The Auto Industry: Flexible Networks

The days of having a product that sells 400,000 units in any particular market – there are very few products that do that today. It’s a much more fragmented market place and it means that volumes of any particular model are much more variable. We need to set up plants that can build multiple models and we need to put the same model into multiple plants. That’s what gives us the flexibility to respond to the market needs. – Diane Tremblay, Global Chief Manufacturing Officer, General Motors.

• Why did flexibility become a trend in the automobile industry?

The automobile industry has undergone significant changes in recent years, and flexibility has become a trend in response to these changes. The market has become more fragmented, and there are very few products that sell 400,000 units in any particular market [p.1]. This means that volumes of any particular model are much more variable, and car manufacturers need to set up plants that can build multiple models and put the same model into multiple plants to respond to the market needs. This trend has been observed across the industry, with major car manufacturers investing in flexible networks to stay competitive. For example, Ford Motor Company announced its “One Manufacturing” operations strategy in 2012, which aimed to drive improved efficiencies, increase capacity utilization, and make the company an industry leader in lowest total cost production [p.1]. Similarly, Volkswagen invested €100 million in improving the flexibility of its Wolfsburg plant, and General Motors invested $460 million in building a flexible engine plant in Spring Hill, Tennessee [p.2]. These investments demonstrate the importance of flexibility in the automobile industry and the need for car manufacturers to adapt to the changing market needs. However, implementing flexible networks is not without its challenges. There are two important effects of variety in the automobile industry: the average effect and the variability effect [p.3]. The average effect reflects a mismatch between existing plant capacities and typical sales at the model level, while the variability effect reflects the difficulty in matching actual demand and capacity due to forecasting challenges. Car manufacturers need to forecast annual demand accurately to plan their capacity, but the variability effect makes it difficult to forecast the annual volume of any given model. This means that companies are placing expensive bets when installing/retooling dedicated capacity and they run a significant risk of having too much or too little capacity compared to actual demand [T3, p. 3].

• What are the advantages and what are the challenges?

The advantages of flexibility in the automobile industry include the ability to respond to changing market needs, improved efficiencies, increased capacity utilization, and lower total cost production [T1, p. 1]. Flexible networks also provide a strategic advantage to car manufacturers, as they can adapt to the changing market needs and stay competitive [T3, p. 6].

Implementing flexible networks is not without its challenges. One of the main challenges is the complexity of the automobile industry, which is driven by the technological sophistication of the product, vertical integration, and variety [T3, p. 2]. Another challenge is the difficulty in matching actual demand and capacity due to forecasting challenges, which makes it difficult for car manufacturers to plan their capacity effectively [T3, p. 3]. Car manufacturers need to forecast annual demand accurately to plan their capacity, but the variability effect makes it difficult to forecast the annual volume of any given model. This means that companies are placing expensive bets when installing/retooling dedicated capacity and they run a significant risk of having too much or too little capacity compared to actual demand [T3, p. 3].

Despite these challenges, the advantages of flexibility in the automobile industry outweigh the challenges, and car manufacturers are investing in flexible networks to stay competitive and meet the changing market needs.

• What trade-offs do executives face when designing the capacity network?

Executives face several trade-offs when designing the capacity network in the automobile industry.

One of the main trade-offs is between flexibility and efficiency. Creating a flexible plant requires executives to choose among four levers: product design, process design, production technology, and people [p.4]. However, these levers can also affect the efficiency of the plant. For example, increasing the flexibility of the plant by adding more production technology can increase the cost of the plant and reduce its efficiency [T2, p. 4].

Another trade-off is between capacity and demand. Car manufacturers need to forecast annual demand accurately to plan their capacity, but the variability effect makes it difficult to forecast the annual volume of any given model. This means that companies are placing expensive bets when installing/retooling dedicated capacity and they run a significant risk of having too much or too little capacity compared to actual demand [T3, p. 3]. Having too much capacity can lead to excess inventory and higher costs while having too little capacity can lead to lost sales and lower revenue.

Finally, executives also face a trade-off between centralization and decentralization. Centralizing production can lead to economies of scale and lower costs, but it can also reduce flexibility and increase the risk of supply chain disruptions. Decentralizing production can increase flexibility and reduce the risk of supply chain disruptions, but it can also increase costs and reduce economies of scale [T3, p. 5]. In conclusion, executives face several trade-offs when designing the capacity network in the automobile industry, including the trade-off between flexibility and efficiency, capacity and demand, and centralization and decentralization. Executives need to carefully balance these trade-offs to design a capacity network that meets the changing market needs and stays competitive.