Strategic Supply Chain Management - Daimler-Benz - Essay Example

1. Why should MCC assemble the cars themselves when suppliers are already deeply integrated on the site? Major Stakeholder: MCC is a wholly owned subsidiary of Daimler-Benz. Micro Compact Car (MCC) is a brand of the Daimler-Benz Corporation. The reason behind the merger that produced MCC was that the automotive sector had stagnated and the automobile sector manufacturers were not willing to invest in this sector. The MCC project was attractive for all the stake holders i.e. Daimler-Benz, and their suppliers, because the cost of this project was being shared by Daimler and its suppliers. The cost-sharing ratio is as follows: Daimler Benz Investment Suppliers Investment(7) DM 445 DM 385 DM 700 DM 300 EMPLOYEES 650 850 DEALER & DISTRIBUTION DM 550 - TOTAL It can be seen from the above that even though MCC was formed as a result of supplier integration and partnership cost sharing, but MCC was by far the stakeholder with the maximum investment. MCC had paid more than 50% of the total pre-launch, and infrastructural, product designing investment. The remaining 50% was shared amongst seven integrated suppliers and 16 non-integrated suppliers. Since the primary stakeholder is MCC, it is sensible for them to manufacture the car since the performance of the car in the market, its success or failure, will directly have an impact on them. The customer re consumers who are purchasing the product with the label Daimler-Benz, whereas the customers of the suppliers is the newly formed company MCC. The Brand Name: As discussed above, the MCC car carried the Daimler-Benz name. The brand name is actually a promise to the customer of quality and reliability. Due to this, if there are any technical flaws in the finished product, Daimler-Benz would suffer. The impact would not only be felt on the sales of Smart Car but it would have a sill-over effect and would adversely impact the current high-selling models of Daimler and Benz. For his purpose, even though supplier integration is a crucial part of MCC policies, however, even then MCC has to be in control of the manufacturing process. Influence and Control: Supplier integration is a “pull” mechanism whereby due to the influence of Daimler-Benz, which has its roots in the volume of business provided to their suppliers and partners by them, the suppliers and partners have willingly decided to invest and be a part of MCC. In the absence of the Daimler-Benz entity, it would be difficult to bring the different players of the automobile sector performing various functions under one roof. Likewise, this influence is needed to keep a control over the supply chain activities and to monitor supplier-supplier relationships. Without this influence and control, there would be greater conflicts and it would be difficult to make such a system work. Check and Balance, Performance Indicators and Quality Controls: Even though having lead times unmatched by any other in the industry is a milestone, but quality can not be compromised due to this. For this purpose MCC has the authority to terminate the contract of the supplier who was unable to match quality standards over a period of time. Also, measures to evaluate processes have been devised by MCC through which suppliers can evaluate and asses their own performance, find loopholes and improve them. The principle behind this is the continuous improvement six sigma model. Conflict & Disagreement: If, after several years, one of the partners of the supply chain disagree principally on some issue, they might have a tendency to pull out their capital. This happened to Smart Car in which in the first stage Swatch pulled out and then even Mercedes pulled out, the result of this is that the major stakeholder will suffer. This is one of the reasons why MCC should manufacture the car themselves with the major share in investment so that even if the partners decide to pull out of the project at any time, MCC would still hold the ownership of the brand and Smart car would sill be there product and they can opt to continue producing it. 2. What problems may there be with a supply chain system based on co-operation rather than direct ownership or control? MCC, is a wholly –owned subsidiary of Daimler-Benz. They have set landmarks in the automobile manufacturing sector, the greatest achievement being setting lead times of car manufacturing in weeks. This is possible due greater participation from the suppliers and very close supplier integration. Till yet, this system has worked well for MCC and has given it a competitive edge over all other competitors. However, such a close co-operation with the supply chain has its set of disadvantages. Some of the disadvantages are: 1. Power convergence on one organization in the supply chain: This happens when power is retained and wielded by one organization in the supply chain. MCC is vulnerable to this risk as “the seven integrated suppliers are responsible for the supply of 70-80 percent of the volume and 30-40 percent of the value of the car”. Due to this, a situation may arise whereby the more influential supplier of these seven, who can and is capable of giving business to other suppliers, may exercise his influence on the smaller vendors to have his demands accepted from Daimler Benz, the primary company behind MCC .The demand might include change in car model or make, or prices or even shareholding percentage. 2. Lack of Strategic Fit: This happens when a strategic fit is lacking and management styles are incompatible with the other suppliers. Till yet, the current arrangement of MCC is working out very well. However, in view of amalgamations, takeovers, mergers, downsizing, the complete management or some integral parts of the management might change and the new management might have a completely different style of working. MCC has seven closely integrated suppliers. This adds another risk on the watch list of MCC management to monitor the changes in management of its integrated suppliers. 3. Lack of Willingness to Co-operate: It is human nature as well as general tendency of companies that There is a lack of willingness to cooperate to the benefit of all. For example Bosch is manufacturing headlights for MCC as well as other customers. However, for Bosch, MCC will be another client along with the rest. Even though MCC would have a better working relationship but Bosh would also like to expand business possibilities with other prospects. Thus, the overall willingness would be a degree less than when it is manufacturing for MCC rather than when they are manufacturing for other clients. 4. Administrative Costs: Having too many suppliers increases both the management task of controlling them and the associated administrative costs. Reducing the total and moving towards single-sourcing can produce such benefits as, lower administration costs, more time to manage each supplier, an improvement in the relationship between you and the supplier more responsive problem solving, resulting from a greater understanding of difficulties and requirements and better communication. 5. Tendency to overlook core functions: Sometimes, in the supply chain integration, the principal company gets so involved that it does not have the necessary time and resources to concentrate on its core functions or for that matter on Research & Development. This tendency has been appropriately referred to appropriately “Don’t forget to put your own house in order first” in a trade journal. (www.entrepreneur.com/tradejournals) 6. Potential for Conflict: this has been referred in their article on Advantaged Supply Network by Bill Jackson and Conrad Winkler in the following “Relentless demands by suppliers for engineering changes and price renegotiations also absorb a huge amount of their and the customer’s management, engineering, and purchasing resources. This creates counterproductive tension. Suppliers hide profits and work hard to drive up margins, instead of putting their energy into delivering world-class service for their customers. Customers, on the other hand, may feel exploited by aggressive suppliers, which can lead them to impose outrageous demands (e.g., across-the-board purchase order price reductions after all negotiations are complete or last-minute part changes that require large capital expenditures). Customers frequently threaten to take away their programs if suppliers don’t comply. As the customer’s workload expands, the number of its purchasing managers swells, too. As a result, suppliers have little or no opportunity to interact with their customer’s senior management — and have no chance of developing a more strategic relationship with that customer.”( www.strategy-business.com) 7. Decision Making : As pointed out by Phillip Kirst and Erik Hofmann “Frequent changes of customer preferences and demand as well as dynamic political and economical conditions do pressurize companies to continuous adjustments. If a company is embedded into integrated supply relationships the impact of the adjustments at other supply partners have to be taken into account as well. Thus, more time is needed due to an extended decision-making process, which in turn reduces a companies’ flexibility and may decrease its competitive capabilities. This trade-off between the opportunity to gain relational rents in integrated supplier-buyer relationships on the one side and decreased flexibility on the other side has to be taken into account by an evaluation of the outcome of close relationships”. Thus it can be concluded that excessive supplier integration has its pitfalls too. (www.springerlink.com/content) . 3.Why is there a response time 2-3 weeks for a car when order specific modules such as dashboards can be produced at 2 hours notice? MCC has established a supply chain which is formed on the basis of Just in time production (JIT) or kanban. This implies that on one hand, MCC will benefit from having zero finished goods inventory but on the other hand this advantage will be shared by the suppliers. The suppliers would have zero inventories as well. Moreover, the required components are provided to the assembling line as and when they are required. This would mean that once Magna has completed assembling the body, only then will Surtema will start working on paints, Once Surtema has completed this function, and then VDO will assemble the cockpit. In this way, time keeps piling up. Even though the total lead time to put together a car may be as low as 4.5 hours but there are 50 small processes (modules) that have to be completed by utilizing JIT approach before the car is ready to be assembled. Paint: The paint process takes at least about a day and after the body has been painted it needs to dry up for a proper finishing. That would be the most time consuming process. Integrated Vs Non-integrated. There are seven integrated suppliers as compared to sixteen non-integrated suppliers. Considering this, the lead times of the integrated suppliers re less but the non-integrated suppliers would have the same standard lead times. Most of these non-integrated suppliers are providing crucial parts for the body of the car. Moreover, not only acquiring them would take time but then assembling them would require even more time. For example Bertrand Faure supplies seats and is a non-integrated supplier; it would take time to transport the requirements to the assembling site. Shipment & transportation of the vehicle to the Smart Centre: Once the vehicle is ready as per the requirements of the customer, it has t be shipped/ transported to the smart centre nearest to the customer or where the request was generated from. This would require additional time. Documentation: the sale of the car requires proper documentation incusing transfer order, purchase order and other such requirements. Fulfilling these requirements would also take time. 4.The modular product concept permits customization of the product through logistical postponement but the final assembly is done in Hambach. Why is this the case? The modular concept refers to customization of the car according to the customers requirements. It is following the “pull structure” according to which once the sale as per specifications has been made, then the production starts. The sale is made at the Smart Centres, where customer can design and customize their own car. This information is transmitted via Satellite to the manufacturing facility in Hambach. The Smart Centres have some inventory, which is meant for “takeaway” sales. These cars at the Smart Centres are for cash sales ad even though some modifications and light assembly can be made in the sales centers, but these centers are not equipped with providing the complete assembly line. Thus, if a customer wants a higher degree of customization, he will have to place an order through Smart centre, which will be relayed to the production facility and the order would be implemented and delivery would be made in the standard two to three weeks. Supplier Availability: The state of the art production facility is only available in Hambach, France. The car manufacturing process requires as many as 40-50 modules and sixteen non-integrated and seven integrated suppliers. All these suppliers are available in close proximity in the facility in Hambach. It would not be possible to maintain inventories for all the parts and components .Furthermore, the duplication of assembly line in the service centers would be very costly. It is due to this that the production facility has to be in Hambach. Dealers and Agents: another issue that might arise is, that even though MCC has invested in dealerships, but the function of dealers basically is to distribute the product and instigate sales. However, the dealers are separate entities working on the commission they earn when they sell a car. They do not have the responsibility of maintaining quality levels. For this purpose; cars can not be manufactured in the service centre. Logistical Postponement: the customization features built into the car for example the colour option are such that they require modification at the earlier stage of car manufacturing i.e. in the second stage of production. This is not possible to be provided at the service centers. For this purpose, the requirements of the customer are transmitted via satellite to the Hambach production facility whereby the concerned MCC professionals and suppliers work together to meet the requirements. Standardization Vs Customization: It is true that Smart is a highly customized car however; “standardization” of processes has been carried out at ever level to maintain the quality. For this purpose, every part of the car is branded with the name of the top of the line producer of that particular component. If the assembling facilities were provided at service centers, this degree of standardization would not be achieved and the car performance and reliability can not be guaranteed. Surveillance: Even though a high degree of participation is allowed to the suppliers but the supplier teams work under an MCC assigned coach. In the end, the surveillance is of MCC. This is not possible if the production was being carried out at other places. High Investment: If the production facilities were provided at the sales and service centers, the investment required would be so high that it would bring down the feasibility of the Smart Car. The organization would them have a choice between 1. Service centers with assembling facilities with very few service centers 2 have better distribution and more service centers without the assembling facility Any organization having the above two choices would go for the second option. (2526 words ) REFERENCES I. Philips Kotler, Marketing Management II. John W. Scharlacken,The 7 Pillars of Global Supply ChainPlanning, www.scmr.com/article/ III. www.entrepreneur.com/tradejournals IV. www.ventureoutsource.com/contract-manufacturing/trends-observationsdonts-of-supply-chain-benchmarking V. http://www.strategy-business.com VI. Smart Automobile, Wikipedia VII. www.tutor2u.net VIII. www.springerlink.com/content Read More