Accenture Business Journal for IndiaThe Flexible Manufacturer in IndiaOutperforming competition by changing the rules

The Flexible Manufacturer in IndiaOutperforming competition by changing the rules

32

The world’s four biggest economies―the United States (US), China, Japan and Germany—account for 45 percent of the world’s gross domestic product (GDP). They are also home to manufacturing companies with massive scale—global giants. In 2012, these four nations together exported manufactured goods worth US$4.8 trillion—more than 80 percent of their total merchandise exports.

Today, China produces 725 million tons of steel, about half the world’s production and seven times more than the next largest steel producer. Six of the world’s 10 largest steel-producing companies are Chinese. Five of the 10

biggest semiconductor manufacturers are based in the US, accounting for 31 percent market share. Germany is home to two of the five largest manufacturers of wind turbines, and has more wind farms than second-placed US, third-placed Spain and fourth-placed Denmark combined. By contrast, India is home to few industrial giants, and manufacturing’s contribution to India’s economic growth has been relatively paltry. Compared with China and Germany, where more than two-thirds of exports are manufactured products, India’s manufacturing exports constitute just about a third of the total (see Figure 1 and Figure 2).

Figure 1: India lags behind world leaders in industrial output

INDIA

CHINA EXPORTS, 2012

GERMANY EXPORTS, 2012

CHINA GDP, 2012

INDIA GDP, 2012

GERMANY GDP, 2012

SIZE = US$2.2 TRN

SIZE = US$1.7 TRN

SIZE = US$8.2 TRN

SIZE = US$1.9 TRN

SIZE = US$3.4 TRN

SIZE = US$0.4 TRN

INDIA EXPORTS, 2012

WORLD LEADER

Figure 2: Manufacturing is an engine of export

77 MN TONSTEEL CHINA – 725 MN TON

1x 10x

210 MN TONCEMENT CHINA – 2 BN TON

10x1x

4.1 MN UNITSMOTOR VEHICLES CHINA – 19.2 MN UNITS

5x1x

605 MN TONCOAL CHINA – 3.6 BN TON

6x1x

Industry

Services

Agriculture

Industry

Services

Agriculture

Industry

Services

Agriculture

Manufactured Merchandise

Nonmanufactured Merchandise

All Services

Manufactured Merchandise

Nonmanufactured Merchandise

All Services

Manufactured Merchandise

Nonmanufactured Merchandise

All Services

6%8%

35%

31%

34%

86%

69%

45%

63%28%

9%

45%

56%26%

18%

10%

16%

15%

Sources: World Steel Statistics Data 2013, World Steel Association; USGS Minerals Information; International Organization of Motor Vehicle Manufacturers (OICA); Statistical Review of World Energy 2013, British Petroleum Sources: World Bank Open Data, UNCTADstat

The Flexible Manufacturer in India

Outperforming competition by changing the rules

4 5

But what, precisely, is flexibility in the context of manufacturing? We define flexibility as the ability to respond to changes in the business environment without increasing operational and supply chain costs, and with little or no delay in response time. For the shop floor, flexibility translates into the ability to deliver variable batch sizes of customized products in a timely and cost-competitive manner without compromising on quality. Flexible shop-floor setups can easily straddle the entire breadth of product types—from completely standardized to fully customized. They can also deliver all plausible batch sizes, from a single unit to a large order, without prohibitive cost and time implications (see Figure 4).

In an Accenture survey, manufacturing executives cited flexibility as the most important lever they plan to use to maintain or improve profitability.

Becoming flexible

CUSTOMIZED PRODUCT

STANDARDIZED PRODUCT

SMALL QUANTITY LARGE QUANTITY

Improving quality

Reducing labor costs

Reducing inventory levels

Reducing material cost

Figure 3: Manufacturers are limbering up

On the contrary, it is very hard to alter a large-scale operation’s shape or size once the operation has been established. Most large-scale manufacturers can efficiently deliver only a limited degree of customization for a large batch size. Businesses are realizing that to be flexible, they need to rethink their perceptions of scale. Having large scale and catering to smaller, customized demand will be next to impossible. But having flexible scale will let companies meet all kinds of demand. In fact, seven out of 10 manufacturers Accenture surveyed said that improving their operating model to achieve greater flexibility is a significant business priority (see Figure 5).

What’s holding India back?A variety of problems are preventing manufacturing companies in India from achieving global scale. For one thing, India has a much higher rate of inflation than other countries do. Costs of capital are also higher, and India faces tougher regulatory constraints. Finally, advantages that Indian companies have enjoyed from low-cost labor are fast fading, with labor costs rising rapidly in most industrial hubs across the country. In 2012, remuneration to employees was close to 9 percent of all business expenses in India, while in Germany it was only about 6 percent.

With these challenges forming the backdrop, the Indian manufacturing sector must find an alternative path to growth. Luckily, such an alternative exists, because large scale is going out of favor—for the first time since the Industrial Revolution. Instead, flexibility will offer a way forward.

Getting flexibleFlexibility on the part of manufacturers has never been more critical than it is today. Volatility in raw material prices, unpredictable exchange rates and unprecedented environmental disasters have disrupted global supply chains. Uncertainty about a macroeconomic recovery has dampened consumer confidence. Complexity and ambiguity surrounding technological disruptions and regulatory shifts across major global markets are making matters worse. Together, these characteristics have created a business environment marked by permanent volatility.

To survive in this arena, businesses must be lean and agile so they can respond swiftly to changes in demand and supply. Large scale can be a disadvantage because like unwanted flab, it can slow businesses down. Indeed, the benefits of being lean and agile, such as efficiency and cost benefits, are outstripping those previously associated with large scale.

The Accenture 2013 Global Manufacturing study reveals that in this age of permanent volatility, businesses around the world are placing flexibility at the top of their strategic priorities (see Figure 3).

Figure 4: A flexible operation easily adjusts to two criteria: quantity and customization

0% 20% 40% 60%

57%

35%

33%

31%

30%

WORK ORDERTYPE 3

WORK ORDERTYPE 1

WORK ORDERTYPE 4

WORK ORDERTYPE 2

FLEXIBILITY

6 7

In this regard, Indian manufacturers may have an advantage. Relatively unrestricted by the legacies of large scale, they have a greater opportunity to build flexibility into their operations than manufacturers in China or Germany do.

But achieving flexibility by optimizing a company’s operating model is easier said than done. Operating model strategies of the past that assumed predictable business cycles will no longer work well. Business leaders that were trained to navigate these cycles may miss their mark in volatile times. Processes and systems that were designed to achieve large scale and low cost will become irrelevant.

Digital technologies, such as advanced analytics, telemetry, industrial Internet cloud and mobility, can help in such times. These technologies are becoming increasingly important in manufacturers’ efforts to sense impending changes in their business environment, enable faster and better decision making, and create strong networks and relationships across stakeholders. Digital technologies can help build an ultraflexible, hyper-responsive operating model, fundamentally shifting the economics of production.

Indian manufacturers that embrace digital technologies to achieve flexibility should be able to contribute much more to the nation’s growth than they have in the past—without worrying about building large-scale operations.

The authorsSaurabh BhatnagarManaging Director, Resources Operating GroupAccenture, India s.x.bhatnagar@accenture.com

Manish ChandraManaging Director and Lead – Operations Strategy, Accenture StrategyAccenture, Indiamanish.chandra@accenture.com

Aarohi SenAssociate Manager – Accenture Institute forHigh Performance Accenture, India aarohi.sen@accenture.com

Figure 5: Companies see operating-model improvement as a priority

Very insignificant

Insignificant Neither significant nor insignificant

Significant Very Significant

29%

44%

24%

50%

Improving operating model as a business priority

40%

30%

20%

10%

0%2%1%

98

Disclaimer

This report has been published for information and illustrative purposes only and is not intended to serve as advice of any nature whatsoever. The information contained and the references made in this report is in good faith, neither Accenture nor any its directors, agents or employees give any warranty of accuracy (whether expressed or implied), nor accepts any liability as a result of reliance upon the content including (but not limited) information, advice, statement or opinion contained in this report. This report also contains certain information available in the public domain, created and maintained by private and public organizations. Accenture does not control or guarantee the accuracy, relevance, timelines or completeness of such information. This report constitutes a view as on the date of publication and is subject to change. Accenture does not warrant or solicit any kind of act or omission based on this report.

Scan to access key insights, infographics and videos anytime, anywhere.

For more information write to businessjournalindia@accenture.com

About Accenture

Accenture is a global management consulting, technology services and outsourcing company, with approximately 319,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

Copyright © 2015 Accenture All rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.