Saturday, March 23, 2013

Accidents are cheap and safety expensive

There was a blast in the Tarapur unit of Aarti Drugs Limited at the Tarapur MIDC yesterday. Five young people lost their lives. It seems these young people were screaming with pain for 2 - 3 hours before giving up the struggle.

http://timesofindia.indiatimes.com/city/mumbai/5-dead-as-reactor-blast-brings-building-down/articleshow/19137728.cms

This is not the first incident of an accident at Aarti Drugs Limited. As recent as October 2012 a major boiler blast in the Dombivali unit of Aarti Industries had led to three people being hospitalised and more than 125 others treated for vomiting, burning eyes and breathing problems. Coming back to Tarapur, this is just one of the many incidents which have been reported from Tarapur MIDC. In December 2012 a reactor blast in Sunrise Process Equipment had led to injury of four people. In September 2011 a hydrogen sulphide gas leakage at the Sequent Scientific plant at Tarapur had caused death of 4 employees.

Tarapur is not a town secluded from the mainstream. It is less than 100 kms away from Mumbai and has the Atomic Power station. The industrial town also boasts of organisations like Tarapur Management Association (TMA) and Tarapur Industries Manufacturers' Association (TIMA). Such frequent accidents do not show these organisations, factory owners and professionals working in Tarapur in a positive light. 


Why is it that the accident rate is so high in the Tarapur MIDC and also a few select companies like Aarti Industries? The only possible reason is that it is cheaper to manage accidents and more expensive to prevent them.

The low probability factor

Human minds are known to ignore all risks that have a very low probability of occurrence. That is why people avoid wearing helmets and seat belts. Even though the impact of a traffic accident is high, possibly death, the extremely low probability makes the human mind think - it can't happen to me. This is precisely why these firms, their owners and the senior professionals have a lax attitude towards accidents.

What they fail to understand is that a series of low risk situations would lead to a high risk probability. For example, assume that one process has a probability of failure as 1%. If five such processes are kept in a series, the cumulative probability of failure would be higher than 60%. This is a very simple probability calculation and I do not think that the firm owners are oblivious of this fact.

Accident prevention is a mindset. It starts with not tolerating even the slightest deviation from the operating norms. Equipments have to be maintained as per some fixed processes. Piping and valves have to be changed routinely. People working in the plants have to be trained continuously for safety procedures. But, all these activities are very expensive. It is probably easier to 'manage' a boiler inspector rather than shut the firm and have a honest boiler inspection. Same could be the case with pollution inspectors who are generally 'considerate'. As it is, it very rare for a business owner to get jailed for such acts of wilful murder.

Is it Tarapur and Aarti alone?
Of course not. The lax attitude towards industrial safety seems universal in India. A major automobile OEM has different safety standards for its own and contract employees. It is rare to see a worker on scaffolding in industries and around new constructions wearing safety belts. There are many offices in Mumbai where adequate fire protection  measures are avoided and extinguishers even when present are past the due date.

May be, the government authorities who are responsible to monitor and the business owners who are responsible to provide have both enough incentives to not do their jobs. At such times it is the professionals and professional organisations (like TMA and TIMA) who are responsible towards highlighting lax procedures and forcing firms to implement safety procedures. Businesses surely have to run to create profits and every action of businesses would be directed towards creating higher returns. However, human life should be above all such calculations. It might be okay to work around excise, transport and all such officials. But, anything that could even have the smallest probability of impact on human life must be non negotiable. 

Disclaimer
There of course will be some exceptions. I am sure that some plants in Tarapur and such industrial clusters have a very elaborate safety mechanism. But at the same time, there would possibly be a large number who would consider safety as an unnecessary burden. The article is directed towards these firms.

I do not have data of accident rates at other locations and I consider even a single occurance of such accidents as an untoleratable act.

Wednesday, March 20, 2013

Question of Scale in Indian retail

An issue very close to my heart has brought me back to blogging. It also gives me an opportunity to say - "I had told you this". It was the news in the Economic Times dated 19th March, regarding Office Depot and Staples putting a halt to their India plans.

http://economictimes.indiatimes.com/news/news-by-industry/services/retail/office-depot-staples-concede-fight-to-kiranas-pack-up-retail-plans/articleshow/19055125.cms

 It is very clear that the large format retailers have a significant overhead and would need a huge scale to be able to sustain their business model. The MD's salary for Shoppers Stop is around 0.15% of the total revenue. For Walmart, this percent is 0.000045%. Well there are lots of difference between WalMart and Shoppers Stop, but the differences in the proportion mentioned above are too large to be ignored. (WalMart does not reveal the salary expenses and based on newspaper reports the remuneration for Mike Duke has been assumed to be 20 million USD). To put this into perspective roughly one third the gross margins (not profits) of one Shoppers Stop store are expnesed in paying the MD's remuneration. With only 53 stores this is way too much money spent on one person. (The expenses of Shoppers Stop considered for Gross Margin inclde the COGS and the employee costs)


According to a report, 90% of Americans have a WalMart within 15 minutes of their house. It is only with this huge scale and the superlative use of technology that WalMart makes the money that it does. For a population around 2 million, Dubai has six super stores of Carrefour. Thus there is one Carrefour for every three hundred thirty three thousand (333,000) people. Mumbai metropolitan area which is about the same size as Dubai and a population of around 20 million has six Big Bazaar stores. This makes it around one Big Bazaar store for 3.3million people.

Again, it is debatable if Mumbai and Dubai can be compared. The idea here is to indicate the stark difference and the lack of scale among Indian retailers. Overheads like salaries, IT expenses, etc are not very linear to the scale of Operations. Shoppers Stop is not even 0.1% of the size of Walmart in terms of revenue, but the compensation to the Shoppers Stop MD is around 3% of the WalMart CEO compensation.

Unless these large retailers in India plan for scale, it will be impossible for them to sustain. They have to have planned growth that has a significant multiplier effect to the number of stores. Shoppers Stop has managed 53 stores in 20 years, and in ten years Big Bazaar has managed 214 stores. That they still have such a small footprint does not seem right. Walmart has 3000 stores in the US. Even Toys "R" Us has around 875 stores in the US. Tesco has 471 super stores in UK which is 80% of the size of Maharashtra. In all formats combined Tesco has almost 3000 stores in the UK. France, which is just around twice the size of Maharashtra has 1200 super and hyper markets of Carrefour. Across formats the number of stores is more than 5500. An Asian country like Taiwan, which is around 12% of the size of Maharashtra has 70 Carrefour stores.

It is clear here that scale is an essential component for survival in organised retail. And, this scale is more about the stores in the same retail format than across formats Given this common knowledge the behaviour of Indian retailers is surprising. McDonald's India has managed to create around 250 restaurants in 15 years and now they plan to double the number in West and South India in the next two years.The message here is that it is okay to have a lower number of outlets now, but without a significant increase in capacity the survival of the organised retail market in India is questionable.