SCM PROJECT REPORT

Escorts cost reduction case

Submitted to Prof. Atanu Chaudhuri

Submitted by: Group 7 1. 2. 3. 4. 5. 6. Meghana Katiki (PGP28230) Priyanka Gupta (ABM09035) Ashok Patsamatla (PGP28275) Mansi Dhamija (PGP28261) Vipul Banthia (PGP28251) Arun Ginjala (PGP28246)

Case 7a. In the year 2008, the newly appointed CEO of Escorts Agri Machinery division is worried about the state of company financials. Along with sagging sales, the company cost structure didnt look good. There was no scope to initiate actions on sales front due to cost constraints. The immediate need was to contain costs. He calls you in and lays down following objectives Is there opportunity to improve cost structure significantly? If yes what is the quantum? Our task is 1. To assess possibility of cost reduction using publicly available data 2. You are given a 3 day window to spend time with top officials of Escorts to assess internal state of affairs. What are the data points you would seek and why. Create a data requirement table with details of data point /duration/purpose. Background: Escorts Group The Escorts Group, with Escorts Limited as its flagship company, is among Indias leading corporations operating with diverse products: agri-machinery, information technology, health care, financial services, railway components, auto components, construction and material handling equipment. Escorts has evolved as one of Indias largest conglomerates. The group has 15 modern manufacturing facilities & an extensive marketing network spread across the country. ETL is a public limited company and is a market leader in the Tractor industry. Escorts Agri Machinery Group Having pioneered farm mechanization in the country, Escorts has played a pivotal role in the agricultural growth of India for over five decades. One of the leading tractor manufacturers of the country, Escorts has already sold over 6 lakh tractors. Its tractors are marketed under three brand names, viz. Escort, Powertrac and Farmtrac. Spanning these three brands, the company has a full range of tractors to cater to the domestic as well as overseas markets.

Table 1: Some Facts Total Tractors Sold Total Manufacturing capacity per year Market share (as of 2008) Annual Revenue Number of Area offices Number of Dealers Number of Territory Managers Number of suppliers Number of employees 600,000 75000 tractors 14% Rs 2000 Crore 33 800 150 350 6500

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Present (2008) situation The company was facing low sales given the recession. There was a sharp decline in export sales from 5468 tractors last year to 1401 tractors this year. The following snapshot from the balance sheet shows that the Revenue has fallen by 14% Decline in sales =

2293.701968.92 = 14% 2293.7

Figure 1: Snapshot from Financial statements (2007-08)

Along with sagging sales, the company cost structure didnt look good. Figure 2: Snapshot from Financial statements (2007-08)

There was no scope to initiate actions on sales front due to cost constraints. The immediate need was to contain costs.

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7a.1: Possibility of cost reduction Cost could be decreased in a number of ways as depicted in the following figure. Figure 3: Spend management
Area of focus form the present study

Costs could be contained by implementation of Lean operations through the following potential opportunities. Figure 4: Potential opportunities for controlling cost

Reducing Inventories From the following the financial measures we can estimate the amount of inventory in the supply chain Escorts Agri-machinery group. Figure 5: Snapshot from Financial statements (2007-08)

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Table 2: Important measures of Inventory (2007-08) 2007-08 1.16 0.99 15.10 24.17 2006-07 1.12 0.9 14.42 25.31

Current Ratio Quick Ratio Inventory Turnover Ratio Days of supply

With each tractor costing an average 4,00,000 Rs, an inventory of 874 tractors means locking up Rs.400 million in just finished goods inventory. Figure 6: Snapshot from Financial statements (2007-08)

Demand forecast mechanism As we can see there is a lot of inventory in the supply chain. The factory should churn out only 129 tractors a day though it has a capacity of 400 in order to meet the demand and decrease inventory. =
Sales per day 365

46958 = 365

129

Production should be planned based on market demand and effort should be made to reach 100% adherence level. To be able to this demand visibility should be provided to all stakeholders. The production was driven by shortage lists, gut feel and manual adjustment as of 2008. A better connectivity is required but this cannot be done manually. To coordinate the details from 800 dealers, 150 territory manager and 350 suppliers, an IT system should be implemented. This can significantly reduce the planning time. The present planning time is 15 days. Reducing rework In 2008, a problem was detected in the hydraulic lifts of tractors of Escorts owing to oil contamination, resulting in leakage from safety valves and choked filters. This was causing repeated service requests to Escorts and an increase in After-sales costs. Sharing resources amongst Escorts subsidiaries Escorts has various subsidiaries like Agri Machinery, Auto Products, Railway Products and Construction Equipment. Activities that are duplicated like HR, Materials and Finance can be merged to attain Economies of scale.

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Intangible potential areas of cost cutting For the success of any Lean operations all the stakeholders should be involved in the process. Escorts Agricultural Machinery had 6,500 workers. Aligning them with Lean culture could be achieved by a series of training sessions and facilitated discussions. Large-scale interactive process should be implemented to bring together workers and executives to dissect customer feedback threadbare. This will link the workforce to the market. Dealers and suppliers should also be made part of the lean culture for success. For example to tackle the problem of hydraulic lifts, teams including suppliers and dealers should be formed who could give us their feedback on the products. This can help streamline the manufacturing and supply chain processes. The implementation of IT suggested earlier will aid this too. 7a.2: Data Requirement Table We need to categorize and disaggregate the spending based on the following matrix to assess cost reduction: Figure 7: Categorize the overall spends

Table 3: Data Requirement Table Data Point Financial break up for AMG (investments, cash flows) Products sales data Duration 3-4 years Purpose Escorts Ltd. Balance sheet, P&L, Cash flows for the organization Sub-entity break up will give better picture of financials Spend to sales ratio by location or business unit, top categories by spend, category Pareto analysis Production mismatch can be identified and better integrated with demand-supply in terms of model mix and volumes Split of WIP, Raw material, finished goods to check bottlenecks or specific piling up locations in supply chain Amount of cash locked-in and the data for operational efficiency and liquidity

1.

2.

2-3 years

3.

4.

Demand forecastsindustry level, product level Inventory Product category wise split Working capital/Cash availability

Weekly or monthly data over 2-3 years Weekly records over past 3 years Quarterly over 3 years

5.

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6. 7. 8. 9.

Labor Material Planning cycle SCM using IT Suppliers- over 350

Wages over past 2 years Weekly data for 2-3 years Recent addition of any tool/ERP Quarterly data Quarterly data

Productivity levels, benefits Initiatives like SGA and its cost-benefit Centralized planning, Information on inventory management data, coordination in the supply chain Pareto analysis, spend by business unit, top suppliers Distribution network, lead times, response time/service levels (CRP, CPFR, VMI systems) To analyze any trend or specific feature that might be leading to cost increase, e.g. In 2008, leakage from safety valves of hydraulic lifts of tractors was sorted by a team comprising suppliers and dealers, who could give their feedback on the products. To be analyzed from financial information available and the insights given by functional and divisional managers Supply chain performance indicators

10. Distributors- 800 dealers, 150 territory managers, 32 offices 11. Product portfolio details and specifications

All product lines, annual

12. KPIs for operational efficiency- market share, revenue growth, ROI 13. Inventory turnover, days of supply, fill rate 14. Quality and safety issues in products

2-3 years

Monthly/weekly data over an year All products

Return rate, obsolescence, etc.

References 1. Financial Statements of Escorts Group 2. Annual Reports of Escort Group 3. World of Escorts- The Escort group communiqu 4. www.escortsgroup.com

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