Maintaining competitiveness : how do companies reduce their costs?

Enterprises are increasingly facing rising costs of production while their markets become more and more competitive. As a result, companies have to struggle to survive. How do they manage to optimise their costs?

The minimum wage, salary compensation, payroll taxes, rising cost of raw materials, interest on loans and overdrafts, marketing budgets,  premiums for retaining competent staff, all these are taking their toll on enterprises in an increasingly competitive environment. The worst affected are small and medium enterprises. Entrepreneurs constantly need to innovate, improve their management methods and review the entire production process. To maintain competitiveness, they cannot always play on their price so they have to concentrate on reducing costs. But is it always possible?

Companies, large and small, are adopting more and more drastic measures to contain costs. Dhaneshwar Sarjua, director of Conserverie Sarjua Internationale Ltée, tells us it is not always easy to cut costs. “For some factors, yes, it’s possible, but for others, no. For example, the cost of labour, with the minimum wage, is set by the authorities,” says the entrepreneur. He explains that in addition to the minimum wage, one must also add the cost of the bonus, paid holidays, forced holidays, for example because of bad weather, social contributions and especially public holiday rates. “There are unnecessary public holidays that have a cost. I do not understand the usefulness of a holiday to commemorate the past. We must stop looking back and instead look towards the future,” says Dhaneshwar Sarjua. He believes that the State should not force entrepreneurs and workers to stay idle. Events can always be commemorated without stopping work. “Those who want to absent from work are free to do so, but those who want to work must be able to do so. We lose two days each year for these unnecessary holidays.” Dhaneshwar Sarjua adds that business costs increase because of public holidays. He concludes that young entrepreneurs need a mentoring service to help them learn how to reduce costs and remain competitive, but it is not academics who can provide mentoring, but rather seasoned entrepreneurs with years of experience.

Amar Deerpalsingh, chairman of the Federation of Small and Medium Enterprises, says that an entrepreneur can reduce costs only if he manages to generate productivity gains. According to him, one cannot reduce costs in all circumstances, because each sector of activity has its own specificity. In general, he believes that entrepreneurs have some limited means to tackle production costs.

First, entrepreneurs may negotiate directly with their suppliers, eliminating the middlemen, in order to save on purchase price. Then, at the production level, the company can try to optimise its labour costs. “Labour is expensive, especially with the minimum wage. We are not asking workers to work more, but rather to work smarter. The ‘Work Smart’ concept is now in place,” he says. Next, the company can improve its planning and management of resources. “For example, if a company has to make deliveries, it ensures that an entire region is covered the same day, to optimize on vehicle use.” There is also the adoption of new technology, to increase efficiency and productivity, thus lowering operating costs. “The entrepreneur tries to invest in new production tools, though it is costly, it is advantageous in the long run.” The reorganisation of the administrative system is essential because a worker cannot waste too much time doing unproductive administrative tasks. “You must be able to give more productive work to employees.”
Amar Deerpalsingh explains that some skills can be shared with other companies, in order to reduce costs. At the production level, there is also the option of outsourcing, which is cheaper. Another way to reduce costs is to relocate to other places where cost of production is lower, or to import semi-finished products and complete the production cycle in Mauritius.

Marc Hill : “Competitive does not always mean being the least expensive”

News on Sunday asks Mark Hill, CEO of Apollo Blake Ltd, a company engaged in the ICT/BPO sector in Mauritius, how enterprises in this sector manage to reduce their costs to remain competitive. He replies that enterprises reduce their costs by identifying areas to improve efficiencies.  This can be any cost: transportation, facilities, marketing, etc.

“It is a great question and something very important to operating any business.  Running efficiently is an absolute requirement.  However, there are other methods besides simply reducing costs in which companies can remain competitive and/or rise above their competition: value.” He cites an example to illustrate his views: 
You may pay Rs 100 for a screwdriver, as opposed to another priced at Rs 250. At first, the decision may seem easy; of course, why spend more for a simple screwdriver?  

But then you go home, use it a couple times, and then find that the handle breaks and the screwdriver is then useless. Now you go back to the store and do what?  Purchase the “cheap” screwdriver again?  Or do you buy the more expensive and perhaps “better” quality one? So – exactly what did you save?  As a consumer?  And what did you tell your friends?  And what feedback did the store owner receive after many people return complaining of the cheap product.

To be competitive, he says, does not always mean being the least expensive.  Yes – all businesses want to be efficient.  But simply slashing costs is not the answer.  It must be balanced between the quality of the product/service and the market. In the BPO sector, Mauritius cannot compete simply on price.  There are just too many locations/regions around the globe that can provide services cheaper.  However, Mauritius can provide a quality of service in several specific areas of the BPO sector much better than the rest of the competition.

“At Apollo Blake, we provide superior services.  Based on just pricing – we can be undercut.  But then – our delivery of service is far superior. In the end – as the old saying goes: you get what you pay for.  Some services and products can be managed on simply a cost level – but many should not,” concludes Mark Hill.

Antish Bhowaneedin, Director of Fairy Textiles, explains how the advent of the minimum wage has affected his business. He says he is not against the minimum wage, because the workers must have their due, but he disagrees with the way the minimum wage was introduced. “There was a lack of communication. Companies heard one version and the workers another. Our workers even went on strike because their expectations were different from what the authorities proposed. This made me lose orders from abroad because our foreign customers follow the news and ask questions.” He says it is very difficult to reduce operating costs because all inputs are becoming expensive. The alternative is to increase the price of products, but it can scare away customers. “We cannot raise price on repeat ordersm but we can try to play on new orders.” Finally, he opted for the abolition of overtime and now refuses orders with low margins. 

Antish Bhowaneedin reveals that many SMEs have closed down because they are no longer competitive. He fears for the future of SMEs in Mauritius. Factories will be compelled to move elsewhere if they lose competitiveness. “Even banks are reluctant to finance companies engaged in textiles,” he says.

Injustice and inequality

With the liberalisation of the market, local producers feel they are victims of injustice and inequality, says Amar Deerpalsingh. According to him, local producers must incur a lot of costs in order to meet strict norms and standards imposed by the authorities, while importers can flood the market with low-end products, without being worried about standards. “Some imported products constitute unfair competition because they are not subject to the same quality controls.” He mentions another example: A local manufacturer who uses sugar as raw material is affected by the tax on sugar, but the one who imports the same product is able to avoid this tax.