A Factory Without General Stores
I was introduced to the MD of a multinational Glass Fibre unit in Hyderabad through a common friend in 1999. He had just taken over the job as MD after a year and half working on the project of buying up this unit from an Indian Corporate group on behalf of the MNC and now after the takeover he was given the responsibility of managing the day to day operations and scale up the unit to a higher level.
Soon after he took over he found there were a lot of operational issues which used to bog him down and he had to spend a lot of time resolving these issues which need not have come up to him at all. When I met him I was sharing with him my recent experiences with other businesses in India helping them adopt the concept of Business process re-engineering and how I found some dramatic changes and improvements when the management took it up seriously. He narrated an event that happened the previous day in his unit. He suddenly found on his table along with many other documents a note asking for approval for Rs 28/- towards an emergency medical expenses incurred in the factory along with the medical shop bill. He was furious but could not do anything except call the concerned people and give them a piece of his mind. He was told that since this purchase amount was not in the approved category as per company policy this has to be cleared by MD.
Hence when he met me he was immediately reminded of this and many more instances of a highly broken procurement process when he had to intervene everyday knocking out valuable time. He asked me to work on an assignment to Re-engineer their procurement process first.
When we started the assignment he felt that to make a quick impact on the power of this approach we must look at one of the areas where there would be immediate and dramatic change which will compel every one to adopt BPR in all aspects of their work. As usual we formed a cross functional team and were looking at the various areas where procurement was playing an important role. Suddenly the team members started talking about the complex ways in which they had to deal with the running of the factory canteen and the system of coupons and the amount of work involved in administering the same. And how many times they could get their canteen food even without the coupon when they happened to forget it in their homes. The team felt that if they could re-engineer the canteen process which affects every employee then BPR would become easily adoptable in other areas.
After analyzing all the aspects involved in the management of the canteen, the team found two important home truths based on the actual working. While there was a lot of administrative work associated with printing, distributing and accounting of coupons, in practice since the work load is huge the accounting of the coupons for making bill payment to the canteen contractor was in fact done in a cursory way only and most of the time whatever the bill the contractor submitted got passed based on an average cost per person estimate per meal. Suddenly the team realised that if the final act of procurement, the bill payment, actually gets done without 100% accounting for the coupons, and the actual payment was getting made based on an estimate of the average cost per person which is not documented, why not do away with the coupons altogether and pay the contractor only based on an agreed rate based on the number of people opting to eat at the factory canteen. Needless to say the first objections came from the finance and administration people. The admin said what if someone eats more dosas than the other or eats more food than others. There will be IR issues. The finance department said what if the contractor charges for people who don't eat. By this time the MD, who was still rankled by the experience of the Rs 28/- medical bill, gave his ruling asking everyone to implement the redesigned process immediately.
Very soon the management found that 5 people from admin and 2 from accounts apart from a large number of almirahs needed to store the coupons and room space were released from their work associated with managing the canteen coupons system and they could be assigned other work. Most important aspect was that both the workers and the canteen contractors were happy since they had a most cordial relationship since the management said workers can eat however much they want and the contractor now got paid based on the number of workers registered for canteen food. Very soon the management and the contractor found that workers on their own ate only that much food they needed to sustain and not excessively and the canteen contractor knowing well that his income is fixed based on numbers, found ways to reduce waste in the canteen. Win win for all.
This experiment encouraged everyone to take a relook at the complete procurement process. Like in any such continuous process unit the centerpiece of their operations apart from the glass making furnace which has to run for 24x7, 365 days continuously for 8 to 10 years before it is scrapped and rebuilt, the general store played an important role. This is the back bone for ensuring that the Glass furnace doesn't stop for any reason. Hence a lot of inventory was carried here just in case they will be needed suddenly. When we asked everyone connected with running of the plant how often many of the store items were really used the answer was from daily to once in a year to “not recall when we last used” this kind of story for most of the items.
The team also found that they had more than 3000 items of value about Rs 80-90 Lakhs in the general stores and nearly 600 plus suppliers were in their approved list most of whom were multiple vendors for the same items. Despite all this when an indent was raised it took at least a month and in many cases more than a month to procure any of the standard items in the store. We also found out that many items that the general store carried as inventory also were standard inventory in the supplier's premises, most of whom were dealers for these items of factory supplies. Since there were many suppliers for any item no supplier was sure of the quantum of business they could get from the company and hence they waited for firm orders before taking up actions for supply.
When the team was in the process of setting goals for the procurement process, they said why not we crash the inventory levels by 90%, number of vendors by 90% and the time taken to supply by 90%, the MD suggested why not we think out of the box and do away with the general stores and let the suppliers keep the stock and give us just in time. This was too much for any one to accept but then MD insisted that he wanted the re-engineered process to do away with the general stores and he can use that space for the factory production expansion he has planned.
When the redesign got completed the team found that it is not impossible to do away with General Stores if the number of vendors got reduced from 600 to 30 with literally a single vendor for each category of item like electrical, hardware etc. The vendors now had annual rate contracts with a provision of automatic review of the rate as the market moved with a guarantee of a substantial volume of business provided they dont fail even once in their commitments. The bill payment process also got simplified with the indentors directly dealing with the approved vendors and using IT passing the bills for payments by finance. As the technology improved even direct funds transfer to the vendors bank accounts were arranged.
When I met the team after a year I was surprised to find that the general store had in fact been replaced by a new manufacturing area and now they got calls from the vendor reminding them about when the time for replacement has come for some of the critical store items. The story did not end here. When the annual accounts were presented to the global head they were surprised to find zero inventory in the general store and they sent a special audit team to find what was going on. When they found out the re-engineered process made it possible to run the factory without general stores, they commended the Indian management and recommended that 77 plants located in different parts of their operations world wide should adopt this best practice.
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