COST is a Strategy

Post financial crisis of 2008, followed by fear of sustained recession, most of the players across various industries have realized the importance of four letter word COST. I define COST as a strategy which has emerged out of recession. The startegic definition of COST is explained below.

C : Collaborative Operations

O : Optimization of Resources

S : System Thinking

T : Termination

Collaborative operations: Beyond manufacturing and integration of information, beyond outsourcing, I foresee the impact of globalization will give opportunity to collaborative operations in all areas of business like sourcing, logistics and services. We have examples of airline industry where companies made a cluster through code sharing. They did it after a lot of bleeding and at the time when they were at verge of survival and death. Functions like procurements, ticketing and operations, not only simplified with a significant reduction in cost but also given an opportunity to focus on brand building and consumer experience. The other industries need not to wait for situation to be worsened to consider collaboration. They should move proactively to chart out collaborative global sourcing, logistics and customer services.

Collaborative logistics: In India a big opportunity in on the way to shake all the industries is the implementation of GST by 2010. This can open the doors of collaborative transport, warehousing and distribution. All third party logistic companies have an opportunity to expand their services. Now few companies already started planning out such options. See the following quote of Mr Pradipta Mukherjee, GCPL Vice Chairman, in one of the interview given to business standard recently:

“We would be looking at re-doing our supply chain and logistics costs once the goods and services tax (GST) is implemented from April 2010, and CST is phased out from 4 per cent to nil. We also intend to consolidate the FMCG companies in the Godrej Group, and so, post-GST implementation, we would be looking at how the group FMCG companies can get together to use common depots and supply chain. This would not only reduce cost of operations but also enable reduction of inventory levels”

Optimization of Resources: There is no end to the upper end of required resources for any task. All we need is adequate resource planning. Optimization of resources is nothing but defining just adequate numbers to all the direct cost like manpower and infrastructure. Remember all the adequate numbers can also be optimized. So it’s a continuous process. I say optimum and not the minimum as its not a cost reduction strategy, but its an strategy which will give maximum of all your manpower and infrastructure by challenging their capacity or output on a continuous basis.

System Thinking: I am a fan of Deming philosophy. So I believe that both success and failure are the outcome of good or bad systems and not the manpower. Investment in system actually reduces cost by enhancing the outcomes and efficiencies. The challenge here is not only implementation of world class practices but also how philosophy and strategy of a company can be inculcated in system itself.

Termination: This is law of nature that end of everything is certain. I suggest just deciding the end before nature does. So it will be a wise decision to get rid of not performing assets, business, and manpower as early as possible. This will reduce negative energy of the organization significantly to focus on performance and new opportunities.

Though ‘COST’ seems to be a strategy of recession manager, I feel its reliability even in better times.

Air India In-action

When a government enterprise like Air India books huge losses, have you ever thought who is financing it? Government or ultimately the tax payers? Had it not been a government controlled organization, a private company in this situation could have filed for bankruptcy by now. I want to highlight few fundamental things again as consideration for AI. Lean manufacturing is a concept which revolutionased the world can be extented to other areas like lean staffing, lean service infrastructure, and lean collaboration. A government bailout or IPO could be only a temporary solution to finance the losses immediately. But for sustainable survival AI need to focus on cost rationalization, performance, quality of service and customer experiences. Remember,when you determine to become lean you need to invest in quality and services for future. Any ways, thank to government or tax payers, to make AI survive. Hope Air India to be out of "Inaction" to "IN Action".

Recession and Organizational Restructuring

Cautious recovery of stock market and second innings of government has changed the Indian economic discussions from 'recession' to 'growth'. Just few months back when various companies were innovative in changing practices to fight recession by reducing cost are now thinking optimistic for expansion and growth. I feel the greatest gain of last crisis to Indian industries are cost consciousness with eye on opportunity for growth.

In this blog i want to discuss the strategies adopted by various companies on their organizational restructuring by either splitting up for growth or consolidation for cost rationalization. Which strategy is better? Should it be a role of a recession manager or a regular activity in regular time.

Here are the examples of various companies who used either consolidation or expansion for efficiency or growth or vice-versa in last few months:

1. Bharati Airtel recasts business into nine arms to increase focus on non voice business like mobile commerce, entertainment, media, internet, enterprise services and small & medium businesses.

2. Dabur decides to split sales force, stockists to prop up market share

3. Tata Tea Brews plan for consolidation by merging tea, water and soft drink business into single entity to simplify operations and rationalize cost.

4. In the similar consolidation line Godrej announces merger of its three businesses; Godrej Consumer Products (GCPL) and two of its joint ventures — Godrej Sara Lee (GSL) and Godrej Hershey’s (GHL).