Management Practices and Performance Reporting in the Sri Lankan

Apparel Sector

Anton Malmadana Kapuge and Malcolm Smith

School of Accounting, Finance & Economics

Edith Cowan University

Corresponding Author

Professor Malcolm Smith

School of Accounting, Finance & Economics

Edith Cowan University

100 Joondalup Drive

Joondalup WA 6027

Western Australia

Tel: (08) 6304 5263

Email: Malcolm.smith@ecu.edu.au
Management Practices and Performance Reporting in the Sri Lankan Apparel Sector

ABSTRACT

An increasing number of organisations in developing countries are implementing

management accounting innovations in order to generate improvements in accounting
practices, which should ultimately impact on financial performance. This study focuses on
the implementation of one such innovation, total quality management (TQM), among
apparel companies in Sri Lanka. A survey is conducted of Sri Lankan companies to identify
differences in their business strategy, management practices and performance reporting,
depending on whether or not they have implemented TQM.

The results demonstrate a significant difference in the business strategy implemented by the
two groups, with those companies adopting TQM regarding quality as more important than
cost efficiencies. Significant differences in both quality management practices and
performance reporting systems were observed, except in the area of employee
empowerment.

Key words:
Total Quality Management, Apparel companies, Multi Fibre Agreement, Management
practices, Business Strategy, Performance Reporting, Sri Lanka

2
1. Introduction

On 26th December 2004, Sri Lanka faced a devastating tsunami which resulted in extensive

losses of both lives and the property. Financially and economically the tsunami had a big

negative impact on the country, causing untold misery and hardship to the people, while

severely disrupting economic activity across the country. The apparel sector is one of the

few industrial activities to remain largely untouched by the tsunami, and it has the capacity

to contribute to the rebuilding of the economy by maintaining export momentum. In order

to do so the redevelopment of infrastructure and the export competitiveness of the industry

require priority attention.

Just six days after the tsunami, on 1st of January 2005, the Multi Fibre Agreement (MFA)

came to an end. Protectionism in the form of Multi Fibre Agreement (MFA) quotas had

helped Sri Lanka and many other developing countries to develop their export oriented

garment industries by insulating them from direct competition from established producers.

The abolition of this allocated quota system for each country meant that the market would

once again be based on the forces of supply and demand; while countries like China and

India will gain from the abolition of quotas, other countries, including Sri Lanka, will lose

out, with job losses predicted to be between 70,000 to 135,000, mainly concentrated

amongst the small and medium sector. In the longer term the Institute of Policy Studies

predicts that strong competitive factories are likely to create more jobs as uncompetitive

enterprises go out of business. On top of job losses expected within the country there will

be approximately 125,000 to 150,000 workers returning from overseas where Sri Lankan

garment manufacturers went to take advantage of quotas.

3
The apparel industry is the biggest in Sri Lanka, and the quality of garment is vital to its

survival in an increasingly competitive apparel industry, so that the production of high

quality garments and improved productivity in the apparel industry are very important.

Many Sri Lankan garment factories have realised the importance of quality and

implemented management accounting practices, like Total Quality management (TQM).

On the other hand some have chosen not to, largely because the costs of doing so are

regarded as too large relative to the perceived benefits.

The increase in competition has led to an increased focus on customer satisfaction as a

means of obtaining competitive advantage and survival of the company in the long run.

TQM is one approach to improving the competitiveness, effectiveness and flexibility of a

whole organization, its most important characteristic being a focus on the satisfaction of the

external customer, defined as the immediate customer of the organization and all other

customers in the distribution chain for products and services, right through to the final

customer. In the textile and apparel field this plays an important role in evaluating

performance in the industry.

Current and future customer requirements have to be identified with regard to economic,

social, and technological factors, and a clear separation between short and long term

development specified. Many third world countries have adopted quality management

practices, such as TQM and in this research we highlight how the Sri Lankan garments

industry has implemented such practices.

4
2. Background to the Sri Lankan Apparel Industry

The garment industry in Sri Lanka grew rapidly after the introduction of free trade in 1977,

mainly as a result of quota-hopping East Asian garment exporters attracted by the country’s

liberal trade regime, and able to relocate their already well established garment businesses

to Sri Lanka. This relocation encouraged local entrepreneurs to start their own garment

enterprises to exploit markets guaranteed by quotas, assisted by the liberal trade regime for

importation, and subsequently, incentives granted by the Board of Investment (BOI) to

selected industries. Sri Lanka did not have a well developed export quality textile industry

base at that time, since garment production was based on imported inputs and value added

remained low (close to 30%). By the early 1980s, garment exports were growing rapidly

and by 1986 garments accounted for the largest share of all exports (27%).

The Board of Investment (BOI) of Sri Lanka offered an attractive incentive package to

garment producers in 1992 to move to rural areas; a textile quota board was established in

the same year to manage the allocation of quotas for the garment industry. These

innovations attracted well established garment producers to rural areas, and encouraged

new enterprises, with no background in garment production, to take advantage of the

quotas. By 1992, the garment industry had become the largest foreign exchange earner in

the country (US$ 400 million) so overtaking the tea industry. By 2002, Sri Lanka’s textile

and garment sector accounted for 6% of GDP, 39% of industrial production, 33 % of

manufacturing employment, 52% of total exports and 67% of industrial exports.

5
The abolition of the Multi Fibre Arrangement (MFA) makes the Sri Lankan economy,

already dependent on garment exports, highly vulnerable to the changes in the global

trading system. In such an environment, strengthening the competitiveness of the garment

industry becomes very vital if Sri Lanka is to remain one of the suppliers of choice in her

major markets.

The Multi Fibre Arrangement quotas have restricted exports of textile and clothing products

from developing countries for over thirty years, despite being established in 1974, as a

temporary measure, in part to provide industrialized countries time and space to adapt to

the increasing competition from developing countries in the importation of textiles. Given

the labor-intensive nature of the production process, it was relatively easy for developing

countries to compete in a global market. In effect, MFA developed restraint mechanisms

through the establishment of quota restrictions on specific textile and clothing items.

Industrialized countries were allowed to place bilateral quotas on various textiles, balanced

by an obligation to the developing countries to maintain annual growth rates. The MFA was

subsequently renewed five times prior to its expiry on December 31, 2004.

One outcome of MFA has been the development of new textile industries, in seemingly

unlikely countries. As exporting countries were regularly running out of quota allotment,

buyers turned to a growing number of sourcing locations. This trend led to the development

of emerging textile and clothing industries in new countries that otherwise may not have

entered the international trade market in textiles and clothing.

Sri Lanka is highly dependent on the industry for both employment and foreign exchange

earnings, and foreign direct investment (FDI) has been very significant in the sector, with

6
foreign investors now owning close to half of all garment factories. Sri Lanka remains a

large export oriented garment sector, dependent on imported textile materials and with no

capacity to supply the quantity or quality of yarn and fabrics required by the industry.

Efforts to promote backward linkages (vertical integration) in the garment industry have

largely been unsuccessful, not helped by the impact of the 1997 East Asian currency crisis

which triggered devaluations in Indonesia and the Philippines (two major competitors in

garment exports). Sri Lankan garment exporters found it difficult to compete without a

matching devaluation, so that three privatized textile factories had to be closed down.

Today, the Sri Lankan garment industry remains a low value added industry, though some

backward linkages have been developed since the mid 1990s. The absence of vertical

integration (associated with the lack of a fabric and accessory base) means that the

turnaround time of Sri Lanka’s garment industry remains close to 90-150 days compared

with an international benchmark lead time of around 60 days. This long turnaround time is

an issue in the context of competitiveness, particularly at a time when “just-in-time”

delivery has become an accepted principle and requirement in the global market. (Saman

Kelegama, 2005)

The competitive strength of the Sri Lankan garment industry is based on cheap labour, high

labour standards, a literate labour force, investment friendly government policies and

strategic shipping lanes. On the other hand, there are also competitive disadvantages, such

as long lead times, lack of product development, weak marketing and low labour

productivity partly due to outdated technology. Emerging low labour cost East Asian

countries (e.g., Cambodia and Vietnam) mean that Sri Lanka cannot compete on the basis

of low cost labour in the long-term, meaning that measures are necessary to secure

7
improvements in the productivity and quality of the sector. Management practices like

TQM, to assist the survival of the industry, have thus received renewed attention.

At the firm level, competitive issues have rarely featured in strategic planning owing to the

assured market guaranteed by the quota system and the laid back attitude of some

entrepreneurs. Most companies have made little effort to produce high value added and

high quality garments and there is a heavy dependence on buyers to channel garments to

international markets. Until recently, most garment orders were on a “No Foreign

Exchange” (NFE) basis. Many garment producers preferred such orders because there was

less risk involved. Little effort has been made at the firm level to reduce wastage and

improve the quality of work.

Sri Lanka’s lack of competitiveness in apparel products is not solely determined by low

labour productivity, firm level inadequacies and high turnaround time but also by the high

cost of infra structure facilities (e.g., electricity, water and telecommunications); Saman

Kelegama (2005) note that Sri Lanka’s electricity charges remain the highest in Asia.

Kelegama and Epaarachchi (2002) in a study of the productivity of the garment sector

identify a number of issues relating to low labour productivity where substantial

improvement is possible through upgrading the development of human skills to deal with

technological change.

3. Literature Review

A TQM implementation program requires several years for significant results to appear

(Cole 1998). Some studies show that the impact on the bottom line may be negative during

8
the first years of implementation (Hendricks and Singhal 1995). The implicit assumption is

that the organization has time to invest in resources and wait for results, and that its

external stakeholders are also willing to engage in long term relationships with the

company. Future orientation is supported by a comprehensive long term planning process,

which is based on assumptions that organization can forecast and plan for future based on

current and historical measurements.

Successful implementation of TQM in a developing country like Sri Lanka may depend on

variables different from those associated with western countries. Cultural differences have

been identified as one of the significant contributors to the failure of TQM applications

(Entrekin and Pearson, 1995), so that the transformation of the organization’s culture,

processes, and beliefs, among employees is seen as the vital aspect of the successful

introduction of TQM (Brown, 1995).

Sun (1999) suggests that the components of a TQM programme may vary from country to

country, resulting in models for different countries which are not exactly the same. A

number of authors (e.g., Lawler, Atmiyanada & Zaidi, 1992; Galperin, 1995; Katz et al.,

1998); Nasierowski & Coleman, 1997; Tata & Prasad, 1998) have investigated the links

between culture and TQM implementation, and increased the level of understanding about

national differences relating to TQM implementation.

Survey based research in the area of quality management requires the development of

reliable scales to measure the key aspects of quality management. Saraph, Benson and

Schroeder (1989) provide a model for assessing managers’ perceptions of quality

management practices at the organizational level. Their instrument addressed the role of top

management leadership, the role of the quality department, training, product design,

supplier quality management, process management, quality data and reporting, and

9
employee relations. Flynn, Schroeder, and Sakakibara (1995) extended this work by

developing a scale for use at plant level with all job levels.

These studies suggest a link between quality management practices and quality

performance, with “quality leadership” and “employee involvement” having the strongest

relationship to quality performance. Mann and Kehoe (1995) demonstrate the importance

of management in the success of TQM. Of the seven quality critical organizational

characteristics (QCOCs) considered, they found that management style and shared values

were the two main characteristics having the most impact on the successful

implementation of TQM. On the other hand, Kanji (1996) identified poor management style

that inhibits a learning culture, is based on fear or intimidation, and creates barriers between

departments, as contributing to failed TQM initiatives. Several authors have examined the

financial effects of implementing total quality management programs. Hendricks and

Singhal (2001) find that the extent of financial benefits arising from TQM depends on firm

characteristics. Easton and Jarrell (1998, 1999) also show a significant improvement in

performance after implementing TQM. Powell (1995) concludes that the resources often

associated with successful TQM implementation improve performance, rather than the

TQM tools themselves.

Dale (2001) notes that even TQM implementations in the West are at a relatively early

stage of development, and that inadequate attention has been devoted to research in the

developed nations, so that findings cannot confidently cross national boundaries, to

developing economies like Sri Lanka. In a rare study in a developing country, Lau and Idris

(2000) addressed the factors needed to ensure the success of total quality management

10
implementation in Malaysia, attributing the major influences to soft elements such as

‘culture and trust’ and ‘teamwork’.

Generally, there seems to be limitations of the findings of some of the earlier studies in

their applicability across national boundaries (Dawson, 1994; Rao et al., 1999). Therefore,

the findings of such systematic studies will generate a new way of thinking concerning total

quality management in the various country contexts.

This research will reflect the thoughts and strategies of many importers of clothing and

textiles in implementing TQM, and provides insight to anticipated changes that may result

following January 2005. The introduction of the WTO’s Agreement on Textiles and

Clothing (ATC) and the ten year phasing out of quotas will mean massive changes in the

Sri Lankan garment industry, which presently has a heavy reliance and was built on quota

categories. Garment workers will no doubt feel the biggest impact.

While the abolition of quotas will create opportunities for developing countries, it will also

expose them to additional competition from other, formerly restrained, exporters. The

outcome for any individual country will depend heavily on its policy response. Countries

that take the opportunity to streamline their policies, and improve their competitiveness, are

likely to increase their gains from quota abolition.

4. Hypothesis Development

The TQM literature highlights the importance of top management involvement as a change

agent in the introduction and establishment of TQM in their organization. Oakland (1989)

argued that a way to implement TQM successfully is to issue a total quality message that

clearly states top management'

s commitment to TQM and outlines the role everyone must

play. According to Oakland, this will enable workers to take the concept seriously since it

11
originates from the top, and shows the seriousness of the top management in implementing

the concept. Quality is an important consideration for executive thinking; the increased

awareness of senior executives, who have recognised that quality is an important strategic

issue is reflected as an important focus for all levels of the organization. A number of

authors (e.g., Wilkinson, 1992; Oakland, 2000) make a distinction between quality factors

which embrace ‘soft aspects of management’ (e.g., top management commitment and

involvement, employee empowerment and culture) and ‘hard aspects’ (e.g., improvement

tools, techniques and systems).

One method of optimizing the quality focus is through implementation of the TQM

management tools throughout the organization. TQM is concerned with the improvement of

quality in every section of the organization, so that employees are expected to be more

likely to pursue a business strategy which emphasises quality rather than cost cutting. This

expectation gives rise to the development of following hypothesis:

Hypothesis 1: Apparel companies who have implemented TQM are more likely to adopt a

business strategy focused on quality relative to those companies without TQM.

Good management practices are associated with well developed plans, good employee and

customer relations, quality products and valuable external contacts. A positive relationship

is anticipated between TQM adoption and quality management practices. Management

practices are considered in terms of particular functions: in the apparel field, these would

normally include business management, financial management, transport management,

program management, and personnel management. Garments factories who have

12
implemented TQM are expected to have better developed quality management practices, an

expectation which leads to the development of a second hypothesis:

Hypothesis 2: Apparel companies which have implemented TQM are more likely to have

more developed quality management practices than those of non TQM companies.

Performance reporting allows an organization to set sensible objectives and measure and

monitor their degree of compliance. Such reporting will help to measure the extent to which

customer requirements have been met, and assist the stakeholders of a company with an

ongoing dialogue about the setting of company priorities and the allocation of resources.

Efficient use of performance information implies recognition of ‘continuous learning’, so

that we know what has worked before, and what has not worked, so that plans can be

adjusted to improve performance. In a quality focused garment organization, measures of

quality performance are vital, and would normally include the number of defective

garments, response time and customer satisfaction measurements.

According to Wilkinson and Willmott (1995, p.8), the hard side of TQM has been

emphasised to the detriment of the soft side. Much attention and effort has been directed at

the measurement and documentation of procedures and outcomes through the use of flow

charts, scatter diagrams, control charts, etc. Comparatively less consideration is given to the

softer process of winning employee support for, and commitment to the TQM philosophy

of continuous improvement. Such views are consistent with the findings of both Hassan et

al. (1993) and Lammert and Ehrsam (1987) who suggest that more appropriate

13
performance measures need to be developed to encourage employee involvement and team

work.

Although non financial measures are increasingly important in decision making and

performance evaluation, companies should not simply copy measures used by others. The

choice of measures must be linked to factors such as corporate strategy, value drivers,

organizational objectives and the competitive environment. Smith (2005, p.16) emphasises

that performance measurement choice is a dynamic process, and that the chosen measures

need to be continually reassessed as strategies and competitive environments evolve This

leads to the development of a third hypothesis:

Hypothesis 3: Apparel companies who have implemented TQM are more likely to report

physical and financial quality measures than those companies without a TQM

implementation.

Few studies have investigated the relationship between performance measurement systems

and the new manufacturing environment. In the main, existing studies have been limited to

case studies, and the findings not sufficiently comprehensive to explain the general

relationship between the performance system and TQM practices.

The final hypothesis tests the impact of the implementation of traditional performance

measurement systems:

14
Hypothesis 4: Apparel companies who have not implemented TQM are more likely to have

performance reports comprising only traditional performance measures when compared to

those companies who have implemented TQM.

6. Research Method

6.1 Development of the Survey Instrument

The study employs a mail survey, and uses a 42-item questionnaire (detailed in Appendix

1) with questions largely derived from influential works in the literature. The instrument

comprises five major sections:

The survey instrument commences (Q.1-4) with general questions relating to the name of

the company, the number of employees, confirmation of TQM status, quality systems

implemented and the position of the respondent in the company. Subsequent questions take

the form of a Likert five point closed rating scale.

Section 2 (Q. 5-9) measures cost leadership and is based on the instrument developed by

Parthasarthy and Sethi (1993) to explore the relationship between business strategy and

cost leadership strategy measures. These questions examine the importance of operating

efficiency, competitive pricing, economies of scale, volume discounts and cost cutting

strategies in the garment industry.

Section 3 measures TQM implementation, and is based on the instrument developed by

Powell (1995). Q. 10-29 are designed to provide feedback on the seven essential aspects of

quality management practices: quality training, open organization, employee

15
empowerment, quality management, customer and supplier focus, process improvement

and corporate wide support for quality management.

Section 4 is based on Daniel and Reitsperger (1991), and includes questions (Q. 30-37)

relating to the performance reporting of physical and financial measures. Their study had

highlighted the ready availability of internal failure measures (e.g., rejects, scrap, rework)

for every level of the factory.

In the final section we seek descriptive information (Q. 38-42) on non-financial measures

(i.e., garment delivery times, overseas customer satisfaction, goods returned, garments

inspection activities), and on traditional efficiency measures (i.e., material, labor, overhead

variances and capacity utilization rates).

6.2 Sample selection

The sampling frame for the study comprises all the garments companies located in Sri

Lanka. The trade directory of ‘www.srilankabusiness.com’ was used to source the email

addresses of these companies (around 500 in total). A sequential random selection from

these companies was conducted, and telephone calls made to identify those companies

which had a ‘quality manager’ or a person on staff with designated quality-responsibility.

These companies were classified as ‘quality implemented’, those without as ‘quality non-

implemented’. Contact continued until 60 companies of each category had been identified

(providing a target sample of 25 per cent).

The questionnaire was emailed to the quality manager, or to a senior manager with

designated responsibility for quality (in the quality-implemented group of companies) and
16
to the Managing Director, or equivalent, in each non-quality implemented company.

Respondents were told of the purpose and importance of the research, and guaranteed

anonymity of their answers. Follow up reminders were emailed two weeks after the initial

emails.

Of the 60 questionnaires sent to quality-implemented companies, 32 completed responses

were received (53.3%); for the 60 questionnaires sent to non quality-implemented

companies, 35 completed responses were received (58.3%). These totals include nine

responses received via normal post rather than email. Tests for differences between email

and mail responses, and between early and late responders, revealed no significant

differences, suggesting that non-response bias was not a serious consideration in this study.

7. Results

An analysis of the position held by those who completed the questionnaire indicated that

only two (2.98%) held the titles of Managing Director, General Manager or Chief

Executive Officer and 36 (53.7%) held the title of Quality Manager. The remaining

responses of 29 (43.28%) were received from persons holding the positions such as

accountant, merchandiser, planner, owner, marketing manager and administration manager.

The number of employees in respondent companies ranged from 225 to a maximum of

4500. A t-test for the difference in size between TQM and non TQM apparel companies

indicated that the TQM companies were significantly larger than non TQM companies; the

average number of employees for the former being 2182, and for the latter 457.

Table 1 shows the comparison of the business strategy, quality management practices and

performance reporting systems between TQM and non TQM apparel companies. For the

17
purposes of testing comparisons were made with respect to scores for that group of

questions addressing: quality strategy (Q. 5-9); corporate wide quality policy (Q. 10-11),

customer focus (Q.12); supplier linkages (Q.13); process improvement (Q.14-16); quality

training (Q. 17-19, 29); employee empowerment (Q. 20-25); quality measurement (Q.26-

28); financial and physical quality measures (Q. 30-37) and traditional efficiency measures

(Q. 38-42).

Table 1: t-test of differences between TQM and Non TQM apparel companies
(Detailed analysis)

TQM Mean Non TQM t-statistics

(n=32) Mean(n=35)
Cost Vs quality strategy 4.162 3.468 5.861

Corporate wide quality policy 4.421 3.257 4.132

Customer focus 4.156 3.342 7.161

Supplier Linkages 4.406 3.314 8.868

Process Improvement 4.270 3.314 8.401

Quality Training 4.156 3.342 5.790

Employee empowerment 3.112 3.000 1.653 *

Quality measurement 4.023 3.271 5.996

Financial and physical 4.214 3.275 8.288

Quality measures
Traditional efficiency 4.212 3.325 6.999
measures

* Not significant at p<0.01 (two tailed)

18
Quality and company strategy

The first group of questions was designed to test whether companies carried out a cost

oriented strategy or quality strategy. The mean scores for the TQM and non TQM

companies show a significant difference between the two, with TQM companies rating cost

factors as less important relative to quality, compared to non TQM companies. Hypothesis

1 was supported ( t=5.861, p=.001).

Quality management practices

The second group of questions (Q. 10-29) was devoted to the seven aspects of quality

management practice. Table 1 shows that TQM companies’ scores were significantly

higher than those of non TQM companies for six of the seven aspects of quality

management, with a smallest t-statistic of 4.132, but all significant at the p=.001 level.

These results support Hypothesis 2.

Interestingly the t-test shows no significant difference between the two categories with

regard to the employee empowerment item. Mean scores for ‘employee empowerment’ are

significantly lower than any other score, for both groups, respectively 3.112 and 3.000,

suggesting that there is little commitment to any form of employee empowerment in the Sri

Lankan garment industry.

Performance Reporting

The third group of questions considered the frequency of reporting of physical and financial

quality and traditional performance measures. There was a significant difference in means

of the TQM and non TQM companies. At the same time, t-tests show there was a

significant difference in the reporting of physical and financial quality performance. There

19
was significant difference between TQM and non TQM companies in respect to the quality

measurement, providing conclusive support for Hypothesis 3 (t=8.288, p=.001).

The final group of questions related to traditional performance measures. Contrary to

expectations, TQM companies had a higher mean value than non TQM companies, in terms

of traditional performance measures, and this difference was statistically significant

(t=6.999, p=.001). Hypothesis 4 could not therefore be supported. The suggestion is that the

users of ‘new’ performance measures (non-financial and quality measures) use these to

complement rather than replace existing traditional measures.

8. Summary and Conclusions

The primary objectives of this research were to compare the business strategy, quality

management practices and performance reporting systems of apparel companies in Sri

Lanka which have TQM implementation with those of non TQM implementation. It was

anticipated that garments companies which had implemented TQM would be pursuing a

high quality strategy, and delivering a high quality performance.

There was conclusive support for hypotheses relating to differences between quality

management practices of TQM and non TQM apparel companies, with significant

differences in customer focus, process improvement and supplier linkages. There was

strong support for the hypothesis that companies with TQM would provide more frequent

physical and financial quality measures than non TQM companies.

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Most importantly, employee empowerment in both TQM and non TQM companies

displayed similar characteristics, so that there was no significant difference between the

two in this respect. Clearly employee empowerment is not well established in this industry,

with Sri Lankan top management failing to encourage lower level employees to take

important decisions or to actively involve them in decision making. This may be a feature

of Sri Lankan manufacturing industry in general, suggesting that the research should be

extended to other sectors.

The findings of the study are subject to the usual limitations associated with survey

research. In particular the use of scaled responses does not permit the receipt of detailed

answers from the respondent, which might be addressed in subsequent studies through

follow-up interviews..

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