Individual report on Global Car

Manufacturing Industry

Student name:
Student I’D:
Answer to the question no. 1
In 2008, not only did the global economy suffer a setback, but so did the "Big Three" automakers
in the United States (Benmelech, Meisenzahl and Ramcharan, 2017). The General Motors (GM)
Corporation declared bankruptcy, the Ford Corporation announced a loss of $12.7 billion, and
Chrysler filed for bankruptcy protection later that year in 2009. Traditional operational
systems were adhered to by each and every one of these companies, which was the only thing
they had in common. Following the traditional operational system was one of the primary
reasons for such a significant economic loss for the “Big Three” since it hampered the
organizations’ ability to adjust its output to the circumstances that were demanded by the
economy. Because of the high expenses involved, particularly in terms of inventory and labor,
manufacturers were unable to make any price reductions because the production method they
used was the traditional one (Pauwels et al., 2018).
The term "traditional operational system" refers to a set of business practices that emphasizes the
production of a predetermined quantity of a good or service throughout each period while also
maintaining a stockpile of the item for usage in the event that demand is higher than projected or
there aren't enough supplies (Sterling, 2021). In traditional operational systems, producers
employ methods of reducing costs that promote increased levels of mass manufacturing. As a
component of the product cost, the fixed factory overhead expenses, such as rent for the factory,
the depreciation of machinery, and insurance, are spread out evenly among all of the units that
are produced. Only when all of the units that were created have been sold will it appear as a cost
of sales expenditure on the income statement. Therefore, the profits will be higher the greater the
ratio of units produced to those sold, the lower the fixed factory overhead that is included in the
cost of sales and the greater the number of units produced. The unsold pieces are kept as
inventory, which necessitates storage space as well as further push efforts in marketing and
advertising directed toward selling to customers. In addition, workers are rewarded monetarily
for increased levels of output productivity.
Structural expenses (such as labor, overhead costs, and transportation costs etc.) and inflexibility
when it was required are two main constraints that traditional operational systems have that
made it difficult for the big three to adjust their output to the current economic conditions.
Structural expenses: The Big Three were compelled to maintain their output level despite the
decrease in demand since the majority of the wages were required to be paid regardless of
whether or not there was a halt in production. As a consequence, they saw an increase in their
costs (holding costs), a decrease in their income, and an extra restriction as a result of their
overproduction. For example, GM's structural limitations and operational flexibility were
severely limited as a result of the decline in consumer spending in the economy. Furthermore,
the company was unable to reduce output since there was little wiggle space in the variable costs
to allow for reductions (Law, 2017). In addition, General Motors had the intention of shutting
down the factory and replacing it with a new facility, but they were unable to do so since the
committed labor costs were too expensive. In addition, GM exerted pressure on its suppliers to
reduce expenses by relocating production of their goods outside of the United States. As a direct
consequence of this, GM was forced to invest more costs in order to have the components built.
Another example is, over the course of more than half a century, the Arlington facility owned by
GM employed a total of three thousand people. Despite the company's best attempts in the year
2000 to renovate, General Motors was constrained by the long-term benefits, high pay, and
layout limitations of its workforce. It was required for it to employ lengthy conveyers in order to
move its production from one process to another, which resulted in an increased amount of
wasted throughput time. When GM used older machinery, it experienced more failures, which
resulted in more hours of idle labor. It had a distributed network of suppliers, which resulted in
high transportation costs and the possibility of supply delays. The term "overhead costs" refers to
the expenses that are connected with conducting a business but cannot be directly related to the
process of producing a good or providing a service (Berrett, 2021). They are the costs that the
company must pay in order to continue operating, regardless of the amount of money it makes.
Most organizations' cost structures comprised of 60% direct labor, 30% materials, and 10%
overhead when conventional cost accounting structure was introduced in the early 1900s.
(Lampón, Cabanelas and González-Benito, 2017) Companies assigned overhead costs to goods
at the same rate as direct labor since manufacturing cost structures comprised relatively little
overhead. As a result of The Big Three's inability to adapt to such a severe economic crisis, this
ended up being one of their primary sources of concern.
Inflexibility: The big three were forced to deal with inflexibility challenges because they
pursued a traditional accounting approach rather than a lean accounting approach (Solke and
Singh, 2018). One illustration of GM's structural limitations and inflexibilities is how obvious
they were at their production location in Arlington. Instead of upgrading the facility that was
already there, General Motors (GM) decided to construct a brand new body shop in a separate
structure so that it could keep up with advances in technology and product development. As a
result, the production process had to go through more motion and took significantly more time
than it would have if the circumstances had been perfect. However, due to large committed labor
expenditures, GM was unable to afford to shut down the plant for renovations at this time.
Transportation expenditures that were related with pre-existing contracts with suppliers, of which
78 percent were dispersed throughout Michigan, Canada, and Mexico, contributed to the
company's operational inflexibility. Another illustration of inflexibility is the fact that problems
with supplier relationships have persisted throughout production, which accounts for 85 percent
of a vehicle's composition. A significant number of suppliers, who were under intense pressure
to lower their prices, moved their production facilities outside of the United States
(Hadziahmetovic, Halebic and Colakovic-Prguda, 2018). This, in turn, had a significant impact
on the company's overall transportation expenses. When Ford was transitioning toward lean
production, the company also had to deal with historical cultural difficulties.
 Structural
Inflexibility
costs

Figure: major constraints in traditional operational system

Sources: Sterling, 2021.
References
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