Leadership Challenges in the Small Scale Sector

LEADERSHIP CHALLENGES IN THE SMALL SCALE SECTOR


                                                                               by hemendra k. varma




The first thing to recognise about the Small Scale Sector is that it is no longer so. Comprising over 11 lakh units and with an output valued at approximately Rs. 41,000 crores, it accounts for around 50% of the total industrial production in India. When viewed along with the other identifiable sectors, viz. the public sector and the medium and large scale private sector, it will be seen that the contribution of the Small Scale Sector in the total industrial output is the largest. Any operations management practitioner would recognise that in terms of an ABC analysis, the Small Scale Sector falls squarely in the ‘A’ category and deserves appropriate attention. The tragedy, however, is that the pampered sector still remains the Public and the Large & Medium Scale Private Sector. Be it in terms of finance, or of foreign collaborations, be it in terms of political clout and support or be it in terms of news value - the small scale sector is very much an ignored one.

At the very outset it might be stated that the small-scale sector also accounts for the largest number of sick units and we will begin our discussion here.

Why is this so ? The answer is not too difficult to find. The small scale sector being very much a priority sector on paper, the success of any State government financial or industrial development institution is gauged by the number of small scale units that they are able to promote. The attitude and the practices that flow from such an attitude, have been fully exploited by a large number of unscrupulous people. Projects that are either not viable or only marginally viable are getting approved. Loans are granted and disbursed, and that’s the end of the story in so far as the institutions are concerned.

Unfortunately, what follows is equally important but sadly neglected. The real work of the development and financial institutions actually beings after the funds are in the hands of the entrepreneurs to ensure that their spending is in accordance with and for the specific purpose indicated in the approved project. This is rarely done, with predictable consequences.

Thus, we have two major questions to be tackled. The first problem is to regulate the growth of the small scale sector into only those units that are viable. The second is to ensure that in case of viable projects, sanctioned funds are not frittered away in what may aptly be described as non-plan expenditure. How does one do this ?

Let us take the question of viability first. So far, the practice is to examine viability on the basis of the project report only. While this is no doubt an important dimension, it is certainly not a complete analysis in itself. What is equally, if not more important, is that the approving institutions take a good, hard look at the promoter. The same project in the hands of two different people can turn out diametrically opposite results, and the factor responsible for this is management. Therefore, while assessing the potential of a project, there must be a good and proper assessment of the entrepreneur.

Of course, while saying this it is realised that one is introducing a very subjective element in the scrutiny of a report, which, in the context of the atmosphere of corruption that pervades our entire economic system, can be exploited and lead to harassment. Nevertheless, there is no escape from such an assessment of the promoter. It would not be too difficult to lay down some basic norms for such an assessment.

While the benefit of doubt may definitely be given to the entrepreneur, what can be done is that in cases where this is the first project of the person concerned, or his capabilities are not fully reassuring, a closer scrutiny of the project should be made, and in the initial stages he must be prevailed upon to employ suitable professional expertise, or suitable professional expertise should be provided from the pool available with the industrial development bodies themselves.

Next, we come to the question of the performance of the small scale sector today. While the figure of 50 % share in the total industrial output is no doubt impressive, the individual performance of most of the small scale units is rather poor. The performance failures have been mainly on the following three fronts :

(1) Capacity Utilisation
(2) Quality reliability, and
(3) Adherance to Delivery Schedules


Each of these aspects is very much a management problem. The point, therefore, being made is that management of small scale industries, or to use a hackneyed expression, “professional management” of small scale industries, is almost non-existent. Let us consider each of the three major shortcomings listed above.

Capacity Utilisation

In a country like ours where capital is scare and labour so costly - I say the latter because what must be compared is not the wage level along, but, rather, the wage level in relation to a worker’s effective output - every capital asset has not merely to be worked but to be overworked to the maximum permissible limit.

Today, large numbers of machines lie unused or partially used in the small scale sector. Conservative estimates place the extent of non-utilisation at a minimum of 25% excluding down-time on account of power shortages. There are a variety of reasons for this. Wrong or inappropriate choice of equipment at the initial stages, unattended breakdowns, non-availability of spares from machine manufacturers, discontinuance of a product or a particular operation or process for which the machine was specially bough are some of the major causes leading to this state of affairs.

What is even more tragic is that while one unit may be having a low utilisation of one kind of machine, say a milling machine, another unit in the same or nearby area may be crying for milling capacity and may be having to decline orders on this count. True, units in such situations do get together to mutual advantage, but such cases are few and far between owing to very poor infrastructural set-up for information exchange.


From the foregoing two paragraphs it will be seen that the causes for low capacity utilisation are essentially of 3 types :


· Due to mistakes in initial planning/procurement decisions in respect of capital equipment.

· Due to external factors beyond one’s control - especially change in market demand, product/process obsolescence, etc.

· Due to operational shortcomings, poor spares management, defective scheduling etc.


Of the above 3 factors, the first and third fall squarely within the purview of management’s responsibility. In the case of the second factor, whilst there may be external forces at work over which one may hot have control, it is certainly possible, with some perceptiveness and a little bit of conscious effort, to anticipate the effect of these external factors and, since forewarned is forearmed, one can prepare for the eventuality such that damage to oneself is minimised.


As will be readily recognised, the essential input required for tackling these situations is management competence coupled with some infrastructural support and facilities.



Quality Reliability


One of the myths about our small scale sector is that it is largely promoted and run by educated or technically qualified entrepreneurs. The truth is far from this.


A very large number of such units have been started by non-technical people or by workers who are employed in industries and have grown from single machine units to larger establishments over the years. In most such cases, the entrepreneur had adequate competence for the initial activity he undertook, but, with growth in his volume and span of activity his competence bank has not kept pace. As a result, in times of demand boom, while he may have been able to get by, he suddenly finds himself out of depth when there is a demand slump or some technological advancement, for he is unable to innovate and respond actively to such challenges. He never had any reservoir of technical competence nor has he taken any steps to keep himself updated.

The output from such establishments, is always woefully poor on the quality front - both in conformance as well as consistency. Procurement personnel of various large companies are painfully aware how difficult it is to locate a “reliable” supplier - either his quality is inconsistent or his delivery unreliable. Rare is the case when a supplier performs well on both factors.


Secondly, because of shortage of working capital, as well as the constant pressure for “immediate delivery” form customers (owing to poor planning on the latter’s part) small scale suppliers tend to do a hurried job. Their chief objective is to deliver so that they can bill. What happens in the process is that a shoddy product is delivered and a lot of re-work has to be done by the supplier (or, sometimes, the buyers). This really is a national wastage of manpower and resources and, so far as the supplier is concerned, means a proportionate reduction in his net earnings.


Doing it right the first time, with some extra effort pays in the long run but is not a philosophy practised or accepted by the small scale sector. This is yet another case of management failure, or, rather, shortcoming.



Delivery


Planned job scheduling and machine loading are unheard of in the small scale sector. The result is inevitable delay and non-adherence to promised delivery dates. The customer who follows up most gets his job first - for the rest, it is as and when, if at all ! Lack of planning stems from two basic causes - lack of knowledge (of planning methods and practices) and lack of attention to this aspect, chiefly owing to the entrepreneur having to attend to every job himself.


At the risk of repetition, it has to be once again stated that this too is another case of management failure. There is rarely an initial expertise on such matter available and, if available, it is confined to the entrepreneur himself. Rarer still is the case where such expertise is added on in a running small scale unit, however well it may be doing. Inputs in terms of intangibles like management expertise are always viewed with suspicion and treated as “cost additives”. The argument runs somewhat like this : for the salary I am going to pay this manager, I can hire two more workmen and run these two machines in 3rd shift as well ; or, I can buy an additional machine with six months of his salary equivalent and increase my production by 25 % etc.


What is ignored is that even to keep going, an enterprise must be constantly improving its operating performance and this is only possible with better management and not with more output of doubtful quality and beyond delivery deadlines.


The purpose of such an elaborate discussion on the operational shortcomings of the small scale sector has been to underline that they all stem from a single basic cause - indifferent, unresponsive and inadequate management effort.


This is a major challenge that is squarely the responsibility of the small scale sector industrialists. The leadership of the SSI must spend time to consider this challenge in all its dimensions and evolve a strategy for converting this challenge into an opportunity.


So much for the challenges of the physical operating aspects. Another important challenge for the small sector is manpower availability, retention and utilisation. It is perhaps the single most important factor affecting the performance of a SSI unit for it greatly affects the three aspects of physical operations discussed earlier.


Manpower utilisation is an important issue through the country, whether in the bureaucracy, educational institutions, service establishments or the industry. In the case of the small scale sector, the problem gets accentuated because by the nature of their set up the SSI have fewer people to begin with. Reference has already been made to the usual tendency among industrialists to save on manpower expenses by hiring “cheap” personnel rather than the best person for the job at hand whose salary expectations might be higher than what they industrialist considers reasonable or worthwhile. Thus there is already a natural barrier to the employment of “good” people.


This situation is compounded further by the fact the even if the entrepreneur wishes to take good people he is not able to attract the best talent for the following three reasons :


· He cannot locate them easily - advertisement and/or selection consultants are expensive and even if he resorts to these avenues the response is less than adequate for most people have not probably heard of his organisation.

· If, perchance he can locate them, in most cases he cannot afford them or, rather, he thinks he cannot afford them. This is, of course, the major barrier to entry of good managers in the SSI.

· Lastly, there is a natural and understandable desire among job-seekers to work with a big company or a big or well-known name. The more qualified and talented a manager, the more intense such a desire. Further, the big companies are in any case waiting like sharks to snap up such talent at the first opportunity and imprison them with golden handcuffs of inflated salaries and unmatchable perquisites. In most cases, such talent is literally snatched off from the cradle, so to say, by the medium of the campus interviews/selection.


As if this were not enough, those who do seek jobs with the small scale sector - be it a qualified manager or a skilled workmen - do so with the intention of, sooner than later, changing over to a better/bigger company after having acquired some job experience. Thus, mobility of all category of employees is very high in the small scale sector.


The enlightened entrepreneurs will need to devote a considerable amount of time and energy into tackling this situation so that not only can the SSI’s get a good set of people, to begin with, but they should be able to train them suitable for matching the work requirements. What is more important, they should be able to retain such employees for sufficiently long periods so that the latter make a reasonable contribution to the concern’s growth and profitability before they decide to seek a change.


So far we have been discussing what may be described as essentially internal challenges to the SSI leadership and, therefore, responsibility devolves on them to take the initiative to seek solutions and make the necessary intervention.


Let us now look outwards and examine the various interacting forces that affect the performance of the small scale sector. The small scale industries face a formidable host of obstacles by way of the large number of agencies that they have to be in touch with for each of their separate requirements.


For instance, at the national level there are two nodal agencies, viz. NSIC, the National Small Industries Corporation whose key activities are supposed to be supply of machines or hire - purchase, single point registration, development of prototypes of machines, setting up turnkey projects abroad, etc. and the DCSSI, the Development Commissioner, Small Scale Industries who concentrates on various promotional and technical advisory activities through the SISI, the Small Industries Service Institutes and its regional offices.


At the State level there are a series of bodies starting from the Department of Industries, Small Industries Development Corporation, State Financial Corporation, Small Industries Consultancy Corporation, Small Industries Export Corporation, and finally, the all-encompassing District Industries Centres.


The establishment of so many separate functional bodies was presumably to provide specialist assistance in each of these areas. Unfortunately, it has had the opposite effect. It is only served to compound the confusion owing to a large extent of overlapping of functions and responsibilities and lengthened the bureaucratic path that an entrepreneur must traverse before he can get what he wants.


As is bound to happen in such situations, there is a great deal of buck-passing and tendency to secure approvals of “all concerned” agencies leading to inevitable delay, dilution of original assistance sought, and what is worse, a great degree of corruption.


To add to the confusion, two more set-ups, are proposed viz. CFTC - Common Facilities and Training Centre and PDTC - Prototype Development and Training Centres and to cap it all yet another expert body is being set up under the Chairmanship of the Secretary, Industries Department to examine the whole gamut of the problems of the SSI :


Consider the following

As will be seen from the above sketch and SSI entrepreneur has to deal with a large number of bodies. This is true for all other industries, too, but with the important difference that while the bigger organisations can afford to and do have full-fledged separate departments to deal with each such body or group of bodies, the SSI entrepreneur has to co-ordinate with all these bodies are forces almost single-handedly.


In the process more than half his time is spent in commuting and waiting to meet these people and talk to them. Is it any wonder, then, that the SSI man can find little time to devote to the actual running of his unit, much less to make a good job of it ?


The SSI units start with a very small capital base, they are short of manpower and very unsure on the marketing front. Therefore, the SSI’s need a drastic reduction in the number of referral bodies they must go to for any assistance or information. The DICs were conceived to fulfil this need by providing a single-window service but their actual performance has fallen woefully short of expectations. They are poorly manned and ill-equipped.


They have neither the requisite autonomy nor sufficient authority for taking quick decisions thus defeating the very purpose for which they were established.


The above situation, then poses a major challenge to the political and bureaucratic leadership concerned with the small-scale sector to restructure the set-up for providing infrastructural guidance and support to the small scale sector. It is obvious that a drastic pruning upgradation is required in the capability of the staff manning such bodies.


Next, we come to the question of finance. This is a major and constant source of worry for the small scale industrialists. First of all their sources of finance are limited. SSI’s can get terms loans from only State Finance Corporations and cannot resort to public borrowings, while the organised sector has ICICI, IFCI, IDBI, LIC and UTI and various State investment corporation plus access to public borrowings.


As if this were not enough, the Government has now permitted the SFC, the only avenue for SSI term loan to lend to medium sector units as well upto to Rs. 30 Lakhs, thus reducing and restricting the resources available to SSI.


Secondly, as has been mentioned earlier, owing to insufficient scrutiny of the initial project report approved and almost total absence of any monitoring thereafter, the entrepreneurs, most often, do not make the most efficient capital equipment decision.


The most common practice of ordering equipment is (a) either to buy what his friends has, or (b) to go buy what his consultant recommends to him, which more often than not is equipment from a company which is giving a commission to the consultant. At the time of drawing up the equipment requirement of the next 4/5 years, the advantages and disadvantages of going for a more versatile equipment straight away so that the branching out into diversified products is eventually cheaper. No doubt, these considerations are also dictated by the present fund availability.


However, when one is starting a fresh project and has to go in for a loan anyway, a projection of activities in the next 4/5 years should certainly be taken into account and appropriate allocations made and approvals requested for. The net result of the present approach is that the little money that is received is poorly spent and very soon more funds are required whilst the previous loan lies locked up in unwanted assets.



The next area of fund lock-up is raw material and in-process inventory. This happens mainly on two accounts :

• Due to generally poor supply conditions, people tend to overstock. First of all, this results in a lock-up of funds and, secondly, a good percentage of the inventory which is remaining in storage for a long time either gets spoilt or lost or becomes unserviceable i.e. beyond use.
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• The other reason for higher - than - required inventory is the whims and fancies of the large buyers on whom the small scale industries depend. It is a very common practice for the large buyers to be clamouring for material one day, and on the other, to suddenly cancel all orders. The victims of such whimsical working are of course the small scale industries.

Last, but not least, the squeeze comes from the delayed payment from the buyers. As it is, the large and medium scale industries corner a lion’s share of bank credit for working capital. Bank credit to SSI amount to barely 12 percent for to gross bank credit and only 30 percent of the advances to industry (medium and large), for matching output in the country. Of the little that goes to the small scale industries, virtually, the entire amount is sucked up by these large buyers when they receive the goods from the supplier but delay their payments.


A promised payment period of 30 days is invariably converted to an assured period of 90 days, which is finally effected only after 180 days or more. One estimate is that over Rs. 1000 crores are blocked up in the organised sector, at any point of time. This is a very big lacuna in the entire system of granting working capital credit to the industry.


This aspect needs to be seriously examined so that some way is found of preventing this diversion of bank credit from the small scale sector to the large and medium scale by this devious device of withholding payments. Mention has also been made of the difficulties the SSI face in the matter of obtaining qualified personnel. One possible solution is to use consultants for specific problem as an when required.


Unfortunately, as of today, none of the consultants is willing to even touch small scale enterprises. On their part the small scale sector is also shy of approaching consultants partly for the reason that they feel they will not be entertained, partly for the reason that they have a notion that such advice is extremely costly and of doubtful usefulness.


Except for the Bombay Management Association which runs a window for the small scale sector, there is no known formal advising authority. Similarly, none of the Management Institutes OR Schools provide programmes specifically beamed at the small scale sector though there are a few programmes where SSI entrepreneurs can and do participate.


As mentioned above, management is a key resource that is being under utilised in the small sector and by far, this will be the biggest leadership challenge in the years to come.


The difference in the effectiveness of our small scale sector can be easily weighed against the performance of the Japanese small scale sector, or, what is less - widely known, of the American small scale sector. Everybody has heard of General Motors and General Electric but it is not very well known that over 65 % of American industries are in the small scale sector.


The point that is being attempted to be made here is that, in the coming years, the small scale sectors will require a very large dose of managerial inputs and advice. Not only must the leaders in the small scale gear themselves up to improving their managerial inputs and performance, but a very large responsibility devolves upon the consultants, to focus their attention specially and specifically to this large clientele.


The point that is being attempted to be made here is that, in the coming years, the small scale sectors will require a very large dose of managerial inputs and advice. Not only must the leaders in the small scale gear themselves up to improving their managerial inputs and performance, but a very large responsibility devolves upon the consultants, to focus their attention specially and specifically to this large clientele.


To summarise -


The leadership challenges in the small scale sectors, therefore, are very basic and fundamental in nature. In brief, these are :


1. Ensuring greater attention to the problems of SSI and constructive involvement in their development by the government and bureaucracy commensurate with the size of contribution made by the SSIs to the nation’s industrial output.

2. Evolutions of systems for the proper appraisal of a unit’s viability and potential at the proposal stage, with special emphasis on promoter’s background and capabilities.

3. Enriching the managerial capabilities of the SSI Units through inputs like trained manpower, updating of technology and production practices, and a sensitive and relevant information system encompassing market intelligence and performance measurement, which will make the SSIs more responsive, to the environment and strengthen them to better face the challenge of change.

4. Reducing number of specialist bodies in existence for ostensibly servicing the SSI units by, merging the existing bodies, where feasible, to enable the SSI entrepreneur obtain a single-roof service as far as possible.

5. Evolving suitable control and monitoring systems to prevent diversion of small scale sector’s bank credit to the medium and large scale sector by the tactic of delayed payments.

6. Attracting sufficiently large number of management consultants to assist and advise the small scale units.

7. Inducing Management Institutes to run special courses designed to improve managerial effectiveness in SSI units.


Bombay :
September 1983.