Competitive through Inventory Management – A case of AP

Effective inventory management is the first major component of AP’s (Asian Paints) strategy on distributing cost control. AP achieved high efficiency in this regard. Actually, in inventory cost, AP took the lowest position in the industry. AP’s average inventory level equals only 28 days sales, while the industry average is 51 days sales. This provided a 45 per cent edge in inventory costs to AP compared to its competitors. AP’s stock of finished goods was just 7 per cent of its net sales while for the others in the industry it was twice that level. What is particularly striking in this achievement is that AP offered customers and dealers a high level of service in product delivery compared to its competitors and yet the inventory costs down by 45 per cent compared to the competitors.

Control of Credit out standings: Large credit out standings, running beyond two months or more, was a natural concurrent of the distribution strategy chosen by AP. The dealers are requires to maintain stocks of all the SKUs that are on demand in the territory. It pushes up inventory levels at the outlets. They need credit. AP allowed 15-21 days credit for dealers located in the major towns and 22-30 days credit for dealers in upcountry regions.

AP had to pull off a smart credit control strategy for survival. It resolved the thorny problem through an innovative dealer incentive scheme. AP stipulated that each of its dealers should pay for the supplies within a specified time and offered them an attractive incentive scheme for doing so. It consisted of two components:

(1) A special discount of 3.5 per cent. This was referred to as the discount for perfection in payments. It was passed on at the end of the year, provided each and every payment throughout the year was made within the stipulated time norms.
(2) A cash discount of 5 per cent. This was paid for all outright cash purchase. It was given whenever payments were received within 24 hours of the supply/invoice. In respect of outstation accounts, the payment should have been made in advance by draft in order to be eligible for the cash discount.

The scheme was a grand success. AP’s credit outstanding always stood below 25 days, while the out standings of the other major companies were in the range of 40 days and above, Systematic computerization also helped AP maintain the credit out standings within limits.

IT initiatives in Distribution cost control:

AP’s IT initiatives in respect of distribution, inventory control and control of credit outstanding in particular helped it to control distribution costs without lowering the service level. AP went in for a fully computerized distribution system. AP did this not only with an eye on distribution cost control, but also of the sake of distribution effectiveness per se. But for such an approach, AP’s distribution management would have gone haywire. Here was a situation where 2,000 different items of paints, manufactured at four different plants, had to be distributed to 15,000 dealers in 3500 towns spread all over the country, through 55 depots. AP accomplished this, maintaining the average service level at 85 per cent, a clear 25 per cent above that of competition. The IT initiatives also ensured prompt billing, accurate customers accounting and effective control of credit outstanding.

AP later hired from the department of telecommunication, satellite time and got all its offices in the country networked. They transmit data daily to the corporate head office in Mumbai, which uses it for sales and production. AP has consistently improved its IT systems over the years. It has linked all its factories and 55 depots through V-SAT terminals, and derived big benefits in terms of streamlined distribution. More recently, AP has implemented supply chain management software from 12 technologies. AP plans to upgrade its communication infrastructure through VSAT leased lines and ISDN lines all over India.