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Operational Excellence Indian Vs. International Practices
1. Operational Excellence: Indian vs. International Practices CONFIDENTIAL This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion. Western Region Annual Meeting April 11, 2002
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4. …WHICH TRANSLATE INTO SUPERIOR VALUATIONS Average Total returns to shareholders Wilshire Index (market) "Excellent" - Top 12* "Excellent“ – Next 32 S&P 500 Industrials * Operational excellent companies defined as 12 companies that passed operations excellence filter from the Industry Week Global 1000 Source: McKinsey Operations Discovery Project 3X TRS performance relative to market
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6. ALCOA CASE STUDY – CORPORATE-WIDE LEAN TRANSFORMATION Lean operating practices (APS) Transformation foundation Performance-based measurement system Facilities modernization Renegotiated labor contracts Variable compensation (salary and hourly) Quality assurance, SPC Reduced set-up times Flexible job design Pay for performance/skill Alcoa Business System
7. ALCOA CASE STUDY – THE RESULTS * Alcoa’s quarterly net income adjusted for special items Source: Platt’s Metal Week; Wall Street Journal; McKinsey Metals Practice Alcoa adjusted net income Aluminum spot price Adjusted net income* $ Millions Spot price of aluminum $/lb. Alcoa performance vs. price of aluminum -100 100 200 300 0.40 0.60 0.80 1.00 1.20 0 1982 83 84 85 86 87 88 89 90 91 92 93 0 Initiated Alcoa production system 94 95 96 97 98 99 Broke out of price cycle EVA- 1995-99 (ROIC-WACC) Growth- 2000-05 (5-year projected) Alcoa Competitor Industry Alcoa Competitor Industry
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9. INDIAN MANUFACTURING COMPANIES FACE A PROFITABILITY CRISIS 1997 20% decrease Profit margins* 2000 PAT, percentage of sales Percentage of companies making losses Per cent 1997 50% increase 2000 1997 7% decrease EVA (ROIC minus cost of capital) 2000 Per cent * Based on a set of 132 companies in 10 sectors (Industrial Machinery, Ferrous, Non Ferrous, Consumer Durables, Chemicals, Petrochemicals, Pulp & Paper, Power, Tyres and Automotive) Source: Prowess; McKinsey team analysis
10. POOR FINANCIAL PERFORMANCE IS DRIVEN BY POOR LABOUR AND CAPITAL PRODUCTIVITY… Automotive Steel Power (generation) Labour Productivity Capital productivity Index, US = 100 Apparel Index, US = 100 Source: McKinsey Global Institute study of the Indian economy NA NA EXAMPLES
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14. SEVERAL SOURCES OF GAPS EXIST IN MANUFACTURING Source: Interviews; SIAM; Harbor Report Equivalent cars per equivalent employee; Index, US average in 1998 = 100 Pre-libera-szation plants Excess workers, OFT*, DFM**, techno-logy, scale Post-libera-lisation plants Supplier relations Scale/ Utili-sation Organisation of functions and tasks and training India Potential Non-viable Auto- mation US average 6 32 38 17 7 5 84 16 100 16 Design for manufacturing India average = 24 1 Viable Auto- mation 1. Manufacturing AUTOMOTIVE EXAMPLE
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22. SET AGGRESSIVE ASPIRATIONS FOR OPERATIONAL EXCELLENCE Source: McKinsey Performance comparison/gaps Com pany Process effective- ness Process efficiency Factor cost Best com- petitor bench- mark Other Material Capital Personnel 100 15 – 25% Best of best bench- mark 35 – 40% Theore- tical limits 60 – 75%
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