Ashok Leyland Supply Chain Revamp

Submitted by
Vineet Chaturvedi

Revamping the Supply Chain: The Ashok Leyland Way:

Introduction
V Ramachandran, Deputy General Manager, Corporate Buying Cell, Ashok Leyland (AL), the
Chennai based

manufacturer of medium and heavy commercial vehicles was surfing the

Internet at midday in his office. A closer look at the screen showed that he had logged on to
an auction site. But this auction site was different. Ramachandran was looking for suppliers of
some specific tyres in the global market. At a price of $350, five suppliers were interested. He
then lowered the price by $5. Now three of them were willing. Ramachandran kept lowering the
price, each time by
$5. At $325, there was only one response- the seller asked for an hour's time to confirm. Within
one hour, the Czechoslovakian company confirmed it could

supply the tyres. Both parties

then signed up by e-mail and the deal was struck at $325, saving Ashok Leyland Rs 14,700
per set. Known as reverse auction, this was one of the many ways AL was reducing materials
cost, which accounted for nearly 70 per cent of its product cost.
1

In 1997-98, AL, recorded a profit-after-tax (PAT) of Rs. 18.4 crore on sales of Rs. 2,014.3 crores.
A look at the previous financial year's PAT showed that the profits for 1997-98 had gone for a
severe beating. In 1996-97 AL had a PAT of Rs. 124.9 crore on sales of Rs. 2, 482.5 crore.
With the manufacturing Industry reeling under

recession, the freight generating sectors

(manufacturing, mining and quarrying) saw a steep decline resulting in a severe downturn of
freight volumes. For AL, whose

business was directly dependent on moving material, goods

and people across

2

distances, this had come as a severe blow. AL's supply chain had gone haywire under the
recession which had eaten away 17.62 per cent of its revenues in one year forcing the company
to helplessly allow inventories to build up. The results were showing on working capital. It
had climbed from 33.34% of sales in 1993-94 to 58.81% in 1997-98.

'Together We Can' - Beat the Recession

AL did not seem to succumb to the 'uncertainty gloom'

that was playing havoc

to its

business environment. It decided to meet the challenge by re-gearing its systems,

be it

material order, procurement, material handling, inventory control or production. AL conducted

3

brainstorming sessions inviting ideas on cost cutting. Quality Circle teams were formed for this
purpose. Said Thomas T. Abraham, deputy general manager, Corporate Communications, "Our
Quality Circle teams were very helpful at this juncture and the worker involvement made it
easier to address
cost cutting." AL took every employee's ideas into account and figured out a way to keep things
going and reduce production without inflicting pain.
The recession saw AL waging a war on wastage and inefficiency. AL took many initiatives ranging
from tiering its vendor network to reducing the number of vendors, and consequently, moving to
4

a just-in-time

(J-I-T)

ordering

system,

to

joint-improvement

programmes

(JIP),

which

were essentially exercises in value-engineering undertaken in association with key vendors. It

set up different tier-levels to improve the quality of the suppliers. Tiering formed the basis of the
vendor- consolidation drive. Till 1998, Ashok Leyland used to source the 62 components that
went into its front-end structure of its trucks and buses, from 16 suppliers. In 2000, one tier-I
vendor sourced
the products from the other vendors and supplied the assembly to the company. This saved
cost and

time

provided

the

vendor

network

was

well

coordinated

with

AL's

own

manufacturing operations.
At

AL,

Vendor

Development

Materials Department (CMD).

and

Strategic

Sourcing

CMD identified the vendors,

were

handled

by

Corporate

rated the vendors

based

on

feedback received from Supplier Quality Assurance Cell, send drawings/specifications, called for
quotes with detailed breakup of operation-wise costs, and negotiated the price at which the parts
would be supplied. In addition to CMD, there were Materials Management Departments (MMDs)
for scheduling based on unit production plan.
AL's purchasing philosophy was to maximize bought-out parts. Over 90% of the parts were
bought-out.

AL believed in global

sourcing. Consistent with its operational needs, AL

considered both domestic (Indian) as well as international vendors. Global sourcing was normally
resorted to overcome local

constraints in the form

effectiveness. AL considered new

suppliers for

of technology, quality, capacity or cost

required components,

based

on

Vendors'

ability to meet its specification, price and delivery schedules. Vendors were required to have a
strong manufacturing base

with adequate engineering support for their own

product

development activities, as needed by the category of product.

AL's policy was to develop a vendor base committed to continuous improvement to meet quality,

'Together We Can' - Beat the Recession

cost and delivery standards. AL considered its vendors as partners in progress and believed
in

establishing mutually beneficial relationships. It provided necessary

the form

technical assistance in

of project and production engineering, to maintain quality levels. In addition, where

required, it also

helped

vendors

financially. AL's Vendors

were

expected to have

a good

quality system. Vendors' quality system had to encompass the following: cost effective process,
assured

process capability,

continuous

improvements

based

on

customer feedback,

compliance of all statutory/legal/commercial requirements of AL, a stage of development where

the Vendor could come under AL's self-certification system, and, traceability - first-in first-out.
AL also placed emphasis on optimizing the inventory and vendors were required to progressively
meet "Just-in-Time" requirements. Delivery modes as well

as packaging were

required to

minimize the handling/loading and unloading time. AL preferred a manufacturing/assembly/

support base at close proximity to the production units.
Commenting on
director, human

the relationship AL shared

J.N.

Amrolia, executive

resources, said, "The close working relationship with the vendors

development program have

understand

with its vendors,

for vendor

benefitted us a lot in cost cutting and making the vendors

the complexities of material handling."

This resulted in low

inventories all

through the chain. He further added, "We stabilized the inward material flows as well as the
outbound material and that saved

us a lot on

the inventory." In

the late 2000, AL's

systems were closer to J-I-T with inventories averaging just seven days, down from three weeks
in the late 1990s.
AL seemed to realize that cost cutting would work only if the supply chain was smooth. Thus,
in
1999,

AL

launched

Project

OSCARS

(Optimizing

Sourcing). OSCARS identified two methods to reduce

Supply

Chain

Rationalizing

costs in the inbound supply

reduce material costs and through optimum inventory levels reduce

carrying costs.

and

chain:

the invisible inventory

The basic tenets of OSCARS were: a single strategic sourcing agency at the

corporate level with local, unit- level scheduling; smaller, stronger vendor base preference for
vendors who had access to technology; and to bring down supply chain costs.

Single Window System

The Strategic Sourcing and Corporate Quality Engineering (CQE) teams jointly formed the single
window vendor management agency, bringing with them specialised commercial and technical
knowledge. Within

the

centrally negotiated

price and

share

of business, unit

material

functions interacted with the approved panel of vendors to "pull" materials in line with their
production plans.
For the suppliers, this had created a convenient single-point contact with AL, for sharing
drawings, for

negotiating prices and

long-term business

volumes,

and for

assistance and

consultancy on quality to management issues. This corporate buying seemed to have benefited
AL through consolidation of business per supplier and dealing from a position of strength that
consolidated volumes.
The starting block
which were
business
based

was the creation of a company-wide database for the 22,000-plus parts

matched with suppliers' part numbers. This revealed

and differential pricing

on

at

units. A classification

a picture of fragmented

of the 1,400-odd suppliers,

business volumes, showed that 18 per cent accounted for 92.5 per cent of the

business, while 61 per cent handled just 1.9 per cent. In Phase I, corporate buying covered major
suppliers (Rs 10 lakh plus per year). The materials were classified into "packs" (broad

groups

of similar items) with one representative each from the CMD and the CQE forming a threelegged race team of specialists for each pack.

Supplier Tiering
AL pruned its panel of direct suppliers through tiering and system buying. Under tiering, AL
dealt directly with tier-one suppliers who, in turn, were supported by tier-two and tier-three
suppliers. The benefits of system buying could be illustrated with the example of the tool
kits that accompanied every vehicle. In the late 1990s,

six suppliers' spread over Punjab,

Faridabad, Bangalore and Chennai used to supply the 15 items, which were assembled

in-

house. A short supply of 1,000 screwdrivers meant 1,000 numbers of the remaining 14 items
in idle inventories. To overcome this problem, AL aimed at a reduction of its supplier base from
1,400 to 750.
Strategic sourcing aimed at reducing costs
painless and

sustainable.

Tear

down

for the supplier so that the gains were

studies

and

constitution and composition of a part to prune

or

value

engineering

analyzed

real,
the

costs through substitution, reduction

elimination of materials/sub-assemblies without affecting quality and performance. The

cost benefits were shared with the partnering supplier.

AL focused on a JIT approach for high value/high volume items and low cost logistics for low
value high volume items. Project OSCARS brought about a few fundamental changes. The push
system ("let us make all we can just in case we need it") which resulted in upto 45 days of
inventories of components compared to between 3 and 5 days globally had given way to the pull
system ("make what the customer needs, when he needs it"). Each stage produced only as
much as the next stage needed. Thus, only when a new chassis was loaded did the request go
out for the supply of an engine assembly, and so on, for the front and rear axle assembly lines,
and for the components that went into them. This resulted in a savings of Rs 8.50 crore a year
and a lean supply chain.
To begin with, Project Oscars

classified the

main components

used

by the company

into Categories 'A' (amounting to 75 per cent of the total cost of components), 'B' (18 per cent),
and 'C' (7 per cent), with their suppliers also being classified accordingly. Then, AL devised
different delivery systems for each category, aimed at cutting inventory-holdings.
The

plant sent a J-I-T card, specifying the part number, quantity and

the unloading

location, through courier, fax or e-mail to the supplier who promptly dispatched the required
consignment directly to the assembly line. But how did it guess AL's requirement? For that,
Project OSCARS devised a funnel-planning system, covering 12 weeks

of requirements. The

immediate two weeks' plan was frozen and the next two weeks' semi frozen, the balance eight
weeks' plan was tentative. Thus, the vendor already knew roughly when to expect the J-I-T card.
To reward the vendors for conforming to the schedule, Project OSCARS planned a reduction
in their numbers to 200 over a 3-year time frame. Said S. Nagarajan, Executive Director, AL, "We
are looking at giving a minimum business of Rs 1 crore to each supplier involved with us." AL

Supplier Tiering
also

provided technological inputs for troubleshooting on the suppliers' shopfloors, so that they
could cut their costs.

Oscars II
After revamping the inbound supply chain, AL went out to revamp the out-bound supply chain.
The revamp
objectives

of the

out-bound supply

chain (code

named

OSCARS II)

of improving customer satisfaction and reducing finished goods

had

the

twin

inventories, and

reaching improved service levels with optimum pipeline inventory levels.

A customer survey and a study of benchmarks had come out with three major parameters
for service level targets: order to delivery time, reliability of deliveries and availability of order
status information. The customer could expect delivery in five days from the date of payment, for
regular models. For multi-axled vehicles, the promised period was two to four weeks. The second
promise was that the age of the vehicle when delivered would be a maximum of 90 days.
In the new structure, plant sales yards acted as national pools to hold rare models (called "strangers")
and excess of regional requirements. The next tier was made up of the five regional stock pools, which
ensured just-in-time supplies to all regional sales offices.
Said Amol J Sandil,

executive director,

marketing,

"Within

the objectives of OSCARS II,

namely,

achieving efficient distribution and working capital management, we have been able to improve customer
satisfaction by cutting down on delivery time." He further added, "Qualitative improvements in demand
forecasting and data management have been central to this achievement".
In 1999, AL also adopted Total Quality Management practices. The Hosur plant in Karnataka came out with
a new TQM process which seemed to be a success. (Refer Table I).

The Seven Plus One TQM Method

Rule

Objective

Total

Cost

Management

Cut Cost

(TCM)

Energy

Optimize energy

Management

loss

Value Engineering

Efficient

(VE)

material usage

Cross

Functional

Synergy

Result

Within a year, operating cost as a percentage

of plant turnover was down by a third.

Overall energy saving. Average power cost

per product reduced

by 30.06% without

additional investment.

Substantial reduction in the chasis cost.

The very first CFTs resulted in savings of Rs.

Teams (CFT)

18.2 million.
The

Suggestion

handling

of

suggestion

has

Involve everyone resulted in continuous, suggestions to cut

Scheme

Source:
2000.

quick

cost and improve quality.

Inventory

Better

Probably the best IM today in the

Management (IM)

housekeeping

Industry that has resulted in a lot of saving.

Shop

Monitor

Fix Operating cost as per cent of shop

Investment

and

Programme

Utilize

turnover machines efficiently.

Plus One

Training

Training across all levels in the organization.

'Geared

Up', A&M, November 15,

However, with all these activities at the shop floor, AL did not lose sight of the customer.
To understand customer needs and assimilate the knowledge, AL adopted '4P' Programme: Probe,
Prioritize, Plan and Position. This worked in tandem with manufacturing as part of a crossfunctional team (CFT). The CFTs worked towards continuous improvement in products and
marketing. AL also built a 'marketing information system' (MIS) to monitor the trends and
forecast demand from the inputs of the dealers and field executives.

The Comeback
In the first half of 1999-2000, AL recorded a net profit of Rs 1.9 crore on sales of Rs 1,092.8
crore, against a Rs 36.7 crore loss for the corresponding period in 1998-99. This seemed to have
been possible due to operational efficiency resulting from strategic raw material sourcing, with
fewer sources and higher volumes, which cut costs; better control over process inputs by
tightening supply

chain and

inventories and;

savings on energy, tools, spares

reduced operating

expenses

through

cost

and adoption of preventive maintenance policies. In 1999-

2000, raw material costs were down 1-2% and inventories reduced by Rs 300 crore. Also in
1999-2000, AL sold 37,859 heavy commercial vehicles (HCVs), 27% more than it did in 199899. AL's total income in 19992000, at Rs 2,611.41 crore

was 25% higher than the corresponding figure for 1998-99.

Its operational profits in 1999-2000 was Rs 55 crore, Rs.77 crore

more than the Rs 12-crore

operating loss it had made in 1998-99.

However, analysts felt that the comeback of AL could
recession. They cited the example
growth in sales volumes

be attributed to the end of the

of its main rival, TELCO, which also registered a 37.5%

in 1999-2000. For AL officials the 'bad years' between 1997 and

2000 made it pinpoint its focus on critical issues like cost-reduction, operational improvement,
and market penetration. Commented,

R. Seshasayee,

Chairman,

AL, "The

recession made

us hasten the process of improvement that we had been working on for some time."

Still, in 1999-2000, despite the reduction, the company's material cost, expressed as a
percentage of sales was, at 70%, 3% higher than that incurred by TELCO. Said Arindam
Bhattacharya, Principal, A.T. Kearney, who

was involved in Ashok Leyland's

"While the company has made significant progress,

standards in inventory management and productivity."

turnaround effort,

it will still take time to achieve global

Case Analysis
CHALLENGES WITH ASHOK LEYLAND
The biggest Challenge with Ashok Leyland as to cut costs in terms of
-

Material Procurement cost

Inventory Holding Cost

Logistics Cost (Inbound/Outbound)

HOW DID THE COMPA NY HANDLED THE C HALLENGES

Cutting Material Purchase cost
Reverse Auction - The Company used methods such as REVERSE AUCTION to gain the advantage
of competition in the market. It was one of the best methods to cut the material purchase cost.
Vendor Management System Ashok Leyland developed a vendor base. They reduced the number
of vendors

and then conducted Joint-Improvement Operations through which the vendors

realized their strong and weak points and improved upon them to meet ALs quality, cost and
delivery standards.
AL formulated a self development program for vendors for the same which was based on the
customer feedback.
Cutting Inventory holding costs
Implementing Just In Time (JIT) Deliveries This minimized the inventory holding costs,
time with respect to loading / unloading and enhanced the working capital.
Better forecasting AL also used better qualitative and quantitative techniques to forecast
the demand in a better way, thereby, preparing efficient production plans.
The forecasting was also based on the inputs from dealers and field staff which they would have
combined with the system generated forecast figures and would have came upon
based forecasting.

consensus

Reducing Logistics Cost

Optimize Inbound & Outbound Logistics
Inbound logistics - AL created a single window contact system for vendors which comprised if
the strategic sourcing and quality engineering people. They shared the information about the
technical requirements of the company with the approved pool of vendors.
Vendors in turn would share the new designs, drawings and technologies with the Companys
team. AL always treated its vendors as its business partners.
AL nurtured them with the technical knowledge which the company required in order to sustain
in the market. In turn, the vendors supplied them with the desired products and services.
This helped in reducing the communication gap amongst the suppliers and the buyers as well
as reduced companys time which was usually spent in search of key vendors and further
negotiations.
The cost benefit gained by the company by implementing this process was shared by the suppliers
which further motivated the vendors to work more efficiently and with low costs.
LEAN MANUFACTURING AL also implemented the concept of lean manufacturing which
indicates to produce only that much quantity which is demanded by the customer. This brought
down the inventory of AL from 45 days to just 5 days, thereby saving approximately Rs. 8.5 Crore.
Outbound logistic s AL focused on the 3 major targets
-

On time Deliveries
Reliability of delivery
Order status monitoring

To ensure on-time deliveries, they restructured their warehouses. The plant warehouses were used
to store the not-so-fast moving goods whereas, the regional warehouses were used to store the
JIT orders.
This helped AL in cutting down
enhanced the working capital.

the inventory holding cost, enabled deliveries in time and

Total Quality M anage ment AL also implemented the total quality management techniques
on shop floor which always focused on cost cutting, energy saving, efficient material usage,
better housekeeping, training and development and brainstorming sessions amongst the
company staff, thereby involving everyone in pouring out ideas for savings in operational costs.

SWOT ANALYSIS

Strengths

Weakne ss

1. Good brand value of AL

1. High inventory due to false forecasting

2. Good market share

2. Major

3. Efficient Vendor base

tasks remained un-accomplished

due to incomplete minor tasks

4. Tech-savvy staff

3. Skew

5. Readiness of absorb the new

demand

(demand

based

on

industrial production)

technologies

Opp ortunities
1.

Threats

Good opportunity in savings in terms

1.

Can lose their competitive edge due to

of Inventory holding cost, Logistics

absorption of costs

cost.

resulting in loss of profitability or loss

2. Can very well exploit their vendors by

more

developing

the

educating them with regard

products,

tools,

machinery,

and their future requirements

vendors,
to the
designs

in market

share

as

if not minimized

more

efficient

competitors will overtake the volume

AL.

of