Case 11

Econ Industry

Strategic Procurement Initiatives

Econ Industry (EI) is a leading parts and accessories manufacturing company supplying to the automobile majors in India. Econ produces parts made out of engineering plastics. The company's strength is its R&D wherein they spend a large part of their revenue for developing plastic parts. They procure raw materials, that is, chemicals for formulation for metal substitutes. Econ is purchasing raw plastics in the form of nodules and with the right process they mould the parts as per the requirements of the customers (OEMs).

Econ is facing a lot of competition from small-scale industries. However, because of its high-quality products and delivery performance, it is a preferred supplier to all automobile manufactures in India. To be more competitive and cost-effective, Econ has gone for new supply chain initiatives. They first focused on the procurement and subsequently move to the manufacturing and finally to the distribution process. The aim of new SC initiative was to implement JIT in its SC process.

Initially, they applied Pareto's law, that is, 80/20 rule to its inbound inventory and finally decided to concentrate on five of the inputs which are high-value and also critical in nature during manufacturing. These items are required for faster moving products and resulted in higher inventory velocity. Econ has a wide network of suppliers; the critical materials were sourced from a limited number of them. In those case contracts, bids were a ritual, with the winner known well in advance. Econ reviewed the service performances of the suppliers and wanted deliveries within 10 days from the date of order. Econ decided to have on-time delivery with plus or minus 2 days from the scheduled delivery date. This decision meant a 5-day service window. Econ wanted a minimum service within the 5-day window over 93 per cent fulfilment.

The manufacturing department wants a mixture of plastics as raw material. Econ's manufacturing process requires five major raw materials. The company's current procurement policy is to source each of these compounds from major suppliers through an annual rate contract process. Econ traditionally considered the best offer on the lowest price. But due to the new guidelines, the suppliers are to be selected on the basis of lead time on delivery performance and order fulfilment rates. The analysis of past data on suppliers’ performance is shown in Exhibit 1.

Exhibit 3 Suppliers’ Performance

Econ has now evolved the performance criteria of delivery within 4 days with a margin of 2 days further with the minimum fill rate over 93 per cent. Econ has a very flexible manufacturing process and takes up batch processing of different components without any time delay.

In order to avoid material shortages and thereby maximize production, Econ is maintaining a 6 days’ inventory for each of the raw material. Econ wants to slowly change over to the JIT system. The company has recently implemented the ERP system. Marketing/sales department receive the customer orders online. This allows the manufacturing department to monitor the incoming materials’ shipments as well as schedule the production runs. Under this system, most of the customer orders are produced within 5–7 days of the order. The material, after being manufactured, is sent to the distribution department for onward dispatch to the respective customers.

Three to four days normally go by from the time the material leaves the manufacturing plant till it is shipped from the warehouse. The 80 per cent of Econ's customers are within 250 km from the plant. Econ now wants to select the right suppliers for the raw materials, keeping in mind the new selection criteria.

REVIEW QUESTIONS

1. Map Econ's supply chain indicating the value-added activities.
2. 2. Using the new performance criteria, select the suppliers and allocate the quantities to be procured from them.
3. Discuss the scope of performance improvements at suppliers’ end.