing 1 outstanding-debt at the banks at the beginning of the first period.) The determination of the maximum borrowing limit should-be based on pro- forma cash flow, income statement and balance sheet of the firm. If the limit is set at a level higher than the needs of the firm, it will hurt the portfolio as well as the net return of the bank. If the limit is lower than the needs of the firm, credit will become a constraint and it will reduce net return of both the firm and the bank. 9.5 Suggestions for Further Research 1. In this study, the analysis of cement product industry covered only a part of the different types of cement product firms found in rural areas in Thailand. Little if anything could be said about branch firms, more advanced firms, and specialized cement block making firms. Branch firms were excluded from the study because the decision making process is not done at the regional site and they are too big to be classified 302 as small-scale firms. The more advanced and specialized cement block making firms were excluded because complete production cost and financial data were not obtainable from them. The study of credit needs of the more advanced firms is recommended because the products produced by this type of firm, such as lamp posts, concrete slabs, etc., are expected to have great demand in the future. An expansion of this group of firms will require a large capital invest- ment and the employment of many workers. This suggestion is not intended r- to downplay the role of the group of cement product firms included~ in I this study in the generation of income and employment of rural households. This is because the more advanced firms exist only in large provincial i4) towns while the type of firm included in this study exists in both large I and small provincial towns as well as in large and small district towns. As in the case of the cement product industry, there is a need to study the credit needs of those ready-made garment firms that produce fashion garments and athletic garments since demand for the products are expanding very fast. Given this good intention, the most important hurdle facing research- ers is the cooperation and the willingness of the firm to provide impor- tant data. Perhaps research on an improved methodology for the collection of data is needed. 2. It would be desirable for research on the analysis of the short- term credit needs of the firms of different sizes in the same industry and among the firms in different regions be undertaken. To accomplish this objective, more production cost data from each individual sample firms as well as the addition of more sample firms are needed. 303 3. Since data were not available on the added cost (reduced return) and/or added return (reduced cost), resulting from the adaption of new technology in small scale industries, this suggests a fertile area for future research. Also, analysis of the credit implications for firms making long-term investments should be pursued. 4. As mentioned earlier, further refinements in the generalized linear programming model developed for this study could improve its abil- ity to solve important problems. For example, the inclusion of inventory of raw materials could be undertaken. However, personal experience with the industries of the researcher indicates that the firms do not carry very many raw materials in inventory, especially in the ready-made gar- ment industry in which style, design of the fabric and consumer tastes change frequently. More study is needed to validate or modify this ob- servation, however. If inventory of raw materials is to be included as one of the activities in the model, the following data are needed: month- ly prices of individual raw materials, space or inventory, and cost of holding inventory. 5. The optimum number of time periods to be specified in the model is a researchable question. There is a tradeoff between the added cost and the added understanding that may be incurred with the specification of more periodsin the model. Given a number of products produced an in- crease in the number of periods specified would add greatly to the com- plexity of the model. Furthermore the greater the number of periods, would markedly increase the cost of data collection, specifiation of the model and computer costs. 304 6. The model, in this analysis, is assumed to behave under condi- tions of certainty. The model would more nearly resemble reality if un- certainty was taken into account. To do so could require information on the probability distributions of some variables such as demand, supply of labor, etc. 7. The small scale industry of Thailand is complex and involves many products under a wide range of production and marketing conditions. Employing the methodology used in this study to other industries for which data were collected in the ROFEA Project could yield important results. Such omitted industries include: fruit and vegetable processing, furniture, noodles, bean curds, silk fabrication and woodcrafts. In Summary, theagenda for research on small scale industries in Thailand is very long. This study is a modest contribution to all that is needed. APPENDICES APPENDIX A 305> Table A-1 Debt and Assets Structure of the Basic Cement Product Firm Assets I . 1 ' Liabilities and Equity Current Short-Term Debt Cash 10.000 Commercial Banks 909 Accounts Receivable -- - Credit Associations 288,182 Inventory: Finished Goods -- Friends & Relatives 15,454 1 Raw Materials -- Input Suppliers 16,182 Total 10,000 Total 320,727 Fixed Long-Term Debt Land 545,371 Commercial Banks 223,676 Buildings 225,421 Credit Associations -- Vehicles 335,577 Friends & Relatives 70,634 Machinery: CB* Machine 163,402 Input Suppliers ~- Mixing Machine 15,089 Total 294,310 Molds 116.616 Total 1.401.476 Total Debt 615,237 TOTAL 1 .411 .475 Eq'” W 795 '239 ' TOTAL 1,411,476 *CB 8 Cement Block Tab' Cur Fi: 306 Table A-2 Debt-Assets Structure of Basic Ready-Made Garment Firms ' Types Of Firm ExpOrting D/C ‘ "‘04W/R' Current Assets Cash 12,000 2,700 4,000 Total 12,000 2,700 4,000 Fixed Assets ' Land' 44,317 96.340 112,750 Building 29,468 105,623 434,785 Vehicle 8,855 6,827 169,523 Machinery 25,824 10,207 76,723 Total 108,463 218,997 793,781 Total Assets 120,463 221,697 797,781 Short-Term Debt Commercial Banks - 60,000 - Credit Associations 3,125 - 41,650 Friends and Relatives - - 7,500 Input Suppliers 42,687 27,500 - Total 45,812 87,500 41,950 Long-Term Debt Commercial Banks 88,750 11,500 250,000 Credit Associations 6,250 400 18,750 Friends and Relatives - 40,000 30,000 Input Suppliers - - - Total 95.000 51.900 298.750 Total Debt 140.812 139,400 347,990 APPENDIX B Table Bric Ceml Con Wir H01 Dr. Ro Fl Tc 307 Table B-1 Types of Product Produced by Each Cement Product Firm Product Firm 10 ll 16 21 22 19 12 08 18 15 14 Bricks X Cement Blocks X X X X X X X X X Concrete Slabs X Wind Blocks X X X X X X X X X House Plots X X X X X X X X X X X Drainage Pipes X X X X X X X X X X X Roof Tiles X Floor Tiles X Toilet Heads X X X X X Well Pipes X X X X X X X X X X X Table Sets X X X X X X Spirit Houses X X X X Stoves X X X Well Pipe Covers X X X X Connection Pipes X Shallow Pipes X X 308 mooaa< NeNeN I =N ON ON ON mN mN Om ON NN ON me NN ON e ON me Nm ON NN NN ON ON ON ON NN O m NN ON mm ON Om ON ON Nm ON ON NN ON N ON ON O Ne Om mN NO NO . NN ON Oe Nm N OoNeoa NO x ONNN mNNe NmON NmON NOON «OON NOO OON NOO «mm OeN NON NOOOONO :oNuozuoce NN Om mN mm NN ON Nm mN Om mm ON NN e ON me em O NN NN ON NN ON ON ON O m ON O em «N Om NN ON ON NN mN NN Ne N NN ON N cc NO ON Om Ne NN «N we Nm N OONemO mg a mNON NOmm NNON ONmN OeNN NOON OON ONO mOm NmN OON mO NOOOONO moNem .O>< ON ON ON OO NN ON NN NN ON NN ON ENNN ELNN nuance; Ncmsmo No comm No mwNmm NNOOLO No mOmucmucmO use mmmmzoezm NNOOLO No mOmucmucmO .mummm< OOO NOOO .OoNcmO ma Ncoucm>cN new coNuozuocO No msNe> .mmNOm NIO mNamN BIBLIOGRAPHY BIBLIOGRAPHY Ahmed, S., E. Chuta and M. Rahman, "Rural Industries in Bangladesh: Re- search and Policy Implications," Journal of Management, University of Dacca, 1978. Akrasanee, Narongchai, "Industrial Development in Thailand: Problems and Prospects," mimeographed, 1980. 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