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Sustainability in supply chain
management: suggestions for the
auto industry
Yu Xia and Thomas Li-Ping Tang
Department of Management and Marketing,
Jennings A. Jones College of Business, Middle Tennessee State University,
Murfreesboro, Tennessee, USA
Abstract
Purpose – The auto industry in the USA is facing tremendous challenges – plunging demands due
to economic downturn, the gloomy trend in technology development, and fierce global competition.
This article aims to examine the challenges of supply chain management and to propose a triple-C
(cease-control-combine) remedy for the North American auto industry’s supply chain management.
Design/methodology/approach – The authors applied management theories, collected
information from managers at different levels of the auto industry’s supply chain management, and
developed a novel theoretical model of sustainability in supply chain management for the auto
industry.
Findings – It is argued that outsourcing to low cost countries – the current supply chain strategy –
is not only unsustainable but also irresponsible for the auto industry and society. A triple-C
(cease-control-combine) remedy is proposed for the auto industry’s supply chain management.
Practical implications – The proposed triple-C strategy will save the auto industry money in R&D
investment, reduce quality cost and inventory waste, help the industry go through the volatile
economy, and achieve sustainable development. With close relationships and strong supports from
suppliers, the industry can speed up technology development, introduce new gas efficiency models
quickly, and become less dependent on gas price. Finally, the triple-C strategy will help the industry
keep jobs and generate new jobs in the USA. These activities lead to public support and restored
corporate image.
Originality/value – The current business environment is analyzed, problems of current supply
chain strategy discussed, and a new supply chain strategy remedy for the North American auto
industry proposed.
Keywords Automotive industry, Supply chain management, Professional ethics,
Economic sustainability, United States of America
Paper type Conceptual paper
1. Introduction
With plunging auto sales, the ups and downs in gas prices, and the blurring future for
new technologies, the North American auto industry expects less revenue, more
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0025-1747.htm
The authors wish to thank Editor, John Peters, and anonymous reviewers for their helpful,
specific, and constructive comments. Thanks are also extended to Mr Emil Hassan, Chairman of
Auto Services Americas; retired Senior Vice President of Manufacturing, Purchasing, Quality
and Logistics for Nissan North America; Ms Beth Lee, Department Manager in Supply Chain
Management for Nissan North America; Mr Jim Rose, Section Manager, Domestic Logistics for
Nissan North America; and other auto industry managers and engineers, for taking time to share
their thoughts and ideas about the current situation, and the future of the industry.
Sustainability in
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Management Decision
Vol. 49 No. 4, 2011
pp. 495-512
qEmerald Group Publishing Limited
0025-1747
DOI 10.1108/00251741111126459
consolidation, and even bankruptcies in the next few years. With a decisively
important impact on operational efficiency, supply chain management of the auto
industry becomes one of the core elements for the survival or success of the very
industry (Webster, 2006). Due to the supply chain management’s critical role in the
auto industry, we identify the need to think strategically and critically regarding the
strengths and weaknesses of the field, examine closely the opportunities and threats in
the competitive global environment, and offer suggestions to maximize benefits for all
stakeholders and maintain the sustainability of the auto industry.
In this article we address our ideas in four major areas. First, the North American
auto industry must adapt to the competitive environment in the economic downturn,
meet the noticeable market demand for increasing gas efficiency and renewable energy
resources, and take the ultimate responsibility for the society. Second, the current
supply chain management strategies cannot rise to the challenges from the assorted
perspectives. Third, we propose an ethical triple-C (cease-control-combine) remedy for
the supply chain management. Finally, it is our hope that by applying our model and
allowing all the stakeholders to cooperate and share ideas, resources, and innovation,
the auto industry may achieve sustainability in the future. We believe that these four
key constructs fit well together in a conceptual framework. We summarize our ideas in
Figure 1. In the next section, we briefly review some selected background literature of
supply chain management, in general.
2. Recent trends in supply chain management
Supply chains are effective networks of firms performing activities in a particular
product/service value chain (Stevenson, 2007). Firms in a supply chain coordinate and
share the benefits through market mechanisms, contracts, and partnership
arrangements, which lead to the increasing efficiency of all partners. In today’s
tough economy, the competition among large corporations has long been extended to
the competition among players in supply chains. Automobile manufacturing involves
hundreds of parts from many suppliers; supply chain management is a critical area in
operations management of the industry and a decisive factor for the success or survival
of the auto makers.
For the last several decades, we have witnessed several dominant trends in supply
chain management. In the 1980s, it was just-in-time production; in the 1990s, it was
supply chain collaboration and the outsourcing of logistics activities; and in the 2000s,
it was application of the internet, according to supply chain thinker, David Simchi-Levi
(Hopkins, 2010). The design of the supply chain will become more central to overall
organizational effectiveness and efficiency in the future than ever before and has
attracted a lot of attention in the literature.
In particular, for the past several years, there have been six significant challenges in
the competitive world market that have affected supply chain design for many
multinational corporations (MNCs). These changes include:
(1) globalization that produces longer and longer lead times in production;
(2) reduction of costs for products and transportation that leads organizations to
take the advantage of economics of scales by shipping large quantities of
products from overseas that in turn, leads to increase in logistics costs and large
inventory;
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(3) long and geographically diverse supply chain that exposes to numerous threats
of disruption and risks;
(4) significant increase of labor costs in developing countries (e.g. 20 percent
increase in China vs 3 percent increase in the USA) that shrinks labor cost
savings in these emerging entities overtime;
(5) change in regulations requires companies to consider the amount of carbon
emission the supply chain produces that leads organizations to focus on green
supply chain and long-term sustainability; and
(6) volatility of commodity prices (e.g. coal, gold, oil, steel) that causes changes in
procurement of commodity (long-term vs. short-term commitment) in the
markets.
Most executives can deal with each one of these changes and challenges individually.
However, it is the combination of these six challenges that makes the issue of supply
chain design much more complex and difficult to respond than before. In short, the
Figure 1.
Auto industry supply
chain management:
triple-C strategy
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supply chain addresses issues of logistics and the flow of materials, the flow of
information, and the flow of money. Evidence suggests that “supply chain
management has mostly been focused on cost reduction, and that’s one of the most
critical mistakes a company can make”, according to Simchi-Levi (Hopkins, 2010, p. 19,
emphasis added).
In addition, Charles H. Fine focused on the issue of the value chain, which is an
important supplement to supply chain. He stated that the value chain is concerned with
who gets the value in the chain, who creates value, who captures value, where is the
value created – and how do you think about that in a coherent manner. There are three
types of value chain design:
(1) zero-sum (modular architecture);
(2) win-win (integral architecture); and
(3) open innovation.
In a mature industry, major players in the value chain may work together in a
collaborative fashion with long-term objectives and engage in the win-win strategy
(“integral architecture”). On the other hand, in an immature industry, the processes and
product technologies are not very well established, such as Silicon Valley, the biotech
for energy (e.g. algae, corn, ethanol, wood) or other renewable energy (e.g. sun, wave,
water, and wind). It will be difficult to establish long-term trust-based relationships;
therefore, most major players compete in the race following the zero-sum mentality
(“modular architecture”). Moreover, besides these two, the open innovation approach
uses the world as the lab and tries to create mechanisms to find innovations, ideas, and
new products anywhere and then, tries to use marketing and the product development
channels to distribute that product in the millions, or billions of units to the world.
Using this approach, major players may use supply chains and different models of
supply chain design to create value collectively in the value chain. It is important to
know that agility and absorption allow organizations to weather through dangerous
threats, seize opportunities, and thrive in turbulent markets (Mishra et al., 2009; Sull,
2009).
It is clear that the auto industry fits the mature industry overall because its
products, process architectures, and standards are stable, relatively speaking.
However, due to global warming, the energy for the auto industry (in terms of type,
form, source as well as storage and supply of green and renewable energy) becomes the
center stage and a dominant challenge in the near future (Tang, 2010). Green energy is
in the immature stage of the life cycle. Therefore, the auto industry straddles both
mature and immature industries and requires a new, innovative, and creative design
for the supply chain management.
There are several major lessons here. First, executives need to identify the most
appropriate situation to use integral, modular, or open innovation strategies. Second,
the key issue is that innovation, technology, demands, and markets do change quickly,
therefore, all advantage is temporary. Whatever is good right now for the supply chain,
may not be good years later. In other words, besides our understanding of what, how,
and why, we must consider who, where, and when. Therefore, executives must
evaluate these strategies periodically.
The key ingredients for success in this race are speed and flexibility. In the
management literature, most scholars and executives agree that the win-win strategy
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is better than the zero-sum strategy. However, “the winners of the immature stage are
the guys who are the fastest, but they often can’t transition to become the winners in
the mature stage” (Hopkins, 2010, p. 23, emphasis added).
The bullwhip effect, a well-observed supply chain phenomenon, suggests that a
long pipeline, or uncertain demand, or both, in a supply chain will accumulate huge
waste at the end of the channel (Lee et al., 1997). The best supply chains are not only
fast and cost effective but also agile and adaptable to ensure that all companies’
interests stay aligned (Lee, 2004; Khan and Pillania, 2008). The logic of both
transaction-cost approach and knowledge-spillover consideration points toward the
increasing spatial concentration of high value-added activities instead of long
outsourcing pipelines (Kim and McCann, 2008). Coexisting suppliers share the market
based on their efficient market niche (Xia et al., 2008). Multiple logistics providers
(Vijayvargiya, 2010) or outsourcing to low-cost country is not a cost saver. Supplier
selection needs to mitigate the overall supply risk by considering a total cost (Micheli,
2008). Instead, balanced outsourcing may raise costs slightly, but may create more
“bang for the buck” from innovation spending; whereas proportionately too much
outsourcing will result in dramatically higher total costs (Stanko et al., 2009).
Furthermore, not all suppliers are created equal. According to Emil E. Hassan
(Chairman of Auto Services Americas, retired Senior Vice President of Manufacturing,
Purchasing, Quality and Logistics for Nissan North America), executives must identify
all major players of the auto industry supply chain using the following five criteria:
quality, cost, delivery, development, and management (QCDDM criteria) to ensure
success. Close collaboration with suppliers, following the QCDDM criteria, helps the
auto industry meet the challenges in the competitive market (Xia and Tang, 2008).
In addition to the above findings, recently, many researchers have studied supply
chain management from a much broader perspective than before. Ethical issues such
as supply chain governance, environmental issues, and social responsibilities have
attracted a lot of attentions. Carter and Jennings (2002) examined the potential impact
that pursuing social responsibility (PSR) might have on supply chain relationships.
They suggested that PSR has a direct and positive impact on supplier performance as
well as an indirect, mediated effect on performance through improved trust and
cooperation. Research shows that trust is important among people at the individual
level (Gilbert and Tang, 1998) and is also important in supply chain success among
business entities (Kidd et al., 2003; Morgan and Hunt, 1994). Svensson and Wood (2003)
examined business ethics dynamics with cases from the auto industry and provided a
conceptual discussion of the dynamics of business ethics in society as well as in the
marketplace. Roberts (2003) examined the relationship between corporate social
responsibility, reputation, and supply network conditions. Beamon (2005) highlighted
issues associated with ethical decision-making in supply chain management and stated
that management has ethical responsibilities to consider the immediate and eventual
environmental and social impacts of their products and processes. Svensson and Baath
(2008) described a conceptual framework of supply chain management ethics, explored
the common grounds, and provided initial insights into the complex and multifaceted
field of supply chain management ethics. Lindgreen and Swaen (2010) and Lindgreen
et al. (2009) investigated actual corporate social responsibility (CSR) practices related to
different stakeholder groups and developed an instrument to measure those CSR
practices.
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In summary, although outsourcing to low-cost countries with a long pipeline may
save some purchasing costs in the short-run, it may cost more in total cost due to the
bullwhip effect in today’s economic uncertainty. As Pfeffer (1998) pointed out that
labor rates and labor costs are not the same. Further, labor costs are a function of labor
rates and productivity. Sometimes, lowering labor rates increases labor costs.
Outsourcing also cannot rise to the responsibility of the society. Automakers with a
strong focus on low-cost purchasing may lose the opportunity in technology
development as well as the opportunity to thrive in the future. So far, we have
discussed the supply chain management in general. For the rest of the paper, we
specifically focus on the supply chain management for the auto industry and propose
an ethical triple-C (cease-control-combine) strategy that may lead to the sustainable
development of the industry. In the next section, we provide a detailed discussion
regarding the challenges of the auto industry in our model (Figure 1).
3. Challenges
The North American auto industry faces tremendous challenges from four different
perspectives. These challenges are:
(1) volatile economy;
(2) uncertain gasoline prices;
(3) green energy; and
(4) social and ethical responsibility.
We briefly discuss these four major issues below.
3.1 Volatile economy
In volatile markets, organizations need to focus on agility and absorption so that they
can be flexible in making changes and meeting the needs and demands of the
customers quickly (Mishra et al., 2009; Sull, 2009). The deep US economic downturn in
2008 has remarkably influenced consumers’ purchasing power as well as their
purchasing confidence. In fact, in December 2008, five of the Big Six automakers,
General Motors, Ford, Toyota, Nissan, and Honda, saw a 30 percent sales slide from
November; while Chrysler plummeted 53 percent. For the full year of 2008, all of the
Big Six automakers reported sales declines. In total, the industry sold 13.2 million
vehicles, an 18 percent drop from 2007s 16.1 million, closing the books on the
industry’s worst year since 1992 (Edmund Auto Observer, 2009). The new car market
across North America suffered the full force of recession in 2009, with some worrying
trends revealed in the latest figures supplied by world’s leading provider of automotive
data and intelligence, JATO Dynamics. The North America vehicle sales were down by
0.20.6 percent in 2009, with 3,271,321 fewer new cars bought than in 2008, even with
US government’s “cash for clunkers” incentives that boosted sales sharply in July and
August of 2009 ( JATO, 2010). A TrueCar analyst expected 2009s US auto sales to be
the worst since 1970, or 1950 on a population-adjusted basis. Sales to corporate fleets or
car rental companies remained a wild card and could push the total higher. Although
many people anticipate real improvement in the underlying demand for US autos,
which bodes well for 2010, the industry expects another few years of hard time. We
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posit that organizations with agility, absorption, and quick action will survive in the
volital environment (Mishra et al., 2009; Sull, 2009).
3.2 Uncertain gasoline prices
The industry has to cope with the uncertain gasoline prices, which have been very
volatile for the last two years. Research shows that there is an inverse relationship
between rising oil prices and auto manufacturers’ performance. This reduction in
performance is concentrated in those manufacturers of SUVs (Camerona and
Schnusenberg, 2009). Due to the rapid changes in gas prices, the market demand of
automobile becomes much more uncertain, which increases the bullwhip effect in the
auto supply chain and causes a tremendous amount of waste in purchasing and
inventory. The situation is getting much worse as many automakers choose to
purchase from low-cost countries. The transportation time for parts from some of these
countries to the US is more than five weeks. The automakers have no time to react to
the market. As mentioned, agility and absorption allow organizations to weather
through dangerous threats, seize opportunities, and thrive in turbulent markets
(Mishra et al., 2009; Sull, 2009). However, the supply chain loses its agility due to the
long outsourcing pipeline and becomes much more vulnerable to gasoline price
changes and other risks.
3.3 Green energy
Due to recent oil spills in the Gulf of Mexico, one of the worst ones in the history, the
demand for green energy fuels the energy-hungry fire. With the rising market demand
for green energy, a vast amount of investment in research and development is
unavoidable. Alternative energy could revive the auto industry. However, many
technology hurdles need to be conquered before new technologies can be industrialized.
Furthermore, whether the new dominant energy resources will be solar, electric,
ethanol, or diesel for the auto industry in the future is still not clear at this point.
Therefore, the auto industry has to invest its research and development (R&D) in
different directions. According to Clayton M. Christensen, 93 percent of all innovations
that have ultimately become successful started off in the wrong direction (Mangelsdorf,
2009). Not investing in all valuable research directions or constantly switching among
research directions can cost an automaker the opportunities to thrive in the future.
Many people believe that one of the biggest mistakes that GM made was switching the
direction of research on power among different technologies (Taylor, 2008). It is
inevitable to focus on the big picture and the overall structural changes of the
automobile transportation system and new renewable energy resources. Executives in
the auto industries also have ethical responsibilities to the development of green
technologies around the world (Conley and McLaren, 2009).
3.4 Ethical responsibility
Finally, the auto industry employs about 10 percent of total workforce in the USA,
directly and indirectly. The struggle of the industry has caused a vast amount of job
losses in many states and impacted community stability and family lives of many
Americans. The industry has received extremely strong support from our nation’s
federal government. As of November 2009, American public had already spent $400
billion in bailing out the industry. The number is still growing (Kiel, 2009). To boost
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auto sales, the US Government conducted a national-wide “Cash for Clunkers”
program. The North American auto industry is not only just an industry, but also a
symbol of the nation. The industry holds the ultimate responsibility to the American
society. American society has invested tremendously in this industry at this critical
time and most people in the USA have very high expectations for the auto industry to
keep jobs in local communities and to generate a quick turnaround in profits (Roth,
2008). The population anticipates rapid financial and moral paybacks as well.
4. Current strategy and the problems
In supply chain management, most automakers react to the market by lowering
purchase costs and outsourcing to low-cost countries to digest some of the losses.
Chrysler alone is looking for a 25 percent cost reduction from suppliers. Many
automakers force replenishment cost reduction to their purchasing teams. Nissan, the
most efficient auto assembly plant in the USA (Davenport and Tang, 1996; Laws and
Tang, 1999; Rhody and Tang, 1995), expects to reduce cost (5 percent) from its
purchasing department annually. The strategy leaves the auto industry no choice but
to outsource to low-cost countries (Halliday, 2008). Several top executives and
managers in the automobile industry’s supply chain management admitted in our
interviews that the application of the low-cost purchasing/outsourcing strategy existed
and that they expected the trend to go further and deeper. However, we assert that
low-cost purchasing/outsourcing strategy is indeed not a remedy for North American
auto industry (Tang et al., 2000). It will cause more harm than good in the long run and
may not even generate enough benefit in the short run as expected.
4.1 Long supply chain pipeline and huge waste in inventory
Outsourcing requires a long pipeline. According to Beth Lee, the Department Manager
in Supply Chain Management of Nissan North America, automakers such as Nissan
can adjust orders with a D6 system (six days) to domestic suppliers when demand
changes. However, due to the amount of time required in communication and
transportation, a 30-days or more advanced notice is needed for their outsourced
counterparts. For example, it takes eight weeks to ship materials by boats from China
to the west cost of the USA and another week or so by trucks to haul from the west cost
to Nissan in Tennessee. Furthermore, transportation costs can be very high and
transportation capacity along with events such as natural disasters and wars can
severely hurt the stability of the supply chain (Hopkins, 2010). This adds onto the
uncertainty of the demand, causes severe bullwhip effect in the supply chain channel,
and therefore wastes a huge amount of financial resources in inventory management.
Many opportunities to adjust product preference changes in the market and production
schedules are lost due the long supply chain pipeline.
According to Jim Rose, Section Manager, Domestic Logistics for Nissan North
Americas, the just-in-time production strategy is an important link in the supply chain
management. However, the just-in-time part of the supply chain management only
applies to “the last mile” of whole supply chain pipeline. In fact, automakers need to
have all the parts stored in these huge near-by warehouses within one mile of the auto
assembly plant so that trucks can deliver parts from the warehouse to the plant. As
mentioned, in order to cut prices and save money for parts, automakers apply the
economics of scales by ordering and shipping large quantities of produces from
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suppliers and store parts in huge warehouses (Hopkins, 2010). The huge amount of
inventory may reduce the costs for products, but cost more for storage and reduce
flexibility. These facts may illustrate the dangerous myth about outsourcing and
just-in-time production related to the auto industry supply chain management (Xia and
Tang, 2008). The loss of time, flexibility, and market is directly related to the loss of
money. The wastes are much larger than the savings in purchasing cost (Stanko et al.,
2009). In some special occasions, products had to be delivered from Asia, for example,
using Boeing 747 cargo airplanes rather than boats to save time, which costs large
amounts of money.
4.2 Lose control of quality and increase quality cost
Outsourcing also places challenges in quality control, supplier communication, and
technology development that are essential to the core competence of automakers. A
certain series of Honda Civic 2007 (considered as having good quality) have already
gone through three manufacturer recalls; the labor cost per car for each recall was
about $100. The warrantee cost and recall cost are just something that automakers
should try to avoid in the tough market today. Quality management theories have
taught us that we would rather spend in prevention cost (choosing high quality
suppliers, training them well, and supporting their quality control programs) than in
failure cost after the damage is already done.
4.3 Lack of supplier support in R&D
Furthermore, research and development (R&D) requires close cooperation with
suppliers. One major concern is suppliers’ capability in product development. If there
are specific design changes of products due to changes of demand and preference in the
market, then, the major suppliers’ product development functions play an important
and critical role here, according to Emil E. Hassan’s QCDDM criteria. Take the once
Fortune 500 company, Lucent Technology, as an example. Its weaker competitor,
Alcatel, acquired Lucent in 2006. The major reason for the bankruptcy was that Lucent
outsourced for a lower price and hoped to focus more on its core business–marketing
and research. Ironically, Lucent failed to support its R&D effort and marketing
strategy without comparable manufacturing capacity (Yue et al., 2009). Due to the lack
of close cooperation from its suppliers, Lucent also failed to deliver new products to the
market and to conduct core technology tests. With changing demands and independent
suppliers, Lucent was unable to adjust quickly according to the rapid market demand
changes, not to mention control and bid for the short delivery time (Hoyt, 2001). This
tragedy in the telecommunication device industry is a valuable lesson for executives in
the auto industry, especially in today’s volatile market.
4.4 Loss of jobs and employment in the USA and distortion of corporate image
By purchasing from and outsourcing to low-cost countries, automakers continue to
shrink their operation size in North America. The loss of jobs is an unavoidable
consequence. Furthermore, automakers continue to cut loose their business
relationships with their local suppliers and partners. This can put many suppliers
out of business, hurting the entire local economy. Because of frustration, anger, and
lack of patience, people start to voice against the continuous bailout of the industry.
The corporations’ images have been severely distorted.
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In conclusion, the bullwhip effect in a long pipeline causes vast amount of waste in
inventory and purchasing, as the automakers adjust to rapid change of the market
demand. At the time of economic downturn and unstable gas prices, choosing the
low-cost purchasing/outsourcing strategy to resolve the financial problems is no
different from drinking snake venom when thirsty: It may help you in the short run,
but will kill you in the long run. It will hurt the industry in transforming technology
into products, as the cooperation and support through the supply channel suffer. Even
worse, the strategy will consequently cause more job losses in North America. In a
situation like this, it holds no moral stand if the auto industry continues to cut the labor
force and to hurt the people in the communities, especially right after billions of dollars
in bankruptcy bailout paid by American people and the national-wide “Cash for
Clunkers” programs (see Table I).
5. Our suggested remedy and the expected results
The current low-cost purchasing/outsourcing strategy comes from the voice to focus
on “here and now” and on survival. However, as our aforementioned analyses pointed
out, it may cause more harm than good and does not solve our problems. The main
reason for taking the risks in outsourcing is that executives want to be more
competitive in pricing and hope to gain a bigger market share than before. However,
price is not, and has never been, the sole decision criterion in auto market share; not to
mention the very risky outsourcing strategy costs the supply chain more than the
savings in tag price. In the total quality management literature, research suggests that
customers focus more on performance, features, reliability, conformance, durability,
serviceability, and aesthetics in choosing high quality products (e.g. automobiles) than
on price alone (Garvin, 1987). The recent Toyota automobile’s braking system problem
and the massive recall event have dramatically hurt the auto giant, not only in market
share but also in lawsuit cost and damage of reputation. In January 2010 alone,
Toyota’s US market share fell from 17.9 percent to 14.1 percent, while Ford grabbed
16.7 percent of the market, up from 14.2 percent the previous year (Welch et al., 2010).
No one could have predicted that Toyota – famous in making reliable automobiles –
would flame out over quality. However, the company had expanded too soon and
focuses too much on lowing cost in its mass production system and supply chain
Challenges of the auto industry Results of current “low-cost purchasing” strategy
Volatile economy Significant bullwhip effect caused by long supply pipeline.
Supply chains cannot adjust to market changes rapidly. Big
wastes in inventory and purchasing. Higher total cost.
Aggravated financial difficulty
Uncertain gas prices
Green energy Generic product due to mass production of parts. Less connection
and cooperation from suppliers in technology improvement.
Increasing difficulty in industrialize innovations. Loss of
opportunity to thrive in the future
Ethical responsibility Layoffs and job losses in North America. Loss of domestic public
support. Additional moral burden and distortion of corporate
image
Table I.
Challenges of the auto
industry and the current
strategy’s problems
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management in recent years. Toyota may be able to recover some of its sheen, but the
consumer will never again look at the world’s largest automaker the same way.
Among the Big Three domestic automakers, Ford is currently doing well and is the
best, staying out of bankruptcy court and bailout money. Consumers have shown a
willingness to pay up for Ford vehicles, for its new models, including refreshed versions
of the Fusion, Taurus, new F-150 pickup, and Lincoln MKS sedan. Many of these
vehicles are winning kudos for style and fuel economy and rank right up there in the
quality stakes with Toyota and Honda (BusinessWeek, 2009). Ford sets an example for
success that other automakers can follow. The whole idea is to focus on style, quality,
fuel efficiency, and new technology, in other words, strengthening and focusing on R&D.
6. The case-control-combine strategy
In this section, we propose a triple-C (cease-control-combine) strategy and explain why
this remedy is better than the low-cost purchasing/outsourcing strategy and how it
resolves the issues (Figure 1). We believe that the survival of the North American auto
industry lies in the supply chain strategy in dealing with the unstable demand and that
the future of the auto industry lies in R&D. Both require coordination and cooperation
of all the major players in supply chain management. Our strategy includes three parts:
(1) combine;
(2) cease; and
(3) control.
First, cease low-cost purchasing/outsourcing, shorten supply chain, and reduce
production on the traditional and old models that do not sell well. Work with suppliers
that are: flexible to market changes; controllable in product quality; and reliable local
players in order to reduce long and geographically diverse supply chain (cf. Hopkins,
2010). Second, control the supply channel by building up core supplier group, assure
members of this group for their business, share research costs, work closely,
collaboratively supporting major R&D, and prepare them for technology innovation.
Third, combine research power. Instead of having independent research teams,
automakers should work together, share the cost, enjoy the benefit, and most
importantly speed up the technology innovation. Although cease, control, and combine
seem to be in the right order, it is also possible that all these three components may be
started simultaneously in the process.
In summary, in today’s challenging economy, we believe that the auto industry
should stop low-cost outsourcing, extending the production pipeline, and trying to
solve the problem from outside (cease outsourcing). On the contrary, the automakers
should stay close to each other, stay close with their core suppliers (control the supply
chain), identify their own potential, and rely on collaboration instead of competition in
order to survive and enhance future development (combine research power).
7. Why the triple-C strategy works
There is a strong voice to get rid of R&D right now. R&D needs a large investment up
front and does not provide a quick return of this investment. In addition, this huge
amount of capital is also at risk, especially when no clear direction for R&D is identified.
Recent lessons suggest that switching between fuel-cell and plug-in electric car had cost
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GM a fortune and ruined its chance to lead in the industry so far (Taylor, 2008).
According to Emil E. Hassan, Nissan hybrid uses Toyota’s engine to save research cost.
Therefore, the focus for “here and now” should be on R&D. New sources of energy have
to replace the traditional fossil fuel that will not last forever. Whether it is ethanol,
electric, solar energy, or something else, the auto industry must find a way out, the earlier
the better. Hybrid, due to the two power sources it uses, can only be a transition.
The truth is that whoever leads the way in technology innovation and whoever
follows quickly in efficiently mass production of these new vehicles will be the
survivors and winners in the industry. With no clear direction, executives do not have
the luxury to waste their time anymore (Taylor, 2008). Getting rid of R&D right now
may kill the future of the auto industry.
Research suggests that supply chain management has mostly been focused on cost
reduction, and that is one of the most critical mistakes a company can make (Hopkins,
2010). Regarding value chain design, major players in a mature industry engage in the
win-win strategy or integral architecture; whereas those in an immature industry
compete in the race following the zero-sum, or modular architecture mentality. The
critical point is that winners in the immature industry often cannot transit to winners
in the mature stages. The implications are clear: Winners in a 100-meter dash will not
last long and will not become winners of a marathon (42.195 kilometres or 26 miles and
385 yards). Most organizations would like to be successful for a long time and have a
long life cycle in the society, i.e. a marathon, and not for just a few short years. The auto
industry straddles both mature (auto production) and immature (green energy)
industries and as a result, requires a new, innovative, and creative design for the
supply chain management. It calls for a major collaboration between the auto industry
and the energy industry in order to succeed. One will not survive without the other.
7.1 Save big in R&D investment
We suggest that automakers must collaborate and combine R&D power to save cash,
speed up the introduction of new technology, seize strong control, and develop
partnership with their suppliers to survive the uncertain time. We must speed up R&D
to save the auto industry, as the new technology is the key to save the industry (Conley
and McLaren, 2009).
According to Emil E. Hassan, Nissan and Renault have formed an alliance, mainly
in sharing research costs. They alone have employed a research team of 8,000
engineers and scientists. When different groups of R&D people work together, they
become more productive than working alone. Therefore, cooperation creates synergy,
accelerate the innovation process, save cash, and reduce shared risks. There is no need
to get everyone involved in re-inventing the “green energy” wheel (in the early stage of
an immature and new industry) at the same time. The whole auto and energy
industries can learn from their experiences. If the Big Two can ask for bail out together,
why cannot they combine their strong research resources to save big money and work
out the puzzle of the auto industry quickly?
Innovation suffers during downsizing because work environment stimulants to
creativity decrease and work environment obstacles increase (Amabile and Conti, 1999).
As mentioned, most executives only think negatively, worrying about the “dangerous
threat” during economic downtime and want to cut R&D to save money. On the other
side of the same coin, “opportunities” do exist in a crisis. It is the buyers’ market to
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snatch talent, expand their R&D at a bargain price, and calmly navigate through the
stormy sea (Mishra et al., 2009; Sull, 2009; Tang, 2010). Therefore, executives need to
reverse their thinking and do exactly the opposite. That is, they must invest in
employees (Laws and Tang, 1999; Mishra et al., 2009; Sull, 2009; Tang et al., 2000) and
boost morale and creativity during economic down time. The future is “now”.
7.2 Build agile supply chain and save inventory cost
With the current economy, financial difficulties in auto loans, and higher customer
requirements, we have seen monthly drop of sales in the range of 20 percent to 37
percent. In the near future, the demand is expected to be continuously unstable. Due to
the instability of market, the auto supply chain must stay very agile and react quickly.
As Lee (2004) concluded, the best supply chains are not just fast and cost-effective.
They are also agile and adaptable. They ensure that all their companies’ interests stay
aligned. To achieve this goal, the automakers need to seize strong control over their
suppliers (Yue et al., 2010). Automobile assembly needs hundreds or even thousands of
parts, depending on how we define parts. Automakers cannot afford to spending time
shopping around with many suppliers for cost saving. Instead, they should build up a
core supplier group to lower management cost and achieve suppliers’ loyalty,
cooperation, and support. They need to assure members of this group their business
and build long-term partnership. By doing that, they can cooperate with the suppliers
well in response to the changing market, keep quality level high, and gather efforts and
supports in technology innovation and development.
7.3 Gather strong support from suppliers and speed up new technology development
In supply chain management, frontloading collaborative research with part suppliers
has been proven to be a very efficient way to share the research burden with the supply
chain and help the suppliers develop and prepare for possible technology changes
(Wagner and Hoegl, 2006; Peterson et al., 2003). Trust and co-operative learning have
emerged as critical factors that affect the success of strategic alliances (Mellat-Parast
and Digman, 2007). Only by working closely with suppliers, viewing them as partners
instead of contractors, automakers can integrate the suppliers earlier into the R&D
process; build a framework that will support them in leading the industry innovations
and/or spontaneously responding to the technological advances. Cost savings realized
using our cease-control-combine remedy may, in fact, support further R&D activities
and innovations and ultimately secure the future (Batson, 2008; Binder et al., 2008).
7.4 Gather continuous public support and restore corporate image
Most importantly, the survival or development of auto supply chain relies on the
support of the society. After the bailout money and national policy to support the
industry, the industry holds the responsibility to pay back to the US society. Our
proposed triple-C cease-control-combine strategy will enhance the technology research
in gas efficiency and speed up the development of green energy resources in
transportation system. It contributes not only to the automakers, but also to the
sustainable development of the society. By ceasing outsourcing and building a core
supplier group domestically, the strategy will also keep many jobs in North America,
create many high-tech employment opportunities, and boost automaker’s corporate
social image. Table II lists our tentative and plausible solutions.
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8. The future of auto industry supply chain management
As we discussed above, the future of auto industry supply chain management lies in
four elements:
(1) sustainable development;
(2) less dependence on gas;
(3) green energy reform; and
(4) high moral standard.
The successful development of the 100 percent electric Nissan Leaf shows how a
Combine-Cease-Control supply chain management strategy supports the above
elements. The Nissan Leaf is the first 100 percent electric, no gas, no tailpipe vehicle. It
uses technology called an inverter, which works similar to a fuel pump and pumps
electricity stored in a battery to power the vehicle. The vehicle runs 60 miles for every
recharge. The manufacturer suggested retail price (MSRP) for the Leaf SV and the Leaf
SL start at $32,780 and $33,720, respectively, which is more than 65 percent higher
than the traditional Nissan Altima Sedan (MSRP ¼$19,900). Nissan started the drive
electric tour on October 1, 2010, and by October 15, 20,000 people have already
reserved a Nissan Leaf. This high number of reservations has exceeded everyone’s
expectations (Nissan, 2010).
The Nissan Leaf is the result of the Renault-Nissan Alliance that dates back to 2002
(Yshino and Fagan, 2003). The two companies combined their research resources,
which facilitated the development of the high technology in the Leaf. The alliance
lowered their purchasing costs by joint purchasing, ceased some long logistic pipelines
by combining their supply networks and closely coordinating with their suppliers.
Furthermore, the Renault-Nissan Alliance ceased their research, development and
production of hybrid engines. Instead, they installed Toyota engines in Nissan’s
Hybrid vehicles. With the saved resources and the leaner supply system,
Renault-Nissan was able to hold strong control of their supply chain, maintain high
quality production and gather sturdy support in developing and producing the
innovative Leaf.
The Leaf electric car shows a module of sustainable development in auto supply
chain management. Furthermore, its success clearly exhibits customers’ demand for
Challenges of the auto industry Results of the triple-C strategy
Economic downturn Shorten supply pipeline, build an agile supply channel. Lower
cost in supplier management. Supply chains can react to market
changes rapidly. Less wastes in inventory
Gas price uncertainty Green energy will make the industry independent to uncertainty
of gas prices
Market demand for green energy Combine research power. Enhance green energy research,
increase gas efficiency, and protect mother nature. Gather
support from suppliers in technology improvement
Responsibility to the society Keep jobs in North America. Gather domestic support. Boost
corporate social image
Table II.
Challenges of the auto
industry and why triple-C
remedy can resolve the
issues
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less dependence on gas and green energy. The introduction of the first 100 percent
electric car also boosts the company’s image and demonstrates a high moral standard,
as stated in Nissan’s motto, “Nissan, shift the way you move.”
9. Conclusion
In this article, we investigate the supply chain management strategy of North
American auto industry, identify some of the biggest challenges of the industry,
analyze the issues of the current strategy, and propose a new, cease-control-combine
remedy. The proposed triple-C strategy will save the auto industry big money in R&D
investment, reduce quality cost and inventory waste, help the industry go through the
volatile economy, and achieve sustainable development. Furthermore, with a close
relationship and strong support from the suppliers, the industry can speedup
technology development, introduce new gas efficiency models quicker and become less
dependent on gas price than before. R&D’s innovations in green energy will be
incorporated into transportation system to meet market demand. The industry will
continue to lead in green energy reform. Finally, the triple-C strategy will help the
industry keep jobs and generate new jobs in the USA. These activities lead to public
support and restored corporate image. Executives’ ethical responsibility to the
industry and the society signals a higher moral standard than before.
In conclusion, the new triple-C cease-control-combine strategy is sustainable,
strategic, and ethical. The auto industry must satisfy all stakeholders in the society:
customers, local community, suppliers, employees, different interest groups, trade
associations, local and federal government, universities, creditors, investors, natural
resources, and environment. It is important to take a proactive stance and act quickly
before it is too late. In order to achieve sustainable innovation in the auto industry, we
must think long-term and identify the “WIN” strategy in this game[1]. We believe that
although the North American auto industry is in a very cold winter time, when the
spring comes, trees will bud and flowers will bloom. The industry still has a very
bright future ahead as long as we make the correct choice right now.
Note
1. WIN is an acronym for “What’s important now?” (Holtz, 2006).
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About the authors
Yu Xia (PhD) is an Assistant Professor of Management and has published her research in top
academic journals such as Management Science,Production Operations Management,European
Journal of Operational Research, and OMEGA. Her main research interests lie in supply chain
management and the related market competition and segmentation.
Thomas Li-Ping Tang (PhD) is a Professor of Management and has published more than 130
articles (in five languages) in top journals such as Journal of Applied Psychology,Personnel
Psychology,Journal of Management,Human Relations,Journal of Organizational Behavior, and
Journal of Business Ethics. He has offered seminars/EMBA classes in China (Fuzhou, Hong Kong,
Lianyungang, Nanchang, Shanghai, and Qingdao), France (Nantes), and Spain (Valencia).
Thomas Li-Ping Tang is the corresponding author and can be contacted at: ttang@mtsu.edu
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