high performance manufacturing india's next …...players in india launch...

High performance manufacturing India's next opportunity

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Achieving a balanced and inclusive macroeconomic growth is extremely vital for India to emerge as a stable global economic powerhouse. The role of manufacturing sector in providing the necessary balance and inclusive character to India's macroeconomic growth is undisputed.

Recognizing the strategic importance of manufacturing to India's future growth trajectory, the Government of India created the National Manufacturing Competitiveness Council (NMCC). NMCC formulated a National Strategy for Manufacturing (NSM) in 2005-06.

Under the auspices of NSM, NMCC along with various Ministries and private sector

collaboratively launched a host of relevant programs to, upgrade skills and innovation capacities within small and medium industries, raise awareness about intellectual property, enhance IT-adoption etc. Under its flagship "Visionary Leaders for Manufacturing Programme", NMCC, in collaboration with industry bodies and industry experts, has helped train a band of visionary managers, senior executives, CEOs and entrepreneurs in the manufacturing sector.

The manufacturing sector in India has indeed come a long way since the inception of NMCC. The sector had become increasingly knowledge and IT-intensive. Across sectors, players have developed capabilities helping them build highly unique

core-competencies even in R&D intensive hi-tech industries such as aerospace, defense and life sciences. It's wonderful to see players in India launch 'new-to-the-world' technologies, products and business models across segments spanning automobiles to water purifiers.

At the NMCC, we recognize and appreciate this growing spirit of Indian entrepreneurialism. At the same time, we are cognizant of the fact that a large part of the Indian manufacturing sector, predominantly labour intensive in character, continues to languish on fringes of competitiveness.

Our challenge is to make these labour-intensive players as competitive as high performers in their respective sectors. There

Forewords

Dr. V. KrishnamurthyChairman National Manufacturing Competitiveness Council India

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are a number of issues that will have to be tackled to achieve this goal but for me two areas stand out particularly.

Skill building will have to be core ingredient of any recipe to hone the competitiveness of these players. At NMCC we firmly believe that enhancing productivity on the shop-floor is key to unlocking profitable growth across a large section of the manufacturing sector. I am happy to note that this is one of the key issues discussed at length in this report being launched by Accenture.

Its time that public agencies, industry bodies and manufacturers leverage the talent within the IT&ITeS sector to develop scalable models that can be cost-effectively taken to remote manufacturing units in

the country. This needs to be put in place as an immediate goal.

The second key ingredient is innovation. We recognize that innovation is more of a mindset issue than a resource issue. In my experience, many firms are shy to innovate as they fail to have an appetite for risk. We need to find ways of creating this risk appetite and developing capabilities within these firms to take calculated risks. Communicating and sharing success stories can be the first step and industry bodies will need to action this in collaboration with innovative public and private sector organizations.

As we inch closer to launching the National Strategy for Manufacturing 2011, I believe that we need to be ready with

programs in these two areas that can be implemented through public private partnerships. Only then will we be in a position to achieve goals espoused in the forthcoming National Strategy for Manufacturing.

I congratulate Accenture for publishing this timely research report and for raising issues of immense relevance to manufacturers in India. I hope that manufacturers will be in a position to derive strategic insights from this report and implement them within their respective firms.

Dr. V. Krishnamurthy

Forewords

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For the period 2001-2010, agriculture, industry and services have respectively accounted for around 20%, 27% and 53% of India’s GDP. Compare that with China where the average numbers are12%, 46% and 42%, in the same order.1 These numbers make it evident that the non-agricultural composition of China’s GDP is far more balanced as compared to that of India.

Accelerated growth of the manufacturing sector has been instrumental in generating this balance for the Chinese economy. During the period 2001 to 2010, Chinese manufacturing sector grew at an average rate of 11.7% as compared to 7.3% in India. Hence, during the last decade, the average share of manufacturing value added (MVA) to China’s GDP reached a staggering number of 34.2%, more than twice the share

of MVA in India’s GDP. Moreover in the same period, China ramped up its share of world manufacturing output from 9.5% to 19.8%, whereas the share of India registered an increase of only 1% and stood at just 2% in 2010.2

With services sector growth peaking in the range of 9-11%, and agricultural productivity not showing sustained improvement, over the last decade, manufacturing will now have to shoulder the responsibility of helping India sustain a high growth trajectory. The manufacturing sector also needs to be an employment engine, generating opportunities for India’s emergent young workforce and absorbing its surplus agricultural labour.

Manufacturers in India therefore have a role cut out for them. The task is ambitious and will have

to be achieved in a business environment that is getting more complex and competitive. With increasing demands for product localization and shrinking product lifecycles, manufacturers will have to implement out-of-the-box solutions, while at the same time facing the tide of highly price-competitive imports from India’s partners in free trade agreements.

Manufacturers in India will need to leverage the existing strengths of the Indian manufacturing ecosystem – its growing labour force and talent, its wide array of business technologies and processes and its mature partner networks – in order to manufacture products that command a premium based on value.

I think there is lot to take from the German manufacturing

Sanjay DawarLead, Management Consulting Accenture, India

sector’s growth story during the last decade. As in India, small and medium-sized family-owned enterprises make up the backbone of German manufacturing. They have historically specialized in machinery and other heavy equipment. But in recent years, these enterprises—with active support from large industries (their customers) and government —have turned manufacturing into an art form. To achieve this, these enterprises poured money into R&D and cut other expenses. The government supported them by loosening up the tightly regulated labour market. Large and small manufacturers found unique ways to cut labour costs by sometimes providing an employment guarantee for a fixed period as a quid-pro-quo for less pay. Instead of laying-off workers, managements deployed idled workers to new assignments.

The result of such strategies is evident. Germany has emerged as the most competitive industrial economy across the developed world through the last decade. Unemployment in Germany has declined during the global economic crisis. In 2010, the unemployment numbers in Germany actually dropped, according to the OECD, whereas the GDP expanded by around 3.6%3—highest since reunification, twenty years ago.

For the purpose of our research, we spoke to senior executives to understand their plans to grow profitably in this evolving global and local macro-business environment. We asked them about their strategic priorities and the actions they would be taking to address them in light of changing priorities of their

global and local customers. In all we were able to strike 100 valuable discussions. Out of these 80 interactions were conducted with industry leaders through meticulous execution of a survey tool and the remaining 20 took the form of free-flowing conversations with business leaders, policy makers and academics on issues relevant to our research.

Blending insights gathered from the survey and interviews with Accenture’s time-tested High Performance Business Research and secondary data, we have developed a robust High Performance Manufacturing Business Framework.

We have always believed that identifying a valuable market position ahead of competitors is a necessary first step to high performance. Our research on this project suggests that high performing manufacturers build their market position by prioritizing investments in strategic initiatives that support and strengthen their core differentiation.

Our framework identifies four distinctive capabilities that organizations must build to differentiate themselves from the competition: smart shop floor, market-driven innovation infrastructure, data based decision making and responsive relationships. Through examples and case studies, this report shares rich insights into how leading companies across India’s manufacturing sector are focusing their energies to build such capabilities.

But we do not stop at identifying distinctive capabilities. The new Accenture framework enables us to offer four action points

that business leaders can use to develop a performance culture within their organizations. We propose four key actions toward this goal: building manufacturing’s brand image in India, investing in a best-in-class operating environment, using sustainability to build competitiveness and developing leaders across the organization.

The challenge of building India's strong manufacturing sector must be a shared responsibility. The size and scale of investments make it imperative for industry, government and other stakeholders to collectively find solutions to macro problems. This report emphasizes the need for a program similar to the one implemented by Chinese authorities to train surplus agricultural labour. It also highlights the need to create an Investor Services Organization to achieve more policy and regulatory coordination across authorities at the central, state and local levels.

It is Accenture’s conviction that a concerted focus on manufacturing will lay a solid foundation for India’s international competitiveness. We are pleased to see a wide range of companies beginning to lay such a foundation. And we are committed to working as a trusted partner with those organizations who are keen to help India realize its potential as a global economic powerhouse.

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Sanjay Dawar

Executive Summary

India remains caught in a manufacturing performance paradox. When measured by output, India is steadily emerging as a manufacturing powerhouse: in 2010, India became the ninth largest manufacturer in the world. However, the contribution of manufacturing to country’s GDP continues to remain very low in comparison to China and Republic of Korea, the other two Asian emerging markets featuring in the list of top ten global manufacturing destinations.

Analysis of this lackluster performance often focuses on macro-level explanations, such as infrastructure deficiencies or a lack of policy coordination. Yet Accenture’s discussions with C-suite executives at India’s leading manufacturers revealed that significant barriers to high performance are occurring within firms themselves.

Critical firm-level operational challenges facing manufacturers include, quality inconsistency, supply chain inefficiencies, widening gaps between labour productivity and compensation and the ability to attract and retain the best talent.

This report leverages Accenture’s High Performance Business framework to discover how – given a certain set of environmental constraints – some manufacturers in India are overcoming these firm-level challenges in order to continue to outperform their peers and sustain high performance. Drawing insights from a survey of 80 C-suite executives across different large manufacturers, 20 one-on-one interviews and Accenture’s proprietary High Performance Business Research (which has examined more than 8000 companies globally), Accenture has developed a proprietary ‘High Performance Business Manufacturing Framework’. This Framework provides manufacturers with insight into the three essential building blocks of high performance. These are:

• Market positioning – the differentiation strategy and initiatives a manufacturer must prioritize to evolve as a high performer in a given market.

• Distinctive capabilities – the capabilities a manufacturer must build to achieve operational excellence for supporting its differentiation strategy.

• Performance culture – the organizational culture a manufacturer must develop to nurture mindsets and values capable of driving manufacturing excellence.

Market PositioningFor a manufacturer, the journey to high performance begins with a very clear articulation of the core differentiation strategy. Accenture research suggests that high performing manufacturers in India focus on investing in strategic priorities (such as, launching new products, raising productivity, scaling capacity, entering new consumer markets etc.) supporting their core differentiation strategy.

Insights from our research also indicate that high performing manufacturers in India maximize value associated with their investments made across strategic priorities through building a set of distinctive capabilities.

Distinctive capabilities Accenture has identified four such distinctive capabilities. High performing

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manufacturers build these capabilities by harnessing unique characteristics associated with three key business levers – business technologies and processes; labour and talent; and partner networks.

1. Smart shop floorManufacturers must create smart shop floors by establishing an appropriate alignment between shop floor labour and automation, with their market positioning strategy. For instance, Castrol India has almost completely automated the shop floor for its B2B operations to support a differentiation strategy that focuses on maintaining very stringent process controls for complex lubricant products. For its B2C business, however, Castrol India’s competitive positioning relies on brand, distribution and cost leadership. The firm therefore innovatively pursues a level of semi-automation on its shop floor to reap benefits of a cost-efficient Indian workforce while continuing to meet high quality standards.

2. Market-driven innovation infrastructureManufacturers must invest in developing market-driven innovation infrastructure—that is innovation infrastructure capable of delivering innovation clearly focused on addressing the changing needs of customers—fast and cost-efficiently. High performance manufacturers in India have focused on building innovation infrastructures capable of simultaneously driving ‘big-bang’ and incremental innovations benefiting customers. Their innovation infrastructure drives profitable revenue through successful fruition of innovations that go beyond the realm of product innovations. The innovation infrastructure at ACC Limited (ACC) has not only helped the company launch specialized and new varieties of cement through development of indigenous technologies but has also helped it enter new markets through introduction of a range of services such as guidance on good construction practices and testing of ingredients on site.

3. Data-based decision makingManufacturers that use IT tools to gather and quickly process vital

information on each element of their supply chain to raise the level of service and productivity can gain a distinctive and sustained edge over their competitors. Hindustan Unilever (HUL), for example, uses analytics across the value chain to gather robust insights on the buying behavior and patterns of customers, improve demand forecasting and manage the risk of commodity price inflation.

4. Responsive relationshipsRelationships that help manufacturers de-risk their supply chain and scale productively, while maintaining quality of output are critical for high performance. Mahindra was able to launch its SUV ‘Scorpio’ with a very high level of supplier involvement from concept to reality. All the major systems associated with this vehicle were designed with suppliers. By adopting such a model, Mahindra forged trustworthy relationships capable of being scaled productively across its entire range of utility vehicle offerings.

Supporting these distinctive capabilities requires a culture that is focused on high performance. High performers engage in developing a performance-driven culture. To develop such a performance culture, we recommend that manufacturing firms must:

• Build manufacturing’s brand image in India within and outside the traditional boundaries of the firm. For instance, Godrej’s “Joy of Manufacturing” program is aimed at building a sense of pride and respect for manufacturing among its employees as well as in the society. This is achieved through de-briefing sessions involving vendors, customers at the end of the project, and senior managers who share experiences in the form of stories and organizing felicitation programs for young achievers.

• Invest in a best-in-class operating environment that gives workers the incentive to offer their best on the shop floor and be loyal to the firm. The existence of a safe work environment became the dominant reason women workforce at L’Oreal agreed to move when the company shifted base from Umbergaon to Pune a few years back. Our analysis shows that it is equally important for the manufacturing unit to

ensure that its suppliers have an equal or better operating environment. Only then can the manufacturer maintain quality consistency across the board.

• Use sustainability to build competitiveness by using lessons from sustainability initiatives to strengthen core differentiation. ITC’s leadership has recently established “sustainability groups” at the division and factory level to identify opportunities that can further contribute to enhancing the firm's triple bottom line performance. Under the sustainability groups’ guidance, the company has built a water tertiary treatment facility that has allowed them water security for the future and reduced dependence on ground water. ITC has also undertaken wind energy programs that enable the firm to reduce power costs for most of its operations in Karnataka from Rs 5 per unit to less than a rupee per unit with a positive impact on environment.

• Develop future leaders across the organization with the right skill sets at all levels – be it at the shop floor, middle management level or the top leadership. For example, one of the largest foreign auto manufacturers in India has institutionalized the mechanism of Personnel Development Committees within the organization to identify star workers from the shop floor and facilitate their growth with the company. It has also nurtured tie-ups with colleges for year-long academic courses in order to help employees prepare for higher-end jobs.

Creating an enabling environment will be instrumental in ensuring the sustained success of manufacturers in India. This report identifies the need to build the skills of surplus agricultural labour and policy coordination between government and business as two key areas for concerted actions by all stakeholders.

Manufacturers in India who achieve high performance can also benefit the wider Indian economy. A vibrant manufacturing sector facilitating profitable participation of large as well as small and medium players can create significant jobs in rural India and create meaningful opportunities for entrepreneurs across India.

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Manufacturing: A sector of paradoxes and promises

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A robust manufacturing base can play a defining role in shaping the direction and speed of a nation’s growth trajectory. A modern manufacturing sector cradles innovations and technological breakthroughs valuable to the nation as a whole, thereby supporting the growth of knowledge economy. Most importantly, a modern and competitive manufacturing sector becomes the fulcrum of a nation’s long-term employment and macroeconomic stability.

Since India began its economic liberalization in the early 1990s, the country has made impressive strides as a center of manufacturing. In 2010, India became the ninth largest manufacturing nation in the world. Among developing countries, it is second largest, behind China, in the manufacturing of textiles, chemical products, basic metals, general machinery and equipment, and electrical machinery.4 In 2010, India also secured a place among the top 20 global merchandise exporters — a result of strong market and product diversification during the last decade.5

The manufacturing sector’s ability to sustain comparatively strong growth, even through the global downturn, is impressive and a cause for optimism. Yet the sector’s contribution to GDP remains lackluster. While the contribution of manufacturing to GDP of China and Republic of Korea – the two other Asian emerging economies featuring within the list of top ten global manufacturers, has expanded over the last decade along with improvement in rank – in the context of India the contribution of manufacturing to GDP has stagnated in spite of improvement in rank. (See Figure 1)

What accounts for this weakness? In our survey of C-suite executives at 80 leading India’s manufacturers, the respondents cited poor infrastructure as by far the biggest challenge holding back the sector. Poor infrastructure adds a layer of cost (for example, quite a few manufacturers we interviewed had already invested in the creation of their own power plants to ensure quality power) and thereby eats into operating margins. But other challenges were also identified by many of the executives. (See Figure 2)

Corruption and lack of policy coordination were also cited as key barriers. For example, an executive at a leading kitchen furniture manufacturer told us that his company lost an opportunity to capture market share due to lack of coordination between state and local officials. The company needed to act quickly to expand production capacity, but municipal and state authorities failed to coordinate efforts to complete the necessary paper work in a timely way.

Some of the senior executives and manufacturing sector experts also voiced their concern about very little time being provided to compete against the onslaught of cheap finished-goods imports resulting from bilateral and regional free-trade agreements (FTAs). The problem is twofold, they mentioned. Domestic finished-products manufacturers have to pay duties at the municipal and at the district level (such as octroi charges, cess and entry tax/levies) during the process of manufacturing and transportation, against which they cannot claim credit under domestic tax statutes. Hence,

manufacturers of these products are at a disadvantage against duty free imports from FTA-partners by the margin of these duties. Besides, the problem of inverted duty structure (that is, raw materials attract higher import as well as domestic duties or taxes in comparison with finished products) also makes it difficult for finished-goods manufacturers to take advantage of the import and domestic tax liberalization regime.

There were also questions raised about whether India needed to be so aggressive in the area of free-trade agreements. A quick analysis revealed that India is the most aggressive negotiator of FTAs covering merchandize trade in comparison to its highly industrialized Asian neighbours. (See Figure 3)

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Figure 1: Output versus value: India’s dubious distinction

Asian emerging economies featuring in the list of top ten manufacturing nations

Ranks Manufacturing value added as a percentage of GDP

2000 2010 2000 2010

China 3 2 32.12% 36.27%

Republic of Korea 8 5 26.14% 29.77%

India 13 9 14.29% 13.82%

Source: UNIDO

4%

6%

10%

15%

18%

34%

46%

50%

86%

High training cost

Insufficient access to capital

High transaction costs

High raw material costs

Inadequate skills among low-cost labour

Poor work culture

Lack of policy coordination

Corruption

Poor infrastructure

Figure 2: What’s holding back Indian manufacturing?

Source: Accenture survey

Figure 3: India’s growing FTA-footprint in comparison to its highly industrialized Asian neighbours

Source: Database “FTA by Country” Asia Regional Integration Center, Asian Development Bank

Asian economies in the list of top 25 manufacturing nations for the year 2010

Free Trade Agreements

In Effect Under Negotiation

China 10 5

Republic of Korea 6 4

Indonesia 7 4

Thailand 11 6

India 13 12

Respondents to our survey identified several major challenges in the macro environment preventing Indian companies from performing better.

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Despite weaknesses, India continues to be an attractive manufacturing destinationExecutives who responded to our survey were almost unanimous (98 percent) in seeing India as an increasingly attractive destination for manufacturing. They pointed to several reasons for this high level of optimism.

Chief among them: proximity to the expanding domestic consumer market and access to high-end skilled talent, such as engineers and managers. (See Figure 4)

India’s rising attractiveness as a manufacturing destination is leading companies to ramp up investment and hone performance. Several domestic

and global manufacturing companies have added capacity in India in the last five years with the motive of making India a regional or global hub. This can be seen clearly in the auto industry, where India has become the second-largest carmaker among developing economies. (See Figure 5)

Manufacturers in India must now capitalize on their general optimism about the sector’s promise and to do that, they are going to have to identify not just external challenges but also the deficiencies at the firm-level that may be holding them back from making the most of the Indian opportunity.

Figure 5: Auto majors ramping up capacities

Source: Company websites and Accenture research

Figure 4: What’s attracting manufacturers to India in spite of challenges at the macro level


6%

9%

13%

13%

47%

49%

56%

76%

Favourable regulations (e.g. Tax incentives)

Proximity to other Asian consumer markets

Rising wages in other Asian economies (e.g. China)

Adequately liquid and efficient capital markets

Access to low-cost labour

Access to skilled labour

Access to high-end skilled talent (managers and engineers)

Proximity to expanding domestic consumer market

Company Capacity as of 2007 (units)

Additional capacity being created post-2007 (units)

Hyundai Motors India Ltd. 300,000 300,000

Ford India Private Ltd. 100,000 100,000

Honda Siel Cars India Ltd. 100,000 60,000

General Motors India Pvt. Ltd. 70,000 155,000

Toyota Kirloskar Motor Pvt. Ltd. 60,000 90,000

Maruti Suzuki India Ltd. 520,000 480,000

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During 2011, Accenture set out to identify the strategic priorities, key challenges and action agenda of manufacturers in India over the next five years. As part of this research initiative, Accenture commissioned a survey and embarked on conducting rigorous discussions with senior business executives, policymakers and academics. In all we were able to strike 100 valuable discussions. Out of these, 80 interactions were conducted with industry leaders through meticulous execution of a survey tool and

the remaining 20 took the form of free-flowing conversations with business leaders, policy makers and academics on issues relevant to our research.This primary research has been supported by an extensive review of the existing literature on manufacturing strategy and operations, including media resources, academic journals, corporate annual reports and business studies.

18%

1%

18%

15%9%1%

19%

4%

1%14%

FMCG Consumer durables Chemical & Pharmaceuticals Industrial ProductsAutomotive Oil and Gas Metals & Mining Cement

Others Textiles

Industry-level breakdown of survey respondents

Research Methodology

2Looking inside for shortcomings

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To their credit, many executives we interviewed were not fixated on barriers to growth and quality largely outside their control – whether that means slow growth of infrastructure, bureaucratic inefficiency, or one of many other challenges. Instead, they are increasingly focusing on firm-level challenges.

The path from strategy to action is challengingIf identifying and clearly articulating the core strategy of the organization is critical, then an equally defining challenge is effectively translating that strategic vision into operational reality. Manufacturers in India often face challenges in operationalizing their strategic agenda because of legacy organizational structures – resulting from family-ownership for instance – that over-centralize decision-making authority within top management. This often leads to organizational silos, which hamper a firm’s ability to coordinate and share valuable information across functional units and business segments.

Over-centralization of decision-making authority can significantly impede the ability of manufacturers to operationalize their strategic agenda when faced with market change. One large manufacturer expressed that the inability of middle management at its suppliers to make simple operational decisions, such as alterations in reordering, threatened its ability to implement its strategic agenda. Specifically, over-centralized decision-making at its suppliers slowed the responsiveness of capacity adjustments that were necessary in the face of demand fluctuations.

Beyond back-end operations, manufacturers’ reliance on customer-facing distributors and intermediaries also presents a challenge for operationalizing strategy. Manufacturing sector in India is replete with examples in which distributor and intermediary partners implement strategies and operations that are not sufficiently aligned with

the manufacturers’ agenda. This can create an operational disconnect at the end of manufacturers’ value chain that can have a significant adverse impact on the marketing of their products and their bottom-line.

Gap between emoluments and labour productivity wideningComing out of a recession in 2000-01, labour productivity registered a much higher growth as compared to growth in average emolument during 2001 to 2005 (see Figure 6). The blip experienced by labour productivity growth in 2005-06 was due to massive employment growth in manufacturing based on the expectations of a beginning of a robust business cycle (which got corrected in 2006-07).

Beginning in 2007-08, the trend has started showing reversal. We see that the growth in average emolument has exceeded labour productivity and this dangerous trend was exacerbated in 2008-09. This has occurred largely due to:

• Manufacturers being compelled to offer wages, disproportionately higher in comparison to the short-term productivity improvements made possible by adding new employees; and

• Manufacturers not being equipped with mechanisms capable of empowering existing and newly hired workers to achieve superior productivity levels within short spans of time.

Attracting the best talent becoming increasingly difficultFacing stiff competition from services industries, manufacturing companies are often unable to attract the best talent. As a senior executive heading an industrial products unit of one of the largest conglomerates in India reported, parents are not keen to see

their children pursue a job on the shop floor after completing a degree in engineering. The reason: accepting a job with a manufacturing unit does not necessarily result in elevation of the family’s prestige.

The CEO of a medium-sized chemical manufacturing unit identified a similar problem facing first-generation SME-entrepreneurs: the second generation is not eager to soil their hands on the shop floor. Their reasoning: Why soil your hands when you can earn better in the services industry with the same amount of effort?

Even if manufacturers solve the problem of acquiring talent, it is becoming increasingly difficult to retain it. This phenomenon manifests itself across all levels of the workforce within the manufacturing sector. “We end up creating skilled and experienced blue-collar talent for the Middle East” is how an executive of a large industrial equipment major puts it. If not addressed, the ability to attract, train and retain India’s workforce may only exacerbate the emerging challenge for manufacturers of managing the generational divide on the shop-floor and in other departments linked to manufacturing such as procurement, warehousing and R&D.

Cohesive approach towards quality control found missing in many casesWhile many companies understand the importance of quality control, our discussions with senior executives revealed that not many companies in India have developed a comprehensive approach to quality control. As put by one executive, “While many companies have mastered a few parts of this critical process, very few have mastered it from beginning to end”. Instead, there are many instances of isolated best practices in distinct areas of the quality control process, with no complete, cohesive approach

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Growth in Labor Productivity (year-on-year) Growth in average emolument (year-on-year)

0%

5%

10%

15%

20%

25%

30%

35%

40%

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

that runs across the organization. In effect, each part of the organization ends up developing its own approach to quality management, with little or no integration or transparency on a corporate scale.

Our discussions reveal that a poor service mindset is leading to inconsistent quality delivery that threatens firm-level performance. As related by a leading soap manufacturer, in spite of long-standing relationships, suppliers often fail to consistently adhere to the desired standards of quality due to a poor service mindset.

Expanding partner networks making innovation and supply chain efficiency challenging to achieveAn expanding base of potential partners – suppliers, distributors, retailers and customers – is one of the defining features of India’s manufacturing landscape. Managed effectively, this expanding pool of partners can provide India’s manufacturers with substantial competitive benefits (See Sidebar: Unique Characteristics of Key Business Levers in India).

However, working with partners in India carries with it several risks that can undermine manufacturers’ ability to sustain operational excellence in key parts of their business. When we asked C-suite executives how well aspects of their business were positioned to execute their strategic priorities, they noted that the greatest shortcomings occur in their innovation infrastructure and supply chain– parts of manufacturers’ business where working with partners is becoming the most necessary. (See Figure 7)

Collaborating to develop market-leading innovations – from processes to products – is increasingly becoming a necessity for firms across the world.6 Yet, partnering to innovate, especially with customers, continues to prove a challenge for India’s manufacturers. Bringing India’s hard-to-reach customers and partners

Source: Accenture calculations based on Annual Survey of Industry data sets

Figure 6: Growth trends in labour productivity and average emolument in the manufacturing sector

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Innovation infrastructure

Supply chain

Talent/workforce

Partnerships and collaborations

Connect with customer base

Financing

Technology

Less than Superior Superior or state-of-the-art

Figure 7: Can we execute our strategic priorities?


We asked executives to rate the extent to which key parts of their manufacturing business are positioned to execute strategic priorities.

into manufacturers’ innovation infrastructure requires a significant level of investment – a level that India’s manufacturers have yet to reach.7

Supply chain partnerships are not new for India’s manufacturers. But in the current environment, manufacturers’ ability to control and leverage these partnerships is a key determinant of supply chain efficiency. Low-cost suppliers are quickly becoming India’s manufacturers’ answer to rising cost pressures. Similarly, manufacturers’ capacity to coordinate distribution and retail partners remains critical to bringing their products to market in spite of infrastructure constraints. However, managing these partner relationships across the supply chain continues to prove difficult. As a report by the National Manufacturing Competitiveness Council notes, the “suppliers and distribution side (of manufacturers’ supply chain) is far from being efficient”.8 Part of the issue lies in manufacturers’ inability to ensure that partners consistently

deliver the required inputs and to coordinate supplier and distribution partners’ across their supply chain.9

Methods of measuring shop floor performance need a relook Manufacturing processes that aren’t continually measured, evaluated and improved subject a manufacturer to considerable risk—such as inefficient production (and eroding margins), irrelevant products and ultimately customer defection. The use of metrics to drive continuous process improvement is especially important given the significant ongoing changes across the Indian manufacturing landscape.

When we asked C–suite executives to evaluate their performance based on globally accepted shop floor metrics, the vast majority indicated that their

organizations had superior or state-of-the-art performance. (See Figure 8)

However, current metrics may be leading to misguided optimism about shop floor performance. Evidence for this lies in recent changes in the manufacturing sectors’ cost-to-profitability ratio. (See Figure 9) The fact that over the past three years the average growth of input costs has outpaced the average growth in profits (measured by PBDITA – profit before depreciation, interest, tax and amortization net of prior period expenses and income) likely indicates that process-driven productivity gains on the shop floor are falling short of what is needed.

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Less than Superior Superior or state-of-the-art

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Downtime versus scheduled time

Workforce satisfaction

Asset utilization

Material efficiency

Percent overall throughput

Overall equipment effectiveness

Percent production to plan

Figure 8: How are we doing? A self-assessment


We asked executives to rate their organization’s performance on key manufacturing metrics

Average growth in PBDITA net of P&E (%)Average growth in raw material, compensation and selling & distribution costs (%)

30

25

20

15

0

10

5

2001-04 2004-07 2007-10

10.93

6.4

25.5

18.0

12.7313.8

Figure 9: When costs eat into profits

Source: Accenture calculations based on data sourced from Centre for Monitoring Indian Economy

The High Performance Business Manufacturing Framework

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With firm-level challenges being identified as a key stumbling block to high performance, India’s manufacturers must adopt a studied and systematic approach to honing their performance across the value chain.

To help them do so, we have developed a proprietary ‘High Performance Business Manufacturing Framework’. (See Figure 10) This framework provides manufacturers with insight into the three essential elements of high performance. These include:

• Market positioning: the strategy and initiatives that a manufacturer must pursue to differentiate itself in the market;

• Distinctive capabilities: the customer-valued capabilities a manufacturer must build to achieve operational excellence in support of its strategy; and

• Performance culture: the organizational culture a manufacturer must develop to nurture mindsets capable of driving manufacturing excellence.

This framework is built on the three key building blocks in Accenture’s High Performance Business research, a program that covers 8000 companies around the globe.

StrategyO

perational excellence

Mar

ket

Posi

tion

ing

Dist

inct

ive

capa

bilit

ies

Perf

orm

ance

cult

ure

Nurtune mindsets to drive manufacturing excellence

Build distinctive capabilities to strengthen your marketing positioning

Build manufacturing’s brand image in IndiaInvest in a best-in-class operating environmentUse sustainability to build competitivenessDevelop leaders across the organization

Locate your core differentiationIdentify areas in which your firm will want to differentiate itself from competitors in the market(s) of interest.

Prioritize investmentsInvest in those strategic priorities that best support your core differentiation agenda

The following are some examples of strategic priorities for India’s manufacturers:

Launching NewProducts

Raising productivity

Scaling capacity

Entering newconsumer markets

Reaching new standards of quality

Building futureworkforce

Becoming climatefriendly

Smart shop floor

Create a shop floor that integrates learnings from past operations to achieve the optimal balance between technology and labor and consistently deliver productivity improvements

Market-driven innovationinfrastructure

Build an agile and cost-efficient innovation engine capable of proactively responding to customer demands with state-of-the-art solutions and products

Data-based decision making

Invest in IT-tools and other mechanisms that help you gather vital information on each element of your supply chain to raise the level of service and productivity

Responsive Relationships

Invest and grow relationships that de-risk your supply chain helping you deliver unique products and scale productively, while maintaining quality of output

Figure 10: The High Performance Business Manufacturing Framework

4Market Positioning

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The first step toward achieving high performance is to arrive at a clear strategic focus on what differentiates a manufacturer from its competitors. A manufacturer can focus on achieving cost leadership; or focus on value differentiation.

Our survey shows that many Indian manufacturers are already pursuing a differentiation strategy based on value – and that they are even more likely to follow that strategy in the next few years. (See Figure 11) In our interviews, we learned why this is so: Executives believe that in a fast-expanding customer market, differentiation based on value is the best way to fight against competition from cheap finished imports and growing competition at home.

Our survey also identified the top strategic priorities manufacturers will be focusing on in the coming three to five years. Launching new products, raising productivity and scaling capacity were named as the top three areas. (See Figure 12)

The example of Rallis, a large agrochemical company, reflects how high performers invest in relevant strategic priorities to support their core differentiation agenda. It also shows the impact of following a particular differentiation strategy on the organization of operations.

The leadership at Rallis recognized that a differentiation strategy based on cost over the long term may not deliver, given the changing needs of its customers (that is farmers) and growing competition in the market from low cost players Hence, it prioritized investments in processes such as fact and information based reverse engineering (FIBRE) to develop a better understanding on value differentiation by competitors towards refining value addition across their own product range. To ensure the robustness of the

FIBRE-initiative, Rallis has invested in creating platforms facilitating continuous feedback loop between its sales, production and research workforce. This constant interaction helps teams on the shop floor and its R&D wing to continually improve shop floor processes and production techniques to refocus and change or align strategy with the ultimate aim of constantly adding value to customer.

Marico’s experience in launching new products also exemplifies how a firm pursues strategic priorities in order to reinforce its core differentiation. For its personal care line, Marico has been prioritizing investment in new product development, to strengthen its positioning in an otherwise commoditized coconut hair oil market. For instance, Marico's Parachute Hot Oil was borne out of a discussion on giving away a heater with its coconut hair oil as consumers faced the problem of the oil congealing during winters. While looking at ways to reduce the costs of a heater, the company came up with the idea of hot oil instead.

Once a manufacturer has settled on a broad strategic focus and set investment priorities, the next major challenge is translating strategy into operational excellence. Insights from our research indicate that India’s high performing manufacturers harness three key business levers – business technologies and processes; labour and talent; and partner networks – to build distinctive capabilities that help them maximize value associated with their investments made across strategic priorities. (See sidebar: Unique characteristics of key business levers in India.)

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Delivering relatively similar value to customers at a lower costDelivering Unique or greater value to customers

Delivering relatively similar value to customers at a lower costDelivering Unique or greater value to customers

Differentiation strategy in the next 3 to 5 years

44%

56%

25%

75%

Differentiation strategy at present


36%

38%

40%

49%

56%

64%

79%

Becoming climate friendly

Building future workforce

Reaching new standards of quality

Entering new consumer markets

Scaling capacity

Raising productivity

Launching new products

Figure 12: Strategic priorities of respondent companies in India over the next three to five years


Figure 11: Strategic differentiation: lower cost or greater value?

We asked executives to define their firm’s primary differentiation strategy: cost leadership or value differentiation.

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Unique characteristics of key business levers in IndiaThere has always been a close link between high performance and a manufacturer’s ability to make the most of the unique strengths of its local environment. The success of Chinese and American manufacturers provides evidence of this. Chinese manufacturers have differentiated themselves on the world stage partly by leveraging China’s large low-cost labour pool to achieve unparalleled economies of scale in their operations. Likewise, US manufacturers’ access to world-class talent and high-end business technologies through partnerships with American universities and Silicon Valley firms has helped them remain at the forefront of new product development.

In India, the unique character of three key business levers – business technologies and processes, labour and talent, and partner networks – provide manufacturers with the opportunity to distinguish themselves from competition both at home and abroad. Our research indicates that how India’s manufacturers deploy these levers in their business often determines their capacity to achieve high performance. These are the key business levers that allow India’s manufacturers’ to turn strategy into operational reality and build the distinctive capabilities – smart shop floor, market-driven innovation, data-

driven decision-making and responsive relationships —that will allow them sustain high performance.

Business technologies and processesThe rapid growth in India’s service sector provides evidence of India’s advantage in business technologies. High performing manufacturers must consistently connect with and leverage insights from India’s service sector to build a cutting-edge technology backbone for their business. Liberalization of the service sector has already contributed to substantial productivity gains for India’s manufacturers.10 Moving forward, manufacturers can improve competitiveness by drawing on India’s world-class service sector for cutting-edge technologies – in areas such as analytics and after-sales customer service – to improve performance management and enhance service levels across their value chain.

In recent years, India has also begun to emerge as a global leader in process development and innovation. Microspinning, the Tata Nano, the mini-multi-use tractors capable of farming very small farms, HUL’s water purifier are all examples of frugal product innovations that have achieved

commercial viability with support from new process orientations that have allowed them to be manufactured at scale. In the space of pharmaceuticals, the rise of “reverse pharmacology” further demonstrates India’s leadership in process development. Building on Ayurveda techniques, pharmaceutical companies in India have developed a one-of-a-kind process orientation that has redefined drug testing in generic pharmaceuticals.11 Reverse pharmacology has not only provided production efficiency gains but it helped manufacturers to test generic drugs more quickly and increase the speed-to-market and reduce the approval time for their drugs, even in developed economies, such as the United States and Europe.

Labour and talentIndia offers manufacturers an exceptional workforce opportunity. India’s manufacturers not only have the opportunity to make the most of the world’s fastest-growing workforce but also access to one of the world’s fastest-growing engineering talent pools.

India is one of the few environments that offer manufacturers large pools of both engineering talent and low-cost labour, but to be sure, serious challenges to effectively using this business lever still

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exist. Skill deficits still exist among India’s workforce and those present in engineering graduates remain a key barrier.12 India’s manufacturers need to address these shortcomings in order to effectively deploy talent and labour within their businesses. Some have already begun to do so, transforming this apparent weakness into a competitive strength. Based on a history of dealing with skills shortages, a number of India’s manufacturers are now building some of the world’s largest and most sophisticated in-house training systems. Several C-suite executives expressed how graduate training is becoming a key part of their business and that their firm’s ability to tailor graduates’ skills and values to meet the specific needs of their business continues to result in significant competitive gains. The ability to train, equip and retain an expanding low-cost workforce as well as capacity to customize the skills of engineering graduates and educated workforce to needs of manufacturing will be critical determinants of the manufacturers’ ability to capitalize on India’s unique labour advantage.

Partner networksIndia is home to a thriving network of partners, hosting one the world’s largest small and medium enterprises (SME) and university networks. Manufacturing SME’s – including technology start-ups, contract manufacturers, suppliers, and distributors –currently account for over 40% of total industrial exports and almost

35% of the gross value-add in the manufacturing sector. The growth of SMEs continues to outpace that of medium- and large-scale manufacturers, with an increase in the number of SMEs from around 6.79 million units in 1990-91 to over 13 million in 2007-08.13

Partnering with India’s SMEs offers medium- and large-scale manufacturers substantial opportunity to scale the impact of manufacturing led growth. Not only do SMEs drive inclusive growth – it’s been estimated that an investment of Rs. 100,000 in fixed assets in the SME sector generates employment for four persons.14

While quality management issues exist, manufacturers must effectively leverage SME-partners to realize competitive gains in areas such as cost and risk management. India’s globally competitive automotive and pharmaceutical sector provides an excellent example of how the strengths of SMEs can be built and leveraged.

Beyond SMEs, India’s universities and engineering colleges also offer value-creating partnership opportunities. Manufacturers in India have a tremendous opportunity to convert labouratories in 409 universities and university level institutions and around 4700 engineering colleges into innovation centres.

5Distinctive Capabilities

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To achieve high performance, companies must create distinctive capabilities – the capabilities that allow them to drive operations in support of their market positioning. In Indian manufacturing, Accenture has identified four distinctive capabilities high performers need to build to outpace competitors and achieve high performance:

1. A smart shop floor, which allows companies to integrate lessons from past operations to balance technology and labour and to consistently deliver productivity improvements.

2. Market-driven innovation infrastructure that helps companies build an agile and cost-efficient innovation engine capable of responding to shifting customer demands.

3. Data-based decision making, which raises the level of service and productivity in the supply chain by making optimal use of information.

4. Responsive relationships that reduce supply chain risk and help companies scale while maintaining quality.

Smart shop floorWhat makes a shop floor “smart”? Two imperatives stand out. First, India’s manufacturers must coordinate the balance between shop floor labour and automation with their market positioning and core differentiation. Given the growing impact of wage growth on profit margins in an inflationary environment, most manufacturers are under mounting pressure to move more toward automation. However, since the cost advantage associated with Indian labour is yet to be completely exhausted, adopting a western model of aggressive automation is not always the optimal solution.

Consider how one manufacturer, Castrol India, is seeking the right balance. The company has separated its B2B and B2C businesses into different plants to support its differentiation strategy, but operates both businesses at the same quality system standards. It has almost completely automated the shop floor for its B2B operations to support a competitive differentiation strategy that focuses on maintaining very stringent process controls for complex

lubricant products. For its B2C business, however, Castrol India’s competitive positioning relies on brand, distribution and cost leadership. The firm therefore innovatively pursues a level of semi-automation on its shop floor to reap benefits of a cost-efficient Indian workforce while continuing to meet high quality standards.

Similarly, Caparo, a manufacturer of automotive and engineering products, in a crowded market, focuses on differentiating itself from competition on the basis of cost. By attaining a right balance between technology and talent, Caparo is enabling rapid strides in the performance of its shop floor systems, improvements in quality, waste elimination and delivery.

The second imperative is to adopt a process orientation that captures learning from past experience and communicates it effectively to the workforce. Toward this goal, an industrial products arm of a large conglomerate documents all manufacturing and rework processes digitally. Explaining the importance of this approach, the senior executive we interviewed said: “We believe knowledge is meaningless unless it is documented.”

A recent study of Indian textile manufacturers by the World Bank, Stanford Business School and Accenture confirms this insight. The study demonstrated that methodically implementing global performance management best practices to document shop floor operations can significantly improve shop floor productivity. The study found that collecting operational data to advise organizational processes led to an 18 percent productivity improvement and reduced inventory among the test group, while the control group realized no gains.15

Developing an understanding of where lessons can be applied to improve shop floor efficiency is only part of the story. Effectively integrating insights into day-to-day operations is equally important. For example, the engineering tools arm of a large conglomerate has adopted a program in which customers are allowed to visit the shop floor to inspect its quality and meet workers. These direct interactions help the workforce acquire a high-fidelity understanding of what the customer wants.

Rallis, a leading agro manufacturer uses LASER (Learn, Apply, Share, Enjoy and Reflect) and TOC (Theory of Constraints) methodologies to achieve excellence in each element of the supply chain, including the shop floor. Through consistent implementation of such initiatives, Rallis has realized significant gains. For example, Rallis saved Rs. 172 lacs (US$ 0.34 million) by optimizing its machine-based energy consumption on the shop floor during 2006 to 2008.

Market-driven innovation infrastructure The majority of manufacturers we spoke to were keen to differentiate themselves from competition by driving and creating more value in what they manufacture (see Figure 11). Market-driven innovation – innovation clearly focused on addressing the changing needs of customers – is at the heart of such a strategy.

Manufacturers need an innovation infrastructure that can deliver market-driven innovation fast and cost-efficiently. In a business environment that is becoming increasingly open and networked, market-driven innovation infrastructure consists of in-house innovation-teams, customers and suppliers. At times, other stakeholders such as universities also need to be integrated to make the infrastructure more robust and receptive. Innovation infrastructures that guzzle resources without generating commensurate returns become a liability, and businesses quickly shed them. As a result, many great ideas die in the boardrooms, cafeterias, labs and shop floors. The workforce loses the drive to experiment, and the business is gradually transformed from an entrepreneurial powerhouse into a ‘me-too’ business.

High performance manufacturers focus on creating an innovation infrastructure capable of driving ‘big-bang innovations’ as well as incremental innovations. Their innovation infrastructure, which encourages the active participation of suppliers and users, continues to drive profitable revenue through the successful fruition of innovations that go beyond the realm of product innovations.

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89%

69%64% 62%

52% 51%

43%

Implementing new talent management processes to encourage innovation

Using analytics capabilities to more effectively guide R&D investment

Using new technologies (e.g. cloud computing) to aid in the transfer of ideas across the organization

Deploying open - source innovationplatforms to co-develop products with business partners

Partnering with universities in India

Locating R&D centers close to new customer markets

Acquiring other companies with specific R&D expertise

Figure 13: Key drivers of innovation


ACC Limited (ACC) is a prime example. A brand synonymous with cement, ACC continues to steadily innovate not only different types of cement, but has been extending its innovation infrastructure to design products and services in the area of packaging, cement-based applications, bulk handling facilities, and other services required by users of cement.

ACC has built an agile and cost-effective innovation infrastructure, which helps the company introduce specialized varieties of cement with very high quality at regular intervals. In 1984, ACC introduced a special G-type of oil well cement for oil exploration companies in India. In 1987, it developed a special binder for use at sub-zero temperatures, which was utilized in India’s Antarctica-expeditions. In subsequent decades, it developed sustainable and technologically superior varieties of cement such as fly ash based Pozzolana cement, and cements offering superior protection against coastal climate.

Improving and innovating continually, ACC’s modern bulk cement handling

terminal in Navi Mumbai is now equipped with all the facilities to support sophisticated construction sites in a metropolis like Mumbai. The site is equipped with a laboratory, a fleet of specialized trucks, site silos and options to supply loose cement in bulk tanker vehicles as well as in bags of varying sizes. Proactively responding to customer needs, ACC has gone beyond products and introduced a range of on-site and off-site value-added services such as guidance on good construction practices, testing of ingredients at site, site visits at different stages of construction, testing performance of concrete structures and durability test services required by users of cement.

Building the right process orientation is critical for maintaining a market-driven innovation that is in tune with market demands and able to adapt quickly to market shifts. Marico has retained its leadership position in rural and urban low- and middle-income groups by implementing a “low-cost/fail-fast” prototyping process model. This model has helped Marico to repeatedly innovate to fine-tune product

characteristics and the packaging of its brands to suit the rapidly changing tastes, budgets and usage requirements of low-income populations.

A variety of factors underlie a company’s ability to pursue market-driven innovation infrastructure. We asked executives to rate the ones they viewed as most important. The respondents chose talent as the most critical ingredient: 89 percent said that they will be implementing new talent management practices and processes to encourage innovation within their firms. (See Figure 13)

“Democratizing innovation” can be a way to engage the talented, entrepreneurial Indian mind. To make employees feel involved and motivated to contribute their ideas, open environments should be formed for them to provide fresh thinking that can lead to innovations. The Suggestion Scheme at Maruti Suzuki offers a tremendous opportunity to all employees including shop floor technicians and associates to take Kaizen initiatives throughout the year with their initiative and thinking facilitated by the

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15%

21%

26%

39%

44%

54%

58%

59%

84%

Doing business over other companies’ business platforms

Creating processes/platforms for feeding external ideas directly into your innovation process

Exploring forms of customer-driven marketing (e.g. social networks, blogs)

Finding ways to share information and data with external customers and innovators

New possibilities to collaborate with other players in the value chain

Lowering costs through new technologies (e.g. cloud-computing services, digitization)

More efficient ways of working (e.g. online training,team collaboration across various geographies)

Obtaining more and better data

Having better data-analysis capabilities

11%

13%

Creating a business platform on which other producers can oeprate

Adopting/promoting open industry standards (e.g. for interoperability)


Figure 15: Investing in technology: the data advantage

We asked executives, what are the drivers of your information technology related investments in India?

company. Under the auspices of the ‘Agni initiative’, Maruti Suzuki India Ltd. provides middle management executives across functional teams with physical and virtual space as well as a budget to share innovative ideas. After ideation reaches a certain level of maturity, the company allocates a mentor to each of the teams for their innovative ideas to reach fruition. Teams with promising ideas are provided an audience with top management at regular intervals.16

Data-based decision makingFactories generate a huge volume and variety of data. Across manufacturing operations, information about quality parameters, process trends, maintenance events, parts and spares, material inventory and more is flowing into manufacturing and business systems, and doing so at an ever-increasing rate. Gaining insight from the data trapped in these systems can certainly improve the way manufacturing happens.

Let’s take the example of inventory

optimization. Analytical capabilities can be used to ensure the lowest possible inventory level, while still providing the right service level for each customer segment. Compare the traditional approach to forecasting and replenishment in the pharmaceuticals industry with the analytically driven approach in Figure 14. As one can see, the analytically driven forecasting and replenishment allows product manufacturing and replenishment strategies to be tailored to the stages of the product lifecycle in real time.

Analytics can also drive improvements in supply chain visibility and risk assessment. This involves getting a bird’s eye view of the most important supply chain processes through key performance indicators, reports and balanced scorecards.

Hindustan Unilever (HUL) uses analytics across its value chain. It deploys analytics to manage the risk of commodity price inflation. It has proprietary tools to assess the price elasticity for each of its brands, so that it knows exactly how consumers may react

if it raises prices by, say, a rupee. The company has launched a recent drive to ensure that every employee stays constantly connected to the consumer. This gave birth to the phone booth-like kiosks in HUL’s Mumbai office where employees from any function can listen in to the ‘Voice of the Consumer’ from stores across the country. This helps them to draw insights into the buying behavior and patterns of customers at retail outlets and improve demand forecasting for their products.17

Most senior executives that we surveyed grasp the potential for analytics—and sense the opportunity to use their data as a lever for competitive advantage. (See Figure 15)

As our survey results on IT investments show, manufacturing executives see many more opportunities to use data to lower costs, become more efficient, collaborate with suppliers, and reach customers with innovative marketing.

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Aggregate Forecast Based on Historical Trend

Safety Stock and Re-Order Point

Replenish Based on Historical trend and Static Targets

Historical Sales Data

Figure 14: Forecasting and replenishment

Historical Data

Slow MovingProducts

End of LifeCycle or Obsolete

ContinuousProducts

ForecastabilityAnalysis

SKURationalization

Forecast UsingRecommendedAlgorithms

SeasonalProducts

Replenish UsingOptimal Stockingand Ordering Policies

Disposition



Adjust AssortmentStrategy

MarkdownOptimization

Optimal AlgorithmParameters

AlgorithmRecommendation

Optimal StockAllocation

Seasonal Forecasting

Safety Stock and Re-Order Point

AggregateForecast

Analytically driven forecasting and replenishment

Source: “Achieving High Performance in Pharmaceutical Analytics through Supply Chain Analytics,” Accenture (2010)

Traditional forecasting and replenishment

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19%

28%

50%52%

55% 57%

70%

78%

Manage customerinteraction

Manage supplierrelationships

Manage postproduction partnerships (e.g. distributors, sales)

Achieve greater differentiation from competitors in offerings

Innovate and develop new solutions

Manage outsourcing (contract manufacturers) relationships

Manage external government stakeholders (e.g. regulators)

Detect acquisition targets and execute on merger integration

Figure 16: Responding to stakeholders

We asked executives, what actions will your company take to deliver distinctive products to customers in the next year?


Responsive relationshipsManaging relationships has become increasingly important to companies over the past decade. In many large manufacturing businesses, suppliers are taking on a larger role in production; customers are becoming more demanding and participatory; contract labour is more common; and product teams are dispersed. These firm-level relationships are unfolding in a macro-environment characterized by high volatility in raw material prices, infrastructure deficits, credit becoming costlier and skilled talent becoming more expensive.

Companies must therefore identify ways of sharing risks and deflating cost pressures by building responsive and credible relationships. To achieve the former, they must make their suppliers active stakeholders in the firm’s projects. More than 70 percent of the respondents to our survey identified

managing supplier relationships as a critical item in the immediate future toward delivering distinctive products to customers. (See Figure 16)

And rightly so. Early supplier involvement, good supplier information visibility, efficient sourcing processes and better coordination between product development teams with suppliers can help hedge against risks of non-compliance, quality deficits and missed deliveries, while helping companies launch unique products.

The sports utility vehicle (SUV) ‘Scorpio’ developed by Mahindra is an excellent example in this context. The design and engineering of various systems that went into the SUV was done by suppliers, with testing, validation and materials selection being carried out jointly. Working with world-class suppliers such as Mico and Bosch,18 Mahindra was able to build this new vehicle and its various versions with very high level of supplier involvement from concept to reality at comparatively very low costs

and with agility. By adopting such a model, Mahindra forged trustworthy relationships capable of being scaled productively across its entire range of utility vehicle offerings.

To build a robust talent pipeline, some manufacturers turn to another area where relationships are critical: with institutions imparting technical education. To ensure the influx of qualified automotive professionals at Toyota, the company has partnered with industrial and technical training institutes across India to create the Toyota Technical Education Program (T-TEP). More than 1000 students from these institutes have benefited from this program so far, with over 400 students undergoing training on the latest automotive technology and service techniques every year. The curriculum of this program also includes on-the-job training at Toyota dealerships. Introduced in 2006, the T-TEP Program has led to 17 different institutions coming under its wing.19

6Performance Culture

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In order to support and exploit the distinctive capabilities that can lead to high performance in manufacturing, companies must also have the right culture – a culture of high performance. In our research, we found that four actions can nurture such a culture:

1. Build manufacturing’s brand image in India.

2. Invest in a best-in-class operating environment that motivates workers to give their all on the shop floor.

3. Use sustainability to build competitiveness, especially by drawing on lessons from the periphery to strengthen core differentiation.

4. Develop leaders across the organization with the right skill sets at all levels.

Build manufacturing’s brand image in IndiaIt’s no secret that in India the manufacturing sector suffers from a brand deficit. Over the last two decades, India’s service sector has been championed as the sector of dynamism and high-growth while the manufacturing sector has lagged behind. Though India’s manufacturers are now emerging as dynamic, globally competitive high performers, they continue to feel the negative effects of this brand deficit at home - most acutely in their ability to attract and retain the best local graduates. India’s service sector continues to attract more engineering graduates from tier 1 universities. To overcome this deficit, high performers are embracing initiatives to improve manufacturing’s brand image both within and outside the traditional boundaries of the firm.

Building manufacturing’s brand in India requires a systematic approach that goes beyond the traditional boundaries of the firm. Our research indicates that high performers are systematically engaging external stakeholders in an effort to debunk myths that manufacturing is only about nuts and bolts and assembly

lines. High performers invest in initiatives that demonstrate to external stakeholders, especially to potential employees, that India’s manufacturers are in a dynamic business that demands both high-end critical thinking and creativity. One executive from a leading oil exploration and refining company explained how the firm seeks to communicate manufacturing’s need for creative and critical thinking through engagements with universities. The company organizes competitions between groups of students at tier 1 and 2 universities and presents awards and employment opportunities to the students who provide the most creative answer to a real-life strategic or operational issue that the firm is currently grappling with. These university challenges are not only building the firm’s reputation, but also helping it to identify India’s top talent and motivate them to take-up a career in manufacturing.

Building manufacturing’s brand with external stakeholders and potential workers is only half the battle though. As one C-suite executive explained, the challenge isn’t always in attracting talented young workers, it also lies in maintaining employees’ excitement about manufacturing in order to retain them and keep them motivated after they have received training.

Godrej’s “Joy of Manufacturing” program does just that. One of the divisions of Godrej engaged in executing mission critical projects for the nuclear power industry realized that it is important to create, share and sustain the excitement and sense of self-worth and self-esteem normally associated with projects of these kinds. The execution of such a project requires teams to work across functional boundaries.

The manner in which the team resolved several complex challenges is a rich source of learning for others who either were not part of that team or are new entrants to the organization. This is achieved in many ways. One: debriefing at the end of the project where, even the customers and vendors participate. Such efforts create strong bonds and a great

sense of belonging and achievement. Secondly, senior managers also share the experiences in the form of stories, in formal sessions during interactions or outbound programs. One C-suite level executive at Godrej noted that this initiative’s impact on employee engagement and motivation occurs across management levels. He said that sharing these stories has dual benefits. "Our existing team feels good about their achievements as it enhances sense of self esteem; and it improves our outreach by helping to attract and retain young engineers to manufacturing.”

Godrej’s approach to maintaining employees’ excitement about manufacturing does not stop there. The firm uses routine opportunities such as a felicitation program for the young achievers - wards of employees, to apprise them of the work done by their parents. The primary message for the children is that “they should be grateful for the kind of efforts their parents are putting in to provide them with all the amenities”, but the message delivered to Godrej’s employees is equally important. The excitement about manufacturing that family members express after such events helps to build a sense of pride and respect for manufacturing among Godrej’s employees – a feeling that lies at the core of Godrej’s “Joy of Manufacturing” program.

Invest in a best-in-class operating environmentA best-in-class operating environment provides a variety of tangible and intangible benefits. It helps reduce operating costs, enhance asset productivity and yield better returns on capital investments. Perhaps more important, it also inspires confidence, effort, and a sense of belonging on the shop floor.

Accenture High Performance business research suggests that companies that take greater responsibility for workers’ health and safety on the job, as well as for their plants’ larger environmental impacts, outperform those that

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9%

11%

16%

18%

20%

26%

33%

35%

49%

64%

Risk management

Environment friendly value chain

Financial management

Environment friendly production methods

Talent management

IT, automation and technology focus

Customer relationship management

Innovation focus

Professional management culture

Quality consciousness


Figure 17: Fostering collaboration with suppliers

Capabilities large manufacturing units would want suppliers to develop to foster productive collabouration

don’t.20 L’Oreal India’s Pune factory is a case in point. When L'Oreal decided to shift its manufacturing operations out of Umbergaon in Gujarat to Pune in Maharashtra eight years ago, all permanent employees were provided with an option of relocating to the new location in Pune. The workers were mostly Gujarati women, mostly in their twenties and unmarried, born and raised in the villages around Umbergaon, roughly 225 kilometers from Pune. Much to the surprise of the management, around 90 percent of permanent employees opted to shift to Pune, 70 percent of which were females, forming the core workforce of the new factory.21 When L’Oreal did a survey to understand the reasons for this encouraging response, its safe work environment emerged as one of the top factors.

For L’Oreal India, safety is fundamental to mastering productivity and maintaining quality. The Pune plant has a variety of programs designed to encourage and improve safety.

New employees – both temporary and permanent– at the time of induction are made to undergo extensive sessions on quality and safety. The factory also organizes safety stand-down meetings across the factory every month for 15 minutes, where the agenda is to discuss potentially unsafe conditions and events.

Employees themselves manage the cleanliness and orderliness of production lines. The shop-floor employees spend 15 minutes cleaning the equipment in each shift and also participate in preventive and breakdown maintenance, as this helps inspire ownership and trust. L’Oreal also runs a program wherein employees can provide feedback if they observe a safety gap or a potential hazard. The best observations are rewarded. Other formal actions include regular safety inspections by line management.

In addition to having rigorous internal quality checks in place,

it is imperative to have effective supplier recruitment, certification and alignment programs to ensure quality consistency across the board. As one executive aptly said, it is impossible to maintain quality standards across the organization unless your vendors are also committed to the task. Moreover, quality consciousness has emerged as the top item on the list of capabilities our survey respondents want small and midsize enterprises to focus on for a productive collaboration. (See Figure 17)

Organizations are making serious efforts to get their vendors up to speed to ensure maintenance of quality standards. For instance, one of the largest two-wheeler manufacturers in India has created a vendor association to integrate and strengthen its supplier network. Apart from using the association as a forum to redress issues on quality, cost and delivery, it is also expected to help promote collective innovation and standardization of plant activities.

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Use sustainability to build competitivenessAs India’s manufacturers enter a competitive environment increasingly defined by resource-price volatility, the need to rethink sustainably is becoming apparent. Our research indicates that among high performers a mindset shift is occurring at the C-suite level. The leadership at high-performance manufacturers are increasingly seeking to use lessons from sustainability initiatives at the periphery to strengthen their core differentiation.

For example, ITC’s sustainable business practices have made it the only company in the world to be carbon positive, water positive and solid waste recycling positive. Its businesses support livelihoods for over 5 million people. ITC's e-Choupal, its farmer empowerment initiative, enhances rural incomes by leveraging information technology and customized extension services for sustainable agriculture while at the same time enabling competitive agri-sourcing for ITC's Foods business. It has also gained the trust of rural communities by co-creating opportunities for livelihoods as also community assets such as water harvesting projects.

To provide further impetus to the firm's sustainability initiatives, ITC’s leadership has recently established “sustainability groups” at the division and factory level to identify opportunities that can further contribute to enhancing the firm's triple bottom line performance. For example, under the sustainability groups’ guidance, the company has built a water tertiary treatment facility that has allowed them water security for the future and reduced dependence on ground water. ITC has also undertaken wind energy programs that enable the firm to reduce power costs for most of its operations in Karnataka from Rs 5 per unit to less than a rupee per unit with a positive impact on environment.

Develop leaders across the organizationOne key facet of organizational effectiveness is developing, engaging, and organizing leaders with the right skill sets at all levels. Some measures that could prove effective in developing successful leaders include institutionalizing a robust process to help workers from the shop floor grow with the organization, investments in the right kind of training, and high-quality coaching and feedback.

One of the largest foreign auto majors with a unit in India has institutionalized the mechanism of Personnel Development Committees at various levels within the organization to identify star workers from the shop floor and facilitate their growth with the company. The committees consist of employees, supervisors and managers from a higher level, and they track an individual’s career growth and provide feedback. They also help in succession planning.22 The other function of the committees involves communicating customer feedback to employees through their supervisors. This allows the employees to understand the areas that they need to work on, whether it is through training or specific assignments.23 This auto manufacturer has also inked tie-ups with colleges for year-long academic courses in order to help employees prepare for higher-end jobs. At the technician level, this is known as ‘Career Development Program’, while the ‘Career Mentoring Program’ helps technicians become managers. People are selected for these programs through a structured process.24

7Creating an enabling environment

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The mammoth investments being made by the private sector and financial institutions in creating manufacturing capacities clearly exhibit that there is too much at stake to risk failure. All stakeholders stand to gain tremendously, if they can create an enabling environment aimed at fostering operational excellence.

An independent Investor Service Organization at the level of the Central Government must be set up to facilitate coordination across various ministries and departments at the central, state and local level towards creating a more predictable and transparent business environment.

Collaboratively creating talent poolsIndian businesses have started to address talent deficits at the bottom rung of the talent spectrum by working collaboratively with bodies such as the National Skills Development Corporation. The National Manufacturing Competitiveness Council has also undertaken an ambitious ‘Visionary Leaders for Manufacturing Program’ in collaboration with industry to develop visionary managers, executives, CEOs and entrepreneurs in the manufacturing sector.

In the construction sector, companies such as Larsen & Toubro have already started collaborating with government organizations to develop a pipeline of cutters, welders, carpenters, plumbers that can be absorbed across various projects. Accenture is also making concerted efforts to bridge skills-gaps in emerging markets including India in a scalable manner through its “Skills to Succeed” program. The program is aimed at equipping 250,000 people around the world with the skills to get a job or build a business by 2015. To achieve this ambitious target, Accenture is working with a number of strategic partners that share its skill-building goals.

The immediate and daunting challenge although is to absorb and transform surplus agricultural labour into a skilled and productive industrial workforce at a scale. China presents a classic example of how government

can be an active player in such an initiative. (See sidebar “The Sunshine Project”).

Moving ahead1. Taking a page from the Chinese experience, industry—in collaboration with the government—should consider the creation of an indigenous “Sunshine Project” to impart the necessary skills to surplus agricultural labour at a scale.

2. Toward ensuring a flow of innovative talent into the industry, businesses should proactively finance new departments in the innovation universities being set up by the Government of India across the country.

3. To achieve higher scale in its skills endeavor, manufacturers must explore opportunities to share interactive and e-learning packages with major universities, private and public educational institutions, and other technical seats of learning over a high-speed National Knowledge Grid being developed by the Government of India.

Enhanced policy coordinationLand acquisition and acquiring regulatory clearances are the two areas involving maximum touch points between industry and government departments while creation of large manufacturing projects. While single window mechanisms exist in many states to provide clearances, they do not play a role of an effective orchestrator to obtain all the relevant licenses across central, state and local administrations.

Moving ahead1. Risks associated with land acquisition should be shared through a mechanism that transfers the burden of risk to those who are best suited to bear it. For example, governments should not pass the burden of land acquisition on the manufacturer, especially if the former is better positioned to bear the same.

2. A detailed plan should be in place for managing the resettlement of

the affected population and working closely with them to help ensure their requirements and needs are adequately handled. Having social anthropologists and social planners as part of the project team to manage these issues can help to address potential problems.

3. An independent Investor Service Organization at the level of the Central Government which will facilitate coordination across various ministries and departments at the central, state and local level to help the investor address regulatory issues in a predictable and transparent manner.

Over the last decade, China embarked on an ambitious training initiative, the “Sunshine Project” aimed at helping surplus rural labour effectively transition into its manufacturing sector.

Between 2004 and 2006, China’s Central government invested 1.25 billion RMB Yuan while local governments helped tailor the “Sunshine Project” to local requirements by investing an additional 1.5 billion RMB Yuan. It’s estimated that 8.3 million rural labourers participated in training within the “Sunshine Project” between 2004 and 2006, and 86.7 percent of these trainees successfully found jobs in towns and urban areas. In addition, more than 10 million rural workers participated in the training programs organized by local government and the civil society. The productivity and wage impact of the “Sunshine Project” training has been significant. Those trained under the “Sunshine Project” each have an income of 833 RMB Yuan monthly on average, 400 RMB Yuan more than their income from farming at home, and 200 RMB Yuan more than the income of those untrained.

There are some interesting lessons to be learnt from China’s success at productively integrating surplus agricultural labour into its manufacturing sector. First, while China’s government coordinated the program, it left the majority of training to market-driven non-governmental educational institutions, which tended to be the most responsive local manufacturers skill requirements. Beyond just functional training, the “Sunshine Project” also sought to empower international civil society groups who were especially adept at dealing with social obstacles that occur from rural to urban migration. NGOs have proven especially adept at developing the social support for integrating China’s rural female labour force into urban working roles. Consider the Asia Foundation which, with help from the Levi Strauss Foundation, has developed a social support system that has provided services to more than 740,000 migrant women workers in more than 200 factories in 22 cities and districts in China's Pearl River Delta, the Lower Yangtze River, and Beijing Municipality.

SunShine Project Integrating surplus rural labour into mainstream industrial labour markets

Source: Wang Qiang and Miao Jiandong. “Rural-Urban Migration and the Role of Adult Education in China's Social Integration” http://www.iiz-dvv.de/index.php?article_id=727&clang=1

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ConclusionThe tide has changed for manufacturing in India. Many of India’s manufacturers now find themselves amongst the world’s most formidable competitors and foreign MNCs are increasingly finding India a more attractive place to manufacture.

Organizations that are bold enough to experiment with strategies —and that are committed to delivering operational excellence —will continue to gain a considerable advantage in the years to come. Over the next decade, manufacturing is expected to be a source of continued macroeconomic growth. Companies that start engaging in this opportunity now can establish a footprint in this growing market and, at the same time, help create the Indian economy of the future.

To make the best use of these opportunities, businesses need to make serious investments in developing a smart shop floor, market-driven innovation and data-based decision making and responsive relationships. Perhaps the most significant challenge they now face is creating the culture and mindsets required to achieve excellence in manufacturing, while increasing scale and reach.

To unleash growth opportunities, commitment is required from not only businesses, but also from government and other stakeholders. All stakeholders stand to gain tremendously, if they can act together quickly and efficiently.

Manufacturers in India who achieve high performance can also benefit the wider Indian economy. A more competitive manufacturing sector can become the driver of inclusive growth. The ability of large manufacturers to drive growth among India’s SME manufacturers – one of India’s largest employers of low-income and geographically remote populations – by achieving high performance will determine India’s ability to fully realize its inclusive growth agenda.

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1 Percentage of GDP calculated at factor cost sourced from the EIU database

2 UNIDO National Accounts Main Aggregate Database and UNIDO Industrial Statistics database

3 Real GDP Growth Rate Tables provided by EUROSTAT

4 “The International Yearbook of Industrial Statistics 2011,” United Nations Industrial Development Organization (UNIDO), 2011

5 “The World Trade Report 2011,” World Trade Organization, July 2011

6 Accenture, “From global connection to global orchestration: Future business models for high performance where technology and the multi-polar world meet,” 2010

7 Pankaj Chandra, “Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey,” Indian National Manufacturing Competitiveness Council and Institute of Management Bangalore, 2009



10 Jens Matthias Arnold, Beata Javorcik, Molly Lipscomb and Aaditya Mattoo, “Services Reform and Manufacturing Performance: Evidence from India,” Centre for Economic Policy Research, September 2010

11 Bhushan Patwardhan, Ashok D. B.Vaidya, Mukund Chorghade and Swati P. Joshi, “Reverse Pharmacology and Systems Approaches for Drug Discovery and Development,” Institute of Ayurveda and Integrative Medicine, 2008

12 Andreas Blom, Hiroshi Saeki, “Employability and Skill Set of Newly Graduated Engineers in India,” The World Bank, 2011

13 “Role of SMEs in the Emerging Indian Economy,” www.smeworld.org/story/features/role-of-smes-sector-in-the-emerging-indian-economy.php, December 2010

14 “Role of SMEs in the Emerging Indian Economy,” www.smeworld.org/story/features/role-of-smes-sector-in-the-emerging-indian-economy.php, December 2010

15 Nicholas Bloom, Benn Eifert, Aprajit Mahajan, David McKenzie and John Roberts, “Does management matter: Evidence from India,” The World Bank, February 2011

16 AIMA and Accenture, “India’s Quest for Inclusive Growth: Achieving High Performance through Inclusive Business Models”, November 2010

17 “How HUL keeps growth intact in times of inflation,” www.thehindubusinessline.com/companies/article2139557.ece, June 28, 2011

18 “MICO and BOSCH - a success story in India,” www.boschindia.com/content/language1/html/10836_11499.htm, March 16, 2005

19 “Toyota Technical Education,” www.toyotabharat.com/inen/ttep/ttep_intro.aspx

20 Accenture, “Accenture Research and Insights into Manufacturing Mastery,” 2009

21 “Gender diversity: 45% of L’Oreal India’s workers are women,” articles.economictimes.indiatimes.com/2009-08-21/news/28472820_1_chakan-l-oreal-pune, April 21, 2009

22 “Ford India,” business.outlookindia.com/article.aspx?271763, May 14, 2011

23 “FORD INDIA: Making Every Day Exciting,” www.thehumanfactor.in/01022010/storyd.asp?sid=258&pageno=1

24 “FORD INDIA: Making Every Day Exciting,” www.thehumanfactor.in/01022010/storyd.asp?sid=258&pageno=1

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Reference

Copyright © 2011 AccentureAll rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 223,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.

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About the Institute for High PerformanceThe Accenture Institute for High Performance creates strategic insights into key management issues and macroeconomic and political trends through original research and analysis. Its management researchers combine world-class reputations with Accenture’s extensive consulting, technology and outsourcing experience to conduct innovative research and analysis into how organizations become and remain high-performance businesses.

AuthorsSanjay Dawar Lead, Management Consulting [email protected]

Manish Chandra Partner and Lead Operations Consulting practice [email protected]

Co-authors: Raghav Narsalay, Ryan Coffey and Mamta Kapur

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