Reference no: EM13246344

Tata Iron and Steel Company (TISCO) was established in 1907 by J N Tata1 at Jamshedpur in Bihar, India. TISCO offered a wide range of products and services including hot rolled/Cold rolled (HR/CR) coils and sheets, tubes, construction bars, forging quality steel, rods, structurals, strips and bearings. It also manufactured material handling equipment, Ferro alloys and other minerals, software for process controls, and offered cargo-handling services.

In the early 1980s, TISCO initiated a modernization program of its steel plant. Explaining the need of modernization, J J Irani, the then managing director of TISCO said, "We would have been finished otherwise... you cannot fight a modern-day war with weapons of the Mahabharata. We would have been annihilated had we not modernized. We realized this and embarked on the four phases of modernization. We addressed our drawbacks like the steel making process, which is our weakest link." By mid-1990s, TISCO had become India's most cost-effective steel plant. It also became Asia's first and India's largest, integrated steel producer (ISP) in the private sector. By 2000, eight divisions of Tata Steel were ISO-14001 certified, including Noamundi Iron Operations, West Bokaro Collieries, Ferro Alloy Plant, Joda, Sukinda Chromite Mines, Joda East Iron Mines, Tubes Division, and Growth Shop & Steel Works. By early 2000, TISCO had completed four phases of the modernization programme with an investment of about Rs 60 billion. The company had invested Rs 4 billion on consultancy fees during 1990 to 2000. The fifth phase of the program had commenced in April 2000.

By April 2001, TISCO had emerged as the world's lowest cost producer of steel. TISCO's operating cost at the 'hot metal' (liquid) stage was $75 per tonne. The company's cost per tonne of finished steel stood at $152 for the financial year ending March 2001. The World Steel Dynamics (WSD), in a report stated, "Tata Steel is a 'world class' steel maker - the only in India - and one of the few companies in the world with such a standing. This view point is based on a variety of reasons such as low operating costs, special company culture, good profitability, etc." WSD identified 12 companies as World Class Steel Makers, and ranked them based on certain factors. Analysts felt that TISCO's achievement of becoming the lowest cost producer of steel was mostly attributed to its implementation of TOP (Total Operational Performance), a program that focused on improving TISCO's operational practices and rationalizing procurement costs.

THE 'TOP' PROGRAM

In the early 1990s, TISCO appointed McKinsey and Booz-Allen & Hamilton to study its operations and suggest ways to cut costs. Irani explained the rationale, "Cost-cutting measures are more important in the present situation where one can no longer control

steel prices which are dictated by international markets." The consultants suggested TISCO to focus on various components affecting the cost of steel, which included cost of raw materials, cost of conversion, fuel rate in the blast furnace and mining of coal. TISCO was advised to use the most modern technologies to cut costs further. In the second half of 1998, in association with McKinsey, TISCO implemented total operational performance "TOP program" at its G blast furnace. TOP was widely regarded, as a program, which would have a maximum positive impact to the bottom line, with minimum investment, required in minimum time. It aimed achieving large improvements in throughput, quality and cost in the short term. In the long run, TOP was expected to enable the TISCO to achieve high rates of performance improvement. Since TISCO's scale of operations was quite large, the whole organization was divided into manageable 'units' to facilitate the implementation of TOP. A unit team was formed comprising a unit leader and two facilitators. Initially, McKinsey provided the facilitators. The unit leader was responsible for the performance of that particular unit. The team worked full time on the TOP program for a period of 12 weeks. Around eight units were addressed simultaneously during the 12 weeks, and this was also known as 'Wave.' The entire Wave was divided into five phases. The unit team's objective was to explore ideas to reduce the cost or delays made by the unit by about 40%. In the process, the team was expected to identify and understand how each cost element could be reduced. The team had to establish relationships between key performance indicators and the elements that had an impact on these key performance indicators. Each team was asked to set itself a target based on the TOP norms; develop ideas to improve from the present level of performance to the target level; and implement those ideas to improve the system. The Phase I of a Wave was two weeks long. During this phase, the cost base was examined and the items that had a maximum impact on the bottom-line were identified. Individual components of the larger cost elements were identified by drawing cost trees.

The cost elements, which could be reduced, were highlighted and the reduction targets were set. In the Phase II of the Wave, ideas were explored to reach the set targets. At the G blast furnace, throughput and fuel costs were identified as the key performance indicators in the Phase II. Among the different individual components of fuel costs, coke and coal were the largest cost elements. They accounted for about 50% of the total costs. A reduction target was set to bring costs down to 570 kgs per ton from 610 kgs per ton. In the Phase III of the Wave, ideas were generated to achieve the target output of 3800 tons per day. Considering the techno-economic feasibility, 36 ideas were short-listed. The ideas were then grouped based on the capital expenditure required for implementing each idea. The Phase IV of the Wave started with the implementation of these ideas. The G blast furnace also implemented 185 ideas, which did not require any capital investment. By March 1999, the G blast furnace achieved a savings of Rs 87 million against the targeted savings of Rs 40 million. TISCO set up a potential savings target for its G blast furnace at about Rs 300 million per annum, accounting for more than 10% of its profits in the fiscal 1999. By late 1999, TOP was in Phase V of the Wave. In 2000, similar Waves were also adopted in TISCO's shop floors. The TOP program had helped TISCO to shift its focus from just producing volumes to costs and quality. Moreover, TOP enabled TISCO to improve customer satisfaction and loyalty.

IMPLEMENTING BEST PRACTICES

In 1999-2001, TISCO took measures to reduce costs further by adopting innovatõsrx.øi5nd other cost-cutting exercises. For example, TISCO stopped using manganese, an expensive metal used to increase the strength and flexibility of steel. The company made efforts to reduce its product delivery time from 3-4 weeks in 1998 to 2 weeks in 2000. The company aimed to further reduce the time to one week.

TISCO also took steps to reduce its manpower costs. Between 1996 and 2000, TISCO reduced its workforce from 78,000 to 40,000 employees. Analysts opined that cutting its workforce by 38,000 employees was not an easy job and the company was able to do it with a lot of communication with employees. TISCO had adopted Performance Ethic Programme (PEP), under which, it planned to promote hardworking young people to higher positions depending on their performance, rather than following the convention of seniority. This exercise was expected to cut the management staff from 4000 to 3000. PEP had two core elements. Firstly, it proposed a new organizational structure, which was expected to foster growth in businesses, introduce more decision-making flexibility, clear accountability, and encourage teamwork among the managers and the workforce. Secondly, PEP proposed to introduce a Performance Management System (PMS). It would identify and reward strong performers, and also offer development opportunities for each employee. PMS would also ensure that every employee's job profile was clearly defined. By introducing PMS, TISCO wanted to make performance appraisals transparent and fair and reward the good performers. The company also planned to introduce a new compensation package based on performance from November 2001. Muthuraman explained the benefits of PEP, "Youngsters are getting higher salary than some of the seniors, and after the restructuring, the average age of the managers has fallen by 10 years. Through PEP, TISCO also reduced the hierarchical levels from 13 to 5." In a bid to reduce costs further, TISCO used IT as a strategic tool. In 1999, the company formed a small cross-functional in-house team consisting of consultants from Arthur D Little and IBM Global Services. The team was responsible for re-designing two core business processes - order generation and fulfillment and marketing development. The program began with a study on cost-competitiveness. The aim of the program was to enhance customer focus enabling better credit control and reduction of stocks, thereby reducing the costs. After considering several packages, the team decided to use SAP R/3. TISCO wanted the team - also known as ASSET (Achieve Success through SAP Enabled Transformation) - to integrate SAP into the existing information system and make it compatible with future SAP implementations. After SAP solutions were introduced in TISCO, the business processes became more efficient. It also improved customer

service and productivity, and reduced costs. The introduction of SAP also decreased manpower cost from more than US $ 200 per ton in 1998 to about US $ 140 per ton in 2000. There was a significant reduction in inventory the carrying cost, from Rs 190 per ton in 1999 to Rs 155 per ton by 2000. There were also significant cost savings through efficient management of resources.

THE FUTURE

Analysts felt that TISCO's modernization program was very successful. The Steel Authority of India Ltd. (SAIL) adopted a similar program with an investment of Rs 70 billion. However, the program was not successful. In contrast, in spite of the depressed market and lower margins, the decrease in the production costs enabled TISCO to achieve a profit after tax of Rs 5.53 billion in 2000-2001, and Rs 4.22 billion in 1999-2000 compared to Rs 2.82 billion during 1998-99.

TISCO planned to enter new areas including setting up of a 0.1 million-ton Ferro chrome export oriented project. The project was planned in Australia because of the lower power costs. TISCO was to get power at a tariff of 1.8 cents for about 15 years that is about one-fifth of the tariffs in India. Power accounted for 60% of the cost of Ferro chrome manufacturing. TISCO was also planning to enter titanium mining through alliances with major global companies. To provide employment to the employees opting for VRS at over-manned units, TISCO planned to enter the call center business in Jamshedpur. To develop this business, TISCO entered into a marketing alliance with Tata International, the trading arm of Tata Group. TISCO also planned to exit from some of its non-core activities.

Critics felt that TISCO might face problems due to the decrease in demand for steel in the global and local markets and increasing competition from cheap imports, and anti-dumping duties imposed on the domestic steel manufacturers by the US. They felt that it was doubtful whether steel, would deliver returns higher than the cost of capital in India. However, some analysts remarked that in the long run, TISCO's strategy to export to Jordan, Iraq and the Southeast Asian countries might reduce dependence on the US

markets thus helping the company. They said that its entry into value-added products was expected to safeguard the company from the fluctuations in the steel prices.

1. TOP was described as "maximum impact to the bottomline, with minimum investment, in the minimum time". What was the rationale behind the implementation of TOP?

2. Briefly analyze the TOP and explain the advantages of TOP?

3. The cost-cutting measures seemed to have helped TISCO to a large extent. Apart from TOP, what are the other steps taken by TISCO for reducing costs?

4. The lowered production costs enabled TISCO to record a profit during 1999-2000, despite a depressed market and low margins. Do you think the low costs would help the company in the long run?