In times when market shifts and customer preferences are constantly challenging the Indian manufacturer, supporting processes such as F&A, Procurement & Logistics need to be aligned in a manner to deliver beyond the traditional value add for the organization. This whitepaper emphasizes the best approach to manage these expectations and remain sustainable and competitive.
The Indian manufacturing industry has grown steadily over the past few years.
With recent announcements from government for the “Make in India” initiative and the expected increase in contribution of manufacturing to the GDP in coming years, the Indian manufacturing sector has started to focus on innovation and become more competitive to meet global market demands. While there have been significant amount of initiatives to make the manufacturing process more efficient, to reduce time to market of products and to utilize advance technologies to reduce manpower, there has been a low focus toward the non-core supporting processes such as F&A, HR, Procurement, and Legal, which also serve as key supporters to the sustainability of the industry. Consolidation of the non-core processes under a single unit, also commonly known Shared Services, has witnessed a great amount of success in the manufacturing sector globally; however, its adoption remains low within the Indian manufacturing context.
This paper focuses on the best approach to utilize Shared Services for Indian manufacturing companies and also addresses the best approach to adopt when setting up a Shared Services Center (SSC).
Growth of the Indian Manufacturing
A published report by the India Brand Equity Foundation toward the end of 2016 highlighted that the manufacturing sector has tremendous potential of reaching a market size of $1 trillion by 2025. Coupled by strong support from the government in terms of initiatives, the sector has a target to contribute 25 percent of the GDP by 2025. Currently, the GDP contribution of this sector stands at 16 percent. Furthermore, in 2015, the UNIDO ranked India at the 6th position, clearly moving 3 places up on the charts from the previous year. However, 2016 was not very positive for the manufacturing sector as there was a decline in the overall manufacturing output in Q1 by 2.2 percent. In Q2 and Q3, the industry again saw a marginal decline of 0.7 percent and 0.9 percent, respectively.
In February last year, the Make in India week saw a commitment of INR 15.2 trillion in terms of investments. UNIDO also has marked India as a potential hub for hi-tech manufacturing. With robust growth in the manufacturing sector, there also lies a responsibility for manufacturers to increase production, improvise quality of finished goods, and ensure customer satisfaction. The launched initiatives primarily focus on providing the much needed boost in terms of regulation, infrastructure, skill development, technology, availability of finance, and other necessities to put the sector on a fast track. However, there are other factors which cannot be ignored, such as the continued existence and dependency on manual labor and low technological penetration in these rapidly changing economic times.
Innovation in Manufacturing
Some of the most noted and acclaimed innovations in manufacturing have been to lower cost of production, improve time-to-market of goods, removal of process bottlenecks whilst improving the quality of the finished goods, and supplying them at competitive rates to the end consumer. In addition, there are also subtle investments which a manufacturer should ideally embrace in order to tackle the highly competitive and rapidly changing environment, which is bound to yield a good return on investment and is also highly sustainable and ever evolving. These challenges can be overcome by leveraging the power of Shared Services.
Shared Services in Manufacturing
Shared Services have been in existence for almost two decades. What commenced initially as a simple consolidation exercise to curtail costs, is now witnessing the highest level of technological adoption in terms of the innovative ways services are delivered from a Shared Services organization or function. Today, many concepts from manufacturing are utilized in managing and growing Shared Services operations. Terms such as process standardization, adoption of lean, elimination of non-value add activities, and bundled with Six Sigma best practices are some of the primary concepts that drive the Shared Services industry. However, the manufacturing sector has globally been the laggard in terms of adoption of this concept. In the yesteryears, many organizations would relate to the example of the GE-GENPACT creation and spin-off to build a case for Shared Services, irrespective of the sector they operate within; however, from an industry specific context, today we commonly see BOSCH leading the manufacturing sector in terms of Shared Services.
Mining the Value of Shared Services to the Indian Manufacturers
A manufacturing organization’s performance is primarily evaluated based on their financial and customer parameters. Below are a few standard examples for measuring key performance indicators (KPIs) on these two parameters.
Any manufacturer will have the above data readily available. What changes the game is how the above data link to the organization’s current and past performance and identification of areas of improvement. The reasons as to why some metrics are not on par with industry standards and what should be done to improve them are where the value addition lies and hence the need to have an SSC becomes justified. Providing end-to-end visibility of backend operations measures how the business will continue to evolve and sustain in a competitive environment.
Creation of a consolidated center to deliver extensive non-core process related services to the core business still seems to remain a low priority for manufacturers. One major reason that can be attributed to this is the model of Shared Services was predominantly based on an offshoring or outsourcing concept, wherein non-core processes would be delivered from a low cost destination. However, this equation does not hold relevance and value within the Indian manufacturing context, as cost of talent is not really a vital parameter to consider for setting up Shared Services within India. It is necessary to evaluate the other emerged models of Shared Services that can be applicable.
Shared Services Models
In this type of a model, a manufacturer can completely outsource the following processes:
These are usually executed by a single third-party vendor, who has deep expertise in the above mentioned processes, has systems, policies, procedures and best practices in place and access to a capable workforce, backed by robust technological capabilities to execute the processes in a stipulated timeframe.
Benefits of the Model
When a manufacturer decides to outsource its non-core processes, they either pay a fixed cost on a monthly/yearly basis to the vendor, or deploy a pay-per-use model which allows them to only pay for the services consumed. For example, if a third party vendor processes 100,000 invoices per month for a manufacturer, they would pay for the total number of invoices processed.
Drawbacks of the Model
An organization will have to monitor the service provider on a timely basis to evaluate the efficiency of the invoices processed, carry out corrections on invoices, and adhere to the contract. In cases where there is a mismatch or error, the organization might/will have to pay an additional fee. In addition, this can cause a delay on the agreed SLA levels between the organization and the service provider. This can also become cumbersome over a period of time, as the organization expands its operations, and may also require additional vendors to manage the processes, whereby creating a whole new layer of a maker & checker and the additional responsibility for coordination between vendors, in turn raising costs for the manufacturer rather than gradually reducing them over a period of time.
In this model, a bifurcation of core and non-core processes is carried out, wherein all those processes that are standardized, which are repeated in nature, have pre-defined SLAs and other set criteria are outsourced to a vendor. The remainder of the processes, which require special skills, such as negotiation, timely intervention of resources, based on customer demands/feedback and are strategic in nature, are managed by a team of in-house resources, as these are critical to customer, quality, and business.
Benefits of the Model
Organizations can leverage this model to gain cost savings in terms of manpower and also in parallel, embark on initiatives to standardize other in-house processes over a defined period of time, and also outsource them.
Drawbacks of the Model
Despite this model being used in many Shared Services setups today, within the Indian context, an organization must need to be cognizant of the fact that processes have to gradually improve, or become candidates to be deployed under the outsourced processes. This requires maintaining in-house processes on par with those outsourced to the third party, or achieve the level of automation and standardization as per industry standards. In many cases, there is a lack of alignment, which leads to more challenges in future.
In this model, everything is managed in-house, either through re-allocation of existing staff under the Shared Services department, or through infusion of new specialized skilled resources to manage the processes.
Benefits of the Model
The organization has complete control on costs, and clear visibility of the growth trajectory of the Shared services setup. Based on the organizational priorities, they can accordingly decide to accelerate or decelerate their scalability of processes.
Drawbacks of the Model
Cost saving, which is primarily the focus of Shared Services, becomes diluted to a certain extent, as cost savings in terms of FTE reduction becomes nullified. As an organization’s Shared Services ramps up, the cost of technological advancements should also be accounted against the initial setup plan.
Ideal Approach for Indian Manufacturers
Disruptive is the Way to Go
India has to approach Shared Services with a radical mind-set. The realm of Shared Services has grown drastically over the years. The need of the hour is to commence the transformational journey with a disruptive agenda in mind. Competing on a global scale requires not only being innovative, but also requires extensive preparedness from the supporting processes to manage growth and demand. In order to cater to this requirement, an integrated approach is required, wherein every department of the Shared Services prioritizes the “customer” irrespective of whether internal or external. Having an in-house Shared Service Model will be most relevant for the Indian context.
The Right Composition of Shared Services
Flexible, Lean, and Scalable
In order for a manufacturer’s Shared Service setup to be disruptive, it is critical to be flexible. Similar to the way production is managed and altered to meet demands of the end consumer, a well-defined SSC should be adaptable to manage high volumes, have the ability to identify potential opportunities in terms of expansion of services, and have the appetite to integrate additional processes within their existing scope of service offerings. Having a flexible and lean Shared Services simply implies that the SSC should be a specialized unit, which delivers a high value outcome, or if put in simpler terms, have the ability to “Punch above Their Weight”. Such a setup eventually will also have the ability to scale up or down, based on market trends.
Embarking on the Journey
It is commonly said that “A journey of a 1000 miles begins with a single step” In most cases, the primary reason to adopt or setup an SSC is a cost perspective. Most business cases also tend to reflect cost savings as a justification for setting up of the same. However, in a country such as India, where local companies have only seen value in function specific (such as HR, IT, Finance) Shared Services, a multi-function model may sometimes may feel a far-fetched dream. Many organizations begin the initial journey, but fail to prioritize Shared Services. As a result, the journey loses traction, and along the journey, Shared Services finds itself amongst the least prioritised projects and eventually most projects get shelved. In some cases, the technology ramp up (ERP, CRM implementation and BPM tools) are also not in line with the requirements of the Shared Services, and hence destined toward a path of failure. In order to ensure commitment, continuity, and viability, there are three aspects which need to considered at all times before beginning the journey, namely:
- Management Buy-in and Support
- Change Management
- Project Execution and Management
Management Buy-in and Support
For any successful project, there needs to be continual support and strong commitment from the senior management of the organization. As most projects are driven by a top-down approach, it is vital that the commitment, engagement, and on-going support are always driven from them, as they are in a position to steer the engagement in a successful direction, either through an authoritative approach or facilitate the same through democratic leadership skills. As a Shared Services engagement will span across an array of processes and functions, they are in a better position to manage the complexities that may arise along the course of the implementation.
In every organization, any new large project or transformation program is met with some type of resistance and apprehension at every stage. It is a myth to assume that people will eventually be accustomed to a new way of working. The domestic manufacturing sector has been known for their low risk appetite, particularly toward large transformational projects which span across functions and processes. It is vital that senior management engages with all levels of employees to keep them abreast of the changes and play the role of mentors and manage the resistance to change with a tailored approach that best suits the culture of the organization.
Project Execution and Management
Every Shared Services project encompasses many processes, people, and technologies. Such a project needs to be governed extensively in a manner that ensures success at every stage or milestone. Some Shared Services projects are managed on an activity basis or measured on a milestone achievement basis. A robust structure to manage complexities, stakeholder impact, and creation of risk assessments is necessary to ensure the continuity of the project. Communication with regards to progress, hurdles, escalations, and overshooting of costs visibility is a necessity at all management levels. Timely intervention and decisions are necessary to ensure project success.
Shared Services have matured beyond delivering value beyond cost arbitrage. They are more holistic and strategic in nature, and to evaluate their success solely on a cost saving benefit today would be undermining their viability and capability. Shared Services have access to a vast amount of data, which upon crunching can assist to identify a variety of patterns related to customers and supplier management, and also deliver strategic insights from a financial perspective as well as provide an overview to the overall impact on the frontline production. Adopting Shared Services allows an organization to consolidate and create a common framework which can be replicated when a manufacturer expands operations beyond local borders. As Shared Services are ever evolving, they are extensively in the process of improvising and enhancing the way they operate, in order to create more value to the organization. Shared Services leaders today have a seat in the board room and are proactively involved in the annual planning meetings. Hence, embracing the Shared Services journey with an objective to support and improve the overall business is vital and the need of the hour for Indian manufacturers.