SAP Case Study

mySAP SUPPLY CHAIN MANAGEMENT AT MARICO

ENHANCING BRAND EQUITY BY IMPROVING DISTRIBUTION PERFORMANCE

AT A GLANCE: mySAP SUPPLY CHAIN MANAGEMENT AT MARICO Strategic Goals:

Enhance long-term value of company brands by

achieving excellence in distribution performance

Maintain market share growth in a competitive

environment with much larger, offshore rivals

Scale supply chain operations to sustain customer

service as the business grows

Marico Industries, Ltd. is a leading India-based consumer goods company with sales of Rs 6.96 billion (approximately $142 million) for the fiscal year ending March 2002. With 6 factories and about 1,000 employees, it has maintained steady revenue and profitability growth throughout the past 10 years. Marico offers a range of products to the local and export markets (primarily South Asia and the Middle East), including refined edible oils, food products such as jams and sauces, niche fabric care products, and hair oils. Marico was incorporated in 1988 and began commercial operations in 1990 when it acquired the consumer products division of Bombay Oil Industries. Since its inception, a key strength of the company has been its ability to build brands. Marico has pursued a rigorous approach to creating and sustaining its brands, focusing on understanding and anticipating consumer needs, innovating in distinct ways, developing advertising campaigns to reinforce value delivered to consumers, and tracking metrics that support product positioning strategies. The companys approach has enabled it to pioneer polyethylene packaging for coconut oils, a cold-water clothes starching product, and other unique developments. Marico faces competition from large, well-capitalized international rivals such as ConAgra Foods and Unilever, domestic brands, and non-branded products. Nevertheless, Maricos approach has enabled the company to create unique value for consumers and thereby to build significant market share in many product categories. Of Maricos nine brands, three are market leaders. A key attribute of Maricos brands is the widespread availability of the companys goods throughout India. Maricos distribution network is key to ensuring that its products reach about 100 million people throughout the Indian subcontinent each month. Marico produces 125 SKUs at its own factories and through 15 subcontracting manufacturers. It stores products at 32 warehouses and sells to 3,500 distributors. These distributors in turn provide products to 1.6 million domestic retail outlets.

Reduce total delivered cost

Approach: Marico shortened its planning cycle from 30 days to about 15 days; revised its demand planning process to forecast sales out (shipment from distributors to retailers); and implemented an improved process to replenish its distributors. The company focused on achieving relatively even shipment levels throughout each month and developed internal collaborative processes to support planning. This approach was enabled by mySAP Supply Chain Management software, which includes demand planning and supply network planning capabilities coupled with SAP R/3 and SAP Business Information Warehouse (SAP BW).

Results (achieved during 3Q01 to 1Q02):

Decreased stock-outs associated with distributor

sales to retailers by 33%

Reduced lost sales due to stock-outs by 28%, thereby

improving total revenue by 1.5%

Lowered excess distributor inventory by 33% Reduced late deliveries to distributors by 37.5% Reduced costs associated with supply chain exceptions
by 25% (for example, intracompany stock transfers, truck detention costs)

Positioned the company for a vendor-managed inventory

implementation and further performance improvements

Maricos peer companies in other countries recognize its strength in distribution; consequently, Marico has secured a distribution alliance with Indo Nissin Foods and a distribution agreement with Procter & Gamble. Though Marico experienced robust expansion throughout the 1990s, the company realized that it would face challenges to continued profitable growth. Greater rivalry in its core markets meant it had to increase marketing expenditures. The company also was unable to sustain the performance of its supply chain as its scale of operations grew. Marico was increasingly experiencing inaccurate forecasts, excess inventory, stock-outs, and delays in response to market requirements. These supply chain performance issues were reducing Maricos cash flow and did not support the product brand images the company had taken care to develop. In order to achieve sustained profitable growth, given market factors and the need to maintain its distribution effectiveness, Marico determined that it must improve its supply chain capabilities. Specifically, the company focused on customerfacing business processes as well as on its internal operations. After a careful analysis of alternatives, Marico selected mySAP Supply Chain Management (mySAP SCM) to enable the reengineering of its associated planning and execution processes. Maricos goals included improving forecast accuracy and delivery performance in order to sustain the widespread availability of its products in the market and the associated positive perceptions of its brands. By concentrating on internal operations, Marico has been able to lower inventory and supply chain operating costs, particularly those expenses that could be reduced through better planning in areas such as intracompany stock transfers. The company has achieved improved cash flow to fund future growth, sustained the viability of its independent distributor network, and maintained those elements of its brands images that are tightly coupled with high availability of its products to its customers.

CHALLENGES AND OBJECTIVES

Although Marico had achieved a compound annual growth rate of about 18% during the 1990s, the company recognized in the latter part of the decade that it must renew its focus on profitability in order to participate in long-term growth opportunities. The company had become highly dependent on its three leading brands for generating revenue and earnings, and was facing increasing competition in the associated edible oil markets as well as in other product categories. This meant that Marico would have to increase its advertising expenditures to defend the market positions of its various products and continue to invest in product development to ensure continued growth. Moreover, even though distribution was a core strength for Marico, the performance of its supply chain network was not keeping pace with the growing scale of its operations. For example, the company had a planning cycle of 30 days, and, during this period, was unable to respond to changes in demand. The bucketed time horizons for manufacturing and distribution were not synchronized and distribution levels were uneven, with a weighting of 15%, 32%, and 53% for the first, second, and final third of each month. This suboptimal skewing of distribution activity over time, coupled with low levels of forecast accuracy, led to a mismatch of supply and demand, inventory build-ups at Marico and at its distributors, expired products, and stock-outs all of which adversely affected endconsumer perceptions. Total delivered costs were increasing due to storage capacity constraints, which often required interwarehouse stock transfers, temporary renting of additional storage space, and truck demurrage. Also, spreadsheet-based planning methods and multiple, nonintegrated transaction systems inhibited widespread visibility into essential data, further compounding planning-process problems. Thus, key goals for Marico included improved forecast accuracy and more uniform distribution levels throughout each month. It also needed to reengineer its planning processes to more effectively match supply and demand. As a result, costs would

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be more in line with best-in-class operations in the consumer industry. Inventory carrying costs and total supply chain costs would be reduced, freeing cash flow to reinvest in growthgenerating activities. Marico targeted improvements in stockout reductions and on-time delivery that would be a consequence of better planning processes. These actions would support the companys branding initiatives as well as help ensure the profitable operation and continued viability of its distributor network.
IMPLEMENTATION

Marico to distributors based on forecasted retail-level demand and distributor inventory levels. Implementation of SAP R/3 capabilities in finance, cost accounting, materials management, production planning, quality management, and sales and distribution was started in June 2000 and went live quickly in a big bang implementation in April 2001. Implementation of the demand planning and supply network planning capabilities of the SAP Advanced Planner & Optimizer of mySAP SCM along with the SAP Business Information Warehouse (SAP BW) began in August 2000 and went live in a big bang implementation in May 2001. Twenty-six staff members and 20 consultants assisted in the project, using AcceleratedSAP (ASAP) methodologies to ensure a rapid implementation. The scope included all company factories, warehouses and business offices; distributors; and contract manufacturers, and the implementation achieved systems integration that efficiently supported the new planning and execution processes. The implementation produced quick results. By early 2002, forecast accuracy was improved by 14%, and the levels of shipment activity through each third of a month had become more even (25%, 32%, and 43%). The planning-cycle time was reduced from 30 days to 15-20 days, and enhanced reporting facilitated management decision making. These results led to reduced internal and distributor inventory, fewer stock-outs, lower levels of lost sales, and reduced supply chain exception-handling costs. In the future, Marico plans to implement vendor-managed inventory (VMI) processes by making use of Internet-based integration of distributors stock levels into the companys SAP R/3 system. This VMI implementation will enable Marico to further reduce the planning cycle to 10 days and ensure greater visibility into distributor operations, reduced inventory, lower supply chain management costs, and higher levels of delivery performance. These results will continue to reinforce the companys branding initiatives and position Marico for long-term, profitable growth.

In 1999, Marico initiated a detailed evaluation of its supply chain operations to determine how best to reduce costs, satisfy customer needs, support its brands images, and position the company for long-term growth. The company concluded that sourcing and manufacturing were straightforward, while its distribution operations were the key source of opportunity. Marico procured only a few commodity raw materials (for example, vegetable oils and safflower seeds), had no major manufacturing capacity constraints, had no sales seasonality associated with its products, and minimized artificially induced demand surges by avoiding the use of promotions. However, the distribution network was complex, with SKU/distribution point combinations numbering in the millions. Marico focused on business processes that addressed internal collaborative forecasting between its manufacturing sites and warehouses. The company defined clear responsibilities to ensure that distribution from its warehouses to distributors would meet service level and inventory objectives. Also, the company implemented policies to distinguish the relative priority of SKUs and of distributors. After a careful evaluation, Marico selected mySAP SCM to enable the associated planning and execution processes. These processes included calculation of monthly shipment requirements from its plants to its warehouses to support make-tostock operations, electronic transfer of stock level data from the distributors to Marico, and push distribution of products from

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