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[Student’s Name] Wayne Harper

[Student Number] s3403582

[Lecturer’s Name] Amirreza Hashemi

[Submission Date] 8th October 2012

[Word Count] 2233

LGM100 – Introduction to Logistics & SCM.

Assignment 1:

Why efficient Procurement and Production processes are essential.

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TABLE OF CONTENTS

TABLE OF CONTENTS 2

SECTION 1|INTRODUCTION. 3

What is Supply Chain Management? 3.

Abstract. 3.

SECTION 2|SUPPLY CHAIN PROCESSES. 4

Procurement. 4. Production. 6.

SECTION 3|DISCUSSION AND RECOMMENDATION. 7

SECTION 4|CONCLUSION. 8

SECTION 5|REFERENCE LIST. 9

SECTION 6|APPENDICES/ENCLOSURES. 10

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SECTION 1|INTRODUCTION.

What is Supply Chain Management?

Before we begin discussing what makes for efficient Procurement and Production processes, we should first

clarify the definition of both these processes within a Supply Chain Management model. Supply Chain

Management or ‘SCM’, is a broad ranging concept but for this discussion paper, it will be defined as a

reference to the network of businesses and resources that come together to provide a ‘good/service’ from the

point of product origin, into the hands of the eventual ‘end’ customer.

In all, there are 6 key processes of a supply chain, all of which are not necessarily mutually exclusive to 1

business alone. As noted above, 2 of these processes will form the basis of this discussion paper, however as

described by Coyle et al. (2009) they are briefly outlined as follows:

1. Procurement – the broad range of processes that are needed to obtain a ‘good/service’ to manufacture

a product or operate the business.

2. Production – the transformation of inputs (resources/materials) into outputs (end product) that

customers demand.

Abstract.

For this paper the two companies being discussed are GM Holden and the Ford Motor Company (Aust.).

More specifically, we will compare directly between both Holden’s Commodore and Ford’s Falcon. I will

attempt to investigate the two processes of “Procurement” and “Production”; plus any Information

Technology employed that gives the chosen organisations competitive advantage in its industry against its

immediate competitor. I will then present my recommendations and highlight the benefits of an effective

and efficient supply chain. In ending the discussion paper, a conclusion will be drawn on where the two

companies’ futures lie within these processes.

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SECTION 2|SUPPLY CHAIN PROCESSES.

Procurement.

As touched on above, Procurement is the management of a varying scope of activities connected with an

organisations need to obtain a product/service. Managers responsible for procurement have several key

issues that have to be addressed whenever they purchase or source product. These issues essentially revolve

around the question “how do we ensure bang for our buying buck?” Automotive manufacturers, particularly in

Australia, face mounting cost pressures largely due to the rising value of the Aussie dollar, a drop in demand

for locally manufactured vehicles and increasing foreign competition saturating the local market.

How do local manufacturers ensure they can compete on a ‘cost to manufacture’ and ‘cost to supply’ basis?

They do this by first consolidating their supply of materials. As Holden and Ford are part of a global supply

chain this can sometimes be easier said then done. The global financial crisis of 2007/2008 caused both

companies to experience a massive reduction in customer demand for product. This slow down had a flow

on effect in the automotive supply chain resulting in some closures of suppliers. It forced manufacturers to

look very keenly at much leaner and efficient processes.

In Australia, whilst overall volume of vehicle sales remained steady, consumer tastes changed as they

abandoned the traditional mainstays of the market; the large family sedans, and moved to smaller, more

economical cars that represented greater value. This along with the increase in the price of petrol saw

Commodore and Falcon sales plummet dramatically. In 2011/2012 both cars were no longer the perennial

favourites with consumers that saw them regularly in the top 3. Whilst the Commodore has lost its number

one mantle it still sits in the top 4. Conversely the Falcon, is struggling to stay in the top 20, which is in stark

contrast to its 3rd position in 2005/2006.

By adopting long-term strategies like funding production of smaller, alternate fuelled vehicles, Holden is

looking to secure its position in the local market. These strategies are geared on investment in its

relationship and commitment to local parts manufacturers. However, in order for this investment to work,

local suppliers must meet high criteria such as “innovative technology, superior quality, outstanding launch

support & competitive total enterprise cost solutions” (GM Holden Ltd 2010). Local manufacturers have

quickly acknowledged that in order to survive, they must show a level of innovation and sophistication that

cannot be found anywhere else in the world. The demand for this ‘ingenuity’ will then off-set the high costs

of operating in Australia.

The Chairman & Managing Director of GM Holden, Mike Devereux, was recently quoted as saying that “If

someone wants to make something in Australia, my advice is don’t make things that are easy to make,”

(Porter 2012a). In other words, local manufacturers need to differentiate themselves from others in the

market to drive demand. Two things are happening here. First, Holden is shifting quickly from its traditional

‘gas guzzlers’ in line with market demand in the hope it can continue to shift the numbers it needs to stay

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competitive. In order to do this it needs to support its local suppliers by moving more of these technically

complex vehicles to drive the demand for product innovation; namely EV and Hybrid derivatives.

“innovative technology, superior quality, outstanding launch support & competitive total

enterprise cost solutions” (GM Holden Ltd 2010).

There is a 2-fold benefit by sourcing from local suppliers. First, it avoids high transportation and import

costs. Second, with a reduced lead-time from local supply, companies can re-position themselves to hold

less stock. The use of this ‘pull strategy’ is a more efficient process where vehicles traditionally sit in a

showroom.

Both companies are already reducing their costs by sharing component suppliers. As a result, suppliers are

able to invest in a process that both supports product innovation as well as improved product quality. This

allows them both to consolidate and leverage their buying power as they position themselves as key

customers. In fact, the Australian automotive industry has come to rely on all key stakeholders in the supply

chain over the years, which has lead to a closer relationship between customer and supplier. This

collaboration has given rise to several initiatives between car manufacturers and suppliers, like the

‘Guaranteed Order Volumes’ and ‘Short-term price rises’strategies. A recent example of this was the short-

lived resurrection of APV Automotive Components in April where Holden, Ford and Toyota agreed to give

the company funding assistance through these strategies.

The AVP closure may support Mr Devereux’s earlier comment that local manufacturers are best served

producing innovative product rather then basic, easily sourced small parts. However, it also shows the

willingness of businesses within the supply chain to support each other in order to achieve efficiency and

effective processes. This emphasis by Holden and the like, to value a meaningful relationship with its

suppliers can lead to benefits both ways. It encourages greater cooperation and proficiency across all teams,

in both supplier and customer, which are the hallmarks of efficient systems and practices.

This emphasis by Holden and the like, to value a meaningful relationship with it’s’ suppliers can

lead to benefits both ways.

The clear difference here between Holden and Ford, is that the latter has suffered a near terminal fall in

sales, particularly in the Falcon. Sales for Fords large family car have fallen to around 950 units a month

compared to between 2000 – 3000 units for the Commodore. This disparity affects a company’s ability to

negotiate on purchasing based on supply volume. Fords huge restructure to its “One Ford” (Ford 2012)

business model has also contributed to it’s re-think of product sourcing.

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Production.

This process is at the heart of the automotive business. In order to be profitable, companies in the past would

simply rely on appearance and general performance of their product and then let the marketing guru’s do

their thing. Nowadays, consumers are empowered with knowledge and information. In a time where oil

prices are high; carbon pollution is centre stage of most economic debates; and job and fiscal uncertainty has

forced everyone to curb spending, consumers want more from their cars then ever before. This massive shift

in trend towards smaller, more fuel-efficient and higher quality vehicles have seen dropping demand for

locally built large cars like the Commodore and Falcon.

This has forced production strategies to find greater efficiencies. FCAI (2011) noted that Australia has over

60 car brands vying for around 1 million sales compared to say Japan, where JAMA Inc (2012) states there

is approximately 40-45 brands competing for nearly 4.5 million sales. Margins are very small especially for

local manufactures. Holden and Ford have to decide between a system that gears towards ‘efficiencies of

scale’ (Large Production runs) or ‘economies of scale’ (Small production runs that give greater flexibility).

Previously, both companies invested in a production system that geared towards large-scale runs, which at

the time supported their one-car sales dominance. However, with flat lining sales on the Falcon, Ford needed

to come up with a plan that would generate demand and keep the plant operating while also avoiding the

funding a major re-fit. Its answer was the Territory AWD. The Territory was based on the BA Falcon and so

could be built on the same production line as the Falcon. Ford’s hopes were that they could tap into the large

SUV market driving demand for the production line. However, with unpopular engine capacity options for

the Falcon and strong foreign competition for the Territory in the SUV category, they continue to struggle in

the showroom.

Holden’s local production plans appear more long-term. It first invested $1.0 billion into the development of

the VE Commodore back in 2006. This investment included factory tooling, 3D computer modelling and

R&D development. This technology seems to have better placed Holden to react and respond to customer

demand for vehicles. In addition they received a “further $275 million from the government to support a

further $1.0 billion dollar investment from Holden’s parent company GM to ensure future manufacturing to

at least 2022” (Porter 2012b). This investment has already paid dividends with changes in “cycle time on the

assembly line from 100 to 60 seconds” Plant Manager Richard Phillips was quoted recently as saying

(Porter 2012b). Production efficiencies gained by reducing idle time have seen the “amount of time

employees in the plant are adding value improved by 15%” (Porter 2012b).

Production efficiencies gained by reducing idle have seen the “amount of time employees in the

plant are adding value improved by 15%” (Porter 2012).

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SECTION 3|DISCUSSION AND RECOMMENDATION.

Manufacturing vehicles is a global activity. As the taste of Australian consumers comes closer into line with

the rest of the world, the business case for larger family vehicles like Falcon and Commodore become less

viable. This forces the manufacturer to look at ways of either changing the existing vehicles’ design to better

suit demand, or produce a new vehicle altogether that does.

Both companies have looked at ways of increasing the flexibility of their respective production lines in order

to reach a suitable ‘economy of scale’. In Ford’s case they put most of their eggs in the large SUV basket.

This failed for a number of reasons. First, whilst the Territory could run alongside the Falcon on the

production line, consumers were instead choosing the better priced and equipped imported SUV’s in the

segment. That put Fords whole production line at risk, as sales for both Falcon and Territory fell. Secondly,

with initial funding they received from the government already used for tooling the factory towards larger

vehicles, they had no scope to adapt to their production planning to match real-time demand for smaller

vehicles.

Although Holden may have been a little slow in reacting to market demand for small vehicles, it worked

hard to secure investment into a re-tooling of its plant to begin production of the Series II Cruze. The

company has been on record saying that it will produce two new global vehicle platforms. Not only will this

underpin the next Holden Cruze model but anonymous sources from Holden’s component supply chain have

told Reuters “this new platform will have the flexibility to underpin the next Captiva, Volt and Opel Astra”

(Reuters 2012). This is in addition to the Commodore’s upcoming VF model, which is set to be in

production till 2018.

The future of vehicle manufacturing lies in the continued investment into ‘state-of-the-art’ production

automation. Globalisation continues to drive standardisation and centralisation of systems and processes.

This will have a 2-pronged effect. The bad news will be that with greater automation comes the requirement

for less human involvement in the processes, which will result in further job losses. But this automation will

not mean a complete removal of labour from the entire system. Secondly, as automation improves so to will

production output and machine flexibility. This will do away with the need for smaller localised plants that

cater for local demand. It will also support the strategy of integrating vehicle platforms that allow for

adaptive manufacturing (producing multiple vehicles off the one platform type).

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SECTION 4|CONCLUSION.

Efficient and effective processes can determine the future of a company, especially one suffering from

diminishing returns. “The motor vehicle manufacturing industry is expected to continue shrinking as local

manufacturers struggle to produce profitable cars that consumer’s desire” (IBISWorld 2012). Local car

makers are being forced to downsize as the industry as a whole is in the stages of decline. They have

recognised that their future (albeit in medium terms) lies in the demand for more fuel-efficient cars. To hold

off the final death knell, local manufacturers need to equip themselves to compete with importers on EV or

Hybrid cars and must be able to manufacture these locally in order to stay viable.

To do this, it is important local manufacturers develop greater flexibility in their production lines that allows

them to respond quicker to changes in market demand. They also need leaner production processes such as

‘Just in Time’ or other pull-based systems, which will reduce waste and associated costs. These, along with

a greater emphasis on collaboration and transparency within the supply chain, empowers the stakeholders

with information on which to not only pro-actively improve processes, but also react to consumer changes.

These make for more effective processes and future proofs any supply chain system.

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SECTION 5|REFERENCE LIST.

Coyle, J, Langley, C, Novack, R, Gibson, B 2009, ‘Supply Chain Management; A Logistics Perspective , 9th edn, Cengage

Learning, South-Western, Ohio, USA.

Federal Chamber of Automotive Industry 2011, ‘2011 Annual Report’, viewed 19 September 2012,

<http://www.fcai.com.au/library/publication//fcai-annual-report-2011.pdf>.

Ford 2012, ‘Our Blueprint for Sustainability: Our Strategy’, Ford Corporate US, viewed 04 October 2012,

<http://corporate.ford.com/microsites/sustainability-report-2011-12/blueprint-strategy>.

GM Holden Ltd 2010, Business Report, Writing Our Own Future, GM Holden Ltd, viewed 9 September 2012,

<http://www.holden.com.au/resources/documents/2010_Holden_Business_Report.pdf>.

IBISWorld 2012, ‘Motor Vehicle Manufacturing in Australia (C2811) ’, IBISWorld Pty Ltd, viewed 11 September 2012,

<www.ibisworld.com.au>

Japan Automotive Manufacturers Association 2012, ‘Motor Vehicle Statistics of Japan , viewed 24 September 2012, <

http://www.jama-english.jp/publications/MVS2012.pdf>.

Porter, I 2012a, ‘Parts weren’t made to be easy’ GoAuto.com.au, weblog, viewed 19 September 2012,

<http://www.goauto.com.au/mellor/mellor.nsf/story2/532DCFFEC858004ACA257A76007F7857 >.

Porter, I 2012b, ‘Holden hits the production accelerator’ GoAuto.com.au, weblog, viewed 22 September 2012,

<http://www.goauto.com.au/mellor/mellor.nsf/story2/933288B74859A16 3CA25 7A6B000B2C7A >.

Reuters 2012, ‘Update 2-Future Chevy Cruze leads new global platform-sources’, viewed 26 September 2012,

<http://in.reuters.com/article/2012/08/23/gm-chevroletcruze-idINL4E8JN3Y920120823f>.

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SECTION 6|APPENDICES/ENCLOSURES.

Eisenstein, P 2011, ‘With new strategy Ford aims for the top’, msnbc.msn.com, weblog, viewed 11 September 2012,

<http://www.msnbc.msn.com/id/43391595/ns/business -autos/t/new-strategy-ford-aims-top/#.UG0dZ640OSo>

Holden HQ 2012, ‘Contribution of the Automotive Industry to Australia’, infographic, <http://holdenhq.com.au/wp-

content/uploads/2012/05/073HO_infographic_v14.jpg>

IBISWorld 2012, ‘Motor Vehicle Manufacturing in Australia (C2811) ’, IBISWorld Pty Ltd, viewed 11 September 2012,

<www.ibisworld.com.au>

Office of the Pro Vice-Chancellor (Business) RMIT 2010, ‘College of Business: Guidelines for referencing and presentation in

written reports and essays’, course notes from LGM100, RMIT University, Melbourne, viewed 2 September 2012,

Online@RMIT

Razagui, H 2012, ‘New GM platform to spawn next Cruze, Captiva’ GoAuto.com.au, weblog, viewed 25 September 2012,

<http://www.goauto.com.au/mellor/mellor.nsf/story2/E1D553ADBF9606BBCA257A640026F3D0>.

Carsales.com.au 2011, ‘Holden’s Devereux addresses National Press Club’ weblog, viewed 26 September 2012,

<http://www.carsales.com.au/news/2011/ford/holdens -devereux-addresses-national-press-club-27977>.