The issue of industrial or manufacturing competitiveness has been engaging the attention of the Government of India (GoI) for the last several years. The GoI had taken some salutary measures in the past, through its enactments and the requirements of its agencies such as Securities and Exchanges Board of India (SEBI) to enhance the disclosure of information by certain categories of corporations for review by their stakeholders. While aspects like Management Discussion & Analysis have trailed the trends in other advanced countries, certain disclosure requirements on R&D expenditure, technology imports, technology assimilation, development of indigenous technologies, energy efficiency, payables to small and micro enterprises, installed capacities and production, imports and exports have been uniquely Indian, and have helped shine the light on certain important operational parameters of companies. The mandatory requirement of independent cost audit for certain category of firms has been another uniquely Indian requirement of corporate introspection and disclosure, mandated by the GoI, although it has never reached the status of statutory audit of accounts.
The new enactments on the Cost Audit Report Rules (CARR) and Companies (Auditor’s Report) Order (CARO) by the GoI represent an attempt to sharpen the cost audit principles and also expand their applicability. Simultaneously, they seek to reduce the hitherto prevalent resistance of the companies to external cost audits on the grounds of confidentiality of cost data. They also ensure greater teeth through a performance appraisal report that focuses on key operational metrics such as capacity utilization, productivity improvement and so on. Currently, The National Task Force on CARR and CARO of The Institute of Cost Accountants of India (ICAI) is engaged in a nation-wide discussion with industry associations, captains of industry and professional experts. Hopefully, the final outcomes would have the acceptance of all the stakeholders. While such Government and ICAI sponsored cost audits have their utility in terms of focusing attention and ensuring compliance, the real benefits of cost audits would accrue to the company only when the companies understand the concept of cost in its totality and put in place systems of rigorous and meaningful cost management. This blog post proposes a new paradigm of total quality and cost management against a time perspective for India, Inc.
Cost, quality and competitiveness
Cost management is the most important instrument in the quest for globalization by India, Inc. Cost, however, should never be seen independent of Quality. In all ways, cost and quality are significantly interrelated. There are several myths surrounding the cost-quality equation. The most prominent one is that cost and quality are inversely correlated. In other words, it is assumed that higher quality leads to higher cost and somewhat conversely lower cost implies lower quality. While higher levels of quality do require higher levels of product specification, material strength, manufacturing integrity and service delivery, the relationship is neither linear nor proportionate. A higher quality product or service actually creates and expands demand, enables higher scale of production and distribution, improves overhead absorption and ultimately results in superior cost position. Quality integrated cost management is the essential tool for competitiveness.
An ability to successfully operate on low margins is the ultimate test of the cost-competitiveness of a firm. Many times, firms, especially those operating in innovation and niche space believe that cost is secondary and differentiation is primary. Some firms may even believe that pursuit of cost leadership and product differentiation are contrarian activities. There is, in fact, no conflict in the pursuit of these twin goals. Elimination and avoidance of all non-value adding and wasteful activities, and infusion and integration of value adding activities is a primary strategy of all corporations which have accomplished sustainable profitable growth for decades. A review of all corporations which have had decades of such growth over the last several decades in multiple industries and multiple regions, from Toyota in Japan to IBM in USA reflects the basic philosophy.
Controllable factors, all?
Many times, firms have a rather simplistic view of costs and competition. Many leaders are apt to exhort their employees that they should control what is under their control, namely costs, capacity and production, and not worry too much about the factors which in their view are not under their control, for example prices, demand and competition. Nothing can be farther than truth in this. In fact, all factors mentioned above, whether apparently controllable or not, squarely fall within the responsibility and control of the firms. The fact that market demand is at a low level oftentimes is an indicator of the unacceptable quality-cost position of a product or service. The fact that some other player has a lower priced, equivalent or superior quality product or service in the market is an indicator of the superior cost position such a player has been able to achieve relative to the incumbent. The phenomenon of competition in an industry indicates that the industry is attractive in terms of growth and profitability parameters. In essence, therefore, a firm cannot believe that its costs alone are a concern but not how a competitor prices its products.
The belief that a firm should continuously work on a best-in-class quality-cost position is the fundamental tenet that differentiates an industry leader from the rest. This is not to suggest that all firms in an industry must aspire for such an industry leading position. A firm’s strategy is a resultant not merely of a firm’s leadership aspirations but also of its technical and managerial capabilities, capital and other resource endowments, and the legacy issues relating to historical evolution. The point is that a firm should anchor its growth and sustainability strategies on a comprehensive strategy of quality integrated cost management. To be able to do that, firms must recognize that quality and cost are supported by individually unique set of cluster factors that determine the levels of quality and cost, and their interrelationship that a firm can enjoy.
Cost-quality cluster metrics
Cost is a powerful indicator of the ultimate competitiveness of a firm in an industry in which all the constituent firms are able to provide products or services of a comparable quality. The levers that a firm has in its possession to establish a position of superior cost are: productivity (or efficiency and effectiveness combined), scale, scope and speed. Encompassing all this is a zero-waste approach. Each of these factors is interrelated and their harmonious integration requires detailed planning, and correct execution with high forecast and delivery accuracy. Here, forecast accuracy is a broad concept covering not merely demand forecasting but also forecasting of all resource requirements including people, finance, materials, equipment, and various other inputs that are required for operations and delivery. Total cost management, therefore, requires application of the appropriate levers as identified herein across the entire value chain.
Quality is a powerful indicator of the ultimate competitiveness of a firm in an industry in which all the constituent firms are able to provide products and services of a comparable cost. The levers that a firm has in its possession to establish a position of superior quality are: innovation, product and service specifications, process specifications (covering both technical and non-technical processes), safety, skill levels of employees and compliance systems. Encompassing all this is a zero-defect approach. Each of these factors is interrelated and a superior position on quality can emerge only based on integration of all these parameters across the value chain, with a ‘first time right’ approach. Concurrent engineering is a methodology that has been successfully deployed by the automobile industry, especially the Japanese automobile industry, to ensure that quality is ensured in a seamless and unfailing manner across the total value chain. Here, compliance is an important concept in terms of establishing stringent benchmarks and the organization simultaneously conforming as well as innovating to meet such benchmarks. Total quality management, therefore, requires application of the appropriate quality levers as identified herein across the entire value chain.
Technology and management as integrators
The foregoing discussion may lead one to consider Total Cost Management (TCM) and Total Quality Management (TQM) to be two independent, though quite interrelated, streams of a firm. The point that each influences the other positively is well-taken but how such integration would need to be accomplished in practice is as yet unclear from the discussion afore. The key to such integration lies in technology; be it product technology, service technology, manufacturing technology, distribution technology or information technology. Product and process technologies present themselves in terms of the right form factor, appropriate levels of consumption of appropriate types of materials, the conversion efficiencies in terms of uptime, yields and so on. Service and distribution technologies present options for the firms and consumers to interconnect the supplies and requirements in a seamless function. Information technology helps the total value chain to be efficient and effective, and to eliminate waste and ensure compliance to specifications.
Equally important is the management of a firm, which comprises a host of factors from organizational culture to individual competencies. TCM and TQM aspirations cannot be fulfilled merely by deployment of technologies. Like every firm activity which is fundamentally behavior driven, cost and quality require a managerial mindset that utilizes technology and human resources in perfect harmony. The overall industrial context, including its strategic evolution, and the nature of competitive forces determine how management should deploy technology and human resources. What industries considered as a luxury in research and workshop settings a few decades ago, namely automation has become common place with the advances in mechatronics (electronics integrated mechanical engineering) and vastly changed expectations on what constitutes good ergonomics and wise economics. At the same time, the employee’s fundamental capabilities continue to determine how a national or global value chain comprising several functions, sites, teams and technologies can be seamlessly integrated.
Time as the ultimate arbiter
With several firms competing for similar strategic space, and all of them pursuing superior quality-cost options, it becomes necessary to identify one additional calibrator for superior positioning of the firms of the highest order. In this context, time which is the most precious, non-renewable and non-regenerative resource becomes critically important. Here again, myths surround the concepts of quality-cost execution in a time frame. It is not true, for example, that faster work could carry the risk of lower quality or that greater time allocation would ipso facto provide greater quality. Many times there are hidden or implicit activities that need to be performed, not performing which could have adverse quality and cost implications. Curing of concrete in a construction activity is one such example. There could also be limitations in the extent of parallel processing that can be carried out in a multi-tasked project. Components of a new design watch, for example, cannot be ordered unless the basic design parameters, both product and manufacturing, are frozen.
The laudable initiatives of the GoI in cost audit and the recent enactments on CARR and CARO themselves are reflective of the importance of the temporal dimension. These projects were initiated by the Ministry of Corporate Affairs, Government of India, in January 2008 with the constitution of an Expert Taskforce, which submitted a report in a timely manner by December 2008. However, the time taken to translate the recommendations into enactments and furthermore the far longer time that appears to be required by the Indian industry to go beyond the statutory audit requirements and establish in-house cost management efforts point to a need to integrate time as an essential third dimension in the quality-cost-time triad of competitiveness. The very special attribute of rendering the highest quality work at the lowest cost possible, and in the shortest time frame possible differentiates the firm that is solely and uniquely positioned in an optimized quality-cost paradigm. The Total Quality, Cost and Time Management (TQCTM) paradigm as a completely integrated and holistic strategic platform of competitiveness is highly relevant for an India, Inc that is seeking an ever expanding presence in the globalized economic and industrial world.
Posted by Dr CB Rao on March 4, 2012