The cost of success

The cost-erosion initiative, which began in April 2000, is arguably the most important element in a remarkable revival that has seen Tata Engineering recover from a loss of Rs 500 crore in the year ended March 2001 to a profit of Rs 28 crore in the first quarter of 2002-03. A quality improvement programme based on the Six Sigma model, and the development of new products are the other components of this revival, but it is in cost reduction that the gains have come thickest and fastest.

Consider the figures: Rs 296 crore in 2000-01 and Rs 332 crore in 2001-02. Thats cost erosion and its big.

Tata Engineerings earlier efforts to control costs resulted in small benefits, largely limited to the cost of materials. These benefits were cancelled out by inflationary price increases and expenses incurred on adding new features to vehicles or otherwise improving them. And the results from the companys three operation centres, Pune, Jamshedpur and Lucknow, were never uniform. There was no method to secure the gains of any cost-cutting exercise.

This did not matter too much then. The good times were rolling and Tata Engineering made the best of the situation. From 1993 to 1997 the company grew 30 per cent a year. Revenues sped from Rs 2,500 crore to over Rs 10,000 crore and the operating margin soared to 16 per cent. The country was booming, the economy was booming, the company was booming, recalls Praveen P Kadle, executive director (finance and corporate affairs). We were in a sellers market.

Then came the collapse. It wasnt any one factor that fuelled Tata Engineerings fall. The market for commercial vehicles, the mainstay of the companys business, crumbled by almost 45 per cent at about the time Tata Engineering was spending more than Rs 1,300 crore in expanding capacities in this segment and improving its utility vehicles. The Indica project, up and running by this time, squeezed a further Rs 1,700 crore from the kitty.

Revenues caved in as a consequence, sinking to Rs 6,637 crore in March 1999, but Tata Engineerings troubles were far from over. The cost of complying with new emission norms and the increasing weight of competition added to the pressure on the companys operating margin, which dropped to a low of 7 per cent in March 2001. For the first time the market, rather than Tata Engineering, was determining the prices of our products, says Kadle.