For Coimbatore-based auto component manufacturer Pricol Ltd, component outsourcing is not a mere tool to reduce cost, which has become imperative in a very competitive environment. While it seeks to rationalise its vendor base, it also hopes the vendor development programme will help its component-makers move up the value chain and supply parts not only to Pricol but to other auto component manufacturers too.

The exercise is important because the sheer scale of purchase by Pricol is substantial. As it operates plants in many locations in India and abroad too, it wants to encourage its suppliers to establish units closer to its own plants established near major automobile hubs.

In an interview to Business Line , Mrs Vanitha Mohan , Vice-Chairman, Pricol, explains the logic behind the company's initiative to promote vendor development aggressively. Though it may take about a year to take final shape, its impact on the economic health of the vendors will be significant as the Indian automotive growth story is gathering momentum, serving not only the domestic but foreign markets too.

Excerpts from the interview:

What is the total value of components that you use and what is the growth in component requirement annually?

The value of components that we used during the financial year 2010-11 was Rs 560 crore. We expect a growth of 15 per cent in the component requirement during the current year.

What are the main components that you manufacture yourself? What percentage of this is outsourced?

We manufacture plastic, rubber moulded, machined, sintered components and dials printing. Our total material cost is 68 per cent. Of this, we produce 30 per cent of the components in house and the remaining 70 per cent is bought from outside.

You had conducted a vendor awareness programme some months back. What has been the response? How many vendors supply components to Pricol and how many new vendors are you looking for?

The response was overwhelming, with more than 800 vendors registered at the Subcon 2011 exhibition conducted during July 2011. Many of them evinced keen interest to take up sub-assemblies by procuring the components that go into the sub-assembly themselves. Our current vendor base is 1,000.

We are looking at rationalisation of our vendor base by adding more value to the vendors — which can be both new and existing. It depends on their capability to invest and to also source the components at competitive rates for the sub-assemblies. We are also looking for technically qualified suppliers who will also be our partners, and add value to our product development in terms of cost and quality.

What is the arrangement you are looking for? What are the major advantages of outsourcing in terms of price, quality of components?

We are looking for vendors who can source the components and supply as a sub-assembly. They should be able to source components at competitive rates, adhering to the rigid quality norms. The major advantage of outsourcing is that we will be able to concentrate more on products that need a lot of focus and also new business.

The existing manpower can move away from the routine manufacturing process and add more value to the above products. It will also help us to infuse a breath of fresh air through the innovative ideas they will bring to our table.

Once you finalise your outsourcing plans, what level of investment will the vendors have to make?

The amount of investment varies from sub-assembly to sub-assembly, depending on the nature of the commodities used and also the processes to be followed. As such, we will not be able to peg a figure in terms of investment. Since it will be a tiered system, the suppliers in tier 1 will have to have enough financial resources to be able to source from tier 2 and tier 3 suppliers and to extend credit to them.

Are the vendors assured of any minimum offtake annually? Will you help them in product development?

Considering the vagaries of the automobile industry, we have taken every effort to ensure a minimum annual business. We have always strived to keep their business running in spite of the drastic cuts in the orders that we receive. In future also, we will endeavour to maintain a minimum level of business with our suppliers.

That is why we want to rationalise our vendor base so that they have a large mix of components and sub-assemblies to supply, which can offset the ups and downs in the schedules we receive from our customers. We also have plans to involve them in the development of our products so they have a clear understanding of how they can add value to the products eventually.

You have plants in other locations. Will such vendors be encouraged to set up units in other centres as well?

Yes, we have already encouraged some of our local vendors to set up units near our plants at Pune and Manesar and there are people who supply through their establishments in the local areas. However, cost advantage will playa key role in the decisions that we make as far as identifying the suppliers in our other plants. Considering the transport cost, we prefer to have localised suppliers who have a much better feel of the locally available facilities and resources.

In a competitive environment, cost becomes a ‘very, very critical factor' and wherever possible, we have to cut costs. Just as vehicle manufacturers expect component suppliers to cut costs, we, in turn, expect our vendors to become competitive. When we have regional plants, it does not make sense to transport components from here (Coimbatore).

Do you expect this to reflect on your bottomline over a period and become more profitable?

When we get leaner and eliminate all the non-value added, it will. Though our topline has been growing, our bottomline has eroded over a period of time. While we need to look at more areas (to save cost), the most important is the material cost. But as our components are high precision components, quality is very important.

Will not this exercise also help the vendors move up the value chain?

Absolutely. It would give a huge value-add to our existing suppliers and the biggest beneficiaries are those who show the maximum interest to participate in this effort. We are not only aiming at cutting our own cost but in helping our suppliers to move up the value chain and ‘we want them to be our partners in progress'. We are also looking constantly at newer markets.

We expect the whole exercise at vendor development to take a concrete shape in about a year's time. But we need to focus a lot on it.

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