The VW Resende Modular Consortium - Essay Example

The VW Resende Modular Consortium Introduction Nothing remains at the same place; everything in this world is changing with an intensive pace and high speed. While talking about business and management processes these formulation is most welcome. Innovations in technologies, changing consumer’s needs and preferences, global environmental concerns, etc., all these influence such significant component of business process, as supply chain management. In order to become more efficient and competitive, the companies tend to develop new approaches and procedures of managing their supply chains. Thus, one of the revolutionary approaches to supply chain management has been contributed by the VW Resende plant in Brazil. The goal of this paper is to evaluate the contribution of VW’s supply chain strategy to its overall company strategy, with reference to Michael Porter’s strategic framework; to analyze the ways in which VW could employ technology across the different supply chain processes; and to evaluate current global supply chain challenges to this VW supply chain model. The contribution of VW’s supply chain strategy to its overall company strategy, with reference to Michael Porter’s strategic framework In order to be highly competitive and get an edge over its rivals, VW has implemented a revolutionary project in the automotive industry – Resende Modular Consortium. Being developed as an innovative project in the automotive industry, Resende Modular Consortium has become a significant contribution to the VW’s supply chain strategy in Brazil. While an overall company’s strategy was “make everything internally”, VW’s strategy in Brazil has introduced new approach to “outsource everything” through the modular consortium (Correa and Park, n.d., p.12). The idea of a modular consortium consists of separating the product into sub-assemblies (modules) which are delegated to and entirely provided by a specific module supplier. Therefore, the module supplier is responsible for assembling its module directly on the automaker’s assembly line (Pires 1998, 225). By establishing strong partnership with 7 key suppliers and outsourcing 100% of its manufacturing, VW was striving to: optimize the operating costs, minimize the coordination costs, to improve cooperation between the partners (suppliers), to improve quality and productivity, to increase the market share, and to utilize space more efficiently. Referring to the Porter’s strategic framework, VW’s strategy of manufacturing trucks in Brazil could be defined as a Focus Strategy. Under a focus strategy the firm concentrates on one or a limited range of segment of the market (Thompson and Martin 2005, p.287). Thus did VW, by focusing its manufacturing process on trucks. Working in the automotive industry throughout the world, VW has made a decision to focus mainly on one segment of the automobile industry in Brazil. It was a truck production sector. While this strategy was different from the overall company strategy, VW had to act in a way that best fitted the organization’s competitive environment in Brazil. The company benefited from its specialization on truck segment by gaining strong competency in the production of trucks and some of their modules. According to the information, received from the interview with Jose Ignacio Lopez, the VW Resende Modular Consortium could enable the company to gain significant competitive advantage among the rivals. These included: modern and productive manufacturing process, relatively low cost, quality of the trucks, simultaneous engineering process with the suppliers, speed in the development and launching of new products, common corporate goals and objectives (trend to work more toward mutual success) (Correa and Park, n.d., pp.1, 7, 10). With Focus strategy approach the company can seek either lower costs or differentiation (Thompson and Martin 2005, p.287). Therefore, by going deeper to the Porter’s focus strategy, it is possible to assume that the VW’s Resende Modular Consortium was more closely related to the cost leadership focus. Cost leadership as a generic strategy does not imply that the company will market the lowest price product or service in the industry (Thompson and Martin 2005, p.290). Thompson and Martin (2005, p.290) explain that low cost focus does not imply lower rewards for stakeholders, because efficient cost leaders can be very profitable. The main goal of the cost leader is to secure a cost advantage over its rivals, price competitively and relative to how its product is perceived by the customers and achieve a high profit margin (Thompson and Martin 2005, p.290). By adopting cost leadership focus strategy on the Brazilian truck market, the VW Company was striving to satisfy its customer’s needs with up-to-date technologies and trucks of the highest quality of relatively low prices. These relatively low prices were achieved by saving the costs for supply chain management processes and avoiding unnecessary additional costs (Thompson and Martin 2005, p.290). In addition to his four generic strategies, Michael Porter highlights that culture can powerfully reinforce the competitive advantage a generic strategy strives to achieve, if the culture is an appropriate one (Porter 1985, p. 25). One of the key objectives of the Modular Consortium was to increase the speed of development of new products (Pires, 1998). Obviously, by organizing Modular Consortium, VW had in its plans strategic initiatives how to set an appropriate culture, which would provide module suppliers with an opportunity to develop rapidly competencies and new business, as well as to obtain new competencies in technologies, processes and production management (Pires, 1998). Pires (1998, p.223) explains that in this case, the supplier develops and continually improves the competencies and infrastructure to provide the set of goods and services used in the supply chain, while the customer (VW) has no longer these competencies and infrastructures and there are no assembly employees direct from VW. In result, the company has to acquire rapidly competence in new processes and technologies, to learn to manage and develop the module supply chain, and to develop basic infrastructure (Pires 1998, p.228). By arranging such a tight cooperation between VW and its suppliers there has been set a strong partnership with suppliers. Due to this cooperation, VW planned to gain its competitive advantage through the cost reduction, decrease in assembly time, and the increase of the speed of development of new products. However, VW’s outsourcing strategy might create some challenges for the company. By talking about 100% outsourcing, there might arouse questions regarding the risks imposed on VW which relate directly to the outsourcing of the core competencies. Making a decision to outsource everything might seem to be very irrational and very risky strategy for VW. By outsourcing the core competencies, the company could be under a risk of high dependence on suppliers and threaten itself for having a weak competitive position on the market. However, this decision can be explained by logical reason and arguments. One of the key reasons for adopting buying or outsourcing strategy relates to the lack of experience. Considering the history of the development of the VW’ plant and the termination of the joint venture between Ford and VW (Autolatina), we can talk neither about proper experience, nor about appropriate facilities. In other words, VW “did not have a solid tradition in manufacturing medium and large trucks” (Correa and Park, n.d., p.3). Therefore, the company could hardly lose something that it has never possessed definitely. Generally speaking, Resende is a revolutionary plant, which has definitely made a contribution towards the state of the art in production management (Piers 1998, 232). The ways in which VW could employ technology across the different supply chain processes While Resende Modular Consortium seems to be a fairly efficient and cost effective idea (relying on the historical situation of VW), there are some challenges and problems that might be solved by adopting effective and up-to-date technologies. Having outsourced seven core modules including: chassis module, axle module, instruments and cabin interior module, wheel and tire module, cabin paint services module, engine and transmission module, cabin panel and structure model, VW decided to maintain internally some of its activities. In order to manage effectively and efficiently these internal activities, such as coordination, end product quality control, engineering for configuration of the omnibuses and trucks produced and post-sales distribution and service, the truck manufacturing company could adopt some technologies, which would enable the company to coordinate all necessary resources, activities, communication and information properly and thus be more competitive on the Brazilian market. It has been mentioned in the case study that the most spread difficulties faced by the company’s routine operations were: signing service contracts, defining responsibilities, service legal agreements, and some others (Correa and Park, n.d.). In order to minimize these complexities, VW could adopt SAP R/3 technology. This program would enable the company to solve the problem of large constellation of different aspects. Another significant challenge for the VW Modular Consortium model related to the problems of delivery reliability, causing a great number of unfinished vehicles (Correa and Park, n.d.). According to the case study, nearly a third of the total number of vehicles that leave the assembly line today require rework (Correa and Park, n.d.). It meant that the company had to spend additional costs for storehouse, labor force and other operating expenditures required for normalizing an assembling process. Additionally, this problem caused VW to pay for the assembly of parts that arrived late out of the line. It was absolutely cost-inefficient organization of assembly problems, imposing very high unreasonable risks. By introducing E-Supply Chain Management programs, such as Enterprise Resource Planning System the company would be enabled to minimize the amount of late deliveries and assemblies, to save costs and even to improve its efficiency. By having a centralized database, VW could arrange assembly plans, communicate more effectively with the module suppliers, to organize its logistics more efficaciously, to manage properly the procurement processes, to lead financial affairs, and to be in charge of the various projects (Tech-faq, n.d.). By adopting ERP, VW would be able to control and manage quickly and easily its financials, including: accounts payable and receivable, general ledger, billing, cash management, etc. (Tech-faq., n.d.). Another significant challenge of the VW modular consortium was referred to the diversified corporate culture with the plant. As Correa and Park (n.d) have specified, it was difficult to start because of management and cultural mixture. ERP which also includes Human Resources Component would probably help to solve the conflicts and smooth over cultural differences. This component covers the key HR issues, such as recruitment, compensations, time and attendance, people management, labor rules, payroll, benefits and training (Tech-faq., n.d.). Probably, VW even could minimize its strategic risk of ignoring technological developments in one module by the partners through adopting ERP System (Correa and Park, n.d.). As well this system might help in organizing projects for the company, including the issues of costing, billing, activity management, time and expenditure (Tech-faq., n.d.). While earlier it was a big challenge for VW Modular consortium to anticipate possible projects and to develop contingency plans to handle them, with the adoption of new up-to-date supply chain management technologies it would become a great opportunity for the truck manufacturing company (Correa and Park, n.d.). ERP would definitely decrease quantity of management effort and negotiation, both from VW and its partners (Correa and Park, n.d.). While both SAP R/3 and ERP System technologies would significantly improve the VW supply chain management operations and processes, there is one more, the most important technology known as the Radio Frequency Identification (RFID). RFID is a new technology that significantly increases the efficiency of the supply chain management process (RFID - Technology Video 2006). By introducing RFID to its Resende Modular Plant, VW will be enabled to transfer its data without physical contact, thus saving time and labor costs. Additionally, RFID helps positively to identify shipping units, record and utilize valuable information on an international scale (RFID - Technology Video 2006). RFID enables the company to avoid time-consuming procedures, which require a whole series of individual steps, done manually (RFID - Technology Video 2006). A single reader is capable of registering up to 40 RFID transpondents in 1 second (RFID - Technology Video 2006). Thus, by adopting RFID, VW Modular Consortium would be able to ensure the location of every module and spares. From the customer’s perspective, adoption of new technologies would also be very beneficial for the company, enabling it to improve its sales and marketing efforts, and to arrange properly the issues of customer contact and after sales support. While introduction and adoption of new technologies of the SCM can be very expensive and time consuming processes, it can save the company much more money in a long-term perspective. Evaluate current global supply chain challenges to this VW supply chain model Along with the continuous changes and development of the world are changing the requirements and expectations for the supply chain management. The procedures and ways of running business, which were acceptable few years ago, do not correspond to the current accelerated pace and style of life. Scarcity of energy resources, value of time, environmental concerns, legal restrictions and some other issues impose significant challenges to the global supply chain management. Some of the key global supply chain challenges include: various restrictions (oil prices, CO2 emissions and other environmental issues; restriction in different countries for not travelling at any time in the year); regulatory issues; governmental influences; changes of prices for energy resources; lack of collaboration between suppliers, manufacturers and retailers, access to information, visibility, sustainable development, and some others (Global Commerce Initiative, 2008). However, the two key challenges are related to: High overhead of cost of running Supply chain processes and improved technology. Oil prices Global prices for oil are very volatile and dependent on the key oil suppliers (for instance, OPEC). Thus, for example, we can retrace the dependence of some countries on oil exporting countries. Political conflicts in Libya result in increased prices for oil. The whole Europe feels these changes. Supply Chain managers, representing a part of the people who are really concerned about the volatility of prices for oil and other significant resources are willing to develop some ideas in order to weaken such dependency. Turning back to the VW Modular Consortium, it becomes clear that from one side of the coin, the company’s strategy is quite efficient. Having organized the close relationships with the suppliers, VW managed to locate them in one area and thus to save expenditures for oil and to avoid/minimize traffic congestion. Obviously, despite innovation and development perspectives VW has competitive advantage of lowering operating costs required for transportation. Lack of collaboration between parties Despite strong effect of globalization, supply chain management systems are not as much as effective as they could be just because of the lack of collaboration between suppliers, manufacturers and retailers. VW supply chain model implemented in Brazil is a good example of the way how collaboration and mutual cooperation can be achieved. Being oriented on mutual success, managers and suppliers tend to cooperate rather than to compete. As it has been already discussed, mutual cooperation does not only save the company’s costs but also enables to be profitable organization. Thus, for example, VW in Brazil demonstrates an increased apprenticeship by the presence, under the same roof of numerous different companies, which bring rich know-how (Correa and Park, n.d., p.10). Access to information and visibility In order to be a competitive business unit, you need to possess valuable, accurate and timely information. Unfortunately, access to such sort of information is limited. From the VW’s perspective, seems that the model of modular consortium is very effective in providing access to information for managing internal processes effectively. Timely access to information and communication enable people to solve their problems immediately due to their close communication and presence of each other in the near area. Sustainability Sustainable development can be viewed as one of the new directions in business development. Everybody today is concerned about global warming issues, artificial food and other important things. While trying to increase the customer’s loyalty is to make them (customer’s) to believe that your company is absolutely “green” and environmentally responsible. By assuming that the company tends to develop and introduce new innovations, these innovations will relate to sustainable development as well. Some of the other few challenges of Global supply chain are: - Transport, infrastructure, communication (IBM Global technology services, 2007) - Longer and less reliable lead times when sourcing from the Far East - Skills – where do our starter jobs come from? (IBM Global technology services, 2007) - Poor forecast accuracy - Lack of integration between supply chain and product development (Supply Chain Digest, 2010) - Lack of visibility to current market demand (Supply Chain Digest, 2010) - Shorter product life cycles (Supply Chain Digest, 2010) Conclusion VW Resende Modular Consortium is really a revolutionary approach to the supply chain management. While the company decided to outsource all its activities due to its lack of expertise in truck manufacturing, VW has enabled itself not only to save costs and develop low cost focus strategy but also to activate learning and development processes. Undoubtedly, the company imposes certain risks on its business but by adopting new technologies these risks can be either diminished or absolutely avoided. Comparing current global challenges in supply chain processes to the VW modular consortium, it can be concluded that the VW resend plant has a very effective and competitive supply chain management. References: Cook S., Macaulay S., Coldicott H. (2004). Change management excellence: using the four intelligences for successful organizational change. Great Britain, Creative Print and Design. Correa and Park (n.d.) The VW Resende Modular Consortium. Case study. Future Supply Chain 2016, (2008). Video file. Retrieved from http://www.youtube.com/watch?v=US5lO1HfmEo Pires S. (1998). Managerial implications of the modular consortium model in a Braizlian automotive plant. International Journal of Operations and Production Management, vol 18. No.3, pp.221-232. Porter M. (1985) Competitive advantage: creating and sustaining superior performance : with a new introduction. New York, The Free Press. RFID - Technology Video (2006). Video. Retrieved from http://www.youtube.com/watch?v=4Zj7txoDxbE Thompson J. and Martin F. (2005). Strategic management: awareness and change, 5th edition. C & C Offset, China. Tech-faq. (n.d.). ERP. Retrieved from http://www.tech-faq.com/erp.html Supply Chain Digest (2006). Supply Chain News: The five challenges of today’s global supply chains. Retrieved from http://www.scdigest.com/ASSETS/ON_TARGET/10-08-12-3.php?cid=3649 Read More