Introduction In the increasingly competitive automobile industry where China’s fledgling auto industry is pressuring a downward spiral in prices, automobile giants like Daimler-Chrysler now have to look to outsourcing to optimize the use of their resources and reduce labor costs incurred by the company. Productivity is improved by implementing process improvements within their own operations. The main priority of Daimler-Chrysler is to convert as much fixed costs to variable costs as possible by restructuring current operations through outsourcing its engine production and assembly operations.
2. The Outsourcing Plan With many brands under the Daimler-Chrysler umbrella, this outsourcing plan is focused on the Mercedes-Benz A-Class Saloon. With its sandwich construction and compact interior, the car was to be a radical move for Mercedes-Benz. The company has been looking into reintroducing the A-Class into the consumer market after the failure of a much publicized collision-avoidance test. As such, Daimler-Chrysler has been investing in its Research and Development (R;D) to overcome this failure. Certain factions of its production of the A-Class may be in-sourced and outsourced.
R;D is to be in-sourced as Daimler-Chrysler views R;D as the very essence of its technological leadership over other car manufacturers. R;D is essential for the company as it paves new ways for innovative product designs. In terms of product design, the Mercedes-Benz A-Class is a prototype from Daimler-Chrysler and to maintain market leadership, the design of vehicles has to be done internally as it serves as a platform for competitive advantage in other areas like engine design. Withal, most other functions in the production of the A-Class may be outsourced. Diagram 1 in the following page summarizes the functions to in-source and outsource.
Diagram 11 A. Engine manufacturing The engine of the new A-Class has to meet consumer’s expectations of quality that is associated with the Mercedes-Benz name. As Daimler-Chrysler does not directly manufacture engines, outsourcing this function to car engine manufacturers who are also in the business of selling automobiles will make the latter direct competitors. All engines of Daimler-Chrysler are brand-model specific and engines can be considered as the ‘heart’ of a car. Thus as attractive as it may be to reduce costs, it is virtually impossible to outsource the entire manufacturing function of the A-Class engine to one supplier.
It is an ill-culminated business proposition if Daimler-Chrysler were to hand over the specifications of its A-Class engine to a competitor for the overall manufacture of the engine as the competitive edge of the A-Class over other 3/5-door saloons would be compromised. Hence, the components of the upgraded A-Class engine are to be outsourced to a few different companies for production. This would include parts such as cylinder blocks, ball bearings, connecting rods, pins, rings etc to suppliers who specialize in the manufacturing of the individual parts.
However, the engineers responsible for the A-Class engine would still have to provide the antecedents for the various parts to the suppliers. Suppliers in turn would manufacture these items according to given specifications. Components are then transported back to assembly plants for the A-Class and pieced together to form engines before they are tuned to meet the optimal level of performance as intended by R&D and company engineers. In this way, Daimler-Chrysler retains its competitive edge because of its ownership in engine design.
Daimler-Chrysler must draw up guidelines for supplier selection which will include high manufacturing standards. Also, the company should look into whether the supplier is reputable and reliable in meeting the requirements of Daimler-Chrysler in terms of ‘best practices’ and datelines respectively. Daimler-Chrysler has to take into account the cost of logistics and supply chain in terms of transporting the components back to a centralized facility for assembly. Daimler-Chrysler must weigh the costs and benefits of its individual suppliers and select the supplier for that one engine component based on merit of the supplier.
Lastly, the company should set up a quality check system that will perform frequent checks on the manufacturing facilities of its third-party suppliers. This will serve to keep Daimler-Chrysler’s suppliers on its toes constantly and push them to perform at optimal standards. By outsourcing the manufacturing of the various engine components, Daimler-Chrysler would be able to exercise cost-savings in having to maintain the factories and its facilities that would otherwise have been incurred if the parts were all to be produced in-house.
Though the company would still require assembly facilities, a significant amount of space and number of machineries required would be reduced. In addition, the company would not incur overheads and labor costs that are associated with the manufacturing of the components. When the onus of production facilities and relevant costs fall on suppliers, they too are keen on driving costs down in order to increase profit-taking. In essence, fixed costs incurred by the company if they were to undertake this function themselves will then be considered as variable costs through outsourcing.
B. Engine assembly The high operational costs in the European auto industry would lead to unnecessary possible financial burden for Daimler-Chrysler if assembly of the Mercedes A-Class were to be done in Europe due to the high cost of unionized labor. One recognized strategy is to outsource the manufacturing operations to cost-competitive countries like India and China. With the global outsourcing phenomenon proliferating due to relative lower labor costs and increased efficiency, Daimler-Chrysler would also find it profitable to outsource their assembly operations.
Assembly of components of the A-Class’s main engine could be outsourced to India as India is one of the loci of this outstanding outsourcing phenomenon. The efforts made by manufacturing companies in India over the last five years to restructure, trim labor force, induct modern technologies and to enter international markets have made them competitive in the world market. Hence it would be wise for Daimler-Chrysler to take advantage of the cost-competitiveness in India to assemble its main engines in part to offset the large amount of money the company invests in R&D.
Researchers have speculated that auto components made in India are 35% to 40% more cost-competitive than those made in the European Union2. As such in the long run, it would be beneficial for Daimler-Chrysler as cost is reduced, resources are used efficiently, quality is enhanced and most importantly, economies of scale due to India’s access to large export markets is attained as assembly of engines is carried out in India. In fact, major car manufacturers have already ridden on the bandwagon in terms of economies of scale India can provide.
For instance, Ford Motors has started outsourcing car engines from Hindustan Motors; Tata Motors is selling Indica cars to Rover for the UK market; Toyota is making India a source for transmission parts; Yamaha and Mitsubishi have announced plans to make India a global sourcing hub for 125 cc motor cycles. However, outsourcing to India alone is not enough. There is a growing trend for companies to devise alternative outsourcing plans to different locations. It is already evident as auto makers seek outsourcing plans in many countries to diversify the geopolitical-economic risk.
One extremely cost-competitive country is China. Big auto supplier Delphi Corp. found savings of as much as 40% by shifting production to China, with a projected significant increase over the next five years3. Mirroring the corporate giants, Daimler-Chrysler should take advantage of the cost-savings and keep in mind the cost advantage and improvement in profit margins China can offer to Daimler-Chrysler. Daimler-Chrysler could export from China car components like chassis and suspension systems, brakes, transmission systems and shock absorbers for the final assembly of the A-Class.
The main concern of quality is uncalled for as Chinese auto-parts suppliers now serve as global price-quality “benchmark” for such components. It is a pricing policy that would leave Daimler-Chrysler scrounging to close a cost gap as wide as 20% to 40% even after taking into account the costs the complicated logistics caused by the distance between Asia and Europe4. C. IT support Lastly, in the reintroduction of the A-Class engine, IT infrastructure is an integral part of the company’s operations as it provides support for all other business processes.
The design stage of IT applications should be sub-contracted out to India with a team of Daimler-Chrysler IT personnel performing the execution of the applications all over the world. The cost-quality dynamic is the driving force behind the push to outsource IT to India. India has thousands of English-speaking IT trained professionals who have the skills and capabilities Daimler-Chrysler need for off-shore business processing. India is first choice as China’s workforce tends to skew towards people with skills in engineering while personnel with specialized technical skills like IT, marketing and accounting tend to be scarce5.
Unlike manufacturing functions, there are no material or shipping costs, few logistic issues, no heavy equipment to buy and move, no import or export tariffs associated with IT off-shoring. Also, the per-hour labor cost in India is lower and the quality is similar or better than the lowest cost U. S. IT trained personnel. All of the above will mean that outsourcing the IT function to India will reduce costs. However, outsourcing IT will incur lower costs at the expense of a loss in privacy of data.
On a bigger picture, this will pose a threat to security as data on company finances, customers, and proprietary data are processed by a third party. This issue can be address by proactively adopting a ‘best practices’ work ethic. Daimler-Chrysler should select their IT infrastructure provider based on reputation and excellent track record in terms of best practices. 3. Conclusion Essentially, the A-class is looking into a lot of major chassis re-engineering, including adaptive damping and a new rear suspension. Engine power has to be increased from the base 95 hp 1.
5-liter four-cylinder engine to a range topping 2. 0-liter turbo four that makes 193 hp. In order to produce a more cost-efficient hybrid car, Daimler-Chrysler has to look into outsourcing various functions to create a honed version of the existing vehicle. It will improve cost efficiency, quality of product and improve labor productivity, all of which are beneficial to Daimler-Chrysler. Outsourcing, if done right has the ability to give Daimler-Chrysler an edge over its competitors in terms of margins as the automotive industry is one where margins are slim and tough to manage.
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Proquest 1 Diagram is adapted from http://www.continental-design. com/engineering/success-stories. html 2 Industry in 2003: Increased efficiency, hesitant recovery S. D. Naik. Businessline Chennai:Dec 25, 2003. 3; 4 Chain Reaction — Big Three’s Outsourcing Plan: Make Parts Suppliers Do It; Using Chinese Prices as Base, Car Makers Set Targets That Force Firms Offshore; Superior Takes Venture for Spin Norihiko Shirouzu. Wall Street Journal (Eastern Edition). New York, N. Y. :Jun 10, 2004. 5 Information from the Economist Intelligence Unit. OPIM201: Business Processes G2: Case Study – Daimler Chrysler.