Supply chain comes under the scanner

Supply chain management or SCM is critical to the auto sector. Logistics take up nearly 12 percent of total cost and it, therefore, makes sense for companies to keep this in check and better still reduce it. Interestingly, logistics cost in China was about 14 percent a couple of years ago and has since fallen to 12.5 percent.

At the recently concluded AutoSCM India 2006 - Indian Automotive Supply Chain Conference & Exposition, organised by the CII Institute of Logistics, a decision was taken to rate vehicle and component manufacturers on their supply chain management practices.

The CII Institute of Logistics, a centre of excellence established by the Confederation of Indian Industry, is taking up this initiative. Though several companies excel in manufacturing practices, most are either unaware of the scope of outsourcing in SCM or just unclear about the concept.

To put this in the right perspective, going by what experts had to say at the meet, SCM involves managing the supply chain from vendors’ vendor to customers’ customer in terms of handling movement of goods and information.

BEST PRACTICES

In addition, third-party SCM companies participate in new product development to optimise overall efficiency. These best practices benefit small companies and help them outsource to a greater extent. The way supply chains are configured and managed determines the cost of products, time-to-market and organisational response to customer expectations. Rapid levels of communication coupled with cost reduction and more interdependent suppliers/customer relationships have quickened the pace of integrating supply chains. All this has contributed to keeping costs in check.

Third party logistics is information-driven (besides integrating supply chains) and helps companies reduce inventory and costs, add product value, extend resources and accelerate time-to-market. As experts told this writer, effective management of the supply chain not only improves flow of materials from the perspective of the end user but also reduces logistics costs.

The SCM solution market is being accepted widely by many industry sectors, particularly manufacturing and retail where inventory-carrying costs are high. CMIE estimates that high inventories across the manufacturing industry works out over Rs 100,000 crore and is going to be a tough burden to bear in the future.

##### WORLD FOCUS

R Dinesh, chairman of Auto SCM India 2006 and executive director of TV Sundram Iyengar & Sons said at the seminar that there has been greater world focus on supply chain management especially with the component industry expected to increase exports from 19 percent in 2004-05 to 30 percent in 2006-07. This is because of increase in demand of castings in Europe and Japan.

Dinesh said that logistics costs in India had fallen from 13.4 percent in 1995-96 to 11.5 percent in 2004. However, cost of transportation as a percentage of logistics has increased. This, he added, showed the inefficacy of the transportation system owing to delay in customs, ports, interstate laws, highway/road congestion and poor infrastructure.

As a result, these could lead to Indian companies becoming less competitive in the global market. It is therefore incredible that in this background, industry (especially the automotive sector) recorded 8.4 percent growth in 2005-06. Dinesh reiterated that it was important to improve logistics and fuel growth. He suggested that a benchmark be set for companies to adopt robust SCM practices.

The CII Institute of Logistics is working on a document (listing a set of parameters) which will be out early this year. This will detail days of inventory, planning aspects, turnaround time for trucks and overall efficiency of the supply chain. The institute also plans to bring out a compendium of the best SCM practices in the country. While only large corporates outsource transportation, Dinesh was of the view that any company with a turnover of over Rs 50 crore should have this done by third party logistics providers. This will cut costs by up to 25 percent.

HUGE SPINOFFS

The two-day event dwelt upon optimal use of third-party logistics and benefits to users. Effective supply chain management helps all business processes, leading to continuous improvement in areas such as data accuracy, reductions in operational complexity, supplier selection, purchasing, warehousing, and distribution.

Other benefits include improved delivery performance such as quicker customer response and fulfillment of rates, greater productivity and lower costs, reduced inventory throughout the chain, improved forecasting precision and fewer suppliers and shorter planning cycles.

According to McKinsey, global outsourcing of automobile and auto components would reach $375 billion by 2015 from $65 billion in 2002. India has the potential to make the most of this situation and could reach up to $25 billion. In the process, McKinsey adds, it will emerge as a major sourcing point along with the likes of China, Mexico and Thailand.

Shakthikanta Das, industries secretary of the Tamil Nadu government, said the logistics base for the components industry could improve by linking the hubs of Madurai, Hosur and Coimbatore with Chennai. The present annual output of the State's automotive sector is estimated at $3.5 billion.