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The white paper explores challenges and solutions in India's domestic pharmaceutical distribution. Despite industry growth, companies face significant gaps.

Beyond the pill: How distribution failures are undermining India's pharmaceutical giants

<h5>Background</h5><p>India's growing affluence and rising aspirations, coupled with increasing incomes and better access to healthcare, have led to the pharmaceutical market in India to grow at a rate of 8%-10%. <sup>[1]</sup> Consequently, it is projected to reach $130 billion by 2030. <sup>[2]</sup> Despite this promising growth opportunity, most pharmaceutical companies are not fully equipped to capitalise on it, particularly in terms of multi-tier distribution.</p><p>The distribution network in the pharma sector typically involves central / regional warehouses, Carrying &amp; Forwarding agents (C&amp;F) or depots, stockists, sub-stockists, and chemists. However, this network is often fragmented, with significant gaps in distribution even in urban markets.</p><figure class="image"><img style="aspect-ratio:16668/9474;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-01_1733742921.png" width="16668" height="9474"></figure><p>It is disquieting to note that despite decades in operation, even large pharmaceutical companies have not been able to ensure consistent availability of their brands at chemists across all regions of India. A survey by Vector (n=934 chemists) indicated that even for top pharma firms the reach of their products at chemists is in the range of 60%-85%. Consequently, chemists are not always able to fulfil a doctor’s prescription or supply the requested brand.</p><p>If the prescribed/demanded brand is not available, in order to prevent a loss of sales, chemists mostly try to sell an alternative.</p><figure class="image"><img style="aspect-ratio:16668/10363;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-02_1733742942.png" width="16668" height="10363"></figure><p>Whether persistent or sporadic, unavailability of in-demand medicines at many local chemists can encourage the proliferation of spurious drug makers seeking to fill this gap. According to a WHO report, approximately 10.5% of medicines sold in low and middle-income countries, including India, are substandard and falsified. <sup>[3]</sup></p><figure class="image"><img style="aspect-ratio:16668/10880;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-03_1734081063.png" width="16668" height="10880"></figure><p>In addition to being a social and safety issue, this loss of sales is also a significant financial setback for the companies. The impact is considerable, as the material cost, on an average, is a mere 35% of the sales price for the pharmaceutical companies. Further, this wastes the efforts and investment made in educating doctors to prescribe company brands. Doctors may also discontinue prescribing medicines which are continuously unavailable.</p><p>Companies are aware of this, so, in order to try and protect availability companies hold significant levels of inventory of FG in their entire supply chain i.e. company warehouse(s) and distribution channel.</p><figure class="image"><img style="aspect-ratio:16668/7461;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-04_1734081096.png" width="16668" height="7461"></figure><p>&nbsp;</p><figure class="image"><img style="aspect-ratio:16668/7461;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-05_1733741208.png" width="16668" height="7461"></figure><p>Maintaining this inventory in the channel and in the company warehouse for highly regulated products such as medicines comes at a risk of obsolescence. Companies are obligated to take back on an average 4%-10% of expired/ damaged inventory from the channel and destroy it along with any inventory which would have gotten spoiled or expired in their own warehouse(s). So, companies are forced to write down or write-off huge amounts of obsolete inventory, sometimes running to several million dollars’ worth a year.<sup>[4]</sup></p><figure class="image"><img style="aspect-ratio:16668/10797;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-06_1733741260.png" width="16668" height="10797"></figure><p>Why, despite having so much inventory at chemists and within the supporting supply chain of stockists and company warehouses, do we still find significant gaps in product availability to fulfil a doctor's prescription?</p><p>It behoves us to dig deeper to understand the core issues in the current management of pharma distribution networks and why this creates a seemingly hopeless situation, where improving availability at chemists is difficult without further increasing inventory.</p><h5>How the market works</h5><p>In India, chemists source products either from wholesale markets or from distribution focused-stockists.</p><p>In wholesale dominated markets, chemists typically visit stockists directly, often in a ‘Dawa Bazaar’. In contrast, in distribution-dominated markets, chemists note down their requirements, and stockists take these orders. Regardless of whether the market is wholesale or distribution-driven, chemists generally work with a limited set of stockists and vice-versa.</p><figure class="image"><img style="aspect-ratio:16668/10797;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-07_1733741335.png" width="16668" height="10797"></figure><p>In distribution markets, as the range of product brands prescribed by doctors increases, chemists find that they cannot stock all the different items due to limited working capital and space. This makes them order smaller quantities. This leads them to demand faster service from their stockists. This means that stockists are expected to deliver quickly and regularly, often several times a week and even daily.<sup>[5]</sup></p><figure class="image"><img style="aspect-ratio:16668/11351;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-08_1733741542.png" width="16668" height="11351"></figure><p>However, frequent deliveries increase required manpower, transportation costs, handling, and logistical coordination. As a result, stockists try to increase their access to fast-moving product brands across companies that are preferred by doctors in those areas, in an effort to optimise the costs of order-taking and deliveries.</p><p>Similarly, in wholesale markets too, there is a need for stockists to increase their range of fast-selling product brands to maximise sales from the limited chemists buying from them. This necessitates stockists to partner with multiple companies. For instance, a mid-sized pharma stockist typically works with around 24 different pharmaceutical companies.</p><figure class="image"><img style="aspect-ratio:16668/10471;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-09_1733741710.png" width="16668" height="10471"></figure><p>Companies, however, are organised into therapeutic divisions that include both fast-moving and slow-moving product brands. Once stockists associate with some of these divisions, the sales teams often push them to take up the entire range of their division's products. This leaves stockists with limited working capital to cover other divisions of these companies despite the presence of fast-moving brands in those divisions. Over time, stockists, whether wholesalers or distributors, work with multiple companies but focus on a limited range of therapeutic areas from each.&nbsp;</p><figure class="image"><img style="aspect-ratio:16668/11035;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-10_1733741823.png" width="16668" height="11035"></figure><p>Further, the 'reach' of these stockists is also often limited, even in distribution markets. Since stockists work with many companies, there is no area demarcation in the industry. It is not practical for stockists to dedicate resources to a company to service the market at high frequency. Typically, common set of resources service chemists in their areas based on the stockists' considerations of cost, credit, demand, serviceability etc. Moreover, as per market practice, chemists have to be offered credit. Since the working capital of stockists is limited, this forces them to cherry-pick chemists in their area to work with, limiting market penetration.</p><p>Consequently, neither chemists associated with stockists in wholesale markets nor in distribution markets, get access to all product brands across all therapeutic areas of any one company through the stockists that they are associated with. This means that the range of products available at chemists is limited to those provided by the limited number of stockists servicing them. And despite having multiple stockists in an area, no company is able to cover all chemists for all therapeutic areas.</p><p>Main reason why an SKU required by chemists tends to be unavailable at stockists; Hence, despite significant inventory being present in the system, the actual range of products available at chemists is often limited.</p><figure class="image"><img style="aspect-ratio:16668/9288;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-11_1734081205.png" width="16668" height="9288"></figure><h5>Stockists’ dilemma</h5><p>Stockists in the pharmaceutical industry face a persistent challenge.</p><figure class="image"><img style="aspect-ratio:16668/10471;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-12_1733742504.png" width="16668" height="10471"></figure><p>To offset the costs of servicing chemists and to boost profits, it’s crucial for them to offer all the brands that are demanded by the limited set of chemists working with them. However, to meet this demand, they must stock a wide variety of products. Unfortunately, their working capital is often limited and tied up in inventory that is pushed onto them by companies.</p><p>The financial constraint of having to carry 2-7 weeks’ worth of stock forces stockists to limit the number of product brands they can carry and the number of chemists they serve, creating a dilemma between meeting market demand and managing their finances effectively.</p><figure class="image"><img style="aspect-ratio:16668/6722;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-13_1733742538.png" width="16668" height="6722"></figure><p>From the companies’ perspective, it’s also impractical to work with every stockist in a given area. Partnering with multiple stockists can lead to several challenges, such as internal competition, price wars, and increased working capital requirements. Additionally, companies might face backlash from established stockists, further complicating distribution strategies.</p><h5>Direction of solution</h5><p>Companies can address the conflict faced by stockists while benefiting themselves. By finding ways to enable stockists to maintain a full range of their products across various therapeutic divisions without requiring additional working capital, a mutually beneficial situation can be created. Stockists would see better returns on their inventory investments and improved cost recovery for services, while companies would benefit from a broader product presence at stockists, thereby enhancing their market reach at chemists.</p><h5>How can companies help?</h5><p>To support stockists and improve their product range, companies should focus on reducing the amount of inventory stockists need to hold for each SKU. This approach would free up working capital, allowing stockists to carry a broader range of products across all therapeutic areas without increasing their total inventory investment.</p><p><strong>Frequent supply capability: </strong>Companies should build the capacity to supply stockists more frequently, ideally at least once a week, or even 2-3 times a week in some markets. This would involve delivering smaller quantities of each SKU without compromising daily availability at the stockist level.</p><p><strong>Automatic Replenishment System: </strong>Managing stock levels can be resource- intensive for stockists. To ease this burden, companies should introduce an Automatic Replenishment System (ARS) that calculates daily order quantities based on real-time data, prioritising SKUs that are at risk of running out.</p><p><strong>Inventory control:</strong> To prevent overstocking, companies should set a maximum inventory level for each SKU at the stockist level and ensure that supplies do not exceed this limit. With frequent deliveries, this maximum level could be as low as 10 days of inventory, or even less with more frequent supplies. For instance, if stockists currently hold 2-7 weeks’ worth of stock, this could be reduced to 1-2 weeks.</p><figure class="image"><img style="aspect-ratio:16668/5856;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-14_1733742604.png" width="16668" height="5856"></figure><p><strong>Adaptive inventory levels: </strong>Demand for certain products may fluctuate over time, so companies should regularly reassess and adjust the maximum inventory levels. For products with seasonal demand variations, pre-emptive decisions on stocking levels are essential. High responsiveness enables this at lower inventory and without the risk of unsold stocks at the end of the season.</p><p><strong>Warehouse availability: </strong>To maintain stock availability at reduced inventory levels, companies must ensure near 100% availability of SKUs at their warehouses. Given the unpredictability of market demand, companies need to build highly responsive supply chains with short lead times and the flexibility to adapt quickly.</p><p><strong>Abandoning monthly forecasts:</strong> Traditional monthly rolling forecasts and frozen manufacturing schedules can limit supply chain responsiveness. Companies should shift to a more agile, demand-driven manufacturing and distribution model instead of relying solely on monthly forecasts.</p><p><strong>Balancing responsiveness and stability:</strong> While adapting to changing demand, companies must also maintain stable plant operations. This balance can be achieved by creating protective buffers of finished goods and raw materials. Finished goods buffers allow plants to schedule production efficiently, while raw material buffers provide the flexibility to produce any required product.</p><h5>Advantages of the new model</h5><ol><li><strong>Prevents leakage in sales:</strong> Adopting this innovative new approach in the supply chain ensures consistent product availability at chemists, leading to higher prescription fulfilment rates and a subsequent increase in sales.</li><li><strong>Enables improvement in the range: </strong>As stockists add new product divisions, chemists (the end customers) will be able to increase the range offered and further improve the prescription fulfilment rates.</li><li><strong>Increases ROI of stockists:</strong> Increased sales to chemists at the same service costs will improve stockists’ ROI.</li><li><strong>Reduces inventory of each SKU at stockists: </strong>The ROI will be further improved by the reduced inventory levels that have to be maintained. This becomes possible due to the small and frequent deliveries from depots to stockists. Further, this approach will help break the month-end skew in sales (often &gt;60%) and prevent the build-up of inventory which usually gets created to enable this skew.</li></ol><figure class="image"><img style="aspect-ratio:16668/9052;" src="https://backend.vectorconsulting.in/storage/editor_uploads//beyondthepill-images-15_1733742699.png" width="16668" height="9052"></figure><p>5. <strong>Faster signals from the market: </strong>The reduction in inventory at stockists helps companies in getting faster signals about consumption trends otherwise delayed due to inventory build-up. This will allow the company to respond quickly to emerging changes in demand.</p><p>6. <strong>Reduction in inventory:</strong> If the company responds quickly to market demand, the supply chain lead time reduces and the inventory in the system comes down. Further, the uniformity of billing from depots due to this method of frequent service will also reduce the during-the-month ballooning of working capital for companies (inventory as well as receivables).</p><p>7. <strong>Reduction in obsolescence/expiry: </strong>Moreover, this method of frequent replenishment in sync with market demand will prevent unnecessary build of inventory in the supply chain that is not in demand currently or enable the company to take targeted corrective actions in the market. This will ensure that the inventory expiring on shelves/obsolescence in warehouses, is minimum, cutting costs.</p><p>8. <strong>Better market coverage: </strong>The working capital release and range availability that they experienced can be further leveraged by stockists to reach out to all potential chemists (big and small chemists even in the hinterlands) to offer more frequent and reliable deliveries of the full range of products now available with the stockist. This can bring down inventory levels in the channel further, increase convenience for the chemists (won’t have to visit the mandi) and increase sales. Even a very conservative increase in sales through better coverage can give a further boost in both earnings and ROI for stockists.</p><p>9. <strong>Growth in profits of the company: </strong>This increase in frequency of service from depots to stockists might marginally increase the logistics costs which are typically 1%-3% of sales. However, the gross contribution from the increase in sales will more than cover any incremental costs. So this growth in sales can occur with little or comparatively negligible increase in costs for the company and will allow the company to reap rich rewards in profits.</p><h5>Conclusion</h5><p>Implementing this new model of distribution offers significant benefits across the supply chain. For stockists, the expense remains the same as they can consolidate larger orders for each visit by the sales personnel, ultimately leading to increased sales volumes. Chemists benefit by being able to purchase all necessary products from a single stockist, eliminating the need to source from multiple suppliers. For the company, this approach ensures comprehensive reach for each division, effectively plugging loss sales, and ultimately resulting in increased market share/ profits. This holistic strategy not only enhances efficiency but also drives growth and customer satisfaction across the board.</p><h5>Exhibit: Primary research design</h5><p>Survey of pharmaceutical stockists and chemists</p><ul><li>Stockists: <strong>68</strong></li><li>Size of stockists: Ranging from 3-100 in employee strength</li><li>Time span of stockists survey: July 1, 2024 to July 17, 2024</li><li>Chemists: <strong>934</strong></li><li>Time span of the chemists survey: February 24, 2024 to March 4, 2024 Sampling methodology (both): Convenience sampling</li><li>Data collection instrument (both): Survey questionnaire</li><li>Data collection method (both): In-person interview</li><li>Geographic coverage (both): Urban and semi-urban city centres</li></ul><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p>

Turning the Tide: Effective strategies for mitigating inventory excess in Indian Auto Dealerships

<h6><strong>Published in ETAuto.com, 15th October, 2024.&nbsp;</strong></h6><p>https://auto.economictimes.indiatimes.com/news/industry/turning-the-tide-effective-strategies-for-mitigating-inventory-excess-in-indian-dealerships/114215434&nbsp;</p><p>Indian auto dealerships are facing significant challenges as a recent decline in car sales in India has left them burdened with a substantial inventory surplus—equivalent to approximately 85 days of sales. Despite receiving clear signals of slowing demand, many OEMs, driven by pressure to maintain full capacity utilisation, continued production at maximum levels. This is not the first time this situation of excess auto inventory has happened. This has happened several times in the past and has been reported in newspapers many times. This chronic situation underscores broader inefficiencies in the industry's inventory management. &nbsp;</p><p>&nbsp;</p><p>In this article, we examine the root causes behind the surge in auto inventory levels with dealerships and explore strategies that companies can implement to align production with demand more effectively. This ensures a more efficient and win-win inventory management for the company and dealerships while also ensuring that supplier partners are not negatively impacted.</p><p>&nbsp;</p><p>Let’s first explore why this situation happens. &nbsp;</p><h5><span style="color:#863157;">The genesis of the inventory crisis</span></h5><p>Inventory issues at dealerships stem from two key factors. First, companies set annual targets, which are then broken down into monthly goals for regional sales teams. The sales force is expected to meet these targets consistently. Further, these targets also drive manufacturing forecasts and production plans, as companies aim to meet internal projections. Second, to show achievement of market share, either maintained or gained, as reported by industry bodies like SIAM based on wholesale data, it is essential for companies to show strong primary sales performance. &nbsp;</p><p>To protect market share and meet planned targets, companies continue producing based on monthly forecasts. However, these forecasts are often inaccurate, leading to inventory misalignment between what’s made and actual retail demand. Nevertheless, to achieve primary targets, companies push available stock to dealerships, which may not match dealership needs. This results in a disconnect between what dealerships hold and what customers are seeking. For instance, despite having 85 days' worth of inventory, customers may still struggle to find the specific models, colours or configurations they want, leading to excess stock. &nbsp;</p><p>The cumulative effect of target-driven inventory push and the need to protect primary numbers is evidenced in the widening gap between retail <sup>[2]</sup> and wholesale sales data.</p><p>&nbsp;</p><p>To make matters worse, pushing auto inventory into dealerships in this manner delays real market feedback for the company, as the production and procurement departments don’t have visibility into actual demand trends. They only have visibility of internal forecasts and are unaware of changing market preferences. While there are indications that the market is slowing down, demand is shifting, and different SKUs are required, this information is not reflected in the internal MIS of OEM plants or their suppliers. &nbsp;</p><p>The current issue did not emerge in just one month; it may have started several months ago. This is a cumulative effect—small amounts of inventory gradually built up, increasing from manageable levels of 20 to 30 days to the current 80-85 days. At this stage, dealers are facing significant strain, with a large portion of their working capital tied up in excess stock. In addition, they face inevitable margin losses as this excess stock can only be cleared through heavy discounting.</p><p>&nbsp;</p><p>This operational pressure has sparked protests from dealerships and fueled an ongoing debate in the auto industry about whether wholesale or retail sales numbers truly indicate the industry’s health. Several leading auto manufacturers have argued in the past that actual car sales to customers better reflect consumer sentiment and have urged the industry to shift toward reporting retail numbers. However, the implementation of this paradigm has remained elusive <sup>[3]</sup>.</p><p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<span style="color:#0F4761;">&nbsp;</span></p><h5><span style="color:#863157;">Supply chain impact of this crisis</span></h5><p>The situation at dealerships has now reached a point where companies are being forced to scale back production to prevent further accumulation. However, halting production now will not be an easy decision for OEMs since it could create a significant disruption (not just for their primary targets) in the supply chain. When OEMs cut production, suppliers would bear the brunt of the bullwhip effect caused by this decision.&nbsp;<span style="color:red;">&nbsp;</span></p><p>&nbsp;</p><p>Suppliers are already burdened with significant inventory, holding more than a month's worth despite often being just a couple of days apart from the OEMs they serve. If OEM production reduces, inventories across suppliers (finished goods, work in progress, and raw materials) will accumulate, potentially doubling or tripling the number of days, forcing them to cut their production as well. Meanwhile, with reduced off-take, payments from OEMs may slow or cease, leading to liquidity issues. Suppliers, some of whom may even have invested in additional capacity with borrowed capital during the rise in OEM demand, will now struggle to cover interest payments and other expenses. Many suppliers will cut back on purchases and may be forced to lay off workers. The disruption to their working capital cycle will make material procurement more difficult, creating a vicious cycle of reduced production and limited cash flow.</p><p>&nbsp;</p><p>Even during a slowdown, while an OEM may have FG inventory in its supply chain, it might not align with specific customer demands. This mismatch could still necessitate OEMs to continue production and procurement to fulfil those needs despite existing stock. However, strained working capital would limit suppliers' ability to meet this demand, with some even defaulting. This would further dampen OEM's sales. &nbsp;</p><p>When demand returns and OEMs eventually try to ramp up production, suppliers may still struggle to respond quickly due to the limitation of the workforce and shortage of working capital. Since OEMs depend on all component suppliers ramping up in unison to increase vehicle production, they, too, will suffer until the last supplier is able to recover fully, resulting in a lose-lose situation for both parties. &nbsp;</p><h5><span style="color:#863157;">What should be done going forward so that the situation does not arise?</span></h5><p><span style="color:hsl(0,0%,0%);">Peg market share / internal targets to retail numbers:</span></p><p>As some leading OEMs have emphasised, all manufacturers must recognise what Eliyahu Goldratt said, "until the end consumer has bought the vehicle, no one in the supply chain has truly made a sale”. Basing performance metrics on wholesale figures is misleading and leads to inflated production and artificial demand projections. Instead, market share and internal targets should be pegged to retail sales. The sales team, too, must shift their efforts from pushing inventory down the dealerships to focusing more on tactics to create demand and drive actual purchases. &nbsp;</p><p>Second, to sustainably address the excess auto inventory problem at dealerships and throughout the supply chain to suppliers, the forecast-based approach to inventory creation and movement must be abandoned. Instead, a systematic approach grounded in consumption signals from the market is essential. This method will better align the supply chain with actual market demand by reducing the lag in reaction by OEMs and suppliers to actual demand signals. &nbsp;</p><p>The solution involves:</p><p><span style="color:hsl(0,0%,0%);">Defining inventory limits: &nbsp;</span></p><p>Defining maximum auto inventory limits involves setting a top limit for inventory at each location (dealer as well as company warehouses) for each SKU and halting additional shipments once this limit is breached. By doing so, the company can quickly identify and address problems related to demand or market conditions before they escalate.</p><p>Setting maximum inventory levels at various stocking locations—such as dealers and yards for finished goods and plants for components—while prioritising production and logistics based on the risk of stock-outs ensures availability across all these locations. At the same time, halting manufacturing or procurement when these limits are reached for each SKU helps prevent overstocking in the supply chain and ensures production aligns with actual demand. Dynamically adjusting inventory limits in response to changing demand patterns over time ensures continued alignment with current demand. &nbsp;</p><p><span style="color:hsl(0,0%,0%);">Supplier alignment: &nbsp;</span></p><p>To enhance responsiveness across the supply chain, it is crucial to provide suppliers with visibility into the OEMs' component buffers. By sharing real-time signals about component stock levels along with a risk-of-stock-out-based priority system, suppliers can proactively adjust their production schedules and supply in response to changes in OEM’s production. &nbsp;</p><p>Since the OEM plant serves as an aggregation point, the sales fluctuations across dealers nationwide tend to average out, resulting in a fairly consistent load on the OEM plant for any SKU on a daily basis. This smooths out demand spikes, thereby reducing the need for suppliers to carry excessive protective inventory, which is often required in a forecast-based system.</p><p>If market demand slows and the off-take of finished goods from OEMs decreases, there will be a corresponding drop in parts consumption. Since they have visibility to this, suppliers will be able to take preemptive steps to adjust their production plans 6-8 months in advance, rather than relying on the current forecast-driven inventory management system. While suppliers can accommodate occasional dips in demand, they are wary of prolonged or severe downturns. Thus, this proactive approach will help mitigate the bullwhip effect during market fluctuations, fostering healthier vendor relationships and creating a more agile supply chain.</p><p><span style="color:hsl(0,0%,0%);">Optimising the use of dealer working capital: &nbsp;</span></p><p>By having a defined upper limit for each SKU, dealers’ working capital is not locked into specific items but remains available for a broader range of color and model variants. This allows dealers to stock a variety of items, enhancing their ability to fulfill diverse customer needs and improving delivery times, thus reducing customer wait times for less common items and meeting overall market demand more effectively.</p><p>Certain OEMs are already exploring models that minimise inventory at dealerships. For instance, a leading luxury auto OEM has implemented a zero inventory at dealership model called ‘Retail of the Future’<sup>[5]</sup>, allowing customers to purchase directly from the company. This shift eliminates dealer inventory, enabling them to reduce their financial risks and focus on customer relationships rather than managing inventory.&nbsp;<span style="color:#863157;">&nbsp;</span></p><h5><span style="color:#863157;">What to do to mitigate the immediate crisis?</span></h5><p>While these strategies provide long-term solutions, OEMs must address the immediate crisis by making difficult decisions regarding reduced production, particularly if car sales in India decline during the Diwali season.&nbsp; However, as there are mismatches in inventory at dealerships vis-à-vis customer demand, OEMs still need to produce to cover the gaps in FG availability. To protect their sales, however limited they may be, OEMs need to ensure that suppliers are able to continue to supply parts despite having a working capital crunch. In order to maintain the continuity of business, suppliers need to pay for raw materials as well as labour. Given their tight working capital and high receivables situation, their business continuity could be seriously jeopardised. &nbsp;</p><p>Hence, it is in the interest of larger and more financially stable auto OEMs to facilitate a robust win-win-win ‘bill discounting’ mechanism with the help of a financial institution by leveraging its own high credit rating. This will help the suppliers get paid faster without draining OEMs’ cash. &nbsp;</p><p>However, as mentioned, this is not a long-term solution. The few strategic steps discussed in this article must be taken to sustainably address the challenges faced by OEMs, their supply chain partners, and dealerships. &nbsp;</p><p>&nbsp;</p><h5><span style="color:#863157;">A final word</span></h5><p>By adopting strategies that emphasise end-to-end flexibility and agility, auto supply chains can meet customer demands without increasing inventory levels, fostering a healthier relationship among all stakeholders in the supply chain. By doing so, the Indian auto sector can establish a compelling narrative for itself. While other markets may emphasise technology, quality, or value for money, India's narrative should centre on providing flexibility and reducing lead times to enhance customer satisfaction. This alignment with market needs will better position companies to effectively respond to evolving consumer preferences and demands, ultimately fostering long-term resilience and competitiveness in the market.</p><p>&nbsp;</p><p>&nbsp;</p>

Discover effective strategies to tackle inventory excess in Indian auto dealerships. Insights and solutions by Vector Consulting Group. Read the full whitepaper here.

Strategies to Curb Excess Inventory in Auto Dealerships White Paper | Vector Consulting Group

The saga of why Indian generic industry is currently caught in an unexpected dilemma and what they can do about it.

A pharmaceutical odyssey

A Pharmaceutical Odyssey

<h5><strong>Introduction</strong></h5><p>Just-In-Time (JIT), a production philosophy pioneered by Toyota in the 1970s, became popular with Toyota’s rapid growth and was quickly adopted globally by major OEMs during the 1980s and 1990s. The implementation of JIT by these OEMs attempted to integrate their operations with their suppliers and vehicle dealerships into a seamless supply chain.</p><p>&nbsp;</p><h5><strong>Implementing JIT</strong></h5><p>Once JIT is implemented, a supply chain management system is expected to showcase the following characteristics/benefits:</p><p>&nbsp;</p><h5><strong>‘Pull’ based inventory movement</strong></h5><p>Inventory movement will be ‘just in time’ in the entire supply chain and is based on the pull from the previous node or “bin availability”. For instance, when a bin <sup>[1]</sup> signals that it needs replenishment, it initiates the movement of materials from the supplier or storage area to the production line. This movement is typically rapid and aligned with the production schedule. Forecasts will be used only for high-level planning. E.g. for raw material planning but not for actual RM procurement or for planning production. The idea is that any movement of inventory before the actual need for it can generate excess inventory, and any movement later will create shortages.</p><h5>&nbsp;</h5><h5><strong>Frequent deliveries</strong></h5><p>Suppliers, OEMs, and dealerships would practice frequent and small deliveries. For e.g., raw materials will be received just-in-time for production at the production line.</p><p>&nbsp;</p><h5><strong>Smooth and stable production flow</strong></h5><p>A smooth and continuous production flow is expected to be seen at suppliers and OEMs without frequent stoppages or disruptions.</p><p>&nbsp;</p><h5><strong>Reduced/Stable inventory levels</strong></h5><p>Suppliers, OEMs, and dealerships will have very limited stock of raw materials, work-in-progress, and finished goods. These levels will stay stable – no large variability across the supply chain.</p><p>&nbsp;</p><h5><strong>Lean Manufacturing</strong></h5><p>Lean manufacturing principles, actively identifying and eliminating waste, focusing on value-adding activities, and optimising processes are followed by the OEM and all suppliers.</p><p>&nbsp;</p><h5><strong>Continuous improvement</strong></h5><p>Companies/entities will have a culture of Kaizen (continuous improvement) and encourage employee involvement in identifying and implementing process enhancements. Actions such as standardisation, quality initiatives, set-up time reduction, etc., are taken to reduce variability in the system and improve synchronisation.</p><p>To sum up, by emphasising precise production and timely delivery of goods without excess inventory, JIT‘s pull mode of operations promises efficiency and reduced costs for suppliers, OEMs and dealerships. The reports of benefits experienced by many international vehicle manufacturers in their operations attracted many large Indian OEMs to adopt JIT as well.</p><p>However, even a small dipstick survey can indicate that all is not as expected.</p><h5>&nbsp;</h5><h5><strong>The challenges</strong></h5><p>While most OEMs (75%) have implemented JIT practices in their processes, their supply chain partners have not been roped in JIT. This means the JIT implementation is not end-to-end in any Indian OEM’s supply chain. One exception seen is of an MNC OEM in India that has done a zero-inventory model at the dealer level, with real demand from end consumer demand triggering inventory movement. Some have also done a demand-pull replenishment for only spare parts from their OEM warehouse to dealers. However, most follow a hybrid push-pull system – i.e. monthly/weekly forecast-based ordering from dealers, scheduling monthly production requirements from suppliers with daily inventory movement to OEM plants as per demand.</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//1_1708591358.png" width="2084" height="2084"></figure><h5><strong>Poor stability in the supply chain – expediting and firefighting</strong></h5><p>Moreover, the stability that a JIT supply chain is expected to offer is not realised. As per 90% of respondents in this survey, JIT is partially and ineffectively implemented by their firms. The lack of stability can also be seen in two parameters - the level of expediting and the variability of the inventory profile.</p><p>With significant expediting and firefighting (75% of the respondents of this research indicated that the JIT system involves a lot of firefighting), an attempt is made to ensure 1-2 days of full kit at OEMs and suppliers but from time to time, kits are incomplete for production. The availability of full kits is found to be only 75% at OEMs and 70% at suppliers for assembly. Even if one item is not available, the plan has to be changed. Consequently, the production plan adherence is poor, especially at suppliers (only 80%-85%).</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//2_1708591390.png" width="2084" height="2084"></figure><h5><strong>Poor stability in the supply chain - inventory variability&nbsp;</strong></h5><p>At the same time, even though suppliers (Tier 1) are included by most of the OEMs in a JIT partnership, there are clear signs that the inventory benefits are skewed towards the OEMs. Thus, while the OEM may have only one day or one shift worth of inventory, the suppliers hold 10-12 days of inventory for OEMs, even when they are only a few hours away from the assembly plants of the auto OEM. Similarly, dealerships maintain 1-3 months sales worth of stocks depending upon the season.&nbsp;</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//3_1708591415.png" width="2084" height="2084"></figure><p>90% of the survey respondents also reported that in the current practice, the inventory stays in the supplier’s books till it is inwarded in the OEM’s facility while it moves to the dealership account on a factory exit basis from the OEM. The trend is common across all OEMs surveyed and 90% of the suppliers affirmed this practice. Similarly, 85% of the Tier 1 suppliers tend to follow the same practice of inwarding with their suppliers.</p><p>Further, the inventory of the entire supply chain goes haywire from time to time. For example, after COVID-19, the dealer inventory of the OEMs ballooned, and the reaction of OEMs for production correction had a significant lag (about 6-7 months of lag). After COVID, the glut in the market was followed by shortages since OEMs could also not ramp up when demand picked up. This infamous ‘bullwhip’ effect is part of every economic downturn.</p><h5><strong>Combination of push-pull inventory movement</strong></h5><p>A closer look at the supply chain can show other indicators to show that inventory movement is not fully ‘pull-based’. Many OEMs get inventory from suppliers in JIT. However, production in the entire supply chain (according to 100% of suppliers and OEMs surveyed) is based on forecasts rather than actual consumption or demand.</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//4_1708591437.png" width="2084" height="2084"></figure><p>However, market demand fluctuates, and these forecasts don’t match reality (accuracy is 60%-80%). Consequently, issues such as rescheduling, searching for missing components and daily expediting ensues. It is not uncommon for 15%-25% of the full kits needed for the day to be incomplete at many OEMs in spite of regular full kit meetings. Expediting by the OEMs leads to a change in what is demanded daily from the supplier vis-a-vis the order schedule. There is up to 25% variation experienced by suppliers with OEM schedules.</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//5_1708591453.png" width="2084" height="2084"></figure><p>&nbsp;</p><p>Because plant scheduling and material planning of suppliers is based on the monthly or weekly forecast of the OEM, the suppliers’ ability to respond quickly to OEMs’ daily production plan changes is restricted. Even though the supplier keeps significant inventory buffers to try and prevent the situation (10-12 days), there is often a mismatch in what can be supplied and what the OEM demands; therefore, suppliers often fail to meet changing requirements at a daily level. It must be noted here that while some of this inventory kept by the supplier is by design, some is due to a change in plan by the OEM (made as per plan but not lifted yet). The Tier 1 supplier has a similar relationship with their vendors.</p><h5><strong>Real problem</strong></h5><p>These findings from this research point to</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//jit1_1708592057.png" width="2084" height="2084"></figure><p>&nbsp;</p><p>As can be seen in the study, in spite of JIT (or because of it), a majority of Indian Auto OEMs are struggling to effectively manage demand - especially at the SKU level, across various time horizons. Shorter product cycles, changes in regulations, and an accelerated introduction of new components into the market are aggravating demand fluctuations. In this environment of high demand variability across products, companies do not have the ability to do demand levelling, i.e. having a cadence of SKUs across time periods (Heijunka). Without this levelling, adhering strictly to a JIT-based approach (bin availability-based inventory movement) throughout the supply chain becomes difficult. Any attempt to do so is detrimental since small disturbances will have a cascading effect on the operations of all entities in the supply chain.</p><p>Hence, a system has been established in India where JIT/bins are used within OEM’s operations and for moving inventory from suppliers to OEMs. So, large auto OEMs maintain little or no inventory (1 shift or day’s inventory inside their premises). However, they require suppliers to keep an adequate stock of supplies at warehouses near OEM assembly lines. Moreover, since production at the supplier is not based on JIT but on forecasts (inevitably inaccurate), this also leads to the accumulation of inventory. Wherever suppliers are larger than their own vendors, a similar situation ensues.</p><h5><strong>Direction of solution</strong></h5><p>How, then, can the automotive supply chain be improved? It is well accepted that a pull system is superior to a forecast-based approach because it minimises waste, reduces excess inventory, and ensures production or ordering aligns precisely with real customer demand. So, any direction of solution proposed should protect these advantages and offer a practical and effective end-to-end pull system in this industry that offers a win-win-win (win for all partners).</p><p>In an environment of inherently high variability, trying to eliminate it altogether, as attempted by the Heijunka, is impractical. However, variability can be dampened considerably with the help of buffers. For such a buffered system to be implemented and to make sure that this system responds to market demand with agility and also, the following steps have to be taken:</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//6_1708591534.png" width="2084" height="2084"></figure><p>The most effective starting point to implement a system of 'buffers replenishing buffers' will be on the demand side of the auto OEM. We can mitigate demand spikes at the dealer level by transferring inventory from the OEM to the dealer based solely on consumption rather than adhering to fixed sales targets/forecasts.</p><p>This will involve the OEM creating a central warehouse to maintain FG inventory that can absorb fluctuations in demand from dealerships during the supply lead time. Production at the OEM should be driven by actual consumption from the warehouse (a fall in buffer level or norm), rather than on sales forecasts. This will improve load balancing and operational flow at the plant.</p><p>Component suppliers can also maintain an FG inventory from which they supply the OEM's RM inventory based on daily consumption. The suppliers should transition to pull-based production, producing based on actual off-take from their FG warehouse rather than using monthly schedules. This will decouple them from any fluctuations in the OEM’s manufacturing plans as well. A similar system, which helps reduce supply lead time and ensures adequate availability of feeding components from Tier II vendors, can be established.</p><p><strong>2 Implement an execution-based priority method to deal with variability in demand and capacity so that the system gets clear signals on what to focus upon when total demand across products exceeds capacity. </strong>Procurement and production based on daily consumption rather than forecasts will allow for better responsiveness to changing demand patterns. However, since demand is not levelled, it is possible that total daily demand across products exceeds capacity at an entity (which is not a problem in an environment where demand is levelled). So, in this situation, a priority system is needed to identify which products to produce/dispatch, etc. For every item, a target inventory can be set based on ‘paranoid’ consumption during replenishment time (the maximum forecasted demand during the replenishment time factored by the fluctuations in the replenishment time). The prevailing level of stock, as compared to this target level of various products/buffer levels, can be used to signal priority using simple colour codes. For example, on a daily basis, some FG SKUs will have lower stock compared to the target level while others may have higher stock. A colour-based priority system will, in this situation, signal the following:</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//7_1708591604.png" width="2084" height="2084"></figure><p>Naturally, Red SKUs should be prioritised over Yellow and Green. This system is important as reacting to small quantity consumption is clearly inefficient. Thus, the colour system provides the necessary flexibility for these decisions.</p><figure class="image"><img style="aspect-ratio:2084/2084;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//8_1708591628.png" width="2084" height="2084"></figure><p>The colour-based system can also trigger adjustments in inventory norms. For instance, if sales rates consistently exceed supply rates or supply, the norm can be increased. A mechanism can also be put in place to adjust the norm in preparation for known jumps or drops in sales (e.g. major promotional events by the OEM). This method of tracking priority zones of SKUs and periodic changing of norms of the buffers by forward and backward sensing of demand needs can be put in place (giving very high transparency in the system) with the help of end-to-end IT infrastructure.</p><h5><strong>Conclusion</strong></h5><p>The study highlights the limitations of JIT (Just-In-Time) manufacturing. Clearly, implementing JIT is not advisable in the current automobile industry environment, as demand variability is high across products, and companies are unable to level demand as Toyota once could. Attempts by OEMs to avail themselves of the inventory benefits of JIT have resulted in the creation of two separate worlds within the supply chain: a JIT world at the OEMs and a non-JIT world at partner organisations. This has led to stock pileups with partners in the supply chain, resulting in increased costs and low capital turnover for suppliers and dealers, often leading to friction in relationships.</p><p>To implement a pull system that can benefit the entire supply chain, a solution is proposed involving buffering and intelligent decoupling to absorb variability in the system. This approach ensures seamless flow, provides flexibility, and aligns the supply chain with market movements without increasing inventory levels in the supply chain.</p><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p>

Our study on India's auto industry could not find any end-to-end JIT implementation in the supply chains of auto companies. We explore why and propose an alternative pull system with buffers and smart decoupling to overcome the limitations of JIT while securing its advantages.

Just-In-Time or Just Not There? Re-evaluating India's automotive supply chain dynamics

<h5><strong>Introduction</strong></h5><p>Just-In-Time (JIT), a production philosophy pioneered by Toyota in the 1970s, became popular with Toyota’s rapid growth and was quickly adopted globally by major OEMs during the 1980s and 1990s. The implementation of JIT by these OEMs attempted to integrate their operations with their suppliers and vehicle dealerships into a seamless supply chain.</p><p>&nbsp;</p><h5><strong>Implementing JIT</strong></h5><p>Once JIT is implemented, a supply chain management system is expected to showcase the following characteristics/benefits:</p><p>&nbsp;</p><h5><strong>‘Pull’ based inventory movement</strong></h5><p>Inventory movement will be ‘just in time’ in the entire supply chain and is based on the pull from the previous node or “bin availability”. For instance, when a bin <sup>[1]</sup> signals that it needs replenishment, it initiates the movement of materials from the supplier or storage area to the production line. This movement is typically rapid and aligned with the production schedule. Forecasts will be used only for high-level planning. E.g. for raw material planning but not for actual RM procurement or for planning production. The idea is that any movement of inventory before the actual need for it can generate excess inventory, and any movement later will create shortages.</p><h5>&nbsp;</h5><h5><strong>Frequent deliveries</strong></h5><p>Suppliers, OEMs, and dealerships would practice frequent and small deliveries. For e.g., raw materials will be received just-in-time for production at the production line.</p><p>&nbsp;</p><h5><strong>Smooth and stable production flow</strong></h5><p>A smooth and continuous production flow is expected to be seen at suppliers and OEMs without frequent stoppages or disruptions.</p><p>&nbsp;</p><h5><strong>Reduced/Stable inventory levels</strong></h5><p>Suppliers, OEMs, and dealerships will have very limited stock of raw materials, work-in-progress, and finished goods. These levels will stay stable – no large variability across the supply chain.</p><p>&nbsp;</p><h5><strong>Lean Manufacturing</strong></h5><p>Lean manufacturing principles, actively identifying and eliminating waste, focusing on value-adding activities, and optimising processes are followed by the OEM and all suppliers.</p><p>&nbsp;</p><h5><strong>Continuous improvement</strong></h5><p>Companies/entities will have a culture of Kaizen (continuous improvement) and encourage employee involvement in identifying and implementing process enhancements. Actions such as standardisation, quality initiatives, set-up time reduction, etc., are taken to reduce variability in the system and improve synchronisation.</p><p>To sum up, by emphasising precise production and timely delivery of goods without excess inventory, JIT‘s pull mode of operations promises efficiency and reduced costs for suppliers, OEMs and dealerships. The reports of benefits experienced by many international vehicle manufacturers in their operations attracted many large Indian OEMs to adopt JIT as well.</p><p>However, even a small dipstick survey can indicate that all is not as expected.</p><h5>&nbsp;</h5><h5><strong>The challenges</strong></h5><p>While most OEMs (75%) have implemented JIT practices in their processes, their supply chain partners have not been roped in JIT. This means the JIT implementation is not end-to-end in any Indian OEM’s supply chain. One exception seen is of an MNC OEM in India that has done a zero-inventory model at the dealer level, with real demand from end consumer demand triggering inventory movement. Some have also done a demand-pull replenishment for only spare parts from their OEM warehouse to dealers. However, most follow a hybrid push-pull system – i.e. monthly/weekly forecast-based ordering from dealers, scheduling monthly production requirements from suppliers with daily inventory movement to OEM plants as per demand.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//1_1708591358.png"></figure><h5><strong>Poor stability in the supply chain – expediting and firefighting</strong></h5><p>Moreover, the stability that a JIT supply chain is expected to offer is not realised. As per 90% of respondents in this survey, JIT is partially and ineffectively implemented by their firms. The lack of stability can also be seen in two parameters - the level of expediting and the variability of the inventory profile.</p><p>With significant expediting and firefighting (75% of the respondents of this research indicated that the JIT system involves a lot of firefighting), an attempt is made to ensure 1-2 days of full kit at OEMs and suppliers but from time to time, kits are incomplete for production. The availability of full kits is found to be only 75% at OEMs and 70% at suppliers for assembly. Even if one item is not available, the plan has to be changed. Consequently, the production plan adherence is poor, especially at suppliers (only 80%-85%).</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//2_1708591390.png"></figure><h5><strong>Poor stability in the supply chain - inventory variability&nbsp;</strong></h5><p>At the same time, even though suppliers (Tier 1) are included by most of the OEMs in a JIT partnership, there are clear signs that the inventory benefits are skewed towards the OEMs. Thus, while the OEM may have only one day or one shift worth of inventory, the suppliers hold 10-12 days of inventory for OEMs, even when they are only a few hours away from the assembly plants of the auto OEM. Similarly, dealerships maintain 1-3 months sales worth of stocks depending upon the season.&nbsp;</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//3_1708591415.png"></figure><p>90% of the survey respondents also reported that in the current practice, the inventory stays in the supplier’s books till it is inwarded in the OEM’s facility while it moves to the dealership account on a factory exit basis from the OEM. The trend is common across all OEMs surveyed and 90% of the suppliers affirmed this practice. Similarly, 85% of the Tier 1 suppliers tend to follow the same practice of inwarding with their suppliers.</p><p>Further, the inventory of the entire supply chain goes haywire from time to time. For example, after COVID-19, the dealer inventory of the OEMs ballooned, and the reaction of OEMs for production correction had a significant lag (about 6-7 months of lag). After COVID, the glut in the market was followed by shortages since OEMs could also not ramp up when demand picked up. This infamous ‘bullwhip’ effect is part of every economic downturn.</p><h5><strong>Combination of push-pull inventory movement</strong></h5><p>A closer look at the supply chain can show other indicators to show that inventory movement is not fully ‘pull-based’. Many OEMs get inventory from suppliers in JIT. However, production in the entire supply chain (according to 100% of suppliers and OEMs surveyed) is based on forecasts rather than actual consumption or demand.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//4_1708591437.png"></figure><p>However, market demand fluctuates, and these forecasts don’t match reality (accuracy is 60%-80%). Consequently, issues such as rescheduling, searching for missing components and daily expediting ensues. It is not uncommon for 15%-25% of the full kits needed for the day to be incomplete at many OEMs in spite of regular full kit meetings. Expediting by the OEMs leads to a change in what is demanded daily from the supplier vis-a-vis the order schedule. There is up to 25% variation experienced by suppliers with OEM schedules.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//5_1708591453.png"></figure><p>&nbsp;</p><p>Because plant scheduling and material planning of suppliers is based on the monthly or weekly forecast of the OEM, the suppliers’ ability to respond quickly to OEMs’ daily production plan changes is restricted. Even though the supplier keeps significant inventory buffers to try and prevent the situation (10-12 days), there is often a mismatch in what can be supplied and what the OEM demands; therefore, suppliers often fail to meet changing requirements at a daily level. It must be noted here that while some of this inventory kept by the supplier is by design, some is due to a change in plan by the OEM (made as per plan but not lifted yet). The Tier 1 supplier has a similar relationship with their vendors.</p><h5><strong>Real problem</strong></h5><p>These findings from this research point to</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//jit1_1708592057.png"></figure><p>&nbsp;</p><p>As can be seen in the study, in spite of JIT (or because of it), a majority of Indian Auto OEMs are struggling to effectively manage demand - especially at the SKU level, across various time horizons. Shorter product cycles, changes in regulations, and an accelerated introduction of new components into the market are aggravating demand fluctuations. In this environment of high demand variability across products, companies do not have the ability to do demand levelling, i.e. having a cadence of SKUs across time periods (Heijunka). Without this levelling, adhering strictly to a JIT-based approach (bin availability-based inventory movement) throughout the supply chain becomes difficult. Any attempt to do so is detrimental since small disturbances will have a cascading effect on the operations of all entities in the supply chain.</p><p>Hence, a system has been established in India where JIT/bins are used within OEM’s operations and for moving inventory from suppliers to OEMs. So, large auto OEMs maintain little or no inventory (1 shift or day’s inventory inside their premises). However, they require suppliers to keep an adequate stock of supplies at warehouses near OEM assembly lines. Moreover, since production at the supplier is not based on JIT but on forecasts (inevitably inaccurate), this also leads to the accumulation of inventory. Wherever suppliers are larger than their own vendors, a similar situation ensues.</p><h5><strong>Direction of solution</strong></h5><p>How, then, can the automotive supply chain be improved? It is well accepted that a pull system is superior to a forecast-based approach because it minimises waste, reduces excess inventory, and ensures production or ordering aligns precisely with real customer demand. So, any direction of solution proposed should protect these advantages and offer a practical and effective end-to-end pull system in this industry that offers a win-win-win (win for all partners).</p><p>In an environment of inherently high variability, trying to eliminate it altogether, as attempted by the Heijunka, is impractical. However, variability can be dampened considerably with the help of buffers. For such a buffered system to be implemented and to make sure that this system responds to market demand with agility and also, the following steps have to be taken:</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//6_1708591534.png"></figure><p>The most effective starting point to implement a system of 'buffers replenishing buffers' will be on the demand side of the auto OEM. We can mitigate demand spikes at the dealer level by transferring inventory from the OEM to the dealer based solely on consumption rather than adhering to fixed sales targets/forecasts.</p><p>This will involve the OEM creating a central warehouse to maintain FG inventory that can absorb fluctuations in demand from dealerships during the supply lead time. Production at the OEM should be driven by actual consumption from the warehouse (a fall in buffer level or norm), rather than on sales forecasts. This will improve load balancing and operational flow at the plant.</p><p>Component suppliers can also maintain an FG inventory from which they supply the OEM's RM inventory based on daily consumption. The suppliers should transition to pull-based production, producing based on actual off-take from their FG warehouse rather than using monthly schedules. This will decouple them from any fluctuations in the OEM’s manufacturing plans as well. A similar system, which helps reduce supply lead time and ensures adequate availability of feeding components from Tier II vendors, can be established.</p><p><strong>2 Implement an execution-based priority method to deal with variability in demand and capacity so that the system gets clear signals on what to focus upon when total demand across products exceeds capacity. </strong>Procurement and production based on daily consumption rather than forecasts will allow for better responsiveness to changing demand patterns. However, since demand is not levelled, it is possible that total daily demand across products exceeds capacity at an entity (which is not a problem in an environment where demand is levelled). So, in this situation, a priority system is needed to identify which products to produce/dispatch, etc. For every item, a target inventory can be set based on ‘paranoid’ consumption during replenishment time (the maximum forecasted demand during the replenishment time factored by the fluctuations in the replenishment time). The prevailing level of stock, as compared to this target level of various products/buffer levels, can be used to signal priority using simple colour codes. For example, on a daily basis, some FG SKUs will have lower stock compared to the target level while others may have higher stock. A colour-based priority system will, in this situation, signal the following:</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//7_1708591604.png"></figure><p>Naturally, Red SKUs should be prioritised over Yellow and Green. This system is important as reacting to small quantity consumption is clearly inefficient. Thus, the colour system provides the necessary flexibility for these decisions.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//8_1708591628.png"></figure><p>The colour-based system can also trigger adjustments in inventory norms. For instance, if sales rates consistently exceed supply rates or supply, the norm can be increased. A mechanism can also be put in place to adjust the norm in preparation for known jumps or drops in sales (e.g. major promotional events by the OEM). This method of tracking priority zones of SKUs and periodic changing of norms of the buffers by forward and backward sensing of demand needs can be put in place (giving very high transparency in the system) with the help of end-to-end IT infrastructure.</p><h5><strong>Conclusion</strong></h5><p>The study highlights the limitations of JIT (Just-In-Time) manufacturing. Clearly, implementing JIT is not advisable in the current automobile industry environment, as demand variability is high across products, and companies are unable to level demand as Toyota once could. Attempts by OEMs to avail themselves of the inventory benefits of JIT have resulted in the creation of two separate worlds within the supply chain: a JIT world at the OEMs and a non-JIT world at partner organisations. This has led to stock pileups with partners in the supply chain, resulting in increased costs and low capital turnover for suppliers and dealers, often leading to friction in relationships.</p><p>To implement a pull system that can benefit the entire supply chain, a solution is proposed involving buffering and intelligent decoupling to absorb variability in the system. This approach ensures seamless flow, provides flexibility, and aligns the supply chain with market movements without increasing inventory levels in the supply chain.</p><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p>

Explore the challenges and benefits of Just-In-Time (JIT) in India's automotive industry supply chain. Learn how JIT implementation impacts inventory management and operational stability.

Have automobile companies in India really implemented Just In Time (JIT)? | Vector Consulting Group

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The hidden obstacles stalling your automated planning system. Discover how to overcome them for improved delivery reliability and higher productivity

Manufacturing Schedulers: What works and what doesn’t!

<p><i>Mr. Srinivasan Prabhu, the Head of Planning at a major pharma company, is having a frustrating day with his colleagues in the Production Planning department. Despite the implementation of a cutting-edge scheduling system over the past several months, his team's workload has only increased. The company, which is heavily focused on exports, has been shelling out large amounts of money in penalties due to delayed deliveries to its customers. The primary objective behind the investment in the scheduling system was to improve the planning process and eradicate the issue of penalties altogether. However, Srini, as he is fondly called, is struggling to justify to the higher-ups why the expensive resource planning system has not delivered the expected results so far. Additionally, a recent audit of the operations team revealed that the tool’s schedule is not being followed either. Surface-level feedback suggests that change management and lack of proper training may be the issue. Still, Srini knows that if those were the issues, the planners wouldn't be able to update the past altered production data in the scheduler to keep up pace with the actual progress.&nbsp;</i></p><p><i>During lunch, Srini discussed his frustrations with Mr. Madhur Seth, the Head of IT, who assuaged him of at least meeting the need for digitalisation of the supply chain. However, Srini needed to be more convinced about the benefits of digitalisation, as it had not resulted in any improvements in on-time performance, inventory reduction, operating expenses, or output. He also questioned the claim that digitalisation could reduce the dependency on people since the planning system was still heavily reliant on human inputs rather than generating schedules that can be strictly adhered to.</i></p><p><i>Srini realises that there could be deeper, underlying issues at play preventing the scheduling tool from being used effectively. He feels that he needs to take a step back and re-evaluate the entire planning process to identify the root cause of the problem.</i></p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//image_1697116226.png"></figure><h5><strong>Seems like déjà vu?</strong></h5><p>Have you ever felt like you've hit a dead end with your planning system, despite investing a significant amount of resources into it? Don't worry, you're not alone! Keep reading to discover the core issues that impact such implementations and learn how to establish a planning system that will make you reliable and on time.</p><p>Most&nbsp;<strong>advanced scheduling systems</strong>&nbsp;implemented in manufacturing plants lose relevance very quickly. Either the schedulers operate at a lag of a day or two as compared to the real-time situation on the shop floor, or the planners stop using it completely. Both of these situations have nothing to do with any technical incapability of a scheduler to model unique rules or manage the complexity of master data. Let us understand why most scheduling systems are not able to survive for long in manufacturing organisations.</p><h5><strong>Mapping the shop floor - Is an exact replica a cause of concern?</strong></h5><p>The science of scheduling primarily focuses on maximising the utilisation of people and equipment, which requires a precise understanding of when resources are available and when they are occupied. Achieving this goal involves configuring a digital twin of the shop floor, where all system resources are mapped to their digital counterparts with identical parameters, including cycle time, set-up/set-down times, cleaning/maintenance schedules, and more.&nbsp;</p><p>The most highly touted feature of such advanced planning systems is the Gannt Chart view of orders on multiple work centres including their start and end times. This view can give the users an impression of control and precision. Hence, if the parameters do not match, then the expected start and end won’t match at any work centre which will kill the purpose of the implementation itself.&nbsp;</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//s1_1708606719.png"></figure><p>To generate this level of view,&nbsp;<strong>herculean efforts</strong>&nbsp;are required to configure the plethora of rules for scheduling, sequencing, batching, and routing at all work centres.&nbsp;</p><p>A research was conducted by Vector involving production planners from 40 organisations across industries (equipment manufacturing, textile, garment manufacturing, pharma, automobile, aluminum casting, etc.) to understand the implementation success and usability of such production schedulers. The study highlighted the various problems that planners were facing. 70% of the respondents expressed that they faced one or the other problem with the scheduler. While many of these unhappy planners had multiple issues with it, when picking the most dominant issue they had with their scheduler, 48% expressed that there is a lack of dynamism in the tools, 33% said that the tool is complex to use and 19% claimed difficulties with master data management.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//s2png_1708607012.png"></figure><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//sl_1708608213.png"></figure><p>70% of these respondents in the survey conducted by Vector were of the opinion that following the schedule generated by the system threatened either delivery commitments, capacity utilisation of critical work-centres or both. So, they modified the schedule before implementation. A probing through personal interview into why some are comfortable with the system-generated schedule while the majority are not, clarified that these were companies that had fairly stable demand, little or no RM issues, and significant extra capacity to able to absorb any random variability. Essentially their ‘constraint’ or bottleneck consistently is in the market and not operations.</p><p>But in firms that have constraints in operations, no plan survives first contact with the enemy called&nbsp;<strong>Variability.</strong></p><p>Let us understand how variability attacks these very tenets of a successful production scheduler implementation.</p><p><strong>In execution, there are two types of variabilities that hit the schedules– Inherent and Forced.</strong></p><p>&nbsp;</p><h5><strong>&nbsp; </strong><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//image_1697116502.png"><strong> &nbsp;Inherent variabilities&nbsp;</strong></h5><p>Inherent Variabilities are factors that are always present in any manufacturing plant, for e.g. delays in the arrival of raw material or packaging material, machine breakdowns, unexpected quality issues, changes in customer schedules, delay or early arrival of 3rd party inspector, changes in container schedules etc.</p><p>These last-minute variations cannot be modelled upfront on a scheduler, hence requiring additional modifications on the generated schedule to ensure proper utilisation levels.</p><p>&nbsp;</p><h5><strong>&nbsp; </strong><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//image_1697116538.png"> <strong>Forced variabilities&nbsp;</strong></h5><p>Forced Variabilities, on the other hand, are introduced by the participants themselves; for e.g., an escalation from the National Sales Manager for an order under execution ensures many batching/scheduling/sequencing/routing rules are forcefully set aside or modified, and the urgent order is expedited.</p><p>These inherent and forced variabilities result in a continuous change of schedules at all work centres.</p><h6><strong>This has the following ramifications:</strong></h6><ul><li>If a scheduler is set up to quote due dates against orders, those dates would shift frequently. As a result, the Customer Required Delivery Date (CRDD) itself is taken as the commitment. The only attempt will be to ensure that any new date re-casted due to variability and uncertainty is close to the CRDD. However, in cases when the load is higher than the available capacity, the likely readiness date will keep shifting away from the CRDD.</li><li>On the other hand, if the scheduler is not 're-run' based on the latest impact of variability, then all the Gantt Chart views of start and end dates lose their relevance, and the entire information becomes unusable within no time.</li><li>And if time buffers are used in scheduling to protect against the variability, then the schedule itself will not be precise enough to be shown at a minute level.</li><li>Finite scheduling at all work centres seems necessary to arrive at deterministic start dates in any of them when work centres feed onto one another. But if schedules keep changing in all work centres, then the promised benefits of ‘Visibility’ and ‘Control’ become meaningless. These two terms are often marketed as the key selling points. However, if what is visible today changes drastically in the next shift, then that ‘Visibility’ is non-actionable, which implies it will never give any ‘Control’.</li></ul><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//image_1708609224.png"></figure><p>The customers who were initially impressed by the Gantt Chart view of scheduled orders on workstations later realised that the sense of control and precision conveyed by the chart was an illusion, as the constantly changing schedules make it difficult to adhere to the planned timelines.</p><p>The frequently changing ETAs take ownership of on-time performance away from the production teams. The scheduler is made the scapegoat<i>. “We did what was best according to the scheduling software…. Sales team should be content with the new date as it is the best possible date given the circumstances…….”</i>&nbsp;is one of the most common excuses.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//s4_1708609311.png"></figure><h5><strong>A typical final state of scheduler implementation</strong></h5><p>What happens when a schedule is disrupted due to inherent and forced variabilities?</p><p>A few scheduling software’s make it easier to get back on track; provided there is hard coupling between the scheduling software and the legacy ERP on which the final production orders are created or in case the scheduling software doubles up as a manufacturing execution system. In such scenarios, for some time, given the high expenditure and management focus, the on-ground team will try to keep the scheduler updated by making entries on it post the event has happened. A lag of 1-3 days is usually noticed. But since a Murphy cannot be predicted, they soon realise that a dedicated team is required to keep the scheduler updated with the ground-level happenings.</p><p>It transforms from being a guiding lighthouse to a lagging shadow. It's like having to manually enter your latitude and longitude every time you want to know your position on Google Maps.</p><p>What is the benefit of forcefully keeping the scheduler updated? The realisation dawns upon eventually, more so when master and transaction data must be continually updated, and then finally, in many cases, the scheduler is reduced to a transaction recording system, while Excel spreadsheets take over as the primary tool for scheduling.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//s6_1708609369.png"></figure><p>&nbsp;</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//s7_1708609416.png"></figure><h5><strong>The way ahead</strong></h5><p>An elegant solution has to accept the above realities. Let us understand the implications of the above:</p><ul><li>If we have to acknowledge the presence of uncertainty and variability, it becomes crucial to recognise that the only aspect that requires protection is the final due date committed to the customer. The schedule of start and end dates on individual work centres is not of great significance.</li><li>The above implies that we need to leave aside protective capacity while quoting due dates.</li><li>Since constraints control the output of the system, we need to focus on considering the scheduling needs of these work centres to ensure the overall plant is well levelled in terms of demand and capacity.</li></ul><p>Using the protective capacity to quote dates implies that the capacity may get wasted in the execution if the actual variability is less than what has been considered. So, the way out is a 3-engine approach.</p><p>&nbsp;</p><h5><strong>Engine 1 - Planning</strong></h5><p>Rather than accepting a customer-requested delivery date (CRDD), planning should actually plot the order on the key CCRs and check the feasibility of managing delivery on or before the CRDD. If not feasible, the customer should be informed about the possible due date based on the order load on relevant CCRs and a protective buffer time. The buffer time safeguards the order from Murphies and provides enough time for batching/sequence optimisation at critical work centres. In the case of make-to-Stock scenarios in the legacy ERP where the WIP is not tagged to an order&nbsp;<strong>VectorFlow’s Planning Engine&nbsp;</strong>is able to dynamically allocate the WIP while keeping the load on downstream resources balanced and quotes the best possible due date for each order. This due date is the outer boundary that should not be crossed in execution. The batching/sequencing needs to happen in such a way that this date is never crossed. This enables a culture of an on-time delivery promise which is sacrosanct. A release date is derived to define the planned start date of an order on the first work centre. Releasing orders as per the release date prevents unwanted queueing on the shop floor.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//sr1_1708609542.png"></figure><h5><strong>Engine 2 - Execution</strong></h5><p>During execution, the arrival of raw materials, packaging materials and other bought-out components may not follow the exact plan. Some might be received early, and some might be delayed. VectorFlow’s Execution Engine first creates an unconstrained sequence of orders on the few key CCRs assuming all inputs are available. It then generates the list of the preferred inputs required for executing the orders. Many times, there are alternate inputs that can be used in place of the exact input defined in the BOM. The planner filters the orders based on input availability. This revised order list is input to the sequencer engine to generate the final execution sequence. An intelligent algorithm ensures the most optimal sequence/batch while ensuring an apt percentage of the protective buffer time is left intact for the complete execution in the remaining work centres. Each order has a revised estimated completion date which is earlier or the same as the original delivery due date. A colour priority system ensures if an order is delayed, it gets expedited at all remaining work centres to meet the due date. The sales team is made aware of the latest readiness date of the order in case the order is getting read much earlier than the promised due date.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//sr2_1708609644.png"></figure><h5><strong>Engine 3 – Pull-based Dynamic Release Management</strong></h5><p>A typical order can get executed via multiple routes available within the plant. From time to time, the order load of released orders on certain routes can increase if the rate of output at the key CCRs drops while fresh input is being released as per the calculated release dates. Similarly, order load on certain routes can go down also if there are large amounts of rejections/rate of output at the key CCRs increases. To avoid starvation and over-queueing on the routes,&nbsp;<strong>VectorFlow’s pull-based Dynamic Release Management Engine&nbsp;</strong>keeps a tab on the released load at each and every route and suggests early/late order releases depending on the status of the released load as compared to a threshold. The threshold is decided such that key CCRs will not experience starvation/over-queueing. This dynamic release control ensures WIP on the shop floor is maintained at a healthy level which key CCRs get utilised properly.</p><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//sr3_1708609713.png"></figure><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//s9_1708609729.png"></figure><p>The only input from the Planning Engine to the Execution Engine is the committed due dates. Execution Engine run handles finite scheduling / sequencing / batching in critical work centres based on a rule of remaining duration to the committed due dates. In all other work centres, instead of a schedule, people get a sequence of orders that the work centres should follow to ensure due date adherence.</p><h5>&nbsp;</h5><h5><strong>Visibility and Control in the 3-engine approach:</strong></h5><p>In this new way of working, instead of a Gannt view, a future load chart on each key work centre will depict the cumulative pending order load in a horizon. Planners can take a call on whether to accept an urgency or plan preventive maintenance based on the utilisation of that work centre on that horizon. Lower priority orders can be parked for urgent orders /preventive maintenance.</p><h5>&nbsp;</h5><h6><strong>The above 3-engine approach also requires paradigm changes in decision-making both in sales and operations. They are as follows:</strong></h6><ul><li>Acceptance of the fact that a detailed schedule does not give control. What is required is a pending load in front of any work centre. This gives much better control. If you want to understand where you are in a specific road journey and the likely time of reaching the destination, what you need is queuing information at key nodes and not the precise schedule of every vehicle, along with your vehicle at every node on the road.</li><li>Due dates need to be committed perpetually to an incoming order as and when the order arrives. The date should be subordinated to during the execution engine run. The pending order bank should not be re-cast as the typical monthly planning process. The committed due date of an order cannot change. The monthly re-casting leads to desynchronisation and loss of capacity in many plants.</li><li>Forcing a new customer due date within a packed schedule of previous orders should not be allowed. If that is a regular occurrence and there is a need to serve the urgent orders, then a separate configuration of capacities should be done accordingly to avoid conflicts with running orders.</li><li>Material release schedules based on pull signals of WIP should never be violated for want of local efficiency improvement at a non-constraint work centre.</li></ul><h5><strong>Impact on implementation</strong></h5><ul><li>Since constraining work centres will always be fewer than the complete manufacturing set-up, the master data management will require far less efforts.</li><li>The scheduling in the Execution Engine is localised, and based on the available load, it is much more likely to be closer to reality.</li><li>The sales team and customers are committed to only one due date, which doesn’t change planning for subordinates to deliver the order on or before that due date.</li></ul><figure class="image"><img src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//s10_1708609957.png"></figure><p>&nbsp;</p><p>&nbsp;</p>

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