This paper will focus and investigate the SMART car sculptured by Micro Compact Car (MCC), a wholly owned subsidiary of Daimler-Benz. Hambach, France was chosen as the production site, where the main suppliers were integrated in a supplier’s park called “Smart Ville”. MCC used such supply chain practices which were never used before such as supplier involvement, outsourcing the main manufacturing and modular production. Complete modules were attached in the rigid body frame called “Tridion”. The lead time is just under 5 hours, which is exceptionally good in automobile industry.
However, the management of MCC is facing some issues related to manage and control the supply chain where MCC just contributes 15% of value added. The case study “Smart Car and smart logistics” gained special attention from the academics and automobile professionals. INTRODUCTION “Difficult situations inspire ingenious solutions” (English proverb). It is true with Smart car. The scarcity of parking spaces and pressure exerted from the environment friendly pressure groups induce the organisations to think artistically.
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Daimler-Benz and Swatch are the two companies which came upwith the joint venturetoproduce the idea of Micro Compact Car (MCC) or simply the Smart Car. The thinking was to combine the talents and values of both companies to create a conceptually new car (see appendix). The manufacturers aimed at manufacturing wallet friendly, city friendly and eco-friendly without compromising the individual mobility concept. MCCused innovative practices in the industry such as: customization, waiting time were shorten, suppliers co-invested in the project and final assembly was merely 10% of the production cost price.
About 80% of the smart car can be recycled (dirt to dirt). This bears a resemblance to“the functional chain awareness school” indicated by Bechtel and Jayaram (1997). This model is very close to porter’s value chain which explicitly mentions flow of goods. The car is built around a potent body frame also called “Tridion”to which modules are assembled. Smart car comprises of five main modules; the platform, the powertrain, the doors and roof, the electronics and the cockpit. The modules are supplied in a unique arrangement for final assembly.
Most of the suppliers are fully incorporated at the production site. Suppliers supply “suppler modules” based on a postponed purchasing approach. Modules are bought by the MCC only when they are required in the assembly process (postponed purchasing). The car is moved along the work stations of the assembly line, which has a lay-out in the form of a plus sign (see appendix). In this way, the “integrated suppliers” are able to supply their modules directly into the final assembly line on the basis of “Just in Time”.
Waters (2009) defined the JIT as a concept that “organises all activities to occur at the exactly the same time they are needed”. The mastermind of the project chose to locate the production site strategically at the heart of logistics of Europe, Hambach. Around 60% of the population of EU can be reached within 24 hours. The length, breadth and height of the smart car are only 2. 5, 1. 51 and 1. 53 metres respectively, thusmakingmost of the parking space. Smart car was first introduced in 9 European countries: Belgium, France, Spain, Italy Austria, Switzerland, Netherlands, Germany and Luxembourg.
MCC introduced a new level of integration in supply chain. They go beyond the existing practices assuppliers’ involvement, outsourcing and modular manufacturing. System partners are deeply involved in planning and designing process of the Smart car. This depicts the characteristics of “The Integration/ Process School”. Cooper, Lambert Pagh (1997, p. 2) gave the definition of integration school as “the integration of business process across the supply chain is what we are calling supply chain management”. In all 85% of the total added value in the product come from the system partners.
MCC was only responsible for 15% of the added value. In these circumstances, controlling and monitoring the supply chain was becoming difficult task for the management of MCC. MCC adopted smart promotional plan, instead of investing gigantic amount of capital on advertising. The effort was to create awareness, curiosity and demand by placing the smart car at lifestyle centres, located in shopping arcades and highly visited places. The prospective customers can customize their smart car in the showroom and forward the order to the distribution centre.
MCC and the system partners ardently follow the customer service practices. LaLonde and Zinszer cited in schary and Larsen (2002) categorize the customer service practices under the three sub headings: pre-transaction, transaction and post-transaction elements. Distribution centres has the capacity to perform final assembling like plastic panels that can be switched out easily to change the colour of the caror light final assembly as a form of postponed manufacturing. Postponement thus plays a significant role in customising the smart car.
Bowersox and Closs (1996 cited in van hoek1998) suggested that postponement involves the activities which lower the risk by delaying the further investment into the product until orders are confirmed. WHY MCC SHOULD ASSEMBLE ITSELF It is now a day’s common practice for firms to outsource some or even all manufacturing and logistical operations needed to market the particular product. Bowersox,Closs, Cooper (2002) state that the nature of product, nature of manufacturing, cost and next destination in the supply chain are the key issues while considering the attractiveness of outsourcing.
Modular productivity style is an upsurge fad in the automobile industry. The motives behind this approach were to reduce capital investment and minimize the time for the production of automobiles. MCC motives were no different, systems partners invested in the development of factory thus lowering the MCC financial commitment. The suppliers were on the site, the final assembly of cars takes just 4. 5 hours. Onsite suppliers provide flexibility, just in time operations and short supply lead-time. MCC follows consortium approach.
Kingsley and Klein(1998) suggested that Consortium approach as collaboration among the multiple firms so that their knowledge, skills, expertise and/or supply chain positions creates synergies in planning, designing and manufacturing the product/service. MCC assembles the car itself without the involvement of any system partners. The motive behind this tactic isthat MCC wants to control the quality of the Smart car. Any loophole on behalf of the system partner would affect the reputation of MCC. MCC spend a gigantic amount of promotional money to create brand awareness and acceptance among prospective buyers. Bowersox, Closs, Cooper (2002) defined brand power as “the measure of a customer’s purchase preference based on a manufacturers reputation, product quality and supply chain capabilities is known as brand power”. By assembling the car itself, MCC will maintain the pertinent knowledge and expertise (core competence). Hamel and Prahalad(1990) defined the idea of core competence as “the skills and abilities by which resources are deployed through an organisation’s activities and process such as to achieve competitive advantage in ways that others cannot imitate”. In case of any suppliers left in the middle of the process.
MCC will be capable of handling the situation. MCC will measure the performance of suppliers more effectively and precisely as MCC knows the production process and understand the operational difficulties of the process. Being part of the production will give more flexibility. Products made by the suppliers may not respond to customers’ needs. MCC will response to any customer need more swiftly and vigorously as compared to its suppliers. The supply chain of MCC should be responsive than to be efficient. (See appendix) MCC do not want to face the problems of coherence as management of VW’s faced at Resende plant.
VW’s project started in 1996 at Resende (Brazil) lags behind in terms of quality and productivity. According to Harbour and Associates Inc. , 33% of the total vehicles manufactured at the Resende plant were recalled before final clearance. Moreover, the number of hours required to assemble a truck was double the norm in the United States. MCC monitor the supply chain bycontrolling and integrating the flow of information. They inform suppliersabout orders, develop customer know-how by using POS-data and dialoguewith customers about products and customer specific demands.
This resembles to “The Information School” which clearly emphasises on the flow of information (both ways). Johannsson (1994) states that “all parties must be well informed so that they know the needs and wants of consumer, flow of information among different participants are critical to overall performance of SCM”. Furthermore, they coordinate the manufacturing and logistics operations between the system partners. HOW TO MEASURE THE UNMEASURABLE The production of MCC involved extensive outsourcing and sub-contracting, which make difficult for management to measure the performance of different entities across supply chain..
The focus on different interfaces in the supply chain contradicts the traditional methodologies of controlling and governing based on ownership and vertical integration (Van Hoek, 1998). In this way, preference is always given on the overall optimization of the system rather than on the sub-optimization at one point. But it is not as easy to implement as it seems because individual players of the supply chain maybe reluctant to sacrifice their internal efficiencies and competences. Another bone of contention is the sharing of revenues among the system partners.
On the other hand, Van Hoek (1998) argues that supply chain integration can benefit the multiple and individual players in the supply chain. MCC brought a peculiar way to measure and control the supply chain arrangements. The role of MCC decreases in the value adding process, because suppliers and distributers perform considerable amount of operational activities. LaLonde and pohlen (1996 cited in Van Hoek 1998) states that measurement systems like total cost of ownership and direct product profitability are predominantly designed for few segments of the supply chain and doesn’t cover the whole operations system.
Scapens (1998 cited in Van Hoek (1998) explains that advance measurement system should support innovative strategies like teamwork. They can also be a helping hand in measuring the financial approaches like the balanced scorecard. Modern ICT such as enterprise resource planning (ERP) and point of sale (POS) are expected to configure this development. Cooper et al (1997) emphasis that more research work is needed on devising effective performance measurement in the supply chain. Brewer and speh (2000 cited in Harrison and Van Hoek 2008) says that performance measure must be aligned with supply chain practices.
MCC should in introduce new performance measures such as customer service level, order to delivery lead time, new product introduction rate, internal defect rate and financial flexibility should be introduced because these measures can be applied across all entities in the supply chain and improve visibility and control. HOW TO IMPROVE THE LEAD TIME Auto manufactures gains numerous benefits by applying the Built to Order (BTO) strategy. Manufactures cope with problems such as over production and low profitability by implementing BTO approach.
Initially MCC goal was to develop a framework in which smart car can be built and delivered to customer specification in minimal lead time with 3-5 days order to delivery time as the ultimate goal. The inspiration of BTO comes from the Dell computer supply chain. MCC took bold step of putting the end customer first, but they are facing issues of long lead time which results in unsatisfied customers. Azarahar (1998:p8) states” customers’ satisfaction is vital in BTO system since they are agreed with the customer and customer satisfaction is vital element in achieving competitive advantage”.
One reason might be that the actual customer orders that are received are either fitted into the plan laid out by the production programme months aheador forecast orders are amended to customers’ requirements. But still this didn’t improve the delivery lead time of Smart car. Waters (2009) define lead time as “the total time between ordering materials and having them delivered and available to use”. The new car buying process tends to be a very frustrating experience for customers. DayCar Research indicated that in the UK, a customer has to wait on average 48 days for his/her custom build car and in some case even longer that 60 days. International car distribution programme (ICDP) research in 1997 revealed that 26% of customers are not willing to wait longer than 7 days and only 19% are willing to wait 30 days. Harrison and Van Hoek (2008) state that Toyota is capable of manufacturing a car in five days but has decided not to do so because of the pressure it would put on its suppliers and distributors and result in high cost of manufacturing.
There are several barriers to the short lead times and inhibit short response times. These barriers are at market and dealer level, which forces the dealer to stick to the allocation given. The allocations are decided in the production programme meetings, which are heavily influenced by financial interests. Priority is always given to markets with high profitability (3DayCar). Need to discourage the push based system mind-set. This mentality focuses on volume and market share. The decisions regarding the product mix obstruct the order flow.
SALES SOURCING| STOCK REDUNDANCY RISK| ALTERNATIVE SPECIFICATION RISK| DISCOUNTING RISK| LEAD TIME RISK| CAPACITY UTILISATION RISK| DEALER| Very high risk| Very high risk| Very high risk| No risk| Moderate risk| DEALER TRANSFER| High risk| High risk| High risk| Low risk| Moderate risk| DISTRIBUTION CENTRE| Moderate risk| Moderate risk| Moderate risk| Low risk| Moderate risk| ORDER AMENDMENT| Low risk| Low risk| Low risk| Moderate risk| Moderate risk| BUILD-TO-ORDER| No risk| No risk| No risk| Very high risk| Very high risk|
The paradox of production capacity and BTO, MCC tend to strive for the most efficient utilisation of the production and assembly facilities. Most of the time orders come in random sequence which does not suit the production schedules. The goals for managing transportation and inventory can be contradictory. This scenario is called sandbox or silo mentality. Internal integration barriers have resulted to a common situation referred to as “great divide”. In this situation marketing and distribution is on the outbound and procurement and manufacturing on the inbound side. Time
MCC needs to create operational integration which will bring flexibility in the organisational structure. The integration will create following benefits: economic value, market value and relevancy value. To provide right product at right time at right place, MCC need to achieve the operational objectives such as responsiveness, variance reduction and inventory reduction. The lead time will improve as the integration and flexibility increase at the MCC. Hence results in better customers’ service. Research conducted in 2003 shows that 70% of customers will come back if their complaints are dealt with appropriate manner.
This rebuilding ties with customer is referred as service recovery. Schary and Larsen (2002) asserted that retained customers are more profitable than new customers. Pareto law also signify the importance of the retention of customer. Around 80% of the profits of the business come from the 20% of the customers. POSTPONEMENT IS NOT FOR EVERYONE Postponement is a strategy in which some of the activities are delayed until the orders are confirmed/received (Van Hoek 2001 cited in Yeunget al 2007). Organisations used this practice to improve the service level and minimize cost.
Chopra (2000) Postponement can greatly improve the flexibility capabilities of the organisations. Organisations need to evaluate that the cost associated with postponement must not exceed the expected benefits. The concept of postponement works best under specific demand, product, and production requirements. Postponement does not guarantee a win-win situation under all circumstances because of the cost involved (chopra 2000). In postponement the cost inevitably goes up because of product or process redesign.
The impact is sometimes not limited to the company implementing postponement, but affects the other players in the supply chain (Chopra 2000). Chopra (2000) asserted that Postponement best suits when the demand is uncertain and high. Organisations need to ask two questions: first, does the postponement align with the organisational strategy; second is the flexibility obtained from postponement desirable with regard to the customers and competitors. The rationale of the postponement is to delay some activities after some information about the customers’ demands is known.
The fast information system allows MCC to send the customer orders directly to the original equipment manufacturing (OEM) and suppliers and manufacturing starts after the orders are confirmed. Snapp (2009) postponement is never been a successful phenomenon in auto mobile industry. It reaps least benefits. Chopra (2000) a company must implement postponement strategy where the demand is uncertain and the response time is important. The demand for smart car never exceeds the forecasted demand and MCC lead time is fastest in the industry and customers are willing to wait.
MCC has to carry the amount of finished inventory to the distribution centre (DC). Since shipments come from different suppliers, not only these DCs need toStock a large amount of inventory to compensate for the lead time, they also had to stock additional Inventory to handle all of the product proliferation . The transport costs are lower than the stock cost. In certain situations, customers are even willing to sacri?ce certain bene?ts such as short waiting time for more options (Waller et al. 2000 cited in Yang and Burns 2003).
The response time of postponed products is not critical. Pollard, Chuo and Lee (2008) stated that auto dealers have strong influence on manufactures. They prefer large stock to show variety for consumers to choose from a wide array of floor stock. There is high amount of financial commitment required to reconstruct the supply chain to support postponement. RECOMMENDATION AND FUTURE TRENDS * There is a huge target market which they can explore by introducing electric engine Smart car. Electric engine are eco-friendly, operating and maintenance cost is low. MCC should introduce the Smart car in Asian markets such as China,India, Pakistan, Malaysia and many more. * There is need for improvement in the customer service area. More accurate and realistic delivery date should be given to customers. In USA, on average a satisfied customer stays with the same supplier for further 12 years and buys 4 more cars of the same make. CONCLUSION MCC produced Smart car, which was the need of an hour. MCC used such supply chain practices which was never used before in the automobile industry.
No doubt, the supply chain practices used by MCC have opened news doors for the restructuring of the automobile industry in terms of production, supply chain management and flexibility. The whole project has been a role model for other similar developments. The production plant and supplier relations where built from the scratch. The introduction of supplier parks has improved the lead time and brings more integration among the supply chain partners. The relationship with suppliers are going to last the entire life cycle of Smart car. MCC has outsourced most of the manufacturing and logistical operations, but assembles the car itself.
It helps the MCC to maintain the control over the whole supply chain and brings flexibility. MCC should use those parameters which measures the whole supply chain rather measuring the individual entities. MCC has marketed the Smart car in a peculiar way. Emphasise was to create awareness among the target market. Some questions have been raised about the customer service of MCC. In the future we can see many more projects following the footsteps of MCC. By implementing these innovative and exemplary practices, MCC has showed the business a new way to gain competitive advantages.