Global Recession and Indian Response - 1: The Case of Maruti Suzuki

The global recession has hit the world economies badly. The growth prospects of companies were affected adversely. As companies aimed to survive or remain profitable they instituted severe measures to close down or realign businesses and operations and implement severe cost compression measures. Jobs were lost and savings were wiped out while purchasing power crumbled and confidence wilted.

Indian economy too faced the adverse impact of the global recession with reduced GDP growth and heightened liquidity crisis. The fiscal year 2008-09 represented one of the most excruciating years for Corporate India. Different companies, of course, were affected by the economic recession differently and also responded to the evolving situation differently. 

The author examines in a series of papers, the first of which is this paper, as to how Maruti Suzuki, India’s leading automobile manufacturer responded to the situation.

Maruti Suzuki – the small car titan

Maruti Suzuki India Limited (Maruti Suzuki) requires no introduction. Maruti Suzuki was set up on 14th December 1983, in collaboration with Suzuki Motor Corporation, Japan, which was an innovator in small car technology. Maruti Suzuki revolutionized the Indian automobile industry with its small cars and vans, and provided unprecedented choice to the Indian automobile user, consistently from the 1980s. Set up to produce 100,000 cars a year the company grew by leaps and bounds to reach a production capacity of a million cars a year by 2009. Maruti has become an icon of India’s industrial capability with four plants, nineteen related companies, several hundred dealers, vendors, service entities and business associates.

Despite the entry of several global automobile majors into India and the foray by India’s own leading truck and bus maker, Tata Motors, into the car sector, Maruti continues to hold an impressive market share of  55% in cars and vans. The company has sold over 7 million cars cumulatively and despite the domestic orientation exported over 500,000 cars cumulatively.

Like every other company, Maruti Suzuki was buffeted by the adverse economic developments of 2008 and 2009. Recession hits automobile markets rather instantly and intensively, with sharp curtailment of automobile finance and postponement of automobile purchases by individuals and institutions. The car industry did register a healthy growth of 15% in physical sales during Q1 of FY09 but saw the growth plummet to 0.5% in Q2 and then to a negative growth of 15.5% in Q3. The growth recovered to 1.6% in Q4. In the overall for the year, it was creditable that Maruti’s vehicle sales increased by 1.6% to 792,167 and the total income increased by 14.3% to Rs 214,538 million (USD 4.47 billion; USD 1 = Rs 48).

Yet, given the growth impetus that existed in the company, total expenditure increased faster by 17.6% to Rs 187,610 million,  Earnings before interest, depreciation, tax and amortizations (EBIDTA) reduced by 22.3% to Rs 24,333 million, Profit before tax (PBT) reduced by 33.1% to Rs 16,758 million and  Profit after tax (PAT) reduced by 29.6% to Rs 12,187 million. Three other critical parameters of performance showed interesting trends. Inventories declined by 13.1% to Rs 9,023 million and sundry debtors understandably increased by 40.2% to Rs 9,189 million.

Fixed assets increased by 22.3% to Rs 49,321 million, given the significant capacity creation that was effected. Given that around 75% of the company’s components are outsourced working capital management plays a key role. It is significant that the company’s inventory turnover ratio increased significantly increased from 15.7 in FY08 to 16.7 in FY09 while the average receivables holding period increased only marginally from 12.2 days in FY09 to 12.4 days in FY09.

Sound finances and robust strategies

The manner in which Maruti Suzuki withstood the recession underlines the fact that a cumulative set of virtuous strategies can help a company withstand the volatility of economy and the vicissitudes of business. Being virtually debt free and enjoying healthy cash balances (Rs 44,907 million), the company’s ability to fund growth from internal generations has laid a solid financial foundation for operational resilience. The company consistently followed prudent financial policies whether relating to dealer incentives or vendor payments which helped the company to build strengths in these two vital stake holders. In addition, continuous efforts at cost cutting and productivity improvement, even in good times, helped the company make reasonable profits despite the higher commodity prices and a weaker rupee. The company recorded complete capacity utilization and provided full employment to its workforce despite the recession.

Maruti Suzuki’s strength lies in its emphasis on product-market equity. Continuous expansion of product range (8 new models in 40 months; a new car and a new engine in the year of recession), focus on product quality, service infrastructure and customer connectivity. Maruti’s products continuously rank high in J D Power surveys on excellence in automotive performance as well as in customer satisfaction. The company’s continuously expanding distribution network of 681 sales outlets spread over 454 cities and towns, 315 pre-owned car outlets in 181 cities and towns, and 2767 service workshops across 1314 cities and towns remains the bulwark of a foresighted marketing strategy that the company steadfastly pursued. A network of over 50 driving schools further reinforces customer connectivity.

Maruti is perhaps one of the leading companies with an integrated operational excellence model. The Japanese parentage has, no doubt, helped the company to implement the famous Japanese automobile management systems from the very beginning. Maruti was a pioneer in India in terms of a massive vendor development system covering both tier-I and tier-II, and even tier-III vendors. This has helped the company create a contiguous vendor eco-system and implement a just-in-time inventory system, customized to Indian scenario. In terms of manufacturing too, Maruti Suzuki adopted well the parent’s practices of balancing high throughput and high product variety. An end-to-end optimized supply channel drives Maruti’s business efficiencies.

A robust financial strategy well supported by a strong product-market strategy and an efficient supply chain strategy provided Maruti with strong fundamentals and the capability to withstand the severe recessionary climate. Maruti’s example illustrates that an integrated operational framework that is strategically designed and assiduously reinforced over the years helps companies withstand turbulent times.

Organizing for core competencies 

A forward looking organization innovates in organization design to ensure core competencies for a sustainable future. A competent board that comprises the representatives of Suzuki, the parent, the full time executive directors of Maruti Suzuki and eminent retired CEOs of leading Indian companies as independent directors brings scholastic vision to the company. A business and operations team well honed in the Japanese management techniques provides business and operational efficiency.

Simplicity in organizational design leads to focus, empowerment, responsibility and accountability, and results in superior performance. The latest Maruti organization design comprises five verticals: marketing & sales business vertical, production business vertical, supply chain business vertical, engineering business vertical and administration business vertical. Each is headed by two managing executive officers, one of whom is also a board member. Together with the MD & CEO they constitute the core leadership team. This unique system has enhanced decision speed, execution agility and business performance in the company.

Each business vertical has its task cut out. The marketing & sales business vertical has the task of strengthening the sales and service infrastructure, increasing the reach to rural markets on one hand, and entering relatively untapped urban segments such as taxi and institutional markets on the other. The production business vertical has the task of enhancing manufacturing standards to higher and more exacting levels.  Reducing line change set-up time, which was reduced from 7 days to current 1.5 days, to even lower levels is a key factor for manufacturing flexibility. Balancing automation and human intervention is a particularly relevant factor.

The supply chain business vertical has a major task in terms of enhancing localization and upgrading quality continuously. The engineering business vertical has perhaps the most exacting task of building a total engineering capability to develop new models with granular cost points. The administration business vertical which provides corporate services has the tasks of enhancing human resources base, leveraging information technology, framing financial framework and assuring corporate governance. The combined set of objectives of these five business verticals constitutes Maruti’s quest for future, which Maruti calls as quest unlimited.

Sufficient for today and superior for future?

There is no doubt that by charting through the recessionary waters successfully Maruti Suzuki has demonstrated its strengths and capabilities. These have been a result of the typical hands-on Japanese approach of focusing on fundamentals and continuously enhancing competitiveness through kaizen. Maruti Suzuki brought a new wave of world class industrialization to India, long before the economy was liberalized in the 1990s. Should Maruti Suzuki be content with retaining its exemplar role or play a pioneering role once again? Is Maruti conceptualizing the necessary strategies and building the enabling competencies for such a breakthrough iconic role again? Will Suzuki’s tight ownership and management offer an opportunity or pose a constraint in such an endeavor?

Industrial scenario in India is significantly different from what existed in the early 1980s when Maruti Suzuki entered the country. At that time Maruti with the technological  backing of Suzuki and a creative leadership team led a technological and business revolution in the automobile industry, virtually single handed. Today, however, industrial competencies are resident in a much wider spectrum of companies and the competitive dynamics are far more complex. Launch of an indigenously designed micro car, Nano, by the very Indian Tata Motors reflects the maturing of skills in the Indian industry.

Maruti’s FY09 Annual Report discusses the enhanced design and engineering competencies the company now has. There is no evidence, however, in the report that the company is geared to design and develop a whole new automobile by itself. Maruti’s R&D expenditure at 0.42% of the sales turnover is hardly sufficient to design and launch a new car. While it is commendable that the engineering talent base has been virtually doubled to 730 people in just one year (FY09) and would be increased to 1000 people by 2011, the potential to further harness Indian engineering talent to design new cars and vans needs to be more comprehensively leveraged. Higher levels of capital and revenue expenditure in the R&D domain are called for.

Clearly, India is emerging as a global hub for small car production, an initiative ironically is being led by Hyundai Motor, which never believed in small cars until it entered India. In contrast Suzuki Motor was a pioneer in small car design and manufacture for decades. Perhaps, Maruti Suzuki India Limited and Suzuki Motor Corporation need to develop a new global strategic plan for small car design and manufacture for global needs. The plan could also focus on the van segment which could lead a new revolution in intra-city movement of goods and passengers.

It is clear that a focused business model with technological strengths and management efficiencies has assured market and financial leadership for Maruti Suzuki, even in the toughest of the times. Strong fundamentals should therefore continue to ensure a vibrant future for the company.

Posted by Dr CB Rao on September 21, 2009

Business Competitiveness and Industrial Engineering

Industrial Engineering (IE) discipline has played an admirable role in enhancing productivity and efficiency at shop floor level for the last several decades. With the rapid changes in market dynamics and enhancements in competitive pressures, emphasis has shifted to more comprehensive and sustainable models of continuous business improvement. If the 1970s constituted the decade of industrial engineering, 1980s the decade of corporate planning and 1990s the decade of globalization, 2000s started off as a decade of investment-led growth. However, the global meltdown that started in 2008 brought business competitiveness as an essential strategy to cope with recession. In this context, industrial engineering can re-discover its niche in a corporate perspective as a tool for total business improvement.

A contemporary business model

In today’s context, a company is an amalgam of several core and supportive functions. While product development, manufacturing and marketing remain the core functions in an organization, an increasing number of domains such as information technology, human resources, quality assurance, environment, safety & health and intellectual property management are playing an important role in enhancing the specifications and quality of a product or service.

Today’s business faces heightened competitive pressures which are peculiar to each industry and which are related to suppliers, markets, technologies and other factor inputs. Traditional industrial engineering techniques have focused on optimization of individual activities in functional domains while today’s challenge is more pervasive in terms of an overall corporate value chain.

Viewed in a macro perspective, a company is no longer a stand-alone entity in the supply side or market side. A company has to view itself as part of a larger supply chain spanning the basic material to end product user stages. This has resulted in concepts of supply chain management (SCM) or customer relationship management (CRM) as two key drivers of competitive advantage. At an elevated level, one company’s SCM could be its vendor’s CRM. The inter-linkages between markets, manufacturers and vendors are as varied and complex as they are obvious.

Over the years, operationally as well, there has been a significant change of the context in which industrial engineering finds applications. A typical factory or office system has moved from being a predominantly man-dominated machine system in the 1960s or 1970s to a machine-dominated human system from the 1990s. The rate of technological change itself has moved from a stable, steady-state situation to a state of rapid change. Consequently, product life cycles which used to be predictable with extended spans of 10 years or more have become volatile, with compressed spans of 3 years or less. As a result, the competitive scenario has become intensely market-driven in addition to being supply driven, with heightened rivalry among firms.

Given the above changing dynamics, while individual and isolated efficiency improvements in discrete operations or functions continue to be important, it becomes necessary to bring a wider business perspective for industrial engineering to contribute effectively to corporate development.

An IE model for total business improvement

Given the fact that business development and corporate management have become extremely challenging with multi-domain, multi-entity and multi-location interactions, the need for overall system efficiency in an end-to-end connected value chain becomes obvious. In order to address this imperative industrial engineering needs to evolve itself into a new corporate level paradigm.

The proposed business driven model for industrial engineering views the entire spectrum of corporate actions as a total value chain where every entity and every domain has a specific role to play in improving a business in totality. Maximization of efficiency within and across each and every stage of the value chain becomes important as a potential strategy to optimize the overall system efficiency. At the same time, given the complexity of task, a conceptually elegant model is required to manage the complexity in an easily comprehensible fashion.

The proposed IE model for total business improvement has four essential components; two of which are internally focused and two externally oriented. Together, the four components can be synergised to deliver a powerful, positive impact on a company’s operations and overall business.

The proposed model is simple in that its rests on two fundamental concepts of ‘optimizing’ and ‘connecting’ which are applied on two relevant dimensions of ‘internal business processes’ on one hand and ‘external corporate transactions’ on the other. The business driven IE model is thus a 2x2 concept-application matrix which can be deployed in totality to the contemporary business configuration discussed earlier. This model will be relevant regardless of the number of internal or external domains or entities involved in a company’s value chain. The combinations are as follows:

Optimization of Internal processes : Value engineering
Optimization of External transactions : Supply chain management
Connectivity of Internal processes : Value chain management
Connectivity of External transactions: Collaborative networking

The model integrates four levers for industrial engineering to play a major role.

1. Value engineering

Value engineering has been by far the longest existing branch of industrial engineering that re-engineers products, services and operations to eliminate waste and enhance efficiency. Whether it is simplified components, optimized materials or minimalist manufacture, value engineering plays a vital role in re-engineering not only product, process and production systems but also any operational activity to enhance productivity and efficiency.

In today’s context, value engineering takes newer dimensions with application of computer aided design and manufacture which help designers and production engineers achieve unparalleled results in design and manufacturing simplification. Similarly, at operational level, information technology helps optimise man-machine interface through simulation of data and enhanced quantitative techniques in a manner that was not within the analytical reach of an industrial engineer in earlier years.

Modular design platforms and common internal components can help product designers achieve higher variety of end products with minimal proliferation of components and aggregates. Similarly flexible manufacturing systems and versatile dies, moulds and tool settings which can handle diverse component sizes and different production batch sizes can redefine manufacturing efficiencies. Value engineering has the capability to move from a focus of component and operational level improvement to a broader perspective of an overall engineering philosophy that simplifies design and manufacture at product family level. Value engineering then becomes a powerful tool for enhancing competitive advantage in the business as a whole.

2. Value chain management

If value engineering optimizes design, manufacture and operations, value chain management interconnects each functional domain of an organization to ensure overall delivery of a product or service in the most efficient manner. For any business to be competitive, it is not only essential to do each functional activity right but also integrate all the functional activities smartly with the right connectivities.

In today’s business environment wherein information is a widely accessible asset it is the execution that marks the difference between successful and not so successful firms. It is no longer sufficient to aspire for a product portfolio or market turnover. It is, on other hand, incumbent to plan out the entire value chain of activities starting from product conceptualization and ending with market launch, in terms of clear activities and resource deployment. Structured and end-to-end connected execution enables a company generate maximum value due to timely and precise deployment of resources across the organization for high quality results. Time tested project management techniques of PERT / CPM which are now further enhanced by the customized computer programmes should be deployed for various long term, multi-functional or multi-centric projects to ensure effective execution with the least resources or time slack. As an approach, concurrent design and manufacture, whereby all functions connected with product development, manufacture and market launch collaborate from the very beginning, is an ideal approach to institutionalize value chain management in a company.

3. Supply chain management

Business efficiency today verily rests on the manner in which a provider of a product or service manages its inventory not only within the company system but also covering the entire supply and distribution chain comprising multi-level vendors on the supply side to multi-tier distributors, retailers and customers on the market side. From an initial enthusiasm of minimal inventories within the company, the accent now is on optimizing inventories across the value chain. Various quantitative and simulation methodologies which the industrial engineers have in their tool kits are helpful in smoothening the inventories across the supply chain.

More fundamentally, the critical approaches of the industrial engineer in defining and streamlining work flows and eliminating redundancies as well as idle times are extremely relevant in developing a supply chain structure that supports efficiency. Disintermediation or elimination of superfluous layers leads to significant procurement and distribution economies. Modular packaging and foolproof, secure packaging could help movement of SKUs across the chain without the hassles of unpacking and repacking across the tiers.

Industrial engineers need to also integrate technology in a significant manner for optimal supply chain management. Contemporary telecommunication technologies and global positioning systems enable tracking of unit products or cartons anywhere in the world. Radio Frequency Identification (RFID) and related software solutions need to be deployed by industrial engineers to achieve technology-led efficiencies in supply chain management.

4. Collaborative networking

Even the best of supply chain management would perform below potential, if true partnership and collaboration are not integrated into the relationships. Quite apart from tools and techniques, industrial engineers would need to also focus on behavioral dynamics that result in adversarial or play-safe practices among various entities in a supply chain. For example, as long as the goals (at a strategic level) and the forecasting processes (at an operational level) of a manufacturer and its vendor are not truly aligned in a collaborative fashion, any degree of supply chain optimization, whether through quantitative analysis or technological development, would not be effective.

At the core of collaborative networking lies the premise that any two entities engaged in a relationship will derive greater value by having common objectives of business development. Toyota for example, is continuing to make strides over and above its famed Toyota Production System by adopting collaborative networking. Toyota’s CCC21 (Construction of Cost Competitiveness for the 21st century) initiative has helped Toyota double its annual consolidated cost savings from 100 billion yen (which itself is a formidable figure) to 200 billion yen. Collaboration helps Toyota and its suppliers find ingenious ways of feeding cost improvements back into products to raise their value.

Collaborative forecasting of demand and supply profiles has helped retail giants like Proctor & Gamble and Henkel achieve improved shelf presence of their products and enhanced customer satisfaction while ensuring dramatic reductions in inventory and other costs of retailing.

In order to succeed in collaborative networking, industrial engineers would need to develop a total business perspective of the industry structure, supply chain dynamics (both vendor side and customer side) and process linkages between entities. Key drivers of business optimization need to be identified and skills of collaborative networking and management mastered. More than anything else, industrial engineers would need to be members of cross-entity and cross-functional teams that facilitate collaborative management.

Conclusion

The business challenges that a firm faces in today’s recession environment are a complex combination of strategic and operational issues, with every industry becoming intensely volatile and competitive. As Indian industry globalizes, business opportunities as well as competitive pressures enhance.

Industrial engineers can make a useful contribution to India’s global business development by creating a new skill-set for total business improvement. The 2x2 model discussed in this paper of focuses on ‘optimizing’ and ‘connecting’ as the thematic tools to be deployed across ‘internal business processes’ and ‘external corporate relationships’. The proposed business improvement model provides to industrial engineering a relevant and highly productive play in a wider business canvas.

Posted by Dr CB Rao on April 12, 2009

Recession and Rigidity

Corporations the world over are concerned with and fearful about recession. Having been accustomed to years of unbridled growth which piggybacked on easy money, bloated assets and burgeoning demand, companies are finding the liquidity crunch, asset revaluations and frozen demand as indicative of a long, harsh recession. While a few companies may welcome periodic recessionary episodes as a much needed correction to profligacy and a reward for efficiency, most companies tend to be clueless and powerless in the wake of a recession.

It is surprising how even enlightened companies react typically to recession in terms of a three point formula: refusal, reduction and regression. Committed to a bandwagon of growth, CEOs universally at first refuse to recognize recession. As a result, companies build up huge inventories, which require painful adjustments in terms of slashed production. When recession stares one in the face and declining demand can no longer be brushed under the carpet, then follows an unthinking wave of reduction measures, from job and salary cuts to business and plant closures. By the time this cycle of compression is complete, companies would have regressed by a few years, unable to discover in time the silent revival of demand, much less respond to it.

The rigid mindsets of organizations ahead, in the midst and in the aftermath of recession lead to intriguingly counter-intuitive and counter-productive strategies, which tend to shrink their ability to fight recession even more. There are examples galore in the Indian business scene. A few months ago when consumer purchasing power was at its peak in India, a Rs 25000 (USD 500) mobile phone was considered a high end phone. Today, when every consumer is trying to avoid all discretionary expenditure, we have a host of mobile phones launched with a price tag of Rs 35000 to Rs 40000 (USD 700 to 800), with obviously little consumer enthusiasm for the usurious pricing! Low cost airliners were offering plenty of services when corporate and personal travels were at their peak. Today, when corporations and individuals seek to minimize or avoid travel costs, we have the low cost airliners either withdrawing their operations or increasing their prices. There was a great urgency in the Tata group to launch the ultra low cost Nano micro car in the midst of an automobile boom. In today’s recession, on the other hand, Nano is miles away from a mass launch.

The above paradoxical and market-inefficient business strategies of even reputed companies are a result of a corporate mindset which fails to absorb the ramifications of recession in a timely manner and come up with appropriate strategic revisions. Companies have to appreciate that recession affects different sectors differently. There are four basic realities of recession. Firstly, recession only distorts demand but does not destroy demand. Secondly, certain sectors tend to be recession-proof. Thirdly, governmental responses to recession often stimulate certain sectors differentially. And finally, if one domain needs increased investment in recession it is Research & Development (R&D).

Fundamentally, even in recessionary conditions demand does not disappear; it only migrates across market segments. The boom in WalMart sales in US is indicative of this. Demand has migrated in this case from high end malls to economy departmental stores. Had Indian telecom companies been appreciative of this, their product introduction strategies would have been more pro-consumer, packing more value for less money. Airlines would have persevered with their low-cost flying strategies for a few more months to woo the cash strapped companies and individuals. The Tata group would have substituted Indica and Indigo car production with Nano car production in all their plants to accelerate the Nano revolution on the Indian roads.

Secondly, sectors which are intertwined with the basic needs of a society will buck recession rather than succumb to it. Generic and innovative pharmaceuticals, healthcare, textiles, education, low and middle income housing, passenger transportation, basic consumer goods and household items are some industrial sectors which would survive most recessionary conditions. By enhancing product introductions across customer segments in such sectors and expanding scale and scope in such industrial segments, recession in other sectors can be compensated. Conglomerate groups such as Tatas, Birlas and Reliances would do well to realign their group business strategies accordingly.

Thirdly, in several countries with infrastructural stimulus packages, construction and capital goods sectors would see a major growth impetus. Cement, steel, earthmovers, heavy duty vehicles, power and transmission equipment and allied sectors could be the first victims of a recession but would also be the enduring beneficiaries of recession in government sponsored programs of stimulus. Bracing for capacity augmentation and cost competitiveness, such industries can qualify as preferred bidders in public and private works programs.

And finally, progressive companies would do well to accelerate their research activities and enhance their R&D investments to eventually beat recession. New products and services which provide greater value would help sustain demand in recession and trigger growth beyond recession. Examples are energy conserving automobiles, cost saving consumer goods, productivity equipment, recycling products and global connectivity services. Each domain would need to integrate electronics and information technology to create new generation goods and services.

In the overall, full-line manufacturers who offer multiple products at different price points, conglomerates which operate in different industrial sectors, companies which are committed to continuous R&D and more importantly companies and groups which have a flexible, proactive and strategic mindset would weather any recession successfully.

Posted by Dr CB Rao on December 14, 2008