Chain reaction

GOOD TO GLOBAL

Ranbaxy CEO and MD
Brian Tempest

Given its influence on business drivers like cost, customer service and revenue generation, the supply chain can be a critical source of competitive advantage.

But building a global supply chain can be expensive, complex and prone to error. So, when is the right time for a company to take its supply chain global?

With Ranbaxy CEO and MD Brian Tempest, Manjari Raman tracks the pharma major's initiative to optimally manage its 19 factories in seven countries, even as Harvard Business School professor Ananth Raman emphasises that global supply chains begin and end with the customer.

Let the records show that on April 12, 2003, Ranbaxy Laboratories Ltd dodged a bullet.

On that day, Ranbaxy admitted that before it could dream of becoming a $5 billion pharmaceutical giant "" and one of the world's top five generics manufacturers "" it needed to avert a potential, life-threatening crisis. Before it could rule the world, it had to gird the globe with a supply chain "" one that delivered the right product at the right place at the right time in every hemisphere. Says Brian Tempest, managing director and CEO, Ranbaxy: "It's taken quite some time to get to where we are, and we've still got a lot of work to do. But, thank God, we started a year and a half ago."

Ranbaxy's supply chain is nightmarish in its complexity. It manufactures 5,000 stock-keeping units (SKUs) in 19 factories in seven countries and sells them in more than 100 countries. Eighteen months ago, Ranbaxy embarked on a mission called Spectrum "" a handy acronym for "Supply chain Planning for Enhancing Customer service To Ranbaxy's Universal Markets" "" to sort out its global supply chain's skeins. The project's short-term goal was to optimise inventory in such a way that there was a significant improvement in customer service, but over the long-term, Spectrum is meant to help Ranbaxy gain competitive advantage.

So far, it's been a mixed blessing. While Ranbaxy claims that key performance criteria "" like commitment versus delivery "" have already improved, the organisation is still feverishly coping with Spectrum-itis. With consultancy company Accenture helping with the heavy lifting, the project has cost more than $1 million. It's worth it, however, says Tempest. "We believe that if we don't have the very best supply chain, it will limit Ranbaxy's growth."

That's smart thinking. On the one hand, the supply chain is a critical source of competitive advantage or disadvantage for a global company because it directly influences business drivers like cost, customer service, asset productivity and revenue generation. On the other hand, a global supply chain raises tough challenges. The investment is high, managing it is complex, and the propensity to make blunders is high. There comes a point in the life-cycle of an emerging globaliser when it not only makes sense to take the supply chain global, it's foolish not to. Ranbaxy recognised that inflexion point. But for most emerging globalisers, it's a tough call. When is the right time for a company to take its supply chain global?

Ananth Raman, a professor of management at the Harvard Business School and one of the world's leading authorities on supply chain management, says that the guiding principal is simple: "Your customer should be excited about what you do [with your supply chain] "" and reward you with either better prices or more business and preferably, both." If building a global supply chain gives the company only a marginal benefit and the same value could have been achieved by operating in one country, says Raman, the company should reconsider its options. In those circumstances, a global supply chain may be costly and leave the company vulnerable. He adds: "A company shouldn't want to have a global supply chain unless the benefits are substantial."

That settled, consider:

People and processes, not technology

Depending on technology for your global supply chain is like putting the cart before the horse; it won't work. Spectrum's most sophisticated IT component "" so far "" has been an Excel spreadsheet. Instead of technology, the focus has been on developing a robust, integrated planning mechanism. The processes have ranged from forecasting, demand planning, supply planning, quality control, scheduling, rationalising the number of SKUs, standardisation and last, but not least, new product launches. Says Tempest: "In the next few years, the complexity in Ranbaxy's supply chain will come not from new geographies, but a steady stream of new products."

For each process, the Spectrum team designed a best fit process, implemented it, and then tracked key performance indicators to monitor process improvement. Right from day one, it was clear that Spectrum's real success lay in the people who would manage those processes. The April 12, 2003, kick-off brought together 45 young men and women of different nationalities from across Ranbaxy's global operations. They were appointed Demand or Supply Planners; and given the responsibility of making Ranbaxy's supply chain world class. "Spectrum is a lot about processes and a lot about people," points out Tempest.

That changed somewhat in May 2004, when Ranbaxy launched the next phase: Project Spectrum +. Until then, processes had been either manual or used simple automated tools like Excel or Visual Basic. But now, Ranbaxy decided to bring in a sophisticated software tool for electronic planning and scheduling: Advanced Planner and Optimizer (APO), a SAP product that has plenty of bells, whistles "" and pitfalls.

On paper, APO promises to help Ranbaxy build a world-class supply chain using advanced algorithms to improve forecasting and optimise production schedules, and facilitating complex what-if analysis. In practice, it could give Ranbaxy a world-class headache. Stressing that process discipline is what really matters, Raman warns: "There are only some things a firm can track with technology. There's a lot of information in a global supply chain that's hard to codify."

Going forward, Ranbaxy's challenge will lie in not getting distracted by the cumbersome implementation, and focusing on extracting competitive juice from all the electronic power of the APO. Already, the strain is showing. The APO is scheduled to be "implemented" by end 2005 "" when it will cover seven key markets and five plants covering 70 per cent of Ranbaxy's business. Says Tempest: "When we put an enterprise resource planning system it was hard "" and I think Spectrum+ is going to be an even more difficult process. It's going to take us a few years to get on top of it. It's not a quick fix."

Customers, not countries

A good supply chain is one that is designed to serve the customer best "" it's as simple as that. In 2001, when Singapore-based Flexotronics was asked to manufacture the Xbox video game hardware for Microsoft, it realised the speed was of the essence. Microsoft wanted the Xbox in stores before December to maximise Christmas sales. To ensure a quick launch, Flexotronics based Xbox production at its facilities in Mexico and Hungary.

Even though the plants were not the cheapest sites in the world, they were closest to Xbox's biggest markets, US and Europe, respectively. Next year, when Sony fought back by aggressive dropping prices on its Playstation 2, Flextronics realised that it could serve Microsoft best by slashing manufacturing costs "" and shifted the Xbox supply chain to China. Says Raman: "The customer is where all supply chains should start."

In most cases, the nature of the demand "" the product life cycle, demand predictability, product variety and market standards for lead times and service "" for a company's products defines the kind of supply chain it must develops (See box). At other times, supply chains are dispersed around the globe to diversify risk. Government regulations often drive kinks into the supply chain. In all cases, according to Raman, two questions should bring sanity to the madness: how predictable is the world in which the company operates (particularly important for pharmaceuticals where a change in government regulations changes markets), and how capable is the company of coordinating a supply chain. Says Raman: "The customer doesn't necessarily need production to be based in a certain region of the world. The customer only needs the appropriate supply chain for each product on each day "" and needs change by product, by day."

According to Tempest, Ranbaxy believes that India is the best location for manufacturing the best quality at the best price "" yet, it refuses to be India-centric. Instead, since 40 per cent of its business comes from the US; it has four manufacturing facilities there. Similarly, having a manufacturing base in Ireland helped Ranbaxy meet European regulations. According to Raman, a smart supply chain is one that builds a partnership with customers. Says he: "If customers feel that Ranbaxy is not going to push India on them, they are more likely to say that "we're having a strategy meeting, why don't you show up too?"

Orchestra, not instruments

A well managed supply chain is like Beethoven's "Eroica" "" it's a symphony of well-orchestrated pieces. According to Raman, just as a conductor can't play favourites, a company has to treat all parts of its supply chain fairly. If one manufacturing facility is more cost-efficient, another might be more flexible and adaptable. Smart supply chains are based on figuring out the best of each element and leveraging on the strengths. At Polaroid, for example, the US plant was used for new product launches because the design team was close by. As soon as the product was ready for large-scale production, Polaroid would shift manufacturing to Ireland, where costs were cheaper. The goal, says Raman, is not only to be fair, but to be seen to be fair.

"If a company says that what it does in India is what 'we' do, and what it does in Korea is what 'they' do "" it's in trouble," cautions Raman. That may have been at the heart of designing Ranbaxy's Spectrum initiative. Seven key markets "" the US, the UK, Germany, China, India, Vietnam and Brazil "" and key manufacturing plants at Dewas and Mohali were identified for implementing those processes.

Those markets and plants were chosen first since they represented a mix of complexity, volumes and business models, ranging from complex consumer markets to steadier institutional demand. By June 2004, however, the processes were implemented in all of Ranbaxy's outposts. Says Tempest: "One of the critical issues we wanted to bring to our supply chain was transparency."

Not only has Spectrum allowed Ranbaxy to hone in on the level of forecasting accuracy, it has also brought about clarity on capability. Says Tempest: "We measure a lot of metrics in terms of what the countries desire and what the factories can commit to. And then we measure a second set of metrics that track what the factories actually delivered versus what they committed to. Finally, all this ties into measuring what was available and what was supplied on time and in full."

Spectrum, therefore, leaves no room for excuses and makes every one in Ranbaxy speak the same language. Indeed, the key metric that everyone tracks is DIFOT "" Delivery In Full, On Time "" a measure of service to end customers. That is measured every month for all countries. Says Tempest: "We know at the beginning of the month how much inventory is needed to fulfil all the demand in the next 30 days, and whether it is available in our warehouses in the first week of the month."

 

CHOOSING THE RIGHT SUPPLY CHAIN
	Physically-efficient supply chain	Market-responsive supply chain
Primary purpose	Supplies predictable demand efficiently at the lowest possible cost	Responds quickly to unpredictable demand in order to minimise stockouts, forced markdowns, and obsolete inventory
Manufacturing focus	Maintains high average utilisation rate	Deploys excess buffer capacity
Inventory strategy	Generates high turns and minimises inventory throughout the chain	Deploys significant buffer stocks of parts or unfinished goods
Lead-time focus	Shortens lead time as long as it doesn't increase cost	Invests aggressively in ways to reduce lead time
Approach to choosing suppliers	Selects primarily for cost and quality	Selects primarily for speed, flexibility and quality
Product-design strategy	Maximises performance and minimises cost	Uses modular design in order to postpone product differentiation for as long as possible
Source: "What is the Right Supply Chain for Your Product'', Harvard Business Review, March-April 1997

Top-down, not inside-out

"Green Volvos" is the title of the scariest story in supply chain management's fat book of horrors. In 1995, Volvo manufactured more green cars than it could sell. So the sales and marketing people began offering deep discounts to dealers. When the supply chain team noticed more green Volvos were being sold, they doubled the production of green cars. By 1996, Volvo had twice the stock of unsold green Volvos! Says Raman: "The hardest part of a global supply chain is coordination. Most companies end up paying the costs of poor coordination."

The tentacles of a supply chain ensnarl an organisation chart. Unless top management can look horizontally across functions, align them, and iron out the tensions between product-divisions, a supply chain has little chance of not getting snagged. The challenge is particularly severe when an organisation becomes global. Very quickly, the merging globaliser's reporting structure begins to look like a complex matrix of country heads, product/service heads, heads of factories and plants.

Balancing a global perspective against local pressures becomes critical. Says Raman: "The person who is managing region A may have to be told to send his production to a factory in region B, and leave a factory in his region idle because it's better for the company as a whole. That gets tricky."

Even more so, adds Tempest, at Ranbaxy which has management teams in more than 40 countries. Not surprisingly, Spectrum forced Ranbaxy to conduct a fundamental reorganisation. A Global Planning Hub was formed and given the responsibility for coordinating supply with demand. The demand from each geographic market is managed by its own Regional Demand Planner, who creates a statistical forecast based on historical data and by using algorithms related to the market for which he or she is responsible. The forecast includes inputs from sales and business heads in the region and factors in stocks, safety stocks, and time-phasing to arrive at the region's Net Demand Requirements.

The Global Planning Hub gets all the Net Demand Requirements from across the different countries, aggregates them and then de-segregates them based on the plant where those SKUs are manufactured. That information goes to Global Supply Planners who are based at Ranbaxy's 19 plants. The planners are responsible for carrying out Rough Cut Capacity Planning for their plant based on variables like capacity, manpower and key materials. Pulling all this together is a Director of Global Supply Chain, who is based in Delhi but monitors and co-ordinates the entire supply chain. That's not all. Tempest gets personally involved in tracking key performance parameters every month. Raman approves: "That's one job you can't delegate."

True. But that still left me with one final niggling question: what is the test of a good global supply chain? How can a company know whether its supply chain is working or not? In a flash, Raman was back at the core issue of customers. Says he: "To understand whether a company is leveraging the global-ness of its supply chain or not, it should ask: are we able to do things for our customers that we would not have been able to do if our supply chain was present only in one country?"

That figures; if global supply chains start with the customer, they must end with the customer too.