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Oiling the chain

Sayantani Kar  |  Mumbai 

is bringing its supply chain up to speed as it enters new categories

You can’t fault Director when he says: “Our strength lies in ” With 16 per cent of its turnover reserved for marketing, the Kolkata-headquartered Emami, maker of and over-the-counter health products, is undoubtedly a marketing-led company. It has brands like Himani BoroPlus (Rs 250 crore in size) and Navratna (Rs 300 crore) in its portfolio and wants to launch eight to ten products every year. From a little over Rs 1,000 crore in 2009-10, it wants to become Rs 2,000 crore in size within two years.

In the days to come, it is betting big on products like soap, talcum powder and shampoo — the bastion of multinational corporations like Hindustan Unilever, Procter & Gamble, and Johnson & Johnson and homespun street fighters like Godrej and Dabur. Just skills won’t be good enough, has realised. It has thus undertaken an exercise to make its supply chain efficient. With seven factories, five departments, around 120 stock keeping units (SKUs), many of which are seasonal, 35 warehouses, 2,500 stockists and 4,25,000 retailers, it was a long chain. The acquisition of Zandu added to it.

Emami went to work with Ernst & Young’s business advisory arm to stem supply chain efficiencies in late-2008. The professional services firm positioned its team at the Emami headquarters to help the company achieve a leaner supply chain, among other things.

Till then, Emami’s products were not able to move quickly on the supply chain to meet the change in consumer demand. Either there would be a lot of inventory languishing along the chain or there would be too little to take care of a surge in demand at the retail stores. The former hiked operational costs (in occupied warehouse space, cost of buying raw materials, dead stocks and so on), while the latter led to lost opportunities to sell to consumers who were looking for its products. “There would also be a delay of two to three months for a new product to reach the stores,” points out Emami CEO N Venkat.

It’s not that the company did not make demand forecasts. The problem was the five departments entrusted with the job — sourcing, production, planning & logistics, sales and — were not working as one team. Each worked in its own silo. Any change in customer preference got lost in the lack of communication between the various departments. Says Emami Supply Chain General Manager Samir Chaturvedi: “This led to high variations in the amount that was forecast, produced, distributed and got sold.” This was at the heart of the overhaul that Ernst & Young suggested to the company.

Silo breaking
Emami opted for unified planning, as Ernst & Young had suggested. The consolidated sales forecast that comes in now from the area sales managers, in the first week of the month, is first run through the marketing and branding teams. Both the teams arrive at a forecast that also takes into account any surge expected after new brand campaigns or launches. The planning team then converts it into a production plan, in tandem with production and sourcing teams. On the next day, there is meeting of all the five departments to freeze the sale and production plan for the month.

Each brand with its different SKUs is assessed on the previous month’s leftover stocks, the current month’s forecast and the next month’s buffer stock forecast. Since Emami, like many other companies, has a rolling system of forecasts spanning three months, minor surges in demand in the current month often square off against the buffer stocks of the previous month. However, what can set off an inventory pile-up, and hence lock up operating capital, would be an awry forecast for the next month. One of the metrics that Emami has evolved is forecasting fidelity which measures the accuracy for forecast. It has gone up from 50 per cent to 70 per cent of the stocks, which shows that Emami is increasingly getting the forecast for the next month right.

Accurate forecasting is even more critical for Emami because it has a large portfolio of seasonal products like Himani BoroPlus prickly heat powder and sun-protection lotion for the summers and Himani BoroPlus cold cream for the winters. Of its 110 SKUs of FMCGs, around 22 are for winter, 33 are for summer and 55 are all-season. It has to take stock of the sudden spikes in demand for one set of products, while the other set slackens. A bad forecast can leave Emami with old stocks which could become redundant the next season. Emami now forecasts for its seasonal products four to five months in advance, with in-built flexibility closer to the season. This is also why it wants to up its production capacity by as much as 40 per cent and automate its factories by next year. Some products like Boroplus Talc and Navratna Talc had faced a supply crunch due to low capacity at Emami’s third-party manufacturers.

The leaner supply chain has brought down Emami’s own internal estimates of loss of sale. Amidst an industry average of 0.8-1.3 per cent loss of sale of stocks, Emami brought its own 4 per cent down to 1-1.5 per cent. After all, 94 per cent of the demand is being met by available stocks as opposed to 80 per cent stock availability earlier. The most tangible result of the tighter supply chain has been the cutting down the time inventory spends in the chain, or lead time, from 37 days to 31 days. It has, consequently, unlocked an estimated Rs 1 crore in working capital on an average every month.

Lean logistics
Costs have been drastically cut down in transport, a vital part of logistics in supply chain. While a year back (2008-2009) it was 2.59 per cent of the turnover, it is now 2.3 per cent. Analysts estimate some of the big multinational companies to have transportation costs of 4.7 per cent, even though these have advantages of scale over Emami. Using express modes (transport in less time for a premium) for just 10 per cent of the stocks instead of 30 per cent, enabled by less last-minute surprise fluctuations in demand (better forecast and adherence to the universal plan), has helped.

Instead of hiring two or three large transporters for its pan-India operations, as it had done earlier, Emami has enlisted 16 transporters. This has reduced monopolistic pricing and got Emami lower prices and better servicing. The higher number of transporters has also given the company the flexibility to move its stock according to its forecasts or when replenishment is needed. In transport, and in sourcing, Emami conducts reverse auctions now, where it sets a cut-off rate and transporters and vendors have to bid online.

Emami has also realigned its distribution chain. It has put up “mother” warehouses where all SKUs first reach from the plants before these are redistributed to smaller warehouses and stockists. Ernst & Young Business Advisory Services Partner Ashish Nanda says: “A mother warehouses was required to consolidate demand.” It allowed better visibility of movement of stocks and more flexible transfers. “Earlier, we would have kept buffer SKUs in different warehouses according to discrete forecasts. So, if there was any change elsewhere, stocks would be stuck in other places.” says Chaturvedi.

Emami is trying out a more extensive version of immediate replenishment of stocks in its southern markets, as opposed to the forecasting it does in the other zones. Taking advantage of the fact that it had a depot in Hyderabad, which became its mother warehouse for the south, Emami now keeps just 10 days of buffer stock there. If those get pulled by smaller warehouses, only then does it refill the main warehouse. There is less of dead inventory, yet the demand is always met. The west and east zones would be next on its replenishment model map.

However, the quest for tighter forecasts to lower loss of sale and operating cost would only end with making sales easier to track. Emami’s sales team had been manually filling out forms for forecasting, based on their targets and stocks left behind at the depot. Emami is now bringing its big distributors online with the help of information technology, leaving little room for assumptions. It will be able to track sales that distributors make to retailers. “Sale from the stockist to the retailer cannot be manipulated. The stockist might hoard up on stocks if there is a good trade scheme going on for he will have space to store, but the retailer will often buy stocks that he can sell off,” points out Chaturvedi.

With Zandu’s biggest brand being brought under Emami’s core consumer division and a new factory in Uttaranchal, the supply chain integration has become easier for the acquisition as well. The Ayurveda products under Zandu are planned separately to take into account their 15 to 30 days of production process (fermentation mainly). Chaturvedi claims it got easier when Emami infused rigour into planning products that would get made once in 4 months, once in three months and once every month on the existing capacity.

Still, there are challenges that remain. Emami’s plants are located only in the tax-free zones of the north and in the North-East; the company therefore has to work with higher lead times for a pan-India distribution. Players who have factories more liberally distributed boast of turnaround time of 15 to 18 days because of faster transport and bigger scale of operations. That is why Emami’s move becomes significant in the light of the opportunity at hand. Branding differentiation alone would not suffice. The full-blown benefits of the supply chain changes should be felt this financial year.

First Published: Mon, July 26 2010. 00:17 IST