De-fracturing Manufacturing

We, at OfBusiness, are exposed to manufacturing at multiple levels: 1st as a buyer, then a seller, a lender, a SAAS provider and now a manufacturer and contract manufacturer ourself. Manufacturing in India is pegged with low RoIs and stretched working capital: hence poor scalability. But, in our hard grinding of building OfBusiness, here are our top dos/ don’ts for scalability (in no way prescriptive or exhaustive):

1.     It’s all about scale and gross margins – If you are small, you’ll perish sometime soon. Great selling, buying and production efficiencies yield gross margin: if you lack any, you are paralyzed.

2.     Make to stock, not to order – If you make a standardized product that can be stocked, you call the shots: the buyer comes to you. If you make an order, then you are continuously on the treadmill: 1st to get an order, 2nd to dispatch, and the 3rd to collect. The latter compensates with margins but is too tough to scale.

3.     Outsourcability – You should have both the ability and willingness to outsource some part of your product. Like stripping it into modules and getting good vendors/ partners for it while you control the end product. This gets other parties to put in capital and enables you to focus on fewer attributes, thus simplifying operations.

4.     Hunt for advancement – There’s somebody around the corner who does stuff better than you in quality, cost and time. Keep hunting for them.

5.     Be good at something else, too – Just being a manufacturer is not enough; having another muscle is key to not leave value on the table. Lots of manufacturing-oriented FMCGs are great at distribution (ITC, HUL), while capital goods ones are in financing (Mahindra, L&T).

6.     Create a brand – Get your logo on the product, come what may. And communicate what it stands for. It pays off in the long run.

7.     Invest in professionals – One oft-quoted mantra in management, especially for SMEs, is that 4 things matter (buying, operations, finance and selling), and they are all in the family. Great to begin with, but likely to fail as most families don’t scale, esp. when generation changes hands.

8.     Invest in workers – Enterprises that cut corners in worker happiness will be paralyzed one day: by competition, authorities or by the workers’ themselves.

9.     Reinvestment of profits – You need continuous plowback of profits to create an enterprise. Can’t treat it like a cash cow.

10.  Build leverage partnerships – You will always attract sizable low-cost debt as there is always an asset to back it. A continuous hunt for good quality debt can be a significant differentiator.

11.  Grow via acquisitions – Systematic M&A strategy trumps starting ground-up, though riddled with its own set of issues.

12.  Treat your vendors with care – They deliver on multiple counts: 1) Soaking in fluctuations of working capital, 2) Building capacities for outsourcing, 3) Cutting costs/ inventories with on time in full, low-cost supply. 

Read more from CEO speaks Column:-
– Our Moral Compass
– A Partnership for the Ages