According to an English proverb, challenging situations can lead to innovative solutions. This holds true for the Smart car company, which has been inspired by the lack of parking spaces and the influence of environmentally conscious groups. These factors have compelled the company to think creatively.
Daimler-Benz and Swatch collaborated to establish a joint venture in order to produce the Micro Compact Car (MCC) or Smart Car. Their goal was to integrate the strengths and principles of both companies to develop a completely innovative vehicle (see appendix). The objective of the manufacturers was to create an affordable, environmentally friendly car suitable for urban areas, while still maintaining the concept of individual mobility. MCC implemented groundbreaking practices in the industry, including customization, reduced waiting times, supplier co-investment, and a final assembly cost that accounted for only 10% of the production cost price.
Approximately 80% of the smart car can be recycled, following the principle of “dirt to dirt”. This concept is similar to the “functional chain awareness school” described by Bechtel and Jayaram (1997). The model closely resembles porter’s value chain, which emphasizes the flow of goods. The car’s construction revolves around a sturdy body frame known as “Tridion”, which serves as the foundation for assembling various modules. These modules consist of the platform, powertrain, doors and roof, electronics, and cockpit. They are provided in a distinct arrangement for the final assembly process.
Most suppliers are fully incorporated at the production site, supplying “supplier modules” based on a postponed purchasing approach. The MCC purchases modules only when needed in the assembly process (postponed purchasing). The car moves along the work stations of the assembly line, which has a plus sign layout (see appendix). This allows integrated suppliers to directly supply their modules into the final assembly line on a “Just in Time” basis.
According to Waters (2009), Just-in-Time (JIT) is defined as organizing all activities to occur exactly when they are needed. The smart car project’s production site was strategically placed in Hambach, a key logistics hub in Europe. This location allows for easy access to approximately 60% of the European Union population within 24 hours. The smart car has compact dimensions, measuring only 51 meters in length and 1.53 meters in height, which maximizes parking space utilization. Initially, the smart car was introduced in nine European countries: Belgium, France, Spain, Italy Austria, Switzerland, Netherlands, Germany, and Luxembourg.
MCC revolutionized supply chain integration by going beyond conventional practices like supplier involvement, outsourcing, and modular manufacturing. The system partners play a pivotal role in the planning and design of the Smart car, aligning with the principles of “The Integration/ Process School” in supply chain management. As per Cooper, Lambert Pagh (1997, p. 2), the integration school emphasizes merging business processes throughout the supply chain. It is important to highlight that 85% of the product’s overall added value stems from these system partners.
MCC faced challenges in controlling and monitoring the supply chain due to only contributing 15% of the added value. Instead of investing heavily in advertising, MCC opted for a smart promotional plan. This involved placing the smart car at lifestyle centres in popular shopping areas to create awareness, curiosity, and demand. Prospective customers had the opportunity to customize their smart car at the showroom and submit their orders to the distribution centre.
MCC and the system partners strongly adhere to customer service practices. LaLonde and Zinszer, as cited in Schary and Larsen (2002), classify these practices into three subheadings: pre-transaction, transaction, and post-transaction elements. Distribution centers are capable of performing final assembly tasks such as easily changing the color of the car by switching out plastic panels or adjusting the final assembly of lights. Postponement is therefore crucial in the customization of the smart car.
Bowersox and Closs (1996 cited in van hoek1998) proposed that postponement encompasses activities that reduce risk by delaying additional investment in the product until orders are confirmed.
WHY MCC SHOULD ASSEMBLE ITSELF
According to Bowersox, Closs, and Cooper (2002), it has become commonplace for companies to outsource various manufacturing and logistical operations in order to bring their products to market. The factors that determine the appeal of outsourcing include the characteristics of the product, the manufacturing process, the cost, and the next step in the supply chain.
The automobile industry has witnessed an increasing trend in adopting modular productivity style. This approach aims to decrease capital investment and shorten the production time of automobiles. MCC also embraced this strategy, as its systems partners invested in factory development, resulting in a reduction in MCC’s financial commitment. With suppliers located on-site, the final assembly of cars now takes only 4.5 hours. Onsite suppliers offer flexibility, just-in-time operations, and shorter supply lead-time. MCC adopts a consortium approach in their operations.
Kingsley and Klein(1998) proposed that the Consortium approach involves collaborating with multiple firms, utilizing their knowledge, skills, expertise, and/or supply chain positions to generate synergies in planning, designing, and manufacturing the product/service. In this case, MCC assembles the car independently, without the participation of any system partners. The reason behind this strategy is that MCC desires to maintain control over the quality of the Smart car. Any weaknesses on the part of the system partner would have a negative impact on MCC’s reputation. Additionally, MCC invests a significant amount of money in promoting the brand to build awareness and gain acceptance among potential buyers.
According to Bowersox, Closs, and Cooper (2002), brand power refers to a customer’s preference for purchasing a product based on factors such as the manufacturer’s reputation, product quality, and supply chain capabilities. MCC will retain core competence by personally assembling the car, thereby maintaining the necessary knowledge and expertise. Core competence, as defined by Hamel and Prahalad (1990), is the unique skills and abilities through which an organization deploys resources in its activities and processes to gain a competitive advantage that others cannot copy. This is especially crucial if any suppliers are no longer available during the production process.
MCC will have the ability to manage the situation effectively. By being familiar with the production process and understanding its operational challenges, MCC can accurately measure suppliers’ performance. Being directly involved in production allows for greater flexibility. Suppliers may not always meet customers’ needs, but MCC will swiftly and vigorously address any customer requirement, surpassing the capabilities of its suppliers. The priority for MCC’s supply chain should be responsiveness rather than efficiency. (See appendix) MCC aims to avoid facing the coherence issues that VW’s management encountered at the Resende plant.
Volkswagen’s project in Resende, Brazil, which began in 1996, is falling behind in terms of quality and productivity. According to Harbour and Associates Inc., 33% of the vehicles manufactured at the Resende plant were recalled before final clearance. Additionally, it takes double the amount of time to assemble a truck compared to the standard in the United States. MCC plays a role in monitoring the supply chain by controlling and integrating information flow. They communicate order details to suppliers and use POS-data to develop knowledge about customers. Moreover, they engage in dialogue with customers regarding products and their specific demands.
This is similar to “The Information School,” which emphasizes the flow of information in both directions. According to Johannsson (1994), it is crucial for all parties to be well-informed about consumer needs and wants, and the flow of information among participants is vital for the overall performance of supply chain management. Additionally, they also coordinate manufacturing and logistics operations among the system partners.
HOW TO MEASURE THE UNMEASURABLE
The extensive outsourcing and sub-contracting involved in the production of MCC make it difficult for management to measure the performance of different entities across the supply chain. This contradicts traditional methodologies of controlling and governing based on ownership and vertical integration (Van Hoek, 1998). The focus is on optimizing the overall system rather than sub-optimizing at one point. However, implementation is not as easy as it seems because individual players in the supply chain may be unwilling to sacrifice their internal efficiencies and competences. There is also disagreement about how to share revenues among system partners.
Van Hoek (1998) asserts that supply chain integration can be advantageous for both the collective and individual participants in the supply chain. MCC introduced a distinctive method for evaluating and regulating supply chain arrangements. However, as suppliers and distributors undertake a significant amount of operational activities, the role of MCC diminishes in the value creation process. LaLonde and Pohlen (cited in Van Hoek 1998) argue that measurement systems such as total cost of ownership and direct product profitability primarily cater to specific segments of the supply chain and do not encompass the entire operations system.
According to Scapens (1998 cited in Van Hoek 1998), it is important for advance measurement systems to support innovative strategies such as teamwork and to assist in measuring financial approaches like the balanced scorecard. This development is expected to be achieved through the use of modern ICT, including enterprise resource planning (ERP) and point of sale (POS) systems. Cooper et al (1997) emphasizes that further research is needed to devise effective performance measurements for the supply chain. Similarly, Brewer and Speh (2000 cited in Harrison and Van Hoek 2008) argue that performance measures must align with supply chain practices.
MCC should introduce new performance measures that can be applied across all entities in the supply chain and improve visibility and control. These measures include customer service level, order to delivery lead time, new product introduction rate, internal defect rate, and financial flexibility.
HOW TO IMPROVE THE LEAD TIME
The application of the Built to Order (BTO) strategy provides numerous benefits for auto manufacturers. By implementing the BTO approach, manufacturers are able to address issues such as over production and low profitability. The initial goal of MCC was to create a framework that would allow for the building and delivery of smart cars based on customer specifications in the shortest amount of time possible, with the ultimate goal being a 3-5 day order to delivery time. The inspiration for BTO came from the Dell computer supply chain. MCC took the bold step of prioritizing the end customer, but they are currently facing issues with long lead times, which leads to customer dissatisfaction. According to Azarahar (1998:p8), customer satisfaction is crucial in a BTO system, as it aligns with the needs and desires of the customer and is an essential element in achieving a competitive advantage.
One possible explanation is that the received customer orders are either adjusted to fit the production plan established months in advance or forecast orders are modified to meet customers’ needs. However, despite these efforts, the delivery lead time for Smart car did not improve. According to Waters (2009), lead time refers to “the overall duration between ordering materials and receiving them for use”. This process of purchasing a new car often proves to be highly frustrating for customers.
According to DayCar Research, customers in the UK typically face a waiting time of approximately 48 days, sometimes exceeding 60 days, for their custom built car. The International Car Distribution Programme (ICDP) conducted a study in 1997 and found that 26% of customers are not willing to wait longer than 7 days, while only 19% are willing to wait for a period of 30 days. Harrison and Van Hoek (2008) state that Toyota has the capability to produce a car within five days but chooses not to do so in order to prevent excessive pressure on its suppliers and distributors, which would ultimately result in higher manufacturing costs.
The presence of various obstacles hinders both short lead times and prompt response times. These barriers exist at both the market and dealer levels, compelling dealers to adhere to their allocated resources. These allocations are determined during production programme meetings, which are greatly influenced by financial motivations. Markets with high profitability consistently receive priority (3DayCar). It is imperative to discourage the mentality that favors a push-based system, which emphasizes volume and market share. Decisions regarding the product mix often impede the flow of orders.
The paradox of production capacity and BTO, MCC is that they aim to maximize efficiency in utilizing production and assembly facilities, even though orders often come in random sequence that does not align with production schedules. Consequently, managing transportation and inventory goals can be conflicting, creating a sandbox or silo mentality. This internal integration barrier is commonly known as the “great divide,” where marketing and distribution are focused on outbound activities while procurement and manufacturing are focused on inbound activities. Time
MCC needs to establish operational integration in order to enhance flexibility within the organizational structure. This integration will yield several advantages, including economic value, market value, and relevancy value. To ensure the delivery of the appropriate product at the right time and place, MCC must strive to achieve operational objectives such as responsiveness, variance reduction, and inventory reduction. As the level of integration and flexibility at MCC improves, lead time will be enhanced, resulting in improved customer service. A research carried out in 2003 demonstrates that 70% of customers are likely to return if their complaints are handled appropriately.
Rebuilding the relationship with customers is known as service recovery. According to Schary and Larsen (2002), retaining customers is more profitable than acquiring new ones. The Pareto law also emphasizes the significance of customer retention, stating that around 80% of a business’s profits come from just 20% of its customers.
POSTPONEMENT IS NOT FOR EVERYONE
Postponement, as described by Van Hoek (2001) and cited in Yeunget al (2007), is a strategy where certain activities are delayed until orders are confirmed/received. This practice is used by organizations to enhance service level and minimize costs. According to Chopra (2000), postponement can significantly enhance the flexibility capabilities of organizations. However, it is crucial for organizations to assess that the costs associated with postponement do not exceed the anticipated benefits. The effectiveness of postponement is influenced by specific demand, product, and production requirements. Nevertheless, Chopra (2000) warns that a win-win situation is not guaranteed in all circumstances due to the inherent costs involved. In any case, the cost of postponement will naturally increase due to product or process redesign.
The implementation of postponement can have an impact not only on the company but also on other players in the supply chain (Chopra 2000). According to Chopra (2000), postponement is most effective when there is high uncertainty in demand. Organisations should consider two questions: first, does postponement align with the organisational strategy; second, is the flexibility gained from postponement beneficial for customers and competitors. The purpose of postponement is to delay certain activities until information about customer demands is known.
The fast information system enables MCC to send customer orders directly to OEMs and suppliers, with manufacturing commencing once the orders are confirmed. According to Snapp (2009), postponement has not been successful in the automobile industry and offers minimal advantages. However, Chopra (2000) argues that a company should implement a postponement strategy when demand is uncertain but response time is crucial. In the case of smart cars, the demand never surpasses the forecasted demand, and MCC boasts the quickest lead time in the industry, with customers being willing to wait.
MCC is responsible for transporting the finished inventory to the distribution centre (DC). Due to shipments from multiple suppliers, these DCs must stock a significant amount of inventory to account for lead time as well as accommodate product proliferation. The cost of transporting goods is lower compared to the cost of stocking them. In some cases, customers are willing to sacrifice certain benefits, such as shorter waiting times, in exchange for more product options (Waller et al., 2000 as cited in Yang and Burns, 2003).
According to Pollard, Chuo, and Lee (2008), the response time for postponed products is not considered crucial. Auto dealers hold significant power over manufacturers as they prefer to have a large stock of products available for consumers to have a wide range of choices from the floor stock. However, implementing postponement in the supply chain requires a significant financial commitment for reconstruction.
RECOMMENDATION AND FUTURE TRENDS
There is a significant target market that can be tapped into by introducing the electric engine Smart car. The electric engine is environmentally friendly and has low operating and maintenance costs. MCC should introduce the Smart car in Asian markets such as China, India, Pakistan, Malaysia, and others. There is a need for improvement in customer service, specifically by providing more accurate and realistic delivery dates to customers. In the USA, satisfied customers tend to stay with the same supplier for an additional 12 years and purchase 4 more cars of the same make. In conclusion, MCC produced the Smart car, which was highly demanded. Furthermore, MCC implemented innovative supply chain practices never before used in the automobile industry.
Undoubtedly, MCC’s supply chain practices have revolutionized the automobile industry by enhancing production, supply chain management, and flexibility. This project serves as a benchmark for similar ventures, as it involved constructing the production plant and establishing relationships with suppliers. The implementation of supplier parks has resulted in shorter lead times and increased integration among supply chain partners. MCC intends to maintain long-term supplier relationships throughout the lifespan of the Smart car. While most manufacturing and logistical operations are outsourced, MCC takes charge of car assembly.
The MCC utilizes control over the entire supply chain, ensuring flexibility. It is recommended that MCC focuses on assessing the entire supply chain rather than individual entities. MCC has adopted a unique marketing approach for the Smart car, with an emphasis on raising awareness among the target market. Concerns have been raised regarding MCC’s customer service. In the future, we can expect to see more projects following MCC’s lead. By implementing these innovative and exemplary practices, MCC has paved the way for businesses to gain a competitive edge.