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Strengthening SMEs through strategic and marketing linkages R C Bhargava Indian Scenario Competition is becoming increasingly intense Manufacturing companies need to lower costs and improve quality Materials are a significant part of cost of production for a majority of industries

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Strengthening SMEs through strategic and marketing linkages

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Strengthening smes through strategic and marketing linkages l.jpg

Strengthening SMEs through strategic and marketing linkages

R C Bhargava


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Indian Scenario

  • Competition is becoming increasingly intense

  • Manufacturing companies need to lower costs and improve quality

  • Materials are a significant part of cost of production for a majority of industries

  • Outsourcing of components is a means of lowering costs and reducing risk

  • Industry has developed in a protected and controlled economic environment

    • In the past, cost, quality and customer service were not critical parameters


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Indian Scenario (cont’d)

  • Most suppliers are small or medium scale units

    • Small industry is defined in terms of investment in plant and building

  • Small industry has always been given special protection by the Government (reservation policy, excise concessions)

  • Consequently, most suppliers did not grow or increase investments to improve technology, as well as production and quality control systems

  • In the past, pricing was only on cost plus basis


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Indian Scenario (cont’d)

  • To reduce/avoid tax payments, most industries declared low profits

    • Consequently no internal resources were generated

  • There were no long term contracts or relationships with buyers

  • Now competitive environment requires suppliers to meet stringent quality standards, regularly improve technology and be cost competitive

  • The Maruti experience offers insights on how this can be done


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Maruti Experience

  • When Maruti entered into Joint Venture with Suzuki in 1982 to produce cars, Government policy required local content to increase to about 93% in 5 years

  • No component of Suzuki cars readily available in India

    • All items had to be developed

  • Japanese specified quality standards had to be met in order to localize any component

  • In order to sell 100,000 cars in a market which had been at the level of 40,000 for 10 years, price of vehicles had to be kept low

  • Maruti vendor policy and practices developed in this context


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Vendor Development Policy

  • Technology, quality and manufacturing standards of vendors in 1983 were not of international standards

  • Most vendors were reluctant to make investments for Maruti

    • Not confident that Maruti could achieve stated volumes

  • First task was to dispel doubts and create confidence

  • Maruti assured vendors of long term relations

    • No annual tender system

  • Maruti normally limited suppliers of any component to two vendors

    • Good volumes thus assured


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Vendor Development Policy (cont’d)

  • Prices fixed once a year on basis of cost of production

  • Transparent and quick payment system - no delays

  • Maruti provided financial help to vendors for tooling, payment of custom duty etc.

  • Maruti helped to identify sources of technology, and its transfer to Indian vendors

  • Maruti deputed engineers for introducing systems, improving manufacturing practices, trouble shooting

  • Suzuki provided opportunities for training to vendors


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Vendor Development Policy (cont’d)

  • Where large and complex dies were required, Maruti imported and supplied to vendors

  • Line of credit for vendors arranged with FI’s to enable lease financing for purchase of equipment and tooling

  • To reduce costs export guarantees given under EPCG scheme

  • Maruti assisted in bulking purchase of aluminium, steel, plastic materials, seat fabric to lower costs

  • Maruti provided feedback to vendors on their performance and monitored improvements


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Vendor Development Policy (cont’d)

  • Annual awards were given to vendors to encourage them to improve

  • These measures and the sales success of Maruti made vendors willing to invest

  • Maruti participated upto 26% in equity of some vendors

  • Assisted in project formulation, implementation and management of these JV’s

  • Assured reasonable return on investment

  • Management control of JV’s left to Indian partners

  • 11 JV companies were established


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Purchasing

  • Vendor rating system introduced

  • Share of business based on performance

  • Vendors were required to be ISO certified

  • Small vendors assisted to obtain ISO certification by adopting cluster approach


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Purchasing (Cont’d)

  • Vendor contracts provided for payment after 30 days

  • Payment system computerized early

    • Option given to receive payment in 15 days, with 0.5% discount

    • No delay in payments


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VA/VE Activities

  • Value analysis, value engineering activities started in 1999 using cross functional teams

    • Benefits shared with vendors in order to motivate them

  • Value of implemented suggestions increased from Rs. 268 million in 1999 to Rs. 601million in 2001

  • VA/VE workshops started to lower cost of high value components

    • In first year savings of Rs.13 million


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Local Content Levels

  • Maruti 800 and Omni both reached 95%+ local content in 5-6 years

  • Zen 92% - introduced 1993

  • Esteem 89% - introduced 1994

  • Alto, Wagon R 91-92% - introduced 2000

  • Compared to FOB prices, cost of localised parts reached following levels:

    • 800cc: 46%Omni: 43%Esteem: 65%

    • Zen: 62%Alto: 57%


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Lessons From The Maruti Experience

  • Outsourcing essential for reducing costs, reducing risk and enabling management to concentrate on core business

  • Since 74% of vehicle cost was outsourced, Maruti’s competitiveness depended on quality and cost levels of suppliers

  • It was in Maruti’s interest to improve vendor efficiency and performance

  • Ideally, vendor operations needed to be made as efficient as Maruti


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Lessons (Cont’d)

  • For this, developed long term relationships and instilled confidence in small suppliers

  • Devoted resources to upgrade vendors in terms of technology, quality, systems, and management

  • Indian industry today needs to recognize the important of outsourcing and upgrading vendors

  • Since not many buyer companies have resources comparable to Maruti, important to build institutional arrangements to provide marketing and affordable consultancy services for small industry

    • This activity should be carried out by appropriate non-Governmental agencies


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