Revamping the Supply Chain - The Ashok Leyland Way

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Case Details:

Case Code : OPER004
Case Length : 08 Pages
Period : 1992-1998
Organization : Ashok Leyland
Pub Date : 2002
Teaching Note : Available
Countries : India
Industry : Automobiles

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"The ultimate objective of assaulting costs in the supply chain is not just to effect one-off reductions in the price of components. It is, instead, to set off a chain of continuously falling costs-by mutually discovering ways to do things better without a proportional increase in the rupees poured into the process."

- Business Today, January 7, 1999.


V Ramachandran, (Ramachandran) deputy general manager, Corporate Buying Cell, Ashok Leyland (AL), the Chennai based manufacturer of medium and heavy commercial vehicles was surfing the Internet at midday in his office. A closer look at the screen showed that he had logged on to an auction site.

But this auction site was different. Ramachandran was looking for suppliers of some specific tyres in the global market. At a price of $350, five suppliers were interested. He then lowered the price by $5. Now three of them were willing. Ramachandran kept lowering the price, each time by $5. At $325, there was only one response- the seller asked for an hour's time to confirm.

Within one hour, the Czechoslovakian company confirmed it could supply the tyres. Both parties then signed up by e-mail and the deal was struck at $325, saving Ashok Leyland Rs 14,700 per set. Known as reverse auction, this was one of the many ways AL was reducing materials cost, which accounted for nearly 70 per cent of its product cost.

In 1997-98, AL, recorded a profit-after-tax (PAT) of Rs. 18.4 crore1 on sales of Rs. 2,014.3 crore. A look at the previous financial year's PAT showed that the profits for 1997-98 had gone for a severe beating. In 1996-97 AL had a PAT of Rs. 124.9 crore on sales of Rs. 2, 482.5 crore. With the manufacturing Industry reeling under recession, the freight generating sectors (manufacturing, mining and quarrying) saw a steep decline resulting in a severe downturn of freight volumes.

For AL, whose business was directly dependent on moving material, goods and people across distances, this had come as a severe blow.

AL's supply chain2 had gone haywire under the recession which had eaten away 17.62 per cent of its revenues in one year forcing the company to helplessly allow inventories to build up. The results were showing on working capital. It had climbed from 33.34% of sales in 1993-94 to 58.81% in 1997-98.

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1] 1 Crore =10 million

2]  A basic supply chain consists of a company, an immediate supplier, and an immediate customer directly linked by one or more of the upstream and downstream flows of products, services, finances and information. An extended supply chain includes suppliers of the immediate supplier and customers of the immediate customer and an ultimate supply chain includes all the companies involved and flows of products, services, finances and information from the initial supplier to the ultimate customer.


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