Case TC1-0168 ver: July 2014

The Auto Industry: Flexible Networks

The days of having a product that sells 400,000 units in any particular market – there are very few
products that do that today. It’s a much more fragmented market place and it means that volumes of any
particular model are much more variable. We need to set up plants that can build multiple models and we
need to put the same model into multiple plants. That’s what gives us the flexibility to respond to the
market needs.

- Diane Tremblay, Global Chief Manufacturing Officer, General Motors.

An Industry Invests

On August 6 2012, Ford Motor Company announced that it would support its “biggest global expansion
in 50 years by rolling out a single manufacturing operating system that will drive improved efficiencies,
increase capacity utilization and make the company an industry leader in lowest total cost production.”
Ford has produced over 350 million cars in its 110 year history, and car number 350 million was a Ford
Focus produced in Rayong, Thailand in a $450 million facility that opened in May 2012. The Rayong
plant typified Ford’s “One Manufacturing” operations strategy. Talking in August 2012, John Fleming,
Ford’s Executive Vice President of Global Manufacturing, said that Rayong “underscores the power of
our One Ford plan to deliver profitable growth with great products built in ultra-flexible and efficient
facilities everywhere around the world.” a

By the time the Rayong facility opened, Ford was already on a multi-year journey to “ensure that nearly
all of [its] U.S. assembly plants have flexible body shops.” b The revamped Michigan Assembly Plant
(MAP) is a case in point. As part of its new global Ford Focus program, Ford invested $550 million in
MAP, making it “the world’s first plant to build gasoline-powered, battery electric, hybrid electric and
plug-in hybrid electric vehicles on the same line.”c Quick on the heels of the MAP investment, Ford spent
$200 million on its Louisville, KY plant to “make it capable of building more vehicles on more platforms
than Michigan Assembly.” d

Ford is not the only car company pursuing flexibility. Soon after Fiat acquired a large stake in Chrysler in
2009, CEO Sergio Marchionne deployed Fiat’s “World Class Manufacturing” (WCM) process at
Chrysler. In addition to driving efficiency and quality through continuous improvement, “WCM is
designed to make our plants flexible and competitive with the best in the world,” said Sergio
Marchionne. e As it happens, Chrysler’s flexibility strategy pre-dated the Fiat alliance. Starting in 2003
under then-CEO Tom LaSorda, Chrysler “invested billions of dollars in a flexible manufacturing
initiative.” f At around the same time, Honda spent $400 million to make its three Ohio assembly plants
flexible. By 2008 the investment was reaping large benefits according to the Wall Street Journal:

East Liberty, Ohio -- One recent morning, the Honda Motor Co. plant here churned out 120
Civic compacts. Then the production line came to a halt and workers in white uniforms

This case was case was prepared by Brian Tomlin at the Tuck School of Business. The case was written for the
purposes of class discussion and is not intended to illustrate effective or ineffective management practices.

© 2013 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of
Business.
 Auto Industry: Flexible Networks

swept in to install new hand-like parts on the giant gray robots that weld steel into the cars’
frames. About five minutes later, the line roared back to life, and the robots began zapping
together a longer, taller vehicle, the CR-V crossover. In the automotive world, this is
considered quite a feat. Until a few years ago, most auto plants in North America could
make only one vehicle without substantial investment. Now, other manufacturers have a few
flexible plants. The manufacturing dexterity of Honda's plants, now the most flexible in
North America, is emerging as a key strategic advantage for the company. g

With Volkswagen’s 2011 announcement that it would spend €100 million improving the flexibility of its
Wolfsburg plant and General Motors’ (GM) 2012 announcement that it invested $460 million building a
flexible engine plant in Spring Hill, Tennessee, it can seem like car companies are competing in a
flexibility race. They are, according to Rich Morris, Vice President of Assembly for BMW Manufacturing
Co.:

Everyone has to become more flexible. The real battle is the race towards efficient
flexibility. h

This is not a drag race, however. It’s an endurance race that started more than a decade ago and the
checkered flag is not in sight.

Matching Supply And Demand: Critical But Complex

If you were the CEO of a major European car company what’s the one thing you would want to do?
According to Fiat-Chrysler CEO Sergio Marchionne:

If I could do just one thing, most likely it would be to create a flexible labor system capable
of managing supply and demand. i

The challenge of matching supply and demand is not an exclusively European problem nor is it solely an
issue of labor constraints. It is a preeminent challenge for all the major car companies because of the
complexities at the heart of the car business. Complexity in the auto industry is driven partly by the
technological sophistication of the product – there are tens of thousands of parts in each car and
automotive electronics and software are becoming increasingly advanced. Complexity is also driven by
the twin issues of vertical integration and variety.

Ford’s famous River Rouge factory complex, opened in the early 1920’s, was the physical manifestation
of Henry Ford’s vision for a vertically integrated car company, with iron ore entering and finished Model
A cars exiting. There was even a company-owned power plant located on the site. Vertical integration,
although moderated somewhat, is still a bedrock operations strategy in the auto industry. The major
stages - pressing, body, paint, powertrain (engine, transmission, drive shaft), and assembly - are typically
carried out in company-owned facilities. In some cases stages are carried out in separate locations while
in other cases stages are co-located within one location, in which case stages can be thought of as “plants
within a plant”. This asset-intensive, vertical-integration strategy is one reason that structural, or fixed,
costs are significant in the auto industry - approximately 50% of total costs according to one investment
bank estimate. j Given this cost structure, plant utilization is a crucial driver of profitability: if a plant is
running well below its capacity then revenues may not cover fixed costs.

Market segmentation and annual model introductions were among the many innovations that Alfred Sloan
pioneered while growing GM’s US market share from 12% in the 1920s to 52% in the 1950’s. A

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 Auto Industry: Flexible Networks

revolutionary departure from Henry Ford’s focus strategy (“any customer can have a car painted any
color that he wants so long as it is black”), this pursuit of variety dominated the marketing strategies of
almost every major car company for the rest of the twentieth century. In 2012, BMW estimated that
customers could choose from 5x1032 possible versions of its cars. Brands, vehicle segments, and options
all contribute to the incredible variety in the auto industry. For example, the GM brands Buick and
Chevrolet both offer models in the compact vehicle segment – the Buick Verano and the Chevrolet Cruze
– and Chevrolet offers two models in the SUV segment – the Suburban and the Tahoe. In the subcompact
segment, the Chevrolet Aveo model had 600 variants arising from different combinations of options. Not
coincidentally, as GM emerged from bankruptcy in the late 2000s it actively pursued a complexity-
reduction strategy by eliminating four of its eight brands and focusing on option rationalization. The
Chevrolet Sonic, introduced in 2012 to replace the Aveo, had 48 variants rather than the 600 for the Aveo.
Even with this strategy in place, variety remains a key driver of complexity in GM, as it is for all other
global car companies.

Speaking at the 2012 MIT conference on “The Future of Manufacturing in the U.S.”, Diane Tremblay,
GM’s Global Chief Manufacturing Officer highlighted the challenge:

The days of having a product that sells 400,000 units in any particular market – there are
very few products that do that today. It’s a much more fragmented market place and it means
that volumes of any particular model are much more variable.

There are two important effects of variety here – the average effect and the variability effect. The average
effect reflects a mismatch between existing plant capacities and typical sales at the model level: average
annual sales of a model are much lower than in past decades, and so large legacy plants cannot be filled
up, i.e., run at a high utilization, if they are dedicated to single models. The variability effect reflects the
difficulty in matching actual demand and capacity due to forecasting challenges. With lead times of years
for building new plants and many months (if not a year) for retooling a dedicated plant for a new product,
forecasting annual demand is crucial for capacity planning. Unfortunately, the variability effect makes it
difficult to forecast the annual volume of any given model. Measuring forecast accuracy by the relative
difference between the forecasted annual volume and the actual annual volume, it is not unusual to have
forecast accuracies of 50% three years out from start of production and 35% one year out. In effect,
companies are placing expensive bets when installing/retooling dedicated capacity and they run a
significant risk of having too much or too little capacity compared to actual demand.

Variety increases the probability of supply-demand imbalances. Vertical integration means these
imbalances have a significant financial impact due to fixed costs in the manufacturing network. Because
capacity can’t be reduced in the short term, car companies push on the price-incentive pedal to drive up
demand. Incentives, while an understandable tactical reaction, are not a strategic solution to supply-
demand imbalances: they eat into revenues and train customers to wait for a better price. Recognizing
this, the auto industry is embracing flexibility as a strategy to manage its supply-demand risk. Building on
her 2012 comment about market fragmentation and volume variability, GM’s Diane Tremblay went on to
say:

So one of the challenges for us from a manufacturing standpoint is that we can’t set up as
many dedicated plants that they only build this model vehicle and that’s all they build. We
need to set up plants that can build multiple models and we need to put the same model into
multiple plants. That’s what gives us the flexibility to respond to the market needs.

The flexibility race has been heating up from some time. As far back as 2003, Ford’s president of North
American sales and marketing was quoted as saying he hoped that Ford’s “new flexible manufacturing
plants would help balance supply and demand and reduce incentives.” k

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 Auto Industry: Flexible Networks

When auto executives speak of flexible plants, it is important to distinguish between plants that can
produce variants of one model and plants that can build multiple models. Variant – or option – flexibility
is already in place in dedicated plants that can only build a single model, e.g., the Buick Verano or the
Chevrolet Sonic. The new flexibility race is about model flexibility – equipping a plant so that it can
make multiple models. For example, in 2010 GM spent $545 million overhauling their Orion Assembly
plant in Michigan and it can now produce both the Buick Verano and the Chevrolet Sonic. In their
pursuit of model flexibility, senior executives need to answer the two key questions: How do we create
flexible plants? How do we go from flexible plants to a cost-effective flexible network?

Creating Flexible Plants: The Four P’s

Manufacturing executives can choose among four levers to create flexible plants. The levers are product
design, process design, production technology and people.

Product Design

Plant flexibility isn’t just about plants. It’s also about the products. Put simply, the more similarities in
design across models the easier it is to enable plants to produce multiple models. Product design must
navigate two competing forces in the auto industry: the desire for variety on the marketing side and the
desire for complexity reduction and scale economies on the engineering and operations side. Because
different market segments have different perceived requirements there is a tendency to closely tailor the
design of models to their targeted segment. Too often this tailoring is done without regard for the overall
portfolio complexity. The result: low economies of scale and little flexibility because of limited sharing of
technologies, systems and components across models.

Platforms are one strategy for managing this tension. In essence, a platform is a set of engineering
subsystems that is shared across multiple models. Sometimes referred to as vehicle architectures,
platforms are central to the engineering and operations strategy in the auto industry. In fact, almost all
companies in the industry are in the midst of consolidating their models around fewer platforms. It is
estimated that “by 2020, the 10 major OEMs (General Motors, Volkswagen, Toyota, Ford, Nissan, PSA
Peugeot Citroen, Honda, Renault, Fiat and Daimler) will reduce their platforms by about a third from over
175 platforms in 2010” l. General Motors plans to reduce its number of platforms from 30 to 14 in the
coming decade. In addition to scale economies, flexibility is a driver of platform consolidation:

The 2009 Opel Insignia will be the first vehicle built based on the company’s new midsize
architecture known as Epsilon II, or Global Epsilon. The five previous platforms replaced by
Epsilon II had underbody geometries and mounting points that were all within a few
millimeters – and yet these slight differences meant the vehicles could not be built on the
same assembly lines. With the new common global platform, GM expects to save
approximately US$1 billion. As GM introduces new global architectures for each vehicle
family, it can transfer tooling among global “flex” plants and build automobiles anywhere. m

The tide is flowing in the direction of platform consolidation but consolidation has its natural limit and
there will always be some differences across models. Product design alone will not achieve the degree of
flexibility required in the car industry.

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 Auto Industry: Flexible Networks

Process Design

Each major stage of car manufacturing requires multiple process steps to complete that stage. Creating a
flexible production system is much more difficult if different models or subsystems require the steps to be
carried out in a different sequence. According to Ford “when different models are designed to be
assembled in the same sequence they can be built in the same plant.” n Achieving a manufacturing process
sequence that is shared across models requires a concerted and long-term effort to deploy a portfolio
perspective in product and manufacturing engineering. Kitting, whereby, “workers synchronize packages
of parts with the order of vehicles heading down the assembly, and place part kits inside vehicles under
construction,” is another assembly process design that promotes flexibility. o

Production Technology

Automation has long been promoted as the means to achieving flexibility. ABB, a major supplier of
industrial robots, identifies flexibility as a key reason to invest in robots: they “add flexibility to your
production line. Once programmed, they can easily switch between processes, helping you to meet
changes in product design or customer demand with minimum effort.” p And, indeed, advanced robotics
are helping car companies manufacture different models with the same production equipment. In 2013,
ABB launched a new robotic welding system that can frame multiple models on the same car-body
production line. On a more mundane level, but no less important, is the pursuit of common production
tooling across models. By designing tooling that can be used for multiple models, factories avoid
significant downtime when switching back and forth between models.

People

While automation is critical, labor is still a crucial ingredient at certain points in car manufacturing.
Building flexibility into the operating system hardware - product, process and production technology - is
important but so is building a flexible workforce from line workers, through supervisors to managers. By
cross-training workers in different production steps and by building their problem solving skills
companies can enhance flexibility. Such endeavors can be fostered or hindered by human resource
policies, labor agreements, and the frequency of employee turnover.

Which Levers to Pull?

Each of the Four P’s of Flexibility is an important lever but each may have greater or lesser relevance in a
particular industry or specific manufacturing stage within an industry. Take auto manufacturing as an
example: according to Ford, production technology is crucial in the body and paint shops but process
design is crucial in final assembly:

In the body shop, where the sheet metal comes together to form the vehicle’s body,
flexibility means more than 80% of the tooling is not specific to one model. In the paint
shop, flexibility means robotic applicators are programmed to cover various body styles as
they move through the paint booth with equal precision. In the final assembly area,
flexibility means the build sequence is the same among multiple models on one or more
platforms. q

Regardless of which combination of the Four P’s is chosen, executives must answer a complicated set of
questions when deciding how much to invest in flexibility and how best to deploy that investment. Which
of our plants should be made flexible? How flexible should we make those plants? How do we create a
cost-effective flexible network?

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 Auto Industry: Flexible Networks

Configuring Flexible Networks

Figure 1 illustrates the U.S. assembly-plant network of one of the Big-Three auto companies before it
began its pursuit of model flexibility. r There are eight plants, shown as squares, and sixteen models,
shown as ovals. A link between a plant and a model indicates that the plant can produce the model. For
example, Plant 1 can only produce Models A and B whereas Plant 2 can only produce Model C. The more
links that a plant has the more flexible it is. The annual capacity for each plant and the mean and standard
deviation of annual demand for each model are given in Table 1. The table also gives the maximum and
minimum demands for each model. These capacity and demand numbers are given in thousands of
vehicles. The data has been masked to protect confidentiality but the numbers are reflective of the auto
industry.

The company is not planning to change the capacities in its assembly plant network, that is, no new plants
will be opened nor will existing ones be closed or expanded/contracted. Instead, the company wants to
make this existing network more flexible. In other words, it wants to create more plant-model links.

The Executive Vice President of Global Manufacturing has asked you to examine the current network and
come up with a recommendation on how best to increase flexibility, that is, what additional plant-model
links to create. Additional data and directions can be found in the assignment questions.

a
Source: Ford celebrates 350 million vehicles at Thailand plant. Retrieved June 26, 2013, from
http://media.ford.com/article_display.cfm?article_id=36982
b
Source: Ford Annual Report 2011, p. 29
c
Source: Ford opens flexible, green Michigan Assembly Plant with production of all-new Ford Focus. Retrieved June 26, 2013, from
http://media.ford.com/article_display.cfm?article_id=34225
d
Source: Woodyard, C. (2011). Ford focuses on flexibility at its factories. Retrieved June 26, 2013, from
http://usatoday30.usatoday.com/money/autos/2011-02-28-autoplants28_CV_N.htm#
e
Source: Chrysler Group LLC’s Jefferson North Assembly Plant transforms itself in preparation for 2011 Jeep® Grand Cherokee launch. Retrieved
June 26, 2013, from http://media.chrysler.com/newsrelease.do?id=9677&mid=49
f
Source: Teresko, J. (2006). Chrysler's winning formula: hot cars + flexibility. IndustryWeek. Retrieved June 26, 2013, from
http://www.industryweek.com/companies-amp-executives/chryslers-winning-formula-hot-cars-flexibility
g
Source: Linebaugh, K. (2008). Honda's flexible plants provide edge. Wall Street Journal. B1. September 23, 2008.
h
Source: Henry, J. (2009). BMW says flexible, not lean, is the next big thing in autos. Retrieved June 26, 2013, from
http://www.cbsnews.com/8301-505123_162-42940876/bmw-says-flexible-not-lean-is-the-next-big-thing-in-autos/
i
Source: ANSA (2012). Marchionne urges greater labor flexibility. Retrieved June 26, 2013, from
http://www.ansa.it/web/notizie/rubriche/english/2012/02/28/visualizza_new.html_105270260.html
j
Source: U.S. Automakers. UBS Investment Research Report. 20 March 2009.
k
Source: Just-Auto (2003). USA: Ford flexible manufacturing plants will help cut incentives. Retrieved June 26, 2013, from http://www.just-
auto.com/news/ford-flexible-manufacturing-plants-will-help-cut-incentives-oconnor_id84001.aspx
l
Source: Sehgal, B. & Gorai, P. (2012). Platform strategy will shape future of OEMs. Evalueserve White Paper.
m
Source: IBM (2008). The enterprise of the future: automotive industry edition. IBM Global CEO Study. Retrieved June 26, 2013, from
http://www-304.ibm.com/easyaccess/fileserve?contentid=190261
n
Source: Ford (2011b). Ford Flexible Manufacturing. Retrieved June 26, 2013, from
http://media.ford.com/images/10031/Manufacturing_Flexibility.pdf
o
Source: Boudette, N.E., & Shirouzu, N. (2005). Amid price war, Chrysler to revamp manufacturing. Wall Street Journal. A1. August 2, 2005.
p
Source: ABB (2013) 10 good reasons to invest in robots. Retrieved June 26, 2013, from
http://search.abb.com/library/Download.aspx?DocumentID=10good reasons 001&LanguageCode=en&DocumentPartId=&Action=Launch
q
Source: Ford Flexible Manufacturing. Retrieved June 26, 2013, from http://media.ford.com/images/10031/Manufacturing_Flexibility.pdf
r
Source: Jordan, W.C. & Graves, S.C. (1995). Principles on the benefits of manufacturing process flexibility. Management Science.

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 Auto Industry: Flexible Networks

Exhibit 1: Assembly Plant Network

Table 1: Demand and Capacity Data

Model Mean Stand Dev Minimum Maximum Plant Capacity Models

Demand Demand Demand Demand Plant can
Produce
A 320 128 64 576 1 380 A, B
B 150 60 30 270 2 230 C
C 270 108 54 486 3 250 D, E
D 110 44 22 198 4 230 E, F
E 220 88 44 396 5 240 G, H, I
F 110 44 22 198 6 230 I, J
G 120 48 24 216 7 230 K, L, M
H 80 32 16 144 8 240 N, O, P
I 140 56 28 252
J 160 64 32 288
K 60 24 12 108
L 35 14 7 63
M 40 16 8 72
N 35 14 7 63
O 30 12 6 54
P 180 72 36 324

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