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 firstname.lastname@example.org