Mrf Tyre Industry Ver 4

MRF CSF analysis Page 1

Indian Tyre Industry A study of CSF’s for MRF in the OEM division

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By: Deepali Naniwal – 13/5

Sushant Sehra – 45/5

Saurabh Sinha 38/5


Tyre Industry background

The origin of the Indian Tyre Industry dates back to 1926 when Dunlop Rubber

Limited set up the first tyre company in West Bengal. MRF followed suit in 1946.

Since then, the Indian tyre industry has grown rapidly.

Auto and Transportation industry and tyre industry go hand in hand as the two are

interdependent.. With an extensive road network of 3.2 million km, roads meet

significant chunk of the demand of transportations of goods and men..

The Indian tyre industry produces the complete range of tyres required by the Indian

automotive industry, except for aero tyres and some specialised tyres. Domestic

manufacturers produce tyres for trucks, buses, passenger cars, jeeps, light trucks,

tractors (front, rear and trailer), animal drawn vehicles, scooters, motorcycles,

mopeds, bicycles and off-the-road vehicles and special defence vehicles.

The demand from the OEM or vehicle manufacturers segment is a derived one and

directly correlated to the level of automotive production. The OEMs demand varies

significantly across categories from between 8% for truck and bus tyres to over 50%

for some other segments like, jeeps and mopeds.

Some of the major players in the Indian tyre industry are MRF, Ceat, JK Industries,

Apollo Tyres, Bridgestone India, Goodyear India, Falcon Tyres and TVS Srichakra.

The tyre industry in India is fairly concentrated, with the sample of eight companies

accounting for 82% of production in FY2002. Besides, not all companies have a

diversified product portfolio.

Apart from being capital intensive, the tyre industry is highly raw material intensive.

Any change in the prices of raw materials affects the profitability of tyre companies.

The raw materials used in the manufacture of tyres are rubber and petroleum

derivatives like nylon tyre cord, carbon black, styrene butadiene rubber and poly

butadiene rubber. The most important raw material is rubber-natural and synthetic.

Natural rubber (NR), with 29% weight age in the cost of raw materials used by tyre

industry, is the highest cost item. Annual consumption of NR by tyre industry is 3.50

lakh tonnes, valued at Rs. 14 billion. Over 85% of NR consumed' by the industry is

procured domestically. 15% is imported.

The level of economic activity, performance of domestic automotive industry, and the

faring of the transport sector directly influence the performance of the tyre industry in

India. With the replacement segment dominating the overall tyre demand in India,

the industry remains inherently vulnerable to economic cycles.

According to the top credit rating agency research, the tyre industry in India expected

to grow at CAGR of 10% till FY14. Current tyre radicalization in India stands at 9%


compared to a world average of 65%. Domestic tyre industry has witnessed a

remarkable recovery in FY10, after a slowdown in FY09.

Financial Year 2009-2010 (Snapshot)

Turnover Rs. 25,000 Crores

Production (Tonnage) 13.50 lakh M.T.

Production – All Categories (Qty.) 971 Lakh

Tyre Export from India (Value) : Rs. 3625 crores

Number of tyre companies: 36

Industry Concentration 10 Large tyre companies account for over 95% of

total tyre production.

Radialisation

(as a % of total tyre production)

Passenger Car tyres: 98%

Light Commercial Vehicles: 18%

Heavy Vehicles ( Truck & Bus ): 12%

External Enviornment

Tyre Industry Delicenced since 1987

Exports Freely allowed

Imports Freely allowed.

Import Policy for Used / Retreaded tyres: Restricted from April, 2006

Scope We have primarily focused on the new tyre industry for the OEM’s or original

equipment manufacturers which are auto mobile companies. The retreading industry

and replacement industry are out of scope of this study, although we do believe that

because the significant demand from the replacement market, it has an impact on

the critical success factors of the organizations.

The tyre company chosen for Critical Success Factor analysis is MRF or Madras

Rubber Factory and the products in focus are the passenger car and motorcycle

tyres for the vehicle manufactures.

Methodology We have used Porter’s 5 forces framework to analyse attractiveness for tyre industry

in OEM market. Analysis pertaining to major dimensions in tyre industry is done and

then a score in 0 to 5 range is given, with 5 being the highest in terms of overall

attractiveness


. The tyre company chosen for Critical Success Factor analysis is MRF and its role in

serving OEM market is looked in details. We have identified required systems and

looked at the current systems to improve Information Systems usage in MRF.

Industry Analysis


Porter five forces Analysis of the Tyre Industry in the OEM market.

1. Threat of New Entrants

The threat on New entrants impacts the overall profitability and the structure of the

company. Especially the activities configuration is determined based on the

perceived threats.

Dimension: Supply Side economies of scale:

The supply side economies of scale can be defined as benefits accrued by working

on a larger production scale. If the benefits are large then this will prevent new

entrants as the current manufactures will be operating on a large scale and to

compete with them a large capital would need to be invested and greater risk would

have to be taken.

In our assessment there are only few advantages of large scale production that a

producer of tyres in India can enjoy for Supplying to OEM market. The reasons for

this assessment are following

The Share of the largest player in the industry is 21% and that of smaller

player is around 7%. There are 40 odd producers of tyres in India. Thus we

can see that largest players can’t nudge out smaller players because of scale

advantage.

The average plant size has a capacity of 1.5 million tyres while the industry

demand is 70 million tyres. This implies that no major scale benefit is

associated with building large capacity.

If there would have been significant advantage in building scale then the

Industry would have seen major consolidation among the players, but

historically the industry has been immune to any merger or acquisition.

The major cost for running the tyre manufacturing costs comes from raw

material which is rubber, and there is no significant operation efficiency in

terms of cost that can be achieved by producing on a large scale.

Thus based on the above observations about the industry it is clear that the industry

doesn’t enjoy any significant economies of scale, and that makes it easier for the

new entrant to enter in the market.

Score on this dimension: 2 out of 5

Dimension Demand-side benefits of scale

The demand-side benefits of scale can be defined as the benefits accrued to auto

makers if the suppliers of tyres are operating on a large scale and thus supplying to

different customers. The higher the benefit the more difficult is for the new entrant to

join as it would be very difficult for them to incentivise the auto makers to break from

the network and try new products.


There are no significant demand side benefits of scale. The customers or the OEM

get into contracts with numerous tyre makers to fulfil the demand. Most of the OEM

manufactures are not in alliance with each other and production facilities are not

concentrated in a particular region. The rationale why we think there are no demand

side benefits of scale are as follows.

There is no “Network” effect visible in the OEM market, that is one Auto maker

benefiting because other has ordered same tyre from same company. There

is no service or production benefit associated with having same tyre across

auto industry.

No alliance, formal or informal associated with the auto industry; every

manufacture orders its own set of tyres and maintains its own service centres.

An auto manufactures has multiple vendors for its tyre requirements.

Thus based on the above observations it is clear that there is hardly any benefit

associated from customer point of view that suppliers be producing on a massive

scale.


Dimension: Customer switching cost

Customer switching costs are the transactions costs associated with changing one

vendor of tyres with the other. The higher the switching costs for the customers or

the OEM lesser they will be inclined to switch to a new entrant

In our view there are few switching costs for the automakers and rationale behind is

based on the following observations.

The product is standardised, the industry works on the evolved technical

specifications. Thus once making a switch the automakers don’t have to worry

about changing the design or process of manufacturing of their product to

accommodate the product of the new tyre maker.

There is lock-in visible of a automaker with a tyre company. There is only one

automaker which purchases from a single tyre manufacturer rest all have

multiple vendors serving their needs.

Based on the above observations it is clear that the OEM don’t incur much switching

costs. Although there is evidence to suggest that they get into long term contracts

with the tyre vendors, but the terms of the trade will be more tilted towards the

automaker as the switching cost for the automakers are very low.


Dimension: Product differentiation


Product differentiation can be defined as the notion that there are differences that

exist between products. The higher the differentiation more difficult it is for the new

entrant to carve his own niche.

Tyre industry has come up with different type of tyres like radial and tubeless and

most of the end consumers consider these tyre categories different from the classical

tyres. But still we believe that the differentiation is low based on the following

rationale

The technical specifications for different product categories are standardised.

Although radial and tubeless tyre can charge a premium on being different

from tyres it is impossible to distinguish between one radial of MRF with radial

of JK tyre.

Automakers don’t advertise the tyres of manufacturer they are using.

Although cars having tubeless tyres are advertised as having a certain type of

tyre but the manufacture is not advertised.

Most of auto makers specify different sizes for the tyres but beyond size there

is no major feature difference that is demanded.

Thus based on the above observation it is clear that there is no major product

differentiation apart from the difference in certain type of tyres and that too is

restricted to only car tyres.


Dimension: Brand Equity

We will measure the brand equity with respect to the importance to the car

manufacturer. The higher the brand equity higher is the barrier for new entrant as it

takes time to build the brand equity.

There are numerous tyre manufacturer and they spend part of their budget to

promote their brand. But the importance of the brand equity to a OEM is limited as is

based on the following rationale.

There is limited customer pull demand for a tyre manufacturer from the

customers of the automakers. This absence of pull demand gives freedom to

the automakers to go beyond a brand and look for the best deal.

Automakers don’t advertise Brand of the tyres they are using. Which means

there is no brand equity that can be built up in the OEM’s


Thus based on the above observation it is clear that there is no major brand equity.

Auto makers might loose some customers for using unbranded tyres but they don’t

gain any customers for using a certain type of brand.


Dimension: Capital requirements

Capital requirements are a major deterrent for the new competitors. A new tyre plant

with a capacity of 1.5 million can be built around for 800 million rupees. Per say this

number looks large but compared to return in the industry and breakeven point this

not a major investment and as the variables costs are almost immediately

recoverable. Hence the capital requirements for this industry are not very large.


Dimension: Access to new technology

If a industry has proprietary technology it makes it difficult for the new entrant to

imitate the technology and build similar products. Of late Indian tyre manufactures

have started spending 2 to 5 percent for their earnings towards R&D and tyres based

on the technologies have come into prominence for example Radial and tubeless

tyres. It is also driven by the specialized cars and their requirements for better safety

and performance from the tyres. But the technology tie-ups are possible and do exist

in the industry, hence the difficulty to access to the technology is marked as

Moderate.


Dimension: Access to Raw materials

The availability and the ownership of raw materials is a crucial consideration for any

new entrant. There are two major raw materials in the manufacture of the tyres

Natural Rubber

Petro Products.

Both the products are commodities and freely traded in the market. Hence there is

no difficulty is accessing the product from the market. Additionally these products are

also available in the international markets which make imports also possible in case

large scale decline in local production. All this makes it easier for the new entrant to

enter the market and start producing using the raw materials.



Dimension: Access to other production inputs like location

Location can be another factor that can deter the new competitors. As per industry

structure there is no significant advantage of locating the manufacturing location to a

particular location. Locating it close to the OEM’s or Natural rubber plantations might

help to decrease in the lead times of distribution or procurement but it doesn’t add

any significant benefit as both the auto plants and rubber locations are spread in

various parts of India.


Dimension: Prevalence of learning from experience

There is no evidence to prove or contradict that firms in tyre industry have any

advantage of learning from experience. Hence this dimension is not rated.

Dimension: Access to distribution channels.

Ability of the firms to market their products across distribution channels is one of the

major factors that new competitors consider. Distribution channels not just lower the

risk by distributing it they also define the reach of a product. In case of product

market combination this report is considering there is only one distribution channel

that is the OEM.

The distribution is based on the long term contracts hence it is very difficult for the

new entrant to access this single channel of the sales.


Dimension: Protection from government policy relating to entry of new players

in the industry

External environment and regulation creates the barriers for the new entrants by

ways of policies of quota or taxation. As per current laws and regulation there is no

restriction for a manufacturer in India to produce tyres but the imports are


discouraged by ways of higher excise duties especially for the tyres for 2/3 wheeler

segment.

Score on this dimension: 2.5 out of 5

Overall average score of attractiveness in terms of threat from the new supplier is

2.23 out of 5. This means that the industry faces threat of entry of new entrants in

case the overall margin in the industry is high.

2. Power of suppliers

Power of suppliers is the leverage enjoyed by the suppliers of the raw materials or

services to the manufactures of the tyre industry. The amount of leverage impacts

not just the procurement processes but also the operations and the sales potential.

Dimension: Concentration of supplier industries

The concentration of the suppliers industries which we will measure with relation to

the number of tyre manufacturer measures the bargaining power of the suppliers

with respect to the manufacturer.

The two raw materials used in the manufacture of tyres are

Rubber: It is traded in the markets and easily available. Rubber is highly

commoditized product and there are no large producers of the same.

Petro-products There are few suppliers of petro products in India as this is an

imported product under government regulation. And most of the petro

companies are large in size.

Hence we can assume that there is an moderate concentration of the suppliers.


Dimension: Switching costs for the industry in changing suppliers

The ability of the tire manufactures to change their suppliers determines the

processes that affect the procurement and the input costs. The raw materials are

mainly commodities as described above and are highly standardized, but there may


exist some long term contracts for the procurement from certain suppliers and some

location specific suppliers. Hence the switching costs are moderate to low to switch

the suppliers.


Dimension: Differentiation in products/ services offered by suppliers

There is different type of rubbers, and rubber is recognized by the quality sometimes.

There is no differentiation in the petro products which is another input in the tyre

manufacture. Overall we can assume that there is moderate to low product

differentiation in the products offered by the suppliers.


Dimension: Differentiation in products/ services offered by suppliers

As indicated above there are different type of rubbers few of them are listed below

The quality and specification of the rubber impacts the specification and the quality

of the tyre manufactured.


Dimension: Contribution of suppliers' inputs to the cost of industry's output

ACRYLIC RUBBER BUTADIENE RUBBER

BUTYL RUBBER CHLOROBUTYL

CHLORINATED POLYETHYLENE CHLOROSULPHONATED POLYETHYLENE

EPICHLORHYDRIN ETHYLENE ACRYLIC

ETHYLENE PROPYLENE RUBBER FLUOROELASTOMERS

HYDROGENATED NITRILE RUBBER ISOPRENE RUBBER

NATURAL RUBBER NITRILE RUBBER

PERFLUORO ELASTOMERS POLYCHLOROPRENE

POLYNORBORNENE RUBBER POLYSULPHIDE RUBBER

POLYURETHANE RUBBER SILICONE (and FLUOROSILICONE) RUBBER

STYRENE BUTADIENE RUBBER TETRA-FLOUROETHYLENE/PROPYLENE


As per the data available between 2000 and 2005 the two inputs to the tyre

manufacture constitute around 60% of the costs of the manufactured tyres. The data

is consistent across various companies of various sizes.


Dimension: Availability of substitute inputs for the industry

There are very few substitutes available of the rubber and petro products that are

used in the manufacture of the tyres. Because of lack or credible alternatives the

power of suppliers is high in the industry.


Dimension: Suppliers' threat of forward integration

Out of two type of suppliers the rubber manufactures because of fragmentation don’t

have enough financial capital to do forward integration although 50% of the rubber

produced in India is used by the tyre industry. Petro-product based companies have

huge financial capitals but usage of their products in tyre industry constitute very little

to their overall sales. Hence there is little threat for forward integration by the

suppliers of tyre industry.


Dimension: Industry's threat of backward integration

The tyre industry is highly unlikely to go for backward integration as the capital

requirements to buy petro-products manufacturing units are extremely high and the

rubber production is fragmented in small holdings and regulated by the government

hence tyre industry doesn’t pose much threat to it’s suppliers.


Dimension: Dependence of suppliers' industries on the industry (for revenue/

profitability)

As indicated above the tyre industry is the minor customer or consumer for the petro-

products but it consumes 50% of the rubber production hence the dependence of the

suppliers on the tyre industry can be attributed as moderate to high.



Overall attractiveness average score for the Power of supplier force of porter is 2.78.

Which means that power of suppliers is high and they are in position of strength

compared to the tyre industry

3. Power of Customers

The leverage enjoyed by the customers of tyre industry determines how much to

focus the attention to the external environment. For the current analysis we consider

auto manufacturers as the customers of the tyre industry and they are categorized

by their large size and mass production of their production.

Dimension: Concentration of customer industries

There are few number of buyers compared to the number of tyre manufacturers and

the OEM market is dominated by the big players with large financial clout. There is

data available which shows the margins while selling tyres to auto manufactures is

very low.


Dimension: Switching costs for customers to move to another firm in the

industry

The markets work on long term contracts hence there might be some switching costs

in changing the vendors but due to lack of product differentiation between the firms

then penalty to switch is not too high.


Dimension: Customers' threat of backward integration

Auto makers have high financial capital to perform backward integration but tyres

have little contribution to the overall cost of their final product, sometimes even less

2%. Hence the threat of backward integration is low by an auto manufacturer. Also

historically worldwide there has been no such instance of backward integration



Dimension: Proportion of customers' purchase from the industry out of their

total cost

Tyres are not a major cost driver for the auto makers as indicated above they can

cost up to 2% of the total costs. Hence there is less intensive for the automakers to

drive hard bargains.


Dimension: Pressure on customers to cut costs (due to profitability/ cash flow

situation)

Indian auto industry is going through fierce competition and there is extreme

pressure on the margins and this is leading them to further squeeze the margins on

the tyre industry.


Dimension: Contribution of industry's supplies to the quality of customers'

output/ consumption

Contribution is likely only for the innovative tyre products like tubeless tyres or radial

tyres but beyond that there is no significant contribution to boost the quality of the

final product.

Score on this dimension: 2 out of 5.

Dimension: Impact/ criticality of industry's supplies to the overall performance

of the customers' business

Although no car can be delivered without the tyres there are other more critical

inputs for the auto makers like engine, body etc. hence the criticality for the auto

makers is comparatively low.

Score on this dimension: 2 out of 5.

Over all the average attractiveness score for this Porter force is 2.50. That means

that the customers have a big sway on the margins of the tyre industry.


4. Threat of substitutes

There are no close substitutes of the tyres available for the auto makers. Hence in

all the dimensions the attractiveness score are high.

Dimension Score Rationale

Availability of close substitutes of the industry's product/ service to its customers

4 No substitute available

Switching cost for the customer in using one of the substitutes

NA

Substitute's price-value characteristics compared to price-value of industry's product/ service

NA

Profitability of firms in the industry(s) offering substitutes

NA

5. Rivalry among Competitors in the Industry

Dimension Score Rationale

Differentiation in products/ services offered by the industry to its customers

3 As indicated above there is little differentiation except in case of radial tyres and tubeless tyres

Switching costs for customers to move to another firm in the industry

2 As indicated above because of low differentiation and standardization of the product switching costs are low

Fixed cost (as proportion of total cost) for the players in the industry

3.5 Assembly-line production can be adjusted to demand. Main fixed costs are from plant & eqpt.

Capacity addition can be done by players in the industry in small numbers or large numbers

3.5 The capacity addition can be done in small numbers this is indicated by the large number of players, around 40 thus Small capacity additions feasible if it builds on existing production lines.

Shelf-life of products offered by the industry

4 Tyres have large shelf life hence the firms can afford to keep them in the inventory and don’t face the pressure of selling them because they will rot away.

Concentration of players in the industry 4 Top 4 players enjoy 75% share therefore high concentration.

Industry growth rate 3 Moderate growth (4-6%


historically and projected).

Capacity utilisation in the industry Don't know

Proportion of assets used by players in the industry that cannot be deployed in other industries

2 Highly specific assets (very few types of equipment like mixers may find alternate application, rest is tyre specific).

Government policy on exit by players 1 Indian labour law restricts the winding up of public firms under the companies law thus it makes it difficult for players to exit (eg., Dunlop Chennai unit).

6. Summary of analysis

As per our rating of various dimensions the following is the summary or the average

result

Competitive Forces Attractiveness Score (1 to 5)

Weightage Weighted Scores

1. Threat of New Entrants 2.23

20% 0.45

2. Power of Suppliers 2.78

20% 0.56

3. Power of Customers 2.50

20% 0.50

4. Threat of Substitutes 5.00

10% 0.50

5. Rivalry Among Competitors in the Industry

2.89

30% 0.87

OVERALL ATTRACTIVENESS OF THE INDUSTRY

3.08

2.87

.

The attractiveness of the tyre industry is marginally above average. More qualitative

analysis yields the following results.

There are no substitutes of tyre and the industry will grow with the growth in

the auto industry.

Major costs are associated with raw materials, and they are major cost

drivers. The investments compared to returns are not very high.

There is good competition between the firms as product is not differentiated

and switching costs for customers and suppliers is very low.

There is always a threat for new entrant but limited threat that customers or

suppliers will indulge in backward or forward integration.


The tyre industry works on a tight margins because of the high customer and

supplier power.

There is little or no Brand equity hence the terms or trade are not built on the

brand reputation

Critical Success factors for MRF.

Company Background Madras Rubber Factory, popularly known as MRF, is one of the major tyre manufacturing companies in India. It is located in Chennai, Tamil Nadu. MRF is mainly involved in making vehicle tyres. It is India's largest tyre manufacturing company and has a sizable presence in the world market. Currently is it exporting to more than 65 countries around the world. MRF Tyres has signed an OEM (original equipment manufacturer) alliance with Siel, Honda Motors and Hindustan Motors in 1998. It has tie ups with Maruti udyog as well. The company tied up with Uniroyal Goodrich Tire Co. of USA, a subsidiary of the French Tyre giant Michelin, which held 9.8 per cent stake in the company.

Company Strategy

Considering the structure of the industry it is difficult to follow 100% pure generic

strategies.

Cost Leadership: The major cost of the tyre industry comes from the input

materials. On which it doesn’t have much leverage. Also it has been indicated

that the economies of scale are absent in the industry which could have

driven the costs down. Thus any one pursuing the strategy has a limited room

as the major costs are common for all the companies in the industry.

Product Differentiation Strategy: The branding of the tyre to OEM doesn’t

matter and within product there are only few features that can distinguish it

from others and any innovation in the product can be easily imitated due to

easy availability of the technology Hence pure product differentiation strategy

hasn’t work in the industry.

Having ruled out pure generic strategies for OEM market the success of the MRF

depends less on its value chain and more on the value chain of the OEM. To

evolve the critical success factors for MRF one has to look at the value chain of

the customers, and the successful firms in the industry will have to follow strategy

similar to one mentioned below.


“Have a differentiated business delivery model that is

responsive and adaptive to the needs of the value chain of the

auto maker and yet delivers the tyres at a low cost “

7. Analyzing OEM Needs

To find out the critical success factors for a tyre company we need to answer

the following questions for the customer or the OEM of the MRF.

1. What is the crucial demand of OEM with respect to its tyre supplier?

Most of the auto companies face variable demand for its products. Sometimes the

demand is seasonal like in the case of Diwali or sometimes it is dependent on the

Macro Economic variables like fuel prices and state of economy. The lead time to

assess the changing demand is very low for the auto manufacturers hence they don’t

have clear visibility of the future. Considering the state of the demand the automaker

will want that production schedule of the supplier be tolerant to changes in the

production schedule of the OEM.

2. How important is the lead time?

Tyres are the necessary components for the auto companies but are not the

cost drivers. Auto companies won’t want the delivery to be held up because of a low

cost component hence if there is no reliable supplier then they will have to build up

the inventory of the goods. This will put pressure on already existing margins in the

auto industry. Hence if they can find a supplier with punctual delivery and low lead

time they will prefer to do business with him.

3. How important is the cost of input?

When auto industry is facing sudden high demand the lead time is more crucial than

the cost but in normal day to day business because there is no product differentiation

and customers have high bargaining power they tend to go for the cheapest deal.

Product innovation is vital but not crucial to the automaker but if a new breakthrough

product like tubeless tyre can be delivered at a low cost and fetch a premium to the

automaker then the willingness to adopt the new product is high.


8. Building Critical Success Factors for MRF

Based on the above analysis of OEM requirements we can derive following success

factors for MRF. These are firm specific success factors but also applicable to the

industry.

1. Estimate the future demand of the OEM as fast as possible.

The demand of the tyres by OEM is completely a pull demand. No amount of

marketing has created a push demand in this segment. As it has been mentioned

earlier, the OEM has a variable demand, to be able to estimate the variations early

will give the industry an enormous competitive advantage and time to adjust to the

changing market.

2. Demonstrate flexibility in production based on the variable demand of the OEM

without incurring extra costs.

As the demand is variable, the ability of MRF to remain sensitive to OEM demand

and flexible in its production plan will differentiate it with respect to the competition. If

MRF or any tyre company can absorb the costs of the changing production

schedules, inventory pileup etc by showing agility in the scale of production and

distribution then the customers will be far more inclined towards it.

3. Maintain low lead time of delivery and ensure the orders are always met.

The operational efficiency and punctual delivery will ensure that the there is no

breakdown in the OEM assembly line. This will reduce the burden of OEM to

maintain the too much inventory of tyres.

4. Build strong relations with auto manufacturers and suppliers so that longer term

contracts can be signed.

The ability of the MRF to manage customer and suppliers relationships, like offering

Discounts on providing accurate demand or faster order processing and invoice

settlement will make MRF preferred partner and this will enhance the prospect of

getting long term contracts which are crucial to providing stability to the operations.

5. Maintain good working capital to accommodate variations in demand from the

OEM.


As we had seen in the porter’s 5 forces analysis the power of suppliers and

customers is high compared to the power of MRF to negotiate. This means that MRF

is always on the wrong side of credit terms in respect to the customers and

suppliers. Hence it is imperative for it to maintain good working capital to ensure that

the cash flow is at optimum level.

9. Required information Systems

Based on the above 5 critical success factors MRF would require different

information systems. The list is provided below.

1. Estimate the future demand of the OEM as fast as possible.

Required information system

Demand Forecast system: A system that has a tie up with the OEM forecast

and real time data so that it can seamlessly predict the variant mix and

aggregate demand. This system shall give time leeway to MRF to expand the

capacity or reduce inventory and production. Ideally this system should be

integrated with the auto manufacturer information system to get real time data

and accurate forecast.

2. Demonstrate flexibility in production based on the variable demand of the OEM

without incurring extra costs.


A centralized resource planning software: A information system that can

adjust and optimize the production and sales based on the information from

the environment like from Demand forecast system or it can optimize the

operation based on the information generated from within like inventory or

machine break down is needed to achieve the critical success factor.

3. Maintain low lead time of delivery and ensure the orders are always met.


Integrated inventory and transport system: A system in which the

inventory of finished goods can be used to service the demand from the

inventory and track the transport to the delivery is required to achieve the

critical success factor.

4. Build strong relations with auto manufacturers and suppliers so that longer term

contracts can be signed.


Customer relationship management and Supplier relationship

management: To maintain and grow the customer and supplier relationships

MRF needs to reward them with discounts when possible, reduce the order

management time, generate accurate billing as per order and contract,


process and verify invoices quickly maintain the customer and supplier data

and preferences and generate accurate information for them when required.

5. Maintain good working capital to accommodate variations in demand from the

OEM.


A Financial and Inventory accounting software: A financial and inventory

accounting software that can record any internal or external transaction

information, process the relevant information by distributing it under relevant

headers or accounts and performing accurate settlement of financial

transaction is needed to meet the above objective.

10. Existing information systems at MRF

MRF has installation of ERP or enterprise resource planning from SAP. Within SAP it

has following modules implemented.

Financials and Controlling (FICO)

Sales & Distribution (SD)

Materials Management (MM),

Production Planning (PP)

Plant Maintenance (PM)

Human Resources (HR)

Net Weaver Business Intelligence

Most of the information gathered is aligned with the financial data using the FICO

module. The top management has now clear idea about the activities that impact the

financials and due to central information processing due to ERP the visibility of the

decision maker on the activities inside the system are very high.

11. Assessment of existing Information Systems

MRF chose SAP for Automotive solutions to support efforts to drive operational excellence across its global organization. Following a detailed evaluation process, MRF opted to replace existing applications from Oracle in favour of SAP’s leading ERP solutions, based on the SAP Net Weaver platform. With global operations manufacturing and distributing tyres to more than 75 countries, MRF was faced with the need to improve visibility throughout its entire value chain from raw materials to


finished-goods partners in order to better plan for and adapt to fluctuations in global supply and demand. With SAP, MRF was able to integrate data between logistics and finance, eliminating redundant work and saving time and operational costs but there were certain issues due to some handicaps in SAP’s reports in Country India Version, which called for applying new service packages often. One of the issues which we see with standard SAP application is that MRF has missed on some firm specific processes. For instance, the entire production facilities of MRF are concentrated in south of India and their top 3 buyers are in north of India. At any instance, when an order is received, it should go through customized algorithms focused on least lead time and minimum cost. A smaller lead time can help MRF differentiate its services in the market and can help them charge higher margins. The current cost focussed modules on logistics would be suboptimal for MRF.

Many customized solutions are to be developed for using specific features of SAP, which means increase in costs for hiring consultants for such jobs. However we believe an apt networked Supply network planning software can help MRF beat competition hands down. They should customize the distribution part of the supply chain in order to suite the requirements of the buyers.


On the other hand, we see that there is a potential for backward integration as well. The prime cost of tyre manufacturing is rubber. Currently MRF does not has an SRM solution in place. The company can utilize the existing modules of SRM in SAP to integrate the supplier network. This can further improve the lead time to delivery for the company. Michigan Tyres has successfully tried vendor managed inventory in Germany. MRF should try to set up VMI with its prime suppliers. This could give the company a competitive edge in terms of speed and certainty of delivery and cost.

12. Conclusion

MRF currently has inside out approach to IT strategy. Their current IT philosophy

seems to be geared towards control of processes in organization and being cost

focussed. While this central control has led to significant cost benefits as the

information flows very fast decision maker from inside the organization and he can

adjust his strategy accordingly.

Although this approach has yielded benefits, our view is that they should also look

for outside in approach where the outside information flows seamlessly to the

decision maker and inside information flows out seamlessly to external stakeholders

including buyers and suppliers. This will help MRF to not just manage the production

but also the supply chain.

Documents

Mrf Tyre Industry Ver 4