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Theory Of Constraints Theory Of Constraints What is the
Theory Of Constraints
This Scientific principles to manage an enterprise..
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June 2011
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Sourcing Electrical and Lighting: Bajaj is redesigning its distribution supply chain so that channel partners invest less and earn more, faster.

A Paradigm Shift

Bajaj is redesigning its distribution supply chain so that channel partners invest less and earn more, faster

Bajaj electricals LTD (BEL), the legacy brand in electricals and lighting, has decided to rework its distribution supply chain in order to improve response time, cut costs, and boost profi tability. It has hired Vector Consulting Group, a specialist in supply chain management solutions, to look into the complexity of the supply chain of its distribution-led businesses. Under a two-year agreement, Vector will be responsible for transforming the Rs. 2,763- crore company’s formidable supply chain and weeding out its effi ciencies.

According to R Ramakrishnan (rr@bajajelectricals.com), BEL’s executive director, the company has a total of six business units (BUs), of which consumer durables and consumer lighting are distribution-led businesses; while luminaires and engineering & projects are made-to-order and project-based. “We are re-designing our supply chain for the distribution-led BUs using the Theory of Constraints (ToC), wherein Vector Group will help us in implementing the same,” he informs.

ToC is a management philosophy introduced by Dr Eliyahu M Goldratt in his book titled The Goal published in 1984. This theory is both descriptive and prescriptive in nature; it not only describes why system constraints happen, but also offers guidance on what to do about them. “It will help us in redefi ning the paradigm of managing the supply-chain right from vendors to channel distribution. Its implementation will have an enterprisewide impact on the consumer-focussed business units including appliances, fans, lighting, and Morphy Richards,” avers Ramakrishnan.

Explaining the need for a supply chain makeover, he further states, “The current process in these units is dependent on a very involved forecasting model. And, at times, one usually tends to over-forecast. This causes a bull whip effect throughout the supply chain, right from the vendor to the branch, and results in high mismatch of inventories. As a result, we have often carried high unwanted inventory and simultaneously faced constant shortages across the entire supply chain. This has resulted in high inventory carrying costs on the one hand, and loss of potential sales due to unavailability on the other.”

A Formidable Network

  • 1,000 distributors
  • 4,000 authorised dealers
  • 4,00,000-plus retail outlets
  • 300 customer-care centers
  • 6 business units
  • 19 branch offi ces

What Does ToC Say

The ToC is an assumption that every system has at least one constraint, which limits it from getting more of what it strives for, its goal. And to remove the constraint, the following fi ve steps must be taken:

  • Identify the constraint – the resource or policy that prevents the organisation from obtaining more of the goal
  • Decide how to exploit the constraint – get the most capacity out of the constrained process
  • Subordinate all other processes to above decision – align the whole system or organisation to support the decision made above
  • Elevate the constraint – make other major changes needed to break the constraint
  • And fi nally if, as a result of these steps, the constraint has moved, return to step 1. Don’t let inertia become the constraint.

The core principal of ToC is that there are not tens or hundreds of constraints, just one or a few. Constraints can be internal or external. An internal constraint is seen when the market demands more than what the system can deliver, in which case the constraint must be recognised and removed. An external constraint exists when the system produces more than what the market can take, in which case the organisation should create more demand for its products.

Types of internal constraints

  • Equipment: the way equipment is used limits the ability of the system to produce more goods
  • People: lack of skilled people limits the system, mental models held by people can cause behaviour that becomes a constraint
  • Policy: a written or unwritten policy prevents the system from making more

This step of BEL indicates that strong marketers may be badly let down by an unresponsive distribution system, which allows goods to be stuck in places where there is no demand.

Solutions provider Vector Consulting Group’s founder director Puneet Kulraj (puneet@vectorconsulting.in) believes that companies in the electrical consumer goods segment like Bajaj rely too much on forecast, which leads to a mess most of the times. Instead of relying on forecasts, he suggests that companies should make their supply chain very agile, crash the lead times, and move to a rapid replenishment-based distribution model. “This will ensure high availability of the full range of a company’s portfolio at a very low inventory. The distributors’ ROI too will jump, and they will have capital to fund a wider range and service more retailers.”

According to Kulraj, the electrical trade is marked by the presence of a large number of wholesalers and trading hubs, which together control the supply chain and pricing of companies. “Our solution will help the distribution network to mature; besides, the speculative trading impact is expected to reduce over a period of time.” He elaborates that not only does this solution free up the company’s managers’ time and effort spent in fi refi ghting and dealing with issues of high and low stocks; it also enables the sales team to focus on its primary job. And the payback period of the entire change is typically less than a year as the gains are substantial. “Due to an increase in sales, the bottom-line of the company jumps up signifi cantly. The gross contribution of the additional sales goes to the profi t as fi xed costs remain the same, or in the worst case they increase only marginally.”

BEL’s Delhi-based vendor Tarun Murarka (tm@advancedgroup.in) of Emkay Appliances has already started benefi ting from the new solution, which is still in its initial phase of implementation. “We have started reaping the benefi ts of ToC. Our raw material, work-in-progress and fi nished goods, all are now aligned with BEL; and we know what they need on daily basis and are able to provide the same at short notice.”

Even in this short while Murarka has got the feeling that the supply is more regulated and faster. “Earlier, we used to supply to the company’s branches across the country, but now our supplies are made only to three warehouses. This has resulted in goods moving to the warehouse on daily basis, thus eliminating the waiting time for trucks to be completed. Also, this has drastically reduced our fi nished goods inventory, and we are already saving money.” Emkay makes ceiling fan, fresh-air fans, water heaters and room coolers for BEL.

It has been famously said, “It is not companies, it is supply chains that compete.” This is quite true in a complex business world, where even the best product may bite the dust just because it has been pushed into a reluctant dealer’s godown by an overzealous salesman concerned with only his targets. Such pressures are but an indication of a failing supply chain. Bajaj’s initiative is timely and channel partners can only profi t as the programme gets implemented.

 


Source : Sourcing Electricals « News Highlights


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