Managing large CAPEX projects: Moving away from ‘project management’ to ‘project flow management’

The EPC sector operates at 5-10% margins. Delayed reconciliation of materials, a task often left in the hands of overworked site engineers, eats into these slim profits. Having a different approach to material reconciliation could help resolve this.

Uncovering the hidden profit

COVID pandemic: A bolt from the blueWith COVID-19, many organizations are experiencing the impact of a pandemic for the first time in their lifetime. Most were unprepared to deal with a disruption of this scale. Economic activity in the country took a severe beating when a complete lockdown was enforced to contain the spread of the COVID-19 virus. Organizations suffered severely; their sales have fallen off the cliff.&nbsp;Viruses can never be completely eliminated from any country with a single lockdown. This means that, even when the complete lockdown is lifted, and some territories have been selectively opened up based on the number of Covid cases in these areas, the areas open for business are not likely to remain stable. It is very likely that new cases of Covid infection will re-emerge in different areas from time to time, leading to fresh bouts of localized lockdowns. This will likely go on until a vaccine for &nbsp;COVID-19 can be administered to the entire population.&nbsp;Are we being pessimistic?Going by past records of our struggle with and triumph over infectious diseases, we can confidently assume that a vaccine or a treatment for COVID-19 is sure to be invented, thus relegating the disease to the same status as that of a common flu, which passes without triggering a pandemic.&nbsp;Should organizations forget this episode as one of its kind?Nevertheless, organizations can learn from this pandemic and prepare for any similar crises that can befall us. There are countless zoonotic viruses out there in nature with the potential to create havoc for the world populace and economy. It might serve organizations to become pandemic-resistant. This means that organizations need to be ready to exist and thrive in environments where lockdowns are dynamically imposed across territory.&nbsp;Why we claim current practices of consumer goods companies are not pandemic-resistant&nbsp;Most organizations follow a process of forecasting and a push-based monthly planning system for manufacturing, procurement, and distribution. The horizon of planning can vary from one month to even six months, depending on the lead time of the entire delivery system. Since forecasting errors are inevitable, and there is a need to provide stability to procurement and production, many organizations grudgingly try to fix the schedule to a smaller part of the entire planning horizon, extending to a month or more, depending on the type of environment.&nbsp;The errors in forecasting in the fixed horizon lead to stock-outs, wrong placement of inventory and continuous expediting, along with a month-end skew in dispatches.&nbsp;Organizations have learned to live with this phenomenon because many others in their industry follow similar practices and suffer from the same problems. Being in a herd, at times, gives the courage to stay in the status quo.&nbsp;However, the same practices which force companies to fix production and distribution plans for at least a month can cause more havoc in an environment of dynamically shifting lockdowns.&nbsp;<ul><li>Inventory turns will deteriorate drastically when some locations come under lockdown. At times, inventory turns can become half based on the period of lockdown and sluggish sales in the aftermath.</li><li>Extended lockdowns, such as the ongoing one in the country, can lead some distributors into a severe liquidity crisis. If they are short of cash and end up in credit locks, they may not be able to restart business immediately after lockdown. In turn, this can lead to a gridlock, which prevents them from getting more supplies, leading to eventual loss of sales for the parent company.&nbsp;</li></ul><figure class="image"><img style="aspect-ratio:400/400;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//1_1711626386.png" width="400" height="400"></figure><ul><li>The capacity of the sales team in lockdown areas is also likely to be lost as they are unable to meet customers. Others cannot be pressed into service to take this up because salespeople are traditionally allocated fixed geographies. Moreover, in an environment of uncertainty and travel restrictions, they would be struggling to cover their own geographies and would not be in a position to take on the extra load.</li><li>Suppliers clustered in an area under lockdown can disrupt production. They can also cause delays in ramp-up after the lifting of the lockdown due to working capital woes.&nbsp;</li></ul>The impact of the above will be a double whammy of deteriorating working capital turns and a significant loss of sales.&nbsp;Only those companies who have developed systems designed for agility to react to uncertainties created by dynamic lockdowns (disruption) and changing demand patterns across geographies will survive and gain market share in this environment.Potential problems with the current way of managing sales in the post-lockdown situation:&nbsp;<ul><li>High risk of losing sales from areas where the assigned salespeople are unable to visit or refuse to visit (out of fear of infection)</li><li>Drop in sales productivity by as much as 75% due to restrictions in the amount of time markets stay open</li><li>Compromised range selling since each visit has to be short, if more retailers have to be visited in a limited time</li><li>Broken rhythm of weekly beat – order collection and dispatch due to limited time/manpower to visit the market</li><li>Significant crippling of indirect distribution since retailers have no time/are unable to go and purchase from wholesalers&nbsp;</li></ul>This means shortening the decision horizon of following decisions&nbsp;<ul><li>What to produce?</li><li>How much to produce?</li><li>Where to send the inventory?</li><li>How much to send?&nbsp;</li></ul>The shorter the horizon for planning, the fewer the forecasting errors. So, ideally, for maximum flexibility, the horizon for these decisions should be reduced to a single day. (A monthly plan for planning overall RM and capacity coverage can continue). This will allow production and inventory management to react seamlessly to emerging scenarios of dynamic lockdowns.&nbsp;Similarly, a company should be able to divert sales efforts to areas where opportunities exist in the very short horizon without getting bogged down by the traditional geography-linked organization structures.&nbsp;Direction of Solution- Flexibility leading to Agility1. Flexibility in planningCompanies have to shift into a process of daily planning based on daily consumption signals from the recipient node(s) in the system. The TOC methodology of ‘Pull-Manufacturing’, ‘Pull-Procurement’ and ‘Pull-Distribution’ enables companies to react to daily variability without losing out on efficiencies.&nbsp;Companies that have moved to this way of planning have low committed positions in inventory in all downstream nodes with the ability to swiftly resupply any demand in each area. Hence, they will be able to transition to normalcy fast while their counterparts struggle with supplies.&nbsp;<figure class="image"><img style="aspect-ratio:400/400;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//2_1711626659.png" width="400" height="400"></figure>2. Flexibility in manufacturing and suppliesWith daily dynamic planning systems, plants will have higher flexibility. However, it is also important for companies with multiple plants to move away from the practice of dedicating plants to specific sets of products and make products across the various plants to reduce risk. Otherwise, if a particular plant becomes part of a lockdown area, products of this plant will quickly become unavailable in the market. Making products across the various plants implies that entire change-over times need to be reduced to ensure that plants maintain similar levels of efficiency despite adding more variety.&nbsp;Single product facilities:<figure class="image"><img style="aspect-ratio:400/400;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//3_1711714812.png" width="400" height="400"></figure>Multi-product facilities:&nbsp;Reduce risk of market unavailability of products by having multi-product facilities.&nbsp;When suppliers also move into a system of daily pull-based manufacturing, they will have low levels of inventory, and at the same time, they will rapidly adjust to changing demand patterns. Low inventory levels also allow suppliers to operate with low working capital (almost half of a monthly planning system), which in turn allows them to bounce back after lockdown much faster than others.&nbsp;3. Flexibility in distributionThe idea of having an aggregated hub and distributed spoke model of distribution has been accepted by most companies in this GST era. Companies have started consolidating warehouses with that model in mind. However, having a single physical hub warehouse can be a risky idea if the area goes into a lockdown. Hence, companies need to have multiple hub locations with the ability to behave as a single virtual hub.&nbsp;Single aggregated hub:<figure class="image"><img style="aspect-ratio:400/400;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//4_1711627122.png" width="400" height="400"></figure>The distribution to downstream locations should follow the pull model of consumption-based inventory movement to minimize the risk of large inventory moving out and piling up at any location downstream. It is also important to distance the warehouses from the plants to ensure that even if the plant goes under lockdown, the warehouses can continue to supply from their buffers. And if a warehouse goes under lockdown, the plant can redirect its stock to other warehouses. Warehouses should not be in close proximity to densely populated areas.Multiple hub locations with pull model of inventory movement:<figure class="image"><img style="aspect-ratio:400/400;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//5_1711627208.png" width="400" height="400"></figure>4. Flexibility in SalesCompanies depending on physical 'beat plans' for order taking will have a big issue. With social distancing and limited capacity due to travel and market opening restrictions, the ability to physically collect orders shall be severely jeopardized. Hence, it is imperative to set up a system of centralized, yet distributed, order-taking on phone calls. This not only enables a greater reach of sales force, but the model also de-risks the vagaries due to physical order taking. Since a tele-order representative can touch three to four times the number of retailers compared to an on-field foot soldier, it will free up sales manpower for the distributors. The remaining sales team of distributors and the company can focus on physical visits to expand ‘reach’ or to solve the problems of retailers who are not placing orders frequently.&nbsp;Companies who have moved on to this model prior to the current COVID crisis, have not only expanded their sales reach but are also now ready to operate seamlessly in an environment of dynamic lockdown. The other advantages of this model are a ‘direct connect’ with retailers and the ability to derive data-driven insights thanks to the availability of retail point data from even the smallest mom –and-pop store. Further, unlike the rigid traditional sales structure, these companies have the flexibility to immediately shift the calling location without any problem as and when needed.&nbsp;<figure class="image"><img style="aspect-ratio:400/400;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//6_1711627246.png" width="400" height="400"></figure>Advantages of shifting to phone calls instead of physical visits for order-taking from customers5. Flexibility in physical branch officesIn such a sales environment, do companies really need a branch office? The current COVID triggered lockdown has proven that most of the discussions and review work can now be done over virtual platforms. The work of local logistics and documentation in the branch can also be easily moved to a centralized back office, making the physical branch office redundant. Moving all back-office work to a central location also allows one to share the workload across branch offices and proves more robust and cost-effective.<figure class="image"><img style="aspect-ratio:400/400;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//7_1711627274.png" width="400" height="400"></figure>6. Flexibility in sales channelsCompanies need to re-think models of selling. While physical stores will continue to exist, many buyers might choose to move to e-commerce modes if there are too many hassles of social distancing at the retail point. It is important for companies to build/collaborate with hyperlocal e-commerce platforms where customers have the ability to view inventory in the nearest location and place orders over an app. This will allow companies to provide products through any channel the customer chooses without undue dependence on the e-commerce marketplace.&nbsp;<figure class="image"><img style="aspect-ratio:400/400;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//8_1711714837.png" width="400" height="400"></figure>Flexibility on these six levels will enable organizations to respond rapidly to a market that is dynamic, especially during a pandemic.&nbsp;

This article explores why current manufacturing and distribution practices are pandemic-vulnerable and proposes a transformative approach centred around daily planning, flexible manufacturing, distribution, sales, and physical operations. By adopting agility-oriented strategies, companies can navigate uncertainties effectively, ensuring resilience and market share growth in the evolving landscape shaped by the pandemic.

Pandemic-resistant manufacturing and distribution

COVID pandemic: A bolt from the blueWith COVID-19, many organisations are experiencing the impact of a pandemic for the first time in their lifetime. Most were unprepared to deal with a disruption of this scale. Economic activity in the country took a severe beating when a complete lockdown was enforced to contain the spread of the COVID-19 virus. Organisations suffered severely; their sales have fallen off the cliff.&nbsp;Viruses can never be completely eliminated from any country with a single lockdown. This means that, even when the complete lockdown is lifted, and some territories have been selectively opened up based on the number of Covid cases in these areas, the areas open for business are not likely to remain stable. It is very likely that new cases of Covid infection will re-emerge in different areas from time to time, leading to fresh bouts of localised lockdowns. This will likely go on until a vaccine for &nbsp;COVID-19 can be administered to the entire population.&nbsp;Are we being pessimistic?Going by past records of our struggle with and triumph over infectious diseases, we can confidently assume that a vaccine or a treatment for COVID-19 is sure to be invented, thus relegating the disease to the same status as that of a common flu, which passes without triggering a pandemic.&nbsp;Should organisations forget this episode as one of its kind?Nevertheless, organisations can learn from this pandemic and prepare for any similar crises that can befall us. There are countless zoonotic viruses out there in nature with the potential to create havoc for the world populace and economy. It might serve organisations to become pandemic-resistant. This means that organisations need to be ready to exist and thrive in environments where lockdowns are dynamically imposed across territory.&nbsp;Why we claim current practices of consumer goods companies are not pandemic-resistant&nbsp;Most organisations follow a process of forecasting and a push-based monthly planning system for manufacturing, procurement, and distribution. The horizon of planning can vary from one month to even six months, depending on the lead time of the entire delivery system. Since forecasting errors are inevitable, and there is a need to provide stability to procurement and production, many organisations grudgingly try to fix the schedule to a smaller part of the entire planning horizon, extending to a month or more, depending on the type of environment.&nbsp;The errors in forecasting in the fixed horizon lead to stock-outs, wrong placement of inventory and continuous expediting, along with a month-end skew in dispatches.&nbsp;Organisations have learned to live with this phenomenon because many others in their industry follow similar practices and suffer from the same problems. Being in a herd, at times, gives the courage to stay in the status quo.&nbsp;However, the same practices which force companies to fix production and distribution plans for at least a month can cause more havoc in an environment of dynamically shifting lockdowns.&nbsp;<ul><li>Inventory turns will deteriorate drastically when some locations come under lockdown. At times, inventory turns can become half based on the period of lockdown and sluggish sales in the aftermath.</li><li>Extended lockdowns, such as the ongoing one in the country, can lead some distributors into a severe liquidity crisis. If they are short of cash and end up in credit locks, they may not be able to restart business immediately after lockdown. In turn, this can lead to a gridlock, which prevents them from getting more supplies, leading to eventual loss of sales for the parent company.&nbsp;</li></ul><figure class="image"><img style="aspect-ratio:4000/3704;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-3-img-1_1733793036.jpg" width="4000" height="3704"></figure><ul><li>The capacity of the sales team in lockdown areas is also likely to be lost as they are unable to meet customers. Others cannot be pressed into service to take this up because salespeople are traditionally allocated fixed geographies. Moreover, in an environment of uncertainty and travel restrictions, they would be struggling to cover their own geographies and would not be in a position to take on the extra load.</li><li>Suppliers clustered in an area under lockdown can disrupt production. They can also cause delays in ramp-up after the lifting of the lockdown due to working capital woes.&nbsp;</li></ul>The impact of the above will be a double whammy of deteriorating working capital turns and a significant loss of sales.&nbsp;Only those companies who have developed systems designed for agility to react to uncertainties created by dynamic lockdowns (disruption) and changing demand patterns across geographies will survive and gain market share in this environment.Potential problems with the current way of managing sales in the post-lockdown situation:&nbsp;<ul><li>High risk of losing sales from areas where the assigned salespeople are unable to visit or refuse to visit (out of fear of infection)</li><li>Drop in sales productivity by as much as 75% due to restrictions in the amount of time markets stay open</li><li>Compromised range selling since each visit has to be short, if more retailers have to be visited in a limited time</li><li>Broken rhythm of weekly beat – order collection and dispatch due to limited time/manpower to visit the market</li><li>Significant crippling of indirect distribution since retailers have no time/are unable to go and purchase from wholesalers&nbsp;</li></ul>This means shortening the decision horizon of following decisions&nbsp;<ul><li>What to produce?</li><li>How much to produce?</li><li>Where to send the inventory?</li><li>How much to send?&nbsp;</li></ul>The shorter the horizon for planning, the fewer the forecasting errors. So, ideally, for maximum flexibility, the horizon for these decisions should be reduced to a single day. (A monthly plan for planning overall RM and capacity coverage can continue). This will allow production and inventory management to react seamlessly to emerging scenarios of dynamic lockdowns.&nbsp;Similarly, a company should be able to divert sales efforts to areas where opportunities exist in the very short horizon without getting bogged down by the traditional geography-linked organization structures.&nbsp;Direction of Solution- Flexibility leading to Agility1. Flexibility in planningCompanies have to shift into a process of daily planning based on daily consumption signals from the recipient node(s) in the system. The TOC methodology of ‘Pull-Manufacturing’, ‘Pull-Procurement’ and ‘Pull-Distribution’ enables companies to react to daily variability without losing out on efficiencies.&nbsp;Companies that have moved to this way of planning have low committed positions in inventory in all downstream nodes with the ability to swiftly resupply any demand in each area. Hence, they will be able to transition to normalcy fast while their counterparts struggle with supplies.&nbsp;<figure class="image"><img style="aspect-ratio:4000/4548;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-3-img-2_1734346852.jpg" width="4000" height="4548"></figure>2. Flexibility in manufacturing and suppliesWith daily dynamic planning systems, plants will have higher flexibility. However, it is also important for companies with multiple plants to move away from the practice of dedicating plants to specific sets of products and make products across the various plants to reduce risk. Otherwise, if a particular plant becomes part of a lockdown area, products of this plant will quickly become unavailable in the market. Making products across the various plants implies that entire change-over times need to be reduced to ensure that plants maintain similar levels of efficiency despite adding more variety.&nbsp;Single product facilities:<figure class="image"><img style="aspect-ratio:4000/3964;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-3-img-3_1733793067.jpg" width="4000" height="3964"></figure>Multi-product facilities:&nbsp;Reduce risk of market unavailability of products by having multi-product facilities.&nbsp;When suppliers also move into a system of daily pull-based manufacturing, they will have low levels of inventory, and at the same time, they will rapidly adjust to changing demand patterns. Low inventory levels also allow suppliers to operate with low working capital (almost half of a monthly planning system), which in turn allows them to bounce back after lockdown much faster than others.&nbsp;3. Flexibility in distributionThe idea of having an aggregated hub and distributed spoke model of distribution has been accepted by most companies in this GST era. Companies have started consolidating warehouses with that model in mind. However, having a single physical hub warehouse can be a risky idea if the area goes into a lockdown. Hence, companies need to have multiple hub locations with the ability to behave as a single virtual hub.&nbsp;Single aggregated hub:<figure class="image"><img style="aspect-ratio:4000/1998;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-3-img-4_1734346884.jpg" width="4000" height="1998"></figure>The distribution to downstream locations should follow the pull model of consumption-based inventory movement to minimise the risk of large inventory moving out and piling up at any location downstream. It is also important to distance the warehouses from the plants to ensure that even if the plant goes under lockdown, the warehouses can continue to supply from their buffers. And if a warehouse goes under lockdown, the plant can redirect its stock to other warehouses. Warehouses should not be in close proximity to densely populated areas.Multiple hub locations with pull model of inventory movement:<figure class="image"><img style="aspect-ratio:4000/2738;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-3-img-5_1734346900.jpg" width="4000" height="2738"></figure>4. Flexibility in SalesCompanies depending on physical 'beat plans' for order taking will have a big issue. With social distancing and limited capacity due to travel and market opening restrictions, the ability to physically collect orders shall be severely jeopardised. Hence, it is imperative to set up a system of centralised, yet distributed, order-taking on phone calls. This not only enables a greater reach of sales force, but the model also de-risks the vagaries due to physical order taking. Since a tele-order representative can touch three to four times the number of retailers compared to an on-field foot soldier, it will free up sales manpower for the distributors. The remaining sales team of distributors and the company can focus on physical visits to expand ‘reach’ or to solve the problems of retailers who are not placing orders frequently.&nbsp;Companies who have moved on to this model prior to the current COVID crisis, have not only expanded their sales reach but are also now ready to operate seamlessly in an environment of dynamic lockdown. The other advantages of this model are a ‘direct connect’ with retailers and the ability to derive data-driven insights thanks to the availability of retail point data from even the smallest mom –and-pop store. Further, unlike the rigid traditional sales structure, these companies have the flexibility to immediately shift the calling location without any problem as and when needed.&nbsp;<figure class="image"><img style="aspect-ratio:4000/1962;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-3-img-6_1733793100.jpg" width="4000" height="1962"></figure>Advantages of shifting to phone calls instead of physical visits for order-taking from customers5. Flexibility in physical branch officesIn such a sales environment, do companies really need a branch office? The current COVID triggered lockdown has proven that most of the discussions and review work can now be done over virtual platforms. The work of local logistics and documentation in the branch can also be easily moved to a centralized back office, making the physical branch office redundant. Moving all back-office work to a central location also allows one to share the workload across branch offices and proves more robust and cost-effective.<figure class="image"><img style="aspect-ratio:4000/3302;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-3-img-7_1733793111.jpg" width="4000" height="3302"></figure>6. Flexibility in sales channelsCompanies need to re-think models of selling. While physical stores will continue to exist, many buyers might choose to move to e-commerce modes if there are too many hassles of social distancing at the retail point. It is important for companies to build/collaborate with hyperlocal e-commerce platforms where customers have the ability to view inventory in the nearest location and place orders over an app. This will allow companies to provide products through any channel the customer chooses without undue dependence on the e-commerce marketplace.&nbsp;<figure class="image"><img style="aspect-ratio:4000/4168;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-3-img-8_1734346916.jpg" width="4000" height="4168"></figure>Flexibility on these six levels will enable organisations to respond rapidly to a market that is dynamic, especially during a pandemic.&nbsp;

<h5>API: Achilles heel of Indian pharma&nbsp;</h5>It’s well known that India is the global leader in Generic Pharma exports (Figure 1). However, the industry has an Achilles heel. It imports as much as 65%–100% of the APIs (Active Pharmaceutical Ingredients)[1], which are critical for manufacturing drugs, including capsules, tablets, etc., from China [2]. Such a high dependency on a single nation, especially one with whom India’s diplomatic relationship is often contentious, brings with it both political and economic risk.&nbsp;<figure class="image"><img style="aspect-ratio:16668/13500;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-1-01_1733244117.jpg" width="16668" height="13500"></figure><figure class="image"><img style="aspect-ratio:16668/10628;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-2-01_1733244131.jpg" width="16668" height="10628"></figure>Risk notwithstanding, not only has overall API imports increased over time, India’s API imports from China grew by 28% from Rs. 947 crores in 2025-16 to Rs. 1,150 crores in 2019-20.&nbsp;<figure class="image"><img style="aspect-ratio:16668/13632;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-3-01_1733244148.jpg" width="16668" height="13632"></figure>At the same time, it must be noted that there are many well-established API players in the country, and India is second only to China as a supplier to the US markets. The companies in the country are holding this position by virtue of some major strengths, including:<figure class="image"><img style="aspect-ratio:16668/16636;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-4-01_1733244157.jpg" width="16668" height="16636"></figure><ul><li>An established reputation for quality, consistency, regulatory compliance, EHS (Environment, Health &amp; Safety) compliance, as well as a workforce with superior technical skills [4](evidenced in the fact that India holds almost half of the DMFs [5]). </li><li>The legacy proficiency in formulations allows Indian companies to provide end-to-end solutions, like supplying Pellets/Granules or even finished dosage instead of just API.&nbsp;</li></ul>In addition to these advantages, the government has been pushing towards further developing API manufacturing capabilities within India since 2017 [6] and has introduced some schemes to help make this sector more competitive. [7] [8]<figure class="image"><img style="aspect-ratio:16668/12903;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-5-01_1733244236.jpg" width="16668" height="12903"></figure>However, the country is still way behind China. This is attributed primarily to the fact that while over the years, Chinese firms aggressively forayed into the scaling of API businesses, there was also a simultaneous erosion of interest in the API business from Indian players (read why in the box titled ‘Indian API story’). This has allowed Chinese companies to entrench themselves with many formulation companies. Changing an already established API vendor for a particular drug already being manufactured is a huge hassle (time-consuming approvals are needed) in this rigidly regulated environment. Moreover, since formulation companies in India and globally continuously face price erosion for their products, they are forced to seek their inputs (including API) at low costs. China is able to offer lower prices in many APIs; since production costs in China are, on average, 10% and 20% cheaper [9][10][11]. This allowed Chinese firms to consolidate their markets.&nbsp;<figure class="image"><img style="aspect-ratio:16668/12424;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-6-01_1733244283.jpg" width="16668" height="12424"></figure>Direction of Solution: A two-pronged strategy to revive Indian API&nbsp;Weaning away formulation companies from their established API partners for blockbuster drugs that are already being manufactured by them is likely to be an uphill task at this stage. So, if Indian pharma companies have to really be competitive and a volume player again in API, the best opportunity for them will be to adopt a double-pronged strategy. For this, API players have to:&nbsp;1. Develop rapid R&amp;D capabilities to establish sustainable vendor relationships for APIs of drugs newly free of patent or for low-competition genericsA good opportunity for creating a market for Indian APIs through the R&amp;D route is presented by the fact that there are a large number of niche, low-competition APIs that can be supplied to the regulated marketsxii. And there is a completely new emerging market for animal health that has very little competition. Most of the APIs in this market are currently made by the innovator companies in their in-house facilities, but there is an increasing trend of third-party sourcing.&nbsp;<figure class="image"><img style="aspect-ratio:16668/11773;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-7-01_1733244291.jpg" width="16668" height="11773"></figure>Moreover, the next big patent cliff is coming in the next few years. API companies with much shorter R&amp;D lead times than the competition are front runners in developing the targeted APIs, can seed many potential formulation companies and can lock them in supply partnerships as soon as these drugs expire will enjoy a tremendous advantage.&nbsp;However, the challenge will not be over just by establishing partnerships. Over time formulation companies will experience dramatic price erosion in their markets, and so they will expect their API partners to play their part in reducing input costs. So API R&amp;D will have to work on process innovation to identify the route for the lowest cost of production for these molecules at the highest yield. This is necessary to help secure and sustain price competitiveness and, consequently, higher SOB with customers.&nbsp;2. Ensure operational capabilities (quality &amp; reliability of supply) in addition to price competitiveness that can completely offset the Chinese cost advantagexiiiWhile leveraging R&amp;D can help establish a foothold in formulation companies to increase market share over time, it is necessary to take significant steps in operations. This means that manufacturing plants must provide greater value to customers than just price parity with Chinese counterparts. In order to achieve this, Indian API players must offer not only competitive prices and high quality (which India is already known for) but also reliability of supply. This will differentiate Indian API companies and reshape the competitive landscape.However, it must be noted that if these efforts in R&amp;D or Operations require significant additional investment, it will wipe out any hard-won margin and profitability. So, the only viable direction of a solution for API players is to&nbsp;<ul><li>Increase new API molecule filings with much shorter and more competitive development lead times by using the current strength of the R&amp;D team / without additional resourcing. </li><li>Increase tonnage of API output manufactured while also ensuring high reliability of customer orders without any capacity investment or cost increase.&nbsp;</li></ul>While this may sound too ambitious, the good news is that companies are either ignoring or not noticing the huge wastage in R&amp;D and Operations. If we can eliminate them, these objectives can be met.&nbsp;How to enable Rapid R&amp;D1. A vicious mismatch of capacity and loadCurrently, most API R&amp;D facilities in India are highly inconsistent in terms of output every year. Lab development lead times of API itself in many companies are very lengthy, spanning 15-18 (best are at 8-9 months) months, even for a simple molecule. The whole journey till filing can span 26-30 months (in the best case, they can do this in 16-17 months). This situation exists since, in this environment, there is a perennial mismatch experienced between capacity and load.&nbsp;If you examine the workload on expert resources, which are crucial for these projects to progress in the R&amp;D pipeline, it can be seen that they are caught in a vicious loop of time wastage through task elongation, interruptions and bad multi-tasking (see image). Therefore, in spite of the best efforts from all and a lot of stress, projects are delayed, and the company’s ability to be a front runner to market the new API becomes an issue.&nbsp;<figure class="image"><img style="aspect-ratio:16668/8866;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-8-01_1733244310.jpg" width="16668" height="8866"></figure>2. Changing paradigms to build speedFortunately, there is a way to emerge out of this vicious loop. If the principles discussed below are implemented, it may enable a faster flow of projects in the R&amp;D pipeline:&nbsp;<ul><li>Instead of the current practice of capacity scheduling, limit the WIP of development projects in the system and ensure that a new one is initiated after one of the current projects is completed. This will prevent capacity loss due to interruptions. </li><li>Since work disruption is unavoidable if the full kit of information, materials and approvals is not available beforehand, a separate preparatory team can organize a full kit before a project enters the WIP list. </li><li>Plans go haywire quickly by trying to manage projects using deadlines by triggering multi-tasking when everything becomes urgent. Moreover, using a WIP limit makes it impossible to use predefined date commitments. Therefore, use a common global priority system to ensure sync between teams. </li><li>Use daily management and predefined issue resolution frequency rather than the usual intervention process close to committed dates to enable task completion at the fastest possible pace. </li><li>Eliminate individual task-level buffers and track buffer consumption at the project level vis-à-vis work completion, to get visibility of all the projects in the company’s R&amp;D pipeline and take timely expediting/corrective actions wherever judicious.&nbsp;</li></ul>(For more details, read <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/articles/generic-drug-development-the-prescription-for-success/">Generic drug development: The prescription for success</a>)Once these steps are implemented, a group of 50 chemists and 100 analysts who would, in the earlier way of working, typically give an output of 8-10 projects per year would start delivering 15-18 projects per year! The speed with which projects are completed can be leveraged to establish partnerships early with formulation companies.How to leverage operations for competitive advantage?&nbsp;Similarly, a closer review of current manufacturing practices in this industry will indicate that there are several sources of capacity wastages that result in burgeoning lead times and longer working capital cyclesxiv in API companies. Let's examine the causes of these wastages and why they mostly go unnoticed.&nbsp;Sources of capacity wastage1. Wastage due to starving bottlenecksEach API molecule manufactured needs to take a predefined route of steps for manufacturing, and set-up change tends to be time-consuming. Each route will have its own bottleneck or capacity-constrained resource. Any idle time on these bottlenecks costs the company in terms of reduced output and increased lead time. It will be interesting to note that some of the capacity wastage is created during the planning stage itself. The reasons are as followsStarvation due to month-end skewMost API plants are run with monthly schedules. Output is committed by the plant for a month, and any delay/rework during the month needs to be covered by expediting the last stages of manufacturing at month-end. Often these last stages are non-bottlenecks for a product.&nbsp;In order to deliver volume for the month, manpower is shifted from bottlenecks to non-bottlenecks resulting in starvation at the bottleneck and wastage of capacity.<figure class="image"><img style="aspect-ratio:16668/13224;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-9-01_1733244321.jpg" width="16668" height="13224"></figure>This manpower shifting prepones the output declaration from the first week of the next month to the last week of the current month, creating a backlog for the next month before it starts. This again puts pressure on production at month-end of the subsequent month-end cycle repeats.Machine efficiency lossesMachine efficiency is at its best if the processes are strictly adhered to and the technical parameters are precisely achieved.&nbsp;However, very often, due to the ageing of machinery and inefficiency of utilities, the necessary parameters are not precisely achieved in the stipulated time. For instance, in spite of following procedures correctly, it may take more time to reach the required temperature during drying.&nbsp;If this can be prevented by continuously tracking to ensure that the machines function at their best, the time saved will be equal to the output earned.&nbsp;While this may sound very simple, such improvement projects are usually overlooked for two reasons. Firstly a consistent demand capacity gap is rarely experienced in planning. This is because annual sales targets are anyway based on estimated capacity based on previous experience (with wastages built-in).Secondly, because of margin pressure, the top management tends to be more focused and drive cost reduction projects than productivity improvement projects.2. Wastage due to planning horizonMonthly production plans are a combination of actual orders and 3-month forecasted orders since most API companies have to serve unregulated markets (transactional deals; difficult to predict) in addition to the regulated markets (more predictable). So, closer to due dates, very often, the order quantity / priorities get changed. So this means that set-ups have to be changed, a few WIP orders have to be set aside, and some other urgent order/s have to be processed. When urgencies of this nature hit an API company, they perceive themselves as short of capacity (pain felt- expediting, sale loss or delay in delivery).&nbsp;However, companies never perceive themselves as having wasted capacity since they almost never have excess of FG inventory (evidence of capacity stealing) in their warehouses (which logically should have been created due to forecast inaccuracy). The reason for this is the buying practice of formulation companies. Since they tend to change their priorities at the last moment, most are amenable to picking up any FG that has been created at their behest or at least adjusting it in the credit terms, and voila – no excess inventory on the books!&nbsp;Interestingly, this is one of many capacity wastages that can be traced to formulation companies.&nbsp;3. Wastage due to ordering practice of formulation companiesBecause of their buying practices, formulation companies (whether captive or otherwise) end up keeping 4 months to 1 year of API inventory in their warehouses. They also trigger orders and replenish when the stock levels fall below a particular, very conservatively calculated, ‘minimum’ level (3-6 months of sale) on an urgent basis. While this stock may be being maintained in the formulation company’s books, stealing the capacity to make this ahead of the required time becomes a source of capacity wastage for the concerned API company. Further, it is inevitable that when there is so much inventory being held some of it will expire and will have to be sent back to the API vendor and repurposed. This becomes an additional source of capacity wastage.&nbsp;Eliminating capacity wastageReducing wastage of capacity due to this heavily buffered ordering practice of formulation companies is possible only if ~100% reliability at shorter lead times can be consistently demonstrated by their API partners. For this, API companies have to abandon the monthly planning approach and instead implement processes in their procurement, quality control and manufacturing that enable the flow. The major steps involved in enabling alignment of capacity to market pull are:&nbsp;<ul><li>Decoupling RM procurement lead time from manufacturing lead time by maintaining stock replenishing based on consumption. This will ensure the high availability of RM at reduced stock levels since forecast errors do not affect it. </li><li>During planning, ensure optimization of product mix for throughput maximization.&nbsp;</li></ul>Implementing these ensures that flow improves and month-end skew is eliminated. Some of the gains from these efficiencies in terms of higher output (30%-40% increase), at lower WIP (~40% reduction)/FG (25%-30% reduction) inventory and shorted working capital cycles can be passed on to the customers to bring better price competitiveness if required.&nbsp;At the same time, the high availability (&gt;90% daily of made-to-stock items) that the new system enables can be leveraged to gain a decisive competitive advantage by offering ready delivery of API to formulation companies. Since formulation companies are also very keen on reducing working capital stuck in the RM, such a reliable vendor who can reliably offer small and frequent off-takes as and when needed will be viewed as God-sent and is sure to gain higher and higher SOB from them over time.&nbsp;Conclusion: API can be done rightxv xviBelow is a simple simulation of how such an Indian API company can stack up against a Chinese API company once it has become an efficient partner to formulation companies. Clearly, profitability can be increased significantly by increasing output from the same capacity and converting this into sales without increasing fixed costs. So if most API companies adopt these practices, India can become a globally competitive API manufacturing hub.&nbsp;<figure class="image"><img style="aspect-ratio:16668/17343;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-3-img-10-01_1733244332.jpg" width="16668" height="17343"></figure><img src="https://qclab.app/wp-content/uploads/2023/07/VCG_API-Article_May-2023.jpg" alt="">An afterthoughtThese steps will surely help the Indian pharma industry re-establish its footprint in the API business. However, it must be added that since more than 75% of India’s KSMs imports originate from Chinaxvii, there is still a significant supply risk. Supply disruptions in KSA may squeeze margins and raise product prices. So, API companies will next need to find ways to strengthen the moat around their business by integrating backwards to KSM and other basic intermediates.&nbsp;How can that be done? That’s another story.&nbsp;&nbsp;&nbsp;&nbsp;

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API manufacturing in India is less attractive than in China. However, by enhancing operational excellence in manufacturing and R&D, India's API industry can unleash its true potential.

Mighty molecules: Strategies for reclaiming the global API throne

“If a factory is torn down, but the rationality that produced it is left standing, then that rationality will simply produce another factory.” Robert Pirsig, Zen and the art of motorcycle managementWarning letters and their impactAn analysis of the number of warning letters issued by USFDA over the years [1] to pharmaceutical companies across the globe has been increasing over the years.<figure class="image"><img style="aspect-ratio:16668/11669;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-1-01_1733242587.jpg" width="16668" height="11669"></figure>In the warning letter, the FDA makes it clear that the concerned company must correct the problem and provide directions and a timeframe for the company to inform the FDA of their plans for correction. Failure to address the FDA’s concerns can lead to enforcement actions that have significant repercussions as well as product liability exposure. Therefore when a warning letter is received, company employees, especially senior management (who are already very busy), scramble to address it within the stipulated time frame.It is estimated that a single warning letter leads to a loss of approx. 900 man-hours across the hierarchy. This increases exponentially if multiple warning letters are received simultaneously. It has to be noted that this will be at the cost of progress on their routine, ongoing tasks.&nbsp;<figure class="image"><img style="aspect-ratio:16668/10032;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-2-01_1733242600.jpg" width="16668" height="10032"></figure><img src="https://qclab.app/wp-content/uploads/2023/06/Estimation-of-time-needed-to-address-a-single-warning-letter.png" alt="">After this marathon, the remediation procedures that FDA expects companies to implement can be even more expensive than complying in the first place. Moreover, there are long-term repercussions in terms losing credibility with regulators - not just the FDA but also other global regulators, leading to increased scrutiny and more inspections. In case of repeat offenders, they often have to pay hefty fines and sign a consent decree of permanent injunction that will bind them to be compliant in perpetuity. All this can impact the company’s business/financial performance, affect company valuations, and reduce the overall reputation.&nbsp;The problemThe major reasons for FDA warning letters are not unknown. About 50% of FDA warning letters pinpoint CAPA (Corrective Action and Preventive Action) failures [2]. CAPA failures also show up year after year in these warning letters. The FDA also clearly indicates FDA that most of these CAPA failures are a failure of root cause analysis.&nbsp;<figure class="image"><img style="aspect-ratio:16668/8279;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-3-01_1733242664.jpg" width="16668" height="8279"></figure>What does not work well?&nbsp;So, over the years, pharma labs have used multiple techniques to identify the root cause so that they can take the necessary actions to improve their quality performance. The popular techniques employed include 5-Whys, Fishbone diagrams, Pareto charts, Failure Mode and Effect Analysis (FMEA), decision trees, and brainstorming.&nbsp;A significant chunk of the results of these analyses tends to point to human or analyst error (~40-55%). Therefore, some of the typical actions companies have taken are adopting digital systems to reduce documentation error, putting in next-generation analytical testing technology, automating a of few of the quality processes, increasing the level of supervision in the lab, increasing the training of analysts and addition of resources to reduce the load on the system.&nbsp;<figure class="image"><img style="aspect-ratio:16668/12347;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-4-01_1733242679.jpg" width="16668" height="12347"></figure><img src="https://qclab.app/wp-content/uploads/2023/06/Typical-results-of-analysis-of-sources-of-error.png" alt="">However, experience has shown many of these companies that these steps (always quite expensive in terms of time or money or both), while offering some improvement, do not help sustain high-quality standards consistently. After a while, any improvement that accrued stagnates, or even more perplexingly, when something improves, something else seems to deteriorate. Moreover, FDA has increasingly been criticizing the finding of ‘human error’ as the conclusion of root cause analysis as limited or shallow and has been urging companies to take a deeper look.&nbsp;<figure class="image"><img style="aspect-ratio:16668/10100;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-5-01_1733242692.jpg" width="16668" height="10100"></figure><h5>The real root cause: Cognitive overload</h5><figure class="image"><img style="aspect-ratio:16668/6058;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-6-01_1733242720.jpg" width="16668" height="6058"></figure>A closer study of the testing environment in pharma companies will indicate that the analysts are often under a situation of significant ‘Cognitive Overload’. The analysts have the responsibility to<ul><li>conduct all activities of assigned tests as per the TDS (Test Data Sheet) - i.e. collect glassware and documents, arrange for chemicals and reagents, ensure the validity of all solutions prepared till tests are complete, select appropriate equipment (e.g., column), manage instruments, etc. </li><li>generate an audit trail for which they also have to record the equipment used. </li><li>concurrently record various observations in TDS and maintain a separate checklist to ensure no steps are missed.&nbsp;</li></ul>Skips and misses: All this the analysts have to manage in an eight-hour shift by switching between various stages of testing (instrument setting/monitoring, solution preparation, mobile phase, collecting glassware, checking/arranging resources, etc.) and by trying to take advantage of the natural waiting time in some of these stages. Unfortunately, the human brain finds such a balancing act and this level of multi-tasking very difficult to manage. Therefore, occurrences of inadvertent skips and misses became inevitable.Systemic error masked as human error: In addition to such human errors, testing environments also tend to have systemic errors due to<ul><li>missing information in the SOPs set or because of inadequately documented SOPs.</li><li>a process gap or due to a gap in the testing method</li></ul>However, when faced with a melee of different kinds of problems cropping up daily, it is difficult for managers to correctly infer and assign real causality for these errors. So, in this confusion, even systemic errors are mistaken for human error. This inevitably leads to frequent-finger pointing, stress and inability to take timely corrective actions.<figure class="image"><img style="aspect-ratio:16668/11569;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-7-01_1733242736.jpg" width="16668" height="11569"></figure>Direction of solution:Based on these insights, it is obvious that the only option is to first address the cognitive overload in the system to bring down real manual errors to minimal levels. Then, the systemic errors due to incorrect methods followed, unclear procedures, etc., will become visible, and actions can be taken to rectify them.&nbsp;While this logic is unrefutably simple, implementing a system-wide, counterintuitive solution that can significantly reduce the cognitive load on analysts without sacrificing overall productivity is obviously a huge challenge. The key to this is to release capacity by identifying and eliminating significant wastages in the analyst’s activities. Research by Vector has shown that the level of analyst capacity wastage can be as high as 40% in a typical pharma lab.&nbsp;<figure class="image"><img style="aspect-ratio:16668/18428;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-8-01_1733242750.jpg" width="16668" height="18428"></figure>The ‘flow’ focussed solution that Vector implements to eliminate these wastages and for release capacity serve a dual purpose. On the one hand it enables the released capacity to be used for controlling the loading of analysts, and on the other, it will reset the company’s quality practices to a much higher level of rigour. For instance, improving the STPs (Standard Testing Procedures) by detailing them more thoroughly to remove elements of subjectivity can ensure that a large number of systematic errors are eliminated.&nbsp;<figure class="image"><img style="aspect-ratio:16668/11764;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-9-01_1733242761.jpg" width="16668" height="11764"></figure>A few pioneering companies have implemented this new approach. Within a few months, they could significantly reduce invalid OOS and bring down lab incidents! Some salient details of the results of the implementation achieved with a major multi-national pharma company’s labs in a year are as below:&nbsp;<figure class="image"><img style="aspect-ratio:16668/9607;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-10-01_1733242775.jpg" width="16668" height="9607"></figure><img src="https://qclab.app/wp-content/uploads/2023/06/Parameter-and-improvement.png" alt="">If more companies address cognitive overload, which is the true root cause of their quality issues, it can bring down quality-related inconsistencies and keep companies ‘inspection ready’ at all times. With that, one is sure to see a dramatic dip in the warning letters the FDA has to issue.&nbsp;

Many generic pharma companies continue to struggle with high levels of invalid OOS and lab incidents, making them vulnerable to adverse observations from the US FDA. Often, 'analyst error' is cited as the reason, but the real reason is something else.

Getting to the true root of lab quality problems

“If a factory is torn down, but the rationality that produced it is left standing, then that rationality will simply produce another factory.” Robert Pirsig, Zen and the art of motorcycle managementWarning letters and their impactAn analysis of the number of warning letters issued by USFDA over the years [1] to pharmaceutical companies across the globe has been increasing over the years.<figure class="image"><img style="aspect-ratio:16668/11669;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-1-01_1733242587.jpg" width="16668" height="11669"></figure>In the warning letter, the FDA makes it clear that the concerned company must correct the problem and provide directions and a timeframe for the company to inform the FDA of their plans for correction. Failure to address the FDA’s concerns can lead to enforcement actions that have significant repercussions as well as product liability exposure. Therefore when a warning letter is received, company employees, especially senior management (who are already very busy), scramble to address it within the stipulated time frame.It is estimated that a single warning letter leads to a loss of approx. 900 man-hours across the hierarchy. This increases exponentially if multiple warning letters are received simultaneously. It has to be noted that this will be at the cost of progress on their routine, ongoing tasks.&nbsp;<figure class="image"><img style="aspect-ratio:16668/10032;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-2-01_1733242600.jpg" width="16668" height="10032"></figure><img src="https://qclab.app/wp-content/uploads/2023/06/Estimation-of-time-needed-to-address-a-single-warning-letter.png" alt="">After this marathon, the remediation procedures that FDA expects companies to implement can be even more expensive than complying in the first place. Moreover, there are long-term repercussions in terms losing credibility with regulators - not just the FDA but also other global regulators, leading to increased scrutiny and more inspections. In case of repeat offenders, they often have to pay hefty fines and sign a consent decree of permanent injunction that will bind them to be compliant in perpetuity. All this can impact the company’s business/financial performance, affect company valuations, and reduce the overall reputation.&nbsp;The problemThe major reasons for FDA warning letters are not unknown. About 50% of FDA warning letters pinpoint CAPA (Corrective Action and Preventive Action) failures [2]. CAPA failures also show up year after year in these warning letters. The FDA also clearly indicates FDA that most of these CAPA failures are a failure of root cause analysis.&nbsp;<figure class="image"><img style="aspect-ratio:16668/8279;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-3-01_1733242664.jpg" width="16668" height="8279"></figure>What does not work well?&nbsp;So, over the years, pharma labs have used multiple techniques to identify the root cause so that they can take the necessary actions to improve their quality performance. The popular techniques employed include 5-Whys, Fishbone diagrams, Pareto charts, Failure Mode and Effect Analysis (FMEA), decision trees, and brainstorming.&nbsp;A significant chunk of the results of these analyses tends to point to human or analyst error (~40-55%). Therefore, some of the typical actions companies have taken are adopting digital systems to reduce documentation error, putting in next-generation analytical testing technology, automating a of few of the quality processes, increasing the level of supervision in the lab, increasing the training of analysts and addition of resources to reduce the load on the system.&nbsp;<figure class="image"><img style="aspect-ratio:16668/12347;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-4-01_1733242679.jpg" width="16668" height="12347"></figure><img src="https://qclab.app/wp-content/uploads/2023/06/Typical-results-of-analysis-of-sources-of-error.png" alt="">However, experience has shown many of these companies that these steps (always quite expensive in terms of time or money or both), while offering some improvement, do not help sustain high-quality standards consistently. After a while, any improvement that accrued stagnates, or even more perplexingly, when something improves, something else seems to deteriorate. Moreover, FDA has increasingly been criticizing the finding of ‘human error’ as the conclusion of root cause analysis as limited or shallow and has been urging companies to take a deeper look.&nbsp;<figure class="image"><img style="aspect-ratio:16668/10100;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-5-01_1733242692.jpg" width="16668" height="10100"></figure><h5>The real root cause: Cognitive overload</h5><figure class="image"><img style="aspect-ratio:16668/6058;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-6-01_1733242720.jpg" width="16668" height="6058"></figure>A closer study of the testing environment in pharma companies will indicate that the analysts are often under a situation of significant ‘Cognitive Overload’. The analysts have the responsibility to<ul><li>conduct all activities of assigned tests as per the TDS (Test Data Sheet) - i.e. collect glassware and documents, arrange for chemicals and reagents, ensure the validity of all solutions prepared till tests are complete, select appropriate equipment (e.g., column), manage instruments, etc. </li><li>generate an audit trail for which they also have to record the equipment used. </li><li>concurrently record various observations in TDS and maintain a separate checklist to ensure no steps are missed.&nbsp;</li></ul>Skips and misses: All this the analysts have to manage in an eight-hour shift by switching between various stages of testing (instrument setting/monitoring, solution preparation, mobile phase, collecting glassware, checking/arranging resources, etc.) and by trying to take advantage of the natural waiting time in some of these stages. Unfortunately, the human brain finds such a balancing act and this level of multi-tasking very difficult to manage. Therefore, occurrences of inadvertent skips and misses became inevitable.Systemic error masked as human error: In addition to such human errors, testing environments also tend to have systemic errors due to<ul><li>missing information in the SOPs set or because of inadequately documented SOPs.</li><li>a process gap or due to a gap in the testing method</li></ul>However, when faced with a melee of different kinds of problems cropping up daily, it is difficult for managers to correctly infer and assign real causality for these errors. So, in this confusion, even systemic errors are mistaken for human error. This inevitably leads to frequent-finger pointing, stress and inability to take timely corrective actions.<figure class="image"><img style="aspect-ratio:16668/11569;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-7-01_1733242736.jpg" width="16668" height="11569"></figure>Direction of solution:Based on these insights, it is obvious that the only option is to first address the cognitive overload in the system to bring down real manual errors to minimal levels. Then, the systemic errors due to incorrect methods followed, unclear procedures, etc., will become visible, and actions can be taken to rectify them.&nbsp;While this logic is unrefutably simple, implementing a system-wide, counterintuitive solution that can significantly reduce the cognitive load on analysts without sacrificing overall productivity is obviously a huge challenge. The key to this is to release capacity by identifying and eliminating significant wastages in the analyst’s activities. Research by Vector has shown that the level of analyst capacity wastage can be as high as 40% in a typical pharma lab.&nbsp;<figure class="image"><img style="aspect-ratio:16668/18428;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-8-01_1733242750.jpg" width="16668" height="18428"></figure>The ‘flow’ focussed solution that Vector implements to eliminate these wastages and for release capacity serve a dual purpose. On the one hand it enables the released capacity to be used for controlling the loading of analysts, and on the other, it will reset the company’s quality practices to a much higher level of rigour. For instance, improving the STPs (Standard Testing Procedures) by detailing them more thoroughly to remove elements of subjectivity can ensure that a large number of systematic errors are eliminated.&nbsp;<figure class="image"><img style="aspect-ratio:16668/11764;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-9-01_1733242761.jpg" width="16668" height="11764"></figure>A few pioneering companies have implemented this new approach. Within a few months, they could significantly reduce invalid OOS and bring down lab incidents! Some salient details of the results of the implementation achieved with a major multi-national pharma company’s labs in a year are as below:&nbsp;<figure class="image"><img style="aspect-ratio:16668/9607;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ls-article-1-img-10-01_1733242775.jpg" width="16668" height="9607"></figure><img src="https://qclab.app/wp-content/uploads/2023/06/Parameter-and-improvement.png" alt="">If more companies address cognitive overload, which is the true root cause of their quality issues, it can bring down quality-related inconsistencies and keep companies ‘inspection ready’ at all times. With that, one is sure to see a dramatic dip in the warning letters the FDA has to issue.&nbsp;&nbsp;

How can Indian CROs reduce the number of observations and deviations observed during the studies by 40%-50% and generate the final integrated report 25%-35% faster with the same resources while protecting the quality of reports? Find out

Agile CROs can fly high

New products are vital for the growth of companies. Increased competition from other companies, changing consumer behaviour, advancements in technology, ensuring freshness of product offerings, diversification of risk, etc. are some of the reasons why new products have to be launched.&nbsp;In environments where market dynamics are rapidly changing, a company is considered healthy and growing only if at least 25%-30% of their overall sales is accrued from their new productsi. This is expected to be significantly higher for companies that deal with lifestyle or technology products. So, firms put in a lot of effort into understanding the market and try to continuously develop new products. However, according to research by Clayton Christensen, Harvard Business School Professor and renowned author, over 30,000 new products are introduced into the market every year, and 95% of them failii.<figure class="image"><img style="aspect-ratio:1000/1000;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//1_1712575368.png" width="1000" height="1000"></figure>What is often not realized is that the success of any new product is dependent not only on its ideation and development stage, but also on the way it is launched in the market. Even a revolutionary product can fail. 75% of consumer-packaged goods and retail products fail to reach the minimum sales expectations after launch. And products that start out strong may also have trouble sustaining success.&nbsp;This article will examine the challenges companies face while launching a new product and the tactics needed to ensure that new products of a company have the best opportunity to succeed and sustain in the market.&nbsp;NPL – The ChallengesWhile there could be numerous reasons for products to fail (e.g. legal issues, socio-cultural mismatch, product falls short of claims, etc.), the major cause of failure, for otherwise acceptable new products, tend to be associated with scaling up or rolling out.&nbsp;So, if we did a postmortem of a typical failed product, you are likely to see the following issues:<ul><li>Lack of visibility on the shelves at retail counters: The newly launched product is not getting the right placements (both in terms of quantum and the type of outlet), or after getting the required placements, they are not getting the right visibility. (Note: Products are usually launched with considerable fanfare, ATL/BTL activities to support it. But even if these succeed in catching the customer’s attention, in most cases these customers will not go beyond their regular, known outlets to try and buy this product).</li><li>Customers could not get the product in many places: Even though the product could be placed in relevant retail outlets and made visible, it became unavailable very soon, and the vast majority of customers never got the chance to even see it (let alone buy it)</li><li>Delay in addressing the feedback received from the market: There were pockets of customers giving feedback about the new product/ processes that, if included, could have prevented the demise of the product. However, the company could not act on this in time.</li><li>Customers could not get sufficient product information: Customers did not get a chance to understand how to use the product (a new product category), or the customers did not understand the products’ new features. This led to a loss of interest from consumers.&nbsp;</li></ul>These indicate that if you don’t scale your supply chain quickly, become available consistently, course correct where needed and grab customer loyalty, your product is toast. Further, your competition may launch its own version and walk away with the market. But how can we ensure that these issues don’t happen during/after launch?To identify a solution, we must first understand the nature of new product launches in greater detail.What is the real issue?The most important characteristic of new product launches is that the consumer’s response to the new product is uncertain. Even though the product may have gone through a market research phase, reality is the only true test of consumer willingness to adopt a new product, and there is no trend data available to predict potential sales.&nbsp;<figure class="image"><img style="aspect-ratio:1000/1000;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//2_1712575404.png" width="1000" height="1000"></figure>Because of this, companies are in perpetual dilemma when it comes to launching a new product – ‘Do they take a cautious approach and launch the product in a select few territories, or do they adopt the big bang strategy and launch it across all their POS?’. Both have pros and cons. A smaller launch allows companies to test the trend in demand. Moreover, incorporating any changes to the product or processes without affecting the brand’s reputation is easier if the initial launch is limited. However, a big bang launch means companies can enjoy the first mover advantage in all geographies and increase all sales opportunities before the competition gets an inkling.&nbsp;However, very often, this choice is taken out of the hands of companies. Delays in new product development of the products and the threat of missing the appropriate timing/launch window (could be the beginning of a season, a festival, etc.) result in pressure to launch the product when it is ready across as many territories as possible. The risks of this are easily imaginable, though. The bigger the scale of the launch, the higher the level of uncertainty of demand. The sales team also has to be proportionately bigger to cater to this scale of launch. With very little time available to impart proper training to the sales team, the USP of the product is not effectively communicated to the potential consumer of the product. Moreover, there is very little focus on responding to the feedback provided by the consumers. And, in this rush, the supply chain has also not been equipped to respond to demand fluctuations. This increases the possibility of product shortages in some areas where it is selling well (even though it is available in excess in other parts of the supply chain). Patchy availability of the products eventually puts off consumers. This leads to poor adoption of the product and the company discarding the product as unpopular.&nbsp;Product failures create a vicious cycle for companies – as products fail more often than not, there is greater pressure to develop more new products to ensure the company’s growth! So, finding a way to address these challenges and improve the typical hit ratio of product launches is imperative.&nbsp;<figure class="image"><img style="aspect-ratio:1000/1000;" src="https://new-stage-be.vectorconsulting.in/storage/editor_uploads//3_1712575424.png" width="1000" height="1000"></figure>Direction of SolutionIt is clear that reducing the extent of demand uncertainty during a new product launch will help improve its effectiveness. The best way to reduce uncertainty to have better control over the supply chain/sales team readiness is to launch new products in a phased manner - i.e., stagger the rollout across territories/POS.&nbsp;Ensuring the effectiveness of new product launches&nbsp;Staggering the rollout across territories/POS helps companies take the required steps to ensure the effectiveness of new product launches:&nbsp;<ol><li>Reduces demand uncertainty by testing the product: For this, the territories and POS should be selected in such a manner that there is adequate representation; this will allow the company to check whether the product is working in those areas before a full roll-out. Care also has to be taken to ensure that the product is displayed well (by defining the percentage of capital and space for the new product) and that there is continuous availability of the new product at the POS.</li><li>Align the supply chain in line with expected demand: This is because when the roll-out is phased out:</li><li>Manufacturing capacity can be stepped up slowly and aligned in line with the demand.</li><li>The distribution channel can ensure adequate stocks for display and repeat sales where there are more sales.</li><li>There is now even the possibility to ensure buffer capacity to manage any sudden spike in demand.</li><li>Provide adequate training: With this approach, challenges and overheads related to training will also come down. A relatively smaller sales team to be trained before launch, and so the quality of the training improves, and one can expect improved adherence to your sales strategy, communication guidelines, etc.</li><li>Capacity to analyse and respond to the feedback: In a staggered roll-out, the system has enough capacity to focus on and respond to the feedback provided by the early consumers for both the product and the marketing collaterals. This can help limit the exposure of the product’s issues to a small set of customers, thereby, preventing a negative perception of the new product to a wider audience. One also will have the agility to resolve these issues in a timely manner, resulting in greater customer satisfaction levels with the new product. Collecting and responding to information on marketing collaterals can help align the marketing spends as per market requirements.&nbsp;</li></ol>Next stepsThe learnings gained from one roll-out to be transferred to the next roll-out. And the sales team already trained on the product initially can be utilised to further train other teams in other territories during this scale-up. Thus, the entire sales team will be better trained to communicate the product’s USP/features effectively and help customers adopt the product. Moreover, since the company can implement customer feedback into the product and processes in a timely manner, the brand can quickly gain customer trust and loyalty.&nbsp;When more and more products are launched successfully, the pressure on NPD comes down, and they can work in a more focused manner on a more considered number of new products. This will allow them to help launch products in a timely manner reducing pressure on having to take a big bang approach to new product launches.&nbsp;What to expect?Implement this new product launch strategy and significant improvement in the success ratio of new product launches is virtually guaranteed (at least 30% improvement in the number of hits), and the company can expect ~ 50% increase in the contribution of new products into overall sales. Once consistent availability of the products across all potential outlets continues to be assured, find out how by clicking on this <a target="_blank" rel="noopener noreferrer" href="http://new-stage.vectorconsulting.in/en/research-and-publication/articles/managing-distribution-chain-is-there-a-better-way-than-gazing-the-crystal-ball/">link</a>, the product life of each new product is also expected to improve, accruing more returns for the company.&nbsp;&nbsp;&nbsp;

According to research, ~95% of new product launches fail. How can companies improve the success rate of their new product launches?

Acing new product launches

New products are vital for the growth of companies. Increased competition from other companies, changing consumer behaviour, advancements in technology, ensuring freshness of product offerings, diversification of risk, etc. are some of the reasons why new products have to be launched.&nbsp;In environments where market dynamics are rapidly changing, a company is considered healthy and growing only if at least 25%-30% of their overall sales is accrued from their new productsi. This is expected to be significantly higher for companies that deal with lifestyle or technology products. So, firms put in a lot of effort into understanding the market and try to continuously develop new products. However, according to research by Clayton Christensen, Harvard Business School Professor and renowned author, over 30,000 new products are introduced into the market every year, and 95% of them failii.<figure class="image"><img style="aspect-ratio:4000/3490;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-1-img1_1733797723.jpg" width="4000" height="3490"></figure>What is often not realized is that the success of any new product is dependent not only on its ideation and development stage, but also on the way it is launched in the market. Even a revolutionary product can fail. 75% of consumer-packaged goods and retail products fail to reach the minimum sales expectations after launch. And products that start out strong may also have trouble sustaining success.&nbsp;This article will examine the challenges companies face while launching a new product and the tactics needed to ensure that new products of a company have the best opportunity to succeed and sustain in the market.&nbsp;NPL – The ChallengesWhile there could be numerous reasons for products to fail (e.g. legal issues, socio-cultural mismatch, product falls short of claims, etc.), the major cause of failure, for otherwise acceptable new products, tend to be associated with scaling up or rolling out.&nbsp;So, if we did a postmortem of a typical failed product, you are likely to see the following issues:<ul><li>Lack of visibility on the shelves at retail counters: The newly launched product is not getting the right placements (both in terms of quantum and the type of outlet), or after getting the required placements, they are not getting the right visibility. (Note: Products are usually launched with considerable fanfare, ATL/BTL activities to support it. But even if these succeed in catching the customer’s attention, in most cases these customers will not go beyond their regular, known outlets to try and buy this product).</li><li>Customers could not get the product in many places: Even though the product could be placed in relevant retail outlets and made visible, it became unavailable very soon, and the vast majority of customers never got the chance to even see it (let alone buy it)</li><li>Delay in addressing the feedback received from the market: There were pockets of customers giving feedback about the new product/ processes that, if included, could have prevented the demise of the product. However, the company could not act on this in time.</li><li>Customers could not get sufficient product information: Customers did not get a chance to understand how to use the product (a new product category), or the customers did not understand the products’ new features. This led to a loss of interest from consumers.&nbsp;</li></ul>These indicate that if you don’t scale your supply chain quickly, become available consistently, course correct where needed and grab customer loyalty, your product is toast. Further, your competition may launch its own version and walk away with the market. But how can we ensure that these issues don’t happen during/after launch?To identify a solution, we must first understand the nature of new product launches in greater detail.What is the real issue?The most important characteristic of new product launches is that the consumer’s response to the new product is uncertain. Even though the product may have gone through a market research phase, reality is the only true test of consumer willingness to adopt a new product, and there is no trend data available to predict potential sales.&nbsp;<figure class="image"><img style="aspect-ratio:4000/3190;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-1-img-2_1733797733.jpg" width="4000" height="3190"></figure>Because of this, companies are in perpetual dilemma when it comes to launching a new product – ‘Do they take a cautious approach and launch the product in a select few territories, or do they adopt the big bang strategy and launch it across all their POS?’. Both have pros and cons. A smaller launch allows companies to test the trend in demand. Moreover, incorporating any changes to the product or processes without affecting the brand’s reputation is easier if the initial launch is limited. However, a big bang launch means companies can enjoy the first mover advantage in all geographies and increase all sales opportunities before the competition gets an inkling.&nbsp;However, very often, this choice is taken out of the hands of companies. Delays in new product development of the products and the threat of missing the appropriate timing/launch window (could be the beginning of a season, a festival, etc.) result in pressure to launch the product when it is ready across as many territories as possible. The risks of this are easily imaginable, though. The bigger the scale of the launch, the higher the level of uncertainty of demand. The sales team also has to be proportionately bigger to cater to this scale of launch. With very little time available to impart proper training to the sales team, the USP of the product is not effectively communicated to the potential consumer of the product. Moreover, there is very little focus on responding to the feedback provided by the consumers. And, in this rush, the supply chain has also not been equipped to respond to demand fluctuations. This increases the possibility of product shortages in some areas where it is selling well (even though it is available in excess in other parts of the supply chain). Patchy availability of the products eventually puts off consumers. This leads to poor adoption of the product and the company discarding the product as unpopular.&nbsp;Product failures create a vicious cycle for companies – as products fail more often than not, there is greater pressure to develop more new products to ensure the company’s growth! So, finding a way to address these challenges and improve the typical hit ratio of product launches is imperative.&nbsp;<figure class="image"><img style="aspect-ratio:4000/3810;" src="https://backend.vectorconsulting.in/storage/editor_uploads//cg-article-1-img-3_1733797754.jpg" width="4000" height="3810"></figure>Direction of SolutionIt is clear that reducing the extent of demand uncertainty during a new product launch will help improve its effectiveness. The best way to reduce uncertainty to have better control over the supply chain/sales team readiness is to launch new products in a phased manner - i.e., stagger the rollout across territories/POS.&nbsp;Ensuring the effectiveness of new product launches&nbsp;Staggering the rollout across territories/POS helps companies take the required steps to ensure the effectiveness of new product launches:&nbsp;<ol><li>Reduces demand uncertainty by testing the product: For this, the territories and POS should be selected in such a manner that there is adequate representation; this will allow the company to check whether the product is working in those areas before a full roll-out. Care also has to be taken to ensure that the product is displayed well (by defining the percentage of capital and space for the new product) and that there is continuous availability of the new product at the POS.</li><li>Align the supply chain in line with expected demand: This is because when the roll-out is phased out:</li><li>Manufacturing capacity can be stepped up slowly and aligned in line with the demand.</li><li>The distribution channel can ensure adequate stocks for display and repeat sales where there are more sales.</li><li>There is now even the possibility to ensure buffer capacity to manage any sudden spike in demand.</li><li>Provide adequate training: With this approach, challenges and overheads related to training will also come down. A relatively smaller sales team to be trained before launch, and so the quality of the training improves, and one can expect improved adherence to your sales strategy, communication guidelines, etc.</li><li>Capacity to analyse and respond to the feedback: In a staggered roll-out, the system has enough capacity to focus on and respond to the feedback provided by the early consumers for both the product and the marketing collaterals. This can help limit the exposure of the product’s issues to a small set of customers, thereby, preventing a negative perception of the new product to a wider audience. One also will have the agility to resolve these issues in a timely manner, resulting in greater customer satisfaction levels with the new product. Collecting and responding to information on marketing collaterals can help align the marketing spends as per market requirements.&nbsp;</li></ol>Next stepsThe learnings gained from one roll-out to be transferred to the next roll-out. And the sales team already trained on the product initially can be utilised to further train other teams in other territories during this scale-up. Thus, the entire sales team will be better trained to communicate the product’s USP/features effectively and help customers adopt the product. Moreover, since the company can implement customer feedback into the product and processes in a timely manner, the brand can quickly gain customer trust and loyalty.&nbsp;When more and more products are launched successfully, the pressure on NPD comes down, and they can work in a more focused manner on a more considered number of new products. This will allow them to help launch products in a timely manner reducing pressure on having to take a big bang approach to new product launches.&nbsp;What to expect?Implement this new product launch strategy and significant improvement in the success ratio of new product launches is virtually guaranteed (at least 30% improvement in the number of hits), and the company can expect ~ 50% increase in the contribution of new products into overall sales. Once consistent availability of the products across all potential outlets continues to be assured, find out how by clicking on this <a target="_blank" rel="noopener noreferrer" href="http://new-stage.vectorconsulting.in/en/research-and-publication/articles/managing-distribution-chain-is-there-a-better-way-than-gazing-the-crystal-ball/">link</a>, the product life of each new product is also expected to improve, accruing more returns for the company.&nbsp;&nbsp;&nbsp;

&nbsp;<h5>The dilemma of the CEO of a real estate major</h5>Mr. Mahindra Kumar, CEO of Blu Homes, a major residential real estate company in India, was facing a dilemma. He was under pressure to quickly improve the internal rate of return (IRR) of his projects. The problem was “how”.&nbsp;Even before the pandemic dealt a painful blow, the pressure on the real estate sector was evident to all [1]. Post-2013, sales of Blu Homes had stalled, unsold inventory had piled up, and the Internal Rate of Return (IRR) from the projects had dropped from 18%-21% realised between 2007-11 to 13%-17%; moreover, the debt burden had more than trebled over the same period.&nbsp;The good news, however, was that his company had emerged whole from the COVID phase. Much of the inventory could be sold even during this time because of government subsidy support [2]. Post-COVID the company was now achieving YoY sales growth of 68%. Over the past two years Tier 2 and Tier 3 cities had emerged as hot spots for them, and they were setting unprecedented sales benchmarks.&nbsp;Despite the global economic slowdown, this positive momentum was expected to continue, and the sector is projected to grow to one trillion US dollars by 2030 (see figure below [3]).&nbsp;<figure class="image"><img style="aspect-ratio:16668/11858;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-1-01_1732343241.jpg" width="16668" height="11858"></figure>What more, there was a prevailing demand-supply gap in all segments (see figure below [4]).&nbsp;<figure class="image"><img style="aspect-ratio:16668/12757;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-1_1732343548.jpg" width="16668" height="12757"></figure>Naturally, the board of Blu Homes saw this as a clear opportunity to mop up this demand, recoup the business, put its profits on a growth trajectory and offer healthier returns. The threat was always there that if the company continued to only make IRR to the tune of 13-17% in its projects, investors might pull out. So, the pressure was now on Mr. Mahindra Kumar to ensure a significant jump in IRR. However, he was not sure how. For improving IRR, it was not enough to improve sales; in addition, Blu Homes must ensure that, while delivering each project, they&nbsp;1. Reduce costs and improve margins&nbsp;2. Improve cash flow by faster billing&nbsp;The key to both of these is primarily the timely completion of projects. If projects are finished on time as planned, customers can be billed faster, and un-budgeted expenses due to project elongation can be avoided.&nbsp;The irony was that Blu Homes has ALWAYS delivered projects on or before the promised deadlines (protected by the Real Estate Regulatory Authority - RERA). However, the company rarely met the targeted IRR in these projects, even during the ‘good times’. And this was not only true for Blu Homes - it is an industry-wide phenomenon!&nbsp;To understand why this happens, one needs to understand how companies in this unique environment typically function.&nbsp;The typical way of project management in a real estate projectProjects in the Real Estate industry in India start off with three due/completion dates! Strange, but true. With the government bringing in RERA laws that impose stringent penalties on developers for delays in finishing projects, the industry has come up with RERA due dates, which are significantly buffered to avoid being penalised [5]. Another due date is the internally budgeted due date, which, if met, meets the IRR targets set by the developer. The third due date, which is ‘informally’ promised to end customers, is somewhere in between these two.&nbsp;So, why does the industry use these 3 due dates? The reason is that real estate is an industry plagued with project delays and unfulfilled promises. Recent research has indicated that, despite conservative and buffered dates, as many as 500,000 Homes worth Rs. 4.48 lakh crores are stuck in just seven micro markets of India [6].&nbsp;<figure class="image"><img style="aspect-ratio:16668/18669;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-2-01-01_1732343964.jpg" width="16668" height="18669"></figure>With such delays being the norm rather than the exception, developers know that they have to buffer any external commitment in order to maintain their reputation and gain or maintain market share.Why should there be delays, one may ask?If you ask any developer about delays, you will be met with a laundry list of reasons, most of them pointing to some external agency and hence, unavoidable. Interestingly, each of the agencies involved has its own reasons related to the developer or other agencies.&nbsp;<figure class="image"><img style="aspect-ratio:1600/1600;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//typical-reasons-for-delay-according-to-different-stakeholders_1750951303.jpeg" width="1600" height="1600"></figure>However, delays in most real estate projects follow an interesting storyline.The real cause of delays in real estate projectsThe lifecycle of a typical real estate project can be categorised into three key stages&nbsp;1. Pre-Construction: This stage involves the completion of all activities required before the commercial launch of the project, including:&nbsp;<ul><li>Business case approvals and land deal finalisation</li><li>Detailed design completion and issuance of goods for construction drawings to start construction</li><li>Project RERA approval and other necessary statutory approvals to start construction</li><li>Set-up of sales office/mock-up units for customer visits&nbsp;</li></ul>2. Core &amp; Shell: This stage involves the construction of buildings’ RCC frame and internal partition walls for the units. Typically, most developers engage a dedicated contractor to work on the Core and Shell.&nbsp;3. Finishing: This includes all work till the final handover of units to end customers. Plastering, waterproofing, flooring/tiling, electrical works, firefighting equipment installation, plumbing, painting, putting up doors &amp; windows, railings etc. are typical activities executed inside the residential units, in the corridors, common areas, shafts and utilities. Assessing delays in different stages of the project indicates that severe delays start to manifest in the finishing stage of the project.&nbsp;<figure class="image"><img style="aspect-ratio:16668/13746;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-4-01-01-01_1732344963.jpg" width="16668" height="13746"></figure>While Core &amp; Shell works are typically executed by a single specialized agency/contractor, what differentiates the finishing stage from the upstream stages are the following facts:&nbsp;<ul><li>Multiple specialised agencies: Finishing work needs intervention of multiple specialised agencies/sub-contractors in the limited space of a floor/apartment/unit</li><li>Inter-dependent activities: Activities to be performed by each specialised agency are dependent on clean front hand-over by another specialised agency or agencies. Moreover, technical dependencies are such that most finishing agencies have to visit a work-front multiple times. For e.g., the plastering contractor completes the plaster for maximum wall area in the first pass but re-visits the wall for final plastering after floor skirting and door/windows installation is completed</li><li>Volume-based contracts: For all specialised agencies, billing is based on the volume of work executed with a small percentage withheld as retention amount and linked to final completion and handover to the developer.&nbsp;</li></ul>Given the above realities of the real estate environment, agencies cherry-pick high billing activities in each work front in order to maximise billing to support its working capital requirements. Often, high effort and low billing value activities are missed out/delayed, leading to unclean front handover [8] to the next specialised agencies. Downstream agencies, despite unclean handovers, will start working on the front in order to utilise their resources and maximise their billing.&nbsp;However, given the unclean handovers, agencies face multiple interruptions in completing the fronts. And when there are interruptions, two things happen: a) it increases the overall lead time for completion of that front and creates a higher waiting time for the next agency to start work and b) the labour (of the agency facing interruption) may become idle. So, in order to utilise their resources fully, often the contractors are forced to start working on whatever is available wherever it is available (preferably with high billing), again with partial preparation. When this behaviour cascades across all processes involved, we end up having multiple contractors engaged in the same work area without having a clean handover six from one agency to the next. This chaotic way of functioning results, many times, in quality compromise.&nbsp;Inevitably, these quality problems come back to bite you in the form of snag lists or punch points. Now, contractors are reluctant to mobilise manpower for such activities. As mentioned earlier, they tend to prefer higher billing activities in new work fronts over handling the snag list, which may require high labour hours but yield lower billing. Therefore, very often, the company has to persuade the contractors by agreeing to higher hourly rates to get these snag list points closed. In this process, not only does the developer end up paying twice for the same work, but also suffers as the elapsed time for each work front closure elongates.&nbsp;<figure class="image"><img style="aspect-ratio:16668/19082;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-5-01-1-01-01_1732344935.jpg" width="16668" height="19082"></figure>The way outAs we have seen, when incomplete work fronts are handed over to the next stage, this leads to wastages in the form of rework, cost increases and leads to significant delays. Therefore, the only way to break out of this vicious loop is to make sure that clean handovers happen between two functions/contactors/agencies at all times. Since the pressure to maximise billing forces incomplete handovers, the only solution is for every agency to complete all their activities as per plan or earlier (i.e. in the shortest possible time). The question is, how do we ensure this?&nbsp;To resolve this conundrum, let’s examine, the key elements required to execute the project in the shortest possible time. The answer is quite intuitive. If the project has all the material needed, tools, clearances etc required to complete it (a full kit) and is resourced with adequate manpower in the right mix and quantity, work can progress without any interruptions or stoppages. No surprises here, right?&nbsp;Now, if we wait for the full kit to be formed for the entire project or a large phase of the project before starting it, the time to complete the full kit will be so significant that it will surely delay the project and be extremely wasteful in terms of resources. On the other hand, if we plan for full kitting of too small a phase of the project, this will lead to chaos as the work will progress faster than the time to arrange the full kit for that phase. Consequently, the pressure of time will again force the next phase to start without the completion of an earlier phase-back to the vicious loop.&nbsp;The answer lies somewhere in between. Based on project size and type, a part of the project, a ‘work bundle’ has to be identified in such a way that allows for adequate time to arrange the full kit and at the same time allows fast/clean handover to the next function. What next?&nbsp;The flow modelFor these work bundles to be completed quickly and in order to ensure clean handovers to happen between every stage a flow model needs to be used. What is a flow model? Think of a manufacturing shop, where there is input of raw materials and this input flows through the shopfloor, being processed at different workstations, and comes out as finished goods. All this happens in a rhythm. The flow model in real estate project management mimics this – a work bundle flows in, is processed by resources and a completed work bundle is passed on to the next set of resources. When all the work bundles flow through and are completed one after the other, the project gets completed.&nbsp;For this flow to work on a project site, it requires a set of execution rules to be defined. However, before doing that, some understanding is needed with respect to technical dependencies between agencies and the amount of natural interruption [9] happening in the course of the project. Functions [10] that are executed by various agencies can be classified into two types. One type, called the Primary function, has a high touch time for tasks and low natural interruptions. The second called the Secondary function, has low touch time and high natural interruptions. A combination of primary and secondary functions (and the resources responsible for completing these) is termed a Cluster. The flow line planned in any real estate project will consist of several such clusters laid out in a sequence, based on their technical dependencies.In order to ensure fast and clean completion, a work bundle should be taken up for working by a cluster only if the entry criteria, consisting of full kit, maximum resourcing, closure of earlier work bundle and any other pre-defined item, is met. Similarly, a work bundle is considered closed only if a pre-defined exit criteria is met. Further, the number of work bundles to be taken up depends on resourcing- i.e. the WIP of work fronts or work bundles is limited based on available capacity to prevent bad multi-tasking and consequent task time elongation. Once started, a cluster can go to the next work bundle only after completing one work bundle from the current WIP. This is called the One Out-One In rule in project management. In order to ensure that work does not start without full kits, a bank of full kits for subsequent work bundles must be made ready for a cluster to work on.&nbsp;Once these rules are in place, the flow model will work, in rhythm, and the project will progress according to this rhythm. The only thing that can upset this rhythm is the delay in resolving issues/problems that occur during execution. Generally, an issue remains unresolved only if it requires cross-functional intervention or escalation to someone with higher authority. If resolution does not happen quickly, the elapsed time to close work bundles will increase and that will in turn result in violations of all the flow model rules. Subsequently, the entire system may disintegrate into the earlier chaos.&nbsp;To make sure issues are resolved quickly and protect the flow of work bundles, a system of High Frequency Management (HFM) can be fixed for all stakeholders across or within functions, or hierarchies. If these HFM meetings are at a set pre-defined time and conducted at rhythmic intervals, it will allow stakeholders to be available to resolve issues quickly.&nbsp;When resources work on restricted work fronts, without being idle, with full-kit and when any issue that crops up during the execution of work is being resolved in an aggressively fast manner, the flow of work rapidly increases. With clean handovers, rework and snag lists also reduce significantly.&nbsp;The overall resultThe CEO of Blu Homes is a happy man these days. After implementing the flow model, lead times to handover possession to customers had dramatically come down by about 25% to 30%. Importantly, the company is now able to consistently adhere to budgeted due dates in its projects or finish earlier. This led to a dramatic improvement in IRR to the tune of 4%-6.5% in their projects.&nbsp;The table below illustrates how IRR improves significantly with just this reduction in lead time.<figure class="image"><img style="aspect-ratio:16668/16527;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-6-01-01_1732344916.jpg" width="16668" height="16527"></figure>As seen in the above example, most Blu Homes projects are of around 3-year (34-month) duration. As can be seen in the table, compared to a typical project execution of theirs from the past, projects in which the Flow Model of project management is employed show significant gains in time at major milestones. With the implementation of the flow line and a full kit process in central functions, to align material, drawing and approval requirements for the sites, projects could gain around three months compared to their earlier way of working while completing the core and shell activities. A further gain of another quarter or so could be made by implementing entry-exit criteria for every agency to ensure a clean handover during the pre-finishing and finishing activity. This was because the number of iterations required by an agency to complete a work bundle came down. Similar benefits of early finish by about a quarter were realised during the finishing phase as well.&nbsp;In addition to protecting the company's profitability, the Flow Model of project management also ensures that the working capital turns of the contractors and vendors improve a win-win-win scenario. However, what thrilled Mr. Mahindra Kumar most was that the new way of project execution yielded not only operational and financial benefits but also simultaneously de-stressed project execution for his whole team and helped build a company environment where work-life balance was good, and employee satisfaction was reflected in the significantly reduced attrition rate.&nbsp;

Using the Flow Model of Project management in residential real estate projects, companies can increase IRR from 17% -21%.

Steps to ensure excellent IRR in real estate projects

&nbsp;<h5>The dilemma of the CEO of a real estate major</h5>Mr. Mahindra Kumar, CEO of Blu Homes, a major residential real estate company in India, was facing a dilemma. He was under pressure to quickly improve the internal rate of return (IRR) of his projects. The problem was “how”.&nbsp;Even before the pandemic dealt a painful blow, the pressure on the real estate sector was evident to all [1]. Post-2013, sales of Blu Homes had stalled, unsold inventory had piled up, and the Internal Rate of Return (IRR) from the projects had dropped from 18%-21% realised between 2007-11 to 13%-17%; moreover, the debt burden had more than trebled over the same period.&nbsp;The good news, however, was that his company had emerged whole from the COVID phase. Much of the inventory could be sold even during this time because of government subsidy support [2]. Post-COVID the company was now achieving YoY sales growth of 68%. Over the past two years Tier 2 and Tier 3 cities had emerged as hot spots for them, and they were setting unprecedented sales benchmarks.&nbsp;Despite the global economic slowdown, this positive momentum was expected to continue, and the sector is projected to grow to one trillion US dollars by 2030 (see figure below [3]).&nbsp;<figure class="image"><img style="aspect-ratio:16668/11858;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-1-01_1732343241.jpg" width="16668" height="11858"></figure>What more, there was a prevailing demand-supply gap in all segments (see figure below [4]).&nbsp;<figure class="image"><img style="aspect-ratio:16668/12757;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-1_1732343548.jpg" width="16668" height="12757"></figure>Naturally, the board of Blu Homes saw this as a clear opportunity to mop up this demand, recoup the business, put its profits on a growth trajectory and offer healthier returns. The threat was always there that if the company continued to only make IRR to the tune of 13-17% in its projects, investors might pull out. So, the pressure was now on Mr. Mahindra Kumar to ensure a significant jump in IRR. However, he was not sure how. For improving IRR, it was not enough to improve sales; in addition, Blu Homes must ensure that, while delivering each project, they&nbsp;1. Reduce costs and improve margins&nbsp;2. Improve cash flow by faster billing&nbsp;The key to both of these is primarily the timely completion of projects. If projects are finished on time as planned, customers can be billed faster, and un-budgeted expenses due to project elongation can be avoided.&nbsp;The irony was that Blu Homes has ALWAYS delivered projects on or before the promised deadlines (protected by the Real Estate Regulatory Authority - RERA). However, the company rarely met the targeted IRR in these projects, even during the ‘good times’. And this was not only true for Blu Homes - it is an industry-wide phenomenon!&nbsp;To understand why this happens, one needs to understand how companies in this unique environment typically function.&nbsp;The typical way of project management in a real estate projectProjects in the Real Estate industry in India start off with three due/completion dates! Strange, but true. With the government bringing in RERA laws that impose stringent penalties on developers for delays in finishing projects, the industry has come up with RERA due dates, which are significantly buffered to avoid being penalised [5]. Another due date is the internally budgeted due date, which, if met, meets the IRR targets set by the developer. The third due date, which is ‘informally’ promised to end customers, is somewhere in between these two.&nbsp;So, why does the industry use these 3 due dates? The reason is that real estate is an industry plagued with project delays and unfulfilled promises. Recent research has indicated that, despite conservative and buffered dates, as many as 500,000 Homes worth Rs. 4.48 lakh crores are stuck in just seven micro markets of India [6].&nbsp;<figure class="image"><img style="aspect-ratio:16668/18669;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-2-01-01_1732343964.jpg" width="16668" height="18669"></figure>With such delays being the norm rather than the exception, developers know that they have to buffer any external commitment in order to maintain their reputation and gain or maintain market share.Why should there be delays, one may ask?If you ask any developer about delays, you will be met with a laundry list of reasons, most of them pointing to some external agency and hence, unavoidable. Interestingly, each of the agencies involved has its own reasons related to the developer or other agencies.&nbsp;<figure class="image"><img style="aspect-ratio:1600/1600;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//typical-reasons-for-delay-according-to-different-stakeholders_1750951303.jpeg" width="1600" height="1600"></figure>However, delays in most real estate projects follow an interesting storyline.The real cause of delays in real estate projectsThe lifecycle of a typical real estate project can be categorised into three key stages&nbsp;1. Pre-Construction: This stage involves the completion of all activities required before the commercial launch of the project, including:&nbsp;<ul><li>Business case approvals and land deal finalisation</li><li>Detailed design completion and issuance of goods for construction drawings to start construction</li><li>Project RERA approval and other necessary statutory approvals to start construction</li><li>Set-up of sales office/mock-up units for customer visits&nbsp;</li></ul>2. Core &amp; Shell: This stage involves the construction of buildings’ RCC frame and internal partition walls for the units. Typically, most developers engage a dedicated contractor to work on the Core and Shell.&nbsp;3. Finishing: This includes all work till the final handover of units to end customers. Plastering, waterproofing, flooring/tiling, electrical works, firefighting equipment installation, plumbing, painting, putting up doors &amp; windows, railings etc. are typical activities executed inside the residential units, in the corridors, common areas, shafts and utilities. Assessing delays in different stages of the project indicates that severe delays start to manifest in the finishing stage of the project.&nbsp;<figure class="image"><img style="aspect-ratio:16668/13746;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-4-01-01-01_1732344963.jpg" width="16668" height="13746"></figure>While Core &amp; Shell works are typically executed by a single specialized agency/contractor, what differentiates the finishing stage from the upstream stages are the following facts:&nbsp;<ul><li>Multiple specialised agencies: Finishing work needs intervention of multiple specialised agencies/sub-contractors in the limited space of a floor/apartment/unit</li><li>Inter-dependent activities: Activities to be performed by each specialised agency are dependent on clean front hand-over by another specialised agency or agencies. Moreover, technical dependencies are such that most finishing agencies have to visit a work-front multiple times. For e.g., the plastering contractor completes the plaster for maximum wall area in the first pass but re-visits the wall for final plastering after floor skirting and door/windows installation is completed</li><li>Volume-based contracts: For all specialised agencies, billing is based on the volume of work executed with a small percentage withheld as retention amount and linked to final completion and handover to the developer.&nbsp;</li></ul>Given the above realities of the real estate environment, agencies cherry-pick high billing activities in each work front in order to maximise billing to support its working capital requirements. Often, high effort and low billing value activities are missed out/delayed, leading to unclean front handover [8] to the next specialised agencies. Downstream agencies, despite unclean handovers, will start working on the front in order to utilise their resources and maximise their billing.&nbsp;However, given the unclean handovers, agencies face multiple interruptions in completing the fronts. And when there are interruptions, two things happen: a) it increases the overall lead time for completion of that front and creates a higher waiting time for the next agency to start work and b) the labour (of the agency facing interruption) may become idle. So, in order to utilise their resources fully, often the contractors are forced to start working on whatever is available wherever it is available (preferably with high billing), again with partial preparation. When this behaviour cascades across all processes involved, we end up having multiple contractors engaged in the same work area without having a clean handover six from one agency to the next. This chaotic way of functioning results, many times, in quality compromise.&nbsp;Inevitably, these quality problems come back to bite you in the form of snag lists or punch points. Now, contractors are reluctant to mobilise manpower for such activities. As mentioned earlier, they tend to prefer higher billing activities in new work fronts over handling the snag list, which may require high labour hours but yield lower billing. Therefore, very often, the company has to persuade the contractors by agreeing to higher hourly rates to get these snag list points closed. In this process, not only does the developer end up paying twice for the same work, but also suffers as the elapsed time for each work front closure elongates.&nbsp;<figure class="image"><img style="aspect-ratio:16668/19082;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-5-01-1-01-01_1732344935.jpg" width="16668" height="19082"></figure>The way outAs we have seen, when incomplete work fronts are handed over to the next stage, this leads to wastages in the form of rework, cost increases and leads to significant delays. Therefore, the only way to break out of this vicious loop is to make sure that clean handovers happen between two functions/contactors/agencies at all times. Since the pressure to maximise billing forces incomplete handovers, the only solution is for every agency to complete all their activities as per plan or earlier (i.e. in the shortest possible time). The question is, how do we ensure this?&nbsp;To resolve this conundrum, let’s examine, the key elements required to execute the project in the shortest possible time. The answer is quite intuitive. If the project has all the material needed, tools, clearances etc required to complete it (a full kit) and is resourced with adequate manpower in the right mix and quantity, work can progress without any interruptions or stoppages. No surprises here, right?&nbsp;Now, if we wait for the full kit to be formed for the entire project or a large phase of the project before starting it, the time to complete the full kit will be so significant that it will surely delay the project and be extremely wasteful in terms of resources. On the other hand, if we plan for full kitting of too small a phase of the project, this will lead to chaos as the work will progress faster than the time to arrange the full kit for that phase. Consequently, the pressure of time will again force the next phase to start without the completion of an earlier phase-back to the vicious loop.&nbsp;The answer lies somewhere in between. Based on project size and type, a part of the project, a ‘work bundle’ has to be identified in such a way that allows for adequate time to arrange the full kit and at the same time allows fast/clean handover to the next function. What next?&nbsp;The flow modelFor these work bundles to be completed quickly and in order to ensure clean handovers to happen between every stage a flow model needs to be used. What is a flow model? Think of a manufacturing shop, where there is input of raw materials and this input flows through the shopfloor, being processed at different workstations, and comes out as finished goods. All this happens in a rhythm. The flow model in real estate project management mimics this – a work bundle flows in, is processed by resources and a completed work bundle is passed on to the next set of resources. When all the work bundles flow through and are completed one after the other, the project gets completed.&nbsp;For this flow to work on a project site, it requires a set of execution rules to be defined. However, before doing that, some understanding is needed with respect to technical dependencies between agencies and the amount of natural interruption [9] happening in the course of the project. Functions [10] that are executed by various agencies can be classified into two types. One type, called the Primary function, has a high touch time for tasks and low natural interruptions. The second called the Secondary function, has low touch time and high natural interruptions. A combination of primary and secondary functions (and the resources responsible for completing these) is termed a Cluster. The flow line planned in any real estate project will consist of several such clusters laid out in a sequence, based on their technical dependencies.In order to ensure fast and clean completion, a work bundle should be taken up for working by a cluster only if the entry criteria, consisting of full kit, maximum resourcing, closure of earlier work bundle and any other pre-defined item, is met. Similarly, a work bundle is considered closed only if a pre-defined exit criteria is met. Further, the number of work bundles to be taken up depends on resourcing- i.e. the WIP of work fronts or work bundles is limited based on available capacity to prevent bad multi-tasking and consequent task time elongation. Once started, a cluster can go to the next work bundle only after completing one work bundle from the current WIP. This is called the One Out-One In rule in project management. In order to ensure that work does not start without full kits, a bank of full kits for subsequent work bundles must be made ready for a cluster to work on.&nbsp;Once these rules are in place, the flow model will work, in rhythm, and the project will progress according to this rhythm. The only thing that can upset this rhythm is the delay in resolving issues/problems that occur during execution. Generally, an issue remains unresolved only if it requires cross-functional intervention or escalation to someone with higher authority. If resolution does not happen quickly, the elapsed time to close work bundles will increase and that will in turn result in violations of all the flow model rules. Subsequently, the entire system may disintegrate into the earlier chaos.&nbsp;To make sure issues are resolved quickly and protect the flow of work bundles, a system of High Frequency Management (HFM) can be fixed for all stakeholders across or within functions, or hierarchies. If these HFM meetings are at a set pre-defined time and conducted at rhythmic intervals, it will allow stakeholders to be available to resolve issues quickly.&nbsp;When resources work on restricted work fronts, without being idle, with full-kit and when any issue that crops up during the execution of work is being resolved in an aggressively fast manner, the flow of work rapidly increases. With clean handovers, rework and snag lists also reduce significantly.&nbsp;The overall resultThe CEO of Blu Homes is a happy man these days. After implementing the flow model, lead times to handover possession to customers had dramatically come down by about 25% to 30%. Importantly, the company is now able to consistently adhere to budgeted due dates in its projects or finish earlier. This led to a dramatic improvement in IRR to the tune of 4%-6.5% in their projects.&nbsp;The table below illustrates how IRR improves significantly with just this reduction in lead time.<figure class="image"><img style="aspect-ratio:16668/16527;" src="https://backend.vectorconsulting.in/storage/editor_uploads//ec-article-1-img-6-01-01_1732344916.jpg" width="16668" height="16527"></figure>As seen in the above example, most Blu Homes projects are of around 3-year (34-month) duration. As can be seen in the table, compared to a typical project execution of theirs from the past, projects in which the Flow Model of project management is employed show significant gains in time at major milestones. With the implementation of the flow line and a full kit process in central functions, to align material, drawing and approval requirements for the sites, projects could gain around three months compared to their earlier way of working while completing the core and shell activities. A further gain of another quarter or so could be made by implementing entry-exit criteria for every agency to ensure a clean handover during the pre-finishing and finishing activity. This was because the number of iterations required by an agency to complete a work bundle came down. Similar benefits of early finish by about a quarter were realised during the finishing phase as well.&nbsp;In addition to protecting the company's profitability, the Flow Model of project management also ensures that the working capital turns of the contractors and vendors improve a win-win-win scenario. However, what thrilled Mr. Mahindra Kumar most was that the new way of project execution yielded not only operational and financial benefits but also simultaneously de-stressed project execution for his whole team and helped build a company environment where work-life balance was good, and employee satisfaction was reflected in the significantly reduced attrition rate.&nbsp;&nbsp;&nbsp;&nbsp;

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