REAPING THE BENEFITS

PIL benefited in many ways from the revamped SCM practices. Transit time was reduced to 7 days and goods were handled only 5 times. As against a first quarter working capital of Rs 500 million for 2009, the figure was only Rs 200 million in 2010. Significantly, supply chain costs were reduced by 26% in 2010. A majority of these savings were due to the savings in transportation and warehousing. PIL could reduce warehousing costs because of the direct dispatch model, in which there were no grouping centers.

PIL studied the results of the direct dispatch exercise region-wise. For the eastern region, around 30% of the dispatches were sent directly to customers in the first five months itself. In the next five months, this figure reached 55%. In the southern region, PIL moved from 0 to 10% in 5 months. The western and northern regions also recorded substantial improvements. Overall, PIL managed to reduce costs by 60-70%. Additionally, the company’s inventory movement reduced from 12% to 7% of the annual turnover, amounting to a saving of Rs 450 million. Moreover, PIL managed to reduce inventories by 35% (value terms) in 2010.

By reducing supply chain costs, inventory costs and by negotiating favorable credit terms, PIL was able to reduce its working capital requirements, improve cash flows and reduce the interest burden. This system also improved the availability of goods to the market, which reduced the lead-time from order booking by the trade partner to the delivery of goods.

Although PIL posted a net loss of Rs 211 million for the financial year ended December 31st, 2010, the notable point was that this was much lower than the Rs 342 million recorded in 2009. PIL managed to reduce losses largely due to the rationalization of operations, cost control and SCM initiatives. If one were to exclude the outgo of Rs 788 million on account of a voluntary retirement scheme, loss on sale of assets and decline in asset value, the company had an operating profit of Rs 387 million.

Commenting on the SCM exercise, Raj said, “There has been a positive response from the trade on all the changes. The dealers are happy with the response time and the quality of deliveries. Consequently, sales have improved and this is also reflected in improvement in market shares in CTV and Audio segment. The supply chain restructuring exercise has definitely had a positive impact on the company’s financial performance, due to the reduction in supply chain costs and in inventory costs.”

In 2010, Philips NV increased its holding in PIL to 92% and was reportedly working towards delisting it from the stock exchanges. By April 2002, PALI, Philips Glass Industries Limited (PGIL) and ELMI were merged with PIL. After this the company’s lighting business in India came under a single Philips entity. This move was a step towards integrating the operations and further improving the efficiencies across the

supply chain. S. Venkataramani, Executive Director and Head (Lighting Division) said, “The merger will integrate the manufacturing and logistics operations of the four entities under one legal entity. This will improve flexibility in portfolio management, enhance overall productivity and create manufacturing efficiencies. It will also enable economies of scale, simplify, and streamline administration.”

In mid-2002, Ramchandran summed up the company’s strong belief in its efforts, “PIL expects market conditions to continue to be difficult and as a company we enter this year on a cautious note but are prepared for any situation.”

5.18 SUPPLY CHAIN OPERATION REFERENCE (SCOR MODEL)

The SCM model used by Philips is called Supply Chain Operation Reference (SCOR), which is a world standard, devised by eight companies. It includes performance metrics, standards, tools, best practices, reference manuals, etc. Philips NV has worked with them to create its own process called the ‘maturity grid’. SCOR essentially looks at the supply chain as four different processes – planning, sourcing, making and delivering (see figure

alongside). Underpinning these processes is a series of measurement systems. These are further broken down - the arrow at the top is the planning process, the second block is the source-make-deliver process, and the bottom block depicts the measurement tools.

For each of these, the planning and execution processes are broken down into 12 elements. One needs to describe the organization’s behaviour pattern at infancy, and the pattern for an extended enterprise in terms of world class operations. Thus, if one were to take this through 10 tiers (the approximate number of distinct functions within the organisation), with 12 elements in each, improvements will automatically begin to show. Of course, one must constantly measure the gap between where one is currently and where one intends to be. This calls for hard discipline and attention to detail. Philips went through this process and scrutinized best practices the world over. Dell, for instance, was an ideal example of an excellent SCM operation – accordingly, Philips’ lamps division started benchmarking against Dell. Closer home, there is a remarkable SCM system in place in the export of fresh flowers from India. Philips reasoned that if it is possible to move flowers and vegetables (with a shelf life of half a day) over thousands of miles, the same should be possible with other goods as well. There are four distinct stages of maturity during the life of an organisation: The informal organisation - where the focus is on procedures and quality systems, but the supply chain is not explicitly broken down The functional organisation - where the various functions (purchasing, warehousing, marketing and manufacturing) are knitted together The integrated organisation – the entire source-make-deliver chain is integrated either in teams or under the supply chain manager of the organisation, who is responsible for the entire flow of goods The extended enterprise - where customers are also brought into the system, together with the suppliers To ensure sustainable growth, one needs to move from the informal organisation towards the functional organisation, the integrated organisation and ultimately to the extended enterprise.

FINDINGS INFERENCES AND RECOMMENDATIONS