A Study On Volvo Cars Management Essay

Volvo Cars is a Swedish automobile manufacturer founded in 1927, in the city of Gothenburg, Sweden. It is currently owned by Ford Motor Company, which has agreed to sell the firm to Geely Automobile of China in a deal expected to be completed in the third quarter of 2010 .Volvo was originally formed as a subsidiary company to the ball bearing maker SKF. It was not until 1935, when Volvo AB was introduced on the Swedish stock exchange, that SKF sold most of the shares in the company. Volvo Cars was owned by AB Volvo until 1999, when it was acquired by the Ford Motor Company as part of its Premier Automotive Group (Haventon 2008, Haventon 2009).

Volvo Cars is one of the world’s leading car manufacturers. The company has a diversified customer base in North America, Europe and Asia with its main markets being the US and Sweden. Volvo produces models ranging from SUVs, station wagons (estates), and sedans (saloons), to compact executive sedans and coupes.

Table 4.: Vehicle models of Volvo Cars across categories. Source: Just Auto 2010

The company had a worldwide dealership network of 2,341 dealers as of December 2008, selling its vehicles in 103 countries worldwide, 60 percent of sales come from Europe, 30 percent from North America, and the other 10 percent from the rest of the world. Volvo’s market share is shrinking in North America. However, Volvo increased its market share in new markets such as Russia, China, and India.  In the US, Volvo dealers are listed by Forbes as the ninth best general car manufacturer, and sixth best for luxury cars (Just Auto 2010, Haventon 2009, Haventon 2008).

Table 4.: Volvo Cars sales in top ten markets, 2007-2008 (in units). Source: Just Auto 2010

Table 4.: Sales breakdown of Volvo Cars across models, 2007-2008 (in units). Source: Just Auto 2010

Volvo Cars are famous for its safety features, and are pioneer in the market for being first to introducing them. As one of the founding fathers of Volvo Gustaf Larson said:

“Cars are driven by people. The guiding principle behind everything

we make at Volvo, therefore, is and must remain safety”,

Gustaf Larson, one of Volvo’s co-founders

Like three-point safety belt designed by Nils Bohlin in 1958, who was recruited as safety engineer. Volvo cars have their own accident research team since 1970. They have investigated almost 40,000 accidents in detail, so that they can make Volvo cars safer and minimize the risk of accidents. To make safety their second name, Volvo cars announced to build “Volvo’s Car Safety Centre” in Torslanda factory, and it was inaugurated in 2000. This centre has 30 high-speed cameras which can take 3000 pictures per second. Every year 300 full scale tests carried out in the facility, some are for Ford companies and some for Volvo trucks and others. The collision tracks are 108 and 154 meters long and ceiling has a height of 14.5 meters. Over the years, Volvo has developed some of the very sophisticated technologies in the industry. Volvo has them most advanced anti-skid/stabilization system of 1990s was DTSC (Dynamic Stability and Traction Control system). It increases the control during acceleration and when driving on slippery surfaces, and also stops if there is any slight of possibility of skidding. The sensors in it measure the wheel rotation, the position of steering wheel and acceleration. Volvo also developed ACC (Adaptive Cruise Control), it adjusts cruising speed to suit the current conditions. This technology continuously measures the gap of vehicles ahead with the help of radar sensors. It automatically adjusts the car’s speed to stay a safe distance behind vehicle in front. The distance between cars can vary between one and three seconds, the time determines the safety margin. To discourage drunk driving, Volvo was the first to launch alcolock in the car with name AlcoGuard. The diver blows into the breathalyzer, which leads air into the fuel cell through a pump. The alcohol molecules are than trapped into the platinum membrane, which generate current in the cell, and depending on the amount of alcohol on the breath turn a green, yellow or red light (Haventon 2008; Haventon 2009).

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After suffering huge losses in 2007 and 2008, Ford Motor Company decided to put Volvo Cars on the market in December 2008. On October 28, 2009, Ford confirmed that, after considering several offers, the preferred buyer of Volvo Cars is Chinese motor manufacturer Geely. On December 23, 2009, Ford confirmed that all substantive commercial terms of the sale to Geely have been settled. A definitive agreement worth $1.8 billion was signed on March 28, 2010, with the deal expected to be closed by Q3 2010 (thelocal.se, bbcnews.com).

In 2008, Volvo lost market share in both US and Europe by 10 and 20 basis points respectively. The company retained light vehicle market share of 0.5% in US and 1.3% in Europe (Just Auto, 2010).

Table 4.: Key consolidated financial performance of Ford and Volvo, 2004-2008. Source: Just Auto 2010

Table 4.: Numbers of cars manufactured across facilities, 2008 (in units). Source: Just Auto 2010

Volvo BTO Supply Chain Model

Volvo’s BTO supply chain model in the Fig. 4-1 below is depicted from Ost & Mandel 2008 to show all actors and operations across the supply chain. The customer or dealer places the order in virtual order bank (VOB), which coordinates all the requirements placed upon the system, which are:

Feasibility check

Order booking

Order status information

The customer and dealer are external actors in this supply chain, who produce the order load within the system. In the production network, the actors are final assembly plants (FAPs), external assembly service provider (EASPs), BTO suppliers and build to stock (BTS) suppliers, and for these actors, customer and dealer, the following requirements were identified by the Ost & Mandel (2008):

Car configuration

Order configuration

Order tracking

The sequencing is the result of the interaction between the actors of production network and the VOB. This figure gives the basic understanding to the readers about the order arrival, order processing, production at suppliers end and final assembly of the vehicle.

<< communicate >> << communicate >> << communicate >>

VOB

<< communicate >>

FAP EASP BTO Supplier BTS Supplier

Figure 4.: BTO Supply Chain Model. Adopted from: Ost & Mandel 2008.

Volvo and Suppliers

Volvo has continuously gone through numerous changes when it comes to supplier strategies, and these were proper strategic moves rather than any short term solution to the problems (Kinch 1991).

Back in 1920s, Volvo’s strategy was to focus only on assembly and the outsourcing of components to the independent Swedish companies as suppliers (Kinch 1991). The basis behind this decision was the availability of limited capital which compelled them to use outside suppliers, which is contrary to the in-house production of components by North American giants at that time. The Volvo saw growth in next two decades, better sales moved Volvo to increase their production capacity, for which they acquired AB Pentaverken in 1930. The company supply engines to Volvo and needed some support to grow and to match the demand by its customers. Volvo experienced its most rapid expansion period in the 1950s and 60s. The production figures escalates from 15,000 units per annum in 1950 to over 220,000 in 1970, which was direct result of supply strategies. Volvo continued with these supplier strategies and opened their first own component production plant at Floby in 1958, and later in Fargelanda and Bengtsfors (Larsson 1997).

In early 1960s, Volvo decided to establish a final assembly plant in Ghent, Belgium. This decision was part of their internationalization process. Later, they started manufacturing engines in France with the collaboration of Renault and Peugeot. But these joint ventures affect negatively to the Gothenburg plant in the coming years. In 1972-82, the production size in Gothenburg plant seized, where in Ghent it expanded. This led Volvo to make a major change in its policy towards expanding its operations with subcontractors. We have also observed that Volvo concentrate on its core activities and restructuring of the automotive business. Some of the old Volvo-owned suppliers were sold, and remaining were reorganized into Volvo Components Corporation. Presently, Volvo intends to minimize the number of activities which are not directly connected to the development and assembly of the car. It includes all internal components-producing units. The engine factory in Skovde still comes under central control due its strategic importance for future product development. Volvo’s present supplier strategy has many similarities with “Japanese production philosophy”, which is distinguished by a high level of outsourcing and close integration with suppliers (Larsson 1997).

CONCENTRATION 80s – 90s

Components producers sold as a result of outsourcing strategy. Concentration on core values.

START-UP 1920s

Use outside independent firms as suppliers of components Volvo should only do final assembly.

DIVERSIFICATION 70s – 80s

No new suppliers, Volvo components established as a subsidiary company. Cooperation with other assemblers.

START-UP 1930s – 40s

First acquisition of supplier in 1930. Caused by increasing volumes and need guarantee deliveries.

RAPID EXPANSION 1950s – 60s

More suppliers incorporated and first own components plant opened up. Internationalization process a major issue.

Figure 4.: Volvo supplier strategies over the years adopted from Larsson 1997.

BTO Activities between Volvo’s Torslanda Plant & Suppliers

Volvo’s Torslanda plant, Gothenburg, is the main production facility of Volvo cars, the other is at Ghent, Belgium. It established in 1964, and mainly produces big vehicle, sedans and SUVs (sports utility vehicles), where small models, hatch-backs manufacture at Ghent plant, Belgium . Our focus of study is Torslanda plant, Gothenburg. In 2003, the Torslanda plant produced 160,000 cars (Fredriksson, 2006). Production at Torslanda is highly dependent on the suppliers, which are spread across the close proximity of the plant. There are about 170 suppliers surround the plant, which supplies different components and parts to the plant. The in-house production units accounts for approximately 25% of the value of the components and systems in a car, where external vendor’s supplies sums for 75%. A certain group of vendors are engaged in pre-assembly of components and inject these ready to install product modules components in Volvo’s final assembly line. These specific suppliers are strategically very important, because the main objective of having them is to deliver modules in the same sequence as car bodies are put on Volvo’s assembly line, and they have few hours to transport these modules to the assembly plant (Miemzcyk & Holweg 2004). These pre-assembly plants, close to the Volvo’s plant, are called module assembly units (MAUs). In other words, MAUs are supplier parks. The total numbers of MAUs are 15 which related to Torslanda plant, and delivering 26 different modules which comprises of seats, cockpits and exhaust systems. The modules vary from model to model, and depend on which model is on the assembly line. The Fig 4-3 below gives an idea how Volvo production network works and logistics activities involved in it (Fredriksson & Gadde 2004).

Figure 4.: Volvo’s production network and logistics activities adopted from Fredriksson & Gadde, 2004.

Torslanda & Suppliers Coordination

Suppliers receive information from Volvo’s planning system for building cars to order production plans. Relying on this information, suppliers start planning their replenishment and production processes, scheduling routines to be able to deliver requested part and components by the Volvo. The basis for the supplier planning is production forecast, which can be diverge within the specified limits mentioned in the contracts between Volvo and suppliers(Meimczyk & Howard 2008). Every supplier given the two production plans containing details of components, quantity of components, delivery time etc. These production plans gets updated and enveloped all information about what variants are to be assembled and in what sequence. Initially, these plans are fixed and no changes can be made. Volvo bound to assemble the specified car variants in the defined sequence. Later, if the forecast predicts any change than these routines can be altered inside the limits classified in the agreements between Volvo and suppliers. The sales forecast helps in developing long-term plans. But it is still indecisive that these plans would match the production forecast for supplier’s long-term planning (Holweg & Pil 2001).

Volvo has signed agreements with all suppliers on the basis of long-term sales forecasts, and in these agreements both parties have mutually agreed on prices, expected volumes to be manufactured and production schedules. These agreements vary over the life cycle of the different car models. Following the contracts, suppliers have to keep production volumes at a specific peak for continuity of business with Volvo. Some specific equipment and tools used for producing certain components by the suppliers are owned by Volvo.

Modularity and Assembly Line

The body, or skeleton, of the car is final put on the assembly line; it has been allotted a unique identity number according to the specification of the buyer of the car. The buyer could be the end customer or dealer. The details of the specification by the buyer are embedded in this identity number like exterior colour, interior trim, engine, transmission types, power pack etc (Fredriksson, 2006). Therefore, these all variant specific modules according to the unique identity number must be present at station on the assembly line when the specific car body arrives. These variants are delivered according to the sequence of assembly of the model to be assembled. Now, suppliers have to deliver their modules with respect to which station comes first on the assembly line. For example, if interior trims are going to be fitted first before exhaust system than supplier who supplies interior trims have to deliver their module first than those who supply exhaust system. Normally, the supplier who are delivering at first station on the assembly line has about four hours, on the contrary those who are delivering to the end of the line can consume about ten hours. With such small time frame, suppliers have to be vigilant in pre-assembling the modules and delivering them in this short time. That is the reason that MAUs are located at maximum 15 minutes driving distance from the Torslanda plant (Camuffo, 2000; Doran, 2003).

MAUs (Supplier parks) & Logistics Activities at Torslanda

The Volvo handles transportation of the modules by itself between MAUs and final assembly line, and trucks and pick-ups made one to two times delivery per hour at each supplier. The frequency of delivery or pick-ups oscillates with respect to the Torslanda’s assembly line speed and packaging density of the each module type. The packing density is the volume of number of components stored in a given space (Morris et al., 2004; Fredriksson, 2006). Due to precautionary measures, the packing density has been kept quite low, deliberately, because the modules requires customized carriers to protect them from any kind of transport damages. It has also been taken into consideration that packing should design in a way that it would help the operators while installing the components in the car’s body. The Fig 4-4 depicting the deliveries from MAUs and the installation of the modules in the cars on the assembly line (Fredriksson & Gadde 2004).

Figure 4.: MAUs and delivery of module variants adopted from Fredriksson & Gadde 2004.

The modules supplied by the MAUs are ready-to install modules, like exhaust system would fit directly from engine to the end of body as one unit. Similarly, the dashboard containing electronics, audio player, air-conditioning, speedometer, would be fitted as one unit. And the modules are different from others due to different model or large number of variants in terms of interior trim, exterior colour and engine transmission. So there are diverse types of modules, as we were told by Volvo that there are 3,500 types of seats and 10,000 plus power-pack combinations (Fredriksson, 2006). The current activity structure that is used in production and for logistics as well helps Volvo in transporting the vast number of product variant to its customers in a lean way. This has become possible by the Volvo’s capability of coordination and integration of plans both upstream and downstream. In figure, the Arendal supplier park is shown, which works as MAUs for Volvo Torlanda plant. In the figure, we can see that Arendal is located few kilometres from the main assembly location Torslanda, and providing ready to install plastic components like dashboard, internal plastic body covers etc (Larsson, 1997; Morris et al., 2004).

Figure 4.: Arendal supplier park and Torslanda Assembly Plant adopted from Larsson, 1997.

Integrated Production Planning

We were told in the interview by the Volvo personnel that Volvo’s production plans comprises of forecasts and orders from dealers. Later this information is connected to the production capacity of Volvo and its suppliers. At Torslanda plant, the logistics department is responsible for planning process. The production forecasting is done by the production planning system automatically. This system generates output after evaluating inputs like current order queue, capacity restrictions in the system, and Volvo’s main concern for various markets. The production forecast information is kept posted and distributed among all departments within Volvo and to suppliers. The foremost usage of this information is to give first order confirmation to the dealer on the order placement and for aiding suppliers in the production of parts and components planning process.

The other challenge is to outline the production plan for what car variants to assemble in what sequence. The production plan for this is updated on weekly basis and relates with production forecasts, which also helps in improving the planning capabilities of Volvo’s assembly department, and keeps suppliers on the same station. There is also short-term production plan, which keeps daily production activities on track. These production plans are designed by automatic planning system and logistics engineer to control the restrictions injected in the system. Logistics engineers are more capable of considering more restrictions than those highlighted by the automatic planning system.

Information Sharing

This information is heavily relying on the forecasts and orders from the customers. The marketing department at Volvo provides the information of each geographical market’s predicted sales of all car models and variants. The inputs of this kind of information is based on the sales drift of Volvo and other car manufacturers, introduction of new and upgraded models, and elements of socio-economic and political factors of each region. These forecasts have been developing for several years, and revised with passage of time on the basis of factors mentioned above.

Different Production Plans

Volvo major markets are Europe and North America, which comprises 60% and 30% of total sales respectively. Therefore, Volvo have to follow two types of production plans, one for Europe which is short-term base, and other is long-term base for North American markets. Volvo’s goal to build cars only on order and to avoid finish stock inventory, this short-term plan is only constructed to bring that aim to reality. In Europe, when dealers get the final go from customer than they place order at Volvo. The final customers have to wait for few weeks for delivery of the car. The Volvo’s production planning system is in direct link with European dealers. The dealer sends the full specification of the car specified by the customer into the system which later determines at time car can be assembled. The delivery confirmation is staged in three steps. First confirmation is based on the specifications that system calculates. The second and final delivery confirmation is given by logistics department after analysing the received orders and pending orders with respect to the limitations not studied by the automatic planning system. This whole planning is done with close coordination and communication with suppliers, which makes possible for Volvo to build cars on orders.

On the contrary, the orders from North America receive different reception. Automobile market in North America is different from Europe’s. American buyers, mostly, are not ready for their car for even few weeks. Instead, they want new car on the same of day of order placement. To cope this, Volvo dealers in North America depends on the forecasts and order different car variants. There are three central warehouses of Volvo. From where car shipped to the dealer when they finalize the customer order. Some of the dealer keeps stock of a limited number of Volvo cars of different variants and features to delivery instantly. The delivery time, hence, is shorter in this market, but also it restricts the number of variants and features available to customers as compared to the European markets.

Analysis

In this chapter our analysis is presented. The findings from the empirical study will be connected to the frame of reference using such parameters as supplier’s role and activities performed in BTO supply chain, and production activities executed in the OEMs facilities.

The model we developed in our frame of reference, will help us in analyzing our empirical findings. We will analyze all aspects of this model, Fig 5.1, in relation with findings. Beginning with supplier analysis, and analyzing their coordination and planning activities, with ICT being backbone of it. Supplier parks are essential part of BTOSC and gets important coverage in analysis. In production and assembly activities, vehicle is assembled and finished according to the specifications, and analyzed accordingly. Modularity is indispensible for BTOSC, without modularity the BTOSC is incomplete, and have analyzed carefully. Logistics activities analyzed as per their role in BTOSC, which is of great significance.

Figure 5. BTOSC model for Automotive Industry adopted from Fredriksson, 2006.

Suppliers’ Analysis

To implement BTOSC, we have to switch from traditional production approaches, like make-to-stock, to build-to-order. There are a lot of factors that have to be consider before implementing it. As Fisher (1997) highlighted some, expectedness of demand for the product, the efficiency required and response from the market, such variables have to be take in to consideration before developing a supply chain. There has to be a close knitted supplier production schedules into customer production schedules. The issue related to this integration could be geographical location of suppliers and customers (Holweg & Pil 2001).

In empirical findings, our OEM, Volvo, believes in the strong relationship with all tiers of suppliers and close coordination with the downstream actors, dealers and customers. Volvo shows heavy reliance on their suppliers, and suppliers rely on the information provided by the Volvo to them, to initiate production schedules of the components demanded by Volvo. And we tried to show the same in our model, Fig 5.1, the close attachment of supplier parks with final assembly line. This close cooperation is essential for building car to orders, and manufactures them according to the specification of buyer.

Coordination & Planning

There is heavy flow of information between Volvo and its suppliers at levels of tiers, as seen in our frame of reference the incorporation between the all tiers of suppliers with OEM allow to properly implement the BTO concept (Lyons et al., 2006). This flow of information is taken care by the ICT infrastructure, which unite all nodes of BTOSC. The information generation is for coordinating and planning activities is provided by the system that receives orders and forecast the sales. For European markets, production starts on arrival of orders, and for North American markets the production starts on forecast generated by the system. With this approach, it brings much more importance of accurate planning and coordination between Volvo and its suppliers. This whole communication supported by a seamless ICT infrastructure, which not only manages orders from dealers and customers, but also keep track of suppliers activities, pending deliveries and arrival of supplies from them. This system also allows stakeholders to monitor their order position in real time, and it supports them to optimize their processes for the future orders. The model, Fig 5.1, also depict the ICT cloud, which brings all players to one podium, where they can exchange and share information uninterruptedly. This ICT infrastructure is conglomerate of multiple ICT systems, which includes systems of suppliers of at all tiers, OEMs, logistics service providers and dealers. With help of this bonded system, Volvo is able to get a clear picture of the current status of whole system (Mandel, 2008; Holweg & Pil, 2004).

Supplier Parks

The Volvo’s supplier park as discussed in empirical part is Arendal, which is few kilometres away from main production facility Torslanda, which supply’s ready to install components. These supplier parks supply’s components on synchronous, sequential JIT deliveries as discussed in frame of reference. Lyons et al., (2006) put forward the benefits of developing supplier parks, and added that sequential JIT deliveries are backbone of supplier park concept. Supplier parks manufacture modular components, and sequenced-in directly into the assembly line at Torslanda plant. The supplier park provides better delivery service level, cost savings, controlled inventory levels, increased customization options for end-customer (Pfhol & Gareis 2005). The supplier parks supply’s parts and components at the decoupling point in the BTO supply chain, and it depends on the OEM where they want to place the decoupling point along the chain. It brings suppliers parks in close proximity to OEM. Similarly, in empirical findings, Arendal supplier park provides pre-manufactured parts that are ready to assemble at the Torslanda plant (Larsson, 1997). The same have been shown in the model, Fig. 5.1, That result in significant reduction in cost, inventory, lead time, increase in the variants of car models, more room for customization. This also helps Volvo to invest more and concentrate on research and development for the future growth (Morris et al., 2004).

Production & Assembly Analysis

The vehicles assembled at Torslanda plant, where assembly is dependent on the parts provided by the supplier parks. When orders are received from the customers and dealers, the production starts by the suppliers and they deliver the parts within the lead time. Mandel (2008) also highlighted process of assembly in frame of reference that VOB receives order and depending on the capacity of the supplier it assigns the task to the supplier, and later LSP transport components to the assembly plant. In the same way, when modules of different variant arrive into the Torslanda facility, they directly transported to the point of assembly where they fitted immediately.

Modularity

The transported modules are finished at modules assembly units (MAUs). These all units are located within the supplier parks at 15 minutes drive from the main assembly unit. The MAUs have very strategic importance for Volvo, and have central role in manufacturing cars on orders. Modularization provides integrity to system architecture, which allows system to have liberty to fluctuate the decoupling point along the supply chain (Schilling 2000). Similarly, Volvo at Torslanda benefit themselves from modularization by dividing and distributing the manufacturing of modules across the supplier parks. This whole process of modularization is at Torslanda is pretty systematic. The system analyzes distance and capacity of the supplier than assign the task to the supplier. Supplier can combine it resources to produce components to serve its customers (Fredriksson & Gadde, 2004). If the components demanded are not same, still supplier can utilize some of its resources to fulfil other customer demand. The volumes ordered by Volvo from its suppliers differ from time to time, so in this structure supplier have to act efficiently by combining efforts in one supply chain to the other supply chain (Camuffo, 2000; Doran, 2003)..

Complementary Production

When it comes to production there are varied number of variables Volvo working on at the same time at Torslanda. The input variables comes from customer or dealer, that later evaluated and processed by the system. The system connects all actors on one platform where they plan out how production of specific order will be carried out. The activities between suppliers and Volvo are very complementary. The structure designed by Volvo for component production is decoupled by close complementarity, which is the result of the building on customers’ orders (Fredriksson & Gadde, 2004). Now, this complementarity of activities can also benefit the Volvo by having similarities among activities and by achieving economies of scale in their operations. But we have to realize that these benefits are dependent on number of variants ordered. Because the more different type variants ordered the more planning and coordination is require between suppliers and Volvo. There is another point to be noted that as we know that in BTO supply chain inventory levels and buffers are tried to kept low as they can be (Fredriksson, 2006). So, with number of variants to be manufactured this is a real challenge for Volvo to tackle all these concerns at a same time.

Synchronize and Sequential Logistics

As we know that logistics are the backbone of the successful BTO supply chain, and play major role in decision making at Torslanda. The delivery promises made with dealers and customers are given after consultation with and confirmation from logistics department. Logistics department at Torslanda has wide range of objectives. They keep track of all logistics activities at all levels of tiers of suppliers. The logistics activities are very synchronous and sequential in nature throughout the Volvo’s supply chain (Morris et al., 2004). The order received gives the main input how transportation would take place between the MAUs and Torslanda. Logistics department receives details of deliveries that they have to make from MAUs. The deliveries have to be precise and within the allotted lead time. As these MAUs are not located very far away, only approximately 15 minutes drive from the main assembly unit, so they match assigned lead time easily (Doran, 2003). But they also have to make deliveries in the same synchronization and sequence as the customer order going through the final assembly process. The reason for this synchronize and sequential deliveries is that the decoupling point has moved upstream, so 1st and 2nd tier of suppliers has moved in the confines of the BTO supply chain. The model developed, Fig. 5.1, also connects MAUs (A1, A2…An) with final assembly line at multiple points to delivery modules and components. Another point to be noted that as there is no inventory in BTO supply chain, we can