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LOGISTICS COSTS IN INDIAN AUTOMOTIVE INDUSTRY

11AGENDAIntroductionCategories of logistics operations in auto and auto components industry Benefits of efficient logistics managementBrief about logistics costs involvedIndian auto and auto components logistics industryGrowth drivers of Indian auto industryCritical success factorsComposition of logistics cost in the Indian auto industryCost driversIssues Challenges22OVERVIEW OF INDIAN LOGISTICS INDUSTRYEstimated at US$ 235 billion Employs 45 million peopleExpected 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 GDPTransportation35%Inventory25%Labour9.5%Packaging11%Handling and Warehousing9%Others(incl. losses)10.5%According to World Banks 2010 logistics performance index, India is ranked 47th out of 155 countriesLogistics cost as a percent of sales in India almost 30% higher than in most major economies of the worldReasons for high logistics cost:Multi-layered tax regimeInfrastructure bottlenecksHigh inflation rateELEMENTS OF LOGISTIC COSTS33LOGISTICS COST AS A PERCENTAGE OF SALES

OVERVIEW OF INDIAN LOGISTICS INDUSTRYName of industry% share of logistic cost in total salesCement15%Steel6%F&B5%FMCG4%Durables4%Apparel3%Auto3%Major contributors for the growth of logistics industry are:emergence of organized retailincrease in foreign trade India becoming a manufacturing hub44LOGISTICS EXPENSES OF SOME AUTO COMPANIES IN 2012-2013CompanySalesLogistics expensesLogistics expensesas a percentage of salesMarutiRs. 481,147 millionRs 5513 million1.13%

Tata Motors(Global revenues including Jaguar and Land Rover)Rs 1876480 millionRs 47980 million2.55%TVS MotorsRs 70890 millionRs 2360 million3.329%Hero MotocorpRs 235830 millionRs. 6533 million2.77%BajajRs 206180 millionRs 3050 million1.479%5OVERVIEW OF INDIAN LOGISTICS INDUSTRY5

In the eastern region, there is an extra cost in the form of Congestion SurchargeCOMPONENTS OF LOGISTICS COST IN INDIAOVERVIEW OF INDIAN LOGISTICS INDUSTRY66BENEFITS OF EFFICIENT LOGISTICS MANAGEMENTDecreases 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 legislationOVERVIEW OF INDIAN LOGISTICS INDUSTRY77LOGISTICS INNOVATION AT TATA MOTORS IN 2012-2013Introduced a Telematics and Fleet Management Service, branded Tata FleetMan.Targeted at commercial vehicle fleet owners and large consignors of goodsFeaturesfuel management driver management remote diagnosticsreal time fleet trackingSMSAlertsGeo-fencingtrip managementBenefitsimproved fleet utilization and logistics(and hence reduces costs)reduce track downtimes(hence improves efficiency)OVERVIEW OF INDIAN LOGISTICS INDUSTRY88INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRYTRENDS THAT WILL TRANSFORM THE INDUSTRYLong-term secular growth and volatilityEscalating costs of supply chain operationsIncreasing product proliferationGrowth of exportsRegulatory changes and opportunitiesFast growing aftermarket

1. VOLATILE GROWTH IN DEMAND

2. RELATIVELY HIGH LOGISTICS COSTSLogistics costs as percentage of sales 30% higher than in other large Asian automotive marketsIndia on course to become worlds third largest auto manufacturer by 2020Source: Building world-class automotive supply chains in India, ATKearney, 2013, IHS Global insight99INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRYTRENDS THAT WILL TRANSFORM THE INDUSTRYLong-term secular growth and volatilityEscalating costs of supply chain operationsIncreasing product proliferationGrowth of exportsRegulatory changes and opportunitiesFast growing aftermarket

3. NUMBER OF CAR MODELS IN INDIA TO SKY ROCKET

Increasing competitionMultinational OEMs entering IndiaChanging customer demographicsShorter replacement cyclesSource: Building world-class automotive supply chains in India, ATKearney, 20131010

INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRYTRENDS THAT WILL TRANSFORM THE INDUSTRYLong-term secular growth and volatilityEscalating costs of supply chain operationsIncreasing product proliferationGrowth of exportsRegulatory changes and opportunitiesFast growing aftermarket4. GROWTH OF EXPORTSExport 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

Source: Building world-class automotive supply chains in India, ATKearney, 20131111INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRYTRENDS THAT WILL TRANSFORM THE INDUSTRYLong-term secular growth and volatilityEscalating costs of supply chain operationsIncreasing product proliferationGrowth of exportsRegulatory changes and opportunitiesFast growing aftermarket5. REGULATORY CHANGESRegulations around GST, product recalls and sustainabilityTax optimized to operationally optimizedReverse logistics to be strengthenedCompliance to sustainability regulations

6. BOOMING AFTERMARKETSource: Building world-class automotive supply chains in India, ATKearney, 20131212INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRYACTIONS NEEDEDLong-term secular growth and volatilityEscalating costs of supply chain operationsIncreasing product proliferationGrowth of exportsRegulatory changes and opportunitiesFast growing aftermarketCollaboration across the value chainInnovations in cost managementProactively manage complexityDevelop tailored value chainsPrepare for regulatory changesDevelop capabilities to exploit opportunities

Source: Building world-class automotive supply chains in India, ATKearney, 201313TRENDS13INDIAN AUTO AND AUTO COMPONENTS LOGISTICS INDUSTRYSource: Building world-class automotive supply chains in India, ATKearneyTECHNOLOGY AND AUTOMATIONTO HELP MANAGE AUTOMOTIVE PRODUCT COMPLEXITYSource: Building world-class automotive supply chains in India, ATKearney, 2013

1414COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRYTotal Logistics spend in India13.2% of GDP = $ 243.1 bnContribution of automotive industry1% of logistics spend = $ 2.43 bnLogistics cost in automotive industry2 3% of salesLogistics cost in auto components industry3 4% of salesReverse logistics cost in industry0.5 1%Source: Reuters, Economic Intelligence Unit, A.T. Kearney analysisOVERVIEW 1515TRANSPORTATION COSTS IN INDIAN AUTO INDUSTRYCOMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRYTransportation forms 35% of the total logistics costEstimated value of $ 850 mn at current GDP levelIndian auto industry relies mostly on roadways for majority of transportation requirementsIn bound logistics cost is approximately 1 2 % of total manufacturing cost for 44% of auto companiesOut bound logistics cost is approximately 2 3 % of the total sales revenue10 15% estimated Y-o-Y increase in auto logistics cost due to fuel price rise and driver unavailabilityReference: Article - Auto sector loses speed on high logistics cost Businessline OVERVIEW 1616TRANSPORTATION COSTS IN INDIAN AUTO INDUSTRYCOMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRYSource: Reuters, Economic Intelligence Unit, A.T. Kearney analysisWHY RAIL TRANSPORT IS BECOMING UNPOPULAR?Important rail networks oversaturatedRail freight tariffs are highTransit times are long & uncertainRail terminal quality is poorLess flexibility in carrying different types of products1717COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRYLABOUR COSTS IN INDIAN AUTO LOGISTICS INDUSTRYSource: Reuters, Economic Intelligence Unit, A.T. Kearney analysisLabor cost in logistics industry is estimated to be 9.5% of total logistics spendSpend on labour in logistics as per current GDP level is 230 million USDOVERVIEW 1818http://www.aquamcg.com/Publications/Newsletters/SupplyChainCostReductioninIndia/SupplyChainCostReductioninIndiaPage3/tabid/205/Default.aspxCOMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRYINVENTORY CARRYING COSTS IN INDIAN AUTO INDUSTRYInventory carrying cost is 25% of total logistics costCost of holding inventory is 1 2% of the total salesCarrying cost as per current GDP level is $ 607 MNhttp://www.ukessays.com/essays/economics/inventory-policy-in-indian-automotive-supply-chain-economics-essay.phpBENEFITS OF VENDOR MANAGED INVENTORYCOMPONENTS OF INVENTORY COSTOBJECTIVES OF MAINTAINING INVENTORYOVERVIEW 1919COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRYCOST OF WAREHOUSING IN INDIAN AUTO LOGISTICS INDUSTRYWarehousing cost in logistics industry is estimated to be 9 % of total logistics spendSpend on warehousing as per current GDP level is 218 million USDWarehousing in India is expected to grow at a rate of 35 to 40% annuallyAuto warehousing in India primarily works on the theory of augmentation and assortmentGOVT INITIATIVES TO REDUCE WAREHOUSE COSTSSource : PWC whitepaper Building warehousing competitiveness202021

COMPOSITION OF LOGISTICS COST IN INDIAN AUTO INDUSTRYCOST OF WAREHOUSING IMPACT OF GST21LOGISTIC COST AND COST DRIVERSSource: Building world-class automotive supply chains in India, ATKearneySource: Building world-class automotive supply chains in India, ATKearney, 201322

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 Holding Inventory Cost of Capital

Logistics costs is inherently complex as it cuts across organizational functions Adding a distribution outlet NEED FOR LOGISTICS ORIENTED COST ACCOUNTING SYSTEM ABC and 3PLCost 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)How much to Charge a customer ?22ACTIVITY BASED COSTINGSource: Building world-class automotive supply chains in India, ATKearneySource: Building world-class automotive supply chains in India, ATKearney, 201323Organizations have different products ,customer service strategy to different target segmentsProliferation of number of Product lines and segmentsIncreased Overhead cost Attributable to different activityTrue Cost of servicing different Customer typeChannelsMarket SegmentEffectively pass on the Cost to the customer who needed specific servicesCompanies Understand Customer costHow does it help managers?Optimum Resource AllocationMeet Customer service in a most cost effective wayOrder ProcessingInventory CarryingPicking and ShippingOutboundFreightCommissions23AssetsCashReceivablesInventoriesPPECurrent LiabilitiesDebt / EquityOrder Cycle TimeOrder Completion TimeInvoice AccuracyInventoryDistribution facilityPlant and EquipmentsDevelop tailored value chainsFinancing Options for Inventory Plant and EquipmentSource: Building world-class automotive supply chains in India, ATKearney, 201324LOGISTICS VARIABLES AND ITS IMPACT ON THE BOTTOM LINELogistics variablesWorking Capital ManagementTo generate invoice fasterDelays paymentLiabilitiesCurrent Assets tied up in inventorySizeable chunk of fixed assetPhasing of supplies Minimize premature commitmentsMRP and DRP Growth in use of third party logisticsTransform fixed cost into expensesDirect impact on funding requirement24High 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 roadKEY ISSUES2525For 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 assetsA smarter supply chain & logistics is identified as the main way to effectively contain cost and other top challenges 3/4PL could be the solution

KEY CHALLENGES2626Outsourcing 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

The Automobile Smarter Supply Chain of The Future - IBMs StudyKEY CHALLENGES2727With 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 complexityInterconnected Integrating the entire supply chain even the fragmented aftermarket to share information, make decisions collaboratively and manage in real-timeIntelligent Relying more on advanced analytics, simulation and modelling tools to evaluate increasingly complex and dynamic risks and constraints and act on better insight

WAY AHEAD2828For 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 WAY AHEAD2929