Ashok Leyland Supply Chain RevampSubmitted byVineet ChaturvediRevamping the Supply Chain: The Ashok Leyland Way:IntroductionV Ramachandran, Deputy General Manager, Corporate Buying Cell, Ashok Leyland (AL), the Chennai based manufacturer of medium and heavy commercial vehicles was surfing the Internet at midday in his office. A closer look at the screen showed that he had logged on to an auction site. But this auction site was different. Ramachandran was looking for suppliers of some specific tyres in the global market. At a price of $350, five suppliers were interested. He then lowered the price by $5. Now three of them were willing. Ramachandran kept lowering the price, each time by$5. At $325, there was only one response- the seller asked for an hour's time to confirm. Within one hour, the Czechoslovakian company confirmed it could supply the tyres. Both parties then signed up by e-mail and the deal was struck at $325, saving Ashok Leyland Rs 14,700 per set. Known as reverse auction, this was one of the many ways AL was reducing materials cost, which accounted for nearly 70 per cent of its product cost.In 1997-98, AL, recorded a profit-after-tax (PAT) of Rs. 18.4 crore1 on sales of Rs. 2,014.3 crores. A look at the previous financial year's PAT showed that the profits for 1997-98 had gone for a severe beating. In 1996-97 AL had a PAT of Rs. 124.9 crore on sales of Rs. 2, 482.5 crore. With the manufacturing Industry reeling under recession, the freight generating sectors (manufacturing, mining and quarrying) saw a steep decline resulting in a severe downturn of freight volumes. For AL, whose business was directly dependent on moving material, goods and people acrossdistances, this had come as a severe blow. AL's supply chain2 had gone haywire under therecession which had eaten away 17.62 per cent of its revenues in one year forcing the company to helplessly allow inventories to build up. The results were showing on working capital. It had climbed from 33.34% of sales in 1993-94 to 58.81% in 1997-98.'Together We Can' - Beat the RecessionAL did not seem to succumb to the 'uncertainty gloom' that was playing havoc to its business environment. It decided to meet the challenge by re-gearing its systems, be it material order, procurement, material handling, inventory control or production. AL conducted brainstorming sessions inviting ideas on cost cutting. Quality Circle3 teams were formed for this purpose. Said Thomas T. Abraham, deputy general manager, Corporate Communications, "Our Quality Circle teams were very helpful at this juncture and the worker involvement made it easier to addresscost cutting." AL took every employee's ideas into account and figured out a way to keep things going and reduce production without inflicting pain.The recession saw AL waging a war on wastage and inefficiency. AL took many initiatives ranging from tiering its vendor network to reducing the number of vendors, and consequently, moving to a just-in-time (J-I-T)4 ordering system, to joint-improvement programmes (JIP), which were essentially exercises in value-engineering undertaken in association with key vendors. It set up different tier-levels to improve the quality of the suppliers. Tiering formed the basis of the vendor- consolidation drive. Till 1998, Ashok Leyland used to source the 62 components that went into its front-end structure of its trucks and buses, from 16 suppliers. In 2000, one tier-I vendor sourcedthe products from the other vendors and supplied the assembly to the company. This saved cost and time provided the vendor network was well coordinated with AL's own manufacturing operations.At AL, Vendor Development and Strategic Sourcing were handled by Corporate Materials Department (CMD). CMD identified the vendors, rated the vendors based on feedback received from Supplier Quality Assurance Cell, send drawings/specifications, called for quotes with detailed breakup of operation-wise costs, and negotiated the price at which the parts would be supplied. In addition to CMD, there were Materials Management Departments (MMDs) for scheduling based on unit production plan.AL's purchasing philosophy was to maximize bought-out parts. Over 90% of the parts were bought-out. AL believed in global sourcing. Consistent with its operational needs, AL considered both domestic (Indian) as well as international vendors. Global sourcing was normally resorted to overcome local constraints in the form of technology, quality, capacity or cost effectiveness. AL considered new suppliers for required components, based on Vendors' ability to meet its specification, price and delivery schedules. Vendors were required to have a strong manufacturing base with adequate engineering support for their own product development activities, as needed by the category of product.AL's policy was to develop a vendor base committed to continuous improvement to meet quality, cost and delivery standards. AL considered its vendors as partners in progress and believed inestablishing mutually beneficial relationships. It provided necessary technical assistance in the form of project and production engineering, to maintain quality levels. In addition, where required, it also helped vendors financially. AL's Vendors were expected to have a good quality system. Vendors' quality system had to encompass the following: cost effective process, assured process capability, continuous improvements based on customer feedback, compliance of all statutory/legal/commercial requirements of AL, a stage of development where the Vendor could come under AL's self-certification system, and, traceability - first-in first-out.AL also placed emphasis on optimizing the inventory and vendors were required to progressively meet "Just-in-Time" requirements. Delivery modes as well as packaging were required to minimize the handling/loading and unloading time. AL preferred a manufacturing/assembly/ support base at close proximity to the production units.Commenting on the relationship AL shared with its vendors, J.N. Amrolia, executive director, human resources, said, "The close working relationship with the vendors for vendor development program have benefitted us a lot in cost cutting and making the vendors understand the complexities of material handling." This resulted in low inventories all through the chain. He further added, "We stabilized the inward material flows as well as the outbound material and that saved us a lot on the inventory." In the late 2000, AL's systems were closer to J-I-T with inventories averaging just seven days, down from three weeks in the late 1990s.AL seemed to realize that cost cutting would work only if the supply chain was smooth. Thus, in1999, AL launched Project OSCARS (Optimizing Supply Chain and Rationalizing Sourcing). OSCARS identified two methods to reduce costs in the inbound supply chain: reduce material costs and through optimum inventory levels reduce the invisible inventory carrying costs. The basic tenets of OSCARS were: a single strategic sourcing agency at the corporate level with local, unit- level scheduling; smaller, stronger vendor base preference for vendors who had access to technology; and to bring down supply chain costs.Single Window SystemThe Strategic Sourcing and Corporate Quality Engineering (CQE) teams jointly formed the single window vendor management agency, bringing with them specialised commercial and technical knowledge. Within the centrally negotiated price and share of business, unit material functions interacted with the approved panel of vendors to "pull" materials in line with their production plans.For the suppliers, this had created a convenient single-point contact with AL, for sharing drawings, for negotiating prices and long-term business volumes, and for assistance and consultancy on quality to management issues. This corporate buying seemed to have benefited AL through consolidation of business per supplier and dealing from a position of strength that consolidated volumes.The starting block was the creation of a company-wide database for the 22,000-plus parts which were matched with suppliers' part numbers. This revealed a picture of fragmented business and differential pricing at units. A classification of the 1,400-odd suppliers, based on business volumes, showed that 18 per cent accounted for 92.5 per cent of the business, while 61 per cent handled just 1.9 per cent. In Phase I, corporate buying covered major suppliers (Rs 10 lakh plus per year). The materials were classified into "packs" (broad groups of similar items) with one representative each from the CMD and the CQE forming a three-legged race team of specialists for each pack.Supplier TieringAL pruned its panel of direct suppliers through tiering and system buying. Under tiering, AL dealt directly with tier-one suppliers who, in turn, were supported by tier-two and tier-three suppliers. The benefits of system buying could be illustrated with the example of the tool kits that accompanied every vehicle. In the late 1990s, six suppliers' spread over Punjab, Faridabad, Bangalore and Chennai used to supply the 15 items, which were assembled in-house. A short supply of 1,000 screwdrivers meant 1,000 numbers of the remaining 14 items in idle inventories. To overcome this problem, AL aimed at a reduction of its supplier base from 1,400 to 750.Strategic sourcing aimed at reducing costs for the supplier so that the gains were real, painless and sustainable. Tear down studies and value engineering analyzed the constitution and composition of a part to prune costs through substitution, reduction or elimination of materials/sub-assemblies without affecting quality and performance. The cost benefits were shared with the partnering supplier.AL focused on a JIT approach for high value/high volume items and low cost logistics for low value high volume items. Project OSCARS brought about a few fundamental changes. The push system ("let us make all we can just in case we need it") which resulted in upto 45 days of inventories of components compared to between 3 and 5 days globally had given way to the pull system ("make what the customer needs, when he needs it"). Each stage produced only as much as the next stage needed. Thus, only when a new chassis was loaded did the request go out for the supply of an engine assembly, and so on, for the front and rear axle assembly lines, and for the components that went into them. This resulted in a savings of Rs 8.50 crore a year and a lean supply chain.To begin with, Project Oscars classified the main components used by the company into Categories 'A' (amounting to 75 per cent of the total cost of components), 'B' (18 per cent), and 'C' (7 per cent), with their suppliers also being classified accordingly. Then, AL devised different delivery systems for each category, aimed at cutting inventory-holdings.The plant sent a J-I-T card, specifying the part number, quantity and the unloading location, through courier, fax or e-mail to the supplier who promptly dispatched the required consignment directly to the assembly line. But how did it guess AL's requirement? For that, Project OSCARS devised a funnel-planning system, covering 12 weeks of requirements. The immediate two weeks' plan was frozen and the next two weeks' semi frozen, the balance eight weeks' plan was tentative. Thus, the vendor already knew roughly when to expect the J-I-T card.To reward the vendors for conforming to the schedule, Project OSCARS planned a reduction in their numbers to 200 over a 3-year time frame. Said S. Nagarajan, Executive Director, AL, "We are looking at giving a minimum business of Rs 1 crore to each supplier involved with us." AL alsoprovided technological inputs for troubleshooting on the suppliers' shopfloors, so that they could cut their costs.Oscars IIAfter revamping the inbound supply chain, AL went out to revamp the out-bound supply chain. The revamp of the out-bound supply chain (code named OSCARS II) had the twin objectives of improving customer satisfaction and reducing finished goods inventories, and reaching improved service levels with optimum pipeline inventory levels.A customer survey and a study of benchmarks had come out with three major parameters for service level targets: order to delivery time, reliability of deliveries and availability of order status information. The customer could expect delivery in five days from the date of payment, for regular models. For multi-axled vehicles, the promised period was two to four weeks. The second promise was that the age of the vehicle when delivered would be a maximum of 90 days.In the new structure, plant sales yards acted as national pools to hold rare models (called "strangers") and excess of regional requirements. The next tier was made up of the five regional stock pools, which ensured just-in-time supplies to all regional sales offices.Said Amol J Sandil, executive director, marketing, "Within the objectives of OSCARS II, namely, achieving efficient distribution and working capital management, we have been able to improve customer satisfaction by cutting down on delivery time." He further added, "Qualitative improvements in demand forecasting and data management have been central to this achievement".In 1999, AL also adopted Total Quality Management practices. The Hosur plant in Karnataka came out with a new TQM process which seemed to be a success. (Refer Table I).The Seven Plus One TQM MethodRuleObjectiveResultTotalCostManagement(TCM)Cut CostWithin a year, operating cost as a percentage of plant turnover was down by a third.EnergyManagementOptimize energy lossOverall energy saving. Average power cost per product reduced by 30.06% without additional investment.Value Engineering(VE)Efficient material usageSubstantial reduction in the chasis cost.CrossFunctionalSynergyThe very first CFTs resulted in savings of Rs.Teams (CFT)18.2 million.SuggestionSchemeInvolve everyoneThe quick handling of suggestion hasresulted in continuous, suggestions to cut cost and improve quality.InventoryManagement (IM)Better housekeepingProbably the best IM today in the Industry that has resulted in a lot of saving.Shop InvestmentProgrammeMonitorandUtilizeFix Operating cost as per cent of shop turnover machines efficiently.Plus OneTrainingTraining across all levels in the organization.Source: 'Geared Up', A&M, November 15, 2000.However, with all these activities at the shop floor, AL did not lose sight of the customer. To understand customer needs and assimilate the knowledge, AL adopted '4P' Programme: Probe, Prioritize, Plan and Position. This worked in tandem with manufacturing as part of a cross- functional team (CFT). The CFTs worked towards continuous improvement in products and marketing. AL also built a 'marketing information system' (MIS) to monitor the trends and forecast demand from the inputs of the dealers and field executives.The ComebackIn the first half of 1999-2000, AL recorded a net profit of Rs 1.9 crore on sales of Rs 1,092.8 crore, against a Rs 36.7 crore loss for the corresponding period in 1998-99. This seemed to have been possible due to operational efficiency resulting from strategic raw material sourcing, with fewer sources and higher volumes, which cut costs; better control over process inputs by tightening supply chain and inventories and; reduced operating expenses through cost savings on energy, tools, spares and adoption of preventive maintenance policies. In 1999-2000, raw material costs were down 1-2% and inventories reduced by Rs 300 crore. Also in 1999-2000, AL sold 37,859 heavy commercial vehicles (HCVs), 27% more than it did in 1998-99. AL's total income in 1999-2000, at Rs 2,611.41 crore was 25% higher than the corresponding figure for 1998-99. Its operational profits in 1999-2000 was Rs 55 crore, Rs.77 crore more than the Rs 12-crore operating loss it had made in 1998-99.However, analysts felt that the comeback of AL could be attributed to the end of the recession. They cited the example of its main rival, TELCO, which also registered a 37.5% growth in sales volumes in 1999-2000. For AL officials the 'bad years' between 1997 and 2000 made it pinpoint its focus on critical issues like cost-reduction, operational improvement, and market penetration. Commented, R. Seshasayee, Chairman, AL, "The recession made us hasten the process of improvement that we had been working on for some time."Still, in 1999-2000, despite the reduction, the company's material cost, expressed as a percentage of sales was, at 70%, 3% higher than that incurred by TELCO. Said Arindam Bhattacharya, Principal, A.T. Kearney, who was involved in Ashok Leyland's turnaround effort, "While the company has made significant progress, it will still take time to achieve global standards in inventory management and productivity."Case AnalysisCHALLENGES WITH ASHOK LEYLANDThe biggest Challenge with Ashok Leyland as to cut costs in terms of - Material Procurement cost- Inventory Holding Cost- Logistics Cost (Inbound/Outbound)HOW DID THE COMPANY HANDLED THE CHALLENGESCutting Material Purchase costReverse Auction - The Company used methods such as REVERSE AUCTION to gain the advantage of competition in the market. It was one of the best methods to cut the material purchase cost.Vendor Management System Ashok Leyland developed a vendor base. They reduced the number of vendors and then conducted Joint-Improvement Operations through which the vendors realized their strong and weak points and improved upon them to meet ALs quality, cost and delivery standards.AL formulated a self development program for vendors for the same which was based on the customer feedback.Cutting Inventory holding costsImplementing Just In Time (JIT) Deliveries This minimized the inventory holding costs, time with respect to loading / unloading and enhanced the working capital.Better forecasting AL also used better qualitative and quantitative techniques to forecast the demand in a better way, thereby, preparing efficient production plans.The forecasting was also based on the inputs from dealers and field staff which they would have combined with the system generated forecast figures and would have came upon consensus based forecasting.Reducing Logistics CostOptimize Inbound & Outbound LogisticsInbound logistics - AL created a single window contact system for vendors which comprised if the strategic sourcing and quality engineering people. They shared the information about the technical requirements of the company with the approved pool of vendors.Vendors in turn would share the new designs, drawings and technologies with the Companys team. AL always treated its vendors as its business partners.AL nurtured them with the technical knowledge which the company required in order to sustain in the market. In turn, the vendors supplied them with the desired products and services.This helped in reducing the communication gap amongst the suppliers and the buyers as well as reduced companys time which was usually spent in search of key vendors and further negotiations.The cost benefit gained by the company by implementing this process was shared by the suppliers which further motivated the vendors to work more efficiently and with low costs.LEAN MANUFACTURING AL also implemented the concept of lean manufacturing which indicates to produce only that much quantity which is demanded by the customer. This brought down the inventory of AL from 45 days to just 5 days, thereby saving approximately Rs. 8.5 Crore.Outbound logistics AL focused on the 3 major targets - On time Deliveries- Reliability of delivery- Order status monitoringTo ensure on-time deliveries, they restructured their warehouses. The plant warehouses were used to store the not-so-fast moving goods whereas, the regional warehouses were used to store the JIT orders.This helped AL in cutting down the inventory holding cost, enabled deliveries in time and enhanced the working capital.Total Quality Management AL also implemented the total quality management techniques on shop floor which always focused on cost cutting, energy saving, efficient material usage, better housekeeping, training and development and brainstorming sessions amongst the company staff, thereby involving everyone in pouring out ideas for savings in operational costs.SWOT ANALYSISStrengths1. Good brand value of AL2. Good market share3. Efficient Vendor base4. Tech-savvy staff5. Readiness of absorb the new technologiesWeakness1. High inventory due to false forecasting2. Major tasks remained un-accomplished due to incomplete minor tasks3. Skew demand (demand based on industrial production)Opportunities1. Good opportunity in savings in terms of Inventory holding cost, Logistics cost.2. Can very well exploit their vendors bymore developing the vendors, educating them with regard to the products, tools, machinery, designs and their future requirementsThreats1. Can lose their competitive edge due to absorption of costs if not minimized resulting in loss of profitability or loss in market share as more efficient competitors will overtake the volume of AL.