LOGISTICS COSTS IN INDIAN AUTOMOTIVE INDUSTRY

AGENDA
1. Introduction a) Categories of logistics operations in auto and auto components industry b) Benefits of efficient logistics management c) Brief about logistics costs involved 2. Indian auto and auto components logistics industry a) Growth drivers of Indian auto industry b) Critical success factors 3. Composition of logistics cost in the Indian auto industry 4. Cost drivers 5. Issues 6. Challenges

OVERVIEW OF INDIAN LOGISTICS INDUSTRY

Estimated at US$ 235 billion

Employs 45 million people

Expected to grow annually at the rate of 10-15%, reaching revenues of approximately $ 385bn by 2015. Highly Unorganized with organized sector responsible only for 6% Logistics costs are about 13.2% of the GDP

ELEMENTS OF LOGISTIC COSTS

Transportation 35%

Inventory Labour
Packaging Handling and Warehousing Others(incl. losses)

25% 9.5%
11% 9% 10.5%

According to World Banks 2010 logistics performance index, India is ranked 47th out of 155 countries Logistics cost as a percent of sales in India almost 30% higher than in most major economies of the world Reasons for high logistics cost: Multi-layered tax regime Infrastructure bottlenecks High inflation rate
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OVERVIEW OF INDIAN LOGISTICS INDUSTRY

LOGISTICS COST AS A PERCENTAGE OF SALES

Name of industry Cement

% share of logistic cost in total sales 15%

Steel
F&B FMCG Major contributors for the growth of logistics industry are: emergence of organized retail increase in foreign trade India becoming a manufacturing hub Durables Apparel Auto

6%
5% 4% 4% 3% 3%

OVERVIEW OF INDIAN LOGISTICS INDUSTRY

LOGISTICS EXPENSES OF SOME AUTO COMPANIES IN 2012-2013
Company Sales Logistics expenses Logistics expenses as a percentage of sales 1.13% 2.55%

Maruti Tata Motors(Global revenues including Jaguar and Land Rover) TVS Motors Hero Motocorp Bajaj

Rs. 481,147 million

Rs 5513 million

Rs 1876480 million Rs 47980 million

Rs 70890 million Rs 235830 million Rs 206180 million

Rs 2360 million Rs. 6533 million Rs 3050 million

3.329% 2.77% 1.479%

OVERVIEW OF INDIAN LOGISTICS INDUSTRY

BENEFITS OF EFFICIENT LOGISTICS MANAGEMENT
Decreases the cost involved in the movement of the product to the end customer. Usage of IT systems in logistics improves the communication between the parties involved. Electronic messaging reduces the time to create consignments and manage accounts receivable. Proper fleet management(main component being GPS) can optimize investments, Improve efficiency and productivity, Reduce a companys overall transportation costs, provide100% compliance with government legislation

OVERVIEW OF INDIAN LOGISTICS INDUSTRY

LOGISTICS INNOVATION AT TATA MOTORS IN 2012-2013 Introduced a Telematics and Fleet Management Service, branded Tata FleetMan. Targeted at commercial vehicle fleet owners and large consignors of goods Features fuel management driver management remote diagnostics real time fleet tracking SMS Alerts Geo-fencing trip management Benefits improved fleet utilization and logistics(and hence reduces costs) reduce track downtimes(hence improves efficiency)

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY

TRENDS THAT WILL TRANSFORM THE INDUSTRY
Long-term secular growth and volatility Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket

1. VOLATILE GROWTH IN DEMAND

2. RELATIVELY HIGH LOGISTICS COSTS

India on course to become worlds third largest auto manufacturer by 2020

Logistics costs as percentage of sales 30% higher than in other large Asian automotive markets
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Source: Building world-class automotive supply chains in India, ATKearney, 2013, IHS Global insight

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY

TRENDS THAT WILL TRANSFORM THE INDUSTRY
Long-term secular growth and volatility Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket

3. NUMBER OF CAR MODELS IN INDIA TO SKY ROCKET

Increasing competition Multinational OEMs entering India

Changing customer demographics Shorter replacement cycles

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Source: Building world-class automotive supply chains in India, ATKearney, 2013

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY

TRENDS THAT WILL TRANSFORM THE INDUSTRY
Long-term secular growth and volatility Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket

4. GROWTH OF EXPORTS
Export volumes growth 19% CAGR 1 mn units in 2007, 2.9mn units in 2013 Component exports: $9bn(2013), $25bn(2020E) India emerging as a hub for manufacturing
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Source: Building world-class automotive supply chains in India, ATKearney, 2013

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY

TRENDS THAT WILL TRANSFORM THE INDUSTRY
Long-term secular growth and volatility Escalating costs of supply chain operations Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket

5. REGULATORY CHANGES
Regulations around GST, product recalls and sustainability Tax optimized to operationally optimized Reverse logistics to be strengthened Compliance to sustainability regulations

6. BOOMING AFTERMARKET

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Source: Building world-class automotive supply chains in India, ATKearney, 2013

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY

CRITICAL SUCCESS FACTORS
Long-term secular growth and volatility Collaboration across the value chain Innovations in cost management Proactively manage complexity Develop tailored value chains Prepare for regulatory changes Develop capabilities to exploit opportunities

Escalating costs of supply chain operations

Increasing product proliferation Growth of exports Regulatory changes and opportunities Fast growing aftermarket

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Source: Building world-class automotive supply chains in India, ATKearney, 2013

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRY

TECHNOLOGY AND AUTOMATION TO HELP MANAGE AUTOMOTIVE PRODUCT COMPLEXITY

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Source: Building world-class automotive supply chains in India, ATKearney, ATKearney 2013

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY

OVERVIEW Total Logistics spend in India Contribution of automotive industry Logistics cost in automotive industry Logistics cost in auto components industry Reverse logistics cost in industry 13.2% of GDP = $ 243.1 bn 1% of logistics spend = $ 2.43 bn 2 3% of sales 3 4% of sales 0.5 1%

COMPARATIVE ANALYSIS OF COMPONENT WISE LOGISTICS COST ACROSS COUNTRIES

India 35% 25% 9% 31%

China

49%

24%

9%

18%

USA 0% 10% 20%

50%
30% 40% 50%

15%
60% 70%

25%
80% 90%

10%
100% 14

Transportation

Inventories

Warehousing

Others(Including Losses)

Source: Reuters, Economic Intelligence Unit, A.T. Kearney analysis

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY

TRANSPORTATION COSTS IN INDIAN AUTO INDUSTRY
OVERVIEW
Transportation forms 35% of the total logistics cost Estimated value of $ 850 mn at current GDP level Indian auto industry relies mostly on roadways for majority of transportation requirements In bound logistics cost is approximately 1 2 % of total manufacturing cost for 44% of auto companies Out bound logistics cost is approximately 2 3 % of the total sales revenue 10 15% estimated Y-o-Y increase in auto logistics cost due to fuel price rise and driver unavailability 1978-79 - 283mn tonnes
1% 34% 65% Railways Highway Others 46% 53%

1986-87 - 485mn tonnes

1% Railways Highway Others

2007-08 - 2,555mn tonnes

4% 29% Railways Highway Water 58% 15 Air

9%

Reference: Article - Auto sector loses speed on high logistics cost Businessline

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY

TRANSPORTATION COSTS IN INDIAN AUTO INDUSTRY

FUEL PRICES RISING AT A CAGR OF 9%

80 70 60 51.4 50 40 30 20 10 0 2008 2009 2010 2011 Diesel(Rs/Litre) 2012 2013 Petrol(Rs/Litre) 45.6 31.8 63.4 48.7 40.1 32.9 37.8 40.9 73.2 70.7

WHY RAIL TRANSPORT IS BECOMING UNPOPULAR?

Important rail networks oversaturated Rail freight tariffs are high

44.6

Transit times are long & uncertain

Rail terminal quality is poor Less flexibility in carrying different types of products

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Source: Reuters, Economic Intelligence Unit, A.T. Kearney analysis

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY

LABOUR COSTS IN INDIAN AUTO LOGISTICS INDUSTRY
OVERVIEW
Labor cost in logistics industry is estimated to be 9.5% of total logistics spend Spend on labour in logistics as per current GDP level is 230 million USD FACTORS EFFECTING LABOR IN LOGISTICS
Unavailability of skilled work force Strict labor laws thinner margins for logistic provider Wages rising at a CAGR of 10% per annum

RISING WAGES IN INDIAN AUTO LOGISTICS SECTOR

250 200 162.5 150 100 122.1 133.6 147.7 192.5 177.4

50
0 2008 2009 2010 2011 2012 2013 Average Nominal Wage Index(Base 2005) Linear (Average Nominal Wage Index(Base 2005)) 17

Source: Reuters, Economic Intelligence Unit, A.T. Kearney analysis

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY

INVENTORY CARRYING COSTS IN INDIAN AUTO INDUSTRY
OVERVIEW
Inventory carrying cost is 25% of total logistics cost Cost of holding inventory is 1 2% of the total sales Carrying cost as per current GDP level is $ 607 MN Economie s of scale Protectio n from uncertain ties & buffer Cushion between supply & demand Discount on bulk purchase

OBJECTIVES OF MAINTAINING INVENTORY

BENEFITS OF VENDOR MANAGED INVENTORY

Reduced inventory level Improved end customer service Reduced inventory costs

COMPONENTS OF INVENTORY COST

Inventory cost

Better demand forecast

Reduced leadtime

Holding costs

Setup costs

Ordering costs

Shortage costs

http://www.aquamcg.com/Publications/Newsletters/SupplyChainCostReductioninIndia/SupplyChainCostReductioninIndiaPage3/tabid/205/Default.aspx 18
http://www.ukessays.com/essays/economics/inventory-policy-in-indian-automotive-supply-chain-economics-essay.php

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY

COST OF WAREHOUSING IN INDIAN AUTO LOGISTICS INDUSTRY
Warehousing cost in logistics industry is estimated to be 9 % of total logistics spend Spend on warehousing as per current GDP level is 218 million USD Warehousing in India is expected to grow at a rate of 35 to 40% annually

Auto warehousing in India primarily works on the theory of augmentation and assortment

GOVT INITIATIVES TO REDUCE WAREHOUSE COSTS

Free Trade Warehousing Zones (FTWZ) Speciality logistics parks Goods & Services Tax
Infrastructure to facilitate import & export of goods Freedom to carry out trade transactions in free currency Exclusive parks for automotive industry Connected through well-laid rail links & multi-modal facilities Uniform tax-rate Manufacturer can store and distribute goods without state boundaries
Assembling Cross-dock facilities

Automation

Pre-delivery inspection

VALUE ADDED WAREHOUS E SERVICES BY 3PL

Consolidati on & Deconsolid ation centres

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Sorting
Source : PWC whitepaper Building warehousing competitiveness

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRY

COST OF WAREHOUSING IMPACT OF GST

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LOGISTIC COST AND COST DRIVERS

NEED FOR LOGISTICS ORIENTED COST ACCOUNTING SYSTEM ABC and 3PL
Decision taken in one area can lead to unforeseen impact on other areas Change in minimum order value
Customer ordering patterns -> additional cost
Cost of sales (actual product mix) (attributable costs only) Commissions Sales calls Key account management time Trade bonuses and special discount Order processing costs Promotional costs (visible and hidden) Merchandising costs Non-standard packaging/unitization Dedicated inventory holding costs Dedicated warehouse space Materials handling costs Transport costs Documentation/communications costs Returns/refusals Trade credit (actual payment period)

Cost of Holding Inventory Cost of Capital Logistics costs is inherently complex as it cuts across organizational functions Adding a distribution outlet

How much to Charge a customer ?

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Source: Building world-class automotive supply chains in India, ATKearney, ATKearney 2013

ACTIVITY BASED COSTING

Companies Understand Customer cost
Organizations have different products ,customer service strategy to different target segments Proliferation of number of Product lines and segments Increased Overhead cost Attributable to different activity True Cost of servicing different Customer type Channels Market Segment Effectively pass on the Cost to the customer who needed specific services
Order Processing

Inventory Carrying

Picking and Shipping

Outbound Freight

Commi ssions

How does it help managers? Optimum Resource Allocation Meet Customer service in a most cost effective way
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Source: Building world-class automotive supply chains in India, ATKearney, ATKearney 2013

LOGISTICS VARIABLES AND ITS IMPACT ON THE BOTTOM LINE

Assets
Cash Receivables Inventories

Logistics variables
Order Cycle Time Order Completion Time Invoice Accuracy Working Capital Management To generate invoice faster Delays payment Current Assets tied up in inventory Sizeable chunk of fixed asset

Inventory
Distribution facility Plant and Equipments

PPE

Liabilities
Current Liabilities Develop tailored value chains Financing Options for Inventory Plant and Equipment

Phasing of supplies Minimize premature commitments MRP and DRP Growth in use of third party logistics Transform fixed cost into expenses Direct impact on funding requirement

Debt / Equity

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Source: Building world-class automotive supply chains in India, ATKearney, 2013

KEY ISSUES
High level of fragmentation in the trucking industry no standards w.r.t cost and transportation labour charges, overloading, no tracking, safety etc. Tax Structure - Payment of multiple state and central taxes results in: Considerable loss of time in transit for road freight Fragmentation of warehousing/inventory space 90% of automotive companies outsource in case of transportation, but lacks in effectiveness as compared to that of top supply chains 65% of Indias freight travel over long distance is structurally suitable for rail and waterways but 70% of transportation happens via road Connectivity within India should given more significance reducing cost of the vehicle manufactured (20% in India as opposed to global standard of 5-10%) USA, China and other emerging economies spend more on rail and less in road
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KEY CHALLENGES
For any company dealing with logistics, the value proposition rests on three key pillars: optimizing logistics costs for customers shortening the length of the order completion cycle and, reducing the number of fixed assets A smarter supply chain & logistics is identified as the main way to effectively contain cost and other top challenges 3/4PL could be the solution

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KEY CHALLENGES
Outsourcing is one potential area of opportunity to variabilize the costs As per Deloittes Report on logistics costs in Automobile Industry, 80% of automotive SCM have implemented variable cost structures that align costs with fluctuating revenues only 20% have done so extensively Most of the Automobile Companies are ineffective in controlling logistics costs

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The Automobile Smarter Supply Chain of The Future - IBMs Study

WAY AHEAD
With GST, logistics and distribution costs in India could go down by 10-15%

The development of key infrastructure projects related to ports, highways and rails (e.g. Golden Quadrilateral, NSWE project etc.) will help in creation new warehousing hubs
A smarter supply chain ensuring visibility embodies 3 key characteristics: Instrumented Using sensors and smart devices to gain greater visibility across the network, mitigate risk, reduce cost and manage rising complexity Interconnected Integrating the entire supply chain even the fragmented aftermarket to share information, make decisions collaboratively and manage in real-time Intelligent Relying more on advanced analytics, simulation and modelling tools to evaluate increasingly complex and dynamic risks and constraints and act on better insight

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WAY AHEAD
For providing value-enabling solutions we require action on three fronts: Creating an environment for graduating the Indian logistics market to provide value propositions in logistics solutions Increasing the capability of the Indian Logistics Industry to provide such solutions Requiring Government and other regulatory mechanisms in the country to provide an enabling environment for value propositions in logistics services Outsourcing is one potential area of opportunity to variabilize the costs Organizations need to move towards value delivered costs and not merely transportation costs collaboration with 3PL (Third Party Logistic Service Providers) in strategy and planning
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THANK YOU

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