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PAPER ID# 140

BEST PRACTICES AND PERFORMANCE


BENCHMARKING FOR SCM IN INDIAN AUTO INDUSTRY
Sunil Sharma, Reader, Faculty of Management Studies, University of Delhi,
DELHI 110007, INDIA;
E-mail : ssharma@fms.edu; Tel : +91-9871119464, Fax : +91-11-27667183.
The present paper first traces out the multidimensional functional relationship of supply chain
management (SCM) with material planning and delivery, lean manufacturing and total quality
systems. Consequently, based on executive judgement and literature survey, an extensive list
of sixty critical success factors has been developed for benchmarking in SCM. These factors
are then evaluated and analysed in leading Japan / Korea collaborated car manufacturing units
located in India. Some key performance parameters of SCM are thus evolved which are then
assessed in sample companies. The paper validates a potential for intensive research in area of
performance benchmarking in SCM on a global basis particularly in firms operating on joint
ventures / collaborations.
Keywords : Lean manufacturing, JIT II, SCM Performance Parameters
INTRODUCTION :
Recently there has been increased focus in organizations on improvement of value delivery
systems to customers and as a part of this strategy, supply chain management (SCM) has been
identified as a thrust area by most corporate who are now entering into strategic partnerships
with specific suppliers and distributors and even customers to improve the performance of
value delivery system and networks facilitated with information technology. This clubbed
with the physical distribution and logistics requirements is posing a great challenge to the
companies which want to make their value delivery system most effective particularly
regarding their front ending with the customers. Obviously, manufacturing and engineering
companies cannot accomplish these objectives unless their vendors meet the specified criteria
specially latters ability and willingness to participate in cost, delivery, quality, service and
logistics improvement programmes. Never has there been a greater thrust on careful selection,
rating and development of suppliers oriented towards fostering strategic alliances rather than
just meeting shot-term contractual obligations and consolidating vendors base. This is going
to be even more rigorously pursued in the first decade of new millennium. Using SCM as a
competitive strategy can now not be debated.
Relation of supply chain management with modern material planning and delivery, lean
manufacturing and total quality systems :
Since most companies including those in India are changing steadfastly towards adoption of
advanced material planning and delivery systems like MRP, JIT and even JIT-II comprising
proactive networking, and join collaboration with vendors, it becomes inevitable to tune in
their supply chain management systems with MRP and JIT requirements which in turn are
determined by the operation flow patterns existing in respective manufacturing systems and
inventory requirements therein. Hernandez (1993) has aptly described relation of TQM / JIT
with supply chain. Linkage of MRP / JIT with supply chain management is being enabled by
computerised information systems and electronic data interchange (EDI) with suppliers,
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PAPER ID# 140

dealers, warehouses and customers alike. In fact, adoption of good supply chain management
practices is further necessitated by use of Total Quality (TQ) practices. Most of the
international quality system standards today lay down specific criteria for selection, rating and
assessment of vendors. Needless to say, supply chain management practices would have
marked effects on physical distribution processes including material handling, storage and
delivery systems, layout considerations, say, on-line delivery of parts. So, in a nutshell,
change in supply chain management practices effects a wider, more than expected, spectrum
of operations ranging from layout engineering, operations flow planning and control, material
planning, storage and delivery and also quality assurance till the finished goods are
transported to warehouses, distribution / retailing centers and finally customers. Michael
Porter (1985) has thus, been right in identifying in-bound logistics and outbound logistics as
primary activities of value chain being controlled by cross-functional support activities of
which procurement of materials is one. Manufacturing batch sizes in layouts having process
orientation and line balance and flow rates in layouts having product orientation could affect
SCM practices. In fact, volume and process variability have been identified as root causes of
unnecessary supply chain cost and variation. It has now been widely researched that contrary
to American automakers, Japanese and Korean auto-manufacturers have their production and
material reports triggered by sales demand not forecasts. (Ahmadian and Afifi, 1990) This
implies that planning, replenishment, traffic and distribution of stock is based on orders
entirely triggered by customers demand. This has been referred to as demand-driven supply
chain and is a foundation for lean supply chain. A demand driven supply chain would aim
to move from long manufacturing and delivery lead times to short ones and replacing batch
processing with flow processing preferably using group or cellular technology (GT) which
facilitates high speed supply chain. Ensuring single piece flows in a lean manufacturing
environment would always highlight the value-flow across internal/external supply chain
members.
It is now well established that Japanese and Korean automakers represent classic
examples of integrating supply chain with their plant and customer requirements. Schonberger
(1982) has enumerated some characteristics of world class firms trying to manage suppliers
towards stock reduction and short manufacturing and delivery lead times. Leading consultants
like KPMG (1997) and Mc Kinsey (1992) have also enlisted some key performance
benchmarks in world class firms following SCM. The present paper deals with an insight into
key attributes and performance benchmarks of using supply-chain management practices in
some leading Japan and Korea collaborated automobile units located in India.
LITERATURE SCAN :
Beamon (1999) presented a number of characteristics that are found in effective performance
measurement systems for SCM. Camp (1989) has provided a comprehensive treatment of
benchmarking for best practices related to superior performance.
In order to study the large number of supply chain performance measures available,
researchers have categorized them. Neely, et. al. (1995) presented a few of the categories
namely quality, time, flexibility and cost. The SCOR (Supply Chain Operations Reference)
Model of the Supply Chain Council suggests metrics related to reliability (on-time delivery,
order fulfillment lead time, fill rate), Flexibility (supply chain response time and upside
production flexibility), Expenses (all SCM costs, warranty cost as a percentage of revenue and
value added per employee) and assets/utilization (total inventory days of supply, cash-to-cash
cycle time and net asset turns).

PAPER ID# 140

The performance measures utilized in the models proposed by various authors as


Bytheway (1995), Waters-Fuller (1995), Lamming (1996) etc., directly relate with real-world
applicability in terms of different performance measures mostly categorized into :
(i)
cost
(ii)

time

(iii)

customer responsiveness

(iv)

(volume and variety-) flexibility

(v)

a combination of two or more than two of the above.

Costs may include inventory costs and other operating costs as procurement,
manufacturing and distribution cost. Customer responsiveness measures include lead time,
on-time and available-to-promise (ATP) delivery, stock-out probability and fill rate.
Interestingly Lee and Bellington (1992) also cite a number of trade-offs that a corporate might
have to do for best results from a supply-chain. These are lot size inventory trade-off,
inventory-transportation cost trade off, lead-time-transportation cost trade-off, product variety
inventory trade-off and production and distribution costs customer service trade-off.
Various measurement categories and corresponding criteria are summarized in Table 1.
Table 1 :
Sr.
No.
1.

SCM Performance parameters as cited by different researchers.

Performance
Measurement
Categories
Cost

Corresponding
Researchers

Key Parameters

Cohen and Lee (1988)


Cohen and Moon (1990)
Lee and Feitzinger (1995)

Costs related with procurement,


manufacturing, transportation,
inventory,
warhousing,
distribution etc.

Pyke and Cohen (1993)


Tzafestas and Kapsiotis (1994)
2.

Cost and Time

Arntzen et. al. (1995)

Customer
response
time
manufacturing
lead
time,
available-to-promise
(ATP)
performance, order fulfillment
cost.

3.

Cost
and Christy and Grout (1994)
Customer
Cook and Rogowski (1996)
Responsiveness
Davis (1993)

Making a trade-off between cost


and customer responsiveness to
optimize
the
return
on
investments.

Ishii et. al. ( 1988)


Newhart,
( 1993)

Stott

Wikner,
(1991)

Towill

and

Vasko

and Naim

PAPER ID# 140

4.

Customer
Responsivess

Lee and Billington (1993)

High level of customer service


judged by on-time deliveries,
customer satisfaction, fill rate,
stock-out probability, warranty
costs and product returns etc.

5.

Flexibility

Voudouris (1996)

Volume and variety flexibility to


meet customer demand.

Examples of other performance measures are : customer satisfaction (Christopher, 1994),


information flow (Nicoll, 1994), supplier performance (Davis, 1993), risk management
(Johnson and Randolph, 1995). Stevenson (2005) reports another interesting factor Velocity
in terms of inventory velocity which refers to the rate at which inventory goes through the
supply chain (faster is better) and information velocity which would refer to the rate at which
information is transferred within a supply chain.
METHODOLOGY :
A sample of leading Japan and Korea collaborated car manufacturing units located in India
were selected. Three of them were located in NCR (National Capital Region) of Delhi and
one located near Chennai and the other one in Bangalore. These are namely : Honda Siel
Motors, Maruti Udyog Ltd., (the then) Daewoo Motors (I) Ltd., Hyundai Motors (I) Ltd. and
Toyota Kirloskar Motors Ltd. A list of key success factors (KSFs) was prepared on the basis
of literature survey, executive judgement and cues provided by professional studies done by
consultants like KPMG, Mc Kinsey on a global basis and the ET (Economic Times)
Intelligence Group in India. A questionnaire, which listed key success factors (KSFs) for
supply chain management practices, was administered to senior executives of materials,
purchasing and/or vendor development departments of these companies. A comparative
analysis is done as to what extent these companies are following supply chain management
practices. The manufacturing system and flow patterns were similar in selected companies.
Moreover, the companies selected had Japanese or Korean collaborators who had
demonstrated potential of integrating supply chain management systems and practices
particularly in a lean environment.
The Questionnaire :
The questionnaire was administered through visits to various plants located in National
Capital Region and through mail to plants located near Chennai and Bangalore. The
questionnaire was framed keeping into view the factors that are attributed to best practices in
supply chain management in the contemporary environment. The questionnaire listed sixty
key success factors (KSFs). As indicated, KSFs were derived on judgemental and literature
survey basis by this researcher.
OBSERVATIONS
A comparative analysis of the sixty identified critical success factors in the select sample
companies namely Honda-Siel Motors, Maruti Udyog Ltd., Daewoo Motors (I) Ltd., Hyundai
Motors (I) Ltd. and Toyota Kirloskar Motors Ltd. is done. A point rating of 1 is given if a
company is very strongly following the management practice given in the form of a key
success factor (KSF) while a rating of 0.5 is given if a company is partially following or is in
the process of implementing a practice. A rating of zero is given if a company does not at all
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PAPER ID# 140

follow a practice. A 5-point equal-interval rating scale is used to represent degree of presence
of a particular supply chain attribute in a company. The results are tabulated in Table 2 and
Table 3.
INTERPRETATION :
It is clear from Tables 2 and 3 that the select companies have significantly followed supplychain management practices, vendor integration and consolidation strategies. These
companies are common in aiming for :
i) High level of sole-sourcing.
ii) Having most vendors located proximally.
iii) Better span of control for their purchasing executives for better follow-up, expediting
and control.
iv) Reduction of delivery lead time with vendors.
v) Keeping vendors informed about production schedule changes on a regular basis.
vi) Minimum lead time in placing orders with vendors.
vii) Higher level of strategic alliances with suppliers including Joint Ventures (JVs).
viii) Giving preference to vendors having material planning and information systems and
on-line access to production schedules of OEM purchasing companies.
ix) Need for less frequent contract reviews / negotiations and encouraging blanket
ordering.
x) Preferentially selecting vendors with ISO 9001/02 quality assurance systems.
xi) Giving flexibility to vendors in design change, process improvement and cost
reduction.
xii) Encouraging vendors to supply on-line and in small frequent lots.
xiii) Assisting vendors in reducing their manufacturing lead times.
xiv) Vendors assistance and development schemes for joint collaboration.
xv) Development of supplier quality assurance systems and practices.
xvi) Reduced followup and expediting efforts with vendors.
xvii) Simplifying and consolidating logistics operations and practices.
The selected companies however, lacked in :
i) Following strategic classification of materials
ii) Controlling late deliveries from vendors which still cluster around 15%
iii) Controlling rejects from vendors as lot control systems / acceptance sampling plans
are inadequate or are not properly contractually obligated. Rejects still hover around
5%.
iv) Controlling number of line stoppages due to material / component shortages.
v) Extensive strategic partnerships / alliances in form of coalition / joint ventures
vi) Preferential selection of vendors with QS-9000 and ISO 14001 system
vii) Encouraging more vendors to follow recirculatory packaging and handling and
enabling them to deliver right on / near the line (JIT II)
viii) Giving vendors more design and processing flexibility i.e. focusing on performance
specifications rather than design specifications.
ix) Properly arbitrating contractual clauses so that disputes related to cost, quality and
delivery are reduced
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PAPER ID# 140

x) Rationalising purchasing costs which still amount to 10-15%


xi) Encouraging far-off vendors to develop transit stores / contract warehousing and own
transport by giving them financial assistance.
xii) Intensive consolidation of out-bound freight and encouraging contract warehousing
and company owned transport at the focal firm end.
xiii) Design and installation of a transporter rating system.
CONCLUSIONS
From this study, it is concluded that automobile companies with Japanese / Korean
collaboration are going in a big way to consolidate and integrate their supply chain and value
delivery networks. For this they are striving towards attaining better logistics and
communication system with their vendors. However, they are still giving less flexibility in
design and process changes to vendors and most of the vendors are at receiving end. May be,
vendors also have to change their attitude and have to be more particular in terms of cost,
speed of delivery, quality, service and flexibility criteria. It is to be appreciated that backward
vertical integration may also not be a good proposition always and should be resorted to on
selective basis. Also successful negotiations on a win-win basis could be strategically used to
arbitrate purchasing contracts on mutual basis for long term partnerships and develop strategic
coalition in value delivery systems. More and more OEM companies should go in for
encouraging and assisting vendors to adopt material planning, information and
communication systems including MRP, e-networking, etc. Sometimes there is inadequate
sharing of real time information about material planning, delivery and production routing and
scheduling by OEM with their vendors. Companies need not see SCM in an isolated manner
and should analyze for variability cause of SCM tracing back to even their production flow
systems and bottlenecks and volume and design flexibilities. Both capacity and capability
assessments are to be done at vendors end. Emphasis must be there to remove waste (muda)
in processes to remove unnecessary cost and variation in supply-chain. To cap it all, even
traditional mid-sets at a company could be stumbling blocks in implementation of SCM
practices. Lot control systems and plans must be rigidly followed. What is required in Indian
context is, that companies should make their manufacturing and supplies systems more
reactive and responsive to needs of changing demand patterns for which vendor consolidation,
integration and development in tune with individual needs may only provide the final
solution. Lastly the importance of third party relationship in case of outsourced logistics
should not be under-estimated. This particularly holds true for Indian companies who have to
work out a functional relationship using proper coordination while dealing with third party
logistic (3PL) providers. By next decade, most buying companies in India should have all
vendors equipped with on-line communication, a developed ability to deliver zero-defect
small lots on-line at a short notice, a strong system to plan and control materials and a
strategic intent to follow international quality, environmental and safety standards throughout
the supply chain.

PAPER ID# 140

Table 2 :

ANALYSIS OF KEY SUCCESS FACTORS OF SUPPLY CHAIN


MANAGEMENT IN SELECT COMPANIES
(Legend :
Very strong Strong { Medium Weak
Very weak strength of KSF
/ attribute presence)
Daewoo

Honda-Siel

MUL1

HML2

1. Carrying out strategic


classification of materials

2. Maintenance of Approved
Supplier List

3. Regular assessment and


upgradation of vendors list

4. Keeping number of suppliers


per part minimum

5. Assignment of minimum
suppliers to each purchasing
executive

6. Maximising percent
components sole-sourced

7. Maximising percent suppliers


located within 100 kms

8. Pursuing advance material


quantity planning

9. Pursuing advance material


quality planning

10. Keeping lead time minimum


with suppliers

11. Minimisation of time spent in


placing order

12. Minimisation of percent late


deliveries

13. Minimisation of percent


rejected material

14. Minimisation of time lost in line


stoppages due to material
shortages per year

15. Minimum times the stock


overflows in4 A class items

KEY SUCCESS FACTORS OF


SUPPLY CHAIN MANAGEMENT

.
.
3
.
2

TKM3

Maruti Udyog Ltd.


Hyundai Motors Ltd.
Toyota Kirloskar Motor Ltd.

PAPER ID# 140

Daewoo

Honda-Siel

MUL1

HML2

16. Maximum percent blanket


orders / open orders of total
orders

17. Frequent release of production


schedules to vendors

18. Release of Purchase Orders


(P.O.) through modern
communication aids e.g., e-mail

19. Getting orders from dealers


through modern modern
communication aids e.g., e-mail.

20. Development of design


capability in vendors with focus
on performance specifications

21. Enabling suppliers to undertake


value analysis for cost reduction

22. Disregarding vertical


integration and encouraging
coalition / JVs with suppliers

23. Preferred and advantageous


contracts against parent foreign
collaborators

24. Capability to arbitrate /


negotiate reasonable contracts
with supply sources for strategic
partnerships

25. Limiting competitive bidding to


only new purchases

26. Policy of always storing


materials only at point of
manufacture

27. Vendor incentive / development


schemes for superior and
inferior vendors respectively.

28. Testing, measurement and


calibration system in operations

29. Ensuring single piece flow


control system / lean
environment

KEY SUCCESS FACTORS OF


SUPPLY CHAIN MANAGEMENT

TKM3

Assessment at vendors end of


(28-44)

PAPER ID# 140

KEY SUCCESS FACTORS OF


SUPPLY CHAIN MANAGEMENT

MUL1

HML2

Daewoo

Honda-Siel

30. Supplier quality assurance


system

31. Information system / EDI / e-mail


facilities at vendor

32. Managements competence and


attitude for quality, cost
reduction and continuous
improvement

33. PPM analysis to pursue zero


defects

34. Ability to produce and supply in


frequent small-sized lots

35. Communicational accessibility


of vendor

36. Milk-run to verify material,


engineering and design
specifications

37. Establishment of Lot Control


systems ie. labeling of lot with
reliable information on quality
and quantity and submission of
inspection plans

38. Maintenance of process output


data (SPC etc.) for critical
processes

39. Documentation of process


improvement over a period of
time

40. Assessment and validation of


machine capabilities of special
processes so that Cp index is
equal to or greater than 1.33

41. Ability of vendors to extend JIT


purchasing to their vendors

42. Compliance with ISO


9001/9002 requirements

43. Compliance with QS-9000


/other specific requiremen

44. Compliance with ISO


14001/other environmental and
safety standards

TKM3

PAPER ID# 140

KEY SUCCESS FACTORS OF


SUPPLY CHAIN MANAGEMENT

MUL1

HML2

TKM3

Daewoo

Honda-Siel

45. Use of recirculatory / reusable


material packaging / handling
equipments

46. Use of computerized material


planning (MRP/MRP II) by
vendors

47. Delivery by suppliers right near


production lines rather than to
receipt stores (on-line delivery)

48. Regular source development


and audit practices particularly
for new parts

49. Frequency of contract reviews /


negotiations

50. Extent of disputed supplies


regarding quality / cost /
delivery with vendors

51. Reduced efforts in follow-up


and expediting with vendors

52. Development and


implementation of a Transporter
Rating System

53. Encouraging company owned /


contract warehousing and
shipping / discouraging
common carriers

54. Consolidation of freight for


transportation

55. Maintenance of schedules for


inbound and outbound freights

56. Flow synchronized concurrent


material movement and
handling with simple
documentation

57. Adoption of standards and


protective packaging with
proper container labeling
especially for K.D. assemblies

58. Adoption of total quality (TQ)


approach in operations

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PAPER ID# 140

KEY SUCCESS FACTORS OF


SUPPLY CHAIN MANAGEMENT

Daewoo

Honda-Siel

MUL5

HML6

59. Adoption of Material


Requirement Planning (MRP)
Push and /or JITPull system in
spirit

60. Strategic intent for implantation


of ERP
Table 2 :

TKM7

KEY PERFORMANCE PARAMETERS OF SUPPLY CHAIN


MANAGEMENT IN SELECT COMPANIES

KEY PERFORMANCE
PARAMETERS
i) Minimum number of
suppliers per part
ii) Maximum number of
suppliers per part
iii) Approximate number of
suppliers per purchasing
executive
iv) Percent components solesourced
v) Percent suppliers located
within 100 kms
vi) Minimum lead time with
suppliers
vii) Maximum lead time with
suppliers
viii) Time spent in placing the
order with vendor
ix) Average percent late
deliveries
x) Maximum percent reject
material
xi) Average time in line
stoppages due to material
shortage per month
xii) Average time stock
overflowing of A class
items in a year

Daewoo
01

HondaSiel
01

MUL

HML

TKM

01

01

01

02

01

03

03

02

08

07

05

07

03

95%

95%

15%

75%

95%

80%

80%

80%

75%

90%

1 week

1 day

2-4hrs

3 days

2-3hrs

4 week

6days

10 days

1 week

1-3 days

1-3 days

1 day

1 day

35%

10%

3hrs day
10%

15%

15 min3-4 hrs
5%

15%

05%

2.5%

3%

2%

20 min

5-10
min

120 min

60 min

45 min

10

12

10

12

11

PAPER ID# 140

KEY PERFORMANCE
PARAMETERS
xiii) % Blanket Orders of Total
orders

98%

HondaSiel
98%

95%

90%

95%

xiv) Frequency of release of


production schedules to
vendors

1/month

1/month

1/month

1/month

1/month

xv) Number of exclusive Joint


Ventures (JVs) with
suppliers

Not
known

xvi) Percent vendors com-plying


ISO 9001/ 02

80%

70%

70%

60%

90%

xvii) Percent vendors complying


QS-9000

5%

10-15%

Below
5%

5%

20%

xviii) Percent vendors complying


ISO 14001 (environmental
and safety standards)

Nil

Nil

A few

Nil

A few

xix) Percent vendors using


recirculatory material
handling and packaging

2%

70%

70%

50%

80%

xx) Percent vendors following


MRP / MRP II

30%

50-60%

30%

40%

60%

xxi) Percent vendors directly


delivering on to production
lines

2%

Negligible 60%

30%

90%

xxii)

Daewoo

MUL

HML

TKM

Normally
Frequency of contract -----------------------------once a year----------------------------------reviews / negotiations

xxiii) Percent disputed supplies of


total annual supplies

3%

5%

5-10%

3-5%

2-3%

xxiv) Percent vendors having


computerised information
systems and e-mail)

5%

20%

80%

40%

90%

xxv) Cost of purchasing as


percent of purchasing value

5-10%

15%

15%

10%

15%

(These responses are as collected from material and purchasing executives of respective
companies and may not represent company postulated standards/practices).

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PAPER ID# 140

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