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Part - I
What Type of Products are Paints?
Paint is a product where the number of SKUs is well over 1000 for the top paint companies. Yet only a few are fast selling. This leads to the following characteristics: -
Volumes of some SKUs are small and demand difficult to predict.
Wide distribution networks (similar to FMCGs) lead to high safety stock requirements.
Seasonal demand and High competition make obsolescence costs and stockout costs high.
The characteristics of the Functional-Innovative scale are given in Exhibit 4. (Click on Exhibit 4 to view it). From it we can infer that in the current scenario, paints are more of an innovative product.
Study of the Paint Industry
Before going into the study, some characteristics of the paint industry are mentioned1: -
Working Capital intensive: The number of shades is very large and a sufficient stock of every shade has to be maintained at all levels of the distribution channel, the working capital cycle is very high. The extent can be gauged from the fact that Asian Paints has a 12000 strong dealer network selling more than 150 shades. Also, the number of raw materials required can stretch upto 300. As majority of these raw materials are either imported or sourced from small chemical manufacturers, a large stockpile needs to be maintained.
Seasonal nature of demand: The demand peaks during festival season while is very lean during monsoons. Thus, a major part of the sales are achieved in the second half of the fiscal year.
An analysis of the supply chains of the three best performing Indian paint companies was carried out using the framework proposed by Shah and Singh (7). The objective was to find the companies with the most efficient supply chains and examine the functional strategies behind these efficiencies. The source of data was the PROWESS database maintained by CMIE. This was followed by a study of major Asian Paints retailers in Bangalore and to calculate the amount of inventory carried by the retailers. The results are given in Exhibit 5. (Click on Exhibit 5 to view it). The major findings are listed below: -
Goodlass Nerolac has the lowest raw material costs-could be due low bargaining power of suppliers or the use of cheaper substitutes. However, its WIP and finished goods inventories are high offsetting its gains.
WIP has reduced as the companies have moved towards dealer tinting systems and postponed the point of differentiation.
Finished goods inventory is lowest for Asian Paints. This is because:
The supply chain inefficiency is also the lowest for Asian Paints because of its efficient and responsive distribution networks.
The stock carried by retailers is less than 4 days and that too, whites are stored. If an order comes, the Colourworlds mix the white bases and tinters and supply. In case of other suppliers, they get supplies within a day from the nearest warehouse or shop with a tinting machine, all of which are located at strategic points to ensure quick delivery.
Two brands were found to provide majority of sales. Moreover, whites sell more than other shades2.
Inferences
Thus we see that the gain is due to a radical shift in process design and shifting the point of differentiation with an efficient distribution network that rivals have not been able to emulate. With this method they are able to wider range of shades, yet lower costs, and thus maximizing customer satisfaction.
Some functional Strategies that may be adopted: -
Since demand peaks in Diwali season, whites fast moving brands can be produced 2-3 months in advance, since error in forecasting is low for these.
Production of slow moving brands can be outsourced.
To improve supplier responsiveness, suppliers can be informed about expected demands 2-3 months in advance and in what range demand is expected to vary (for paints this would be quite high).
The following section gives a framework for deciding how much safety stocks to keep for raw materials and finished goods in environments similar to the paint industry.
While increasing responsiveness is good, the companies must at the same time ask themselves the following questions: -
Does the customer see benefit in having so many shades?
What are the customers' perceptions of the benefits of customized products?
Will the customer settle for something from a limited-range product line, with a standard product's options and variants fulfilling the customer needs?
How much is the customer willing to pay for customisation?
How long will the customer be willing to wait for customisation?
Next
1 http://www.indiainfoline.com/sect/pain/ch03.html
2 Based on interviews with retailers
* Contributed by -
Rajit Ghosh,
Done MBA from IIM Bangalore,
Currently working with Tata Strategic Management Group as a Consultant.
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