Abstract
Prior to 2011, Service Industries Limited’s (SIL) production for the Pakistani market was sold through the marketing and retailing network of Service Sales Corporation (SSC), as both SIL and SSC were owned by the Service Group. However, in 2011, the companies parted ways based on two main conditions. First, SSC would continue to buy shoes worth at least PKR 3.8 billion from SIL till 2021. Second, SIL would give exclusive license to SSC to use Servis brand for the shoe business till 2021.
Omar Saeed, CEO of SIL, is reflecting on the previous four years’ performance for the shoe business division. It has not met the sales target for 2014, domestic sales are dependant on SSC and Klara (SIL’s own brand of wholesale), the European market is presurizing SIL to reduce prices as well as provide high variety and low volume orders, and more efforts need to be made to utilize SIL’s manufacturing facilities. Omar has to make SIL’s strategy for 2021, when SSC may not be there to give business worth PKR 3.8 billion, as well as plan the necessary roadmap. SIL’s top management wants to see SIL as a global player in its line of business.
Keywords
Discussion Questions
Assess the progress that SIL had made towards its vision and mission in the last four years. To what extent is the value chain of SIL aligned with the vision, mission and core values?
What was SIL’s strategy since 2011 – in terms of where? What? How? Why? Be specific. How should core values, vision, and mission impact this strategy?
Who are the main players in SIL value chain? What roles do they play and expect from SIL?
What are the challenges in SIL’s footwear business value chain? What had SIL done so far to tackle with them?
What should be the plan of action of Omar as he prepares for 2021?
It was March 2015 and Omar Saeed, CEO of Service Industries Limited (SIL), was reflecting on his company’s previous four years’ performance while going through 2014’s annual report that had just arrived on his desk. The annual report of SIL, which had two manufacturing businesses, that is, shoes and tyres, carried mixed news. The tyre business had made satisfactory progress towards the company targets in the preceding four years. However, the shoe business had gone through more ups and downs and was a source of worry for Omar.
Prior to 2011, SIL’s annual production of 11.4 million pairs of shoes for the Pakistani 1 market was sold through the marketing and retailing network of Service Sales Corporation (SSC), as both SIL and SSC were owned by the same group. However, in 2011, the companies parted ways on two main conditions. First, SSC would continue to buy at least PKR 3.8 billion worth of shoes from SIL until 2021. Second, SIL would give exclusive license to SSC to use the Servis brand for the shoes business until 2021.
In the last four years, SSC had bought only the contractually required minimum number of shoes from SIL, that is, of PKR 3.8 billion per year. SIL started its own wholesale brand, Klara, which represented only 6 per cent of SIL’s total shoes’ sales in 2014.
In the international market, SIL was working with two main customers, Caprice and Workout, and several small volume customers. Almost 90 per cent of SIL’s export customers, which were mainly from Europe, were asking for reduction in prices, thus squeezing SIL’s margins. Moreover, the European customers, except Caprice, gave high variety and low volume orders along with cost pressures. Recently, SIL had obtained two orders from the European division of Zara, a large international fashion products retailer. Since Zara offered large volume and less variety, SIL aspired to seek more business from Zara and the US market, where economy was more stable and prices were attractive. However, Zara required better quality, low delivery lead times and a faster product development process.
Against the target of PKR 26 billion for 2014 set by SIL’s management in 2011, actual sales were only PKR 16.5 billion. The domestic sales were stuck at PKR 3.8 billion from SSC and PKR 300 million from Klara. The export sales had grown but there was a lot more that SIL had to do to keep its manufacturing busy as well as profitable.
Omar wondered what his strategy and roadmap for 2021 should be when SSC might reduce or completely cut down its purchasing from SIL. According to his brother and director of the company’s tyre manufacturing division, ‘SIL is the leading shoes manufacturer in Pakistan but we are not satisfied because we want to be a global player in our line of business.’
History of Service Group
The foundation of Service Group was laid by a group of young college friends who set up Service Industries in 1941 in Lahore as a small-scale business of manufacturing handbags and sports goods. During the First World War, Service benefited from the opportunities of working with the British army. Based initially at Gujranwala, Service became a supplier of army boots. A consistent business from the army boosted the business as well as provided the capital to raise the production capabilities of Service. Their business flourished within years and they started supplying their products to every corner of the Indian subcontinent.
In 1953, the friends started a small tannery namely Halal Tanneries. Subsequently, in 1954, the group installed a shoes manufacturing plant in the industrial area of Gulberg, Lahore. This plant provided support to Halal Tanneries and started production of various types of shoes. Later the group shifted the factory from Lahore to Gujrat. In 1959, the group established Service Sales as its marketing company and the journey of SIL and SSC continued together.
In 1959, the group approached the government for acquiring the land for Service Factory Gujrat to set up Pakistan’s first organized shoes factory. According to Arif Saeed, director SIL tyre division and a third generation member of the founding family, ‘Our elders were blessed and succeeded in this process because they paid all the taxes and made products which people liked.’
SIL Gujrat was established in 1964. In 1965, the founders decided to start their own marketing unit rather than manufacture on contracts only. Hence, they established a retail company with the name of SSC. According to Arif:
They took shops on rent and decided to put a shop of Servis parallel to every shop of the multinational brand Bata that dominated the local market at that time. Even now [in 2015], where there is a Bata shop, there is also a Servis shop.
In 1968, the friends entered the textile sector. They gathered investment through three partners from the Middle East and two from Pakistan to set up Servis Textiles. In 1984, Muhammad Saeed and his sons left Servis Group and took SIL Textiles; later they started Servis Fabrics, Prime Dairy, ROCO ice-cream and other businesses. SIL Textiles was still an operational unit in Gujrat.
Muhammad Hussain’s and Nazar Muhammad’s families continued to work together in the business for more than seventy years. During 1988–1989, they started four more factories, that is, SIL Muridkey, Dar-us-Salam Textile Mills, a motorcycle tyre factory and a gas masks manufacturing factory. The motorcycle tyre factory was the concept of Ahmad Mukhtar and the idea of the other factories came from Muhammad Hussain. According to Arif:
In 1991, when I joined, they [Muhammad Hussain and Nazar Muhammad] discussed constructing a new canvas shoes factory. They took this concept from Korea and these shoes were in fashion at that time. However, the idea became less attractive because the international market switched to China because Chinese companies were making less expensive canvas shoes.
By 2010, the manufacturing side of the group had flourished into SIL, which had shoes, tyres, tubes and rubber production facilities in Gujrat and Muridkey (see vision and mission statements of SIL in Exhibit 1). SIL was the leading exporter of footwear in Pakistan. Similarly, SSC was Pakistan’s leading footwear retailer by revenue and had also diversified into other businesses like pharmacy retailing. SSC had more than 450 retail outlets and more than 2,000 dealer bases in Pakistan.
In 2011, when the group’s ownership was in the hands of the sons and grandsons of the founders, the owners decided to break the group’s assets into two equal portions to be owned and managed separately by the two owning families. Hence, an arbitrator was appointed to make two equal portions. One portion included SIL and the Servis brand; the other portion included SSC and allied businesses. Since there was a belief that the group could perhaps create more synergy if it stayed together, some terms and conditions were established to maintain the synergy. There were two key conditions in this arrangement. The first was that SSC had to purchase shoes of any mix worth at least PKR 3.8 billion from SIL for the next ten years, that is, until 2021 and similarly, SIL was bound to supply them. SIL’s total sales in 2011 were about PKR 5.8 billion. After those ten years, SSC was not bound to purchase shoes from SIL. The second condition was that the Servis brand was to be owned by SIL and SSC would be allowed to use the Servis brand for ten years for shoes retailing. Hence, SSC was given the license to use Servis brand for ten years for SSC’s shoes retailing business and the license could be renewed on mutual agreement. Thus, SIL could not use the Servis brand for selling shoes in retailing or wholesale business. However, Servis Shoes was allowed to sell its shoes with a new brand as well as supply shoes to other brands inside and outside Pakistan. Additionally, SIL could use the Servis brand for its tyres business. Similarly, SSC was not barred from starting a new manufacturing business with a different name. Arif stated:
Servis is among top three big brands of Pakistan. We are superior in the shoes and tyre industry and the Servis brand can be used for businesses in other industries as well. Though it took 40 to 45 years, our elders started from zero. In 2015, again, we are on the verge of starting new things. For example, we need retailing, wholesaling and distribution for shoes. We should learn from our history that our company has the potential to become number one.
Out of this reorganization of ownership and management, Omar Saeed, a Harvard MBA graduate and third generation family member, emerged as the chief executive officer of SIL in March 2011 (see organizational hierarchy of SIL in Exhibit 2 and Exhibit 3 for the description of the board of directors and executive team). Prior to leading SIL, Omar had run SSC as chief operating officer from 2001 to 2010. When he joined SSC in 2001, double-digit growth was a challenge at the organization. Omar took several initiatives. Young managers aged between 30–35 years were inducted to improve the average manager age (53 years) in 2002. SSC started holding annual conferences to recognize high achieving employees. SSC adopted the policy of introducing 55 per cent new styles every year as opposed to the traditional mix of 70 per cent old and 30 per cent new. Major changes were brought throughout SSC’s supply chain and retail management by launching ‘Project Giant Leap’ and engaging an international consulting company. SSC introduced a new format of retail stores, namely Shoe Planet, which was a large shoe store where SSC displayed SSC’s own as well as shoes of other brands. The result was that in 2009, SSC was opening a shoe store every week leading to 24 per cent annual growth in its business.
After joining SIL in 2011, Omar arranged a three-day exercise to mutually create and set the goals for SIL’s leadership for the next three years. SIL took forty senior managers to Murree (a hill station) for the three-day exercise that was facilitated by a consultant, to come up with a set of objectives and the action plans to achieve them. The managers worked in groups to develop their objectives and proposed action plans. The plans were scrutinized through a series of presentations by their peers. The exercises concluded by setting the following goals to be achieved by SIL in the next three years:
Tyre business will increase from PKR 5 billion per year to PKR 12 billion per year. Shoe exports will increase from PKR 2 billion per year to PKR 7 billion per year. Shoe domestic sales will increase from PKR 3.8 billion per year to PKR 7 billion per year.
Moreover, the participants of the exercise decided to take the actions shown in Exhibit 4.
Year 2015: Main Divisions of SIL’s Shoes Business
Product Design/Development
The new product development (NPD) process for the foreign market started with the customers’ design expectations (stepwise NPD process for international customers is shown in Figure 1). Customers sent the sample shoe or shoe pictures to SIL; sometimes ‘sole’ 2 and the ‘last’ 3 also came from the customer. Then SIL created the shoe specifications sheet that had information such as the ‘sole’ material, upper material, colour and thickness. The product development department developed about 200 new styles for the Garda fair—an international fair held in Europe twice a year. The Garda fair had established itself as the most important international fair where international customers came, met manufacturers and placed orders. Annually SIL sent about 450 styles of which 200 were new and 250 were repeats.
The main difference in duration of the NPD process between the local and international market was because of the transportation time needed. For instance, the time for transporting a ‘last’ (or ‘sole’ or sample) from a European customer would be about a week and that of SSC would be only a day or two. If the ‘sole’ or other part of the shoe was to be revised, the revision would add more transportation time in the process. Furthermore, SSC interacted directly with SIL, as opposed to the international customers who came through agents primarily—adding another layer to communications and more time to development.
The local market was predominantly represented by SSC, which sold shoes of seven SSC-owned shoe brands namely Ndure, Don Carlos, Calza, Liza, Skooz, Toz, Breeze and one SIL-owned shoe brand namely Cheetah. SSC had continued to reduce its sourcing from SIL from 2011 to 2014 for all brands except Cheetah and Calza (see Table 1). According to a marketing manager:
Over time, SSC has reduced buying shoes from SIL except Cheetah, which only SIL can manufacture. SSC is reducing buying from us mainly because of our delayed deliveries, high prices, poor quality, lack of innovation and inability to manage small batches at low cost. As far as ability to innovate is concerned, we lack this because this has not been SIL’s way of doing business. Historically, SSC has given us the design and we only manufacture. Klara is also suffering because of our inability to innovate.
SSC did not require major changes in SIL’s hot selling articles. For example, Cheetah brand had not changed for several years because modifications in these hot selling styles were not welcome by the customers. For the local market, SIL followed the rule of ‘sellable shoes at the right price.’ Hence, for many styles, SSC asked SIL to lower cost rather than innovate in design. As a result, SIL changed material to save cost. For example, SIL replaced leather with synthetic leather to reduce the cost but such material change reduced the shoe durability.
SSC’s Brands and Respective Revenues of SIL
In case of new designs, SSC provided the information about the recent trends by showing the pictures of possible articles and suggesting the material. SIL came up with one or more samples and their prices. Then SSC’s salesman chose the best, keeping in mind customer perspective. Sometimes SIL worked with SSC to make a shoe cost efficient. For example, a shoe’s cost could be reduced by replacing natural leather with artificial leather. The replacement of leather was possible in articles where SSC believed the end customer had low sensitivity to quality.
Production/Planning Department
The planning department gathered information from the NPD department and marketing department regarding the articles to be manufactured. NPD gave the approved sample and the specifications of the articles. It mentioned all the codes of the material and the needed tooling to be used in the production process. The planning department gave the monthly production schedule to the production department. The production plan specified the monthly production targets of various articles but did not specify the daily production at article level. It was left on the mutual convenience of the planning and production departments to make decisions during the month, on ongoing basis to develop the weekly or daily production schedules at article level. The weekly and daily production schedules varied depending on the availability of the supplies and urgency from the marketing department. According to the manager from the planning department:
The quality and timely delivery of our supplies are not consistent; thus, we have to keep the production schedule fluid. If the necessary supplies of an article scheduled on a particular production line are delayed, we schedule another article for production. Similarly, if we receive a request from the marketing department for an urgent delivery of an order, we tend to comply.
The Gujrat plant—where almost 80 per cent production was for domestic customers, who were mainly SSC—had the flexibility to deliver monthly commitments of various articles during any time of the month (see Exhibit 5 for production process at Gujrat factory). The planning department did not have the exact numbers that could confirm the production capacity of the plant’s various facilities. The department believed that it was difficult to assign capacities to various units of the production department because there was a large variety of articles and each article required different levels of time and effort. Production planning department did not work together with the industrial engineering department to optimize the production plan to set optimal production targets. According a planning manager:
We are not using the input of the industrial engineering people in making our production schedule. This is due to two reasons. First, industrial engineering people are doing very basic work that is not even usable for us. Second, the industrial engineering group is not officially required to give us the input.
Half of the production capacity of Muridkey’s factory was allocated to Caprice. The other half was split between Workout and other smaller orders. The Muridkey plant, of which almost 80 per cent production was for the international market, faced the challenge of long lead time of about ten weeks (see Exhibit 5 for the production process at the Muridkey factory). Often the international customers wanted to place orders on a lead time of ten weeks. However, the issue was that international customers gave more variety of articles with less volume of individual articles. According to a manager:
One of the reasons behind long lead times is inefficient use of ERP. The ERP that we have is not customized for us. For example, our ERP system has so much confusion in it that it takes seven to ten days between the receipt of the order and delivery of the order to the procurement department.
Sourcing/Procurement Department
The role of the procurement department was to buy and transport supplies according to the requirements of the production plan. The main supplies were natural and synthetic leather, polyurethane (PU), thermos plastic rubber (TPR), ‘last,’ moulds, 4 grindery items and packaging. In 2014, about 83 per cent of leather by value came from local vendors and all PU and TPR supplies were imported. Leather, PU and TPR accounted for about 70 per cent of an average shoe’s cost of materials (see Table 2).
The nature and quantities of supplies varied throughout the year according to the customer orders. The variability in supplies was more for foreign customers because, compared to the domestic market, the foreign customers ordered more variety and less volume. For example, depending on the customer’s requirements, the type of leather varied and all varieties of leather were not available in Pakistan. Similarly, quality of local leather was not consistent because of lack of professionalization at various stages of leather’s local value chain such as animal fattening, de-skinning, transportation of skins to tanneries and chemical treatment at tanneries. Local tanneries preferred to export high quality leather because they got more volume and better prices in the international market.
In addition, the procurement department was responsible for developing low-cost, good quality, low lead time and reliable vendors locally and internationally. For example, after the recent free trade agreements between Pakistan and countries such as India and China, the procurement department shifted supplies from Italy to India and China to save cost and transportation time. Although quality did not match with the Italian vendors, it was acceptable. Recently, SIL had developed a local vendor in Karachi for pigment, 5 which was about 1–2 per cent of the average shoe material cost. Earlier, pigment was bought from a foreign vendor in small quantities of 25–50 kg and transported by air, thus the cost was high. The local vendor could easily send small quantities like 5 kg through road transport in two days’ time, saving cost as well as giving more flexibility for SIL.
SIL’s Main Supplies and Their Challenges
Similarly, the procurement department was developing local vendors to replace international vendors. One of the main ongoing projects was the development of a local vendor, namely IntraChemi, in Lahore for supply of ‘lasts’ (annual requirement was about 15,000 shoes’ ‘lasts’) for both factories. IntraChemi, which was vending to SIL for the last twenty years in various minor supplies, invested an additional amount of about PKR 55 million in buying the machinery and building the infrastructure for ‘lasts’ production. SIL helped IntraChemi by promising early payments and connecting with SIL’s previous vendor in India to give machinery and training to IntraChemi. The Indian vendor was willing to sell the machinery and impart training because it was graduating to the next level of technology and products, and was quitting from the product line SIL was buying from it. SIL committed to buy at least three months’ production of IntraChemi per year. The availability of ‘lasts’ from IntraChemi was expected to save transportation cost, reduce lead time from 60 days to 20 days, and increase flexibility for SIL without compromising on quality. Though SIL was working on developing the local vendors, one of the managers expressed his feelings like this:
Though we are not as fast and focused in developing the local vendors as we should be, in the last four years, we have done things that were never done before. For example, we have searched and developed sources in India and Pakistan, created competition among our suppliers in China, and are trying to eliminate traders and buy directly from manufacturers.
Quality Control Department
The role of the quality department started from the NPD process. As a part of the product development process, the quality department made five pairs of each article to discover the possible quality problems in the production process. Once the trial production in the product development process completed, the role of the quality department was mainly inspection of shoes at different stages of the production process. The department personnel inspected every shoe at allocated locations such as closing line, lasting line and before packaging. In addition to SIL’s quality inspectors, quality inspectors from customers also came for inspection. A manager described the quality department’s functioning in these words:
The quality department’s main role is to stop the faulty product from going into the next production stage and finally to the customer, and we do that by numerous inspection points and 100 per cent inspection. If we are going to work with Zara and Nelson, then the role of the department should be strong and iron handed. They always demand from us that the faulty product should not be packed, but I always say to my colleagues that faulty products should not be produced. They always try to improve quality from inspection but I think they have to improve the production processes so that they can make quality products. The problem is that we lack the focus of being proactive, which means avoiding the fault from happening. We also lack proper information management system—we are still working on MS Excel. We don’t have database or data banks that can enable our important data to be secured, made easily available and used.
Comparing SIL’s production rework and rejection with that of a leading exporting company in textiles, one manager mentioned:
If we want to be like one of the top exporters in the textile sector, we need to significantly improve our production process. For example, current rework of our closing and lasting sections in the Muridkey factory are as high as 12 per cent and 15 per cent respectively, though we have improved from 35 per cent rework in 2002. Similarly, the rejection rate is 2.9 per cent for the Muridkey factory. However, a leading textile factory working with Nike has a rejection rate of less than 0.50 per cent because Nike does not allow more than that. We have a long way to go but the problem is we repeat mistakes. For example, we were repeating the ‘in-socks’ problem (shoe in-socks were not appropriately bonded by adhesive) every year until I dug down the data to show to my product development and production colleagues that we have been repeating it for several years. Then, we finally committed to ourselves that we would not repeat this in 2011 and we succeeded.
The quality manager from the Gujrat plant highlighted that:
In the past, we recorded the data but is consists of the total number of quality issues and we couldn’t trace back to the specific problem. Now, when we have started to collect detailed data, there are other problems. Sixty per cent of the total strength in quality department is just matriculation (10th grade pass) or below. They cannot read English.
Human Resources
SIL employees consisted of staff, executives starting from assistant manager to the higher management and workers who were either on piece rate labour or indirect labour. The employee turnover was very low at the staff level. However, the turnover at worker level was high. The workers left factory employment during the agricultural crop harvesting seasons because they got more wages in harvesting. They came back after the harvesting season and SIL rehired them. However, now SIL had made a policy that a worker would be not rehired within three months of his last resignation.
Since SIL had targeted to increase its exports, it had hired several new employees in the management cadre in the last three years from the textile sector, which had a long history of exporting from Pakistan. Importantly, the nature of the textile sector was similar to the shoes industry in terms of production processes. The new employees were hired in production, quality, design and planning departments. The current factory managers in both the factories had come from the textile sector in the same induction spell. According to one of SIL’s human resource managers:
One main challenge for us is to raise the academic qualifications of our workers and supervisors. Our traditional workforce is not literate even though they are supervisors and have roles in management. They cannot use computers, do not know how to gather relevant information and cannot even help us in data collection. We, on the other hand, need people equipped with modern management tools and a workforce who can pick up and promote worthy ideas quickly. We are working on this and now our department leads are either MBA or Masters, and also have the necessary exposure. Having factories in Gujrat or Muridkey rather than in a main cities like Lahore or Karachi is a handicap when we try to attract highly qualified people, though Muridkey is relatively better because it is closer to Lahore.
6
In the wake of the lack of managerial capability of SIL’s middle management, SIL sent about 30 middle managers to the Management Development Programme
7
at Suleman Dawood School of Business at Lahore University of Management Science in 2015.
SIL’s management was trying to create systems to reduce dependencies on individuals. A manager captured this idea in these words:
Earlier we used to make payments to our workers based on the assessment and recommendation of the foremen, who thus played a pivotal role. Now in Muridkey, we have made an industrial engineering section, which has gathered data and made standards on which we measure the daily quantum of work of individual workers, and make payments accordingly and directly into their bank accounts. Once we are done with this change, we shall use the industrial engineering team properly for industrial efficiency.
Recently, the Muridkey plant had hired management trainees for the first time for the factory. These trainees were BSc engineers. The idea behind hiring BSc engineers was to increase the educational level of the workforce as well as to prepare young-line and middle-tier management for the years to come. SIL had engaged a consultant to work with the production team. However, a manager’s view on this was the following:
The consultant can correct you once or twice but you have to retain the consultant’s input and implement it. If you do not accept and retain the consultant’s feedback, you will not benefit from him. For example, my assessment is that 40–50 per cent of the corrections our consultant makes are not retained by us and we repeat the same mistakes. The consultant corrects our practices and tells us the right way of doing things, but we do not adopt the corrections permanently and repeat the mistakes. How are we going to improve our processes then?
Marketing
Prior to the separation of SSC and SIL in 2011, SIL approached the local market only through SSC’s retail outlets; thus, SIL did not need to have a marketing unit for marketing SIL’s shoes production. The Muridkey factory had an independent marketing department for international customers, but their major buyer was Caprice.
In 2014, the main target markets for the Muridkey and Gujrat factories were global and local markets, respectively. About 80 per cent of the Muridkey factory production went to international markets. Similarly, 80 per cent of the Gujrat factory production went to the local market.
In the export market, SIL was dealing with Caprice, Workout and several other smaller customers. Recently, SIL had received orders from Zara’s Europe division. Though SIL wanted to increase its exports by working with large customers like Zara, it had to improve its operations as well as marketing to get business from them. According to a manager at SIL:
Over time, we have specialized in making ladies’ shoes, but we have not been so successful in selling this niche capability in the international market—particularly to customers like Zara. While we need to improve our marketing, we also need to improve our production processes to meet the low lead time and high quality requirements of such international customers.
Recent Initiatives
Foreign Consultants
Two months ago, SIL had hired a foreign consultant on a one-year contract to work with SIL to improve productivity and on-time delivery of export articles. According to a manager from SIL:
The consultant is on the floor and working with an eight-member SIL team including one person from the new product development department, one from planning, two from cutting and closing, one from quality, one from production and three from lasting and production. As a result, we have improved our on-time deliveries and we are now 95 per cent on-time. We have reduced our rejections to 4 per cent and our target is 2.5 per cent. We are working on zero claim rates. Our ‘lasting’ line productivity has improved from 600 pairs per day to 700–800 pairs per day. Overall housekeeping and discipline have also improved on floor.
People from Textile Industry
During the last four years, Servis had hired people from the textile industry. According to a manager:
When you hire people from different industries, they can share different ideas, systems and techniques. We are still hiring the second layer of managers to share the burden of higher management. In the past, there were just foremen reporting to their managers, with no tier in between. This lack of middle management made the system vulnerable because there was no replacement for the manager. Before hiring people from textiles, we were not exporting much, that is, just 100,000 pairs per year. We have tried to create an export culture and systems. For example, we have made a specific area of stitching and lasting that is dedicated to export production, and we have split export and local lines. Last year, we exported 525,000 pairs of shoes. In a time span of four years, our exports have increased by almost five times.
Lark and Finch
Before separation from SSC, SIL started a brand, namely, Lark & Finch (L&F). At that time, Servis Shoes was for the mass market and L&F was established for the high-end market. In L&F, SIL used Italian ‘sole’ and exported material. According to the general manager of domestic sales:
L&F’s sale and marketing expenses were much more than that of the usual shoes. Overheads of running four to five shops of L&F were not feasible when compared with 500 shops of Servis. Operational cost of L&F was not making sense for the local market, given that our Muridkey factory, which made L&F, was sacrificing export orders for manufacturing L&F in low volumes. Thus, the management decided to stop L&F.
Klara
After separation from SSC, SIL launched its own brand, named, Klara for the wholesale market. In 2014, Klara’s sales were PKR 300 million and the target for 2015 was 750 million. According to the general manager of domestic sales:
Now we are planning for the year 2021 when there may not be any business from SSC. Gradually, over the last two to three years, we have developed some articles whose demand is from 70,000 to 100,000 pairs per year. Now we plan to enter retail with big shops. For running these retail shops, our SIL capacity may not be enough. We can approach China or other vendors but surely, we will keep the capacities of our factories engaged. However, for entering wholesale and retail, we need strong and full-fledged marketing, sales and distribution operations.
4 Years Later: A Snapshot of SIL in 2015
Footwear
The SIL footwear wing was still the largest footwear exporter in the country (see Exhibit 6 for SIL’s financial performance). Annual revenues of the footwear division exceeded PKR 8.3 billion, of which 45 per cent came from exports primarily to EU countries, that is, Germany, France and Italy. SIL’s in-house manufacturing covered all aspects of the shoe manufacturing value chain from model designing, cutting, stitching, to lasting (injection), finishing and downstream activities like marketing. At present, SIL’s combined capacity of the Muridkey and Gujrat plants was more than 40,000 pairs of shoes every day. The Gujrat plant manufactured shoes mainly for the local market (80% production by volume for the local market) and the Muridkey plant manufactured mainly for the international market (80% production by volume for the international market). Over time, SIL had developed niche capability and market in ladies’ shoes in the export market, and 80 per cent of SIL’s export was in ladies’ shoes.
Tyre
Specialized in manufacturing and marketing products for the consumer market, SIL’s tyre division’s main business was producing tyres and tubes for motorcycles and bicycles. This had an annual revenue of approximately PKR 6.7 billion, with the revenue doubling after every three years. In the last four years, SIL had become the market leader in the bicycle market and a holder of majority share in the motorcycle tyre and tube markets. In addition, SIL was a major supplier of tyres and tubes to original equipment manufacturers of motorcycles including Honda and Yamaha and other local motorcycle assemblers in Pakistan.
Challenges in 2015
Training of the Workers
According to Gujrat’s factory manager:
Training of the workers is our weakest area. I want to see it exactly like the apparel industry, for example, like my previous employer where the training department trained a batch of twenty-five to thirty workers after hiring them. The workers were sent to the production floor when they achieved at least 50 per cent of the designed worker efficiency. But there is hardly any format here. Workers learn on the job, thus hurting productivity as well as quality. Now we are gradually hiring at least tenth grade pass workers so they can learn the processes easily.
Business with Zara/Nelson and Internal Challenges
SIL’s top management felt that though they had developed a niche in ladies’ shoes in the international market, they had been unable to achieve the business accordingly. SIL’s senior management aspired to attract and work with large international brands who could give large volumes and higher margins. The potential export markets for SIL were Europe and America (see Exhibits 7 and 8 for global exporters and importers of shoes).
Trained Middle Management
There was hardly any educational institution that provided training in shoe manufacturing compared to other industries like textiles and auto. According to a manager:
There are several educational institutions and universities providing highly trained manpower to the textile sector where I have come from. Because of that trained manpower, ideas like time and motion studies, man to machine ratios, and man to management are used there, and the industry has matured. Unfortunately, in our industry, there is no such university. There is only one such institution for our industry that offers a diploma after matriculation but there is no relevant university in Pakistan. Hence, educated and trained manpower is one of our main limitations. Another drawback is that in our industry and location of plants, female workers are not hired. Thus, we have to hire males only, though we have recently started to hire females as well.
SIL-Gujrat had set up five stitching lines where only female workers were hired. The section that had 300 female units was managed separately. The unit had different entry points to the factory to avoid the interaction between male and female workers. Similarly, the Muridkey factory had also started a female workers’ stitching unit where about two-thirds (about ninety) of the workers were female. According to a manager:
We have seen that female workers have higher productivity than male workers on some specific articles. When the information regarding productivity of female workers goes to our male workers, they try to beat the female division’s productivity. This behaviour creates healthy competition between male and female workers. Additionally, it is easier to control female workers since their quality of work is better in some specific shoe styles.
Lead Time and New Product Development
More than 90 per cent of SIL’s export business was coming from Europe where the economy had not been doing well since the last few years. As a result, the cost pressures from European customers were forcing SIL as well as the European customers to cut their profit margins. Since US economy was doing much better, SIL’s management was trying to get business from US-based customers. Customers such as Zara and Nelson, whom SIL was trying to increase business with, were also working with Indian and Chinese companies. For example, Zara was working with Tata Footwear and Farida Group from India by giving them business of USD 12 million per year (PKR 1.2 billion per year) and USD 6 million per year (PKR 0.6 billion per year), respectively, whereas SIL was currently working with Zara at USD 1.6 million per year. According to Omar Saeed:
We have capacities but we are unable to sell them. We have tried to build business with Zara but there is a lot more we can do. Zara is pushing us to be more responsive by reducing our lead times, which would make us a better supplier worldwide. If Zara agrees to work with us, it alone can engage 20 per cent of our capacity. If we go after Zara, we will be competing with big companies in India and China. We have done benchmarking with an Indian company and we find ourselves comparable in terms of pricing and lead time. Thus, if we have to bring Zara to us, we need to be a notch above. We should focus to offer better lead times because it would not be a better bet to compete on cost and thus reduce our margins like we are doing in Europe. Moreover, lead time can reduce our cost by making us leaner. Our strength is our expertise in ladies’ shoes because in India, Pakistan and Bangladesh, we have the niche capabilities in ladies’ shoes manufacturing. For example, Farida is making 75 per cent men and 25 per cent ladies; other competitors are not much different in terms of their men versus ladies shoes mix.
Domestic Business
Stuck at 3.8 billion and in real terms, domestic business is depreciating at 5–6 per cent per year because of inflation. Non-SSC business (Klara 300 billion) is 6–8 per cent of the total domestic revenue. Though SSC’s business had grown by 4–5 per cent, they were sending the new business to China and cottage industry that can make the same shoes but cheaper. Another aspect was that SSC wanted to become independent of SIL and develop a supply base that could provide more variety and better cost.
Conclusion and Way Forward
Omar recollected his four years in these words:
On joining SIL in 2011, I presumed that people reporting to me were decision-makers like I had in SSC and I passed on the decisions to them but that was a mistake, that is, they were not good decision-makers. It took me half a year to figure this out and resolve the roles of various top positions in SIL. Thus, I gave my 100 per cent to the factory at Muridkey from 2012 to March 2014. Though I knew that there were several things at the corporate level that I needed to do, I preferred not to come to the head office. Then during March 2014 to December 2014, I gave three days to the factory and three days to the head office. Since January 2015, perhaps I have been playing the role of the CEO because now I have a team of people in place at Muridkey who can take up from here.
Omar believed that the management team needed to carry SIL forward so that the directors and the board could focus on strategic matters rather than day-to-day operations. He was comparing SIL’s preceding four years’ performance with the targets set in the 2011 strategy development exercise. Against the target of PKR 26 billion, SIL had a revenue of PKR 16.5 billion in 2014. Tyre business was at PKR 7.3 billion and shoes (local and export businesses) were PKR 4.8 billion and PKR 4.4 billion, respectively. In Omar’s words:
European business is not offering good profits. If we don’t open the US market in the next twelve months, we may be in serious trouble. On the domestic front, SSC business is stuck at PKR 3.8 billion; non-SSC domestic business is not growing and is stuck at 6–8 per cent of total business. SIL has to find business to replace the PKR 3.8 billion business that has kept almost half of SIL shoes capacity busy as it may be gone in 2021.
Omar wondered what his targets and strategy for the year 2021 should be, for the three main lines of business, that is, domestic footwear export and tyre division. The roadmap for SIL’s shoes business for the next five years was another big question. He knew that his brother Arif believed that SIL’s future was to become a strong local retailer and then a global player.
Financial Performance of SIL (Shoes and Tyres Combined)
