Assignment: Innovation in Networks
Supplier Involvement in product development and innovation: The Tata Nano story.
Tata Motors is the largest automobile company in India with consolidated revenues of about 14 billion dollars in 2008-09. It is the country’s market leader in the commercial vehicles segment and holds the third position in the passenger vehicle segment. It is the world’s second largest bus manufacturer and fourth largest truck manufacturer. Through associate companies and acquisitions and subsidiaries Tata Motors has operations in the UK, South Korea, Thailand and Spain also containing the two iconic British brands the Jaguar and The Land Rover. It also has an industrial joint venture with Fiat in India. The Tata brand of vehicles are marketed in several countries across the world including parts of Europe, Africa, The Middle East, South Asia, South east Asia and South America. (www.tatamotors.com)
Tata Motors has clearly shown its emergence as an international player with acquisition of Jaguar/Land Rover from Ford Motors and the launch of Tata Nano, the One Lakh Rupees ($2500) car. The price tag of $2500 of the Tata Nano is a clear indicator of Tata’s strategic superiority in the context of its supply chain networks. The Nano must have a highly reliable and low cost supply chain network to produce the demand that it to create and satisfy in order to be profitable after accounting for materials, transportation, overheads and taxes.
Systems of innovation approach:
A network can be defined as a specific type of relationship that exists between a defined set of persons, objects or events (also called nodes or actors) involved in different processes and activities that produce value to the ultimate customer in the form of products and services. (Mitchell, 1969) (Christopher, 1992)
Let us consider the firm i.e Tata to be the main actor who performing activities by utilising the resources available to them.
The Interaction between the network of actors, network of activities and network of resources:
- Tata Motors and Tata Nano design team: The Tata Nano team started off with 4 members of Tata Motors studying the feasibility of such low cost car. Once the feasibility of such an idea was established more members from various departments got involved and a design team was created and set to task of designing the world’s cheapest passenger car. This process involved the generation of ideas from all contexts and then screening of the generated ideas to find the best ones.
- Suppliers: Tier 1, Tier 2, and Tier 3: Taking into consideration the needs of the project, the design team went sourcing for the right suppliers and vendors who had the capacity and capability to supply to this project. They used the help of a company called Ariba Inc. who provide on-demand spend management solutions, to achieve the right combination of tier 1 suppliers. These suppliers were also initiated into the design process from the early stages itself. The Tata Nano team settled for about 100 tier 1 suppliers out of the thousand others to whom invitations were extended based on their expertise, reliability and capability in terms of being able to deliver large quantities.
- Distributors: The Distributors play an important role in this project as the Tata Nano is to be built in the form of kits and shipped to distributors where it will be assembled and delivered to the customer.
- Competitors: The nearest competitor the Maruti-Suzuki 800 is still 100% more expensive than the Nano. And other competitors are yet to finalise their offerings in this segment. So clearly the Nano has the first mover advantage here.
- Customer: The customer being targeted here is largely the motorcycle using population and also the section of people wanting to buy their second car. The customer in India is willing to wait from 3 months to 1 year for delivery of the car which works very well for this model.
- Government regulation: The Tata Nano meets all government set safety regulations and goes one step further by being more energy efficient and having less carbon footprint when compared to other cars in its segment and also quite a few motorcycles. The government has also helped Tatas find land and set up their plant in Sanand, Gujrat, India.
- Local people: Tata Nano has picked engineers from the local universities like Indian Institute of Technology, Kharagpur, and Jadhav University to be a part of the design team. It also promises direct and indirect employment in and around the area of the manufacturing plant and also better community facilities. But another aspect to this is the picketing of the plant in Singur by angry farmers who felt they were being vacated from their lands unlawfully. This lead to the closure of the Singur facility and the whole Tata Nano plant being moved ‘lock stock and barrel’ to Sanand in Gujrat, India.
We can clearly see that in Systems of innovation approach, innovations are not only determined by the elements of the network themselves but also by the relationships that exist between the different elements of the system. These relationships are complex and are distinctive due to the presence of reciprocity, interactivity and feedback mechanisms. Hence the low price of the car can only be achieved if the design team, the suppliers, distributors, government, universities and local people all work in tandem at various levels towards this objective. The complexity of the relationships can also be considered as a challenge because when the project and the place of production are new, there is not enough information about the exact nature of these relationships. The interdependency and connectivity between the elements of the network has to be captured through empirical work which is not an easy task as it involves research into various parameters. (Edquist,2005)
Q2: Using secondary, published and references data sources, discuss a particular innovation that has occurred in this organisation.
After the severe financial meltdown the automobile sector has faced from the past two years it has become very clear that big, gas guzzling, large engine vehicles will not sell. This can be attributed to the lower disposable incomes, rise in fuel prices all over the world and stricter emission policies being adopted by most countries. PwC predicts that over the next five years the production of small cars will increase by about 50%. Since the margins on the sale of small cars are much lower the auto companies will have to sell much more in order to be profitable. (Webb, 2010) The Tata Nano goes even further. Using the bottom of the Pyramid approach (Prahalad & Hammond, 2002) it is targeting a whole new market of motorcycle users who would be interested in shifting to a Nano as it comes with a price tag of around $2500 which is slightly more than the price of a motorcycle but almost half the price of the Maruti Suzuki 800 which
h is the next cheapest car in the market. To be able to be profitable after accounting for raw material costs, labour and other overheads the Nano has to sell in large volumes. To be able to handle such large volumes there has to be a cheap and a robust supply chain mechanism in place.
The Tata Nano with its One Lakh Rupees price tag is not just a product of technological innovation but also innovation in terms of supply chain and networks.
The major innovative aspects of the Nano’s supply chain are:
- Target pricing
- 3Ps Initiative-Production, Preparation and Process Methodology
- Localised single source suppliers
- Vendor parks
- The Tata group subsidiaries
- Distribution of Nano car kits to the dealers
Target Pricing: The process of target pricing attempts to determine the features and functions that should be provided in the car at a price the customer is willing to pay. Once the functions and features are finalised target costs are allocated to each and every component or system. The design teams relay the function required and the target cost of the components to the suppliers who then come up with suitable designs and production methods to suit the requirement within the specified cost. The suppliers where involved in the early stages of design of the Nano through the 3Ps initiative – where the suppliers inputs in the Production, Preparation and Process methodology were considered and incorporated in the final design.In this case the design team looked at every bolt and nut to keep the cost down without affecting the functionality. For example the Nano has instrument clusters which did not use screws for fixing and did not have an anti-glare coating.
Localised single source suppliers: Established suppliers like Bosch where roped in for Proprietary design components like engine management systems and spark plugs. Bosch used local design capabilities by splitting the development between its Bangalore and Germany design centres. This was a crucial decision as it helped to use local talent and keep the costs low.For in-house designed components and systems, Tata Motors picked suppliers with strong process capabilities who could provide input and valuable suggestion on the designs. It was important to screen the suppliers at an earlier stage itself since the suppliers had a greater role to play not just in the design and development process, but also the purchasing. About 75% of the components are being single sourced and about 90% of the total car is being outsourced to local vendors and suppliers. (SupplierBusiness.com)
Vendor Parks: The supplier selection process was highly selective for the Tata Nano. Ariba.Inc a leading provider of on-demand spend management solution providers where pressed into service. (Kumarswamy, 2009) Out of the 1000 invitations that were send out only 100 suppliers were selected based on their capabilities to deliver the required high volumes to the required quality levels. The expertise and knowledge levels were also considered during the selection process. Half of the 100 vendors for the project are co-locating with the mother plant at Sanand, Gujrat in a 350-acre vendor park. This was achieved by convincing the suppliers of the volumes by offering volume contracts instead of annual contracts which in turn helped drive the cost further down. Another aspect of having these vendor parks is the ability to share knowledge and problem solving capability. There is problem solving team at Tata Nano which goes to the vendor sites and provides technical know-how and expert opinion thereby reducing the need to hire expensive technical experts for the individual vendors. For example all of Tata Nano’s tubular structures are generated through Hydro-forming which results in weight reductions and simpler production process. It also uses roll-forming instead of stamping which allows a common tooling for a number of parts leading to fewer operations and hence better productivity.
The Tata group subsidiaries: Tata Motors have made great use of the subsidiaries that exist under the Tata umbrella to achieve the target cost of Nano. Subsidiaries include Tata Steel for chassis and some non-load bearing components of the vehicle (www.tatasteel.com), Tata Auto Comp Systems (TACO) for on-board computer systems (www.tacogroup.com) and HV Axles Limited for the axles. (www.hvaxles.com)
References:
Harland, C.M. (1996). Supply Chain Management: Relationships, Chains and Networks. British Journal of Management, Vol. 7, Special Issue, S63-S80, UK
Edquist.C. (2005): ‘Systems of Innovation, Technologies, Institutions and Organisations ‘. TJI Digital, Padstow, Cornwall, UK
Christopher, M.G. (1992). Logistics and Supply Chain Management. Pitman Publishing, London, UK
Easton.G, Hakansson.H (1996): Markets as networks: Editorial Introduction, International Journal of Research in Marketing, ELSEVIER United Kingdom
Palathinkal.J.D, (2008): Strategies for High Volume Supply Chains in India, Massachusetts Institute of Technology, US
Mitchell, J.C. (1969). ‘The Concept and Use of Social Networks’. In: J.C. Mitchell (ed.), Social Networks in Urban Situations, pp.1-50. Manchester University Press, Manchester.
Anderson.C.J, Hakansson.H, Johanson.J. (1994). ‘Dyadic Business Relationships within a Business Network Context’. The Journal of Marketing, Vol. 58, No. 4 (Oct., 1994), pp. 1-15 Published by: American Marketing Association. Accessed at http://www.jstor.org/stable/1251912
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Kumaraswamy.R. (2009) ‘Spendmatters’. Accessed at: http://www.ariba.com/learningcenter/content/assets/Chatter/bts-tatmotors.mp3 (www.ariba.com)
www.tatasteel.com
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www.hvaxles.com