3. PROFILE ON PRODUCTION OF COTTON

GAUZE, BANDAGE AND WADDING

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TABLE OF CONTENTS

PAGE

I. SUMMARY 3-3

II. PRODUCT DESCRIPTION & APPLICATION 3-3

III. MARKET STUDY AND PLANT CAPACITY 3-4

A. MARKET STUDY 3-4

B. PLANT CAPACITY & PRODUCTION PROGRAMME 3-6

IV. MATERIALS AND INPUTS 3-6

A. RAW MATERIALS 3-6

B. UTILITIES 3-7

V. TECHNOLOGY & ENGINEERING 3-7

A. TECHNOLOGY 3-7

B. ENGINEERING 3-9

VI. MANPOWER & TRAINING REQUIREMENT 3-10

A. MANPOWER REQUIREMENT 3-10

B. TRAINING REQUIREMENT 3-11

VII. FINANCIAL ANLYSIS 3-11

A. TOTAL INITIAL INVESTMENT COST 3-11

B. PRODUCTION COST 3-12

C. FINANCIAL EVALUATION 3-13

D. ECONOMIC BENEFITS 3-14

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I. SUMMARY

This profile envisages the establishment of a plant for the production of cotton gauze,

bandage and wadding with a capacity of 250 tonnes per annum.

The present demand for the proposed product is estimated at 182 tonnes per annum. The

demand is expected to reach at 337 tonnes by the year 2025.

The plant will create employment opportunities for 32 persons.

The total investment requirement is estimated at about Birr 6.08 million, out of which

Birr 3.15 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 25 % and a net

present value (NPV) of Birr 4.09 million discounted at 8.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

Cotton gauze, bandage and wadding are medical articles made of cotton yarn. Bandages

are single jersey fabrics produced as a network of vertical Knitted-Wales joined together

by the connecting cross-bindings and used to cover a wound hold dressing in place of

immobilize an injured part. Gauze is a loosely woven cotton fabric used to absorb fluid.

Cotton gauze bandage and wadding are mainly used in hospitals, clinics and health

centers. Bandages and wadding are required for use in binding round a wound or injury.

Gauze swabs are used for taking specimen from patients for testing infection and for

other medical purposes.

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III. MARKET AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Gauze, bandage and wadding are both imported and domestically manufactured.

However, currently, the bulk of the demand for the products is met through import. As

can be seen from Table 3.1 below, the import data set even though fluctuates from year to

year exhibits a strong positive trend. The average import for the seven years was 136

tonnes with an average annual growth rate of 51%.

Table 3.1

IMPORTED OF GAUZE, BANDAGE AND WADDING

Import Year Quantity ( Tonnes)

Value ( 000 Birr)

2000 89 3305.762001 136 4726.532002 129 4913.252003 99 4163.192004 138 8115.732005 74 3352.322006 286 9284.93Average 136 5,409

Source; External Trade Statistics. In order to be conservative the import of the products for 2007 is determined through

applying 10% growth rate on the average quantity of the products import attained during

the last three years (2004 – 2006) which is calculated as 182 tonnes.

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In addition to import, there is a domestic producer called Asmi Industrial which

produce bandages, gauze and swab. The installed capacity of this plant is about 20,000

kg/anum.

Hence, the present effective demand for gauze, bandage and wadding is estimated at 202

tonnes.

2. Projected Demand

The demand for gauze, bandage and wadding is directly related to population growth and

the extension of medical facilities, increase in the number of beds, hospitals, clinics and

health centers. Therefore, the demand for the products is projected using 4 % growth rate

which is equivalent to the rate of population growth. The projected demand and the

supply demand gap is presented in Table 3.2.

Table 3.2 PROJECTED DEMAND AND SUPPLY DEMAND GAP

( TONNES)

Year Projected Demand

Domestic Supply

Supply Demand Gap

2008 210 20 1902009 219 20 1992010 228 20 2082011 237 20 2172012 246 20 2262013 256 20 2362014 266 20 2462015 277 20 2572016 288 20 2682017 299 20 2792018 311 20 2912019 324 20 3042020 337 20 317

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3. Pricing & Distribution

The price of the domestic bandage of size 75cm2 is Birr 9.80. Assuming a 30% margin

and sales tax, the factory get price for the envisaged project is set at Birr 7.54 per packet

(dozen). This is equal to Birr 10.05 per m2.

The distribution of the product will be through the established pharmaceuticals channel as

well as a direct delivery to hospitals.

B. PLANT CAPACITY AND PRODUCTION PRPGRAMME 1. Plant Capacity The annual rated capacity of the plant will be 250 tonnes per 300 working days a year, 8

hours of single shift per day.

2. Production Programme

The plant will operate at 75% of its rated capacity in the first year, 85% in the second

year and at full capacity starting from the third year and thereafter.

IV. MATERIALS AND INPUTS A. RAW MATERIALS

The main material required for the production of cotton gauze, bandage and wadding is

half-bleached cotton yarn. The raw material can be available locally from textile

factories. The estimated annual cost of material and inputs at 100% capacity utilization is

given in Table 4.1.

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Table 4.1

ESTIMATED ANNUAL COST OF MATERIALS INPUTS

Cost, 000 Birr Sr. No.

Description Qty Foreign Local Total

1 Cotton yarn 225 tonnes 5,962.50 5,962.502 Miscellaneous Materials L.S 56.00 20.00 76.00 Total - - 6,038.50

B. UTILITIES

Utilities required are electricity and water. Water is mainly needed for human

consumption and general purpose. The annual quantities and cost of utilities are

estimated as shown in Table 4.2.

Table 4.2

ANNUAL UTILITY REQUIREMENT

Sr. Cost, 000

No Description Qty Birr

1 Electric Power 75,000 kWh 35.52

2 Water 500 m3 5.00

Total 40.52

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Knitting is the first process for the production of gauze, bandage and wadding by looping

fine spun cotton yarn on knitting machine. One complete turn of the yarn over the needle

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is called stitch. The width of the fabric varies with the stitch length. A constant knitting

width is ensured by the use of elastic yarn.

Cotton gauze from a feed roll is reeled into rolls of normal commercial length and

simultaneously cut to bandages of any given width. The cut edges of the gauze are

embossed by the embossing rollers, thus preventing the pulling out of warp threads

during use of the bandages.

Prior to folding, the gauze passes through stainless steel expander. A maximum of 3 ply

folding is obtained in each folding station. The folded gauze is wound up on cardboard or

plastic sleeves, which were cut to the width of the folder gauze.

The cotton wool ribbon which has previously been formed is converted to ordinary and

perforated zigzag cotton wool. In the case of perforated zigzag cotton wool, the multiple

gauze is transversely precut at its folding edges, thus being divided into portions.

The two rolls of gauze are guided from un winded via directing rollers of stainless steel,

into the gauze feeding station of the swab folding unit. Therein, each tack of gauze is

pulled off and folded on both sides according to the size of the finished swabs. A smooth

and even feeding of the gauze into the cutting station is effected by a rubber coated

pressure roller. The gauze in the cutting stations is measured and cut. After cutting to the

required length for the finished swab, the material is passed into the longitudinal folding

station. Here, the gauze is folded three times in the length direction. After passing this

section, the folded swab is guided by means of a conveyor belt into the cross-folding

station. In this station, the swab is cross-folded once or twice to the desired size. Finally,

the finished products of gauze, bandage of swabs will be packed for dispatch. 2. Source of Technology

The technology of gauze, bandage and wadding can be obtained from the web:

http://www.alibaba.com .The equipment can be supplied from Europe, Far East or India.

Contact can be made with the following suppliers:

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i) Yuangshan Industry Co., Ltd Manufacturer & Exporter No.454.YUANG SHAN RD. JIHUEI-TSUN CHUNGHO CITY (235) TAIPEI TAIWAN

B. ENGINEERING 1. Machinery and Equipment

The production equipment required by the plant and their estimated costs are given in

Table 5.1.

Table 5.1

MACHINERY & EQUIPMENT REQUIREMENT & ESTIMATED COSTS

Sr. Cost, ( OOO Birr) No Qty (No.) F.C L.C Total

1 2 3 4 5 6 7 8

Knitting Machine Reeling Machine Gauze Wrapping Machine Longitudinal Folding Machine Gauze Swabs Folding machine Gauze cutting/Slitting Machine Gauze Swab Sterile Machine Inspection Machine

3212 1111

993.60800.0064.20

606.6055.2018.4065.0020.00

198.72 160.00 12.88

121.32 11.04

3.68

13.00

4.00

1,192.32960.0077.08

727.9266.2422.0878.0024.00

Insurance, customs duty, inland transport, bank charge,

etc. - 524.64

-

Total - 2,623.00 3,147.64

Grand Total 2,623.00 524.64 3,147.64

2. Land, Building and Civil Works

The processing building does not require a special arrangement other than a steel

structure covered with EGA sheet roof. The total area of land required is estimated to be

1500 m2, out of which 400 m2 will be built-up area. The cost of land at the rate of Birr

0.625 per square meter and for 80 years of land lease will amount to Birr 75,000.00 The

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total cost of building and civil works at the unit cost of Birr 2,500 per m2 is estimated at

Birr 1,000,000.00.

3. Proposed Location

The plant should be located where the raw material, infrastructure, power and utility are

available. Hence, the plant is proposed to be located in Arba Minch/ Dilla/Welaita sodo

or Hosana town.

VI. MANPOWER AND TRAINING REQUIREMENT A. MANPOWER REQUIREMENT

The total manpower requirement of the plant is 32 persons. Details of manpower and

estimated annual labour cost including fringe benefits are indicated in Table 6.1.

Table 6.1

MANPOWER REQUIREMENT AND ESTIMATED LABOUR COST

Sr. No of Salary, Birr No. Job Title Persons Monthly Annual 1 General Manager 1 2,500 30,0002 Secretary 1 800 96003 Technical & Production Manager 1 1,800 21,6004 Finance and Administration head 1 1,800 21,6005 Sales person 1 700 8,4006 Store keeper 1 700 8,4007 Purchaser 1 600 7,2008 Accountant/Cashier 1 750 9,0009 Driver 2 400 9,60010 Production 9 350 37,80011 Laborers 10 200 24,00011 Guard 3 200 7,200 Total 32 194,400.00 Employees’ Benefit (25% of Basic Salary) - 48,960.00 Grand Total - 243,360.00

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B. TRAINING REQUIREMENT

The production supervisor should be given a one week on-the-job training by skilled

technician of the equipment supplier. The cost of training is estimated at Birr 40,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the cotton gauze, bandage and wadding project is based on the

data presented in the previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity

70 % loan

Tax holidays 3 years

Bank interest 8%

Discount cash flow 8.5%

Accounts receivable 30 days

Raw material local 30days

Raw material, import 90days

Work in progress 5 days

Finished products 30 days

Cash in hand 5 days

Accounts payable 30 days

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at 6.08

million, of which 32 per cent will be required in foreign currency.

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

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Table 7.1

INITIAL INVESTMENT COST

Sr. Total Cost No. Cost Items (‘000 Birr) 1 Land lease value 75 2 Building and Civil Work 1000 3 Plant Machinery and Equipment 3147.64 4 Office Furniture and Equipment 125 5 Vehicle 250 6 Pre-production Expenditure* 438.13 7 Working Capital 1044.42 Total Investment cost 6080.19 Foreign Share 32

* N.B Pre-production expenditure includes interest during construction ( Birr 288.13 thousand ) training (Birr 40 thousand ) and Birr 110 thousand costs of registration, licensing and formation of the company including legal fees, commissioning expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 7.17

million (see Table 7.2). The material and utility cost accounts for 84.76 per cent, while

repair and maintenance take 1.76 per cent of the production cost.

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost % Raw Material and Inputs 6,038.50 84.20 Utilities 40.52 0.56 Maintenance and repair 125.91 1.76 Labour direct 146.02 2.04 Factory overheads 36.5 0.51 Administration Costs 97.34 1.36 Total Operating Costs 6,484.79 90.42 Depreciation 457.26 6.38 Cost of Finance 229.87 3.21 Total Production Cost 7,171.92 100

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C. FINANCIAL EVALUATION

1. Profitability

According to the projected income statement, the project will start generating profit in the

first year of operation. Important ratios such as profit to total sales, net profit to equity

(Return on equity) and net profit plus interest on total investment (return on total

investment) show an increasing trend during the life-time of the project.

The income statement and the other indicators of profitability show that the project is

viable.

2. Break-even Analysis

The break-even point of the project including cost of finance when it starts to operate at

full capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 17 %

Sales – Variable Cost

3. Pay Back Period

The investment cost and income statement projection are used to project the pay-back

period. The project’s initial investment will be fully recovered within 4 years.

4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 25 % and the net

present value at 8.5% discount rate is Birr 4.09 million.

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D. ECONOMIC BENEFITS

The project can create employment for 32 persons. In addition to supply of the domestic

needs, the project will generate Birr 2.89 million in terms of tax revenue. The

establishment of such factory will have a foreign exchange saving effect to the country by

substituting the current imports.