Tata Nano – A frugal innovation

A cost center is part of an organization that does not produce direct profit and adds to the cost of running a company. Examples of cost centers include research and development departments, marketing departments, help desks and customer service/contact centers.

Although not always demonstrably profitable, a cost center typically adds to revenue indirectly or fulfills some other corporate mandate. Money spent on research and development, for example, may yield innovations that will be profitable in the future. Investments in public relations and customer service may result in more customers and increased customer loyalty.

Since the cost center has a negative impact on profit (at least on the surface) it is a likely target for rollbacks and layoffs when budgets are cut. Operational decisions in a contact center, for example, are typically driven by cost considerations. Financial investments in new equipment, technology and staff are often difficult to justify to management because indirect profitability is hard to translate to bottom-line figures.

Business metrics are sometimes employed to quantify the benefits of a cost center and relate costs and benefits to those of the organization as a whole. In a contact center, for example, metrics such as average handle time, service level and cost per call are used in conjunction with other calculations to justify current or improved funding.

The basic cost centers of automotive industry can be divide into:

Research and development :Quality AssuranceQuality Control

Market Research:Advertisement Brand building

Consumer relationship Management:Information center

Study of interrelationships among a firm’s sales, costs, and operating profit at various levels of output

Break-even point is the Q where TR = TC (Q1 to Q2 on graph)

TR

TC

Q

$’s

Profit

Q1 Q2

In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". A profit or a loss has not been made, although opportunity costs have been paid, and capital has received the risk-adjusted, expected return.

Draw a line through origin with a slope of P (product price) to represent TR function

Draw a line that intersects vertical axis at level of fixed cost and has a slope of MC

Intersection of TC and TR is break-even point

TR

TC

FC

Break-even point

MC

P

1 unit Q

1 unit QQ

$’s

Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.

It assumes that fixed costs (FC) are constant. Although, this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise.

It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e. linearity)

It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period).

In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).

Margin of safety represents the strength of the business. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break even point.

margin of safety = (current output - breakeven output) margin of safety% = (current output - breakeven

output)/current output x 100 When dealing with budgets you would instead replace

"Current output" with "Budgeted output". If P/V ratio is given then profit/ PV ratio == In unit Break Even = FC / (SP − VC) where FC is Fixed Cost, SP is Selling Price and VC is

Variable Cost

Rattan Tata was able to keep his promise and deliver a car for Rs 1,00,000, the Nano, with help from some 100 component manufacturers, most of them homespun Indian outfits. Some of them worked with the core Tata Motors team in total secrecy for over three years.

A day after Tata drove the car to the ramp at the 9th Auto Expo here and the world gaped in awe, several component manufacturers decided to lift the veil of secrecy and told Business Standard how the car was put together through collaborative engineering. The price target, they said, was achieved by sheer design improvisation and not cutting corners on essentials.

The brief to them was simple: make things smaller and lighter, do away with superficial parts and change the material wherever possible.

A few did their own research and development, some developed products with Tata Motors and quite a few were given designs by Tata Motors. The company even helped some vendors find international partners to make products that met the company's requirements.

To begin with, it was decided to make the 623 cc two-cylinder petrol engine from aluminum. Conventional engines are made from cast iron, adding weight as well as cost to the car. "Being smaller and lighter, the cost was lower," said Rico CEO ArvindKapur who supplied the blocks to house the engine.

The engine being lighter and placed at the rear of the car put less pressure on the steering systems, which allowed for more cost savings. As a result, there was no requirement for a link between the engine and the rear wheels.

Still others said Tata Motors was able to bring down prices through old-fashioned bargaining. Price negotiations from Tata Motors' side apparently started from 50 per cent of what component suppliers offered. But the Nano is expected to sell in large volumes and that would make up for the crunch in margins, they were promised."When you are talking about 350,000 to half a million units, you start pricing the parts on variable cost. Typically at 250,000 units if the part reaches break-even point then the scope for reducing price changes dramatically," said Anil Srivastava, CEO, GEA, a strategic consulting firm for automobile and parts companies.Even so, some suppliers could not meet Tata Motors' price demands. For instance, AIS, the country's top automotive glass maker, decided to stay out of the basic car shown by Tata yesterday (the order was placed with Saint Gobain). "We are hopeful of getting into the deluxe model," said AIS CEO Sanjay Labroo.Initially, Tata had plans to assemble the car at the dealers' workshop to cut down his spend on logistics. The plan, reliable sources said, still stands.

Surinder Kapur, chairman of the Sona group, which supplied the steering columns, steering gear and differential drive assembly, said: "The tubular design of the car instead of the conventional 'rod' design definitely helped cut costs, particularly the processes involved."

Lumax, which has supplied lighting systems for the Nano, worked closely with engineers from Tata Motors' Engineering and Research Centre to ensure that cost targets were met. "We also did some competitive buying of material from countries like China and Thailand," LumaxExecutive Director Deepak Jain said.

Costs were also cut by using regular bulbs that meet the regulations instead of long life bulbs.

Production concerns

Another cost cutting exercise that was attempted was to reduce the number of tools to make the components while at the same time, increasing the life of the dies used, by three times the norm. "It made the design and manufacture of the dies more complicated. We tried special materials and received a lot of help from the product design team in meeting the target," says another production engineer.

Initially Vivek Suhasrabuddhey, divisional manager, Small Car Project Office, was sceptical about meeting the projected cost because ''the car looked like an Indica, with the same volume but the targeted price was a quarter of the cost of the Indica. But then I realised we could do many things." They started with benchmarking all parts and sub assemblies with vehicles ranging from a two-wheeler to a high-end fancy car. They also did an exercise called design for manufacturing and assembling whereby the design efficiency of each of the assemblies was worked out. ''Basically this means determining how many useful parts there are in the design. We involved the suppliers also in this exercise and they realised that some functions could be integrated in parts. That is how we got some cost benefit," he says.

Because the Nano is a rear-engine car, serviceability and accessibility was a big concern. ''We had to make the car more serviceable and accessible from the customer's point of view. So we did some design modifications to allow this," says Nagabhushan R Gubbi, head of engineering, Passenger Cars. An innovative approach, creating a statistical tolerance sheet for critical failures in product design, gives the team critical control parameters.The car has undergone all required safety testing. "We have done the full frontal crash testing. The offside frontal is required for Europe and will be required in India too. We have completed all simulations etc and are ready. The car also conforms to all environment norms, including Bharat Stage III," says RG Rajhans, project manager, Body Systems Engineering Automation, INCAT.

This team had a major contribution to make in lowering the cost of the car because majority of the parts were to be outsourced and had to be procured at low cost. The team evaluated and selected vendors who could deliver quality at the required price and then worked with them to ensure that the parts were made to the right critical parameters on the drawings given by ERC.

"There were two primary challenges for us," says Sachin Singh, assistant general manager, Strategic Sourcing Group." The first was to contain the prices, because every time there was a change in design or specification, the cost changed. The second and unique challenge was to convince the vendors about the volumes." Not surprising since talking volumes of two million over five years was not heard of in the four-wheeler industry.

"A major task was to interact with them, to figure out their processes and optimum capacity to which they could deliver," he adds.

E Balasubramoniam, head - Sourcing, small car project, PCBU says, "A lot of engineering has been contributed by our suppliers. We have about 100 vendors, of which 50 will be co-located at the vendor park at Singur. Of these 15-20 would be integrated facilities."

Some of the vendors are from the Tata Group. The TACO group companies include - TACO IPD, Tata Toyo Radiators, Tata Johnson Controls, Tata Visteon, Tata Yazaki, Tata Ficosa, Tata GS Yuasa Batteries. There-s also Tata Ryerson for the steel service centre and roll form sections, Tata Bearings for bearings and Tata Steel Tubes for the engine cradle.

The big task now is to get the plant operational with the 50 vendors setting up their facilities, clearing all the testing and validation, looking at timelines, the production and ramp rate. "In a normal set up, machines are running and processes are established; here the 4Ms of production - man, machine, material and method, are all new. It is like setting up 50 factories," says Mr Balasubramoniam.

The difficulty also lies in the fact that the product and the location are both new. The team is doing its best not to repeat mistakes from the Indica launch. "We are taking definite measures to minimise problems. We have started the early vendor involvement initiative. It is a unique initiative (3P - production, preparation, process methodology) used by Toyota for their supplier base," he adds.