Posted by: qmaxim | March 9, 2012

Is It Pull?

Cooking Gas connections in India are heavily subsidised and are in great demand. The subsidy per cylinder is very high.  Each authorised connection is entitled  to  2 gas cylinders.  Because of big difference (about IRs 600 per cylinder)  between market price and subsidised price big black market  exists for illegally  procuring  subsidised gas cylinders.  Recently, govt. in the state of   Karnataka  took the initiative  of  unearthing  illegal connections  so that  legal gas connections could be regularised. Each house holder having gas connection was asked to produce legal identification, those not producing the same  were  threatened with disconnection. This exercise lead to discovery of over 2 million illegal  gas connections in the state of  Karnataka  alone. Assuming each house holder requires  7 cylinders per year, one can only  imagine the extent of loss on  all India basis. 

 Is this post a rant about high level of corruption in India?  Not really.

 One of the Oil companies which also distributes cooking Gas cylinders has implemented a new innovative way to tackle this issue.

 It works like this.  When a customer requires a new refilled cylinder  he has to call single company assigned  number (common for the state) instead of calling the  dealer in his locality.  When he finishes the call, he receives SMS informing him about the approximate date  (in  +/- 48 hrs window) of delivery and his  local agency gets   informed as well. When the gas cylinder is ready for delivery, local agency calls up the customer and cylinder is delivered at a mutually convenient time. This system enables the gas company to make plan based on actual (legally sanctioned) demand rather than   estimate of likely demand  based on the information provided by its dealers. Local  dealers are  required to   hold just few days’  of inventory. Direction of  Information flow is  reversed  and it flows only in one direction i.e. from company to dealers. This is expected to curtail roaring black market for  subsidised Gas cylinders to a great extent.

 

The new system appears to be adoption of   ‘pull’ principle of famed Toyota Production system (TPS) which is also known as Lean production in many countries .  Though TPS has its origins in Toyota manufacturing, it has found  widespread application in many industries – both manufacturing and service. One example of service  application is in  Agile software development. Most  businesses are  run  by so called ‘push’ system. In ‘push’ system production of goods is based upon a plan (schedule) that’s made in advance, which means production and purchases are made based on projected customer demand. Company tries  to ‘push’ its  inventory to its customers.  Obviously, in such a system  large inventory has to be maintained to prevent a ‘stock out’.

 

On the other hand,   ‘pull’ system of production  plan is based on the  actual customer demand  – in other words customer demand ‘pulls’ the product. Pull is not about managing inventory but on minimising it. Pull principle also means ideal state of just-in-time manufacturing : giving the customer what he wants, when he wants it, & in the amount he wants. This is precisely what is being attempted  in this case.  Production is decided by the actual customer demand and there is no need to maintain excess inventory.

 

This has several benefits both for customers and the company. For the company, reducing the inventory of finished products as well as raw materials  leads to significant cost  saving   in inventory holding cost. Considering the long supply chain (probably  gas comes all the way from Qatar) savings could be quite big.  In this case, lower level of supply also means reduction in loss in supplying each gas cylinder and  big  reduction in subsidy. This is likely to give knockout blow to  thriving black market as well. For the customer, supply occurs when he wants it  and without any hassle.

 

 So, it is a win-win for both. Of course, it is  a challenge   making all components work together as a system and  this   is by no means an easy thing to do. Companies take years to perfect it.

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