Three Cost Management Tips For Chemical Companies in India
As projected by Tata Strategic Management Group, the Chemical Industry in India is likely to rise from $139 billion in FY 2014 to $214 billion in the coming 4 years with an annual growth rate of 9% amid growing demand scenario. The supportive hand of Government of India on this sector is also expected to offer ample contribution in its growth. While there is no particular silver bullet to enhance the competitiveness of the Indian Chemical Companies in the global sphere, and prepare them for looming shocks, the cost-management programs can back up the industry by large in improving the cost-cuts, and accountability.
The 3 key points to keep in mind while creating the cost-management program for your chemical company are cited below:
Know Your Costs:
The cost-cutting is an important segment of any cost-management program. While the administrative, sales, and general costs are intransigent, there are lot other costs that can be tamed down over the course of time. Few kinds of costs for the chemical companies are:
- Direct costs relating to procurement, production, and improvement.
- Indirect costs relating to information technology, traveling, etc.
- Distribution costs including the warehousing and supply.
- Conversion costs including the expenses of repairs and maintenance.
For the small to medium time span, such costs can be reduced to improve the profitability of the business, however for long-term competitiveness, the organizations have to settle upon some enduring cost-management exercise.
Assign Cost-Cutting Responsibility At Different Levels:
The company cannot successfully manage its costs if only few head honchos are held responsible for the purpose. This is because they lack an in-depth knowledge of what’s happening at the junior levels of an organization, and are thus, unable to make any strong plan/ cost-reduction targets. As an alternative, the managers can break their costs by assigning responsibilities at the small and practical level. It will assist in:
- Identifying the exact area of cost mismanagement in a small time.
- Making a detailed plan to control future costs in that area.
- Executing the plans in a precise manner.
This sort of delegation makes every part of the team accountable, and they work hard to reduce the costs through the temptation of performance evaluations, and other incentives.
Instead of just reflecting upon how much cost is required to be cut, the Chemical Companies shall lay stress upon how they are going to cut those costs. In this way, they can ensure that while cutting the costs they’re not compromising upon their revenue, and the results of their steps are going to create a long-lasting value for the business. For this, the companies have to set new policies and procedures and model the desired behavior. The benchmarking of costs has to be focused upon 3 aspects, namely:
- Determine the manufacturing location that is close to resources, and has all the facilities in terms of technology, power, infrastructure, storage, and distribution. Also, the target markets and business ethics should be regarded while settling on a decision.
- Decide the scale of operations according to the demand in a market, and prevailing competition to stay upfront with other rivals. For instance, the lack of scale resulted in around 6% decline in domestic production of organic chemicals consequently increasing the imports by 17-19% between FY 2006 and FY 2011.
- Link the cost-cutting initiatives to the broader strategic plans to enhance the scope of the business. It involves the diversification or integration of several industries in order to maintain growth and profitability while cutting the costs. For instance, in December 2015 the chemicals and seed producer DuPont in New York intensified its cost-cutting endeavors by merging with Dow Chemical Co. thus, expecting to cut its costs by 730 million from year 2015 and earning more profits.
That’s about the 3 important cost-management tips the Chemical Companies in India shall learn by heart, and commit to in long-term in order to ensure its competitiveness and success in the global sphere.