In 1982, Maruti Udyog and Suzuki signed a historic joint venture that changed the landscape of the Indian automobile sector forever. Nearly four decades later, in 2019, India is set to become the world’s fourth largest automobile market. It produces about 4.5 million vehicles (80% passenger and 20% commercial) annually. This industry employs more than three crore people and contributes more than 7% to the overall GDP of India.
Cut to 2022, the industry is recovering from a two-year period of material shortages, reducing customer demand and under-utilizing production capacity covid, According to SIAM, 2021 was the worst-performing year in a decade for Indian automobile sales, with only 17.51 million units sold. While some green shoots of demand-recovery are visible, the challenges facing Indian auto OEMs are not over.
At the heart of this maelstrom is the Chief Procurement Officer of the automotive OEM. When the CPO felt that the war room atmosphere was over due to Kovid, many new issues emerged. They are sitting on pending order-books of more than 7.5 vehicle units. Global supply chains and logistics are still broken. The chip shortage persists. Rising commodity prices in a price-sensitive market have added to their concerns. So for now the atmosphere of the war room has been created.
However, managing a supply chain during COVID has also taught us many lessons – lessons that can be applied to mitigate the current challenges. By building a flexible, agile and digital supply chain that optimizes total cost of ownership, there is a light at the end of the tunnel for auto CPOs. Let’s start by dissecting the challenges and the root cause of these challenges.
First, the shutdowns related to Covid19 have had a major impact on global supply chains. The lack of container and cargo shipping made the situation worse. With extended and unpredictable lead times from global suppliers, OEMs have oscillated between shortage and excess of inventory, as supply becomes out of sync with demand. The extended lockdown in the China-Ukraine war has led to a rapid improvement in 2022.
India imports auto parts worth $17.5 billion annually. Most of them are from China, America and Europe. The lack of local sources for many critical components has seen Indian OEMs bear the brunt of this problem.
Secondly, commodity prices have been out of control for more than a year. The rapid rise at first, and then the resulting high volatility, added fuel to the fire. Prices of critical materials for automotive components such as steel, aluminium, plastics (linked to the price of oil) and rubber have increased significantly since 2020. In a price sensitive market like India, all these prices cannot be passed on to the consumer without affecting the demand.
Chip deficiencies are well documented and over-analysed by all. But did you know that the global automotive industry buys only 4% of the global chip supply. Within that, India’s auto OEMs have only 4% of the global market share. Hence, it should come as no surprise that India’s auto OEMs have to contend for their fair share of chips. The price of chips has gone up 1.5 times, and yet, there is no guaranteed supply or long-term commitment from the manufacturers. One India Auto OEMs complained that their suppliers of chips reneged on an LOI and were even willing to pay penalties for failure to deliver on time. They had clearly found a more “significant” buyer in the global consumer electronics industry.
The rise of EVs has provided a ray of hope for the automotive industry. This year, Indian consumers have already bought over 3.9 lakh electric vehicles in the H1, which is more than the total number of units sold throughout 2021. So, for Indian OEMs, there is no question of “should we get into EVs”. “? The right questions are “how soon” and “how can we make it affordable”? But this presents some new challenges for CPOs. To name a few, a large percentage of EVs (by value) are imported. In addition, the cost of lithium, and therefore the cost of batteries, is rising rapidly due to increased global demand. All of this under intense time pressure and facing some new competitors willing to bet on the farm on EVs Huh.
restructuring automotive supply chain
Given all these challenges, the CPO’s tenure in the war room is likely to continue. But two things are about to change in this war room. First, we must complement traditional supply chain performance indicators such as security, cost, quality and delivery with new age – flexibility, agility and total cost of ownership. Second, the war room needs to be highly cross functional, with finance, marketing and sales becoming an integral part of most major decisions.
Flexibility is essential to ensure that your supply chain is not disrupted by an unforeseen event or supply shock. Triggered by Covid, an auto OEM began an in-depth analysis of each component imported to determine its “risk” and respective strategy to ensure flexibility. The resulting near-term strategies included “find alternative suppliers”, “change to local supplier”, and “change specification”. manages to lack of chipSome Indian carmakers are “changing the specifications” by dropping features like 360-degree cameras and voice-assist as they don’t expect it to reduce demand for the car. Medium to long-term strategies include “vertically integrating”, “developing a local vendor eco-system” or “encouraging government-to-government trade agreements”. As you can imagine many of these decisions require cross functional teams to reach the right decisions. Even though some of the risks were classified as “uncontrolled”, OEMs found that more than 75% of the risk could be controlled.
Agility in the supply chain is essential not only to handle supply shocks but also to manage rapidly changing customer preferences. Most Indian companies have already moved to labor and asset flexibility to become more agile. But with the times in mind, there are three new disciplines that help increase agility. The first is the adoption of digital tools and related analytics for real time and faster decision making. Digital track and trace of incoming supplies, including visibility of a supplier’s inventory, can help create ample time for better planning and exploring options.
Analysis of real-time POS data for both finished good and spare parts can help in deciding which models/parts to manufacture and where to deliver them. Both are vital feeds for the battle room. The second is to outsource non-critical tasks. One OEM outsourced its entire non-strategic procurement and store management and found that this not only reduced costs but freed up time for the procurement team to focus on more important activities. Third, and perhaps most important is the need for small and agile, cross-functional teams that are empowered to make decisions as the external environment evolves.
total cost of ownership
Frugality in the supply chain should go beyond the purchase price and look at the total cost of ownership. Most OEMs have already looked at the possibility of closing long-term contracts and supplies. However, there are many other “hidden” costs. Inventory build-up is often a major hidden cost in supply chains. This is caused by lack of planning, poor data management and too many “emergency spares”.
Improved processes, always-clean data and the right analytical tools can reduce inventory costs by up to 30%. Another often overlooked area is after-market spares. For example, an OEM found that it could reduce its after-market parts distribution cost by 10% through network optimization exercises. Another OEM found that the extended period from PR to PO (the time between when the purchase order is placed by the user when the purchase order is placed at the supplier) resulted in price fluctuations or mind-boggling purchases and higher logistics. There is cost. A simple kaizen practice and a digital tool solved it. All these costs add up, and addressing them is often
The war room tenure of the Indian Automotive CPO is not over yet. In fact, I believe the time has come to expand the battle room to include the CFO, CMO and CTO. Few decisions require this cross-functional approach and faster decision making. Flexibility, agility and total cost of ownership are not new concepts, but this high-powered team of CXOs needs to put them into practice not only to manage near-term crises but also to ensure long-term survival.
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