Question

Case Let Analysis:

Oman Commercial Vehicle Manufacturer Company is one of the largest companies in the Sultanate of Oman. It is the third-largest manufacturer of passenger cars. Extensive quality enhancement and cost reduction task was initiated in September 2018. The outcome of this task helped the company to reach a profit of 28 million while the loss in the year ended March 2017 was 500 million.

The company followed the cost cutting system and saved more than 300 million of the company’s expenses over the last two years. The positive turnaround of the cost-cutting resulted in huge money gain, which does not even go beyond the projection. The vice president of the company Mr. Ahmed, who is at the manufacturing, was given the title of “Cost-cutting champion”, and he oversee the entire initiative.

Four Specific Areas Were Identified

· Direct material costs (which constitute roughly 65 per cent of all costs);

· Variable conversion costs (power, fuel, water, tools, etc.);

· Fixed costs- (labour, marketing, corporate expenses, plant operations, research, and development).

· Financial restructuring (working capital, debt restructuring, balance sheet, etc.).

In order to implement, drive and monitor the across the organization, three teams are formed namely— members, leaders and champions. The teams focused on cost-cutting measures, getting back the company to financially stable. For better communication across the company, employees were co-opted.

In order to achieve quality management project goals and cost-cutting exercise, which go simultaneously, employees helped each other. More importantly, the message conveyed to the employees was cost cutting measures were no way cutting corners. The employees in the same teams were involved in both exercises. This resulted in many win-win situations.

Answer the Following Questions:

1. List and explain the roles of teams in the above case. Any four

2. Identify and explain the four specific areas that Mr. Ahmed identified and how this cost plays essential roles in reducing the expenses for the organization.

3. List and explain the roles of top management related to the above case. Any two.

Answer 1

Ans.1. As per the case, three teams were formed for the purpose of implementation of cost-cutting drive across the organization –

a. Members

b. Leaders

c. Champions

Their roles included:

A. Implementation of cost-cutting measures: This would be primary role of members as the ground staff is the actual one implementing the cost-cutting measures.

B. Cutting back losses and making the Company financially stable again : Here, the role of leaders and champions would be more than the members, since they would breakup the one big objective of saving 300 million into smaller targets, which could be communicated down the hierarchy for implementation.

C. Maintaining quality alongwith cost-cutting : Here again, the role of members and leaders is prime, to ensure that quality is not compromised in the aim to cut costs.

D. Measuring progress and motivating : This is primarily the role of the leaders and champions to measure the percentage of target achieved from time to time.

Ans.2. Four cost areas identified in the case are:

A. Direct material costs : This is the cost of raw materials used in production and varies directly with output. High output is necessary for higher revenues, however, if the per unit direct material cost and usage of raw materials is too high(avoidable usage), it will directly eat up a large chunk of the revenues, in the form of high production cost. Thus, controlling per unit cost of raw material and quantity of raw material used can lead to a huge difference in production cost (65% of total cost is raw materials cost in the question)

B. Variable conversion cost : These include variable expenses that are linked to production. Since these too vary with production, the difference they make to total costs is much more than fixed costs. Therefore, their careful usage affects the costs positively.

C. Fixed costs : Fixed costs are period costs that remain fixed over a period, for example, factory rent has to be paid irrespective of whether 10,000 units are produced or 100,000. So, these costs can be minimized by optimising production and reducing idle time. This way, fixed cost per unit can be reduced by trying to achieve the level of production that minimizes fixed cost per unit.

D. Financial restructuring : Financial expenses are expenses such as interest payments on long-term debts, bonds payable by the Company. These expenses can eat away the operating profit and turn any profitable business into loss-making. Therefore, financial restructuring such as changing the form of debt from high-interest bearing debt to low-interest bearing debt, paying off debt from time to time,etc, helps reduce financial costs thereby increasing net profit for the company.

Ans.3. The top management has several roles in the case in question. Two of them would be :

A. Planning : In order to achieve the turnaround objective,the top management focused on the problem area and developed detailed plan to be implemented for achieving the set target.

B. Communication : The top management laid down teams structure, communicating the same to the bottom – most level and engaged the entire organisation in achieving the target.

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