Auto Monitor - May 2013

Auto MonitorSupply Chain Strategising

The Indian auto sector is struggling to contain costs and stay profitable. Alagu Balaraman – Partner & Managing Director, India Operations, CGN India, shares his expertise in SCM, the auto industry, and what manufacturers can do to improve efficiencies and maximise returns. Excerpts from an interview with Jayashree Kini-Mendes.

The auto sector is in doldrums. Until the markets recover or buying improves, manufacturers will face a slowdown. Do you have a solution for them?

Consumer demand can vary for several reasons, sentiment being a major one. The reasons most commonly ascribed today are “economic slowdown”, high fuel costs, high interest costs and tax increases. Perceptions often fly in the face of facts, especially at a consumer level. People are not losing jobs. Fuel costs have been flat to declining in the past 2 years. The same is the case with interest rates. Tax increases only affect SUVs, which account for less than 10% of the total market.

But the reality is that consumers do not necessarily react to facts, but to sentiment. To overcome these negative perceptions, marketing has to have much stronger propositions. Companies will actually have to sell their products, rather than simply launching them and pushing them into the pipeline for dealers to liquidate. A good salesman listens hard and is very responsive; similarly auto companies have to be more adaptive to market situations and nimble in response. To do this, among other things, the entire model of the supply chain has to change: from being focused on producing and shipping volumes to being responsive to the market.

In what ways can supply chain operations lead to creating and sustaining market differentiation for auto companies?

This is a good question, because in a market such as ours today, differentiation will be key for success. While the decision to buy a car is a considered one, the actual selection depends upon a myriad of factors: is the new model at a dramatically newer price point? Is the salesman listening to my needs? What are the discounts offered? What is the dealer throwing in? Are there special maintenance packages? Is the colour and model that I want available? All of these will be jostling in the mind of the consumer to tilt the decision in favour of one model or another. The situation will also change rapidly as competitors, dealers and influencers make their moves.

To be an effective player in this field, it is necessary to ensure a high level of control over cost and availability. Creating supply chains that are faster to respond and opportunistic in nature; building cost structures that allow companies to make “killer” offers – these are crucial new capabilities for the Indian market.

How can an efficient supply chain provide an edge over competitors?

An efficient supply chain helps to lower total cost. This provides additional margin to the company that it can put into its war chest and make dramatic use of in marketing and service offers. However, an efficient supply chain isn’t everything. I can have a very low cost model and service offering, but if my consumer sees more value in another offering, they will switch even if it is at a higher cost. Maruti has always been a cost leader in the market and had a market share of around 80% in 1995. Today it has about 45%, reflecting the changing value perceptions of consumers.

It is important to have a responsive supply chain: one that can adapt very quickly to changing market conditions. Many companies have invested in making their own operations highly responsive. But overall responsiveness is not possible without having a strong vendor eco-system that can support and respond as quickly as the market demands. Creating a responsive supply base, as against one that only focuses on cost, is also critical for competitive advantage.

How can auto companies benchmark their supply chain? Please provide details with the parameters.

Benchmarking is a useful tool, although it has its limitations. According to the Performance Measurement Group, over 70% of companies do not use benchmarking. In India, the main focus of benchmarking is cost comparison. A good set of benchmarks would cover reliability, responsiveness, flexibility, asset utilization and cost. These are outcome benchmarks. They should be used along with process benchmarks like the SCOR model (Supply Chain Operations Reference, created by the Supply Chain Council). Benchmarking is like a doctor taking a patient’s temperature. As an input it is useful, often vital, but it does not provide the solution or replace the need for the doctor.

Most companies have increased levels of complexity arising from a diversity of products, customers and IT systems. How would you advise them to streamline things so that the processes are smooth?

Complexity, in this situation, is caused either by introducing more models than the organization is capable of handling, or introducing new models faster than the organization can cope with. So there is a problem with management bandwidth or with agility. There are four fundamental ways in which this can be addressed. First, restructure the company to decentralize decision making. The famous case of GM forming divisions is an example of this. Second, restructure the business processes to speed up decision making and in the early days of business process re-engineering (BPR), Ford’s accounts payable was a well known case. The third option is to fundamentally redesign the product and make it modular. VW has been working on what we call the MQB, a global initiative, with great success, to standardise whole modules and systems across platforms. The fourth option is about sharper positioning, a combination of confident marketing and product design that led to Apple dominating different product market spaces with very few models. Why make more models when the few you launch are outstanding winners?

Each company, depending upon its business strategy can choose one or more of these approaches to deal with complexity. It is easy to choose, but much more difficult to implement. Whichever is chosen, the entire extended enterprise has to be realigned to the new model. Skills will have to be reshaped and considerable management will is required to drive this multi- year cultural shift.

In times like today when sales have slumped, most manufacturers resort to just-in-time manufacturing. Even demand forecasting goes for a toss. How can companies even out capacity planning since most of them are operating below capacity?

The question itself is a contradiction in terms. When a company is operating well below capacity, the focus should not be on capacity levelling but on responsiveness. After all, even with the Manesar wage hikes, it is expected that Maruti’s labour costs will go from 2.4 percent of sales to 2.7 percent.

The focus should be less on locally optimising parts of the business and more on getting business. When having business is the constraint, other aspects should take secondary priority. Profit management demands that discretionary expenditure be cut back. However, given that most costs are fixed in nature, it would be counterproductive to cut back on operational expense.

How can companies manage growth as far as supply chain is concerned?

Over the last two decades growth has been continuous. At times like this it is easy to manage growth. You keep adding capacity, you hire more people and vendors build additional capacity. Today, while growth will continue, it will be more volatile in nature. In such a situation, managing growth becomes more challenging. It requires much more careful assessment of investments, building in flexibility and responsiveness, and more importantly, it places a completely new level of challenge in managing business partners.

The process of managing business partners, both suppliers and dealers, has to evolve to a completely new level now. Application of collaboration, rather than dictating terms, will become necessary. Just as the new generation of workers and managers entering the workforce have different expectations and need to be handled differently, so too will relationships with suppliers have to change.

How do you help companies with best practices, quality management and appraisal systems for supply chains?

CGN & Associates have been working with engineering and automotive companies around business performance through supply chain interventions. Challenges can be about increasing profitability or reducing supply chain response times. To address these, a variety of tools and methods are used, often working across the dimensions of quality, cost, delivery and service to get the desired result. In India, we have seen a strong demand for supplier collaboration and development and for supply chain design and planning. the world for nearly two decades now. During that time, CGN has focused on delivering superior business performance through supply chain interventions. Challenges can be about increasing profitability or reducing supply chain response times. To address these, a variety of tools and methods are used, often working across the dimensions of quality, cost, delivery and service to get the desired result. In India, we have seen a strong demand for supplier collaboration and development and for supply chain design and planning.

What can companies do to manage sourcing decisions and potential inherent risks?

I wish I could answer that question in a few sentences! Risk management involves a detailed analysis of potential risks and possible cost-effective solutions for them. In the area of sourcing today, we see operational risks arising out of poor visibility of demand, especially on the supply side with Tier 1 and Tier 2 suppliers and financial risk for these players.

Problems such as the bull whip effect are well-known in the industry, but continue to be propagated through poor policy and management. The result has been a huge amount of stopstart production and inventory pile-ups, which are financially damaging and competitively ruinous. These problems can be addressed, but not by a purchasing department only. It has to be a company level initiative. Just as the creation of a supplier base was the big challenge of the late 80s and early 90s, so is the reinventing of the supplier relationship now.

What are your customers’ expectations when it comes to delivery? How do you know if you are fulfilling them?

While we are a consulting firm, our delivery is not restricted to advice. We believe that long lasting client relationships can only be built on tangible value being provided – the kind that can be seen to impact a P&L statement. As a result, most of CGN’s work is outcome-based work, wherein we analyze the problem, devise the solution and implement it on ground. Typically the financial benefits are approved by the client’s finance team and our fee is often linked to the outcomes being delivered. As a result, there is a strong alignment between our clients’ business goals and our own.

Can you talk briefly about your international presence and some supply- chain learnings you have gained in the process?

CGN was founded in the Midwestern United States and has worked with a Fortune 500 client base and their suppliers through the years. As our clients gave us more work around the world, our offices spread. Today we cover the US, Europe, India, China and SE Asia. Our client base started in engineering and automotive, and now also includes consumer goods. In this time, we have worked to both design and implement changes in supply chains in different countries and cultures. We believe the science and fundamentals of supply chain design and performance are common across the world, but the implementation of solutions has to have a strong local understanding and expertise. Making changes stick is one of our mantras and this means ensuring that the new changes are locked in with the appropriate measures, be they related to strategy, policy, procedure, technology or skills.

What are the IT tools you use for consultancy? What tools/applications/software do you use or have developed to enable data visibility?

IT tools are one weapon in the armoury that we deploy when battling supply chain problems. Our approach to the application of tools is similar to our deployment of methods to solve problems – where an industry standard exists, use it, and where it doesn’t serve the purpose, create a new one. So in IT we might use tools for network optimisation, simulation, and supply chain planning and scheduling depending upon the need. If the client has an existing tool we use that. If a special version is needed, we use one of our proprietary tools. For example, in studying Total Cost of Ownership or Capacity Assessment, we use highly evolved tools to diagnose the problem.

At the end of the day, the tool is only as good as the people who use it. So, we try to ensure that we have really good consultants whose primary goal is to deliver the end result..

The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd