titan- the outsourcing strategy

8/7/2019 Titan- The Outsourcing Strategy

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BY

Manoj

Rajat

Ruchika

Manka


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Over the years, the Hosur facility went on to become

one of the largest integrated watch-manufacturingunits in the world, employing around 3500 people.The facilities in Hosur included a computer aideddesign (CAD)5 and prototyping unit, a

comprehensive tool room with capacity formanufacture of precision tools and die-sets.

From the very beginning, Titan had used cost cuttingas a means to achieve competitiveness and improve

profitability. It realized that sustained advantage inthe marketplace could be achieved only by keepingcosts low and launching innovative/technologicallysuperior products


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The company's tryst with outsourcing began in1999, with the changes in India's foreign tradepolicies. 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 notface the competition from cheaper importsfrom China.


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Due to outsourcing the company could launchthe watches for just Rs 250-395.

The Future

Fastrack range grew by almost 100% in terms

of volume and it established itself as the largestyouth brand in the country.

With the company planning to focus all itsenergy to meet competition in the lower as well

as higher ends of the market, the watchindustry seemed to be all set for an interestingbattle.


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Titan had no option move away frommanufacturing and towards trading in the longrun.

Outsourcing was not a very surprising move as it

seemed but natural for the company to look forcost effective sourcing options at a time whenmanufacturing seemed rather costly.


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Titan's decision was influenced by a host of

factors that made the company realize thepotential benefits of outsourcing as a tool forholding on to its position in the Indian watchesmarket.

The liberalization of the Indian economy andthe subsequent removal of quantitativerestrictionson watch imports in the late 1990s,forced Titan to focus more on marketing efforts

rather than manufacturing to retain itscompetitive edge in the future


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Ques 2 :

Explain the concept of outsourcing and the

reasons for its growing popularity in themanufacturing industry.

Briefly comment on the pros and consassociated with outsourcing the

manufacturing function.


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So, what is outsourcing? Outsourcing is contracting with anothercompany or person to do a particular function. Almost everyorganization outsources in some way. Typically, the function beingoutsourced is considered non-core to the business. An insurancecompany, for example, might outsource its janitorial and landscapingoperations to firms that specialize in those types of work since theyare not related to insurance or strategic to the business. The outsidefirms 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 modelto carry out narrow functions, such as payroll, billing and data entry.Those processes could be done more efficiently, and therefore morecost-effectively, by other companies with specialized tools andfacilities and specially trained personnel.

Currently, outsourcing takes many forms. Organizations still hireservice providers to handle distinct business processes. But someorganizations outsource whole operations. The most common formsare information technology outsourcing (ITO) and business processoutsourcing (BPO).

OUTSOURCING


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Cost savings The lowering of the overall cost of the service to the business.This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, and cost re-structuring.

Focus on Core Business Resources (for example investment, people,infrastructure) are focused on developing the core business.

Cost restructuring Outsourcing changes the balance cost by offering a movefrom fixed to variable cost and also by making variable costs more predictable.

Improve quality Achieve a steep change in quality through contracting out theservice with a new service level agreement.

Knowledge Access to intellectual property and wider experience and

knowledge.

Contract Services will be provided to a legally binding contract with financialpenalties and legal redress.


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Operational expertise Access to operational best practice thatwould be too difficult or time consuming to develop in-house.

Access to talent Access to a larger talent pool and a sustainablesource of skills, in particular in science and engineering.

Capacity management An improved method of capacitymanagement of services and technology where the risk inproviding the excess capacity is borne by the supplier.

Catalyst for change An organization can use an outsourcingagreement as a catalyst for major step change that can not beachieved alone.

Scalability The outsourced company will usually be prepared tomanage a temporary or permanent increase or decrease inproduction.


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Provides flexibility and versatility to in-housestaff.

Frees up capital and cash for other activitiesthat 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 manufacturingtechnologies.

Helps avoid long-term investments inpotentially under-utilized production capacityor excessive inventories.


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Outsourcing your Non-Core activities helpsin concentrating more on Core businessactivities and focus only on strategic

decisions. Outsourcing helps a company to become

flexible enough to terminate an operationif it does not meet the business goalswithout being concerned about varioushuman resources, separation, or litigationissues.


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Loss of control .

Exposure to supplier risks and issues of qualitycontrol .

Suppliers can reap undue advantages by imitatingproduct/technology

Product degradation because the supplier paysless attention to it .

The companys confidential information has to bedisclosed to the supplier.

Difficulty in measuring the actual costs of thesupplier.


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Potential problems associated with taking thefunction back or substituting the supplier whenthe outsourcing agreement terminates.

Possibility of being tied to obsolete technology. Outsourcing may lead to lack of customer focus.

Outsourcing can create potential redundancies forthe organization.

Outsourcing affects the morale of the employeesin the manufacturing sector.


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3. Evaluate the benefits Titan derived as a resultof outsourcing the manufacturing function.Does

outsourcing render Titan a low-cost producer?


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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 countrys largest watchmaker

25% market share of total domestic market

50% share among recognized brands

Revenues: Rs. 7 bn

Net profit: Rs. 235 mn


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Competition with unorganizedmanufacturers importing parts fromChina

Outsourcing ~ 30% cheaper than in-house manufacturing Cut down employee costs, which was -11.2% of its

total revenue

Prevented investing in high end machinery tomanufacture new designs New ranges priced competitively

Dash: Rs.250-395 Fastrack: Rs.650-1500

Gained large market share


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Price competitiveness possible because watchessourced completely from Hong Kong andTaiwan

Could focus on making other aspects ofproduction more cost efficient

Overall watch assembly time reduced from 17 to 10days

Surface treatment (finishing) reduced from 62 hoursto 1 hour


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However, the outsourcing decision did not indicate in any waythat Titan had decided to forego its earlier focus on enhancingoperational efficiencies.

Titan had also put in place various measures to enhance theproductivity of employees and the machinery, including measuresto 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. Inaddition, surface treatment time i.e. time take for a process toimprove the finish of the watches, was reduced from 62 hours toone hour. Titan began working towards reducing its cost ofoperations with the help of Andersen Consulting through an e-commerce initiative.

titan- the outsourcing strategy

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