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Last year, Tata Motors’ plan to produce a car for approximately 1 lakh (approx. 2,500 USD) was greeted with equal parts excitement, envy…and skepticism that they could deliver the shockingly inexpensive car. 14 months later, the Tata Nano has arrived. As you can see in the test drive video below, the car drives surprisingly well - always a concern since many joked that at that price it would have a top speed of 40mph or loose parts as it rolled down the street.
So the questions remain; how did they do it? And can their supply chain cost reduction model be replicated?
Most of the coverage of how Tata Motors cut costs vaguely say they focused on their supply chain. They cut the price of a car to 1/4 of the cost of a new econo ride in the US and they simply “focused on the supply chain”? Obviously there is more to it.
For one, Tata Motors set their retail price target before they designed the car. Doing so let them establish their demographic - in this case, motorcycle owning families - before pricing them out of the car during the design process.
Setting the price and working backwards also required a fundamental shift in the way the car was designed, since many costs are fixed once the design is set. To accomplish this, Tata Motors worked in collaboration with their suppliers very early in the process - so early in fact that they were able to provide functional goals for many parts rather than technical specs (i.e. wipe water from windshield vs. windshield wiper must be x mm by y cm and work at z cadence). This approach tapped the ingenuity of the supply chain, who delivered parts that met the functional requirements and extremely low prices.
BusinessWeek also shed light on another cost cutting strategy - Tata Motors’ distributed assembly model, where they ship the parts to local manufacturers for final assembly. Aside from the obvious reduction in capital costs, perhaps there are other lessons to be learned from this practice. Could their approach make catering a global product line to local tastes, regulations and practical requirements help contain costs?
For a deeper look at how Tata Motors managed the seemingly impossible, I’d recommend Jason Busch’s (of SpendMatters) interview Ravi Kumaraswami, who worked with the company on their sourcing and procurement strategy and process. Ravi walks through Tata Motors’ evolution from a record breaking quarterly loss to the innovative culture that now creates the world’s most affordable car. It’s well worth a listen even if you’re cost cutting goals are more modest than Tata’s were.
Justin Fogarty is Managing Editor of Supply Excellence. For any questions or feedback on the blog or its contributors, Justin can be reached at jfogarty[at]ariba.com.
10 responses so far ↓
1 Bill Huber // Mar 25, 2009 at 11:08 am
This philosophy is not much different from Henry Ford’s. Ford, when developing the Model T determined what it needed to cost and then figured out how to build it for that price.
2 Justin Fogarty // Mar 25, 2009 at 11:25 am
Great point Bill. The more things change, the more they stay the same.
3 Radhika // Mar 25, 2009 at 6:37 pm
Amazing Job done.
4 Gregory C. Pavlov // Mar 29, 2009 at 4:10 am
Absolutely! Identify a need and then taylor a product to fit the need. Nothing more, nothing less! Become recognised as a leader in that need and then find another need to conquer!
5 Atul // Mar 30, 2009 at 5:20 pm
Either its a Henry Ford’s T Model or TPS, what was required for masses were never available. Now Tata has done it. It’s Tata’s Supply Chain Model (TSCM) and all supply chain professionals need to study it , understand it and assimilate the new SCM process adopted by them. If you can improve, who stops you..
6 Supply Excellence — Deloitte Encourages CFOs to Embrace Spend Management // Apr 7, 2009 at 12:06 am
[...] didn’t mention it, working with your suppliers to nurture their costs savings innovations - as Tata Motors did with the Nano - can be a great way to strengthen relationships, improve products and cut [...]
7 Supply Excellence — New iPod Shuffle: Supplier Innovation & HUGE Margins // Apr 16, 2009 at 2:57 am
[...] recently wrote about Tata Motors collaborating with their suppliers to foster innovation and costs savings while creating their $2,500 Nano. Reactions to this model on [...]
8 Supply Excellence — GM: Are eBay & a $4,000 car enough to turn things around? // Aug 18, 2009 at 1:26 am
[...] last Friday in a move that everyone sees as a shot across the bow of Tata Motors and their $3,000 Tata Nano. Little is known about GM’s plans - other than that it will likely be built in Asia and may [...]
9 ankit // Oct 3, 2009 at 11:44 pm
tata followed a price led costing approach rather than a cost led pricing one when making the nano, which is quite a common feature in Japan and China, further more, tata’s innovation is much more credible than Henry Ford’s Model T for at that time there was no competition and people would buy whatever was available but now its not the same….
10 Tata Swach: Relying on Innovation with Eye Towards Bottom Line | Reaction Radio // Dec 11, 2009 at 5:41 am
[...] Tata Group (TTM) at a very rapid clip. The Tata Nano, which relied heavily on the company’s suppliers for their cost savings and creativity, raised the proverbial innovation bar by dramatically lowering the cost of an automobile thus [...]
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