GUEST EDITORIAL (For PGP24s)

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 Jayaram

The guest editor is an alumni of IIML (Batch of 2007), working as a SCM consultant with Bristlecone India Ltd. He can be reached at sachin380@yahoo.com

Alum Speak – Ronjay Chakraborty

Introduction to Operations Management

A WARM WELCOME TO YOU ALL FOR MAKING THROUGH TO IIM LUCKNOW….

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 India, but across Asia-Pacific.

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 1^st 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 rony.bitmesra@gmail.com

Beware of EOQ

Reverse Supply Chain – Aditya Kavi Raaj Chennuru

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 aditya.chennuru@ril.com

Jobs @ Ops – Summer’s Experience

Asian Paints – Supply Chain Profile
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 pgp23179@iiml.ac.in

Ops-News

Logistics Sector hit hard by Oil Price hike
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.


http://economictimes.indiatimes.com/Analysis/Rising_crude_prices_spell_doom_for_logistics_sector/articleshow/3165808.cms

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.
http://sify.com/finance/equity/fullstory.php?id=14701939