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and consequently, moving to a just-in-time (J-I-T)4 ordering system, to jointimprovement programmes (JIP), which were essentially exercises in value-engineering undertaken in association with key vendors. It set up different tier-levels to improve the quality of the suppliers. Tiering formed the basis of the vendor-consolidation drive. Till 1998, Ashok Leyland used to source the 62 components that went into its front-end structure of its trucks and buses, from 16 suppliers. In 2000, one tier-I vendor sourced the products from the other vendors and supplied the assembly to the company. This saved cost and time provided the vendor network was well coordinated with AL's own manufacturing operations. At AL, Vendor Development and Strategic Sourcing were handled by Corporate Materials Department (CMD). CMD identified the vendors, rated the vendors based on feedback received from Supplier Quality Assurance Cell, send drawings/specifications, called for quotes with detailed breakup of operation-wise costs, and negotiated the price at which the parts would be supplied. In addition to CMD, there were Materials Management Departments (MMDs) for scheduling based on unit production plan. AL's purchasing philosophy was to maximize bought-out parts. Over 90% of the parts were bought-out. AL believed in global sourcing. Consistent with its operational needs, AL considered both domestic (Indian) as well as international vendors. Global sourcing was normally resorted to overcome local constraints in the form of technology, quality, capacity or cost effectiveness. AL considered new suppliers for required components, based on Vendors' ability to meet its specification, price and delivery schedules. Vendors were required to have a strong manufacturing base with adequate engineering support for their own product development activities, as needed by the category of product. AL's policy was to develop a vendor base committed to continuous improvement to meet quality, cost and delivery standards. AL considered its vendors as partners in progress and believed in establishing mutually beneficial relationships. It provided necessary technical assistance in the form of project and production engineering, to maintain quality levels. In addition, where required, it also helped vendors financially. AL's Vendors were expected to have a good quality system. Vendors' quality system had to encompass the following: cost effective process, assured process capability, continuous improvements based on customer feedback, compliance of all statutory/legal/commercial requirements of AL, a stage of development where the Vendor could come under AL's selfcertification system, and, traceability - first-in first-out. AL also placed emphasis on optimizing the inventory and vendors were required to progressively meet "Just-in-Time" requirements. Delivery mode as well as packaging were required to minimize the handling/loading and unloading time. AL preferred a manufacturing/assembly/ support base at close proximity to the production units. Commenting on the relationship AL shared with its vendors, J.N. Amrolia, executive director, human resources, said, "The close working relationship with the vendors for vendor development program have benefitted us a lot in cost cutting and making the vendors understand the complexities of material handling." This resulted in low
inventories all through the chain. He further added, "We stabilised both the inward material flows as well as the outbound material and that saved us a lot on the inventory." In the late 2000, AL's systems were closer to J-I-T with inventories averaging just seven days, down from three weeks in the late 1990s. AL seemed to realize that cost cutting would work only if the supply chain was smooth. Thus, in 1999, AL launched Project OSCARS (Optimising Supply Chain and Rationalising Sourcing). OSCARS identified two methods to reduce costs in the inbound supply chain: reduce material costs and through optimum inventory levels reduce the invisible inventory carrying costs. The basic tenets of OSCARS were: a single strategic sourcing agency at the corporate level with local, unit- level scheduling; smaller, stronger vendor base preference for vendors who had access to technology; and to bring down supply chain costs.
Supplier Tiering
AL pruned its panel of direct suppliers through tiering and system buying. Under tiering, AL dealt directly with tier-one suppliers who, in turn, were supported by tier-two and tier-three suppliers. The benefits of system buying could be illustrated with the example of the tool kits that accompanied every vehicle. In the late 1990s, six suppliers' spread over Punjab, Faridabad, Bangalore and Chennai used to supply the 15 items, which were assembled in-house. A short supply of 1,000 screwdrivers meant 1,000 numbers of the
remaining 14 items in idle inventories. To overcome this problem, AL aimed at a reduction of its supplier base from 1,400 to 750. Strategic sourcing aimed at reducing costs for the supplier so that the gains were real, painless and sustainable. Tear down studies and value engineering analyzed the constitution and composition of a part to prune costs through substitution, reduction or elimination of materials/sub-assemblies without affecting quality and performance. The cost benefits were shared with the partnering supplier. AL focussed on a JIT approach for high value/high volume items and low cost logistics for low value high volume items. Project OSCARS brought about a few fundamental changes. The push system ("let us make all we can just in case we need it") which resulted in upto 45 days of inventories of components compared to between 3 and 5 days globally had given way to the pull system ("make what the customer needs, when he needs it"). Each stage produced only as much as the next stage needed. Thus, only when a new chassis was loaded did the request go out for the supply of an engine assembly, and so on, for the front and rear axle assembly lines, and for the components that went into them. This resulted in a savings of Rs 8.50 crore a year and a lean supply chain. To begin with, Project Oscars classified the main components used by the company into Categories 'A' (amounting to 75 per cent of the total cost of components), 'B' (18 per cent), and 'C' (7 per cent), with their suppliers also being classified accordingly. Then, AL devised different delivery systems for each category, aimed at cutting inventoryholdings. The plant sent a J-I-T card, specifying the part number, quantity and the unloading location, through courier, fax or e-mail to the supplier who promptly dispatched the required consignment directly to the assembly line. But how did it guess AL's requirement? For that, Project OSCARS devised a funnel-planning system, covering 12 weeks of requirements. The immediate two weeks' plan was frozen and the next two weeks' semi frozen, the balance eight weeks' plan was tentative. Thus, the vendor already knew roughly when to expect the J-I-T card. To reward the vendors for conforming to the schedule, Project OSCARS planned a reduction in their numbers to 200 over a 3-year time frame. Said S. Nagarajan, Executive Director, AL, "We are looking at giving a minimum business of Rs 1 crore to each supplier involved with us." AL also provided technological inputs for troubleshooting on the suppliers' shopfloors, so that they could cut their costs.
Oscars II
After revamping the inbound supply chain, AL went out to revamp the out-bound supply chain. The revamp of the out-bound supply chain (code named OSCARS II) had the twin objectives of improving customer satisfaction and reducing finished goods inventories, and reaching improved service levels with optimum pipeline inventory levels.
A customer survey and a study of benchmarks had come out with three major parameters for service level targets: order to delivery time, reliability of deliveries and availability of order status information. The customer could expect delivery in five days from the date of payment, for regular models. For multi-axled vehicles, the promised period was two to four weeks. The second promise was that the age of the vehicle when delivered would be a maximum of 90 days. In the new structure, plant sales yards acted as national pools to hold rare models (called "strangers") and excess of regional requirements. The next tier was made up of the five regional stock pools, which ensured just-in-time supplies to all regional sales offices. Said Amol J Sandil, executive director, marketing, "Within the objectives of OSCARS II, namely, achieving efficient distribution and working capital management, we have been able to improve customer satisfaction by cutting down on delivery time." He further added, "Qualitative improvements in demand forecasting and data management have been central to this achievement". In 1999, AL also adopted Total Quality Management practices. The Hosur plant in Karnataka came out with a new TQM process which seemed to be a success. (Refer Table I). Table I The Seven Plus One TQM Method Rule Total Cost Management (TCM) Result Within a year, operating cost as a Cut Cost percentage of plant turnover was down by a third. Overall energy saving. Average Energy Optimize power cost per product reduced by Management energy loss 30.06% without additional investment. Value Efficient Substantial reduction in the chasis Engineering (VE) material usage cost. Cross Functional The very first CFTs resulted in Synergy Teams (CFT) savings of Rs. 18.2 million. The quick handling of suggestion Suggestion Involve has resulted in continuous, Scheme everyone suggestions to cut cost and improve quality. Inventory Probably the best IM today in the Better Management Industry that has resulted in a lot of housekeeping (IM) saving. Shop Investment Monitor and Fix Operating cost as per cent of Programme Utilize shop turnover machines efficiently. Objective
Plus One
Training
Source: 'Geared Up', A&M, November 15, 2000. However, with all these activities at the shop floor, AL did not lose sight of the customer. To understand customer needs and assimilate the knowledge, AL adopted '4P' Programme: Probe, Prioritize, Plan and Position. This worked in tandem with manufacturing as part of a cross-functional team (CFT). The CFTs worked towards continuous improvement in products and marketing. AL also built a 'marketing information system' (MIS) to monitor the trends and forecast demand from the inputs of the dealers and field executives.
The Comeback
In the first half of 1999-2000, AL recorded a net profit of Rs 1.9 crore on sales of Rs 1,092.8 crore, against a Rs 36.7 crore loss for the corresponding period in 1998-99. This seemed to have been possible due to operational efficiency resulting from strategic raw material sourcing, with fewer sources and higher volumes, which cut costs; better control over process inputs by tightening supply chain and inventories and; reduced operating expenses through cost savings on energy, tools, spares and adoption of preventive maintenance policies. In 1999-2000, raw material costs were down 1-2% and inventories reduced by Rs 300 crore. Also in 1999-2000, AL sold 37,859 heavy commercial vehicles (HCVs), 27% more than it did in 1998-99. AL's total income in 1999-2000, at Rs 2,611.41 crore was 25% higher than the corresponding figure for 1998-99. Its operational profits in 1999-2000 was Rs 55 crore, Rs.77 crore more than the Rs 12-crore operating loss it had made in 1998-99. However, analysts felt that the comeback of AL could be attributed to the end of the recession. They cited the example of its main rival, TELCO, which also registered a 37.5% growth in sales volumes in 1999-2000. For AL officials the 'bad years' between 1997 and 2000 made it pinpoint its focus on critical issues like cost-reduction, operational improvement, and market penetration. Commented, R. Seshasayee, Chairman, AL, "The recession made us hasten the process of improvement that we had been working on for some time." Still, in 1999-2000, despite the reduction, the company's material cost, expressed as a percentage of sales was, at 70%, 3% higher than that incurred by TELCO. Said Arindam Bhattacharya, Principal, A.T. Kearney, who was involved in Ashok Leyland's turnaround effort, "While the company has made significant progress, it will still take time to achieve global standards in inventory management and productivity."