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Competitiveness of Indian Manufacturing: Findings ofthe Third National Manufacturing Survey

Report Submitted to the National Manufacturing

Competitiveness Council

By:

Pankaj Chandra

Professor of Operations & Technology Management andDirector

Indian Institute of Management Bangalore

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Table of Content

Executive Summary ii

Acknowledgement ix

1. Introduction 1

2. Details of the National Manufacturing Sample 6

3. Operational strategy of Indian Manufacturing Firms 8

4. How Appropriate are the Managerial Practices of Indian

Manufacturing Firms? 18

5. Performance of Manufacturing Firms: Old Gains and New

Targets 29

6. Regional Comparisons: Are Manufacturing Capabilities

Similar Across the Country? 40

7. Some Observations on Variations in Strategies and

Performance of Manufacturing Firms by Size 58

8. Implications and Conclusion 74

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Executive Summary

The Indian Manufacturing sector has traversed a diversified path to industrial

development within the country. While its share in the GDP has declined over the

years, its growth rate in recent years has been impressive (a CAGR of close to 8 percent

in the last eight years). Very few countries in the world can boast of such a diversified

industrial base of significance: from textiles & apparel to steel, from chemicals to

machine tools, from consumer goods to avionics. And then there is the automobile and

the auto-component industry with engineering & service design that has created an

industrial dynamics that only a few countries in the world have been able to achieve.

But most important has been the slow transformation of the economy through

manufacturing with a service approach. India’s manufacturing growth has been based

largely on its own domestics market with its own limitations and potential (e.g., it is

estimated that the electronics market in India will be worth US$ 40bn; its size in 2004

was US$ 11.5bn – an expected growth rate that is higher than China’s)1. Once this

market grows in quality and sophistication, the natural corollary would be strong entry

on the global stage. In other words, Indian manufacturing is about to come of age. It is

nearing the bend on the long distance race when the potential winner is expected to

shoot past the leading pack! Indian manufacturing is at that bend and is gearing to

make its move.

The challenges before Indian manufacturing are immense, however. Some are

environmental in nature – the recent financial crisis around the world will restrict

exports as much as possible and national barriers are likely to get raised, ability of firms

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long term, those firms that have been assiduously working to develop distinctive

capabilities will grow tremendously as many others may fall by the wayside. Thechallenges within the walls of the organization will relate to tiding over the short term

crisis financially. But more important, this may be the opportunity to focus on

productivity through training and process improvements (which will be helpful in the

short term as well) so that when the global markets pick up, firms have built

competitive strengths.

This report is different from most economic projections on Indian Manufacturing. This

is based on the findings of the third National Manufacturing Survey conducted every

five years (i.e., 1997, 2002, and now 2007). Data was collected from tiny, small, medium

and large manufacturing firms through a questionnaire survey and interviews. Our

study is based on this national sample of 683 firms that are representative of all the four

regions of the country, i.e., North, South, East & West. In addition, we collected

additional data from Uttar Pradesh to benchmark manufacturing activities in a less

developed industrial environment. The sample data was collected from firms in eleven

key sectors of industry namely Automobiles, Auto-components, Casting & Forging,

Chemicals & Allied Industries, Electrical & Electronics, Engineering, Food & Agro-

Business, Machine Tools, Pharmaceuticals, Steel, Textiles (Spinning, Weaving and

Garments). It is a study of the shop floors and the supply chains and the innovative

processes in Indian manufacturing. It provides insights into the processes underlying

effective management of suppliers, manufacturers and distributors and innovation

therein. These insights into operational management will inform us what Indian

manufacturing requires to do to be able to run past the bend at a higher pace than other

l b ll

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well as a location where their firms can setup their manufacturing base to serve large

emerging markets like India as well as their global clients. What is required is tounderstand what will it take to develop further this manufacturing eco-system and how

to raise the value add of manufacturing firms that are part of this environment.

Some key highlights of the findings of the third national manufacturing survey on how

firms are building competitive stances, i.e., appropriate capabilities by aligningstrategies with effective managerial practices, and what may be the challenges that they

may have to overcome to compete effectively are as follows:

• Firms in different regions and of different sizes appear to be adopting differing

strategies for competing in the market. Most consistent are the medium size

firms (and a few large firms) that follow a medium volume, medium product

variety strategy. Many of the large firms do not take advantage of the scale

economies that is inherent in their operations. Most of the small firms do not

compete on flexibility and innovation which is their natural strength but would

rather become ancillaries to large customers (a role that is better played by large

firms). However, those small firms, who follow a low volume, high variety

strategy perform better in the market place.

• The scale of operations of most firms is below their global competitors. Many

reasons are provided for relative small scale. Highest amongst them are

expensive capital costs, restrictive labour laws and small size of the domestic

market (most firms serve Indian markets – much of Indian manufacturing is

domestic oriented), and inadequate systems to manage large work forces. Mass

manufacturing has not taken roots in India on a wide scale.

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processes that would help in reducing costs or developing higher value add

product. Similarly, they identify fast & on-time delivery as areas of concernwhere the gap between their strength and priorities is high. Another area that

suffers from strategic focus is ‘after sales service.”

• To implement the above strategies, firms have identified certain managerial

practices that will support the strategy. The five most important practices that

the firms would focus on during the next two years are:o Improving the quality of work life

o Continuous Improvement of current manufacturing processes

o Supervisor training

o Management training

o Worker training

Skill building at all levels has been recognized as one of the most crucial driver

for growth in the future. In addition, non-availability of technical manpower is

leading to hiring of farm hands who are migrating to large cities to work in the

factories. The need for preparing industrial persons could not be emphasized

enough. It is important to recognize that it is better to train the worker and expect

higher productivity out of him or her rather than not invest in skill building and

keep wages low. The presence of “continuous improvement” as a priority reflects

a recognition that firms are making towards improving processes on the shop

floor.

• Supply Chain coordination emerges as a key weakness for most manufacturing

firms. They are plagued with a large number of suppliers, plants that are located

far away from each other thereby preventing learning natural opportunities, and

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• While firms do see benefits from investment in innovation, investments in R&D

are very low. Most training for innovation happens when new technology orequipment is purchased.

• Investment and usage of IT on shop floor is very low (about 45 percent of sample

firms). Its impact is being seen on many fronts – high lead times, low inventory

turns, inability to track orders on the shop floor, inability to coordinate with

suppliers or distributors, weak real time planning etc. This is a serious limitationof Indian manufacturing. Once basic IT investment is done, only then will

Indian firms be able to implement & take advantage of automation on shop

floors. IT firms in India have failed to develop a viable and low cost IT solution

for Indian manufacturing. Firms other than the large ones are struggling on this

count.

• The average financial and operational performance of Indian firms has been

quite satisfactory – there has been round the board improvement across the

following:

o Order fulfillment

o Supply Processes

o Physical Manufacturing

o Over all Business Unit Performance

Over the last three years, Indian manufacturing has seen significant

improvement over various indicators. The three areas that have seen the

maximum improvement over the last three years are: overall quality as perceived

by the customers, average customer defect rates, and delivery lead times.

• Despite the last observation on delivery lead times, the variance across lead times

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unit sales, net pretax profit ratios and return on assets have been high. Capacity

utilization, however, must increase (it may not be hurting much now as most of

the plant and equipment are old). Similarly, delays exist in recovery of payments

from customers leading to excessive efforts and consequently higher cost of

operations.

• First pass yield across sectors is not very high – this requires establishment of

processes on shop floor for elimination of defects rather than removing defectiveitems through a pre-shipment inspection.

• There is strong evidence that firms are now starting to get their “process on the

shop floor right.” This is a very robust sign of capability building amongst Indian

manufacturers. Linkages with suppliers, however, continue to remain weak.

• Total sales per employee is found to be highly correlated with training

expenditure, advanced skills (degrees), and high perceived strengths in

flexibility and technology.

• Small firms that are customizing requirements of customers are doing well. This

service approach to production may turn out to be the distinctive hallmark of

Indian manufacturing. Wherever, a firm has started to service a global customer

through customized service (i.e., small batch production or producing in variable

production lot sizes or dispatching at short lead times etc.), the firm has been

able to create a niche market for itself – perhaps, a unique Indian model of

production. The need is to extend this model to a cluster of small firms, each

producing a distinctive variety and coordinating their production & sales such

that the network acts like a large firm (even when all its constituent members are

small firms).

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their shop floors (including extent of implementation). East (except for the steel

sector) has low performance on most of these counts. Firms in West spend the

least amount of resources on training their employees but have most well

developed channels of distribution. Physical infrastructure supporting

manufacturing requires the most improvement in East and South.

• Strategies of firms and their performance vary by size. Tiny and small firms

spend a higher percentage of their sales in R&D as compared to large andmedium sized firms. Medium size firms hold the maximum promise in terms of

their ability to compete on the basis of higher productivity and operational

parameters as compared to the sales value. One wonders, if this is the model of a

dominant Indian manufacturing firm – nimble, high investment in technology,

higher investment in training, seeking more out of IT, mid-volume, mid variety

(and consequently, competing both on flexibility & cost). The only place where

all of them perform poorly is on hiring employees with advanced degrees – this

perhaps is a salient weakness of Indian manufacturing and their ability to

develop innovative products & processes.

We believe that competitiveness of Indian manufacturing is a function of the nature and

extent of capabilities developed by these firms. Capability building is a complex process

– it is supported by a variety of drivers and the extent can be measured by a range of

outcomes. Indian firms have been building a wide range of capabilities. In addition,

restructuring of the industry is slowly leading to the emergence of a firms that is

desirous of competing globally. With the many FTAs that India is part of, soon goods

from these countries will start to flood the domestic market. At that time, high training

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Acknowledgements

I owe immense gratitude to a large number of manufacturing firms across different

sectors who have participated in this survey. Without their care, concern for

manufacturing in India and their openness in discussing their shop floors in detail, this

project would not have been possible. A number of firms have continued to participate

in all the three surveys – special thanks to them. All of the participating firms have

helped me understand the nuances of capability building process in their plants and

appreciate the issues facing Indian manufacturers better.

Thanks are also due to the National Manufacturing Competitiveness Council for two

things: for supporting this project and more important for being tremendously patient

and understanding of long delays on account of my moving to Bangalore as the project

was coming to an end. I would like to thank Mr V. Krishnamurthy, Mr V Govindarajan,

Mr Rajeev Ranjan, and Mr M. Sahu for seeing value in our past work and for their

comments on the findings of the survey. Their genuine interest in helping India become

a manufacturing power by providing strong policy initiatives is highly appreciated.

We would like to also thank Market Insights for conducting the survey throughout the

country and to Mr Jagdish Soni and Ms Akhila Reddy for able research assistance. Mr

Jai Prakash Narayan provided valuable help in organizing the data in the report.

In the end, all errors and delays are mine.

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The Competitiveness of Indian Manufacturing: Findings

of the Third National Manufacturing Survey, 2008

1 Introduction

Manufacturing may be having a small share in the Indian GDP, its growth rate has

been impressive (a CAGR of close to 8 percent in the last eight years). More important,

it is about to reach the stage in its modern avatar from where the growth ahead can be

exponential - an envious stage for any nation. Moreover, for a country like India,

diversified manufacturing is of strategic importance both in terms of its contribution to

the Indian economy as well as its ability to generate employment for the youth in the

country. Interestingly, the world is also looking for alternative sources of supply for

goods as well as a location where their firms can setup their manufacturing base to

serve a large emerging Indian market as well as their global clients. What is required is

to understand what will it take to develop further this manufacturing eco-system and

how to raise the value add of manufacturing firms that are part of this environment.

Indian manufacturing has traversed some distance from the days of licensing and

national control until early eighties through de-licensing in eighties and early ninetiesand the opening up, post-liberalization. Each of these phases were in the direction of

subjecting Indian manufacturing firms to higher levels of competition from firms

globally as well as removing constraints on their operations. Firms have also responded

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cash rich at the turn of the new century. However, it also meant that with opening up

of the economy the manufacturing firms had to be re-invented – with new strengths,

new skills, new technology, new partnerships and new sources of funding. Many of the

old entrepreneurs who had done well during the “closed period” of Indian

manufacturing either did not have the right capabilities to compete or found new

opportunities that were more rewarding or easy to operate in. Consequently, many of

the old firms (both public and private) fell by the way side. The space thus created aswell as new opportunities that were arising in the liberalized environment was getting

filled by a new class of entrepreneurs. A large number of educated Indian technocrats

were ready to take the mantle of new entrepreneurs – some of these were first time

entrepreneurs who were educated in the best of Indian technical institutions and had

left their jobs in the public sector (and sometimes in the private sector) to setup

technology driven enterprises while others were children of old time entrepreneurs

who were armed with technical training as well as family funds to enter into new

domains of industry or upgrade their old businesses. Indian manufacturing had started

to change. In early 2000, another restructuring of Indian Industry started to happen –

with the advent of new auto technology (same is true in pharmaceuticals or chemicals

due to strict regulation or textile with improved equipment etc.), old & small

enterprises found themselves unable to cope with competition from the output of large

firms in India and abroad. Their skill levels were low and technology levels poor. Many

started to close. (Here the traditional sectors in older towns were affected more

adversely). Their place was being taken by fewer yet more modern facilities (both SME

and large) as well as imports. The structure of Indian industry had changed. The ones

that remained were the stronger ones amongst the lot but new challenges were to arrive

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and the phased indigenization policies of the government). Growth in demand in India

as well as the coming of these competing firms from outside India meant that domestic

firms had to adjust their strategies quite rapidly. With increased purchasing power, the

demand for goods was growing and the manufacturing sector could hope to get fair

returns if they invested in upgrading their plants, processes & products. The MNCs, on

the other had, brought with them new skills, new practices, new product & process

technologies, and of course, new form of competition based on quality and service. Thechallenges before the domestic firms were clear. If they could re-invent, re-rejuvenate,

and re-organize themselves, the prize was a fair share of the growing market else they

would lose their presence to MNCs as well as goods coming from outside through

various free trade agreements that the government was planning to enter with countries

in Asia. There was an opportunity to learn from their competitors as well.

There was another driver at play in the changing Indian economy. Agriculture, that

had a significant presence in the Indian GDP started to shrink (for a variety of reasons

including low attention from policy makers, productivity issues etc.). At a time when

India was emerging as a country of young people and manufacturing was expanding in

various ways as mentioned earlier, their key occupational base, i.e., agriculture was not

able to retain them and they started to migrate to urban and semi-urban centers in

search of jobs. Manufacturing was looking for young workforce except that a large

fraction of the migrants did not carry any industrial skills (or at times even school level

education) for them to contribute immediately to the growing industrial economy. The

expanding manufacturing sector needed workforce and went on to hire a large number

of these migrants while the rest looked for opportunities in the service sector. It has led

i i h h b l d “k kh i ki 2 ” f

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While there are many factors that will define how the Indian economy will grow, it is

clear that Indian manufacturing will have to grow tremendously to provide both

employment and generate the productivity required to sustain the high level of

employment that it needs to support. The big question is whether Indian manufacturing

will deliver on this expectation. More important, will India be able to become an

important factory to the world. This would require an enabling environment that will

allow firms to build capabilities in their plants and supply chains and meet the demandof the customers in a competitive manner. The purpose of this research is to assess this

ability of manufacturing firms in India.

We have been presenting our findings from the study of manufacturing firms every five

years. This is the third report on the competitiveness of Indian manufacturing based on

a survey of manufacturing firms. We believe that once manufacturing firms build

unique competitive stances, they will create appropriate performance outcomes to help

the nation overcome the challenges that we have outlined above. Firms build

capabilities by aligning strategies with effective managerial practices – all within the

context of the enabling policy environment of the country. The objective of this study is

to understand and explain the dynamics of capability building in manufacturing firms.

Capability building is a complex process – it is supported by a variety of drivers and the

extent can be measured by a range of outcomes. We try to identify those critical factors

that are responsible for building capabilities and consequently competitiveness amongst

firms. In particular, the research questions that we address in this report have to deal

with how manufacturing firms in India are transforming themselves through

organizational practices, technology and innovation. These are:

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We are specifically interested in managerial systems deployed in plants of

manufacturing firms across a variety of sectors. This gives us an opportunity to

understand how certain sectors are organized differently from others. This report is

organized as follows: in the next section we describe the process of data collection for

this research and detail the characteristics of the sample that we use for our analysis. In

section 3 we identify the operational strategy of Indian manufacturing firms, In section4 we analyze whether the operational practices adopted by firms on their shop floors

and across the supply chains are sufficiently aligned to help develop distinctive

capabilities. The resulting performance of the sample firms is presented in the following

section. In section 6 we provide comparisons of manufacturing capabilities across

different regions of the country while in section 7 we try to delineate any variants in

strategies & performance of manufacturing firms by size. Finally, we provide

implications of the study and discuss our conclusions in the last section.

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2 Details of the National Manufacturing Sample

The 2007 National Manufacturing Competitiveness Survey was conducted between

April and August 2007. A national directory of firms was created from various sources

including directories from industry associations. This directory contained more than

10,000 firms across the sectors of interest. A questionnaire was developed with a focus

on innovation in manufacturing. Two modes were used for data collection:

questionnaires were mailed to a large number of firms especially those firms that had

participated in our two earlier surveys (i.e., in 1997 and 2002) and at the same time a

market research agency was hired to undertake an in-person data collection. The

agency interviewed the CEO and senior manufacturing managers of the sample firms.

The ratio of the questionnaires from the two modes was 1:7 with the larger sample

coming from interviews. About 800 questionnaires were received but 683 were found to

be useful and comprise the national sample. Our study is based on this national sample.

The sample data was collected from firms in eleven key sectors of industry namely

Automobiles, Auto-components, Casting & Forging, Chemicals & Allied Industries,

Electrical & Electronics, Engineering, Food & Agro-Business, Machine Tools,

Pharmaceuticals, Steel, Textiles (Spinning, Weaving and Garments).

Sampling was done to maintain a representation of firms from dominant sectors in the

four regions of the country, i.e., north, south, east and west. The sample in the North ishigher as it included a special coverage of firms in Uttar Pradesh – a state that we

wanted to study specifically.

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Table 1: Distribution of Sample firms by Revenue and Number of Employees

PANEL A PANEL B

Revenue

(Rs million)

Number

of Firms

Number ofEmployees

Numberof firms

1-100 463 0 -10 18

100-500 146 11-50 140

500-1,000 23 51-100 116

1,000-3,000 23 101-300 177

3,000-10,000 8 301-1000 125

10,000 & above 3 1000 & above 92

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3 Operational Strategy of Indian Manufacturing Firms

The dominant operational strategy of sample manufacturing firms is geared towards

producing medium product variety at medium scale (as claimed by about 31.9 per

cent of sample firms in Table 2). Scale economies are achieved when a standardized

product (i.e., low product variety) is produced in high volume. Strategy of only 3.5

per cent of the sample firms fall in this category. Consequently, only a small fraction

of firms compete on the basis of low costs (as is borne by additional evidence later)

through scale economies. One intriguing aspect that needs to be mentioned is that

about 18.7 per cent of sample firms produce high variety with high volumes -

perhaps large firms with multiple high volume lines (or a factory within a factory).

However, our sample does not have commensurate fraction of firms that are large.

Perhaps, this points to a mismatch in strategy of other firms – an issue that we will

explore later. Two other observations from Table 2 are due here – about 3.8 percent

of firms follow high variety, low volume strategy. While about 10.1 percent of firms

follow a low variety, low volume strategy. While the former may be representing

firms that are small (a strategy appropriate for them), the latter may reflect strategy

of firms struggling to survive.

Table 2 : Categorization of Operations of Sample by Global Scale & Scope

Product Variety (%)

High Medium Low

Volume

(%)

High 18.7 9.5 3.5

Medium 10.1 31.9 7.0

Low 3.8 4.4 10.1

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competition coming from domestic firms while 35 per cent of firms see most

competition from Chinese firms (while barely 12 per cent of firms see competition

from European and American firms). There could be three possible explanations for

this observation – one, that firms in India are really cost competitive globally and are

entering into markets of Chinese producers; two, that Chinese firms are entering into

product markets served by Indian firms; and three, that European and American

producers serve technology driven markets where Indian firms do not exist.

Interestingly, as can be seen from Figure 1, Indian firms in the sample consider

themselves better than their global competitors (on a scale of 1 to 7, a 4 represents

“about equal” while more than that is “better”). They rate their quality and service

as factors where they are most competitive in comparison to their foreign

competitors while they rate themselves weakest on prices. There has been a

systematic increase in the self perception rating as compared to the same in our

previous surveys and that too on every factor. Perceived gain in performance, from

the 2001 to 2007 survey, is most when it comes to prices, product design and quality.

Could this be reflective of a more improved and consequently a more confident

manufacturing firm in India?

Most firms in the sample are much smaller in scale as compared to their global

competitors (see Figure 2). Eighty per cent of sample firms are much smaller or equal

to their global competitors in size. Barely 12 per cent of firms have plant size that is

much larger than their competitors around the world. We also find that about 28 per

cent of sample firms cite expensive capital costs as the most important reason for

their smaller size of operations while 19 per cent of firms do not want to scale

because of restrictive labour laws. Interestingly, about 14 per cent of firms believe

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igure 1: Com arison of Per ormance with Foreign Competitors

10

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igure: 2 Sca e of Operatio

ns (percent o firms)

11

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are important reasons linking operational strategies on size to regulatory and firm level

practices. These might also be the reasons behind India not being highly cost

competitive in global markets in many sectors.

What is heartening to find in the survey is that quality continues to be the most

important focus of manufacturing firms (Figure 3)4

. Over the next five years, firms planto accord the highest priority to improving quality followed by executing structural

changes in supply chain followed by operations related initiatives (i.e., shop floor

improvements) in their plants and then to innovation and R&D. That Innovation and

R&D continues to be accorded the lowest priority amongst the four categories is,

perhaps, a reflection of the fact that either firms are still struggling to get operational

control across the supply chain and hence are not able to pay adequate attention to

innovation or are still not perceiving its importance to the long term competitiveness to

their business or both. Figure 4 gives the disaggregated details of the data presented in

Figure 3. Developing new processes has entered the competitive priority with this

survey and that too at a higher rating. Perhaps that is the emerging strategy of Indian

manufacturing at this juncture of time, i.e., from working hard to get their “quality

right,” the firms are now starting to get their “process right.” If we look at areas of

competitive strength as reported by firms (see Figure 5), it is apparent that their

continued focus and consequently efforts on quality, over the period of our three

manufacturing surveys, has helped develop perceived strengths in various dimensions

of quality. It is reflective of increasing capabilities in improved quality processes and

shop floor operations. However, it also shows that low price is not really how Indian

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to build capabilities in this domain in order to create a differentiation in the market

especially in the face of global competition.

In summary, the operational strategy of sample firms has been to focus on India, invest

in quality and produce in mid size to small sized plants. It is not a surprise that India is

not a low cost producer but may be moving up the quality ladder.

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igure 3: Com

petitive Prior ties: Group verages

14

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igure 4: Com

petitive Priorities of Firms: Degree of Importance over the Next Fiv Years

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igure 5: Perc

ived Competitive Strength of Firms: De ree of Strength Relative to Indian Companies

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igure 6: Com petitive Gap: Difference B tween Future Priorities an Current Strength

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4 How Appropriate are the Managerial Practices of IndianManufacturing Firms?

Firms implement their operational strategy by choosing appropriate managerial

practices or action vehicles on their shop floors and across their supply chain. By

judiciously choosing these practices, a firm can impact the various performance

parameters that it wishes to focus on. Figure 7 lists the top ten managerial practices

that firms focused on during the last two years. It reflects the strong recognition toimprove the quality of work life as key to achieving their strategic objectives

followed by the need to provide enhanced worker and supervisor training. This is

seen as important in order to improve productivity through continuous

improvements on the shop floors. Quality improvement requires adoption of new

tools and techniques – all of which requires intensive training of operators,supervisors and managers. While it appears that sample firms are getting this

relationship right (Figures 7 and 8), the nature & extent of training (which indeed

defines the extent of expertise developed) requires some investigation (more on this

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igure 7: Rela ive Payoff fr m Manufact ring Practice in the Last Two Years (To Ten)

19

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igure 8: Deg

ee of Emphasis on Manufacturing Practi es for the Next Two years Top 10)

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suppliers. However, there are still sectors (i.e., auto) where firms still have large

number of suppliers (i.e., more than 20 per cent of firms have 100-500 suppliers, about 3

per cent of firms have 500-1000 suppliers, about 2 per cent of firms have 1000-2000

suppliers, a per cent of firms each have 2000-5000 and 5000-10,000 and about 2 per cent

of sample firms have more than 10,000 suppliers). Rarely can a firm with more than few

hundred suppliers coordinate its operations effectively with those of the suppliers. This

would result in poor inspection or high coordination costs or long delays. It is also

pointing to the fact that intermediate agents do not exist in the Indian manufacturing

supply chain whose role is to coordinate and prepare sub-assemblies or kits for final

manufacturers (the manufacturers are also not thinking aggressively in this direction).

This situation has not changed since the previous surveys. One wonders why this

global practice does not get adopted in India. Is there a problem of trust betweenmanufacturers and suppliers that prevents them from seeking a greater role for the

supply chain integrators rather than working with redundant suppliers or is there a

competency issue at play here?

In a similar vein, the low number of retail outlets per manufacturer (i.e., fewer than 50

per cent of sample firms have less than 100 approved retailers) implies a limited reach

of Indian manufacturers (see Figure 9). One can hypothesize that as the size of the

manufacturing firm increases, their distribution network also tends to grow. For a

country of the size of India, barely 22 percent of firms have 100-500 approved retailers

(if uniformly distributed, this implies about 4 to 20 retailers per State of India!). Efforts

are needed to increase the reach of producers across the country either through shared

warehouses (which happens to be one of the key bottlenecks) or through large multi-

b d h h k h d b f l

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igure 9: Sup

ply Chain St ucture (perce tage of firms versus numbers for each e helon of the supply chain)

22

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One of the soft aspects of improving productivity in manufacturing enterprises is to co-

locate manufacturing facilities and suppliers in clusters so that best managerial and

technical practices are co-developed and shared across interacting firms. However, if

plants and suppliers at located far from each other, it leads to higher cost of logistics,

higher infrastructure overheads, lower ability to learn from a firm’s experience that

comes through proximity etc. Our sample firms don’t come out well on this count. More

than 25 per cent of firms have multiple plants that are located more than 500 km away.

Only about 55 per cent of firms have multiple plants located within 100 kms of each

other. Location of suppliers has been better. Most firms procure material from suppliers

that are located less than 100 kms from their plants.

Another aspect of the adoption of managerial practices that requires attention is thefocus (or lack of) of the firms on innovation. It may be recalled that Innovation & R&D

did not rate high in terms of organizational priorities of sample firms. If one tries to

understand the nature of innovative activities that the firms undertook during the last

two years, one gets an interesting picture (see Figure 10). Most firms link innovative

activity to purchase of equipment etc. followed by introduction of new products (often

variants of exiting ones). Our data reveals that firms, over the last two years, have

spent (on an average) close to 9.8 per cent of their revenue in acquiring externally

developed technology, about 8.1 per cent of the revenue in training for the

implementation of new technology, about 7.2 per cent of their revenue on tooling &

other engineering changes to startup the new technology and about 7.9 per cent of their

revenue on coordinating various functions to commercialize any new technology. What

is interesting is that about 60 per cent of firms report that they worked with customers

d d b h lf h b f f d d

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However, leaders of manufacturing firms do see many other potential benefits from

innovation for their firms in the future. In Figure 11 we plot the responses of firms on

different benefits that they anticipate from innovation related activities. While in our

earlier surveys (i.e., 1997 and 2001), improvement in product quality and improvements

in material/overhead costs were rated highest in terms of potential benefits, the current

survey found that leaders of firms see highest benefits of innovation accruing through

shortening of production cycle times, improvement in product quality, reduction in

environmental damage and improvement of working conditions. These responses

reflect a maturation of the shop floor requirements in terms of areas that are seen to

require innovative efforts – the reduction in cycle time is directly linked to the concern

of improving productivity; improving product quality is coming from the overall

concern of enhancing product quality further; the other two – reduction inenvironmental damage and improvement in work life are new entrants in the “club of

concerns” that require attention and in that they signal sustainable concerns of the firms

as well as the need to be more inclusive in making workplaces a better place for all.

While productivity related benefits are highlighted, lowering of labour costs is not high

in priority (perhaps, they are already quite low). This may have an interesting

implication – it may be worth getting more out of worker productivity through training

workers than driving their wages down!

The extent of process innovation (i.e., innovation that deals with plant machinery as

well as production processes) can be surmised by the following picture: about 82.3 per

cent of firms reported that they have invested resources in upgrading their machinery

in the last five years. The average investment by a firm in upgrading machinery over

hi i d h b R 32 36 illi Si il l 64 f l fi h

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igure 10: Inn

ovation Relat d Activities uring 2004-2 04 (percenta e of firms)

25

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igure 11: Pot

ntial Benefits from Innov tion in the Future (on a perception scale of 1 to 7)

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necessary. Due to various government controls as well as market conditions in the past,

many firms had suffered as their technology & equipment were old and not capable of

producing precision products and delivering high quality for the global market. Four

things must come together for winning high value domestic and global orders:

• ability to produce to tight conformances,

• ability to design and develop new variants or new replacements,

• ability to produce at low cost, product, and

• ability to bid/execute/deliver/service at a short lead times.

While the first three capabilities listed above are drivers of the fourth, Indian firms

seem to be focusing at this juncture on “getting the quality & process right.” Wehave reported on the strategy of “getting the quality right” in the earlier surveys and

firms now have an experience of over 10-15 years in establishing processes &

practices for improving quality. And the benefits are here to see. The quality of

Indian products has been progressively improving. However, it is only now that

firms are looking at improving their technical or technology processes in

manufacturing (and here we are not talking about IT but those processes that are

directly used for production). While both of the above help reduce costs through

reduction in cost of poor quality, they are only partly responsible for the overall

costs. Firms still do not have a strong ability to reduce costs and lead time

systematically. This would require intervention of IT, management of the supplier

processes and having better flow-through of material through the supply chain.

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scheduling – activities that are linked with building deep capabilities in

manufacturing. Moreover, online transactions have yet to take roots in Indian

manufacturing.

Table 3: Use of IT on the Shop Floor (percentage of firms)

To track/ control production process 59.59

To track inventory/ work in progress 54.75

To reduce defects 46.70

For engineering design 30.60

For real-time planning & scheduling 47.73

For placing orders with the suppliers 48.16

For preparing reports for management 56.07

For selling online 26.06

For interacting with customers 42.02

For interacting with designers 20.79Others 3.07

Many aspects of organizational improvements are being seen on Indian shop floors – in

addition to “improvements in quality,” the new agenda has been to get the “process

right.” However, deep supply chain innovations evade these firms. Unless the nature of

relationships with suppliers is modified, real benefits will elude these firms. Supplier

management by building their capabilities is turning out to be the last frontier of

manufacturing renaissance unless firms learn to work deeply and invest regularly in

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5 Performance of Manufacturing Firms: Old Gains and New

Targets

One of challenges in manufacturing is to take a leap of faith with investments in

technology and managerial processes and hope that they will lead to improvements in

performance. This is because the uncertainties in the environment, in processes, in

material conditions and above all in the behavior of operators decide whether the

strategies worked or not. Looking at the performance of sample firms, one can

confidently say that Indian manufacturing firms are slowly coming of age, at least some

of them. Figure 12 gives the average performance improvement of sample firms on a set

of operational dimensions. The bar charts show the per cent improvement, i.e., an

average performance index of 112 for “order fulfillment” implies an average

improvement of 12 percent. While there has been improvement across the board, i.e., in

product development, physical manufacturing, supply process, order fulfillment, as

well as the overall business unit performance, the rate of improvement has been

decreasing over the three survey durations (i.e., 1997, 2001, and now 2007). It implies

that, perhaps, the low hanging fruits have already been plucked and in the future

improvements in performance will not come in easily. They will require deployment of

strong innovative processes and deeper firms level capabilities.

Figure 13 shows the details of the data provided in Figure 12 earlier. It gives the percent

improvements on various performance indicators over the last three years. There are a

few salient observations here. One, the quality in the hand of the customers (or as

perceived by them) has been increasing and so is the improvement on time taken to

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igure 12: Av rage Performance Indicato

30

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igure 13: Per

ent Improve ent on Various Manufact ring Performance Indicato s over the La t Three Years

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There are a couple of dimensions of these performance parameters that require

attention. The distribution of order processing lead time (amount of time taken in days

to complete an order) of sample firms shows the following: about 299 sample firms

have lead times that range from 1 to 10 days, 145 firms have lead times varying from 11

to 25 days, 148 firms take anywhere from 26 to 50 days to complete processing an order,

26 firms take anywhere from 51 to 75 days to process an order in their plants, the order

processing time of 15 firms ranged from 76 to 100 days and from 101 to 125 days for 7

sample firms while 3 firms report that it takes them on an average between 151-175

days to process any order. While it is true that processing time is a function of the type

of parts/products being processed as well as the order size, much of these order

processing lead times seem to be unusually high. They do not reflect appropriate

management of manufacturing processes that promote breaking down of tasks into sub-

tasks so that they can be done in parallel in order to reduce cycle times. No customer

will prefer a supplier who exhibits long lead times. Moreover, long lead times reflect

high levels of inventory and consequently higher product costs or low profit margins –

all characterizing Indian manufacturing at this juncture. High lead time is the defining

character of Indian manufacturing and unless it is addressed very seriously throughbetter planning, better technology & capacity and better managerial control, Indian

manufacturing will never become cost competitive in the global market. Moreover,

Indian firms will never be able to win high value global orders as they will be

contributing to increasing their customer’s costs due to their own high lead times. This

issue is also not well understood in the manufacturing sector in India. An average lead

time of 20 days across all sample firms is not a healthy sign for the industry. It may be

mentioned that the maximum order processing lead time for a sample firms was

b d 180 d !

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customer’s orders. Many of these service areas need to be carefully re-engineered with

the help of effective processes that are enabled by IT to support the competitiveness of

manufacturing firms.

Table 4 gives the mean values on various business performance parameters by different

industries. As it can be seen, for all the sectors, sales has grown over the last two years

and so has the return on assets for sample firms in each sector. This is a sign of financial

health across the manufacturing industry. And it is a good sign. However, there are a

few operational indicators that need attention. Utilization of plant capacity can be

improved significantly across the sectors and manufacturing costs as a percent of sales

is also high. Another aspect that needs attention is that first pass yield has to increase

above 90 per cent if the cost of a product has to come down. Firms are not using process

control and statistics to improve on-line quality but delivering quality through

inspection and removal of poor quality product from dispatches. This continues to be a

weakness that we have observed over various surveys. Poor design & innovative

abilities are showing up in terms of low performance related to new product

introduction. Another aspect that needs highlighting is the high cash-to-cash cycle thatis due to poor business practices as well as low IT penetration that can help make

transactions efficient.

There is an evidence of a large scale restructuring occurring in the manufacturing

sector. Unproductive small firms have been affected the worst while medium size firmshave been consolidating. While manufacturing performance has improved across the

board (though is still reactive), continuous productivity improvement is not a norm.

Firms will be served well if they specifically measure and improve the productivity of

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Table 4: Mean Values of Manufacturing Business Performance by Industry

Indicators Automotive Auto-Components

Chemicals

&AlliedIndustries

Electronics Engineering

Forging

&Casting

Food &Agro MachineTools Pharmaceuticals Steel Spinning Weaving Garmen

Annual SalesRevenues(Rs.bn)

5.14 1.65 1.41 1.68 6.79 2.18 2.39 1.28 1.77 19.70 2.97 1.39 1.2

Net PretaxProfit Ratio(%)

14.3 13.5 12.5 12.8a 14.2 9.9 14.4 13.7 14.5 14.3 7.8 9.5 9.9

Return onAssets (%)

17.5 20.0 18.6 24.2 17.8 16.8 14.1 17.5 16.9 21.5 8.8 12.7 10.5

Growth Ratein Unit Sales(%)

13.1 27.7 17.2 20.3 18.8 20.1 16.1 16.1 21.1 17.0 15.7 16.9 28.3

Growth Ratein Rupee Sales(%)

20.9 29.4 17.3 19.8 18.3 19.8 13.8 19.4 24.8 20.4 14.6 29.1 32.2

CapacityUtilization (%)

78.7 90.7 65.6 69.5 64.2 71.7 59.0 67.2 68.3 73.2 86.0 72.6 69.8

Manufacturing

Costs as % ofSales

71.3 65.8 63.4 66.0 58.7 74.2 53.2 64.8 61.2 70.0 72.0 65.9 64.0

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Table 4 : Mean Values of Manufacturing Business Performance by Industry (continued)

Indicators AutomotiveAuto-

ComponentsChemicals

&Allied

Industries

Electronics Engineering

Forging &Casting

Food &Agro

MachineTools

Pharmaceuticals

SteelSpinning

Weaving Ga

On-time Deliveries(%)

93.9 88.8 85.4 87.0 83.3 89.8 81.9 84.1 90.1 87.7 93.8 87.5

AverageManufacturingLead Time (days)

9.0 14.6 14.8 20.1 29.6 22.7 8.7 38.3 13.7 24.3 16.3 21.9

First Pass Yield (%) 82.5 85.0 86.3 86.9 87.9 88.9 81.2 78.2 85.6 85.3 95.7 74.2

Average total Lead

Time to NewProducts (months) 7.5 10.9 5.6 5.9 6.2 4.8 5.8 6.7 8.6 5.3 5.0 3.1

% of Annual Salesby New Products

48.9 29.9 24.7 29.9 21.1 29.5 23.5 22.7 33.2 28.4 24.0 31.3

% of PerfectOrders deliveredto Customers (%)

92.2 89.5 88.3 91.5 86.0 87.9 84.8 87.7 92.4 89.9 95.2 90.8

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Table 4: Mean Values of Manufacturing Business Performance by Industry (continued)

Indicators AutomotiveAuto

ComponentsChemicals &Allied Ind. Electronics Engineering

Forging &Casting

Food &Agro

MachineTools Pharmaceuticals Steel Spinning Weaving Ga

% of PerfectOrdersreceivedfrom toSuppliers

(%)

92.2 86.0 84.8 89.1 81.4 87.9 79.8 84.3 89.6 82.8 90.5 89.7

Cash-to-Cashcycle(days)

28.3 49.8 54.3 63.1 47.1 59.0 35.5 56.8 58.7 48.5 38.8 49.3

Material cost(%)

66.2 60.1 60.5 62.8 61.3 62.6 53.7 56.4 54.3 63.7 57.7 57.2

Direct Labor

cost(%)

16.2 17.7 17.7 16.8 18.3 11.8 18.8 18.6 18.0 14.4 20.4 20.7

Other costs(%)

17.5 19.7 19.2 19.8 18.9 20.6 20.0 23.3 25.2 20.9 22.8 21.5

Costs ofPhysicalDistribution(

% of sales)

6.8 9.8 9.1 9.4 12.0 20.6 7.8 5.8 9.0 9.9 2.9 9.6

Cost ofWarrantyClaims(% of sales)

0.0 4.4 7.7 5.7 5.8 20.6 14.2 4.1 7.7 6.1 2.0 9.0

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amongst various entities, does not help the above cause.

So, while operations are undertaking difficult structural changes, R&D is still not

playing a critical role. Large firms are not investing enough. Investments in R&D are

such that they are required to be at a minimum threshold before returns can start to

affect the financial position of the firm. Simultaneously, skill gaps exist in a very big

way. Only large firms are able to draw engineering graduates. All types of firms are

found to be low on hiring of PhDs. Advanced science & engineering skills are crucial

for building any R&D programme. This weakness will have to be addressed seriously.

We also found that for sample firms, total sales and sales per employee are highly

correlated with training expenditure, advanced skills (degrees) of employees and high

perceived strengths in flexibility & technology (vis-à-vis competitors outside India).

However, sample firms do not appear to be investing adequately on training. Firms

seem to have spent 10-50 hrs on training per employee per year and most have linked it

with adoption of new machinery or process on the shop floor. Managerial training that

focuses on productivity enhancement is not understood well. Consequently, training

expenditures are generally low (unfortunately, technical training is at an even lower

level). Total training expenditure is at an average of Rs 4000 per employee per year. The

sectoral training investments show high investments in the Auto-components,

Pharmaceuticals, Machine Tools, and Electrical sectors and low investments in the

Casting & Forging, Food & Agriculture, Steel, Garments, and Weaving sectors.

Table 5 analyses the sources of training that are being deployed by sample firms. For

instance, 21.2 percent of firms claim that they have extensively used formal in-company

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One of the downsides of a poorly trained workforce is their inability to take many

decisions themselves (of course, the causality may be in the other direction also). This is

substantiated by the response of firms that most innovative thinking in their

organization is done by top management. This is not very healthy for the

manufacturing sector. It implies that the firms either have very “dominating” top

management or the skill levels of the work force are very low. Advanced skills appear

to be rare in Indian manufacturing firms. For instance, about 45 per cent of sample firm

have less than 10 technical employees while 78 per cent of firms have less than 50

technical employees. Similarly, about 65 per cent of sample firms have less than 10

managers while about 89 per cent of firms have less than 50 managerial employees.

When it comes to R&D employees in firms, the situation is worse – about 86 per cent of

firms have less than 10 R&D employees and about 98 per cent of firms have less than 50

R&D employees. The absence of employees with advanced skills is surely going to

affect the ability of firms to develop innovative products & processes as well as enhance

productivity in the future (which is the need of the hour).

In summary, firms have performed well financially as well as on many operationalparameters. However, lead times and skill building remain the two key weaknesses.

The former affects costs, service & order books and the latter affects the ability of firms

to innovate through advanced skills. Indian firms do not pay adequate attention to

systematically improving their productivity.

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Table 5: Training of Employees (percentage of firms)

Formal in-companyprograms

Vocationaleducationprograms

Tradeassociation

Vendor of newequipments

Consultants orprivate training

firmsApprenticeships Others

UsedExtensively 21.2 2.6 1.8 2.3 4.1 7.2 0.3

UsedFrequently 27.7 16.8 11.4 15.7 15.4 12.6 0.6

SometimesUsed 18.4 20.6 18.6 22.7 18.2 11.4 0.1

Rarely Used5.4 12.7 12.9 10.8 11.4 12.4 -

Not Used10.8 24.0 30.9 24.3 27.5 30.6 1.3

6 l f b l

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6 Regional Comparisons: Are Manufacturing CapabilitiesSimilar Across the Country?

Having looked at the national manufacturing scenario, we now turn our attention to

regional comparisons. We would like to understand if manufacturing competitiveness

varies across the country. While Indian manufacturing is quite spread out

geographically (i.e., North, South, East & West), it is clustered industry or sector wise.

Some States, due to their history or natural endowment or due to good public policy,

have managed to perform differently from others. Regional disparities, if any, will have

to be addressed with support from industry associations and targeted industrial policy

especially those that will improve the productivity across the supply chain. While

studying regional differences, we also study firms in Uttar Pradesh (UP) to understand

how UP compares in terms of industrial development and manufacturing

competitiveness with respect to firms in other regions. It will inform us how to address

industrial development in low performing States of India.

A quick overview of the regional characteristics and manufacturing strategy of firms in

each region reveals the following:

• Regional Distribution: Sample size (number of firms)

North South East West UP

318 165 68 132 96

The sample from North includes firms from UP.

M t b f fi i th N th f ll di l di d t i t

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Most number of firms in the North follow a medium volume, medium product variety

strategy except in UP which follows a high volume, high product variety strategy. Most

regions have large number of firms, i.e., with second highest priority, that have a high

volume, high product variety strategy. The (HV, HPV) strategy requires high resources,

high automation and separate fast paced production line for each product – all that very

few can execute efficiently. Moreover, this strategy requires a strong supply chain

coordination especially on the upstream side (one that is not obvious yet from these

manufacturers). It reflects a mismatch between strategy and capabilities of firms.

• Markets Served

– More than 93 per cent of firms in each region serve the Indian market

–

Next comes Europe & America (except UP, where it is Asia)

– There is a low participation of the sample firms in other developing countrymarkets across the regions

• Rating of Operations vis-à-vis global competitors

–

Firms in all regions view themselves strongest on quality

– Next comes Delivery/Service for firms in North & West; Service for firms inSouth & East; and Packaging & Finishing as strengths in UP

• Relative Priorities of Manufacturing Firms

–

Firms in all regions are focused on improving product quality reaching thehands of the customers

– Firms in all regions (except East) give highest priority to reducing defects(i.e., conformance quality)

While uncertainty in demand & supply is part of any business cycle uncertainty in

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While uncertainty in demand & supply is part of any business cycle, uncertainty in

policy is often difficult to manage. High interest rates have an adverse impact on

investment in technology and manufacturing firms tend to become more cautious that

what it should be. Firms across all regions also see most competition coming from

other domestic firms and then firms from China.

• Innovation Related Activities

1.

All regions report the following as the highest innovation related activity:

– Purchase of machinery, equipment & computers

– Introduction of new products/introduction of new production method

– Working with customer on product/process design

2. All report a low involvement in In-house R&D (i.e., projects greater than 3 yearsduration; those which are more than continuous improvements)

3. Top factors driving innovation:

– Competition (price/cost, quality, efficiency)

– Changes in market needs/customer requirements

– Top management initiatives to improve sales

– Regulatory policies (there are minor regional differences in terms of howfirms in different regions have responded)

4 Focus of innovation potential benefits seen by firms

6 Investment in R&D: Most firms have been investing in product development

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6. Investment in R&D: Most firms have been investing in product development

R&D when long term manufacturing related gains would come through process

innovation for a majority of firms (as only a small number of firms that would be

capable of developing a globally competitive product). East and West invest

higher on process improvements – perhaps gains from the steel & chemical

sectors are obvious here. Investment in testing activities (a prerequisite for

precision high value manufacturing) are higher is South followed by North (see

Table 6; N is the sample of firms that are performing that task or answering that

particular question). Same is the case with investment to upgrade technology.

Firms in North and South invest 7.15 and 6.98 percent of sales in R&D activities

respectively. East and UP have low investment on this count. As far as dealing

with intellectual property (IP)is concerned, the South has been more active –

more patents licensed from outside, more industrial design registrations and

more trademark registrations (Tables 7 & 8). North has obtained more patents in-

house as well as from outside. Firms all over the country are less inclined to

license patents from others. In general, the patenting activities by Indian firms

are relatively low.

7. Process Innovation

As can be seen from Table 9, firms in all the regions have been investing in new

technology, processes and design activities. Firms in the eastern region appear to

be catching up. It also points to increasing investments in Steel in the East. If welook at the vintage of equipment on the shop floors (in Table 10), an interesting

picture emerges. Firms in South India have a higher rate of investment in new

l ll hi i i i l Th d

much of the innovation in product, process and practice domains Our sample data

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much of the innovation in product, process and practice domains. Our sample data

reveals that

– All regions show low to medium usage of IT

– Number of firms reporting high usage of IT is highest in South and lowest in

East (this number in UP is higher than East)

–

On average, 30 percent of firms do not use IT (East & UP are worst than thisaverage value)

– IT mostly used for tracking/controlling production and for preparing

reports for management (the highest to lowest sequence is found to be

South-West-North-East)

– The Manager is the key user of IT followed, at a distance, by the Supervisor

except South where the usage of IT by both Manager & Supervisor is close to

each other

–

Machine operators, in most cases, still do not use IT (the highest instance ofoperators using IT amongst all the regions, is in South)

– Internet being used by about half of the firms using IT for sales & purchase

enquiry

– Firms in South deploy IT for more functions than any other region.

It is very clear that the extent of deployment and usage of IT is higher as well as

more spread out in terms of functions in South and the worst in East and UP

Table 6: Regional Distribution of Total Investment in R&D in Various Activities (percent of firms)

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g (p )

NORTH SOUTH EAST WEST UP

N Mean N Mean NMean N Mean N Mean

Product development 204 34.97 91 32.17 36 45.84 81 45.50 69 24.76

Process development182 21.92 88 18.55 33 20.45 79 25.24 66 17.00

Up gradation oftechnology 171 19.09 81 26.67 28 16.89 71 19.02 66 17.42

Testing activities171 16.10 74 18.64 35 12.94 64 13.74 64 15.55

Others12 8.38 8 12.06 2 27.00 4 14.5 6 7.00

Investment in R&D as aPercent of Sales

201 7.15 82 6.98 27 1.88 85 4.46 67 13.00

Total 318 318 165 165 68 68 132 132 96 96

Table 7: Patent Registered by Firms in India

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g y


N Mean N Mean N Mean N Mean N Mean

Patents obtained by

in-house activities

25 5.16 10 3.60 19 6.00 14 4.14 3 2.00

Patents licensed fromoutside 8 2.88 2 3.00 3 1.00 0 0.00 1 3.00

Industrial designregistrations filed 7 2.85 2 5.50 5 1.20 5 5.60 1 4.00

Trademarksregistered 36 5.62 17 8.17 22 4.50 20 2.15 4 2.50

Total318 165 68 132 96

Table 8: Patents Registered by Firms Abroad

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Patents obtained byin-house activities

9 11.22 4 1.00 5 1.00 7 3.28 0 0.00

Patents licensedfrom outside

5 1.60 0 0.00 3 1.00 1 1.00 1 2.00

Industrial designregistrations filed

5 1.80 0 0.00 2 1.00 0 0.00 1 1.00

Trademarksregistered

10 2.20 4 5.75 4 1.00 7 1.85 1 5.00

Total 318 165 68 132 96

Table 9: Regional Distribution of Process Innovation by Firms (percent of firms)

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N Yes No N Yes No N Yes No N Yes No N Yes NoInvested inupgradingMachinery

311 80.2 19.8 159 81.8 18.2 67 86.8 13.2 132 85.6 14.4 95 72.9 27.1

If YES thenInvestment inRupees (cr)

161 14.3 108 27.3 50 128.5 87 16.7 26 23.3

Have you adopteda new productionprocess

302 65.1 33.6 147 60.6 39.4 61 60.3 39.7 131 67.9 32.1 92 62.5 37.5

Invested in designrelated activities

306 50.3 49.7 154 50.9 49.1 63 33.8 66.2 130 42.4 57.6 96 63.5 36.5

Outsource any ofyour design related

activities

306 31.4 68.6 150 31.5 68.5 61 16.2 83.8 126 22.0 78.0 95 53.1 46.9

Total 318 165 68 132 96

Table 10: Vintage of Equipment (percent of equipment on the shop floor)

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Less than 5 yrsold

280 43.42 130 51.07 64 30.27 112 40.38 86 37.59

Between 5-10 Yrsold

255 39.72 123 35.67 58 40.64 104 48.81 84 36.39

More than 10 yrsold

199 39.25 93 37.73 52 40.12 73 37.34 68 54.46

Total 318 318 165 165 68 68 132 132 96 96

ideas & innovation and there is low participation of shop floor or younger employees

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(however, amongst all the regions, South is the best).

• Supply Chain Characteristics

- Firms in West use most number of channels, i.e., suppliers, regional

distributors, retailers, intermediate of finished goods producer. This is

followed by South (UP has an extremely weak channel infrastructure and

uses very few channels).- Majority of firms do not track inventory across the supply chain (firms West

are the worst amongst all regions).

- Manufacturing (followed by distributor, wholesaler, and then retailer) are the

highest source of inventory – it appears that manufacturing strategies are not

coordinated with others in the channel.

It can also be seen from Table 11 that Supply Chain practices vary across regions.

Perhaps this might be explaining the differences in the operational performances of

firms in different regions. For example, firms in the South are more inclined to use third

party logistics service providers for both procurement of raw material and intermediate

goods as well as finished good (they are followed by sample firms in the North, then

West, then UP and finally East). Indeed there also signs of weak understanding of what

improves performance and productivity across the entire supply chain or perhaps it is a

failure to understand the mid to long term implications of their approach. For instance,

about 70.9 percent of firms in the South expect their suppliers to hold inventory for

them. It may be realized that this practice would increase the cost of the product to the

supplier who would then either pass it on to its customers or may not be able to sustain

Table 11: Regional Distribution of Supply Chain Practices

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N Yes No N Yes No N Yes No N Yes No N Yes No

Do you expect

your supplier tohold inventory? 314 50.3 49.7 165 70.9 29.1 64 64.7 35.3 132 60.61 39.39 96 35.4 64.6

Do you havecontracts withtruckingcompanies?

314 51.3 48.7 165 75.2 24.8 60 63.2 36.8 132 61.36 38.64 96 38.5 61.5

Do you have 3PL

service providersfor dispatches? 315 54.1 45.9 165 66.7 33.3 60 16.2 83.8 132 48.48 51.52 96 35.4 64.6

Do you have 3PLservice providersfor procuringmaterial?

313 39.6 60.4 164 50.0 50.0 59 16.2 83.8 132 34.09 65.91 96 34.4 65.6

Is a major part ofyour logisticsoutsourced to 3rdparty serviceprovider?

308 40.9 59.1 165 51.5 48.5 58 11.8 88.2 131 35.88 64.12 95 32.6 67.4

Total 318 165 68 132 96

the road infrastructure is superior in the West and parts of North. It is also true that

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truck movement faces significant bottlenecks in some parts of the South. It may be

pointed that the average figures across the regions are particularly high. Travel between

two locations that are about 500 km should not be taking more than a couple of days. In

addition to bottlenecks due to infrastructure (both in terms of road quality as well as

available space on the road & congestion) that leads to high lead times, the technology

of the truck & its efficiency, the condition of the truck, the skill of the driver, regulatory

stoppages on the highways by the road transport office staff or police or local rent

seekers, layover of trucks for long hours especially when passing through cities (due to

low availability of by-passes through cities), poor highway support in case of

emergencies, accident or breakdown etc. are also responsible for these long lead times.

Another factor that is affecting supply chain performance are delays in clearing customs

for cargo. Our sample data shows that firms in North, on an average, take 4.67 days to

clear a consignment of goods from customs. This figure for firms in South, West, East

and UP are 5.54 days, 6.31 days, 6.63 days and 9.67 days respectively (there is also high

standard deviation observed around each of these mean values). It must be mentioned

that this long lead time at customs has a cascading effect on cost across the entire

supply chain. Long customs clearance time means firms down stream (i.e., customers to

these suppliers) face high uncertainty in terms of when their supplies are going to

arrive and cannot plan their production or deliveries accurately or are not able to take

advantage of high value orders that need to be delivered at short lead times. Give this

uncertainty or long lead time, firms have to hold higher levels of inventory in order tomeet their production requirement thereby increasing their cost. Effective execution of

lean supply chain practices requires reduction of lead times across all elements of the

l h

electricity, and ignoring prescribed labour regulation. Larger firms in many countries

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(especially in Japan) have tried to address these issues by having active supplier

associations that ensure maintenance of standards while helping suppliers develop

capabilities. Our data reveals that very few firms in any region has a supplier

association (it is a very rare concept in India). North has the highest number of firms

with suppliers on a long term basis (about 50 percent of firms). There is a very low

investment in suppliers’ capabilities across regions (i.e., organizing supplier

conferences, sharing of production plans etc.). North has more equity holding in

suppliers & distributors than any other region. It appears that sample firms in the

North are committing more to their suppliers and this will have positive externalities as

manufacturing grows further. One wonders if this is historical or a sign of

entrenchment of modern practices in the North. One must not forget that

manufacturing in North is quite diversified.

Firms across regions procure their raw material or intermediate products from far and

near as shown in Table 12. Firms in South and North have more percent of suppliers

that are located more than 100 kms away from them (firms in South have 87.88 percent

of suppliers while firms in the North have 59.37 percent of suppliers located more than

100 kms away). The same is true for UP. One hypothesis is that given the advanced as

well as diversified state of manufacturing in South and North, firms may have to

procure all over the country as well as globally while given the low concentration of

manufacturing in UP, firms there may not be finding local suppliers hence may have togo far for procuring their supplies. Firms in West and East procure more locally.

Reasons might be different in both the cases. Manufacturing in the West may be more

f d ( h i l d h i l i G j ) C l f i

There is one more fact regarding suppliers in various regions – there is a low to medium

f IT b li /d l ll i S h i li h l b I i i

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of IT usage by suppliers/dealers across all regions. South is slightly better. It is quite

obvious that Indian manufacturing, in general, has not benefited from IT services

growth in India.

Table 13 provides a comparative view on a variety of performance parameters across

the different regions. The differences in the performance of different regions stands out

quite clearly. East and UP are at the bottom of the heap. West, North and sometimes

South share the lead.

Appendix I & II provide a listing of comments provided by the sample firms that act as

hurdles in their plants (both internal to the firm and external to the firm). The Average

rating gives the relative weight of each factor and consequently the importance of each

factor in that region.

Table 12: Location of Suppliers from the Plant (percent of the total suppliers)

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NMean

%N

Mean%

NMean

%N

Mean%

NMean

%

within 0-5 Km 318 4.90 5 3.03 68 28.71 131 4.07 96 7.05

within 5-25 Km 318 11.04 7 4.24 68 34.65 132 28.28 96 9.12

within 25-100 Km 31724.69 8 4.85 68 53.88 132 69.00 95 10.78

Total 318 165 68 132 96

Table 13: Regional distribution of Business Unit Performance for the Last Fiscal Year

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Annual sales revenues (Rs.in Cr’s) 311 168.06 161 400.64 68 615.86 124 329.19 95 100.14

Net pretax profit ratio (%) 248 13.35 133 11.96 61 11.02 96 19.55 82 14.86

Return on assets (%) 219 15.55 96 15.21 26 19.36 97 26.29 86 13.85

Growth rate in unit sales (%) 255 20.40 133 17.51 58 16.91 100 29.94 85 13.55

Growth rate in Rupees (%) 242 22.09 118 19.35 51 20.06 104 79.70 92 32.76

Capacity utilization (%) 280 64.24 146 83.69 62 72.01 120 67.36 92 55.77

Table 13: Regional distribution of Business Unit Performance for the Last Fiscal Year (continued)

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Manufacturing costs as percentage of sales(%) 301 62.95 154 65.51 62 66.01 114 90.98 94 80.73

Percentage of on-time deliveries in days 295 89.08 150 90.20 53 85.16 115 69.15 94 22.53

Avg. lead time to convert RM to finishedproducts

296 19.45 156 24.05 58 20.23 83 18.11 76 21.20

Annual inventory turnover (turns/year) 231 62.38 109 41.38 15 13.96 108 89.60 89 81.03First pass yield (%) 256 94.39 139 80.69 29 78.851 95 33.16 92 3.90

Avg. total lead time in days to introduce newproducts

250 7.34 136 5.60 36 4.98 76 7.66 85 31.24

Percentage of sales generated by the newproducts

202 31.00 114 19.66 10 35.92 122 92.85 94 87.43

% of perfect orders delivered to yourcustomers 302 89.04 158 92.15 60 86.00 117 89.66 92 85.15

% of perfect orders received from yoursuppliers

295 86.46 150 88.14 57 84.19 109 55.73 92 38.51

Cash-to cash cycle time 284 51.1232 142 50.3169 13 56.53846 121 59.69612 94 60.90926

Material cost (%) 305 58.7815 163 61.8902 65 54.01092 121 16.5862 94 21.33394

Direct labour cost (%) 306 18.3789 163 17.1204 65 23.07231 119 21.69429 92 17.545Other costs (%) 305 20.273 163 20.9617 64 22.2475 36 5.193889 50 18.772

Cost of physical distribution as % of sales 119 11.1406 75 7.0424 7 8.255714 36 5.193889 50 18.772

Cost of warranty claims/returns as (% of sales) 95 9.50321 41 2.27122 5 2.24 30 3.469703 47 14.27234

Cost of manufacturing as (% of sales) 179 42.1289 100 54.0901 23 60.55043 45 56.71111 53 35.5283

7 Some Observations on Variations in Strategies andPerformance of Manufacturing Firms by Size

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Performance of Manufacturing Firms by Size

In order to understand if there is any variation in strategies of firms by size, we

segregate the sample firms into four distinct categories by size and then compare their

manufacturing practices and performances. We highlight some distinctive observations

on a variety of dimensions. Sample firms were grouped into four categories by size:

•

Tiny: firms that have annual sales revenues less than Rs 5 crores; about 12.3

percent of sample firms were tiny.

• Small: firms that have annual sales revenues greater than Rs 5 crores and less

than Rs 50 crores; about 43.1 percent of sample firms were small.

• Medium: firms that have annual sales revenues greater than Rs 50 crores and

less than Rs 300 crores; 32.3 percent of sample firms were medium.

• Large: firms that have annual sales revenue greater than Rs 300 crores; about 12.3

percent of sample firms were large.

Indian manufacturing is very diverse – their strengths and characteristics vary. Sample

firms that can be categorized as tiny, small, medium, and large have the following

characteristics:

• Tiny firms: Low volume, low product variety; firms perceive their scale to be

much smaller than their global competitors; Dominant category of firms report

investment of 5-15% of sales in R&D (perhaps acquisition of new technology/or

process), have low technical manpower capabilities, and are low on training

investments;

S ll i fi M di l di d t i t fi i l

We now discuss each of these dominant operations strategy of firms of various sizes

in detail. We find that the dominant manufacturing strategy of tiny firms is to

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in detail. We find that the dominant manufacturing strategy of tiny firms is to

produce low volume and cater to low product variety (i.e., 30 percent of tiny firms).

This is indeed a bothersome observation. It appears that tiny firms, instead of being

source of innovative production environment (which is their natural advantage over

medium & large firms), are producing a limited variety of products – they appear

satisfied or due to structural problems are locked into producing for few customers

similar kind of products. The very fact that their capacity is low, they are producing

for each customer in small volumes. Tiny firms are neither innovative producers

serving a variety of customers with a variety of product/service offerings nor are

they low cost producers. Tiny firms are often run by technocrats who have strong

technical skills and hence are more likely to grow by exploiting their technological

skills & innovativeness which would come at low overhead. If they become flexible

solution providers to a large variety of customers then they are building on their

innovative capabilities. And this would come at low overhead costs (the cost of

developing or experimenting at a large producer’s facility will be much higher). If

these firms follow a focused product, larger volume strategy (which is what they are

doing) then a larger firm will out-compete them on cost. Similar is the problem with

small firms in the sample. Amongst the small firms, the largest percentage follows a

medium volume and medium product variety strategy (i.e., 34.3 percent of small

firms). The next higher incidence is of small firms that seek high variety and high

volume (i.e., 15.1 percent of small firms). The problem with small is same as that ofthe tiny. Their strategy should also be aimed at becoming flexible producers rather

than becoming a lowest cost producer (a large firm with low product variety will

h l d l ) h h

As we had mentioned earlier, most firms find themselves about equal or smaller

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, q

than their global competitor. The top three reasons for their being smaller in size isgiven in Table 14.

Table 14: Top Three Reasons for Being Small in Size

Category of Firms Reason for Being Small in Size

Tiny Firms

1. Capital is Expensive

2. Restrictive Labour Laws &

Uncertain Markets

3. Catering to Smaller Domestic

Market

Small Firms


2. Restrictive Labour Laws

3. Uncertain Markets

Medium Size Firms


2. Uncertain Markets

3. Restrictive Labour Laws

Large Size Firms


2. Catering to Smaller Domestic

Market

3.

Restrictive Labour Laws &Uncertain Markets

more than 50 percent of revenue coming from new products) and these are also the

firms that have high revenues. Small firms unfortunately, don’t perform well on this

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g y p

count – the most number of firms in this category, 32 percent of small firms, have only16-25 percent of revenue coming from new products. For medium and large firms, the

strategy seem to be aligned to their size and volume sale – 41 percent and 35 percent of

medium and large firms respectively form the largest group in each category and both

cases have only 0-10 percent of sales generated by the new products. Medium and large

firms are less flexible.

In terms of performance, for all sizes, most number of firms5 have grown (in terms of

growth rate in unit Rupee) in the range of 5.1-10 percent while the next highest number

of firms have seen growth rates in the range of 15 – 24 percent. Most tiny and large

firms have net pretax profit ratios in the range of 10-15 percent. For small firms, the

largest number of firms has this value between 15-25 percent. When it comes to

medium firms, we find that equal number of sample firms have net pretax profit ratio

between 10-15 percent and between 15-25 percent. We find that 26 percent of tiny firms,

38 percent of small firms, 36 percent of medium firms and 35 percent of large firms have

net pretax profit that is greater than 15 percent thereby indicating a strong financial

performance for firms in each category. One can hypothesize that unless tiny firms

don’t secure economic rents through innovative products & flexible production, their

profit may not grow as much. The return on asset of all type of firms except the tiny is

in the range of 15-21 percent. This value for tiny firms is between 10-15 percent.Capacity utilization of most number of tiny & small firms has been in the 64-84 percent

range while that for the medium & large firms has been between 85-95 percent. It is

h l f h l l f h

while a same percent of tiny firms have inventory turns between 21-60. Interestingly,

for all other categories of firms, most firms have inventory turns either ranging between

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0-4 or between 5-11 – values that reflect poor inventory management. A similar pictureemerges when we look at first pass yield - 46 percent of tiny, 42 percent of small, 24

percent of medium and about 17 percent of large firms have first pass yields between

76-90 percent; about 14 percent of tiny, 14 percent of small, 27 percent of medium and

17 percent of large firms have first pass yield less than 75 percent; only 18 percent of

tiny, 22 percent of small, 29 percent of medium and 30 percent of large firms have first

pass yield greater than 98 percent. Tiny and small firms have large number of firms

with poor first pass yield while medium and large firms have more firms at higher

levels. Tiny, small and medium do not perform well when it comes to delivering

perfect (or complete) orders to their customers – this is an important service measure

and part orders delivered to customers creates a coordination problem and may delay

customer’s production plans. Most firms in all the three categories (43 percent of tiny,

37 percent of small and 27 percent of medium firms) deliver somewhere between 76-90

percent of their orders that are complete. The same figure for the most number of large

firms is between 96 and 100 percent. TSMEs (tiny, small & medium enterprises) have to

bridge this gap. On further exploration it appears that tiny and small are all not

receiving perfect (or complete) orders from their suppliers which might be reducing

their ability to meet their customer’s requirements. The largest grouping under tiny

firms, 33 percent of them, has only 81-90 percent of order from their suppliers that are

complete. This figure is 32 percent amongst small firms. The medium and large firms do

somewhat better. About 31 percent of medium firms and 37 percent of large firms

receive 91-100 percent of orders that are complete. Large firms receive better service

f h l h d h l h h h h

The extent of investment in machinery is low across different categories. However, the

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tipping point is when firms become medium in size. There is a strong correlationbetween investment in machinery and size – the causality runs in both directions.

About 32 percent of tiny as well as small firms have more than half of their equipment

on their shop floors that is less than five years old. This figure is about 30 percent for

medium size firms and about 24 percent for large firms. Similarly, 66 percent of tiny

firms, 77 percent of small, 76 percent of medium and 69 percent of large firms have less

than fifty percent of equipment that is more than 10 years old. While Indian firms have

started to invest, they require strong policy support to transform the shop floors.

Now we will explore the Innovation infrastructure across firms of different categories.

As we can see in Table 15, the highest percent of sample firms in tiny & small categories

spend between 5-15 percent of their sales in R&D. The highest percent of sample firms

in medium & large categories spend between 1-3 percent of their sales in R&D which is

significantly low. Perhaps the tiny and small are investing for new product

development. We also find that 9.7 percent of tiny firms, 13.6 percent of small firms,

15.0 percent of medium firms, and 30.8 percent of large firms invest less that 1 percent

of sales in R&D. A related observation is with respect to IT. IT systems form the

backbone for most innovation systems in organization. As can be seen from Table 16,

larger the firm, more sophisticated is its use of IT. Firm size is strongly correlated with

the extent of usage of IT – smaller firms must be encouraged to implement appropriate

IT strategy to make them competitive. We also find that medium size firms are most

interesting. These are the firms whose IT strategy appears to me most actively aligned

h b ld O h f f b l f

about 23 percent have less than 100 operators, about 57 percent have less than 300

operators and about 89 percent have less than 1000 operators. For large firms the

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distribution is as follows: 4 percent have less than 50 operators, about 10 percent lessthan 100 operators, 29 percent have less than 300 operators and 58 percent have less

than 1000 operators. Most of the tiny firms have less than 5 engineering/technical

employees (often zero). Similarly, most small firms have between 5-15 technical

employees, most medium size firms have between 15-50 technical employees and most

large firms have between 100-500 technical employees. It is obvious that the threshold is

medium size firms in terms of a noticeable technical workforce. A similar story emerges

when it comes to R&D personnel. About 81 percent of tiny firms employ less than 5

R&D personnel (often zero); similarly about 62 percent of small firms employ less than

five R&D personnel while 83 percent of them have less than 10 R&D personnel;

medium size firm, on the other hand, have about 48 percent of firms employing less

than 10 R&D personnel and about 91 percent of them employ less than 30 such

knowledge workers. About 65 percent of large firms deploy less than 30 R&D

personnel. It can be seen that as size is increasing, the number of R&D personnel is not

growing commensurately – this is a weakness of the Indian manufacturing sector. In

addition, firms will have to devise ways of attracting more R&D personnel to small

firms in order to render the natural strategy of small successful (i.e., become the R&D

houses of the industry).

If we look at Tables 17, 18, 19 the conclusion that we can derive is that tiny and smallfirms are unable to hire technical graduates, medium size firms are not hiring enough

of graduates with master’s degrees (especially the larger of the medium size firms) and

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Table 15: Investment in R&D as percent of Sales for Different Category of Sample Firms

Investment in R&D as a percent of Sales

0-0.5 0.5-1.0 1.0-3.0 3.0-5.0 5.0-15.0 15.0-25.0 > 25.0

Tiny % of Sample firms 3.2 6.5 16.1 12.9 51.6 6.5 3.2

Small % of Sample firms 6.2 7.4 27.8 9.9 32.7 11.1 4.9

Medium % of Sample firms 7.9 7.1 40.9 10.2 26.0 6.3 1.6

Large % of Sample firms 10.8 20.0 44.6 7.7 15.4 1.5 0.0

Table 16: Top Five Uses of IT in Different firms

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Top Fives Uses of Information Technology

Tiny

1. For preparing reports for management2. To track inventory/work in progress3. To track/control production4. For real time planning & scheduling5. To reduce defects/For placing orders with suppliers/For

interacting with customers

Small

1.

To track/control production2. For preparing reports for management3. To track inventory/work in progress4. For placing orders with suppliers5. For real time planning & scheduling

Medium

1. To track/control production2. To track inventory/work in progress3. For preparing reports for management4. To reduce defects4. For placing orders with suppliers

Large

1. To track/control production2. For preparing reports for management3. To track inventory/work in progress4. For real time planning & scheduling5. For placing orders with suppliers

firms and 11.1 percent are large firms. Of the 497 firms in the sample that have hired

master’s graduates, 8.5 percent are tiny firms, 42.3 percent are small, 36.0 percent are

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medium and 13.3 percent are large. Similarly, of the 175 firms that have PhDs working

for them, 1.7 percent are tiny, 33.1 percent are small, 38.9 percent are medium and 26.3

percent are large. Its shows how inadequate are these manufacturing firms in terms of

advanced skills particularly the large. Also, if Indian manufacturing has to become

innovative, then small will also have to become attractive to be able to hire advanced

skills.

A related issue pertains to the average number of hours spent on training employees as

well as the firm expenditure on training each year. When it comes to average number

of hours spent on training per employee, about 74 percent of tiny firms spend less than

50 hours (while 90 per cent spend less than 100 hours per employee); about 65 percent

of small firms spend less than 50 hours on training per employee while 85 percent of

these firms spend less than 100 hours per employee); amongst medium size firms about

54 percent of firms spend less than 50 hours on each employee for training and about 74

percent of them spend less than 100 hours; finally, about 73 percent of large firms spendless than 50 hours per employee on training and about 88 percent of these firms spend

less than 100 hours. As can be seen, the pattern of hours spent on training is very low

across the size of firms with no significant differences. In here the smaller firms are

perhaps doing better. Medium and large size firms appear to be having a “fortress”

mentality where they resist investment in training due to the fear of their employeeleaving the firm after training – a mindset that reflects conservative thinking. The above

poor strategy is further reflected in the data given in Table 21. Once again, we find that

Supplier related practices also point towards the strength of the supply chain as well as

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the cost and quality of products that a firms can produce. Moreover, the supply chainstructure needs significant re-structuring in order to become lean. About 10. percent of

tiny, 16.9 percent of small, 37.5 percent of medium and 70 percent of large firms have

more than 100 suppliers while about 1.3 percent of tiny, 1.5 percent of small, 11.2

percent of medium and 27.2 percent of large source from more than 500 suppliers. The

largest percent of tiny firms have on an average 10-15 suppliers each; this figure for

small is 24-50 suppliers, for medium and large firms is between 100 and 500 suppliers.

Firms still work with large number of suppliers leading to higher coordination cost,

higher lead times and higher probability of quality problems. We also find that more

number of small firms (i.e., 23.7 percent of the total) want their suppliers to hold

inventory for them (this is followed by medium size firms in the sample). Overall, 59.1

percent of sample firms (across sizes) want their suppliers to hold inventory for them.

From Table 22 we can also see that larger the size of the firm, higher is the propensity to

use 3PL services providers on a long term contract for making dispatches to customers.

(These figures are, however, lower for procurement of material from its suppliers where

the use of 3PL trucking services on long term contracts are less prevalent).

Table 17: Nature of Firms and Number of Employees with PhD degree (percent of

firms)

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Number of PhDs

<5 5-10 10-30 30-60 >60

Tiny % of Sample

firms

100.00 0.00 0.00 0.00 0.00

Small % of Sample

firms

79.30 18.97 0.00 1.72 0.00

Medium % of Sample

firms

64.71 20.59 10.29 2.94 1.47

Large % of Sample

firms

58.70 28.26 2.17 4.35 6.52

Table 18: Nature of Firms and Number of Employees with Masters degree (percent

of firms)

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Number of Masters

<10 10-50 50-100 100-300 >300

Tiny % of Sample

firms

90.48 9.52 0.00 0.00 0.00

Small % of Sample

firms

75.71 23.33 0.48 0.48 0.00

Medium % of Sample

firms

36.87 53.63 5.59 3.91 0.00

Large % of Sample

firms

16.67 34.85 16.67 21.21 10.61

Table 19: Nature of Firms and Number of Employees with Bachelors degree

(percent of firms)

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Table 20: Nature Firms and Percentage with Advanced Degrees

Bachelors Masters PhDsTiny 11.9 8.5 1.7Small 45.3 42.3 33.1

Medium 31.7 36.0 38.9

Large 11.1 13.3 26.3Total Number of

Firms603 497 175

Number of Masters

<10 10-50 50-100 100-300 >300

Tiny % of Sample

firms

63.89 31.94 2.78 1.39 0.00

Small % of Sample

firms

30.40 61.17 6.23 2.20 0.00

Medium % of Sample

firms

5.24 41.88 23.56 26.70 2.61

Large % of Sample

firms

4.48 20.90 14.92 28.36 31.34

Table 21: Total Training Expenditure (in Rs Lakhs) by Size of the Firm

Average SalesTotal Training Expenditure (in Lakhs)

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Revenue(in Rs. Crores)

g p ( )

< 5 5-10 10-30 30-60 60-100 100-250 >250 Total

Tiny (< 5 )% of

each class 80.7 9.7 3.2 3.2 3.2 0.0 0.0 100.0

Small (5-50)% of

each class 53.6 20.5 23.2 1.8 0.9 0.0 0.0 100.0

Medium (51-300) % ofeach class 24.3 14.2 33.7 16.6 8.6 2.5 0.01 10.00

Large (> 300)% of

each class 10.4 12.1 18.9 13.8 13.8 15.5 15.5 100.0

Total% of

each class 37.1 15.5 24.6 9.7 6.4 3.7 3.0100.0

Table 22: Supplier Practices of Various Types of Firms

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Average SalesRevenue(in Rs. Crores)

Percent of Firms Using 3PLService Providers formaking dispatches to

customers

Percent of Firms havingContracts with Truckingcompanies for making

dispatches to customers

Tiny (< 5 ) 50.0 49.4

Small (5-50) 46.7 50.2

Medium (51-300) 57.7 70.7

Large (> 300) 66.7 86.9

Total 53.1 61.1

8 Implications & Conclusion

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In this research we have tried to understand the managerial regimes that exist in

manufacturing plants in India, especially those relating to manufacturing management

and the extent to which it is contributing to building the competitiveness of Indian

manufacturing firms. Rather than rating them as more competitive or less, we have

explored areas where there are alignment or mismatch between manufacturing

strategies and the manufacturing practices adopted by them, study the performance of

these firms again from a manufacturing management perspective and identify areas

for improving strengths and reducing weaknesses. Manufacturing competitiveness is

as much a function of the distinctive capabilities built by each firm as it is of the

collective capabilities of firms around them as well as how they exploit these

capabilities by adopting robust strategies and state-of-the art managerial practices.

We will first make some general comments and then discuss specific implications.

Indian firms have been riding the “get the quality right” wave since early ‘90s initially

through ISO certification to become vendors for European firms. But soon they

converted it into an opportunity to review their quality systems. What was seen as a

non-tariff barrier soon led firms to draw out their own trajectories of quality

improvement in a systematic manner – a journey that continues even now. And this

came with significant gains including global recognition via contracts and rewards (i.e.,

Deming & other prizes for Indian plants). As the global markets expanded, these firms

were ready to serve them with better quality products, soon to be followed by

upgraded processes. Indian manufacturing, at least a portion of the entire sector, was

market. Interestingly, while some of these same mid-size firms are looking to acquire

other mid-size companies globally, they continue to remain targets of acquisition by

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global firms! What however is missing in most Indian firms is a focus on Innovationand particularly R&D. This weakness is repeatedly highlighted by lack of investment

in innovation infrastructure, low availability of advanced skills, weak strategy on new

product introduction, etc. There are early indicators that some of the firms are focusing

to “get their process right.” This is a good indicator – if firms develop proprietary

processes based on innovative engineering abilities, it would lead to competitive gain

as tacit knowledge is not easy to copy. Besides, it might also trigger a continuous

improvement process on these shop floors. Lastly, the lack of top management focus,

among Indian manufacturers, on systematically reducing costs is a strategy that is

perilous to say the least. Indian manufacturing strategy has to combine manual and hi-

tech manufacturing to retain the cost advantage of an emerging economy. Firms cite

high raw material and logistics related costs as contributing to higher costs of Indian

operations. These firms have to embark on process innovation while reducing costs in

order to compensate for these disadvantages and gain global advantage.

There is a need to grow large manual factories with advanced tooling and precision

measurement systems. This will allow India to develop capabilities in mass market

products – a domain that is going to get hit hard with the ASEAN FTA. One wonders if

the Indian firm, on an average, is not over capitalized? It is essential to serve the mass

market products made out of India in order to retain jobs for the common man.

Firms need to focus on improving their service – service with a BIG S – customizing

d i ’ i i b k i i f i

Wages are on the increase – this demands higher productivity to survive in the market.

Consequently, an increase in training investment becomes necessary. This is directly

li k d i h l k f i i i h I di f i i d l i

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linked with lack of innovation in the Indian manufacturing industry – low investmentin R&D, low investment in advanced skills, weak process innovation regime, low

patenting record, low usage of ICT for enhancing design productivity by generating

libraries for creating new designs or for verification, low investment in modern tools of

production (especially hand held tools and precision measuring instruments), low

intensity of shop floor improvement practices, low penetration of statistics as a skillamongst shop floor workers, absence of a well defined plan to move up the value chain

ladder etc. There is a need to cut costs regularly through innovative process & product

re-design – firms will come to source from Indian manufacturers only if their costs are

low. The challenge is to keep Indian manufacturing Low on Cost, High on Productivity

– this can happen only through innovation.

In Tables 22 and 23, we present the roles that need to be played by different types of

firms as well as differing manufacturing management capabilities across different

regions of the country – both contribute to structural reasons for the extent of

competitiveness in different firms in different parts of the country. It is apparent that

the strategy of firms is often not always aligned to their intrinsic strengths – sometimes

its government policy that distorts incentives for the firms to behave in a certain

manner; at other times, the firms do not assess their intrinsic strengths appropriately.

These tables point to directions of improvement. Interestingly, mid-size firm in the

South, particularly in Tamil Nadu, are starting to create a niche for themselves in terms

of developing competitive capabilities. Tamil Nadu is also seeing an emergence of large

l f i f ili i h NOKIA f ili i S b d ll

Table 23: Strategic Fit for Various types of Firms in the Manufacturing Eco-system

Tiny Small Medium Large

L l t d d

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Supplier to small firms incluster

Household level distributedenterprises largelysupplying smallcomponents to small or

medium size firms

Material supply fromcustomers

Innovation Centers of theManufacturing Cluster -experimentation onprocesses innovation

Focus on Processes –generate IP aroundinnovative processes

Use innovative processes todeliver higher value for

customer’s product

Generally, not involved inproduct design &development

Focus on large variety andlow volumes

Best poised for innovative,medium volume, mediumvariety business

Foundations established fora lean strategy; most

benchmark managerialpractices in place

Suppliers to large andhaving small as vendors

Have been innovative thus

far, now need to addeconomies of scale to itsstrength

Starting to move frombeing a regional distributorto a national/internationaldistributor

Large volume, standardproduct producer

Strong product Innovation& R&D

More Investment inTechnology & Equipment

More employees withadvanced skills

Strong product design &development

Broad Channels ofDistribution

Integrated Supply Chain:coordination acrossmultiple plants & vendors

Own IT network withvendors on this platform

Table 24: Regional Imbalances in Manufacturing Abilities

North South East West UPHighest

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R&D in select domains

Customs/Cargo ClearancePerformance the best

Well developed suppliernetworks & small suppliers

Lean aware &Implementation high chieflydue to auto industry

Some regions in North areinnovative process developers(e.g., NCR, parts of Punjab)

Requires higher investment toupgrade machinery

HighestPatenting/trademark/designregistration Activity

Highest Investment in Training

Higher Utilization of IT on shopfloors including more machine

operators using IT basedapplications

Best availability of technicalemployees

More involvement of 3PLogistics suppliers

Weak Road Infrastructure

Lean awareness &Implementation high chieflydue to auto industry

Pretax profits & returns onassets lower commensurate tocapabilities developed

Emergence of large scalemanual factories

Weakest Region forManufacturing on severalcounts (most development inmetallurgical industries)

Very low investment in R&D asa percent of sales

Weak on IT infrastructure,customs/cargo clearance times,availability of technicallytrained manpower

Small enterprises have declinedthe most

Requires very high investmentto upgrade machinery

Logistics practices & transportinfrastructure requiresmodernization

Some R&D in select domains

Poor investment in training

Wide sectoral base anddiversified suppliernetworks

Best road infrastructure

Lean awareness primarily inauto production region

Some regions in West areinnovative process

developers (e.g., Pune,Rajkot)

Most developed supplychains (particularlydistribution channels)though use of IT formanaging them low

Pretax profits & returns onassets highest

Low on most counts

Foundations of modernindustry yet to be established old strengths eroded

Low on skills (includingavailability of technical

employees) though in-housetraining by firms is key sourceof skill building

Low on IT infrastructure

can undertake to overcome some of the key impediments towards helping create world-

class firms.

Recommendations for Firms

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Recommendations for Firms

Indian manufacturing companies need to increase the productivity of their plants. The

trend is in the right direction yet significant changes are not being witnessed beyond the

top ten or so firms in each sector. From a competitiveness perspective, this is not

reflective of a widening of capabilities. Manufacturing industries need both deep

capabilities in firms as well as those stretching across multiple levels of the supply

chain. Often we have found that manufacturing firms are unable to map the key

requirements in terms of managerial processes that enhance productivity for themselves

as well as for their vendors or customers thereby failing to understand the implications

of their performance on others in their supply chain. Box 1a & 1b6 show how such

processes can be mapped for firms at different levels of capabilities (and size) in order

to drive innovation & capability building in one of the industrial sectors under study,

i.e., the auto-component sector. It must be recognized that capabilities are built by firms

individually. First, the firms may map the capabilities of the partners in the entire

supply chain (Box 1a) and then based on the level of the firm and its manufacturing

characteristics, a sequence of managerial initiatives for improving productivity of the

manufacturing & distribution entities can be implemented (Box 1b). This can become a

useful template for improving capabilities for each sector. Now we discuss some

specific recommendations for firms.

Initiatives that firms need to undertake in order to climb the ladder of capabilities are:

The nature and extent of “training”, particularly of the operators, must improve

dramatically. Training of Supervisors on modern tools of manufacturing will yield

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higher benefits. Some ideas on training are as follows:

* Training should be both managerial & technical

* Training both in-class and on the shop floor must for annual increments and

promotion; for supervisors, evaluation should include hours spent coaching& training in addition to those spent learning oneself

* IT solutions must be sought for engineering skill upgradation – ICT

intervention can come in the form of content for automated self learning

* Night schools for operator training as well as coaching for higher level of

diploma & degree examinations

* Investment in training of operators & supervisors as percent of sales must be

increased

* Training in the new tool of manufacturing, i.e., Statistics, should be made

mandatory for every engineer, supervisor or operator;

(c) Indian manufacturing is facing a severe shortage of trained manpower. Firms

need to make special efforts to bring women into the workforce – especially on

the shop floor. Young educated women from semi-urban centers, with adequate

relevant training, would increase the pool of skilled manpower in the country

tremendously.

(d) C l h f l d f f / h fi l k i

Box 1a: The Market-Size-Capabilities Classification of Auto-component firms

Firm Markets Firm Size

Current

Manufacturing Capabilities

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Firm Markets Firm Size Manufacturing Capabilities

LEVEL I Predominantly Domestic Tiny to Small Low

LEVEL II Predominantly Domestic Small Low

LEVEL III Predominantly Domestic Small to Medium Low to Medium

LEVEL IVPredominantly Domestic, some

ExportMedium Medium

LEVEL V Domestic and/or Export Medium to Large Medium to High

Box 1b: Map of the Manufacturing & Distribution Processes for Different Category of Auto-Component firms

MANUFACTURERCATEGORY

MANUFACTURERCHARACTERISTICS

MANUFACTURING MANAGEMENT DISTRIBUTION PROCESS

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LEVEL I(Tier 3 Supplier)

• Order processed by thehigher tier

• Production planning bythe customer

• Blueprint provided bythe customer

• Dedicated supplier• Single plant

• Housekeeping – 5S• Quality inspection – 100% OK

plant dispatch• Traceability of materials/orders

to batches

• Pickup by thecustomer

• Local delivery

LEVEL II(Tier 3 Supplier)


• Production planning bythe customer


• Dedicated supplier• Single plant

• Process analysis for capacityevaluation

• Establish time standards(industrial engineering)

• Establish process capabilities• Preventive maintenance


• Local delivery

LEVEL III(Tier 2 Supplier)


• Production planning bycustomers


• Dedicated capacity forseveral customers

• Single plant

• ISO certification• Value engineering• Quality control

• WIP control• Standard containers, poke yoke• Design support• Costing• Supervisor training


• Local delivery

MANUFACTURER

CATEGORY

MANUFACTURERCHARACTERISTICS

MANUFACTURING MANAGEMENTDISTRIBUTION

PROCESS

LEVEL IV(Tier 2 Supplier)

• Order processing &production planning by

• Cellular layout• Single piece flow

• Delivery tocustomer

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(Tier 2 Supplier) production planning bythe manufacturer

• Forecasting orders• Modification to blue

prints• Multiple customers• Multiple Plants• Global delivery

• Single piece flow• Multiple machine operators• Statistical process control• Total productive maintenance

(initiation)• Environment quality•

Design department – multiplerequirements, design modifications &CAD drawings

• Operator training

customerlocations

• National vendors• Require inventory

management

LEVEL V(Tier 1 Supplier)

• Order processing &production planning bythe manufacturer

• Forecasting orders• Own designs &

blueprints• Multiple customers• Multiple plants• JIT or Pull delivery• Part of global supply

chains

• Total productive maintenance• Lean manufacturing• JIT or pull production•

Quick response• Environment quality – QS• Strong design department – library or

designs, proprietary designs, IPR ondesigns, prototype laboratory,CAD/CAM systems

• Extensive operator training

• National supplychain

• JIT delivery• Need to manage

nationalwarehouses

• Logistics function• OEM &

replacementmarkets

• Warranty &product recallsystems

• Strong supplychaincoordination

P ll

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Housekeeping (5S)Preventive Maintenance

Process Analysis

ISO

Tool Room Maintenance

& InstrumentationControl WIP

Movement

TPM

PullProduction

Value

Engineering

SPC

Figure 14 : Ladder of Capabilities for Discreet Part Manufacturing

(f) Strong focus required on measuring correctly & controlling lead times –

manufacturing cycle times, order delivery times, fill rates, supplier delivery

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times, internal order transaction times, material movement time, on time

delivery etc.

(g) Most small and medium size firms must focus on Process Innovation and a

few medium and large may invest in Product Innovation.

Recommendations for Industry Associations

While there are islands of excellence in various sectors of industry that have

capabilities to compete globally, the industry associations have failed miserably.

They have either been captured by the larger firms to serve their own interests or

have become lobbying platforms for the industry as a whole – their role in building

capabilities through systematic interventions in member firms has been minimal.

The opportunity for these associations to create industry benchmarks, do collectively

what individual firms are unable to do, develop common initiatives & facilities

especially in industry clusters, etc. is high and the need is overwhelming. Lack of

fruitful initiatives either stem from lack of professionalism in managing the affairs of

industry associations or inability to think out of the box or due to lack of trust

between its members. The industry associations have to re-invent themselves.

Several initiatives can be undertaken by them. Some of these are:

(a) Given the downturn in the global economy as well as competition in

(b) Organize exhibitions and marketing efforts for small and medium size firms

as well as firms that are not located in clusters. Strengthen the various

industry fairs that are organized in the country.

(c) Establish IT based manufacturing programmes in ITIs that prepare students

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on PLC systems and data manipulation, robotics and IT manipulation,

engineering services automation and design, fly-by-wire simulation etc. –

this could be a cluster effort jointly implemented by the auto-component

and IT industry associations. This will help develop new skills that the

industry requires.

(d) Develop cluster based initiatives for each sector:

i. Help develop Supplier Associations in various clusters to

become agents of Cost, Quality, Delivery, and Flexibility

improvements.

ii. Cluster initiatives like joint procurement of raw

material/machinery, establishment of common testing facilities

will cluster training initiatives will help address the “Cost” of

operations;

iii.

Focus on the “Quality” of domestic market and initiate a newdomestic quality standard (i.e., ISO like certification

domestically) that will help those that are not able to secure

International certification;

iv. Offer services to firms to map their activities that will help them

identify “Delivery” related bottlenecks. Industry Associationsmust create Industry Awards for firms that have never delayed

a delivery to their customers;

competitive capabilities – industry associations can encourage

firms to undertake process enhancements.

Industry associations recognize their firms for financial performance or

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aggregate innovativeness. There is a strong need to recognize firms for

specific operational performance even if it just to highlight the need to focus

on these parameters.

(e) Create Market for Innovations - innovations, in addition to generating tacit

knowledge and competitive advantage in the market for the firm, are also

intellectual property that can be traded for financial benefit to the firm. For

example, small firms can continuously experiment on the process side or on

product design on behalf of their customers and once an improvement is

achieved, can sell it or lease it to the customer. Industry Associations can

grant “stop-gap/short duration recognition” to these innovative firms (till

they file a patent, if they do) or facilitate formation of these linkages

between developers and users of innovation. This will considerably help

change the role of small firms from becoming ancillaries to medium or large

size firms to becoming powerhouses of innovation and the R&D arms oflarge and medium firms. Then the linkage between the small, medium &

large will be most productive.

(f) Support & develop a new architecture for small producers – create an

architecture based on a network of tiny & small firms especially in ruralareas where one village produces one type of product (i.e., component) –

“ONE VILLAGE, ONE PART.” This will help in building of collective

be similar as well as less costly and cluster quality can also be easily

compared or certified. This will help identify the village cluster with a

specific part and related processes. This could become a strong entry strategy

for a rural cluster.

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(g) Develop programmes to link SMEs in India to technology driven SMEs

(technology driven) outside India (e.g., TAMA in Japan7). This will help the

growth of innovative firms in India.

(h) Lean practices must take roots in sectors other than those related to auto.

Industry associations have not paid enough attention to productivity

enhancing practices.

(i) Promote R&D and design engineering especially in engineering colleges –

need to provide advanced computer based tools that will train young

engineers on the fundamentals & principles of design & R&D rather than on

software (which they can learn in the firm they work with).

(j)

Lead the Industry by helping improve training intensity through eveningclasses, on the job training modules, and computerized self learning

opportunities. Start Simple Manufacturing Programmes for small and

medium sector like: Identify Waste on Shop Floors, Halve your Lead Time,

Reduce Delays at To & From Vendors, How to Reduce Your Material

Movement, Freeing Up Working Capital, Making Excel Sheets Show YourShop Floor’s Performance, How to Never be Late in Delivery, Plotting

Charts, Identifying Shop Floor Errors, Planning For Production, Organizing

and workers. Many of these learning programmes can be taught through 10-

15 minute long video films or computer based training programmes – the

films can be running in the background over large screen in dining facilities

during lunch & tea breaks – alternatively, they can be shown during morning

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assemblies. Industry association can help get these films made for

distribution to firms. Our feeling is that a large number of manufacturing

firms do not have the basics of manufacturing management – while the

owner/manager has attended some training programmes, there has been no

or low investment in training of workers – this is where productivity gains

have to be made through training.

(k) Industry associations must be managed by professional managers who see a

career in helping firms in the industry build capabilities and not by part time

managers who are owners of firms.

Recommendations to Policy Makers

The current economic downturn is requiring responses from government that are

not only inclusive but also based on building skills and employment in a fairly shortperiod of time. Attention is required in three specific areas: employment, skills, and

market linkages. First, there are a large number of people migrating from rural and

semi-urban centers to larger cities and clusters in search of employment. Given that

most of these are young adults who have not worked before and not schooled

appropriately or are farm workers, they predominantly seek jobs in the low end of

the manufacturing sector. Unless the manufacturing sector grows, most of these job

seekers will not be able to find any opportunity to seek a livelihood. There is, at the

the manufacturing productivity. Firms are reluctant to hire such people and find it

unattractive to train them on the job. The low skills of these job seekers is going to

have a very detrimental effect both in the short and the long run on manufacturing

quality, productivity and GDP. The third area of concern that requires attention is

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creation of market linkages. Enterprises, particularly the small, at this juncture

require support in terms of orders to survive. Government procurement could be

done in a strategic manner by involving a large number of Small and Medium

Enterprises (SMEs) there by helping augment the market linkages for these firms.

Defence procurement or those required for public infrastructure stand as good

candidates for planned buying from SMEs.

Government policies over the last several years have been progressively becoming

industry oriented and have been freeing up firms to compete. However, they have

focused mostly on removing tariff barriers both within the country and outside to

ensure smooth flow of material as well as developing the necessary infrastructure for

producing and carrying goods across the country. However, they have completely

ignored the processes necessary to enable firms to build competitive organizational

and managerial strengths – leaving them completely to the firms and hoping that

market forces will address them. Unfortunately, this is where market failures havebeen immense in Indian manufacturing. Policy that support building of these

capabilities will go long ways in sustaining any competitive edge that Indian firms

might develop. Appendix III of this report gives a list of comments provided by

sample firms in different sectors of policies that act as hurdles to their competing

globally.

Policy initiatives that would help in that direction are:

(b) Enabling legislation/orders are required to ensure that Education &

Training in Science & Engineering is reformed at the earliest both in

educational institutions as well as in companies. Some suggestions are as

f ll

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follows:

i. Educational Institutions need autonomy from the government

so that they are able to attract the best of young faculty and can

design their own innovative academic programmes.

Engineering education requires more practice oriented and

action oriented courses;

ii. Vocational Education reforms needs to be undertaken urgently;

iii. Training programmes of Companies should be re-designed and

certified as equivalent to ITI diploma – firms may be given the

authorization to grant the diploma;

iv. Establish Tax driven training escrow fund – a fraction of the tax

paid by a firm can be kept in an escrow fund which can be

redeemed by a firm for every hour that it trains its own

employees – this will increase the incentives of firms to spend

more time on training and the country will gain by an increasein skill level;

(c) Government procurement processes should help create linkages with small

and medium enterprises. Orders in hand should be considered as collateral

for working capital loans by banks.

(d) Every district must have a state-of-art technical training centers and

(e) In order to increase investment in plant & equipment, a Technology

Upgradation Fund or TUF (similar to the one that exists in the Textile

sector) like facility should be made available to all sectors but with

specification of targets to be achieved by each beneficiary firm on Cost,

Q lit D li d P d ti it

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Quality, Delivery , and Productivity.

(f) The Scale of Operations of most firms need to increase. Simultaneously,

firms must learn to operate with smaller margins in order to win bigger

orders – this is also facilitated with an increase in scale. Implementation of

this suggestion would require a reduction in the cost of credit as well as

loosening up of labour laws.

(g) There is a need to develop high speed movement corridors for goods

especially for export purposes between the factory and the ports. Publish

statistics on Lead Time/Turn Around Time as a key measure of

performance for this kind of infrastructure.

(h) Develop national digital network for transfer of data, funds and compliance

documents seamlessly between participating firms, between firms and

banks, between firms and government etc.

(i) Establish a large number of manufacturing clusters based on distinctive eco-

system capabilities including a new architecture for small producers

especially in rural areas – this would be a network of firms that complete

the eco-system with the principle of one village, one product. Developprototype centers, design firms, infrastructure firms, banking facility,

logistics firms, machinery maintenance centers within each cluster.

templates of data required must be developed for each sector. Also

establish a target for turnaround time reduction at customs & cargo

clearance at ports & airports.

(k) Quick dispute resolution required out of the court system.

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( ) p q y

(l) Need to reform transport & transport infrastructure – this sector is very

unorganized, very in-efficient and uses low quality equipment which

results in damage of both the road infrastructure as well as the goods that

they carry. Large transport companies must be encouraged to be setup

facilities with newer equipment as well as new practices.

(m) Bring back significant import substitution awards.

(n) Need to establish funds to facilitate merger of small firms in order to help

create viable mid-size firms.

(o) Support for consulting services to small and micro enterprises in rural areas

as an extension service especially to groups of firms.

(p)

National clearing house on manufacturing – a portal that links buyers andproducers amongst SMEs, listing projects done by engineering students and

engaging engineering students to undertake projects for these firms.

(q) Invite key firms from China, e.g., in the garments & textile sector to setup

plants in India so that we can learn on how large scale manufacturing is

executed. There is a strong case for benchmarking Japanese and Chinese

manufacturing firms – it must be undertaken as a national mission. We

t t t d t d h t th k bli f t i th f

and capabilities, linkages with other sectors, specific policies that support or

retard growth, education & training levels etc. This Commission should

comprise of best of academic minds in Management, Labour Relations,

Engineering, Sociology, Organizational Theory etc.

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Appendix I

Regionwise Distribution of Internal Barriers that Act as Hurdles toInnovation in the Plant

NORTH SOUTH

INTERNAL BARRIERSAverageRating


Pressure for short-term results / lack of long-term (5 years or more)thinking

1.71 Pressure for short-term results / lack of long-term (5 yearsor more) thinking

2.25

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Inadequate reward for Innovation 1.69 Insufficient company budget allocation to innovation 2.125

Lack of an organisational focus on innovation 1.66Skill shortages due to lack of effective in-house trainingprogrammes

2.02

Skill shortages due to lack of effective in-house trainingprogrammes 1.56

Lack of talent 1.96

Insufficient company budget allocation to innovation 1.53 Resistance to change among other employees 1.92Lack of talent 1.52 Problems in measuring innovation activity & results 1.86

Failure to keep apace with technological changes in the industry1.49

Failure to keep apace with technological changes in theindustry

1.80

Lack of time1.48

Existence of traditional organisational hierarchies andfunctional silos

1.73

Problems in measuring innovation activity & results 1.44 Lack of an organisational focus on innovation 1.62

Resistance to change among other employees 1.43 Lack of time 1.61Existence of traditional organizational hierarchies and functionalsilos 1.43

Any Other1.6

Low levels of stakeholder involvement in the innovation process1.33

Failure to innovate successfully in the past 1.57

Poor understanding of customer needs and market dynamics1.32

Inadequate reward for Innovation1.55

Failure to innovate successfully in the past 1.26 Resistance to change among top management 1.47

Resistance to change among top management1.18

Low levels of stakeholder involvement in the innovationprocess

1.38

Penalty for failure1.16

Poor understanding of customer needs and marketdynamics

1.32

Any Other 0.25 Penalty for failure 1.21

EAST WEST



Lack of an organisational focus on innovation 2.44 Any Other 3.82

Poor understanding of customer needs and market dynamics 1.75Pressure for short-term results / lack of long-term (5years or more) thinking

1.53

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years or more) thinking

Low levels of stakeholder involvement in the innovation process 1.27 Problems in measuring innovation activity & results 1.51

Resistance to change among top management 1.18 Lack of talent 1.40

Pressure for short-term results / lack of long-term thinking 1.17Skill shortages due to lack of effective in-housetraining programmes

1.36

Lack of talent 1.05Insufficient company budget allocation toinnovation

1.34

Existence of traditional organisational hierarchies and functional silos 0.99 Resistance to change among other employees 1.34

Problems in measuring innovation activity & results 0.99Existence of traditional organisational hierarchiesand functional silos

1.28

Lack of time 0.97 Lack of time 1.20

Resistance to change among other employees 0.95 Lack of an organisational focus on innovation 1.18

Insufficient company budget allocation to innovation 0.90 Inadequate reward for Innovation 1.08

Skill shortages due to lack of effective in-house training programmes 0.87 Resistance to change among top management 1.07

Failure to keep apace with technological changes in the industry 0.76Low levels of stakeholder involvement in theinnovation process

1.04

Penalty for failure 0.76Failure to keep apace with technological changes in

the industry

0.99

Inadequate reward for Innovation 0.67 Failure to innovate successfully in the past 0.95

Failure to innovate successfully in the past 0.59Poor understanding of customer needs and marketdynamics

0.87

Any Other 0.33Penalty for failure

0.76

UP

INTERNAL BARRIERS

AverageRating

Inadequate reward for Innovation

2.47

Skill shortages due to lack of effective in-house training programmes 2.01

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Lack of talent 1.99

Pressure for short-term results / lack of long-term (5 years or more)thinking 1.99

Lack of an organisational focus on innovation 1.97

Insufficient company budget allocation to innovation 1.92

Low levels of stakeholder involvement in the innovation process 1.84

Existence of traditional organisational hierarchies and functional silos 1.84

Poor understanding of customer needs and market dynamics 1.76

Failure to keep apace with technological changes in the industry

1.74

Lack of time 1.71

Penalty for failure 1.69

Resistance to change among other employees 1.66

Problems in measuring innovation activity & results 1.65

Failure to innovate successfully in the past

1.63

Resistance to change among top management 1.42

Any Other 0.50

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APPENDIX II

Regionwise Distribution of External Barriers that Act as Hurdles toInnovation in the Plant

NORTH

EXTERNAL BARRIERS Average

Any Other

3.83

Excessive government regulation in your industry 2.29

SOUTH

EXTERNAL BARRIERS Avera

Indequate tax incentives for investment ininnovation 2.60

Capital intensiveness of innovation in theindustry

2.35

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Inadequate tax incentives for investment in innovation 2.04

Capital intensiveness of innovation in the industry 1.80

Lack of cooperation with other firms in the industry

1.74Insufficient external pressure to innovate 1.70

Lack of effective collaboration between your industry 1.64

Long time taken for innovations to reach the market 1.62

Lack of information on technology 1.53

Difficulty in finding partners 1.46

No demand for innovation 1.40

Weaknesses in the current Indian IPR regime 1.30

industry

Excessive government regulation in yourindustry

2.24

Long time taken for innovations to reach themarket

2.18

Lack of effective collaboration between yourindustry

2.14

Insufficient external pressure to innovate 1.87

Lack of cooperation with other firms in theindustry

1.85





Any Other 0.67

EAST


Excessive government regulation in yourindustry

1.97

Capital intensiveness of innovation in the1 96

WEST

EXTERNAL BARRIERS A

Any Other

Indequate tax incentives for investment in

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pindustry

1.96

Insufficient exterl pressure to innovate 1.60

Long time taken for innovations to reach themarket

1.20


Lack of cooperation with other firms in theindustry

1.09


0.89


Indequate tax incentives for investment ininnovation

0.80

Weaknesses in the current Indian IPRregime

0.71


Any Other 0.00

Indequate tax incentives for investment ininnovation

Capital intensiveness of innovation in the industry

Excessive government regulation in your industry


Long time taken for innovations to reach the market

Lack of cooperation with other firms in the industry

Weaknesses in the current Indian IPR regime

Insufficient exterl pressure to innovate

No demand for innovation

Difficulty in finding partners

Lack of information on technology

UP


Excessive government regulation in your industry 2.45

Indequate tax incentives for investment in innovation 2.36

L k f i i h h fi i h i d 2 25

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Lack of cooperation with other firms in the industry 2.25

Insufficient exterl pressure to innovate 2.24

Capital intensiveness of innovation in the industry 2.24


Lack of effective collaboration between your industry 2.00


Long time taken for innovations to reach the market 1.95



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APPENDIX III

Government Policies in Different Sectors that Act as Hurdle to Firms’Competing Globally

Auto Components Electrical & Electronics

• Labour laws• Taxes and duties.• High Excise duties (sometimes 60%)• Licensing policies• No control on raw material prices

• Labour laws• High excise duties• High interest rate• Import duty• Freight Cost

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p• Complicated Import/Export Procedures• Reduction in import duty• Freight cost from Delhi to port is very high• Transit time between Delhi and port is very high•

Non Availability of skilled & unskilled labour with animplication to hire 70% local labour

• DPV is less• High bank interest rates• Import duty to be reduced further• Tax on employee to be reduced, so that he can earn more

and do more•

Multiple Tax Struture• Too many NOCs required for pollution & fire hiderant• Octroi/entry tax• Once excise compliance is done audit should be reduced• FTA policy - haste in FTA finalisation• Credit risk policies in export• Central excise policy - notification 11/2006 to adopt MRP

based assessable value for payment of duty, final productrate, abnormal increase by 40%

g• Sales Tax• CST + VAT• Inspector visits and corruption• Documentation for DEPB•

Aquiring new technology• Complicated IT laws for manufacturing units such as FBT

etc.• Excessive paper works for EOUs• Exchange rate fluctuations• EXIM Policies• Govt. Agency Clearance•

Extremely high taxes and harrassment by all govtdepartments• High cost of land• High Cost Of Power• High input costs both locally and internationally• Lack of clarity in rules leading to interpretation• Octroi is the main problem. Even after sale if we get the

product for repair, we have to pay octroi• poor infrastructure• Power Shortage• Procedural delays in arranging duty free licences for

infontmetl and permission from central excise forremoval of goods without payment and excise duty

• processing fees should be reduced• Strict compliance to central vigilance commission

circulars and scrutiny of all decisions by internalvigilance audit and cost of India audit

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Steel Forging & Casting

• Labour laws• Customs laws reducing speed of import and export• High cost of borrowing - including short repayment term

of loans

• Frequent fluctuation in Steel price• Excise duty• No benefits for new entrepreneurs (lack of awareness)•

State sales tax rules and procedures• High interest rates• Higher transaction costs• Control on major raw material price- like iron ore, coke

etc.

Food & Agro Processing Machine Tools• Labour policy• Food Law• Taxation & VAT• Octroi• Agricultural policy on procurement/ storing of wheat

• Labour Laws• Complexity in tax structure and high customs duty• Cost of power and interest is very high as compared to

China• Customs related problem

• Ayurvedic licence policy are very tough• BT Cotton Policy & issues relating to it• Delay in rebate• Excessive government control on all aspcets from raw

material cost to sale price• Exchange rate fluctuation• Excise duties

• Service Tax• Taxes on raw material• VAT• Availability of capital for investment and banking

procedures• Complex Procedures to be followed for 100% Eou• Govt. Policy on the waste material

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• Export Policy• Govt. is very supportive in all aspects• Govt. restrictions on sugarcane area, cane price• Service tax•

Sugar quantity release imports, export policies• Tax Exemption on improved product• Transit Trade• Transportation timing in Delhi• Wheat movement stocking• Wheat Production policy

• Lack of technical upgradation in knowledge• Purchase procedures• R&D and professional skills of staff• Road Permit system•

Sales tax• Steel & plastic prices are increasing• Separate laws for Big companies and Small Companies

Chemicals Engineering

• Govt. interference regarding labour laws• Higher rates of duty on packaging material imports• Lopsided duty structure - duty on raw materials higher

than finished goods• Import-Export Policies• Killing of unique value adding technological units by the

f l f l

• Labour laws• Complicated tax structure• Custom duties on raw materials

• Higher taxes (excise and VAT) inspite of wood savingalternative to improve environment

• Import duties (higher than most other coutries)

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financial institutions forcing units to close• Lack of efforts by govt. agencies to put unproductive

assets of thousand of crores of closed units to bring intoproductive stream

•Lack of information delivery mechanism by the govt.agencies to industry

• License to expand• Multiple taxes (entry tax, higher vat rates, current cst

regime)• Octroi on RM• Pollution norms•

SEZ policy of taxation on sale to DTA market makes usuncompetitive• Should support exports• Subsidy/concession policy of the govt.• Tax regulation relating to import of material for the

purpose of export

• ssi reservations• Wide fluctuations in prices of raw materials in

aluminium and steel• Advance licensing procedure•

Artificial pricing of diesel• Lack of monitoring of dumping by foreign company for

price & delivery competitiveness• Export obligation documentation to be simplified to

reduce indirect cost• Finance - very poor assistance to small• Input cost - raw material is costly than China•

inspection specifications• High interest rates• Lack of unified VAT makes our product more

competitive

Garments Pharmaceuticals

• Labour policy should be more flexible• Complicated tax structure• Custom duties & VAT

• Central excise and customs rules creating delays, hurdles• Rising RM Prices• Labour laws

• Complex documentation• Export incentives (DEPB) should be increased from

current 5% (11% in China)• Fiscal policy (High tax rate/vat)

• High rate of interest on capital• Infrastructural policy (Electricity problem/roads)• Liberalisation for import from China

O t i MRP

• Complicated tax structure - duplication of tax• Costly funds• Delay in FDA approvals• Drug price control order

• FBT• Follow up the Govt. organization for any Patent• Higher Cost of Fuel & No uniformity in gas price

I iti f t & O t i

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• Octroi on MRP• Environmental Policy• Exim Bank doesn't provide 100% funding of the L.C• No encouragement for human resource development

No suport for land development for park so as to providebetter infrastructure - attract buyers

• Rising prices of raw materials

• Imposition of taxes & Octroi• Less control on raw material inspection• Licensing Policy for new Patent, New Product Patent is

very difficult•

No local association/ union etc• Manufacturing restrictions in certain areas• Payments from Govt. is very slow• Price control order on drugs & procurement cost is very

high

Spinning Weaving • Excise and customs duty structure• Labour laws need to be reformed• Infrastructural policy• Too many legal formalities• Import/Export duties• Rising dye prices• Overall very favourable policies, as we are 100% export

unit• Check on low quality imports• Taxes are increasing the cost of production• DEPB• Power Cost

• Excise duties• Sales tax• Income tax• Too many formalities & approval in india, there are many

taxes• Raw Material Stability not in use• VAT, CST duties & levies are not refundable on time• Labour Laws• Dollar Value Regulation• Labour Policy• Export Limitation, Cotton export policy,• Labour Laws

• Capital Intensity and heavy capital requirement• Interest rates

• Lack of power regulation• Entry tax in our state for raw material• Higher rate of income tax on export earnings• Corruption

• Fringe benefit tax, which is unnecessary• Import Duties• Excessive labor wage• Jute packaging compulsion in india

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• Jute packaging compulsion in india• High rates of duties and taxes• Poor marketing support• Documentation in banks•

DEPB rate• Entry tax on procurement of yarn from out of state. It is

4% imposed by state govt.• Octroi imposed by state govt. on inputs which are sent to

out for job work as well as repair work• Maharashtra cotton procurement policy• lack of training institutes for workers in garment industry

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