The Hindu Business Line | December 12, 2013
Cashing in on Constraints
Less than a decade ago, Morphy Richards was a small appliances brand that was struggling to find its feet in the Indian market, much like other international players in that space – Braun, Moulinex and T-Fal, to name a few. Many of them have even packed up and left.
But Morphy Richards played a patient waiting game even in trying times. In pre-liberalisation India, the brand was hampered by its inability to import anything of its global range, but could only license its brand name to local manufacturers. It first tied up with a Nashik-based appliances maker Surya. Later Eureka Forbes attempted distributing the brand for a short while. Then, in 2003, the brand tied up with Bajaj Electricals. In its first year, the joint venture managed a paltry turnover of Rs. 2 crore. Ten years later the brand touched Rs. 185 crore of sales growing in the range of 30-35 per cent every year. And Vivek Sharma, Business Head, Morphy Richards, says, "We wanted it to be an ever flourishing upward curve."
Sometime in 2011, top executives of the company attended a session on The Theory of Constraints (TOC). Propagated by Eliyahu M. Goldratt, the theory immediately appealed to them. Elsewhere in the world, especially in the consumer electronics and durables business TOC was something that firms internationally swore by. Apple swears by it. Closer home, companies such as Godrej Appliances have been looking at implementing TOC in their business and even consumer durables retailer Vivek’s has used it effectively, say consultants.
Still, one could question the rationale of Morphy Richards, which was growing at high double digits, to rock the boat. The answer lies in the way sales-led companies function. There are many undesirable practices.
Topping that list is the fact that nearly 60 per cent of the entire month’s sale happens in the last week of any given month. That means most companies and their dealers are sitting on high inventory (relative to production lead times). And there is every possibility of a shortage because of the high month-end skew. These factors lead to low profitability and a low return on investment.
Second, most stock replenishments take place based on the value of goods sold by distributors. So, if a distributor sells Rs. 10 lakh worth of goods in a month, he would find another Rs. 10 lakh worth of goods replenished by company. The problem, as Sharma puts it, was, "You would have sold apples, but be replenished with oranges."
Morphy Richards decided to look at its channel partners differently – both the suppliers at the back end and distributors at the front. "Unless their profits are good, there is no way a company can either sustain its growth or profitability," says Sharma
For the first nine months executives at Morphy Richards focused on the back end where spares and sometimes even final products are sourced – roughly 50 per cent of its product range across 19 categories is sourced from India while the remaining is imported.
In India, vendors typically carried a high inventory of spare parts even when there are no orders in the pipeline. As a result, the stock ages and affects the finish of products. Especially in spares that use rubber, the older it is, the black tends to become grey. "If sourcing is not up to the mark and product availability is not good, customers at the front end are not confident," says Sharma.
So Morphy introduced a system to track the inventory for its spares. Vendors would stock only what was required and their stocks would be fed into a daily reporting system. The result: As vendors were not investing too much in dead stock, their return on inventory was also bound to be better.
The other problem was at the distributor’s end from where stocks proceeded to the marketplace. "Most manufacturers are not bothered about the stock of the distributor. They are only bothered about meeting their targets. High stock is typically the distributor’s problem and hence he will get rid of it, is a common thought" says Puneet Kulraj, Director, Vector Consulting Group who advised Morphy Richards in its TOC implementation.
Morphy Richards, according to Kulraj, wanted to ensure that the distributor came out a winner in this process as it would indirectly help the company. "Unless one knows the stock of distributors, they cannot replenish accurately," he says.
Morphy Richards roped in its distributors to report sales on a daily basis. To ensure data discipline a distributor scorecard was created, which would eventually influence their incentives.
"What can kill a TOC implementation is stock variance due to wrong reporting of sales. So we do a physical stock check at least once a month," says Sharma
The distributor scorecard also signalled the beginning of a new era as far as tracking sales went. Previously if certain items were not selling, both sales people and the trade blamed it on poor marketing conditions. "They say the market is down and the discussion is over. One shoe fit all arguments," says Sharma.
But with the distributors reporting sales everyday, Morphy Richards got sales for each SKU. So sales for each sector came under intense scrutiny. And distributors had enough motivation going to tell the truth. Based on the score card if a distributors reporting accuracy was above 70 per cent and payments had been good, they would get a foreign excursion.
Also because they stocked only what they could sell, unlike in the past when the company’s salespeople dumped stocks with them, the return on investments improved. Previously, the trade was working on a distributor ROI of 30 per cent. Now it can work on a ROI of 40 per cent -plus.
When Rajat Dheer, the national sales manager of Morphy Richards, presented the idea to trade partners, he had to make it stress-free for distributors who were not accustomed to daily reporting practices. So the company gave the trade a plan in which Morphy Richards offered to pay penalty for not meeting the orders of distributors. "We could eliminate loss of ability to meet consumer demand. Then the discussion changed," says Sharma.
At present, Morphy Richards gets daily reports across the country on a per SKU basis – the company has about 130 SKUs across 19 categories ranging from microwaves and irons to induction cookers. Based on these reports it’s been able to engineer a revival of fortunes in some categories.
One example is in the category of microwave ovens. Over 60 per cent of the category is dominated by two players, LG and Samsung. Then there are other players such as Onida, IFB, Whirlpool and Godrej taking a share of the pie. In this scenario, when the sales team at Morphy Richards found that sales across categories has come under scrutiny thanks to the implementation of TOC, they could not dump stocks with distributors to achieve their monthly sales target.
As microwave ovens were high-value items, they found the category could shore up overall sales value. Soon a proactive sales team was asking its marketing counterparts for comparison cards that help in differentiating their product from the competition in terms of feature, product benefits and pricing. As a result, sales of microwave ovens grew by 200 per cent in 2012-13, albeit on a smaller base. "We sold double the quantity than we would have originally sold," says Sharma.
As for Morphy Richards, a year after it has rolled out TOC in its sales function, there has been a remarkable drop in stock outs at the distributor’s end. Previously, if 30-40 SKUs out of the 130 were not available, now that number has come down to 11 and company executives claim that they are working towards a complete elimination of stock outs.
The working capital has been optimised by as much as 40 per cent. The most important benefit, according to Sharma, has been "the faith and belief and attachment of trade to us".
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