Capex to Opex: How Gokaldas’ CIO Convinced his Vendor to Move to a New Payment Model

Summary:

New software could save Gokaldas Exports millions a year—the problem was it required a capex investment the company didn’t want to spend. It seemed like a lost cause until its CIO created a payment model that kept everyone happy.

The Organization: Gokaldas Exports is the royalty of the Indian garment industry. Its pedigree goes back four decades to when J.H. Hinduja founded the company and quickly put India on the global apparel map. Today, the Bangalore-based bulk manufacturer and exporter of ready-made clothes works with high-street clients that include Nike, Diesel, Levi’s, and Abercrombie and Fitch, among others.

When we did a study to find out the areas we needed to improve in, we found that Gokaldas was losing a considerable amount in value chain loss.

The Business Case:

Like most other businesses worldwide, sluggish sales and rising input costs have forced Gokaldas Exports to look inward to cut costs and improve the health of their bottom lines.

When the company’s leaders began looking in 2011, what they found surprised them. “When we did a study to find out the areas we needed to improve in, we found that Gokaldas was losing a considerable amount in value chain loss,” says Yatendra Kumar, head-IT, Gokaldas Exports, who was part of the team in search of new efficiencies.

Value chain loss is a challenge many manufacturers face. At Gokaldas Exports, it came in the form of raw fabric that was left over after a roll of cloth had been cut. According to Kumar the company was losing upto 10 percent of raw material in the manufacturing process. Given that Gokaldas purchases raw fabric worth about Rs 800 crore a year, it was taking a Rs 80 crore hit, approximately, in value chain losses a year.

“That’s huge,” says Kumar.

‘Cut Plan’ software, Kumar knew, could reduce raw material wastage. The software, which is available off-the-shelf from Provab Technosoft, allows workers to input the size, type, and other specifications of the garment to be made and uses an algorithm to generate an optimal cutting plan. This plan is then fed into the systems at the cutting lines.

“We ran a test for the software about six months towards the end of 2011 and saw great results,” says Kumar.

There was only one problem: The software was very expensive.

The Challenge:

“We realized we needed to invest about Rs 8-10 crore to install the software at all 30 factories,” says Kumar. And that didn’t include other overheads like training costs.

Once upon a time, an ROI window of a year might have been acceptable, but not in today’s climate. So Kumar then tried looking for a more cost-effective alternative to software Provab provided, but came up empty. “Most other players had standalone modules. Clustering many of these smaller apps together would lead to integration challenges,” he says.

So Kumar revisited his original idea of working with Provab, only this time he focused getting them to agree on an opex model. The question was: How was he going to convince a software provider, which didn’t have a cloud offering—and probably knew it had a monopoly in its niche market—to agree to anything but a capex model?

The more Kumar thought about it, the more he realized he needed to look at it from Provab’s perspective. “It already had the software ready. If they didn’t agree to a more flexible model, the software would just sit idle with them,” says Kumar.

Kumar also knew that Provab was confident of the enormous savings its technology could bring. He decided to challenge the company: If they really believed in their product, they would accept no upfront payment and only 5 percent of what Gokaldas saved using its software for three years. If Gokaldas could save 8 percent on raw material purchases worth Rs 800 crore, Provab’s take would be in the range of about Rs 3 crore. He then hung the alternative before Provab: Make no money at all.

Provab got on board.

Benefits:

It’s been nine months since the software was deployed at Gokaldas’ factories. Initially, Gokaldas saw only a 2 percent saving as it got used to the software.

But over time, Kumar says, the needle moved up to 5 to 6 percent. At 5 percent, Gokaldas is still saving about Rs 40 crore a year—even if it lowers its buying to Rs 800 crore of fabric a year.

Kumar says that they plan to increase savings to 8 percent, which works out to about Rs 64 crore a year—a feat that would have been impossible if Kumar had decided to listen to conventional wisdom and cut his coat according to his cloth. 

When we did a study to find out the areas we needed to improve in, we found that Gokaldas was losing a considerable amount in value chain loss.