Wednesday, September 24, 2008
After announcing plans to more aggressively enter the retail channel and shutter a legendary computer plant in Austin, TX earlier this year, Dell is currently shopping its remaining company-owned factories, according to a report in the Wall Street Journal. The move follows another disappointing quarter in which Q2 earnings dropped 17%, from 2007, causing a sharp drop in Dell’s stock price as well. Unlike most computer manufacturers, Dell continues to build most of its own computers, in part to support the “build to order” model that had for more than a decade defined its supply chain greatness (Read article “Jit – The Dell Way”) and which the company said it was substantially abandoning in Spring 2008 announcements. It also said at the time it was planning to make greater use of contract manufacturers (CMs). Dell currently does use Asian-based CMs for first-stage production of many of its notebook computers, but the work is actually completed in Dell-owned facilities to add final options, a process Dell refers to internally as “two touch.” While the approach added extra logistics and manufacturing costs versus a single-touch system, for many years profit margins were fat enough to absorb the hit. But market conditions have changed, both in terms of lower prices and margins and a rapid shift to notebooks, making the two-touch process more of a financial burden than when notebooks were a smaller percent of sales.
Tata Motors may outsource distribution to a new unit
India’s largest auto maker is planning to outsource the logistics and distribution part of its business to a fully owned unit, TML Distribution Co. Ltd, which was incorporated on 28 March, according to the company’s latest annual report. Tata Motors Ltd’s plan to outsource distribution to a newly created unit may help it keep some costs off its books and make money from through contracts with other manufacturers, analysts say. Tata Motors’ distribution plan is not new in the Indian automobiles business. Rival Mahindra and Mahindra Ltd, India’s largest utility vehicle maker, has a unit called Mahindra Logistics, which manages the logistics business for the entire Mahindra Group and also for other manufacturers.
Videocon Targets Over 100 Logistics Centre Sites
Videocon Industries has identified sites in over 100 cities where it plans to set up logistics centres through a joint venture with Japan’s Mitsui and Hitachi firms. The report in the Economic Times said the JV is likely to be operational by the third quarter of this year, and will have Videocon offering its infrastructure for setting up back-end services, while Mitsui and Hitachi will provide expertise and know-how. They will initially provide back-end support to Videocon's retail businesses, including consumer electronics chain Next, cash and carry chain Bolld, and entertainment store Planet M. The centres may later on provide services to third parties, and become business centres in themselves.
Interestingly, this idea of reuse is not a new phenomenon. Recycling of plastics, papers, metals, reuse of glass bottles, etc. are being practiced for a few decades. In contrast to recycling, where recovery is done for useful material, remanufacturing is done for recovery of parts, components, modules or even at product level. These recovered parts/components are thoroughly cleaned, inspected and if necessary repaired and replaced with new ones and then reassembled to build up a product with quality 'as good as new'. One should remark that a remanufactured item is often cheaper than a new one as the reprocessing and manufacturing expenditures (time, energy, cost, etc.) are avoided. For example, a used machine can be remanufactured to "as good as new" for 50-60% of the cost of new machine and Berkeley Auto Mall is selling refurbished Maruti 800 series 1997 (AC) model at Rs. 130,000.
With global concern over environmental issues, various countries have formed stringent laws on disposal of goods and take-back policies are made mandatory for companies. Disposal cost has drastically increased several times. Consumers too demand for a 'green' image of the company. The best option available for a company to come out with such pressures from the government and customers is 'Green manufacturing'. It is not only economically profitable but also ecologically beneficial.
'Green manufacturing' is successfully operating in western world like US and Europe. Several companies, like Xerox, IBM, Kodak, etc., have adopted it for their products. There are estimated to be in excess of 73000 firms engaged in remanufacturing in USA directly employing over 350 000 people with total sales accounting for $ 53 billion per year. In India, unfortunately product recovery is still not well known in business sector and market. Although, environment has already become a serious issue in strategic plans for an Indian manufacturer, no organized effort has yet been seen in recovery of used products or remanufacturing. On the other hand, India being a developing country, perhaps, bears enough potential as a market for remanufactured products. We cannot deny the facts that product recovery practices exist in the Indian market as an unorganized business sector and there is a presence of strong secondhand market segment. In a price sensitive market like India, if there is availability of refurbished/remanufactured products, one would definitely plan to buy a remanufactured product from the company as the price is comparable to a secondhand product and the quality is comparable to a new product.
'Green manufacturing' involves product recovery activities and reverse logistics. The former reflects on various operations, which are directly applied on the returned product to convert it to a usable one. There are various types of such activities like remanufacturing, recycling, refurbishing, etc. On the other hand, reverse logistics is the area that focuses on inbound supply and distribution of the used products and the inventory management. This once again can be divided into inventory management activities and reverse distribution processes.
The uniqueness of these activities is mainly centered on the uncertainty factors, particularly relating to timing, quality and quantity of supply of used products. The following facts justify the reasons for the complexity inherent to 'Green manufacturing'.
• The timing, quality and the quantity of returns are unknown
• Demand is also stochastic in nature, so balancing returns with demand is vital
• Disassembly operations are highly variable with respect to the time required which, in fact depends on the condition of the returned product, modules, components or parts
• There exist various methods of product recovery depending on the condition of the product, for example, returned items may either be remanufactured or used for spares or sold to secondary market or recycled
• Reverse logistics network is also a complex domain of 'Green manufacturing' due to the involvement of stochasticity both in supply of returns and demand of remanufactured products, and existence of both forward and reverse distribution channels
• Uncertainty exists also in routing and processing times, as the condition of a returned product is not known before disassembly operation
As a scientific field, 'Green manufacturing' is still young. It needs new inter- and intra organizational processes. However, the inherent scarcity in natural and environment resources is creating the necessity and the motivational forces to make it a field of active research and an efficient business proposition in years is yet to come. In addition, within a few years, like a newspaper boy or a milkman, you may not be surprised to see a company-van coming to your doorstep collecting their products back.
Rajan Jindal (PGP24041)
JIT, Just-In-Time is a term usually thought of as describing inventory arriving or being produced just in time for the shipment or next process. Just-In-Time inventory systems depend upon logistics that include transportation, warehousing and several strategies for handling the potential supply chain uncertainties. Just-in-time is easy to grasp conceptually, everything happens just-in-time. Conceptually there is no problem about this; however achieving it in practice is likely to be difficult!
Many corporations have adopted JIT since its inception but no one has gone as far as Dell. It is well known, of course, for nearly eliminating finished-goods inventory by cutting out resellers and connecting directly to customers. What is less known is how it has transformed the back end of its operations -- its assembly lines and supply chain -- into one of the fastest, most hyper efficient organizations on the planet. Eleven years ago, Dell carried 20 to 25 days of inventory in a sprawling network of warehouses. Today, it has no warehouses. Though it assembles nearly 80,000 computers every 24 hours, it carries no more than two hours of inventory in its factories and a maximum of just 72 hours across its entire operation. The key to this robust production system is a solid process that monitors demand and supply on a real-time, continuing basis. "But when you have basically zero inventory, it's like draining a swamp -- all of the stumps start to show," Dell says. "The problems reveal themselves, and you can take immediate corrective action to fix them."
The New Finance Model in place
The implications of working in this kind of hyper drive are profound. Dell changes the finance model, and it is an enormous competitive weapon. On average, computer makers pay their suppliers 30 days before a PC is shipped to market, bought by a customer, and paid for. However, Dell's build to-order model lets it receive payments from its customers immediately -- through credit cards, either online or over the phone. It pulls the parts directly from its suppliers; builds and ships the product within four days. Yet the company does not pay those suppliers until 36 days after it receives payment from the customer. So Dell has achieved a cash-conversion cycle of negative 36 days. That means it operates with negative working capital, eliminating the need to finance its operations. Dell turns its inventory 107 times per year -- an astounding advantage over HP and IBM, which flip their inventories 8.5 and 17.5 times per year, respectively. It's a fundamental law of manufacturing that the faster you turn inventory the lower are your costs. To get a slice of its lavish procurement pie, Dell's legions of suppliers must do things its way. They must be flexible enough, cost-competitive enough -- and above all, fast enough -- to compete on Dell's terms.
The Constant drive for development
Dell is every bit as hard on itself as it is on the folks who make its disk drives and batteries. Dell has brought a maniacal focus to shaving minutes off the time it takes to assemble and ship a computer. By studying videotapes of "the build," as they call it, factory managers have slashed in half the number of times a computer is touched by workers. They have counted the screws in a PC and redesigned it so that the major components -- hard drive, graphics card, CD player – simply snap in place. In a blur of synchronized movements, a veteran builder can piece together a Dell PC in three minutes. The software burn and testing, which is powered by Dell servers with enough bandwidth to download the entire Encyclopedia Britannica in eight seconds, takes several hours, depending on the amount of customization that is required. The entire process, from the time the order is taken to when the finished PC exits the factory, is wrapped up in four to eight hours. Dell is always on a mission to outdo itself, and the factory is expected to increase its production by 30% every year.
The Thin White Line: Kanban Analogy
Dell's clout with its suppliers is epitomized by a set of thin white lines on the floor of the manufacturing plant. The lines form a rectangle that fronts each of the 110 cargo bays encircling the factory. Tractor-trailers loaded with parts line up at the bays. When an assembly line runs low on disk drives, a signal goes out. A forklift wheels onto a trailer bed, snatches a pallet of disks, and pulls out onto the floor. When the forklift crosses the white line, a scanner records the shipment's bar code and the parts move from the supplier's books to Dell's. Dell does not pull the part until it has a customer order; it does not take ownership until it pulls the part.
In effect, that thin white line demarcates Dell's entire supply chain. Dell holds inventory only for the six to eight hours it travels across the assembly line and for the 18 hours it takes for the completed CPU to be trucked to merge center, where the unit is bundled with a monitor and shipped to the customer. Total inventory time: two to three days. Most suppliers, however, are required to stage anywhere from 8 to 10 days' worth of buffer stock in those multivendor warehouses located within 90 minutes of the plant
The constant Pressure on vendors
Dell is hardly coy about pressuring its suppliers to do better. A metrics-obsessed organization measures everything, not least its suppliers' performance. It rates all of its vendors on their ability to compete on cost, technology, supply predictability, and service, and posts their scores daily on a password-protected Web site. Every quarter, the suppliers' executive team meets in Round Rock, Texas, where Dell is headquartered, for a formal feedback session. In these meetings, dubbed QBRs (quarterly business reviews), suppliers are ranked against their competitors. Based on that comparison, they are awarded a percentage of Dell's purchases for the upcoming quarter. Dell is cold-eyed in these assessments, unflinching and unsentimental.
Despite being one of the market leaders, Dell is still relentlessly striving to get better faster; Dell intends to slash $2 billion in costs which will come from manufacturing operations and the supply chain. That will put even more pressure on Dell's component makers. As Michael Dell aptly says, ‘In the high-tech business, you either grow or die’.
Praneet Gourav Mishra (PGP 24151)
Integrated Electrical Maintenance
We now look into the Mechanical maintenance area in an integrated steel plant.
Integrated steel plant means that the firm makes finished products like cold rolled sheets from basic raw materials like iron ore, coal, and fluxes. The role of Maintenance is to ensure equipment availability as per annual business plan of the firm.
The sheer size and complexity of process requires a dynamic maintenance process and hence Tata steel the world 6th largest steel manufacturer adopts Total Quality Management (TQM) practice in to achieve this target.
Components of TQM:
Daily management: Deals with sustenance of current level of performance
Policy management: Deals with future high level performance.
Individual responsibility for different work is assigned and the data is collected. For better understanding of data graphs are attached with individual data. A review is done on this data on a monthly basis and all the deviations are noted. The action plan for those deviations are made and implemented on next month. Since working in a steel plant is hazardous, due importance is given to safety aspects. Tata Steel focuses on continuous improvements, hence suggestions from individuals are encouraged, and progress on those is tracked through this. (Concept borrowed from Total Productive Maintenance, TPM)One important misconception about daily management is that people consider it as a daily affair. Daily management can be done on monthly or weekly basis. Policy management in maintenance function is not of much use as not much of significant changes are happening in this.
Written on experience gathered while working in Tata Steel Limited by
AshishKumar (PGP 24187)
It then links these customer requirements directly to operational processes. It illustrates how the manufacturing methodology fundamentally affects the customer satisfaction. This is in illustrated in many different ways ranging from quality and cost (directly related to operations); to service (delivery time and schedule). Then the book goes on to show how competitors attack existing companies whenever they fall short on customer expectations. They improve their manufacturing setup to enable them to provide better customer service.
It shows how this is accomplished by the help of linear solutions (like reorganization, decentralization, de-layering, continuous improvement, benchmarking, and participative management) & more importantly, through non-linear solutions. The book emphasizes on the non-linear solutions (Also called re-engineering by some people) and shows how linear solutions help the company to remain in competition (at least for a short time) but non-linear solutions make a company soar ahead of its competitors and hunt them down. The book provides some valuable insights into the world of manufacturing. It shows us that a bad system cannot be improved endlessly. Eventually it has to be replaced by a better system.
Some of the key points discussed are
1. Customer orientation (operating in customer time, quality, cost etc)
2. Cycle time & system response time
3. Inspection, inventory & feedback
4. Strategy, process model, process intent & value delivery system
5. Linear & non-linear solutions
6. Quality & Cost, Flexibilty & Delivery
The book tries and manages to present theories in a compelling manner. Even counter-intuitive points are presented in a logical and easy to understand manner. As a literature of management this book provides for a very compelling read and is quite thought provoking in nature.
Jagrit Minocha (PGP 23064)
Monday, June 30, 2008
As you read these lines, I presume that you have already explored the campus in its wilderness & beyond. But this is only a beginning of the memorable years that you are stepping into. While the mountain of books collected from the PGP office lies unsettled in your rooms, the freshness of a new book does create inquisitiveness to atleast flip through once. The campus air would be rent with who’s who of campus including the faculty. ‘Mark ‘, ‘Ops’, ‘Fin’ etc are just a few slangs in academia that you will live by for atleast next two years. While ‘facchas’ do have access to PGP2s 24x7 to quell their anxiety & resolve all queries under the planet, let me do my bit to decode & break the myths for one i.e. ‘OPS’.
Operations Management, better known as ‘Ops’ has its share of history too like any other subject. Put it simply, this area of management forms the heart of any business. The analogy with heart is not to highlight that this is the most important aspect but to signify that it pertains to executing your business plans on ground. The efficacy of any planning is realized when it is executed. And Operations deals with execution!
The junta with work ex would surely have more idea of what operations entails, the uninitiated might easily assume that operations is all about factory, union, transportation etc. Well, it is surely much beyond all these. And it does not pertain to manufacturing only. It has come a long way since the Industrial revolution of 40’s. You have operations in services as well. Eg. Banks, Hotels, Retail, Railways etc. And operations or for that matter any business function should never be viewed in isolation. All work together for growth of a company.
The latest avatar of Operations - Supply Chain Management (SCM) has become a buzz word across campuses, businesses & research labs. SCM has encompassed all the aspects right from product design to manufacturing to distribution to after sales service. It interfaces with other functions like marketing & finance at various nodes & time frames. It has given a ‘process view’ of delivering the products & services in a business. That also explains the vastness of this subject & the interest it has generated in the business world for last two decades.
I do not intend to make this editorial a literary of definitions & theories. The curriculum will give you enough gyaan on history, present & future of SCM. And some of the Profs do ‘Rock’, pay heed to them. Library at L is one of the best in country. This monthly newsletter from OIG itself shall be a good source of information on Operations. Do track it.
Some of you might have already started grilling your seniors on subject combinations & specs to be taken in 2nd year. Relax! There is no hurry for that & you have loads of time & opportunities to come to a decision. Keep your mind open & do not form opinions at the outset. Just sail along!!!
- Sachin JayaramThe guest editor is an alumni of IIML (Batch of 2007), working as a SCM consultant with Bristlecone India Ltd. He can be reached at firstname.lastname@example.org
Introduction to Operations Management
A WARM WELCOME TO YOU ALL FOR MAKING THROUGH TO IIM
The main purpose of writing to you is to give you a basic concept of Operations Management and dispel any notions attached to it. Moreover I will try to explain what all you can expect from Operations in IIML and finally where you can be if you wish to pursue operations as a career option.
The basic functions of an organization viz. a viz. the functions of management are always the same: designing, planning, organizing, directing, and controlling albeit with a little modification according to the business needs. Management establishes the goals and objectives of the firm or organization and plans how to attain them. It is management that organizes the system and directs it so that its goals can be reached. Finally, management must be able to analyze the working of the system in order to control it and to correct any variations from the planned procedures in order to reach the goals. These functions interact with one another and managers must be skilled in these coordinating processes and functions if they are to accomplish their goals through the efforts of other people.
The basic building block of every organization is Operations. The driving force here must be an overriding goal of continually improving service to the end customers. Services here encompass all those facilities that are essential/will help to improve the quality of work of the next process/customer. Therefore Operations Managers seek to control the processes that determine outputs from businesses. In other words, as an Operations Management major you’ll study operating systems, quality management, product design, supply chain management, and inventory control. You’ll study how equipment, information, labor, and facilities are used in the production process. You’ll learn about every step that goes into making a product or service and how to make each step as efficient and beneficial to the company as possible.
Within Operations management, an MBA is expected to go through the various disciplines such as Basic Operations Management, Supply Chain Management, Logistics and Vendor Management, Manufacturing System Design, Manufacturing Planning and Control, Service Operations, Operations Strategy. Many and most of these courses are floated by the IIM Lucknow Operations faculty over the two year course. The best part of this is that students can learn the best of both worlds, namely the strategic view as well as the operational view of Operations Management through these courses. The current faculty in IIML is also pretty best in class in the operations group and learning from them is an experience altogether.
Throughout the two year course, there is a general feeling in the students that the courses are monotonous and mainly academic in nature. Herein lies the functionality of groups like OIG which organizes events throughout the year which can be considered fun, challenging as well as educative. Paper writing competitions covering recent developments in Operations allows students to showcase their talent across the best B-Schools not just in
All said and done, B-school grads will always look at events through the view-point of “How a particular activity will help/give direction to my career?”. With the large number and variety of companies coming to campus for placements, students can have a focus towards Operations and venture into diverse areas like Supply Chain Management across FMCG sector, Banking Operations, Consulting Firms etc. Companies like McKinsey, Accenture Consulting, Cadburys, Nestle, Asian Paints, Reliance (The list just goes on…) are really looking out for B-School grads with interests in the operations side. The need of management graduates with sound operations knowledge is highly valued in any and every organization and that is why the 1st year has a number of courses to introduce the offerings.
I hope that atleast a few of those who will be reading this article will find the concept of operations interesting and see the courses offered in a new light. Set your priorities when you are in IIM Lucknow and work towards them in the best possible manner. But within all this, remember one thing. NEVER FORGET TO ENJOY AT THE CAMPUS as these two years will be one of the best you will ever have. All the best to you all for the coming years!!!
Ronjay Chakraborty (IIML’ 08) is working as a Senior Consultant with Capgemini India Ltd. He can be reached at email@example.com
Economic Order Quantity (EOQ) is the scientifically drawn formula to balance the ordering cost and inventory holding cost to arrive at the optimal quantity for which reordering must be done.
Q* = Economic Order Quantity
C = Fixed Cost of Ordering
D = Annual Demand of the product
H = Holding cost of inventory
EOQ is believed to be so sacrosanct that more often than not B-School grads tend to swear by EOQ in the long run. But end of the day, what has to be observed is that things in real world are not as hunky dory as shown in the text books and the assumptions behind the derivation of EOQ must not be forgotten while applying EOQ in real life.
The derivation of the above formula is based on some frequently overlooked presumptions. Based on my learning/ experience in last one year at RIL, I would like to attack some of these presumptions in this article.
Demand or consumption pattern must be steady
EOQ model assumes a steady or uniform consumption pattern, where there is a variance; we need to pad up the EOQ with some safety stock. Wherever the coefficient of variance (standard deviation / mean) of demand is very high, there is very little benefit drawn out of EOQ. This is due to the reason that EOQ would be very much negligible compared to the safety stock.
Note: Further read up on the topic of “long tails” would help which talks about categories of products where coefficients of variability are very high
Vendor does not always sell a single product
EOQ assumes a ‘single vendor – single product’ scenario. In real life a vendor doesn’t supply one single item to a customer. In such a situation, you always find ways to order for quantity well below your EOQ, as the ordering cost is offset by combining orders for more than one item together.
Vendor is not necessarily a friend
Some Original Equipment Manufacturers who enjoy a monopoly or a technology advantage have the upper hand and do not supply to orders which are valued below a certain value. If your EOQ happens to be valued below the limit imposed by the vendor, you are in trouble. There are a number of consolidation strategies to resort to in such conditions which require thrashing of EOQ.
Logistical implications on procurement lot size
Sometimes it is logistics that recommends a larger lot size of procurement for simple reasons of convenience. This lot size again could be larger than the EOQ.
Consumption does not always happen in factors or multiples of EOQ
Some materials always get consumed in lots. For instance, the activity of replacing tires of a car requires replacing all 4. Here the consumption lot size is 4. In such cases it is not right to procure in numbers that are not multiples of four. In such cases the right approach is to revise the EOQ to the immediate next multiple of the lot size.
Vendor might be happy to stagger the deliveries
Some vendors would be more than willing to deliver the order quantity in small lots in a periodic basis rather than in a single delivery. This is very advantageous as it reduces inventory at vendors place as well. The implication being that, since our average inventory has gone down, we can order for more than EOQ.
Some products come with an expiry date
Some items have a shelf life (expiry date in other words). In such cases if EOQ results in inventory to satisfy demand for longer than the shelf life, we would always face a loss due to expiry of the product. In such cases, the order quantity must be lower than EOQ to avoid such loss.
Volume discounts may encourage larger order quantities
By going a little above EOQ if we become eligible for volume discounts that give us more benefits compared to the loss due to inventory holding, then it is logically better to go for the same.
Product Life Cycle shouldn’t be forgotten
A strategic implication comes into picture when dealing with products that have a life-cycle. Again here, the demand has a variation of rapid increase in the beginning, followed by a plateau of demand and ending with a drastic decline and obsolescence of the product. In such cases, application of EOQ gets complicated and may endanger us into having a stock of obsolete products at the end.
Therefore, the assumptions behind EOQ should not be forgotten before applying it. Based on the nature of material, its consumption pattern, vendor association and product life cycle, EOQ may not be applicable or it might require adjustment.
Aditya Kavi Raaj Chennuru, Batch of ’07 is working as a Manager – Special Projects, Reliance Industries Ltd. And can be reached at firstname.lastname@example.org
The perception about Asian Paints is that its one of the very few companies which takes so much pride in its supply chain practices and well on reaching there this perception just got validated.
The supply chain department is categorized into three main divisions : PLANNING, PURCHASE, DISTRIBUTION. For the plants MANUFACTURING OPERATIONS would be an additional division. I was assigned a project, pertinent to the purchase division.
My project title was:
“Identifying Opportunities & Generating options of Vendor Managed Inventory for Raw Materials with Cost Benefit Analysis”
This company’s purchase volumes across all the raw materials was expected to grow by more than 40% next year and with a new production plant ready to come up in another couple of years time. Asian Paints procures raw materials worth almost 900 Crores annually across its 5 production plants. The supplier count was in excess of 800 but it was soon to be increased with the new production plant coming up at a new location. What really was mind boggling was the raw material – supplier combination and it was really challenging to set up Vendor Managed Inventory (VMI) system for some of these combinations as some of the vendors who had a greater raw material assortment had some of their supply share for raw materials too low due to some availability and delivery issues.
The main aspects where I was expected to work upon were: Options to be generated for implementing Vendor Managed inventory, the raw material vendor combinations where there is a scope for implementation, a comprehensive cost benefit analysis of those combinations as per the formulated model so as to assist decision making and finally benchmarking this model with what other companies follow across the FMCG sector.
Since the benchmarking exercise could provide me with inputs on how to go about implementing VMI, this was taken up first. I managed to contact persons working in Nestle, Johnson & Johnson (Consumer), Castrol, Cadbury’s, Colgate Palmolive, Marico and P&G. Only Colgate Palmolive and J&J had implemented VMI setups while Nestle had burnt their fingers trying to implement VMI. The rest of the companies followed a strict policy of not sharing any kind of consumption or stock information with the vendors over the portal and thus the model followed was either as good as the model followed by Asian Paints or inferior to it based on other considerations. The inputs were really helpful and the basic principles of their models were adapted during the formulation of our model.
Once the options of how to implement a VMI model were in place, it was time to look into the raw material data and identify their suitability to VMI. For this first the criteria for selecting raw materials and their suppliers were laid down, some of them being reliability, quality, transit lead times etc for the suppliers & average monthly consumption quantity, consumption value, annual purchase value etc for the raw materials. A detailed analysis of inventory data for FY 2007-08 and forecasts for 2008-09 was done for this purpose. Huge consumption variances or root mean squared errors of forecasting (understandable due to seasonality nature of the industry) and lead time variance were found out, latter revelations being really alarming reinforcing the need for VMI system to be set up.
The basic point of implementing VMI was to have a sole supplier for a particular raw material as there are serious issues of implementation with multiple vendors. I followed it with a cost benefit analysis as those issues would be taken care off during the negotiation stages. Some of the qualitative pros and cons were:
• Whether the suppliers are dedicated to Asian Paints (so it makes sense to put up a facility near the end customer)
• Would the supplier forego some portion of the stocking cost & admin costs (administrative inefficiency in case of daily invoicing) in exchange for a significant increment in volumes of purchase
Are the supplier-customer relations strong enough so that the supplier is ready to give a payment credit period extension for some boost in his sales volumes
The costs majorly were the transportation freight and infrastructure costs if we wanted the supplier to stock inventories at his stock point located at the point of use i.e plant site. At this point the raw materials were further categorized as powdered and liquid because irrespective of their applications the transportation modes were entirely based on their textures. The benefits were the tax implications (saving the CST in case of interstate purchases) and inventory carrying costs savings as well as savings due to credit period extension.
The results of this project were really promising given the vendor performance metric which was 98% in the areas of quality and flexibility and 95% in delivery. So setting up VMI would definitely ensure better deliveries and thus better servicing to the plants and enhance their productivity. Also the prospect of reduction in inventory levels in the whole system was bright given the fact that Asian Paints would share the daily consumption and closing stock info with the vendor enabling better planning from their side and thus reducing overall buffer stocks in the system. Also the transportation costs which played a major part in the cost benefit analysis, were likely to come down given the enormous increase in the number of trips leading to much better negotiations with them and thus increase the savings. Finally the savings were substantial enough (around 2-3% of annual purchase value) to justify the implementation of VMI. As far as tax benefits were concerned , the CST is likely to be revoked in a couple of years time thus nullifying a major chunk of savings. So its better to implement it for powdered raw materials rather than the liquid ones as they take up less storage space , are much easier to handle & do not require a warehouse to be put up which calls for some serious investment as in the case of tanked or barreled raw materials.
The experience while carrying out the project was a little painful in terms of putting in extra hours at work (even full working days on Saturdays) but extremely satisfying as far as freedom of decision making at work, helpfulness of employees in data collection, candid feedback and proper guidance from my guide (even though the purchase people are the ones who are the busiest in the department) and his superiors & richness of the work assigned (culminating in permanent learning) , were concerned.
Finally, my opinion is it’s a great company to work for if somebody is interested in the field of Supply chain because the kind of exposure that one gets here is incomparable across the whole industry. The company also follows a non firing policy unless there are very strong circumstances. The whole summer internship program is very well structured with the HR intervening for feedbacks just at the right time. Full freedom is provided for taking decisions regarding the work that is assigned and the way to go about managing it. Work content is very rich and compensation packages are competitive now.
Swarnadeep Bandyopadhyay, Batch of ’09 can be reached at email@example.com
The beleaguered logistics sector has not had much to rejoice about over the past two years. However, the current scenario of rising crude prices, steep interest rates may just see their cup of woes run over, with final blow being intense competition from railways, as an upcoming low-cost option. Post the market fall in January, logistics stocks have retreated more or less to their all-time lows, squarely underperforming even the broader market. In fact, with the exception of Blue Dart and Allcargo Global, key players in this sector have given negative returns, ranging from 20% to 70%, over the past six months.
The impact of crude price hike would be severe with respect to logistic companies. The entire business is heavily dependent on the movement of vehicles. Fuel costs constitute 60% of net expenditure incurred by logistic companies. The diesel price hike alone has hit the bottom-lines of logistic companies by at least 6%. A surging inflation and increasing real estate costs will have strong collective impact on logistics companies, believe industry experts. Freight charges are expected to see a rise though it would be difficult to quantify the hike, given that freight rates are fixed as per the nature of contracts. Analysts say freight charges could be hiked to the extent of 10-15% by logistics companies.
If one sees logistics sector as a whole, express companies (cargo and parcel companies) have already raised charges by over 3%. Companies operating in the air-freight segment too may follow suit as they are bleeding profusely as a result of rising ATF costs. The end-sufferers of the price hike would surely be the consumers.
Essar Shipping enters 3rd-party logistics
With plans to become an integrated logistics provider, Essar Shipping Ports and Logistics (ESPLL), the Indian subsidiary of Cyprus-based Essar Shipping, plans to venture into third-party logistics services. The company is adding capacity and assets to scale up operations in all its verticals, namely shipping, ports, terminals and logistics. The ports, terminals and logistics divisions of ESPLL are currently used for captive requirements of group companies -- Essar Steel, Essar Oil and Essar Power.
This makes the logistics division confident of scaling up its operations to meet the demands of other clients, which would mainly be oil and power companies looking at similar transport facilities for their raw and finished materials. The company has lined up a Rs 10,000-crore expansion plan for the next 3-5 years. The ports and terminals division will raise capacity from 10.50 million metric tonnes per annum (mmtpa) to 34 mmtpa with an investment of Rs 4,354 crore. Besides, the company will invest $965 million to add bulk and tanker fleet. For inland transportation of steel and petroleum products, the company currently charters equipments. It now plans to add its own.
Tuesday, February 5, 2008
Saturday, February 2, 2008
An example of such intelligent systems is a fabric measurement system that measures the genetic fingerprint (tensile, shear hysteresis, bending, thickness, compression and surface properties), tailorability prediction system modeling the interaction of fabric with machinery, intelligent sewing machines capable of making optimal adjustments depending on the fabric being stitched and self learning systems monitoring and controlling quality.
Levis Strauss is one of the earliest examples of application of Quick Response concepts in the apparel business. The Head Office of the organization is located in San Francisco. All major design and marketing functions are carried out from this office. The country has its sales spread across the globe with Europe contributing around 30% of the total sales. The production plants are spread across Europe and all the regional sales offices are engaged in recording the sales data. In such a widespread situation, the possibility to communicate between the various units was one of the priority requirements in the definition of the information systems. This vital need has made Levi a pioneering company in the area of Electronic Data Interface. The system helped Levi Strauss to be aware of the changes in the apparel business and incorporate changes in fabric and designs as and when required. Studies conducted by ICRIER in 1993 showed that productivity of Indian apparel industry lagged far behind that of developed nations. Analysis of the reasons affecting the productivity found that technology, workforce management, quality standards, labour relations and management involvement were prime reasons.
Quick Response system can thus be seen as an extension of JIT philosophy where the entire value chain is involved for combined efficiency and benefits rather than the benefits for individual players. QR reduces the lead time across the value chain and hence reduces the risks as the decisions can be taken much closer to the actual sales event. The information exchange makes the forecasts better and the risks are shared across the different players in the value chain.
According to a survey by E2open Inc., (www.e2open.com) at the SaaS (software-as-a-service) Pavilion during the Oracle OpenWorld 2007 event in November 2007, the highest priority supply-chain initiatives are globalization of the supply chain, lean supply-chain management, and trading partner integration.
Of the more than 350 respondents, 66% said globalization of the supply chain is the highest priority initiative to leverage economies of scale and scope across the multinational supply-chain network and operations that have grown by acquisition. E2open says multiple selections were allowed. 60% said extending lean principles across the supply chain to drive shorter and more real-time process cycles was the highest priority initiative.
Additionally, 57% selected trading partner integration in order to synchronize processes and data with suppliers by consolidating supplier portals and business-to-business gateways. While 33% selected process automation—replacing manual with technology-enabled processes to make it faster and easier to interact with suppliers in processes such as vendor-managed inventory, procure-to-pay and international procurement offices as their highest priority initiative for the supply chain.
Market Review: Freight Forwarding Market undergoing Consolidation
The freight forwarding market has been a major beneficiary of an increasingly globalised world economy. The development of extended supply chains, integrating manufacturers, suppliers and retailers on a worldwide basis, has led to significant year-on-year growth in international trade volumes. Freight forwarders revenues - and profits - have surged and this has resulted in structural changes to what for many years was a conservative and stable industry.
These changes have included an unprecedented level of mergers and acquisitions from which a small number of global players has emerged. Many long standing brands like MSAS, AEI, Emery, Danzas, ASG, Wilson, Circle have been subsumed with evolution of mega-carriers such as DHL Global Forwarding, Schenker, UPS Supply Chain Solutions and Kuehne + Nagel.
The levels of profitability in the market, its growth prospects and the asset light nature of freight forwarders' business models have made the sector highly attractive to investors. The industry's attribute of counter-cyclicality - that is, its ability to increase margins in times of economic downturn - gives it an advantage over other segments of the logistics market. Global Freight Forwarding 2007, a report by Research and Markets contains a comprehensive overview of all the major trends and developments affecting the industry. The report looks in detail at the structure of the industry, examining in turn each of its constituent parts.
Wednesday, January 16, 2008
BMW is one of the best known car brands in the world known for their high quality and safety standards. Hence, they are able to afford a delivery time of 4-8 weeks in this competitive world and even use it as a marketing tool to showcase their brand value.
The Munich plant is one of BMW’s oldest and is right across the road from its corporate headquarters. As part of our industrial visit, we were taken many shops including welding, painting and assembly. All the shops except the final assembly were heavily automated. The level of automation reached by the BMW plant is mind-boggling. BMW customers are allowed to customize their products over the internet or through dealers. This means that every car in the BMW assembly line could be different from the next one. BMW is able use techniques of mass production with the help of RFID tags. These tags communicate with the machines in all the shops and inform them how exactly it has to be processed.
It all starts with rolls of steel sheets being brought in from the suppliers. These sheets are cut and bent into various parts of the car’s body. These parts are placed together and welded almost completely by robots with workers needed mainly to overlook the process.
The body frame is then passed through the painting shop. Each car goes through four rounds of painting. The frame is first immersed into a tank of paint which acts as an anti-oxidant. The second coating consists of a base color over which the actual color is sprayed. The last coating of paint is the one which gives the cars their glossy shine. The body has to spend quite a while in the paint shop as it takes time to dry.
Parallely, the engine is machined and assembled in the engine shop. It is then tested at no-load and full-load and boarded onto the respective chassis. In the final assembly shop, the chassis is then matched to its body frame using RFID tags and fastened together.
After the assembly, the cars are pretty much read for the road. But the vehicle is driven for an equivalent of 3000 km in order to test it thoroughly and also to ensure smoother driving for the customer.
An important aspect that was visible in Europe in general and BMW in particular was the importance given to human capital management. BMW makes all possible effort to reduce any physical or mental stress on the employees. The employees are rotated from job to another in order to remove monotony. All automations are designed by keeping in mind the comfort of the employee. For example, the entire vehicle is upturned during some sections of the final assembly so that the employee can work in a more ergonomic position. All such measures do tend to keep job satisfaction high. And besides that, it also ensures that the product is of higher quality and there are lesser chances of failure or rejections. This, according to the BMW management, makes all such measures worthwhile in the long run.
One of BMW’s competitive advantages is its very strong research and design focus. Besides designing the cars, they also come up with important innovations in production techniques (some of which have come up in collaboration with Japanese companies) which have enabled them to maintain their premium quality.
- The Premier Padmini car design resembled design of a car launched by Fiat in India. Which car are we talking about?
- Founded in 1918 by the founder at age 23 years, the first product of the firm was an attachment plug. This electronics giant imports and distributes’ Famous Grouse’ Scotch whisky. Identify the company
- Connect the Following: Sabeer Bhatia, Anil Ambani, Kavita Iyer
Kindly mail your answers to firstname.lastname@example.org.
Tuesday, January 8, 2008
“The Goal is to make Money”, as stated by Goldratt ; and that can only be done through optimal use of the resources like material, money, man, machine or anything which goes into the system as input. Business is all about managing these resources efficiently and making best use out of it to make profits and provide better services. For that matter Business Manager is exposed to several problem situations where he has to take decisions based on his knowledge and available information using suitable supporting tools and methodologies. Most of the resource planning problems can be modeled as optimization problems and can be handled using methods like Mathematical Programming. The knowledge of the Decision-maker helps in understanding the problem situation, identifying the decision variables and modeling the problem as a Mathematical Program. The information is retrieved pertaining to values of several parameters with respect to the problem in focus, which is used for solving the optimization model.
One may say that Information is also a type of input which goes into the system to facilitate the process of managing business and thus making profits. In fact, in the current business milieu it has become one of the very crucial inputs; as right amount of information available at the right time can result into right decisions. But often this information is not available in the precise form. Decisions are required to be taken before actual values of the parameters are known. This imprecision in information may cause serious disruptions in the planning and decision-making process. Sometimes the decision becomes totally useless as the solution happens to be infeasible.
Most of the real-life optimization problems are characterized with this imprecision in the parameter values (for example uncertainty of demand, sales, transportation costs, share prices etc). There are ways of addressing this problem of imprecision or fluctuation in the values of the parameters, like sensitivity analysis or using point estimates like averages or expectations but solving a deterministic optimization model using a point-estimate of the parameters may not be a wise proposition. These approaches are reactive methods and not the proactive ones. Using reactive methods one can only find out the impact of fluctuations in the values but what is needed, is to take care of this imprecision into the modeling aspects.
Imprecision is inherent into the system. This imprecision in the parameter values may occur because of several reasons like forecasting or estimation errors, measurement errors and implementation errors etc. Two situations arise with respect to imprecision in the data – first, when a probability distribution of the values is known; second when there is no information regarding the probabilities also. First situation is called the risk and second is called true uncertainty. In the case of uncertainty what we just know is the range of the values, so it is also called interval uncertainty.
There are some proactive methods like Stochastic Programming, Chance constrained programming and a few other probability based models to deal with modeling under risk. But practically, the reliability of probability estimates is also questionable. These estimates are often biased and prone to error, which leads us to the second situation of interval uncertainty. To deal with such problem situations new methods called as Robust Optimization (RO) methods are coming up. RO methods are proactive and take care of this uncertainty by searching for a robust solution which is feasible and close to optimal for all realizations of the uncertain parameters. RO methods are immune to uncertainty and do not depend on the probability distributions. These methods assume that parameter can realize any value from the given interval. There is not a single method as such, different researchers have explored and exploited different modeling aspects using different methodologies but the purpose is same, looking for a feasible and close-to-optimal solution for all scenarios.
To make it clear let us consider a case of an FMCG company which has to transport its goods to different cities from its one or more manufacturing plants and they have to decide the number and location of warehouses or distribution centers (DC) for different regions of the country. These DCs will further supply to the retailers (the demand points) so another decision is which DC will supply to which retailers. Though, company has methods to estimate the demand at retailers end and the cost of transportation per unit demand is also known, but it is very obvious that demand and the cost of transportation practically fluctuates. Moreover the forecasted demand will not be same for every month, whereas we have to take the location decision for a long-term. Location Decisions are strategic level decisions and involve huge expenditures, thus cannot be changed frequently. Also, the DCs have certain capacity beyond which these cannot hold inventory.
If this location-allocation problem is solved using the average demand, it might happen many times that the solution becomes infeasible due to the capacity constraints. Fluctuations in demand may result in low capacity utilization at one place and capacity being exhausted at another place, at the same time. Lower than expected demand at one DC will result in overstocking and therefore extra inventory carrying costs. If the product is of perishable nature, the total value of the item is lost. If it comes from the product segment characterized by rapidly changing technology, then it becomes obsolete and, either loses its whole value or is sold at a lesser value. On the other hand, if the demand is more than expected, then understocking of items will result in either lost sales, backlogging or, if possible than, demand fulfillment at a higher cost. This also impacts upon the goodwill of the firm in the market and results in losing to the benefit of the competitors.
In many cases relying upon the probability distributions of the parameters based on past data might not be a good idea. It is just like asking someone, “What is the probability that this probability distribution is correct and what is the probability that probability of probability distribution being correct is correct and so on….” In such cases RO may be helpful in taking robust decisions by finding a solution which remains feasible and thus implementable in most of the scenarios.
The literature related to RO is new and sparse. Though researchers had started talking about uncertainty and robustness long time back in the past but most of the work in this domain has been done in last 5-7 years. Seeing to the current scenario, where the uncertainty is becoming more prevalent and unpredictable, researchers are trying possibilities of applying these methods into different areas of management and engineering. There lies a wide and deep scope for further research into this domain, in terms of developing new methods and applying the methods into different disciplines.
RO can be a very helpful tool for new breed of Mangers who have to regularly work and take decisions under conditions of uncertain future. RO can help them into different areas of business. It has found application into domains like Finance, Marketing, Economics and Operations etc, for taking strategic and operational level decisions involving activities like Portfolio optimization, Credit Line Optimization, SCM and Logistics, Inventory Management, Location Decisions, Capacity Planning, Production Planning and Scheduling etc.
Business Managers need to be equipped with advanced tools and methods to be prepared for the uncertain future. As told by someone, “The trouble with the future is that there are so many of them”. This reflects the philosophy of RO which makes them prepare for many and not the just one predicted future. Neils Bohr once said, “Prediction is very difficult, especially if it's about the future”. Business Mangers should realize that with spiraling economy and increasing competition, ignoring the uncertainty and relying just upon prediction might be very dangerous for the business and might result in losing money. After all, it’s all about money honey.
Monday, January 7, 2008
Most all of us remember the Transporter on Star Trek and the "beam me up Scotty" phrase that typified use of this particle beam transportation technology. And with the millennium only five years old, we see an opportunity to introduce technologies we believe will be to the 21st Century what the truck, tractor trailer, intermodalism and forklift were to this century.
The basic concept of Teleportation is that a physical object would get broken down to its' component molecular parts at one location and then transmitted to another location where they would be reassembled back to the original form completing the process of transport without any of the current costs, equipment or time delays. Molecular Nano-Technology is a slightly different although similar approach whereby the required molecules for the creation of a specific item are precisely assembled to "build" the item at or near the location of consumption.
This takes the concept of Teleportation back even one step further, to actually eliminate current production processes. In fact in most cases production today is based on our taking matter and cutting/forming it into the product required. Molecular Nano-Technology uses the reverse of this concept where the intent is to microscopically place through exact placement precisely only the molecules required to create the given item.
Two years after announcing its plan to replace bar-coding with RFID as a means of sorting and tracking baggage, McCarran International Airport in Las Vegas has completed the first phase of its RFID deployment, according to Swanson Rink, the consulting engineering firm that designed the system.
On Labor Day weekend,
RFID is a favorable alternative to bar-coding for luggage identification. Due to the unpredictable orientation of the label to the optical scanner, 15 to 30 percent of the bar-coded labels being used to identify the luggage at McCarran are not properly read as the bags move through the airport luggage handling equipment. Each piece of luggage for which the bar code is not successfully scanned is diverted and manually read. Because RFID tags do not require line-of-sight with the interrogator, they are much more easily read.