The Global Downturn:
Chronicles of Cost-cutting Prowess
With a keen nose for ill tidings, Taiwan's SMEs have already gone into crisis mode in response to global economic doldrums. Four companies are readying their battle plans, preparing to wage a long-term war of resistance against rising costs.
Chronicles of Cost-cutting ProwessBy Hsiao-Wen Wang, Yi-Shan Chen
From CommonWealth Magazine (vol. 402 )
Jiu Zhen Nan Taiwan Pastry
Eliminating Waste at the Source
Amid growing signs of economic downturn, Jiu Zhen Nan, a Kaohsiung-based pastry maker with a history of more than a century, is something of the odd man out. Bucking the trends, it is opening a new location in Taipei.
Early this year, as market prices for flour, butter and packaging materials spiraled out of control, Jiu Zhen Nan president Eric Lee summoned his staff and laid the numbers before them: "Things are looking grim."
The first step forward for the group would be to raise the yield on products. According to Lee, the company's bakers were not such sticklers for precise measurements in their baking. For example, perhaps a recipe calls for each pineapple tart to weigh 30 grams, yet after imprecise measurement during preparation, they all weigh 35 grams. During the course of the day, Jiu Zhen Nan produces eight truckloads of pineapple tarts – more than 8,300 of them. Absent the five-gram discrepancy in measurement, an additional 1,387 pineapple tarts could have been made from the same amount of ingredients.
In addition to grappling with yield control, Jiu Zhen Nan is also looking to reduce packaging costs. For example, the company once individually wrapped its green bean buns in plastic, then placed the individually wrapped buns in a cardboard box. The company has since dispensed with the cardboard box and now uses KOP plastic bags with superior antioxidant properties, simplifying the packaging, becoming more environmentally friendly, and cutting costs too. Starting last year, Jiu Zhen Nan also began requesting that those taking deliveries in the Tainan area and points south begin to recycle the packaging crates from their shipments for reuse. Once the packaging materials have been used to their limit, Jiu Zhen Nan has even begun selling the remains to recyclers. At NT$5.5 per jin (about half kg), it's another source of income.
"Streamlining the packaging lets us minimize packaging materials, for which costs are rising anyway," Lee notes.
The third phase of Jiu Zhen Nan's cost controlling measures is keeping prices down by buying in bulk, using their buying power to negotiate the best deal possible with raw material suppliers. With butter, for example, earlier this year Lee negotiated with the key supplier to fix a unit price schedule on butter contingent on specific quantities purchased. The butter supplier secures guaranteed demand; Jiu Zhen Nan receives raw materials price stability in return. Both are winners in the end. Most recently Lee has taken to approaching his printers about importing his own paper stock, which he says will save him another 30 percent in costs.
"You have to pay attention to every detail to know where it is you can save," Lee says, as if squeezing blood from a stone.
U-Ming Marine Transport Corp
Riding Cash Flow through Dire Straits
Like a hunter stalking its prey, U-Ming President Wang Shu-ji tracks the China monster that last year sucked down half the world's iron ore supply. Yet despite U-Ming's after tax earnings of NT$5.6 billion and its near 47-percent growth in operating revenue reaching NT$9.2 billion in the first half of this year, Wang senses a weakening in growth in Chinese market demand and is looking to batten down the hatches.
"China's growth has slowed," Wang grumbles, adding that the current global economic slowdown is likely to continue for another year or so.
In response, U-Ming has raised its cash position, with Wang now managing a liquid fund of more than US$600 million. U-Ming has also reduced the ratio of its vessels engaged in spot order deliveries and has shifted more toward futures contracts of six months or more to lock in profits during these turbulent economic times.
"Retaining liquidity, signing long-term agreements; it all shows that nobody knows when the market might suddenly tank," says Tsao Poh-hsuan, an analyst with Capital Securities.
Things have been good throughout the shipping industry during the past two years. In May of this year amid rising fuel and materials costs across the shipping sector, the Baltic Dry Index, an index monitoring bulk dry shipping rates, reached 11,793 points as iron ore shipping rates set a new all-time high, and a daily leasing rate of US$300,000 for a coastal steamer ceased being the stuff of an outlandish tale from the Arabian Nights. With a wildly profitable 2008 beckoning, shipping companies have been turning to banks for financing for new ship construction and leasing.
"In the past when times were fat and financing was readily available, everybody invested heavily in fleet expansion," Wang says. "With the current financing situation much tighter, a lot of shipping companies could find themselves in financial crisis."
With financing tight and large-scale ship deliveries scheduled for the second half of next year, the global shipping industry is facing a situation of oversupply.
"When the time comes, it will be an opportunity for us to grab more market share," says Wang, with the confidence of one who has planned carefully.
TECO Electric & Machinery Co., Ltd.
Trimming the Fat
"We saved more than NT$100 million, but that's really nothing," enthuses TECO Electric & Machinery Co. chairman C.K. Liu, unable to conceal his pride. Despite worldwide inflation, soaring commodity prices for copper and steel and surging domestic energy prices in the first half of the year, internal operating costs at TECO, Taiwan's leading maker of electrical equipment, actually declined.
The impetus behind this decline is an internal TECO workgroup of less than 300 members known as the CRP (cost-reduction program). Personally directed by the chairman and president, the group meets weekly to scrutinize progress reports and has saved TECO NT$100 million over the past six months, about four percent of last year's total after-tax profits. The workgroup has set a goal of reducing costs by 30 percent this year.
The list of cost control issues that most concern businesses keeps growing, with the attendant details growing increasingly complex, causing bemusement in managers charged with cost-cutting duties. At TECO, however, such efforts are decidedly focused.
"LCD TVs and those other home electronics doing battle in the marketplace can't be squeezed for savings any further. Actually, heavy electric machinery, our most profitable sector, is where there's a lot of room for attack," Liu says, going out of his way to use the English word "attack" to describe the efforts of the CRP in confronting cost wastage as TECO's public enemy number one.
TECO targeted its fatted calf for its initial cost-cutting efforts, focusing on its highly profitable heavy machinery division, simultaneously going after the materials sourcing and design processes, the ultimate source of value.
The global price of copper, which can account for as much as 50 percent of the cost of electrical machinery, has risen four-fold in the past year to US$8,000 per ton, becoming a particularly vexing problem for the CRP staff.
The CRP centralizes purchasing/sourcing management and collectivizes price negotiation. It also chops production down into more modular segments to facilitate materials substitution in TECO's electric motor production, for example using, where feasible, aluminum rather than copper, as it is one quarter the price. Engineers charged with developing new motors, meanwhile, have accelerated the pace of the miniaturization of their designs, on the notion that the smaller the motor, the greater the savings on raw materials.
"Source management is the most effective," says TECO president Sophia Chiu, revealing that even evaluation reports for R&D personnel provide for an index for cost reductions.
Moving downstream along the value chain, TECO has also applied its cost-cutting touch to its various manufacturing processes.
All TECO plants now utilize highly efficient motors and energy-saving light bulbs. The company is also in the process of swapping out all its coal-fired smelting furnaces for cleaner-burning electric furnaces, using the new furnaces to recast the siliconized steel plates used in their electric motors, in the process saving further tens of millions of NT dollars in costs.
Consequently, even if the current economic crisis turns out to be what C.K. Liu calls a historically unprecedented "utter collapse," TECO, with its nimble cost-cutting abilities will be able to weather the storm.
Thinking against the Grain
Amid the splashy red decor and brightly lit dining rooms of Tasty Steakhouses recently, diners with kids need no longer order a separate NT$350 kids meal, yet waiters will still keep the sorbet and complimentary bread coming until the whole family is rubbing their bellies and exclaiming: "I'm stuffed!" Under the looming threat of declining numbers of dinner guests this summer, Tasty Steakhouse has opted to step up service as the way to add value.
Despite continually rising prices of flour and meat, Pintian Ranch, a new chain the Wang Group opened last year, has continued to develop innovative new dishes for its menu, from garlic teppanyaki chicken to cheesy meatballs, in a bid to add more value to its product line.
"One needs to think against the grain, and add value despite the economic downturn," says Pintian Ranch GM Hsiao Wen-jie.
Confronted with soaring food costs and tightening consumer wallets, Wang Group, Taiwan's biggest food service industry group, is steering a middle course between the two options of hiking prices or slashing them. Instead, it is insisting on a policy of "no price hikes, only value hikes."
Despite three consecutive years of weakening consumer sentiment – following the credit-debit card crisis of 2006, the surging oil prices of 2007 and the turbulent stock market of 2008 – Wang Group has bucked the trends and continued to expand and open new locations. Operating revenue was up 24 percent last year to NT$4.3 billion, and according to Wang Group chairman Steve Day, this is attributable to its chosen operating philosophy: "Ward off inflationary pressure, continually add value."
But the question bears continued repeating: short of raising prices, how can Wang Group maintain its fat eight-percent profit margin?
On this point, Day is supremely confident.
"Our profit margin this year will absolutely be on a par with last year," Day says with conviction.
Day's modus operandi is to take advantage of the economic downturn to cut premises rental/leasing costs by three percent and labor costs by two percent, all the while using collective purchasing leverage to keep food costs under control. For example, after protests in South Korea slammed the door on U.S. beef imports into that country, Day hustled to sign a one-year supply contract with the American suppliers, ensuring the beef costs will not be a drag on profitability this year. With these three cost-control targets, Day expects to maintain premises rental/leasing costs at 10 percent of total costs, personnel costs at 20 percent of the total and food/beverage costs at 30 percent of the total – the proverbial magic formula in the food and beverage industry.
With its cost controlling efforts and "no price hikes, only value hikes" philosophy, perhaps Wang Group's NT$5 billion operating revenue target for this year is not so far off the mark after all.
Translated from the Chinese by Brian Kennedy
Chinese Version: 中堅企業 下殺成本各顯神通