Part 4 Caselets

LOGISTICS CONTROLS

1. L’Oréal—Improvising Supply Chain Performance
2. Camy Pharmaceutical Co.—Seeking Solutions to Logistics Issues
3. Hindustan Motors—Shaving-off Procurement Cost Through Reverse Auction

L’Oréal—Improvising Supply Chain Performance

L’Oréal is the world’s leading cosmetics company, with consolidated sales of Rs. 14 billion euros, with 300 subsidiaries across the globe and having presence in over 150 countries. They develop more than 3000 formulas each year, and have a worldwide team of 50,500 employees, including 3000 employees in research spread over 42 factories across the globe. L’Oréal India, spread across 300 major towns and cities, has three mother brands—L’Oréal, Garnier and Maybelline—and achieved a growth of 70 per cent over the last two years. The company manufactures products in various categories for both the mass as well as the premium segment—hair colour and care, skin cleansing and care, and make-up. L’Oréal India recorded a turnover of INR 6 billion and a growth of nearly 40 per cent in 2007.

Regulations in India in 1990 prevented L’Oréal from entering solo, and the company formed a joint venture with the MJ Group to launch the Ultra Doux range of hair care products. Encouraged by the acceptance of its brand in India, L’Oréal seized the opportunity to break the JV and formed its own subsidiary in 1994.

The company has commissioned a plant near Pune, providing proximity to the company’s head office in Mumbai. This plant manufactures hair care, hair colour and skin care products for the Indian market, besides exporting to the neighbouring countries. Consumers are likely to get benefited from the most advanced production quality standards, with manufacturing processes in the plant taking place in well-defined, isolated zones to minimize contamination. The new facility is equipped with the most modern effluent treatment plants.

L’Oréal has an ever-expanding SKU range of over 700 in number. Eighty per cent of its SKUs (finished goods) and 76 per cent of the raw materials are imported, even for the locally manufactured products. These imports contribute to a longer lead time. The company’s logistics network consists of 23 warehouses, 637 distributors and 59,500 retailers.

The company distributes the material through 23 clearing and forwarding agents (C&FA)—one in each state—who provide warehousing, invoicing and delivery facilities. Consignment sales through C&FA are helping L’Oréal India to avoid double taxation of 4 per cent for inter-state sales, bring in flexibility of order sizes, and enhance the efficiency of transportation. Currently, the cost of transportation is less than 2 per cent of net sales. The stocks at C&FAs, dealers and retailers are for 60 days, 30 days and 30–90 days, respectively. The break-up of logistics cost at L’Oréal India is 1.5 per cent freight, 0.7 per cent warehousing and 0.3 per cent overheads totalling 2.5 per cent, which is within the FMCG industry standards. On an average, the payment receivable stands at 10 days. The SKU level is 725, consisting of 455 for consumer products, 239 for professional products and 31 for active cosmetics. At any point of time, fast moving SKUs are 200. The company has a flexible ordering system by distribution through CFA with a frequency of twice a week to once a month.

Fig. 1 Logistics process

Fig. 2 Distribution flow

Procurement planning and scheduling for imported SKUs is based on the sales forecast (both for domestic and export markets). Order quantity is worked out by considering 75 days lead time for “A” class items and 60 days for the rest of the items and deducting the stocks in transit to 23 warehouses. For individual regional requirements the same process holds good.

The company had changed its policy of holding two months’ stock (one month at the national warehouse and another at the CFAs) because of some supply chain optimization initiatives, which resulted in the stock cover falling to just about 40 days. This was because of adopting efficient distribution practices (such as managing to distribute the right stocks at the right place and at the right time) that resulted in avoiding heavy shortages. A large increase in volumes enabled the company to renegotiate freight rates with transporters and a reduction of 11.5 per cent was achieved by the department. Another reason contributing to the overall reduction in operations cost was the increase in sales volume, which led to the increase in manufacturing batch sizes resulting in lesser production costs and better margins for 2007.

Unlike its competitors, L’Oréal India is not into the JIT (just-in-time) stock management system. It follows the practice of keeping one month’s inventory at the CFA level in the beginning of the month and another one month’s stock at the warehouse plus in-transit inventory resulting into increased inventory-holding cost of the company. Improper forecasting (68 per cent accuracy) is what is responsible for this lower performance compared to the competitors. Further steps towards improvising forecasts will help the company to reduce the inventory-holding costs, thereby enhancing the profit margins.

REVIEW QUESTIONS

1. Discuss the methods by which L’Oréal can enhance the level of its forecast accuracy to improve the supply chain performance.
2. Critically evaluate L’Oréal’s logistics process and distribution flow and find out if there is scope for system performance improvements.

Camy Pharmaceutical Co.—Seeking Solutions to Logistics Issues

India’s pharmaceutical industry is one of the fastest growing sectors in the Indian economy, with an average annual growth rate of 11 per cent in this decade. The growth of the industry is mostly driven by the surge in production, legislative reforms, the growth in contract manufacturing and outsourcing of clinical trials, R&D, foreign acquisitions and joint ventures by domestic players and other such factors. The industry is ranked fourth in the world in terms of production volume and 13 th in domestic consumption value. The industry reached the USD 6.2 billion mark in 2006, which is about 1 per cent of the global industry size of USD 643 billion in 2006. The factors that could materialize this target include a world-class patent regime and an environment that fosters innovation and entrepreneurship.

Logistics is regarded as a crucial part of the Camy Pharmaceutical Co., since its activities are highly time sensitive. In addition, pharma products need temperature-controlled storage and distribution.

From the beginning, Camy has been focusing on the development of innovative activities such as high quality products and research and development. Since its inception, Camy has given due importance to logistics by focusing on activities at the supply chain and logistics level, such as delivering the product to the end customer at the right time and the right place, in a secure mode and at a competitive operational cost.

The most important supply chain factors at Camy are inventory reduction and bringing down the order cycle time. This is so because operational performance could be directly linked to logistics costs, while inventory reduction and the demand to decrease order cycle time are related to just-intime deliveries and supply chain speed.

There has been a paradigm shift in the supply chain process at Camy Pharmaceutical Co. Value-added tax (VAT), consolidation of pharma companies and the emergence of pharma retail chains are some of the factors driving the changes in the distribution cycle of Camy. Camy is continuously reforming its supply chain with changing regulations such as introduction of VAT in most of the states, the squeeze on domestic margins and increasing government pressure to contain retail drug prices. From the cost composition point of view, the major logistics costs at Camy include packaging (product mix consisting of 350 formulations) and distribution (national coverage). Hence, logistics comprises 30–35 per cent of the costs in the pharmaceutical value chain.

Camy’s growth was mostly driven by a strategy of partnerships, quality acquisitions, brand building and manufacturing. On the supply chain management (SCM) front, Camy’s major challenge is to integrate its Indian and international businesses. Transportation of goods and inventory management are two areas the company is trying to further improve. With the implementation of SCM practices, the company could achieve significant results in the areas of raw material price reduction and inventory level optimization.

On the material front, Camy has 30 depots and spends 12 lakh per year on information communication. Within six months of the SCM applications, Camy has been able to reduce inventory from 40 per cent to 25 per cent, which is much lower than the industry’s average.

On the supply side, Camy deliberately reduced its supplier base to reduce the risk factors and the company shifted to bulk purchases from a few sources. They have adopted the single-window approach for procurement. This decision of the company has allowed it to gain bargaining power and reduced prices by 4–9 per cent for different raw materials. To improve the distribution service quality, the company has reduced the number of transporters in order to achieve reduced delivery time. This move of Camy has led to a clear improvement in quality and delivery of products. SCM has helped Camy to enhance their efficiency in managing resources and improving relationships.

Logistics in pharma industry is very critical for providing the right medicine to the right patient at the right time, place and dosage, and most importantly, at the right price. Since business is highly competitive today, success largely depends upon the efficiency of the supply chain. The critical importance of the supply chain lies in its ability to maintain the complex network relationship among the organizations (drug manufacturers), trading partners to source raw materials, delivery products, retailers and hospitals (Figure 3).

Fig. 3 Camy’s distribution network

With the growing competition among major pharmaceutical players in the industry, inventory control plays a significant role in pharma value chain as lots of inventory exists in the supply chain. For instance, out-of-stock situation in the existing business environment is unacceptable and research and development requires huge investment to bring products to market, when it finally arrives.

In addition, the margins on Camy products are very high. Around 30 per cent is shared by different channels of distribution. Hence, Camy was ready to spend to improve the efficiency of its supply chain. Camy with its supply chain initiative and efficient logistics is now ready to become globally competitive, as SCM contributed towards the enhancement of productivity as well as growth of the company.

REVIEW QUESTIONS

1. Discuss the role of logistics in Camy’s supply chain.
2. What are the critical factors which affect the efficiency of any pharmaceutical company’s supply chain?
3. Discuss how Camy can further improve its logistics process.

Hindustan Motors—Shaving-off Procurement Cost Through Reverse Auction

Hindustan Motors is one of the leading manufacturers of automobiles (both passenger and commercial vehicles) in India. HM started its manufacturing activities way back in 1945 with one model in the passenger car segment, that is Ambassador. In the 1980s it introduced Contessa in the luxury car segment. However, the model got phased out as it could not stand against foreign competition after the Indian economy opened up in 1991. Thereafter, HM went into collaboration with Mitsubishi of Japan to manufacture Lancer and Pajero from 2000 onwards. Ambassador is still being manufactured; however, the numbers are reducing every year due to competitive markets. Owing to international competition and slowing down of the economy, HM started facing a shrinkage in margins. To ease out the problem, HM looked into their logistics and supply chain cost. One of the areas they could identify was the procurement cost of raw materials, parts and components. The first attack was on the standard items without much technical complexities. The product category identified was lubes and oils. They discovered that the transaction (purchase process) cost could be reduced to a large extent by resorting to reverse auction as against the conventional method that is time consuming. However, HM did not have the necessary infrastructure to conduct reverse auction (commonly known as the e-procurement process).

They invited WIPRO’s “01markets”—e-procurement service provider—which had the reverse auction software to conduct the reverse auction process. “01markets” offers consultancy in the areas of expenditure analysis, category analysis and procurement-to-payment process. The company offers reverse auction services that help buyers reduce the cost of direct and indirect materials and discover new suppliers. In its solutions, “01markets” designs and implements e-procurement and e-sourcing strategies for customers. Its solutions also include reverse and forward auctions, Request for Quotation (RFQ) bidding, online negotiations, procurement catalogues and workflow, strategic sourcing management (expenditure analysis), and supplier relationship management. The company estimates that the clients’ savings are between 2 and 22 per cent on their purchases, with an average saving of 10 per cent across all product categories.

Estimated at a total INR 37.8 million, Hindustan Motors’ requirements of lubes and oil are spread across six categories—cutting oil, gear oil, hydraulic oil, engine coolant, engine oil and coolants. The requirement was consolidated across the company’s factories at Chennai, Indore and Kolkata. The estimated requirement was INR 37.9 millions. The 01markets’ e-procurement team understood and consolidated HML’s requirements, studied the market dynamics and prepared a total cost request for proposal (RFP). The RFP was served to a potential base of over 20 suppliers, including incumbent suppliers in all categories. These suppliers were distributed across Mumbai, New Delhi, Chennai, Kolkata and Ranchi. Looking into the category versus the supplier base matrix, it became clear that it would be necessary to conduct six online auction events, one for each category. In the final analysis there was a saving of INR 7.3 million or 28 per cent on the historical price. The ülmarkets’ e-procurement team, consisting of analysts and consultants, swung into action. The day and the time for the reverse auction was fixed and was conveyed to the bidders. Suppliers were contacted, familiarized with the RFP and trained for the actual bidding marathon. The suppliers logged on to reverse auction website on the day and time already fixed up.

As lot after lot went up for bidding, the price graphs went on a massive downward dive. Lot 1 started early in the morning and delivered a saving of 11.9 per cent over the current buying price. Lot 2 delivered a huge 21.5 per cent cut in prices.

Fig. 4 Bid history of one of the six lots

The biggest one, Lot 6, representing 50 per cent of the total requirement by value, was the last to go up for bidding. By the time it was all over with Lot 6, Hindustan Motors had saved a whopping 28 per cent on the historical price. Over 125 bids were received during more than eight hours of bidding. In nutshell, HM could save over INR 7.3 million on a purchase bill of INR 37.8 million—a saving of over 19 per cent. For “01markets” it was a mega success.

REVIEW QUESTIONS

1. What is e-procurement and what advantages it has over the traditional procurement method?
2. Which category of inventory items is suitable for reverse auction process and why?
3. What is the preparation required for conducting reverse action process?