Operational Excellence – The pressure to get the basics right

Operational Excellence – The pressure to get the basics right By Wilfried Aulbur and Amit Kapoor The authors discuss the idea of how to race ahead in the competitive Indian Environment. "Cost reduction is therefore not an option but a conditio sine qua non, a necessary condition without which no strategy will be successful." "In today’s highly competitive environment, companies have to run just to stand still. To survive, they need to live by the Olympic motto citius, altius, fortius – higher, stronger, faster." India's consumers pose a very difficult challenge for foreign and local companies alike. Being successful in India means serving your customers at China’s prices and providing Japan’s quality. It implies marrying German engineering, US innovation and Italian design with Korean efficiency. Clearly, like other emerging markets, companies in India have to identify holistic, sustainable, customer-driven solutions to survive and potentially thrive in such a challenging environment. Operational excellence hence becomes the entry ticket to doing business in India. Value for money is defined by the size of the Indian customer's wallet and his or her willingness to spend a certain amount for your product. Your price must match this amount or sales will be restricted to relatively small sections of the overall Indian economy. Cost reduction is therefore not an option but a conditio sine qua non, a necessary condition without which no strategy will be successful. Facing the world – The impact of India's Liberalization India's liberalization in 1991 spawned the country's foray into productivity enhancement and modern management techniques. Key drivers for the same were the reduction of tariffs on inputs and final goods, increased FDI, delicensing and reforms in supporting service sectors such as banking, telecommunications, transportation and insurance. Productivity growth in India was mostly dominated by "within-plant" productivity improvements. Existing plants and companies became more competitive in the face of increased competition as well as improved access to input materials and technologies. Reallocations, – that is, the exit of non-productive companies that succumbed to competitive pressures –did happen, but overall seemed to have played a lesser role.[1] Indian companies that adapted quickly to the changed environment and adopted modern management techniques early were able to reap significant benefits. Productivity and quality tools such as ISO certifications, Kaizen, Value Stream Mapping and Total Productive Maintenance are widely used in larger Indian companies.[2] Benefits achieved via these techniques include enhanced operational performance, improved customer satisfaction, improved global competitiveness, improved image and or brand perception and solutions for chronic problems. Remaining barriers – Run just to stand still In today's highly competitive environment, companies have to run just to stand still. To survive, they need to live by the Olympic motto citius, altius, fortius – higher, stronger, faster. Even today, this is more important for companies operating out of India as they have several additional challenges to overcome compared to rivals from developed and other emerging countries. Some of the factors include the lack of infrastructure, the availability of electricity, the cost of and access to capital, the implicit cost of institutional voids, the cost of a country of origin malus and the lack of adequately trained workforce. Beating the odds – India's heroes While the challenges may seem daunting, all is not lost. A number of companies have developed operating models that enable profitable growth in India. Many of these have done exceedingly well. Here we will discuss the example of Maruti-Suzuki in detail. Maruti Suzuki – Driving India since 1983 With a current market share of around 50%, which is close to its historic highs, Maruti Suzuki has defined mobility for Indians since the 1980s. Its relentless pursuit of a "volume up, cost down" strategy has created a virtuous cycle that continues to create sustainable competitive advantage. Maruti Suzuki is poised to profit from the growth of the Indian passenger vehicle (PV) market like no other company in India. India's PV market has grown at a healthy clip, with a CAGR of 14% between 2005 and 2012. While the overall market stagnated at around 2.6 million vehicles between 2012 and 2014, growth seems to have resumed in 2015 due to a change in government and improved customer sentiment. Going forward, growth of the PV market to about 4.6 million units in 2020 is expected.[3] This volume would put India firmly in a top spot by volume behind China and the US. Clearly, India is too large a market for any OEM to ignore. Maruti's beginning goes back to 1981 when Dr. V. Krishnamurthy incorporated Maruti Udyog Ltd., a company formed for two purposes. The first was to to develop an indigenous, small and fuel-efficient car that could adequately provide affordable mobility to India's masses and the second was through this venture to modernize and develop India's technological and manufacturing footprint. Right from the beginning, Dr. Krishnamurthy knew that he could not fulfill this mission by himself but that he needed a foreign partner. While India had three car manufacturers producing vehicles at the time – Hindustan Motors (Ambassador), Premier Automobiles (Padmini, better known as Fiat Padmini) and Standard Motors in Bangalore –product quality and technology were a far cry from the needs of Indian customers as well as the demands of more developed markets. A relevant supply base did not exist in India as the three dominant players had very high degrees of vertical integration. Krishnamurthy rightfully concluded that these challenges were too daunting to be tackled without competent and committed help. Suzuki emerged as the partner of choice out of the many potential suitors for a passenger-vehicle joint venture, as the focus and mission of the company aligned perfectly with India's needs.[4] Osamu Suzuki was a man of action and unfazed by the challenges that India had to offer. Taking a minority stake of 26% in a government public sector undertaking (PSU) did not give Suzuki the kind of management control that the company would have liked. Operating under the Licence Raj would imply limitations on the number of vehicles that could be sold and potentially affect break-even calculations. In short, the odds seemed to be fully stacked against a joint venture between the Government of India and Suzuki. Yet, to the surprise of everyone, Maruti Suzuki not only survived but thrived. Rahul Bharti, Vice President, Corporate Planning, observes "From day one we had a very successful blend of Indian and Japanese ways of doing things. We were impressed with the minute detail-orientation of the Japanese. Their way of observing customers in detail, identifying their needs and then aligning the whole value chain to deliver this need at an appropriate value was impressive." Osamu Suzuki, current Chairman and CEO of Suzuki Motor Corporation as well as the Indian and Japanese management teams, played a key role in this. With Suzuki's conviction that cleanliness would drive effectiveness, he and his team drove down 5S principles[5] in the organization. Suzuki would personally inspect the factory as well as offices, open drawers and check corners for signs of inefficiency and waste. He worried about the width of alleys and the distance between supervisors and their employees, all in the interest of ensuring fast and open information flow. Supervisors were expected to be accessible to their employees, to not intimidate them and to recognize that every employee is equal in the aspiration to make their company excel. Open offices, one uniform, a common canteen for everyone from sweeper to Managing Director – all these ideas helped to reinforce the common responsibility of Maruti Suzuki employees to work for the well-being of their company. All of these concepts were revolutionary in India in the 1980s, even for private companies, let alone PSUs. Suzuki's conviction "smaller, lighter, lesser and more beautiful" became inculcated in Maruti Suzuki's DNA and is relentlessly applied to everything that the company does, whether it is products, machines, or head quarter documents. One of the major initiatives launched in this context was the "1 component, 1 gram, 1 Yen" initiative. Osamu challenged the organization to go through all vehicles and to identify cost improvements to the tune of at least one Yen as well as weight reductions to the tune of at least one gram. The impact of the initiative was enormous. Not only did the campaign mobilize an army of about 6,000 employees and several thousand vendor employees and generate a meaningful weight reduction per vehicle, but it also drove the "smaller, lighter, lesser, and more beautiful" philosophy across the extended company. Maruti Suzuki's DNA was aligned to this motto and this alignment is one of the major reasons for the company's continued success in the country. The quest for truth – the 3G principles[6] – became another part of Maruti's DNA. Management drives teams to identify problems and to go to the location of the problem to solve them. If there is a problem with a vendor, the teams go and visit the vendor to identify the solution. If there is a challenge with rural marketing, Maruti Suzuki employees visit villages to understand the problem and identify solutions. Realistic actions are being taken based on these observations rather than based on a cascade of management reports. Efficiency within Maruti Suzuki was driven via 3M,[7] i.e., the consistent and continuous elimination of wastage, inconsistency and strain. Here Suzuki's global experience in making waste visible in factories, e.g., via videography and other tools, proved invaluable. JIT, Kanban and Kaizen, for instance, became common tools for Maruti Suzuki and the company's vendors long before liberalization started. Lastly, Maruti Suzuki's Indian employees had to become accustomed to Suzuki's determination to drive Jugaad out of their system via the 3Ks.[8] Consequently, driving home adherence to standards and a structured, continuous improvement of standards via Kaizen amounted to a dramatic cultural change program. A major part in this effort was to not only impart training by Japanese expats in India, but also to send hundreds of employees into Japanese factories to work alongside Japanese workers and to experience 3G, 3K, 3M and 5S in action. This proved to be crucial for Indian employees because they then understood the importance of these principles when they saw them in action. Other efforts such as having Maruti Suzuki employees take an oath that they would not accept, make, or pass on bad quality parts in the course of their work, also drove changed attitudes. While the company was changing the way India manufactured goods within its walls, the constraints of the phased manufacturing program, i.e., commitments on localization, made it necessary for Maruti Suzuki to develop a local vendor base as well. Here the company applied an interesting balance between handholding and leveraging competition. Models of support for suppliers included a one-time sale of technology, technology collaborations, joint ventures (JVs) and 100% subsidiaries. Quality of components tended to improve with increased cooperation between OEM and supplier. More than 125 foreign suppliers (Japanese, European and American, in order of relevance) were brought into the country by Suzuki and Maruti Suzuki supported the suppliers along project management, feasibility studies, sample validation and hand-over. To ensure quality in the supplier JVs, Maruti Suzuki demanded expat quality managers to be present in the JVs for a minimum of two years. In about 18 suppliers, Maruti Suzuki took equity directly. However, even for these suppliers, 2nd source suppliers were brought into the fray to prevent complacency, which would ultimately erode value for customers. Maruti provides detailed training and technical support to its dealers that leverages Japanese management techniques. Every activity in the showroom or in the work bays is documented, detailed and imparted to sales and service staff via training. Dealer-balanced score cards drive dealer management with both leading and lagging indicators including standards for training and remuneration of sales and service staff, promptness of salary payments, and presence of HR staff in each showroom. "Initially we needed to work hard to convince dealers that our suggestions would lead to higher volumes and better profits for them," says Rahul. "Once they realized that high performing dealers were making more money, it became easier to align them to us. The same happened when we suggested investments in driving schools, insurance, used car businesses, etc. Today, our success makes interaction with dealers easy." Detailed market understanding is driven by own insights, cooperation with dealers and the desire to be intellectually honest, i.e., to do a rigorous analysis of your own and your competitors’ performance in the market and to derive the necessary actions. Maruti understands that in the automotive business, it is the right product and the company's commitment to live up to its promises on service, and total cost of ownership that make all the difference. Focus on key parameters such as leadership in customer service satisfaction has driven positive word of mouth for the brand and enabled sustained sales success. The product itself has to be a delicate balance of fuel efficiency, engine power and pick-up, space, styling, interiors and price. Says Rahul: "If you miss any of these points in your equation at a particular price point, your product will not be successful.” Frugal engineering is a major strength of the company. Various suppliers to several OEMs in India point out that Maruti Suzuki's designs satisfy all regulatory and customer requirements but are still 10-15% cheaper than the competitors'. Frugal engineering is supported by two research centers in the country. The R&D center in Gurgaon has about 1,250 local engineers and 35 expats who support connection with and knowledge transfer from R&D in Japan. In addition, a new R&D center at Rohtak has a test track, crash test facilities, a wind tunnel, a performance and endurance chassis dyno, and electro-magnetic compatibility labs. This center greatly enhances the engineering work that can be done in India and is intended to design, develop and test vehicles for the local as well as export markets in Africa, Middle East and Southern Asia. All of the activities undertaken by Maruti Suzuki, including efforts to create value for customers and to provide affordable mobility to India's masses, are driven by volume, as shown in Figure 1. The product portfolio is designed to hit at least 50,000 units per model launched. Production is stable so that operational efficiencies can be optimized and inventories minimized for the OEM as well as the suppliers. Higher volumes and stable production drive better conditions with suppliers; this translates into lower prices and drives volumes. Higher volumes and better supplier profitability enable suppliers to invest in productivity enhancements and quality improvements which again drive down cost and increase volumes. They also create positive business cases for dealers and allow larger network coverage that in turn increases volumes. Higher volumes enable profitable downstream services such as True Value (used cars), insurance, financing, and accessories that increase CSI[9] and hence drive positive word-of-mouth and volumes as well as dealer profits. Dealer profits can be reinvested in service, again leading to improved margins and improved volumes. With a large distribution footprint and a low cost position of high-volume platforms, niche models become feasible, again driving volumes. Volumes also lead to surplus cash, which can be invested and drive significant below-the-line cash flows that provide long-term financial stability or that can be re-invested in R&D or the distribution network. Maruti Suzuki's success is unique. Maruti's stock surged 65% in 2014, raising its market capitalization to USD 19.7 billion and overtaking its Japanese parent company Suzuki, which is valued as USD 19 billion. Maruti sold 1.29 million units in FY15, contributing 44% of Suzuki's global sales of 2.9 million units. It accounted for 33% of Suzuki's auto revenue and 55% of EBIT in FY15. Clearly, for Suzuki, India is not a lead market, it is THE market in which winning is crucial even for the survival of the parent brand. Maruti Suzuki's determination of remaining the leader in the Indian passenger vehicle market based on profitable growth is underlined by its detail orientation and alignment in every little step of the value chain. Opportunities for export markets, such as Africa, the Middle East and Southeast Asia, for which the Indian organization has the global export lead, are waiting to be fully tapped. Maruti's way forward remains challenging. The company will have to work hard not to fall victim to its own success. Since most of the present older generation has driven a Maruti at some stage in their life, new products will have to help the company shed the "daddy's car" image. Also, as India becomes more affluent, Maruti needs to graduate from the small car A and B segments into the C and potentially D segments. Maruti's moves have been continuous and evolutionary rather than radical, e.g., simplified by its journey from the Swift to the Dzire and S4 and finally to the Ciaz and S Cross. With its premium showroom concept NEXA, that the company has launched across India, Maruti is trying to blend into the lifestyle of an Indian customer that is about to upgrade in many aspects of his or her life. The transition from a value to a life-style oriented brand has been difficult for Suzuki globally. India may just be the market in which it finally cracks the code. [1] Ann E. Harrison, Leslie R. Martin and Shanthi Nataraj, "Learning Versus Stealing: How Important are Market-Share Reallocations to India's Productivity Growth" (Santa Monica, CA: RAND Corporation, 2011), http://www.rand.org/pubs/working_papers/WR832. [2] J.A. Garza-Reyes, H.S. Parkar, I. Oraifige, H. Soriano-Meier and D. Harmanto, "An empirical-exploratory study of the status of lean manufacturing in India," International Journal of Business Excellence, 2012, Vol. 5(4), 395; Darshak A. Desai and Mulchand B. Patel, "Impact of Six Sigma in a developing economy: analysis on benefits drawn by Indian industries," Journal of Industrial Engineering and Management, 2009, Vol. 2(3), 517-538. [3] Roland Berger projects 4.6 million vehicles based on an assumption of a CAGR of 7.4% for 2015-20 for GDP growth. IHS projects 4.2 million while LMC has published a target of 9.3 million vehicles in 2020. [4] R. C. Bhargava and Seetha, "The Maruti Story: How a Public Sector Company put India on Wheels" (New York: Harper Collins Business, 2011). [5] The 5s principles are: Seiri – Sorting; Seiton – Systematic arrangement; Seiso – Cleaning; Seiketsu – Standardization; Shitsuke – Sustaining the discipline [6] The 3G principles are Genchi – Go to the spot; Genbutsu – See the actual problem; Genjitsu – Take a realistic action based on the facts [7] The 3M principles are: Muda – Wastage, Mura – Inconsistency, Muri – Strain [8] The 3Ks are: Kimeraareta Koto Ga – What has been decided; Kihon Dori – Exactly as per standards; Kichin To Mamoru – Must be followed [9] Customer Satisfaction Index (CSI) measures the satisfaction of customers with the sales and after sales processes of a company.

Note From Editor-in-Chief

In Conversation with Michael Porter

Building Technology Products for the next 500M Indians

Co-creating Inclusive Development at Impoverished Rural Territories

Big Idea by Don Tapscott

Leading Thinkers in Economics and Governance for 2017

In Conversation with Mark Kramer

How to Get Through a Crisis

Operational Excellence – The pressure to get the basics right

Error thrown