Financial Express, May 27, 2013

Managing India’s manufacturing

  In my last column, I suggested that the quality of management may be a critical stumbling block to increasing the size of India’s manufacturing sector. The clues I gave last time came from studies supported by the National Manufacturing Competitiveness Council. But there is still more evidence, from different academic studies. For example, Nicholas Bloom and John van Reenen, in a study published in 2010, found that Indian firms with strong management practices are comparable to the best US firms on this dimension. However, there is a thick tail of badly-run (by their measure of management practices) Indian firms, which often neglect basic tasks such as collecting and analysing data, setting clear performance targets, and linking pay to performance. 

In another study, Bloom and different set of co-authors performed a controlled experiment with a sample of Indian textile firms, and found that the treatment firms improved productivity by 17% over the control group, by implementing specific improvements in operations. The focus was mostly on the basics of operations, such as the organisation of the factory floor, how parts were stored or moved around, how inventories were logged and stored, how machinery was maintained, and so on. In the experiment, the advice came from high-priced consultants (whose services were paid for by the researchers), but the improvements were not rocket science, and did not seem to require expertise at the level of a modern business school graduate. Finally, in a study I did last year with Shruti Sharma, looking at the productivity effects of investments in information technology in Indian manufacturing plants, we found results consistent with the hypothesis that the quality of management mattered for determining these impacts. 

Ultimately, the pressure to remove inefficiencies in manufacturing has to come from competition: last week I noted that inefficient firms still made high profits, and that also seemed to be the case with the sample of textile firms studied by Bloom and his co-authors. But this does not foreclose the possibility that removing constraints on management quality will make things better. Certainly, if and when regulatory and business environment constraints on Indian manufacturing get relaxed, the availability of appropriately skilled management will be critical. 

How is this availability to be achieved? India has certainly expanded graduate management education very rapidly. However, there are problems of quality in many of the new institutions. Even in the best management schools in India, the focus is very much on fast tracks to success, typically through focusing on finance or marketing or general management. Just as in the United States, classic roll-up-your-sleeves, shop-floor management is quite neglected in India. However, for the US, the issues are different: focusing on finance and marketing has taken away from high-end innovation. This is why many Silicon Valley firms still shy away from hiring MBAs, and prefer to train their managers with customized in-house courses. Such courses are difficult for smaller firms to afford, though, and will not provide the large-scale solution that India needs. 

Indian manufacturing, if my reading of the evidence is right, needs basic managerial training, and lots of it – not just for fast-track executives, but for every level from factory supervisors on up. The implication is that not all of this training has to be in the form of MBA degrees or equivalents. Indeed, short certificate courses are probably best suited for many of the skill gaps that lead to basic inefficiencies on the shop floor. Given the shortage of faculty, the solution is going to have to include development of online materials that can be accessed by large numbers. 

One can envisage this effort originating at the level of individual industries, since manufacturing processes can be quite specific to the nature of the product. Of course, there are many management techniques that are more generic, such as basic accounting or inventory tracking. The Indian information technology industry is well known for training its workers, most of whom are skilled professionals, and for using global standards of certification. In their case, they were able to generate the cash flow needed for internally supporting such efforts, but some kind of tax credits may be a good idea for manufacturing. 

One hopeful example is the Munjal Global Manufacturing Institute, at the Indian School of Business’s Mohali (Punjab) campus. This is being developed in collaboration with the Massachusetts Institute of Technology, and will probably be aimed at the high end of the market, but it may provide a role model for mid-market offerings. The key is for industry to be involved in shaping the curriculum and working with faculty (preferably including ex-managers), so that the connection to shop floor challenges remains strong. 

Programs that pull in experienced manufacturing managers from around the world to share their knowledge will also be more valuable. Of course, creating and delivering such programs has its own management challenges and constraints, but a start has to be made, otherwise national policy goals will remain pipe dreams.