Technology Operations Limited (TOL) is an ancillary of Sandwood (India) Limited (SIL). TOL manufactures small size oil purifiers for SIL, as per the quality and design specification provided by SIL. SIL also provides the raw components of the oil purifier which TOL assembles to make the final product.
TOL is a small company with 60 employees and an annual turnover of Rs. 70 crores. It has been a loyal ‘business partner’ of SIL for the last seven years, with very good quality and delivery performance. The productivity and cost- competitiveness is also comparable with similar units.
During the last 2 years, SIL has been facing an acute competition from new entrants to the Indian market. Its volumes and margins have dropped considerably. Being a monopoly company few years back, it did not bother for its own cost-competitiveness and employee-productivity. Most of its quality and cost performances come from ancillaries like TOL. Now with market pressures, it has started transferring most of its ‘cost-inefficiencies and cost burdens’ to the ancillaries and other suppliers. It has also started using unfair means and coercive tactics to gain maximum possible advantage from these small partners.
SIL cut TOL’s prices by 12% volume by 40%. SIL could not give any reasonable reasons for such a cut. There is growing strain now on the relationship between SIL and TOL, which is badly affecting the ‘quality of coordination’ between the 2 sides.
TOL is now feeling the heat of price and volume cut very badly. It is making serious ‘operating losses’. SIL has not given any analysis or guarantee for a ‘near future revival’ of the situation. Economic slow-down and growing competition are the only 2 reasons repeatedly told by SIL, without any pragmatic and visible course of action. TOL now faces a situation of uncertainty without any proper guidance or support from the principal.
There is a growing unrest among the workers of TOL, as their ‘productivity bonus’ has been considerably reduced, due to fall in production. Workers are not in a mood to understand the ‘uncontrollable problems’ of TOL. TOL’s bankers are also pressing for timely debt-serving. 2 years back, on the instruction from SIL, TOL had explained its production facilities on fund by borrowed from the bank at a high cost. Increased depreciation and interest have put terrible pressure on TOL’s cash flow and profitability accounting respectively.
TOL’s owner cum chairman, Mr. Deshpande and is top team have decided to reduce their salaries by 25% and other relevant overheads by 30%. Yet, these cost-cutting measures may not help TOL considerably. The top team recently carried out several brainstorming sessions for arriving at a drastic course of action. Meanwhile, its finance chief Mr. Guha left the organization. His resignation added further complexity to the present scenario.
The brainstorming sessions have resulted in many aggressive remedies. These remedies will have to be assessed very carefully before they are really tried out. The major remedies are as follows:
1) TOL should compel SIL for transparency in its transactions. SIL must explain the logic behind the volume and price cut. SIL should share its cost-details with TOL.
2)SIL must share information about market pressures and its relevant strategies. It should guide TOL properly, in shaping up the future.
3) TOL should join hands with other ancillaries and create ‘united strength’ to fight the coercive tactics of SIL.
4) TOL should look for other customers to use its capacity. A broad-based clientele will reduce TOL’s over-dependence on SIL. It would also be useful in disciplining SIL.
5) TOL should enter into ‘strategic agreements’ without SIL and keep enough exit for itself, in case SIL does not keep up its promises.
6) TOL should think about the possibility of ‘horizontal expansion’ through restricted diversification.
7) It should educate its employees about the market conditions and reappropriate the wage policy to avoid future confusion.
The top team is not very clear about the consequences on application of these remedies. It is also not very clear about the prioritization of these remedies. The team has come to a conclusion that Mr. Deshpande, if possible, should talk to similar ancillaries of the competitors of SIL and try to understand the realities of market. Such interaction would definitely create a ‘base’ for formulating ‘remedial strategies’.
Q. What exactly should TOL do? What should be the prioritization of the remedies?
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