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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.
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