In the automobile industry, an Original Equipment Manufacturer’s (OEM) spares business has two major, and at times conflicting, needs to satisfy; 1) ensure delivery of spares to the customers at the point of requirement in the shortest possible time and 2) to do so in a manner that is financially beneficial to the company.1)Importance of delivery of sparesOnce an OEM (Original Equipment Manufacturer) has sold an automobile (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 are known to negatively impact vehicle sales of a company.2)The financial challenge in spares managementEnsuring the availability of spares 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 the automobiles (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 automobile 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 the 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 automobile OEMs in India struggle with parts availability. The ramifications of such unavailability further lead to inefficiencies in service centres and ironically take away the advantage of what should have been a monopoly market for the automobile OEMs.Impact of unavailability at service dealershipsDelay in parts availability at service dealerships leads 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 centres; hence, it is not surprising to find customers seeking out cheaper alternatives. Therefore, most vehicles leave the automobile OEM service network after the warranty period. If we take cars – according to ACMA, while nearly 20% of the cars on the road are more than 15 years old, the typical age profile of cars reporting at dealerships is less than seven years.Impact of unavailability in the aftermarketMany automobile 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 distributors, and small retailers comes with its own challenge. Most of these market players are small businessmen find it difficult to invest large sums as capital.The problem of unavailability is further aggravated by the 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 automobile 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 the vehicle is down), and the non-availability of original parts make 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.<figure class="image"><img style="aspect-ratio:933/933;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//1_1709892150.png" width="933" height="933"></figure>Core IssueIn the automobile industry, these chronic availability issues have their roots in how typical OEMs operate. They send in 3-month rolling schedules, based on sales forecasts 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 the prevalent practice of pushing material at month-ends (with or without incentives) to meet sales targets. This is one of the reasons why distributors tend to keep 45 to 60 days of stock even when the nearest company warehouse is just a few days away.When many parts are inherently slow-moving, pushing them to the channel partners 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. A distributor’s daily working capital woes force him to restrict his business, and many tend to service only a limited number of retailers (usually larger retailers) who are perceived 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 in the 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 the 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 centre, 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 a small chance of failure or parts with large replacement cycles like Axels, Transmission, Cabin, Frame, Door, Fuel Tank, Central Locking System, etc.. Accident insurance claims, which are usually made in these cases, generally take 10 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:&nbsp;These are usually stranger parts that belong to 4-10 year old models of the OEM and 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.<figure class="image"><img style="aspect-ratio:933/933;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//3_1709892290.png" width="933" height="933"></figure>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 be held closer to the consumption point, the less frequently demanded items can be held further upstream.&nbsp;This will help reduce the SKUs that have to be held at different stocking points, but the challenge in this environment is that VOR situations (Vehicle Off The 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 a way that each dealer in the cluster will only carry a limited but independent set of erratic parts that others can source in the cluster. This can ensure that any part is available to another within 2 hours!&nbsp;A judicious decision of where to hold which kind of parts ensures easy availability of even stranger parts. However, OEM&nbsp; dealerships/channel partners also need to be able to service their customers within their limited capital. For this they have to hold less inventory of the kind of parts required to be by them.&nbsp;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. Similarly availability at a central warehouse can help reduce inventory at the regional warehouse.&nbsp;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 can 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 PullIn the automobile industry, for 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 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.<figure class="image"><img style="aspect-ratio:933/933;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//2_1709892311.png" width="933" height="933"></figure>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, but it also leads to FG inventory pile-up either at the vendor’s end or at the warehouse when the item is unexpectedly in surplus. Moving from this push system to a pull system wherein the movement of inventory is based on actual consumption takes away the need to arrive at accurate forecasts and send in monthly schedules. A communication system that indicates the level of stocks against a norm (daily) can be set up between the 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 the 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 suppliers and unneeded FG can also be eliminated.Similarly, consumption-based inventory movement can be triggered between central warehouse, regional warehouse, service centres, distributors 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 signalling 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 automobile service dealerships and distributors. Higher sales achieved as an effect of better availability in the entire supply chain and without an 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, forces distributors to erode their margins, has to be prevented, and price parity has to be maintained. Once wholesalers are removed from the network and replaced with dedicated distributors assigned to 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’s more, since the 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 aftermarket to be between ₹28,000 Crs. - ₹24,800 Crs., whereas the service market is estimated at ₹8,000 Crs. The combined value is projected to rise to ₹60,000 Crs. by 2020. A recent Automobile Components Manufacturers Association (ACMA) study reveals coverage figures as low as 15-20%, indicating that most OEMs address this market ineffectively. But once the distribution network of the company spreads into the nooks and corners of the country, OEMs can not only increase vehicle sales, but they can also augment revenues by claiming this vast untapped opportunity in the aftermarket.

First pick rate improved to 97%

Find out how companies can implement a Demand-Driven Replenishment Model, to boost first pick rate, reduce inventory, and enhance dealer satisfaction, while optimizing supply chain efficiency and customer retention.

Spare the Trouble

Royal Enfield

BA Read More

title

Unlocking the untapped potential of your sales team can be a game-changer. Our latest success story with Godrej Interio showcases how they doubled their market share by carving out a dedicated business development team from the existing team.

Exploiting Sales Capacity

When the winds of change blow, some people build walls, and others build windmills. – Chinese ProverbMarket demand in B2B markets is stagnating. The number of new orders bagged by Indian companies fell by 30 percent in 2015 compared to the previous year1. This is attributed to the fact that the Indian manufacturing and infrastructure sector has been stagnant in the recent past. India’s core sectors (coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity) recorded a growth rate as low as 1.4% in 20152. This has left many Companies watching helplessly at escalating costs while sales are flat or falling. They are aware that the way to harness sales volumes in a stagnating market is to expand their customer base aggressively. However, in the B2B space, customer acquisition is not an easy job. Numerous meetings with different managers in client organizations, followed by technical approvals and demos, may be required to land the first order.The effort and time taken to get an order from a new customer is usually much higher than that required for getting reorders from the existing customer base. So, more the number of customer interactions more would be the sales. Consequently, the current narrative of the top management in almost every B2B organization is “go out in the market… spend less time in office”. On the face of it, this instruction sounds odd – aren’t the sales people already expected to spend most of their time in the field?Analysis of how sales teams use timeVector Consulting Group analyzed how sales managers in&nbsp;<a href="https://www.vectorconsulting.in/industry-solution/equipment-manufacturing/">equipment manufacturing companies&nbsp;</a>spend their time. The results provide an interesting insight.<ul><li>Salesmen put in long hours at work. Many of them (33-43%) work overtime</li><li>Salesmen spend as much as 65-80% of their time doing sales support activities!</li><li>80-85% of field visits of salesmen are limited to existing customers</li><li>Only 15-20% of these visits are to potential customers</li></ul><img src="https://qclab.app/wp-content/uploads/2021/07/Exploiting-Sales-Capacity_The-Table-only-1-1024x634.jpeg" alt="">If we define the core competency of a salesman as the ability to bring about buy-in for company products through customer interactions, then all other tasks can be described as sales support activities. The top capacity guzzlers of a salesman are these sales support tasks related to pre-order and post-order - right from ensuring clean order entry in the system to all customer follow-up tasks during order execution. Most of these support tasks require easy access to IT systems, rigorous documentation, and strong coordination with customers and other internal departments making it necessary for sales managers to spend most of their time in local branch offices rather than on field visits. Moreover, even though each of these support tasks (as shown in table 1) done by a salesman looks small, they cumulatively not only use up their capacity but also waste it. Every enquiry to order cycle or an order to collection cycle is interspersed with numerous small tasks. Each of them is typically iterative in nature and has to be done in small periods of time; else they are likely to become urgent. For example, if an enquiry comes in and the proposal has to be sent in in the next five days, the salesman is forced to drop everything and process the enquiry. Alternatively, if a dispatch is held up for want of inspection during the month end, most often, the salesperson is asked to step in to sort it out. Then, the salesperson will most likely drop everything else to facilitate the dispatch. (In many organizations, the sales team spends the last week of the month just trying to ensure dispatches and invoicing, wasting a clear 1/3rd of their capacity). When each salesperson handles about 10 to 15 open sales orders and 10 to 15 open enquiries, the number of open support tasks can be as high as 50 to 100. All these 50 to 100 tasks, with low lead-time service requirements, create a cycle of perennial urgency and bad multi-tasking for the salesperson. Moreover, all these tasks affect the rate of order intake as well as the rate of final billing to the customers. So, to use time better and avoid perennial switching between different types of tasks, sales teams try to batch various types of tasks across different sales orders into time buckets. (Such batching is one of the reasons for spikes in order booking and dispatches in many organizations). But, despite this, the capacity available for actual sales work (acquiring new customers or selling new products to existing customers) is little, and very often, the efforts required to acquire a new customer look disproportionately high with respect to immediate results. Consequently, salespeople are in a perpetual conflict.On the one hand they have to meet new customers to establish a new business, and on the other, they have to focus on support activities to ensure that they meet their monthly order booking and sales targets. Their capacity is currently completely taken up by the second. So, even if the board rooms resonate loudly with the demand for expansion of customer base to increase market share, as long as this conflict is not resolved, nothing is likely to change.A solution that does not workTo release the salespeople capacity, they have to be released from having to chase sales support tasks. But building a backend support team that truly serves its purpose is not simple. Many companies have tried this and burnt their fingers. To free up some of their salespeople’s time, some companies, particularly the ones with multiple business units and geographically spread out branch locations, have tried to create a commercial function at branches to support the backend work like order entry, material follow up, and dispatches. But this did not work as expected for two reasons. For one, the support team did not have the authority to interact with customers directly. They could complete their tasks only with information and help from the sales team. The prime responsibility and accountability of support tasks resided with the sales force. Secondly, the support team also had other unrelated responsibilities limiting their availability to undertake support tasks in a timely manner. When tasks were missed or were incomplete, the salespeople had to follow up with them. So, the support team was not perceived as adding any value. On the contrary, it was seen as just adding another layer to the bureaucracy the sales team had to wade through.The core problemThe only way out of this conflict is to question the fundamental assumptions of how sales as a function is structured. The two critical assumptions under the current organization of sales are as below:<ul><li>All customers want a single window of communication for all matters regards to sales and sales support activities</li><li>Accountability, and hence, the responsibility of all activities related to order intake and final billing should reside with the individual sales team.</li></ul>The first assumption is flawed, and the second one is costly. Customers need to be able to reach out to the company and have access to the relevant information without having to repeat themselves continuously. But it is irrelevant whether this is to the same person who sold their product to them. In fact, in many situations, they prefer to talk to an expert rather than a person who just acts as a contact point without having the necessary competency to deal with the queries. The banking sector works very effectively with multiple windows – customers interact with the call center, website, and branch offices without feeling the need to talk to just one person.The price organizations pay for the second assumption is the tremendous loss of sales capacity.Releasing sales capacityWhat is needed to resolve this dilemma is a method by which the non-sales or support activities are taken up in a manner that ensures clockwork efficiency and reliability without using the sales capacity for any kind of coordination. For this, a streamlined backend has to work directly with customers with machine-like efficiency! Only then will the sales team have the confidence to let go of the support activities.In order to ensure that the backend is streamlined,<ul><li>The support team has to be centralized so that there is an aggregation of work across branches, making a dedicated team for support tasks viable.</li><li>The team should have direct access to customers.</li></ul>The universe of tasks have to be standardized with clear handover criteria and then divided between different teams based on time and skill requirements (e.g., payment follow-up, design follow-up, etc.). This reduces the need for multi-tasking of the support team and improves their ability to get back to a task after natural interruptions. (The need to distribute support tasks across different resource types is another reason why the support activities need to be centralized for maximum aggregation benefits).Service Level Agreements have to be in place which clearly defines scope and responsibilities. The entire back-end has to be managed like a shop floor with real-time evaluation of tardiness and right-time expediting.The process has to be automated wherever possible, especially the big volume, repetitive tasks.When all work together seamlessly, much like various stages of a production process, expediting customer calls to the field sales team will quickly reduce to zero. This will build confidence in them to concentrate on ‘real sales’.Improving sales team productivityAn effective backend may release approximately 70% capacity of the salespeople, but this still does not prevent further wastage. Research indicates that half of the time an average salesperson spends on customer calls gets used for traveling and another two-thirds are spent waiting to meet customers. Since customers tend to be geographically spread, this limitation makes salesmen pick and choose whom to visit. They generally meet only those whom they believe are most likely to give them an order. Many opportunities for building relationships and influencing orders in the company’s favor at pre-bid stages are thus missed in this bargain.So in order to use the salesperson’s time better, it may be useful to analyze the customers a company serves and see if they can be serviced effectively without any wasteful travel. There are essentially two kinds of customers – repeat customers or existing customers - who have given at least one order, and new customers who have to be targeted for business development (for acquiring the customer or increasing share of business).Repeat customers:Repeat customers or existing customers have already demonstrated their conviction in the company’s brand by purchasing from the company. Still, maintaining the relationship through continuous contact is important. With a paucity of time, most sales peoples leave out a large dormant customer base from their regular contact schedule. But the good news is that since product demos and expert selling skills are not required, a good portion of these interactions can be conducted through a phone beat that can reach a much larger base than what travel can accomplish! These phone beats can be done by a separate team that focuses on reaching out to the entire customer base in a pre-defined rhythm. Travel for physical meetings, then, needs to be done by the field sales only when the customer specifically requests for one.This approach requires sales with an existing customer base to be handled by teams of two groups of resources working in tandem – internal sales and field sales. But the advantage of this is that most of the transactions (including the closing of sales) are taken care of by the internal sales partner by directly interacting with the customers. And since the field salesman makes only scheduled meetings, set up by the internal sales partner, with a definite agenda, his travel is focused and more rewarding.-New customers/new products to existing customers (business development)Selling to new customers or a new business development requires a much longer time and involves a series of physical meeting/s with the customer. This also requires a higher degree of expertise to understand the customer’s requirements, knowledge of the company’s products, and selling skills. At the same time, approaching every new customer requires a cold call. The expert salesperson, however, finds cold calls very unpleasant.Here again, tasks related to the ‘cold call’ phase – setting up the meetings and making the sales call can be divided. Centrally located campaign coordinator/s can develop the database, filter potential opportunities through e-mail or phone interactions, and schedule visits for the expert salesperson to woo the customer. This team can also take care of all the non-sales activities needed to support business development. Once a new sale is finalized, the customer can be handed over to the team servicing repeat customers.When internal sales activities are as per process, and sales visits are pre-scheduled, the sales funnel will be a lot more transparent than what it currently is. Monitoring of the sales tasks can be done by checking the progress of orders in the funnel. Each order can be mapped to be in various stages of the sales funnel with the help of any standard CRM package, and if a task is indicated as stuck, help can be provided proactively for speedy issue resolution. Efforts should be made to improve the flow from lead generation to billing. Improved flow will, over time, reflect as an increase in sales.Changing the paradigmAt the very core of this new paradigm is the <a href="https://www.vectorconsulting.in/theory-of-constraints/">Theory Of Constraints</a> approach of taking all possible steps to subordinate to the identified constraint. This is the only way to ensure maximum usage of the capacity of the constraint. The subordination steps involve reorganizing the sales function and an even greater revolution in thought. But when multiple people (centralized back-end, internal sales teams, field salespeople, and business development managers) work together to make the sales happen, there will be a quantum jump in sales productivity while ensuring improved quality of service. Moreover, sales will cease to be a ‘black box’ as it is often considered now and become more transparent. Since this model is expected to free up a considerable amount of sales capacity, the company may also find itself with surplus salespeople. The approach also opens up new possibilities for re-defining and aggregating branch and geographical locations.&nbsp;1<a href="http://www.business-standard.com/article/companies/new-orders-slow-down-for-india-inc-in-september-quarter-115100700386_1.html">http://www.business-standard.com/article/companies/new-orders-slow-down-for-india-inc-in-september-quarter-115100700386_1.html</a> 2<a href="http://www.dnaindia.com/money/report-why-india-s-core-sectors-continue-to-slow-down-2073680/">http://www.dnaindia.com/money/report-why-india-s-core-sectors-continue-to-slow-down-2073680</a>

Doubling market share by releasing sales capacity

Vector Consulting Group

By abandoning the conventional three-month rolling plan and instead, adopting a daily production plan, the company increased productivity to 99% while reducing manufacturing lead times to a single day!

Revving Up The Agri-equipment Business

Surpassing industry growth by implementing pull based operations

Vector Consulting

The demand for industrial equipment and machinery is growing worldwide. Global manufacturers are embracing new technologies like artificial intelligence, internet of things etc, to expand their bouquet of offerings to the customer. In India too, the manufacturing industry is growing, thanks to initiatives like ‘Make In India’. The Government of India has issued sops and created numerous special economic zones (SEZs) to encourage exports from the capital&nbsp;<a href="https://new-stage.vectorconsulting.in/en/industries/consumer-goods-retail/">goods industry</a>. These opportunities are drawing international&nbsp;<a href="https://new-stage.vectorconsulting.in/en/industries/equipment-manufacturing/">equipment manufacturers</a>&nbsp;from the&nbsp;<a href="https://new-stage.vectorconsulting.in/en/industries/auto-and-auto-components/">automotive</a>&nbsp;and defence sector to set up plants in the country.However, despite these favourable conditions, the Indian industrial machinery manufacturing companies are struggling. Competing with international manufacturers, they have a tough time attracting business from domestic customers and are miles away from catching the eye of International customers. Let’s explore why the Indian equipment manufacturing companies are faring so poorly in capitalizing on the growth in this industry.The missing edgeTwo fundamental issues are of importance here.<ul><li>1) Perception of low technology capability: Indian equipment manufacturers are believed to lack the expertise to build technologically high-end machinery; they are considered followers, not innovators, in this industry.But the fact is that Indian equipment manufacturers have been proving their technology capabilities. From time to time, they are known to create cutting edge equipment especially by collaborating with international firms. However, they have not been able to get the word out and commercialise these products.</li><li>2) Lack of complete range of products/price points/service: Additionally, unlike in earlier times when companies were comfortable buying different machines from different companies, the global trend is for manufacturing companies to prefer a single supplier for all their equipment; preferably with a service package. Unfortunately, equipment manufacturers in India, be it machine tools, material handling or ancillary equipment, still specialise in just one particular type of product. Moreover, when these machines are launched, they have only a limited range of features or options. This narrows the companies’ target customer base.</li></ul>The vicious cycle in the R&amp;D processThese two issues may appear unrelated, they aren’t. So, what do they have in common? The answer to this lies in understanding the vicious cycle set in motion when an environment of rampant multi-tasking (that traditional methods of managing projects creates) meet the necessity to meet deadlines of product expos/exhibitions.Exuberant expo &amp; salesExpo/exhibition is the single largest platform for most new equipment launches. The objectives for participating in these expos are: 1) To familiarize customers with company’s offerings 2) To book orders from potential customersThe process of new product development is at its most frantic when it’s time for expos and exhibitions. During this time most manufacturers work long days and nights on their products so they can display them at the expos.Forced compromisesIn a rush to meet expo deadline, companies often – Display products whose designs are not properly validated – Exhibit only the base design of the equipment. This is primarily because creating a prototype is expensive. Eventually, these are sold in small volumes. So, companies cannot afford to make many different prototypes/pilot models and dump them later. They prefer that any machine made after the prototype stage would be with some assurance of sales in the form of confirmed orders. Secondly, even if the company is keen on showcasing multiple options and/or different price points at the expo (to get an edge over competition), R&amp;D teams of these companies tend to be too stretched for time to manage it all before the expo deadline.Pressure to increase new product launchesWhen price points are not competitive, and when the options are limited, the marketing teams find it tough to woo customers. Only a few machines are readily picked up at the expo. This poor strike rate exerts more pressure on the R&amp;D team to launch a higher number of products in the next expo/exhibition. But the team plans to do so rarely have a smooth run.Interruptions to R&amp;DAfter the expo, there is a lot of unsold or slow-moving equipment in stock. There is also the pressure to secure immediate sales. The sales team strives to push these products to customers accepting all forms of customisation requests.This practice of securing sales based on customization (maybe a feature or a price point) along with the fact that the validation stage was compromised prior to the exhibition creates two major sources of interruptions to the planned activities of the R&amp;D team.For one, when the products that are not fully validated reach the customer premises, multiple shortfalls and complaints arise. This forces the company to channelize resources to address them. Further, the same team also has to design the promised customizations/options/provisions. These urgencies arrive with strong emphasis from the top management. They are attended to at the expense of on-going new product development tasks. This continues till the next expo launch deadlines approach and work on new products for the upcoming expo becomes high priority.Expanding lead-time of R&amp;DWhen new projects are planned, interruptions are either not factored in or are considered minor issues. Plans are usually made with the assumption that teams would dedicate 100 per cent of their time for every project. In reality, however, that is not the case. Teams switch between projects. In this process of switching between ongoing and emergent tasks, the teams can barely give 50% of the time originally allotted to a particular project. Most of their time is used up by emergent tasks causing the lead time to expand.The Integration equationThere is another detail that further complicates this cycle and creates more delays. In addition to switching between new projects and emergent tasks, teams also switch between the many new projects in the R&amp;D bucket. And when teams switch between these projects, they may all choose different projects. For instance, part development team might “cherry-pick” a project which has the potential to generate substantial cost savings whereas testing team might choose one that can show a high utilisation of test rigs. As a result of this cherry-picking, progress of every project stalls in stages like integration/assembly for want of input from one of the many teams. This is called delay due to “De-synchronization”. At this juncture, as the teams wait for inputs, they switch again, and the problem only worsens. Almost every new product is delayed.In this environment of chronic delays, when the next expo looms large on the horizon, manufacturers are forced to compromise on important aspects of New Product Development. They tend to do one or more of the following:<ul><li>1. Make compromises in scope</li><li>2. Drop products midway</li><li>3. Postpone the development of products; in many cases these postponed projects do not see the light of day again.</li><li>4. Launch products with compromised validation</li></ul>Under pressure, the company launches whatever designs they can in whatever state of completion that can be managed before the expo deadline. Thus, the cycle continues.Fall-out on technology &amp; innovationAny new product or innovation calls for ample dedication of resources. But the above-mentioned problems are resource and time guzzlers. They consume the capacity of teams leaving them depleted of motivation and creativity. Eventually, innovation takes a backseat, and at best happens only in spurts. That is why Indian companies are not recognised as innovators or product leaders in the global arena.The solution that isn’tThe problems laid out above are deep-rooted and are caught in a complex web of cause and effect. Companies tend to, superfluously, blame these chronic issues on quality or quantity of resources at their disposal. Consequently, the usual approach to tackle this is by adding or replacing resources. They soon discover that this does not change much. Ironically, post addition of extra resource, the problems could take a turn for the worse! Hence, the way forward is not toward augmenting resources but identifying how to manage the quantum of work involved effectively to experience a higher level of overall output.The elements of the solutionControlling WIP General perception also dictates that in order to get more output, resources and teams have to work on a high number of projects. More the number of projects worked on, higher the output? Really?This is true but only up to a point; the output eventually stabilises. This is because, in the initial days, the teams are not loaded to their fullest capacity. After a certain point, the output stagnates with the addition of more and more projects to the list. Adding more projects to this already heavy roster only jeopardises output/closure of projects. When the already stretched teams are forced to juggle multiple projects, they enter the bad multitasking zone; productivity and output begin to suffer. Most companies quickly reach this point. By loading the pipeline with more and more projects, the companies actually jeopardise the very output they seek.How can companies move out of the red zone and into the green zone? How can they reduce switching and bad multitasking by teams?The first step is to ensure that no further work/project is allowed into the system. But that, however, would not cut down existing Work in Progress (WIP). The only way to reduce WIP is to freeze work on a few projects. Strict application of the rule – absolutely no work on these projects – would help immensely (A word of caution: While reducing the active WIP, make sure that the system doesn’t enter the zone of starvation).Improve synchronizationSlashing WIP improves output. It does not, however, cure de-synchronization. Teams would still continue to cherry-pick among the open projects in the system. To improve synchronisation, teams have to be directed to work towards a common project goal. This can be made possible by establishing a “Global priority” for all teams. Every project is given a token number. Teams pick projects as per the token numbers.This “Global priority system” is common for all teams. This means that every team picks the same project when there is a choice to be made among many projects, thereby avoiding “cherry-picking” of projects. Care should be taken to ensure that this priority remains stable. Else, the system will soon deteriorate to its prior state of rampant switching and multi-tasking.Gate controlThe steps detailed above will free up team capacity. This will enable them to execute more projects, and most importantly, to perform the steps that were overlooked or skipped, especially simulation, product validation and process validation. Teams can also take time for development of options/additional provisions and also to undertake the pilot lot for the Equipment. This will ensure that the products, post launch, are ready to meet the needs of any customer. Most importantly, once the pilot lot is completed, the marketing teams become more confident of selling the product. This is because the company now has a Decisive Competitive Edge of providing the product readily to any customer who wants it (no waiting time).It is important to make sure that the steps of validation/pilot are not skipped. For this, a strict mechanism of gate control at strategic points like Design, Manufacturing/Assembly and Launch is needed. This will ensure that the requisite steps for the particular stage are completed; subsequent stages can then be executed without interruption/rework.The bottom lineThe injections of WIP control, priority and gate control also need effective monitoring. Sustaining these processes and not falling for the temptation of violating the SOPs under pressure of time will determine their long-standing success. These injections will go a long way in increasing the productivity of R&amp;D teams. What’s more, with the streamlining of work, the stress levels of employees come down, too.So, if your workplace could be stress-free with much higher productivity, wouldn’t you welcome this change too?

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

The Equipment Enigma: Aligning NPD Processes to Deliver Business Growth

Focussing on flow of projects to delivery quantum business of projects

Vector

After implementing a ‘pull’ based distribution solution, Bajaj Electricals has created a distribution highway that reaches out every week to more than 200,000 retailers!

Small is Big

Economic Times May 23, 2014India’s population follows a long tail distribution – 15% of the total districts (640) are occupied by 35% of the total population. The remaining 65% of the population is spread across the larger number of remaining districts. The size of the population in the “tail” is bigger than that under the “head”. Assuming every district has a representation of various socioeconomic classes, the sales data of distributors of a consumer goods company with a pan India presence should ideally mirror the long tail population distribution curve. However if one looks at the sales data of a consumer goods company across distributors, most of them have a much bigger “head” – 70-80% of the sales will come from 20 to 25% of the distributors or in other words – a few distributors or wholesalers contribute to a lion’s share of the total sales of the company.<img src="https://qclab.app/wp-content/uploads/2021/04/District-Products-Distributor-1024x413.png" alt="">Despite the contradicting demand and sales curve, these companies strongly believe that they do not have a reach problem due to the presence of a few large wholesalers who buy in bulk and are supposed to reach out to the vast population of small retailers.Myth of reach through wholesalingBy design, wholesalers are meant to service the markets where a company’s distributor is unable to reach. However most wholesalers do not service the tail because:<ul><li>Wholesalers operate with wafer thin margins and hence cannot invest in physical infrastructure to service small retailers there by resorting to passive selling- they do not go out to sell, instead, wait for retailers to buy.</li><li>At the same time, the need for collections bandwidth and the risk of default also forces them to limit credit (to avoid hassles of follow up with many retailers).</li></ul>The above factors limit the number of retailers buying from the wholesalers – only those who can buy on cash and are willing to invest time and effort to physically get the products from the wholesalers. At the same time, to reduce risks, most wholesalers limit their portfolio to the few fast movers, resulting in limited penetration of the range of company’s products, amongst wide population of small retailers.Surprisingly, the phenomenon of wholesaling is not only seen in rural areas but also in urban areas for many companies. It is not uncommon to find wholesalers in many metros of the country across various consumer brands, when such areas have adequate distributors. The presence of wholesalers in prime metros is a phenomenon created by Brand Company.The pressure of primary sales target forces sales team to nurture distributors who are willing to buy in huge lots, much more than their immediate requirement. When the distributors are saddled with large stocks, they use the bait of high volumes and deep discounts to liquidate – this limits the number of parties who buy from them. These parties turn out to be wholesalers. (Some companies even deal directly with wholesalers in their prime territories as a mechanism to get easy sales for their targets). Having liquidated most of his stock to the wholesaler and few large retailers, the distributor does not have material (or even motivation) to do the difficult job of actively servicing small retailers in his area. This leaves vacant a large market, where no-one is working proactively to secure shelf space – the large number of small retailers. The above phenomenon of “wholesale driven sales” strategy creates not only a large head of distribution sales amongst distributors but also for SKUs. 20%-30% of SKUs (or product categories) contribute to 70-80% of the sales. This forces companies to critically look at trimming their product range. Even though a dysfunctional distribution setup prevents an SKU from being present in all shops and expose itself to real demand.Living with the penetration gapBrand companies and distributors have learnt to live with this penetration gap justifying it as “cost inefficient” to try to plug the penetration gap directly using a distribution structure. They assume that the gains will not commensurate with the costs required to do the same and that the retailers and customers will find out a way to get to the brand. This logic holds good when the brand is near monopoly, and consumers will put up with the purchase inconvenience. Not many brands in the Indian market enjoy that iconic status. This means, one cannot assume that all potential customers will seek those limited retail points, serviced by the distributor based on his business considerations.It is safer to assume that one does not know where one’s potential customers will walk-in to buy the product. If we assume this, then it becomes imperative to be present (with adequate range) in all potential retail points where one’s customer is likely to walk in. This means one needs to develop a distribution method, which is cost efficient to directly service frequently the long tail of smaller retailers. In order to develop such a distribution structure, one needs to understand why companies have not been able to do so.Origin of the problemFrom the supply side, it is the paradigm of “big” which dominates the management thinking – bigger batches for efficient production run, bigger case lots, large truckloads and few large distributors. However, the real requirement of tail is the paradigm of small – small and frequent supplies, small investment and service to many small retail points. The model of wholesaling was supposed to act as a bridge between these two paradigms of management. However wholesalers stay on the side of the paradigm of “big” by controlling range and reach, thus creating the penetration gap in the market.Interestingly, the manufacturing and buying practices in the industries and organizations drive the level of conflict between two paradigms. Industries with very large capital investment, like textiles or steel, or the ones dependent on buying from large vendor set-ups, have a dominant voice of big in their supply chain as compared to industry like fast moving consumer goods. Big (and fixed) batches for manufacturing and purchasing are assumed to be necessary to keep costs minimal. However the forecast errors associated with large batches, coupled with long and rigid lead-time of supply create a higher pressure of inventory in these environments. Due to this pressure of inventory, these environments typically depend more on wholesaling than pure distribution to reach out to customers. The dependence on wholesaling is very high for textile and steel companies while seemingly low for FMCG. Still most industries have significant wholesaling which is a sign of inadequate penetration of the company’s range. The dependence on few and large traders also puts a never-ending pressure to perennially reduce product costs which in turn leads companies to keep looking for cheaper sources of manufacturing and constantly changing vendor bases, leading to stock outs and inventory problems due to unreliability in supplies.<img src="https://qclab.app/wp-content/uploads/2021/04/Level-of-wholesaling-1024x352.png" alt="">Resolving the conflict between big and smallCompany can get advantage of adequate penetration only if it can reduce the costs of showcasing a wider range to a wider reach of population.The costs associated with dealing with smalls are as follows:<ul><li>Cost (or associated investment) of distribution.</li><li>Cost of manufacturing – large batches reduces manufacturing costs but puts a pressure of inventory on everyone in the chain.</li><li>Cost of follow up for delivery of an order and follow up for collections – this forces sales team to deal with few large distributors or retailers.</li></ul>Reducing cost of distributionThe challenge of servicing the Long tail is the sheer spread of smalls across a wide geography. This requires one to have distributors who are willing to service ALL retail outlets in a defined geography, at a defined frequency regardless of size of outlet. They have to stop “cherry picking” retailers in their territory. However if a distributor earns standard 25 to 30% on a smaller base (due to limited territory), then the absolute returns may not be attractive. The only way out is to improve ROI multifold – close to 80 to 90%, to make distribution an attractive proposition even with a smaller territory. This means the investment in stock and credit in the market has to be very significantly lower without creating a stock out. At the same time when a distributor services all the outlets in an area with a fixed frequency (weekly) visit, the consolidated orders form a good enough volume to justify a single delivery vehicle to service those orders.To ease the pressure of inventory from the distributors, it is important the distributor buying is not constrained by manufacturing MOQ requirements. This can only happen when distributor is always serviced from a buffer stock rather than from scheduled production, in other words production should be decoupled from distribution.Reducing cost of manufacturingProducing to forecast was supposed to decouple production from distribution. However forecasting errors, lead to frequent situations where production ends up producing some items where stock is high while others are stocked out. This puts a continuous backpressure on production to keep changing schedules, and unplanned expediting which adds to costs. The attempt to manufacture as per fixed large batch sizes with a rigid schedule creates the biggest waste of manufacturing capacity. The only way out of this rigid system is to move to a system of producing to replenish buffers.Replenishing to a common central buffer enables production to react to changing demand patterns, with a flexible batch size approach, at a frequency which is adequate to prevent any resource from turning into a bottleneck due to too many unplanned set ups.Reducing costs of follow up and collectionsFollow up and collections takes away sales bandwidth and hence sales teams always try to use the capacity to deal with few large customers. The only way one can deal with large number of customers regardless of size is when supply and collections is on autopilot. This means, in most cases, the payments come automatically when due, without extra-ordinary effort for every collection. At the same time, products reach the end customers without any need to expedite and follow up for them. This can happen only when:<ul><li>Supply to distributors and retailers is limited to frequent small quantities (more frequent supplies) per SKU so that capital is not stuck with unwanted inventory – the small lots are facilitated by the frequent visits and service which create a constant flow of orders and payments.</li><li>At same time there is NEVER a stock out to prevent loss of sales, to avoid follow up efforts.</li></ul>The above conditions require an ability of the entire supply chain to be very agile so that it can create and move inventory quickly to the latest demand. This means one has to move away from a rigid forecast based production and inventory management to agile pull based manufacturing and distribution, which reacts dynamically to consumption signals.As opposed to monthly forecasting based push where a distributor ends up having inventory of about 30-45 days, a consumption based system with high availability at central warehouse ensures high availability with about 10-12 days of inventory (depending on distance from nearest warehouse), thus improving the ROI dramatically. The released capital of distributors can then be used to increase reach and range in a defined geographical market segment. This mandates that the DSO (Distributor Sales Officer) has to reach every potential counter in the assigned geography in a predefined beat plan regardless of the size of the retail shop. The distributor also has to ensure limited supply per SKU to the retailer. When both distributor and retailer use released capital to deploy a wider range, more SKUs start reaching out to the market, thus creating a Win-Win-Win for everyone in the chain.The suggested model calls for dramatic changes in ageold beliefs, measures and practices like restricting primary sales to an agreed norm per SKU, ruthlessly stopping territory transgression by distributors. It also calls for enforcing price hygiene in the retail market, removal of trade schemes, ensuring daily availability to distributors etc.The journey is arduous but has been fruitful for the companies who had the courage to embark on the change. Perhaps they are inspired by the famous quote from Apple “The people who are crazy enough to think they can change the world, are the ones who do.”

Creating a new benchmark in consumer goods distribution

Implementing Vector's unique solution, Skipper Ltd. was able to overcome challenges in their customized manufacturing business.

Get More Out Of Less

An analysis of the top 200 equipment manufacturing companies in India, during the last five years (2012-2016), reveals an interesting pattern. About thirty one of these companies show a consistent y-o-y sales growth between 2012 and 2016. But, only 25 achieved consistent y-o-y profit growth. And, just 2 companies demonstrated a consistent ROCE (Return On Capital Employed) of more than 25 per cent!<img src="https://qclab.app/wp-content/uploads/2021/05/Get-more-out-of-less.png" alt="">There are four types of companies in this sector.Ever-flourishing Organizations, which are able to show consistent sales and profit growth, while maintaining a high ROCE. Asset inefficient organizations – that maintain sales and profit growth, but are unable to maintain a healthy ROCE. Turnover biased Organizations, which grow topline consistently, but are unable to maintain consistent profit growth. Starving Organizations, which are unable to grow consistently because of lack of ordersMost of the organizations make annual business plans as an ever-flourishing company. Yet, most of them fail to achieve that state in execution. The reasons are:<ul><li>Uncertainty and time lag between manufacturing capacity enhancements and additional demand,</li><li>&nbsp;Disproportionately higher working capital required for managing the higher sales, and</li><li>&nbsp;Increasing management strength (to improve coordination) without getting corresponding increase in output.</li></ul>The Recipe for being an ever-flourishing companyThe only way to be an ever flourishing company is to be in a state where the rate of growth of sales (and gross contribution) is always higher than the rate of growth of total fixed expenses and working capital requirements. This can happen only when the company has the:<ul><li>&nbsp;Ability to get significantly more output than the “best ever achieved in full load conditions” from current capacity, cash and management bandwidth.</li><li>&nbsp;Ability to maintain an adequate order backlog, without dropping prices.</li><li>&nbsp;Ability to always create disproportionately more capacity from small incremental investments.</li></ul>A company can get significantly more output than the “best ever achieved in full load conditions” only when there is “hidden” capacity. At the same time, it can generate additional orders from same market and products, when there is “hidden” unfulfilled demand in current market. Any other strategy of expanding by adding new plant capacities or going to new markets with new products without first generating additional significant surplus cash (higher ROCE) cannot guarantee an everflourishing status.Revealing the“hidden” capacityMost equipment manufacturing companies define capacity in terms of the best physical output, with a specific product mix, achieved in a month. But this does not reveal inherent potential. The correct way of looking at capacity is to measure the exact touch time on the constraint work center (like the actual time spent in metal removal in a drilling machine, or time spent in assembly when complete components kit is available) and compare it with available calendar hours in a month. The “theoretical” numbers arrived in most cases, using the suggested method, are at least twice the best output ever achieved by the plant. Large part of the big gap between the “theory” and “actuals” is usually explained by periods of starvation in which the critical work center waits for either material or operators.Capacity &amp; Cash Guzzler – The Monthly Planning SystemMost equipment manufacturing organizations (other than large equipments where every component is engineered for an order) follow a monthly planning system. A snapshot of actual execution performance is taken at the end of the “current” month and a fresh plan for next month is made, considering order done closer to “current” month end; vendors are able react to it well into the start of next month. As different feeding components have varying lead times, it takes time to complete a full kit. As a result, capacity is lost in the first half of the month. WIP (work-inprogress) goes up, as initial work centers are kept busy processing whatever components arrive. Pile-ups happen in front of assembly points with WIP and raw material inventory ballooning as the month progresses. Production of missing parts is expedited, which in turn affects the scheduling of other parts, creating a vicious loop of more de-synchronization for assembly and loss of capacity (additional set ups) in parts manufacturing. Consequently, even when WIP piles up, desynchronization causes under-utilization at assembly. Capacity is lost, not only when there is very low WIP, but also when there is excessive WIP.As the full kits start getting ready, the remaining time (capacity) available in the month, to complete the entire plan falls short. Significant quantum of orders gets spilled over to the next month.By the month end, to show a lower inventory in management reports, plant managers stop inflow of parts, which cannot help in the current month’s billing. The practice forces vendors to wait for fresh plans to get the right picture. At the end, a snapshot is taken of pending orders and excessive WIP and raw material, and a new plan is made after “netting” off. The same cycle of starvation in first half and pile up in second half repeats every month. If the lead-time of manufacturing the equipment is higher than a month, then such skewed output waves can also be observed towards every quarter end.<img src="https://qclab.app/wp-content/uploads/2021/05/Get-more-out-of-less_img2.png" alt="">The “wave-based” movement of inventory requires high working capital due to peak WIP during the middle of the month and skewed dispatches (which cause a large volume of receivables to be due almost at the same time).The solution, which isn’t!Organizations have tried to tame the wave by creating rolling plans – one-month “firm” (immediate next month) and subsequent two months “tentative” to improve utilization of first week. (Companies with lower lead times create a tentative plan by around 15th of previous month followed by a “fixed” plan by month end). However, high level of expediting weakens the reliability of such projections. So suppliers do not react to tentative plans, everyone waits for the arrival of the end of the month “firm” plan.Exploiting the hidden capacityThe only sustainable way to improve output of equipment manufacturing plants is to ensure synchronization of parts (full kits) at assembly operations throughout the month. The prime reason for desynchronized parts supply is the visibility of the entire order backlog to the parts manufacturers. This visibility causes them to “cherry pick” components for processing across order backlog – for better efficiencies. Various part manufacturers have their own unique preferences for cherry picking. As a result, parts arrive in de-synchronized manner for assembly.A restricted visibility, with clear order level priorities forces focus on few orders, which in turn improves synchronization dramatically. The lead-time of orders comes down dramatically. Uniformity of inventory flow prevents creation of “temporary constraints”, thus revealing the hidden capacity. With improved flow, the “real” constraint is exposed. Few improvement projects on the constraint increase the output further. A process of ongoing improvement can be launched to incrementally address each constraint, as they are exposed with increasing volumes.As the reliability of delivery improves, and spillovers of orders are negligible, there is no need to re-schedule orders every month end or weekend. Monthly planning can be changed to a daily perpetual planning – where orders are scheduled, based on available capacity, as and when they arrive.Lower lead-time and uniformly staggered deliveries across the month reduces working capital requirement dramatically.Revealing and exploiting the “hidden” MarketWith the implementation of such flow processes, the variance in lead-time performance comes down dramatically. The resultant impact is very high reliability in deliveries. When most competitors are unreliable (i.e. commit and execute within a wide range of lead times), the capability of one player to commit and execute with lower lead time and specific delivery dates can be disruptive in the market. The previously “unaddressed” delivery sensitive customer segment is likely to shift volumes to such suppliers en-masse.In almost every equipment category, there are two classes of customers. Large institutions that buy customized products in big volumes and many small businesses or house holds that tend to buy in very small quantities with minimal customization.Typically, the gross contribution percentage of such small orders is much higher than that of large institution orders. But most organizations neglect the “smalls” because of the following reasons.<ul><li>&nbsp;Large orders give higher sales output as compared to small orders for same effort.</li><li>&nbsp;Small customers are many and spread out; a larger sales team would be required to reach out to them.</li><li>The plant prefers large orders for higher efficiencies.</li><li>When the plant is loaded with large orders, the lead-time of small orders become long and unreliable. Customers of “smalls” shy away from placing orders on large companies.</li></ul>With reliable delivery and customer preference, the efforts of sales team reduce significantly. The released capacity in the plant and the flow system enables delivery of small orders in shorter lead times. With these enabling conditions, a company can reach out to geographically spread out customers of “smalls” by establishing a network of sales agents. The lower lead times enable agents to place confirmed orders rather than anticipated orders. Eliminating the risk of un-confirmed orders, enables the company to sell “smalls” with advance payment. The sales efforts become negligible as small orders can be managed on “autopilot”.Risk-Free ExpansionIn an environment of skewed flow, temporary constraints emerge at many places in the supply chain. When managers plan for growth in such environments, they tend to add capacity in many places.However, in an organization with an uniform inventory flow, the real constraints are always in few places. This enables organizations to invest in small incremental lots. The released capacity is used for supporting the growth in sales. This incremental approach can continue till available opportunity in current capacity and current markets is sufficiently addressed. The ROCE and operating surplus improves dramatically, thus creating a platform for adding new plants, serving new markets or creating new products with much lower risks, hence enabling an Ever Flourishing organization.

50% reduction in lead time by adopting 'pull' based manufacturing and operations

Adopting a new dynamic approach to pharmaceutical operations, Ajanta Pharma was able to release extra capacity, increase output by 40-70%, and improve On-Time In-Full (OTIF) performance for their US warehouses to 99%.

Accelerated Pharma Manufacturing

Innovative approach to pharma manufacturing to reduce invalid OOS and lab incidents.

Explore the complexities of pharma manufacturing amidst global demand surges, regulatory challenges, and operational intricacies, urging a dynamic approach for enhanced agility and efficiency.

Accelerated Pharma Manufacturing | Vector Consulting Group

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

<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.

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