Titan - The Outsourcing Journey

"Once Titan puts its valuable name on the watch it does not matter to the customer whether we have manufactured it, or assembled it, or fully outsourced it."

- Jacob Kurien, Vice-President (Marketing), Titan, in 1999.

Introduction
In late 1999, the top management of Titan Industries Ltd. (Titan), India's leading watch, clock and jewelry manufacturer, was surprised when several senior executives threatened to resign. The threats reportedly came after a long period of employee unrest in the organization. The reason behind the unrest was the company's decision to increase the level of outsourcing in its manufacturing activities while limiting production facilities for just assembling purposes. Titan's Vice-Chairman and Managing Director Xerxes Desai (Desai) quickly issued a statement stating that the above was not true. However, this was in sharp contrast to his earlier statements in the media. In an interview to a business magazine1, Desai had remarked, "We will manufacture only if we can do it faster and cheaper than anyone else in the world." Even as the company worked towards explaining its strategies clearly to the employees, analysts could not help remark that Titan was already sourcing a large part of cases and movements, key watch components, from within and outside India. Moreover, the company had always been sourcing a variety of raw materials such as stainless steels, tool steels, engineering plastics, tools, consumables, components and specialty movements2 for its watch manufacturing operations through vendors spread across 20 countries, mainly in Asia and Europe. The company's management seemed to have realized that global sourcing of certain components made better business sense. Media reports even quoted watch industry officials claiming that companies like Titan had 'no option but to move away from manufacturing and towards trading in the long run.' This was not a very surprising move as it seemed but natural for the company to look for cost effective sourcing options at a time when manufacturing seemed rather costly. Titan's decision was influenced by a host of factors that made the company realize the potential benefits of outsourcing as a tool for holding on to its position in the Indian watches market. The liberalization of the Indian economy and the subsequent removal of quantitative restrictions3 on watch imports in the late 1990s, forced Titan to focus more on marketing efforts rather than manufacturing to retain its competitive edge in the future.

Rs 400 million jewellery plant in 1994 over a built-up area of 13. The facilities in Hosur included a computer aided design (CAD)5 and prototyping unit. sheet metal bracelets. both located close to the Hosur plant. Titan Watches overtook the market leader HMT by selling 3.000 square metres. a comprehensive tool room with capacity for manufacture of precision tools and die-sets. Titan Watches entered into a joint venture with Timex Corporation of USA to market Timex watches in India. Uttaranchal. Besides. Tamil Nadu in 1987. set up with technical know-how from Europe and Japan. the Hosur facility went on to become one of the largest integrated watch-manufacturing units in the world. Gold was refined and alloyed in-house at the Hosur plant. The company also set up a watch assembly unit with a capacity of 5 lakh watches in Dehradun. The same year. In 1992. the leading manufacturer of mechanical watches at that time. in order to change its image from that of a watch manufacturer to that of a fashion accessories manufacturer. Titan also introduced the Tanishq range of 18-carat gold jewelry.2 million watches against the latter's 3 million. Tata Sons.4 During the same period.500 square metres in Hosur. The state-of-the-art manufacturing facility. The same year the company set up a joint venture with the Economic Development Board of Goa to manufacture electronic circuit boards in Goa in an effort towards indigenization. in technical collaboration with one of the world's largest manufacturers of watch movements.5 million watches per annum. Titan had a wide range of computerized numeric control (CNC6) machines. Titan Watches decided to concentrate on manufacturing quartz watches. alarm timepieces and premium table clocks in 1995. The company was incorporated in July 1984 in Chennai. The plant had a capacity of manufacturing four tonnes of gold a year. Unlike Hindustan Machine Tools (HMT). Due to poor market response the company discontinued the manufacture of jewelry watches. had an installed capacity of 3.Background Note Titan was promoted as Titan Watches Ltd. The Rs 2. a French company. employing around 3500 people. the company established a component manufacturing facility and in 1990.7 billion watch and clock manufacturing facilities were spread over a built-up area of 42. France Ebauches. the company integrated backwards to manufacture step motors. the company changed its name Titan Industries Ltd. Over the years. In 1995. used in its watch movements. The company established its first manufacturing facility in Hosur. Titan set up its fully integrated. it started a case manufacturing plant. it began manufacturing electronic circuit blocks. In 1988. . jointly by Questar Investments Limited (a Tata group company). India. The company also set up a separate manufacturing facility for solid link. In 1992. Tata Press and the Tamilnadu Industrial Development Corporation Limited (TIDCO).

Titan became one of the most successful and respected Indian brands. In its efforts towards developing its export markets. Titan started selling its products in over 40 European. the company decided to move out of the lower segment of the clocks business. In 1998.18 million units per annum. quality and safety. heavy branding and good distribution. From the very beginning. The company was ranked sixth among the world's largest watch manufacturers. In 1997.but the design center for jewelry was located in Bangalore. In 1998. West Asian and South East Asian markets through its subsidiaries in London. The . Titan had used cost cutting as a means to achieve competitiveness and improve profitability. Titan sold its products through a network of exclusive Titan showrooms called. It realized that sustained advantage in the marketplace could be achieved only by keeping costs low and launching innovative/technologically superior products. it increased the capacity of the Hosur plant to 5 million watches. Over the years. 'The World of Titan' and 'Time Zone. lower lead time and inventories. It was able to increase the proportion of indigenous components from 44% in 1994 to about 75% in 1998. better product design. The company also implemented SAP Enterprise Resource Planning on the advice of Coopers & Lybrand consultants. To improve productivity. As part of the WCM initiatives. Titan decided to discontinue the joint venture arrangement with Timex due to certain differences. In the same year.5 million to 4. It was given the credit for revolutionizing the Indian watch industry in India through constant innovation. In 1996. Singapore and Dubai. the company launched its own range of table clocks to cash in on the fact that there were no branded players in the segment. Titan had always implemented World Class Manufacturing (WCM) practices that helped keep costs under control. Titan automated select manual and semi-automatic operations in movement and case manufacturing. The same year. Total Productive Maintenance and Total Quality Control. Titan increased the Hosur plant's capacity to cater to the growing domestic and international demand from 3. it began to manufacture watches for several prestigious international brands. Titan implemented practices such as Just-In-Time Manufacturing.' a multi-brand watch showroom selling premium domestic and international brands. Quality. In the same year. In order to cut costs. Cost control and Delivery on time. the company indigenized its components. to improve the utilization and planning of resources. in addition to over 5500 dealer networks across 1400 towns in India. Titan instituted the 'PQCD world class-manufacturing program' that placed renewed emphasis on Productivity. This program emphasized greater focus on customer satisfaction and profitability.

According to the Outsourcing Institute.com The company's tryst with outsourcing began in 1999.3 48 22 10 20 Source: www. information technology services to name a few.000 and above could be imported.KEY STATISTICS Market Market Shares (in %) Production Size Year (in 000 (in Rs Titan HMT Timex Others nos) crore) 1993 29401.6 516. human resources management. Outsourcing suggests an organization focussed on a few. About Outsourcing Simply put. Earlier only watches worth Rs 35. In order to be able to meet the challenges of the changing market dynamics. wherein typically an earlier 'make' decision is altered to a 'buy' decision. It is thus a type of make-orbuy decision." An organization can outsource many functions of its day to day operations . cost management in manufacturing usually resulted in backward integration and gaining ownership of a large range of manufacturing and subassembly facilities. However.manufacturing. more and more organizations began moving towards outsourcing manufacturing for a lot of reasons.advertisement campaign for Titan watches with the signature tune adapted from the 25th Symphony of Mozart became a landmark Indian advertising's history (Refer Table I for key statistics of the Indian watch industry). well-chosen core competencies supported by long-term outside relationships for many of its other activities and resources. According to analysts.indiainfoline. realized the financial muscle and technological superiority of the MNCs.4 465. marketing.4 45 22 12 21 1996 24726 766 41 23 13 23 1997 36480. The new EXIM policy7 freed the imports of watches of any value under a special import license. this removal of restrictions could cause international players to make a beeline for marketing their products in India. Earlier.5 746. Outsourcing helps a . when competitive pressure on companies was not very severe. failing HMT as the main competitor. with the changes in India's foreign trade policies.3 45 21 10 24 1998 36717.6 587.3 37 47 3 13 1994 30648. Titan.5 49 22 10 19 1995 20918. "Outsourcing is nothing less than a basic redefinition of the organization. The import duty was also set to be reduced gradually in the future. outsourcing means getting those things done outside that were hitherto provided for internally. outsourcing became an imperative for the company.7 797. TABLE I INDIAN WATCH INDUSTRY . which hitherto had only the low-profile.

‡ Frees up capital and cash for other activities that are the company's core competencies. there has been an increase in the investment risk in new technology. Most importantly. with the markets changing rapidly. It is not necessary to build a fixed overhead infrastructure and the company can acquire and leverage customer acquisition expertise easily when it outsources certain activities. companies have discovered the importance of optimizing the supply chain activities. This covers the complete cycle of material flow from the purchase and internal control of production materials to the planning and control of work-in-progress and distribution of the finished product. The materials management department coordinates the outsourcing initiatives in an organization. organizations have also realized that it is in the best interest of the company to concentrate its resources on its core competencies only. Before deciding in favor of outsourcing. for instance in terms of greater economies of scale. exploit and protect their core businesses. only those manufacturing functions should be outsourced in which the suppliers have a distinct comparative advantage. TABLE II THE ESSENTIALS OF OUTSOURCING Understanding company goals and objectives Having a strategic vision and plan Selecting the right vendor . The benefits of outsourcing can be summarized as follows: ‡ Provides flexibility and versatility to in-house staff. a fundamentally lower cost structure or stronger performance incentives.company become flexible enough to terminate an operation if it does not meet the business goals without being concerned about various human resources. ‡ Helps shorten the 'time-to-market' by focussing on core activities. separation. Most importantly. As customers increasingly demand quick delivery. machinery and other equipment. ‡ Provides access to industry leading process development expertise and manufacturing technologies. it is essential for organizations to identify. Moreover. or litigation issues. This has necessitated flexible production systems in manufacturing concerns throughout the world. They should retain or insource those manufacturing functions that are critical to the product and those the company is distinctively good at making. such as R&D or marketing. ‡ Helps avoid long-term investments in potentially under-utilized production capacity or excessive inventories. as a way to improve manufacturing performance by generating employee commitment at all levels (Refer Table II & III for the essentials and perils associated with outsourcing). Thus. it is necessary to use outsourcing proactively through a stronger focus on internal core business areas.

Titan was one of the first Indian companies from the consumer electronics business to have opted for outsourcing its manufacturing activities as a strategic exercise. which are typically above baseline costs because of the experience curve Potential problems associated with taking the function back or substituting the supplier when the outsourcing agreement terminates Possibility of being tied to obsolete technology Source: ICMR Many leading global companies such as Volvo and HP have been reaping the benefits of outsourcing manufacturing. .com TABLE III THE PERILS OF OUTSOURCING Loss of control Exposure to supplier risks and issues of quality control Suppliers can reap undue advantages by imitating product/technology Product degradation because the supplier pays less attention to it The change from collaborative to opportunistic behaviour of the supplier (or the buyer) over a period of time Difficulty in measuring the actual costs of the supplier.salience. The practice has been particularly popular among companies in the automobile and pharmaceutical industries.Ongoing management of relationships Having a properly structured contract Communicating with affected individual/groups Getting senior executives' support and involvement Paying careful attention to personnel issues Having short-term financial justification Using external expertise Source: www.

December 6. we will opt for them increasingly. new entrants began to threaten Titan's market share. The only input in this 'virtual manufacturing8' setup from Titan's side was in the form of design. Putting up plants and buying equipment is clearly not the answer to competing in the new environment." He added. when the import duty on watches was reduced to 25% from 50% and import licenses became easier to obtain. it decided to concentrate on building a strong distribution and support network. with the changes in the EXIM policy. the design of Titan's clocks was also found to be faulty. branding and distribution. Outsourcing activities were further strengthened in the next few years due to the problems Titan was facing with the gray market. breakup Mid 45% * Estimates. "In the old days it would have made sense to put in huge investments in . Source: Business Line. as much as 55% of the demand was met by small players from the unorganized sector.Outsourcing at Titan Titan's entry into the clock segment in the mid 1990s failed badly because its clocks could not face the competition from cheaper imports from China. And as we find suitable vendors for full watches. Kurien said. not Hosur. TABLE IV THE INDIAN WATCH INDUSTRY IN 2001 Indian watch Organized Unorganized industry Sector Sector* 16-18 million Volume 20 million units units 9 Value Rs 10 billion Rs 3-5 billion Premium 15% Segment-wise Mass 40% N. Though the segment itself grew in size. Moreover. The company's management was also aware that outsourcing was the accepted norm in the global watch industry and many leading global watch brands were not manufactured by the companies that owned them. 2001. During the early 1990s. the variety and range available in the mid segment increased dramatically after 1999. The company converted its clock plant into a plastic watch-manufacturing unit to make alarm and travel watches. To correct these problems. This worked well for the company and soon it became the undisputed market leader in the watches market. The gray market has always accounted for a substantial part of the Indian watch industry (Refer Table IV).A. However. instead it decided to import them from Hong Kong. Since Titan faced stiff competition from these players on the price. the company decided to stop manufacturing clocks. "We have to think global.

it reported a loss of Rs 52 million.2 146.9 16. 30% 33% 33% 25% 26% 26% 26% (%) Source: www.9 3207. outsourcing worked out be around 30% cheaper than manufacturing in-house.6 Jewellery 0. Moreover.4 192.5 394.9 2 3. which increased expenditure by Rs 1.4 129.4 29.2 4420.4 Depreciation 131. According to company estimates.2 6141.2 188.4 6303. Moreover.8 165 84.8 5506. But that is no longer the case. This was because the growth in the premium segment of the watch market.7 242.8 16 18. had been below its expectations." According to analysts.3 139.3 2761.7 21.8 Taxes Equity Div.4 667.4 204 209.7 12 16.8 165.8 387.5 435.7 Taxes Taxes 35.KEY STATISTICS 1999. Company watchers partly attributed this to the heavy investments in the manufacturing setup.5 billion.7 million in 1996 (Refer Table V). Titan's multibillion investment in manufacturing facilities were proving to be a real drain on its profitability in the changed industry.9 275.9 Profit After 250. net profits had come down by 47% to Rs 146.6 4820.1 214.3 148.3 6969 Expenditure 2239.new technology because it was a protected market.1 130.2 508.1 116. in lakhs) Watches 325. Though the company had consistently posted yearly profits.6 20.titanworld. in the first quarter of 1999-00.9 275. since the company relied heavily on its marketing finesse than operational excellence.4 189.8 478. which was Titan's mainstay. excise duties and marketing spending in 1999-00. Titan had no other option but to settle for outsourcing.3 31.4 255.6 519. TABLE V TITAN .3 Profit Before 250.200094-95 95-96 96-97 97-98 98-99 00 01 Sales Volumes (nos. Titan decided to change its focus to generating more volumes rather than value.6 24.2 4085. Around the same time. .5 43 32.8 234.com Taking into account the above factors.7 278 162.9 Interest 218 342.4 Profit Other Income 14.3 Operating 236.8 30 72.3 511.3 3572 3934.2 201.9 3507.7 130.4 million in 1998 from Rs 275. This loss was due to the high overheads.2 Sales Income 2824.1 156.5 246.4 30.2 564 529.1 585. The company wanted to build up a base in the lower value segment and extend its reach.4 170. these investments were deemed to be too high.1 Table Clocks 6.7 36.

even unique elements of design are being easily copied at a lower cost. M. Bhaskar Bhat. Today.Another reason why Titan wanted to reduce its focus on manufacturing was the high employee costs 11. Workers at the Hosur plant only assembled these watches." As the employee unrest settled down. This increased overall employee costs. Titan began to focus on implementing its decision to outsource. "I want to correct a misapprehension that Titan had inadvertently succeeded in creating that the company was turning to external sources of supply because inhouse production is expensive.000 per month. Titan had neither made any fresh recruitments nor replaced close to 200 supervisory and managerial-level employees who left in the same period. All the components for the Dash range of children's watches that was launched in July 1999 were outsourced from local and global vendors. Shantharam also tried to put to rest the doubts of the employees. With cheaper Chinese imports flooding the Indian market. "Whatever we can buy at a cheaper price we will. the management had not expected the trouble with employees.2% of its revenues in 2000. Commenting on the move. Chief Operating Officer. it had come in direct competition with players in the unorganized market. "There will be no more big investments in manufacturing." These factors eventually led the company to announce that it would be outsourcing in the future. In 1997 and 2000. we will go ahead and outsource it. The workers are fully apprised of the competitive scenario and they realize the urgency of better productivity. the Hosur factory had a huge worker base. even a low-skilled blue-collar worker at the company earned as much as Rs 10. this was alarming because since 1996. Wherever we find it is more competitive to outsource as against manufacturing it in-house. Desai released a memo stating that. In 1999. According to a former company manager. To put to rest the employee unrest issues. "The extra costs in the system aren't helping in differentiating the brand. According to Titan . As a result. but not at the cost of underutilization of the factory. watches business unit." The Chief Manufacturing Officer of the watch business unit. the biggest factor that swung the decision in favor of outsourcing was the fact that Titan was not being able to meet the onslaught of the unorganized sector for the first time." He further added. This was because in the days when the company had no other option but to manufacture. According to analysts." However.S. Since the company decided to focus on generating volumes from low-end mass products. from hand-plating technology to manufacturing cases. the company entered into various wage agreements with the workers' union. Titan realized that the complete technology of making watches. was easily available at prices much lower than what the Hosur factory could ever deliver. the company outsourced close to 1 million movements from suppliers in Hong Kong and China. said. "The message to perform is clear to every employee. However.

Tissot. If it had to manufacture the range. "We are able to offer the watch at this price only because of the sourcing model. Esprit. the company could launch the watches for just Rs 250-395.sources. Through process reengineering efforts. the success of these two watches was due to the fact that they were outsourced. By 2001. Similarly. Moreover. during 2001-02. This was because Tanishq. By opting for outsourcing. surface treatment time i. including measures to facilitate better buying and negotiating. Titan emerged as the country's largest watchmaker with a 25% marketshare of the total domestic market and a 50% share among nationally recognized brands. Esprit and Swatch entered the mid-priced segment. time take for a process to improve the finish of the watches. it was priced on the higher side. The Future Dash proved to be a runaway success for Titan with 50. However. posing stiff competition to Titan's brands in this range (Refer Exhibit I for Titan's product profile in . Titan began working towards reducing its cost of operations with the help of Andersen Consulting through an e-commerce initiative. and salvage non-moving components. the Fastrack range of digital watches was also priced in the range of Rs 650 to Rs 1500. In addition. locate better vendors. However. the jewellery division had posted a 32% growth. The Fastrack range grew by almost 100% in terms of volume and it established itself as the largest youth brand in the country. in December 2001. while the income from the watch division increased by 4%. positioned on the fashion platform. However. it would have had to invest at least Rs 2. Titan had also put in place various measures to enhance the productivity of employees and the machinery. Therefore. the figure was 10% for the company as a whole.youth in the 15-24 age group. According to company sources. the outsourcing decision did not indicate in any way that Titan had decided to forego its earlier focus on enhancing operational efficiencies. keeping in mind the target segment . it dropped its plans after it realized that the costs involved would be too high for the volumes it was expecting in the initial stages. Premium international watch brands such as Swatch. some of these brands such as Citizen. new range of watches typically took some time to generate volumes. locate alternative sources.e.5 million just for the machinery to make the moulds for the watches. The line was extended to the digital watch market with Fastrack Digital. Longines. It was clear that the company needed to work towards strengthening the watch business in order to reap the full benefits of its marketing and outsourcing efforts. Citizen. Titan managed to reduce the overall watch assembly time from 17 days to 10 days today. analysts said that Titan will not have things so easy in the future due to the increasing competition in the watch industry." Though the company had initially thought of developing the technology for the watches on its own. was reduced from 62 hours to one hour. Kurien admitted. with revenues of Rs 7 billion and net profit of Rs 235 million. Rado and Omega entered India in the late 1990s and catered to the super-premium segment of the market. Titan could price the range so attractively because the watches were completely sourced from Hong Kong and Taiwan.000 watches being sold within the first two months of its launch.

Questions for Discussion 1. 3] Restrictions on imports that limit the quantity of the good or service traded. Explain the concept of outsourcing and the reasons for its growing popularity in the manufacturing industry. They allow engineers to view a design from any angle on the computer and make it possible to zoom in or out for close-ups and long-distance views. all other values that depend on it are automatically changed accordingly. August 30. Is outsourcing a viable option for Titan? Does the operational strategy contribute to competitive advantage? How far is outsourcing likely to help Titan face competition in the domestic as well as international markets? NOTE: 1] Businessworld. The company's marketshare in this segment was 75%. It is an integrated. Explain why Titan had to decide in favor of outsourcing its manufacturing activities despite having a state-of-the-art manufacturing set up. It also keeps track of design dependencies so that when the engineer changes one value. 7] CAD systems enable engineers and architects to carry out design activities on the computer. Does outsourcing render Titan a low-cost producer? 4.2002). usually in the form of 'quotas' or 'voluntary export restraints. 2. They allow engineers to view a design from any angle on the computer and make it possible to zoom in or out for close-ups and long-distance views. which in turn rotates the hands of the watch. Evaluate the benefits Titan derived as a result of outsourcing the manufacturing function. 5] CAD systems enable engineers and architects to carry out design activities on the computer.' 4] The stepping motor controls the gears in a watch. 8] Virtual Manufacturing refers to the use of computer models and simulations of manufacturing processes to aid in the design and production of manufactured products. 3. financial daily Business Standard's estimates cited the value of the overall Indian watch market at Rs 60 billion. It also keeps track of design dependencies so that when the engineer changes one value. 1999. 6] CNC machines are machines that are controlled by computer programs and run as dictated by the program. which contributed nearly 65% to the Titan brand's value and one-third of the company's entire watch business. Briefly comment on the pros and cons associated with outsourcing the manufacturing function. all other values that depend on it are automatically changed accordingly. With the company planning to focus all its energy to meet competition in the lower as well as higher ends of the market. synthetic manufacturing environment exercised to enhance all levels of decision and control. . 9] In May 2002. independent of the operator. the watch industry seemed to be all set for an interesting battle. 2] Movement refers to the assembly consisting of the principal elements and mechanisms of watches/clocks.

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