A business environment characterised by increasing complexity and volatility is creating significant challenges for organisations in India today. Consider some of the signs: slow GDP growth, high inflation, tight liquidity, continuing depreciation in the rupee making imported inputs costlier, policy paralysis and upheaval in global financial markets, to name just a few of the most notable symptoms. This kind of uncertainty and complexity is now a permanent part of the business landscape, and companies have little choice but to develop a strategy to manage it.
The playing field has also changed. Indian companies are no longer playing only against their local competitors. They now also find themselves competing with best-in-class developed market multinationals and upstarts from other emerging economies — all vying for a share of the same pie. Our experience suggests that leading companies are navigating this volatile environment through four key approaches: scrutinising their operations with even greater care, keeping a sharp focus on core business, using talent as a business differentiator and using today’s consumers to build tomorrow’s growth. The idea is to take an end-to-end view of how they create value. We’ve observed three keys to these efforts.
Operational excellence. The journey of operational excellence for any organisation often starts by having a clear idea of what we call competitive essence-what the organisation does better than others and enables it to win in the marketplace. A thorough understanding of competitive essence helps the company to drive an operational excellence strategy.
An operational excellence strategy comprises decisions about two elements affecting the ability of companies to deploy and stay true to their competitive essence-structure and execution. Structure addresses the “what,” “ who” and “where” of a business’s operating model and assets. That is, what capabilities, best practices and assets will the business need to leverage and sustain its competitive essence? Who will carry out those capabilities and manage those assets? Where will the capabilities be carried out and the assets located? Execution is the “how” of the operating model and assets; specifically, how will the organisation deploy people, processes, technology and organisational design to extract the most value from its operating model and assets?
Finally, the organisation needs to select the appropriate change journey that would work best for them. There could be a transformational programme (top down projects impacting the entire organisation), targeted intervention (efforts that span structure and execution in a specific function) or continuous improvement (programmes that span building excellence in execution). Choosing an appropriate change journey is critical as each company has a different context for change, a unique starting point and its own corporate DNA.
A leading engineering, procurement and construction (EPC) player in India undertook a transformational operational excellence programme. The company has not only significantly improved its profitability but also implemented robust business processes in line with best practices and organisation structure changes to sustain the same. Then there is a major chemicals company in India that has implemented a Six Sigma-led operation excellence programme to improve its profitability while also develop new capabilities in its people.
Rapid and sustained cost management. Clearly, cost management has become an integral part of doing business in India. The key question, however, is how cost management can be carried out most effectively without jeopardising long term revenue and shareholder value. Many organisations are currently looking to reduce costs across the board by 10 to 15 per cent. Accenture sees enormous opportunities in rapidly driving costs across procurement, SG&A (an acronym used in accounting to refer to selling, general and administrative expenses, which is a major non-production cost) and manpower.
Organisations have room to optimise their procurement by not just stopping with volume discounts but pushing for better demand management and long-term strategies that drive continual improvements and apply contract controls and compliance. Companies have the potential to leverage synergies — of both scale and skills — across different business units and leverage strategic sourcing levers such as low-cost country sourcing, complexity reduction, should cost models and e-auctions. A few companies are closing the loop on spend management by driving accountability not only for savings but also creating unprecedented visibility on the cost structure that drives out savings through pro-active cost-avoidance leveraging zero-based budgeting, clear ownership of category spend and smart consumption policies. A leading global beverage company, for instance, has been successful in reducing its in cost of goods sold by 15 per cent through strategic sourcing and close loop spend management.
A recent Accenture analysis of manufacturers’ balance sheets revealed that the gap between wages and manpower productivity has been widening in India since 2007-08. Such a situation puts a premium on efforts to improve manpower productivity. Business interventions such as workforce pyramid redesign and pyramid refresh can help achieve significant reductions in employee costs by determining the optimal size of an organisation.
A leading Indian pharmaceutical company, for instance, has been successful in achieving productivity improvements of 25-30 per cent by identifying surplus manpower across its two business units. The company defined an optimal organisational structure with the appropriate workforce size required at each level and identified non-core activities that could be outsourced.
Building dynamic supply chains. As Indian companies grow and diversify their operations, their supply chains are becoming increasingly more complex and the potential sources of disruptions are multiplying. This complex operating environment is undermining traditional supply chain strategies. For instance, supply chain integration, the mantra of the recent past, that helped organisations secure key relationships by tying the operations of critical partners together is becoming redundant. As organisations struggle to operate in environment of permanent volatility, tightly integrated supply chains are actually restricting the ability of firms to keep up with the current pace of change. Companies are being pushed to take new approaches in managing their supply chains more effectively.
As supply chains globalise, they face a lot more potential sources of disruption and risks. Building in operational flexibility to withstand these disruptions is crucial. For instance, an agile and flexible supply chain enabled one of the world’s largest specialty chemicals players to shift its production from Argentina to Gulf Coast of the United States in a span of 30 to 45 days, when a major energy crisis hit Argentina a few years back.
Accenture research suggests that high performance businesses draw on a portfolio of measures to build a dynamic supply chain. These include creating a global supply chain that can withstand the uncertainty of international markets, producing a number of products at the same plants, building capacity redundancy, designing products on modular product architectures, and striking flexible contracts and dual-sourcing strategies with vendors.
The speed of response is a critical capability of dynamic supply chains, and the key to anticipating and mitigating risk. But response time hinges on the company’s ability to proactively identify high-risk events, and to decide whether to design the operation to flex to known risks-those that are unpredictable but relatively more likely to occur-or to have contingency plans for the unknown risks- those that are unlikely to occur but are potentially catastrophic. In fact, 86 per cent of executives who responded to Accenture’s 2011 Global risk survey identify the risk management function as a key driver that helps them effectively deal with today’s volatile business environment. Many companies are also using predictive analytics to identify where problems are likely to arise along the supply chain, highlighting critical areas for risk mitigation.
The current volatile economic environment is here to stay. To successfully manage through these challenging times, organisations need to drive both short-term and longer-term operational efficiency and responsiveness. The companies that take this journey will have the ability to respond to market shifts more quickly, as well as to operate more efficiently and cost-effectively-both of which are crucial to success in a world of ever-increasing uncertainty.
Sanjay Dawar is managing director, management consulting, Accenture India, and Manish Chandra is partner & lead, sourcing and procurement practice (Asia Pacific) and Operations Consulting Practice (India), Accenture
