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The constantly growing competition between companies of different industries and market segments is causing the top management of the companies to consider and approach the performance from the different points of view. Particularly, nowadays, companies cannot any longer maximize their profits by just increasing the production and level of sales. Currently the global market is oversupplied by the propositions of any goods and services. The most recent trend for the companies to remain profitable and solvent is to optimize the production process and minimize the costs associated with it. The optimization of the production might include many things: starting with the purchase of the new equipment and its fine-tuning, and finishing with improved yields on material consumptions together with increased productivity of the personnel.
One of the sides of the law of diminishing marginal productivity is strongly related to the direct and indirect labor, which means that each time employment increases, the increase in output will get smaller and smaller. A very young but powerful global tobacco company Japan Tobacco International, which bought an international division of RJR Nabisco (producer of Camel and Winston brands) in 1999 has recently developed the new strategy which will allow it to receive a great competitive edge in the nearest future. In 2002 Jtis Board of Directors authorized the beginning of the SAP/R 3 ERP (Enterprise Resource Planning) project. Within the next several years the company is planning to spend approximately 400 million dollars on the implementation of this sophisticated software, which will allow the corporation to cut approximately 25 % of its administrative personnel. Along with streamlined planning and forecasting approaches, the ERP system will track the productivity of the company, analyze the material usage, and plan the supply of the raw materials in the most efficient way (such as to cut the transportation and storage costs).
There is also one great plus to the Jtis situation. The tobacco consumption is constantly growing, therefore the production also does. The management of Japan Tobacco has decided to replace the 60 % of its machinery in the factory locations. The new Proto's (cigarette making machine) has twice the productivity of previously used MARK-S, and costs one and a half times less. Having written off the MARK-Ss and putting into the balance Protos, the company ends up with the same level of fixed costs and depreciation of eight years to go.
This step allows the company to absorb greater amounts of the fixed costs in the future (since the productivity is expected to grow). At the same time, currently Proto's machinery is under-utilized (meaning there is still resource for production capacity extension). Therefore, the relationship of increasing productivity to the decreasing total cost (fixed which are getting lower due to the amortization, and indirect labor cost decrease due to ERP, plus, variable depending on the level of output) gives the company positive effect on the break-even point, and eventually higher operating cash contribution. The example of initiative undertaken by the management of Japan Tobacco International shows the benefits of market situation accompanied by the successfully planned strategy of cost decreases and steadily increasing production volumes. Sources: web web
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Research essay sample on Productivity And Cost Of The Tobacco Giant
