Retailers Dilemma

India's iconic menswear brand Blackberrys redefined it's supply chain and was able to overcome inventory pitfalls and achieve sales success

It is not uncommon for a manufacturing company to enjoy a profitability of around eight percent when the gross contribution is about thirty percent. However, it is rare for a retail chain enjoying a gross contribution of forty percent to have a consistent profitability of three percent (if they manage to make a profit at all).It is relatively easier for retail chains to show rapid sales growth by opening new stores, however if there is no profit then continuing on this path of growth jeopardizes the very existence of the company.<figure class="image"><img src="https://images.vectorconsulting.in/storage/editor_uploads//planned-gross-contributions-before-discounting_1680522406.png"></figure>&nbsp;As per a study by Harvard University professors, retailers with consistent high inventory turns have high profitability, resulting in higher share prices and vice versa.Deciphering the correlationFactors that affect inventory turns negatively are surplus and shortages, a reality for retailers across categories. It is not uncommon for stores to be stocked out of popular items while they hold slow moving stock of other items.The impact of these factors on profitability is as follows:Excess Inventory<ul><li>Money is blocked in excess inventory, thus preventing buying of required fast-moving items (due to OTB controls) resulting in lost sales.</li><li>Surplus and slow-moving inventory occupy precious shelf space meant for fast-movers.</li><li>Slow-moving items often require discounts resulting in loss of profitability.</li><li>Write-off due to obsolescence or deterioration of inventory.</li></ul>Stock Outs<ul><li>Stock outs may result in loss of sales as customers may not buy alternative items.</li><li>Even when stock outs are addressed through expedited supplies, it disrupts normal operations and increases costs.</li><li>Repeated experience of stock outs can lead to buying in excess which in turn can impact inventory.</li><li>Both excesses and shortages have a negative impact. Each factor can result in a future instance of the other! The only way to improve inventory turns, consistently, is to eliminate shortages and surplus.</li></ul>Improving Inventory Turns – The ChallengeThe real challenge for improving inventory turns for a retail chain, consistently, is managing wide variety of products, and dealing with unpredictable movement of products in their life cycle.Based on the current performance, products across retail categories can be classified as:<figure class="image"><img src="https://images.vectorconsulting.in/storage/editor_uploads//profitability-of-modern-retail-chains-in-2011_1680522410.png"></figure>&nbsp;<ul><li>Hits: Products in the ‘peak’ sales phase of their lifecycle.</li><li>Laggards: Products whose sales are tapering off.</li><li>Deads: Those at the end of their lifecycle</li><li>Niche: Products with low but a consistent sale rate.</li></ul>This classification means nothing to the end customer. But the understanding is critical for controlling sourcing and making store distribution decisions for improving inventory turns without jeopardising availability. The decisions become more complex when products move across classifications in a time much shorter than the supply chain lead-time. (For example, a garment style may become a ‘hit’ within three weeks of launch while the lead time to source it could be six months).This environment forces buyers to forecast for a longer horizon resulting in surplus and stockouts. The inventory turns of such retail chains often go haywire, and are only brought under temporary control by discounted sales.The mistake most retail chains are making is trying to manage the environment by improving forecast accuracy. A flop or hit looks obvious in hindsight; one assumes that with more information, knowledge or experience, one can predict this in future. However, the environment remains unpredictable while discounted sales promotions stay a regular affair.The only way for retailers to achieve higher inventory turns without jeopardizing sales is to move away from forecasting to processes and systems for ‘fast reaction’ to changing trends.Fast reaction ability is required in the following areas:<ul><li>Supply Chain</li><li>Decisions to Change Stock Levels</li><li>Managing New Introductions</li><li>“Killing” of Products</li></ul>1. Supply ChainThe speed of supply chain is determined by the speed at which supplies are made to stores i.e., the speed at which the correct item in the correct quantity is made available. This speed varies based on each vendor’s supply lead time to the stores. Improving all vendors’ lead time is a herculean task. Typically, retailers protect sales by ensuring that inventory is sufficient to meet forecasted sales during the long lead time of vendors. In addition, the vendors’ minimum order restrictions force stores to buy excess quantities. These rules reduce the ability to react quickly to changing demand.Lead time to stores can be reduced if a retailer sets up a central warehouse to hold inventory, and then supplies the stores an assortment of SKUs (sourced from different vendors), based on daily consumption. This eliminates the need for minimum order on vendors for each store. With a central warehouse, the forecasting of product quantities would be at an aggregated location which can then absorb the variations in sales across stores, thus reducing the total inventory required in the chain. Higher the variability in demand and higher the number of stores to be supplied to, lower is the central warehouse inventory. Inventories at stores will come down due to reduced lead time, which is now the delivery time from the central warehouse. The supply of inventory based on consumption based pull replenishment will ensure that the store’s inventory stays low. The consumption based pull system, as opposed to a reorder point system, also ensures lower slow-moving inventory in stores as supplies are made as per sales rate, not minimum order quantities. Resultant impact is improved availability of items, and reduced stock outs.<figure class="image"><img src="https://images.vectorconsulting.in/storage/editor_uploads//product-life-cycle-of-various-skus_1680522415.png"></figure>&nbsp;For vendors, a central warehouse provides significant benefits – high volume and uniform transactions to a single location. Also, better sales in stores translate into higher sales for the vendors.The level of inventory retailers maintain at the warehouse is dependent on vendors’ lead time. If vendors are dedicated to the retailer, then one can implement the principles of <a href="https://qclab.app/theory-of-constraints/">Theory of Constraints (TOC)</a> in the vendors’ shop floors to reduce lead time. However, if the vendor supplies the same brand to multiple retailers, then one can move to a system of replenishment from the finished goods warehouse of vendors to the warehouse of the retailer. This will deduct production lead time from the replenishment lead times. Also, with the vendor’s warehouse in place, the frequency of supplies to the retailer can be increased. This frequent consumption based replenishment system helps reduce lead time.The central warehouse and pull replenishment model have a huge impact on ‘niche’ items which sell at a low rate. When such inventory is pushed to stores, the overall inventory goes up as sludge is created. The best approach is to have low inventory (one piece) and keep the rest in the warehouse for frequent pull replenishment.2. Changing Stock NormsA system that analyses sale rate daily, helps pick up trends. When supply chain lead time is reduced, and there is a daily check on sales trend, a retail chain has the ability to change inventory norms and correct its buying decisions as soon as the trend is recognized.3. Managing uncertainty of new product introductionsThe current paradigm of buying relies on the judgment of buyers on potential hits or flops. Inventory of new products is placed at stores with the same assumptions and accepting reality when the performance is different from the initial judgment. A better way of managing new products is to accept the inherent uncertainty of the sales of their products. The central warehouse provides a capability to react immediately to sales in stores. When all quantities of new products are placed at the stores, the capability to react is lost. The way out is to place minimum quantity at stores, and have more in the central warehouse.In some cases, it makes sense to limit introductions in few stores, and observe how they fare. The information can be used to decide on how they will be introduced in other stores and when to make a product continuous replenishment item.4. “Killing” the SKUsWhen new items are continuously introduced, they cannibalise the sales of some existing items in the category. This creates a long tail of SKUs with slow inventory movement. The normal practice is to declare an item dead, when it stops selling. The way to avoid dead inventory is to stop purchasing the SKU while it is still selling.The company has to define a policy of range limit for each category. Once an item is introduced, another has to be removed from the range. The one which is the new item is substituting or the one with the lowest sale rate. If the discontinued item prevents the new one from being introduced occupying shelf space,(such as furniture) it should be removed within a targeted period with aggressive discounts.These changes will help a retail chain enjoy consistent high inventory turns without compromising on availability, thus enabling it to exploit sales opportunity in current stores and earn a high return on investment. A high ROI model enables a chain to expand rapidly without facing roadblocks of low profitability and working capital issues.

An Innovative Approach to Apparel Supply Chain

Vector

Kirloskar Ferrous Industries Ltd (KFIL), successfully unlocked the full potential of their operations and sustained excellence over the last 7 years.

Auto supply chain in India – A mishmash of “Push” and “Pull” methods

An Inspiring HistoryThe operational practices of almost every player in the Automobile and Auto component industry are greatly influenced by the pioneering innovations of Henry Ford and Taichi Ohno. Henry Ford used space as a ’forced’ limitation in the shop floor layout to ensure a rapid flow of inventory. Piled up inventory in the allotted space, forced a cascading stoppage of the entire line, and this simple mechanism ensured that everyone focused on flow rather than just producing to utilize the capacity of individual workstations. The “assembly line” concept, a simple mechanism helped Ford create a benchmark in producing the model T car – the total lead-time to produce a model T was 81 hours (from raw material mining to loading a car for dispatch). Ford was hugely successful with the model T and became the most dominant car manufacturer during the 19th century.Later, Taichi Ohno, inspired by the working of supermarkets in US, created the concept of Kanban cards, which did the same magic as Ford’s innovation of space limitation in an environment of a large variety of SKUs. The card or a physical bin (dedicated to an SKU) was an indication of the quantum inventory of a specific SKU. As per the process, the card or the bin is released only when the succeeding work centre consumes the quantity in the card or the bin. No one is allowed to manufacture or move inventory without the trigger of a Kanban card or the availability of the bin. This ensured focus on flow (as opposed to just work centre utilization) in an environment of a wide variety of SKUs.The physical bins or the cards could then be used to set up a process of ongoing improvement. The plant can keep reducing the number of Kanban cards, which will in turn expose the various flow problems in the plant. Other tools and techniques were invented to ensure plants could remove the obstacles to flow, like setting up of reduction techniques, standardization, 5S, etc. The entire manufacturing system is now famous as the Toyota Production System. It is also known as Just-In-Time (JIT) manufacturing. The operational practices of TPS helped Toyota produce highly reliable cars yet affordable for the masses. By the late 20th century, Toyota had built a decisive competitive edge in the market. It was able to make strong inroads in the US market, previously held by the big three of the US auto market.Learning from HistoryMost auto plants in India have some form of Kanban system or restricted bins (or restricted carriages to hold SKUs). Some plants deliberately limit space to force the flow of inventory. For example, the purchase material store in many OEM and tier I auto component organizations have space limitations to carry inventory enough to cover a few shifts of production. With minimal inventory on the production floor and the incoming stores, implementation of other tools of TPS (Just-In-Time manufacturing) like 5S, cellular layout most plants look clean and organized. Visually, these clean plants give the impression that years of effort has gone into implementing the best flow systems and that the auto OEMs’ supply chains are very stable.Is it really the case?The stability of a&nbsp;<a href="https://www.vectorconsulting.in/blog/pull-solution-for-distribution-and-sales/first-among-equals-marketing-or-supply-chain/">supply chain</a>&nbsp;can be gauged by two parameters – the level of expediting and the stability of the inventory profile in the chain. To understand the level of instability, one needs to first appreciate the complexity of an auto supply chain. Auto plants, whether an automobile plant or a tier I component plant, are mostly assembly-oriented. Each end SKU requires a multitude of parts to arrive together for assembly. Non-availability of a single feeding part can delay the assembly of the SKU. The level of stability of a plant is directly indicated by the availability of complete kits for the planned assembly schedule. Higher the kit coverage (number of days of planned production for which kits are complete), the more stable the plant. Our research and experience in the Indian Auto Industry shows that most auto OEMs and component manufacturing plants suffer greatly from poor kit coverage. It is not uncommon to have many incomplete kits of SKUs at a day level, particularly for the SKUs that are being demanded immediately by the customer. The purchase managers struggle to get kits for a day. Frequent rescheduling due to incomplete kits further aggravates the kit availability problem. Purchase manager of the OEM or even the purchase manager of a component vendor is on an expediting mode throughout the day, trying to somehow get adequate kits to meet the production plan of the day. The schedules of production are not stable even for a day at times even for a shift.Most auto supply chains in India do not have the stability of schedules. At the same time, the inventory of the entire supply chain goes haywire from time to time. For example, during every economic downturn the dealer inventory of the OEMs balloons up many times, and the reaction of OEMs for production correction usually has a significant lag (about 6-7 months of lag in production corrections). This leads to a ‘bull-whip’ effect, and the inventory goes haywire for many players in the chain. At the same time, every month-end the level of inventory of the auto OEM drops with a huge spike in the last week’s dispatches.A similar inventory problem exists with the component vendor, whose warehouses usually have a month’s inventory even when they are a few hours away from the assembly plants of the auto OEM. Despite having a month’s inventory, the OEMs do not seem to have the component SKU they need for the day. Theoretically speaking, instability indicators (high expediting and varying inventory levels) should not be seen in a supply chain, which is supposed to move inventory based on ‘Just-In-Time’, only on a pull trigger like availability of space or a bin.We need to analyze if the auto supply chains have really implemented JIT or Just-In-Time manufacturing principles or is it the case of few visible ‘props’ on the shop floor.The limitation of space or bins makes the supply chain extremely sensitive to flow issues when the demand is widely fluctuating. Toyota has been able to deal with the challenge of deliberate limitations of a bin by a process of standardization and deliberate smoothening of the demand (at an SKU level) on the customer.But most Indian Auto OEMs have not been able to impose the smoothening of SKU demands across time horizons, and hence are severely exposed to the problem of wide fluctuations at the SKU level. At the same time, changing Euro norms have increased the rate of new product introduction at a component level.When new components are replacing old ones frequently, the number of bins have to be re-defined frequently – which in turn makes it impossible to be on a process of ongoing improvement (the baseline of the number of bins is not fixed to bring about a continuous process of reduction of bins to expose the flow problems). In this environment, strictly following bin-availability-based production in the entire chain is nearly impossible. So they have made a compromise, used the bins to move inventory between component vendor and OEM, but not used it to trigger production at tier I vendor. If the bin is not used to trigger production, then one has to bear the brunt of high inventory. So the ‘solution’ that most auto OEMs have devised is to force the weaker partner in the chain to provide the required protection.The auto OEMs keep inventory enough to cover a few shifts of production at their incoming stores and insist their tier I vendors keep adequate stocks at warehouses near their assembly lines. The stocks are produced not based on a pull trigger (of a bin or a card) but based on a ‘push’ as per forecasted schedules of OEM.The same is the case with dealers – they get inventory as per sales targets of OEMs. It is not aligned to the actual rate of secondary sales. Most auto OEMs in India do not have a Kanban system for inventory movement between the dealer and the OEM as the demand fluctuations across time horizons for an SKU are high, and they have not been able to enforce smoothening of SKU demand on the market.An ineffective connotation of Push and PullAs a result, most auto supply chains turn into botched-up combinations of a push system with few ‘visible’ elements of pull system mechanisms in restricted locations of the supply chain. Tier I and tier II vendors operate on forecasted schedules provided by the OEM every month. Due to plant scheduling and material planning based on a monthly or a weekly forecast of the OEM, the vendors’ ability to respond quickly to OEMs’ daily production plan changes is restricted. Therefore, they fail to meet changing requirements at a daily level. Many&nbsp;<a href="http://vectorconsulting.in/industry-solution/auto-auto-component/">auto component</a>&nbsp;vendors analyze their performance based on the initial monthly plans of the OEM and give themselves high marks. At the same time, issues such as rescheduling, searching for missing components and daily expediting requests remain on the problem lists of both the OEM and the tier I vendor.The way forwardHow does one improve the auto supply chain? Most OEMs and auto component vendors have an ineffective supply chain where inventory at the finished goods level is many times higher than the inventory of the incoming component level. This is despite the fact that the component level holds the highest form of aggregation (the same component can be used across many end SKUs). It is not uncommon to find that components required to complete an SKU are missing while the same component has already been used up in an SKU that is not likely to be dispatched in the near future. One can argue that the same component could have been used to produce what is required rather than produce what is not required. If one can reverse the inventory pattern at OEM, an OEM stands to gain a lot without changing the way all tier vendors work.We know that an auto component vendor has already invested in space for maintaining buffers for OEM. So, if we can have the right inventory profile at a daily level, then an OEM can still enjoy low inventory of components while having good availability of the feeding components.If one wants to move an entire auto supply chain from push to a pull system, and implement Just-In-Time manufacturing in its true sense, the best place to start is the demand side of the auto OEM. We can reduce the demand spikes from the dealer level by moving inventory from the OEM to the dealer only based on consumption and not as per a sales target. Consumption-based movement also requires one to hold higher aggregated inventory at the central warehouse, as compared to the dealers. Production at the OEM can also be based on consumption from the warehouse and not on the sales forecast. Pull-based planning along with a periodic process to change the inventory norm based on changes in the observed sale rate (as compared to supply rate) can help auto OEMs to practically implement pull systems without having to resort to forced smoothening of demand at the SKU level on the customer.When one OEM changes over to pull-based movement of inventory at the dealer level, the immediate impact would be better smoothening of load on the plant and subsequently on the multi-tiered component vendors. (This article does not get into details of how a pull-based system can be implemented at the OEMs, this is subject for a separate article. The focus of this article is component vendors).In the current paradigm of push-based functioning, most auto component vendors are expecting improved forecast accuracy from the OEM as an answer to the puzzle. The OEMs, however, believe that component vendors need adequate capacity buffers to absorb any kind of variation. Is there a way out of this conflict?Forecasts can never be accurate at a component level – the OEM’s component requirement is dependent not just on the vehicle offtake forecasts but also on the impact of production schedules changing due to incomplete kits. It is nearly impossible to mathematically model the vicious loop of rescheduling decisions to find out the forecasts for the component requirement with any reasonable accuracy. So, the only way out for component vendors is to shift from push-based production to pull-based production, even though one has a monthly schedule of offtake from the auto OEM.So, instead of trying to adhere to a monthly schedule provided by the OEM, they need to produce to actual off-take from the warehouse. To cut down on disruptions in the plant at a daily level, they need to have a buffer level which protects them from maximum consumption during supply lead-time. Consumption from the buffer level (or the norm level) can be the trigger for daily production. The norm level is the artificial lock – no one is allowed to move inventory or produce above the norm (like the use of space or reacting to Kanban cards).However, if supply lead time is high, the level of demand spikes imposed on the plant is high. To minimise the impact of spikes, it is important to reduce the supply lead time. Most auto component vendors actually have short production lead time but the supply lead time goes up due to the unavailability of various feeding components (procured from tier II vendors). The problem is aggravated by the lack of adequate space at the purchase stores. There is a need to have adequate space for ensuring good availability of feeding components. The feeding component inventory (of tier II vendors) should be enough to accommodate the demand during the supply lead time of the feeding-component. Procurement triggers should not be based on forecasts but on daily consumption. Once adequate inventory buffers are available for the feeding component (incoming components from tier II vendors), the supply lead time for the component of tier I vendors comes down.The level inventory for incoming feeding inventory can go up in the short term, but the finished goods inventory can come down dramatically – there should be a net reduction in total supply chain inventory for the tier I vendor. Once all sub-components are available on a daily basis, the ability of production to respond to changing requirements is greatly enhanced as the spike gets smoothened too.Since the offtake at the component level will vary, the level of available inventory at the finished component warehouse of the tier I vendor will be different as compared to the buffer level. For example, on a daily basis, some SKUs will have low stocks compared to the norm while others will have high stocks. The level of stocks as compared to the norm can be used as a priority system for production and dispatch. An SKU with actual stocks closer to the norm (between 2/3rd of the norm to full of the norm) can be tagged as green, while those between 1/3rd and 2/3rd of the norm can be marked as yellow, those below 1/3rd of the norm can be tagged as red. SKUs that are at the red level of inventory need to be prioritized over the yellows and greens. The priority system is important, as reacting to consumption of even small quantities might be difficult due to set-up and other production considerations. The colour system gives the plant the flexibility to take decisions on production. The same colour system can be used to understand if sales rate is higher than supply rate and can be used as a trigger to change the norms. (Ideally, in a stable system, most SKUs should stay in the yellow zone).The same colour-based priority system can be implemented for feeding components to the incoming side. One can work on a process of ongoing improvement by helping suppliers (tier II vendors) to reduce their supply lead-time, which in turn will reduce the level of inventory at the tier I vendor. Our experience of implementing the above system over a one-year period has shown that the total inventory turns can be improved from an average of six rotations in a year to about 18 rotations in a year. But this requires sustained effort with a partnership-based approach to help each tier II vendor to improve his lead-time. It is important to build win-win partnerships with vendors and let go of the promiscuous relationship based just on price reductions.As they say, win-win and lose-lose are the only practical possibilities in every relationship. Win-lose is just a temporary phase which deteriorates to lose-lose within no time. So the only way to ensure Win for us is to ensure the Win for the other party in the relationship.

Becoming a preferred vendor in the grey iron casting industry

Explore the complexities of the auto supply chain in India and the integration of push and pull methods, as discussed by Vector Consulting Group experts.

Auto Supply Chain in India: Balancing Push and Pull Methods | Vector Consulting Group

The agony of the tier 1 suppliers: Caught between a rock & a hard place

J.K. Fenner (India) Ltd,. a market leader in mechanical power transmission & sealing solutions achieved remarkable results by creating an agile supply chain by building a highly responsive "pull" based supply chain that now provides higher availability of its products as well as faster and reliable delivery to its customers.

Most Tier 1 OEM suppliers claim that they supply more than 90% of the requirement of OEMs for the month. Yet, most OEMs declare that their suppliers are unreliable and have to continuously follow up for the material. At the beginning of the month or end of the previous month, the suppliers get a monthly plan with a weekly schedule. They plan raw materials, parts, and production batches accordingly. The same plan is communicated to their suppliers (Tier 2). Generally, in the first week itself, the Tier 1 suppliers get communication from the OEMs that the weekly schedule has changed. Some items are required earlier than scheduled. As the procurement and production batches are planned, this leads to a lot of expediting and replanning in the Tier 1 suppliers. They also have to reschedule their suppliers. Some suppliers are unable to cope with the changes and fail in their delivery. The OEMs cannot produce the vehicles (complete the assembly) even if one item is not available, nor can they leave their capacities unutilized, so they have to reschedule again. Again forcing a change of plans given to suppliers. Soon, sales of OEMs are not getting models according to the forecast given. Compound this with the fact that the forecasts provided by sales cannot be accurate, and hence, sales also forces continuous changes in the original plan. The schedule given to suppliers changes again, and thus the vicious cycle continues.The OEMs demand reliable delivery and blacklist suppliers who perform poorly. Rightly so, as the consequences of poor delivery from the supplier result in huge damage for the OEMs (e.g., stockouts and surplus of models, loss of capacity, constant expediting, etc.). Most suppliers have established capacities to deliver specific products (e.g., radiators, starters, filters, etc.), and losing business is a huge risk to their financial performance. Being unreliable toward the OEMs puts them in a weak position to ask for price increases, influencing their profits and capability to add capacity. Suppliers keep asking OEMs for a stable plan. However, due to the vicious cycle described above, the OEMs cannot provide a stable plan. The only way out for the suppliers is to keep huge inventories of Raw Materials (RM) and Finished Goods (FG). But there is a limit to the working capital that can be deployed, as margins are shrinking every quarter. As the plans given by OEMs change frequently and have spikes, soon the tier suppliers land up with mismatched inventory – for some items, the inventory is for many weeks (or months), while for others, it is very less or stocked out. Hence, despite having high FG inventory, Tier supplier 1 is still firefighting and working hard to meet daily schedules. High inventories have resulted in huge financial losses during the downturn, as the age of current inventories suddenly doubles or triples when demand falls abruptly. The suppliers are caught between a rock and a hard place. They neither get a stable plan from the OEMs nor can they increase inventories to provide for the variations in this plan.The way outJIT/Kanban/Toyota Production System (TPS) is considered the solution for a reliable and lean supply chain in the auto industry.Most OEMs are beginning to adopt TPS. To them, it means having 1-2 shifts of inventory of parts in the plant. They have adopted the policy of ordering the parts on the same day or the earlier day for the production plan for the day (drop plan). Without a stable plan, this results in a huge chaos at the supplier’s end. The TPS at the OEM will not work if the suppliers are not reliable. As a matter of fact, the suppliers are paying a huge price as a result of adopting this system.Worse, some suppliers have implemented TPS/JIT with a partial understanding of the TPS system. TPS’s most popular visible features include very low inventory and spic &amp; span shop floors. They have adopted the 5S approach and restricted space for inventory. They have adopted the same principle of 1-2 days of RM inventory and expect their purchasers to get the material from Tier 2 suppliers on a daily basis. With the schedule of the OEMs changing nearly daily, and the Tier 2 suppliers not equipped to react to daily changes, it is a nearly impossible to get the RM for that day on the same or earlier day. Unfortunately, most Tier 1 suppliers have to gather parts (kits) to make assemblies. The unreliability of suppliers and the need to utilize capacities lead to a production plan that is not in sync with the OEM requirements. Therefore, the vicious cycle has been continuing for a long time, continues.There are two fundamental reasons why TPS/JIT is not successfully implemented in most OEMs and their supply chain:<ul><li>The plan from the OEM for the month must be stable, i.e., no change</li><li>The suppliers have not been well equipped to implement JIT</li></ul>However, both changes look very remote in the short term.The way out for Tier 1 suppliers: The OEMs should frequently supply to actual sales (at the dealers) as observed on a daily basis at the dealers (i.e., daily replenishment of what is sold on the previous day) and from a central FG stocking point. This regular replenishment to actual sales ensures that the dealers will not have capital locked in non-moving stocks, thus preventing the need to postpone buying or prepone by the attraction of higher credit limits. False signals of high/low demand are prevented from entering the plant. The challenge here is to meet the numbers without pushing. Sales have to work in the market to increase secondary sales and not on primary sales. (The impact of push sales is seen in the subsequent month if the dealers do not sell the required quantities pushed earlier).Due to the Principle of Aggregation, the central warehouse cancels out the variations from the dealer’s sales across the nation (high sales of a model at some of the dealers while low sales at others), thus providing a uniform load for each SKU to the plants. The OEMs’ plants can increase production to fill the FG buffers, but no additional production. Also, a sudden spike in demand on some days is absorbed by the FG buffer, and hence the panic is not relayed to the Tier 1 suppliers. Therefore, the production plan according to the requirement generated from the penetration of the OEM FG buffers is quite uniform across a period, and the same is relayed to the Tier 1 suppliers. Consequently, the Tier 1 suppliers will face a fairly uniform and stable demand.This appears logical and an excellent approach, but bringing about this big change in the OEMs planning from Push to Pull is beyond the domain of the Tier 1 suppliers. Waiting for the OEMs to make this change will not help the Tier 1 suppliers. The Tier 1 suppliers have no choice but to invent a system that can ensure high reliability on a daily basis at lower inventories, in spite of unstable planning by the OEMs.The direction of a solution for Tier 1 and 2 suppliers: The Tier 1 supplier maintains an FG buffer and supplies daily requirements of OEMs from the FG buffer. Production is defined as planning to fill the buffers and not reacting to OEMs’ schedules. This is a critical change. The question here is what should be the size of the FG buffer. If all components, procured or made inside, are available at all times; usually, the assembly time of any product in the Tier 1 supplier is 1-3 days. With such reaction times of production, a FG buffer of 10-12 days is sufficient to address any reasonable daily demand from the OEMs on a daily basis.In order to maintain continuous availability of parts, the same system of replenishing the RM/parts buffer is followed with the Tier 2 suppliers as well.<img src="https://images.vectorconsulting.in/storage/editor_uploads//new-the-agony-of-tier1_1680517827.png">At times, the load on the plant (which is the difference between the target level of the FG inventory and the current stock across all SKUs) will be greater than the capacity on a given day. The available capacity could reduce due to various issues such as absenteeism, manpower unavailability, and/or machinery breakdown. There has to be a priority system to decide what has to be produced in a limited capacity for the load generated from the penetration of FG buffers. As the objective of the plant is to maintain the availability of all items in the FG buffer in all warehouses, the priority is decided by the penetration of the stock into the buffer. The lower the stock compared to the FG SKU target level, the higher the priority. To make the communication simpler for the plant, the target level is divided into three equal zones – the bottom one-third is red, middle one-third is yellow, and the top is green. The stock level moves between the three zones.<img src="https://images.vectorconsulting.in/storage/editor_uploads//replenishment-time-image-1024x338_1680517841.jpg">The stock level in red gets the first priority, followed by yellow and then green. The stock of the RM parts is also coloured accordingly and communicated to the suppliers in the buffer penetration report every day. The supplier produces/supplies the red stock first. The supplier is convinced to keep similar buffers of items that the Tier 1 has buffers for, and gets assistance to change production planning to maintain availability in his FG buffers. If Tier 2 maintains FG buffers, the Tier 1 can maintain buffers sized to accommodate just the transportation time from the Tier 2 along with some safety, i.e., very low inventories of 3-6 days for local suppliers and about 10 days for suppliers outside the local area.Why would the Tier 2 supplier agree to keep the FG buffer and follow the replenishment system? He gets the benefit of a uniform demand and transparency to the real priority from the Tier 1. He can use this transparency to prioritize his limited capacity to prevent using capacity on a not immediately required part. This helps the supplier to improve service to his customers. Capacity is released, as he is not producing items that are not required. Also, as the load is uniform, this helps him to plan his RM at lower stock levels.Over a period, the demand rate of OEMs’ models changes. Continuing with the initially sized buffers can still lead to stockouts and surpluses. Having a mechanism that changes the target levels based on changes in the rate of consumption helps maintain appropriate inventory levels; Dynamic Buffer Management captures trends (decrease or increase) in the consumption of the OEM immediately. If the part is continuously dipping in red for the period of the replenishment time, and there are no issues on the supply side, it indicates an increase in the demand. The buffer is increased by one-third to accommodate the increase in demand, and a similar step is taken for the decrease in demand. The only difference here is that the decrease is evaluated over a longer period, i.e., being aggressive while increasing and cautious while decreasing buffer sizes. During a downturn, as signals are captured early, the inventory levels are decreased early. The disastrous vicious loop of capital getting locked in a slow-moving inventory is avoided and, the Tier 1 and Tier 2 suppliers can sail smoothly even during the downturn. Such changes can be facilitated by using a simple software tool. For any changes more than 33% (seasonality, etc.), the changes are made manually, thus changing the buffer levels once and letting the system takeover for further increase or decrease.Described above are some of the elements of the Theory of Constraints (TOC) solution for managing operations in order to maintain availability at very low inventories that Vector Consulting Group has implemented in Tier 1 suppliers to achieve over 98% reliability on a daily basis as well as increase output significantly (over 40%) while reducing inventory substantially (at least 30%). More significantly, firefighting is nearly eliminated, which releases considerable time of the senior managers. The time released is used to take up improvement projects to decrease lead times (which decrease inventory further), value engineering projects to reduce material costs, and work with suppliers to reduce the cost of parts, thus increasing gross contribution and profits. OEMs will also favor such suppliers as these meet the inherent requirement of the OEM – Guarantee for Availability (GFA) for any plan on any day. The OEMs will increase business share with such Tier 1 suppliers as they realize that the gains of reliable delivery on a daily basis are many times the gains from a cheaper but unreliable supplier. For Tier 1, this will result in an increase in volumes. If these additional volumes are produced from capacity released from the existing infrastructure, the gross contribution of the additional sales adds to the bottom line (as fixed costs have not increased), thereby increasing profits significantly.The analysis of the buffer trends (continuous reds) will reveal the areas of improvement. The obstacles exposed and projects for a reduction in lead times reduce the buffers continuously, bringing the system to deliver JIT or TPS service to OEMs, despite their frequent changes in plans.Following are two cases of Tier 1 suppliers who implemented TOC thinking and solutions company-wide, with Vector Consulting Group and achieved fantastic results, creating a win-win situation for the Tier 1, OEMs, as well as suppliers of Tier 1:Fleetguard FiltersFleetguard is a company of the Cummins group, a market leader in manufacturing and supplying auto filters for the commercial vehicle segment. The company delivers a service of over 98% for daily requirements on an everyday basis to all its OEMs. It has been delivering this service for the past five years since it started the Theory Of Constraints journey. The output has increased by over 100% from the existing infrastructure.Tata Radiators LtdTata Radiators Ltd is a company of the Taco group and supplies radiators and intercoolers to the OEMs. In one year, the company has improved its service levels to daily requirements to OEMs to over 97%. The output of the plants has increased by over 30%.

Transforming operations to improve MTS availability to high 90s

Tata Motors Spares CVBU built agility and excellence in its service by transforming its large and highly complex supply chain network from a forecasting based system to pull replenishment.

Spare the trouble

An automobile Original Equipment Manufacturer’s spares business has two major, and at times conflicting, needs to satisfy; 1) ensure delivery of spares to the customers at point of requirement in shortest possible time and 2) to do so in a manner that is financially beneficial to the company.1)Importance of Spares DeliveryOnce an OEM (Original Equipment Manufacturer) has sold a product (car; truck etc) to a consumer, it becomes a commitment for the OEM to ensure that the spares and service are seamlessly available to the customer. In the case of some large OEMs, this could involve making more than 1.5 lakh individual parts readily available at all times! If customers (or the mechanics) struggle for parts whenever they want to repair or maintain their vehicles, they judge the OEM poorly. Frequent poor sales and service experience is known to negatively impact vehicle sales of a company.2)The financial challenge in Spare ManagementEnsuring spares availability is naturally a major challenge due to the enormous variety of parts involved across the portfolio of the OEM’s vehicles. With new models being launched with increasing frequency, the number of spare part SKUs that have to be serviced also increases. Moreover, OEMs have to maintain this large variety of parts over the long life span of vehicles (very often for more than 7 years). To complicate things further, some of these are in frequent demand while others are needed very infrequently. Unfortunately, this business has a large number of these infrequently demanded “stranger” items!Consequently whenever OEMs try to improve spares availability, the cash tied up in slow moving inventory balloons! Further, it is not enough for a part to be available at the warehouse or the distributor’s location; all parts have to be available or delivered in shortest possible time to the point of requirement (service dealers, retail shops etc. from where the customers buy them).Because of the conflicting objectives of spare parts management, most OEMs in India struggle with parts availability. The ramifications of such unavailability further leads to inefficiencies in service centers and ironically takes away the advantage of what should have been a monopoly market for OEMs.Impact of unavailability at Service dealershipsDelay in parts availability at service dealerships lead to high turnaround times for vehicles coming in for service and disgruntled customers. This in turn can have a cascading effect on service bay availability and delays in repairing other vehicles in the service center. Servicing in an OEM dealership is usually more expensive, than getting it done outside. Unfortunately, most often these higher prices do not translate into superior service in terms of vehicle turnaround times in the service centers, hence it not surprising to find customers seeking out cheaper alternatives. Therefore most vehicles leave OEM service network after warranty period. If we take cars – according to ACMA while nearly 20% of the cars on road are more than 15 years old, the typical age profile of cars reporting at dealerships is of less than seven years.Impact of unavailability in AftermarketMany OEMs allow parts to be sold outside its network; more so, for the older models. This is to ensure good reach of parts to counter the gaps in their existing service network. But distributing large no of parts through a network of distributers, and small retailers come with its own challenge. Most of these players in the market are small businessmen find it difficult to invest large sums as capital.The problem of unavailability is further aggravated by presence of few, yet very large wholesalers in the network. Their presence is assumed to be the answer to reach out to far flung areas. So companies sell in bulk to these large wholesalers at cheaper rates with the hope that they will help the company improve ‘reach’ and get sales from these unserved areas. Unfortunately these wholesalers are passive sellers who sell only to those who approach them and therefore do not serve this purpose effectively. Moreover they end up creating more area conflicts in current territories than serving the deeper geographies. Most OEMs have resigned themselves to live with this –the management bandwidth in the spares and service business is already fully occupied in expediting spares in the distribution and service network.These conditions impact the last mile availability of original parts creating an ideal condition for small local players to manufacture and sell counterfeits. Most of the counterfeit sellers also offer much better service to retail points due to their geographical concentration. Easy availability, a customer in dire need of parts (when vehicle is down) and non-availability of original parts makes it a viable market for counterfeits.Consequently no other consumer product category has seen counterfeiting to this extent in the Indian market. ACMA assesses that 36% of the components in the aftermarket are fake. It is also thought to be growing 9-11% annually. Since counterfeiting is usually of the OEM’s intellectual property, in addition to eating into the aftersales of the vehicle manufacturer, it may also spoil the vehicle and endanger the life of the driver.<img src="https://images.vectorconsulting.in/storage/editor_uploads//figure-1-coverage-pattern-for-auto-part-aftermarket-1024x608_1680504875.png">Core IssueThese chronic availability issues have their roots in how typical OEMs operate. They send in 3 month rolling schedules, based on sales forecast of individual parts to their vendors, who then manufacture and supply as per the schedules. In addition to supply being unreliable, the fact that forecasts are inherently error prone creates situations wherein some items are stocked out and others are in surplus. At the same time, demand tends to be skewed with high month end spikes due to prevalent practice of pushing material at month ends (with or without incentives) to meet sales targets. This is one of the reasons why distributers tend to keep 45 to 60 days of stock even when the nearest company warehouse is just few days away.Pushing parts to the channel partners, when many parts are inherently slow moving, aggravates the problem. The speed at which stock rotates deteriorates because the channel partner is exposed to a smaller demand and highly variable demand in a restricted geography. Thus, this practice impacts the buying power of channel partners, and their ability to restock when items are sold out. The daily working capital woes of a distributer forces him to restrict his business and many tend to service only a limited number of retailers (usually larger retailers) who they perceive as low credit risk. Net impact is reduced availability of spares in the market.Direction of solutionAny solution should aim at ensuring parts are made available at shortest possible time. But this has to be realized at the same or lower levels of inventory and nobody in the entire chain should be burdened with extra investment.For this it is imperative to classify parts into various categories and create a distribution strategy based on that. Based on frequency of demand at the point of sale, parts can be classified thus:1. Fast mover Parts: These are regular maintenance parts like the Filters, Oils, Break lining, Clutch, belts, Oil seals, Battery, Tyre, wiper etc. which are replaced as part of regular maintenance. In terms of sales, these are usually 60 to 70% of the total spare parts sold.2. Erratic Parts: These are parts which are prone to frequent damages like the gear parts, Bumper, wind shields, etc. They may also be exclusive parts needed for preventive maintenance of less popular models or consumables or items needed after minor accidents. While the vehicles of a particular model may not frequently visit a particular service center, as far as the customer is concerned, these are regular items and they will not have the patience to wait for long.3. Slow Parts: These are infrequently used repair parts or failure parts like Radiator, Window glass, Fuel injection, crank shaft etc.4. Stranger parts (rare parts): These include major or rare Accident parts, parts with small chance of failure or parts with large replacement cycles like axels, Transmission, Cabin, frame, Door, fuel tank, central locking system. Accident insurance claims which are usually made in these cases, generally take ten to 14 days. As long as the parts can be made available within this window, there would not be any hold up for customer service due to unavailability.5. Out-of circulation parts: These are usually stranger parts that belong to 4- 10 year old models of the OEM which are no longer in production. And even though these parts are not used in current models, the OEM is legally expected to maintain these parts for repairs and replacements.<img src="https://images.vectorconsulting.in/storage/editor_uploads//spare-parts-classification-1021x1024_1680504890.png">**(network of dealerships in close proximity who share their stock information virtually and trade when required)# (may vary; a stocking location is decided based on frequency of sale from a location)Distribution StrategyBased on the above categorization it is evident that the frequency with which each part is demanded at a point of sale and customers’ willingness to wait can be used to decide which SKU has to be stocked where. For example while the fast movers have to be readily available at the service dealerships (retailers), customer service is not usually jeopardized if a stranger part is not immediately on hand. Similarly, most customers are willing to wait for the out- of circulation parts. This means that while the frequently needed parts have to held closer to the consumption point, the less frequently demanded items can be held further upstream. This will help reduce the SKUs that has to be held at different stocking points but the challenge in this environment is that VOR situations (vehicle off road), customer intolerance to waiting and repair bay blocking, force service points to keep a large number of SKUs. But by questioning the assumption that this range has to be carried individually as they currently do, a mutually beneficial method can be evolved. A system of parts sharing can be set up between dealerships in a locality (cluster warehouse) in such way that each dealer in the cluster will only carry a limited but independent set of erratic parts that can be sourced by others in the cluster. This can ensure that any part is available to another within 2 hours! While these actions trim the SKUs being held at a location, in order for dealerships/channel partners of the OEM to service their customers with this large range of parts within their limited capital, they should also be able to hold lower stocks.Stock is a function of lead time, therefore significantly reducing the lead-time of the dealership/distributor from their next node (the regional warehouse) in the service distribution network can aid in reducing the stock the dealer has to maintain. And similarly availability at a central warehouse can help reduce inventory at the regional warehouse. Thus when lead times are reduced, the minimum inventory to be held at various nodes in the network for every SKU will reduce, enabling stocking of an increased range of spares in the supply chain for the same working capital.In addition to decoupling the supply lead time from the replenishment time, a central warehouse is also needed to act as a dampener to absorb fluctuations in spares demand. The greatest variability in parts demand is logically at the point of sales, while the CWH which is an aggregate location servicing demands from all points, experiences the least variability. Using this benefit of aggregation, a central warehouse is able to serve many different destinations in the supply chain far more efficiently whilst keeping the lowest possible overall stock in the system.Inventory Creation and Movement – from Push to PullFor the distribution strategy to succeed, availability has to be ensued at all points in the supply chain: in the central warehouse, regional warehouses; distributors/dealerships; and at the retailers. This is only possible if the supply chain moves away from the damaging “push” system and implements a “pull” i.e. instead of pushing inventory downstream each node quickly responds and replenishes the depletion from the inventory maintained at the subsequent node.<img src="https://images.vectorconsulting.in/storage/editor_uploads//a-diagrammatic-representation-of-spares-ventory-movement-with-pull-replenishment-scaled_1680504917.jpg">Therefore vendors in the system have to supply as per actual consumption from the central warehouse instead of forecast based schedules. The prevalent approach of schedule based planning for spares sourcing not only creates desync with real demand, it also leads to FG inventory pile up either at the vendor or at the warehouse when the item is unexpectedly in surplus. Moving from this push system to a pull system wherein movement of inventory is based on actual consumption takes away the need to arrive at the accurate forecasts and send in monthly schedules. A communication system that indicates level of stocks against a norm (daily) can be set up between OEM’s warehouse and vendors for a daily order system. The vendor can then manufacture the corresponding parts and replenish stocks at the OEM as per priority, set based on actual level stock in comparison to norm. This system enables the suppliers to receive purchase orders in a hassle free manner. Constant change in order priorities that cause capacity loss for supplier and unneeded FG can also be eliminated.Similarly consumption based inventory movement can be triggered between central warehouse, regional warehouse, service centers, distributers and even retailers (refer figure 2). At any two links, the inventory should move based on immediate pull signals based on actual consumption with the buffer levels signaling priority for replenishment. A fast courier service has to be engaged for rapid movement of stranger and slow parts from the regional and central warehouse to the point of sales or service.BenefitsThis model of managing spares will give immediate benefit to the service dealerships and distributors. Higher sales achieved as an effect of better availability in the entire supply chain and without increase in inventory allows dealers to earn high ROI and gives them the motivation to invest more resources towards improving reach and customer service in the market.But in order for this model to achieve its full potential in the aftermarket, cross country dumping by the wholesalers which force distributors to erode their margins has to be prevented and price parity has to be maintained. Once wholesalers are moved out from the network and replaced with dedicated distributors assigned with clear territories, the higher ROI would enable them to service retailers in their territories with regular beat plans. Consequently, the company will experience higher overall sales without any discounts or schemes.What more, since material is ordered by downstream supply chain partners based on consumption, this process hitherto fraught with firefighting will move into auto mode. This and the reduction of month end skew of orders can give a much needed respite to the management team, giving them an opportunity to focus on initiatives to further increase market share.Industry studies peg the current size of the components business in the Indian automotive after-market between Rs 28,000 crore- Rs 24,800 crore, whereas the service market is estimated at Rs 8,000 crore. The combined value is projected to rise to Rs 60,000 crore by 2020. A recent ACMA study reveals coverage figures as low as 15-20% indicating that this market is addressed ineffectively by most OEMs. But once the distribution network of the company spreads into the nooks and corners of the country, OEMs can not only increase vehicle sales, they can also augment revenues by claiming this vast untapped opportunity in the aftermarket.

Transforming The Spares Supply Chain

By adopting flow-based project management, Godrej Electricals & Electronics is able to carry out rapid execution of infrastructure projects.

Right for accounting. Wrong for project management.

Getting it right in accounting…Financial accounting is a challenge in project organizations involved in delivering large construction projects for its clients. The activities can start in one financial period and end in another. Unlike regular production, where we wait till dispatch of completed goods to recognize revenue, we cannot wait till the delivery of complete project for revenue recognition. If we do that, then the accounts will be distorted and comparison across periods will be impossible. So revenue has to be recognized along the duration of project execution. So revenue recognition and matching costs to the revenue for determining the performance of the firm for a period has to have relevant assumptions, so that we can compare a firm’s performance effectively across periods. The Institute of Chartered Accountants of India has defined accounting standards (AS7) to deal with the problem. AS7 highlights that % expenditure booked (actual expenditure incurred as compared to total expected expenditure) can be used as a factor multiplied by project order value to book turnover for the period. The expenses will be matched accordingly. The good enough assumption did solve the accounting problem to a large extent.…can make it wrong for project managementThe problem starts, when organizations work towards the turnover booking rather than managing the project. Is there a difference?If we look from accounting point of view, the relative importance of tasks is based on the costs associated with doing the tasks. However, if we look at tasks from a <a href="https://qclab.app/research-and-publication/engineering-construction/">project managemen</a> point of view, the relative importance of task depends on the dependency relationship and location along various paths of the project plant. The paradigm of managing the project using rules of project management can get into a conflict with the paradigm of managing the project using the financial accounting guidelines, particularly in environments of limited resources. And yes, most environments have resource limitations which are shared across various paths of the projects. Many EPC companies even have the engineering and procurement resources shared across projects. So under resource limitations, when one prioritizes tasks for turnover booking, one can end up doing it at cost of moving along the longest path of projects, thus harming the project as a whole. (The longest path activities contribute to a small fraction of the total billing or turnover as most of the tasks in a project do not belong to the longest path of the project).The problem aggravates in multi-project departments where sharing is done, as one needs subordination not only to the longest path of a project but also subordination to the longest path of a delayed project. When there is pressure for turnover booking, the prioritization of tasks may not align with the criticality of projects.The cascading delays…Most organizations have yearly turnover targets broken down to quarterly and even monthly. These targets are then set as departmental KRAs. When monthly or quarterly turnover targets drive the departments’ KRAs, there is a pressure to start design ASAP and get on to procurement. This leads to an environment of bad-multitasking in these departments of shared resources. The badmultitasking in engineering department leads to expansion of lead times. The designs where inputs are required from other resources groups or vendors get into further delays due to conflict of priorities. The delays of design usually put pressure on engineering department to pass on unapproved designs or design with omissions or just pass on drawings which are easy to release. It is no wonder; in many EPC organizations designs have 5 to 6 revisions before they are closed. Under pressure of billing, procurement starts procuring items where designs are easy to finalize. (In most cases designs of longest paths activities require integration inputs from various different sources and hence are the most difficult to finalize.) As a result, many times, items required much later lands up in site much earlier, while there are delays in the critical items. Similarly manufacturing tends to get the easier designs earlier (where there are less of integration inputs) and some items are produced much ahead of time, while others are delayed. Many times, manufacturing focuses on items which are good from expenditure booking at cost of other critical items where expenditure is not much. While from turnover booking, many such items tends to get billed as expenditure is incurred. But from project management point of view, it does not help the project as a whole as erection is held up for want up items.…and the vicious loopWith bulk of the civil or structural work done, many items procured, when site is close to final erection, bulk of the expenditure is booked on the project and turnover realized. But from project management point, this is a point where all delays accumulate. Usually the necessary items are missing and erection is held up. At same time, the management focus has shifted to another project (due to reduced turnover booking opportunity). This further delays the erection of project. Finally under customer pressure, the sites are somehow commissioned with a long pending list of items. After commissioning is over, bulk of the project resources are removed and client mostly gets on with the regular operations.<img src="https://images.vectorconsulting.in/storage/editor_uploads//the-vicious-loop-1-1024x621_1680513527.png">The pending list remains pending and so does the retention money. (Close to 10 to 15% of the project fees is usually held up as retention money for most such EPC projects.)When management attention shifts to turnover booking of another project, the old projects are left behind, like a long expanding tail, with some resources and retention money. Since site is not handed over to the client, some resources continue with the project, managing even the maintenance work. Gradually such “inactive projects” get piled up. The receivables go up. (It is not surprising to see many companies in this business, having receivables of close to 1 year.)With rising receivables, there is a pressure on cash flows which in turn affects the billing of other projects. The pressure on working capital slowly builds up with retention money stuck across many inactive projects. This vicious loop goes on. Working capital problems leads to delays in paying advances to vendors which in turn leads to delays in supplies and eventually the billing of new projects starts getting effected. Every year management tries to close the long tail projects but with increased time, other conflicts add up to the problems.The issues of liquidated damage claims and material pilferage carry risk of potential write-offs to close a site. Some companies break the vicious loop by taking harsh decisions of write-off of part of the retention money to close the issue. Time to time management takes such harsh decisions to somehow close the sites and get the cash for billing regular new projects.The wrong paradigm…Accounting assumptions were invented to depict accurately the performance of a firm. It was never meant to be the driving tool for managing projects. In fact, using billing or expenditure booking as a key metric to drive operations of such organization eventually leads to much less expenditure booking than is potentially possible.…and the wrong solutionWith due date failures and customer complains, many project organizations have realized the problem to set the project management right. However they continue with monthly expenditure booking targets. Time to time, these organizations lookout for a new gizmo – new project management software. These gizmos look even more attractive when a single tool claims to integrate the needs of accounting information, cost management, material management and project management. Many vendors of the project management software present the fancy information reports to the management as part of their sales pitch. The new reports look attractive to management who look at the entire problem as an “information gap” problem. Most organizations do not evaluate the overheads of maintaining such systems. The enormity of upfront detailing required in planning and frequent updates required in execution makes it almost impractical to maintain such systems. In multi-project environment, where bad multi-tasking is prevalent, the initial task schedule in project plans become useless within no time and needs constant revisions to maintain pace with execution. Many times, the upfront detailing required for such systems is known only after one has executed part of the project. For example, only after general arrangement drawings are over, the exact scope of detailed drawings are known. Any tool which requires a detailed and stable plan, as a starting step, become difficult to implement as these project environments have significant uncertainties. The discipline required for maintaining the data is tremendous and most difficult to get in a multi-project environment. (In a highly uncertain world, it is most difficult to put people under a rigour of process discipline).The middle and lower management do not see any value to themselves in maintaining the systems. They look at it as an extra burden. It is not surprising to see many firms, after buying the tools and putting all efforts in implementing, use the tools very superficially or do not use them at all ( as data discipline is almost absent)Caught between the devil and the deep sea…As we have analyzed, if we use the billing or expenditure booking targets as a measure to drive project execution, one ends up messing with project execution. On the other hand, most project management tools do not seem to help.…and the way outInvented by Dr Eli Goldratt, Critical Chain Project Management provides the execution process framework to increase speed of project flow in multi-project environments in the EPC (engineering, procurement and construction) domain. CCPM is about implementing two important paradigm shifts, to get the desired benefits. The first one questions the conventional wisdom: early start leads to early finish. This assumption is erroneous for environments with limited resources. (When the default rule is ASAP, resources end up doing bad-multitasking, this in turn increases the lead time, wastes capacity due to frequent switches.)The only way to get out of the mess is to control the release of projects in design and procurement. At times, it is also important to control drawings released to site to prevent resources stealing (working at non-priority areas at cost of high priority areas) and thin assignment of resources across sites.The second paradigm shift questions the widely held wisdom: in order to complete a project on time, each task should complete on time. This assumption leads to hidden buffers at task level. Once the buffers are hidden within the milestone, it tends to get wasted as milestones turn into self fulfilling prophecy. The milestones prevent managers from intervening on a task early and prevent gains from passing on in a chain of activities.CCPM deals with the above problems by staggering the projects and work packets within project based on the capacity limitations. The projects are not planed with so called “accurate estimates”. The task estimates are made aggressive and buffers (about 1/3rd of the project lead time) are placed at end of the project as project buffer and end of feeding chains, before the integration point, as feeding buffers. The transparency in buffer consumption provides the early warning system to take expediting actions at right time. The buffer signals also provide way to prioritize tasks across projects (project buffer penetration has higher priority than feeding buffer penetration).The new measurement system to guide projects is no longer expenditure booked on a project. It is % completion along the longest path, compared with the % buffer penetration. With these new measures, it becomes impossible to compensate for slow progress in longest path by fast progress in feeder paths. The new measures transfer the bad news to management ASAP. If there is no progress on longest path, the % completion remains the same, while buffer incursion goes up. This brings the necessary focus and prevents the effect of “90% project complete in 1 years and rest 10% in another year”. Finally we have a solution to look good on accounting numbers without trying to drive them.As long as we understand that expenditure booking or billing is an indirect effect of effectively managing projects, we will be better off. CCPM offers a practical process framework to make that distinction.

Rapid Execution of Infrastructure Projects

By focusing on enabling flow of projects in the New Product Development funnel using the principles of TOC rather than tracking individual projects, KOEL crashed lead time of projects!

Rally with your allies

It is a widely held belief among organizations that forging long-term relationships with dedicated vendors is crucial for supply chain excellence. Industries like the auto sector have understood this better than others.Most auto <a href="https://qclab.app/research-publication/an-sos-for-the-oems/">OEMs</a> have dedicated vendor setups close to their own setups in the interest of just-in-time supply. Their pricing arrangement is period-based rather than transaction-based for seamless movement of inventory. Many consumer goods and equipment manufacturing companies have adopted similar models, more out of the need to outsource manufacturing content and reduce in house labor than for any other reason. The arrangement appears like a collaborative, interdependent partnership, where each party focuses on its core competency. When overall economic growth is good, and everyone in the chain makes money, the model can appear like an epitome of successful win-win partnerships. However, it is in the recession years, when sales, profits and working capital come under pressure that cracks develop in the relationships.In the last five years, the Indian economy has gone through two slow-down phases – in 2008 and in the last couple of years. Sectors like engineering, auto and consumer goods experienced sales pressure. Profits dipped, working capital rose. Resultant impact has been a shift of focus in management from “growth ideas” to “reductionist ideas”. Initiatives for reducing working capital, cutting material costs and fixed costs are dominating boardroom discussions. With a crisis-like situation looming in many companies, these initiatives are under a lot of time pressure to yield results. With pressure comes the need to resort to harsh measures that will give immediate results. These are usually meant for and imposed on the weaker entity in the chain – the “partner” suppliers.<img src="https://images.vectorconsulting.in/storage/editor_uploads//rally-with-your-allies-image-1024x637_1680506699.png">Burden SharingWhen pricing to end customers is under pressure, organizations typically look at vendors to support them in retaining margins. Buyers in the organizations are given aggressive targets; they are directed to re-negotiate pricing terms with the vendors. Large organizations even hire outside expertise to identify, and at times, directly negotiate with vendors using templates of “correct” costing.The overall recessionary mood, with capacities going unutilized, creates an atmosphere of desperation. In these conditions, there is an abundance of new players willing to price products using marginal costing principles to gain entry to established vendor networks. Power relationships are manipulated to force vendors to drop prices. Alternatively, new and cheaper vendors are added to the network to create “competition”.Borrow from BuddiesRecessions typically also bring along a liquidity crisis. Receivables not only expand in time but also become difficult to collect. Organizations find themselves under pressure to deploy more capital to manage much lower volume of sales than they did during other times.Many get into the mode of using vendors’ cash to improve their conditions. Short-term tactics like:<ul><li>Adhoc delays in vendors’ payments.</li><li>Formal increase in payable periods.</li><li>Delayed off take of material made by vendors, even after, it is made as per confirmed schedules.</li></ul>Both approaches of pushing “capital” and “costs” back to vendors are myopic and have disruptive ramifications for organizations not only in the long term but also in the short term.Short Term Impact: When smaller, dedicated vendors are not paid on time in recession periods, they are pushed into a bigger crisis than the organizations they service. Stuck between the proverbial rock and a hard place, they take desperate actions to protect themselves. Many cut down on raw inventory or prune labor capacity. These indirectly lead to disruptions in supplies. The effects of these measures would be clearly seen if one were to do an analysis of parts availability at the auto OEMs, the entities that are heavily reliant on “partner” vendors. With excess capacity becoming available at the vendors’, one would expect parts supplies to improve. However, at most OEMs, parts availability takes a hit. The everyday search for parts, manic and frequent rescheduling only takes a turn for the worse. The few sales orders that trickle in are cancelled or their fulfillment delayed. OEMs that depend on a large number of vendors to bring in parts for assemblies suffer more when cash flow issues cripple the production of even a handful of vendors. High level of mismatched inventory almost nullifies the gain in payables period derived by delayed payment to vendors.Long Term Impact: When the economy recovers and there is a sudden hunger for extra capacity, vendors try to restore capacities. This capacity enhancement comes with a built in lead-time, resulting in a disruptive supply chain and potential sales loss for the parent organization in the transition period. Many vendors also use the opportunity to price the product higher to account for increased payable period of the organization.When organizations add new vendors to bring about“competition” amongst existing vendors,“partner” vendors, particularly those with large capital investment, are forced to look for new avenues to fill up capacity. Their “dedication” weakens causing day-to-day conflicts in scheduling, which in turn affects deliveries to the main organization when business starts reviving. The experience of downturn also makes vendors wary of adding dedicated capacities for the organization. Thus begins a never-ending search for an “ideal” partner. The “rationalized” vendor base expands. More vendors means more effort for coordination. Eventually, organizations realize the need to consolidate vendor base. Many keep switching between paradigms of more vendors for more competition and consolidated fewer vendors for smooth coordination.Deciphering the inherent Win-WinThe long-term growth story of India is still intact. The periods of economic slowdown will always be short, thanks to the increasing number of prosperous middle class Indians. Hence organizations can create a sustainable supply chain for a long term only if they avoid the disastrous short cuts in the short periods of downturn.Easing the pressure on cash and profits, however, is a genuine challenge. Not many organizations will be able to compromise short-term goals for long-term good. The only way out is to deal with short-term challenges without giving up on long-term goals. This is possible if organizations look at vendor supply chain and their internal operations holistically to release the hidden value both in terms of cash and margins.Cash locked in inventory flow in entire chainCompanies look at the inventory MIS at the month end, quarter end or year end to conclude about value locked. They shouldn’t. To get the real picture they should be looking at daily inventory. Many discrete manufacturing companies have a skewed inventory profile in raw material, WIP and finished goods. The profile peaks as inventory balloons towards the middle of the month and falls with the flush out at the end of the month. Working capital deployed in the business is determined by the peak rather than the month end numbers reported in the monthly MIS. This way of working creates wide variability in manufacturing lead time, which is also one of the main guzzlers of working capital. This way of working also locks up working capital of partner vendors.Cash locked in receivables in entire chainTo understand the compulsion of increasing payable period of vendor one needs to understand how pressure of working capital builds for organizations. For many equipment manufacturing companies, engaged in assembly and erection at the site, the receivables do not exactly reflect the collectible amount. Parts supply allows companies to book turnover and receivables, but when payment terms are tied to erections and commissioning, the large time gap between supplier payment and actual collections eats up working capital. The gap widens in downturn as companies try to bill out of sequence to make up for sales.The conflict between controlling receivables and pursuing turnover growth at the same time is not only seen in case of custom-made equipment but also in standard products sold through dealer networks. During a downturn, push sales leads to ballooning of inventory and then to cash flow crisis for dealers. In both types of industries, the inability to manage receivables and inflated working capital forces organizations to resort to delayed payments to vendor partners.Margins locked in capacity utilization in entire chainIn supply chains, where inventory flow is skewed, the capacity deployed for managing growth is always to manage the peak, leaving pockets of capacity wasted. This wastage is never revealed in the output figures reported in the monthly MIS. The capacity wastages (hidden) find their way into product pricing of vendors. (The only way to identify this wastage is to check the difference between the touch time of an operation in critical work center and compare it with the total available time for a period).The way outOrganizations stand to gain both in the short term and in the long term if they focus on accelerating inventory flow while minimizing the variability of flow in the entire supply chain.The epidemic of month-end, quarter-end and the year end skew in many organizations points not just towards a persistent, unresolved problem of many decades but also to the enormity of the problem in the entire industry. Investment in enterprise IT tools in the last few decades has not changed this reality for many organizations. It is time for a close look at the conceptual framework of existing supply chain practices.Relook at the TheoryThe wave of inventory is typically due to concept of planning horizons or planning cycles. At the end of these, one needs to make a correction for the errors in past planning cycle and re-plan for the future incorporating both errors of the past and requirement of the future. Longer the planning cycle, longer is the time taken to correct the errors and bigger is the correction cycle, therefore the wave of inventory movement and capacity utilization.Every supply chain has the twin challenge of ensuring inventory movement decision for maximum utilization of assets and ensuring fulfillment of entire demand. Widely used supply chain practices – both for standard and nonstandard products – make one or both of the following assumptions about reality to make such decisions.<ul><li>With more information, one can predict the demand for future in reasonable accuracy.</li><li>With more information, one can calculate precisely the capacity of manufacturing.</li></ul>Both these assumptions are right if one wants to explain variations in hindsight. For example, everyone seems to know the exact (and a very obvious reason) why actual sales deviated from sales forecast. But they fail to predict the future, more so close to economic downturns and upturns. A plethora of variables impact demand; one can never be sure when a variable’s impact is noise and when an impact is a signal (worth a listen). As a result, most forecasting tools fail the retrospective test – use past data to predict the immediate past. Hence, using forecasting data to create and move inventory in the supply chain invariably leads to surplus, shortages. At the same time, it creates waves of capacity utilization. The waves are more gigantic during downturns as it takes time for entities to adjust to real demand.Similarly, manufacturing planning techniques assume that it is possible to accurately define capacity for maximum utilization. However, varying product mix and uncertainties make it nearly impossible to determine the exact capacity required for any point of time. As a result, any upfront inventory creation decision results in periods of overload and under load. This approach of schedule-based planning and associated errors leads to inventory pile-ups at vendors’. It is not uncommon to find vendors complaining about high finished goods inventory that has not been picked up by the main organization, even though the goods were produced exactly as per schedule.Moving away from push system of upfront scheduling of capacity and predicting demand for a month or a week to a daily pull system in the entire chain, including suppliers, operations, and customers, not only reduces inventory in the chain but also uncovers excess capacity. Pull systems depend on initiating movement of inventory based on rate of completions while maintaining a constant inventory profile in operations or distribution. This takes away the need to arrive at accurate capacity or demand for future.The reduction in inventory in the entire chain takes away the pressure of tampering with vendors’ payables. At the same time, when capacity usage improves, the entire gross contribution adds to the bottom line of vendors creating an environment where gains can be shared with the organization, particularly in cases where the main organization takes the initiative and makes the special effort to streamline flow in the entire chain. The released cash and capacity can be used to build strategic inventory or capacity buffers to offer guaranteed and reduced lead time in the market to grab more orders during a downturn. The suggested approach provides a competitive edge to an organization, more so because it flies in the face of typical approaches adopted in the downturn.

KOEL crashed delivery lead times from four-six weeks to one week.

Moving away from a forecast-based model to consumption-based operations, KOEL crashed delivery lead times from four-six weeks to one week.

Find out how Pratibha Syntex turned around from being a business struggling to survive to a profitable one that offers one of the shortest lead times and highest reliability to customers.

A stitch in time: Cutting lead time and improving reliability of textile supply chains

From fiber to fashion, the textile industry value chain tends to be long, containing many stakeholders. Barring a few vertically integrated units, which have an end-to-end control of the entire supply chain, the usual flow spans multiple units specializing in one or two parts of the total value chain:<img src="https://images.vectorconsulting.in/storage/editor_uploads//dbr-in-textile-2-3_1680521110.jpg">The raw material, few in number, undergo irreversible transformations at every stage or unit of this value chain. And, in the process, the output variety increases by leaps and bounds. Let's take an example of cotton garments manufacturing. From a single fiber i.e, cotton, by varying the twists, more than 50 types of yarn of different thickness and strength can be created. A combination of these yarns can be knitted into 100s of greige fabric – each varying in structure, thickness, width. When the greige fabric is dyed into different hues, variety explodes into 1000s. Finally, from the same fabric, many types of garments can be manufactured.A typical sequence of processes in a garment factory is shown below:<img src="https://images.vectorconsulting.in/storage/editor_uploads//a-typical-sequence-of-processes-1024x628_1680521116.png">Generally, retail brands or downstream partners design the products they would like to order. Then, manufacturers come up with samples. Subsequently, the approved designs are manufactured. Currently, for most mills, not only is the total manufacturing lead time fairly long, it is also extremely unreliable. So much so, that for brands, the ‘concept to delivery-to-stores’ lead time can vary from 9 to 12 months. Variety involved is huge, while fashion cycles are short, often shorter than the lead time! So, a ‘stock and sell’ model, will overburden the supplier with huge inventories. This is impractical, to say the least.As a result, most suppliers operate as ‘Make-To-Order’ (MTO) units to its downstream partners. An order is usually a collection consisting different designs. At each unit, the order gets more granuralised. But assortment completion or delivering all the SKUs of an order together is of paramount importance. For example: Let's say, a retail brand places an order for its spring-summer collection with a garment supplier and it has ordered different quantities of 12 individual designs. On the shop floor of the garment supplier, each of these SKUs will run individually, and may get dispatched separately. But generally, such designs are part of a collection or a storyline and is expected to occupy the retail shelf space together. So, for the brand, until all 12 designs are delivered, the collection is incomplete and useless.A similar situation can arise between a garment supplier and a fabric/trim supplier when supply of some fabric SKUs arrive on time, but one fabric is missing in each assortment! This could happen between a fabric supplier and his yarn suppliers – weaving or knitting cannot start until all yarn SKUs, in the required quantity, is available. In the case of a yarn supplier, mixing of yarns to achieve a desired shade cannot begin until all shades of the fibers required are present.Chronic industry issuesAll textile units run their shop floors with a target to complete all the SKUs in their various orders. But, in spite of sophisticated scheduling software and continuous expediting, these units experience the following chronic problems:<ul><li>The overall lead time of an assortment is high.</li><li>The inventory levels skyrocket as rate of creation of incomplete assortments (which cannot be dispatched) is much higher than the rate of closure of assortments or dispatch.</li><li>Overall system reliability that customers experience is poor though traditional measurement of on-time performance may indicate differently.</li><li>Consequently, very often the supplier has to pay for this chronic unreliability (delays/quality issues/incomplete assortment) by having to resort to expensive airfreights and/ or by paying penalties to customers.</li></ul>But what really creates these issues?The Root Cause- A Vicious Loss of CapacityBulk manufacturing of textiles is a high-investment business. So, to ensure good return on this investment, efficiency of each work center is diligently protected, and any capacity loss or idling is a no-no. Moreover, these machines have an optimized sequence of work (e.g., yarn making has a count sequence, dyeing needs to maintain a particular color sequence etc.). So, to utilize the machines to the highest levels, most textile units follow a monthly planning system in which all opportunities for batching across the backlog of orders are utilized.Based on the SKUs manufactured in the previous month, a plan is made at the beginning of each month for that month’s production. The plan is shared with vendors or downstream units. Vendors too experience delays. Moreover, different materials have different lead times. So, in this wait for the complete kit of materials to become available for production, capacity of the mill is lost or underutilized in the first half of the month and overburdened towards the end of the month when all the material starts becoming available. Therefore, work moves in ‘waves’ into the various work centers in the textile mill.At every work center, a few raw materials can be transformed into many varieties of output. So, it is easy to 'steal’ the raw material of a current order of say SKU-2 to make a bigger batch of SKU-1. In the process, the SKU-2 will now wait for raw material to be available again while stock of SKU-1 piles up in the warehouse waiting for the assortment to complete. So, in spite of inventory ballooning over the course of the month, this practice of cherry-picking across customer orders also creates erratic cycles of starvation and overloading in work centers. This also increases the time gap between manufacturing various items needed for completing orders (poor On-time-in-full performance).Subsequently, when pressure from customers or downstream units to process missing items of an assortment intensifies, batching considerations are sidestepped, and production plans are rescheduled. This affects scheduling of other material, creating more de-synchronization. So, by the time all the input material becomes available, time runs short. All planned orders for the month cannot be completed; many orders spill over to the next month.At the end of the month, the large WIP and raw material in the system is again ‘netted off’ against pending orders and, a new plan is made. Consequently, the same cycle of underutilization in the initial part of the month and expediting towards the end of it, repeats every month.The vicious loop that such environments tend to experience is this:<img src="https://images.vectorconsulting.in/storage/editor_uploads//the-vicious-loop-that-such-environments-tend-to-experience-1024x452_1680521125.png">What is most ironical is that in spite of fighting hard to 'protect' the returns on investment and profitability by focussing of utilization and machine productivity, in the end, this is all in vain. The company does not experience any real improvement in overall utilization. And, to add to that, due to system unreliability, there is a consequent increase in costs because of to having to frequently send material through airfreights and/or by being forced to pay penalties.Direction of solutionThese problems arise because various work centers of a textile mill are blind to how local decisions affect the fate of customer orders. So, how can mills solve these? The only win-win way out of the conflict of order completion versus utilization is a method which limits WIP and defines the boundaries within which local batching considerations can prevail to protect efficiencies without delaying orders.Sounds simple! doesn't it? Let's see how to do it.Tactical StepsThough the lead time for completion of order is often long, the actual processing time or the touch time of an order on the machines is low. The gap between touch time and lead time is long because orders often wait to be processed in front of various work centers or in warehouses. In order to reduce the waiting time, and to implement a paradigm of focus on completing orders rather than driving efficiency, the following tactical steps are needed:1. Production scheduling with WIP control: As against existing practice of monthly planning and batch releases, release of material should only be based on daily gap in WIP i.e. new orders are released only when the same quantity exits. This can be implemented by first identifying the bottleneck or work center in the system whose output determines the system output (called the Drum). Since by definition, the other work centers have higher capacity, a day’s output from this can be the input to the system on the next day (Rope). With this rule in place the mill will have enough visibility to do some batching to meet any technical requirements and protect utilization while at the same time forcing completion of work on the orders in hand. Consequently, the execution lead time -i.e. time from date of release of the order to date of completion (Buffer) will reduce. At the same time, this step also enables planning to be conservative and spare some capacity, while allowing execution to aggressively use any unused capacity and maximize output.2. Keeping track of 'Flow’ of orders: To ensure on-time delivery of a complete customer order, it is also essential that instead of tracking components, completion of the assortment is managed. All local level measures and targets like ‘Daily dyeing output should be 10 tonnes’ or ‘daily garmenting output should be 25,000 pieces’, which can hamper adherence to this objective (by encouraging batching), should be eliminated. High productivity of each work center will likely be achieved; but only as a by-product.3. Managing priority: Now, the delivery date of the order should be the only determinant of priority on the shop floor. To enable this, a simple color-based priority mechanism can be devised based on relative closeness to the due date. Red is highest priority, then Yellow &amp; Green the least. The color priority dictates expediting on the shop floor and at the vendors’ facilities.4.Quoting due dates: The sales department usually generates new orders, and quote delivery dates with a fixed lead time or based on customer expectations. But, in such a system, quoting a fixed lead time delivery date may not always be enough, considering there is a queue of orders already in the system (waiting to be processed at the bottleneck work center - the drum). And letting customers pick a date may also upset this queue, and thereby, the already committed delivery dates. So, the delivery date offered should not jeopardize the existing queue and should also allow for sufficient lead time to complete the execution post the processing at the ‘drum’. A daily perpetual order slotting for Due Date Quotation with clear definition of capacity is essential. That is, the production team has to provide the sales team with “safe dates” or highly reliable dates they can offer to customers for orders that the sales team might close next. Then, not only will lead times be low but the reliability would also be near 100%. This will also help smoothen the load on the shop floor since sales will have visibility of gaps in the production load and, thereby, help encourage sales even during lean periods.5. Managing preparatory activities: The preparatory activities (sourcing of yarn and trims, submission of GSS samples to customers) can also be prioritized based on the relative closeness to release date with the help of a preparatory buffer which is back-to-back to the production buffer. For instance, in a garmenting plant, a preparatory buffer should help create a bank of full kits of sales orders with completed fabric, trims, and approvals to ensure continuous running of the stitching operation on correct orders. So, the overall system would look like:<img src="https://images.vectorconsulting.in/storage/editor_uploads//managing-preparatory-activities-1024x321_1680521137.png">ConclusionOnce an organization implements these tactics, synchronization can be achieved with all the preparatory activities including raw material supplies. Moreover, waiting times will be reduced, and lead times of completing an order can consequently be slashed by more than half. With such an overall reduction in lead time, key customers who require orders in considerably lower lead time can be offered deliveries in half the normal lead time (possibly at a higher price). To achieve this, capacity can be set aside for running these orders without hampering other normal lead time orders. This means that, in an industry which is chronically struggling with long lead times and poor reliability, a company adopting this method can build for itself a competitive edge based on reliability with lower lead times, while ensuring more output from same capacity.

Achieved OTIF of mid-90s in 2 months

<h4>Shifting gears in auto spare parts business</h4> &nbsp;

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The COVID-19 pandemic caused unprecedented disruptions in the auto industry, severely impacting demand, supply chains, and production stability.&nbsp;Problem: Auto spare parts companies face liquidity stress, vendor instability, labor shortages, and unpredictable demand, leading to misaligned production, delayed deliveries, and compromised market share.&nbsp;Solution: Introduce pull-based replenishment to stabilize supply-demand alignment, dynamic buffer management, and proactive supplier support, ensuring seamless operations and agility.&nbsp;Benefits: Reduced lead times, efficient working capital usage, production stability, improved profitability, and the ability to expand market share amidst challenges.

Key Takeaways

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

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