amazon highlights: Apparent in Hindsight / Vector Consulting Group / 2015

 

Review meeting

”It’s not what it used to be three decades ago. We are not in the pre-liberalised economy. The production mindset is still in that era. We have to be more customer-oriented. The plant has to be more flexible. Forecasts can never be accurate.” --- “Your vendors have a lot of capacity, yet Sunil isn’t getting the material he needs?” --- “Our company would have been better off if we knew how to improve production and how to work with weekly instead of monthly forecasts.”

Capacity mystery

“Are we your personalized warehouse, Sirji? It’s not fair... Take all that and then I will manufacture the next order,”   --- “Forecasts can’t be accurate. They cannot be treated like unchanging facts. There was excess capacity…

Just another scheme

Retailers should be mostly on our side because of our existing scheme…Now, to win over mechanics with an equally good scheme…

Big brother is right

But all this is no good if the chronic issue of unreliability of delivery is not addressed,”

“No aggregates or averages,

“Can you meet out daily requirement?”

“No, you don’t. Here’s what I need. I need the inventories ready in your warehouse. I want my daily assemblies to be smooth. Do you understand that?”

“Daily schedules will keep changing, Majumdar. You have to keep up. The market is dynamic. We asked for it in the second week, you could have sent it by third week at least.”

“Your best is not helping. Automac is losing business, thanks to your inefficiency,” the Vice President thundered. “The market is dynamic. Some models sell more than others. In this scenario, sales forecasts cannot be accurate, neither can monthly schedules. You have to be flexible. Perform or perish.”

“Guardwell has been meeting daily schedules without much of a fuss…”

“The items are available to us within 24 hours of ordering. They’ve been living up to the promise, despite fluctuations. They have also assured that they will not hold us to our monthly schedules. We lift any quantity any time.”   --- But the good days don’t make up for the bad ones, as Bhaskar said. They don’t cancel out each other.

As a customer I look at daily deliveries, but as a supplier I am content with the cumulative. The damage cannot be undone. The phrase “capacity utilisation” conveys nothing on its own. It needs the frame of time to be meaningful.

Does the small matter?

“Our products are not available at the retailers. “The scheme is ineffective because distributors are not reaching out to all retailers?” Mechanics lose interest in gathering points when they see the items frequently unavailable.

Insights from the kitchen

“If things keep changing so dramatically, why does the OEM bother with a monthly forecast? And if the forecast changes so crazily, why give it importance?”

“They fulfill the total quantities as per the original schedule. But this doesn’t mean they are punctual.”

“If capacity is limited and if we change our mind – one is bound to suffer.”

If the common factor is you and your plant, then you could be the reason for every vendor’s unreliability.

“Forecasts become erroneous. So everyone adjusts for erroneous forecasts of the previous months, which results in excess inventory that has to be netted off from the latest demand pattern.

If we were to make a long-term forecast, errors will keep piling up. We will need to undertake massive corrective measures at the end of that longer period.”

“Can’t this forecast be sent by the middle of the previous month at least, so you can prepare better?”

“No. That’s the time everyone is running helter- skelter trying to meet the month’s targets. At the same time, nobody knows exactly what will be the residual at month end, due to skewed output.”

“Just to keep our efficiency levels up, we start producing whatever we can, using up the common parts. Then, we run short of material to complete the actual orders.”

The root of all problems, seems to me, is this forecast.”

“If you ask me, you should not be relying on it so much.

“The word reactive does sound inferior to the word proactive. But in this context, the point is when one cannot predict and prevent, then it is better to have systems which can detect and react fast.”

make sure I always have raw material. And always battle- ready, which is ready to fulfill any immediate demand. And ignore the forecast. Since there is no certainty in the auto world, it would serve us well to accept that.

Not a typical conference

Our working capital is locked up because of delays in settling credit notes. We’ve lost sales because of material not being available.” --- “You dump inventory on us. But you don’t do anything in the market,”

“At the end of the month, I am dumped with material that I don’t need. What I need I don’t get. Then I am forced to sell at discounted prices just to release the locked up cash.

There is always pending stock, pending credit. We definitely can’t survive the write-offs.”

The billing is done every day. It is uniform through the month.” --- Guardwell’s billing is spread out throughout the month, it doesn’t heap stocks on distributors towards the month end. At the same time, it’s been growing at a rapid rate. “We are holding three months of inventory. Prakashbhai holds only 15 days of inventory at a time. Yet, his business is growing,”

The distributors say they don’t have targets, yet their sales growth is the best in the industry.

The right inventory

since we do have a decent number of full kits, we’ve ramped up production and pushed down WIP,”

How much should I order, what data should I refer to? How do I arrive at the quantities?

“I bought raw material before the forecast arrived and then ordered raw material as per the forecast once it arrived. I ended up with too much raw material inventory.”

Min-max or reorder point systems work when demand is fairly stable. But not many SKUs behave like that. So is forecasting the only way out?

Lean is mean?

“So you produce according to a schedule which is nothing but a forecast given by the OEM?”

“How can you call that JIT?”

“It can be called JIT if everybody, including the vendors, create and move inventory closest in time to the real demand, JIT, at every level.

“The Kanban system does not help when the demand is erratic. So demand has to be smoothened or levelled. Instead of peaks and troughs, it has to be one straight line. It cannot fluctuate wildly.”

I can’t control demand, no way I can tame it.

“There is a way,” We call this mix model levelling. It means that every product has to be produced every day.

“The Japanese call this Heijunka. It prescribes that every product be produced in every cycle. These cycles have to repeat rapidly, many times during a day. Keep the cycles short and quick.”

Heijunka says: Give equal attention to all your SKUs, ensure continuous supply. Do not give the market a chance to miss any of your products. Satisfy the market and you will never see another day of expediting.”

The many vendors in the many tiers can’t have their own rhythm. Tiers can’t have their own rhythm in isolation.

In Japan, Toyota did it. It took Taichi Ohno 20 years to perfect it. That company had the commitment and patience to continue on the journey.”

Same story every month

“Sunilji, if you ask me what’s the biggest crib of the distributor, it is the irregular billing. A bulk of it is done in the last couple of days of the month.”

hockey stick has always been there. Many companies in the manufacturing and distribution business operate this way. 30-40% of the target is achieved by the 23rd or so, then 70% is done in the last few days.”

“We would willingly take on fast-movers, but we aren’t so lucky to get what’s on our wish list.”

“The distributor could probably deal with being so full, if he is full with the right kind of stock. Companies choke us with the wrong stuff which only incapacitates us.”

“The other aspect is this. The distributor has limited capital. When it is stuck in the wrong kind of stock, our hands are tied. We cannot buy the fast-movers. This causes a loss to the company as well.

“The distributor is in a tricky situation. When he wants product x, he is given product y, which is not immediately saleable.

“The distributor is stuffed with wrong stocks. This means he has a shortage as well as surplus. The two always occur together.

“Guardwell assured us it wouldn’t create surplus or a shortage at the distributors’ end.”

The supply of fresh stocks is restricted to whatever stocks I’ve sold at a product level.”

“Guardwell advised me to expand the range of products I supplied and also service more small retailers. That did the trick. Sales began to climb.”

“All retailers are equal in the eyes of Guardwell. No A, B, C categorization based on size, no differential treatment.”

Lessons from a tube of toothpaste

you don’t promote one brand over the other. You don’t switch customers. As far as I can see, you treat all brands – high or low margin – as equal.”

“Companies want retailers to take on more and more stock. We invest our money in their products. Now, some products sell fast, some don’t. We cannot treat all products as equals.”

‘the customer buys, the retailer doesn’t sell,’

incentivizing the retailer does not impact sales.

Small is big

“When does a retailer not pay on time?”

“A retailer dodges payment when asked to pay for unsold items. That’s the general attitude. But for whatever he has sold, he mostly pays willingly.

“A retailer can’t not keep buying and not paying.

How does a distributor get a retailer to pay, promptly?”

Keep less stock with him!”

“Give him small and frequent lots.

“Restrict supply, at the outset, to say 15 days’ stock. Assuming supply is once a week, that much material is enough. After that period, when he has sold all of the stock, he will need to order again. When will he get the stock he orders? Only after he clears his previous payment!”

Guardwell removed all trade schemes which can force trade partners to advance their orders and maintain high inventory.”

the cost of not going to the small retailers is higher than that of servicing him regularly.”

he will buy large quantities that will last for several weeks or at least till he can afford another trip?”

“The stock reaches the tiny town and sits on the retailers’ shelves for weeks, at times months, together. That stock is actually my working capital.”

“The retailer hoards stocks, doesn’t pay the stockist. The stockist doesn’t pay me. My money is stuck. I suffer.”  

“So you should service the retailer regularly, restrict his stock to a few pieces per product?”

“Yes. That’s the way to ensure my money doesn’t get locked up in idle stock. By staying away from the small retailer, I am doing myself a disservice.”

“As you can imagine, the conspicuous absence of companies leaves the door open for dubious agents who swoop in and gobble up market share,”

All this talk of market share is baseless when we don’t know the size of the market.”

they actively meet the needs of these retailers, service them regularly, save them those tedious trips to stockists. Whatever the retailers need, agents deliver to their doorstep.”

“So, if you look at it… by not servicing small retailers, companies expose themselves to more risk and more loss.” Prakash stopped to confirm if Sunil agreed. “Guardwell explained this to us, opening our minds to expanding our network of retailers.”

“Look, Guardwell reduced our inventory and followed the same system of limiting supply to whatever we sold. They helped us reduce our inventory. We are helping them expand their market reach.”

“Unbelievable! This means that Guardwell is taking on the excess inventory. How can a company implement this kind of a strategy of shifting inventory burden from distributors to within itself?

Glimpses of Guardwell

“Do we produce just-in-time, as per demand? Yes. Do we use the techniques of JIT? Are we following the systems of Heijunka and using Kanban cards? No.

The painful process of set-up time reduction, standardisation, levelling and smoothening –the trio integral to achieving JIT production - would run a healthy, functioning plant into the ground before elevating it to perfection, she warned.

“You don’t need to shut out all fluctuations, and create an air-tight factory. A few fluctuations are bound to find their way in, both for volume and model.”

“Toyota needs Heijunka because it supplies to dealers according to the dealers’ orders or forecast. We don’t do that.”

We are only looking to dampen the fluctuations, reduce them drastically. Not eliminate the fluctuations.”

WIP can be constant only if parts or raw material are perennially available. If the FG is low and constant, it means the plant is producing according to off-take not to forecast.

Buffet of lessons

“The mis en plas or the raw food or ingredients are ready. When we see that a particular item is running out fast we make a fresh batch.”

“The average per head cost of a buffet and an a la carte meal is the same for a group as large as ours. But with a buffet, a person gets to sample a large variety of dishes.”

Distributors receive from Guardwell’s warehouse exactly those products that have been sold or moved out of the distributors’ warehouses.

The production team, Sunil grudgingly concluded, is the backbone of the replenishment system.

Gleanings from the water crisis

one demand point – however large – was far easier to satisfy for a supplier than multiple small points.

The tanker could keep one large overhead tank from running dry, but it couldn’t prevent hundreds and hundreds of buckets from drying up.

The overhead tank, an intermediary between the tankers and the buckets, ensured that the buckets received water whenever the taps opened.

the overhead tank acted like a dampener.

An overhead tank acted as a reservoir of water, a storehouse. The equivalent of a storehouse for the auto industry could only be a warehouse or a central warehouse.

Without a central warehouse, the demand and supply have to be aligned perfectly.

with a sufficiently stocked central warehouse, OEMs would have access to auto parts to keep their assembly lines well fed and running.

How could he transition from manufacturing to a ‘schedule’ to manufacturing to ‘maintain stock levels’?

Guardwell enjoys twice the protection because it holds seven days FG which is twice its lead time. The key is lead time,

Shorter the lead time, more agile the plant.

What was the simplest ways to shorten lead time?

One, in the presence of complete raw material, the SKUs can be assembled in no time.

Two, if quantities of orders of each SKU are brought down, those orders can be fulfilled in little time.

Instead of manufacturing to forecast, the plant can manufacture according to OEM offtakes, which are small quantities,

“Instead of manufacturing to OEM forecasts, which will involve big batches, we will manufacture according to OEM off-takes, which shrink the batch sizes. The number of SKUs will come down, so will the lead time,”

Discovering the inherent harmony

That is the power of a symbiotic relationships – a win-win relationship.”

Instead, they’d speak of the dialogue that had opened their eyes to the need to transform their relationship from “parasitic to symbiotic”,

The buffet, the broken pump, the vivacious Noronha, with his cautionary tales, the fatiguing yet enlightening encounter with Priya Kapur, were analysed at length.

What do we want?

Articulating the ‘want’ - high sales figures, a chaos-free plant that satisfies the needs of both OEMs and distributors’

The sales team would despatch stocks from the central warehouse to distributors based only on the distributors’ consumption. Like the buffet system. In other words, they would react to the ‘pull signal’ as sent out by the distributors.

The plant would have to manufacture stocks and replenish the stocks despatched from the warehouse to distributors, just like the kitchen staff cooked up the food and topped up the buffet spread at the restaurant.

That’s how sales and production would together execute the perfect ‘pull’.

The central warehouse would be the dampener that would keep fluctuations in market demand from blowing into the plant, just like the overhead tank shielded the tankers from demand coming from the many households (and their numerous buckets) in a society.

Plants following TPS draw up schedules based on dealer orders or dealer forecasts. What I am proposing is that we do away with forecasts completely.

Instead, we look at what the distributors are consuming and despatch only those products from the central warehouse. And the plant will produce what the warehouse is despatching.”

This aspect sets this system apart from the Toyota Production System, which manufactures quantities as per dealers’ orders. Dealer orders are nothing but forecasts. These orders are force-fitted onto the Heijunka of the plants,

“The central warehouse acts as a good enough dampener across dealers. A regional warehouse would act as an additional dampener, shielding the plant completely from the fluctuations of local markets.

The central warehouse would also double up as the aggregator of stocks. Just like the overhead water tank storing water for apartments.

“The distributors can have low inventories, unlike in the Toyota Production System, where the inventory would be high because distributors are still forecasting their orders,”

“The central warehouse might have slightly higher inventory, but the inventory of the entire pipeline will come down and the sales would go up.

Visibility is low, yet flexibility is high. That’s the paradox.”

“I won’t pay attention to products whose sales have touched only one or two pieces. And I will attend immediately to those that are close to a stockout; their batch sizes will be big enough to keep plant efficiency figures healthy. I have full flexibility to decide on batch sizes and timing of production.”

“When will you produce those one or two pieces that have been dispatched from the warehouse?”

“I might fit those between schedules, whenever there is a gap in capacity. Or choose to finish those if I have time after a particular shift ends. I can also attend to them when I am ready with a similar set-up for a similar product.

Or I might choose to sit on those till the stock levels dip to an extent that when I do take up the production of that particular product, the batch size is decently large.

“It’s exactly like how we take our cars for fuel refills. We do it at our convenience, thanks to the fuel meter, which indicates the stock levels.

Visibility means flexibility.”

“Unlike in Toyota Production System, where the batch sizes have to be small and fixed, here the batches can be of any size. That’s flexibility in the true sense.

“A distributer has to catch every retailer he spots. That’s what makes him a distributer. Only wholesalers can afford to sit on their hands and wait for retailers to come to them.”

“A distributor does not vary the price with quantity and customer. But a wholesaler, he’s a different breed. He sizes up his customer, looks at the quantities he’s buying and then fixes the price.”

“Retailers have assumed that the route to getting higher ROI is via high margins. They don’t see that they are trading high ROI for margins.

There is no debate about which of the two is more covetable. ROI, of course. Higher margins means buying in bulk. They have to hold that inventory for long periods.

About five percent damages taken into account. These eat into the margin. Eventually, there is a loss in ROI.     

“Higher margins do not guarantee higher ROI because margins only come with large quantities. That’s not desirable at all. The only way to secure high ROI is to focus energies on inventory turns.”

“High inventory rotation is not a given, companies are unable to ensure this. Retailers, in the pursuit of reasonable ROI, keep demanding higher and higher margins.”

“I will supply them small quantities. Free up their working capital. This will allow them to buy more variety. More variety will reach the market. Sales will go up when we expand reach.”

“That’s the way to go, theoretically at least. Improved range coupled with wider reach will deliver that shot in the arm for sales. Sales begin to climb, distributors would want in on it.

They’d want more and more pieces of the same pie, not another pie. What I am saying is when distributors get a taste of the attractive ROI, they’d want to consume more,”

“We can implement the solution in a controlled environment. Make sure we get good results and use that to convince people,”

A pilot project

“No more orders and forecasts,”

“You simply have to report your daily sales to us. We will replenish your stocks accordingly, send you only those products that you have sold,” he repeated. “There won’t be any stockouts. I guarantee that.”

Even if the targets are not met, I promise you, we will not push material on you.

“We want you to actively increase coverage of the market, improve your service, and do better range selling.”

Norm Setting. That was the first task of the pilot. Sunil looked at transportation time – from the plant to the warehouse of the distributors - 10 days. This plus five days (allowing for any delays) would be the target level or the norm.

He then analysed the rate of sales of each product, by studying sales figures of the past month, and arrived at the average quantities that could be sold in 15 days.

Next, Sunil and his team visited the distributors’ warehouses to assess their stock levels.

Back at their office, records showed that one of the distributors had reached his credit limit.

 

Another review meeting

In retrospect

“That our colleagues’ imaginations are limited by their past. High Gear is trapped in the past.”

We view the world through the lens of our experience. When we encounter something radical, we evaluate it with reference to past experience, our baggage.

Unfortunately,we use our past experience, which is based on the old paradigm, to evaluate the future involving the new paradigm.”

The ideas are radical. Any mind would find it hard to wrap itself around them. To listen to theory and relate it to one’s own job and work environment would take a complete shift in attitude.

“Same goes for the salesmen. Won’t they lose their minds without targets? The idea that primary sales cannot be controlled directly is hard to swallow.

“Think of the production men’s plight. No schedules, no monthly plans. Breaking it to them would be like pulling the rug from under their feet!”

There’s a bigger challenge here. We need to find ways to make people – anyone – change.”

Healthy lessons

recognised that ruling out status quo as an option forces one to act.”

“Godbole agreed to our pilot because he feared the status quo – sales not improving.

the distributors agreed to participate in the pilot because the inventory turns were low and deteriorating.”

“Everybody in High Gear has different goals. Maintaining status quo is the safest option; they are invested in the current paradigm. You should have made the effort to convince each person why preserving the status quo is not good for him as an individual in the organisation,”

“Convince the person to let go of status quo and create capacity? Is that all there is to your change management process?”

“It’s the way a father teaches cycling to his child. He pushes, motivates and handles obstacles that come in the way.    

Once the child starts learning and enjoying the activity, the father can let go and be assured that the child can cycle independently; the child has entered a new state of inertia.

Converting the wholesalers into distributors would demand a massive paradigm change.

“The wholesalers were dealing with a few large retailers. Now if they were to turn into distributors, they’d have to deal with numerous small retailers.

They’d need more staff to handle the extra load, the number of transactions. The reconciliation effort multiplies overnight when you take on more retailers.

His sales people have to maintain a certain rhythm of visiting the retailers. There are challenges with respect to transportation.

“None of us acknowledged these problems or took the initiative to solve them. And I was merely instructing, not handholding or coaching. I should have worked with them to remove the obstacles, just like the instructor did with me.”

“Everyone needs a coach to make a transition, someone who has seen the obstacles along this journey and knows how to overcome them. He knows the challenges that will arise while crossing over to the new paradigm. If left alone, they are likely to go back to the old paradigm.

The importance of sequence

START   

- Consumption-based replenishment in plant

- A central aggregation point

- Replenishment for suppliers

- Replenishment for distributors

- Replenishment for retailers

- Expansion of reach and range in market

- Replenishment for OEMs

Each requires us to discontinue old practices.

 

STOP     

- Monthly schedule for plant

- Monthly schedule for vendors

- Pushing inventory to meet primary targets

- Volume-based schemes for distributors and retailers

- Wholesaling

“We should take few large distributors in a region,” Sunil continued, “Put them under pull-based replenishment with reserved stocks and then start work in the same region to increase the range and reach.

Yes, availability of stocks will not be perfect but it will be lot better than it is today.”

“The replenishment based on consumption will break the sales skew. We will get additional sales and also get capacity at the plant to implement the next step.” 

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