1. The emphasis of cost management should be on rationalizing costs, not on cutting them indiscriminately. We need to question each major outflow and ask, “What returns will I get from this expenditure/ investment? Can the money be used more productively? Can the desired results be obtained at a lower cost?”
2. A greater focus on costs can be achieved by cross-functional teams (CFTs) – consisting of enthusiastic influencers. Such teams work best when the members are empowered and motivated. One way of accomplishing this is by factoring the results of cost management into participants’ Key Result Areas.
3. Demonstrate organisational commitment to cost management. For example, Titan’s Managing Director recently launched “WOW” (War on Waste) and conducts monthly progress reviews with CFTs. During the initial meetings, participants brainstormed and generated initiatives with potential to save costs. These are then discussed and the initiatives with maximum saving potential are selected. Later, responsibilities and timelines are assigned, and results are reviewed on a periodic basis.
4. Cost reduction is not ‘Finance’s baby’; it is an organisational priority. Nevertheless, Finance professionals must be involved in operations to be able to enhance cost consciousness. This can be achieved by focusing attention on costs, analyzing cost data and sharing relevant information with CFTs.
5. Accountants can also help focus attention on costs by interpreting them intelligently. Examples from Titan’s watch manufacturing plant in Hosur:
(a) The Machine Hour Rate of Precitramme equipment was high because it was not fully utilized. The fixed costs were spread over a lower number of hours. This pushed up the cost and retail price of Titan Edge (“the slimmest watch in the universe”), thus suppressing demand for the watch. After we adopted a ‘variable cost MHR’ for costing and pricing decisions, the watch became an overnight success.
(b) In-house vs outsourced decisions: Similarly, the Manufacturing team used to outsource certain watch components because the in-house manufacturing cost appeared higher. However, when one looked only at relevant costs, it made sense to utilize existing machinery to manufacture those components in-house. Our cash outflow was thus reduced.
6. Even ‘Overheads’ need to yield some benefit: Before Tanishq’s business picked up, diamond-setting capacity (a labour-intensive process) was surplus, classified as ‘employee cost’ or overheads. Hence, the cost of stone-setting was not factored into the price of jewellery. We were losing a big opportunity. Later, realizing our lapse, we rectified prices and also looked at cheaper mechanized processes. This improved our gross margins on studded jewellery significantly.
7. Constantly review your assets and, when times are good, clean up your Balance Sheet… Release cash by liquidating non-moving/ slow-moving items. Tanishq’s retail businesses achieved this by constantly reviewing its current assets. Slow-moving jewellery designs were redeployed to other Tanishq showrooms. We also had road shows, exhibitions and ‘Best Deals’ counters - wherein jewellery was sold at attractive discounts. Many of Tanishq’s promotions were a resounding success. When all else failed, we even melted jewellery!
8. Identify the core problem and explore every opportunity to solve it: Initially, Tanishq used to buy gold bullion - 80% of our material cost - on spot basis, resulting in outflow of scarce funds and exposure to price risk... In the early 2000s, Titan was a cash-strapped company. We gradually started buying gold on credit from foreign banks (lower interest, open price) and operating on the forward market. These mechanisms reduced the company’s net capital employed and interest cost, boosted Return on Capital Employed, and helped hedge the gold price risk.
9. Contrary to popular logic, paying creditors late is not good business: When Tanishq approached diamond merchants to negotiate prices, we realised that we had been short-sighted by delaying their payments. The suppliers’ interest cost (higher than ours) had been loaded onto their normal prices, based on our longest-delayed payment… By agreeing to pay suppliers in time, we got significantly lower purchase prices, which helped us to further improve our margins.
10. When Excise Duty was introduced on branded jewellery, it came as a big burden in a low-margin business. We were already at a disadvantage vis-à-vis the local jewelers. To mitigate this risk, Tanishq established a manufacturing unit in an excise free area (Uttaranchal).
11. Advertising: Some Marketing people lack business acumen but they do have an important role to perform. Tanishq faced a three-fold problem:
(a) The proportion of money spent on producing advertising was excessive, relative to mass media spends
(b) Product ranges were launched without proper cost benefit analyses and
(c) Service providers’ rates had not been adequately negotiated down.
We needed to encourage the Marketing department to spend on advertising that reaches the customer rather than on production costs.
We also used Public Relations and press releases judiciously; these are a lower-cost and more credible medium than advertising.
12. People drive businesses... But when salaries are undifferentiated, good performers have no motivation to give off their best and they will seek more remunerative opportunities. Titan faced such a situation that also resulted in a costly attrition problem. So, the company revamped salaries, paid rates closer to best-in-market and demanded superior performance. Titan also introduced a package wherein 30% of earnings (even higher for retail staff) was linked to performance. This improved morale, efficiency and output.
13. This was preceded by an attractive VRS package that eliminated ‘deadwood’/ redundant employees, who had been a drag on the organisation.
14. Challenge employees to justify their existence, to measure cost savings relative to their salaries. For instance, I once negotiated with a credit card ‘acquirer’ (who placed electronic data capturing machines at our stores) for a reduction of 0.10% (10 percentage points) in their commissions. This resulted in savings for Tanishq that were more than my annual earnings.
15. One radical rule introduced in Tanishq was that domestic air travel could only be on discounted tickets, which were available for nearly 50% less than normal prices. This is a small item, but it resulted in lowering costs and better planning of activities. The most significant benefit was that people became aware that such cost-saving opportunities exist.
16. For greater involvement across the organisation, invite ideas from employees and announce rewards for suggestions that are successfully implemented. When ideas and winners are recognized (intranet, public felicitation), it could motivate others to come forward.
One evening, an old Cherokee told his grandson about a battle that goes on inside people.
