Revamping the Supply Chain: The Ashok Leyland Way

Themes: Supply Chain Management

Period : 1992-1998
Organization : Ashok Leyland
Pub Date : 2002
Countries : India
Industry : Automobiles

Revamping the Supply Chain: The Ashok Leyland Way | Case Study

"The ultimate objective of assaulting costs in the supply chain is not just to effect one-off reductions in
the price of components. It is, instead, to set off a chain of continuously falling costs-by mutually
discovering ways to do things better without a proportional increase in the rupees poured into the
process."

- Business Today, January 7, 1999.

Revamping the Supply Chain: The Ashok Leyland Way:

Introduction

V Ramachandran, (Ramachandran) deputy general manager, Corporate Buying Cell, Ashok

Leyland (AL), the Chennai based manufacturer of medium and heavy commercial vehicles was surfing
the Internet at midday in his office. A closer look at the screen showed that he had logged on to an
auction site. But this auction site was different. Ramachandran was looking for suppliers of some specific
tyres in the global market. At a price of $350, five suppliers were interested. He then lowered the price
by $5. Now three of them were willing. Ramachandran kept lowering the price, each time by $5. At
$325, there was only one response- the seller asked for an hour's time to confirm. Within one hour, the
Czechoslovakian company confirmed it could supply the tyres. Both parties then signed up by e-mail and
the deal was struck at $325, saving Ashok Leyland Rs 14,700 per set. Known as reverse auction, this was
one of the many ways AL was reducing materials cost, which accounted for nearly 70 per cent of its
product cost.

In 1997-98, AL, recorded a profit-after-tax (PAT) of Rs. 18.4 crore1 on sales of Rs. 2,014.3 crore.
A look at the previous financial year's PAT showed that the profits for 1997-98 had gone for a severe
beating. In 1996-97 AL had a PAT of Rs. 124.9 crore on sales of Rs. 2, 482.5 crore. With the
manufacturing Industry reeling under recession, the freight generating sectors (manufacturing, mining
and quarrying) saw a steep decline resulting in a severe downturn of freight volumes. For AL, whose
business was directly dependent on moving material, goods and people across distances, this had come
as a severe blow. AL's supply chain2 had gone haywire under the recession which had eaten away 17.62
per cent of its revenues in one year forcing the company to helplessly allow inventories to build up. The
results were showing on working capital. It had climbed from 33.34% of sales in 1993-94 to 58.81% in
1997-98.

AL did not seem to succumb to the 'uncertainty gloom' that was playing havoc to its business
environment. It decided to meet the challenge by re-gearing its systems, be it material order,
procurement, material handling, inventory control or production. AL conducted brainstorming sessions
inviting ideas on cost cutting. Quality Circle3 teams were formed for this purpose. Said Thomas T.
Abraham, deputy general manager, Corporate Communications, "Our Quality Circle teams were very
helpful at this juncture and the worker involvement made it easier to address cost cutting." AL took
every employee's ideas into account and figured out a way to keep things going and reduce production
without inflicting pain.

The recession saw AL waging a war on wastage and inefficiency. AL took many initiatives ranging
from tiering its vendor network to reducing the number of vendors, and consequently, moving to a just-
in-time (J-I-T)4 ordering system, to joint-improvement 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.

1] 1 Crore =10 million

2] A basic supply chain consists of a company, an immediate supplier, and an immediate customer directly linked by one or
more of the upstream and downstream flows of products, services, finances and information. An extended supply chain
includes suppliers of the immediate supplier and customers of the immediate customer and an ultimate supply chain includes
all the companies involved and flows of products, services, finances and information from the initial supplier to the ultimate
customer.
3] Work group that meets to discuss ways to improve quality and solve production problems.
4] Inventory system in which production quantities are ideally equal to delivery quantities, with materials purchased and
finished goods delivered just in time to be used. Also known as Kanban.

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 self-certification 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.

The Strategic Sourcing and Corporate Quality Engineering (CQE) teams jointly formed the single
window vendor management agency, bringing with them specialised commercial and technical
knowledge. Within the centrally negotiated price and share of business, unit material functions
interacted with the approved panel of vendors to "pull" materials in line with their production plans.

For the suppliers, this had created a convenient single-point contact with AL, for sharing
drawings, for negotiating prices and long-term business volumes, and for assistance and consultancy on
quality to management issues. This corporate buying seemed to have benefited AL through
consolidation of business per supplier and dealing from a position of strength that consolidated
volumes.
 The starting block was the creation of a company-wide database for the 22,000-plus parts which
were matched with suppliers' part numbers. This revealed a picture of fragmented business and
differential pricing at units. A classification of the 1,400-odd suppliers, based on business volumes,
showed that 18 per cent accounted for 92.5 per cent of the business, while 61 per cent handled just 1.9
per cent. In Phase I, corporate buying covered major suppliers (Rs 10 lakh plus per year). The materials
were classified into "packs" (broad groups of similar items) with one representative each from the CMD
and the CQE forming a three-legged race team of specialists for each pack.

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 focused 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 inventory-holdings.

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.

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 Objective Result

Total Cost
Within a year, operating cost as a percentage
Management Cut Cost
of plant turnover was down by a third.
(TCM)

Overall energy saving. Average power cost

Energy Optimize energy
per product reduced by 30.06% without
Management loss
additional investment.

Value Engineering Efficient

Substantial reduction in the chasis cost.
(VE) material usage

Cross Functional The very first CFTs resulted in savings of Rs.

Synergy
Teams (CFT) 18.2 million.
 The quick handling of suggestion has
Involve
Suggestion Scheme resulted in continuous, suggestions to cut
everyone
cost and improve quality.

Inventory Better Probably the best IM today in the Industry

Management (IM) housekeeping that has resulted in a lot of saving.

Shop Investment Monitor and Fix Operating cost as per cent of shop
Programme Utilize turnover machines efficiently.

Plus One Training Training across all levels in the organization.

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.

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."