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Submitted By
Arun Narayanan T. V. Roney Joseph Vincent
The organized sector comprising of large and medium size units The unorganized or the small scale sector.
The organized sector has a market share of 60%, valued at 23.4 bn. This is in contrast to the 55% share that the sector commanded a few years back. There are around 25 units in this segment. The unorganized sector comprises of around 2,000 units with a combined market share of around 40%. Major companies in this segment include Asian Paints, Goodlass Nerolac, Berger Paints, Shalimar Paints, and Rajdoot Paints.
High excise duties, low technology and low capital costs for production led to the incidence of a high number of units in the small scale sector. However, since 1992 the government has been consistently lowering duties from 40.5% in 1992 to around 16% currently. This has led to lowering of price differential between the organized and unorganized sector. Moreover the paints sector was also allowed to claim MODVAT credit on petro-based products, thus lowering the excise incidence further. Consumption of paints is skewed towards decorative paints which account for 70% of paints sold in India. This is in a sharp contrast to the trend in developed countries, where the ratio is skewed towards the industrial segment. This segment is marked by the presence of a large number of players from the organized as well as unorganized sector. Competition is high and margins tend to be low in this segment. Products of this segment are relatively price sensitive. Demand for decorative paints is seasonal with bulk of sales taking place during the festival seasons from September to December. Besides sales remains slack during the monsoon months from June to August. Entry barriers in term of technological and funds requirements are relatively lower in the paints sector. It is estimated that a plant of 1 m tpa will cost around Rs 120 m. However decorative paints are marketing-savvy products and backed by large advertisement campaigns and dealership networks. These serve as high cost entry barriers for new companies in this business. The huge investments required in setting up a vast marketing and dealership network, to advertise and develop a brand over a period of time can only be afforded by companies in the organized sector. It is for this reason that smaller companies and small scale sector units are slowly losing market share to the organized sector. Market split of the industry Company Asian Nerolac Berger Ici india limited Jenson and Nicholson Growth rate Total Decorative 38 7.8 14 9 6.9 8.9 15033 m mil Industrial 15 40 14 12.5 6.9 18 6442 mmil Overall 32.5 17.5 14 10.5 6.9 11 21476 mmil Estimated paint 6890 mmil 3750 mmil 3007 mmil 2254 mmil 1482 mmil
The products of the paint industry can be classified into 2 types. Decorative (Architectural) Paints Industrial Paints Decorative Paints The decorative paint segment can be classified into interior paints and exterior or cement paints. 80% of the decorative paints account for interior paints, which consist of premium, medium and economy categories. The premium category consists of plastic emulsions, the medium-priced category consists of synthetic enamels and the economy category consists of distempers. Industrial Paints
1. Solvents They are volatile organic compounds (VOC) used to dissolve, suspend or change the physical properties of other materials. They are generally used to bring down the viscosity of paints to the desired level, which also reduces the cost of paint formation. They constitute 70%-75% of the paint liquid and ultimate escapes into the atmosphere when the fluid dries. Solvents such as ethylene glycols and alcohols are finding wider use as co-solvents in new water-borne formulations.
2. Binders They are generally oils, resins and plasticisers that give paints its protective property. Most resin manufacturers make alkyds, polyesters, emulsion polymers, epoxy resins, amino resins, powder coating resins etc. 3. Additives They are added in small proportion to the paint to improve its performance characteristics in various ways. Skinning inhibitors, fungicides, wetting agents, driers are included in this category. 4. Pigments They are finely ground solids of different shades to give colour, durability, consistency and other properties to paint. It is also one of the major raw materials, accounting for one-third of the total raw materials cost.
Since paint is more of an innovative product responsiveness in supply chains is more important.
We can see from the above figure that the type of product determines the significance of various costs in a supply chain.
Indian paint industries face major challenges especially with respect to inventory related issues. Timely movement of goods across the supply chain is very important and any delay results to inventory build ups and thus increased costs. The typical factors like: Continuous manufacturing of products, Sophisticated and extremely capital intensive manufacturing plants, Production planning and raw material specification, Multiple, interdependent products, Complex transportation logistics and also the complex supply chains make it difficult to manage the supply chains in the paint industry. The Indian Paint Industry is characterized by high Working Capital requirements, Low Fixed Asset requirement, Seasonal nature of demand, and High Entry barriers in the form of a Distribution network. Paint is a product where the number of SKUs is well over 1000 for the top paint companies. Yet only a few are fast selling. This leads to the following characteristics:
Volumes of some SKUs are small and demand is difficult to predict. Wide distribution networks (similar to FMCG) lead to high safety stock requirements. Seasonal demand and High competition make obsolescence costs and stock out costs high. Working Capital intensive: The number of shades is very large and a sufficient stock of every shade has to be maintained at all levels of the distribution channel, the working capital cycle is very high. Also, the number of raw materials required can stretch up to 300. As majority of these raw materials are either imported or sourced from small chemical manufacturers, a large stockpile needs to be maintained. Seasonal nature of demand: The demand peaks during festival season while is very lean during monsoons. Thus, a major part of the sales are achieved in the second half of the fiscal year.
For responsive supply chains, since product variety is large, forecasting becomes difficult. Further, high stock out costs implies large safety stocks have to be maintained. For raw materials, the effect becomes more pronounced because of the large bullwhip effects that take place. In prioritising raw materials or finished goods, companies tend to prefer ABC analysis.
document exchange facility that will improve the efficiency and effectiveness of interaction with suppliers. The Supply Chain Management is backed by IT efforts that help the company in demand forecasting, deriving optimal plant, depot and SKU combinations, streamlining vendor relationships, reducing procurement costs and scheduling production processes for individual factories. The successful deployment of ERP, CRM, Business Intelligence and Portal software from leading solution providers and integrated SCM systems has helped improve efficiency in the business as well as increase the transparency and accuracy of information across the company.
Modern distribution planning enables Asian Paints to plan deployment on a weekly basis, and to quickly and easily adjust those distribution plans as needed. By adopting a robust approach to change management, the company can now adapt more nimbly to shifts in market demand, to new manufacturing processes, and to changing regulatory pressures or business requirements. In terms of market performance, improved supply chain planning and execution systems have allowed the company to grow it is now four times the size it was 10 years ago while dramatically reducing the on-hand inventory needed to serve its customers. To further optimize the execution of the supply chain processes in conjunction with the planning solution, and to provide a seamless plan-do-checkact framework to the supply chain executives, Asian Paints deployed the JDA Agile Business Process Platform, now part of the JDA Enterprise Architecture. This has provided Asian Paints with the ability to build highly customized planning and execution workflows to further improve supply chain efficiencies. The Asian Paints brand stands for the quality of their products, on-time performance and good service. The supply chain is viewed as a very critical function in the organisation. Their ability to deliver the right product on time at the right place has clearly differentiated them from the competition, and allows them to retain a large share of the business. Thus we see that the gain is due to a radical shift in process design and shifting the point of differentiation with an efficient distribution network that rivals have not been able to emulate. With this method they are able to wider range of shades, yet lower costs, and thus maximizing customer satisfaction. Some other factors also helped Asian Paints. They are 1. Most paint companies are hit by the fact that they do not make raw materials themselves. For example phthalic ahydride is manufactured from orthoxylene and which goes to production of paints with titanium dioxide. Asian paints is the only company that manufactures PAN. The other paint companies have to import their stock. Since PAN prices outpace international orthoxylene prices by almost 50% paint companies end up paying a fortune. In such a situation Asian Paints benefit by selling PAN in the open market. 2. The company has outsourced its transport management to Dynamic logistic private limited 3. The company has 72 warehouses scattered all over India which helps in efficient distribution.
Recommendations
Implement JIT so that they can find the raw material at time and use it for manufacturing the paint. Provide raw material of product to the distributors so that they can make the paint of the colour demanded by the customer at the same time by tinting machine and provide more tinting machines. Implement RFID so that they can track the consignment, and demand will verified easily and fast. Improvise the e-procurement to do better in the field of supply chain management. Some functional Strategies that may be adopted: -
Since demand peaks in Diwali season, whites fast moving brands can be produced 2-3 months in advance, since error in forecasting is low for these. Production of slow moving brands can be outsourced. To improve supplier responsiveness, suppliers can be informed about expected demands 2-3 months in advance and in what range demand is expected to vary (for paints this would be quite high).
For raw materials, three parameters should be use to decide how much safety stock to keep and how close monitoring must be done: 1. Consumption Value (ABC classification) 2. Criticality (VED classification and also availability of substitutes) 3. Reliability of Suppliers. This is measured on: Quality (Number of rejections) Variability in lead time of delivery (measured by coefficient of variation) Responsiveness (ability to despatch material quickly in case of emergency orders) Distance from plant (low lead times reduce variance) For finished goods also, three parameters should be used: 1. Sales Value (ABC classification) 2. Criticality (Measured by margins and classified as VED) 3. Variability in Demand
References
http://www.asianpaints.com/corporate_information/supply_chain.aspx http://www.asianpaints.com/corporate_information/information_technology.aspx http://www.force10networks.com
http://www.jda.com/file_bin/casestudies/AsianPaints_casestudy_032610.pdf http://www.scribd.com/doc/28658015/A-critical-analysis-of-supply-chain-management-withfocus-on-Paint-Industry%E2%80%9D-An-analytical-view-of-the-Sales-and-Marketing-side