1. INDIAN CONSUMER DURABLES INDUSTRY
The consumer durables industry in India has become highly competitive in the recent past. The entry of large-scale players has irrevocably changed the landscape, serving the Indian consumer like never before with bewildering array of products. Today, in addition to the multiple choices in the models, the products are home-delivered without the customer having to take the trouble of visiting a dealer’s shop. Due to fierce competition, the industry players are resorting to the following:
- Cost reduction by eliminating wasteful efforts in business process
- Redesigning the supply network to extend excellent service to the customer
- More emphasis on product innovations and shortening the life cycle for their existing products
- Getting closer to the customer through CRM programs
- Production on make-to-order rather than make-to-stock basis
- Emphasis on the value chain rather than the supply chain
Today, the Indian consumer durable (white goods) industry stands at INR 15,000 crores. TVs contribute the maximum share followed by refrigerators, washing machines and air conditioners.
Perhaps more than in any other industry, the push system has worked well in the consumer durable industry for many years; but now the pull system is becoming the next logical step in the industry’s development in the market-oriented Indian economy. The push system is basically a replenishment system fraught with inherent inefficiencies like extended credit terms, stockpiling, sluggish orders and pipeline inventories. The pull system by contrast is based on demand creation and only make-to-order as per the customer requirements. In consumer durables the push system was used because the market was limited, buying power was limited and dealers were compensated with credit. Until 1995 the push system was the primary business process. However, today there is a total shift to demand-based manufacturing planning using sophisticated software tools. Appliances are built according to actual customer demand, and with the response time being reduced from 5 weeks to 5 days, the replenishment of inventory at dealer’s showroom is done automatically, production cost has reduced, and inventory at all levels has dramatically come down. Consequently, responsiveness to customer demand has improved considerably.
Despite the consistent demand for consumer durables, the companies did not focus on the cost of servicing and distribution until 1995. An analysis of the top six companies in the industry shows that the overall selling cost as a percentage of net sales jumped from 20 per cent in 1995 to 29 per cent in 1996. This was mainly because of increased competition forcing more above-the-line advertisement and below-the-line sales promotions to dealers. The selling expenses to net sales had touched 33 per cent in 1999, when new players stepped up activities to expand the market share. The past few years have seen a drop in sales in most of the segments, which reflected in the lower distribution cost. The good sign was the focus on the supply chain and the saving in costs related to it. The earlier analysis of stocks at various levels in the white goods industry had shown the higher side as a percentage of total sales. However, today the picture is totally changed and firms are focusing more on making the supply chain lean.
Several factors have spurred interest in the supply chain in the consumer goods industry. The main reason was a dip in sales growth (during 99-00) to 16 per cent from 34 per cent (in 1998) due to an overall slowdown in the economy. Most companies had gone in for setting up capacities in the early 1990s to cater to the vast, unexploited Indian market. But in 90s the market growth slowed down and competition increased manifold, resulting in sharing of market between many players.
The sector trends (consumer durables) show that overall logistics cost has decreased from 5.9 per cent in 1996 to 5.1 per cent in 2000. However, the finished goods inventory had shown declining trends from 32 days in 1996 to 23 days in 2000. These numbers show a distinct improvement from the situation 5 years ago. It must be remembered that the importance of supply chain and its role in business came to be appreciated only around the period 1997-1998. A better performance is expected in the next 5 years as the key issues of inventory management, logistical network and technology adoption are being addressed properly. The freight cost seems to be of much concern to most of the companies in the white goods sector. The freight cost is under control but there needs to be a marked improvement in the quality of transportation (to reduce transit damages). Manufacturers have reduced the number of transporters and retained only a few as their logistics partners to provide logistics solutions. Many white goods companies have reengineered their distribution network and adopted the hub-and-spoke model for their distribution network. They have evolved a proper performance measurement system for the logistics partners. The service providers are rewarded and penalized based on their actual performance against the targets. A few companies such as Samsung and Godrej are using railways transportation for bulk dispatches to their distribution hubs to economize on the freight cost.
2. MOHINI ELECTRONICS LTD. (MEL)
MEL is an Indian subsidiary of a world-renowned consumer electronic company having a presence in 65 countries. The Indian company was set up in 1994. Within 6 years of its operations in India, it achieved a sales turnover of INR 2800 million in 2001 through its innovative manufacturing and distribution strategies. The company achieved a growth rate of 25 per cent per year. Over the last few years the consumer electronic division had shown a growth of 26 per cent, while the growth in home appliances was 24 per cent. In spite of recessionary market trends, MEL had shown a remarkable performance among the industry players.
MEL is very aggressive on the new product front. It has so far launched 12 new models in colour TV and six models in home appliances. The parent company, which is operating in 65 countries, has achieved sales of USD 30 billion in 2000.
MEL is comparatively a new player in the industry, and had to go through many ordeals in establishing themselves in the Indian market. For starters like MEL, the established Indian companies reacted strongly. However, MEL competed first on the product quality and then on the price front. Besides, there was the simultaneous entry of such companies as Electrolux, Carrier, Whirlpool, GE and LG, and all of them raised stakes in the market.
Supply chain management (SCM) is relatively a new concept in Indian industry. MEL was the first company in the consumer durables industry to introduce SCM. Earlier, the white goods producers were more production and sales oriented. MEL brought the SCM concept from the day they started operating in the Indian markets. The underlying philosophy is that it is good to innovate on the process rather than functions. They made a paradigm shift from inventory made-to-stock to inventory made-to-order. They developed their distribution network on the hub-and-spoke system for better control on the customer service and the inventory in pipeline.
In accordance with the industry standard, MEL has the lowest logistics cost as the percentage of sales. Due to aggressive marketing efforts, the MEL market penetration level was the highest among the competitors. Their market share in the colour TV segment has grown from 9 per cent in 1999 to 11 per cent in 2001. MEL has increased its capacity to 8,00,000 units in colour in 2001. They had plans to reach a target of INR 50,000 million in sales in 2003.
3. OUTBOUD LOGISTICS
MEL products are sold through 22 branch offices, 26 CFAs, 4 regional distribution centres and 5000 dealers all over India. They have 550 service centres for service backup for their products. The logistics costs for outbound operations were 1.80 and 1.62 per cent of sales in 1999 and 2000 respectively, which fell to 1.25 per cent in 2001. MEL has engineered their supply chain to market conditions with the make-to-order policy. The main stumbling block here was the accuracy in forecast and the frequency of forecast review, which has been taken care of through the weekly rolling plan for manufacturing schedules. To support the weekly rolling plan, MEL had gone in for the online connectivity to its dealers. The dealers’ requirements are consolidated and finally sized up at the regional offices and further consolidated at HO for direct dispatch from the warehouse hub to the dealers’ place. The online connectivity has helped the MEL marketing team to get an insight into market trends, feedback and information on competition sales. The data forms the base for future action to translate into sales, production, stock, and dispatch plans. These plans are prepared and reviewed on a weekly basis. MEL has adopted the two-tier distribution warehouse system to supply the material anywhere in India within 48 hours and make it more cost-effective.
MEL has a plant warehouse located near Delhi, wherefrom the goods are moved to 4 regional distribution centres (including Delhi) for further dispatches to the dealers’ warehouses. At this point the sales signal goes back to the MEL system for stock replenishment. To cater to the needs of smaller dealers the C & F operators are equipped with 6-8 different sizes of vehicles to ensure that within 4 hours material is delivered to the top 10 dealers in the city. A major improvement in the company has been in the field of their focus on distribution planning. The imported products are planned before the order is placed, as port allocation is done in advance. After allowing goods movement across all four ports in the country, the outbound distribution cost has been drastically reduced. The regional distribution centres now get the material from the nearest port. This eliminates inter-branch stock transfer, thereby reducing the transportation costs drastically.
MEL uses EDI for connectivity and information. The system gives the vendor the weekly purchase plan and weekly delivery schedule for material supply to all 5000 dealers across the country, within 48 hours of receipt of an order from them.
The new system called “logistics innovation” has helped to reduce the delivery by 2 days and the inventory level by 25-30 per cent.
The finished goods are dispatched from the factory warehouse within one day of production. MEL has currently engaged, on a long-term basis, five transporters instead of the 17 they had in 1998. Of the 17 transporters they had before, one was carrying 30 per cent of the goods produced and another 18 per cent. With the current arrangement, the transportation cost has come down by 30 per cent from its 1998 level. For safe transportation, container trucks are in use to keep product damages within the norms. The inventory levels at MEL now are 30 days as against 90 days in 1998.
Another issue in distribution is the availability of spare parts at the 550 service centres across the country. The company’s service centres are linked to global resource centres for procurement of spare parts. The parts flow from assigned international hubs to the regional distribution centre directly. The new system has reduced the spare parts order cycle time from 45 days to 30 days. The global spare part sourcing is a single window clearance system that makes tracking of 7000 spare parts easier. The system automation, which is still in the planning stage, will reduce in future the spare parts order cycle time to 7 days and in effect considerable reduction in transaction cost will be achieved.
The logistical connectivity at MEL is based on V-Sat that is linked to SAP. This has helped in reducing MEL’s receivable payments from 60 days in 1998 to 21 days in 2001. The spread of the company’s dealers now is 31 per cent in the north, 28 per cent in the west, 22 per cent in the south and 19 per cent in the east. The total number of dealers has gone up from 2700 in 1998 to 5000 in 2001.
4. INBOUND LOGISTICS
MEL meets 60 per cent of its raw material, components and CKD kits requirement through imports from its parent company. It also imports complete units of certain models of CTVs, washing machines and refrigerators. The raw material inventory average does not exceed 17 days at any point of time.
The ordering base of the raw materials is the rolling forecast that is reviewed weekly. The ordering for imported items is done in smaller lots on a weekly basis to minimize the implications of risk and costs. The planning is done for 12 weeks, but firm call-ups are done on a weekly basis with permissible contract variations of 10 per cent. The same holds good for the local purchase items. The production schedules are made available to the vendors to plan their manufacturing and raw material procurement schedules. All MEL vendors are responsible for 100 per cent quality checks for the material they are supplying.
MEL’s vendor base consists of 55 suppliers. Out of these, 38 are within a distance of 100 km from their Delhi factory, which takes a maximum of three hours to transport the materials. Eleven vendors are beyond 100 km and the remaining six are located overseas. Local parts can be procured with a one-day intimation, while overseas vendors require at least 12 weeks notification. MEL has classified its vendors into A and B classes. Currently, they have 18 “A” class vendors supplying “A” class items contributing to 60 per cent of their material bill. “A” class items are procured on the JIT basis. All “A” class imported high-value, small-size, low-volume items are transported by air. All the raw material is palletized. MEL encourages the vendors to use plastic recyclable boxes for material packing. These boxes are unitized on the recyclable pallets. Both pallets and plastic boxes are returned to the respective vendors for reuse. The TV cabinets are procured locally and are palletized to avoid damage during transit. MEL’s logistics partner ensures that the landed consignment is cleared through customs and reaches the Delhi factory within 10 days of landing. The inbound logistics cost of MEL is the lowest in the industry at just 0.75 per cent of the sales.
MEL is connected via G-net logistics system and Z-Spare-SYS to their worldwide network. These systems are used in India for their inbound and outbound logistics operations to gain on cost-effectiveness, operational efficiency and asset productivity.
5. MEL NET SERVICES
MEL is making a big push at streamlining its sales service through the net. The firm has invested in Rs. 5 crores on intra-net to connect 550 authorized service centres with HO. It is also offering customer call logging, under which a customer can register a service call at the site. Once a customer makes an online call, he/she is given an ID number, detailing product and customer data. The information goes to the authorized service centre (ASC) nearest to the customer to provide services within 24 hours of the call. In case a call is not attended within 48 hours, it is automatically forwarded to the regional service centre head. Even then if it is not attended within 7 days, it goes to the service head at MEL factory. All MEL key suppliers (local and overseas) are linked through the EDI system for speedy business transactions. EDI is integrated with the ERP system (SAP) for the entire supply chain integration of MEL operations.
6. MEL AUTOMATED INVENTORY MANAGEMENT
For high storage density, and speedy pickup and storage operations MEL uses horizontal carousel, which has increased the picking speed to 150 items per hour, from 30 items per hour with the conventional system. The loading capacity of carousel proved 300 per cent more than the previously used shelving system. With carousel, the storage space requirement has been reduced by 50 per cent; picking efficiency has increased to 99 per cent; and the inventory level is reduced by 55 per cent. Earlier, MEL pickers had to search the rows of shelving, which was a time-consuming and difficult task. With automated carousel now in place, the parts automatically come in front of pickers, helping them to attain a level of shipping 75000 parts in 1500 SKUs within 3 hours from one day earlier. All this helped MEL to gain high level of customer satisfaction.
7. AUTOMATED ORDER PROCESSING
In 1998 MEL, due to rapid increase in operations, experienced problems in data storage and analysis capabilities of the system then in operation. The order cycle time took 40 days and there were multiple information re-entry and updating points. To shorten the order cycle time, MEL invested in the custom-built automated order processing software package and made modifications in the supporting operating systems. The factory, HO, branch offices and RDC were connected through intranet, while the dealers were connected through extranet for online data flow and analysis. The new system facilitated online order processing, resulting in a marked improvement on the customer service and demand management fronts.
Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.