A Study on Cost Reduction Measures in Kamco Ltd

A STUDY ON COST REDUCTION MEASURES IN KAMCO LTD

INTRODUCTION

Agriculture is the back born of Indian economy. A very high proportion of the working

population is engaged in agriculture, which contributes a large share in National Income. The

share of income from agriculture sector is less than the share of employment in agriculture. From

the point of view occupational pattern, the Indian economy is primarily-agriculture because

agriculture contributes nearly half of the national income.

More over, in the agricultural sector of the Indian economy , much larger number of laborers

is engaged in production rather than is rarely needed. In other words, the marginal product of

labor in agriculture is often negligible; it may be zero or may even be negative. The low

productivity per hectare in Indian agriculture and the low level of productivity per worker in

agriculture and industry are largely a consequence of the low level of technology.

One of the major problems of the Indian economy is uncertainly of agricultural production,

since agriculture still gambling with the monsoons. “Instability of output of agriculture also

results in causing instability in the related sectors”. Thus, a major development issue for the

Indian economy is devises a strategy of agricultural development, which can promise a steady

growth of agriculture output.

The significance of Indian agriculture arises from the fact that it has the source of supply of

raw materials to our leading industries cotton and jute textile industries, sugar, vanaspati and

other plantation, all these depend on agriculture directly. There are many other industries, which

depend on agriculture in an indirect manner. Handloom weaving, oil crushing, rice husking- all

these depend upon agriculture for their raw materials.

Importance of Indian agriculture also arises from the role it plays in India’s trade. Agriculture

products tea, sugar, oil seeds, tobacco, spices etc contribute the main items of exports of India.

Roughly speaking, the proportion of agriculture goods, which are exported, may amount to 50%

of our exports. This has great significance for economic development. For, increased exports

help the country to pay for the increased imports of machinery and raw materials.

It is significant to note here that, it is the failure on the agricultural front, which has upset

the whole system of planning. Therefore it is clear that, agriculture is the backbone of Indian

economy and prosperity of agriculture can also be largely stand for the prosperity of the Indian

economy. At the same time, it is true that percapita productivity in agriculture is less than in

industry.

The real problem of Indian agriculture is that there are too many people who depend on

agriculture. The natural increase in production could not be absorbed in industries and even those

who followed traditional handicrafts have to give them up and adopt agriculture overcrowding

and the consequent pressure of population on land have led to sub-division and fragmentation of

holdings and decline in the area of land per capita.

The Indian farmers are not motivated by the considerations of economic progress. Unless this

atmosphere that supports backwardness and stagnation is changed, there is no possibility of

agricultural progress. But the important thing is that, these conditions are changing fast. Indian

agriculture has suffered because of inadequacy of such non-far mind services as provision of

finance, marketing etc. either these facilities are non-existent or if they are available, they are

quite expensive to Indian farmers.

One of the basic weaknesses of Indian agriculture has been the most of the farmers throughout

the country, have to depend upon the rainfall and very few of them can avail the facilities of

irrigation. Besides this, Indian farmers have been using old and inefficient methods and

techniques of production.

As a remedial measure to these problems attempts to rejuvenate the Indian agriculture were so

many different forms. Agricultural efficiency and production depends largely upon the inputs

and investment in agriculture has resulted in increased agricultural production and reduction of

costs. Besides, agricultural machinery has been useful in reclaiming barren lands. Naturally,

there is now a common belief that progressive agriculture is impossible without mechanization

of agricultures.

Mechanization of agriculture means the replacement of animal and human power by machinery’

wherever it is possible. The tractors and tillers will be useful for ploughing and transporting

crops to markets, sowing and putting of fertilizers are to be, done by tillers and reaping and

threshing by the combines harvest thresher. Thus, the mechanization of agriculture stands for the

use of machinery in all-farming operations, ranging from ploughing to the marketing of the

product. Machines work faster and work accurately. Farm machinery has led to large-scale

production. Huge plots of the land can be taken in to markets. All these can be done by

machinery without any loss of time and cost of production is reduced.

The rate of progress of mechanization in agriculture has been sufficiently fast since 1961. The

use of tractors, oil engines for irrigation purpose and electric pumps have increased extensively.

Likewise the consumption of electricity or agricultural purpose has also increased considerably.

The production of tillers for agricultural purpose is another good indication of growing use of

agricultural machinery in the country.

To facilitate the purchase and distribution of tractors, power tillers, pump sets and other items of

agricultural machinery to farmers in their respective states, Agro Industrial Corporation have

been set up in 1973. KAMCO has been one of the agriculture farming industry in India since

1973. They were born with a vision to meet the needs of the farmer. So, KAMCO pampered the

earth, plough on it, sowed riches and reap gold.

KAMCO Limited is a fully owned public limited company. A public limited company

gives more emphasis to public interests. Its main aim is not profit maximization but serving

public interests. Thus, it has a very important role in the economy. There are two kinds of public

enterprises namely, those owned by central government and by the state government. KAMCO

Limited is a public limited company, which is fully owned and controlled by the state

government of Kerala.

COMPANY PROFILE

Kerala Agro Machinery Corporation Limited popularly known as KAMCO was

established in the year 1973 as a fully owned government of Kerala undertaking at Athani,

25kms to north Kochi. It all began in 1958, when Dr. Rajendra Prasad Then the president of

India presented with a Kubota power tiller by Japan. (M/S Kubota limited, Japan, the world’s

leading manufactures of power tiller and the agricultural machinery). The machine helped to

open up new avenues in farm mechanization for a country predominantly agrarian. It was

realized that mechanization of farming operations would be one of the keys to engineering a

successful green revolution and reliable indigenously manufactured farming equipment the need

of the day. With these purpose, KAMCO was set up in 1973.

The main objectives of the company are to manufacture or assemble in India, either in

collaboration or otherwise tractors, power tillers, power reapers, diesel engine, accessories,

attachments and spares there to. The other objectives to be cited are to organize, conduct or

manage engineering workshops or repair shops and to manufacture, import, export, buy, sell or

deal in workshops machinery, machine tools and metals of all kinds and to undertake repairs,

serving of agriculture machinery or other equipments, implements and tools and render other

kinds of services for consideration or otherwise.

The main products of the company are KAMCO power tiller, KAMCO power reaper, and

KAMCO diesel engine. KAMCO power tiller is a versatile machine used for primary farming

operations like tilling, ploughing, weeding, leveling and transplanting. KAMCO power reaper is

a compact small harvesting machine, suitable for harvesting paddy, wheat, and barley etc.

KAMCO diesel engine is used for pumping water with great force. For last three decades,

KAMCO has been meeting the needs and demands of Indian farmers.

The logo of KAMCO is “engineering revolution”. KAMCO has been successfully engineering

the green revolution in India through the manufacture of indigenous and quality agricultural

equipments like ‘Kubota combine harvester’ and ‘KAMCO kukge rice transplanter’. The

company is running for profit for the last 18 years continuously increasing its production,

turnover and profit year after year. KAMCO has established three more units from its internally

generated resources. KAMCO has an ISO 9001-2000 registered company. The motto of

company is “a boon for the farmers and a gain for the nation”.

KAMCO YESTERDAY

Kerala Agro Industries Corporation Limited (KAIC) Trivandrum, promoted the establishment of

Kerala Agro Machinery’ Corporation Limited (KAMCO). The KAIC Limited entered into a

technical collaboration agreement with M/s Kubota Limited, Japan in February 1972. On 5-1

L1972, the Kerala Industrial and Technical Consultancy Organization Limited (KITCO) was

entrusted with the work of preparing the project report for the manufacturer of Kubota power

tillers and diesel engines at Athani, near Kochi.

KAMCO was incorporated on 24-03-1973 with an authorized capital of Rs.2 crores as a

subsidiary of M/S KAIC Limited, which held the entire paid up capital share worth Rs.15.009

lakhs in KAMCO. The company was licensed to manufacture 12000 tillers, 5000 numbers 4-5

hp-diesel engine. The company has a carryover loss of 210 lakhs up to march 1984. This was

completely wiped off by 1989 and the company is paying dividend to the government for the last

13 years.

KAMCO Kalamassery unit was purchased outright from SIDCO during 1990 and converted as a

viable diesel engine unit. Moreover KAMCO absorbed the workers of that sick unit as

permanent employees.As an expansion activity, a new modern compact unit for manufacturing

power tillers was put-up at Kanjikode, Palakkad district for a cost of 4.3 crores during the

beginning of 1995. As a part of diversification activity, the company developed a compact small

harvesting machine ‘KAMCO power reaper’ and its production is carried out at Mala unit in

Trissur district. The project cost of the unit was 4.28 crores.

KAMCO TODAY

KAMCO is synonymous with service to the small and marginal farmers of the country.

KAMCO through their precision and quality is revolutionizing the small and the marginal

holdings throughout the country. Today KAMCO power tiller is the most sought after tiller in

India, enjoying over 50% of the market share at national level.

The year 1998 was the silver jubilee year of KAMCO. The company with its four plants at

Athani, Kalamassery, and Kanjikode and Mala units is confidently meeting the demands for

KAMCO products in India and in abroad.

The main market for the power tiller is at West Bengal, Assam, Tripura, Meghalaya and

Manipur. As in previous year, this year too the company recorded an all time high in production

and operating profit touched Rs.983.04 lakhs. The year 2001-02 recorded a production of 7431

numbers of power tillers and 722 numbers of power reapers as against production of 7130 power

tillers and 194 power reapers in 2000-01.

A major milestone for the company was the award of the International quality excellence

certificate under ISO 9002 in October 1996. KAMCO is the second public sector undertaking in

Kerala getting this converted certificate and the only public sector undertaking in who has got

ISO 9002 certification justifying the high standards of the products for their three units. From 15-

03-2002 onwards KAMCO becomes an ISO 9001-2000 registered company by KPMG quality

registration accredited by the Dutch council for certification.

OBJECTIVES OF THE COMPANY

The main objective of KAMCO is to make the agricultural tools available to small scale and

medium scale farmers in low cost. The other objectives are:-

To get customer satisfaction

To maintain the quality of products

To introduce new products

To increase operational efficiency, etc.

PRODUCTION UNIT

KAMCO has four units at-

Athani

Kalamassery

Kanjikode

Mala

UNITS PRODUCTION

AthaniPower Tiller

Kalamasser

y Diesel Engine

KanjikodePower Tiller

MalaPower Reaper

COMPETITORS OF KAMCO

The main competitor of KAMCO is VST Tiller and Tractors’, it is the main competitor of

KAMCO in the Indian market.

The other competitors are:

Bengal Machine Tools

Khazana

Crompton Greaves

Ganga

Tesmaco

Srachi

MARKET SHARE OF KAMCO

In the Indian market KAMCO has

the market share of 41.5%. The

market shares of other companies

are given below.

DEPARTMENTS IN KAMCO

KAMCO there are 11 departments.

They are as follows.

COMPANY MARKET

SHARE

VST Tillers And

Tractors41.6%

Bengal Machine Tools.3%

Khazana.5%

Crompton Greaves 2.2%

Ganga 2.2%

Tesmaco1.9%

Srachi9.8%

Marketing

Finance

Human Resources

Materials

Purchase

Stores

Quality Assurance

Production

Maintenance

Research& Developments

Systems

MAJOR DEALERS IN INDIA

West Bengal Govt: West Bengal Agro Industries Corporation

Pvt: Friend’s Machinery and Spares Limited

Assam Govt: Assam Agro Industries Development Group

Pvt: Chem. Trade India Pvt. Ltd

Tripura Govt: Tripura Horticulture Group

Pvt: Krishishilpa Udyog

Meghalaya Pvt: Stanley Roy Constructions

SALES IN VARIOUS STATES

STATE SALES IN %

West Bengal 33%

Tamil Nadu 12%

Meghalaya 11%

Assam 10%

Karnataka 8%

Orissa 7%

Kerala 7%

Andhra

Pradesh

4%

Maharashtra 3%

Tripura 3%

Gujarat 2%

REVIEW OF LITERATURE

1. Cost Reduction And Control Best Practices- Oct 2005 by Institute Of Management And Administration

http://www.flipkart.com/institute-of-management-and-administrati/

http://www.flipkart.com/institute-of-management-and-administrati/

Today, cost control must be integrated into corporate culture in order to preserve that

corporate culture. cost Reduction and Control Best Practices provides financial

manages with no-nonsense, balanced, and practical strategies that are being targeted

and used nationwide for controlling costs by thousands of companies in areas such as

human resources, compensation, benefits, purchasing, outsourcing, use of consultants,

taxes, and exports. These best practices are based on the trenches experience,

research, proprietary databases, and consultants from the Institute of Management and

Administration (IOMA) and other leading experts.

* Provides best practices and techniques for controlling costs within a company

* Provides the latest strategies companies re using to control costs

2. European Economic Review ,Volume 49, Issue 8, November 2005, Pages 1979 : Mark Penno

Mark Penno (1979) says that while cost accounting is a well-developed discipline with a rich institutional past, it is criticized for being manipulable. This criticism is due, in part, to the existence of multiple, yet equally accepted cost allocation procedures or cost estimation techniques. Employing a principal–agent model, cost accounting is modeled as a menu of alternative methods which, conditional on agent effort, produce noisy, unbiased and independently distributed (i.e., equally defensible) measures from which a single realization is selected ex post as the report used to contract with the agent. Assuming that the report does not indicate which method produced it, the report modeled is “tainted” in that the lowest (most favorable to the agent) outcome is reported, where the “amount” of tainting corresponds to the menu's size. The paper identifies bright-line conditions where the principal's expected net payoff is independent of the amount of tainting, demonstrating that tainting does not necessarily affect the report's incentive value.

3. Planned Cost Reduction . By: Mayman, Douglas. Management Services, Nov78, Vol. 22 Issue 11, p10-14,

Contrary to the general belief, cost reduction is not an objective in itself. Different people will give different reasons why they wish to reduce costs and they may all be right in their particular circumstances. The objective of cost reduction is to increase profits in an environment where selling prices are fixed by external competitive pressures. Even if selling prices aren't so fixed, a clear definition must be made between increasing profits by raising selling prices and by cost reduction. The key factor in planned cost reduction

http://web.ebscohost.com/ehost/viewarticle?data=dGJyMPPp44rp2%2FdV0%2Bnjisfk5Ie46bFIsaeyT7Wk63nn5Kx95uXxjL6nr0evqK1Krqa3OLewr024qrQ4zsOkjPDX7Ivf2fKB7eTnfLujr0u2rLdIs6ivSKTi34bls%2BOGpNrgVeDr5j7y1%2BVVv8Skeeyzr0qzra5Jsa2kfu3o63nys%2BSN6uLyffbq&hid=103

http://www.sciencedirect.com/science?_ob=PublicationURL&_tockey=%23TOC%235804%232005%23999509991%23607467%23FLA%23&_cdi=5804&_pubType=J&view=c&_auth=y&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=4015181e90908ba573463a010aeaca03

http://www.sciencedirect.com/science/journal/00142921

is the cost per unit, which has to be reduced and this may sometimes even mean additional expenditure. The mere tightening of controls is not of itself effective cost reduction, though the control so set up may operate reasonably well in keeping costs down. Thus, while the accountant's comparison of actual costs with standards or budgets is a continuous process to enable management to control by exception, it is only valid to the extent that standards are reviewed energetically (Mayman, Douglas, year)

4. A Program for Cost Reduction . By: Payne, Bruce. Harvard Business Review, Sep/Oct53, Vol. 31 Issue 5,

The article discusses the process of developing a cost reduction program for industries . The suggested strategy is a continuing process that is expected to reduce production costs by ten percent and keep them at a competitive level. The process begins with gathering information about direct production costs, indirect labor costs, and opportunities for downsizing, which management and industrial engineers use creatively to define where cost reduction can be implemented. Topics include managing resistance from employees and labor unions, obstacles to starting a cost-reduction program, and the benefit from hiring outside management consultants

5. The Hindu Business line Mumbai /New Delhi, June 22

Air India is targeting a reduction of almost 17 per cent or Rs 500 crore of its annual wage bill of more than Rs 3,000 crore. The airline is passing through a severe financial crisis, losing almost Rs 15 crore a day. A four-member committee has been constituted to go through all the wage agreements negotiated so far. It will seek to achieve the three-pronged objective of improving productivity of employees, eliminating restrictive work practices, and reducing wasteful expenditure. The committee includes members from the human resources and finance departments. The restrictive work practices include some areas where the job which could be completed by one person is done by two or more persons as the current rules allow. This leads to a lopsided wage structure for an airline where salaries and wages constitute 35 per cent of the total operating costs.

6. MITBE BLOG Cost Control or Cost Reduction May 24th, 2009

Cost reduction is sometimes euphemistically called “cost improvement,” you can avoid the impact that belt-tightening programs might have on department morale by finding

http://web.ebscohost.com/ehost/viewarticle?data=dGJyMPPp44rp2%2FdV0%2Bnjisfk5Ie46bFIsaeyT7Wk63nn5Kx95uXxjL6nr0evqK1Krqa3OLewsEm4qbE4zsOkjPDX7Ivf2fKB7eTnfLujr0u2rLdIs6ivSKTi34bls%2BOGpNrgVeDr5j7y1%2BVVv8SkeeyztE%2B1rLdPt5zkh%2FDj34y73POE6urjkPIA&hid=7

opportunities to improve fiscal management. Rather than cut costs, sit down with your staff members to identify how your unit can spend more wisely. Your workers probably know more about the ins and outs of the job than you. You can hold a problem-solving meeting in which you solicit ideas for cutting production corners or for reducing waste. As a group, your unit also may come up with ways to step up the amount of work done, thereby reducing unit costs and helping your organization achieve a competitive advantage with lower prices

7. Cost Reduction Ideas (Beyond Sourcing)PurchTips - Edition #167 December 9,

2008 - By Charles Dominick, SPSM

When seeking to reduce its expenditures on goods and services, the first thought in many organizations is "Let's find cheaper suppliers." But in many cases, sourcing for new suppliers is either not practical or it's a suboptimal alternative.

Fortunately, there are several ideas for achieving cost reductions without switching suppliers. Rob Patton, an associate with sourcing consulting firm Paladin Associates, has identified seven such cost reduction ideas, including the following four:

"Ask & You May Receive" - "Ask your suppliers if they havecost savings ideas," suggests Patton. "You never know when the answer may surprise you."

Aggregation - According to Patton, Aggregation is "any effort that makes the buyer's requirements more attractive to the seller by bundling those requirements with the volume of other buyers. This can be internal across business units or geographies or external with other companies." For external bundling, you can build your own consortium or join an existing group purchasing organization.

Spec Rationalization - Spec Rationalization involves looking at the goods and services you buy and determining smarter ways to specify them. Patton shares an example from previous employment: "We discovered that we had between 80 and 100 different specifications across the company worldwide for water. No reasonable person in Purchasing or Engineering is gonna say that we really need that many specs for water."

Leveraging The Supply Chain - "In this technique, you're looking at suppliers' suppliers, one or two steps back in the supply chain," Patton explains. Sometimes, "the biggest cost component in the equation is really out of your own immediate supplier's direct control."

Patton recommends working to identify situations where several of your suppliers buy the same material towards what they make for you and then leveraging that combined demand to drive cost reductions from lower tier suppliers.

8. Brecker Associates

The long-term viability of a company's business plan depends on sustaining its Competitive advantage is usually achieved through developing new products and services that satisfy and delight customers and through restructuring and improving business processes to improve quality and reduce costs -- adding Value

9. M/s Sukumaran &Co ,Cost Accountant(2004):

According to him, for the improvement of every company depends on its cost control and the cost reduction techniques used by the company ,for that he suggest the minerals and metals company to use the coal instead of furnace oil because its cost is very less compared to furnace oil.

OBJECTIVES OF THE STUDY

In the above context, the specific objectives of the study are

To identify the cost reduction areas and practical measures undertaken by KAMCO

Measure the effectiveness of the methods adopted for cost reduction and continual

improvement

To analyze the impact of cost reduction methods on the financial performance of the firm

To suggest improvement for efficient financial management of the firm

SCOPE OF THE STUDY

On a primary study of the organization itself, we can see that the organization

under study via; Kerala Agro Machinery Corporation Ltd (KAMCO), Athani, Kerala has certain

unique features, which distinguishes it from other firms. In a competitive environment, making

profit continuously for 30 years and declaring dividend itself is a noteworthy feature. No public

sector, especially in Kerala may have this feature. A detailed analysis can throw light on the

reasons for the success of the company.

The study has implications on the four units run by KAMCO. It can be made part

of the guidelines of various developments policy of KAMCO. Also keeping in view the

changeable business scenario and economic realities of investments made in different operational

levels, there is a scope for further studies with respect to auditing the effectiveness of reducing

cost of inputs and the corresponding outputs. The study can also serve as a platform for

designing a cost reduction program, which can effectively aid the organization to streamline its

processes, increase productivity and continuously contribute towards the business goals of the

organization.

In the present competitive environment, the manufacturer has a little control on

price and it is almost market determined. On the other side, profit is also controlled by the

reasonable expectations of investors and cost should be the difference between these two, i.e. the

market price and expected returns to be determined.

Being a Public Sector unit, KAMCO has so many limitations in its functioning.

Still company managed to earn profit continuously. In this context various practical cost

reduction approaches adopted by the company and its impact on overall financial performance of

the firm is a topic of interest for a financial analyst. It is worthwhile to study the cost reduction

methods adopted by the firm and how they influenced the financial performance

RESEARCH METHODOLOGY

This research is a financial research. It accesses the overall financial position of a

company by taking into account the financial data for a period of 5 years i.e., 2004 to 2009.

This research consist the following:

RESEARCH DESIGN

A research design is an arrangement of condition for collection and analysis of data in a

manner that aims to combine relevance to the research purpose with economy in procedure.

The research design adopted for the study is descriptive in nature. In descriptive research. The

researcher has to use the facts and information already available and analyze these to make the

critical evaluation of the material.

FORMULATION OF RESEARCH PROBLEM

The research problem in this project IS the ‛ practical approach to cost reduction and its

effectiveness on the financial performance of KAMCO

DATA USED

The data, which I used ere, is primary data and secondary data. Primary data are data,

which are collected for the first time and are original in nature. Secondary data are those,

which have already been collected and analyzed by someone else.

SOURCES OF DATA

Primary data are obtained mainly through direct personal interview with managers and

other officers of the organization. Secondary data are obtained through published annual

reports, magazines and websites etc.

TOOLS USED FOR ANALYSIS

The tools, which are used for research, are:

Productivity and accounting ratio

Comparative income statement

Dupont model

DURATION OF THE STUDY

The duration of the study is for a period of 90days from 14th October 2009

THEORETICAL STUDY

To remain competitive in the global economy, Indian Industry and agriculture need to

reduce the cost in both sides of inflow and outflow of goods and services. While giving focused

attention to doubling the present potential capacity by the subsequent years in order to meet the

bargaining demand of the Indian economy and to close the increasing demand-supply gap, it is

important to give serious attention to the question of reducing the cost at all levels of activities.

After years of heavy investment and expansion, businesses across the economy are feeling

enormous pressures to reduce their cost. As a vital factor, presently business managers are

applying strategic thinking to the reduction of their costs. A well-conceived cost-reduction

strategy enables managers to capture maximum value in the form of direct savings and the

installment of a culture of efficiency while minimizing the distraction of company value

resulting from cutting too much from core business activities.

ROLE OF COST REDUCTION PROGRAMME FOR INCREASED PROFITABILITY

Most organizations cannot afford an effective Cost Reduction Programs (CRP) of some type.

Business is under ever increasing competitive pressure.

Markets are more global than they have ever been and the competition may overseas whether

it is awarded or not by the management of organizations.

Te quickest way to improve profitability is to effectively reduce costs. Each amounts

removed from expenses reports to the bottom line profit. The most difficult approach is to

increase sales. While the best corporate strategic and operating plans focus on both, one cannot

deny the power of an effective cost reduction program. Cost Reduction Program are easy to

install and can guarantee the results.

The Cost Reduction programs are not a fuel. The ft that they have found application in

every organization for decades is proof of their value and effectiveness. They may be seen as

stand-alone programs or elements of reengineering, TQM, value engineering, industrial

effectiveness programs, continuous improvement or the like.

NEED FOR COST REDUCTION PROGRAM

With a volatile and contently declining revenue stream, organizations are forced to re-align their

cost structure now a day. A well conceived cost reduction strategy enables managers to capture

maximum value in the form of direct savings.

Every company always pays much focus on

Increase Revenue

Reduce Cost

Improve Productivity and Potentiality

Comparative who modestly miss earnings expectations suffer swift and brutal backlash from the

markets. In a stagnant market, managers have no choice but one v way is to reduce cost. But in

their rush to cut costs, many companies are also destroying their values. Today’s complex and

rapidly changing market place require winning companies to approach cost reduction more

strategically in order to achieve effectiveness and lower cost while minimizing values

destruction. The cost reduction methods are mainly applied to:

1. Desire to improve profit margins or increase services per expenses

amount.

2. Need enhanced stability.

3. Must meet and beat competitive challenge.

4. Combat obsolescence. Fund new opportunities and products.

5. Overcomes stagnation or inadequate growth

BENEFITS OF COST REDUCTION PROGRAM

A. Higher profits from lower cost and higher margins.

B. Improved Balance Sheet.

C. Larger market share from price reduction due to cost reduction.

D. Greater organization stability – Fewer Lay offs.

E. Better morale.

F. The organization develops a stronger future focus.

G. Improved quality and service.

H. Employee participation builds focus and team work.

I. Enhanced competitive position.

J. As a challenge mechanism it prevents obsolescence.

ESSENTIALS FOR SUCCESS OF COST REDUCTION PROGRAM

A cost reduction program should not be taken as a one time activity. It is a

continuous activity aimed at reducing cost continuously reducing by innovative ideas from time

to time.

a. Slashing cost arbitrarily should not do cost reduction. It should be real and

permanent reduction in cost

b. To make cost reduction programme acceptable to the employees of the

organization, the examples of cost reduction should be first set up by top

executives

c. Persons giving innovative ideas for cost reductions should be suitably

rewarded by giving raise in wages and salaries. Promotion and special

awards.

d. A cost reduction programme should not merely take into consideration in

cost but it should also consider all other factors i.e.; social and legal aspects

which will be affected by the programme of cost reduction

For putting cost reduction into effect, active cooperation of employees supervisors and

executives at all levels should be solicited. For best results, the employees should be made to

express their views without reservations.

The main aim of cost reduction programme is to highlight sources of “high cost” and

“wastes”. This aim can be achieved only when this programme is implemented in a phased

manner according to a particular sequence, which is decided after determining the priorities. If

approach is made like this, attack can be concentrated on the areas where potential savings are

likely to accrue.

COST REDUCTION COMMITTEE

In some organizations, a cost reduction committee is set up for the

purpose of obtaining permanent savings in expenses. This usually consists of departmental

heads and some technicians who are experts in their fields.

The committee locates the areas of potential savings and gives direction and coordination. It

determines priorities and naturally picks up the areas of higher cost or low efficiency fist. A cost

reduction programme succeeds only when clear-cut targets re laid and effort is made to achieve

them.

DANGERS OF COST REDUCTION

The possible dangers of any cost reduction plan may be as follows;

Quality may be sacrificed at the cost of reduction in cost. To reduce cost quality may be

reduce gradually and it may not be detected till it has assumed alarming proportion.

Quality may be reduced to such an extend that it may not be accepted in the market and

the business may be lost to the competitors.

In the beginning, cost reduction program may not be likely by the employees and danger

may be posted to the program because success of any cost reduction plans depends upon

the willing co operation and active participation of the employees.

It is possible that reduction in cost may not be real and permanent. I t may not be based

on sound reasons and may be short lived and cost may come back to the original cost

level when temporary conditions, that is fall in prices of materials due to which cost has

reduced may disappear.

Value analysis

The value of a product will be interpreted in different ways by different customers. Its common

characteristic is a high level of performance, capability, emotional appeal, style, etc. relative to its cost.

This can also be expressed as maximizing the function of a product relative to its cost:

Value = (Performance + Capability)/Cost = Function/Cost

Value is not a matter of minimizing cost. In some cases the value of a product can be increased by

increasing its function (performance or capability) and cost as long as the added function increases more

than its added cost. The concept of functional worth can be important. Functional worth is the lowest cost

to provide a given function. However, there are less tangible "selling" functions involved in a product to

make it of value to a customer

One client used this Value and Lean-based improvement methodology to reduce their product

cost by over 50% in 2 years.

They

improved product value,

improved quality,

increased productivity (reduced waste),

reduced cycle time,

increased customer satisfaction

and saved $ millions.

Areas of Application

The application of the Brecker Product / Process Improvement Methodology is flexible and can

accommodate the spectrum of business and marketplace needs. Emphasis can be placed on

completeness or speed in accordance with the company's economic cycle time.

The improvement process can be undertaken gradually to insure compatibility with the business

and to demonstrate the range of benefits. Individual workshops are used to identify value and

quality improvements for specific products / services and processes (Phase 2). Workshops

include training in applying a variety of value, quality, and productivity (lean) tools. Teams or

individuals are assigned responsibility for solving specific problems and implementing

recommended improvements (Phase 3). Additional workshops are conducted as needed to

address complex products / processes and to improve additional products / services and

processes.

When an organization is ready to commit to a business level improvement system, Value

Workshops at the business level are used to identify and prioritize the areas of opportunity

Phase 1. Six Sigma-Value leaders are trained while conducting the Planning and Re-design

workshops Phases 2 .and 3and are responsible for implementing the improvements. Management

participates strongly in prioritizing opportunities (Phases 1) and in guiding implementation

Phase 4. Implementation can be self-funding and does not require a costly up-front training

program.

Value, quality, and productivity (lean) techniques that are especially useful in addressing specific

business areas are discussed below.

Customer

The mission of all organizations is to satisfy customer's needs repeatedly day after day. Customer

Satisfaction is a key element in TQM and ISO9000-2000. The most successful organizations

provide the greatest value to their customers -- superior benefits per unit cost.

Design-Mfg.

Customers demand increasingly high quality and reliability. QS9000 and ISO9000-2000 quality

systems require continuous quality improvement systems. The first efforts for improving quality

are usually on improving the process since that is usually less costly than re-designing the

product.

Multi-functional process improvement teams are particularly effective in eliminating defects,

resolving repetitive quality and productivity issues, and meeting the process CTQs. Focusing on

a broad process perspective works well in job shop operations as well as in high volume

operations. The brainstorming techniques of Value analysis (VA) lead to consensus

improvements that can usually be implemented quickly. Simple statistical testing can be used to

determine CTQs. Simple Design of Experiments (DOE) can be used to improve performance in

complex processes . Statistical Process Control (SPC) is used to keep processes under control.

When process improvement is not practical or is very expensive, product re-design is necessary.

Focus needs to be on producing a "robust design" -- a design that is not sensitive to the normal

variations in materials or processes. Creativity is needed to identify alternative methods of

providing the desired product functions. This can be different hardware or software concepts,

different materials, different processes, etc. VA brainstorming is an excellent tool to refine

creative solutions and to develop consensus on the best alternative approaches. Simple statistical

testing and Design of Experiments can help identify and prioritize key product and process

parameters (CTQs). Design for Manufacturability (DFM), Design for Assembly (DFA) , and

Lean Manufacturing concepts are applied to insure balance between design requirements and

manufacturing capabilities. Concurrent engineering teams work especially well.

The product and processes used to produce it need to fit business strategies for producing

product variations as well as having "Six Sigma quality."

Purchasing -- Supply Management

Companies frequently out-source materials and services that are not central to their business

strategy or core competencies. Their suppliers can often achieve competitive advantages of scale

with lower labor and / or lower overhead costs. The printed circuit board industry is a prime

example. Since purchased materials and services costs can be 50-70% of the cost of goods and

services, it is important to get the greatest value possible for these expenditures.

High productivity depends on the high quality of materials. A Six Sigma quality level means that

disruptive quality problems are rare. Customer-supplier VA workshops focused on improving

process quality as well as providing greater functionality lead to quick and dramatic cost savings

for both customer and supplier.

Service

Service businesses are usually process dependent. Process improvement focuses more on the people

performing processes and on customer satisfaction. QFD is particularly useful in quantifying the less

tangible customer (value) requirements such as responsiveness and individualized attention.

Brainstorming (VA) identifies ways to eliminate defects and to improve CTQ performance. The "data-

based decision-making" of Six Sigma contributes heavily to achieving consensus on improvement

solutions. Statistical methods are useful in analyzing service data to detect variations in performance

and their sources.

High volume transaction processes are usually automated and / or are heavy users of computer

systems or communications equipment. Process improvement here also encompasses both

computer systems and automated equipment capabilities and human interactions with them. A

variety of Statistical Process Control (SPC) and Design of Experiments (DOE) techniques can be

applied to analyze process performance. The techniques applied vary somewhat from those used

in manufacturing.

Administrative

Administrative process renewal parallels process improvement in service businesses except that

customers are primarily internal to the organization. Here, QFD usually focuses on implementing

business strategies and tactics especially lean thinking. Teams which include internal customers

develop a deep, shared understanding of common quality issues. Brainstormed solutions are

"shared" as is a commitment to implementation. Simple statistical methods -- usually not as

detailed as in design and manufacturing processes -- can be used to analyze and improve process

performance.

DATA ANALYSIS AND INTREPRETATION

Cost reduction is a continuous process of critically examining various elements of cost and each

aspect of the business is critically examined with a view of improving the efficiency for reducing

cost. Every plan of cost reduction proceeds with this assumption that there is always scope for

cost reduction. The importance of an effective and continuous cost reduction attempts lie in the

fact that in a competitive environment price is determined by market forces and profit on the

expectations of investors and cost alone is under the control of the management.

Kerala Agro Machinery Corporation Ltd. (KAMCO) is striving to maintain a lead

position among the small farm machinery manufacturers by continuously upgrading the

technology and taking effective measures to reduce costs. The Company is guided by the motto

that the customer is the most important asset and that the industry exist to provide the nation with

the most of cost effective and widely useful products. The present study on cost reduction -

practical approaches of KAMCO is conducted in KAMCO to assess the effectiveness of cost

reduction. The study mainly focuses upon:

To identify and analyze the cost reduction areas of KAMCO.

To identify the practical steps taken by the company to reduce cost and to measure

impact of such strategies on cost.

To analyze the effectiveness of cost reduction on continued success.

COST REDUCTION AREAS AND PRACTICAL STEPS UNDERTAKEN BY KAMCO

TO REDUCE COST

As cost data is the main theme of analysis, major cost elements are taken for analysis. In

taking the major elements, cost drivers are also have been considered. Statutory expense like

excise duty, sales tax, rates and taxes etc. On which there is a scope for little control have been

exempted from the study.

MAJOR COST ELEMENTS

The major cost elements are:

1. COMPOSITION OF MATERIALS: COMPONENETS, PAINT & CHEMICALS

Average of 67% of the total cost of the company comprises of material cost and slight increase

or decrease in the area will very much dominate the profitability of the company.

KAMCO being an assembly unit, there is no usage variance for the company and price variation

is the major headache to the organization. Procurement cost, development cost, carrying cost etc.

also require attention for any cost reduction attempt. In all cost reduction efforts on materials, the

major to be considered is that the strength of KAMCO is its quality and any compromise with

quality in input selection for cost reduction will be determined to the long term interest of the

company.

KAMCO has about 900 items required for production. The quality and cost control starts from

the selection of vendors. In the purchase policy of the company, there are three suppliers for a

single item. This is to ensure an uninterrupted supply at competitive rates. Price of each supplier

is compared with the detailed cost sheet prepared by the company. Suppliers are also directed to

give their cost sheet which is again analyzed with the cost sheet of the company and all scope for

reduction is explored.

Company follows JIT ( Just In Time) system for about 100 costly and bulky components to

reduce holding cost, preserving cost, advance payment, insurance cost etc. and also to block

money. Components having high weight are locally procured. This will reduce the transportation

cost.

Almost all orders are on FOR (Free On Road) destination terms. So freight inward expenses to

the company are almost nil. Majority of the orders are placed with penalty clause. This penalty is

for scheduled defaults. This is not to make profit out of the sales but to ensure timely supply.

10% is the penalty. Self inspection is encouraged so that inspection cost can be reduced.

Sampling t test is alone followed by the company. Assembly rejections are to the account of

supplier. All materials entering in the company will have manufacturer’s identification mark.

There is a vendor development cell in KAMCO. If rate and quality of the materials supplied is

not satisfied, then the new suppliers are to be identified. Vendor rating and reward facilities are

also done by the company. Annually there will be meeting to honour and reward so as to

improve the quality and performance. Price fluctuations are passed on to the suppliers by annual

order with monthly schedule.

Credit facility for 30 to 45 days is available to the company, at the same time early payment will

be released deducting interest @ 15% per annum, if the supplier requires payment. This will

reduce the purchase cost and 15% is almost the double of prevailing treasury rate of interest. At

the same time this is helpful to the supplier because bank- borrowing rate is also almost the same

and so many formalities are to be observed for acquiring bank finance and commitment charges

also will be there.

PAINTS AND CHEMICALS

Paint is very important for any automobile industry. It should last without any colour fading.

Paint cost is about Rs.100 per tiller and hence requires much attention. Except to other items, for

paint, there is usage variance. Consumption can be reduced by spray painting, painting after

cleaning the surface well removing the rust and oil and applying the paint at correct temperature

and curing the parts in electric oven at correct temperature. Viscosity of the paint, correct

diluting and prescribed application method are also ensured for reducing cost. And also the paint

used is poly urethane paint which can be dried without the help of champers. Thus reducing cost.

2. CONSUMPTION OF TRADED GOODS

Traded goods means products procured within the state or outside the state or from abroad and

selling the same without any modification or vale adding activity. Usually this is done for

imported agricultural machineries for various operations. This will help the company to

understand the stability of the product, market acceptance, customer complaints, their

preferences etc. and potential need. If these are all analyzed, company can consider such product

for diversification if a marketable quantity is demanded. For traded goods company usually pays

a nominal margin and such scope for cost reduction is comparatively less.

3. MANUFACTURING AND OTHER EXPENSES

Manufacturing expenses consisting of various direct expenses like freight, stores consumed,

power and fuel, ETP operation charges, excise duty, loss on revaluation tools , repairs etc. out of

the same, only major heads where there is scope for cost reduction alone have been analyzed .

FRIEGHT

Being an assembling unit, company requires about 900 components to be procured in various

states in India. All the input has been indigenized now. However all the materials has to come

from places like Coimbatore, Bangaluru, Ahmadabad, Delhi etc. automobile suppliers which are

concentrated and cost vise cheaper freight is a deciding factor.

To reduce the incidence of freight, company places almost all orders on FOR destination basis.

Further annual order with economic monthly or by monthly or quarterly quantity is ordered so

that supplier also can dispatch the items directly or through approved carriers like KTC, TCI, and

ABT etc. Company arrange to collect such material from the carriers weekly once or twice in its

vehicle and cost is recovered from each supplier based on the quantity so that all the items will

have to pay only nominal amount. In addition to the same, care is taken to ensure that bulky

materials are procured from within the states and near to the units so that transportation cost to

the supplier is also less, because any cost of the supplier will have an effect on the price

demanded by them.

STORES CONSUMED

For any manufacturing unit several items may be required for carrying out production like grees,

cotton waste, cue rosin etc. These are generally categorized under general stores. Usually control

is exercised through fixing standard and budgetary control. In the case of KAMCO, they have

fixed monthly standard for each item coming under this category and annual budget allocation is

also given for broad category. Consumption control is exercised by ensuring reuse of the items

wherever possible to the maximum extend.

Departmental level monitoring ells are formed and monthly review of consumption is made at

departmental meetings. Employees are also made conscious of the importance of saving

consumable item for overall cost control. Quality circle forums are contributing much to this

effort.

POWER AND FUEL

Power charges constitute a major percentage of manufacturing cost. Even though an assembling

unit, one machine shop is functioning at Athani with few milling machines, lath etc. Similarly

two big air compressors are also there consuming major power input. Company’s power tariff

rate is based on peak loan consumption and when consumption during the time 6 pm to 9 pm

exceeds the allotment consumption the rate of entire consumption increase. In order to avoid this,

company has taken several measures and the total power charge is controlled at the normal rate.

Along with the total power charges for all the units are paid in advance for one year so that

company have a saving of about 8% by way of advance payment incentive offered by KSEB. As

interest rate of treasury is only 7% advance payment to KSEB is found to be beneficial and cost

of monthly remittance by way of DD etc. can be avoided also.

With regard to fuel, cost is only nominal as generator is seldom used. During last 2 years as

power cut is not there, fuel consumption is almost nil and hence much control need not be

exercised.

EFFLUENT TREATMENT PLANT

In the company, there are installed effluent treatment systems designed by the LBS Centre for

Science and Technology and approved by State Pollution Control Board on which there is scope

for little control.

EXCISE DUTY

To make the power tillers available to marginal farmers at very low prices, central government

has exempted power tillers from excise duty. However the diesel was dutiable on the ground that

the same is multi purpose final product. Though the company has taken up the matter with

central government from 2006-07 onwards engine used for the power tillers also have been

exempted from excise duty. As a result, only spare engine sales are subjected to excise duty.

STAFF COST

Staff cost includes salary, wages, bonus, statutory contributions and employee welfare payments.

SALARY

Company offers excellent salary pack and welfare facilities. The main advantage of the company

is that a major portion of the staff expense is linked with performance by way of scientifically

defined incentive system.

Almost all the jobs have been brought under measured job and standard is fixed for all measured

job. Only works like maintenance service, rectification work as well as for indirect employees

like officers and office staff indirect incentive is paid which again is divided into semi direct and

indirect. For semi direct 80% of the incentive and for indirect 50% is paid. As all measured

production is entered in the log book and computer on daily basis and it can be published in the

notice board on all days. This will make the system transparent and will create a competitive

spirit among the employees. Actually no public sector enterprises in Kerala may be achieving

targeted production, but KAMCO is an exemption and in almost all years its target is been met or

in certain years capacity utilization exceeds 100% without any doubt. The credit of this

achievement can be given to the incentive system.

The present problem facing the company seems to be high employee retirement. Age group of

employees is yet another problem i.e., almost all employees are at the age of 50’s and above. By

better mechanization, company compensates the retirement without labour addition and

retirement vacancies are filled only in essential cases this will help the company to maintain the

labour cost even if, pre employee cost increases due to increase in salary and dearness allowance

linked with cost of living index. The notable feature is that the retirement has not affected

production. So actually labour cost per unit is maintained without much increase.

STATUTORY CONTRIBUTIONS AND EMPLOYEE WELFARE PAYMENTS

For majority of contributions like PF, ESI, Welfare Fund etc. there is no scope for

reduction. However various amenities expenses are controllable. The major staff welfare

expenses relate to canteen expense, employee medical expense, leave surrender expense etc. As a

welfare measure company extents full medical facilities to its employees and their dependants.

This has definitely improved the security savings, morale and commitment of employees and

thereby reduced the incidence of labour turnover. To reduce the impact of medical expense,

company has insured all employees under group insurance scheme. Accident policy has also

been taken and all these will facilitate the company to get reimbursement against payment made

to employees and dependants.

Another measure taken by the company to reduce the medical expenses by way of periodical

medical check up to all employees. When employees are aware of their health position they can

adopt preventive measures and suitable diet control for reducing the medical expenses. Gratuity

and terminal leave salary liabilities are covered under group policies of LIC. This will reduce the

expenses by ensuring attractive rate of earnings on the policies. As the company is paying

Income Tax, this payment will reduce the tax liability also.

Cost effective and hygienic food is arranged to company’s employees through its

canteen. Canteen is run by the company directly under the supervision of the committee

comprising of management and trade union nominees.

The menu is fixed by the committee considering the age group and health requirement.

The foods having high sugar and cholesterol are avoided. Vegetables, foods, fish etc. are

included in the menu so as to ensure required calories of food to the employees.

VRS PAYMENT

VRS scheme had been allowed during 2005. The scheme was introduced to allow unhealthy and

unwilling employees to retire without much monitory loss. Unhealthy employees are always

curse to any organization as that contribution will be always negative and expense on account of

medical and other facilities will be high. Also morale of other employees will be badly affected

if the sick employee gives any leniency on any work. Company has the advantage of curtailing

the annual wage bill by allowing VRS scheme for which state government help is also there.

OFFICE, ADMINISTRATION AND GENERAL EXPENSES

It includes mainly printing and stationary, postage and telephone, legal and consultation fee,

bank charges, rent and rates, R&D expenses, repairs, software development expense etc.

TRAVELLING EXPENSES

The traveling expenses are controlled by means of budgetary control and travel from head

quarters is permitted only in case of eventualities. In majority of cases communication is made

through network connections and vendors/ dealers are invited to head office for discussion and

price negotiations. In case of essential requirements second class railway fare is allowed to

employees.

PRINTING AND STATIONARY

Majority of the forms are computerized. The cost is reduced by standardizing the forms. Costs

are controlled by centralize purchase of stationary and printing. Introducing standard

computerized format in almost all areas minimizes printing cost.

POSTAGE AND TELEPHONE

E-mail facility in the company helps to reduce the cost of postage and telephone.

LEGAL AND CONSULTATION FEE

It is allowed only in exigencies/ emergencies. In almost all areas professionals are appointed and

it is their duty to advise the company without any additional cost. However the company

maintains a very good library. Legal and professional books are added to the library hence

officers and workers can always suggest name of books to be purchased. When enough books are

available for clarification, in majority of cases, consultation can be avoided. Legal disputes are

discouraged, so that legal expense can be reduced.

BANK CHARGES

Company has no loan funds. Over Draft is also not used. Bank charges are only nominal. Funds

are controlled on centralized basis and need based transfer of funds are made to the units.

Banking operation is also centralized and usually banks are having selected branches at all

locations. Hence Union Bank and Federal Bank are selected as lead bank of KAMCO and both

of them have branches at Palakkad, Kalamassery and Mala. This will facilitate Mutual transfer of

funds at free of cost. By keeping the funds required centrally in current account, company

maintains its bargaining power and 50% concession is available in all bank charges. Usually

almost all purchases are on FOR destinations and sales are at X-works price so that bank charges

if any on account of purchase will be to the suppliers account and on sales will be to the account

of dealers.

RENT

Company uses rented building only 2 points at Calcutta and pondichery. At Pondichery, room is

hired to reap the benefit of concession tax advantage of Pondichery state. At Calcutta, as

majority of sales of the company is affected Calcutta to meet the service needed, an office is

maintained there. To reduce the impact of rent at both the places, the hired building is used as

office cum residence. A portion of the rent is recovered from the employee and no YRA is paid

to employees residing there. Further employees on travel to such areas are provided with

accommodation facility there. This will reduce the overall cost impact to the company.

RESEARCH & DEVELOPMENT EXPENSE

It is not an actual cost. The company can reap again of these expenses. KAMCO has a customer

centered R& D to analyze the problems of farmers and to collect feed back of the product to

improve the product.

REPAIRS

It is done for 4 to 5 years. If repairs increased mileage decreases. It will affect the company.

SOFTWARE DEVELOPMENT EXPENSE

There is only a little scope for reducing the cost. It is an in-house activity done by the employees

to meet procurement of the company.

SELLING AND DISTRIBUTION EXPENSES

The selling expenses refers to costs incurred in promoting sales and retaining customers and

distribution expenses constitute the cost of the process which begins with marking the packed

product available for dispatch and ends with making the reconditioned returned empty packages

available for reuse.

PACKING AND FORWARDING

Standard packing is used. The bulk products sell without packaging. Per unit expense reduced by

using mounding frame and usage of lorry can be increased.

ADVERTISEMENT

Advertisement is restricted to the minimum and nowadays advertisement is made together with

dealer by sharing the cost on 50: 50 basis. Since any increase in sale is beneficial to the dealers

also the promotion expense are shred. To introduce the product to new markets, demonstration of

product is found much more effective and contributory and hence thrust is given on the same.

WARRANTY CLAIM

Warranty claim is essential to maintain the customer relationship and it is admitted in all

deserving cases. Still cost on this account is reduced to minimum by charging the warrant on

account of material defect to the supplier of concerned material. Process or assembly defect only

is born by the company. To charge this expense to concerned supplier, identification mark is

insisted on all components and hence it can be traced and dispatched to the concerned supplier

for necessary inspection and preventive corrective action.

ANALYSIS OF PROFITABILITY

Profitability is the overall measure of the companies with regard to

efficient and effective utilization of resources. It indicates in a nutshell, the effectiveness

of the decision taken by the management from time to time. The practices followed to

reduce the costs to strengthen the profit earning capacity, is considered essential for the

survival of the business. These ratios, therefore becomes utmost important for a concern.

To enlighten the end results of business activities, these ratios are calculated which is the

sole criterion of the overall efficiency of a business concern.

NET PROFIT RATIO

This ratio provides considerable insight into overall efficiency of the business. It explains per

rupee profit generating capacity of sales. If the cost of sales is lower, then the net profit will be

higher and when divide it with the net sales, lower will be the sales efficiency.

Net Profit after Tax x 100

Net Profit Ratio = Net Sales

A higher ratio is an indication of the higher overall efficiency of the business and better

utilization of total resources. A low ratio would mean a poor financial planning and low

efficiency.

TABLE SHOWING NET PROFIT RATIO

Year

NET Profit

(Rs. in lakhs)

Sales

(Rs. in lakhs)

NET Profit Ratio

(%)

2004-05 467.83 7934 5.89

2005-06 522.82 8004 6.53

2006-07 572.60 9121 6.28

2007-08 625.54 10121 6.18

2008-09 764.51 12028 6.36

Year 2004-05 2005-06 2006-07 2007-08 2008-09

5.4

5.6

5.8

6

6.2

6.4

6.6

NET Profit Ratio (%)

NET Profit Ratio (%)

The Net Profit during the selected years has shown an increasing trend, in which the year

2004-05 has the lowest net profit. This reduction was due to implementation of long term

settlement on wages and payment of arrears to employees.

The net profit ratio also shows an increasing trend except 2007 and 2008.this

higher net profit ratio indicates that how well the resources of the company have been utilized.

OPERATING PROFIT RATIO

The operating profit ratio establishes the relationship between operating profit and sales. This ratio indicates the portion remaining out of every rupee worth of sales after all operating costs and expenses have been met. Operating profit is the profit before interest and taxes.

Operating profit x 100

Operating Profit Ratio = Net Sales

Higher the ratio, higher the favourability as it gives an idea of improved efficiency of the concern.

TABLE SHOWING OPERATING PROFIT RATIO

Year

Operating Profit

(Rs. in lakhs)

Sales

(Rs. in lakhs)

Operating Profit Ratio (%)

2004-05 726.23 7934 9.15

2005-06 805.69 8004 10.06

2006-07 883.70 9121 9.69

2007-08 950.12 10121 9.38

2008-09 1177.05 12028 9.79

Year 2004-05

2005-06

2006-07

2007-08

2008-09

8.6

8.8

9

9.2

9.4

9.6

9.8

10

10.2



INTERPRETATION

The table shows that operating profit ratio was high during the year 2005-2006 and least

during the year 2004-2005. As already explained , reduction on operating profit was due to sharp

increase in salaries and wage expenses resulting from implementation of long term settlement. In

order to improve the operating profit ratio company should concentrate in reducing the operating

expenses or improving the net sales.

EARNINGS PER SHARE

\ Earnings per share is a good measure of profitability and when compared with EPS of similar other companies, it gives a view of the competitive earnings or earning power of a firm. EPS calculated for a number of years indicate whether or not earning power of the company has increased.

Net Profit available to Equity shareholders

Earnings Per Share = Number of Equity shares

The performances and prospects of the company are affected by Earnings Per Share. If the EPS increases, the company may pay more dividends.

TABLE SHOWING EARNING PER SHARE

Year

Net Profit after tax

(Rs. in Lakhs)

No:of equity shares

(Rs. in lakhs)

Earnings Per Share

2004-05 467.83 161.460 2.89

2005-06 522.82 161.460 3.23

2006-07 572.60 161.460 3.55

2007-08 625.54 161.460 3.87

2008-09 764.51 161.460 4.74

Year 2004-05

2005-06

2006-07

2007-08

2008-09

00.5

11.5

22.5

33.5

44.5

5

Earnings Per Share

Earnings Per Share

INTERPRETATION

From the above table and chart, it is clear that that the earnings per share shows an increasing

trend. The highest rate of EPS is in the year of 2008-2009.i.e. 4.74 and the lowest is achieved in

the year 2004-2005 i.e. 2.89. the increasing trend of EPS indicates better profitability.

EXPENSES RATIO

Expenses ratios are calculated to ascertain the relationship that exists between operating expenses and volume of sales. They are:

a) MATERIAL CONSUMED RATIO

The ratio indicates the proportion that the material consumption bears to sales.

Material Consumed x 100

Material Consumed Ratio = Net Sales

TABLE SHOWING MATERIAL CONSUMED RATIO

Year

Material consumption(Rs. in lakhs)

Sales

(Rs. in lakhs)

Material Consumed Ratio (%)

2004-05 4820.41 7934 60.76

2005-06 5560.56 8004 69.47

2006-07 5694.85 9121 62.43

2007-08 6722.07 10121 66.42

2008-09 8390.08 12028 69.75

Year 2004-05

2005-06

2006-07

2007-08

2008-09

56

58

60

62

64

66

68

70

72



INTERPRETATION

The table and chart shows that the expenses on material cost are more or less fluctuating

all over the years. This fluctuation is mainly due to the fact that there is no rigid policy in fixing

the selling price depending on material cost. This may be due to the stringent competition in the

market.

ADMINISTRATIVE EXPENSE RATIO

This expense ratio shows the relationship between all administrative and general expenses of company to its net sales.

Administrative & General expenses x 100

Administrative expense Ratio = Net Sales

TABLE SHOWING ADMINISTRATIVE EXPENSE RATIO

Year

Administrative Expense

Sales

(Rs. in lakhs)

Ratio ( % )

2004-05 122.70 7934 1.55

2005-06 109.62 8004 1.37

2006-07 121.69 9121 1.33

2007-08 137.87 10121 1.36

2008-09 148.19 12028 1.23

Year 2004-05 2005-06 2006-07 2007-08 2008-090

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Ratio ( % )

Ratio ( % )

INTERPRETATION

The above chart and table reveals that the administrative expense ratio does not shows a steady

increase or decrease. It is more or less fluctuating all over the years. The lowest ratio of 1.23 is in

the year 2008-09,where the company has bring down the expense of R&D and rent charges.

SELLING AND DISTRIBUTION EXPENSE RATIO

This ratio is calculated to measure the selling and distribution expense against the net sales carried on to ascertain whether they are creating favourable condition or not within the affairs of the company.

Selling & Distribution Expenses x 100

Selling & Distribution Expense Ratio = Net Sales

TABLE SHOWING SELLING & DISTRIBUTION EXPENSE RATIO

Year

SELLING AND DISTRIBUTION (IN LAKHS)

Sales

(Rs. in lakhs)

Ratio ( % )

2004-05 100.13 7934 1.26

2005-06 116.09 8004 1.45

2006-07 119.49 9121 1.31

2007-08 146.22 10121 1.44

2008-09 194.27 12028 1.61

Year 2004-05 2005-06 2006-07 2007-08 2008-09

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Ratio ( % )

Ratio ( % )

INTERPRETATION

The selling and distribution ratio of the company during the years has shown an

increasing trend. It was high during the year 2008-2009. i.e. 1.61. In the year 2008-2009 the

expense of agency commission and demonstration expense was added to the expense which in

cause raised the expense. The ratio was lowest in the year 2004-2005 i.e. 1.26.

DUPONT MODEL

DUPONT MODEL has been used to detect the drivers of change in financial performance. The

model is also an excellent tool for a forward-looking assessment of Strategic Alternatives. The DuPont

Model was originally developed in 1919 by a finance executive at E.I. du Pont de Nemours and Co. of

Wilmington, Delaware, for financial planning and control purposes. The DuPont system helps many

companies understand the critical building blocks in return on assets (ROA) and return on equity (ROE).

This is a model that measures short-term impacts, so we can include these costs, assuming that they

may not be incurred in future periods.

Strengths of the DuPont Model

The main advantage of the DuPont Model is its simplicity. It reveals how the key ratios link with

each other to govern total financial performance. The model gives you a look into important

drivers of financial performance such as cash flow to revenues and asset turnover. It also enables

one to ask "what if" kinds of strategic questions that help to gauge what kind of impact

implementing changes can have.

Types of "what if" questions that the model can handle are:

1. After the acquisition of a small competitor, what will the ROA and ROE be?

2. What will the proposed upgrade to a new customer ordering system be on ROE?

3. If inventory turnover improves after implementations stemming from a nine-month

reengineering project, how much will improve ROA?

The DuPont model can be used to understand short-term performance and not long-term value. It

is a strong screen to test for impacts to operational metrics, but not intrinsic value. In its

unadjusted form (net income–based) it has less linkage to cash generation and is less indicative

of value.

RETURN ON ASSETS (ROA)

Return on assets is a measure of the productivity of assets. Assets appear on your balance

sheet. They are things that you own. Some examples of assets are equipment, real estate,

inventory, software, trademarks, and patents. ROA tells you how much net income your assets

are generating. This type of measurement is important in understanding short-run impacts to

value. It can be used to measure the productivity of Strategic Alternatives in isolation and

combined with the rest of the business. ROA is an important tool for the analysis of mergers and

acquisitions because it measures the productivity of the transaction on the total purchase price.

RETURN ON ASSET (ROA) = NET INCOMETOTAL ASSETS

YEAR NET INCOME

(Rs. in lakhs)

TOTAL ASSETS PERCENTAGE

2005 467.83 6066.12 7.71

2006 522.82 6527.71 8.01

2007 572.60 7035.01 8.14

2008 625.54 7608.05 8.22

2009 764.51 8316.42 9.19

TABLE

2004-2005 2005-2006 2006-2007 2007-2008 2008-20096.5

7

7.5

8

8.5

9

9.5

Series3

INTERPRETATION

The return on asset has shown an increasing trend.

The ratio shows that how much income is generated from the total assets. The 7.71 %during the

period 2004-2005 indicates that of the total assets 7.77% income is generated.

The ratios has shown an increasing trend and it is high during the period 2008-2009

Return on equity (ROE)

Return on equity (ROE) measures productivity in relation to equity. This measure focuses on the part of

the investment that is funded by equity. Strategic Alternatives can be funded using two sources: debt

and equity. Debt is money that is borrowed (for example, money from the bank). Equity is money that is

contributed by shareholders. Projects are funded using a mix of debt and equity. This mix affects the

cost of capital, which may be used as the adjustment for time and risk more specifically, the risk

adjustment.

RETURN ON EQUITY (ROE) = NET INCOMECOMMON EQUITY

YEAR NET INCOME

(Rs. in lakhs)

COMMON EQUITY

(Rs. in lakhs)

VALUE

2005 467.83 161.46 2.88

2006 522.82 161.46 3.24

2007 572.60 161.46 3.55

2008 625.54 161.46 3.87

2009 764.51 161.46 4.73

TABLE

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

6.5

7

7.5

8

8.5

9

9.5

7.718.01 8.14 8.22

9.19

PERCENTAGE

COMPARATIVE INCOME STATEMENT

This statement discloses the operating profit or loss resulting from the operations

of the business. Such statement shows the operating result for number of accounting periods, so

the changes in absolute data from one period to another period may be stated in terms of

percentage. This statement helps in deriving meaningful conclusions as it is very easy to

ascertain the changes in sales volume, administrative expenses, selling & distribution expenses,

cost of sales etc.

Comparative Statement of Income & Expenditure for the years 2004 – 2005(Rs. In lakhs)

Particulars 2004 2005

Increase(+)or Decrease(-) Rs.

Increase(-)or Decrease(-)

%

Income

Sales 6815.4 7934.39 +1118.99 16.41

Other Income 218.75 209.60 -9.15 4.17

Self Manufactured Product 3.34 --- --- ---

Variation in Stock 285.41 -194.76 -90.65 31.76

TOTAL 7322.9 7949.23 +626.33 8.55

Expenditure

Materials& Traded Goods 4179.07 5056.46 +884.94 21.17

Manufacturing Expenses 497.29 582.45 +85.16 17.12

Staff Cost 1169.94 1271.83 +101.89 0.07

Administrative & General Expenses

99.20 122.71 +23.51 23.68

Selling & Distribution Expenses

509.22 100.14 -409.08 80.33

Depreciation 87.90 81.30 -6.61 7.50

TOTAL 6542.6 7223 +680.4 10.40

Operating Profit 780.2 726.23 -54.07 6.93

INTERPRETATION

1. All expenses showed an increasing trend and sales also increased

2. The cost of materials and manufacturing expenses increased considerably. The staff

cost and administration expenses also increased. Due to this even though the sales

have improved, corresponding increase in operating profit could not be achieved.

3. Only the selling and distribution expenses could be controlled, which is a good sign.




Increase(-)or Decrease(-) %

Income

Sales 7934.39 8003.69 +69.3 0.87

Other Income 209.60 195.46 -14.14 6.75

Self Manufactured Product

--- --- --- ---

Variation in Stock -194.76 398.63 +203.87 104.68

TOTAL 7949.23 8593.25 +644.02 8.10

Expenditure

Materials& Traded Goods

5064.57 5811.78 +747.21 14.75

Manufacturing Expenses

582.45 321.21 -261.24 44.85

Staff Cost 1271.83 1350.06 +78.23 6.15


122.71 109.62 -13.09 10.67

Selling & Distribution Expenses

100.14 116.09 +15.95 15.93

Depreciation 81.30 76.72 -4.58 5.63

TOTAL 7223 7787.56 +564.56 7.82

Operating Profit 726.23 805.69 +79.46 10.94

INTERPRETATION

1. In 2006, sales show a slight increase. While the other source of income decreased.

Variation in stock shows a sharp increase.

2. Operating profit has slightly increased by controlling expenses such as manufacturing

and administration expenses.

3. Manufacturing cost got reduced due to exemption on excise duty.

4. Increase in staff cost was the result of increase in salaries and wages based on long term

settlement.





Income

Sales 8003 9121.74 +1118.05 13.97

Other Income 195.46 258.64 +63.18 32.32

Self Manufactured Product 1.09 --- --- ---

Variation in Stock 398.63 -375.97 -774.6 194.32

TOTAL 8593.25 9004.41 +411.16 4.78

Expenditure


Manufacturing Expenses 321.21 347.98 +26.77 8.38

Staff Cost 1350.06 1444.56 +94.5 6.99


109.62 121.69 +12.07 11.01

Selling & Distribution Expenses 116.09 119.40 +3.4 2.93

Depreciation 76.72 66.70 -10.02 13.06

TOTAL 7787.56 8118.07 +325.51 4.18


INTERPRETATION

a. In 2006, an income called self manufactured product has raised amounted Rs

1.09.

b. Variation in stock recorded a whooping increase of 194.32% in the year 2007

c. In 2007, the other income has got a sharp increase of 32.32%

d. All expenses showed an increasing trend. Material cost, staff cost, manufacturing

expenses, administrative expenses and selling and distribution expenses increase

considerably. Only depreciation decreases by Rs 10.02 ie 13.06 %





Income

Sales 9121.74 10121.86 +1000.12 10.96

Other Income 258.64 278.21 +19.57 7.57

Self Manufactured Product --- --- --- ---

Variation in Stock -375.97 -187.54 +188.43 50.12

TOTAL 9004.41 10212.53 +1208.12 13.42

Expenditure


Manufacturing Expenses 347.98 304.61 -43.37 12.46

Staff Cost 1444.56 1543.69 +99.13 6.86


121.69 137.87 +16.18 13.30

Selling & Distribution Expenses 119.49 146.23 +26.74 22.38

Depreciation 66.70 65.28 -1.42 2.13

Impairment loss of Asset 0.59 0.57 -0.02 3.39

TOTAL 8113.07 9259.17 +1146.10 14.13


INTREPRETATION

a. In 2008, sales have been increased sharply by around 11%. So the strategy of the

firm is clear to widen the market operations but not reflected in the operating

profit.

b. Among the expenses, selling & distribution expenses has failed terribly to manage

and got resulted in increase of 22.38%. it shows that the marketing cost is

increasing year by year to face the competition.

Comparative Statement of Income & Expenditure for the years 2008 – 2009(Rs.In lakhs)




Income

Sales 10121.86 12028.50 1906.64 18.84

Other Income 278.21 295.91 17.7 6.36

Self Manufactured Product --- --- --- ---

Variation in Stock -187.54 -71.52 +116.02 61.86

TOTAL 10212.53 12252.89 2040.36 19.98

Expenditure

Materials& Traded Goods 7060.92 8859.63 1798.71 25.47

Manufacturing Expenses 304.61 193.71 -110.9 36.41

Staff Cost 1543.69 1606.11 62.42 4.04


137.87 148.18 10.31 7.48

Selling & Distribution Expenses 146.23 194.27 48.04 32.85

Depreciation 65.28 71.65 6.37 9.76

Impairment loss of Asset 0.57 1.30 0.73 1.28

TOTAL 9259.17 11074.85 1815.68 19.61

Operating Profit 950.12 1178.04 227.92 23.99

INTREPRETATION

a) In 2009, sales have been increased sharply by around 19 %.

b) Staff cost and Administrative & General Expenses have brought into the control of the

management. There is only a slight increase in both items i.e; staff cost increased by 4.04 % and

Administrative & General Expenses by 7.48.

c) In 2009 other income shown only a slight increase of 6.36 % as compared to 32.32 % in 2006-

2007

FINDINGS AND SUGGESTIONS

The study on the cost reduction techniques and the practical measures taken by

KAMCO – a case study of KAMCO covers an analysis of KAMCO Ltd over a period of 5 years

from 2004-2005 to 2008-2009. The analysis is done on the basis of data provided in the

published annual reports of the company. Various findings and conclusion of the study are stated

in the relevant chapters itself. Focus interviews ,peer discussion, comparative statements,

profitability and expense ratios are the tools of analysis mainly used to study the objective of this

work.

From the analysis of performance of the company, it can be seen that various expenses

are increasing. Profit and sales shows an increasing trend. But in an inflationary economy,

increase in staff cost is due to annual increments and linking of dearness allowance with cost of

living index. Though the volume of sales increase, sales price per unit is not seen increased to

match with increase in cost of production. This indicates the competition in the market. The set

back of agriculture all over the country is gradually affecting the turnover and profit of the

company. Even though cost is showing increasing trend, the increase is lesser than the inflation

rate. This indicates the efficiency of various cost control measures taken by the company.

The cost structure of the company reveals that out of sales revenue, variable cost, fixed

cost and profit constitute 75 %, 15%, and 10% respectively. The fixed cost increases by 10 % per

annum and hence approximately minimum 7.5 % increase in turnover has to be achieved to

retain the profit. Growth is essential for survival. In competitive environment with single product

profit that cannot be increased or even maintained. Hence diversification is essential for the

existence of the company. The company also increases profit by decreasing cycle time and

inventory holding. If present total 3 months inventory is decreased to minimum one month and

surplus fund released by such reduction is invested elsewhere the profit can be increased.

The retirement of key managerial personnel’s as well as employees is a threat requiring

urgent attention of the management. Recruitment has to be made in a faced manner so that

scarcity of experienced managerial personnel’s will not hinder the development activities of the

company. Sizable amount is seen deposited in treasury giving a return of lesser than 10%. Profit

can be increased by utilizing this fund in alternative productive areas.

For any organization, growth is absolutely essential for survival. Performance analysis of

KAMCO emphasis the need of a diversification. From the discussion held at various levels of

officers, it is learnt that several proposals for diversification are under the active consideration of

management.

CONCLUSION

KERALA AGRO MACHINERY CORPORATION LTD., being the premier supplier of agricultural products, is traditionally enjoying the market leadership. However the liberalization policy has increased the competition and as a result of this, profit has become skin deep. In addition to this, all input cost as increased considerably during the last 5 years. Though confronted with these problems, it could retain its position in the market because of product quality, confidence of the farmers and soil friendliness of its Tillers. Company can capitalize this confidence of farmers by providing other agricultural machinery as well.

Analysis of ‘Cost Reduction Approaches of KAMCO’ reveals that the financial position of KAMCO is quite satisfactory. But still management has to be careful in utilizing the funds. For this KAMCO should try to utilize its strength to overcome its weakness and take advantage of opportunities by avoiding threats.

BIBLIOGRAPHY

S.P Jain, K.L Narang; Costing Methods And Techniques, 2001

Jawahar Lal : cost accounting, Tata Mc Graw Hill Publishing Company Ltd

Maheswary S.N, Cost Accounting, Sree Mahavir Publications, 8th Edition

Chakravarthy A.M ; Cost Accounting, Bani Book company, Third Edition

Nigam ; Sharma; Advanced Cost Accounting,Himalaya publishing House, 1987

Annual Reports of KAMCO from 2005 to 2009

A Study on Cost Reduction Measures in Kamco Ltd

Documents

Transcript of A Study on Cost Reduction Measures in Kamco Ltd