As Ratan Tata unveiled the Rs 1 lakh[US$ 2500] car, I thought about the process which enabled the Tata Nano to be designed at this phenomenally low price. It was done by a relentless focus on costs and eliminating waste and redundancy.
The secret of designing the Tata Nano is a concept called Target Pricing or Target Costing.
Target Pricing process attempts to determine what features and functions the customer wants in a car. Do consumer want 2 doors or 4 doors? What should be the engine capacity? Should the windshield wipers have 2 blades or 1? What instruments should be provided?
Once the features and functions are finalized target costs are assigned to each and every component/system – transmission system, instruments, engine, body, interiors, electrical systems. The sub-teams then design the components/systems within the target cost. They look at every bolt and nut and keep driving cost out of the components/ system.
For example the Nano has a variable transmission instead of the standard gears. It has instrument clusters which do not have anti-glare coating and does not use screws for fixing.
This same concept, of relentless focus on costs and ‘scraping the barrel’ mentality can be applied to supply chains!
Cost and waste is driven out of supply chains by reducing inventory, eliminating waiting times and delays, increasing utilization of warehouse and trucks, optimizing location of warehouses and plants, drawing up the optimum transportation network, utilizing backhauls etc.
Reducing inventory reduces the working capital cost , reduces warehousing costs and obsolescence costs . To reduce inventory, demand fluctuation will have to be reduced, reliability of inventory replenishment will have to increased, Inventory Record Accuracy will have to be above ~95% and supply chain length will have to be reduced.
Reducing supply chain times reduces inventory and increases responsiveness. To eliminate waiting times and delays the complete supply chain process will have to be mapped. For this a lead time map is used. Delays like waiting for loading or unloading and waiting for documents can be minimized. Transit times can be reduced [ not by fast and rash driving ] but by using AC cabins and double-drivers. Also, backhauls are a way to reduce costs.
Truck utilization can be improved by using truck optimization softwares . Similarly, warehouse space can be utilized more efficiently by increasing storage height- by increasing the rack heights or having a mezzanine.
On a strategic level, Supply Chain Network Design – locating plants, contract manufacturers, Distribution Centres and warehouses- is important because 70% of the cost of a supply chain is fixed at the design stage.
So while Tata Nano has created a breakthrough in car manufacture by reducing the cost of a car significantly, it has led me to think about doing a Tata Nano with my supply chain.