Vendor tierisation in the automobile industry

Abstract

Among the initiatives that have evolved in the Automobile industry is the process of Vendor rationalization by way of tierisation. Both at the global level and in India, the process is on in a big way in the automobile industry. At a glance, it is obvious that this process has great cost benefits for the OEM and, if undertaken in the right manner, for the industry as a whole. However, the process is not without its implications for the manufacturer and the supplier. And in the Indian context, there could be issues that are unique to the manufacturers here. This study is about these implications and suggestions to improve the process. The purchasing function in any manufacturing organisation aims at delivering greater value to the organisation by keeping a lean supply chain. Among the practices followed by them is the vendor tierisation program. Essentially, this process is about dealing with a select few suppliers who supply groups of components than deal with multiple suppliers giving individual components. However, this process is not without its difficulties. In order to do it the right way, our analysis indicates that there is a seven step process that needs to be followed to deliver the conceived benefits of tierisation. These are as follows: • OEM decides on objectives for tierisation • Decision on modules to be outsourced • Tierisation based on modules or suppliers • Implementation of Tierisation • Cost reduction • Emergence of issues and differences • Vendor handling and negotiation to stabilise process and convert from dynamic to static Thus beginning from a traditional supply chain model where suppliers supply and the OEM sources, produces and assembles before selling the final good, this seven step process looks at a supply chain model by which the OEM tierises his suppliers who source the respective components and assemble them to supply a final module that the OEM integrates to produce the final good. As already mentioned, while the idea looks good on paper, there are lots of practical constraints that the OEM will be facing in this seven step process. Critically, there are two problem areas that he would have to account for. Firstly, this process that aims at cost reductions will serve no purpose if the reduction is just passed on to the next tier of suppliers. Cost reduction should be through economies and not through shifting responsibilities. A second issue arises when the tier 1 supplier is given so much business that the balance of power equation in the industry is altered in favor of the tier 1 supplier. While there is no best way to solve these problems, we recommend that while pursuing cost reductions, the OEM looks at industry costs as a whole and tierises in favor of that supplier that can indeed achieve the economies of scale. This will ensure that the job is being given to somebody who can actually do it better than the OEM. Secondly, while cost reductions are the desired goal that the OEM would aim at in this process, he also has to keep in mind the probability that there could be a situation in future when he would have to listen to the tier 1 supplier. The situation could well arise when the tier 1 supplier seeks to reduce costs and improve margins by passing those on to the OEM himself. A theoretical framework has been provided that would enable the OEM to forecast the time horizon when this situation could happen and enable the OEM to plan his tierisation accordingly. Thus to conclude, while this process is here to stay in the industry, it is no use undertaking it in a haphazard manner just because it is the norm. The seven step process that we have explained provides a systematic basis for this process to take place. And finally, one must recognize that this is a dynamic process involving numerous constraints and thus be prepared to plan for the same and also make the necessary trade-offs.