Winning Manufacturing Strategy and Indian Manufacturers

The latest issue of Strategy and Business has an article by William J. Holstein ‘Six Keys to a Winning Manufacturing Strategy’ I wish Indian manufacturing sector took some lessons and go global in scale and profitability without raising constant alarm of the Chinese wolf and looking to the government to provide relief. I would have loved to see M&M agricultural equipment division as the largest in the world. It must focus on the need of agricultural equipment of the Indian farmers who look for robust simple products, easy finance and ‘Nano’-price. With many from the rural area moving to urban workplaces, the farming will require more mechanization, even if some may keep on talking against it. Many a rural households will very soon not be having the manpower to milk the cows and buffalos. Simple equipment designed to meet local requirement will be essential. Trained technocrats to design and develop the equipment needed must support grassroots innovations.

Deere & Company, Caterpillar, Honeywell, and United Technologies are just some of the companies in US that have defied long-held nostrums about the death of American manufacturing by achieving double-digit sales increases. Deere has major plants in Brazil, India, and China, as well as in Mexico, France, and Germany. With 50,000 employees, nearly half located outside the United States, Deere manufactures its John Deere agricultural and construction equipment in 15 countries. Its total sales in 2007 were US$24 billion, with net income of $1.8 billion, far higher than that of the Detroit auto manufacturers. Six main components of its manufacturing strategy are:

1.Strong links with the market. Deere’s factories maintain a robust feedback loop with the design, engineering, and research and development functions. Nurturing market sensitivity can be a problem for manufacturers that shift production offshore in pursuit of cost savings.

2.Rigorous financial discipline. Deere follows a system called shareholder value added (SVA) that measures the difference between operating profit and the company’s cost of capital. And compensation for everyone from top management to unionized labor is based in some respect on SVA. “Everything is a ratio of what we earn over what we invest.” It gives the whole organization an incentive to drive down costs. “For 30 consecutive quarters, it has reduced inventory and the ratio of receivables to sales,” It has meant “getting faster and faster at providing the right products to the right customers at the right time.”

3.Balanced investment approach. Deere uses “a balanced investment approach that includes a substantial reinvestment in the United States.” Deere shifted production to Waterloo, Iowa, and to Mexico in order to improve SVA and boost efficiency. It has been investing heavily in bringing the most modern, advanced productivity tools to factories. By moving engines to existing plants in Waterloo and Mexico, the company improved the economies of scale of those operations. Deere also manufacturers diesel engines in France that suggests that the company is not interested only in low-cost locations.

4.Multiple “home markets” plus export strategy. Some companies may locate manufacturing in a particular country to satisfy demand there, but Deere embraces a dual approach, considering the demand in major markets, which it calls “home markets,” and also factoring in possible exports from those markets. Deere “builds diesel engines, transmissions, and tractors in India that serves the Indian market and at the same time it exports from India to 52 countries, including the United States. Deere facilities in China are exporting to a limited number of countries. What Deere builds in China primarily stays in China.” Most of Deere’s tractors built in China have fewer features and meet lower specifications than farmers in many other markets are demanding. Those products are right for China because its level of mechanization of agriculture is lower.

5.Labor flexibility. Until very recently, U.S. auto manufacturers hadn’t done much to modernize their manufacturing techniques because of resistance from the United Auto Workers (UAW). Deere has a different sort of relationship with the union. In exchange for greater flexibility in work practices, Deere offers its UAW employees profit-sharing schemes based on SVA and productivity. That kind of collegiality has built a relationship that can handle even tough calls, like closing down production.

6. Lean production. Deere embraced lean production. It manufactures different products – planters, sprayers, combines, tractors – all of them quite different. Deere Production System is tailored to low-volume, high-quality production.”
DPS is based on “pull system.” Deere bases its manufacturing on customer demand, and products are made only after a customer has ordered them. The approach lets Deere adapt to cyclical and seasonal factors much better than in the past.
Another element of DPS is a constant push to update machine tools, eliminate waste, and enhance flow-through. It has resulted in ending up with significant productivity gains – close to double digits every year.”

William J. Holstein has referred to the Deere’s competition with M&M. Unfortunately, M&M is still to grow as big as Deere, though it has potential to become one soon. Whatever, Deere has been doing is known to the executives and managers of Mahindra and Mahindra. Can someone pinpoint the reasons for M&M not attaining what Deere has been able to do?

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