MIT WPU School of Management (PG)

CASE STUDY #5 ON

PUTEX CORPORATION: CORPORATE PLANNING PROCESS

It was early morning of Monday, March 24, 2014, Gupta was driving to his office located on outskirts
of the city. His mind was totally occupied with the events that were to take place later in the day and
might have repercussion on the future of the company and challenges ahead.

Gupta and Singh, young executives of a leading automotive component manufacturing company
Putex Corporation in collaboration with a global automotive component MNC, were quite excited
after Rajesh, Chief Operating Officer (COO), gave his final approval, to the five year corporate plan
and annual budget for the company, a 500 page detailed document, compiled by them as their first
assignment, after multiple iterations. The basic inputs were given by each department based on
general guidelines discussed and current year’s projected data as was the practice followed over the
years. The company followed a very meticulous five year planning and budgeting process, it had
adapted from the collaborator, which began with sales forecast prepared by marketing department in
November each year and ended with the approval of the five year corporate plan and budget for the
next year by the Advisory Committee in February of the next year, well in time for the next financial
year beginning from first day of April. They got ten photocopy sets of the document made for
submitting to the Advisory Committee consisting of the Group Chairman and Managing Directors and
General Managers of all the group companies including Rajesh, COO, of their own company. The
formal presentation to the advisory committee was to take place next day in a five star hotel in the
city. They were eagerly looking forward to the presentation. Next day, as planned, all advisory
committee members were present and also the Chairman of the group.

A group of about 40 top and senior level executives from all the group companies attended the
Management Conference, as it was called. Gupta and Singh started to make their first presentation to
the top management on the five year corporate plan and the budget for the next year. It seemed simple
as the COO had given general guidance for preparing the plan as 10 percent increase per year in sales
and adjust the other factors in the same ratio except the manpower. Both were a bit nervous. On Sales
presentation Sinha, Managing Director of a group company and a member of Advisory Committee
asked, “You are showing last year sales quantity of product Lube Filter for the Korean Car Company
as 4000 and projected 4400 for this year. What is the basis of arriving at this figure?”. “We have made
an assumption of 10 percent growth in sales this year.” was the answer. “The turnover was estimated
as INR1 4500 million for the current finacial year, we have planned it to increase to INR 4950 million
in the next year. The profit also goes up by 10 percent”, they said with a lot of confidence. But who
told you to take 10 percent growth, when Korean Car Company is commencing production of 50,000
vehicles per annum this year from their new plant in South?” There was a chilling silence in the room
that followed. Gupta and Singh has no clue of this information. The COO was watching the
discussions with keen interest as a member of the advisory committee on the other side of the table.
The committee asked Gupta and Singh to take a relook at the five year plan and the budget for the
next year. Both left the room quietly after promising to come back with modified plan within next 30
days.

AUTOMOTIVE COMPONENT INDUSTRY IN INDIA

Projections for growth of Automotive Segment over next 10 years had been given as 13 percent for
passenger vehicles, 11 percent for Commercial Vehicles, 5 percent for Tractors, 7 percent for 2
wheelers and 3 wheelers and 14 percent for construction vehicles by Automotive Componenet
Manufacturers Association (ACMA) and Society of Automobile Manufacturers (SIAM). There were
several conflicting views on the growth of the sector for the next year and the following years.

The overall growth for automotive components for 2013-14 had been projected at 4.7 percent . A few
studies however put this growth at 11percent . “Overall, the growth would be flat this year,” said
Lakshman, president, ACMA5 . According to an industry expert Khan, Auto Parts Turnover Drops
First Time in Fiscal 20146. As per the statistics published by ACMA, engine parts form the largest
segment (31 per cent) of auto part industry followed by drive transmission and steering parts (19 per
cent). Suspension & braking parts and body & chassis account for 12 per cent each in the entire
product range, followed by equipment accounting for 10 per cent of the same . The auto components
industry’s turnover had grown at a CAGR of 14.6 per cent during 2007-11. ACMA and D&B
Research estimated the industry to grow at a CAGR of 11 percent during 2011-20217. Though there
were a large number of manufacturers for each automotive component, there were only a few leading
suppliers for filtration systems and engine components with well-known brands. These were preferred
suppliers due to quality and reliability of their products and were OEM suppliers for companies in US
and Europe. These suppliers were readily accepted by the Indian companies, which were either
wholly owned subsidiaries of the parent company or in technical or financial collaboration with the
big automotive companies. As per industry estimates, Indian auto component industry derived 60 per
cent of its turnover from sales to domestic original equipment manufacturers (OEMs), 25 per cent
from sales to the domestic replacement market and around 15 per cent from exports. Putex
Corporation was present in all the segments.

THE INDUSTRY ASSOCIATION

Automotive Components Manufacturers Association (ACMA) was a connect between Industry and
the Government. Every year ACMA brings out Industry compilation of key statistics such as
production and sales of automotive for past 10 years, segment wise, company wise, region wise,
model wise etc. This was popularly called Blue Book as it had traditionally at blue colour cover. This
was the only known source of information in this highly competitive industry. On an average, for the
past 10 years, the production of OEM’S was increasing at 8-10%, with a few exception such as
commercial vehicles and tractors. The replacement market for automotive components, After Market
as it was called, was growing at 9-10 percent per annum. The automotive component industry had to
be content with limited growth due to global economic scenario and competition form Chinese
manufacturers which were increasing their exports to India at a fast pace. However to get very reliable
estimates was difficult and each company had to make their own estimates.

THE COMPANY’S BACKGROUND

This was a family business promoted by the father of the present Chairman with a close business
associates. The original promoter had handed over the reins to his son, a brilliant engineer and a good
business man. The other family members devoted the time to look after the family companies, which
supplied major components to the groups manufacturing companies, thereby having control over the
key supplies and also on the value chain. Another family member looked after the marketing company
and the youngest was given responsibility for sales, advertising and business promotion of Putex
Corporation. The Chairman had a knack for picking the right people. The entire group was being run
on professional lines, at par with the best in the world, in spite of its smaller size.
The Company, Putex Corporation, discussed in the case, was a closely held public limited company in
collaboration with a leading MNC. The head office and one plant of the Company were located in the
same premises in NCR. The corporate office was also located nearby. The other group companies
were set up with foreign collaboration with leading auto component manufacturers from US and
Europe. The brand names became a household name due to high level of publicity campaign by these
companies and the Group. These companies had gone public due to high brand recall. Most of the
expansion was through acquisitions and setting up greenfield plants. The expansion and growth was
mainly financed through internal accruals.

The sales to aftermarket, other than OEMs and large customers was handled by a group marketing
company. Putex Corporation in which Gupta and Singh were working had a significant market share
due to high level of technology and high quality and relatively efficient operations. The competition
for similar products was quite fierce amongst the key suppliers due need for high investments mande
in setting up the design and manufacturing facilities and limitation of local technology. Leading
automotive companies had their Joint Venture companies or wholly owned subsidiaries, with limited
capacities, supplying these parts as captive units. Putex Corporation was supplying to almost all
OEMs in Automotive (Cars and Heavy Commercial Vehicles, Scooters and Motorcycles), Industrial,
Tractor, Earthmoving and other sectors. They were also exporting to nearby countries and also to
Europe. All the leading car manufacturers were having their assembly plants in India. The commercial
vehicles were manufactured by Telco and Ashok Leyland. Escorts, Eicher, TAFE, Ferguson etc. were
leading tractor manufacturers. Two wheeler and three wheeler manufacturers were Bajaj, Hero Group,
Honda, TVS, Yamaha etc ( see exhibit 1 for OEM customers of Putex) .

RESEARCH AND DEVELOPMENT

Putex Corporation had a history of robust research and development. Having invested in developing
highly motivated and committed teams of R&D engineers and upgrading the facilities on a continuous
basis, the company was able to adapt the technologies and products designs transferred from the
collaborators. Most of new applications of products for customers was developed in house. Filter
paper, main raw material, was also developed and procured locally as a second source. The
manufacturing processes and testing processes were developed on a regular basis. Engineers were
regularly trained at collaborator’s plants in US and Europe. The company had developed products
meeting customers specifications and manufactured these customized with their customer’s respective
brand names printed on each product and also on the individual cardboard cartons.

THE MANUFACTURING PROCESS AND FACILITIES

The company had got technology for manufacture of filtration systems using resin impregnated filter
paper from its collaborator. Filters made from this specially treated paper were much more efficient
than traditional filters made from steel mesh or felt or other such materials. This resulted in higher
mileage, better performance and longer life of the engine. Disadvantage seemed to be the need for
periodic replacement as the life of filters made from paper was relatively short as compared to wire
mesh filters. The filter paper initially had to be imported from USA. The company had set up facilities
for resign impregnation and manufacturing filter using paper. Resin coated filter paper being highly
combustible, required special temperature and flue gas flow controlled oven to cure it at high
temperature. The technology and equipment was initially imported from the collaborator, therefore
was a major barrier for entry for the competitors. The design and testing technology was also provided
by the collaborator and company engineers were trained at collaborator plant to absorb the knowhow.
The company was continuously improving the processes and methods of manufacturing filtration
systems and engine components. The staff and workers in this plant were highly dedicated and
efficient in their work. The plant was on an incentive system set up on an ad-hoc bases. The plant had
broken many production records in the recent years manufacturing over 17000 of a particular type of
oil filter using a standard crew of 27 workmen in an 8 hour shift as against 6000 per shift
recommended by the US collaborator initially. Kaizen, continuous improvement drive of the
manufacturing team was major contributor for this increase in productivity. The incentive pay was
sometime more than the average monthly wage of a worker.
The manufacturing process involved impregnating filter paper in a separate facility. The raw filter
paper from jumbo rolls it was imported in, was slit into smaller width reels during resin impregnation
process, as per the manufacturing plan. Processed filter paper for each application was different as per
specific product design and thefore each reel was marked with lot number during the impregnation
process and the filter production lot for which is was processed. The slit paper reel was loaded in a
decoiler, which fed filer paper into a pleating machine. This machine made corrugations and pleats to
fold the paper into multiple pleats as per design. A sharp knife cut off the exact number of pleats
enough to make one filter. Side sealer machine stitched the two ends of the cut paper length to form a
cylinder of pleated paper. Each filter required from 50 cm to one meter paper to provide for enough
surface area needed for filtration as per specific designs. A perforated red or yellow thick perforated
paper reel was run through a stitching machine to make cylinder like outer shell for each filter. The
pleated paper and the outer body and an inner tube were assembled to form a cylinder like shape. It
was then put in an end cap filled with adhesive and passed through a conveyer oven at low
temperature called Jeller. The second cap was now filled with adhesive and this partialy cured
cylinder was put on it to form a complete cylinder. It was also passed through the Jeller. Now each
filter was checked for height – low or high, and higher hight filters were corrected by hand, also for
taper if the cap was a little inclined. In process defective products were taken out for rectification
later. The OK pieces were allowed to go through the gas fired oven at a high temperature. During this
process the filter paper was cured and also the resin in the caps to form a complete filter. It was rather
hot as it came out of the oven. A team of 5 workers, wearing gloves, quickly pressed rubber grommets
on the both ends of the caps of the filters to make it leak proof when used in service. The same crew
packed it in polythene bags and finally in cardboard cartons, which were pre-printed. It was a treat to
watch these workers working on these processes with less than 5 seconds a cycle. A new type of filter
was also being manufactured for a major customer, a leading German Joint Venture Company, which
decided to outsource this work to Putex Corporation. As per their standard time data, a crew of 10
persons could produce 400 filters in 8 hour shift. The base level was fixed at 400 filters per shift and
since there was a pressing need to supply more, an incentive system was introduced. The
manufacturing team of this plant through their superior skill, and ability to make modifications in
manufacturing process, could take the production level to 3800 per shift giving a huge incentive to the
workers. The company followed a policy of equal opportunity to all workers to work on this new line
so that their earnings were rather balanced. Visitors from other collaborators of the parent company in
US and other countries such as Argentina were amazed at seeing these people working on production
lines in India and took their learning back home to make improvements in their own plants in their
home countries.
Putex Corporation manufacturered a large variety of filters for air, fuel and lube applications for each
customer and printed brand of the customer on each product during the manufacturing process itself,
thereby making a product mix of over 5000 product brand SKU (refer exhibit 2 for product range of
Putex). Putex Corporation had four manufacturing plants across India.

SUPPLY CHAIN AND DISTRIBUTION NETWORK

Putex Corporation had set up 6 regional warehouses spread all over India. These were strategically
located to fill orders from a distributor or dealer in 24 to 48 hours. The company supplied to over
1000 distributors and direct dealers spread in many parts of the country. Regional sales executives
collected the orders from dealers and sent to the head office through their regional head. The plants
had been organized on product or customer basis. OEMs were given the highest priority and schedules
received from OEMs were scheduled first. Export and Aftermarket orders from distributors and
dealers were taken up next. The company was facing a problem to meeting the aftermarket orders and
sometimes the export orders due to large SKUs and complex planning requirements. Orders which
could not be supplied in a particular month were rescheduled later as back orders. The company had
implemented a sophisticated ERP system to keep track of the orders, dispatches and the account
receivables. Production planning being too complex needed manual intervention and decision making.
Due to very high volumes involved, company preferred to use trucks from the open market which
were more economical than tie up with any Third Party Logistics Company (3PL). For incoming
materials however it used its own tempos and also one or two smaller transportation companies 3PLs
operating in the respective region. Milk round system was used to keep transportation costs low and
also to get more frequent supplies of parts from the component suppliers located nearby. Supply to
OEMs was done in full tempo or truckloads from the respective plants. For Exports also exclusive
trucks were used. Transportation through train was tedious and time consuming. The road transport
was mainly used for all transportation needs. Sales return from the aftermarket due to many reasons,
such a delay in supply, transit damage etc. was a serious headache and no one wanted to touch it. It
was difficult to track and keep proper record of sales returns from the dealers and distributors. For
settling of claims, the sales department handled by negotiating and sharing the loss with respective
dealer on an annual basis. From OEMs there were no sales return.

ORGANIZATION CULTURE
The plant was managed by Gupta as Plant Head reporting to Mahesh, a hardworking General
Manager. Rajesh was now looking after all the operations of the company as new COO. Ravi, a
pleasant, happy go lucky person, was head marketing reporting to Rajesh and also to the Chairman.
The Chairman’s office was in the nearby premises as the company plant and other offices. The
company had a culture of putting trust in their employees and delegating full responsibility and
authority at all levels. All employees including senior managers were expected to carry out all the
work as per their respective roles, all by themselves, as per the need of the situation. No one was
needed to supervise them or ask them to explain about the decisions they had taken. Even the
Chairman had never over ruled any decision taken by a manager. Each manager was given best
possible facilities at par with leading MNCs such as travel by air, stay in five star hotel, and claim
actual expenses with very liberal limits. The company had opened schools for employee’s children
near plants located in remote locations. They had also started a small hospital for taking care of the
employee’s families. Chairman joined the managers and staff during his visits to each location
followed by cocktails and dinner sponsord by the company.

NEW MANUFACTURING FACILITY

Putex Corporation was looking at possible site to expand its facilities as space available at the present
locations in NCR and other Metro Cities it had plants was limited. After a thorough search and
evaluation, a site in another state in the North was decided. The state offered a number of incentives
such as backward area benefit, financial subsidy, soft loans at especially low rates, land at a
subsidized rates, tax benefits, and housing for company employees on easy instalments and industrial
sheds for the suppliers. All clearances and approvals were given on a fast track through the State’s
Industrial Development Corporation under the State ministry of industry. With everything in place,
the company set up the plant in a record time of about 18 months. The company also developed all the
equipment in house by improvising on the design of the original equipment and even modifying the
gas fired oven to Diesel fired oven, which was more economical to operate. The manufacturing
process of filters involved a number of part suppliers who manufactured the inner tube made from
perforated steel sheets, top cap and bottom caps, rubber grommets, gaskets, and polythene bags,
cardboard cartons and wooden crates for final packaging. Being a very high volume business,
manufacturing about two million filters and filter assemblies per month in each plant, suppliers in the
NCR were located at far off places. In new plant, however, being a new town, it was possible to locate
most of the suppliers nearby. The production planning process had to cater to the specific requirement
of printing customers brand names on the red or yellow outer body at supplier’s end and also on the
individual card board cartons. This made the production planning process very complex. Each
production lot had to match the exact requirement given by a customer for that specific month. Any
mismatch, would lead to delay in production of the specific lot, which the company could ill afford, as
it could lower their supplier rating at the customer end. Daily standing meeting of the production
manager, production planning manager, purchase manager, stores manager, quality control manager
and sometimes finance manager was held on shop floor to identify problem areas and take immediate
action to prevent any delay.
The plant was almost ready and trial production runs were underway. There were many problems as
the new HSD fired oven was being tried for the first time. The component trials were also on as the
new vendor facilities set up in the state were being made operational. The company had embarked
upon a drive to hire staff and workers. The Chairman, having a long term view, directed for new HR
policy to keep male-female ratio of 50:50 in the workforce. This was to ensure harmony amongst
workers and to avoid any possible threat of labour unrest or strike, as was the case in the nearby states.
Finding female workers would be a big challenge for the HR team, which till date had dealt with
mostly male workers in the plant in the NCR and other Merto cities. The company decided to install
100 percent captive power plant to ensure uninterrupted operations. A guest house with lush green
lawns was ready to accommodate officers and staff from the head office and also those joining till
accommodation for them was made ready. The Chairman, very enthusiastic person, driven by a
dream, visited the new location once a month and held a big party for all the staff in the evening as a
major morale booster for the young staff that had shifted from large cities to work here and also to get
first had information on the problems that needed to be solved for smooth functioning of the new
plant. Rajesh, a rational person driven by facts, had been visiting this plant, but looking at the status
and progress, was unsure of when the plant would be ready for final production. As a policy, it was
decided that there will be no incentive system in the new plant. Performance incentive, if at all needed
at a later stage, would be given at the plant level and not individual or group level performance,
something the company could not control at the plant in the NCR.

OPTIONS FOR THE COMPANY FOR MOVING FORWARD

Due to limited growth in auto component business as evident from many forecasts and studies and
increasing competition, the Group Chairman had formed a Diversification Cell headed by Vijay, a
senior project manager. The initial work suggested ten areas for diversification, including Industrial
Filters, Carbon Black filter bags, resin, automotive coolants for radiator, ultra-fine filters for clean
room, air and water pollution control equipment etc. These were new areas and company had little
expertise on these, hence it was suggested to identify foreign collaborators and prepare detailed
project report on each area identified. The five year sales projection were showing at least 30 percent
sales coming from diversified areas after an initial start-up period of six months to a year (refer exhibit
3 for sales history of Putex in the last 5 years). The company hired a team of experienced chemical
engineers for taking these projects further.

Due to unusually harsh comments from the Advisory Committee, the top management of the company sat
down to take a relook at the five year plan and the budget for the next year (refer exhibit 4 for 5 year plan
of Putex Corporation) . Management had inducted Rajesh a senior retired government officer as COO of
this company. Rajesh, who had just joined initially preferred to follow company’s established practice.
However after the above incident, he took over the responsibility to relook at the five year plan and the
budget for the next year. He decided that rather than going ahead with the usual approach of updating the
current year’s projected figures for each department and function, start the process from a zero base. He
called this approach as Zero Base Budgeting. Everyone took this new approach with a pich of salt and as a
passing phase as never in the past anyone had questioned the basis for preparing a budget. However,
Rajesh, stood to his stand and made all executives prepare their estimates from scratch, questioning the
assumptions made by each one of them. Sales plan was the first to be revised, followed by budget for each
activity. This was rather difficult process, as no one had ever thought in this direction. After gruelling long
meetings, the final version of the five year plan and the annual budget was complied. The initial sales
budget for next year was modified from INR 4950 million to INR 5500 million. This too was turned down
by the Advisory Committee. After days of reworking and series of presentations, Advisory Committee
accepted a final Sales Plan of INR 6075 million including INR 500 million from the diversification
projects for the next year (a massive 35 percent increase in annual plan for the next year and an average of
26.5 percent over next 5 years!). Rajesh was a very seasoned professional and therefore did not show any
emotions. The Chairman looked at the team with a usual smile. Gupta and Singh were quite worried as
to what would be the impact of this.
 EXHIBIT 1 : OEM CUSTOMERS OF PUTEX CORPORATION
Ashok Leyland Royal Enfield
Bajaj Auto Ltd. Swaraj Isuzu
Caterpillar TAFE
Daimler India Commercial Vehicles Tata Motors
Escorts Toyota Kirloskar
Ford India TVS Motors
Force Motors Volvo Eicher Commercial Vehicle
Fiat India Volvo Trucks
General Motors Yamaha Motors
Harley Davidson Mahindra Navistar
Hero Motor Corp. MAN Force
Honda Siel Cars India Maruti Suzuki
International Cars & Motor Ltd. Nissan
Ingersoll Rand Nissan Ashok Leyland
Kirloskar Oil Engines Limited Mitsubishi
Mahindra & Mahindra New Holland Tractors
Piaggio Vehicles Punjab Tractors

EXHIBIT 2 : PRODUCT RANGE OF PUTEX CORPORATION

Air filtration – 1.Air filter Assemblies 2.Air intake systems 3.Plastic cylinder head covers
Liquid filtration - 1. Oil filter systems fuel filters, 2.Oil filters 3.Oil vapor separators

EXHIBIT 3: 5 YEARS SALES REVENUE OF PUTEX CORPORATION (INR MILLION) * Rd

Year Sales % Growth
2013-2014* 4500 11.1
2012-2013 4050 11
2011-2012 3650 12.3
2010-2011 3250 10.2
2009-2010 2950 9.3
Average Growth 10.8
* estimated

Exhibit 4 : 5 YEARS SALES PLAN FOR PUTEX CORPORATION (INR MILLION)

Year Sales Plan % Growth
2018-19 14127 21
2017-18 11675 25
2016-17 9340 23
2015-16 7594 25
2014-15 6075 35
Average Growth 26.5