Abstract
International Color Company (ICC), a multinational paint major was an established player in the paint market in India. It had launched its premium 2-pack refinish product range in January 2013. Within first six months of the launch, when the excitement of the new launch had abated, it was found that there were shortage of certain SKU’s. There were incidences of shortage in some specific locations as well as the entire country, which required to be addressed on an immediate basis. The import lead time was 12 weeks by ship and 4 weeks by air which made the solution even more difficult. The situation was becoming more acute every passing day.
Jayant, the Product Manager responsible for 2-pack refinish product range had been given two months time by the top management of ICC to get the situation under control. Apart from the mismatches in stock availability and its requirements across the retail outlets and branches, Jayant had inherited problems which were related to the structure and compensation plan of ICC, which made his task even more challenging.
Keywords
International Color Company (ICC) was a multinational paint major and an established player in the paint market in India. It was headquartered in Kolkata (also referred to as Calcutta) for the past eight decades, and had three manufacturing plants. ICC had a well-established presence in the automotive refinish market because of its distribution strength of over 12,000 retail outlets and popularity of its brands among the auto refinishers in India.
ICC India had launched its top-of-the-line 2-pack refinish product range in January 2013, which was imported from its sole global manufacturing plant located in the United Kingdom (UK). Within the first 6 months of the launch, by the time the excitement of the new launch had abated a bit, it was found out that there were shortage of certain stock keeping units (SKUs) in the different markets (but not in the country) and emergency supplies were required. There were also incidences of shortage in the entire country that required to be addressed on an immediate basis. The import lead time was at least 12 weeks by ship and 4 weeks by air, which complicated matters. The situation was becoming more acute every passing day.
Jayant, the product manager responsible for the 2-pack 1 paint category, had the added responsibility for managing the supply chain also. Jayant had been working in the sales function of ICC for the last 2 years. However, he had been assigned this role only a week back, because of the sudden resignation and departure of his predecessor. Apart from the mismatches in stock availability and its requirements across the retail outlets and branches, Jayant had also inherited many internal problems that competed for his immediate attention. There were mismatches between book stock and actual stock in all his warehouses. The organizational structure and his position in it did not allow him any leverage of authority either. These problems were compounded by the fact that the organization had a very efficient mechanism for handling the logistics of products that sold in large quantities. However, the system did not work where they had to deliver small quantity, as was the case for 2-pack paints.
Jayant had been given just two months’ time by the top management to get the situation under control and set up processes for the supply chain and present his results to the top management. It was a big opportunity to demonstrate his competence and improve prospects of his promotion, but on the downside, risk was so high that he was not even ready to think about it. He knew that he had to identify the root cause of the problem and address it effectively; otherwise, the problem would remain a perpetual one that would consume most of his time and energy. He started considering all options on why there was a demand and supply mismatch and how quickly it could be overcome given the typical context of ICC India. He pondered over the information that was needed to solve the problem.
Paints Market in India
Paints business was very competitive in India, and logistics efficiency was a critical success factor. The plants of ICC India were in Washi (near Mumbai) in the west, Mohali (near Chandigarh) in the north and Hyderabad in south India to be able to cost-effectively cater to the needs of the Indian market as a whole. The institutional sales team and the corporate management team operated from their head office (HO) in Kolkata. Sales through the distribution channels were coordinated through 18 branches located in most of the state capitals. However, the smaller and inaccessible north-eastern states, such as Nagaland, Manipur and Mizoram, were operated through their Gauhati branch. Some of the smaller small states such as Jharkhand were combined with Bihar for operational convenience. Refer to Figure 1: Map of India.
The annual turnover of ICC in 2011 and 2012 had been stagnant at Indian rupees (₹) 5,000 million (for calculation purposes, the exchange rate could be approximated to where US$ 1 was equal to ₹ 52). The paint industry in India had sales revenues of ₹ 21,000 million per annum (including unorganized sector) in 2012. The unorganized sector (as classified by ICC) accounted for approximately 40 per cent of the industry turnover and included produce from small-scale units (which were essentially local players and had annual turnover of less than ₹ 300 million). There were more than 1,000 small unorganized sector paint companies across the country.
ICC manufactured and marketed essentially two types of paints. Decorative paints were used for household applications typically in the walls and wooden surfaces. Automotive refinish paints were used for application on automobiles after they had come out of the factory, for example, dent repairing and so on. The decorative paint segment accounted for 65 per cent of the company’s turnover and the refinish paints accounted for balance 35 per cent. The weighted average consumer price per litre or kilogram was ₹ 90 for decorative paints and ₹ 110 for automotive refinish paints. The company had its own method of allocating the fixed overhead costs to the two different types of products, and the pricing strategy was essentially market driven. In the last two years, the contribution of the refinish business was 70 per cent and decorative business was 30 per cent of the total company profits. The company made ₹ 530 million profits in 2011 and ₹ 480 million in 2012. The average gross margin in the case of decorative paints was approximately ₹ 30 per kilogram or litre, while it was ₹ 50 per kilogram or litre of refinish paints. The company had different systems for allocating the sales and administrative overhead of the decorative and refinishes businesses, based on the complex reporting structure. There were dual responsibilities of the products assigned to individual managers across various functions, and it changed from year to year.
Refinish Paints
Automotive refinish paints were used for touch-up jobs where only a small dented area was painted. The most critical element of refinishing was the colour matching with the original paints, so that the repairing was close to invisible. In fact, one of the major usages of the refinish paint was by the automobile dealerships to repair small damages and chip offs that occurred in transit from the factory to the dealerships. This repair work during pre-delivery inspection required the best quality of colour matching and workmanship; else, the consumers would not accept the products. Only 20 per cent of the usage of refinish paint in India was for full repainting of the vehicle, where the colour matching issue was not critical.
Normally, the automotive painting involved a three-step process: surface preparation, priming the surface and application of the topcoat paint. The surface preparation included preparing the metal and plastic surfaces, which made the surface corrosion resistant. The steps included cleaning, degreasing and application of ‘oil primers’. Oil primers were priced at approximately ₹ 50 per litre at retail. The priming of the surface was typically done by a process called ‘sanding’ (rubbing the wet metal surface with fine emery paper) and applying ‘surfacers’, which provided smoothness to the surface and good adhesion properties for the topcoat. The average price of conventional surfacers was ₹ 60 per litre. The final finish was accorded by the visible paint, called the ‘topcoat’. Prices of topcoats ranged from ₹ 250 per litre of solid colours to ₹ 400 per litre of metallic colours. There was a significant usage of compatible thinners (in the ratio of one part primer/topcoat to two parts thinner) for the primers as well as topcoats, and these thinners were priced at ₹ 40 per litre.
The paint workshops in India were managed by automobile dealerships, independent garages as well as roadside painters. The paint was actually applied by the painters, and they normally had to be convinced of the quality as well as commercial benefits of using the same. Though most of the painters had no formal education in painting, the workers in the garages or helpers of the painters learnt on the job from their colleagues. The marketers regularly targeted these painters through training programmes and promotional events. There were clusters where the roadside paint workshops were located, in many cases, in a lot of 5 to 25.
Sales Set-up of ICC
The sales function was historically organized in quite a complex manner, and since the sales, distribution and logistics processes were designed with the structure in mind, it made structural changes difficult to implement. The decorative business and refinish business were headed by two different business heads designated as business managers (BMs). The BMs were solely responsible for the entire range of refinish or decorative paints. The BMs had regional managers (RMs) located in the four regions (east/west/north/south) reporting to them. The RMs were common to both the decorative and refinish businesses. The RMs had separate targets for the two businesses and reported to both the BMs for the achievement of their respective sales targets. The RMs had area sales managers (ASMs) reporting to them, who were normally responsible for both the decorative and refinish paints. However, for markets that had a substantial potential of refinish sales, there were separate ASMs for refinish business, and their sales targets were only for refinish products. These ASMs were located in eight cities, Delhi, Kolkata, Chandigarh, Chennai, Mumbai, Bangalore, Hyderabad and Cochin. However, the field sales force was common to both the area managers in the above-mentioned locations. The other sales support functions were common and reported to the senior most managers administratively (aspects such as leave approval and sanctioning of travel plans) and functionally to anyone who had professional work with them. In most locations, the warehouses were common, but since the storage of refinish products required a ‘Directorate of Petroleum’ licence, sometimes it was located differently.
The refinish business was primarily an aftermarket operation. Its prospects were essentially dependent on the automobile sales and the tie up with the different motor manufacturers. Refinish BM had a dedicated manager who worked in close collaboration with the motor manufacturers, directly reporting to him. This manager’s specific responsibility was to work with the motor manufacturers and get the paints approved as a genuine part to be used by the authorized dealership of the motor manufacturers. The other major activity was to help in the process of motor manufacturers bringing the new colours to the market. Typically, the motor manufacturers approved only some specific refinish paints for touch-up work and it had to reach their dealerships before the cars of those colours reached them, so that they could rectify any paint-related deficiencies before selling the cars.
The Distribution Set-up of ICC
The refinish paints were stored in the warehouses of ICC. Against written order of the sales force, they were supplied to dealers (there were no distributors). The dealers sold to the garages (painters). The garages were of two types. The roadside garages were normally coming and buying paint from the dealers. The service offered to them by the dealers was credit and bulk breaking by selling even part of the cans, say, 250 millilitres from a 1-litre can. In fact, this business was almost 40 per cent of the volume sales in the industry. The bigger garages, however, mostly bought on credit but always ordered in full packs and were also normally delivered at their garages free of charge by the refinish paint dealers. The bigger garages were mostly the authorized service centre and workshops of car dealers.
Car touch-up and repainting accounted for 93 per cent of the refinish market, while the balance 7 per cent was used in commercial wood finishes. Traditionally, the automotive refinish paints were sold in cans of lot sizes 4 litre, 1 litre, 1/2 litre and were available in all the shades in which cars were manufactured by all the motor manufacturers in India. They are typically called the ‘ready mixes’ in the industry. The paint dealers were selling almost half of their ready mixes loose (in small quantities and not necessarily the entire can) to the painters as per their need. The paint dealers were also doing some bit of shade adjustment for their customers as most cars required minor colour adjustments because of weather and other effects. This colour adjustment was done by mixing and matching different shades as per the need.
The net margin for the dealers was approximately ₹ 3 to ₹ 4 per litre of refinish paints, but the margin could be ₹ 15 per litre in case colour matching was done and sold in part quantities (premium for value-added services). The average stock turnover was once in 40 days. This was because of the heavy sales pressure of the paint manufacturers as well as the high inventory holding (needed to keep all the shades in stock). Dealers were extracting an average credit of 45 days from the paint manufacturers or a reasonably good cash discount to take care of cost of capital. There was intense competition among dealers, which forced them to pass on the margin to their customers, and their net margin was low. The paint dealers maintained a credit line for the painters. Painters normally paid up after the paint job was over and the car owners paid up, which was on an average a credit of 15 days.
Changes in the Automobile Refinish Market in India
Automobile refinishing had two major parameters of evaluation: the colour matching and the gloss matching. Due to the changes in the preference of automobile customer and the entry of new car manufacturers in the Indian automobile industry, there was a revolution in the colours of the automobiles after 2007. Car manufacturers started to produce more gloss finishes. Metallic and other exotic finishes such as pearl colours became popular with the customers. There were tremendous changes in the quality of the painting-related infrastructure of the manufacturers which reflected on the final finish of the cars they produced.
These changes led to drastic changes in the automotive refinish market by end of 2011. The predominantly solid colour market of automobiles had become predominantly metallic colour based. The car manufacturers were introducing new colours every two to three months. This was necessitated because of the changing consumer requirements. Consumers were increasingly becoming colour conscious and considered the colours of their car as an important expression of their style a particular. There was a relation between the shape of the car and how a colour looked on it. Though there were many colours in all the models, only some of them preferred by the consumers and that too were model specific. This increased the complexity for the manufacturers, but they had no choice. The problems were more when some colours suddenly caught the imagination of the consumers, resulting in very high demand, and more often than not, they also went out of preference as suddenly as they became popular, making prediction of color preference of consumers very difficult.
Metallic and pearl colours were aluminium particle-based products. The orientation of the aluminium particles was a key element of proper colour matching. The existing ready-mix paint technology was not capable of meeting the requirements of the market in terms of both the colour matching and gloss level.
The technical solution to the market requirement of the refinish paint was 2-pack paints. It had a base coat of paint covered with a clear coat, which offered accurate colour matching and high gloss level, respectively, in the repair jobs. The most problematic part was the correct choice of the aluminium particle size in the paint and managing their layout characteristics while spray-painting. These 2-pack paints were essentially a system with its own set of surface preparation, topcoats and thinners, which was technically complex. Any colour could be made by using a combination of the base tinters. But to arrive at the right colour, a lot of skill was required. The paint manufacturers therefore released recipe, where the specific tinters and their quantities were mentioned for making 1 litre of the specific colour. These recipes were developed and tested in the colour laboratories of the manufacturers and required trained manpower and sophisticated instruments. Some colours could be made by using alternate recipes, and they were also shared. However, in case any particular tinter was not there at all, it was not possible to substitute with another tinter or a combination without significantly compromising the results.
The time required in developing such systems and the subsequent investment required to manufacture them were also huge. The immediate solution for ICC was to import the 2-pack paints and making it available to market. Some small entrepreneurs were importing similar products already, and getting very good margins, which were in the range of about 150 per cent of the conventional paints. By the end of 2012, all the major refinish paints manufactures in India had been importing the 2-pack paints from their global technology partners and marketing in India. However, these paints were difficult to apply and also required a lot of investment in the infrastructure and training. For the 2-pack paint jobs to be successful, the entire painting workforce needed to be trained, whether they were located in the paint shop or the garages.
ICC’s Top Management Decision on the Refinish Business
The automotive refinish paint situation was discussed by the top management team of ICC in mid-2012, and it was decided that:
The automotive paints market in India was expected to follow the international trend and was likely to move from conventional paints to largely 2-pack paints over the next five years. The sales volumes at the end of five years were expected to be more than 600 kilolitres per year for ICC India, even in the worst-case scenario. Hence, the company would focus in this market and make investments on the development of the market and its own brand so as to establish a prominent position in the refinish market of the future. Since it was not possible to manufacture the products in India in the short run, it would be imported from ICC’s international production base located in the UK (Around 8000 kilometres by sea route from India). ICC India would have two managers in Kolkata HO to look after this nascent business. One would be responsible for business development and the other for product management. This would give enough focus to the new and emerging business. The business was given a unique identity as ‘advanced refinish’ (in short AR), for giving it a special identity in the overall operation of ICC India. There would be recruitment of specialized sales force to be located in the top eight markets of the country, where there were dedicated ASMs to supervise the refinish paint business. This specialized sales force was required because the product required technical selling and the existing sales team did not have the necessary technical skills as well as the time required for developing the new business. This special sales force was to report to the refinish ASM and was responsible for the AR products only. The AR team at HO would use the present import, logistics, information technology and branch operations for its 2-pack business. They would be directly responsible to the refinish BM for their operations and results.
Based on the above decisions, two capable and enthusiastic human resources were allocated from other projects to form the AR team at HO. Since the business was in the nascent stage and the assignment was challenging, there was a lot of enthusiasm in the refinish business team in the HO as well as the branches.
The 2-Pack Advanced Refinish Paint Technology
The 2-pack technology was a completely ‘tinter’-based paint system. For the user, it is approximately five times costlier on a per litre basis as compared to the existing paints. However, the paint requirement was only 50 per cent of the existing paints. It was not compatible with the existing non-2-pack products available in the market.
In the new tinter-based technology, the colour was made on the basis of the formulae, and the system had 92 numbers of essential tinters. Hence, the entire colour shade of all motor manufacturers of the world could be made by mixing and matching these essential tinters. Most of the colours required a set of six to seven tinters in proportions as given in the formulae. The main problem of this technology was, absence of even one of the tinters stopped the entire colour making process. In addition, the 2-pack system had its own set of surface preparatory materials, primers and thinners, which made the total SKU list to 108. Of the entire set of 108 SKUs, the thinners were available in 5-litre, 10-litre and 20-litre cans, while seven of the tinters were in 2.5-litre cans and the rest 98 were in 1-litre cans only.
The 2-pack tinters were required to be stirred regularly, which were done in stirring machines. These were essentially a paint shelves, which had mechanical stirrers attached to it. These mechanical stirrers were fitted to the cans, which were placed in the designated places in the machine. Normally the paints were required to be stirred for 15 minutes, twice every day to give best results. Similarly, these paints gave best results if the painting was conducted in the paint booth. These were capital-intensive equipment. Refer Figure 2 for a line diagram of a paint booth which has its own heating system also, for fast curing of the 2 pack paints.
The Distribution of Advanced Refinish Products by ICC
Dealers were required to invest ₹ 0.3 million on the stirring machine to keep the paint in good operative condition and make the appropriate shade of mixed paint. They had to also make an investment in the complete set of tinters, which cost approximately ₹ 0.3 million. This amount of investment was very heavy for the normal refinish dealers, and only very select dealers were identified to be the target for AR paint dealership of ICC.
The margins and the pricing were set in such a way that the commercial proposition was attractive to the entire value chain that included the company, the dealer as well as the garages/painters. This was possible because the end customers (car owners) were not price sensitive and were willing to pay the premium price for the accurate colour matching and high gloss finish that these paints provided. Touch-up of a car door was priced at ₹ 1,500 for a conventional single-pack paint, while a 2-pack paint job on a similar door was priced in the range of ₹ 4,000–5,000.
The distribution channel members and their specific roles in the AR business could be summarized as:
Company: Imported and supplied to the dealers, the tinters, surfacers, thinners and all the required 2 pack painting and finishing materials as per the order. It also provided the technical and colour matching training to the dealers and the garages. Thus, ICC recruited and extensively trained a set of paint technologists who worked as technical sales executive and color matching expert to service the needs of the paint workshops as well as the dealers. They did market development work for the paint workshops and helped dealers to get some key paint workshops start buying ICC’s 2-pack paints. Dealers: They invested in the equipment, tinters, surfacers, thinners and so on. They had to provide space to install paint stirrer and run it for 15 minutes, twice a day, to keep the paints in good usable condition and avoid any possible settling problem. They collected orders from the garages and supplied them with mixed paint of the required shade, surfacers, thinners and so on. They also provided the colour matching facility, for which they required highly skilled manpower. They also had to bear the losses due to mixing errors which were normal during the paint mixing process as well as losses during transit to their customers. Garages: They invested in the paint booth (refer to Figure 2) and related infrastructure, which could cost in the range of ₹ 0.5–1 million, and also invested in training of the manpower. They bought the paint from the dealers and tried to educate the customers about the benefits of using the 2-pack paints. Customers: The customers who opted for the 2-pack paints had to pay almost two to three times the price of a normal paint job (depending on the nature of job), and they got in return an invisible repair, with excellent long lasting finish.
Typically, the paint dealers were keeping many brands of the conventional refinish paints for meeting consumer requirements. Most dealers had strong affinity to one company at any point of time, which depended on the commercial proposition and other market dynamics. However, the 2-pack paint system was different. It required considerable commitment of financial resources and long-term customer services and relationship management. There was also a significant amount of time investment in training required, from both the company and dealers, in developing the market for the new product. There were interdependencies that created some sort of exit barrier in the relationship for both the parties and typically even the multi-brand dealers dealt with only one 2-pack brand.
The Progress of Advanced Refinishes Business
In the first few months, the sales operations of 2-pack paints were set up at the different cities in a phase-wise launch in the cities where specialist refinish ASMs were located. The branch operation systems were updated, followed by supplies to the warehouses and training of the staff. The dealers were identified and appointed after due negotiations. The market development activities were taken up by the ICC AR sales executives at the paints workshop and painter level.
Point Booths
Sales were happening as per expectations and, in some cases, even exceeded expectations. In fact, a lot of the success was due to a very peculiar strategy adopted by the sales force. The core target audiences of 2-pack paints were the painters and garages. The value proposition was the benefit of the touching up a very small area and thereby reducing the consumption of the paint leading to cost and time savings. However, in addition, the ICC team targeted the end consumers with not only accident repair but also aesthetic proposition. With 2-pack paints, the car owners had the possibility of getting their cars painted in colours that were absolutely unique and not in the limited choice set that the motor manufacturers offered with that specific model. Since the paint quality was really good, many consumers liked the value proposition and were ready to shell out ₹30,000–40,000 that such a makeover required. Some even got their new cars painted in exotic colours. Word of mouth helped in making such exotic colours popular. In fact, this was an innovative idea of ICC that was simple and attractive. This value proposition was also copied quite effectively by all the competitors, and the 2-pack category in India derived almost 25 per cent of its sales due to such makeovers. For ICC India, such sales were almost 35 per cent of its entire 2-pack sales, while these figures never exceeded 2 per cent of the entire sales for ICC in any of the other countries.
ICC India placed SKU-wise order to the international production base in the UK, and the ordering was based on the ICC India’s expectation of the tinter requirements and projections given by the AR team. The international business of ICC, which had considerable experience of launching this product in many countries of the world, had been using their global experience to help the Indian team, but the authority and responsibility was firmly with the AR team in India.
Apart from the thinners, the entire ranges of 2-pack products were imported. The thinners needed for the 2-pack paints were to be made in Hyderabad factory of ICC as import of thinners was not allowed by Government of India regulations.
The paint was imported and was stocked in an additional warehouse in Mumbai branch, for administrative reasons. The equipment required for the paint system were also stored in the same place for ease of distribution. Choice of Mumbai was quite natural as the lead time for the import by ship to India was the least for Mumbai port as it had shorter transit time as well as faster customs clearance.
It was decided that it made no sense to transport the relatively low-cost thinners for the 2-pack range to Mumbai and then dispatch to different branches. Thus, thinners were planned to be directly sent from Hyderabad factory, where they were produced, to branches along with the other dispatches from the factory.
In the first six months of launch, the total sales of the AR products reached to a stable sales of around 6 kilolitres a month, and the expectation was that it would grow up to 10 kilolitres in another six months’ time. However, the total 2-pack stock in the country was 50 kilolitres, which was more than eight months of stock cover at present levels of sale. Moreover reports of shortage as well as supply and demand mismatches started pouring in by the end of March 2013. The top management was very upset about the state of affairs and had communicated clearly to the AR team to put their act together. No further increase in stocks was allowed as it meant drain on the scarce working capital of the company; no airlifting was allowed without the approval of the BM.
When the situation was analyzed in early April 2013, the following points came up:
The logistics department in ICC India was responsible for the imports of 2-pack products. They were also handling the production planning, inbound (which included imports of raw materials and some finished goods) and outbound logistics (ex-factory to branches) of all the products. The existing systems and processes of ICC’s production planning and logistics team were very well designed for established products and colour categories. Enough checks and balances were built in the customized software systems to weed out possible errors and adjust to fluctuations in market demand. The logistics system was not geared for a new product, which was having an import lead time of three months for the tinters and the equipment, and very small lot sizes of delivery to the branches. The forecasting system could not adjust to the fact that the initial sales mix was more in line with the requirements of the pipeline filling, as there were many new dealer opening. The actual demand of the market was not captured separately and now seemed to be very difficult to decouple from the total sales. Hence, serious corrections in that data were required to reflect the actual consumption of the different SKUs. The international ordering system of ICC did not have scope of cancelling orders, though it had scope of providing priority to a particular order, which reduced the lead time by two weeks. Thus, the orders had to be right first time. The manpower at the warehouses were not trained adequately for handling the equipment and the tinters. The problem was compounded further, as AR products had one (international) code printed on the imported cartons and a different Indian code fed in the computer. This mismatch in the coding was not intentional but a necessity, as the ICC India’s computer system was numeric in nature and not capable of accepting the alphanumeric code of the ICC international products. Hence, there were many errors in the dispatches; consequently, the physical and book stocks did not match. These problems were at all the stocking points, such as the ICC warehouses and even the dealer counters. The requirement of one dealer for one order of AR products was of a total of 5–10 litres at a time, and it consisted of a set of tinters, surfacers and thinners. The logistics system of the company was used to handling requirements of at least 80 litres in one shot, which was the norm for the conventional refinish and decorative products. The supply chain was thus not geared for handling the 2-pack paints, and it was force managed by the managers, requiring many a times, unnecessary and unplanned adjustments. The logistic problem was compounded by the fact the logistics departments had all arrangement in the factory and were able to dispatch smoothly from the factory locations. However, the AR materials were stored in one of the warehouses in the Mumbai branch. Hence, the material had to be first sent to the Washi factory and then sent along with other materials to the destination branch. This was required because load formation was a problem. Thus, the supply of 2-pack materials was possible only when other materials produced at Washi plant were dispatched to a specific destination. This process was also adding more complexity and confusion in the system as the online systems were not able to monitor these dispatches. The performance evaluation of the logistics team was done on the basis of service ratio. The service ratio calculated total material supplied as a ratio of the total material indented. This meant, even if the small quantities of AR materials were not dispatched, it did not affect the overall performance of the logistics team significantly. The more disturbing element was that the logistics department had come to the conclusion that more time they devoted to AR, their delivery on the core business was also getting affected and the service level drops were in much larger scale. Thus, AR materials became their last priority. Sometimes, urgent materials were required. Within India, the air courier did not accept paints as they were inflammable. Hence, to manage the conditions of extreme shortages, dispatches were made through surface couriers of reputed courier companies. However, these materials mostly reached in leaky and damaged condition as the packaging of the assorted materials was not suitable for the transport systems of the couriers. In fact, financial losses were to the extent of five times the courier charges. The couriers were not ready to take any responsibility of the material, as the proposition was not commercially viable for them. Couriers were even ready to lose the entire ICC business in case they were held responsible for the AR materials. ICC managers came to the conclusion that normal document couriers with cargo operations were not really competent in handling these types of loads even if the company was ready to pay for it. During the shortage, a lot of big dealers were trying to hold large inventories of the materials they thought would be in shortage. This was to meet their customer’s needs and also, in some cases, charge premiums. This was a standard speculative tendency in any consumer durable trade and made matters worse for the AR team. Dealers were known to keep a tab on which colours were in demand in other markets and also ordered such materials based on speculation of the future demand. By and large, the dealers were ready to hold 15 days of AR stocks at any point. The dealers were also ready to plan their requirement and order in such a manner that gave seven days’ time to ICC to supply their requirement. ICC top management indicated that no more increase in the direct manpower or working capital was allowed in the AR business.
The pressure on the AR team was increasing from the market as the dealers were not getting the materials. The problem was much more serious as the dealers and ICC were losing their credibility in the eyes of their high-potential and prospective future customers. There was tremendous pressure from the top management on performance and a lot of sleepless nights for the AR team. It was becoming increasingly clear that the availability at the right time in the right quantity was the critical success factor for the business and the organizational machinery was not geared to handling the situation.
Competition in the Indian Advanced Refinish Market
At least four more major refinish paint players in the Indian market were in the process of building up their AR businesses. The products of all the competitors were equally acceptable to the consumers as they could not make out any difference in the output after it was applied, and they were all internationally acclaimed and successful products. They were similarly priced and not really differentiated. Interestingly, all the competitors were also facing similar supply problems as was bing faced by ICC, and so far no clear winner had emerged.
Evidence and experience in other parts of the world suggested that the essential differentiator in this emerging business was the quality of sales support, which included commercial as well as technical services and more importantly the reliability of supplies. The position of ICC was very strong on the sales force competence and service part. However, logistics was letting it down, and stopping it from establishing a clear dominance in the market. It was also amply clear that the company that would be able to sort out the supply problems the fastest would be the winner in the long run. This was because the switching cost from one brand to other was significant for the dealers as well as the paint workshops.
Immediate Change in ICC’s Advanced Refinish Team
The product manager of ICC’s AR business had another attractive job offer from a bank, so he resigned and left ICC in a hurry at the end of May 2013. To those who knew the situation, the hurried departure, without even a reasonable notice period, was understandable, if not predictable.
The top management decision was that this function was critical. Since the person needed to deliver from the first day in office, it was important to have someone competent and familiar with the sales and logistics aspect of the product. The Mumbai ASM-Refinish, Jayant, was transferred as the product manager. He was given the single-point agenda of getting the logistics process streamlined by the end of August 2013. Thus, the responsibility of the logistics function was delinked from the rest the organization and placed directly on the product manager 2-pack paints. He was given a free hand in taking any commercially viable and legally correct decision. The company at this stage of market development was not so much sensitive to the gross margin, but was extremely keen to meet the demand of the product in the market and also to establish its credibility in the market.
The company was also planning to shift its headquarters from Calcutta to Gurgaon (near Delhi), and this was also likely to impose another challenge to the current as well as future logistics operations of AR. Thus, the planned logistics solution also needed to factor this change.