India Inc takes the innovative route to cost-cutting
Austerity, and not necessity, appears to be the mother of invention these days with the economic slowdown forcing companies to explore new ways of doing businesses.
So while Maruti Suzuki, in a bid to bring down cost of manufacturing vehicles, plans to use plastic to build fuel tanks as against conventional steel in models such as the new Swift, FMCG major, PepsiCo India, has opted to save cost by using palm oil instead of rice bran oil for cooking its snacks.
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Maruti however, is not alone in its endeavour. Its competitors, Ford and Honda, are also using the same technology. Mahindra and Mahindra (M&M) on the other hand is using plastic fenders in place of conventional steel.
As Pawan Goenka, president (automotive sectors) Mahindra & Mahindra puts it, “To bring down the overall cost of manufacturing, we have to make use of cost-effective alternate products for manufacturing while not compromising on quality and safety. Work on newer substance which can be used to replace traditional materials used for making vehicles is on."
PepsiCo has undertaken contract manufacturing of oats in India (besides potatoes which it already sources from India) in a bid to reduce costly imports. With the rupee touching over 55 against the dollar, local sourcing is gaining ground, say experts.
Another addition to this growing list of cost conscious companies is the Bangalore-based GMR Group which has found innovative alternatives to defer discretionary capex by around 15 per cent. These, however, are not the only measures companies are adopting to keep the costs in check. Simple ways of controlling administrative expenses and travel and saving on energy and water has led companies to save around 20 per cent of costs. GMR Group saved 20 per cent cost on its travel by increased use of technology for video conferencing – in addition to installing video conferencing facility at all meeting rooms in all locations.
With corporate performance in FY12 been pressured on account of adverse economic environment and overall GDP growth slowing down to 6.5 per cent from 8.4 per cent due to a subdued performance of the industrial sector, companies say taking such measures to cut costs are imperative.
“Consumer momentum lost heat by the end of the year, and demand for goods came down. As capital formation slowed down, capital goods production was impacted which caused strong backward linkages along with muted growth in consumer goods of both basic and intermediate goods," said Madan Sabnavis, Chief Economist, Care Ratings.
This loss in consumer momentum could have forced Bharat Forge not to allot for any new capital expenditure this financial year. The company had earmarked Rs 500 crore in investments last year and said the unspent Rs 180 crore will be used this year. The focus, said Baba Kalyani recenlty, would be on asset utilisation and improving the productivity.
Bharat Forge’s competitor, Tata Motors though has not cut its capex, it is feeling cost pressures. Prakash Telang, managing director (India operations) said, “There have been some cost pressures which we haven’t been able to recover from the market but going forward there are lots of things which have been set out by the company like we are looking at direct material cost reduction and improvement in overall efficiency in the operations. Telang adds that sudden downturn in the second half of the financial year 2012 in the medium and heavy commercial vehicles where margins are always better, affected Tata Motors the most. “We have kick started some of these efficiency processes the outcome of which will be seen in the coming quarters," Telang said.
Competitive intensity and increasing costs poses significant challenge to the passenger vehicle industry, with higher inflation, interest costs, fuel price increases dampening the demand.
“For overall industry, raw materials and component prices are expected to be under control, material cost reductions and expense reduction focus will continue", Tata Motors stated in its fourth quarter report.
For FMCG companies which remained relatively insulated from the slowdown, there are warning signs, say experts. Margins have suffered on account of the accent on volume growth, mainly because companies have not taken sufficient price hikes.
To tide over the issue of limited pricing power, most firms have put in place an aggressive cost management programme, pruning advertising and sales promotion (ASP) expenses by about 200-300 basis points to rein-in expenditure. FMCG firms spent about 11-12 per cent of their net sales on ASP in 2011-12 against 13-14 per cent in the previous year.
The trend is likelky to be no different this year as companies grapple with inflation and high costs. With discretionary spends already showing signs of a slowdown, analysts say the accent on long-term brand-building will be less while the focus on short-term sales promotions will be higher in a bid to get as many consumers into the fold.
For instance, companies such as Hindustan Unilever, Procter & Gamble (P&G) are all running promotions on their detergent brands, especially their larger packs, encouraging consumers to pick up more. HUL is also running a promotion on its Lux beauty soap luring consumers with the bait of a gold pendant if they buy the beauty bar.
Similarly, P&G is running its popular ‘Thank You, Mom’ campaign currently, where it is offering discounts on purchase of company products as well as the chance to win a diamond pendant.
Companies such as Dabur, on the other hand, have been firmer with their cost management programme, scrutinising every cost item and seeing where it can slash expenditure especially in areas such as production, distribution and allied overheads. “The strategy for us is to cutback on expenditure till the situation eases," Amit Burman, vice-chairman, Dabur India had told Business Standard in an interaction earlier.
Coca-Cola India, for instance, has put a rigorous efficiency programme in place which involves not only bulk buying of key inputs, but also optimum utilisation of production lines by running larger batches and adopting a pre-sell model of distribution.
According to a spokesperson, the pre-sell model is something it has been doing of late to reduce freight costs. “It involves taking orders beforehand so that your trucks can ply accordingly," says the spokesperson.
This practice is being adopted by almost all beverage companies today, as they look to slash expenditure following volatile fuel prices. “Rather than plying your trucks every day, you make sure they run with orders in hand," says the Coca-Cola spokesperson.
Coca-Cola, is also looking to extend its sourcing arrangement with mango pulp supplier Jain Irrigation to citrus fruits. Jain has begun a pilot project in Maharashtra for citrus fruits, where cultivation of the Brazilian variety of oranges is on.
But cost-cutting measures are not restricted to these players. Soap makers, especially small and regional players, for instance, are known to replace a part of palm oil, which is a key input that goes into making the product, with fillers such as talcum powder. Further cost-cutting measures include using local fragrances as opposed to international ones. “Personal care companies are not shying away from this practice," says Dalip Sehgal, managing partner, DS Consulting, who has worked earlier with both Godrej Consumer and Hindustan Unilever. “This trend can be found with all products in skin care and hair care — shampoos, soaps, conditioners, deodorants, talcum powder" he says.
However, the personnel front has seen tougher set of measures adopted by companies as inflation eats into profitability.
In the last financial year, Bangalore-based Britannia Industries had asked 42 employees to clear their desks, citing underperformance, Sehgal of DS Consulting says. It is common for companies to demand greater productivity during times of inflation. “This is the time when most systems and processes are under review. Firms are careful about recruitment and seek greater productivity from their employees."
Most large and medium-scale FMCG companies do have appraisals in place to gauge performance. This gets more stringent during inflation and a consequent slowdown.
Construction and engineering major Larsen and Toubro Ltd (L&T) is going slow on hiring in the current financial year to optimise cost. “We will not be hiring 5,000 people as we are right now on a cost optimisation drive. In certain areas like infrastructure and others, we are growing. There, we will add 2,000-3,000 people," A M Naik told Business Standard.
HR consultants say if companies are not laying off people, they are cutting employee cost, mostly through reductions in variable pay.
(with inputs from Viveat Susan Pinto, Swaraj Baggonkar, Katya Naidu & Aneesh Phadnis)