Remedies To Counter Strengthening Rupee And Rising Domestic Inflation

In the last article, we briefly discussed the adverse effects of domestic inflation and value of rupee appreciating against the dollar. As a logical extension to the article, it would be appropriate to address the methods to counter this downward pressure on 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 currency appreciation will depend on various macroeconomic factors, such as performance of the economy in general, government interventions in policy making or changing, central bank intervention through foreign exchange trading, etc. A quick look at these factors tells us that some of them are well beyond the control of an individual company. In most likelihood, the problems will persist over the entire length of global economic cycle and their effects may persist even longer due to high interdependence in a closely connected or globalised economy. Although an understanding of all these factors is essential to spot long term trends, influencing them may be need collaborative efforts on the industry level in different dimensions.

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

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

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

Although the presence of lean manufacturing procedures such as Six Sigma etc are rarely seen to be adopted in the Indian textile manufacturing 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, using internal manufacturing capacity may not be the cheapest option always. At times, sourcing the raw material from low cost manufacturing destination such as China can be explored. Other manufacturing countries which may offer competition to China for specific products may be Bangladesh, Philippines, Indonesia and Viet Nam.

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