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Tuesday, 19 August 2014 00:00

Managing Costs in a low growth environment

Written by  Paul Mracek
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Paul Mracek is the CEO of Kotan Australia. He is a 7th degree Black belt holder in Martial arts.  He has 25 years of experience in Asia, Europe, USA and Australia in leading multimillion dollar companies and building successful businesses. He is also an author of several books on success and business, balance and how to apply ‘success mindset’ to any part of life.  Paul is a Master coach and practitioner of NLP, TLT and Hypnosis.  He is a Chartered Professional Engineer, Fellow of Australian Institute of Management, Graduate of Australian institute of Directors. Paul works with a few companies in India. Theindianmanufacturing.com caught up with him during one of his trips to India to get his views about ‘Managing Costs in the new normal environment where the growth is not very high’. With experience in business environments on different continents,  Paulis the right choice to talk about this subject.

 

Managing costs in the new normal environment where the growth is not very high.

 

There had been a big change in India in the last 2 years. Most of the Companies have experienced either ‘no growth’ or ‘low growth’. This is quite different from the previous 7-8 years when the Indian Manufacturing experienced healthy growth. Companies are struggling to readjust to the new normal.

 

The Indian Manufacturing.com (TIM) :What are your observations about the Indian Manufacturing companies in the last two years when the economy had not been doing very well?

Paul Mracek (Paul) :Indian manufacturing companies are suffering from similar pains as those companies in other countries when the normal growth rates they are used to are no longer happening. They are seeing their profitability and sales go down quicker than they can adjust to the market conditions. Customers are being cautious and not holding as much stock as they have in the past due to the tough financial conditions that all countries are struggling with. The lack of money in the market is affecting both private and Government spending and creating uncertainty in people’s minds, so they are delaying spending money where ever they can.

All the companies are looking to try and take cost out of their businesses, look for new or different markets and products, which of course takes money, time and resources. While at the same time competition has become harder and prices falling that impacts further profitability.

TIM :How do you think they are coping with the cost of operation?

Paul :They have not been used to managing their cost base as efficiently as they could and in proportion to the demand or volumes to match. They have not been used to managing their cost base as efficiently as they could and in proportion to the demand or volumes to match.  Labour has always been seen as a small cost and not that well managed, by this I mean they tend to have 20% more people than really needed if the operations where set up to match the demand properly. The challenge with constant growth is that the additional operations, machines and people are just squeezed into the existing space (footprint) as best can be done, rather than necessarily being re-planned from the start again to get the best efficiency and cost base. When the volumes drop this then becomes a bigger cost burden or anchor to the business.

TIM :How to become cost competitive to face the global environment?

Paul:Lean manufacturing to take out waste and Six Sigma for quality to take out variability become even more important in these cases. Quality and Cost are not just differentiators for business anymore they are pre-requisites for staying in business and keeping customers, especially in a more competitive market. Delivery and Service are the deciding factors in my opinion what will make your business standout from others in the market place. Customers don’t want to hold stock, because it costs them money and profit…so they are looking for suppliers to be able be more flexible and make and deliver products quickly as demand changes. Service is your ability to be able to be exceed your customers’ expectations and be one step in front of them in providing product and services that they can trust and give them no extended or ongoing issues. This is looking at the whole of life cost for them to supply the products to the end customer or user.

TIM :Can you give some good examples of Companies who are managing their costs very effectively?

Paul:The companies that manage these factors effectively and are flexible enough to adapt quickly are certainly the ones that are going to survive and grow into the future. They are also looking to continue to invest into the knowledge base within their companies, i.e. to train their people and to find ways to effectively use technology to support. This doesn’t always mean automation, rather ways that they can cost effectively find the right balance with their existing workforce. Rather than talk about specific companies I would indicate that it is more to do with specific market segments, for example Automotive, Petro-Chemical and pharmaceutical are usually operating with this mindset.

TIM :Raw materials are the biggest cost in the P&L of most of the companies. Can you give some insights about managing these costs?

Paul:Yes raw materials are normally a large part of the cost of product and doing business. As many companies in the past have found, constantly pushing prices down with suppliers can back fire and your business ends up suffering. Certainly you need to get the best price, however if you are both not making profit then there is only one thing that will happen, you will both go out of business. The best approach from my experience is to be open and get your suppliers to be active in your cost reduction programs and help them so they can help you in providing new ideas on different designs, materials, supply options, stock levels, terms  and of course costs. They generally have more ideas than we think which can have substantial impact on your costs and profitability.  

TIM :People costs are perhaps the next biggest in most of the Companies. How do you think Companies can manage these costs?

Paul:From my experience most companies don’t do this well, unless they have some training in method time measurement and workplace and tool design. On average as I mentioned before they have around 20% too many people. In addition the participation or engagement levels by employees is far from ideal with at least 1 in 3 doing enough just to survive; meaning that they are not actively looking to improve their performance or that of the business. Establishing standard processes and training people to use and stick to them is a great first start, this allow companies to easily calculate the number of people they need based on the changing demand levels. The next par to look at engaging their people better so that they are more productive…through training and coaching of the key supervisors and managers.

 

TIM :The White collar productivity or the productivity of Staff is a subject that is not addressed by many of the Indian Manufacturing Companies. What are your views on this subject?

Paul:Absolutely this is a big area of opportunity I have seen in Indian companies. There are many that are operating with what I call the old school method, of just  do what I say…and don’t listen enough to what their people are saying. The risk with this approach is that you disengage one of the biggest resources and cost within the business. Like machines you have to do maintenance with your people and this is the role of the white collar staff in the business. Telling people might get you the quickest result, or at least that this the thinking however it doesn’t mean that you get the best and most cost effective outcome.

TIM :I observe that Staff in Australia or USA or Europe tend to be much more productive than those in India. What do you think are the major differences between the Staff in these countries?

Paul:Yes and no, I have seen both more and less productive staff depending on the country and industry that we talk about. I think that one of the different key drivers for overseas companies that certainly drives a different perspective and constant looking to improve the performance of staff is the cost of people. This is a lot higher in Australia, Europe or Europe, for example on average it is around $18-$20 per hour base rate and then with statutory charges this can go up to $35-$40 per hour for the company. So there is certainly an incentive to get the most out of the staff that they have…and not to have too many.

Therefore the companies see the need to have coaching and training of the people as it pays by impacting the company bottom line.

TIM :Profitability of 10-15% is what an Indian Company looks at / aspires for.. Do you think these are reasonable targets and what is the profitability of Manufacturing companies overseas?

Paul:I think that the 10-15% profitability targets are reasonable targets as a minimum, after all the other option for returns on capital are to invest into the share market or with banks and they need to be competitive with them. The better companies overseas are looking for returns of 20-25% to be able to grow the business by generating the cash flow internally and be able to invest in new products, equipment and markets.

TIM :Can you give examples of a few companies where you trained the staff and the level of improvement that you were able to achieve?

Paul:Even though I am now consulting, coaching and training businesses I have found that as a leader in an organisation that there is a constant need to train your people so as to raise the level of knowledge, skill and performance in the business. You might have the title of manager, president, director or managing director the business performance is dependent on your people. It is something that everybody should be doing constantly and consistently all the time. Over the last 10  years I have taken a number of companies through strategic change and training programs that have resulted in improvements is the following key business measures:

-          revenue improvements of 65+%

-          export improvements of 50%

-          quality improvements of 90%

-          cash flow improvements of 250%

-          productivity improvements of 25+%

-          inventory improvements of 30%

-          production output improvement of 50%

TIM :What is the importance of I.T and how can this be used to boost the productivity of the people in the organization? Can you give some examples of companies using I.T effectively?

Paul:I have seen too many times in businesses where I.T has not delivered the stated returns and ended up costing the business rather than saving or generating money. For me I.T is an enabler and needs to complement the existing business activities and processes. It needs to be able to provide benefits to both internal and external customers. I.T systems can provide a competitive advantage for the business in identifying key business parameters, for example product costs – planned and unplanned, headcount and capacity planning, inventory planning and levels to match demand, forecasting, support sales & marketing programs and rollout of new products and services, customer service, and of course financial planning. All these things can be done in real time with a good I.T system, providing timely information to management so as to make informed decisions.

Customers’ expectations are that they are kept informed and responded to within 24 hours to whatever questions or enquiries that they have.  Unfortunately I have seen more companies getting it wrong with I.T systems than right, mainly because they haven’t documented or understood their own internal processes and procedures..which is often called “legacy systems”. Getting this right first is what will determine how effective any new I.T system will be for the business.

The size of the company is not really an indicator as to how good their system is. A couple of good systems that I have seen by large corporate companies are Robert Bosch (German company, Regal Beloit (USA company) and TVS (Indian company) which both have subsidiaries operating in India. On the other end of the scale I have also seen a small company approximately $10million sales in the training industry set up their own system using standard software who are be best in class and has delivered increased sales due to the improved customer service and regulatory compliance that they were able to achieve.   

 

TIM :What role should a Leader play in preparing the Company towards a much more austere environment with respect to costs?

Paul:This is a good question and the old saying of “A company is a reflection of its leader” really does apply in this situation. All the resources of the business needs to be focused and used effectively in a cost and cash conscious environment. I have found that there are many opportunities for businesses to improve productivity, develop new products and services and reduce costs that get missed because they are not tapping into the existing knowledge base of their staff.

The leaders role is not all about telling others what to do, it is more about getting engagement of their staff, which drives responsibility and accountability. It allows the leaders to be able to delegate with control and be able to focus on working on the business which is what they should be doing. In India where there has been a long time of economic growth, there will be and is a generation of managers and staff who don’t know what or how to do things in a slowing or negative growth market-environment. They need to be taught what to look for and how to do it, and this is the leaders role to ensure that the appropriate knowledge and skill through coaching and training is provided to staff.

 

TIM :How to avoid the company getting in to too much of Cost control and forgetting the main goal of growing?

Paul:This is a constant challenge for many businesses around the world over the last few years, and I have to say that it is not as difficult as people seem to think. I have found from my experience it is reasonably simple, however the challenge here is that “Simple, doesn’t mean easy!” It requires focus, action and most of all discipline to stick to what needs to be done even if it is uncomfortable.

The constant theme that I have seen that is missing is to have within the business documented processes and procedures for all the key requirements in the business. This means production, quality, sales, marketing, accounting, purchasing and human resources processes as an example. Too many times I  have found that this is not clear for staff and they do the best they can based on their experience level and this is where things start to go off track and cost more money, time and resources than expected. Staff need to keep strictly to the processes which have known outcomes and timeframes. Every time I have seen blowouts in projects it has been more than 90% of the time due to people going away from standard processes and procedures. As I said simple and not necessarily easy.  

TIM : How to balance long term benefit and short term cost control ? Can you give an example of some companies who do this best?

Paul: This is an interesting question and makes the assumption that there is a difference between long term and short term in the way the business should operate. I don’t see this as being the case, the two should be in alignment and all activities need to be directed to what is driving growth and profitability for the business. The companies that do well in time of slower economic growth are the ones who stick to what they have been doing and works. Investing in your people through training and coaching is going to pay dividends all the time, and usually even more so when people are worried about their jobs. Unfortunately the first thing that businesses do in a slowdown is to cut this area which gives the organisation the wrong message and productivity, quality and in the end sales-profitability suffer. After all what is making your business different to everybody else out there.

 The companies that I mentioned earlier Bosch, Regal Beloit and TVS provide an example  of what can be done in a positive way…and of course we can all improve and need to make sure that we don’t get complacent thinking that nothing more can be done.  

 

 

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