Wednesday, May 03, 2006

Manufacturing Management

This is a dated paper, written in 1996. I was working in a company making zip fasteners in India, and we had over 600 blue collar people working for us, and our production value was around Rs.14 crores (US$ 400,000 in those days).

The owner of the company wanted us to sell globally, and his idea was that in an industry requiring such a large workforce per rupee (or dollar) of production, we in India should be globally competitive. Indeed it made a lot of sense as a concept.

We could source raw materials duty free at international prices for export production. Our labour cost was just over $1 a day. Utilities were not a significant cost. And so, gung-ho, I was dispatched to conquer the world markets.

I came back with the discovery that our cost of production was far higher than our competitor’s selling prices. This led me to examine where we were going wrong.

We first started with checking specifications. Were our products heavier (and therefore using more raw materials)? No, we were at par. Was it the murderous 19.5% interest rates? We factored in interest at international rates and still found ourselves out-priced.

It was at this time that I came across a mentor who taught me about manufacturing management – as distinct from technology. He taught me two great techniques – SMED and IJIT.

SMED stands for “Single Minute Exchange of Die”, a technique developed for Toyota by Shigeo Shingo. Toyota used to take long shut downs (and idle their plant) whenever they changed the car model being produced. They had to change a whole series of dies and press tools, and this was being done by removing each part of the dies and tools, and replacing it with a fresh set. They could have a 30 to 45 days shutdown in the process.

Shingo had a Eureka. He proposed that the disassembly and assembly of dies and tools into its parts and components need not be done on the shop floor. Rather, Toyota could have a “nest” which could be slid out and then dis-assembled in the store. Similarly, the new nest could be assembled in the store, and slid onto the production machines. These processes cut down the stoppage time from 30 to 45 days to a few minutes, and raised production capacity by 10% to 25%.

We were doing change of tools in some of our machines every eight hours, by spending two hours on each change. And we were spending 19.5% interest on invested capital on this idle time. Replacing this idle time with productive time substantially changed the economics.

But the bigger effect came from IJIT or “Internal Just-in-Time”. Why only internal? Because India’s infrastructure did not allow for JIT.

How did IJIT help us? Manufacture of zip fasteners in an integrated factory requires a vast range of processes – knitting, weaving, cord-twisting, wire-drawing, annealing, die casting, press tooling, stitching, injection moulding, dyeing, painting, metal plating, ultrasonic sealing, assembly and more.

Each process was individually optimized for least cost production. For example, weaving would produce a 100,000 meters of a particular design of tape because that would maximize their output, even if the next stage required only 10,000 meters. The excess production would be carted to the store. If there were a quality problem, the foreman running the next process would be able to get 10,000 meters of required quality in any case, and he will quietly take this quantity. Over time, some of the stock lying in store would also deteriorate, and sold off as scrap at the year-end.

We found that in the process, almost 8% to 10% of our materials, at various stages of value addition, were going as scrap.

But when we implemented IJIT, we were producing only exactly as much as the next process required. We saved on working capital, on storage, on handling materials, and most of all, we would find quality problems the moment these appeared and slash scrap.

The result was that we became internationally competitive.

China is the world’s manufacturing powerhouse, and it is based on a low cost workforce. India is trying to edge itself in, but the basis is knowledge, superiority in design and technology. Yet, very few of our manufacturing companies have learnt from the Japanese, who were once the world’s manufacturing giant.

This kind of knowledge about manufacturing management has to percolate down to small and medium enterprises if we have to become competitive. Most of our manufacturers say that India specializes in producing small lots-large varieties. These and similar techniques could be invaluable in sharpening the competitive advantage.

Are any educational institutions hearing this?

Can biodiesel help India?

Biodiesel is becoming universally popular as an alternative to petro-diesel, because of the huge rise in crude prices. The world is scared what a war in Iran or an uprising in Nigeria could do to crude oil.

Most of the crude oil in the world is found in politically and socially unstable regions – Gulf states, Southern Russia and Siberia, Nigeria, Venezuela, etc. Crude pumping is at or near its maximum capacity, and fast growing economies like China and India are adding hugely to the demand.

Biodiesel is viable in some parts of the world – like Malaysia, India, Philippines, USA, parts of Europe, but only if crude prices are at least $50-55 a barrel.

However, in India, there is another strong justification to shift to biodiesel. This fuel, in India, is extracted from the seeds of the jatropha shrub. This shrub can grow in lands that are not viable for other agricultural crops due to low fertility of the soil.

There are huge such tracts of land in India all over the country. The areas where such lands are located are also the poorer parts of the country. As such, both capital (land) costs and labour would be cheap, and it will not displace food or cash crops.

If India can replace even 25% of its petrodiesel consumption (as in 2005) with biodiesel, it will:

  1. Replace imported crude worth $5 billion with locally produced crops, giving a huge boost to the economy.

  1. Provide employment of over 50 million mandays to people below the poverty line, creating another huge boost to consumer markets.

  1. Cut down drastically on carcinogens emitted by transport vehicles, farm tractors, and rural DG sets used to power pumps and other farm machinery.

  1. Reduce emissions of other pollutants as well, including carbon monoxides and unburnt hydrocarbons.

The government of India has announced a Rural Employment Guarantee Programme to address the needs of the rural poor. This is a huge drain on public resources, and experience tells us that barely 15% of the money will reach the needy. If the REGP money can be channeled into promotion of biodiesel, it will not only provide a huge amount of employment (therefore meeting the objective of the REGP), but also create national wealth.

Jatropha shrubs start yielding oil seeds in the 5th year and are productive for about 40 years after that. They require very little water, and can grow in infertile soils.

India has the potential to become the biodiesel leader of the world. Unlike USA, which uses soy, or Malaysia, which uses palm oil, jatropha does not divert resources from food or cash crops.

A question often asked is – “If the world shifts to bio-diesel, crude oil prices will tumble and could make bio-diesel unviable”. Yes, that could be true, but it is a far better alternate than living with crude prices over $55 a barrel. It is already looking at $75, and is forecast to reach $100 and put the world economy in a tailspin like in 1973 and 1979 and 1991. And the rate of depletion of crude oil is much faster than discovery of new hydrocarbon resources.

India is trying to seek security in oil supplies by buying foreign oil fields in countries like Nigeria, Libya, Sudan, Burma, etc. In the event of war or major disruption in supplies, do we honestly expect such countries to honour their contracts? India was part of a consortium led by Amoco producing oil at the Rostam and Raksh fields in Iran in the 1960s. But when the mullahs came to power, they nationalized the oilfields, giving India a pittance as compensation (They paid far more to Amoco).

The Petroleum Ministry seems to have forgotten this episode altogether, and we are once again seeking energy concessions in a country that has already expropriated it once. The rulers of Iran must be laughing at our stupidity.

India has also sought concessions in Venezuela. Venezuela is not known for respecting contracts. They have told foreign oil companies to hand over 60-90% of their shareholding or leave. The royalty on oil has been increased from 1% to 30%, and the oil tax from 34% to 50%.

In Russia, privatised oil companies have in effect been re-nationalised. We should not be surprised if the Sakhalin field, where India has a stake, is also nationalised.

The Mittal-ONGC combine has been given an oil concession in Nigeria provided India invests $ 6 billion in Nigerian infrastructure. The oil ministry is celebrating this. But the oil concessions can later be expropriated by Nigeria, while India cannot expropriate the infrastructure. The current Nigerian government is much better than earlier dictators who looted the oil industry, yet is not a safe oil haven.

Is Nuclear energy the answer? It looks promising, especially in view of the current bonhomie between USA and India. But is the US a reliable partner? And, do we have uranium in the country? No. And what happens when uranium suppliers do an OPEC? There are pitifully few places where uranium is available, and fewer still are the suppliers of equipments for nuclear power plants. This is not to deny the importance of nuclear power as an additional source, but that is what it should be limited to.

The lesson is clear. We should have our own home-grown source of fuels, rather than depend on people who can arm-twist us. And if that home-grown source gives us huge economic, social, and health benefits, in addition to providing security, shouldn’t the Government of India and citizens be taking action?

So far, the only people to have taken any significant action seem to be the Railways. They are using surplus land along the tracks to grow jatropha and extract biodiesel. Since jatropha is a shrub, does not grow beyond a height of 2 meters, it is nicely suited for growing along the tracks.

The Pant University, which catalysed the green revolution, is working to improve yields from this plant.

But the action is far too little and unfocussed. It needs to be upgraded into a mission.

Sunday, April 23, 2006

India's Railway Plans

April 11, 2006

Can an investment of $110 billion in transportation infrastructure transform the Indian economy?

That is what the Indian Railways is going to do over the next five years.

The Project Report says:

Sources of Funds

1. From internal generations (profits) $27.5 billion
2. From public-private partnerships like $44 billion
building hotels, office blocks etc
on railway lands and above railway
stations and tracks.
3. From borrowings (debts) $27.5 billion
4. From budgetary support (grants) $11 billion

Applications of Funds

1. High Speed Freight Corridor $22 billion
2. Other tracks-capacity building $22 billion
3. Rolling Stock $22 billion
4. Assets Replacement $8.8 billion
5. Signaling & Electrification $8.8 billion
6. Others $26.4 billion

Indian Railways, which we have been regarding as a bottomless pit, has been transformed beyond recognition.

Consider the achievements within the last year.

- Container freight cut by 40% in one go.
- Size of freight trains doubled to 3,000 tons by putting two engines.
- Freight rolling stock “paytime” i.e. time when the engines and wagons are earning money, rather than idling, increased dramatically.
- Flexible freight rates introduced, in order to draw traffic in competition with road transport.
- Upper class passenger fares cut by 10% to 18% to compete with low cost airlines. When this did not have much effect within a month, they changed their focus to getting short-distance passengers by abolishing station-wise quotas.
- Financial bottom line? Railways made a staggering profit of $2.5 billion in one year. Had the railways been a company, it would have zoomed into the stratosphere.

Looking at last year’s profits, raising $27.5 billion from profits in 5 years seems quite practical.

Raising $44 billion from private-public partnerships is very feasible, may be an under-estimate considering the way property prices are zooming. Indian Railways wants to use the massive pieces of land over railway stations to build hotels, shopping centers, and office blocks. Can you imagine the price at which office space would sell over Churchgate, Marine Lines, and other Bombay stations; over New Delhi station and between New Delhi and Okhla; over Howrah, Sealdah, Egmore etc stations? And they are talking about all stations and tracks inside cities. Work has already started over New Delhi station.

With $71.5 billion coming from these two sources, raising loan and grant would be easy play.

What is the expense going to bring?

The biggest impact will come from the high-speed freight corridor, which will connect Amritsar-Delhi-Calcutta and Amritsar-Delhi-Bombay. Railways plan to use Ro-Ro (Roll On Roll Off) wagons on these corridors. You can park trucks on these wagons. Businesses use trucks because trucks pick up cargo from your warehouse and deliver it to the customer’s warehouse. In case of rail, you have to take the cargo in a local truck to the rail yard, load it on wagons, unload from wagons at the destination, and use another truck to carry to customer’s place.

With RoRo, you load the cargo on the truck, and the truck gets loaded (driver and all) on the wagon. At the destination, the driver just drives away the truck to the customer’s place.

The high-speed corridor will let a Delhi-Bombay trip be done in 12 hours, Delhi-Calcutta in 15 hours. These trips take 5 to 7 days as of now. Highway diesel consumption will drop to nearly nothing. Highway accidents, crowding, pollution will be eliminated. Trucks’ service life, which is currently capped at 10 years for long distance and 15 years overall, could go up to over a century, which means infinity.

The Indian economy will then have a huge surplus capacity for diesel, trucks, tyres, and parts, and can become the supplier to the world. Maybe some of these plants will get re-located outside India.

I think, that with the multiplier effect of transport efficiency, this plan can add another 2% to the economic growth rate.