Promat Clothing: A Case Study of Supply Chain Reengineering
Leon R. Raath CA (SA), C.P.M.
Leon R. Raath CA (SA), C.P.M., Chief Executive, Promat P.O. Box 32607, Braamfontein, South Africa 2000, Tel. ++27-11-773-8191 Fax ++27-11-773-7722.
83rd Annual International Conference Proceedings - 1998
Abstract. This paper is a case study of the Promat Clothing organisation in South Africa and the transformation process towards becoming World-class. The case study centres mainly around Supply Chain Management and Purchasing; and the need for transformation of both to create Supply Chain synergy.
This presentation focuses on the bottom line benefits achieved in reducing Total Logistics Cost (TLC) in Promat's category management area of clothing. Leading research shows that skillful contact negotiations extract an average 1-5% reduction in cost. Our re-engineering reduces cost by more than double this percentage i.e. 12% of turnover viewed differently. Total Logistics cost are reduced by 50%.
Four areas are covered :
- Organisational background
- The opportunity and need for change
- The transformation roadmap in four phases
- The "Golden Nuggets" being the key learning points that we experienced.
The Promat Clothing is a division of the larger Promat organisation. It forms part of one of South Africa's largest parastatals called Transnet, incorporating diverse transportation- related businesses. Transnet itself has 110 000 employees and its major divisions are:
- Spoornet (all railroads in South Africa)
- South African Airways (the national airline)
- Portnet (all Ports and Harbours in South Africa)
- PX (container freight)
- Autonet (road transportation
- Petronet (pipe lines)
- Metro (Metropolitan commuter rail service)
Promat has a turnover of South African Rands 2 billion, which is equivalent to approximately $500 million; The clothing division within Promat has a turnover of approximately $10 million and employs 100 people which are spread in 8 geographically dispersed warehouses all over South Africa. The main clients are Spoornet (Railways), Metro (Commuter rail service) and Portnet. The 80 000 clothing customers of Promat are employees of the above businesses.
2.NEED FOR CHANGE
Promat had to change its business operations
A number of warning lights were flashing, which made it clear that Promat had to adapt or face an ever-shrinking market. A number or major clients had opted to have their clothing sourced from elsewhere; and the remaining clients were demanding better service. This included the provision of customer choices, i.e. every end user should be given the possibility of choosing a clothing "kit" most suited to his or her needs from a pre-determined catalogue. Before the purchasing function was obliged to purchase the wrong items due to insufficient client guidelines.
The total Logistic Cost of the overall operation pointed to considerable inefficiencies in various elements of the Supply Chain and Purchasing.
Numerous indicators pointed to unsatisfactory business and operations results. The high inventory level, (six months inventory) coupled with a low delivery reliability and poor on-time deliveries were regarded as the Price of Non-conformance of a sub-optimal overall system. In addition, the organisation and culture was also lacking, marked by poor moral and a lacking service ethic.
Promat's vision of enhancing customer value (client service levels) and reducing the cost of clothing and specifically also its total logistics cost serves as a vital link between the current state and the desired end-state. The vision therefore also drives the strategies and focus points which make up the transition. A joint project team was formed between the IBM Consulting Group and Promat Clothing. The transformation would focus on the whole supply chain and would look at the main leverage points of any organisation : People, Processes, Technology. A transition was to be break away from the current sub-optimal focus on functional silos to a process orientation. A global Supply Chain optimum is always better than optima of the various links or elements.
A four-phase transformation approach
A four-phase transformation approach is used to cross the gap from the current to envisaged end-state. The phases are:
Each phase deals with different issues aims to create a Customer Value Management framework. This means that an infrastructure
- together with the relevant capabilities
- must support the customer values and requirements.
During the Understand phase, one tries to get to grips with the current problems in order to be able to make sure they are dealt with in the subsequent phases. The elements that are dealt with in this phase are:
- Customer requirements and values, problems, implications of problems, leverage points.
The Design phase starts dealing with the issues of the envisaged end state. Elements that are dealt with here include:
- Supply chain elements, Supply chain configuration, Total Logistic cost, Supply Chain optimisation
The Create phase deals with establishing the basic elements of the new design, being:
- Processes, Information technology, People, Organisation
This is the phase of classic Business Process Reengineering.
The Implementation phase puts all theory into practice. It puts into practice all elements surrounding:
- Warehousing & distribution network, Technology (both IT and other), People, Organisation
Supply chain links
Various supplier development initiatives and performance improvement actions were taken. Cooperative partnershipping was adopted and an infrastructure was set up to develop newly emerging Small business and Black Economic Empowerment in line with South Africa's Reconstruction and Development Programme.
Initiatives related to suppliers included:
- Supplier management, Performance measurements, Performance feedback, Communications, Develop emerging suppliers (Black Economic Empowerment), Cooperative partnerships
- Processing speed, reliability and accuracy, Information integrity, Visibility and fulfillment tracking, Custom-built forecasting tool, Stream-lined tendering process
- Person-specific parcels, Productivity and accuracy focus, Innovative warehousing techniquesand technologies, Normal & express processes, Warehouse management system
Initiatives related to distribution and customers:
- Localised Promat presence, Tracking system, Specific client needs, Door-to-door service, Information flow, Optimised transportation
The Distribution network
The Central Distribution Centre (CDC) being the hub and most important component of the re-designed Supply chain, most effort was spent here. A World-class facility was designed, which would have a healthy balance between technology and manual flexibility. A revolutionary picking principle was adopted which would allow for very high picking efficiencies to be attained. As all warehouses would be consolidated into one CDC, this allowed for greater investments to be made here than would have been otherwise the case. A new distribution network was devised whereby all stockkeeping is restricted to the CDC and distribution is driven by entities called Local Distribution Depots (LDD's). These serve as permanently manned customer interface points.
The warehouse implementation phase deals with all operational issues of the CDC:
- ERP customisation, Scanner technologies, Radio Frequency, Communications, Racking and technology, Building and refurbishments, Training and organisational design
Total Logistic Cost (TLC) reduction
The new system will reduce the TLC by more than 55%. It will allow for the most important design specifications to be met:
- Door-to-door service
- Lower TLC including a change from 8 expensive warehouses to a significantly more cost-effective structure of 1 CDC and 12 LDD's.
- Speed service
- Optimum workload
4."GOLDEN NUGGETS" OR KEY LEARNING POINTS
4.1 The Total Logistic Cost (TLC) principle was used as a decision support mechanism in finding the most suitable supply chain configuration for Promat. The current TLC was calculated by looking at the most significant cost categories. This model was used as the base line in the subsequent phase to see what the relative TLC would be of a number of Supply chain options. A selection was made of the most suitable Supply chain configuration and a "Stretch TLC" was calculated, i.e. taking all cost savings into account. Finally a "compromise TLC" was established which would be a realistic goal for the new Supply chain in terms of cost.
4.2 Joint Application Development (JAD) allows for IT and other critical elements to be taken into account during the process re-design state. The most significant 8 processes were selected for re-design. The 8 key processes identified were:
- Receive uniforms as promised
- Package individual parcels
- Forecast demand
- Optimise garment stock levels
- Deliver uniforms as promised
- Order uniforms as required
- Optimise cloth levels
- Deliver raw materials as required
A Joint Application Development (JAD) approach was adopted which allowed for a cross-functional IBM and Promat team to come up with the best solution. The methodology adopted, allowed for not only the design of new processes, but also IT and people implications. It also facilitated the buy-in of various Promat employees.
4.3 At least three options exist on how to integrate your business requirements with an enterprise resource planning system (ERP) or smaller integrated software solutions:
- Idealised design driven where a greenfields approach (starting design from a clean sheet of paper) is adopted to design the idealised business process whereafter it is compared with an ERP standard. A compromise was reached between the package capabilities versus the business requirements. These compromises were "hand circuited" ("made to stick") on the ERP system which in our case was the SAP R3 package.
- Option 2 is ERP capability driven where the ERP "vanilla" (standard package) influences the business process designed.
- The third option is similar to the first option without commencing with a greenfields approach
Option 1 was our preferred choice because it would deliver the best results.
4.4 An intermediate layer between SAP and the barcoding system allows for additional functionality through a warehouse control system (WCS) while catering for transaction buffering.
This layer gave us the benefits of:
- Added functionality through the WCS
- Slow response time of the main SAP system creates no problem
- Management of SAP down-time
- Semi-independent WCS; data from SAP
- Only four InterSAP integration points
4.5 When re-engineering processes; it is critical that possible future compatibility with an Electronic Supply chain be taken into account; especially for "express" processes.
The primary focus is our normal processes where physical material (inventory) and/or information flows from client to planning to supplier to the CDC to LDD's and finally to the client. An additional focus is required where electronic commence is to facilitate express orders.
4.6 The level of internal and external involvement varies in the respective state of the transformation process.
The first three stages require higher levels of external (consultants) involvement whereafter internal involvement is higher:
- The current state stage where the need to change is considered required higher levels of external sponsors to deal with naysayers.
- The understand phase requires an objective and neutral view on "current state" and solution strategies.
- The design phase is the critical outside involvement phase: Promat users expected best practice expertise and world-class solutions.
- The create phase is the critical buy-in phase: User involvement leads to buy-in and better process design and change acceptance.
- The implement phase is the ownership phase: Client needs to take ownernship; final transfer of learning and self-sufficiency.
4.7 How to "hard-circuit" changes (making the changes in your supply chain stick). There are different ratings of success depending on the approach. "Hard-circuiting" can be achieved though:
- IT enabled/processes and an ERP package allows little deviations from idealised processes and could because a straitjacket. This approach is suitable where a majority of processes are IT enabled and achieves a good rating of success.
- New procedures & documentation does not ensure compliance because changes have a habit of returning to the old. This is the least effective of all mechanisms and therefore needs to be supported by a measurement system.
- Physical changes on the infrastructure and distribution method without an altlernative forces all parties to change. Change management is required to facilitate and expediate acceptance. This approach can be highly effective where many changes occur.
- Measurements and a combination of the above gives a balanced score card. This required instrumentation to guide it in the right direction and delivers the overall best results.
As the Promat project once again shows: Supply chain transformation remains one of the most feasible ways to improve an organisation's bottom-line:
- Organisations are competing with their supply chains
- There is a clear common goal: getting rid of waste and inventory - not people
- Promat is representative of most organisations, where:
- The Total Logistic Cost (TLC) is between 15-20% of Total costs
- The profit margin is about 4% (This figure is based on research and does not necessarily reflect Promat's results)
- S.C. interventions yield TLC reductions of between 10-40%
- ... leading to a profitability increase of 37,5 to 200%