Cost Reduction in Tata Motors Through Effective Supply Chain Management

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.

Cost Reduction in Tata Motors Through Effective Supply Chain Management

Uploaded by

Copyright:

Available Formats

Cost Reduction in Tata Motors Through Effective Supply Chain Management

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost Reduction in Tata Motors Through Effective Supply Chain Management

Uploaded by

Copyright:

Available Formats

COST REDUCTION IN TATA MOTORS

THROUGH EFFECTIVE SUPPLY CHAIN

 Tata Motors performed a large part of its manufacturing activities in-

 It had installed facilities to manufacture engines, gearboxes and

 E-sourcing at Tata Motors as an alternative to traditional purchasing

 Move towards single vendor policy and maintaining a healthy vendor

 Shift from a hierarchical model to a collaborative approach

You might also like