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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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indian scenario
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
indian scenario cont d
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
indian scenario cont d4
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
maruti experience
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
vendor development policy
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
vendor development policy cont d
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
vendor development policy cont d8
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
vendor development policy cont d9
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
purchasing
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
purchasing cont d
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
va ve activities
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
local content levels
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%
lessons from the maruti experience
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
lessons cont d
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