Insight into Volvo’s Production Model
What were the main design principles affecting process design at Volvo’s Uddevalla plant?
In the 1970s, Volvo embarked on redesigning its production process in order to improve its competitiveness. This led to the establishment of Volvo’s Uddevalla manufacturing plant where workers played a key role in the production of cars. Volvo revolutionized the process of manufacturing cars by introducing the holistic or the reflective production model at its Uddevalla plant (Holweg & Pil 2009, pp. 353-365).
The model upheld the principles of craftsmanship by relying on workers who utilized their expertise to produce high quality cars. In order to implement the new system, production processes were redesigned based on the following principles.
To begin with, the company adopted a craft production system in which employees worked in teams to produce an entire car. Thus, the Uddevalla production plant did not have an assembly line where various parts could be assembled sequentially to produce a complete car (Holweg & Pil 2009, pp. 353-365).
Unlike the assembly system where cars are moved from one station to another during production, the Uddevalla plant had docking stations where cars were built without being moved.
Skill development and professionalism was an integral aspect of the holistic production model. The Uddevalla plant had low levels of automation since it focused on craftsmanship (Holweg & Pil 2009, pp. 353-365). As a result, human involvement in the production process was high.
The employees had to acquire excellent skills and to demonstrate high standards of professionalism in order to produce high quality cars. In this regard, extensive on-the-job training programs were used to improve the employees’ skills and their understanding of the holistic approach to car production.
Natural assembly work was vital for the success of the holistic approach to production (Holweg & Pil 2009, pp. 353-365). The company established groups of employees who performed various production tasks. The teams were supported by a special parts delivery and order system that ensured timely delivery of supplies.
The company also ensured that the production tasks were ergonomically sound to minimize discomfort and fatigue among workers (Holweg & Pil 2009, pp. 353-365). The production levels were variable to enable the workers to respond effectively to variations in demand. Additionally, the production process was characterized with long cycle times to enable each team to complete its work.
In order to improve productivity, the company allowed each team to be autonomous (Holweg & Pil 2009, pp. 353-365). Each team worked independently by managing its production tasks. Promoting autonomy in each team had the following advantages. First, it promoted individual innovation in each team.
The, employees were likely to focus on product and process innovation if they were allowed to work independently and to make their own production decisions. Second, autonomy promoted individual motivation (Holweg & Pil 2009, pp. 353-365).
Workers were likely to be motivated if they were allowed to employ their creativity and independence to complete the tasks assigned to them. Finally, it facilitated adaptability and created opportunities to leverage unique abilities.
Despite their potential to improve product quality, the principles used at Uddevalla plant did not promote knowledge transfer within the company.
Lack of knowledge transfer was undesirable because it limited organizational learning, which in turn reduced the possibility of creating competitive advantages (Henderson & Clark 1990, pp. 9-30). Additionally, the holistic approach did not improve efficiency because it was labor-intensive and lacked economies of scale.
What is the relationship between process design at Volvo’s Uddevalla plant and the emergence of customer-oriented and built-to-order approaches to car manufacturing?
Apart from adopting a new production model at Uddevalla, Volvo focused on improving its distribution system. This involved introducing the customer-oriented production (COP) system in 1992. The main objective of the COP system was to bolster Volvo’s responsiveness to customer needs (Holweg & Pil 2009, pp. 353-365).
The introduction of the holistic approach to car production led to long cycle time, thereby limiting Volvo’s ability to fulfill customers’ orders in time. For instance, the Uddevalla plant required fifty hours to produce a car, whereas the Ghent plant required only twenty-five hours to produce a car (Holweg & Pil 2009, pp. 353-365). In this regard, it was important to improve the distribution system in order to prevent further delays.
Therefore, Volvo introduced the build-to-order (BTO) system to address its distribution challenges. Under the BTO system, Volvo produced cars according to the level of confirmed orders (Holweg & Pil 2009, pp. 353-365). Moreover, it enabled the company to focus on the production of customized cars that met specific customer needs.
A company that intends to implement a BTO system must be able to ensure flexibility in all aspects of its value chain. Specifically, there must be flexibility in production processes, product offering, and production volume. At Volvo, the emergence of the BTO system can be attributed to various process design factors at the Uddevalla plant.
To begin with, the holistic model facilitated variation of production levels (Holweg & Pil 2009, pp. 353-365). Consequently, it was possible to increase output in response to rising demand and vice-versa. In this context, flexibility in production facilitated the implementation of the BTO system by enabling the company to align its production schedules to changes in demand.
The introduction of specialized parts delivery and improved order processing systems made it possible to match production to confirmed orders (Holweg & Pil 2009, pp. 353-365).
Specifically, specialized parts delivery systems ensured that the production plants had adequate car parts to produce the vehicles ordered by customers. The improved order processing system, on the other hand, enhanced the efficiency of the supply chain by improving the order booking process and delivery of confirmed orders.
The Uddevalla plant was characterized with small-scale production because of low automation and the use of teams of workers that required long cycle time to complete their work (Holweg & Pil 2009, pp. 353-365). Operating the Uddevalla plant was likely to be uneconomical due to its lack of economies of scale.
In this regard, the company had to improve the competitiveness of the plant through cost reduction measures such as reducing inventory, reducing cycle times in fulfilling orders and eliminating discounts. Since the BTO system facilitates achievement of the aforementioned requirements, it was adopted to enable the company to operate profitably.
The focus on craftsmanship improved workers’ skills and professionalism (Holweg & Pil 2009, pp. 353-365). As a result, they were able to ensure flexibility in product offering by customizing the cars according to customers’ needs.
In order to leverage this capability, the company had to implement a production and order processing system that could enable it to meet customers’ needs in terms of product specification and quantities. This led to the emergence of the customer-oriented production model that focused on satisfaction of market needs.
What are the differences between the volume/ variety strategies pursued by Volvo and Ford?
The main difference between the volume strategies adopted by the two companies is that Volvo focused on lean production and distribution, whereas Ford focused on mass production of cars (Holweg & Pil 2009, pp. 353-365). Volvo had positioned itself as a luxury car producer in Europe. Moreover, Volvo lacked adequate capital to expand its output and to introduce new car models.
Thus, it focused on producing small quantities of high quality cars in order to keep its brand promise. Given the decline in demand in the 1990s, Volvo was likely to make losses by embarking on mass production of luxury cars.
Thus, the company adopted the BTO system to avoid the costs associated with holding excess stock of cars (Holweg & Pil 2009, pp. 353-365). Generally, Volvo’s volume strategy was to produce cars that just satisfied the existing demand in Europe. However, it served its export markets from stock rather than the BTO system.
Ford’s volume strategy, on the other hand, focused on mass production of standardized cars. The aim of this strategy was to achieve economies of scale in production (Holweg & Pil 2009, pp. 353-365). The resulting reduction in the overall costs of production was expected to improve the competitiveness of Ford’s cars. In this regard, Ford expected to achieve high sales, thereby improving its profits.
The variety strategies pursued by Ford and Volvo were also different. Before the takeover by Ford, Volvo focused on producing only a limited range of luxury cars. These included medium to luxury sedans and estate cars. By contrast, Ford hard a wide range of models, which included luxury cars, SUV, and medium sized cars (Holweg & Pil 2009, pp. 353-365).
After the takeover, the competitiveness of Ford and Volvo decreased because of the differences in the volume/ variety strategies that they pursed. Ford’s focus on mass production limited Volvo’s ability to continue pursuing the BTO distribution system.
The resulting increase in the stock of cars forced Volvo to provide discounts to eliminate the excess stock, thereby reducing its profit margins. Similarly, Ford was not able to improve its earnings by increasing Volvo’s output.
Which operation strategies should Geely pursue to volarise Volvo’s production technology and brand?
Geely should pursue the following strategies in order to leverage Volvo’s technology and brand. First, the company should ensure that its governance and business model is strategically aligned to that of Volvo (Russo, Ke & Tse 2010, pp. 1-8).
This can be achieved by integrating the core business functions of the two companies so that they can achieve synergies by sharing product platforms, development costs, and production technologies. Integrating core business functions will also facilitate technological transfer from Volvo to Geely.
In this regard, the core business functions that should be integrated include finance, production and distribution, as well as, research and development. Second, Geely should address the differences between its organizational culture and that of Volvo. In particular, the company must clearly define the objectives that it intends to achieve by acquiring Volvo.
Furthermore, Geely must address the elements of organizational culture such as language barrier that may cause resistance to change after the acquisition (Russo, Ke & Tse 2010, pp. 1-8).
This can be achieved through diversity programs that focus on integrating the employees from the two companies. Generally, reducing cultural conflicts will help the two companies to pursue compatible strategies that will enable them to achieve their objectives effectively.
Third, Geely should develop a comprehensive staff retention strategy to avoid losing the top management of Volvo (Russo, Ke & Tse 2010, pp. 1-8). The rationale of retaining Volvo’s top leadership is to avoid reduction of staff morale that is likely to arise as top managers leave the company. Volvo’s employees are likely to continue working for it after the acquisition by Geely if they have high morale.
Thus, Geely will avoid the risks of losing the talented employees who promote innovation and technological advancements at Volvo. Retaining Volvo’s employees is also central to the achievement of Geely’s objective of learning from Volvo. Specifically, it will facilitate technological transfer by enabling Geely’s employees to learn from their counterparts who work for Volvo (Maielli 2007, pp. 275-294).
Technological transfer is important to Geely since it will enable it to maintain the brand image of Volvo and to improve the quality of its own brands. This will bolster the ability of the cars produced by the two companies to penetrate the global market.
Undoubtedly, retaining Volvo’s employees will eliminate the staff acquisition costs that Geely is likely to incur in order to replace those who will leave the company. The funds saved through staff retention can be used for skill development in the two companies.
Fourth, Geely should reposition Volvo’s cars to serve the mass market. Currently, Volvo serves the high-end segment of the market that consists of customers who are interested in luxury cars. However, Geely lacks experience in this market since it focuses on serving the mass market.
Consequently, it might not be able to leverage Volvo’s brand if the company’s top leadership leave after the acquisition. This challenge is exacerbated by the fact that the Chinese luxury car market is already dominated by established brands such as Audi and BMW (Russo, Ke & Tse 2010, pp. 1-8).
Although repositioning Volvo is likely to boost sales, it is also likely to create new challenges. For instance, Volvo might lose its global market share if its important attributes such as safety are lost after the acquisition. Besides, brand conflicts are likely to arise as Geely tries to reposition Volvo’s brands. These challenges can be addressed by clearly defining Volvo’s brand attributes that will be retained after the acquisition.
Finally, Geely should implement cost reduction measures to improve the competitiveness of Volvo’s cars (Russo, Ke & Tse 2010, pp. 1-8). Geely should restructure Volvo’s business model by improving its economies of scale. This will involve shifting Volvo’s supply base from Europe to China where it is building a new production plant. The resulting decrease in the cost of procuring supplies will reduce the cost of production.
Moreover, the efficiency of Volvo’s distribution system should be improved to prevent accumulation of excess stock. Reducing production costs will enable Geely to sell Volvo’s cars at competitive prices in order to penetrate the market in China and other parts of the world.
References
Henderson, R & Clark, K 1990, Architectural innovation: The recognition of existing product technologies and the failure of established firms, Administrative Science Quarterly, vol. 35 no. 9, pp. 9-30.
Holweg, M & Pil, F 2009, ‘A break from the past: Volvo and its malcontents’, in M Freyssenet (eds), The second automobile revolution: Trajectories of the world carmakers in the 21st century, Palgrave Macmillan, New York, pp. 353-365.
Maielli, G 2007, Counterfactuals, superfactuals and the problematic relationship between business management and the past, Management and Organizational History, vol. 2 no. 4, pp. 275-294.
Russo, B, Ke, T & Tse, E 2010, An inorganic approach to globalization: The marriage of Geely and Volvo. Web.