Mumbai: Four specific areas wre identified as the target zones of the cost-erosion fusillade that Tata Engineering launched in April 2000.
Direct material costs
Since materials accounted for a bulk of the company's expenses, getting the initiative on track here was crucial. It started with Ravi Kant, Tata Engineering's executive director (commercial vehicles division), assembling a team of 23 young achievers (average age 30) in April 2000 and giving them three days to come up with ideas on how to reduce direct materials costs by 10 per cent a year for 2000-2001 and 2001-2002.
Atul P Renavikar, currently the senior manager (e-procurement, materials pricing committee), was one of the young guns picked for the exercise. "We burnt plenty of midnight oil and [after three days] we were ready with ideas and proposals," he says. "We had a road map." Kant liked the group's ideas enough to give the go-ahead for a pilot cost-reduction project.
The team, comprising engineers, managers and shop-floor workers, was pared down to eight members for the pilot project, which essentially involved exploring ways to minimise Tata Engineering's costs on vehicle parts supplied by vendors from across the country.
The team started with three major models, one each from the light commercial vehicle, medium and heavy commercial vehicle, and passenger car families. This made sense because the cost-reduction possibilities identified with these could be applied to a whole lot of variants in the three vehicle categories
"We took apart each of these models, down to the last nut and bolt," says Renavikar. "This helped us improve our own understanding of these vehicles and we compared them with some benchmark vehicles, our own and the competition's." This was followed by analyses of various kinds: zero-based costing (building the cost of the products from scratch, from the value of the components that go into its making), purchase-rate analysis, rate-to-weight study and value-for-money scrutiny.
The information thus gleaned came in handy when the team began renegotiating rates with vendors, but there was more dissection before that happened. A value-chain analysis revealed the scope for reducing incremental taxation. In the automobile industry, value additions go through different stages and there is taxation at every stage. "We reduced the taxation by integrating some of these value additions at the suppliers' end," says Mr Renavikar.
Other approaches followed:
- Value engineering - the system of identifying alternative materials, designs, technologies and processes was reinforced.
- SWOT (strengths, weaknesses, opportunities, threats) analysis of vendors - the team worked out a strategy to maximise Tata Engineering's equation with vendors by tracking the relationship between its bargaining power and its purchasing value.
- The single-source advantage - moving from multiple vendors to a single vendor.
- Reducing imports - by indigenising wherever possible.
- Suppliers - looking for alternate suppliers if regular vendors could not, or would not, reduce costs.
- e-procurement - the reverse-auction process, where vendors bid online to supply requirements.
Once the pilot project was completed, the initiative in reducing direct material costs was spread across the company. A total of 16 cross-functional teams went to work on nibbling away at a total figure of about Rs 4,000 crore. Each team was headed by a leader, who was typically about 35 years old. The 'value' teams were organised around the aggregates: engine, gearbox, axle, etc. The 'commodity' teams considered things such as electrical parts, tyres, air-conditioners, seats, plastic pieces, etc.
Additionally, 'line-of-business' teams were established. Earlier Tata Engineering had one structure to cater to all its vehicle classes, which meant there wasn't enough focus on different automobile families. Now the company structured its marketing along different lines of business. Price increases were factored into the overall cost-erosion venture. "This meant that any cost increase in our products had to be negated by cutting more costs elsewhere," says Renavikar.
The results - and the savings - were quick to show. Direct material costs went down by about Rs 200 crore in 2000-01 and by Rs 168 crore the following year.
Variable conversion costs
Cost reduction in this area, though not as substantial as in direct materials, has had a significant impact on the success of the initiative as a whole. The most prominent accomplishment here has been in improving Tata Engineering's efficiency on the energy front.
The company reduced power consumption across various operations, and achieved a 'unity' buying factor, or optimum utilisation, at its Pune plant to qualify for benefits from the Maharashtra State Electricity Board. It also secured sales tax gains by purchasing power generated by windmills set up near Satara (Maharashtra) by a private company.
An example of lowering power consumption was the use of polycarbonate sheets on the shop floor (this allowed for the utilisation of natural light when possible). A change in its capacity-buying scheme helped Tata Engineering reach the unity buying level, and maintaining the unity factor in 2002-03 will deliver a rebate of Rs 31 lakh for the company. Savings from the purchase of wind power climbed to Rs 4.5 crore in 2001-02. Sales tax benefits from using wind energy will touch Rs 9.5 crore in 2002-03.
Further savings in variable conversion costs were recorded in fuel usage (estimated savings every year: Rs 85 lakh) and in the buying of indirect materials and tools.
The big story in this category was the voluntary separation scheme (VSS). Tata Engineering had a peak employee count of 37,000 in 1998; today the number has shrunk to 22,000. Over a two-year period (2001-2002), the company shed over 6,100 people. There was some restructuring that accompanied the VSS scheme, with people being retrained and shifted to other functions. Of the employees who took the VSS package, around 1,000 were managers and the rest blue-collar workers.
That this programme proceeded without any hitch - and with the support and cooperation of the company's union - is one of the notable successes of the cost-reduction initiative. "We did a tremendous amount of work in explaining why this was necessary," says Prakash M Telang, senior vice president (manufacturing). "Our people also saw the trouble we were in: fewer shifts on the shop floor, fewer vehicles going out of the gates, etc. The slowdown was obvious to everyone.
"We have had many communication sessions and we trained a lot of people internally to work as counsellors. Before we announced the rightsizing exercise, we called in the union and explained the situation. Our efforts worked."
What also worked to Tata Engineering's advantage was its decision to avoid freezing wages. "We did not freeze salaries because what happens then is that your best people start leaving you. We wanted to retain and nurture them, so we took a parallel action with the VSS scheme: we significantly increased the benefits for our top performers. This way we ensured that they stayed with us."
Getting rid of the flab from its balance sheet was of paramount concern to Tata Engineering in its financial restructuring efforts. Selling some of its investments was the route the company took to bring a figure that at one point read Rs 7,000 crore down to Rs 4,300 crore. Improving the quality of this balance sheet was another.
Interest cost savings between 2000 and 2002 have amounted to Rs 118 crore, inventories have come down from 75 days to 41 days and receivables from 90 to 24. The cash-to-credit ratio used to be 25: 75 in 1998-99; now it is 70 per cent cash and 30 per cent credit. Most impressively, the working capital cycle has fallen from 111 days to nil!