Commodity Business

By Ramesh Akkineni

from an article by Vanita Kohli-Khandekar in Businessworld

When you look at eliminating waste and cutting cost do you find most companies typically looking at labour, which accounts for just 8-10% of total costs, instead of materials, which could account for as much as 40-50%?

Yes. While designing a new automobile, the cost of supplies is almost as much as 85%, and labour is 5%. If you make a lot of improvements at the design stage and use common parts to reduce costs, effort or weight and make a 10% improvement, that is a straight 8.5% reduction in cost. Suppose you fire 10% of the workers -- that's only a 0.5% reduction in cost.

Jolly stands to save lakhs if not crores by following the Kaizen practices his factory adopted about five years back. He proudly displays the results. Even while the workforce has halved from 435 to 220 workers, production has gone up almost 40% and revenues 20% from 1993-94 to 1998-99. Jollyboard holds just a month's worth of finished goods inventory, much less than the industry norm of two-three months. Work in progress is never more than four-five hours, down from five days. Electricity consumption is down almost 16%: that's a saving of Rs 70 lakh every year on a bill of Rs 3.5 crore. Furnace oil consumption is down over 21%, taking Rs 80 lakh a year from a Rs 4 crore bill....

It is this clear link he sees between the bottomline and Kaizen that makes Jolly its biggest proponent. The logic is simple. "I don't sell a branded product which marketing can push. What we are selling is a commodity and we cannot increase prices beyond 2-3%. That leaves only the manufacturing end for me to save costs on and make money," he explains. In 1997, despite the fact that international prices of hard and soft board plummeted by 20%, and imports were allowed, he made profits of over Rs 2 crore on revenues of Rs 34 crore. He claims his prices are about 7-8% lower than those of imported products and 4-5% less than those of local producers. But Jolly knows this advantage is short-lived. The reprieve he got when the government increased import duties on hard and soft boards from 30% to 40% will last only two years. After that time, the Rs 300 crore industry has to shape up to face the challenge of WTO (World Trade Organisation) norms, under which import duties have to be reduced.

the best investment will be when some one trained in these practices reforms a branded products business and makes it efficient even if the practices are not required to remain the leader

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