In 1982, Maruti Udyog and Suzuki signed a historical joint venture which changed the landscape of the Indian automobile sector forever. Nearly four decades later, in 2019, India is set to become the 4th largest automobile market in the world. It produces about 4.5 million vehicles annually (80% passenger and 20% commercial). The 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 torrid two-year period of material shortages, flagging customer demand and underutilized production capacity due to Covid. According to SIAM, 2021 was the worst performing year for Indian automobile sales in a decade, with only 17.51 million units sold. Even though there seem to be some green shoots of demand-recovery, the challenges faced by the Indian Auto OEMs are far from over.
At the centre of this maelstrom is the automotive OEM’s Chief Procurement Officer. Just when the CPO thought the war-room environment precipitated by Covid was over, a slew of new issues has emerged. They’re sitting on a pending order-book of more than 7.5 vehicle units. The global supply chain and logistics is still broken. Chip shortages persist. Rising commodity prices in a price-sensitive market have exacerbated their worries. So, for now, the war-room environment persists.
However, managing a supply chain during Covid has also taught us many lessons – lessons that could be applied to mitigate the current challenges. By building a resilient, agile, and digital supply chain that optimizes total cost of ownership, there is a light at the end of the tunnel for the Auto CPO. Let’s start by dissecting the challenges and the root cause of these challenges.
First, the Covid19-related shutdowns have led to a whiplash effect on global supply chains. Container and cargo shipping shortages worsened the situation. With extended and unpredictable lead times from global suppliers, OEMs have oscillated between inventory shortages and excesses, as the supply has been out of sync with demand. Extended lockdowns in China and the Ukraine war have curtailed a swift recovery in 2022.
India imports $17.5 Billion worth of auto components annually. Most of these are from China, USA 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 over a year. First there were rapid escalations, and then the resultant high volatility has added fuel to fire. The prices of materials critical to automotive components like steel, aluminium, plastics (oil price linked) and rubber have risen significantly since 2020. In a price sensitive market like India, not all these prices can be passed on to the consumer without impacting demand.
Chip shortages have been well documented and over-analysed by everyone. But did you know that the global automotive industry buys only 4% of the global chip supplies. Within that, India’s auto OEMs have only 4% of the global market share. So, it’s not surprising that the India auto OEMs have to fight for their fair share of chips. Price of chips have gone up 1.5 times, and yet, there is no guaranteed supply or long-term commitments from the manufacturers. One India auto OEM complained that their supplier of chips reneged on an LOI and was even willing to pay the penalty for failure to deliver on time. They had obviously found a more “important” buyer in the global consumer electronics industry.
The rise of EVs has provided a glimmer of hope for the automotive industry. This year, Indian consumers have already bought more than 3.9 lakh electric vehicles in H1, more than the total number of units sold in all of 2021. So, for the Indian OEM, it is no longer a question of “should we get into EVs”? The right questions are “how quickly” and “how can we make it economical”? But for the CPO, this throws some new challenges. To name a few, a larger percentage of an EV (by value) will have to be imported. Also, Lithium costs, and hence battery costs are rising rapidly due to the global demand surge. All of these under intense time pressure and in the face of some upstart competitors who are willing to bet the farm on EVs.
Reengineering the Automotive Supply Chain
Given all these challenges, the CPOs’ stint in the war room will likely continue. But two things are going to change in this war room. First, we must supplement traditional supply chain performance indicators like safety, cost, quality, and delivery with new-age ones – resilience, agility and total cost of ownership. Second, the war room must become a lot more cross functional, with Finance, Marketing and Sales becoming integral part of most key decisions.
Resilience is needed to make sure your supply chain is not disrupted by an unexpected event or supply shock. Catalysed by Covid, one auto OEM embarked on a thorough analysis of every component they imported to quantify its “riskiness” and the corresponding strategy to ensure resilience. The resulting near-term strategies included “find alternate suppliers”, “shift to local supplier”, and “change the specification”. To manage the chip shortage, some Indian car manufacturers are “changing specs” by dropping features like 360-degree camera and voice-assist as they don’t expect this will drop demand for the car. Medium to long term strategies included “vertically integrate”, “develop local vendor eco-system” or “encourage Government to Government trade pacts”. As you can imagine many of these decisions require cross functional teams to reach the right decisions. Even though some risks were classified “uncontrollable”, the OEM found that over 75% of the risk could be controlled.
Agility in the supply chain is needed not just to handle the supply shocks but also to manage the rapidly changing customer preferences. Most Indian companies have already moved towards labour and asset flexibility to become more agile. But in keeping with the times, there are three new themes that help enhance agility. First is the adoption of digital tools and corresponding analytics to make real-time and faster decisions. Digital track and trace of incoming supplies, including visibility of supplier’s inventory can help plan better and create sufficient time to look for alternatives.
Analysis of real-time POS data for both finished good and spare parts can help decide what models/parts to build and where to distribute them. Both are important feeds to the war-room. Second is outsourcing non-critical functions. One OEM outsourced its entire non-strategic procurement and stores management and found that it not only lowered cost but freed up time for the procurement team to focus on more critical activities. The third, and perhaps the 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 move beyond the purchase price and look at the total cost of ownership. Most OEMs have already looked at long-term contracts and the possibility of locking up supply. However, there are several other “hidden” costs. Inventory build-up is often a large hidden cost in supply chains. This is caused by lack of planning, poor data management, and too many “emergency spares”.
Better processes, always-clean data and the right analytical tools can bring down inventory costs by as much as 30%. Another often ignored area is the after-market spares. For example, one OEM found that it could reduce its after-markets parts distribution cost by as much at 10% through a network optimization exercise. Another OEM found that extended period between PR to PO (time between when a purchase requisition is made by the user to when a purchase order is placed on the supplier) resulted in price fluctuations or maverick-buys and higher logistics costs. A simple kaizen exercise and a digital tool solved this. All these costs add up, and addressing them is often
The Indian automotive CPO’s war room stint is far from over. In fact, I believe it’s time to expand the war-room to include the CFO, CMO and CTO. Some of the decisions require this cross-functional view and faster decision-making. Resilience, agility and total cost of ownership are not new concepts, but this high-powered team of CXOs need to start putting them into practice to not just manage the near term crisis but also to ensure long-term survival.
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