.

1- THE FUTURE OF TEXTILES AFTER 2005
2-
SICKNESS OF COMMERCIAL AND INDUSTRIAL UNITS
3- TEXTILE INDUSTRY

 

SICKNESS OF COMMERCIAL AND INDUSTRIAL UNITS

 

 

.


By ABDUL AZIZ ARAIN
M.A., M.Com:, A.M.B.I.M

Sep 22 - 28 , 2003 
.

 

 

 

We have heard a lot about sick industry or sick commercial institutions. What do we really mean by the sickness of a unit? To find the real disease one has to analyze the identification of the disease, look into the cause of disease, its extent and degree of sickness, and diagnosis prescription for its recovery, revival and rehabilitation coupled with suggestions for future preventive measures. Causes of sickness are the general problem to be interrogated. The sick industry is an institution which has resulted in low or negative productivity, operating below break-even point, with no profitability, consuming all its working and paid up capital and still under financial constraints with no possibility of capital returns. To have an understanding of the nature of sickness and identifying areas where policy measures can reduce the occurrences of the industrial and commercial units sickness in future, some common measures are highlighted for preventive action.

During 1970-80 the incidences of industrial sickness wide spread like an epidemic disease, although the highest incidence of sickness is noticed during 1970-71 to 1975-76. This is the period, which includes a number of developments that significantly de-stabilized the national economy. These ill considered developmental policies include devaluation of Pak Rupees, nationalization of industries, nationalization of banks, introduction of fiscal/monetary/taxation policies unfavorable to the manufacturing sector and failure to establish healthy labour-management relations.

At times, it was a general mis-conception that sick units are only in the public sector, which were taken over and nationalized by the government in the decade of 1970-80. This impression was not entirely correct, as there were large number of units in private sector, which were also reported sick for various reasons.

According to a survey made by the industrial department, Government of Sindh, indicated that the highest-incidence of sickness and closures of industrial units in terms of numbers has been the units falling in the chemical group of industries and in terms of investment in textile group. The evil of sickness began when the private sector textile failed to overcome the crisis created mostly due to international situation in the early seventies, and further situation was aggravated after massive devaluation of 1972.

It is a fundamental principle of sickness that its treatment should commence immediately without loss of time; otherwise, it may turn to be a chronic case for big operation and surgery. Unfortunately the rescue operations of the sick industries in our country commenced so late that the entire operation became an exercise in-futility, whereas the country could not afford to waste its resources in the name of revival and rehabilitation. Every sickness irrespective of its nature has to be properly checked and laboratorically tested for its correct diagnosis and correct treatment. Our society has developed a habit that if the unit becomes sick, we put the blame on the government policies and economic developmental system or international pressures which are the exclusive reasons for the promotion of un-healthy industrial environment which ultimately tentamount to industrial sickness. Sickness of an industrial unit can be due to many other factors or any one, as narrated below, the major basic reasons can be:

 

 

GOVERNMENT POLICIES AND ACTIONS.

MANAGEMENT'S OWN DEFICIENCIES.

IMPROPER USE OF MODERN BUSINESS TECHNIQUES AND RESEARCH.

The further elucidation and microscopic analysis of the basic reasons of sickness may be due to:

GOVERNMENT POLICIES AND ACTIONS

Devaluation
Fiscal Policies
Lack of adequate protection to the domestic industry & trade houses.
Smuggling
International agencies pressure on the domestic policies and political constraints.

MANAGEMENT'S OWN DEFICIENCIES

Lack of managerial ability
Lack of adequate finance
Change of technology
Non-utilization of the profits generated for modernization and balancing.
Import of wrong and defective technology
Labour management relations, and
General problems.

IMPROPER USE OF MODERN BUSINESS TECHNIQUES AND RESEARCH.

Lack of proper planning for development and research of new products to replace out dated ones.
Improper Inventory control.
Credit sales without proper credit worthiness checks.
Mounting up of bad debts.
Improper cash management & financial constraints.
High cost of non-productive expenses.
Deployment of excessive labour for the production achieved.
Lack of control over recurring and non-recurring expenditure.
Non-flexibility in operation by quick action to face changing environment and conditions.
Occupational hazards, safety, environment and diseases protection.
Uncalled for litigation
Internal Audit, and Administrative and Operational Constraints.

DEVALUATION

Pak Rupee was devalued in June 1972, to the extent of approximately 131%. The revaluation of assets and liabilities (foreign investment and equity) following this drastic devaluation increased the debt/debt servicing liabilities of industrial units manifold. The high cost of finance as well as significant increase in the cost of production. A number of industries particularly in textile sector become uncompetitive in the international market.

FISCAL POLICIES

The government fiscal policies play a very important role in maintaining the health of an industry. The excise duty and sales tax, imposition of surcharge, turn over tax, tariff etc. are the examples. Such fiscal policies and anomalies invariably lead to closure or shrinkage of the units and had badly affected the health of the then existing units.

LACK OF ADEQUATE PROTECTION TO DOMESTIC INDUSTRY, PRODUCTS AND TRADING HOUSES

Instances have been noticed where industrial units and commercial trading houses had to close down their operational activities because either domestic industry protection could not be had or where such protection provided, were withdrawn prematurely and imports of similar items were allowed without realizing the impact on the domestic industry.

SMUGGLING

Smuggling of products/items that are already produced locally is a great nuisance. The smuggled products are available in the open market at a rate cheaper than the locally fabricated and manufactured. Large scale smuggling badly affect the local products as the product remains on the shelf for years, resulting in jamming of working capital, reduction in production activities and adverse cash flow which ultimately lead to bad health and closure of the unit.

INTERNATIONAL AGENCIES PRESSURE ON DOMESTIC POLICIES

The dictation of terms by the donor agencies at times becomes so hard to be adjusted. Withdrawal of subsidy, and imposition of additional taxes, duties and levies ultimately increase the cost of production and the product become non-competitive in the national and international market, resulting the dis-continuation of the products.

POLITICAL CONSTRAINTS

Political Constraints which affect the health of an industry comprises of:

Un-expected changes in the government policies,
Instable political conditions,
Insecure political environments and
Disturbed political situations.

LACK OF MANAGERIAL ABILITY

The fiscal, monetary and taxation policies of the government change frequently without prior indication, whereas changes in technology are occurring with such rapidity that the management has to be extremely alert and responsive for both the changing environment as well as the changing economic parameters. The failure on the part of the business houses and industrial units to employ the capable, experienced and competent managers has also contributed to the ill health and closers of the units. If the top management insists on certain guidelines for its management, they are bound to follow it rigidly and ultimately cause a problem for healthy unit to fall sick. A unit can be well managed if sufficiently required guidelines are timely available to the management.

LACK OF ADEQUATE FINANCE

Timely availability of the required funds is most essential requirement of a unit, where the management fails to tap the additional resources required to meet the challenge of the competition or other un-called for emergencies, it is generally found that the industrial concern or the trading house takes a turn by fall of the graph which eventually lead itself to dis-reputation, discredit and closure. It is observed that the lending institutions in the bad days of falling graph make it difficult for the management to allow the additional funds requirements as the advances are highly in secured.

CHANGE OF TECHNOLOGY

Changing technology and the socio-economic changes has a direct impact on the cost of production, as well as the quality of the products. An industry, therefore, which fails to take care of changes in technology and does not modernize its plant and machinery, and systems at the appropriate time tend to become in-competitive in the national as well as in the international market. Where the management is stuck with outdated process and obsolete machinery and systems, there is no alternative but to close down the unit completely. Technology is advancing at a terrific pace and requires replacements frequently, if one wish to remain in existence with good health of the unit.

NON-UTILIZATION OF THE PROFITS GENERATED FOR MODERNIZATION AND BALANCING

The frequency of non-utilization of the profits of the unit generated is high in the private sector enterprises where mostly the profits are distributed by way of bonus to the employers and high dividends to the shareholders and high non-operational expenditure etc., leaving not much for reserves for improvement, modernization and balancing and the replacement of the plant, machinery and the systems. It is an acknowledged fact that the life of a plant is extended by induction of new technology which is brought about by balancing and modernization within the existing plant, thus bring about high level of efficiency and economy in cost of production as a replacement of the entire unit requires induction of large capital and burden on the profit not only on account of high depreciation but high rate of financial cost.

IMPORT OF WRONG AND DEFECTIVE TECHNOLOGY

The advance technological countries commonly carryout experiments of their technology in the third world and with the experience keep on improving their own technology at the cost of third world. If the unit falls into the trap, importing wrong or defective technology, it will be a constant headache and the unit may turn sick since its birth as the plant may not yield the product to be competitive with the sophisticated technology coupled with cost of production being out of proportion.

LABOUR-MANAGEMENT RELATIONS

The commercial service-oriented houses and the industrial units where the management has failed to establish harmonious relationship with the labour force and on the other hand the exorbitant demands of the labour go beyond the means and limits of the establishment for it to remain competitive. There is no choice but to face the bad situation and ultimately consider to close down the unit. The worst effected period of this particular problem has been experienced during 1970-71 to 1976-77 when the labour-management relationships were far from satisfactory position. The labour unions demanded sky-high increase in wages and additional benefits consequently there was go-slow, lockouts, strikes etc., which seriously affected overall production and profitability of the units. The continuing friction between labour and management created an environment of confrontation and hostility.

 

 

GENERAL PROBLEMS

The general problems causes the sickness of the unit can be due to the following:

Delay start in the execution of the unit.
Faulty project formulation, leading to frequent amendments, revisions and changes.
Omission of certain items in the original plans.
Under estimation of cost.
Under estimation of completion period.
Changes in the scope of the unit at later stages.
Inflation during completion period.
Natural calamities.
Award of works, supplies and contracts to non-deserving parties.
Delay in obtaining various permissions, licenses, utilities connections.
Changed market conditions may cause alteration of the project.
Lack of coordination within the management, organization.

Lack of proper planning for development and research of new product to replace out dated ones

Expenditure on research and development was rarely incurred in the past in Pakistan. Now a trend has developed and having realized the importance of research and development, the industry is making investment therein. Research and development is one item in which all our organizations are bit weak. The strong point in any industrial nation is the constant factor of research and development and the regular introduction of new products or new methods of economical manufacturing. In the absence of developing new products and new technology, a progressive unit should keep a watchful eye on the research that is taking place in the trade by the advanced countries to adopt the same.

IMPROPER INVENTORY CONTROL

Where inventory controls on finished and raw materials, packing material, and others is not properly and effectively exercised the unit finds itself into financial difficulties. The mis-management of inventory control generally arises by virtue of wrong planning either in the purchases of raw material which is imported or locally fabricated or massive finished products is produced in anticipation of meeting season or flooding the market and eventually find itself landed with the inventory in hand and blockage of the working capital, which create problems for the unit for smooth operation.

CREDIT SALES WITHOUT CREDIT WORTHINESS CHECKS

At times under the pressure of sales target and/or market shares, the products are supplied on deferred payment system, without having a proper assessment of the credit worthiness of the dealers. In other works it is a change of godown and not a sales in real terms. The product credit supply system without credit worthiness assessment is full of risk. The unit should determine the maximum amount of credit it can afford in credit sales as well as the credit period and must stick to that period, quantum and level, otherwise "Cash Flow" problem would be unavoidable.

MOUNTING UP OF BAD DEBTS

A continuous and regular check and verification on debtors and outstanding is absolutely necessary to weed out the un-desirable elements so that the loss on bad debts is minimized.

IMPROPER CASH MANAGEMENT & FINANCIAL CONSTRAINTS

Cash control and timely availability of the required funds is most essential for a commercial and industrial unit without proper cash controls it may be a blind adventure. A proper cash-in-flow and out-flow control can add to the efficiency of the unit. Lack of cash-in-flow or out-flow control may lead to funds constraints and compel to borrowings which may cost to the unit and ultimately affect the profitability and creditability of the organization.

HIGH COST OF NON-PRODUCTIVE EXPENDITURE

High cost of non-productive expenditure like expenses in administration, distribution, advertising, up keep of offices, repairs and maintenance expenses beyond economical repairs and others should be kept within reasonable and budgeted limits, Non-productive expenses vary from unit to unit and product to product and an experienced entrepreneur should take cognizance of the fact to avoid the non-productive expenses for the adverse impact on the health of his unit.

DEPLOYMENT OF EXCESSIVE LABOUR

Deployment of excessive labour force irrespective of its ranks and portfolio than the real manpower requirements had been the reasons for failure of many public sector units in the past. In the first instance, right size employment should be the objective, however, it is observed that under political pressure, particularly in public sector units excessive employment was made. Flexibility should be permitted to lay off surplus staff as and when it is required in order to obtain profitability and in the interest of good health of the unit.

LACK OF CONTROL OVER EXPENDITURE

To exercise a proper and strict control over the expenditure of a concern is the primary requirement of an organization. A proper and effective budgetary control system with breakup in the primary heads of expenses and its periodical review preferably on monthly basis shall provides a better and affective control on the expenditure such as telephone, telex, fax, entertainments, travelling, gas, water, electricity, petrol, repairs and stationery etc. The variances in expenses than the budgeted should be critically examined for corrective measures.

 

 

NON-FLEXIBILITY IN OPERATION BY ACTION TO FACE CHANGING ENVIRONMENT AND CONDITIONS

An immediate and quick action at times become necessary to meet the changing circumstances like changes in government policies, changes in production line, introduction of new product and services by competitors. The flexibility must be available with the unit so that necessarily required action may immediately be taken without much redtapism.

OCCUPATIONAL HAZARDS, SAFETY, ENVIRONMENT AND DISEASE PROTECTION

Some units deal with and under go manufacturing process with such products which consists of such hazardous basic material which is injurious to the human health and is the cause for occupational hazards and diseases. Non-observance of proper occupational safety, health and environmental considerations not only affect the efficiency of the employees, but may affect a quick turn over of the trained, experienced and skilled workers which is a share loss to the organization and may ultimately affect the health of the unit itself.

UNCALLED FOR LITIGATION

Default in agreement performance, or litigation amongst the partners and the sponsors and with others also lead to the closure of an industrial and commercial unit.

INTERNAL AUDIT

In monitoring the operations of a company internal audit play an important role, it save it from avoidable risks in an uncertain environment. At times when the entrepreneurs are looking for preventive measures to avoid corporate collapses, a strong, independent internal audit, which performs its functions in an objective manner, is the solution along with the management performance audit. An internal audit monitor and review the business process, operations, financial statements and associated risks on a continuing basis. At the same time, the internal audit help the management to accomplish its objectives by bringing a systematic, disciplined approach based on an objective evaluation of the effectiveness of risk management and controls.

ADMINISTRATIVE AND OPERATIONAL CONSTRAINTS

The general administrative and operational constraints of the unit can also be the reasons of the ill health of the unit such as:

Inadequate qualified manpower.
Optimistic assumptions.
Incorrect placement of persons.
Gas, electricity and other utilities un-announced failure.
Delay in supply of spares and materials.
Technical fault in manufacturing operations.
In-correct selection of machinery & plant etc.