(Mt) – First Auto Company Case Study

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For the exclusive use of A. Benmedhayan, 2020. IMB 615 PROCESS REENGINEERING IN EMERGING MARKETS – AN AUTOMAKER’S EXPERIENCE (A) HARITHA SARANGA Haritha Saranga, Professor of Production & Operations Management, prepared this case for class discussion. This case is not intended to serve as an endorsement, source of primary data, or to show effective or inefficient handling of decision or business processes. Copyright © 2017 by the Indian Institute of Management Bangalore. No part of the publication may be reproduced or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise (including internet) – without the permission of Indian Institute of Management Bangalore. This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) Sudiptha Sarkar, General Manager, Material Management and Logistics (MM&L) at First Auto Company (FAC) India was deep in thought at his office trying to resolve the dilemma between the existing built-tostock (BTS) model and the futuristic order-to-delivery (OTD) model on the evening of January 15, 2009. He had just come back from a heated discussion between FAC’s MM&L India team, MM&L regional team (Asia-Pacific and Africa (APA)), and FAC India’s Sales & Marketing team executives, who could not arrive at an agreement regarding OTD implementation at the India plant for the Model-i, the first compact passenger vehicle that FAC was launching in India. OTD was supposed to be the panacea, a solution to most of FAC’s current problems in the APA region. If they are unable to get a consensus on OTD implementation at the home plant, how on earth were they going to implement it in other countries? Nearly 15 years after its entry into the Indian market, FAC was planning to launch a small car, the FAC Model-i, targeted towards India’s highly price competitive subcompact car segment. FAC’s engineering team worked very hard during the design and engineering of Model-i to get the parameters such as quality, reliability, and fuel efficiency, which are very important to the Indian customers, just right. They also localized most of the components of Model-i, to take advantage of low-cost sourcing in India and to keep the material costs low. For the first time since FAC’s entry into India, they were planning to carry out production of 100,000 to 150,000 vehicles per annum. The scale economies of large-scale manufacturing would help in cutting down costs further. However, they had to become much more efficient in managing their operations if they wanted to compete successfully with the leading auto assemblers in India such as Maruti Suzuki India Ltd. (MSIL), Tata Motors, and Mahindra & Mahindra (M&M) as these companies already enjoyed scale economies and cost savings from local sourcing. OTD seemed to be just what the doctor ordered for FAC India under these circumstances. If implemented properly, OTD would not only reduce the huge piles of finished vehicle inventories that FAC India held in its yards, but also enable its assembly plant to produce according to dealers’ orders, rather than the marketing team’s forecasts. To top it all, OTD would improve the schedule stability in FAC India’s assembly plant as well as shop floors of suppliers, and also impart the much needed discipline to the supplier capacity planning and dealer’s ordering pattern. Under the existing BTS system, the ordering system was completely out of control with dealers placing orders as and when they wanted (“once in three days or thrice a day” according to GM of Sales & Marketing, FAC India), since assembly plant typically stockpiled inventories of different models in all their variants, similar to a departmental store, and the dealers had the choice of picking and choosing the cars they wanted, when they wanted. The APA, MM&L team was quite certain that OTD would reduce much distress for the FAC India’s sales and marketing team by bringing in some order to the existing ordering system. However, to everyone’s surprise, it was the marketing team that was putting up the most fight, mainly because, under the OTD system, the dealers would have to place orders 2 to 3 months in advance. Much work had gone into the planning stage of OTD system for FAC’s plants in the APA region. Most team members of MM&L had spent nearly 5 to 6 years in training and understanding the nuances of OTD system in various FAC plants across the world. All of them had returned to their home plant in India with great enthusiasm to finally implement what they had been learning and planning, with a game-changing product such as Model-i. However, 8 months into the project, they still had not reached a consensus on how exactly to proceed with Page 2 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) the OTD; in fact, the concerns raised by the marketing team were so severe that, unless addressed properly, they could completely derail the OTD implementation. FAC’S EVOLUTION IN INDIA FAC began its production in India in the mid-1990s with an annual capacity of 25,000 vehicles. FAC remained as a premium automaker in India until 2010, selling approximately 25,000–30,000 cars/year during the decade of 2000–2009, although the Indian automobile industry grew at an impressive rate during this period. Most FAC models sold in India during this period were adapted products originally designed for the advanced markets in Europe and North America. This made FAC India a niche player in India, present only in the upper market segments where volumes were relatively low. PRODUCTION PLANNING – BTS During the 10-year period, 2000–2009, when low-volume products were being manufactured, FAC India adopted the BTS model and carried out production planning and material handling, etc. manually using Excel spreadsheets. Under the BTS model, production took place based on forecasts made by the marketing team and large amounts of finished vehicle inventory stocks of various models and their variants were held in the yard adjacent to the assembly plant. Dealers would pick and choose the vehicles they wanted from these stocks closer to the sales horizon. FAC’s sales and marketing team also modified the orders placed by the dealers and allocated vehicles based on their past performance as well as FAC India’s own annual targets. Owing to mismatch between production and demand, FAC India frequently ended up with a yard full of unsold cars, while there were stock-outs for some other models. On average, FAC India typically carried between 2,500 and 3,000 finished vehicles in its yard, while dealers carried approximately a month’s equivalent of inventory in their dealerships. Also, manual planning allowed significant and even last minute changes in the production schedule owing to pressure from the dealers and the senior management which was trying to respond to the market dynamics. However, these changes frequently disrupted the supplier production plans, causing disquiet among FAC India’s suppliers. While the BTS system allowed advanced material planning and sufficient notice to the suppliers, the last minute changes in production disrupted the schedule stability both at FAC’s production plant as well as supplier’s end. Given the low volumes, FAC India’s management felt these disruptions were manageable, both at the production plant and in the supply chain. The fact that almost all automobile assemblers in India, including large volume players such as Maruti Suzuki India Ltd. (MSIL), Tata Motors and M&M used the BTS model, also made it seem the best approach for FAC India. FIRST AUTO COMPANY AND APA INTEGRATION First Auto Company was organized into four main regions across the world: North America, South America, Europe, and the APA region (comprising India, China, Australia, South Africa, Thailand, Vietnam, Philippines, and Taiwan). All the North American plants were integrated by one suite of IT systems in the early 1980s, whereas all the European plants were integrated by another suite of IT systems in the late 1990s. However, the plants in the APA region were operating independently until 2002 or so, owing to smaller volumes in respective countries. The material planning and production scheduling in Page 3 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) these plants were being carried out manually, using spreadsheets. As the rising incomes, emerging middle class, high saving rates, and improvement in auto finance led to revolutionary growth in the Asia-Pacific countries during the decade of 2002–2012, FAC projected that 90% of the growth in automobile sales would come from emerging markets and the APA region. In 2002, as volumes in Chinese and other Asian markets began to increase, FAC decided to bring in the material planning and supply chain management activities of all plants in the APA region under one umbrella. FAC had globally accessible common material management system (CMMS) (which was also accessible to FAC suppliers), worldwide integrated purchasing system (WIPS) and worldwide engineering release systems (WERS). The availability of such robust systems, which could be operated from any part of the world made centralization of supply chain management (SCM) operations in APA region seem feasible. Thus originated the idea of an MM&L hub for the APA region, and considering India’s expertise in IT and outsourcing related activities, it was decided that this hub would be located in India. To develop the requisite manpower for this hub, FAC began by sending people with relevant expertise in MM&L India to large volume assembly plants in Europe and United States for training. The ultimate goal of the MM&L hub was to centralize supply chain activities across the APA region and integrate capacity, material planning, production planning, and marketing functions of all APA plants under one suite of IT systems, so that all planning could be carried out centrally on a single platform and from a single location. This required major overhauling and re-engineering of multiple processes in all the country business units (CBUs) across the APA region. One of the first processes selected for centralization was supply chain integration. In January 2004, Meghan Agarwal from FAC India’s supply chain department was sent to Europe to learn how to centralize supply chains of the entire APA region and operate them virtually using the IT systems from the Indian office. Remembering the skepticism in the India plant about successfully implementing the supply chain centralization project, Meghan commented: It was an extremely challenging time for me at FAC. It was the first time any regional responsibility of this magnitude was assigned to FAC India and people had very little conviction that it would actually work. I remember being told that I better succeed in this project, otherwise plan my exit. Within the next 6 months to one year, I created a team of 8 people, got them trained in Europe and successfully implemented the project from India plant, sitting in India. During the Christmas party that year, I heard our Managing Director telling people that everything went off so smoothly with the SCM project that he never even had to know how it works, but only that it works. The SCM centralization project for the APA region resulted in savings of over 75% in operating costs within a short span of time, giving boost to other centralization projects. The next low-hanging fruit was the centralization of pre-production management (PPM) for the entire APA region. In 2005, Ramaswamy Chandrasekharan, another executive from FAC India was sent to Europe and the United States to conceptualize how the bill of material (BOM), engineering change (EC) controls and PPM could be centralized and virtually managed from India. Sudiptha Sarkar, was posted in Page 4 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) China at that time as MM&L Manager, but was called back in September 2005 and sent to the United Kingdom to learn about OTD, capacity planning, constraints management, etc. Some more people from the India plant were trained to centralize other activities such as the systems planning and implementation (SPI), IT helpdesk, packaging engineering, inventory management, etc. The final piece of the puzzle, the assembly plant scheduling was still remaining. The core team, which included Sudiptha, Meghan and Ramaswamy realized that unless scheduling function was centralized, most of the benefits would not be realized. Functions such as supply chain management, BOM, EC, etc. could be centralized easily, because all country plants in the APA region were using the same IT systems; however for scheduling, each country used a different IT system. To tackle this more difficult problem of scheduling and integrate all the above systems under one umbrella, all the members of the MM&L team (formalized under the APA region) came together in the regional office at Bangkok in 2006. They worked through 2006 and 2007 to integrate the entire suite of IT systems under the banner of OTD for APA region. The OTD integrated all the main functions such as marketing, sales, production planning, production scheduling, material planning, and supply chain management, and the total costs added up to $35-40 million. By early 2008, the OTD system was ready for launch and the core team was very excited. Talking about those days, Sudiptha reminisced: All of us from India plant had been used to managing smaller scale of operations and manual planning and scheduling. However, with almost 2 years of planning and training abroad, we created an IT system that was capable of virtually integrating the operations of the entire APA region, that too remotely. The additional benefit of virtual integration is that we can plan for the entire APA region’s demand, taking into account overall capacity of all the assembly plants and the supplier networks within the APA region. Therefore, we couldn’t wait to get OTD implemented across all countries in the APA region. The idea was to implement the OTD system first in South Africa, next in India, followed by Australia, China, and Thailand. However, owing to some reorientation at a strategic level, OTD could not be launched in South Africa and the MM&L team in Bangkok started getting jittery. Finally, in April 2008, the team got a go ahead to implement OTD in FAC India’s assembly plant. Sudiptha was made General Manager, MM&L, FAC India, and was to go back to India, as the customer, while his other teammates were going to help implement OTD as solution providers, as part of MM&L, APA region. INTRODUCTION OF THE SMALL CAR IN INDIA In early 2008, the FAC India plant was getting ready to launch its first small car “FAC Model-i” in the Indian market. Small cars comprised more than 70% of the cars sold in India and given the status of India as an emerging market, and owing to the sheer volume of the potential market,1 FAC decided to make an entry into the small car segment with Model-i, a 1.2-liter engine car. The Model-i was first of its kind in 1 According to the available statistics, there were only seven cars for every 1,000 Indians in India during 2008. Given the population of the country, there was great potential for growth in the Indian market for automobile companies. Page 5 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) FAC’s product portfolio, engineered exclusively2 to make FAC India a key player in this high-volume market segment. Also as a part of FAC’s global strategy to transform India into a manufacturing hub for small cars, it was decided that Model-i would be manufactured in India and exported to other countries in the APA region. In order to increase the scale of operations in India, FAC implemented the following changes in various functional areas. In early 2008, the FAC India plant was getting ready to launch its first small car “FAC Model-i” in the Indian market. Small cars comprised more than 70% of the cars sold in India and given the status of India as an emerging market, and owing to the sheer volume of the potential market,3 FAC decided to make an entry into the small car segment with Model-i, a 1.2-liter engine car. The Model-i was first of its kind in FAC’s product portfolio, engineered exclusively4 to make FAC India a key player in this high-volume market segment. Also, as a part of FAC’s global strategy to transform India into a manufacturing hub for small cars, it was decided that Model-i would be manufactured in India and exported to other countries in the APA region. In order to increase the scale of operations in India, FAC implemented the following changes in various functional areas. Investments in Production Capacity FAC invested $500 million to scale up the capacity of the India plant from 100,000 to 200,000 cars/annum. FAC also established an engine plant next to its assembly line, which had the capacity to produce both diesel and petrol engines on the same line. This was the only engine plant in FAC’s entire global network that was capable of producing both varieties on the same line. They de-bottlenecked body shop, paint shop, and automated various feeder lines. They equipped the paint shop with a three-wet system which was first of its kind in India and the process time in the paint shop was subsequently reduced by one-third. Supplier Capacity Up-gradation FAC actively persuaded key Indian suppliers to invest in expanding their FAC-related operations. FAC provided funding for FAC-specific tooling, the rest of the investments were made by the suppliers. Owing to the higher volumes projected for Model-i, FAC also managed to attract more suppliers to set up shop close to FAC India’s assembly plant. About 30 more suppliers were added to FAC’s supply chain with the introduction of Model-i. Many more parts of Model-i were localized, with active involvement of local suppliers at the design/adoption stage itself. As the local content planned for Model-i exceeded that of any of their earlier models (at 87%) and given the potential for large volumes, the total procurement cost reduced significantly, enabling FAC to position Model-i as a cost-competitive product in its market segment vis-à-vis its competing products from MSIL and Hyundai. 2 Although Model-i was based on an existing platform, it was a major modification, with the engineering cost (the vehicle dimensions had to be reduced to meet small car criterion under Indian regulations) amounting to many millions of dollars. 3 According to the available statistics, there were only seven cars for every 1,000 Indians in India during 2008. Given the population of the country, there was great potential for growth in the Indian market for automobile companies. 4 Although Model-i was based on an existing platform, it was a major modification, with the engineering cost (the vehicle dimensions had to be reduced to meet small car criterion under Indian regulations) amounting to many millions of dollars. Page 6 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) Material Planning and Production Scheduling Since Model-i was targeted at a high-volume segment, FAC’s senior management felt it was an ideal candidate for OTD implementation; as manual planning and BTS model were unlikely to work, given the increase in number of total variants planned for Model-i (two types of engines: petrol and diesel; four different sub-models; seven different colors totaling to 56 main variants of Model-i).5 If one takes into account other smaller options such as ABS, airbag, alloy wheels, and tilted steering, etc., the total number of variants would increase further. This exponential increase in variant mix makes it virtually impossible to do material planning and shop-floor scheduling manually, using spreadsheets. However, OTD was a completely new concept for people based in India plant; in fact, OTD was a completely new concept in the Indian automobile industry itself, as no other OEM in India was using OTD in 2008. The sales and marketing team of FAC India was especially baffled by the “A for C” concept that the APA regional team kept referring to, as soon as they began discussion of launching OTD in India plant. CONCEPT OF “A FOR C” IN OTD Unlike the BTS, the OTD system began with an end-customer or dealer orders. One of the main criteria behind the OTD system was maintaining schedule stability on the assembly line, which in turn translated into schedule stability for the suppliers. Maintaining stability of the schedule was essential in large-scale manufacturing environments such as the automobile assembly, since it involved a large number of suppliers at multiple tiers, who required long lead times to supply required parts to the assembly line. Therefore, all FAC plants in the United States and Europe typically followed the “A for C” schedule in their OTD systems, which means dealers would have to place their orders for month C, during month A itself (which essentially means dealers had to order 60 days in advance) and they placed orders once every month. The regional sales offices then aggregated various dealer orders region-wise and passed them on to ‘‘Sales Planning’’. These orders were next entered into the CMMS, which using the BOM information, expanded this requirement into a detailed part requirement to be placed on the suppliers; and were simultaneously entered into the OTD system, which created the production schedules. With this approach, the suppliers would get nearly 2 months of advance notice about the parts that had to be supplied to FAC at an aggregate level, and allowed them sufficient time to plan for material procurement and production scheduling of their own plants. More detailed part requirements on a weekly basis and daily basis were also shared with the suppliers closer to the production period, once the actual production plan was frozen and just-in-time deliveries were scheduled at different gates on the assembly line. The “A for C” plan would allow the production plant to freeze the production schedule for at least a month (month “C”) leaving one whole month (month “B”) for material procurement and planning purposes, assuming that there were no further disruptions in the supply chain. Once the vehicles were assembled and tested (which typically required one week), they were loaded on to the trucks and sent to the dealerships, preferably in batches of six vehicles (standard truck size), to minimize transportation cost 5 The variants of other FAC India vehicles were fewer in number. Page 7 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) (another one week for transportation). Depending upon the sales volumes of each dealership and the delivery truck size, the demand for an entire month could be divided and delivered uniformly throughout the month. Some amount of finished vehicle inventory could be held at the dealerships to reduce stockouts. The uniform delivery pattern ensured that there were always some vehicles that were in-transit to the dealership (unless it was a really small dealership in a remote area, most dealerships had to receive multiple deliveries in a month). CHALLENGES FOR OTD IMPLEMENTATION The OTD team decided to adopt the “A for C” approach and organized a series of meetings with people responsible for Model-i introduction from various departments, to share their OTD plans. The idea that dealers had to order 60 days in advance in the OTD system was not acceptable to the Marketing and Sales team. Appajee, a senior marketing manager from FAC India commented during one of the OTD brainstorming sessions: It all looks very nice in theory and perhaps even works in developed markets like the US and Europe, where demand is more stable and dealers use high-tech forecasting systems. We are talking about the Indian market here, where volatility is so high that no month’s forecast ever stands valid and dealers work with very primitive forecasting methods, mainly hunches and gut feels. In such a scenario, you are talking about getting orders from dealers 2 to 3 months in advance, which should be used as our Bible for production without holding any extra inventory stocks. How can the dealers predict, 2 to 3 months in advance, how many cars of which color variant will sell? Or are we going to ask them to keep stocks of all 56 variants of Model-i in sufficient numbers in their dealerships? How on earth is this going to work and how are we to capture the market share with this plan? Everyone who was familiar with the Indian operations knew this was a valid point. Not all dealers were equally equipped to forecast their demand 2 to 3 months in advance. With the BTS system, they could pick and choose the hot-selling models and variants from the finished vehicle inventory, while with OTD system, the cars were assigned to them 2 to 3 months in advance (if one adds production and transportation lead times to the 60 days). So, the dealers were bound to be unhappy with the change, and they were apprehensive about whether they would get the vehicles they needed during the sales period or not. To top it all, the OTD system mandated the dealers to pick up all the cars that they had ordered, irrespective of how the market was performing or the demand was changing and irrespective of the level of inventory stocks they were holding, because, once an order was placed in the OTD system, as soon as the car left the assembly line, it would be invoiced to the dealer’s account. Meghan, who had garnered much experience during her stint as MM&L Director, tried to reason with him: I understand your concerns Appajee, and I know ultimately it is you guys who have to interact with the dealers and convince them. However, if you see from the suppliers’ point of view, even with a 20,000-volume car, they end up making so many changes to Page 8 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) their schedules, because we can’t assemble cars as per our schedules, and because our dealers keep changing their orders every few hours. Imagine following the same routine with a 100,000–150,000-volume car like Model-i… It will be a nightmare I tell you, both in our assembly plant as well as at the suppliers’ sites… Ramaswamy added: And what about the finished vehicle inventory we have to carry with a car like Model-i, which comes in 56 different variants? There is no way we can follow a BTS system and stock up like a retail store any more. Our costs will fly through the roof. We can never compete in the compact car segment unless we minimize our inventories, reduce waste, and produce exactly what the market wants. Currently, we get our forecasting right only 50% of the time, I am sure once we get the dealers involved in forecasting through OTD, the accuracy will go up. The only way to do it, is using OTD, there is no other way out! To address the concerns raised above and to bring a consensus among all stakeholders, the OTD implementation team came to an agreement. They first asked the sales and marketing team of FAC India to work with the dealers and identify their major concerns against OTD. Next, they asked Meghan Agarwal to organize a meeting with all the tier-1 suppliers to understand their main concerns and expectations from the new product introduction. The APA MM&L team was assigned the job of estimating the lead times required for material procurement and assembly of major sub-assemblies (Exhibit 1) such as engines, power train, transmissions, dashboard assembly, brake systems, etc. by the suppliers. They decided to meet after two weeks on February 2, 2009 to take stock of the situation and finalize the plan for OTD. Page 9 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020. For the exclusive use of A. Benmedhayan, 2020. Process Reengineering in Emerging Markets – An Automaker’s Experience (A) Exhibit 1 Major sub-assemblies in a typical car Source: http://mgmtfunda.com/automobile-system/# Page 10 of 10 This document is authorized for use only by Alhanouf Benmedhayan in Supply Chain Management taught by MOHAMED ASKAR, Dominican University – Illinois from Jan 2020 to Jun 2020.

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