COST REDUCTION IN TATA MOTORS THROUGH EFFECTIVE SUPPLY CHAIN MANAGEMENT Tata Motors is India's leading commercial vehicle manufacturer and the third largest passenger car manufacturer. The company is the sixth largest truck manufacturer in the world. Tata Motors had two main business segments - Commercial Vehicle Business Unit (CVBU) & Passenger Car Business Unit. Tata Motors Limited (Tata Motors) declared a profit of Rs.1,237 crores (Rs. 12.37 billion) against the gross revenues of Rs.20,483 crores (Rs. 204.83 billion) for FY2004-05. This marked a significant turnaround for the company that had posted a net loss of Rs. 500 crores (Rs. 5 billion) as recently as 2001 One of the most important reasons for the remarkable turn around was a unique cost reduction program under taken by Tata Motors called ‘cost erosion.’ Tata Motors had all along believed in developing strong in house design, engineering, and manufacturing capabilities. Tata Motors performed a large part of its manufacturing activities in-house. It had installed facilities to manufacture engines, gearboxes and transmission mechanisms, body panels, castings and forgings and important components & sub-assemblies It even manufactured its own machine tools, dies and fixtures, in its machine tools division... Cost reduction initiatives as a tool to company turnaround Need for a cross functional team to implement and monitor cost reduction initiatives E-sourcing at Tata Motors as an alternative to traditional purchasing Move towards single vendor policy and maintaining a healthy vendor relationship Shift from a hierarchical model to a collaborative approach Four specific areas were identified: direct material costs (which constitute roughly 65 per cent of all costs); variable conversion costs (power, fuel, water, tools, etc); fixed costs (labour, marketing, corporate expenses, plant operations, research and development); financial restructuring (working capital, debt restructuring, balance sheet, etc). Three-tiered teams — members, leaders and champions — were set up at the plant level to implement, drive and monitor the exercise across the organisation. Their task began with spreading the cost-reduction message, emphasising its importance to bringing the company back to good health, and defining the methods to accomplish it. Direct material costs Since materials accounted for a bulk of the company’s expenses, getting the initiative on track here was crucial. It started with Ravi Kant, Tata Engineering’s executive director (commercial vehicles division), assembling a team of 23 young achiever in April 2000 and giving them three days to come up with ideas on how to reduce direct materials costs by 10 per cent a year for 2000-2001 and 2001-2002. analyses of various kinds: zero-based costing (building the cost of the products from scratch, from the value of the components that go into its making) For example, earlier, Tata Motors paid for its forged components on a cost-plus basis as claimed by a vendor. Under the new system, it paid a price depending on the weight of the forging, leading to savings of 25%. , purchase-rate analysis, rate-to-weight study and value-for-money scrutiny. team began renegotiating rates with vendors, but there was more dissection before that happened. A value-chain analysis revealed the scope for reducing incremental taxation. In the automobile industry, value additions go through different stages and there is taxation at every stage. "We reduced the taxation by integrating some of these value additions at the suppliers’ end," says Mr Renavikar. Value engineering — the system of identifying alternative materials, designs, technologies and processes was reinforced. SWOT (strengths, weaknesses, opportunities, threats) analysis of vendors — the team worked out a strategy to maximise Tata Engineering’s equation with vendors by tracking the relationship between its bargaining power and its purchasing value. The single-source advantage — moving from multiple vendors to a single vendor. Reducing imports — by indigenising wherever possible. Suppliers — looking for alternate suppliers if regular vendors could not, or would not, reduce costs. e-procurement — the reverse-auction process, where vendors bid online to supply requirements. Earlier Tata Engineering had one structure to cater to all its vehicle classes, which meant there wasn't enough focus on different automobile families. Now the company structured its marketing along different lines of business. Price increases were factored into the overall cost-erosion venture. "This meant that any cost increase in our products had to be negated by cutting more costs elsewhere The results — and the savings — were quick to show. Direct material costs went down by about Rs 200 crore in 2000-01 and by Rs 168 crore the following year. there are other things to consider: complexity management (essentially, making fewer variants of a particular product range); putting a comprehensive testing system in place; increasing the scope for outsourcing; and giving e-procurement a more conspicuous role in the order of priorities, with projected savings of Rs 100 crore on online purchases of Rs 1,500 crore over the next three years. Mr B. B. Parekh, deputy chief (strategic sourcing) of Tata Motors said: "We have worked out a single source policy to make a lean vendor base. When we first kicked off our outsourcing policy, we had nearly 1,400- odd vendors. The number has reduced to half even though we have come up with newer models. This number will be reduced further over the next few years." Tata Motors will encourage those vendors who have ability to acquire technology through joint ventures or acquisitions. The vendor should have the readiness to put multiple facilities near the vehicle assembly unit. With this new vendor policy in place, the company is confident of going in for 80% auto component outsourcing for its cars as against 60% now. This will substantially bring down the material cost of its cars which alone constitutes 70% of total cost of production. E-sourcing : a concept that has become a mantra today and is credited as one of the major factors in Tata Motors’ astonishing turnaround. Tata Motors has saved more than Rs 100 crore, thanks to e-sourcing and has conducted close to 300 auctions with the help of e-sourcing major FreeMarkets.