A report on how best-in-class warehouse design and management, and a focus on efficient parts delivery, is making an impact on the Indian parts market despite labour, infrastructure and visibility difficulties
Pankaj Chandak is elated. The World Auto Forum, supported by KPMG, has recognised Fiat India’s spare parts management as having the best service levels in 2012, after it improved its fulfilled order rate from 85% to 95%. It’s a point of pride for Chandak, assistant vice-president of parts and services at Fiat India Automobiles, and his team, who this April will see the company take over the complete marketing and distribution of its own vehicles and aftermarket activities, together with Chrysler, as the OEM unwinds its previous commercial partnership with Tata. Chandak credits the Italian OEM’s strong planning processes for parts ordering and logistics for the award.
Fiat’s recognition highlights a segment that, until recently at least, had been given relatively short shrift by manufacturers in India. Shubhabrata Saha, head of the spare business unit at Mahindra & Mahindra, responsible for all spare parts for motorcycles, cars and farm tractors, points out that while globally the spare parts business makes up around 10% of turnover for manufacturers across all industries, in India the figure is only 3-6%. “There is clearly room to grow,” he says.
"India is not a 'do-it-yourself' economy... Beyond the warranty period, customers look for support anywhere so garages should be able to obtain parts" - Shubhabrata Saha, Mahindra & Mahindra
A report by the consulting firm McKinsey backs him up, indicating that India’s automotive aftermarket is worth Rs.19,000 crore to 24,000 crore ($3.5 billion - $4.5 billion), growing at 11% per year and estimated to reach up to Rs. 44,000 crore by 2015. What’s more, the aftermarket business segment has traditionally been more profitable than selling new vehicles. According to McKinsey, the aftermarket contributes 24% of revenue to OEMs, but 55% of its profits. With gaps in spare parts distribution, big opportunities exist for improving logistics, too. “This is a lucrative sector to play in,” the report reflects. “With independent players actively expanding, there is a need for OEMs to consider various initiatives to attain a tighter control of parts distribution.”
In recognition of this profit potential, M&M’s Saha says that OEMs and dealers have increasingly been hiring mechanics and adding genuine spare parts repairs and servicing to their offering. “India is not a DIY [do-it-yourself ] economy. We need others, like mechanics, to help get our conked-out cars set right again,” he says. However, their success depends largely on parts availability and logistics. “Beyond the warranty period, customers look for support anywhere and everywhere,and so garages everywhere should be able to obtain parts,” says Saha.
The McKinsey study also points out that the supply chain and delivery service could be one of the biggest challenges for success in the Indian aftermarket. “Winning the aftermarket is far from easy, since it entails significant complexity, a large number of maintenance and parts activities, and crucial supply chains,” say the report’s authors.
A complex aftermarket ecosystem
While the potential for India’s spare parts business is immense, making use of resources across the vast subcontinent is difficult when you consider the high service expectations among dealers and final customers. The goal is simple, yet devastatingly difficult to hit: provide the customer with the right part, at the right time, with the lowest downtime for his vehicle at workshops. But despite India’s slow-moving roads, this inventory must be replenished without burdening dealers with excess storage costs for spare parts.
The aftermarket ecosystem is complicated and involves several stakeholders, including OEMs, part suppliers, logistics providers, the dealer network, service points and general spare part distributors. Parts are sourced in bulk from parts suppliers, transported and then stored and managed in entral warehouses, often termed ‘mother warehouses’ in India, or ‘source warehouse’ elsewhere. Following dealer orders and inventory management, the parts are then moved to regional hubs in repackaged, ready-to-sell retail merchandise packaging, and transported at the shortest possible time to the needy dealer. This flow is almost continuous, with orders sent and received nearly everyday. Fiat’s Chandak dubs this pace “e xc i t i ng and challenging”.
Ford has one of the most sophisticated logistics setups in India, with parts distribution centres (PDCs) in Chennai, Gurgaon and Mumbai catering to dealers closest to those regions. According to Vinodha Jevanthilal, director of centralised operations for Asia Pacific Africa at the Ford Customer Service Division, the Chennai centre acts as the ‘re-distribution centre’ in Ford’s terminology, ser v ing the regional PDCs as orders are called off everyday. Dealers use an application to get stock order suggestions, says Jevanthilal. “When dealers review and finalise it, the order gets transmitted to our system. We have daily stock order shipments out of our parts distribution centres. This helps us in keeping the supply chain lean,” she says. As well as the continuous replenishment model from Chennai to the regional distribution centres (RDCs), Ford has also added a crossdocking operation at Chennai. Aftermarket: labour, infrastructure and visibility While Ford’s logistics have already set an impressive benchmark for India, the country nevertheless faces a number of difficulties for spare parts – some specific to its conditions, such as labour turnover and poor infrastructure, and others that would be familiar to almost any market, such as the need to share more inventory data and real-time visibility. Jevanthilal’s list of concerns for Indian spare parts logistics include constraits for road, rail and ports. “[The result is] lead time fluctuations and using inventory to cover for the problems,” she says.
Sunil Singh, regional manager for contract logistics and distribution at UTi Worldwide India, adds that beside infrastructure limits, there are very few transporters who enjoy a pan-Indian presence. Hence, strong regional players have to be deployed for efficient and timely delivery.
But at the top of Jevanthilal’s list is labour turnover, an issue echoed by other providers and manufacturers. While labour egions. According to Vinodha Jevanthilal, director of centralised operations for Asia Pacific Africa at the Ford Customer Service Division, the Chennai centre acts as the ‘re-distribution centre’ in Ford’s terminology, ser v ing the regional PDCs as orders are called off everyday.
"Without sufficient information sometimes, it is challenging for 3PLs to design an optimised solution" - Amit Kamat
Dealers use an application to get stock order suggestions, says Jevanthilal. “When dealers review and finalise it, the order gets transmitted to our system. We have daily stock order shipments out of our parts distribution centres. This helps us in keeping the supply chain lean,” she says. As well as the continuous replenishment model from Chennai to the regional distribution centres (RDCs), Ford has also added a crossdocking operation at Chennai.
Aftermarket: labour, infrastructure and visibility
While Ford’s logistics have already set an impressive benchmark for India, the country nevertheless faces a number of difficulties for spare parts – some specific to its conditions, such as labour turnover and poor infrastructure, and others that would be familiar to almost any market, such as the need to share more inventory data and real-time visibility.
Jevanthilal’s list of concerns for Indian spare parts logistics include constraits for road, rail and ports. “[The result is] lead time fluctuations and using inventory to cover for the problems,” she says.
unil Singh, regional manager for contract logistics and distribution at UTi Worldwide India, adds that beside infrastructure limits, there are very few transporters who enjoy a pan-Indian presence. Hence, strong regional players have to be deployed for efficient and timely delivery.
But at the top of Jevanthilal’s list is labour turnover, an issue echoed by other providers and manufacturers. While labour in the country is cheap, there are low levels of professionalism among warehouse staff, with casual employees usually working for six months at a time (it is typically illegal to work longer without formal contracts). Some complain that 3PLs have thus turned into manpower suppliers, leaving the actual training to the manufacturers.
“By the time you have trained a batch of helping hands and are feeling comfortable, they are out,” points out Prasoon Singh, Volvo Eicher Commercial Vehicles’ senior manager of operations for aftermarket parts. “It is difficult to inculcate your ideas again and again.”
According to Rajeev Chopra, chief executive officer of Evon Global Logistics, visibility is the biggest challenge facing spare parts logistics in India. While OEMs do have systems in place with dealers – Ford uses a data exchange portal called Redflex, for example – Chopra says that dealers are not sure what parts are readily available at the OEM or distribution centre level, while OEMs are similarly unaware of spare parts availability at the dealer level.
Amit Kamat, head of solution design at CEVA Logistics, also believes that there is a need for stronger collaboration en OEMs and 3PLs. “At times, they [OEMs] share partbetwee mation when they invite us [3PLs] to handle their spare inform operations. Without sufficient information sometimes, parts o hallenging for 3PLs to design an optimised solution,” it is ch he says, pointing to the difficulties a provider faces in designing warehouses and transport routes without comprehensive data.
Another sore point is the absence of customers’ end-user feedback, which Kamat believes would improve data quality, forecasting and allow for better resource planning of both men and material
But that does not mean that great leaps in IT or data sharing should be ruled out in the future. Mahindra’s Shubhabrata Saha says the company is working to improve on a ‘replenishment model’ for forecast and production planning, rather than relying purely on forecasts. He admits that RFID would be a benefit to such a model. “We don’t know how to use RFID at this moment but that does not mean its usage is ruled out forever,” he says. “The replenishment model will be more effective with an RFID route.”
Vishal Barnabas, head of operations for Unipart Services India, which serves Tata Motors and Toyota in India, says OEMs are now understanding the complexities of aftermarkets management in India, particular warehouse operations. “It is not the old style ‘godown’ [warehouse] management. At Unipart, we treat warehousing like manufacturing, with a set of standard operational procedures,” he says. “However standard operations are not effective unless combined with a trained and engaged workforce.”
Indeed, designing and planning warehouses for spare parts is complex and requires constant adjustment (see box, left).t Based on the movement of each part – in a fast, slow, or ‘not moving’ category – a location strategy has to be reviewed and implemented every quarter. “When I came to India, guys were climbing over material to pick and choose at mother warehouses,” recollects Kristian Blomberg, general manager for the parts division at Volvo Eicher Commercial Vehicles.
Blomberg, was sent to India from Volvo headquarters to introduce best-in-class storage and retrieval practices. “First thing, I had to build the right infrastructure and then introduce the requisite processes,” he says. “I was told to benchmark Indian operations to global standards.”
"When I came to India, guys were climbing over material to pick and choose at mother warehouses... I was told to benchmark Indian operations to global standards" - Kristian Blomberg, Volvo Eicher
Prasoon Singh, Blomberg’s number two in logistics at Volvo Eicher, stresses that the goal for spare parts logistics is simple: “availability, availability, availability.” Vo l v o’s s t o r age strategy is therefore equally simple: fast-moving parts should be ready for picking and binning while slow-moving parts should be held with maximising storage space in mind. In other words, put the slow-moving parts on top shelves and the fast-moving items on the ground level closer to loading bays.
Ford, too, has made important strides in its warehouse operations. According to Jevanthilal, its incorrect pick rate is only 0.05%, while overall damage rates are 2%.
Phased-out model management
Volvo Eicher’s Singh offers another simple formula to follow for inventory management: 50% part penetration, 90% availability across the supply chain (supplier to warehouse to dealer) and, most importantly, 100% absorption rate for all vehicles. This means that the aftermarket business should be able to sustain the supply of spare parts even if the company no longer sells a particular vehicle – or even if the company no longer exists at all.
Managing inventory is particularly challenging for older or phased-out models. Indian law stipulates that parts must be available for a model up to seven years after it has been phased out of production. But there is no guarantee of what the needed quantity of such parts might be. If a model stays popular after its production run, spare parts might still need to be made. On the other hand, a model could need just a few replacement pieces during the entire seven-year period.
In view of this, OEMs often purchase a ‘lifetime supply’ from a supplier before the end of a production run to hold in storage for seven years. But even in these cases, there is no guarantee that demand for a particular part won’t outstrip the supply that had been predicted. According to one OEM official, who requested anonymity, such a situation can lead to considerable discounts offered to customers seeking a part that is no longer available. In one such situation, the executive admits, the carmaker exchanged the phased out model for the next model at a heavily discounted sticker price.
Regional distribution centres and future networks
In other, more developed markets in Europe – including those geographically much smaller than India – carmakers have built up fairly dense networks of distribution centres. In India, one of the forerunners in setting up a comprehensive service network has again been Mahindra & Mahindra, which manages 54,000 stock-keeping units across its two wheelers, farm tractors and vehicles. The manufacturer’s in-house logistics provider, Mahindra Logistics (see box, right), t manages its aftermarket logistics.
According to Shubhabrata Saha, the company was one of the first to use clearing and forwarding agents to disperse parts across the country from the manufacturer’s central warehouse in Khane. “Today we have ten such agents across India. We use this platform to address road permit issues, for example,” he says. “Instead of sending items from our central or mother warehouse to far away destinations, this route enables us to park them at various, strategic locations to collect the parts we need.”
However, the next step for the company will be the rollout of a network of dedicated RDCs to get even closer to the end customers. “Our maiden RDC is coming up at Bhiwandi, Maharashtra, with more to be added soon,” says Saha, adding that it will be a 23,000-square-metre facility. “We have done a lot of studies internally with regard to distribution centre infrastructure and processes and this will come in handy when our new RDCs are readied.”
The Mahindra example, with its network design and dispersed regional warehouses, plus strict control of transport costs and quality with Mahindra Logistics, could be the shape of the loistics to come. Profitable as the aftermarket can be, it is also highly competitive. If an OEM wants to compete with the service of its competitors, or other distributors selling service parts, prompt and safe delivery will be crucial.