Accelerated pharma manufacturing

Explore strategies for accelerating pharmaceutical manufacturing amidst global demand surges and regulatory challenges with insights from Vector Consulting Group.

Accelerated Pharma Manufacturing | Vector Consulting Group

Infrastructure industry in India at crossroadsThe World Economic Forum ranked India 71 out of 144 countries in the 2014 global competitiveness index. The Forum cited poor infrastructure as one of the major reasons for this low rank. It is loud and clear that if India aspires to be a key global player on the economic front, it has to take up infrastructure development on a war footing. Improving infrastructure has been a major challenge for India. Many projects (worth almost Rs.18 lakh crores) initiated in the last few years have been are stalled. Chronic delays have worsened working capital crises that infrastructure companies face. Working capital cycles are among the longest in the world; Cash flow statements show high debt and low returns [1]. According to the finance ministry’s mid-year report, private sector infrastructure companies across the board are deep in debt. Therefore, even if the incumbent government initiates new projects or expedites approval, the situation for many of these companies will continue to be dire. They may not be able to source the resources to undertake these projects. Many do not even have earnings to cover interest payments for their current debt. Moreover, the banking sector is increasingly unable to or unwilling to lend more money to this sector [2].Working capital crisis in companiesInfrastructure companies need large amounts of working capital. Hence the high debt. Even companies who excel (who have managed to have positive working capital) use 30-80% of their debt to finance working capital which is high because receivables and inventory are high. This is characteristic of the Infrastructure industry in India. It is also true that, in the recent years, the quantum of receivables (and the money stuck in it) has been growing, as an analysis of the major infrastructure companies reveals. (Refer to figure 1).<figure class="image"><img style="aspect-ratio:16668/12688;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-1-01_1733058780.jpg" width="16668" height="12688"></figure>On the face of it, it looks like this liquidity crisis they face is beyond the control of the infrastructure companies. The truth, however, is that some of these woes are self-inflicted. Companies continue to favor conventional project management styles even though these may not be ideal for curtailing wastage of working capital.&nbsp;The working capital situation of infrastructure companies goes through predictable swings during the year’s quarters of the year. These movements are linked to how the companies recognize turnover. Skewed sales every quarter-end and greater sales skew at the end of the last quarter of the year lead to skewed working capital requirements throughout the year. Most companies’ working capital situation deteriorates dramatically in the first quarter of every year. (Figure 2).&nbsp;<figure class="image"><img style="aspect-ratio:16668/12756;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-2-01_1733058793.jpg" width="16668" height="12756"></figure>The phenomenon of last quarter (or year-end) sales spike is well documented. What is less known is that there are spikes in turnover booked at the end of each quarter as well (Figure 3).<figure class="image"><img style="aspect-ratio:16668/12560;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-3-01_1733058810.jpg" width="16668" height="12560"></figure>Each spike in sales is followed by a spike in working capital and debt. This is because while sales has been booked, and receivables have ballooned, no real money has accrued in the system from operations. The contractor is expected to receive payment after a credit period post billing to client. This payment may be delayed when there are errors or gaps in documentation. The practice of batching customer billing further increases the risk of payment delays, as mistakes in a few bills can lead to the entire batch of receivables being held up. This is more so during quarter end where focus is on internal turnover booking rather than customer billing. While the contractors may cry ‘delay from client end’, a substantial portion of the responsibility for this delay in realizing receivables actually lies with the companies and the way they operate.&nbsp;The turnover biasThe sales spikes and the corresponding working capital spikes are a consequence of ‘turnover bias’ in a company’s approach to project management. Turnover bias comes in when a company manipulates information or material/execution flow to meet quarter-end or year-end numbers (usually to meet targets) in its financial statements. Such practices are rampant in most infrastructure companies, whether ‘execution-intensive’ or ‘material-intensive’. The turnover bias manifests itself in ‘material-intensive’ projects when managers choose to supply high-value items to project sites to meet quarter-end numbers. To do this, multiple work fronts are opened in the project so that more and more high-value material can be supplied and booked as sales. Since supply is usually focused on select items, the full kit of material required to complete a logical work stretch becomes available only in fits and spurts. So, worker gangs move on and have to keep moving back and forth multiple times to complete work. This mode of project management creates a vicious loop of wastage of time and capacity, leading to delays and increased site expenses for the project (Figure 4). This is the same for erection-intensive projects. Here, too, turnover bias prompts the contractor to pick the highest billable jobs first. He/she opens many work fronts to harvest more such opportunities. In the absence of supervisory bandwidth to simultaneously complete all these, the project is inevitably delayed.&nbsp;Over time, clients have come to recognize these patterns in project management. Many have now skewed the payment terms towards erection and project closure. Yet, most turnover-biased infrastructure companies continue their project management practice of ‘cherry-picking’ material to meet quarter-end and year-end turnover targets. Most of the turnover is already booked by the end of the year. The opportunity to cherry-pick reduces dramatically and hence, there is a dip in turnover in the first quarter. Companies go back to cherry-picking to meet their ambitious numbers.&nbsp;<figure class="image"><img style="aspect-ratio:16668/10407;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-4-01_1733058824.jpg" width="16668" height="10407"></figure>The problem aggravates when recession sets in; the working capital cycle spirals out of control. New projects become scarce so do advances which could have been used to bank roll ongoing projects. At the same time, many open projects are at their tail-end or near-closure. A crisis-like situation arises. Money is not available to book significant turnover; even the ability to cherry-pick is gone. Cash-starved and hard-pressed to meet increasing working capital requirements, companies are forced to source expensive short-term debt. Over time, this style of project management drives these companies into a vicious, out-of-control loop of inevitably delayed projects. They find themselves up against angry clients, ever-increasing working capital requirements, and debt (Figure 5). Thus, the companies (already working on wafer-thin margins) have to contend with write-offs, cost overruns, erosion of profit margin, and late delivery penalties.&nbsp;<figure class="image"><img style="aspect-ratio:16668/18135;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-5-01_1733058838.jpg" width="16668" height="18135"></figure>The way outTo break out of this vicious loop companies need to embrace the flow principles of project management. They need to focus on rapid execution and project closure. The flow principles can be implemented using the following rules:&nbsp;a) Implement a Pull system where material movement is based on execution speed.&nbsp; b) Remove value targets in purchase and focus on full kit (the complete assortment required for execution).&nbsp; c) Limit the number of simultaneously open sites (limit work in progress) within a project based on the availability of supervisors. Strict rules for opening sites linked to site closures have to be enforced. One project should start only when one is complete.&nbsp; d) Resolve issues obstructing flow by implementing a strong system of active daily management.&nbsp;These flow rules ensure that management pays attention to closures. These processes in project management can successfully lower lead-time. Low lead-time inevitably leads to increased rate of turnover. The need to manipulate material or information movement to book sales goes away. The usual skew of sales turnover during quarter-end and year-end is broken as each project is managed to meet its promised lead-time and due date. The working capital requirements and its variability also drop.&nbsp;This new style of project management, which focuses on flow (execution and speedy closure of projects), not only guarantees timely and within-budget completion of projects, it also ensures that working capital is not locked up needlessly. Organisations implementing the flow principles have been able to increase the working capital turns many folds. In the process, they have also succeeded in freeing up 30%-40% of their working capital. Extrapolating this to the industry as a whole, we see that ₹ 30,000 Crs. – ₹ 40,000 Crs. (almost 40% of the total debt of the industry) can be released by simply changing the approach to project management. The impact would be the availability of significant cash for investment in new projects and other avenues of growth. This would benefit not just the industry but the country as well.&nbsp;

High debt plagues infrastructure firms due to working capital demands. Project management practices skewed towards revenue targets end up inflating costs and debt. Embracing Flow Principles, prioritizing rapid execution, and timely closure of projects can release significant working capital and spur industry growth.

Unshackling infrastructure industry

Infrastructure industry in India at crossroadsThe World Economic Forum ranked India 71 out of 144 countries in the 2014 global competitiveness index. The Forum cited poor infrastructure as one of the major reasons for this low rank. It is loud and clear that if India aspires to be a key global player on the economic front, it has to take up infrastructure development on a war footing. Improving infrastructure has been a major challenge for India. Many projects (worth almost ₹18 lakh crores) initiated in the last few years have been are stalled. Chronic delays have worsened working capital crises that infrastructure companies face. Working capital cycles are among the longest in the world; Cash flow statements show high debt and low returns [1]. According to the finance ministry’s mid-year report, private sector infrastructure companies across the board are deep in debt. Therefore, even if the incumbent government initiates new projects or expedites approval, the situation for many of these companies will continue to be dire. They may not be able to source the resources to undertake these projects. Many do not even have earnings to cover interest payments for their current debt. Moreover, the banking sector is increasingly unable to or unwilling to lend more money to this sector [2].Working capital crisis in companiesInfrastructure companies need large amounts of working capital. Hence the high debt. Even companies who excel (who have managed to have positive working capital) use 30-80% of their debt to finance working capital which is high because receivables and inventory are high. This is characteristic of the Infrastructure industry in India. It is also true that, in the recent years, the quantum of receivables (and the money stuck in it) has been growing, as an analysis of the major infrastructure companies reveals. (Refer to figure 1).<figure class="image"><img style="aspect-ratio:16668/12688;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-1-01_1733058780.jpg" width="16668" height="12688"></figure>On the face of it, it looks like this liquidity crisis they face is beyond the control of the infrastructure companies. The truth, however, is that some of these woes are self-inflicted. Companies continue to favor conventional project management styles even though these may not be ideal for curtailing wastage of working capital.&nbsp;The working capital situation of infrastructure companies goes through predictable swings during the year’s quarters of the year. These movements are linked to how the companies recognize turnover. Skewed sales every quarter-end and greater sales skew at the end of the last quarter of the year lead to skewed working capital requirements throughout the year. Most companies’ working capital situation deteriorates dramatically in the first quarter of every year. (Figure 2).&nbsp;<figure class="image"><img style="aspect-ratio:16668/12756;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-2-01_1733058793.jpg" width="16668" height="12756"></figure>The phenomenon of last quarter (or year-end) sales spike is well documented. What is less known is that there are spikes in turnover booked at the end of each quarter as well (Figure 3).<figure class="image"><img style="aspect-ratio:16668/12560;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-3-01_1733058810.jpg" width="16668" height="12560"></figure>Each spike in sales is followed by a spike in working capital and debt. This is because while sales has been booked, and receivables have ballooned, no real money has accrued in the system from operations. The contractor is expected to receive payment after a credit period post billing to client. This payment may be delayed when there are errors or gaps in documentation. The practice of batching customer billing further increases the risk of payment delays, as mistakes in a few bills can lead to the entire batch of receivables being held up. This is more so during quarter end where focus is on internal turnover booking rather than customer billing. While the contractors may cry ‘delay from client end’, a substantial portion of the responsibility for this delay in realizing receivables actually lies with the companies and the way they operate.&nbsp;The turnover biasThe sales spikes and the corresponding working capital spikes are a consequence of ‘turnover bias’ in a company’s approach to project management. Turnover bias comes in when a company manipulates information or material/execution flow to meet quarter-end or year-end numbers (usually to meet targets) in its financial statements. Such practices are rampant in most infrastructure companies, whether ‘execution-intensive’ or ‘material-intensive’. The turnover bias manifests itself in ‘material-intensive’ projects when managers choose to supply high-value items to project sites to meet quarter-end numbers. To do this, multiple work fronts are opened in the project so that more and more high-value material can be supplied and booked as sales. Since supply is usually focused on select items, the full kit of material required to complete a logical work stretch becomes available only in fits and spurts. So, worker gangs move on and have to keep moving back and forth multiple times to complete work. This mode of project management creates a vicious loop of wastage of time and capacity, leading to delays and increased site expenses for the project (Figure 4). This is the same for erection-intensive projects. Here, too, turnover bias prompts the contractor to pick the highest billable jobs first. He/she opens many work fronts to harvest more such opportunities. In the absence of supervisory bandwidth to simultaneously complete all these, the project is inevitably delayed.&nbsp;Over time, clients have come to recognize these patterns in project management. Many have now skewed the payment terms towards erection and project closure. Yet, most turnover-biased infrastructure companies continue their project management practice of ‘cherry-picking’ material to meet quarter-end and year-end turnover targets. Most of the turnover is already booked by the end of the year. The opportunity to cherry-pick reduces dramatically and hence, there is a dip in turnover in the first quarter. Companies go back to cherry-picking to meet their ambitious numbers.&nbsp;<figure class="image"><img style="aspect-ratio:16668/10407;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-4-01_1733058824.jpg" width="16668" height="10407"></figure>The problem aggravates when recession sets in; the working capital cycle spirals out of control. New projects become scarce so do advances which could have been used to bank roll ongoing projects. At the same time, many open projects are at their tail-end or near-closure. A crisis-like situation arises. Money is not available to book significant turnover; even the ability to cherry-pick is gone. Cash-starved and hard-pressed to meet increasing working capital requirements, companies are forced to source expensive short-term debt. Over time, this style of project management drives these companies into a vicious, out-of-control loop of inevitably delayed projects. They find themselves up against angry clients, ever-increasing working capital requirements, and debt (Figure 5). Thus, the companies (already working on wafer-thin margins) have to contend with write-offs, cost overruns, erosion of profit margin, and late delivery penalties.&nbsp;<figure class="image"><img style="aspect-ratio:16668/18135;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-9-img-5-01_1733058838.jpg" width="16668" height="18135"></figure>The way outTo break out of this vicious loop companies need to embrace the flow principles of project management. They need to focus on rapid execution and project closure. The flow principles can be implemented using the following rules:&nbsp;a) Implement a Pull system where material movement is based on execution speed.&nbsp; b) Remove value targets in purchase and focus on full kit (the complete assortment required for execution).&nbsp; c) Limit the number of simultaneously open sites (limit work in progress) within a project based on the availability of supervisors. Strict rules for opening sites linked to site closures have to be enforced. One project should start only when one is complete.&nbsp; d) Resolve issues obstructing flow by implementing a strong system of active daily management.&nbsp;These flow rules ensure that management pays attention to closures. These processes in project management can successfully lower lead-time. Low lead-time inevitably leads to increased rate of turnover. The need to manipulate material or information movement to book sales goes away. The usual skew of sales turnover during quarter-end and year-end is broken as each project is managed to meet its promised lead-time and due date. The working capital requirements and its variability also drop.&nbsp;This new style of project management, which focuses on flow (execution and speedy closure of projects), not only guarantees timely and within-budget completion of projects, it also ensures that working capital is not locked up needlessly. Organisations implementing the flow principles have been able to increase the working capital turns many folds. In the process, they have also succeeded in freeing up 30%-40% of their working capital. Extrapolating this to the industry as a whole, we see that ₹ 30,000 Crs. – ₹ 40,000 Crs. (almost 40% of the total debt of the industry) can be released by simply changing the approach to project management. The impact would be the availability of significant cash for investment in new projects and other avenues of growth. This would benefit not just the industry but the country as well.&nbsp;&nbsp;

A new style of project management that focuses on flow guarantees timely completion of projects and ensures that working capital is not locked up needlessly. Read to know more.

Unshackling infrastructure industry | Vector Consulting Group

Large infrastructure projects have a dubious record – rarely is a project delivered on or before the original planned due date. Analysis of every failed project reveals that the delays are due to uncertainties, apparently, outside managers’ direct locus of control.&nbsp;Is that really the case? Are we sure that no wastage is created due to dysfunctional management practices?&nbsp;The wastage of time and capacity in projects emanates from the following erroneous paradigms of management:Assumption of (In) Adequate ResourcesMost of the large infrastructure projects are actually many independent sub-projects, almost executed in parallel with integration at the end. The managerial and technical bandwidth and even the direct resources (civil labour, fabricators, engineers, etc.) required to manage it, are significant. But, in most cases, there is always a scarcity of resources. But at the same time, to complete a project on time, it is considered imperative to work on all work fronts sooner rather than later. This, in turn, leads to bad multi-tasking in engineering and procurement. Delays creep in, and almost every sub-project is delayed in the pre-erection phase. Civil work invariably starts without complete drawings, leading to further interruptions. At the same time, when many civil work fronts are started simultaneously, progress slows down due to the thin assignment of resources.&nbsp;<figure class="image"><img style="aspect-ratio:1080/1080;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//1_1715232237.png" width="1080" height="1080"></figure>Almost every manager in every key area attributes delays to ‘inadequate resourcing’ and all efforts go into recruiting experienced or skilled resources, which seem ever elusive. However, what gets ignored is the rampant wastage of limited resources due to multi-tasking in various support departments, leading to inadequate preparations before the start of the site job or poor issue resolution due to stretched management bandwidth.&nbsp;Conflict of cost and timeLarge projects invariably involve huge procurement budgets with significant scope for negotiations for a price reduction. Typically, using multiple vendors and aggregating various parts in different modules (or sub-projects) are considered as the best way to reduce the costs of bought-outs. But, at the same time, such aggregations also create a ‘batching effect’ in design and procurement. This leads to a situation where work has to be done in parallel on all sub-projects at the site. In the end, one reaches a stage where commissioning not only has to be done independently for each sub-project but also for the larger integration between sub-projects for going live on entire operations. This invariably leads to rework and cascading delays.&nbsp;<figure class="image"><img style="aspect-ratio:1080/1080;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//2_1715232277.png" width="1080" height="1080"></figure>Management by milestonesIn such projects, it is considered that task detailing and scheduling is good for the overall project. Scheduling of minor tasks is usually done up to level 4 and even level 5. This level of detailing in task scheduling leads to buffering and higher overall lead time. When the task milestones are converted to a deadline, it invariably leads to adding buffers in plans while most of it is wasted in execution. Surprises are revealed only close to milestones when delays are not recoverable. Issue resolution slows down, blame games become rampant, and plans are rescheduled to follow the execution. Execution drives plans rather than the other way out.&nbsp;<figure class="image"><img style="aspect-ratio:1080/1080;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//3_1715232295.png" width="1080" height="1080"></figure>The way outThe <a href="https://www.vectorconsulting.in/en/scientific-system-thinking/">‘Theory of Constraints’</a> way of managing large projects is to first acknowledge the limitations in resourcing and management bandwidth. Once this limitation is accepted, the focus shifts to exploiting the limited bandwidth rather than wasting it by bad multitasking. So, the way ahead is to visualize the large project as a portfolio of small sub-projects and stagger them considering the limitations in resources. The rules of WIP (work in progress) control are put in place in design/procurement with clear prioritization of different modules. Work on a module is activated not based on a planned start date but based on a module completed from allowed WIP. The staggering of work fronts in pre-erection leads to staggered execution in civil.&nbsp;<figure class="image"><img style="aspect-ratio:1080/1080;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//4_1715232335.png" width="1080" height="1080"></figure>The conflict of cost and time is resolved by organizing work for collective simultaneous decision-making. The procurement contracts are designed to get aggregation benefits without having to aggregate and batch work modules.Similarly, daily management becomes the guiding management mantra rather than milestone management. The buffers are shifted from the tasks and aggregated at the project level to provide maximum safety at a point where it is needed the most. &nbsp;

Most large infrastructure projects, which actually are a collection of many independent sub-projects executed in parallel with integration at the end, often get delayed. Conflict is between 'inadequate resources' and balancing cost v/s profit. There is a way to avoid delays without increasing costs.

Improving flow in large infrastructure projects

Large infrastructure projects have a dubious record – rarely is a project delivered on or before the original planned due date. Analysis of every failed project reveals that the delays are due to uncertainties, apparently, outside managers’ direct locus of control.&nbsp;Is that really the case? Are we sure that no wastage is created due to dysfunctional management practices?&nbsp;The wastage of time and capacity in projects emanates from the following erroneous paradigms of management:Assumption of (In) Adequate ResourcesMost of the large infrastructure projects are actually many independent sub-projects, almost executed in parallel with integration at the end. The managerial and technical bandwidth and even the direct resources (civil labour, fabricators, engineers, etc.) required to manage it, are significant. But, in most cases, there is always a scarcity of resources. But at the same time, to complete a project on time, it is considered imperative to work on all work fronts sooner rather than later. This, in turn, leads to bad multi-tasking in engineering and procurement. Delays creep in, and almost every sub-project is delayed in the pre-erection phase. Civil work invariably starts without complete drawings, leading to further interruptions. At the same time, when many civil work fronts are started simultaneously, progress slows down due to the thin assignment of resources.&nbsp;<figure class="image"><img style="aspect-ratio:4000/1558;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-12-img-1_1735539755.png" width="4000" height="1558"></figure>Almost every manager in every key area attributes delays to ‘inadequate resourcing’ and all efforts go into recruiting experienced or skilled resources, which seem ever elusive. However, what gets ignored is the rampant wastage of limited resources due to multi-tasking in various support departments, leading to inadequate preparations before the start of the site job or poor issue resolution due to stretched management bandwidth.&nbsp;Conflict of cost and timeLarge projects invariably involve huge procurement budgets with significant scope for negotiations for a price reduction. Typically, using multiple vendors and aggregating various parts in different modules (or sub-projects) are considered as the best way to reduce the costs of bought-outs. But, at the same time, such aggregations also create a ‘batching effect’ in design and procurement. This leads to a situation where work has to be done in parallel on all sub-projects at the site. In the end, one reaches a stage where commissioning not only has to be done independently for each sub-project but also for the larger integration between sub-projects for going live on entire operations. This invariably leads to rework and cascading delays.&nbsp;<figure class="image"><img style="aspect-ratio:4000/1558;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-12-img-2_1735539768.png" width="4000" height="1558"></figure>Management by milestonesIn such projects, it is considered that task detailing and scheduling is good for the overall project. Scheduling of minor tasks is usually done up to level 4 and even level 5. This level of detailing in task scheduling leads to buffering and higher overall lead time. When the task milestones are converted to a deadline, it invariably leads to adding buffers in plans while most of it is wasted in execution. Surprises are revealed only close to milestones when delays are not recoverable. Issue resolution slows down, blame games become rampant, and plans are rescheduled to follow the execution. Execution drives plans rather than the other way out.&nbsp;<figure class="image"><img style="aspect-ratio:4000/1558;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-12-img-3_1735539779.png" width="4000" height="1558"></figure>The way outThe <a href="https://www.vectorconsulting.in/en/scientific-system-thinking/">‘Theory of Constraints’</a> way of managing large projects is to first acknowledge the limitations in resourcing and management bandwidth. Once this limitation is accepted, the focus shifts to exploiting the limited bandwidth rather than wasting it by bad multitasking. So, the way ahead is to visualize the large project as a portfolio of small sub-projects and stagger them considering the limitations in resources. The rules of WIP (work in progress) control are put in place in design/procurement with clear prioritization of different modules. Work on a module is activated not based on a planned start date but based on a module completed from allowed WIP. The staggering of work fronts in pre-erection leads to staggered execution in civil.&nbsp;<figure class="image"><img style="aspect-ratio:4000/1558;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-12-img-4_1735539786.png" width="4000" height="1558"></figure>The conflict of cost and time is resolved by organising work for collective simultaneous decision-making. The procurement contracts are designed to get aggregation benefits without having to aggregate and batch work modules.Similarly, daily management becomes the guiding management mantra rather than milestone management. The buffers are shifted from the tasks and aggregated at the project level to provide maximum safety at a point where it is needed the most.

A few simple steps can drastically reduce project completion lead time in large infrastructure projects. Read to know more.

Improving Flow in Large Infrastructure Projects | Vector Consulting Group

Knowing WHAT TO improve is as important as knowing WHEN TO improve and WHAT NOT to improve!&nbsp;Last month, I made a trip to 2 different plant locations of a company. Both locations produced the same range of SKUs with almost the same production volume per month. The difference between 2 plants was, however, very striking. One of them was very clean. Machines were well organised and followed the desired material flow. While the other one was very dirty with too much of work in progress almost everywhere. Even before I could ask the plant manager, he offered an explanation. In the cleaner plant, they have implemented Lean techniques of organising plant layouts for better material flow, 5S, etc. and hence plant was cleaner. He promised that the next plant would soon go through the restructuring, and eventually, both the plants would look similar.&nbsp;The plant manager was very proud of his achievements.I asked him about the WIP in both plants; he said it is almost 10 days in both plants. So, your manufacturing lead time is just 10 days? No, he said, it is 4 weeks. There were two contradictions in his statement.&nbsp;01. How can WIP be 10 days while manufacturing lead time be 4 weeks?&nbsp;02. How can both the plants have same WIP?&nbsp;I realised the problem with first one. He was giving me the month-end figures. Further investigations revealed that the actual WIP builds up to a peak in the middle of the month and then flushes out by the month-end. It is almost like a wave, remarked the plant manager. The reason is very simple. Every month-end, the financial figures are reported and there is pressure to maintain a low inventory. So plant managers have figured a way out. They just have to choke the release of raw material to the plant in the last week to get the effect. For raw material (RM) inventory, they just have to prevent the supplies from entering the plant gates. Yes orders in first week will suffer, but as long as due date is measured in month’s horizon, it does not matter. I got the explanation for the inherent contradiction between 10 days WIP and manufacturing lead time of 4 weeks.&nbsp;Why do you have inventory targets? I asked. The management wants strict control on working capital and has made targets for the various inventory categories, he replied. These targets were tracked in the month-end MIS. I went ahead with more questions. Does this month-end choke of WIP do anything to working capital requirements? Does it really reduce or increase the working capital requirements? The plant manager started thinking.&nbsp;In the lunch break, the plant manager thanked me for the realisation that the month-end inventory is not a real reflection of working capital requirements. So, one needs to check the snapshot of inventory at multiple points within a measurement period (to discount the measurement bias) to understand whether one has really reduced the inventory (and hence released working capital) on a sustainable basis.&nbsp;Another important point is that the inventory cannot be reduced just by a management mandate, I added. We would be just playing with numbers and causing more damage. To reduce inventory on a sustainable basis (without the measurement bias), we need to look at the basics of how the plant is being managed. Maybe the answer lies in the second contradiction. Let us look at WIP and lead time in both plants. &nbsp;Are they the same? I asked.&nbsp;&nbsp;They are exactly the same. Lead time is the same 4 weeks, while the month-end WIP is around 10 days; he replied:&nbsp;In the plant with a cellular layout, the inventory was not spread at all the work centres; it was kept after the starting operations and before the closing operations, where lot of space was available. This gave it a cleaner look. Moreover, my visit was during the last week of the month. My next question unsettled him. If the quoted manufacturing lead time and WIP are the same in both the plants, what have you gained by implementing the lean techniques? It seems you have not implemented the Kanban system.&nbsp;Kanban is very difficult to implement in our environment of wide variety, fluctuating loads, replied the manager. Moreover, we have implemented Lean with the objective of reducing costs. The new layouts will help us reduce costs. We can operate with much less people.&nbsp;What happened to all the extra people? I asked. Are they out of company rolls?&nbsp;They have been relocated, he replied. Gradually, over the years, the recruitment will be controlled, and the cost reduction will be realised eventually.&nbsp;It seems your company has strong focus on costs!Yes he replied proudly.I looked at the total costs of the plant; I saw a gradual increase in costs rather than decrease. Some of the increased costs were due to increased expenses of automation, done primarily to reduce direct labour. (I wonder why most <a href="https://www.vectorconsulting.in/en/industries/equipment-manufacturing/">manufacturing companies</a> are obsessed with the reduction of the comparatively inexpensive direct labour rather than the management layer. It could be because of the ‘mathematics’ involved in cost accounting. Direct labour is mostly used to absorb the overheads, which includes management salaries, to determine the product costs).&nbsp;After implementation of most of these automation projects, the labour is not immediately taken out of the rolls of the company. So, the company incurs additional short-term costs, for the automation project to hopefully realise the savings in the long term. These proposals always get cleared with the promise of manpower reduction.&nbsp;But in reality, the labour reduction either does not materialise or does so gradually in the long run. (Moving people from one place to another does not reduce the overall costs).&nbsp;I asked him to put two additional information fields in such automation proposals - the names of people who will be asked to leave the organisation because of the automation and their last date of employment. This will help us understand real payback period, if any, of such investments. The manager added enthusiastically; I expect about half of the proposals will get rejected, if we ask for the above information.&nbsp;While looking at cost elements, I found this company had very high expediting expenses, like high over time, emergency freights. If you guys are so cost focussed, why are you not reducing these obvious wasteful expenses to zero?&nbsp;Well we have lots of problems: absenteeism, supplier issues, quality problems, and capacity issues in our plant. It is very complex. We cannot do away with all the problems, so expediting is going to be there. My next question again unsettled him.&nbsp;Do you see a pattern in these expediting expenses? If I am not mistaken most of it is incurred during the last part of the month?&nbsp;Yes, he said. How did you know? Well the skew of WIP movement shows it, I replied. I have another question for you: if these expediting expenses are because of uncertainties, then it just implies that Lady Luck (or Murphy) is very selective yet consistent. They hit mostly in the later part of the month. I could see the discomfort in the plant manager. Well, you have a point…but.., continued the plant manager, trying hard to explain. I intervened in between. Now don’t you see that this is nothing but a self-inflicted injury?&nbsp;Can you elaborate, requested the manager?What is the percentage of touch time to the overall lead time of a typical order? If it is much less than 10%, it just means that we can actually deal with the uncertainties if we do not waste time (and capacity) in plants. Well, we have some machines with very high setup and the efficiency of some machines is low. We are working on it.&nbsp;I am not referring to the ‘visible’ wastages. I am referring to the biggest wastage of capacity which is hidden from management. The biggest wastage of capacity is producing items which are not immediately required at the cost of something else. It is like urgent items waiting for their turn in front machines which are busy producing items, which eventually are going to wait as WIP or Finished good inventory. This is capacity stealing.&nbsp;Well, I am not sure, if there is capacity stealing in our plants.It is very simple to check: do you have common resources where many different parts can be made? &nbsp; Yes, he replied.&nbsp;What is the choice set available for your work centre managers? How long into the future can they see the orders to pick and choose?&nbsp;Well, they can look at the entire order booking done to date, replied the manager.&nbsp;This means that every work centre can exercise a choice set of what it wants to make. (The first work centre has the entire order book to choose from, while the next one can choose from what has been made by the preceding work centre).&nbsp;Yes he replied.We already know that every work centre has significant choice set in front of the work centres. When there is a large choice set, work centre managers select items to maximise local efficiency without regards to potential waiting time of the produced items. This local efficiency thinking can jeopardise the speed of movement of inventory (the flow). Having a large choice set is one of the primary reasons for capacity stealing. We just validated that the cause (having a large choice set) of capacity stealing exists. Now let us look for the existence of effects.&nbsp;Do you also have, in front of assembly, lot of parts inventory but at same time there are parts which are missing? Yes he replied. Do you have some line items of orders completed much ahead of time, waiting in FG while many others are delayed? This shows that you have resource stealing in your company. As long as resource stealing is predominant in the plant, the overall flow of inventory is poor (inventory moves in waves or gets stuck in many places). In such plants, we cannot hope to get any local improvement initiative (setup reduction, layout changes, quality improvements, etc.) translate into global benefits (reducing lead time, on-time delivery, reduction in total costs, etc.).&nbsp;Please elaborate further, asked the plant manager.&nbsp;Look, if there is capacity stealing, how will it help, if we increase net available capacity of equipment? We are just opening more avenues for more stealing.&nbsp;What about quality improvement initiatives? Can’t we work on it without doing anything about the overall flow, asked the plant manager.&nbsp;Yes, we can work on them. But how do we ensure that the initiatives we are working on are not within the noise of the system? There are many quality problems which crop up once in a while but we need to deal with the ones which are repetitive and at the same time have got significant impact on the order lead time. What is the current mechanism to identify the right quality improvement projects? It is mostly based on where there is a lot of hue and cry. Let me explain further, I offered. When a large part of the order lead time is wasted in waiting time, any small quality problem close to the last work centres looks big, because there is hardly any time left. But such quality problems may be within the noise of the system which could have been managed within the lead time, if there was no wastage of time in the initial work centres. Any resolution of quality problems which is within the noise of the system does nothing to overall delivery capability.&nbsp;Do we always have to select quality projects based on impact on deliveries?&nbsp;Asked the Manager.&nbsp;Look, you have limited management bandwidth. So if there are quality problems where delivery is not impacted while there are others where delivery is impacted, one should anyway choose the latter as the first priority project. Currently it appears to us that most quality problems, if not all, impact deliveries. Let us first prevent the wastage of time and then we can understand which quality problems really impact deliveries. Remember in many situations, rejections are also because some quality assurance steps are missed. This is usually when there is time pressure. So unless we remove this ‘time pressure’ from the system, we cannot expect people to follow all the rules of the game.&nbsp;Remember, many times, management allows such violations to make up for the order delays. Let us look at good housekeeping initiatives like 5S. They are great tools but when flow is bad and expediting is predominant, nobody cares about putting things in right places. Look at the way most shopfloors look by the end of the month.&nbsp;What about 6 sigma projects?&nbsp;Asked the manager.&nbsp;Look the first 6 sigma project one should consider is improving the reliability of overall lead time. When capacity stealing is rampant, lead times will fluctuate widely. Doing any other initiative in this environment does not help the manufacturing setup as a whole.&nbsp;6 sigma starts with mapping the voice of customer. It assumes that the verbalised voice of the customer is the real need of the customer. When we start listening to the voice of the ‘internal customer’ for selecting a project, we have a problem because, in an environment of flow problems, the perceived problem is usually not the real problem. Look at all the problems that you specified when we discussed the reasons behind expediting. You did not tell me that the main problem is wastage of time and capacity in your plant. So your voice does not depict the real problem. You only verbalised the symptoms. When one launches improvement projects listening to these symptoms, not only do we have too many improvement projects, but also many which may be unnecessary for any system-wide improvement.&nbsp;So the first focus of any plant manager is to straighten up the flow problem. From the current situation (of having too much WIP), when you solve the flow problem, you will see lead time drop down with improvement in consistency of the lead time. The system becomes more predictable. Your job is not over. From time to time, uncertainties will create flow problems. Select the ones which are repetitive and have a significant impact on flow. Then, use all the improvement techniques (SMED, 6 Sigma, etc.) to deal with those specific uncertainties to keep on improving the flow. This management approach helps plants not only have lower lead times and a very high on-time delivery but also lower overall costs. But remember the first thing to be done is solve the current flow problem.&nbsp;How can one apply a flow solution, he asked?&nbsp;The biggest problem for flow is the presence of inherent excess capacity in almost all the plants. This excess capacity is misused to produce inventory which is in excess or made ahead of time (at cost of something else). Excess inventory is a clear proof of excess capacity.&nbsp;So one needs a locking mechanism which prevents overproduction or ahead of time production. The locking mechanism should force people to focus on flow and not start jamming the shop floors with ‘ahead of time’ or ‘excess production’. The geniuses of production management have invented such locking mechanisms; like use of space by Henry Ford, Kanban cards by Taichi Ohno and Time Buffer by Eli Goldratt.&nbsp;How do I learn more about them? And which one is applicable to my environment, asked the plant manager?&nbsp;You should read the article ‘Standing on the shoulders of the Giants’ by Eli Goldratt to understand the flow solutions and their applicability in various environments. I realized knowing what to improve is as important as knowing when to improve and what not to improve, remarked the plant manager.&nbsp;

BA Read More

In manufacturing, the journey towards efficiency is often obscured by contradictory practices. This article delves into the challenges faced by a company striving for lean operations, shedding light on the intricacies of inventory management, the paradoxes of cost reduction, and the importance of addressing underlying flow issues before delving into improvement initiatives.

Planning improvement projects

Explore effective strategies for planning improvement projects to optimize plant operations and reduce lead times for enhanced efficiency and profitability.

Planning Improvement Projects | Vector Consulting Group

Managing projects by comparing the planned task duration with execution is a widespread practice. In most cases, it is also one of the parameters in the appraisal of resources working in projects. Despite the widespread use, managers are also aware that the uncertain reality of project environments can cause actual durations to be different. The difference has the potential for erroneous decisions and consequent disharmony in the workplace.&nbsp;According to Error Management Theory, when making decisions under conditions of uncertainty, two kinds of errors can occur – 'false positives', i.e. deciding that a risk or benefit exists when it does not, and ‘false negatives’, i.e. failing to notice a risk or benefit that exists. If managers use the planned durations as a way to evaluate resource performance, there is a chance of managers being unfair because of a ‘false negative’ measurement bias: declaring an efficient person as inefficient. The fact that a person was late as per planned duration does not necessarily mean that he/she was inefficient. Maybe he/she gave his/her super best despite the uncontrollable uncertainties, and his/her special efforts prevented potential additional delays. One cannot deny the presence of 'false negative' measurement bias, but there could be an argument about the extent of bias (or its statistical significance). Well there is no study in public domain evaluating the statistical significance but we can refer to our collective experience. It is not uncommon for most resources with lower grades to blame systemic reasons for their low performance. We cannot just ignore them as 'excuses'. The unfairness of most appraisal systems in the project environment is perhaps one of the 'open' secrets of the project environment. We call it a secret because whenever you confront managers with the problem, many claim that, with adequate experience, they can arrive at the 'right' or the ‘correct’ reference single point task duration. Statistically speaking, the words ‘right’ or 'correct’ estimate sound like oxymoron. With few clarity questions, one can understand that the word ‘accurate’ is usually interchangeably used with the word ‘realistic’. So, what is a realistic estimate? It is a duration considered achievable in a typical environment of uncertainties. This implies that the estimate is adequately protected (or buffered). If most task durations are buffered to protect from uncertainties, then a resource completing work on planned time does not necessarily mean that he/she is efficient. So there could be a second error in decision-making: the ‘false positive’ measurement bias or the inefficient person being declared as efficient.&nbsp;A resource completing a task as per planned duration could also mean that the resource was lucky in execution (no uncertainties hit the task) but expanded work to use all the hidden buffers in the task. Now, how big is this bias? Well, let us refer to our experience again. Most resources grudge the high efficiency ratings of their colleagues. The star grades are almost always debatable.&nbsp;Managers are intuitively aware about these biases. So, in many cases, they rely more on their experience with resources to 'curve fit' the mathematics behind the efficiency ratings.&nbsp;The challenge before us is to evaluate the efficiency of the resources or in other words check if the task was done by the resource in the fastest possible way. How do we know if the task was done in the fastest possible way? One yardstick could be the shortest time ever achieved in the past for the same or similar task. Is this the correct measure? Let us look deeper.&nbsp;The 'shortest time' for any task can be achieved very rarely because a lot of uncertain things that influence the task time have to turn out favourably, all at the same time. This is very rare indeed. Thus, in almost all instances 'as fast as possible' would still be longer than the 'shortest time' ever achieved. Now, if the 'shortest time' ever achieved in the past is the measure of 'as fast as possible', how many times can we claim that the resources completed their tasks 'as fast as possible'? Almost never!!!&nbsp;Let us try a radically different approach.In execution, we just do away with any reference point to planned task duration. Let the resources and the management close their eyes to the task level planned 'targets' along the road to project completion. But when we remove the milestone dates they find themselves in an environment without targets. Then how does one control?&nbsp;A new working culture is needed to suit the new environment. Let us borrow the new work culture from a relay race, where in execution, each runner runs as fast as possible. So we want a relay race culture, wherein execution, resources move 'as fast as possible' or in other words the planned task durations best assumed as zero in execution.&nbsp;But we still need a mechanism to know whether a task was done 'as fast as possible'.&nbsp;We know that we cannot use any benchmark duration because each time level of uncertainties affecting the task is different.&nbsp;So let us add a small caveat to our goal – do your tasks 'as fast as possible – under the given circumstances'. Now, the picture is completely different. 'Given circumstances' will always be different for different projects (although the task may be the same). Managers have a role to play to ensure an environment of enabling circumstances. One of the chronic reasons for delays at the task level is the environment of frequent priority changes, where resources are forced to multitask, while the elapsed time goes up for tasks. The other reason for chronic delays is the lack of preparedness before the start of the task, which in turn leads to resources waiting for specs or decisions or, even worse, frequent rework. As a first step towards ensuring the right circumstances, managers should eliminate bad multitasking and then ensure resources have all necessary preparations ready before the start of a task.&nbsp;Even after ensuring the two steps, there could still be some uncontrollable Murphy, which can cause tasks to be delayed. If that is the case, then the factor which determines the task time is the speed and quality of resolving obstacles that come in the way of task completion. So what is required is a daily review process that will ensure speedy and effective decision-making to resolve obstacles. It should facilitate quick surfacing of obstacles followed by quick removal of the same.&nbsp;If the process ensures that obstacles are immediately highlighted to the appropriate level of management who then takes immediate steps to remove them, we can safely presume that the all systemic reasons are in place to ensure that the task is done 'as fast as possible – under the given circumstances'.&nbsp;If the enabling processes are put in place, one should see a drastic reduction in the elapsed time of tasks, and only after that the problem, if any, of resource efficiency is surfaced. In other words, if there is an issue with individual resource efficiency, it can only be observed after putting the enabling processes in place. When we have all the enabling processes in place, what we now need from resources is a commitment to stay focused on the task till the agreed completion criteria. A manager who is actively involved with the task execution (and hence understands all circumstances associated with the task) knows exactly which resources displayed the desired behaviour. We can have an evaluation and feedback method focused on identifying and encouraging the right enabling behaviours and discouraging the wrong dysfunctional behaviours. Without an easy calculable numeric, the suggested evaluation may not look ‘objective’, but it will not be disputed if the resources are given immediate direct feedback on observation of the behaviour. The method suggested is exactly the way a football coach evaluates the individual performance of the players – only by observing them. The players do not have any individual output-based measures. The only output measure is for the team as a whole.&nbsp;With enabling processes, an effective feedback system and a team goal, we should not only enhance resource productivity but also bring about harmony in the workplace.&nbsp;

In the pursuit of efficiency, evaluating resources based on past benchmarks can be flawed. A revolutionary approach involves a relay race culture, urging resources to move 'as fast as possible' in their tasks and adapting to given circumstances. A supportive working culture and effective daily reviews to swiftly address obstacles can foster a harmonious workplace and boost productivity.

Enabling resource productivity in project environments

A relay race culture, wherein resources complete tasks “as fast as possible” under any given circumstances can ensure that projects are completed in the least possible time. Find out how can we ensure this.

Enabling resource productivity in project environments | Vector Consulting Group

“When are you going to finish this task?”…Every person in the corporate world will relate to the above question as a boss or subordinate. The bosses love questioning while the subordinates don’t quite enjoy answering. The deadline culture is all prevalent in the corporate world. It is, in fact, a primary tool of control of managers over subordinates. Every meeting starts or ends with such flood of commitments. Perceptions on individual performance are built around adherence to the commitments. People who adhere to commitments are seen in a positive light, while others are not.&nbsp;Deadlines have a perceived advantage – it controls the wastage of time. The best proof of this advantage is status of any task which does not have a deadline. Experience tells us such tasks, in many cases, do not get completed at all.However, the problem starts when many commitments are thrust upon a few resources. When faced with an existing load of work and new commitments every day, resources try and ask for a comfortable time while making new commitments. This helps them delay the start of the task to accommodate other urgent tasks than can crop up in the time period. Interestingly, deadline gives important information to resources – by how much time, they can afford to delay the start of the task. The start of the job close to the deadlines leaves less time to manage uncertainties detected while doing the task. In many instances, due to last moment pressure of a deadline, resources skip final checks and hand over incomplete work, which in turn expands work in the downstream departments.&nbsp;The deadlines for a new task, in many situations, are also set without much consideration to existing commitments. This creates conflict of priorities between tasks. Many tasks are equally important. Given this situation, the resources prioritize based on what they think is best or based on decibel levels of the scream of his boss. In either case, the prioritization decisions may not be in the best interest of the company. In some situations, we find resources not attending to the constraints of the company and moving to some other job because of deadline pressures.&nbsp;A company well entrenched in the deadline culture does not have a fixed priority list of tasks for any of its managers even for a day. The day starts with one plan of tasks and ends with another set of tasks, with frequent interruptions in between doing a task. Meetings clash, resources move out of one meeting, in between, to attend others while the working hours expand beyond 8 hours.&nbsp;The assumption that deadlines control the wastage of time seems erroneous.&nbsp;Deadline culture is all about abdication of responsibility by managers. It helps them avoid the trouble of getting into details of issues related to doing the job effectively.So what is the alternative to this unproductive culture which helps no one?Instead of asking just one question on when the job will complete – managers should ask 3 questions for effective execution:<ol><li>When will you start the job? This question will help managers understand the priority list decided by the resources. Many of the tasks up in the priority list may not be of top priority to the organization. A discussion on start date will help resources align priorities, move start of some tasks lower in order. In many cases the decision to reprioritize is with the managers themselves.</li><li>What are the obstacles to working uninterrupted on this task, once it starts? This question tries to surface all sources of interruptions and managers can take decisions, or act as a filter to prevent all interruptions from elongating the task duration.</li><li>What is the remaining duration? This third question should only be asked after the start of the job. The question should be asked frequently. The idea is not to set a deadline again but to understand if there are interruptions to the task. The trend of remaining duration information will provide information on interruptions to the job. The role of managers is again to facilitate effective working.</li></ol>Yes, replacing one easy question with 3 detailed questions requires a change in mindset of managers – a shift from controlling to facilitating. It is also a shift from abdication of responsibility to taking charge for resolving issues affecting the task.So what do we do now with deadlines?Eliminate all deadlines except the one at the end of the project.

'When are you going to finish this task?' Every person in the corporate world relates to this dreaded question of 'deadlines'. They are perceived to control the wastage of time, which in reality does not seem to be true. Asking 3 simple questions can help managers with effective execution.

Deadline culture – does it help?

Explore the impact of deadline culture on productivity and efficiency in corporate settings, and alternatives for effective task management by Vector Consulting Group.

Deadline Culture in Corporate Environments | Vector Consulting Group

Lockdown due to COVID-19 had a significant impact on the auto spares sector. What can the industry do to get back on the growth trajectory?

Shifting gears in auto spare parts business

By implementing "Pull" solutions of manufacturing, auto spare parts companies can guarantee reduced lead time to OEMs and grab more orders post lockdown. Read more.

Shifting Gears in Auto Spare Parts Business | Vector Consulting Group

Post-lockdown, India's agri-equipment sector faced demand surges but grappled with severe supply and operational challenges. This adversity presented an opportunity for agri-equipment companies to make strategic adjustments in their supply chain and make it more resilient.

Revving up the agri-equipment business

Discover how Vector Consulting Group's strategies revived agri-equipment demand post-COVID, overcoming supply chain challenges effectively.

Revving Up The Agri-equipment Business | Vector Consulting Group

IntroductionOver the years, many big FMCG companies of the world have striven to make inroads into India’s expanding markets. New domestic players have also emerged, threatening to capture market share from global giants. Both international players and Indian giants have focused considerable research efforts on understanding the buying patterns of the Indian consumer. Based on the results of these extensive studies, most companies now offer a fairly demarcated basket of products and pack sizes for the country’s urban and rural consumers, respectively.&nbsp;Organisations have also invested significantly in developing a distribution network that can reach these products to their consumers. However, what is interesting to note is that these companies’ direct distribution, while better in urban areas, tends to dissipate as urban becomes urban and rural. Naturally, there is no debate on how direct distribution is superior (better margins, better control over how products are marketed, etc.) to indirect distribution; companies strive continuously to improve it. However, they believe that trying to cover 100% of their market through direct distribution is not a good or practical idea. This is because of two firm beliefs. Firstly, it is assumed that 80% of the sales will accrue from 20% of the country (Pareto principle). So, even though 60-70% of the population lives in rural India, the most companies’ main focus is on urban areas. Secondly, even though there is evidently some potential in rural India, it is considered economically unviable to service the outlying, scattered areas of the country directly. It is believed that indirect distribution is a better method to make inroads to these rural markets – goods will travel across territories via the wholesaler network and assure good enough coverage of that region.&nbsp;<figure class="image"><img style="aspect-ratio:1000/1000;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//1_1712575505.png" width="1000" height="1000"></figure>So, even companies that considered the gold standard in distribution have created a distribution system with some direct distribution but also relies significantly on indirect distribution.&nbsp;How conventional distribution works and the impactCompanies appoint distributors for designated areas. Distributors are expected to service all the retailers in their respective areas. Now, companies have primary sales targets to achieve, so they 'push' material using monthly/quarterly volume-based discounts to these distributors every month (end) to achieve those targets. Distributors who have limited working capital, when ‘pushed’ to keep stock higher than required for immediate consumption, often end up with working capital issues. To release capital, distributors also begin to push stocks to retailers. When burdened with this unwanted stock, retailers delay the payment to distributors. This leads to higher outstanding in the market for the distributor. When their outstanding increases beyond a comfortable level, distributors enter the vicious loop of trying to free their working capital by pushing big volumes at lower margins and passing on part of their schemes and margins to these retailers. The combined pressure of high outstanding and lower retention of margin creates viability issues for some distributors, forcing them to cut their costs and scale by compromising the reach and/or frequency of serving “smaller” retailers.&nbsp;Therefore, in almost every market, there are retailers who are not serviced by the distributors because they do not order in big volumes. These retailers remain underserved or not served at all by company-appointed distributors. This is common, not just in upcountry or rural regions but also in the heart of urban areas where retailers are left out of the distribution network.&nbsp;<figure class="image"><img style="aspect-ratio:1000/1000;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//2_1712575556.png" width="1000" height="1000"></figure>There indeed is a certain level of demand (footfalls) at these small retailers. If a company’s products are not present at these retail outlets, it is sales loss for the company, however small. The summation of such lost opportunity at the vast multitude of small retailers is a huge number, and this is not lost on the managers of FMCG companies. So, to reach these retailers, companies have a system of indirect distribution in place. Companies sell in bulk to big wholesalers at cheaper rates with the intention of getting sales from these unserved areas. Since this indirect network is in place, companies don’t believe that they have any ‘reach’ problem. However, unbeknownst to them, the wholesalers’ modus operandi is creating a bigger problem for the company. &nbsp; &nbsp;&nbsp;The conundrum with wholesalersWholesalers are passive sellers who mostly sell only to those who approach them. Even if they service retailers, they decide<ul><li>Which outlets will they serve.</li><li>Which products will they keep.</li><li>What price will they bill the retailers.&nbsp;</li></ul>This makes the complete system opaque to the company. The company is left with no option but to make more and more effort to please the wholesaler to increase sales and protect market share. So, increasing sales becomes synonymous with better schemes for volume buyers. Better schemes for volume buyers create price disparity, which in turn hurts the company’s direct distribution channel. This reliance on wholesalers creates a vicious loop which is fed by the desire to achieve higher sales numbers in the short term.&nbsp;<figure class="image"><img style="aspect-ratio:1000/1000;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//3_1712575572.png" width="1000" height="1000"></figure>The conventional ‘fix’ and why it does not workA few companies have realized the problems presented by wholesaling and have tried to solve them using one or both of the following approaches to increase the scope of direct distribution.1. The frequency lever It is believed that the cost of serving small orders from small and scattered retailers is very high. Hence, companies try to reduce the frequency with which orders are collected from small retailers. Then, whenever they visit, they can receive bigger orders, which will make up for transportation costs.&nbsp;This practice, by design, forces retailers to keep larger quantities than their immediate need, which blocks working capital. Since small retailers are more constrained by the shortage of cash than the bigger retailers, their natural response to this mode of operation is to limit the product range to protect the working capital and also to find a wholesaler willing to service them more frequently, which would reduce the need to keep higher stock. In both options, the range kept at the retailer’s end gets compromised, depriving the company of reaping the benefits of untapped market potential.&nbsp;<figure class="image"><img style="aspect-ratio:1000/1000;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//4_1712575608.png" width="1000" height="1000"></figure>2. Aggregation: Increasing order volume using sub-stockist Companies sometimes appoint a sub-stockist who would aggregate all orders from smaller retailers and buy one large lot from the appointed distributor. &nbsp;It is expected that this sub-stockist will supply the material to small and scattered outlets, which the appointed distributor does not serve. However, two things happen in this mode of operation.&nbsp;<ul><li>Sub-stockists start billing retailers mapped to appointed distributors creating territory conflicts in the market.</li><li>Sub-stockists bill small parties but, with regular service, sales from these outlets start to grow, which then looks lucrative for the appointed distributor. This also leads to territory conflict between two parties and fuels price war from time –to-time, creating viability issues for both parties. If sub-stockists lose many of their retail counters to distributors, they may drop the business of the company.&nbsp;</li></ul><figure class="image"><img style="aspect-ratio:1000/1000;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//5_1712575625.png" width="1000" height="1000"></figure>In these circumstances, to stay viable, both stockists and distributors are likely to start cherry-picking retailers who give high-volume orders and service only those. Or they may choose to reduce order-taking frequency. In either case, availability at retail counters reduce. Lower availability will lead to lower sales.&nbsp;COVID-19 lockdown – A solar eclipse in distributionIn spite of all its limitations, FMCG companies, along with their whole distribution ecosystem of distributors, retailers, etc, have learned to live with the conventional way of doing business mainly because many others in their industry follow similar practices and suffer from the same problems. However, with COVID-19 and the consequent lockdown of the country, this distribution system got a major shock.&nbsp;Since most large wholesalers/sub-stockists are located in populous COVID-affected metros/Tier-I cities, they found themselves in containment areas and red zones with crippling restrictions on vehicle movements. Markets are open only for limited time slots, and moving stock along the usual route is nearly impossible for these wholesalers/sub-stockists. Most wholesalers have been forced to restrict their sales to walk-in customers (if they can open) or shut shop temporarily. Even during this period of lockdown, demand for FMCG products did not abate since this category mostly constitutes essential items. However, since retailers could no longer rely on their usual wholesalers, they had to turn to the local distributors.&nbsp;Like the long solar eclipse on May 29, 1919 which offered an opportunity, for the first time, to view and validate Einstein’s theory of General Relativity (by shutting down unrelated factors which are difficult to normally control), this forced exit of wholesalers from the distribution network, offered an unprecedented opportunity to understand the true nature of demand distribution across various geographies of India. As discussed, this is not discernible in the normal course due to the effects of wholesaling, discount schemes and heavy skew in distribution systems towards urban, as compared to rural. This unique situation has given companies an opportunity, for the first time, to see pure direct distribution in action. This period can reveal:&nbsp;<ul><li>What is the customer buying pattern (product and territory mix)? Do rural and urban consumers have significantly different product choices? Are urban consumers really more than rural?</li><li>What is the impact of direct distribution on availability in the market (in the absence of indirect distribution)? Are the company’s products now available with more or fewer retailers? Is there a change in the range of a company’s products available at retailers?</li><li>What is the potential of sales that was hidden by indirect distribution? What is the true viability of direct distribution?</li></ul>The results of the research conducted by Vector consultants have been surprising but conclusive:&nbsp;1. Shift in Urban/Rural Sales MixContrary to expectations that the potential of urban consumers is significantly higher than that of rural consumers, it was found that this may not be true or has changed over time. Industry sources have revealed that many product categories, despite the decline in overall volumes largely due to supply issues, saw a marked shift in secondary sales split between urban and rural markets. Pent-up demand for a range of products is now coming to the fore from rural/semi-rural areas. One Sales manager from a leading FMCG in Punjab (the state had strict lockdown measures in place) shared that their rural/urban sales split has changed from 20/80 to 30/70. That is a whopping 10% point jump that occurred in the last few months. Similar trends were reported from UP and Karnataka. With almost 14 million mom –and-pop stores serving essentials to the population, it is not a far-fetched assumption that the sum of all consumption in rural/urban areas will at least equal that of urban markets, if not outweigh it.&nbsp;2. Demand pattern of products is changingWhat is even more surprising is that many of the products in which they are seeing an increasing offtake from the rural and rurban areas are products primarily targeted at the urban consumers! Sources in the FMCG industry point out that categories like UHT milk, breakfast cereals, hand sanitizers and liquid soaps are flying off the shelves.&nbsp;3. Availability at retail counters has made a quantum jumpVector consultants have also observed an increase in product range availability and sales across surveyed stores in Mumbai and Kolkata.Conversations with retailers made the reason for this clear. Earlier, these retailers mostly sourced their products from wholesalers who only carried and sold them a limited range. Now that they were sourcing from distributors, along with the fast movers, all the relevant range is also piggybacking into the store. The fact that there is increased demand for a whole range of products from customers, who are now relying heavily on the local stores because of movement restrictions during lockdown, is helping. However, it is evident that if retailers can be serviced by distributors, product range availability will improve.4. Small and till-date unserved retailers are several times more in number than the existing base of retailers in the direct distribution networkThis new pattern of buying from retailers is also making these counters viable for distributors to serve. Moreover, distributors are trying to serve ALL demand right now as any sales at this time is precious. They have given up the tendency to cherry-pick retailers (aided by the fact that most retailers are ready to pay upfront and schemes/margin cuts are non-existent). This has revealed the vast, underserved number of stores for direct distribution to companies.&nbsp;Much to the surprise of many distributors and FMCG companies, the number of counters has doubled in many areas. This has resulted in these distributors seeing a significant jump in sales, especially in rural areas. Even if we consider that some of this may be because e-commerce and modern trade faltered, FMCG companies still saw sales growth here (and at better margins!). &nbsp;These observations and trends clearly strengthen and validate Vector’s work in enabling clients to exploit the true potential of their sales by making sure that they can effectively tap consumption opportunities at small markets/numeric stores while enhancing their range and shelf-share at large stores and urban centres.The TOC Way of DistributionUsing TOC pull distribution, we solve problems/conflicts using a powerful thinking process which helps us state the core conflict and invalidate erroneous assumptions that have long prevented simple, elegant, and powerful solutions from being adopted.The conflict in distribution is: Cost of Servicing v/s Consumption Opportunity&nbsp;In order to continuously increase sales, stock must be supplied to ALL points of sales. A sale happens NOT when a distributor or wholesaler buys stock from a company. A sale happens when a consumer buys the product. All else is a stock transfer from one location to another!&nbsp;But, in order to minimize the Cost of Sales, companies MUST minimize all variable costs. Fixed costs of distribution cannot be brought down dramatically beyond a point. Variable costs – freight of servicing, for instance, can be minimized. Distributors are trying to accomplish this by servicing large orders or servicing infrequently. It makes business sense! We’ve realized above what limiting direct distribution reach can do to a company’s sales!&nbsp;Therefore, how do we serve ALL retailers (points of sale) without becoming unviable?To break this conflict, we propose a breakthrough solution involving a significant release of a distributor’s working capital from inventory, thus achieving high ROI. This released working capital is deployed to reach out to ALL relevant retailers DIRECTLY without increasing variable costs!&nbsp;The current lockdown and transition period post-lockdown is a unique opportunity like a solar eclipse, which will block all the noise in the distribution network and unveil the true potential of not only direct distribution but also challenge archaic beliefs of sales and marketing managers about product mix, market mix, and the power of the small neighbourhood kirana store.&nbsp;What remains to be seen is who will realize this opportunity and make the correct tactical moves.&nbsp;It will also be interesting to see which set of companies will be brutally honest when they see what unfolds in the coming weeks and then face the mirror about what needs to change. Only these companies will become immune to future pandemics and will be in a position to continuously increase their market share, in good times and more so in “bad times”.&nbsp;&nbsp;

A study was conducted to understand the impact of the absence of wholesaling on the market availability of FMCG products during and immediately after the complete lockdown. The results are surprising but conclusive.

Solar eclipse in sales & distribution

<h5>Introduction</h5>Over the years, many big FMCG companies of the world have striven to make inroads into India’s expanding markets. New domestic players have also emerged, threatening to capture market share from global giants. Both international players and Indian giants have focused considerable research efforts on understanding the buying patterns of the Indian consumer. Based on the results of these extensive studies, most companies now offer a fairly demarcated basket of products and pack sizes for the country’s urban and rural consumers, respectively.&nbsp;Organisations have also invested significantly in developing a distribution network that can reach these products to their consumers. However, what is interesting to note is that these companies’ direct distribution, while better in urban areas, tends to dissipate as urban becomes urban and rural. Naturally, there is no debate on how direct distribution is superior (better margins, better control over how products are marketed, etc.) to indirect distribution; companies strive continuously to improve it. However, they believe that trying to cover 100% of their market through direct distribution is not a good or practical idea. This is because of two firm beliefs. Firstly, it is assumed that 80% of the sales will accrue from 20% of the country (Pareto principle). So, even though 60%-70% of the population lives in rural India, the most companies’ main focus is on urban areas. Secondly, even though there is evidently some potential in rural India, it is considered economically unviable to service the outlying, scattered areas of the country directly. It is believed that indirect distribution is a better method to make inroads to these rural markets – goods will travel across territories via the wholesaler network and assure good enough coverage of that region.&nbsp;<figure class="image"><img style="aspect-ratio:4000/3359;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-5-image-1_1733792231.jpg" width="4000" height="3359"></figure>So, even companies that considered the gold standard in distribution have created a distribution system with some direct distribution but also relies significantly on indirect distribution.&nbsp;<h5>How conventional distribution works and the impact</h5>Companies appoint distributors for designated areas. Distributors are expected to service all the retailers in their respective areas. Now, companies have primary sales targets to achieve, so they 'push' material using monthly/quarterly volume-based discounts to these distributors every month (end) to achieve those targets. Distributors who have limited working capital, when ‘pushed’ to keep stock higher than required for immediate consumption, often end up with working capital issues. To release capital, distributors also begin to push stocks to retailers. When burdened with this unwanted stock, retailers delay the payment to distributors. This leads to higher outstanding in the market for the distributor. When their outstanding increases beyond a comfortable level, distributors enter the vicious loop of trying to free their working capital by pushing big volumes at lower margins and passing on part of their schemes and margins to these retailers. The combined pressure of high outstanding and lower retention of margin creates viability issues for some distributors, forcing them to cut their costs and scale by compromising the reach and/or frequency of serving “smaller” retailers.&nbsp;Therefore, in almost every market, there are retailers who are not serviced by the distributors because they do not order in big volumes. These retailers remain underserved or not served at all by company-appointed distributors. This is common, not just in upcountry or rural regions but also in the heart of urban areas where retailers are left out of the distribution network.<figure class="image"><img style="aspect-ratio:4000/3459;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-5-image-2_1733792249.jpg" width="4000" height="3459"></figure>There indeed is a certain level of demand (footfalls) at these small retailers. If a company’s products are not present at these retail outlets, it is sales loss for the company, however small. The summation of such lost opportunity at the vast multitude of small retailers is a huge number, and this is not lost on the managers of FMCG companies. So, to reach these retailers, companies have a system of indirect distribution in place. Companies sell in bulk to big wholesalers at cheaper rates with the intention of getting sales from these unserved areas. Since this indirect network is in place, companies don’t believe that they have any ‘reach’ problem. However, unbeknownst to them, the wholesalers’ modus operandi is creating a bigger problem for the company. &nbsp; &nbsp;&nbsp;<h5>The conundrum with wholesalers</h5>Wholesalers are passive sellers who mostly sell only to those who approach them. Even if they service retailers, they decide<ul><li>Which outlets will they serve.</li><li>Which products will they keep.</li><li>What price will they bill the retailers.&nbsp;</li></ul>This makes the complete system opaque to the company. The company is left with no option but to make more and more effort to please the wholesaler to increase sales and protect market share. So, increasing sales becomes synonymous with better schemes for volume buyers. Better schemes for volume buyers create price disparity, which in turn hurts the company’s direct distribution channel. This reliance on wholesalers creates a vicious loop which is fed by the desire to achieve higher sales numbers in the short term.&nbsp;<figure class="image"><img style="aspect-ratio:4000/4319;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-5-image-3_1733792265.jpg" width="4000" height="4319"></figure><h5>The conventional ‘fix’ and why it does not work</h5>A few companies have realised the problems presented by wholesaling and have tried to solve them using one or both of the following approaches to increase the scope of direct distribution.1. The frequency lever It is believed that the cost of serving small orders from small and scattered retailers is very high. Hence, companies try to reduce the frequency with which orders are collected from small retailers. Then, whenever they visit, they can receive bigger orders, which will make up for transportation costs.&nbsp;This practice, by design, forces retailers to keep larger quantities than their immediate need, which blocks working capital. Since small retailers are more constrained by the shortage of cash than the bigger retailers, their natural response to this mode of operation is to limit the product range to protect the working capital and also to find a wholesaler willing to service them more frequently, which would reduce the need to keep higher stock. In both options, the range kept at the retailer’s end gets compromised, depriving the company of reaping the benefits of untapped market potential.&nbsp;<figure class="image"><img style="aspect-ratio:4000/4349;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-5-image-4_1733792281.jpg" width="4000" height="4349"></figure>2. Aggregation: Increasing order volume using sub-stockist Companies sometimes appoint a sub-stockist who would aggregate all orders from smaller retailers and buy one large lot from the appointed distributor. &nbsp;It is expected that this sub-stockist will supply the material to small and scattered outlets, which the appointed distributor does not serve. However, two things happen in this mode of operation.&nbsp;<ul><li>Sub-stockists start billing retailers mapped to appointed distributors creating territory conflicts in the market.</li><li>Sub-stockists bill small parties but, with regular service, sales from these outlets start to grow, which then looks lucrative for the appointed distributor. This also leads to territory conflict between two parties and fuels price war from time –to-time, creating viability issues for both parties. If sub-stockists lose many of their retail counters to distributors, they may drop the business of the company.&nbsp;</li></ul><figure class="image"><img style="aspect-ratio:4000/4619;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-5-image-5_1733792291.jpg" width="4000" height="4619"></figure>In these circumstances, to stay viable, both stockists and distributors are likely to start cherry-picking retailers who give high-volume orders and service only those. Or they may choose to reduce order-taking frequency. In either case, availability at retail counters reduce. Lower availability will lead to lower sales.&nbsp;<h5>COVID-19 lockdown – A solar eclipse in distribution</h5>In spite of all its limitations, FMCG companies, along with their whole distribution ecosystem of distributors, retailers, etc, have learned to live with the conventional way of doing business mainly because many others in their industry follow similar practices and suffer from the same problems. However, with COVID-19 and the consequent lockdown of the country, this distribution system got a major shock.&nbsp;Since most large wholesalers/sub-stockists are located in populous COVID-affected metros/Tier-I cities, they found themselves in containment areas and red zones with crippling restrictions on vehicle movements. Markets are open only for limited time slots, and moving stock along the usual route is nearly impossible for these wholesalers/sub-stockists. Most wholesalers have been forced to restrict their sales to walk-in customers (if they can open) or shut shop temporarily. Even during this period of lockdown, demand for FMCG products did not abate since this category mostly constitutes essential items. However, since retailers could no longer rely on their usual wholesalers, they had to turn to the local distributors.&nbsp;Like the long solar eclipse on May 29, 1919 which offered an opportunity, for the first time, to view and validate Einstein’s theory of General Relativity (by shutting down unrelated factors which are difficult to normally control), this forced exit of wholesalers from the distribution network, offered an unprecedented opportunity to understand the true nature of demand distribution across various geographies of India. As discussed, this is not discernible in the normal course due to the effects of wholesaling, discount schemes and heavy skew in distribution systems towards urban, as compared to rural. This unique situation has given companies an opportunity, for the first time, to see pure direct distribution in action. This period can reveal:&nbsp;<ul><li>What is the customer buying pattern (product and territory mix)? Do rural and urban consumers have significantly different product choices? Are urban consumers really more than rural?</li><li>What is the impact of direct distribution on availability in the market (in the absence of indirect distribution)? Are the company’s products now available with more or fewer retailers? Is there a change in the range of a company’s products available at retailers?</li><li>What is the potential of sales that was hidden by indirect distribution? What is the true viability of direct distribution?</li></ul>The results of the research conducted by Vector consultants have been surprising but conclusive:&nbsp;1. Shift in Urban/Rural Sales MixContrary to expectations that the potential of urban consumers is significantly higher than that of rural consumers, it was found that this may not be true or has changed over time. Industry sources have revealed that many product categories, despite the decline in overall volumes largely due to supply issues, saw a marked shift in secondary sales split between urban and rural markets. Pent-up demand for a range of products is now coming to the fore from rural/semi-rural areas. One Sales manager from a leading FMCG in Punjab (the state had strict lockdown measures in place) shared that their rural/urban sales split has changed from 20/80 to 30/70. That is a whopping 10% point jump that occurred in the last few months. Similar trends were reported from UP and Karnataka. With almost 14 million mom –and-pop stores serving essentials to the population, it is not a far-fetched assumption that the sum of all consumption in rural/urban areas will at least equal that of urban markets, if not outweigh it.&nbsp;2. Demand pattern of products is changingWhat is even more surprising is that many of the products in which they are seeing an increasing offtake from the rural and rurban areas are products primarily targeted at the urban consumers! Sources in the FMCG industry point out that categories like UHT milk, breakfast cereals, hand sanitizers and liquid soaps are flying off the shelves.&nbsp;3. Availability at retail counters has made a quantum jumpVector consultants have also observed an increase in product range availability and sales across surveyed stores in Mumbai and Kolkata.Conversations with retailers made the reason for this clear. Earlier, these retailers mostly sourced their products from wholesalers who only carried and sold them a limited range. Now that they were sourcing from distributors, along with the fast movers, all the relevant range is also piggybacking into the store. The fact that there is increased demand for a whole range of products from customers, who are now relying heavily on the local stores because of movement restrictions during lockdown, is helping. However, it is evident that if retailers can be serviced by distributors, product range availability will improve.4. Small and till-date unserved retailers are several times more in number than the existing base of retailers in the direct distribution networkThis new pattern of buying from retailers is also making these counters viable for distributors to serve. Moreover, distributors are trying to serve ALL demand right now as any sales at this time is precious. They have given up the tendency to cherry-pick retailers (aided by the fact that most retailers are ready to pay upfront and schemes/margin cuts are non-existent). This has revealed the vast, underserved number of stores for direct distribution to companies.&nbsp;Much to the surprise of many distributors and FMCG companies, the number of counters has doubled in many areas. This has resulted in these distributors seeing a significant jump in sales, especially in rural areas. Even if we consider that some of this may be because e-commerce and modern trade faltered, FMCG companies still saw sales growth here (and at better margins!). &nbsp;These observations and trends clearly strengthen and validate Vector’s work in enabling clients to exploit the true potential of their sales by making sure that they can effectively tap consumption opportunities at small markets/numeric stores while enhancing their range and shelf-share at large stores and urban centres.<h5>The pull-based distribution model</h5>Using the pull distribution, we solve problems/conflicts using a powerful thinking process which helps us state the core conflict and invalidate erroneous assumptions that have long prevented simple, elegant, and powerful solutions from being adopted.The conflict in distribution is: Cost of Servicing v/s Consumption Opportunity&nbsp;In order to continuously increase sales, stock must be supplied to ALL points of sales. A sale happens NOT when a distributor or wholesaler buys stock from a company. A sale happens when a consumer buys the product. All else is a stock transfer from one location to another!&nbsp;But, in order to minimise the Cost of Sales, companies MUST minimise all variable costs. Fixed costs of distribution cannot be brought down dramatically beyond a point. Variable costs – freight of servicing, for instance, can be minimized. Distributors are trying to accomplish this by servicing large orders or servicing infrequently. It makes business sense! We’ve realised above what limiting direct distribution reach can do to a company’s sales!&nbsp;Therefore, how do we serve ALL retailers (points of sale) without becoming unviable?To break this conflict, we propose a breakthrough solution involving a significant release of a distributor’s working capital from inventory, thus achieving high ROI. This released working capital is deployed to reach out to ALL relevant retailers DIRECTLY without increasing variable costs!&nbsp;The current lockdown and transition period post-lockdown is a unique opportunity like a solar eclipse, which will block all the noise in the distribution network and unveil the true potential of not only direct distribution but also challenge archaic beliefs of sales and marketing managers about product mix, market mix, and the power of the small neighbourhood Kirana store.&nbsp;What remains to be seen is who will realise this opportunity and make the correct tactical moves.&nbsp;It will also be interesting to see which set of companies will be brutally honest when they see what unfolds in the coming weeks and then face the mirror about what needs to change. Only these companies will become immune to future pandemics and will be in a position to continuously increase their market share, in good times and more so in “bad times”.&nbsp;&nbsp;

Vector Consulting Group - Research and Publications: COVID-19 pandemic gave FMCG companies an opportunity to relook at their distribution models? Know more.

Solar Eclipse in Sales & Distribution | Vector Consulting Group

&nbsp;The Dilemma of the CEO of a Real Estate MajorMr. Mahindra Kumar, CEO of Blu Homes, a major residential real estate company in India, was facing a dilemma. He was under pressure to quickly improve the internal rate of return (IRR) of his projects. The problem was “how”.&nbsp;Even before the pandemic dealt a painful blow, the pressure on the real estate sector was evident to all [1]. Post-2013, sales of Blu Homes had stalled, unsold inventory had piled up, and the Internal Rate of Return (IRR) from the projects had dropped from 18%-21% realised between 2007-11 to 13%-17%; moreover, the debt burden had more than trebled over the same period.&nbsp;The good news, however, was that his company had emerged whole from the COVID phase. Much of the inventory could be sold even during this time because of government subsidy support [2]. Post-COVID the company was now achieving YoY sales growth of 68%. Over the past two years Tier 2 and Tier 3 cities had emerged as hot spots for them, and they were setting unprecedented sales benchmarks.&nbsp;Despite the global economic slowdown, this positive momentum was expected to continue, and the sector is projected to grow to one trillion US dollars by 2030 (see figure below [3]).&nbsp;<figure class="image"><img style="aspect-ratio:16668/11858;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-1-01_1732343241.jpg" width="16668" height="11858"></figure>What more, there was a prevailing demand-supply gap in all segments (see figure below [4]).&nbsp;<figure class="image"><img style="aspect-ratio:16668/12757;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-1_1732343548.jpg" width="16668" height="12757"></figure>Naturally, the board of Blu Homes saw this as a clear opportunity to mop up this demand, recoup the business, put its profits on a growth trajectory and offer healthier returns. The threat was always there that if the company continued to only make IRR to the tune of 13-17% in its projects, investors might pull out. So, the pressure was now on Mr. Mahindra Kumar to ensure a significant jump in IRR. However, he was not sure how. For improving IRR, it was not enough to improve sales; in addition, Blu Homes must ensure that, while delivering each project, they&nbsp;1. Reduce costs and improve margins&nbsp;2. Improve cash flow by faster billing&nbsp;The key to both of these is primarily the timely completion of projects. If projects are finished on time as planned, customers can be billed faster, and un-budgeted expenses due to project elongation can be avoided.&nbsp;The irony was that Blu Homes has ALWAYS delivered projects on or before the promised deadlines (protected by the Real Estate Regulatory Authority - RERA). However, the company rarely met the targeted IRR in these projects, even during the ‘good times’. And this was not only true for Blu Homes - it is an industry-wide phenomenon!&nbsp;To understand why this happens, one needs to understand how companies in this unique environment typically function.&nbsp;The typical way of project management in a real estate projectProjects in the Real Estate industry in India start off with three due/completion dates! Strange, but true. With the government bringing in RERA laws that impose stringent penalties on developers for delays in finishing projects, the industry has come up with RERA due dates, which are significantly buffered to avoid being penalised [5]. Another due date is the internally budgeted due date, which, if met, meets the IRR targets set by the developer. The third due date, which is ‘informally’ promised to end customers, is somewhere in between these two.&nbsp;So, why does the industry use these 3 due dates? The reason is that real estate is an industry plagued with project delays and unfulfilled promises. Recent research has indicated that, despite conservative and buffered dates, as many as 500,000 Homes worth Rs. 4.48 lakh crores are stuck in just seven micro markets of India [6].&nbsp;<figure class="image"><img style="aspect-ratio:16668/18669;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-2-01-01_1732343964.jpg" width="16668" height="18669"></figure>With such delays being the norm rather than the exception, developers know that they have to buffer any external commitment in order to maintain their reputation and gain or maintain market share.Why should there be delays, one may ask?If you ask any developer about delays, you will be met with a laundry list of reasons, most of them pointing to some external agency and hence, unavoidable. Interestingly, each of the agencies involved has its own reasons related to the developer or other agencies.&nbsp;<figure class="image"><img style="aspect-ratio:16668/15645;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-3-01-01-01_1732343993.jpg" width="16668" height="15645"></figure>However, delays in most real estate projects follow an interesting storyline.The real cause of delays in real estate projectsThe lifecycle of a typical real estate project can be categorized into three key stages&nbsp;1. Pre-Construction: This stage involves the completion of all activities required before the commercial launch of the project, including:&nbsp;<ul><li>Business case approvals and land deal finalization </li><li>Detailed design completion and issuance of goods for construction drawings to start construction </li><li>Project RERA approval and other necessary statutory approvals to start construction </li><li>Set-up of sales office/mock-up units for customer visits&nbsp;</li></ul>2. Core &amp; Shell: This stage involves the construction of buildings’ RCC frame and internal partition walls for the units. Typically, most developers engage a dedicated contractor to work on the Core and Shell.&nbsp;3. Finishing: This includes all work till the final handover of units to end customers. Plastering, waterproofing, flooring/tiling, electrical works, firefighting equipment installation, plumbing, painting, putting up doors &amp; windows, railings etc. are typical activities executed inside the residential units, in the corridors, common areas, shafts and utilities. Assessing delays in different stages of the project indicates that severe delays start to manifest in the finishing stage of the project.&nbsp;<figure class="image"><img style="aspect-ratio:16668/13746;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-4-01-01-01_1732344963.jpg" width="16668" height="13746"></figure>While Core &amp; Shell works are typically executed by a single specialized agency/contractor, what differentiates the finishing stage from the upstream stages are the following facts:&nbsp;<ul><li>Multiple specialised agencies: Finishing work needs intervention of multiple specialised agencies/sub-contractors in the limited space of a floor/apartment/unit </li><li>Inter-dependent activities: Activities to be performed by each specialised agency are dependent on clean front hand-over by another specialised agency or agencies. Moreover, technical dependencies are such that most finishing agencies have to visit a work-front multiple times. For e.g., the plastering contractor completes the plaster for maximum wall area in the first pass but re-visits the wall for final plastering after floor skirting and door/windows installation is completed </li><li>Volume-based contracts: For all specialised agencies, billing is based on the volume of work executed with a small percentage withheld as retention amount and linked to final completion and handover to the developer.&nbsp;</li></ul>Given the above realities of the real estate environment, agencies cherry-pick high billing activities in each work front in order to maximise billing to support its working capital requirements. Often, high effort and low billing value activities are missed out/delayed, leading to unclean front handover [8] to the next specialised agencies. Downstream agencies, despite unclean handovers, will start working on the front in order to utilise their resources and maximise their billing.&nbsp;However, given the unclean handovers, agencies face multiple interruptions in completing the fronts. And when there are interruptions, two things happen: a) it increases the overall lead time for completion of that front and creates a higher waiting time for the next agency to start work and b) the labour (of the agency facing interruption) may become idle. So, in order to utilise their resources fully, often the contractors are forced to start working on whatever is available wherever it is available (preferably with high billing), again with partial preparation. When this behaviour cascades across all processes involved, we end up having multiple contractors engaged in the same work area without having a clean handover six from one agency to the next. This chaotic way of functioning results, many times, in quality compromise.&nbsp;Inevitably, these quality problems come back to bite you in the form of snag lists or punch points. Now, contractors are reluctant to mobilise manpower for such activities. As mentioned earlier, they tend to prefer higher billing activities in new work fronts over handling the snag list, which may require high labour hours but yield lower billing. Therefore, very often, the company has to persuade the contractors by agreeing to higher hourly rates to get these snag list points closed. In this process, not only does the developer end up paying twice for the same work, but also suffers as the elapsed time for each work front closure elongates.&nbsp;<figure class="image"><img style="aspect-ratio:16668/19082;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-5-01-1-01-01_1732344935.jpg" width="16668" height="19082"></figure>The way outAs we have seen, when incomplete work fronts are handed over to the next stage, this leads to wastages in the form of rework, cost increases and leads to significant delays. Therefore, the only way to break out of this vicious loop is to make sure that clean handovers happen between two functions/contactors/agencies at all times. Since the pressure to maximise billing forces incomplete handovers, the only solution is for every agency to complete all their activities as per plan or earlier (i.e. in the shortest possible time). The question is, how do we ensure this?&nbsp;To resolve this conundrum, let’s examine, the key elements required to execute the project in the shortest possible time. The answer is quite intuitive. If the project has all the material needed, tools, clearances etc required to complete it (a full kit) and is resourced with adequate manpower in the right mix and quantity, work can progress without any interruptions or stoppages. No surprises here, right?&nbsp;Now, if we wait for the full kit to be formed for the entire project or a large phase of the project before starting it, the time to complete the full kit will be so significant that it will surely delay the project and be extremely wasteful in terms of resources. On the other hand, if we plan for full kitting of too small a phase of the project, this will lead to chaos as the work will progress faster than the time to arrange the full kit for that phase. Consequently, the pressure of time will again force the next phase to start without the completion of an earlier phase-back to the vicious loop.&nbsp;The answer lies somewhere in between. Based on project size and type, a part of the project, a ‘work bundle’ has to be identified in such a way that allows for adequate time to arrange the full kit and at the same time allows fast/clean handover to the next function. What next?&nbsp;The flow modelFor these work bundles to be completed quickly and in order to ensure clean handovers to happen between every stage a flow model needs to be used. What is a flow model? Think of a manufacturing shop, where there is input of raw materials and this input flows through the shopfloor, being processed at different workstations, and comes out as finished goods. All this happens in a rhythm. The flow model in real estate project management mimics this – a work bundle flows in, is processed by resources and a completed work bundle is passed on to the next set of resources. When all the work bundles flow through and are completed one after the other, the project gets completed.&nbsp;For this flow to work on a project site, it requires a set of execution rules to be defined. However, before doing that, some understanding is needed with respect to technical dependencies between agencies and the amount of natural interruption [9] happening in the course of the project. Functions [10] that are executed by various agencies can be classified into two types. One type, called the Primary function, has a high touch time for tasks and low natural interruptions. The second called the Secondary function, has low touch time and high natural interruptions. A combination of primary and secondary functions (and the resources responsible for completing these) is termed a Cluster. The flow line planned in any real estate project will consist of several such clusters laid out in a sequence, based on their technical dependencies.In order to ensure fast and clean completion, a work bundle should be taken up for working by a cluster only if the entry criteria, consisting of full kit, maximum resourcing, closure of earlier work bundle and any other pre-defined item, is met. Similarly, a work bundle is considered closed only if a pre-defined exit criteria is met. Further, the number of work bundles to be taken up depends on resourcing- i.e. the WIP of work fronts or work bundles is limited based on available capacity to prevent bad multi-tasking and consequent task time elongation. Once started, a cluster can go to the next work bundle only after completing one work bundle from the current WIP. This is called the One Out-One In rule in project management. In order to ensure that work does not start without full kits, a bank of full kits for subsequent work bundles must be made ready for a cluster to work on.&nbsp;Once these rules are in place, the flow model will work, in rhythm, and the project will progress according to this rhythm. The only thing that can upset this rhythm is the delay in resolving issues/problems that occur during execution. Generally, an issue remains unresolved only if it requires cross-functional intervention or escalation to someone with higher authority. If resolution does not happen quickly, the elapsed time to close work bundles will increase and that will in turn result in violations of all the flow model rules. Subsequently, the entire system may disintegrate into the earlier chaos.&nbsp;To make sure issues are resolved quickly and protect the flow of work bundles, a system of High Frequency Management (HFM) can be fixed for all stakeholders across or within functions, or hierarchies. If these HFM meetings are at a set pre-defined time and conducted at rhythmic intervals, it will allow stakeholders to be available to resolve issues quickly.&nbsp;When resources work on restricted work fronts, without being idle, with full-kit and when any issue that crops up during the execution of work is being resolved in an aggressively fast manner, the flow of work rapidly increases. With clean handovers, rework and snag lists also reduce significantly.&nbsp;The overall resultThe CEO of Blu Homes is a happy man these days. After implementing the flow model, lead times to handover possession to customers had dramatically come down by about 25 to 30%. Importantly, the company is now able to consistently adhere to budgeted due dates in its projects or finish earlier. This led to a dramatic improvement in IRR to the tune of 4%-6.5% in their projects.&nbsp;The table below illustrates how IRR improves significantly with just this reduction in lead time.<figure class="image"><img style="aspect-ratio:16668/16527;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-6-01-01_1732344916.jpg" width="16668" height="16527"></figure>As seen in the above example, most Blu Homes projects are of around 3-year (34-month) duration. As can be seen in the table, compared to a typical project execution of theirs from the past, projects in which the Flow Model of project management is employed show significant gains in time at major milestones. With the implementation of the flow line and a full kit process in central functions, to align material, drawing and approval requirements for the sites, projects could gain around three months compared to their earlier way of working while completing the core and shell activities. A further gain of another quarter or so could be made by implementing entry-exit criteria for every agency to ensure a clean handover during the pre-finishing and finishing activity. This was because the number of iterations required by an agency to complete a work bundle came down. Similar benefits of early finish by about a quarter were realized during the finishing phase as well.&nbsp;In addition to protecting the company's profitability, the Flow Model of project management also ensures that the working capital turns of the contractors and vendors improve a win-win-win scenario. However, what thrilled Mr. Mahindra Kumar most was that the new way of project execution yielded not only operational and financial benefits but also simultaneously de-stressed project execution for his whole team and helped build a company environment where work-life balance was good, and employee satisfaction was reflected in the significantly reduced attrition rate.&nbsp;

<h4>Steps to ensure excellent IRR in real estate projects</h4>

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The article outlines steps to boost IRR in real estate projects by addressing delays, implementing the flow model, ensuring clean handovers, and achieving faster completion, improving profitability and employee satisfaction.&nbsp;Problem: Real estate projects often fail to achieve targeted IRR due to delays, particularly in the finishing stage. These delays stem from unclean handovers between contractors, resource interruptions, and rework, leading to increased costs, extended timelines, and lower profitability.&nbsp;Solution: Implement a flow model with clearly defined work bundles, full kit readiness, and entry-exit criteria for clean handovers between contractors by limiting work-in-progress to available capacity, enforce a "One Out-One In" rule, and resolve execution issues swiftly through High Frequency Management (HFM).&nbsp;Benefits: The flow model reduces project lead times by 25%-30%, improves IRR by 4%-6.5%, minimises rework and snag lists, enhances contractor cash flows, and fosters better employee satisfaction with reduced stress and attrition.

Key Takeaways

Using the Flow Model of Project management in residential real estate projects, companies can increase IRR from 17% -21%.

Steps to ensure excellent IRR in real estate projects

&nbsp;The Dilemma of the CEO of a Real Estate MajorMr. Mahindra Kumar, CEO of Blu Homes, a major residential real estate company in India, was facing a dilemma. He was under pressure to quickly improve the internal rate of return (IRR) of his projects. The problem was “how”.&nbsp;Even before the pandemic dealt a painful blow, the pressure on the real estate sector was evident to all [1]. Post-2013, sales of Blu Homes had stalled, unsold inventory had piled up, and the Internal Rate of Return (IRR) from the projects had dropped from 18%-21% realised between 2007-11 to 13%-17%; moreover, the debt burden had more than trebled over the same period.&nbsp;The good news, however, was that his company had emerged whole from the COVID phase. Much of the inventory could be sold even during this time because of government subsidy support [2]. Post-COVID the company was now achieving YoY sales growth of 68%. Over the past two years Tier 2 and Tier 3 cities had emerged as hot spots for them, and they were setting unprecedented sales benchmarks.&nbsp;Despite the global economic slowdown, this positive momentum was expected to continue, and the sector is projected to grow to one trillion US dollars by 2030 (see figure below [3]).&nbsp;<figure class="image"><img style="aspect-ratio:16668/11858;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-1-01_1732343241.jpg" width="16668" height="11858"></figure>What more, there was a prevailing demand-supply gap in all segments (see figure below [4]).&nbsp;<figure class="image"><img style="aspect-ratio:16668/12757;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-1_1732343548.jpg" width="16668" height="12757"></figure>Naturally, the board of Blu Homes saw this as a clear opportunity to mop up this demand, recoup the business, put its profits on a growth trajectory and offer healthier returns. The threat was always there that if the company continued to only make IRR to the tune of 13-17% in its projects, investors might pull out. So, the pressure was now on Mr. Mahindra Kumar to ensure a significant jump in IRR. However, he was not sure how. For improving IRR, it was not enough to improve sales; in addition, Blu Homes must ensure that, while delivering each project, they&nbsp;1. Reduce costs and improve margins&nbsp;2. Improve cash flow by faster billing&nbsp;The key to both of these is primarily the timely completion of projects. If projects are finished on time as planned, customers can be billed faster, and un-budgeted expenses due to project elongation can be avoided.&nbsp;The irony was that Blu Homes has ALWAYS delivered projects on or before the promised deadlines (protected by the Real Estate Regulatory Authority - RERA). However, the company rarely met the targeted IRR in these projects, even during the ‘good times’. And this was not only true for Blu Homes - it is an industry-wide phenomenon!&nbsp;To understand why this happens, one needs to understand how companies in this unique environment typically function.&nbsp;The typical way of project management in a real estate projectProjects in the Real Estate industry in India start off with three due/completion dates! Strange, but true. With the government bringing in RERA laws that impose stringent penalties on developers for delays in finishing projects, the industry has come up with RERA due dates, which are significantly buffered to avoid being penalised [5]. Another due date is the internally budgeted due date, which, if met, meets the IRR targets set by the developer. The third due date, which is ‘informally’ promised to end customers, is somewhere in between these two.&nbsp;So, why does the industry use these 3 due dates? The reason is that real estate is an industry plagued with project delays and unfulfilled promises. Recent research has indicated that, despite conservative and buffered dates, as many as 500,000 Homes worth Rs. 4.48 lakh crores are stuck in just seven micro markets of India [6].&nbsp;<figure class="image"><img style="aspect-ratio:16668/18669;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-2-01-01_1732343964.jpg" width="16668" height="18669"></figure>With such delays being the norm rather than the exception, developers know that they have to buffer any external commitment in order to maintain their reputation and gain or maintain market share.Why should there be delays, one may ask?If you ask any developer about delays, you will be met with a laundry list of reasons, most of them pointing to some external agency and hence, unavoidable. Interestingly, each of the agencies involved has its own reasons related to the developer or other agencies.&nbsp;<figure class="image"><img style="aspect-ratio:16668/15645;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-3-01-01-01_1732343993.jpg" width="16668" height="15645"></figure>However, delays in most real estate projects follow an interesting storyline.The real cause of delays in real estate projectsThe lifecycle of a typical real estate project can be categorized into three key stages&nbsp;1. Pre-Construction: This stage involves the completion of all activities required before the commercial launch of the project, including:&nbsp;<ul><li>Business case approvals and land deal finalization </li><li>Detailed design completion and issuance of goods for construction drawings to start construction </li><li>Project RERA approval and other necessary statutory approvals to start construction </li><li>Set-up of sales office/mock-up units for customer visits&nbsp;</li></ul>2. Core &amp; Shell: This stage involves the construction of buildings’ RCC frame and internal partition walls for the units. Typically, most developers engage a dedicated contractor to work on the Core and Shell.&nbsp;3. Finishing: This includes all work till the final handover of units to end customers. Plastering, waterproofing, flooring/tiling, electrical works, firefighting equipment installation, plumbing, painting, putting up doors &amp; windows, railings etc. are typical activities executed inside the residential units, in the corridors, common areas, shafts and utilities. Assessing delays in different stages of the project indicates that severe delays start to manifest in the finishing stage of the project.&nbsp;<figure class="image"><img style="aspect-ratio:16668/13746;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-4-01-01-01_1732344963.jpg" width="16668" height="13746"></figure>While Core &amp; Shell works are typically executed by a single specialized agency/contractor, what differentiates the finishing stage from the upstream stages are the following facts:&nbsp;<ul><li>Multiple specialised agencies: Finishing work needs intervention of multiple specialised agencies/sub-contractors in the limited space of a floor/apartment/unit </li><li>Inter-dependent activities: Activities to be performed by each specialised agency are dependent on clean front hand-over by another specialised agency or agencies. Moreover, technical dependencies are such that most finishing agencies have to visit a work-front multiple times. For e.g., the plastering contractor completes the plaster for maximum wall area in the first pass but re-visits the wall for final plastering after floor skirting and door/windows installation is completed </li><li>Volume-based contracts: For all specialised agencies, billing is based on the volume of work executed with a small percentage withheld as retention amount and linked to final completion and handover to the developer.&nbsp;</li></ul>Given the above realities of the real estate environment, agencies cherry-pick high billing activities in each work front in order to maximise billing to support its working capital requirements. Often, high effort and low billing value activities are missed out/delayed, leading to unclean front handover [8] to the next specialised agencies. Downstream agencies, despite unclean handovers, will start working on the front in order to utilise their resources and maximise their billing.&nbsp;However, given the unclean handovers, agencies face multiple interruptions in completing the fronts. And when there are interruptions, two things happen: a) it increases the overall lead time for completion of that front and creates a higher waiting time for the next agency to start work and b) the labour (of the agency facing interruption) may become idle. So, in order to utilise their resources fully, often the contractors are forced to start working on whatever is available wherever it is available (preferably with high billing), again with partial preparation. When this behaviour cascades across all processes involved, we end up having multiple contractors engaged in the same work area without having a clean handover six from one agency to the next. This chaotic way of functioning results, many times, in quality compromise.&nbsp;Inevitably, these quality problems come back to bite you in the form of snag lists or punch points. Now, contractors are reluctant to mobilise manpower for such activities. As mentioned earlier, they tend to prefer higher billing activities in new work fronts over handling the snag list, which may require high labour hours but yield lower billing. Therefore, very often, the company has to persuade the contractors by agreeing to higher hourly rates to get these snag list points closed. In this process, not only does the developer end up paying twice for the same work, but also suffers as the elapsed time for each work front closure elongates.&nbsp;<figure class="image"><img style="aspect-ratio:16668/19082;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-5-01-1-01-01_1732344935.jpg" width="16668" height="19082"></figure>The way outAs we have seen, when incomplete work fronts are handed over to the next stage, this leads to wastages in the form of rework, cost increases and leads to significant delays. Therefore, the only way to break out of this vicious loop is to make sure that clean handovers happen between two functions/contactors/agencies at all times. Since the pressure to maximise billing forces incomplete handovers, the only solution is for every agency to complete all their activities as per plan or earlier (i.e. in the shortest possible time). The question is, how do we ensure this?&nbsp;To resolve this conundrum, let’s examine, the key elements required to execute the project in the shortest possible time. The answer is quite intuitive. If the project has all the material needed, tools, clearances etc required to complete it (a full kit) and is resourced with adequate manpower in the right mix and quantity, work can progress without any interruptions or stoppages. No surprises here, right?&nbsp;Now, if we wait for the full kit to be formed for the entire project or a large phase of the project before starting it, the time to complete the full kit will be so significant that it will surely delay the project and be extremely wasteful in terms of resources. On the other hand, if we plan for full kitting of too small a phase of the project, this will lead to chaos as the work will progress faster than the time to arrange the full kit for that phase. Consequently, the pressure of time will again force the next phase to start without the completion of an earlier phase-back to the vicious loop.&nbsp;The answer lies somewhere in between. Based on project size and type, a part of the project, a ‘work bundle’ has to be identified in such a way that allows for adequate time to arrange the full kit and at the same time allows fast/clean handover to the next function. What next?&nbsp;The flow modelFor these work bundles to be completed quickly and in order to ensure clean handovers to happen between every stage a flow model needs to be used. What is a flow model? Think of a manufacturing shop, where there is input of raw materials and this input flows through the shopfloor, being processed at different workstations, and comes out as finished goods. All this happens in a rhythm. The flow model in real estate project management mimics this – a work bundle flows in, is processed by resources and a completed work bundle is passed on to the next set of resources. When all the work bundles flow through and are completed one after the other, the project gets completed.&nbsp;For this flow to work on a project site, it requires a set of execution rules to be defined. However, before doing that, some understanding is needed with respect to technical dependencies between agencies and the amount of natural interruption [9] happening in the course of the project. Functions [10] that are executed by various agencies can be classified into two types. One type, called the Primary function, has a high touch time for tasks and low natural interruptions. The second called the Secondary function, has low touch time and high natural interruptions. A combination of primary and secondary functions (and the resources responsible for completing these) is termed a Cluster. The flow line planned in any real estate project will consist of several such clusters laid out in a sequence, based on their technical dependencies.In order to ensure fast and clean completion, a work bundle should be taken up for working by a cluster only if the entry criteria, consisting of full kit, maximum resourcing, closure of earlier work bundle and any other pre-defined item, is met. Similarly, a work bundle is considered closed only if a pre-defined exit criteria is met. Further, the number of work bundles to be taken up depends on resourcing- i.e. the WIP of work fronts or work bundles is limited based on available capacity to prevent bad multi-tasking and consequent task time elongation. Once started, a cluster can go to the next work bundle only after completing one work bundle from the current WIP. This is called the One Out-One In rule in project management. In order to ensure that work does not start without full kits, a bank of full kits for subsequent work bundles must be made ready for a cluster to work on.&nbsp;Once these rules are in place, the flow model will work, in rhythm, and the project will progress according to this rhythm. The only thing that can upset this rhythm is the delay in resolving issues/problems that occur during execution. Generally, an issue remains unresolved only if it requires cross-functional intervention or escalation to someone with higher authority. If resolution does not happen quickly, the elapsed time to close work bundles will increase and that will in turn result in violations of all the flow model rules. Subsequently, the entire system may disintegrate into the earlier chaos.&nbsp;To make sure issues are resolved quickly and protect the flow of work bundles, a system of High Frequency Management (HFM) can be fixed for all stakeholders across or within functions, or hierarchies. If these HFM meetings are at a set pre-defined time and conducted at rhythmic intervals, it will allow stakeholders to be available to resolve issues quickly.&nbsp;When resources work on restricted work fronts, without being idle, with full-kit and when any issue that crops up during the execution of work is being resolved in an aggressively fast manner, the flow of work rapidly increases. With clean handovers, rework and snag lists also reduce significantly.&nbsp;The overall resultThe CEO of Blu Homes is a happy man these days. After implementing the flow model, lead times to handover possession to customers had dramatically come down by about 25 to 30%. Importantly, the company is now able to consistently adhere to budgeted due dates in its projects or finish earlier. This led to a dramatic improvement in IRR to the tune of 4%-6.5% in their projects.&nbsp;The table below illustrates how IRR improves significantly with just this reduction in lead time.<figure class="image"><img style="aspect-ratio:16668/16527;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-6-01-01_1732344916.jpg" width="16668" height="16527"></figure>As seen in the above example, most Blu Homes projects are of around 3-year (34-month) duration. As can be seen in the table, compared to a typical project execution of theirs from the past, projects in which the Flow Model of project management is employed show significant gains in time at major milestones. With the implementation of the flow line and a full kit process in central functions, to align material, drawing and approval requirements for the sites, projects could gain around three months compared to their earlier way of working while completing the core and shell activities. A further gain of another quarter or so could be made by implementing entry-exit criteria for every agency to ensure a clean handover during the pre-finishing and finishing activity. This was because the number of iterations required by an agency to complete a work bundle came down. Similar benefits of early finish by about a quarter were realized during the finishing phase as well.&nbsp;In addition to protecting the company's profitability, the Flow Model of project management also ensures that the working capital turns of the contractors and vendors improve a win-win-win scenario. However, what thrilled Mr. Mahindra Kumar most was that the new way of project execution yielded not only operational and financial benefits but also simultaneously de-stressed project execution for his whole team and helped build a company environment where work-life balance was good, and employee satisfaction was reflected in the significantly reduced attrition rate.&nbsp;&nbsp;&nbsp;&nbsp;

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