Supply Excellence — Supply Management: Engine for the New World Car

Supply Management: Engine for the New World Car

January 14th, 2008 · by Tim Minahan · No Comments · automotive sector, costing, sourcing, supply management

With Tata Motors unveiling of its much-anticipated one-lakh (about 100,000 rupees or $2,500 U.S.) Nano car last week, the race to deliver the most affordable car officially kicked into high gear. Analysts revved up positive predictions for the future of the auto industry as automakers around the world scrambled to revive efforts to deliver small, fuel-efficient vehicles to growing middle classes in emerging markets, such as India. (More on this in future posts.)

The excitement around the delivery of an automobile that actual fits the lifestyle and the budget of the emerging market consumer is understandable. Yet, news reports have predominantly focused on the what — a cheap car — and the why — for a growing class of consumers. Few have taken the time to uncover how Tata is able to deliver the unimaginable: a safe, fuel-efficient, five passenger vehicle for $2,500 (air conditioning is extra).

Tata is taking a three-pronged approach:

Alternative design and materials: Tata has kept the form factor for the new Nano extremely small, with early reviews indicating that the “five passenger” claim will be a snug fit at best. Tata has also elected to sheath the Nano in sheet metal instead of the more conventional plastic. Finally, Tata has elected to use a 33-horsepower engine, which will make the Nano’s top speed max out at 60 miles-per-hour, but yield a fuel efficiency ratio of 50 miles per gallon.
Low cost manufacturing and logistics: Tata execs say the Nano will be produced and sold only in its home market of India for at least the first three years of production, allowing the company to capitalize on the region’s comparatively lower cost R&D and manufacturing talent. The single market approach will also help the company hold down manufacturing costs by leveraging existing production assets and supply lines and avoiding cross-border shipping, tariffs, and landed costs.
Better spend leverage and management: Tata will reinvigorate its strategic sourcing approach, extending the use of its e-sourcing and competitive online bidding methods, consolidating spend with fewer suppliers, and improving supplier development and capacity. According to one report, Tata uses online auctions for 45% of its direct materials spending, compared to an average of 15% of spend being e-auctioned by most big auto firms. These approaches will be critical considering the rising costs of sheet metal and aluminum. Tata expects to benefit from buying these commodities from a consolidated base of Indian suppliers. In addition, basic sheet metal cutting and stamping requires less sophisticated suppliers than the more complex plastic-injection molding and assembly used by other automakers.

A little digging reveals that Tata is no stranger to spend and supply management approaches. After a disappointing 2001, when the company lost an alarming 5 billion rupees, Tata leadership launched a three-phase recovery strategy. Not surprisingly, phase one was to rein in spending and improve its procurement and supplier management operations. With an aggressive timetable for savings, Tata used a mix of sourcing automation and external sourcing and spend category expertise (all from a single vendor) to better control its direct materials costs. The company later extended this strategic sourcing approach to indirect materials, particularly industrial MRO.

Tata’s closely-watched Nano is a bellwether of the unconventional approaches it will take to compete in the new world and how supply and spend management will be key to success.

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