Reengineering the Supply Chain in a Paint Company Essay Example

align="justify">The company monitored its performance in Customer Satisfaction through two process measures: (1) OTIF: On Time In Full. (2) OSR: Order Satisfaction Ratio. OTIF measures the performance of the business against ful? ling a complete customer order (In Full) on the desired date (On Time). OSR measures customer order satisfaction at the stock keeping unit (SKU) level. Despite additional capacity being introduced the organisation’s performance remained poor in terms of its ability to satisfy demand. According to the Managing Director of the company, “All the time we were looking for truck-? eets to push our product to the retailers’ shops in the absence of a proper distribution management strategy”. Earlier the company was the leader in the industrial paint segment with little holding in the direct consumer market.

The OTIF/OSR was in the range of 50-60 per cent indicating that a huge latent demand for the company’s products remained unful? lled. This low service level performance was despite the organisation holding a large inventory (approx. 50-60 days). At the same time increased competition, and correspondingly lower margins, resulted in an urgent need to improve the organisation’s working capital management. Supply chain performance became a key focus area for senior management. With the support of the Supply Chain team the re-engineering process was started in 2002, with a diagnostic workshop.

Key members of the supply chain like Business Managers, Plant managers, Planning managers, Logistics managers and the Sales and Marketing teams exchanged views. Using the Supply Chain Maturity Pro? le Matrix (Table I), the business benchmarked itself on 23 elements of the supply chain and identi? ed ? ve key areas where improvements in performance could

lead to a signi? cant increase in customer satisfaction. These were: (1) customer service measurement; (2) demand management – forecasting; (3) distribution management – replenishment; (4) distribution management – warehousing; and (5) manufacturing management – master scheduling.

Project teams were set up to review each area and the steering group was chaired by the Chief Executive Of? cer. Subsequently the topic of Supply Chain Information Systems was added to the list of priority areas. It also emerged that the existing organisation structure would not be able to support the organisation’s objective of delivering high levels of service at minimum cost. The existing structure had Materials, Manufacturing and Distribution functioning as independent entities with minimal integration.

In order for the initiative to be a success and the organisation to derive bene? t from it, it would be necessary to review the existing organisation structure. Reengineering the supply chain 659 660 IJPPM 55,8 Area Strategic planning People and teamwork Customer requirements Need recognised but no formal measure in place No regular reporting Data collection is manual Data has one source and available automatically Calculation is understood Regular reporting in place Senior management use it as a performance measure Stock replenishment Table I. Supply chain maturity pro? e matrix Innocence Awareness Description Understanding Competence Excellence Action taken to investigate performance problems Data capture improved Performance reported to customer and used as a selling aid Whole organisation has customer service as an objective Methods of exceeding customer expectations pursued Internal and external customer needs are linked into service measures Customer complaints are measured with proactive action to resolve and feedback resolution Benchmarking of competitor service is well established (continued)

Process 1. Launch/obsolescence plan 2. Sourcing 3.

Manufacturing strategic planning 1. Supply chain people and skills 2. Manufacturing teamwork 1. Order acquisition 2. Warehousing 3. Distribution 4. Customer service No measurement measurement is made Bene? t of measurement not recognised 1. Inventory management Area Process Innocence Awareness Description Understanding Competence Excellence 2. Replenishment calculation 3. Processing of replenishment order at plant 4. Replenishment delivery 5. Communication from plant Manufacturing 1. Inbound supply of raw material 2. Production planning and control 3. Quality and continuous improvement Demand 1.

Sales forecasting planning 2. Sales and operations planning 3. Master production schedule 4. Materials requirement planning Information 1. Provision of MIS 2. Management and ? nancial accounting Reengineering the supply chain 661 Table I. IJPPM 55,8 662 Organisational transformation Most organisations today understand the concept of integrated supply chain management, whereby ? ows of information and material between supplier and consumer are co-ordinated and managed as a system. The primary objective is to create a process linking and optimising each step as the product ? ows towards the customer.

However, one of the biggest impediments to the adoption of this approach is the structure of an organisation. When the organisation is structured on a functional basis it often becomes budget, and hence consumption, focused rather than being driven by the objective of delivering pro? table output. Under the structure systems doctrine practiced in the early half of the century, corporate executives made decisions that drove resources and responsibilities down towards the frontline people. Such an organizational structure “had little built-in capability for renewal- for discarding old ideas and assumptions” (Ghoshal and Bartlett, 1995).

This kind of conventional organisation

structure leads to several problems for effective supply chain management. Inventory tends to build up at functional boundaries due to each function seeking to optimise their operations irrespective of upstream or downstream linkages. Pipeline costs are not transparent. For a smooth ? owing logistics pipeline end-to-end process management orientation is essential, but the functional boundaries impede process management. With each department functioning independently, customers often see different faces of the same organisation.

Change processes go through a series of phases that, in total, usually require a considerable length of time. Skipping a step crates an illusion of speedy transformation but rarely produces a satisfactory result (Kotter, 1995). A single methodology or framework can not be adopted as a guiding tool in many situations (Mohanty and Deshmukh, 2000). For any organisation to make the transition to an integrated supply chain a paradigm shift in operating style is required. Today the new paradigms are: . from functions to processes; . from pro? t to pro? tability; . from product to customers; . from transactions to relationships; and . rom inventory to information. Like most conventional organisations, the Indian Paint Company was structured on a functional basis, inherently vertical in nature. Division of responsibility and lack of integration were re? ected in the fact that the various departments like purchasing, production, sales, marketing distribution etc. were integrated only at the level of the CEO. Each function was highly budget driven and “territorial” in approach. It was essential that structure and strategy should be aligned to achieve the business objective of providing superior customer service at the lowest cost.

The Company adopted a three level framework (Figure 2) to

achieve the integration that it believed would enable it to make the transition to a customer oriented organisation (Figure 3). These levels are: (1) Level 1. Structural integration. (2) Level 2. Process integration. (3) Level 3. Performance integration. Reengineering the supply chain 663 Figure 2. The supply chain integration framework Figure 3. Organizational transformation process Level 1: Structural integration With company’s shift in portfolio towards high volume- low margin products it was of critical importance that the company manage its working capital effectively.

The two components of Working Capital management are: (1) debtor management; and (2) inventory management. With the organisation debtor policy being largely dependent on the business environment, inventory management was the area which the organisation could in? uence through adopting an integrated Supply Chain approach. A variety of factors that in? uence working capital requirements like customer service objectives, production capability, credit policy, supplier reliability, distribution design and forecasting accuracy were identi? d and a model that determined the optimum inventory levels by mapping the organisation’s current capabilities in areas such as IJPPM 55,8 664 forecasting accuracy, production compliance etc. was developed. A series of initiatives were launched to deliver the potential reduction in inventory levels (Table II). In the short term it was felt necessary that the organisation be restructured with the objective of centralising control over activities that in? uence the level of inventories in the system. From the existing functional orientation (Figure 4) the company created a supply chain organisation (Figure 5) within the overall structure.

A primary consideration was to ensure that no additional layers were introduced but that strategic as well as transactional activities were undertaken effectively.

The organisation was headed by the General Manager (Supply Chain), an indicator of the Business’s commitment to the integrated supply chain concept. Certain specialised roles were introduced to ensure that an optimum product ? ow was maintained. The role of Customer Service Manager was split into the role of Supply Side Manager, to manage the purchasing function, and Business Logistics Manager to manage ? ished goods planning and distribution. The role of Demand Planner was introduced to manage the forecasting process and the Regional Logistics Managers were integrated into the structure to ensure control over the distribution process. The span of control of the new supply chain organisation was therefore from Demand Management, through Distribution and Manufacturing to Supplier Management. This organisation accordingly was responsible for managing the entire inventories in the system i. e. Raw materials, Work in Process and Finished Goods.

In this manner the organisation managed to integrate Materials management, Manufacturing management and Distribution management. The supply chain organisational structure however would be expected to continue to metamorphose depending on the changing business environment and the organisation priorities. Key driver: stock norm Components Manufacturing capability Fortnightly plans Compliance (Fortnightly compliance: 60-85 per cent) (Weekly compliance: 35-50 per cent) Transit lead times Plant to Mg Mg to Dg Forecast accuracy “A” class (50 per cent tolerance) “B” class (100 per cent tolerance) Distribution inef? iencies Norm with current capabilities Current capability 14 days 7 days Weekly plans Compliance (Fortnightly: 90 per cent) (Weekly: 80 per cent) (Direct despatch) Potential reduction 7 days 4 days 6 days 3 days 10 days 10 days 7 days 57 days 2 days Table II. Optimal inventory model-current

and revised capabilities (25 per cent tolerance) (50 per cent tolerance) Potential norm 5 days 5 days 3 days 31 days Reengineering the supply chain 665 Figure 4. Structural integration – existing functional structure Figure 5. Structural integration – integrated organization structure IJPPM 55,8 666

Level 2: Process integration With the newly formed Supply Chain organisation structure in place, it was necessary to integrate it with the other functions of the organisation to ensure that information sharing was facilitated and that a planning orientation pervaded the organisation. The Company decided to utilise the Sales and Operations Planning process to achieve this integration. The process involved three different meetings and effectively involved the entire organisation in the planning process. The three meetings conducted on a monthly basis are: 1. Pre SOP sales meeting (Figure 6) Objective.

To generate a realistic sales forecast across the planning horizon (three months), incorporating sales and marketing plans. Agenda. Finalising the sales forecasts across the planning horizon and reviewing forecast accuracy; forum for sharing of Marketing plans (promotions and new products); Review of regional OTIF (customer service) failures. 2. Pre SOP operations meeting (Figure 7) Objective. To review production and despatch performance at each factory for the previous month and freeze plan for next month. Agenda. Review production deviations for the previous months; Review ? st cut production plan for the planning horizon; Discuss capacity/ bottleneck issues and freeze plan for next month; review purchase trends. 3. SOP meeting (Figure 8) Objective. To review sales and operations performance and project annual sales and operations plans. Agenda. OTIF (customer service) review; review sales performance and future projections; review operations performance; review working

capital performance and projections. Figure 6. Process integration – pre-SOP sales meeting Reengineering the supply chain 667 Figure 7. Process integration – pre-SOP operation meeting Figure 8.

Process integration – SOP meeting Level 3: Performance integration The primary objective of an organisation is to deliver customer satisfaction at the least possible cost. It is therefore necessary to have a suitable measure of customer satisfaction that objectively assesses the organisation performance. IJPPM 55,8 668 The company subscribes to the measure OTIF, On Time In Full satisfaction of customer orders. In the Indian Paint company, this measurement was being mechanically taken at the sales order processing point and was routinely reported on a monthly basis and no improvement was observed in OTIF performance.

OTIF performance was considered as an adequate measure of supply chain performance as it focused on the output, but in the absence of a suitable feedback mechanism it was impossible to identify the real causes behind OTIF failure. It was decided that a mechanism should be developed that tracked customer service failures to each link in the chain and each function should be able to clearly understand its role in ensuring customer satisfaction. A failure analysis tree was developed which tracked each possible cause of OTIF failure.

The performance of the functions of Sales, Distribution and Manufacturing could be tracked for their contribution to service level achievement. This data is reviewed by the business at each level up to the Chief Executive. The analysis of this data helped the organisation to focus on the areas where initiatives would provide maximum improvement to OTIF levels. With the greater transparency, OTIF has now become an integrating

performance measure for the entire organisation, as it is a single common measure of customer satisfaction universally understood by everyone within the organisation and its logistics partners beyond the organisation.

It became possible to include OTIF, as a Performance Objective for each individual in the organisation as it was now possible to quantify their contribution to delivering customer service. Conclusion This paper has tried to focus upon a step by step organisational transformation process. A three level supply chain strategy was adopted by the BPR team in the case study to integrate supply chain structure, process and performance at various positions. Dramatic improvements have been achieved with the service levels (OTIF) improving by more than 20 per cent across all regions.

OTIF has become the key driver for process improvement initiatives across the organisation. Planning orientation and organisational integration resulted in process optimisation across the supply chain resulting in a higher service level with an 18 per cent (Rs90 Million) reduction in inventories. Improved availability also had a knock on effect on the debtor status. Signi? cant reduction in distribution cost (Rs10 Million) was achieved due to the introduction of specialised manpower in logistics roles. Further improved visibility and a robust demand management process enabled the system to avoid “crisis” situations and associated costs.

Increased information sharing and integration through multi-functional task forces enabled the people to develop a holistic view and sensitivity to other functions. Training was used to educate employees across the organisation on the importance of customer service and supply chain concepts. Improved information ? ow across the chain enabled the Purchasing team to leverage this information to take strategic decisions on

major raw materials. This resulted in a saving of 5 per cent in raw material purchase. These bene? s have increased the company’s commitment to the integration of the Supply Chain Organisation and it is driving further business improvement initiatives through this organisation. This framework can also be used as guiding source to carry out organisational transformation processes.