Assignment on Mahindra & Mahindra

Name: - Ankush Agrawal

Roll no. : - R1001005

Course: - Managerial Accounting

Topic: - Cost’s a Fortune

Q1) Outline the following in relation to case study:

Ans: -

Mahindra and Mahindra ‘s which is one of the largest farm equipment sector company is currently at 4 th rank in the
world globally due to its long term goal with efficient cost improvement measures and effective management paves the
path to reach at this juncture .

There was a down turn in the year 2001 in the farms sector; it is due to sales slid by 13 per cent. But for M&M this is
being the special year because the farm division still manage to make profit with the help of there effective measure for
cost.

Vision:
The M&M being among the top wants to attain there vision of “Shaving the cost out of the system in such a manner
that the break even point of sales is lowered by 50 percent”. Here the breakeven point is that point at which the firms
contribution is equal to the fixed cost which it incur in the production for this contribution.

Objectives opted:
The vision is the basic pillar for achieving the long term objectives of attaining the Cost Leadership which require short
as well as long term effective measure to optimize the cost and this helps in retaining the desire of M&M to become The
World Largest Tractor manufacture sector. These measures are initiative to be the best in industry on labour and
overhead costs, marketing costs, working capital and inventory.

History and Performances:

Since there was a down turn in 2001 in this industry sector, then also the M&M still managed to make the profit. This
was not due to there significant increase in the export by 77% rather there effective cost control exercise that was
initiated in the previous year. During this stagnant period the management felt that “We had to speed up the process of
change drastically”. Three years down the line, the company seems to have emerged stronger from this initiative. In the
last financial year, with market share of 27% and a revenue share of 30%, the company claims that it had an industry
profit share of 70%. In the year 2003, M&M profit share was 110% which is only company that made the profit, despite
the sales dropped by 22 percent. There is encouragement for the M&M in inventory management which was already
better than tractor industry standard.
Q2) Outline the strategy adopted by the Farm-Equipment division of M&M Ltd in 2000-2001 to
lower the break-even point of Sales by 50%? It is suggested that you detail the specific actions
initiated in relation to the following:
Ans:-

The Farm-Equipment division of M&M Ltd in 200-2001 adopted various effective measure for the following heads to
lower the breakeven point of sales by 50%.

Sales:-
In the sales segment of the company has approached for operational efficiency. Since the sales segment is very volatile
in nature, it kept on decreasing since 2001; the control of sale price lies in the hand of market factor so to achieve the
quick break even, the company focused over cost cutting measure of various component of cost so that the contribution
can be matched with fixed costs. Here, we can make assumption that in such a volatile scenario company can keep
either the quantity sold as a constant by changing the sale price or it can keep the sale price at a constant level and
varies the number of quantity sold so that contribution as whole can be matched with the fixed cost incurred or foe the
quick breakeven point.

Variable costs:-
The variable component of the cost is the major element which effects the contribution available per unit against the
fixed cost. In this segment the material cost is the major element while the element of labour is covered in the fixed
controllable cost. The material cost accounts for 60% of the total cost. For this, company has appointed 12 teams to
study the each aspects of this cost so that various sunk or residual elements can be avoided. The benchmarks are
assigned to each component. Here there can be a possibility of keeping the level of output and sale price as constant
and changing the variable price proportionately to have breakeven outlay.

Fixed costs:-
To achieve the breakeven point and to ensure that no cost was unattacked, the company divide the fixed cost
component in two heads (a) Fixed Committed (b) Fixed Controllable .Fixed committed cost for ex. Employee wages
which cannot be changed, while Fixed controllable cost is fixed but it can be controlled for ex. Cost heads like
advertisement and travel expenses, general and administration costs. These are fixed but can be proportionately
controlled.

Q3) what were the specifics of the Projects North Star? What do you find unique in this project?
Ans:-

There was an exception to the M&M farm division that despite of slow-down in the market the company had substantial
profit and able to keep its market share at required level. To look best-in-class across the industries, M&M started a
project called North Star, which implies that the different potential industrial leader globally defined the benchmark
parameter for different component of cost and activity involved in it.
 According to me, the uniqueness of this project is that the firm has to meet the risk adjusted benchmarks which were
already adopted by these global leaders to define them. Also while define these parameter there is segregation of all
factors of cost. In case when the benchmarks are unrealistic then disappointment sets in. This helped us to understand
how to set realistic targets; this is uniqueness for this project.

Some of the major players for instance , are DLH was to be chosen one for supply chain practices, while the company
looked at Toyota for managing material costs and controlling inventories. For sales processes, Japanese office
automation companies, Ricoh, was the benchmark.

Q4) In the Strategy adopted by the Farm-Equipment division of M&M Ltd in 2000-2001 to lower the
break-even point of Sales by 50%, explain the following terms and their relevance in the above
mentioned strategy:
Ans:-

Cost control measures which were fundamental to the vision of the company is consist of various cost effective term,
which are explained below;

a) Vendor Rationalization: under the cost control measure, Vendor Rationalization is a method of retaining the
optimum number of vendor on the basis of higher volume of work to them for better price. In other words, company
negotiate for price to those vendor which provide implied intermediate resources at a better price and retain them
for further negotiation. These vendors can be categorized in three levels, i.e. Tier-1, Tier-2, and Tier-3. The company
generally negotiates with Tier-1 vendors. Here theTier-2 and Tier-3 vendors are direct resource provider to the Tier-
1 Vendor. In cost cutting measure rationalization helps in reducing the cost price for the products. It also helped the
company to achieve the better efficiencies. With the minimum vendor base the company can monitor the
production closely. Again the cost saving allowed the firm to use extra resources which can make the product more
efficient.

b) Product Portfolio Optimization: This tool reorganizes or bifurcated the brands and products on the basis of
competition and provides new markets for further enhancement. This grading helps to eliminate those product
segments which are redundant. To improve margins, M&M turned its all attention to product portfolio optimization.
All marketing initiatives were then be focused on promote the best sellers. At present company claims that 60% of
its products are in top grade.

c) Cross-Functional teams: Another effective tool is Cross Functional Team which consists of different person with
different functional potential working toward a common goal. In other words every expert is the manager for the
problems of which he is expertise. In case of M&M 200 managers from different functions met every month and
discussed progress on projects and jointly resolved bottlenecks. This effective exercise helps to eliminate the
bottlenecks arising for one to another.

d) Commonality of Parts: This particular technique emphasis on if some component have common feature then this
features can be accumulated to one single component in order to avoid extra cost burden over the product for
producing different component. M&M has subsequently decreased the number of sticker from 10 to 3 and also they
implement this tool in parts like bulb for tail and head light.

e) Location based improvements: During the production cycle there is some idle cost related to the plant lying idle
at different location. So by utilizing these idle resources there can be effective improvement in saving and reduction
in the cost. For Instance, M&M also focused on location based improvement by deriving benefits from economies of
scale. For, instance, Previously, Rudrapur, in Uttaranchal, was just a satellite plant that the company used only for
assembling around tractors every year. In the last nine months the Rudrapur Facility has been scaled up to
manufacture 25000 to 30000 units from scratch.
f) Time to market: The concept of Time to Market is most important in the sense that if this period is stretched there
will be extra burden over the cost of the products. The Time to Market involves the length of time it takes from a
product being conceived until its being available for sale. M&M managed to reduce the time to market of new
products by 20 percent and increase first time hits (getting it right the first time) drastically.

g) Lean manufacturing: This tool implies that manufacturing without too much waste, using parts that are
interchangeable, facilitating better worker and management coordination .M&M has also taken this measure for
cost minimization for which 30% of programmers in lean manufacturing have already been implemented.

Q5) Specify the initiatives taken to improve the Working capital management of the division and its
impact on the Cost are of the division?
Ans:-

The working capital management is one of the important parts of decision making in financing activity. The adequate
working capital and its optimum utilization are very important. Working capital can be defined as that part of capital
which is used for day to day administration and recurring in nature or in the other words it is the difference between
current assets and current liabilities. The cost can bear the positive and negative effect of the working capital.

In case of M&M, during the lean year in 2001, dealers tended to offer customers longer periods of credit. This creates a
hassle for the credit cycle. Consequently the industry had 120 to 150 days of debtors. M&M had debtors of 90 days.
Here the M&M management had effectively used the working capital management technique and stopped the practice
of providing unsecured credit to farmers. Instead it initiated ties to some finance company for financing the tractor. By
availing this option company could crash working capital to 30 days in 2003.

Another segment where working capital management decisions are effective is Inventory management. M&M has
managed to cut inventory from 40 to 50 days to 22 to 23 days. The aim is to get to four to five days soon for work-in-
progress and raw materials. It has also exploring global sourcing options from China for which it recently signed a joint
venture.