• 
• 

Published on January 2, 2008

Aside from political risks, oil prices pose the major concern for companies of all sizes as they face increases in production costs amid high competition that makes it difficult for them to raise product prices.

Sukij Kongpiyacharn, managing director of garment company Hong Seng Knitting, said his firm had adopted three strategies to re-duce rising costs since early last year.

"As a result of rising fuel prices and the strengthening baht, my company was under pressure to consider how to reduce costs. We could not increase our selling price as garments rely on global market prices. A price increase would dampen our competitiveness," said Sukij.

Finally, he found a useful cost-management method - "lean manufacturing" - adopted from Toyota.

Lean manufacturing includes three strategies.

First, the company changed its raw-material orders from bulk to smaller amounts in order to reduce the cost of stocking. The costs of the product would not increase as suppliers would give the same price as before but would send raw materials to the firm gradually, in the manner of a supermarket.

Second, the firm increased its production capacity by changing old machines, improving labour skills and offering incentives for employees to increase their efficiency. Although the strategy caused higher spending, it gave higher returns in the long run.

Third, it decreased logistics costs, which may be more efficiently reduced by companies sharing

customers' data with their suppliers. Sukij said this helped parties reduce their logistics costs at all levels of the supply chain. His firm also conducted a demand pool with suppliers in order to save logistics costs.

After adopting lean manufacturing, Hong Seng Knitting reduced manufacturing costs by 5 per cent. Sukij said the firm had also achieved bigger margins because of lower production costs.

Last year, Siam City Cement had to shut down two old energy-consuming kilns and lay off some workers, as crude oil prices reached new record highs at US$96.24 (Bt3,200) per barrel.

The retail price of diesel, used extensively by industrial plants and in the transport sector, could have surpassed the per level if the Bt1.50 compulsory contribution to the Oil Fund had been maintained.

Crude oil jumped to nearly $97 a barrel last Friday after larger-than-expected declines in US crude inventories and on heightened geopolitical concerns following the assassination of Pakistani opposition leader Benazir Bhutto.

Bhutto's assassination adds another level of uncertainty to the outlook for the region, David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney, told Associated Press.

It is anticipated that amid high oil prices, retail oil prices next year will be above Bt30 per litre.

Prasarn Akarapongpisak, man-aging director of the country's one-stop-service stainless steel producer Lohakit Metal, said that to cope with high oil prices, the com-pany had adopted a software programme to manage its supply chain to serve clients as a solutions package.

In addition, it plans to purchase a new steel-cutting machine to remove bottlenecks from its production process. "It will not only help the company but also its clients to reduce costs from baht appreciation and rising oil prices," he said.

"I don't worry much about the baht strengthening as the company's export sales amount to only 10 per cent. Meanwhile, the company has also opted to export its products to neighbouring countries so that transportation costs can be kept under control."

Rising oil prices and an increase in raw-material prices have also had a negative impact on property firms. Most have had to find a way to manage construction costs to maintain their net margin.

Asian Property Development CEO Anuphong Assavabhokhin said his company controlled construction costs by striking one-year contracts with suppliers of cement, steel, wood and other materials.

"We will shortlist the raw materials that we need for the entire year and try to keep them at a minimum. Then we will negotiate with our suppliers to fix costs. We can do so if we buy in huge volumes. That will help us to manage our costs and maintain our margin when raw-material prices rise further in 2008," he said.

Preuksa Real Estate president and CEO Thongma Vijitpongpun said his company had tried to manage its construction costs by developing a process of prefabrication that reduces the time for house construction from an average eight months per unit to only three months. That creates economies of scale for its business.

Meanwhile, the company has signed a one-year contract with its suppliers to buy raw materials that will save costs at a time when they appear to be rising, he said.

It is expected that housing prices will be static in 2008 despite rising costs, due to persistently low demand amid huge competition as the property industry draws more investors.

Business Reporters

 The Nation