Lg’s Supply Chain Essay Sample
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Lg’s Supply Chain Essay Sample
LG Electronics India believes in reaching products to people on-demand. Somebody impressed the market with a sense of enterprise, depth of vision, efficiency of service and the durability of products. Jayashree Mendes meets the Vice-President (Head – SCM) of LG Electronics India, KK Kaul, the man behind this movement. He has been working with the company since LG India set up operations in India in 1997. Growing with an establishment does have its advantages. You become familiar with the system. You are part of the growth. You know the history. You learn from your mistakes and take forward the positives.
You have seen the innovations that worked and those that didn’t. You have watched people join and leave or stay on. And all this has added to the experience. So it’s no surprise when after 15 minutes into the meeting with KK Kaul, Vice-President (Head – SCM), LG Electronics India Pvt Ltd (LGEIL), the man not only begins to reel off figures and statistics related to various departments and products, but also speaks on the dynamics of business in general and the portfolio he handles in particular. He can tackle a topic that most people wouldn’t touch with a bargepole. That’s experience and authority. Fourteen years with a company does that to you.
Comfortably settled in his office after having concluded a meeting with his team, Mr. Kaul requires no prodding and is ready to speak on issues about inadequate transportation and corrugated infrastructure (more about that later). But for now, Mr. Kaul must explain the inside story of how, according to a survey conducted by market research GfK Group last year, LG continues to be ranked No. 1 in most product categories, except LCDs where it comes up No. 2, Audio: No. 3, and cell phones as No. 4, and unknown to the common man how the supply-chain department keeps the machinery well-oiled. A little knowledge of that can be gleaned by looking around his office. Occupying an entire wall sits a white-board displaying rows and columns of figures under various headers. Ask him about the figures, and smiling, Mr. Kaul says the figures represent up-to-the-minute data on raw materials inventory, manufacturing sales, targets, end-products inventory, etc. “The chart is crucial to us as it gives us a holistic picture of our position across the board of our targets to be met,” he says. Manufacturing Momentum
LGEIL manufactures a range of products spanning washing machines, color televisions, monitors, refrigerators, air-conditioners, microwave ovens, DVD, cell phones, and Optical Disk Drives (See Box: LG India: Production Numbers) at its two plants in Greater Noida operational since 1998 and at Ranjangaon in Pune since 2004, besides employing the services of third-party manufacturers. While LGEIL has several firsts to its credit, in manufacturing it was the first company to produce DVD Writers in the country. The move to rope in electronic manufacturing services (EMS) or third-party manufacturers arose in 2002 after LGEIL realized that supply was not keeping up with demand. The Noida plant was running to full capacity. Over the next six years, LGEIL has meticulously added 15 EMS companies to exclusively manufacture goods for them. To ensure quality, LGEIL provides the EMS companies with components such as picture tubes, panels, chips, compressors, LCDs, etc., that it sources globally for its own two plants. Today, the EMS companies manufacture 25 percent of the total number of goods produced by LGEIL.
For logistics purposes and to ensure that the components reach the EMS companies on time, the locations of the EMS companies are based at Dehradun, Rourkee, Rudrapur, Baddi, Noida, Kolhapur, Pune and Rajpura. The locations are significant in that they are either close to LG’s Greater Noida plant or the Pune one, thus making transportation and access easier. It is common for MNCs like LG, Panasonic, Samsung, or Ericsson (LOG.India January 2011 issue), who have global manufacturing units to source components and raw materials from global suppliers. Mr. Kaul says, “We source major and locally unavailable components like picture tubes, LCDs, chips, panels, compressors, etc. from established Asian companies, most of who are our subsidiaries. The components come in from China, Korea, Thailand, Malaysia, Indonesia, and Japan.”Except for deciding on price and the order, the logistics of raw materials and components is overseen by the supply-chain department under Mr. Kaul.
In keeping with its long-term plans, LGEIL is planning to set up a third manufacturing plant, most likely to come up in West or South India. Twelve years ago when LGEIL set up manufacturing facilities, it was still testing the demand waters and the focus was small investment in large capacities. Today, more surefooted, the investment on the expected plant can go up to `2,000 crore. According to Mr. Kaul, “Our research tells us there still remains about 50-60 percent of the market which is untapped. We have a strong product range and should be able to permeate the market deeper seeing the demand potential. The supply-chain is also working out ways to meet the new challenges as growing customer bases will create logistical challenges.” Simultaneously, LGEIL is investing `800 crore in ramping up production at its Noida plant. LGEIL expects the increase in production to commensurate with a three-fold increase in revenue by 2015. Currently, the company exports 20 percent of produced goods to Africa, the Gulf countries, Europe, the US and the CIS countries. Experience Counts
Mr. Kaul’s association with LGEIL started when the company first came to India as Goldstar, by tying up with a local manufacturer. At that time, regulations in India did not allow for a foreign company to set up a fully-owned subsidiary. Mr. Kaul and a small team of people set up the India arm for LG Electronics. In his words, “The Korean headquarters were apprehensive about the acceptance of the brand. They had a hands-on approach on all functions and processes in India. Today LGEIL has come a long way to functioning on its own, with the Korean headquarters mainly providing the design of the products and the technology to run processes.” Mr. Kaul’s years of experience at managing imports, exports, planning, procurement, and his perception of excise and sales tax laws helped him build up the infrastructure for LGEIL from scratch.
A graduation from Delhi University and a degree in Materials Management from Bhartiya Vidyapeeth Delhi completed his education. The first three years with Eicher Good Earth honed him in procurement, sales and imports, and only improved with the next three years at Samtel. It was, however, the six years that he spent with Rajasthan Petro Synthetics where he learnt project management and the subtleties of setting up new projects. Mr. Kaul says, “I drew on my experience and accomplished a lot more at LGEIL, right from forecasting to manufacturing to building the supply-chain. I have been part of the team that established the line of production, quality, set requirements and price, juggled transportation, managed import of raw materials and finished goods in keeping with Customs clearance.” The Supply-Chain Process
At a time when most companies are dissatisfied with the high logistics cost, Mr. Kaul says quietly and with some pride, “Our logistics cost is 3.01 percent on net sale after deduction of excise duty, including our export freight cost.” So how does the company keep it so low? He adds, “We experimented with several production and distribution models over the last few years. The exponential growth in demand and constantly catering to newer and distant locations buoyed us to improve our supply-chain. But it was the implementation of GSCP (Global Supply Chain Planning) in 2008 that streamlined all our operations.” Year 2008 also changed a lot of things for LG globally with the implementation of new IT systems and changing its transportation functions through adoption of IT. Earlier, the Korean chaebol found it hard not only to keep up with the fast-growing company, but concurrently tracking demand, supply, inventory, manufacturing, raw materials, logistics and distribution. It was onerous to compute collective data that would allow the company to see its progress at a quick glance, and in real-time. The Indian arm had to regularly send across long detailed excel sheets of data.
The Korean headquarters required a system to synchronize forecasts, production and sales that would eliminate the issues of inaccurate shipping, planning and inventory. The Global Supply Chain Planning was established. The GSCP integrates control of the entire business process from receiving orders, production to sales, and inventory, with an online link of LG companies around the world. Integrated with the Oracle ERP systems of LG worldwide, the end result of the deployment of GSCP enables the company to close the gap between demand and supply. It also provides the previous week’s performance results and capability matrix. The difference in GSCP from the earlier IT tools that LG Electronics has been using is that it combines design, parts supply, procurement, production, supply-chain, and cost management into an integrated process thus allowing the company to know how much to produce.
For that to happen, Mr. Kaul clarifies, it is crucial that all the branch personnel from every department collaborate on the weekly Sales & Operations Planning (S&OP) to decide on production and sales plans. Prior to deploying GSCP, LGE also faced problems in managing inventory. At a time when it needed to be at 42 days of inventory, it had 10 to 15 days more of inventory. LGE rolled out 12 Inventory Optimization solutions thus releasing it from millions of cash flow that’s no longer tied to inventory. Considering that LGEIL outsources its transportation, the company often faced simple theft, misrepresentation of inventory, counterfeiting and piracy. This was restricted by installing deployed Global Digital Logistics System (GDLS) which aids in better route optimization, as well as improved loading and tendering capabilities. Playing on its existing Oracle ERP and EXEWMS, the transportation solution provides execution capabilities to its shippers and 3PL partners. Forecasting Paradigm
Forecasting for LGEIL is at three levels: Inventory, production, and sales. The company adopts a short-term forecasting of up to six weeks, and a mid-term one for four months. For LGEIL, it is important that the company procures right. Some of the components that it imports have long lead times. For instance, following the earthquake and the tsunami in Japan, companies round the world had to look elsewhere to fulfill their supply of raw materials, which otherwise came from that country. This impacted production and supply. Mr. Kaul says with some satisfaction, “Our short-term forecasting is 95 percent accurate, though of course we are working at improving it. Since we need to place orders for some components at least three months in advance, we have maintained a forecasting model of 16 weeks.” The stress on accuracy becomes even more pertinent considering that it imports about 35-40 percent of components which total about 60 percent in value terms. LGEIL executes demand forecasting by using GDMI (Global Demand Management Innovation).
The solution used for demand forecasting is integrated with the demand fulfillment system. Based on the previous year’s seasonality demands, trends in the previous quarter across each product, the company arrives at expected demand in the coming season. It works on three layers: market feedback, Global Aspiration and supply-chain capabilities – all of which lead to a single sales plan. For instance, For instance, from Target Aspiration, LGEIL has deducted a higher turnover can only be accrued by focusing on high-value products. The results of the inventory and demand forecasting are passed on to the EMS companies and to its own production department. To maintain the rhythm, all the various departments straighten out forecasting by the 6th of every month, by the 12th all the divisions file in their data in the system, and by the 16th the schedule for the next month will be pinned up on the production department’s display board.
LGEIL’s sales department sends across its forecasting data to a centralized server on the last Thursday of the month for the following month, while keeping figures tentative for the next three months. The production department picks up the plan and based on the closing stock and demand forecasting decides on the numbers to be manufactured. Mr. Kaul says, “At the time of sales forecasting, we also decide on the products that should be sent across to a particular region, how and when.” With the new plant coming up by 2013, LGEIL is mulling the capacity it needs to fit based on a tentative demand forecasting it has visualized till 2015. Inventory Control
LGEIL’s strategy is to strike a balance between inventory levels and optimum utilization of capacity. It also has to deal with high rates of product obsolescence and evolving customer needs. The GSCP maintains a record of all inventories, but according to Mr. Kaul, “one always tries to decrease inventory turn at warehouses”. He adds, “Days of inventory outstanding or DIO for finished goods is 27 days (including in transit), while monthly warehouse shelf inventory turn is 4 days. We try to ensure that goods move out of the Distribution Center in less than 30 days. Our focus this year is on reducing DIO, because of shortened product life cycles. That’s why our forecasting has to be incisive.” LGEIL takes care of the life-cycle of products, especially end-of-life (EOL) products, through a carefully controlled production plan. It sells EOL products through schemes, and some find its way into smaller and rural towns.
In urban areas, this appears difficult as few or no dealers want to be saddled with old and outdated models. The GSCP tool, while keeping track of EOL products, also throws up data of where these products could be deployed and sold. LGEIL follows the hub-and-spoke model. So the final goods are moved from its various factories to the central DC at Noida and Ranjangaon, from where it moves to its 53 warehouses. A staunch subscriber to the outsourcing theory, Mr. Kaul believes that outsourcing non-value added activities to third-party can help create focus from operational activity to strategic value add operations. This is the reason why LGEIL has outsourced most activities such as transportation and warehouses. Choosing The Right Partners
Towards the end of each year, LGEIL conducts a ‘global bidding’ to choose five shipping lines for its imports and to ship its products across the country. Most major shipping lines participate and send in their quote for a year’s business with their service conditions. It requires five shipping lines to import its containers numbering approximately 24,000 TEU per year, of which an estimated 12,000 TEUs are exported every year through Nhava Sheva port alone. Here are a few more firsts to LGEIL’s credit, according to Mr. Kaul. In India, it was the first consumer durables company to use the sea route to ship goods. The first sea movement was from Kandla port to Kochi, and then extended to Coimbatore and later on to Chennai. It also started sending out goods by rail using the services of the private container train operators (PCTOs), and introduced the concept of using high cube containers.
In rail, LGEIL moves full rail rack to Kochi, Kolkata and Guwahati. Rail transport is frequently used from Pune to Kochi and Guwahati, Noida to South (Chennai, Hyderabad and Bangalore). Mobile phones are shipped by air as they are prone to constant change in prices, high obsolescence and the need to supply on demand thus making sure that inventory is minimal. In 1997, it started using closed body trucks for distribution and moved to using trucks that allowed for double stacking. Up to 2008, LGEIL primarily used road transportation. As consumer durables bear the burden of ‘seasonality’, a festival season in a particular area means that supply could go as high as four times compared to the other months in the year. Citing an instance, Mr. Kaul says, “During Onam in South India, demand for white goods and electronic items go up four times. Similarly, the Dassehra or Durga festival in September sees a shoot up in demand in Eastern India. While March and April see a drastic rise for air-condition and refrigerator compressors.” Outbound Logistics
To meet the fourfold increase in demand, it has to speed up the manufacturing and transportation to these respective cities. A drawback of having several manufacturing industries based out of North India, mainly Baddi and Dehradun, invariably sees a huge demand for vehicle requirements. Trucks move from northern India to the rest of the country. Inflow of trucks to the north is few and this means less backload from the south or the east to the north. The lack of backload sometimes creates problems in terms of long hauls and shortage of trucks. Currently, LGEIL channelizes approximately 7,500 vehicles every month from its various manufacturing locations to branch DCs. But it was the constraint of availability of quality vehicles that led the company to explore multi-modal transportation. Besides this, approximately 24,000 vehicles are sent out from branch DCs every month, for secondary transportation, to various dealers and distributors all over India. Arvind Kumar Lohia, Managing Director, East India Transport Agency (A unit of EITA India Ltd), and an LGEIL transportation partner, says, “Since the products are in high volume and fragile in nature, we cater with customized vehicles.
A challenge is to cater to seasonal fluctuation which is endemic with such a products range. It requires constant planning and shifting our fleet strength to those locations where they need to send their products as well as arranging for the return goods from those locations.” Siddharth Adya, Managing Director, South Asia Region, at APL Logistics, a 3PL partner managing the regional distribution center at Chennai, says, “Retaining labor is a challenge. Hiring quality people with the right skill sets is a constant challenge, particularly in a high-volume facility like this one.”
APL Logistics handles all the warehouse function for LGEIL at Chennai like Inbound Inventory Management, Outbound such as handling shipments to dealers and modern trade and institution sales; Storage, and Transportation Management and Coordination including update of proof of delivery in LGE’s Oracle system. Anoop Chauhan, Regional Head (SCM – Business Development) at DHL Lemuir, a 3PL partner to LGEIL, says, “Consumer durables are sensitive to damage. We have customized trucks and tracking that ascertain that goods move as per the client’s requirements. The purpose of bringing us in was to ensure that goods are available on the shelf when the dealer needs it.” Regional Distribution
Ten years ago, the consumer durables and electronics trade was in disarray in terms of distribution. Most companies preferred to go with national distributors, who in turn sent out the goods to dealers. Dealers did not deal with the company directly. Also, companies manufacturing several products had created separate divisions within their company and each division would deal with the distributor separately. This caused a certain amount of confusion in the supply-chain. Soon there arose issues and allegations in terms of margins or the lack of it, product quality, and reverse logistics. LGEIL (possibly, another first way back in 2003) charted a new course and went to the regional distributors (RDs) directly, thus doing away with national distributors. Mr. Kaul says, “We thought that only local people would know their own market. This has worked well for us.” It also began offering higher margins to help them scale up their business from LG products.
The expertise of the RDs also helps LGEIL to near correctly send out the right product batches and manage the reverse logistics too. Vishaal Dutta, Regional Manager (Maharashtra), LGEIL says, “The customer returns are handled by the customer support department directly, while the returns from dealers are handled by the supply chain. Transportation used is the same which goes for the delivery of the products to such dealers. In Maharashtra, we have a warehouse in Bhiwandi and goods are moved to the warehouses of our trade partners. We deal directly with dealers and distributors who in turn supply to sub-dealers.” So how does it distinguish between urban and rural supply-chain? “We don’t,” says Mr. Kaul. “Actually, you’d be surprised that goods that find their way to urban places also find their way to rural, though on a smaller scale because of power outages or lack of electricity.” As is evident at LGEIL, there’s much required to do something simple and keep it that way. See demand and push supply, so goes the saying at LGEIL.