Procurement Outsourcing in an Automotive Air Conditioner Manufacturer in India: A SAP-LAP Analysis

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1 Procurement Outsourcing in an Automotive Air Conditioner Manufacturer in India: A SAP-LAP Analysis Reeturaj Mishra Indian Institute of Management Rohtak MDU Campus, Rohtak, , India Parikshit Charan Indian Institute of Management Rohtak MDU Campus, Rohtak, , India Jitendra Madaan Department of Management Studies Indian Institute of Technology Delhi New Delhi, , India Rahul Anand Indian Institute of Management Rohtak MDU Campus, Rohtak, , India Abstract This paper studies the case of A1 (for technical reasons the name of the organization is concealed), a leading Auto Air Conditioner manufacturer in India which was facing the problem of high levels of inventory. The Situation-Actor-Process (SAP)-Learning-Action- Performance (LAP) framework has been applied for analyze the case of A1. Keywords: Auto Air Conditioner manufacturer, SAP-LAP, India Introduction Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party to reduce overall costs and/or to tighten the company's focus on its core competencies. Procurement categorisation and vendor management of indirect materials and services (commonly referred to as indirect procurement) are typically the most popular outsourced activity. Outsourced procurement teams allow companies to benefit immediately from experienced procurement specialists support & expertise. This avoids the creation of an internal team (new resources) and the required time for that team to structure itself, its processes and its expertise (ATSPG, 2012). Outsourced procurement is therefore an available solution for companies who (Cooper, 2007) 1. Have no internal competencies but want to quickly benefits from procurement action (Cost reduction, suppliers and contract management etc.) 2. Have internal procurement expertise (department) but want to outsource activity on specific area(s) like indirect materials and services. 1

2 3. Consider Procurement as a non-strategic / core function and want to have it managed by a procurement service provider 4. Want to develop quickly a procurement function to deliver savings, with a willingness to internally develop this function in the midterm. Procurement Outsourcing is being thought of in a big way in automobile manufacturers in India and China because with increasing number of cars being produced every passing day more man hours are required in trivial issues like timely delivery of materials. Hence Procurement team cannot concentrate on its core competency of negotiations and vendor selections (Mittal, 2007). A report from AT Kearney shows that the outsourcing industry growth from year 2007 to 2012 is significant with the highest growth shown by Procurement outsourcing sector. A gaint growth of 27.9% in 2007 which is more than double than its counter parts in that year to diminishingly increase in forecasted growth in year 2012 by 12% which is again more that 130% of its counterparts in the same year. This paper is organized as follows: The next section gives brief about organization. Then, A1 has been discussed using SAP-LAP analysis and Indirect outsourcing analysis. In the end, based on the analysis, some recommendations have been proposed. Introduction of A1 A1 was established in 1985 as a joint venture between the Suri brothers, Denso Corporation, Japan and Suzuki Motor Corporation, Japan. A1 is the largest and only integrated Auto Air c o n d i t i o ne r m a n u fa c t u re r i n t h e c o u n t r y, w i th a capacity of 1 Million AC units per annum. It has three plants in Noida and one each in Pune and Manesar and two more coming up in Chennai and Sanand shortly. A1 manufactures compressors, condensers, heat exchangers and all the connecting elements which are required to complete the AC loop. A1 p r o d u c t s a r e k n o w n f o r t h e i r reliability, energy efficiency and low noise levels, making them the OEM customer s preferred choice. The company manufactures new generation energy efficient swash plate compressors from 83cc ~138cc to meet all the customer needs in India. HVACs, Condensers and piping are designed to suit vehicle configurations. A1 provides complete range of Bus Air conditioners ranging from 7.5KW to 35KW capacity suitable for 4 mtr to 12 mtr buses. High cooling performance and air flow volume have been achieved by the introduction of highly efficient evaporator, condenser and lower air flow resistance. Fuel saving has been achieved by increased refrigeration cycle efficiency with the introduction of new multi-flow condensers. It uses environment friendly R 134a refrigerant. Company has mission of delivering the product and services to customer with superior performance in speed quality and cost. It has vision of becoming world Class Company in their domain by focusing on customer and innovation. Following figure shows the vision, mission and core values of the organization. Products A1' product range spans across Auto Air-conditioning and Engine Cooling systems for Passenger as well as Commercial vehicles. The company manufactures compressors, HVACs, piping and heat exchangers to suit various vehicle configurations. 2

3 Supply Chain Management The A1 supply chain is consist of six departments which act as a pillar on which it is functioning. These six departments are as follows: MRP team Imports (Purchase, Planning & logistics) Strategic Sourcing & Vendor Development Stores Plant SCM Purchase (Non-BOM) MRP Team A1 had implemented SAP in the year 2002 and different module of SAP is acting as a backbone of its supply chain. The MRP team acts as an interface between material management and production planning and responsible for the proper manufacturing resource planning. The sales and operation plan feed the data to the demand management which is the source on which MRP runs and finally the requirement feed to the local and import channel for material procurement. A1 follows requirement based planning in which at the end of every month, the Marketing team gathers requirement from each of its customer and feed it to SAP. The finished good is planned on the basis of make to order and make to stock to meet the customer requirement and also maintain a proper safety stock, which are 30 days for the imports and 2 days for the local items. The company follows both modes of planning, i.e. forward and backward planning but provides more emphasis on backward planning as there is very less fluctuation in the demand on the customer side. The MRP team is responsible for executing all these functionalities in an orderly manner and provides a proper flow of supply chain across various levels. The marketing team feed the six month demand plan from the customer which is one month firm and five month forecasted in nature. They also feed the one month firm plan in daily schedule as per the data provided by the customer up to 25 th of every month for upcoming month. These data will be the input from MRP and according to the mentioned safety stock and lead times MRP provide schedule lines for local suppliers, PR for imports and planned orders for production. The Production planning control department converts these planned orders into production orders and provide plan to the production department on the daily basis. Imports (Purchase, Planning & logistics) The A1 material procurement is divided at two levels i.e. local procurement and import procurement which is looked by two different team. The import procurement is centralized and requirement gathered for different plant which is quite helpful in inventory optimization. The Material requirement planning (MRP) run provides three outputs i.e. schedule lines for the local items, purchase requisition (PR) for the import items and planned orders for the production. The imports department is mainly responsible for the procurement for import items according to the purchase requisition generated by SAP on the basis of available stock and material requirement. The purchase requisition gets converted into purchase orders (PO) manually on the basis of signing authority which decides on the requirement of particular part. Purchase Requisitions are generated as MRP run output. In case of imports, the concerned buyer converts them into Purchase Order according to multiple variables like available stock, lead time. Where as in case of purchase from Local vendors, MRP output directly reflects as Schedule line. This activity happens on weekly basis or as when there is change in customer requirement. Some of the important functionalities performed by the import team is as follows: 3

4 PR to PO conversion Act as a single point of contact between supplier and A1 On time delivery of various consignments to different plants Act as a single point of contact between Freight forwarders and the company Maintain the proper stock level by part shortage analysis Strategic Sourcing & Vendor Development This department work for developing the new sources for material procurement and manage the existing vendors for smooth functioning of supply chain. In A1 material procurement occurs at local and import level for different vendors. In the beginning all the vendors were from outside India which increases the overall cost of material procurement. This team has identified the alternate parts and source from which the material can be procured locally and hence decreases the overall cost of procurement. They firstly identify the source and decide whether the raw material and machinery should be provided by the company or vendor is capable to meet the A1 quality standards. After that they keep on reviewing the concerned vendor and do periodic visits to analyze the resources available with the vendor and its capacity according to which they allot the share of business. In vendor development they share new ideas and technologies to different vendor to increase their productivity and overall profit. They work with vendor hand to hand and provide valuable resources which ensure timely delivery from the vendor end. They also work in the sink with R & D department to provide different mould to the vendor as per the A1 specification. The vendors are reviewed on the quarterly basis and got rated on the prescribed criteria. The vendor meet which is conducted by this department also strengthen the bond between the supplier and the company which results in smooth procurement of the material according to the requirement. Stores The Stores department is responsible for tracking the physical stock and matching it with the available SAP stock and also receiving of goods inside the plant. Each plant has its own store which work in co-ordination with the SCM team and keep tracking the consignment to be delivered. For the import delivery after creation of inbound delivery, the stores create GR (Good Receipt) of the concerned consignment and store it into the staging area where the physical verification took place. After the quality verification, the store inventory gets updated in the SAP. All the operation is governed by specific movement types which are indicated in the SAP. The store also supply inventory needed for production to the plant by specific movement and update the inventory in the SAP. In the case of local supply, the consignments contain ASN (Advanced Shipping Notification) through which the GR for the material is made and rest procedure is being followed. Plant SCM Apart from centralized SCM team, each plant has its own SCM own SCM team which work in co-ordination with the centralized SCM team for the smooth running of SCM. The Plant SCM team also works in co-ordination with the PPC department of the plant for the proper movement of material and hence increase in the plant productivity and efficiency. It conducts Production co-ordination meeting on the daily basis where supplier issues, maintenance issues, material issues, machine issue etc. are discussed. It also maintains and overview the safety stock in co-ordination with the stores. It communicates with vendors at the local level and discusses various issues such as quality, price increase etc. at the regular interval. It provides its crucial input for central costing to reduce the overall cost of the procurement. 4

5 Purchase (Non-BOM) This department is responsible for the purchase of the materials which are not the part of Bill of Material but required for the smooth functioning of the plant and the company on the requirement basis. The whole purchase happens inside the two heads: Indent Purchase Request & Capex Purchase. In the case of indent purchase the repeat orders are to be issued for the items which are already purchased in the past. In the case of new items, the quotation is demanded from the different suppliers and according to that the purchase is made. The process of procurement starts with the Purchase Requisition (PR) raised by different departments according to their demand. The Purchase team made negotiation with different suppliers as per the standards and made the Purchase Order (PO). This Purchase Order is being authorized by the concerned authority and finally procurement of material took place against these purchase orders. For analyzing the effect of procurement outsourcing SAP LAP analysis (Sushil, 2000, Charan, 2012) have been applied on the various factors which are responsible for procurement outsourcing and then indirect procurement is discussed based on data obtained from the company for analysis. SAP LAP Analysis Situation High Inventory levels Increase in demand of the product Meeting the quality standards High lead time as suppliers were not in sink with company s production schedule High operating cost as most of the raw materials were imported Actors Direct Procurement : Local Suppliers producing semi-finished goods Indirect Procurement : Extranet (Supplier relationship management tool) Import material outsourcing Process (Direct Outsourcing) Demand Schedules from various customers such as Maruti, Tata Motors etc Data feed into SAP & MRP Run Schedule lines generated for local suppliers & Purchase Requisition for raw material Local Suppliers produce semi-finished goods according to the production plan & moulds provided by A1 Material received by plants for further processing Process (Indirect Outsourcing) SAP generates the part requirements according to available inventory Vendors consider the requirement from extranet in form of to be delivered quantityinvoice, corresponding to the delivery of material At A1, barcode is scanned and GR is created & Qty deducted from SAP requirement Material is checked and added to stock 5

6 Import material Outsourcing Purchase Requisition created by SAP developed into Purchase Orders Purchase Order send to leading manufactures such as Denso, Sumitimo etc. Suppliers procures raw materials or semi- finished goods & ship it according to the schedule Material received at plant for further processing Learning Direct outsourcing helps to meet the customer even with the limited production capacity with meeting customer s quality standards Indirect outsourcing reduces the overall lead time as one month advanced production plan shared through it Import material outsourcing enables to procure best quality goods with price efficiency Action Vendor development through different stages to ensure proper quality standards & periodic review of production capacity Projected supply schedules shared with the suppliers through Extranet Projected demand schedules were shared to import suppliers as lead time is quite high Performance Localization of products decrease the overall production cost by 10% yearly on average 1 Million AC Kits delivered in March 2012 Leading automobile AC manufacturer with the market share of 42% Expanding its business in commercial vehicle segment along with leading in passenger car segment Indirect Outsourcing & Analysis Now the indirect outsourcing that is A1 Extranet portal in discussed which plays a vital part in managing direct outsourcing. Familiarizing with extranet portal Extranet- SRM (Supplier Relationship Management) It is a portal which acts as an interface between A1 and local suppliers to automate material procurement process. It has been started in the year 2008 to support green policy by incorporating a communication channel to perform all local procurement related activities electronically. Thus reducing paper usage. It is accessed by vendors with individual login and password, to fulfil the requirement. Thus it provides controlled and secure mechanism. Its process flow for major activity can be presented as- Material requirement gets generated in SAP system in the form of Purchase Requisition (PR). For local procurement, these Purchase Requisitions are known as Schedule Lines. The Schedule Lines are mapped to corresponding suppliers with the help of configurations fed into the system. There is Scheduling Agreement (SA)/ Purchasing Order (PO) between A1 and suppliers which includes all terms and conditions like quantity, price, etc. Each Scheduling Agreement contains multiple Line Items corresponding to the different material 6

7 procured from the supplier. Source List is maintained in the system for each and every material procured. It contains information like supplier, Scheduling Agreement number, Line Item number, period of validity. Extranet reads the requirement from SAP in the form of Schedule Lines and populates data according to the configuration fed into the SAP system. Suppliers login to their respective accounts and check the current requirement for all line items in Scheduling Agreement. This activity is performed regularly on daily basis. Supplier generates Advance Shipment Notification (ASN) number. The ASN number is captured in barcode along with other details like quantity in shipment, invoice number, date etc. This barcode is attached on the material packing and shipment is sent. When shipment reaches A1 plant, barcode is scanned to generate Goods Receipt (GR). Corresponding quantity is reduced from requirement of the material in SAP. And same quantity is added to GR with ASN quantity. Sometimes due to issues, Good Receipt is made without capturing ASN number, and then corresponding quantity is added to GR without ASN quantity. Material is kept in receiving area and then added to stock after checking for quantity and quality. Understanding the various business logics involved in extranet requirement formulation Main formula used in extranet is- To be delivered quantity= Cumulative Scheduled quantity (Sum of all ASN + Cumulative GR without ASN) To be delivered quantity is the quantity that supplier is expected to deliver. Current scheduled quantity (requirement) minus in transit quantity is the actual quantity that supplier is expected to deliver. This is calculated by the formula stated above. Cumulative Scheduled quantity is the cumulative requirement of material in SAP system till date. Sum of all ASN is the total quantity for which ASN is made by supplier till date. It is captured directly from extranet. Cumulative GR without ASN is the total Good Receipts that are generated at A1 till date, without capturing ASN number. This is also taken form SAP system. Now, if any of the term in right hand side of the equation is deviated from expected or actual quantity, then requirement visible to the supplier gets deviated from actual one. Also, the GR without ASN quantity is the derived quantity that is calculated by the formula- Cumulative GR without ASN= Cumulative GR Cumulative GR with ASN Cumulative GR and Cumulative GR with ASN are stored by SAP system as per the entries made till date. Thus any deviation in either of the quantity results in deviated calculation of Cumulative GR without ASN quantity; finally, distracting the requirement visible to the supplier. 7

8 Root Cause Analysis: Based on the data gathered from weekly issues and extranet issues root cause analysis is performed. Figure 1: Root cause Analysis Understanding the functionality of extranet, the data is gathered for various issues related to different suppliers for different parts supply. Then pareto analysis for the same is as below- Pareto Analysis Pareto Analysis-Extranet Frequency Cumulative % 1. No ASN generated 5. No PO/SA - 2. Unanticipated (ASN) 6. GR w/o ASN -ve 3. (GR with ASN)> (ASN) 7. Double supplier entry 4. To be delivered qty deviated 8. Decimal qty. 9. Parts are getting repeated Figure 2-Pareto Analysis-Extranet Next, the issues reported by various plants to the extranet controller are analyzed. The analysis resulted in understanding the basic causes that lead to the major problems present in extranet. The pareto analysis for the same is as below- 8

9 Issue wise Analysis Expired/wrong ASN 7. Vendor not access able on E/N 2. Not is use PO exist 8. Vendor not dispatch 3. Supply without Schedule Line 9. ECR/Source List updation 4. Re GR 10. Not is use fix qty PO exist 5. SL on Old line item 11. Improperly used firm SL 6. Dates changed due to server.. Frequency Cumulative % Figure 3:Issue wise Analysis Various reasons that contribute to the issues stated above are- Expired ASN, Wrong ASN, Re GR, ASN made, not attached, Improperly used firm SL, Partial delivery of ASN quantity, Not in use fix quantity PO exist, Not in use open PO exist, SL on old line item and Quality Rejection Conclusion: Procurement outsourcing involves transferring the key sourcing or supplier management tasks of an organisation to an third party primarily to cut costs or to allow the organisation to focus on its core competency. It can be either direct or indirect in nature. The procurement outsourcing facilitates the organization to streamline the ongoing operation and facilitate in encountering the problems which resulted in increased productivity with proper channels of supply chain management. This paper studies the case of A1*, a leading Auto Air Conditioner manufacturer in India which was facing the problem of high levels of inventory. The Situation- Actor-Process (SAP)-Learning-Action-Performance (LAP) analysis has been applied for studying the case of A1. The situation refers to the problems which were faced by the company in the past which motivated the organization to think on the lines of procurement outsourcing and actors refers to the various participants which influenced in determining the proper path for implementation of procurement outsourcing. The root cause effect method is used to understand the core problems which were faced by the organization and the process based view has been suggested to understand the tangible and intangible associated with the implementation of procurement outsourcing system. A1 has taken various steps for improving the productivity and quality standards by implementing newer technologies. However the issues which need more attention is the huge pile of inventory on which the company is sitting in order to satisfy the demand supply match of its customers. The results of SAP-LAP analysis helps in understanding the current scenario, operational drivers and processes involved in procurement outsourcing and indirect outsourcing. Using learning derived from the analysis performed, actions are recommended for improving the performance. 9

10 Scope for future work: The study performed is only on an Auto Air Conditioner manufacturer in India and its procurement operations. There is a lot of scope for future work in this area. The study can be extended to other players in the Auto Air Conditioner manufacturer, performing a comparative study across players. It can be also done for other sectors like manufacturing, automobile, textiles, power, etc. focusing on multiple players. *For technical reason the name of the company is concealed. References Sushil SAP-LAP models of inquiry. Management Decision 38(5): Charan, P Supply chain performance issues in an automobile company: a SAP-LAP analysis. Measuring Business Excellence 16(1): Above the Standard Procurement Group and beyond-the Future. Cooper, Anna To outsource or not to outsource? Mittal, R Procurement Outsourcing: Does India have a play? _play-mwwz html 10