Case Analysis on VW Resende Modular Consortium

Course Name: Supply Chain Management Course Code: IB 307

Submitted to: Shobod Deba Nath Lecturer Department of International Business Faculty of Business Studies University of Dhaka

Submissive: Sujon Saha (17) Borhan Uddin (21) Nepal Chandra Dhar (30) S.M. Khairul Islam (42) Arijit Kumar Saha (57)

Letter of Transmittal
The Honorable Course Instructor, Shobod Deba Nath Lecturer Department of International Business University of Dhaka

Subject: Submitting CASE ANALYSIS on VW Resende Modular Consortium

Sir, At the threshold I am glad to submit the term paper to you which is a partial course requirement of the respective course of BBA Program. For understanding the Supply Chain Management broadly, you have given us to analyze a case on VoksWagen of Brazil. While preparing this term paper, we have learned so many things. So we thank you for giving us this opportunity to analyze the case.

Hereby, we hope you would be kind and generous to accept the case analysis and oblige thereby.

Thanking you, S.M. Khairul Islam (on behalf of our group members)

Table of Contents
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Content Context of the case About VW Brazil About the modular consortium SWOT analysis Environment of the consortium Internal environment External environment Findings Problems of the modular consortium Answers to the discussion questions Recommendations Bibliography

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Context of the case:

The case is all about the modular consortium model adopted by Volkswagen in their trucks and buses plant in Resende, Brazil, in which only big module (large sub-assemblies) suppliers carry out assembly operations. The choice for the modular consortium was made because of the urgency in building a new truck plant after Autolatinas (a joint venture between Ford and Volkswagen in Latin America which lasted from 1987 to 1995) end and because VW did not have the necessary core

competencies regarding the production of the truck modules, having thus decided to take advantage of well established suppliers competencies in the new plant.

In 1996, when the Resende Volkswagen plant, the first world wide to adopt the Modular Consortium model, was inaugurated in the State of Rio de Janeiro, Brazil, the worlds attention of the operations management community centered on it. The object was to take to the extreme a world trend, which already had existed for many years, in the car assembly plants to reduce their supplier bases to smaller number of partners, with whom they would establish longer relationships that would be more concentrated on co-operation than on conflict, delegating to each of the partners growing shares of responsibility, both in the production as in the project of parts and assemblies. The extreme to which VW took these ideas meant a model in which, at the Resende truck and bus green field plant, VW would have business relations with only 7 suppliers of large systems (or modules), who would be responsible for both their respective supply chains, as for the assembly of the large component modules of the vehicles in the VW assembly line. Thus, no VW employee would in any manner what so ever carry out any production or assembly operation.

After four years in operation, on the one hand, it is seen that the model initially conceived underwent alterations. On the other hand, the latest plants of Volkswagen and other car assembly plants in Brazil have been designed according to a different model that of the industrial condominium, which maintains the idea of large modules supplied by partners with neighboring units, however, the one who executes the assembly itself (or a substantial part of it) in the vehicle is the car manufacturer using its own staff.

About VoksWagen Brazil:

Focusing on the present and looking to the future.
Volkswagen has 59 years in Brazil. This success story began in a small rented hall on the street of the Manifesto, in the Ipiranga neighborhood in Sao Paulo, with only 12 employees. Only six years later, on November 18, 1959, the company inaugurated the unit Anchieta, with the participation of President John F. Kennedy.

In 1976, Volkswagen began operation Taubat plant, built with the purpose of producing the Gol, best-selling car for 25 consecutive years. Twenty years later, in 1996, the company opened a plant in Sao Carlos, one of the three largest producers of engines of the Volkswagen Group worldwide. And in 1999, started the operation of modern unit Pinhais

Vision
To be a leader in quality, innovation, sales and profitability of the automotive industry in South America, with a high-performance team focused on sustainable development.

Mission
Volkswagen Brazil is a manufacturer of high-volume vehicles dedicated to quality, customer satisfaction, innovation and environmental responsibility. VW focuses its efforts on adding value to shareholders, employees, customers, dealers, suppliers and society.
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Modular Consortium at Resend

The Modular Consortium is the group of main suppliers that make the parts, and assembles them for Volkswagen Truck and Bus on site in the Resende factory. Volkswagen Groups involvement is only in supplying the factory and inspection at the end of production; Volkswagen pays only a small amount of wages, as each partner of the Modular Consortium pays the workers. The Modular Consortium comprises these companies:

Maxion Sistemas Automotivos Ltda. manufacture the chassis parts such as Air Reservoir, Fuel Tank and Frame

ArvinMeritor manufacture the Suspension and Axle parts such as Springs and Hubs and Drums

Remon S.A. manufacture the Tires and Wheels Aethra Karmann-Ghia manages the Body Shop Carese manages the Paint Shop Continental AG manufacture the Cab Trim components such as Seats and Instrument Panel

SWOT Analysis

Environment of the VW Resende Modular Consortium:

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The Internal Environment

The Modular consortium took to extremes that the idea of partnership with a small quantity of seven suppliers in charge of increased responsibilities in both project and production and other sectors. The suppliers would design and assemble the bulk of the seven modules (large subassemblies) in which the products that the trucks and buses but they would be solely responsible for the module assembly on the VW production line. Resendes Modular consortium was built on the logic that VW would outsource the manufacture of all the parts of its trucks. It decided to only maintain internally the activities of coordination that means the purchases, planning, production programming and control of materials, end product quality control and engineering for configuration of the omnibuses and trucks produced as well as post sales distribution and service. The whole modular designers divided the product into sub-assemblies or groups of components whose supply would be completely outsourced. The module suppliers for the Resende plant would also have the additional responsibility of assembling the modules directly on VWs assembly line. So the seven suppliers would create the main internal environment of the Resende Modular consortium. They are: Maxion- supplier of the chasis module. Meritor- supplier of the axle (front and back) module Powertrain(MWN + Cummins) supplier of the engine and transmission module Remon (Bridgestone + Borlem + Maxion) supplier of the wheel and tire module Delga supplier of the cabin panel and structure module VDO/Mannesmann(Now siemens) suppliers of the Instruments and cabin interior module Carese (Eisenmann) supplier of the cabin paint services

The above 7 suppliers made the total internal environment clear that the choice for a modular configuration seemed right and was following a trend of the industrial sector as many experts agreed that modularity has allowed the companies to handle increasingly complex technology.

More than 1400 people working in the plant, only 270 were VW employees and none assembled the products. And for the next VW would drastically reduce their supply base from 450 to 7.

The payment of the suppliers at the end of the line implying that module manufacturers share looses caused by interruptions regardless of who originated them and the quality audit point should be included.

All of the workers of the plants dress the same, eat in the same cafeteria, have the same payment scheme and the plants HR is formed by a representative of VW and the 7- module suppliers.

The 25% of the productivity improvement expected in relation to traditional plants. The 25% of the quality improvement expected in relation to traditional plants.

Above all the factors made the Modular consortiums internal environment comparable good that why it should operate its plants very technically and carry out its operation.

The External Environment

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The external environment of the modular consortium that contains the externals factors like the competitor of the market , the capital investment of the VW, the market share, Introduction of new products, logistics and the initial public reaction of the Resende modular consortium.

In the inauguration of the Resende plant attracted a lot of attention from academics as well as professionals, not only in Brazil, but also all over the world. Brazilian authorities, among them president Fernando Henrique Cardoso were present at the inauguration.

The competitor of the Brazillan truck market that should take different steps are the Mercedes Benz, Ford motors, Scania, General Motors. These companies are the competitors of the market. They have been taken different steps in the entries over time, of the various players overtime it indicates the recent steps of the VW presence is in this market.

The market share graphs are partially self explaining, but it is clearly noticeable that the traditional leaders mainly (Mercedes-Benz) lose share at the end of the 90s, opening space for new entries, among which is VW. Except for the growth of VW, only Volvos and Scanias share grow. This show the competitors stage of the market that is the part of the external environment.

To support its workers and create strong external environment VW provides the housing and the module supplier provide the furniture. This should expose the external situation of the company.

The introduction of the new product should create strong position of the company to its competitor. So company should make new product to compete its other competitor. The logistical support of the manufacturing company has the strong importance to successful a project. In that case the VW Resende Modular Consortium have the logistical facilities that should
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make it different from the other companies projects. Logistical support is one of the vital element of the external environment of the VW Resende Modular Consortium that should differentiates itself from other company.

Above discussion shows the role of external element that should compare the actual position of the other leading companies position and the position of VW Resende Modular Consortium.

Findings

Problems at the VW Resende Modular Consortium:

1. With the advent of using modular consortium model in resend plant in VW, the increased commitment and responsibilities on both project and production cuts off the responsibilities and control of the employees like there would be no assembly employees direct from VW rather it includes only from the partners; these in turns enhances the extreme dependency on the suppliers for manufacturing products (buses and trucks).

2. When purchasing from third party, the module manufacturers would confront cash flow problems.

3. The another shortcoming of the model in relation to the Resende Model is that the main vehicle modules ( including the engine and transmission) are not outsourced and continuing to be manufactured by the internal operation of VW. 4. It requires implementing large managerial effort and negotiations for defining responsibilities and a large constellation of different aspects involved in as enterprise.
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5. It requires maintaining and controlling of large diversified workforce for the operation of the Resende Plant in VW. 6. Though suppliers of large subassemblies operate around the assembly plant but VW, not the suppliers, is responsible for assembling the modules on the vehicles.

7. The major issue seems to be the strategic risk that the Modular Consortium Model would represent in terms of outsourcing core competencies.

8. The buy everything strategy is not applied in manufacturing light vehicles (automobiles). 9. VW, with the decision, is running the risk of becoming a hollow company, with no competencies to distinguish it from the competitors. The risks contain are company transfers it competitive advantage to the third party that becomes an efficient competitors. company has its distinctive advantages spread to the competitors by a common third party suppliers. company stops having important innovations and learning sources, transferred to the third party. 10. Suppliers can supplant the company, as they have some or more knowledge.

Discussion Questions:
1. Que: Do you think the Modular Consortium Model is a trend today? Why or why not? The question seems to be in the strategic decision to make or buy. As VW historically never had had the distinctive competency of manufacturing trucks, in that point of time it chose the buy
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everything strategy. However, this is not the case of manufacturing light vehicles (automobiles) and, therefore, it is difficult to believe that VW would be considering the strategic decision of buying everything for all its car assembly plants.

Then the answer to the initial question of this section, if the modular consortium model, as implemented in VW plant of Resende (outsourcing 100% of the modules and their assembly on the final product), is a general trend, is simple: no. VW had its historical process reasons to decide in favour of this model (urgency of inaugurating a truck plant because of the end of Autolatina and not dominating core competencies for producing the products modules). These reasons made the configuration of the pure modular consortium make sense. This does not necessarily mean that in anther historical and strategic context this same configuration will make sense. A careful analysis must be carried out in each case, mainly taking into account the core competencies issues to guarantee strategic correct make or buy decisions. Once again the notion is reinforced that the contingencies approaches for choosing management models must predominate over the simplistic approaches based on "better practices".

2. Que: Is there a risk VW becoming empty of competencies and, therefore, dispensable? Ans: Yes, there exists risk of becoming empty of competencies and therefore dispensable. The central issue seems to be the strategic risk that the Modular Consortium model would represent in terms of outsourcing core competencies. In a continuous change from making everything internally up to outsourcing
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everything, VW chooses, for its Resende plant, the extreme of outsourcing everything. Thus one of the reasonable questions to be asked is to what extent VW runs the risk of becoming a hallow company, naked of competencies that distinguish it form competitors or that strengthen its importance for the supply chain in which it is inserted. In other words, to become hallow means to outsource all the competencies, and losing muscle to support competitive efforts. It is very possible that VW did not see the potential trap when it decided on the modular consortium model, outsourcing all the manufacturing and assembly operations.

3. Why do you think the new plants of VW and other auto assembly companies have not followed the MC model? The new plants of VW and other auto assembly companies have not followed the MC model because the model initiates the following problems Enhancing the extreme dependency on the suppliers for manufacturing products (buses and trucks). Confronting the cash flows problem The main vehicle modules are not outsourced in Resende Model Implementing large managerial effort and negotiations Maintaining and controlling of large diversified workforce VW is responsible for assembling the modules on the vehicles The strategic risk in terms of outsourcing core competencies

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 Manufacturing light vehicles is not involved in buy everything strategy The risk of becoming a hollow company

4. Do you think the option for the MC was the result of a rational analysis of the various alternatives on the part of VW

management? Yes, the option for the MC was the result of a rational analysis of the various alternatives on the part of VW management since VW historically never had the distinctive competency of manufacturing trucks, in that point of time it chose the buy everything strategy.

5. Overall, does the Resende experience appear to be successful? Ans: Resende experience appears is to be successful. By considering the

following aspects, we can measure the success of Resende experience: 1. VW realized that module manufacturers would have cash flow problems when purchasing from third parties VW then buys the parts and delivers them to the module manufacturers for assembly. 2. By applying Modular Consortium Model high rates of improvement reached, the numbers of the VW quality Audit (where numbers zero indicate better quality) decreased from 4 to around 2 in 4 years, probably influenced by short problem solving cycles because of the proximity of the suppliers.

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3. VW market share for medium trucks went from 29% in 1995 to 27% in 1996 to 24% in 1997 to 31% in 1998 to 35% in 1999. In 2003, VW became the Brazilian market leader in trucks.

Recommendations:

1. VW should consider the strategic decision of buying everything for all its car assembly plants.

2. VW should prefer to retain the whole outsourcing these modules, at least in the near and middle future.

3. The contingency approaches for choosing management models must predominate over the simplistic approaches based on better practices.

4. A plant to be efficient, would have to handle a maximum of some hundreds parts, what the modular models allow.

5. If the marginal cost of outsourcing is considered less, it would be good to outsource but core competencies should not be outsourced.

6. The human resources involved in the Resende plant should be managed and organized in a systematic way to coordinate in better way.

7. VW should focus on grabbing market share in Brazil in semi-heavy duty trucks.

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8. VW should emphasize more on improving assembly quality or delivery problems because the module supplier tends to strictly follow the assembly instructions.

9. For making the assembly effective VW should buy the parts and deliver them to the module manufacturers.

10. For the competency to be considered a core, three features are necessary for VW: A contribution disproportional to the value perceived by the client. Competitively alone or exclusive, producing an edge over the competition. Expandability or a potential opening towards future markets.

Bibliography:

Supply Chain Management- Chopra & Meindl http://www.vw.com.br/pt.htm www.correa.com.br

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