DIVINE MERCY COLLEGE FOUNDATION INC.

CBME 1 – Operations Management and TQM

Finals Exam
(DUE: FRIDAY – JAN. 20)
Name: MONDAYA, YVONNE ESTOQUIA Student No.: C-011152-21
Section: BSBA MM – 2A Time & Day: 1:21PM, JANUARY 19, 2023
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Tata Indica - The Making of The Small Car

 
"Telco's Indica not only has a new plant and a new set of people manning the plant, but also
new manufacturing philosophies, new systems and new processes in place, as it gets ready to
take on its competition in the millennium to come."
- Business India, March 22, 1999.

Background Note
The history of Telco, India's leading automobile manufacturer dates back to the early 1920s.
The location of the Telco plant originally belonged to Peninsular Locomotive Company
(Peninsular), which was established in Tatanagar, Jamshedpur in 1923. In 1927, Peninsular was
taken over by East India Railway to manufacture passenger carriage underframes for the
Indian Railways. In 1945, Tata Sons purchased the plant from the Government of India for
manufacturing steam locomotive boilers and other engineering products, under the name Tata
Locomotive & Engineering Company. Initially the company manufactured broad gauge open
wagons for the Indian Railways. By 1947, it started producing boilers for imported
locomotives. The company also entered into collaborations with Marshal Sons (UK) to
manufacture steam road roller, and with Krauss Maffei (West Germany) to manufacture steam
locomotives.

In 1954, the company entered into a technical collaboration with Daimler-Benz to manufacture
automotive vehicles.

The association with Daimler-Benz helped the company build up a strong in-house R&D center
(Engineering Research Center - ERC) at Pune, Maharashtra. In 1960, company’s name was
changed to Tata Engineering & Locomotive Company Ltd. By 1961, it was manufacturing
construction equipment. Over the years, the company acquired technology from several
collaborations and co-operation agreements with international companies (Refer Table I).
TABLE I
TELCO - COLLABORATIONS AND JOINT VENTURES
Tata Cummins Ltd.
Joint Venture with:  Cummins Engine Co. Inc. USA.
  Manufacture of Cummins ‘B’ Series
Business:
engines for M/HCVs.
Tata Holset Ltd.
Joint Venture with:  Holset Engineering Co. Ltd. UK.
Business:  Manufacture of turbochargers.
Concorde Motors Ltd.
 Jardine International Motors
Joint Venture with:
(Mauritius) Ltd.
Business:  Retailing of Passenger Cars.
Source: www.telcoindia.com

In 1961, Telco produced its first crane in collaboration with M/s Pawling & Harnischfeger (P&H),
U.S.A. In 1966, it acquired Investa Machine Tools Co and set up a machine tools division at
Pune. In the same year, it started its Press Tool Division and vehicle manufacture facilities at
Pimpri and Chinchwad (Pune). The first commercial vehicle was produced in 1977. In 1983,
Telco started producing heavy commercial vehicles.

In 1986, the company rolled out its first light commercial vehicle - TATA 407 that had a
completely indigenous design. In 1991, Telco produced indigenously - designed passenger cars -
Tata Sierra and Tata Estate and in the same year it started its assembly and training plant at
Lucknow (Uttar Pradesh). The product range of the company included passenger cars, heavy
commercial vehicles, trucks and buses (Refer Table II).
TABLE II
TELCO - PRODUCT PROFILE
CATEGORY PRODUCTS
Tata Sierra, Tata Estate, Tata Sumo, Tata Safari,
Passenger
Indica, Indica V2.
Light Commercial Vehicles Tatamobile, Turbo Truck, LPT 407 Turbo Truck.
Heavy Commercial LPT 1109 Turbo Truck, SE 1613 TC Turbo Truck,
Vehicles SE 1613 Turbo Truck, LPT 1613 TC Turbo Truck.
SFC 407 Turbo Mini- bus, LP 407 Turbo Mini- bus,
Buses
LP 709 E Turbo Bus, LPO 1510 CGS bus (CNG bus).
Source: www.telcoindia.com

By the late 1990s, Telco had emerged as a leading name in commercial vehicles, passenger
vehicles, construction equipment, metal cutting and grinding machines, industrial shutters, high
quality steel, alloy castings and other related products. In 2000, commercial vehicles accounted
for 94% of its gross revenues; vehicle spare parts accounted for 5%; and hire purchase income,
1%.

The Story of Indica

In the early 1990s, Telco's Chairman Ratan Tata (Tata), was flirting with the idea of developing
a small car. By mid-1994 a rudimentary design was in place. In 1995, Telco announced that it
planned to build a car which would be priced close to the Maruti 800, shaped like the Zen, and
spacious as an ambassador. Producing the new small car - Indica - represented a different kind
of challenge for Telco. Should Tata succeed, he would change the face of Telco.

As a truck-maker, Telco was so integrated that it even made its own castings and forgings. As
an automaker, it would have to focus on the value chain that stretched between raw materials
and after-sales service as well as assembling the parts into the complete automobile. For its
new venture, Telco outsourced 80% of the components (1,200 of its 1,500-plus parts), from
200-odd vendors. To develop the Indica, Telco had to combine the learnings from its
predecessors with its own unique supply chain management strategies to ensure a sustainable
low-cost platform.

By learning to build and manage a supply chain, it would set the ground for leveraging the
capabilities of the automotive component-manufacturers who already operated in its target
markets. In other words, Telco planned to use its skills as an integrator--bringing together
products and services from both upstream and downstream operations, and packaging them
for the customer under a brand name in its new venture. Globally, a car could be built in 48
months with an investment of US $ 3 billion (Rs 127.5 billion). Indica, was built in 31 months on
a budget of Rs 17 billion. This seemed to have been possible by focusing on the supply chain.

The Outsourcing Strategy

For Telco, outsourcing seemed to be one of the most difficult aspects of producing the Indica.
Unlike global automobile majors, Ford Motors or General Motors, which had a global vendor-
base that could be replicated on a smaller scale in India, Telco had to create a vendor-base from
scratch. Moreover, it did not have the expertise either to design a car or to build an engine for
it. Against this background, Telco had to take its primary 'make-or-buy' decisions for the key
inputs-design, engine, and transmission. Telco decided to shop globally for the best deals and
use its own expertise to make whatever modifications were needed (Refer Table III for the
components outsourced by Telco).

TABLE III
OUTSOURCING THE COMPONENTS
Components  Supplier
5 door hatchback  I.D.E.A., Italy
 Institut Francais du
Engine
Petrol, France
Assembly Line  Nissan’s Plant, Australia
Presses  Mercedes Benz
Pistons and Piston rings  India Pistons
Electrical components and fuel injection systems  Lucas-TVS
 Rane TRW Steering
Steering systems
Systems
  Sundaram Brake Linings
Clutch facings and rear (drum) brake linings
(SBL)
Seating Systems  Tata-Johnson Controls
Radiators  Tata-Toyo
Rear view mirrors  Tata-Ficosa
Front and rear bumper, dash-board, inside trims  Tata-Auto Plastics
Air conditioning kits  Subros Ltd
Wind screens and windows  Asahi Glass
Fuel lines  Imperial Auto
Differential assemblies  Sona Steering
Sheet metal items  JBM Tools
Source: Business Today, March 22, 1999 and December 7, 1999.

Telco turned to the Italian company, I.D.E.A., for the product-design. It bought the engine from
the Institut Francais du Petrol of France, and applied its engineering skills to adapt the engine
requirements. The transmission was developed in-house at its Engineering Research Centre
(ERC), at Pune. Of the Rs 2.5 billion it spent on designing the Indica, the major share went in
buying design tools and training its engineers in new skills. Telco's engineers traveled regularly
to the sites of its technology suppliers, to receive training before the actual delivery of the
machines. Telco also outsourced its assembly line from Nissan's plant in Australia for just Rs 900
million. Telco transplanted it at its factory at Chikli near Pune, which was newly set up for
Indica. A new assembly line of the same proportions would have cost at least Rs 4 billion.

Again, of the 3 presses for the Indica, only 1 was new, acquired for Rs 900 million, while the
other 2 were bought second-hand from Mercedes-Benz and modified to suit the Indica. Telco's
engineers and the ERC did the application engineering, programming, installation, and
commissioning to save around 45% of the technology costs. The tooling for the car too was
supplied internally by Telco's machine tool division. To manage the supply chain better, Telco
kept the number of suppliers for Indica to just 200 as compared to about 1,000 for trucks. Most
of the parts were supplied by Telco's traditional suppliers- TVS, Rane Group and Tata Auto
Component Systems (Taco) who were single source suppliers. Pressed parts, assemblies, and
drive shafts were sourced from single vendors.

Vendor Development
Once Telco made its make-or-buy choices, the next step was to identify the vendors. Most of
the parts that went into making Telco were sourced locally. Except for some sheet metal parts,
cylindrical gaskets, and belts--which accounted for 2% of the component value, the Indica was
totally indigenous. K. Mahesh, CEO, Sundaram Brake Linings, said, "Localisation of components
is the most important challenge a new manufacturer faces. It is a time-consuming and
painstaking process."

Telco employed a simple yardstick for selecting suppliers: the ability to supply components at
the negotiated quality, cost, and quantities. In the first stage of selection, an initial assessment
team from Telco evaluated the supplier. This was followed by self-evaluation of the supplier,
based on a format provided by Telco. Then there was a quality systems survey, carried out by a
Telco quality audit team. This was followed by design validation. And then there was a
manufacturing validation to ensure that the supplier was following the proper manufacturing
processes. This was followed by the Production Part Approval Process (PPAP), which certified
the production quality.

R. Chakraborty (Chakraborty), senior deputy general manager, materials & supplier quality
improvement group, said, “When a vendor reached this stage, our comfort level in dealing with
him goes up considerably, with regard to quality and his ability to supply material to us. We feel
that he has a proper production process in place to ensure quality and timely supplies.” Only a
handful of vendors met Telco’s stringent requirements.
Telco set up Supplier Quality Improvement Teams to improve the vendors' systems to ensure
that they produced defect-free parts. It applied a 13-step Quality Improvement Program,
covering supplier self-evaluation, thorough design-validation, and audit of supplier quality.
Another key to Telco's successful vendor-base was a modern system of process management.
Telco's target-costing was broken up into vendor-wise cost targets, and the suppliers had to
carry out their own value-engineering exercises to lower cost and improve quality. For example,
India Pistons, which supplied the pistons and piston rings, walked away with the Indica order
because it benchmarked itself against supplies to Maruti Udyog; whereas the other vendors
benchmarked themselves against pistons supplied to Telco's commercial vehicles. India Pistons
invested Rs 1.5 million in tooling, and Rs 25 million in a separate line at its Maraimalai Nagar
(Tamil Nadu) facility. N. Venkatramani, CEO, India Pistons, commented, "TELCO is very
particular about logistics, that raw materials have a supply trace, be ready for assembly, need
no inspection. It is a demanding customer."
Telco even involved its vendors in the design-process to give suppliers more lead time to
innovate, and for better supply chain coordination. Commented T.K. Balaji, CEO, Lucas-TVS,
which supplied electrical components and fuel-injection systems for the Indica, "By making
vendors its partner early, TELCO ensured both quality and price-conformity. Late involvement
would have yielded different results." M.S. Kumar, Director & CEO, Rane TRW Steering Systems
(Rane), which supplied the steering systems for the Indica, added, "TELCO has been extremely
supportive, making available its entire R&D resources to our engineers. It is one of the best
experiences we have had in product-development."

Telco wanted Rane to design a system that would meet the peculiarities of Indian road
conditions. Besides offering both manual and power systems, Rane also had to come out with a
left-hand drive variant for the export market.
Rane had to go deep into application engineering because the front axle-weight of the Indica
was heavier, and its engine-displacement, higher. Indica was not only compact, which left less
space, but also heavy, which strained the system. Telco wanted Rane to benchmark the
maneuverability of the Indica against the Zen, a much-lighter car. Rane took about 16 months
to develop and get the steering system approved, spending close to 2 man-years on it. It spent
Rs 16 million on development costs for the power steering system--including tooling and dies--
and Rs 10 million for the manual steering system.

Said P.R. Sarathy, President, Rane (Madras), "TELCO gave us price-targets. We worked within
them, using value-engineering and concurrent engineering to lower our development costs. For
all effective purposes, we were an arm of TELCO during the process." In the case of small
vendors, Telco examined their processes- and cost-levels. Telco configured its suppliers in 2
tiers. Tier I suppliers had to assemble sub-systems using components provided by Tier II
vendors. Telco asked the latter to supply products at low margins to the former. On its part,
Telco helped them lower their costs by solving quality-related problems.
For instance, SBL, which supplied clutch-facings and rear (drum) brake linings for the Indica,
developed them in-house. V.R. Janardhanam, President, SBL, remarked, "Despite its size, Telco
has a lot of humility. It is willing to work with even the smallest of vendors to meet its targets."

A typical brake-lining usually went through the following steps: the raw material was converted
into slabs; the slab was cut into the required length; the cut piece went through 2 stages of
grinding for the inner and the outer diameters; then, the piece was drilled, and, finally,
chambered. But SBL brought down the number of operations to 3: the raw material was
straightaway converted into pieces of required length, and the grinding was done to only the
outer diameter. And the company saved 15% because of this single-piece flow technique. K.
Pandarinath, Deputy General Manager (Research), SBL, commented, "Telco is a transparent
company. It allowed us to use all their facilities as long as it helps develop a better product. Our
engineers spent several weeks working with Telco's engineers on perfecting the brake-linings."

Supply Chain
To keep its transaction costs low, Telco configured its supply chain on a just-in-time basis. All
high-value components were delivered daily, and in the case of nearby suppliers, twice a day.
Vendors who were located far away from Pune set up local warehouses near the plant. The
rationale for the relocation: transportation costs alone accounted for 45% of the total logistics
costs for a company, delays in supplies added to costs in terms of machine down-time at the
plant.

Meanwhile, on the shop floor, where the assembly line was located, Telco had done away with
the traditional store function. There was no material store in the Pune plant of Telco. The truck
loaded with the material first entered the factory at the material gate where there was a
documentation center. A person at this center checked whether the material was scheduled to
arrive or not, by keying in the part number and the supplier code. If the material was not
scheduled to arrive, the documents were not processed further and the truck was not allowed
to enter the factory premises.

Once it was cleared at the gate, the truck proceeded to the receiving center. Once the items
were unloaded, unpacked and cleared for quantity and quality, they were moved into the
transit area. From there they went into what was called the 'super market'. The super market
was close to the assembly line. In the super market, the materials were arranged in such a way
that the workers could easily access all the material required on the assembly line without
wasting much time and effort. The benefits of this just-in-time inventory system were that the
inventories were low and so the interest costs were also low. Again, the manpower required to
handle the inventories was also low.

For Telco, a crucial link in the supply chain was its ability to forecast demand accurately, which
would help the vendor plan his production-schedule in advance, thus lowering costs. Telco and
Concorde employed market research agencies to help forecast demand through trend analysis,
using the historical data technique. It used a complex web of correlation involving the country's
economic situation, competitors' products, and their USPs.

To ensure quick flow of information along the value chain, Telco electronically linked its
demand forecasts to production, and backwards to its suppliers. All its dealers were linked to
the plant through VSATs connected by e-mail to relay demand patterns on-line to the Pune
plant. This reduced the order-processing time by 80%. Analysts felt that by being online, Telco
would save a minimum of 4 days from the order-to-dispatch lead-time.

For speedy delivery, Telco resorted to inter-location transfers of the product between
dealerships. This would ensure movement of the product to a place where there was more
demand. This would make a big difference to finished goods inventory management once Telco
started producing at optimum capacity. Telco also trimmed costs by making Concorde leaner
than other dealerships, with just 3 levels: managing director, general managers, and
managers. Each of Concorde’s general managers worked as profit-center heads of their
individual business regions, and reported directly to the managing director. Added, A.K. Seth,
General Manager (Delhi), Concorde, "The company wanted to create a lean and responsive
network, with the primary objective being to meet customer requirements as quickly as
possible."

Leveraging the Supply Chain

Indica marked the beginning of Telco's drive into India's auto market as an integrator with a
multi-product portfolio. Analysts felt that the competencies that Telco had grown in the
process of marketing Indica would be the core around which it would build its future car
business. Analysts also felt that Tata would use the supply chain that fed the Indica to feed a
whole range of Telco cars of the future.

D.C. Anand, CEO, Anand Group, said, "Telco's capacity will be tested by how many new models
it can come up with--and how soon. Is Telco in a position to do so? Four years ago, I would
have said no. Today, I am not going to underestimate their capacity. They have demonstrated
it." Business Today wrote, "Leveraging the low-cost supply chain that it has built, Telco will
launch a series of other cars--priced both below and above the Indica, straddling the entire
spectrum--each of which will be progressively easier to integrate."

The supply infrastructure would become economical as the volume of the business that Telco
offered its vendors increased. The volume of business would increase with a larger number of
cars. The learning that it was extracting from the Indica supply chain would also be available to
the company as it moved into other products. There seemed to be a distinct opportunity for a
smaller, cheaper car, positioned as an entry-level for the first-time buyer. Analysts felt that
Telco's supply chain management would become the pivot around which it could assemble its
passenger-car business.

Give your answers by answering thru this following format:

I. Identify the problem (10 points)

II. Statement of Objectives (10 points)

III. Areas of Consideration (SWOT Analysis) Strength, Weaknesses, Opportunity and

Threat (10 points)

IV. Alternative Decisions (10 points)

V. Plan of Actions (10 points)