Redesigning Supply Chain on the Technology Platform
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Indian tyre industry is at a crossroads due to the various challenges it is facing after the liberalization of the Indian economy in 1991. It is a technology-driven industry and very much dependent on rubber as the major raw material input to the final product. Firms that have their rubber plantations have a better control on costs and deliveries. There are big players in automotive tyre with technology backup from the world giants. The major players are CEAT, MRF, Apollo, Bridgestone and JK. The industry is highly competitive. Today, brands like CEAT, JK, MRF and RP are very strong in OEM markets. However, Apollo captured the replacement market in the commercial vehicle-segment. On the technology front everyone is trying to bring in radial tyres to Indian markets, as they are being readily accepted by customers due to their advantages.
After the liberalization of the economy, the approach to tyre pricing was driven by market forces instead of the cost-plus-profit formula earlier used by the manufacturers. Due to cutthroat competition organizations were forced to offer a competitive price irrespective of the product cost, which, however, needs to be controlled through some internal mechanism. To remain competitive tyre manufacturing firms started relooking at their business process and costs associated with production and distribution of the product. The major reason was the high cost of operations due to system inefficiencies, higher inventory levels and low productivity of assets. They started looking for ways to improve their efficiencies, effectiveness and productivity in order to sustain growth.
RP was a considerably younger player in tyre manufacturing but had its inefficiencies spilled over from the pre-liberalization era, when the businesses were under government controls, manufacturing capacities were limited due licensing process and manufacturers had government protection. RP being a relatively new company had state-of-the-art manufacturing facilities and very little problem on the manufacturing front. The area of inefficiency was logistics on the distribution side. They felt that the need of the hour is speed in reaching the customer with efficiency and cost-effectiveness. RP decided to go in for a system based on the latest information and communication technologies to enhance coordination across the supply chain so as to reduce cost and increase asset utilization.
RP had taken a strategic decision in the mid-1990s to be a cost-based and customer seihce based differentiator for remaining competitive in the automotive tyre market. They undertook a complete redesign of the existing supply chain and made the coordination of the various activities and linkages of the business process and independent functions. The company decided to go in for the SCM initiative through the change process to work on the open culture. Through SCM they further decided to integrate the procurement, manufacturing and distribution activities of RP using the latest information and communication technology tools for bringing speed in information and inventory flow. As a result of aggressive SCM strategies, the company could boast the achievements mentioned in Table1.
Table 1 SCM initiative achievements
On account of the SCM initiative RP dealers are now assured of supplies per their requirements. ‘The inventory level in the distribution channel has drastically reduced to 15/18 days as against 45/50 days earlier. The assets and funds blocked in inventory are now reduced to half. The job for the sales personnel in the field has become easier. Their efforts are now focused more on sales generation than chasing goods at the factory or depots, resulting in a reduction in time spent on non-value-added activities. RP, which was earlier more worried about the customer service level in the competitive environment, now talks about the enhanced customer satisfaction level and the improved customer value delivery system through its SCM initiatives.
With the SCM initiative RP reviewed its existing practices and introduced drastic changes to bring about efficiency, cost-effectiveness and productivity in the system at the operating level. The following were the changes introduced:
FROM PUSH TO PULL SYSTEM OF SUPPLY CHAIN
RPL had the push system in practice for distribution. This system required production to be planned on the aggregate sales forecast based on the past trends, resulting in a very high level of inventory. With the change to the pull system, the production planning is now based on the actual sales requirement from the point of sales. To support the pull system RP has worked out inventory norms based on demand variations, transit time and load frequency. The latest IT tools were introduced for information collection, analysis and dissemination. In this system the stock-keeping units (SKUs) sales information was to be punched on a daily basis and sent to the factory, which was the responsibility of the dealer; C&F agent and hubs, in order to ensure ease and speed in the replenishment activity.
From the earlier multiple stock point systems RP has gone in for the warehousing hub system. The firm has mother warehouses at their three factories producing tyres for two-wheelers, commercial vehicles and four-wheeler passenger cars. The four regional warehousing hubs (at Mumbai, Delhi, Bangalore and Calcutta) now receive supplies from the three factories and two contract manufacturers in and around Mumbai. The hub warehouses are owned and managed by the 3PL service providers. The material from the factories is sent to the hubs through full-load trucks and also through the rails containers.
The ratio of road to rail dispatches is 75 to 25. The hub warehouses are equipped with mechanized material-handling systems for speedy inventory movements. The 3PL firm has it own self developed Warehouse Management System package that is linked with the company’s ERP system. The material from the warehouse hubs is directly sent to the 24 distribution centres (one in almost every state) that are managed by the C&F agents. The material from C&F agents reaches the dealers within 24 hours.
SPEEDY INFORMATION FLOW
RP invested nearly Rs 120 million on an information processing and communication system to ensure that all branch offices, warehouse hubs, distribution centres, dealers and factories are connected online with one another. For stock taking the information updates are made twice a day.
RP’s real strength lies in logistics, which is totally outsourced to TCI who has dedicated container trucks to transport the products from factories to the regional warehouse hubs. TCI’s local offices are responsible for organizing the trucks, LCVs or smaller capacity vehicles for transporting the tyres from hubs to the C&F agents. The dealers pay the secondary transportation charges, however, the C&F agents are fully responsible for organizing the secondary transportation. TCI has provided RP with the trace and track system to find out the whereabouts of material dispatched to hubs and C&F agents. The contract is based on the reward and penalty system. As a result, transit delays have come down to within 5 per cent as against 30 per cent earlier. Further efforts are on to reduce this further to within 3 per cent.
With the SCM initiative, the myth of higher customer satisfaction with higher inventory, which RP earlier believed in, has been totally destroyed. The WMS across all the three mother warehouses and four hub warehouses is integrated to logistics operations and C&F agents to plan and fulfil the requirements at dealers’ end, with the result that RP’s finished goods inventory has drastically come down to 20 days from 55 days earlier. Due to information flow, the inventory flow has increased manifold, resulting in inventory turns of 15 from a figure of 6 earlier. Today RP is able to deliver the right product mix at the right place and at the right time with lower inventory levels
The supplies are made from three factories and two contract manufacturers in and around Mumbai. RP’s HO is responsible for meeting the requirements of tyres for the two-wheeler; commercial vehicle and passenger car segments. HO at Mumbai runs a system to ensure that all the requirements of the three segments are met. Mother warehouses at factories and contract manufacturers send their materials to regional hubs based in four locations across the country. These hubs supply the product to C&F agents at 24 locations, from where it is supplied to a dealer network of3200 to service the replacement markets. All OEM customers and exports are directly handled by HO. The supplies to OEMs directly go to the customers’ plants from the factories. In exports, the product goes to the port from the factories and finally to the customer via shipping lines, complying with government regulations.
The product allocations for OEMs, exports and replacement done by the HO, which has online access to information on product- requirements and inventory at all dispatch points across the country.
CUSTOM ER SERVICE
In the tyre industry the quality of service is more important than product quality. The latter is a poor product differentiator, In the Indian context, all tyre manufacturers produce world-class goods with technical know-how from world-renowned manufacturers. Hence, the product quality being almost the same, the other major differentiator is quality of service. This means, the customer, needs of “what he wants and when he wants” should be met through service. The customer makes his choice based on who provides him with the most effective service in terms of cost & time. In the replacement market, the dealer is an important customer, who in turn services the end customer. The dealer will minimize his investment risk through minimum inventory. If assured by the manufacturer the dealer will stock lesser quantity of the product. Through the SCM initiative, RP has developed a system that triggers a response not just at the warehouse hub but also at the plants.
RPL supplies the products to three major market segments.
1. Replacement markets
In the replacement markets, the product is supplied to 3200 dealers across the country, resulting in complexity in distribution. In efficient and cost-effective distribution, information and communication technology plays a major role by way of providing customized software solution for warehousing management, production planning, inventory controls and distribution planning, and can be integrated to the firm’s ERP system.
In the case of OEM customers like Mahindras and Maruti who follow the JIT system, the product should arrive at the assembly line just in time so they do not have to carry any inventory. For exports, the requirements are quality and on-time delivery, taking into consideration the hassles of customs clearance, documentations, and multi-modal transportation. With the ERP in place the product requirements of both OEM customers and exports are efficiently handled by RP
PERFORMANCE MEASUREMENT AND CONTROLS
For maintaining the system performance, RP has devised a performance measurement system for identifying causes and taking corrective action thereafter. The factors responsible for customer satisfaction are the on-time delivery, order fill rate and minimum errors in dispatches, which are measured against the targets for rewards and penalties. As these services are outsourced, the selection of the right 3PL partners becomes crucial.
The other factor that is difficult to assess is the lost sales or opportunity at point of sales for the period of say, a month. RP designed a measurement system that relates lost sales to the sales affected and the minimum inventory held over the period of a month. RP has established that for having sales of 24 tyres a week, the minimum stock at the point of selling should be 4 tyres per day. RP is aiming at having the sales lost figure brought down to within five per cent from the present level of 25 per cent. Similarly, for the inventory level the control figure is 20 days. The factor applicable at warehouse was the inventory turn ratio, which RPL improved to 15 from a level of 6 and further wants to increase to 18.
In a nutshell, with the SCM initiative on the technology platform, RP could reduce its finished goods inventory to a bare minimum of 20 days. Factory compliance to the market demand improved to 80 per cent with a marked achievement in manufacturing flexibility. The other achievement was reliability in delivery with 95 per cent consistency through alliance with 3 PL partners.
1. Discuss how RP channeled its resources for maximizing the benefits. 2. RP wants the inventory to be reduced to 12 days from the existing level of 20 days. According to you, what should be RP’s plan of action to achieve this? 3. Discuss the importance of the performance measurement system in the context of RP. 4. What are the critical linkages of SCM for integration in this case? 5. Discuss the tactical solutions RP has implemented to get over the changing market situation.