Twists and turns: how automotive companies can travel the complexity highway.

If one could only select a single adjective to describe the automotive industry, the most apt descriptor would likely be: complex. Here in automotive, market segments are large and diverse--from passenger and light vehicles to heavy trucks and equipment. Industry value nets are comprised of an intricate web of suppliers, automakers and retail dealerships. Not to mention that automotive is a global game--with design, manufacturing and distribution occurring on virtually every continent.

And doing business in automotive has only become more complicated over time. Intense competition for market share generated a frenzy of mergers and acquisitions that frequently left larger companies with complex--if not unwieldy--organizations and infrastructures. Outdated forecasting practices coupled with inflexible manufacturing facilities and fast-changing business dynamics have resulted in substantial overcapacity and complicated inventory management practices that have sliced margins. To top things off, the innovation race has multiplied the technological complexity of vehicles and the processes used to produce and service them, thereby increasing time-to-market, lifecycle costs and the potential for quality problems. This can lead to safety issues and contribute to rising governmental regulation, which adds yet more time, cost and (no surprise here) complexity

It's hard to imagine that the auto business can get any more complex--but it will.

Complexity takes a toll

New vehicle development takes 32 months on average(1)

Excess global production capacity currently estimated at more than 20 million units(2)

Warranty costs now average more than $700 per vehicle in the U.S. alone(3)

Record number of mergers and acquisitions between 1998 and 2002(4)

To keep business opportunities from getting mired in all of this complexity, auto companies need a different approach--one that allows them to cost-effectively produce the innovation demanded by customers, team with partners to drive down development time and costs and enter new markets when and where appropriate.

Counteracting increased complexity requires business processes that are fully integrated--end-to-end across the company and with key partners, suppliers and customers--so that auto companies can respond with flexibility and speed to any customer demand, market opportunity or external threat.

This is business on demand

Doing business on demand: What it looks like

On demand automotive companies operate differently than others--they are much more responsive, resilient, variable and focused.

A responsive automotive company:

* Identifies and acts on changes in the market environment quickly

* Collaborates throughout the value net to build and maintain an all-encompassing customer profile

* Introduces new products and services to the market faster and with greater success

* Builds vehicles that customers are passionate about, with no need to add incentives

* Shares information freely among OEMs, suppliers and dealers

* Empowers the frontline to make fast, well-informed, customer-focused decisions.

On demand in action

At a meeting with the sales and marketing team for a newly launched model, several metropolitan dealers share stories of sales lost to a competitor's newly released model. Thanks to specific feedback from customers, they are able to suggest specific model changes that will make the OEM's vehicle competitive--and perhaps even superior. The manufacturer recognizes that changes must be made immediately. By integrating new features and options into its vehicle to compete with its rival within the current model year, the manufacturer recaptures lost sales and revenue for both itself and the dealer community.

A resilient automotive company:

* Possesses realtime knowledge of exposure to operational, market and governmental risks

* Maintains service levels and operational continuity even in times of turmoil

* Decreases the number of points of vulnerability or potential failure

* Shares risk with strategic partners

* Builds robust, "self-healing" capabilities (both process and technology).

On demand in action

An auto supplier monitors warranty and failure analysis data using electronic chips installed in its wiper motors and finds that a new model's motor is prone to failure under heavy downpour conditions. The supplier alerts the manufacturer, and together they identify and implement a solution before the condition can become widespread. The manufacturer is able to pinpoint the specific vehicles produced with the faulty motor and contacts those owners directly so they can replace the motor Quick action prevents a recall and significant warranty costs.

Can you envision building any vehicle anywhere at any time?

A variable automotive company:

* Builds capacity to handle an average load

* Supplements internal capabilities with out-tasking to support peak capacity

* Has the ability to produce virtually any vehicle in any plant anywhere, at any time

* Outsources non-core capabilities in total

* Shifts cost structure from predominantly fixed to predominantly variable

* Scales capacity/inventory smoothly, in line with actual demand.

On demand in action

An automotive manufacturer identifies a significant increase in demand for a particular model in an emerging market. Since the manufacturer has standardized on a few main body styles, using flexible planning and manufacturing processes, the manufacturer is able to rapidly shift production for the popular vehicle to the country where it is most in demand. With minimal effort, the manufacturer adjusts the assembly line and produces the product in the local market, reducing costs and increasing revenue and profit.

A focused automotive company:

* Focuses on core competencies and supplements with best-in-class partners

* Concentrates investment in areas that differentiate it from its competition

* Establishes a clear market profile and customer value proposition

* Drives incremental revenue by in-sourcing in areas of strength

* Assembles dynamic value nets with best-in-class partners for each business situation.

On demand in action

An automotive manufacturer determines that the majority of its revenue and profit come from the luxury class customer segment. Because vehicles in this segment contain many advanced technology and engineering features, the manufacturer decides to concentrate capital expenditures on leading-edge design and engineering features. In light of this focus, the manufacturer phases out a small division that produces mid-priced vehicles. The manufacturer highlights its skill and expertise in producing luxurious, technically sophisticated vehicles through marketing and advertising campaigns.

Impact areas: On demand is where the rubber hits the road

On demand operation allows automotive companies to make substantial strides in areas of key industry differentiation maintaining lifelong relationships with customers, collaborating to deliver new vehicles at the speed the market demands and delivering vehicles when the customer wants. In short, responding on demand requires substantially improved integration and collaboration across the entire automotive value net.

With this flexibility, automotive companies can tackle important obstacles and improve key processes:

Customer experience

By pooling existing data, OEMs and dealers can better understand and segment customers. Access to this full consumer household view allows auto companies to target customer groups based on their specific needs and wants--and deliver personalized experiences across all touchpoints. Efficient tools and reliable, integrated information

On demand impacts

Customer experience Change in customer experience and enhanced brand value to increase owner satisfaction and loyalty, leading to annuity revenue and profit

Product innovation and cycle time Redefined design and development processes and business models to reduce cycle time, optimize global capabilities and build on customer-led innovation

Vehicle ordering and delivery Improvements in vehicle ordering and order-to-delivery speed to meet customer requirements for increased personalization, while driving lower costs and inventory

Value net collaboration Breakthroughs in automotive value net collaboration to leverage innovation, market speed and scale

equip customer-facing representatives to make realtime decisions on behalf of the customer and prepare service centers to deal with today's more complex vehicles and difficult-to-diagnose problems. Even better, in-vehicle software with realtime connections to OEM and dealer support systems enables electronic diagnostics and even remote repair. Telematics is pushing the very definition of the transportation experience. Fully integrated with OEM and partner systems, telematics can deliver innovative, on demand services that make driving safer and more enjoyable.

Loyalty can lead to a tenfold increase in per household revenue

Product innovation and cycle time

Improved integration among vehicle design sub-teams, and among OEM and suppliers as well, reduces the overall number of changes and speeds up the change management process for those that remain. Disparate enterprise systems and design tools are connected so that different teams even in separate companies on different continents can work together more easily. Product designs can also benefit from field data fed in from maintenance records and warranty claims as soon as it becomes available.

Vehicle ordering and delivery

Consumers are able to configure their desired vehicle and features and receive a commitment on delivery date--regardless of delivery method. Through increased data on consumer preferences, vehicle incentive plans can be targeted at selected customers, not the masses. Plant production is optimized based on accurate sales forecasts that keep capacity aligned with actual demand. Full visibility across the value net allows auto companies to make shipment adjustments in hours, not days. And supplier effectiveness improves now that critical order and delivery information is shared routinely in realtime.

Value net collaboration

In an on demand environment, value nets can be assembled and disengaged dynamically based on evolving business needs. Plus, on demand auto companies have the flexibility to take on different roles in the value net to better leverage the combined strengths of all participants. The entire value net is outfitted to sense and respond to issues and opportunities as they arise. Open business and technology standards allow companies to easily link in new business partners and reconfigure relationships when required. Cooperation and trust becomes more pervasive as information sharing and collaboration grow.

High impact potential

On demand operations can pay off in numerous ways--here is just a sampling of where you might see results:

Get a leg up on lifetime value

According to IBM Institute for Business Value analysis, there's more than a tenfold difference between the revenue generated per vehicle over 10 years (around $60,000) and a customer's household loyalty over a lifetime [(over $670,000)(5) On demand companies are focused on the latter, building the service and product innovation capabilities needed to retain their most valuable customers. Converting even a fraction of their existing transaction base into lifelong customers can help establish a long-term annuity revenue stream.

Trade development days for sales days

The average development cycle for a new vehicle can take 32 months(6). By collaborating more closely with partners and suppliers, on demand companies can move more quickly through design and build phases. With development costs ranging from $200,000 to $1 million per day,(7) trimming even just a month off the cycle is a substantial boon--not to mention the profit and market share boost an earlier launch might afford.

A million dollars spent, a million dollars earned--speed to market determines the difference

Make a dent in incentives

Given the U.S. economic climate, vehicle incentives have become the norm, often totaling as much as 18 to 20 percent of the vehicle price(8). In an on demand auto company, marketing efforts are coordinated around a single integrated view of current region-specific inventory levels which allows the company to offer rebates on only the slowest moving vehicles, keeping inventory levels in check and more profits in-house.

Getting there

Becoming an on demand automotive company should not be viewed as a big leap -- but as a journey of systematic, incremental improvements. You can begin with three basic steps:

1 Define where you are and where you want to be. Determine how well you are performing in all four areas of differentiation customer experience, product innovation and cycle time, vehicle ordering and delivery, and value net collaboration. Assess which are most critical to your business and where your current strengths lie.

2 Identify areas of greatest opportunity and success. Map out a series of initiatives that help you achieve your on demand goals. Factor in work that you already have underway; give priority to those projects that support your on demand objectives. Select where you will start first.

3 Make the process self-funding. Use the savings and efficiencies from each initiative to fund the next step in your journey

Although a true on demand automotive company cannot be built overnight, the transformation has begun for some, and early adopters are already reaping rewards.

To learn more about what's involved in running an on demand automotive business or find out about solutions that can help you get there, please visit ibm.com/ondemand/automotive/impacts

IBM Business Consulting Services 

With consultants and professional staff in more than 160 countries globally, IBM Business Consulting Services provides clients with business process and industry expertise, a deep understanding of technology solutions that address specific industry issues, and the ability to design, build and run those solutions in a way that delivers bottom-line business value. As part of IBM Business Consulting Services, the IBM Institute for Business Value develops fact-based strategic insights about critical industry-specific and cross-industry issues. The Institute offers member forums where senior business executives can benefit from access to in-depth studies, interaction with their peers and dialogue with IBM business consultants.

1 Office for the Study of Automotive Transportation. "Delphi X Forecast and Analysis of the North American Auto Industry." Volume I - Technology March, 2000

2 Girsky, Stephen J Automotive News World Congress Morgan Stanley January 2003

3 IBM Institute for Business Value analysis, 2003.

4 PricewaterhouseCoopers "Automotive Sector Insights." 2003.

5 Arthur, Sharon and Bark Linda. "Connecting with the automotive customer: Driving revenues through lifetime relationships." IBM Institute for Business Value. May 2003

6 Office for the Study of Automotive Transportation "Delphi X Forecast and Analysis of the North American Auto Industry" Volume 1 - Technology March, 2000

7 Ban Linda "The automotive industry: On the road to on demand." IBM Institute for Business Value analysis, June, 2003

8 Ibid.