A long post sharing my experience on cost control during the critical early days of our corporate turnaround. REDUCTION OF FIXED COSTS The first initiative in the turnaround of our company was to achieve a drastic reduction of weekly fixed costs by 25% in within twelve weeks. I introduced a concept, “motto for the year” to highlight the major thrust of the company for that year. Our first motto was “REDUCE COST FOR SURVIVAL”. We pasted the motto in our name badges. The message was also displayed boldly in banners in all public spaces like canteen, factory floors and offices. We wore our badges with the message even when we went outside the factory for meetings with suppliers, dealers and banks. The badges, instead of conveying a bad impression, informed everyone that the company was aware of their problems and was doing everything possible to overcome them. It motivated us to look for economies and simple savings in day to day operations. Our people started to think twice before doing anything even remotely wasteful. Some workmen came out with great ideas for salvaging material, which was going as scrap and thereby saving costs. For instance, we used magnets to recover iron filings from the dust in shot blasting machines, which used to be thrown away and sold the filings as scrap, saving nearly four thousand rupees a week. A QC circle found ingenious ways of salvaging useful material by using off cuts from packing cases, for making dispatch boxes for spares. Another QC circle from the canteen studied the serving patterns of food for reducing wastage of food. Accounts clerks studied usage of stationery and simplified and computerized accounting processes saving money. During the austerity period most of us travelled by train and saved airfares. We used air-conditioned second class sleeper coaches for overnight train travel. This habit of thrift and cost cutting permeated across the organization and greatly helped in our journey towards financial health. We made personal sacrifices. Officers and supervisors paid for their uniforms which were issued free till then. I raised the charges for travelling in the company executive bus. Workmen’s annual bonus was restricted to the statutory minimum, a step, which had never been taken in the company before. We had always paid full twenty per cent bonus irrespective of profit or loss. Strict limits were put on the use of telephones at home. Subscriber Trunk dealing facility was withdrawn from most executives and officers, retaining the facility only for those, who needed it for their work. Many of the savings were small but they underscored the seriousness of the management in cutting costs. I wrote to the Managing Director offering to forgo any pay revision and increment for me during the period. My request was accepted. I did not use my LTC for foreign travel during the turnaround time. We pruned advertising budgets drastically. We all but vanished from the TV, a difficult decision, which elicited considerable adverse comment. Press ads were cut to the minimum. A special drive was initiated to collect receivables from dealers, most of whom co-operated willingly. We also sought the help of our larger vendors for easier terms of payments for materials and components. Many obliged and eased of our cash flow problems. It was a measure of the goodwill that the TVS name and our MD personally enjoyed that many people and organizations, including banks, pulled out all stops to help us. We quickly analyzed the work being done in house to identify low value-addition, high labor-intensity and less skilled jobs. We off loaded the work to outside parties, mostly small-scale industries with lower cost base. For example, the assembly of wheels consisted of threading spokes and nipples through the wheel rims and hub, balancing and truing the assembly, mounting of tires and tubes and then inflating the tires to specified pressures. We off-loaded the total job retaining only the pressing of bearings on the hubs in the plant. The subcontractor was supplied the hubs, rims, tires, tubes, spokes and nipples. We also transferred the simple machinery for carrying out wheel assemblies to the contractor. Farming out such jobs allowed us to concentrate on high-value core activities, which needed our expertise and warranted employing our costlier labor force. Our workmen, bless their hearts, did not object to the work being taken out of the factory, as long as their jobs were secure. In fact, many ex-employees who opted for the VRS found employment with our subcontractors. I initiated a massive communication drive with employees frequently apprising them of the financial status of the company. I even held classes for groups of workmen explaining the concepts of balance sheet, income statement, fund and cash flows and basic ratios like debt-equity, current ratio and depreciation accounting and the poor financial health of the company. While I was not sure whether the audience fully understood what we were trying to convey, the exercise had the salutary effect of making people understand the seriousness of our situation. A specially constituted task force was assigned to drive reduction of inventory. We classified inventory using an ABC classification under the twin heads of usage and value and drew a matrix to show us where the maximum scope was available for savings. We found a lot of usable materials had been procured as substitutes for regular materials but kept aside when the regular materials arrived. These had been classified as non-moving inventory, to be scrapped! We ensured that such materials were put to use and not just stowed away, blocking funds and wasting space. Inventory turned out to be a veritable gold mine for savings. In just three months, inventory was halved to rupees eighteen crores, releasing an equal amount for other uses. Our wage bills came down drastically in the wake of the out-placements and VRS scheme, though we had to pay the compensation up front. We successfully spearheaded the move to reduce postage, travel, telex, stationery and telephone costs down. Capital equipment purchase was cut down to the bare minimum. Repairs and maintenance expenditure were carefully analyzed and reduced to the maximum possible extent. Against the planned time frame of twelve weeks, it took us sixteen weeks to bring the fixed costs down by the targeted 1.6 million rupees per week. Every week a team from the plant went to Chennai to review progress in reducing fixed costs under each head of expenditure. The managing director reviewed the progress and suggested strategies and areas for attention. We faxed to Professor Bhattacharya the graphs on our progress and he faxed back his reactions. Though our progress was uneven, costs started to come down slowly but steadily. We were ourselves surprised and gratified that we were able to meet the stiff targets set to us. As a consequence of these actions, our break-even volume came down considerably. Despite severe cash flow problems, we ensured that payments of interest and principal to the banks and financial institutions were released on time. Not a single payment was delayed. We never approached them for accommodation of delays in payments or for rescheduling loans. Because we had kept faith with them, they were most supportive and accommodating with credit in emergencies. Our General Manager (finance) handled the Daily cash flow management was not easy as cash was in short supply and had to be rationed and apportioned to multiple needs. To use a dramatic analogy, the heavy bleeding had been arrested and the patient had been transferred from the intensive care unit to the special ward! Now the painful task of recovery had to start and the patient had to move to the general ward finally to be released after full convalescence. We now had to start the ‘revival process’, having successfully overcome the ‘survival’ challenge.
Posted on: Wed, 12 Mar 2014 04:42:57 +0000
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