Challenges for SMEs

Int. J. Services and Operations Management, Vol. 4, No. 2, 2008 181

Copyright © 2008 Inderscience Enterprises Ltd.

Challenges and strategies for competitiveness of SMEs: a case study in the Indian context

Rajesh K. Singh* and Suresh K. Garg Mechanical Engineering Department Delhi College of Engineering Delhi-110042, India E-mail: [email protected] E-mail: [email protected] *Corresponding author

S.G. Deshmukh Mechanical Engineering Department Indian Institute of Technology Delhi-110016, India E-mail: [email protected]

Abstract: Small and Medium Enterprises (SMEs) are considered engines for economic growth, not only in India but all over the world. They account for 80% of global economic growth. Market conditions have dramatically changed for Indian SMEs after economic reforms. SMEs are regularly facing new challenges in terms of cost, quality, delivery, flexibility and human resource development for their survival and growth. In the context of a dynamic market scenario, they have to formulate their strategies for developing various capabilities and competencies to satisfy their domestic as well as global customers. For long-term competitiveness, SMEs have to focus on all aspects of organisational functions such as assets, strategy development, processes and their performance. This study tries to illustrate this concept with the help of a case study. It is observed that to be competitive, SMEs should have clarity of mission and should proactively develop their human resources and competencies to meet fast changing customer requirements.

Keywords: Small and Medium Enterprises; SMEs; competitiveness; assets; challenges and strategy development.

Reference to this paper should be made as follows: Singh, R.K., Garg, S.K. and Deshmukh, S.G. (2008) ‘Challenges and strategies for competitiveness of SMEs: a case study in the Indian context’, Int. J. Services and Operations Management, Vol. 4, No. 2, pp.181–200.

Biographical notes: Dr. Rajesh K. Singh is a Senior Lecturer in Mechanical Engineering at the Delhi College of Engineering, Delhi, India. His areas of interest include competitiveness, small-business management and quality management. He has published papers in journals such as Singapore Management Review, International Journals of Productivity and Performance Management, Competitiveness Review, Global Journal of Flexible Systems and Management, International Journal of Productivity and Quality Management, South Asian Journal of Management, Productivity, IIMB Management Review and Productivity Promotion.

182 R.K. Singh, S.K. Garg and S.G. Deshmukh

Dr. Suresh K. Garg is a Professor in Mechanical Engineering at the Delhi College of Engineering, Delhi, India. His areas of interest include competitive strategies, JIT manufacturing systems, quality management and supply chain management. He has published many papers in international and national journals such as the International Journal of Manufacturing Technology and Management, International Journal of Operations and Production Management, International Journal of Production Economics, IIMB Management Review, Global Journal of Flexible Systems and Management and Productivity.

Dr. S.G. Deshmukh is a Professor in Mechanical Engineering at the Indian Institute of Technology, Delhi, India. His major research interests include manufacturing management, supply chain management and quality management. He has a long list of papers published in reputed international and national journals such as the International Journal of Operations and Production Management, International Journal of Production Research, International Journal of Manufacturing Technology and Management, Production Planning and Control, International Journal of Production Economics, IIMB Management Review, etc. He is also on the editorial board of reputed international journals.

1 Introduction

Small and Medium Enterprises (SMEs) are considered the backbone of economic growth in all countries. Since the economic reforms of 1991, Indian SMEs have been facing very different scenarios compared with the protective environment of the past. Owing to global competition, technological advances and changing needs of consumers, competitive paradigms are continuously changing. These changes are driving firms to compete, simultaneously along different dimensions such as design and development of product, manufacturing, distribution, communication and marketing. A leading firm is characterised by dynamic strategic behaviour in terms of innovation, relationship management with market and suppliers, internationalisation processes, ability to organise and manage business networks, etc. According to Cruz and Rugman (1992), competitiveness can be studied at three levels: country, industry/sector and firm. Recognising that all the three levels of competitiveness are interlinked with each other, but keeping in view that it is the firm that faces direct competition and actually competes in the marketplace, this paper tries to analyse issues related with firm-level competitiveness.

The industry and country are facilitators in providing the necessary infrastructure and support to the firms. Competitiveness of an organisation can be influenced by external as well as internal factors. Internal factors are material and energy prices, quality of manpower, R&D and technical capabilities, logistics management and other processes whereas external factors are potential new entrants, substitute products, bargaining power of the buyers and bargaining power of suppliers (Porter, 1990). In addition to this, other factors may be government policies, capital resources, availability of technical manpower and infrastructure of roads, communication and energy.

Challenges and strategies for competitiveness of SMEs 183

The competitiveness of an organisation is usually analysed in terms of certain financial parameters, whereas it should comprise the four major constructs relating to the firm’s internal factors, external environment, influences of the entrepreneur and the firm’s long-term performance. Singh et al. (2005) specified these four factors for the purpose of measuring the competitiveness index of an organisation as assets, pressures, constraints, strategy development, competitive priorities, processes and performance in their framework. A case study of an electrical equipment manufacturing organisation has been considered to illustrate this concept in the present paper. Studies based on such kind of holistic approaches are very limited. This study will be highly useful for senior managers of SMEs in understanding the concept of competitiveness and for taking corrective measures to sustain competitiveness. This paper discusses characteristics of SMEs, challenges and strategy development, research objectives and methodology, framework for study and detailed case study comprising of company profile and other issues such as assets, pressures, constraints, strategy development, processes followed and performance related to the case organisation. Therefore, the major objectives of this study are to illustrate the concept of competitiveness by taking a real-life case to motivate other SMEs and to identify major challenges on SMEs in highly competitive markets. It will also try to identify critical success factors for sustaining competitiveness.

2 Characteristics of SMEs

Small and medium enterprises are small in size but not in importance. SMEs are recognised as engines for economic growth and sustaining country competitiveness. SMEs account for 80% of global economic growth (Jutla et al., 2002). The use of outsourcing and alliances has increased the importance of SMEs. According to Dangayach and Deshmukh (2005), SMEs play an important role in both developed and developing economies.

In most countries, SMEs have been defined in terms of the number of employees whereas in India, investment in plant and machinery has been considered as a criterion for defining SMEs. In India, firms having investment less than one crore (ten million) Rupees in plant and machinery are called Small-Scale Industries (SSI). For certain types of industries/activities (export-oriented), this investment limit of SSI has been extended up to five crore Rupees. Organisations having investment up to 100 crore Rupees are defined as medium-scale industries. The definition of SMEs varies from country to country as given in Table 1 (Ghosh, 2001).

According to a recent report (Economic Times, 2006), in India, 95% of industrial units (3.4 million) are in small-scale sector with 40% value addition in the manufacturing sector, provide 80% of employment (second highest after agriculture) and accounts for 40% of the industrial production. These units contribute 35% to Indian exports. Contribution of SMEs to Indian economy and some other developed economies is given in Table 2.

The SMEs comprise different types of units such as village industries, tiny sector units, export-oriented units, ancillaries and others. They have behavioural advantage over large firms, which have material advantages. They encourage workers to come up with


ideas for improving the business. SMEs respond by favouring short-over longer-term gains and flexible over specific investments. Some of the key characteristics of SMEs are as follows (Walczuch et al., 2000; O’Regan et al., 2005):

• Greater emphasis on managerial leadership, employee empowerment and customer satisfaction

• Tendency to have a higher research and development productivity

• Faster information flow between customers and the company

• People-oriented, cross-functional training, less interaction and sharing of information

• Simplified organisational structures, lower complexity, facilitated communication, informal relationship and higher flexibility.

Table 1 Definition of SMEs in select countries

Country Category of industry Criteria/Country’s official definition

Australia Manufacturing services Small enterprises <100 employees

Medium enterprises <20 employees

Canada Manufacturing <200 employees

China SME Depends on product group usually <200 employees

France SME 10–499 employees

Germany SME <500 employees

India Tiny

SSI

Medium

<2.5 million Rs of investment in plant and M/C

<10 million Rs of investment in plant and M/C

<1000 million Rs of investment in plant and M/C

Indonesia SME <100 employees

Japan Manufacturing <200 employees

Korea Manufacturing

Services

<300 employees

<20 employees

Malaysia SMEs 175 full-time workers

Investment <US$1 million

Singapore Manufacturing services <SS12 million fixed assets

<100 employees

Thailand Labour-intensive

Capital-intensive

<200 employees

<100 employees

USA Very small

Small

Medium

<20 employees

20–99 employees

100–499 employees

Vietnam SME No fixed definition, generally <200 employees


Table 2 Contributions of SMEs to the economy of some countries

Country Share of total

establishments % Share of output %

Share of employment %

Share of exports %

India 95 40 80 35 USA 98 NA 53 NA Japan 99 52 72 13 Taiwan 97 81 79 48 Singapore 97 32 58 16 Korea 90 33 51 40 Malaysia 92 13 17 15

3 Challenges and strategies for the competitiveness of SMEs

Owing to market globalisation, SMEs in India are feeling severe pressures to perform at international standards in terms of cost, quality, delivery speed and flexibility. To meet these demands of the market, organisations feel certain constraints. The paucity of financial resources, lack of skills appropriate to the technology and inability to conduct a detailed information search significantly increase technical, financial, business and personal risks. Small companies have neither the time nor the dedicated specialists available to investigate medium- to long-term investment alternatives as thoroughly as they would like under these conditions. SMEs generally focus on short-term competitiveness and do not pay enough attention to the generation and absorption of both technological and organisational redesign of business processes. Owing to the short-term vision of most of the SMEs, they hardly devote resources to new platform development, since it does not provide immediate benefits.

Today’s intense competition requires that firms excel simultaneously in several areas without trade-off, including innovativeness and responsiveness to their customers. Rise in global competition has compelled the firms to increase performance standards in many dimensions such as quality, cost, productivity, product introduction time and smooth-flowing operations (Hitt et al., 2001). Different pressures on SMEs are conformance quality, i.e., low defect rates, product features or attributes, competitive price and performance. Other challenges are effective implementation of IT tools and supply chain integration (Stockdale and Standing, 2004), new product development capability (Sonia and Francisca, 2005) and information gap between marketing and production function (Xiong et al., 2006).

To compete under above challenges, SMEs need to develop effective strategies. A firm’s competitive strategy specifies the potential products and markets, long-term objectives, and policies for achieving the objectives. Organisations must continuously review their manufacturing strategies to identify the aspects of market priority, product structure, manufacturing configuration and investment. Improvement programmes should match operational goals and objectives (Muda and Hendry, 2003; Sum, 2004; Raymond, 2005). High-growth firms place a greater emphasis on external drivers such as strategic orientation, their operating environment and the use of e-commerce compared with firms having static or declining sales. Williams et al. (1995) identified significant relationship between manufacturing strategy and firm performance. The main task of corporate strategy is not to describe the current state of the art, but to identify and explore core


competencies that must be added. Otherwise, the current competencies can become obsolete and begin to function as core rigidities. A more natural and fruitful approach is therefore to think of knowledge and skills required by a company in order to maintain or improve its competitiveness. In such a challenging environment, the capacity of a firm to maintain reliable and continuously improving business and manufacturing processes appears to be a key condition for ensuring its sustainability in the long run. Developing new-to-market products using novel and often simpler technologies help SMEs to compete in the global market (Mosey, 2005). According to Wong and Aspinwall (2005), organisations should improve knowledge management process to create competencies for long-term survival. To keep in pace with international competition, firms of all sizes are challenged to improve and innovate their products and processes constantly. However, firm size does impact the innovation type pursued by companies (Wagner and Hansen, 2005). In high-performing firms, organisational culture is more associated with innovation.

SMEs can get competitive advantage by having integrated information systems (Blackwell et al., 2006) and by being more responsive to change in the Enterprise Resource Planning (ERP) system before generating purchase and work order (Lenny Koh and Simpson, 2005). Business executives of SMEs must regard IT as a strategic resource (Beheshti, 2004; Floyd and McManus, 2005). Information and communication technologies are indispensable to the operation of the core routines of organisations. Before investing in information and communication technologies, SMEs should seek accredited advisors to ensure success (Morgan et al., 2006).

Clean production and safety measures for environment have become essential criteria for organisations to compete in the market. Companies that voluntarily embrace environmentally good practices can simultaneously improve their business performance. Rao and Holt (2005) have advocated for green supply chains to improve competitiveness of organisation. Competitive advantage can arise from integrating environmentalism with organisational strategy.

Laugen et al. (2005) have observed that, in the present scenario, increasing equipment productivity and environmental compatibility is the best manufacturing practice for improving performance of organisation. For improving equipment productivity and environmental compatibility, Total Productive Maintenance (TPM) can be an important strategy. Machine productivity can be improved by using properly trained personnel and by using appropriate information technology-controlled processes, thereby providing better proactive servicing (Eti et al., 2006). Brah and Chong (2004) have observed that business performance of TPM firms is significantly superior to the non-TPM firms. TPM implementation has tangible and intangible benefits for machines as well as employees.

4 Research methodology

After market globalisation, Indian SMEs are getting many opportunities to work in collaboration with, or as vendors for large-scale organisations. Large firms seek to partner with smaller firms in order to exploit their flexibility and innovativeness. To remain as integral parts of the value chain, SMEs have to be competitive in domestic as well as the global market. Case research has emerged as an effective research methodology for in-depth understanding of issues in fast changing markets.


There are several challenges in conducting case research: it is time-consuming, it needs skilled interviewers, and care is needed in drawing generalisable conclusions from a limited set of cases and in ensuring rigorous research. Despite these, the results of case research can have a very high impact. Unconstrained by the rigid limits of questionnaires and models, it can lead to new and creative insights, development of new theory, and have high validity with practitioners – the ultimate user of research (Voss et al., 2002). Various researchers have used case study for their research (for example: Taylor et al., 2004; Gunasekaran et al., 2001). Major strengths of the case research are that the phenomenon can be studied in its natural setting, and case method allows the questions of why, what and how to be answered with a relatively full understanding of the nature and complexity of the complete phenomenon.

In developing this case study, the Eisenhardt (1989) framework (Table 3) is used. The research methodology adopted in this study is based on literature review and discussion with executives of the organisation. The literature review enabled the identification of various issues related with firm-level competitiveness and development of a model for analysing these issues with the help of a case study. Discussions with executives helped to identify different issues in a real scenario. The model for the study is shown in Figure 1. According to this model, competitiveness of an organisation depend on its assets, ability to meet challenges, strategies for selecting competitive priorities and processes as well as performance. In the present framework, strategy formulation has taken centre stage. According to this framework, the assets of the organisation and challenges from the market will decide the various strategies of an organisation. On the basis of strategy development, competitive priorities and processes will be decided. The effective implementation of management process will decide the performance of an organisation. Various sources of information about the company consist of annual reports, control charts, documentation of various processes and discussion with managers of various departments during regular scheduled visits.

Table 3 Case study methodology

Steps Comments

1 Definition of research question

To identify the issues related with the competitiveness of Indian SMEs in a globalised market.

2 Objectives The case methodology will seek answers to following questions:

• What are the major pressures and constraints of the organisation?

• What are the major assets of the organisation?

• How are strategies formulated?

• What are its competitive priorities?

• Which management processes are followed?

• How is it performing in the market?

3 Selection of the case Organisation is selected on the basis of its investment in plant and machinery.

4 Crafting research instruments

A structured questionnaire is used to capture major issues of competitiveness, followed by interviews and observations.

5 Entering the field Organisation was contacted via telephone and agreement was sought for the study, then data collection using the interviews and observations, etc., was started. Multiple respondents were interviewed to get a richer understanding of the different issues.

6 Analysing the data Information and data collected from the organisation were used to analyse concepts of competitiveness in broader perspectives.

Source: Adapted from Eisenhardt (1989)


Figure 1 Model for competitiveness analysis of case organisation

5 Case study

After analysing different issues theoretically, the present case study was conducted to illustrate the above-discussed issues of competitiveness in a real scenario in the Indian context.

5.1 Profile of organisation

HIL (name changed) began as a trading concern in 1958. It is a major manufacturer and supplier of a wide range of low-voltage electrical equipment catering to the needs of the domestic and industrial markets. It has strategic alliance with Geyer AG of Germany, Schiele Industriewerke of Germany, and Crabtree of UK. Its sales turnover is approximately 120 crore Rupees. It has set up a R&D centre in Noida, UP (India). The number of employees is 3500. The share of export in total sales is 30%. Recently, it has acquired a Greek company. HIL also has an enviable clientele, not only in the domestic market, but also in international markets including Malaysia, Bangladesh, Sri Lanka, Dubai, Russia, Yugoslavia, Iran and Nepal.

Among its satisfied clients are prestigious names such as the Rashtrapati Bhawan, State Electricity Boards, Indian Oil Corporation, National Thermal Power Corporation, Bharat Heavy Electricals Limited, Bhaba Atomic Research Center, Maruti Udhyog Ltd., HPCL, Metro Rail, Tata Chemicals, L&T, ECC, DOT, CDOT, SAIL, TISCO, ONGC and many more. Its main products are Miniature Circuit Breakers (MCBs), Residual Current Circuit Breakers (RCCB), changeover switches and Compact Fluorescent Lamps (CFLs). HIL is committed to meeting the challenges of the 21st century with integrity and technological expertise.

Challenges:• Pressures• Constraints

Assets

Strategydevelopment

Competitivepriorities

Processes

Performance


5.2 Assets

The competitiveness of an organisation can be derived through diverse sources. Competitiveness is often derived from basic factors such as natural endowments. For instance, the competitiveness of the overseas ventures of Japanese firms has been derived mainly through factor endowments such as land and labour. Assets can be tangible or intangible. Major assets for HIL are discussed in the following sections.

HIL is the largest manufacturer of MCBs in India and recognises the further vast potential available both in India and the international market for MCBs. HIL has set up an absolutely world-class, totally automated manufacturing plant in an approximately 50 000 square meter area in the green environment of Himachal Pradesh (India). Its current capacity is twice its original capacity. It has international clients in 43 countries with a talented international business division having an exhaustive partner network in India and abroad. It has 1000 dealers, 25 000 retailers, 3200 professionals qualified in various fields. The internal control systems have been fine-tuned in line with the global practices and have been adopted keeping in mind company environment. These controls pervade all the departments such as accounting and finance, manufacturing operations, human resources development, marketing and purchasing, material handling, etc.

The use of ERP and other software systems as financial and operational backbone, a comprehensive MIS reporting system, documentation of processes and authority structures have strengthened the organisation’s internal control. Innovation is the hallmark of every vital development at HIL. The company regularly pursues the upgrade of technology in existing products and development of new products and has also adopted the latest development made by its collaborators. HIL has R&D facilities in all its manufacturing plants at present, which are continually developing new products. As innovation and research is the foundation on which the future of any manufacturing organisation is built, the company is setting up a central R&D facility at Noida, UP (India). It shall be covering 25 000 square feet area, equipped with the latest equipment for testing, developing, prototype, etc. It has employed over 100 engineers for this cause. This centre shall be in addition to the individual R&D cells in each factory and shall concentrate only on really futuristic projects of the company.

HIL achieved global recognition based on its products, getting prestigious international approvals such as CSA, KEMA, CB, and CE. The major factors of its assets such as cost factor, logistic factor and technology factors will be discussed in the following sections.

5.2.1 Cost factor

Cost of manufacturing gives the company an edge over its competitors. Cost of manufacturing consists of direct labour cost, direct material cost, energy cost, cost of logistics, marketing/office expenses, etc. A comparison of different cost factors with those of its major competitor is given in Table 4. Labour cost, as compared with their competitors, is quite high for HIL. It was also seen that in order to keep the system working, the company hired more technical persons and gave more facility to operators. Energy cost is higher than its competitor by about 20%.


Table 4 Comparison of various cost elements for HIL

Cost elements HIL Competitor Comparison

Labour cost Rs/month Rs 3500 Rs 3000 Labour cost is higher.

Energy cost Rs/product Rs 0.1018 Rs 0.1223 Energy cost is nearly 20.13% more in case of competitor.

Raw Material (RM) cost % of MRP

30.38% 34.74% approx. RM cost is nearly 4.74% more in case of competitor.

The competitor’s raw-material cost was found to be almost 4.74% more. The raw material cost mainly depends on the design of the product, and it fluctuates as per market rates. The main raw materials are sheet metal, nylon-6, copper and brass. TATA Steels, Bhushan Steels, Surya Roshini, Wheel Polymer, Agarawal Metals, Easter, DSM, etc. are the main raw material suppliers. HIL has undertaken value engineering projects to reduce raw material cost. It has also started procuring raw materials from China, which are less costly. HIL has also done some changes in the design of the MCB that resulted in the reduction of material cost without affecting the performance of the product.

5.2.2 Logistics factor

Transportation cost is one of the most important factors that affect production cost. The distance of suppliers and customers from HIL is given in Table 5. The location of suppliers and customers become very important in reducing transportation cost. In view of reducing raw material cost, HIL prefers nearby suppliers. It has established a network of ancillaries for critical components. HIL has approximately 55% suppliers within a radius of 50 km, whereas majority of its customers are beyond a 50-km radius. Some of the components are also being imported, for which indigenisation is in progress. About 35% of the customers are within a radius of more than 500 km. Hence, HIL has installed their own warehouses near OEMs and other customers in order to cater to their needs. Only 7% of its customers are from overseas.

Table 5 Distance of suppliers and customers from HIL

Distance % of suppliers % of customers

Within 5 km radius 21.05 5.85

Between 5 km and 10 km radius 7.89 5.85

Between 10 km to 50 km radius 26.32 15.20



Beyond 500 km radius (including those from abroad) 6.14 35.09

5.2.3 IT applications

Information technology is being utilised by HIL in its day-to-day operations. It is working on an ERP system (Baan). Table 6 shows the various applications being utilised by different departments.


Table 6 IT applications in HIL

Department IT application

Procurement Automatic procurement plan, online purchase order generation, online ordering, e-mail, internet.

Production and planning control

Automatic generation of MPS, MRP, production order, requisitions slip and status of WIP.

Administration Internet, e-mail, online manpower details, online salary generation.

Quality Internet, e-mail, software such as RQMAN and PQMAN.

Design Internet, e-mail, software such as Pro-E, CAD.

Sales and marketing Internet, e-mail, online packing slip, online generation of sales invoice, online order booking, online information about the dealers stock.

5.3 Challenges

Major challenges faced by HIL for its competitiveness include reducing product cost, rejection rate, delivery time, etc. These challenges are also shown using the Ishikawa diagram (Figure 2). In meeting these challenges, HIL feels the need to develop new products based on indigenous R&D, innovative processes, reduction in material-related cost as well as other overheads, long-term contracts with vendors and implementation of pull-based material procurement.

Figure 2 Challenges for HIL to sustain competitiveness

In meeting the above challenges, HIL faces problems caused by unreliable vendors, poor quality of transport infrastructure, complexity in business transactions and inadequate government support. Some of the major constraints felt by HIL in meeting these challenges are:

• High cost of capital and infrastructure – power supply remains erratic and the cost per unit charged to industry remains prohibitively high.

Productrange

Reducedelivery

time

Increasing rawmaterial and

input cost

Lead-timereduction

Changingtax

regulations

Inventorycost

reduction

Challengesto sustain

competitiveness

Productrejection rate

Labourregulations


• Diversified Manufacturing – Indian manufacturing base is diversified though there is little coordination between various levels of the sector’s value chain.

• Negative effects of location policies of the past – policies of the past that provided incentives to locate in underdeveloped regions of the country made firms locate plants in very distinct location. Many multiplant firms now find it difficult to contain the cost of distribution from these plants and are unable to simultaneously roll out various improvement programmes or vendor development strategies effectively.

• Changing tax regulations – a firm needs to have stable regulations or needs advance notice of change to order and make rational investments. Frequent changes in the tax regime have introduced uncertainty in operational planning.

• Innovation – absence of any serious innovation is a major problem for HIL. One explanation for this lack of innovative ability in HIL is that there are very few qualified people for this type of activities although HIL has started hiring more people and a separate R&D centre has been started at Noida to gain the competitive advantage on this front.

5.4 Strategy development

Business success depends on the formulation and implementation of viable strategies. The new competition is in terms of reduced cost, improved quality, products with higher performance, a wider range of products and better service, and all delivered simultaneously. According to Fleury and Fleury (2003), for operational excellence, organisations should optimise the quality/price ratio.

HIL has a clear-cut manufacturing strategy aligned with marketing strategy. Vision and mission are set at the top level. In line with mission and vision, directors of different functions formulate the manufacturing objectives for the organisation. Major competitive priorities for HIL in order of priority are: vendor development, human resource development, labour productivity and product quality. The main elements of HIL’s long-term strategy are the use of Advanced Manufacturing Technology (AMT), continuous improvement through Total Quality Management (TQM), 5S, Kaizen, adoption of ethical practices, continuous emphasis on waste elimination, lean manufacturing, employee empowerment and involvement, fostering quality at source, reduction in non-productive time, smooth material movement, product diversification and safety measures for employees.

5.5 Processes

Improvements in competitors’ capabilities have shortened product life cycles, elevated product complexity and expanded accessibility to new technical breakthroughs. The capacity of a firm to maintain reliable and continuously improving business and manufacturing processes to meet above challenges will be a key condition for ensuring its competitiveness in the long run. Some of the processes followed by HIL such as development of human resource, TQM, TPM, Kaizen, process and product development are discussed in the following sections.


5.5.1 Development of human resource

HIL believes that the employee is the first customer an organisation has to win, and to fulfil this purpose, it is important to have a team whose members are well-conversant with both technical and commercial knowledge. Being a manufacturing company, workers form an important link in the chain of growth. A congenial atmosphere has been created at shop floor level and all facilities required for a secure and cordial environment are provided. Management at all levels take care of the interest of the work force and frequent interactive sessions are conducted throughout the year. By proper training, education and demonstration, it tries to encourage employees’ involvement in organisation management. This is reflected in terms of improved labour productivity, i.e., in spite of constant number of operators and staff, the performance of the company has increased in all aspects, i.e., production, sales and addition of products.

At HIL, the number of operators has increased from 189 in 2000–2001 to 214 in 2003–2004, which is approximately 13.5%. Corresponding to this increase, the number of staff has increased only 3.6%. It indicates high operators-to-staff ratio, which is a sign of better workforce management.

On this account, all technical staff have been assigned with small group activities apart from their routine work. This helps in keeping touch with shop floor operations, and operators are motivated to solve quality problems through these small group activities such as 5S and Kaizen. These types of group activities improve the staff and workforce relation, which result in better control on the shop floor and ultimately improve labour productivity.

5.5.2 Total quality management

TQM is a system approach to quality management. It refers to a complete commitment to quality in all spheres of the organisation. HIL decided to focus on policy deployment and Daily Routine Management (DRM) to achieve their TQM implementation. As a result, HIL redefined its management of processes for new product development system, manufacturing quality, supplier quality and customer quality. In the new system, each manager is required to define his role, his metrics, his measurement of performance to date and steps being taken to improve performance. TQM implementation has created tangible and intangible benefits for HIL. Intangible benefits including role clarity so that each person understands his/her role in the organisation, the organisation’s suppliers and customers, and its metrics. The focus on competency and involvement resulted in a different approach to managing people. The focus on management points and checkpoints and the systematic approach to planning has also resulted in a management system where charts, goals and current performance relative to plan all became commonplace throughout the company. Also, common for every problem that came up were the systematic analysis of the problem, steps taken to resolve it, impact of the steps and learning from each observation. HIL has focused on some basic points in their daily work. These are understanding of quality policy, doing things right the first time and every time, considering quality as the responsibility of the producer, treating the next process as a customer, 5S, following the procedures and work instructions religiously, maintaining records properly, cultivating a sense of belongingness, teamwork and total commitment, six sigma approach, timely delivery, technological improvements and daily monitoring of performance.


TQM always strives for better quality through continuous improvement. By comparing with world-class organisations and by identifying customer’s needs, a basis for long-term continuous improvement evolves. This is achieved by bridging the gap between ‘AS-IS’ situations to a ‘TO-BE’ situation. Kaizen means ongoing small improvements which result in performance improvement of the company. At HIL, it is a day-to-day practice; Kaizen is mainly presented by the group of workers during Daily Work Meetings (DWM) and the best Kaizen selected gets rewards from the management. These types of activities boost the morale of the workers, which ultimately increase the productivity and quality of the product. Kaizen also involves the application of 5S for improvement. These are: Seri (straighten up), Seiton (put things in order), Seiso (clean up), Seiketsu (personal cleanliness), Shitsuke (discipline). At HIL, 5S maintenance is a day-to-day habit; every employee has been given training for 5S activities. To make the employees participative, a trophy is circulated between different departments on the basis of their score on the 5S audit.

5.5.3 Total productive maintenance

TPM is based on teamwork and provides a method for the achievement of world-class level of overall equipment effectiveness through people and not through technology or system alone. At HIL, TPM activity is executed by a team known as the Cross-Functional Team (CFT). It has the responsibility of improving plant performance by solving problems and managing specific plant area, machine or process.

Steps taken by HIL for effective implementation of TPM are: providing awareness about TPM to all supporting departments, helping them to identify P, Q, C, D, S, M (production, quality, cost, delay, safety and maintenance) in each function in relation to plant performance, identifying the scope of improvement in each function and collecting relevant data, helping employees to solve problems in their circle and to cover all employees and circles in all functions, doing DWM to discuss all related activities and improvements with the presentation of each CFT.

5.5.4 Inventory management

At HIL, for the purpose of having optimal inventory, ERP software is used. Inventory analysis is done at all levels, i.e., component, raw material and finished goods. The schedule of procurement for new materials and flow of goods within the company is made on the basis of inventory analysis using ERP. This also helps in rationalising the vendors. A significant issue at HIL is that raw materials contribute to more than 40% of total product cost. HIL is working with a continuous production line, which leads to a minimum requirement of the stock at different points. It also helps reduce the inventory at the shop floor. To make the system more effective, there is a separate Production Planning and Control (PPC) department. The PPC department applies many industrial engineering techniques for issuing directives to the production department for issuing what to produce, how much to produce, what resources are needed in production, how to coordinate different resources of the system and how to control deviations from the plan such as meeting production deadline, etc.


5.5.5 Product and process development

Critical success factors for product development are time to market, efficiency of operation, product quality, engineering innovation and market-driven designs, etc. To keep pace with the market player/competitors, HIL has R&D facilities in its manufacturing plant for continuous development of new products. As innovation and research is the foundation on which the future of any manufacturing organisation is built, HIL has also started a central R&D facility at its corporate office premises at Noida.

A product development system must be process-oriented, ensuring that the capabilities and architecture of the system effectively support each of the activities necessary to actually accomplish the process of product development. HIL has become the market leader through its world-class manufacturing processes. HIL has the manufacturing capability to produce good quality products at the right time and with cost efficiency. It has an automatic production line, which is developed by the HIL engineers indigenously with the help of the channel partners. All the testing of the miniature circuit breaker is done by the Special Purpose Machines (SPMs) without manual intervention and all the SPMs are interfaced so that the real data are transferred to the computer with the help of Programmable Logic Controllers (PLCs). Based on this real data (no one can manipulate the data in the system), the different quality tools (e.g., FMEA, 7QC tools, root cause analysis) are applied on different areas to reduce the chance of failure of a breaker. HIL has the best tool-room facility, which includes three CNC wire-cut, five EDM with other conventional machines such as lathes, surface grinders, milling, etc. Recently, HIL has been in the process of further improving the manufacturing process by making it full-proof, which can be done by the operators. In this system, every product is marked with a distinguished bar code, which is read by the bar code reader before doing the test of the product, and data are transferred to the server with the help of the communication port through PLCs; if a product is not OK or not tested at the previous stage, it will not be accepted by the next machine.

5.6 Performance of HIL

Performance measurement is the process of quantifying the efficiency and effectiveness of the manufacturing system. Performance of an enterprise is often measured as a ratio of output to input. The outputs constitute the products of the enterprise and the inputs are the resources used by the enterprise. Though there are developed special methods of SME efficiency measurement, smaller companies often have much less sophisticated accounting systems, shorter operational track records, and their internal data is rarely available for outside research. Garg et al. (2003) suggest that as most small firms are privately held, it is unlikely that their CEOs will be willing to provide detailed accounting data on the firm’s performance. Therefore, they suggest the use of ‘subjective and self-reporting measures of performance’. Singh et al. (2006) have also observed subjective performance as an indicator of overall competitiveness.

Performance data was collected for five years. On the basis of this data, performance of HIL on some measures is given below:

• Rationalised the vendors from 300 in 2001–2002 to 178 in 2004–2005 although the purchase of material increased from Rs 675 lakhs in 2003–2004 to Rs 3375 lakhs in 2004–2005.


• Online vendors have increased from 35% in 2002–2003 to 55% in 2004–2005.

• Cost of raw materials such as copper and brass has increased by 55% (during 2002–2005) but the cost of the end product has increased by 25%. These figures show the efficiency and the productivity of the Materials Department of the organisation.

• Increase in the inventory is approximately 30% whereas production is increased by approximately 62% in the financial year 2004–2005. Lower increment in the inventory in comparison to production indicates better performance of inventory management.

• Downtime of the machine has decreased from 5.24% in year 2002–2003 to 4.11% in 2003–2004 and to 2.43% in 2004–2005. These data indicate the productivity of the Maintenance Department. Major breakdowns have decreased from 14 in 2002 to 7 in 2005. Similarly, minor breakdowns have come down from 23 to 13 in the same duration. It reflects improved performance of the Maintenance Department.

• Achievement of preventive maintenance schedule has increased from 62% in 2002–2003 to 89% in 2004–2005.

• On time delivery has increased from 68% in 2003–2004 to 86% in 2004–2005. It reflects the performance of the Marketing Department.

• Loss of Plan (LOP) has decreased from 15% in 2003–2004 to 6% in 2004–2005.

• Product rejection rate has decreased from 10 000 plus PPM in 2002 to 2500–3500 PPM in 2005.

• Production of the company increased from 10 881 210 units in 2003–2004 to 17 714 133 units in 2004–2005 (62% increase).

• Productivity increased more than 20% with the introduction of new SPMs for different operations, which shows the efficiency of the Production Department.

• Sales of the company increased from Rs 4539 lakhs in 2000–2001 to Rs 11827 lakhs in 2004–2005. It is approximately 300% increase w.r.t year 2000–2001.

• During the year 2005, the company achieved Rs 48 crores as an export turnover as compared to previous year’s turnover of Rs 21 crores. It shows a growth of more than 125%.

• The net profit increased from Rs 6.21 crore in 2000–2001 to Rs 30.53 crore in 2004–2005 (Approximately 400% increase).

Above observations clearly indicate that HIL has improved its performance in terms of vendor development, inventory management, maintenance, sales and overall profit.

5.7 SWOT analysis

With the help of the model given in Figure 1, different issues of competitiveness such as assets, pressures, constraints, strategy development, processes and performance were analysed to identify major Strengths, Weaknesses, Opportunities and Threats (SWOT) for HIL. Its major strengths are its wide range of products, committed manpower and team


spirit, ISO-based suppliers, R&D facilities, wide distributors and retailer’s base, etc. Weaknesses of this organisation are excessive dependence on key personnel, high employee turnover, increasing overhead, shortage of experienced professionals and lack of innovation. Some of the opportunities, which HIL has gotten after globalisation, are expanding domestic and global markets and alliance with big players in the market. In availing itself of these opportunities, HIL feels some threats. These are growing competition owing to the entry of new competitors, reducing profit margins, increased expectations of customers and Chinese threat of very low price. The SWOT analysis for HIL is summarised in Table 7.

Table 7 SWOT analysis of HIL

Strengths Weaknesses

• Wide range of products for satisfying customers

• Capability to diversify further into other products such as CFLs, Fans, etc.

• Expansion through group companies

• Committed manpower and team sprit

• ISO 9000-based suppliers

• Optimal use of local manufacturing facilities, skills, raw materials and environment

• R&D facilities

• Wide distributors and retailers base

• Reduced profit margins because of plant overheads and increased raw material price

• Adapting to Indian government rules and regulations related to tax structure

• Dependent on key personnel of departments

• High employee turnover, i.e., loss of human capital

• Shortage of experienced professionals

• Competency for innovation in developing stage

Opportunities Threats

• Various new launches giving rise to new opportunities

• Increase in awareness giving rise to huge increase in market

• Export avenues in the neighbouring and European countries

• Increase in foreign trade owing to association with European counterparts

• Growing competition in the market after the entry of new competitors

• Reduced profit margins because of competition

• Increased expectations of customers

• The Chinese threat of very low price, which may pose a direct impact on the company’s performance

6 Conclusion

After market globalisation, competitiveness of organisations has received considerable attention from researchers. In the past, it has been studied principally in the context of large-scale organisations. The present study adopted theoretical as well as practical approach for analysing different issues of competitiveness. Firstly, it tried to identify major issues with the help of literature review. Then case study was elaborated for better understanding of competitiveness issues emerging from the literature. Some of the major observations about competitiveness of HIL are:


• It has clarity of mission. Its mission is to become a global electrical goods supplier with excellence in component manufacturing.

• Passionate pursuit of customer’s satisfaction is through technology, quality, cost and responsiveness. It indicates its aggressiveness and desire to become a globally competitive company.

• Huge investment in human resources is a key driver for HIL’s competitiveness. It believes that technical workforce at all levels should develop knowledge of electronics, electrical, computer and mechatronics areas.

• HIL continues to invest substantially in the in-house-training programmes in the areas of 5S, SPC, FMEA, etc.

• It puts enormous emphasis on technology transfer, absorption and development.

• HIL has spent approximately 0.21% of total turnover in R&D activities in 2004–2005 to designing and developing new products such as air circuit breakers, relays, microprocessor-based modular case circuit breakers, etc.

HIL has greatly improved its competitiveness and can be a role model for other organisations. Therefore, the above observations about HIL can help other organisations in framing their strategies for competitiveness. However, ‘competitiveness enhancement’ is a journey and not a destination. Organisations need to identify new sources of competitiveness and acquire and build appropriate competencies from time to time. However, for generalisation of the above findings, more case studies from different manufacturing sectors are recommended.

Acknowledgement

Authors are extremely grateful to the referees for their constructive suggestions and comments for improving the quality and content of the paper.

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