The AUDI Automotive Supply Chain Report

Executive Summary

The automotive industry has seen tremendous growth over so many years. It is still growing up to date. This growth though has come about with challenges facing the senior management at the Audi Company that the industry needs to sort out for it to remain a profitable venture for investors. Some of these challenges are:

• Saturation of the industry is a problem is affecting the supply of vehicles to the market. It has stifled further growth of the industry by inhibiting the movement of goods in the market as well as the marketing of new products.
• Another challenge is the influx of independent dealers. Independent dealers have invaded the industry in masses thus complicating the feedback system that the manufacturers used to have, which they use in the forecasting of market demands.
• Product proliferation has been identified as a challenge to the distribution of automobiles due to the difficulty it has presented to the dealers in terms of differentiation of the models in the market. Different manufacturers have presented the market with cars that have almost the same features thus posing a challenge in the process of defining how one car is better that the other.

The paper therefore presents the above challenges in details in an attempt to provide possible solutions to them especially with regard to the Audi automaker.

Introduction

The automotive industry has come out as one of the most expansive and growing industries due to the need for people to move around using vehicles. Audi Company is one of such automotive industries. The ability to sustain the ever-increasing competition has boiled down to planning for the market and the ability to put together a proper logistic framework to cope with the needs of the industry.

Therefore, using Audi as a case company, the paper presents the key challenges that the senior management at this company faces. Besides, it presents the solutions to the challenges in a bid to boost its performance.

Key Challenges that senior management faces

Saturation of the automotive industry market

The biggest challenge that faces the industry can be attributed to the saturation of the market thus leading to a form of stagnation. Paul (2003) finds that the Audi automotive industry has seen a steady decline in growth of the market especially in the developed world, which forms the largest market accounting for 70% of all the cars made (p.9).

This saturation qualifies as a key challenge because it has been occasioned by several factors that put together have led to the slowdown in the purchase of new cars in the developed world, which is the biggest consumer of cars due to a high purchasing power of the market.

The car industry has seen a wide expansion for a long period in the production capabilities of the manufacturers who have led to mass production of cars mostly of the same model due to technological advancement as a way of tapping the benefits of economies of scale.

This has led to the Audi market being flooded with so many cars that at times do not attract the interest the manufacturers had thought that they would thus leading to a kind of stock pile of cars that would be sold under incentives that would eat into the profits of the manufacturers at the end of the day.

This has become a tremendous challenge to the management of a company like Audi due to the need to find ways of balancing between the market demand and the supply of cars as well as the ability to keep a strong presence in the market (Pil 2004, p.396). Most countries, which can be described as developed, are found in Europe and America, which are the biggest consumers of cars.

Due to the unfolding economic conditions, most possible buyers of new cars have resorted to keeping their old cars. This strategy has affected the turnover of new cars. The biggest challenge in this case has been how to tackle the forecasts that had been made by Audi through the different suppliers of cars. It has led to suppliers having in store stock that is not moving, which would have to be sold on the cheap end at the end of the day.

The dynamic nature of the car industry is that every other day a new model is brought into the market. People will tend to rush towards it as they move from the old models. Therefore, forecasts for new cars are made with the mind that the stock will be cleared within a specific time before another model can be brought.

As a result, when a model stays for long in the show room and in the store, it becomes difficult for suppliers to take in more stock.

This has a domino effect on all players in the market, as it will affect suppliers of car components as well and thus leading to a breakdown in relationship in that they would refuse in the future to supply to Audi and supply to their competitors. Therefore, because the Audi automotive supply chain is tied to demand, suppliers must match the supply with demand.

The influx of independent dealers

The Audi industry is currently facing so many challenges due to changes in the mode of operation that has hit the industry in the recent past. This qualifies as a crucial challenge since Audi used to offer exclusive rights initially to specific car dealers who would be the exclusive suppliers of a given brand of cars within a certain region. Thus, they would enjoy a comfortable sale of cars if the brand were popular.

These exclusive dealers would be the point men of the manufacturers on the ground. They would be used to collect and remit data on the sales, performance of cars, as well as the new and possible trends that should be expected. This case is different to the present-day emergence of independent dealers as well as virtual dealers (Rodgers 2004, p. 62).

The tricky bit about independent dealers is that, as much as they would be willing to supply a certain brand of a car, they cannot be tied to contractual obligations that would require them to trade only in the cars from the specific manufacturer. They tend to stock in vehicles that sell fast and or are appealing to the buyer. Therefore, they cannot be relied for giving feedback to the manufacturer on the performance of a specific model.

Independent dealers would also stock cars from rival manufacturers who would be a source of competition to cars from Audi. Audi uses the build-to-forecast system when coming up with predictions for the market demand.

This involves collecting of data from the different suppliers for production programming, which leads to order entry, which in turn leads to production scheduling, supplier scheduling, and inbound logistic, which will end up with vehicle production (Holweg 2002, p.845). All these happen through the feedback mechanism that enables manufacturers to obtain information about the market before they can produce the cars.

This bottom-up approach to manufacturing enables the manufacturer and the dealer on the ground to be in constant touch with each other thus saving the manufacturer the need to do a lot of research. The problem with independent dealerships is that they are so many nowadays that Audi cannot keep a tab on them for collecting data. It tends to stock impulsively depending on the emergence of new and attractive models.

Another mode of dealership that has disrupted the state of the Audi market is the emergence of auto ‘cybermediaries’. As such, car-pooling has come in as a challenge to Audi Company’s marketing of its new cars.

This pooling is done through rentals in that one does not need to buy a car for a certain occasion. Rather, he or she needs to rent one. Car-pooling affects the marketing of Audi’s new cars because future buyers tend to concentrate on them instead of buying their own.

Product Proliferation in terms of Car models

Product proliferation has turned out to be one of the biggest problems that Audi has to face in the current market. The reason behind this claim is that the Audi automobile industry is heterogeneous in nature and that so many brands of cars are in the market having features similar to one another.

The level of differentiation has become so thin that it is difficult to tell the difference in features of cars form the same manufacturer competing against each other and cars from different manufacturers competing in the market (Dragansk 2005, p. 8).

Though Audi has made a monumental difference in the differentiation of its products, it has become a challenge to it due to the need to be ahead of the market in terms of production of the latest models. The challenge posed by modern models of cars is that they do not last in the market for long before new models can be made.

This has made the movement of Audi’s stock become exceedingly difficult thus forcing the company to produce limited models of specific brands of cars, which therefore take away from them the advantages, which come with economies of scale (Miemezyk 2004, p. 175).

The performance of most cars that are coming today in the market especially the high-end cars that Audi sells for a premium can be defined simply as scientific in nature because the features that these cars have between them can only be recognised from a scientific point of view when it comes to performance.

The differentiation of these cars is about components, which are made specifically for a given model as a way of identifying the model. Different suppliers manufacture these components. Thus, it takes time to put them together and transport them to the manufacturer’s site.

Guimen (1999) indicates, “The cost of transporting different components for different cars increases the cost of the cars as well as the time the car can become complete” (p.243). Furthermore, different suppliers who are found in different locations make these components hence making a hefty challenge to the Audi carmakers because it escalates the prices of the cars that Audi has to supply to the market by making the costs prohibitive.

The delivery of the parts also takes time therefore adding to the delay in time the complete unit can be delivered to a customer from the time of the order to the time it is delivered. The proliferation of different models therefore affects the marketing of cars by Audi in such a way that the company has to find convincing language and terms that will convince the clients to buy the car.

Different dealers stock in different models. Therefore, the transportation of ready cars to the different suppliers is an added cost to Audi because the dispatch cannot be made in bulk to save costs of delivery thus increasing the cost of cars. Due to the economic conditions in the European and American markets, a rise in cost for any goods simply puts off potential clients.

The economic conditions have also affected the suppliers of components in such a way that they cannot deliver on time or have increased the minimum number of units of a component that they can sell for them to make a profit. This has affected Audi in such a way that the company will either have to pay much higher prices for the components or buy much more than it requires since this will be higher than the orders it has received.

Solutions to the challenges

Solution to tackling the Saturation of the market challenge

The problem of saturation of the market can be attributed to both the manufacturers and the economic conditions, which are beyond the control of the Audi industry. For a long time, just like many other manufacturers, Audi has used the build-to-forecast method as a way of determining the market demands for its vehicles.

The problem with this method is that it depends on data from dealers and suppliers who tend to overestimate the needs of the market in most cases thus over forecasting the same. This challenge can be resolved by the build-to-order system that will allow only the number of ordered cars to be manufactured thus saving lots of cost on transportation and storage of units that cannot move fast.

Suthikarnnarunai (2008) finds, “the build-to-order uses real orders from dealers as opposed to the build-to-forecast system that uses forecasts to manufacturers’ cars (p. 3). The build-to-order provides the best solution to oversupplying of vehicles to the market. It also guarantees market for the given model of vehicles, as they will be produced according to demand.

This balance between demand and supply can allow manufacturers like Audi to sell their high-end models without having to guess whether they will sell or not. The problem of saturation of the market can be resolved by finding ways of penetrating in foreign markets that have the potential of providing the consumption of the produced vehicles. 70% of Audi sale volume is in Germany.

This simply shows that the carmaker has not been aggressive in the marketing of the car in other European countries as well as America. Asia is also coming up as one of the biggest emerging markets for the world (Friselle 2004, p. 1016). The purchasing power of citizens of these countries has increased tremendously thus providing an exit route for the saturated market in Europe where Audi is concentrated.

Audi should also find a cheap way of manufacturing its vehicles as a way of making them more affordable to masses without losing their quality. The company can learn from Subaru, which produces high performance cars that are affordable to many people with parts that are not as expensive as those of Audi.

Solution to challenges posed by independent dealers

Independent dealers are a massive challenge to Audi. Though they have disrupted the way Audi used to do business with its dealers on the ground, they too provide an avenue of selling cars by the manufacturer. Audi should find ways of collecting data on the ground independent on the dealers. It should also find an integrated way that should be used to incorporate independent dealers.

Audi should come up with a system that would recruit dealers at whatever level in a bid to group them according to regional markets, which would then be used as a centre for collecting data from independent dealers. This system should be internet-based with dealers having id’s that would be used in the integrated system.

Audi can also find ways of keeping in touch with clients in areas where it does not have a vast presence. This would enable it to acquire data for use in its future manufacture of goods and services. Audi can adopt the automotive loyalty network system, which is a customer relationship management that uses technology to satisfy a car manufacturer’s supply network based on customers’ value and loyalty (Gregory 2006, p.430).

It allows the company to flawlessly serve its customers through its ability to manage inventory across the different types of customers that the company has sold to, whether long term or short term. It gives the manufacturer the capacity to plan in a way that will be responsive to the customers’ priorities.

Frazier (1999) commends, “this stands out as a good way to integrate all kinds of dealers who at any level have sold an Audi car instead of depending solely from the franchised dealers” (p. 233). It is a way of collecting data from the market using all fronts, which give Audi more information than what it used to have.

The collection of data from the field is critical to the Audi automotive industry due to the industry’s dependence on forecasting in the production of motor vehicles. Without the right form of collecting data, the manufacturer will be operating from a jeopardised position.

Therefore, the use of the automotive digital loyalty network will enable the Audi manufacturer to integrate all dealers. With this, too they can integrate suppliers in a bid to make it a seamless process that will deliver products satisfactorily when orders are made.

Solution to the challenges of product proliferation

The problem of product proliferation has been experienced by the Audi carmaker in a way that new models of cars having the same features though from different manufacturers today flood the market. Many car manufacturers have tended to run out of ideas on new models.

Thus, when a new car appears on the market, and is seen to be exclusive, it takes a remarkably short time for competitors to come up with models to match it (Poirier 1999, p. 19). Therefore, a solution to this for Audi can be to come up with limited editions of high-end cars that should be able to sell exceptionally fast before they become common.

It should venture much more into the custom-made industry as a way of making the difference in the product it has put in the market especially in the high-end cars that it produces. Audi’s market is predominantly Europe specifically the German market. Therefore, to reduce the chances of product proliferation, it can venture into new European markets that never existed before it previously.

The Asian market can as well provide an exit point for this problem based on the market’s increase in demand for European luxury goods. Due to the high level of product proliferation and the need for Audi to stand out in the market, Audi therefore needs to plan ahead of the market with many innovations in its stock that will always put it ahead of the market.

Audi so far has so many models within its base that are highly competitive within themselves. This raises interdepartmental competition among the different arms that make different cars for different markets. This also requires the carmaker to invest in equipment that will serve the different needs of the different departments.

Berry (1995) finds, “this challenge is expensive, and a solution to it is simply to reduce the in-house competition by reducing the internal variety” (p. 246). This can be achieved by having few standards for bodies in the form of body in white, which can then be made different by putting in external features that would differentiate it. This will reduce the cost of equipment needed as well as the number of suppliers needed to make different cars.

Conclusion

The problems facing Audi in the automotive industry can be viewed as common problems for many automotive manufacturers due to the same mode of operation they have employed over a remarkably long period. The increase in costs of production and the need to come up with affordable cars have become two competing factors that finally affect the marketing of the cars as well as their sales (Christopher 1998, p. 23).

This therefore calls for efficiency in the production of cars. One area that has to be streamlined is the logistics channel because they contribute up to 30% of the cost of making a car, which is extremely high. If well managed, logistics and marketing can cut the cost of producing a car to make it easily affordable.

References

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