PUTEX CORPORATION: CORPORATE PLANNING PROCESS

It was early morning of Monday, March 24, 2014, Gupta was driving to his office located on outskirts of the city. His mind was totally occupied with the events that were to take place later in the day and might have repercussion on the future of the company and challenges ahead.

Gupta and Singh, young executives of a leading automotive component manufacturing company Putex Corporation in collaboration with a global automotive component MNC, were quite excited after Rajesh, Chief Operating Officer (COO), gave his final approval, to the five year corporate plan and annual budget for the company, a five hundred pages detailed document, compiled by them as their first assignment, after multiple iterations. The basic inputs were given by each department based on general guidelines discussed and current year's projected data as was the practice followed over the years. The company followed a very meticulous five year planning and budgeting process, it had adapted from the collaborator, which began with sales forecast prepared by marketing department in November each year and ended with the approval of the five year corporate plan and budget for the next year by the Advisory Committee in February of the next year, well in time for the next financial year beginning from first day of April. They got ten photocopy sets of the document made for submitting to the Advisory Committee consisting of the Group Chairman and Managing Directors and General Managers of all the group companies including Rajesh, COO, of their own company. The formal presentation to the advisory committee was to take place next day in a five star hotel in the city. They were eagerly looking forward to the presentation. Next day, as planned, all advisory committee members were present and also the Chairman of the group.

A group of about 40 top and senior level executives from all the group companies attended the Management Conference, as it was called. Gupta and Singh started to make their first presentation to the top management on the five year corporate plan and the budget for the next year. It seemed simple as the COO had given general guidance for preparing the plan as 10 percent increase per year in sales and adjust the other factors in the same ratio except the manpower. Both were a bit nervous. On Sales presentation Sinha, Managing Director of a group company and a member of Advisory Committee asked, "You are showing last year sales quantity of product Lube Filter for the Korean Car Company as 4000 and projected 4400 for this year. What is the basis of arriving at this figure?". "We have made an assumption of 10 percent growth in sales this year." was the answer. "The turnover was estimated as INR1 4500 million for the current finacial year, we have planned it to increase to INR 4950 million in the next year. The profit also goes up by 10 percent", they said with a lot of confidence. But who told you to take 10 percent growth, when Korean Car Company is commencing production of 50,000 vehicles per annum this year from their new plant in South?" There was a chilling silence in the room that followed. Gupta and Singh has no clue of this information. The COO was watching the discussions with keen interest as a member of the advisory committee on the other side of the table. The committee asked Gupta and Singh to take a relook at the five year plan and the budget for the next year. Both left the room quietly after promising to come back with modified plan within next 30 days.

AUTOMOTIVE COMPONENT INDUSTRY IN INDIA

Projections for growth of Automotive Segment over next 10 years had been given as 13 percent for passenger vehicles, 11 percent for Commercial Vehicles, 5 percent for Tractors, 7 percent for 2 wheelers and 3 wheelers and 14 percent for construction vehicles by Automotive Component Manufacturers Association (ACMA) and Society of Automobile Manufacturers (SIAM). There were several conflicting views on the growth of the sector for the next year and the following years.

The overall growth for automotive components for 2013-14 had been projected at 4.7 percent . A few studies however put this growth at 11percent . "Overall, the growth would be flat this year," said Lakshman, president, ACMA5 . According to an industry expert Khan, Auto Parts Turnover Drops First Time in Fiscal 20146. As per the statistics published by ACMA, engine parts form the largest segment (31 per cent) of auto part industry followed by drive transmission and steering parts (19 per cent). Suspension & braking parts and body & chassis account for 12 per cent each in the entire product range, followed by equipment accounting for 10 per cent of the same. The auto components industry's turnover had grown at a CAGR of 14.6 per cent during 2007-11. ACMA and D&B Research estimated the industry to grow at a CAGR of 11 percent during 2011-20217. Though there were a large number of manufacturers for each automotive component, there were only a few leading suppliers for filtration systems and engine components with well-known brands. These were preferred suppliers due to quality and reliability of their products and were OEM suppliers for companies in US and Europe. These suppliers were readily accepted by the Indian companies, which were either wholly owned subsidiaries of the parent company or in technical or financial collaboration with the big automotive companies. As per industry estimates, Indian auto component industry derived 60 per cent of its turnover from sales to domestic original equipment manufacturers (OEMs), 25 per cent from sales to the domestic replacement market and around 15 per cent from exports. Putex Corporation was present in all the segments.

THE INDUSTRY ASSOCIATION

Automotive Components Manufacturers Association (ACMA) was a connect between Industry and the Government. Every year ACMA brings out Industry compilation of key statistics such as production and sales of automotive for past 10 years, segment wise, company wise, region wise, model wise etc. This was popularly called Blue Book as it had traditionally at blue colour cover. This was the only known source of information in this highly competitive industry. On an average, for the past 10 years, the production of OEM'S was increasing at 8-10%, with a few exception such as commercial vehicles and tractors. The replacement market for automotive components, After Market as it was called, was growing at 9-10 percent per annum. The automotive component industry had to be content with limited growth due to global economic scenario and competition form Chinese manufacturers which were increasing their exports to India at a fast pace. However to get very reliable estimates was difficult and each company had to make their own estimates.

THE COMPANY'S BACKGROUND

This was a family business promoted by the father of the present Chairman with a close business associates. The original promoter had handed over the reins to his son, a brilliant engineer and a good business man. The other family members devoted the time to look after the family companies, which supplied major components to the groups manufacturing companies, thereby having control over the key supplies and also on the value chain. Another family member looked after the marketing company and the youngest was given responsibility for sales, advertising and business promotion of Putex Corporation. The Chairman had a knack for picking the right people. The entire group was being run on professional lines, at par with the best in the world, in spite of its smaller size.

The Company, Putex Corporation, discussed in the case, was a closely held public limited company in collaboration with a leading MNC. The head office and one plant of the Company were located in the same premises in NCR. The corporate office was also located nearby. The other group companies were set up with foreign collaboration with leading auto component manufacturers from US and Europe. The brand names became a household name due to high level of publicity campaign by these companies and the Group. These companies had gone public due to high brand recall. Most of the expansion was through acquisitions and setting up greenfield plants. The expansion and growth was mainly financed through internal accruals.

The sales to aftermarket, other than OEMs and large customers was handled by a group marketing company. Putex Corporation in which Gupta and Singh were working had a significant market share due to high level of technology and high quality and relatively efficient operations. The competition for similar products was quite fierce amongst the key suppliers due need for high investments mande in setting up the design and manufacturing facilities and limitation of local technology. Leading automotive companies had their Joint Venture companies or wholly owned subsidiaries, with limited capacities, supplying these parts as captive units. Putex Corporation was supplying to almost all OEMs in Automotive (Cars and Heavy Commercial Vehicles, Scooters and Motorcycles), Industrial, Tractor, Earthmoving and other sectors. They were also exporting to nearby countries and also to Europe. All the leading car manufacturers were having their assembly plants in India. The commercial vehicles were manufactured by Telco and Ashok Leyland. Escorts, Eicher, TAFE, Ferguson etc. were leading tractor manufacturers. Two wheeler and three wheeler manufacturers were Bajaj, Hero Group, Honda, TVS, Yamaha etc. ( see exhibit 1 for OEM customers of Putex)

RESEARCH AND DEVELOPMENT

Putex Corporation had a history of robust research and development. Having invested in developing highly motivated and committed teams of R&D engineers and upgrading the facilities on a continuous basis, the company was able to adapt the technologies and products designs transferred from the collaborators. Most of new applications of products for customers was developed in house. Filter paper, main raw material, was also developed and procured locally as a second source. The manufacturing processes and testing processes were developed on a regular basis. Engineers were regularly trained at collaborator's plants in US and Europe. The company had developed products meeting customers specifications and manufactured these customized with their customer's respective brand names printed on each product and also on the individual cardboard cartons.

THE MANUFACTURING PROCESS AND FACILITIES

The company had got technology for manufacture of filtration systems using resin impregnated filter paper from its collaborator. Filters made from this specially treated paper were much more efficient than traditional filters made from steel mesh or felt or other such materials. This resulted in higher mileage, better performance and longer life of the engine. Disadvantage seemed to be the need for periodic replacement as the life of filters made from paper was relatively short as compared to wire mesh filters. The filter paper initially had to be imported from USA. The company had set up facilities for resign impregnation and manufacturing filter using paper. Resin coated filter paper being highly combustible, required special temperature and flue gas flow controlled oven to cure it at high temperature. The technology and equipment was initially imported from the collaborator, therefore was a major barrier for entry for the competitors. The design and testing technology was also provided by the collaborator and company engineers were trained at collaborator plant to absorb the knowhow. The company was continuously improving the processes and methods of manufacturing filtration systems and engine components. The staff and workers in this plant were highly dedicated and efficient in their work. The plant was on an incentive system set up on an ad-hoc bases. The plant had broken many production records in the recent years manufacturing over 17000 of a particular type of oil filter using a standard crew of 27 workmen in an 8 hour shift as against 6000 per shift recommended by the US collaborator initially. Kaizen, continuous improvement drive of the manufacturing team was major contributor for this increase in productivity. The incentive pay was sometime more than the average monthly wage of a worker.

The manufacturing process involved impregnating filter paper in a separate facility. The raw filter paper from jumbo rolls it was imported in, was slit into smaller width reels during resin impregnation process, as per the manufacturing plan. Processed filter paper for each application was different as per specific product design and thefore each reel was marked with lot number during the impregnation process and the filter production lot for which is was processed. The slit paper reel was loaded in a decoiler, which fed filer paper into a pleating machine. This machine made corrugations and pleats to fold the paper into multiple pleats as per design. A sharp knife cut off the exact number of pleats enough to make one filter. Side sealer machine stitched the two ends of the cut paper length to form a cylinder of pleated paper. Each filter required from 50 cm to one meter paper to provide for enough surface area needed for filtration as per specific designs. A perforated red or yellow thick perforated paper reel was run through a stitching machine to make cylinder like outer shell for each filter. The pleated paper and the outer body and an inner tube were assembled to form a cylinder like shape. It was then put in an end cap filled with adhesive and passed through a conveyer oven at low temperature called Jeller. The second cap was now filled with adhesive and this partially cured cylinder was put on it to form a complete cylinder. It was also passed through the Jeller. Now each filter was checked for height - low or high, and higher height filters were corrected by hand, also for taper if the cap was a little inclined. In process defective products were taken out for rectification later. The OK pieces were allowed to go through the gas fired oven at a high temperature. During this process the filter paper was cured and also the resin in the caps to form a complete filter. It was rather hot as it came out of the oven. A team of 5 workers, wearing gloves, quickly pressed rubber grommets on the both ends of the caps of the filters to make it leak proof when used in service. The same crew packed it in polythene bags and finally in cardboard cartons, which were pre-printed. It was a treat to watch these workers working on these processes with less than 5 seconds a cycle. A new type of filter was also being manufactured for a major customer, a leading German Joint Venture Company, which decided to outsource this work to Putex Corporation. As per their standard time data, a crew of 10 persons could produce 400 filters in 8 hour shift. The base level was fixed at 400 filters per shift and since there was a pressing need to supply more, an incentive system was introduced. The manufacturing team of this plant through their superior skill, and ability to make modifications in manufacturing process, could take the production level to 3800 per shift giving a huge incentive to the workers. The company followed a policy of equal opportunity to all workers to work on this new line so that their earnings were rather balanced. Visitors from other collaborators of the parent company in US and other countries such as Argentina were amazed at seeing these people working on production lines in India and took their learning back home to make improvements in their own plants in their home countries.

Putex Corporation manufactured a large variety of filters for air, fuel and lube applications for each customer and printed brand of the customer on each product during the manufacturing process itself, thereby making a product mix of over 5000 product brand SKU (refer exhibit 2 for product range of Putex). Putex Corporation had four manufacturing plants across India.

SUPPLY CHAIN AND DISTRIBUTION NETWORK

Putex Corporation had set up 6 regional warehouses spread all over India. These were strategically located to fill orders from a distributor or dealer in 24 to 48 hours. The company supplied to over 1000 distributors and direct dealers spread in many parts of the country. Regional sales executives collected the orders from dealers and sent to the head office through their regional head. The plants had been organized on product or customer basis. OEMs were given the highest priority and schedules received from OEMs were scheduled first. Export and Aftermarket orders from distributors and dealers were taken up next. The company was facing a problem to meeting the aftermarket orders and sometimes the export orders due to large SKUs and complex planning requirements. Orders which could not be supplied in a particular month were rescheduled later as back orders. The company had implemented a sophisticated ERP system to keep track of the orders, dispatches and the account receivables. Production planning being too complex needed manual intervention and decision making. Due to very high volumes involved, company preferred to use trucks from the open market which were more economical than tie up with any Third Party Logistics Company (3PL). For incoming

materials however it used its own tempos and also one or two smaller transportation companies 3PLs operating in the respective region. Milk round system was used to keep transportation costs low and also to get more frequent supplies of parts from the component suppliers located nearby. Supply to OEMs was done in full tempo or truckloads from the respective plants. For Exports also exclusive trucks were used. Transportation through train was tedious and time consuming. The road transport was mainly used for all transportation needs. Sales return from the aftermarket due to many reasons, such a delay in supply, transit damage etc. was a serious headache and no one wanted to touch it. It was difficult to track and keep proper record of sales returns from the dealers and distributors. For settling of claims, the sales department handled by negotiating and sharing the loss with respective dealer on an annual basis. From OEMs there were no sales return.

ORGANIZATION CULTURE

The plant was managed by Gupta as Plant Head reporting to Mahesh, a hardworking General Manager. Rajesh was now looking after all the operations of the company as new COO. Ravi, a pleasant, happy go lucky person, was head marketing reporting to Rajesh and also to the Chairman. The Chairman's office was in the nearby premises as the company plant and other offices. The company had a culture of putting trust in their employees and delegating full responsibility and authority at all levels. All employees including senior managers were expected to carry out all the work as per their respective roles, all by themselves, as per the need of the situation. No one was needed to supervise them or ask them to explain about the decisions they had taken. Even the Chairman had never over ruled any decision taken by a manager. Each manager was given best possible facilities at par with leading MNCs such as travel by air, stay in five star hotel, and claim actual expenses with very liberal limits. The company had opened schools for employee's children near plants located in remote locations. They had also started a small hospital for taking care of the employee's families. Chairman joined the managers and staff during his visits to each location followed by cocktails and dinner sponsored by the company.

NEW MANUFACTURING FACILITY

Putex Corporation was looking at possible site to expand its facilities as space available at the present locations in NCR and other Metro Cities it had plants was limited. After a thorough search and evaluation, a site in another state in the North was decided. The state offered a number of incentives such as backward area benefit, financial subsidy, soft loans at especially low rates, land at a subsidized rates, tax benefits, and housing for company employees on easy instalments and industrial sheds for the suppliers. All clearances and approvals were given on a fast track through the State's Industrial Development Corporation under the State ministry of industry. With everything in place, the company set up the plant in a record time of about 18 months. The company also developed all the equipment in house by improvising on the design of the original equipment and even modifying the gas fired oven to Diesel fired oven, which was more economical to operate. The manufacturing process of filters involved a number of part suppliers who manufactured the inner tube made from perforated steel sheets, top cap and bottom caps, rubber grommets, gaskets, and polythene bags, cardboard cartons and wooden crates for final packaging. Being a very high volume business, manufacturing about two million filters and filter assemblies per month in each plant, suppliers in the NCR were located at far off places. In new plant, however, being a new town, it was possible to locate most of the suppliers nearby. The production planning process had to cater to the specific requirement of printing customers brand names on the red or yellow outer body at supplier's end and also on the individual card board cartons. This made the production planning process very complex. Each production lot had to match the exact requirement given by a customer for that specific month. Any mismatch, would lead to delay in production of the specific lot, which the company could ill afford, as it could lower their supplier rating at the customer end. Daily standing meeting of the production manager, production planning manager, purchase manager, stores manager, quality control manager and sometimes finance manager was held on shop floor to identify problem areas and take immediate action to prevent any delay.

The plant was almost ready and trial production runs were underway. There were many problems as the new HSD fired oven was being tried for the first time. The component trials were also on as the new vendor facilities set up in the state were being made operational. The company had embarked upon a drive to hire staff and workers. The Chairman, having a long term view, directed for new HR policy to keep male-female ratio of 50:50 in the workforce. This was to ensure harmony amongst workers and to avoid any possible threat of labor unrest or strike, as was the case in the nearby states. Finding female workers would be a big challenge for the HR team, which till date had dealt with mostly male workers in the plant in the NCR and other Metro cities. The company decided to install 100 percent captive power plant to ensure uninterrupted operations. A guest house with lush green lawns was ready to accommodate officers and staff from the head office and also those joining till accommodation for them was made ready. The Chairman, very enthusiastic person, driven by a dream, visited the new location once a month and held a big party for all the staff in the evening as a major morale booster for the young staff that had shifted from large cities to work here and also to get first had information on the problems that needed to be solved for smooth functioning of the new plant. Rajesh, a rational person driven by facts, had been visiting this plant, but looking at the status and progress, was unsure of when the plant would be ready for final production. As a policy, it was decided that there will be no incentive system in the new plant. Performance incentive, if at all needed at a later stage, would be given at the plant level and not individual or group level performance, something the company could not control at the plant in the NCR.

OPTIONS FOR THE COMPANY FOR MOVING FORWARD

Due to limited growth in auto component business as evident from many forecasts and studies and increasing competition, the Group Chairman had formed a Diversification Cell headed by Vijay, a senior project manager. The initial work suggested ten areas for diversification, including Industrial Filters, Carbon Black filter bags, resin, automotive coolants for radiator, ultra-fine filters for clean room, air and water pollution control equipment etc. These were new areas and company had little expertise on these, hence it was suggested to identify foreign collaborators and prepare detailed project report on each area identified. The five year sales projection were showing at least 30 percent sales coming from diversified areas after an initial start-up period of six months to a year (refer exhibit 3 for sales history of Putex in the last 5 years). The company hired a team of experienced chemical engineers for taking these projects further.

Due to unusually harsh comments from the Advisory Committee, the top management of the company sat down to take a relook at the five year plan and the budget for the next year (refer exhibit 4 for 5 year plan of Putex Corporation) . Management had inducted Rajesh a senior retired government officer as COO of this company. Rajesh, who had just joined initially preferred to follow company's established practice. However after the above incident, he took over the responsibility to relook at the five year plan and the budget for the next year. He decided that rather than going ahead with the usual approach of updating the current year's projected figures for each department and function, start the process from a zero base. He called this approach as Zero Base Budgeting. Everyone took this new approach with a pich of salt and as a passing phase as never in the past anyone had questioned the basis for preparing a budget. However, Rajesh, stood to his stand and made all executives prepare their estimates from scratch, questioning the assumptions made by each one of them. Sales plan was the first to be revised, followed by budget for each activity. This was rather difficult process, as no one had ever thought in this direction. After grueling long meetings, the final version of the five year plan and the annual budget was complied. The initial sales budget for next year was modified from INR 4950 million to INR 5500 million. This too was turned down by the Advisory Committee. After days of reworking and series of presentations, Advisory Committee accepted a final Sales Plan of INR 6075 million including INR 500 million from the diversification projects for the next year (a massive 35 percent increase in annual plan for the next year and an average of 26.5 percent over next 5 years!). Rajesh was a very seasoned professional and therefore did not show any emotions. The Chairman looked at the team with a usual smile. Gupta and Singh were quite worried as to what would be the impact of this.

EXHIBIT 1 : OEM CUSTOMERS OF PUTEX CORPORATION Ashok Leyland Royal Enfield Bajaj Auto Ltd. Swaraj Isuzu Caterpillar TAFE Daimler India Commercial Vehicles Tata Motors Escorts Toyota Kirloskar Ford India TVS Motors Force Motors Volvo Eicher Commercial Vehicle Fiat India Volvo Trucks General Motors Yamaha Motors Harley Davidson Mahindra Navistar Hero Motor Corp. MAN Force Honda Siel Cars India Maruti Suzuki International Cars & Motor Ltd. Nissan Ingersoll Rand Nissan Ashok Leyland Kirloskar Oil Engines Limited Mitsubishi Mahindra & Mahindra New Holland Tractors Piaggio Vehicles Punjab Tractors EXHIBIT 2 : PRODUCT RANGE OF PUTEX CORPORATION Air filtration - 1.Air filter Assemblies 2.Air intake systems 3.Plastic cylinder head covers Liquid filtration - 1. Oil filter systems fuel filters, 2. Oil filters 3. Oil vapor separators EXHIBIT 3: 5 YEARS SALES REVENUE OF PUTEX CORPORATION (INR MILLION) * Rd Year Sales % GrowthEXHIBIT 2 : PRODUCT RANGE OF PUTEX CORPORATION Air filtration - 1.Air filter Assemblies 2.Air intake systems 3.Plastic cylinder head covers Liquid filtration - 1. Oil filter systems fuel filters. 2. Oil filters 3.Oil vapor separators EXHIBIT 3: 5 YEARS SALES REVENUE OF PUTEX CORPORATION (INR MILLION) * Rd Year Sales % Growth 2013-2014* 4500 11.1 2012-2013 4050 11 2011-2012 3650 12.3 2010-2011 3250 10.2 2009-2010 2950 9.3 Average Growth 10.8 * estimated Exhibit 4 : 5 YEARS SALES PLAN FOR PUTEX CORPORATION (INR MILLION) Year Sales Plan % Growth 2018-19 14127 21 2017-18 11675 25 2016-17 9340 23 2015-16 7594 25 2014-15 6075 35 Average Growth 26.5