Shubham Agarwal - Hello and Welcome to the Counterpoint podcast. I’m Shubham Agarwal and today we have a special episode featuring an iconic name in the world of motorcycles, Royal Enfield.

Joining us is none other than B. Govindarajan, the CEO of Royal Enfield, and we shall be discussing how they tackled a critical challenge of availability of spare parts at their service centers.

Mr. Govindarajan will take us through the intricacies of this transformation, sharing insights on the strategies and solutions implemented by Vector Consulting Group that revolutionized their supply chain efficiency.

So, let’s get going.

Shubham Agarwal - Tell us about Royal Enfield

B Govindarajan - Royal Enfield is the oldest motorcycle brand in continuous production, it is since 1901. Even from the last decade, from a motorcycle which has a segment of almost what, maybe 40,000 per year, currently Royal Enfield in India, we make almost about 800,000 motorcycles per year. In fact, we make every 45 seconds one motorcycle.

We focus only on 350cc and 450cc and 650cc motorcycles, but we make genres of motorcycles around those CCs. So, our focus is always narrow, but what we do is primarily to look at how do we give the pure motorcycling experience to the consumers

We wanted to deliver it through the connection that we wanted to bring in through the Man, Machine and the Terrain. So, our character of the motorcycle is always built around that.

Currently the market share wise, if I had to talk about Royal Enfield, we are almost about 90% market share in the middleweight in India. Outside India, we are almost there in about 60 countries.

Shubham Agarwal - Why is spare parts management important for auto companies?

B Govindarajan - Spare parts anyway is very important for any the product per se because the consumer wants them whenever he wants something to be repaired or something like that. But for Royal Enfield, it's all the more important because we don't sell a product. Consumers also look at our product as an emotional purchase. They really want it as an ally to him or her as a self-expression of themselves.

So, he brings a motorcycle for service or some issues which are there or general service. At that point, if he sees that particular part is not available, and it is going to come to him only after a few days, and he starts looking at, “Oh, my friend is not there with me for a few days,” that's not on.

He goes and then picks up a part from the local market, which is spurious, and he puts it into the motorcycle. When he rides it and if there is an issue with the part, he doesn't see that the part is actually a spurious part and as a result of it, the motorcycle is not okay. He will immediately say that the Royal Enfield parts’ quality is not good. That's how the ecosystem will start looking, and the consumer will start looking at it.

In terms of parts availability to customer retention also, there is a correlation.

You know, we give a warranty of three years. Nowadays, for all our motorcycles, we give a three-year warranty to the consumers. And we also sell what is called an extended warranty for the next two years.

During that window, if the part is not available and he gets the feeling that Royal Enfield doesn't give me that sort of comfort which is required. Why am I going back to them? I lose a future business because he is my future consumer.

For any of the new products which are coming up. Let's assume a guy who bought a motorcycle, say in 2010, and if he is continuously with me in service and all those things, when in 2023, when I come back with a new product, I can go back to him and then say, "Hey, guy, here is a new product for you," which is a very different product from what you are owning. And we are friends, and you have been with us. I'm serving you. And here is a product. Would you like to take it?" So, the customer retention and the new consumers, more than that, the existing consumer's upgradation of our motorcycles when the new product comes in, it's very important for us. And there, the spare parts also play a major role.

In the availability of those things, will it be a great motivator? May not be. The non-availability of those is a great deterrent for the consumer to be sticking with you.

Shubham Agarwal - What are the challenges in maintaining spare parts availability?

B Govindarajan - So, what we start looking at is at every stage when the motorcycle requires a part, it has to be available at a right point of time, at a right place. This is easier said than done.

So where to keep? What quantity, which has to be kept at in higher numbers? What is the velocity? This complexity was building on day-by-day when we came out with more and more motorcycles.

We have almost, what, 4 and up to 5 lakh job cards which comes to our dealership. We have almost about 1,100 dealership outlets and about 850 studio formats. All put together, we have almost about 2,100 outlets in India. In all these outlets, ours is a service, spares and sales, that's the counters. We call them triple 'S’ counters. This retail outlet when the consumer is actually bringing the motorcycle, we won't know what motorcycle is bringing in and what part is required.

You know, what happens is there is, the total number of SKUs which we handle, if I have to tell you in terms of number of parts which we do, there's almost about 2,800 parts which are current parts which are required and about 7,800 older vehicle parts which are required. So, 10,000 parts. Now you look at the probability, the 10,000 parts - at what point of time, which part is required and how many numbers are required, it's anybody's guess.

We normally look at how many motorcycles are sold in a particular area, in that area, what are the number of parts, what used to be the moving parts, let's assume and the guys will actually do a sort of a forecast, and the forecast will be sent back to the central warehouse. The central warehouse will talk to the suppliers. Everybody has an MOQ, and all of them, they send a particular MOQ, and the supplier will come back and then say I have an MOQ; I have to give you so much of an inventory. The warehouse says that I have to keep something if I have to serve. The guy is asking something else.

Organizationally, when we are growing, consumer requirements are changing. We do a platform change. When the platform change happens, then what happens is, there is also an issue at the supplier’s end. There is also an issue at the warehouse end.

So, the whole ecosystem can become very complex over a period of time when you are there in the growth path.

Shubham Agarwal - What was the way in which you tried to manage spare parts earlier?

B Govindarajan - The definition of the first pick is when a job card is opened for the vehicle to be serviced at a point of time the parts have to be available; we were almost about 78%-80% at that point of time. What does it mean? It means about 20% of the instances, the parts were not available.

And the part will come from the central warehouse or from the supplier. It may take even 20 days. It's very unpredictable.

So, I would have easily done, that is a management decision to say that okay, go ahead, improve the inventory, hold inventory everywhere, hold double the inventory at the dealer point, all the parts, you block the working capital there, increase the size of the warehouse, thereby you do not need to keep 60-65 days, go for 100 days. So, you can double it, triple it, thereby you can say I can actually serve all these consumers, take it from the first pick rate of 80% to about 95%, 98%. But then what happens is that there is no one who is actually happy in the entire value chain.

Consumers may be looking at, but there is one issue for the consumer - let us look at a rubber part. If I allowed the guys to double the inventory, rubber parts have a life cycle.

And if the dealer is actually holding the rubber part at the dealer point and the consumer comes and if a consumer wants it immediately, he will use a rubber part which would have lost its life cycle and then I am giving an inferior quality. So, the consumer is not very happy.

The dealer might be thinking, oh man, I have to block so much of working capital into my business, and I do not know when the inventory will move, so his velocity is also blocked. So his current asset is not churning, so he is not very happy. I bring in inventory in the whole thing, and that inventory is not moving. I would not know at what point of time it will become a dead inventory, and I have to do a write-off. If I actually look at that, that’s not a frictionless, seamless, neat way of doing business.

Shubham Agarwal - What was the core issue identified in Royal Enfield's distribution model affecting availability in the supply chain?

B Govindarajan - So, the complexity used to be that people used to guess what sort of spare parts they had to keep, how many quantities they had to keep, how many numbers they had to order. So, it was a general forecast depending upon whatever experience the guys were having on the ground. Based on that, they were actually ordering the parts. When we were growing, what was happening is at lot many areas, the spare parts were actually not moving.

And after some time, you know, they have to actually discount it and then give it off into the market. And as I mentioned, the life cycle is not okay for that product, the quality levels are not okay. So, everyone started telling, there is a block of money. What was an issue which was happening is that because his money got blocked in the non-moving inventory, he was not getting more line items which are required so that the consumer is happy. So, he always says, I have money which is already blocked. I can have only about 3,000-line items, which I can keep. But the requirement is that I have to keep almost about 4,000-line items. So, he has to get in fresh money. Already, the money is blocked for him. And if he has to get the new line items which are required to serve the consumer which is required, then he always feels that, oh, more money I have to bring in and that's not very profitable.

The consumer interest comes first. So, any VOR comes, what we normally say is, okay, air freight the component. And air freight, once again you do the component, you expedite it by actually paying extra money for it. Though we were doing it and VOR (Vehicles Off the Road) we were saying that, okay, it used to be about eight days, the vehicles are off the road (VOR), it used to come down by saying that, oh, it has come to five days because by expediting it. But the number of VORs and the percentage of VORs were actually not coming down.

So, whenever we go back to them and then say you have to stock more, there is always resistance from the dealers. And they come back and then say, oh, our inventory levels are going up, and we are not happy with the system.

Shubham Agarwal - How did you now transform your spare parts management?

Step 1: Move away from forecast-based inventory to daily replenishment-based inventory creation/movement

B Govindarajan - Yes, so over a period of time what I have understood is forecast is anybody's guess. At some point of time, it was okay. Now, with the complexities which is going up, forecasting is not going to help. It will actually add more and more complexity to the whole system.

That's when I happened to meet Kiran from Vector, and we had a discussion once. And I really felt the Replenishment Model which they were trying to explain to us, how the current, the kind of pressure point we were in the business and how it can actually affect us in the future. And that's when I really took a decision to work on the Replenishment Model.

Step 2: Dampen demand variability by implementing a system of 'Buffers replenishing Buffers' based on consumption triggers

B Govindarajan - First, they took an as is condition, they were looking at which are all the parts which are moving, which are all the parts which were not moving, what's the kind of an inventory. Then I think the team started analysing the static data. They started looking at, then we will set a norm (for buffers) to start with at the dealer point and at the warehouse. We also said that the warehouse and we started looking at an SLA. Everywhere the parts have to reach a particular window and what's the kind of a time window which we have to keep it.

The entire value chain in which the supplier also started becoming very comfortable, because now we have a norm and any washer which is picked up from any corner of the country, it triggers off back into the central warehouse, and it triggers it back to the suppliers.

You know when the norms were setting, obviously everything has a lead time. There is a lead time from the raw material procurement to conversion at the supplier’s end, bringing it to the warehouse, taking it to the dealer point and from there to the consumer or to the distributors. So obviously, the analysis the team started doing was which are all the runner parts, the repeaters, strangers and what sort of a lead time for all these parts. Runner part: if the velocity is very high, why are we keeping so much of an inventory? So all those analysis of runners, repeaters, strangers and what does it mean in terms of keeping the inventory? What does it mean in terms of MOQs? What does it mean in terms of ordering? All those things have been reviewed.

In fact, I must tell you it also helped me to do a value stream mapping at that point of time when we were doing it and a lot more inefficiencies which were hidden also came out during that analysis.

Step 3: Execute an execution-based priority system to manage demand and capacity variability.

B Govindarajan - There is a clean system which is a Black, Red, Yellow, and Green, all those whole system which is done up.

Today I think in my understanding, everyone looks at it in the morning - first thing is what is the Black, Red, Yellow, and Green. Black, get the damn thing moving and Red, you have to act on it immediately; Green, do not even touch even if you had excess so do not send it

I think it all has become a culture now.

And now, the company is operating on this colour scheme. So, everyone knows that there is no manual intervention, and there is no data massaging which takes place. The system actually takes it. The best thing, personally if you ask me what I like is everyday night, I think at midnight, the system actually spools the orders and it runs it with an inventory and it says what to dispatch.

Step 4: Autocorrect norm levels based on intelligent demand pattern sensing

B Govindarajan - So, we set the norm based on the historic data, right, that’s how the forecasting was also done at that point of time. But what was happening is, the system because we have the Black, Red, Yellow and the Green, which is laid down, the norms are set at various locations. Anything which is getting consumed, if there is some, let us assume a norm is set to 100 numbers, and at a point of time the consumption was only about 10 per month suddenly you see the consumption is going up in that particular area the system automatically corrects, and it corrects the norms also based on that thereby, what happens is nobody needs to do a calibration exercise on what is moving not moving in that. So always, it auto-corrects, it throws exactly what is there to be focused on, and that is an advantage which we had through the system.

Shubham Agarwal - Can you describe the transition journey for the company and distribution partners? What were the obstacles and how they were overcome ?

B Govindarajan - Look, I think when we wanted to get into the Replenishment System as I mentioned, you know, the complexity was going up, when the complexity was going up people got involved in that complexity for a period of time, they always feel that “I have a solution for the complexity” and normally what happens is everybody will like to put more energy doing firefighting, that is how the complexity can be overcome, and that is a human tendency when we wanted to get into the Replenishment Model people also started looking at “oh it would not work, because how will I know what is required at what point of time? I only know by doing a forecasting” I said, we understand okay, let’s not looking at one by one what does it mean.

So first with the buying in which is to be taken with all our team members - the core team members we did a buy in session for all of them, and I think the methodology Vector adopts is very good, they do a first 3-day session for you to understand and appreciate what does it mean all about not relating your business, they do a dipstick study and come back and then say this is how it can impact your business. So, our guys also went through that, and they started looking at ‘looks like there is something can I try that’ so the core team buy-in came up like that. Then the next is, we go back to the dealers, when we went to the dealers, everybody started that ‘I know what I want’, ‘It is my business, I know how many motorcycles I sold, and what to keep’ and all those things. Then we said okay if that is the case let us take a pilot project at a particular area, we took a pilot project and we brought in the success in the pilot project and then we made the dealers to understand the pilot project. So, guys went back and then started explaining this is the kind of benefit which will come into this there is a buy-in regional level, zonal level slowly the dealers started buying-in. Then the distributors and the mechanics also started, have to understand that yes parts will be available because they are understanding earlier had been somebody will come and then collect order from me, now they are saying that nobody need to come and collect the order, so what does it mean how the business will work maybe I am not going to get the parts but now the whole system is got tied up and everybody feels that I do not need to worry parts will be available anything it is consumed it will get replenished

When you in a bigger organization of our size – we are about 14,000 people who are working, we are in about 62 countries, we have so many new products which are coming in and about 6.5 Mn motorcycles which are already there in the market and we are growing right, we are a 122-year-old startup, that is how we always like to say. Why I am saying the intervention from Vector on the Replenishment Model had been very good success for us is in a bigger organization it is not very easy for someone to come and then say that we can work on a variable model, it is not always the fixed model, it is very tough. They said we will work on a variable model; that is number one because you are putting a skin in the game, that is very good; the second is they were also saying that we will show you on the ground, it is not we will sit and then talk about only in the conference room and we will give you a presentation we will work with you and then do the changes on the ground.

I think it is very different, it has really helped for the people to understand that, this is not some management discussion and it is not top driven, it is really an intervention which can go up to the bottom most level and it will really make changes I think the process and the methodology which has been adopted by the Vector team is very nice and it is also a learning for me too in the entire process.

Shubham Agarwal - What benefits did these steps bring to the overall supply chain?

B Govindarajan - Currently, if I have to go back and I was just doing a check with my dealers, the dealers were pretty happy because – 1) They're saying that I don't have a non-moving inventory, which is getting piled up. 2) At some point of time, I used to keep an inventory which has come down by almost about 28%. My working capital got released by almost about 28%-30%.

First pick ratio. from 80% of the first pick ratio now has gone to almost about 96%-97%. And because the working capital got released, we could also tell the dealers that now you have to keep more parts in this area.

Today, if I have to tell you what has happened over that period, at the time when we started, we were having almost about 1,500 retail outlets. Today, we have about 2,100 retail outlets.

The number of line items we were doing was maybe about 1,500 numbers and the non-current was about some 3,500 numbers. It has actually doubled.

The percentage of VOR (Vehicles off the Road) is drastically coming down now.

So, the dealer community is damn happy about the entire implementation of the Replenishment System.

As far as the central warehouse is concerned, in fact, our business has doubled over about three, four years' time, in this, my warehouse size has shrunk by almost 15%.

That’s a good thing which has happened, by doing it because the norm which we have set in this particular area, we don't need to keep so many numbers in the warehouse. So, the warehouse size has come down, but the number of parts which we kept in the warehouse has gone up

And my supplier is also very happy, fundamentally because he gets the clarity of what to make, what not to make, and his lines are not getting disturbed. Thereby, his efficiency is also not lost.

Now that I am able to give the parts back to my service stations, all the consumers who were not using our services for service are also coming back because they feel the parts availability is better now at Royal Enfield, and “if I go to them for me to get the vehicle serviced is faster I do not need to go in for spurious parts because the quality of Royal Enfield parts is better”. That way the entire transformation has helped in getting the consumers who were not coming to us for service also started coming in thereby the business also is going up now.

Shubham Agarwal - Are there any other intangible gains or de-stress benefits that you would like to add?

B Govindarajan - When we implemented the Replenishment Model; because nobody needs to actually do a forecast, nobody needs to chase somebody for an order, all those things are not required. So, our guys’ focus as of now, their released bandwidth because of the Replenishment System is now on market development and bringing in efficiency more and more into the system.

Today, the value add is, going back to the market and getting those consumers who has actually bought my motorcycles 15 years back and who are not coming to the service stations. Our guys are actually going, reaching out to the mechanics, getting them into the service stations and removing the spurious parts which are there in the market and taking our parts into that area. That's why I'm seeing organizationally I'm very happy because it is also helping me with business development and more and more new products which are coming in, we don't need to kill ourselves of actually what to keep, what not to keep. So, we just arrived at something, within about a month's time, it auto-adjusts in the system, and it actually helps us to say this is what you have to keep as an inventory, you don't need to plan anything. The system has actually taken, over and I think it is learning on everyday basis and it is correcting, and that way, it has brought in a lot of efficiency into the system.

Shubham Agarwal - What are your plans for the future?

B Govindarajan - I must tell you that the spare parts transformation and Replenishment Model has landed up on very positive note. The extent is, you know I am extending that even for my finished goods inventory replenishment model, but as I mentioned, all this focus had been first only in the domestic market.

Now, our next growth story for the Royal Enfield is going to be on the international market. That is why I said our market share is only about 7.5%, and that is where the next growth story is there.

Now, we are looking at as an organization to extend the replenishment model even for the international markets. We are also into what is called as motorcycle accessories because we are a pure motorcycling company. We add up all those extra items and some of the SKUs which are required for the consumer to feel safe, comfort and all those things. Our accessories business also we are now looking at whether we can add it up into the Replenishment Model.

Why I am saying this is I think it was a great success for us at Royal Enfield, honestly, the entire Replenishment Model which we have implemented.

Shubham Agarwal - Lovely, we should look forward to it Mr. Govindarajan, thank you so much for giving us your time. It was a wonderful discussion, and I am sure the listeners would love it, thank you once again.

For all the listeners, thank you for all the love and support, we will keep coming back with more such episodes. Until then, this is Shubham signing off, bye.