Sunday, September 1, 2013

MANAGEMENT SPECIAL........ Innovation is the new normal for budgeting during a downturn


Innovation is the new normal for budgeting during a downturn

In a slowing business environment, when auto major Maruti Suzuki decided to stop production for a day in May 2013, the logic was clear-working at full efficiency levels for five days will surely be better than working sub-optimally for six days of the week. By doing this, the auto major brought the production closer to the market demand, also saved on overhead costs for one day. "We keep a hawk-eyed watch over every single penny," says Alok Sethi, CFO, Maruti Suzuki.
    Like Sethi, many CFOs and corporate planning folks are busy these days. Gone are the days when the planning exercise used to be a standalone activity with numbers bandied out from department to department within the corporation that not necessarily tallied with the annual budget. If you exceeded the budget numbers, there were bonuses and incentives and promotions. In "The New Abnormal" times, it's all about watching pennies. Today, owing to worsening market conditions, the planning process across India Inc has become iterative, and at a regional level, it is done on an almost daily basis. "Risks increase during tough times, and therefore budgeting by companies becomes far more conservative," says Professor Krishnamurthy Subramanian of Indian School of Business.
    But the troughs do provide companies with the opportunity to innovate across processes which are very much under their control. After the worsening demand, the latest whammy was the rupee depreciation.
    On the macroeconomic front, with the government now predicting a growth rate of just 5.5% against its forecast of 6.1% made during the annual budget-budgeting has taken a whole new meaning.
Getting the fizz back
    
For companies, god resides in the excel sheets. Take the case of food and beverages major Pepsico India. Though the company has a long-range 3-4 year plan, its operating plan is annual and is tweaked every month, says Pepsico India CFO Kimsuka Narsimhan. Just as the long-range plan becomes the base for the annual plan, its annual budget then becomes the base for company's quarterly plans. "Now we are doing it every month and it is becoming more rigorous and detailed," says Rajdeep Dattagupta, Senior Director Planning, Pepsico India.
    Narsimhan and co are looking at the numbers multidimensionally. For instance, consumer taste in the food and beverages industry evolves over a longer period of time than, say, electronics. That is when the company can tap into its long-range plan bucket. However, commodities have a much shorter cycle and since the company is hugely dependent on agro products, even daily fluctuations need to be borne in mind. Similarly, keeping your nose ahead is important and so the competitors' ploys are factored in on quarterly terms - pricing, new product launches, emergence of a new competitor - are some instances.
    Peculiarities of the business notwithstanding, several factors work in tandem for the company to compile its annual budget: macroeconomic environment, overall consumer behavior, the evolution of categories with innovation pipelines thrown in. Over the last couple of years, Dattagupta has coined a new term, 'India Factor', for unforeseen market behavior in the subcontinent, for which the company can never be prepared. "Though you can predict certain things, sometimes you don't know when they'll hit you, such as the unprecedented diesel price hikes, hikes in VAT or central excise," he says.
    Such business contingency plans are also now factored in to the overall planning process. Narsimhan illustrates with an example: "It rained earlier than usual this year, and since we are sensitive to seasons, we brought forward our off-season plan. A bottle of Pepsi now is cheaper than what it was two months ago."
Golden Parachute
    
Like Pepsico, the Rs 4,596 crore Marico too works on a moving plan - long range (3-4 years), annual and quarterly buckets. The quarterly plan looks at the annual budget set at the beginning of the fiscal for that quarter and then the numbers are recalibrated. "Some of the assumptions keep changing as the year unfolds and so it is important for us to be agile," says Vivek Karve, EVP & Head, Corporate Finance, Marico.
    In times of constraints, agility certainly goes a long way in bringing fiscal prudence. Karve explains that any volatility brings with it two types of errors - either an error of omission where you can freeze and take no action, or an error of commission, where you tend to act in haste. It happens because companies normally don't have policy frameworks that lay down rules which help management react to volatility. "We have had such a policy over the last 3-4 years," says Karve.
    In shaping the policy, Marico has sought feedback and advice from its pool of forex consultants, banks and board of directors. So at times like these, when currency volatility is at an all-time high, Marico adheres to the policy that does not allow the company to keep its forex exposures open. "We use plain vanilla forwards and options as our trading tools and have consciously stayed away from exotics (structured hedging tools)," says Karve. In other words, hedging is seen as a risk management tool at Marico rather than a profit-maximization one.
    On the sales front, Marico by dint of being an FMCG player, has a sharp focus on volumes as opposed to value. Ergo, increasing the consumer franchise is vital for the company. So it uses technology to do detailed sales planning, at both annual and quarterly levels. The planning is not focused on primary (sales by Marico to distributor) but on the secondary (sales by distributor to the retailer) level.
    Though the plan is done every quarter, the numbers are revisited with vigor month-on-month. "The shorter the planning bucket, the higher the granularity of planning and action for the fiscal," says Karve. For example, in the hair oil category, Marico's Parachute brand has performed lower than what the company expected in the first quarter of FY2013-14. It stood at 4% as compared to the average 7-8% growth. On scrutiny, it was found that the blip was on account of deflation in coconut oil prices. "Since it is important for us to get the consumer franchise back on track, we have made a tactical reduction in price of some of the SKUs of
    Parachute and believe that the measure will help
    offtake by another 3-4%," says Karve. Balancing Act
    Using a Test cricket analogy, the Marico man points out that it's important to play the session well without losing sight of the big score while coming up with such budgeting exercises. "Recently, we looked at our cost structure and questioned every line item since last year, since we would like to wage a war against any wastage in the system. It allows us to free up resources behind our brand-building efforts. In our annual and quarterly budgets, we plan for such savings because unless you plan, there won't be adequate pressure on the system to deliver."
A durable(s) solution
    
In consumer durables, a capital intensive industry with longer gestation than FMCG, planning is never static. At Whirlpool India, the annual budgeting exercise starts around July. By the end of the month, the top management conducts a strategic planning exercise where the P&L holders present their case. While the process does throw up some numbers, the real number-crunching takes place from August to November, since July is too early to take a call on currency or cost of goods.
    By September-October, the numbers that go to the parent in the US earlier in the year are updated. By November, the planning process is completed as expectations are out for the upcoming year. By March, the company looks at a formal exercise to scrutinize the plan that was executed in November.
    Shantanu Dasgupta, VP-Corporate Affairs & Strategy, Asia South, Whirlpool of India says that the planning exercise can be a double-edged sword. When the going is good, as witnessed in 2009 on the back of the 6th Pay Commission and excise cuts, profits soared, but nowadays as things look bleak with flattened toplines since 2011, structured planning can come in handy.
    In a capital-intensive industry, Whirlpool is cautious. Launching a completely new line of refrigerators can take as long as 12 months. However, the company doesn't want to commit so much as demand is low. But Dasgupta points out to a plethora of things that can be done without much capex. "You can do modifications on the model as you see consumers downtrading. The add-ons to the existing product line that can make them appealing," he says.
    Yet another way of triggering demand is that when the company budgets, it sets aside 5% of its revenues for advertising and promotions (A&P). But when growth comes down, it is advertising that takes a hit. "We don't cut below-the-line because that's where the action is," says Dasgupta. So questions such as merchandising spends and product and innovation spends weigh critically at such a juncture.
    Localisation also holds the key in times of duress. So the company has indigenized two popular models of washing machines that were imported.
    While it has developed a local supplier for one model, it will produce the other in its own factory as soon as moulds are delivered, also developed in record time. For the latter, Whirlpool has also done some value engineering that has enabled it to substantially reduce the material cost.
    Though it is a rolling budget for Whirlpool, company executives remain focused on the profit plan executed in November. Today, all categories in the durables space are declining. Since outcomes are becoming extremely difficult to project, Whirlpool does scenario planning, sticking to variables that are in its control. That implies costs are further scrutinized. "But you don't revise your numbers…by keeping your profit plan constant, you take a call after summer and have a new set of numbers to go through," says Dasgupta.
    With the added cost of importing materials, either the company can pass it on to consumers, difficult owing to widespread inflation, or absorb the costs. So though the PAT has taken a 23% dip over last year and the topline is down by 2%, Dasgupta claims to have strengthened his marketshare. "When times are bad, it is better to bite the bullet and wait for the business to revive," he says.
Stepping on the gas
    
At carmaker Maruti Suzuki, detailed sessions by P&L managers and the finance team formulates a draft budget before further discussions on it by the top management and board draws up the annual budget in December each year. "There may be a revision of the annual budget based upon volatile market conditions," says CFO Ajay Seth. He admits that though the company has been following the process for long, the revision didn't matter as much as over the last two years, owing to increased volatility.
    For Maruti, last year, the variation in forex was as much as 10% between what happened when it started the year with a rate of Yen/Rupee at 0.62, which moved to 0.70 in September. On the currency front, Maruti has three exposures: imports that come in to Maruti directly, the royalty payment made to parent Suzuki in yen and compensating vendors for the exchange variation of imports by them. That perhaps explains why it is pushing for localization. From 29% imports sometime back, last year, it came down to 20%. "At the same time, we're looking at increasing our exports in SAARC and the Middle East to eliminate risk," says Seth.
    Besides, the slowdown throws up other challenges for revision, where targets on costdowns, localization levels, value engineering and employees' suggestion schemes, and many more are considered. That's when the revision in plan takes place. The 5 working days a week, instead of the previous 6, which the company rolled out in May this year, was a product of such revision. Innovation, rather than conservatism, seems to be the new normal for budgeting during a downturn.

Moinak Mitra CDET130823

No comments: