Q.1What is the competitive priorities for Synthite?
Oleoresin market has become very competitive with thin margins. Reducing cost and moving up the value
chain were the only ways to survive and grow. Synthite had achieved cost efficiencies through a smart
global raw material sourcing strategy and by maximising plant utilisation with the addition of a diversified
set of spice products. Diversification also addressed the growing customer trend, and it helped Synthite to
become one-stop shop. Currently, the critical success factors are providing short deliveries to the customer
in food business. The moment delivery period is quoted two to three weeks customer starts to explore other
suppliers. Also the ability to process orders of any quantity is critical in the oleoresin market
Q.2 How efficient is the company’s operations?
Company’s operations were not efficient at all, as they were not able to deliver the products in one week
period, which was the company’s competitive advantage. For some product, production lead time was two to
four weeks. Lead time were getting increased due to manual transfer of SFG from the barrel into the mixing
kettle and reloading the FG into the mixing kettle for reprocessing and daily transfer of de-oiled cake. This
led to increased cost and re-processing time.
The average inventory of raw material was over 900MTs during 2010 and part of 2011, equal to three
months of production. The holding cost of the inventory is very high as 0.2% oil is evaporated, causing a
loss of INR 19 million every quarter.
Q.3 What are the company’s order and production lead time, inventory cost, switch over cost of
different products, etc.?
Raw Material Order:
Optimal order quantity for raw material cannot be calculated as ordering cost and leading time are unknown.
If these two data points are considered to be zero, then following can be the calculation for raw material
procurement:
Input Data
Demand rate, D 4083635 Consumption from April, 2011 to March, 2012
Ordering cost, Cs ₹ -
Carrying cost %, I 0.80% 0.2% oil loss every quarter
Unit purchase cost, P ₹ 10,000.00
Daily demand rate, d 11188.0411
Lead time (in days), L 0
Results
Economic order quantity, 319.52
Q*
Maximum inventory 319.52
Average inventory 159.76
Number of orders 12780.67
Total holding cost ₹ 3,12,780.67 Rs. 25 per Sq. ft for 12000 sq. ft warehouse
Total ordering cost ₹ -
Total purchase cost ₹ 40,83,63,50,000.00
Total cost ₹ 40,83,66,62,780.67
Production Lead Time:
Distillation Continuous Extraction Homogenization Blending
3 steam distillation Crude batch into SFG 15-20% Oil and 35-
of 2 MT each
De-oiled cake batch, 10 hour 55% piperine
24x7 in 12 hour + berries process (2MT)
3 mixing kettles
Kettle cleaning after
cycle operation (75:25) every 7 batches, 8 (1.7MT, 2MT, 3MT)
Processed 6MTs of 500 Kgs per hour operation Minimum quantity
berry and 210 kgs Sand mill operation, = 250 Kg
of Pepper Oil with hours, Yield 200-250 Kgs per Smaller order sizes
rest de-oiled cake about 1260 hour), 7 hours were drawn from
SFG stored in 7MT
De-oiled cake Kg tank holding 5 SFG
lab or from FG
stored in 850 Kg batches
batches
barrel Standard test and
SFG stirring for 4
hours 20% underwent
Five standard test extended tests
performed on the
batch
Lead time for Semi Finished Goods:
In the process, this activity can increase the lead time un-necessarily, in extraction process, the machines
maximum capacity is 12MT and it takes 24 hours to process, and if the company is running machine at full
load, which delay the process by 12 hours
If extraction is done only in full load, then 1 batch of SFG of 1260 Kg takes 71 hours and if extraction can
also be done in half load, then 1 batch of SFG of 810.6 Kg takes 59 hours.
For every 8th batch of SFG, lead time will increase by 8 hours due to cleaning processes of the charging
kettle.
Lead time for Finished Goods:
Batch Size Standard Test (Hours) Extended Test (Hours)
Less than 1MT 12.71 102.71
1700 Kg 12.86 102.86
2000 Kg 14.71 104.71
3000 Kg 18.57 108.57
Inventory Cost:
Raw Material Cost
Holding Cost 0.2% loss quarterly Average Inventory = Rs. 54447920
in Oil, Rs. 80 per 680.599MT
Kg/per year
Storage Cost 12000 Sq. ft Rs. 25 per Sq. ft. Rs. 300000
Warehouse
Semi Finished
Goods
Storage Cost 7MT Vessel (Rs. Average Inventory = Rs. 4057500
675000) + 25m 42MT
(Rs. 50 per meter)
pipeline
Finished Goods
Storage Cost 7MT Vessel (Rs. Average Inventory = Rs. 2705000
675000) + 25m 25.289MT
(Rs. 50 per meter)
pipeline
Total Cost Rs. 15215420
The cost is calculated for from April 2011 to March 2012.
Average Inventory is calculated using closing stock for the whole period.
Switch over cost for different products:
Component of Cleaning SFG Level Cleaning FG Level Cleaning
Labour @ Rs. 75/man hour 8 man hours 3 man hours
Oil @ Rs. 10000/ kg 1 Kg 0.5 Kg
Total Cost Rs. 10600 per cleaning Rs. 5225 per cleaning
Varieties other than Black Pepper Oleoresin account for 12% of the total orders.
Q.4 What are the operations challenges/ problems Synthite is facing?
1. Despite carrying extensive inventories of Finished goods, Synthite is not able to fulfil demands in the
delivery period due to large variety of products
2. Changeovers to different products create bottleneck thereby increasing production lead time
3. To fulfil the demand of variety of products, they need to pull out packaged finished products and re-
blend them to specifications
Q.5 What are the root causes of these challenges? Demand forecast, production capacity, inventory
management, material handling, etc.?
1. Demand forecast of the SKU was not accurate which led to orders not being completed on time
2. The manual material transfer was employed in the company. These led to operational inefficiencies
resulting in loss of material and capacity and the extra cost of re-processing and retesting
3. The equipment used is suitable for batches above 250 Kg, but around 50% of the orders are between
1-250 Kg this again leads to longer lead time as company has to wait for more orders or more
extensive inventory as company is practising overproduction
4. Inventory management of raw material is also not efficient as the company is losing around INR 19
Million every quarter
Q.6 What solution do you propose to resolve issues?
Kettles that can process orders of batch size of less than 250Kg should be employed as it will remove
the need of re-processing the existing finished goods thereby saving a lot of time
Instead of manual labour being used for loading and unloading the whole process should be done
using pipelines, thereby completely removing manual labour for loading and unloading and reducing
lead time
Synthite can go for mother batched and then mixing them as per orders. Total storage cost will not
change but time required for orders will reduce considerably as now any variety can be produced
with similar lead times that is in a week
Synthite can focus only on Black pepper oleoresin and its varieties as it constitutes 97% of the
company’s revenue. Synthite can outsource other oleoresin to reduce their overall cost of
changeovers thereby removing bottle neck
