In the last article¹, webriefly discussed the adverse effects of domestic inflation and value of rupeeappreciating against the dollar. As a logical extension to the article, itwould be appropriate to address the methods to counter this downward pressureon profit margins.

The problem at hand can be addressed from two perspectives,short term and long term.

The long term solution to either inflation or currencyappreciation will depend on various macroeconomic factors, such as performanceof the economy in general, government interventions in policy making orchanging, central bank intervention through foreign exchange trading, etc. Aquick look at these factors tells us that some of them are well beyond thecontrol of an individual company. In most likelihood, the problems will persistover the entire length of global economic cycle and their effects may persisteven longer due to high interdependence in a closely connected or globalisedeconomy. Although an understanding of all these factors is essential to spotlong term trends, influencing them may be need collaborative efforts on theindustry level in different dimensions.

We can of course take short term measures internally in thecompany by strategically aligning most of them towards cost reduction.

From a financial perspective, the quickest measure a smalland medium business can take is currency hedging. Foreign exchange can becovered from RBI at least three to four months in advance. Indeed,companies should routinely do this. For those orders, whose hedging has notbeen done, it may not be too late to take such an initiative. Since predictionof currency spot rate is difficult, it is always a gamble. Speculators may havedrastically different idea on how future value will shape. This may also temptcompanies to eschew short term hedging but from perspective of stability andcash flow planning, foreign exchange coverage is always a good option.

From an operational perspective, cutting manufacturing costsis an option although efforts can be made in the short term, but its effectswill show up only in the medium to long term.

Although the presence of Lean Manufacturing Procedures suchas Six Sigma etc are rarely seen to be adopted in the Indian textilemanufacturing industry, exploring simpler techniques such as Just In Time (JIT)or Vendor Managed Inventory (VMI) may be useful.

For the orders at hand, say for fabrics and made ups, usinginternal manufacturing capacity may not be the cheapest option always. Attimes, sourcing the raw material from low cost manufacturing destination suchas China can be explored. Other manufacturing countries which may offercompetition to China for specific products may be Bangladesh, Philippines, Indonesia and Vietnam.

Last but not least, another possibility is sourcing theraw material available in stock. This is a sure and immediate way to reducecosts. Admittedly, this may not be an option in each and every case, thinkingin this direction not only for basic raw material but even for accessories andpackaging supplies will surely present concrete cost cutting options.

References:

1. &sec=article&uinfo=<%=server.URLEncode(2428)%>" target="_blank">http://www.rbi.org.in/home.aspx
2. &sec=article&uinfo=<%=server.URLEncode(2428)%>" target="_blank">https://www.fibre2fashion.com/industry-article/22/2184/lean-rationale-for-textiles1.asp
3. &sec=article&uinfo=<%=server.URLEncode(2428)%>" target="_blank">http://www.textilestock.in/

About the Author

The author is Co-founder of Textilestock.in;he holds multiple years experience in Textile industry and was responsible forleading the business development initiatives in an export house from Delhi.