The Hindu Business Line : ‘Supply chain complexity impacting auto sector costs’

Chennai, Nov. 6 The complexity in the supply chain is resulting in increasing inefficiencies and impacting costs of Indian automobile manufacturers, according to a white paper prepared by Deloitte India.

An analysis of the combined financial performance of leading vehicle manufacturers indicates that while there has been an increase in net profit over the period 2005-08, ‘inventory turns’ (that equals the cost of goods sold divided by the average inventory) of these companies had been on a high till 2005-06, but has started falling.

Inventory turns or inventory turnover is the most commonly used supply chain metrics. A high turnover may indicate inadequate inventory levels, which may lead to a loss in business.

One of the reasons for the inventory turns falling could be the shortening product lifecycles of automobiles and the presence of several market players that has resulted in the launch of over 50 models and variants in the last two years. This decreases the efficiency of the supply chain with companies being forced to increase inventory to make their product portfolio available to the customers.

This requires higher levels of operating efficiencies by logistics service providers, said the white paper on ‘Fast Tracking the Indian Automotive Logistics,’ released at the two-day Auto SCM 2008 organised by the CII Institute of Logistics.

For a vehicle manufacturer, about 50,000 parts are required at any point of time. Of this, around 5,000 are fast moving. The assembly lines require well coordinated just-in-time scheduling of auto parts supplies to maintain the desired flow.

India’s automotive industry contributes to around 1 per cent of the country’s total logistics spend or 0.14 per cent of India’s GDP. Logistics cost in automotive industry accounts for 2-3 per cent of sales and 3-4 per cent in the auto component industry. Reverse logistics cost is estimated to be 0.5-1 per cent of auto and auto components industry.

The auto component industry has grown to $15 billion in 2007-08 from $4.47 billion in 2001-02. This has been driven by the growth of vehicle production to 11 million units in 2007-08 from 5.3 million in 2001-02.

Almost all the players in the auto sector use 2PL (second party logistics service provider) and around 80 of the auto component industry use 3PL (third party). A trend towards creating a ‘perfect blend’ of in-house and outsourced service component to effectively manage their supply chains is leading to the emergence of 4PL (fourth party).

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