The Hindu Business Line : Board the `bullet train' to cut down costs

WHAT do companies do to sustain profitability and stay afloat during a business slowdown like the one being experienced now? Business slowdown is the result of recessionary conditions in the economy and its most visible symptoms are rising unemployment and slackness in consumer-spending leading to reduced demand all around. A busi-

ness slowdown warrants an in-depth analysis of its causes and effects and a redefining of the company's strategy, at least for the short term.

The following case study illustrates the steps taken by a company affected by the slowdown and its efforts to shore up confidence among its customers and investors.

Toysforkids Ltd is a large public company with more than three decades of sustained growth, specialising in the creation of simulated miniature mechanical toys, apart from the conventional toys, targeted at the smaller age-groups. The company's brands are well known globally and command a significant share of both the domestic and overseas markets. Its shares are widely held and traded on the premier stock exchanges. The company had acquired in 1998 a business hived off by a leading publishing company dealing with the publication of children's classics. The company management had argued, in justification of the acquisition, that the new business would be synergic with its own core business and would strengthen its bid for becoming a top name in the intellectual development of children.

The company's mission statement says that its main aim is to assist in the mental development process of children, to introduce new, innovative ideas in toys and allied products, to create value for its brands, to achieve an average annual growth of 25 per cent in top-line revenues and to enable creation of wealth for its shareholders.

The company's profitability in recent months has been declining sharply. And concerned with the steady decline in its market capitalisation, the company had asked an external consultant to do an analysis of the causes of the decline in its profits, although the general slowdown was also taking its toll on the company. The consultant's study and its own assessments led to a review of the company's strategy so as to get the company on course to retaining its premier position in the industry.

The company has a high-profile chief executive who was instrumental in the rapid development of the company's wide range of products but who, because of being essentially design oriented, had little time for focussing on the mechanics of running the business.

Unable to deliver on his big goals for profitability, the company decided to bifurcate the functions of the CEO, having two joint managing directors, one of whom will be the present chief executive and the other being filled by recruitment from outside, poached from his current employers, a top company in the fast moving but highly competitive consumer products industry. The two joint managing directors report independently to the board of directors and the new incumbent joint managing director would be responsible for the sales and marketing and general administration. The changes in top position enabled the company to look at the options with an open mind and initiate a revised strategy.

Since the publishing business is now out of step with current trends, most of the developments in this area being oriented towards the visual media, it was decided to sell off the unit, although at a loss, but the cash inflows from the disposal coming in handy towards meeting working capital requirements and reducing interest costs. Another major change in the

strategy was to aim for bottomline growth rather than look for top-line growth. Growth in sales revenue alone would be meaningless unless accompanied by proportional bottomline growth.

Indeed, an analysis of customer-wise profitability had indicated that a higher proportion of the sales in recent months was coming from distant supermarkets involving higher transportation costs and higher volume discounts, both of which were eating into the margins. Also, the sales force had fewer hunters (those who thrive on developing new business) and more of farmers (those who were content with taking care of existing accounts) and needed to be motivated by incentives such as commission, paid holidays, and so on. A number of older employees in the latter category were laid off, as existing accounts needed little follow-up efforts.

Next, the company instituted "bullet train", a cost-cutting concept widely used by the General Electric group. The system targets seven expense categories: from travelling to advertising materials with the objective of shaving off at least 15 per cent from the budget for each category.

As cheaper goods from countries such as China and Taiwan were competing with the company's sales, the company decided to outsource some of its cheaper brands from manufacturers in China. The high volume of sales of these brands coupled with lower costs of manufacturing, as a result of the outsourcing, helped increase gross margins considerably. The company's intention is to have a manufacturing facility of its own in China, so that the cost advantages may be extended to its high-value brands.

The next target for review was the product development cycle. Typically, it took up to six months from the time of agreeing on a new design till the time of completion of tooling and the release of a prototype, a further six months for assessing the impact of the product on the focus group of customers and a further six months for production in commercial lots. As this was resulting in a loss of opportunity in potential sales, it was agreed to cut the product development cycle to 12 months. The media blitz for the launch of the new product would commence some two weeks before the stocks

become available on the shelves.

Scheduling of production well in advance, based on marketing estimates, provides big cost savings. If a plant has enough time, it can use just one or two moulds to produce all the necessary quantities of a popular toy, instead of having to rush and use several moulds simultaneously. The difference is significant, as the capital costs of moulds are quite substantial and the wear and tear on the moulds can in this way be reduced.

Another substantial saving in costs was effected in packaging. For export sales, a dozen different packages were being made ready at all times, printed in different languages, in readiness to ship against an order, marked in the language of the particular country ordering. This was causing a build-up in inventories, as materials would remain packaged in the warehouse till orders emanated from countries specifically marked up. This practice was dispensed with and all the packages were printed in only three languages so that any package could be shipped to any country irrespective of the language of the country ordering.

The company also arranged for its staff — designated teams drawn from different divisions — to work with some of the major customers with a view to studying the product flow in their warehouses and this resulted in new pellet patterns and box shapes and a better flow of information between the company and the customers.

The benefits arising from the changes in strategy as well as the cost-cutting measures were substantial and this should be made a continuous process, not only during business downturns but at all times so that the business has an edge over competition in costs and profitability.

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Board the `bullet train' to cut down costs