Global supply chain disruptions caused by the COVID19 pandemic have set off the search for the next global manufacturing hub. The crisis presents India’s opportunity to reform its manufacturing sector and make its supply chain more competitive. India has a demonstrated history of pursuing reforms during a crisis. As manufacturing enterprises typically pivot “make or buy” decisions on costs, a focused approach to cost optimisation during the ongoing crisis and beyond can turn India into a global manufacturing hub.
The following levers of cost-optimisation may provide the starting point of transforming India into a manufacturing workshop for the global economy:
● Build collaborative supply chains to pass-through benefits
The cost-efficiency of procurements of manufacturing materials affects the cost-efficiency of the final product, owing to cost-plus pricing at every tier in the supply chain. Therefore OEMs in India must simplify macro-level cost-efficiency targets into MSME-specific cost-efficiency targets at the micro-level and build collaborative supply chains from the ground up.
● Relax caps on investment for component manufacturing MSME units
There is a direct proportionality between cost-efficiency and plant capacity in manufacturing. For component manufacturing MSMEs in India to be cost-efficient, the size of operations has to attain a minimum viable level through higher investments in plant, equipment, and machinery. However, investment caps in the regulatory framework that define the scope of MSMEs in India are agnostic of manufacturing requirements. Relaxing the investment caps for component manufacturing MSMEs can enable capital expenditure for plant capacity expansion and stimulate their cost-efficiency.
● Specialisation in manufacturing of custom components necessary to reduce costs
One of the significant drivers of cost-efficiency in manufacturing is the economies of scale accruing from specialisation. Therefore, for Indian manufacturing enterprises to be cost-efficient, they need to look to specialise in the manufacturing of custom components. MSMEs and OEMs in India need to focus on greater customisation of their products. Production of made-to-order components that adhere to the quality standards and reliability and performance requirements calls for investment in the development of specific manufacturing technologies. Such investments in specialisation enable a reduction of long-run average costs.
● Focus on digitisation of procurement processes to unlock cost-efficiency
One of the significant areas of manufacturing that has continued to elude cost efficiency is procurement. Procurement of machine tools, industrial supplies, and equipment of the right specifications at the right costs at the right time are integral to determining the cost-efficiency of long-term projects and contracts. Manufacturers in India need to embrace digitisation in their procurement processes to ensure greater accuracy in mapping industrial purchases that affect OPEX and track supplier performance through analytics for continuous improvement in cost, quality, and delivery.
● Improve contract execution through AI and ML to control project costs
High project costs have been one of the major pain points for Indian manufacturers, especially in verticals like engineering, production, and construction, logistics, and infrastructure development. Significant reasons for overrunning project costs include multiple rounds of stakeholder collaboration in contract management and clauses within contracts that allow parties to stretch project KPIs that impact project margins. Indian manufacturers need to leverage artificial intelligence and machine learning-driven contract management applications to track cost, quality, and delivery metrics to keep project costs under control.
● Set phased targets to localise a greater proportion of value of the final product
The COVID19 experience is likely to stimulate manufacturers to explore the nearshoring model with renewed vigor. Indian manufacturers need to set phased targets to localise a higher proportion of the final product’s value. To achieve this goal, suppliers need to strategically locate their manufacturing plant in proximity to their customers and aggressively pursue import substitution practices through higher local manufacturing and local procurement. Doing so can enable manufacturers in India to reduce freight costs and de-risk their supply chain.
● Prioritise technology transfer from OEMs to MSMEs
One of the challenges facing Indian manufacturing is the lack of technical expertise and managerial know-how. Resolving this challenge calls for large OEMs to partner with their suppliers to facilitate knowledge transfer through deeper collaborations on technology sharing and diffusion of knowledge resources. Transfer of technology (ToT) agreements through foreign direct investment (FDI) can be an excellent route to propel Indian component manufacturers and suppliers towards achieving best-in-class cost efficiencies.
● Partnerships to shape the future of cost-efficient manufacturing in India
The gaps emerging in the global supply chain through the COVID19 pandemic present an opportunity for India to become a manufacturing hub. Indian manufacturers need to be agile and reach out for low-hanging fruits in the short term. In the long run, this calls for the fusion of trade diplomacy and partnerships with manufacturing leaders across south-east Asia and Asia-Pacific to improve global supply chain connectivity and create a cost-optimised India centric global manufacturing model.
