- In 2001, Tata Motors posted a net loss of Rs. 5 billion and undertook a unique cost reduction program called "cost erosion" to reduce costs in areas like materials, conversion, fixed costs, and financial restructuring. - A three-tier team focused on value engineering, vendor analysis, and e-procurement to reduce costs. Changes to purchasing like e-sourcing and shifting to single vendors from multiple vendors helped save Rs. 4,000 crore. - Understanding customer segments better and commitment to customers helped Tata Motors launch the world's cheapest car, Nano.

1. Badam Niharika - 1421036
Shefali Verma - 1421057
Pooja Gupta - 1421149
Olwan Sheikh - 1421220
Mayank Singh - 1421216
Majid Hussain - 1421214
Mohammed Ismail Khan - 1421218

2. “ Cost Erosion at Tata Motors”
Situation Analysis:
• Depressed market conditions.
• Low Revenue Growth.
How to make Profits?
• Answer: Reduce Costs.
• Prakash M Telang, Senior Vice President
(Manufacturing) was appointed as the ‘Cost-
Erosion Champion’.

3. • Established – 1945
• Till 1990’s – Commercial Vehicle Segment
• 1994- Entered SUV segment
• 1999 – Entered Passenger Car segment
• 2003 – Midsize Car segment

4. Tata Motors posted a net loss of Rs. 500 Crores (Rs. 5
billion) in 2001.
Mar '05 Mar '04 Mar '03 Mar '02 Mar '01
Sales
Turnover
20,262.61 15,298.47 10,700.66 8,710.05 7,969.49
Total
Income
17,747.15 13,115.02 9,221.68 7,365.48 6,921.15
Total
Expenses
15,343.12 11,158.91 8,016.15 6,700.37 6,402.36
Operating
Profit
2,000.05 1,727.28 1,060.46 571.36 331.56
Net Profit 1,236.95 810.34 300.11 -63.39 -500.34

5. for the Cost
Erosion Initiative
• Direct material costs: 65 per cent of all costs.
• Variable conversion costs: Power, fuel, water,
tools, etc.
• Fixed costs: Labor, marketing, corporate
expenses, plant operations, research and
development.
• Financial restructuring: Working capital, debt
restructuring, balance sheet, etc.

6. • Tool to company turnaround
• Need Cross functional team
• E-sourcing as an alternative to traditional
purchasing
• Single vendor policy to maintain healthy
relationship
• Shift from a hierarchical model to a collaborative
approach

7. • Quality improvement initiative – started in
September 2000 based on the Six Sigma model.
• Workforce went through training courses
• Increase its production capacity from 330,000 to
360,000 units, by the end of 2004.
• Reducing costs significantly by maintaining healthy
vendor relationships.

8. STRENGTHS WEAKNESSES
• Strong domestic player.
• Its demand driven and
customer-oriented.
• Long list of portfolios.
• Low return of
investment.
• Products are not
considered luxurious.
• Safety Standard issues.
• Limited consumer base.

9. Opportunities Threats
• The product line of
TATA has a great
opportunity to
improve.
• Increase of e- sourcing
and vendor
management
• Government taxation
policies.
• Drastic increase in the
volume of production
despite of losses
• The price of aluminum
is increasing

10. • Tata Motors Looked Towards Re-hauling their
entire procurement strategy
• Hence It Went into a New Task system where:
• All value additions were to be integrated at the
suppliers front (Saves VAT)
• E –Sourced and E auctioned its contracts (saved
300 Crores)
• E-Procurement, Shifted from dealing with many
suppliers to few suppliers
• Sought long term dealing and relationship with
these few suppliers.

12. • Re-negotiation with the existing vendors to
reduce prices.
• Shift from multi-vendor strategy to single-
vendor strategy.
• Vendor SWOT analysis was conducted.
• Track its relationship with the vendor in terms
of the bargaining power and purchasing value.

13. • In the year 2001 Tata motors posted a net loss of 5 billion .
• Unique cost reduction programme was undertaken called “cost
erosion”
• The cost reduction were done in direct material cost, variable
conversion cost, fixed cost, and on financial restructuring.
• The three tier team was appointed to focus on value engineering,
vendor analysis, e-procurement selling and for selling their financial
investments.
• Value team was formulated
• Value chain analysis helped in saving 4000 crore.

14. • To save on cost changes were made in purchasing pattern
• Introduced e- sourcing by replacing the traditional purchasing
mode.
• E-auction helped in saving around 300crore
• For many product categories company shifted from multi
vendor policy to single vendor .
• Major focus was shifted on understanding and developing the
market segments and commitment to customers
• As a result Tata motors gave worlds cheapest car NANO.