By Jagdish Khattar

In the last few years of the previous millennium, many Indian industries experienced a major shake-out. Both the automobile and the auto-components industries were affected by India's open-market policies. Given this context, the Indian automobile sector will face major challenges in this millennium. Several global manufacturers have set up manufacturing facilities in India, attracted by studies predicting that India will be among the countries with the highest demand for cars in the first decade of this century. Unfortunately, the problem of over-capacity has crept into India too.

Auto-makers have built an aggregate capacity of 1.20 million vehicles a year while demand in the current year will cross just half a million. Suppliers too cannot support their operations solely on these volumes. Globally, the auto-industry has witnessed a spate of mergers, with Nissan-Renault and Daimler-Chrysler being the most spectacular in recent times. Analysts expect many others to follow. Such efforts, besides killing capacity, will help reduce the break-even point of the merged entity by shrinking the number of platforms, ensuring a faster introduction of new models, and increasing the optimisation of the supply chain.

FOCUS ON THE SUPPLY CHAIN. Why is it so important to optimise the supply chain? Inefficiencies in the supply chain lead to higher inventories at all points. This adds costs related to wastage, blocked funds, and the risk of holding obsolete products. Today, Maruti is aiming to be among the lowest-cost car-manufacturers in the world. Low inventory levels at all points of the supply-chain will help it achieve this objective. Despite doubling its output over the previous 5 years, Maruti has not had to increase the area allotted to incoming material storage because of a combination of factors like staggered supply from multiple sources and more frequent supply from vendors located nearby. An efficient supply chain can ensure that customers get better products.

LONG-TERM BUYER-SUPPLIER RELATIONSHIPS. For car-makers, suppliers bring in more than just components. Increasingly, the responsibility for detailed design and testing lies with speciality suppliers. Most high-value and critical parts are made to the suppliers' proprietary designs, with car-makers giving overall specifications. An important facet of the supply chain concerns managing relationships with suppliers. Traditionally, a manufacturer unhappy with any aspect of the supply would abandon the relationship by switching to another supplier. This happened even with critical parts in the automobile industry. This is not in the overall interest of either party nor that of the final customer. Today, the need is for long-term relationships, where both manufacturer and supplier can look for mutually beneficial solutions.

Suppliers too prefer long-term relationships because most investments in design and technology in this industry give returns only over a long period of time, sometimes as long as the lifecycle of the product. Without the assurance of continued business, suppliers will find it unattractive to work towards the cost-reductions and process-improvements that can improve the end-product. The emphasis of companies in this millennium will be to nurture this relationship. The supply chain also has to be sustainable. Suppliers should get a fair return on their investment so that they can make necessary investments for improvement and growth.

TOOLS TO HELP MANUFACTURERS IMPROVE. Standardisation plays an important role in developing a supply chain. The strength of the auto industry, for instance, lies in the development of systems and procedures to ensure quality and consistency. Another aspect of standardisation is the move towards common platforms. This reduces development-time, and makes it easier and cheaper to develop parts and modules. High value parts like engines, transmissions, and suspensions are now being made common across models to reduce the unit cost. Common platforms make it imperative for the modules to be interchangeable. This has to be handled at the supplier's end. The trend is shifting from suppliers who produce to the car makers' specifications to suppliers who produce components or sub-assemblies that can be used across models.

A natural outcome of this is the separation of suppliers into tiers. Tier 1 suppliers are the systems suppliers. Tier 2 suppliers are those that supply speciality parts to these suppliers. Tier 1 suppliers will not only assemble systems, they will be responsible for the detailed design and testing of systems. They will also manage the logistics of supplying just in time to the manufacturer.

TOOLS TO HELP SUPPLIERS IMPROVE. Meeting the needs of the end-customer is paramount. Suppliers have to involve themselves in the product-development process to deliver better value for money. With design increasingly becoming the responsibility of the supplier, the onus of making improvements in design to reduce cost and weight, and to improve functional characteristics will also devolve on them. The systematic process of improving product utility, value engineering, will become more important in the context of retaining marketshare in the face of increasing competition.

While there can be a debate on what the critical action points of the future will be, emerging trends show that the supply chain will become a primary source of competitive advantage. Besides Maruti, where stocks of finished vehicles were halved in 3 years, and the incoming inventory per vehicle was also halved over 2 years, there are many other examples. Godrej Locks has reduced its order-to-delivery cycle from 21 days to 3 days, and Hewlett-Packard India, from 37 to 10 days. We can look forward to more dramatic improvements in this area in this millennium. Over the past year or two, many companies all over the country have come to realise the costs that can be saved in the supply chain.

However, as the pace of change accelerates, the future becomes more uncertain. And though manufacturing-costs are under greater scrutiny, they are not the only source of competitive advantage in the supply chain today. Today, infotech allows unprecedented speeds of response. Manufacturers and suppliers have to be nimble-footed enough to anticipate the needs of the moment, and continuously re-engineer themselves to keep pace. The ultimate objective is to give the customer the best possible value for money.

Jagdish Khattar is the CEO of Maruti Udyog

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