Coal India and lessons in Inventory Management September 17, 2007Posted by Ramnath Rangaswamy in Business, Emerging Markets, India, Indian Economy.
Coal India’s production is being hampered by shortage of tyres for their heavy [ 85 tons+] dumpers. This indicates a failure of Coal India’s inventory management and sourcing strategy.
Heavy duty tyres are in shortage across the world. Bridgestone has sold out it’s entire 2007 production. Australian mines are facing similar problems of shortage of tyres. Michelin is the only tyre company which has some spare capacity and stocks. The main reason for the shortage is the increase in the consumption of coal across the world behind the higher energy requirements of India and China.
Inventory is classified into AB&C depending on the amount of management attention required
Inventory is classified as ABC, depending on
- Total consumption value: This is what we are taught in B-School classes; an item is calssified as an A item if it has a high value of consumption. It could be because of a high value item having a low consumtion or a low value item having a very high consumption. What was not told is that this is just one half of the criterion!
- Softer elements: An item should be classified as an A item if it is a proprietary item, has limited suppliers if there a capacity constraint or if it is required for a special project.
The ABC classification is reviewed periodically, usually once a year. The items classified as A items get 80% of mangement attention.
Heavy duty tyres should have been classified as an A item by Coal India. Even if value of consumption value did not merit a A classification, it should should have been classified as an A item because there were few producers.
If Coal India indeed spent had classified Tyres as an A item and kept a close watch on heavy duty tyres it would have realized the growing demand supply gap. It would then have entered into a long term contract with the producers and evaluated alternate suppliers. With the current suppliers it should have shared it’s tyre requirements, for the next 3-5 years, and signed a long term agreement that would have guaranteed supplies.
Modern purchasing organizations have a matrix structure.
Purchasing Managers have purchasing responsibility for a department, plant or group. Also, they have to develop expertise in a particular material group. This way the company develops a COE [Centre of Excellence]. The COE’s responsibility is to constantly study the external market, spot trends, identify new suppliers and identify alternate materials.
For example, you would have purchasing manager for soaps and specializing in packing materials. purchasing manager would have KPIs for cost savings and service related to soaps and packing material across the company.
In Coal India, the purchasing manager with COE responsibility for dumper truck tyres should have forecasted the capacity crunch of tyre manufacturers and the consequent supply constraint. Coal India could have then taken appropriate action.
I am sure Coal India has already begun Tyre Management i.e. increasing the life of the tyre by re-treading and better maintenance of the tyres in use.
Lessons for all companies
The Coal India situation is not unique or rare. I have seen many ‘cripples’- products complete in all respects but unable to ship out because of a missing part. Railway coaches worth US$ 50000 being held up because of missing bolts [ € 0.09, US$0.125], split pins [€0.02, US$0.025] or products being held up because of cartons not being available.
There are innumerable ways– Kanban, VMI – to manage bolts, nuts, split pins and other consumables that are C class items. For A Class items there is no shortcut except looking outwards and keeping a close watch.
Companies should use the Coal India situation to look at their own inventory management and purchasing functions.
For further details see the article Coal India and Inventory Management lessons