Financial Daily from THE HINDU group of publications
Wednesday, Sep 25, 2002
Enterprise Resource Planning
'I've got the best view'
VIJAY Mohan surprised us. Many CEOs who meet the press have this air about them: "Hamare baare mein kuch achcha chaaph do, yaar." They saunter into meetings, and when flummoxed by a few queries, conveniently say that those are replies that they can't give due to a non-disclosure policy with a vendor or a customer. These kinds of CEOs are all good, too, doubtless, but hardly give enough relevant information.
Vijay Mohan, Vice-Chairman and Managing Director of Premier Instruments & Controls Ltd (Pricol), was different. He might have had the same intention that all CEOs have - that their respective companies should get good press. But his homework and preparation, and his idea of what a business reader would want to read about his company were exemplary.
eWorld, while seeking information on how Satyam Computer Services is doing with its customers, in its strategic consulting business, merely had to sit and listen, while Mohan was eloquent on how Pricol made the necessary changes to survive and thrive in the liberalised era. Based out of Coimbatore in Tamil Nadu, Pricol manufactures auto instruments, oil pumps and electronics for automotive manufacturers.
In the mid-90s, when it was considering changes in the way it conducted business, the motorcycle industry was growing rapidly. It had to contend with real competition. Says Mohan, "We were having tremendous problems in developing new products and productionising them. An average of 18 months was typically required to design products, develop the vendors to manufacture them and so on till delivery. Even then, quality was an issue. Only 60 per cent of the time did we get it first-time right. The number of components that we had to manufacture - 5,000 - only made it more difficult. By then, we had developed too many vendors for this, so delivery adherence was a problem."
By June 2002, Pricol had been able to decrease time to market to 9 months for cars and to 6 months for two wheelers, increased its first-time right quality to above 90 per cent, and reduced the number of vendors to half, from 500 vendors. Finally, it had seen raw material and component inventory go down by Rs 10 crore while finished product inventory has reduced by Rs 4 crore.
Here's how: Says Mohan, In 1993-94, there were only four players in the field. Now there are 10. Without our initiatives in the area of business process restructuring, enterprise resource planning software implementation, vendor rationalisation, to all of which Satyam has contributed, we could not have grown and retained the dominance that we have now, with some 10 players in the field, now."
Pricol chose Satyam as the recommending and implementing partner for its BPR and ERP initiatives as, "the bigger guys were already tied up with other companies in the metros and coming in to Coimbatore might not have appealed to them."
Bold moves aplenty
Pricol first conducted a three-day seminar for about 60 of its executives. This conveyed to them the rationale behind the BPR initiative. Mohan says, "Satyam tells us that the BPR initiative was far more a success here than they have seen elsewhere and this was because most of us realised its value and accepted it, rather than reconciling to it. Also, they were going to be mentors for the rest of the organisation. This get-together was a wise thing we did, in hind-sight."
Mohan gave it in writing to the organisation that there were bound to be redundancies caused by better processes. How could he do that? He says, "It was very easy for me since I knew that we were growing and that personnel rendered redundant could be redeployed, with some training."
Says S. Prashanth, Senior Consultant, Enterprise Business Solutions at Satyam, who led the charge in the project, "The first objective was to address the demand for new product developments and to be able to handle the increasing demand for existing products. At the time, it was difficult to satisfy even existing customers."
Earlier, Pricol behaved as one entity with everything centralised. Mohan says, "Satyam helped us divide Pricol into seven production and supply units. There are some activities that people repeat every month. For instance, the schedule that you receive from the customer or the schedule you release to your vendors." Now, each of these sub units started receiving schedules and doing it independently." Each became a profit and loss centre, thus making the department heads intrapreneurs, each responsible for his unit.
But with each changing management guru, isn't the issue of centralisation versus de-centralisation an eternal debate? Says Mohan, "At the time, IT was not so much in vogue. So decentralisation made sense - sales, and purchase people were sitting with the manufacturing folks. Decision-making was faster."
Decentralisation of production and supply processes dramatically increased our delivery adherence which was in the order of 20-70 pc and averaging 50pc - to 90 pc."
When patience is a virtue
Significantly, Mohan wasn't in a hurry. From the time Satyam came in in1994, he waited about a year before the ball was set in motion. According to him, "It took time to ensure things went smoothly. For instance, people were to be multi-skilled. Heads of departments (HoDs) now received schedules, procured from vendors and made cash collections. So new skills had to be taught and people had to be shifted from one place to another. But the wait was well worth it."
If he had to put it in one sentence, what would Mohan say was the major change that BPR brought about? "In new product development, we used to indulge in serial engineering. The marketing team got information from the customer and passed it to the R&D team.
This team developed the product without consulting manufacturing, materials or the engineering department. Once the vendors got involved, they reverted with requests for changes since they couldn't meet specifications within the budgets. Once the component had been developed and handed over to engineering and manufacturing, they had problems - so one more change is required. After restructuring, we went into concurrent engineering.
Says Prashant, "It is important for all concerned to sit together, right at the beginning. With the customer coming in, it was easy to decide on a particular design that would stay till the end.
Since more than just the marketing folks were involved, valuable suggestions that reduced costs or the lead time - such as use of a standard product - were more forthcoming right at the beginning."
But didn't the marketing people lose their sense of importance, having to reconcile with several others interacting with customers?
No, says Prashanth. "They were always at the receiving end if the customer was irked.
Now, a team was collectively responsible for any gaffes. Secondly, the marketing team got more time for business development, rather than deal with daily firefighting."
Mohan nods in agreement, "We were able to diversify into oil pumps and disc brakes possibly because the marketing folks had the time to study customer requirements and suggest that we could get into these areas."
Part of the BPR was the material sourcing process. Vendor development and upgradation was critical here. According to Mohan, "It is a fallacy to think that more vendors means better choice for the buyer or that the buyer can achieve lesser cost of purchase by pitching one vendor against the other. At some point, it works against you.
Your few vendors should get economies of scale so that they can reduce your prices. If they can grow and make money with you, then they can reinvest in processes, their processes become better and quality improves, so cost goes down further. Also your transaction costs go down."
Pricol patronised vendors who went along with Pricol. "There were others who were rigid and refused to change. Those were dropped," Mohan says.
Then he springs another surprise on you: "Our focus on vendors helped us realise Rs 6.5 crore of accrued benefits." How did he arrive at that figure now? "It was a theoretical exercise.
The materials department would earlier only get a quote from a vendor. Now they studied him, saw his capability, channelised it and helped improve it. So his rejection levels come down.
In addition, we looked at the earlier calculation of his component costs and his justification of the costs, versus the current levels. Transaction costs have also reduced."
Pricol also set up a vendor centre of excellence to impart training to vendors. Next was the ERP exercise. Satyam helped Pricol choose SAP for its implementation.
Mohan says SAP was the best bet then, as other vendors were going down financially and SAP could be relied on. Prashanth says, "The minimum guarantee we gave Pricol was that it would take away what money it put in." The remaining was to be a bonus.
So, was the cost of the ERP implementation around the usual Rs 2.5 crore? No says Mohan vehemently. "With hardware, implementation and 101 licences of SAP it came to Rs 4 crore. In some cases, where information exchange between departments is high, we put up optic fibre connections too."
Interestingly, while SAP helped Pricol with the materials accounting, sales order processing, financial accounting, quality monitoring and assets accounting, the company still retained its legacy system. Says Prashanth, "In some 10 per cent of the areas, legacy systems were superior. Excise was a big problem, while in the area of bills accounting and passing, Pricol's systems were 10 times faster." Mohan adds, "We still do a little bit of tweaking.
In emergencies, we need to switch to manual processes - so we come out from the core, do the processing, and get results back into SAP and continue."
Interestingly, the part that gave the company maximum benefits, took the longest to implement.
Mohan feels, "Materials resource planning was an ERP component that became nightmarish for us. Our bills of material (BoM) had some 5000 components.
The BoM in R&D was different from the actual BoM used by assembly. It took us a lot of time to set right this mismatch.
Even now, it is not 100 per cent fit. But since January 2002, we have been running the MRP module."
In the first six months, MRP itself has turned in savings in inventory of Rs 14 crore. Mohan expects that to reach Rs 28 crore by the calendar end.
Quick to upgrade
Pricol is going in for i2's Pronto implementation. If SAP itself is so good, why i2 now, we asked Mohan. Says he, "Planning in fixed, rigid intervals such as weekly or monthly is okay with SAP. If I want this on a daily basis or a `what if' analysis, i2 can help me do it."
He elaborates, "For example, if a customer such as Maruti calls and says it wants a different model.
They are linked to showrooms thanks to information technology and accordingly make changes with suppliers like us. We shouldn't be caught with our own manufacturing constraints. With about 50 per cent of components for our products coming from our vendors, it is important to be prepared for a what-if scenario for every client."
We couldn't resist asking Mohan if he would do this - SAP and i2implementations - together if he could do it. He smiles and says, "Tempting. But too much change can be disturbing if you have to get a lot of people to do it. Taking it one step at a time is preferred. Cash availability is also an issue. These pieces of software don't come cheap. With i2, Pricol aims to increase delivery adherence from 90 per cent to 98 per cent. Since we will be able to plan our utilisation of assets, costs will be lower."
Customer care first
During the course of the restructuring, Pricol looked at the customer and decided that he must face no more than one face from the organisation.
Says Mohan, "For example, one customer interacted with some three business units for supplies and for procurement, he also interacts with say two different product groups. We decided to have a one-window person who becomes responsible for that customer.
Thus came the concept of Customer care manager who interacts with the customer and passes on information to the cross-functional team that decides everything from designs to delivery schedules.
Prashanth adds, "Further, the company also has a customer service executive for key customers, stationed at the site itself. This becomes relevant since some eight customers contribute to 80 per cent of Pricol's revenues.
It is important to consistently keep in touch with these 8.
IT has helped here too. Mohan says, "With the aid of technology, we have been able to establish and monitor the performance levels of each department for each customer.
It becomes easier to drive the functions of the departments this way."
Now Pricol is looking at changing from a one-man CCM to a team that performs the function.
Says Mohan, "as a single person, it is difficult for the CCM to become responsible for all problems. So a cross-functional team becomes responsible for a customer.
We intend to have 2 such teams in the North and the West regions of the country and one such team for the South."
In the course of vendor rationalisation, Satyam also helped Pricol learn the lesson of customer rationalisation. Says Mohan, "It is not necessary to service every customer. There were some who weren't profitable for us to service.
So we explained to them that they must scale up or quit. About ten such went out of our loop, which makes it better for us."
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