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.

Background Note
Titan was promoted as Titan Watches Ltd. jointly by Questar Investments Limited (a Tata
group company), Tata Sons, Tata Press and the Tamilnadu Industrial Development Corporation
Limited (TIDCO). The company was incorporated in July 1984 in Chennai, India, in technical
collaboration with one of the world's largest manufacturers of watch movements, France
Ebauches, a French company. Unlike Hindustan Machine Tools (HMT), the leading
manufacturer of mechanical watches at that time, Titan Watches decided to concentrate on
manufacturing quartz watches.

The company established its first manufacturing facility in Hosur, Tamil Nadu in 1987. The
state-of-the-art manufacturing facility, set up with technical know-how from Europe and Japan,
had an installed capacity of 3.5 million watches per annum. In 1988, the company established a
component manufacturing facility and in 1990, it started a case manufacturing plant, both
located close to the Hosur plant. In 1992, the company integrated backwards to manufacture
step motors.4 During the same period, it began manufacturing electronic circuit blocks, used in
its watch movements. The Rs 2.7 billion watch and clock manufacturing facilities were spread
over a built-up area of 42,000 square metres.

The company also set up a watch assembly unit with a capacity of 5 lakh watches in Dehradun,
Uttaranchal. In 1992, Titan Watches entered into a joint venture with Timex Corporation of USA
to market Timex watches in India. 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. Titan set up its fully integrated, Rs 400 million jewellery plant in
1994 over a built-up area of 13,500 square metres in Hosur. The plant had a capacity of
manufacturing four tonnes of gold a year. Due to poor market response the company
discontinued the manufacture of jewelry watches.

The company also set up a separate manufacturing facility for solid link, sheet metal bracelets,
alarm timepieces and premium table clocks in 1995. In 1995, Titan Watches overtook the market
leader HMT by selling 3.2 million watches against the latter's 3 million. The same year, the
company changed its name Titan Industries Ltd. 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.

Background Note Contd...

Over the years, the Hosur facility went on to become one of the largest integrated watch-
manufacturing units in the world, employing around 3500 people. The facilities in Hosur
included a computer aided design (CAD)5 and prototyping unit, a comprehensive tool room
with capacity for manufacture of precision tools and die-sets. Besides, Titan had a wide
range of computerized numeric control (CNC6) machines. Gold was refined and alloyed in-
house at the Hosur plant, but the design center for jewelry was located in Bangalore.

From the very beginning, Titan had used cost cutting as a means to achieve competitiveness
and improve profitability. It realized that sustained advantage in the marketplace could be
achieved only by keeping costs low and launching innovative/technologically superior
products. To improve productivity, quality and safety, Titan automated select manual and
semi-automatic operations in movement and case manufacturing. Titan had always
implemented World Class Manufacturing (WCM) practices that helped keep costs under
control. As part of the WCM initiatives, Titan implemented practices such as Just-In-Time
Manufacturing, Total Productive Maintenance and Total Quality Control.

In 1996, Titan increased the Hosur plant's capacity to cater to the growing domestic and
international demand from 3.5 million to 4.18 million units per annum. In 1997, the company
launched its own range of table clocks to cash in on the fact that there were no branded players in
the segment. In the same year, it began to manufacture watches for several prestigious
international brands. In 1998, Titan decided to discontinue the joint venture arrangement with
Timex due to certain differences. In the same year, it increased the capacity of the Hosur plant to
5 million watches.

Titan sold its products through a network of exclusive Titan showrooms called, 'The
World of Titan' and 'Time Zone,' a multi-brand watch showroom selling premium domestic and
international brands, in addition to over 5500 dealer networks across 1400 towns in India. In its
efforts towards developing its export markets, Titan started selling its products in over 40
European, West Asian and South East Asian markets through its subsidiaries in London,
Singapore and Dubai.

5] CAD systems enable engineers and architects to carry out design activities on the computer. 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. It also keeps track of design dependencies so that when the
engineer changes one value, all other values that depend on it are automatically changed accordingly.
6] CNC machines are machines that are controlled by computer programs and run as dictated by the program, independent of the operator.

ackground Note Contd...

In 1998, the company decided to move out of the lower segment of the clocks business. The same
year, Titan instituted the 'PQCD world class-manufacturing program' that placed renewed
emphasis on Productivity, Quality, Cost control and Delivery on time. This program emphasized
greater focus on customer satisfaction and profitability. In order to cut costs, the company
indigenized its components. It was able to increase the proportion of indigenous components from
44% in 1994 to about 75% in 1998. The company also implemented SAP Enterprise Resource
Planning on the advice of Coopers & Lybrand consultants, to improve the utilization and planning
of resources, lower lead time and inventories.

Over the years, Titan became one of the most successful and respected Indian brands. The
company was ranked sixth among the world's largest watch manufacturers. It was given the credit
for revolutionizing the Indian watch industry in India through constant innovation, better product
design, heavy branding and good distribution. The 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).
 TABLE I
INDIAN WATCH INDUSTRY - KEY STATISTICS

Market Market Shares (in %)

Production
Size
Year (in 000
(in Rs Titan HMT Timex Others
nos)
crore)
1993 29401.6 516.3 37 47 3 13
1994 30648.4 465.5 49 22 10 19
1995 20918.6 587.4 45 22 12 21
1996 24726 766 41 23 13 23
1997 36480.7 797.3 45 21 10 24
1998 36717.5 746.3 48 22 10 20

Source: www.indiainfoline.com

The company's tryst with outsourcing began in 1999, with the changes in India's foreign
trade policies. Earlier only watches worth Rs 35,000 and above could be imported. The new
EXIM policy7 freed the imports of watches of any value under a special import license. The
import duty was also set to be reduced gradually in the future. According to analysts, this
removal of restrictions could cause international players to make a beeline for marketing their
products in India. Titan, which hitherto had only the low-profile, failing HMT as the main
competitor, realized the financial muscle and technological superiority of the MNCs. In order to
be able to meet the challenges of the changing market dynamics, outsourcing became an
imperative for the company.Next >>

7] CAD systems enable engineers and architects to carry out design activities on the computer. 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. It also keeps track of design dependencies so that when the
engineer changes one value, all other values that depend on it are automatically changed accordingly.

About Outsourcing
Simply put, outsourcing means getting those things done outside that were hitherto provided for
internally. According to the Outsourcing Institute, "Outsourcing is nothing less than a basic
redefinition of the organization. Outsourcing suggests an organization focussed on a few, well-
chosen core competencies supported by long-term outside relationships for many of its other
activities and resources." An organization can outsource many functions of its day to day
operations - manufacturing, marketing, human resources management, information technology
services to name a few. It is thus a type of make-or-buy decision, wherein typically an earlier
'make' decision is altered to a 'buy' decision.

Earlier, when competitive pressure on companies was not very severe, cost management in
manufacturing usually resulted in backward integration and gaining ownership of a large range
of manufacturing and subassembly facilities. However, more and more organizations began
moving towards outsourcing manufacturing for a lot of reasons. Outsourcing helps a company
become flexible enough to terminate an operation if it does not meet the business goals without
being concerned about various human resources, separation, or litigation issues. 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.

As customers increasingly demand quick delivery, companies have discovered the importance of
optimizing the supply chain activities. Moreover, with the markets changing rapidly, there has
been an increase in the investment risk in new technology, machinery and other equipment. This
has necessitated flexible production systems in manufacturing concerns throughout the world.
Most importantly, organizations have also realized that it is in the best interest of the company to
concentrate its resources on its core competencies only. The benefits of outsourcing can be
summarized as follows:

• Provides flexibility and versatility to in-house staff.

• Frees up capital and cash for other activities that are the company's core competencies, such as
R&D or marketing.
• Helps shorten the 'time-to-market' by focussing on core activities.
• Provides access to industry leading process development expertise and manufacturing
technologies.
• Helps avoid long-term investments in potentially under-utilized production capacity or
excessive inventories.

About Outsourcing Contd...

The materials management department coordinates the outsourcing initiatives in an organization.
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.

Before deciding in favor of outsourcing, it is essential for organizations to identify, exploit and
protect their core businesses. They should retain or insource those manufacturing functions that
are critical to the product and those the company is distinctively good at making. Thus, only those
manufacturing functions should be outsourced in which the suppliers have a distinct comparative
advantage, for instance in terms of greater economies of scale, a fundamentally lower cost
structure or stronger performance incentives. Most importantly, it is necessary to use outsourcing
proactively through a stronger focus on internal core business areas, 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).

TABLE II
THE ESSENTIALS OF OUTSOURCING
 Understanding company goals and
objectives
Having a strategic vision and plan
Selecting the right vendor
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.salience.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,
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. The practice has been particularly popular among companies in the
automobile and pharmaceutical industries. 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
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. Moreover, the design of Titan's clocks was also
found to be faulty. To correct these problems, the company decided to stop manufacturing clocks,
instead it decided to import them from Hong Kong.

The only input in this 'virtual manufacturing8' setup from Titan's side was in the form of design,
branding and distribution. The company converted its clock plant into a plastic watch-
manufacturing unit to make alarm and travel watches. Outsourcing activities were further
strengthened in the next few years due to the problems Titan was facing with the gray market.

The gray market has always accounted for a substantial part of the Indian watch industry (Refer
Table IV).

TABLE IV
THE INDIAN WATCH INDUSTRY IN 2001

Indian watch Organized Unorganized

industry Sector Sector*
16-18 million
Volume 20 million units
units
Value9 Rs 10 billion Rs 3-5 billion
Premium 15%
Segment-wise
Mass 40% N.A.
breakup
Mid 45%

* Estimates.
Source: Business Line, December 6, 2001.

During the early 1990s, when the import duty on watches was reduced to 25% from 50% and
import licenses became easier to obtain, as much as 55% of the demand was met by small
players from the unorganized sector. Since Titan faced stiff competition from these players on
the price, it decided to concentrate on building a strong distribution and support network. This
worked well for the company and soon it became the undisputed market leader in the watches
market. However, the variety and range available in the mid segment increased dramatically after
1999, with the changes in the EXIM policy. Though the segment itself grew in size, new entrants
began to threaten Titan's market share.

Outsourcing at Titan Contd...

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. Kurien said, "We have to think global, not Hosur. Putting up plants and buying
equipment is clearly not the answer to competing in the new environment. And as we find suitable
vendors for full watches, we will opt for them increasingly." He added, "In the old days it would
have made sense to put in huge investments in new technology because it was a protected market.
But that is no longer the case."

According to analysts, Titan's multibillion investment in manufacturing facilities were proving to

be a real drain on its profitability in the changed industry. Moreover, since the company relied
heavily on its marketing finesse than operational excellence, these investments were deemed to be
too high. Though the company had consistently posted yearly profits, in the first quarter of 1999-
00, it reported a loss of Rs 52 million.

This loss was due to the high overheads, excise duties and marketing spending in 1999-00, which
increased expenditure by Rs 1.5 billion. Moreover, net profits had come down by 47% to Rs
146.4 million in 1998 from Rs 275.7 million in 1996 (Refer Table V). Company watchers partly
attributed this to the heavy investments in the manufacturing setup.

TABLE V
TITAN - KEY STATISTICS

94-95 95-96 96-97 97-98 98-99 1999-00 2000-01

Sales Volumes (nos. in lakhs)
Watches 325.8 387.5 394.5 435.3 511.1 585.4 667.6
Jewellery 0.9 2 3.7 12 16.8 30 72.1
Table Clocks - 6.7 36.4 30.5 43 32.9 16.2
Sales Income 2824.9 3507.2 4085.2 4420.6 4820.4 6303.3 6969
Expenditure 2239.3 2761.9 3207.3 3572 3934.8 5506.2 6141.9
Interest 218 342.2 564 529.6 519.2 508.8 478.4
Depreciation 131.1 156.8 165.2 188.2 201.4 204 209.3
Operating Profit 236.5 246.3 148.7 130.8 165 84.3 139.4
Other Income 14.4 29.4 129.3 31.6 24.1 130.1 116.3
Profit Before
250.9 275.7 278 162.4 189.1 214.4 255.7
Taxes
Taxes - - 35.8 16 18.7 21.6 20.9
Profit After Taxes 250.9 275.7 242.2 146.4 170.4 192.8 234.8
Equity Div. (%) 30% 33% 33% 25% 26% 26% 26%

Source: www.titanworld.com
Outsourcing at Titan Contd...
Taking into account the above factors, Titan had no other option but to settle for outsourcing.
Around the same time, Titan decided to change its focus to generating more volumes rather than
value. This was because the growth in the premium segment of the watch market, which was
Titan's mainstay, had been below its expectations. The company wanted to build up a base in the
lower value segment and extend its reach. According to company estimates, outsourcing worked
out be around 30% cheaper than manufacturing in-house.

Another reason why Titan wanted to reduce its focus on manufacturing was the high employee
costs - 11.2% of its revenues in 2000. This was because in the days when the company had no
other option but to manufacture, the Hosur factory had a huge worker base. In 1997 and 2000, the
company entered into various wage agreements with the workers' union. As a result, even a low-
skilled blue-collar worker at the company earned as much as Rs 10,000 per month. This increased
overall employee costs. According to analysts, this was alarming because since 1996, Titan had
neither made any fresh recruitments nor replaced close to 200 supervisory and managerial-level
employees who left in the same period.

However, 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. Since
the company decided to focus on generating volumes from low-end mass products, it had come
in direct competition with players in the unorganized market. With cheaper Chinese imports
flooding the Indian market, Titan realized that the complete technology of making watches, from
hand-plating technology to manufacturing cases, was easily available at prices much lower than
what the Hosur factory could ever deliver. According to a former company manager, "The extra
costs in the system aren't helping in differentiating the brand. Today, even unique elements of
design are being easily copied at a lower cost."

These factors eventually led the company to announce that it would be outsourcing in the future.
Commenting on the move, Bhaskar Bhat, Chief Operating Officer, watches business unit, said,
"There will be no more big investments in manufacturing. Wherever we find it is more
competitive to outsource as against manufacturing it in-house, we will go ahead and outsource
it."

Outsourcing at Titan Contd...

However, the management had not expected the trouble with employees. To put to rest the
employee unrest issues, Desai released a memo stating that, "I want to correct a misapprehension
that Titan had inadvertently succeeded in creating that the company was turning to external
sources of supply because in-house production is expensive." The Chief Manufacturing Officer of
the watch business unit, M.S. Shantharam also tried to put to rest the doubts of the employees,
"Whatever we can buy at a cheaper price we will, but not at the cost of underutilization of the
factory." He further added, "The message to perform is clear to every employee. The workers are
fully apprised of the competitive scenario and they realize the urgency of better productivity." As
the employee unrest settled down, Titan began to focus on implementing its decision to outsource.
In 1999, the company outsourced close to 1 million movements from suppliers in Hong Kong and
China. All the components for the Dash range of children's watches that was launched in July
1999 were outsourced from local and global vendors. Workers at the Hosur plant only assembled
these watches. According to Titan sources, new range of watches typically took some time to
generate volumes.

Therefore, it was priced on the higher side. By opting for outsourcing, the company could launch
the watches for just Rs 250-395. If it had to manufacture the range, it would have had to invest at
least Rs 2.5 million just for the machinery to make the moulds for the watches. Similarly, the
Fastrack range of digital watches was also priced in the range of Rs 650 to Rs 1500, keeping in
mind the target segment - youth in the 15-24 age group. Titan could price the range so
attractively because the watches were completely sourced from Hong Kong and Taiwan. Kurien
admitted, "We are able to offer the watch at this price only because of the sourcing model."
Though the company had initially thought of developing the technology for the watches on its
own, 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.

However, the outsourcing decision did not indicate in any way that Titan had
decided to forego its earlier focus on enhancing operational efficiencies. Titan had also put in
place various measures to enhance the productivity of employees and the machinery, including
measures to facilitate better buying and negotiating, locate better vendors, locate alternative
sources, and salvage non-moving components. Through process reengineering efforts, Titan
managed to reduce the overall watch assembly time from 17 days to 10 days today. In addition,
surface treatment time i.e. time take for a process to improve the finish of the watches, was
reduced from 62 hours to one hour. Titan began working towards reducing its cost of operations
with the help of Andersen Consulting through an e-commerce initiative.

The Future
Dash proved to be a runaway success for Titan with 50,000 watches being sold within the first two
months of its launch. The Fastrack range grew by almost 100% in terms of volume and it
established itself as the largest youth brand in the country. The line was extended to the digital
watch market with Fastrack Digital, positioned on the fashion platform. According to company
sources, the success of these two watches was due to the fact that they were outsourced.

By 2001, with revenues of Rs 7 billion and net profit of Rs 235 million, 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. However, in December 2001, while the income from the
watch division increased by 4%, the figure was 10% for the company as a whole. This was because
Tanishq, the jewellery division had posted a 32% growth. 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.
Moreover, analysts said that Titan will not have things so easy in the future due to the increasing
competition in the watch industry. Premium international watch brands such as Swatch, Esprit,
Tissot, Longines, Citizen, Rado and Omega entered India in the late 1990s and catered to the
super-premium segment of the market. However, during 2001-02, some of these brands such as
Citizen, Esprit and Swatch entered the mid-priced segment, posing stiff competition to Titan's
brands in this range (Refer Exhibit I for Titan's product profile in 2002). The company's
marketshare in this segment was 75%, which contributed nearly 65% to the Titan brand's value
and one-third of the company's entire watch business. With the company planning to focus all its
energy to meet competition in the lower as well as higher ends of the market, the watch industry
seemed to be all set for an interesting battle.

Questions for Discussion

1. Explain why Titan had to decide in favor of outsourcing its manufacturing activities despite
having a state-of-the-art manufacturing set up.
2. Explain the concept of outsourcing and the reasons for its growing popularity in the
manufacturing industry. Briefly comment on the pros and cons associated with outsourcing the
manufacturing function.
3. Evaluate the benefits Titan derived as a result of outsourcing the manufacturing function. Does
outsourcing render Titan a low-cost producer?
4. 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?