Why product design and demand can impact on supply chain structure and strategy.

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Amirreza Hashemi 9th November 2012

2264

LGM100 – Introduction to Logistics & SCM.

Assignment 2:

Why product design and demand can impact on supply chain structure and strategy?

TABLE OF CONTENTS

TABLE OF CONTENTS 2

SECTION 1|INTRODUCTION. 3

Abstract 3. What to plan for first, product demand or product supply? 3.

SECTION 2|PRODUCT DEMAND AND SUPPLY CHAIN. 4

SECTION 3|PRODUCT DESIGN AND SUPPLY CHAIN. 5

SECTION 4|DISCUSSIONS AND RECOMMENDATIONS. 7

SECTION 5|CONCLUSIONS. 9

SECTION 5|REFERENCE LIST. 10

SECTION 6|APPENDICES/ENCLOSURES. 11

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SECTION 1|INTRODUCTION.

Abstract.

Product design and demand play a key role in every firms supply chain planning. Getting this balance right

can lead to greater response times from your supply chain and improved customer service through increased

engagement from your stakeholders. This paper will focus again on Holden Pty Ltd. It will discuss how

changes to demand and design for the Commodore has over the years, affected the way their supply chain

managers plan and implement SCM strategies. Drawing information from the required research material,

recommendations will be made on how Holden, and the wider automotive industry, can reduce risk and

generate greater performance in the alignment of new product developments within its supply chain.

What to plan first, product demand or product supply?

The first assignment focused on the processes of Production and Procurement within Holden. Little focus

was given to the products themselves and in particular, how their design and demand could impact on a

company’s supply chain considerations. Understanding these is beneficial to reducing risk on the supply

chain. Too often companies would be left wondering why, after so much investment into supply chain

technology, they still suffer problems meeting the demands of their customers. So what should a business

focus on when designing the overall structure of their SCM? The answer often lies within the product itself.

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SECTION 2|PRODUCT DEMAND AND SUPPLY CHAIN.

A key driver for generating and maintaining demand for a product, is the continual need to update product

offerings “in order to satisfy customers’ requirements better, while staying competitive” (Pero et al. 2010).

This process will inherently lead to increased production rates and volumes, putting pressure on a supply

chain system that hasn’t adequately catered for the demand requirements of its products. But how do supply

chain managers design a system for products with unpredictable demand?

Fisher (1997) believed that by identifying whether your product was either ‘functional’ or ‘innovative’, you

could better anticipate the demand cycle of your product. Based on demand levels for the Commodore from

5 years ago, Holden could be forgiven for forming their demand philosophy on a predictable ‘functional’

concept. However in light of more recent patterns, they have had to change their planning to one that fits the

‘innovative’ category. There are 2 important reasons why. Firstly, innovation is a key driver for demand. It

is also useful in combating market competition. Secondly, as discussed in the first assignment, it enables

companies to demand higher prices in the market thus generating greater returns.

“Uncertainty about demand is intrinsic to innovative products” (Fisher 1997).

In the face of increased competition; greater innovation; and changes in consumer demand, Holden must

make changes to the Commodore. It fails to resonate with local consumers who now look for greater levels

of innovation. Their uncertainty in this regard highlights the importance for correctly interpreting what

Fisher (1997) calls “Market Mediation”. According to Fisher what market mediation does is to ensure “that

the variety of products reaching the market place matches what the consumers want to buy”. Holden was too

slow to address these issues around the Commodore and so was not in the best position to respond to

changes in demand. Its falling popularity with consumers meant less demand for its local production.

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SECTION 3|PRODUCT DESIGN AND SUPPLY CHAIN.

These days, consumers face a choice ‘overload’, where the value proposition and quality of vehicles for sale

are hard to differentiate. Product churn is high and life cycles are low. Production systems that catered for

long runs now struggle to react to consumer demand for something new and different. Holden has reacted to

this by adding flexibility and innovation to their systems in order to regain market ground. Their focus is

now on ‘value of design’ as opposed to ‘value of demand’. Part of this change incorporates the concept of

‘Mass Customisation’, where companies try to have products share as many of their common components as

possible, while still offering a different consumer experience.

The benefits of this cannot be understated. Globally, this reduces a company’s supply chain needs through

consolidation of parts. It also reduces the unpredictable nature of demand within the supply chain. The

overall philosophy behind this reasoning is to alleviate any supply chain risks and reduce “time-to market”

(Khan, O. and Creazza, A 2009). Ensuring demand is catered for however, requires some forethought to

product design. Holden’s plan to produce a chassis that will form the underpinning of 2-3 different products

within their range, as well as the introduction of more popular engine choices, has only been possible after

great consideration to product design and consumer demand for innovation. They strive to find a balance

between the innovation consumers’ demand, against any possible economies of scope the manufacturer can

take advantage of. In this case the platform of the Cruze, which will be shared along with the next

generation Captiva 5 SUV and possibly the Volt (should this also be manufactured locally), will allow for

both product diversification and a reduction in cost based on the common use of components.

Economies of scope are achieved when you are able to reduce the average cost of a product when produced along side one or more other products that share the same components.

This doesn’t leave much hope for the Commodore. Aside from the low volume Caprice and its limited

export markets, the only car it shares its platform with is the Chevrolet Camaro, which is produced in

Canada. The more recent announcement of the NASCAR deal, which will see the next generation

Commodore re-bagged in the America as the Chevrolet SS (Super Sports), won’t happen for another 6

months. However with the Australia dollar still sitting above parity to the US, pricing in America will need

to be very lean. It does seem like beyond this, there is little scope to develop a second ‘in-demand’ vehicle

off the now aging Commodore platform.

This raises another key point about the necessity for structuring the right supply chain for a specific type of

product. By doing so, it avoids the possible mismatch between product design and supply chain (Fisher

1997). In 2005, Fixson outlined the importance of understanding a products’ design architecture, as it allows

supply chain managers the ability to match a products’ functionality by its physical attributes; to the most

appropriate supply chain structure (cited by Khan, O. and Creazza, A 2009, p. 305).

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As Holden shifts from an efficient and lean production format, to a more agile and responsive one, it better

positions itself to not only produce more unique and innovative cars, but also to react faster to changes in

consumer tastes. The Commodores’ design is no longer a popular choice in the market and unless Holden

can somehow re-invigorate its hero car with class leading design and innovation that both, takes advantage

of Holden’s existing production structure and elevate it above its competitors, it will not arrest its sliding

sales.

“…the root cause of the problems with many supply chains is a mismatch between the type of product and the type of supply chains”. (Fisher 1997).

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SECTION 4|DISCUSSIONS AND RECOMMENDATIONS.

For a long time the Commodore was the number one choice for Australian families. It represented the best

of what Australia could produce. It also had hero status due to its feats on the racetrack. In the past these

were all it needed to convert ‘goodwill’ into sales. Sadly, these facets no longer stand up in the face of

increased competition, a high Australian dollar and changing consumer trends.

To combat diminishing returns, high average costs and low market appeal, Holden must take advantage of

its existing technologies and rely on economies of scope to rejuvenate the Commodore nameplate. The

challenge here is that in order to continue with its strategy of local production, it must either find ways to lift

its unit sales per year, or develop a second vehicle to share its platform with. Current trends would suggest

that this is unlikely. However plans to see the new VF model, due out in mid-2013, exported to the US as a

re-badged Chevrolet for use in NASCAR, could see a turn-around in its fortunes. Another option to cover

for changing consumer tastes would be to develop a platform that can be shared with a similar sized SUV

like the Captiva 7 or Colorado 7. As Holden’s CEO and Managing Director Mike Devereux was quoted as

saying, to do this “the company needed to sell roughly 1800 cars a month to make local production viable.”

in order to have a viable business case, and that meant "we have to pick two pretty much top 10 vehicles.

There's no room for error." (Drive 2012).

Should this turn into a reality, the added benefits to the supply chain are obvious. Sharing the same platform

could open the door for further parts integration. Not only would this allow for a reduction in unit cost, but it

would see component suppliers increase production in order to meet the higher demand this would generate.

It would also give them the economies of scale needed to reduce their average costs, making them a truly

viable alternative to importing goods.

What has not fully been covered is the notion of aligning SCM with New Product Development (NPD). One

of the issues raised has been Holden’s need to bring more product innovation to the market. This has its own

challenges. Unlike functional products, demand can be hard to predict. As outlined by Pero et al. (2010, p.

118) “the higher the level of product innovation, the greater the impact on the supply chain”. As product

innovation rises, life cycles become shorter and the risk of obsolescence greatly increases. In other words,

Holden must actively engage with its supply chain when developing these new products, before such

innovations can become a reality. Any issue in supplying such product, will only work to undermine the

integrity of the manufacturer and the quality of the product itself.

A concept raised by Heiber (2002) as cited by Pero et al. (2010, p. 120) is the “Configuration, Collaboration

and Coordination” supply chain model that further elaborates on this idea. Holden is working through these

3 aspects. There is a re-configuration of their production as it looks to more agile systems in response to the

markets demand for innovative product. They are collaborating not only with Government and supplier but

also unions to ensure they can meet their supply chain metrics. And they are also coordinating in-house

design with their global network to find best economies of scope through platform and parts integration.

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The current plight of the Commodore is representative of the Australian markets’ overall transition to more

flexible, advanced and efficient passenger vehicles. Holden have started down the track to address the

consumers’ shift away from the big family sedan with its planned weight and fuel consumption reduction

programs. As this paper focuses mostly on the local production of the Commodore, it might be fair to say

that any perceived supply chain risks are limited to production and procurement. However labour concerns

can also be a factor, especially when the work force feels their long term job security is at risk. When

Holden changed their shift structure back in February 2012; moving their night shift production into their

day shift to address slowing demand but also look at consolidating production requirements in a more

efficient way, the news was not received well by the work force and the industry’s union. Carmakers need to

work harder to be more transparent in their communication and collaboration through-out the entire supply

chain.

The Commodore was once the first choice for the Australian motoring consumer. However, in the past few

years its sales have slowly and steadily fallen. Whilst it still generates numbers that support continued local

production, this trend cannot be ignored. There is hope for the nameplate but it requires a change in thinking

and somewhat of a declaration to the automotive consumer from Holden themselves. They must announce to

the market they will again make the Commodore the ‘first’ in choice for a new car. This platform allows

Holden to tap into the mindsets of both its consumer and work force alike, by reconnecting emotionally with

the people that make and buy their vehicles.

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SECTION 5|CONCLUSIONS.

In order for the Commodore to survive Holden need to change the consumer’s overall perceptions of the car.

With high fuel usage, basic interior design and function, and low innovative appeal, its new VF model due

next year, must offer consumers higher levels of technology. As discussed earlier, Holden’s shift from

‘functional’ to ‘innovative’ product structures, will force a re-think of this. Promotion of its green

credentials would again elevate it in the eyes of the environmentally and financially conscience consumer. It

must offer something beyond its traditional design layout and function. Using existing technologies not yet

on the Commodore; like push button start, could be enough to re-energise the models appeal. With its

already standard 5 star ANCAP safety rating, innovations like ‘All-Wheel-Drive’ and ‘run-flat’ tyres would

affirm its safety appeal to its target family market, whilst also cementing its exclusivity as being the ‘first’

and only large passenger sedan to offer both.

By reviewing the market trend and demand for the Commodore, it seems its future is not certain. A lot rides

on the success of the new VF model. Has Holden left its response to the changes too late, perhaps? Most

interesting will be how Holden balance what new technologies the next one will offer, against what

consumers are demanding. Reading market signals early and mating them with flexible and responsive

production will be very important for Holden, and other local manufacturers, in the future.

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SECTION 5|REFERENCE LIST.

Drive.com.au 2012, ‘SUV firms as Commodore replacement’ weblog, viewed 26 October 2012,

<http://news.drive.com.au/drive/sydney-motor-show/suv-firms-as-commodore-replacement-20121018-27srv.html>

Fisher, ML 1997, ‘What is the Right Supply Chain for your Product’ Harvard Business Review, vol. 75, no. 2, pp. 105-116.

Park, B 2012, ‘Call to fit Commodore with run-flats’ GoAuto.com.au, weblog, viewed 29 October 2012,

<http://www.goauto.com.au/mellor/mellor.nsf/story2/CB7C02A15F7CDAE3CA257AA5007FCA29>.

Khan, O and Creazza, A 2009, ‘Managing the product design and supply chain interface: Towards a roadmap to the design

centric business’ International Journal of Physical Distribution & Logistical Management, vol. 39, no. 4, pp. 301-319.

Pero, M, Abdelkafi, N, Sianesi, A, and Blecker, T 2010, ‘A framework for the alignment of new product development and

supply chains, Supply Chain Management’ An International Journal, vol. 15, no. 2, pp. 115-128.

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SECTION 6|APPENDICES/ENCLOSURES.

Christopher, M 2005, ‘Logistics and Supply Chain Management, Creating Value Adding Networks, 3rd ed,. Prentice-Hall,

London.

Harper, W 2012, ‘Why efficient Procurement and Production processes are Essential: Introduction to Logistics and Supply

Chain Management’ course assignment from LGM100, RMIT University, Melbourne, 8 October 2012.

Office of the Pro Vice-Chancellor (Business) RMIT 2010, ‘College of Business: Guidelines for referencing and

presentation in written reports and essays’, course notes from LGM100, RMIT University, Melbourne, viewed 2

September 2012, Online@RMIT

Teece, DJ 1980, ‘Economies of Scope and the Scope of the Enterprise’ Journal of Economic Behavior & Organization, vol. 1 no.

3, pp. 223-247.

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