Cost Scenario in Unstable Economy and Fluctuating volume

Economy in every country of the globe is trying to recuperate from the meltdown of 2008~09 and is still to find its firm footing back onto the path of growth. As a buyer it becomes very difficult to close any contract as with unstable economy, volumes are also fluctuating.

In the era of growth and increasing volume, there are abundance opportunities available at buyer end to push vendors for cost by showing the supposedly rosy picture ahead. The volume card also attract more vendors and thus more competition, all in all a perfect picture for buyer. But how to perform in challenging economy:

1. Consolidation: The best medicine of the problem. Consolidate the spend towards bigger and more stable vendors. Increasing their pie in reducing economy and volume helps in achieving the cost advantage and also it’s the strategy to derisk you in economy where small players might be facing financial issues.

2. Changing the strategy: The strategy in increasing volume is showing the rosy picture of business increase but in reducing volume, the strategy is to show a picture of “continuation of business”. The strategy helps in negating the effects of reducing volume as you can project a picture of continual engagement and thus showing supplier that they are part of the core group and they can reap rewards of the current engagement in future.

3. Revisiting basic cost drivers: This is the most basic concept and is the most effective one in all circumstances. Understanding all the cost drivers and try to reduce cost by using techniques like value engineering, value analysis, localizations of tier 2 parts, yield Improvement etc.

Technology and single source items

Quite often as a buyer I have faced issues while finalisation of source for a product when the particular product is technology dependent. You have limited options to choose from and you have very limited room for negotiation of final price.

Traditional method of price estimation and negotiation like differentiating cost in RM (Raw Material) , Process Cost and Overheads and Profit doesn't hold good and neither you have multiple suppliers where you can go for competitive bidding to reduce the cost. 

Essentially you are dependent on the supplier to give you the correct cost. Still how you can determine the correct cost.

1. Historical buying pattern : The first thing to look at is to see the cost pattern  of similar products. This will help in achieving some cost estimation and perhaps helps in determining the cost drivers.

2. Dependency of the supplier: Determining the dependence of the supplier on your organisation or that particular product. It will help you increase your BATNA in the negotiation.

3. Look for competitors: Though the toughest part for this kind of component, yet the idea is to use them as leverage during negotiation. They may not be 100% match but yes they can be helpful as part of negotiation.

4. Understand the product: The knowledge about the product, volume, no. of years of usage, maintainence requirement or other cost drivers help in determining the negotiation points and helps in determining the correct cost.

The idea as always in any negotiation is keep pushing the supplier and with above inputs, determining the correct cost becomes slightly easy.

Effect of Infrastructure bottlenecks on Supply Chain

Infrastructure plays an important role in business and is important part of Supply chain. Companies can invest millions in creating an internal infrastructure mixed with high end ERP technology to very strong supplier base but if there is not enough infrastructural development en route from supplier location to customer location then overall supply chain effectiveness goes for a toss.

This situation is increasingly becoming a big problem in countries like India where economy is growing by leaps and bound but infrastructure development is not picking up at the same pace. Due to which in spite of creating world class supply chain apparatus, it’s becoming challenging to bring in the material from supplier end on time.

How one can design a supply chain apparatus when the infrastructure bottlenecks, which are outside ones control, can nullify all the benefit of having a good supply chain apparatus? This seems to have become a very big problem and organizations are now moving from a very successful Just in Time approach to a situation where inventory levels are increase. These very acts destroys the lean apparatus of the supply chain and add waste in the system in terms of huge inventory, more cost and lessen the control on quality.

What This Recession Means To Globalization And Supply Chain.

The world after couple of years of recession has become a very different place, the growth engine of the world has shifted to places like China and India from US and Europe. While US are working on a firm plan to come out of recession as quickly as it can, Europe is still in grip of recession as evident by the fiasco in Greece. But what this new world order will mean to the globalization and how will it affect supply chain?

The last decade saw a wave of outsourcing and globalisation taking place at each and every level of an organisation. The term globalization moved from books of high flying consultants from McKenzie’s n Accenture to the real world. Big outsourcing deals were taking place from places like China, India, and Brazil which were in part was powering growth in these markets. All big companies have bigger targets to outsource from India or China. Big offices were being setup by companies like GM, Chrysler, Volvo, Ford to make suppliers in India and China competitive enough in terms of process and quality while cost was never a problem due to low input and labour costs. But suddenly the markets in the US and European regions fell due to recession and so was the demands of goods and automobile while the markets in countries like China and India kept on growing at a pace which was making every European and US observer envy.


This all leads to a whole new paradigm in globalization:
1. Reduction in demand means the outsourcing deals were not either put on hold or the volume required reduced significantly and thus the whole benefit of outsourcing was negated.
2. The high unemployment rate in US and European regions meant labour becomes easily available at cheaper rate.
3. The requirement surged in developing countries like India or China making the domestic suppliers stretched to the maximum. This leaves them very little room to leave their capacities to foreign players. It is always logical to go with the rising star and when the rising star is near your home then why go for a fading star far away.

These changes affect a lot of supply chain professional directly. In 2008 nobody could have predicted a strong growth in 2009 thus every supplier was reluctant to put additional capacities. Now after a strong growth in 2009 and even stronger growth projected n 2010, the pressures on capacities have increased dramatically. The local markets are eating into the capacities of all suppliers and there are not many capacities left for suppliers in India and China to outsource to western countries. And if some suppliers do go for lucrative European markets then there will be shortages in already stretched markets in these developing countries. This will make the current year a very challenging one as capacities will be stretched to the maximum due to strong local demand and yet the lure of dollar will make every organization to go for outsourcing. The scarce resources will have to be managed well by every supply chain professional.

Exciting Phase for Supply Chain Professional in Indian Automotive Market

Three latest entrants in India’s small car market have set the fire in industry in terms of pricing. First Maruti Suzuki, the biggest carmaker in India reshaped its flagging model Versa into Eeco at mouth watering Rs 2.50 lacs and then Old American war horses, GM and Ford bringing out there new products i.e. Beat and Figo respectively at Rs 3.49 lacs (ex showroom price). This is seems to be a beginning of a price war in India which will reshape the industry as all major global players are now getting ready to take their part of Indian Automotive Industry Pie.


Well lower prices like these are not reached through one day of innovation by the marketing and finance guys in these organisations. It is the continuous hard work of the supply chain of these companies and shows the strength of our low cost automotive component supplier base.

The latest price wars will only put a lot of pressure on the buyers in these organisations to purchase at the lowest possible prices. The overall scenario looks very competitive as not only hard negotiation will be there to reduce cost but there will be smart new ideas that will be generated to make the cost of producing these components cheaper without effecting quality. This will be in turn enhances the overall capabilities of Indian part manufacturer to compete globally.

Already GM, Ford, Chrysler, Volvo and many other companies were aggressively scouting for Indian component suppliers for their global requirements and with expansion of Domestic Indian automotive market the chances that the Indian component supply base will become more stronger and technically capable to achieve this goal.
The whole game plan (of low cost Indian component supply base emerging stronger) becomes dynamic with the arrival of bigger and technologically advanced component suppliers in India in order to tap growing Indian market. These new players like American Axles and Magneti Marelli are technologically advance and will be more adaptable to changes happening in Indian market.

In the midst of all these development it will be exciting for every Automotive Supply Chain Professional in India to manage right product at a right time but at the cheapest possible price.

Expanding Indian Automobile Industry – Challenges for Buyer

Indian Auto Industry is booming, Sales rose 25% from 1.5 million units to 1.9 million units in the fiscal year ended 31 March as new model launches improved consumer sentiment and increased financing resulted in buyers flocking to showrooms.

Also SIAM has predicted a continuous growth of 10% to 14% in the Fiscal year 2010~ 11. This is now bringing a new paradigm shift in the industry as a whole and being in the middle of this industry making a buyer job as an exciting venture.
With the arrival of global players in the Indian market has done a world of good for all parts manufacturer. They have more customers and different avenues of growth but this is also a very tricky times from a buyer prospective.

The major points where a buyer needs to look now are:

1. The capacities which were installed by parts manufacturers for one OEM is being shared with other OEMs also. This could lead to serious issues when the capacities are not well planned at the suppliers end.

2. Earlier the leverage of providing the business is being used as a very handsome tool in negotiation but now suppliers are getting new avenues of growth and they are free to do cheery picking rather then working for one OEM at its terms and condition.

3. The availability of raw material is also major cause of worry. As the production numbers are increasing and market is again showing high signs of volatility things could turn bad to worse in terms of supply.

These points have now started affecting the production at various plants in India and are making the job of a buyer more challenging and exciting. At one level there is a need to increase capacities at parts manufacturer end (to match its capacities with the increasing market and also OEMs capacities) and on the other the part manufacturer needs to update themselves both in terms of technology as well as advance process and know how.

Managing Supply Chain After Recession

Year 2008 was a distress year for most of the industry with widespread closure and downsizing by everybody and anybody, however 2009 brought much needed hope of revival and finally numbers are started to look good in 2010. But so much fluctuation in demand has led to very serious issues in supply chain of every organization.

While buyers were answering issues relating to overcapacity and cost going haywire due to poor numbers off take and adjusting amortization costs in 2008 and 2009, now some interesting questions are being asked by same buyers to their respective suppliers regarding capacity augmentation. The production numbers are coming back with exponential growth and frankly not every supplier is ready to invest back in capacity increase after having downsizing only last year.

There are many issues which is now becoming problem for every supply chain executive after recession:

1. Meeting the increased demand with current capacities.

The most immediate need of the hour for any supply chain executive is to make sure that manufacturing line doesn’t stop. Production numbers fluctuation only add to problem and the problem become severe when the capacity at your supplier end is low w.r.t requirement and developing new sources is long and difficult process.

The answer to the situation is to start proactively analysing the installed capacity at supplier end and closely monitoring the inventory level at supplier end.

Installed capacity can be assessed based on many factors which include installed infrastructure, installed technology and overall takt time of the process. Once the study is done of the installed infrastructure and technology, ways need to be found out to decrease takt time of the process.

Also another solution to manage the issue is to build up the inventory levels at supplier end. The inventory level could range from couple of days to week depending upon the size of the part and space availability at the supplier end. The inventory planning also includes sufficient inventory of raw material and bought of parts.

2. Complex expansion projects

Capacity augmentation was on high list for everybody till 2007. However the complete lists of expansion projects were thrown in 2008. Often the projects with long lead time and complex technology requirement were also put on hold or were scrapped. Now to kick start same projects in order to meet the current demand is a very critical issue to ever supply chain executive.

3. Daily fight for survival

Imagine your supplier can only produce 1000 parts and daily requirement is of 1200 nos. Under capacity situation like these is a nightmare for any supply chain executive. This leads to daily fight for survival which includes day long follow-up with supplier and often night long vigil at his end to ensure smooth supplies.

4. Costing issues

Recession bought a much needed relief for supply chain executive in terms of supplier management as not many were coming up with cost increase proposal due to fear of losing their already reduced business. Also globally commodities prices were at their all time lows thus giving buyers much needed relief and helped them achieve their cost reduction targets however lower off take also meant that amortization cost increased dramatically. But now the things have changed completely. Commodities prices are at upswing again, suppliers have become aggressive in terms of posturing specially in areas where they know they are the only source. Also push by many industries of stock build-up to meet demand and pushing future expansion projects fast is only adding to the overall cost and managing these issues are becoming increasingly difficult for them.

5. Manpower issues

Recession has forced many organizations to downsize aggressively which included manpower downsizing also. Now to manage increased capacity the requirement also is to have skilled manpower. That’s the reason recruiting has picked up again in the economy. However it’s not easy to hire skilled managers overnight to manage this situation. This only adds to the problem in the current scenario.

Another issue relating to manpower is of remunerations There were minimal or no hike in pay during the last couple of year due to recession but now that numbers have started to look upwards organizations needs to handle the pay issue very carefully to retain their best manpower and supply chain executive needs to monitor that respective pay revision do take place at their supplier end so that workforce remain motivated enough to handle the current scenario.