Case Challenge Classmate

August 2012

Instructions:
Registered Teams will submit a case analysis document comprising no more than 5 pages of single spaced, 12-point font (including illustrations and excluding TOC, Cover page). Along with the word document each team must submit a 10-slide presentation of the case analysis/solution suggested. There is no pre-determined structure to analyse the case. Participants are free to use any format which best illustrates and provides convincing arguments for their idea. Wherever necessary, the participants must make references to the sources of information and data. Case presentations will be judged based on identified criteria the originality, creativity and uniqueness of the idea will receive the highest weightage; the implementability, sustainability and scalability of the idea; its fit with ITCs vision and the manner in which it can leverage ITCs strengths; the thoroughness of research, analytics and economic logic used to defend viability and execution of the idea. Last date for submission of case solutions is 12th August 2012. Teams must send their entries to the email ID provided for the campus. For full details please refer to the Interrobang Season 2 Case Challenge Brochure available with your Campus Point of Contact or contact interrobang@itc.in

ITC Interrobang Season 2 Case Challenge : Classmate

Classmate
ITC Interrobang Case Challenge 20121

ITC Centre Chennai: 4th June 2012; For ITC Education and Stationery Products Business (ESPB), one of the largest Stationery products company in the country, May 2012 was an excellent month (Appendix A). Revenues had increased by 40% over the last year and profit before tax had also gone up significantly. At the Junes meeting of the Management Committee, the mood therefore, was one of celebration. As Mr. C S Das, the Divisional CEO, pointed out, there was good news all around, since every category had performed well. But in particular, he pointed out the Notebook category which had achieved record growth in May. After formally recording his satisfaction with the categories performance, he acknowledged and thanked everyone for their efforts. He then gestured to move towards the next item on the agenda which was operational performance review. While reviewing Order Fill Rate, Mr. Das came across the overall Fill Rate2 for the month of May for Notebook category. He spoke aloud, While the overall sales performance has been good, this fill rate of 82% for notebooks is indeed worrying. He then turned to the person on his right, How do you think this might have impacted your May sales performance? he asked. Mr. Thakur, the Head of Sales and Marketing began by pointing towards one SKU on the screen, Quite a bit, actually. Take the example of SKU 240X180_30.There was a stock out in the middle of May in most of South India locations resulting in significant sales loss. The fill rate for this SKU was only 54% which is alarming given it is one of our top performing SKUs. Looking at the numbers on his screen, Mr. Kumar, the Head of Supply Chain, responded Yes, while it is true that this SKU had a stock out, it resulted from the fact that all Southern sales branches put together sold more than three weeks equivalent of demand in the first week itself. Further, we started May with a low opening pipelineof 8 lakhs for this SKU which is around 21 days of forward demand. We therefore ran out of stocks in the middle of second week until start of the third week which is when stocks manufactured in May connected. Mr. Das after hearing the numbers intervened,How did we start the month with only 21 days of stock? These are high selling SKUs and we must have adequate safety cover on these SKUs. Was it a planning issue or did we sell more than forecasted in previous months? We need to do a root cause analysis on this issue. Let us meet early next week to discuss the details.

Making of Indias Largest Notebook Brand Classmate ITCs entry into the Education & Stationery Products Business (ESPB) is a classic case of a company successfully leveraging its existing strength. Drawing from its strengths, in brand building and distribution reach, resident in its FMCG businesses, the company also combined its knowledge of image processing, printing and conversion from the Packaging & Printing Business and paper and pulp manufacturing competencies from its Paperboards and Specialty Paper Division. Starting with the brand Paperkraft in the premium segment, it soon followed with the Classmate brand in the popular segment. In a highly fragmented market dominated by regional players, Classmate, in less than five years has become the most popular brand in the category across the country. Not just paving a niche for itself, Classmate has also led the way in the branded notebooks category setting very high benchmarks for quality and value offering. ITC ESPB soon expanded into the non-paper categories, quickly establishing a strong presence in the Scholastic Products (Pencils and Geometry Boxes). In the fiercely competitive Writing Instruments (Pens) category, ITC ESPB has managed to

This Case is developed by and is the sole property of ITC Limited. This is for academic purposes only and is not intended to be copied or displayed or reproduced at any place outside the Campus.
2Fill

rate is defined as ratio of stock serviced versus stock ordered, Fill rate drops is due to stock unavailability at the node

ITC Interrobang Season 2 Case Challenge : Classmate

establish brands in just three years while continuously striving to offer new and exciting ranges to the consumer. With an extremely robust growth that has catapulted ITC ESPB to the No.1 position in the stationery segment in the country. In the operating scenario, ITC has been extremely efficient in identifying growth drivers and rolling out initiatives to continuously deliver superior value to the consumer.Several new initiatives have been rolled out in the area of Dealer Operations Efficiency and Dealer working capital management. ITC ESPBs manufacturing competencies has been built on the back of constant benchmarking against global best practices. A changing economic scenario has seen ITC ESPB undertake massive indigenization efforts to localize production in India for non-paper products that were previously imported. ITC ESPBs processes and systems ensures that ITC influences every step of the value chain right from raw material to notebook manufacturing to the eventual availability of high quality notebooks at roughly 100,000 retail outlets across the country. Through all this, ESPBs turnover is expected to grow at a healthy CAGR of 25% and profitability is expected to grow at an even better CAGR of 36% at the end of the current year. The Market opportunity for education and stationery product categories identified by the company in the space of Education and Stationery Products is around Rs. 10000 Cr growing at 8% per annum in line with GDP growth. Favourable demographics and massive investments in education sector will ensure ongoing derived demand for Stationery products. Going forward, ITC ESPB plans to put even greater focus on Product Development to create offerings which are innovative, new to the market and futuristic. In this regard, the business is also in the process of creating a Product Development Cell to further add to its portfolio of differentiated and superior products. Notebook Category attributes and Supply Chain challenges Following are some of the key attributes of the Notebook category, which makes for a very complex value chain scenario. a) Highly seasonal demand About 50% of the annual turnover comes from three months of the year. This sort of seasonality results in varying stress levels on the supply chain in different time periods of the year, which in turn poses many challenges in arriving at optimum levels of manufacturing capacity, production levels and inventory. b) Regional product portfolio In Education and Stationery products and particularly in notebooks, region wise demand variations are huge. On the back of varying socio-economic scenarios across the country, each region has its own set of products, with their own periods of season and off season. Most of these products are not substitutable and coupled with high seasonality, this simply means that if a particular type of notebook is not sold in a particular region during the season it might have to remain in that region till the next season. The margin for errors is thus very small for demand forecast and for inventory carrying levels. c) Large Number of SKUs There are about 650 SKUs in the portfolio and 24 warehouses acrossthe country. About 20% of the SKUs contribute to 80% of sales and 40% of SKUs contribute to almost 95% of sales. Adding to the complexity is the fact that most of the SKUs across the portfolio will be part of a segment defined by the size and binding. For example, in a segment of 240 x 180 mm size - centre stapled binding, there are 5 notebooks with different rulings (ruled, unruled, math ruled, etc.,). During the season, if one of these SKUs is not present, sales of all other SKUs will get affected. Under such circumstances, maintaining a healthy pipeline across so many SKUs, each of them critical in its own across 24 warehouse locations is a major challenge. d) Low Value Density Notebook is a volumetric good, meaning revenue per ton of goods sold is low, compared to some other FMCG products, say personal care products for example. Hence, transportation cost is a significant portion of therevenue. Any sub optimal (backward) transportation that is done will have a significant impact on the company bottom line. e) Fragmented Manufacturing Base Notebook manufacturing as a category in India is reserved for Small Scale Industry (SSI). As per SSI regulations, total investments in fixed assets (Land, Plant and Machinery) have to be within certain pre- defined limits. This results in limiting the capacity of one manufacturing unit to around 250 tons per month. ITC works with close to 25 Notebook manufacturing units across the country to meet the consumer demand. This results in significant logistical challenge both in terms of delivering raw material and picking finished goods.

ITC Interrobang Season 2 Case Challenge : Classmate

f)

Constant manufacturing capacity While the demand is highly seasonal, manufacturing has limited opportunity for scaling up during season and scaling down during off season. This is primarily because it is currently a labour intensive set up.

g) Low demand predictability

The very nature of business coupled with a high growth rate results in a forecast accuracy that is usually lower than other traditional FMCG businesses. This necessitates the presence of a highly responsive supply chain at a reasonable cost.

Supply Chain Network The Notebook Supply Chain network of ESPB consists of the following entities:

Retailer

Dealer

WSP

Hub

Converter

a) Converters Notebook manufacturing is a reserved category under Small Scale Industry (SSI) segment. ITC has partnered with a set of Notebook manufacturers across the country whose manufacturing processes, systems & quality related processes have been developed or specified by ESPB. Due to the relatively labour intensive setups (SSI reserved) it is critical to utilize at least 75% of their peak capacity during all the months. Most of these converters form geographic clusters knows as manufacturing regions. These converters have limited storage capacity so it is critical to ship all the manufactured stocks to the HUBs as soon as the finished goods (FG) form a truck load. b) HUBs These are large warehouses (50,000 to 1, 50,000 sq ft) which are located in close vicinity to the manufacturing regions. HUBs are essential as they act as inventory storage point for the company especially during off-season. The HUBs accumulate the FG and serve the WSPs demand on a daily basis. Typically, a HUB services a set of WSPs. c) WSPs WSPs are smaller Customer servicing warehouses which receives stocks from the HUBs. These in turn service the dealer locations which are attached to it. Inventory levels at the WSP are managed on a replenishment basis from the respective HUBs3. The shipments from a WSP to a Dealer happen through large/small trucks, LCVs and parcels based on shipment loads. Typical per Kg shipment costs for these modes are given in Exhibit1. d) Dealers A dealer is one who actively distributes our products to the retailers and wholesalers in a given geographical territory for a pre-determined profit. Currently ESPB operates through ~700 distributors across the country. A dealer is attached to the nearest4 WSP. A dealer receives stocks from the WSPs through two modes of ordering: IDO (Ideal Delivery Order): This is an auto generated order based on dealers inventory pipeline, sales estimates for the month and the desired safety cover days. In its simplified form, the IDO formula can be represented as: Quantity IDO generated on a Day= MAX (0, Cover Days* Daily Estimated Demand SOH).
3 4

A WSP can receive stocks from multiple HUBs, but it will have only one source for a given SKU Due to CST regime, a distributor is usually attached to a WSP in the same state.

ITC Interrobang Season 2 Case Challenge : Classmate

Cover days for distributor depends on various factors like distance from WSP, variability in time-in-transit, variability in sales. Typical cover days will usually be ~15 days. MDO (Manual Deliver Order): Special order given by a dealer directly to the company to service a sudden demand. Supply Chain Processes a) Operational These are processes that are related to day to day stock movements through the network (Planning and Execution). Stock flow across the value chain happens on a replenishment basis and is rule based (discussed below). As discussed in IDO for a dealer, cover days norms are maintained at all nodes of the supply chain (WSP and HUB). Replenishment is required when the available SOH falls below the cover days. This replenishment quantity is called Basic STR & can be represented as: Basic STR = MAX (0, Cover days* Daily demand available SOH)

Current Stock on Hand < Inventory norm

Y Generate Basic STR and propagated to primary source

Potential for fill rate drop

Stock available at primary source

Stock available at secondary source

Deployed STR

Aggregate all deployed STRs for each lane and consider each lane for truck load building

Truck Load built for a lane

Critical stocks

N Potential for fill rate drop

Shipment

Truck load built after pulling forward demand

No shipment

ITC Interrobang Season 2 Case Challenge : Classmate

b) Manufacturing Planning High seasonality coupled with limited capacity indicates a long inventory build-up period. The manufacturing program of what SKUs need to be manufactured at which location is given 40 days in advance (for a manufacturing to happen in June, plan is to be given by the 20th of April). The remaining 40 days are used to arrange raw materials (mainly paper and board) at all the converter locations. Notebooks can be divided into various segments; a list of the same is given in Appendix C. For all the SKUs of a segment, raw materials remain the same. This lead time of 40 days from order to commencement of manufacturing increases complexities in achieving high forecast accuracy. Though ~600 SKUs are to be maintained in terms of stock availability, in a given month only around 100 SKUs can be manufactured (beyond which the switch over time between SKUs will hamper throughput). This means that for very low sellers, the manufacturing might happen only once or twice a year, while the bigger SKUs are manufactured more frequently. Last years data on manufacturing of SKUs is shown below:

Frequency of Manufacturing 12 months a year >6 months a year and <12 months a year >3 months a year but< 6 months a year 2 months a year Only once a year Never*

No of SKUs 6 80 105 110 125 105

Contribution to Sales 24.0% 61.0% 10.5% 3.0% 1.0% 0.5%

*Can happen for very low sellers where inventory was carried forward from previous year and new manufacturing was not required (however cannot be dropped from the portfolio refer Section 3. Point c).

Demand forecast is done in the current month for the next month(CM), month after next(NM) and the month after that (MAN). With the high manufacturing lead time & inventory build-up, the MAN forecast plays a critical role in deciding the manufacturing plan. The accuracy levels for these estimates for last 3 months are given in Appendix C. c) Sales & Operations Planning Sales and Operations Planning (S&OP) is a monthly planning process for the next month that happens during the last week of the current month. The purpose is to align the monthly plan with the business plan. Anticipated shortages are also discussed along with mitigation measures for the same. Also, expected delivery schedule from manufacturing is discussed for effective sales and distribution planning. The outcome of S&OP is the final sales estimates for the immediate next month post supply constraints and also any future shortages.In exceptional cases, additional quantities for an SKU can be added for next month if the equivalent quantity is reduced from another SKU from the same segment (as they share the same raw material). d) Capacity Planning This is a quarterly review process to detect and mitigate any capacity bottleneck in serving the forward 18 months demand. It takes place in the first week of the first month of the quarter. Long term forecasts are reviewed at the beginning of every quarter basis which the readiness of the manufacturing side is assessed more regularly (to avoid any surprises during the season). Several factors are to be noted here including lead time for capacity addition, minimum lot for capacity addition, etc. Forecasted demand for the next 24 months, planned capacity for next quarter & current inventory levels are shown in Appendix E. To provide an idea of the timeline of these processes, take an example of the month of April. The capacity planning meeting for Q2 will happen in Apr Week 1. Demand forecast for May, June and July will be done by Apr 20th. Manufacturing plan for June basis demand forecast will be prepared by Apr 25th. And finally on Apr 28th, the S&OP planning for May will take place.

ITC Interrobang Season 2 Case Challenge : Classmate

ITC Centre 7th June, 2012 Mr.Sanjeev, the Head of Finance walked in to the cabin of Mr. Kumar. He had a worried expression on his face. Kumar, I would like to talk to you about the inventory levels that we are holding, he began. Our current inventory pipeline is higher than the plan. It looks like achieving the average inventory target might be difficult. And this will definitely impact our financials. We are under tremendous pressure on fill rate drops. Lowering our inventory would be very difficult in such a scenario, Mr. Kumar responded. He thought for a while about the numbers involved. The average sales value was Rs. 100 per kg while the average COGS (including transportation) was Rs. 85 per kg. The WACC for our business is fifteen percent right? he asked Sanjeev. Mr.Sanjeev nodded. You might want to weigh the inventory levels against fill rate improvement initiatives. If it makes business sense, we can alter our average inventory plan. Mr. Kumar smiled. Thats exactly what I had in mind. ITC Centre 11th June 2012 In the meeting, Mr. Kumar began with the analysis on Fill rate issues. He began with the example of SKU 240X180_30 (Appendix B). At the beginning of May, total inventory was 8 lakhs which is equivalent of 21 days. Out of total 8 lakhs quantity, 5 Lakhs quantity was already distributed among WSPs and only 3 lakhs was available at upper nodes (HUBs). Below is the scenario at the beginning of May o Demand for the month was 11 lakhs o Manufacturing receipt expected was 14 lakhs Start of May In Lakhs qty Actual Starting Inventory Demand Plan Actual Sales Manufacturing Plan Manufacturing receipt Planned Closing Inventory Planned Closing inventory (Days) Actual Closing Inventory Actual Closing inventory (Days) Feb 31 9 11 8 7 30 60 27 53 Mar 27 21 25 8 7 14 48 9 30 Apr 9 8 9 9 8 10 27 8 21 May 8 11 14 11 48 Jun 8 9 12 54

Below is the scenario at the end of May (beginning of June) o Actual sales was 6 Lakhs compared to Demand plan of 11 Lakhs o South branches sold 3 Lakhs against demand plan of 7 Lakhs o While overall fill rate was 54% for this SKU. Fill rate for southern branches was only 44%; o Manufacturing receipt was 14 lakhs against the plan of 14 lakhs Start of June In Lakhs qty Actual Starting Inventory Demand Plan Actual Sales Manufacturing Plan Manufacturing receipt Planned Closing Inventory Planned Closing inventory (Days) Actual Closing Inventory Actual Closing inventory (Days) Feb 31 9 11 8 7 30 60 27 53 Mar 27 21 25 8 7 14 48 9 30 Apr 9 8 9 9 8 10 27 8 21 May 8 11 6 14 14 11 48 16 36 Jun 16 9 9 16 60

ITC Interrobang Season 2 Case Challenge : Classmate

Mr. Kumar then presented the beginning of April position to deliberate the root cause. o o o In the month of March total sales was 25 lakhs quantity against plan of 21 lakhs. This resulted in significant drop of 5 lakhs in the closing inventory i.e. 9 lakhs (30 days) against 14 lakhs (48 days) of planned closing inventory. Since production one month of frozen horizon, no increase or SKU interchange could be done for the month of April. However, May production was increased from 8 to 14 lakhs. Start of Apr In Lakhs qty Actual Starting Inventory Demand Plan Actual Sales Manufacturing Plan Manufacturing receipt Planned Closing Inventory Planned Closing inventory (Days) Actual Closing Inventory Actual Closing inventory (Days) Feb 31 9 11 8 7 30 60 27 53 Mar 27 21 25 8 7 14 48 9 30 Apr 9 8 9 10 33 May 9 14 15 54 Jun 8 8 15 54

Pointing to the numbers, Mr. Kumar concluded, The problem here is that even though we knew at the end of March that our overall inventory level was low on this SKU, we couldnt do anything in the month of April to salvage the situation. What we need is higher flexibility to cater to upswings in the market demand. He continued, Talking about the larger issue, we work with a lower forward cover5 during the peak months, so that we dont end the season with high inventory. Average inventory levels are critical for our ROI as this is a significant capital employed by us. On the other hand, given our estimation accuracy and other constraints, such tight inventory levels during these monthsare bound to take a toll on the fill rates. Mr. Kumar then presented his simulation on Inventory Levels Vs fill rate analysis. Refer Appendix D. He further added, We do want to use capacity as a lever in this regard, but the minimum utilization levels of 75% is a big constraint Mr.Chaudhary, the Head of Operations, thought about it for a while and then responded, We can lower those constraints, but we still need to pay for the work force. This means that we will anyway pay for 25% of the usual COGS for the portion of unused capacity, to the extent less than 75% to the converter without getting any output. After hearing the discussion, Mr Das responded, We will need to look at all aspects from a long term view while ensuring sales shortages in short term are also avoided. I would like a two member task force to be set up. They will present their recommendations in next Management committee meeting.

You are one of the Task force members and your task is to do the following. Identify all potential levers, both short term and long term for building higher flexibility in the supply chain What approaches can ESPB take to improve supply chain flexibility at optimum cost to company? What should be the capacity addition schedule for the forward 18 months? Comment on the quality of the forward manufacturing plan (Refer Appendix E) Present your recommendations to the Management committee

5Refer

to the Appendix E for the CYs plan