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LOGISTICS COSTS IN INDIAN AUTOMOTIVE INDUSTRY

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AGENDA
1. Introduction a) Categories of logistics operations in auto and auto components industry b) Benefits of efficient logistics management c) Brief about logistics costs involved 2. Indian auto and auto components logistics industry a) Growth drivers of Indian auto industry b) Critical success factors 3. Composition of logistics cost in the Indian auto industry 4. Cost drivers 5. Issues 6. Challenges

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5% 11% 9% 10. India is ranked 47th out of 155 countries • Logistics cost as a percent of sales in India almost 30% higher than in most major economies of the world • Reasons for high logistics cost: • Multi-layered tax regime • Infrastructure bottlenecks • High inflation rate 3 .5% • According to World Bank’s 2010 logistics performance index.2% of the GDP ELEMENTS OF LOGISTIC COSTS Transportation 35% Inventory Labour Packaging Handling and Warehousing Others(incl.OVERVIEW OF INDIAN LOGISTICS INDUSTRY Estimated at US$ 235 billion Employs 45 million people Expected to grow annually at the rate of 10-15%. reaching revenues of approximately $ 385bn by 2015. losses) 25% 9. Highly Unorganized with organized sector responsible only for 6% Logistics costs are about 13.

OVERVIEW OF INDIAN LOGISTICS INDUSTRY LOGISTICS COST AS A PERCENTAGE OF SALES Name of industry Cement % share of logistic cost in total sales 15% Steel F&B FMCG Major contributors for the growth of logistics industry are: • emergence of organized retail • increase in foreign trade • India becoming a manufacturing hub Durables Apparel Auto 6% 5% 4% 4% 3% 3% 4 .

6533 million Rs 3050 million 3.13% 2.OVERVIEW OF INDIAN LOGISTICS INDUSTRY LOGISTICS EXPENSES OF SOME AUTO COMPANIES IN 2012-2013 Company Sales Logistics expenses Logistics expenses as a percentage of sales 1.55% Maruti Tata Motors(Global revenues including Jaguar and Land Rover) TVS Motors Hero Motocorp Bajaj Rs.479% 5 .147 million Rs 5513 million Rs 1876480 million Rs 47980 million Rs 70890 million Rs 235830 million Rs 206180 million Rs 2360 million Rs. 481.77% 1.329% 2.

OVERVIEW OF INDIAN LOGISTICS INDUSTRY COMPONENTS OF LOGISTICS COST IN INDIA In the eastern region. there is an extra cost in the form of Congestion Surcharge 6 .

• Usage of IT systems in logistics improves the communication between the parties involved. • Improve efficiency and productivity.OVERVIEW OF INDIAN LOGISTICS INDUSTRY BENEFITS OF EFFICIENT LOGISTICS MANAGEMENT • Decreases the cost involved in the movement of the product to the end customer. • Electronic messaging reduces the time to create consignments and manage accounts receivable. • provide100% compliance with government legislation 7 . • Proper fleet management(main component being GPS) • can optimize investments. • Reduce a company’s overall transportation costs.

• Targeted at commercial vehicle fleet owners and large consignors of goods • Features • fuel management • driver management • remote diagnostics • real time fleet tracking • SMS • Alerts • Geo-fencing • trip management Benefits • improved fleet utilization and logistics(and hence reduces costs) • reduce track downtimes(hence improves efficiency) 8 . branded ‘Tata FleetMan’.OVERVIEW OF INDIAN LOGISTICS INDUSTRY LOGISTICS INNOVATION AT TATA MOTORS IN 2012-2013 • Introduced a Telematics and Fleet Management Service.

VOLATILE GROWTH IN DEMAND 2.INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY TRENDS THAT WILL TRANSFORM THE INDUSTRY Long-term secular growth and volatility Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket 1. IHS Global insight . 2013. RELATIVELY HIGH LOGISTICS COSTS India on course to become world’s third largest auto manufacturer by 2020 Logistics costs as percentage of sales 30% higher than in other large Asian automotive markets 9 Source: Building world-class automotive supply chains in India. ATKearney.

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY TRENDS THAT WILL TRANSFORM THE INDUSTRY Long-term secular growth and volatility Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket 3. NUMBER OF CAR MODELS IN INDIA TO SKY ROCKET • • Increasing competition Multinational OEMs entering India • • Changing customer demographics Shorter replacement cycles 10 Source: Building world-class automotive supply chains in India. ATKearney. 2013 .

ATKearney. 2. $25bn(2020E) India emerging as a hub for manufacturing 11 Source: Building world-class automotive supply chains in India. GROWTH OF EXPORTS • • • • Export volumes growth – 19% CAGR 1 mn units in 2007.9mn units in 2013 Component exports: $9bn(2013). 2013 .INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY TRENDS THAT WILL TRANSFORM THE INDUSTRY Long-term secular growth and volatility Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket 4.

product recalls and sustainability Tax optimized to operationally optimized Reverse logistics to be strengthened Compliance to sustainability regulations 6.INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY TRENDS THAT WILL TRANSFORM THE INDUSTRY Long-term secular growth and volatility Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket 5. BOOMING AFTERMARKET 12 Source: Building world-class automotive supply chains in India. ATKearney. 2013 . REGULATORY CHANGES • • • • Regulations around GST.

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY TRENDS Long-term secular growth and volatility ACTIONS NEEDED Collaboration across the value chain Innovations in cost management Proactively manage complexity Develop tailored value chains Prepare for regulatory changes Develop capabilities to exploit opportunities Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket 13 Source: Building world-class automotive supply chains in India. ATKearney. 2013 .

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY TECHNOLOGY AND AUTOMATION TO HELP MANAGE AUTOMOTIVE PRODUCT COMPLEXITY 14 Source: Building world-class automotive supply chains in India. ATKearney 2013 . ATKearney.

2% of GDP = $ 243.COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY OVERVIEW Total Logistics spend in India Contribution of automotive industry Logistics cost in automotive industry Logistics cost in auto components industry Reverse logistics cost in industry 13.1 bn 1% of logistics spend = $ 2.5 – 1% COMPARATIVE ANALYSIS OF COMPONENT WISE LOGISTICS COST ACROSS COUNTRIES India 35% 25% 9% 31% China 49% 24% 9% 18% USA 0% 10% 20% 50% 30% 40% 50% 15% 60% 70% 25% 80% 90% 10% 100% 15 Transportation Inventories Warehousing Others(Including Losses) Source: Reuters. Economic Intelligence Unit.T. Kearney analysis . A.43 bn 2 – 3% of sales 3 – 4% of sales 0.

485mn tonnes 1% Railways Highway Others 2007-08 .283mn tonnes 1% 34% 65% Railways Highway Others 46% 53% 1986-87 .555mn tonnes 4% 29% Railways Highway Water 58% 16 Air 9% Reference: Article .2.COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY TRANSPORTATION COSTS IN INDIAN AUTO INDUSTRY OVERVIEW Transportation forms 35% of the total logistics cost Estimated value of $ 850 mn at current GDP level Indian auto industry relies mostly on roadways for majority of transportation requirements In bound logistics cost is approximately 1– 2 % of total manufacturing cost for 44% of auto companies Out bound logistics cost is approximately 2 – 3 % of the total sales revenue 10 – 15% estimated Y-o-Y increase in auto logistics cost due to fuel price rise and driver unavailability 1978-79 .Auto sector loses speed on high logistics cost – Businessline .

9 37. A.6 Transit times are long & uncertain Rail terminal quality is poor Less flexibility in carrying different types of products 17 Source: Reuters.1 32.COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY TRANSPORTATION COSTS IN INDIAN AUTO INDUSTRY FUEL PRICES RISING AT A CAGR OF 9% 80 70 60 51.9 73.4 48.6 31.2 70. Economic Intelligence Unit. Kearney analysis .8 40.4 50 40 30 20 10 0 2008 2009 2010 2011 Diesel(Rs/Litre) 2012 2013 Petrol(Rs/Litre) 45.T.7 40.8 63.7 WHY RAIL TRANSPORT IS BECOMING UNPOPULAR? Important rail networks oversaturated Rail freight tariffs are high 44.

5% of total logistics spend Spend on labour in logistics as per current GDP level is 230 million USD FACTORS EFFECTING LABOR IN LOGISTICS Unavailability of skilled work force Strict labor laws – thinner margins for logistic provider Wages rising at a CAGR of 10% per annum RISING WAGES IN INDIAN AUTO LOGISTICS SECTOR 250 200 162. A.5 150 100 122.4 50 0 2008 2009 2010 2011 2012 2013 Average Nominal Wage Index(Base 2005) Linear (Average Nominal Wage Index(Base 2005)) 18 Source: Reuters.COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY LABOUR COSTS IN INDIAN AUTO LOGISTICS INDUSTRY OVERVIEW Labor cost in logistics industry is estimated to be 9. Kearney analysis .T.1 133.5 177.7 192. Economic Intelligence Unit.6 147.

ukessays.com/Publications/Newsletters/SupplyChainCostReductioninIndia/SupplyChainCostReductioninIndiaPage3/tabid/205/Default.php .com/essays/economics/inventory-policy-in-indian-automotive-supply-chain-economics-essay.COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY INVENTORY CARRYING COSTS IN INDIAN AUTO INDUSTRY OVERVIEW Inventory carrying cost is 25% of total logistics cost Cost of holding inventory is 1 – 2% of the total sales Carrying cost as per current GDP level is $ 607 MN Economie s of scale Protectio n from uncertain ties & buffer Cushion between supply & demand Discount on bulk purchase OBJECTIVES OF MAINTAINING INVENTORY BENEFITS OF VENDOR MANAGED INVENTORY Reduced inventory level Improved end customer service Reduced inventory costs COMPONENTS OF INVENTORY COST Inventory cost Better demand forecast Reduced leadtime Holding costs Setup costs Ordering costs Shortage costs http://www.aquamcg.aspx 19 http://www.

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY COST OF WAREHOUSING IN INDIAN AUTO LOGISTICS INDUSTRY Warehousing cost in logistics industry is estimated to be 9 % of total logistics spend Spend on warehousing as per current GDP level is 218 million USD Warehousing in India is expected to grow at a rate of 35 to 40% annually Auto warehousing in India primarily works on the theory of augmentation and assortment GOVT INITIATIVES TO REDUCE WAREHOUSE COSTS Free Trade Warehousing Zones (FTWZ) Speciality logistics parks Goods & Services Tax • Infrastructure to facilitate import & export of goods • Freedom to carry out trade transactions in free currency • Exclusive parks for automotive industry • Connected through well-laid rail links & multi-modal facilities • Uniform tax-rate • Manufacturer can store and distribute goods without state boundaries Assembling Cross-dock facilities Automation Pre-delivery inspection VALUE ADDED WAREHOUS E SERVICES BY 3PL Consolidati on & Deconsolid ation centres 20 Sorting Source : PWC whitepaper – Building warehousing competitiveness .

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY COST OF WAREHOUSING – IMPACT OF GST 21 .

LOGISTIC COST AND COST DRIVERS NEED FOR LOGISTICS ORIENTED COST ACCOUNTING SYSTEM – ABC and 3PL  Decision taken in one area can lead to unforeseen impact on other areas  Change in minimum order value Customer ordering patterns -> additional cost Cost of sales (actual product mix) (attributable costs only) ● Commissions ● Sales calls ● Key account management time ● Trade bonuses and special discount ● Order processing costs ● Promotional costs (visible and hidden) ● Merchandising costs ● Non-standard packaging/unitization ● Dedicated inventory holding costs ● Dedicated warehouse space ● Materials handling costs ● Transport costs ● Documentation/communications costs ● Returns/refusals ● Trade credit (actual payment period)  Cost of Holding Inventory – Cost of Capital  Logistics costs is inherently complex as it cuts across organizational functions  Adding a distribution outlet How much to Charge a customer ? 22 Source: Building world-class automotive supply chains in India. ATKearney 2013 . ATKearney.

ATKearney. ATKearney 2013 .customer service strategy to different target segments  Proliferation of number of Product lines and segments  Increased Overhead cost – Attributable to different activity  True Cost of servicing different  Customer type  Channels  Market Segment  Effectively pass on the Cost to the customer who needed specific services Order Processing Inventory Carrying Picking and Shipping Outbound Freight Commi ssions How does it help managers?  Optimum Resource Allocation  Meet Customer service in a most cost effective way 23 Source: Building world-class automotive supply chains in India.ACTIVITY BASED COSTING Companies Understand Customer cost  Organizations have different products .

2013 .LOGISTICS VARIABLES AND ITS IMPACT ON THE BOTTOM LINE Assets •Cash •Receivables •Inventories Logistics variables •Order Cycle Time •Order Completion Time •Invoice Accuracy •Working Capital Management •To generate invoice faster •Delays payment •Current Assets tied up in inventory •Sizeable chunk of fixed asset •Inventory •Distribution facility •Plant and Equipments •PPE Liabilities •Current Liabilities •Develop tailored value chains •Financing Options for Inventory Plant and Equipment •Phasing of supplies •Minimize premature commitments •MRP and DRP •Growth in use of third party logistics •Transform fixed cost into expenses •Direct impact on funding requirement •Debt / Equity 24 Source: Building world-class automotive supply chains in India. ATKearney.

Payment of multiple state and central taxes results in:  Considerable loss of time in transit for road freight  Fragmentation of warehousing/inventory space • 90% of automotive companies outsource in case of transportation.KEY ISSUES • High level of fragmentation in the trucking industry – no standards w. safety etc. but lacks in effectiveness as compared to that of top supply chains • 65% of India’s freight travel over long distance is structurally suitable for rail and waterways – but 70% of transportation happens via road • Connectivity within India should given more significance – reducing cost of the vehicle manufactured (20% in India as opposed to global standard of 5-10%) • USA. • Tax Structure . no tracking.r. overloading. China and other emerging economies spend more on rail and less in road 25 .t cost and transportation – labour charges.

KEY CHALLENGES • For any company dealing with logistics. the value proposition rests on three key pillars:  optimizing logistics costs for customers  shortening the length of the order completion cycle and.  reducing the number of fixed assets • A smarter supply chain & logistics is identified as the main way to effectively contain cost and other top challenges – 3/4PL could be the solution 26 .

IBM’s Study . 80% of automotive SCM have implemented variable cost structures that align costs with fluctuating revenues – only 20% have done so extensively Most of the Automobile Companies are ineffective in controlling logistics costs 27 The Automobile Smarter Supply Chain of The Future .KEY CHALLENGES • Outsourcing is one potential area of opportunity to ‘variabilize’ the costs • As per Deloitte’s Report on logistics costs in Automobile Industry.

) will help in creation new warehousing hubs • A smarter supply chain ensuring visibility embodies 3 key characteristics:  Instrumented – Using sensors and “smart” devices to gain greater visibility across the network. simulation and modelling tools to evaluate increasingly complex and dynamic risks and constraints and act on better insight 28 . make decisions collaboratively and manage in real-time  Intelligent – Relying more on advanced analytics. reduce cost and manage rising complexity  Interconnected – Integrating the entire supply chain – even the fragmented aftermarket – to share information.g.WAY AHEAD • With GST. logistics and distribution costs in India could go down by 10-15% • The development of key infrastructure projects related to ports. NSWE project etc. highways and rails (e. mitigate risk. Golden Quadrilateral.

WAY AHEAD • For providing value-enabling solutions we require action on three fronts:  Creating an environment for graduating the Indian logistics market to provide value propositions in logistics solutions  Increasing the capability of the Indian Logistics Industry to provide such solutions  Requiring Government and other regulatory mechanisms in the country to provide an enabling environment for value propositions in logistics services • Outsourcing is one potential area of opportunity to ‘variabilize’ the costs • Organizations need to move towards “value delivered” costs and not merely transportation costs – collaboration with 3PL (Third Party Logistic Service Providers) in strategy and planning 29 .