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Asian Paints

Submitted By
Arun Narayanan T. V. Roney Joseph Vincent

An overview of Paint Industry

The Indian Paint industry can be divided as:

The organized sector comprising of large and medium size units The unorganized or the small scale sector.

The organized sector has a market share of 60%, valued at 23.4 bn. This is in contrast to the 55% share that the sector commanded a few years back. There are around 25 units in this segment. The unorganized sector comprises of around 2,000 units with a combined market share of around 40%. Major companies in this segment include Asian Paints, Goodlass Nerolac, Berger Paints, Shalimar Paints, and Rajdoot Paints.

High excise duties, low technology and low capital costs for production led to the incidence of a high number of units in the small scale sector. However, since 1992 the government has been consistently lowering duties from 40.5% in 1992 to around 16% currently. This has led to lowering of price differential between the organized and unorganized sector. Moreover the paints sector was also allowed to claim MODVAT credit on petro-based products, thus lowering the excise incidence further. Consumption of paints is skewed towards decorative paints which account for 70% of paints sold in India. This is in a sharp contrast to the trend in developed countries, where the ratio is skewed towards the industrial segment. This segment is marked by the presence of a large number of players from the organized as well as unorganized sector. Competition is high and margins tend to be low in this segment. Products of this segment are relatively price sensitive. Demand for decorative paints is seasonal with bulk of sales taking place during the festival seasons from September to December. Besides sales remains slack during the monsoon months from June to August. Entry barriers in term of technological and funds requirements are relatively lower in the paints sector. It is estimated that a plant of 1 m tpa will cost around Rs 120 m. However decorative paints are marketing-savvy products and backed by large advertisement campaigns and dealership networks. These serve as high cost entry barriers for new companies in this business. The huge investments required in setting up a vast marketing and dealership network, to advertise and develop a brand over a period of time can only be afforded by companies in the organized sector. It is for this reason that smaller companies and small scale sector units are slowly losing market share to the organized sector. Market split of the industry Company Asian Nerolac Berger Ici india limited Jenson and Nicholson Growth rate Total Decorative 38 7.8 14 9 6.9 8.9 15033 m mil Industrial 15 40 14 12.5 6.9 18 6442 mmil Overall 32.5 17.5 14 10.5 6.9 11 21476 mmil Estimated paint 6890 mmil 3750 mmil 3007 mmil 2254 mmil 1482 mmil

The products of the paint industry can be classified into 2 types. Decorative (Architectural) Paints Industrial Paints Decorative Paints The decorative paint segment can be classified into interior paints and exterior or cement paints. 80% of the decorative paints account for interior paints, which consist of premium, medium and economy categories. The premium category consists of plastic emulsions, the medium-priced category consists of synthetic enamels and the economy category consists of distempers. Industrial Paints

1. Solvents They are volatile organic compounds (VOC) used to dissolve, suspend or change the physical properties of other materials. They are generally used to bring down the viscosity of paints to the desired level, which also reduces the cost of paint formation. They constitute 70%-75% of the paint liquid and ultimate escapes into the atmosphere when the fluid dries. Solvents such as ethylene glycols and alcohols are finding wider use as co-solvents in new water-borne formulations.

2. Binders They are generally oils, resins and plasticisers that give paints its protective property. Most resin manufacturers make alkyds, polyesters, emulsion polymers, epoxy resins, amino resins, powder coating resins etc. 3. Additives They are added in small proportion to the paint to improve its performance characteristics in various ways. Skinning inhibitors, fungicides, wetting agents, driers are included in this category. 4. Pigments They are finely ground solids of different shades to give colour, durability, consistency and other properties to paint. It is also one of the major raw materials, accounting for one-third of the total raw materials cost.

Asian Paints An overview

Asian Paints is Indias largest paint company and Asias third largest paint company, with a turnover of Rs 77.06 billion. It is one of the largest paint companies that operates in 20 countries and has 28 paint manufacturing facilities in the world servicing consumers in over 65 countries. Besides Asian Paints, the group operates around the world through its subsidiaries Berger International Limited, Apco Coatings, SCIB Paints and Taubmans. Over the course of 25 years Asian Paints has become a corporate force and India's leading paints company. Driven by its strong consumer-focus and innovative spirit, the company has been the market leader in paints since 1968. Today it is double the size of any other paint company in India. Asian Paints manufactures a wide range of paints for Decorative and Industrial use. Throughout this decade, its domestic business grew rapidly as a result of increasing demand from Asian paints growing domestic and international distribution networks. Additional growth also came internationally from a series of acquisitions in third-world developing markets. The success of Asian Paints has been attributed to its customer-centric approach and aggressive marketing initiatives, which had changed the way industry, functioned. Asian Paints wanted to be one of the top five companies in the global paints industry by 2007. In order to achieve this goal, it focused on three main areas - building the Asian Paints brand in terms of a new product portfolio, changing its logo and packaging. The new Asian Paints was expected to be even more customerfriendly and service-oriented. In order to keep its prices low, Asian Paints had to keep its production costs low. So it undertook backward integration to production costs.

Supply Chain in Paint Industry

Products are either functional or innovative. Functional products are generally made-to-stock whereas innovative products are made-to-stock or assemble-to-order. Functional products need an efficient supply chain whereas innovative products need a responsive one. But increasing responsiveness also increases cost and complexity. Their characteristics and supply chain requirements are given below.

Since paint is more of an innovative product responsiveness in supply chains is more important.

We can see from the above figure that the type of product determines the significance of various costs in a supply chain.

Indian paint industries face major challenges especially with respect to inventory related issues. Timely movement of goods across the supply chain is very important and any delay results to inventory build ups and thus increased costs. The typical factors like: Continuous manufacturing of products, Sophisticated and extremely capital intensive manufacturing plants, Production planning and raw material specification, Multiple, interdependent products, Complex transportation logistics and also the complex supply chains make it difficult to manage the supply chains in the paint industry. The Indian Paint Industry is characterized by high Working Capital requirements, Low Fixed Asset requirement, Seasonal nature of demand, and High Entry barriers in the form of a Distribution network. 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 is difficult to predict. Wide distribution networks (similar to FMCG) lead to high safety stock requirements. Seasonal demand and High competition make obsolescence costs and stock out costs high. Working Capital intensive: The number of shades is very large and a sufficient stock of every shade has to be maintained at all levels of the distribution channel, the working capital cycle is very high. Also, the number of raw materials required can stretch up to 300. As majority of these raw materials are either imported or sourced from small chemical manufacturers, a large stockpile needs to be maintained. Seasonal nature of demand: The demand peaks during festival season while is very lean during monsoons. Thus, a major part of the sales are achieved in the second half of the fiscal year.

For responsive supply chains, since product variety is large, forecasting becomes difficult. Further, high stock out costs implies large safety stocks have to be maintained. For raw materials, the effect becomes more pronounced because of the large bullwhip effects that take place. In prioritising raw materials or finished goods, companies tend to prefer ABC analysis.

Importance of Supply Chain Management in Paint industry

The paint industry is raw material intensive. Paint involves the mixing of various raw materials in various proportions. The raw materials are of a wide variety. On an average, raw materials account for 60% of net sales (industry average). In case of small-scale units it forms up to 70% of the net sales. High cost and erratic availability of raw materials mark the Indian paint industry. Around 300-400 raw materials are required to manufacture different kinds of paints. The high number of raw materials and finished goods highlights the working capital intensity of the sector. Most of the raw materials are petroleum based. Thus paint companies benefit when the petrochemical industry goes into its cyclical downswing. A hike in the price of petroleum products raises input costs negating the impact of a cut in import tariffs on raw materials. Raw materials frequently run into short supply, resulting in high inventory cost. The shortage of one specific material could result in severe manufacturing problems It is estimated that 18-20% of the total raw materials used the industry are imported. Most paint companies are hit by the fact that they do not make the raw materials themselves. For example, phthalic anhydride (PAN) is manufactured from orthoxylene and which goes into the production of paints along with titanium dioxide. Most of the paint companies have to import their stock. Since PAN prices generally outpace international orthoxylene prices by almost 50% paint companies end up paying a fortune when prices rise. Raw materials are divided into three major groups, namely, pigments (titanium dioxide, zinc oxide etc.), solvents (mineral turpentine) and resins and additives.

Supply Chain of Asian Paints

Asian Paints has harnessed the powers of state-of-the-art supply chain system using cutting edge technology to integrate all its plants, regional distribution centres, outside processing centres and branches in India. All the company's paints plants in India, two chemical plants, 18 processing centres, 350 raw material and intermediate goods suppliers, 140 packing material vendors, 6 regional distribution centres and 72 depots are integrated. Asian Paints is the only company in India to have integrated Supply Chain Management (SCM) Solution from i2 Technologies of JDA Software group, and Enterprise Resource Planning (ERP) solution from SAP. With these IT tools firmly in place and with the backing of an extensive communication platform, they are an internally enabled enterprise. The supply chain runs through a wide spectrum of functions right from materials planning to procurement to primary distribution. It has played a pivotal role in improving operational efficiencies and creating agile procurement, production and delivery systems. It has also enhanced the flexibility of operations, lowered output time and reduced delivery costs, while improving customer-servicing levels and profitability. It has also launched a supplier portal that includes an automated digital

document exchange facility that will improve the efficiency and effectiveness of interaction with suppliers. The Supply Chain Management is backed by IT efforts that help the company in demand forecasting, deriving optimal plant, depot and SKU combinations, streamlining vendor relationships, reducing procurement costs and scheduling production processes for individual factories. The successful deployment of ERP, CRM, Business Intelligence and Portal software from leading solution providers and integrated SCM systems has helped improve efficiency in the business as well as increase the transparency and accuracy of information across the company.

Strategic Analysis of Asian Paints Supply Chain

Asian Paints applies advanced master planning technologies to decide which products should be produced at which manufacturing plants, incorporating variables such as cost and demand volume, capacity, current inventory levels, environmental requirements and other factors, optimizing across multiple objective levels like capacity, demand satisfaction, safety stock requirements, inventory optimization and transportation costs. The paint company sources raw materials from domestic suppliers and international vendors, and the company uses a sophisticated materials planning system to manage those crucial supplies. Given that raw materials comprise 60 percent of its value chain, Asian Paints constantly improvises its bill of materials, routings and alternate parts. This leads to a complex alternate materials scenario during the procurement planning process. To ensure optimum raw materials selection, Asian Paints uses JDAs factory planning software to manage a wide range of variables, such as the inflow and use of raw materials among multiple possible alternates across multiple alternate vendors and possible production routes. JDAs advanced scheduling software is used to set weekly timing requirements on a plant, unit and machine-bymachine basis. The company typically experiences a hockey stick variation in monthly demand for its products and also sees an annual upsurge in demand during festival seasons in various parts of India. Asian Paints utilizes a sophisticated distribution planning system from JDA to address this variable demand and to move product smoothly to this complicated and dynamic marketplace. After implementation of JDA, Asian Paints has dramatically improved its debt-to-asset ratio. The company has become essentially debt free, and has leveraged its supply chain efficiencies to pursue an aggressive growth strategy. During the initial implementation phase, the company reduced finished goods inventory to an average of 40 days of finished goods inventory on hand, and in recent years has further reduced that figure to 30 days of finished inventory. This leaner inventory stance was a key factor in the companys improved cash flow position and its ability to invest in growth -oriented acquisitions. The company has also used JDA solutions to move from an end-service-level metric to a more proactive and precise order-fill method of analysis. After fully implementing various JDA solutions, Asian Paints now achieves 8790 percent service levels for SKU sales at the location level, which puts the company well ahead of competing firms in the marketplace. The companys enhanced master planning system enables Asian Paints to optimize the kinds and size of inventory it holds, and to deal more effectively with fluctuations in the volatile paints marketplace. Better materials planning system allows the company to create more complex paint formulas, and to select the best vendor and manufacturing method for any given situation.

Modern distribution planning enables Asian Paints to plan deployment on a weekly basis, and to quickly and easily adjust those distribution plans as needed. By adopting a robust approach to change management, the company can now adapt more nimbly to shifts in market demand, to new manufacturing processes, and to changing regulatory pressures or business requirements. In terms of market performance, improved supply chain planning and execution systems have allowed the company to grow it is now four times the size it was 10 years ago while dramatically reducing the on-hand inventory needed to serve its customers. To further optimize the execution of the supply chain processes in conjunction with the planning solution, and to provide a seamless plan-do-checkact framework to the supply chain executives, Asian Paints deployed the JDA Agile Business Process Platform, now part of the JDA Enterprise Architecture. This has provided Asian Paints with the ability to build highly customized planning and execution workflows to further improve supply chain efficiencies. The Asian Paints brand stands for the quality of their products, on-time performance and good service. The supply chain is viewed as a very critical function in the organisation. Their ability to deliver the right product on time at the right place has clearly differentiated them from the competition, and allows them to retain a large share of the business. Thus we see that the gain is due to a radical shift in process design and shifting the point of differentiation with an efficient distribution network that rivals have not been able to emulate. With this method they are able to wider range of shades, yet lower costs, and thus maximizing customer satisfaction. Some other factors also helped Asian Paints. They are 1. Most paint companies are hit by the fact that they do not make raw materials themselves. For example phthalic ahydride is manufactured from orthoxylene and which goes to production of paints with titanium dioxide. Asian paints is the only company that manufactures PAN. The other paint companies have to import their stock. Since PAN prices outpace international orthoxylene prices by almost 50% paint companies end up paying a fortune. In such a situation Asian Paints benefit by selling PAN in the open market. 2. The company has outsourced its transport management to Dynamic logistic private limited 3. The company has 72 warehouses scattered all over India which helps in efficient distribution.

Implement JIT so that they can find the raw material at time and use it for manufacturing the paint. Provide raw material of product to the distributors so that they can make the paint of the colour demanded by the customer at the same time by tinting machine and provide more tinting machines. Implement RFID so that they can track the consignment, and demand will verified easily and fast. Improvise the e-procurement to do better in the field of supply chain management. Some functional Strategies that may be adopted: -

Since demand peaks in Diwali season, whites fast moving brands can be produced 2-3 months in advance, since error in forecasting is low for these. Production of slow moving brands can be outsourced. To improve supplier responsiveness, suppliers can be informed about expected demands 2-3 months in advance and in what range demand is expected to vary (for paints this would be quite high).

For raw materials, three parameters should be use to decide how much safety stock to keep and how close monitoring must be done: 1. Consumption Value (ABC classification) 2. Criticality (VED classification and also availability of substitutes) 3. Reliability of Suppliers. This is measured on: Quality (Number of rejections) Variability in lead time of delivery (measured by coefficient of variation) Responsiveness (ability to despatch material quickly in case of emergency orders) Distance from plant (low lead times reduce variance) For finished goods also, three parameters should be used: 1. Sales Value (ABC classification) 2. Criticality (Measured by margins and classified as VED) 3. Variability in Demand

http://www.asianpaints.com/corporate_information/supply_chain.aspx http://www.asianpaints.com/corporate_information/information_technology.aspx http://www.force10networks.com

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