Abstract
The multinational paint major M/s International Colour Company (ICC) has outlived the excitement of the launch of its two-pack refinish product. The problem is not unique to ICC but is pervasive across the industry. Essential differentiators in this emerging business, globally, have been the quality of sales support and reliability of supplies. Logistics, at that moment, was letting ICC down. Amidst this situation and the resignation of product manager of two-pack refinish product, Jayant took over as the product manager for advanced refinish with an added responsibility of weeding out supplies issues.
Margin Calculations for Advanced Refinish
Two-pack paint (hereafter referred to as advanced refinish, i.e., AR) is anticipated to touch 600 kilolitres sales in 5 years. First year sales at 6 kilolitres/month is expected to be around 72–80 kilolitres. The margin calculations for AR are shown in Table 1.
This implies that by assuming a similar turnover during the next year, the AR business would give a profit of INR 2.2 million (72 kl x INR 31/litre) that translates to about 20 per cent of the total profit of ICC, which is around INR 10 million. Since the management’s focus is to meet the demand for the product and establish credibility and leadership in the market, leverage has been granted to Jayant in terms of gross margin. The percentage sale of AR as part of total ICC sales for small garages and workshops is shown in Table 2.
AR Sales as Part of Total ICC Sales for Small Garages and Workshops
A product with such a high profit percentage against minimal volume certainly demands attention, especially when the car segment contributes 93 per cent of the total refinish business for ICC. Moreover, this market (end user) is not price-sensitive, leaving ample scope for Jayant to evolve an aggressive market plan.
Jayant’s slate is full of multiple issues: Stock keeping unit (SKU) shortages, inventory mismatch, hoarding by dealers, insensitivity of logistics staff, transit losses, gaps in supply chain linkages and improper demand assessment from the field. The solution, therefore, can be provided from supply side as well as demand side. Broadly, the demand-side issues are as follows:
Improper forecasting Small order size Speculative tendency of the dealer Stock keeping of all SKUs rather than carving a niche
The supply-side issues include the following:
Lack of capability to handle a new product Lack of capability to handle small pack No scope for cancellation Technical errors AR dispatches from Mumbai clubbed with other items Transit losses Performance evaluation issues of logistics staff
It is clear that ICC, during its discussions in the mid-2012, had not evaluated the supply aspect and launched the top-end product based solely on the assessment of sales potential. Nevertheless, it was not too late as competitors were facing similar issues, and an urgent solution could avoid any dent to the credibility of ICC. Timing is critical, margins are not, in the short run. While several options can be worked out, the following short-term immediate alternatives are evaluated as follows:
Jayant should reason out with the management to reposition him at Mumbai instead of Kolkata (and later at Gurgaon). This will enable him to closely monitor the supply issues which were effectively originating from Mumbai. Moreover, he could also explore the possibility of shifting the additional warehouse from Mumbai to Washi factory premises. This option aims at increasing operational efficiency of the logistics management through better control and easier and instant approvals. Armed with margins of INR 31/kilolitre against refinish margins of INR 21/kilolitre, Jayant can afford to play thin initially and create a niche positioning for AR. It is clear that 35 per cent of the total two-pack sales of ICC are towards makeover. This simple, innovative idea of ICC had already created a unique value proposition for end users as well as painters and garages. ICC was far ahead of competitors in such type of sales and Jayant, an experienced refinish sales person, can expand in this area immediately and convince garages to place indents for the AR SKUs required for the makeover, thus improving forecasting and reducing the demand for multiple SKUs and smaller packs. There is an apparent indicator that alteration in performance evaluation criteria of the logistics staff could yield results. Service ratio could be redefined in margin terms as under:
Since margin to volume ratio of AR is fairly high, even a small increase in supply of AR would result in a phenomenal increase in service ratio of the logistics team and, consequently, better appraisal. The technical revamping of the coding system can be undertaken to minimize errors and eliminate mismatch in book stock and actual stock.
The yardstick to evaluate the alternatives and arrive at a decision would include immediate improvement in supplies, reduced errors in stock keeping and improved credibility of ICC. Since timing is critical, focus is on instant solution. Long-term options such as setting up new manufacturing base for tinters in India or manufacturing thinners at ICC factory in north India (Mohali) besides the Hyderabad factory are not considered here.
Amongst the shortlisted options, the fourth option is apparently technical in nature and Jayant has to rely on additional resources. The ICC management has already indicated that no more manpower or resources are allowed for AR business. Hence, it is not feasible.
The third option may not provide immediate improvement in supplies as there is no remedial execution in the alternative. The option incentivizes the logistics staff but does not suggest any tool for immediate action. Performance evaluation is an annual/biannual phenomenon and changes in it may not see an immediate improvement in the situation.
The first option is significant since the problems in two-pack marketing of ICC have their genesis in Mumbai. Five out of eight cities where two-pack has been launched fall in the peninsular region of India, which is geographically closer to Mumbai than Kolkata. Shifting of ICC headquarters (HQ) to Gurgaon would further increase geographical distance of the HQ from a large number of two-pack markets. While the management decision to move the HQ to Gurgaon may be based on several considerations, the possibility of Jayant being shifted to Mumbai can be explored. Being in Mumbai, Jayant can have a first-hand feel of the logistics issues, load formation, staff insensitivity to small packs and technical coding issues. This fits our yardstick of immediate improvement in supplies and reduced errors in stock keeping. Simultaneously, Jayant should try to shift the additional warehouse to Washi to improve operational efficiency and, thus, the supplies.
The second option addresses the demand side of the issue. Jayant has already handled refinish business and is aware of the network dynamics and channel behaviour. He can put to use his experience in technical sales and network management and bring dealers to an agreement that they will focus entirely on the makeover business for the next few months. Though this brings a fall in margins for both company and dealers, knowing that the two-pack business is capital intensive and exit barriers are high for the dealers, experienced Jayant can convince the dealers. This will reduce the number of SKUs required and, therefore, result in larger order quantity, which in turn reduces coding errors, improves stock assessment and demand forecasting. During its situation analysis, it has been already noted that dealers are ready to plan their loads and that prioritization of indents is possible. Prioritization further reduces lead time by two weeks.
Sequentially speaking and moving by the above yardstick, Jayant should be positioned at Mumbai immediately and then have an initial focus on makeover business which can reap a virtuous circle creating a win–win situation for all stakeholders.