External product variety in the automotive industry: An empirical analysis of German and Japanese OEM operations

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Publication Type:

Conference Paper

Source:

Gerpisa colloquium, Paris (2011)

Keywords:

Case study, Marketing-Operations Interface, Mass customization, Product variety

Abstract:

Today, consumers’ needs and wants are rapidly changing. In the automotive industry, increasing product variety has been reported resulting from such factors as changes in energy prices, and regional differences in safety and environmental regulations, in addition to the growing sophistication of consumers. For example, consumers in several countries expect to configure their own individual vehicles. The range of customization to meet such consumer requests, however, is greatly different. Some OEMs rely on providing only a low level of external variety, while others offer variety to an extent that the number of theoretical variants is higher than the number of actual sold units. Furthermore, the approach to response to customer orders from the point of sale to the delivery (i.e. the order fulfilment process) differs as well. Recent empirical research into product variety in the automotive industry has been mainly limited to OEMs from one region only. In this paper we present a comparison between German and Japanese cases. Our aim is to evaluate the consequences of different variety strategies.

Numerous aspects linked to product variety have been discussed by an interdisciplinary body of literature. The discussion in operations was driven by the results of MIT’s first International Automobile Assembly Plant Study conducted 1985-90 and extended by the debate on mass customization; through which product variety can be delivered to end customers at lower costs. In practice, for the past fifteen years, almost all OEMs have achieved operational excellence by the adaption of Japanese-based lean production principles. Competition, however, takes place in multiple dimensions simultaneously: firms need to develop appealing products, build attractive brands, and excel in operations. Thus, a central theme remains the decision on the ‘optimum’ or ‘appropriate’ level of variety: on the one hand, offering variety can provide differentiation in the marketplace, increasing revenues; on the other hand, it increases cost and lowers productivity.

The comparison of decisions by German and Japanese automotive OEMs shows differences concerning the level of external variety. We focus our analysis on customization based on so called ‘options’. Options are widely used in the automotive industry to provide product variety; e.g. customization of certain car models in terms of sun roof, air conditioning, four-wheel drive or navigation system. We study two levels of product variety by options: (1) customization that influences the manufacturing process by adding options that are integral to the product structure; and (2) customization that is added by options within the distribution system and that is independent of other elements of the product structure. An important indicator at the first level is the option content and variability that is being installed at the factory. Although this indicator is only a proxy for the complexity in the manufacturing process, it clearly shows differences within the variety being provided by a factory. Delaying the product differentiation (also called postponement or late-configuration) is common way to add customization at a later stage of the order fulfilment process. At the second level certain product and process design approaches such as standardization and modular product structure are typically necessary.

In our cross-case comparison, first, we collected data on product varieties, production and sales volumes, and factory conditions from five German and five Japanese major OEMs in order to understand the general differences. Then, we collected more detailed data on order fulfilment processes and mass customization techniques from each one German and Japanese case. As part of our data collection, we have conducted more than 30 interviews at these OEMs from 2008-10. The interviews are conducted not only in the manufacturing departments, but also in further relevant organizational units, such as sales, marketing, and planning. Our analysis has been extended by factory observation of five factories over the same time-horizon.

The main focus is the link of order-fulfilment inside the factory. We investigate the implication of product variety by options; compare the assembly line set-up, and the complexity in manufacturing. How both OEMs apply mass customization strategies to mitigate negative effects of product variety is further studied. Particularly, the analysis of distribution-based mass customization techniques, namely postponement/late-configuration and option bundling is an additional focus.

The findings show a great difference in the extent of external variety between German and Japanese OEMs. Regarding the two OEMs in our study, we find that in Japan several different car models are assembled on one line. For each model only a low variety based on the option content is added. Very similar tasks for the assembly worker are being performed even for different models based on a standardised production system. In Germany, fewer models are assembled on a certain line, but the models have a greater variety by the number of factory installed options and their variability. Similar tasks for the assembly worker are given by the limitation on a fewer model-mix per assembly line. In Germany, the average number of factory installed options is six times higher. The use of distribution-based mass customization techniques is in greater use in Japan, as customization is also done in the distribution-system by dealers using postponement/late-configuration. Such techniques tend to be in use only for accessories in Germany. Further mass customization is done in Japan by a greater extent of option bundling, while the German OEM offers single options and also their combination in bundles.

In conclusion, our study provides empirical evidence on the extent of external variety in Japan and Germany, which order fulfillment processes are currently in use, and how two companies from Japan and Germany apply mass customization techniques to reduce negative impacts of variety in the factory.

Copyright© Gerpisa
Concéption Tommaso Pardi
Administration Géry Deffontaines

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