Strengthening SMEs through strategic and marketing linkages

1. Strengthening SMEs through strategic and marketing linkages R C Bhargava

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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%

14. 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

15. 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