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Supply Chain Management in Automobile Industry
Supply Chain Management in Automobile Industry
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Supply Chain Management in the major reasons for surge in demand for
Automobile Industry automobiles in India.
12000 800
700
10000
600
806.49
8000
9735.22
500
629.54
8467.85
6000
7243.56
400
6279.97
5316.30
300
479.92
4000
200
307.31
2000
184.68
100
0 0
2001-02 2002-03 2003-04 2004-05 2005-06 2001-02 2002-03 2003-04 2004-05 2005-06
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There is a considerable rise in demand for 2005-06, exports of auto components have
Indian three-wheelers in global market, shot up at CAGR of 24.6% (chart 4). Europe
particularly in the African countries. From accounts for 31% of total exports of auto
2001-02 to 2005-06, exports of three-wheelers
have grown at CAGR of 49.33%. Chart-4: Exports of Auto Components
(US$bn)
Auto components industry is growing
2 1.8
at CAGR of 20.3% 1.8
Growth of automobile industry has driven 1.6 1.4
India’s auto components industry as well. 1.4
Indian auto components industry has 1.2 1
increased at CAGR 20.3% from 2000-01 to 1 0.8
2005-06 in terms of production. During 2005- 0.8 0.6 0.6
0.6
06, production of automotive components
0.4
was worth of US$10 billion from US$8.7 0.2
billion in 2004-05. It is expected to reach 0
US$18.7 billion by 2009 and US$40 billion by 2000- 2001- 2002- 2003- 2004- 2005-
2014. 01 02 03 04 05 06
3
According to Mckinsey, global outsourcing of Given the potential of India’s automobile
automobile and auto components would sector, multinationals can take the full
reach US$375 billion by 2015 from US$65 advantage of its huge resources. India with its
billion in 2002. India has plenty of scope to large young population and abundant skilled
garner this potential. According to the labour force can become a major player in the
management consulting firm, India has the automobile sector across the world.
potential to notch this opportunity and reach
up to US$25 billion to emerge as major Role of SCM in Automotive Industry
sourcing destinations along with China,
Mexico and Thailand. Besides low cost, According to the Council of Logistics
India's auto components industry has the Management Supply Chain Management, “the
major advantage of enormous skills in process of planning, implementing and
process, product, and capital engineering—its controlling efficient and cost effective flow of
excellent manufacturing history and good materials, in-process inventory, finished goods
education system. and related information from point-of-order
to point-of-consumption, for the purpose of
India’s process-engineering potential can be conforming to customer requirements as
utilised for redesigning of manufacturing efficiently as possible”.
processes to make them more labour intensive
and less capital intensive, which will enable The automobile industry has undergone
the MNC’s to reduce their overall costs significant structural and other changes in the
substantially. For instance, "de-automating" of last decade or so. In view of the present
the production processes, which are applied in globalisation, implementation of lean
Western countries’ factories, can reduce the production and the development of
overall manufacturing cost of some modularisation have changed the relationships
components by up to 20%. between automobile assemblers (OEMs) and
their suppliers, especially those in the first tier.
In case of product engineering, India has Stiff competition among manufacturers will
emerged as a leading destination in the world. result in more mergers or acquisitions. The
India’s strength is in its design, which helps in challenges automobile manufacturers and
reducing costs. For instance, redesign of the suppliers face include improving quality,
Maruti Alto’s steering system has cut down its meeting cost reduction targets and developing
weight by 15%. India, with its skilled time to market.
engineers, can design a product very fast,
which in turn reduces its development cost Global Automobile Market Scenario
and lead times. For example, an Indian
supplier took six months to design a steering Diverse customer High cost due to
system for an automaker. It took more than needs huge R&D
four years to develop similar system with investment
suppliers in the other low-cost countries.
Several automobile manufacturers have
already set up their auto component facilities
in India.
4
All this is driving the organisations towards Supply chain management has two types of
greater product differentiation using cutting- software—planning application and execution
edge R&D, innovative sales and marketing applications. While planning application is
approaches, and increasing focus on boosting utilised to determine the best way to fill the
efficiencies in manufacturing and supply order, execution software determines the
chain. Hence, in the age of e-business and physical status of goods, the management of
global outsourcing, supply chain management materials and financial information of all
(SCM) plays a crucial role in many of these parties involved.
areas.
Rapid surge in global sourcing of auto
SCM is a best-in-class, high-performance components has also become a challenge for
solution which can be utilised by the world's manufacturers and suppliers although
leading automobile manufacturer, logistics sourcing has reduced the cost of production
and distribution companies, and retailers to substantially. Auto component manufacturers
blend the demand chain with the supply and all tiers of the supply chain have immense
chain. SCM helps in demand forecasting; opportunities to enhance their entire supply
taking an order; giving an accurate promise chain process with the successful
date; sourcing and manufacturing the right implementation of SCM solution.
goods; position inventory properly; pick, pack,
and efficient transshipment; most importantly, Benefits of SCM and IT
SCM makes a world of difference to the
manufacturers by maintaining a minimal Quicker response – improved professional
finished goods inventory. service
o Timely product supplies
Supply chain management flow is divided o Accurate pricing/discounts
into: o Reduction in billing errors – cleaner
SOA
a) Product flow o Simplified and faster payments
process
b) Information flow o Reduction in administration costs for
customers/vendors
c) Finance flow o Online information (purchases, sales,
inventory, financials)
The product flow is nothing but movement of o Elimination of reconciliation of
goods from supplier to customers and also in accounts/error processing
case of any customer returns or service o Reduction in accounting cycle times
requirements. The information flow covers o Less duplication of job – utilisation
updating the status of the delivery as well as of human-power in value adding roles
sharing information between suppliers and o Reduction in paper flow, data
manufacturers. The finance flow encompasses processing, printing, mailing
credit terms, payment schedules and o Better warehousing and
consignment and title ownership transportation management
arrangements. o Timely and correct asset capitalisation
o Credit management (customers)
o Better plant maintenance
o Easy access to data /information
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Benefits to Shareholders Kirloskar Group saved Rs7 crore with reverse
o Accurate and transparent information auction.
o Good controls over receivables
o Better inventory management Chart-5: SCM Market Size in India (Rs cr)
o Improved reporting of accounts
o Audit trail 800
o Branding 700
600
500
Potential and Market Size of SCM in 400
India 300
200
SCM solution market has been making
inroads in India and it is being accepted 100
widely by many industry sectors in the 0
country, particularly manufacturing and retail 2001 2002 2003 2004 2005*
where inventory carrying cost is very high.
According to CMIE, over Rs100,000 crore of
industry sector is tied up due to high *2005 Cygnus Estimates
inventories. In India, logistics cost is very high Source: IDC, Cygnus Research
as compared to other developed countries. It
forms around 14% of the country’s total
GDP. Transportation accounts for 35%;
Hence, the essence of SCM solution lies in
inventory for 25%; losses for 14%, packaging
coordinating the flow of information and
for 11%; handling and warehousing for 9%;
goods between the customers and the
and others for 6%. Several automobile
network of suppliers, manufacturers and
manufacturers in India have taken proactive
distributors. Interestingly, there has been a
measures to control their logistics cost and
growing trend of realisation of supply chain
improve customer services. Several measures
optimisation in India; there is no dearth of
were undertaken by Indian companies to
SCM solutions in the country. Around 70% of
improve their supply chain.
Indian software houses have expertise in
SCM. Currently, manufacturing and
automotive sectors have been the leaders in
implementing SCM solutions in the country.
In India, some of the automobile
manufacturing companies have adopted e-
IT spending by the manufacturing sector in
sourcing, which helped them to reorganise the
India, which accounts for 10% of the
purchasing process and supported the
domestic IT market, is growing between 30 to
aggregated buying across business units with
40% per annum. The main reasons for this
the help of Internet-based tools or B2C
surge in spending on IT by manufacturing
Internet portals. With the use of Internet,
industry are: a) Indian manufacturing
more global suppliers have participated
companies which are Tier 1 or Tier 2
compared to the traditional strategic sourcing
suppliers to OEMs in India or abroad, to
process. The process reduces time spent on
reduce time-to-market and product life cycles,
negotiating, accelerates information gathering
put pressure on manufacturers to integrate
and speeds up communication channels
with OEMs of both India and other MNCs,
among buyers and sellers. The companies
Tier I suppliers, sub-contractors and
have implemented this e-sourcing for
distributors during product development and
procurement of high-value commodities. For
process manufacturing; b) The manufacturing
instance, Tata Motors has saved Rs22 crore
sector wants to improve operational efficiency
on transactions worth Rs362 crore in 2004.
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and capital productivity by reducing fixed and requirements and intense competition. The
variable costs; c) dwindling product lifecycle, major challenges are:
rapid customisation of products and most o Network Planning – This is one of
importantly growing globalisation led to a the most important issues for SCM.
spurt in IT spending (chart 6) by the Determination of production
manufacturing sector in India. requirements and inventory levels at
the vendor’s facility for each product
There is a huge scope for Indian automobile and development of transportation
and auto component manufacturers to reduce flows between these facilities to the
their logistics costs with the implementation warehouses in a best possible way to
of SCM solutions. Proliferation of Internet, in reduce total production, inventory
particular has made the business easier and and transportation costs with
cheaper for manufacturers to coordinate their fulfilment of service level
business activities with their suppliers. requirements.
Indian IT Industry is growing rapidly and in
2005-06, IT service (excluding ITES) industry
o Supply chain integration and strategic
witnessed an excellent growth rate around
partnering – In SCM, information
30%, out of which software export accounted
sharing and operational planning are
Chart-6: Sector-wise usage of IT in India crucial for successfully integrated
supply chain. But the challenges are –
what type of information would be
11%
Small of f ice/ Home
shared, and how this information will
Educat ion 11% be used, what level of integration is
required and what partnership can be
Ener gy 6%
implemented?
Gover nment 14%
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Best Practices / Case Study production, logistics, working capital
(inventory), and the cost of lost sales. Thus,
Success story of Mahindra and SCM solution has enabled a pull-based
Mahindra replenishment, which helped in optimising the
logistics and manufacturing operations to
Mahindra and Mahindra (M&M), is one of the improve margin and minimised costs by
largest private sector companies in India, enabling quick customer requirements.
under the flagship of Mahindra Group.
Successful implementation of SCM has helped
M&M Farm equipment unit is one of the M&M by reducing its inventory by more than
major two operating divisions of M&M, 50% and the company expects to maintain
producing around 100,000 tractors per similar inventory level. Replenishment lead
annum. In 2005-06, the company sold total times, which cover planning and execution
85,029 units, achieving a growth rate of 30% lead times, were around 52 days, before the
against the previous year. Mahindra’s farm SCM project began. Now, the replenishment
equipment division plays an important role in time has been reduced to 19 days.
the country’s mechanisation of agriculture,
which directly impacts lives of around 6m The company has established a strong web
farmers in the country. The division is the component for its 400 plus dealers to collect
third largest producer of tractors in the world. sales information and 800 suppliers to submit
The company exports tractors to the US, SCM planning information and material
African countries, and several countries of requirement planning (MRP) schedules. The
South-East Asia. company started with dealer stock of 12,000
tractors and company stock of 7,000 units.
The company has faced stiff competition after But the change in business model and
the country’s economic reform in 1990s. The implementation of pull-based replenishment
company was facing a major challenge in its enables the company to minimise its dealer
supply chain of products across the country as stock to 6,000 and company stock to 3,500.
well as overseas market. The company has set With the fuller implementation of SCM, the
up its assembly/manufacturing facilities at company expects to reduce its dealer
multiple locations, which has increased the inventory further to 4,000 tractors and
complexity of the entire supply and company stock from 3,500 to 2,000 by
operations. Hence, the company needed an maintaining healthy customer delivery
integrated solution, which could link all plants response. Information flows from the
to optimise total costs, operational efficiency, company to its supplier in terms of MRP-
and respond quickly to customer derived schedules.
requirements.
Ashok Leyland- Success story
The company, therefore, implemented SCM
solution in the year 2000 to streamline its Ashok Leyland, one of the largest private
business process. companies in the country, had sales over
Rs6,000 crore in 2005-06. Ashok Leyland is a
For M&M, cost reduction was very important. part of Hinduja Group. It is also one of the
In view of global competitiveness, the largest automobile and auto component
company has to develop new products and companies in India.
varieties in existing products to compete with
world-class offerings. The company has to The company offers a world-class range of
spend more money on raw materials but trucks, buses, special application vehicles and
cannot increase the prices due to high engines, crossing millions more than 40
competition. Thus, SCM was the only countries in the world. During 2005-06, the
solution to keep its margin healthy – company produced total 65,085 vehicles out
minimising costs by reducing the cost of of which it has exported 4,879 units. In the
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domestic market, the company has sold total
56,776 units. o Vendor base rationalisation
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capacity. Total savings was 3% on
total operating cost. Conclusion
o Logistics initiative included Indian automobile and auto components
transporter-based rationalisation, industry is on a roll and there is an immense
Kanban pull from satellite scope for management for enhancing the
warehouses, enhancement of truck- supply chain of the sector. India has become a
turn around, load, space and route favourable destination for foreign companies
optimisation benefiting entire to establish their facilities and form alliances
logistics process, which has benefited with domestic companies. Low cost of
the company by saving over Rs1.25 manufacturing and conducive government
crore per annum support have been the major drivers for
o Stores outsourcing covered activities foreign companies investing in India. India’s
outsourced to 4PL service providers large young population, higher GDP growth,
and the service are– receipt and most importantly per capita passenger car
accounting/documentation, binning penetration is low at 8.5 car per thousand
and debinning, issue accounting, population, which creates great opportunity
perpetual inventory and reverse for industry players to offer an affordable
logistics for pallets. All these services four-wheeler alternative to the two-wheeler
have saved 42 man days. customers. According to Planning
o E-sourcing included global Commission of India, Indian automobile
benchmarking, gain through bidding, industry is expected to grow at CAGR of 15%
identification of cost-competitive over the next five years. The Indian economy
sources, introducing best sourcing is now gaining momentum in the world of
practices, increasing efficiency and free trade and liberal movements of goods
minimising costs, improving bottom- and services between countries. Therefore,
line of the value chain. All these efficiency in supply will be critical for India’s
activities have saved 11.5% of total automobile success.
material cost
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