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Buyer-Supplier Ecosystem in India: Evolution, Challenges and the Way-forward

Sudarshan Naik

Introduction

The blog discusses the evolution of the buyer-supplier ecosystem in India where the automotive sector is taken as a unit of analysis. The Indian automotive ecosystem is majorly influenced by Japanese, American and German manufacturing practices and currently the ecosystem is a mixture of these practices and is still evolving. Subsequently, we identify the factors that are limiting the growth of this ecosystem and how the central government is addressing the issue and the role of Karkhana.io in helping companies achieve their vision for ‘Make in India’.

Before studying the buyer-supplier ecosystem, let us understand what does the term ‘ecosystem’ mean? 

What is an Ecosystem ?

It is a community of multiple participants who come together to achieve something which they can’t achieve alone. The activities or actions of the participants lead to co-evolution of the participants. Co-evolution happens either through collaboration as well as competition between the participants.

Co-evolution: When participants come together as a community, the action of a participant affects other participants as well as the participant itself gets affected by the action of other participants. When one participant does some action, it prompts remaining participants to change or upgrade themselves. Thus they evolve together. 

What is the buyer-supplier ecosystem?

The study of the general buyer-supplier ecosystem spanning across multiple sectors is vast and cannot be captured in a blog. Thus, for this blog, the automotive industry is taken as a unit of analysis to get an understanding of the buyer-supplier ecosystem in India.

Buyer-supplier ecosystem in automotive industry

Typical automotive supply chain

The above figure shows the typical buyer-supplier ecosystem. The participants in this ecosystem includes OEM, tier-1 suppliers, tier-2 suppliers and tier-3 suppliers. OEM assembles the components and manufactures some core components while the manufacturing of the rest of the components are outsourced to tier-1 suppliers. Tier-1 suppliers obtain sub-components from tier-2 suppliers. Tier-2 suppliers obtain raw materials from tier-3 suppliers to manufacture sub-components. 

Characteristics of automotive buyer-supplier ecosystem in India and how it has evolved over time

Post-independence, the Indian Government had introduced strict policies on import. This was done to control foreign exchange flows. Companies were not allowed to import Complete Knock Down kits . Thus companies had to produce vehicles in-house and must have local content according to the local content regulations. This led to vertical integration. With the contribution of all major vehicle manufacturers (Hindustan Motors, Premier Automobiles and others), ~40000 cars per year were produced in India. Suppliers didn’t find a need to invest in improving their capabilities for such a low amount of production. 

The market demand was rising during the 70's. The quality of products manufactured was low. The conditions like India’s increasing dependence on importing oil and chronic foreign exchange shortages called for producing fuel-efficient vehicles. These conditions created the basis for economic liberalization.

During 1980’s deregulation took place in India. At the same time, the Japanese manufacturers were looking to make investments with foreign companies as there was a crowded market and increased competitions in Japan. Japanese manufacturers were interested in making investments in India. Lots of joint ventures for passenger vehicles were proposed to the Govt. of India, but only the Maruti Udyog Limited (MUL) - Suzuki joint venture was allowed. 

The Indian Automotive Industry was non-flexible and had high cost for products. The Japanese started adopting flexible systems to reduce supply bottlenecks and increase industrial competitiveness. India had small markets and an underdeveloped supplier industry encouraging in-house production. This was inconsistent with outsourcing that was central to a flexible system. The high cost of imports and stringent quality requirements forced the Japanese to create joint ventures in the components industry. Companies like MUL started institutionalizing the co-operative relationship between buyers and suppliers and between management and workers. MUL negotiated prices charged by suppliers through a detailed cost breakdown, thus a more trusting environment was cultivated.

The nature of the buyer-supplier relationship brought by the Japanese is a partnership relation. Their philosophy is ‘Upgrading suppliers and increasing supplier competence will increase our competitiveness’. Thus, they make suppliers an equal partner in growth. MUL suppliers started improving their competencies due to influence from Japanese practices.

Key aspects of Japanese manufacturing practices
  1. Supplier selection: Suppliers are selected based on their equipment capabilities and compatibility.
  1. Quality: The Japanese have a ‘zero defect policy’ in place. They focus on ‘built-in quality’ in products rather than doing quality checks after production.
  1. Just-In-Time (JIT) philosophy: Just-In-Time Delivery as a part of JIT philosophy is stressed by Japanese firms. Suppliers are often located close to major manufacturers in order to better coordinate their deliveries with the OEM’s production schedules.
  1. User/Producer Interface: There is a close technical cooperation between large manufacturers and their first tier suppliers in the product development. For example, design engineers from both firms may work as a part of a team of a new product. There is a close collaboration between OEM and supplier for making production processes more efficient.
  1. Culture: Active quality circles programs provide opportunity for employee involvement accompanied by an ‘open-door policy’ practiced by senior executives. Some firms consider employees as associates rather than workers while some other firms have no classification of employees, a common locker room and everyone starting their work at the same time.

Post economic liberalization in 1991, companies from America and Europe entered the Indian automotive ecosystem and they brought their own practices in India. 

The nature of the buyer-supplier relationship brought by Americans is an arms-length relationship / transactional relationship. The relations are short-term relationships where the opportunity is awarded to the lowest bidder.

Key aspects of American manufacturing practices
  1. Supplier selection: Supplier selection is based on the price.
  1. Quality: Quality checks are done after the production is completed. This results in higher per unit costs.
  1. User/Producer Interface: The relationship is often limited to the order in hand rather than a long term R&D relationship and coordination of efforts.
Japanese Diagnostic Approach and North American Traditional Approach to Parts Manutacturing
[Original idea from: R.A. More, Developer/Adopter Relationships in New Industrial Product Situations,
Journal of Business Research, 501-517 (1986)]
German practices

The buyer-supplier relationship in Germany is somewhere between American and Japanese patterns. The Germans have stable relationships. ‘Stable relationships’ are defined as relationships that persist and continue to function in spite of structural imbalances in the relative bargaining positions of the partners and in spite of conflicts of interest in negotiations between them. 

An example is Kronprinz AG, a supplier of Volkswagen. The company Kronprinz AG in Solingen which supplied Volkswagen with wheels lost most of this business because VW introduced the in-house production of wheels in 1959/60. Yet this was not to the detriment of relations between these business partners as advance warning of in-house production had been given several years before – and in addition compensatory business had been agreed upon. Instead of wheels, VW now bought precision tubes from Kronprinz.

The nature of buyer-supplier relationships in India is a mixture of Japanese, American and German practices. The evolution of buyer-supplier relationships of other ecosystems and of other sectors may not include the mixture of practices. The ecosystem is still evolving and is yet to reach its full potential.

Let us have a brief look at the buyer-supplier ecosystem in China.

Buyer-supplier ecosystem in China

In China, relationships are influenced by the concept of ‘guanxi’.  Chinese business is highly relational. They operate within a relational network. Those inside the network are trusted more. There is a low-trust for outsiders. There is in-group/out-group dichotomization. The Chinese word ‘guanxi’ refers to the concept of drawing on connections in order to secure favours in personal relations. If an outsider is introduced by an insider to the network, the outsider becomes an insider and high trust is obtained. Well-connected people are considered as trustworthy and reliable, and transactional relationships are usually suboptimal. 

According to us, if the product is commoditized, the relationship between buyer and supplier is transactional. If the product is non-commoditized and has high value, the buyers invest in long term relationships with the suppliers. Suppliers would augment their capacities, capabilities based on how the buyers are giving them projections as well as an insight of the business and accordingly helping them make those investments. When it comes to building relationships with suppliers for non-commoditized products, the Japanese and German ecosystem is followed.

Multiple ecosystems exist in India adapted from the Japanese, German and American ecosystems. While these ecosystems have positively influenced the automotive sector, not all manufacturing segments have seen similar investments and/or influence. Given the nature of economic development in India, and the huge size of the country, the manufacturing sector has grown at a sclerotic pace - the sector’s contribution to the GDP has hovered around 15-16%. The manufacturing sector’s competitiveness is also limited in the global competitiveness. There are a few critical factors for lack of growth and competitiveness of the manufacturing sector. These factors are outlined below:

Weaknesses of the Indian Manufacturing Sector

  1. Low Productivity: Manufacturers are held back by poor workforce productivity, primarily because of lack of automation, outdated manufacturing processes, limited use of design-for-manufacturing, and numerous non-value-added tasks.
  1. Talent and skill shortage: Rigid labor laws force companies to hire casual workers. Training schools are not well equipped to train workers. Hence, companies have to spend on retraining the workers. Engineers are not adept at concepts such as kaizen and kanban.
  1. Inefficient supply chains: Supply chains are not lean and agile. Infrastructure bottlenecks and structural impediments attributed to state-level taxation policies have contributed to longer lead times and excess inventory across the value chain.
  1. Lower levels of supplier competence: Tier-1 or tier-2 suppliers tend to be small or medium-sized enterprises with limited engineering or process capabilities. Adoption of lean and quality systems is often low, which results in poor quality products.

While the weaknesses are holding down the manufacturing sector’s potential, two strengths can provide a foundation for growth. 

  1. Availability of raw materials: India’s raw material can be an additional area of strength - cotton, steel, coal, downstream petrochemicals are materials where India has a surplus advantage due to the surplus availability over the long-term.
  1. Manpower: India has a large pool of engineers, young labor force and wages that are half of China’s.

According to us, we have a diverse and large ecosystem. The number of establishments in manufacturing is atleast a few million. The manufacturers have a good understanding of different types of manufacturing processes. The weakness lies in the fragmented and unorganized nature of the manufacturing sector. There is very little transparency. There is very little adoption of digitalization and single source of data. They are unorganized because of the structures these establishments have. Most of these are family-owned or proprietary businesses. There is a proprietor and everybody else is a technician. Thus there is a single decision maker (proprietor) and the technicians work on the command of the proprietor. In this scenario, the growth of the business is limited to the skillset of the proprietor.

Central governments have taken cognizance of the need to make the manufacturing sector competitive in order to increase the sector’s growth and to provide employment. Hence, in 2014, the government launched the Make in India initiative, and comprehensively reimagined the approach to encouraging manufacturing in India. 

Make in India

“I tell the world, ‘Make in India’. Sell anywhere but manufacture here. We have the skill and talent for it,” 

Mr. Narendra Modi, Hon’ble Prime Minister of India

Mission

To make India a global manufacturing hub.

Purpose

To develop a policy that creates a conducive environment for investments for developing, manufacturing and assembling products made in India. To provide incentives to companies for doing investments in manufacturing. To develop a modern and efficient infrastructure.

What Make in India seeks to achieve specifically
  1. To increase the manufacturing sector’s share of GDP from 16% to 25% by 2025.
  2. To encourage domestic and international companies to set up firms in India.
  3. To provide employment opportunities and skill development in 25 sectors. 

But there still exist some pain points in the manufacturing sector which are not addressed by this initiative and it complicates the supply chain in the manufacturing sec

or. Karkhana.io has identified these pain points and has created an ecosystem model for addressing the pain points. The model is built in such a way that it simplifies the supply chain and contributes to ‘Make in India’. 

To make the’ Make in India’ program a success, the negative characteristics of the manufacturing sector will have to be addressed. Some of these include:

  1. Manufacturing majorly takes place in the unorganized sector. Most of the firms are small and are by inhibited lack of capital, scale and competencies, and competitiveness
  2. As a consequence of (1), their operating style   lacks professionalism and project management, transparency and standardization.
Karkhana.io -  Enabling Growth for Manufacturing SMEs Across India

The manufacturers must change their structure from a proprietor model to a company model. But everybody may not have the same ambitions. If there are a handful of manufacturers who can make big things, then there is a need for aggregation of small manufacturers. Also, these small manufacturers don’t have easy access to good capitals. Karkhana.io is addressing these issues.

Karkhana.io is creating an ecosystem through an on-demand manufacturing platform.  Through this platform, customers looking to manufacture parts can place orders on the platform, completely staving off the problems related to sourcing directly from a vendor (s). On the other side of the platform, vendors get an opportunity to expand their client and project base, and benefit from Karkhana.io best in class practices. 

The participants in this ecosystem are karkhana.io, buyers, suppliers and investors. Here karkhana.io is a digital platform and the buyers and suppliers are both connected to the digital platform. As a platform orchestrator, karkhana.io takes the responsibility of quality consistency in parts, transparent operations, coordinating production and delivery of small parts, and professionalism. Also, this ecosystem will save buyer’s time in finding the right suppliers, reviewing the quotations and choosing the best supplier. Karkhana.io will find the best supplier according to the capabilities and requirements.  

How will this ecosystem help small manufacturers?

Karkhana.io can have access to capital and help these manufacturers use it in the form of technology that karkhana.io is building for them. They can make use of karkhana.io’s network and business development ability to improve their business year-on-year. 

How karkhana.io contributes to the mission of Make in India

  1. Localisation: Karkhana.io can help domestic and international firms to localise manufacturing of their products.
  1. Helping startups: Karkhana.io can help startups to move seamlessly from prototype-to-production stage. 
  1. Improving capabilities of MSMEs: Karkhana.io with its digital quotation-to-order platform provides projects specifically curated to meet their manufacturing competencies. Projects are sourced, managed and planned by karkhana.io. Thus, increasing utilization, revenue and efficiency of the suppliers. 

Let us work together to improve buyer-supplier ecosystem in India

The buyer-supplier ecosystem is evolving in India and can match the global standards. Karkhana.io is geared to contribute to the evolution of the ecosystem. We encourage manufacturers to join hands with us to propel manufacturing. 

Let us work together and make India a global manufacturing hub.

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