Subhojit Ghosh Final

8/3/2019 Subhojit Ghosh Final

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Value ChainAnalysisat Carrier Airconditioning

& Refrigeration Limited

Subhojit Ghosh


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A REPORT

ON

Value Chain Analysisat Carrier Airconditioning & Refrigeration Limited

By

Subhojit Ghosh

10 BSP 1138

ICFAI Business School


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A REPORT

ON

Value Chain Analysisat Carrier Airconditioning & Refrigeration Limited

By

Subhojit Ghosh

10 BSP 1138

ICFAI Business School

Submitted to :

Dr. Subir Sen (Faculty Guide)Dept. of Finance, IBS Kolkata

Vippin Datta (Company Guide)

Regional Service Manager-East, Carrier Airconditioning & Refrigeration Limited, Kolkata

Date of Submission: 6th May, 2011


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AUTHORIZATION

This is to certify that the report titled Value Chain Analysis undertaken in Carrier Airconditioning &

Refrigeration Limited, Kolkata and analysis pertaining to it under the subject to indicate and illustrate the ValueChain Management of the company is being submitted as partial fulfillment of the requirement of PGPM Programof Icfai Business School, Kolkata.


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Acknowledgements

I wish to express my gratitude to Carrier Airconditioning & Refrigeration Limited management for giving me anopportunity to be a part of their esteemed organization and enhance my knowledge by granting permission to pursuemy Summer Internship Program under their kind guidance.

I am grateful to Mr. Vippin Datta (Company Guide) Regional Service Manager-East, my guide and mentor, for his

invaluable guidance and cooperation during the course of the program. He provided me with his guidance and

support whenever needed that has been instrumental in completion of this project.

I am also sincerely thankful to my faculty guide, Dr. Subir Sen (Faculty, IBS-Kolkata) who had immense patience

to take up my all queries and provide me with his invaluable suggestions. His guidance and encouragementenlightened the path to fulfillment of my project.

Finally, Im very grateful to all the staff of Carrier Airconditioning & Refrigeration Limited and my friend Mohit

Damani who have been a great help in the overall development and completion of this project.


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Table of Contents

CONTENTS PAGE NO.

1. Executive Summary 3

2. Industry Profile 43. Company Background & Business Profile 54. Basic framework of VALUE CHAIN 65. CARRIERs Value Chain 106. Conclusion and Recommendations 32

7. Annexure 338. References 36


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Executive Summary

The concept of a Value Chain has existed for twenty five years but we find it still is an unclear concept. There is aneed to relate the concepts of the value chain and the supply chain. It has been suggested that the third generation

supply chain is based on customer intimacy and is fully synchronized. The report discusses different aspects of thevalue chain and synchronizing value that optimized business performance at Carrier Airconditioning &RefrigerationLimited.

Carrier the premier in Air-Conditioning industry in the country is one of the largest sellers of heating, ventilation, airconditioning and refrigeration (HVACR) systems in India. Even in such a competitive market carrier retains a veryhigh revenue growth over the years. When the other contenders fight hard to make its margin Carrier makes asmooth flow of revenue with very unique revenue building model based on the br illiant value chain managementtechnique.

The Value Chain concept was developed and popularized in 1985 by Michael Porter, in Competitive Advantage, a

work on the implementation of competitive strategy to achieve superior business performance. Porter defined valueas the amount buyers are willing to pay for what a firm provides, and he conceived the value chain as the

combination of nine generic value added activities operating within a firmactivities that work together to providevalue to customers. Porter linked up the value chains between firms to form what he called a Value System;however, in the present era of greater outsourcing and collaboration the linkage between multiple firms value

creating processes has more commonly become called the value chain. As this name implies, the primary focus invalue chains is on the benefits that accrue to customers, the interdependent processes that generate value, and theresulting demand and funds flows that are created. Effective value chains generate profits.

Current economic situation is so volatile that its getting tougher and tougher to make a good cost budget. So for any

manufacturing company the margin of profit has narrowed drastically. Even though most of the other manufacturersare planning to drop down their prices further to ensure market building, Carriers ACs are in general priced at 10 -15% above competitors products. Carrier outlook is not to sell the cheapest product while Carriers target segment

is pretty much evolved and is not particularly the first time buyers. Instead, they cater to customers who are lookingfor a repeat purchase.

Though the company currently manufactures its full range of residential products in India, 50-60% of its commercialrange is still imported from its factories in US, China and other parts of the world, one reason for the upper markedpricing. The company is now planning to localize its offerings in India to control costs. It already have a sustainabledesign centre in India and are planning to take it forward to a higher level, particularly with respect to localizedproducts.

With high inflation and increasing competition it is true that different means of revenue generation is very muchnecessary for the sustainability of the company. Carrier thrive the industry for Air-Conditioning and RefrigerationsServices and Maintenance both in the commercial as well as the residential sector.

Carrier achieves such a success by implying a dedicated work force over its franchise and dealership model. And atthe heart of this operation which is the main reason for its success is its excellent Value Chain management.Even with the hot waves of stiff competition, Carrier makes smooth sail with its Value Chain management to

make some cool moves to fight the heat.


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Industry Profile

Traditionally, air-conditioners have been considered to be luxury appliances, and therefore, the demand for air-conditioners have either come from the institutional segment or from affluent homes in the top metropolitan cities ofIndia. Thats no longer the case. While easy finance options have made air-conditioners more affordable, companies

are also going that extra mile to make air-conditioners a must-have appliance in more and more middle class Indiahomes.Price cuts as a strategy to increase sales volumes is definitely in the cards of appliance companies. Clearly thecompanies are not hoping to garner huge margins from the sales of these air-conditioners but are looking at growingsales volumes.

Growing sales volume is crucial for air-conditioner companies. During the last 4 years, the cost of inputsincludingcopper, steel and plasticshave been rising steadily while competition too has become intense. This has led to asqueeze on margins. On the positive side, a reduction in excise duties has helped the air-conditioner market to growrapidly. Last year, the air-conditioner market grew by 20 percent, and this year companies are confident that marketgrowth will register an increase of nearly 25 to 30 percent from last year. While the key players in the popularsegment of the air-conditioner market are LG, Voltas, Panasonic, and Samsung, the premium segment is dominatedby brands such as Hitachi, Daikin, and Carrier.

The spurt in sales of air-conditioners has led to a rush of launches in the premium segment as well. Not surprising,as the high-end air-conditioner segment comprises nearly 12 percent of the total market. Companies feel productdifferentiation and innovative features will be key to selling premium air-conditioner brands.

Due to a vibrant consumer market and large urban population, consumer appliance goods have always been popularand in demand in the Indian marketplace. Air conditioners are in more demand in cities than rural areas. In citiessuch as Mumbai, Delhi, Chennai and Kolkata, the use of air conditioners have become indispensable. This is mostlydue to the tropical weather of India, including the sweltering summers, that has temperatures rising up to 37 degreesCelsius.

Carrier delivers global solutions across the broadest range of heating, cooling and refrigeration applications.Carrier serves three markets:

Residential and light commercial: homes and small facilities. Carrier supplies furnaces, central airconditioners, heat pumps, air filters, window units, split systems and other home comfort solutions.

Commercial building: industrial and multi-level facilities. Carrier supplies chillers, large unitary, airsidesystems and controls that provide comfort and efficiency in buildings around the world.

Refrigeration systems: food retail and transportation. Carrier supplies applications to ensure food suppliesare transported and stored for safe consumption as well as products for the air conditioning of passengerbuses and recreational vehicles.

India has the fastest-growing middle-class society in Asia. As per a recent report of National Council for AppliedEconomic Research, a family with an annual income between 3.4 lakh to 17 lakh (at 2009-10 price levels) falls inthe middle class category. The country's middle-income group is expected to grow 19% a year for the next fiveyears, according to a report by brokerage and investment banking services provider CLSA last year. The report, 'Mrand Mrs Asia', also forecasted that discretionary spending in India will increase 18% every year.

There are two kinds of room air conditioners in India; the split air conditioner and window.There are many brands of air conditioners in India. The most popular brands are foreign. Some of these brands areSamsung, LG, Voltas, Onida, Whirpool, Electrolux, Godrej, Carrier, Haier, Lloyd, Videocon, Sanyo, Kenstar,Hitachi, Bluestar, O general and TCL.

The country's room AC market, which is expected to touch 3.6 million units in 2011 from 3 million last year, isdominated by split ACs that account for two-thirds of the market. Indian AC market estimated at close to Rs 9,400-crore and growing more than 20% a year. Rising incomes among consumers in a flourishing economy along withrising summer temperatures across the country and increasing affordability are expected to drive up demand for ACsin the country for several years.


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Company Background & Business Profile

The Carrier Corporation is the worlds largest manufacturer and distributor of heating, ventilating and air

conditioning (HVAC) systems, and a global leader in the commercial refrigeration and food service equipmentindustry. A wholly owned subsidiary of United Technologies Corporation, Carrier is a $11.4 billion company withover 43,000 employees serving customers in 170 countries on six continents.

Carrier is a part of United Technologies Corporation, USA. With 2010 revenue of $54.3 billion, UTC is aconglomerate operating in the high technology space. The UTC group operates in aerospace & building systemswith companies like Carrier (air-conditioning), Otis (Elevators), Pratt & Whitney (Jet- engines), Sikorsky(Helicopters), UTC Fire & Security (Chubb & Kidde), Hamilton Sundstrand and UTC Power.

Founded in 1915 by Dr.Willis Carrier, the inventor of modern air-conditioning, Carrier has developed into being theworlds largest provider of air-conditioning, heating and commercial refrigeration systems (HVACR). Over thedecades, Carrier name has become synonymous with reliability, innovation, commitment, superior technology,cutting-edge manufacturing and world-class performance. It also has one of the most prestigious installation bases inthe world. The company developed the first air conditioning system for skyscrapers in 1939 and in 1965 installedground-based environmental control systems for the Apollo-Saturn V moon program.

United Technologies Company acquired Carrier in 1979. In 1988, Carrier became one of the first companies to setenergy reduction goals for its factories. Over the past decade, the company adds that it has reduced its air emissionsby 76 percent, water usage by 52 percent on an absolute basis and greenhouse gas emissions by 33 percent.

Carrier started its operations in India with setting up of companies namely Carrier Aircon Limited in 1986, andCarrier Refrigeration Private Limited in 1992. Carrier brought to the Indian consumer, access to advancedtechnology and air-conditioning and refrigeration products from the worldwide product portfolio of Carrier. InOctober, 2006, Carrier Aircon merged with Carrier Refrigeration and the name of the merged entity was changed toCarrier Airconditioning & Refrigeration Limited (Carrier India).

Carrier India's manufacturing facility at Gurgaon produces air conditioning equipments including Window RoomAir conditioners, Hi- Wall Splits, Slimpak Splits, Cassette Splits, Ducted Splits and Chillers. It also manufacturesRefrigeration Equipments including Cold chain equipment comprising of Cold Rooms, Truck Refrigeration & BusAir-conditioning system(STRAK, bus air-conditioning brand of Carrier recently been acquired by the Germancompany Eberspacher), Freezers, Visi Coolers & Super Market Products.

Carrier India pioneered HVAC dealer concept in the country to give an unparallel experience to its customers. TheCompany has built a strong distribution network on a platform of partnership and trust. The Company boasts of astrong network of over 600 sales and service dealers and 1000 distributors and retailers. The cornerstone of theCompanys distribution is the Willis Carrier Club Dealer (WCCD).

Willis Carrier Club is a nationwide endorsement of the Companys best dealers in the country. This endorsement not

only gives unique identity to the dealers, but also helps drive customer satisfaction. Apart from the nationaltraditional channel, the Company has also developed relationships with most of the organized retail chains in thecountry.


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Basic framework of VALUE CHAIN

The term Value Chain was used by Michael Porter in his book "Competitive Advantage: Creating and Sustainingsuperior Performance" (1985). The value chain analysis describes the activities the organization performs and links

them to the organizations competitive position.

Value chain analysis describes the activities within and around an organization, and relates them to an analysis ofthe competitive strength of the organization. Therefore, it evaluates which value each particular activity adds to theorganizations products or services.

This idea was built upon the insight that an organization is more than a random compilation of machinery,equipment, people and money. Only if these things are arranged into systems and systematic activates it will becomepossible to produce something for which customers are willing to pay a price. Porter argues that the ability toperform particular activities and to manage the linkages between these activities is a source of competitiveadvantage.

Porter distinguishes between primary activities and support activities. Primary activities are directly concerned with

the creation or delivery of a product or service. They can be grouped into five main areas: inbound logistics,operations, outbound logistics, marketing and sales, and service. Each of these primary activities is linked to supportactivities which help to improve their effectiveness or efficiency.

There are four main areas of support activities: procurement, technology development (including R&D), humanresource management, and infrastructure (systems for planning, finance, quality, information management etc.).The basic model of Porters Value Chain is as follows:

The term Margin implies that organizations realize a profit margin that depends on their ability to manage thelinkages between all activities in the value chain. In other words, the organization is able to deliver a product /service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.


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Some thought about the linkages between activities: These linkages are crucial for corporate success.The linkages are flows of information, goods and services, as well as systems and processes for adjusting activities.Their importance is best illustrated with some simple examples:Only if the Marketing & Sales function delivers sales forecasts for the next period to all other departments in timeand in reliable accuracy, procurement will be able to order the necessary material for the correct date. And only ifprocurement does a good job and forwards order information to inbound logistics, only than operations will be ableto schedule production in a way that guarantees the delivery of products in a timely and effective manneras pre-determined by marketing.

In the result, the linkages are about seamless cooperation and information flow between the value chain activities. Inmost industries, it is rather unusual that a single company performs all activities from product design, production ofcomponents, and final assembly to delivery to the final user by itself. Most often, organizations are elements of avalue system or supply chain. Hence, value chain analysis should cover the whole value system in which theorganization operates.

Within the whole value system, there is only a certain value of profit margin available. This is the di fference of thefinal price the customer pays and the sum of all costs incurred with the production and delivery of theproduct/service (e.g. raw material, energy etc.). It depends on the structure of the value system, how this marginspreads across the suppliers, producers, distributors, customers, and other elements of the value system. Eachmember of the system will use its market position and negotiating power to get a higher proportion of this margin.Nevertheless, members of a value system can cooperate to improve their efficiency and to reduce their costs in orderto achieve a higher total margin to the benefit of all of them (e.g. by reducing stocks in a Just-In-Time system).

A typical value chain analysis can be performed in the following steps:Analysis of own value chainwhich costs are related to every single activityAnalysis of customers value chainshow does our product fit into their value chainIdentification of potential cost advantages in comparison with competitorsIdentification of potential value added for the customerhow can our product add value to the customersvalue chain (e.g. lower costs or higher performance)where does thecustomer see such potential.


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The firm's margin or profit then depends on its effectiveness in performing these activities efficiently, so that theamount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It isin these activities that a firm has the opportunity to generate superior value. A competitive advantage may beachieved by reconfiguring the value chain to provide lower cost or better differentiation.

The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it

can pursue a competitive advantage as follows:

Cost advantage: by better understanding costs and squeezing them out of the value-adding activities.Differentiation: by focusing on those activities associated with core competencies and capabilities in orderto perform them better than do competitors.

Cost Advantage and the Value Chain

A firm may create a cost advantage either by reducing the cost of individual value chain activities or byreconfiguring the value chain.

Once the value chain is defined, a cost analysis can be performed by assigning costs to the value chain activities.The costs obtained from the accounting report may need to be modified in order to allocate them properly to thevalue creating activities.

Porter identified 10 cost drivers related to value chain activities:

Economies of scaleLearningCapacity utilizationLinkages among activitiesInterrelationships among business units

Degree of vertical integrationTiming of market entryFirm's policy of cost or differentiationGeographic locationInstitutional factors (regulation, union activity, taxes, etc.)

A firm develops a cost advantage by controlling these drivers better than do the competitors. A cost advantage alsocan be pursued by reconfiguring the value chain. Reconfiguration means structural changes such a new productionprocess, new distribution channels, or a different sales approach. For example, FedEx structurally redefined expressfreight service by acquiring its own planes and implementing a hub and spoke system.

Differentiation and the Value Chain

A differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that areunique and not widely available to competitors can create differentiation, as can distribution channels that offer highservice levels.


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Differentiation stems from uniqueness. A differentiation advantage may be achieved either by changing individualvalue chain activities to increase uniqueness in the final product or by reconfiguring the value chain.

Porter identified several drivers of uniqueness:

Policies and decisions

Linkages among activitiesTimingLocationInterrelationshipsLearningIntegrationScale (e.g. better service as a result of large scale)Institutional factors

Many of these also serve as cost drivers. Differentiation often results in greater costs, resulting in tradeoffs betweencost and differentiation.

There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forwardintegrate in order to perform functions that once were performed by its customers. It can backward integrate in orderto have more control over its inputs. It may implement new process technologies or utilize new distributionchannels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration thatincreases product differentiation.


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CARRIERs Value Chain

Carriers initiatives are really about developing appreciation and awareness of customer needs and values, and thenorganizing the firms activities around efficiently providing for those needsquickly, accurately, and at minimum

cost. This is because value occurs when customer needs are satisfied through an exchange of products and/orservices for some form of payment.

The degree to which the needs that are met exceed the price paid in the exchange is one objective way that value canbe measured.

A key distinction in Carriers defining value is whether the exchange that generates value is between firms i.e.,Business to Business (B2B)or between a firm and a consumeri.e., Business to Consumer (B2C).

As seen from the above diagram, Cost Differentiation strategy is consistent with a low cost structure, highwillingness to pay (value to the consumer) and a price below the average in the industry.

Cost Leader has the lowest cost structure and charges the lowest fee. At the same time, consumers demonstrate alower willingness to pay for possibly inferior product offering.

Differentiation strategy is consistent with higher cost structure, higher prices and higher utility to the consumer.

Current economic situation is so volatile that its getting tougher and tougher to make a good cost budget. So for any

manufacturing company the margin of profit has narrowed drastically. Even though most of the o ther manufacturers


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are planning to drop down their prices further to ensure market building, Carriers ACs are in general priced at 10 -15% above competitors products. Carrier outlook is not to sell the cheapest product while Carriers target segment

is pretty much evolved and is not particularly the first time buyers. Instead, they cater to customers who are lookingfor a repeat purchase.

Carrriers Product Differentiation strategy focuses on offering a unique product to the broadest possible market. Theproduct offering necessitates continuous innovation in light of the highly competitive market forces.

THE PRIMARY VALUE CHAIN ACTIVITIES ATCARRIER :

INBOUND LOGISTICS:the receiving and warehousing of raw materials and their distribution tomanufacturing as they are required.

The level of RM Inventory the company looks good, which is for around 46 days of usage. Minimum RM inventorycoverage represents the minimum time to prepare RM for production.

Operations:the processes of transforming inputs into finished products and services.

i. ENERGY CONSERVATION MEASURES TAKENRetrofitting/Minor Modifications of existing equipmentReplacement of incandescent lamps/tube-lights with compact fluorescent lampsReplacement of damaged/leaking compressed air pipe linesReplacement/Installation/Modernization of old and inefficient existing equipment and systemsModification in old thermopac with atomization modulation thermopac resulting in fuel saving.Replaced old400 KVA DG Sets with 250 KVA DG sets to adjust for low load requirement resulting in fuelsaving.Replacement of old air/gas compressor with efficient oneReplacement of state electricity board old independent feeder with new one, thus improving the quality ofpower and reduction in captive power generation

ii. Energy substitution/switching measuresSubstitution of electricity use in any other specific equipment with renewable energy source e.g. solar,winds, agro-waste, etc. (Eco Ventilator)Substitution of fuel with low cost fuel (Fuel CIX) in boilers/furnaces for energy cost reductionProcess Monitoring and ControlsTemperature monitoring and control systemCombustion control system in boilers/furnacesSurface temperature monitoring system

31-Mar-09 31-Mar-08

RM Inventory (days consumption) 46.70 42.50


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iii. Power fuel consumptionParticulars

31-Mar-09 31-Mar-08

1. Electricity

(a) Purchased

Units (in Lakhs) 19.74 17.13

Total amount (Rs. in Lakhs) 89.41 76.78

Rate/ unit (Rs.) 4.53 4.48

(b) Own generation

Through diesel generator

Units (in Lakhs) 14.87 23.82

Units per litre of diesel oil 3.40 3.65

Cost/unit (Rs.) 10.00 9.25

iv. Consumption per unit of production31-Mar-09 31-Mar-08

Electricity (Kwh/box) 9.00 10.10

v. Operations Outlook

Additional investments and proposals, implemented for reduction of consumption of energyAdditional investments and proposals: Rs 7.2 lakhs (Rupees Seven Lakhs Twenty Thousand)The reduction of energy consumption and consequent impact on the cost of production of goodsAs a result of energy conservation measures undertaken by the Company, as mentioned hereinabove, 15%of the energy was saved during the year 2008-2009.Total energy consumption and energy consumption per unit of production

Outbound Logistics:the warehousing and distribution of finished goods.

Days of finished goods inventory ratio reflects the time it takes the company to sell the products it manufactures,and calculated with respect to cost of goods sold.

*Reference to Annexure

31-Mar-09 31-Mar-08

Operating Margin (%) 5.90 6.40

Working Capital to Sales (NS) * 0.20 0.20

Working Capital Days (days gross sales) 52.90 50.60

31-Mar-09 31-Mar-08

FG Inventory (days cost of sales) 28.00 42.40


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Marketing & Sales: the identification of customer needs and the generation of sales.

Particulars

31-Mar-09 31-Mar-08

Advertisement & Business Promotion(in Lakhs) 839.67 959.49

Advertisement & Business Promotion as a percentageof Total Expenses:

1.14% 1.33%

Service:the support of customers after the products and services are sold to them.Particulars

31-Mar-09 31-Mar-08

(in Lakhs) (in Lakhs)

Cost of Services 3139.65 311070

Service Income17921.09 15283.18

31-Mar-09

Service income as a percentage of turnover: 22 %

Net Profit income as a percentage of turnover: 4.32 %

Service Cost as a percentage of Manufacturing and other Expenses

(excluding Spares and Components) : 4.29%

The Service Value Chain is the progression of a service opportunity from beginning to end. Small improvements ateach step can translate to significant improvement in sales.

The Service Value Chain closes the loop with the customer. Once the service work is completed, Carrier builds anongoing relationship with the customer in order to get repeat business and referrals.

Carrier thrive the industry for Air-Conditioning and Refrigerations Services and Maintenance both in thecommercial as well as the residential sector.


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These primary activities are supported by:

The infrastructure of the firm:organizational structure, control systems, company culture, etc.

Debtors Turnover Ratio

Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. Insimple words it indicates the number of times average debtors (receivable) are turned over during a year.

Particulars

31-Mar-09 31-Mar-08

Sundry Debtors (in Lakhs) 15997.86 14101.37

Debtors Turnover Ratio

4.97 5.38

Outstanding over Six Month as a percentage of totalSundry Debtors

7.4% 4.4%

Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turnedover a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquidthe debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquiddebtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may beused as a norm to interpret the ratio as it may be different from firm to firm.

Human resource management:employee recruiting, hiring, training, development, andcompensation.

Environment Health & Safety (EH&S)Carrier is committed to a disciplined approach towards implementation of EH&S Management System at all levelsof work. During the year, the Company has put in immense efforts towards 'Environmental Health and Safety'program and has made steady progress in its key safety metrics over the years.

o Achieved Zero Lost Workday incident Rate in 2008 and 2009YTD.o Achieved 2.7 Million man-hours without Lost Workday incidento Achieved 85% audit rating in 2008 Assurance Review from United Technology Corporation (UTC),

Company's Holding Company

The management emphasis on Safety targets for:o Maintaining accident free environment, "ZERO Accident Tolerance" including First Aid Caseso Creating and promoting safe and environmentally friendly Workplaceo Conducting periodic inspectionso Addressing unsafe acts immediately when spotted and fully comply with EH&S Ruleso Continuously reinforcing "SAFETY FIRST" message

Human Resource Development for Energy Efficiency improvementEmployees sent for training within India & abroad for inculcating and developing best practices in energyefficiency.


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Procurement:purchasing inputs such as materials, supplies, and equipment.

Particulars31-Mar-09 31-Mar-08

Raw Materials and Components

Imported46.9% 51.8%

Indigenous 53.1% 48.21%

Stores and Spares

Imported 35.92% 28.77%

Indigenous 64.08% 71.23%

Though the company currently manufactures its full range of residential products in India, 50-60% of its commercialrange is still imported from its factories in US, China and other parts of the world, one reason for the upper markedpricing. The company is now planning to localize its offerings in India to control costs. It already have a sustainabledesign centre in India and are planning to take it forward to a higher level, particularly with respect to localizedproducts.

Technology development:technologies to support value-creating activities.

A. Research and Development (R&D)i. Specific areas in which R&D carried out by the Company

Improvised the cooling capacity & energy efficiency of various air-conditioning products.Introduced new models of window air conditioners.Introduced next generation condensing unit for duct free splits.Re-engineered ducted product range of air conditioners.

Quality of air-conditioning units improvised for reducing the variability in performance and reducing costof quality.Open display cases and condensing units developed for modern retail and cold room segment respectively.New Bus Air-conditioning products developed for India market to capture new business opportunities in allsegments.Engineering & service integrated to optimize product performance.

ii. Benefitsderived as a result of the above R&Do Competitive advantages in terms of cost and additional revenue generation.


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o Improvement in the performance and reliability of the units.o Enhanced the market positioning in the different segment of Bus Air conditioners.o Competitive for OEM market with respect to Quality & Cost.

iii. Future plan of actiono Value engineering for all products.o Quality improvement of air-conditioning units.o Energy efficiency improvement through design optimization of products.o Re-engineering of Ducted product range of air conditioners, other than ones already done.o Introduction of 100% environmentally safe water blown foam for Bottle coolers.o Low temperature condensing unit for cold room applications.o Introduction of MCHX technology, energy efficient motors, etc in different products of Bus Air

conditioners.o Introduction of Small & Medium size Bus AC to strengthen market for stated segments.o Localization & Development of Truck refrigeration in India with respect to Cost & Quality in

Indian competitive market.

iv. Expenditure on R&DDuring the period under review, the Company has incurred following expenditure on R&D:

Particulars31-Mar-09

a) Capital : NIL

b) Recurring : Rs 268.92 Lakhs

c) Total : Rs 268.92 Lakhs

d) Total R&D expenditure as a percentage of turnover: 0.35%

B. Technology absorption, adaptation and innovationi. Efforts, in brief, made towards technology absorption, adaptation and innovation

Introduction of CDU/WRAC/AHU by using global platform designs,Introduction of BUS AC/Truck Refrigeration by using Global Designs.

ii. Benefits derived as a result of the above efforts, e.g., product improvement, cost reduction, productdevelopment, import substitution etc,

The above stated efforts have resulted in product development, cost reduction and quality improvement.


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The WOW Value

At Carrier managers motivation, preferences, feelings of comfort and trust create value for individuals that engage

in trading relationships. These trading relationships are extremely influential in the determination of successfulexchange.

There are competitive forces affecting the market value of any exchange of resources when comparisons can be

made between competing offers. Competing offers can erode value (and margins) by making the lowest price adeciding factor in evaluating an exchange.


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At Carrier the consumer level of exchange, value is layered, and has been described by three concentric rings. In thecenter ring is product value, the technical value derived from providing a source of supply. A second ring of servicevalue is provided by the services that surround the product such as personal care and warranty service. The third ringhas been called the new service/quality.

This third level of value is achieved by providing enhanced service, to make your customer successful rather thanjust satisfied. At this level, the experience surrounding the exchange of resources provides its own unique wow

value, and the product itself is secondary.

For Carrier, the capability of providing value to customers generates revenues in excess of costscreates profit,which in turn generates stakeholder value. Thus, the exchange of value (or the value created in exchange) is thebasic engine that drives the company. The upstream (value stream) impact of value creation is stakeholder value.

Because value is derived from customer needs, activities that do not contribute to meeting these needs are non-value-added waste.

Careful consideration of the tasks and functions that occur at Carrier it is observed, considerable waste still availablefor process improvement activities to uncover and reduce or eliminate. By streamlining the processes that generatethe goods and services, fewer resources need to be expended, and the margin between customer value and the cost ofdelivery can increase, improving firms profit margin. This is the essence of Carriers corporate strategies that focus

on operational excellence.

In the field of service businesses, up to 40 percent of the opportunities each day are lost forever. By understandingthe Service Value Chain companies can improve sales and gross margins by making the most of the opportunities.

Field Service is a large and diverse industry. In the broadest sense, there are two categories of field service:

1. Consumer Discretionary.Consumers, both residential and commercial, willcontract for repairs or installations on as as-needed basis. Thisbusiness is characterized by demand servicetypically driven by Yellow Page advertising.

WOW

Value

Service Value

Product

Value


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Speed of service delivery, field payment processing, a requirement that thecustomer is present at the time of service,and dynamic real-time dispatching are all business drivers. Businesses in this category include Plumbing, DrainCleaning, Appliance Repair, Pest Control, Utility Repair, Auto Towing or Mobile Repair services, Painting andWall Hangingcontractors, Electrical contractors, Roofing contractors, Window replacementbusinesses, Fencingcontractors, Landscapers, and Heating and Air Conditioning.

2. Entitlement-Based.Field Service in this realm is based on contract relationshipswith the customer. This business is characterized byscheduled service, no requirement for the customer to be present, efficiency of service delivery, no fieldpaymentprocessing, routes instead of dynamic dispatching. Businesses in thiscategory include Lawn Care, JanitorialMaintenance, Industrial EquipmentMaintenance, Pest Control Baiting System Providers, Gardening, PoolMaintenance, and also Heating and Air Conditioning.

The Service Value Chain at Carrier is primarily directed to Consumer Discretionary field service businesses.However, much of the exercises apply equally to the Entitlement-based businesses.

The Service Value Chain

Field Service is a simple businessthe customer calls for service, the company provide the service, and get paid.But if that scenario only works sixty times out of every one hundred, then something is not right.

In order to get to the bottom of this and fix it, we need to view field service asa processa process that starts withthe need for service and ends with the successfuldelivery of service. This is the heart of the Service Value Chain atCarrier Airconditioning &Refrigeration Limited.

The Service Value Chain at Carrier is the progression of a service opportunity from beginning to end. Smallimprovements at each step translate to significant improvement in sales.

In effect, Carrier grows by 20 percent or more without any change in service demand.


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When its not done right, fewer and fewer opportunities come, and the process slowly grinds to a halt, as does

business.

The arrows decrease in size during the process because customers and opportunities are lost at each step. Losses ateach step may be less than ten percent, but only a relatively small number of customers make it to the repeat

customer stage.

The Service Value Chain closes the loop with the customer. Once the service work is completed, Carrier builds anon-going relationship with the customer in order to get repeat business and referrals. When everything is done right,the reward is a satisfied customer that provides business again. The process repeats itself and has helped Carriergrow over the years.

Customer Opportunities.Carriers opportunities have come from Sales Channels and from repeat business. Repeat business needs to bethought of as reward for doing a great job in managing the service value chain and customer relationships. If thecompany is not actively engaged in retaining its customers, only about 24 percent of first time customers will come

back. That means 76 percent of customers that took service from the company once will never ask for service in thefuture.

In fact, the majority of consumers cannot even remember the name of the service provider they used after just threedays!

Historically, Field Service businesses had only one sales channelyellow page advertisingand only one methodof contactinbound calls. Although most field service businesses continue to operate that way, but Carrierimplemented many other sales channels that brought more opportunities to its business:

Outbound CallsDirect SalesSelf-ServiceWholesale Opportunities,

Service BrokersAlliances

Carriers field service businesses now receive over 50 percent of their work from these channels, freeing thecompany from total dependence on inbound calls.

TCCJ was established in April 1999, as a Joint venture between Toshiba Corporation and Carrier Corporationaiming to reinforce the corporate competitiveness by strategic cooperation from global standpoint. Carrier is theworlds largest HVAC Company and Toshiba is quite strong in the Residential and Light Commercial segment with

most advanced technology.

Service Demand.Carrier captures the customer information and arranges a time for a site visit. Typically, calls are handled byCustomer Service Representatives (CSRs) or in some cases by dispatchers or managers in the branch.

Capturing service demand needs to be handled in a highly professional manner.Reliable methods initiated by Carrier of measuring lost opportunities (Hang -ups) in order to improve performancein the critical area are:

Trained specialists should take all inbound customer calls. Empathize with the customer. Dont pre-qualify the customer.


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Dont do over-the-phone diagnosis.Carrier identified that the most common reasons for failing to book a service work order:

Customer wanted a price quote or estimate over the phone. Customer could not say how they would pay for the service. Customer thought the price was too high. Customer did not agree to the trip charge or diagnostic fee. Customer wanted faster service than the business could provide. Customer wanted a specific appointment time.

Therefore Carrier installed the principle ofgive the best service to the best opportunities.

To reduce hang-ups, honesty is needed in reporting. Many CSRs will go out of their way to avoid the stigma of ahang-up. To improve hang-ups, Carrier implemented strong leadership, training programs, good tracking system,and plenty of time spent observing the CSRs and listening in on conversations.

Daily call closure targets


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Results as on 3rd May

Dispatch and Logistics.The next step in the Service Value Chain begins with a booked work order. When a customer that has agreed to theservice or at least to have a diagnosis done. At this point, Operations takes over. An authorized service dealer willassign a technician, estimator, or salesperson to the work order and send the person to the job site at the appointedtime. This process is logisticsgetting the right technician, with the right parts and equipment to the right customerat the right time.

Logistics break down for a variety of reasons; foremost among them is an imbalance between supply and demand.Carrier identified at any given point in time, the service dealers will either have too many technicians or too manyservice work orders.

If this imbalance gets too great, business will suffer and Carrier wont be able to get a technician to the job siteeither not at all, not fast enough, or not when promised.

Customer cancels happen after the service work order is booked but before the technician arrives at the job site.Major reasons for customer cancels are:

Technician Did Not Show Up On Time. Customer Booked with a Competitor. Customer Found a Quicker Service Provider. Customer Had to Leave. Customer Fixed Their Problem.

There are some hidden opportunities with customer cancels. One study showed that if company calls back all the

customers that cancelled service the following day, 20 percent will agree to book again. If the cancel rate is a typical10 percent, then just by taking this simple step, company can increase its sales instantly by two percent.

Carriers most of the customers are entitlement-basedthat is, under contract or warranty. However, long termcaptive customers have a way of getting even when exposed to persistent poor service; therefore Carrier never getstoo complacent with these customers.

Many HVAC companies face fifty percent plus cancellations from customers after their annual contract expires.


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Imagine having to replace one half of your business each year just to stay afloat. Carrier never takes a customer forgranted.

Industry has seen cancel rates as high as 25 percent, but a 10 percent rate is typical. This is a double-edged swordif your cancel rate is too high you need more technicians. Ifits too low, you may have too many technicians, oryour customers are captive. A healthy, high performing business should experience a cancel rate from four andeight percent. While Carrier faces around 6%.

Calls open in the system more than 3 months

Service Sales.The technician arrives on site, diagnoses the problem, and presents a written estimate for the customer to approve.

The customer signs off on the estimate and the work begins (or, at least the job staging process begins).Factors contributing to the success in this process are:

Technicians appearance. Condition and cleanliness of the service vehicle. Rapport the technician builds with the customer during the problem diagnosis. Quality and thoroughness of the estimate. Technicians ability to explain the problem and solution. Price. Timing of the work to be done.

The end result should be a sale. For repair businesses, a 90 percent success rate is typical. For major repairs orinstallations, the success rate is normally from 33 to 50percent. A no-sale fails both Carrier and the customer. Thecost of getting the technicians to customers front door is from Rs. 500 to Rs. 600, depending on the market. Thefollowing are the main reasons a customer declines service:


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Customer will get a second opinion or price quote from a competitor. Customer only wanted an estimate - will decide later. Customer had to leave. Customer had a payment problem. Technician took too long to arrive. Technician not able to duplicate problem. Technician not able to perform the work. Parts or Equipment not available.

Carrier experienced that a high correlation exists between no-sale work order rates and the experience levels of thetechnicians. If most of technicians are less experienced, a high no-sale rate is expected. If most of the technicianshave been with Carrier for three or more years, then the no-sale rate should be well below 10 percent. This is thebiggest reason Carrier works hard to maintain low attrition rate.

Open Call Tracker as on 01 April

Job Preparation.If the field service work requires some job staging and job preparation, its unlikely that the company will be able tooffer same day service. The staging required in order to install a new Air Conditioning unit in the customers home:

Close the sale and arrange for financing. Pull permits for Mechanical and/or Electrical work. Arrange for Public Utility Company rebates and/or Manufacturer rebates. Order A/C unit or pull from inventory. Determine parts and material requirements for ducts, vents, and returns, etc. Order or pull the necessary parts. Set up appointment with the customer and the lead installer for the installation.


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Companies good at this can accomplish all six tasks in a few hours. Sales made today are routinely installedtomorrow in HVAC businesses. However, in some environments job staging can take several days or weeks. It isimportant to stay in close contact with the customer during this time. If there are delays, customers often cancel anddemand their money back, obviously not well for the company or for the customer. Customer communication is thebest defense.

By minimizing job preparation time, Carrier looses very little business, maybe one or two cancels per hundred.

Follow-up.Most businesses consider the process complete when the work is done and the technician collects the payment.However, several steps remain in the Service Value Chain. Re-services and warranty work are common follow-upissues. Technician recommendations, satisfaction surveys, and Customer Relationship Management (CRM)activities have been the most important success drivers for Carrier.

Quarter - 1 performance for service delivery parameters, 2011.*Kolkata ranking 1st

Re-services.All field service businesses have a small number of jobs requiring re-servicing. The primary reason is poor qualityof service, followed by defective parts. When a technician does not do the job right the first time, he or she has toreturn, often multiple times, to complete the job. This is costly to the company and annoying to the customer.Carrier stops re-service by the following measures:

Sends a qualified and prepared technician to the job site.


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Charge back the technician for re-services. Target training in high re-service areas. Coaches technicians that have re-services

Recommendations.Technicians are asked to write recommendations for future work on quote estimates and generate invoices. Carrier

expects to have good follow-up recommendations on about one third of the invoices written in the field. Typicalrecommendations are fixture upgrades, maintenance or extended warranty offerings, accessories, or additional workthat the customer does not want to have fixed as part of that days work. The technician must review therecommendations with the customer. After several days or weeks, Carriers CSRs places outbound calls in an effortto book the additional work.

There are always slack calling periods when they have time for this effort. Carrier is successful about 20 percent ofthe time. The end result is a 6.6 percent revenue increase for its business.

Financial Targets and Achievements as on April 2011

Satisfaction Surveys.Many, if not all, of service customers are contacted after the work is completed to make sure they were happy withthe work and that their problem was solved. Questions asked are, like:

Did the technician show up on time? Did the technician explain the problem and how it would be fixed? Did the technician fix the problem and clean up when done? Would you use us again?


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Tracking technician satisfaction levels is another way Carrier reinforces the importance of satisfying the customer. Itserves to prevent technicians from using excessive behavior patterns, such as gouging the customer because theythink they can.

Customers can have trouble knowing whether or not a technician did a good job. Tangible things they can addressare the appearance and friendliness of the technician, how careful he or she was in not damaging or dirtying theirhome or business, and how well he or she cleaned up.

If the technician leaves the jobsite cleaner than it was before the problem occurred, customers will consider that tobe great service. Customers describing their service experience as great are four times more likely to use Carrieragain as compared with customers that received good service.

Follow-up CRM.CRM, or Customer Relationship Management, is a process designed to build customer loyalty and customerretention. Occasional reminders that a tune-up is due, special offseason offers, and other mailers are helpful to keepCarriers name in-front of the customer.

It costs an estimated five times more to acquire a new customer than it does to retain an existing one, so this effort is

money well spent for most field service businesses.

Carrier focuses more its energy and money on commercial accounts, where on-going relationships can be built andthe mean-time-between service is six months or less.


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Carrier - turn to the experts

While innovation and marketing strategies at Carrier focuses on improving customer perceptions of the value ofgoods and services by innovatively improving the perception of what gets delivered. Value chain management,increases the margin between delivery cost and perceived value and is the foundation for improved businessperformance at Carrier Airconditioning & Refrigeration Limited.

Yield is the percentage of opportunities that result in a successful sale. Six Sigma refers to this as flow throughyield, since there are several steps along the way that impact yield. In this report, Carriers service business wasobserved to determine Carriers success.

By closely examining each of the segments in its Value Chain, it is evident that there is no magic pillCarrier isdoing many things just a little better than its peers.

It is seen this time and againthe difference between a highly successful business and a struggling one is not justone or two things - the highly successful business is just a little better in twenty or thirty ways, and the differencesaccumulate.


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Conclusion and Recommendations

Value is highly conditioned by the larger social and economic environment through which complex and numerousinteractions affect the human perception of value-based transactions. Advertising, social trends, and economicconditions all influence consumer and business valuations of products, services, and resources flowing through thevalue systems in our economy.

One of the most watched figures in the marketplace is the consumer confidence index based on a survey ofhouseholds. This index is an aggregate measure of confidence in the economy and a leading indicator of howconsumers will value, and therefore how they will spend money on goods and services. When perceptions of valuein a marketplace become exaggerated, market bubbles occur such as the recent Sub-Prime bubble.

When significant trends take hold in this larger environment it is difficult, if not impossible, for individual

companies or households to avoid being swept along in the sudden creation and destruction of value that may result.

Carrier is a company founded on a history of innovation. Beginning with Willis Carriers pivotal invention of thefirst mechanical air conditioning system, Carrier has consistently introduced new technologies and industry "firsts"that have forever changed the way we live, work and play. From revolutionary improvements to health care,manufacturing processes, research, building capacities and food preservation to art and historical conservation,general productivity, indoor comfort, and much more.

Carrier is committed to creating new possibilities that enhance peoples comfort and improve their lives. Carrierbelieves that industry leadership demands environmental leadership. In fact, environmental stewardship is one of thecompanys core values. Carrier continuously works to improve the environmental performance of their products andservices, operations and culture to help achieve a sustainable society.

For supply chains to generate maximum value in this dynamic environment, Carrier must synchronize the flows ofsupply with the flows of value from customers in the form of rapidly shifting tastes, preferences, and demand.Carrier need to stop thinking of supply chains and value chains as different entities, but, rather, should integrate thetwo.

Third generation supply chains require that the material flow and product delivery be synchronized and lean, andthat the information, knowledge, and financial flows be fully integrated and instantaneous. SCM 3.0 requires thatproduct design be fully integrated with production capability, delivery processes, and information about customerdemand. This can be achieved by taking a holistic view of the end to end business process throughout the productlife cycle and across geographical borders. The next level of business performance will be achieved by the companyas it integrates fully the concurrent flows of value and supply.


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Annexure

Financial results

Income Statement

31-Mar-09 31-Mar-08

Profit / Loss A/C Rs mn %NS Rs mn %NS

Net Sales (NS) 7966.48 100.00 7599.06 100.00

Material Cost 4203.10 52.76 4035.68 53.11

Increase Decrease Inventories 990.41 12.43 873.72 11.50Personnel Expenses 651.87 8.18 499.35 6.57

Manufacturing Expenses 414.89 5.21 416.06 5.48

Gross Profit 1706.21 21.42 1774.25 23.35

Administration Selling andDistribution Expenses

1173.72 14.73 1213.61 15.97

EBITDA 532.49 6.68 560.64 7.38

Depreciation Depletion andAmortisation

65.70 0.82 74.75 0.98

EBIT 466.79 5.86 485.89 6.39

Interest Expense 7.86 0.10 9.94 0.13

Other Income 84.81 1.06 106.78 1.41Pretax Income 543.74 6.83 582.73 7.67

Provision for Tax 199.49 2.50 210.13 2.77

Extra Ordinary and Prior PeriodItems Net

0.00 0.00 0.00 0.00

Net Profit 344.25 4.32 372.59 4.90

Adjusted Net Profit 344.25 4.32 372.59 4.90

Dividend - Preference 0.00 0.00 0.00 0.00

Dividend - Equity 531.88 6.68 0.00 0.00


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Balance Sheet

31-Mar-09 %AL 31-Mar-08 % ALEquity Capital 1063.77 21.18 1063.77 21.87

Preference Capital 0.00 0.00 0.00 0.00

Share Capital 1063.77 21.18 1063.77 21.87

Reserves and Surplus 848.36 16.89 1126.40 23.15

Loan Funds 0.00 0.00 0.00 0.00

Current Liabilities 2016.74 40.15 2057.75 42.30

Provisions 1094.10 21.78 617.22 12.69

Current Liabilities and Provisions 3110.84 61.93 2674.97 54.98

Total Liabilities and Stockholders Equity (AL) 5022.97 100.00 4865.13 100.00

Tangible Assets Net 491.39 9.78 308.45 6.34

Intangible Assets Net 7.10 0.14 0.06 0.00

Net Block 498.49 9.92 308.51 6.34

Capital Work In Progress Net 18.64 0.37 159.35 3.28

Fixed Assets 517.12 10.30 467.87 9.62

Investments 0.11 0.00 0.11 0.00

Inventories 1115.40 22.21 1307.87 26.88

Accounts Receivable 1599.79 31.85 1410.14 28.98

Cash and Cash Equivalents 539.86 10.75 483.07 9.93

Other Current Assets 2.00 0.04 7.42 0.15

Current Assets 3257.04 64.84 3208.51 65.95

Loans & Advances 1218.38 24.26 1158.00 23.80

Miscellaneous Expenditure Other Assets 0.00 0.00 0.00 0.00

Total Assets (AL) 5022.97 100.00 4865.14 100.00


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Ratio Analysis

As on 31-Mar-09 31-Mar-08Return Related

Return on Total Assets (%) 24.40 22.20

Return on Networth (%) 18.00 17.00

Return on Capital Employed (%) 26.80 26.90

Profitability

Gross Margin (%) 21.40 23.30

Operating Margin (%) 5.90 6.40

Net Profit Margin (%) 4.30 4.90

Adjusted Net Profit Margin (%) 4.30 4.90

Asset Turnover(x) 3.90 6.90

Leverage

Interest Coverage (x) 67.70 56.40

Liquidity

Current Ratio (x) 1.10 1.20

Quick Ratio (x) 1.10 0.90

Cash Ratio (x) 0.30 0.20

Per Share

Book Value Per Share (Rs) 81.30 93.50

Earnings Per Share (Rs) 14.70 15.90Dividend Per Share (Rs) 22.70 --

Growth(%)

Total Sales 4.84 --

EBITDA -5.02 --

EBIT -3.93 --

Net Profit -7.61 --

Total Assets 3.24 --


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References

1. M. Porter, Competitive Advantage, Creating and Sustaining Superior Performance, TheFree Press, New York, 1985.

2. Womack, James and Daniel Jones, Lean Thinking, The Free Press, New York, 2003.

3. J. Ramsay, "The real meaning of value in trading relationships," International Journal ofOperations & Production Management, vol. 25, pp. 549, 2005.

4. Clemmer, Jim, The Three Rings of Perceived Value. The Canadian Manager. 1990 Jun 1;15(2):12-15.

5. Cooper, Martha C., Douglas M. Lambert and Janus D. Pagh, Supply Chain Management: More Than a New Name for Logistics, The International Journal ofLogistics Management, Vol. 8, No. 1 (1997), pp. 1-14.

6. Supply-Chain Council (2005), available at:www.supply-chain.org

7. Bacheldor, Beth, (2003), Supply chain management still a work in progress, InformationWeek, May 23.

8. Laseter, T. and Oliver, K. (2003), When will supply chain management grow up?, Strategy + Business, No. 32, pp. 20-5.

9. S.A. Sherer, "From supply-chain management to value network advocacy: implicationsfor e-supply chains," Supply Chain Management, vol. 10, pp. 77, 2005.

10. D. Walters and M. Rainbird, "The demand chain as an integral component of the valuechain," The Journal of Consumer Marketing, vol. 21, pp. 465, 2004.
http://www.supply-chain.org/http://www.supply-chain.org/http://www.supply-chain.org/http://www.supply-chain.org/

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