Indian Auto Supply Chain Management -

Quantification & Measurement.


























Indian Auto Supply

“Any process that can be measured, can be improved”


Abstract

The Indian auto industry is small in size, compared to the world markets ($ 6.73 billion compared to a world market of $ 737 billion) but has experienced a growth rate of 20-25 % the past few years. Over 13Indian companies have won the Deming prize and quality has improved significantly. If we compare the Indian auto industry to the industry in China, it provides an interesting contrast. Some interesting insights regarding the future of the Indian auto and the way SCM is being measured in the same -



Introduction

A study of the evolution of the auto-ancillary supply chain in India using a combination of firm product specific data measures, firm level performance, industry performance, global best practice data and country comparisons with China. The goal is to assess the current state of the industry and identify both the potential and the management realities associated with developing globally competitive auto supply chains in India.

Some of the questions that need to be asked are :

- Will the future of the Indian automobile industry be that of a globally competitive car producer that can offer quality at a competitive price point?
- Will the industry mainly compete at the component level, focusing on design intensive and process intensive engineered products?
- Will the domestic car market provide sufficient incentives for foreign suppliers?
- How are these trends influenced by infrastructure investments in India, the impact of China, and world commodity price levels?
- How will the Indian government policies affect the development of these supply chains?
-
A quick summary of industry analysis suggests some intriguing and initially counter
intuitive results:

- The quality movement and the associated adoption of lean manufacturing techniques have been extremely successful in the Indian industry. 13 Indian companies that have
won the Deming prize. However, the analysis shows that none of these firms show any
improved financial benefits over the rest of the industry. Given this data, how do we interpret the impact of such quality improvement initiatives?

- Any understanding of the auto components industry has to focus on component type such as transmissions, engines, braking components etc. An analysis of the price pressure by segment shows that for many segments, margins have decreased in recent years. In addition, a total factor productivity analysis by segment shows decreasing productivity across the precise period that volumes have risen.

- Any focus on firm level growth has to consider firm size as we understand industry evolution. Analysis by firm size (large versus small segments), and by product segment, reveals that newer firms that have the benefit of size have shown the most improvement in recent years.

- Finally, despite higher raw material costs, higher energy costs and poorer infrastructure in India, multinational OEMs that have entered the Indian market have managed to produce cars that have high local content and are sold at competitive retail prices.

The Indian Automobile Industry – A quick survey

The Indian automotive components industry’s annual turnover (for FY 2003) was US$
6.73 billion. When compared to the global automotive components industry of US $737
billion, the Indian industry dwarfs in size. But, at a compounded growth rate of 20-25 %,
the growth in India’s auto components exports is much faster than that of the domestic
market (10-14%). Many consider this growth in exports as just the tip of the iceberg
similar to that witnessed by the information technology industry in the early 1990’s. The
auto ancillary industry caters to three broad categories of the market:
1) Original equipment manufacturers (OEM) or vehicle manufacturers, that
comprises of 25% total demand
2) Replacement market that comprises 65% of the total demand
3) Export Market, that comprises primarily of international Tier I suppliers and
constitutes 10% of total demand

Cost Structure
The cost structure in the auto ancillary sector is shown below. It is clear that any analysis
of the cost should focus on material cost, labor cost and other manufacturing costs.

It is evident from the from industry data that for the engine parts segment, the employee costs as a fraction of total cost are higher than for other segments, indicating the complexity of the activity. This plays an important role in explaining the total factor productivity trends, described later.



Quality

Firms in the auto sector have made significant advances in quality over the last 10 years.
This is the largest number of firms from any country outside Japan that have won this award.

According to conventional understanding, this rapid change should have resulted in better
bottom line performance. Senior quality managers in auto component companies reveal that one of the very first conditions that MNC OEMs set out for Indian auto component
companies in the late nineties was the need to conform to internationally recognized
standards within three years. A number of companies are also simultaneously embarking on a Six Sigma program in order to reduce defects and delays in their processes, drastically. All these initiatives have resulted in a perceptible increase in quality levels of auto component industry as a whole

The Supply Chain:

Delivery parameters are linked to Supply Chain (SC) metrics of an organization. It was,
again, the entry of the MNCs that heralded a paradigm shift in the way supply chain was
thought of and implemented in India (Refer Table 2.4). Today, all the automobile OEMs
demand (JIT) supplies and daily milk runs and the use of third party logistics (3PL) for
component supplies have now become commonplace. The result is that OEMs no longer
maintain large stocks of components / raw materials but instead leave it to their suppliers
to ensure that there is a smooth flow of parts in the logistics pipeline.

When the analysis was done at an industry level, it was found that new firms with lower overheads had high growth rates and that the small firms that are newer, larger and have lower overheads witness high growth rates and are more profitable. We also find that amongst large firms, new firms have better return on assets than old firms, i.e., traditional large companies perform poorly.



Methodology

The degree of development of the supply chain can be gauged by examining the extent to
which carmakers choose to buy in components, rather than manufacture in-house.

Supplier Quality

International best practices for carmakers in US, Japan and Europe currently aim to bring
the large majority of suppliers under 100 ppm. The distribution of defects observed confirm the view that first-tier suppliers to newly arrived carmakers in India and China are already operating close to world-class standards.

An ICRA report (ICRA, 2004), further, substantiates Suttons view that with regard to
quality there are not significant differences between India and China. Our initial
interviews with managers and Ramnath Consulting Ltd. reveals that China might be
slightly ahead in some areas and more importantly, both countries are behind world
standards.


A successful model that can be incorporated for robust measurement of Supply Chain is the SCOR model.








SCOR:
• Common Methodology
• Common Language
• Common Metrics

Partner Relationship Management
• Supply Chain Programs
• Innovative Product Developments
• Total Cost Reduction Programs

Procurement Excellence:
• Value Creation
• Low Cost Sourcing
• Operational Excellence




The Supply Chain Council (SCC) has developed The Supply Chain Council (SCC) has developed and endorsed the Supply Chain Operations Reference-model (SCOR)
as the cross-industry standard for supply chain management

The SCC is an independent, not-for-profit, global corporation with membership open to all companies and organizations interested in applying and advancing in state-of-the- art supply chain management systems and practices.

• Over 1000 Company Members
• Cross-industry representation
• Chapters in Australia/New Zealand, Brazil, Europe, Japan, North America, Southern Africa, and South East Asia with petitions for additional chapters pending.










SCOR: A Reference Model for a Supply Chain:
5 core processes:



PLAN
Source
Make
Delivery
Suppliers
Customers
Return
Return
Return
Process Best Practices
Metrics Technology






















Ease of implementation
Solution portfolio
high
medium
low
SC reconfiguration
Direct Shipment
Transport Load optimization
Lead time reduction
Forecasting Process
VMI
Portfolio Strategic Development
SC Delivery Performance
high
medium
low
Impact/Benefits

Change management issues in a collaborative scenario
Typical barriers:
Shared vision feeding
mutual need & interest
Understanding about
business concepts &
opportunities
Trust & openness
between partners while
building reliable supply
chain operations
Change management
solutions:
Collaborative
workshops
Common definitions
(Reference model)
Commonly selected
& shared metrics





Conclusions


I
Enterprise
integration
II
Corporate
Excellence
III
Partner
Collaboration
IV
Value Chain
Constellation
V
Full Network
Connectivity
Enhancing partner collaboration is key
SCOR
Collaborative Commerce
Most Achieved level II
(today’s market)

SC Maturity Model
Functional
Process
Intra –
Enterprise
Inter-
Enterprise
External
Total Business
Systems




Everything here suggests that :

- Usage of simple tools leads to great improvements in SC management
- Automation is the buz word in the process control
- Implementation of SC management systems/tools require trust between partners.
- Continous coordination is a must for any model to work
- Continuous adaptation to the particular business & process improvements required.
A particular model is not guarantee for success in the Supply Chain. The auto supply chains in our Auto markets, are not yet tier zed and consolidated. Total factor productivity trends for the industry show a decline, suggesting a change in the product mix towards higher labor content, i.e., higher design content and engineering content products. In summary, the Indian auto ancillary supply chain presents a fascinating case study of firms at crossroads, that have to select whether to pursue business as it is, develop a global supply network, grow their demand globally or develop more complex products and design capabilities.