''Even as I am forging a future for my organisation, I have stumbled upon archaic systems here that threaten to set back all my plans. In fact, the company has no production planning in place. For a person acclimatised to the rigorous marketing, production, and procurement plans of a professionally-managed company, the world of uncertainty prevailing in our family business-which I have taken over recently-comes as a rude shock. Marketing forecasts are inaccurate, there is no planning at the micro level, and inventory is piling up. Instead of tailoring our production-schedules to demand, the company has been trying to maximise capacity utilisation. This is no way for a supplier to compete in an environment where Just-In-Time manufacturing practices are becoming the norm. I am not sure whether I can attain my objectives of injecting professionalism into this company and changing the organisational mindset...'' Even as Sudhir Easwaran, the CEO of the Rs 302.60-crore Sanket Forgings, was penning his thoughts in a letter to his teacher, he was also wondering whether he would be able to turn a purely domestic business into a global one. Bajaj Electricals' R.A. Rajendra Prasad and Marico Industries' Shreekant Gupte debate Easwaran's problems and provide him with a framework for the future. A BT Case Study.

Personal
Mumbai, July 14, 1997
From: Sudhir Easwaran, CEO, Sanket Forgings
To: Raghu Chaitanya, Director, Institute of Management Studies, Pune

Dear Raghu,

I was delighted to run into you at the All Maharashtra Management Association Convention last week. I cannot tell you how much I have been looking forward to catching up with you ever since I graduated from the IMS in 1991. Your lectures are firmly etched on my mind even now, and provide me with insights on doing business all the time. I often recall the case studies that you discussed with us while teaching the course on production management.

After leaving the IMS, as you may recall, I signed up with a Fast Moving Consumer Goods company, where I acquired some first-hand experience in brand-building. I quit that job, as I mentioned to you, 6 months ago, and have now taken charge of the Rs 302.60-crore Sanket Forgings, which is part of the Rainbow Group, as its CEO. Founded by my grandfather, this Rs 3,650-crore group is a third-generation family-owned business house, with interests in the steel and aluminium sectors. My father sees my tenure at the forgings company purely as training for taking on bigger responsibilities within the group. I have been given one specific mandate by him: increase Sanket Forgings' exports to 50 per cent of its turnover by 2003. That alone will help the company tide over the vagaries of the domestic market. My first priority is to get our processes the ISO 9000 quality certification, which will hasten our entry into Europe. While that is my primary objective, I must, simultaneously, oversee the transition of the company from a family-managed to a professionally-managed one. If I can accomplish the objectives that I have set for myself here, I believe I will be qualified to play a bigger role in the management of our group. I have, however, an immediate problem, which is why I am writing to you.

It pertains to the production planning processes at Sanket Forgings. We have been following the Offset Planning System, which was recommended to me by an external consultant, for some time now. Recently, we experienced a major hiccup because we accepted a rush order that could not be executed on time. I must mention that, although Sanket Forgings has been in existence since 1977, it does not have sophisticated management systems. We are flogging a fully-depreciated plant, and our people are, by no means, the pick of the crop. In fact, the ambience is quite a contrast to the transnational I worked for. My induction marks the beginning of a degree of professionalism here, but I fear that I may not be able to change the mindset of an organisation that is not familiar with systems, and has, strangely, not formulated a strategic vision for itself. Simply put, I head an organisation that is not sure where it is going.

Forgings, as you are aware, are used as inputs by the engineering and automobile sectors. The process of forging entails giving a pre-determined shape to molten metal. It is, basically, an intermediate activity, occupying a relatively low profile in the value chain of the end-user. Although the automobile sector accounts for 80 per cent of our sales, it is not a glamorous business. True to type, the forgings industry alternates between peaks and troughs. While we witnessed a boom in 1996-97, at the moment, we are in bad shape, and could be heading for worse trouble unless we adopt remedial measures. All our customers-primarily, the auto-component manufacturers-have slashed their output by 25 per cent in the first quarter of this year compared to last year. In 1997-98, our turnover rose by 2 per cent while our profits after tax fell by 20 per cent.

Although this downturn has affected all 3 tiers of the supplier industry-the assemblers, the sub-assemblers, and the component-manufacturers-there is one difference between us and the others. Unlike the case of other automotive components, there is no optimal scale in the forgings business, with the plant-size of a forgings unit varying from 100 tonnes per annum (tpa) to 120,000 tpa. Since there are, therefore, no entry barriers for new players, there is also a thriving small-scale sector in this business. Most such units-which are scattered around Pune and Chennai-have antiquated equipment and poor furnace designs. As a result, their power- and fuel-consumption are both twice that of a bigger foundry like ours, and 4 times that of a unit in a developed country like the US. Actually, there are only 7 players in the organised sector in this country-including Sanket Forgings which, with a capacity of 85,000 tpa, is the third-largest player in the business. Since the biggest, the Rs 420-crore Indo Forge, has a capacity of 120,000 lakh tpa, we are not far from occupying the top position in our industry in terms of size.

Despite its technological shortcomings, India's forgings industry does enjoy some inherent advantages. Steel-the basic raw material which accounts for 55 per cent of the product cost-is easily available. Thanks to a well-developed indigenous industry, we are able to locally source whatever raw materials our product-range requires. We have never faced any problems with regard to either input dimension or composition. Incidentally, Sanket Forgings buys only about 20 per cent of its steel from Rainbow Steels, our group's flagship. Our average labour costs, at about 7 per cent of sales, are also lower than in countries like Japan, where they are as high as 25 per cent. Thus, there are opportunities for Indian companies if they are willing to grab them. In fact, the stringent environmental laws in the developed markets have increased the cost of operations of foreign companies since they must invest heavily in non-polluting technology. Consequently, foundries and forges from Europe may relocate in India-where the environment laws are not so stringent-at costs which are a fraction of the cost of setting up a new plant of equivalent capacity. Just imagine the cost advantages domestic manufacturers will enjoy in the international market: we have the requisite skills, and we can acquire the technology. Going global is definitely my long-term objective at Sanket Forgings.

There are, however, three developments that have exerted considerable pressure on our operations. Most of our customers, particularly those with Japanese collaborations, are in the process of implementing the Just-In-Time (JIT) concept. More importantly, the Original Equipment Manufacturers are exerting pressure on suppliers to change their manufacturing practices. Of course, in a country like ours, it takes time to implement JIT. But the pressure has heightened, and is forcing suppliers like us to tighten our internal operations. The strain is accentuated by the poor quality of the infrastructure in the country. It takes a week for goods to reach an end-user at, say, Gurgaon, near Delhi, from our warehouse in Mumbai.

Let me now turn to the problem that has been plaguing me for some time now. It reflects the sorry state of affairs in an organisation that has ambitions of going global. It all started, in the first month, February, 1997, that I joined Sanket Forgings, with a casual conversation I had with the Production Controller, Vikram Das, who reports to the Vice-President (Manufacturing), Shankar Krishnan. It was the last week of the month. So, I asked Das for a copy of the Distribution-Sales-Production-Procurement Plan for the following month. But Das said that neither he, nor the company, had any such plan, adding that the plant worked on the basis of an annual-and not a monthly-plan, and that he could only give me a copy of the annual plan.

''I've seen the annual plan,'' I said, naturally taken aback at the absence of micro-level planning at the company. ''Tell me, Vikram, how exactly do you go about the planning exercise?''

''What we follow, Sudhir, is more of an updation process than a planning programme,'' said Das. ''The Annual Plan is prepared at the beginning of the year, based on the forecasts made by the Marketing Department, and is then broken down into 12 months. At the beginning of each month, the figures are revised for that particular month, as per the fresh estimates of the Marketing Department, after taking into account two factors: the orders confirmed, and the available capacity in terms of equipment and people.''

''Which means that Sanket Forgings does have a monthly plan. After all, when you break down the annual plan monthwise, the monthly plans must be in consonance with the annual plan,'' I said.

''Well, not really,'' explained Das. ''The forecasts and the estimates made by the Marketing Department are always off the mark; often, by as much as 80 per cent. So, they do not give us a proper reference-point. Nor does it provide a viable basis for action. Scheduling is, generally, governed by necessity.''

He went on to explain how the Production and Purchase departments were hardly given any time to respond to changes in the plan. Linked to such ad hocism were related costs-such as overtime and excess inventory. It was obvious that we had a problem on our hands. I decided to convene a meeting of my senior managers at the plant the following day to sort out the issue. And also asked Mohan Nair, a consultant who had been associated with the company for years, to join us.

I was surprised at what I discovered: my vice-presidents were so used to dealing with uncertainty that they hardly saw it as a problem. I had to shake them up. ''I have been reviewing our inventory-levels last week, and I am appalled at our carrying costs,'' I said firmly. ''We are holding a 30-week inventory of raw materials, our Work-In-Progress levels have touched 16 weeks, and the finished goods stocks are 8 weeks old. This is atrocious.''

''The real problem, Sudhir,'' said Krishnan, ''is that the marketing forecasts are never right. There have been fluctuations in our scheduling even on a day-to-day basis. So, unless the production team gets its targets right, we will not be able to get a hold on our planning system.''

My Vice-President (Finance), Arnold Fischer, intervened at this stage to say that the company's bankers had often pointed fingers at our high inventories while sanctioning our working capital requirements. ''But,'' he added, ''they have not made an issue of it, largely because of our long-standing business relations with them.''

Then, I asked Sunil Parikh, Vice-President (Marketing), why his projections were always off the mark. ''Forecasting and planning exercises always have an in-built element of uncertainty in any industry,'' said Parikh, ''and that is particularly true of a feeder unit like forgings. Besides, an old unit like ours, which has no track-record of formal systems, has peculiar problems of its own.''

Disappointed, I asked Nair what the benchmarks for the industry were.

''Your inventory levels are certainly high,'' he said, ''but I do not believe that you can have benchmarks. It is not possible to relate them to an industry norm because there is no such norm as far as forgings are concerned. Each unit is different, with even purchase procedures and market compulsions varying considerably between 2 units of comparable size. The problem at Sanket Forgings,'' continued Nair, ''is that your manufacturing is based on a push-system. The machines are kept running because you have raw materials waiting to be processed, and your managers abhor idle capacity. I can say this with some conviction because it is based on the discussions I have had with your line-managers, and a look at some of your systems. However, there is a solution: have a pull-system instead. Produce only for demand; if the capacity remains idle, so be it. Once you go through some hiccups over a period of time, you can get a grip on the problem.''

I was surprised. ''But I thought production was still driven by marketing forecasts,'' I said.

When my managers remained silent, I sensed that expediency was more the norm than an exception at the shopfloor.

''Be that as it may,'' said Nair quickly, ''I suggest that you should now introduce an Offset Planning System. It is quite simple and workable. It is based on the premise that all planning must be done with reference to a 12-week cycle. All your operational processes should be governed by such a framework. Let me explain how the system works.'' At the beginning of the first week of the year, explained Nair, 4 different plans must be firmed up simultaneously: the Sales Plan for Week 12; the Distribution Plan for Week 11; the Manufacturing Plan for Weeks 8, 9, and 10; and the Procurement Plan for Weeks 1 to 7. ''At the beginning of Week 2, the previous plans are kept fixed, and the plans for sales in Week 13 are developed. From this, the distribution, manufacturing, and procurement plans are worked back.''

The system sounded good. But I wondered whether it wasn't critical to freeze the 12-week plan cycle once it was finalised.

''Yes, that is very important,'' continued Nair. ''That can best be done through regular monitoring. At each weekly meeting of the Management Committee, you will not only measure how the plans have performed during the previous week, but also firm up all the 4 plans, starting from the Sales Plan for Week 13. The success of the new planning system will depend on 2 critical factors. First, the Marketing Department should provide a reasonably-accurate forecast 12 weeks in advance every week. And second, all other functions-distribution, manufacturing, and procurement-should stick to their commitments.''

Krishnan said that as long as the Marketing Department provided a forecast that did not fluctuate wildly, it should be possible to work according to the new plan.

''The Marketing Department can, at best, provide an accurate forecast for the month at the beginning of that particular month,'' warned Parikh, ''It is impossible to forecast 12 weeks in advance. I am no fortune-teller. But it is possible to fore-cast 4 weeks in advance because our customers would have firmed up their orders by then.''

I wondered aloud what value addition the Marketing Department was providing if its forecasts were based on firm customer orders.

''I am merely saying that such rigorous planning is not possible in the forgings business,'' continued Parikh. ''Nevertheless, I am open to trying out the new system. But what is sacrosanct about a 12-week cycle? Why not, for the sake of argument, 24 weeks, 36 weeks, or, perhaps, 10 weeks?''

''I assure you, you can bring it down to 8 weeks once you get the system working,'' said Nair. ''I said 12 weeks because, in my opinion, that is feasible for a unit like Sanket Forgings at this stage.''

But Parikh insisted that the focus was all wrong. ''We should really be looking at the need to compress our lead times to procure, manufacture, and distribute. That is the best way to get a proper planning system in place. Instead, we are going about it the opposite way, assuming a 12-week cycle, and forcing the Marketing Department to provide an unreal forecast for the period. If a customer wants delivery in 8 weeks, why not find ways to compress our supply chain to correspond to that deadline?''

''That makes sense,'' I said, ''but I think we should give the system suggested by Nair a chance. It is worth a try. I have a feeling it will work.''

Krishnan raised a point of contention at this stage. ''If we are talking of tracking the planning system every week, and monitoring plan performance,'' he said, ''we should also fix the degree of deviation from the norm. That alone can give us a performance measure. It is obvious that no plan can be frozen in the true sense of the word. We cannot work on the assumption that business circumstances are cast in stone.''

It was finally agreed, after a heated discussion, that a 10 per cent deviation should be allowed at every stage in the sales-distribution-manufacturing-procurement chain for the purpose of evaluating plan performance. ''That should make a considerable difference to the existing deviation of almost 80 per cent,'' pointed out Nair.

In March, the new planning system was introduced at Sanket Forgings. By June, our inventory levels had come down to 4 weeks for finished goods, 6 weeks for Work-In-Progress, and 12 weeks for raw materials, and there was also a perceptible decline in the associated costs. During the third week of June, while I was away on a business trip to Europe, the company was approached by Shruthi Motors, a Delhi-based Light Commercial Vehicle-manufacturer, with a rush order. The order was large, and came with 2 attractive baits: the pricing was such that the margins were 30 per cent higher than the normal rate. Also, the company gave us an assurance that if the order were executed within 2 weeks, Sanket Forgings would secure a place in the company's accredited list of suppliers. Naturally, Parikh accepted the order without hesitation.

When he excitedly informed his colleagues at the planning meeting the following day about it-as well as the promise of the long-term business it would generate-he immediately sensed the apprehensions in the room.

''This will throw the planning system completely out of gear,'' said Krishnan.

But Parikh insisted that it made sense to execute the order because having Shruthi Motors on the company's client-list would result in opening up new markets. Finally, it was decided to put the planning system on hold for the time being, and let the new order be serviced in preference to the existing orders.

But we encountered problems within 3 days of the order getting onto the shopfloor. Since there was no buffer inventory, the company was forced to purchase raw materials at higher prices which, ultimately, reduced our margins by 60 per cent. And, the order was completed with a delay of 5 days. Shruthi Motors was peeved. So were our regular customers, whose orders had been put on hold. There was chaos all around.

On returning from my trip, I found everyone blaming each other-and the Offset Planning System. Parikh said that the absence of a buffer inventory-a direct offshoot of the planning process-was the main reason for the company being unable to meet its obligations. My other vice-presidents also believed that the system had let them down. But I still wonder where things really went wrong. I am, therefore, taking the liberty of asking you to help me find out. Please do let me know when you will be free to take this up as your next consultancy project.

Regards,
Sudhir

Was Sanket Forgings' Offset Planning System to blame for its fresh set of problems? Could it have been the wrong production planning process to adopt for a forgings unit? Had the adoption of a system robbed the company of all flexibility? Can an automotive ancillary manage without such a forecast-based approach? Could the company's top managers have erred in overriding the system to execute a rush order? Should Easwaran hire another consultant to teach his managers the basics of production planning? What really ails Sanket Forgings?

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Solution A   II  Solution B

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