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COST REDUCTION IN TATA MOTORS THROUGH EFFECTIVE SUPPLY CHAIN MANAGEMENT,

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					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.

				
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posted:5/18/2010
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