Wednesday, September 12, 2007

The indus spray story...

[This is my attempt to write a story / case based on the man org project that we had as part of our course... well this case is a mix of fact and fiction... take it in the spirit... nothing more... I dont intend to make any statements of judgment through this article....]

It’s very important to start a good story from the beginning, so here we start from how it all began.

Mr Shashidhar, with his entrepreneur spirit found a huge market for the tapping in the packaging domain. He decided to try his idea out, and started off pushing at 3M for a contract of packaging its aerosols and lubricants. 3M was the first company that he chose thanks to tow major thought process, - firstly the huge quantity of packaging that 3M has to do, and the potential gains if this was outsourced to Indus Spray, second 3M is known for supporting entrepreneur ideas, so all that Mr Shashidhar would have to do was get a buy in showing the lower costs and other benefits.

The road to an enterprise is not an easy task for its entrepreneur; nor was it any easier for Mr Shashidhar. He had to make a number of visits to the 3M Company before he could actually get the contract for packaging of the lubricants and the aerosols. Well it is surely not enough to start off with just the manufacturing of the products right away, he had to get the area for setting up his plant, and clearance norms so that he could get the packaging of the goods once the contract was confirmed.

While on one hand Shirdhar was trying for a contract on the other he was setting up his small scale industry for packaging. He set up the factory in Electronics city on the outskirts of Bangalore. Well why did he choose this particular location? The potential advantages that a start up would need, so as to let it grow into a larger firm is the answer. Electronics City, being on the outskirts of Bangalore, has access to lower tax rate (or is it a holiday?), the second most important criteria, is the cost of labor; the skill needed for this packaging was relatively less and so all that was needed was mostly unskilled labor. The location advantage coupled with the low labor cost was the major factor in choosing the company at Electronics city.

The company had access to low cost unskilled labor, but if all the work was to be done manually, it would be a huge overhead when there was a large order to be completed. This necessitated the need of some machined to enable faster and quicker delivery, the cost of labor was substituted by a one time investment in machinery. For this purpose, machinery was imported form Germany, and the necessary technical support was obtained from the Indian collaborator of the German firm, to set up the machinery and other related maintenance.

Having the necessary machines, the labor, and a location where it could handle the raw material and the completed goods, he was waiting to start off with the packaging once the deal struck.

The deal stuck and it was time to get to the shop floor for Mr Shashidhar, though he started of looking into the routine working of the packaging department, as time moved on, he realized there were other pressing needs to be catered to. There was the finance that had to be taken care, the accounting of the firm, the stores to manage the inventory; if Shashidhar was engaged in all these routine activity he would have no time to work on the growth plan of the company. He hired a person who could take the responsibility of looking into the daily handling of the company affairs, be it stores, or finance or even production. This person became the general manager of the company, who would look into the daily handling of the company. At this point the structure of the company was simple with just a General Manager who would look in the aspects of the company, such as the production, the accounts, the stores. He would report directly to The MD.

MD was involved placing the strategy for the company that he had started off with. He had to start gaining a suitable margin for the products that he produced, considering the large volume that was to be packed, and relatively low expenditure, a small margin on the product would do. There was virtually no transaction specific investment that Indus Spray had to do for the packaging of the products. The machines that were set up had a generic capacity and nothing much would change if 3M decided to let go with Indus Spray and a new customer would come in. This acted as an advantage; there was no transaction specific investment to be done for the 3M.

How ever, 3M was taking a major bet by outsourcing the packaging to such an upstart company. 3M was an established brand and a major leader in the lubricants and the aerosol industry. The packaging of these products had to be of a high standard, in case it has to have the advantage that is has, so it was taking a huge risk To mitigate the risk, it agreed to hand over the packaging of the products to Indus Spray if it agreed that it would be the only consumer it would cater to. This was a hard bet for Indus Spray, but it had to agree for two major reasons, the market that 3M gave and the reputation that would be earned on being earned due to association with 3M.

Indus Spray now had the order, now had such a big company as its client, 3M would supply all the necessary material, all that Indus Spray had to do was just pack the products and return to it. The initial consignment was mostly of lubricants to be packed. Well with all the material available, it is quite logical to assume that Indus spray could use all the material and make a brand of its own, why doesn’t this happen? Well the brand that 3M has serves as a hedge in such an attempt, even if Indus Spray made its own brand from the material supplied, it would not be able to make a head way into the market.

With continued association 3M gained confidence in the work that Indus Spray was doing. With trust being a major capital now, 3M decided to hand over the packaging of aerosols to Indus Spray. Indus Spray had to invest into obtaining the permission to use LPG for its production, was this transaction specific investment that Indus spray was getting into? First sight gives us that impression, makes us believe that 3M was getting a better grip in the contract than Indus Spray, well a deeper insight which the MD gave enabled us to clarify this confusion. Indus Spray wants to venture into the Deodorants packaging business, and this was a logical first step to obtain permission for use of LPG. Thus an investment that looked so transaction specific is what forms a part of the much larger gain to Indus Spray.

Now with 3M gaining confidence in the work that Indus Spray was doing it was time for Indus Spray to try and enlarge its client sphere. The MD who was till now occupied with the his co-ordination with 3M to build trust now had to shift focus, as the relation ship was quite stable, and growth is what “makes” a firm.

After 3 years of association with 3M, it was now time for the MD to look for new avenues to expand. For this he had to ensure that 3M gave the permission, and make a provision to let Indus Spray have another customer. After a bit of running around, 3M finally granted the permission to go ahead, Indus had to ensure that it did not hamper the deal with 3M.

The next client that 3M wanted to get in contact with was Natural Remedies. Natural Remedies was into the business of herbal medicines, the domain was completely different, and did anything differ? Well not much, with a generic capability in manufacturing and the association with 3M to back with, it was not difficult to see that Natural Remedies did not have much difficulty to collaborate with Indus Spray.

Natural remedies did have some minor modification to make from 3M in the caps that were needed, the nozzles etc. The supply of these nozzles and crowns led to association with another supplier. This business was slowly turning from the service of packaging to procuring the material for the purpose of packaging.

The margin was low and, the volumes were high and so it was a profitable business to be in. The competitors where not many, because the low margin on each product doesn’t let many firm get into, its also hard to find clients like 3M when you start off, who can give you the market that you need. These factors provide a hedge against a lot of firms entering into competition and let the market to the existing firms.

While Indus spray concentrated on the packaging of the products, being a low margin high volume business it could not spend a lot of amount on investment in maintenance, and fixed cost on permanent labor. To reduce these costs, Indus doesn’t have any permanent staff other than the GM. Other employees are daily/weekly wage workers and are hired as needed. The maintenance of the property, security is outsourced, which would reduce the cost of maintenance, and security. Here we find that the company has already outsourced the most possible area for outsourcing, the support staff. Being the cost leader is what has emphasized this move.

The packaging needed is rather uniform through out the year and doesn’t vary much except when a bulk deal comes from 3M. In case of such high demands, additional labor can be obtained by word of mouth and this gives Indus Spray and additional flexibility.

Other factors of environment needed for production like electricity which is not too regular considering that Karnataka is a power starved state, emerges as major hurdle in the production process. But again thanks to the employees who are flexible, ready to work during off peak hours and complete the production on schedule.

This gets into another dimension that is visible, the interpersonal skill of the entrepreneur. The commitment of the unskilled low cost labor, which is not a permanent workforce, shows the interpersonal capacity of the entrepreneur in reaching to the emotional need of respect that the labor posses. While this is one of the strong points of the company, there is a need for constant growth.

The company till now has been able to move from 3M to gain a new client in Natural Remedies, but does it stop at this? No, there is huge potential for growth, there are a number of packaging areas to enter into. The MD wanted to reap heavy profits and that is exactly why he entered into this business, so what does he do next?

Mr Shashidhar, went on to obtain an alcohol license, this needed a lot of work and is not hassle free. The long term aim of the MD and hence the company is to move into the high margin Deodorant packing business. Recently the company has been able to obtain the alcohol license that was needed for such a deo-packing industry. This gives it a boost into creating much higher profits.