Management Control System Tata Steel

MCS PROJECT REPORT ON TATA STEEL (BUDGETING, PERFORMANCE MANAGEMENT & RESPONSIBILITY CENTRES)

SUBMITTED TO: Prof.Nitin Gupta IBS,Hyderabad

SUBMITTED BY: Group 4,4th Semester,IBS Hyderabad Abhilasha Singh11BSPHH010020 Ambarish Kapil Barpujari11BSPHH0 Aakash Utreja-11BSPHH01 Amit Talwar-11BSPHH01 Abhiroop Bhattacharjee11BSPHH

ACKNOWLEDGEMENT “The sole efforts of an individual are not sufficient to accomplish the desired successful completion of a project. It involves interest and efforts of many people and so this becomes obligatory on our part to record our thanks to them.” We would like to acknowledge the efforts and guidance of Prof.Nitin Gupta, MCS,IBS Hyderabad, who gave us his precious time to guide us in the best possible way.. Last but not the least, we would extend our sincere gratitude towards library staff, teachers at ICFAI BUSINESS SCHOOL, HYDERABAD and our family and friends whose continuous encouragement and help inspired us to make this project successful.

Table of Contents Table of Contents....................................................................................................... 3 ECONOMY : STEEL INDUSTRY ANALYSIS.....................................................................3 COMPANY ANALYSIS...................................................................................................8 ORGANISATION STRUCTURE.....................................................................................11 REVENUE CENTRE:................................................................................................34 COST/EXPENSE CENTRE:.......................................................................................34 PROFIT CENTRES:.................................................................................................. 35 INVESTMENTS CENTERS:.......................................................................................36 OTHER SUPPORT CENTRE (ADMINISTRATIVE CENTER):.........................................36 LEARNING’S OUT OF CONTROL SYSTEM ILLUSTRATIONS .........................................37 CONCLUSION:...........................................................................................................37

ECONOMY : STEEL INDUSTRY ANALYSIS GLOBAL STEEL INDUSTRY: In 2010-2011 emerging markets grew faster than the developed markets as some of the geographies in the developed markets were still facing fiscal imbalances due to the economic slowdown in 2009-2010.The sustainability of global economy depends on how the developed economies manage their public debt, boost economic activity and generate employment. In 2011 the world crude steel production reached 1527 million tons and showed a growth of 6.8% compared to previous year. While China maintained the lead position with a growth rate of 9%, Japan recorded a negative growth rate of 1.8%.India moved to 4th position. Rank

Country

2011

2010

% Change

1

China

683.27

626.7

9.0%

2

Japan

107.6

109.6

(1.8)%

3

United states

86.2

80.6

6.9%

4

India

72.2

66.8

8.1%

5

Russia

68.74

67

2.6%

6

South Korea

68.47

58.5

17.0%

7

Germany

44.29

43.8

1.1%

8

Ukraine

35.33

33.6

5.1%

9

Brazil

35.16

32.8

7.2%

10

Turkey

34.103

29

17.6%

Source: World Steel Association

Fig. in million tons

In Asia the annual production in 2011 was 954.19 million tons which was up by 6.27% from 2010.The EU registered a growth of 2.6% producing 177.431 million tons of crude steel. However production Inuk was 9.481 million tons as compared to 9.7 million tons in 2010.The CIS countries recorded an increase of 3.62% i.e. total production of 112.43 million tons in 2011 with Russia and Ukraine as major contributors.

Source: World Steel Association

The world crude steel capacity utilization ratio increased to 81.1% in March 2012 but when compared to March 2011 it had decreased by 1.2 percentage points...

Source: WSA, TSE strategy

Overall global demand is expected to rise by 4% in FY’12 but with considerable regional differences with EU demand falling by 1% whereas emerging economies and North America to grow by 5% or more.

GLOBAL CHALLENGES: The challenges faced by global steel sector are as follows: •

Shift to emerging economies from mature economies

•

Growth in volatility of prices of raw materials and pressure of profit margin.

•

Lag between demand fluctuations and production adjustments.

•

Need of new business models which would be customer and suppliers centric.

REMEDIAL MEASURES THAT CAN BE UNDERTAKEN: 1. Increasing customer reach • By increasing product offerings • By broadening profitable customer base with new and existing clients. • Prioritizing markets to compete. 2. Cost competitiveness • By adopting vertical integration • Optimization of capital • Strategic cost reduction measures. 3. To increase effectiveness and flexibility of supply chain so that it can respond quickly to changing market. 4. To gain stakeholders confidence.

STEEL INDUSTRY IN INDIA: The trend of crude steel production in India is as follows:

Source: http://steel.gov.in

Indian steel sector saw a growth of 8% in 2011 thereby becoming the fourth largest steel producer in the world. Indian steel industry can be divided into two sectors: Public & Private Sector. It can also be divided into two types of producers: •

Integrated producers: Those that convert iron ore into steel. There are three of them:SAIL,Tata Steel & RIPL.Eg:Essar Steel,Ispat Industries & Lloyd Steel

•

Secondary producers: These are mini steel plants which make steel by melting scrap or sponge iron or mixture of two.

CONSUMPTION:

Source: http://steel.gov.in

PRICING AND CHALLENGES: In the global market there are various challenges that is being faced by the steel industry: •

Unremunerative prices

•

Endemic deficiencies such as high ash content in coal.

•

Systematic deficiencies such as

•

High Cost of Capital

•

Low labour productivity

•

High cost of basic inputs and services

•

Poor quality of basic infrastructure

•

Lack of expenditure in research and development

•

Delay in absorption of technology by industrial units

•

Low quality of steel and steel products

•

Lack of facilities to produce various shapes and qualities of finished steel

•

Limited access of domestic producers to good quality iron ores which are earmarked for exports.

•

High level taxation

•

Lack in product quality and product design

•

Lack in on time delivery and post sales service

•

Inefficiency in distribution network & managerial initiatives.

OPPORTUNITIES: •

Unexplored rural markets.

•

Excellent potential in other sectors such as automobile, packaging, engineering industries, irrigation and water supply in India.

MAJOR PLAYERS: SAIL: Steel Authority of India ltd. SAIL is India’s largest steel producing company with a turnover of INR 50348 crore. It has five integrated steel plants, three special plants and one subsidiary in different parts of the country.

JSW STEEL LTD: JSW Steel is one of the lowest cost steel producers of the world. It offers a wide range of flat and long products. By 2020 it aims to produce 34MTPA annually with Greenfield integrated steel plants. Presently it is the 3rd largest steel producer in India.

BHUSHAN STEEL: This is the third largest Secondary Steel producer with an annual turnover of 2MTPA presently. It has three manufacturing units: Orissa, Maharashtra and Uttar Pradesh. It produces long as well as flat products.

COMPANY ANALYSIS TATA STEEL LIMITED Tata companies operate in seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals. They are, by and large, based in India and have significant international operations. The total revenue of Tata companies, taken together, was $67.4 billion in 2009-10 with 57% of this coming from business outside India, and they employ around 396519 people worldwide. The Tata name has been respected in India for 140 years for its adherence to strong values and business ethics. Every Tata company or enterprise operates independently. Each of these companies has its own board of directors and shareholders, to whom it is answerable. There are 28 publicly listed Tata enterprises and they have combined market capitalization of some $95 billion, and a shareholder base of 3.4 million. The major Tata companies are Tata Steel, Tata Motors, Tata Consultancy Services, Tata Power, Tata Chemicals, Tata Tea, Indian Hotels and Tata Communications. Tata companies have always believed in returning wealth to the society they serve. Two-thirds of the equity of Tata Sons, the Tata promoter company, is held by philanthropic trusts that have created national institutions for science and technology, medical research, social studies and the performing arts. The trusts also provide aid and provide assistance to non-government organizations working in the areas of education, healthcare and livelihoods. Tata companies also extend social welfare activities to communities around their industrial units. The combined development related expenditure of the trusts and the companies amounts to around 4% of the net profits of all the Tata companies taken together. In tandem with the increasing international footprint of Tata companies, the Tata brand is also gaining international recognition. Brand Finance, a UK based consultancy firm, recently valued the Tata brand at $9.92 billion and ranked it 51st among the world’s Top 100 brands. Business Week magazine ranked Tata 13th among the ’25 Most Innovative Companies’ list and reputation Institute,USA,recently rated it 11 th on its list of world’s most reputable companies. Turnover PBT

PAT

Tata Steel India

29396

9777

6866

Tata Steel Europe

75991

1751

1666

Nat Steel Holdings

7413

143

152

Tata Steel Thailand

3911

(151)

(131)

Tata Metalliks Limited

1347

(15)

1

Tayo Rolls Limited

133

(30)

(30)

Tata Steel Processing & Distribution 1592 Limited

63

43

Tinplate Company of India Limited

810

51

36

Tata NYK Shipping Pte Limited

660

3

3

Tata Refractories Limited

926

67

44

Tata Sponge Iron Limited

683

150

101

Tata Steel KZN Pte Limited

597

(55)

(55)

Source:Annual Report

Figures are in INR crore

CONSOLIDATED FINANCIAL HIGHLIGHTS 2011-2012 (Source:Data taken fromAnnual report 2011-2012)

TATA STEEL(JAMSHEDPUR DIVISION) Tata Steel has always believed that the principle of mutual benefit- between countries, corporations, customers, employees and communities- is the most effective route to profitable and sustainable growth.

Established in 1907, Tata Steel is among the top ten global companies with an annual crude steel capacity of over 28 million tons per annum (mtpa).It is now one of the world’s most geographically-diversified steel producers, with operations in 26 countries and a commercial presence in over 50 countries. The Tata Steel Group, with a turnover of US$ 26.13 billion in FY’2011-2012, has over 81,000 employees across five continents and is a Fortune 500 company. Tata Steel’s vision is to be the world’s steel industry benchmark through the excellence of its people, its innovative approach and overall conduct. Underpricing this vision is a performance culture committed to aspiration targets, safety and social responsibility, continuous improvement, openness and transparency. Tata Steel’s larger production facilities include those in India, the U.K, the Netherlands, Thailand, Singapore, China and Australia. Operating companies within the Group include Tata Steel Limited (India), Tata Steel Europe Limited (formerly Corus), NatSteel and Tata Steel Thailand (formerly Millennium Steel)

VISION Our vision is to be the global steel industry benchmark for value creation and corporate citizenship We will achieve our vision through: Our People By fostering teamwork, nurturing talent, enhancing leadership capability and acting with pace, pride and passion. Our Offer By becoming the supplier of choice, delivering premium products and services and creating value for our customers. Our Innovative Approach By developing leading edge solutions in technology, processes and products. Our Conduct By providing a safe workplace, respecting the environment, caring for our communities and demonstrating high ethical standards. VALUES: The Tata Group has always been driven by five core values: •

Integrity: We must conduct our business fairly, with honesty and transparency. Everything we do must stand the test of public scrutiny.

•

Understanding: We must be caring, show respect, compassion and humanity for our colleagues and customers around the world, and always work for the benefit of the communities we serve.

•

Excellence: We must constantly strive to achieve the highest possible standards in our day-to-day work and in the quality of the goods and services we provide.

•

Unity: We must work cohesively with our colleagues across the group and with our customers and partners around the world, building strong relationships based on tolerance, understanding and mutual cooperation.

•

Responsibility: We must be responsible and responsive to the countries, communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over.

GOALS: The Tata Steel Group has set four key corporate goals to be achieved by 2012: •

Value Creation: Deliver a 30% return on invested capital(ROIC)

•

Safety: Achieve an industry leadership position by driving down our lost time injury frequency rate (LTIF) to a maximum of 0.4 incidents per million of hours worked.

•

Environment: Reduce CO2 emissions to less than 1.9tonnes per ton of crude steel

•

People: Rank as an employer of choice in the top quartile across all industries.

ORGANISATION STRUCTURE The organization structureof Tata Steel is centralized and matrix.The entire structure of the organization of Tata Steel can be broadly divided into 3 levels, each level having separate roles and responsibilities. These 3 levels are upper management, senior management and the middle management. Each of these lower levels is responsible to perform its functions and thereby report to the next higher level in the organization on a periodic basis. The Upper Management of the company has designation like the Managing Director of the entire company and the Group Executive officer. The Senior Management has the various Vice Presidents of the different departments which come directly under the Managing Director. Under the Vice Presidents we have the Chiefs of the various functions who coordinate the activities of its function along with the other departments. There can be more than one chief in a department depending upon the number of line of the products. This is seen in the Long Products Departments. The Chiefs are also accompanied by the Heads in some of the departments.

Under these Chiefs and Heads, we have the various Sectional Heads who are the Unit Leaders, the Managers or the Officers. This structure is prevalent in the entire organization on a national scale. In the Finance and Accounts Department of Tata Center, Kolkata, the functions are handled by the Head of Marketing and Finance. Then, there are the various Manager Accounts who handle the different aspects of the department. Under these Managers are the officers who carry out the actual accounting work of the department.

Source:www.google.com

CREDIT RATING RATING FIRM

OUTLOOK

STABLE

STANDARD POORS

& Long term credit rating (Foreign Currency)

BB

MOODY'S

Long term corporate family credit rating

Ba3

FITCH

Long term corporate credit rating (Foreign currency)

BB+

Long term corporate credit rating (Domestic currency)

AA

Short term corporate credit rating (Domestic currency)

FI+

Source:Annual Report

Tata Steel – Striving to be an EVA positive company Tata Steel aims to be on the lookout for and shape the opportunities to get the first mover advantage and remain ahead of competition. The opportunities could exist in emerging technologies, new business models, value creation, customer service, new products, services or businesses, financing options etc. To mobilize all resources and efforts through value based management that will help us earn returns better than cost of capital. The equation below shows that the EVA is positive when RONA is greater than the cost of capital invested. EVA= (RONA-WACC)*Invested Capital EVA – Economic Value Added RONA – Return on Net Assets ( Net Operating Profit After Tax/ Net Assets) WACC – Weighted Average Cost of Capital

SHARE PERFORMANCE AND DIVIDEND POLICY OF TATA STEEL: As we can see from July’2011 Tata share prices went down but it again increased Jan’2012.

Source:www.bseindia.com In FY’12, Tata Steel followed the existing dividend policy of 120% i.e. INR 12 per share.

Source:Annual Report 2010-2011

Here Dividend payout ratio has decreased in FY’10 compared to earlier years and then has again increased by 2%. This indicates that company is increasing its retained earnings to support its expansion phase. Increase in EPS indicates better returns for the investors.

GROWTH PROJECTS:

Tata Steel’s one of the major strategies is focused growth. With the aim of strengthening its position in global market it has come up with two major projects: • 2.9 MTPA Brownfield expansion project in Jamshedpur: This project comprises of the following:  6 MTPA Pellet plant  Two Stamp Charge Coke oven batteries with 0.7 MTPA  2.9 MTPA Blast furnace  TSCR (LD Shop) of 2.4 MTPA capacity. • 6 MTPA Greenfield expansion project in Kalinganagar, Odisha.

CAPITAL BUDGETING Capital budgeting is finance terminology for the process of deciding whether or not to undertake an investment project. Basically it is the part of the budget process that focuses on the resource plans for building new facilities, renovating existing facilities, buying major pieces of equipment, or improving the campus infrastructure. A capital budget typically has a long term horizon – a minimum of five years – because the expenditure is of investments in assets that are expected to benefit more than one year. However capital budgets also will have a short term, or operating year, component that identifies the annual resources needed to fund the new building or renovation project.

GOAL OF THE FIRM Maximize shareholder wealth or value of the firm

Financing Decision

Investment Decision

Long Term Investments

Short Term Investments

CAPITAL BUDGETING

OBJECTIVES:

Dividend Decision

Objectives are the guiding light. It’s like a framework within which the organization functions. Some of the objectives of a Capital Budgeting Process are: •

To enhance the value of the firm and its shareholders wealth

•

To align the needs of the scheme/project owners with that of the firm

•

To choose the right project and separate out the project which is not needed or which provides no returns.

•

To build a cost effective plan.

•

Through study of the plan and identify its limitations and shortcomings.

•

Reviewing alternate options, including non-capital options.

•

Approving only those projects which will help have positive cash flow.

IMPORTANCE AND NEED: The Capital Budgeting Process plays a vital role in any company. Its importance and needs are as follows: •

It is structured and systematic process.

•

Easy flow and fast approval of the project

•

Proper allocation of funds.

•

Considers the needs of the firm as well as the owners.

•

Isolates marginal and unsound proposals.

•

Includes opinions of both the engineers as well as the financial analyst.

•

Higher probability of success of the project

•

Reviewing all kinds of risk involved.

CAPITAL BUDGETING – THE PROCESS Capital budgets as discussed above involves huge sum of money, so it becomes necessary to assess a capital plan/project from all angles. Therefore it would require both technical and financial knowledge.

Thus the process of capital budgeting has to be in alignment with understanding of both the financial manager as well as the engineer. All parties to the process contribute their share and make the process successful. A process is successful when the objective is met. When this Capital budgeting Process helps create value for the firm its goal is met.

STEPS INVOLVED IN A CAPITAL BUDGETING PROCESS

Corporate Goal

Strategic Planning Investment opportunities

Preliminary Screening

Financial appraisal, quantitative analysis, project evaluation or project analysis

Qualitative factors, judgments and gut feelings

Accept/reject decisions on the projects

Accept

Reject

Implementation

Facilitation, monitoring, control and review

Continue, expand or abandon project

Post completion Audit CLASSIFICATION OF INVESTMENTS Preparing and controlling a budget is critical to the success of a program but before preparing this budget it is important to classify the projects. Firms normally classify the projects into different categories and each of these categories is analyzed somewhat differently. The classification varies from firm to firm but some of the classifications are:

1. Mandatory InvestmentsThese are expenditures required to comply with the statutory requirement. These are usually nonrevenue producing investments. While analyzing these investments one should mainly focus on the most cost effective way of fulfilling a given statutory need.

2. Replacement ProjectsFirms routinely invest in equipment meant to replace obsolete and inefficient equipments, even though they may be serviceable condition. The objective is to reduce cost, increase yield and improve quality. Such replacements projects can be evaluated in a straightforward way.

3. Expansion ProjectsThese investments are meant to increase capacity and/or widen the distribution network. Such investments call for an explicit forecast of growth. Since these can be risky and complex, expansion projects normally warrant more careful analysis than replacement projects. Decisions related to such projects are taken by the top management.

4. Diversification ProjectsThese investments are aimed at producing new products or services or entering new geographical areas. Often diversification projects entail substantial risk, involving large outlay and require considerable managerial effort and attention. Given this strategic importance, such projects call

for a very thorough evaluation, both quantitative and qualitative. Further they require the involvement of the Board of Directors.

5. Research and Development ProjectsTraditionally, R&D projects absorbed a very small proportion of capital budget in most Indian companies. But now, companies are allocating more funds to R&D projects more so in knowledge intensive industries. R&D projects are characterized with numerous uncertainties and typically involve sequential decision making. Such projects are decided on the basis of managerial judgment. Firm which rely more on quantitative methods use decision tree analysis and option analysis to evaluate R&D projects.

6. Miscellaneous projectsThis is a category which includes items like interior decoration, executive aircraft and so on. There are no standard approaches for evaluating these projects and decisions regarding them are based on the personal preference of the top management. Once the project is classified, valuating it and analyzing it becomes simpler this is because different projects need to be tackled differently. A growth project would have more returns than a welfare project. So they cannot be treated alike. In the same way other projects also cannot be weighted on the same scale.

PROJECT EVALUATION METHODS Corporate capital budgeting and cost of capital estimation are crucial decisions and so the management needs to use accurate methods which would result in maximization of Shareholders wealth. A wide range of criteria’s are used to evaluate the worthiness of investment projects. These criterias can be divided into two broad categories – Discounting and Non-Discounting criteria. The use of these tools varies from organization to organization and thus there is no fixed standard tool depending on which the management decision is made.

Investment Criteria

Discounting Criteria

Net Present Value

Internal Rate of Return

Non-Discounting Criteria

Benefit Cost ratio

Payback Period

Accounting rate of Return

RISK MANAGEMENT Capital Budgeting decision involves costs and benefits extending over a period of time during which things can change in unanticipated ways. Investment project differ in risk. A research may be more risky than an expansion project and the latter being more risky than a replacement project.

Sources of risk There are several sources of risk in a project. Some of the important ones are:

 Project-specific riskThe earnings and cash flow of the project may be lower than expected because of estimation error or some factors specific to the project like quality of product etc.

 Competitive riskThe earnings and cash flow may be affected by unanticipated actions of the competitor.

 Industry-specific riskUnexpected technological development and regulatory changes related to the industry will have an impact on the earnings and benefits.

 Market risk-

Unanticipated changes in the macroeconomic factors like the GDP growth rate, interest rate etc. will have an impact on overall performance of the project.

 International riskIn case of foreign projects, the earnings may vary due to the change in the exchange rates or other foreign policies.

RISK ASSESSMENT TECHNIQUES: A project’s systematic risk is already captured through the discount rate. The unsystematic risk is dealt with by adjustment of the discount rate or the cash flow forecasts. It is recommended that the latter approach is followed owing to following reasons: •

The correct factor which will settle unsystematic risks in the cost of capital is difficult to identify.

•

Having multiple discount rates can be a source of confusion to operating managers.

•

A focus on discount rate can encourage the use of discount rate as variable instead of constant in analysis.

The traditional focus on single point NPV estimate does not yield any insights to the risks involved in a project. Risk analysis provides the means of estimating project value under different sets of circumstances. The variety of techniques suggested in handling risk in capital budgeting are as follows:

Techniques of Risk Analysis

Analysis of standalone risk

Analysis of contextual risk

Sensitivity Analysis

Scenario Analysis

Breakeven Analysis

Hillier Model

Simulation Analysis

Decision Tree Analysis

Corporate risk

Market risk Analysis

CAPITAL BUDGETING PROCESS FOLLOWED BY TATA STEEL A planned capital expenditure and optimum utilization of funds are the primary concern for any organization. At Tata Steel a similar well defined system exists. The capital budgeting procedure mentioned below is applicable for all investments above 50 lakh and of all divisions of the company, which are executed by in house project engineers. Investment Management Committee lays down the guidelines and framework to ensure such investments that would strengthen and will remain aligned to organization’s goals and objectives.

OBJECTIVE: •

Determine the economic viability of investment opportunity to ensure effective allocation of scarce financial and human resources.

•

Ensure consistency between procedures for evaluating performance and methods of analyzing projects.

•

Strengthen accountability for the performance of new investments.

•

Provide the base for future operating plans.

Thus to summarize the objective is to: •

Select the right project

•

Maximize value creation from the selected project.

Factors that form the basis of any Capital Investment Decision: •

Availability of funds

•

It’s alignment with the vision of the company

•

Attractive returns

BUSINESS PROCESS IN TATA STEEL: •

Formation of Capital Scheme

•

Creation of WBS structure & Networks.

•

Project ordering and procurement

•

Assetisation of completed scheme.

•

Asset retirement, obsolescence and sale.

Processing of Capital Scheme: •

Development of Capital scheme.

•

Sanctioning the capital scheme

•

Physical execution of the scheme.

•

Post completion review.

TYPES OF PROJECTS:

In Tata Steel the projects are divided into these three categories in terms of total cost. These are as follows:

•

Major projects: The capital cost of these projects is more than INR 50 lakh

•

Minor projects: The capital cost of these projects is between INR1 – 50 lakh

•

Equipment & Furniture projects: The capital cost of individual items included in the project is up to 1 lakh.

CLASSIFICATION OF SCHEMES

Source:Internal sources,Annual Report

On the basis of above table appraisal process is carried out which sets basis for the approval of the capital projects.

CAPITAL EXPENDITURE PROGRAM The capital expenditure program lists the various major projects a that are given in principle approval by board. The inclusion of project in the CEP does not guarantee that the project included in it would be sanctioned for implementation of the project. The projects also need to get administrative sanction before they are implemented. If the costs of the formal scheme vary by +/- 10% of the cost indicated in the CEP, the schemes are not taken for the study group review unless an approval is taken from the MD explaining the reason for variation in costs. The inclusion of the project in CEP starts with identification of projects by the respective divisions. This identification of projects is an ongoing process and it may relate to project relating to diverse requirements such as growth, replacements, sustenance of production, cost reduction and quality improvement etc. The respective division does the estimation of capital cost and quantification of benefits of the project. Then a two page note is drafted as Form 1.The two page note is then submitted to the Engineering project-in-charge group. This is followed by sending a two page note to the Capital Planning Group.

Thereafter, projects are prioritized by the respective VP’s concerned for the inclusion of CEP. The proposals of the carry over budgets in the standard format are then submitted by the respective divisions on the capital planning group. Capital planning group then prepares the draft CEP taking into consideration ongoing schemes and proposal for review. The CEP is then finalized based on criticality of the scheme and the availability of funds. The board gives the final approval of CEP. Subsequently, Capital Planning group communicates the board’s approval of CEP to the concerned divisions.

Guidelines The main guidelines followed by Tata Steel for processing major capital schemes are as follows: •

Inclusion of proposal in the Capital Expenditure Program.

•

Development of a formal scheme.

•

Review of schemes.

•

Execution of schemes

•

Submission of carry over budget for sanctioned schemes

•

Audit of completed schemes

•

Post completion review

Inclusion of Proposal in the Capital Expenditure Program Divisions continuously inspect their departments and identify areas of critical replacement. This is then followed by analyzing the cost involved. Thereafter they are forwarded to the MD/VP’s of the particular department. Accepted proposals are sent to the capital planning group in form of a two page note. Each proposal is then reviewed by the Capital Planning group and compared against other proposals as the funds available are generally less than required. The approved/not approved proposals are then communicated to their respective divisions.

Development of a Formal Scheme For proposals approved by CEP, each division can develop formal schemes in case of new proposals. Each scheme has an ‘owner’ and a ‘project-in-charge’, the owner is responsible for delivering the benefits of the scheme. The execution of the project within the designated budget and in time is ensured by the project in charge. Though the schemes are developed based on proper engineering techniques it might require additional internal clearance. These are clearly indicated on the scheme papers. High value schemes are subjected to value engineering during formulation or implementation. Management has approved the general norms for contingency provision of 5%. However, in specific cases different contingency provision can be provided with proper justification.

Review of schemes Major capital schemes are reviewed at Jamshedpur, by a team of experts. They may decide to scrap the scheme entirely or may call for additional information before forwarding it to the head of capital planning. Head of capital planning then conveys sanctions to the board members and takes their opinion on it.

Execution of Schemes Execution of schemes is done after the approval of the board. The project in charge has to follow a normal procedure of purchase to select party and to place order. There could be many orders for the same schemes related at different times. Each time the order is released, the project-in-charge has to obtain ‘execution sanction’ from his line management as per delegation of financial powers. The project in charge must indicate the executive sanction request, value of administrative sanction, cumulative execution already obtained, balance against administrative sanction and present request for executive sanction. The project-in-charge must ensure that cumulative value of the sanction always remain within the value for the administrative sanction.

Submission of Carry over Budget for Sanctioned Schemes The project in charge indicates the status of every sanctioned scheme once in a year to the Capital Planning group. This includes schemes approved in previous financial year as well as in the current financial year. However, no over-run costs are allowed to be included in the carry over budget.

Audit of completed schemes The project-in-charge and the owner of the scheme conduct a self-audit of schemes executed. A completion report is then submitted to the engineering commission which evaluates things like actual and projected cost, timely completion of the project and other performance parameters.

Post Completion review After the scheme is completed and the facilities are taken over by the owner of the scheme, a post completion review is carried out by a committee made to review completed schemes. A suggestion is made towards better prospects that can be achieved from the scheme in case of yield of undesired results. RECOMMENDATIONS:  Traditional approach of budgeting to be modified.  Generally there is a budget carryover. To avoid this regular appraisal of projects should be done by the concerned VP’s.  Instead of annual review quartely review should be done  Special teams for critical projects should be appointed.  For risk analysis better tools such as Monte Carlo Simulation should be used which provides a better picture  The discounting rate should be carefully taken as risks associated varies from project to project.To get better results WMCC(Weighted Marginal Cost of Capital) should be taken in place of WACC(Weighted Average Cost of Capital)

PERFORMANCE MANAGEMENT AT TATA STEEL HR policy of Tata Steel Tata Steel is an equal opportunity employer. With talent Tata has realized that people can shape the competitiveness, which is why it pursues management practices, which have been designed to enrich the quality of life of the employees, develop their potential and maximize their productivity. For all its employees Tata has aimed and ensured transparency, fairness, and inequities in all its dealings. Realizing its human resources true values and upholding that value has been Tata’s biggest asset. The openness that it suggests in its work environment has tremendous effect on the employees, which in turn helps to develop an atmosphere of mutual trust and teamwork.

PERFOMANCE ETHICS PROGRAMME The values and principles, which have Governed Tata Steel’s business for a century, have been deployed through the implementation of the Tata Code of Conduct (TCOC, often referred to as the 'Code'), which was first formally articulated in 1998. This was intended to serve as a guide to each employee on the values, ethics and business principles expected of him or her in personal and professional conduct. The Management of Business Ethics is effectively instituted today in Tata Steel through its four pillars concept: •

Leadership

•

System and Processes

•

Training and Awareness

•

Measurement

The TCOC is a testament to Tata Steel’s determination to help its employees in every way to understand their duties and commitments towards shared values and principles. The comprehensive document serves as the ethical road map for Tata employees and Group companies.

National Interest being given foremost importance, The Code also embodies such values as clarity of communication, transparency, respect for others and an ethical approach in conducting business, all of which contribute towards building team spirit and enhance integrity in the Company’s involvement with all stakeholders.

The TCOC has added significance in the Group’s aspiration to be the global industry benchmark for value creation and corporate citizenship. It highlights the importance of group efforts in improving the quality

of life of the people in the communities in which it operates. This includes the understanding that in the process of production and sale of its products and services, the Company will strive for economic, social and environmental sustainability.

In the context of Tata Steel’s increasing global presence the Tata Code of Conduct has been reviewed to accommodate required and appropriate modifications. This has ensured that diverse cultural and business related issues are addressed universally across the Group. The Tata Code of Conduct was launched in Tata Steel (Thailand), NatSteel in July 2007 and in Corus in January 2009.

All employees have a clear responsibility to implement the Code. Additionally the Code now extends to contractors and vendors, who must agree to respect it. The systems and processes are revisited and modified constantly to ensure that they are not subjected to unethical practices. The key PEP drivers are: •

Enhance focus on current business and its growth

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Enhance profit and loss accountability

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Provide employees with exciting opportunities

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Build a high performance team

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Redesign the organization to match people with positions

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Initiate contemporary performance-appraisal and management systems

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Install a transparent and unambiguous governance code

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The first task of the programme was to appraise employees comprehensively for their competencies

BASIC FUNDAMENTALS OF THE NEW OUTLOOK: Structure: It clearly defines the job profile and responsibility for the job, and not just that, it also defines procedures and eligibilities in making the best job to person match. The job to person match is crucial for the company in the long run. Appraisal: Transparency and fair appraisal on the basis of performances are core to this kind of appraisals. Reward: Ensuring that alongside the monetary rewards, there is adequate scope for promotions with increased responsibilities, which enrich the job of the employee

A separate team of PEP researches was established to look into the details in intricacies of the parameters for evaluating employees in the process of transforming them into leaders Besides core competencies, employees were assessed for their capacity to think strategically, decisionmaking ability, achievement orientation, planning and organizing capabilities, oral and written communication skills, cost orientation, and their aptitude for learning

A few more initiatives: In the early 1920s, when there was a dearth of talent in the then nascent steel industry, Tata Steel established a technical training institute to produce high-quality steel profession Tata Steel has also set up, in association with XLRI, a management development centre to provide needbased training for its management cadre. When the company began acquiring a global perspective, it started sending key executives to leading institutes abroad for advanced training.

APPRAISAL •

In Tata steel, an individual’s achievements against the KRA’s are compared to his/her peers performance category.

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Performance is measured in the range from 1-5, where individual’s getting a score of 4,5 are termed as good performers and those getting 1,2 are termed as poor performers.

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If an individual gets low ratings for two consecutive appraisals, he/she is asked to leave the organization.

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Category 3 employees are seen as competent, who have the potential to do better.

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To prevent these employees from getting demotivated, special measures are taken by the company.

FEW DRAWBACKS •

The company uses a forced distribution system or vitality curve (normal distribution) for appraisal.

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In this few employees are graded exceptionally good or marked unsatisfactory, and most are graded good or merely satisfactory.

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Forced ratings reward only a small population, thereby demotivating others.

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Forced ranking injects fear into the workforce. Sometimes employees are penalized just for the sake of maintaining the “vitality curve.”

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Due to this quality and development of employees takes a backseat.

RESPONSIBILITY CENTRES One of the most important component of Management Control System are the responsibility Centres. This deals with assigning responsibilities to managers across the organisation to implement and execute strategy. In an organisation along with implementing a ground breaking strategy, it is also essential to execute it appropriately to ensure optimal impact of the same. Therefor a management control system should:• How responsibility is assigned and measured. • How tasks are measured (not necessarily tasks done by humans but also by machines; e.g. units produced). • Task controls such as, when to order inventory, why the actual differ from budgeted (the causes of difference between the actual and budgeted). • And, aspects not easy to measure or quantify, such as impact on behaviors, intangible assets, and so on. So in simple terms responsibility centre in Tata Steel can be look upon as, an organisational unit for which a manager will be made responsible, or a work station in a production line for manufacturing steel or the payroll processing centre within Tata Steel. Along with the above Responsibility Centres also ensure that,  Its manager run the business optimally and preserve the interests of the larger organization.  Provides goals for the center which are specific and measurable, and  Promote the long terms interests of the organization which are compatible with all responsibility center activities. Evaluating the Performance of a Responsibility Centre: Tata Steel converts the physical inputs used in the manufacturing units into monetary units when evaluating the performance of a responsibility centre. Measuring output is also a tedious task, as Input

may be extended this year but outputs (benefits) may be received over several years (e.g. employee training). It is sometimes also difficult to make a causal relationship – e.g. marketing expenses, IT investments, accountants and generation of revenue and profits. Tata Steel draws a relationship in the form of an input-output attribute to measure how well a responsibility centre did. Such could be in the form of financial controls such as cost, revenue, profits etc. In some cases though the above measurement is not applicable, but mostly it is applicable across the organisation. Examples of such could include:  To measure the contribution of a production department? It can be done on a cost measurement basis.  To measure the contribution of a sales department –by revenue generated. But the question arising here is why Tata Steel relates input to output:  Because they inherently measure efficiency and effectiveness.  Efficiency: ratio of output to inputs;  Simplistically, an output of 1.2 to an input of 1 is preferable than 1:1 or 0.8 output to 1 unit of input.  Caution: Do not use ratio of output to input in an absolute sense; but, only in a comparative sense.

Revenue

Investment

Types of Responsibility Centers

Profit

Cost / Expense

REVENUE CENTRE:  Responsibility Centers whose members control revenues but,  Not the manufacturing or acquisition cost of the products or service they sell, or  The level of investment in the responsibility center.  In other words, you cannot link the input to the output.  Most revenue centers may not set selling prices  They definitely have no control over the costs of input acquired (service manager of Tata Steel does not control coal costs)  Manager is responsible only for costs directly incurred by his/her unit.  They are evaluated on the basis of actual sales or orders booked against budgets or quotas

COST/EXPENSE CENTRE:  Responsibility centers whose employees control costs, but  Do not control their revenues or investment level.  Examples: Production department in a manufacturing unit, a dry cleaning business  Two types of costs at Tata Steel: ◦ Engineered: those costs that can be reasonably associated with a cost center – direct labor, direct materials, telephone/electricity consumed and office supplies.

◦ Discretionary: where a direct relationship between a cost unit and expenses cannot be reasonably made; Management allocates them on a discretionary basis (e.g. depreciation expenses for machines utilized).  Tata Steel follows the conventional principle of comparing the actual with the budgeted cost ◦ Budgeted costs are target estimates. ◦ It points to a goal to be achieved. ◦ But, it is not written in concrete. ◦ Actual costs are that were incurred during a given period. ◦ The difference between the two could be either positive or negative variances. ◦ However, making conclusions on the basis of positive or negative variances must be done carefully.

PROFIT CENTRES:  Managers of profit centers control both the revenues and costs of the product or service they deliver.  It is like an independent business except it is part of a larger organization (e.g. Sales manager of larger product portfolio).  The Product line manager would have responsibility for pricing, product selection, and promotion.  Cost for these units vary depending on ability to control labor, waste, and hours.  Revenues also will vary depending on the unit’s service level, location, etc.  In other words, local discretion would affect revenues and costs.  Investments and some costs (e.g. centralized purchasing).  Therefore, profits represent a broader index of both corporate and local decisions.  If performance is poor, it may reflect poor conditions that no one in the organization could control as well as poor local conditions.

 For this reason, Tata Steel does not evaluate performance only based on costs and profits, but  Perform detailed evaluations that include quality, material use, labor use, and service measures that the local unit can control.

INVESTMENTS CENTERS:  Responsibility centers whose managers and employees control revenues, costs, and the level of investment.  It is also like an independent business (common when an organization acquires another organization – e.g. Tata Steel-Chorus).

OTHER SUPPORT CENTRE (ADMINISTRATIVE CENTER):  One of the most difficult to evaluate because neither the input nor the output is easy to measure (e.g. accounting services, marketing), and  Linking unit’s input and output to organizational objectives. But, with a little careful approach, the costs of such centers can be reasonably computed.  Since most of these centers are treated somewhat like cost centers, an approach based on costs would be helpful. Summary of the responsibility centres

Revenue Center

Output measured in monetary terms

Expense/Cost Centers

Input measured in monetary terms

Profit Centers

Output measured in monetary terms

Investment Centers

Output measured in monetary terms

LEARNING’S OUT OF CONTROL SYSTEM ILLUSTRATIONS  All responsibility centers evolve from the concept of “controllability.”  Controllability principle states a manager should be assigned responsibility for the revenue, costs, or investment that he/she could control.  Revenues, costs, or investments that do not fall under a manager’s control must be excluded when evaluating the manager or his/her center.  Problem with this concept: In most organizations, many revenues and costs are jointly earned or incurred and differentiation the controllable from the uncontrollable is difficult.

CONCLUSION: After studying the responsibility centres of Tata Steel we as a group came to a conclusion that its all system is in place and well integrated. It doesn’t need any improvements in the current scenario.

REFERENCES: •

www.wikipedia.com

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www.tatasteel.com

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www.google.com/images

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Management Control Systems by Anthony & Govindrajan

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Capital Expenditure Manual of Tata Steel

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Annual Report 2010-2011 & 2011-2012