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S. Muralidhar

CHENNAI, April 21

FOR a company that was dogged by labour problems just two years ago, the inside story of how Maruti Udyog Ltd (MUL) turned around and got back into the black during 2001-02, is punctuated by its successes in raising labour productivity, production quality and consequently lower costs.

Despite higher outlays for launching the new businesses of car finance, lease and fleet management services for companies, dealing in pre-owned cars and a network of call centres, Maruti has managed to turn around largely due to the huge savings generated by improvements in quality and productivity.

The turnaround achieved by Maruti suggests that superior quality can lead to lower costs, unlike the traditional premise that a reduction in costs means a drop in quality levels. A detailed analysis of the company's in-house performance parameters is revealing.

For instance, Maruti's in-house warranty cost per vehicle has come down by a whopping 83 per cent. This, of course, has contributed straight to the company's bottomline.

It shows that improved quality translates into lower cost and better competitiveness. Similarly, average defects per vehicle have moved down from 2.35 defects per vehicle in 1999-2000 to 2.26 in 2000-01and to 0.45 in 2001-02. On another parameter, the company's internal index for cost of process rejection has dipped from 75 and 100 in 1999-2000 and 2000-01 respectively to 30 in 2001-02.

In direct pass rate (DPR), a major quality parameter, Maruti has achieved a sharp improvement in the past year. From an average of 19.5 per cent in 2000-01, the DPR has gone up to 80.3 per cent in March 2002. The higher rate has come about because of Maruti's recent emphasis on "doing it right the first time" on the production line. With a high DPR, Maruti has achieved a higher final quality of the cars without having to work on them beyond the production line. Another indicator is the number of people involved in post-production repairs. From an earlier level of 20 Maruti employees deployed in the repair area beyond the production line, there are now only two.

Take the parameter of hours per vehicle (HPV). This parameter is used by the car industry globally to assess productivity. There has been a steady reduction in Maruti's HPV during the year. It is down 31 per cent compared to the start of the year 2001-02.

There is another indicator of how labour productivity has improved at the country's leading car company. Today, Maruti has as many employees in production as it did in September 1994. The number of cars the company produces now however, is two-and-a-half times the number in September 1994. The average attendance rate of MUL employees, which was around 91 per cent until last year, also went up to 97 per cent in 2001-02, the officials added.

MUL officials also said that the cost rationalisation efforts also involved, what the company calls, aggressive value analysis and value engineering (VA-VE). Together with its vendor partners, the company identified areas where costs could be reduced through superior engineering. Maruti also negotiated and secured favourable interest rates and launched an effective system of performance-linked promotion and remuneration for executives and managers during 2001-02.

Another area where Maruti managed to cut costs was procurement. By streamlining procurement and stocking of materials and components through its `Delivery Instruction system' the company's e-procurement last year helped it bring down procurement time and costs.

Maruti has reported a net profit of Rs 55 crore in 2001-02 and a total revenue of Rs 9,295.3 crore. In comparison, the company had registered a net loss of Rs 269 crore in 2000-01 on a total revenue turnover of Rs 9,219.6 crore. This turnaround by the company has come in a year when the car market was flat and the overall economic sentiment remained depressed. Maruti sold about 3.4 lakh vehicles in the domestic market during 2001-02 against 3.35 lakh units in 2000-01.The company has returned to profit despite a higher depreciation provision compared to the previous year. The depreciation in 2001-02 was Rs 347 crore against Rs 322 crore in 2000-01.

Last year, Maruti's quality systems and practices were rated "as a benchmark for the automotive industry worldwide" by A.V. Belgium, global auditors for ISO.

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