Companies resort to Theory of Constraints to stay ahead in the game

News Release

The Economic Times | October 17, 2014

Companies resort to Theory of Constraints to stay ahead in the game

Five years ago, Dr Reddy's Laboratories (DRL) was facing a difficult time in the US. It had a significant number of backorders and supplier ratings were at an all-time low. That's when the company started implementing processes advocated by the (Theory of Constraints (TOC) to fix its supply chain Last year, it won a best supplier award in the US. Saumen Chakraborty, DRL's chief financial officer, says, "When selling in the US, two things matter: your product quality rating and your supplier rating. Today, TOC has become a part of our management philosophy. It defines our manufacturing and R&D pipeline and helps us understand where we need to focus and improve."

Focus is the most important thing in TOC, says Rami Goldratt, CEO, Goldratt Consulting, the global pioneer in TOC methodologies. The key principle here is to get rid of the constraints that are limiting the business from doing more.

Companies resort to Theory of Constraints to stay ahead in the game
"If you are not improving something that's limiting the business from doing more, the business will not do more," says Goldratt.

At DRL, TOC has not only tightened the supply chain with a focus on better inventory management in the US and Russia, but also in finance and project management. "Shifting to a throughput based system where we track operating expenses has simplified management accounting and reporting. Ultimately it helps the management focus. With critical chain project management too, where there is too much uncertainty in new product development, it enables us to look at alternatives for development. The focus is on specifically understanding which part of the value chain is weak and needs to be supplemented. Once that is fixed then you move on to the next aspect", says Chakraborty.

Over the last few years, the degree of uncertainty and complexity in the general environment has impacted all areas of business. Irrespective of the nature of the business, the key differentiator is how seamlessly the supply chain operates. One day delivery in e-tail, getting the specific product you want in the store you choose to go to or an infrastructure project being completed in time, it all links back to an effective supply chain.

At Bajaj Electricals, having an efficient supply chain is critical to both the B2B and the B2C parts of the business. "We are seeing a significant jump in sales in B2C in areas where we have implemented the process and a significant reduction in lead time of project completion in B2B," says chairman and managing director Shekhar Bajaj. In the EPC business where 100% delays were the norm, the company has been delivering projects before time. "TOC is about aligning all the functions of the organization – tendering, sales, design, logistics, supply chain, execution — towards one single goal," says Girish Bhave, vice-president-corporate services, Bajaj Electricals. If the different departments working on a single project are focused only on their own efficiency, the project is sure to get delayed. The challenge is to synchronize various functions to ensure more than 95% reliability of project delivery. This also helps eliminate wastage of working capital in delayed projects which at times eat up entire margin of the project.

Satyashri Mohanty, director, Vector Consulting, a TOC focused consultancy, says, "The underlying philosophy is to go for the pull, rather than the push approach to the supply chain. Instead of predicting the future it's about having a fast reaction system. It's all about focus – what should and shouldn't be done. If you find the leverage point, the interdependencies in the system ensure other problems will disappear as well."

In a steel plant, a replenishment-based supply chain is considered a novel idea. Tata Steel has used the TOC framework in areas ranging from out-bound supply chain to implementation of shut-downs and equipment upgrades. It even tried using it to develop business objectives and strategies. The company's process is consumption rather than forecast driven. "It results in much shorter lead times, lower working capital requirement from our channel partners and a leaner system with higher throughput," says Alok Krishna, chief of TQM, Tata Steel.

"It also helps us take informed decisions on what to produce, for whom to produce, when to produce and how much to produce, helping in making the overall system leaner and minimizes excess or shortage of stocks."

Growth Potential
In India, there is plenty of potential to grow the aftermarket spares business. The size of the components business in the Indian automotive after-market, as assessed by industry studies, is between Rs.28,000 crore and Rs24,800crore. Cars make up 26 per cent of this.

The service market is worth Rs.8000 crore. Together they are expected to touch Rs.40,000 crore by 2015 and Rs.60,000 crore by 2020. The spare parts after-market could touch Rs.37,000 by 2015 if it grew at the rate of 11 per cent. This market is barely addressed by OEMs; a recent study by ACMA has found that the coverage is just 15-20 per cent.

This is primarily because most of the vehicles leave the fold after the warranty period. Another survey by ACMA found that nearly 20% of cars on the road are over 15 years old but the average age of those visiting dealers is less than seven years. This indicates that the older cars aren't driving into OEM service centers.

Godrej & Boyce has 15 different businesses under it, from appliances to furniture and security systems. "Each business is empowered to do what it needs under its general strategy to meet its goals in line with the 10×10 group strategy (increasing revenues ten-fold in a ten year period by 2022)," says PD Lam, executive director and president. For the security business, there was an urgent need to increase market share to deliver in time. "The company did a deep study to understand where its USP should be and realised that time is more valuable than money," says Lam.

Companies resort to Theory of Constraints to stay ahead in the game

It worked on a framework to fix the supply chain to reduce the lead time on deliveries. Within a year, profitability more than doubled while inventory levels reduced by close to 50%. "This has given the business an edge – we can go out and bid for more projects and deliver faster. The other big change is that people are now thinking about how to change and changing how they work. This builds a strong foundation going forward which is more important," says Lam.

While it is this change in mindset that makes a difference over the longer term, in the short term, it is also the most difficult thing companies have to grapple with. Managers are used to planning their supply chains and inventory in a certain way and doing things in a diametrically opposite manner tends to meet more than its fair share of resistance.Instead of planning things on a quarterly or monthly basis it's suddenly about daily planning and aligning production with real orders rather than forecasts. This also means making changes at the policy level. The appliance business at Bajaj Electricals required distributors to buy a certain number of goods as inventory, but after implementing TOC it has moved to a pull based system. The company had to move away from setting primary sales targets because that would require them to push a certain amount of inventory to the distributors to hit targets. "Now the focus is on real sales and the primarily sales are on auto-pilot," says Mohanty.

It's not just about making changes at the HQ. Distributors and vendors need equal amounts of convincing. Most times distributors are concerned about stock-outs given the significant drop in inventory levels. Kurlon, a part of the Rs 2,000 crore Manipal Group, has been working with its top dealers to allay their concerns and make them a part of this exercise. Among India's leading mattress makers with 6000 dealers across in India, the biggest issue it faces is the lack of standard sizes. "India has at least 30 size options with further customisations depending on the consumer. In a situation like this maintaining inventory is a nightmare," says chief operating officer Narendra Kudva.

Working with Goldratt Consulting, Kurlon identified the products that comprised 80% of the sales in each city and now ensures that a certain level is maintained in warehouses. "Instead of a monthly sales dispatch it is now practically a daily dispatch as per the stock levels in the warehouses," says Kudva. The inventory held at the sales office has dropped from 35 to 23 days and dealers know which products will always be in stock at their local sales office and which can be supplied within 24 hours. The system also keeps track of factors like change in demand in popular products and seasonality and automatically reconfigures the system buffer.

At Liberty Shoes, Vector worked to first classify the inventory depending on whether it was a ‘hit', ‘laggard' or ‘dead' product and then worked at adjusting available inventory levels in shops according to this classification. "Weeding out the ‘dead' resulted in discounts reducing from 16 % to 6.2 % annually while fresh and lean inventory resulted in a 30% increase in turnover year-on-year. While this classification means nothing to the end customer, understanding it is critical for controlling sourcing and making store distribution decisions without jeopardising availability," says Adesh Gupta, CEO, Liberty Shoes.

Retail is one business which has seen an exponential increase in the degree of volatility and uncertainty with rapidly evolving consumer behaviour. "The mistake most retailers are making is trying to manage the environment by improving forecast accuracy," says Gupta.

However the company realised that the only way to achieve higher inventory turns without jeopardising sales was to move from forecasting to having a faster reaction time.So from forecasting 4-6 months in advance, the company now responds to changing consumer preferences in 45-60 days, resulting in a 75% increase in stock turns.

Mohanty of Vector Consulting points out that one of the biggest advantages here is that once the key day-to-day tasks are taking care of themselves, it frees up management time to look at the bigger picture and innovation initiatives. "If your short term focus is running on auto-pilot then it frees up management bandwidth. Long term becomes short term and you are doing it daily, not at offsites," he says. Which means that the equally anticipated and maligned management offsite could soon be a thing of the past, perhaps an unintentional fallout of the theory of constraints.

The Key Tenets

  1. Identify the key constraints to the business and focus on fixing those.
  2. Identify a leverage pointonce you solve this, the other areas will fall into place.
  3. Plan production to real demand not forecasts.
  4. Follow a pull, not push, based supply chain.
  5. Work with vendors and distributors to implement these changes at their end.
  6. Ensure all departments are working towards a common goal, and not individual targets

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