Tata Indica - The Making Of The Small Car

The case provides an understanding of the issues concerning the supply chain management system at

Telco in regard to its small car, Indica. It outlines how Telco, built the supply chain for the car by

leveraging its existing competencies and how it transformed itself from an integrated truck

manufacturer to an automobile integrator and from a product-centric company to competence-

centric company. The case discusses various components of the supply chain and emphasises how

Telco orchestrated them with the objective of minimizing costs.

 
"Telco's Indica not only has a new plant and a new set of people manning the plant, but also new

manufacturing philosophies, new systems and new processes in place, as it gets ready to take on its

competition in the millennium to come."

Background Note
The history of Telco, India's leading automobile manufacturer dates back to the early
1920s. The location of the Telco plant originally belonged to Peninsular Locomotive
Company (Peninsular), which was established in Tatanagar, Jamshedpur in 1923. In 1927,
Peninsular was taken over by East India Railway to manufacture passenger carriage
underframes for the Indian Railways. In 1945, Tata Sons purchased the plant from the
Government of India for manufacturing steam locomotive boilers and other engineering
products, under the name Tata Locomotive & Engineering Company. Initially the company
manufactured broad gauge open wagons for the Indian Railways. By 1947, it started
producing boilers for imported locomotives. The company also entered into collaborations
with Marshal Sons (UK) to manufacture steam road roller, and with Krauss Maffei (West
Germany) to manufacture steam locomotives.

In 1954, the company entered into a technical collaboration with Daimler-Benz to

manufacture automotive vehicles.
The association with Daimler-Benz helped the company build up a strong in-house R&D
center (Engineering Research Center - ERC) at Pune, Maharashtra. In 1960, company’s
name was changed to Tata Engineering & Locomotive Company Ltd. By 1961, it was
manufacturing construction equipments. Over the years, the company acquired technology
from several collaborations and co-operation agreements with international companies
(Refer Table I).
TABLE I
TELCO - COLLABORATIONS AND JOINT VENTURES
Tata Cummins Ltd.
Joint Venture  Cummins Engine Co. Inc. USA.
 with:
 Manufacture of Cummins ‘B’ Series
Business:
engines for M/HCVs.
Tata Holset Ltd.
Joint Venture
 Holset Engineering Co. Ltd. UK.
with:
Business:  Manufacture of turbochargers.
Concorde Motors Ltd.
Joint Venture  Jardine International Motors
with: (Mauritius) Ltd.
Business:  Retailing of Passenger Cars.
Source: www.telcoindia.com
In 1961, Telco produced its first crane in collaboration with M/s Pawling & Harnischfeger
(P&H), U.S.A. In 1966, it acquired Investa Machine Tools Co and set up a machine tools
division at Pune. In the same year, it started its Press Tool Division and vehicle manufacture
facilities at Pimpri and Chinchwad (Pune). The first commercial vehicle was produced in
1977. In 1983, Telco started producing heavy commercial vehicles.

In 1986, the company rolled out its first light commercial vehicle - TATA 407 that had a
completely indigenous design. In 1991, Telco produced indigenously - designed passenger
cars - Tata Sierra and Tata Estate and in the same year it started its assembly and training
plant at Lucknow (Uttar Pradesh). The product range of the company included passenger
cars, heavy commercial vehicles, trucks and buses (Refer Table II).
TABLE II
TELCO - PRODUCT PROFILE
CATEGORY PRODUCTS
Tata Sierra, Tata Estate, Tata Sumo, Tata Safari,
Passenger
Indica, Indica V2.
Light
Commercial Tatamobile, Turbo Truck, LPT 407 Turbo Truck.
Vehicles
Heavy
LPT 1109 Turbo Truck, SE 1613 TC Turbo Truck, SE
Commercial
1613 Turbo Truck, LPT 1613 TC Turbo Truck.
Vehicles
SFC 407 Turbo Mini- bus, LP 407 Turbo Mini- bus,
Buses
LP 709 E Turbo Bus, LPO 1510 CGS bus (CNG bus).
Source: www.telcoindia.com
By the late 1990s, Telco had emerged as a leading name in commercial vehicles, passenger
vehicles, construction equipment, metal cutting and grinding machines, industrial shutters,
high quality steel, alloy castings and other related products. In 2000, commercial vehicles
accounted for 94% of its gross revenues; vehicle spare parts accounted for 5%; and hire
purchase income, 1%.

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 supply 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 'make-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
 Institut Francais du
Engine
Petrol, France
 Assembly Line  Nissan’s Plant, Australia
Presses  Mercedes Benz
Pistons and Piston rings  India Pistons
Electrical components and fuel
 Lucas-TVS
injection systems
 Rane TRW Steering
Steering systems
Systems
Clutch facings and rear (drum)  Sundaram Brake Linings
brake linings (SBL)
Seating Systems  Tata-Johnson Controls
Radiators  Tata-Toyo
Rear view mirrors  Tata-Ficosa
Front and rear bumper, dash-
 Tata-Auto Plastics
board, inside trims
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,
and commissioning 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 suppliers- 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,
"Localisation 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 supply components
at the negotiated quality, cost, and quantities. In the first stage of 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, “When a vendor 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 Improvement Teams 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, "TELCO is very particular about logistics, that raw materials
have a supply trace, be ready for assembly, need no inspection. It is a demanding
customer."
Telco even involved its vendors in the design-process to give suppliers more lead time to
innovate, and for better supply chain coordination. Commented T.K. Balaji, CEO, Lucas-TVS,
which supplied electrical components and fuel-injection systems for the Indica, "By making
vendors its partner early, TELCO ensured both quality and price-conformity. Late
involvement would have yielded different results." M.S. Kumar, Director & CEO, Rane TRW
Steering Systems (Rane), which supplied the steering systems for the Indica, added,
"TELCO has been extremely supportive, making available its entire R&D resources to our
engineers. It is one of the best experiences we have had in product-development."

Telco wanted Rane to design a system that would meet the peculiarities of Indian road
conditions. Besides offering both manual and power systems, Rane also had to come out
with a left-hand drive variant for the export market.
Rane had to go deep into application engineering because the front axle-weight of the
Indica was heavier, and its engine-displacement, higher. Indica was not only compact,
which left less space, but also heavy, which strained the system. Telco wanted Rane to
benchmark the maneuverability of the Indica against the Zen, a much-lighter car. Rane took
about 16 months to develop and get the steering system approved, spending close to 2
man-years on it. It spent Rs 16 million on development costs for the power steering
system--including tooling and dies--and Rs 10 million for the manual steering system.
Said P.R. Sarathy, President, Rane (Madras), "TELCO gave us price-targets. We worked
within them, using value-engineering and concurrent engineering to lower our development
costs. For all effective purposes, we were an arm of TELCO during the process." In the case
of small vendors, Telco examined their processes- and cost-levels. Telco configured its
suppliers in 2 tiers. Tier I suppliers had to assemble sub-systems using components
provided by Tier II vendors. Telco asked the latter to supply products at low margins to the
former. On its part, Telco helped them lower their costs by solving quality-related problems.
For instance, SBL, which supplied clutch-facings and rear (drum) brake linings for the
Indica, developed them in-house. V.R. Janardhanam, President, SBL, remarked, "Despite its
size, Telco has a lot of humility. It is willing to work with even the smallest of vendors to
meet its targets."

A typical brake-lining usually went through the following steps: the raw material was
converted into slabs; the slab was cut into the required length; the cut piece went through 2
stages of grinding for the inner and the outer diameters; then, the piece was drilled, and,
finally, champered. But SBL brought down the number of operations to 3: the raw material
was straightaway converted into pieces of required length, and the grinding was done to
only the outer diameter. And the company saved 15% because of this single-piece flow
technique. K. Pandarinath, Deputy General Manager (Research), SBL, commented, "Telco is
a transparent company. It allowed us to use all their facilities as long as it helps develop a
better product. Our engineers spent several weeks working with Telco's engineers on
perfecting the brake-linings."

Supply Chain
To keep its transaction costs low, Telco configured its supply chain on a just-in-time basis.
All high-value components were delivered daily, and in the case of nearby suppliers, twice a
day. Vendors who were located far away from Pune set up local warehouses near the plant.
The rationale for the relocation: transportation costs alone accounted for 45% of the total
logistics costs for a company, delays in supplies added to costs in terms of machine down-
time at the plant.
Meanwhile, on the shop floor, where the assembly line was located, Telco had done away
with the traditional store function. There was no material store in the Pune plant of Telco.
The truck loaded with the material first entered the factory at the material gate where there
was a documentation center. A person at this center checked whether the material was
scheduled to arrive or not, by keying in the part number and the supplier code. If the
material was not scheduled to arrive, the documents were not processed further and the
truck was not allowed to enter the factory premises.
Once it was cleared at the gate, the truck proceeded to the receiving center. Once the items
were unloaded, unpacked and cleared for quantity and quality, they were moved into the
transit area. From there they went into what was called the 'super market'. The super
market was close to the assembly line. In the super market, the materials were arranged in
such a way that the workers could easily access all the material required on the assembly
line without wasting much time and effort. The benefits of this just-in-time inventory
system were that the inventories were low and so the interest costs were also low. Again
the manpower required to handle the inventories was also low.

For Telco, a crucial link in the supply chain was its ability to forecast demand accurately,
which would help the vendor plan his production-schedule in advance, thus lowering costs.
Telco and Concorde2 employed market research agencies to help forecast demand through
trend analysis, using the historical data technique. It used a complex web of correlation
involving the country's economic situation, competitors' products, and their USPs.
To ensure quick flow of information along the value chain, Telco electronically linked its
demand forecasts to production, and backwards to its suppliers. All its dealers were linked
to the plant through VSATs3 connected by e-mail to relay demand patterns on-line to the
Pune plant. This reduced the order-processing time by 80%. Analysts felt that by being
online, Telco would save a minimum of 4 days from the order-to-despatch lead-time.

For speedy delivery, Telco resorted to inter-location transfers of the product between
dealerships. This would ensure movement of the product to a place where there was more
demand. This would make a big difference to finished goods inventory management once
Telco started producing at optimum capacity. Telco also trimmed costs by making Concorde
leaner than other dealerships, with just 3 levels: managing director, general managers, and
managers.4 Each of Concorde’s general managers worked as profit-centre heads of their
individual business regions, and reported directly to the managing director. Added, A.K.
Seth, General Manager (Delhi), Concorde, "The company wanted to create a lean and
responsive network, with the primary objective being to meet customer requirements as
quickly as possible."

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, "Telco'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 Today5 wrote, "Leveraging 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.