Case Game: The Case Of Supply-Chain Management

CASE GAME
The Case Of Supply-Chain Management

To reduce costs, Total Industries- BT's fictional firm-must manage its supply-chain efficiently. What should its roadmap be? IIM-I's N. Agarwal, Tata Strategic Mgmt Group's V.C.Sinha, & Godrej-GE's G. Sunderraman deliberate. A BT Case Study.

By R. Chandrasekhar

"I'm glad the deal worked out,'' said Ajit Singh, the strapping, bespectacled, Director (Corporate Planning) of B&B, a personal-care giant.

''Same here,'' quipped Abhinav Kumar, the young CEO of the diversified Total Industries, with whom B&B had just inked a deal for sourcing soaps and detergents.

Kumar knew that the deal was critical to the turnaround of Total's modest soaps and detergents division. His empire comprised three more businesses-switchgears, consumer durables, and batteries. But these businesses boasted a respectable share in their market segments. The soaps division, a baggage from Total's past, fetched Rs 105 crore in sales every year, but its profits were a piffling Rs 2 crore. Over the previous six months, Kumar and Guneen Roy, the President of the soaps division, had worked hard at wooing B&B. And, the tie-up had finally happened.

''As you might know, Abhinav,'' Singh continued, ''B&B has revamped its sourcing strategy. The focus is on cutting flab in our supply chain. We would like Total to quickly adapt to the new system.''

''Don't worry, Ajit. Not just this, but all our other divisions are going to be reconfiguring their supply chain,'' Kumar hastily clarified.

The idea of Supply-Chain Management had been mooted by Srikant Suresh, President of Total's consumer durables business. The division, which made B&W and colour TVS, and refrigerators, was Total's largest, with a turnover of Rs 3,900 crore. Of this, refrigerators alone contributed Rs 2,100 crore, translating into a 20 per cent share of the market.

Of late, though, Suresh had been under pressure. The average annual growth rate of the refrigerator industry had shrunk to 5 per cent over the last four years; net margins, to 6 per cent. It was a small consolation for Total that it was the only refrigerator manufacturer to have made profits the previous year. There was no guarantee that it would be the exception again next year.

Retail prices had been frozen for most of the year, though input prices were inching up. Besides, there was a supply overhang and demand hadn't recovered enough to absorb it. Suresh knew there were two things Total needed to do. One, decimate costs and two, focus on differentiation in the marketplace.

Kumar had argued that it wasn't just the refrigerator division that needed remedying. And he was going to raise that theme at the executive meeting scheduled for the following day.

''Soaps has a new lease on life,'' began Kumar, getting the meeting started, ''and we need to capitalise on this to shore up the other divisions as well.''

Suresh nodded: ''Especially our cost efficiency.''

''What you are saying,'' interjected Manoj Kohli, President, Switchgears, ''is that we should seek cost advantage as well as value advantage. But, to my mind, we already have a cost advantage derived from volumes.''

''True,'' replied Suresh, ''but don't forget that entry barriers are dissipating and technology is no longer a differentiator. Rather, it's the supply chain that will have to fight the battle for us.''

''Given the fact that we have been making refrigerators since 1978, we are uniquely placed to leverage our value chain,'' concluded Kumar.

''I agree that differentiation is important,'' clarified Kohli, ''but we shouldn't stretch it too thin. All of us know what happened to TPL's ''space-advantage'' refrigerator. They changed the fridge space to freezer space ratio from the industry standard of 75:25 to 80:20. It was a good gimmick, but technically a disaster because a small freezer also limits the evaporative power that is so critical to optimise cooling.''

Suresh and Kumar remained silent. But Roy piped up.

''The two issues raised by Suresh are independent of each other. Value advantage can come from certain intangible benefits perceived by the customer. It could be service delivery, after-sales care, replacement offer, or technical support.

''The other issue,'' Roy continued, ''is building a unique competitive advantage. It must come from the way we organise and perform various activities in the value chain. Broadly, there are two kinds of activities on which we need to focus. One, primary activities including inbound and outbound logistics, operations, marketing, sales and service. And secondary functions such as product development, technology upgradation, human resource, materials procurement and finance.''

''Roy is right,'' Kumar conceded. ''When we talk of supply-chain management, we are really looking at all those activities that form an integral part of the supply chain. And when we do a job of managing it, we achieve two objectives: reducing costs through closer integration with suppliers, exploring out- sourcing opportunities and optimising capacity utilisation; and enhancing our value advantage by identifying improvements in channel relationships, service standards and customer satisfaction.''

''It's much more comprehensive than anything we do today,'' pointed out Ratika Sahai, the head of Batteries. ''But our SBU structure should help us tap value along our supply chain.''

''I agree,'' said Kohli. ''We do not have functional silos within Total. We should take the integration outside the boundaries of our firm to include suppliers and customers.''

''We need a model business to work on the new supply chain,'' noted Kumar. ''And I think our flagship refrigerators looks like the best candidate to me.'' The others agreed. ''But the point is, how do we go about it?''

Kumar had reason to be cautious. The business had some peculiarities of its own. For instance, 65 per cent of its costs arose from the supply side. Sourcing inputs for refigerators was complex too. For instance, the division had 300 big-ticket vendors; 800 critical-to-quality (CTQ) items; 1,100 spare parts and components, and about 2,800 process parameters.

Suresh, who had been doing some thinking on supply chain, suggested that a vendor development team (VDT) comprising 8 to 10 cross-functional members be formed. The team would update various specifications and establish a manual of CTQ characteristics to be used by the vendors as a benchmark. As a next step, it would undertake a technical review of vendor processes leading to quality manuals for each vendor. It would then track the work practices of each vendor, measure improvements in delivery and response time and work out an index with which to rate each vendor.

While the rating, Suresh explained, would provide a basis to measure vendor competence and rate prospective suppliers, the overall mandate to the team was clear: ensure that every big-ticket vendor achieves year-on-year price reduction of 5 per cent. ''To me that's the litmus test of whether our initiatives are working or not,'' Suresh said.

''I suggest we put a time frame on this,'' suggested Kohli.

''April, 2001,'' said Kumar, promptly setting a date.

''Is it a realistic target?'' Sahai queried. ''After all, besides the back-end complexity, the division has 75 state-level primary dealers and 5,000 retail outlets.''

Vikas Singh, Total's CFO, said that the discussion so far had missed a vital ingredient. ''Working capital management,'' he noted, ''should be an integral part of the supply-chain management. Particularly, wherever margins are low, sales are stagnant, and inventory is piling up. In fact, I would suggest that a dedicated cross-functional team be in charge of supply-chain management.''

Roy brought in a fresh angle to the issue. He felt that Total should go beyond the standardisation matrix in manufacturing. He cited the example of a Japanese white-goods major that changed its models and colours five times a day. ''Our average run length has been about six days in the last three years. We should ensure that it comes down to less than two days, and do this ahead of the impending market recovery.''

The debate soon grew to engulf information technology aspects. There was unanimity about the need for the organisation to invest in infotech. However, Kumar voiced his concern. ''Low margins restrict the organisation's capacity to invest in infotech, while rapid obsolescence makes frequent upgrades necessary.''

Two more hours into the meeting, and a whole range of other issues had cropped up. How should Total design a supply-chain management initiative? What should be its roadmap? What were the pitfalls Total was likely to face and how were they to be avoided? How was the progress to be monitored by the organisation?

Kumar remembered Singh's words from the day before, and knew that Total had little choice but to make the initiative succeed.