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Last year, Tata Motors' (NYSE:TTM) 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.

Source: Tata's Nano: How'd They Do It?