As Published In May 2005

Revving Up for Global Challenges
By Katheryn Potterf

For automotive companies—east and west—Lean strategies mean survival.

Try to put the pedal to the metal when there's no metal—and not much pedal. That is increasingly the global predicament of the automotive industry. A worldwide steel shortage and record-high petroleum prices could not have come at a worse time for the industry, which is already grappling with the problem of overcapacity. Simply put, many regional markets have reached the saturation point. This has forced automakers to give huge price incentives to get people to buy, further eroding profits.

To stay in business, automakers are looking for better ways to build products and to "get the lead out" of their operations—that is, to achieve continuous cost reduction and improve delivery execution. Lean manufacturing techniques have become survival strategies during a time characterized by lean—and very mean—profits.

Already, the typical automaker (original equipment manufacturer, or OEM) in the United States makes an average of only US$18 net profit on each car. This figure sounds low—surprisingly so—to people outside the industry. It means that someone making little knick-knacks and selling them at the local crafts fair may easily rake in more profit on one item than the industrial giants in Detroit make on each car.

In emerging markets such as China, net profits for low-end cars are comparable to those in the United States, according to the CIO of a prominent Chinese OEM. But the situation with medium- to high-end passenger cars is different in China, where OEMs can average US$1,200 to US$2,400 in net profit per unit, and dealers as much as US$2,400. China's explosive growth in the demand for automobiles, along with a less crowded competitive environment for automakers, largely explains the bigger profits.

No wonder the Chinese market, with the tantalizing prospect of hundreds of millions of consumers, is so attractive to automakers. Moreover, the per-capita car-ownership rate in China is lower than in advanced or medium-growth countries—another indicator of huge market potential. Virtually every major OEM from North America, Europe, Japan, and Korea has already entered into joint ventures with Chinese companies in order to tap into the lucrative market—and take advantage of low labor costs. Ford and Mazda, for instance, have both entered into joint ventures with ChangAn Automobile Group, one of China's leading automakers. (China has become the fourth-largest auto producer in the world and will soon overtake Germany for the No. 3 slot. The top two producers are the United States and Japan, in that order.)

Still, the automotive industry in China faces formidable challenges of its own. China entered the World Trade Organization (WTO) at the end of 2001, and the Chinese government will have to cut import tariffs on automobiles to a minimum level by 2005. China's automakers will be forced to compete with all the flashy imports that are sure to flood the market.

China's OEMs and suppliers are already cutting their prices, and they are experiencing fierce competition—and ferocious price wars. To gain the competitive edge, Chinese automakers are turning to information technology to squeeze the costs out of operations, from manufacturing and logistics to channel building and marketing, according to Ma Jun, CIO of ChangAn Automobile Group, China's fourth-largest vehicle producer. "Car manufacturers and suppliers are seeking the help of IT to streamline production and logistics to drive down costs—and they are actively looking for foreign partners that will help them modernize production," says Ma Jun.

A Dragon in the Making

To meet its production goals and increase shareholder value, ChangAn has been reshaping its business with Oracle E-Business Suite, which it implemented in 2003. Prior to that, ChangAn had run 38 LAN information systems. Although the systems ran well separately, they essentially functioned as information silos and therefore failed to provide a complete view of the enterprise. There was no central way of accessing and sharing the wealth of information and data within each isolated application. This made analysis difficult, hampering the decision-making process and restricting ChangAn's ability to respond efficiently to a volatile market.

ChangAn chose Oracle E-Business Suite for its breadth of functionality, modular structure, open architecture, and integration, according to Ma Jun. "With Oracle, ChangAn has not only integrated and centralized management of human and material assets, production, supply, and sales but has also formed a real-time supply chain involving more than 2,000 suppliers and distributors. This will help the company build a competitive edge."

A study by IDC reveals that ChangAn has realized substantial strategic and operational benefits from the Oracle systems—improved production capabilities, tighter inventory control, shorter time to market, and better enterprise visibility, among others. In less than five months, ChangAn recovered its initial investment and realized a return on investment (ROI) of 265 percent. According to IDC, ChangAn redefined more than 100 work processes, the optimization of which has boosted productivity, improved operational efficiency, and reduced unexpected losses. The company uses Oracle Database and Oracle E-Business Suite to automate enterprise resource planning (ERP), customer relationship management (CRM), and supply chain management (SCM).

Streamlining Production and Accelerating Time to Market

Streamlining the design modification process and improving time to market by 77 percent sounds like a manufacturer's dream. But that's what ChangAn achieved—and the company gives credit to its Oracle system. ChangAn also uses the Oracle Bills of Material function to expedite the execution of engineering change orders (ECOs) in one of its largest factories. For example, it reduced the turnaround time for doing small modifications on vehicle parts from 30 days to 7 and cut the ECO turnaround time for new vehicles from 120 days to 65.

Automating Order Fulfillment

By automating most of its order fulfillment tasks with the new Oracle applications, ChangAn is able to move more products to market faster. And the automaker has a lot of product to move—the Oracle system dispatches about 1,500 vehicles a day from its warehouse. Automated order processing has also allowed ChangAn to reduce order entry staff from eight to four. Another important benefit of the system is increased order accuracy—accomplished, in part, by eliminating duplicate data entries.

Scaling Back on Inventory

Over the last decade, almost every company in the automotive industry has taken steps to reduce costs associated with holding inventory. ChangAn has done the same—but its results are exceptional. With its Lean management philosophy, ChangAn soon realized the value of implementing Oracle's manufacturing, inventory, and procurement applications. The company not only gained stronger control over its inventory but also reduced waste in the factories that employ the applications.

Armed with accurate information about its inventory levels, ChangAn now keeps minimum "safe inventory" levels and decreases the wide fluctuations that had once caused stock shortages, production downtime, and unpredictable cash flows. In the past, the monthly discrepancy between system inventory and actual inventory at one factory had averaged between US$2.4 million and US$3.6 million. After the Oracle implementation, this discrepancy fell to US$193,000.

ChangAn has also saved significantly on storage costs. Better inventory control means the company can keep fewer goods on hand and still meet production goals. The new system shortened the time ChangAn needs to count inventory, which saved 30 working days a year at one factory and 12 days at another. Because these extra days can now be used for production, the company expects to boost output, generating an additional US$20.8 million in profits annually. According to the IDC study, overall labor efficiency at one factory's assembly workshop improved by 25 percent in 2003.

Enhancing Quality Control and Shipping Management

Before implementing Oracle Manufacturing, ChangAn's factories were unable to track flawed products. The plants simply rebuilt defective products—without recording the cause of the defects. By using Oracle Quality, however, ChangAn can now track flawed products and immediately fix any underlying problems.

The Oracle system has also enhanced coordination among ChangAn's operating units. Previously, ChangAn Sales Company, which manages production, had little visibility into ChangAn Logistics Company, which distributes ChangAn's vehicles to sales outlets. This lack of transparency made it difficult for ChangAn Sales to hold the logistics company financially accountable for goods damaged in shipping. Now, ChangAn Sales has gained tighter shipment control and can track every vehicle in the distribution pipeline. According to the IDC study, improved visibility has enabled ChangAn Sales to recover US$533,000 in shipment damages from April to August 2003 alone.

Tighter control over shipping and quality has gone a long way in boosting customer satisfaction. This, along with all the other continuous improvement projects ChangAn has instituted, has enhanced the automaker's reputation in the marketplace.

Making Inroads into the Future

Despite all the competitive challenges that increased globalization brings, Ma Jun is optimistic about China's automotive industry. "China's government has initiated a program of building roads in every town, so in order to facilitate economic development of economically backward areas, this development needs manpower and materials. And vehicles are the most favorable means to get manpower and materials to those remote areas."

ChangAn has every reason to be upbeat about its future as a company. "In 2003 our economic benefit from Oracle E-Business Suite was US$23 million," says Ma Jun. "We're very happy that Oracle has helped us transition into the fast lane."

Making All Those Wheels Turn

Look inside almost any car or truck, and you'll find products from ArvinMeritor. You name it—ArvinMeritor makes it. A key supplier to the auto industry, the company manufactures thousands of different parts, ranging from brakes and axles to transmissions and clutches. With US$8 billion in annual revenue and more than 150 manufacturing facilities in 27 countries, the Troy, Michigan-based company is a critical link in the global automotive supply chain for DaimlerChrysler, General Motors, Ford, Volvo, and most other car manufacturers.

Built for Success With a name that evokes the splendor of the Tang dynasty's capital city, ChangAn is showing the rest of the world that China has entered another golden age—this time with a focus on rapid industrialization and technical innovation. Fast facts The state-owned company started out in 1862 as a weapons factory, founded by Lihongzhang, prime minister of the Qing dynasty. It developed China's first jeep-style vehicle. It started making vehicles in the early 1980s and is the largest minivehicle manufacturer in China, with a market share of 31 percent of the domestic minitruck market and a production volume of 500,000 units in 2004.

Steve Tracy, ERP (enterprise resource planning) program director for ArvinMeritor, has worked in the automotive industry in various capacities for more than 18 years. During that time, he's witnessed substantial changes in how information technology is employed. "Automotive companies now recognize the importance of working with external suppliers to create Lean supply chains that drive greater efficiencies," he says. "Companies were more vertically integrated in the past. Now they partner together to create complex supply chains." Additionally, Tracy adds, "I've seen a lot more use of technology in the product development area and a consequent reduction of product development cycle time."

Going with the Flow

ArvinMeritor has implemented Oracle applications, including Oracle Flow Manufacturing, to make its end-to-end manufacturing processes more agile and effective. Using Oracle products, ArvinMeritor is transforming its manufacturing environments and extended supply chain processes, with Lean strategies that support demand-driven operations.

Lean manufacturing allows businesses to plan and manufacture in step with actual customer demand. By controlling product production, cost, and quality, Oracle Flow Manufacturing enables manufacturers to minimize risks from overproduction, as well as loss of revenue and poor customer satisfaction from missed deliveries. Additionally, this control allows companies to reduce production waste and variability while improving velocity, cutting inventory and transportation costs, shortening order-to-delivery cycle times, and better directing resources to meet real-time demand.

"The Oracle system is crucial to our ability to meet many of our international manufacturing requirements, especially production sequencing. We're just beginning to exploit the solution to control costs, support customer requirements, and deliver value to our customers," says Brian Cavagnini, director of continuous improvement for commercial vehicle systems at ArvinMeritor.

So far, the results have been encouraging. At its commercial vehicle division, which makes up about a third of the company's overall business, managers use sophisticated assembly line methods to maximize efficiencies and respond faster to demand. In the past, keeping the lines running and products shipping required overcoming the challenge of maintaining an aging, highly customized mainframe system. By 2003 the system that was being used to control the division's foundation brake business system was nearing the end of its useful life.

Synchronizing Assembly Lines for Faster Inventory Turns

Snapshots ChangAn Automobile Group www.changan.com.cn Annual revenues: US$3 billion Number of employees: 30,000 Oracle products and services: Oracle Database; Oracle Portal; Oracle E-Business Suite, including Discrete Manufacturing, Financials, Order Management, Inventory Management, Procurement, Call Center, Service, and Marketing; Oracle Consulting Other products and services: Sun/Solaris, Teksen, Besthelp, and Topup (consulting partners) ArvinMeritor www.arvinmeritor.com Annual revenues: US$8 billion Number of employees: 32,000 Oracle products and services: Oracle Database; Oracle Portal; Oracle E-Business Suite, including Flow Manufacturing, Discrete Manufacturing, Order Management, Release Management, Financials, General Ledger, Receivables, Payables, Assets, Purchasing, iSupplier Portal, Configurator, Inventory, Supply Chain Planning, Cost, Engineering, and Procurement Other products and services: Sun/Solaris, HCL Technologies (consulting partner)

ArvinMeritor first implemented Oracle E-Business Suite at two plants that specialize in making brakes and related components for large trucks. These two facilities, in Ontario, Canada, and South Carolina, form a critical link in ArvinMeritor's internal supply chain. The Canadian facility designs and produces the brake components, but final assembly is done in both facilities. The brakes come in myriad configurations to meet customer specifications. ArvinMeritor's challenge is to produce the brakes and components exactly how—and when—the customer wants them.

That means synchronizing orders with the company's network of assembly lines and suppliers. "The issue of line sequencing in our brake business is critical—getting requirements in from customers and setting up how the brakes get built and in which sequence they get stacked on the pallets," explains Tracy.

With Oracle Flow Manufacturing, ArvinMeritor not only matched the performance of its customer line-sequencing system but also gained new efficiencies, including Web-enabled enterprise integration and standards-based best practices. "The value-add of the Oracle solution was that we were able to build industry-leading functionality into this solution while leveraging standard components," says Tracy.

Converting Demand to Production

Big truck manufacturers typically place brake orders with ArvinMeritor through electronic data interchange (EDI). Using Oracle Release Management and Oracle Order Management, ArvinMeritor converts changing customer demand into a rapidly evolving set of instructions for its shop floors. "We allow changes in orders all the way into our manufacturing process," Tracy says. "The fact that Order Management is integrated with Flow Manufacturing and the other modules enabled us to manage the environment."

Also key is Oracle's ability to link different organizations and facilities across ArvinMeritor's internal supply chain. Better interplant coordination, according to Tracy, will lead to lower inventory and reduced waste. When a company is as big, and has as many facilities, as ArvinMeritor, coordination is critical.

Having launched the two brake manufacturing plants on Oracle E-Business Suite, the company continues to roll out capabilities, which include functionality for manufacturing, procurement, financials, and order management, to its other commercial-vehicle production facilities in North America. In addition, ArvinMeritor is upgrading its Oracle applications instances in Europe, South America, and Singapore.

Resources The Lean Automotive Enterprise Demo Oracle Solutions for the Automotive Industry

Improving Financial Control and Accountability

Creating a Lean enterprise requires that continuous improvement initiatives be implemented everywhere—not just in manufacturing operations. It is part of the corporate culture at ArvinMeritor for everyone to look for ways to increase efficiencies in all business processes, across the front and back office.

With Oracle E-Business Suite, for example, ArvinMeritor's plant operations connect directly to the general ledger. This financial integration is a change from when the company had "an instance for every site and the general ledger was separated from the operational inputs," as Tracy notes. "With Oracle, we are leveraging a consolidated single ledger and chart of accounts." Thus, ArvinMeritor now detects transaction errors earlier, and the company can now support new business structures such as shared services. It has also enhanced the flexibility of its financial close process as a result of the Oracle implementation.

ArvinMeritor has improved its financial reporting as well, by adding flexible multicurrency features. "With Oracle, we have the option of running our Canadian subsidiaries in U.S. dollars and then leveraging Oracle's multiple-currency reporting capability to track transactions in Canadian dollars for reporting," says Tracy. "And following passage of the Sarbanes-Oxley Act, Oracle Financials gives managers better control and accountability. We have more-centralized enterprise-class systems and fewer control issues. That's highly appealing, particularly if you have to sign off on those financials."

Embracing the Future of Automaking, East and West

In the final analysis, it's all about results—producing high-quality, low-cost vehicles and components that sell—and using Lean initiatives and whatever else works to reach this goal. The proof, as they say, is in the profits.