OEM

An original equipment manufacturer, or OEM, refers to a company that makes a

final product for the consumer marketplace. For example, Ford and General
Motors are OEM companies that manufacture cars, and Apple is a computer OEM.
Tier One
Tier one companies are direct suppliers to OEMs. The term is especially common
in the automobile industry and refers to major suppliers of parts to OEMs. For
example, Sensata Technologies is a tier one supplier of exhaust gas sensors to
automotive OEMs.
Tier Two
Tier two companies are the key suppliers to tier one suppliers, without supplying
a product directly to OEM companies. However, a single company may be a tier
one supplier to one company and a tier two supplier to another company, or may
be a tier one supplier for one product and a tier two supplier for a different
product line.
Other Tiers
Companies sometimes find it convenient to distinguish other tiers. Tier three
companies are supply tier two firms. Tier four companies are the providers of
basic raw materials, such as steel and glass, to higher-tier suppliers.
Other Meanings

The terms tier one and tier two are sometimes adopted with slightly different
meanings or definitions. For example, companies might use billing patterns to
define tiers. Companies that submit bills to OEMs are considered tier 1 and
companies that submit invoices to non-OEM companies are tier 2.
SUPPLY CHAIN MANAGAMENT PROCESS

MAJOR COST BREAK UP

Network Design Cost

Breakup Of Transportation Cost

10%

Inbound

32%

Outbound

5%
9%
5%
13%
58%
10%

Transporta
tion

Warehousi
ng

Inventory
Carrying
Cost

Transit &
Damages

Taxes &
Clearances

Others

Inhouse

58%

MAJOR CHALLENGES
1) Two separate supply chains for New Vehicles & After Sales Services
2) Huge number of suppliers (For Ex:- MSIL has 1046 Local and 19 International
suppliers)

3)

Very high logistics cost( For ex:- MSIL incurred close to INR 3000 Crores

4) Quality control & collaboration among across the value chain

5) Being high value items which require huge number of inputs as raw material &
involve multi state logistics taxation is a huge issue
6) Prevalent union system across many points of value chain is a big threat
SUPPLY CHAIN LOGISTICS

AFTER SALES SERVICE SUPPLY CHAIN

Down Stream Supply Chain of Ashok Leyland

Ashok Leyland (AL) has 7 plants across India at the following locations: Chennai1, Hosur-3, Maharastra-1, Rajasthan-1, Uttarakhand -1. From these 7 plants the
regional stockyards (1 in each state receive the parts and send it across to the
dealers. Majority of vehicle models are produced in the Hosur plant.
AL took many initiatives ranging from tiering its vendor network to reducing the
number of vendors, and consequently, moving to a just-in-time (J-I-T) ordering
system, to joint-improvement programmes (JIP), which were essentially exercises
in value-engineering undertaken in association with key vendors.
It set up different tier-levels to improve the quality of the suppliers. Tiering
formed the basis of the vendor-consolidation drive. Till 1998, Ashok Leyland used
to source the 62 components that went into its front-end structure of its trucks
and buses, from 16 suppliers.
In 2000, one tier-I vendor sourced the products from the other vendors and
supplied the assembly to the company. This saved cost and time provided the
vendor network was well coordinated with AL's own manufacturing operations. At
AL, Vendor Development and Strategic Sourcing were handled by Corporate
Materials Department (CMD).
CMD identified the vendors, rated the vendors based on feedback received from
Supplier Quality Assurance Cell, send drawings/specifications, called for quotes
with detailed breakup of operation-wise costs, and negotiated the price at which
the parts would be supplied.
Incentivization
The dealer gets a margin of 3-4% per vehicle and a margin of 25-30% on after
sales services and spare parts. They also have an incentive program based on
the rating of dealers. Quarterly dealer review is done and they are rated
platinum, gold, or silver accordingly. For the platinum segment the incentive is

up to 2 lacs per annum. For the gold segment, it's 1.5 lac per annum and for the
silver segment it is 1 lac per annum. The sales executives of dealers get
incentives directly from Ashok Leyland on the number of sales made by them in
a month.
Sales Forecast
The sales forecast is done at every level (dealer - regional or state and national
level) to achieve a better target of order management. For example, the Monthly
Sales Forecast for September 2016 would be calculated in the following way.

3 Years Average for the month of September 2013,2014,2015

Monthly Sales in August of same Year
Previous Quarters average monthly sales

Sales forecast given is consolidated at National level and ORDER BANK is created
& instructions are floated to each plant for manufacturing. Scheduling for
procurement from various Tier suppliers/OEMs is scheduled for fulfilling the
demand.

Supply Chain of MSIL

Maruti Suzuki, the market leader for passenger vehicles, is moving towards
hub-and-spoke distribution models for vehicle and spare parts. The hub and
spoke model is a system which makes transportation much more efficient by
simplifying a network of routes. It is extensively used in commercial aviation for
both passengers and freight and the model has been adopted in the technology
sector as well.
Maruti Suzuki is also building regional vehicle and parts distribution centres.
Building up various distribution centres will help reduce the lead time from days
to hours. They are also planning a new factory in Gujarat and are increasing their
infrastructure for outbound vehicles and for spare parts distribution. These steps
will help them integrate the supply chain which is essential to meet customer
requirements and fulfil demand in the market.
MSIL has 6 plants. 3 in Manesar and 3 at Gurgaon. The total capacity of both the
plants is approximately 14.5 lacs per annum. They have 246 local and 19 global
dealers in Tier I and 800 dealers in Tier II and III. There are 2 types of distribution
centres: Vehicle Distribution Centres and Parts Distribution centre from where the
parts and vehicles reach the dealers and services network.
Some Best Practices adopted by MSIL in its Supply Chain
SOURCING & INBOUND LOGISTICS

To practise JIT Maruti Sources 86% of its components by Value from

suppliers which are located within 100KM distance & because of which
76% of 246 Tier 1 suppliers are located within 100KM distance.

Maruti uses E-Nagare an electronic platform to integrate the entire

supply chain & also to practise a Kanban type of approach

Quality Circle Competition & Shikhar programmes to bring down

average monthly defects to 500 out of million

15 Days Material schedule as against earlier 30 days to reduce inventory

levels by 70%

The Just-in-Time (JIT) and e-nagare inventory management systems,

introduced in 2003, have helped in reducing inventory levels to less than a
day

A milk run system was also started in 2010-11 for 30 suppliers based in
Faridabad. The logistics for these companies is managed by one logistic
supplier. This initiative helped in reducing the number of trips per day to
MSIL by 30 per cent from these suppliers and improvement in the truck fill
rate by over 25 per cent.

For vendor efficiency, Maruti has a separate organization called Maruti

Centre for Excellence (MACE) to give vendors advice.
SPARE PARTS BUSINESS

MSIL has outsourced the management of spare parts and components in

terms of warehouse management and transportation

The outsourced logistics service partner gets an access to the e-nagare

system of MSIL, through which MSIL can download the production schedule
and coordinate with suppliers for the components and the quantity

Logistic service providers (LSPs) operate as Tier I suppliers to MSIL and

maintain an inventory of 3 days in the warehouse and 2 days of in-transit
inventory

The spare parts are directly dispatched to the dealers after receiving the
indents through the MSIL system.
OUTBOUND LOGISTICS

The company is moving towards hub-and-spoke distribution models for

vehicle and spare parts through regional vehicle and parts distribution
centres (VDCs and PDCs

MSILs purpose of building hubs is to reduce lead times for spare part and
vehicle deliveries from days to hours.

MSIL use road transport for 90 per cent of their dispatches of vehicles.
MSIL use rail transport only for A-star

The consignment module, 'Visual Cargo,' has advanced dashboard and

report features that allow logistics managers to easily monitor, track and
manage operations.

MSILs 80-plus vehicle carriers operate a combined fleet of around 9,000

trucks or trailers have helped reduce average delivery time from 6 weeks
in 2003 to 4 weeks now