Case 6
Indian Paints
Innovative Supply Chain Practices
Indian Paints is a Rs. 11, 000 crore sales turnover company, with five manufacturing locations and over 60 sales branches spread across India. They have an extensive distribution network of over 14, 000 dealers and a product range of over 2, 500 SKUs (stock keeping units) and is supported by the world's first state-of-the-art IT solution to SCM (supply chain management) from i2 Technologies, and an ERP (enterprise resource planning) solution from SIP. Indian Paints is a supply chain pioneer in India in paint industry.
IP manufacturers and markets a wide spectrum of coatings which include decoratives, production paints and heavy-duty coatings. The manufacturing facilities of the company for paint products are currently spread over four locations in Maharashtra, Gujarat and Andhra Pradesh. Indian Paints offers the widest range of paints in terms of products and shades, as well as pack sizes. IP manufactures and markets more than 2, 500 items of paints. IP has four popular brands.
Distribution Strategy
In the decorative paint segment, a wide product range in terms of colour and pack size was a crucial factor for success. IP has a competitive edge of offering the widest range of products. It also created the distribution channel for reaching the wide range of products to customers in every nook and corner of the country. IP has used the new technology to offer any colour shade to the customer through mixing at the retail outlet using an automated machine installed at the retail outlet. The desired shade is prepared by mixing different shades and stainers in the required proportion. IP is now maintaining only half-a-dozen basic colourants with retailers; mixing can create the other variants. The new arrangement helped IP to manage with a narrow range of paint ingredients. Thus, the number of SKUs handled has drastically reduced resulting into cutting down on inventory holding costs.
The new technology reduced the importance of the physical distribution task in the business, compared to the position in the earlier years. In the earlier years the physical distribution and channel management task was the most crucial one in paint marketing. Even now, physical distribution and channel management continue to be crucial functions in the business.
Distribution Challenge
Both physical distribution and channel management posed formidable challenges in paint distribution. In the earlier years, the distributors concentrated on big cities, where they could make the sales without much investment in distribution infrastructure and market development. The distributors controlled the paint business and were making it impossible for a new paint company like IP to enter and establish in the business. IP studied the then scenario correctly and formulated a unique distribution strategy of entering in rural market which was not tapped. IP bypassed the bulk buyer segment and went to individual consumers of paints. IP went slow on urban areas and concentrated on semi-urban and rural areas. IP went retail. IP went in for an open-door dealer policy. IP went for nationwide marketing and distribution.
Challenges
IP's decision to serve the individual consumers resulted into maintaining a wide product range. The individual consumer segment involves a very wide choice in terms of products, materials, shades and pack sizes. This forced IP to maintain a large inventory. Naturally, distribution was becoming more complex and expensive for IP. IP had to go in for more dealers in order to serve the scattered semi-urban and rural market.
An extensive network of dealers and a matching physical distribution infrastructure play a crucial role in the decorative paints segment. This is essential for ensuring easy access of the product to customers. In this, IP scored over its competitors with a massive network of 14, 000 dealers spread over 3, 500 towns across the country.
IP established a large chain of company operated depots/stock points throughout its vast marketing territory, from where the retail dealers could conveniently pick up their requirements. After all, IP did not have any wholesale distributors to whom the responsibility for operating the stock points could possibly have been assigned. IP established a network of 30 company-run depots, spread throughout the country and serviced its retailers from them. The number of depots varied from city to city. For example, Bangalore had just one depot while Mumbai had four. The depots typically supplied material to about 200–300 dealers. These depots were controlled by 4 regional sales offices, 35 branch sales offices and a large number of sales supervisors and sales representatives spread all over the country.
With the extensive distribution network, IP's service level is more than 85 per cent whereas that of other large paint companies falls between 50 per cent and 60 per cent. This meant a further rise in IP's physical distribution costs. A high service level in physical distribution-in transportation, warehousing, order processing and inventories necessarily means a high level of costs. While following a totally customer-oriented distribution strategy. IP could not afford to ignore the cost angle.
Effective Inventory Management
Effective inventory management is the first major component of IP's strategy on distribution cost control, and IP achieved high efficiency in this regard using IT solutions. IP's average inventory level equals only 28 days sales, while the industry average is 51 days sales. This right away provided a 45 per cent edge in inventory costs to IP compared its competitors. IP's stock of finished goods was just 7 per cent of its net sales while for the others in the industry it was nearly twice that level. IP could provide a high level of service in product delivery to its customers and dealers as compared to its competitors and yet kept the inventory costs down by 45 per cent compared to its competitors.
IT Initiatives in Cost Control
IP's IT initiatives in respect to distribution-inventory control and control of receivables helped control distribution costs without lowering the service level. IP went in for a fully computerized distribution system. IP did this not only with an eye on distribution cost control, but also for the sake of distribution effectiveness per se. The 2, 000 different items of paints, manufactured at four different plants, had to be distributed to 15, 000 dealers in 3, 500 towns spread all over the country, through 55 depots. IP accomplished this, maintaining the average service level at 85 per cent, a clear 25 per cent above that of competition. The IT initiatives ensured prompt billing, accurate customer accounting and effective control of credit outstanding.
IT solution enabled IP to process recent sales data for the 100 fastest moving SKUs. This analysis was used to project sales of specific products, which helped plan production and raw material purchases. With computerization, IP was able to analyse past trends to arrive at a 90 per cent accurate sales forecast. Production was thus evened out month-to-month. IP linked all its factories and depots through the IT network resulting in a streamlined distribution. IP has implemented the supply chain management software and also an ERP solution from SAP.
IT-enabled Supply Chain
Indian Paints deployed an extensive IT infrastructure to integrated supply chain using i2 technologies. They used the enterprise resource planning (ERP) solution from SAP. IP has streamlined procurement, manufacturing and distribution processes for its decorative paint business. They used i2 technology solution for production planning, distribution planning and demand planning for 2, 500 SKUs. The i2 technology solutions helped IP to manage the following business processes:
- Master production planning
- Material planning
- Distribution planning
The i2 Factory Planner was designed to enable IP to quickly react, synchronizing factory production plans and schedules to meet business challenges. It also assisted IP in performing efficient material planning by providing extensive modelling capabilities to solve problems in the entire material planning process domain. The i2 Factory Planner enabled IP to perform the following:
- Immediately resolve potential supply chain problems
- Create optimal manufacturing plans against capacity constraints
- Provide accurate due-date quoting to improve customer service
- Create powerful time-based report summaries
- Create powerful time-based report summaries and time to value
The i2 demand planner helped IP to estimate the demand in a more accurate way. The i2 supply chain planner provided a way to model the entire supply chain—from suppliers and outsourced manufacturers to factories, warehouses and distribution centres. The supply chain planner helped IP to optimize inventories, production, distribution and transportation. The supply chain planner was designed to support master planning, allocation planning, distribution planning, inventory planning and profit optimization.
IP benefited by using the i2 supply chain planner by way of reduction in lead times for responding to demand variability, improvement in service-level performance, customer satisfaction, improved usage of resources, improved inventory management and reduction in overall logistics costs.
REVIEW QUESTIONS
- What are the supply chain issues and challenges faced by Indian Paints?
- Discuss the various innovative supply chain strategies evolved and implemented by Indian Paints.
- Explain the role of IT in Indian Paints supply chain.