Effect of loss of product (Appendix). Innova Machines (Pvt) Limited, located in Chennai, India, supplies automotive components to two-wheeler (scooters, motorcycles, mopeds, and such) manufacturers. A dozen major customers located within India account for most of its sales. The largest customer accounted for 20% of the sales, and the smallest accounted for about 6% of the sales volume. As elsewhere in the world, the market for automotive components is extremely competitive, and price is the key determinant of which supplier gets the order. For 2010, management estimated materials cost at Rs. 80,000,000 (Rs. denotes Rupees—Rupee is the Indian currency), labor at Rs. 120,000,000, and manufacturing overhead at Rs. 75,000,000. The (industry) standard of 15% markup on manufacturing cost yielded total revenue of Rs. 316,250,000. The firm made a modest profit after accounting for selling and administration expenses. One of Innova's smaller customers (accounting for 8% of sales) went bankrupt and closed at the end of 2010. Innova's management tried hard to replace the business but was unsuccessful, and budgeted manufacturing overhead at Rs. 72 million for 2011. They then computed prices based using the standard markup. Despite heroic efforts from its sales force, the firm lost another customer in 2011—a customer who accounted for 15% of 2010 sales. Despite another saving of Rs. 7 million in budgeted overhead costs for 2012, it appeared that the firm had succumbed to nimbler competitors making the product at lower cost.

The objective of the question is to figure out a turnaround strategy for the management of the Company.

Step-by-step explanation

Before we get into the specifics of the question, let's first understand the key pillars of the business. Every business has the following factors which determine its success, including the extent of it's success as well:

1. Internal factors:

a. Operations

b. Finance

c. Product

d. R&D

e. Management

2. External factors:

a. Markets & Industry

b. Competitors

c. Technology

d. Customers & preferences

Let's now tackle one-by-one, each of these elements enumerated above.

Operations: "Despite heroic efforts from its sales force, the firm lost another customer in 2011—a customer who accounted for 15% of 2010 sales. Despite another saving of Rs. 7 million in budgeted overhead costs for 2012, it appeared that the firm had succumbed to nimbler competitors making the product at lower cost."

This statement makes it clear that the customer was clearly not impressed with the product offerings of the Company. It only means that the Customer was able to source the same product at a lower cost from a competitor or was able to procure a much better product at the same/lower cost elsewhere. Customers accounting for 15% of sales are large customers and such customers are thorough of what they want, how much they want and the quality they need. It seems that the Company was not able to deliver on this adequately. To address the lower cost element, the Company may conduct a "Value Engineering" study on all its products to figure whether the key functionalities of the products can be accomplished at a lower cost. This can be achieved by using different raw materials or the same raw materials in different proportions or by bringing in manufacturing efficiencies through automation/robotics, all of which can make operations a "low-cost" affair. This can bring the overall cost per unit lower and provide an opportunity for the Management to be more competitive in its pricing.

Finance: Using a "One-size-fits all" pricing method for all products may not be a good idea. It is possible that the Company's finance and accounting systems are not providing accurate cost details. For example, there are products (say A) which take more time to manufacture but lesser raw materials and some products (say B) which require more materials but very less time to manufacture. If the Company's accounting systems allocate labour costs equally to all products, then it is likely that Product B may be more expensive and product A may be too cheap! This can result in improper pricing quotations being sent to customers and the resultant decline in sales. The Company must evaluate if it has adequate tools (such as ABC Costing, Marginal Costing, etc.) to identify and allocate it costs appropriately so that a fair price is quoted to the end-customer.

Product & R&D: We have covered the "operations" piece above and products are very closely linked to operations. So let's dwell upon the R&D element. I will try to explain this with an interesting example of mobile phones. There are a few manufacturers such as Xiaomi, Oppo, etc. who want market share and sell their products at very low profit margins. Then there are those such as the Apples and Samsungs of the world who don't chase market share but chase "product differentiation" and "brand value". Product premiumization in a highly competitive market always gives an opportunity for great businesses to thrive. Not everybody uses Apple products but Apple as a Company is worth over USD 2 Trillion while Xiaomi is valued at USD 150 Billion. Xiaomi has sold more handsets than Apple over the last many years but still, Apple is where Apple is because of "Brand" and "Product premiumization". The Company may focus on just that so that it can separate itself from the competition.

Management: Management and employees are finally the strongest pillars and drivers of the business. Their ability to instill confidence in all stakeholder is pivotal to the success of the business. However, sometimes, having too many top executives and processes may also slow down the organization at large. Sometimes, its better to be "nimble" and "flexible" while carrying out day-to-day tasks. Hence, the Company may consider how best to use the existing talent in the organization as well as streamline certain key processes so that overall "turn-around times" for both internal and external customers are reduced.

Industry: Industry cycles play a huge role in demand & supply dynamics. All industries go through "Peaks" and "Troughs", i.e periods where sales grow consistently and periods where sales decline. Additionally, external events (events such as COVID-19 or wars or inflation, etc.) can impact industries to a very large extent. The Company may conduct a study as to which phase the industry is in and make a reasonable prediction of where the industry is headed over the next couple of years. For example, if it is expected that demand will remain strong, the Company can invest in capacity expansion or invest in streamlining operations to that it can get larger economies of scale. However, if the industry is expected to decline, the Company may consider focusing on cost-reduction initiatives so that it can weather the storm.

Competitors: Competitors often play many tactics to win customers. Some use tactics in product pricing (For example by pricing products low and increasing annual maintenance fees), some try to disturb supply chain dynamics (For example by taking over a major supplier and vertically integrating its operations), some try to take-over another competitor (an enemy's enemy is a friend) and become larger in size and capabilities or even poaching key employees. Thus, keeping a track on what the competitors are doing is critical so that the Company can take effective counter-measures to protect itself as well as the customers. The Company may look into some of these aspects to figure out if anything has changed in the industry that led to one customer going bankrupt and losing another's business. More often, simple counter-measures such as product differentiation can retain customers, solid after-sales support can enhance/maintain customer stickiness, providing business and financial support to vendors and suppliers may compel them to continue to do business (rather than giving up and being taken over by competitors), maintaining adequate work-life balance for employees as well as compensating them fairly can ensure that employees continue with the Company in the long run.

Technology, Customer and Preferences: Technology is always a major disruptor on all industries. Take for instance what Tesla is doing, and how it's changing the automotive industry. Or even what an Amazon/Flipkart has done to traditional shops and malls. A lot of us today buy our product online and are not buying as much from shops as we used to before. The Company needs to keep a close watch if its products are getting obsolete with better and newer products from Competitors. Investing in R&D can significantly improve a business' chances to staying relevant over longer periods of times. If the Company has not scope of makings its products and services better, it will inevitably lose customers. Today's world is a very dynamic world and customer preference change everyday. Engaging with customers, conducting surveys and "VOC"s (Voice of Customer i.e understanding why and how the customer uses the products of the Company and what are key expectations of the customer) will keep the Company on its toes. It will force the Company to innovate, better its product offerings, reduce costs and compete effectively.