Go with the flow

Business Standard, November 12, 2012

The automobile industry in India comes with a disclaimer. That the looping challenges of its component manufacturers, who supply anything from nuts and bolts to seats to the original equipment manufacturers (OEMs), puts the brakes on its ambitious plans. While the downturn in 2008 laid bare the gaps in capacity, the lack of access to capital and over-dependence on just one or two OEMs, the current slowdown in the automobile industry has saddled them with excess stock. Of course, there are long-ranging solutions such as developing global supply chains and strategic technology partnerships with OEMs, but what about here and now?

A handful of component suppliers are turning their attention to their existing supply chains for answers. While lean manufacturing is the way to go, some of them are trying out a different kind of lean — not the traditional just-in-time (JIT) — by trying to decongest the pipeline itself and looking at the Theory of Constraints (ToC) for inspiration. ToC is making them agile by freeing up their working capital faster and increasing capacity for diversification.

Satyashri Mohanty, whose firm, Vector Consulting Group, has been working on implementing ToC among some of the companies, says, “The entire auto sector swears by JIT in an effort to replicate Toyota’s success in Japan. JIT will mean that the component manufacturer produces exactly what the OEM demands, close to the time of consumption, without any excess stocks. Suppliers build warehouses nearby the vehicle manufacturer’s plants for this. Yet, if one were to survey these holds, you will find a huge mismatch of inventory — one to two months’ worth of stocks for some parts, while others are out of stock.”

Inventory spells doom for suppliers of auto components by tying up their working capital, an expensive proposition for enterprises that are much smaller than OEMs.

The long buffers may be a way to get around the uncertainty that afflicts the transport and logistics industry in the country, but Mohanty says they could do better: “The maximum time taken to traverse the north-south (longest) route by road will not be more than 15-20 days—it can be done in less than 10 days. Stocks should be held to cover demand during the transport time. It still does not explain why any of the suppliers, as well as dealers of final vehicles, will hold months’ worth of stocks.”

It smacks of a supply chain where stocks are pushed down the line and not pulled by the market demand. Push supply chains often are in danger of spiraling out of control if there is a change in demand on the part of the end consumer because it is not easy to quickly change the goods produced along the way.

Enter ToC.

Fix that order
For ToC to work, the flow of what is to be manufactured, or production planning, has to be reworked. The companies, from the OEM right down to the lower tier suppliers, generate a schedule, predicting future sale based on past sale records, for the month to guide their suppliers. However, forecasting leaves a lot of scope for miscalculations and errors. If a bloated, noisy estimate reaches down-the-tier suppliers, it comes back to haunt the factory lines sooner than later. Mohanty says, “In the auto sector, companies have a mishmash of both JIT and forecasting. While component manufacturing runs on a monthly plan, based on forecasting, the use of components on the assembly line is based on production requirements of the day or shift. The OEM pulls parts from the vendors’ godowns, but the vendors are left with a huge variation in what is consumed by the OEMs and what gets manufactured.”

Such changes in the OEM-demand are not going away any time soon. What can be taken out of the equation is the uncertainty. The OEMs are aware; Hemant Sikka, chief purchasing officer, automotive and farm equipment, M&M, says, “We are striving to make as much information available to our suppliers as possible.”

For the tier I and tier II suppliers who are implementing ToC, the hard-wired manufacturing triggers of forecasting and full capacity utilisation are giving way to replenishment ordering.

Niranjan Kirloskar, managing director, Fleet-guardFilters, a Cummins group company, which is the largest producer of automotive filters, says, “We realised we could sell more without additional investment if only we increased the chances of supplying the right product as and when needed by the OEMs.” His second-in-command, Vijay Gokhale, COO of Fleetguard, recalls the nightmare of shifting orders. “In the middle of the day, we would get a note from the OEM saying that they had run out of some other component, say, a chassis, as a result of which they had to switch to another platform. That meant we had to also change our production. For us it was painful, because it often meant things we had produced would now lie around and we would be scrambling to make something else. Our suppliers got caught in the same vicious circle.”

Gokhale explains the idea of replenishment ordering: “Whatever the client picks up from our warehouse, becomes our order for the next day”. After five days — the average time it takes to make one of their products and transport it — the new filter is ready to be pulled from the warehouse. Manufacturer-forecast schedules are still used but only to provision manpower and raw materials at the beginning of the month. Production does not follow it and there is no scope for more surprise.

Pune-based Mhetre Packaging, that supplies corrugated boxes to tier I component makers, such as Fleetguard, started by identifying the 291 parts that moved the fastest and could not depend on staid OEM monthly forecasts. These needed stocks or buffers to be held. The rest were special made-to-order parts which would come with prior intimation.

The stocks for these parts are monitored using ToC’s simple traffic-light colour coding: green says the stocks of that particular product are adequate for the day, yellow says it is time for a dekko and red says the replenishment for that stock has been unsatisfactory and is cause for alarm. “Yellow denotes that I have some breathing space to manufacture but red means the product has to be not only made that day but should reach the client the next day. Earlier, the client would make multiple changes to even the daily manufacturing schedule, seeing us firefight every day,” rues Dilip Mhetre, the owner.

Vendor-managed replenishment ordering is being tried out by some OEMs as well, though not always ToC-assisted. Prashant Badiger, senior manager (procurement) of supply chain management at AMW, a manufacturer of heavy commercial vehicles, says, “Vendor-managed replenishment is way better than the forecast model. The latter tries to predict what might happen. Since last year, we have been trying to shift our tier I suppliers to the replenishment model.”

The inventory of raw materials for production at AMW was brought down by 34 per cent year-on-year by March, 2012, as a result. Less than 30 days’ inventory is now held for critical parts. Of course, the forecasting still helps their tier 1 vendors manage their raw materials and manpower, but consumption, that is, the supply of the parts, is done through replenishment. While Fleetguard is one of its suppliers too, vendors who don’t follow a ToC-led replenishment model station their representatives at AMW’s factory for stock count and quality checks.

M&M, too, is considering a move from scheduling to replenishment at both its own factory line as well as its suppliers. “This will minimise changes and offer better visibility,” says Sikka. For now, bulky components which are difficult to store such as the cockpit, instrument panels, seats are supplied JIT, while the rest are stored and transported by suppliers.

Filtrum Tools and Components (also tier II) VP Sandip Devkar says moving away from forecasting to the ToC-led replenishment model has brought down the time of manufacturing by five days. Smooth working has ensured that even the red alert occurrences have gone down from 5 per cent to 1 per cent.

Mohanty says, “Replenishment helps cut down production lead times as well. What used to take a month to supply can now be supplied in four/five days by the lower tier suppliers, making them more agile. With replenishment, they just keep manufacturing to meet the pre-determined levels.”

Buffering but just
The pre-determined level of inventory is what is called buffer. While the traditional mass production systems called for buffers at every stage along the production, JIT requires there be no buffers. Another founding director of Vector, Kiran Kothekar says, “The problem with JIT is that it is not geared to handle the daily demand variations that we see on the Indian auto assembly.”

But won’t buffers compound the excess inventory trouble? Mohanty explains, “ToC is not about building accidental buffers that sprout when production is switched between platforms, leading to unused excess parts of the previous product or even finished vehicles which are not in demand but get pushed to the dealers. ToC creates additional buffers of raw materials which can be held at the suppliers’ delivery end so they don’t run out of parts when production plans change suddenly.”

In ToC, the buffer is the estimate of only the consumption during the time taken for placing a new order, manufacturing and transporting it to the warehouse. This can lead to cutting the buffer levels by 25-50 per cent. Fleetguard stocks no more than five days’ worth of inventory as buffer while Mhetre stocks two days’ worth of the products it had homed in on. Apart from daily monitoring, buffer levels can also be revised as Filtrum does every three months to factor in new products.

Usually it is held near the client’s point of use, say, the supplier’s warehouse near the OEM factory. The buffer in ToC acts as the upper limit of holding inventory at that point, and is rarely breached. Only when the buffer goes down for a given product is a new replenishment order generated. Otherwise, it is not manufactured at all.

Scrutiny in replenishment ordering is crucial even for OEMs. For its part, AMW combs through orders from the parts-buying team and checks them against the next four days’ planning to see if there is any duplication or if the need for a fresh component is genuine, before filing a replenishment request to tier I suppliers. Earlier, marketing forecast would have just led to dumping of raw material rather than what was being needed on the manufacturing lines by the company.

Vendor-managed replenishment ensures that OEMs can enjoy the benefits of ToC without undergoing a change themselves. The senior sourcing manager of a leading Indian manufacturer of both commercial and passenger vehicle, not wishing to be named, says, “The vendor-managed inventory as followed by Fleetguard has simplified inventory management and ensured that our inventory levels go down too. But that has not dented parts availability. In fact, it has now improved from 50 per cent of supply to 80 per cent of the correct supply.” Kothekar says, “The ToC-assisted manufacturer has to tell its customer to lift whatever it needs and forget whether their production planning is adhered to or not.”

ToC encourages small batch sizes and switchovers, something that mass production can’t handle. Non- repetitive, quick switchovers can derail JIT as well, more suited for uniform, stable manufacturing plans. ToC has helped Gokhale’s team to “increase changeovers, with multiple parts produced on the same line and day. It does not let our resources to idle.” Such flexibility is now being appreciated.

Theory of constraints

    • Eliyahu Moshe Goldratt (March 31, 1947 – June 11, 2011), a physicist-turned business guru, had proposed ToC to explain that a system will always have atleast one constraint. Otherwise, it will go on to produce unlimited amounts (throughput) of what that it strives for.
    • This system could be likened to a business or its many processes, such as supply chain, finance, human resource management. Hence, ToC helps in systems management.
    • The constraint for a business could be the market, a resource, finance, policy etc. For a supply chain, it often is a hindrance to the flow of inventory, that creates less availability of the products needed to be sold (throughput) and greater surpluses of products not sold.
    • ToC works on the constraint in five steps:i. Identify the constraint (to the throughput)

      ii. Exploit the constraint (by quick improvements using existing resources)

      iii. Subordinate every other process to step 2 (align them to support step 2)

      iv. Elevate the constraint (improve the performance at the constraint until it stops being one)

      v. Repeat (the above steps for the next constraint, while aggressively improving the current one)

    • ToC approaches a lean and synchronous system in a manner different from just-in-time (JIT). JIT’s varied processes focus on eliminating waste and defects from the whole manufacturing process, while ToC focuses on increasing the throughput by removing the constraint.

Hidden capacity
Experiences of manufacturers also show that ToC unlocks capacity. Kothekar says, “With correct order-filling and meeting each order, the capacities across factory line, storage and finances are released.”

Gokhale says Fleetguard has been able to release 30 per cent additional capacity which has helped it enter the aftermarket. Fleetguards gets 30 per cent of its revenues from the aftermarket and exports. Mhetre which was earlier dependent for 90 per cent of its revenues on Fleetguard, now gets 14-25 per cent of revenues from non-auto customers. Auto research analyst Yaresh Kothari from Angel Broking says, “Replacement demand insulates component manufacturers from the fluctuations in OEM demand. During slackening demand, we have seen some of them shut production to align their inventories with the demand and free working capital.”

The freed up working capital as a result of a fast moving supply chain also helps ease the margin pressures that component suppliers complain of. Devkar of Filtrum says that his working capital now turns 14 times a year. Crisil’s report on Fleetguard Filters show a jump of net sales from Rs 2.9 billion in 2008-09 to Rs 7.4 billion in 2011-12. Profits after tax jumped from Rs 107.5 million to Rs 756 million in the same period. Its operating profitability has been mostly in the range of 13 to 16 per cent over the past five years. Mhetre saw a jump in revenues of 21 per cent.

The benefits for OEMs are for all to see. AMW’s Badiger points out, “Cutting down inventory to 30 days (Fleetguard’s inventory at AMW’s factory) has helped free up space since filters are bulky. The free space can be used to house parts for upcoming models without new investments.”

Moving upstream
The application of ToC is not limited to downstream benefits only. The chain that links manufacturer with the distributor can also benefit. The problem of dumping the inventory that has been produced but not in demand to dealers could be alleviated by ToC’s dealers management. “There is a huge difference between ToC-assisted and other manufacturers who dump stocks on us. We might be getting a turnover discount from the others, but that only means we have had to handle more inventory to meet month-end targets. It takes up our working capital and storage space,” says Jaspreet Singh, managing director of Maini Auto Incorporation, which distributes Fleetguard’s filters for the after-market and also has a sister concern selling other auto components. “The availability of stocks is guaranteed by Fleetguard, and if they fall short, they pay us a penalty, instituted by them. All we have to do is follow their system. While we need to hold products worth a month’s sales for other companies, we need to hold not more than a week’s stock of Fleetguard’s filters,” says Singh. With Fleetguard’s stocks, Singh’s working capital can be rotated four times more than others. Fixed routes on fixed days, as guided by ToC, ensures that he services the retail network better and grows it quicker.

Implementing ToC has its own share of challenges, the foremost being the change in the mindset it demands. Forecasting and investing in new capacity to increase revenues are tenets that have been ingrained for all these years. Benefits for any new processes will take longer to manifest and hence, the larger the organisation, the lower the chances of radical changes. However, ToC’s agility in putting a manufacturer’s house in order, irrespective of its linked customers and suppliers, could come in handy. That said, analysts believe that more than a process, the challenge is to source accurate and timely data. Rakesh Batra, national leader, automotive, Ernst & Young, says it is imperative for auto component makers to get such data to beef up their production plans and train manpower to read it. Agility, as a result, and delivering on time consistently, will boost the suppliers’ negotiation powers with the OEMs. “Sudden changes to schedule and inaccurate forecasting lead to most of the problems in this industry,” he sums up. As global auto-manufacturers opt for fewer global platforms to reduce variability, JIT could become a reality. For now, ToC can provide clues to lean and synchronous supply chains.

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