Case Game: The Case Of Vendor Development

CASE GAME
The Case Of Vendor Development

Will vendor-development improve quality standards for Total Industries-BT's fictional firm? Godrej Soaps' M.P. Pusalkar, NITIE's Thomas Mathew, and Ernst & Young's S. Shankarnarayanan debate. A BT Case Study.

By R. Chandrasekhar

You are right. He is arrogant,'' whispered Prateek Kaushik to his boss, Guneen Roy. Kaushik's comment was targeted at the man standing about eight feet in front of them, busy drawing a diagram on a white board. His name was Suhas Nair, an engineer from B&B-a personal care major with which Roy and Kaushik's company, Total Industries, had recently tied up for supply of soaps and detergents. Nair had been sent to take stock of Total's ageing and barely-profitable soap manufacturing facility, and draw up a plan to raise its quality and delivery standards to the level of B&B.

As his customer, Roy-who headed Total's soap division-could ill-afford to lock horns with Nair. Offensive as he was, Nair had to be put up with. Besides, Total's young CEO, Abhinav Kumar, had given Roy specific instructions to make Nair's job easy. So, when Nair sneered at Roy for not buying raw materials in the futures market, Roy had to keep his calm. But he knew that working with B&B was not going to be easy.

As soon as Nair finished his pre-lunch session, Roy headed straight for Kumar's room. ''We have a problem,'' he said, slumping into a chair across Kumar. ''My men find B&B's, particularly Nair's, shotgun-style very rude.''

''So, problems are cropping up sooner than I expected,'' noted Kumar. ''I don't need to tell you, Roy, but B&B is a customer we simply cannot afford to lose. Soaps is the only division in our company I lose sleep over. We've worked hard to rope in B&B and I am not going to let the fear of cultural incom-patibility scare this golden opportunity away.''

Kumar had a point. Total had three other divisions-switchgears, consumer durables, and batteries-that were leaders in their respective industries. In fact, had the B&B deal not happened, the soaps division would have been put on the block.

''But, culturally, we are two different worlds,'' insisted Roy. ''B&B is a pure play in soaps and detergents; it's a transnational headquartered in Boston, USA. It manufactures in 26 countries, and fights marketing battles like hell. In our case, the soaps division is a baggage from our past, and since its contribution to Total is insignificant, it gets little of management time...''

''And we want to change all that,'' said Kumar, interrupting Roy. ''I agree that there are differences. However, we have synergies as well. For instance, B&B has a formidable marketing clout and we have surplus capacity; B&B has a strong presence in the premium segment, and our lone soap brand, Tulip, is well-entrenched in the popular end. And we both are known for our clean commercial practice and business integrity.''

''As such, shoring up quality at our factory is a big challenge, given the equipment we have. And now, Nair's aggression is putting people off. There's no way we can meet B&B's six-month deadline for improving quality and service to comparable level,'' argued Roy.

''Listen, Roy. We can. In fact, we must. I have promised B&B that we will,'' said Kumar firmly. ''And don't forget that the audit we conducted before committing to the deadline corroborated that it is possible to make significant gains in six months.''

Roy knew that only too well. He, as much as Kumar, was responsible for Nair's visit. For, the decision to get help in supply-chain improvement was as much Roy's as Kumar's. And, there was a good reason to focus on the supply-stream. Nearly two-thirds of the soaps division's total delivered cost was located in the supply-chain. More than a third of its raw material purchases related to various oils (palm, coconut, and rice bran). Some of them, like palm kernel oil, were imported.

The other major basket of raw materials comprised chemicals, perfumes, colours, additives, and of course, packaging materials such as wrappers, cartons, and boxes. Total had about a dozen suppliers for each of these and they had been doing business right from day one.

Nair and his team had examined the profiles of all the 50 A-class suppliers, who accounted for 70 per cent of the value, and come to the conclusion that they were way below B&B's standards. Measuring their capabilities on a pre-determined scale of 0 to 100, Nair had put them at 33. ''This is simply unacceptable,'' Roy recalled Nair as saying. The target that the B&B's engineer wanted to set was a rating of 60 in another six months. ''If we reach 60,'' Kumar said, as if reading Roy's mind, ''the business will be back on track.''

Roy knew that Kumar was right. Reluctantly, he returned to the conference room to hear more of what Nair had to say.

The B&B engineer was already back from his lunch and was waiting for Roy to join the group. ''We should set up a vendor improvement team (VIT).'' he said, getting straight to the point. ''This team should comprise seven cross-functional executives drawn from the soaps division. This is, essentially, a fast-track mechanism that is designed to supplement an on-going vendor development programme of the organisation.''

''Wouldn't we end up duplicating one another?'' Roy asked.

''No,'' replied Nair. ''VIT is a short-term, but dedicated resource that will help A-class vendors quickly improve quality standards. Vendor development, on the other hand, will have the larger goal of improving quality and delivery, and reducing cost. Obviously, it will also address issues such as product development, supervisory training, and strategic planning.''

''I think we are rushing things here,'' Roy opined. ''We are also getting our priorities wrong. The focal point in the organisation's supply-chain ought to be working capital-for the simple reason that it is our weakest point.''

At Total, Roy wasn't the only one who thought so. Kumar also believed that in a situation where margins are narrow, capacity-utilisation is low and finished goods inventories are adding to costs, the first priority of a company should be to get the most out of working capital.

''I couldn't agree more with you, Roy,'' said Nair to the latter's surprise. ''Total has been operating at five turns of inventory. We should step it up to about 25 times in the next six months. But these gains are not likely to happen if the company doesn't first invest time in vendor-development.''

Nair went on to explain how the VIT would work. Initially, he said, two manufacturing engineers from the VIT would train at B&B's Boston facility for two weeks. On their return, based on the techniques they had learnt, the engineers would develop a 10-week improvement programme for adoption by Total's suppliers. ''The idea,'' Nair explained, ''is to establish an approach that, while achieving immediate quality targets, would create a B&B way of working.''

Five months into the VIT programme, certain loose ends were showing up many of the A-class vendors. Most of the vendors saw some kind of a hidden agenda in Total's efforts. They were scared that sharing cost data would heighten buyer demand for price cuts. Vendor employees were also beginning to crack up. The labour unions were objecting to the extra work that operators had to do as part of the quality initiative, especially having to learn new statistical techniques.

''We are just a month away from the deadline for improving quality. Yet, the rating in most cases has only gone up to 40,'' pointed out Roy to Kumar. ''Productivity increases are not commensurate with the effort made. Expect the worst once the VIT team disbands.''

Kumar was inclined to agree. For one, he knew that nowhere else in the world did B&B employ the VIT model. It was an experiment unique to India, and to be replicated elsewhere in the world if the right kind of results were obtained.

''Will we be a guinea pig for B&B?'' Roy asked. Kumar didn't have an answer.