Ashok Leyland – Supply Chain RevampSubmitted by Vineet Chaturvedi Corporate Buying Cell. which accounted for nearly 70 per cent of its product cost. . each time by $5. For AL. Known as reverse auction. saving Ashok Leyland Rs 14. 482. there was only one response. Ashok Leyland (AL).3 crores. Ramachandran was looking for suppliers of some specific tyres in the global market. At $325. 18. Both parties then signed up by e-mail and the deal was struck at $325. the freight generating sectors (manufacturing. At a price of $350.5 crore.81% in 1997-98. whose business was directly dependent on moving material. the Czechoslovakian company confirmed it could supply the tyres. Within one hour.700 per set. mining and quarrying) saw a steep decline resulting in a severe downturn of freight volumes. Ramachandran kept lowering the price. recorded a profit-after-tax (PAT) of Rs.34% of sales in 1993-94 to 58.014. With the manufacturing Industry reeling under recession. this was one of the many ways AL was reducing materials cost. five suppliers were interested. In 1996-97 AL had a PAT of Rs. 2.9 crore on sales of Rs. AL.4 crore on sales of Rs.the seller asked for an hour's time to confirm. the Chennai based manufacturer of medium and heavy commercial vehicles was surfing the Internet at midday in his office. this had come as a severe blow. It had climbed from 33. 124. 1 In 1997-98. Now three of them were willing. goods and people across 2 distances.62 per cent of its revenues in one year forcing the company to helplessly allow inventories to build up. 2.Revamping the Supply Chain: The Ashok Leyland Way: Introduction V Ramachandran. AL's supply chain had gone haywire under the recession which had eaten away 17. But this auction site was different. The results were showing on working capital. A look at the previous financial year's PAT showed that the profits for 1997-98 had gone for a severe beating. He then lowered the price by $5. Deputy General Manager. A closer look at the screen showed that he had logged on to an auction site. procurement. Vendors were required to have a strong manufacturing base with adequate engineering support for their own product development activities. Quality Circle teams were formed for this purpose. which were essentially exercises in value-engineering undertaken in association with key vendors. Vendor Development Materials Department (CMD). be it material order. from 16 suppliers. In 2000. AL believed in global sourcing.Beat the Recession AL did not seem to succumb to the 'uncertainty gloom' that was playing havoc to its business environment. and consequently. AL conducted 3 brainstorming sessions inviting ideas on cost cutting. material handling. capacity or cost required components. called for quotes with detailed breakup of operation-wise costs. inventory control or production. It decided to meet the challenge by re-gearing its systems. Consistent with its operational needs. moving to 4 a just-in-time (J-I-T) ordering system. one tier-I vendor sourced the products from the other vendors and supplied the assembly to the company. AL considered new suppliers for of technology. AL's purchasing philosophy was to maximize bought-out parts. Over 90% of the parts were bought-out. send drawings/specifications. as needed by the category of product. and negotiated the price at which the parts would be supplied. price and delivery schedules. Tiering formed the basis of the vendor. The recession saw AL waging a war on wastage and inefficiency. Corporate Communications. AL's policy was to develop a vendor base committed to continuous improvement to meet quality. there were Materials Management Departments (MMDs) for scheduling based on unit production plan. "Our Quality Circle teams were very helpful at this juncture and the worker involvement made it easier to address cost cutting.'Together We Can' . quality. were handled by Corporate rated the vendors based on feedback received from Supplier Quality Assurance Cell. Ashok Leyland used to source the 62 components that went into its front-end structure of its trucks and buses. Said Thomas T. Abraham. Till 1998. This saved cost and time provided the vendor network was well coordinated with AL's own manufacturing operations. . AL took many initiatives ranging from tiering its vendor network to reducing the number of vendors. AL considered both domestic (Indian) as well as international vendors. to joint-improvement programmes (JIP). based on Vendors' ability to meet its specification. In addition to CMD. deputy general manager." AL took every employee's ideas into account and figured out a way to keep things going and reduce production without inflicting pain.consolidation drive. and Strategic Sourcing CMD identified the vendors. It set up different tier-levels to improve the quality of the suppliers. Global sourcing was normally resorted to overcome local constraints in the form effectiveness. At AL. 'Together We Can' . AL considered its vendors as partners in progress and believed in .Beat the Recession cost and delivery standards. establishing mutually beneficial relationships. AL seemed to realize that cost cutting would work only if the supply chain was smooth. said. to maintain quality levels. "The close working relationship with the vendors development program have understand with its vendors. unit. AL also placed emphasis on optimizing the inventory and vendors were required to progressively meet "Just-in-Time" requirements. Delivery modes as well as packaging were required to minimize the handling/loading and unloading time. In addition. traceability . Vendors' quality system had to encompass the following: cost effective process. OSCARS identified two methods to reduce Supply Chain Rationalizing costs in the inbound supply reduce material costs and through optimum inventory levels reduce carrying costs. AL's systems were closer to J-I-T with inventories averaging just seven days. It provided necessary the form technical assistance in of project and production engineering. it also helped vendors financially. Amrolia. compliance of all statutory/legal/commercial requirements of AL. stronger vendor base preference for vendors who had access to technology. AL preferred a manufacturing/assembly/ support base at close proximity to the production units. where required. for vendor benefitted us a lot in cost cutting and making the vendors the complexities of material handling. assured process capability. ." This resulted in low inventories all through the chain. AL launched Project OSCARS (Optimizing Sourcing). in 1999. AL's Vendors were expected to have a good quality system. He further added. and chain: the invisible inventory The basic tenets of OSCARS were: a single strategic sourcing agency at the corporate level with local. executive resources.level scheduling. down from three weeks in the late 1990s. Commenting on director." In the late 2000. human the relationship AL shared J.first-in first-out. continuous improvements based on customer feedback. smaller. and. a stage of development where the Vendor could come under AL's self-certification system.N. "We stabilized the inward material flows as well as the outbound material and that saved us a lot on the inventory. and to bring down supply chain costs. Thus. Single Window System The Strategic Sourcing and Corporate Quality Engineering (CQE) teams jointly formed the single window vendor management agency. In Phase I.000-plus parts matched with suppliers' part numbers. corporate buying covered major suppliers (Rs 10 lakh plus per year). The starting block which were business based was the creation of a company-wide database for the 22. and for assistance and consultancy on quality to management issues. this had created a convenient single-point contact with AL. business volumes. . The materials were classified into "packs" (broad groups of similar items) with one representative each from the CMD and the CQE forming a threelegged race team of specialists for each pack. This corporate buying seemed to have benefited AL through consolidation of business per supplier and dealing from a position of strength that consolidated volumes. showed that 18 per cent accounted for 92. A classification a picture of fragmented of the 1. unit material functions interacted with the approved panel of vendors to "pull" materials in line with their production plans. for sharing drawings.400-odd suppliers. for negotiating prices and long-term business volumes. For the suppliers. Within the centrally negotiated price and share of business. bringing with them specialised commercial and technical knowledge. This revealed and differential pricing on at units.5 per cent of the business. while 61 per cent handled just 1.9 per cent. Strategic sourcing aimed at reducing costs painless and sustainable. The plant sent a J-I-T card. specifying the part number. for the front and rear axle assembly lines. Project Oscars classified the main components used by the company into Categories 'A' (amounting to 75 per cent of the total cost of components). six suppliers' spread over Punjab. the vendor already knew roughly when to expect the J-I-T card. when he needs it"). Faridabad. The cost benefits were shared with the partnering supplier. aimed at cutting inventory-holdings. "We are looking at giving a minimum business of Rs 1 crore to each supplier involved with us.Supplier Tiering AL pruned its panel of direct suppliers through tiering and system buying. AL aimed at a reduction of its supplier base from 1. Each stage produced only as much as the next stage needed.50 crore a year and a lean supply chain. AL. and 'C' (7 per cent). Project OSCARS brought about a few fundamental changes. Project OSCARS planned a reduction in their numbers to 200 over a 3-year time frame. AL devised different delivery systems for each category. quantity and the unloading location. But how did it guess AL's requirement? For that. Nagarajan. through courier. reduction elimination of materials/sub-assemblies without affecting quality and performance. only when a new chassis was loaded did the request go out for the supply of an engine assembly. were supported by tier-two and tier-three suppliers. 'B' (18 per cent). the balance eight weeks' plan was tentative. the costs through substitution. Bangalore and Chennai used to supply the 15 items. which were assembled in- house.000 screwdrivers meant 1.000 numbers of the remaining 14 items in idle inventories. This resulted in a savings of Rs 8. Thus. and for the components that went into them.400 to 750. AL focused on a JIT approach for high value/high volume items and low cost logistics for low value high volume items. fax or e-mail to the supplier who promptly dispatched the required consignment directly to the assembly line. The benefits of system buying could be illustrated with the example of the tool kits that accompanied every vehicle. Project OSCARS devised a funnel-planning system. Tear down for the supplier so that the gains were studies and constitution and composition of a part to prune or value engineering analyzed real. AL dealt directly with tier-one suppliers who. with their suppliers also being classified accordingly. Under tiering. 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. Then. To overcome this problem. A short supply of 1. covering 12 weeks of requirements. To reward the vendors for conforming to the schedule. Thus. To begin with. The immediate two weeks' plan was frozen and the next two weeks' semi frozen. Executive Director." AL . and so on. in turn. In the late 1990s. Said S. Supplier Tiering also . which ensured just-in-time supplies to all regional sales offices. "Within the objectives of OSCARS II. so that they could cut their costs. The very first CFTs resulted in savings of Rs. "Qualitative improvements in demand forecasting and data management have been central to this achievement". the promised period was two to four weeks. Average power cost per product reduced by 30. Overall energy saving. achieving efficient distribution and working capital management. AL went out to revamp the out-bound supply chain. marketing. A customer survey and a study of benchmarks had come out with three major parameters for service level targets: order to delivery time. namely. (Refer Table I). Said Amol J Sandil. and reaching improved service levels with optimum pipeline inventory levels. Oscars II After revamping the inbound supply chain. The Seven Plus One TQM Method Rule Objective Total Cost Management Cut Cost (TCM) Energy Optimize energy Management loss Value Engineering Efficient (VE) material usage Cross Functional Synergy Result Within a year." He further added. In 1999. we have been able to improve customer satisfaction by cutting down on delivery time. for regular models. The Hosur plant in Karnataka came out with a new TQM process which seemed to be a success. . For multi-axled vehicles.06% without additional investment. plant sales yards acted as national pools to hold rare models (called "strangers") and excess of regional requirements. reliability of deliveries and availability of order status information. The second promise was that the age of the vehicle when delivered would be a maximum of 90 days. The next tier was made up of the five regional stock pools. executive director. Substantial reduction in the chasis cost. The revamp objectives of the out-bound supply chain (code named OSCARS II) of improving customer satisfaction and reducing finished goods had the twin inventories. AL also adopted Total Quality Management practices. The customer could expect delivery in five days from the date of payment.provided technological inputs for troubleshooting on the suppliers' shopfloors. In the new structure. operating cost as a percentage of plant turnover was down by a third. This seemed to have been possible due to operational efficiency resulting from strategic raw material sourcing. against a Rs 36.9 crore on sales of Rs 1. AL's total income in 19992000. However. AL did not lose sight of the customer.77 crore more than the Rs 12-crore operating loss it had made in 1998-99. at Rs 2. They cited the example growth in sales volumes be attributed to the end of the of its main rival.41 crore was 25% higher than the corresponding figure for 1998-99. raw material costs were down 1-2% and inventories reduced by Rs 300 crore. tools.7 crore loss for the corresponding period in 1998-99. Plan and Position. R.611. quick cost and improve quality.2 million.5% in 1999-2000. Rs. Inventory Better Probably the best IM today in the Management (IM) housekeeping Industry that has resulted in a lot of saving. 27% more than it did in 199899.Teams (CFT) 18. TELCO. This worked in tandem with manufacturing as part of a crossfunctional team (CFT). analysts felt that the comeback of AL could recession. operational improvement. suggestions to cut Scheme Source: 2000.859 heavy commercial vehicles (HCVs). AL recorded a net profit of Rs 1. savings on energy. and market penetration. "The recession made . AL sold 37. with fewer sources and higher volumes. 'Geared Up'. AL. November 15.092. Prioritize. Plus One Training Training across all levels in the organization. Seshasayee. which also registered a 37. The Suggestion handling of suggestion has Involve everyone resulted in continuous. A&M. However. spares reduced operating expenses through cost and adoption of preventive maintenance policies. which cut costs. The Comeback In the first half of 1999-2000. In 1999- 2000. Shop Monitor Fix Operating cost as per cent of shop Investment and Programme Utilize turnover machines efficiently. AL adopted '4P' Programme: Probe. Its operational profits in 1999-2000 was Rs 55 crore. Chairman. AL also built a 'marketing information system' (MIS) to monitor the trends and forecast demand from the inputs of the dealers and field executives. with all these activities at the shop floor. To understand customer needs and assimilate the knowledge. For AL officials the 'bad years' between 1997 and 2000 made it pinpoint its focus on critical issues like cost-reduction. Commented. better control over process inputs by tightening supply chain and inventories and. The CFTs worked towards continuous improvement in products and marketing. Also in 1999-2000.8 crore. " .us hasten the process of improvement that we had been working on for some time. despite the reduction. Principal. the company's material cost. it will still take time to achieve global . Said Arindam Bhattacharya. A. standards in inventory management and productivity." turnaround effort. expressed as a percentage of sales was. Kearney. in 1999-2000. at 70%.T. who was involved in Ashok Leyland's "While the company has made significant progress. 3% higher than that incurred by TELCO.Still. cost and delivery standards. preparing efficient production plans. It was one of the best methods to cut the material purchase cost. The forecasting was also based on the inputs from dealers and field staff which they would have combined with the system generated forecast figures and would have came upon based forecasting. Better forecasting – AL also used better qualitative and quantitative techniques to forecast the demand in a better way. time with respect to loading / unloading and enhanced the working capital. Cutting Inventory holding costs Implementing Just – In – Time (JIT) Deliveries – This minimized the inventory holding costs. consensus .The Company used methods such as REVERSE AUCTION to gain the advantage of competition in the market.Case Analysis CHALLENGES WITH ASHOK LEYLAND The biggest Challenge with Ashok Leyland as to cut costs in terms of – - Material Procurement cost - Inventory Holding Cost - Logistics Cost (Inbound/Outbound) HOW DID THE COMPA NY HANDLED THE C HALLENGES Cutting Material Purchase cost Reverse Auction . AL formulated a self development program for vendors for the same which was based on the customer feedback. Vendor Management System – Ashok Leyland developed a vendor base. thereby. They reduced the number of vendors and then conducted Joint-Improvement Operations through which the vendors realized their strong and weak points and improved upon them to meet AL’s quality. 5 Crore. thereby saving approximately Rs. This helped in reducing the communication gap amongst the suppliers and the buyers as well as reduced company’s time which was usually spent in search of key vendors and further negotiations. They shared the information about the technical requirements of the company with the approved pool of vendors. This helped AL in cutting down enhanced the working capital.Reducing Logistics Cost Optimize Inbound & Outbound Logistics Inbound logistics . training and development and brainstorming sessions amongst the company staff. . better housekeeping. drawings and technologies with the Company’s team.AL created a single window contact system for vendors which comprised if the strategic sourcing and quality engineering people. thereby involving everyone in pouring out ideas for savings in operational costs. Vendors in turn would share the new designs. efficient material usage. the inventory holding cost. In turn. The cost benefit gained by the company by implementing this process was shared by the suppliers which further motivated the vendors to work more efficiently and with low costs. The plant warehouses were used to store the not-so-fast moving goods whereas. the regional warehouses were used to store the JIT orders. 8. they restructured their warehouses. enabled deliveries in time and Total Quality M anage ment – AL also implemented the total quality management techniques on shop floor which always focused on cost cutting. AL nurtured them with the technical knowledge which the company required in order to sustain in the market. AL always treated its vendors as its business partners. LEAN MANUFACTURING – AL also implemented the concept of lean manufacturing which indicates to produce only that much quantity which is demanded by the customer. energy saving. This brought down the inventory of AL from 45 days to just 5 days. Outbound logistic s – AL focused on the 3 major targets – - On time Deliveries Reliability of delivery Order status monitoring To ensure on-time deliveries. the vendors supplied them with the desired products and services. tools. Good market share 2. Readiness of absorb the new demand (demand based on industrial production) technologies Opp ortunities 1. Good brand value of AL 1. resulting in loss of profitability or loss 2. Can very well exploit their vendors by more developing the educating them with regard products. Tech-savvy staff 3.SWOT ANALYSIS Strengths Weakne ss 1. of . machinery. Efficient Vendor base tasks remained un-accomplished due to incomplete minor tasks 4. to the designs in market share as if not minimized more efficient competitors will overtake the volume “AL”. Threats Good opportunity in savings in terms 1. Skew 5. Major 3. Logistics absorption of costs cost. High inventory due to false forecasting 2. and their future requirements vendors. Can lose their competitive edge due to of Inventory holding cost.