Supply Chain Management in Automotive Industry

Dr. KS Bhoon ks.bhoon@accconcrete.com

SJMSOM IIT MUMBAI 11 Aug 2009

Agenda
SCM in Auto Industry Postponement in Automotive Manufacturing RFID in Automotive Assembly

July 29, 2011

Overview of Performance of Indian Auto Industry Units Sold

Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Passenger Vehicles Commercial Vehicles Three Wheelers

707,198

902,096

1,061,572

1,143,076

1,379,979

1,549,882

1,551,880

190,682

260,114

318,430

351,041

467,765

490,494

384,122

231,529

284,078

307,862

359,920

403,910

364,781

349,719

Two Wheelers

4,812,126

5,364,249

6,209,765

7,052,391

7,872,334

7,249,278

7,437,670

Grand Total

5,941,535

6,810,537

7,897,629

8,906,428

10,123,988

9,654,435

9,723,391

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Turnover Rs Crore
160000 140000 120000 100000 80000 60000 40000 20000 0 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7
Daily Turnover -376 Crore 40 days Inventory 15000 Crore Cash Flow opportunity in reduction by 10 Days ~ 4000 Crore Recurring Savings opportunity @ 20% - 800 Cr
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137140 108044 83584 59520 66176

Supply Chain Structure

Tier 3 Supplier

Tier2 Supplier

Tier 1 Supplier

OEM

RSO

Dealer

Typically Typically Typically Raw Material ComponentsAssemblies

Integrators Standardisers Components Suppliers Raw Material Suppliers

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Order Fulfillment System Auto Industry

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Number of Days 45 40 35 30 25 20 15 10 5 0
ntr y an k Or de rE Or de rB

Order Fulfillment Cycle

Order Fulfillment process

To ta l

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Sc he du l in g Se qu en cin g M an uf ac tu re Sh ip to D C DC to De ale r

Supply Chain Drivers

Competitive Strategy

Supply Chain Strategy Efficiency Supply chain structure Responsiveness

Inventory

Transportation

Facilities

Information

Drivers
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Inventory in the Auto Supply Chain

Vendors (15)

Manufacturing (20)

Dealers (15)

Parts Warehouses (20)

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Complexity reduction- entails reducing automobile model options or combinations available to the consumer without reducing the end consumers choices. Reduction in the number of suppliers - more interfaces tend to introduce complexity and goes against the lean supply chain. Cluster Approach. Popularized by Japanese, first implemented by Maruti in India and now by others to varying degree Inventory management. -reduced inventory at the line side of the plant and throughout the supply chain (JIT). Collaboration- OEM and suppliers cooperation in order to achieve lean supply chains. Propagation- OEMs need to put forth their lean supply chain systems to the Tier 1 suppliers and they in turn must do it with their suppliers further down the chain.
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Lean Auto Supply Chain Strategies

Advantage of Component Commonality 450000

400000 350000 300000 250000 200000 150000 100000 50000 0 3 4 5 6 7 8 9 No 1 Finished products per component of 2
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SS

Platform Strategies of Japanese and selected European car makers1997 2007

Manufactu Annual Mode Platfor Model rer volume ls ms s/ platfor m Toyota 4.89m Nissan 2.74m Honda 2.3m 45 39 26 21 18 30 33 22 24 15 12 14 13 11 2.0 1.6 1.7 1.8 1.3 2.3 3.0 Volume/ Mode Platfor Models/ platform ls ms platfor m 222,272 105,385 153,333 94,285 78,571 207,692 358,503 40 35 30 19 16 31+ 55 7 5 5 7 4 5 4 5.7 7.0 6.0 2.7 4.0 6.2 13.7

Mitsubishi 1.98m Mazda Fiat Volkswage n 1.1m 2.7m 3.9m

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12 Source: FT World Automotive Marketing

Ashok Leyland SCM Implementation

00-01 Vendor Base ISO/QS Certified Self Certified JIT PO Value (%) LCL MRP
1017 245 210 69 5 26

01-02
950 281 240 72 5 23

02-03
738 364 260 74 6 20

03-04
612 382 290 77 7 16

04-05
450 450 350 82 9 9

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Cards Gears Cards with Gears

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Motivation

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Collaboration

Warehousing Promotion Planning Import Export Management Distribution Management Transportation Product Development Manufacturing Order Processing/Fulfillment Inventory Management Demand Management Customer Service 0 1
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2 3 4 Criticality Score

5
16

Leveraging Collaboration
Business Curve without collaboration

Working Capital

Free Cash Flow

Business Curve with collaboration

Service Levels

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Collaboration Analysed
Challenge Lead Times Challenge Postponement Opportunity Collaboration Opportunity Collaboration Opportunity Collaboration Challenge Make it win-win

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Some thoughts on SCM in Auto Industry Forecasts

o

The desire for meeting short term financial targets often preempts the best forecasting algorithms Forecast model and its accuracy is not measured frequently. Operational forecasts usually focus on interaction between the dealers and marketing. These forecasts are not time-phased across the supply chain. Significant time lag between forecast and delivery, resulting in greater error

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Some thoughts on SCM in Auto Industry

Standardisation and Variety reduction (Customisation by Modularisation) Inadequate Infrastructure is leading to frequent changes in production schedules in India Decision making is slow Limited Production Flexibility Developing long term strategic partnerships with suppliers. More emphasis should be on consistency, less on cost. Line side supply by vendors in the form of kits. Reliable logistic providers are needed Use VMI Use IT for decision making Postponement need to be considered where feasible
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Postponement in Auto Industry

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Push and Pull Systems

Push System. Production decisions are
based on long-term forecasts.

Pull System. Production is demand driven

PUSH STRATEGY

PULL STRATEGY

Push-Pull Boundary
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Delayed Differentiation

The delayed differentiation strategies can be viewed as a method to combine push and pull systems within a single supply chain CASE: Benetton Push System. Uncolored sweaters are made to forecast.

Acquire Yarn

Finishing

Garment Parts

Join Parts Dyeing

Pull System. Dyeing, a reaction to customer demand Benetton, major supplier of knitwear

Push-Pull Boundary
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Harvard Business Review JanuaryFebruary (1997 ) July 29, 2011

Postponement Approaches (Lee and Tang 1995)

Basic Approach Redesign Process for Delaying Conditions for Effectiveness Product Differentiation Effec tive when the investment c ost and inc remental proc essing c ost required for the standardization are low. Standardization Design a part that is c ommon to all produc ts.

Modular Design Divide a part into 2 modules-T he number of modules inc reases. the first module is a c ommonHowever, this approac h is effec tive when part and the assembly the inc remental lead time, inc remental operation of the sec ond proc essing c ost and unit inventory holding module is deferred. c ost are low. Process Restructuring: Postponement of Operation Process Restructuring: Reversal of Operations Divide an operation into 2 Effec tive when the lead time of the steps- the first step is c ommon step is signific antly longer than c ommon to all produc ts and the sec ond step that is being delayed. In the exec ution of the sec ond addition, this approac h is effec tive when step is postponed the sec ond step is a high value added ac tivity when deferring the high valueReverse the order of 2 Effec tive operations. As a result, the added operation by reversing the first operation is c ommon to operations all produc ts.

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Differentiation Points in Manufacture

T1

T2

T3

Family Differentiation Point Product Differentiation Point

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Postponement in Auto AssemblyAlternator Example

Mounting Brackets

Rotor

Alternator

Stator
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Example
Model No. Mean Sigma 95% Assurance Demand Quantity A1 A2 A3 A4 20 20 20 20 4 4 4 4 32 32 32 32

Total Stock 128 With Postponement: Brackets set 128 (same) Stators and Rotors 104 ( Mean 80 Sigma 8 Saving 20% in Stators and Rotors
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Postponement in Automotive IndustryA Perspective

(a) Postponement usually occurs on the down stream side of supply chain, i.e. close to the customer. In Auto Industry major supply chain problems crop on the inward supply chain. In some literature it is mentioned as early postponement (a contradiction in terms) (b) Most of the OEM have stopped making components in house. There is thus a problem in postponing unless supplier is brought into picture (c) There is very little awareness of postponement among the supply chain managers of Auto OEM. Since most examples come from PC industry, they feel it is not relevant to them (d) Just in time practices have shifted some inventories from OEM premises upstream, to the supplier. Thus, they feel they have already achieved postponement
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Postponement- A Case Study

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Postponement through Collaboration- Case Study

Slitting & Cambering HR Coil Slits Slits

Forming & Drilling Frame Side Member s

Stage Steel 1

Mill

Stage 2Auto

Factory

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Calculation of VOP
Overstock Cost. Since calculations cover a period of one year, it can be assumed that over stock will result in scrap. Past experience confirmed that. Therefore overstocking cost is equal to the value of HR coil (Rs 25 per kg) minus scrap value Under stock. Although postponement will result in lower under stock, we have ignored this cost in both cases, for want of reliable yardstick. In the postponed scenario, production flexibility will ensure larger overall benefit. Therefore, ignoring this cost adds to the robustness of this strategy. Calculations under Postponement. On postponement, all HR Coils are treated as one product. Thus mean is the algebraic sum and standard deviation is calculated by the Littles Formula i.e. aggregated sigma is equal to square root of number of models multiplied by individual sigma.
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COST BENEFIT ANALYSIS OF POSTPONEMENT ON RANGES OF MODELS VOP IN RS LAKHS

1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 1 3 5 7 9 11 13 15 17 19 2 8 20 40 80

COEFFICIENT OF VARIATION

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Postponement through Collaboration- Broad Framework for Auto Industry

Customer Requirement Current Models Rationalised Models Design for postponement through customisation by modularisation

Development of Customised Models

New Models based on Modular Design

Customer Demand

Customise d Vehicles

Postponemen t through collaboration

Redesign business process for modular design incorporating postponement strategy

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RFID in Auto Industry

Opportunities Challenges Case

Study Where are we? Conclusion

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RFID Opportunities in Auto Manufacturing

Inventory Visibility Reduction of Inventory in the supply chain and better customer service Speed of movement Mistake Proofing

Data Capture Errors Wrong Records Mistakes in Assembly Rework Early discovery of mistakes

After Sales Service Reduction of Counterfeits Pilferage reduction

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Visibility Challenge- I
Average time spent in searching inventory, tools, people etc per day Total time in a year in hours (30x300/60) Total cost per employee -@ Rs 75 per hour Total Loss per year in an organisation having 10,000 employees
No of items involved Cost of RFIDing @ Rs 100

30 minutes 150 hours Rs 11250 Rs. 11.25 Cr

60*100

= 60 Lakhs = 60 Crores

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Visibility Challenge - II
ERP already throws up huge amount of data which is difficult to manage RFID will throw out more data, leading to data deluge. We need to find ways to manage and use the mounds of data that will come from RFID tags. While storekeepers may be reduced, we will need costly data managers with advanced statistical knowledge. Errors usually multiply with more data. Companies must design IT systems based on the assumption that reading 100 percent of the RFID tags today isn't possible. We are habitual of concealing something in short supply. If we want to cheat, RFID will allow us to cheat

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Speed of Movement Challenge

Speed increases because of faster reads Scanning/reading/counting account for just 10% of non value added activities Major wastes (Muda) in supply chain in India are: Variance Inventory can go up by 60% if COV is 20% for 99% assurance level Highway movement A truck in USA covers 1200 Km per day as against 400 km in India. That is the mean. It can vary as much as 250 to 500. A truck takes 6 days from North to South with a standard deviation of 2 days (exponential distribution). What will real time information do for me? Can RFID move the truck faster? Can it grease the palm of five agencies at each check post faster? Asks a COO of a manufacturing company Quality Etc.
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Competitiveness Challenge
Labour cost savings- India v/s USA
India Cost of Labour per Hour Possible bar code scanning in one hour Labour cost per scan Cost per tag including reader and other overheads No of repeated scans required in the supply chain to recover labour cost Viable Tag price with 10 reads per product
July 29, 2011

USA Rs 300 150 Rs 2.0 Rs 100 50 Rs 20

Rs 30 150 Rs .20 (20 Paisa) Rs 100 500 Rs 2

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Although RFID scanners can read tagged product at speeds in excess of 600 ft/minute (Wal-Mart expectation!), the need to isolate and fix bad tags by slowing down the conveyor dramatically reduces the average performance of the scanning equipment. Even things as basic as tag placement on a component/ pallet can dramatically impact the functionality and accuracy level of the RFID equipment. Scanning RFID signals off a book is not the same as scanning off a Self Starter. Imagine what a curved surface can do to an RFID transmission, with signals being deflected and bounced off ad infinitum. Water and Metals are mistake dens for RFID trouble spots Electrical Appliances can distort reads unless taken care of Who dunnit??

Error/ Mistake Proofing Challenge

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Counterfeits/ Pilferage Challenge

Most technology solutions to Counterfeiting in India tend to fail because:
Even when people know it is duplicate, they still buy: Cheap Readily available Personalized after sales service Life cycle cost is low RFID cannot change the culture Counterfeits always have a counter-counterfeit solution Pilferage? Remember GPS Tracker in The Da Vinci Code

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Technical Challenges

Problems with RFID Standards RFID systems can be easily disrupted RFID reader Collisions RFID Tag Collisions Security, privacy and ethics problems with RFID The following problems with RFID tags and readers have been reported. An RFID tag cannot tell the difference between one reader and another. RFID readings are not 100% accurate. It is not even sixsigma RFID tags are difficult to remove RFID tags can be read without your knowledge RFID tags can be read at greater distances with a highgain antenna RFID tags with unique serial numbers can be linked to your company
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Cost Benefit Sharing Across Extended Enterprise

Supplier
Tagging

OEM
Reader

Dealer
Reader

Post Sales
Reader

Cost

Infrastructu in infrastructure re Integration into production Costs process existing IT Benefits Reader infrastructure infrastructur e
Changes

Infrastru cture

Distributio

Inventory

Benefit s

n Theft Control

Supplier End

Mgt Theft Control Brand Identification Assembly Distribution Support for Recall Recycling

Distributio

Historic

n Theft Control Brand Authenticati on Customer End

Data Ease of Maintena nce Brand Authentic ation

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ROI Challenge

The Biggest Challenge!

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Case Studies

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I- Asset tracking Instruments

Track location Track Calibration Track utilisation Store User Dept II Track Availability Reduce search time Alarm! Reduce wait time of criticalDept 1 Compression Tester out equipment to 252666135 User Departments Streamline preventive maintenance (PM)Dept III User Enhance security

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II-Mistake Proofing Case Study RFID in Assembly

Reader Reader

ERP Components

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Case Study - Issues

Tag placement is critical, and requires empirical testing to find the optimal location. Properly placed tags offered more accurate reads. Tags had to be isolated from metal components. Until tags are manufactured with an insulating material, there will be restrictions about where they can be placed. Factory workers need to be thoroughly trained in use of this technology. In unionized environment, it is extremely difficult to implement such initiatives Tags could be too big for some of the valuable components used in production, such as sensors in engine. Micro tags tends to be costlier Full data which is generated cannot be used due to existing constraints. For example, existing MIS applications may not be able to accept this data, and processing it may require more IT resources. During the planning phase, it will be necessary to understand how much of this data is useful and how it can be integrated with existing MIS applications.

Note: The Project did not take off because of ROI (Pay back Period:15 Years
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Proposed Approach to RFID Implementation in Auto Manufacturing

Establish an RFID Cross Functional Team from Engineering, Manufacturing and Supply chain Identify a pilot. Assembly line of a costly item is ideal. Use active tags and circulate within manufacturing by reusing. Do not promise positive NPV at this stage Encourage major vendors supplying assemblies costing more than Rs. 10,000 per piece to start similar pilots so that the benefits are shared across the supply chain Once the pilot is successful in establishing positive NPV, duplicate on all A items (costing Rs 5000 or more), down the value chain, costly assembly first- all in manufacturing Do not go for the parts warehouse immediately. Let the parts warehouse follow manufacturing. Costs will be minimal, if done in this fashion. Expand beyond the supply chain on both ends by Bar code B and C components, simultaneously and integrate the two technologies
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Conclusion

RFID is not a technology solution to supply chain complexity in manufacturing. It can only fit in properly if it is embedded into processes, not the other way round. Its value, as with any technology, lies in providing solutions to particular business challenges. While doing so, one should be aware of its advantages and its pitfalls. I also refer to a Fortune interview in which the Federal Express CIO, when asked about RFID, quoted Bill Gates' definition of a "two-ten technology," i.e., for the first two years, it's all about hype, then disappointment, until 10 years later when people realize the technology has become embedded in daily life.

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?
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Summary of Results There is a linear increase in value of postponement with COV.

This is expected due to COV and mean demand being uniformly distributed and calculation of standard deviation (SD) from these two leads SD to be uniformly distributed. VOP will thus have linear relation ship with change in COV or mean demand at given No. of models. Value of postponement increases sharply as the number of models goes up from 2 to 8. However, as the number of models is increased further towards 80, relative increase is much lower. This leads us to an interesting observation postponement strategies yield comparatively high value of postponement when number of products to be differentiated is small. As the number of models is increased, marginal benefit is not as high. Change in business process to effect postponement will cost the company Rs. 5 Crore approximately. Assuming COV to be a moderate 10%, we get a VOP of Rs. 5.46 Crore for 80 models. July 29, 2011 This yields a payback period of less than one year.

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IMPACT OF CYCLE SERVICE LEVEL ON VOP- 80 MODELS

1200.00 1000.00 800.00 VOP 600.00 400.00 200.00 0.00 1 3 5 7 9 11 13 15 17 19 COEFFICIENT OF VARIATION (COV) 0.65 0.70 0.75 0.80 0.85 0.90 0.95

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of interest under investigation in development in shop trial being implemented implemented

SSG US Customs, Contracts

St. Louis Philadelphia Wichita (Military) Wichita (Commercial) Mesa Tulsa San Antonio Anaheim/El Paso/Heath Canoga Park Decatur Huntington Beach Huntsville Seal Beach Long Beach Macon Anaheim Auburn Everett Puget Sound Renton

RFID Across a Manufacturing MNC 2007

Application
7E7, data TBD SSG Security IDS, HLSS BCA, CAS Airbus

Legend

id Reid

e Fletcher

Burke

Part/Assembly Tooling Calibrated Tools / Gages (Certified) Computing Assets & Security Cranes (Overhead) Utilization-Scheduling Consumables Documents Fleet Maintenance (flight hardware) Foreign Object Detection HazMat / Time&Temp SensMaterials Hardware Health Monitoring Material "out-life" (e.g. composites) Panstock(Standards) Parts / Assemblies - Work-in-Progress Parts / Assembly Shipments Personnel / Security (Boeing external) Personnel / Security (Boeing internal) Portable / Hand Tools @ tool crib level Portable / Hand Tools @ toolbox level Ramp / Flight Test Equipment Raw material / Parts Receiving Stores Inventory Rotables Transport Equip (Slings, Dollies, etc) Serialized Parts (flight hardware) Vehicles (e.g. fork lifts, scooters) Waste Containers (Trash)

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