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Before Henry Ford and F. W.

Taylor introduced their pioneering 'assembly line' theory and started mass production, general-purpose machines were the order of the day and 'made-to-order' products ruled the industry where craftsmanship and customisation were the USPs. But Ford changed that to zero-variety 'made-to-stock'products and that remained the norm for almost 50 years. The introduction of CNC machines and FMSs meant that there was a shift back towards 'made-to-order' products. Soon there was an attempt to shift the point of differentiation further and build 'assemble-to-order' products. Currently, all three exist simultaneously. Their characteristics are given in Exhibit 1. (Click on Exhibit 1 to view it.)

According to Fisher (3), products can be classified as functional and innovative. Accordingly, the supply chains have to be efficient and responsive respectively. Made-to-order and assemble-to-order products are generally of the innovative type whereas made-to-stock products are functional. Their characteristics and supply chain requirements are given in Exhibit 2. (Click on Exhibit 2 to view it.)

For responsive supply chains due to the large number of SKUs and short PLCs, forecasting becomes difficult. This means more safety stock has to be kept. Some significant costs for each type of supply chain are given in Exhibit 3 (Click on Exhibit 3 to view it). On the other hand, for functional products, methods like Vendor-managed-inventory have been successfully used to reduce inventory.

Need for the Study

Responsiveness in a supply chain leads to increase in costs and complexity. So, a study of a company, which can bring in efficiency in a responsive supply chain, is necessary to understand the best practices in the industry. Also, a framework for reducing costs and complexity is necessary. Finally, increasing responsiveness cannot be valued by traditional capital budgeting methods. So a model is required for valuing such projects with embedded options.

Structure of the Report

This paper is divided into three parts. Part 1 shows a study of the Indian Paint Industry and shows how Asian Paints has increased its responsiveness, yet lowered costs. Part 2 suggests a framework by which inventories can be reduced even in a responsive supply chain. It provides an appropriate method of material classification by which proper prioritisation can be done. Part 3 gives an option-pricing model for increasing responsiveness with specific reference to the paint industry.

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.

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