Vendors are the King Maker

Vendors are the King Maker

Apex Electronics Limited (AEL), is a 15-year-old company headquartered at Delhi, manufacturing electronic as well as consumer durable products like CTVs, audio-systems, washing machines, computer monitors, etc., with a turnover at about Rs 1,500 crore. The company has two production plants situated at NOIDA (just 15 km from Delhi) and Bangalore. In the year 1999, the company also established a plant at Taiwan for the production of some components which are used in the production of various products in India. The main purpose behind-the establishment of the plant at Taiwan has been quite strategic, because presently, Taiwan is dominating the global scenario of electronic component industry and it has about 60 per cent share of India's imports of electronics.

For the production of electronic products at NOIDA and Bangalore, AEL procures around 1000 parts and components. The present sourcing structure, the distance of the sources from the plants and the normal replenishment cycle time are shown in Table 1.

At present, for the procurement of various local parts and components, AEL is sourcing from 4-5 vendors and the remaining parts are procured from the firm's Taiwan plant. The normal replenishment cycle time to customer (reseller) is 30–40 working days. The parts and components supplied by vendors are first received by the stores department, where an extensive quality check is undertaken by the Inspection Division, which also generates a performance report twice a month and sends it to the respective vendor, providing a feedback. At the same time, this system facilities in the implementation of `Reward and Punishment System'. Under this system, a vendor showing an excellent performance (less than 5 per cent defective delivery) for continuous 3 months will get an additional bonus of 0.5 per cent on the price for his products till such time as he maintains the quality. At the same time, when a vendor makes defective delivery (more than 15 per cent) continuously for a month, he is punished by way of a deduction of 0.5 per cent in the billed price along with logistical costs (both inward and reverse). AEL also provides technical support and improvement mechanisms from time-to-time to those vendors who exhibit inconsistency in the performance.

Normally, the company has cooperative relationships with its various vendors. It also offers and maintains alliance relationships (3-5 years) with those vendors who have excellent performance for six months at a stretch and are able to maintain the same performance level. Whereas, partnering relationships (5—10 years) are offered to those vendors who deliver products without rejects and also issue a certificate of achievement. This policy of the company encourages vendors to become more sensitive towards the quality aspect. Twenty per cent of components which are procured from the Taiwan plant of the company, are not inspected for quality check. When consignments arrive from the Taiwan plant, they are stored in the plant and, from there, directly plated on the production line.

With the above well-defined system, the company has enjoyed quite a comfortable position in the Indian market. But, due to gradual transformation in the Indian consumer durable industry, which has been one of the worst affected in the recent past, AEL is facing problems in terms of volume of sales, profitability as well as market share. There are many factors behind the prevailing scenario in the consumer durable industry, such as recent economic slow down, the entry of large MNCs like LG, Samsung, Akai, AIWA, Sony, etc., due to the liberalization policy of the Government of India, who have irrevocably changed the landscape, spoiling the Indian consumers like never before with a bewildering array of products. The MNCs have world-class technology products as well as supply chain processes.

Furthermore, the Indian consumer durable industry has been valued at Rs 15,000 crore in 2001. One unique feature of this industry is in terms of `Multi brand-multi product' distribution system. In other words, most of the dealers of this industry deal with multiple brand products. Hence, this industry is facing a dual challenge in terms of keeping both consumers and dealers happy, because if is the push efforts of dealers which makes a difference in the marketplace. Due to the prevailing cut throughout competition, dealers are demanding more in terms of return, failing which, they are not showing any interest of products of the particular company. Hence, the success of the company is largely dependent on the interest of the dealers in its products. Thus, the gamut of consumer durable industry is shifting from supply chain to value chain.

Due to such a dramatic change in the overall scenario of consumer durable industry in the recent past, there is a metamorphic transformation in the expectation of consumers. They have become quite conscious about the product quality in terms of technology, price (as there is continuous slash in the price of the product), ready delivery (failing which, easy shift from one brand to another), etc. That is why, in the last one year, the AEL has started experiencing difficulties in the marketplace, slipping from 2nd position to 3rd in CTVs, from 3rd to 5^th in washing machines, is able to maintain 2nd position in audio-systems and in computer monitor, facing difficulties due to a long replenishment cycle time. Its MNC competitors are able to supply to various computer companies within 3–5 days whereas, AEL needs 10–15 days, resulting into a decrease in the profit. While responding to the environment in terms of prevailing market price, AEL has started eating its own profit, resulting into a gradual decrease in the overall performance of the company.

On the recapitulation and analysis, it has become apparent that major problems are associated with AEL's various logistical functions in general and inventory-carrying cost in particular. While addressing this situation, the top management of the AEL has decided to redefine the whole supply chain under the project `Operation Excellence' with the objective to maintain at least its earlier position in the next one year. The highlight of the project includes removing wasted efforts, implementation of JTF (just-in-time) system, sourcing parts and components from a single or two vendor(s), visualizing itself as a customer-driven organization, development of tighter value chains to tide over components shortages that could potentially interrupt production and transform it into make to order rather make to store.

AEL has started implementing e-SCM system. In the first phase, it has initiated integrating whole logistics functions by Extranet, which is likely to be completed in the next three months. Simultaneously, it has also started connecting its partnering vendors for the e-procurement so as to have JIT system. Nowadays, order processing and fulfillment take place online with those vendors. The second phase of a-SCM will commence by the end of 2003, where key dealers will be integrated with the system. While implementing the JIT system, AEL is facing problems because, a good number of vendors are not responding properly as they are very small in size and also not professionally equipped.

QUESTIONS

1.    Discuss how the JIT development process might work at AEL.

2.    What should be the relationship between AEL's supply management strategy and the development of its performance measurement system?

3.    Why is purchased quality so important to AEL