International Journal of Mechanical Engineering and Technology (IJMET)

Volume 9, Issue 11, November 2018, pp. 515–527, Article ID: IJMET_09_11_051
Available online at http://www.iaeme.com/ijmet/issues.asp?JType=IJMET&VType=9&IType=11
ISSN Print: 0976-6340 and ISSN Online: 0976-6359

© IAEME Publication Scopus Indexed

IDENTIFICATION OF COST DRIVERS IN

INDIAN COMMERCIAL VEHICLE INDUSTRIES
– AN APPROACH TOWARDS COST
MANAGEMENT
Palavesa Murugan R
Assistant General Manager, Manufacturing, Ashok Leyland,
Chennai, Tamil Nadu, India

Dr. Pon.Ramalingam
Registrar, Hindustan University,
Hindustan Institute of Technology & Science, Chennai, India.

ABSTRACT
Indian commercial vehicles industry is passing through a challenging phase due to
multi-directional pressures like a) forthcoming stringent Bharat Stage-6 Emission
norms; b) other Central Motor Vehicle Regulations (CMVR); c) Cost pressure from
supplier partners d) Cost pressure due to market driven selling prices which are
squeezing the margins.
This paper talks about the compelling need of the Cost Management Initiatives
and methodologies of identifying cost drivers and mitigating them to minimize the
waste and thereby protecting the margins and surviving in the competition, which are
challenging tasks.
Key words: Cost, Cost Management, Cost Drivers, Resources Matrix, Cost
Management Initiative, Activity Based Costing.
Cite this Article: Palavesa Murugan R, Dr. Pon.Ramalingam, Identification of Cost
Drivers in Indian Commercial Vehicle Industries – An Approach Towards Cost
Management, International Journal of Mechanical Engineering and Technology
9(11), 2018, pp. 515–527.
http://www.iaeme.com/IJMET/issues.asp?JType=IJMET&VType=9&IType=11

1. INTRODUCTION
Despite being a service sector driven economy, Indian economy is continuously focusing on
agricultural and industrial development, expansion of opportunities for gainful employment,
progressive reduction of social and economic disparities in the population and removal of
poverty.
From the period of independence, the year-on-year increase of Gross Domestic Product
(GDP) was around 3% to 3.5%. External debt grew 38.7% of GDP in 1991. After

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 Identification of Cost Drivers in Indian Commercial Vehicle Industries – An Approach Towards
Cost Management

liberalization, industrial de-licensing (free from the license raj), foreign technology
agreements and foreign direct investments resulted in increased threats to domestic goods and
dependence on foreign countries.
Indian Medium & Heavy Commercial vehicle (M& HCV) segment is also not exempted.
From independence, there were only two Indian auto makers viz., Ashok Leyland Ltd and
TATA Motors ruling their territories i.e., four southern states and rest of India respectively.
Post liberalization there are now ten plus manufactures in the same space. This has created a
stiff competition and the margins are under pressure. Figure 1 and Figure 2 explains the
market share details accordingly.

India M&HCV Sales 1989 - 92 - Market share % India M&HCV Sales 2012 13 - Market share%
3%
2% 1% 0.30% TATA Motors
0.6%
28.1% 14% Ashok Leyland
Telco
VECVs - Eicher
Ashokleyland 23% 57% AMW
71.3%
Others SML Isuzu
Mahindra Navistar
VECVs - Volvo

Figure 1 Figure 2
Source: Web site
Post Liberalization and entry of new players demanded a level playing field for the old
timers in the country. Indian Auto makers had a need to suddenly improve on the technology
front, customer focus, after market support, product reliability, delivery and last but not the
least – VFM (value for money). Customers are no longer innocent or ignorant, but highly
informed and with a dynamic appetite to expect more value for money.
Changing dimensions, kept targets challenging for the manufactures, and all this had a
cost. Customers are demanding rather than simply accepting what is offered. Hence the Indian
Auto Industry was at an advantage vice versa - New entrants. Some of the new entrants are
yet to make a dent because not everyone has understood the Indian customer at large.
Customers of commercial vehicles were always keen on the target cost they have in mind,
both the purchase and operating cost of a commercial vehicle.
To counter the changing dynamics of the industry, it had become prudent for the
manufacturers to work with a target cost. The success is to maintain the cost at bay, provide
more value or value creation for the customer and staying ahead of customer needs and
satisfaction. Some of the new entrants are yet to break even because they are yet to untie the
knot of hidden threads in the market force.

2. REVIEW OF LITERATURE
Study of literature insisting the need of Cost Management Initiative, how the FAST diagram
is throwing the abnormal functions, how the resource and cost driver matrix helps in
prioritizing the resolution. The “Survival tripod” by Cooper and Slagmulder (1997)
considered as the rules for firms. Added to that Cooper and Slagmulder (1997) emphasizing
to use the term “Cost Management “instead of “Cost reduction”.
The required quality to be achieved at lower cost. The performance of a product and a
good part of its cost are defined in its development (Dekker and Smidt, 2003) and for that
reason, to optimize these two parameters quality and cost, a correct approach of cost
management is necessary. Miller and Vollmann (1985) state that the real driving force behind

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 Palavesa Murugan R, Dr. Pon.Ramalingam

manufacturing overhead costs is not production volume but transactions dealing with
logistics, balancing, quality, and change. Cooper and Kaplan (1987) and Johnson and Kaplan
(1987) suggest that many of the transactions that drive costs are determined by the complexity
of plants’ operations.
Palavesa Murugan R and Dr. Pon.Ramalingam (2018) insisting in order to improve
performance, the losses should be understood and relentlessly eliminated. Within any system,
the losses of waste, variability and inflexibility will inhibit performance. These wastes
increase cost while adding no value from the customers perspective. They also extend the
period of return on investment (ROI).
Hayes and Clark (1985) indicate that production complexity increases with the number of
product lines, the variety of flow patterns, and number of inventory locations. While Banker
and Johnston (1993) found that measures of operational complexity are related to overhead
costs in the airline industry.
Various researchers have attempted to address cost management from various industries,
however there is no widely accepted or broad level method towards prioritization of resources
depleted, identification of cost driver for commercial vehicle industry.

3. SIGNIFICANCE OF COST MANAGEMENT INITIATIVES

Earlier the entire market was sellers’ market where the supply was less than the demand. The
selling price and profit was decided by the manufacturer wherein all the costs were accounted.
It was a scenario which was supply controlled ecconomy and cost means merely accounted
data in system.
Selling Price = Cost + Profit
But currently the installed capacity of Indian M&HCV is around one million and the Total
Industry Volume (TIV) is only around 40%. ie, Now the supply is more than the demand and
price are market driven in a free present economy with competition. At this juncture, it is
essential for the auto makers to re-engineer the entire business process to sustain and improve
the market share and profitability. Than its accounting, cost need to be managed more.
Profit = Selling Price – Cost
Operating margins are shrinking year over year due to increase in raw material cost (like
Nickel, Rubber, Copper and the impact of price increase given to suppliers …. etc. Refer
Figure 3. At this juncture managing these costs is vital for SURVIVAL. We need to redefine
the way we operate.

Figure 3

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 Identification of Cost Drivers in Indian Commercial Vehicle Industries – An Approach Towards
Cost Management

Cost Escalations cannot be passed on to customers, but the expectation is for reduction in
price and hence we need to look inwards for retaining same margin without revising prices.
Cost Management Initiative is gaining its significance it is critical for any firm to manage
and control its business unit’s cost. It enables the business unit to act as an independent profit
center there by ensuring sustaining and improving the profit. The compelling need of
containing and mitigating the cost escalations which can’t be transferred to customers. So,
cost management initiative is necessary to stay in business and to get energy to compete with
competitor.

4. THE METHODOLOGY

Figure 4
Each Plant, business unit, shop will critically analyze the activities and update the norms
as a master data. It is imperative to Measure, Monitor and control BU’s Abnormal Costs.
Refer Figure 4.
Abnormal Cost Logic: -
Abnormal Cost = [ Actual Cost – (Prod Part Quantity x Respective Norms Value)]
Localized cost compilation module at Shop floor / operating level which will be
understandable to the operating people for them to own up and monitor these costs.
 Radical shift from traditional cost management.
 Shop floor / Operating group develop their own costing model which help to monitor and
control their costs.
 Resources - cost driver matrix

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 Palavesa Murugan R, Dr. Pon.Ramalingam

Primarily resources are classified into Capacity resources and Variable resources.
Resources can be the Product line, Material, Man, Machine, Tool, Power, Consumables,
Maintenance spares, etc.
Cost driver is defined as an activity which results in excess usage of resources or does not
add value to product / customer.
 Cost matrix to throw out inefficiencies, hidden wastage
 Identify work content
o Based on operation / facilities
 Identify resources
o Capacity resource
o Variable resource
o Identify cost drivers
Cost Driver - An activity which results in excess usage of resources or does not add value to
product / customer – Ref: Figure 5

GLOBAL MANUFACTURING PROCESS

Capability Equipment
Handing Machining Assembly

INPUT OUTPUT
• • Number of Products
Raw materials • Value adding activities • Quality conform
• Human power/intellects • Value enabling activities
• • Planned time
Technology resources • Unneeded activities Cost drivers
• Capital • Determined cost
(Cost Drivers) Money & time
Quality & Yield
Resources
Intellect

CAPACTY (QUALITY & YIELD) PRODUCTION ECONOMICS

Figure 5
The resource Cost Driver matrix is the compilation of the cost impacted by the identified
resources depletion. Every activity / aspect is analyzed for any depletion by the virtue of
Design and or Process. The quantum of cost impacted is tabulated which will give the cost
dimension for each Cost Driver. The sum of the abnormal cost is arrived for prioritizing the
remedial actions. The resource depletion is categorized as different type of Cost Driver to
identify the type of remedial actions.
 Daily Management
 Process Control
 Process / Product Design
 Technology
 Unused Capacity

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 Identification of Cost Drivers in Indian Commercial Vehicle Industries – An Approach Towards
Cost Management

Develop Resource - Cost driver matrix (Monthly) – Refer the below Table.
`# Resources
CATEGORY

Cowl Bottom

Wiper motor
Panel board
CMI CODE

% of Total
Hardware

Wiper kit

Fuse Box

E2 valve
Cost Drivers

Total

YTD
Brut
FES
INR INR INR INR INR INR INR INR INR INR
1 Removal of
side and
107 B bottom panels 4842 4842 3 18900
2 Vestigial
components in
98 C Cowl 33960 33960 22 63000
3 E2 valve -
assembly
123 C spoilage 11993
4 Removal of
FES floor
76 B dummy plates 12750
5 Fuse box
45 C cover damage 56600 56600 37 10500
6 Panel board
dummy decall
231 C fitment 7924 7924 5 14700
7 Accumulation
of incomplete
67 B wiper kit 49780 49780
8 71 Wiper motor
C coil burning 1014 1014 1 1521
9 TOTAL ABNORMAL
COST 4842 49780 33960 56600 7924 1014 154120 100 131843
10 UNUSED
E CAPACITY
11 PERMISSIBL
F E 191806.1 191806.08 2918604
12 GRAND
TOTAL 4842 49780 33960 248406.1 7924 1014 345926.08 3050447
Classification of the Cost Drivers and the Cost Impacted
DAILY MANAGEMENT
A
PROCESS CONTROL
B 4842 49780 54622 16 31650
PROCESS / PRODUCT
DESIGN
C 33960 56600 7924 1014 99498 29 100193
TECHNOLOGY
D
UNUSED CAPACITY
E
PERMISSIBLE
F 191806 191806 55 2918604
GRAND TOTAL 4842 49780 33960 248406 7924 1014 345926 100 3050447

4.1. Daily Management

There is no standard operating procedure to be followed to correct these kinds of cost driver,
rather we need to adhere the hygiene factors.
Examples: Switch off the electrical equipment when not in use.

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 Palavesa Murugan R, Dr. Pon.Ramalingam

4.2. Process Control

The cases, whenever the standard operating procedure is not followed, it will lead to the
resources depletion. Merely resuming the standard operating procedure will reduce the
resource depletion.
Example: Exact amount of lubricant filling as per the Standard Operating Procedure in a multi
model production assembly line.

4.3. Process / Product Design

When existing Process / Product design is causing the resource depletion, the design change
of process or product to be implemented to avoid the resource depletion.
Example: More number of assembly joints in an air intake system – By redesigning the entire
system the assembly interfaces can be reduced which will reduce the direct material and
assembly cost. Similarly, the manufacturing process which is consuming excess man power
and or excess consumables to be redesigned to overcome the resource depletion.

4.4. Technology Change

If a technological change in the process will eliminate or reduce the resource depletion, it is
categorized as Technology cost driver.
Example: Painting process change from brushing to spray painting. Manual welding process
changes to robotic welding.

4.5. Unused Capacity

The amount invested in Unused Capacity also considered as a cost driver.
Example: Considering the market demand the new facility was created and the utilization is
only 50% of installed capacity and then the money invested for creation of the unused
capacity also to be considered as a cost driver.

5. ACTIVITY BASED COSTING

Activity Based Costing (ABC) is a method that measures cost of a product/service, based on
the activities performed to produce the product/service. The activity must be definable where
productivity can be measured in units (e.g., number of samples Versus man-hours). After the
project is broken into its activities, a cost estimate is prepared for each activity. These
individual cost estimates will contain all labor, materials, equipment, and subcontracting
costs, including overhead, for each activity. Each complete individual estimate is added to the
others to obtain an overall estimate. Contingency and escalation can be calculated for each
activity or after all the activities have been summed. ABC is a powerful tool. Refer below
table for the typical cost elements of a Machining line.
MATERIAL LABOUR TOOL POWER TOTAL % of
SI Machining - CONSUMABLE REJECTION
COST COST (in COST COST (in COST MATERIAL
NO Component COST (in Rs.) (in Rs.)
(in Rs.) Rs.) (in Rs.) Rs.) (in Rs.) COST
1 Axle Arm xxx xxx xxx xxx xxx xxx xxx 79.9%
2 Axle Beam xxx xxx xxx xxx xxx xxx xxx 96.5%
3 Crank Shaft xxx xxx xxx xxx xxx xxx xxx 79.2%
4 Head Rough xxx xxx xxx xxx xxx xxx xxx 63.6%
5 Block Rough xxx xxx xxx xxx xxx xxx xxx 72.2%
6 Head Finish xxx xxx xxx xxx xxx xxx xxx 87.6%
7 Block Finish xxx xxx xxx xxx xxx xxx xxx 83.8%
8 Cam Shaft xxx xxx xxx xxx xxx xxx xxx 56.4%

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 Identification of Cost Drivers in Indian Commercial Vehicle Industries – An Approach Towards
Cost Management

Considering the Cam shaft machining line in which the conversion cost is further analysis
done on operating cost by critically analyzing the activities. Refer below details of a typical
cam shaft machining line being the conversion cost is comparatively high.
CAM SHAFT OPERATING COST
Rs.16.69 Rs.79.23 Rs.4.39
Rs.30.20 Rs.5.36 Rs.23.84 Rs.22.73
Rs.10.77 Rs.31.52 Rs.4.12 Rs.46.65 Rs.12.56 Rs.23.80 Rs.22.61 Rs.14.05

TEMPERING HARDEN HARDEN WASH NUM PUN J OIL HOLE GUN DRILL CAM MILL KW MILLG TURNI NG TURNING TURNINGSTRAIGHTENING F&C
TURNI NG
START
CT
T P
T C T C T C T P
END

TEMPERING C LAPPING STRAIGHTEN OI L H DRIL J GRIND J GRIND CAM GRIND CAM GRIND HARDNESS DEBURR CD PARKER LAPPING WASHING OILING

Rs.11.66 Rs.19.42 Rs.62.00 Rs.86.55 Rs.6.20 Rs.5.44 Rs.14.72 Rs.6.74

.
Rs.5.35 Rs.11.74 Rs.62.00 Rs.32.28 Rs.4.90 Rs.10.15 Rs.6.23

7.95% 4.18% 5.13%

P – POWER, T -- TOOLS, C -- CONSUMABLES
DESCRIPTION cost per comp percentage rank 4.62%
0.49%
TOOLS 146.52 7.95 3
0.94%
CONSUMABLES 76.97 4.18 6
0.03%
POWER 94.54622 5.13 4
LABOUR 85.08 4.62 5

ADMINISTRATION(OH) 9.06 0.49 8

62.38% 14.29%
SCRAP 17.25 0.94 7
INVENTORY HOLDING COST 0.62 0.03 9
1st hi gh cost TOOLS CONSUMABLES
DEPRECIATION 263.44 14.29 2 2nd hi gh cost POWER LABOUR
MATERIAL 1150 62.38 1
3rd hi gh cost ADMINISTRATION(OH) SCRAP
4th hi gh cost INVENTORY HOLDING COST DEPRECIATION
TOTAL COST PER COMP 1843.5 100.00 5t h high cost MATERIAL

Each and every activity of manufacturing and resources are monitored through online
transactions and the norm Vs usage comparison throw-out the abnormalities. i.e. Cost drivers.
The identified cost drivers are being taken up for mitigation through improvement projects.
After implementation, the resource consumptions are being monitored for verification of
improvement and sustenance.

6. ELEMENTS OF COSTS
The cost elements of any product can be majorly classified as direct material cost, value
adding cost and over heads. The typical representation of the cost elements in Figure 6.

Cost Split of Indian Comercial Vehicles HGP – Heavy Goods

and Passenger
HGP MDV – Medium Duty
MDV Trucks
Vehicle

MDV Bus
ICV – Intermediate
commercial vehicle
ICV - Trucks
LCV – Light
ICV - Bus commercial Vehicle
LCV

0 20 40 60 80 100 120

% Material Cost % Value Add % Overhead

Figure 6

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 Palavesa Murugan R, Dr. Pon.Ramalingam

6.1. Material Cost

The material cost is the major part of any commercial vehicles which needs to be analyzed
categorically.

Figure 7
ABC analysis is a valuable tool to enable companies for strategic cost management by
measuring the current inventory levels for their materials management system and identifying
the "low hanging fruit". The simple countermeasures that can yield the largest cost
management benefits in the near and middle term periods. ABC analysis is a categorization
method which consists in dividing items into three categories (A, B, C): Ref: Figure 7.
 “A” being the most valuable items, i.e. ~ 80%
 “B” being the moderate valuable items, i.e. ~ 15%
 “C” being the least valuable ones, i.e. ~ 5%
This method aims to draw managers’ attention on the critical few (A-items) not on the
trivial many (“C” items). Here, the ABC analysis will be considered to identify the high cost
items to prioritize prior to the initiation of Function Analysis System Technique ( FAST ).

7. FUNCTION ANALYSIS SYSTEM TECHNIQUE (FAST)

Ref: Figure 8. The main path connecting the Lower order function to the higher order function
is referred as critical path. The functions which lie on this path are referred to as critical path
functions and are connected and arranged with How? Why? Logic.
Moving from lower order function by asking the question “why?” the function immediate
to the left to answer that question. This process is carried from right to left until a logical
series of functions can answer “Why?” to the higher order function. Similarly questioning
from higher order function to the lower order function through the critical path function, each
successive function must answer the question “How?”.
The “How?” and “Why?” logical connections between functions in the critical path serves
as an excellent way to verify the validity of the FAST diagram and focus on functions that
removes physicality from the system i.e., to achieve the higher order function of the ECU
mounting panel to protect the Electronic Control Unit (ECU) from vibration and
environmental effects. To meet the all-time function of protecting ECU from vibration and

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 Identification of Cost Drivers in Indian Commercial Vehicle Industries – An Approach Towards
Cost Management

environmental effects, the secondary unwanted function of abnormal cost identified and can
be taken up for alternate material for cost reduction. Thus, the FAST is an important and
systematic tool for identifying Cost Drivers.

Figure 8

8. YIELD IMPROVEMENTS

Yield improvement applied to Raw materials can for example be achieved by choosing a
raw material which is closer to final product dimension and thereby minimizing the excess

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 Palavesa Murugan R, Dr. Pon.Ramalingam

raw material cost. In the production process, yield improvement can be obtained by
minimizing the squandering of materials in each step of the process, and/or by getting closer
to the specification and thereby minimizing Tool cost, Power cost, consumables cost and
Manpower cost.

9. WEALTH FROM WASTE

Within any system, the losses of waste, variability and inflexibility will inhibit performance.
Identifying “Value” in the eyes of the customer is a critical starting point in an operational
transformation.

9.1. What is Value

 Value is defined by the ultimate customer, not by the manufacturer
 It is a statement of what is important to the customer

9.2. Examples of Value

 Getting from A to B as quickly as possible, safely, comfortably, and with minimal hassle
 Getting the right products from a supplier in the right quantities, at the right time, in the right
quality
 Purchasing a life insurance policy, with minimum hassle and no mistakes.

9.3. Value Added Activity

 Value Added Activity is activity that directly adds value, as perceived by the customer (e.g.
assembly of parts)
 What the customer is ready for paying

9.4. Incidental Activity

 Work that does not directly add customer value, but which is currently necessary to maintain
operations (e.g. small movements to reach for material for assembly)

9.5. Waste
 Work or use of resources that does not add any value to a product.
 Waste is sometimes called “muda“, from the Japanese for waste
 Waste is work which adds cost, but doesn’t add value
There is no process without an element of waste it. If we can have a control on waste and
minimize and or eliminate it, then we are keeping our cost under control.
Every waste erodes resources, which indirectly add up as on indirect input cost.
Understanding value from the customers point of view is essential, otherwise we may
spend time optimising activities that do not add value to the customer. This is known as
“optimising the muda.

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 Identification of Cost Drivers in Indian Commercial Vehicle Industries – An Approach Towards
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The objective is to maximize the proportion of value added activity by reducing

waste and incidental activity to reduce cost

An example of “optimising the muda“ was a manufacturer that disassembled a supplied

part within its production process. Therefore, no matter how efficiently the part was
assembled in the first place it was pure waste.
Certain production system, like Canadian Production System, Toyota Production System
and Caterpillar Production system
have laid emphasis on wastes like
1) Over Production
2) Waiting
3) Transportation
4) Over Processing
5) Inventory
6) Rework
7) Motion

Each of the 7 elements of waste control are key to wealth conservation in directly
impacting wealth.

10. CONCLUSIONS
The paradigm shift from sellers’ market to buyers’ market, pressure from suppliers, Emission
and CMVR regulatory controls making the commercial vehicle industry under cost pressure.
The industries are evolving cost management initiatives to identify cost drivers and initiating
projects to eliminate or reduce the cost drivers as a mitigation to survive in the competitive
environment.

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 Palavesa Murugan R, Dr. Pon.Ramalingam

Survival means staying with Success in a win-win situation. Customer wins a cost-
effective solution while industry wins a profitable disposition. It is imperative that focus on
keeping the value for money always on track is the key to success.
Hence care should be taken that industry and customer satisfaction are always in
connection. Any disconnect will prove to be disaster like some of the auto companies which
become history. Inherent generation of Auto Industry is looking ahead to face challenges to
meet customer demand, A mobility solution without non-renewable source of fuel. Let the
industry gear up soon for the same.

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ISSN Print: 0976-6340 and ISSN Online: 0976-6359

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