Paint Industry Project

REPORT ON

THE PAINT INDUSTRY

PROJECT TITLE:

“STUDY OF SUPPLY CHAIN MANAGEMENT IN THE PAINT

INDUSTRY”

– AN ANALYTICAL VIEW OF THE SALES AND MARKETING

SIDE

ORGANIZATIONS IDENTIFIED FOR THE STUDY:

BERGER PAINTS INDIA LTD

ASIAN PAINTS INDIA LTD

BUSINESS SECTOR IDENTIFIED FOR THE STUDY:

PAINT INDUSTRY

PROJECT GUIDE: PROF. ANIRUDH SHARMA

A Report By: Manmeet Singh/ IIPM / PGP / SS 2003 – 05

Alumni Reference Code – SS03517

ACKNOWLEDGEMENT

It is my proud privilege to acknowledge with a deep sense of gratitude, the invaluable

help, kind patronage and able guidance, given to me by my learned and revered project

guide, Prof. Anirudh Sharma Vice President - Corporate Relations, Indian Institute of

Planning & Management. Their prudent counsel, meticulous supervision, ardent

personal interest, sustained encouragement and affection have been of immeasurable

help all along. In fact working under his supervision is a matter of pride.

I owe a debt of honour of Prof. Sumanta Sharma, The Indian Institute of

Planning and Management, for the exceptional cooperation and multifarious

openhanded help.

I am also thankful to Prof. A. Sandeep, Dean - Center for Advanced Consulting

& Research, Indian Institute of Planning & Management, for the support he provided at

the time it was most important to me. He provided me with the project of Micheal

Potter's 5 forces analysis project, which made me gain a lot of knowledge and start the

project with a right platform.

My heartfelt gratitude are due to the officials and staff of various companies

specially to Mr. Arun Batra (RSM Berger Paints), Mr. Rajesh Sahay ( DSM Berger

Paints India Ltd), Mr. Joydeep Paul(RSM Asian Paints India Ltd) and Mr. Nimesh

Gupta (ASM ICI Paints) who all helped me with the information I needed to finish the

project successfully in time.

EXECUTIVE SUMMARY

Supply Chain Management is an area that is used as a differentiating

factor for a lot of companies. Every company in the world have either

improved the Supply Chain Management or are looking forward to give

proper concentration to it. This project will take a look at the supply

chain management of the Paint Industry. In view of the same the

companies which are been covered are primarily the biggest 2

companies in Delhi. As being No.1 in Delhi, Berger Paints India Ltd and

the follower Asian Paints India Ltd. The study has only been focused

towards the working of these companies in the global region of Delhi.

The research has mainly covered some company officials; in the

company officials even I have tried to cover at least 3 levels of

officials, thus for the same effort I have covered 24 sales officers of 3

companies (Berger Paints, Asian Paints and ICI paints also for a better

idea of the industry), then onwards there are ASM’s of all the three

companies and RSM’s of only the two focal companies. After covering

the company persons, the next step was to cover, as many dealers as I

can, but due to the time constrain the no of dealers, which were been

covered, were restricted to only 38.

With the discussions to the company persons and the dealers I was

able to gain knowledge that the paint trade in Delhi is primarily

working on 2 things. One is rebates and the other is credit period. On

the basis of both the things the market runs.

In the thesis I have first explained about the basic concept of supply

chain management. After the same I have explained about the Indian

Paint Industry. Paint trade in India is organised only to the level of 60%

and rest is all un-organised. The unorganized sector in the Paint

Industry is very scattered, Delhi in all have almost 550 Local vendors.

Thus the competition and usefulness of SCM goes deeper.

After understanding the need then the thesis moves to various areas

of the SCM and see how are all these things managed in Paint Industry

as a whole and wherever possible about the two companies differently.

The second chapter covers the areas of Logistics; logistics, which is the

backbone of any SCM, is covered with various areas. It has areas like

invenmtory management, order processing, network planning and

many more. In this chapter all the functions are explained individually

and also been accompanied with the paint trade for that particular

segment only.

Moving further to the areas where the heart of any company exists,

the financial aspects, this chapter explains about the relevance of

finance to SCM and SCM to finance. How well the combination of the

two is working together for the Paint Industry.

The further chapter moves towards the forecasting methods and the

importance of forecasting. It shows that how difficult is it to forecast in

the paint industry.

This is followed by the relationship chapter, this chapter talks about

the customer satisfaction and the inter firm relations. This chapter

explains both the things differently and explains how Asian is trying to

take an additional advantage by giving special kind of services and

trying to gain customers goodwill.

Role of sales and marketing in the working of SCM is the next chapter.

This chapter tells us about the importance of human touch in the

human involvement then the whole process might go for a toss. Thus

to have a perfect person at perfect place is as importance as to have

the right market share.

In the next chapter there is discussion about the machine which has

changed the working of the Paint industry. This machine has made the

SCM in the Paint Industry some effective.

Further moving to the final chapter we will talk about the future of the

paint industry and what all changes are going to hit the paint market

and what all effect will be there from the changes.

TABLE OF CONTENT

Chapter No.

Particulars

Page No.

Synopsis & Research Methodology

7

Chapter 1

Supply Chain Management

10

Chapter 2

Logistics management

26

Chapter 3

Financial areas

39

Chapter 4

Forecasting

50

Chapter 5

Customer Satisfaction & interfirm relationship

63

Chapter 6

Role of sales and marketing in SCM

74

Chapter 7

Tinting machines

82

Chapter 8

Future Trends in the Indian Paint Market

89

Chapter 9

Conclusion

96

Annexure 1

99

Annexure 2

101

Annexure 3

103

SYNOPSIS

THE TITLE OF THE THESIS:

“Study of Supply Chain Management in the Paint Industry”

THESIS GUIDE:

Prof Anirudh Sharma

Vice President - Corporate Relations,

Indian Institute of Planning & Management.

OBJECTIVES OF THE STUDY

The objective here is to get an overview of Supply Chain Management and to know how this concept works in the Paints Industry, The various steps the companies take to improve the supply chain management and how successful are they.

Primary objective:

To understand the Supply Chain Management followed at Paint Industry. To find out the gaps left while implementing Supply Chain Management in various companies under the paint industry. Finally to find out the solutions for those Gaps.

Secondary objective:

 To study the various areas of Supply Chain Management in Paint Industry.  How they manage Supply Chain.

 Whether they are able to get the maximum out of the Supply Chain Management and make the highest benefit of it.

RESEARCH METHODOLOGY

Methodology of the study will be an exploratory research. The nature of the study is such that it needs to have both the secondary research as well as the primary one. The Secondary research will help to gain more and more information about the companies and the usage of Supply Chain Management in them. The primary research will make me understand the realities of the market.

I. INFORMATION SOURCES Primary Sources

The following sources have been identified to provide primary information regarding the supply chain management of the organizations under study:

• Employees of the organization in the concerned departments through o General Discussions

• Business Associates/ Wholesalers/ Stockiest/ Dealers/ Sub-Stockiest/ Other intermediaries of the Organization’s Sales and Distribution network

The focus during the research would be towards meeting more and more channel members of the company not only facilitate our primary research but in the process collecting authentic data and verifying the same.

Secondary Sources

The following sources have been identified to provide secondary information about the organizations under study:

• Literature on sales and marketing o Research publications o Books by Renowned authors o Business magazines and journals

• The Internet

II. DATA COLLECTION TOOLS

Though there are numerous tools available for Data Collection, we have identified the following tools to be used for the purpose during the course of the project:

• Group discussions

• Personal Interviews and

CHAPTER 1

SUPPLY CHAIN MANAGEMENT

Cisco does it. Toyota does it. IBM does it. Do you do it?

What is Supply Chain Management?

(An overview on Supply Chain Management)

In this chapter we will see that what is Supply Chain Management, how did it evolved, how does it affect the various areas of our companies.

When we think of Supply Chain Management the first thing which comes to our mind is logistics and movement of the material. We all have a misconception that Supply Chain Management only works from the company end to the consumer, it creates a better platform for the product to reach the market. Before we start learning about how the supply chain works in the paints industry let us first learn about what is Supply Chain Management exactly is and which all areas it covers.

To serve a few or to serve the whole market, one thing that is common in them is to produce the product and making it available to the customer. Any company that will be successful to do it better would lead the market in its respective market & Industry. Leading manufacturers of the world have starting improving the efficiency of their manufacturing and enhanced profitability by focusing on how they interact with suppliers and customers.

Supply chain management is the management of supply chain. Thus to manage a supply chain properly we must first understand what supply chain is all about. This effort to cover all the areas in the market is called Supply Chain. Supply Chain is the one that starts from purchases of raw material of our raw material supplier and finishes at making the product available to the end customer.

Traditionally, supply chain was a synonymous with logistics and the movement of materials. Today, it carries a broader definition; supply chain is the one that covers all the areas of sourcing, production and distribution.

A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm.

A very simple supply chain for a single product, where raw material is procured from one supplier, transformed into finished goods in a single step, and then transported to the ultimate customers. Lets understand it with a Drawing (See SC1)

Supplier

sPECIFIC COMPANY

Customer

Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along an arbores cent network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large.

It is really difficult to explain a supply chain without a particular industry. It does not end here, supply chain even differs within the industry. Different companies in an industry even have different kinds of supply chains and they may be managing it in different manner. To give you a generalized view let us see a part of supply chain that is generally common in all the companies. See SC2

This is just a part of the supply chain. Imagine that this figure has 45-50 Initial suppliers, 10-15 Suppliers who are making the raw material available to the company. On the other hand if there are some logistics companies, a number of distributors, a huge number of dealers dealing with them and a un-countable number of customers. This all can be accompanied with the Institutional selling, bulk selling which has different pattern and direct marketing. With having all this in one diagram I feel that it is almost impossible to built a diagram that can explain al that.

Supply chain can better be understood by putting it as a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton, but the entire team needs to make a coordinated effort to win the race.

Initial Supplier

Customer

sPECIFIC COMPANY

A part of Supply Chain

Supplier Third party _CustomerUltimate logistics supplier

Let us see some definitions of Supply Chain Management,

 The planning, scheduling and control of the supply chain, which is the sequence of organizations and functions that mine, make or assemble materials and products from manufacturer to wholesaler to retailer to consumer. The driving force behind supply chain management (SCM) is to reduce inventory.

 Dr. Roger D. Blackwell, professor of marketing at Ohio State University and author of the best-selling book, "From Mind to Market," says it very succinctly. "Supply chain management is all about having the right product in the right place, at the right price, at the right time and in the right condition."

 Typically, SCM will attempt to centrally control or link the production, shipment, and distribution of a product. By managing the supply chain, companies are able to cut excess fat and provide products faster. This is done by keeping tighter control of internal inventories, internal production, distribution, sales, and the inventories of the company's product purchasers.

 A cross-functional approach to procuring, producing, and delivering products and services to customers. The broad management scope includes sub-suppliers, suppliers, internal information, and funds flow.



Supply chain management (SCM) deals with the planning and execution issues involved in managing a supply chain.

 Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the Logistics Management activities noted above, as

across marketing, sales, product design, finance and information technology.

(Source: Council of Supply Chain Management Professionals www.cscmp.org)

Here are some official definitions

 "MIT's definition is integrated supply chain management is a process-orientated, integrated approach to procuring, producing, and delivering products and services to customers. ISCM has a broad scope that includes sub-suppliers, suppliers, internal operations, trade customers, retail customers, and end users. It covers the management of material, information, and funds flows."

(Dymystifying Supply chain Management by Peter J Metz from Supply Chain Management Review Winter 1998)

"A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distirbution of these finished products to customers."

 Supply chain management (SCM) is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and integrating these flows both within and among companies. It is said that the ultimate goal of any effective supply chain management system is to reduce inventory (with the assumption that products are available when needed). As a solution for successful supply chain management, sophisticated software systems with Web interfaces are competing with Web-based application service providers (ASP) who promise to provide part or all of the SCM service for companies who rent their service.



Supply chain management (SCM) is the practice of coordinating the flow of goods, services, information and finances as they move from raw materials to parts supplier to manufacturer to wholesaler to retailer to consumer. This process includes order generation, order taking, information feedback and the efficient and timely delivery of goods and services.

Let us now see how the Supply Chain Management evolved.

Over the decades, management of the supply chain has moved through three distinct phases, from decentralized (functional/departmental), to centralized (corporate planning and purchasing), and finally to a combination of both.

The trend is now moving towards centralized planning combined with decentralized execution. Technology now allows for the rapid sharing of business information from all functional and geographical areas of the extended enterprise, which enables decision makers to plan and execute with the view to maximising enterprise-wide profitability.

Let us now understand both the Phases in a bit depth manner and then a combination that is now days been promoted in the corporate world

Phased Evolution of Supply Chain Management

Phase 1: Decentralised (Functional or Departmental) Phase 2: Centralised (Integrated) Phase 3: Combination of both centralised and decentralised

Supply

Chain

Planning

 Done in functional areas  Ineffective due to limited information.  Difficult to implement Standardisation around the enterprise.  Shift to a business process focus  Increase in effectiveness due to standardisation of information across the enterprise  Integrated supply chain planning: demand  Collaborative planning  Extension of the planning process beyond the enterprise to include contract manufacturers, key customers and suppliers

forecasting, planning & scheduling

Supply

Chain

Execution

 Execution is generally in a reactive mode  Decisions often made by functional managers and key Associates  Most of the decisions made on an enterprise wide area.  Limited collaboration  The functional manager might not be happy with the decisions made.

 Decisions taken at the most appropriate level in the organization  Greater proportion of collaborative, pre-emptive Decisions

Phase 1—Departmentalized or functional supply chain management

Organizational structures from the fifties to the late eighties can be characterized as a series of functional and geographical areas. Executive management’s attempts at centralised supply chain planning in such an environment were ineffective due to the lack of standardisation of business information, poor data integrity and analysis support, disparate technology systems, and incentives that did not promote sharing of information. Supply chain execution decisions were made by a core set of managers within each functional area with minimal thought about repercussions in other areas. Decisions were reactive and based solely on criteria that were applicable to the particular functional area.

In the late eighties and early nineties, with the advent of BPR, corporate leaders started seeing the benefits of

aligning their organizations, along with the associated business objectives and performance incentives for executives, to underlying business processes. Advances in technology and lower cost of computing increased the penetration of enterprise-wide transaction systems such as ERP systems. Standardised business information and a coherent set of metrics from different businesses, functional and geographical areas were now readily available to senior managers. With the introduction of advanced planning and scheduling systems, supply chain optimization became a feasible option. This led to an increase in the effectiveness of increasingly centralized supply chain planning processes. The planning process was more integrated and driven by cross-functional teams with an objective to look at the enterprise as a whole. Leading corporations across all industries started realising that to reap the full benefits, demand forecasting, supply chain planning, and production scheduling ought to be treated as an integrated business process. Sales and operations planning programs, where cross-functional teams periodically meet to determine the best course of action, became popular. Supply chain execution decisions also became more cross functional and integrated. Purchasing and manufacturing could now jointly decide on a raw material procurement decision that minimized the total cost-to-make of a product, not just the lowest purchase price. Similarly customer service and distribution and logistics could jointly decide on a fulfillment decision that minimized the total cost to serve a particular customer.

Phase 3—Transformation to value networks

Today, the Internet is unleashing a powerful phenomenon—collaboration—that is affecting the supply chain. Integrated and centralized supply chain planning will become even more effective as the majority of inputs to the planning process will flow bottom-up through the enterprise, and an increasing portion of it will originate from the end customer. Pertinent information will be adjusted and reviewed by relevant players based on new developments. Demand forecasts will be routinely updated by sales representatives based on the latest customer information and eventually by the end customers themselves. Sharing of information around product seasonality, promotional events and new product launches between buyers and

sellers will further enhance the trend, and increase the associated benefits of higher customer service levels and lower supply chain costs.

The other significant development will be that supply chain execution decisions will become increasingly decentralized. As supply chains migrate from a push model (build-to-stock) to a pull model (build-to-demand), they require four key elements for operational success: real-time visibility (across the entire supply chain), flexibility (of supply and sourcing options), responsiveness (to changes in customer demand and product lead-times) and rapid new product introductions (based on market trends and new designs).

Let us now see that how is the supply chain management works in the paint industry. In short we can say that how the paint trade works.

The Indian paint industry has come a long way from the days when paints were considered a luxury item. Today the awareness level on benefits of paints is relatively high and people have started making paint as a part of their life. India is a favorable proposition for a lot of trades and a lot of world leaders have already or wants to start operations in India. Paint industry is one of these industries, where leaders of the world are looking at companies like ICI has already entered and companies like Sherwin Williams also are looking for some entry gateway in India. Factors due to which these companies are interested in coming to India include the low per capita consumption of paints (currently 0.5 kilogram and has a huge potential to grow as per the world average), growth in construction sector (it is being offered industry status) and growth in the auto/white goods market respectively spurring demand for decorative and industrial paints. The industry has also witnessed increased activity in the industrial variety of paints with the entry of MNCs in auto, consumer durables etc, which has been gaining steadily over decorative paints in the last one decade, by having such fast growth the industrial sector has been able to gain a good market share. Right now the market share of industrial paint is close to 30 % of the paint industry.

This paint industry of India comprises of organized as well as unorganized sector, which can also be called small scale sector. Approximately 60% of the production is contributed by the organized sector. The unorganized sector in the paint industry is having a big number of players running nearly 2000 small-scale units. We can say that one cannot count the number of players running in a particular market. This trade is so dynamic that after every few days one can hear a new name in the market.

With having so many competitors in the market one has to be very accurate in the market, this is because being a high technical product one cannot judge the quality of the product at the time of purchasing. The production of Paints is not a very expensive affair, which is because we have so many players in the market. Thus to show the differentiation in the product wither one have to wait for a few years or he can give a better service and get the perception about the quality of the prouct in the customers mind.

In the organised sector, leading from the front is market leader Asian Paints which leads the market to the market share of 54% of the organisaed sector and over 15000 dealer networks and it is increasing its network by concentrating in the semi urban and rural areas for more penetration in the market. Two very close companies with the name of Nerolac and Berger are followed Asian Paints, these companies have a market share of 17% and 16% respectively. After all this fourth in the major organised sector is ICIDulox, which is gaining control with a very fast pace.

The Paints Industry mainly consists of emulsion paints, enamel paints, pigments, printing inks, synthetic resins and many more products.

The paint trade in India is divided in two segments Industrial paints and Decorative paints.

Automobile manufacturers are the biggest targets of the Industrial paints segment as they are the one who has the maximum demand in this segment of market. It is very difficult to study the supply chain of the paint industry in the industrial segment, as there is a different set of works for every customer or every set of customers. Every customer in this segment is such big that the company has to change the working style as per the customer. In this particular segment Nerolac is the leader with having majority of market share followed by Berger and then rest of the players follow the market.

Decorative is market which leads the Indian paint industry and which needs all the efforts on all the sides. This is one segment of the market that needs all the efforts of all the functions of the market as in this segment the market covers whole India. The product range which one company covers in the market is also

company covers emulsion paints, enamel paints, pigments, printing inks, synthetic resins and many more products. All these products have their first quality product and second quality product in these areas.

Let me explain this with a example of taking Emulsions and Enamels of Berger Paints.

 Rangoli Super Emulsion  Luxol Silk Emulsion  Bison Emulsion  Bison Distemper  Jadoo Distemper  Castle Distemper  Weather Coat  WalMasta  Durocem  Jadoocem  Happy Wall Putty

Paint

EMULTIONS (water-based)

Exterior Wall Finishes

Interior Wall Finishes

ENAMELS (solvent-based)

Synthetic Enamels

for Exteriors & Interiors

 Luxol Hi Gloss  Butterfly Enamel  Luxol Luster Finish  Luxol Satin finish  Luxol Rich Mat Enamel  Butterfly Furniture Enamel  Antisol Roof Enamel  Wood Primer  BP Cement Primer  And Many More……….

 And Many More……

Let us move further and multiply the number of colours, which every product has to provide in the market. Move further and multiply all these (products X Colours) to the No of Pack sizes every product has to supply in the market.

This was just a small segment of the works of the paint industry. Another major area of work might be the tinting machine’s that are available in the market. After having this illustration you one might be able to imagine the kind of complexity that is there in the paint companies.

A GLIMPS ON THE INPUT SIDE OF THE PAINT INDUSTRY (Raw Materials)

The industry is raw-material intensive. Of the 300 odd raw materials, nearly half of them are imported petroleum products. Other major raw materials titanium dioxide, phthalic anhydride and peutarithrithol constitute 50 per cent of the total cost. Besides, this, there are other raw materials such as castor, linseed and soybean oils, turpentine and pigments. Majority of the inputs in paint industry are sourced through big industrial houses and the raw materials used are standardized across the industry with limited substitute available and very limited scope for players to switch suppliers. Materials like titanium dioxide, phthalic anhydride, peutarithrithol and petroleum products are imported and they constitute nearly 30 per cent of their raw material requirements and the raw materials cost sums up to a whopping 70 per cent thus changes in import policies can affect the industry. For imported petroleum products, any deficit in global oil reserves affects the bottom-line of the players. Raw materials such as castor, linseed and soybean oils, turpentine and pigments are procured from the local players which are easily available in the market and thus decreasing the bargaining power of the suppliers

With having these many complications in the production of the product and making it available in the market the story doesn’t ends here. Further are the expectations of the product in the market which a company has to fulfill in the market. To be successful in the market paint should provide number of things.

Qualities of an exterior Paints

• Durability

• Finish

• Anti-fungal properties

• Dirt pick-up resistance

• Ease of Application, no curing required

• Wide range of shades

• Cost

These are a few of areas which one has to provide as a bear minimum in the market to stay there and be in the consideration box of the target audience.

Let us now come to the reality and analyse that what the Indian domestic market is doing in the decorative segment. As we have already seen that the market leader in the paint industry is Asian Paints with a good amount of margin. Asian has that advantage because they have a very keen eye on the decorative market and they have been the most aggressive company in the paint companies from last many years, due to this aggressive effort of many years Asian holds rank 1 in the decorative segment, following to the leader is Berger Paints, which is been closely followed by ICI and then last is the industrial segments leader Nerolac.

The efforts which is there in the markets in the current times by all the companies are as follows

•Aggressive efforts of GNP for resurgence.

In the past couple of years Nerolac has started making an aggressive effort in the retail market. With the effort of marketing and putting amitabh bachan in their Advertisements they have been able to get

some good effort from the market but still a lot more to go to come into the prompt notice of the target audience

.

•Focus brand marketing of ICI.

ICI being a player who does not believe in providing the affordable products in the market is able to make a prompt mark in the market attacking only in the high end products.

•Comeback battle of Shalimar.

Shalimar Paints which was loosing its presence from the market is now trying to make a comeback and is trying to be the 5th _{player in the market.}

•Gradual evaporation of J&N.

Jenson and Nicholson, once being the initial companies to install the tinting machines is now loosing their presence from the market and is now almost out of the market.

•Price game tinkering of Asian.

Asian even being the market leaders are now not able to command their needed price and are feeling threat from other players in the market, due to the same they are now coming more aggressive in the market with the price game. With having the same the aggressiveness in the market is still these with the name of Asian paints in the market.

•Positive outcome of brand building exercise in Berger Paints

With the efforts from the marketing Berger Paints is now able to Improved visibility & brand salience due to which they are able to improved the price realizations even after providing the consumer affiliation & applicator base.

Due to the VAT implementation and Crude oil price fluctuation the Paint Industry is moving towards - Intense brand wars.

- Clash of loyalty programs. - Clash of application facilitation. - Hostile dealer associations - Product showcase outlets.

- Large format retail outlet customers: a new trend. - Losing human resources to consumer related industries.

CHAPTER 2

LOGISTICS MANAGEMENT

In this chapter we will analyze that how the most important area of the supply chain management works. The area which was been given the second name of Supply chain management. With the theories of logistics we would co-relate it with the paint trade and we would find out the way paint is taking care of this particular segment.

Logistics, which used to the be the synonym of Supply Chain Management till couple of years back and is still understood the same way by a lot of people. It is the area which covers the core of any business. Logistics activities have a major impact on the capabilities and profitability of the company. Logistics management is increasingly being seen as a source of competitive strength. Its effective use provides potential for cost reduction and the opportunity for increasing market share.

Logistics management is the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and the related information flows) through the organization and its marketing channels in such as way that current and future profitability are maximized through the cost-effective fulfillment of orders.

Source: Christopher, M. (1998). Logistics and Supply Chain Management: Strategies for reducing cost and improving service, (2nd Ed.). New York: Prentice Hall.

Logistics Management is that part of Supply Chain Management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements.

Logistics Management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfillment, logistics network design, inventory management, supply/demand planning, and management of third party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution – strategic, operational and tactical. Logistics Management is an integrating function, which coordinates and optimizes all logistics activities, as well as integrates logistics activities with other functions including marketing, sales manufacturing, finance and information technology.

'Logistics' is the process of designing, managing and improving such supply-chains, which might include purchasing, manufacturing, storage and, of course, transport. The Modern business logistics sets out to deliver exactly what the customer wants - at the right time, in the right place and at the right price. Very often transport is a major component of the 'supply-chain' which delivers to the customer the goods and services needed.  Order Processing  Inventory Management  Transportation  Location management  Network planning  Warehousing  E-commerce  Channel Bonding

ORDER PROCESSING

As a very old saying is that demand derives the supply of a product, thus it will not be wrong to say that demand derives the logistics system, if there is no demand there is no reason of a logistics system to exist. Time duration that is been used by a company to complete the order processing is very important for any company. This time duration is one of the factors to find out the reaction time for any happenings in the market.

Order processing includes order preparation, order transmittal, order entry, order filling and order status reporting

Order preparation involves the customer or sales person filling out the order form, voice communication

by telephone to a sales clerk or selection from a computer menu. In some companies it is been done by using bar codes on the products and only giving it the quantity.

Order transmission is transferring the order from its point of origin to the place where the order entry can

be handled. This can be done either manually or electronically

Order entry includes

 Checking the accuracy of the order information such as item description and number, quantity and price

 Checking the availability of the requested items  Checking the customer’s credit status

 Transcribing the order information as needed  Billing preparation

Order filling represents the area where the order is allocated and then been dispatched after making a

challan for the order. This area also covers the confirmation of the delivery of the order to the customer.

Order status reporting ensures good customer service by keeping the customer informed of any delay in

order processing or delivery.

Let us now see that how are these functions are been taken care in the paint industry.

Order preparation is done by the sales person or is taken by the order clerk on the phone.

Order form has various columns as  Customer name

 Customer code  Territory code

 Stock business line code (SBL Code)

Every customer in the company has a unique code for his name. As for example a code is written as

03/005254/05

This means

07 / 005254 / 0 5

Territory Code Customer Code SBL Code Customer type

Further in the order form there are columns with the heads as  Serial No

 Item Code and Name  Product Name or Code

The row has to be filled as per the columns heading, the quantity of the product has to be filled in the product size column.

Further this again makes a full code, which tells the whole story

2145482000

This means

214 548 2000

Product code Shade Code Size Code

In the process of Order transmission the order is been accompanies with a cheque of the ordering party

Blank cheque’s are been given by the dealers to the companies, these cheque’s are signed by the party and crossed on the name of the concerned paint company. The only blank area in the cheque is the area where the amount is been written

After the attachment of the cheque’s the order is been transmitted to the order entry desk, where the order is been entered into the computer. In the process of entering the order the customers credit limit (In Value and in days) and the availability of the products is been checked. After which the invoice is been printed and the amount is been filled in the blank cheque of the dealer.

In Order filling the order invoice with the challan is passed to the Godown and the physical transfer of goods is been taken care of. In this process one copy of the challan and invoice is been returned back after signing the acceptance of the products.

INVENTORY MANAGEMENT

Inventory provides a means to take care of all the uncertainties in product supply and demand. It is meant for the purpose of making the product available at the very time when the customer needs it. To give a prompt supply it is needed. It can be explained as it is done to shorten the time between the order and the delivery.

With having this accuracy of the supply to the customers and to be very prompt to all the demands of any customer a company can create a very nice goodwill in the market and can create a healthy relation with the customers. Inventory is a very important portion of providing the right product at the right time and the right place. Thus it is very important to have high inventory level.

At the same time where inventory so important to the company it can even present threat to corporate profitability to the consumer. The capital that is invested in keeping the inventory can be invested at any other place and the profits can be made to the company

Manufacturing entities have inventories for raw products, products in the production process, and finished products. In addition there are often warehouses or distribution centers between the different levels of the supply chain. Inventories are costly. Binding capital in inventories prevents the company from investing this capital in projects of higher return. The holing cost inventories are therefore often set as high as 30 - 40% of the inventory value! In addition it is desirable to avoid so-called dead inventory, i.e. inventory that is left when a product is no longer on the market.

As we see it is in every company's interest to keep inventory levels at a minimum. Much effort has been put into this, for example an entire manufacturing paradigm has come out of it. A main objective of the Just in Time (JIT) paradigm is to virtually abolish inventories. The efforts made have been more or less

There are a number of mismatches which are countered when we plan for the inventory MISMATCH BETWEEN INVENTORY LEVEL STORAGE COST TRANSPORTATION COST PRODUCTION COST RAW MATERIAL COST

Let us now see that how is the inventory is been managed in the paint industry

There is no hard and fast formula in the paint industry. It is always based on the budget which is been prepared. On the basis of the budget the Target Stock Level (TSL) is been fixed on the basis of which the product is been kept in the go down.

Inventory of the factory is always based on the forecast of the depots that is been compiled and the production plan is been made. Many products as per the other costs has to be made in one bulk order and is to be managed high in the inventory.

At the depot level a basic cap is been made as the TSL and further stock is been kept as per the schemes, which are been run by the companies. When the company is going to run schemes on product (A), then they would make it sure that the product is available at the depot’s level.

As far as the dealers level is concerned, they don’t have to keep much stock in their inventory as it is very easily accessible to them from the closest depot. The inventory has to be high only when the season is coming and at that time getting products from the depot at urgency will not be very easy thus at that time dealers are been asked to keep a high amount of inventory.

TRANSPORTATION

Transport remains a major component of most supply-chains. Certainly limitations of, or restrictions to, transport caused by congestion, taxation or legislation will drastically affect the design and operation of supply-chains. Logistics services and other transport companies need to understand logistics and supply-chain management in order to tailor their services to meet their customers' needs.

Transportation is the only area that works at all levels of the supply chain. It is taken as critical that if a company has good transportation planning and they can work it out optimally then the supply chain of the cooperate has a high probability of being good.

We can understand the transportation as

With all the functions this is a common phenomena

This for a paint company will be in a different format.

The transportation cost is one critical factor for any paint company. The transportation cost is

Raw

material

supplier

Production

Plant

Parent

Depot

Retail Depot

Dealer

End Customer

various factories at distinct location of India. By doing this they can even provide quick service to any depot in the country.

Berger Paints works on a format that the factory directly sends the product to the sales depot, which will sell the products to the dealers, and it is sold in the market by them.

The structure of Berger can be seen with a diagram:

This is how Berger paints manages to transport the material from factory to the depot. In this diagram majority of the requirement of the depot is been fed by factory 1 and factory 2. this is because the transportation from the factory to the depot is cheapest in comparison to other factories. Thus the cost efficient factory is providing the material to the depot. Still there are some products that are not in a very regular demand, thus these products are not been manufactured in all the factories and is been transported from the factory that is manufacturing it. This is done to keep the production cost down.

Asian on the other hand is working the pattern of having Regional distribution center(RDC) and further having carrying and forwarding agents (C&F).

Factory 1 Factory 5 Factory 4 Factory 2 Factory 3 Factory 7 Factory 6 Depo t

Their structure will be

Instead of having a depot owned godown they are having a C&F agent at all the places. Their system is to transfer the products from the factory to the regional distribution center, which is more easily accesable to all the depots. By doing this they don’t have to carry high inventory at the C&F level and through this they able to supply the right product to the right depot when ever the need comes up.

The further supplies of the products from the depot’s/C&F to the dealers is done by the transporter’s which is been outsourced by all the companies in the paint trade.

Factory 1 Factory 2 Factory 3 C&F Agent

RDC

C&F Agent C&F Agent

LOCATION MANAGEMENT AND NETWORK PLANNING

For any company to be good in logistics management it is very important to have a proper location of their depot and to have proper location of the dealers they are associated with.

To be located close to the market as a depot and to have dealers in the proper market is the dream of any company. Every company is trying hard on working with dealers, who have highest footfall in their shops. Thus this is one of the most critical areas for any company. If a company is working with these kinds of dealers then they can promote their sales in a better manner.

Both the companies have placed their depots very close to the markets; in a city like Delhi both the companies have 5 depots in all the areas of Delhi.

With the same view both the companies have very critically worked on the dealers also, both the companies are running hard to collaborate with the best dealers in the market. The best dealers are those who have the retail market, the dealers who are placed in the location where the retail sale is high.

As on date Asian is leading in the two, Asian is known for having most of the retailers working with them and Berger is known for having most of the distributors in their hands.

The major advantage that Asian is getting out of it is that the product gets consumed quickly and they again have space in the market to sell. The turnover rate of Asian is better than Berger in the market. As Berger paints products goes from the distributors to the dealers and then to the final customer. Thus the logistics of Asian Paints is better in the manner that one of the most important area

CHAPTER 3

FINANCIAL AREAS

Supply chain activities have a major impact on the capabilities and profitability of the supply chain and its member firms. Let us understand the how is the supply chain connected to the financial part and it is done otherwise.

Significant opportunities exist for the competent supply chain manager to reduce expenses, generate better returns on invested capital and improve cash flows.

Introduction

Customer value and satisfaction are important ingredients in the business formula for success. No one business function alone can create superior value for customers. All departments must work together in this important task. Each company department can be thought of as a link in the company’s value chain. This is, each development carries out value-creating activities to design, produce, market, deliver, and support the firm’s products. Marketing Mangers pay attention to understanding customer needs, understanding the company’s ability to satisfy them, and creating revenues to sustain future growth and profitability. Logistics managers historically have focused their time and attention on three core functions of business operations: inventory policy and practice, facility location and design, and transportation of materials and products. Financial managers strive to obtain borrowed funds at the lowest cost, to select projects that offer the best returns, and to balance the financial risks taken with investor expectations of returns, and to keep the business liquid. The firm’s success depends not only on how well each department performs its work but also on how well the activities of various departments are coordinated.

To the successful supply chain organization is shifting from a single firm cost focus on inventories, facilities, and transportation to a multi-enterprise focus on cycle time compression, system wide cost reduction, and improved value for end customers. Having satisfactory or even excellent products and services no longer guarantees a competitive advantage in today’s market place. Successful companies find that they must also establish supply chain partnerships to reduce costs and complement their product portfolios with value-adding relationships.

Financial Issues of Supply Chain Consultants

The Management of every business wrestles with a common problem: How do we allocate the resources required to effectively and efficiently meet the expectations of our various constituencies? Those needs and expectations very by constituent. Owners and investors desire reasonable rates of return given the level of risk they assume compared with alternative opportunities. Employees need and expect to be adequately

values from the products and services they purchase. Resellers of the firm’s products expect help in marketing and managing their activities. Resellers of the firm’s also expect credit of more and more days and more and more amount so that they will be able to earn more. Suppliers expect timely payment for goods and services provided. They community expects socially responsible behavior, whatever the costs to the firm.

Major reductions in inventory relative to GDP have occurred since 1981, when the prime interest rate was at an all time high. When we look at the changes in total transportation and inventory costs graphically, it appears that productivity improvements have bottomed out.

Are further cost reductions possible? A concern could be raised that the economic value of logistics to the macro supply chain is not increasing. How does the individual firm plan for and evaluate the reductions in its logistics costs? How does the individual firm meet the economic claims of its various constituencies, reduce its logistics costs and achieve acceptable profitability and returns on investments?

Three Paths to Economic Success: The Micro View

There are basically three paths that an enterprise can take to manage its profitability and rate of return: margin management, asset management and financial management.

Margin management is concerned with the revenue streams generated from sales, less the cost of goods and services provided by suppliers, and less the firm’s selling and other operating expenses. The result is net profit.

Asset management is concerned with the investments made to produce the revenues of the company. These include cash, accounts receivable, inventory, and other current and fixed assets (fixed assets include facilities, equipment, and hardware) that are used in the business to generate its income. The productivity of these assets is an important managerial concern. As an important measure of enterprise productivity, the asset turnover measure is computed by dividing the value of sales generated for the period by end of period total assets.

Financial management is concerned with the source of funds used to conduct the business (i.e., debt, equity, or retained earnings) and the capital structure relationship of debt to equity employed. Because the cost of capital and associated risks vary by source of funding, financial management is focused on

achieving balance between debt and equity to provide an acceptable amount of financial risk and leverage to achieve targeted returns on equity.

Using this model, financial simulations are easy to construct that reveal the impact of possible supply chain decisions on the firm’s financial performance. Supply chain executives often have responsibility for a significant portion of the costs of goods sold and operating expenses, and therefore, have a major impact on margin management. Decisions and expenditures associated with procurement, inbound transportation, production planning, and materials management are directly related to the net profits of the firm. Supply chain executives have responsibility for a sizable array of assets – inventories, facilities, handling equipment, transportation equipment, and computer and communications systems, used in the operation of the business. Their decisions on asset acquisition, utilization, replacement, and disposal affect the rate of asset turnover.

The ability of the supply chain executive to perform financial analysis affecting supply chain decisions is critical in competing for funds and adding value to the firm and the supply chain. The supply chain executive must be able to implement the often-competing strategies of cost minimization, value added maximization and control/adaptability enhancement. This requires the use of financial tools.

Financial Focus of the Supply Chain Executive

It was not long ago that operations performance was measured in strictly negative terms, such as costs over budget, damaged goods and shortages, late or missed shipments, and stock-outs. Increasingly, firms have begun to appreciate how improved supply chain performance produces increases in sales, productivity and profit. No longer is supply chain management focused only on internal operational activities and measures. Economic measures, both internal and external, are increasingly used to justify, judge and reward the supply chain organization. There are three areas of financial focus in which the supply chain executive must demonstrate competency; expense control, capital budgeting, and cash flow generation.

Expense control

Expenses control goes beyond merely managing expenses to the constraints of the budget. Expenses control requires a deliberate ad continuous search for more efficient ways of getting value-added work performed while eliminating non-value added activities. Some companies naively install computers and

technology should be used to “reengineer” the work, to abandon inferior yet institutionalized ways of working, and to create better practices and processes that better align with customer needs.

Capital Budgeting

Supply chain executives must understand capital budgeting techniques, including their advantages and disadvantages, to contribute effectively to investment decision-making. They must speak the language of finance. They must know which acceptable methods of investments evaluation will best sell their proposals. Several capital budgeting techniques can be used simultaneously on a single investment proposal. Decision makers must consider the amount and timing of cash inflows, as well as the cost of capital or some internal hurdle rate of return. Some firms use the simple payback method of evaluation or the benefit-cost ratio.

Cash Flow Generation

Cash flows of the firm can be improved as a result of many business practices. Historically, accounting departments attempted to improve working by aggressively collecting accounts receivable from customers white simultaneously delaying payments to suppliers. Such behavior. Such behavior rarely produces and net benefit across the supply chain.

Care must be taken in how that inventory reduction is accomplished. Just in time (JIT) manufacturing techniques have become a “best practice” of manufactures in most industries, but savings in inventory investments associated with JIT practices can be more imagined than real. To offset the faster cash outflow, shippers receive discounts from carriers in exchange for last payment. Lead time reductions affect cash flows. Many firms systematically work on controlling and reducing lead times and have achieved impressive results. An economic evaluation of lead time reduction should examine of impact on future cash flows across all business functions or at the organizational level, no just the product level.

A Gold Mine of Opportunity Left Un mined

Inefficiencies in the supply chain can waste as much as 25% of operating costs. Companies considered to be best practice organizations in moving product to market enjoy a 45% supply chain cost advantage over their median competitors. Their order –cycle time is half that of their competition, their inventory days of supply are 50% less, and they meet their promised delivery dates 17% more often that the competition.1

Key Performance Areas that are used for the financials of the Supply Chain

Management

The “supply chain cost” measures used are 1. Total cost,

2. Cost per unit,

3. Cost as a percentage of sales, 4. Inbound freight,

5. Outbound freight, 6. Administrative, 7. Warehouse order cost, 8. Direct labor,

9. Comparison of actual versus budget, 10. Cost trend analysis,

11. Direct product profitability,

12. Customer of customer segment profitability 13. Inventory carrying,

14. Cost of returned goods, 15. Cost of damage,

16. Cost of service failures, and 17. Cost of backorders.

Margins to remain intact despite increasing input costs

• Between 2007-08 and 2010-12, the demand for paints is expected to grow at a steady rate of around 7 per cent in volume terms and 10 per cent in value terms. While the high growth in the auto sector is expected to drive the demand for industrial paints, higher demand from fresh

of decorative in the short term. Another major rise in the paint industry can be expected with the rise in infrastructure in India because of the common wealth games and other further games that are in plan to be hosted by India.

• The paint industry is raw material intensive and about 50 per cent of the inputs used are petroleum-based. The industry imports around 30 per cent of its total raw material requirements, primarily titanium dioxide. While the unexpected spurt in crude oil prices led to an increase in the cost of production of paints, the pressure on margins was eased by the flexibility to pass on input cost increases. The productivity-related benefits, an increased focus on premium products and the flexibility to pass on any further sharp change in input prices will continue to ensure stability in operating margins.

When we come to the financial controls on the sales level then it is one of the job that nobody wants to do as it has a lot of restrictions and those restrictions are sometimes hurdles for the sale. Due to the hurdles one has to keep a very keen eye on these things so that these things are taken care of before even coming in between sales.

Let us first move to Berger Paints, which have to take care of all the areas at a depot level. Let us first see that what all restrictions are there to which a depot manager has to take care of.

•

Credit Limit to a dealer

•

Credit limit are of two kinds one is the credit limit in term of money or can be said as in Rs. And another can be the case as credit limit in days. Both are very different but have a very close relevance. On one side credit limit in Rs. is the amount of product given to a dealer without paying the amount for the same. On other hand the limit in days is that the dealer can pay the amount in x number of days. There is a limit for every dealer in the companies as per the working pattern of the company. This is been decided on the size of the work that a dealer is doing with the company and the relation that the company has with the dealer. At both the sides there is a amount of capital involved in it. Let us understand this with a example. Let us assume that at a particular depot there are 200 Dealers working with the company and every dealer is on an average working for around 2 Lacks with the company. Thus if the company is giving even one day as credit limit to all the dealers then the company has to go for an additional investment for around 4 Cr. So this explains the importance of having the credit limit in hand and in control.

•

Damage Stock

•

Damaged stocks has always been a big problem for the paint industry as the products are such that the damages are very common in transit thus one has to take care that it is been reduced to the minimum level

•

Non-moving Stock

•

These are those stocks that have not moved from a long time and are lying at the depot only. As these stocks are consuming a lot of money in them in the face of inventory cost, capital, a part of profit which will be there after sales and many other minor areas.

•

Material Returns

•

Material returns are even more dangerous than material not sold as this material is also carrying the cost of transportation from the depot to the customer and return. This material is also needed to be controlled because these returns generally are harming the relations with the customers also.

•

Cheque Returns

•

A stock is consider sold only at that time when the payment of that stock is received. As with the view to this line a cheque return is considered to be product not sold but still is lying at somebody else’s place or even is sold further in the market.

•

Invoice cancellation

•

This is one area which is reducing the credibility in the market as either the customer doesn’t want the product now are it is because of some fault of the company. In both the cases the company is loosing relation as well as the sale, which always harms.

•

Delay in depositing cheques

•

A delay in depositing cheques will result to a delay in clearance. It can be treated as an additional capital is been delayed to get cleared and is further not available for investments.

•

Transportation cost

•

The transportation cost from the depot to the dealers end is a very crucial part as the order of a dealer varies from 1 Lt’s to 10,000 Lt’s, thus when the order is less then the transportation also has to be paid as per the expenses he is bound to get. Thus we need to take care of the transportation expenses in a proper manner.

These are some of the most important areas that have to be given a proper priority so that company doesn’t loose some money, which can be used for further growth of the company. If these areas are handled in a proper manned then the company can grow at a very faster rate in comparison to otherwise.

Now when the discussion moves to the market leader, Asian Paints, then we can see that they don’t have to take care of all the issues they only have to deal with few of them as all other processes are been outsourced by Asian paints to a local vendor or to a centralized one. A few of the areas where even Asian has to worry about are

•

Credit Limit to a dealer

•

Material Returns

•

Cheque Returns

Thus from this discussion one thing which is understood is that with the market leader Asian Paints is making more expenses for the processes but still feels that the payment is justified so that various areas can be controlled in a better manner.

CHAPTER 4

FORECASTING

In this Chapter we will see the relevance of

forecasting in a supply chain management

and how it is been used in various areas.

How can we get the maximum out of the

forecasting and how does it actually happen

in the paint industry

Demand planning and sales forecasting is a critical consideration for manufacturers, distributors, retailers,

and other supply chain members. It is a central activity for many mid- to senior-level executives, mainly for those who manage the companies supply chain activities. Sales forecasting is more important for those who are especially responsible for developing and monitoring sales to forecasts, schedules, and budgets.

Forecasting can be defined as

“Predicting current and future market trends using existing data and facts. Analysts rely on

technical and fundamental statistics to predict the directions of the economy, stock market and individual securities.”

Or

“Can be defined as a quantitative estimate (or set of estimates) about the likelihood of future events based on past, current, and future information. This past and current information is specifically embodied in the structure of the econometric model used to generate the forecasts. The future information contains any predictions or knowledge of the trends in the behavior of the explanatory variables.”

Sales forecasting is a difficult area of management. Most managers believe they are good at forecasting. However, forecasts made usually turn out to be wrong! Even after having such results the managers are forced to look well ahead in order to plan their investments, launch new products, decide when to close or withdraw products and so on. The sales forecasting process is critical for most businesses.

Supply chain initiative such as quick response, effective customer response, collaborative planning forecasting and replenishment and vendor managed inventory all of these rely on the forecasting to help plan and manage operations more effectively.

Sales forecasting for a product is the total volume that would be bought by a defined customer group, in a defined geographical area, in a defined time period, in a given marketing environment. If it is done