Knowledge Management in Automotive Industry

Knowledge Management in Automotive Industry

The automotive industry is one where the overall success is dependent on the interplay of a lot of factors each having its own set of dynamics in the overall scheme of things. These factors are use of appropriate technologies for constant innovation, better cost control through innovation management, the key role that suppliers play in the dynamics of auto industry for the Original Equipment Manufacturers -- OEMs etc. With competition increasingly getting severe, the key to success lies in better cost reduction through innovation management and using the latest state-of-the-art technologies. Propriety Knowledge Management used by major OEMs in every sphere of activity has been playing an important role in the overall performance of the industry. The Total Cost of Ownership -- TCO continues to be the single most crucial factor that limits the quantum of flourishing innovations within the automotive industry. Such is the importance of cost reduction through innovation that the entire process beginning with the customer, the car dealer and the OEM marketing department to the R&D in the OEM facility and also at the supplier end lack appropriate efficiency and is sometimes found to be ineffective also. Considered from the perspective of a manufacturing industry, material cost and processing costs which together accounts for 60% to 70% of the cost of goods sold constitute the two key cost contributors. Over the years it has been increasingly witnessed that suppliers have been the drivers of innovative initiatives within the automotive industry. Especially in the electronics and mechatronics, the supplier community is poised to be the most important driver of innovation within the automotive industry. With the ever increasing dependence of the OEMs on the suppliers' capacity, there will be an urgency to build sophisticated strategies for managing suppliers. In the developing economies like India due to rising disposable incomes, low-cost cars will not only be the fastest growing car segment, but also globally and attention to low-cost designs will be an important R&D focus spearheading the industry past the year 2015.

II) Statement of the Problem: Successful Innovation management through better cost control - a boon for the car industry captains:

The key success factors in the automotive industry lies in utilizing KM in innovation management through better cost control for maintaining a powerful and competitive position within the auto market which every car manufacturer strives to achieve. Gradually the scenario is transforming from a single to an overall system innovation. This means adding new functions in a car by networking of existing components and modules. It is to be noted that nearly each and every aspect of fuel efficiency, emission norms, car safety and security, flawless connectivity and infotainment, driving dynamics, overall performance, driving comfort, flexibility and space and better value for money need enhancement. Nevertheless, both Original Equipment Manufacturers -- OEMs as well as car suppliers are unable to invariably fulfill the requirements of the end customer as it is a human instinct to demand better and reliable products that are reasonably priced. The Total Cost of Ownership -- TCO continues to remain the single most important factor while buying a reality which restricts the amount of thriving innovations within the auto industry. (Dannenberg; Burgard, n. d.)

Presently, the total innovation continuum right from the customer, the car dealer and the OEM marketing department to the R&D at the OEM and the supplier end is extremely inefficient and ineffective. It is estimated that within the next decade, roughly 800 EUR billion will be spent on R&D and about 40% of the proceeds will be wasted. Due to this, every OEM as well as supplier should screen its innovation portfolio to identify the innovations that practically guarantee the needs of the driver. Hence an integrated and coherent marketing plan will assist in positioning the idea of innovation. The persistent cost pressure within the automotive industry through various factors like regulations, competition, rising risks and declining customer demands puts a strong impact on innovation management. Therefore, conventional cost-cutting programs are not sufficient. (Dannenberg; Burgard, n. d.)

Current forecasts reveal that 11% of cost reduction must be implemented to render car production a profitable business in the forthcoming years. Hence OEMs as well as suppliers have to considerably make efficiency improvement in every R&D processes to ensure that costs are kept under control. Besides, the effectiveness of each innovation is required to be investigated. Cost-improvement measures like engineering off-shoring, programs involving reduction of complexities, standardization and modularization or innovating to launch low-cost cars will facilitate the industry to have a better control of some of the cost increases spawned by the rising number of functions. (Dannenberg; Burgard, n. d.)

III) Research Findings:

There are few industries that accord a greater reliance on the Knowledge Management -- KM than the automotive industry. Making good car designs and getting them to market in the quickest possible manner in order to maximize the return on the huge investment in their creation, minimizing the threat of being eaten up by a rival with a far better appealing model or pricing; sharing the plethora of information that contribute in making a car among engineers, marketers, dealers and customers; keeping a track of the sales success of the machine. Each of these processes entail a huge number of documents and facts, lots of people, and the chances of defect gets less with the passing year. For instance, the German car major Audi has developed a market research information system known as MarCo --Market Research Competitor which is the principal knowledge management platform across the company that has substituted several legacy systems. ("The car industry drives forward with knowledge management," 2004)

The MarCo applications is helpful in storing every information collected regarding competitors' present or forthcoming vehicles from a lot of sources, including Audi's independent competitive intelligence department, MR practices, press and analyst articles, customer feedback and the like. Similarly, Ford has looked forward to the Documeutum Enterprise Content Management Platform and has implemented the software alongside an enterprise portal known as Plumtree for displaying and dissemination of content around the company and integrating with the internal and external applications and data sources. ("The car industry drives forward with knowledge management," 2004)

With the passing years, suppliers will benefit as the value proposition within the industry will continue to move downstream with increasingly bigger quantum of production and R&D shifting towards them. Hence modularization happens to be the required technique to control the rising complexity of cars in a better manner. The industry will gradually focus their innovation efforts on module interfaces and features that define brands. For instance the Volvo brand is reputed for security; Mercedes-Benz cars are highly comfortable while Toyota platform is known for reliability. Low-cost cars will be the fastest growing car segment worldwide and new low-cost designs will come to be an important R&D focus fueling the industry past the year 2015. In industrialized nations, the cost of the typical new car has spiraled by 100% since the last two decades whereas the average income has risen by just 50% and the difference between prices of new cars and incomes has grown on an annualized basis. Evidently, cost innovation is the single most important objective for the automotive industry. (Dannenberg; Burgard, n. d.)

The answer to cost-saving lies in a host of issues; which the automotive industry should handle in a concurrent manner. The use of novel and more cost-efficient materials are required to be examined so as to reduce material and processing costs. Flexible manufacturing ideas will help utilization of assembly plants to be improved. Astutely designed collection of optional extras can held lower the quantum of possible configurations and remove costly complexity from the manufacturing processes. Concurrently, it is also important that development costs are reduced. Big automobile companies will have to launch R&D offshoring initiatives to reduce the engineering costs and help drive localized development. Module strategies will help reduce R&D costs per unit and help local companies to cope with a bigger variety and shorter cycles of models. The various components of cost pressure on innovations are shown in Exhibit -I. (Dannenberg; Burgard, n. d.)

It is important to note that the automotive industry is a fiercely competitive one with shrinking margins wherein cost and reliability happen to be a distinct differentiator. The results of different car manufacturers are ample proof to substantiate this. During the year 2002, Toyota earned $1,800 per car with its rising margin per car continuing unabated. But on the other hand, General Motors could make a profit of $300 while Ford lost $240 per car. Studies reveal that critical to maintaining these margins have become Toyota's persistent quest for cost reductions. Toyota is able to achieve these margins through reliance on innovative proposals on cost reduction measures. The result being that the company has been able to identify 174 important components inclusive of air bags, brake systems and fuel pumps in which the supplier was able to reduce costs. Innovation management is supported through the application of Innovation Management tools which are normally web-based and helps them to go beyond conventional geographic barriers. (Das; Puri, 2003)

Innovation Management systems are also able to generate structured processes for evaluation and sharing ideas, such that decision makers are able to target those who possess the maximum potential. Nevertheless from the perspective of a manufacturing industry, the two costs which are important are material cost and processing costs which together accounts for 60% to 70% of the cost of goods sold. Material cost reduction in this perspective is defined as any attempt to lower the cost of bought-out components/raw materials through procedures like value engineering, part rationalization, competitive standardization, alteration in packaging, enhanced transportation etc. Normally, the suggestions emanate from several components in the value chain like customers, suppliers, staff in charge of procurement and designers of products as well as stores personnel. Productivity improvement signifies modifications of any processes which can be core manufacturing process or support processes like material handling. Various challenges can be surmounted through the implementing of innovation management solutions that has inbuilt features to handle the challenges. (Das; Puri, 2003)

An important development witnessed in the automotive sector has been that suppliers have been the drivers of innovation. The outsourcing pattern of the bygone few decades has remarkably raised the share of external value creation within the automotive industry. Presently majority of the OEMs create merely 30 to 35 of the value internally and the remaining are delegated to the suppliers. Besides, even though the industry's externalization of central processes seems to have slowed or even ceased, the reality that the major portions of automotive production takes place at the supplier point. Small wonder then, the suppliers also play a bigger role as innovators. (Maurer; Dietz, 2004)

Research suggests that particularly in the sphere of electronics and mechatronics, the supplier community will come to be the most important drivers of innovation in the industry. With the increasing dependence of the OEMs on the suppliers' capacity, they will require to build even greater refined strategies for managing suppliers. For instance, they will be required to build a formal supplier inspection within their purchasing departments to find out and develop the pertinent technology leaders and include them in their supply base. Apart from that OEMs will require to provide an established and coordinated innovation process as also a virtual and physical innovation policy to make sure that the optimal integration of the suppliers is market-linked and product related know-how. Tier-one suppliers in their role will require building up their engineering competence, either by means of organic growth or through the acquirement of engineering firms. They will also require building innovation networks in tandem with their sub-suppliers to leverage the complete potential of their supply chains. (Maurer; Dietz, 2004)

The urgency for close cooperation between the OEMs and the suppliers through various partnership programs, BOT models, or other online partners is propelled in part by the remarkable shortening of innovation cycles. Since the last decade, the typical life period of a car model in the industrialized nations has minimized by nearly 50% i.e. from about eight years to nearly four years. Within approximately the same period, the average development time right from designing to the commencement of the production has lowered from nearly 48 months to approximately 30 months. This is expected to come down to about 18 months. Due to the spectacular acceleration of development and shrinking of the production cycles, OEMs and suppliers are starting to get involved in one another's design and development processes much sooner than what was being done before. This has resulted in distorting the conventional handoff points between sophisticated development, concept definition and competition, series development, and ramp-up. (Maurer; Dietz, 2004)

This drift indicates that the OEMs are required to structure their development processes in such a manner that the R&D and the purchasing departments work in tandem from the initial stages onwards to define the critical parameters, guarantee product differentiation at competitive cost, and engage suppliers at the earliest possible to leverage their market and product expertise. Therefore in the forthcoming years, the purchasing function of OEMs will be required to contribute in a coordinating manner at the OEM-supplier interface. In the present automotive markets wherein product differentiation at competitive cost is important to sustainable growth, it is crucial that OEMs must strike a tactful balance between capturing the best possible innovation from their suppliers and maintaining costs within reasonable margins. (Maurer; Dietz, 2004)

Over the years it has been experienced that OEMs experience an intricate balancing act while dealing with their suppliers. In order to ensure that product differentiation continues to be the mainstay of the automotive industry, OEMs should demand innovation from their suppliers. Concurrently, there is an expectation by the OEMs that their suppliers will contain costs within the best possible limits. It is a reality that since the bygone decade, OEMs have placed Tier I suppliers under severe and unabated cost pressure, compelling yearly cost reductions which have been averaging nearly 3%. This has resulted in a severe dent in the financial performance of the suppliers compelling some to consolidate while putting others into the brink of insolvency. ("Automotive Cost Reduction," 2008)

Nevertheless, a clearly weakened supplier population does not augur well for the OEMs as in the ultimate analysis as they come to be most important source of breakthrough innovation within the automotive industry. Regardless of this, OEMs demand from the suppliers to reduce costs. In order to stay competitive suppliers have turned to mergers, acquisitions, JVs and low cost sourcing in an endeavor to grow top-line revenues, sustain market share, utilize assets in an effective manner and raise the leverage with the OEMs. Regrettably, the anticipated advantages linked with those objectives sometimes become unsuccessful in turning into reality, resulting in added margin as well as pressure on performance. Attaining persistent cost reduction and improvement in performance will be challenging task and an important focus for the automotive OEMs as well as suppliers. ("Automotive Cost Reduction," 2008)

Well-known analyst Oliver Wyman has done an analysis regarding the innovation strategies of the industry's most successful automotive companies. The research on "Car Innovation 2015" recognizes the levers which car manufacturers and suppliers are required to pull to become the latest innovation leaders. Depending on the business design of the supplier as also the OEM, four dimensions are required to put into alignment. They are innovation proposition, competence focus and collaboration, innovation management, its organization and structure. The major suppliers in innovation management produce a 16% higher EBIT margin compared to their contemporaries, all the while putting through a distinct innovation strategy and balance along those four dimensions. The study entitled Oliver Wyman study "Car Innovation 2015" has given five recommendations for innovation management within the automotive industry. These are (i) raising customer orientation and marketing focus on R&D. (ii) generating a diverse innovation product & services portfolio (iii) improving R&D effectiveness and efficiency thereby lowering the risks involved innovation (iv) improve innovation culture and organization. (v) aligning the innovation strategy as per Oliver Wyman's Innovation Strategy Framework. ("2015 Car Innovation," n. d.)

Keeping the above in view, cost reduction has been and continues to be the most important targets for the automotive industry in Europe. Whereas cost reduction is an outcome of rising competition and international markets, the weight reduction has partly been put on the OEMs by lower fleet consumption targets. Nevertheless, competition has even propelled an unprecedented number of accessories and vehicle electronics. Their added weight has been the drive for lowering the weight of the standard body and drive train compartments. The ever-increasing number of new model releases and the urgency for faster technical innovation has shown several weaknesses in the industry which is required to be surmounted. (Bollig, 2002)

According to a survey the most identified are as follows: (i) Right First Time: Top class component quality and readiness in production from the beginning of a new model. (ii) Speedier technical innovation (iii) Systems integration (iv) development of latest on-board electronics. Product and component callbacks as also delayed product launches are presently casing acute problems for the automotive industry. OEMs are demanding that their suppliers enhance performance and build flawless supplies on time from the very beginning. While readiness in supply is mainly an issue of organization and communication, systems integration and electronics networks continue to be matters of rapid research and development in high technology areas. (Bollig, 2002)