The Machinist - Jan 2015

Next Stop Growth

Macroeconomic changes and action by the Government can have a big impact on the supply chains of manufacturing companies. What are the challenges CEO’s and operations heads can expect in 2015 and how they can be addressed?

In December, the Thomson Reuters / INSEAD Asian Business Sentiment Index rebounded. The country giving the biggest boost to the index was India, with companies reporting a maximum score of 100 for the 3rd consecutive quarter. Business expectation from the Modi government continues to be high. So, is this the time when we will collectively exhale? Will expectations move to reality? Whether or not they do, there are some macroeconomic changes that have taken place already and others like action by the Government that are expected, which can have a big impact on the supply chains of manufacturing companies.  What are the challenges CEOs and operations heads can expect in 2015 and how they can be addressed?

 Next Stop Growth

Critical to focus on efficiency

The biggest event that has already happened is the reduction in oil prices globally. On the surface, this will lead to lowered logistics costs for companies. However, the cause for the price drop is over supply and that is because the Middle East countries seek to bankrupt fracking companies in North America and drive them out of business. If tomorrow, these countries change their strategy, supply can change abruptly and so will the consequent pricing. So, it would be best to reap the benefit of lower fuel costs while we enjoy it and not bank on it over the long term. 

A continued focus on efficiency would be wise. Companies should keep a tight focus on their manufacturing footprint, transport network optimisation for incoming and outgoing material, and truck utilisation. They can pick up additional benefits now and still be in good shape if the situation changes.

Time to invest in productivity gains

Another event that has happened is the steady a moderation of inflation and an expectation of continued moderation. The high consumer inflation of the past few years has placed a substantial pressure on labour costs in manufacturing. After all, inflation impact is always felt the most at lower income levels where food takes up the biggest share of wallet. Companies increased their reliance on contract labour. This led to greater attrition and uncertainty on the shop floor and in warehouses. But the low-cost, contractual labour model will be difficult to sustain in an increasingly competitive market. As a result, we can expect a greater focus on building capabilities and driving productivity. This will help bring about greater stability in operations. The increased cost gains will far outstrip the additional labour cost.

Expect increased competition

The reining in of inflation has another large impact on manufacturing. Lower inflation will result in long-term secular growth trends in disposable income. Our population of 1 billion plus has been enjoying a CAGR of over 10% in disposable income over a 10-year period from 2001, even as GDP growth rates have been a bit more than half that number. This resulted in huge demand generation. As inflation slows down and salaries rise, consumers will continue to buy. 

Private consumption has been a mainstay of GDP growth in India for the past 10 years. So, anything that can help drive up private consumption (spending by consumers) will have a huge impact on manufacturing. Someone has to make the stuff people buy. Others have to make the equipment that is used to make the stuff that people buy. So, we are likely to see a continued surge in demand.

This sounds like a good thing: more customers demanding our products. However, such a growing market will be a lodestone attracting competition. So supply chains will be expected to meet the twin expectations of fast response to consumer demand and highly efficient cost structures. They will also need to deal with rapid new product launches.

Sweat your assets & implement projects fast

The Cabinet has cleared the bill on GST to take to Parliament, the PM has announced he will directly oversee clearance of large projects and the e-SamikSha initiative is expected to accelerate the working of the bureaucracy. These initiatives, if pushed through will suddenly provide a large fillip to economic activity.

Across industries, there has been a lot of work done by companies to increase productivity and to cut out excess costs. Now, the growth agenda will kick in again. At that time, the ability to sweat assets and stay lean during growth will be very valuable. This will involve plant automation, de-bottlenecking capacity, multi-skilling of workers and the application of better planning methods to get more out of existing assets. Increasing in-house capacity is the fastest and least risky way of creating additional capacity.

There is, however, a limit to how much capacity can be squeezed out of existing facilities, so brown field and green field initiatives are likely to mushroom. Delivering these projects, often based on newer technology, on time, will be a crucial skill. This needs faster planning, faster decision making and tight execution.

Relook at management methods

The Indian economy is growing, competition is increasing, customers are getting more demanding and simultaneously we are integrating more with the global economy. We can expect that volatility, uncertainty, complexity and ambiguity (VUCA) will increase.

 This is going to require a new emphasis in operations management mindsets. There has to be a shift from focusing primarily on cost and quality to becoming more responsive. Different industries have complained about how forecasts are less reliable and customers tend to change schedules within a single week. Factories are operating on daily updates of customer orders, not by design but as a fire fighting response to unpredictable demand. This is kind of responsiveness can be alled meeting the customers’ requirements at any cost. No business can support that. So if the nature of demand of the customer has changed, we cannot expect to meet it with the same methods that were used earlier. We need new methods that will meet the customers’ requirements at a reasonable cost.

Greater sophistication in planning and greater rigour in reviews are both essential at all levels and across all functions. This would include order booking, capacity planning, logistics, material planning and new product launches and product upgrades. Most industries are still operating on a slow monthly model of planning, with reviews that are post mortems giving marginal direction for an uncertain future. There is a serious need to up-skill managers, just as there is to up-skill labour. Managerial productivity can have a bigger impact than labour productivity does in future.

In summary: we are going to live in exciting times

The year ahead looks like it will be quite a challenge for any operations chief. After years of tightening, it looks like the growth agenda will start again. If so, will we build on the learning of the past few years and grow differently? Or will we fall back on sloppy growth at any cost and create a high cost structure for the future? Whichever route a company takes, we are likely to see exciting times in manufacturing going forward – the signs are all there. It will be a time for people who like to take on challenges and risks. Others who might prefer to have things stay as they were, it will seem like a visitation of the old, and probably apocryphal, Chinese curse – may you live in interesting times.

The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd