The Driving Force

While they may seem to be mere tiny components of a giant vehicle, they have to power to break or make the performance and then entire value chain. One component lost or damaged can jeopardize the entire vehicle manufacturing process and can even shackle the brand image if the after-sales service is not up to the mark. In this analytical piece, we aim to cover facets of auto components supply chain, taking the holistic perspective from the manufacturers to the service providers…

Around 75% of automotive parts are not designed or built by car manufacturers themselves but by their suppliers, implying that car manufacturing is no longer a job of a single enterprise but of a complex ecosystem of supply chain partners.In that regard, for companies in the automotive spare parts industry, growth depends on the success or failure of your supply chain management. “In a global, volatile, and variant-rich industry, the ability to seamlessly move products from the production floor to your customers’ door is top priority for supply chain planners and managers, and companies that achieve it, are able to leverage significant advantages over others”, avers Yevgen Sokolnikov, CEO & Co-founder, Boodmo.

Talking about the figures, the Indian auto components industry expanded by 14.3% to Rs2.92 lakh crore last fiscal on the back of robust growth in aftermarket sales. According to the latest data by Automotive Component Manufacturers Association of India (ACMA), the aftermarket segment grew by 25.6% to Rs56,096 crore last fiscal from Rs44,660 crore in the preceding year.

Underpinning hopes on the long term benefits of GST on the entire value chain, Ayush Lohia, CEO, Lohia Auto Industries, states, “Every automobile is developed by assembling more than 1000 components. Delivering on-time has a crucial role in this entire value chain. Stock of inventory maintained at the OEM level is very low. GST is going to play a key role in supply chain. Warehouse consolidation has been one of the key areas where companies are focussing currently. Yes, there are implementational challenges, but you can’t undermine the long-term advantages that the GST is going to bring forth. Education and awareness would play a major role in simplifying the GST implementation. Collaboration among industry players would greatly aid in harnessing supply chain network.”

Various policy interventions have had a substantial impact on the dynamics of the auto components supply chain. Highlighting the goods & the bads of the supply chain, TAB Barathi, VP – SCM, Wheels India Ltd, said, “GST has been both good and bad for the auto components industry. We are in transitional stage as we are just four months post implementation. Let’s talk of positives first… we have become borderless state but how true it is a question mark. But again, it’s a learning phase. Hassles of crossing one state have been cut short to a great level. There is an ease in the movement of goods. It has reduced time in terms of commercial taxation activity. Toll is still a worrisome factor for the industry as a whole and the government really needs to take a hard look at the same. It’s not a matter of a few minutes, it gets stopped for hours, so imagine the amount of time we are wasting on the go. Yes, the government has been taking due cognizance of the issues and they have been simplifying the process, yet a lot needs to be done but at a faster pace. It’s very easy to make a product today but very difficult to pass the entire value chain.”

Talking about the complexities posed by GST, L Venkat Madhav, Executive Vice President, Group SCM, Amara Raja Batteries Ltd, elaborates, “Because some of the clauses in the GST are not clear and if at all we want to bring in hub & spoke model by rationalizing the warehouses, cost has really gone up be it rental space or warehouses. Besides this, you really need to build a strong dealer network and keep the momentum going irrespective of these sudden shocks because no one would really be keen to work with you if there is no mutual benefit. For months, containers are being held up in Chennai port, which just doesn’t eat up our cost, but also hampers margins. People have no choice to clear the 7.5% duty paid. predicting business in such volatile market is extremely uncertain.”

Giving perspective from service side, R Shankar, CEO, TVS Logistics Services Ltd – India, shares, “Customers are in the process of realigning their supply chain post GST. We have adapted our systems and processes to meet the demands of quick delivery and tight service level agreements in line with this. There are a lot of opportunities that are opening up for us in terms of handling consolidated Vendor Managed Inventory (VMI) in warehouses close to their plants; and supplying it to our customers just in time.” Sougato Shome, Sr VP, Future Supply Chain, adds, “Kitting (spare parts) is a differentiated value- added service (VAS) that we offer to our customers. We believe that the demand for kitting is picking up and the industry is going the ‘kit’ way to ensure the usage of genuine spare parts. Since we have already built up a strength in this area, we are in a good position to exploit the rising opportunities here.”

Going deep into technicalities, Ravikant Parvataneni, CEO, Crimson & Co India, states, “Inbound to the plant supply chain, I think is pretty evolved with auto companies making vendor parks in and around the plant to ensure minimum inventory on hand. In contrast, the outbound part, which is aftermarket spare parts has been given the least importance. I think it is probably because traditionally there has been a monopoly or a duopoly in most segments within auto industry, so the focus on aftermarket supply chain has not been there. If you see their factory warehouses and see their aftermarket Distribution Centres, there is a huge difference in the infrastructure setup, use of technology automation and systems.” Technology is nothing new in auto supply chain. It’s just that in assembly line it is easier to feed single unique parts through automation. But in a DC, the parts are in thousands and these SKUs are only multiplying since companies have to stock parts of even those vehicles which have been out of production; so, multiplicity of SKUs makes the situation that much more complex. All the large players have used ASRS, mini-load systems, VLMs, carousels, put-to-light technology etc. but none of it is being used in aftermarket spare parts space and there is no reason why it can’t be used. It’s all about getting the focus right, says Parvataneni.

PLAGUING CONCERNS

Though things look positive at this juncture, the supply chain players and the OEMs fight the inadequacies in infrastructure. While on one hand, the policymakers speak about the multimodal-logistics park, the stakeholders raise their concern about the existing infrastructure. Be it road, rail, sea or air, congestion around these points are a nightmare. India is much away from seeing the multi-modal infrastructure a reality. Venkat informs, “The challenge lies in forecasting in terms of freight cost, GST scenarios as we are not able to really budget our cost of supply chain into the business. We, being in the battery industry, with lead being the most critical material, suddenly the dynamics have changed because of the environmental issues of China. The country has stopped lead production and as a result, a huge supply is being exported to China with inflated rates for domestic consumption. Additionally, in case of sea logistics, four liners have formed a consortium to control the entire freight movement. Owing to which, for every supply, freight has shot up by almost 40%. Consecutively, budgets have shot up by 20-25%. Port congestion is also a worrisome factor for us and lot of cost gets eaten up by not being able to load & unload products at the docks on time.”

The foremost pain areas of the logistics industry in India, according to Shankar, are infrastructure challenges, unavailability of skilled talent pool; disparate processes /practices; and impact on environment. These are concerns that we should be collectively discussing as an industry and finding solutions for. The government and industry are partnering at various levels to ensure better multi-modal, road, rail corridors, and warehousing infrastructure. Lack of industry standards and vast differences in even basics like size of pallets; and the size of trucks, the industry uses – has a large impact on supply chain efficiency and cost. In comparison, the US has probably 1 long haul truck size and 2-3 short haul truck sizes, which then make it easier to design infrastructure around these standards and measure performance. This apart, Indian Logistics ails from lack of IT standards and poor systems integration.

Aptly defining supply chain as the mover & shaker of any industry, Venkat says that supply chain takes care of 65-70% of revenues. There are only two verticals that can make an organisation shake: supply chain & finance. Having said that, there is no industry wide forum to understand our concerns and make it heard to the government. Big players are the only ones who rule the market and major challenges have to be faced by MSMEs and SMEs. Responsiveness is also another concern that needs urgent attention from the industry. The government and the industry on their part should stringently make it mandatory for every vehicle to be GPS enabled. Implementation of any new system should be uniform but that’s not happening currently. Consolidation is a miss big time. While we are ensuring the newer systems are updated with the new mandate, we aren’t really talking about the existing and old systems, which is also the need of the hour, otherwise you aren’t completing the loop.

Highlighting challenging scenarios, Sougato Shome indicates that the auto supply chain in general has been hampered by visibility issues across the chain and variability in demand vis-à-vis the plans. Vehicles are staying out longer on the roads now and that leads to a higher demand for spares and focus on faster replenishments. Another challenge facing the auto industry is the omni present grey market. “As far as we are concerned, the demand for visibility from the clients is more on the stocks inside the DC and in transit. This helps them to plan their inventories better and improve service levels. This was always our strong point as our systems are integrated and we provide web based visibility at all points to our clients,” The other need gap is in terms of the required skill sets on the floor and on the data analytics part, which more and more, clients are looking at us to do,” adds Shome.

AFTER-SALES SERVICE CONCERNS

As far as after sales network is concerned, the spare parts business is considered the main driver to enhance customer satisfaction and generate repurchase opportunities. Now, customers have begun asking more to the quality of after-sales services, which directly affect their purchase decisions. The importance of after-sales service and spare parts operations to overall automotive sales is becoming extremely important.

Spare parts supply chain management is more complicated than that of finished products. The life cycle of spare parts is longer than that of vehicles and the total number of SKUs is very huge. Additionally, the demand for parts is relatively unstable and difficult to forecast. All of the above pose enormous challenges to parts’ planning, purchasing, ordering, and logistics, among other operations.The complexities also lie in planning capabilities, stability of parts supply, supplier collaboration, information systems, data management, and supply chain visibility.

For Parvataneni, another challenge is pre-packing / unit packaging activity. Typically, the parts come bare from the vendor and the unit packaging activity is done inside the DC. Apart from the problem of ‘multi-touch’, there is a lot of wastage of master cartons also since they cannot be re-used for packaged parts. “I feel there is a huge waste of time and effort going in this activity. While the requirement from the OEMs to production line is to come bare, but the requirement for aftermarket spares is to go packed. The overall supply chain cost and time may improve if vendors are educated to package spare parts at their end for aftermarket requirements. I have also heard about MRP labelling being a challenge.”

MANAGING TURNAROUND TIME

Various companies have been taking initiatives to reduce turnaround time. Amara Raja, for instance, has adopted reverse logistics. “We have deployed GPS-enabled vehicles. We have rationalized our warehouses and are trying to bring in hub & spoke model to control overall freight cost and also minimizing efficiencies of having so many warehouses in order to distribute materials. We have come up with SCOR product planning. We are also coming up with high tonnage vehicles that can handle more materials safely. Additionally, we are attempting to completely abolish the intermediaries from the system in order to save on time & cost and are planning to work with the transporters or fleet owners directly. We are also training the drivers and are working towards making them as our partners and making them accountable in terms of the lead time on the basis of monthly review mechanism. It’s really bringing down our logistics cost. It’s all about strategic alliance to attain win-win proposition. They have to get me better TAT and I will make sure that they are my long term partners. Sense of ownership needs to be instilled among stakeholders.”

According to Barathi, forecasting accuracy is extremely important because we are all driving towards keeping less inventory. It’s eating on margins. If the forecast is accurate, it helps the entire value chain. Today the consumer is highly discerning consumer. Unless and until he finds value in the new product, he wouldn’t buy. Time to market has to be reciprocative to higher value. “We have started deploying trackers. All our warehouses are connected online, real time information is available for us. We are also attempting to use multimodal transportation as well. Now it’s not just road but also rails that can help us track our products,” says Barathi.

Parvataneni crisply reflects the core of enhancing TATs… The key is to get the supply chain network design right. What parts need to be at which locations. “Mostly I have seen auto companies largely using one of the two models – a centralized location from where parts get shipped all across the world or its regional. The answer could be to look at a hybrid model. Low value parts and/ bulky parts where cost of transporting single part is prohibitively high, can be kept close to customer locations; parts which are very high on variability or high value could be at centralized location. Here, the demand variability as compared to an FMCG, etc., is very high. A lot of analytics is happening to predict part’s failure with respect to time and based on that demand can be predicted. With GST, there is even more reason to do a network analysis and get the network right. In any scenario, any industry, 70% of cost and 90% of lead time is fixed with network,” he elaborates.

EXPECTATIONS VS REALITY

Often considered as one of the most crucial link of the entire value chain, 3PL companies haven’t been able to win over the trust of the industry. Organizations in unison are of the view that 3PLs aren’t ready to take up ownership and that’s where the gap lies. As Barathi informs, “3PLs aren’t playing the part that they should. They aren’t having the sense of ownership. If I have an excellent 3PL partner, I don’t need the service or marketing people in my team because they could very well manage this task. But sadly, that’s not the case. 3PLs are just the aggregators and on the other hand, the transporter owns the vehicle and understands his responsibility well. 3PL today has got multiple choices. The avenues are big for them. To integrate them into the organisation saves network.” Highlighting similar views, Venkat says, “3PL doesn’t work in this country. 4PL is what will work. They need to have a sense of ownership than just managing the deliveries. They need to be responsive throughout the value chain. Accountability is lacking big time in this industry.” Similar is the case with Lohia too… 3PL providers need to work on shared platforms or infrastructure rather than working in silos. This way cost can be reduced drastically. Shome differs, “Worldwide trend is to use bigger 3 PLs to handle transportation and warehousing across auto companies in the same geography. Once the industry is able to collaborate on this front, we will see the costs of supply chain getting optimized. We believe this is the way ahead and are working with our clients to engender this change.”

UNORGANIZED TO ORGANIZED MARKET WITH DIGITIZATION

Automotive spare parts market in India is largely unorganized. The unavailability of spare parts with original cost and getting the genuine products are two basic problems being faced by customers, currently. As there are not much alternatives available in an offline market, digitally enabled automotive spare part sector could successfully resolve these problems, while offering a plethora of choices. Digitization will lead to transition of this large unorganized sector into an organized one, creating a win-win situation for both auto players as well end customers. In India, online sales, executed directly by original manufacturers of auto spare parts and a few online marketplaces, is still a niche area. However, to expand business and cater to the increasing demand of customers, the industry players need to embark on this journey. Shifting the market online will not just lead to increased margins from disintermediation, but also help build a closer relationship with customers, leading to better profitability and retention.

For Barathi, technology in supply chain is truly revolutionizing. The changes are faster and versatile. It has greatly eased the movement of goods in terms of tracking, monitoring, reverse logistics. “It gives us leverage to redesign product, redesign packages as well as logistical requirements. Internet of Things has helped us in a much bigger way. Earlier we couldn’t track the exact date of delivery, so dealers or suppliers used to take the advantages of the situations to increase their credit availability, but due to technology intervention, it’s completely visible,” he highlights. Similarly, for Lohia, technology has greatly evolved in the auto industry. Automation has made loading-unloading possible in the shortest and safest means possible. We can ensure real time tracking of goods from one place to another. Barcoding and scanning systems have revolutionized the inventory management. Smartphones have also augmented this growth bandwagon with data available at your fingertips.

While Venkat is of the view that supply chain executives need to ensure the accuracy of data so that there is lesser dependency on manpower. One needs to think of long-term perspective than the present scenario. Lot of digitalization is happening in terms of GPS, barcoding, but all these initiatives are still at nascent stages. Offering insights into futuristic landscape, Sokolnikov remarks that today’s automotive spare parts supply chain is driven by technology and the ways in which companies deploy software solutions. Companies must leverage multiple solutions at any given time for a variety of tasks and then, integrating these solutions into one unified platform, could help enterprises to streamline business operations. This is an important step in reducing technology costs also it helps in bringing greater visibility to the viability and efficiency of a company’s technology solutions. Integrating various supply chain technology platforms helps automotive companies immensely, to view their supply stream in a more holistic way than several disparate parts.

RSM US LLP shares its understanding that the changes in automotive technology will affect the component FIT (failure in time) rates and service requirements in the auto aftermarket in the years ahead. All of this activity challenges both OEM suppliers and auto aftermarket service providers to prepare now for the new service requirements to come. On the operational side, auto suppliers have implemented or plan to implement a range of technologies, including supply chain tracking and monitoring, enterprise resource planning and the internet of things technologies. Social and economic shifts are also set to reshape many aspects of the sales and distribution market, including an increase in shared mobility and mobility services and shopping offered through connected cars. Sensor-based parts and equipment will increase visibility and data; more advanced robotics, autonomous driving and machine learning will support new levels of automation and flexibility; predictive analytics could increase the accuracy of supply chain forecasting and planning.

ENHANCING PERFORMANCE

While a lot has been done and lot remains to be done, the key lies in getting together to garner benefits. According to Venkat, there is no forum that can bring challenges at the forefront. There is a need for category specific consortium to reach to the bigger audience. Even the government isn’t meeting us regularly to review industry performance. The government should have a grievance cell or a platform to understand the pain points of industry and come out with solutions because today lot many MNCs are finding India as their preferred ancillary hub but for that to happen, we as an industry really need to take concrete steps.

Shankar asserts that visibility, trust and collaboration in the entire ecosystem will be game changers and enablers of an efficiently streamlined and adaptive value chain. Advanced supply chain models based on multi-tier, multi-supplier collaboration can lead the way where visibility and analytics are the key decision making tools; and offer collective benefits. Agile and scalable solutions, which are co-created by relevant stakeholders can help manage volatility and mitigate risks both upstream and downstream in the value chain.

SHIFTING GEARS

Technavio’s market research analysts have predicted that the auto component market in India will grow steadily at a moderate CAGR of around 19% by 2020. Production capacity expansion outpacing domestic consumption will drive export-oriented growth in the coming years and will be one of the major factors that will have a positive impact on the growth of the automobile component market in the coming years. Cost-efficient operations and acceptable quality have increased export volumes for the auto components to global OEMs (original equipment manufacturer). Moreover, recent regulations that facilitate 100% FDI in the automobile industry will attract more joint ventures and wholly owned subsidiaries. This will augment export growth to OEMs in global markets.

Factors such as the rising vendor consolidation, faster replacement market growth, increasing localization, export-oriented growth, and growing electronic content per vehicle have induced the Indian auto component segment to continue to grow much faster than the OEM segment. This, in turn, will invite more exports to OEMs from auto component manufacturers. The OEM segment will dominate the auto component market in India and account for about 89% of the total market share by 2020. As a result of improvements in the perceived quality of Indian products, the industry has transitioned from supplying primarily to the aftermarkets to catering to OEMs across the globe. This shift toward OEMs will continue to fuel the growth of the automobile component market in the coming years as well.

Staying optimistic about the potential, Shome asserts that the industry is looking towards more collaboration surely both upstream and downstream. The ideal state of seamless information systems and hence real-time visibility is what all industry players are working towards. This leads to exciting opportunities of developing integrated and collaborative supply chains. This means looking at common information platforms with high capabilities of real time data capture and data processing to give a new meaning to ‘agile supply chains’. A ‘SMART’er supply chain is taking shape in the backdrop of connected data where all data streams are being captured and channelized into centralized systems, leading to smarter responses to and from customers, vendors, manufacturing points and sales networks. “We see this development accelerating now and this opens up huge opportunities for technology based supply chain players like us,” believes Shome.

The key opportunity that exists and the direction in which the industry is headed is the use of cloud data to link the supply chain, so the entire supply chain becomes a single, integrated global manufacturing operation, rather than discrete operations joined by logistics, enabling a lot more to happen in real-time. The emergence of ‘Smart Factories’ is dependent on the implementation of ‘Smart Logistics’, which provides real-time analysis of supply routes such as potential bottlenecks and the ability to react immediately to changes in demand, inventories and manufacturing and logistics capacity. Such trends point to the need for more premium freight, more expertise, more flexibility, more responsiveness, more contingency planning and more strategic use of built-in emergency logistics as a proactive safeguard of highly responsive, high-risk supply-chain operations. Fundamentally, the supply chain always will rely on components leaving one location and arriving at another, we just have to ensure this process is as swift and foolproof as possible.

KEY LEVERS

• Data integration will make logistics a cohesive element of the manufacturing process, allowing more customization with no impact on lead times.
• The need to accommodate more bespoke orders will intensify the need for responsiveness, which means logistics providers and suppliers must be able to accommodate very late changes.
• A greater level of visibility will be required to enable customization without jeopardizing robustness of supply.