Pre-Feasibility Study

GOLD JEWELRY MANUFACTURING & RETAIL SHOP

Small and Medium Enterprise Development AuthorityGovernment of Pakistanwww.smeda.org.pk

HEAD OFFICEWaheed Trade Complex, 1st Floor , 36-Commercial Zone, Phase III, Sector XX, Khayaban-e-Iqbal, DHA LahoreTel: (042) 111-111-456, Fax: (042) 5896619, 5899756Helpdesk@smeda.org.pk

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5TH Floor, Bahria Ground Floor Bungalow No. 15-A

January, 2006Gold Jewelry Manufacturing & Retail Shop

1 PURPOSE OF THE DOCUMENT ............................................................................................... 3

2 CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT..................... 4

2.1 SWOT ANALYSIS ................................................................................................................... 42.2 ENTREPRENEURIAL FIT ........................................................................................................... 62.3 BUSINESS MODEL: IN-HOUSE MANUFACTURING VS. OUTSOURCED MANUFACTURING ............... 7

3 PROJECT PROFILE .................................................................................................................... 7

3.1 OPPORTUNITY RATIONALE ...................................................................................................... 73.2 PROJECT BRIEF ....................................................................................................................... 83.3 MARKET ENTRY TIMING ......................................................................................................... 83.4 PROPOSED BUSINESS LEGAL STATUS ....................................................................................... 83.5 PROJECT CAPACITY AND RATIONALE ....................................................................................... 83.6 PROJECT INVESTMENT ........................................................................................................... 113.7 PROPOSED PRODUCT MIX ...................................................................................................... 123.7.1 Product Mix - Workshop Operations ............................................................................... 123.7.2 Preferred karatage........................................................................................................... 123.7.3 Item Wise Stock Composition ........................................................................................... 123.8 PROPOSED LOCATION ............................................................................................................ 143.8.1 Location for Workshop Unit ............................................................................................. 143.8.2 Location for Retail Unit ................................................................................................... 143.9 KEY SUCCESS FACTORS/PRACTICAL TIPS FOR SUCCESS .......................................................... 153.9.1 Key Success Factors for Workshop Unit ........................................................................... 153.9.2 Key Success Factors for Retail Unit ................................................................................. 153.10 STRATEGIC RECOMMENDATIONS ........................................................................................... 153.10.1 Marketing ................................................................................................................... 153.10.2 Ratio of Order to From-Counter Purchase................................................................... 153.10.3 Nature of Stock Keeping .............................................................................................. 153.10.4 Pricing Policies: ......................................................................................................... 163.10.5 Mode of Payment ........................................................................................................ 163.11 PRODUCT RANGE IN TERMS OF DESIGNS, ITEMS AND QUALITY ............................................... 16

4 SECTOR & INDUSTRY ANALYSIS ......................................................................................... 16

4.1 INDUSTRY STRUCTURE .......................................................................................................... 164.1.1 Average Workshop........................................................................................................... 174.2 EXPORT MARKET .................................................................................................................. 184.2.1 Major International Market Players ................................................................................. 184.2.2 Pakistans Jewelry Export................................................................................................ 194.2.3 Export Regulations and Procedures ................................................................................. 204.3 LEGAL ISSUES REGARDING INDUSTRY ................................................................................... 244.3.1 Taxation .......................................................................................................................... 244.4 MARKET POTENTIAL ............................................................................................................. 244.4.1 Customer Loyalty............................................................................................................. 244.4.2 Trends ............................................................................................................................. 244.5 TARGET CUSTOMERS ............................................................................................................ 24

5 PRODUCTION PROCESS ......................................................................................................... 26

5.1 PRODUCTION PROCESS FLOW ................................................................................................ 265.1.1 Contracting out an order.................................................................................................. 275.1.2 Jewelry Designing ........................................................................................................... 275.1.3 Gold Refining and Mixing ................................................................................................ 275.1.4 Converting Gold Ingots into Gold Sheets and Wires ......................................................... 275.1.5 Transfer of Design / Pattern Making ................................................................................ 285.1.6 Engraving........................................................................................................................ 28

5.1.7 Finishing ......................................................................................................................... 295.1.8 Polishing and Buffing ...................................................................................................... 295.1.9 Beading and Stone Studding............................................................................................. 295.1.10 Gold Recovery............................................................................................................. 305.2 CASTING PROCESS AND MACHINERY REQUIREMENT .............................................................. 305.2.1 Supply of Machineries...................................................................................................... 305.3 JEWELRY ITEM MANUFACTURING TIME ................................................................................. 315.4 RAW MATERIAL.................................................................................................................... 315.5 MISCELLANEOUS EXPENSE .................................................................................................... 325.6 INITIAL INVESTMENT IN GOLD JEWELRY STOCK ..................................................................... 335.7 MACHINERY REQUIREMENT .................................................................................................. 335.8 FURNITURE & FIXTURES ....................................................................................................... 34

6 LAND & BUILDING REQUIREMENT .................................................................................... 35

6.1 LAND REQUIREMENT ............................................................................................................ 356.1.1 Rent................................................................................................................................. 356.2 UTILITIES REQUIREMENT ...................................................................................................... 36

7 HUMAN RESOURCE REQUIREMENT................................................................................... 37

8 FINANCIAL ANALYSIS............................................................................................................ 38

8.1 PROJECTED INCOME STATEMENT ........................................................................................... 388.2 PROJECTED CASHFLOW STATEMENT ...................................................................................... 398.3 PROJECTED BALANCE SHEET ................................................................................................. 40

9 KEY ASSUMPTIONS ................................................................................................................. 41

9.1 ASSUMPTIONS RELATED TO THE SCOPE OF OPERATIONS ......................................................... 419.2 INCOME RELATED ASSUMPTIONS........................................................................................... 419.3 EXPENSE RELATED ASSUMPTIONS ......................................................................................... 43Pre-feasibility StudyGold Jewelry Manufacturing & Retail Shop

PREF-87/Jan, 2006/ Rev 1

DISCLAIMER

The purpose and scope of this information memorandum is to introduce the subject matter and provide a general idea and information on the said area. All the material included in this document is based on data/information gathered from various sources and is based on certain assumptions. Although, due care and diligence has been taken to compile this document, the contained information may vary due to any change in any of the concerned factors, and the actual results may differ substantially from the presented information. SMEDA does not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. The prospective user of this memorandum is encouraged to carry out additional diligence and gather any information he/she feels necessary for making an informed decision.For more information on services offered by SMEDA, please contact our website:www.smeda.org.pk

DOCUMENT CONTROL

Document No.

PREF-87

Prepared by

SMEDA-Punjab

Issue Date

Jan 2006

Issued by

Library Officer

1 PURPOSE OF THE DOCUMENT

The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs in project identification for investment. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document/study covers various aspects of project concept development, start-up, production, marketing, finance and business management. The document also provides sectoral information, brief on government policies and international scenario, which have some bearing on the project itself.

The purpose of this document is to facilitate potential investors in gold jewelry manufacturing and retail enterprise by providing them a macro as well as a micro view of gold jewelry business with the hope that such information as provided herein will aid the potential investors in crucial investment decisions.

The need to come up with pre-feasibility reports for undocumented or minimally documented sectors like jewelry manufacturing and retailing sector attains greater imminence as the research that precedes such reports reveal certain thumbs of rules; best practices developed by existing enterprises by trial and error, and certain industrial norms that become a guiding source regarding various aspects of business set-up and its successful management.

This particular pre-feasibility is regarding Gold Jewelry Retail Enterprise, which comes under a broader Gem and Jewelry Sector.

2 CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT

Below are some factors and variables that have a great bearing on setting up jewelry manufacturing and retailing enterprise:

2.1 SWOT Analysis

Before stepping into any venture, one has to analyze the strengths, weaknesses, opportunities and threats (SWOT). An industrial / sectoral SWOT analysis is given below. A prospective entrepreneur would have to conduct a micro-level SWOT analysis on the basis of the intended city / town / village for his business.

PREF-87/Jan, 2006/ Rev 1

SWOT AnalysisStrengths1. Stock of skilled craftsmen;2. Low manufacturing cost;3. Low capital investment inmachinery;4. Price inelasticity of demand forgold jewelry implying the relative ease with which an entrepreneur may pass on increase in costs to the customer.5. Easy exit since gold stock can be resold easily (though capital gains/ loss possible due to change in gold price);6. Premium mark-up is accepted in general by customers if theyperceive that the jewelry item they are purchasing is unique orhas a designers value. Thusthere is greater opportunity for anentrepreneur to charge higher mark-up on exclusively positioned jewelry line.Weakness1. Weak sharing of information and bestpractices within the industry. Trade secrets tend to be kept within family;2. Demand for exclusivity prevails over demand for standardized items. Thusthe degree of mechanization of the jewelry manufacturing process tendsto be low;3. Maintaining exclusivity of designs isdifficult due to absence of copyright laws within the industry. Investment in exclusive designers is thus risky.4. Highly skilled craftsmen areconcentrated in few clusters, mainly in Karachi and Lahore;5. Practice of hallmarking products for export is low, thus non-hallmarkeditems are less reliable abroad than competitive but hallmarked jewelry.Opportunities1. Increasing population thusexpanding potential domestic market;2. Gold price is perceived to be outmatching inflation thus purchaseof gold jewelry is more readily justified in terms of future security.3. Increasing demand for 22k gold jewelry abroad amongst SouthAsian expatriates;4. Increasing demand of 18k jewelrywithin Pakistan provides opportunity for jewelers to increase their stock size and range with lesser investment in gold.5. Increasing participation of females in work-force, thus greater purchasing power of women toThreats1. Improving trade relations with Indiamay lead to import of competitive jewelry items into Pakistani Market;2. Competition from Far-East Asian countries is already somewhat visible;3. Proper designing matching the market taste is crucial to sales, if designingdoes not match the market demand, the entrepreneur may be stuck withslow conversion of stock to sales.4. Frequent turnover of key craftsmenrisks loss of quality and exclusivity;

purchase jewelry items;6. Increasing trend and inclination inthe market to pay premium for exclusive designs / brands has a created a niche market for products bearing higher profit margin.

2.2 Entrepreneurial Fit

The prospective investor will need to assess an entrepreneurial fit in the sector in light of the sectoral SWOT analysis. Table 2-1 below gives an example of crucial traits contributing to entrepreneurial fit in the jewelry sector, and course of action to be taken in case the crucial trait is present, and also if its lacking.

Table 2-1: Entrepreneurial Fit

ENTERPRENURIAL FITCRUCIAL TRAITS

Importance

If Positive

Action Needed if Negative

FamilyBackground Source of process knowledge; Prevents costly managerial mistakes more probable in trial and error baseddecision making; Better knowledge/ guidance of the market in terms of trends, suppliers, craftsmen..etc. Entrepreneurial advantage; Lower risk than if any industrial background is lacking. Intensive industrial and sectoral study in terms of processes, modes of quality control, workers' management practices; Preferred technology;Preferred suppliers..Etc.

ProcessKnow How Effective quality control; Feasibility assessment of selecting production technology Entrepreneurial advantage; Effective quality check; Less risk in management and ownership of retail / manufacturing unit. Acquire process know how; Delegate Quality Control function to employee or partner who has the process / production know how

Flair for designing / Ability to gauge trends Unique selling proposition; Premium pricing Customer Loyalty Entrepreneur is able to determine the stock ofjewelry items in terms of designs and variety. Prospective customer's feedback on preferred / notso preferred styles; Advice of established jewelers catering to similar target market; Hire graduates from designing / arts' institutions; Greater investment in jewelry catalogues.

PREF-87/Jan, 2006/ Rev 1

2.3 Business Model: In-House Manufacturing vs. Outsourced Manufacturing

The entrepreneur - assuming sufficient financial resources - then needs to decide on his business model in terms of having his workshop in-house, or outsource jewelry production. The following table gives advantages and disadvantages of the two options.

Table 2-2: Pros and Cons of In-House vs. Outsourced Manufacturing

Pros and Cons of In-House vs. Outsourced Manufacturing In-House Outsourced PROSCONSPROSCONSGreater control on quality

Greater total set-up cost

Lower set-up costLess convenient in terms of quality controlGreater chance of securing design exclusivity

Greater investment risk

lower investment risk

Difficult to keep designs from being copied by competitors

Optimal order processingGreater labor cost in order to prevent craftsmen's turnover

feasible for small scale jewelers

Lesser control over order completion time

Better process control when production under one roofCases of designleakages and craftsmen refusing to work exclusively for one jeweler commonly reported

Possible to rationalize on total labor cost for small/ medium size business

Not feasible for small scale jewelry businessGreater range of choice in terms of craftsmen to be used

3 PROJECT PROFILE

3.1 Opportunity Rationale

A lack of passion for gold jewelry in Pakistan, and even amongst the Pakistani expatriates, is hard to imagine. It is a cultural idiosyncrasy within the South Asian Region. Gold jewelry is perceived not only as a decorative item but a symbol of status. This perception pervades all classes.

Another reason for the vitality of the gold jewelry market is that all domestic jewelry products are priced by weight, which results in the fact that people perceive gold jewelry as a means of security net for the future because gold alone has an internationally agreed price (although there is no regulated appraisal system for selling second-hand jewelry, more often people get much less money than they have paid when they try to return the jewelry).

On the supply side, gold jewelry manufacturing is labor intensive. The skill of most of the craftsmen is passed on from generation to generation or through a process of intense apprenticeship. Gold jewelry manufacturing units tend to specialize in terms of process,

thus they all tend to form a cluster of independent units that utilize each others service to complete a jewelry item. This makes it easier for a new entrant to identify craftsmen in terms of skill, reliability and quality.

In case the entrepreneur wishes to set-up an integrated business (retail and manufacturing), most of the machinery used is now locally made (largely in Gujranwala) and is considered almost at par with the Italian machines for the same purpose. Hence, initial capital investment in machinery is less and does not pose a great barrier to entry into enterprise of gold jewelry manufacturing and retailing.

3.2 Project Brief

The subject enterprise of this pre-feasibility study is an integrated business gold jewelry manufacturing and retailing business. The manufacturing unit known as the workshop is a self sufficient unit that out sources only the following processes: gold refining and mixing, mechanized chain and bangle making.

With required rate of return for the project being 21%, the project is with conservative assumptions is expected to have a net present value (NPV) of Rs. 17,979,862/- and a modified internal rate of return (Modified IRR) of 34.50%. The discounted payback period is about 3.6 years.Project OutcomesNet Present Value17,979,862Modified IRR34.50%Discounted Payback (years) 3.6

3.3 Market Entry Timing

The gold jewelry retailing sector faces a seasonality factor that becomes apparent in the sales. Sales tend to peak during the wedding season. Wedding seasons fall in winters (October - February); and in summers (June August).

As far as the importance of timing of setting up a gold-jewelry business is concerned, its preferable that the business be set up to coincide with either of the wedding seasons.

This would not only help the initial cash flows but also render any promotional tactic (even if it may be just an attractive faade of the shop or a w ell designed jewelry) more effective by having greater number of prospective gold jewelry buyers in the market.

3.4 Proposed Business Legal Status

Since majority of Gold Jewelry business are family owned, most of these enterprises hold the status of registered partnerships. The other option mostly taken up is that sole- proprietorship. The latter two options are preferred over the option of incorporation mainly due to requirement, in the case of incorporation, of periodic disclosure of financial information.

3.5 Project Capacity and Rationale

The capacity of the workshop is defined as the volume of output the workshop is can produce when working to full capacity at a given period of time. In this case, the capacity of the workshop is defined as the amount of gold jewelry in terms of grams (weight) that

the workshop can produce in a year when working at its full capacity. The research, based on interviews with gold jewelry making craftsmen suggests that on average, a skilled craftsman can produce gold jewelry worth 575 grams of gold in a month or 6900 grams (600 tolas) worth of jewelry in a year. Since majority of gold jewelry is handmade and only small portion, if any, of the jewelry involves casting process, number of gold jewelry manufacturing craftsmen is the key variable determining the capacity of the workshop.

The capacity of the retail unit in gold jewelry industry, on the other hand, is described in terms units of gold invested in stock of jewelry prepared by a jeweler at any one time. Table 3-1 shows how a manufacturing unit and gold jewelry retail enterprise is described in terms of capacity and scale.

Table 3-1: Capacity Description

Capacity DescriptionCapacity Description for Workshop UnitSCALENumber ofCraftsmenOutput / year (grams)Output / year (tolas)Small3 - 520,700 34,5001,800 3,000Medium6 - 1041,400 69,0003600 - 6000Large11 or more75,900 - more6,600 - moreCapacity Description for Retail UnitSCALEStock Level (Grams)Stock Level (Tolas)Small1150 - 2300100 - 200Medium2300 - 8050200 - 700Large8050 or more700 or moreThis pre-feasibility report suggests that to enter the gold jewelry manufacturing and retail industry with an integrated business of manufacturing and retailing, the new entrant should enter with at least a medium scaled workshop and also a medium scaled retail unit. The medium sized workshop and retail business is the minimum feasible scale for integrated unit since the larger number of overheads (as compared to if manufacturing and retail were separate independent businesses) require a minimum level of sales for the overhead costs to be met. This minimum level of sales is met with operations at medium scale. Medium scaled workshop can provide jewelry items for its own retail units where generating greater profit margins. Furthermore, in order to keep working capital required, especially in terms of investment in gold jewelry stock, the manufacturing unit can offer its services to other gold jewelry retailers who outsource manufacturing of gold jewelry items. Starting at a larger scale would expose the entrepreneur to greater risk while starting too small, with given fixed and administrative costs, can push the break even period for the project too far ahead. For example, with the given cost parameters described as assumptions, starting with workshop of 4 craftsmen and retail unit with a stock of 2300 grams of gold can push the discounted payback period to more than 10 years.

The financial model given at the end of this report assumes initial capacity of workshop to be manufacturing of gold jewelry worth 69,000 Gms / year (6000 tolas / year) and retail outlet with initial capacity in terms of gold jewelry stock at any one time to be 5175 grams of gold (450 tolas) worth of jewelry.

The model as depicted in Table 3-2 shows that the workshop will initiate its operations at60% of its capacity in year 1, and the level of operations will increase as manufacturingunit receives more orders from its own retail unit and from other gold jewelry retailers. It is estimated that the manufacturing unit will be able to operate at 90% of its initial capacity by year 8.

The model also assumes that in initially, in year one, the proportion of workshop output sold be self and that manufactured for others will be 60 % and 40% respectively. This implies that in its initial year the modeled enterprise will rely on orders from another jewelers due to limited capacity of the self owned retail unit to absorb the workshop capacity and also as a risk managing strategy since the greater the proportion of workshop output is to be sold be self owned retail unit greater the investment in stock required of the entrepreneur, thus greater level of investment tied up in stocks. The ratio of workshop output sold is self owned retail against that manufactured for other jewelers increases as the self-owned retail unit marks its place in the market and gathers its greater market knowledge that will ensure greater sales and thus greater capacity to absorb the output of the workshop. Hence by year 10, the model assumes that the business reaches equilibrium in terms of product mix whereby 85% of the workshops output is sold by self and 15% is manufactured for other jewelers. This accelerating ratio is based on the assumption that the marginal return on investment on selling gold jewelry by self is greater than that on gold jewelry manufactured for others till the 85:15 of product mix.

Table 3-2: Capacity and Operations Parameters

Capacity and Operations ParametersAnnual manufacturi ng Capacity= 69,000 gramsYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Level of Operations (ratio of capacity) of Workshop0.60.650.70.750.80.850.850.90.90.9Level of workshop Operations (volume of gold) grams41,40044,85048,30051,75055,20058,65058,65062,10062,10062,100Stock Level of Gold Jewelry Items to be Maintained by Retail Unit at Any Given Time5175539962616469613369246924733173317331

Ratio ofworkshop output sold by self-owned retail unit0.60.650.70.750.80.850.850.850.850.85Ratio of workshop output manufactured for other gold jewelry retailers0.40.350.30.250.20.150.150.150.150.15

3.6 Project Investment

Table 3-3 below gives an estimate of the initial investment required to set up a workshop with annual capacity to manufacture gold jewelry items worth 69000 grams and gold jewelry retail unit operating initially with stock level of 5,175 grams (450 tolas).

Table 3-3: Initial Investment

DescriptionAmount (in Rs.)Shop Lease Down Payment

Retail Shop200,000Work Shop72,000Total Lease Payment272,000Furniture and Fixtures

Retail197,000Work Shop50,308Total Furniture & Fixture247,308Machinery

Wire Making Machine25,000Plate making machine25,000Wax Casting Machine315,500Polishing Machine and Accessories14,000Tools for craftsmen40,000Tools for gem studders8,000Scales6,600Total Machinery & Equipment434,100Raw Material + Jewelry Stock

Initial Gold Jewelry Stock6,073,380Nitric Acid8,000Wax6,000Total Raw Material6,087,380Fee10,000Licenses10,000Pre-Operating Cost (personnel cost)80,000

Minimum Cash Reserve 329,878Total Investment 7,470,666

3.7 Proposed Product Mix

3.7.1 Product Mix - Workshop Operations

The workshop operations will be based on orders from other gold jewelry retailers who outsource gold jewelry manufacturing and on gold jewelry items sold directly through self-owned retail unit of the model. Table 2.5.2 explained earlier shows how total workshop operations are expected to be distributed between output made on order for other jewelry retailers and output sold directly through self-owned retail unit.

The following subsections refer to product mix of the gold jewelry retail unit.

3.7.2 Preferred karatage

Pakistanis and Indians abroad and at home prefer 22-karat jewelry. The West and Far East prefers jewelry of 18 14 karat gold. Because Pakistanis consider gold jewelry an asset, a trend towards preferring low karat jewelry by the mainstream local market is unlikely in the foreseeable future.

However, a niche for 18 karat jewelry has emerged. This niche constitutes largely of working women belonging to age group 25 years - 40 years.

The business model in this report assumes traditional / mainstream customers who prefer22 karat gold jewelry as the target market.

3.7.3 Item Wise Stock Composition

Based on the interviews of established jewelers, we were able to establish rule of thumb for stock composition of total amount of gold invested in stock of jewelry available for display.

We were also able to establish an average amount of gold per item type and average number of units stocked per item type. Table 3-4 below shows average gold content in grams per jewelry item.

Table 3-4: Average Gold Content

AVERAGE GOLD CONTENT (Grams) PER ITEMItemGold Content (grams) - RangeAverage GoldContent / Item

80% of items of same category sold20% of items of same category sold

Earrings3.574.2Rings37.53.912 Bangles' Set433441.2Bracelets10.2524.7513.15Chains15713.4Necklaces34.53735

Pendants3.2543.4Teeka4.37534.1Bridal Set57.511569Jhoomer11.517.2512.65Calculation of average gold content for earrings (as an illustration) is calculated thus: 3.5 grams * 0.8 + 7 grams * 0.2 = 4.2 grams

Table: 3-4 is to be read as, for example, of the total units of earrings kept as stock for sale, 80% weigh around 3.5 gms, while 20% of earrings kept in stock weigh about 7 grams.

Given the average weight of gold (gms) per jewelry item and the information regarding average item wise stock composition of jewelers participating in this research, Table: 3-5 below gives an idea as to how, percentage wise, total gold available for jewelry stock may be distributed among various jewelry items.

Further more this distribution is translated into number of units per jewelry for initial stock level of gold jewelry items worth 4600 grams (400 tolas).

It is of note that smaller items have higher sales turn-over than larger jewelry items. Thus, though small items like earrings, rings and pendants utilize together only 16 % of total gold available for stock, unit wise they constitute 61% of total units prepared as stock.

Table 3-5: Weight wise distribution of gold metal

WEIGHT WISE DISTRIBUTON OF GOLD METAL STOCK AMONG JEWELRY ITEMSItemItem-wise Distribution ofGold Stock (%)Units per Item Type given4600 gms (400 tolas) of GoldEarrings4%40 unitsRings9%108 unitsBangles' Design (four bangles per design)14%16 unitsBracelets7%24 unitsChains3%10 unitsNecklaces43%56 unitsPendants3%42 unitsTeeka0%2 unitBridal Set17%12 unitsJhoomer0%0 unitsTOTAL100%310 unitsIt is important to note that as such jewelers in Pakistan do not compose their stock on the basis of any hard and fast rule. The stock size and its composition are improved as the retailer gains experience of the market itself.

3.8 Proposed Location

3.8.1 Location for Workshop Unit

The ideal location for workshop would be within a jewelry cluster often referred to as sirafa bazaar in main urban cities. The advantages of locating the workshop are many and some of them relate to the fact the cluster is almost self suffieicient in terms of supply of raw material, small tools and equipment, ancillary services such as machine repair, and also in terms of gold jewelry making processes that may need to be outsourced. More important are the advantages in terms of networks and links developed with suppliers, gold jewelry retailers who may be potential customers, and with potential craftsmen who may be recruited when required.

The downturn of locating the gold jewelry manufacturing workshop that integrates many processes that are usually outsourced (eg. Polishing and buffing, casting) is that the space required for the model workshop will be far greater than the average workshop found in sirafa bazaar. Sirafa bazaars are often located in the oldest part of the city. Finding rentable space is hard and if available, space in terms of complete room is often small. This implies that the workshop may have to be set up in two different rooms / tiers.

Also, the rents and rates of space in a jewelry cluster is almost double that of space for workshop outside the cluster. The difference becomes greater the further one goes fro m the cluster. For example, space 22 by 88 square feet may be let at Rs.6000/month if located within the cluster but may cost Rs.3000/month in old part of the city but far from the cluster.

3.8.2 Location for Retail Unit

An ideal location for setting up a jewelry shop would be in main market or shopping center where more females tend to shop frequently. Ideally that location should not only have a wide range of shops in terms of clothes, shoes etc but also have a cluster of competing jewelry shops.

The latter characteristic is important for jewelry buyers tend to shop around for designs and variety before making a purchase, and because it is convenient for a prospective buyer to window shop amongst clustered shops, they are less likely to enter a recently set-up, and not so renowned shop located in isolation.

Its noted that even shops of established reputation ultimately shift to main market areas to boost their sales.

In short, factors important in considering the location of the shop would be:

Accessibility Security Area frequented by female shoppers Cluster of competing jewelers

3.9 Key Success Factors/Practical Tips for Success

3.9.1 Key Success Factors for Workshop Unit

The key success factors in gold jewelry manufacturing business are: Quality of craftsmanship Managing turnover of key craftsmen; Establishing a reputation of reliability (in terms of honest and timely processing of orders) and quality; Networking to attract and ensure sufficient orders to cover overhead costs; Networking to identify suppliers and service providers who are reliable and provide adequate quality. Housing as many processes in-house so as to provide as many services under one roof. Location

3.9.2 Key Success Factors for Retail Unit

The key success factor in gold jewelry retail business is the turnover which in turn depends on: Quality Design Variety and product range displayed under one roof. Location

3.10 Strategic Recommendations

3.10.1 Marketing

Marketing and promotional schemes are financially feasible only if you have sufficient capital / stock in terms of finished product that you are able to satisfy a customers need. Hence, unless one has a sufficiently wide range of jewelry items to cater to a prospective buyer attracted by marketing scheme, the attraction of that customer to your shop may not translate into sales but into higher average selling cost.

3.10.2 Ratio of Order to From-Counter Purchase

In the wedding season, purchases on order outnumber those from the displayed stock and vice versa on other occasions.

3.10.3 Nature of Stock Keeping

Increase the average stock size to hedge against gold price increase if the trend in of rising gold price is expected to continue for some time.

Some stock is kept of gold and those stones, precious and semi precious gems the type of which have been used in displayed jewelry items to cater to the possibility that a customer may want to purchase a displayed item with some alterations. Stock in term of duplicates of displayed jewelry item is not kept.

3.10.4 Pricing Policies:

Increased competition has reduced jewelers control in terms of price determination of smaller, and relatively non-exclusive jewelry items. One is, however, able to charge a premium on exclusivity and uniqueness of the design.

Price of gold jewelry item is extremely sensitive to price of gold. Furthermore since gold jewelry has a high income elasticity of demand, the jeweler is not free to pass all of the increase in cost of raw material to the customer but has to absorb some of it himself.

If a customer has ordered an item, then the rate of gold that a customer will pay is established when the order is given by the customer and is largely the current market rate at that time.

3.10.5 Mode of Payment

Advance: Advance is normally taken when the jewelry item being sold is to be made on order. There is no fixed percentage of the orders cost demanded since our business depends on relationship building and we keep a customers ability to pay advance at a given moment under consideration.On the Spot Payment: On the spot purchases of displayed items are paid for at the time ofthe purchase.Credit: Credit sales are neither an industry norm, nor encouraged by the jewelers. In therural areas, however, payment if not purchase coincides with the harvesting of crops.

3.11 Product Range in Terms of Designs, Items and Quality

The type of jewelry items in term of design and quality depends on the clientele of the jeweler. The type of clientele, in its turn depends on the location of the shop.

The choice of target customers may be gauged by the general trend as seen via the jewelry items sold by other jewelers in the same or similar area and by trial and error. However, the jewelers vision and his understanding of the market trend have a great bearing on the range and variety of jewelry items displayed in his shop.

4 SECTOR & INDUSTRY ANALYSIS

4.1 Industry Structure

Pakistans jewellery sector is basically retail driven due to a huge local market. Karachi and Lahore are the main hubs for jewellery manufacturing. Dubai is the main exporter of bullion to Pakistan. The dominant reason for the purchase of jewellery in Pakistan is marriage, as gold is perceived as a form of savings and it is accumulated for this purpose over several years. However, with increasing awareness and education, along with other emerging investment opportunities, jewellery is now gaining preference as more of a fashion symbol.

The range of jewellery items produced by the jeweller is very wide. The popular items of Pakistans jewellery are Teeka, Pendants, Bazuband, Jhoomer, Bangles, Nose Pin, Kara, Earrings, Ring, Balian, Pazeb and Necklace.

Jewellery industry is highly fragmented, with very few players having complete in-house production facilities. Most of the players outsource manufacturing process to small vendors. The trade consists of small companies (generally up to 15 workers) with freelance craftsmen. The workforce works in the traditional manner sitting on the floor at low benches rather than seated at conventional workbenches, which are more comfortable and productive. The tools and technology employed are mostly basic. The use of high- tech machinery is missing throughout the value chain.

Each of the major cities of Pakistan has a Sarafa Bazaar, consisting of hundreds of small showrooms, bullion dealers and casting shops. Major cities and their markets are:

KARACHI Zaibunisa Street (Saddar), Tariq Road & Hydery LAHORE Gulberg, the Mall Road, Suha Bazaar RAWALPINDI/ISLAMABAD Muree Road, Mareer Chowk, & Jinnah SuperMarket

The industry structure is very fragmented and one with high degree of operational / functional specialization. For a polisher of gold jewelry will not do anything but polish. Thus a polisher can be an independent unit in manufacturing process and may cater to multiple jewelers. Complete jewelry manufacturing and integrated retailing units are rare in the industry.

The markets preference leans towards exclusive designs. Thus jewelry manufacturing is very labour intensive, and unlike in the West, degree of mechanization and production of standardized items except in case of generic gold chains and perhaps bangles is very low. Hence, every process of jewelry making requires high level of expertise and skill so mush so that jewelry manufacturing is closer to being a form of art. It is an art in the sense that when it comes to making of hand made jewelry, each process has more than one way of doing it, and the quality of work depends on the skill of an individual worker/ craftsman.

Because jewelry manufacturing is spread over number of specialized units in terms of process, jewelry making industry tends to be clustered or geographically concentrated. These clusters of workshops are found in Lahore, Karachi, and Rawalpindi in what are called the Sirafa Bazaars.

Large and renowned jewelers tend to have their workshops preferably in Karachi or in Lahore due to exceptional skill level developed there over time. In order to supervise the quality of workmanship and design of their jewelry item, jewelers not located in the main jewelry manufacturing cities but having their workshops there then have a representative or an agent in the city where their jewelry is being manufactured.

4.1.1 Average Workshop

An average gold jewelry manufacturing workshop tends to be a 10 by 20 square feet covered area that is located within or near a jewelry manufacturing cluster if the workshop depends on outsourcing some of the processes as gem setting or polishing. Workshops visited in the jewelry manufacturing clusters (Sirafa Bazaars) were further specialized in terms of bangle manufacturers alone; makers of plain jewelry only; makers

of studded jewelry only, making gold balls to be sold to other workshops ..Etc. Acompletely self-sufficient workshop is seldom found in the industry.

Average number of workers in a typical gold jewelry manufacturing workshop found within a cluster like Sirafa Bazars is 5 to 6 craftsmen. These craftsmen tend to be generally the pattern makers, or those craftsmen who transfer the design on to the gold. Few workshops have a polisher and a finisher, and even fewer have a stone setter in the same workshop. Within the workshop, however, workers tend to be specialists in terms of their functions. For example, a workshop will have one worker who specializes in copying designs from catalogues; another, a maker of studded jewelry; another, a maker of plain jewelry, or a worker who only makes bangles Etc.

The average number of hours worked are 9 hours a day, six days a week. Workers are often part of a local union.

The recruitment of craftsmen is based on references and personal recommendations. According to some jewelers the turnover rate of workers recruited on the basis of personal recommendation / reference tends to be low since the workers recruited in this manner would not like to loose the confidence of their referees.

The remuneration of the craftsmen is a combination of base salary and performance (in terms of units made and / or quality of work).

4.2 Export Market

4.2.1 Major International Market Players

Global trade for Gems and Jewellery has shown a positive growth trend showing increasing demand for these valuable fashion articles in international market. For Jewellery the total trade expanded from US$21.0 billion in 1999 to US$27.9 billion in2003. Whereas for Gemstones trade expanded from US$44.7 billion in 1999 toUS$56.5billion in 2003. Following are the figures in terms of million US Dollars for top ten Gems and Jewellery exporting countries:

19992000200120022003Italy4,9795,3174,8644,8574,537Hong Kong1,7162,1322,0812,4422,854USA1,9382,1802,5962,7182,768India8651,0191,2081,4432,175Switzerland1,2831,3461,5371,9702,056United Kingdom1,2601,0431,4801,6051,948China1,9941,7911,4981,6601,761Thailand-9018901,0621,202Germany7887958058161,035France6808421,0139661,018

Table 4-1: Jewellery Exports (US$ Million)

5%Thailand Germany France

6% China8%

UnitedKingdom9%

Switzerlan d10%

India10% 5% Italy21%

USA13%

HongKong13%

Source: UNSTAT1

Table 4-2: Jewellery Imports (US$ Million)

Singapore3% Germany5%

France6%

Italy3% Cananda2%

Thailand1%

USA44%

Switzerland8%Hong Kong12% UnitedKingdom16%

19992000200120022003USA5,7726,5536,3597,2217,615United Kingdom1,7131,6271,9882,3202,843Hong Kong1,0701,2611,2361,4352,023Switzerland1,0541,1831,1741,3931,323France7238299489501,074Germany887861792844928Singapore582552529-604Italy307374408434550Canada283404388386432Thailand-4478101158

Source: UNSTAT2

4.2.2 Pakistans Jewelry Export

The export of jewelry constituted only about 1.3% of the total exports made by Pakistan. The export of jewelry had been around Rs.807 million (US$ 1,366,000) over the period of July 2004 to March 2005. This was in effect a decrease of 16% over jewelry exports reported over the period July 2003 March 2004, while the total exports showed an increase of 18% over the period considered above.3

Pakistans export of jewelry targets mainly the South Asian expatriates in Dubai, USA and UK. Several factors contributing to an insignificant share of world jewelry export contributed by Pakistan is that firstly, the industry is still fragmented and not well documented. Secondly, the designs produced by the jewelers are very traditional and are made in 22 carat. No hall marking or branding system exists. The larger export market, on the other hand demands 18, 14 and 8 carat jewellery with new and lightweight designs. The giftware market is negligible.

Pakistans Export Promotion Bureau has identified Pakistans jewelry industry as a sector with major potential. To support this sector, a gold assaying / hall marking facility is being established in the proposed Dazzle Park in Karachi. The necessary ground work is complete and funding has been lined up from the Export Development Fund.

Following tables contains information on Pakistans export performance in the JewellerySector for the last 5 years.

Table 4-3: Jewellery Exports of Pakistan (US$)

1 897 SITC Code Revision 3

2 897 SITC Code Revision 3

3 STATEMENT SHOWING EXPORTS OF SELECTED COMMODITIES DURING THE MONTH OF MARCH, 2005 Ministry of Commerce, Pakistan.

YearsAmount200324,429,084200230,145,136200119,419,226200023,800,144199912,242,415Total110,036,005

Table 4-4: Five Years Cumulative Export Figures with Major Trade Partners(US$)

CountryAmountUtd. Arab Emirates50,003,601USA34,405,920United Kingdom18,467,423Canada2,543,479Singapore825,053Other partners3,790,529Total110,036,005

Source: Source: UNSTAT4

Most of the jewellery exported from Pakistan is purchased by Pakistani expatriates. There is a need to improve our understanding of international designs and trends to increase our customer base beyond our traditional cliental.

4.2.3 Export Regulations and Procedures

The export of precious and semi-precious stones and gold jewelry is governed as per special procedure notified vide S.R.O. 266(I)/ 2001, dated 7-5-2001.53.2.1.1 General Rules:(1) Export of gold jewellery shall be allowed by air, parcel post, courier service and by sea, as accompanied or unaccompanied baggage.(2) Export of gold jewellery shall be against advance payment, irrevocable letter of credit firm order or contract, delivery or payment or delivery on acceptance (DP/DA), orconsignment sale, as well as on self-consignment basis through authorized representative.(3) In addition to registration under the Registration (Importers and Exporters) Order,1993, exporters of jewellery and gemstones shall also be registered with the ExportPromotion Bureau as exporters for jewellery and gemstones on application in the form as set out in Annexure A of S.R.O. 266(I)/ 2001, dated 7-5-2001.

4 897 SITC Code Revision 3

5 Reference : Export Promotion Bureau. (www.epb.gov.pk). Section 3.2.1 is abstracted from S.R.O. 266(I)/2001, dated 7-5-2001.

(4) Exporters of jewellery and gemstones shall be required to be members of one of the recognize Associations such as the All Pakistan Gem Merchants and Jewelrs Association, Karachi, or the All Pakistan(5) Commercial Exporters of Rough and Unpolished Precious and Semi Precious StonesAssociation, Peshawar. or any other Association for jewellery and gemstones recognized by the Ministry of Commerce under the Trade Organizations Ordinance,1961 (XLV of 1961)(6) Exporters of jewellery and gems stones shall maintain a Jewellery Pass Book dulyauthenticated by the Export Promotion Bureau and all export and import transactions, as well as import entitlements and actual imports, shall be entered in the Jewellery Pass Book and authenticated by the Export Promotion Bureau.3.2.1.2. Export procedure:-1. Export of gold jewellery shall be made according to the usual Form E procedure of the State Bank of Pakistan.2. The sale proceeds of gold jewellery and gemstones exported under any provision of this notification shall be repatriated either wholly in foreign exchange throughnormal banking channels or partly in the form of gold up to one hundred per cent weight of gold content of jewellery exported including wastage, and gemstones,and partly in foreign exchange for value addition.3. Export of gold Jewellery and gemstones and import of gold and gemstones shallbe provided preferred handling by the Customs authorities for clearance of related goods, and, in the weighment of gold, variation of one per cent shall be allowed.4. The exporter or his authorized representative shall produce the parcels or boxes containing gold jewellery or gemstones along with export documents to theCustoms authorities for weighment and examination under strict security and privacy.5. The Customs authorities shall verify the weight of gold as per exporter's declaration, and shall assess the minimum value addition norms as specified inthis notification.6. The export documents shall clearly indicate the type of gold jewellery, whetherplain or studded or embedded, and purity and karatage of gold used in making the gold jewellery.7.For gold jewellery studded or embedded with gemstones, the value of gemstones shall be shown separately in the export documents including Form E, clearlyindicating therein the kind, value and weight of gemstones of each article.3.2.1.3. Entrustment scheme:- The Entrustment Scheme provides for export of goldjewellery and articles against import of gold supplied as partial advance payment, by the foreign buyer, to the extent of the quantity of gold to be used including wastage, in the manufacture of the items to be exported.3.2.1.4 Export of gold jewellery and gemstones on self consignment basis:-In case of export of gold jewellery and gemstones taken out by authorized representative of an exporter on self-consignment basis, the following procedure shall be followed, namely:

i) The exporter shall submit to the Export Promotion Bureau, an application in the form as set out in Annexure E. in duplicate for export approval and import authorization and

such application shall be checked and verified by the Export Promotion Bureau and entries shall be made in the Jewellery Pass Book;

(ii) The import authorization shall be valid for one hundred and twenty (120) days from the date of departure of the exporter's representative for bringing back gold and gemstones o_ export proceeds and any unsold gold jewellery or gemstones;

(iii) The Jewellery Pass Book, duly authenticated by the Export Promotion Bureau, shall be produced by the exporter's incoming representative to the Customs authorities on, arrival for clearance or release of gold, gemstones and any unsold gold jewellery and gemstones

(iv) The sale proceeds shall be realized, within one hundred and twenty days from the date of export in foreign exchange through normal banking channels or partly in the form of gold content of the jewellery exported including wastage and gemstones;

(v) The unsold jewellery or gemstones shall be deposited with the Customs authorities and shall be cleared against relevant entries in Jewellery Pass Book, and a bill of entry shall be filed for such import of unsold jewellery or gemstones;

(vi) Import entitlement for gold and gemstones, as well as other imported inputs, shall be entered in the Jewellery Pass Book; and

(vii) Bill of entry for gold and gemstones imported in lieu of foreign exchange and for unsold jewellery or gemstones shall be produced to the bank, through which consignment was exported, within a period of one hundred and twenty days from the date of export.

3.2.1.5. Import of gold and gemstone against export of jewellery (1) In case of exports of gold jewellery made from locally procured gold and gemstones. where sale proceeds are realized wholly in foreign exchange, the exporter shall be entitled to replenishment of gold at one hundred per cent of gold content of jewellery exported including wastage and gemstones actually used in the jewellery exported and the exporter shall be entitled to claim import entitlement for the replenishment within one hundred and eighty days from the date of realization of export proceeds.

3.2.1.6. Import entitlement:- Import of raw materials used in the production of gold jewellery and gemstones shall be allowed to the exporters as replenishment according to the following parameters, and such imports shall be freely transferable, namely:

a. Gold: Equal to the gold content of gold jewellery actually exported, including wastage.

b. Gemstones: Up to seventy per cent of the f.o.b. value of gemstones used in embedded or studded gold jewellery or loose gemstones actually exported.

c. Other raw materials and equipment: Import of the following raw materials and equipment shall be allowed up to seventy per cent of value addition i.e., the f.o.b. export value of gold jewellery and gemstones actually exported, less value of gold

content including wastage and value of gemstones, up to maximum percentages where indicated namely:

i. Jewellery casting power. ii. Moulding rubber.iii. Injection wax.iv. Rhodium plating solution concentrate.v. Bright and chrome lacquering solution.vi. Alloys of silver copper and zinc for mixing the twenty four carats gold.vii. Mounts and findii1g of gold, silver and platinum jewellery. viii. Steel balls and pins (different sizes) used for polishing.ix. Jewellery casting machines and accessories. Diamond cutting tools (different sizes).

3.2.1.7. Import duties and taxes:-

(1) Import of gold and gemstones under all schemes shall be exempt from normal import tariffs. The import of other raw materials, tools, machinery and equipment as' provided in section 3.2.1.5 and 3.2.1.6 shall be- allowed free of customs duties and without payment of advance Income Tax in terms of the Notifications Nos. S.R.O. 592(1)/97, dated the 7th August, 1997, and S.R.O. 490(1)/2001, dated the 17th July, 2000, retrospectively.

(2) In case an exporter uses duty-paid raw materials procured .from the market, duty drawback shall be admissible according to the standard duty drawback system in force. Refund of sales tax, if paid on any raw material inputs, shall be allowed according to the Sales Tax Refund Rules made under Notification No. S.RO 417(1)/2000, dated the 20th June, 2000.

3.2.1.8 Advance import of gold:- Exporters .may also apply, in the form as set out in Annexure, E, for advance authorization of import of gold and gemstones, before export of jewellery, as per letter of credit or firm export order or contract, subject to deposit, with their bank of cash margin equal to one per cent of the value of gold and gemstones and in this case the procedures under the Entrustment Scheme in shall apply.

3.2.1.9 Sale of jewelry to foreign buyers and overseas Pakistanis: -Foreign national and overseas Pakistanis shall be allowed to take out personally gold jewellery or gemstones up to the limit of US Dollars ten thousand, against foreign currency encashment certificate, with itemized purchase receipts(s) and, if the value exceeds US Dollars ten thousand, the normal export procedure shall be followed.

3.2.1.10 Display or sale In international fairs and exhibitions: Exporters shall be allowed to take out gold jewellery and gemstones, for display and sale in international fairs and exhibitions, either as accompanied baggage or through parcel post or courier service, according to the procedures of entrustment scheme and subject to the following conditions namely: (a) Items not sold abroad shall be re-imported within forty-five days of the close of the exhibition;(b) the gold content of items sold in such exhibitions may be imported as replenishment within sixty days after the close of the exhibition; and (c) exporters may take out as personal baggage gold jewellery and gemstones as samples up

to a value of US Dollars one hundred thousand, for export promotion tours and temporary display abroad, Such gold jewellery and gemstones shall be brought back within forty- five days from the date of departure.

4.3 Legal Issues Regarding Industry

4.3.1 Taxation

The gold jewelry manufacturer / retailer is exempt from paying sales and income tax as long as the years profit before tax is less than Rs.5,000,000/- Once the profit moves beyond the threshold of Rs.5,000,000/- the gold jewelry manufacturer / retailer is liable to pay 15% sales tax and 0.75% income tax on the years profit before tax.

4.4 Market Potential

The consensus amongst the jewelers spoken to is that the demand driven growth is definitely positive and potential of annual growth can be between 15% to 20% given an adequate stock size, regardless of the state of the economy as experienced over past five years.

4.4.1 Customer Loyalty

Customer loyalty in urban areas and cities is less than in rural areas. Urban customers tend to shop around for an item before making a purchase. The loyalties of these customers have to be retained via good designs, long product range and relationship building.

4.4.2 Trends

The main driver of demand for jewelry tends to be weddings whereby shopping for jewelry to be given in dowry starts years back and goes on till few days before the event. Larger, prominent and gem studded jewelry, thus, constitutes the traditional demand. However, with increasing rate of females working and earning a salary for themselves; and greater exposure to outside culture through magazines and TV the demand for smaller and contemporary western designs is emerging in the main urban cities. The rural and semi rural areas tend to present a more traditional demand.

4.5 Target Customers

The gold jewelry manufacturing and retail enterprise will have two broad sets of target market. Given the proportion of workshop output sold by self, the main set of target market are the consumers (purchasers) of gold jewelry. The other set of target market are those gold jewelry retailers who outsource the manufacturing of gold jewelry. These jewelers are potential source of orders for the workshop.

The first set of target market consumer market can be sub-defined in terms of how the enterprise decides to position its gold jewelry items. Tapping an exclusive niche that falls under Designer Jewelry may require lower initial investment in terms of stock per gross margin. However, that position strategy would have additional demands of offering exclusive and appealing designs and range to the target market.

The positioning strategy, that is, whether the prospective jeweler (retailer /manufacturer) decides to cater to a local niche or mainstream market; or to the export market has crucial bearing on gamut of decisions ranging from site and dcor of the showroom to production process / feasibility of mechanization of process.

The following table depicts how the choice of target market affects some of the decision variables.

Table 4-5: Implications of Various Positioning Strategies

Implications of Various Positioning Strategies6TargetMarket

Price

Promotion

Product

DistributionNICHEMARKET / DESIGNERDesigner'sPremium for exclusivity Exhibitions; FashionShows;Fashion Magazine shoots / Ads 22 karat - 18 karat; Exclusive designs; Low duplicity; Labor Intensive processes Location in the main market is not crucial; Dcor of showroom must support the brand imageLOCALMAINSTREA M MARKETCompetiti ve pricing;Lesser profit margin than indesignerproducts. Word of mouth; Window displays; If justified by capacity, fashionmagazineadvertisement near seasonal peaks. 22 - 21 karat items; High stock to sales ratio; Larger range of jewelry items available fordisplay; Variety of smaller (high turn over items) High importance of central location in a busy shopping centre, or in a cluster of jewelry shopsEXPORTMARKET (Expatriates from the Sub- Continent)Competiti ve in the foreign market Exhibitions 21 karat; Studded jewelry preferred; Both Asian and contemporary designs; Smaller / lighter jewelry Importing agents; Own agent abroad; ExhibitionsEXPORTMARKET (Non- Expatriates) Competiti ve in the foreign marketTrade promotion 18- 14 karats; Contemporary designs; Smaller / lighter jewelry; Mechanization feasible for mass distribution Importing agents; Own agent abroad; Exhibitions

6 Note: This model is based on catering to the local mainstream market. The various target markets mentioned above, however are not mutually exclusive. For example a gold jewelry manufacturing and retailing enterprise may have mainstream local market for volume of sales as the primary target market but can have separate product lines for exclusive / niche and export market for greater profit margin as secondary target market

5 PRODUCTION PROCESS

5.1 Production Process Flow

Figure 4.2.0 below shows the production process flow from contracting an order and completing an order. The production process depicted in Figure 4.2.0 is described in detail later.

4.2.1 Contract Order

4.2.2 Jewelry Designing

4.2.3 Gold Refining and Mixing

4.2.4 Converting gold ingots into plates and wires

4.2.5 Pattern Making

4.2.6 Engraving

4.2.7 Finishing

4.2.8 Polishing and Buffing

4.2.9 Beading and Gem Studding

4.2.10 Gold Recovery

5.1.1 Contracting out an order

There are two main ways a jeweler contracts out an order. Firstly, if a jeweler has his / her own basic workshop, then he/she assigns the task of manufacturing a particular jewelry item to the workshop supervisor / lead craftsman in the workshop. The person to whom the task is assigned in effect becomes the project manager for the manufacturing of the assigned jewelry item.

The other route is that the jeweler himself takes the order through different manufacturing process located in independent specialized units like Gold Mixing Unit; independent designing and crafting unit, the polishing unit, and the stone / gem setting Etc.

The latter route is more costly and time consuming, however the jeweler can apply greater quality control and be more satisfied with the end result.

5.1.2 Jewelry Designing

The design of the jewelry offered is crucial to a cash flow favorable stock-turnover. There are several sources of jewelry designs: Copy of designs from jewelry magazines and catalogues;Hiring of professional jewelry designers with a related educational and professional background; Jewelry design may be provided by the client himself / herself; Jewelry designing by the jeweler himself / herself.

Once the jewelry design is provided to the craftsman / pattern maker, the latter makes a sketch of the design and shows it to the jeweler / entrepreneur for approval. This process till the approval may take about 2 days.

5.1.3 Gold Refining and Mixing

The jeweler commissioning the manufacture of a gold jewelry first purchases gold in form of ingots amount more than what that item would take. For example for a 1 tola (11.5 gram) gold item, the jeweler would purchase 1.5 tolas of gold) from gold wholesalers in sirafa bazaars.

Next, the gold is mixed to get the desired karatage. The mixed gold is molded into small bars and given to the craftsman who manufactures the order.

If the jewelry design requires setting of gems / stones, they too will have to be bought. The quality of the stones can be checked by the Gem Corporation.

5.1.4 Converting Gold Ingots into Gold Sheets and Wires

In accordance with the design requirements, the craftsman converts the gold ingots into gold sheets and wires with thickness required by the design. The gold sheets and rods are made from a machine locally called sheet and wire making machine (Patra or Ari ki Machine). This machine compresses the gold fed into it in one end to produce sheets / wires according to the setting from the other end.

5.1.5 Transfer of Design / Pattern Making

There are two main ways a craftsman may transfer the design into a jewelry item: Direct transfer of design on Patra (flat gold sheet) by the Engraver locally referred to as Ari ka Kaam Karrney Wala; Casting.

The direct transfer of design is a more popular method. The disadvantage of direct transfer of design on gold sheet is that one requires more gold than is required to make an item. The excess gold at the end of the process is then melted and re-used in other items. However, the jewelry item itself requires less gold through the direct method than it requires if casting method is used. Jewelry made via casting is heavier for it requires more gold. Same design made via casting, taking 30g of gold may be prepared by hand using 20g of gold.

Casting method is used for repeated designs. Casting designs are those that are used currently either as piece in a jewelry item or a jewelry item itself.

Cast process follows thus: First, a model referred to as a dye is prepared on an iron sheet. The model is then used to prepare rubber casts / moulds. These models are used in a casting plate (Casting Machine) to make the gold jewelry. Wax casting is used for Kundan and very light jewelry, like Dhaka or Bangals jewelry. Kundan making skills are concentrated in Lahore, Multan, Bahawalpur, Sargodha and Karachi.

The Casting method is time saving. A casting plate has a capacity of 50 tolas. Unless casting work of 50 tolas is not lined up, the machine will not (or cannot) operate. Because casting method is not popularly used, casting work is not sufficient at any given time to operate the machine.

Hence, workshops having their own casting shop set specific days of a week for casting. For example, a workshop may set two days in a week for operating the casting machine, and the craftsman may have to wait for these days for his work-in-process to proceed.

This is one reason why the casting process is often outsourced by workshops to independent casting units in the jewelry cluster. These independent units run their casting plates every day; hence the casting process does not prove to be a bottleneck for a craftsman.

On getting the casted design, the craftsman gives a finishing to the casted pieces.

Locally manufactured casting machine and its accessories would cost about Rs.315,500/-, whereas imported machines German or Italian.

5.1.6 Engraving

Most jewelry design often requires engraving whereby intricate patterns are etched onto the gold base. Basic engraving may be done at the workshop. However, engraving is a specialized task, and sophisticated engraving may need to be outsourced to an independent engraver in the market.

Engraving mainly requires basic chip forming tools such as miniature chisels made of hardened steel. In proper engraving a sharpened tool is set against the metal at a specific

angle and pressure applied both own-ward and forward. The tool buries itself into the sheet, forms a chip, and pushes that curl of metal ahead of it as it cuts.

5.1.7 Finishing

Once the design has been transferred, engraved and design pieces soldiered to form one item, the craftsman gives the piece a finish technically called deburring before the item is sent for polishing. Deburring is the removal of all sharp edges, air bubbles and burrs on a piece.

5.1.8 Polishing and Buffing

Polishing is the use of abrasives to get general surface finish improvement. Buffing is the step to get a smooth, bright, high luster final finish. There are many different polishing and buffing compounds. An often-used breakdown of compounds is:

Cutting Compounds: These include the brown Tripoli and bobbing compoundIntermediate Compounds: These include Gray Tripoli, Graystar, white diamond, and crocus. Platinum Tripoli and yellow bobbing compound.Polishing Compounds: Some polishing compounds are red rouge, yellow rouge, white rouge, black rouge, green rouge. Super Finish Compounds: Blue rouge, Blue magic, Fabuluster, and Zam.The Polishing and Buffing process is performed on buffing wheels. There are buffing wheels to go with different types of compounds being used. There are cotton wheels, chamois wheels, bristle brush wheels and more. Cotton buffing wheels are the most common, felt wheels are also popular as are the brushes. Chamois wheels are great for final buffing, but they are also fairly expensive.

Polishing may take one to three days depending on the item being polished and buffed. The polisher is paid in kind that is considered as wastage by the jeweler. A polisher setshis rate in terms of 500mg on 11.5g (1 tola) of gold. This means that if a polisher is given 13g of gold to polish, and after polishing the weight of gold goes down to 12.5 g, then 500mg was his compensation. If the weight lessens by more than the set rate, the gold-jeweler will write the excess amount payable by the polisher and will be adjusted at the end of a month when the polisher will melt his gold and pay off the excess to the jeweler.

5.1.9 Beading and Stone Studding

Beading and gem studding process occurs after the finishing, polishing and buffing of the main gold base of the jewelry item.

Beading is the stringing of gem beads on to the main gold jewelry item. There is often a beader in every workshop whose job is only to put on the beads on to the gold jewelry. Gem studding is fixing of gem stones on to the jewelry. While some workshops may have their own gem studder, most of the workshops outsource the gem / stone studding to an independent stone setter. Stone setting may take two to three days.

5.1.10 Gold Recovery

On completing the gold jewelry item /s the craftsman must return to the jewler who had given the order the same amount of gold in terms of jewelry and scrap net of a fixed rate of wastage. For example, if the jeweler had given the craftsman 30g of gold (24k) for a necklace requiring 15 grams of gold, then the craftsman has to return gold in terms of 15 grams constituting the necklace and 13.2 grams in scrap gold after netting wastage at 6% (1.8 grams of gold).

5.2 Casting Process and Machinery Requirement

If a new design is to be casted, the first step to casting is making a model of the design by hand either with gold, silver or iron. The model is then used to make a rubber mold known as dye. For this process, rubber that comes in rolls and is known as Casting Rubber is heated, using a Dye Press Machine, under pressure and flows around the prototype making a mold. When cool it is then is cut apart leaving a cavity in the rubber in the shape of the original piece. Wax Injector machines are used to inject molten wax is into the rubber mold creating a wax copy of the original. The wax model is attached to a rubber base with a heating pen like device known as Waxer with a number of others into a tree like form in the process known as sprueing.

The wax tree is then surrounded by a metal cylinder called a flask which fits onto the rubber base. This cylinder is then filled with plaster which has been mixed under vacuum in a vacuum machine to draw out the air it contains. The plaster encases the wax pieces and then hardens. The base is removed and the assembly is placed in a Gas Furnace. The flasks with the plaster encased waxes are heated overnight to 1350 degrees which burns away the wax leaving cavities in the plaster in the shape of the original pieces.

Gold is melted in a flask like attachment on a casting machine. The flasks of plaster that are ready from the Gas Furnace are put on the Cast Machine that is turned on. The caste machine, using system of pressure makes the molten gold travel into the plaster mold while at the same time removes trapped air and gases.

When the process is done, the plaster is broken off and the tree is then put under a motorized pressure machine that wahes away any remaining plaster. The gold tree is then dipped into nitric acid and heated with a blow torch to get the gold colour on the gold caste pieces. The caste pieces are then cut away from the base and are sanded and filed to remove traces of the spruce, mold lines and any imperfections. The pieces are oxidized if required and undergo a multiple step tumbling process using different grit media to achieve the final desired finish.

5.2.1 Supply of Machineries

As mentioned above, most of the gold manufacturing machinery is made in Pakistan. Gujranwala is the hub where most of the locally made gold manufacturing machinery is manufactured. The suppliers are concentrated in Sadar bazaar of Gujranwala. Simple machines like motorisd polishing and buffing machines can be bought from any sarafa or old city bazaar of main urban centres.

Earlier, casting machines had to import from either Italy or German. The main suppliers through which the imported casting machines were bought are located in Karachi. Some

of the suppliers of imprted casting machines have now started manufacturing (with some imported parts) the casting machines and equipment themselves.7

5.3 Jewelry Item Manufacturing Time

Table 5-1 below gives an average time for a medium sized workshop to produce the respective jewelry items.

Table 5-1: Jewelry Item Manufacturing Time

ItemTimeRing1-2 daysBangle1 weekEarring2-3 daysChain3 daysNecklace1 weekTeeka1 dayJhoomer3 daysNose pin1 dayPendant2 daysBaazoband5 daysBridal set1 monthThe time taken on completion of a small order is not far less than time taken for a bridal set because of the way craftsmen schedules the work on order. Craftsmen prefer to work on larger items since for almost a similar amount of concentration the craftsmens earning on a large item is far greater than his earning on a smaller item.

5.4 Raw Material

Table 5-2 below lists the main raw material needs and the purpose for their use. The monthly requirement assessment for each raw material is based on the workshop operations at 41400 grams / year. The raw material assessment below suggests the proportion of raw material cost to grams of output in terms of gold jewelry is Rs.6.4 / gram.

7 One such supplier is Ayub Brothers Engineering Works and Alay Casting Equipment. Phone# 021-2254747, Address: LR9/14, Amil Street, Wahab Road, Ghazi Nagar, Karachi 3.

Table 5-2: Raw Material Required

Raw Material Needs for Workshop output of 41400 grams in Year 1Raw MaterialPurposeTotal Monthly CostCasting RubberFor making casting dyes for new designs7000Whip Mix Jewelry Investment Powder (Plaster)Required in the process of casting10,000WaxRequired in the process of casting2000Nitric AcidFor bringing out the color of gold after casting process and during polishing2000Surf / DetergentRequired during polishing and buffing process200Coloring ChemicalsRequired to change color of gold jewelry item after finishing process1000Table 5-3 below shows how proportion of raw material cost to output over the period of10 years change and the respective expected annual raw material cost. The change in proportion of the of raw material cost to output is based on the planned level of production of the workshop and on 5% annual increase in raw material cost.

Table 5-3: Yearly Raw Material Cost

ExpenseVariablesYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Proportion of Raw material Cost to Output (Rs / gram)6.406.727.067.417.788.178.589.019.469.93yearly raw material cost (Rs)264,960301,392340,805383,405429,414479,065503,018559,238587,200616,560

5.5 Miscellaneous Expense

Miscellaneous office expense includes: Stationary expense: Printing (receipt vouchers, business cards..Etc), writing material(pens, pencils, ink pads...etc); Tea and entertainment expense for favored customers and employees; Commuting expense (visits to workshops, suppliersetc). Other non-recurring expenses.

5.6 Initial Investment in Gold Jewelry Stock

The retail unit of the integrated modeled enterprise will begin operations with initial stock level of 5175 grams of 22k gold. Given the parameters below, the initial investment in gold jewelry stock required is Rs. 6,073,380/-

Table 5-4: Parameters for Initial Investment in Gold Jewelry Stock

ParametersYear 0Initial Gold Stock (Grams)5175Gold Price (Rs) / Gm905Ratio of other material to value of gold used (Rs)0.06Direct Labour (Rs) / Gm with annual increase of 10%160Wastage Ratio to value of Gold Content0.065.7 Machinery Requirement

A basic gold manufacturing workshop can be set up quite inexpensively. Cutting (separating materials), soldered construction and finishing are the three main things that jewelers do. However the more processes included within the workshop, the greater the level of investment. The model subject to this study includes the following processes and the tools, equipment and machines required are in accordance.The workshop of this model has the capacity to perform all processes. The only process itout sources is gold refining and mixing. Processes performed in the workshop are:1. Gold refining and Mixing2. Handcrafting of jewelry by engravers and craftsmen3. Polishing4. Finishing5. Gem / stone Beading6. Gem Studding7. CastingFor this purpose the tools, equipment and machinery requirements are as follows:

Table 5-5: Details of Machinery & Equipment

Machines, tools andequipmentNo. ofUnitsPrice /unit (Rs)Total Cost (Rs)Place of Origin/ManufacturingWire Making Machine and accessories12500025,000Gujranwala, LahorePlate Making Machine and accessories125,00025,000Gujranwala, LahoreWax Casting Machine& Equipment1315,500315,500KarachiPolishing Machine andAccessories27,00014,000GujranwalaTool set for craftsmen58,00040,000Gujranwala

Tools for gem studders24,0008,000GujranwalaManual scale1600600Gujranwala, Lahore, local marketDigital scale16,0006,000Chinese / ItalianMost of the above mentioned tools and machines are manufactured locally. Gujranwala specializes not only in gold jewelry making tools, equipment and machinery, but also in terms of furnishings (like special safes) required by gold jewelry retail outlet. However, some machines like gold plate making and wire making machines are also manufactured in Faisalabad and Lahore.

There are clusters of Gold jewelry related tools and machine manufacturing and are located in Sadar bazaar in each of the three main cities mentioned above.

The general practice amongst the jewelry manufacturers is to use locally made tools and machinery. Machines generally imported are chain making, bangle making and casting machines. The main origin of imported machines is primarily Italy or Germany. Till recently, casting machines had to be imported as electricity based casting machines were not being manufactured in Pakistan. Casting machines are now being manufactured in Karachi at a small scale. Interviews with users with locally manufactured casting machines have expressed their satisfaction with the latter. Because the enterprise subject to this model deals primarily with hand crafted jewelry and casted jewelry component or whole items constitute only small portion of total output, the model enterprise invests in locally manufactured casting machine and equipment.

Table 5-6 below shows the casting equipment and machinery required and respective cost.

Table 5-6: Casting Equipment and Machine

Casting Machines and ToolsUnitsRate / Unit (Rs)Total Cost (Rs)Die Press113,00013,000Wax injectors28,00016,000Waxer1500500Vacuum Machine118,00018,000Automatic Gas Furnace125,00025,000Caste Machine1230,000230,000Pressure Machine118,00018,000Blow Torch13,0003000Total315,5005.8 Furniture & Fixtures

Furnishing and fittings (including 2 heaters) required for a workshop (22 by 88 square feet) is estimated to cost around Rs.50,000/- (Rs.50,308/- to be exact based on current prices). The workshop requires very basic furnishing and fittings.

A simple furnishing of an 11 by 44 square feet jewelry shop can cost about Rs.197,000/- (Rupees One hundred and ninety seven thousand) on average, including an air conditioning unit and a heater. The fancier the fittings and the furniture, higher the cost.

Table 5-7 below shows the break-up of the cost for furniture and fixture for both the retail and the workshop unit.

Table 5-7: Furniture and Fixture

Cost ItemsUnitsUnit CostTotal CostRetail Unit

Furniture (counters, chairs, wall mirrors, lighting, installed safes)115,000125,000Cash Register

15,000Digital Weighing Machine12,0007,000Hand tools (magnifying glass, gem inspection glass, ring size gauge.etc)1 set5,0005,000Split Unit / AC1

30,000Heater1

15,000Total Cost on Furniture and Fixture - Retail Unit197,000Manufacturing Unit

Jute / date leaves floor matting145245,808work benches11250027,500Safe17,0007,000Heater2500010,000Total Cost on Furniture and Fixture - Workshop Unit50,308Total Furniture and Fixture Cost247,308Mostly Gold jewelry retailers contract for fixtures like lockers and showcases and decided upon after consultation with and recommendation of other jewelers who have had experience in acquiring those items. The whole industry runs on the basis of trust and word-of-mouth reputation. Jewelers tend not to recruit un-vouched for suppliers or workers. However, Gujranwala specializes in specialized lockers for gold jewelry retail shops.

6 LAND & BUILDING REQUIREMENT

6.1 Land Requirement

6.1.1 Rent

Rent varies with space and location. For workshop, the location may be within a jewelry a cluster or outside it. The rents and rates within the jewelry cluster tend to be higher. For example, a workshop space 22 by 88 square feet within the jewelry cluster would seek rent of Rs.6000/- per month whereas the same nature of space further to the jewelry

cluster may seek only Rs.3000/- per month. This model assumes a workshop space of 22 by 88 square feet located within the jewelry cluster. Hence the monthly rent for the first year is Rs.6000/- per month with annual increase of 5%.

The rent for the gold jewelry retail shop 11 by 44 square feet, located in a central shopping centre of a major urban city, is estimated to be around Rs.17,000/- month and is estimated to increase at 5% annually.

The rent for both the workshop and retail shop is often pre-paid in terms of lease.

6.2 Utilities Requirement

A medium sized 324 square feet sized retail shop that is open six days a week for about10 hours / day, tends to incur electricity bill worth about Rs.84,000/. This amounts to amonthly average of Rs.7000/- after considering the fact that electricity bill tends to be higher in summers and lower in winters. Yearly gas bill averages to Rs.12,000/-, amounting to Rs.1000/- per month.

Currently established gold jewelry manufacturing workshops concludes that of utilities, electricity and gas costs amounts to, on average Rs.5000/ month and Rs. 2000/ month on average (use of casting machinery and equipment and wire and plate making machine tends to high use of electricity and gas. The main electricity usage in the workshop will be in terms of lighting and operation of machines such as wire and plate making, polishing and most significantly, the casting machine. The gas expense will be on heating in winters and use of gas furnace in the casting process.Both the workshop and the retail shop will have at least one telephone line. The average monthly bill for each line is expected to be Rs.1000/-.

Table 6-1 below shows the break-up of utility costs for year one. The cost of utilities is expected to rise by 5% annually.

Table 6-1: Utilities

Utility TypeEstimated Monthly Billfor Year 1Estimated Annual Bill forYear 1Retail Unit

Electricity700084,000Gas100012,000Telephone100012,000Total Utilities Cost - Retail Unit108,000Manufacturing Unit

Electricity500060000Gas200024000Telephone100012000Total Utilities Cost - Manufacturing Unit96,000Total Utilities for Year 1204,000

7 HUMAN RESOURCE REQUIREMENT

The model enterprise recruits two types of employees in terms of the latter