CASE STUTDY 1

CASE STUTDY 1

SHILPI AND COMPANYIn November, 1978, Mr. Hopkins, Manager, Piketi Branch, Baroda of Kamini Bank was analysing an advance proposal from the proprietor of a small scale enterprise "SIIILPI". The proposal had requested for long term loan and cash credit to the tune of Rs.85,000.00. The proposal apparently was a very lucrative one, with a novel product, intended to do lot of social service to those who were handicapped by the loss of limbs, whether natural (since birth) or caused by accidents. As a banker, however, Mr. Hopkins felt he should analyse the proposal carefully. He had the following information available to him.

THE FIRM

"SHILPI" was proposed to be established by 1st December, 1978, as a proprietorship firm in small scale industry by Mr. Patil with the aim of manufacturing and selling the cosmetic prostheses (CP). Cosmetic prostheses are synthetic products designed and fabricated to look life like, to camouflage disfigurements of human body. These include the artificial (synthetic) hands, legs, foot, fingers, ear, nose or such other limbs. Artificial limbs manufactured till date in the country were basically functional units. The cosmetic prostheses on the other hand provided cosmetic value (as they not only provide smooth profile but also complexion of skirt as good as natural).

BACKGROUND OF MR. PATIL

Mr. Patil was a qualified and well known sculptor of Baroda. He acquired a diploma in scuplture from MS University, Baroda in 1965-69 and started his career as a Medical Sculptor in the "Cosmetic Prostheses Lab", Tata Department of Plastic Surgery, JJ Hospital, Bombay in 1969, where he continued till 1974. During 1974-75 he started experiments in Research and Development of an artificial but realistic copy of the human hand for use by the hand amputees..

Prepared by Prof Krishna Kumar

The case material is prepared as a basis for class discussion. Cases are not designed to present illustrations of either the correct or the incorrect handling of managerial problems.

The first experiment was the making of a perfect replica of the human hand in wax, thereafter with the help of a friend, who had partnership in a doll and toy factory, he was able to use these techniques for making moulds for the wax copies of the human hand. Mr. Patil also persuaded a PVC Plastic concern to impart him the technical know how of the.formulation of plastic. Finally the cosmetic hand was cast at the doll factory and in mid-1975, the first indigenous cosmetic hand was provided to a female patient, who was born without a hand from wrist below.

During this period he invested approx. Rs. 10,000 in studio, space, labour, new materials, and tools. He also advertised in local newspapers and received some response. Thereafter he registered several cases, out of which three persons were provided with cosmetic hands. Further development, however, was not possible for him due to lack of funds. At this time he did a project called "Maxinno Facil Cosmetic Prosthetics" which was accepted by the State Cancer and Research Institute. He borrowed Rs. 4500.00 from friends and purchased an oven, air gun, raw material and miscellaneous tools. Again he advertised in papers and received some response, but finally these could not materialise as most of these persons wanted custom built cosmetic hands.

In 1976 Mr. Patil created a life-sized life-like replica of Christian Nativity. This drew a lot of publicity from newspapers, as a result of which one of the professors of a Institute of Management offered to recommend him to some bank for a loan. In 1978, a tailoring shop required a life size life like mannequin which Shilpi supplied @ Rs.800/=. In 1975 Mr. Patit had presented a paper titled "Cosmetic Hand Prostheses as a means of Social Rehabilitation" at hand surgery conference held at VS Hospital, Ahmedabad. After the conference, in 1976, the Artificial Limb Centre (ALC) at Poona deputed a representative to discuss the supply of cosmetic hands. However, no agreement could be reached as Mr. Patit demanded a rate of Rs.250.00 per piece and a firm order of bulk supply.

In mid 1976 one Col. Vikram (retd.) approached him to see the cosmetic hand and discuss the business. Col. Vikram was one of the founders of ALC, Poona and later opened his own centre a Delhi. Mr. Patil tried to get a bulk order from him also, I)ut discovered that Col. Vikram's centre was not organised for such pur pose. This he found out only when he visited the retitre in 1977. Mr. Patil could not get necessary bank loan due to lack of firm orders as it was a condition of the bank. He also approached wealthy individuals of Baroda for the finance, but was refused as they did not have confidence in the viability of the project. Mr. Patil also approached GSFC but the formalities puzzled him. Another bank refused the loan because- he was already employed.

He also received an order of 100 nos. small portraits of "Rang Avadoot" to be made in. plaster of paris. He also tried to start production of plastic mannequin, but failed due to lack of finance. Finally he gave up all this side business because it started affecting his family finance. Soon after he also lost one extension project called "Cosmetic Hand Prosthese" due to paucity of funds.

At the time of starting SHILPI, Mr. Patil was incharge of a Laboratory at the State Cancer and Research Institute at a monthly salary of Rs.1200.00. However he had decided to resign after establishing the firm.

REQUEST FOR BANK CREDITAt this stage Mr. Patil decided to set up a firrw, and request some commercial bank to provide credit facilities. He. made-an application to Kamini Bank for the following facilities These were requested under the scheme of self-employment for technicians-

Fresh Term Loan (3 Year) Limit Rs. 3-7,000

Fresh Demand Loan (Clean) Rs. 8,000

Fresh Cash Credit (Hypothecation) Rs. 30,000

Fresh Clean Cash Credit Rs. 10,000

Rs. 85,000

The cost of the project given by'Mr. Patil was as shown below:

FIXED ASSETS

Rs. 6,000/= Refundable deposit

Rs. 2,000/= Interior alterations in the Building

Rs. 37,000/= Machinery, Equipment and Tools

Rs. 451000/=

Working Capital

Rs.30,000/= Raw Material

Rs. I 1,000/= Labour (6, months)

Rs. 2,100/= Rent (6 months)

Rs.43,100/=

Total Rs. 88,100/=.

Borrowings from other sources were indicated as below

Mr. Pancholi Rs. 1,500.00

Mr, NA Shah Rs. 3,000.00

Mr. A. Gardener Rs. 500.00

Mrs. M. Patil- Rs. 10,000.00

Rs. 15,000.00

The bank enquired about the means and standing of the borrower. The following information was made available to the bank.

Total Assets Rs. 8100

comprising

FDR with CBI Rs. 1200

SB A/c with CBI Rs. 900

Cost of Machinery Rs. 3,000

Purchased Household effects Rs. 2000

Accumulated PF Rs. 1000

Rs. 8100

Annual income of the borrower Rs. 1400/=.

Market for SHILPI Products There were no artificial, cosmetic realistic hand manufacturers, in the

country. However one could import the same from Japan @ 70000 yen,

from USA for US $ 550, from UK for pound '300 and from Germany for DM 500 for a stock hand.

The bulk of hand amputees in India come from armed forces aiid industrial labour. In the case of armed forces hand amputees, the ALC,

Poona catered to their needs at government cost. Civilians could also avail the facilities at this centre for cosmetic hands imported from abroad @ Rs. 250.00 after the same is subsidised by the government, compensation for medical services, artificial aids etc. Before, Mr. Patil left his job at ombay in 1974, he felt that there definitely exists a need for cosmetic hands. However, such an item should be available from some Indian manufacturers at low cost.

Mr. Patil also felt that the prospects of Mannequin were as below:

1. Satee Retailers 6. Wrist Watch Retailers

2. Cloth Retailers 7. Opticians

3. Readymade garment Retails 8 Barbers

4. All tailors 9. Hair Stylists

5. Jewellers 10. Hosiery Retailers

MARKETING STRATEGIES

Although no systematic market survey was conducted, Mr. Patil had

identified the potential customer. He had also decided that he would be pursuing sales of the cosmetic hand with the following

1. Artificial Limb Centre (ALC) Poona

2. Artificial Limb Centre, Orissa

3. Artificial Limb Centre, Kanpur- and its 16 Centres 4. All India Institute of Medical Science, New Delhi

5. All India. Institute.of Physical Medicine, Bombay

6. Artipedix, Vijaywada

7. Nevedac, Chandigarh

8. 13 Prostheses Centres all over Ilidia and Sri Lanka

9. Bonny Orthopaedics, Ahmedabad

10.J.J. Hospital, Bombay

11. Jaslok Hospital, Bombay

12. Gujarat Cancer & Research Institute, Ahmedabad

13. 3443 Hospitals all over the country

14. ESIS Central and State Government

15. 10 old patients of mine

16. Solicit custom built orders

17. Individuals who come in direct response to advertisements.

Mr. Patil also explained to the bank as to how he proposes to promote the product and market, the sides arrangement.

a) In December 1978, he would be inviting all the doctors in India,

who were members of orthopaedic and plastic surgery,cancer, pediatricians, outsterticians, physiotherapy, occupational therapy, prosthetic orthortic and cosmetic prosthetics associations.

b) In the same month he would be placing a 2 column x 10 cms advertisements in the Times of India and all local Gujarati newspapers to publicize that such an activity has started. c) He, would establish consulting rooms on sharing basis, in

Ahmedabad, Baroda, Rajkot and Bombay.

d) Simultaneously he would concentrate on liaision with the Rotary,

Lions and Jaycee Clubs and The Red Cross.

e) He would establish special contacts in Tamil Nadu where the

government has sanctioned over a crore of rupees towards aid for

handicapped during the Year, of the Child of 1979.

f) He would register with, Small Scale Industries Service Institute

for the stores purchases, arrangement and for sales to central and state governments.

g) In 1979, after a period of scales he thought he would apply for

the import substitution award.

h) When the first samples of cosmetic hands were ready, he would

have them photographed, make catalogue and mail them to the

above listed potential bulk customers.

i) He, would personally tour nearby areas to promote sales.

T'he sales arrangements for mannequins, Mr. Patil thought, would be on the following lines:

a) As soon as the first samples are ready, we would prepare a

photograph album, and go down personally to enlist as many

customers as possible.

The same would appear in all newspapers published in Gujarat.

b) We would also advertise that we also repair old mannequins,

purchased from parties outside Baroda.

c) The shops supplied with mannequins by us would be offered

Window Display services for a month as a sales incentives.

For securing government orders Mr. Patil thought of the following Strategy-

a) If he can succeed he would try to persuade the ministry of

health to ask the ALC and its 16 centres to promote my cosmetic

hand.

b) Again he would try to persuade the central and state ESIC

departments to recommend by cosmetic hand.

c) He would contact the government department which purchase a

standardised stock of patterns.

d) If the ALC, Poona purchased in bulk from his standardised stock of pattern, he would be dealing directly with the ministry of defence Mr. Patil. also felt there was considerable export potential. The cosmetic hand costs very high in foreign countries : e.g.

a) Cosmetic hand custom-built in USA costs US $ 550

b) Cosmetic hand custom-built costs 70000 yen in Japan

c) Cosmetic hand from standardised stocks from Germany costs

approx. DM 500.

d) Cosmetic hand from standardised stocks from UK costs approx.

pound 300.

While the cost of standardised pattern cosmetic would be;within

Rs. 100.00 he expected the SHILPI cost for custom built hand to be around Rs. 2000.00.

Mr. Patil therefore had also thought of tapping some of the export

potential available. He decided hat as soon as the catalogue and price- list was ready, he would write to all Indian consultants abroad to contact various agencies for imports.

Towards this he had written in the meantime to the United Nations

and also to the World Rehabilitation Fund in this connection and was

expecting a favourable response.

About terms of sales, Mr. Patil had decided against credit sales except in very special cases.

PRODUCTION AND PROFITABILITY

SHILPI production capacity was planned as below

1. Approx. 2000 Nos. (Cosmetic hands per month) covering three

basic types namely:

a) Cosmetic hand with zip.

b) Cosmetic hand with a glove

c) Cosmetic hand with pinch.

Initially there will be three sizes for males and one size for female,

making it to about 48 varieties.

These would be mass produced standardized patterns, anyone of

which will cost not more than Rs. 100.00.

2. Approx. 100 Nos. Mannequins (every month)

Mr. Patil expected an annual production and sales at the following level :

a) Cosmetic hands- minimum of 2000 nos.

b) Mannequins- minimum of 300 nos.

To the bank's enquiry on the cost of production and profitability Mr. Patil answered as follows,

"Since I am not able to answer this in the stereotype form, I could

state as below:

The production programme proposed for the first year is:

a) 2000 cosmetic hands (at an average of Rs.50/- margin per piece)

= Rs. 1 lakh

b) 200 Mannequins (at an average of Rs.500/- margin per piece)

Rs. 1 lakh

For a total capital employed of Rs. 88,100, the total returns on the

above targets would be Rs. 2 lacs.

PRODUCTION FACILITIES AND,RAW MATERIALS

The production facilities did not include many plant and machineries.

Basically SHILPI required

a) A rotational slush casting machine (oven) and associated control

panels.

b) A Cooling tank

c) A mixer-cum-de-airator

The other equipment were small items such as a compressor, vacuum

machine, Avery weighing machine, laboratory balance, life study stand, jig and fixtures etc.

Of these machines the rotational slush casting machine required for

the manufacture of cosmetic hand was the most expensive one. There was no indigenous manufacturer of the machine. The imported machine would cost around Rs. 3 lakh.

Mr. Patil therefore designed the machine himself and ordered for its

manufacture in one of the local equipment manufacturing company. The machine could also be used for manufacture of a variety of other objects. The, machine would thus facilitate diversification to other consumer products in future.

On the raw material front Mr. Patil did not expect any problems as most of the raw material required for product (40/46) were available in

local market. The rest were available in Bombay. About the other inputs namely power, water and labour no difficulty was expected.

There were only three other persons, apart from Mr. Patil to work for

SHILPI. One was a (part-time) accountant and the others were labour who were being trained in specific tasks.

Question Should Mr Hopkins sanction the proposal for advance or not? Give

reasons.

CASE STUDY 17

SCOOTERS INDIA,LIMITED (A)

Towards end of January 1986, Shri P.S. Kapoor, the Chief Executive of Scooters India Ltd. (SIL) was wondering what action plan he should draw to bring back SIL on the rails. The company's losses were soaring. Though the company never made profits 'ever since its inception, of late the performance had been deteriorating fast and company was incurring huge losses. (see exhibits I & 2).History of the Company

In view of increasing demand and supply gap in the 2 wheeler scooter industry of the country, the Government of India decided in principle, around October 1962, to set up a public sector unit for manufacture of scooters with indigenous know how and without involving any foreign collaboration. However, owing to non-availability of indigenously developed design and mass production technology for the planned level of production of one lakh scooters annually, not much progress was made in this direction. Tenders were invited in 1970 from foreign parties for collaboration in the proposed project. Out of the two offers received, the offer of M/s Piaggio of Italy was considered serious and worthwhile.

In the meantime, while considering the applications of M/S Automobile Product of India Ltd. (API) for expansion of their manufacturing facilities with an additional capacity of 100,000 Lambratta 2 wheeler scooters annually by importing the manufacturing facilities of M/s Innocenti S. G. Milano, Italy, their erstwhile collaborators, and also for manufacture of 2.4,000 3 wheelers, the Government of India decided in July 1971 to accelerate the setting up of the public sector unit. Accordingly, discussions were held with API and Innocenti to explore the possibility of jointly implementing the scheme submitted by API. It was agreed in September 1971 to set up a joint sector company for manufacturing 100,000 two wheelers, with Government of India holding 51% and API and Innocenti together ho Iding 49% of equity capital of the new company.

Prepared by Prof. Krishna Kumar, and Dr. Arun Sahay of Scooters India Ltd.

The Case Material is prepared as a basis for class discussion. Cases are not desired. to present illustrations of either correct or incorrect handling of administrative problems.

As a sequel to the negotiations, an inspecting team of technical and financial experts of the Government of India and API was deputed to Italy in October 197.1 to determine the life and condition of the plant offered by Innocenti, the reasonable price of the equipment, and also additional machinery that may be needed for replacement, adjustment and balancing the 'facilities, to achieve the level of production of 1,00,000 scooters annually. The services of an independent appraiser in London were also sought.

The, plants and equipment was being offered by Innocenti on "as is where is" basis. The plant was out of operation for two years as the factory was closed due to serious labour troubles. Most of the machines were old, over 70% of them being older than 10 years. The company Innocenti had also agreed to offer basic manufacturing drawings whatever available but nothing more in terms of "know-how".

The report of the independent appraiser and the inspecting team said:

(i)The equipment offered was in reasonably good condition and on an average the economic life of the plant and machinery offered would extend to have production of 5 lakh scooters, equivalent to around 7-8 years of production.

(ii)While life of special purpose machines was over 8 years, that of general purpose machine was 4 years and above.

(iii)The total price of 3 million demanded by Innocenti was reasonable.

(iv)The production capacity of the individual equipment and tooling for particular operations (classified under good condition was ,,suitable for production of more than 1,00,000 scooters per annum, however, the direct production shop would require balancing equipment of Rs. 95.90 lakhs. Besides, various supporting facilities of Rs. 126 lakhs considered essential for the commencement of production were not included in the offer.

(v)Considering the technological involvement, the ultimate cost of production, and the aspect, of a quality product, a provision was required to be made for shell moulding foundry along with forge and heat tretment shops estimated to cost about Rs. 66 lakhs.

(vi)Shifting of equipment to India would cost about US $0.5 million upto the port of embarkation and Rs. 9 million thereafter.

TABLE-1

ITEMPLANT WITH ENTIRELYPLANT OF'FERED

NEW EQUIPMENT BY INNOCENTI

OFFERED BY PIAGGIO

For 100,000 per Annum

1. Total Fixed Assets Rs. 15.91 Cr. Rs. 10.90 Cr.

2.Foreign Exchange Element 6.56

2.90

(included in total fixed

investment)

3.Working Capital

5.00

5.00

Requirements

4.Production Cost perRs.2022 Rs.1989

Scooter

5. Ex-Factory price at

assumed level of 12.5% Rs. 2321 Rs. 2225

gross return on total

fixed investment

The alternative offer of Piaggio with entirely new plant and equipment compared as shown in table 1 above.

In view of the Positive report of the experts the government approved the purchase of "Innocenti" including auxiliaries- on the following considerations.(a)Lower total fixed investment, foreign exchange involved and production cost compared to and entirely new plant.

(b)Generation of additional resources of about Rs. 4.80 cr. on the sale of 5,00,000 scooters in a period of 7-8 years, when the equipment by Innocenti would, on the average, have reached the end of its economic life. This would enable greater flexibility in replacement programme, phased modernisation, faster expansion and diversification.

(c)Profit of about Rs. 2 crores on the commencement of production by two years ahead with the old plant of Innocenti.

(d)Saving in foreign exchange as payment was to be made after adjustment of $0.40 million towards the equity of the company and the balance of $1.6m was payable out of export earnings over a period of 7 years, the first payment starting after a period of 2 years.

An agreement for the collaboration -on above lines was signed on 16th June 1972 between the Government of India, API Innocenti and Innocenti Lambretta sPa (which had since taken over the scooters operations of Innocenti). To give effect to this agreement, Scooters India Ltd. (SEL) was incorporated on 7 September 1972 as a company under Companies Act, 1956.

While finalising the agreement, however, a serious snag cropped up. In respect of the payments to be spread over 7 years (expected to come out of exports), the vendors (Innocenti) insisted upon a guarantee which could be discounted in Italy. As no bank in Italy was willing to discount a guarantee payable over a period ' of 7 years, the vendors agreed to accept -a cash payment of Rs. 1.45 million in lieu of payment of Rs.1.703 m (spread over 7 years). The amount of $1.6 m had increased to $1.703 -m during the period due to devaluation of the dollar. The cash payment was approved by the Government of India on 15th March 1972.

Sometime in middle of 1972, Innocenti.went into voluntary liquidation. No shares, therefore, could be issued to the vendors (for $0.4 m). The vendors, however, agreed for a cash payment of $0.2 m, in lieu of share equivalent of $0.4 m in order to compensate the company for delay on their part in supplying certain technical and other documents. Government of India agreed to contribute Innocenti' s part of the share capital.

Mr. Soundararajan, Senior IA & AS Officer, was appointed as the first Chairman & Managing Director of the company. Prior to joining SIL, Mr. Soundararajan had a tenure in Garden Reach workship at Calcutta as Managing Director. He also brought with him Mr. Gangopadhyaya as Chief Engineer to look after the civil work.

The API was requested by the Government of India to prepare Detailed Project Report (DPR). The company submitted 2 out of 12 volumes of DPR by end of 1972. The terms and conditions were not settled in advance. While submitting the DPRS, API claimed a fee of Rs. 40 lakhs which was subsequently reduced to Rs. 30 lakhs. The Government, however, informed API that cost of preparing DPR was a matter for SIL to decide. 'Me company felt that the information and data contained in DPR though useful for setting ,up the manufacture of scooters, could not be considered complete owing to non-inclusion of information of certain aspects e.g.:

(i) manufacture of J. Series scooters

(ii) detailed layouts of machine tools in the main plant and layout of

services and

(iii) ordering for balancing equipment and machine tools.

API agreed to carry out modifications etc. in DPR. It was also agreed that a sum of Rs. 15 lakhs would be paid to API for this work in three, equal instalments. While two instalments were paid, the last one was not released as certain items of work were not completed by API. API filed a. suit in August 1976 for payment of last instalment which is still pending in court.

Proposal for the Three Wheeler Project

In January 1973 a proposal was made by Innocenti for sale of world rights to manufacture three wheeler Lambros, technical documentation and the plant and equipment having a capacity to manufacture 30,000 Labros per annum. SIL approached the Government of India in January 1973 for approval to extend its manufacturing activities to --over manufacture of 30,000 three wheelers, and purchase from. Innocenti the technical documentation, equipment, tooling etc., at a cost not exceeding 195 in lire (Rs. 25 lakhs), on the following considerations.

(a)Likely popularity of the three wheelers as a light transport vehicle with a pay load of 600'kgms.

(b)Greater export potential to developed countries in Europe.

(c)Considerable economics in the initial investment and reduction in the cost of production by integrating the three wheeler and two wheeler production.

(d)Attractive price of the technical documentation and equipment.

(e)Minimum additional investment. for the three Wheeler by resorting to more intensive use of the plant and equipment available for the two wheeler production.

(f)The additional investment of Rs. 47 lakhs would result In the plant being able to add a product line valued at about Rs. 16.5 crores and additional profit of Rs. 1.50 crores per annum.

The above proposal was agreed to by the Government of India subject to following conditions;

(i) The cost of plant and/machinery including documentation and world rights not to exceed Rs. 25 lakhs (185 million lire).

(ii)The capital cost of setting up the plant would be approx. Rs.72 lakhs including foreign exchange element of Rs, 35 lakhs(iii)Profitability of the integrated scooter project to be re-calculated and DPR already prepared to be suitably modified and submitted to the Government for approval.

Withdrawal by API

In January 1973 the API was requested to bring its contribution of share capital. However, in July 1973 API declined to-do so on th6 grounds that the ( company had (i) not accepted API as technical collaborators (ii) -decided to take over the-three wheeler project which was to be taken up ,by API in terms of an understanding between API and Government of India.

The Managing Director of the Company stated to Committee on Public Undertakings (COPU) in 1983 that:

"API had be en having certain discussions with the Government where they had proposed that they should be entrusted with the task of preparation of DPR and should also become technical consultants of SIL. The Government mentioned to them that this was a matter to be decided by the company. The company felt that the technical consultancy was not essential because the type of consultancy which they were prepared to give was on general aspects of the company and not on the technical details of the components and other things. This was too high a price to pay. We told them we did not require this type of consultancy. API had planned that the money they would get on technical consultancy from SIL they will invest back in equity. Since they were not getting this money from SIL, they refused to participate in the equity".

The Secretary, Department of Heavy Industry added.

"The API could not be engaged as a consultant because it is not that any body who is manufacturing .something is knowledgeable enough about the design of products. The most important thing which a collaborator should provide us is know-why of the product and not know-how. This know-why was not available with API".

A Senior executive of the company, however, said:

"The API was really pulled down, the Chief Executive thought he could do every thing himself and therefore no external help was required".

Project Costs

The capital investment plan involving an expenditure of s. 12, crores for 'two and three wheeler project was prepared by the company and sent to the Government of India in March 1973 for approval. The approval of the Government to the said plan was accorded for Rs. 11.90 crores in 1974.

The estimates were further revised by the company to Rs. 12.7 crores in November 1974 which too w as approved by the government in September 1975. A further sum of Rs. 75 lakhs was sanctioned b the Govt. on April @y

1976 for the Foundry Projects; thereby increasing the estimates to Rs. 13.45 crores. As against '.he total sanctioned estimates of Rs. 13-45 crores an expenditure of Rs. 19.48 crores (approx.) was incurred on the project upto March 1980 as per the details given in exhibit 3. The excess of expenditure over Rs,.13.45 crores was primarily owing to the expenditure on acquisition of Fans unit (Rs. 54.78 lakhs) of the Ganesh Flour Mills (Delhi) and supporting facilities in tool regrinding and inspection area (Rs. 104.50 lakhs) renewal and replacement programme (Rs. 460.02 lakhs) and certain cost overruns in building, import of machinery from Innocenti, furniture/fixtures etc. It may be noted that the above included an amount of Rs. 309 lakhs incurred upto March 1980 on an unapproved power pack project, subsequently treated as an expenditure on -supporting tool/inspection area facilities and renewal/replacement of machinery.

The company also invested in two subsidiary companies promoted by it, namely U.P . Instruments Ltd. (Rs. 15.68 lakhs) and U.P. Tyres and Tubes Ltd. (Rs. 52.28 lakhs) to ensure supply of instrumentation panels, and tyres and tubes at local levels instead of long lead time procurements from other states.

Funding of the Project

The financing of the project was through equity capital and loans om government and other agencies. The company was registered with an authorised capital of Rs. 5.5 crores (55,00,000 shares of Rs. 10 each), which, was raised to Rs. 8 crores in 1976. The paid up capital as on March 1982 was as under:

Shareholder No. of shares Value of shares % of share

(Lakhs) (Rs. in Lakhs) holding

1. Govt. of India32.60326.0062.1

2. Financial Institutions10.90109.0220.8

3. General Public8.9689.6317.1

Total52.46524.65100.0

Rest of the financing of assets has been through loans from the Government of India and financial institutions (LIC, IDBI etc.) and a commercial bank (exhibit 4). The Government gave a moratorium of 23 -years for the payment of principal as well as interest. The company, however, had not been able to pay the principal or accrued interest so far and every year it was added to the loan amount. The perennial loss position of the company was reflected in a continuous cash crisis in the company and it had to borrow constantly an increasing amount to sustain the operation which default in payment of principal as well as interest occasionally resulted even in defaulting in timely payment to suppliers.

Questions(a)Criticallyexaminethefactorsresp6nsibleforthecompany'spoor performance(b)What action plan do you suggest to bring the company out from the position it is in?EXHIBIT-1

COMPARATIVE PROFIT AND LOSS ACCOUNT OF THE COMPANY

(Rupeesin lakhs)

1979-801980-811981-821982-831983-84 1984-85

Income

Sale of Products2257.752778.012850.782793.112620.73 2780.22

Other sales31.9241.4156.3465.6536.98 48.05

Miscellaneous131.0979.8461.2275.19184.77 75.16

Income

Increase in stock93.0650.06(19.46)546.95(285.68)(119.64)

Total2513.812949.232948.863480.902556.802783.79

Expenditure

Raw Material Consumed1303.141424.261498.721758.121273.071487.78

Purchase for Service Stations18.5520.1427.1129.2231.70.36.36

Factory Expenses240.00277.43302.10355.72332.82270.38

Employee Remuneration

& Welfare Expenses349.65468.49519.82565.37651.55684.94

Administrative Expenses47.2754.0553.2655.3058.5153.64

Selling & Distribution Expenses384.63487.85481.96524.06347.36-509-.79

(Riipeesin lakhs)

1979-801980-811981-82 1982-83 1983-841984-85

Reserve for Doubtful

debts/advances -1.52 12.75 .36 1.32 21.23

Reserve for Inventory

Obsolescence -4.77 29.57 - .20 . 30

Assets Written Off* 5.6335.18 23.36 39.87 42.06 40.12

Depreciation 137.51 133.60 139.38 154.69 163.99 151.51Interest 402.51503.38 619.94 698.66 831.91 936.09

Total 2933.883410.67 3707.37 4181.37 3734.49 4192.14

Loss for the year (420.06)(461.33) (758.51) (700.47) (1177.69) (1408.35)

Adjustment for Prior Periods

(Net Debit) (25.35) (28.69) (9.56) (9.63) (44.57)(28.21)

Net loss for the Year (445.42)(490.05) (768.06) (710.101) (1222.26)(1436.56)

Loss brought forward

from previous year (1532.32) (1977.74) (2467.76) (3235.52) (3945.95) (5168.21)

Balance of loss carried

over to balance sheet (1977)(2467.76) (3235.82) (3945.95) (5168.21)(6604.77)

Includes preliminary expenses, deferred revenue expenditure off and bank charges.

Note:Company annual reports figures recast to conform-to same format of presentation.

EXHIBIT-2SALES/PRODUCTION PERFORMANCE OF SIL

_____________________________________________________________________________________________

Production

______________________________________________________________________________

ParticularsLicenced Installed 1984-85 1983-84 1982-83 1981-82 1980-81 1979-80 1978-79

Capacity

Capacity

____________________________________________________________________________________________________________________________2 Wheeler1,00,000

60,000 27722 22619 36756 31769 35502 33304 23027

(28459) (29328)(29419) (31003) (35715) (33635) (23523)

2 Wheeler --- 20,000 17 3456 16981 10278 12540 12079 15773

Power Packs

3 Wheeler30,000 2,500

950 788 385 711 532 284 102-

Vikram

3 Wheeler ---

1 --- 1

23 l u --- 373

Power Packs --- (1) --- --- (23) (10) ---- (373)

Vinai Moped 50,000 --- ---- --- 10 - - - 15Ganesh Fans75,0010

60,000

37259 37679

- 45685 4110732890 29707

(37020)(39995)

(38482)(44490) (40114)(32044) (30896)

____________________________________________________________________________________________________________________________

Never manufactured

Note:Figures in bracket indicate turnover or sales

DE-RATION OF PLANT CAPACITY

Production

ParticularsLicencedInstalled1984-851983-841982-831981-821980-811979-80 1978-79

capacitycapacity

2 Wheeler1,00,000-60000600006000080000800008000080000

2 Wheeler-10,000200002000020000----

Power Pack

3 Wheeler30,0007,5002500250025006000600060006000

3 Wheeler----------

Power Pack

* Moped Vinai50,000

-------

Ganesh Fans75,000

60000600006000060000600006000060000

*Never manufactured

** Includes 20,000 Mopeds

EXIBIT 3

BREAK-UP OF THE PROJECT COST

(Rupees in lakhs)Item ofCost as perOriginal CostRevised CostActualexpenditureCapita investmentas approved byapprovedexpenditure

planGovt. in(Sept, 75,incurred upto

March 74-June76& June 76)31.3.198031.3.1982

123451. Land and land development

including boundry walls, outside

drainage and roads 27.00 27.00 29.60 18.10 18.10

2. Main factory building storage shed,

mezzanine floor for office, drainage,

water supply and horticulture 223.00 223.00 281.13 339.97 348.82

(including electric installation a mounting to Rs. 101.25 (lakhs)

3.Machinery imported from Innocenti

for the two wheeler plant including

freight, customs duty etc. 289.00 289.00

354.75 402.80 402.80

4.Machinery imported from 'Innocenti 50.50 50.50for the three wheeler plant including

freight, customs duty etc

(Rupees in takhs)

Item of expenditureCost as perOriginal CostRevised CostActual

Capita investmentas approved byapprovedexpenditure

planGovt. in(Sept, 75,incurred upto

March 74-June76& June 76)31.3.198031.3.1982

12 3 4 5

5.Balancing machinery for the two

wheeler and three wheeler plant 350.00 350.00 391.02 339.15 402.48

6. Installation cost of capital repairs

to plant and machinery obtained from 30.00 30.00 35.00

Innocenti prior to

their installation

7.Furniture, fixture, office equipment

and vehicles 35.00 35.00 35.00 44.15 48.16

8.Pre-production expenses to be treated

as deferred revenue expenditure 75.00 75.00 100.00 106.00 106.00

9.Installation of diesel generating set

for total power 3000 KVA.40.00 40.00 33.50 20.95 20.95

10.Residential Colony for Staff70.00 60.00--

I 1.Development of land and other

municipal facilities for work-

men's colony10.0010.0010.001.121.12

contd...________________________________________________________________________________________________________________________________

Item of

Cost as per

Original Cost

Revised costActual

Expenditure

Capita Investment

As Approved by

ApprovedExpenditure

Plan

Govt. in

(Sept, 75,

Incurred upto

March 74-June 76

& June 7631.3.1980 31.3.1982________________________________________________________________________________________________________________________________

1

2

3

4 5

________________________________________________________________________________________________________________________________

12.Foundry project approved by Govt.

in April 1976

-

-

75.00

54.78

60.77

13.Fan unit, ancillary estate and tools and

equipment for retail outlet managers

(not contemplated in the Capital

Investment plan)

- -

-

55.92

87.54

14. Supporting facilities in tools room,

tool regrinding and inspection

areas (Rs. 104.50 lakhs) and

renewal and replacement

programme (Rs. 460-02 lakhs)

--

--

---

564.92

690.40

________________________________________________________________________________________________________________________

1190.50 or

Say 1200.00 1189.93

1345.00

1947.86

_____________________________________________________________________________________EXHIBIT-4

PROJECT FINANCING

(Rupees in lakhs)

1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-93 1983-84 1984-85Sources of Funds

a)Paid Up

Capital 513.71 524.92 524.82 524.82 656.13 706.13

b)Reserves &

Surplus 1.83 6.72 6.72 6.72 6.72 6.72

c)Loans

i) Secured 1008.48 1022.67 1120.43 317.27 1535.38 1528.29

ii) Unsecured 2619.85 3024.88 3816.38 4540.28 5453.80 5453.81

d)Deferred payments and other

current liabilities 827.72 915.14 1010.86 1471.89 1173.09 1062.62

Total

4971.59 5494.23 6590.22 7886.00 8825.14 9954.86

(Rupees in takhs)

1974-75 .1975-761976-771977-781978-79 1979-801980-811981-821982-831983-841984-85

Application of Funds

a) Net Fixed Assets

1243.811300.781223.971176.891148.231078.24

b) Investments

25.0030.0130'.0135.5158.9960.01

c) Current Assets1557.421530.691855.202619.63 2317.14 2170.33

d) Misc expenditure2.282.251.941.681.320.97

(not written off)

e)Profit & Loss A/C1917.73 2407.35 3175.453886.00 5169.82 6549.15

'Total4971.59 5494.23 6579.227886.00 8825.14 9954.86

CASE STUDY 18

SCOOTERS INDIA LIMITED (B)

SIL initially had planned for manufacture of 2 wheeler scooters only. The production actually started in February 1975 while the decision to purchase old plant of Innocenti was taken in November 1971- and one factor that weighed in the acceptance of Innocenti offer over new plant from Piaggio collaboration was that the time required for the commencement of production would be only 24 months after taking the decision as against 42 months required for the creation of new plant.

The company developed a prototype scooter 150 cc (Brand name Vijay Deluxe) and sent it to Vehicle Research & Development Establishment (VRDC), Ahmednagar in November 1974 for technical trials. Certain technical defects were reported by VRDC to the government (after trial run of about 7000 K.ms), who in turn intimated these to the company and authorised it to go ahead with commercial sale of the scooter after removing the defects.

Subsequently VRDC reported to the government in October 1975, on the basis of trial run conducted in July as follows

(i)There were no major defects during trials and endurance test.

(ii)The scooter gave starting trouble and its piston rings were worn out after a run of about 10000 Kms.

(iii)The above defects were not rectified and the performance of the scooter was not satisfactory in these critical aspects.

The company, however, introduced Vijay Deluxe in the market once government clearance was received. The product "fell flat" in the market and tarnished the image of SIL badly. "It had to happen", said a senior executive, "when the production people are overruled in critical decision like introducing the- product after full satisfaction of the -shop. Here was a case when Chief Executive and Production head could never agree with each other and production people were overruled". The customers experienced serious problems with the scooter in starting. There were other problems of reliability as the product was of inconsistent quality.

____________________________________________________

Prepared by Prof. Krishna Kumar & Dr. Arun Sahay of Scooters India Ltd.

The Case Material is prepared as a basis for class discussion. Cases are not designed to present

illustrations of either correct or incorrect handling of administrative problems.

Introduction of Vijay Super

The failure of Vijay Deluxe led to hectic efforts to improve the product by rectifying the defect particularly cylinder and piston wear, vibrations, clutch plate slip, dim head light etc. The company appointed a set of consultants from 1977 to 1980 (see exhibit 5) to improve the acceptability and performance of the scooter. The company removed the defects pointed out by M Bianchi (former engineer of Innocenti) and introduced a new model Vijay Super. It had less starting trouble, improved engine life and had brighter head lights. The company introduced Vijay Super in the market in September 1977 with a solid campaign using M/S Rediffusion as the advertising company. The product got market acceptability but could not come up to expectations raised, particularly it could not avoid the stigma attached to its being a "chain drive". The scooter did have some difficulty in chain drive due to material and heat- treatment problems. However, the product could sell in "a seller's market" and the production level of about 30,000 scooter per annum could be reached. By the end of seventies most of the major problems were taken care of and Vijay Super was having growing sales performance.

Lambretta Centro

The market conditions however, were changing fast. Although the scooter was selling, the management had realised that it was more the seller's" market than the competitiveness of the product that was responsible for sales growth. The cost of fuel was rising and pressure for vehicles with high fuel efficiency was increasing. The main competitor Bajaj, was requesting government for permission to expand capacity. Several companies were negotiating for import of technology with a foreign collaborator whose product Vespa had achieved complete acceptability in the market There were few others who were trying to import technology for fuel efficient motorcycle. All such proposals were being pressed for government's permission to start manufacture. Mopeds had made inroads into two wheeler market by snatching away a large share of low income group segment.

Looking at these developments, management had started focussing on development of Innocents J-100 series scooter, which was the latest model developed by Innocenti before it wound up and sold the plant and machinery to SIL. It was a 100 cc scooter, highly fuel efficient (55km/ litre as compared to 40 km/litre of Vijay Super. The cost was also less (around Rs. 6000) as compared to over Rs. 8000 of Vijay Super. Around this time a high powered Japanese delegation visited the country and the Government enquired from SIL whether it would like to explore collaboration possibilities, before opening the gate for private sector. However since the company was already in the process of introducing a cost effective product, it did not evince any interest. The product was not through the envelopment stage for commercialisation when the Bajaj Auto Ltd. announced the introduction of 100 cc Bajaj Cub model. Almost at the same time another 100 cc two wheeler Vespa PL 170 of A.P. Scooter Ltd. with collaboration of Piaggio of, Italy came in, the market. As if that was not enough another collaboration with Piaggio came in the market with Lohia Machine's 100 cc scooter. Bajaj Auto had expanded. its capacity of 150 cc and Lohia machines collaboration also covered 150 cc size. Right at that time highly fuel efficient Hero Honda, Ind-Suzuki and Yamaha motorcycles came in the market. Combined with this was Kinetic Honda moped. The situation was changing fast. The company, therefore, rushed to announce the product and opened booking to coincide with the booking of Lohia Machine Vespa (100 cc) and Bajaj Cub 100 cc. The booking was brisk and company was able to collect approx. Rs 5 crore deposits for about 100,000 scooters.

The move, however, back-fired. The scooter proved to -have technical snags and had to be withdrawn from the, market for a while for removing these defects. By the time these were removed and product put back into the market, the market had virtually rejected 100 cc scooters. Lohia Machines gave an option to its clients to choose either 100 cc or 150 cc. Bajaj Cub also did not pick up.

Three Wheelers

The agreement for transfer of drawing and equipment to manufacture. three wheelers was entered into in 1973. However, actual production could start only in 1977. The company did not lay much emphasis on this and initially it was limited only as a load carrier. It was only in early eighties that it came to be used as a passenger taxi when the sales and production picked up. Still it did not reach capacity level production as on the one hand the product as it is, did not have a large demand, on the other the production capacity of two wheeler had to be sacrificed if 3 Wheeler production was to be increased. Unlike 2 wheeler the 3 wheeler did not face the situation of market rejection and there were no major technical snags noticed in it. Indeed, it cut into share of Bajaj three wheeler in certain areas.

Marketing of 3 wheelers faced a different kind of problem than 2 wheelers in large cities. The market was already dominated by 2/3 seater small three wheelers from API and Bajaj and also large capacity Bajaj' "NOSE HEAD" tempos. With the capacity of 8-10 passengers it was not economical to use freely for any distance like 2/3 seater three-wheeler. They could thus run economically only from stand to stand. Moreover, the introduction of three wheeler faced organised opposition in other cities from man pulled rickshaws and animal driven tongas. In places like Delhi and Bombay it faced organised opposition from 2/3 seater three wheeler taxis. Technically the product was good. It gave about 18 km/litre of petrol and 25km/litre of diesel. There were no major complaints from dealers.

The company also made about 40 covered 3 wheelers for ambulance and as a 3 wheeler passenger car. It was more out of desire to experiment than use it as a commercial proposition. Management felt that this product (3 wheeler passenger car) does not have much of potential, although it felt there was enough potential for low priced 4 wheel passenger cars, looking at the huge advance bookings of Maruti cars. The basis for management's dim view was that cars are considered a status symbol and people would prefer to have a second hand four wheeler car than a new three wheeler one.

Power Packs

The company had excess manufacturing capacity and therefore, undertook the supply of engines (power packs) to several other 2 wheeler manufacturers. Towards mid seventees several state governments approached SIL for providing necessary technical support for manufacturing 2 wheelers (see exhibit 6). SIL accepted the request and agreed to supply the power packs and sheet metal components like panels etc. Other components they had to -manufacture on their own, or arrange to purchase from outside. The company manufactured power packs -against firm orders and, therefore, did not carry inventory of finished goods.

Mopeds

SIL at one stage also planned to manufacture low power two wheelers, namely "mopeds". Indeed, in 1976, it acquired a part of Ganesh Flour Mills (Delhi), its fans' unit. The Ganesh Flour Mills had become sick and was taken over by government, who was looking for a prospective buyer. SIL took over the company on lease basis in 1976 to utilise its space for manufacture of "mopeds". The project never materialised as management finally decided to abandon mopeds project after deffering it for several years. The unit, therefore, continued to manufacture only fans (see exhibit 2 of SIL (A) Case).

Cost Components

Except raw material cost, almost all the other components of factory costs were fixed costs (see exhibits 7 & 8). As most of the facilities of 2 wheelers and 3 wheelers were common, allocation of even direction labour cost was difficult. The selling and distribution expenses too were variable costs as the company had employed contractors for shipping of goods to the dealers.

Marketing Strategy of the Company

"There was little in the name of Market Research that we could do", said one member of the top management. "We were set up to manufacture scooters, so we started doing that. What else could we do? The task of marketing was principally that of distribution, particularly in view of the large demand and supply gap that existed in those days. Production had been a bottleneck. Till recently we could always sell whatever we produced. We could not be market leaders because our main competitor i.e. Bajaj, had technology which was accepted in the market. The entire R & D efforts all along were focussed on indigenisation programme only. Market Research has become important now when there is glut in the market with several competitors having come in the market. Our facilities are to be utilised and we have to find out customers for it".

"People's psychology is difficult to change," said the General Manager (Marketing) "They think 100 cc is less powerful and hence inadequate for the duty 150 cc scooter are capable of. It is so difficult to convince them that it is due to advanced technology that such high fuel efficiency engines are able to give adequate power with a very low fuel consumption". The sale of 100 cc never took off as expected. The major share in output remained in 150 cc two wheeler (see exhibit 2).

The wide demand and supply gap and production bottlenecks were the underlying factors for company shying away from intensive advertising. By and large it was confining to the introduction of different models of two wheeler. Of late when there was heavy advertising by competitors, the company could hardly spend heavily on the advertisement. While SIL never spent more than 35 lakhs in a year throughout its operations the competitors expenses on advertising ranged from Rs. I crore to 10 crores:

"Frankly," said another top executive, "it is the lack of customers orientation than anything else responsible for any market research and product development. Customer was an enigma for the first generation of top executives. They had background of only giving orders all along in their life. It was too much for them to subordinate themselves to the customers' wishes. They hardly believed the product will sell only if customers wanted to have it. The tug-of-war between marketing-design-production has been an undying phenomenon here throughout."

The company products being highly competitive, the company was never in a position to decide price of the product on the basis of costs. Pricing was generally based on the industry position and price adopted by competitors for their products, and the gut feel as to which price will boost the sales. Besides it was also difficult to determine actual cost as the production level and production varied from period to period. The company had never been able to realise all the cost. It started with pricing at a loss and continues to do so.

The company product line was predetermined by its very establishment namely the two wheeler and three wheelers. The company Management felt that they would not be given a licence to diversify to, say, manufacture a four wheeler passenger car. Converting three wheelers into passenger cars was not considered to be a feasible proposition as the company management felt four wheeler is a status symbol and could not be substituted by a three wheeler.

Besides the Vijay Deluxe, the new products Cento (100 cc) and Vijay Super models (Mark I & 11) were generally based on the market response given by the dealers or what the designers and others in the company thought the product should have. No such thing like independent market research was conducted by the company for the purpose. This led to occasional and unplanned additions and deletions in the accessories. To what extent it led to increase in sale is not easy to, answer. However, it definitely multiplied problems in managing bought out items and efficient inventory management,

As a matter of policy the company did not go for the "traditional" dealers channel for distribution of the scooters. Instead a novel scheme was developed keeping in view the national policy of helping the unemployed youths several young unemployed were recruited and trained to be the regional outlet engineers. They also enjoyed commission on sales made. Generally they did not have any background of automobile sales and service. Recruitment too bad external and internal influences. The policy, however, had to be abandoned after sometime in favour of the "traditional" dealerships as the Regional Outlet Engineers could not deliver the goods. They were, however, given the option to retain the agency as independent dealers. But most of them opted for employment with the company. In-the new set the dealers had no obligations to sale/ service on SIL products alone. Most of them had taken up some other brand of two wheelers as well.

"There have been occasional failures in market planning," said one top executive. "For instance, while introducing "Cento", we were virtually racing against time. We had ma ' de, for once, a highly successful campaign with the help of an advertising agency and had secured advance booking of over 100,000 scooters. While introducing it fast, giving maximum pressure to production, the priorities went to production of finished goods. Back up spare supply was overlooked, as it happens. As a result, when the product developed trouble we had to virtually take back rejected pieces to the factory".

"Our product has very high material component," said another top, executive of the company. "Almost 20% higher than the competing products e.g. Bajaj 150 cc. It costs us around Rs 2000 more than the alternative. This more than off-sets whatever advantage we expected from the low investment by virtue of old plant and machinery. We can't bring any basic design change as this would imply huge investments. We can thus make marginal changes here and there, trying to improve the product. We had distinctive advantage in Cento, which had lower material cost and virtually no additional investment. Unfortunately the product failed. To some extent We are also responsible as we loaded the product too heavily with overheads as the sale of other products dwindled, bringing the price of 100 cc almost as much as the 150 cc while the actual cost was far less".

Costing System of the Company

The system followed by the company was based on absorption costing, principally having certain elements of budgeted/standard costing systems. The cost accounting records-were compiled on annual basis only i.e. at the year end. As per the Cost Accounting Records (Motor Vehicle) Rules1969, proper cost accounting records, were to be maintained by the company which are subject to cost audit as and when ordered, by the Company Law Board. The basic elements of the company's cost accounting system are given below:a) Material CostThe design section prepared the bill of material for each vehicle. Standard material norms were available for each item listed in the bill of material. Periodically the material norms were updated by applying the prevailing procurement rates (major sources rates) and standard material cost for each vehicle was thus ascertained. b) Direct Labour Cost

Direct labour cost included monthly wages, overtime payments, and provident fund. ESI contribution by the company and other identifiable expenses of labour like conveyance, leave travel concession etc. in respect of workmen engaged in production cost centres. These were allocated to major products in proportion to the standard manhour of number of vehicles procured. Like bill of material, there were standard hour norms for each type of product. The facilities being flexible, the product could be. represented in equivalent manhour for 2 wheelers.

c) Overheads

It included salaries of the entire staff except workmen staff (with respective contributions towards conveyance, LTC, PF, ESI, expenses), inhouse medical and canteen facilities, consumables, power and fuel, maintenance, insurances, R & D expenses, depreciation, administrative expenses (like postage, stationary, bank charges, advertisement etc.) and other miscellaneous expenses.

These were also -allocated on the -basis of standard manhours of total vehicles produced in a year.

The company operated through cost centres. The management felt that it was difficult to operate through the profit centre concept due to high pooling of plant and machinery for different lines. The cost centre also helped the executive in closely monitoring and controlling the costs. The executives controlled the operation through the contribution each product made'. Most of the costs (except material, selling and distribution cost), taxes, exicise duty etc. were fixed cost. The plant and machinery had even a de-rated capacity of 6000 two wheelers and 2500 three wheelers per month, while the manpower had already been, recruited to reach the capacity of 100000 two wheelers. There had been increased labour content due to higher rejection rate caused by old machine tools. Still it was felt the company was footing the wage bill far in excess of full capacity production.

Questions(a)Evaluate the marketing strategy of the company(byWhat should the company do now?EXHIBIT 6

PROFILES OF CHIEF,EXECUTIVEZ,SRI S. SOUNDARARAJAN, CMD(NOV 72 TO JAN 79)

Born- 21.4.1926

Qualifications- B.Se. (Hons)

Experience- I.A.A.S., 49 Batch Dy. Secy, Min of Defence, GOI from Nov 58 to Dec 64

M.D., Garden Reach Workshop, Calcutta, Jan 65 to Nov 72

SRI V. KRISHNAN

(JUNE 79 TO MAR 81 : CMD)

(JUNE 73 TO JAN 79: GMT- PROD.)

Born

- 20.6.1929

Qualifications

- BE (Hons)

Experience

- Trainee,,DGOP from Nov 52 to Nov 55 - AWM ' DGOF Gun & Shell Factory,

- Nov 55 to Jun 72

- GM, Ishapur Rifles, June 72 to June 73

- ED, SIL, Jan 79 to June 79

SRI V.K. GHAI (BRIG), ED

(MAR 81 - SEPT 81 EXECUTIVE DIRECTOR)

(AUG 74 - MAR 81 GM - MARKETING)

Born- 6.9.23

Qualifications- Ist Yr (Science), NDA Graduate

Experience- Army Service, UNO Assignment

SRI L.K. JOSHI, MD(SEPT 81 - MAR 84)

Born-19.7.1930

Qualifications-M.Sc. LL.B.

Experience-Asstt/Dy Controller, CDA, 1954-1961

-F.A. & CAO, NDCC, Jan 61-Juji 64

-Jt.Controller, CDA, Dec 65-Aug 66

-Dy. Secy (FEB) & Chief Auditor,

Deptt of Eco, Affairs, Finance Ministry

-Dy,- Cont. Genl (A/C) - Audit, CDA

Div. (Fin)/FA, BEML, Mar 71 to Dec 78

Div (Fin), HAL, DEC 78 to Sept 81

SRI P.S. KAPOOR(JULY 84 ONWARDS)

Born

- 7.4.1934

Qualifications

- B.Sc. (Mech)

Experience

- Indian Railways (1959-

- Last Designation: Ch. Mech. Engr. CLW, Chittaranjan

GMsOTHER THAN THOSE WHO BECAME CEO

SRI M. VARDARAJAN, GM

(JAN 74 TO MAY 76)

Born-10.5.1933

Qualifications-M.A., BL

Experience-IAS, 55 Batch

-Commr & Secy (Medical)

U.P. Govt.

SRI L.LAL, GM (COMMERCIAL)

(NOV 76 TO JULY 82)

Born-20.7.1933

Qualifications-M.B.A. (VancouiVer), Canada

Experience-Lecturer, Commerce, BHU

-Nov 1959-Apr 60

-BD.0, Govt. UP, 1960-63

-A/C Offr, Shri Ram Rayons, 1964-67

Matls Mgr, Jagatjit Industries, 1968-72

Matls Mgr, Danfoss 1. Ltd, 1972-74

M-ils Mgr, Cutler Hammer I. Ltd 1974-76

SRI P.D. JOSHI, GM (MFG)

(NOV 80 ONWARDS)

Born-11.6.1935

Qualifications-BE (Civil)

Experience-SRF, CSIR, Feb 59-4uly 60

-Lecturer, Roorkee University, Aug 60 to Dec 60

-AM, Khamaria OF, Dec 60 to Oct 64

-DM, Khamaria OF, Oct 64 to Nov 68

-Mgr, Khamaria OF, Nov 68 to Dec 75

-W.M. (Prod), SIL, from Jan 76 to Mar 76

-DGM (Prod), SIL, Nov 79 to 80

DR. A. SAHAY, GM (MKTG)

(OCT 80 ONWARDS)

Born-1.1.1942

Qualifications-M.Sc, Ph.D (Foundry) Czechoslovakia

Experience-Asstt. Lecturer, RII, Jamshedpur Jul 62 to Mar 63

-Engr, HEC Ranchi, Mar 63-Oct 73

-Supdt, Tata Yodogana Ltd, Jamshedpur, Oct 73 to

Mar 74

-Fdy Mgr, Lakshmi Machine Works, Coimbatore,

Mar 74-May 77

-GM-II, SIL, May 77 to Oct 80

SRI V.K. KHANNA, GM (T)

(JAN 85 ONWARDS)

Born-3.3.1936

Qualifications - B.Sc. (Mech)

Experience-AE, Jay Engg. Works, July 57 to Oct 62

-Ch Engr (Ping), HMT, Pinjore, Oct 62 to Aug 70

Tech Expert,.Haryana, Govt. Aug 70 to Jan 74

WM, Usha Telehoist, Faridabad, Jitn 74 to Nov 74

Fy Mgr, American Refrigerators, Pune, Nov 74 to

Sept 81

OSDI SIL, Sept 81 to Dec 81

GM, SIL, Jan 82 to Jan 84

EXHIBIT-7

PRODUCT-WISE CONTRIBUTION TREND ANALYSIS

(Based on Purc.hase OrderslAmendments Received)

SI.Particulars

As OnIncreases/

No.

Decreases during

30.6.8631.7.867186 (+)/(-)

1.Vijay Super Mark II

Rs.

with optional items

1. Basic Price78157815

2. Material Cost50775090+ 13'

3. Contribution (1-2)27382725-13

II. Vijay Super Mark II without optional, Items

1. Basic Price73357335

2. Material Cost34414754*+13

3. Contribution (1-2)2594')581

-13

III. Lambretta Cento

1. Basic Price57975597

2. Material Cost38783879 *(+) 1

3. Contribution (1-2)17191718I

IV.3-Wheeler Drive away Chasis (Petrol)

1. Basic Price2007020070

2. Material Cost @15300153099

3. Contribution (1-2)477047619

V.3-Wheeler Drive away Chasis (Diesel)

I.. Basic Price3195031950

2. Material Cost @25639256489

3. Contribution (1-2)631163029

Note- @ Material Cost analysis is based on LDA 510 GLL Engine.

* Modvat benefit is adjusted against material cost as per detail

given on following page.

Amouunt of Modvat

benefit

Vijay Super Mark 11 with Optional Items Rs. 432/-

Vijay Super Mark 11 without Optional items Rs. 400/-

Lambretta Cento

3-Wheeler Drive away chassis (Petrol) Rs. 1557/-

3 Wheeler Drive away chasis (Diesel) Rs. 1597/- Engine is

coming against

form CT2

Note:Material Costs do not include balance of pending proposals as on date and

impact of fluctuation in foreign exchange rates on imported materials.

EXHIBIT-8

COST BREAK-UP OF THE OPERATIONS (1985)

(Rs. in takhs)

Fixed Cost Variable Cost Total Cost

1. Employee Renumeration758

758

2. Power2882110

3. Fuel (Furnace Oil)302050

4. Stores, Spares & Tools4159163

5. Maintenance65

65

6. Research & Development8

87. Material Handling/Transit

Insurance 55

8. Depreciation160160

9.Administrative Overheads7777

10. Selling/Distribution Overheads (excluding freight outward) 35 33 68

11. Interest-C.C./O.D.215

215

12. Interest on other Long/

Short Term Loans

805805

Total21902912481

Sale price if the Vehicle (1985) Vijay Super-Rs. 7475/-

CASE STUDY 19

SCOOTERS INDIA LIMITED (C)

Production Problems

The commercial production of the SIL'.s first product Vijay Deluxe could commence only during 1975-76, approximately 4 years after the completion of negotiations and incorporation of the company. , There were several problems faced by the company in introducing the 'First and subsequent products of the company M/s Innocenti which had used the plant and equipment for around 15-20 years. "The deal of purchasing the plant and equipment with Government of India was struck almost 2 years after Innocenti which had ceased manufacture of Lambretta. Another two years or so were spent in reconditioning and installation of machines at SIL. In effect, the plant remained out of commission for-5 years out of which for about 2 years it was exposed to the elements.The plant was purchased on as-is-basis. While negotiating the deal, Innocenti did not release the equipment that was common with other products. They had also disposed off certain machines and equipment while the plant was out of operation. The dismembered plant offered to SIL was therefore not "balanced" in terms of equipment and facilities. For the purpose of removing these imbalances certain machines and equipment like grinding machines, heat treatment equipment, copying lathes, mini-chuckers and gear shapers had to be purchased from M/s HMT. The tool room, di6-casting shops, foundry shop and forge shop too were indigenous additions to overcome the supply imbalances of the related components. The paint shop equipment as purchased from Innocenti could never be put into use and parallel investment had to be made on installing the conventional "paint system" developed by M/s Bullows of Bombay. The shop was subsequently modemised with electrostatic paint system of M/s Hansburs, England.

"The old plant and machinery frequently lead to difficulties in maintaining close tolerances," said the Production Head. "For instance, M/s Innocenti were making many forged components themselves. Since they did,not provide us the forge shop, initially we got these items from vendors located at distant places like Madras, Pune, Hyderabad etc.

Prepared by Prgf. Krishna Kumar & Dr. Arun Sahay of Scooters India Ltd.

The Case Material is prepared as a basis for class discussion. Cases are not desired to present illustrations of either correct or incorrect handling of administrative problems.

"This, besides increasing the costs, also caused high rejection rate; leading to litigation and choked supply. Finally we had to set up our own forge shop which increased our investments. Situation had improved now but we still cannot maintain the precision forging as much as that of Innocenti. They had t ' heir own tools and gauge set up and necessary expertise also." The plant and equipment supplied by M/s Innocenti did not include the material storage and material handling facilities, which were by and large manufactured and developed subsequently, inplant. With certain capital inputs on handling equipments such as fork lifters and cranes. Indeed; the absence of material handling equipment created serious structural defects in the layout which hampered smooth flow of material, and made material handling costly too.

"When I joined," said an ex-Industrial Engineer, "the building was already complete and the layout of the plant was almost complete, decided by the Chief Executive with the help of few junior officers. Those young boys were out to impress the boss with ideas claiming to be their own. There was no project cell or industral engineering department. The drawings came in crates, cramped in unsorted bundles. There were few layout drawings too. If these had been examined carefully, it would have been noticed that the material handling system of Innocenti was using overhead lifting equipments and conveyors. These are crucial for fast movement of material - in a mass production assembly line operation. This point was simply missed for consideration while deciding the building structure. The Chief Executive decided a prefab structure for expediting installation of machines and to save costs. This is built around a large number of columns that now hinder movement of material. As luck would have it, some columns developed cracks and as, a general policy, loading them with anything was not permitted as it was risky. We had, thus, to be content with using the primitive methods of material handling e.g., trolleys, fork lift truck, even just hands. This inevitably, reduces the efficiency of material handling and thus productivity as a whole." -

"Lack of know-why and backup support for technical problems had been a serious handicap to us," echoed the design and production heads. "Sometimes the problems were quite intriguing. For instance when we developed the new design 'of Cento the engines gave satisfactory performance in testing. It was developing 4.5 H.P. However, when we commercialised the scooter, it was giving only 2.8 H.P. on road. There was 50% return on 5000 scooters introduced in the market, failing on the road. We 'were . shocked. The design of the scooter was based for production at Italy, making it suitable for local conditions there. It was left entirely to us and we have sweated through hit and trial only, to improve the product to make it workable for this country. On the one hand, we were manufacturing, based on drawings available without realising in what way the product ought to be modified, on the other there was pressure for expediting commercial production as no one was prepared to accept delays giving the argument that the plant was giving production in Italy so why should there be any delays. The inevitable happened, the first product Vijay Deluxe failed on the road."

"At the time of introducing Cento we were quite confident because we had been able to overcome most of the technical and production problems of Vijai Super. We indeed declined the suggestion of the ministry to have collaboration with Japan, as it would have required huge investment and we had virtually not to spend anything by manufacturing Cento on our own. The gestation period was virtually nil. Indeed we had planned to phase out Vijay Super as Cento was superior in all respects. But being a new design, this time we failed in "body" rather than the engine or the gearbox. Once again it was due to no backup support to explain reasons for failure or anything to suggest that any change in body design had to be undertaken"

"The plant and machinery that we have," continued the head of the Design Department, "is one of the best in terms of design. Several operations, which in other factories are done one-by-one on different machines or assembly benches, are done at one place simultaneously. This design of manufacturing facilities gives tremendous advantage in! terms of machine/assembly time and reliability. What we lacked was the backup technical support or know-why."

"A little more," said the Production Head, "occasionally we did not know how to check the performance characteristics of components and supplies. For instance, we did not know on what parameters should we check grease. We did not know how to check bearings, a proprietary item, beyond measuring the inner and outer dia. We did not know whether we are using correct electrode for welding the body of a monocog (100 cc) scooter."

Layout Related Problems

"The layout of the factory itself gives irritants to production," he continued, "with close column structure the machines are quite clumsily laid close to each other. Unlike Innocenti layout overhead conveyer belts could not be deployed due to close column prefabricated structure. Everything thus had to be moved through aisles which occasionally did not permit even use of fork lift trucks and heavy items had to be manually lifted and carried. In a mass production plant these assumed mammoth proportions. The plant at Innocenti was fully balanced and virtually automated one. This being an old machine, breakdowns created 'Traffic jams'. There were several, problems due to, local conditions, like Die-casting shop. In hot weather here, it was damaging machines hence they had to he shifted elsewhere. Things like this also made for lot of material handling problems, is, which led to machines/labour waiting and idle time."Besides the above, the structure also inhibited supervision as supervisor was seated amidst machines, at the same level with lot of columns obstructing the view. The toilets are located at one end, so it is difficult to check worker movement and wastage of time. There is no provision for storage of material inspection and inspected material. The material consumption control was also poor. Hence theft and pilferage could not be checked. Even after providing shelves to individuals, it is difficult to locate the responsibility for loss/theft; although it has checked loss of costly items. But still, it is difficult to control the movement by holding individuals responsible."Materials Management

The location of the company was a little disadvantageous. About 70% of the components were bought from distant places. There was no local industrial base for supply. Initially SIL attempted to develop ancillary units in other closeby industrial estates. Indeed, it spent about Rs. 38 lakhs it borrowed from U.P.S.I.D.C. for providing infrastructure facilities which could be a catalytic agent to the industrial development in the area. The ancillaries, however, could not come up to the precision demands of the SIL two wheelers, which were compounded by the fact that the SIL's plants and machinery also could not maintain high precision and-close tolerances. Unable to let the production, haywire due to incapacity of the ancillaries to supply the components, the S.IL had to go for purchase of even such components from, outstation. In turn this ensured 'killing of the ancillaries.

The purpose of components from distant places not only increased transport cost but administrative costs, as also the, inventory carrying costs. Many times the castings and forging had to be airlifted to keep up the production plans.

"Somewhere our procedure for purchase is inefficient," said the production head, "else we can't explain stockouts for classs 'C' items and excess inventory for 'A' class items. This should not have happened given that we are following ABC system of -inventory management."

When enquired about it, the materials Manager said, "it possibly can't be avoided since our production plans are changed frequently for various reasons front change in demand as given by marketing department to change in design by technical demands. The stockouts and excess Inventory (sometimes obsolute also) positions were thus existing simultaneously. Sometime it also h pens that some item is requisitioned urgently and had to be brought by air after lot of pursuasion to suppliers; when the item reached the priorities changed and it is now lying in inventory. Given the communication links we have from Lucknow to various cities, our staff members had to resort frequently to lightning calls to distant places, so much so it had become a habit. Things are changing however," he concluded.

QuestionEvaluate the corporate strategy of the company.EXHIBIT-9 (A)

MIX OF SELF-MANUFACTURED &

BOUGHTOUT ITEMS

Items Vijay Super Lamb. Cento Vikram

(2 wheeler) (2 wheeler) (3 Wheeler)

Bought Out (Finished)420379867

Bought Out (Semi-finished)476652

Inplant (Self Manufacture)183157132

Total6506021051

EXHIBIT-9 (B)

DETAILS OF OUTSTATION SUPPLIERS OF

CRITICAL ITEMS

No. of Suppliers No. of Items Supplied

Calcutta612

Bangalore25

Bombay3343

Madras1113

Nasik323

Thane29

Pune12

58107

Other suppliers were well spread over Delhi, Kanpur, Lucknow, Banaras, Allahabad, Aurangabad, Hyderabad, Unnao, Faridabad, Ghaziabad and several other places.

EXHIBIT-10

THREE-WHEELER POSITION W.E.F. APRIL 1986

TO 30TH SEPT. 1986

Advance in

hand as on theProduction Despatch last day of month

AB C A B C AB C

April3075 105 29 61 90 11- 11

May5454 108 47 45 92 -5 5

June3430 64 31 35 66 -- -

July3444 68 8 53 61 250 52

August-51 51 14 57 91 517 52

+20CKDs

+30CKDs

September263 65 14 28 72 3 42 45

+30CKDs

Total 154 317 461 143 329 472 21 144 135

A = PETROL B = DIESEL C = TOTAL

EXHIBIT-11

PRODUCTION PLANNEDAs decided

in Master

Proda mtg.MAY 86 JUNE 96

JULY 86

AUGUST 86

SEPTEMBER 86 OCTOBER 86

held ina VS C 3WP 3WD VSC 3WP 3WD VS C 3WP 3WD VS C 3WP 3WD VS C 3WP 3WD VS C 3WP 3WD

April 86 1600 200 25 150 2000 - 25 175 - - - - - - - - - - - - - - - -May 86 1500 - 50 100 1500 100 50 100 2000 50 100 - - - - - - - - - - - - -June 86 - - - - 1500 100 80 70 1500 - 100 50 1500 -100 50 - - - - - - - -July 96

- - - - - - - -

800 70 40 60 1000 - 40 60 - - - - - - - -Aug. 86

- - - -

---- - - 500 20 - 25 600 - 40 25 - - 40 75

'Sept 86

-

---

---

-

-

- - - - - - 500 - 25 100 500 - 25 100

EXHIBIT-12

PRODUCTION-DATA FROM THE

YEAR 1973 ONWARDS

As on 150 CC Power packs Vikram Poweram 100 CC Mopeds

Scooters for 150 CC 3 Wheelers packs for Scooters

Scooters

Vikram

123 4 5 6 731.3.73-- - -

-

-31.3.74-- - - - -

31.3.75 546- - - - -

31.3.76 160241253 - - - -

31.3.77 2561711173 - - - -

31.3.78 1631411408 34 347 - 08

31.3.79 2302715773 102 373 - -

31.3.80 3330412079 284 - - -

31.3.81 3550212540 532 10 - -

31.3.82 3172510278 711 23 44 -

31.3.83 3427110981 385 1 2485 -

31.3.84 130723456 788 - 9547 -

31.3.85 25828 17 950 1894 - -31.3.86 2242817 1234 1154 - -

EXHIBIT-13

MANPOWER POSITION FROM 1973 ONWARDS

As on Top Mgmt. Other Staff Workmen Total

Executives Executives

123456

31.3.7312115