Case Tata Indica

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THE STORY OF INDICA

In the early 1990s, Telco's Chairman Ratan Tata (Tata), was flirting with the idea of developing a small

car. By mid-1994 a rudimentary design was in place. In 1995, Telco announced that it planned to build a

car which would be priced close to the Maruti 800, shaped like the Zen, and spacious as an Ambassador.

Producing the new small car ± Indica ± represented a different kind of challenge for

Telco. Should Tata succeed, he would change the face of Telco. As a truck-maker,Telco was so integrated that it even made it own castings and forgings. As an

automaker, it would have to focus on the value chain that stretched between raw

materials and after-sales service as well as assembling the parts into the complete

automobile.

For its new venture, Telco outsourced 80% of the components (1,200 of its 1,500-

plus parts), from 200-odd vendors. To develop the Indica, Telco had to combine the

learnings from its predecessors with its own unique supp ly chain management

strategies to ensure a sustainable low-cost platform.

By learning to build and manage a supply chain, it would set the ground for leveraging the capabilities of

the automotive component-manufacturers who already operated in its target markets. In other words,

Telco planned to use its skills as an integrator--bringing together products and services from both

upstream and downstream operations, and packaging them for the customer under a brand name in its

new venture.

Globally, a car could be built in 48 months with an investment of US $ 3 billion (Rs 127.5 billion). Indica,

was built in 31 months on a budget of Rs 17 billion. This seemed to have been possible by focussing on

the supply chain.

THE OUTSOURCING STRATEGY

For Telco, outsourcing seemed to be one of the most difficult aspects of producing the

Indica. Unlike global automobile majors, Ford Motors or General Motors, which had a

global vendor-base that could be replicated on a smaller scale in India, Telco had to

create a vendor-base from scratch. Moreover, it did not have the expertise either to

design a car or to build an engine for it.

Against this background, Telco had to take its primary µmake-or-buy'decisions for the

key inputs-design, engine, and transmission. Telco decided to shop globally for the

best deals and use its own expertise to make whatever modifications were needed

(Refer Table III for the components outsourced by Telco).

TABLE III

OUTSOURCING THE COMPONENTS

Components Supplier 5 door hatchback I.DE.A, Italy

EngineInstitut Francais du Petrol,

FranceAssembly Line Nissan's Plant, Australia

Presses Mercedes Benz

Pistons and Piston rings India Pistons

Electrical components and fuel injection

systemsLucas-TVS

Steering systems Rane TRW Steering Systems

Clutch facings and rear (drum) brake linings Sundaram Brake Linings (SBL)

Seating Systems Tata-Johnson Controls

Radiators Tata-Toyo

Rear view mirrors Tata-Ficosa



Front and rear bumper, dash-board, inside

trimsTata-Auto Plastics

Air conditioning kits Subros Ltd

Wind screens and windows Asahi Glass

Fuel lines Imperial Auto

Differential assemblies Sona Steering

Sheet metal items JBM Tools

Source: Business Today, March 22, 1999 and December 7, 1999.

Telco turned to the Italian company, I.DE.A, for the product-design. It bought the engine from the

Institut Francais du Petrol of France, and applied its engineering skills to adapt the engine requirements.

The transmission was developed in-house at its Engineering Research Centre (ERC), at Pune. Of the Rs

2.5 billion it spent on designing the Indica, the major share went in buying design tools and training its

engineers in new skills. Telco's engineers traveled regularly to the sites of its technology suppliers, to

receive training before the actual delivery of the machines.

Telco also outsourced its assembly line from Nissan's plant in Australia for just Rs 900 million. Telco

transplanted it at its factory at Chikli near Pune, which was newly set up for Indica. A new assembly line

of the same proportions would have cost at least Rs 4 billion. Again, of the 3 presses for the Indica, only

1 was new, acquired for Rs 900 million, while the other 2 were bought second-hand from Mercedes-Benz

and modified to suit the Indica.

Telco's engineers and the ERC did the application engineering, programming, installation, andcommissioning to save around 45% of the technology costs. The tooling for the car too was supplied

internally by Telco's machine tool division. To manage the supply chain better, Telco kept the number of

suppliers for Indica to just 200 as compared to about 1,000 for trucks. Most of the parts were supplied

by Telco's traditional suppliers² TVS, Rane Group and Tata Auto Component Systems (Taco) who were

single source suppliers. Pressed parts, assemblies, and drive shafts were sourced from single vendors.

VENDOR DEVELOPMENT

Once Telco made its make-or-buy choices, the next step was to identify the vendors. Most of the parts

that went into making Telco were sourced locally. Except for some sheet metal parts, cylindrical gaskets,

and belts--which accounted for 2% of the component value, the Indica was totally indigenous[1]. K.

Mahesh, CEO, Sundaram Brake Linings, said, ³Localisation of components is the most important

challenge a new manufacturer faces. It is a time-consuming and painstaking process.´

Telco employed a simple yardstick for selecting suppliers: the ability to supplycomponents at the negotiated quality, cost, and quantities. In the first stage o

selection, an initial assessment team from Telco evaluated the supplier. This was

followed by self-evaluation of the supplier, based on a format provided by Telco. Then

there was a quality systems survey, carried out by a Telco quality audit team.

This was followed by design validation. And then there was a manufacturing

validation to ensure that the supplier was following the proper manufacturing

processes. This was followed by the Production Part Approval Process (PPAP), which

certified the production quality. R. Chakraborty (Chakraborty), senior deputy general

manager, materials & supplier quality improvement group, said, ³When a vendo

reached this stage, our comfort level in dealing with him goes up considerably, with

regard to quality and his ability to supply material to us.

We feel that he has a proper production process in place to ensure quality and timely supplies.´ Only a

handful of vendors met Telco's stringent requirements. Telco set up Supplier Quality ImprovementTeams to improve the vendors'systems to ensure that they produced defect-free parts.

It applied a 13-step Quality Improvement Programme, covering supplier self-evaluation, thorough

design-validation, and audit of supplier quality. Another key to Telco's successful vendor-base was a

modern system of process management. Telco's target-costing was broken up into vendor-wise cost

targets, and the suppliers had to carry out their own value-engineering exercises to lower cost and

improve quality.

For example, India Pistons, which supplied the pistons and piston rings, walked away with the Indica

order because it benchmarked itself against supplies to Maruti Udyog; whereas the other vendors

benchmarked themselves against pistons supplied to Telco's commercial vehicles.



India Pistons invested Rs 1.5 million in toolings, and Rs 25 million in a separate line at its Maraimalai

Nagar (Tamil Nadu) facility. N. Venkatramani, CEO, India Pistons, commented, ³TELCO is very particular

about logistics, that raw materials have a supply trace, be ready for assembly, need no inspection. It is

a demanding customer.´

LEVERAGING THE SUPPLY CHAIN

Indica marked the beginning of Telco's drive into India's auto market as an integrator with a multi-

product portfolio. Analysts felt that the competencies that Telco had grown in the process of marketing

Indica would be the core around which it would build its future car business. Analysts also felt that Tata

would use the supply chain that fed the Indica to feed a whole range of Telco cars of the future.

D.C. Anand, CEO, Anand Group, said, ³Telco's capacity will be tested by how many

new models it can come up with--and how soon. Is Telco in a position to do so? Four

years ago, I would have said no. Today, I am not going to underestimate their

capacity. They have demonstrated it.´

Business Today[5] wrote, ³Leveraging the low-cost supply chain that it has built, Telco

will launch a series of other cars--priced both below and above the Indica, straddling

the entire spectrum--each of which will be progressively easier to integrate.´ The

supply infrastructure would become economical as the volume of the business that

Telco offered its vendors increased.

The volume of business would increase with a larger number of cars. The learning that it was extracting

from the Indica supply chain would also be available to the company as it moved into other products.

There seemed to be a distinct opportunity for a smaller, cheaper car, positioned as an entry-level for the

first-time buyer. Analysts felt that Telco's supply chain management would become the pivot around

which it could assemble its passenger-car business

QUESTIONS FOR DISCUSSION

1. Telco did not have the expertise either to design a car or to build an engine for it. In light of this fact,

critically analyze the steps taken by the company to keep its product development costs low.

2. Discuss why the company decided to create a vendor-base from scratch for the smaller car and

comment on how it developed its vendor base.

3. As an integrator of automobiles, Telco had to ensure that there was seamless flow across the supply

chain. Explain how Telco managed its Supply chain.

Case Tata Indica

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