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Reengineering the Supply Chain in a Paint Company Essay Example
The framework has been described in the form of a case study in a paints company. Findings – The research ? ndings reveal that most of the Indian organisations have aligned their supply chain objectives with their business objectives. They are now on course for aligning their processes and management focus. Enhanced levels of competitiveness would require Indian organisations to manage the three-dimensional alignment of achieving the agenda set by the business strategy. Research limitations/implications – Further research work should focus on assessing the current level of supply chain integration.
It is essential that structure and strategy should be aligned to achieve the business objective of providing superior customer service at the lowest cost. Practical implications – This paper provides a detailed study to help supply chain managers improve supply chain ef? ciency through reengineering. Dramatic improvements have be
...en achieved with the improvement of service levels (OTIF) by more than 20 per cent across all regions. Planning orientation and organisational integration resulted in process optimisation across the supply chain. Originality/value – The bene? s of re-engineering have increased 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 a guiding source to carry out organisational transformation process.
Supply chain management entails controlling the ? ow of material, information, cash and services through several echelons of a supply chain network. Owing to the recent trends in international procurement, new technologies, increasing pressure from customers on responsiveness and reliability, and globalisation of operations as well as markets, supply chain management has become an increasing challenge and a greate
opportunity. In a survey of supply chain practices in India industries, Sahay et al. ound that enhancing customer service/satisfaction outscores other supply chain objectives like expanding revenues, reducing inventory costs, lowest product cost and improving on-time delivery, in terms of their effectiveness to the supply chain management (Sahay et al. , 2001). A number of authors (Bowersox and Closs, 1996; Cavinato, 1991; Langley and Halcomb, 1992; Stevens, 1989) suggest that meeting customer expectation is the ultimate objective of supply chain management. To satisfy customers, industrial organisations have to reduce product development time, improve product quality, and reduce production costs and lead-times.
Increasingly, these challenges cannot effectively be met by isolated change or merely introducing a new IT system to speci? c organisational units, but instead depend critically on the relationships and interdependencies among different organisations. For ef? cient and effective business it is necessary to integrate and redesign the entire supply chain network to facilitate the production of innovative/functional products and the distribution and delivery of them ef? ciently with high quality and lower cost. There are four dimensions to integrated supply chain management. The ? st is functional integration of purchasing, manufacturing, transportation and warehousing activities. Spatial integration of these activities across vendors, facilities, and markets forms the second dimension. The third dimension entails inter-temporal integration of these activities over strategic, tactical and operational planning horizons. And the fourth and ? nal dimension is enterprise integration, which serves the purposes of strategic and tactical planning within integrated supply chain management (Shapiro, 2001). Supply chain integration can be supported by various emerging methodologies and concepts mentioned in the literature.
The early work in this ?
eld includes industrial dynamics (Forrester, 1961), total quality management (Crosby, 1979; Walton, 1986; Rao et al. , 1996), and partnership sourcing (Macbeth and Ferguson, 1994). More recent management philosophies, which have been identi? ed by the most organisations as useful in the review and re-con? guration of supply chain infrastructures, are business process re-engineering (Hammer and Champy, 1993; Johansson et al. , 1993) and benchmarking (Andersen and Pettersen, 1995). In practice, creating an integrated supply chain is dif? ult, as multiple levels of radical changes are required. For any formulation or structuring of business, it is essential that structure and strategy be aligned to ful? l business objectives. In this paper an attempt is made to present a multiple level, supply chain integration framework designed to achieve superior customer service and lower working capital. The three level integration strategy promises structural, process and performance integration within the organisation. A case from a paint company is considered to identify the practical implications of this integration framework.
Background Paint is a mixture of four elements - solvents, binders, pigments and additives. Solvents give the paint a liquid ? ow while the binder binds it to the surface. Pigments impart colour and opacity to the paint and the additives give it special resistance properties. The Indian Paint Industry started in 1902 with the establishment of the ? rst paint factory of Shalimar Paints in Calcutta. Thereafter, other British companies such as Blundell Permoglaze, Goodlass Wall, British Paints and Jenson Nicholson started their subsidiaries in India.
According to a study by Lotus Strategic Management Consultants, (Lotus Consultants, 2000) at present the Indian paint industry is a $1. 04 billion
market, of which 70 per cent of the market is covered by the organised sector. But the per capita consumption of paint in India is very low at 0. 5 kg per annum, compared to 22 kg in developed countries. The global average per capita consumption is 15 kg. The present case study involves an Indian Paint company dealing in the areas of Automotive Re? nish paints, where it is the market leader, Decorative paints and OEM paints.
It is working particularly hard to increase its market share in the Decorative paints segment. The challenges The Indian Paint Company business portfolio (Figure 1) underwent a rapid transformation during the period 2002-04 because of signi? cant growth in the Decorative business, bringing the portfolio more in line with the market. This growth was fuelled by network expansion, introduction of innovative products and enhancement in production capacity. This shift in portfolio, however, exposed the organisation to operating in a market environment dominated by the competition.
Most of the retail network was already involved with at least two companies in the organised sector. With low pro? t margins, the dealers were reluctant to increase their working capital exposure by investing in a third company. The challenge for the company therefore lay in displacing established brands from the dealer shelf through providing a superior commercial offer, either in the form of a better product or reducing the dealers cost of ownership. Reengineering the supply chain 657 Figure 1. Paints company – portfolio shift 2002-2004
IJPPM 55,8 658 In the decorative paint segment, Asian Paints is the leader with 44 per cent market share. It has a wide and deep
distribution network all over India. Other competitors (like Nerolac, J&N, Shalimar, etc. ) with their economic offerings are gradually increasing their share. The challenge for the supply chain at the Indian Paint Company is to manage a portfolio of 3,000 SKU’s manufactured at four facilities and supplied to 6,000 retail outlets, distributed through a network of four Regional Distribution Centres and forty Depots.
With the consumer viewing paint as a commodity product, the role of marketing initiatives was limited. It is felt to be critical that the company makes the product available at the lowest cost through superior supply chain management. The supply chain initiatives Effective re-organisation strategies for creating a competitive organisation revolve around the on-time delivery of competitive quality goods and services at a reasonable cost via the elimination of non-value adding activities (Stalk, 1988). Stevens (1989) argues that for an integrated supply chain to exist, the facility, people and ? ance must be co-ordinated and harmonised as a whole or under a single umbrella. Evans et al. (1996) propose a supply chain integration model consisting of four-integration steps, namely baseline, functional, internal and external integration. It is evident from their illustration that before integrating with external partners (i. e. suppliers, distributors and customers etc. ) an intra-departmental, interdepartmental and functional integration through people and technology is essential to achieve supply chain objectives (Manheim, 1999).
Hence, it is mandatory for companies who are looking to adopt supply chain management practices and implement supply chain models to ? rst re-structure their own organisation for successful supply chain integration process. In an all-India survey (Sahay et al. , 2001) it was found that in the
chemical industry supply chain implementation and integration initiatives are mostly driven through internal working groups (42 per cent) and consulting ? rms (26 per cent) analysing and re-structuring the supply chain. Very few follow benchmarking (18 per cent) and best practices (13 per cent) approaches.
Mathematical optimisation techniques like mixed integer programming are used at Hewlett-Packard as a way of improving supply chain performance (Lee and Billington, 1995). With increasing competition in the market, companies are seeking ways to improve capability, and to position themselves for survival in the future. Business process re-engineering (BPR) is one approach widely adopted and often reported to have dramatic effect (Hammer and Champy, 1993). To introduce supply chain changes through re-engineering at the organisational level, the Indian Paint Company appointed a cross-functional team.
Supply chain management through BPR Business process re-engineering is basically a multi-dimensional problem solving approach which must be undertaken by cross-functional team (Mohanty and Deshmukh, 2000). It is imperative that an organisation should be clear about what is going to be improved before adopting any SCM change strategy. As discussed earlier, the customer is the key focus for setting performance indicators to drive supply chain management change (Carmen and Conard, 2000). A performance evaluation model mapped on radar that included various ? exibility, cost, time and pro? performance parameters can be used as a directive for promulgating change process (Pires and Aravechia, 2001). Lapide (2000) suggests that one should measure process rather than function. In the Indian Paint company, customer satisfaction is identi? ed as a key performance indicator (KPI). The company has de? ned customer satisfaction in terms of order ? ll rate with accuracy.
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.
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