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: research@nasscom.in
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: research@nasscom.in

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.

Table of Contents

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 influencing 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 firms ...................................... 35

Chapter 3: Mapping supply chain strategies for

auto component firms
• 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
 Foreword

4
5
 Foreword

The Indian Auto Component Industry has been amongst the drivers of the renaissance in
India’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 firms 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 firms will
need to continuously strive to increase their efficiency, quality and value proposition. In this, IT
will increasingly play a crucial role by helping the auto component firms achieve step changes
in productivity benchmarks through the entire range of manufacturing processes and in enabling
the firms 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 firms and especially the SME segment. Developing this understanding
is crucial to ensure that IT investments by the firms are deployed where they can result in
the greatest impact on a firm’s competitiveness and help the firm 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 firms to align their IT investments with the business
objectives, while enabling the IT firms to develop solutions specific 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 on
how individual firms 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

6
Executive Summary

The Indian Automobile Component Industry has emerged as a sunrise sector of the Indian
manufacturing 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
five 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 fiscal 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 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.

To sustain the current growth trajectory and face the increasing competition in the global and
domestic markets, the Indian auto component firms 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 firms will have to focus on moving up the value curve and relentlessly increasing
firm level productivity through adoption of global manufacturing best practices. IT will be a key
enabler for the Indian auto component firms to achieve these aspirations.

An increase in IT adoption will provide the necessary productivity benefits only when the IT
investments are made in business processes which contribute to a firm’s competitiveness.
Thus, it is important to evaluate IT adoption at the level of business processes instead of at the
firm level. This understanding will firstly, help the automobile component firms to align their IT
investments with business objectives and secondly, help the IT firms to develop solutions which
are specific 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 defining 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 firms. Despite these advantages, IT adoption among manufacturing firms in India is rather
low. The diversity in the Indian manufacturing sector is very high; apart from differences in firm
size, sector specific 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 firms along with the constraints faced by them.

7
 The need of the auto component firms to integrate various functions and processes has
driven them to invest in IT, and as a result, in firms that have implemented IT, there has been
a considerable increase in the productivity as well as revenues. However, very few firms have
aligned their IT investments with business objectives or adopted a clutch of applications to
maximise the potential of efficiency gains and this obviously has an adverse effect on the
efficacy of IT adoption.

The current study conducted by NASSCOM is based on an survey of 158 firms 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, identified through the survey
are as follows:
• Different firms appear to be devising differing strategies for IT adoption and size of the
firm seems to be defining the trajectory that a firm will adopt for IT adoption. Firms are at
very different levels of IT implementation and the IT strategy of many firms 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 fluctuations 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 identified by the firms are:
1. Order receipt and demand management
2. Production planning
3. Order processing
• Quick access to reliable business information is a key bottleneck as the auto component
firms possess disparate systems including manual paper based processes that lead to
disconnect amongst the supply chain constituents. This has two major impacts – firstly,
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 firm size.
While for medium and large firms the three processes mentioned above remain the most
critical, for small firms, 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 identified the lack of alignment between business goals and IT
initiatives as a major challenge. The IT heads also find it difficult 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.

8
 • The most common measure of IT effectiveness, amongst the auto component
manufacturers 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 firms
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 firms, none of the metrics that were mentioned are actually used to
measure the IT effectiveness.
• Broadly, large firms are ahead of small and medium firms in the adoption of all application
systems and Enterprise Resource Planning (ERP) is the most widely adopted IT application
among auto component firms. However, very few firms adopt a clutch of applications to
maximise the potential of efficiency gains and this obviously has an adverse effect on
the efficacy of IT adoption. In the adoption of networking and groupware systems also,
large firms are generally ahead of the small and medium firms.
• The firms are undertaking IT investments to integrate the firm’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 firms 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 had
their 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 firms. The outsourced activities related to hardware maintenance include
management and functioning of office 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
firms 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 firms ranging from tiny
and small producers to large firms who supply to both the OEM and replacement markets.
As a result, there is enormous diversity in the intent and strategies of the firms in the auto
component sector.

9
 What firms require is a good understanding of how they can compete by building distinctive
competitive 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 firms
could look to building capabilities and develop distinctive competitive stances. This trajectory
can be defined terms of various stages or Levels with each Level being defined by certain
operational characteristics.
• Level I firms are essentially producers that perform job work. Level I firms receive material
from their customers and they produce to the blueprint provided by them. Most often, these
firms 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 firms is old
and the equipment is second-hand and obsolete.
• Level II firms are also Tier 3 suppliers and posses the same characteristics as Level I
firms except that they have more experience in contract manufacturing and have a higher
turnover as compared to their Level I counterparts.
• Level III firms are also often small in size but on the verge of entering medium scale.
While Level I & Level II firms may be performing machining operations, the Level III
manufacturers produce a part or whole of a component for the industry. Many of these
firms 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 firms are medium size firms with multiple plants and customers and are beginning
to make the first entry into global supply chains. These manufacturers produce to
order(s) as well as in anticipation of orders. These firms 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 flow that helps
them to reduce production lead times in a medium volume and medium to high product
variety environment.
• Level V firms are upper-medium or large firms and supply to the automobile OEMs as well
as in the replacement market and a large majority of these firms export and are part of
a global supply chain. They produce to firm orders as well as to stock, i.e. in anticipation
of 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 capabilities defines the complexity of tasks that
an auto component firm may be able to perform and consequently indicates 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 firms (other than the Level V firms) are SMEs and are often low

10
in capability. As one moves up the pyramid of capability, the number of firms 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 firms at different Levels
have varying needs and therefore it would be useful to design Level specific IT strategy.

The key to successful IT interventions lies in recognising that the Indian Auto Component Industry
comprises firms that are at different stages of industrial development. As a consequence, the
firms 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 firms and others.
The challenge is to design appropriate interventions for these different categories of firms
which are both cost-effective and result oriented. This objective gets further complicated by
the fact that most firms 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 firms are tiny to small firms with low IT capabilities, and use
PCs and simple software products, the challenge for large IT firms is to devise a service model
that will generate revenues to cover its higher overheads while the challenge for small/mid
sized IT firms is to convince auto component firms that they can deliver solutions which create
strong capabilities in the auto component firms. Perhaps a hub and spoke model can be
created where large IT firms could be involved in setting up network platforms for collaboration
between large and small auto component firms while the ‘last mile connectivity’ required for
actual execution of IT implementation and after-sales service is done by small IT firms using
the large firm’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 and
not as a service often provided by external sources.

Based on the current status of IT adoption in the Indian Auto Component Industry, firms may
not have followed the manufacturing capability – IT adoption trajectory and therefore may have
over or under invested in IT. For example, firms that did not require ERP may have invested
in ERP and so on. The IT and auto component firms 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.

11
 Chapter 1: Introduction

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 significant 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 significant backward linkages. The industry has a large
international 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
firms 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, transmission
parts, 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 fiscal 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 five 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.

1
1 lakh = 0.1 million
2
1 crore = 10 million
3
Rs 41 = 1US$

12
ACMA forecasts that industry sales will grow to US$ 40 billion (Rs 164,000 crores) by 2016
with 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.

13
 • 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 firms. Despite these advantages, IT adoption among manufacturing firms 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 firms along with the constraints faced by them.

The diversity in the Indian manufacturing sector is very high; apart from differences in firm size,
sector specific 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 identified 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 defining adoption strategies for this as
well 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 significant ripple effects
in the rest of the economy.

A large majority of the firms (over 85 per cent) in the Auto Component Industry are SMEs.
These firms 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 firm 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 fluctuations, gaps in real-time availability of business information and lack of
smoothness in business processes. Once the firms 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 flow
of material as well as finished products.

14
The need of organisations to integrate various functions and processes has driven them
to implement ERP, SCM and other similar packages, and as a result, in firms that have
implemented IT, there has been a considerable increase in the productivity as well as revenues.
However, very few firms adopt a clutch of applications to maximise the potential of efficiency
gains and this obviously has an adverse effect on the efficacy of IT adoption. The current study
has also shown that while a large majority of the firms in the Auto Component Industry have
invested in IT, these firms 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 difficult 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 firms
• 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 firms
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
1. Identification of sub-sectoral patterns of adoption within the industry
2. Postulation of the strategies currently followed by firms in adoption of IT
3. Identification of characteristics of firms that adopt IT
4. Reasons for deployment
5. Areas of deployment
• Identification of the drivers of IT adoption in the auto component sector
1. Factors that support adoption of IT
2. Reasons for non-deployment of IT
• Analysis of adoption within firms – region-wise
• Identification 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 firms
• Develop a strategy for the future

15
 1. Imperatives for growth
2. Impediments and ways to overcome them
3. Linking IT firms’ strategies to manufacturing requirements
4. 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 firms.

Break-up of Sample
Region Size of Firm BU Heads IT Heads Total Sample
Small 0 8 8
Delhi Medium 34 26 60
Large 29 1 30
Small 1 0 1
Mumbai Medium 2 1 3
Large 5 0 5
Small 1 3 4
Pune Medium 3 7 10
Large 8 0 8
Small 1 2 3
Chennai 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 first 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 defined which can be used by firms 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 firms.

16
 Business challenges and
Chapter 2:
current state of IT adoption

As mentioned in the previous chapter, a primary research of 148 auto component firms in
different parts of the country was undertaken to collect information on their business challenges
and IT adoption. Of these, 46 firms 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 firms, 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 firm is influenced 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 firms 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 firms as it affects their
ability to meet their customer’s demands within due dates. In addition, firms 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 difficult 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 the
employees 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 fluctuations 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 firm characteristics? Table 1 below
provides some interesting insights. A few of these may be noted:

17
 Figure 1: Challenges faced by Business Unit heads

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

Challenge Firm Size Foreign Export

Collaboration
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

Difficulty 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 manufacturing 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

18
 • The main challenges faced by small and medium sized firms are similar-fluctuations
in raw material costs, delivery of quality products in time and price competitiveness.
For large firms, while timeliness of delivery is the most important challenge, other
challenges include tracking of manufacturing costs and easy access to critical information.
The large firms seem to have reached a stage of IT adoption where significant 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 reflected in Table 1 is that there
is more heterogeneity of challenges among SMEs than among large firms; the average
ranks of the most important (top 5) challenges show a much higher consistency of
responses among large firms than among SMEs. On average, non-availability of good
IT technology for business is felt more by medium firms, followed by large ones and the
least by small ones.
• Auto component firms 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 firms 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 firms, while
estimation of demand is more challenging for firms without foreign collaboration.
• Dealing with fluctuations in raw material costs is the most important challenge for both
exporting and non-exporting firms but it is somewhat more critical for the latter. Timeliness
of delivery and product quality on average are more critical for exporting firms while
tracking production costs is more of an issue for non-exporting firms.

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 efficiency), 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 firm will not be adequately met if the IT function of the
firm 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 difficult 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 difficulty 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-benefit analysis, most IT investments do not. Typically, new IT investments
such 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 influencing IT adoption

In a situation where the impact of IT investments cannot be easily seen, what factors influence
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 firm (Figure 4). This is followed by the
need to improve business process flows and increase operational efficiency in the processes
because streamlined business process flows 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 is
discussed later in the report.

Figure 4: Factors influencing 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 firms
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 firms, none of the measures that were mentioned are actually used to
find out the IT effectiveness. The primary reason probably is that there are many IT related
investments for which a cost-benefit analysis is not possible. Similarly, calculating the
value of ongoing IT operations spending on hardware, system and software is even more
difficult, 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 firm

22
 Figure 5b: Measuring IT effectiveness by BU and IT heads

5. Criticality of business processes

Another way to approach issues of IT adoption in a firm is to identify processes that are
critical to the firm and then ascertain how IT can enhance the efficiency of these processes.
Figure 6 illustrates some of the most critical business processes identified by the auto
component manufacturers. The top three critical processes are:
1. Order receipt and demand management
2. Production planning and scheduling
3. Order processing

The survey reveals some variance in the criticality of business processes by firm size. While
for medium and large firms, the three processes mentioned above remain the most critical,
for small firms, order processing is replaced by material handling (Figure 7). Interestingly, the
three least critical processes for small and medium firms are the same – invoice generation/
payment collection, traceability compliance requirements and bank reconciliation. For large
firms, however, bank reconciliation is the only process that is least critical alongwith customer
service management and HR & payroll systems. Most of these firms have already gone through
their IT implementation for these processes and hence don’t find it very critical at this juncture.
The survey provides some interesting insights on how smoothly do these critical processes
work in the auto component firms.

23
 Figure 6: Critical business processes across firms

Figure 7: Criticality of processes by size of firm

24
Order receipt and Demand management

This process combines receiving the orders, providing a timeline for the delivery of the finished
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 significant proportion of the firms.

Table 2: Smoothness of critical business processes

Percentage of firms reporting level of smoothness

Process
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
17 45 26 10 1
decision in the interest of supply chain
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 efficiently
24 42 26 8 0
floor using Kanban
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 profit margins to take pre-emptive corrective action 22 38 17 16 7
Real-time visibility into actual vs. real budget to take
11 35 30 14 9
corrective action
Annual 3-months rolling plan to manage
13 45 25 11 5
budgeting against actual

Sample: Business Heads - 88

25
 Table 3: IT enablement of critical business processes
Process Percentage of Firms

Fully Partially Not IT

Enabled Enabled Enabled

A. Order receipt and Demand management

System to accept orders from OEMs

20 69 11
(without manual intervention) through extranet
Automatic validation of orders 29 43 29

B. Order processing

Ability to confirm orders online 24 62 14

Seamless integration with production planning,
28 55 17
scheduling and order receipt
Capability of information exchange with
17 69 14
OEMs in case of order processing variation
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,
24 58 18
manage changes and measure variances from plan
D. Material scheduling

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

Vendor wise specific material requirements 33 57 10

Established electronic links with suppliers 29 43 29

Capability to share requirements with OEMs
29 43 29
for collective buying/electronic auctions
E. Accounting

Budgeting and variance monitoring system 29 67 4

Ability to carry out accounting based on the
42 42 17
operational system from other related systems
Ability to generate financial systems online (B/S, P&L) 29 63 8

Sample: IT Heads – 60

Order processing

The auto component manufacturers prioritise orders and schedule production based upon the
firm’s shop floor capacity and customer delivery dates. A majority of auto component firms
have smooth processes related to order processing, wherein orders are efficiently recorded,
sorted and prioritised (Table 2). These processes consume less time because of IT enablement
as the orders are received and confirmed online in most organisations (Table 3). Once the

26
orders are received, they are checked against the constraints related to production, as the
order processing system is integrated with the production planning and scheduling facility
through IT in most firms (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 firms.

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
flow 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 firms have not yet achieved full
IT enablement. In fact, for several processes like automatic validation of orders, electronic
linkages with suppliers, etc. more than 25 per cent firms do not have any IT support. There is
tremendous scope, for the auto component manufacturing firms to increase IT adoption.

6. IT adoption – implemented applications/systems

Enterprise Resource Planning (ERP) is the most widely adopted IT application among auto
component firms. Some effort is also being undertaken to integrate the firm’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 firms have deployed
intranets which are made available to all the relevant in-house business functions and enable
effective planning and scheduling. A significant proportion of firms 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 firms are ahead of small and medium
firms 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 firms are generally ahead of the small and
medium firms.

27
 Figure 8: Adoption of IT applications/systems

Figure 9: Adoption of IT applications/systems by firm size

28
 Figure 10: Adoption of IT infrastructure by size

One interesting insight that emerges from a more detailed analysis of the IT adoption data
is that very few firms adopt a clutch of applications to maximise the potential of efficiency
gains. As shown in Table 4, only about 34 per cent firms having ERP also adopt SCM and the
proportion of ERP based firms 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 office. In fact,
only about 3 per cent firms combine CRM, SCM and IT enabled integration of plant systems
with ERP. This obviously has an adverse effect on the efficacy of IT adoption. It also shows
that the surveyed sample comprises firms that are at very different levels of implementation
of IT and that the IT strategy of many firms is not based on a judicious process improvement
strategy. For instance, implementing a SCM module without integrating the manufacturing
facilities to the firm’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 firms.

29
 Table 4: Percentage of firms adopting different applications and networking systems

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

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/factories
IT 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 storage
capabilities; INTRANET – Intranet deployment and expansion; GPWARE – Deploying and expanding groupware/workflow applications
(lotus notes, project management)

Table 5: Combinations of selected applications adopted by sample firms – 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 5.7
SCM 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

30
Will the future IT adoption plans help auto component firms reap synergies across various
IT applications? Including the investment plans of the next one to two years, a large majority
of firms would like to implement ERP and SCM packages and would like to integrate plants
with the head office 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 five 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 firms 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.

Figure 11: Future investment plans for enterprise application systems

31
 Figure 12: A perspective for future plans by size of company for IT adoption

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 efficiency, 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. Significant 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 significant 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.

32
 Figure 13: Annual IT budget

The annual IT budget is expected to increase for a majority (90 per cent) of auto component
manufacturers in the coming year. The significant contributors to this increase are expected
to be:
1. Branded hardware
2. Vertical specific applications
3. Upgradation of the networking facilities such as wireless LANs, bandwidth for data
networking as well as implementation of Virtual Private Networks (VPN)
4. 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 firms by number of servers, workstation and nodes is provided in Figure 15.
Most firms on average have 1-5 servers, 50-199 workstations and 10-99 network nodes.

33
 Figure 14: Full-time employees across locations handling IT service and support

Outsourcing offers a wide range of potential advantages. Many auto component firms 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 firms.

Figure 15: IT infrastructure in auto component firms

34
 Figure 16: Outsourcing of IT services by auto component firms

The outsourced activities related to hardware maintenance include management and functioning
of office 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 firms

Raw material price fluctuations and maintaining price competitiveness figure as major
challenges for BU heads in auto component firms. IT heads do not seem to perceive their
function as an integral part of organisation goals and find it difficult 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.

35
 The responses of the survey suggest that key driver to increase IT adoption is streamlining of
processes. The top five key business processes are as follows:
1. Order receipt and demand management
2. Production planning
3. Order processing
4. Material scheduling
5. 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 most
firms. The need for real-time data capture, applications that cater to shop floor operations and
those having a greater focus the key business processes defined above have driven the advent
of PLCs, shop floor automation applications and Manufacturing Execution Systems (MES).
As firms expand their IT application portfolio and move to an automated real-time information
system, these are likely to gain in popularity.

Most firms 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 findings of this survey reveal that different firms appear to be devising differing strategies
for IT adoption and size of the firm seems to be defining the trajectory that a firm will adopt
for IT adoption. The next section of the report characterises these different types of firms 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 firms understand
these key manufacturing processes, they could design their strategy appropriately to add value
through IT investments.

36
Chapter 3: Mapping supply chain strategies
for auto component firms

The auto component manufacturers in India come in a variety of sizes – mostly micro, small and
mid-size and a few large ones. While the micro and small firms may be struggling to get their
products in the replacement markets, the large firms 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 firms 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 firms.

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 firms in the auto
component sector. While operational excellence is acknowledged as the key requirement
for winning orders, the state of firms on this dimension varies tremendously. Often, bigger
firms 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 firms 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 firms in this sector
could look to building capabilities and develop distinct competitive stances. This trajectory
can be defined in terms of various stages or Levels with each Level being defined by certain
operational characteristics. The competitiveness of a firm, at an operational Level, is a function
of the following:
1. Operational characteristics of the Level to which the firms belong
2. Nature of managerial practices that the firms have implemented
3. Extent of adoption of IT to support the improvements in decision making

Table 6 describes how firms at different Levels of the supply chain can build up their
manufacturing effectiveness.

37
 Manufacturer Category Manufacturer Manufacturing Distribution Process
Characteristics Management
Level I • Order processed by the • Housekeeping – 5S • Pick-up by the customer
(Tier 3 Supplier) higher tier • Quality inspection – • Local delivery
• Production planning by 100% OK plant dispatch
the customer • Traceability of materials/
• Blueprint provided by orders to batches
the customer
• Dedicated supplier
• Single plant
Level Ii • Order processed by the • Process analysis for • Pick-up by the customer
(Tier 3 Supplier) higher tier capacity evaluation • Local delivery
• Production planning by • Establish time standards
the customer (industrial engineering)
• Blueprint provided by • Establish process
the customer capabilities
• Dedicated supplier • Preventive maintenance
• Single plant

Level III • Order processed by the • ISO certification • Pick-up by the customer
(Tier 2 Supplier) higher tier • Value engineering • Local delivery
• Production planning by • Quality control
customers • WIP control
• Blueprint provided by • Standard containers,
the customer poke yoke
• Dedicated capacity for • Design support
several customers • Costing
• Single plant • Supervisor training

Level IV • Order processing & • Cellular layout • Delivery to customer

(Tier 2 Supplier) production planning by • Single piece flow locations
the manufacturer • Multiple machine • National vendors
• Forecasting orders operators • Require inventory
• Modification to • Statistical process management
blueprints control
• Multiple customers • Total productive
• Multiple plants maintenance (initiation)
• Global delivery • Environment quality
• Design department
– multiple requirements,
design modifications &
CAD drawings
• Operator training

Level V • Order processing & • Total productive • National supply chain

(Tier 1 Supplier) production planning by maintenance
the manufacturer • Lean manufacturing
• Forecasting orders • JIT or pull production
• Own designs & • Quick response
blueprints • Environment quality
• Multiple customers – QS
• Multiple plants • Strong design
• JIT or pull delivery department – library
• Part of global supply or designs, proprietary
chains designs, IPR on designs,
prototype laboratory,
CAD/CAM systems
• Extensive operator
training
• 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 firms

38
There are two categories of Tier-3 suppliers differentiated by the extent of shop floor intervention
that 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 firms 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 firms 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 finished products, raw material as well as toolings on the shop floor. Good inspection and
re-work capabilities help them maintain a high dispatch quality to their customers. Very often,
the process technology employed in these firms is old and the equipment is second hand and
obsolete. The customers deliver the raw material to the manufacturing premises of these firms.
The finished products are either picked up by the customers or the firms deliver the finished
products to the customer locally.

Level II firms are also Tier-3 suppliers and possess the same characteristics as Level I firms
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 firms 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 firm’s) operations more tightly both in terms
of quality and costs as compared to the Level I firms. Therefore, performing process capability
studies on the manufacturing machines of Level II is crucial to control quality. The Level II
firms struggle to establish time standards which become essential to estimate capacity and
plan for production. These firms 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 firms 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 firms 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 specific production batches that make up an order.

Level III auto component firms 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 firms
also receive blueprints from their customers and are similar to Level II firms in terms of the
order they may be processing for their customers. Many of these firms 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 firms are also often small in size but on the verge of entering

39
 medium scale. To make this transition, Level III firms need to lay the foundations of competitive
manufacturing facilities. Shop floor improvement practices like value engineering, poke yoke,
etc. are implemented in the manufacturing operations. The firms also get ISO certified or at
least get ready for an ISO certification. The customers of Level III firms 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 firms will employ
supervisors with experience and perhaps formal education for their shop floor operations.
The need to coordinate across orders from various customers will require their employees
to undergo training in shop floor planning and scheduling. The finished product distribution
processes remain the same as for Level I and Level II firms.

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 firms with multiple plants
and customers and make the first entry into global supply chains. The Level IV manufacturers
make to order(s) as well as in anticipation of orders. Some firms 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 flow. This helps them reduce production lead times in
a medium volume and medium to high product variety environment. These firms are ready to
implement various productivity enhancing programmes that are aimed at increasing availability
of equipment through TPM (Total Productive Maintenance), better control of processes on the
shop floor through SQC (Statistical Quality Control), higher operator efficiency (through multiple
machine operations by each operator) and enhanced operator training on manufacturing
management aspects. These firms 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 firms to service multiple customers. Better tools like CAD
systems are needed as there are skilled engineers and supervisors. These firms are vendors
to national and international firms and many have warehouses for servicing their customers.
Inventory management, both for raw material procurement as well as finished goods is an
important area of concern.

Tier-1 suppliers can also be categorised as Level V firms. They supply to the automobile OEMs
as well as in the replacement market. Most of the Level V manufacturers are upper-medium
or large firms and have a national network – a large majority of these firms export and are
part of a global supply chain. They produce to firm orders as well as stock, .i.e. in anticipation
of orders from customers. This requires the Level V firms to develop capabilities which
enable accurate demand forecasting to remain profitable. In the Indian context, many of the

40
Level V firms 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 floor, Level V firms 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. Operators
are trained very extensively to make decisions based on data available from the shop floor.
Firms that address environmental concerns have a better chance of winning orders globally.
Level V firms 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 firms, 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 firms are supposed to have strong
quality systems where the focus is on enhancing process capabilities.

Through an effective deployment of IT, an auto component firm 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 firms.
The next section of the report discusses this aspect in more detail.

41
 Chapter 4: Evolving an IT strategy for
different levels

Developing an IT strategy which is aligned to the manufacturing requirements of the

auto component sector requires an understanding of the needs of firms at each Level. Only
then can effective IT interventions be designed which can help these firms 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
firms and the consequent challenges faced by IT firms in effectively playing a role to build the
IT capabilities of auto component firms. The key to successful IT interventions lies in recognising
that the Indian Auto Component Industry comprises firms that are at different stages of industrial
development. As a consequence, the firms 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 firms and others. The challenge is to design appropriate interventions
for these different categories of firms which are both cost-effective and result oriented.
This objective gets further complicated by the fact that most firms 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 firms. It highlights the nature of decision making that could
be enhanced with IT enablement as well as establishes a requirement for IT firms to develop
new products and services for the auto component firms. The IT strategy of auto component
manufacturers at different Levels could be evolved from these requirements appropriately.
It would be effective to recognise that firms at different Levels have varying needs and therefore
it would be useful to design Level-specific IT strategy.

Many IT projects fail when there is a mismatch between the needs of the manufacturing
customer and what the IT firm offers and this is more pronounced in small auto component
firms which lead to further hesitation in looking at IT as a solution.

Level I and II firms 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.

42
 Role of IT IT Requirements (Software) IT Requirements (Hardware) IT Strategy

Level I Laying the foundation • Traceability • Stand alone PC • Laying the foundation
• Capture external • Mobile application
transactions

Level II Support quality • Error free Bill of Material • Stand alone PC & email • Linkage with external
• Auto-validation of orders • Mobile application environment
• Inform status of orders to • Ensuring accuracy in
customers – shop loading data
• Invoice generation
• Maintenance analysis
• Basic statistics tools for QC

Level III Support planning • Order receipt systems • Limited capability local • Ensure robust
• Statistics tools for QC network planning
• Company based local • Network dial in by • Functional support
transactional systems manufacturer into
• Production planning, daily customer’s system
schedules, generating
production visibility
• Variance monitoring
• Product costing
• System for material release
to vendors
• System for payment to
vendors
• Error free information on
inventory
Level IV Support reduction in costs • Forecasting model & • LAN • Company-wide
& productivity gains system • IT system to integrate training on IT tools
• Design Decision Support plants • Support improved
System/Engineering design • Intranet deployment decision making
system • Few high-end engineering
• Company based local work stations
system to support DSS • PLC based systems
• Real-time scheduling
system
• HR & payroll systems
• Automated capture of shop
floor data
• Financial accounting
including Bank
reconciliation
LEVEL V IT based competitive • Customer response • Electronic linkages with • Innovative structures
advantage gathering systems suppliers & distributors for demand
• ERP • Network storage management – use of
• SCM capabilities call centre for linking
• Electronic communication • Secure servers customers request to
link with vendors • Upgrading bandwidth for delivery practices
• Share shop floor loading data networking • IT on shop floor
with buyer • High-end engineering – data capturing from
• Manufacturing by wire design stations machines
(simulation of new designs) • Integration of ERP with • Manufacturing &
• Automated training modules MES supply chain analytics
• Auctions/Collective buying • Market analytics
with OEMs • Computer based
• Activity based costing learning – content on
• Documentation of shop floors & delivery
innovation through a
knowledge system

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

43
 Level I firms (especially the tiny ones) would often not have any process that is supported
by 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 office computer configuration, establish some rudimentary processes using basic
spreadsheets, use the computer for official transactions and use internet for communicating
with customers.Therefore the objective of the IT strategy of such firms is to lay the foundation
of an IT programme in the firm with a focus on tracking of information and ensuring accuracy of
data and also establish the role of email based transaction between the firm and its customers.
The IT investment has to be low, the approach for managing these processes has to be simple
and the benefits have to be apparent. The idea would be to initiate these firms to IT usage
while developing an appreciation for data capturing formally. Many transactions between these
firms and their customers are oral – in person or over the phone. The next stage for such a
firm, 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 firms are trying to build on their basic IT infrastructure. With them an IT firm 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 in
Level II firms. 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 firms 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 firms 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 firms 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 benefits. Similarly, while most
owners of Level I and II firms (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 firms require IT enablement to establish and implement the planning function in their
firms as robust planning is the foundation for better decision making. Such a system lays

44
the foundation for data based decision making in the firm ranging from daily and monthly
planning, organising data for use of statistical methods on the shop floor 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 floor 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 flexibility parameters. If a firm misses this stage,
it would get locked into making suboptimal decisions with the consequent impediments in the
future growth of the firm. Therefore, tools and processes to reduce errors in information could
find a sizeable market amongst small enterprises. Level III firms 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 firms are essentially mid-size or large manufacturing firms
who actually use IT for delivering competitive advantage to their customers. Level IV firms
establish their IT systems to help them make quicker and better decisions by using customised
software. At this stage, these firms must also experiment with automated data collection from
the machines on the shop floor through PLC controllers. The Level IV firms 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, office, etc.
All of this, however, will require capital investment of a much higher level. IT firms will have
to offer customised solutions at this stage at reduced costs so that the auto component firms
can start using IT enabled decision support systems and start receiving the attendant benefits.
These firms 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 firms to reduce their costs and improve their productivity. In
addition, some of these Level IV firms 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 firms both in terms of hardware maintenance as
well as package and solution offerings. A Level IV firm 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 firms, an opportunity that is ill-served in India.

Level V firms use IT for enabling its supply chain by improving the coordination between the
supply chain stakeholders, suppliers, its manufacturing facilities, distribution network and

45
 customers. Each of these stakeholders may have different requirements – the suppliers may
require production plans, the firm’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 firms may
put in place an activity based costing system on their shop floor or design their procurement
system to manage online auctions – each requiring sophisticated cost measurement and
allocation algorithms.

At this stage, the Level V firm’s IT systems are also being driven by those of the customer’s
hence the firms may have multiple sub-systems (or islands of systems) which may need to be
integrated into a single enterprise system for increased efficiency. The IT strategy for these
firms involves working with different vendors for different IT products as well as consultants
who would help provide specific solution or coordinate different functions. Since these firms
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 office functions like teleconferencing/videoconferencing, ERP & SCM, R&D
and testing with machine data transfer would be crucial.

The IT strategy for Level V firms 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 floor 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.

46
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 classification on to the Level based categorisation of auto
component firms.

Firm Markets Firm Size Manufacturing

Capabilities
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, Medium Medium
Some Export
LEVEL V Domestic and/or Export Medium to Large Medium to High

Table 8: The market-size-capabilities classification of Auto component firms.

Two issues arise out of this categorisation, who can serve the requirements of each category
of firms and what could be the institutional structure for serving a particular firm type.
Auto component firms 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
firms by defining the integration interface between the OEMs and their supplier’s systems.
Customers to these firms 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 firms. The Level V firms, in
turn, impose a similar requirement on their suppliers. It would indeed be useful for IT firms to
understand these inter-linkages in the Auto Component Industry in order to map opportunities
for different tiers of the industry appropriately.

Manufacturing capabilities define the complexity of tasks that an auto component firm 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 firms,
other than the Level V firms), are SMEs and are often low in capability. As one moves up the
pyramid of capability, the number of firms in those higher categories of capabilities become
small. Many of these tiny to small firms 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 firms to develop new solutions and business models to address this
segment as long-term returns are going to be immense.

47
 The challenge for large IT firms is to devise a service model that will generate revenues to
cover its higher overheads while the challenge for small/mid-sized IT firms is to convince
auto component firms that they can deliver solutions which create strong capabilities in
the auto component firms. Perhaps a hub and spoke model can be created where large
IT firms could be involved in setting up network platforms for collaboration between large and
small auto component firms while the ‘last mile connectivity’ required for actual execution
of IT implementation and after-sales service is done by small IT firms using the large firm’s
platforms, tools and design capabilities. A related issue is the mode of service delivery, as
auto component firms 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 firms 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 firm, i.e., align business strategy of the IT firms with the IT strategy
of the customer firm
• Understand clearly the characteristics and capabilities (both technical and business) of
auto component firms 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 firms, 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.

48
Chapter 5: Looking ahead

The key challenge for the auto component firms is to locate themselves appropriately in the
manufacturing needs - IT needs hierarchy. Once this location is identified, firms 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 firms need to understand the stage or Level to which a particular auto
component firm belongs, before suggesting an IT related intervention. This hierarchy can
also be used by industry associations to highlight the trajectory that firms are likely to follow.
This trajectory might help firms 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 firms and industry associations.
Why is IT adoption not a key challenge and priority of auto component firms? This is despite
the fact that BU heads of these firms 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 firms
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 firms use measures that are difficult 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 firms to understand that certain IT applications
and systems will only lead to tangible benefits when integrated with other IT applications and
systems. The reaping of these synergies is very important for enhancing competitiveness of
the auto component firms through IT adoption.

1. Call for action: Strategies for stakeholders

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 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 firms

• Creation of IT requirements and standards by OEM and large auto component firms
(typically Level I and Level 2) for their suppliers

49
 • Develop a data based decision making perspective and see IT as more than a
transaction system
• Work closely with IT firms 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 firm 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 firms for creating IT infrastructure and for providing
services at competitive costs to SMEs – develop synergies between large and small
IT firms
• Develop service models that provide flexibility 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 firm to its entire supply chain –
will create more value for the customer firm, thereby evincing higher IT investments
• Integrate IT solutions with domain value addition – most IT firms are seen as technical
providers of hardware/software rather than those that help solve domain problems for
manufacturing firms
• Develop firm specific focus based on its capabilities

Industry associations
• Impart domain knowledge through IT based learning platforms
• Organise exhibitions and marketing efforts for small firms as well as firms that are not
located in clusters
• Create support for domestic IT firms, especially in smaller towns, that provide IT hardware
and 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 significant 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, fly-by-wire simulation, etc. – this could be a cluster effort jointly
implemented by the auto component and IT industry associations

50
 • Use the hierarchy of IT and manufacturing needs presented in the report to convey to
the auto component firms 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 firms
• Create escrow fund with tax money that a firm 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 fixed cost of investment with strong linkages with
incubators to feed innovating entrepreneurial ventures in the incubators into clusters
• Provide special benefits by way of reduction in import tariffs, low interest loans, etc. for
Indian firms that are innovative and have a focus on the domestic market

Based on the current status of IT adoption in the Auto Component Industry, firms may not have
followed the above trajectory and therefore may have over or under-invested in IT. For example,
firms that did not require ERP may have invested in ERP and so on. Therefore, IT firms may
need to look at existing investments to help auto component firms devise IT strategies. The IT
and auto component firms 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.

51
 Acknowledgements

Several persons and organisations have played a very important role in the creation of this
report 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.

Anil Varghese Arvind Gupta Deep Kapuria

Head – SME Cluster Director, Chairman &
Development, ACMA Managing Director,
Microsoft India Hi-Tech Gears Limited

Neelam Dhawan Ravi Venkatesan Rajesh Uppal

Managing Director, Chairman, Chief General Manager – IT,
Microsoft India Microsoft India Maruti Udyog Limited

Rajeev Ranjan Rajesh Rege Vishnu Mathur

Chief, Director – Sales, Executive Director,
National Manufacturing Sun Microsystems ACMA
Competitiveness Council India

Authors

Pankaj Chandra Rakesh Basant Rajdeep Sahrawat

Professor of Production & Professor of Vice President,
Operations Management and Economics, NASSCOM
Director, Indian Institute of Indian Institute rajdeep@nasscom.org
Management, Bangalore of Management,
chandra@iimb.ernet.in Ahmedabad
rakesh@iimahd.ernet.in

52
NATIONAL ASSOCIATION OF SOFTWARE AND SERVICE COMPANIES
International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi 110 021, India
Phone: 91-11-23010199, Fax: 91-11-23015452
e-mail: research@nasscom.in, Website: www.nasscom.in