According to company sources, the need to rationalise its factories has arisen to cut down on surplus costs. The cost-benefit proportion from the rationalisation programme was not disclosed. The company has also announced its objective to knock off Rs 100 crore overhead costs this year.

Sources said that the first phase of the rationalisation programme involves detergents and beverages (tea), and this would be completed by the end of the current fiscal. The next phase would be undertaken in the next fiscal involving its other business of personal products.

Meanwhile, as part of its ongoing rationalisation process, the company has significantly internalised a part of its third party production (outsourcing) in personal products.

Company sources said that the important task is to have the balance offlexibility in these operations, whether it be third party processing or its own production. The need is to enable the company to become cost competitive (the company maintains its product prices either in line with the competitor's or below that). While HLL, said sources, derives the same quality from outsourcing as it would from internal production, the approach is to achieve the balance of scale to adopt a better technology. HLL signs on an outsourcing agent only if the third party conforms to its strict list of parameters, which include environmental conditions, labour standards and high quality manufacturing processes. These third parties have to exclusively cater to Levers.

Levers has traditionally had a cost effectiveness programme for each division in the past. Under this, each division used to minimise costs as far as possible. Around 10 years ago, the company estimated that each division was scraping the bottom of the barrel where these costs were concerned. Instead of stopping there, HindustanLever has, over the last few years, started the process of integrating the cost effectiveness programme into a single large programme for the whole company, horizontally linking the cost elements of all departments. This has again given rise to a new stream of savings, and thrown up opportunities, in the process, to rationalise.

However, the company cannot totally bring down the involvement of third party processing in personal products as dental care, which contributes the maximum to its personal products turnover, is reserved for the small scale sector. Thus, the company has to outsource its toothpaste and toothbrush products.

In detergents, the third party processing is done to the extent of 30 per cent of its total production. In soaps it is to a lower extent of 10 per cent of the total soaps production.

In regional and small brands, such as some popular detergents, outsourcing has to remain a continuing feature.

Hindustan Lever has worked on a conscious strategy to integrate the third partywithin the supply chain. Levers uses its strength as a raw material buyer, supplies to the third party, and then uses its distribution chain as well as selling qualities to push the products in the market. The big suppliers are even networked through computers with the Hindustan Lever network, and provided substantial knowledge inputs. The extent of integration is complete.