MSMEs – The Growth Engine of New India
Published on : Saturday 08-10-2022
I strongly believe that there is a huge potential for growth in our MSMEs, and what is required is a little nurturing with proper strategies, says Darshana Thakkar.
India has emerged as the fastest-growing major economy in the world. It is expected to be one of the top three economic powers in the world over the next 10-15 years, backed by its robust democracy and strong partnerships.
With around 6.4 crore MSMEs in India, MSMEs are the second largest employment-generating sector employing around 11 crore people.
While these MSMEs contribute around 30% to India's GDP and 50% to the country's export, it is essential for MSMEs also to be growth and cost-centric. In the post Covid era, while the world is looking for China plus strategy, India is on the top. As an Indian MSME, we should grab this opportunity for our own benefit. It will help your business grow and make us a world leader.
As an MSME expert and activities, I come across many businesses. During my long career of about 27 years working with MSMEs, I observed a vast potential in every MSME to grow and contribute to national growth. The four major factors I have observed which hinder the growth of MSMEs:
1) Lack of funds or working capital
2) Lack of appropriate marketing strategy and plan
3) Tremendous hidden and indirect costs in the operations (Operational Excellence), and
4) Resistance to technology adoption.
Herewith I am sharing some policies and strategies to improve the overall business operations of the MSME without significant cost implications.
I. Financial and scheme support
To deal with the first-factor central government, all the State governments are proactively working for the growth and success of the MSMEs. Many policies and support schemes for the MSME have developed in recent years. I have summarised four significant pillars that add to the success of MSME:
i. The entrepreneurial spirit among the citizens
Many citizens of India have God-gifted business acumen. They start from scratch and achieve the highest milestone of becoming the world leader. They are proactive about learning and creating new things and achieving their dreams. They don't only try to earn their livelihood, but many citizens are also passionate about employing other citizens. These characteristics have given rise to many small businesses in the country.
ii. Dedicated Ministry and different statutory bodies for adequate support to MSMEs
To support and promote small businesses, India has a dedicated Ministry. Several statutory bodies operate to encourage the growth of Small firms.
-Khadi and Village Industries Commission (KVIC)
-Coir Board
-National Small Industries Corporation Limited (NSIC)
-National Institute for Micro, Small, and Medium Enterprises (NI-MSME), and
-Mahatma Gandhi Institute for Rural Industrialisation (MGIRI).
iii. Policy support from Government to MSME for Easing business operations
In recent years, government policy initiatives have improved the government's accelerated ease of doing business and growth of the MSME sector to support the MSME industries in resolving different business operations and funding problems.
-Udyog Aadhar Memorandum
-MSME Databank
-My MSME
-Technology Centre Systems Program (TCSP)
-MSME-Sampark
-Direct benefit transfer in the account of MSMEs
-Digital Payments
-MSME-Sambandh
-Grievance monitoring
-MSME-Samadhaan
-National Scheduled Castes and Scheduled Tribes hub, and
-MSME-Sambhav.
iv. Financial support scheme from the centre and State government
To provide credit and financial assistance, skill development, Infrastructure development and technology, and quality upgradation among the MSMEs, the Ministry runs numerous schemes as mentioned herewith.
-Prime Minister's employment generation program
-Credit Linked capital subsidy
-Credit Guarantee Trust Fund for MSE
-Special credit link capital subsidy for the service sector
-Skill development and training
-Financial support for ZED certification.
In one way or another, many schemes are available to provide financial support for the growth of the MSME, as mentioned above.
To deal with the limitation of the working capital, the government has established Receivable Exchange of India Limited (https://www.rxil.in/) where MSMEs can get the funds with a nominal cost against the sales invoice. The process is entirely online, transparent, and quick. This initiative helps to reduce working capital problems for MSME companies.
II. How to deal with Marketing Strategy
During my journey in dealing with MSMEs, I observed that most MSME companies have very poor marketing strategies, plans, and marketing content. They are making just sales with the available resources only. Even the marketing material like website, catalog, company profile, etc., are not up to the mark or even not in line with the company product and offers.
The company should focus on re-establishing its marketing strategy and allocate some budget for developing an appropriate marketing strategy. For these, very little investment and effort are required. But the results are fantastic. In the digital era, appropriate digital presence of the company on the website, e-commerce if applicable and social media, is a must.
III. Operational Excellence
While improving productivity, most of the companies focus on production only. While reducing cost, companies concentrate on cost-cutting with human resources reduction and compromise with quality. Is there any better way to deal with this? Reduce cost along with improved quality and delivery. I would say yes. Of course, you can, and any MSME can.
First, consider the support functions like Procurement, Inventory Management, and HR as strategic rather than support functions.
Under materials management, all three fields are Procurement, Inventory Management, and Logistic Cost. All these together make an input cost. By improving an overall input cost, an organisation can dramatically reduce the overall product cost and improve its operation.
I want to highlight a few strategies to reduce input costs:
a. Excavating the Hidden money from procurement
Organizations should think differently about procurement to strike rich savings in input cost.
Most organisations only scratch the surface of procurement efficiency. But while we dig deeper, we discover that the savings can be dramatic. Purchasing is the largest expense category of the total input cost for most companies, averaging from 43% to 50 % of total costs. According to some world-class research organisations and our experience, a strategic approach and professional procurement specialist can help reduce a company's purchasing cost by an average of 8%-15% and deliver additional annual savings of 2%-8%.
As far as SMEs are concerned, it is very much challenging to dig into all aspects of cost-saving by an owner of a company with limited resources. A talented procurement team can provide valuable data, analysis, and insights that show what a company buys and how it believes. But in many organisations, procurement is just a support function and assumes that procurement is merely a clerical activity of comparison and negotiation. Procurement needs to earn a seat at the table with business unit leaders.
Creating a collaborative partnership between the procurement function and the business is vital to achieving potential savings. The investment in establishing professional procurement teams with the skills and talent to work across all business functions is tremendous. The combination enables smarter, proactive purchasing decisions. A professional procurement specialist can provide regular feedback to business unit heads about where their spending was less efficient than the competition. That's powerful intelligence.
Save Money: Buy Better + Spend Better
Buy better. To trim procurement costs, focus on the two areas of savings you can directly control: price negotiation and supplier selection, which both help companies buy better.
Negotiate better. Negotiating lower prices for everything a company buys may sound obvious, but many companies struggle with how to do this when the offering is more customized or with monopoly suppliers.
Streamline suppliers. Establish a strategic sourcing process for overall procurement transformation for sustainable results in the longer run.
Spend better. Buying better is critical, but spending better can double procurement gains – or even more. Techniques for spending better, focusing on what we buy, not just what we pay for, can produce up to 60% of total savings. While we focus on both – buy better and spend better –we can gather the entire landscape of opportunities.
Three guidelines that help to spend better:
Managing demand. Streamline purchasing by examining specific categories; we can spotlight unnecessary spending.
Design to cost. Procurement professionals should ensure that design teams are not over engineering new products. The design team has to liaison with the procurement team to assess the cost of different components and consider alternative options that may be more cost-effective.
Reduce system costs. Ultimately, the total cost of acquiring goods affects profitability. Paying more upfront can be the more economical choice if savings over time outweigh an initial higher cost. To examine the supply chain regularly makes more sense to understand whether to produce items in-house or buy them from someone else.
b. Inventory Optimisation
Besides procurement, Inventory management is also crucial, especially for MSMEs struggling with working capital management. I have some quick questions to check your inventory management status.
-Have you checked the average inventory value at any point in time?
-How long are you verifying physical stock vs. system stock?
-What is the quantum of non-moving inventory older than six months?
-Are you struggling with material shortages to fulfil the production demand frequently?
-Do you require frequent cash purchases and rush purchases?
-Do you have a frequent problem with the quality?
Any challenge from the above indicates poor inventory management.
c. Human Resources practices
For any business, people are the greatest assets. And people management is the most challenging task worldwide for any business, even for professionals like doctors, Architects, lawyers, etc. We at MSME underestimate the importance of HR functions. Some key factors of good HR practices
-Right fit of the employee based on the skill set and the interest
-Appropriate HR policy and rules and regulations
-Motivational factors that include monetary and non-monetary benefits
-Potential for their career development
-Recognition of the high-performing employees, and
-Increment based on a well-established performance appraisal system.
IV. Technology Adoption
Emerging technology has a pivotal role in the sustainable growth of any business. Large corporations are aggressive in adopting the latest technology for various business functions. But for MSMEs, adoption of technology is minimal. The significant reasons are:
i. Higher initial investment
ii. Awareness about the appropriate technology, and
ii. Resistance to change.
Our experience of practical implementation of various technology and tools across the business functions shows that the return on investment is speedy. Also, the cost reduction and improvement in quality are significant and help to increase the company's competitiveness. I insist that adapting the technology and automation in various business functions, including support functions, adds value to your success.
I would like to highlight some real cases of cost reduction which we have achieved with the active efforts of our clients:
a. Overall, 10 to 15% sales growth achieved in 6 months with a strong marketing strategy
b. Fixed cost reduction up to 20%
c. Operative cost reduction of up to 25%
d. Resource Utilisation: Man, Material, Machine and Data
e. Input cost reduction up to 10 %
f. Inventory optimization resulted in better and timely delivery to the customers, and
g. Digitisation of documentation resulted in better utilisation of data and improved MIS report for decision making
Finally, I would like to share vital information about innovation and business practices ranked across the country.
In recent years, India has accelerated in terms of innovation. In the world innovation index, India has moved up 35 places in the global innovation index in just six years, from 81st in 2015 to 46th in 2021.
Besides, as per the recent report, different States identified as:
i. Top Achievers
ii. Achievers
iii. Aspirants, and
iv. Emerging business ecosystem.
A few States like Gujarat, Punjab, Haryana, Telangana, Karnataka, Andhra Pradesh, Tamilnadu, and Puducherry are the top achievers.
I am glad to be a part of this business ecosystem of a top achiever like Gujarat.
Gujarat is the hub of industries, and the Vadodara region of central Gujarat contributes significantly to the GDP and exports. Exports from central Gujarat reached Rs 1 lakh crore this year, and that of Vadodara district is around Rs 34000 crore. Export from the Vadodara region is estimated to reach around Rs 40000 crore this year.
Besides the engineering and electrical industries, Vadodara is also the chemical and pharmaceutical industries hub. Out of total regional exports, about 50% is contributed by the chemical and pharmaceutical industries.
A glimpse about export from central Gujarat:
Vadodara – Rs 34000 crore
Panchmahal – Rs 11000 crore
Dahej – Rs 72000 crore
Anand – Rs 3500 crore, and
Dahod, Narmada – Rs 300 crore.
To sum up, I strongly believe that there is a huge potential for growth in our MSMEs, and what is required is a little nurturing with proper strategies. Indian MSMEs have the potential to become an engine for the dream of our government to become a $5 trillion economy.
I am passionate about transforming MSME to achieve its highest potential, #vocalforlocal, #localtoglobal, and #atmanirbharbharat.
Darshana Thakkar is MSME Transformation Specialist and Founder, Transformation – The Strategy Hub. An Electrical Engineer followed by MBA – Operations with rich industry experience, Darshana is an expert in transformation, cost reduction, and utilisation of resources. An Author and a Speaker, she has invested 25 years in transforming Micro and Small Enterprises.
She can be reached @ +91 9106708639. Email: [email protected]
LinkedIn: http://in.linkedin.com/in/darshanamthakkar/