The people at Tata Engineering do not fancy the phrase ‘cost cutting’, for no other reason than that they see it as inadequate, even misleading in their context. ‘Cost erosion’ is the preferred terminology at India’s largest automotive company, simply because it better captures the breakthrough exercise that has shaved more than Rs600 crore off Tata Engineering’s expenses over the last two years. What’s cut can grow back; what’s eroded is gone forever.

Consider the figures: Rs296 crore in 2000-01 and Rs332 crore in 2001-02. That’s cost erosion — and it’s big.

Tata Engineering’s earlier efforts to control costs resulted in small benefits, largely limited to the cost of materials. These benefits were cancelled out by inflationary price increases and expenses incurred on adding new features to vehicles or otherwise improving them. And the results from the company’s three operation centres, Pune, Jamshedpur and Lucknow, were never uniform. There was no method to secure the gains of any cost-cutting exercise.

This did not matter too much then. The good times were rolling and Tata Engineering made the best of the situation. From 1993 to 1997 the company grew 30 per cent a year. Revenues sped from Rs2,500 crore to over Rs10,000 crore and the operating margin soared to 16 per cent. "The country was booming, the economy was booming, the company was booming," recalls Praveen P Kadle, executive director (finance and corporate affairs). "We were in a seller’s market."

Then came the collapse. It wasn’t any one factor that fuelled Tata Engineering’s fall. The market for commercial vehicles, the mainstay of the company’s business, crumbled by almost 45 per cent at about the time Tata Engineering was spending more than Rs1,300 crore in expanding capacities in this segment and improving its utility vehicles. The Indica project, up and running by this time, squeezed a further Rs1,700 crore from the kitty.

Revenues caved in as a consequence, sinking to Rs6,637 crore in March 1999, but Tata Engineering’s troubles were far from over. The cost of complying with new emission norms and the increasing weight of competition added to the pressure on the company’s operating margin, which dropped to a low of 7 per cent in March 2001. "For the first time the market, rather than Tata Engineering, was determining the prices of our products," says Mr Kadle.

"Given the depressed market conditions and no revenue growth, the only way we could reduce our losses significantly and return to profitability was by reducing costs," he adds. "We were forced to look beyond the 1 to 2 per cent kind of cost reduction. What we needed was out-of-the-box thinking." And that’s what Tata Engineering got.

Prakash M Telang, senior vice president (manufacturing), was designated the ‘cost-erosion champion’ and put in charge of the entire initiative. Four specific areas were identified:

• direct material costs (which constitute roughly 65 per cent of all costs);
• variable conversion costs (power, fuel, water, tools, etc);
• fixed costs (labour, marketing, corporate expenses, plant operations, research and development);
• financial restructuring (working capital, debt restructuring, balance sheet, etc).

Three-tiered teams — members, leaders and champions — were set up at the plant level to implement, drive and monitor the exercise across the organisation. Their task began with spreading the cost-reduction message, emphasising its importance to bringing the company back to good health, and defining the methods to accomplish it. The company’s union was co-opted to communicate the programme and the house journal did the same.

"Everybody had a cost-erosion target built into his area of work," says Mr Telang, "and we saw a cascading effect take hold."

The company’s quality improvement project and its cost-reduction exercise have run concurrently, and each has helped the other. For one, its people understood that cutting costs did not mean cutting corners. "The same teams and the same people were involved in both, so they were wearing these two hats simultaneously. This led to many win-win situations."

An illustration of this was what happened when Tata Engineering made major changes in some of its technologies. "We were using copper-brass radiators when a new technology allowed us to use aluminium radiators, which give much better performance. So the quality of the vehicle improved, and since aluminium is much cheaper than copper and brass, the costs went down."

The big positive of the cost-erosion initiative goes beyond the statistics of money saved. "The crisis unified the company like never before. We have emerged from this as a much leaner and better organisation.

"What the exercise has done is institutionalise certain methods. Our systems are now good enough to prevent any cost increases, any regression from what we have achieved. It’s not just one person; the whole organisation is in on it, so we can only go forward from here."

Cost reduction is going to be a permanent feature of Tata Engineering’s agenda for the future, but the problem here is that the going gets tougher on this score with every passing month, because finding new costs to eliminate becomes ever more difficult.

Meanwhile, there are other things to consider: complexity management (essentially, making fewer variants of a particular product range); putting a comprehensive testing system in place; increasing the scope for outsourcing; and giving e-procurement a more conspicuous role in the order of priorities, with projected savings of Rs100 crore on online purchases of Rs1,500 crore over the next three years.

With operating margins in its flagship commercial vehicle operations now up at about 13 per cent, Tata Engineering can afford to breathe easy. Where two years back it looked dark as tar, the future now promises the rewards of a war that seems well and truly won.

This is the second part of an article on the turnaround at Tata Engineering. The first, 'Where quality is king', focused on the company’s quality improvement programme.