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Lao Garment Services Centre Ministry of Industry and Commerce, Lao PDR Page 1 Lao Garment Services Center Abstract This project falls under the Export Competitiveness and Business Environment Component of the Trade Development Facility. Specifically it is aimed at enhancing the competitiveness of the Lao garment sector. Garment exports represent one of the most important elements of the country’s total exports and the sector employs up to 28,000 people. Its 120 factories are facing stiff competition from larger producers that have made the effort to invest in human resource development. Labour productivity rates in Laos are 1/5 of what they are in China. This project aims to increase the productivity of the garment sector by supporting the establishment of a Garment Services Centre that would offer “demand driven” training and consultancy to garment factories. The core products of this centre would be productivity consultancy and training for the 3,000 supervisors currently employed by the industry. The Centre would be managed during its first years of operations by an international expert provided to the project by CIM (financed by the German Government). The Centre is anticipated to become “cost covering” in year three of its operations. The project would be owned by the Association of Lao Garment Exporters and the Centre’s core services would be paid for by the garment industries themselves. Name of Sub-Project Lao Garment Services Centre Amount from TDF $558,800 Amount from Project Partners $718,000 Implementation Period September 2009 to August 2013 Sub-Executing Agency The Association of Lao Garment Industries Date of Design January 2009 1. Context

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Lao Garment Services Centre

Ministry of Industry and Commerce, Lao PDR Page 1

Lao Garment Services Center

Abstract This project falls under the Export Competitiveness and Business Environment Component of the Trade Development Facility. Specifically it is aimed at enhancing the competitiveness of the Lao garment sector. Garment exports represent one of the most important elements of the country’s total exports and the sector employs up to 28,000 people. Its 120 factories are facing stiff competition from larger producers that have made the effort to invest in human resource development. Labour productivity rates in Laos are 1/5 of what they are in China. This project aims to increase the productivity of the garment sector by supporting the establishment of a Garment Services Centre that would offer “demand driven” training and consultancy to garment factories. The core products of this centre would be productivity consultancy and training for the 3,000 supervisors currently employed by the industry. The Centre would be managed during its first years of operations by an international expert provided to the project by CIM (financed by the German Government). The Centre is anticipated to become “cost covering” in year three of its operations. The project would be owned by the Association of Lao Garment Exporters and the Centre’s core services would be paid for by the garment industries themselves.

Name of Sub-Project Lao Garment Services Centre Amount from TDF $558,800 Amount from Project Partners $718,000 Implementation Period September 2009 to August 2013 Sub-Executing Agency The Association of Lao Garment Industries Date of Design January 2009

1. Context

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Background The Lao garment sector is one of the most important industries in the country. Today there are 59 exporting companies and 57 sub-contractors employing up to 28,000 workers. Between 1998 and 2002 garment exports represented between 30-40% of the country’s total merchandise exports. Business leaders anticipated a drop in demand following the expiration of the Agreement on Textiles and Clothing but up to now garment producers in Laos are still reporting strong orders up to April 2009. The table below illustrates the durability of the sector over time and illustrates that the Association of Lao Garment Industries has projected a further 10% increase in 2008; up to $167 million.

The garment sector is an integral part of the Government’s export strategy. In late 2005, with the aim of assisting the GoL to formulate an export strategy, ITC analysed 21 sectors and ranked them in terms of their importance. Two main factors were used to determine “relative” importance: export potential and socio economic impact. In total the study used 18 indicators and provided ranking for a number of dimentions to assist policy makers in identifying priorities.1 The three top sectors, according to this report were: wood products, coffee and clothing, in that order. However, for the

1 ITC, “Export Potential Assessment in Lao PDR, Market Analysis Section”, November 2005

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wood sector to expand in a sustainable way “it would require substantial expansion of plantation forestry as a resource base” and concerning coffee, “the capacity for expanding production is limited”2. So, the garment sector remains one of the cornerstones of Lao PDR’s export development strategy. In spite of its good performance the garment sector is facing increasing competition. In 2006 the National Statistics Centre, with the support of UNDP, prepared a policy brief on the garment sector with a view to making actionable recommendations concerning its long term competitiveness. The study focued on three main aspects of competitiveness: labour costs, labour and capital productivity and lead time. Concerning labour costs the study reported that the hourly wage was considerably lower than in China ($US 0.12 vs $US 0.68). With respect to labour and capital productivity it was shown that while wage rates may be low, so is productivity; for example, a garment worker in Laos will produce 1,350 pieces a year compared to her Chinese counterpart at 7,500.3 This low productivity more or less cancels out any wage rate competitiveness. In order to susutainably compete in an environment where it is desirable, from a socio political objective, for wages and incomes to be increasing, today’s labour productivity in Lao garment factories must also increase significantly. The third critical element of competitiveness in this market is, lead time. The fashion industry is “season sensitive”, meaning that quick turn around times are critical to profitablity in the destination markets. The average lead time in Laos is 70 days from when the order is place to the time of delivery. The standard for this is 30-45 days. In spite of this slower lead time, some of Lao’s competitors are also poor, such as Cambodia and Banghladesh thay have lead times of 90 to 120 days.4 The conclusion of this study emphasized that sustainable competitiveness must “come through the training and transfer of technical skills, improving production capacity, access to information and markets, better management infrastructure, access to banking systems, improved government regulations, adopting product and target diversification and identifying niche products and markets.”5

In a separate study, completed in December 2005, ITC looked specifically at developing a “Sectoral Strategy” for the garment sector.6 In this strategy paper, constraints were addressed at three levels: the enterprise level, the institutional level and the macro or policy level. While the suggestions at the enterprise levels are specific and relate mostly to product diversification and markets, the recommendations at the meso or institutional level deal almost exclusively with improving the human resource capacity of the industry. The centrepiece of this section concerns the the establishment of a training centre7 to be owned and operated by the Association of Lao Garment Industries (ALGI). The purpose of this project proposal is to implement this recommendation. Rationale for the Project and how it Contributes to TDF Outcomes

The objective of the Trade Development Fund is to support in the establishment of the National Integrated Framework Governance Structure (NIFGS) and implement activities which facilitate trade and cross border movement of goods. These activities in turn support the GoL’s larger aims of poverty reduction and economic development as reflected in the National Social and Economic Development Plan.8 The overarching outcomes being pursued are:

2 ITC, “Export Potential Assessment in Lao PDR, Market Analysis Section”, November 2005, page 10 3 Comparing productivity according to “pieces” can be misleading sometimes as the value added in a t-shirt may be considerably less than in a quilted jacket. Nevertheless such indicators are frequently used for international comparisons. 4 Given the fact that Laos is landlocked and does not have access to local fabrics and accessories, the given lead times are within acceptable limits. 5 National Statistics Centre, “Addressing the impacts of the Phasing out of textiles and Clothing Quotas in Lao PDR” 2006 6 ITC, “National Export Strategy for Lao PDE 2006-8, Sectoral Strategy, Garments”, December 2005 7 Op Cit. page 6 8 Trade Development Facility PAD, October 2008, page 3

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• A better trading environment with simplified bureaucratic procedures including customs,

• An improved legal and regulatory framework, • Enhanced general capacity of line ministries and agencies involved in the trade

sector, • Improved private sector capacity to compete in international markets, • More effective participation in bilateral and multilateral negotiations, and • An increased competitiveness of Lao PDR products and a contribution to poverty

reduction. This project is specifically related to improving the capacity of the private sector to compete in international markets. There are 5 components to the TDF and this project would fall under Component C “Export Competitiveness and Business Environment”. In this component the aim is to increase the competitiveness of key sectors through improving the relevant parts of the business environment and by “sector-specific growth, driven by local companies that are successful in raising the sophistication of their operations and strategies and increasing their competitiveness”9 The garment sector is specifically identified as a priority in this component. The project described below will address one the most often cited and key competitiveness constraints of the garment sector, namely increasing the productivity of its labour force. 2. Project Description Objective The aim of the project is to “enhance the competitiveness of the garment sector”. The logic of the project is as follows: exports in the garment sector are at risk of stagnating or declining because of eroding competitiveness; one of the most critical competitiveness constraints, particularly for the companies that account for the bulk of exports, is the productivity of their human resources; several analyses of the HRD requirements in these firms point to the need to upgrade their supervisory level so that productivity and efficiency rates can be increased; this can only be done through high quality training adapted to the needs of Laos; for this problem to be addressed in a sustainable way, some form of training facility would be necessary. The immediate objective of the project is “to establish a Garment Service Centre that offers ‘demand driven’ services to more than 120 garment factories in a sustainable way”. This garment centre will start by offering short term courses delivered by part time trainers, but as the Centre matures it will also eventually address the need for longer term and even full time courses of 6, 12 or even 24 month courses that might be delivered by full time Centre staff. This project, however, will only focus, in this phase, on short term and “applied” courses. Components Several projects over the past 10 years have offered “ad hoc” training to relatively small numbers of garment factories in Laos. Up to now none of them have addressed the problem in a sustainable way. One of the core principles of this project is that the fundamental problem of access to good quality training for the garment sector can only be addressed if the garment factories themselves are prepared to pay a market driven price for this training. This “willingness to pay” was confirmed in several interviews with individual firms as well as in a workshop with 12 garment manufacturers in late December 2008. This willingness comes from the recognition of the importance of training and other services to the industry’s future competitiveness. One factory manager commented that “in Laos I employ 1,000 workers and need 20 foreign supervisors to meet my production targets, but in my other

9 Op Cit page 40

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factory in Vietnam where there are 2,500 workers, I only have 2 foreigners. There is no question that the Vietnamese factory is more cost effective, so, we need more competent local supervisors”

There are basically 5 categories of manpower10 in the Lao garment sector: top management; senior management; merchandisers, mid-level or supervisors and lastly operators. Out of all of these categories training is most required in the last two. The personnel turnover is most significant at the lowest level of the operator, where turnover rates can be as high as 50-60% per annum. While this situation is not good, the industry has learned to deal with it effectively. In fact, all factories have specialized selection procedures for hiring new operators and placing them on the line within a period of 2-4 weeks. They use this induction period as a way of selecting the best and most proficient operators and discarding those that they feel have no potential. Even though turnover rates are higher at the lower end, the most important segment of the workforce that most owners consider to be most vital to productivity is at the supervisory level.11 This will be the main target group for this project. Typically, in a factory of 500 workers, it would not be unusual to find between 45-55 supervisors. At least 1 supervisor is required for a line of approximately 24 operators, but in addition to this there are supervisors needed in cutting, trimming, quality control, equipment repair, etc. It is therefore estimated that there are about 3,000 supervisors employed in the garment industry in Lao today. For supervisors, the annual turnover rate is much lower at an estimated 3-8%, meaning that investments in this managerial capacity are likely to yield long term gains. During the preparation for this project proposal factory owners and managers were asked to identify the appropriate “features” of supervisory training. The following is a list of these features:

• The training should be part time so that it does not significantly interrupt production schedules; afternoons and evenings are best.

• Training would be best delivered in modules of 40 hours spread over several weeks. • There should be adequate amenities for the trainees (bright surroundings, safe environment,

access to food and toilets). • Certificates should be issued only to those that are, in fact, competent and pass whatever

standard is set by the training institution. • Trainees should be expected to sign a “bond” committing them to work for the sponsoring

company for a certain time. • The training courses should be appropriate to the level of the trainees (their education and

past experience), so, selection is important. • The training should be delivered in the Lao language. • Trainees should be given “projects” to work on between classes so that their learning can be

immediately applied to their industry. The project has been divided into 4 components. The first is concerned with the identification of specific service packages for the Garment industry so that they are tailored to this sector’s needs. The second component is related to the capacity building of local personnel that will be needed to deliver the Centre’s service packages, and the third component deals with the actual delivery of the services. The fourth and last component is related to the management systems needed to ensure effective delivery, good impact and eventual sustainability for the Centre. Component 1: Services Needs Assessment and Business Plan

10 For more details on job categories see Annex 4 11 The term “supervisor” is loosely used in this context and refers to mid-level management that is involved in pre-production, production, office and post production jobs.

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The aim of the Centre is to be financially self sufficient by the end of the 3rd year of operation. This can only be done if the services it offers are in demand and they can be delivered in a cost effective manner. This will require a detailed “Services Needs Assessment Study”. This study would be conducted as part of the first phase of the project and its outcome would be a defined product range and pricing strategy. Based on similar garment training facilities in other countries in the region, such as Cambodia and Indonesia, the likely mix of services would include:

• Training for supervisors including: production planning, line balancing, work study measurement, cutting and pattern making, quality control, basic costing and supervisory management. (see Annex 1 for details)

• Assessments of factory operations including a review of systems and controls and efficiency measures with a view to identifying the main obstacles to higher performance.

• Evaluating personnel aptitude with the aim of identifying employees with the highest potential for upgrading, this evaluation takes into account critical thinking, motor skills and leadership potential.

• Training of trainers; most supervisors conduct on the job training for new operators, this process takes 2-4 weeks. Training supervisors to economize on this time will save time and money and lead to improved performance.

• Specialist equipment training; higher productivity is also determined by better technology, the Centre, in cooperation with equipment suppliers, will offer courses to specialists who are soon to be working on such machines.

The key outputs of this component would be:

• A training and services needs assessment conducted on a representative sample of Lao garment industries that clearly identifies the training and services needs of the full range of garment factories, from the small sub-contractors up to the foreign owned exporters.

• From this study the Centre would assess which parts of these training and service needs can be addressed within the scope and limitations of the project and the Centre. This will yield a viable product and services portfolio that is tailor made to the needs of garment factories at different levels of production.

• Once this range of products and services is clear the Centre management will draw up a comprehensive Plan of Operations for the first full year of implementation. This plan will include: output targets, key management strategies and a cash flow forecast.

Component 2: Capacity Building: One of the key ambitions for the Centre, and indeed the garment industry owners, is to replace foreign middle level management with local personnel in a timely and economically feasible way. Similarly, a core part of the sustainability strategy of the Centre is to quickly develop local trainers that can be used to deliver the bulk of the services offered by the Centre. This will require a significant investment in training a group of trainers that can be used in a wide range of training and basic consulting situations. The long term HRD needs of the garment sector in Lao will eventually require full time and fully qualified staff but in order to keep the overheads of the Centre low, trainers, at this stage, will be recruited on a part time basis from the existing garment factories and from the free market. In total there are approximately 3,000 middle level managers in various positions in Laos. Assuming that approximately 100 of these are interested and available as trainers, the aim of this component would be to screen and train a first batch of about 50 persons who would

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be used as part time trainers for the Centre. The pool would need to be sufficiently large because factory owners will not permit their best supervisors to be away from their factories for long periods of time. The incentives for this pool of trainers would be: a) a chance to upgrade their own knowledge and hence a chance to increase their role in their respective companies, b) additional remuneration derived from the fees charged to clients and c) increased respect from their peers as a result of their teaching position. The key elements of this capacity building would be:

• Orientation to common training techniques used in the garment industry, this would include basic garment industry literacy and numeracy.

• Curriculum design for a first set of training and service products as identified in the needs assessment component.

• Training as trainers for the delivery of specific service products as mentioned in the Component 1 section of this proposal.

• A brief study tour for selected trainers to other garment training facilities within the region.

• The development of teaching aids and manuals in Lao language to aid in the delivery of the training courses.

The key outputs of this component would be:

• A core of about 50 trained local trainers who would be available to work part time for the centre;

• A set of training materials for 5-6 standard products to be delivered by the Centre in Lao language. The training materials would be comprised of 2 parts: an instruction manual for trainers and a set of hand outs for trainees.

Component 3: Service Product Delivery Once the core needs of the garment industry have been identified and once the Centre has recruited and trained a core set of instructors or consultants, the Centre will begin to deliver its range of services to the garment sector. Most garment industries (owners and managers) want training for their supervisors to have approximately 80 hours delivered in two 40 hour modules with sessions of 2-4 hours each. The exact content of the training courses would be determined in the training needs assessment mentioned in Component 1 but the bulk of this training would revolve around the skills mentioned in Annex 1 of this proposal. ALGI has already identified 2 possible venues for this training, the most likely of which is at the Lao National Chamber of Commerce office. The key elements of this component will be:

• Marketing of the Centre’s full range of services to the garment industries themselves through awareness workshops, factory visits, phone calls and participation in trade related events.

• Negotiations with individual clients to ensure that their needs are addressed as cost effectively as possible and that a large portion of their needs can be met by some of the services of the Centre. This may include assisting garment industries to identify personnel most suited to specific course.

• Planning an annual event calendar that identifies when workshops and training will take place, and circulating this to all of the garment factories.

The key outputs of this Component would be:

• 15-20 training course per annum for up to 20 persons with a duration ranging from 40 to 80 hours each, resulting in 3-400 persons trained per annum.

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• A series of follow up projects of trainees with their employers to ensure the application of the new tools and methods learnt during the training.

• Other short term and basic consultancy services to be provided to garment industries on demand.

• A revenue stream that more than covers the cost of service delivery.

Component 4: Management Systems for the Centre A central objective of the project is to reach a high degree of financial viability for the Centre in year 3 of the project. The rationale for this is that the Centre’s dependency on the garment sector will generate high levels of accountability for the Centre and therefore keep them constantly in touch with the evolving needs of the garment industry itself. As part of its own marketing strategy the centre will need to continuously demonstrate an impact on the industry. For this it will need to have tools and systems to measure the impact of its services. A second and critical set of systems that will need to be developed are related to the financial viability of the Centre. This will require cost accounting systems so that each service bears a portion of the Centre’s overheads. The key elements of this Component will be:

• The development of baseline reports to be completed by trainees or clients prior to the delivery of services. These baseline reports will identify average productivity rates at the outset of the training. They will serve as a comparison to rates achieved after the delivery of the service.

• Follow up studies, to record changes after the delivery of the services, will be conducted on a regular basis as a way to collect changes in productivity or behavioural changes brought about by the delivery of the Centre’s services.

• Cost accounting systems will be developed to record levels of cost recovery and to assist management in the planning and implementation of the full range of services of the Centre.

The key outputs of this component will be:

• Documented comparisons of the client’s enterprise before and after the delivery of the Centre’s services. On average 10 of these reports will be prepared on an annual basis (on the assumption that there are fewer enterprises than trainees); A description of the benchmarks for these comparisons are provided in Annex 2 attached to this report.

• An annual financial statement, similar to one prepared for a business, will be completed every year, this statement will identify cost and profit centres so that service delivery strategies and pricing strategies can be reviewed on an annual basis and amendments made to ensure that cost recovery targets are being met.

Lessons Learnt in the Project Design Over the past several years there have been other initiatives that are related to training people for the garment sector. These have come from both Korea and Japan. Both the Korean and Japanese initiatives are implemented through the Ministry of Labour and Social Welfare. The Korean Centre trains 30-40 people each year, while the one from Japan trains about 75 persons annually. The core target group of these two Centres is disadvantaged women mainly from rural areas. The training is aimed at preparing these women to be hired as machine operators. Both Centres have facilities that could be used by this project if both parties agree. Every attempt will be made to optimize the inputs of the ALGI Garment Services Centre with these two projects, but no duplication is envisaged because the core

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target groups of the Japanese and Korean Centres are mainly at the operator level while the ALGI Centre is focusing at the supervisory level. It could however be possible that some joint training courses are organised and that trainers used by all of the Centres could be interchangeable. There have been some discussions between ALGI and these Centres concerning training for existing employees of the garment sector but up to now nothing has materialised. The principle lesson would appear to be that past training for this sector has been mainly supply driven and offered to a job category that the industry feels is of secondary importance. The main potential for complementarily between the current Centres and the proposed project are: for the current Centres to specialize in longer term courses while the ALGI Centre focuses on short term courses and secondly for the current Centres to focus on vocational training (as they do now) while the ALGI Centre concentrates on “up grading” and applied productivity improvement. 3. Implementation Implementation Partners Once the project has been approved by the competent authorities it will be “owned” by ALGI, and ALGI would be responsible for the project on a day to day basis. ALGI was founded in September 1995 and currently has 58 members. It collects membership fees based on the number of machines that are used in the member’s factory. This fee is $1 per machine. Total revenue collected is between $13,000 and 14,000 depending on the turnover of the members. The main services being offered by ALGI include: information related to debt resolution, market information, and assistance to its members on import and export procedures, advice on taxation issues and the coordination of with the GoL on external assistance such as scholarships for training abroad. It is recommended that for this project, ALGI establishes the Centre as a separate business entity, with its own cost/income accounts and with its own Board and management. ALGI would be the sole shareholder of the Centre and it would nominate the Chairperson for the Board of Directors for the Centre. The Department of Production and Trade Promotion would also have a seat on the Board as an observer. The advantages of this arrangement are that the Centre would be able to manage its own finances and make short term decisions without the necessity of waiting for the next ALGI meeting. ALGI will set policies and ensure policy implementation though their Chairperson on the Centre’s Board of Directors. The Centre would establish its own accounts according to Lao law and would report on a quarterly basis to its sole shareholder, ALGI. ALGI would submit semi annual progress reports (format to be developed) to the Export Competitiveness and Business Environment Task Force through the Department of Production and Trade Promotion of the Ministry of Commerce and Industry. These project reports would be composed of three parts: output delivery; impact measurement and financial accountability (income and expenses). Monitoring and Evaluation Framework Key performance indicators will be measured at two levels of the project. The first level will relate to the improvements that the Centre is having on garment enterprises (impact), while the second level will measure the viability and growth of the training centre itself (sustainability). At the garment enterprise level the key indicators to be assessed and measured could be:

• Net annual increases in export revenues from the companies benefitting from the services of the Centre.

• For the companies sending supervisors for training the following indicators, where appropriate, would be measured once the supervisors are back at work:

o Garment Rejection rates

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o Line output rates o Line balancing o Absenteeism

• An increase of the overall labour productivity ratios (garments per worker or value added per worker) for firms sending at least 20% of their supervisors for training12.

At the level of the training centre the following indicators will be measured:

• The actual number of supervisors trained, and the number of training and consultancy hours delivered.

• The satisfaction rates of the companies purchasing the Centre’s services. • Career development of the training centre’s alumni, as measured in their graduation to middle

level management positions. • A steady annual increase in the level of revenue generated by training and consultancy in

relation to its cost structure. • The number of firms that have been reached by the training courses.

The above mentioned indicators will be refined at the beginning of the project and following this, baselines will be conducted to verify the figures at the start of the project. Intermediate indicators will be measured mid-way through the project particularly at the level of the intermediaries to ensure that the project’s core assumptions, methods and strategy are still valid and are producing the results anticipated. These data sets will be used to make any mid-term changes needed to improve performance. Six months before the completion of the project, the final assessment will be conducted to identify the overall impact of the project on exports and incomes. It should be kept in mind that impact monitoring will be integrated into the marketing strategy of the Centre. In other words, by demonstrating impact from the past delivery of services, it will be able to attract more customers who see the benefit of the services delivered by the Centre. The table below summarises the key outputs of the project and the impact indicators at the enterprise level and also at the level of the Centre. It should be noted that the key indicators for enterprises are related to productivity rates while those of the Centre are related to sustainability. Category: Outputs Impact Source of Data Enterprise: • 3-400 mid-level management

trained per annum, and • At least 5 consultancy

assignments received per annum

20% increase in productivity rates (garments per worker or value added per worker) for those enterprises sending 20% of their supervisory staff for training.

Baselines and follow up reports to be collected by the Centre itself.

Sub indicators to include: • Introduction of new measurement and

production systems • Line productivity • Reduced down time • Reduced absenteeism • Reduced rejection rates

To be collected by the Centre.

Centre: Component 1 (needs assessment)

• A defined set of services • A detailed Plan of Operations • A cash flow for year 1

• Centre achieves income and output targets for all three years of operation.

Centre’s own records

Component 2 (capacity building)

• 50 trained trainers • 5-6 Lao training manuals

• 20 – 30 Training courses delivered on time for 3-400 trainees every year

• High registered satisfaction rates from the trainees/clients

Centre’s own records. Regular satisfaction surveys conducted by the Centre.

12 The indicators at the enterprise level will need to be confirmed with factory owners and managers following the completion of the training needs assessment study and the design of specific training courses.

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Component 3 (service delivery) •

• 3-400 garment workers trained every year

• 5-6 other service products delivered every year

• An income of $60-80,000 per annum • An income of $2-5,000 per annum

Centre’s own data

Component 4 (mgm’ent systems)

• 10 impact reports per annum • Annual financial statements

• A 10% annual increase in the volume of demand for services

• A break even on all recurrent costs and a significant allocation to overheads

Centre’s own records

Risks and Mitigating Strategies The following risks have been identified:

• Willingness of the Garment Industries to Pay: The garment industry is one of the most mature sectors in Laos. Over the course of its history a number of “ad hoc” training and consultancy programmes have been organised to encourage additional output and performance. A few enterprises have benefitted from these programmes, the majority, however have been left to themselves to sort out their competitiveness problems on an individual basis. Will the sector be willing to pay market prices for training?

• Mitigating Steps: During the preparation of this proposal several factory owners were consulted on this issue, some have already invested in training indicating that the sector is already paying for this service. To ascertain a “reasonable” fee for training, factor owners were asked to give a figure. Most of them gave the amount of $15-20 per 8 hour day. A figure of $20 has been used for calculating a tentative cash flow for the Centre. This figure was been verified in a workshop held under the Chairmanship of ALGI on the 18th of December, 2008. Secondly, prior to this proposal being completed a commitment was also made by ALGI to ensure that its members would send at least 200 mid-level supervisors to the Centre during the first year of operation. This should guarantee turnover of approximately $40,000 in the first year of operations.

• Willingness of the Garment Sector to Give Time off to its Staff to be Trained as Trainers: To keep the costs of the Centre to a minimum level, the strategy of the project is to develop a pool of local trainers that can be hired on a short term basis to conduct training and consultancy. These people are already employed in the garment sector as supervisors. They will need to get the permission of their management to take the time off needed to be trained and to conduct courses.

• Mitigating Steps: Factory owners have been consulted on this matter. They are agreeable to releasing their staff under certain conditions. These conditions include: that the release times are not too long; that the supervisors take some of this time as their annual leave; that the supervisors are adequately remunerated for this service; that courses are conducted in the late afternoons and evenings. This means that the pool of trainers needs to be adequately large to ensure that a trainer only has one, or a maximum of 2, courses per annum. Altogether it is anticipated that there will be approximately 15-20 courses of 20 persons each in an average year. Assuming that 2 trainers are needed for each course, this would require a trainer pool of about 30-40 persons. A pool of 40-50 persons is a safer estimate. The benefits to factory owners to having their staff trained as trainers include: trained supervisors can more effectively train new operators in a more cost effective way; trained supervisors can train other supervisors in their factories ensuring that the lessons have a broader impact on the whole company; the additional income that supervisor trainers receive is an incentive to other supervisors to raise themselves to this level, this will have an impact on productivity.

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• Equitable Participation of Smaller Firms: While larger firms, with significant export orders, may recognize the value of training, will the smaller Lao-owned firms be able to pay a cost covering price for the training?

• Mitigating Steps: It is important to maintain a cost covering fee for the quality to be assured. But, smaller firms may either not make the connection between training and higher levels of productivity or feel that this cost is simply too great. Therefore for the smaller firms it is proposed to establish a small scholarship fund to be administered by ALGI for 100 places per annum for all of the training courses offered by the Centre. The scholarship would be for 50% of the training costs and the award of the scholarships would be done according to criteria developed by ALGI, but they would include: potential for the applicant to move into higher levels of middle level management. The impact of this scholarship fund would also be felt in terms of the cost recovery of the Centre, by guaranteeing at least 100 places per annum.

• Will the Centre Cover its Costs? The object is for the Centre to be demand driven and for its services to be delivered at a market price. How realistic is this?

• Mitigating Steps: A tentative cash flow statement has been prepared to indicate core operational costs and income of the Centre. The key conclusions of this, based on the identified assumptions, are that the Centre could break even on costs towards the end of year 2 and could have a positive surplus by the end of year 3. See Annex 3 “Draft Cash Flow” for the first 3 years of operations.

Ownership and Sustainability This is a project that has been requested by the Association of Lao Garment Industries (ALGI). ALGI participated closely in the development of the original Concept Note in June 2008 and hosted the workshop in December 2008 in which the Concept Note was presented, discussed and endorsed. Notes of this workshop are attached for reference.13 During that workshop, in which all of the 12 garment industries supported the concept of a Garment Training Centre, it was also agreed that, in a more formal meeting of the association, ALGI would confirm in writing, to the Task Force for Export Competitiveness and Business Environment, a commitment to the following: a counterpart contribution of $500-800 per month for a competent international expert to manage the Centre; from its members, the funding of at least 200 places in the first year of the Centre’s operations and thirdly, space for the operation, management and training of supervisors (1-2 medium sized class rooms on a continuous basis). With this level of commitment from the private sector, it can be concluded that the ownership of ALGI and the private sector is high. In the first 3-4 years of operations it is envisaged that the Centre will be managed by an expatriate. Although discussions, at this stage, are still preliminary it is anticipated that this could be a CIM expert14. CIM Experts have been used in the past to establish and run The International Garment Centre in Bogor West Java in Indonesia. Under the terms of all CIM contracts the local requesting agency has to make a counterpart contribution to the salary of the expert. The amount of this contribution is determined by the market salary which a local expert of a similar level of competence would be paid. This means that ALGI will already be making monthly payments of $500-800 for a manager for the Centre in the first 3 years of the Centre’s operations. It will therefore be able to afford making this allocation to a competent local manager at the time of the departure of the international expert at the end of year 3 or 4.

13 World Bank, Consultation Workshop on Garment Training Centre, Minutes of Meeting, December 18th, 2008, Novotel Vientiane 14 CIM is a daughter organization of GTZ (German Technical Cooperation) and provides experienced experts to organization as the proposed Centre. They do require a commitment from the requesting agency of a salary level commensurate to a local person at a similar level.

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Concerning financial sustainability, it is planned that the Centre will be financially viable towards the end of year 2. However this estimate is still preliminary and much will depend on the pace and quality of implementation, consequently it should be taken as tentative at this time. 4. Detailed Activity Costs: The main items of expenditure are identified in the budget attached as Annex 4. In summary the total cost of the project is $ 1,276,800 with cost being divided between 4 parties: Contributor Amount Percentage Trade Development Facility 558,400 43.7ALGI 60,400 4.7CIM 400,00 31.4Garment Industries 258,000 20.2

1,276,800 100.0

The important consideration related to budget is that the garment industry and other partners are willing to share a considerable portion of the total costs of this project. Therefore the TDF is leveraging approximately 60% of the total costs of this project from other sources. 5. Operational Management Procurement There are no single large contracts to be implemented under this project, rather there are a series of smaller procurements, most of which can be handled by either the National Implementation Unit of the TDF, ALGI or the Centre’s own administration. Most of the expenditure will be “packaged” in a way so that a large portion of the disbursements could be handled by the NIU. For example, to hire an expert to conduct a ToT for trainer capacity building, the cost of which may be $10-15,000 per course (there may be 5-7 of these in the duration of the project), the procedure would be that Centre’s management prepares a Terms of Reference and identifies the expert required for the task; a contract would be drawn up by the Centre’s management in accordance with the procurement policies of the NIU, and submitted to the NIU with a copy to the DPTP of the Ministry of Industry and Commerce, together with supporting documentation (the appropriate reference to the Plan of Operations, approval of ALGI, etc.); after the contact is fulfilled disbursement would be made directly to the consultant on the request of the Centre. This procedure would be similar for local consultants. Procurement for major pieces equipment would be done in a similar manner. Other small purchases made by the Centre would be done from a small cash account to be maintained at the Centre with an amount no larger than $1,000 at any one time. Disbursement for these funds by the NIU would be consistent with a routine that includes the submission of the cash account statement each time a new call for disbursement is made. 15

Disbursement for the contributions to be made by ALGI would be made directly by ALGI to the CIM expert or admin staff. The cash contributions of the garment industries to the Centre

15 This procedure may need to be modified to match NIU’s procurement rules but some form of petty cash account will be needed in the short run. As the Centre starts to generate its own revenues, petty cash could be drawn from these sources rather than from the NIU.

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would go into a savings account of the Centre and would be managed according to procedures agreed upon by the 3 main parties to the project (TDF, CIM and ALGI). Financial Management There would be two main cost control centres, the NIU and the Centre. The NIU would keep a record of TDF expenditure and also take note of the counterpart contributions from the other parties (as documented in semi annual progress reports). The outgoings by the NIU for expenses would consist of: contracts for foreign consultants; contracts for the deputy manager of the centre; contracts for local consultants to conduct studies, surveys, translations etc.; contributions to the Centre for the scholarships for smaller firms; office and training equipment procurement, etc. The key financial activity of the Centre would be in the form of cash disbursements in the conduct of training of trainers and training of supervisors, travel expenses and minor expenses and payments to trainers as and when required. The Centre would also receive income from the garment industries paying for services and from NIU as 50% payment for the 100 annual scholarships for the smaller garment firms.16 A separate bank account would be established for these purposes. An audited statement of accounts would be prepared on an annual basis of the Centre and would form part of the annual report submitted by ALGI to the NIU. Key Terms of Reference The project would be staffed by three main people, the Centre Manager (CIM expert), the Deputy Manager (a Laos national that could eventually take over) and an administrative person who would handle logistics and cash management. The job descriptions of the two main persons are provided below. Post Title: Centre Manager: Duration: 4 years Duty Station: Vientiane Duties: Responsible for the general management of the Centre and reporting to the Centre’s Board of Directors made of key stakeholders. These responsibilities would include:

• Identifying key strategic issues related to performance of the Centre. This would include: developing a mission and vision for the Centre; strategies for cost recovery and financial expansion; and insuring that Centre’s services are demand driven.

• Preparation of an annual Plan of Operations that would include: key output targets in terms of training and consultancy, detailed inputs needed from all parties to the project; an annual public relations plan; and a cash flow forecast for the Centre.

• The preparation of key terms of reference for external experts to be brought in to build the capacity of the trainer pool or to conduct impact assessments and the management of disbursements, in collaboration with NIU, in connection with these contracts.

• The preparation of annual and ad hoc reports for the Centre and for ALGI in connection with the TDF projects.

• Representation of the Centre at all major functions in which the Centre needs to project a positive image either to sponsors or the garment industry itself.

• The supervision of all Centre staff and any short term staff that may be hired either to perform specific contracts related to training of supervisors or training of garment industry staff, or in relation to impact assessment or training needs assessments.

16 This payment could be made as a capacity building grant to ALGI who would then pass this on to the Centre.

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Qualifications: • At least 10 years working at a managerial level in the garment sector especially

related to productivity measurement. • Exposure to HRD policies and strategies that have a direct impact on productivity are

also important. • Past experience with training of trainers in the garment sector would be a significant

asset. • Familiarity with the functioning of the garment industry in Asia would also be an

asset.

Post Title: Deputy Centre Manager Duration: 4 years Duty Station: Vientiane Duties: The Deputy Manager would report directly to the Centre Manager and would be responsible to the day-to-day operations of the Centre. Specifically this would include:

• The organization of all training courses either for trainers or for supervisors, this would include: informing all relevant garment industries of the annual training plan, negotiating with factory owners or managers to secure either trainers for the Centre’s trainers pool or for indentifying supervisors for training; securing the venue for the training, arranging all logistics for the courses (transport, refreshments, and training materials); conducting baseline surveys of companies sending more than one person for training.

• Identifying and supervising impact assessment studies that need to be carried out on individual firms. Approximately 10 of these studies will be conducted in every year. The aim of these studies is to measure significant changes in business performance that is attributable to the services of the Centre.

• The management of the Centre’s administration, this will include: the supervision of the Centre’s cashier; the supervision of the cash account, approving cash procurements, ensuring that all income from training and services is realized.

Qualifications: • At least 5 years experience at a middle level in the garment sector in Laos. • Secondary education certificate • Managerial and leadership potential • Fluency in Lao language

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Annex 1: Sample of Garment Centre Training Curriculum Outline17

Component Description Controls Review the parameters and systems for optimum control of manufacturing cost; waste;

consumables; individual; line and industrial efficiency; and performance and off-times. Verification of the model Verification of the model of each product to be produced and definition of the best way

to produce the product on the existing lines and with the available machines and operators.

Specification sheets Preparation of product and technical specification sheets.

Layout and workflow Study of the best layout and workflow for the production lines for new products and allocation of standard allowed times per operation.

Line balancing Line balancing.

Times Verification of the standard times using a chronometer once the first bundles are put into operation.

Costing Cost calculations for the product, especially of total time and rate per day.

Product planning Ensuring that the new products are quickly operational on the newly established lines; solution of immediately problems with the supervisor.

Supervisor training Training of supervisors in techniques of production control, so that they understand the actions they need to take to achieve and maintain high quality and high productivity.

Motion time measurement Established of correct procedures for the handling of the product and the performance of the sewing operations. This requires training procedures for new operators and upgrading of existing operators in new techniques. Operation cycle control.

Quality control Introduction of the correct procedures of quality control and establishment of a full quality control structure, as well as training for people who will be responsible for supervising and carrying out the quality assurance. This includes checking of dimensions.

Performance and efficiency Preparing of performance and efficiency forms and controls.

Personnel recruitment Introduction of an efficient operator selection test and instructor training.

Capital investments Identification of the need for new machines, usually for better quality; assistance with new machine selection and the appropriate accessories.

Maintenance Ensuring correct maintenance of machines.

Verification Ongoing verification procedures of fabric and accessories to ensure early identification of problems arising from the material to be used in production.

Fabric use Improved methods of handling cutting plans to increase utilization of fabric.

Working-in-progress Work-in-progress structures and procedures and procedures for handling each bundle-choice of ancillary equipment for internal transport. Ensuring ease of passage of the bundles from one operator to the next.

Housekeeping Improved procedures for housekeeping, vacuum cleaning, and waste handling.

Information systems Establishment of a range of information systems for collecting progress information from the lines hourly to provide up-to-date information to assist in achieving steady and repeatable production and to identify bottlenecks.

Environment Improvements in lighting and space in the warehouse, packing room, offices, and all public areas so that they are light, bright, modern, clean, and well ordered.

17 Nathan and Associates, Measuring Competitiveness and Labour Productivity in Cambodia’s Garment Industry, 2005

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Annex 2: Sample of Typical Benchmarking Parameters18

Parameter Definition Organization chart Organization charts clearly identify all factory personnel positions and job descriptions.

This ensures that no misunderstanding arises about responsibilities. These charts help minimize conflicts between departments, avoid mistakes, and stimulate a more efficient flow of work.

Ratio of indirect-to-direct personnel

Indirect personnel for a typical Lao garment factory normally should make up 8-12% of total personnel at a maximum, depending on the size of the company.

Use of standards Standard times should be known for each production operation (i.e., each discrete step in the production process used in a factory). Standard times are particular to the firm in which the work study measurements are made. They provide a basis for the factory’s resource allocation and performance evaluation.

Plant layout Individual workstations should be engineered to simplify working procedures. Production floor layout and the means to transfer work between stations and section should ensure efficient work flow, thereby reducing handling and shortening lead times.

Line balancing Attention should be paid to line balancing before any order is put into production. For each new garment model produced, machine and labour requirements should be estimated on the basis of known standard times to ensure proper work flow and to avoid delays.

Production planning Reliable production flow and delivery dates for goods ordered should be ensured by taking into consideration order quantities, required delivery dates, standard times for the product, labour resource available, and the efficiency of the plant. Production planning means that forecast dates will more accurate and ensures sufficient time for preparing all the components needed for production.

Product Specifications Through the preparation of product specifications, production mistakes can be avoided. Specifications allow a factory to estimate the cost of the various models and styles to be manufactured.

Production controls Operators’ performances should be recorded daily. Work time as well as “off standard times” (i.e. delays) must be measured. Delays may be caused by a number to factors, such as machine breakdown and repairs and incorrect line balancing that results in operation’ waiting for work to arrive at their station. Timely receipt of this information allows management to take immediate corrective action.

Fabric consumption and waste control

The cost of fabric is a large proportion of the total cost of a garment. It is therefore crucial to have a system for controlling fabric consumption and wastage. Information about fabric consumption and wastage allows a company to estimate accurately the cost-efficiency of production in process and forecast the profit or loss for each model

Quality Customers expect garments to meet certain quality standards. Producers should therefore pay great attention to quality control. It is essential to concentrate quality control efforts on positions where defects occur rather than where quality is mastered. Defects should be caught as they occur to avoid the accumulation of defective work.

Maintenance and investments Equipment should be kept in good working condition at all the times. A preventive maintenance program is essential to minimize delays caused by mechanical problems. Economic analysis should be carried out to justify the purchase of any equipment or services.

Electronic data processing (EDP) equipment

Use of EDP equipment production speeds up the processing of production results, allowing corrective action to be taken more rapidly. The result is reduction in off-standard times and increased productivity.

Training Training of personnel in production is essential to facilitate the high rotation of garment models without major losses in productivity.

18 Nathan and Associates, Measuring Competitiveness and Labour Productivity in Cambodia’s Garment Industry, 2005

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Annex 3: P C F US D V  J    Y Y YQ Q Q Q Q Q Q Q Q Q Q Q

C ITCT C I

C OTCM HOMOPS DT C ON C F

AT TT TC TT

CC

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Annex 4: Lao Garment Services Centre Budget ForecastYear 1 Year 2 Year 3 Year 4 Total

Contributions TDF ALGI CIM GIs TDF ALGI CIM GIs TDF ALGI CIM GIs TDF ALGI CIM GIsComponent 1 (TNA & Bus.Plan)

Training Needs Assessment 15,000 5,000 5,000 5,000 30,000

Business Plan assistance 10,000 10,000

Component 2 (capacity building) 0

Screening and Orientation of trainers 10,000 2,000 2,000 2,000 16,000

ToTs for 50 trainers (mostly STEs) 60,000 20,000 10,000 10,000 100,000

Training Equipment 45,000 5,000 5,000 5,000 60,000

Officeequipment 20,000 5,000 5,000 5,000 35,000

Training materials 6,000 6,000 6,000 6,000 24,000

Manual translations/adaptations 30,000 12,000 6,000 6,000 54,000

Study tour (5 sups. + 3 mgm’t) 25,000 25,000

Component 3 (services) 0

200-300 trained 80 hrs @ 200 40,000 60,000 60,000 60,000 220,000

100 scholarships @ 100 10,000 10,000 10,000 30,000

100 scholarships by SMEs @ 100 10,000 10,000 10,000 30,000

5-6 other servicesp.a@ 2,000 5,000 16,000 16,000 16,000 53,000

Component 4 (mgm’t systems) 0

Centre Manager 100,000 100,000 100,000 100,000 400,000

1 Vehicle 40,000

Contribution by ALGI to CIM salary 800 800 800 800 3,200

Deputy Manager (Lao national) 600 600 600 600 2,400

Admin staff 300 300 300 300 1,200

Premises (in kind contribution) 12,000 12,000 12,000 12,000 48,000

Office Administration (in kind) 2,000 2,000 2,000 2,000 8,000

Impact Ass’mt, STE’s/local cons. 20,000 8,000 8,000 8,000 44,000

Capacity building of Centre mgm’t 10,000 10,000 10,000 10,000 40,000

Minor operation cost 12,000 12,000 12,000 12,000 48,000

Totals 303,600 15,100 100,000 95,600 15,100 100,000 86,000 79,600 15,100 100,000 86,000 79,600 15,100 100,000 86,000 1,276,800

% Distribution of Contributions TDF 558,400 43.7 ALGI 60,400 4.7 CIM 400,000 31.3 Garment Ind 258,000 20.2 1,276,800

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Annex 4: Job Categories: Pre-production

• Merchandising Manager • Designer • Sample Maker • Patternmaking, grading, correcting • Patternmaker specialist • Material and trim sourcing specialist

Production

• Factory Manager • Production Manager

o Production Planning Manager (engineer/executive) o Industrial Engineer (times study technician) o Cutting Manager (line leader, cutting operator) o Sewing Supervisor o Finishing Supervisor o Sewing trainer

• Quality Assurance Manager o QA Supervisor o QA Inspector

• Maintenance Manager o Mechanic

• Safety Inspector Office

• Human Resources Manager o Compliance Auditor

• Accounting Manager Post Production

• Packaging Supervisor o Bundling o Packing

• Shipping Executive19

19 Source: Garment Industry Productivity Centre, Cambodia

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