CHRONOLOGICAL CALL FOR OPERATIONAL RISK MANAGEMENT IN TEXTILE INDUSTRY

SYED ALAMDAR ALI, Hailey College of Banking & Finance Lahore
Aug 27 - Sep 02, 2007

Pakistan has very highly strenuous exports. Currently the majority of exports originate in the textiles and apparels sectors. The textile industry of the country comprises of the following type of units:

1 Establishments primarily engaged in finishing of textiles, fabrics, yarn, thread and apparel.

2 Establishments of converters who buy fabric goods in the gray, have them finished on contract, and sell at wholesale.

Finishing operations include: bleaching, dyeing, printing (rolling, screen, flock, and plisse), stonewashing, and other mechanical finishing, such as preshrinking, shrinking, sponging, calendaring; as well as cleaning, scouring, and the preparation of natural fibers and raw stock. The Textile and Fabric Finishing Mills Industry in the country are mainly engaged in the business of finished textiles, fabrics and yarns of purchased fabric or on a commission and contract basis. Fabrics can be broadwoven or knitted. The industry supplies textile mills, downstream apparel manufacturers, wholesale fabric outlets and retail fabric stores.

The textile industry has entered into a new era of management. With the traditional operations, management, financial and cost control structures of the industry have become obsolete to compete in the international markets. The competing countries in the international markets of textile products are selling their products at a price that is even far lesser than the cost of production of many textile units operating in the countries. The exports of countries like Bangladesh, India and China have increased from 2.0 billion sq meters worth US $ 1.71 billion in 2003-04 to 2.6 billion sq meters worth US $ 2.11 billion in 2005-2006, thus showing an average increase of 7% per annum in terms of value. About 40% of the fabric exported from Pakistan is in unprocessed form. Dyed fabric is only 15% of the total fabric exports. Export of fabrics in unprocessed fabric results in low unit value realization. The major markets where Pakistani fabric has lost its market share are USA, Turkey, UAE, Hong Kong, Italy, UK, Bangladesh and Spain.

The study of the cotton production and consumption figures of the last five years reveal that China and India have made tremendous progress in increasing its productivity, production and spinning capacity. China has also increased its spinning capacity largely, as is evident from the reports of International Textile Manufacturers Association in Zurich. These reports indicate that in the last six years 2000-2005, China has imported 51% of the world total cotton-type spindles shipments, India 13% and Pakistan 10% while balance 26% share goes to rest of the countries of the world.

Keeping in view developments made by our competitors there are new and increased requirements for research in the field of developing information control and management system for textile industry in the country. This scenario also asks for the new control units that coordinate the financial aspects of planning with the operational aspects. There are certain kinds of risks that need to be identified and accounted for while establishing such kind of coordinated units. These all are primarily operational risk associated with this industry. These have been divided into three categories:

STRUCTURAL RISK MANAGEMENT:

The structural risk management aims at managing the risk arising from within the organization itself and enables the organizations provide a detailed plan against the exposure to seven key indicators. These key indicators are Barriers to Entry, Competition, Industry Exports, Industry Imports, Level of Assistance, Life Cycle Stage and Volatility of Industry. The Overall Structural Risk Score is a weighted aggregation of these seven key indicators.

GROWTH RISK MANAGEMENT:

The growth risk management aims at risks arising from the expected future performance of the industry. The overall growth risk Score is determined by amalgamating the scores for recent Industry Growth and Forecast Industry Growth.

SENSITIVITY RISK MANAGEMENT:

The sensitivity risk management aims at risks arising from forces (sensitivities) external to the industry. The overall external sensitivity risk score is determined by identifying the most significant external factors and weighting them to represent how significant each sensitivity is to the performance of the industry. Examples of External Sensitivities are Exchange Rates, Interest Rates, Commodity Prices and Government Regulations.

The development of operational risk management system will also include the development in the following areas as correctly pointed by Dr. H.R. Sheikh Professor, Textile Institute of Pakistan:

1. Selection of correct machines and machinery sequence for the job in hand.

2. Selection of raw-material of correct quality with reference to the required quality of end products.

3. Installation of total quality management system and monitoring of product quality at each production stage against standards.

4. Following a standard procedure of dealing with non-conforming products.

5. Operation of a preventive maintenance system to keep the machinery in top most mechanical condition.

6. Confidence to assure the clients that the products will not only meet their specifications but also their performance criteria.

7. Availing Universal Internet Access Scheme of the GOP at present available in 92 cities but likely to be extended to 400 cities within a year for marketing of value-added products through e-commerce techniques.

The operational risk management measures in the present age also require introduction of a position of the Manager of Operational Finance. The person who will be responsible for the following operational finance aspects of the organization:

1. Daily financial analysis operations of the department ensuring consistency.

2. Stakeholder relation activities, including preparing direct correspondence with them posing questions regarding the System's finances and the preparation of rating agency pre-read materials, prep books and presentation.

3. Analysis of financial and operational trends on a System-wide basis including monthly operating margin and days cash on hand projections.

4. Review, analysis and communication of Textile operations operational Analysis including analysis of operating results, projections and action plans.

5. Design and improvement of costing system in the organization.