" Indian organised retail is more unorganised than the unorganised retail." I love this statement. and though it may seem shocking it is 100% true. The retail industry has seen reckless expansion. The players have multiple formats of stores and are trying to sell everything to everyone. This goes against the basic tenets of sound SCM. That the organised retail industry in India is not making money is not at all a surprise.
In order to survive from their own wayward ways, the retailers are indulging in further senseless activities. Have a look at this article -
http://epaper.timesofindia.com/Repository/ml.asp?Ref=RVRELzIwMDkvMDgvMTAjQXIwMDEwMA==&Mode=HTML&Locale=english-skin-custom
Of course good capacity utilisation is good. And yes, selling more private labels also help. This will of course save a few crore rupees for everyone. But, was this really part of the problem? The problem with the organised retailers is a top heavy structure (super high man power costs) and a knee jerk reaction based supply chain design. None of these factors are getting addressed by the actions the article suggests. Small savings are not going to save the ship from sinking.
Indian retail industry had a golden chance. They could have used all the learnings of the American and European retail industry, coupled it with local knowledge and avoided the growth pangs. But they seemed to have ignored everything. They started with a bank with an inadequate infrastructure and an ill trained staff. Instead of first creating the systems, the retailers progressed with short cuts. With such management bad results are definite.
Wednesday, August 12, 2009
Monday, August 10, 2009
This is how SCM works
With the prices of Oil flowing down, the refineries have reduced their output. Reliance in India is a major refinery that has also taken a massive cut. They use chlorine as part of their process. Reduction of refining has meant a reduced demand for chlorine. A huge quantity of chlorine that would otherwise be used up in the refining process was thus diverted to the open market.
With an excess of chlorine in the open market the prices of chlorine went down. In order to control the prices, the manufacturers of chlorine reduced their production. This is a simple standard story till here. Chlorine manufacturing has a by product - caustic soda. This is used by a lot of industries to make many other products. With reduced chlorine production, the caustic production also reduced. However the caustic demand was still the same. This caused the caustic price to jump up.
Thus while we have oil prices coming down, the prices of caustic products and its allied industries have gone up. Every product in the supply chain has some connections and not every connection is direct. Complicated relationships may cause surpirsing behaviour in the movement of prices of seemingly unrelated commodities.
With an excess of chlorine in the open market the prices of chlorine went down. In order to control the prices, the manufacturers of chlorine reduced their production. This is a simple standard story till here. Chlorine manufacturing has a by product - caustic soda. This is used by a lot of industries to make many other products. With reduced chlorine production, the caustic production also reduced. However the caustic demand was still the same. This caused the caustic price to jump up.
Thus while we have oil prices coming down, the prices of caustic products and its allied industries have gone up. Every product in the supply chain has some connections and not every connection is direct. Complicated relationships may cause surpirsing behaviour in the movement of prices of seemingly unrelated commodities.
Profit from manufacturing knowledge
The Boeing Co is planning to invest in India - in the form of research centres and manufacturing of spares by tying up with firms like L&T etc. They are doing this to target the defence and commercial aerospace market here. Look at this story in Business Standard - http://www.business-standard.com/india/news/boeing-to-replicate-us-business-structure-in-india/366477/
There are three straight plausible reasons -
1. It could seem to be a magnanimous act of a company developing local businesses.
2. Strengthening its appeal (to sell in India) by having local Indian partners
3. Preempting laws that would force local partnerships for such large contracts.
I believe there is a larger business sense in this. Ideally all manufacturing should be as localised as possible. There is no point of Indian iron ore being shipped to Japan and US and then returning to this country in the form of turbines. More so when it is know that heavy engineering items do not enjoy the economies of increasing the scale of production. And, still more so when it is known that there is a heavy variation in the specific nature of these goods produced.
Instead of producing it themselves companies like Boeing could tie up with local companies. Boeing here would not earn from manufacturing, but would earn a substantial revenue from their knowledge sharing. Per unit, this contribution (= unit sales price - unit variable costs) could be lesser than if they could have shipped the product from United States. But making in the local country would reduce costs (and price), substantially increase the demand and the resulting total contribution would be significantly higher.
The waste of intercontinental transportation would be totally avoided. That the company gets a better image as a responsible player (employing local citizens), etc. would be a very good and desirable by-product!!
There are three straight plausible reasons -
1. It could seem to be a magnanimous act of a company developing local businesses.
2. Strengthening its appeal (to sell in India) by having local Indian partners
3. Preempting laws that would force local partnerships for such large contracts.
I believe there is a larger business sense in this. Ideally all manufacturing should be as localised as possible. There is no point of Indian iron ore being shipped to Japan and US and then returning to this country in the form of turbines. More so when it is know that heavy engineering items do not enjoy the economies of increasing the scale of production. And, still more so when it is known that there is a heavy variation in the specific nature of these goods produced.
Instead of producing it themselves companies like Boeing could tie up with local companies. Boeing here would not earn from manufacturing, but would earn a substantial revenue from their knowledge sharing. Per unit, this contribution (= unit sales price - unit variable costs) could be lesser than if they could have shipped the product from United States. But making in the local country would reduce costs (and price), substantially increase the demand and the resulting total contribution would be significantly higher.
The waste of intercontinental transportation would be totally avoided. That the company gets a better image as a responsible player (employing local citizens), etc. would be a very good and desirable by-product!!
Thursday, July 30, 2009
New auto factories?
This is a clear proof that financial heads still rule the automobile companies. They have been very successful in taking their companies' towards financial disasters and have not seemed to have learnt anything out of it. Check this link
http://online.wsj.com/article/SB124884028240989277.html?mod=googlenews_wsj#articleTabs%3Darticle
In spite of the existing recession and the low capacity utilisation of the auto industry, Honda and Nissan have announced setting up of new plants in China. The article says that they are doing this to end the slump. Wow! Ever heard a dietitian tell her obese client to eat more? That is what is exactly happening here. Logically the move makes no sense. But finance has nothing to do with logic.
The way I see it, setting up new plants in China to sell cars in China will impact the transportation costs. Instead of importing vehicles from Japan or any other part of the world, the cars can be made and sold locally. They would also benefit from the low labour rates in China. Wonderful - the cost per car comes down. But, what about the capital cost of setting up the new plant? Well, that could very easily be engineered to reflect as depreciation at a low level. This way, the Chinese venture would easily show profits. And the existing plants? Again, the finance wizards are sure to have done something here also. They would probably defer the depreciation for the existing plants or hive them off as a separate company and ensure that the parent company 'shows' profits.
The first thing that makes me sad is that banks do not seem to realise this game. They seem to merely look at ratios and freely lend to companies. So, an over leveraged company can easily pass of its debts to another subsidiary and present themselves to banks for new loans. And, most of these companies do get the new loans they had applied for.
The worse thing is that the manufacturing companies themselves do not recognise their follies. Sometime everything is going to catch up. The recession is here and nothing has happened to make it go away. Some people never seem to learn.
http://online.wsj.com/article/SB124884028240989277.html?mod=googlenews_wsj#articleTabs%3Darticle
In spite of the existing recession and the low capacity utilisation of the auto industry, Honda and Nissan have announced setting up of new plants in China. The article says that they are doing this to end the slump. Wow! Ever heard a dietitian tell her obese client to eat more? That is what is exactly happening here. Logically the move makes no sense. But finance has nothing to do with logic.
The way I see it, setting up new plants in China to sell cars in China will impact the transportation costs. Instead of importing vehicles from Japan or any other part of the world, the cars can be made and sold locally. They would also benefit from the low labour rates in China. Wonderful - the cost per car comes down. But, what about the capital cost of setting up the new plant? Well, that could very easily be engineered to reflect as depreciation at a low level. This way, the Chinese venture would easily show profits. And the existing plants? Again, the finance wizards are sure to have done something here also. They would probably defer the depreciation for the existing plants or hive them off as a separate company and ensure that the parent company 'shows' profits.
The first thing that makes me sad is that banks do not seem to realise this game. They seem to merely look at ratios and freely lend to companies. So, an over leveraged company can easily pass of its debts to another subsidiary and present themselves to banks for new loans. And, most of these companies do get the new loans they had applied for.
The worse thing is that the manufacturing companies themselves do not recognise their follies. Sometime everything is going to catch up. The recession is here and nothing has happened to make it go away. Some people never seem to learn.
Cheaper way to get energy efficiency
Energy efficient processes have for long been peddled as expensive applications with high pay back periods. The manufacturers of such devices have always lobbied for government support in the form of lower taxes and support. They would then devious devious spreadsheets and use novel jargons to justify and promote their products. Somewhere this is what has prevented these manufacturers from making their products mass based.
Check this link
http://www.fastcompany.com/blog/ariel-schwartz/sustainability/clayton-homes-brings-energy-efficiency-modular-design-multi-famil
A company is designing new homes that are supposed to be energy efficient. They would save the user around USD 40 per year in terms of energy costs. Most important part, they are also cheaper than the regular homes.
This is what the energy efficient products should be. Their capital cost should be at least equal, if not lower than the regular products they seek to replace. That is the only way they are ever going to build up some mass appeal. Rather than using 'clean energy' as a marketing pull they should use the plain simple total cost of ownership concept.
Check this link
http://www.fastcompany.com/blog/ariel-schwartz/sustainability/clayton-homes-brings-energy-efficiency-modular-design-multi-famil
A company is designing new homes that are supposed to be energy efficient. They would save the user around USD 40 per year in terms of energy costs. Most important part, they are also cheaper than the regular homes.
This is what the energy efficient products should be. Their capital cost should be at least equal, if not lower than the regular products they seek to replace. That is the only way they are ever going to build up some mass appeal. Rather than using 'clean energy' as a marketing pull they should use the plain simple total cost of ownership concept.
Sunday, July 26, 2009
Toyota closing the NUMMI plant
It seems that after the pull out of GM, Toyota is considering 'closing' the NUMMI plant. See the link.
http://www.nytimes.com/2009/07/25/business/global/25toyota.html?_r=1&hpw
The article says it all actually. Workers have willingly given suggestions because they have been guaranteed jobs. And when one facility is closed the motivation in others is surely going to take a hit.
My take is that there is something more than what is in print in this case. I still feel that Toyota can definitely bear the loss making plant for around a year at least. May be this is a ploy to get the unionised workers to the bargaining table. Maybe it could be to prompt the government to dole out sops.
That the plant was a joint venture with GM, and it survived so long is itself a surprise in a way. GM and Toyota have totally different cultures. Now with GM gone, Toyota should have been very happy. So, this announcement of 'closing' comes as a surprise. Somehow I cannot see this happening. We can wait and watch, the drama should climax soon.
http://www.nytimes.com/2009/07/25/business/global/25toyota.html?_r=1&hpw
The article says it all actually. Workers have willingly given suggestions because they have been guaranteed jobs. And when one facility is closed the motivation in others is surely going to take a hit.
My take is that there is something more than what is in print in this case. I still feel that Toyota can definitely bear the loss making plant for around a year at least. May be this is a ploy to get the unionised workers to the bargaining table. Maybe it could be to prompt the government to dole out sops.
That the plant was a joint venture with GM, and it survived so long is itself a surprise in a way. GM and Toyota have totally different cultures. Now with GM gone, Toyota should have been very happy. So, this announcement of 'closing' comes as a surprise. Somehow I cannot see this happening. We can wait and watch, the drama should climax soon.
Monday, May 11, 2009
How the growth comes
Growth actually comes only when the consumers buy more products. With the population increasing at a steady rate, higher rate of money growth ensures that people buy more. It is this increased propensity to consume that creates overall growth. We would need more electricity, more turbines and more mining. So, if the consumer spend does not increase, and assuming that there is no existing unfulfilled demand, any other indicator measuring industrial growth would be pure a pure illusion.
Check this link -
http://www.hindu.com/2009/05/10/stories/2009051055611400.htm
In a survey conducted by CII for March April 2009, they have said that there is a slight improvement in the manufacturing sector. They have created some categories like negative, moderate and high growth and have said that most of the sectors have inched up in the March April period.
For first, the measures of classifying industries in the three segments have not been specified. I am sure that the survey must have had some measures, but the CII press release or the reporter, assuming a reader of limited intelligence, spared him of details. That these details would have allowed him to make his own unbiased judgement is a different story.
Inn many cases many surveys with an aim of proving growth. Their aim is of course something very noble - maybe to lead to an increase in the sentiment. They use, abuse and twist standard measurements to prove the hypothesis that they had started with. This is a major reason to give categorical data and avoid specifying the survey method and assumptions in reports. The company chieftains having an access to the complete report are of course too busy to go in to the nitty gritty issues.
As far as growth is concerned, without an increase in consumer spending all growth would either be for two reasons -
1. A buildup of inventory
2. Data / Method manipulation
An inventory buildup is nothing but postponing the slowdown. Besides blocking capital, it could have disastrous results of building up stocks that may not sell. Data and method manipulation is like a self fulfilling prophecy. It keeps the firms happy till the time they suddenly have to shut shop. This may be partly due to the psychological behaviour that says that humans create self belief worlds to avoid recognising situations that are potentially dangerous.
A good measure to measure the automobile sector growth would be to trace the out flow of auto loans issued by the finance companies. Finance industries are highly regulated and getting this data would not be a problem. Measuring gowth on the basis of factory dispatches would be skewed by the change of pipeline inventories with the dealers.
In all this circus I can conclude that companies are intent to hide the real growth or fall. They use selective measures at different points of time to prove the point they want to prove. Maybe in some other post I will discuss the motivations for this.
My simple prescription - macro indicators like growth can be measured by very simple and straight indicators. To make real use of the published growth indicators it is very important to investigate the method used and the assumptions. Any jubilation or a planned course of action without this simple probe would be a dangerous step.
Check this link -
http://www.hindu.com/2009/05/10/stories/2009051055611400.htm
In a survey conducted by CII for March April 2009, they have said that there is a slight improvement in the manufacturing sector. They have created some categories like negative, moderate and high growth and have said that most of the sectors have inched up in the March April period.
For first, the measures of classifying industries in the three segments have not been specified. I am sure that the survey must have had some measures, but the CII press release or the reporter, assuming a reader of limited intelligence, spared him of details. That these details would have allowed him to make his own unbiased judgement is a different story.
Inn many cases many surveys with an aim of proving growth. Their aim is of course something very noble - maybe to lead to an increase in the sentiment. They use, abuse and twist standard measurements to prove the hypothesis that they had started with. This is a major reason to give categorical data and avoid specifying the survey method and assumptions in reports. The company chieftains having an access to the complete report are of course too busy to go in to the nitty gritty issues.
As far as growth is concerned, without an increase in consumer spending all growth would either be for two reasons -
1. A buildup of inventory
2. Data / Method manipulation
An inventory buildup is nothing but postponing the slowdown. Besides blocking capital, it could have disastrous results of building up stocks that may not sell. Data and method manipulation is like a self fulfilling prophecy. It keeps the firms happy till the time they suddenly have to shut shop. This may be partly due to the psychological behaviour that says that humans create self belief worlds to avoid recognising situations that are potentially dangerous.
A good measure to measure the automobile sector growth would be to trace the out flow of auto loans issued by the finance companies. Finance industries are highly regulated and getting this data would not be a problem. Measuring gowth on the basis of factory dispatches would be skewed by the change of pipeline inventories with the dealers.
In all this circus I can conclude that companies are intent to hide the real growth or fall. They use selective measures at different points of time to prove the point they want to prove. Maybe in some other post I will discuss the motivations for this.
My simple prescription - macro indicators like growth can be measured by very simple and straight indicators. To make real use of the published growth indicators it is very important to investigate the method used and the assumptions. Any jubilation or a planned course of action without this simple probe would be a dangerous step.
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