EFFECTIVE COST MANAGEMENT IN MARKETING AND IMPORT OF FERTILISERS V.K.SWAMINATHAN CHIEF GENERAL MANAGER (F&A) KRIBHCO

1. EFFECTIVE COST MANAGEMENT IN MARKETING AND IMPORT OF FERTILISERSV.K.SWAMINATHANCHIEF GENERAL MANAGER (F&A)KRIBHCO

2. Movement of fertilisers is controlled • Movement of fertilisers is controlled • State-wise quantities to be moved in a month from plant/port is to be submitted to DOF for approval • State Agriculture Authorities give supply plan district-wise within overall state-wise plan • Supply plan is given month-wise/state-wise for indigenous urea and vessel-wise/state-wise for imported urea.

3. Imported Decontrolled fertilisers • Product Subsidy • It is paid as per Nutrient Based Subsidy (NBS) policy of DOF • Fixed Subsidy per MT is allowed. Manufacturers/ Importers can fix the selling price (MRP) • However, Manufacturers/Importers have been asked to reduce MRP by Rs. 1500 / MT for DAP and by various amounts for other decontrolled fertilisers

4. Freight Subsidy • Rail freight is reimbursed at actuals • Road freight for direct movement from plant/port is reimbursed at slab rates based on rail freight • No secondary transportation subsidy is payable as units are supposed meet the cost from MRP.

5. Subsidy Reimbursement by Govt. of India • Indigenous Urea • Rs. 138/- per mt is allowed as part of product subsidy to meet marketing expenses except freight. • The amount was fixed in the year 2000 and was not revised. • This amount is applicable for all the manufacturers • Freight Subsidy • Freight subsidy is paid as per the guidelines of Uniform Freight Subsidy (USF) scheme of DOF • UFS is applicable w.e.f. 01/04/2008.

6. Rail freight is reimbursed at actuals as per RR. • Secondary transportation by road from rake point is paid for the quantity moved to a district at the normative district-wise distance as fed in Fertiliser Monitoring System (FMS) of DOF, at the ‘Per Km/MT’ rates notified in Feb. 2009. • For direct road transportation from plant/port freight subsidy for the distance from plant/port to the district as entered in FMS at the ‘per/Km/MT’ rate is paid at the rates notified in Feb. 2009.

7. Main Expenditure Heads of Marketing Operations of Fertiliser Industry • Sale of manufactured fertiliser • Primary Freight - Rail - Road • Handling and secondary transportation • Warehousing • Rebates and discounts • Publicity expenses • Promotional programs • Transit loss • Rebagging / standardization expenses

8. In addition, for imported fertilisers, the following expenditure is also involved. • Custom duty • Bag cost • Stevedoring, clearing and forwarding expenses • Handling loss of material • Draft survey, port dues

9. Reduction in Cost Cost reduction can be achieved in the following areas: - • Freight expenditure • Warehousing cost • Sales terms viz Rebates and Discounts • Selling expenses like publicity, promotional programs • Administrative expenses like travelling, salaries, communication, vehicle running and hire charges • Disposal / lease of non-performing assets. • Interest on working capital • Import Cost

10. Reduction of Freight Cost • A matrix of freight cost by rail and road for each destination (falling within 500 Km from plant/port) should be prepared. • Though rail freight is reimbursed at actuals, other costs of rake handling and secondary transportation are involved in the case of rail transportation. • Rail cost shall be calculated under two scenario • Direct transportation from rake point • Transportation from rake point warehouse.

11. In the case of transportation from warehouse, the expenditure on local transportation from rake point to warehouse and loading and unloading should also be considered in cost matrix. • Reduction in freight cost can be achieved through: - • Feeding a destination / customer by the cheaper mode • Direct transportation from rake point and avoid taking material to local warehouse. • Finalisation of road transportation and H&T contracts at competitive rates by comparison with rates of other organizations

12. To eliminate / reduce transit shortages as freight subsidy is not paid for short quantity. Contract should contain clause for penal recovery for shortages which should cover the amount of retention price and freight subsidy. • Maximize ex-rake point delivery to customers by making their own arrangements by allowing them transportation rebate. • Avoid incurring demurrage and wharfage. • Already saving has accrued in the form of abolition of service tax on transportation w.e.f. 01.04.2013.

13. Saving in freight – incurring freight expenditure keeping in mind freight subsidy provisions • Direct delivery from rake point as freight subsidy is paid only for one movement. • To check the distance from plant/port to districts and rake-points to districts as fed in FMS with the distance considered for payment to transporters and ensure that distances have been correctly fed in FMS. • To fix selling price of decontrolled fertilisers in such a way as to cover secondary transportation cost as under NBS secondary transportation subsidy is NIL.

14. For road transportation of decontrolled fertilisers from plant/port, freight subsidy is paid at slab rate based on rail freight. Under recovery in freight cost for direct road transportation and rail transportation should be worked out and material should be moved by mode involving lesser under recovery in freight.

15. Saving in Warehousing Charges • To hire godown space from institutional agencies like marketing federations instead of from CWC / SWC. • To keep the material with PACS and private dealers after obtaining due security and insurance. • To maximize rotation of stock. • To finalize warehousing on competitive terms like instead of maximum stock during the month, average stock during the month / maximum stock during a week or fortnight.

16. Savings in Rebates and Discounts • To negotiate with institutional customers effectively mentioning manufacturer’s rising cost not compensated by FICC, inordinate delay in payment of subsidy, deteriorating exchange value of Indian Rupee and persuade them to accept reasonable sales terms and credit period. • To discuss with other fertiliser manufacturers / importers and emphasis the need not to under cut each other by offering largesse to customers which subsequently proves suicidal to the industry.

17. Travelling Expenses - Reduction in tour by more use of e-mail, video conferencing - Reduction in grant of exception (higher travel mode and lodging more than entitlement) - To book air tickets in advance when tour date is known • Vehicle running and hire charges - Departmental In-charges and visiting heads to monitor expenses. • Communication - Switch over to Closed User Group (CUG) for all employees of the organization wherein in-coming calls between members of the CUG is free.

18. Publicity Expenses • To reduce employees entitlement of complimentary items. • To revisit the type and number of publicity programs planned for the year and select only those programs which will have impact on brand, technology transfer to farmers etc. • Non performing assets • Dispose off obsolete, worn-out, damaged furniture and fixtures, office equipment, vehicles, electric appliances, surplus stock and parts. • To lease out vacant premises of the organization

19. Saving in interest on working capital • Negotiation with banks for competitive interest rates and terms. • To improve organization’s credit rating which will help lower interest rates. • To evaluate overdraft vis-à-vis short term loan. Many times short term loan does not provide for early repayment even though the interest rate is lower. • To issue cheques to Government from overdraft account as it normally takes two or three days for them to present the cheques.

20. For imports, to evaluate Rupee Loan vis-à-vis Buyer’s Credit in foreign exchange. While evaluating hedging cost should be considered in the case of foreign currency Buyer’s credit. • Field offices should indent funds for their requirements only when the bills are checked and vouchers are signed / ready for signature, in order to avoid idle funds. • Funds for statutory payments like Custom Duty, VAT, Income Tax TDS, Service Tax should remitted to field offices only on due date. • Funds for salaries and other employee payments should be remitted to field offices only on the date of payment.

21. Saving in purchase cost of imported decontrolled fertilisers • Tender to reputed foreign manufacturers and dealers will fetch competitive rates. • Long term agreement with foreign manufacturers for quantity with the price for each shipment mutually settled is another option. • Price should be negotiated taking into account prevailing price published in FMB, Fertecon, market intelligence (price at which other importers have procured)

22. Presently forward premium (hedging cost) is very high at 11%, which is around the interest on Indian Rupee loan. Hence, foreign suppliers may be asked to give suitable discount in lieu of credit period. • All efforts should be made to persuade foreign suppliers to accept discharge port quantity and quality as certified by GOI’s CFQC&TI, Faridabad.

23. Since most of the foreign suppliers agree on load port quality and quantity as per load port draft survey, material should be purchased only from reputed manufacturers who have shipped / are supplying to India and their product meets Indian F(C)O specifications. • Based on the accepted copy of purchase order, forward covers should be obtained timely to hedge against exchange rate variation.

24. Main driving force for cost reduction is conviction that: - (i) We are custodian of shareholder’s funds. (ii)What action one will take under similar circumstances if one’s own money is involved.

25. Thanks