I recently attended an event by Ficci in Kolkata to support prime minister Narendra Modi’s Make in India appeal. In his speech outlining the opportunities for the manufacturing sector, I noticed that there was one aspect that hadn’t been addressed at all — delivery reliability. When the Indian market opened up to the global economy in the ’90s, the quality of our products left a lot to be desired. However, in the last 20 years, Indian organisations have improved product quality to a great degree, to the extent that it is no longer a significant issue. But delivery reliability is the one aspect of Indian manufacturing where a similar improvement is yet to be established.
India exports a huge amount of garments, which can be found in almost all major brand outlets. But if you ask any of the buyers about their biggest pain point, the unanimous answer would be delivery reliability, and with good reason. Often, consignments are not ready for dispatch as per the original shipment dates.
I know quite a few auto components manufacturers who could legitimately claim that they always supply on time, be it domestic sales or export orders. But, in reality, vehicle manufacturers struggle to adhere to their planned assembly schedules. The operations head of a large two-wheeler manufacturer once told me that the company always meets its daily target of vehicle production but not necessarily of the models that are actually planned or required by the marketing department; instead, it makes the models for which it has material readily available.
Since the production for each day is not for the models planned, this either results in sales loss or by having a large finished vehicles inventory in the distribution system. This surge in production of unplanned vehicle models leads to an rise in the finished goods inventory for obvious reasons.
Failure to launch
But why are Indian manufacturers not able to deliver products on time? To quote the late Sumantra Ghoshal, it is because we are “satisfied with our underperformance”. Indian organisations were forced to improve product quality after liberalisation and if India aims to be the manufacturing hub of the world, the next step would be to improve delivery reliability significantly. Many business owners and decision-makers are not even aware of the impact of being able to deliver on-time-in-full (OTIF) on their bottom line — senior industry leaders gave me a 10-30% increase ballpark figure on being asked this question. Thanks to 15 years of theory of constraints (TOC) consulting experience, I have observed that significant increases in OTIF almost always results in a minimum profit before tax (PBT) increase of 100%, even shooting up to 400% in some cases.
Even the conservative assessment of a 10-30% increase in profits should be sufficient for further exploration of obstacles that stand in the way of achieving high delivery reliability. But most organisations continue to ignore this because of one crucial wrong assumption — the belief that we must always control costs, as if the organisational goal is not ‘make more money’ but ‘control costs’. In my opinion, a simple switch from the cost-benefit to the benefit-cost analysis could do the trick, as cost-benefit analysis often leads to tunnel vision and companies end up thinking that they can’t afford even a marginal increase in costs.
Some very commonly cited reasons for delivery reliability are inaccurate forecasts, unavailability of material and inadequate manpower. But how much of an impact can these factors have on delivery? First of all, to be honest, the term accurate forecast is an oxymoron — forecasts are supposed to be wrong by definition, or else they would be called prophecies instead, and prophecies are reserved for imbeciles.
The real issue, in fact, is how to manage material availability in the absence of a highly accurate forecast, and we don’t have to look too hard for a solution. Almost all homes stock hundreds of items of regular use and yet, how often do we runout of these items? We may experience a stock-out at home every once in a while but it is certainly not a regular occurrence. Who provides forecasts in this case? The same logic applies to kirana stores, which, again, stock hundreds and thousands of different products. On the other hand, I have personally experienced the material shortages that a large vehicle manufacturer in India faced on a daily basis. Items such as tyres and fuel injection pumps, which were on shortage lists nearly 30 years back, still appear regularly on these lists to date. Stock-outs occur so regularly that most organisations have standardised the formats for material shortages; that they are updated on excel spreadsheets is the only difference from the situation three decades ago.
Is it possible to have almost no stock-outs without increasing the inventory through the roof? A visit to any retail chemist shop will point you in the direction of the solution — frequent replenishment of items sold; there are simple solutions to every seemingly complex problem. TOC creator Dr Goldratt believed that there should be no conflicts in the social sciences, just the way they don’t exist in hard sciences; in case there is one, we need to check our assumptions. Because solutions are always readily available, provided we are ready to let go of some deeply held but intrinsically incorrect assumptions. I can personally vouch for the fact that a somewhat advanced version of the frequent replenishment system that chemists practise — called the TOC rapid reliable replenishment system — has eliminated shortages for quite a few industrial organisations, without forcing them to increase inventories.
As for the manpower excuse, most companies face labour shortages both on an ongoing basis and during the festival season and almost all of them employ temporary workers. This is despite the fact that the companies know employing temporary workers creates a high level of uncertainty in availability, never mind the skill issues involved.
Most companies still continue this practise, if only to lower standalone labour costs or labour costs as a percentage of total cost or sales, or some other such metric. Unfortunately, the ultimate organisational goal is to make more money, not to subscribe to such surrogate parameters. At best, these parameters may help make the company a little more money but they are definitely not substitutes for the goal itself.
I am not suggesting that companies only have permanent employees. What we need to ensure is that there are a sufficient workers with the right skills available on board at all times, whether temporary or permanent. Frankly speaking, this issue of manpower shortage due to absenteeism is blown out of proportion — what about the loss in output due to wrong selection of manpower or inadequate skill development?
Indian manufacturing may have gained volumes in the last two decades thanks to its price competitiveness, but if low prices are the only criterion, then any company can take away your orders by lowering its prices. But committing to high delivery reliability — with significant penalties for delays — is something that competitors cannot achieve in a short period of time. This gives your organisation the ability to increase volumes with existing customers and prices with new customers. I am aware that adding buffer manpower and training or worker skill upgradation will cost organisations a fair amount of money. However, if improving OTIF could impact sales by even 30-50%, I believe that the benefits of the 100%+ increase in profits would more than adequately compensate for the corresponding cost increase. The goal, after all, is to keep making money as you Make in India.
Co-authored by Ira G Lal, principal consultant, Goldratt India