management level case study aurora...

Nanaska – Possible Issues Managerial Case Study August 2017 Copyright © 2017 Nanaska.com, All Rights Reserved

Management level case study

sststudy AURORA

Possible Issue Part 2


EXCESS CAPACITY

Definition

Excess capacity is a situation in which actual production is less than what is achievable or optimal for a

firm. This often means that the demand for the product is below what the business could potentially

supply to the market.

Background

A company with sizable excess capacity can lose a considerable amount of money if the business cannot

pay for the high fixed costs that are associated with production. Excess Capacity was a significant

problem for Automobile manufactures around the world. In 2014, the industry had the capacity to

produce 116 million vehicles each year, but actual production was 87 million. Therefore, this can be an

issue for Aurora also.

01. Implications of excess capacity to the automobile industry

It can lead to over-production which would consequently force price downwards

Costs associated with the unused capacity can lead to absorption of losses into automobile

manufacturers’ financials

E.g. Aurora’s basic and luxury models of a compact car generating losses at a factory activity

level of 70%

Certain automobile manufacturers leaving the market

02. Causes of excess capacity in the industry

Automobile manufacturers investing in new manufacturing plants, new technologies and

innovations which increase capacity of the industry as a whole without proper research on the

industry situation

Economic cycles – stages such as recessions and slumps are experienced at different times in

their respective economies in different countries which result in lower disposable income to

consumers and thereby they are unable to execute their purchasing decisions due to the lack of

purchasing power

Improper demand analysis in the market for vehicles and lack of consistency and proper

matching between vehicle demand and supply decisions by automobile manufacturers

Sales downturn in the vehicle industry


03. How to deal with the problem of excess capacity at Aurora?

At first, clearly establish the current running capacity and the idle capacity so that the

management is clear as to what action it may take with regards to the excess or the idle capacity

based on the figure.

Depending on the levels of production and plant profitability, maybe Aurora can take decisions

with regards to certain manufacturing plants whether they would dispose them or not

Aurora can start working on sub-contracting where it could get manufacturing contracts from

other automobile manufacturers and use its excess production capacity to do so.

Without further research on the industry situation, Aurora should temporarily hold new

investments in manufacturing plants until the market requires to do so and continue to

concentrate on improving its capacity utilisation of the existing plants

Implement an employee redundancy scheme where Aurora will be able to terminate any excess

employees working in its manufacturing plants.

04. How to manage the situation of excess production at Aurora?

Proper demand analysis of the vehicle range offered by Aurora would give insight into Aurora as

to what the exact requirement by the market would be for a particular time period.

Analysis of past data relating to vehicle sales and then forecasting the future trend after any

adjustments for seasonal and economic cyclical effects

Obtain and analyse published information regarding the automobile industry by leading

research and consultancy firms

05. Industry examples of how automobile manufacturers react to the

problem of excess capacity

Chrysler – shutting down all of its factories for one month while laying off certain employees

during the downtime

General Motors – shutting down 20 plants in North America for a part of the 1st quarter of 2009

General Motors – shutting down one of its 2 factories in India in July 2015


06. Industry examples of excess capacity issues

Indian automakers are worried that they might soon be in a lot of trouble as the excess

capacity of cars is on an all-time high. Car manufacturers sold only 3.22 million out of 4.96

million in 2014-15 accounting for 65% of their overall capacity. In India, Maruti Suzuki,

Hyundai and Honda are the only car makers who sell more than 80% of their capacity.

In Europe, demand is still falling and there is reckoned to be about 30% too much capacity.

Fiat and the European arms of GM and Ford are losing plenty. Given their current problems

and their future prospects, European companies need to cut capacity and boost productivity

(Source: ‘The Economist’)

Developments in China are likely to make things worse still for rich-world companies. China

too has a surplus of car manufacturers, excess capacity and a problem with demand. Annual

sales growth is forecast to fall from 30% to around 10% from this year as other parts of the

country follow Beijing's move to restrict the number of cars in the city. That should squeeze

the domestic market further, hurt Western firms selling into China (including the luxury

brands enjoying a boom, see article) and encourage Chinese manufacturers to look abroad.

(Source: ‘The Economist’)

As a whole, the industry has the capacity to produce 116 million vehicles each year, but last

year it produced 87 million. (Source: annual report - Ford)

http://www.economist.com/node/17902971


JOINT VENTURE PRODUCTIONS

There can be a situation where Aurora partnering with a domestic manufacturer in another country

and introduce its vehicle models to the respective country with a co-brand.

01 What are the implications to Aurora as a result of such a move?

Pros

Expands the sales market for Aurora which in turn would increase their revenue and profits

Easily accessible to markets since they reach the customers through an established domestic

vehicle manufacturer in the respective country.

It would be a starting point which would be crucial in developing and introducing different

vehicle models of Aurora in the respective country which would benefit Aurora more in longer

term once they get established in the country.

Access to knowledge and expertise of the domestic manufacturer in the respective country in

developing and improving vehicle models offered by Aurora

Minimal influence from government and less exposure to political risk since we are entering the

country with a domestic partner

Cons

Risk of failure – since we are quite new to this model, there is always the risk of failure which

would result in the investment not yielding the expected return, ultimately negatively reflecting

on the image of Aurora in the automobile market

The position of the domestic manufacturer in the local market would largely influence this move

since we would be heavily dependent on the local manufacturer in this move – things such as

reputation in the automobile market, financial capability etc. are highly important since they

would be key in ensuring success of this move into the future

Competitors of the respective country would react to this move which would persuade Aurora

to cut prices in order to remain competitive and capture the market and in the meantime there

is a possibility of Aurora making losses as a result

Aurora would be further exposed to risks such as foreign exchange risks such as transaction and

economic risks since a foreign company is involved and sales in that particular country would be

in another currency.

02. What are the criteria to be considered in selecting the local

manufacturer to partner with?

Strategy of the organization

Current market share of the local manufacturer in the respective country

Financial strength – such as shareholders’ funds, debt capital, net income generated during the

recent past, EPS, Price-earnings figures etc.


Research and development capabilities which would be crucial in taking the partnership forward

by developing and introducing products which match to the market requirements

Market Reputation

Competitive strategies in combating competition within the country

Response and sensitivity to environmental issues and concerns

Ethical and corporate social responsibility standards

Relationship and social network with key organizations such as regulators, government,

suppliers, consultancy firms etc.

Industry examples of such moves

Suzuki Motor Corporation has signed a deal with Malaysian carmaker Proton for the assembly

and sale of an entry-level model in its domestic market, which will likely boost exports of its

Indian subsidiary Maruti Suzuki. Under the agreement, Suzuki will supply completely knocked

down (CKD) kits of cars to Proton, Malaysia's first carmaker established in 1983, which currently

enjoys a 17 per cent market share. The company sold about 116,000 vehicles in 2014.

According to a MoU signed by the companies on June 15, the first model will be a compact

passenger car to be assembled by Proton at its Tanjung Malim plant from August 2016. A

decision on additional models will be taken after studies by Proton and Suzuki-Maruti

Corporation. Proton will assemble the cars at its plant and distribute and sell them under its

own brand through its network in Malaysia. According to industry sources, co-branding —

similar to India where cars are sold under the Maruti Suzuki badge — is not ruled out.

Maruti Suzuki India Limited, is an automobile manufacturer in India. It is a 56.21%-owned

subsidiary of Japanese automobile and motorcycle manufacturer Suzuki Motor Corporation. As

of January 2017, it had a market share of 51% of the Indian passenger car market. More than

half the numbers of cars sold in India wear a Maruti Suzuki badge.

They are a subsidiary of Suzuki Motor Corporation Japan. They were born as a government

company, with Suzuki as a minor partner, to make a people's car for middle class India. Over the

years, its product range has widened, ownership has changed hands and the customer has

evolved. What remains unchanged, then and now, is their mission to motorize India. MSIL’s

parent company, Suzuki Motor Corporation, has been a global leader in mini and compact cars

for three decades. Suzuki's technical superiority lies in its ability to pack power and performance

into a compact, lightweight engine that is clean and fuel efficient.

https://en.wikipedia.org/wiki/India

https://en.wikipedia.org/wiki/Suzuki


SUPPLIER RELATIONS

Importance of maintaining close supplier relationships

Aurora depends on various suppliers in the process of manufacturing. So managing

relationships with all their suppliers; both own subsidized and third party suppliers are vital for

Aurora to continue the business with no disruptions.

“Toyota’s recalls have involved large numbers of vehicles, which some critics say is the result of

reliance on single suppliers that provide common components for many platforms and

vehicles.”

01. Factors that should be included in the service level agreements

with the new supplier.

What is Service Level Agreement?

Service Level Agreement (SLA), the document that establishes the relationship between the

service provider or supplier and its customers and that defines what “supplier performance

“really looks like.

Application to the Aurora

As a result towards the adoption of ‘smart manufacturing’, Aurora awarded a major contract to

Routers who will update Aurora’s production automation software.

Aurora needs carefully consider what factors should consider in the service level agreement for

maintain close relationship with supplier.

Suggestions for factors;

The service being provided

A detailed explanation of exactly what service the supplier is offering to provide is the

heart of the SLA. Writing specific descriptions of the services requires understanding

what the supplier is offering to provide and ensuring the supplier knows what Aurora

need. For example, the agreement between Routers and Aurora on installing softeare

for cobots (collaborative robots) should covers the following activities

Detect abnormal activity through force limitation or vision monitoring

Effectively enables the machines to interact with human workers

It will track the employee’s position

It enhance the safety at the work station


It determine the order in which parts are installed

It also communicate with one another

Service standards and targets benchmarks to be used and the consequences of failing to

meet them

Once the services are established that supplier is proving, target benchmarks and

standards should be considered, which would include concepts like availability and

reliability as well as response and resolution times.

For example, availability should be defined within agreed upon targets. If Aurora’s

normal business hours are from 6 Am to 6 pm, it may be appropriate for the services the

supplier provide to support Aurora’s business processes to be available during the same

time.

Each of the services the supplier provides will have regular operating hours and

scheduled time for maintenance. This information needs to be illustrated in SLA.

The expected time to recover the operations in the event of a disaster such as a systems

crash, terrorist attack

Supplier also needs to determine that they can offer to you (Aurora) if a disaster or

emergency happens. Will your supplier be able to provide the same hours of operation

during one of these scenarios?

Expected response time to technical queries.

It is also important to mention response times and resolution times of the supplier

dependent on the business urgency and impact. It is not effective to set same time for

all of their services. This part could be mentioned within the procedure for dealing with

complaints and technical queries which also should be include in the SLA.

Duration

SLA should specify when the agreement begins and expires. By definition, SLA is an

agreement rather than a contract. The start date of the SLA allows us to begin tracking

the supplier performance on the same date ( unless otherwise specified).If the supplier

is providing a new service or simply revising the services that they have been offering

to Aurora , allow enough time to communicate the details of the agreement to them.

It should be considered the when the SLA will expire. For example, if SLA expires after

24 months, you may not be obligated to keep paying for supplier’s service.


Evaluation Criteria

Without evaluation criteria, you’ll have no objective means to determine how well your

supplier is performing. Any representative of Aurora can sit down with the supplier to

select the metrics.

One of the mutual benefits of an SLA is that you and supplier determine how you can

judge the service that they are offering by establishing objective measurements.

Writing an SLA with your supplier will provide the better understanding of supplier’s

businesses, the effect the service have on us and our ability to carry out our business

processes, and ultimately an even better relationship with our suppliers.

02. If the key supplier of a critical assemblies suddenly rise up the

price by X%

Procurement professionals face the challenge of responding to supplier price increases. They

usually try, perhaps unsuccessfully, to negotiate those increases away or at least minimize

them.

How to respond to supplier of a typical component price increases?

Negotiate with the supplier if aurora has sufficient power itself to get the price downward.

We should have begun preparing to negotiate or respond to a price increase when we originally

obtained the current price. We could ask from our supplier to provide cost breakdowns for this

product/service in our response to request for proposal.

Let’s consider, our gear box supplier justification for a price increase such as “ we must raise

your price by 28% because price of the material ( Steel Grade EN8D) for shafts has been

increased by 25% and also materials for gears such as steel grades 20MnCr5, SAE 8620 has

been increased by 10%.” That point is tough to argue if we are not prepared with cost

information for that product.

A cost breakdown will indicate the percentage of the total cost that is comprised by each major

material, other materials, labor, overhead and profit. If a supplier proposes a price increases,

and tries to justify it with an increase in a component of the supplier’s cost, we can say

something like, Steel grade EN8D increased by 28%, but EN8D only comprises 7% of your price.

Considering nothing else, your price should only go up by 5%

We can also argue that productivity gains should have reduced labor costs enough to offset the

small material price increase. May be we can even convince the supplier that productivity gains

more than offset the material price hike , and our price should go down.


Close the contract agreement and sourcing from another supplier

If options for changing and negotiating price aren’t available, we could explore creating a

completely new supply source as this ultimately shifts demand away from powerful suppliers.

As all car manufactures move to a more global outlook, they prefer to have several or multiple

suppliers to prevent a single supplier from getting either too powerful or/and complacent

If there is only a single source of supply this may bring the advantage of bulk purchase

discounts as it leads large economic of scale and allows to manufacture to buy parts of

assemblies and achieve cost efficiencies. That is the good thing.

As the world’s biggest car manufacturer, in Japan, Toyota buys directly from 200 component

suppliers. Based on data from Toyota’s headquarters, the 200 suppliers account for 2 billion

unitis of which 150,000 types are purchased monthly, the total value of purchased components

is pegged at $ 300 million a month.

Vertically integration

If no probable new suppliers are to hand, we could consider making our self the new supplier

by investing in the requisite assets and capabilities, possibly in a strategic partnership or joint

venture with a company that has some of those assets and capabilities.

For example, Aurora could invest on own Gear box manufacturing plant in Asia to take the

advantage of low labor cost.

03. Use of information technology to improve the relationship

with supplier

Introduction

The key activities of upstream supply chain management are procurement and upstream

logistic.

A good example of how the upstream supply chain of automotive industry can be improved

using IT is, Honda cautiously scrutinizing the implications of e commerce with its suppliers in

order to improve relationships. Another example is that recently Toyota bought US logistic

software producer Bastian solution for $ 260m.

Introducing E procurement system to Aurora’s upstream supply chain management

E procurement gives rise to a number of specific applications that the organization like Aurora

can use to manage its upstream supply chain.


EDI (Electronic data interchange) - This involves liking internal systems to those of its suppliers,

allowing for faster and more efficient paperless ordering. This can improve the speed and

accuracy in the fulfillment of orders.

Use of the internet – We can also use the internet to shop around to ensure that we are using

the most reliable, cost effective suppliers. We could access supplier’s company’s profiles to get

to know about their businesses, technology used, capabilities, and their vision and mission.

Disintermediation – This may be able to buy its supplies online directly from an earlier stage in

the supply chain such that from a manufacture rather than a wholesaler or retailer, which could

help the business to save money.

How IT is improving the supplier relations

With automated procurement system delivering a range of mutually rewarding benefits that it

will go a long way to helping cement their relationships, these includes

o Speeding up supplier registration

o Automating and streamlining the tender process

o Lowering administrative/transactional costs and overheads

o Reducing time, effort and the potential for errors

o Improve cash flow through the shorter procurement lifestyle and payment

automation

o More management information

o Transparency and accountability leading to increased mutual confidence and

trust

Whilst procurement drives down costs and delivers super efficiencies into the process of

purchasing and supplying goods and services, for us it can also help shape, enhance and sustain

business relationships that will reap far greater rewards in the longer term.

However there are some risks associated with adaptation of new information technology.

These are;

o There is a risk that the system (whether software or hardware) will not function

correctly. There is very high risk that it will not communicate properly.

For example, since we have adapted to Just in Time system, minimum

inventories are held in the factories. If any discrepancy or error happened to the

automatic procurement system, it could be affected to the entire supplier chain.

o Staff might be reluctant to accept the new procurement methods like SAP

system


PROJECT MANAGEMET

Project Management

Product development is a key in automobile industry. Developing an automobile is a long,

complex, expensive and very much risky process which generally will take around 3-5

years and involves millions or may be billions of dollars. Hence, needless to say why having

a sound project management is essential in this process.

Techniques for Project Management

PERTS Chart- Program Evaluation Review Technique

The PERT chart is a project management technique used to schedule, organize and

coordinate tasks within a project.

PERT presents a graphical illustration of a project as a network diagram consisting of

numbered nodes (either circles or rectangles) representing events, or milestones in the

process linked by labeled vectors (directional lines) representing the specific tasks in the

production and distribution process.

Advantages of PERT

It clearly illustrates task dependencies, thus is preferred over other project management tools such as the Gantt chart

The project manager views information about the likely completion of the movie on

time and on budget by viewing PERT activities and events independently and in

combination

The project manager can evaluate the time and resources needed for any one of the

product developing activities

PERT analysis improves planning and decision-making by integrating and presenting data from multiple departments

PERT chart enable to identify the responsible departments and each person's role in the project

What-if Analysis will enable Aurora to identify possibilities and uncertainties related to project activities


Disadvantages of using PERT

It can be difficult to interpret, specifically when dealing with complex projects such as

developing a new car over years. Therefore, both PERT and Gantt charts are used

parallel

The data collection and analysis process is subjective in nature when creating a PERT

chart. Thus, the PERT chart might not accurately estimate time or cost

The PERT chart is a time network analysis which determines labor, material and capital

equipment requirements for individual projects. Hence cost estimates are developed for

each activity in the network that is primarily focused on time. However, this means that

activities must completed on time to meet the project completion date

Work Breakdown Structure (WBS)

“A hierarchical decomposition of the total scope of work to be carried out by the project

team to accomplish the project objectives and create the required deliverables”

This process will breakdown the tasks, deliverables and activities that are related to the

project into chunks that are manageable.

This will also allow the team members to understand what is needed and what must be

done to achieve objectives specified.

Advantages of WBS

WBS defines and organize the project work and this is done at the beginning of the

project and help identifying skills required for the project

This can be used to identify risk or a project. WBS is graphed as a tree. If one branch is

not doing well or does not look right, it signals potential risk

When one branch of WBS is not well, t shows the deliverables affected

The structure of work breakdown will allow the project members to see the description

of the steps which are needed in order to deliver the right outcome

The structure of work breakdown will provide a great level of detail which will enable

the project manager to understand his team members and hold them responsible for all

tasks that have been completed


The work breakdown structure will also allow for allocating cost and time estimates for

the movie. A budget can be allocated to top levels and then calculate departments’

budgets based on their WBS

This can be improved to see the status of sub deliverables

Disadvantages of WBS

Could lead to micromanagement which may not be attractive to some team members as

this will negatively impact their creativity

It is not an easy task to find the best and most accurate level of details for the WBS as

you must fit in all the process to just one page. It would become extremely difficult to

find what exactly the tasks are and what must be the creation of them added to the WBS

The WBS could become outdated quite fast as the schedule of the project will change

the execution of such projects but the WBS will remain as it is

The development of work breakdown structure is quite hectic and could take some time

and effort

PRINCE2 Model

PRINCE2 is an acronym for Projects in Controlled Environments. In this flexible method

outputs are clearly defined and there is a business justification for every project.

The PRINCE2 method is built on the following principles:

Every project must have a clear need of defined customers, realistic benefits, and a

detailed cost assessment that could justify the project been undertaken

The project members should seek to learn from every stage at every process which is

used to improve future tasks

The roles and responsibilities of each team members are clearly defined. Thus, all

members should know exactly what they’re responsible for — and what their

teammates are responsible for

The project is broken up into individual work phases, with periodic reviews to record

lessons learned and to confirm that the project is still on track for completion


The project manager has the authority to get the project back on track if there are

delays or it is going over budget

Teams keep a constant focus on quality

The PRINCE 2 approach should be tailored for each project

Agile

This is a project management method focuses on continuous improvement, scope

flexibility, team input and delivering essential quality product. This is a solution for

dynamic, fast changing environment. Rather waiting to release the product at the end of the

planned project time, they release small functioning versions and get feedback.

Project requirements are developed during the process based on emerging

requirements; hence the final output may differ from the one we predicted at the

outset.

Project teams are self-directed; therefore creativity is nurtured allowing

innovations to emerge.

Testing ad responding to customer feedback is an ongoing process.

However, the applicability of this method to Aurora may be far.

Kanban- Discussed in Deep Dive 02.

Roles of a Project manager

He / she is responsible for completing the entire project and deliver the outcome expected.

This includes;

Planning and defining scope, resources, activity and sequence

Develop schedules, budgets

Estimate time, cost

Risk analysis and managing including contingencies

Team leadership

Liaison with required parties-internal and external

Managing conflicts

Conduct project evaluation in a timely manner

Prepare and execute follow up action

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