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2010

Case Study on Label Converting

Make or Buy Decision


Case Study on Label Converting 2010

Table of Contents:

1 Background.......................................................................3
2 Study Objective.................................................................5
2.1 To Analyze the Manufacturing Cost Process – Make Decision................................5
4 Other Advantages towards Make Decision........................11
2.2 Just in time Production can be achieved minimizing finished product stocks........11
2.3 Production Wastages can be studied and necessary corrective actions could be
implemented...................................................................................................................11
2.4 Setting time of die could be studied and necessary corrective actions could be
implemented...................................................................................................................11
2.5 Raw Material costs can be tried for controlling with better planning......................11
2.6 Wear and Tear could be minimized with regular maintenance, so not have shut
down time due to machine break downs........................................................................11
2.7 Proper utilization of machine and labor time could be achieved economizing the
cost of production..........................................................................................................11

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Case Study on Label Converting 2010

1 Background
The labels are one of the identification technologies being adopted
world-over. Labels could be pre-printed as a Brand packaging product
label or could be printed on demand as a barcode label. On demand
labels are printed through label printers and these labels printers
typically print on paper and various label stocks in multiple sizes.
Because label printers can use so many types and sizes of media, they
are suitable for an incredibly diverse range of identification printing
needs. Label Printers can produce wristbands, hazardous material
labels, temporary ID badges and visitor passes, event tickets, receipts,
apparel tags, price labels, file and document identifiers, shipping labels
and container IDs, inspection stickers and more.

These labels can be used for Product identification, Product protection,


Asset management applications, documentation and file applications
etc. The applications for label are varied but all that labels helps is in
identification technologies.

These labels are usually in self adhesive forms for easy application to
the varied surfaces.

Both Brand packaging Product labels as well as on-demand labels are


used in various segments including various manufacturing industries –
Automotive, FMCG, Consumer Durables, Electronic, Telecom etc; Govt.
organization; Defense; Retail; Hospitals etc.

There are various Printing technologies been used for producing labels
and few of most prominent ones are as below

1. Rotary or flexo-graphic Technology


2. Letter Press or Flat-bed Technology
3. Offset Technology
4. UV Technology

All the above technologies are utilized for Brand Packaging labels as
these are most efficient and produce quality labels.

Barcode Labels predominantly use Rotary or Letter Press technologies


to be produced, as they are most efficient and produce quality labels.

Here in this case I would highlighting one variety of Barcode Label


production cost analysis for understanding and would use one of the
these 2 technologies to depict the impact on production cost, as both

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Case Study on Label Converting 2010

these technologies have different impact on production speeds and


costs.

LABELS FOR DIFFERENT INDUSTRIES

Labels for Labels for


Pharmaceu Cosmetic
tical & Personal
Industry Care
With Products
Pharma
Grade
Adhesives

Food Barcode
Labels Labels
Thermal
Transfer
and direct
thermal
(Both in
plane and
multi-colour
label)

Laser Labels for


Labels chemical
Drums

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Case Study on Label Converting 2010

Labels for Labels for


Automobil Airlines &
e Industry Transportat
ions

Labels for Security


Garments Labels
Industry

Labels for Difficult Conditions

2 Study Objective

The objective of this study is to achieve the following

a) To analyze the manufacturing cost process – Make Decision.


b) To decide on Make or Buy decisions for processed customized
labels

2.1 To Analyze the Manufacturing Cost Process –


Make Decision

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Case Study on Label Converting 2010

To convert a Label stock to a desired customized label, there are


various processes and costs. I would be highlighting various Cost
break-ups of various manufacturing components to manufacture a
customized label.

To manufacture a Specific Label Size, below Variable components


are required

1. Raw material – Label Stock material, Ink stock material, Dies,


Block, shrink-wrap film material
2. Direct Labor
3. Machine Cost
4. Overhead – Electricity Charges, Overtime, Wastages, Setting-
time

Raw Material

Label Material Stocks

1. Coated and Uncoated Paper label


2. Synthetic, PVC, PP, PE Labels
3. Specialized Labels
4. Film labels

Ink Stock Material – All Panton color and mixed color stock inks

Dies – Dies as per label sizes – Single Up, 2 Ups, 4 Ups and so
on

Machine Cost

There are various type of machine and processes – Printing


Technologies been used for converting a label stock in to a customized
label. Depending on the printing technology being used as mentioned
above, a standard machine cost is proportioned for each job

Calculation of Cost of job for a specific Label

Label Considered : Coated Paper label Stock


Label Size : 50mmx25mm (Width x Height)
Ink formulation : Single Color pre-printing
Qty to be produced : 1Lac labels

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Case Study on Label Converting 2010

Raw Material Cost

Coated Paper Label Stock Cost : Rs.27 per Sq.Mtr

Ink Cost : Rs.500 for 1lac labels

Block Cost : Rs.2000 for custom printing

Die Cost : Rs.1500 for size 50x25mm

Calculation of Material required producing 1lac labels of


size 50mmx25mm

Label Size : 50x25mm 50mm


2mm 25mm

3mm
Inter-label Gap : 3mm minimum as standard

Left Margin : 2mm

Right Margin : 2mm

Material Required : ((28mmx1lac labels)/1000)) = 2800mtr length


of material

Add Wastage (~5%) : 200mtr

Total Material : 3000mtr length

= 3000 x 0.054 = 162 sq.mtr

Total Material Cost : 162 x 27 = Rs.4374

Now to optimize the production, 4 Ups die is been taken, so that 4


labels gets cut with single impression

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Case Study on Label Converting 2010

On a Flat Bed printing technology, it is estimated that about


3000impresssions can be achieved in 1 hour

This translates to 12000labels per hour with 4 Ups die

To produce 1lac labels, therefore now 9 hours would be required –


1lac/12000 = 8.5hours.

To accommodate setting time of die another half an hour is added to


the total production time making total of 9hours.

Machine Cost Calculation

As Flat-Bed printing technology is used for converting raw label stock,


standard machine hour cost is Rs.300 per hour. This would vary with
the printing technology been used with the type of machine.

For a Flexo printing technology, standard machine hour cost taken is


Rs.2000 per hour

Total Machine cost for producing 1lac labels : Rs.300 x


9hrs =
Rs.2700

Labor Cost

On an average Rs.35 per hour is been paid for a Single operator and
for producing any job about 3 operators are required.

Total Labor Cost : Rs.35 x 9 x 3 = Rs.945

Electricity

On an average about Rs.10 per hour charges are been incurred in


running the machine

Total Electricity Charge : Rs.10 x 9 = Rs.90

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Case Study on Label Converting 2010

Overtime Cost

Over time cost is 1 and half times of regular hour cost.

As for producing 1lac labels 9hours are required, 1hour over time cost
for 3 operators would be Rs.35 x 1.5 x 3 = Rs.157.5

Now to compute the total cost of Production as below

1. Raw Material Cost : Rs.4374

2. Machine Hour Cost : Rs.2700


3. Die Cost : Rs.1500
4. Ink Cost : Rs.500
5. Electricity Cost : Rs.90
6. Labor Cost : Rs.945
7. Overtime Cost : Rs.157.5
8. Block Charges : Rs.2000

Total Production Cost : Rs.12266.5

On Above there would be additional Packing and Shrink-wrapping cost,


which is estimated to be 1-2% of the production cost.

Packing and Shrink-wrapping cost: Rs.12266.5 x 2% = Rs.245.3

Total Production Cost with Shrink-wrapping = Rs.12511.8 ~


Rs.12512

Therefore to produce 1Lac labels of 50x25mm, total cost would be


Rs.12512, translating to Rs.125 per 1000 labels.

Fixed Costs

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Case Study on Label Converting 2010

1. Machinery Cost : Rs.20Lac


2. Monthly Rent for the Building : Rs.20000
3. Power line : Rs.1Lac
4. Fixed Assets : Rs.3.5Lac
5. Shrink-Wrap Machine : Rs.50000
6. Security Deposit : Rs.1Lac

Fixed Costs are not directly considered in calculation of the production


cost, except the machine cost is amortized as a variable standard cost
for machine usage. As the profit pricing is been followed and a profit of
Rs.10Lac is estimated in for 1st 3 years to break-even. In this business
of label conversion, 30% gross profit is estimated.

3 Buy Decision

Cost of 50x25mm, 1lac labels buy from Other Big Convertors

Label Cost : Rs.137 per 1000 labels


Logistics Cost : Rs.200 per shipment
Total Cost for 1lac labels : Rs.13700 + Rs.200 = Rs.13900

Apart from this there is a threat cost, as incase label is pre-printed


with a single color logo of a company, original convertor would have
access to the opportunity.

This Buy Cost increase much more once it is high value labels in terms
of Synthetic or specialized labels, where cost of the raw material itself
would be Rs.600 per Sq. mtr

Also as the label becomes much more specialized, there is always a


Minimum Order Qty of the Raw Material Purchases as stipulated by the
Vendor of Raw Material.

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Case Study on Label Converting 2010

4 Other Advantages towards Make Decision


2.2 Just in time Production can be achieved
minimizing finished product stocks

2.3 Production Wastages can be studied and


necessary corrective actions could be
implemented

2.4 Setting time of die could be studied and


necessary corrective actions could be
implemented

2.5 Raw Material costs can be tried for controlling


with better planning

2.6 Wear and Tear could be minimized with regular


maintenance, so not have shut down time due to
machine break downs

2.7 Proper utilization of machine and labor time could


be achieved economizing the cost of production

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