Sourcing from SMEs is key to Bajaj Electricals Ltd's growth and earnings.
Despite the economic downturn, small appliances major Bajaj Electricals Ltd (BEL) achieved a 30 per cent increase in sales turnover and a 22 per cent increase in net profit in 2008-09, to Rs 1,800 crore and Rs 89 crore respectively. It expects this to touch Rs 3,000 crore in 2011-12. “The company’s business model — sourcing from Small Scale Industries (SSIs)—has enabled us to grow over the last 70 years,” said Shekhar Bajaj, BEL’s chairman and managing director.
BEL, part of the Bajaj Group, one of the top five business groups in India, started the model with the intention of serving as a marketing umbrella for SSIs, much before the Small Scale Reservation Policy came into force. Later, the reservation policy saw BEL’s small appliances like toasters and irons, as well as its luminaires (lighting fittings), being reserved for SSIs. So the company continued to source from SSI units, whose annual revenues range between Rs 5 crore and Rs 100 crore.
In the last few years reservations for SSIs have mostly been withdrawn and BEL has also been allowed to manufacture appliances and luminaries, said Bajaj. The major problem of SSIs, besides access to finance, is distribution and after-sales service and this is where BEL plays a key role.
Banks have priority sector lending obligations, and since SSIs come under the priority sector, banks give bill discounting limits to the SSIs (this takes care of the obligation). They in turn get BEL’s acceptance and hence they need not look at the financial strength of the SSIs but only at BEL’s strength. BEL accepts a bill of exchange which is discounted by the SSI, upon which it gets funds immediately. BEL in turn pays the bank as per the bill discounting scheme after 90 days.
Sajan Gupta, chairman, Konark Fixtures Ltd, which has been supplying luminaires to BEL since 1971, says one key advantage of working with a major brand like Bajaj is access to finance, which has always been a hurdle for SSIs. Other advantages, he added, include assured business and a profit margin of 3-4 per cent. (Bajaj personally thinks the margin is 4-5 per cent).
The other challenges SSIs face are marketing and distribution, added Gupta. “If we offer the same product at a lower price, customers will not buy from us even if the product and the quality are the same. It is the brand which makes the difference.” BEL’s distribution network, which includes over 600 distributors, 5,000 direct dealers and more than 3.50 lakh outlets through which the products are sold, is also available to the SSIs.
Another example of a successful BEL vendor is the Delhi-based Advanced Group, which has been supplying ceiling fans, water heaters, room coolers and other fans to it over the last 20 years. The group’s Tarun Murarka describes the association as a win-win situation: “We don’t have to worry about payments and marketing. BEL treats suppliers as partners and not vendors. They rely on us for quality and supply and we rely on them for steady business and timely payment.” As a result of the association, the Rs 116 crore Advance Group has been growing at 15-17 per cent year on year, said Murarka.
The advantage of outsourcing for BEL is that it doesn’t have the responsibility of manufacturing, and to that extent the requirement of funds for managing the manufacturing process does not arise, said Bajaj. For instance, SSIs can increase or decrease their production at short notice, which is difficult for the organised sector.
Procuring from SSI sharpens BEL’s competitiveness, he added. SSIs normally have low overheads. The owner/promoter is the factory manager, purchase manager, finance manager, etc, all rolled into one. Therefore, when volumes go up, overheads are kept under control and they can offer competitive prices, added Gupta.
Currently over 100 SMEs are associated with BEL in Delhi, Noida, Daman, Himachal Pradesh, Andhra Pradesh and Mumbai, employing over 10,000 people directly and indirectly. The company has at least two sources of supply for each of its products and at times even three or four. “For every product we have a primary vendor and a secondary vendor. Hence we continue to get our supplies even if one or two vendors fail,” said Bajaj.
The total Indian market for small appliances among the products that BEL is selling is around Rs 5,000 crore, said Bajaj. Sales of Bajaj’s small appliances were about Rs 470 crore in 2008-09, and he hopes to grow 20-25 per cent year on year, he added.
