opulence case

Opulence – The Supply Chain Workshop

Dummy Motors Ltd.

Mr. Ashish Gupta, the newly appointed CEO of Dummy Motors is on a flight, returning from Mumbai

to Bhopal just after attending the Board meeting of Dummy Motors. His idea of capacity expansion from

current 4,400 vehicles / month to 6,000 vehicles per month was thrashed by the Board. The Board is

very much concerned about the poor capacity utilization and service levels of Dummy Motors. Given the

growth Indian commercial vehicle industry has seen in the past few years, the Board was of the view that

Dummy Motors could have capitalized on its potential if only it had just managed to produce as per the

plan. The Board adopted a strict stance that no additional investments shall be sanctioned for capacity

expansion unless and until the efficiency of production increases by a significant proportion. Mr. Gupta

has approached Opulence Supply Chain Consultancy to solve the production problems.

Dummy Motors Ltd.

Dummy Motors Ltd. (DML) is in the business of manufacturing and marketing commercial vehicles

across tonnages and end use segments. It is a market leader in the Light Commercial Vehicle (LCV)

segment. As part of its business strategy it has been focusing on manufacturing and selling value added

products for a wide range of user segments. DML has comprehensive manufacturing facilities at its

Bhopal Unit. The plant has assembly lines for LCVs and Heavy Commercial Vehicle (HCVs). The plant

also has assembly lines for LCV and HCV cabins, paint shop, axle assembly line, engine and transmission

assembly along with in-house machine shop for final machining of cylinder blocks and heads. The

business has seen an impressive growth over past the two years with the introduction of a slew of new

products, especially in higher tonnage segments.

This case has been written by Nitin Agarwal and G Maheswaran of Miebach Logistics India Pvt. Ltd. for Confluence 2006, management event by IIM Ahmedabad. This case is purely fictional and does not correspond to any organization in the market. If some facts are found to be corresponding to any organization, it is purely a coincidence. This case is written only for the purpose of contest and hence can not be reproduced, referred or used for teaching by anyone without prior permission of Miebach Logistics India Pvt. Ltd.

Indian Institute of Management, Vastrapur, Ahmedabad 380015. India. www.iima-confluence.com [email protected]


Commercial Vehicles Industry in India

Commercial vehicles industry in India is broadly categorized into LCV and M&HCV (Medium and

Heavy Commercial Vehicles) based on the tonnage of the vehicles. There are several players in the

market but is mainly dominated by Bata Motors and Moshak Teyland. Dummy Motors, Sorce Motors,

Jahindra, Kicher, Kwaraj Nazda, Bharat Motors and Dolvo are other players in the market. In the recent

years, with wide product portfolio, Dummy Motors has been posing a threat to the two major players in

the market.

Recent years have witnessed a sharp growth in commercial vehicles industry due to several factors mainly

growth in road infrastructure. Refer Exhibit 1 for the market size and growth of commercial vehicles

industry in India. With such an increase in market, supplying the right product to the right market at the

promised time is the key to succeed in the industry. But the Indian commercial vehicles industry is very

cyclical and hence, capacity expansion can cause loss when the market does not grow at the same rate. In

such circumstance, capacity utilization is very important.

Product Range

DML’s strategy, unlike most of its competitors’, is customization of the vehicles to meet the customer’s

needs. In lieu of its distinct service, the company charges a premium to the customer. This focus has

resulted in a huge product portfolio for DML and hence it has product variants (SKUs) up to 2,000

vehicles as compared to around 100 to 250 of the competitors who compete in a similar product range.

But out of 2000 odd available SKUs only 700 were sold last year. Further, DML had sold around a total

of 30,000 vehicles all across the year (2004-05) and only 40 SKUs contributed to 60% of the sales (refer

Exhibit 2)


Outbound

DML operates through 100 exclusive dealerships which are fairly distributed around the country and are

served via 27 depots (refer Exhibit 3) including the factory which acts as a depot for its own State –

however, there is a strong sales focus on the South and West of India. Interestingly, not all dealers are

supplied via depots – also, some customers are not serviced via dealers but directly from the plant.

The network has been designed to prevent the incidence of Central Sales Tax and hence all the states

have one depot each. Some vehicles are sold on special projects in which case vehicles are sent directly to

the customers and not routed through the depots. Traditionally in India, the distribution of the

commercial vehicles is carried out by driving them to the location. The average distance of 250 to 300

kms between the depot and the dealer leads to an average transit time of one to two days and also results

in substantial in-transit damages, which are later rectified at the depots.

About 20% of all vehicles reaching the dealers are in damaged condition due to the bad conditions of the

roads in India and also carelessness on the part of drivers. Although, according to the contract, the

transporter pays for these damages - it has its own implications in terms of increased lead time to

customer and also affects the quality of the delivered vehicle. Typically inventory levels are quite high in

the depots. Total inventory on the outbound is up to 18 days of sales including an average of 4 days

inventory in transit. Factory also carries finished goods inventory which is close to 21 days. The

composition of inventory at the depots is quite unbalanced with more than 40% of the inventory being

one month old and one can find substantial number of vehicles that are more than 3 months old. The

distribution of depot stock with respect to the age is given in Exhibit 4.

Production

DML has in-house facility for body shop (welding of body parts), paint shop and the assembly line. The

pressing operations of all sheet metals are outsourced and as a result there is no press shop in the

company premises. There are two parallel assembly lines one each for HCV and LCV. Within the same

production line, Dummy Motors follows the model mix concept wherein various models of LCVs are


assembled on the same production line. This lends a lot of flexibility to the production. Refer to Exhibit

5 for the production process.

The production capacity is utilized only to the tune of 60% due to various factors. In other words the real

output is only 60% of the theoretical production capacity.

• The difference in the theoretical capacity and the practical capacity is around 20% due to

factors like manpower efficiency, material availability, quality of parts, breakdown of machines

etc. which are accounted for while planning for the resources. This implies that the practical

capacity is only 80% of the theoretical capacity

• Additional loss of 14% of the theoretical capacity happens due to non-synchronization in

planning. The procurement planning along with the supplier capability and frequently changing

production plan adds to this pie of 14%

• Loss of another 6% occurs due to gaps in the execution processes like non-delivery of

scheduled materials, quality problems concerning materials, various line losses and maintenance

problems

Capacity utilization in production depends a lot on availability of the right components at the right time.

DML has around 12 transporter-run warehouses outside the factory premise and the materials in these

warehouses are owned by the vendors. Although the material which has once come to the warehouse

does not return to the vendor, it is always routed through the DML factory if it fails quality test. All these

12 warehouses are run independently by the transporters and the DML’s employee at stores department

(in factory premises) communicate their requirements to the respective warehouses based on the

production requirement for the next day. Every evening, each of the warehouses has to provide a status

of its inventory to enable the stores people in the company to be aware of the exact inventory at the

warehouses.

Everyday, DML factory receives around 200 vehicles from vendors including all big and small trucks.

Some of them come directly from the vendors and others from transporter-run warehouses. High traffic

at the in-gate leads to complex processes and also sometimes the processes have to be bypassed to ensure

that the production does not stop.


Some of the observations within the factory primarily regarding the execution processes within the

factory premise are as follows:

• Often, vehicle comes without the Advance Shipping Note (required documents) which

requires manual intervention of the procurement officers or stores personnel causing delays

in the entry to the stores

• Vehicle comes without the delivery schedule or the Purchase Order in the system which

requires manual intervention of the procurement officer leading to material entry delay

• Direct shipments from vendors are either sent back to transporter warehouse or kept waiting

outside the plant for long duration in case the parts do not fall in the shortage list and they

are not stored in the central warehouse. For e.g. sometimes a vehicle carrying tyres has to wait

outside the factory gate till the tyre appears in the shortage list (as tyres are not stored in the

warehouse)

• After unloading the components, the decision to send it to central stores or to the receipt area

(Quality Inspection) is totally manual. Sometimes the parts which are supposed to be

inspected before delivery to line are also directly sent to the central stores. This results in

detection of quality defects directly at the production line

• At times, material traceability is a problem if for similar parts the vendor does not fix the

labels properly. As a result sometimes the parts are kept in wrong bins in the stores

• While picking the stores personnel may pick a similar looking part and deliver to the line

• Shortage list released to the warehouse by 2:00 pm for next day’s production and the

warehouses revert back with a Non-Confirmation Report (NCR) by 4:30 pm. The

discrepancy in the required vs. available stock is taken up with the procurement officer. The

change in production plan due to non-availability disrupts shortage lists with respect to other

parts thereby creating a problem during production

• Procurement officers sometimes interact with the warehouse directly, bypassing the stores

which makes the system non-transparent

• Sometimes material from the receipt area is directly replenished on the production line

without Quality Inspection. This leads to by passing of Quality Assurance (QA) process as

well as wrong system inventory


• Similar looking parts may be used interchangeably on the production line. This leads to

system inventory mismatch and hence shortages later on and also affects the quality of the

final product

• Everyday there are 2-3 revisions in the production plan which leads to excess WIP at

previous shops like body shop and paint shop

• Frequent line stoppages were occurring due to component quality problems (both from

certified and non-certified vendors)

• The procurement officers at the weekly production planning meeting consider in-transit

stocks which are proportionate to lead time that has very high variation. This leads to

frequent plan changes even during the week by the marketing department.

• Training of temporary workers consumes a lot of time and it takes around 2 months for them

to perform at the desired level of efficiency. Temporary workers are appointed in batches and

hence the moment a batch leaves there is high production loss in the following weeks

• The post-production processing time is around 3-4 days and it is quite uncertain as well. It

makes it difficult for the dispatch department to ascertain or visualize the exact availability.

• The transporter is able to detect various visual defects on the vehicle even after Pre-Delivery

Inspection check

Exhibit 6 explains the different reasons for production loss.

Inbound

DML has around 400 suppliers of which around 67 supply material directly to the plant, 60 are local

suppliers within a radius of 30 kms from the plant, around 35 processors receive incoming material from

one of the suppliers and supply directly to the factory and around 278 nationwide suppliers supply

material either through consolidation centers (run by transporters to combine loads) and then through

transporter-run warehouses or they supply to one of the processors directly. Some big suppliers directly

send the material to the warehouses without routing it through the consolidation centers.

Geographically these suppliers are well distributed across the Indian states and primarily five clusters of

suppliers can be seen. The biggest cluster is that of the local suppliers, and the other clusters are in South

India, Gujarat, Delhi Faridabad region and the last one in Mumbai-Pune region (refer Exhibit 7). The


details of all these clusters are given in Exhibit 6. Components warehouses put together have an average

inventory of around 10 days and the age of inventory at the warehouses seems to be an issue. Exhibit 8

shows the age of inventory at the warehouse.

The importance of vendors is immense in the automotive industry and a matrix of Supplier ABC vs. the

Material ABC was made to facilitate understanding of the dynamics of procurement with respect to

DML. The table below shows the vendor item combinations where A category refers to top 60%, B

refers to next 20%, C1 refers to next 15% and C2 the last 5% of consumption / purchase for Material

ABC and Vendor ABC respectively. The table below shows the details of vendor-part combination

which implies if a part is supplied by 3 vendors it will appear three times in this table. The 'Not

Consumed' column shows the number of parts which were procured and not consumed according to the

Bill of Material (BOM).

The procurement team consists of 50 procurement officers who handle different parts. They prefer to

handle their parts independently.

Planning Process

Demand planning process at DML starts from dealers who send their forecast to the regional sales heads

and finally the regional heads pass on their respective forecast for the next month’s sale to the Sales and

Planning (S&P) team. The regional heads are expected to give the compiled requirement for next three

months (one month firm and two months tentative) by 22nd of every month which is further moderated

by the S&P team by 25th. Then the S&P team sits along with the Production Planning and the

Procurement teams to finalize the production plan for the next month. This plan is then released to the

Procurement and the Production teams to plan their resources accordingly.

Adherence to the above mentioned process is a big problem as only 10% of the dealers give their

forecasts and rest everything is done primarily on the basis of experience or often personal estimate

A B C1 C2 Not Consumed Grand Total 240 245 389 645 572 2,091 123 196 377 994 207 1,897 77 152 456 1,493 216 2,394 76 94 324 1,274 169 1,937 and Total 516 687 1,546 4,406 1,164 8,319

Material ABCVendor ABC ABC1C2Gr


without any calculations. The production planning is first done on a monthly horizon taking into

considerations the broader constraints which are then broken down to weekly planning and daily

production planning as the situation is quite dynamic and it calls for a close monitoring of the production

planning to ensure good utilization of resources.

The following are the observations on production planning

• Production sequence is fixed after monthly planning and material requirement is planned,

but parts availability is not ensured before production starts

• Production sequence is changed on a weekly basis due to

- Material shortage

- Priority orders

- Production capacity limitations

• Production sequence then is changed daily due to unexpected material shortage and

quality issues

The following are the observations on procurement (material) planning

• Lack of synchronization within purchase department and no standard procedures

followed to ensure that all parts required for the day’s production plan are available in

right quantity at the right time

• ERP (SAP) is not used – material requirement plan (MRP) calculations are completely

manual and person dependent.

• Optimum order quantity and safety stock calculations are not scientific

• The schedule is communicated to vendors on 25th of the month and is subsequently

revised at least twice depending on the revision of plan by production planning

department

• Mostly it is the procurement officers who, based on their experience, give the

requirement to the vendors as the production plan received from S&P team undergoes

many changes and is mostly not received on time

• MRP is done on a monthly level and then the weekly dispatch plan to the vendor is based

on 40% in week 1, 30% in week 2, 20% in week 3 and 10% in week 4 irrespective of the


actual production plan. Sometimes, only the monthly requirement without mentioning the

delivery bucket are communicated to the vendors

• All vendors do not conform to the dispatch plan schedule. No proper communication

exists between procurement officers and vendors.

The dealers book Delivery Advice (DA) in the system which is then used for dispatch planning and also

production planning. DA authenticity is questionable as only few of the DAs created are honored which

leads to Inter Depot Stock Transfers and hence an increased cost of serving the customer.

During month end, DML’s sales team forces the dealers to buy vehicles to meet the sales target. This also

results in a huge skew in primary sales although the skew does not appear in the secondary sales to the

final customer. As a result almost 50% of the total sales to dealers are transacted in the last week of the

month.

Costs

Dummy Motors has an annual expenditure of Rs. 79.14 crores (1 crore = 10 million) on logistics of

which around 63% is spent on transportation (refer Exhibit 9). Another 28% is attributed to the

inventory holding cost and 5% and 4% to personnel and infrastructure cost respectively. Out of the total

expenditure on transportation around 60% is incurred on the outbound transportation and rest on the

inbound transportation of the parts coming from various vendors from all over India. The finished

goods inventory in the outbound network (only till depots) contributes to around 55% of the total spent

on inventory, while the inventory of automotive parts in the company premise accounts for 35% and rest

10% is the inventory of parts in the warehouse.

Conclusion

Mr. Gupta intends to adopt a strategy to solve the production problems and increase the capacity

utilization. He is hoping that the team from Opulence can solve his problems.

Exhibits

87,784

68,922

96,752

65,756

120,502

83,195

166,123

108,917

211,143

138,890

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2000-01 2001-02 2002-03 2003-04 2004-05Year

Commercial Vehicle Production & Market Sub-Segments (Nos.)

Medium & Heavy Commercial Vehicles Light Commercial Vehicles Exhibit 1: Commercial vehicles production in India

0%

20%

40%

60%

80%

100%

120%

0% 6% 12%

18%

24%

30%

35%

41%

47%

53%

59%

65%

71%

77%

82%

88%

94%

% of Total SKUs

% o

f Veh

icle

s S

old

(Qty

)

A 3B 6C1 171C2 420TOTAL 697

Count of SKUs97

Exhibit 2: Analysis on number of SKUs contributing to total sales


Nasik

Goa

Baroda

Ahmedabad

Hyderabad

Hubli

SalemPondicherry

Palghat

Chennai

Agra

SolanZirakpur

Jaipur

Jammu

Faridabad Delhi

CHANDIGARH

Haldwani

Lucknow

RanchiPatna

GAUHATI

KOLKATA

BHUBANRaipur

7.567.5

Bhopal

Markets Depots PLANT

Exhibit 3: Dealer network and market


0%

10%

20%

30%

40%

50%

60%

0 to 10Days

10 To 30Days

30 To 60Days

60 To 90Days

90 to 120Days

> 120Days

Age of Stock at Depots

Per

cent

age

of V

ehic

les

Apr-06 May-06 Jun-06

Exhibit 4: Age of inventory at the depots

Indian Institutewww.iima-confluence.com [email protected]

of Management, Vastrapur, Ahmedabad 380015. India.

Final AssemblyBuffer

-6h -8h 0h -4h 6h

• There are 2 shift at the assembly line on an average day

• Effective working time per shift: 7,5 hrs • Produced vehicle 80 to 125 per day• Average produced vehicle: 100 per day

• Average output 7 vehicle per hour

Cabin TrimmingPaintBuffer

-15h

Buffer

Exhibit 5: Schematic representation of production process

Engine

-10h

Transmission

Cabin WeldingBody in White Painted Body

Press Parts

Press parts come from outside processors. No in-house Press Shop at Dummy Motors


Line Problem

BreakdownDesign

Stores

35%

32%

21%

9%

2%1%

Material Shortage

Quality Issues

Exhibit 6: Production loss analysis

7.567.5

VENDORS PLANT

Exhibit 7: Supplier network of DML

Delhi-Haryana Suppliers - 80 suppliers - Volume per day: 265 m

3

- Average distance to factory: 800 kms

Gujarat Suppliers - 30 suppliers - Volume per day: 40 m

3


Local Suppliers - 90 suppliers - Volume per day: 450 m

3


Mumbai-Pune Suppliers - 70 suppliers - Volume per day: 95 m

3 Southern Suppliers - Average distance to factory: 800 kms - 40 suppliers

- Volume per day: 80 m3


2.7%

14.4%

34.3%

9.4% 10.0%13.8% 15.3%

0%

10%

20%

30%

40%

50%

0-7 8-15 16-30 31-60 61-120 121-240 >240 days

Age of Inventory in Days

% o

f Tot

al In

vent

ory

Valu

e

Exhibit 8: Age of inventory of components


Personnel Cost

Infrastructure Cost

Transport Costs

Inventory Costs

Inbound Production Outbound

25.03 11.69 42.41

49.53

2.89

4.04

22.68

∑

∑

79.14

Exhibit 9: Logistics expenditure by Dummy Motors Ltd.

20.89 28.63

1.90

1.42 0.84 0.63

0.81 3.05 0.19

12.97

∑ Rs 79.14 Cr

0

62.6%

7.81

28.7%

5.1%3.6%

opulence case

Documents