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-Strategic Cost Management ( TATA Motors Experience)


To appreciate the perceptive change possible through the process of Strategic Cost Management. To have a flavour of the cost management practice of Tata Motors Ltd and its strategic intent. To have quick glimpses of companys performance to appreciate the pace of change.

A quick recap on the concept of Strategic Cost Management (SCM). TATA Motors Ltd. (TML) (A brief profile). Cost Management practices in TML. Glimpses of companys performance

The Concept of Strategic Cost Management (SCM) SCM encompasses 1. Continuous reduction and controlling of costs 2. Improvement in revenue. 3. Management's use of cost information for decision making. 4. Improve the strategic position of a firm. 5. Strategic cost management is a permanent task. It ensures continuous improvements. It starts in the choice of business process extends to Product,Process design and Planning and covers all operations to influence the future cost position. 6. Strategic cost management requires involvement of every employee and it integrates business functions.


Cost Management Profit Maximisation Revenue Enhancement Enhance Customer Satisfaction Productivity Improvement

Traditional Cost Management Vs SCM.

Focus Perspective Cost analysis-way Traditional Cost Management Internal Value-added Strategic Cost Management External Value chain

In term of: product, Process,customer, and In terms of the various stages of the function overall value chain of which the firm is Strong internal focus a part Strong external focus

Cost analysis-objective

Three objectives all apply, without regard to the strategic context: Score keeping, attention directing, and problem solving.

Although the three objectives are always present, the design of cost management system changes dramatically depending on the basic strategic positioning of the firm: either under a cost leadership strategy, or under a product differentiation strategy.

Cost driver concept

A single fundamental cost driver pervades Multiple cost drivers such as: literature - cost is a function of volume. Structural drivers (e.g. scale, scope, Applied too often only at the overall firm experience, technology, complexity) Executional drivers (e.g. participative management, total quality management) Each value activity has a set of unique cost drivers. Cost reduction approached via responsibility centers or product cost Cost impact Finance/Accounting Scorekeeper Follower/reactive Risk-averse Cost containment is a function of the cost driver(s) regulating each value activity. Cost/Value/Revenue relationship Marketing/Economies Analyst and consultant Leader/proactive Comfortable with ambiguity

Cost containment philosophy Primary concern Key disciplines Primary role Management responsibility

Brief Profile of the Company

Tata Motors Limited (TML) is India's largest automobile company Established in 1945 with revenues of Rs. 32,426 crores (USD 7.2 billion) in 2006-07 The company is the world's fifth largest medium and heavy commercial vehicle manufacturer, and the world's second largest medium and heavy bus manufacturer. It is the leader by far in the commercial vehicles in each segment, and the second largest in the passenger vehicles market with variety products in the compact, midsize & utility vehicle segment The company's manufacturing base is spread across India Jamshedpur, Pune, Lucknow and Pantnagar. A new plant is being set up in Singur to manufacture the company's small car.

Through its subsidiaries, the company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools and factory automation solutions, high-precision tooling and plastic and electronic components for automotive and computer applications, and automotive retailing and service operations including Vehicle financing. The foundation of the companys growth is a deep understanding of economic stimuli and customer needs and the ability to translate them into customer designed offerings through leading edge R&D. The R&D establishment include a team of 1400 scientists and engineers and has facilities in Pune, Jamshedpur and lucknow. The companys pace of new product development has quickened through an organisation wide structured new product orientation (NPI) The NPI process helped Tata motors create a new segment in 2005, by launching the Tata Ace, Indias first indigenously developed mini truck. The years to come will see the introduction of several other innovative vehicles, all routed in emerging customer needs.

Tata Motors, the first company from India's engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. In 2004, it acquired the Daewoo Commercial Vehicles Company, Korea's second largest truck maker. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach manufacturer, with an option to acquire the remaining stake as well. In 2006, it formed a joint venture with the Brazil-based Marcopolo, a global leader in body-building for buses and coaches to manufacture fully-built buses and coaches for India and select international markets. Tata Motors also entered into a joint venture in 2006 with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market the company's pickup vehicles in Thailand. In 2006, Tata Motors and Fiat Auto formed an industrial joint venture at Ranjangaon (near Pune in Maharashtra, India) to produce both Fiat and Tata cars and Fiat powertrains for the Indian and overseas markets.

The companys 22,000 employees are guided by the vision to be Best in the manner in which we operate, best in the products we deliver, and best in our value system and ethics.

Cost Management in the Company is considered as a key value creation process along with other business processes relating to Product, Sales & Service, Quality or New product introduction The Company believes that items in the profit and loss statement under the head expenditure are really the outcome or end results. These are expenses, which have been incurred by undertaking certain activities or taking some decisions. Activities or elements, which cause costs to be incurred, are called cost drivers. In order to control costs it is very important to identify cost drivers that have caused costs to be incurred. For e.g. Direct material costs can be controlled, only if it is known that the item cost per unit and the number of aggregates/components going into the vehicle, and their functional attributes. Cost drivers can be identified by conducting a drill down analysis of each cost head down to the lowest level.


List of Cost reduction approach commonly deployed by TML

A. 1. Direct Material Cost B. Variable Conversion Product related: Cost I. Tear-down 1. Reduction in II. Zero base costing i. Power consumption III. Value engineering ii. Fuel consumption IV. Global sourcing iii. Indirect material V. Commodity specialist teams consumption Process related: iv. Tools consumption i. Supplier cost reduction programmes ii. E-Procurement iii. Suppliers base rationalisation iv. Volume negotiations C. Fixed Cost i. Working capital reduction ii. Converting fixed cost to variable cost iii. Subcontract / Make v/s Buy iv. Productivity improvement v. Other methods



Other approaches (Impacting all / most of the above areas) i. Cost of poor quality ii. Process improvement iii. Complexity management / variety reduction iv. Waste elimination-Use of Kaizen principles v. Interest cost reduction

Value engineering (VE) is a methodology, which can be applied for value improvement in any key area. It is an approach, which analyses all the functions of a product or service and the related costs involved. Based on this analysis, several alternatives are identified, which can be perform the same functions, while reducing the cost of the product/service.
VE methodology consists of following steps. 1 Orientation phase Select Projects to be handled by VE team Appoint The team 2 Information phase Locate Data from different sources Identify Facts Assimilate Facts in the required form 3 Functional Analysis phase List The comonents of the hardware Verb-noun description of the function for each Prepare assembly and component. Establish Cost of basis function Estimate Worth of each basic function Determine Value improvement potential

Creative phase Conduct Generate Evaluation phase Decide Evaluate Developments phase Develop Arrange Recommendation phase Present Implemention Stage Implement Follow up & audit phase

Creative problem solving sessions (Brainstorming) Ideas, combine and rearrange them to provide different ways to accomplish basic function Criteria Ideas according to pre-fixed criteria New Components/assemblies for acceptance of ideas Trials/test runs To the management for approval Change in production Problems identified during implemention. Problem reported from the field, if any, to establish the change into a smooth flow up to the customer. Saving and compare results with original expectations Actual value improvement to the management.

7 8 9

Resolve Audit Report


To get an explicit understanding of tear-down exercise following three phases can be seen.
Phase 1: Compilation of a robust and accurate database on the vehicle Design specification Weight Validity Supplier information Comprehensive database, containing technical and commercial information


Phase 2: Analysis of all components by Cross Functional Teams (CFTs) to arrive at an A-B-C classification of components Identification of areas for further analysis after discussion with concerned CFTs.


Prioritised list of components for analysis after: Examining all components Consolidating the lists developed by the CFTs

Phase 3: Incorporation of learnings from one vehicle to other models Institutionalisation of the cost reduction process Preparation of a guidebook, as a ready reckoner, on the methodology used for all teams in the organisation


Agenda for future course of action with appropriate time frame and review

Cost Reduction Process

* Teams to consist of members not more than 6, including leader Define Plan (Diagnostic) Step 0 Form a Team * Decide overall target and completion date Identify problem (Substantiate with facts and data) Identify owner across Study current situation Collect As-Is data Analyse data & summarise findings Identify possible causes Shortlist most likely causes Isolate root causes-Separate symptoms from causes List possible solutions Select preferred solutions with justifications Implement preferred solutions Check and monitor results Standardise improvement If goals have been met, standardize solution If goals have not been met, steps 2 to 4are repeated Establish future plans Review the whole process (step 0 to 6) to plug loopholes Identify next problem Measure Step 1


Step 2

Step 3

Improve Do (Remedial)

Step 4

Monitor and Control Check

Step 5 Step 6

Step 7 Act (Hold gains)

To finally have a macro level perspective in the process the following is relevant.

Phase 3 Strategic Aligned to business and sensitive to it

Phase 2 Process Improvement Out sourcing, BPR, IT improvements Phase 1 Operational Generally low hanging fruits: e.g. Prevent Wastage, Conserve resources, defer expenditure, subcontract

In a typical manufacturing company, the manpower cost is generally at number two, only after material cost. Therefore while productivity improvement must definitely be seen from cost angle, one should not overlook equally important benefits related to quality management. This is because an efficient organisation (having higher level of productivity) also has high quality levels. We need to look at productivity of both direct as well as indirect men.

Deploying KAIZEN methodology to improve productivity on the shop floor by applying the following principles. - Eliminate non value adding activity. - Eliminate forced idleness in interdependent process - Define their Standard Operating Procedures.

The KAIZEN principles teach us to identify MUDA or waste of time and resources in all processes and eliminate them on a continuous basis. It identifies different categories of waste :Over Production Inventories Defective products, scraps, repair, rework. Time wasted in process Unnecessary motion and improvements Wastages during processing and transportation.

ROBUST PROCESS OF EVALUATING NPI (NEW PRODUCT INTRODUCTION) : Evaluation through business case. Selection based on Pay Back/IRR/NPV of projects. Strong review mechanism to optimise on opportunities and Costs.

COST MANAGEMENT SUMMARY Process intensified in the 2000 The group of young officers was requested to brain storm and generate all possible ideas to manage costs, without any kind of inhibition. The process has been institutionalised year 2001 onwards and structured team constituted to drive the process. This also embraces contribution analysis of products with a rolling perspective towards target costs and its tracking with actuals for optimising returns. The work done by all the teams is reviewed every month in the respective steering committee meetings. The tracking formats are structured and included in the Balance Score card (BSC). The results are communicated in numerous ways in the organisation through Town hall communication where the directors and other senior officers share performance results and future plans of the company. Divisional/Departmental/shop level steering committee meetings, In-House magazines, Wall-posters where communication on good work done by teams are regularly published for motivation.

Glimpses of Success Story .

Turnover (Rs. in crs)
35000 30000 25000 20000 15000 10000 5000 0

Turnover (Rs. in crs)

Tata Motors Financial Performance from year 1991-92

P r o f it / ( L o s s ) a f t e r t a x e s
2500 2000 1500 1000 500 0
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

-500 -1000

P ro fit / (L o s s ) a ft e r t a x e s

Return on Capital employed

14000 12000 10000 8000 6000 4000 2000 0 03 04 05 06 07

Net Working Capital

Days of sale





30 25

0 -10 -20 -30 -40 -50 -40 -46

Days of sale







20 15 10 5 0




Capital employed


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