Published by APICS magazine, May/June 2011
Most business and supply chain strategies focus on reducing cost at each link in the chain, and thus they create adversarial relationships. However, the theory of constraints (TOC)—which has the goal of making more money—generates harmony. Implementing TOC successfully requires multiple functions to embrace several radical changes in thinking. But while many companies have successfully implemented TOC in one function, there are few examples of holistic success.
A chief reason for this difficulty is the implementation approach. Implementing one major shift of currently held theories in a single department is difficult; implementing multiple shifts across departments is much more challenging. It requires a systemic approach wherein the sequence of execution is well thought out so that buy-in and results are fast, continuous, and sustainable. To embark on such a journey, top managers must understand the benefits and implications up front.
The viable vision process— devised in part by Eli Goldratt—can help users achieve these goals. Viable vision leads a company from its current financial situation to one of significantly greater profits. Following is an account of the viable vision journey at Fleetguard Filters Private Limited in Pune, India. Fleetguard produces filters, filtration systems, and coolants for makers of commercial vehicles. As a vertically integrated company, it provides its filter assembly plants with sheet metal, paper, rubber components, coolant blending, adhesives, and tools and dies.
Fleetguard’s implementation spanned across the extended supply chain and multiple organizations—including suppliers, in-house operations, distribution partners, channel partners, new product development teams, and sales and marketing departments. TOC measurements (throughput, inventory, and operating expense) were put into practice as TOC solutions were implemented in each functional area.
Prior to the TOC implementation, Fleetguard produced approximately 350 different products and had annual sales of $36 million and a profit of $3 million. More than 85 percent of sales were to the original equipment manufacturer (OEM) market segment. About 10 percent went to retail distributors, with institutions and exports making up the remaining sales.
In the OEM market, Fleetguard was under constant pressure to reduce prices and improve delivery performance. Executives emphasized reducing product costs via maximizing work center use and lowering labor and material costs.
Managing five plants that serviced multiple market segments was challenging. OEMs frequently requested expediting, and Fleetguard struggled to serve both the OEM and aftermarket segments. Because the OEMs had more clout, they were given priority—even though aftermarket throughput per unit was much higher.
For the aftermarket, Fleetguard followed a typical push distribution system philosophy. Manufacturing produced large batches based on monthly forecasts, which then were pushed to regional warehouses and distributors. Most inventory was at the point of maximum forecast error, which led to high stock levels and poor availability. Lead times were highly variable.
From the factory to the regional warehouse, Fleetguard experienced delivery fulfillment levels of 80 percent; from factory to the OEMs, 90 to 95 percent; and from regional warehouse to distributor, 70 percent. Inventory in days of supply for raw materials was 15 to 20 days; for work in process 10 days; for finished goods 20 days; for regional warehouses 20 days; and for distributors 45 to 60 days.
In 2005, Fleetguard’s supply chain and its associated performance measures were structured as in Figure 1. Using traditional project management methods, engineering professionals completed about 100 projects in 2006, with average lead times and poor delivery performance.
Given its situation, achieving a significant jump in profits seemed impossible. Nevertheless, Fleetguard, along with Vector Consulting Group–India, embarked on its viable vision journey. The goal was to increase profits sevenfold within four years.
Level one Fleetguard’s implementation was sequenced based on the strategy and tactic (S&T) tree. The S&T tree aims to bring about a holistic strategy— one that helps specify the sequence of implementation and its associated logic. At a generic level, the S&T tree is about developing a decisive competitive edge. Goldratt defines this as a characteristic that satisfies a significant client need and that cannot easily be copied by a competitor for a considerable period. Because Fleetguard already had a huge market share in the OEM segment, it had to exploit its limited growth prospects by adding more products. But the real opportunity was in its other market segments—aftermarket, exports, and institutions. Most suppliers to automotive OEMs have delivery performance percentages in the high 90s. Despite that, OEMs generally end up rescheduling their assembly lines because of missing parts. Fleetguard developed a decisive competitive edge through its guarantee of availability, wherein the OEMs can pick up any products they want at any time without being bound by prior schedules. This means Fleetguard will never cause OEM line rescheduling. The aftermarket potential was huge considering Fleetguard’s market share and limited product range. To develop a decisive competitive edge, it would be necessary for Fleetguard to choose range (the products) and reach (distributors and retailers). The company had to depend on distributors and retailers. Thus, the decisive competitive edge involved keen focus on solving a significant problem of these channel partners. The aftermarket decisive competitive edge is a partnership with the distributor that delivers superior inventory turns, with other parameters remaining the same. Superior inventory turns should cause dramatic improvement of channel partners’ return on investment. Those channel partners then would be willing to increase reach and the range of products at retail points. Experts have shown that switching from a push distribution system based on forecasts to a TOC pull distribution system based on frequent consumption-based replenishments leads to dramatically increased inventory turns while reducing stockouts. Fleetguard marketing professionals developed a “solutions for sales” proposal, which guaranteed 100 percent delivery performance and reduction by half of the current project lead times for the export market segment. Fleetguard’s decisive competitive edge for this sector is its commitment to availability.
Level two The enhanced growth strategies for all market segments focused on Fleetguard’s engineering department. Original lead time would be cut in half by increasing engineering’s rate of new product development. OEMs would provide more products to Fleetguard than other suppliers. The promise of fast new product development using critical chain project management also contributed to Fleetguard’s reputation and business share.
Fleetguard moved from make-to-forecast production to make-to-availability production in its five plants. Simplified drum-buffer-rope (DBR) scheduling and buffer management were implemented. Instead of producing to forecasts, the plants started producing to consumption. When production matched consumption, the capacity stealing across products was nearly eliminated. With simplified DBR implementation, more than 50 percent capacity was released, while lead time dropped drastically. Other changes include
• a daily buffer penetration report based on stock situation to guide priorities
• raw materials buffers and corresponding replenishment system with suppliers so that the plants can produce any stockkeeping unit (SKU) on any day
• a make-to-order-based, simplified DBR system
• a consumption-based replenishment system throughout the supply chain.
Each link in Fleetguard’s chain orders daily and replenishes frequently. With central and regional warehouses acting as perfect decoupling points (rather than storage locations), the replenishment time to distributors dropped from 7-to-15 days to 1-to-4 days. The solution at the distributor required replenishment of daily sales, but there was no information technology system in place, which is the case with most distributors and retailers in India. Thus, Fleetguard developed and implemented a simple web-based system through which distributors reported total sales for each SKU daily.
To capitalize on the decisive competitive edge for each market segment, Fleetguard’s salespeople had to depart from their roles as order takers and learn to sell the company’s superior operational capability. The benefits to distributors were significantly improved inventory turns and 100 percent availability—and, in return, distributors committed to increasing reach and range for Fleetguard products. Fleetguard plants supplied only according to consumption and buffer management. With the new system, distributor sales went up by 30 percent in the first six months, and distributor return on investment rose from 25 to 120 percent.
Fleetguard decision makers next implemented the distributors’ pull system for its retailers. It had been a challenge to get daily data, as most of the retail outlets are small stores. A visual replenishment system was designed and used by the distributors’ salespeople. With each channel partner making more money than before, greater range and reach were easy to achieve. Fleetguard increased the average number of SKUs per distributor. In just five months, the number rose from 18 to 35 SKUs—and it continues to increase. The company also significantly improved the average number of retailers served by a distributor.
These results were achieved without any price discount schemes. In fact, Fleetguard has ended discount schemes with all channel partners. In order to enable replenishment to retailers, the company introduced changes to its aftermarket channel that previously were unheard of in the Indian automotive aftermarket. These include
• area exclusivity for each distributor
• uniform pricing to all distributors and to retailers by distributor
• retailers visited weekly by the distributor’s salesperson to check stock and generate orders.
Once the implementation was stabilized throughout the supply chain, Fleetguard leaders focused on taking steps for the next level in the viable vision—improving the rate of new product development. Managers realized that future throughput is dictated by the rate of new product development for aftermarket parts and parts that address more applications. Using critical chain project management, engineering professionals were able to reduce project lead time by 50 percent and increase the number of projects completed by more than 80 percent within five months with no increase in staffing. In addition, the number of projects delivered in the third year was three times that of the first year.
Fleetguard’s TOC supply chain and its associated measures are displayed in Figure 2. The central warehouse has 99 percent availability at 6-to-8 days of inventory, regional warehouses have 99 percent availability at 12 days of inventory, and distributors have 100 percent availability. Plant work in process is at two-to-three days. Raw materials availability is more than 98 percent.
During the recent recession—when OEMs were operating at 80 percent of capacity—Fleetguard sales to OEMs increased by 10 percent over the previous year. Aftermarket has shown a 50 percent growth annually for the last three years and is on the rise. Distributors enjoy a return on investment of more than 120 percent.
Fleetguard’s current market mix is 67 percent OEM, 24 percent aftermarket, 5 percent exports, and 4 percent institutions. From the initial TOC implementation, annual sales have increased from $36 million to $113 million. The organization is very close to achieving its viable vision of increasing sales fourfold and a sevenfold increase in profit in 2011. Most importantly, Fleetguard and its supply chain partners are working in harmony.