Increasing competition and inflation have compelled Indian corporations to make more profits by cutting down their operational and production costs. Most of the companies initiated cost cutting measures to enhance their profitability. Take, for example, FMCG giant Hindustan Unilever Ltd (HUL). HUL reported a 20 per cent increase in net profit to INR 3467.3 million in the June quarter of 2001. However, the figure of its net sales was quite sluggish, showing only 1.8 per cent growth at INR 29.3125 billion. Similarly, India”s largest corporate, Reliance Industries Ltd (RIL), posted nearly 14 per cent rise in net profit at INR 6.18 billion for the first quarter that ended in June 2001. But if you notice the sales figure, there was an increase of just 4 per cent at INR 63.9 billion crore from INR 61.36 billion in the previous year. Growth during the quarter came due to increase in capacity utilization at 103 percent, increase in volumes and prices and voluntary retirement schemes. As part of restructuring its textiles business which contributed only one per cent of its total turnover, the company retired 4,600 out of 4,900 employees during 2001 at a cost of INR 770 million. In spite of sales being flat the profits were increased by initiating cost cutting exercises. Aditya Birla Group company Grasim also incurred 89 per cent increase in the net profit at INR 1.12 billion for the June 2001 quarter. Interestingly, the sales revenue showed only a marginal decline at INR 11.84 billion as compared to INR 11.96 billion for the same period previous year. This was achieved when the company reduced its fixed interest cost by 22 per cent at INR 480 million as against INR 610 million in the corresponding previous year. Gujarat Ambuja Cements reported a 32.46 per cent increase in net profit to INR 770 million for the year 2001. However, its sales rose at a lower pace by 23.5 per cent to INR 3.78 billion from INR 3.06 billion in the previous year. For the year that ended June 2001, net profit rose by 6 per cent to INR 1.86 billion while turnover rose by 11 per cent to INR 14.48 billion over the previous year. If we notice that the company was able to improve its sales marginally in 2001 as compared with the previous year, the reduction in costs helped the company to improve its profit to 36.8 per cent from 27.1 per cent in the previous year. Britannia Industries also showed similar results. It posted a20 per cent increase in its net profit at INR 162 million but its net sales increased marginally by 5.81 per cent to INR 3.49 billion. Most of the Indian corporations since 2000–01 have reduced their costs to increase their bottom line. This has helped them maintain the growth in their margins even in the case of stagnant market conditions.

Questions

  1. Identify the various cost cutting measures initiated by the infrastructure and FMCG companies in India.
  2. Prepare a chart of various companies which have faced serious profitability problems and have painted themselves black by sheer cost cutting measures.
  3. Discuss the cost cutting measures in terms of
    1. Supply chain and inventoried costs
    2. Fixed costs
    3. Variable costs