nasscom report on it adoption in the auto component industry

8/7/2019 NASSCOM Report on IT Adoption in the Auto Component Industry

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IT Adoption in the

Indian Auto Component Industry



IT Adoption in the

Indian Auto Component Industry

National Association of Software and Service Companies

International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi-110 021, India

Phone: 91 11 2301 0199 Fax: 91 11 2301 5452 Email: [email protected]

Website: www.nasscom.in



Copyright ©2007

National Association of Software and Service Companies

International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi -110 021, India

Phone: 91 11 2301 0199 Fax: 91 11 2301 5452 E mail: [email protected]

First Print: December 2007

Published by

NASSCOM, New Delhi

Designed & Produced by

Creative Inc.

Phone: 91 11 4163 4469

Printed at

P. S. Press Services

Disclaimer

The information contained herein has been obtained from sources believed to be reliable. The

information contained in sections of the report reflects data that was derived from both public

and confidential information collected during the conduct of the study by NASSCOM. Readers

should note that NASSCOM has not independently verified all of the data and assumptions used

in these analyses. Each reader of this report should conduct their own independent evaluation

of the information provided herein. NASSCOM shall have no liability for errors, omissions or

inadequacies in the information contained herein or for interpretations thereof.

The material in this publication is copyrighted. No part of this can be reproduced either on paper

or electronic media without permission in writing from NASSCOM. Request for permission to

reproduce any part of the report may be sent to NASSCOM.



Chapter 1: Introduction

The Indian Auto Component Industry .............................................................. 12

IT adoption in the Auto Component Industry ................................................... 14

Study objectives and methodology .................................................................. 15

Chapter 2: Business challenges and current state of IT adoption

Challenges faced by business heads .............................................................. 17

Challenges faced by IT heads ......................................................................... 20

Factors infl uencing IT adoption ....................................................................... 21

Measuring IT adoption effectiveness ............................................................... 22

Criticality of business processes ..................................................................... 23

IT adoption – implemented applications/systems ............................................ 27

IT budgets ........................................................................................................ 32

IT workforce and outsourcing .......................................................................... 33

Key features of IT adoption in auto component fi rms ...................................... 35

Chapter 3: Mapping supply chain strategies for

auto component fi rms

Linking capability levels to manufacturing practices ........................................ 37

Chapter 4: Evolving an IT strategy for different levels

Aligning IT strategy with manufacturing capabilities ........................................ 42

The MSC perspective ...................................................................................... 47

Chapter 5: Looking ahead

Call for action: Strategies for stakeholders ...................................................... 49

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Table of Contents



Foreword

4



5



6

Foreword

The Indian Auto Component Industry has been amongst the drivers of the renaissance inIndia’s manufacturing sector, and given its strong performance over the last few years, it is

rightfully considered a ‘sunrise’ sector of the Indian economy. Years of sustained efforts by the

auto component fi rms and a pro-active government policy framework have transformed a

relatively small and unsophisticated domestic industry into one with world-class manufacturing

practices and a global footprint.

With success come greater challenges and expectations. To sustain and accelerate the current

growth trajectory and develop new competitive advantages, the Indian auto component fi rms will

need to continuously strive to increase their effi ciency, quality and value proposition. In this, IT

will increasingly play a crucial role by helping the auto component fi rms achieve step changes

in productivity benchmarks through the entire range of manufacturing processes and in enabling

the fi rms to seamlessly integrate with their global and domestic customers and suppliers.

Unfortunately, IT penetration in Indian manufacturing, especially among the SME segment,

continues to lag behind comparator industries in other countries. In order to increase

IT penetration, it is vitally important to understand the IT adoption challenges faced by the

manufacturing industry fi rms and especially the SME segment. Developing this understanding

is crucial to ensure that IT investments by the fi rms are deployed where they can result in

the greatest impact on a fi rm’s competitiveness and help the fi rm to derive positive outcomes

from the IT investments.

It is with this aim that this study has been undertaken. This report seeks to bring an understanding

of IT adoption thresholds, challenges and processes in the different segments of the Indian

auto component sector. This has been utilised to develop IT adoption strategies based upon

the manufacturing capabilities of the different segments of the Auto Component Industry.

This will enable the auto component fi rms to align their IT investments with the business

objectives, while enabling the IT fi rms to develop solutions specifi c to the needs of the different

segments of the industry.

NASSCOM is deeply committed to the development of the domestic IT market, since a strong

and vibrant domestic market is crucial to the continued growth of the Indian IT industry.

We hope this report will stimulate useful discussions and more importantly, actions onhow individual fi rms in the auto component and IT industries, as well as other ecosystem

partners such as the government, industry bodies, academia and others, can together work

to accelerate the adoption of IT by the Indian Auto Component Industry so as to further

stimulate its growth.

Kiran Karnik

President, NASSCOM



7

The Indian Automobile Component Industry has emerged as a sunrise sector of the Indianmanufacturing industry and a key stakeholder in the global automobile manufacturing industry.

While India’s share of the global auto components trade of US$ 185 billion (Rs 75,850 crores)

is only 0.4 percent currently, India is estimated to have the potential to become one of the top

fi ve auto component economies by 2025. By 2015, the global Auto Component Industry is

expected to source goods worth US$ 700 billion (Rs 2,870,000 crores) from low-cost countries

like India.

According to the Auto Component Manufacturers’ Association (ACMA), the Indian auto

component sector generated sales of about US$ 15 billion (Rs 61,500 crores) in fi scal year

2006-07, including US$ 2.8 billion (Rs 11,480 crores) worth of exports. The industry has

been experiencing a high growth rate of 20 per cent over the period 2000-05 and is expectedto grow at a CAGR of 17 per cent over the period 2006-14. Similarly, while growth rate of

exports has been 25 per cent during 2000-05, the exports are expected to grow by a CAGR of

34 per cent during 2006-14.

To sustain the current growth trajectory and face the increasing competition in the global and

domestic markets, the Indian auto component fi rms will have to create a new set of competitive

advantages based on value-capture rather than cost reduction. Achieving this will not be easy

and the Indian fi rms will have to focus on moving up the value curve and relentlessly increasing

fi rm level productivity through adoption of global manufacturing best practices. IT will be a key

enabler for the Indian auto component fi rms to achieve these aspirations.

An increase in IT adoption will provide the necessary productivity benefi ts only when the IT

investments are made in business processes which contribute to a fi rm’s competitiveness.

Thus, it is important to evaluate IT adoption at the level of business processes instead of at the

fi rm level. This understanding will fi rstly, help the automobile component fi rms to align their IT

investments with business objectives and secondly, help the IT fi rms to develop solutions which

are specifi c to the requirements of the Automobile Component Industry. The auto component

manufacturing sector in India has seen tremendous growth in recent years and therefore one

expects this sector to be ahead of others in IT adoption. An understanding of IT adoption

processes in this sector can also be useful in defi ning effective IT adoption strategies for this

as well as other sectors.

Current status of IT adoption in the Indian Auto Component Industry

Studies have shown that the adoption of information technologies can increase the performance

of fi rms. Despite these advantages, IT adoption among manufacturing fi rms in India is rather

low. The diversity in the Indian manufacturing sector is very high; apart from differences in fi rm

size, sector specifi c peculiarities can also play a role in the processes of IT adoption. While

policy initiatives to encourage adoption have been explored, it is equally important to understand

the process of IT adoption by fi rms along with the constraints faced by them.

Executive Summary



8

The need of the auto component fi rms to integrate various functions and processes hasdriven them to invest in IT, and as a result, in fi rms that have implemented IT, there has been

a considerable increase in the productivity as well as revenues. However, very few fi rms have

aligned their IT investments with business objectives or adopted a clutch of applications to

maximise the potential of effi ciency gains and this obviously has an adverse effect on the

effi cacy of IT adoption.

The current study conducted by NASSCOM is based on an survey of 158 fi rms including

small, medium and large automobile component manufacturers across the key automobile

manufacturing clusters in Delhi, Mumbai, Chennai, Pune and Bangalore. Some key highlights

of the current IT adoption in the Indian Auto Component Industry, identifi ed through the survey

are as follows:• Different fi rms appear to be devising differing strategies for IT adoption and size of the

fi rm seems to be defi ning the trajectory that a fi rm will adopt for IT adoption. Firms are at

very different levels of IT implementation and the IT strategy of many fi rms is not based

on a judicious process improvement strategy.

• Supply Chain Management (SCM) has been ranked as the most critical challenge by

Business Unit (BU) heads. Some of the other challenges include fl uctuations in raw

material costs, meeting customer demands for product quality & timelines and procurement

of raw materials, reiterating the importance of the supply chain.

• The three most critical business processes identifi ed by the fi rms are:

Order receipt and demand managementProduction planning

Order processing

• Quick access to reliable business information is a key bottleneck as the auto component

fi rms possess disparate systems including manual paper based processes that lead to

disconnect amongst the supply chain constituents. This has two major impacts – fi rstly,

it impedes real-time decision making and secondly, it results in creation of ad-hoc sources

of information which further exacerbate the problem of availability of accurate data.

The survey reveals some variance in the criticality of business processes by fi rm size.

While for medium and large fi rms the three processes mentioned above remain the most

critical, for small fi rms, order processing is replaced by material handling.

• BU heads expect IT to play an important role in addressing their business challenges.

The key expectations of the BU heads from IT are meeting customer requirements

for timely delivery and product quality, tracking production costs and quick access to

business information.

• The IT heads have identifi ed the lack of alignment between business goals and IT

initiatives as a major challenge. The IT heads also fi nd it diffi cult to justify the current

levels of investments in any IT initiative, as the time for the complete deployment of the

initiative is quite long as compared to many other business function initiatives and the

impact of these IT initiatives and their effectiveness is also felt after a period of time.

1.2.

3.



• The most common measure of IT effectiveness, amongst the auto componentmanufacturers is increased productivity. While the measure of increased productivity for

IT effectiveness is the most preferred one for both BU heads as well as IT heads of fi rms

of all sizes, it is not entirely clear how it is measured. Increased customer satisfaction, is

also a key measure for evaluating IT effectiveness by auto component manufacturers.

However, in many fi rms, none of the metrics that were mentioned are actually used to

measure the IT effectiveness.

• Broadly, large fi rms are ahead of small and medium fi rms in the adoption of all application

systems and Enterprise Resource Planning (ERP) is the most widely adopted IT application

among auto component fi rms. However, very few fi rms adopt a clutch of applications to

maximise the potential of effi ciency gains and this obviously has an adverse effect on

the effi cacy of IT adoption. In the adoption of networking and groupware systems also,

large fi rms are generally ahead of the small and medium fi rms.

• The fi rms are undertaking IT investments to integrate the fi rm’s production facilities with

the other constituents of the supply chain, so that real-time accurate information on the

inventory, production schedule and materials is available as and when required. In order

to have better access to business information, many auto component fi rms have deployed

intranets which are made available to all the relevant in-house business functions and

enable effective planning and scheduling.

• During the year 2005-06, a majority of the surveyed auto component manufacturers hadtheir annual IT budgets to the tune of Rs.20 lakhs. Hardware forms the major proportion

of the current IT investments. The annual IT budget is expected to increase for a

majority (~90%) of auto component manufacturers in the coming years.

• Hardware maintenance appears to be the most outsourced IT service by the auto

component fi rms. The outsourced activities related to hardware maintenance include

management and functioning of offi ce hardware such as PCs, laptops, etc. In a majority of

auto component manufacturing companies that participated in the survey, less than 10 full

time employees take care of the IT service and support function, across all locations. Most

fi rms on average have 1-5 servers, 50-199 workstations and 10-99 network nodes.

Aligning IT strategy with supply chain capabilities

Firms in the Auto Component Industry grow by producing more complex products that have

higher value add and the situation in India is no different especially with the changes in the

product technology. The Indian Auto Component Industry comprises fi rms ranging from tiny

and small producers to large fi rms who supply to both the OEM and replacement markets.

As a result, there is enormous diversity in the intent and strategies of the fi rms in the auto

component sector.

9



10

What fi rms require is a good understanding of how they can compete by building distinctivecompetitive capabilities. While there is no one answer to building their capabilities through

adoption of world-class practices and IT, there is, however, a trajectory through which fi rms

could look to building capabilities and develop distinctive competitive stances. This trajectory

can be defi ned terms of various stages or Levels with each Level being defi ned by certain

operational characteristics.

• Level I fi rms are essentially producers that perform job work. Level I fi rms receive material

from their customers and they produce to the blueprint provided by them. Most often, these

fi rms are tiny to small in size and turnover, and produce exclusively for their customer

from a single facility. Very often, the process technology employed in these fi rms is old

and the equipment is second-hand and obsolete.• Level II fi rms are also Tier 3 suppliers and posses the same characteristics as Level I

fi rms except that they have more experience in contract manufacturing and have a higher

turnover as compared to their Level I counterparts.

• Level III fi rms are also often small in size but on the verge of entering medium scale.

While Level I & Level II fi rms may be performing machining operations, the Level III

manufacturers produce a part or whole of a component for the industry. Many of these

fi rms may not be dedicated to a single customer and produce similar components for

different customers. As a result, they need to develop systems for maintaining various

designs as well as capabilities to manufacture for varying customer requirements.

• Level IV fi rms are medium size fi rms with multiple plants and customers and are beginningto make the fi rst entry into global supply chains. These manufacturers produce to

order(s) as well as in anticipation of orders. These fi rms possess design capabilities and

are capable of modifying blueprints, which becomes a core competence for becoming

vendors for new customers. Since they supply to many customers, their manufacturing

facilities are amenable to cellular manufacturing layout with single piece fl ow that helps

them to reduce production lead times in a medium volume and medium to high product

variety environment.

• Level V fi rms are upper-medium or large fi rms and supply to the automobile OEMs as well

as in the replacement market and a large majority of these fi rms export and are part of

a global supply chain. They produce to fi rm orders as well as to stock, i.e. in anticipationof orders from customers. They supply many customers from multiple manufacturing

facilities located within the country and sometimes from manufacturing facilities located

outside the country.

The above categorisation of manufacturing capabilit ies defi nes the complexity of tasks that

an auto component fi rm may be able to perform and consequently indicates the nature of IT

solutions required. Low manufacturing capability fi rms are transaction oriented while those

with high capabilities will deploy sophisticated technologies and high-end decision making

tools. Most auto component fi rms (other than the Level V fi rms) are SMEs and are often low



11

in capability. As one moves up the pyramid of capability, the number of fi rms in those higher categories of capabilities become small.

The IT strategy of auto component manufacturers at different Levels could be evolved from

these requirements appropriately. It would be effective to recognise that fi rms at different Levels

have varying needs and therefore it would be useful to design Level specifi c IT strategy.

The key to successful IT interventions lies in recognising that the Indian Auto Component Industry

comprises fi rms that are at different stages of industrial development. As a consequence, the

fi rms possess a heterogeneous mix of IT capabilities, ranging from low-tech with no or little

IT knowledge to very sophisticated, providing IT related services to its own fi rms and others.

The challenge is to design appropriate interventions for these different categories of fi rmswhich are both cost-effective and result oriented. This objective gets further complicated by

the fact that most fi rms in the auto component sector are tiny to small (and sometimes medium

enterprises) whose ability and sometimes desire to invest in building capabilities through IT

interventions is limited. In addition, strong IT systems are required to meet compliance and

regulatory requirements either from governments or customers.

Given that most auto component fi rms are tiny to small fi rms with low IT capabilities, and use

PCs and simple software products, the challenge for large IT fi rms is to devise a service model

that will generate revenues to cover its higher overheads while the challenge for small/mid

sized IT fi rms is to convince auto component fi rms that they can deliver solutions which create

strong capabilities in the auto component fi rms. Perhaps a hub and spoke model can becreated where large IT fi rms could be involved in setting up network platforms for collaboration

between large and small auto component fi rms while the ‘last mile connectivity’ required for

actual execution of IT implementation and after-sales service is done by small IT fi rms using

the large fi rm’s platforms, tools and design capabilities.

Looking ahead

The IT and Auto Component Industry must visualise themselves differently if they are to move

to another stage of industrial development and consequently competitiveness. The goal must

be to create a sector where IT is seen as integral to the competitiveness of the industry andnot as a service often provided by external sources.

Based on the current status of IT adoption in the Indian Auto Component Industry, fi rms may

not have followed the manufacturing capability – IT adoption trajectory and therefore may have

over or under invested in IT. For example, fi rms that did not require ERP may have invested

in ERP and so on. The IT and auto component fi rms will have to collaboratively think about

future IT investments in order to create an environment where IT becomes an integral part

of the manufacturing operation and becomes capable of delivering competitive advantage at

various levels.



Chapter 1: Introduction

1 1 lakh = 0.1 million2 1 crore = 10 million3 Rs 41 = 1US$

12

1. The Indian Auto Component Industry

The automobile industry, one of the most dynamic constituents of India’s manufacturing

sector produces approximately 75 lakh1 vehicles per year with two-wheelers constituting more

than three-fourths of the total number of units. The turnover of the automobile industry is around

Rs 150,000 crores2 and has grown rapidly in recent years (2006-2007). With a total investment

of more than Rs 50,000 crores, the industry provides employment to about 1.3 crore people.

The industry contributes close to 20 per cent of indirect tax revenue and exports more than

Rs 10,000 crores. The automobile industry is a crucial sector for the overall Indian economy

due to its signifi cant linkages with the rest of the economy. Among the forward linkages, the

ones with insurance and oil industry are important. Linkages with components, rubber, steel,

plastics and electronics constitute signifi cant backward linkages. The industry has a largeinternational outsourcing potential, and investments to enhance the sector’s competitiveness

can go a long way in making this possible.

Riding this success, and capitalising on the spiralling demand of domestic automobile OEMs,

the Indian Automobile Components Industry has transformed into one of India’s fastest growing

manufacturing sectors, and is rapidly attaining global competitiveness. The sector comprises

fi rms that range from tiny (with a turnover of less than few lakh rupees) to large (with a turnover

above Rs 500 crores).

India’s competitive advantage in this sector does not come from costs alone, but from its capability

to manufacture the entire range of auto components, such as engine parts, drive, transmissionparts, suspension and braking parts, electrical parts, and body and chassis parts. India’s Top 500

Companies, published by Dun & Bradstreet in 2006, listed 22 auto component manufacturers

as top companies in India with a total turnover of US$ 3 billion (Rs 12,300 crores)3.

According to the Auto Component Manufacturers’ Association (ACMA), the Indian auto

component sector generated sales of about US$ 15 billion (Rs. 61,500 crores) in fi scal year

2006-07, including US$ 2.8 billion (Rs 11,480 crores) worth of exports. The industry has been

experiencing a high growth rate of over twenty per cent during the period 2000-05 and is

expected to grow at a CAGR of 17 per cent over the period 2006-14. Similarly, while growth

rate of exports has been 25 per cent during 2000-05, the exports are expected to grow by a

CAGR of 34 per cent during 2006-14.

While India’s share of the global auto components trade of US$ 185 billion (Rs 758,500 crores)

is only 0.4 per cent currently, India is estimated to have the potential to become one of the

top fi ve auto component economies by 2025. By 2015, the global Auto Component Industry is

potentially expected to source nearly US$ 700 billion (Rs 2,870,000 crores) worth of products

from low-cost countries like India.



13

ACMA forecasts that industry sales will grow to US$ 40 billion (Rs 164,000 crores) by 2016with US$ 20 billion (Rs 82,000 crores) coming from exports. Around 70 per cent of the exports

are sourced by global majors such as General Motors, Ford Motor and DaimlerChrysler who

source critical components, with engine parts making up nearly a third of all exports. A break-

up of the constituency of the exports by the auto component sector is as follows:

• Engine parts (31 per cent)

• Drive transmission and steering parts (19 per cent)

• Body and chassis (12 per cent)

• Suspension and braking parts (12 per cent)

• Equipment (10 per cent)• Electrical parts (9 per cent)

• Others (7 per cent)

According to ACMA, more than a third (36 per cent) of Indian auto component exports head

for Europe, with North America featuring a close second at 26 per cent. The composition of

exports in terms of the proportion of Original Equipment Manufacturer (OEM) and aftermarket

has undergone a sweeping change since the past decade. The ratio of OEM to aftermarket

has changed from 35:65 in the 1990s to 75:25 in 2006.

The quality consciousness of the industry matches global standards now. This is corroborated

by the fact that nine Indian companies in the automotive sector have received the coveted

Deming Prize, which is the largest number outside Japan.

Recognising the potential of the Auto Component Industry, the Government of India has not

only provided an enabling policy framework but also invested substantially to provide state-of-

the-art infrastructure for the industry. Some of the key initiatives include the following:

• Automatic approval for foreign equity investment up to 100 per cent for the manufacture

of auto components.

• Manufacturing and imports in this sector is free from licensing and approvals.

• No local content regulation in the Auto Component Industry.

• A reduction in customs duty – maximum level of 7.5 per cent – on key metallic raw

materials and inputs for the Auto Component Industry.

• Reduction of peak rates of duty from 15 to 12.5 per cent.

• Finalisation of the Automotive Mission Plan (AMP) 2006-16 for making India a preferred

destination for design and manufacture of automobile and automotive components.

• Reduced excise duty on small cars to 16 per cent, a step which is intended to propel India

as a global manufacturing hub for small cars and directly enable the auto component

supplier industry to attain volumes.



14

• Setting up of the National Automotive Testing and R&D Infrastructure Project (NATRIP)at a total cost of US$ 388.5 million for enabling the industry to usher in global standards

of vehicular safety, emission and performance standards.

• Setting up an automobile testing and homologation centre, International Centre for

Automotive Technology (iCAT), at an investment of US$ 15.23 million which would act

as an accredited agency to approve homologation standards for automobiles.

2. IT adoption in the Indian Auto Component Industry

Studies have shown that the adoption of IT based technologies can increase the performance

of fi rms. Despite these advantages, IT adoption among manufacturing fi rms in India is rather low. While policy initiatives to encourage adoption have been explored, it is equally important

to understand the process of IT adoption by fi rms along with the constraints faced by them.

The diversity in the Indian manufacturing sector is very high; apart from differences in fi rm size,

sector specifi c peculiarities can also play a role in the process of IT adoption. Given this huge

diversity, it is important that the right sub-segments are identifi ed for IT diffusion initiatives so

that they have appropriate demonstration and spill-over effects.

The auto component manufacturing sector in India has seen tremendous growth in recent years

and therefore one expects this sector to be ahead of others in IT adoption. An understanding

of IT adoption processes in this sector can be useful in defi ning adoption strategies for this aswell as other sectors. Given the linkages of the Auto Component Industry with other sectors

mentioned earlier in this chapter, faster growth of this sector can have signifi cant ripple effects

in the rest of the economy.

A large majority of the fi rms (over 85 per cent) in the Auto Component Industry are SMEs.

These fi rms serve both the OEM as well as replacement demands and work with a variety of

technologies in areas of machining, electronics, plastics & rubber moulding, welding, casting &

forging, etc. These SMEs also vary considerably in terms of their capabilities depending upon,

often, on the markets that they serve, i.e., exports or domestic and within domestic – national

or regional. Increasing IT penetration in the SME segment of the auto component sector is a

critical enabler for enhancing their competitiveness.

Detailed fi rm level interviews conducted during the study have highlighted that the key business

challenges faced by the auto component manufacturers relate to raw material availability

and their price fl uctuations, gaps in real-time availability of business information and lack of

smoothness in business processes. Once the fi rms develop smooth information channels,

it enables them to track costs as well as delays in the various functional processes of the

enterprise. The study also reveals that supply chain is one of the most critical components of

the auto component business and that it has to be integrated for the timely and orderly fl ow

of material as well as fi nished products.



15

The need of organisations to integrate various functions and processes has driven themto implement ERP, SCM and other similar packages, and as a result, in fi rms that have

implemented IT, there has been a considerable increase in the productivity as well as revenues.

However, very few fi rms adopt a clutch of applications to maximise the potential of effi ciency

gains and this obviously has an adverse effect on the effi cacy of IT adoption. The current study

has also shown that while a large majority of the fi rms in the Auto Component Industry have

invested in IT, these fi rms are not convinced about the effectiveness of these IT investments.

While BU heads expect IT to be a key enabler for them to address their business challenge,

the IT heads believe that the IT investments are often not aligned with the business objectives

and given the long gestation period of IT investments, it becomes diffi cult for them to justify

the IT investments.

3. Study objectives and methodology

Given the qualitative insights discussed in the above section, the key objectives of the study

are to:

• Understand IT deployment and its usage patterns in the various segments of the auto

component fi rms

• Identify stages of IT adoption and relationship between IT adoption and decision domains

(or business processes) for performance improvements

• Evolve an IT adoption strategy for different tiers of the fi rms

This report seeks to address the following issues in order to achieve the above objectives:

• Understand the extent of IT adoption in the auto component sector

Identifi cation of sub-sectoral patterns of adoption within the industry

Postulation of the strategies currently followed by fi rms in adoption of IT

Identifi cation of characteristics of fi rms that adopt IT

Reasons for deployment

Areas of deployment

• Identifi cation of the drivers of IT adoption in the auto component sector

Factors that support adoption of IT

Reasons for non-deployment of IT

• Analysis of adoption within fi rms – region-wise

• Identifi cation of stages of IT implementation based on extent of adoption and its

effective utilisation

• Exploring relationship between adoption, business processes (or decision domains) and

performance of fi rms

• Develop a strategy for the future

1.

2.

3.

4.

5.

1.

2.



16

Imperatives for growthImpediments and ways to overcome them

Linking IT fi rms’ strategies to manufacturing requirements

Future and challenges

The report is based on a very comprehensive national level primary research of the

Indian automobile component manufacturing industry which covered a sample size of 158

(10 qualitative and 148 quantitative) interviews including small, medium and large automobile

component manufacturers across the key automobile manufacturing clusters in Delhi, Mumbai,

Chennai, Pune and Bangalore. The table below shows the detailed segmentation of the sample

base across the 148 quantitative interviews conducted with IT and business unit (BU) heads

across small, medium and large Auto Component Industry fi rms.

1.2.

3.

4.

Break-up of Sample

Region Size of Firm BU Heads IT Heads Total Sample

Delhi

Small 0 8 8

Medium 34 26 60

Large 29 1 30

Mumbai

Small 1 0 1

Medium 2 1 3

Large 5 0 5

Pune

Small 1 3 4

Medium 3 7 10

Large 8 0 8

Chennai

Small 1 2 3

Medium 1 11 12

Large 3 0 3

Bangalore Medium 0 1 1

Total Sample Size 88 60 148

This report is broadly divided into three parts. The fi rst part (Chapter 2) describes in some

detail the status of IT adoption in the Auto Component Industry. The section also highlights

the challenges faced by Business Unit (BU) and IT heads as well as the degree of integration

of different critical business processes. The second part (Chapter 3) links the IT requirements

to different process categories of auto component manufacturers. Given the differential IT

needs at different levels and tiers of the industry, a hierarchy of IT adoption is created. Certain

strategies of IT adoption are then defi ned which can be used by fi rms with different requirements.

The third part (Chapter 4 and 5) contains an action plan for various stakeholders to increase

IT adoption in the auto component fi rms.



As mentioned in the previous chapter, a primary research of 148 auto component fi rms indifferent parts of the country was undertaken to collect information on their business challenges

and IT adoption. Of these, 46 fi rms were small (with a turnover between Rs 20-99 crores),

86 were of medium size (turnover in the range of Rs 100-299 crores) and 16 large (with

turnover between Rs 300-500 crores). In 88 fi rms, business heads were interviewed while in

the remaining 60, information was collected from IT heads. The discussion, in this section is

primarily based on the analysis of this dataset.

1. Challenges faced by business heads

Any investment decision in a fi rm is infl uenced by the challenges that the management faces

and IT related investments are no exception. Apart from maintaining price competitiveness and

meeting customer demand for product quality, availability and volatility in costs of raw material

seem to be the major challenges that business heads in Indian auto component fi rms face

(Figure 1). The cost of raw materials must be strictly controlled as it has a direct impact on the

overall cost of production and therefore competitiveness. Similarly, the procurement and the

timely availability of raw material also pose a concern for the surveyed fi rms as it affects their

ability to meet their customer’s demands within due dates. In addition, fi rms face problems

while responding quickly to the customer demands of consistent product quality within the

agreed delivery time.

Another important business challenge faced by the business heads is quick access to

business information. Apparently, the auto component manufacturers are faced with disparate

systems including manual paper based processes that lead to disconnect amongst the value

chain partners. This disjoint makes it diffi cult to develop and quickly share accurate business

information such as projection of demand and tracking the production schedule and the costs

associated with it.

Interestingly, the availability and the implementation of IT is not seen by the BU heads as a

critical business challenge. Similarly, resistance to the use of these technologies amongst theemployees of the company is also not a critical challenge.

Overall, some of the key components of Supply Chain Management (SCM) have been ranked

as the most critical challenge by business unit (BU) heads. These include fl uctuations in raw

material costs, meeting customer demands for product quality & timelines and procurement

of raw materials, reiterating the importance of the supply chain.

A key question is whether these challenges differ with fi rm characteristics? Table 1 below

provides some interesting insights. A few of these may be noted:

Chapter 2: Business challenges and

current state of IT adoption

17



Figure 1: Challenges faced by Business Unit heads

18

Table 1: Average ranks of challenges faced by fi rms with different characteristics

Challenge Firm Size ForeignCollaboration Export

Small Medium Large Yes No Yes No

Meeting customer demand in product quality 6.44 7.03 6.33 6.14 6.89 6.25 7.92

Meeting customer demand in timeliness 6.20 7.53 4.00 6.32 6.86 6.06 8.50

Diffi culty in estimating demand 7.53 8.43 11.00 9.45 7.59 7.83 8.67

Quick/easy access to critical information 8.24 8.53 5.33 8.50 8.20 8.27 8.29

Maintaining price competitiveness 6.62 6.65 6.67 6.05 6.83 6.61 6.71

Fluctuations in raw material costs 5.27 6.18 7.67 5.68 5.79 6.03 5.04

Ease of procurement of raw material 8.71 8.80 9.00 8.95 8.70 8.86 8.50

Timely availability of raw material for production 8.22 8.73 7.33 7.95 8.58 8.63 7.88

Track/trace production timeliness across manufacturing cycle 7.91 8.75 6.67 8.23 8.26 8.05 8.79

Track/trace production costs across manufactur ing cycle 8.84 7.73 4.67 7.55 8.41 8.59 7.13

High attrition rates among employees 9.49 10.33 11.00 10.23 9.82 10.38 8.71

Training and development of employees 9.84 8.88 9.67 10.09 9.17 9.83 8.25

Availability of good IT technology for business 10.49 8.15 9.33 7.77 9.92 9.09 10.17

Implementing IT technology in business 10.62 9.80 12.67 10.23 10.35 10.13 10.83

Resistance to new IT technology among employees 11.00 9.93 10.00 10.95 10.32 10.45 10.54

Infrastructure bottlenecks 10.56 10.60 14.67 11.91 10.32 10.95 10.08



• The main challenges faced by small and medium sized fi rms are similar-fl uctuationsin raw material costs, delivery of quality products in time and price competitiveness.

For large fi rms, while timeliness of delivery is the most important challenge, other

challenges include tracking of manufacturing costs and easy access to critical information.

The large fi rms seem to have reached a stage of IT adoption where signifi cant decisions

are taken on the basis of available real-time data, making quick access to information

and tracking of costs critical. The other important feature refl ected in Table 1 is that there

is more heterogeneity of challenges among SMEs than among large fi rms; the average

ranks of the most important (top 5) challenges show a much higher consistency of

responses among large fi rms than among SMEs. On average, non-availability of good

IT technology for business is felt more by medium fi rms, followed by large ones and theleast by small ones.

• Auto component fi rms with or without foreign collaboration face similar major (top 4-5)

challenges. But there are other interesting differences. Availability of good IT solutions

for business is more of a challenge for fi rms with foreign collaboration than for the ones

without it. Presumably, the former are looking for such technologies more actively. In a

similar vein, tracking production costs is more of a concern for collaborating fi rms, while

estimation of demand is more challenging for fi rms without foreign collaboration.

• Dealing with fl uctuations in raw material costs is the most important challenge for both

exporting and non-exporting fi rms but it is somewhat more critical for the latter. Timeliness

of delivery and product quality on average are more critical for exporting fi rms while

tracking production costs is more of an issue for non-exporting fi rms.

Given these business challenges, what do BU heads expect from IT?

Figure 2: Expectations of Business Unit heads from IT

19



Figure 2 suggests that BU heads expect IT to play an important role in addressing most of their business challenges. The key expectations of the BU heads from IT are meeting customer

requirements for timely delivery and product quality, tracking production costs and quick

access to business information. Interestingly, several of these expectations are inter-linked.

For example, maintaining price competitiveness is an important expectation which can partly

be achieved by reducing production costs (or improving operational effi ciency), which in turn

requires tracking these costs and quick access to real-time business information.

2. Challenges faced by IT heads

The expectations of the BU heads in a fi rm will not be adequately met if the IT function of the

fi rm is not able to implement IT initiatives appropriately. But IT heads face their own challenges

in IT implementation. The survey responses (Figure 3) reveal that the most critical challenge

faced by the IT heads is the lack of alignment between business goals and IT initiatives.

At times, it also becomes diffi cult for the IT head to justify the current levels of investments

in any IT initiative, as the time for the complete deployment of the initiative is quite long

compared to many other business function initiatives. Besides, the impact of these IT initiatives

and their effectiveness is also felt after a period of time. Linked to this is the diffi culty faced

by the IT heads of proving the value of IT. While some IT spending lends itself to somewhat

Figure 3: Challenges faced by IT heads

20



straightforward cost-benefi t analysis, most IT investments do not. Typically, new IT investmentssuch as implementation of supply chain management applications are made in conjunction with

non-IT investments, such as new process design and training. The combined inputs of the

two create measurable value, but allocation of value created by the two types of investment is

virtually impossible. Studies have shown that in order to maximise the impact of IT investment,

it needs to be combined effectively with other elements of the business architecture including

organisational change, ability of managers to use the knowledge made available through IT

and the functional knowledge of business among IT related employees.

3. Factors infl uencing IT adoption

In a situation where the impact of IT investments cannot be easily seen, what factors infl uence

IT adoption by the auto component manufacturers and how is the effectiveness of such

investments measured? Evidently, the need of having better control over the inventory is the

most important reason to implement IT systems in a fi rm (Figure 4). This is followed by the

need to improve business process fl ows and increase operational effi ciency in the processes

because streamlined business process fl ows improve delivery time and reduce bottlenecks.

These processes may be internal (manufacturing or operational) or external (processes related

to suppliers and customers). This business process integration can be achieved by a variety

of technology solutions, some of which can be partial while others can be comprehensive and

integrated. The impact would actually depend on the nature of solutions used. This issue isdiscussed later in the report.

Figure 4: Factors infl uencing IT adoption

21



4. Measuring IT adoption effectiveness

The most common measure of IT effectiveness, amongst the auto component manufacturers

is increased productivity (Figures 5a and 5b). While the measure of increased productivity for

IT effectiveness is the most preferred choice for both BU heads as well as IT heads of fi rms

of all sizes, it is not entirely clear as to how it is measured. It may be recalled that one of the

key expectations of business heads from IT is to meet the customer requirements of product

quality and timelines. This results in increased customer satisfaction, which is also a key

measure for evaluating IT effectiveness by auto component manufacturers.

Interestingly, in many fi rms, none of the measures that were mentioned are actually used to

fi nd out the IT effectiveness. The primary reason probably is that there are many IT related

investments for which a cost-benefi t analysis is not possible. Similarly, calculating the

value of ongoing IT operations spending on hardware, system and software is even more

diffi cult, because the discrete investments made in IT become a part of the broader business

environment after a period of time.

Figure 5a: Measuring IT effectiveness by size of fi rm

22



5. Criticality of business processesAnother way to approach issues of IT adoption in a fi rm is to identify processes that are

critical to the fi rm and then ascertain how IT can enhance the effi ciency of these processes.

Figure 6 illustrates some of the most critical business processes identifi ed by the auto

component manufacturers. The top three critical processes are:

Order receipt and demand management

Production planning and scheduling

Order processing

The survey reveals some variance in the criticality of business processes by fi rm size. While

for medium and large fi rms, the three processes mentioned above remain the most critical,

for small fi rms, order processing is replaced by material handling (Figure 7). Interestingly, the

three least critical processes for small and medium fi rms are the same – invoice generation/

payment collection, traceability compliance requirements and bank reconciliation. For large

fi rms, however, bank reconciliation is the only process that is least critical alongwith customer

service management and HR & payroll systems. Most of these fi rms have already gone through

their IT implementation for these processes and hence don’t fi nd it very critical at this juncture.

The survey provides some interesting insights on how smoothly do these critical processes

work in the auto component fi rms.

1.

2.

3.

Figure 5b: Measuring IT effectiveness by BU and IT heads

23



Figure 6: Critical business processes across fi rms

Figure 7: Criticality of processes by size of fi rm

24



Table 2: Smoothness of critical business processes

ProcessPercentage of fi rms reporting level of smoothness

High Medium Average Low Poor

A. Order receipt and Demand management

Capturing orders in least time 26 53 14 5 2

Ensure and manage supply terms with customers 34 36 25 3 1

Analyse impact of demand variation and take

decision in the interest of supply chain 17 45 26 10 1

B. Order processing and production planning

Recording, sorting and prioritisation of orders 49 25 19 6 1

Processing orders with respect to checks and constraints 28 41 22 7 2

C. Material scheduling

Plan for material requirements at various levels effi ciently

fl oor using Kanban24 42 26 8 0

Material scheduling including WIP etc. in the shop 22 39 26 8 5

Vendor relationship and purchase terms 22 42 26 8 5

Manage sub-contracting 31 38 25 6 0

D. Accounting

Track profi t margins to take pre-emptive corrective action 22 38 17 16 7

Real-time visibility into actual vs. real budget to take

corrective action11 35 30 14 9

Annual 3-months rolling plan to manage

budgeting against actual13 45 25 11 5

Sample: Business Heads - 88

Order receipt and Demand management

This process combines receiving the orders, providing a timeline for the delivery of the fi nished

products and the projection of the demand, a majority of auto component manufacturers have

extremely smooth processes for receiving orders (Table 2). This is achieved without manual

intervention, by the use of IT as in most of the companies, this process is fully or partially IT

enabled (Table 3). The auto component manufacturers are also able to effectively manage the

supply terms with the customers as the system accepts orders through the extranet, reducing the

time taken to receive the orders considerably. However, the ability of the companies to project

and analyse the impact of demand variation and to manage the supply chain accordingly is not

smooth enough (Table 2). Similarly, the validation of orders in auto component manufacturers

is also not IT enabled in a signifi cant proportion of the fi rms.

25



Table 3: IT enablement of critical business processes

Process Percentage of Firms

FullyEnabled

PartiallyEnabled

Not ITEnabled

A. Order receipt and Demand management

System to accept orders from OEMs(without manual intervention) through extranet

20 69 11

Automatic validation of orders 29 43 29

B. Order processing

Ability to confi rm orders online 24 62 14

Seamless integration with production planning,scheduling and order receipt

28 55 17

Capability of information exchange withOEMs in case of order processing variation

17 69 14

C. Production planning and scheduling

Production plan visibility to self and OEM at various horizons 24 64 12

Day-wise, shop/job-wise scheduling for shorter horizons 27 61 12

Monitoring system for execution w.r.t. plan,manage changes and measure variances from plan

24 58 18

D. Material scheduling

Well defi ned error-free bill of material (BOM) structures 43 48 10

Vendor wise specifi c material requirements 33 57 10

Established electronic links with suppliers 29 43 29

Capability to share requirements with OEMsfor collective buying/electronic auctions

29 43 29

E. Accounting

Budgeting and variance monitoring system 29 67 4

Ability to carry out accounting based on theoperational system from other related systems

42 42 17

Ability to generate fi nancial systems online (B/S, P&L) 29 63 8

Sample: IT Heads – 60

26

Order processing

The auto component manufacturers prioritise orders and schedule production based upon the

fi rm’s shop fl oor capacity and customer delivery dates. A majority of auto component fi rms

have smooth processes related to order processing, wherein orders are effi ciently recorded,

sorted and prioritised (Table 2). These processes consume less time because of IT enablement

as the orders are received and confi rmed online in most organisations (Table 3). Once the



orders are received, they are checked against the constraints related to production, as theorder processing system is integrated with the production planning and scheduling facility

through IT in most fi rms (Table 3). The ability to evaluate and check the orders and to provide

a feedback to the OEMs, especially in case of any changes in the plan, is IT enabled (at least

partially) in a large majority of fi rms.

Production planning and scheduling

As indicated earlier, production planning is one of the most critical processes for the auto

component manufacturers. Earning and retaining the business of a larger number of customers

underscores the need for suppliers to effectively manage the production schedules to reduce

delays in delivery to the customers. Additionally, suppliers must be able to manage a regular

fl ow of changes to production schedules and quantities by having a robust production

planning system. Through IT adoption, a majority of auto component manufacturers make

the production plan visible at various horizons internally as well as to the customer. Similarly,

day-wise shop / job-wise scheduling for shorter horizons are also IT enabled by most of the

auto component manufacturers (Table 3).

Overall, while IT enablement of critical processes has resulted in smoothening of these

processes, the fact remains that a large proportion of fi rms have not yet achieved full

IT enablement. In fact, for several processes like automatic validation of orders, electroniclinkages with suppliers, etc. more than 25 per cent fi rms do not have any IT support. There is

tremendous scope, for the auto component manufacturing fi rms to increase IT adoption.

6. IT adoption – implemented applications/systems

Enterprise Resource Planning (ERP) is the most widely adopted IT application among auto

component fi rms. Some effort is also being undertaken to integrate the fi rm’s production

facilities with the other constituents of the supply chain, so that real-time accurate information

on the inventory, production schedule and materials is available as and when required. In order

to have better access to business information, many auto component fi rms have deployed

intranets which are made available to all the relevant in-house business functions and enable

effective planning and scheduling. A signifi cant proportion of fi rms that were surveyed have also

implemented wireless LANs to achieve this, whereas large organisations have also deployed

Virtual Private Networks (Figures 8-10). Broadly, large fi rms are ahead of small and medium

fi rms in the adoption of all application systems except Customer Relationship Management

(CRM) and Sales Force Automation (SFA) where adoption rates are similar. In the adoption

of networking and groupware systems also, large fi rms are generally ahead of the small and

medium fi rms.

27



Figure 8: Adoption of IT applications/systems

Figure 9: Adoption of IT applications/systems by fi rm size

28



One interesting insight that emerges from a more detailed analysis of the IT adoption data

is that very few fi rms adopt a clutch of applications to maximise the potential of effi ciency

gains. As shown in Table 4, only about 34 per cent fi rms having ERP also adopt SCM and the

proportion of ERP based fi rms adopting CRM is even lower (30 per cent). Similarly, Table 5

shows that only about 28 per cent ERP adopters integrate plants to the head offi ce. In fact,

only about 3 per cent fi rms combine CRM, SCM and IT enabled integration of plant systems

with ERP. This obviously has an adverse effect on the effi cacy of IT adoption. It also shows

that the surveyed sample comprises fi rms that are at very different levels of implementation

of IT and that the IT strategy of many fi rms is not based on a judicious process improvement

strategy. For instance, implementing a SCM module without integrating the manufacturing

facilities to the fi rm’s headquarter or with suppliers would not yield commensurate returns

on investment in an SCM application package, except in the exceptional situation of single

plant/supplier fi rms.

Figure 10: Adoption of IT infrastructure by size

29



Table 4: Percentage of fi rms adopting different applications and networking systems

ERP SCM CRM SFA EL IT BWIDTH LANS VPNS SAN/NAS

INTRANET GPWARE

ERP (47) 100.0 34.0 29.8 8.5 31.9 27.7 31.9 40.4 12.8 87.2 44.7 23.4

SCM (24) 66.7 100.0 41.7 25.0 29.2 29.2 45.8 45.8 16.7 75.0 41.7 29.2

CRM (19) 73.7 126.3 100.0 26.3 52.6 36.8 47.4 52.6 15.8 68.4 68.4 31.6

SFA (10) 40.0 60.0 50.0 100.0 40.0 30.0 40.0 50.0 10.0 70.0 70.0 20.0

EL (22) 68.2 31.8 45.5 18.2 100.0 45.5 50.0 54.6 13.6 81.8 59.1 36.4

IT (22) 59.1 31.8 31.8 13.6 45.5 100.0 40.9 40.9 18.2 81.8 40.9 22.7

BWIDTH (26) 57.7 42.3 34.6 15.4 42.3 34.6 100.0 46.2 15.4 73.1 53.9 34.6

LANS (30) 63.3 36.7 33.3 16.7 40.0 30.0 40.0 100.0 16.7 83.3 60.0 36.7

VPNS (8) 75.0 50.0 37.5 12.5 37.5 50.0 50.0 62.5 100.0 50.0 62.5 50.0

SAN/NAS (76) 53.9 23.7 17.1 9.2 23.7 23.7 25.00 32.9 5.3 100.0 31.6 14.5

INTRANET (55) 38.2 18.2 23.6 12.7 23.6 16.4 25.5 32.7 9.1 43.6 100.0 21.8

GPWARE (15) 73.3 46.7 40.0 13.3 53.3 33.3 60.0 73.3 26.7 73.3 80.0 100.0

ERP – Enterprise Resource Planning; SCM – Supply Chain Management; CRM – Customer Relationship Management;SFA – Sales Force Automation; EL – Electronic Linkages with customers & suppliers; IT – Integrating plants/factoriesIT systems to the corporate office IT systems on the internet; BWIDTH – Bandwidth up-gradation for data networking;LANS – Implementing wireless LANs; VPN – Deploying Virtual Private Networks; SAN/NAS – Enhancing/adding network storagecapabilities; INTRANET – Intranet deployment and expansion; GPWARE – Deploying and expanding groupware/workfl ow applications(lotus notes, project management)

30

Table 5: Combinations of selected applications adopted by sample fi rms – mutually exclusive cases

Combinations of select applications adopted Frequency %

ERP, SCM, CRM and IT (Integration of plants to HO) 3 3.4

ERP, SCM, CRM but not IT (Integration of plants to HO) 5 5.7

ERP, SCM and IT but no CRM 1 1.1

ERP, CRM and IT but no SCM 1 1.1

SCM, CRM and IT but no ERP 1 1.1

ERP and SCM but not CRM and IT 7 8.0

ERP and IT but not SCM and CRM 8 9.1

CRM and IT but not ERP and SCM 2 2.3

ERP and CRM but not SCM and IT 5 5.7SCM and IT but not ERP and CRM 2 2.3

SCM and CRM but not ERP and IT 1 1.1

Only ERP 17 19.3

Only SCM 4 4.5

Only CRM 1 1.1

Only IT 4 4.5

None of ERP, SCM, CRM, and IT 26 29.5

Total 88 100.0



Figure 11: Future investment plans for enterprise application systems

Will the future IT adoption plans help auto component fi rms reap synergies across variousIT applications? Including the investment plans of the next one to two years, a large majority

of fi rms would like to implement ERP and SCM packages and would like to integrate plants

with the head offi ce through IT enabled systems (Figure 11). Evidently, adoption of these three

applications is a priority for the companies which have not yet implemented them. CRM and

SCM implementation may only pick up in the next fi ve years. This is particularly true for CRM.

Figure 12 summarises the main highlights of IT related investment plans for both applications

and networking systems for fi rms of different sizes. Upgrading groupware, CRM and upgrading

bandwidth are on top of the priority list. These investments may eventually result in some

synergies being reaped.

31



Figure 12: A perspective for future plans by size of company for IT adoption

32

7. IT budgets

During the year 2005-06, a majority of auto component manufacturers that were surveyed had

their annual IT budgets to the tune of Rs 20 lakhs. Hardware maintenance forms the major

proportion of the current IT investments for the auto component manufacturers (Figure 13). This

component includes the expansion of intranet to integrate the various in-house functions for

increasing effi ciency, as well as the upgradation of bandwidth for data networking to increase

the sharing of real-time business information between the auto component manufacturers, their

suppliers as well as customers. Signifi cant investments were made by the auto component

manufacturers, related to the purchase of new hardware.

The investments made by the auto component manufacturers in terms of software include

purchase of new software/applications as well as the software maintenance cost. As noted

earlier, software application packages such as ERP and SCM have been implemented by

a signifi cant proportion of auto component manufacturers (perhaps the larger ones in the

surveyed sample). The solution cost for these software packages includes the license cost,

maintenance and up gradation cost as well as the cost of training and consulting.



Figure 13: Annual IT budget

33

The annual IT budget is expected to increase for a majority (90 per cent) of auto component

manufacturers in the coming year. The signifi cant contributors to this increase are expected

to be:

Branded hardware

Vertical specifi c applications

Upgradation of the networking facilities such as wireless LANs, bandwidth for data

networking as well as implementation of Virtual Private Networks (VPN)

Implementation and upgradation of enterprise application software packages such

as SCM and CRM

8. IT workforce and outsourcing

In a majority of auto component manufacturing companies that participated in the survey, less

than 10 full time employees take care of the IT service and support function, across all locations.

(In Figure 14, the numbers indicate total number of full time employees across all locations).

The distribution of fi rms by number of servers, workstation and nodes is provided in Figure 15.

Most fi rms on average have 1-5 servers, 50-199 workstations and 10-99 network nodes.

1.

2.

3.

4.



34

Figure 14: Full-time employees across locations handling IT service and support

Figure 15: IT infrastructure in auto component fi rms

Outsourcing offers a wide range of potential advantages. Many auto component fi rms have

implemented or are considering outsourcing various functions within IT. Outsourcing can provide

companies cost savings for transactional work, particularly if sourced to lower-cost vendors.

It can improve effectiveness as outsourcing companies have talent, methods and content that

can be leveraged. As illustrated by Figure 16, hardware maintenance appears to be the most

outsourced IT service by the auto component fi rms.



35

Figure 16: Outsourcing of IT services by auto component fi rms

The outsourced activities related to hardware maintenance include management and functioning

of offi ce hardware such as PCs, laptops, etc. Another important IT service outsourced by the

auto component manufacturers is software maintenance. This includes the implementation and

up gradation costs of the software packages such as the enterprise application systems like

ERP, SCM and CRM. These services are being outsourced to external vendors, who study the

internal processes, implement software modules as per the requirement, train the employees

and also upgrade the software whenever needed.

9. Key features of IT adoption in auto component fi rms

Raw material price fl uctuations and maintaining price competitiveness fi gure as major

challenges for BU heads in auto component fi rms. IT heads do not seem to perceive their

function as an integral part of organisation goals and fi nd it diffi cult to prove the value of IT

in their companies. Despite this perception, BU heads do expect IT to be a strong enabler

to meet changing customer requirements, track production costs and gain access to critical

business information for better decision making.

While the larger companies are more positively disposed towards IT solutions (constant

upgradation, branded IT solutions, etc), the small ones are trying to get their basic

IT infrastructure in place.



36

The responses of the survey suggest that key driver to increase IT adoption is streamlining of processes. The top fi ve key business processes are as follows:

Order receipt and demand management

Production planning

Order processing

Material scheduling

Accounting

While the basic procedures with respect to order receipts and processing seem to be running

smoothly, a need is felt by the BU heads for real-time visibility of certain key information. ERP

systems have either been implemented or are on the short-term IT investment horizon of mostfi rms. The need for real-time data capture, applications that cater to shop fl oor operations and

those having a greater focus the key business processes defi ned above have driven the advent

of PLCs, shop fl oor automation applications and Manufacturing Execution Systems (MES).

As fi rms expand their IT application portfolio and move to an automated real-time information

system, these are likely to gain in popularity.

Most fi rms seem to have planned their IT deployment only in the short run. There are very

few companies with a concrete long-term plan for IT deployment. Outsourcing is a familiar

option as a majority of auto component manufacturers have outsourced IT functions such as

hardware maintenance and software maintenance.

The fi ndings of this survey reveal that different fi rms appear to be devising differing strategies

for IT adoption and size of the fi rm seems to be defi ning the trajectory that a fi rm will adopt

for IT adoption. The next section of the report characterises these different types of fi rms in

the auto component manufacturing sector and maps the supply chain decisions (including the

manufacturing and distribution processes) they seem to be facing. Once the fi rms understand

these key manufacturing processes, they could design their strategy appropriately to add value

through IT investments.

1.

2.

3.

4.

5.



37

Chapter 3: Mapping supply chain strategies

for auto component fi rms

The auto component manufacturers in India come in a variety of sizes – mostly micro, small andmid-size and a few large ones. While the micro and small fi rms may be struggling to get their

products in the replacement markets, the large fi rms are looking towards developing products

for the automobile OEMs. Therefore their capabilities and complexities vary considerably.

This section describes the linkage between various capability stages at which these differently

sized fi rms are and the nature of managerial practices they require to succeed. The next section

of the report outlines the IT strategy required to support implementation of these manufacturing

practices in the different types of auto component fi rms.

1. Linking capability levels to manufacturing practices

Firms in the Auto Component Industry, globally, grow by producing more complex products

that have higher value add. The situation in India is no different, especially with the changes in

the product technology. However, the auto component supply chain comprises tiny and small

producers that supply both to the suppliers of OEMs as well as in the replacement market.

As a result, there is enormous diversity in the intent and strategies of the fi rms in the auto

component sector. While operational excellence is acknowledged as the key requirement

for winning orders, the state of fi rms on this dimension varies tremendously. Often, bigger

fi rms compete on their supplier ’s ability to generate low-cost operation through low wages to

low skilled operators, less robust equipment, evasion of cost of utilities, etc. and not through

effective manufacturing. This, however, turns out to be a temporal advantage that takes the

focus away from operations to clever accounting practices.

What fi rms require is a good understanding of how they can compete by building distinct

competitive capabilities. There is no one answer to building their capabilities through adoption

of world-class practices and IT. However there is a trajectory through which fi rms in this sector

could look to building capabilities and develop distinct competitive stances. This trajectory

can be defi ned in terms of various stages or Levels with each Level being defi ned by certain

operational characteristics. The competitiveness of a fi rm, at an operational Level, is a function

of the following:

Operational characteristics of the Level to which the fi rms belong

Nature of managerial practices that the fi rms have implemented

Extent of adoption of IT to support the improvements in decision making

Table 6 describes how fi rms at different Levels of the supply chain can build up their

manufacturing effectiveness.

1.

2.

3.



38

Manufacturer Category Manufacturer Characteristics

ManufacturingManagement

Distribution Process

Level I(Tier 3 Supplier)

• Order processed by thehigher tier

• Production planning bythe customer

• Blueprint provided bythe customer

• Dedicated supplier • Single plant

• Housekeeping – 5S• Quality inspection –

100% OK plant dispatch• Traceability of materials/

orders to batches

• Pick-up by the customer • Local delivery

Level Ii(Tier 3 Supplier)


• Production planning bythe customer

• Blueprint provided by

the customer • Dedicated supplier • Single plant

• Process analysis for capacity evaluation

• Establish time standards(industrial engineering)

• Establish process

capabilities• Preventive maintenance


Level III(Tier 2 Supplier)


• Production planning bycustomers

• Blueprint provided bythe customer

• Dedicated capacity for several customers

• Single plant

• ISO certifi cation• Value engineering• Quality control• WIP control• Standard containers,

poke yoke• Design support• Costing• Supervisor training


Level IV(Tier 2 Supplier)

• Order processing &production planning by

the manufacturer • Forecasting orders• Modifi cation to

blueprints• Multiple customers• Multiple plants• Global delivery

• Cellular layout• Single piece fl ow

• Multiple machineoperators• Statistical process

control• Total productive

maintenance (initiation)• Environment quality• Design department

– multiple requirements,design modifi cations &CAD drawings

• Operator training

• Delivery to customer locations

• National vendors• Require inventorymanagement

Level V(Tier 1 Supplier)

• Order processing &production planning bythe manufacturer

• Forecasting orders• Own designs &

blueprints• Multiple customers• Multiple plants• JIT or pull delivery• Part of global supply

chains

• Total productivemaintenance

• Lean manufacturing• JIT or pull production• Quick response• Environment quality

– QS• Strong design

department – libraryor designs, proprietarydesigns, IPR on designs,prototype laboratory,CAD/CAM systems

• Extensive operator training

• National supply chain• JIT delivery• Need to manage national

warehouses• Logistics function• OEM & replacement

markets• Warranty & product

recall systems• Strong supply chain

coordination

Table 6: Map of the manufacturing & distribution processes for different categories of auto component fi rms



39

There are two categories of Tier-3 suppliers differentiated by the extent of shop fl oor interventionthat they may have undertaken to improve their processes. Firms at Level I represent one

category of Tier-3 suppliers – essentially producers that perform job work. Level I fi rms receive

material from their customers (typically, Tier-2 suppliers) and they produce to the blueprint

provided by them. Most often, these are tiny to small in size and turnover and produce

exclusively for their customer from a single facility. The operators in these fi rms are often

migrant workers who have experience in farms to which they return during cropping seasons.

These types of producers require housekeeping skills for managing Work-in-Progress (WIP)

or fi nished products, raw material as well as toolings on the shop fl oor. Good inspection and

re-work capabilities help them maintain a high dispatch quality to their customers. Very often,

the process technology employed in these fi rms is old and the equipment is second hand and

obsolete. The customers deliver the raw material to the manufacturing premises of these fi rms.

The fi nished products are either picked up by the customers or the fi rms deliver the fi nished

products to the customer locally.

Level II fi rms are also Tier-3 suppliers and possess the same characteristics as Level I fi rms

except that they have more experience in contract manufacturing and are slightly larger in

turnover as compared to their Level I counterparts. The Level II fi rms also typically perform

some key operations hence may often be the sole supplier for their customer. Consequently, the

customer has a need to control their (i.e., Level II fi rm’s) operations more tightly both in terms

of quality and costs as compared to the Level I fi rms. Therefore, performing process capability

studies on the manufacturing machines of Level II is crucial to control quality. The Level II

fi rms struggle to establish time standards which become essential to estimate capacity and

plan for production. These fi rms tend to expand slowly with similar kinds of technologies and

look for preventive maintenance to maintain the health of their equipment in order to increase

the equipments availability for their customers. Since these fi rms might be the sole suppliers

to their customers, the uptime of machines plays an important role in their customer’s ability

to meet their delivery schedules. The Level II fi rms are also increasingly being asked by their

customers to keep records of their production batches and be able to trace the raw material

and intermediate products used in specifi c production batches that make up an order.

Level III auto component fi rms are essentially Tier-2 suppliers in the automotive component

supply chain. While the Tier-3 supplier may be performing machining operations, the

Level III manufacturers produce a part or whole of a component for the industry. Level III fi rms

also receive blueprints from their customers and are similar to Level II fi rms in terms of the

order they may be processing for their customers. Many of these fi rms may not be dedicated

to a single customer and produce similar components for different customers. As a result, they

need to develop systems for maintaining various designs as well as capabilities to manufacture

varying requirements. These fi rms are also often small in size but on the verge of entering



40

medium scale. To make this transition, Level III fi rms need to lay the foundations of competitivemanufacturing facilities. Shop fl oor improvement practices like value engineering, poke yoke,

etc. are implemented in the manufacturing operations. The fi rms also get ISO certifi ed or at

least get ready for an ISO certifi cation. The customers of Level III fi rms demand better quality

and a time bound reduction in cost from the suppliers. Consequently, the need for controlling

WIP and having a proper costing system becomes important. These fi rms will employ

supervisors with experience and perhaps formal education for their shop fl oor operations.

The need to coordinate across orders from various customers will require their employees

to undergo training in shop fl oor planning and scheduling. The fi nished product distribution

processes remain the same as for Level I and Level II fi rms.

The world becomes very competitive and demanding for Level IV suppliers and of course,

more remunerative as well. These Tier-2 suppliers are medium size fi rms with multiple plants

and customers and make the fi rst entry into global supply chains. The Level IV manufacturers

make to order(s) as well as in anticipation of orders. Some fi rms produce to stock and

deliver just-in-time to national and international customers. These producers are capable of

modifying blueprints which becomes their source of becoming vendors for new customers.

Since they supply to many customers, their manufacturing facilities are amenable to cellular

manufacturing layout with single piece fl ow. This helps them reduce production lead times in

a medium volume and medium to high product variety environment. These fi rms are ready to

implement various productivity enhancing programmes that are aimed at increasing availabilityof equipment through TPM (Total Productive Maintenance), better control of processes on the

shop fl oor through SQC (Statistical Quality Control), higher operator effi ciency (through multiple

machine operations by each operator) and enhanced operator training on manufacturing

management aspects. These fi rms also start focusing on environmental issues within and

outside the plant.

Level IV suppliers grow to become Tier-1 suppliers. Design and production engineering become

very crucial in the ability of these fi rms to service multiple customers. Better tools like CAD

systems are needed as there are skilled engineers and supervisors. These fi rms are vendors

to national and international fi rms and many have warehouses for servicing their customers.

Inventory management, both for raw material procurement as well as fi nished goods is an

important area of concern.

Tier-1 suppliers can also be categorised as Level V fi rms. They supply to the automobile OEMs

as well as in the replacement market. Most of the Level V manufacturers are upper-medium

or large fi rms and have a national network – a large majority of these fi rms export and are

part of a global supply chain. They produce to fi rm orders as well as stock, .i.e. in anticipation

of orders from customers. This requires the Level V fi rms to develop capabilities which

enable accurate demand forecasting to remain profi table. In the Indian context, many of the



41

Level V fi rms produce to a customer’s requirement but they are expected to develop newer designs and their own blueprints, thereby requiring strong design and prototyping capabilities.

Strong IPR regimes help them generate revenue from proprietary product and process

technologies. They also diversify their business around these new technologies. They supply

to many customers from multiple manufacturing facilities located within the country and

sometimes from manufacturing facilities located outside the country. Often their customers

require them to deliver just-in-time which in many cases they do by establishing a warehouse

closer to the customer’s manufacturing facilities. Some even re-locate their plants closer to

the customer’s assembly location. On the shop fl oor, Level V fi rms implement lean production

systems and strengthen the availability of equipment through TPM. They also establish

separate production lines for small orders with variety and large standard orders. Operatorsare trained very extensively to make decisions based on data available from the shop fl oor.

Firms that address environmental concerns have a better chance of winning orders globally.

Level V fi rms establish an extensive national distribution network through which they supply

to the replacement markets. Most serve OEM customers directly from their manufacturing

facilities. Strong supply chain management and logistics processes are required to manage

these diverse linkages between suppliers, producers and customers. These fi rms, however,

have to manage the warranty process across the supply chain and have to have systems that

will enable swift respones in case of any product recall. Moreover, such warranty systems

have to be linked to product/process design as well as the purchase systems so as to provide

a feedback in order to make the product robust. These fi rms are supposed to have strong

quality systems where the focus is on enhancing process capabilities.

Through an effective deployment of IT, an auto component fi rm has the potential to come up

with better decisions to address operational challenges across various processes which in

turn improves performance and meets the customer’s requirement to satisfaction. Whether the

IT solutions will be able to help manage these disparate but inter-linked process will depend

on whether the IT strategy can be aligned into a cogent trajectory for different types of fi rms.

The next section of the report discusses this aspect in more detail.



42

Chapter 4: Evolving an IT strategy for different levels

Developing an IT strategy which is aligned to the manufacturing requirements of theauto component sector requires an understanding of the needs of fi rms at each Level. Only

then can effective IT interventions be designed which can help these fi rms become competitive

and grow.

1. Aligning IT strategy with manufacturing capabilities

Table 6 in chapter three highlights the capability continuum of the auto component manufacturing

fi rms and the consequent challenges faced by IT fi rms in effectively playing a role to build the

IT capabilities of auto component fi rms. The key to successful IT interventions lies in recognising

that the Indian Auto Component Industry comprises fi rms that are at different stages of industrial

development. As a consequence, the fi rms possess a heterogeneous mix of IT capabilities,

ranging from low-tech with no or little IT knowledge to very sophisticated, providing IT related

services to its own fi rms and others. The challenge is to design appropriate interventions

for these different categories of fi rms which are both cost-effective and result oriented.

This objective gets further complicated by the fact that most fi rms in the auto component sector

are tiny to small (and sometimes medium enterprises) whose ability and sometimes desire to

invest in building capabilities through IT interventions is limited. In addition, strong IT systems

are required to meet compliance and regulatory requirements either from governments or

customers. Such IT systems support the related documentation, traceability, replicability, and

for making involved decision making. Obviously, it becomes a public policy challenge, as well,

to develop an IT driven smart auto component sector.

The table takes into account the manufacturing processes and managerial decision making

environment in various category of fi rms. It highlights the nature of decision making that could

be enhanced with IT enablement as well as establishes a requirement for IT fi rms to develop

new products and services for the auto component fi rms. The IT strategy of auto component

manufacturers at different Levels could be evolved from these requirements appropriately.

It would be effective to recognise that fi rms at different Levels have varying needs and therefore

it would be useful to design Level-specifi c IT strategy.

Many IT projects fail when there is a mismatch between the needs of the manufacturing

customer and what the IT fi rm offers and this is more pronounced in small auto component

fi rms which lead to further hesitation in looking at IT as a solution.

Level I and II fi rms are very basic in terms of their IT requirements – mostly transaction oriented

and that too of the very rudimentary kind – one that supports tracking of information related

to quality and some in accounts and perhaps human resources.



43

Role of IT IT Requirements (Software) IT Requirements (Hardware) IT Strategy

Level I Laying the foundat ion • Traceabi li ty

• Capture external

transactions

• Stand alone PC

• Mobile application

• Laying the foundation

Level I I Support qual ity • Error f ree Bil l of Material

• Auto-validation of orders

• Inform status of orders to

customers – shop loading

• Invoice generation

• Maintenance analysis

• Basic statistics tools for QC

• Stand alone PC & email

• Mobile application

• Linkage with external

environment

• Ensuring accuracy in

data

Level I II Support planning • Order receipt systems

• Statistics tools for QC

• Company based localtransactional systems

• Production planning, daily

schedules, generating

production visibility

• Variance monitoring

• Product costing

• System for material release

to vendors

• System for payment to

vendors

• Error free information on

inventory

• Limited capability local

network

• Network dial in bymanufacturer into

customer’s system

• Ensure robust

planning

• Functional support

Level IV Support reduction in costs

& productivity gains

• Forecasting model &

system

• Design Decision Support

System/Engineering design

system

• Company based local

system to support DSS

• Real-time scheduling

system

• HR & payroll systems

• Automated capture of shop

fl oor data

• Financial accounting

including Bank

reconciliation

• LAN

• IT system to integrate

plants

• Intranet deployment

• Few high-end engineering

work stations

• PLC based systems

• Company-wide

training on IT tools

• Support improved

decision making

LEVEL V IT based competitive

advantage

• Customer response

gathering systems

• ERP

• SCM

• Electronic communication

link with vendors• Share shop fl oor loading

with buyer

• Manufacturing by wire

(simulation of new designs)

• Automated training modules

• Auctions/Collective buying

with OEMs

• Activity based costing

• Documentation of

innovation through a

knowledge system

• Electronic linkages with

suppliers & distributors

• Network storage

capabilities

• Secure servers

• Upgrading bandwidth for data networking

• High-end engineering

design stations

• Integration of ERP with

MES

• Innovative structures

for demand

management – use of

call centre for linking

customers request to

delivery practices• IT on shop fl oor

– data capturing from

machines

• Manufacturing &

supply chain analytics

• Market analytics

• Computer based

learning – content on

shop fl oors & del ivery

Table 7: Role that IT needs to play for fi rms that are at different Levels in terms of capabilities and markets



44

Level I fi rms (especially the tiny ones) would often not have any process that is supportedby IT. Moreover, they would not have any IT related skills in their workforce. Typically, it’s the

owner or the child of the owner or a young employee (e.g., an accountant) who is the key user

of the IT infrastructure. The challenge in this scenario is to establish the value proposition for

investing in an offi ce computer confi guration, establish some rudimentary processes using basic

spreadsheets, use the computer for offi cial transactions and use internet for communicating

with customers.Therefore the objective of the IT strategy of such fi rms is to lay the foundation

of an IT programme in the fi rm with a focus on tracking of information and ensuring accuracy of

data and also establish the role of email based transaction between the fi rm and its customers.

The IT investment has to be low, the approach for managing these processes has to be simple

and the benefi ts have to be apparent. The idea would be to initiate these fi rms to IT usage

while developing an appreciation for data capturing formally. Many transactions between these

fi rms and their customers are oral – in person or over the phone. The next stage for such a

fi rm, after this basic infrastructure is established, is to focus on capturing external transactions

– purchase, dispatches, invoices, etc. so that traceability is embodied as a process in itself

that is supported by IT.

Level II fi rms are trying to build on their basic IT infrastructure. With them an IT fi rm can focus

on reducing transaction errors – in purchasing, in bill of material, in invoicing, in dispatches,

etc., and the role of IT would be to support this objective while building systems. This focus

on data accuracy could become a very useful platform for future evolution of IT adoption inLevel II fi rms. The role of building a database in the future needs to be emphasised both from

regulatory perspective (e.g., demand of traceability by the government and customers) as

well from a cost control perspective. These are also fi rms that are establishing their quality

systems. Any IT support that helps in this endeavour would be worthwhile, e.g., training on

basic statistics and ability to use data for simple operational analysis. It may be recognised

that statistics is the new competitive tool for manufacturing and IT fi rms could leverage it to

develop value adding solutions for the auto component manufacturers.

The most important lever of change that works with both Level I and II fi rms is ‘customer

orders’. Pro-active customers could demand certain Level of IT based transactions. In that, an

IT strategy that links customers and suppliers together could yield benefi ts. Similarly, while most

owners of Level I and II fi rms (as they are the key decision makers regarding IT investments)

may not be comfortable with IT usage, they use mobile phones with ease. Consequently,

simple applications using the mobile platform will be more acceptable and will perhaps promote

straightforward data-based analysis at enterprise level in the future – a pre-requisite for any

use of IT for competitive advantage.

Level III fi rms require IT enablement to establish and implement the planning function in their

fi rms as robust planning is the foundation for better decision making. Such a system lays



45

the foundation for data based decision making in the fi rm ranging from daily and monthlyplanning, organising data for use of statistical methods on the shop fl oor for better production

and quality control, nascent inventory management system (including ensuring that error in

inventory shown in the books and in the warehouse or shop fl oor is minimised), and identifying

variances in actual cost and production from their planned values. This is the most crucial

stage for IT adoption. If done properly, auto component manufacturers at this stage would

become ready to take-off with other detailed decision support systems that would help them

perform well on cost, quality, delivery and fl exibility parameters. If a fi rm misses this stage,

it would get locked into making suboptimal decisions with the consequent impediments in the

future growth of the fi rm. Therefore, tools and processes to reduce errors in information could

fi nd a sizeable market amongst small enterprises. Level III fi rms are typically SMEs and any

IT support systems offered to them will have to be either local and developed for their limited

application or accessible in a network through dial-up technology on low-cost public networks.

They would depend tremendously for access and support on application software from large

customers, i.e., higher tier producers.

Level IV and V auto component fi rms are essentially mid-size or large manufacturing fi rms

who actually use IT for delivering competitive advantage to their customers. Level IV fi rms

establish their IT systems to help them make quicker and better decisions by using customised

software. At this stage, these fi rms must also experiment with automated data collection from

the machines on the shop fl oor through PLC controllers. The Level IV fi rms will also need to

prepare for an enterprise-wide IT implementation through internal LAN and IT systems that

will allow data transfer between multiple locations comprising plants, warehouse, offi ce, etc.

All of this, however, will require capital investment of a much higher level. IT fi rms will have

to offer customised solutions at this stage at reduced costs so that the auto component fi rms

can start using IT enabled decision support systems and start receiving the attendant benefi ts.

These fi rms will be looking to put their various functions, i.e., forecasting & sales planning,

design, production & material, HR, etc. on some kind of computer supported system. This

would help the auto component fi rms to reduce their costs and improve their productivity. In

addition, some of these Level IV fi rms will be starting to acquire a few high-end workstations

for design or computational work as they would develop their own CAD design libraries. This

would lead to new service opportunities for IT fi rms both in terms of hardware maintenance as

well as package and solution offerings. A Level IV fi rm will have to invest in extensive training

of its employees to enhance IT related as well domain knowledge with attendant requirements

of advanced HR systems that tie in with the employee training needs. IT based self learning

material is becoming a growing need for fi rms, an opportunity that is ill-served in India.

Level V fi rms use IT for enabling its supply chain by improving the coordination between the

supply chain stakeholders, suppliers, its manufacturing facilities, distribution network and



46

customers. Each of these stakeholders may have different requirements – the suppliers mayrequire production plans, the fi rm’s manufacturing facilities may require forecasts and material

shipment schedules, channel partners may require off-take and receipt information along with

accurate inventory systems and the customers may require visibility on production and delivery

schedules, decisions on last minute production or design changes, batch traceability, etc.

Customers may also demand shop loading schedules and cost related data. Some fi rms may

put in place an activity based costing system on their shop fl oor or design their procurement

system to manage online auctions – each requiring sophisticated cost measurement and

allocation algorithms.

At this stage, the Level V fi rm’s IT systems are also being driven by those of the customer’s

hence the fi rms may have multiple sub-systems (or islands of systems) which may need to be

integrated into a single enterprise system for increased effi ciency. The IT strategy for these

fi rms involves working with different vendors for different IT products as well as consultants

who would help provide specifi c solution or coordinate different functions. Since these fi rms

will be involved with continuous innovation, their IT systems must be able to support related

managerial initiatives like Six Sigma, Process Analysis, SQC, TPM, Pull Control with Digital

Kanbans, etc. IT hardware and software may be networked with a strong focus on data

security, network storage capabilities and ability to transfer large quantities of data. Moreover,

IT support for back offi ce functions like teleconferencing/videoconferencing, ERP & SCM, R&D

and testing with machine data transfer would be crucial.

The IT strategy for Level V fi rms could include organising enterprise-wide IT system either

through an ERP or a customised solution, linking the internal with the external e.g., use of

call centre for order and dispatch management, providing systems (including bandwidth) for

large quality and quick update of data, tools to support use of data analytics within decision

support systems (to support various decisions), market analytics, and computer based learning.

Utilising the shop fl oor data for controlling machines becomes as important as its automated

capture from machines through a link between the ERP and the MES (Manufacturing Execution

Systems). This is also crucial in terms of traceability of components as well as providing inputs

to design.



47

2. The MSC perspective

Firms in the auto component sector could be categorised further by the markets

they serve (M), their inherent size (S) and the manufacturing capabilities (C) that they carry.

Table 8 superimposes the MSC classifi cation on to the Level based categorisation of auto

component fi rms.

Firm Markets Firm Size ManufacturingCapabilities

LEVEL I Predominantly Domestic Tiny to Small Low

LEVEL II Predominantly Domestic Small Low

LEVEL III Predominantly Domestic Small to Medium Low to Medium

LEVEL IV Predominantly Domestic,Some Export

Medium Medium

LEVEL V Domestic and/or Export Medium to Large Medium to High

Table 8: The market-size-capabilities classifi cation of Auto component fi rms.

Two issues arise out of this categorisation, who can serve the requirements of each category

of fi rms and what could be the institutional structure for serving a particular fi rm type.

Auto component fi rms serving the domestic market will have to be very value conscious and

their strategy has to be driven by providing high return for low investments. Export markets

and large domestic OEMs drive the IT strategy and capability agenda of the auto component

fi rms by defi ning the integration interface between the OEMs and their supplier’s systems.

Customers to these fi rms often prefer IT suppliers that already supply to their global supply

chain, thereby requiring standard packages and services. Overseas customers as well as OEMs

are important drivers of IT adoption in Level V auto component fi rms. The Level V fi rms, in

turn, impose a similar requirement on their suppliers. It would indeed be useful for IT fi rms to

understand these inter-linkages in the Auto Component Industry in order to map opportunities

for different tiers of the industry appropriately.

Manufacturing capabilities defi ne the complexity of tasks that an auto component fi rm may

be able to perform and consequently the nature of IT solutions required. Low manufacturing

capability firms are transaction oriented while those with high capabilities will deploy

sophisticated technologies and high-end decision making tools. Most auto component fi rms,

other than the Level V fi rms), are SMEs and are often low in capability. As one moves up the

pyramid of capability, the number of fi rms in those higher categories of capabilities become

small. Many of these tiny to small fi rms with low IT capabilities, however, represent tremendous

opportunity for a basic level of IT implementation, often using PC and simple software.

It is imperative for the IT fi rms to develop new solutions and business models to address this

segment as long-term returns are going to be immense.



48

The challenge for large IT fi rms is to devise a service model that will generate revenues tocover its higher overheads while the challenge for small/mid-sized IT fi rms is to convince

auto component fi rms that they can deliver solutions which create strong capabilities in

the auto component fi rms. Perhaps a hub and spoke model can be created where large

IT fi rms could be involved in setting up network platforms for collaboration between large and

small auto component fi rms while the ‘last mile connectivity’ required for actual execution

of IT implementation and after-sales service is done by small IT fi rms using the large fi rm’s

platforms, tools and design capabilities. A related issue is the mode of service delivery, as

auto component fi rms move from small to large, they become more amenable to moving from

virtual pay-as-you-use applications with secured sharing of servers to proprietary networks

and client resident software.

The implication of the above approach is as follows:

• When IT fi rms start to evolve their own business strategies for the Indian Auto Component

Industry, they must understand the varied nature of the different tiers of Auto Component

Industry and the business perspectives of each tier before proposing solution or service

offering to a particular fi rm, i.e., align business strategy of the IT fi rms with the IT strategy

of the customer fi rm

• Understand clearly the characteristics and capabilities (both technical and business) of

auto component fi rms before embarking on designing solutions

• Understand linkages between various manufacturing improvement programmes

and provide solutions for related programmes/activities together to get more out

of investments

• Emphasise solutions to business and technical problems and not packages or services

• Ensure that preparing customer’s workforce to use IT for generation of solutions to

problems must become part of building/improving domain capabilities

• For a large majority of auto component fi rms, the big constraint to accepting IT based

decision making is investment in hardware & software and hiring of dedicated IT staff – new

business and service models must be evolved to take into account this constraint.



49

Chapter 5: Looking ahead

The key challenge for the auto component fi rms is to locate themselves appropriately in themanufacturing needs - IT needs hierarchy. Once this location is identifi ed, fi rms can broadly

benchmark themselves in terms of current IT adoption status as well as future IT needs and

accordingly design their IT strategy. The details given in Table 7 can become guiding principles.

At the same time, IT fi rms need to understand the stage or Level to which a particular auto

component fi rm belongs, before suggesting an IT related intervention. This hierarchy can

also be used by industry associations to highlight the trajectory that fi rms are likely to follow.

This trajectory might help fi rms at different stages visualise their future IT needs while their

current decisions are pre-dominantly based on immediate requirements.

However, there is a larger issue that needs to be addressed by fi rms and industry associations.

Why is IT adoption not a key challenge and priority of auto component fi rms? This is despite

the fact that BU heads of these fi rms expect IT to address most of their business challenges.

Does it have something to do with the way they perceive the effectiveness of IT? Most fi rms

that have a measure of effectiveness in mind prefer to use return on investment, productivity

changes and customer satisfaction as key measures of effectiveness. Of course, several do

not have a measure. Why do fi rms use measures that are diffi cult to estimate or which require

longer time horizons to take effect? Since the main reasons for IT adoption is to improve

processes like inventory control, timely delivery, etc. it may be more useful to focus on process

improvement measures as a proxy of effectiveness, especially those which are considered to

be critical. If the inability to clearly see returns is one of the constraints on IT adoption, such

an approach may, in fact, enhance adoption.

The other issue that needs to be highlighted relates to complementarities between different

IT applications and systems. It is critical for fi rms to understand that certain IT applications

and systems will only lead to tangible benefi ts when integrated with other IT applications and

systems. The reaping of these synergies is very important for enhancing competitiveness of

the auto component fi rms through IT adoption.

1. Call for action: Strategies for stakeholders

The IT and Auto Component Industry must visualise themselves differently if they are to moveto another stage of industrial development and consequently competitiveness. The goal must

be to create a sector where IT is seen as integral to the competitiveness of the industry and

not as a service often provided by external sources. Some initiatives that various stakeholders

can undertake are given below.

Manufacturing industry: OEM and auto component fi rms

• Creation of IT requirements and standards by OEM and large auto component fi rms

(typically Level I and Level 2) for their suppliers



50

• Develop a data based decision making perspective and see IT as more than atransaction system

• Work closely with IT fi rms to enable them understand the manufacturing and logistics

processes that require improvement in different tiers of the industry

• Identify services like sample preparation & delivery, payment processes, transport &

dispatch processes, etc. that will help a fi rm win orders through use of IT

• Focus on reducing lead times in all activities using IT processes and tools as this will

reduce costs dramatically

IT industry• Create a network of small and large IT fi rms for creating IT infrastructure and for providing

services at competitive costs to SMEs – develop synergies between large and small

IT fi rms

• Develop service models that provide fl exibility and choice to customers both on hardware

options and software applications that will reduce the cost of upfront investment – web based

pay as you use options, lowering the load on client resident hardware/software options, low

cost-limited module service options (i.e, vanilla software and hardware models), etc.

• Shifting focus from intervention in a single manufacturing fi rm to its entire supply chain –

will create more value for the customer fi rm, thereby evincing higher IT investments

• Integrate IT solutions with domain value addition – most IT fi rms are seen as technicalproviders of hardware/software rather than those that help solve domain problems for

manufacturing fi rms

• Develop fi rm specifi c focus based on its capabilities

Industry associations

• Impart domain knowledge through IT based learning platforms

• Organise exhibitions and marketing efforts for small fi rms as well as fi rms that are not

located in clusters

• Create support for domestic IT fi rms, especially in smaller towns, that provide IT hardwareand hardware maintenance services

• Invest in creating an ‘innovation in manufacturing’ fund where IT (especially where there

is an interplay of both hardware and software) plays a signifi cant role – in other words,

IT must get merged with domain related innovation in auto component manufacturing

• Establish IT based manufacturing programmes in ITIs that prepare students on

PLC systems and data manipulation, robotics and IT manipulation, engineering services

automation and design, fl y-by-wire simulation, etc. – this could be a cluster effort jointly

implemented by the auto component and IT industry associations



51

• Use the hierarchy of IT and manufacturing needs presented in the report to convey tothe auto component fi rms the utility of IT at different stages

Government

• Develop a perspective on IT investment and related policies as one that will enhance the

productivity of individuals and fi rms

• Create escrow fund with tax money that a fi rm can withdraw only for new skill building

and skill upgradation programmes

• Establish a fund for enabling investment in IT solutions by SMEs, similar to the Technology

Upgradation Fund (TUF) established for the textile industry

• Enable cluster initiatives to reduce fi xed cost of investment with strong linkages with

incubators to feed innovating entrepreneurial ventures in the incubators into clusters

• Provide special benefi ts by way of reduction in import tariffs, low interest loans, etc. for

Indian fi rms that are innovative and have a focus on the domestic market

Based on the current status of IT adoption in the Auto Component Industry, fi rms may not have

followed the above trajectory and therefore may have over or under-invested in IT. For example,

fi rms that did not require ERP may have invested in ERP and so on. Therefore, IT fi rms may

need to look at existing investments to help auto component fi rms devise IT strategies. The IT

and auto component fi rms will have to collaboratively think about future IT investments given

the initial investments, in order to create an environment where IT becomes an integral part

of the manufacturing operation and becomes capable of delivering competitive advantage at

various Levels of the Indian auto component manufacturing industry.



Several persons and organisations have played a very important role in the creation of thisreport and we are very grateful for their contributions.

We would like to thank all member companies of the Auto Component Manufacturers

Association (ACMA) who participated in the primary research phase for sharing data and their

valuable experiences with us. We would also like to take this opportunity to acknowledge the

efforts of the AC Nielsen team during the primary research phase.

We would also like to specially thank the following for their contributions and guidance which

has made this report possible.

Rakesh Basant

Professor of

Economics,

Indian Institute

of Management,

Ahmedabad

[email protected]

Rajdeep Sahrawat

Vice President,

NASSCOM

[email protected]

Pankaj Chandra

Professor of Production &

Operations Management and

Director, Indian Institute of

Management, Bangalore

[email protected]

Acknowledgements

Neelam Dhawan

Managing Director,

Microsoft India

Anil VargheseHead – SME Cluster

Development,

Microsoft India

Arvind GuptaDirector,

ACMA

Ravi Venkatesan

Chairman,

Microsoft India

Rajesh Rege

Director – Sales,

Sun Microsystems

India

Rajeev Ranjan

Chief,

National Manufacturing

Competitiveness Council

Rajesh Uppal

Chief General Manager – IT,

Maruti Udyog Limited

Deep KapuriaChairman &

Managing Director,

Hi-Tech Gears Limited

Vishnu Mathur

Executive Director,

ACMA

Authors

52

nasscom report on it adoption in the auto component industry

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