Online Open Access publishing platform for Management Research Copyright by the authors - Licensee IPA- Under Creative Commons license 3.0 Research Article ISSN 2229 3795 Cost optimization strategies for food and beverages industries, India Department of Commerce, Gulbarga University, Gulbarga 585 106, India shivarajhutti@yahoo.com ABSTRACT Recently cost optimization has attracted the interest of researchers as well as academicians across the globe on account of global economic meltdown. Many Indian companies have adopted cost cutting strategies to manage downturn claiming the same as cost optimization strategies. They have misunderstood the cost optimization concept. Cost optimization is not a one-time exercise. It is a continuous process and it aims at taking holistic view about various functional areas of management, identifying waste, potential areas of improvement, etc without compromising on quality of product. Presently, the Food and Beverage Industry is passing through a difficult phase due to raising raw-material prices, transportation cost, power cut, stiff competition between players etc. In the light of this development an effort has been made to understand cost optimization strategies do adopted by Food and Beverage Industry. Nestle Indian Ltd. has been selected for the purpose of study. The period of study is restricted from 2006-07 to 2010-11. Keywords: Optimization, food, raw material, cost, products. 1. Introduction Food and Beverage industry in India is considered as sunrise industry. The Nestle India Ltd. is one of the leading manufacturers of food and beverage in India. Nestle India Ltd was established in the year 1956. The company set up their first production facility in the year 1961 at Moga in Punjab. In the year 1967, they set up their second plant at Choladi in Tamil Nadu as a pilot plant to process the tea grown in the area into soluble tea. In the year 1989, they set up a factory at Nanjangud in Karnataka. In the year 1990, the company entered into the chocolate business by introducing Nestle Premium Chocolate. In the year 1991. Cost optimization is a discipline that includes the business practices and business strategies relating to reducing total cost of operation. Recently cost optimization has attracted the interest of business enterprise across the globe on account of global economic meltdown. Many Indian companies have adopted cost optimization practices to manage downturn. Cost optimization is not a one-time exercise. It is a continuous process and it aims at taking holistic view about various functional areas of management, identifying waste, potential areas of improvement, etc without compromising on quality of product. Presently, the Food and Beverage Industry is passing through a difficult phase due to raising raw-material prices, transportation cost, stiff competition between players, etc. In the light of this development an effort has been made to understand cost optimization strategies do adopted by Food and Beverage Industry. Nestle India Ltd. has been selected for the purpose of study. 1.1 Concept of cost optimization 345
In order to understand cost optimization concept one should understand cost reduction and cost control are old style of cost management. Now cost management especially in necessary trend of business cost optimization is one of the best styles to adopt. Hence an attempt is made here explain the terms of Cost Reduction, Cost control and Cost optimization. 1.1.1 Cost reduction Cost reduction may be defined as the achievement of Real and Permanent Reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product. Cost reduction, should therefore, not be confused with cost saving and cost control. Cost saving could be a temporary affair and may be at the cost of quality. Cost reduction implies the retention of essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the costs of manufacture, administration, distribution and selling, brought about by elimination of wasteful and inessential elements form the design of the product and from the techniques and practices carried out in connection therewith. 1.1.2 Cost Control The chartered Institute of management accountants, London defines Cost control as; The regulation by executive action of the cost of operating an undertaking particularly where such action is guided by cost-accounting. Cost control aims at reducing inefficiencies and wastages and setting up predetermined costs and achieving them. 1.1.3 Cost optimization Cost optimization can be defined as value achievement with minimum cost. Recently the cost optimization has attracted the interest of corporate across the world because of global financial crises and Euro crises. 2. Review of literature 1. Aziz Moallen (2006): Examined the optimization of cost of production line of a factory and developed a algorithm solution for the same. 2. Mittel. P.K. et. al. (2007): Examined the issue relating to cost optimization in cement industry and suggested a approach and frame work for an effective study for achieving the benefits. 3. Neetha Bapurikar (2012): in her study attempted to develop approaches to building competitive advantage which in turn help in reducing strategic cost in financial services institutions. According to her firm that make the organizational commitment, to design, implement and monitory are strategic cost reduction programme can achieve dramatic increased in efficiency. 4. Saurine Doshi et. al. (2009): of the view that controlling the total delivered cost of products is key to profitability. He has suggested that the company should adopt strategic sourcing, re-designing distribution networks, etc. to achieve cost optimization objectives. 2.1 Research Gap After reviewing the above literature on cost optimization and cost reduction we came to know that several studies have been undertaken on the topic. But so far else no study has been 346
conducted on cost optimization in food industry in India. This has encouraged the researchers to select the present topic 3. Objectives of study 1. To understand the level of awareness about cost optimization concept among employees of Nestle India Ltd. 2. To know the various cost optimization methods and techniques that has been adopted by Nestle India Ltd. 3. To offer suggestions for cost optimization at Nestle India Ltd. 3.1 Methodology The study period is restricted to 2006-07 to 2010-11. The study is descriptive in nature. The data for study has been collected from primary sources as well as secondary sources. The primary source of information includes interaction with Human Resource Manager of Nestle India Ltd. Nanjanagud plant in Karnataka. The secondary sources include research articles, website, journals of Accounting and Finance, Management Accounting, Indian journal of finance, Business line and Economic Times. The data collected has been analyzed by using percentage method. 3.2 Data analysis and results The Nestle India Ltd is producing different variety of food and beverage products. The researcher has selected chocolate for the purpose of study. The detail of consumption of various raw materials has been presented in table-1. Figure: 1: Flow methodology for cost optimization strategies 347
Table: 1. Overall consumption of raw-material at Nestle India Ltd. Raw-material consumption (Rs. in crores) Total Milk Vegetable Sugar Glucose Cocoa Flavor Oil Powder 2006-2007 554.06 126.84 69.56 13.07 10.65 07.03 781.21 2007-2008 599.92 190.25 85.45 14.86 11.85 10.12 912.45 2008-2009 700.53 166.18 142.78 17.07 16.80 09.52 1052.88 2009-2010 886.98 206.24 200.33 31.64 28.74 10.46 1364.39 2010-2011 896.76 322.85 186.29 37.02 26.09 9.42 1478.48 The table-1 reveals that the milk is major component of chocolate consisting of 71 percentage of total cost in 2006-07 which decreased to 66 percentages in 2008-09 again decreased to 61 percentages in 2010-11. It clearly indicates that the company has initiated measures for cost optimization. The percentages of glucose in total cost were on an average 2 percentage p.a. The percentage share of cocoa powder was 1.67 percentage p.a., whereas the flavor cost is 1 percentage p.a. The percentage share of vegetable oil in total cost was 16 percentages in 2006-07 and 2008-09 which increased to 29 percentages in 2010-11. The percentage share of sugar in total cost was 9 percentages in 2006-07 which increased to 14 percentages in 2008-09 and decreased to 13 percentages in 2010-11. 3.3 Production of food and beverage products The details of overall production of food and beverage products manufacture by Nestle India Ltd., is given in table-2. The table-2 exhibits that the percentage share of chocolate in total output was 13 percentages in 2006-07 which decreased to 12 percentages in 2010-11. The major products produced by Nestle India Ltd. Includes cocking dishes, milk products, followed by chocolate. Table 2: Overall production of food and beverage products manufactured by Nestle India Ltd. (to find out cost per kg chocolate) Milk Cooking dishes Beverages Chocolate Other milk product Total 2006-2007 67635 100064 24951 36211 43415 272276 2007-2008 12288 130107 24203 41413-208011 2008-2009 117666 156601 23031 44438-341736 2009-2010 125026 194583 26478 54285-400372 2010-2011 126715 220153 26736 51869-425473 3.4 Overall production of food and beverage The details of overall productions of various products manufactured by Nestle India Ltd., are presented in table-3, the table- is self explanatory. The table-3 has been prepared in order to find out cost per kg of Glucose, Flavor, Milk & Vegetable oil. 348
Table 3: Overall production of milk products, chocolate and other milk products (to find out cost per kg of glucose and flavor) Milk Chocolate Other milk product Total 2006-2007 67635 36211 43415 147261 2007-2008 12288 41413-161701 2008-2009 117666 44438-162104 2009-2010 125026 54285-179311 2010-2011 126715 51869-178584 3.5 Overall production of food and beverage The table 4 has been prepared find out cost of vegetable oil and table 4 is self explanatory. Table 4: Overall production (to find out cost per kg of vegetable oil) Milk Cooking dishes Chocolate Other milk product Total 2006-2007 67635 100064 36211 43415 247325 2007-2008 12288 130107 41413-293808 2008-2009 117666 156601 44438-318705 2009-2010 125026 194583 54285-373894 2010-2011 126715 220153 51869-398737 3.6 Individual cost components Sugar is the major raw material required for producing chocolate. The details cost per kg sugar consumed is given in table 5. Sugar Consumption Table 5: Cost per kg of sugar Sugar Cost per kg 2006-2007 69.56 276763108.5 2.50 2007-2008 85.45 211439021.3 4.00 2008-2009 142.78 347367809.3 4.10 2009-2010 200.33 406970130.6 4.90 2010-2011 186.29 432484795 4.35 The table 5 demonstrates that Nestle India Ltd. has spent Rs. 2.50 per kg to manufacture various food and beverage products. The cost per kg of sugar increase to Rs. 4.90 per kg in 2009-10 which decreased to Rs. 4.35 per kg in 2010-11. It clearly gives an indication that the company needs to adopt cost optimization strategies in ordered to improve productivity and to reduce cost of sugar. 349
3.7 Cocoa is another major raw material uses to manufacture chocolate and other products. The details of cocoa cost per kg are highlighted in table 6. Cocoa Consumption Table 6: Cost per kg of cocoa Cocoa Cost per kg 2006-2007 10.65 276763108.5 0.40 2007-2008 11.85 211439021.3 0.60 2008-2009 16.80 347367809.3 0.50 2009-2010 28.74 406970130.6 0.70 2010-2011 26.09 432484795 0.60 It is clear from table-6 that the cost per kg of cocoa was Rs.0.40 in 2006-07 which increase to Rs.0.60 in 2010-11. The slight increased in cost of cocoa due to inflationary factor can be justifiable and admissible. 3.8 Glucose is another raw material uses to manufacture chocolate and other products. The details of glucose cost per kg are highlighted in table 7. Glucose Consumption Table 7: Cost per kg of glucose Glucose Cost per kg 2006-2007 13.07 149687861.3 0.90 2007-2008 14.86 164365832.5 0.90 2008-2009 17.07 164775473.9 1.00 2009-2010 31.64 182266045.3 1.75 2010-2011 37.02 181527064.3 2.00 The table 7 reveals that company has spent Rs. 0.90 per kg to produce chocolate in 2006-07 which increased to Rs.2.00 in 2010-11. It clearly indicates, there is ample scope for cost optimization. Company should explore possibility of cost optimization in ordered to minimize cost of glucose. 3.9 Flavor is another raw material uses to manufacture chocolate and other products. The details of flavor cost per kg are highlighted in table 8. 350
Cost optimization strategies for food and beverages industries, India Flavor Consumption Table 8: Cost per kg of flavor Flavor Cost per kg 2006-2007 7.03 149687861.3 0.50 2007-2008 10.12 164365832.5 0.65 2008-2009 9.52 164775473.9 0.60 2009-2010 10.46 182266045.3 0.60 2010-2011 9.42 181527064.3 0.55 The cost per kg of flavor was Rs.0.50 in 2006-07 which increased to Rs. 0.55 per kg in 2010-11. Keeping in mind the inflation rate the slight increase in cost of flavor cannot be questionable. 3.10 Milk is another major raw material uses to manufacture chocolate and other products. The details of milk cost per kg are highlighted in table 9 Milk Consumption Table 9: Cost per kg of milk Milk Cost per kg 2006-2007 554.06 149687861.3 37 2007-2008 599.92 164365832.5 36.5 2008-2009 700.53 164775473.9 42.5 2009-2010 886.98 182266045.3 48.70 2010-2011 896.76 181527064.3 49.40 It is evident from table-9 that cost of milk has increased tremendously over period of time 2006-07. The cost per kg was Rs.37 which increased to Rs.49.40 per kg in 2010-11 increase of 33.5 percentage. The data analyze of table-1 reveals that overall cost of milk has decreased from year to year basis. Where the table-8 has reveals that the cost per kg of milk consumption has increased from year to year basis. It clearly indicates that the company has initiated the measures of cost optimization to reduce overall cost of milk consumption without focusing on cost per kg of milk consumption. 3.11 Vegetable oil is another raw material uses to manufacture chocolate and other products. The details of vegetable oil cost per kg are highlighted in table-10. Table 10: Cost per kg of vegetable oil Vegetable Oil Consumption (Rs. In Crores) (in Kgs) Vegetable Oil Cost per Kg 2006-2007 126.84 251400916 5.00 2007-2008 190.25 298649955.8 6.40 2008-2009 166.18 323957258.4 5.15 351
2009-2010 206.24 380055773.1 5.45 2010-2011 322.85 405308185.8 8.00 The table-10 exhibits that the cost of vegetable oil has increased by 60 percentages in 2010-11 compared to 2006-07. The company needs to design cost optimization strategies to control cost of vegetable oil. Table 11: Other manufacturing cost per kg of output Item 2007 2008 2009 2010 2011 Power & Fuel Cost 4.50 7.56 4.57 5.39 6.84 Employee Cost 9.50 14.52 12.22 10.39 12.29 0ther Man. Expenses 13.76 22.53 14.26 15.90 17.88 Selling & Administration Expenses 21.63 34.21 26.12 26.63 28.90 Miscellaneous Expenses 4.04 3.50 2.51 1.91 3.36 Total 53.41 82.31 59.68 60.22 69.26 The table-11 focuses on the other cost of manufacture. The power cost has increased to 52 percentage in 2010-11 compared to 2006-07. Employees cost increased to 29 percentages 2010-11 compared to 2006-07. The selling and administration expenses increased to 34 percentages during same period. Table 12: Total manufacturing cost per kg of output (chocolate) Item 2007 2008 2009 2010 2011 Raw Material Cost 46.3 49 53.85 62 64.85 Other Cost 53.41 82.31 59.68 60.22 69.26 Total Cost per kg 99.71 131.31 113.53 122.22 134.11 Source: Nestle India Company Ltd annual reports 2006-07 to 2010-11 The table-12 demonstrates that the overall cost of manufacturing chocolate has increased by 35 percentage compared to base year. The company needs to take suitable measures in the respective operational areas i.e., sales, HR, inventory management, administration etc., in ordered to reduce overall cost of manufacturing. 4. Findings The discussion with human resource manager and production manager the researchers came to know that the procurement process of milk and utilization process of milk in producing chocolate has been standardized. This has helped the company to minimize cost of milk in producing chocolate which in turn contributed for improvement in profitability business. 5. Conclusion 1. The study reveals that overall cost of vegetable oil and sugar as increased during the study period. 352
2. The study also reveals that the cost per kg of milk as increased by 33.5 percentage during the study period. 3. It is evident from data analysis that the cost of power, employees, selling and administration expenses as increased in 2010-11 compared 2006-07. 6. References 1. Aziz Moallem., (2006), Cost optimization in production line: A genetic algorithm approach, University of Tehran, Fall 2006, pp 13-16. 2. P K Mittal, Kamal Kumar, S. S. Gupta, Dinesh Satija and Ajay Chaudhary., (2007), Performance enhancement through cost optimisation, http://www.holtecnet.com /web/content/references/technicalpapers/p_2007_2.pdf, pp 7-8. 3. Neeta Baporikar.,(2012), Strategic Cost reduction in financial services building competitive advantage, Journal of accounting and finance, 26(2), pp 12-24. 4. Saurine Doshi, Hemant Kalbag, Kaushika Madhavan and Jagannath Prasad., (2009), Total cost optimization reducing total delivered costs through improved production and distribution planning, AT KEARNEY, Inc. 5. http://www.nestle.in/company website accessed on 13/08/2012, accessed during November 2012. 6. Tutor system, available at www.transtutor.com, United States, website accessed on 19/06/2012, accessed during October 2012. 7. Cost reduction and control techniques, available at www.scribid.com/ doi25704284/costreductionandcontroltechniques/, website accessed on October 2012. 353