We met Mr. Krishnan Natarajan of Dabur in pursuance of our project work. Following are edited excrepts of the interview.

Q: As a manager what are the decision-making areas for you? Ans: Being a finance person and being in an FMCG company, decisions are generally not taken by us. We initiate it. We trigger it. We make MIS reports. We do our analysis. From there we trigger decisions by telling the management as to what would be beneficial for the organization. From a managers point of view, this is our role. We have to ensure what is beneficial for the company. Ultimately the decision is taken by the top management on whether they have to go with our analysis or not. Prior to this I was working with Nestle. I worked there for three and a half years. Its the third largest FMCG company. Dabur is the fourth largest FMCG company. There I was working in a factory location. I started my career with a ground level to understand the basic FMCG operations: where the supply chain starts from, finished goods are made, raw material procurement is done. So I understood the factory operations. Thereafter I stepped into the corporate world. Here its going to be close to one year now. We being finance people, we have a lot of numbers. We have to do a lot of data crunching. So ultimately what I do is that I make this report, summarize it, that this is the impact: current scenario, proposed scenario, the financial benefit or loss; and this we propose to the management. Then, its up to them to take a call. So this is how its being done in every company. Ultimately decision is taken by management committee.

Q: What kind of information do you use to make the MIS reports? Ans: I have a good experience of the FMCG industry. If you see a P&L of a company in the FMCG industry, then the manufacturing cost is close to 50% of costs. So that is the major area where profits can be realized. We have to minimize the cost as we cannot increase the MRP since there is a lot of competition. We have to build efficiencies in our supply chains, then only can we reduce costs and generate profits. As an example, we have close to 15 to 16 manufacturing locations. Now if there is a product that may be manufactured at multiple locations then we do the entire analysis as to where we may get some excise benefit, ATI benefit, freight benefit, whether the location is close to the source of the raw material, which all places we need to deliver the finished goods. Then if for this product 70% of the sales occur in North India and only 30% in South India then I would recommend that we manufacture the product in North India because even if we get the raw material somewhat cheaply in South India, the transportation costs incurred would outweigh the benefits. So this

way we do a cost-benefit analysis, a networking analysis and this is also how we propose capital expenditure.

Q: Is the company planning to expand in locations such as Baddi, as per networking analysis, where there is excise benefit available? Ans: Ill give you an example. For the last couple of years there was a huge expansion which was going on in Nestle. A 650 Cr. Expansion. For this expansion they had a deadline to meet. They had to start production before 31 March 2012. The reason was that if they started production by 31 March 2012, then they would have received ATI benefit and their payback period would have been just 3 years. Otherwise the payback period was more than 10 years. So you can understand the amount of benefit that was being received by meeting the deadline. So these things become critical. As rightly mentioned by you, Baddi is an excise free zone. There you get a 7-year excise free period and ATI benefits. As a result the payback period of the company is shortened. For capital Expenditure the starting point is Sales. Even for a budgeting exercise, the starting point is sales. Only after considering sales is there a material requirement planning.

Q: How do you distribute Overheads? What are the various methods of distributing overheads that you use? Ans: Now, Nestle is one of the best companies as far as costing is concerned. The ERP over there is SAP. Nestle is very strong in costing, in management accounting. They are quite advanced. As far as allocation of overheads is concerned, there are activity drivers that are defined by each and every company. Now in ABC it depends what kind of overheads you want to allocate. For example, for rent, the driver would be floor area. For canteen expenses, the driver would be headcount. Now say for example I have 100kg of cotton and 100kg of Iron stored in a factory, then greater cost would be allocated to cotton because of greater volume. For labour expenses, the driver would be labour hours. Both Nestle and Dabur follow ABC. In an FMCG company, it becomes very important that the product costing is correct as only then would you be able to survive in the industry.

Q: How do you implement Kaizen Costing? Ans: All this comes under TPM Total Performance Management. Companies like Dabur and Nestle have various problem solving tools. They use DMAIC i.e. Define, Measure, Analyze,

Improve and Control. Different kinds of analytical tools are available. On the basis of these they remove the inefficiencies and thus reduce the cost. In Kaizen it is analysed where are the bottlenecks and then we try to remove them. It is done at a grassroots level. That is to say that all Kaizen projects are done at factory level. You would know that the revenue generating part is Sales and the cost generating part are units. Now, Dabur had an initiative called Speed in which they realigned all distribution networks. That resulted in quite a lot of savings. It was quite a lengthy exercise, took close to six months and it happened before I joined. Probably in 2011. I joined in March 2012. There are a lot of initiatives at the factory side. Kaizen Costing should result in a lot of savings. As an example lets say there is a boiler being used to generate steam. Now yield of a boiler is how much steam can be generated by burning 1kg of fuel. Now lets say there is some inefficiency in the boiler. That would result in the steam cost going up. So what the company does is, it starts using boiler economizer. With a boiler economizer the waste heat coming out of the chimney is used to heat the water. This increases the boiler yield. So if earlier we could generate 10kg of steam using 1kg of fuel, then by using boiler economizer, we can generate, maybe, 12kg or 13kg of steam. Now the overall analysis that we do here is: If the economizer costs Rs. 10 lakh, then what would be our savings in the next 10 years by installing the boiler economizer. So these are the decision making factors. If the company is willing to reduce their costs by improving their efficiency then they look at various methods.

Q: If your decisions, as a part of your function, are derived from decisions at various levels, can we have a list of those levels and the link with your decisions? Ans: A decision can be taken at any level even from a grass root level but it should be a cost effective decision, for eg- a soap company was getting lot of consumer complaints about empty sachets being distributed in the market and company was really concerned about the issues raised by the public. Lot of meetings and discussions took place, lot of brainstorming sessions were done. Few managers thought to implement x-ray machines to check the contents of sachets, some managers said to introduce gateways which will check the weight of the sachets and finally a worker from shop floor suggested to use a table fan for blowing away the empty sachets and finally the proposal was accepted. For each project IRR, payback, NPV is calculated before making any decisions. Company does the NPV analysis for calculating the time value of money. Payback period and IRR are generally preset by the company and the project is accepted only if IRR is greater than expected.

Any decision taken from a factory level first goes to the executive level where the feasibility and the cost of the project is determined ,then the proposal goes for approval from the financial head and the operation head then to the CFO of the company and finally to the CEO.

Q: What are the parameters for evaluating the performance of costing techniques at Dabur? Ans: Measuring of the performance of costing techniques is done by analyzing the reduction in cost of manufacturing, reduction in the man power for producing same amount of output, increase in productivity at similar level of resources, efficiency, using less resources and getting more outputs. For eg- in Haryana 80% power is produced and 20 % is purchased from the electricity board whereas in Delhi its exactly the opposite so in Haryana the focus is on the fieldwork not on the purchasing power and here we try to improve our purchase power rather than working on the field work. So the main focus is to reduce cost whatever the way it is suitable. Target costing done at Dabur is triggered by marketing department then a back calculation is done to reduce the cost of the product. First the amount of raw materials required for the recipe is found out and then operation department gives the labor requirement and the no. of machine hours required for the same then the utility cost is calculated with the help of cross functional departments. From this gross contribution is calculated. The companies calculate the price to stockiest rather than MRPs--variable cost to get gross contribution advertisement cost to get net contribution and thus the desired target cost is achieved.

Q: Would you please explain in detail two of the routine decisions you take? Ans: The first one is Networking Analysis. It is very important task. It means which product would be produced where. We also keep reviewing products, which are work in progress, monthly/quarterly /at the time of Budget to get to know whether any improvement is required anywhere in process. It could be triggered by us, marketing department, operations department or anyone else. So, this is a continuous process in company. We do network analysis and compare which product would be cheaper to produce, where to produce, whether produce it or outsource it.

Q: Are these all processes same for Cosmetic and Pharmaceutical Sector? Ans: Yes, most of the things are same in both the sectors. There is no major difference in using these processes for these two sectors. However it also depends much on capital expenditures.

Q: Do you produce all products (in-house) or also do outsourcing for some products? Ans: Yes we do that. It is not that outsourcing is done only in service industry; it is in FMCG industry also. We have almost 25-30 products which are produced by third party (comanufacturers). There are two types of third party production process. One is Job work and another is outright purchase. In job work we provide raw material to vendor, he converts it into finished goods and deliver it to us. In outright purchase vendor himself will buy raw material and convert that into finished goods and deliver us.

Q: Generally which of these two methods is costlier? Ans: We do whole cost analysis for it whether it is cheaper to buy or produce. We do cost analysis at G.C. level (Gross contribution) and PAT level (profit after tax). Whenever we take decision we compare purchase cost, the rate at which we buy goods from third party and variable cost of production because fixed cost is a sunk cost.

Q: How do you ensure quality in case of third party purchase? In general how much percentages of total products are outsourced at DABUR? Ans: For ensuring quality we have our one person there. As percentages of outsourcing are considered, it is never fixed. It depends when company wants to launch a new product, whether outsourcing is cheaper or not, how much investment will be required if company establishes its own plant etc.

Q: How frequently do you take these decisions? Ans: Its a continuous process. There is no fix time period of it but still it is generally done on monthly basis. Actually we do profitability analysis of every brand on monthly basis. If some brands profitability is continuously decreasing then we do RCA (root cost analysis). If we think there is any inefficiency then we decide whether we should outsource that product or produce at any other location so that profitability can get increased.

Q: Is there any non-financial information which you consider? Ans: Nowadays companies have become very environment conscious. There are many things like corporate governance, sustainability, CSR (corporate social responsibility). Nowadays all

factories are zero discharge factories means waste/effluents of the factory do not go out of the factory. According to industrial act they are requires to have ETP (effluent treatment plan).

Q: Is DABUR also taking any action in reference to carbon foot print? Ans: Yes, of course. Rather, DABUR has got many awards for it. There is no any other company in India which tracks carbon foot print except DABUR. It even tracks emissions from cars of its employees.

Q: Any inputs you use to determine the method of distribution like whether we are using ABC etc? Ans. Its ABC only here as well. The reason is that most of the companies these days are having ERPs. And the best costing in ERP is done in SAP. And the costing module in SAP (the FICO or the finance and controlling module) is based on ABC. So where ever this will be, itll be ABC costing only.

Q: So this decision must be taken by the top management? Ans: It depends on how much the company wants to invest in IT.

Q: Is there any periodic view of the chosen basis for overhead distributions? Ans: If we think there can be a better logical driver we change it.

Q: How often do you change it??\ Ans: Generally annually at the time of budget. Otherwise doing it monthly would cause budget variances and it would lead to a lot of explanations to the top management as they are generally not very versed with all the finance concepts.

Q: Talking about bottomline, for FY12 bottomline of Dabur has come under a lot of pressure? What are the reasons for it?

Ans: It wasnt just for Dabur, bottom line growth was affected for all FMCG companies. In fact, Dabur has performed far better relatively. The reason was inflationary trends as it caused increase in costs of raw material, freight costs and all this is passed to the consumer in some form either by increasing price or decreasing the weight.

Ques: How do you allocate the cost of unused capacity among different products? Ans: There is no cost of unused capacity as such. Itll just overall increase your fixed cost allocation. That is if you use the full capacity the fixed cost per unit will come down. So if ideal capacity is there its just there with no extra costs being incurred for it. An example is Godrej. Godrej at some point had invested huge amounts in tetra pack lines for their product Jumpin. However the product failed and these lines were there unutilized. So Godrej started using its packaging line for 3rd parties. Real juice of Dabur is outsourced to Godrej.

Ques: While we thank you for sparing some of your valuable time for us and our learning, we would like to come back to meet you after understanding the points you have stated. Could you please spare another 30 minutes for us in the next month, at a time convenient to you? Ans: Yes sure. Though Id be having a tight budget timeline in March but still Ill manage. But do inform me 2-3 days in advance of your visit.

We thanked him for his valuable time and ended the meeting.