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Cost cutting Strategies of the Indian Companies

The economic growth of Indian economy slowed down sharply after 2008. It was also coincided
with high inflation which led to a drop in consumer demand. During the period of economic
recession after 2008, many Indian companies started focusing on reduction in costs in order to
boost profitability amid slowing down in revenue growth. Companies started looking inwards to
reduce the costs. They were able to reduce the costs by using various measures such as
improving raw material sourcing, reducing manufacturing asset, investing in alternative and
renewable sources of energy, improving supply chain management, etc. Biscuit & confectionary
companies like Britannia, Parley, ITC, PepsiCo started reducing weights and grammage.The
companies like Cairn India, Reliance Industries, Essar, ONGC Oil and energy companies
started cutting capex, trimming human resources and implementing "austerity measures" in its
exploration and production business. Some of the successful examples are given below:

Whirlpool India: For a maker of consumer durables, cost of metals is the big deal. Metals
account for roughly 85% of the manufacturing cost of an air-conditioner . Of the metal cost, steel
accounts for about 60% and copper 35%. During 2010, to 2011 the price of steel was up 14%
and copper 24%. Yet, Whirlpool, India managed to lower its raw material cost by 8.5% in
absolute terms. In relative terms, it spent less on raw material for every rupee of revenue earned.
This was partly because it raised prices 5-7 % and partly because of active cost management. The
2008-09 strategy was internally called 'winning in uncertain times'. The company has been doing
a lot of re-engineering in product design and components, and making structural changes. This
included using alternate materials and reconfiguring body parts of durables. These are
fundamental alterations that will outlive the ongoing slowdown. Because of its parent's global
presence, Whirlpool has global sourcing arrangements - some of its suppliers have facilities in
India and abroad. With the rupee falling against the dollar, which makes imports costlier, the
Indian company has increased domestic sourcing. Within one year time span from 2010 to
20111, the company could reduce raw material cost from 45 % to 40 %.
Monsanto: The Indian subsidiary of the world's largest seed company has adopted a three-
pronged strategy to cut costs. Over the last year, it has consolidated its manufacturing operations
for greater economies of scale, reduced inventory and chopped discretionary expenditure like
travel. Its most decisive step was to shut two of its three small seed-producing factories, in Eluru
and Bellary, in Andhra Pradesh. Its entire operations are now at one factory, in Hyderabad, which
has helped the company reduce the peripheral costs of running multiple units. The core idea is to
have a larger team, larger storage capacity and all systems located at one plant so that no time is
lost in decision-making. The company has dedicated units for contract manufacturing when the
need arises. Its second step was to reduce inventories-a common issue for agri-businesses, which
see seasonal sales by selling its slow-moving products. Inventory reduced by about 35%,
yielding it Rs 44 crore. Keeping inventories low is a long-term goal for the company. It
implemented this by following stricter discipline when the marketing team places orders. If they
ask for 100 tonnes of seed, they have to ensure almost all of it is sold. Its third step has been to
review discretionary expenses. For example, in travel, employees are encouraged to book online,
plan in advance and search for the cheapest options. During the period of 2010 to 2011, the
company could successfully reduce the ratio of raw material as % of sales from 42 % to 30 %.

Lupin, India: The firm has been working to create a stable procurement strategy by working on
long-term pricing arrangements with vendors to mitigate volatility related to factors such as
foreign exchange or the prices of active pharmaceutical ingredients (APIs). Being one of the
most vertically integrated pharma companies has helped it to manufacture most of the APIs
required for close to 80% of our formulations.

Godrej India: Godrej Consumer has also identified sourcing of raw materials as one of the four
pillars to drive operational efficiency. At Godrej Consumer, greater use of technology and
business intelligence tools to make faster and better decisions has helped it optimize marketing
spending. The companys advertising and promotion expense as a percentage of revenue has
reduced to 11.2% in the first half of this fiscal from 14.9% in fiscal 2014. The company aims to
cut costs by at least 5% every year to stay competitive in a tough market. Besides ongoing
processes like comparing input and output metrics across factories to identify areas where it can
do better, in the past few months, Godrej has done a few things of significance in the past few
months to cut costs. The main focus is raw material costs, which have grown at a slower pace
(26%) than revenues (35%) between 2010 to 2011. It reviewed how and from where it sources
raw materials. The company changed sourcing, made import substitution, strengthened hedging
mechanisms and even considered alternate raw materials. All the company's plants are in India,
but half its revenues come from exports. Although India accounts for the other half of revenues,
the company was importing 80% of the raw materials for this geography. As a result, it had to
buy in advance (to factor in shipping time) and in bulk, and deal with a falling rupee. Godrej now
buys more of raw material from India, especially in vegetable oil byproducts. This is faster and
cheaper. Domestic sources are about 5% cheaper. Through this method, the company could
reduce its raw material costs as % of revenues from 57 % to 53 %.

India Infoline: For the 26,000 employees of this Mumbai based broking house, the decline in
trading volumes in stock markets has hurt them where they really feel it: their paychecks.
Salaries are the largest cost head for brokerages. More so for India Infoline, which spent 25.4%
of its revenues paying its employees in the 12-month period to September 2011? This is more
than its peers like Edelweiss (15.6%) and JM Financial (19.2%). But for India Infoline, this was
lower than the 29.8% it posted in the corresponding period of 2010, primarily because of higher
revenues. And it could drop further in the coming quarters, as the company has cut salaries by
10-20 %, across the board. The cuts are "graded" - poor-performers took a greater hit than the
good ones. Performers would continue to get their just rewards. At the same time, the company
continues to hire in "key businesses and niche talent segments" , like adding 1,500 employees in
gold loans in the year 2011. By cutting salaries by 10 to 15 % the company could reduce staff
cost as % of revenues from 30 % to 25.4 %.

Dabur, India: Like every consumer goods company, the past 12 months for Dabur have been
about tradeoffs. On the one hand, it wanted to launch more products and increase revenues, for
which it needed to advertise. On the other, it wanted to cut costs, and selling expenses - a
significant spend at 10-20 % of revenues for large companies -- would draw the axe. Dabur fared
well by playing a good strategy. It spaced out new product launches in the year 2010-11, which
resulted in lower ad spends. It has its own media-planning agency to decide where it will deploy
its advertising money. This helped it save some of the 20-25 % commission a third-party agency
would otherwise take and it also gave the flexibility to match spending with needs. It made
special tie-ups with media houses have helped the company to lower ad buying costs. Rather
than buying with individual publications, Dabur has been buying space across a media group's
publications. It is also co-partnering media houses in its promotional activities, in return for free
advertising. As a result, the companys selling and administrative expenses as % of revenues
have come down from 14.3 % to 11.6 %. Dabur, is also working on improving its buying
efficiencies. Firms have also cut spending on marketing, distribution and advertising, an
expenditure that is often seen as the easiest to prune.

Indian Cements: Cement manufacturers are battling on many fronts: a combative marketplace
where cement supply exceeds demand, high interest rates and rising prices of raw materials. It is
challenging them to find solutions to be profitable. More so for those based in South India, where
excess capacity has shackled profitability. In the last year (2010), the company operated below
capacity, which tends to increase the per unit cost of production. Yet, its operating margin
improved to 23% in the 2011-12, from 9% in the last year through cost controls. India Cements
reduced its power consumption to 90 units a tonne, from 93 units. However, this is still higher
than the 87 units a tonne it achieved about three years ago, when its units were working at
capacity. Power costs, which account for about one-fourth of its total costs, is a focus area for
India Cements. During the period of 2010 to 2011, the company has reduced its power costs as %
of revenues from 29.5 % to 25.3 %. It is setting up a 48 mw thermal power plant, which will help
it save at least 60-70 paise per unit, or Rs 25 crore; and it could add revenues if the company
sells surplus power. India Cements has bought captive coal mines in Indonesia. They will
connect the mines to a nearby jetty, and start shipping this coal to India. This will ensure
availability of coal, for use both in the power plant and cement operations, and a lower cost of
production. For a cement manufacturer, 70% cost is incurred up to the clinker stage. The
company has reduced costs till this stage by 2% and it is trying to cut more. It has also reduced
the costs by 3 % is by increasing the blended cement portion.

ITC, India: Energy costs for Indian firms are also higher than for most of their global
counterparts. Power shortages in various parts of the country add to costs. According to a 2012
report by the Federation of Indian Chambers of Commerce and Industry, a survey of about 650
firms from the manufacturing and services sector showed that 61% suffered a 10% cost
escalation due to power cuts. To battle high costs from conventional power sources, firms are
relying more on renewable energy. At ITC, currently 38% of total energy requirements are met
from renewable energy. The investment in renewable energy not only reduces the carbon
footprint of our operations, but also leads to lower recurring costs.

LG Electronics, India: cost management has become one of the key result areas (KRA) to
assess the performance of employees. Durable maker, LG Electronics India, which used to assign
cost management and profitability up to 30% weightage for the senior management has now
taken it down to the middle-level executives, where the weightage is 20%.

Jet Airways: Companies are also encouraging employee-driven initiatives to save costs. Jet
Airways has begun implementing an idea that came from employees this December it allows
them to go on leave without pay for one day a month.

Max India: Max India, which has interests in insurance and healthcare, made cost management
a part of senior managers' KRA last year. Cost management is becoming important since the
company cannot keep increasing product cost due to competition. Operational cost has become
extremely important. The group has decided to appoint a common vendor for all the businesses
to take advantage of economies of scale. Company is picking out people in their workforce who
are responsible for turnover like the sales staff and others who are responsible for profit by
managing costs.

Coca-Cola: The maker of Thums Up and Coke colas has cut its packaging costs per bottle by
7%-10% after reducing the height of bottle cap and neck of all its aerated drinks and water by
about 5 mm each. The company has reduced bottle weights by up to 12% on sparkling PET
packs, as much as 9% on juice PET packs and up to 30% on packaged water. Coca-Cola had in
2008 set a global goal of improving packaging use efficiency by 7% till 2015. While carbonated
drinks market in India is estimated at Rs 14,000 crore, organized water is a Rs 3,000-crore
category. With high inflation, food and beverage makers have been working towards reducing
weights across global markets.

Kotak Mahindra Bank: Green is the new black as Indian companies step up their efforts to turn
environment-friendly and cut costs thereof. Power savings, density computing, virtualisation,
accurate air-conditioning and cheap printing are some of the measures being adopted by
enterprises to save both on their costs and, of course, emission levels. Kotak Mahindra Bank
estimates a saving of Rs 4.5 crore, due to the power savings, incurred from consolidation of its
existing data centre into a new one. The new data centre has smart cooling which reduces power
consumption and emissions further.

Religare India: Religare Enterprises has reduced its power costs by 30-35% by incorporating
three modular data centres. IBM has designed the green data centres for Religare in Delhi, Noida
and Mumbai as part of the $3.1 million agreement signed with the company. Leveraging such
technologies like high density computing, virtualization and precision air-conditioning, Religare
expects a saving of more than 3600 units (KWH) per day in power consumption. In a year, this
represents a saving of about Rs 1 crore.

Patni, India: Company saved 50% electricity at its Green Knowledge Centre, Noida, as 75% of
its area receives natural daylight. The building is also equipped with motion sensor lights. With
so many green initiatives, measuring carbon footprint of companies is also becoming a priority.
Applied Materials aims to reduce its carbon footprint by 50,000 tonne by 2012.

Questions:

1. Identify the cost cutting methods related to cutting variable cost.

2. Which are the strategies to reduce fixed costs?

3. Which costs have been more challenging to control? Why?

4. Which costs are easier to control? Why?

5. Which costs will have strategic long term advantage for the organizations? Explain.
Written by Dr. Prema Basargekar after compiling data from newspapers