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Due to increase the level of outsourcing in its manufacturing activities while limiting production facilities for just assembling purposes several senior executives threatened to resign. 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.
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. 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
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. 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.
Due to outsourcing the company could launch the watches for just Rs 250-395. The Future Fastrack range grew by almost 100% in terms of volume and it established itself as the largest youth brand in the country. 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.
Titan had no option move away from manufacturing and towards trading in the long run. Outsourcing 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 restrictions 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
Ques 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.
So, what is outsourcing? Outsourcing is contracting with another company or person to do a particular function. Almost every organization outsources in some way. Typically, the function being outsourced is considered non-core to the business. An insurance company, for example, might outsource its janitorial and landscaping operations to firms that specialize in those types of work since they are not related to insurance or strategic to the business. The outside firms that are providing the outsourcing services are third-party providers, or as they are more commonly called, service providers. In recent history, companies began employing the outsourcing model to carry out narrow functions, such as payroll, billing and data entry. Those processes could be done more efficiently, and therefore more cost-effectively, by other companies with specialized tools and facilities and specially trained personnel. Currently, outsourcing takes many forms. Organizations still hire service providers to handle distinct business processes. But some organizations outsource whole operations. The most common forms are information technology outsourcing (ITO) and business process outsourcing (BPO).
Cost savings ³ The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, renegotiation, and cost re-structuring. Focus on Core Business ³ Resources (for example investment, people, infrastructure) are focused on developing the core business. Cost restructuring ³ Outsourcing changes the balance cost by offering a move from fixed to variable cost and also by making variable costs more predictable. Improve quality ³ Achieve a steep change in quality through contracting out the service with a new service level agreement. Knowledge ³ Access to intellectual property and wider experience and knowledge. Contract ³ Services will be provided to a legally binding contract with financial penalties and legal redress.
Operational expertise ³ Access to operational best practice that would be too difficult or time consuming to develop in-house. Access to talent ³ Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering. Capacity management ³ An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier. Catalyst for change ³ An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. Scalability ³ The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.
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 focusing 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.
Outsourcing your Non-Core activities helps in concentrating more on Core business activities and focus only on strategic decisions. Outsourcing helps a company to 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.
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 company·s confidential information has to be disclosed to the supplier. Difficulty in measuring the actual costs of the supplier.
Potential problems associated with taking the function back or substituting the supplier when the outsourcing agreement terminates. Possibility of being tied to obsolete technology. Outsourcing may lead to lack of customer focus. Outsourcing can create potential redundancies for the organization. Outsourcing affects the morale of the employees in the manufacturing sector.
3. Evaluate the benefits Titan derived as a result of outsourcing the manufacturing function. Does outsourcing render Titan a low-cost producer?
Runaway success of new brands
Dash: 50,000 units sold in 1st 2 months Fastrack: grew 100% by volume Fastrack digital: extension of the current line
Emerged as the country·s largest watchmaker
25% market share of total domestic market 50% share among recognized brands Revenues: Rs. 7 bn Net profit: Rs. 235 mn
Competition with unorganized manufacturers importing parts from China Outsourcing ~ 30% cheaper than inhouse manufacturing
Cut down employee costs, which was -11.2% of its total revenue Prevented investing in high end machinery to manufacture new designs
New ranges priced competitively
Dash: Rs.250-395 Fastrack: Rs.650-1500
Gained large market share
Price competitiveness possible because watches sourced completely from Hong Kong and Taiwan Could focus on making other aspects of production more cost efficient
Overall watch assembly time reduced from 17 to 10 days Surface treatment (finishing) reduced from 62 hours to 1 hour
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 ecommerce initiative.