Vendors are the King Maker

Apex Electronics Ltd (AEL), is a 15 y ear old Co. headquartered at Delhi, manufacturing electronic as well as
consumed durable products like CTVs, audio-systems, washing machine, computer monitors, etc., with a turnover
at about Rs. 1,500 crore. The Co. has two production plants situated as Noida (just 15 km from Delhi) and
Bangalore. In the year 1999, the Co, also established a Plant at Taiwan for the production of some components
which are used in the production of various products in India. The main purpose behind the establishment of the
Plant at Taiwan has been quite strategic, because presently, Taiwan is dominating the global scenario of electronic
component industry and it has about 60% share of Indias imports of electronics.
For the production of electronic products at Noida and Bangalore, AEL procures around 1000 parts and
components. The present sourcing structure, the distance of the sources from the Plants and the normal
replenishment cycle time are as under
Parts and components Distance of sources from Plants
Normal Replenishment cycle time
20%
Overseas (Taiwan)
60 days
40%
Within 100 km
5.7 days
40%
Around 2500 km
10.15 day s
At present, for the procurement of various local parts and components, AEL is sourcing from 4-5 vendors and the
remaining parts are procured from the firms Taiwan plant. The normal replenishment cycle time to customer
(reseller) is 30-40 working days. The parts and components supplied by vendors are first received by the stores
department, where an extensive quality check is undertaken by the Inspection Division, which also generates a
performance report twice a month and sends to the respective vendors, providing a feedback. At the same time, this
system facilities in the implementation of Reward and Punishment System. Under this system, vendor showing an
excellent performance (less than 5% defective delivery) for continuous 3 months will get an additional bonus of
0.5% on the price for his products till such time as he maintains the quality. At the same time, when a vendor makes
defective delivery (more than 15%) continuously for a month, he is punished by way of a deduction of 0.5% in the
billed price along with logistical costs (both inward and reverse). AEL also provides technical support and
improvement mechanisms from time-to-time to those vendors who exhibit inconsistency in the performance.
Normally, the Co. has cooperative relationships (3-5 years) with those vendors. It also offers and maintains alliance
relationships (3-5 year) with those vendors who have excellent performance for six months at a stretch and are able
to maintain the same performance level. Whereas, partnering relationships (5-10 years) are offered to those vendors
who deliver products without rejects and also issue a certificate of achievement. This policy of the Co. encourages
vendors to become more sensitive towards the quality aspect. 20% of components which are procured from the
Taiwan plant of the Co., are not inspected for quality check. When consignments arrive from the Taiwan plant, they
are stored in the plant and, from there, directly placed on the production line.
With the above well- defined system, the Co. has enjoyed quite a comfortable position in the Indian market. But,
due to gradual transformation in the Indian consumer durable industry, which has been one of the worst affected in
the recent past, AEL is facing problems in terms of volume of sales, profitability as well as market share. There are
many factors behind the prevailing scenario in the consumer durable industry, such as recent economic slow down,
the entry of large MNCs like LG, Samsung, Akai, Sony, etc., du e to the liberalization policy of the Government of
India, who have irrevocably changed the landscape, spoiling the Indian consumers like never before with a
bewildering array of products. The MNCs have world-class technology products as well as supply chain processes.
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Furthermore, the Indian consumer durable industry has been valued at Rs. 15,000 crore in 20 01. One unique
feature of this industry is in terms of multi brand-multi product distribution system. In other words, most of the
dealers of this industry deal with multiple brand products. Hence, this industry is facing a dual challenge in terms of
keeping both consumers and dealers happy, because it is the push efforts of dealers which makes a difference in the
marketplace. Due to the prevailing cut throughout competition, dealers are demanding more in terms of return,
failing which, they are not showing any interest of products of the particular Co. Hence, the success of the Co is
largely dependent on the interest of the dealers in its products. Thus, the gamut of consumer durable industry is
shifting from supply chain to value chain.
Due to such a dramatic change in overall scenario of consumer durable industry in the recent past, there is a
metamorphic transformation in the expectation of consumers. They have become quite conscious about the product
quality in terms of technology, price (as there is continuous slash in the price of the product), ready delivery (failing
which, easy shift from one brand to another), etc. That is why, in the last one year, the AEL has started experience
difficulties in the marketplace, slipping from 2 nd position to 3rd in CTVs, from 3rd to 5th in washing machines, is able
to maintain 2nd position in audio-systems and in computer monitor, facing difficulties due to a long replenishment
cycle time. Its MNC competitors are able to supply to various computer Cos within 3-5 days whereas, AEL needs
10-15 days, resulting into a decrease in the profit. While responding to the environment in terms of prevailing
market price, AEL has started eating its own profit, resulting into a gradual decrease in the overall performance of
the Co .
On the recapitalization and analysis, it has become apparent that major problems are associated with AELs various
logistical functions in general and inventory-carrying cost in particular. While addressing this situation, the top
management of the AEL has decided to redefine the whole supply chain under the project Operation Excellence
with the objective to maintain at least its earlier position in the next one year. The highlight of the project includes
removing wasted efforts, implementation of JIT (just-in-time) system, sourcing parts and components from a single
or two vendors, visualizing itself as a customer-driven organization, development of tighter value chains to tide over
components shortages that could potentially interrupt production and transform it into make to order rather make to
store.
AEL has started implementing e-SCM system. In the first phase, it has initiated integrating whole logistics functions
by Extranet, which is likely to be completed in the next three months. Simultaneously, it has also started connecting
its partnering vendors for the e- procurement so as to have JIT system. Nowadays, order processing and fulfillment
take place online with those vendors. The second phase of e-SCM will commence by the end of 2003, where key
dealers will be integrated with the system. While implementing the JIT system, AEL is facing problems because, a
good number of vendors are not responding properly as they are very small in size and also professionally
equipped.
Questions:
1) Discuss how the JIT development process might work at AEL .
2) What should be the relationship between AELs supply management strategy and the development of its
performance measurement system?
3) Why is purchased quality so important to AEL?