Merging IT at Daimler-Chrysler - Case Study Example

Case Study: Merging IT at DaimlerChrysler Executive Summary When Daimler-Benz and Chrysler Corporation merged in 1998, hopes were high for building a global company of gigantic proportions. Merging the companies proved to be a challenge, one in which IT was seen to be the solution. In the next nine years after the union, DaimlerChrysler strengthened its supply chain, customer relations, and all other aspects of a profitable business. However, in the end, the company lost money and its place as one of the world’s top car companies. This was blamed on cultural diversity and the fact that the cultures never merged, because the company failed to realize its value at the onset. Introduction In May 1998, Robert J. Eaton, CEO of Chrysler Corporation, and Jurgen E. Schrempp, Daimler-Benz CEO, announced to the world that Chrysler and Daimler would be merging. It was trumpeted as historic, ‘a merger of equals’, a ‘megadeal’. At that time, both companies were leaders: Chrysler was the number 3 car company in the US with mass-market appeal with its Dodge Ram, Jeep, and LH Sedan Series. Daimler-Benz was the lead the European luxury vehicle market with its Mercedes Benz. There was no overlap of product lines. The combined earnings in 1997 was $4.6 billion. The deal was predicted to be synergistic (Vlasic, et al. 1998), with Daimler applying Chrysler’s expertise in production to its operations and product development. Daimler-Benz hoped that Chrysler, which earned more per vehicle than any other carmaker in America, could help it cut spending and costs, and improve profits. Reduction in costs was targeted up to $3 billion yearly, a third of which could be from purchasing costs. In July 2000, signs of trouble became eminent when DaimlerChrysler stock plunged from a high of $103 to $53, a $49 billion drop in market value. The predicted savings due to more efficient technology sharing and purchasing technology was not realized (Tierney, et al. 2000). Information Technology (IT) was seen as the vehicle for this to be realized and DaimlerChrysler put its best efforts to save the merger by hinging on IT. This paper presents how IT was used to improve the supply chain management, business strategy, and operations strategy of the merged DaimlerChrysler and its five business areas: Mercedes Cars, Chrysler, Trucks, Vans, and Others and Financial Services. Supply Chain Profile of Daimler The business model for Mercedes, the primary brand of Daimler-Benz, was based on manufacturing and engineering cars in a continuous improvement manner. Emphasis was placed on just-in-time (JIT) manufacturing, which is a strategy for suppressing inventory, rapid product development, and shorter supply chain lead time (Fine 2005). Having evolved regionally, the business operation in the company was highly decentralized. Each Daimler-Benz business unit operated its own IT systems with no one actually leading the IT units; and also separate financial and human resources applications. In the car manufacturing units, there were separate suppliers for different parts, making the shipping very expensive and high risk. As an example, consider the Mercedes Benz US plant in Alabama which manufactures the Mercedes M-Class. While the car body shops in other companies are highly automated, the M-Class body shop is only 27% automated (SupplyChainBrain.com, 1997). Managers justify this to be strategic automation because the low volume production makes it more expensive to automate. The company however,does not take into account the number of employees that they have to pay. Supply Chain Profile of Chrysler The Chrysler’s business model in the 1990s constituted a modular approach with four elements: vehicle design with emphasis on innovativeness; outsourcing of supplies and services to many suppliers; a relationship of mutual trust with suppliers; and cost reduction dependent on supplier innovation (Fine 2005). This business model made Chrysler Corporation, due to its many brushes in the past with bankruptcy, the leanest car company in the US, earning more per vehicle compared to all other carmakers. It also has an efficient supply chain management system, the concept of which was invented in the 1980s at Chrysler Corp by Thomas Stallkampf (Smock 2003). The supply chain management arose from supply management orientation which is necessary for buyer-supplier coordinated interaction (Shin, Collier and Wilson 2000). This was originally attributed to the Japanese practive of incorporating supplier relationships into the business, ‘keiretsu’, where the suppliers are also partial owners of the business. The practice effectively improves quality and reduces cost. Chrysler saw the importance of giving incentives to suppliers and at the same time, develop cost-cutting means (Dyer 1996). Tom Stallkampf , his ideas and the company’s suppliers brought Chrysler out of financial disaster. Chrysler launched Supplier Cost reduction Effort SCORE., a supplier involvement program, similar to keiretsu. The SCORE program helped Chrysler save US$1.2 billion in costs in 1997. Chrysler’s suppliers also became the company’s long-term partners in design and product development (Handfield, et al. 1999). The company has a highly centralized and standardized IT system which laid the groundwork for the efficient supply chain management system. Challenges and Issues Faced by CIO Susan Unger To Merge the Supply Chains When Susan Unger accepted the challenge to be the Chief Information Officer of the newly merged DaimlerChrysler, she understood that she had to reconcile the two different cultures (Koch 2003). The highly different cultures resulted in differences in almost all aspects of business and operations strategy and even more so in the area of information technology. One of the first things that Susan Unger realized was the need to improve the trust and cooperation between the people in the American and German companies. So she met with top level management to gain support for her projects. She also fixed the the IT organization; assigning the key people and their staff, determined the flow in decision-making process, setting expectations and performance targets. She also observed the differences in how the two cultures arrive at decisions; Americans being fast and Germans taking their time. There was the glaring differences in the business process; while Chrysler was highly efficient, Daimler-Benz was more highly regionalized. Chrysler utilizes the platform based model for producing cars,while Daimler-Benz cross-functional components in making their Mercedes Benzes (Klein and Krcmar 2006). The IT network that each company had was a reflection of the corporate nationality. Chrysler was relatively centralized; all IT activities were controlled by a few technical persons and headed by Susan Unger. On the other side, Daimler-Benz was highly decentralized, with each unit having its own IT structure, and no one in the old company was really identified to be the lead person in this division. When DaimlerChrysler started its operations, Daimler-Benz had sixteen different e-mail accounts compared to Chrysler’s one account. Putting together the email system was a major task in itself but was done to improve inter and intra company communications. Another example was the network backbones; each company had one but again, Daimler-Benz’s was patchworked even in its Europe operations. Susan Unger had decided to remove duplicate applications and databases in order to reduce the cost, but deciding which will be retained was an exercise in hard bargaining and cross-cultural diplomacy. Sharing of engineering and designs was also encouraged but the mistrust was very high. Daimler’s designs were held confidential, thus the people there were not keen in sharing with the Chrysler group. In the end however, due to Unger’s persistence, there were some concessions like some components of the new Chrysler Crossfire sports car were borrowed from Mercedes. Susan Unger also decided that dealer networks and purchasing and distribution systems need to be shared in order to further cut costs. However, these systems were different for each company and this was due to the main differences in the individual markets (Mercedes high-end market and Chrysler’s mass market). Business Strategy Adopted By DaimlerChrysler After the merger, the organization of DaimlerChrysler was divided into five groups: the Mercedes Cars Group, Chrysler Cars Group, Vans and Others, Trucks, and Financial Services. There were production facilities in 21 countries with 360,000 plus employees in 2006. DaimlerChrysler was, by far, a very formidable company. In the mind of Jurgen Schrempp, chief of the company, the only way to unify all the production and business operations was to make use of information technology. As CIO, Susan Unger set about unifying the IT operations at the new company. The bottom line was always the return on investment (ROI). She involved the top management in all decisions on IT matters. To take care of the culture differences, she made sure that the German managers are informed or briefed on proposals before a vote is called during a meeting to give them time to decide or think about their options. In addition, German managers have to be able to decide faster. Secondly, IT projects only is approved if it leads to a payoff and meets the requirements of the people who requested or want the technology. A major requirement is for all IT projects to have the support of senior management who must also assign their key people. If these two requirements are not met, then the project will not be implemented. A major development occurred at DaimlerChrysler in 1999 with the formation of DCXNET Holdings, an initiative which was to take care of DaimlerChrysler’s e-business applications (Klein and Krcmar 2006). There were four elements of DCXNET networking: customer, value chain, employees and products. With DCXNET, faster commnication of changes in vehicle development was achieved; time to bring vehicles to market was reduced and quality procedures were standardized. The role of IT was recognized in the implementation of DCXNET; the IT group analyzed and integrated the different internet based technologies. In the case of DaimlerChrysler, the business strategy and IT functions were aligned. Operations Strategy Adopted by DaimlerChrysler To improve their operations strategy, DaimlerChrysler moved to improve the supply chain. DaimlerChrysler’s warehouses in the past could not meet all of the more than two hundred thousand off replacement parts being ordered by service centres and dealers. To correct this, Susan Unger made use of software linking the company’s Mopar parts division to logistics suppliers and providers. The software allowed the purchasers to see at once the parts inventory. The system saved more than $17 million in reduced inventory and meeting more orders. DaimlerChrysler also attempted to make use of the modular model in production to Chrysler’s modular production system where suppliers who are located in close proximity to the plant provide parts or whole assemblies. This was the case when Daimler-Chrysler was manufacturing the “smart car” where MCC corporation, a venture of Daimler-Chrysler and Swiss watch maker SMH, the suppliers are housed nearby and are assembling cockpits, doors and other components (Fujimoto and Takeshi 2001). DaimlerChrysler also utilized logistics providers like Exel which took care of outsourcing the parts requirements for production. To improve the supply chain, the company also worked with Covisint, the automotive industrys online parts exchange where other major car companies also participated. With Covisint, (for Collaboration, Vision and Integration), the time to negotiate purchases was reduced by 80% from 6 – 8 weeks to 4 – 6 days (Klein and Krcmar 2006). Aside from automating most of its production assemblies, DaimlerChrysler also digitized its operations. The digital factory is a network of models that can simulate and visualize the production process. With the digital factory, the company was able to plan, implement, manipulate and improve all production processes and other resources necessary in producing their cars. Digital factory refers to a comprehensive network of digital models and networks, which includes, among others, simulation and 3-D visualization (Sauer 2005). Digitizing operations results in savings because the need to do actual activity (like simulating car crashes or making error-ridden prototypes) becomes unnecessary. To streamline the IT networks, DaimlerChrysler reduced the number of regional data centres although it was accepted that a single global centre was not possible. To cut more development costs, the company also expanded global ties, especially with Asian car companies, but on the average, these efforts were not successful. The impact of Culture on Global Strategies and Operational Issues After nine turbulent years which saw the stocks and value of DaimlerChrysler drop to levels lower than their individual pre-merger values, Daimler and Chrysler ended the ‘made in heaven’ merger. In November 2007, DaimlerChrysler finalized its sale of Chrysler to the equity group, Cerberus. Compare to the Mercedes Group, Chrysler was the loser in the end. As early as 2000, it had already lost $512 million (Chrysler Head Ousted in Shakeup 2000) The disparity in cultures, both national and organizational, was never made an issue during the days that the merger was being finalized but it was ultimately blamed for the split (Darling, Seristo and Gabrielsson 2005). What the heads of the companies did not initially realize that more than merging company assets like inventory, value, stocks, they were also merging human resources. Their pitfall was that they did not consider the people who can make or break the merger. This is common in mergers and acquisitions where the issue of human resources play a minor part during the merger planning stage (Stahl and Mendenhall 2005) but become the main reasons for merger problems (Schuller and Jackson 2001, Aguilera and Dencker 2004). The disparity in cultures was such that even simple differences in language are roots of misunderstanding. For example, when Germans say ‘yes’, it means that they understand what is being talked about, but they are not exactly concurring. Of course, with Americans, saying ‘yes’ is agreement. In the case of DaimlerChrysler, it was never a ‘merger of equals’. This Jurgen Schrempp later admitted; thus it was more of a German takeover. The 100% German management board installed a German as CEO of Chrysler Group after Robert Eaton left. This further increased the disillusionment of Chrysler engineers and executives and many of them left the company. The difficulty in the integration process was due to the failure in the alignment of identities in the merged company (Bouchikh and Kimberly 2008). The process of identity alignment takes may years especially in a setting that is similar to a colonial system, a point of view taken by many on the merger. The merger was really top-down, with Daimler-Benz having the upper hand and the feeling of being superior over their American counterpart. For Daimler, Chrysler was not an equal, but an inferior in image. Due to this, Daimler did not accept the ideas that came from Chrysler. Daimler would not even showroom space with Chrysler products for fear of diluting their image of quality. Thus, the efficiency and savings that the merger hoped to achieve never became a reality. 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