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Monday, January 16, 2006

Indian Manufacturing: How To Profit From It

An IIM-A report highlights the strengths and missed opportunities

MANALI ROHINESH

The economy underwent drastic changes, structural and otherwise, in 1991. The renaissance saw many sectors of the economy open up to global markets’ influences. But with the manufacturing sector continuing to be in the doldrums, the problems afflicting this segment needed to be looked at. An Indian Institute of Management, Ahmedabad report entitled ‘Competitiveness of Indian Manufacturing’ based on a survey of small and medium enterprises (SMEs) and large manufacturing companies has done just that.

The organised manufacturing sector that was considered in the survey comprised 0.8 per cent of a total of 14,618,623 firms in India. The remaining constituted the unorganised sector as classified by the NSS. This organised sector employs 19.1 per cent of industrial workers in the country and contributes to 74.6 per cent of gross value-added in the economy. Manufacturing firms are facing problems on all the fronts in the current scenario-a global slowdown, reduced investments and price-sensitive demand and consumption of finished goods.

China has aggressively consolidated its position as one of the leading manufacturing locations in the world. The Survey states that researchers are already starting to talk about three key hubs around the world-the knowledge hub of North America, Europe and Japan, the manufacturing hub of China, Korea and Vietnam and the data hub of India, Israel and Ireland. China has graduated from being a global supplier of plastic moulded $1 toys to white goods, bicycles and sophisticated electronic gadgets. Its foray into semiconductor manufacturing is late by 3 years by global standards but is strategic from a long-term perspective.

This Survey was conducted in 2001 and a comparative study was done vis-a-vis a survey done earlier in 1997 using the same parameters. The 2001 Survey highlights strategies adopted by Indian firms to improve their competitiveness. These strategies were divided into: the priorities of the firms and the programmes implemented to achieve these priorities. These have been evaluated on a scale of 1-7, where 1 represents the lowest value in terms of importance or strengths etc and 7 represents the highest value.

Priorities and Strengths
Four issues were highlighted in the two surveys. Quality remains the number one priority of Indian firms. The priority for Quality and Structural Change (which includes ability to change product-mix, fast delivery capabilities etc) has gone up since 1997. This indicates that industry is recognising the importance of bringing about basic changes in manufacturing systems. The priority for R&D has gone down since 1997. The same is true for operations-related changes.

The top three priorities for 2001 have been: improving conformance quality, product reliability and fast delivery as opposed to conformance quality, broad distribution with product reliability in 1997. The replacement of broad distribution with fast delivery reflects a shrinking of distribution network, maybe as a measure of cost control by firms. Product customisation and broad product line has been downgraded in 2001. Emphasis on R&D has declined as well.

But perceived strengths on most factors like product reliability, performance quality, conformance quality etc have gone up in the 2001 Survey. This suggests that manufacturing might have actually improved. The competitive gap between perceived strength and importance was higher in 2001 for factors like low price, design changes, product durability and after sales service. This indicates a shift in competition due to cheaper imports.

The present perceptions of top management about their own operations vis-a-vis their foreign competitors is as follows:

The sample firms rate their operations on an average, “about equal” or “even slightly better” than their global competitors. The average score was 4.9 on service dimension, 4.8 on delivery, 4.7 on flexibility, 4.7 on quality, 4.2 on price and 4.1 on product capability. On a scale of 1-7 firms reported 1 if their operations were “much weaker” than their global peers, 4 if they are “about equal” and 7 if their operations were “much stronger”. About 11% of sample firms claimed they were stronger than their overseas competitors on the flexibility criteria. The scores on some other factors were: price - 6%, quality - 6%, delivery - 5% and product design capability - 6%

This could mean that firms in the Survey were doing well after any restructuring that may have happened in their industry, or that firms may have a good idea about their capabilities but have a poor assessment of the strengths of their international counterparts.

Misplaced Priorities and Lost Opportunities
The Survey also states that the cost of manufacturing still constitutes about 70% of sales while physical distribution costs account for about 10% of sales. Material costs comprises about 65% of the total cost, direct labour accounts for about 9% and the other costs account for the remaining 26%. This implies that efforts to reduce manufacturing costs need to be targeted on material-related costs as well as overheads. Investment in material costs could be reduced by looking at long-term contracts with vendors, reducing rejects and reworks. Currently, the cost of warranty is around 1% of sales, on a average, which is quite high. The issue of labour on the other hand, is not of containing costs but of not having adequate management systems in place to take care of a large workforce.

Investment in tools for conducting basic research internally and rate of acquisition of technology was low in 1997, it has further deteriorated in 2001. Most firms felt that downturn in the global economy will not support any efforts to expand markets - domestic as well as overseas.

Industry also seemed to have given up on labour costs. Also, most firms no longer considered for shortening production cycle times, even though some firms were active in the past.

The Survey states this could be due to firms having fewer people with advanced degrees, so the corresponding drop in innovation was evident. On an average, firms employ about 7 PhDs and 43 with a Masters degree. They spent 3% of sales on R&D and 1% on training for new technology. Between 2000 and 2002, on an average, only 42 new products were launched.

Programmes and Execution
Firms have been investing in various improvement programmes aimed at enhancing their productivity and effectiveness of decision-making. Past initiatives have focussed on employee training but the absence of a common information network has also led to sub-optimal decision-making. However, it does appear that firms would like to integrate information systems with manufacturing in the future. Another future initiative is the focus on improving the quality of work-life. A noticeable absence in this list of top initiatives is workers’ training.

Initiatives that have been ranked as the “bottom ten” in terms of emphasis are: computer-aided manufacturing (CAM), computer-aided design (CAD), computer-integrated manufacturing (CIM), design for manufacture (DFM), computer-aided engineering (CAE), flexible manufacturing cells (FMC), closing or relocating plants, taking back products from customers to restore or recycle, simple pick and place robots and complex robotic systems.

Overall, the 2001 Survey points to a decrease in the areas of manufacturing and order fulfilment as compared to the 1996-97 survey. However, there has been an improvement in supply processes and products development processes in 2001. The rate of growth of overall business unit performance is also lower than in 1999.

The maximum decline (across all parameters) has been found in firms in the process industry, followed by the automotive sector, textiles, consumer goods and electronics. Deterioration in operational performance is a sign of loss of competitiveness of these firms.

Written for The Financial Express

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