TOC implementation outcomes

at Ergis Group

Konstantinov Dmitrii Georgievich, Ergis Group, RussiaOctober 2013

26-27 October 2013, Moscow

www.tocpractice.com

8th International Conference of the

TOC Practitioners Alliance - TOCPA

Dmitrii Konstantinov

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d. konstantinov@mail.ru

Konstantinov Dmitrii Georgievich, owner, Ergis Group, LLC, Executive MBA 2002, management experience:CEO of Ruzcom Group of Companies, LLC, CEO of ZavodKrasnaya Presnya OJSC, Manager for Machine Building withinSeverstaltrans OJSC.

Contents:

1. Profile and history.2. TOC inception.3. Outcomes of corporate TOC seminar.4. Main achievements following the TOC

implementation.

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History:

Created ZAMBROTTO-2004; Federal Market entry - 2009; Changed decision-making model in the company - 2011; Created Solger - 2011; Steel doors market entry - 2012; Market segmentation - 2012.

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Product line MZambrotto1. Door handles;2. Sanitaryware wraps;3. Locks and mechanisms;4. Cover plates;5. Hinges;6. Cross-bars and stoppers;7. Handles for sliding doors;8. Door guides;9. Sliding door mechanisms;10. Knobs

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Zambrotto Door Handles

over 113 SKUs of knob latches-broad range of colors: -polished gold-mat gold-chloantite-brushed chrome-copper-bronze-mat antique bronze-coffee-dark wood-lightwood

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History of production.

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Condition of Ergis Group in January-February 2011.

The shareholders did not receive planned ROI. Cash flow was rather stable, but there had been

no growth trend for a long time. Share of hard-to-sell inventory was 45% (turn-over under

4 times a year). Significant shortage of highly profitable and fast turning

inventory. Tendency of increasing accounts payable and

overdues Distributors were leaving to the competitors. Customer gave negative feedback about the service. Demotivated staff.

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Core obstacles to solve the aforementioned problems

Lack of finance. Lack of people. Lack of time for decision-making.

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Stages of problem solving:

Analyze using in-house or external resources.

Conduct diagnostics of the company and its market position.

Select a strategy. Develop the reform program. Implementation.

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ARB consulting, Chelyabinsk

Corporate seminar TOC-based inventory management 10-13 February 2011.

Value offer development

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UDEs of the company:

Lost sales

Some potential customers did not want to work with our company

Some customers left

Customer requests are not fulfilled in full (for 50 75%)

Some customers do not place orders for long time.

Due dates of goods delivery to the warehouse are failed systematically (2-

3 weeks)

Order shipments are delayed for 2-3 weeks before the order is full kitted

Some fast moving SKUs are not available

High inventory level (4 months)

Slow moving goods make 45% of the inventory

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Conclusion:

The analysis identified a wrong assumption used by the company: We can bring in only the salable goods. In reality the Forecasts developed by the company were frequently wrong.

This resulted in a conflict:On the one hand, it is necessary to purchase the whole range in full volume to satisfy the customers and increase sales and, purchase only well selling SKUs of the range in limited quantities, from the other.

Meet the demand of the customers and increase

the companys throughput

Control costs

Successful business

Give up forecasts and replenish the inventory only on the basis of real consumption for availability in full range and quantity

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Problems solved during TOC implementation from February to May 2011

Identified target inventory level for each SKU. Minimized interval between the requisitions. Order only the items that were sold during the

time between the requisitions. Implemented an IT-system to manage

logistics on the basis of 1-trade.

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Problems solved during TOC implementation from June to December 2011

The partners gave up forecasts and started to replenish the inventory, only on the basis of the real consumption

Frequency of deliveries were increased for all partners of the company.

Partners inventory dropped 2-4 times, in some cases fully eliminated.

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2012What changed?

30% growth of sales vs. the previous period. Constant availability of goods in the warehouse in the

volume required and needed SKUs allowed fulfilling the customers requests for 100%.

Turn-over of inventory increased from 1.9 in February2011 to 4.1 times in February 2012.

Share of slow moving inventory dropped from 45% to19%

Accounts payable fit the contractual terms. Marketing and advertisement costs were reduced

significantly Recognizability of the increased significantly.

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Value offer

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Zambrotto coating = 7 years warranty. Zambrotto coated items survive over 500

hours in salt fog (international standards require48 hours) and have 5H hardness and 5B interlayer adhesion.

f = 500h x 8 / 365d = 10.95 years, where f factor of salt fog calculation into the years of use and 8 factor of more severe aggressive environment vs. standards conditions.

300 000 cycles of opening / closing of Zambrotto handles.

Quality. All stages of production from analysis of the purchased materials to Zambrotto finished goods involve quality control allowing 7 years of warranty and being sure in all elements of the item.

Zambrotto coating = 7 years warranty. Zambrotto coated items survive over 500

hours in salt fog (international standards require48 hours) and have 5H hardness and 5B interlayer adhesion.

f = 500h x 8 / 365d = 10.95 years, where f factor of salt fog calculation into the years of use and 8 factor of more severe aggressive environment vs. standards conditions.

300 000 cycles of opening / closing of Zambrotto handles.

Quality. All stages of production from analysis of the purchased materials to Zambrotto finished goods involve quality control allowing 7 years of warranty and being sure in all elements of the item.

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Value proposition of Ergis Group for retail sector.

100% requests are covered; Inventory reduction by 10-15; 0 investment in inventory; 0 slow moving goods at your warehouses; Profits increase to 40%; Released cash is channeled to new projects

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Value proposition of Ergis Group for the sector of steel doors.

100% of requests covered; Reduction of inventory to zero; Zero slow moving goods in the warehouse; Financial guarantees in case of failed requests

fulfillment. Released cash is channeled to new projects Unique pricing policy;

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Value of cooperation with the company

Dealer working with Ergis Group receives unique competitive advantages

Flexible response to changing demand Best customer service No risk in new products entry into the market

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2013. What changed?

- The market of interior door fittings fell 35-45% during the first half of the year.- Steel doors market fell to 50%.- Customers prefer budget segment.

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2013. What changed?

Revenue during January September 2013 increased by 5.5%;

Profits increased by 7%.

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Market position.

According to an independent source, industrial directory called Door Businessdated 11 June 2013, Ergis Group was one of the largest four distributors in Russia, and #22011, share of ZAMBROTTO was 4.89 % of total market of locks and hardware goods in retail. For example: in May 2008 the share was1.57%

Market share

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Thank you for Attention!

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