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)

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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)

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Table of Contents

Content Page no

Context of the case 4

About VW Brazil 5

About the modular consortium 6

SWOT analysis 8

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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12

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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 Autolatina’s (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 world’s 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.

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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 V oks W agen 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 Taubaté 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

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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.

Modular Consortium at Resend

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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

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S W O T Analysis

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Environment of the VW Resende Modular Consortium:

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 sub-

assemblies) in which the products that the trucks and buses but they would be solely responsible for

the module assembly on the VW production line. Resende’s 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 VW’s 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 module9

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 plant’s 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 consortium’s internal environment comparable good that

why it should operate its plants very technically and carry out its operation.

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The External Environment 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 Volvo’s and Scania’s 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.

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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

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.

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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.

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.

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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

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 product’s 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.

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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 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 competencies15

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.

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.

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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.

8. VW should emphasize more on improving assembly quality or delivery problems because the

module supplier tends to strictly follow the assembly instructions.

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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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