SNOWY LILAC LIMITED

CASE CONTEXT
The case of Snowy Lilac Limited (SLL) deals with a manufacturer in the highly
competitive white goods industry. In such markets where the technology is
mature and where there are several players with access to the latest product
technology, the logistics function becomes a key competitive element. SLL is
considering taking over the control of its logistics function by going in for the
containerised mode of road movement and by appointing dedicated trucking
vendors or its containerised fleet.
The impact of such a move is expected to be felt on inventories, reduced
losses during transit and improved response time and reliability of service. In
other words, there is a positive impact on a number of supply chain parameters.
There is, of course, the cost implications of this shift in practice.
In order to evaluate such a move and to work through its possible
implementations, SLL has to consider some innovations. The company is
considering partial integration of its incoming material supply in order to achieve
some economy of scale of the containerised movement. The case illustrate that
synergies between inbound and outbound logistics are achievable. From the
early days of mass manufacture, this possibility has been known.
SLL is also looking at the possibility of getting traffic from third party sources.

QUESTION FOR DISCUSSION

1.

What are the various benefits from having containerised movement of

goods? How can these be quantified and compared with the costs of doing
so?
2. The cost advantages of shared inbound and outbound logistics functions is
one considerations in the case. Is this the major driving force for the
changes that SLL is considering? What other drivers do you think were
important?
3. What are the major barriers for SLL to be able to exploit the synergy of the
inbound and outbound logistics functions? What effect does the vendor
structure and purchasing strategy have on this synergy?
4. If the strategy of having dedicated trucking vendors who would operate
containerised trucks largely for SLLs use is considered, what
arrangements need to be made to
a. Ensure the quality of service to SLL
b. Incentivise the truckers independent efforts at generating traffic?
APPROACH FOR ANALYSIS
The major cost implications of moving to a dedicated containerised mode of
transport is that the freight cost per kilometre is more. Also, since the overall
market potential for containerised movement is lower than that for general
purpose trucks, a greater proportion of the fixed costs and part of the related ,
assignable variable costs (like the cost for some return trips) will have to be
borne by SLL. This can be compensated by the guaranteed usage of a large
transport volume, which would get some volume discounts.

On the positive side, there are savings in at least the following three areas.
One is the saving on damages during transit and handling. The movement by the
container mode would bring these down to almost zero. Second is the shorter
transit time by having dedicated transport, which would reduce pipeline
inventories. Lastly, are the savings on safety stock holdings by the warehouses,
since transit times become more reliable. All of these can be quantified to a large
extent, assuming some average product costs for inventory calculations and
some reasonable savings in the loss and transit time parameters.
The difference will have to be accounted for by a mixture of innovative
practices like coordinating the raw material supply with back hauls of outward
dispatches and looking for third party movements. There is no reason not to
consider even competitor movements if it is beneficial to both! For estimating
such loads, the scheduling element (of coordinating movements on the time
scale) cannot be too finely tuned and some base loads will have to be assumed
for the purpose.

CASE TEXT
Snowy Line Limited (SLL)
In recent years, Snowy Lilac Limited (SLL) had realised that its performance with
the order delivery process would be crucial to meeting customer requirements
and managing inventories. SLL produced electric appliances like refrigerators
and washing machines, whose supply chains included significant purchasing of
components and assemblies, manufacturing and delivery to customers. As a step
towards this, in January 1996, SLL decided to review the logistics and distribution
function. A multifunctional team, including the Distribution Manager, Despatch
Manager and executives from Production Planning and Quality, was set up for
this task. Mr Marak, the then Despatch Manager, was the coordinator of the
team. After an in-depth analysis, the team came up with a re-engineered logistics
strategy. As per the strategy, it was decided to use containerised trucks for
outbound transportation from the factory to the depots rather than the
traditional open trucks to reduce transit losses. This was in tune with world
practices. The team had yet to decide (i) how to ensure the required supply of
containerised trucks and (ii) if the trucks were to be dedicated for SLLs use, then
how best to manage their return hauls.

BACKGROUND
The appliances division of Snowy Lilac Engineering had been a leader in the
refrigerator market in India for a number of years. In 1993, the firm had entered
into a joint venture with the US giant SEC to expand its presence in the white
good sector, including washing machines, air conditioners and cooking ranges.
The new joint venture company, SLL, continued to manufacture refrigerator at its
plant in Thane near Mumbai and also took up manufacturing in a state-of-the-art
plant in Chandigarh. By 1996, the company was planning to take up distribution
of a number of other white goods products, manufactured and assembled in five
locations (Exhibit 1). This was part of an overall manufacturing and marketing
strategy that retained control over design of products, quality standards and

distribution and service channels, while hiving of manufacturing activities to cost

competitive and specialised manufactures and assemblers.

LOGISTICS AND DISTRIUTION

With liberalisation, wold leaders in the white goods sector had entered the Indian
market from the early 1990s. World class products in terms of design and
performance had become available in the Indian market. Internationally, the
reputations of these players for quality products and reliable service were as
good as those of SLL and SEC. It was getting more and more difficult to break
away from competitors for two reasons. Firstly, the market was mature and
customers expected all the well-established features in the product. Second, the
technology was mature, with product design and development having reached a
state where too many improvements could not be foreseen. The market ensured
that only products with good delivered quality were accepted. The system in SLL,
for both product and process quality, met the international benchmarks. Thus,
product quality and features were not grounds on which SLL could compete as
these were present in most top ranking players.
Mr Marak was convinced that the next battle was in the area of logistics
and distribution, although it accounted for only 5 percent of the total costs.
(Material costs dominated the overall product costs, contributing 55 percent.
Labour costs were 15 percent. There was not much scope to reduce these
further.) SLL had decided that distribution as a function should come under the
marketing and sales department, as there could be no compromise regarding
despatch decisions, priorities and marketing imperatives. This left the pure
logistics function as a specialised area of cost control.
There was scope for value addition through logistical effectiveness of
providing customers (retail showrooms and branches) with the promised variety
of products at the right time and in the expected condition, fit for installation and
use. As product variety began to proliferate and customer expectation began to
rise, Mr Marak realised to things:
1. He was increasingly being called upon as a likely accountable person in
product defects due to handling and transport. This parameter was just
about acceptable in the old days, but was now under increasing scrutiny.
2. From the cost control point of view, the amount of money held up in the
distribution pipeline was significant. The large variety of goods that the
firm was now manufacturing meant the several more products needed to
be held in stock. Where earlier, for refrigerators, it was a question of an
average of four colours of two different sizes, there were now many
variants within each colour and size. He was being called upon to look at
the order fulfilment process more and more closely.
As of 1993, there were 24 branches through which finished products were
distributed. There were no less than 23 transport vendors working with SLL. A
number of ideas for streamlining this distribution network were being considered.
Under the centralised despatch function, SLL was distributing a number of
products from many locations. Mr Marak estimated that his distributors would be
carrying additional stock in order to buffer themselves against lead time
variability. Transit time variability accounted for most of the lead time variability.

He obtained an estimate of transit times (Exhibit 2). The transit time variability
was because of a variety of reason: trucks breaking down, drivers not having
proper documentation, some unfair practices such as overloading of vehicles,
etc. He was sure that the variability in transport time could be brought down
substantially.
Apart from long and uncertain transit times, the handling and physical
transport of his goods was not up to the standards that his company was now
aiming for. The cost of lost sales and loss of reputation was such that they could
not, with any degree of comfort, be written off as logistics related costs.
A quick analysis of logistics related costs showed that within the Rs 40
crore costs allocated towards logistics, fleet management accounted for Rs 32
crore, and warehousing about Rs 3 crore every year. The balance was assignable
to spare management, information networking and other costs.
CONTAINERISED DISPATCH
From the service quality point of view for his internal customers, Mr Marak was
convinced that a shift from open trucks to containerised trucks was essential. For
one, he estimated that the damages and losses from transport would be
reduced. Damages during handling were of many types. Some resulted in minor
defects on the external surface, which could be touched up at depots and
warehouses. It could take three to four days for the depot to rework the product
so that it was fit for sale. Almost 75 percent of the total damages were due to
this. The remaining were more serious, resulting in broken parts or leakages,
which required spare parts from the factory or a return to the factory. At least a
weeks delay was incurred in handling such defects. In the open truck mode,
handling defects were found to exist in about 2 percent of the products. In the
containerised mode, with the use of customised fixtures for securing products,
handling losses were cut down drastically to only about 0.2 percent. This figure
also reflected the reduced losses on account of pilferage.
In India, in 1996, however, only a small percentage of overall road freight
movement was by containers. There were not too many transporters who offered
containerised vehicles, because the market potential, especially for return traffic,
was considered to be poor. In fact, even the reliable supply of trucks with
containerised body on them was doubtful for the volumes that Mr Marak
anticipated. If containerised trucks were available, transporters sought to charge
two-way fares, since return trips could not be guaranteed in the open market.
The per km charge for containerised trucks was about 30 % higher than that for
open trucks.
Mr Marak considered something that he had been toying with for the last few
months, but had not articulated fully. Two conflicting ideas were in his mind and
he could not recall the nucleus of each of them. One was a remark made at a
conference that, If you want to do a thing well, do it yourself . The other was a
strong statement made in a meeting on third party logistics that XYZ is in the
business of making computers, not running a fleet of trucks. Leave that to the
experts
The option of SLL owning and operating a large fleet of trucks was not an
attractive one, given the complexities of the trucking business in India. Mr Marak
was looking for an alternative where he could achieve some benefits of
increasing integration with the logistics activity, without incurring all the costs

and administrative difficulties. In a bid to initiate the process, Mr Marak felt for a
few selected vendors he could consider offering guaranteed traffic in order to
make their initial investments on containerised vehicles viable. From the supply
point of view initial negotiation showed that transporters may be willing to
consider a guaranteed volume of business of about 100000km per vehicle per
year as reasonable. In return, they would have to offer guaranteed availability to
SLL.
An added bonus was that SLL would be able to advertise its products and
company on these vehicles, they being largely dedicated to SLLs use. With
dedicated vehicles, Mr Marak was confident that transit times could be brought
to the minimum with high reliability. Mr Marak could see that any proposition of
taking greater direct control of transport would have to justify it. He made a list
of the arguments for and against the proposition.
First of all, the logic of business process reengineering was with him, since the
logistical function was acquiring the attributes of a key business process and it
made sense to integrate all of those activities under a single point of control,
reorganising the relevant functions, if required. Second, there was a precedent
for this type of action in SEC (the collaborating company). Hence, it was in tune
with the companys corporate plans. With this as the basis, he could visualise its
benefits and he was confident of convincing the others too.

COST IMPICATIONS
Mr Marak realised that the logistics would still be viewed as a cost centre,
although he would be providing additional (perhaps crucial) value to his product.
Any action would be under the security of the cost accountants. Mr Marak was
keen to consolidate the activity from a cost point of view, by at least
demonstrating certain possible synergies and cost saving attributes with other
activities. The first activity that he considered was right outside his window,
since he could see a long line of trucks waiting to unload sheet metal,
compressors, powder coat material, plastic parts, electronic items and other
parts of the 300 components required for the assembly of the refrigerators made
at the thane plant.
Mr Marak got preliminary estimate of the inbound material requirements. A few
things attracted his attention. There was fair amount of complementarity with his
outbound requirements, with quite a few of his distributor destinations also being
partial sources for his products. In theory, some synergy was possible here.
However, a number of things still needed to be worked out. For example, would
the timing of the services make sense? In other words, even if there was a spatial
match of his requirements, could he organise a match in the delivery schedules
of his suppliers and those of his finished good shipments? Currently, the
transport arrangements for these incoming supplies were made by the vendor
firm. But SLL had enough leverage with their vendors to be able to request
supply through some (jointly) approved transporters.
Before working out those details, Mr Marak still need a gross estimate of cost
savings n such an exercise. Exhibit 4gives the characteristics of containerised
and open trucks. The final product was despatched in an assembled condition. As
for incoming materials, cold rolled steel came in the form of coils or sheets, glass
was in the form of cut sheets, and compressors and other components were

transported individually packed form. It was evident that fewer trucks would be
required for the incoming material than for the outbound despatch, given the
nature of the final product. Also, the time synchronization of loads was an issue,
since SLLs major products were somewhat seasonal in nature and the peaks in
incoming material loads would be offset from the peak despatch load by the
average manufacturing cycle time. This offset was of the order of a few weeks,
but certainly too much to balance the trucking requirements exactly.
For both incoming and outbound transport, the company was sometimes being
charged two-way freight rates for one-way transport. This was often explained
(depending on the destination), as being due to the special arrangements for
handling and the urgency of shipment. Some synchronization of outbound and
inbound loads seemed possible, and some additional loads could perhaps be
obtained from sister companies of SLL, which operated in a nearby complex.
Still not satisfied with the cost saving possibilities, Mr Marak tried to look at other
options. A look at an industry location guide encouraged him. He considered
arrangements with other companies with complimentary requirements. He
wanted to decide what services he could offer to other companies to the trucking
vendor, about 2-3 days additional turnaround time would be required to get
loads from the open market. It also struck him that if marginal costs were
considered he could even look for ordinary consignments for his return loads, not
just customers with potential for container movements. Here, he noted that since
the container itself weighed 2-3 tonnes, containers were more attractive for
volume-oriented movements (which SLLs movement certainly was), rather than
weight-oriented movements.

EXHIBIT 1
Locations and Products
Factory Location

Thane

Pune
Chandigarh

Hyderabad
Delhi/Mumbai

Product

Refrigerator (165
L)
Refrigerator (210
L)
Refrigerator (260
L)
Refrigerator (315
L)
Washing Machine
Refrigerator (165
L)
Refrigerator (210
L)
Air Conditioner
Microwave Oven
Cooking Range

Typical
Dimension
(cu
ft)
1.9 * 1.9 * 4.3

Typical Weight
(kg)
50

1.9 * 1.9 * 4.8

60

2.2 * 2.2 * 4.5

65

2.2 * 2.2 * 4.8

72

2.2 * 2.2 * 3.0

1.9 * 1.9 * 4.3

50
50

1.9 * 1.9 * 4.8

60

1.5 * 1.2 * 4.8

70

2.0 * 2.0 * 3.0

40

EXHIBIT 2
Major Outbound Despatches from Thane
(To Warehouse and Other Plants)
Location
Yearly
Transit Time (days)
Rates
Demand Points
Movement
(Rs/truckload)
Min
Avg
Max
One
Two
Truckloads
Way
Way
Nagpur
20
2
2.5
4
6500
12000
Pune
24
1
1.5
2
3500
6000
Ahmedabad
16
2
2
3
4000
7000
Bhopal
12
3
4
4.5
7000
13000
Indore
12
3
3.5
4
5500
9000
Panaji
12
2
3
4
5000
8000
Surat
18
1
1.5
2
3000
6000
Chandigarh
20
4
5
7
9500
16000
Gurgaon (Delhi)
30
3
4
5
8000
15000
Jaipur
12
3
4
5
8000
14000
Kanpur
12
4
5
6
9000
16000
Ludhiana
12
5
6
8
10000
18000
Varanasi
12
4
5
7
10000
18000
Bhubhaneswar
12
4
6
9
10000
16000
Calcutta
24
4
6
8
10000
17000
Guwahati
12
6
8
12
13000
19000
Jamshedpur
12
4
5
7
9000
16000
Patna
18
4
6
8
11000
17000
Bangalore
24
3
4
5
7000
15000
Belgaum
12
2
6
4
4500
8000
Coimbatore
12
4
4.5
5
8000
15000
Ernakulam
12
4
4.5
5
8000
15000
Hyderabad
18
3
3.5
4
7000
16000
Chennai
24
4
5
6
9000
17000
Vijayawada
12
4
5
6
8000
15000
EXHIBIT 3
Inbound Material Movements to Thane
From

Item

Chennai
Nagpur
Hyderabad
Jaipur
Delhi

Compressors, Castings
Cold Rolled Steels
Plastic Components
Glass
Electronic Components,
Gaskets
Packaging Material
Paint and Powder Coating
Others

Pune
Vadodara
-

Proportion by
Weight of
Products
0.15
0.45
0.15
0.05
0.05
0.05
0.05
0.05

EXHIBIT 4
Details of Containerised and Open Trucks
Mode

Capacity
(tonnes)
8

Average Hire
Charge
(Rs/Km)
12

Average Distance
Moved
(Km/day)
350-400

Containerised Truck
20 * 8 * 8 feet
Containerised Truck
40 * 8 * 8 feet
Standard Open Truck

15

20

350-400

10

300-350

EXHIBIT 5
Market Potential for Containerised Movement
Major Products
Tea
White Goods
Industrial Goods
Export-oriented
Goods
(Leather and
Clothing)
Brown Goods
Plywood
Automobiles
Lighting Products

Major Sources
East, South
All over India
West Central
North, South

Major Destinations
North, West
All over India
South, West
Ports in Western &
Eastern India

East
East
North, South
West, South

West
North, West
West
North