TQM CASE STUDIES:
Contents 1. Sundaram Clayton Limited: ....................................................................................................................... 4
Conclusion ................................................................................................................................................ 6 2.Toyota JIT Revolution ................................................................................................................................. 7
Toyota's JIT Revolution: A Legendary Production System ................................... ................. .................................... ................................... ................. 7 3.Revamping the Supply Chain: The Ashok Leyland Way: ................ ......................... .................. .................. .................. .................. ................... ............. ... 13
Introduction ............................................................................................................................................. 13 'Together We Can' - Beat the Recession ................................................................................................. 14 Single Window System ........................................................................................................................... 15 Supplier Tiering ...................................................................................................................................... 16 Oscars II .................................................................................................................................................. 17 The Comeback ........................................................................................................................................ 18 4. Tisco: ....................................................................................................................................................... 19
The 'Top' Program ................................................................................................................................... 20 Implementing Best Practices ................................................................................................................... 22 The Future ............................................................................................................................................... 23 5.Tata Indica: ............................................................................................................................................... 24
Background Note .................................................................................................................................... 24 The Story of Indica ................................................................................................................................. 25 The Outsourcing Strategy ....................................................................................................................... 26 Vendor Development .............................................................................................................................. 27 Supply Chain ........................................................................................................................................... 29 6.Dominos India Logistic: ............................................................................................................................ 31
Introduction ............................................................................................................................................. 31 Background Note .................................................................................................................................... 31 Domino's Logistics Model ...................................................................................................................... 33 7. Gujarat Ambuja: ...................................................................................................................................... 35
Background Note .................................................................................................................................... 35 Working Hard Towards Operational Excellence .................................................................................... 38 Enhancing Productivity ........................................................................................................................... 39 Cutting Costs ........................................................................................................................................... 41
- FUEL .................................................................................................................................................. 41 - FREIGHT ............................................................................................................................................ 42
The Future ............................................................................................................................................... 43 8.TiTan:........................................................................................................................................................ 44
Background Note .................................................................................................................................... 45 About Outsourcing .................................................................................................................................. 47 Outsourcing at Titan ............................................................................................................................... 50 The Future ............................................................................................................................................... 53 9.Reference: ................................................................................................................................................ 54
1. Sundaram Clayton Limited: Sundaram-Clayton Limited (SCL) is part of the US $2.6 billion TVS group of companies, the largest automotive component manufacturing and distributing group in India. The focus at SCL is total customer satisfaction. Comprehensive integration of the supply chain through implementation of ERP (Enterprise-Wide Resource Planning) programme has further enhanced SCL's responsiveness. TEI (Total Employee Involvement) forms the base of SCL's quest for excellence through TQM. They understand the importance of the need to continuously honing the expertise of our human resources and learning from the best practices across the world. Training is imparted not only to the employees but also the suppliers. Their policy statement, “Sundaram-Clayton will deliver a level of quality that totally meets customer expectations. Supplying products of the right quality will obtain this customer satisfaction, at the right time, and at the right place. Total employee involvement and continuous improvement in every sphere of activity will be the twin supports on which Sundaram-Clayton quality will stand" spreads across the entire organizational value-chain, including marketing, operations, product development, finance, and personnel. Hence, we see that the SCL‟s strategic clarity about its long term goals has facilitated its journey towards business excellence. A brief snap shot for the Journey to Excellence at Sundaram Clayton, an Indian auto-component manufacturer, which has become world class is given below in. The road map for competitiveness is an attempt of integrating various initiatives and the major outcomes of those initiatives, which makes an organization to move towards Business Excellence. This has been clearly illustrated by the which was adapted by Sundaram Clayton in their journey to Excellence. [5]. The major benefits derived during the ERP implementation in the excellence journey for SCL are Process and activities standardized as per Japan Institute for Plant Maintenance (JIPM) for their Total Productive Maintenance (TPM) standards, Better control over costs and delivery, Increased integration and collaboration with suppliers & customer and Improved controls and reduced transaction processing time; and operational quality excellence. Source: Sundaram Clayton SAP Implementation - Success Story [30] Emerging winners are taking an integrated view of their supply chain with a clear understanding that connecting and synchronizing the supply chain from end-to-end and beyond can not only create financial benefits but significantly improve relationships with the channel partners including suppliers, intermediaries, third-party service providers, and customers. This includes leveraging ERP software opportunities for procurement, forecasting, replenishment and other supply chain activities to gain competitive edge. One of the primary causes of poor quality is the misunderstanding and inconsistent communication surrounding specifications, expectations, and requirements among supply chain members. One dimension is the buyer‟s ability to communicate these requirements uniformly throughout the organization. Issues like product specifications, raw material grades, delivery requirements, request-for-proposals, or specific tasks and responsibilities require integration and centralization of information. ERP systems have built in functionalities to integrate and streamline these activities so that consistency and accuracy of the information is maintained. One of the most important facets of TQM is managing relation with its customers. TQM in its broadest sense is about empowering people to take control of the quality of the goods and services they produce. TQM says that businesses don‟t buy from businesses; businesses buy
from people, and it is the people that make a difference with their attitudes to quality. And this applies all throughout the business, from product development, delivery and installation, and after sales support. Hence buying decisions are not just price-based, but quality of the product, sales and support and relationship with the customer plays an important role. Hence the relationship with the customer is getting more complicated and there is a need to track customers at each stage to serve them better. There is a view that CRM concept emerged from TQM concept. To manage quality relationships, ERP applications facilitate keeping a tract of customer contacts, their requirements, and complaints for personalizing responses. The model integrating, the philosophy of TQM, CSFs, Business Excellence Models for TQM implementation, ERP implementation, as explained in this paper earlier
Road map for competitiveness as applied by SCL ( Source: “Model for Competitiveness”, Confederation of Indian Industry (CII) Institute of Quality, Bangalore, India)
Relationship of TQM in ERP Implementation in Organizations – Towards formation of a Quality Loop
Hence we can see that TQM philosophy-as a corporate strategy, and applying any model for Business Excellence for Strategy implementation can facilitate ERP implementation as both are approaches require development of capacities for company-wide changes. Once individual and organizations develop elements of management like leadership, teamwork, stakeholder empowerment and involvement, resource allocation and measurement/metrics etc., the result is the creation of a mindset and approach, which can facilitate any future change management. This results in the formation of an Integrated Quality Lo op. This loop comprises of individuals and teams who have the capacity to internalize the concept and view the entire business as a continuous quality loop, or process, with the customer as its initiator. ERP systems play an important role for high-level management and coordination of procedural quality functions. Conclusion
An attempt has been made through this exploratory research to emphasize the relevance of TQM or Business Excellence Strategy implementation for facilitation of ERP implementation. Organizations can realize the full benefits of TQM through successful integration of several improvement activities, each of which addresses a key element of the TQM philosophy. These organizations share several common characteristics or develop common elements of management, which enable them to realize the true potential of TQM over a longer period. TQM brings problem solving techniques and continuous improvement opportunities, which facilitate implementation of ERP systems. The effective use of TQM helps companies obtain the maximum return on investment. Therefore organizations adopting TQM philosophies in the true spirit of understanding the TQM philosophy as part of their corporate strategy and applying any model for Business Excellence for TQM Strategy implementation will result in reducing the cost of ERP implementation and will give a solid foundation of required enhanced human capacities and capabilities, conducive organizational culture, optimal utilization of all resources and improved processes. This will facilitate the change and transformation in an organization and enable them to move towards Business Excellence. For those businesses that have not yet started applying the TQM philosophy as part of their corporate strategy, need to integrate ERP
implementation as part of their TQM Strategy for moving towards Business excellence to gain competitive advantage.
2.Toyota JIT Revolution Toyota's JIT Revolution: A Legendary Production System
In the mid-1990s, more than fifty executives and engineers from major automobile companies worldwide visited Toyota Motor Company's (Toyota)1 manufacturing complex at Georgetown, US, to study the Toyota Production System (TPS). The visit also included an intensive question and answer session. Even though the visitors were from competing automakers, including Ford and Chrysler, Toyota did not deny them access to the plant. The TPS aimed to produce world-class, quality automobiles at competitive prices. It was built on two main principles, Just-in-Time (JIT) production and Jidoka.2 JIT was used not only in manufacturing but also in product development, supplier relations and distribution. Analysts remarked that despite imitating Toyota's JIT for many years, no other automaker in the world had been able to make their production systems and processes as efficient as Toyota had done. Analysts felt that though other leading automakers like Mercedes-Benz, Honda and DaimlerChrysler excelled in advanced engineering techniques, engine technology and styling, they did not match Toyota in efficiency, productivity and quality. Executives of rival companies also appreciated Toyota's manufacturing and product development systems. Officials at GM commented, "Toyota is the benchmark in manufacturing and product development." A top executive at Ford said, "Toyota is far ahead in developing markets that the real race is for the second place." Some executives at BMW also considered Toyota the best car company in the world. The early adoption of JIT principles by Toyota seemed to have helped the company achieve significant success. It helped the company respond quickly to changing customer needs and offer high quality products at low costs, thus increasing customer satisfaction. Toyota's history goes back to 1897, when Sakichi Toyoda (Sakichi) diversified into the handloom machinery business from his family traditional business of carpentry. He founded Toyoda Automatic Loom Works (TALW) in 1926 for manufacturing automatic looms. Sakichi invented a loom that stopped automatically when any of the threads snapped. This concept of designing equipment to stop so that defects could be fixed immediately formed the basis of the Toyota Production System (TPS) that went on to become a major factor in the company's success. In 1933, Sakichi established an automobile department within TALW and the first passenger car prototype was developed in 1935. Sakichi's son Kiichiro Toyoda (Kiichiro) convinced him to enter the automobile business. After this the production of Model AA began and Toyota Motor Corporation was established in 1937. Kiichiro visited the Ford Motor Company in Detroit to
study the US automotive industry. He saw that an average US worker's production was nine times that of a Japanese worker. He realized that the productivity of the Japanese automobile industry had to be increased if it were to compete globally. Back in Japan, he customized the Ford production system to suit Japanese market. He also devised a system wherein each process in the assembly line of production would produce only the number of parts needed at the next step on the production line, which made logistics management easier as material was procured according to consumption. This system was referred to as Just-in-Time (JIT) within the Toyota Group. The JIT production was defined as 'producing only necessary units in a necessary quantity at a necessary time resulting in decreased excess inventories and excess workforce, thereby increasing productivity.' Kiichiro realized that by relying solely on the central planning approach, it would be very difficult to implement JIT in all the processes for an automobile. Hence, TPS followed the production flow conversely. People working in one process went to the preceding one to withdraw the necessary units in the necessary quantities at the necessary time. This resulted in the preceding process producing only quantities of units to rep lace those that had been withdrawn. Toyota flourished during the Second World War by selling trucks and buses to the army and the company launched its first small car (SA Model) in 1947. After the war, the company faced a series of financial problems. A financial support package from a consortium of banks (after the intervention of the Bank of Japan) helped Toyota tide over its problems. The package consisted of a series of steps that included downsizing and restructuring the company into separate manufacturing and sales divisions. As per the revival package, The Toyota Motor Sales Company Ltd. was formed in 1950. In the same year, Kiichiro resigned. By 1952, Toyota made a turnaround and in 1953, the company appointed distributors in El Salvador and Saudi Arabia and started exports. Meanwhile, Taiichi Ohno (Ohno) took charge of the company. In 1957, Toyota entered the US market through its subsidiary, Toyota Motor Sales, USA. In 1959, the company began its first overseas production in Brazil and over the next few years, developed a vast network of overseas plants. Besides manufacturing, Toyota started a global network of design and Research and Development facilities covering the three major car markets of Japan, North America and Europe. By the early 1970s, Toyota's sales exceeded that of Chrysler and Volkswagen and its production was behind that of only General Motors (GM) and Ford. Toyota continued its efforts to make its production system more efficient and also developed flexible manufacturing systems. It also began to tap the markets in the Middle East and by 1974 the Toyota Corolla, (launched in 1965) became the largest selling car in the world. In 1984, Toyota entered into a joint venture with GM and established the New United Motor Manufacturing Inc. (NUMMI). Tatsuro Toyoda (Tatsuro), who took over as the company President in 1992, began to control costs by eliminating all unnecessary expenditure. In 1995, after Tatsuro resigned due to health
reasons, Hiroshi Okuda (Okuda) became Toyota president. In 1996, Toyota consolidated its production in North American production units into the Cincinnati based Toyota Motor Manufacturing (North America). In 1999, Okuda replaced chairman Shoichiro Toyoda and Fujio Cho (Cho) became the president. In the same year, Toyota listed its shares on both the New York and London stock exchanges. By the end of 2001, the company's net income had reached $5,447 million and net revenue reached $106,030 million (Refer Exhibit I for the company's financial performance over the years).
According to analysts, Toyota's success in both the local and global markets was mainly because of its state-of-the-art and well-planned operational strategies. The company had continuously focused on gaining a competitive advantage through implementation of innovative and pathbreaking ideas on its production floors. TPS worked on the basic idea of maintaining a continuous flow of products in factories in order to flexibly adapt to demand changes. The most important feature of TPS was the way it linked all production activities to real dealer demand through implementation of Kanban, JIT and other quality measures that enabled Toyota to manufacture in low quantities. Developed by the Japanese, the JIT production system was one of the most significant production management approaches of the post World War II era. The system comprised a set of activities aimed at increasing production volume through the optimum use of inventories of raw materials, work-in-process, and finished goods. In a JIT production system, a workstation gets a part just in time, completes its work and the part is moved through the system quickly. JIT was based on the principle of producing only what is needed and nothing more than needed. The Japanese believed that anything produced over the quantity required was a waste. Cho defined waste as, "Anything other than the minimum amount of equipment, materials, parts and workers (working time) which are absolutely essential to production." JIT did not allow any surplus as it believed that "effort and material expended for something not needed now cannot be utilized now." (Refer Table I for requirements and assumptions of JIT).
Table I Just-In-Time Production System
What it is • Management philosophy • 'Pull' System through the plant
What it does • Attacks waste (time, inventory, scrap) • Exposes problems and bottlenecks • Achieves streamlined
production What it requires • Employee participation • Industrial engineering/basics • Continuing improvement • Total quality control • Small lot sizes
What it assumes • Stable environment
Source: Production and Operations Mgmt.: Manufacturing and Services, Chase, Acquilano & Jacobs.
JIT could be applied to any manufacturing environment including job shop, batch production or repetitive production. The ideal lot size as per JIT was one. A worker had to complete one task and pass it on to the next workstation for further processing. If workstations were geographically far away, efforts were made to reduce the transit time. The advantages of JIT included price flexibility, reduction in product variation, quick response to customers' demands, high quality products at low cost for consumers, and above all, customer satisfaction. The system also offered the advantages of low inventory investment, shortened lead times, and early detection of quality problems. In the early 1930s, the technology used by American automobile companies was superior to that used by Japanese companies. Kiichiro therefore decided to learn new automobile production techniques from American manufacturers. He soon realized that to catch up with the Americans, he had to master basic production techniques. He then reorganized the production system in Toyota in a unique way. This reorganization eventually led to the development of JIT concept. In the early 1970s, Taiichi Ohno (Ohno)3 implemented JIT in Toyota's manufacturing plants. The JIT system was aimed at avoiding waste, reducing inventories and increasing production efficiency in order to maintain Toyota's competitive edge. Ohno also believed that customers should receive high quality products in the shortest time. Initially, JIT was used as a method for reducing inventories in Toyota's shipyards, but later it evolved into a management philosophy including a set of techniques (Refer Exhibit II for a comparison between JIT and non-JIT systems).
Kanban4 was an essential component of Toyota's JIT concept. The Japanese referred to Kanban as a simple parts-movement system that depended on cards and boxes/containers to take parts from one workstation to another on a production line. Ohno had developed the idea in 1956 from the super markets in the US, which had devised an effective system for replenishment of store shelves based on the quantities picked by the customers. Initially, Ohno used pieces of paper contained in rectangular vinyl envelopes to convey information (called Kanban). In a period spanning three decades, Kanban developed into a sophisticated information system that ensured production in required quantities at the right time i n all manufacturing processes within the
factory. The essence of the Kanban concept was that a supplier delivered components to the production line only when required, thus eliminating storage in the production area. Suppliers delivered desired components when they received a card and an empty container, indicating that more parts were needed for production. In case of line interruption, each supplier produced only enough components to fill the container and then stopped. Since Kanban was a chain process in which orders flowed from one process to another, the production or delivery of components was 'pulled' to the production line (Refer Box). In a pull system, the production of a certain product starts only when a demand or request is made by the buyer. The consumer of the product 'pulls' from the last link of the production chain. This last link pulls its preceding link and so on. In western companies, the push system was considered to be more cost-effective. Push systems were schedule-based projections of what demand was expected to be. Based on historical information (updated on a weekly or monthly basis), a computer program processed the information giving a detailed sub-schedule for buying materials and producing goods. This schedule pushed the production in order to comply with the expected demand. The disadvantage of the push system was that predictions did not always coincide with facts. This resulted in either excess or inadequate inventories. In the traditional forecast oriented method, parts were 'pushed' to the line (Refer Exhibit III for a comparison of the Kanban philosophy with the western philosophy). At Toyota, two types of Kanban cards were used: one, to move parts from one place to another, known as the Conveyance Kanban card, and the other, to authorize the production of parts, known as the Production Kanban card. (Refer Figure I). A standard size container was used to store parts and each card was treated like a coupon. (Refer Box). Suppose a container of item X is required in work centre A. As a first step, a production Kanban card is issued to work centre A. The work centre withdraws a container of raw materials from its inventory. The container of raw materials also included a conveyance Kanban card. Work centre A removes the conveyance Kanban card from the container and sends it to the proceeding work centre where it serves as an authorization to pick up a container of raw materials. Three types of information were exchanged using Kanban. Pick up information guided the earlier stages regarding parts to be produced for the succeeding stages. Transfer information indicated when the parts had to be produced for the succeeding stages. Production information was transmitted from the earlier stages to the later stages to inform the workers about the product mix and other operational matters. To make the Kanban system effective and reap maximum benefits (Refer Table II) from it, Ohno framed six rules: • Later process went to the earli er process to pick up products. • The earlier process produced only the amount withdrawn by the later process. • Should not pick or produce goods without a Kanban. • A Kanban should be attached to the goods.
• 100% defect free parts were required. • Reduce the number of Kanbans. Table II Advantages of Kanban
1. A simple and understandable process 2. Provides quick and precise information 3. Low costs associated with the transfer of information 4. Provides quick response to changes 5. Limit of over-capacity in process 6. Avoids overproduction 7. Minimizes waste 8. Control can be maintained 9. Delegates' responsibility to workers Source: ICMR
The Kanban cards were re-circulated and the number of cards controlled work-in-progress (WIP) in the system. In this way, the activities of final assembly were linked to previous operations by a chain system of card ordering that 'pulled' production through the factory. Another important component of JIT was Heijunka (production smoothing). JIT's principle of building only the required number of items helped keep the production costs low. Heijunka helped in the accomplishment of this principle by creating a consistent production volume. Heijunka averaged the highest and lowest variations of the orders. The variations were then removed from the production schedule. This ensured that the right quantity of parts was produced with minimum workforce. Heijunka took care not only of the total volume of items but also the type of items produced and the other options. Although many automobile companies around the world adopted JIT, the system was far from perfect and difficult to implement. It was based on the key assumption that sources and channels of supply were reliable and dependable at all times. Analysts felt that it did not take into account the possibility of labor strikes at automotive plants. Moreover, JIT involved high set up costs and Special training and reorganization of policies and procedures in the company were necessary to implement JIT. The supplier relations of the company also needed to be improved to ensure timely delivery. In the absence of good supplier relations, JIT increased the risk of inventory shortage. Organizational culture also seemed to play a crucial role in the implementation of JIT. Many companies outside Japan reported difficulties in the implementation of the concept. Another problem seemed to be the difficulty of removing the 'human element' from the systems that generate requirements.
An analyst commented, "Computer algorithms, they say, go only so far. Good people, with lengthy experience at reading the ups and downs of the industry are still a must." Most companies felt that people should be actively involved in the system. Moreover, there could be many barriers to the successful implementation of JIT. For JIT to be successful, companies had to ensure that they did not make frequent changes in production planning and that their forecasting procedures were reliable and did not result in under or over forecasting of demand. Other barriers could be equipment failure and employee absenteeism. Analysts felt that Toyota's JIT was a complicated process and that its success inside a plant depended mainly on highly experienced, highly motivated managers. Outside the plant, JIT's success depended on a network of capable suppliers that operated in sync with Toyota's production processes. In fact, according to some analysts, Toyota was not able to replicate the JIT production system in an efficient way in any of its operations outside Japan. John Paul MacDuffie5 said, "Toyota hasn't developed a single facility that is as efficient as the ones it has in Japan." Although Toyota's JIT had some drawbacks, it offered several advantages over other manufacturing processes. Because of the early adoption of JIT, Toyota benefited more from the system than other automobile companies (Refer Exhibits IV & V). By 2000, JIT was adopted by many Japanese companies, as well as some US car companies. Analysts felt that JIT was not only a process that could be applied to manufacturing, but also a philosophy that governed the attitude of a successful business. According to one analyst, 6 "Using JIT, Taiichi Ohno had revolutionized production. The market clearly reflects the success of JIT. The concept has made Japanese products affordable and reliable in quality. Quality is no longer a privilege - it is a standard accompanied by low cost."
3.Revamping the Supply Chain: The Ashok Leyland Way: Introduction
V Ramachandran, (Ramachandran) deputy general manager, Corporate Buying Cell, Ashok Leyland (AL), the Chennai based manufacturer of medium and heavy commercial vehicles was surfing the Internet at midday in his office. A closer look at the screen showed that he had logged on to an auction site. But this auction site was different. Ramachandran was looking for suppliers of some specific tyres in the global market. At a price of $350, five suppliers were interested. He then lowered the price by $5. Now three of them were willing. Ramachandran kept lowering the price, each time by $5. At $325, there was only one response- the seller asked for an hour's time to confirm. Within one hour, the Czechoslovakian company confirmed it could supply the tyres. Both parties then signed up by e-mail and the deal was struck at $325, saving Ashok Leyland Rs 14,700 per set. Known as reverse auction, this was one of the many ways AL was reducing materials cost, which accounted for nearly 70 per cent of its product
cost. In 1997-98, AL, recorded a profit-after-tax (PAT) of Rs. 18.4 crore 1 on sales of Rs. 2,014.3 crore. A look at the previous financial year's PAT showed that the profits for 1997-98 had gone for a severe beating. In 1996-97 AL had a PAT of Rs. 124.9 crore on sales of Rs. 2, 482.5 crore. With the manufacturing Industry reeling under recession, the freight generating sectors (manufacturing, mining and quarrying) saw a steep decline resulting in a severe downturn of freight volumes. For AL, whose business was directly dependent on moving material, goods and people across distances, this had come as a severe blow. AL's supply chain2 had gone haywire under the recession which had eaten away 17.62 per cent of its revenues in one year forcing the company to helplessly allow inventories to build up. The results were showing on working capital. It had climbed from 33.34% of sales in 1993-94 to 58.81% in 1997-98. 'Together We Can' - Beat the Recession
AL did not seem to succumb to the 'uncertainty gloom' that was playing havoc to its business environment. It decided to meet the challenge by re-gearing its systems, be it material order, procurement, material handling, inventory control or production. A L conducted brainstorming sessions inviting ideas on cost cutting. Quality Circle3 teams were formed for this purpose. Said Thomas T. Abraham, deputy general manager, Corporate Communications, "Our Quality Circle teams were very helpful at this juncture and the worker involvement made it easier to address cost cutting." AL took every employee's ideas into account and figured out a way to keep things going and reduce production without inflicting pain. The recession saw AL waging a war on wastage and inefficiency. AL took many initiatives ranging from tiering its vendor network to reducing the number of vendors, and consequently, moving to a just-in-time (J-I-T)4 ordering system, to joint-improvement programmes (JIP), which were essentially exercises in value-engineering undertaken in association with key vendors. It set up different tier-levels to improve the quality of the suppliers. Tiering formed the basis of the vendor-consolidation drive. Till 1998, Ashok Leyland used to source the 62 components that went into its front-end structure of its trucks and buses, from 16 suppliers. In 2000, one tier-I vendor sourced the products from the other vendors and supplied the assembly to the company. This saved cost and time provided the vendor network was well coordinated with AL's own manufacturing operations. At AL, Vendor Development and Strategic Sourcing were handled by Corporate Materials Department (CMD). CMD identified the vendors, rated the vendors based on feedback received from Supplier Quality Assurance Cell, send drawings/specifications, called for quotes with detailed breakup of operation-wise costs, and negotiated the price at which the parts would be supplied. In addition to CMD, there were Materials Management Departments (MMDs) for scheduling based on unit production plan. AL's purchasing philosophy was to maximize bought-out parts. Over 90% of the parts were bought-out. AL believed in global sourcing. Consistent with its operational needs, AL considered both domestic (Indian) as well as international vendors. Global sourcing was normally resorted
to overcome local constraints in the form of technology, quality, capacity or cost effectiveness. AL considered new suppliers for required components, based on Vendors' ability to meet it s specification, price and delivery schedules. Vendors were required to have a strong manufacturing base with adequate engineering support for their own product development activities, as needed by the category of product. AL's policy was to develop a vendor base committed to continuous improvement to meet quality, cost and delivery standards. AL considered its vendors as partners in progress and believed in establishing mutually beneficial relationships. It provided necessary technical assistance in the form of project and production engineering, to maintain quality levels. In addition, where required, it also helped vendors financially. AL's Vendors were expected to have a good quality system. Vendors' quality system had to encompass the following: cost effective process, assured process capability, continuous improvements based on customer feedback, compliance of all statutory/legal/commercial requirements of AL, a stage of development where the Vendor could come under AL's self-certification system, and, traceability - first-in first-out. AL also placed emphasis on optimizing the inventory and vendors were required to progressively meet "Just-in-Time" requirements. Delivery mode as well as packaging were required to minimize the handling/loading and unloading time. AL preferred a manufacturing/assembly/ support base at close proximity to the production units. Commenting on the relationship AL shared with its vendors, J.N. Amrolia, executive director, human resources, said, "The close working relationship with the vendors for vendor development program have benefitted us a lot in cost cutting and making the vendors understand the complexities of material handling." This resulted in low inventories all through the chain. He further added, "We stabilised both the inward material flows as well as the outbound material and that saved us a lot on the inventory." In the late 2000, AL's systems were closer to J-I-T with inventories averaging just seven days, down from three weeks in the late 1990s.
AL seemed to realize that cost cutting would work only if the supply chain was smooth. Thus, in 1999, AL launched Project OSCARS (Optimising Supply Chain and Rationalising Sourcing). OSCARS identified two methods to reduce costs in the inbound supply chain: reduce material costs and through optimum inventory levels reduce the invisible inventory carrying costs. The basic tenets of OSCARS were: a single strategic sourcing agency at the corporate level with local, unit- level scheduling; smaller, stronger vendor base preference for vendors who had access to technology; and to bring down supply chain costs. Single Window System
The Strategic Sourcing and Corporate Quality Engineering (CQE) teams jointly formed the single window vendor management agency, bringing with them specialised commercial and technical knowledge. Within the centrally negotiated price and share of business, unit material
functions interacted with the approved panel of vendors to "pull" materials in line with their production plans. For the suppliers, this had created a convenient single-point contact with AL, for sharing drawings, for negotiating prices and long-term business volumes, and for assistance and consultancy on quality to management issues. This corporate buying seemed to have benefited AL through consolidation of business per supplier and dealing from a position of strength that consolidated volumes. The starting block was the creation of a company-wide database for the 22,000-plus parts which were matched with suppliers' part numbers. This revealed a picture of fragmented business and differential pricing at units. A classification of the 1,400-odd suppliers, based on business volumes, showed that 18 per cent accounted for 92.5 per cent of the business, while 61 per cent handled just 1.9 per cent. In Phase I, corporate buying covered major suppliers (Rs 10 lakh plus per year). The materials were classified into "packs" (broad groups of similar items) with one representative each from the CMD and the CQE forming a three-legged race team of specialists for each pack. Supplier Tiering
AL pruned its panel of direct suppliers through tiering and system buying. Under tiering, AL dealt directly with tier-one suppliers who, in turn, were supported by tier-two and tier-three suppliers. The benefits of system buying could be illustrated with the example of the tool kits that accompanied every vehicle. In the late 1990s, six suppliers' spread over Punjab, Faridabad, Bangalore and Chennai used to supply the 15 items, which were assembled in-house. A short supply of 1,000 screwdrivers meant 1,000 numbers of the remaining 14 items in idle inventories. To overcome this problem, AL aimed at a reduction of its supplier base from 1,400 to 750. Strategic sourcing aimed at reducing costs for the supplier so that the gains were real, painless and sustainable. Tear down studies and value engineering analyzed the constitution and composition of a part to prune costs through substitution, reduction or elimination of materials/sub-assemblies without affecting quality and performance. The cost benefits were shared with the partnering supplier. AL focussed on a JIT approach for high value/high volume items and low cost logistics for low value high volume items. Project OSCARS brought about a few fundamental changes. The push system ("let us make all we can just in case we need it") which resulted in upto 45 days of inventories of components compared to between 3 and 5 days globally had given way to the pull system ("make what the customer needs, when he needs it"). Each stage produced only as much as the next stage needed. Thus, only when a new chassis was loaded did the request go out for the supply of an engine assembly, and so on, for the front and rear axle assembly lines, and for the components that went into them. This resulted in a savings of Rs 8.50 crore a year and a lean supply chain. To begin with, Project Oscars classified the main components used by the company into
Categories 'A' (amounting to 75 per cent of the total cost of components), 'B' (18 per cent), a nd 'C' (7 per cent), with their suppliers also being classified accordingly. Then, AL devised different delivery systems for each category, aimed at cutting inventory-holdings.
The plant sent a J-I-T card, specifying the part number, quantity and the unloading location, through courier, fax or e-mail to the supplier who promptly dispatched the required consignment directly to the assembly line. But how did it guess AL's requirement? For that, Project OSCARS devised a funnel-planning system, covering 12 weeks of requirements. The immediate two weeks' plan was frozen and the next two weeks' semi frozen, the balance eight weeks' plan was tentative. Thus, the vendor already knew roughly when to expect the J-I-T card. To reward the vendors for conforming to the schedule, Project OSCARS planned a reduction in their numbers to 200 over a 3-year time frame. Said S. Nagarajan, Executive Director, AL, "We are looking at giving a minimum business of Rs 1 crore to each supplier involved with us." AL also provided technological inputs for troubleshooting on the suppliers' shopfloors, so that they could cut their costs. Oscars II
After revamping the inbound supply chain, AL went out to revamp the out-bound supply chain. The revamp of the out-bound supply chain (code named OSCARS II) had the twin objectives of improving customer satisfaction and reducing finished goods inventories, and reaching improved service levels with optimum pipeline inventory levels. A customer survey and a study of benchmarks had come out with three major parameters for service level targets: order to delivery time, reliability of deliveries and availability of order status information. The customer could expect delivery in five days from the date of payment, for regular models. For multi-axled vehicles, the promised period was two to four weeks. The second promise was that the age of the vehicle when delivered would be a maximum of 90 days. In the new structure, plant sales yards acted as national pools to hold rare models (called "strangers") and excess of regional requirements. The next tier was made up of the five regional stock pools, which ensured just-in-time supplies to all regional sales offices. Said Amol J Sandil, executive director, marketing, "Within the objectives of OSCARS II, namely, achieving efficient distribution and working capital management, we have been able to improve customer satisfaction by cutting down on delivery time." He further added, "Qualitative improvements in demand forecasting and data management have been central to this achievement". In 1999, AL also adopted Total Quality Management practices. The Hosur plant in Karnataka came out with a new TQM process which seemed to be a success. (Refer Table I).
Table I The Seven Plus One TQM Method Rule
Objective
Total Cost Management (TCM)
Cut Cost
Energy Management
Optimize energy loss
Value Efficient Engineering (VE) material usage Cross Functional Synergy Teams (CFT) Suggestion Scheme
Involve everyone
Inventory Better Management (IM) housekeeping Shop Investment Monitor and Programme Utilize Plus One
Training
Result
Within a year, operating cost as a percentage of plant turnover was down by a third. Overall energy saving. Average power cost per product reduced by 30.06% without additional investment. Substantial reduction in the chasis cost. The very first CFTs resulted in savings of Rs. 18.2 million. The quick handling of suggestion has resulted in continuous, suggestions to cut cost and improve quality. Probably the best IM today in the Industry that has resulted in a lot of saving. Fix Operating cost as per cent of shop turnover machines efficiently. Training across all levels in the organization.
Source: 'Geared Up', A&M, November 15, 2000.
However, with all these activities at the shop floor, AL did not lose sight of the customer. To understand customer needs and assimilate the knowledge, AL adopted '4P' Programme: Probe, Prioritize, Plan and Position. This worked in tandem with manufacturing as part of a crossfunctional team (CFT). The CFTs worked towards continuous improvement in products and marketing. AL also built a 'marketing information system' (MIS) to monitor the trends and forecast demand from the inputs of the dealers and field executives. The Comeback
In the first half of 1999-2000, AL recorded a net profit of Rs 1.9 crore on sales of Rs 1,092.8 crore, against a Rs 36.7 crore loss for the corresponding period in 1998-99. This seemed to have been possible due to operational efficiency resulting from strategic raw material sourcing, with fewer sources and higher volumes, which cut costs; better control over process inputs by tightening supply chain and inventories and; reduced operating expenses through cost savings on energy, tools, spares and adoption of preventive maintenance policies. In 1999-2000, raw material costs were down 1-2% and inventories reduced by Rs 300 crore. Also in 1999-2000, AL sold 37,859 heavy commercial vehicles (HCVs), 27% more than it did in 1998-99. AL's total income in 1999-2000, at Rs 2,611.41 crore was 25% higher than the corresponding figure for
1998-99. Its operational profits in 1999-2000 was Rs 55 crore, Rs.77 crore more than the Rs 12crore operating loss it had made in 1998-99. However, analysts felt that the comeback of AL could be attributed to the end of the recession. They cited the example of its main rival, TELCO, which also registered a 37.5% growth in sales volumes in 1999-2000. For AL officials the 'bad years' between 1997 and 2000 made it pinpoint its focus on critical issues like cost-reduction, operational improvement, and market penetration. Commented, R. Seshasayee, Chairman, AL, "The recession made us hasten the process of improvement that we had been working on for some time." Still, in 1999-2000, despite the reduction, the company's material cost, expressed as a percentage of sales was, at 70%, 3% higher than that incurred by TELCO. Said Arindam Bhattacharya, Principal, A.T. Kearney, who was involved in Ashok Leyland's turnaround effort, "While the company has made significant progress, it will still take time to achieve global standards in inventory management and productivity."
4. Tisco: Background Note Tata Iron and Steel Company (TISCO) was established in 1907 by J N Tata 1 at Jamshedpur in Bihar, India. TISCO offered a wide range of products (See Exhibit I) and services including Hot rolled/Cold rolled (HR/CR) coils2 and sheets, tubes, construction bars, forging quality steel, rods, structurals, strips and bearings. It also manufactured material handling equipment, ferro alloys and other minerals, software for process controls, and offered cargo-handling services. In the early 1980s, TISCO initiated a modernization program of its steel plant (See Exhibit II). Explaining the need of modernization, J J Irani, the then managing director of TISCO said, "We would have been finished otherwise.... you cannot fight a modern-day war with weapons of the Mahabharata. We would have been annihilated had we not modernized. We realized this and embarked on the four phases of modernization. We addressed our drawbacks like the steel making process, our weakest link." By mid-1990s, TISCO had become India's most cost-effective steel plant. It also became Asia's first and India's largest, integrated steel producer (ISP)3 in the private sector. By 2000, eight divisions of Tata Steel were ISO-14001 4 certified, including Noamundi Iron Operations, West Bokaro Collieries, Ferro Alloy Plant, Joda, Sukinda Chromite Mines, Joda East Iron Mines, Tubes Division, and Growth Shop & Steel Works. By early 2000, TISCO had completed four phases of the modernization programme with an investment of about Rs 60 billion 5. The company had invested Rs 4 billion on consultancy fees during 1990 to 2000. The fifth phase of the program had commenced in April 2000 (See Exhibit
III). By April 2001, TISCO had emerged as the world's lowest cost producer of steel. TISCO's operating cost at the 'hot metal' (liquid) stage was $75 per tonne. The company's cost per tonne of finished steel stood at $152 for the financial year ending March 2001. The World Steel Dynamics (WSD)6, in a report stated, "Tata Steel is a 'world class' steel maker the only in India - and one of the few companies in the world with such a standing. This view point is based on a variety of reasons such as low operating costs, special company culture, good profitability, etc." WSD identified 12 companies as World Class Steel Makers, and ranked them based on certain factors7 (Refer Table I). Analysts felt that TISCO's achievement of becoming the lowest cost producer of steel was mostly attributed to its implementation of TOP (Total Operational Performance), a program that focused on improving TISCO's operational practices and rationalizing procurement costs. TABLE I WSD's RANKING Company
Ranking Score
TISCO Usinor (Russia) Posco (Korea) CSN (Brazil) Baosteel (China) China Steel (China) Gerdau (Brazil) Nucor (US) Car-Tech Nippon Steel (Japan) Severstal (Russia) Dofasco (US)
1
131
2
129
3
127
4
123
5
121
6
119
7
118
8 9
116 112
10
111
10
111
11
109
The 'Top' Program
In the early 1990s, TISCO appointed McKinsey and Booz-Allen & Hamilton to study its operations and suggest ways to cut costs. Irani explained the rationale, "Cost-cutting measures
are more important in the present situation where one can no longer control steel prices which are dictated by international markets." The consultants suggested TISCO to focus on various components affecting the cost of steel, which included cost of raw materials, cost of conversion, fuel rate in the blast furnace and mining of coal. TISCO was advised to use the most modern technologies to cut costs further. In the second half of 1998, in association with McKinsey, TISCO implemented TOP program at its G blast furnace8. TOP was widely regarded, as a program, which would have a maximum positive impact to the bottomline, with minimum investment, required in minimum time (See Exhibit IV). It aimed achieving large improvements in throughput, quality and cost in the short term. In the long run, TOP was expected to enable the TISCO to achieve high rates of performance improvement (See Exhibit V). Since TISCO's scale of operations was quite large, the whole organization was divided into manageable 'units' to facilitate the implementation of TOP. A unit team was formed comprising a unit leader and two facilitators. Initially, McKinsey provided the facilitators. The unit leader was responsible for the performance of that particular unit. The team worked full time on the TOP program for a period of 12 weeks. Around eight units were addressed simultaneously during the 12 weeks, and this was also known as 'Wave.' The entire Wave was divided into five phases (See Exhibit VI). The unit team's objective was to explore ideas to reduce the cost or delays made by the unit by about 40%. In the process, the team was expected to identify and understand how each cost element could be reduced. The team had to establish relationships between key performance indicators and the elements that had an impact on them. Each team was asked to set itself a target based on the TOP norms; develop ideas to improve from the present level of performance to the target level; and implement those ideas. The Phase I of a Wave was two weeks long. During this phase, the cost base was examined and the items that had a maximum impact on the bottomline were identified. Individual components of the larger cost elements were identified by drawing cost tree s9. The cost elements, which could be reduced were highlighted and the reduction targets were set. In the Phase II of the Wave, ideas were explored to reach the set targets. At the G blast furnace, throughput10 and fuel costs were identified as the key performance indicators in the Phase II. Among the different individual components of fuel costs, coke and coal were the largest cost elements. They accounted for about 50% of the total costs. A reduction target was set to bring costs down to 570 kgs per thm 11 from 610 kgs per thm. In the Phase III of the Wave, ideas were generated to achieve the target output of 3800 tons per day. Considering the techno -economic feasibility, 36 ideas were short-listed. The ideas were then grouped based on the capital expenditure required for implementing each idea. The Phase IV of the Wave started with the implementation of these ideas. Simultaneously, the G blast furnace also implemented 185 ideas, which did not require any capital investment.
By March 1999, the G blast furnace achieved a savings of Rs 87 million against the targeted savings of Rs 40 million. TISCO set up a potential savings target for its G blast furnace at about Rs 300 million per annum, accounting for more than 10% of its profits in the fiscal 1999. By late 1999, TOP was in Phase V of the Wave (See Exhibit VI). In 2000, similar Waves were also adopted in TISCO's shop floors. The TOP program had helped TISCO to shift its focus from just producing volumes to costs and quality. Moreover, TOP enabled TISCO to improve customer satisfaction and loyalty. Implementing Best Practices
In 1999-2001, TISCO took measures to reduce costs further by adopting innovative strategies and other cost-cutting exercises. For example, TISCO stopped using manganese, an expensive metal used to increase the strength and flexibility of steel. The company made efforts to reduce its product delivery time from 3-4 weeks in 1998 to 2 weeks in 2000. The company aimed to further reduce the time to one week. TISCO also took steps to reduce its manpower costs. Between 1996 and 2000, TISCO reduced its workforce from 78,000 to 40,000 employees. Analysts opined that cutting its workforce by 38,000 employees was not an easy job and the company was able to do it with a lot of communication with employees. TISCO had adopted Performance Ethic Programme (PEP), under which, it planned to promote hardworking young people to higher positions depending on their performance, rather than following the convention of seniority. This exercise was expected to cut the management staff from 4000 to 3000. PEP had two core elements. Firstly, it proposed a new organizational structure, which was expected to foster growth businesses, introduce more decision-making flexibility, clear accountability, and encourage teamwork among the managers and the workforce. Secondly, PEP proposed to introduce a Performance Management System (PMS). It would identify and reward strong performers, and also offer development opportunities for each employee. PMS would also ensure that every employee's job profile was clearly defined. By introducing PMS, TISCO wanted to make performance appraisals transparent and fair and reward the good performers. The company also planned to introduce a new compensation package based on performance from November 2001. Muthuraman explained the benefits of PEP, "Youngsters are getting higher salary than some of the seniors, and after the restructuring, the average age of the managers has fallen by 10 years. Through PEP, TISCO also reduced the hierarchical levels from 13 to 5." In a bid to reduce costs further, TISCO used IT as a strategic tool. In 1999, the company formed a small cross-functional in-house team consisting of consultants from Arthur D Little and IBM Global Services. The team was responsible for re-designing two core business processes - order
generation and fulfillment and marketing development. The program began with a study on cost-competitiveness. The aim of the program was to enhance customer focus enabling better credit control and reduction of stocks, thereby reducing the costs. After considering several packages, the team decided to use SAP R/3. TISCO wanted the team - also known as ASSET (Achieve Success through SAP Enabled Transformation) - to integrate SAP into the existing information system and make it compatible with future SAP implementations. After SAP solutions were introduced in TISCO, the business processes became more efficient. It also improved customer service and productivity, and reduced costs. The introduction of SAP also decreased manpower cost from more than US $ 200 per ton in 1998 to about US $ 140 per ton in 2000. There was a significant reduction in inventory the carrying cost, from Rs 190 per ton in 1999 to Rs 155 per ton by 2000. There were also significant cost savings through efficient management of resources. The Future
Analysts felt that TISCO's modernization program was very successful. The Steel Authority of India Ltd. (SAIL) adopted a similar program with an investment of Rs 70 billion. However, the program was not successful. In contrast, in spite of the depressed market and lower margins, the decrease in the production costs enabled TISCO to achieve a profit after tax of Rs 5.53 billion in 2000-2001, and Rs 4.22 billion in 1999-2000 compared to Rs 2.82 billion during 1998-99 (Refer Exhibit VII). TISCO planned to enter new areas including setting up of a 0.1 million-ton ferro chrome export oriented project. The project was planned in Australia because of the lower power costs. TISCO was to get power at a tariff of 1.8 cents for about 15 years that is about one-fifth of the tariffs in India. Power accounted for 60% of the cost of ferro chrome manufacturing. TISCO was also planning to enter titanium mining through alliances with major global companies. To provide employment to the employees opting for VRS at over-manned units, TISCO planned to enter the call center business in Jamshedpur. To develop this business, TISCO entered into a marketing alliance with Tata International, the trading arm of Tata Group. TISCO also planned to exit from some of its non-core activities. Critics felt that TISCO might face problems due to the decrease in demand for steel in the global and local markets and increasing competition from cheap imports, and anti-dumping duties imposed on the domestic steel manufacturers by the US. They felt that it was doubtful whether steel, even at the lowest cost, would deliver returns higher than the cost of capital in India. However, some analysts remarked that in the long run, TISCO's strategy to export to Jordan, Iraq and the Southeast Asian countries might reduce dependence on the US markets thus helping the company. They said that its entry into value -added products was expected to safeguard the company from the fluctuations in the steel prices.
5.Tata Indica: Background Note
The history of Telco, India's leading automobile manufacturer dates back to the early 1920s. The location of the Telco plant originally belonged to Peninsular Locomotive Company (Peninsular), which was established in Tatanagar, Jamshedpur in 1923. In 1927, Peninsular was taken over by East India Railway to manufacture passenger carriage underframes for the Indian Railways. In 1945, Tata Sons purchased the plant from the Government of India for manufacturing steam locomotive boilers and other engineering products, under the name Tata Locomotive & Engineering Company. Initially the company manufactured broad gauge open wagons for the Indian Railways. By 1947, it started producing boilers for imported locomotives. The company also entered into collaborations with Marshal Sons (UK) to manufacture steam road roller, and with Krauss Maffei (West Germany) to manufacture steam locomotives. In 1954, the company entered into a technical collaboration with Daimler-Benz to manufacture automotive vehicles. The association with Daimler-Benz helped the company build up a strong in-house R&D center (Engineering Research Center - ERC) at Pune, Maharashtra. In 1960, company’s name was changed to Tata Engineering & Locomotive Company Ltd. By 1961, it was manufacturing construction equipments. Over the years, the company acquired technology from several collaborations and co-operation agreements with international companies (Refer Table I). TABLE I TELCO - COLLABORATIONS AND JOINT VENTURES Tata Cummins Ltd.
Joint Venture with:
Cummins Engine Co. Inc. USA.
Business:
Manufacture of Cummins „B‟ Series engines for M/HCVs.
Tata Holset Ltd. Joint Venture Holset Engineering Co. Ltd. UK. with: Business: Manufacture of turbochargers. Concorde Motors Ltd. Joint Venture Jardine International Motors (Mauritius) with: Ltd. Business: Retailing of Passenger Cars. Source: www.telcoindia.com
In 1961, Telco produced its first crane in collaboration with M/s Pawling & Harnischfeger (P&H), U.S.A. In 1966, it acquired Investa Machine Tools Co and set up a machine tools division at Pune. In the same year, it started its Press Tool Division and vehicle manufacture facilities at Pimpri and Chinchwad (Pune). The first commercial vehicle was produced in 1977. In 1983, Telco started producing heavy commercial vehicles. In 1986, the company rolled out its first light commercial vehicle - TATA 407 that had a completely indigenous design. In 1991, Telco produced indigenously - designed passenger cars Tata Sierra and Tata Estate and in the same year it started its assembly and training plant at Lucknow (Uttar Pradesh). The product range of the company included passenger cars, heavy commercial vehicles, trucks and buses (Refer Table II). TABLE II TELCO - PRODUCT PROFILE CATEGORY
Passenger Light Commercial Vehicles Heavy Commercial Vehicles Buses
PRODUCTS
Tata Sierra, Tata Estate, Tata Sumo, Tata Safari, Indica, Indica V2. Tatamobile, Turbo Truck, LPT 407 Turbo Truck. LPT 1109 Turbo Truck, SE 1613 TC Turbo Truck, SE 1613 Turbo Truck, LPT 1613 TC Turbo Truck. SFC 407 Turbo Mini- bus, LP 407 Turbo Mini- bus, LP 709 E Turbo Bus, LPO 1510 CGS bus (CNG bus). Source: www.telcoindia.com
By the late 1990s, Telco had emerged as a leading name in commercial vehicles, passenger vehicles, construction equipment, metal cutting and grinding machines, industrial shutters, high quality steel, alloy castings and other related products. In 2000, commercial vehicles accounted for 94% of its gross revenues; vehicle spare parts accounted for 5%; and hire purchase income, 1%. The Story of Indica
In the early 1990s, Telco's Chairman Ratan Tata (Tata), was flirting with the idea of developing a small car. By mid-1994 a rudimentary design was in place. In 1995, Telco announced that it planned to build a car which would be priced close to the Maruti 800, shaped like the Zen, and spacious as an Ambassador. Producing the new small car - Indica - represented a different kind of challenge for Telco. Should Tata succeed, he would change the face of Telco.
As a truck-maker, Telco was so integrated that it even made it own castings and forgings. As an automaker, it would have to focus on the value chain that stretched between raw materials and after-sales service as well as assembling the parts into the complete automobile. For its new venture, Telco outsourced 80% of the components (1,200 of its 1,500-plus parts), from 200-odd vendors. To develop the Indica, Telco had to combine the learnings from its predecessors with its own unique supply chain management strategies to ensure a sustainable low-cost platform. By learning to build and manage a supply chain, it would set the ground for leveraging the capabilities of the automotive component-manufacturers who already operated in its target markets. In other words, Telco planned to use its skills as an integrator--bringing together products and services from both upstream and downstream operations, and packaging them for the customer under a brand name in its new venture. Globally, a car could be built in 48 months with an investment of US $ 3 billion (Rs 127.5 billion). Indica, was built in 31 months on a budget of Rs 17 billion. This seemed to have been possible by focussing on the supply chain. The Outsourcing Strategy
For Telco, outsourcing seemed to be one of the most difficult aspects of producing the Indica. Unlike global automobile majors, Ford Motors or General Motors, which had a global vendorbase that could be replicated on a smaller scale in India, Telco had to create a vendor-base from scratch. Moreover, it did not have the expertise either to design a car or to build an engine for it. Against this background, Telco had to take its primary 'make-or-buy' decisions for the key inputs-design, engine, and transmission. Telco decided to shop globally for the best deals and use its own expertise to make whatever modifications were needed (Refer Table III for the components outsourced by Telco). TABLE III OUTSOURCING THE COMPONENTS
Components 5 door hatchback Engine Assembly Line Presses Pistons and Piston rings Electrical components and fuel injection systems
Supplier I.DE.A, Italy Institut Francais du Petrol, France Nissan‟s Plant, Australia Mercedes Benz India Pistons Lucas-TVS
Rane TRW Steering Systems Clutch facings and rear (drum) brake Sundaram Brake Linings linings (SBL) Seating Systems Tata-Johnson Controls Steering systems
Radiators Rear view mirrors Front and rear bumper, dash-board, inside trims Air conditioning kits Wind screens and windows Fuel lines Differential assemblies Sheet metal items
Tata-Toyo Tata-Ficosa Tata-Auto Plastics Subros Ltd Asahi Glass Imperial Auto Sona Steering JBM Tools
Source: Business Today, March 22, 1999 and December 7, 1999.
Telco turned to the Italian company, I.DE.A, for the product-design. It bought the engine from the Institut Francais du Petrol of France, and applied its engineering skills to adapt the engine requirements. The transmission was developed in-house at its Engineering Research Centre (ERC), at Pune. Of the Rs 2.5 billion it spent on designing the Indica, the major share went in buying design tools and training its engineers in new skills. Telco's engineers traveled regularly to the sites of its technology suppliers, to receive training before the actual delivery of the machines. Telco also outsourced its assembly line from Nissan's plant in Australia for just Rs 900 million. Telco transplanted it at its factory at Chikli near Pune, which was newly set up for Indica. A new assembly line of the same proportions would have cost at least Rs 4 billion. Again, of the 3 presses for the Indica, only 1 was new, acquired for Rs 900 million, while the other 2 were bought second-hand from Mercedes-Benz and modified to suit the Indica. Telco's engineers and the ERC did the application engineering, programming, installation, and commissioning to save around 45% of the technology costs. The tooling for the car too was supplied internally by Telco's machine tool division. To manage the supply chain better, Telco kept the number of suppliers for Indica to just 200 as compared to about 1,000 for trucks. Most of the parts were supplied by Telco's traditional suppliers- TVS, Rane Group and Tata Auto Component Systems (Taco) who were single source suppliers. Pressed parts, assemblies, and drive shafts were sourced from single vendors. Vendor Development
Once Telco made its make-or-buy choices, the next step was to identify the vendors. Most of the parts that went into making Telco were sourced locally. Except for some sheet metal parts, cylindrical gaskets, and belts--which accounted for 2% of the component value, the Indica was totally indigenous.1 K. Mahesh, CEO, Sundaram Brake Linings, said, "Localisation of components is the most important challenge a new manufacturer faces. It is a time-consuming and painstaking process." Telco employed a simple yardstick for selecting suppliers: the ability to supply components at the negotiated quality, cost, and quantities. In the first stage of selection, an initial assessment team from Telco evaluated the supplier. This was followed by self-evaluation of the supplier,
based on a format provided by Telco. Then there was a quality systems survey, carried out by a Telco quality audit team. This was followed by design validation. And then there was a manufacturing validation to ensure that the supplier was following the proper manufacturing processes. This was followed by the Production Part Approval Process (PPAP), which certified the production quality. R. Chakraborty (Chakraborty), senior deputy general manager, materials & supplier quality improvement group, said, “When a vendor reached this stage, our comfort level in dealing with him goes up considerably, with regard to quality and his ability to supply material to us. We feel that he has a proper production process in place to ensure quality and timely supplies.” Only a handful of vendors met Telco‟s stringent requirements. Telco set up Supplier Quality Improvement Teams to improve the vendors' systems to ensure that they produced defect-free parts. It applied a 13-step Quality Improvement Programme, covering supplier self-evaluation, thorough design-validation, and audit of supplier quality. Another key to Telco's successful vendor-base was a modern system of process management. Telco's target-costing was broken up into vendor-wise cost targets, and the suppliers had to carry out their own value-engineering exercises to lower cost and improve quality. For example, India Pistons, which supplied the pistons and piston rings, walked away with the Indica order because it benchmarked itself against supplies to Maruti Udyog; whereas the other vendors benchmarked themselves against pistons supplied to Telco's commercial vehicles. India Pistons invested Rs 1.5 million in toolings, and Rs 25 million in a separate line at its Maraimalai Nagar (Tamil Nadu) facility. N. Venkatramani, CEO, India Pistons, commented, "TELCO is very particular about logistics, that raw materials have a supply trace, be ready for assembly, need no inspection. It is a demanding customer." Telco even involved its vendors in the design-process to give suppliers more lead time to innovate, and for better supply chain coordination. Commented T.K. Balaji, CEO, Lucas-TVS, which supplied electrical components and fuel-injection systems for the Indica, "By making vendors its partner early, TELCO ensured both quality and price-conformity. Late involvement would have yielded different results." M.S. Kumar, Director & CEO, Rane TRW Steering Systems (Rane), which supplied the steering systems for the Indica, added, "TELCO has been extremely supportive, making available its entire R&D resources to our engineers. It is one of the best experiences we have had in product-development." Telco wanted Rane to design a system that would meet the peculiarities of Indian road conditions. Besides offering both manual and power systems, Rane also had to come out with a left-hand drive variant for the export market. Rane had to go deep into application engineering because the front axle-weight of the Indica was heavier, and its engine-displacement, higher. Indica was not only compact, which left less space, but also heavy, which strained the system. Telco wanted Rane to benchmark the maneuverability of the Indica against the Zen, a much-lighter car. Rane took about 16 months to develop and get the steering system approved, spending close to 2 man-years on it. It spent
Rs 16 million on development costs for the power steering system--including tooling and dies-and Rs 10 million for the manual steering system. Said P.R. Sarathy, President, Rane (Madras), "TELCO gave us price-targets. We worked within them, using value-engineering and concurrent engineering to lower our development costs. For all effective purposes, we were an arm of TELCO during the process." In the case of small vendors, Telco examined their processes- and cost-levels. Telco configured its suppliers in 2 tiers. Tier I suppliers had to assemble sub-systems using components provided by Tier II vendors. Telco asked the latter to supply products at low margins to the former. On its part, Telco helped them lower their costs by solving quality-related problems. For instance, SBL, which supplied clutch-facings and rear (drum) brake linings for the Indica, developed them in-house. V.R. Janardhanam, President, SBL, remarked, "Despite its size, Telco has a lot of humility. It is willing to work with even the smallest of vendors to meet its targets." A typical brake-lining usually went through the following steps: the raw material was converted into slabs; the slab was cut into the required length; the cut piece went through 2 stages of grinding for the inner and the outer diameters; then, the piece was drilled, and, finally, champered. But SBL brought down the number of operations to 3: the raw material was straightaway converted into pieces of required length, and the grinding was done to only the outer diameter. And the company saved 15% because of this single-piece flow technique. K. Pandarinath, Deputy General Manager (Research), SBL, commented, "Telco i s a transparent company. It allowed us to use all their facilities as long as it helps develop a better product. Our engineers spent several weeks working with Telco's engineers on perfecting the brake -linings." Supply Chain
To keep its transaction costs low, Telco configured its supply chain on a just-in-time basis. All high-value components were delivered daily, and in the case of nearby suppliers, twice a day. Vendors who were located far away from Pune set up local warehouses near the plant. The rationale for the relocation: transportation costs alone ac counted for 45% of the total logistics costs for a company, delays in supplies added to costs in terms of machine down-time at the plant. Meanwhile, on the shop floor, where the assembly line was located, Telco had done away with the traditional store function. There was no material store in the Pune plant of Telco. The truck loaded with the material first entered the factory at the material gate where there was a documentation center. A person at this center checked whether the material was scheduled to arrive or not, by keying in the part number and the supplier code. If the material was not scheduled to arrive, the documents were not processed further and the truck was not allowed to enter the factory premises. Once it was cleared at the gate, the truck proceeded to the receiving center. Once the items were unloaded, unpacked and cleared for quantity and quality, they were moved into the transit area. From there they went into what was called the 'super market'. The super market was close to the
assembly line. In the super market, the materials were arranged in such a way that the workers could easily access all the material required on the assembly line without wasting much time and effort. The benefits of this just-in-time inventory system were that the inventories were low and so the interest costs were also low. Again the manpower required to handle the inventories was also low. For Telco, a crucial link in the supply chain was its ability to forecast demand accurately, which would help the vendor plan his production-schedule in advance, thus lowering costs. Telco and Concorde2 employed market research agencies to help forecast demand through trend analysis, using the historical data technique. It used a complex web of correlation involving the country's economic situation, competitors' products, and their USPs. To ensure quick flow of information along the value chain, Telco electronically linked its demand forecasts to production, and backwards to its suppliers. All its dealers were linked to the plant through VSATs3 connected by e-mail to relay demand patterns on-line to the Pune plant. This reduced the order-processing time by 80%. Analysts felt that by being online, Telco would save a minimum of 4 days from the order-to-despatch lead-time. For speedy delivery, Telco resorted to inter-location transfers of the product between dealerships. This would ensure movement of the product to a place where there was more demand. This would make a big difference to finished goods inventory management once Telco started producing at optimum capacity. Telco also trimmed costs by making Concorde leaner than other dealerships, with just 3 levels: managing director, general managers, and managers.4 Each of Concorde‟s general managers worked as profit-centre heads of their individual business regions, and reported directly to the managing director. Added, A.K. Seth, General Manager (Delhi), Concorde, "The company wanted to create a lean and responsive network, with the primary objective being to meet customer requirements as quickly as possible."Leveraging the Supply Chain Indica marked the beginning of Telco's drive into India's auto market as an integrator with a multi-product portfolio. Analysts felt that the competencies that Telco had grown in the process of marketing Indica would be the core around which it would build its future car business. Analysts also felt that Tata would use the supply chain that fed the Indica to feed a whole range of Telco cars of the future. D.C. Anand, CEO, Anand Group, said, "Telco's capacity will be tested by how many new models it can come up with--and how soon. Is Telco in a position to do so? Four years ago, I would have said no. Today, I am not going to underestimate their capacity. They have demonstrated it." Business Today5 wrote, "Leveraging the low-cost supply chain that it has built, Telco will launch a series of other cars--priced both below and above the Indica, straddling the entire spectrum--each of which will be progressively easier to integrate." The supply infrastructure would become economical as the volume of the business that Telco offered its vendors increased. The volume of business would increase with a larger number of cars. The learning that it was extracting from the Indica supply chain would also be available to the company as it moved into other products. There seemed to be a distinct opportunity for a
smaller, cheaper car, positioned as an entry-level for the first-time buyer. Analysts felt that Telco's supply chain management would become the pivot around which it could assemble its passenger-car business.
6.Dominos India Logistic: Introduction
In early 2000, Pawan Bhatia (Bhatia), the CEO of Domino's Pizza India (Domino's) was a man in a hurry. Ever since Bhatia took over as the CEO of Domino's in November 1999, he had been frantically reworking the pizza chain's India strategy. Bhatia was planning to open 150 new outlets by the end of 2002 covering 23 cities,1 including Bhubaneshwar (Orissa) and Jamshedpur (Bihar). In late 1999, Indocean Chase, the private equity fund bought a 25% stake in Domino's operations in India from the Delhi-based industrial family, the Bhartias, who held Domino's franchise in India. Domino's told investment bankers at the fund that it planned to go in for an initial public offering (IPO) in the next two years. Indocean Chase advised Domino's to go beyond its 16 outlets in Delhi to exploit the potential in the pizza delivery business. Unless a well-thought-out expansion plan was put into place, the IPO was unlikely to find too many takers. As part of its expansion plans Domino's revamped its entire supply chain operations, from sourcing raw materials to shipping them for processing at a central location to delivering it to the customer's. Initially, Domino's had a simple model. It had three self-contained commissaries in New Delhi, Mumbai and Bangalore which bought their own wheat, tomatoes and other ingredients, processed them, then delivered them in refrigerated trucks to each outlet. However, volumes were expected to increase when Domino's planned to open new outlets. Therefore, the existing model had to be revamped. Bhatia said, "It's crucial for us to build a low-cost supply chain operation which takes costs out of the system and in turn gives us greater pricing flexibility in the marketplace." Analysts felt that Domino's had to rethink its supply chain operation because it was the biggest area of costs. Since 75% of Domino's customers ordered either from office or home, it did not have to lease large plots of land in prime locations to attract traffic. Instead, it needed an efficiently managed call centre to bring better returns (Refer Exhibit I). Background Note
In the late 1950s, Dominick De Varti (Varti) owned a small pizza store named DomiNick's Pizza on the Eastern Michigan University campus in Ypsilanti, Michigan. In 1960, two brothers who were students of the University of Michigan - Thomas S. Monaghan (Thomas) and James S. Monaghan (James) - bought the store for US$900. In 1961, James sold his share of business to Thomas.
The pizza business did well and by 1965, Thomas was able to open two more stores in the town Pizza King and Pizza from the Prop. Within a year, Varti opened a pizza store in a neighborhood town with the same name, DomiNick's Pizza. Thomas decided to change the name of his first store, DomiNick's Pizza, and one of his employees suggested the name Domino's Pizza (Domino's). The advantage of this name Thomas felt was that it would be listed after DomiNick in the directory. Domino's philosophy rested on two principles - limited menu and delivering hot and fresh pizzas within half-an-hour. In 1967, it opened the first franchise store in Ypsilanti, and in 1968, a franchise store in Burlington, Vermont. However, the company ran into problems when its headquarters (the first store) and commissary were destroyed by fire. In the early 1970s, the company faced problems again when it was sued by Amstar, the parent company of Domino Sugar for trademark infringement. Thomas started looking for a new name and came up with Red Domino's and Pizza's Dispatch. However, there wasn't any need for it because Domino's won the lawsuit in 1980. In 1982, Domino's Pizza established Domino's Pizza International (DPI) that was made responsible for opening Domino's stores internationally. The first store was opened in Winnipeg, Canada. Within a year, DPI spread to more than 50 countries and in 1983, it inaugurated its 1000th store (Refer Exhibit II for worldwide revenues). Around the same time, new pizza chains like Pizza Hut and Little Caesar established themselves in the US. Domino's Pizza faced intense competition because it had not changed its menu of traditional hand-tossed pizza. The other pizza chains offered low-priced breadsticks, salads and other fast food apart from pizzas. Domino's faced tough competition from Pizza Hut in the home del ivery segment also. Little Caeser was eating into Domino's market share with its innovative marketing strategies. By 1989, Domino's sales had reduced significantly and cash flows were affected due to the acquisition of assets. In 1993, Thomas took measures to expand Domino's product line, in an attempt to revive the company and tackle competition. The company introduced pan pizza and bread sticks in the US. In late 1993, Domino's introduced the Ultimate Deep Dish Pizza and Crunchy Thin Crust Pizza. In 1994, it rolled out another non-pizza dish - Buffalo Wings. Though Domino's did not experiment with its menu for many years, the company adopted innovative ways in managing a pizza store. Thomas gave about 90% of the franchisee agreements in the US to people who had worked as drivers with Domino's. The company gave ownership to qualified people, after they had successfully managed a pizza store for a year and had completed a training course. Domino's also gave franchises to candidates recommended by existing franchisees. Outside the US, most of Domino's stores were franchise-owned. Domino's was also credited for many innovations in the pizza industry and setting standards for other pizza companies. It had developed dough trays, corrugated pizza boxes, insulated bags for delivering pizzas, and conveyor ovens.
In 1993, Domino's withdrew the guarantee of delivering pizzas within 30-minutes of order and started emphasizing on Total Satisfaction Guarantee (TSG) which read: "If for any reason, you
are dissatisfied with your Domino's Pizza dining experience, we will re-make your pizza or refund your money." Domino's entered India in 1996 through a franchise agreement with Vam Bhartia Corp2 in Delhi. With the overwhelming success of the first outlet, the company opened another outlet in Delhi. By 2000, Domino's had outlets in all major cities in India. When Domino's entered India, the concept of home delivery was still in its nascent stages. It existed only in some major cities and was restricted to delivery by the friendly neighborhood fast food outlets. Eating out at 'branded' restaurants was more common. To penetrate the Indian market, Domino's introduced an integrated home delivery system from a network of company outlets within 30 minutes of the order. Goutham Advani (Advani), Chief of Marketing, Domino's Pizza India, said, "What really worked its way into the Indian mind set was the promised 30-minute delivery." Domino's also offered compensation: Rs.30/- off the price tag if there was a delay in delivery. For the first 4 years in India, Domino's concentrated on its 'Delivery' strategy. Domino's Logistics Model
Analysts felt that Domino's took a cue from McDonald's supply chain model (Refer Box and Exhibit III for McDonald's model). However, they opined that the level of complexity in McDonald's system in India was not as high as that of Domino's. Commented Bhatia, "McDonald's operations are not as spread out as ours. They are in four cities while we are in 16. Centralizing wouldn't work on such a geographical scale." McDonald's had one of the best logistics models in India. To maintain consistency and quality of its products, McDonald's shipped all the raw materials — lettuce, patties et al to a cold storage close to the main market (Refer Exhibit IV for McDonald's outsourcing). Based on a daily demand schedule that was prepared a day in advance, the required amount of raw material was transported to individual outlets. Thus in early 2000, Domino's came out with its own logistics model. It began at the point Domino's purchased wheat for making the pizza dough. Domino's first decided the procurement strategy for its key raw materials: wheat, baby corn, tomatoes and spices. 3 For instance, wheat was cheapest in Jalandhar's (Punjab) wholesale markets. Domino's refrigerated trucks got the wheat back to the commissary in Delhi. Commissary processed the wheat and prepared the pizza dough. The pizza dough and other items prepared in commissaries were then sent to the retail outlets again in refrigerated trucks. The temperature inside the truck was fixed based on the distance between the retail outlets and the commissaries. This was to set the dough at a particular level when it reached the outlets. The retail outlets had to use up the processed dough within three days of delivery. If they failed to do so for some reason the entire quantity was discarded. To get to Jalandhar, the trucks had to pass Chandigarh. Chandigarh with a cosmopolitan population, was a potential market for Domino's products.
Therefore, Domino's opened an outlet there. The cost of entry was low because there was no additional costs incurred on transportation of products. Domino's opened an outlet in every potential market, which fell enroute between the commissary in Delhi and Jalandhar, it prime sourcing base. The same logic was extended to Shimla. Shimla was just a three-hour drive away from Chandigarh; it had a large market, especially in the tourist season. On the way back to Delhi, the trucks could pick up cheese from Karnal, a town on the Chandigarh-Delhi highway, and transport it to its commissaries across the country. Earlier, if Domino's had to open a new outlet, the commissary in Delhi would have to process the raw material and send it to the outlet. The truck would return empty. With the revamped supply chain, Domino's was able to leverage its fleet much better (Figure I explains how Domino's new hub-and-spoke model worked. There were two hubs in the northern region — the commissary in Delhi and the principal sourcing area in Jalandhar. The spokes were Shimla and Chandigarh). The logistics model adopted by Domino's offered some obvious benefits including lower transportation costs, cheaper procurement and economies of scale. Domino's had already cut out the duplication in procurement and processing of raw materials across each of the three commissaries. The old model of self-contained commissaries had another disadvantage: adding new outlets did not translate into greater economies of scale. Bhatia planned to extend the model to other parts of the country as well. The commissary was to be located near the largest market in that region. Bhatia said, "Our roll-out began only after we mapped out our procurement strategy." Based on the agricultural map of India, Domino's looked for the best product at the lowest cost. Thus, tomatoes would come from Bhubaneshwar, spices from the south, baby corn from Nepal (where it's 40% cheaper than in India) and vegetables from Sri Lanka (Refer Table I). Similarly, Domino's India planned to extend its operations to Nepal, Sri Lanka and Dhaka. The company planned to establish a commissary in Sri Lanka. Domino's also identified specialty crops in each region. The commissary in that region was entrusted with the task of processing that specialty crop. For instance, the commissary for the eastern region in Kolkata was responsible for buying tomatoes, processing them and then sending them to all the other commissaries. Similarly, the northern commissary had to deliver pizza bases. This way, Domino's minimized duplication as well as the dangers of perishability. Once the new model was formalized, Bhatia planned to use Domino's 25 refrigerated trucks 4 to transport products for other companies on the same route. For instance, if an operator in Kochi (Kerala) needed to transport specialty cheese, he could use the Domino's fleet to transport his products.
Said Bhatia, "Not too many people have refrigerated trucks in the country. And we can offer them quality service because we will be giving them standards we use for ourselves." Company sources said that enquiries from clients for such transport facilities had started coming in. Bhatia said he was in the process of selecting a person to head the logistics operation, which would be spun off as a separate profit centre. Bhatia seemed confident that the profit centre had the potential to bring in Rs 10 bn by 2006. However, he said the profit center would not be allowed
to impede the growth of the pizza business, Domino's core operation. Only those deliveries that did not delay or deroute the truck would be considered.
Table I Outsourcing the Ingredients
Wheat Cheese Tomatoes Spice Baby Corn Exotic Vegetables Pepperoni Jalapeno
Jalandhar (Punjab) Karnal, Haryana Bhubaneshwar, Orissa South India Nepal Sri Lanka Australia Spain
Source: Businessworld, June 12, 2000.
Domino's hoped to lower its prices by saving from the logistics model and third-party transportation. In April 2000, Domino's announced a cut in pizza prices to Rs 49. Domino's was also targeting large corporate offices, railway stations, cinema halls and university campuses for faster growth. It had already established an outlet at Infosys corporate office in Bangalore and at three cinema halls - PVR in Delhi, Rex in Bangalore and New Empire in Kolkata. Domino's also classified its outlets into Super stores, Express stores and Regular stores. Super stores were those, which generated high traffic and therefore had more counters than the regular outlets (the outlet in Churchgate, Mumbai). Express stores were those where people were expected to walk in and order rather than ask for home delivery (university campuses, offices or cinema halls).
7. Gujarat Ambuja: Background Note
Gujarat Ambuja Cements Ltd. (GACL) was established as Ambuja Cements Private Ltd. (ACPL) in 1981 by Narotam Satyanarayan Sekhsaria (Sekhsaria), a businessman from the western Indian state of Gujarat. Originally a cotton trader, Sekhsaria entered the cement business because of factors such as stable demand, lack of substitutes and limited competition. With the support of Gujarat Industrial Investment Corporation‟s (GIIC 1), Sekhsaria and his two partners, Suresh and Vinod Neotia, set up APCL. Suresh Neotia was appointed Chairman while Sekhsaria was made
the Managing Director. In 1983, the company floated a public issue and its name was changed to GACL. The same year, production started at a 0.7 million tons per annum (mtpa) plant, named Ambuja Cements, in Ambuja Nagar, Gujarat. GIIC sold its stake in GACL in two tranches to Sekhsaria in 1987 and 1990. In 1993, GACL commissioned its second cement plant at Ambuja Nagar (capacity 1 mtpa), named Gujambuja Cements. Attracted by buoyant cement demand in the northern regions, GACL commissioned a 1.5 mtpa plant at Suli in Himachal Pradesh (HP), named Ambuja Cements Himachal Unit in 1995. In the same year, GACL floated a wholly owned subsidiary in Mauritius – Cement Ambuja International Ltd. (CAIL). A year later, GACL floated another subsidiary, Ceylon Ambuja Cements (Private) Ltd., through which it acquired a small company, Midigama Cement, in Sri Lanka. In 1996, GACL set up its third 1 mtpa plant at Ambuja Nagar, named Guj Line – II (capacity 1 mtpa). GACL also established grinding and packing units at Ropar (Punjab) and Panvel (Maharashtra). In 1997, GACL acquired Modi Cements’ sick 1.4 mtpa plant at Raipur (Madhya Pradesh) for Rs 1.66 billion. This plant was renamed Ambuja Cement Eastern Ltd. After the acquisition, GACL revamped its processes to bring them at par with the standards of its other plants. In 1998, GACL acquired the Nadikudi (around 100 kms from Guntur) and Proddatur (near Cuddaph) limestone mines in Andhra Pradesh to strengthen its presence in southern India. In December 1999, GACL acquired a 51% stake in Delhi based DLF Cement for Rs 3.5 billion. DLF Cement had started its operations in 1997 in Rajasthan with a plant of capacity 1.4 mtpa. After this merger, GACL became the fourth largest cement manufacturer in India after ACC, L&Tand Grasim. In the same month, GACL also acquired a 7.2% stake in Associated Cement Companies (ACC) for Rs 4.55 billion. ACC was the largest manufacturer of cement in India. With 14 manufacturing units in India, it had a total capacity of over 11 mtpa. It was one of the largest integrated cement companies in the world. By the late 1990s, GACL had emerged as one of the most energy efficient and technologically advanced cement manufacturers in India. In December 2001, GACL began trial production at a new 2 mtpa plant in Chandrapur, Maharashtra, taking its total capacity to 12.5 mtpa (Refer Exhibit I). For the financial year 2000-01, the company recorded a turnover of Rs 12.52 billion and a net profit of Rs 1.5 billion (Refer Exhibit II).
GACL had a large distribution network of 11,500 outlets. It was one of the first cement companies in the country to recognize the importance of brand building. The company's cement, sold under the Gujarat Ambuja brand name, enjoyed good brand equity and sold at a premium. The company was the overall market leader in the Indian cement industry (Refer Table I).
Table I Indian Cement Industry - Companies and their Marketshare (2001)
Region (Mkt. Size in million tonnes) Grasim-L&T Combine GACL-ACC JK Group India Cements Madras Cements Lafarge Others
East South North West Total -14 -23.8 -28.1 -90.5 24.6 20
21
13
37
22
24 -
10 22
36 16 -
23 -
24 5 5
-
22
-
-
5
23 33
35
35
40
3 36
Source: www.equitymaster.com
GACL was not only the market leader, it ALSO ranked very high on the profitability criteria. Its new plants, use of better quality limestone, innovative energy management efforts, and strong retail presence in Mumbai, Gujarat and Punjab gave it a strong edge over its peers. Its cost per rupee of sales was much lower than most of its competitors, resulting in much better operating margins (Refer Tables III, IV and Figure I). Table II Cement Companies - Operating Margins (%)
FY97 FY98 FY99 FY00 FY01
Grasim L&T ACC India Cements Madras Cements GACL
NA NA 14
NA NA 11
14 11 7
13 15 9
17 17 16
25
24
25
23
24
35
33
31
31
31
36
36
36
36
37
Source: www.equitymaster.com
Table III Cement Companies - Capacity Utilization (1996-97) Company
Grasim L&T ACC India Cements Madras Cements GACL
(in %)
79 87 95 94 98 102
Source: Analyst, March 1998.
Industry observers unanimously agreed that GACL was the most efficient cement manufacturer mainly because of its operational excellence. The company had done well in spite of the fluctuations in the cement industry by adopting aggressive productivity improvement and costcutting measures. GACL had won a host of awards for management excellence, quality, business strategy and environment management (Refer Exhibit III). Ever since its inception, the company believed in doing things in an innovative and unconventional way, so as to reap benefits in new ways, using new methods. Working Hard Towards Operational Excellence
According to analysts, GACL's strategic farsightedness was evident in its decision to locate its plants in backward areas, so as to take advantage of substantial sales tax and income tax incentives2. GACL's units in the states of Gujarat, HP and Punjab also received sales tax incentives. This was possible as all new investments in cement after 1986 enjoyed a sales tax benefit of up to 90% of the value of fixed assets for a period of 14 years. To get the sales tax incentives on a continual basis, companies needed to incur constant capital expenditure. Thus, GACL continually expanded capacities in Gujarat and Punjab. The Himachal Pradesh plant had the advantage of prioritized power supply at a guaranteed cost for five years from the date of commissioning. The decision to set up a plant in HP made all the more sense because the region was cement deficit at that point of time. Also, the plant was closer to the mines and the Punjab grinding unit. Another reason GACL finalized the plant location in HP was that the area had substantial limestone deposits. However, there were three hills directly between the quarries and the nearest piece of flat land large enough for the plant.
Though the actual distance was just a few kilometres away, the only way existing was a 17 km stretch of road full of potholes. This would have involved time delays and large fuel bills for transporting the limestone to the plant location. GACL engineers decided to get a conveyor belt built across the three valleys, through the mountains. After many big construction firms refused to do the job, GACL built the conveyor belt on its own, in just 18 months. The distance was cut down to just 2.8 kms and the belt moved 800 tonnes of limestone every hour. Even the company's latest plant at Chandrapur was set up to take advantage of substantial salestax benefits for almost 18 years. This unit was situated at the pit-head of coal mines, to save on freight costs. GACL's management realized that the time taken to set up a plant was not entirely in its hands. The company's actual work began after it had identified the right location, acquired the necessary license, power and water supply connections and machinery. From this point onwards, the work at the site was something the company could control. GACL decided to let its engineers define their own jobs and gave them the authority to take on-the-spot decisions regarding capital expenditure and schedules for achieving targets. The engineers were also allowed to set daily, weekly and monthly tasks for themselves. This empowerment of engineers proved to be very advantageous for the company: job functions were more clearly defined and response time was reduced by as much as 90% since engineers did not have to wait for approvals. GACL's plant engineers placed orders for machinery well before the site was chosen. So the equipment was ready for installation by the time the site engineers had acquired the land. As a result, GACL was able to cut down substantially on the commissioning time of its plants. The very first plant at Ambuja Nagar was commissioned in just 22 months. This was a significant achievement, as a plant of similar size normally took three years to install. Even the second plant was commissioned in a record time of 13 months. GACL was able to save a lot of money just in terms of inflationary costs. Anil Singhvi (Singhvi), Treasurer, GACL said, "By squeezing the project time, you save 10 per cent on account of inflation alone; plus we estimated an interest cost savings of around Rs 250 million." Once GACL got the plants running, it realized that to compete with the established players, who had larger plants and economies of scale, cost control would be important. The major cost components of cement are fuel (20%), freight and raw material (17% each) and power (16%), with other components accounting for the balance 30%. GACL decided to adopt a two-pronged strategy to achieve total cost management (TCM): enhancing plant productivity and reducing costs on each of the cost components individually. Enhancing Productivity
GACL worked hard to reduce mining expenses. Cement companies normally operate their own limestone mines. Mines were not only extremely destructive environmentally, they were also expensive to operate. The explosives used for mining were on the negative list of imports and substantial costs were involved in implementing safety measures. In 1997, GACL sent its engineers to Australia to study the extraction of metals. On their return, GACL implemented new
technologies that could access limestone in smaller areas where blasting was not possible. To reduce the noise and vibration that occurred during the conventional drilling, blasting and crushing process, the company introduced an Australian device called Surface Miner. The Surface Miner was not only energy efficient, it also recovered more material from a given area. GACL engineers found that by focusing on kiln operations, they could not only ensure cement quality, but could also reduce power consumption. A company official said, "You have to make sure that the reactivity is such in the burning zone that whatever you burn is converted into clinker3 minerals. And all this depends on the burning process, which we had no way of monitoring from the outside. Inadequate heating yielded inferior quality cement and over cooking made the clinker harder to grind." In the early 1990s, during a visit to a cement plant in Japan, GACL engineers learnt that factors like retention time (time elapsed in the kiln and the speed of burning), temperature, and rate of cooling could be judged from the microstructure of the clinker minerals. The Japanese engineers physically scanned the clinker pieces extracted from the kiln under a microscope to determine on the basis of their experience, whether the clinker had been heated to the right temperature. After undergoing extensive training, GACL's engineers tried the above procedure at their own plants and successfully brought down power costs from 120 units/ton to 90 units/ton. At GACL's second plant in Ambuja Nagar, kiln productivity ranged between 2800-3000 tonnes. While setting up the third plant in the area, GACL engineers realized that if they had a larger pre-heater (in which the limestone was heated before being fed into the kiln), they would be able to put more material into the kiln and thereby increase production. However, the company's supplier of pre-heaters said it was not possible to make a bigger pre-heater without modifying the kiln. The engineers told the supplier to make a bigger pre-heater, while they themselves modified the existing kiln. After spending two month studying the data available on kilns from the other plants, the engineers eventually worked out a plan for kiln modification. After the above plans were implemented, the same kiln began producing 3500 tonnes per day. With a marginal investment of Rs 24 million, the plant was now producing 0.17 million tonnes more per year. To ensure consistency in the quality of material and kiln temperature, GACL installed a centrally operated computerized process control system. The system controlled around 3,000 operational parameters to ensure quality at each step of the production process. The system utilized raw material management software to evaluate the optimum mix and redesign accordingly to get consistent quality and optimum utilization of raw material. In 1990-91, capacity utilization of the first plant at Ambuja Nagar was 140%. However, GACL's engineers continued their drive to improve capacity utilization further and installed a 24 -hour monitoring system and introduced weekly checks to check faults before a breakdown occurred for certain key components. As a result of these measures, capacity utilization went up to 143%
that year. GACL decided to run its plants non-stop for 40 days against the industry average of five. This was again inspired by the visit to the Japanese cement plant, which ran for 100 days continuously. As a result of all these initiatives, GACL achieved more than 100% capacity utilization during 1999. GACL's focus on quality control practices was manifested in its decision to introduce the practice of reporting quality related data 48 times a day instead of just once. And to ensure that bags contained the right quantity of cement, GACL used Zero Error Electronic Rotary machines which checked the quantity of cement in randomly picked bags. In the case of 50 kg bags, GACL permitted a maximum variation of 200 gm. The company also invested around Rs 60 million in pollution control equipment to limit dust and debris in emissions and dust suppression and extraction systems at brushing and grinding units. These pollution control measures led to a significant decline in the plant's repair bills. Since dust particles cause wear and tear of equipment, the decrease in such particles led to a sharp fall in the number of breakdowns in moving parts and gear boxes. Around 81,000 trees were planted in Ambuja Nagar and an artificial lake was also built. A portion of an old quarry was reclaimed and converted into a vegetable garden. Because of the stringent environmental pollution control norms at its plants, GACL was even able to maintain a rose garden near the Ambuja Nagar plant. The conveyor belt set up for the HP plant was totally covered and no limestone dust escaped into the fragile ecosystem around the conveyor. And because all three motors for the conveyor belt were located at the plant site, there were no engine noises and noxious vapors along its entire length. Cutting Costs - POWER
Power accounted for a large part of GACL's cost of production. GACL realized that a captive power plant would increase savings substantially as power sourced from the power grids was both unreliable and costly. So it set up fuel based captive power plants in Gujarat (40 MW) and Himachal Pradesh (12 MW) in 1998. GACL's captive power generation cost was only Rs 1.30 per kilowatt (excluding interest and depreciation), compared to Rs 4.50 per kilowatt for power supplied by the Electricity Boards. Soon, the company was not only getting around 60.3% of its total power requirement from these plants, it was also selling the excess power it generated to the local state governments. B S Dulani, Vice President, Operations, at the Gujambuja plant said, "Small measures like modifications in higher capacity motors for fans, coolers etc. according to specific requirements (shifting from AC to DC drive, which allows regulation of current) wherever possible, and many other simple steps helped reduce GACL's power consumption from 120 units/tonne of cement in 1987 to 88-90 units per tonne in 1995 against an industry average of 121 units per tonne." - FUEL Coal is an important source of energy for the cement industry. However, while most of the coal production in India is located in the central and eastern parts, the cement industry is concentrated in western and southern parts. Thus, the cost of transporting coal to the cement plants was very
high. Moreover, the quality of coal was also very poor. Cement companies had to decide whether to use imported coal or substitutes like lignite, natural gas and oil. GACL decided to import cheaper, higher quality coal from South Africa. The company also began importing better quality furnace oil for its diesel generator (DG) sets for its power requirements. This led to a considerable reduction in the operating costs of their power plants. GACL consumed only 96 kwh of power per tonne of cement against the industry average of 110115 kwh per tonne. The company's coal consumption was also the lowest in the industry. GACL consumed 170 kg per tonne of cement while the industry average was 250 kg per tonne. Since the company's Ambuja Nagar plants were located in the agricultural belt of Saurashtra, where groundnut husk was available in plenty, GACL engineers tried to use groundnut husk instead of coal to fire the kilns in one of the plants. The idea worked wonderfully and the company was able to bring down the overall coal consumption by 3%. In another plant, GACL replaced coal with crushed sugarcane. The use of sugarcane however, created problems because the water content differed with every batch, leading to fluctuations in kiln temperature. So the company's engineers designed a special mechanical system that could adjust the rate of feeding to ensure a stable temperature in the kiln. In the process, GACL brought the energy bill down by Rs 20 for every tonne of crushed sugarcane.
The company also replaced V belt drives (which consumed more energy due to friction) with flat belt drives. Even though mechanical conveyors gave rise to problems like spillages and breakdowns, GACL did not shift to pneumatic conveyors, which consumed more power. Instead, the company devised an improved version of the mechanical conveyor to eliminate its drawbacks. - FREIGHT According to analysts, the most successful of GACL's innovative strategies was the development of a sea transportation route for its cement. At a company meeting in the early 1990s, a Marketing Manager said, "As we all know, Bombay is the country's largest cement market. It consumes a vast 2 lakh tonnes a month. The city is also 1060 kms away by rail. The transportation and packing costs alone will be phenomenal." Road transport was very costly and rail transport was not feasible due to the limited number of wagons available with Indian Railways. Just when it seemed that the company would have to agree to bear the road/rail transportation costs, an employee in the Logistics department said, "I can bring Bombay closer to our plant." This marked the birth of the idea of using the sea route, instead of land. The sea route would bring down the distance to 315 kms. GACL set up a special cell to develop this idea. The company invested Rs 1 billion to set up modern ports and freight-handling terminals at Muldwarka and Surat (south Gujarat) and Panvel (near Bombay). In addition, it bought three special ships (one designed in Singapore and the other two in India) to transport the cement. The vessels, custom made for Indian conditions and requirements, had the capacity to transport 2500 tonnes of cement each.
The port terminal at Muldwarka was an all-weather port, handling ships with 40, 000 DWT.5 It was also equipped to export clinker and cement and import coal and furnace oil. A fleet of five ships, with a capacity of 2500 DWT each, ferried bulk cement to the packaging units from this port. The bulk cement terminal at Surat had bulk cement unloading capacity with a storage capacity of 15,000 tonnes. The terminal at Panvel had a storage capacity of 17,500 tonnes. To facilitate transportation by ship, GACL sent cement in sealed road tankers from the plant site to the shipping terminal, where it was transferred to silos. 6 From these silos, it was transferred into airtight holds in the ships. At the destination, the cement was unloaded from ship holds and again placed in silos, before being pumped into the sealed road tankers. Customers were provided small storage tanks into which cement was pumped from the sealed tankers by a fluidization process.7 For customers who preferred bagged cement, GACL arranged special packing facilities at the unloading terminals. GACL had conveyor belts running up to the dispatch yard for loading the trucks and wagons. A fleet of around 350 self-financed trucks and a railway siding on the factory premises provided flexibility in the mode of transportation. The cost of transporting cement to Bombay worked out to about Rs 400 per tonne as compared to over Rs 1800 per tonne by road. Since the cement was now being moved in bulk, packaging costs were also reduced. Thus, GACL was able to save roughly Rs 160 million annually. Besides, there was far less wastage and spillage, and since the cement was untouched by human hand, it of the finest quality. GACL's shipping facilities brought many coastal markets within easy reach and made it one of the largest exporters of cement. Because of the port, it was now much more convenient for the company to import coal. A strong focus on logistics management helped GACL reduce finished goods inventory levels also. A Mumbai dealer could obtain stocks within eight hours because of the company-owned jetty.8 The cement was packed at a plant at the jetty itself, at the rate of 100 tonnes per hour. The Future
The continual capacity build-up in the Indian cement industry led to an excess capacity situation by the beginning of the 21st century. During the same period, growth in the cement industry declined from 21% (April-September 1999) to 11% (October 1999-March 2000) because of drought in many parts of the country. Prices dropped because people feared that construction activities would decline due to the drought. At the same time, the cost of production continued to increase because of hikes in power, rail freight, and coal and diesel prices. As a result of the above factors, cement companies were affected negatively. According to some analysts, even GACL seemed to have exhausted its armory of cost-cutting and productivity enhancing strategies. For the third quarter ended March 31, 2002, the company registered a 9.27% decline in net profit. Its profits had come down from Rs 600 million to Rs 544 million in 2002 for the same period last year. This was despite a 11% increase in turnover: Rs 4.3 billion in 2002 as against Rs 3.9 billion in 2001 for the corresponding quarter. The operating margin also came down to 32% as compared to 38% in the previous year. Critics even commented that GACL's cost efficiencies were more
driven by market compulsions rather than a strategic cost focus. GACL however did not seem to be very worried, because the decline in profitability was caused by factors that were beyond its control. Singhvi said, "We have put up a good show despite low cement prices during the quarter by around Rs 300 per tonne. Lower cement prices have not been reflected in the bottomline." At the same time, the company was not taking things lightly. GACL realized that while its traditional cost-saving methods would continue to prove valuable, they were not enough. As stated in the company's Director's report, "The route to higher profitability lay elsewhere: Namely, better sales realization." Thus, GACL's marketing team began focusing its attention on the retail market. The company believed that the retail market offered it the opportunity to build loyalty through higher standards of service. The company asked its marketing teams to push for better prices. Because of these marketing initiatives, GACL was able to maintain its market share in Gujarat, even while commanding a high price. The company posted an increase in sales in the highly competitive and complex Mumbai market even as demand growth slowed down and prices declined. Similarly, this focus on marketing led to an 8% increase in sales in the northern region during 1999-00. GACL continued to seek ways to reduce costs. It planned to use a captive thermal (coal-based) power plant to meet the power requirements of its Chandrapur plant. As the power plant was close to coal mines, the company expected the variable cost of power to be significantly lower. Refuting the claims that the company's drive for achieving operational excellence was totally market-driven, Singhvi said, "We eat, live and breathe cement and we are completely focused on the business. We try and bring in global best practices into a commodity business. This obsession is important for survival."
8.TiTan: In late 1999, the top management of Titan Industries Ltd. (Titan), India's leading watch, clock and jewelry manufacturer, was surprised when several senior executives threatened to resign. The threats reportedly came after a long period of employee unrest in the organization. The reason behind the unrest was the company's decision to increase the level of outsourcing in its manufacturing activities while limiting production facilities for just assembling purposes. Titan's Vice-Chairman and Managing Director Xerxes Desai (Desai) quickly issued a statement stating that the above was not true. However, this was in sharp contrast to his earlier statements in the media. In an interview to a business magazine1, Desai had remarked, "We will manufacture only if we can do it faster and cheaper than anyone else in the world." Even as the company worked towards explaining its strategies clearly to the employees, analysts could not help remark that Titan was already sourcing a large part of cases and movements, key watch components, from within and outside India.
Moreover, the company had always been sourcing a variety of raw materials such as stainless steels, tool steels, engineering plastics, tools, consumables, components and specialty movements2 for its watch manufacturing operations through vendors spread across 20 countries, mainly in Asia and Europe. The company's management seemed to have realized that global sourcing of certain components made better business sense. Media reports even quoted watch industry officials claiming that companies like Titan had 'no option but to move away from manufacturing and towards trading in the long run.' This was not a very surprising move as it seemed but natural for the company to look for cost effective sourcing options at a time when manufacturing seemed rather costly. Titan's decision was influenced by a host of factors that made the company realize the potential benefits of outsourcing as a tool for holding on to its position in the Indian watches market. The 3 liberalization of the Indian economy and the subsequent removal of quantitative restrictions on watch imports in the late 1990s, forced Titan to focus more on marketing efforts rather than manufacturing to retain its competitive edge in the future. Background Note
Titan was promoted as Titan Watches Ltd. jointly by Questar Investments Limited (a Tata group company), Tata Sons, Tata Press and the Tamilnadu Industrial Development Corporation Limited (TIDCO). The company was incorporated in July 1984 in Chennai, India, in technical collaboration with one of the world's largest manufacturers of watch movements, France Ebauches, a French company. Unlike Hindustan Machine Tools (HMT), the leading manufacturer of mechanical watches at that time, Titan Watches decided to concentrate on manufacturing quartz watches. The company established its first manufacturing facility in Hosur, Tamil Nadu in 1987. The state-of-the-art manufacturing facility, set up with technical know-how from Europe and Japan, had an installed capacity of 3.5 million watches per annum. In 1988, the company established a component manufacturing facility and in 1990, it started a case manufacturing plant, both located close to the Hosur plant. In 1992, the company integrated backwards to manufacture step motors.4 During the same period, it began manufacturing electronic circuit blocks, used in its watch movements. The Rs 2.7 billion watch and clock manufacturing facilities were spread over a built-up area of 42,000 square metres. The company also set up a watch assembly unit with a capacity of 5 lakh watches in Dehradun, Uttaranchal. In 1992, Titan Watches entered into a joint venture with Timex Corporation of USA to market Timex watches in India. The same year the company set up a joint venture with the Economic Development Board of Goa to manufacture electronic circuit boards in Goa in an effort towards indigenization. Titan set up its fully integrated, Rs 400 million jewellery plant in 1994 over a built-up area of 13,500 square metres in Hosur. The plant had a capacity of manufacturing four tonnes of gold a year. Due to poor market response the company discontinued the manufacture of jewelry watches.
The company also set up a separate manufacturing facility for solid link, sheet metal bracelets, alarm timepieces and premium table clocks in 1995. In 1995, Titan Watches overtook the market leader HMT by selling 3.2 million watches against the latter's 3 million. The same year, the company changed its name Titan Industries Ltd. in order to change its image from that of a watch manufacturer to that of a fashion accessories manufacturer. Titan also introduced the Tanishq range of 18-carat gold jewelry. Over the years, the Hosur facility went on to become one of the largest integrated watchmanufacturing units in the world, employing around 3500 people. The facilities in Hosur included a computer aided design (CAD)5 and prototyping unit, a comprehensive tool room with capacity for manufacture of precision tools and die-sets. Besides, Titan had a wide range of computerized numeric control (CNC 6) machines. Gold was refined and alloyed in-house at the Hosur plant, but the design center for jewelry was located in Bangalore. From the very beginning, Titan had used cost cutting as a means to achieve competitiveness and improve profitability. It realized that sustained advantage in the marketplace could be achieved only by keeping costs low and launching innovative/technologically superior products. To improve productivity, quality and safety, Titan automated select manual and semi-automatic operations in movement and case manufacturing. Titan had always implemented World Class Manufacturing (WCM) practices that helped keep costs under control. As part of the WCM initiatives, Titan implemented practices such as Just-In-Time Manufacturing, Total Productive Maintenance and Total Quality Control. In 1996, Titan increased the Hosur plant's capacity to cater to the growing domestic and international demand from 3.5 million to 4.18 million units per annum. In 1997, the company launched its own range of table clocks to cash in on the fact that there were no branded players in the segment. In the same year, it began to manufacture watches for several prestigious international brands. In 1998, Titan decided to discontinue the joint venture arrangement with Timex due to certain differences. In the same year, it increased the capacity of the Hosur plant to 5 million watches.
Titan sold its products through a network of exclusive Titan showrooms called, 'The World of Titan' and 'Time Zone,' a multi-brand watch showroom selling premium domestic and international brands, in addition to over 5500 dealer networks across 1400 towns in India. In its efforts towards developing its export markets, Titan started selling its products in over 40 European, West Asian and South East Asian markets through its subsidiaries in London, Singapore and Dubai. In 1998, the company decided to move out of the lower segment of the clocks business. The same year, Titan instituted the 'PQCD world class-manufacturing program' that placed renewed emphasis on Productivity, Quality, Cost control and Delivery on time. This program emphasized greater focus on customer satisfaction and profitability. In order to cut costs, the company indigenized its components. It was able to increase the proportion of indigenous components from 44% in 1994 to about 75% in 1998. The company also implemented SAP Enterprise
Resource Planning on the advice of Coopers & Lybrand consultants, to improve the utilization and planning of resources, lower lead time and inventories. Over the years, Titan became one of the most successful and respected Indian brands. The company was ranked sixth among the world's largest watch manufacturers. It was given the credit for revolutionizing the Indian watch industry in India through constant innovation, better product design, heavy branding and good distribution. The advertisement campaign for Titan watches with the signature tune adapted from the 25th Symphony of Mozart became a landmark Indian advertising's history (Refer Table I for key statistics of the Indian watch industry). TABLE I INDIAN WATCH INDUSTRY - KEY STATISTICS
Market Production Size Year (in 000 (in Rs nos) crore) 1993 29401.6 516.3 1994 30648.4 465.5 1995 20918.6 587.4 1996 24726 766 1997 36480.7 797.3 1998 36717.5 746.3
Market Shares (in %) Titan HMT Timex Others 37 49 45 41 45 48
47 22 22 23 21 22
3 10 12 13 10 10
13 19 21 23 24 20
Source: www.indiainfoline.com
The company's tryst with outsourcing began in 1999, with the changes in India's foreign trade policies. Earlier only watches worth Rs 35,000 and above could be imported. The new EXIM policy7 freed the imports of watches of any value under a special import license. The import duty was also set to be reduced gradually in the future. According to analysts, this removal of restrictions could cause international players to make a beeline for marketing their products in India. Titan, which hitherto had only the low-profile, failing HMT as the main competitor, realized the financial muscle and technological superiority of the MNCs. In order to be able to meet the challenges of the changing market dynamics, outsourcing became an imperative for the company. About Outsourcing
Simply put, outsourcing means getting those things done outside that were hitherto provided for internally. According to the Outsourcing Institute, "Outsourcing is nothing less than a basic redefinition of the organization. Outsourcing suggests an organization focussed on a few, well chosen core competencies supported by long-term outside relationships for many of its other activities and resources." An organization can outsource many functions of its day to day
operations - manufacturing, marketing, human resources management, information technology services to name a few. It is thus a type of make-or-buy decision, wherein typically an earlier 'make' decision is altered to a 'buy' decision. Earlier, when competitive pressure on companies was not very severe, cost management in manufacturing usually resulted in backward integration and gaining ownership of a large range of manufacturing and subassembly facilities. However, more and more organizations began moving towards outsourcing manufacturing for a lot of reasons. Outsourcing helps a company become flexible enough to terminate an operation if it does not meet the business goals without being concerned about various human resources, separation, or litigation issues. It is not necessary to build a fixed overhead infrastructure and the company can acquire and leverage customer acquisition expertise easily when it outsources certain activities.
As customers increasingly demand quick delivery, companies have discovered the importance of optimizing the supply chain activities. Moreover, with the markets changing rapidly, there has been an increase in the investment risk in new technology, machinery and other equipment. This has necessitated flexible production systems in manufacturing concerns throughout the world. Most importantly, organizations have also realized that it is in the best interest of the company to concentrate its resources on its core competencies only. The benefits of outsourcing can be summarized as follows: • Provides flexibility and versatility to in -house staff. • Frees up capital and cash for other activities that are the company's core competencies, such as R&D or marketing. • Helps shorten the 'time-to-market' by focussing on core activities. • Provides access to industry leading process deve lopment expertise and manufacturing technologies. • Helps avoid long-term investments in potentially under-utilized production capa city or excessive inventories.
The materials management department coordinates the outsourcing initiatives in an organization. This covers the complete cycle of material flow from the purchase and internal control of production materials to the planning and control of work-in-progress and distribution of the finished product. Before deciding in favor of outsourcing, it is essential for organizations to identify, exploit and protect their core businesses. They should retain or insource those manufacturing functions that are critical to the product and those the company is distinctively good at making. Thus, only those manufacturing functions should be outsourced in which the suppliers have a distinct comparative advantage, for instance in terms of greater economies of scale, a fundamentally lower cost structure or stronger performance incentives. Most importantly, it is necessary to use outsourcing proactively through a stronger focus on internal core business areas, as a way to improve manufacturing performance by generating employee commitment at all levels (Refer Table II & III for the essentials and perils associated with outsourcing).
TABLE II THE ESSENTIALS OF OUTSOURCING
Understanding company goals and objectives Having a strategic vision and plan Selecting the right vendor Ongoing management of relationships Having a properly structured contract Communicating with affected individual/groups Getting senior executives' support and involvement Paying careful attention to personnel issues Having short-term financial justification Using external expertise Source: www.salience.com TABLE III THE PERILS OF OUTSOURCING
Loss of control Exposure to supplier risks and issues of quality control Suppliers can reap undue advantages by imitating product/technology Product degradation because the supplier pays less attention to it The change from collaborative to opportunistic behaviour of the supplier (or the buyer) over a period of time Difficulty in measuring the actual costs of the supplier, which are typically above baseline costs because of the experience curve Potential problems associated with taking the function back or substituting the supplier when the outsourcing agreement terminates Possibility of being tied to obsolete technology Source: ICMR
Many leading global companies such as Volvo and HP have been reaping the benefits of outsourcing manufacturing. The practice has been particularly popular among companies in the automobile and pharmaceutical industries. Titan was one of the first Indian companies from the consumer electronics business to have opted for outsourcing its manufacturing activities as a strategic exercise. Outsourcing at Titan
Titan's entry into the clock segment in the mid 1990s failed badly because its clocks could not face the competition from cheaper imports from China. Moreover, the design of Titan's clocks was also found to be faulty. To correct these problems, the company decided to stop manufacturing clocks, instead it decided to import them from Hong Kong. The only input in this 'virtual manufacturing8' setup from Titan's side was in the form of design, branding and distribution. The company converted its clock plant into a plastic watchmanufacturing unit to make alarm and travel watches. Outsourcing activities were further strengthened in the next few years due to the problems Titan was facing with the gray market. The gray market has always accounted for a substantial part of the Indian watch industry (Refer Table IV). TABLE IV THE INDIAN WATCH INDUSTRY IN 2001 Indian watch industry
Organized Sector
Volume
20 million units
Value9
Rs 10 billion Premium 15% Mass 40% N.A. Mid 45%
Segment-wise breakup
Unorganized Sector*
16-18 million units Rs 3-5 billion
* Estimates. Source: Business Line, December 6, 2001.
During the early 1990s, when the import duty on watches was reduced to 25% from 50% and import licenses became easier to obtain, as much as 55% of the demand was met by small players from the unorganized sector. Since Titan faced stiff competition from these players on the price, it decided to concentrate on building a strong distribution and support network. This worked well for the company and soon it became the undisputed market leader in the watches market. However, the variety and range available in the mid segment increased dramatically after 1999, with the changes in the EXIM policy. Though the segment itself grew in size, new entrants began to threaten Titan's market share.
The company's management was also aware that outsourcing was the accepted norm in the global watch industry and many leading global watch brands were not manufactured by the companies that owned them. Kurien said, "We have to think global, not Hosur. Putting up plants and buying equipment is clearly not the answer to competing in the new environment. And as we find suitable vendors for full watches, we will opt for them increasingly." He added, "In the old days it would have made sense to put in huge investments in new technology because it was a protected market. But that is no longer the case." According to analysts, Titan's multibillion investment in manufacturing facilities were proving to be a real drain on its profitability in the changed industry. Moreover, since the company relied heavily on its marketing finesse than operational excellence, these investments were deemed to be too high. Though the company had consistently posted yearly profits, in the first quarter of 1999-00, it reported a loss of Rs 52 million.
This loss was due to the high overheads, excise duties and marketing spending in 1999-00, which increased expenditure by Rs 1.5 billion. Moreover, net profits had come down by 47% to Rs 146.4 million in 1998 from Rs 275.7 million in 1996 (Refer Table V). Company watchers partly attributed this to the heavy investments in the manufacturing setup. TABLE V TITAN - KEY STATISTICS 94-95 95-96 96-97 97-98 98-99 Sales Volumes (nos. in lakhs) 325.8 387.5 Watches 0.9 2 Jewellery 6.7 Table Clocks 2824.9 3507.2 Sales Income 2239.3 2761.9 Expenditure 218 342.2 Interest 131.1 156.8 Depreciation 236.5 246.3 Operating Profit 14.4 29.4 Other Income Profit Before 250.9 275.7 Taxes Taxes Profit After Taxes 250.9 275.7 30% 33% Equity Div. (%)
511.1 16.8 43 4820.4 3934.8 519.2 201.4 165 24.1
199900
585.4 30 32.9 6303.3 5506.2 508.8 204 84.3 130.1
200001
394.5 3.7 36.4 4085.2 3207.3 564 165.2 148.7 129.3
435.3 12 30.5 4420.6 3572 529.6 188.2 130.8 31.6
667.6 72.1 16.2 6969 6141.9 478.4 209.3 139.4 116.3
278
162.4 189.1 214.4
255.7
35.8 16 18.7 21.6 242.2 146.4 170.4 192.8 33% 25% 26% 26%
20.9 234.8 26%
Source: www.titanworld.com
Taking into account the above factors, Titan had no other option but to settle for outsourcing. Around the same time, Titan decided to change its focus to generating more volumes rather
than value. This was because the growth in the premium segment of the watch market, which was Titan's mainstay, had been below its expectations. The company wanted to build up a base in the lower value segment and extend its reach. According to company estimates, outsourcing worked out be around 30% cheaper than manufacturing in-house. Another reason why Titan wanted to reduce its focus on manufacturing was the high employee costs - 11.2% of its revenues in 2000. This was because in the days when the company had no other option but to manufacture, the Hosur factory had a huge worker base. In 1997 and 2000, the company entered into various wage agreements with the workers' union. As a result, even a low-skilled blue-collar worker at the company earned as much as Rs 10,000 per month. This increased overall employee costs. According to analysts, this was alarming because since 1996, Titan had neither made any fresh recruitments nor replaced close to 200 supervisory and managerial-level employees who left in the same period.
However, the biggest factor that swung the decision in favor of outsourcing was the fact that Titan was not being able to meet the onslaught of the unorganized sector for the first time. Since the company decided to focus on generating volumes from low-end mass products, it had come in direct competition with players in the unorganized market. With cheaper Chinese imports flooding the Indian market, Titan realized that the complete technology of making watches, from hand-plating technology to manufacturing cases, was easily available at prices much lower than what the Hosur factory could ever deliver. According to a former company manager, "The extra costs in the system aren't helping in differentiating the brand. Today, even unique elements of design are being easily copied at a lower cost." However, the management had not expected the trouble with employees. To put to rest the employee unrest issues, Desai released a memo stating that, "I want to correct a misapprehension that Titan had inadvertently succeeded in creating that the company was turning to external sources of supply because in-house production is expensive." The Chief Manufacturing Officer of the watch business unit, M.S. Shantharam also tried to put to rest the doubts of the employees, "Whatever we can buy at a cheaper price we will, but not at the cost of underutilization of the factory." He further added, "The message to perform is clear to every employee. The workers are fully apprised of the competitive scenario and they realize the urgency of better productivity." As the employee unrest settled down, Titan began to focus on implementing its decision to outsource. In 1999, the company outsourced close to 1 million movements from suppliers in Hong Kong and China. All the components for the Dash range of children's watches that was launched in July 1999 were outsourced from local and global vendors. Workers at the Hosur plant only assembled these watches. According to Titan sources, new range of watches typically took some time to generate volumes. Therefore, it was priced on the higher side. By opting for outsourcing, the company could launch the watches for just Rs 250-395. If it had to manufacture the range, it would have had to invest at least Rs 2.5 million just for the machinery to make the moulds for the watches. Similarly, the Fastrack range of digital watches was also priced in the range of Rs 650 to Rs 1500, keeping in mind the target segment - youth in the 15-24 age group. Titan could price the
range so attractively because the watches were completely sourced from Hong Kong and Taiwan. Kurien admitted, "We are able to offer the watch at this price only because of the sourcing model." Though the company had initially thought of developing the technology for the watches on its own, it dropped its plans after it realized that the costs involved would be too high for the volumes it was expecting in the initial stages.
However, the outsourcing decision did not indicate in any way that Titan had decided to forego its earlier focus on enhancing operational efficiencies. Titan had also put in place various measures to enhance the productivity of employees and the machinery, including measures to facilitate better buying and negotiating, locate better vendors, locate alternative sources, and salvage non-moving components. Through process reengineering efforts, Titan managed to reduce the overall watch assembly time from 17 days to 10 days today. In addition, surface treatment time i.e. time take for a process to improve the finish of the watches, was reduced from 62 hours to one hour. Titan began working towards reducing its cost of operations with the help of Andersen Consulting through an e-commerce initiative. The Future
Dash proved to be a runaway success for Titan with 50,000 watches being sold within the first two months of its launch. The Fastrack range grew by almost 100% in terms of volume and it established itself as the largest youth brand in the country. The line was extended to the digital watch market with Fastrack Digital, positioned on the fashion platform. According to company sources, the success of these two watches was due to the fact that they were outsourced. By 2001, with revenues of Rs 7 billion and net profit of Rs 235 million, Titan emerged as the country's largest watchmaker with a 25% marketshare of the total domestic market and a 50% share among nationally recognized brands. However, in December 2001, while the income from the watch division increased by 4%, the figure was 10% for the company as a whole. This was because Tanishq, the jewellery division had posted a 32% growth. It was clear that the company needed to work towards strengthening the watch business in order to reap the full benefits of its marketing and outsourcing efforts. Moreover, analysts said that Titan will not have things so easy in the future due to the increasing competition in the watch industry. Premium international watch brands such as Swatch, Esprit, Tissot, Longines, Citizen, Rado and Omega entered India in the late 1990s and catered to the super-premium segment of the market. However, during 2001-02, some of these brands such as Citizen, Esprit and Swatch entered the mid-priced segment, posing stiff competition to Titan's brands in this range (Refer Exhibit I for Titan's product profile in 2002). The company's marketshare in this segment was 75%, which contributed nearly 65% to the Titan brand's value and one-third of the company's entire watch business. With the company planning to focus all its energy to meet competition in the lower as well as higher ends of the market, the watch industry seemed to be all set for an interesting battle.
