29.

PROFILE ON LEATHER SOLE

 29-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 29-3

II. PRODUCT DESCRIPTION AND APPLICATION 29-3

III. MARKET STUDY AND PLANT CAPACITY 29-3

A. MARKET STUDY 29-3
B. PLANT CAPACITY AND PRODUCTION PROGRAMME 29-6

IV. MATERIALS AND INPUTS 29-7

A. MATERIALS 29-7
B. UTILITIES 29-7

V. TECHNOLOGY AND ENGINEERING 29-7

A. TECHNOLOGY 29-7
B. ENGINEERING 29-7

VI. MANPOWER AND TRAINING REQUIREMENT 29-8

A. MANPOWER REQUIREMENT 29-8
B. TRAINING REQUIREMENT 29-10

VII. FINANCIAL ANALYSIS 29-10

A. INVESTMENT 29-10
B. PRODUCTION COSTS 29-11
C. FINANCIAL EVALUATION 29-12
D. ECONOMIC BENEFITS 29-12
 29-3

I. SUMMARY

The profile envisages the opportunity of establishing leather sole manufacturing plant mainly
for use in local leather shoe industries.

The demand for leather sole is supplied both through import & local production. The average
import account to 34,000 pairs per annum. The installed capacity of local leather sole
manufacturing industry pairs is about 90,000. The present projected demand for leather sole is
about l43,000 pairs.

The envisaged plant will have a capacity of producing 90,000 pairs of leather soles per annum.
The equipment required by the unit are technically high standard which has to be imported. The
cost of machinery & equipment is estimated at Birr 800,745.

The plant will require a building area of 500 m 2 & the estimated cost of building is about Birr
700,000.

The production inputs consist of leather, glue & other materials as required by the plant. The
total cost of raw materials at full capacity operation will be Birr 25,000. Utilities like electricity
& water cost about Birr 5,000.

The unit will generate employment for about 35 people. The annual expenditure for
employment is estimated at Birr 171,850.

The total investment cost of the plant amounts to Birr l.96 million. The total annual sales
revenue will be Birr l.l7 million at full capacity operation. It takes five years to recover its
initial investment cost. The net present value (NPV) of the project is Birr l.807 million at a
discount rate of l6% & the internal rate of return (IPR) is 49.07%.

II. PRODUCT DESCRIPTION AND APPLICATION

Leather sole is one of the major components of leather shoe. The demand for leather sole
increases with the production of leather shoes. As the demand for leather shoes is expected to
increase substantially with population growth, urbanization & income rise, the demand for
leather sole also grows in the same way. There is also a potential in the export market as
Ethiopian leather is competitive in the world market.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Present Supply and Demand

The demand for leather sole is supplied both by local production & import. Leather sole is
locally produced solely by Data Rapid Shoe Factory located at Addis Ababa. According to
 29-4

the Factory's documented file (MOI), the annual production capacity of the factory is about
90,000 pairs of leather sole.

In addition to the local supply, leather sole is imported to the country from Europe & East Asian
countries. According to Customers Import Statistics, the import of leather sole during the
period l986-l996 ranged between about 5,006 pairs in l988 & about l00,000 pairs in l989 (see
Table 3.l).

Table 3.1

IMPORT OF LEATHER SOLE

Year Amount
(m3)
1985 4l,075
l986 5,273
l987 l8,785
l988 5,006
l989 l00,000
l990 3l,l28
l99l 78,820
l992 l6,4l2
l993 l2,987

Source: The External Trade Statistics

The consumption of leather sole is closely related to the need of high quality shoes, which in
turn depends on increasing income. At present, leather sole shoe are predominantly consumed
by high income group of the population. However, so far there is no documented study
indicating the ratio of leather sole vis-a-vis plastic or rubber sole shoe consumers in the country.
Because of this, and for the purpose of having an idea on the market, random sample survey was
conducted at several mass gatherings. According to the survey result, out of l00 leather shoes
worn by people, a average of 5 shoes were found their sole made from leather. To remove
some of the barriers created due to limited supplies and imports, the figures were initially raised
to a level of 10%. Taking into consideration the annual local leather shoe production, the
present anticipated demand was calculated by multiplying the 10% ratio by the total annual
local leather shoe production. (See Table 3.2)
 29-5

Table 3.2

ESTIMATED DEMAND FOR LEATHER SOLE

Year Annual Shoe Production Estimated Demand

(pairs) (pairs)
1989/90 l,976,365 l97,637
l990/9l l,270,39l l27,040
l99l/92 873,7l4 87,37l
l992/93 928,83l 92,883
l993/94 l,l94,l74 ll9,9l7

Source : Survey of Manufacturing Industries l993/94.

2. Demand Projection

To project the future demand the following simple assumptions were taken.

- The average estimated demand for the year l989/90 - l993/94 was assumed to be the
effective demand for the year l996.

- Considering the future annual growth of shoe production & the changes in the pattern of
shoe consumption due to income rise, the demand for leather sole is assumed to grow by
7% per annum.

Based on the above assumptions, the future demand for leather sole is projected to reach
322,000 pairs in the year 2008. (See Table 3.3)
 29-6

Table 3.3

PROJECTED DEMAND FOR LEATHER SOLE

Year Projected Demand (pairs)

1997 l53093
l998 l638l0
l999 l75277
2000 l87546
2001 200675
2002 2l4722
2003 229752
2004 245835
2005 263043
2006 28l456
2007 30ll58
2008 322239

3. Price

The current average ex-factory price of locally produced leather, plastic & rubber sole Birr 20,
Birr l2 & Birr l0 per pair, respectively. The price of leather sole is relatively expensive
compared to the others. Therefore, to determine the ex-factory price, the average price of
locally produced plastic sole, which is a close substitute for leather sole, is considered. It was
then found more appropriate to adopt an average price of l3.00 Birr per pair of leather sole.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

As presented in the market study, the present demand (l996) for leather sole in the country is in
the order of 90,000 pairs. Accordingly, the envisaged leather sole producing plant will have an
annual capacity of 90,000 pairs. It is expected that it will produce 67,500 pairs of men's sole,
l3,500 pairs of ladies sole, and 9000 pairs of children's sole. The plant will operate on a single
shift operating for 8 hrs. a day, and working for 300 days a year.

2. Production Programme

Production build up will start in such a way that in the first year of operation the plant will
produce only 75% of the installed capacity. In the second and the third year, production
capacity will grow to 85% and 100% of the installed capacity, respectively. From the third year
on wards, it is expected that the plant will maintain full capacity production.

29-7
IV. MATERIAL AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The major raw material required is finished leather. Rejects of hide leather producing plants can
also be used for sole making. The total leather requirement for sole making (90,000 pairs) is
estimated at 2,543.5 kgs. whose cost estimate is Birr l5,000.

Auxiliary materials consists of rubber sheets, cementing adhesive and other components. A
total of about 270 m2 rubber sheet is required. The total cost estimate of auxiliary materials is
Birr l0,000.

B. UTILITIES

Inputs to the plant consists of electricity and water. The total cost of these inputs is estimated at
Birr 5,000.

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The major operation involved in the production process are leather cutting, leather sole splitting,
roughing, trimming, edge making, stamping and cementing.

Required sizes of leather are cut by hydraulic clicking machine. Roughing operation helps to
remove excess. After cutting the required size, the edges of the leather sole are trimmed off by
trimming machine. The next operation is edging. Edging operation is the task of improving the
edges until smooth and satisfactory finishes are obtained.

Stamping and cementing are the major operation carried out consecutively. Hence, leather sole
pieces that are previously prepared are now fixed together and cemented by using adhesive.

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required by the leather sole making plant is presented in
Table 5.1.

29-8
 Table 5.1

LIST OF MACHINERY AND EQUIPMENT

No. Description Qty. No. Cost ('OOO

Birr)
l Roughing machine l
Sole stamping marking machine 1
Sole edge cementing m/c 1
Sole drier 1
Double side laminating 1
Automatic splitting 1 For Items l-l0
Automatic sole Producing 1 cost: Birr
Hydraulic press 1 696,300
Band pressing 1
Decorating machine 1
Sub Total 696.3
Freight insurance, Bank etc. l04.445
Total Cost 800,745

2. Building and Civil Works

The floor size for building is estimated at 500 m 2. Considering the unit cost (per m 2) of the
building to be Birr l,400, the total cost estimate of building is Birr 700,000. It is expected to
accommodate production machinery and equipment, offices, stores for raw materials and
finished products, and other social facilities.

The area of land for the plant is estimated at 700 m2. The cost of land will be Birr 69,195.

VI. MANPOWER AND TRAINING REQUIREMENTS

A. MANPOWER REQUIREMENT

The plant requires both skilled and unskilled labour. Skilled labour will be engaged in operating
the production machinery. The list of manpower involved in production and administrative
activities is shown in Table 6.1.
 29-9

Table 6.1

MANPOWER REQUIREMENT

No Description Qty. (No.) Monthly Annual

Salary/wages Salary/wages
A. Administration

1 Plant Manger l l200 l4,400

2 Secretary 1 400 4,800
3 Personnel Office 1 600 7,200
4 Accountant 1 600 7,200
5 Salesman 1 600 7,200
6 Store man 1 500 6,000
7 Clerks 2 250 6,000
8 General Services 5 l50 9,000
9
B. Production

10 Production Supervisor 1 800 9,600

11 Skilled workers 5 250 15,000
12 Semi skilled 10 l80 21,600
13 Unskilled 6 l50 l0,800
Sub - Total 35 - l18,800
Benefits (25% of BS) 29,700
Training Cost 35 23,350
Grand Total 35 l7l,850

B. TRAINING REQUIREMENT

Training is required for skilled operators. It can be conducted in one of the shoe factories
available in the country. A total of Birr 23,350 is allotted for conducting the training
programme.

VII. FINANCIAL ANALYSIS

A. INVESTMENT COST

The major breakdown of the total initial investment cost is shown in Table 7.1.
 29-10

Table 7.1

SUMMARY OF THE INITIAL INVESTMENT COST

Cost Items Foreign Local Total

Land - 69.l95 69.l95
Building & Civil Works - 700 700
Plant machinery & equipment 696.3 l04.445 800.745
Office furniture & equipment - 100 l00
Vehicle - - -
Pre-production expenditure - l20 l20
Interest during construction - 174.73 l74.73
Total 696.3 1,268.37 1,964.67

The leather sole plant requires an initial investment cost of Birr l.96 million. The foreign
currency component amounts to Birr 0.696 million which represents about 35.4% of the total
initial fixed investment. The other 64.6% of the total initial fixed investment cost will be
required in local currency.

The following parameters were used to estimate the net working capital requirement for the
plant.

Item Day of Coverage

Cash in hand 30
Account 25
Raw material local 45
Raw material foreign l20
Work in progress l0
Finished goods l5
Account payable 30
Energy l5

The net working capital requirement at full capacity amounts to Birr 22,933 of which about
3.36 % will be required in foreign currency.

B. PRODUCTION COSTS

The total production cost at full capacity amounts to Birr 528,311 of which about 4.7% will be
for raw material.
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C. FINANCIAL EVALUATION

1. Profitability

According to the projected income statement (see Table 7.A.1), the project generates profit
beginning from the first year of operation. The income statement and other profitability
indicators show that the project is viable.

2. Break-even Analysis

The break-even point will be reached at a production of 3l.7% capacity utilization. The total
revenue that will be generated in order to breakeven will be Birr 370,877.

3. Pay-back Period

The project will recover the initial investment cost in a period of less than five years.

4. Rate of return

The internal rate of return (see Table 7.A.2) is 34.52% and the net present value discounted at
16% Birr 1,806,530.

D. ECONOMIC BENEFIT

The annual income tax that will be generated from the project will rise from Birr 232,095 in the
first year to Birr 319,895 in the 11th year. The total amount of revenue that will accrue to the
region through out the life of the project is estimated to reach Birr 28.34 million.
 Appendix 7.A

FINANCIAL ANALYSIS SUPPORTING TABLES