questions: 1. Analyse the underlying problems at Interior JV. 2. Construct a roo
ID: 1150925 • Letter: Q
Question
questions:
1. Analyse the underlying problems at Interior JV.
2. Construct a root-cause analysis for each of the issues encountered by Interior JV.
3. Develop a strategy for improving Interior JV’s operation.
This case provides an opportunity for students to explore the use of value-chain analysis in improving the operation of Interior JV. A value-chain analysis consists of examining specific activities, examining how each step adds value to the customers, defining the root causes of the problems in these steps, then establishing improvement measures with performance indicators. The Process Value Chain is carried out on three specific areas of operations?development time, internal quality and on-time delivery?after ranking various out-of-control problems. A ctivity performance measures are then set up in the form of a scorecard to help to guide further improvement activities.
INTERIOR JV: TEETHING PROBLEMS OF A
MANUFACTURING OPERATION IN CHINA
In 2006, European automotive supplier Interior Group and a China-based textile group established Interior JV. The joint venture was to produce seat covers for the automotive industry in China. After a slow start, the joint venture began to secure orders and was moving towards a breakeven point. Nonetheless, it still faced teething problems. Though Interior JV had adopted many processes that were used by its European mother company, operating in the foreign environment of an emerging market posed challenges for the joint venture. Internal quality, on-time delivery and development time were of particular concern.
The Interior Group
The Europe-based Interior Group originally began as a textile weaver for men’s clothing and branched into the production of technical textiles and upholstery for the automotive industry. During the 1980s and 90s, its involvement in the automotive sector continued to grow with various acquisitions of auto suppliers and their brands throughout Europe. By 2010, it was a supplier to many of the large automakers around the world.
Interior JV
Interior Group entered China in 2004 and had entered into three joint ventures by 2010. Interior JV was its joint venture with China Textile, a subsidiary of a state-owned enterprise involved in a wide range of businesses, from the manufacturing of automobiles and textiles to pharmaceuticals, trade services, highway construction and mining, among others. The state- owned enterprise also had numerous cooperative relationships with other foreign companies.
China Textile’s background was in home textiles and, being unfamiliar with the automotive industry, it did not involve itself in the operation or management of the joint venture. Structurally, Interior JV was organised similarly as its parent company in Europe [see Exhibit 1].
Within the supply chain of the automotive industry, Interior JV was a second-tier supplier. It purchased yam from tier-three suppliers that spun yam, then wove the yam into fabric and cut
and sewed the fabric into seat covers. The seat covers were provided to tier-one suppliers that made car seats, which they provided to automobile manufacturers [see Exhibits 2 and 3].
Challenges
Interior Group faced many barriers in entering the China market. Not only were domestic players price-competitive, they also had developed good relationships with domestic automakers. And though Interior Group was well established in Europe, it enjoyed little brand recognition in China.
The situation was further aggravated by the nature of the automobile manufacturing industry. Since automakers would not change suppliers once they commenced serial production, the only opportunity for Interior JV to get business was to bid when automakers were developing new cars, and it took automakers an average of three years to develop a new model. This unique characteristic of the auto industry meant that Interior JV had to carry a loss for at least the first three years. With little experience in producing and managing the supply of automotive textiles, China Textile was unprepared for the time it took for the business to get off the ground.
Interior Group s involvement in the textile industry is in the home textile, they think that they only have to purchase the machines and turn them on and the money will come. But it is different for the automotive industry. . . . In the beginning you have many projects going on, and maybe only after four or five years you can then break even. Things went wrong partly because of the different expectations between the two partners.
Roughing the slow start, Interior JV succeeded in soliciting orders from two large automakers after three years and achieved a turnover of Rmb 50,000,000 in 2010.1 Nonetheless, the operation was fraught with problems: development time was too long, internal quality (number of defective material outputs) was not up to standard and deliveries were often late. The costs associated with these problems were estimated at Rmb 5,000,000, Rmb 1,000,000 and Rmb 6,000,000, respectively.
Development Time
Automakers distributed a design brief to all potential suppliers when they began to develop a new car model, and suppliers would come up with potential designs that would fit the spirit and the target customers of the model. The car designers would make a selection and suggest modifications, and the supplier would make a new sample in accordance with the designers’ comments. It usually took three to four rounds of sampling before the car designers approved a design. The average time for Interior JV’s development process was 35 days, compared to its target of 21 days and China’s industry average of 30 days. The speed of the development was critical because this was the process by which suppliers competed for business and losing an order could easily translate to a loss of Rmb 5,000,000. Multiple factors contributed to the long development time.
Inadequate Internal Coordination
Interior TV’s sales team was based in Shanghai, and its manufacturing plants were located in Jiangsu province about 300 kilometres away. Each salesperson who solicited an order would
submit his or her orders individually, and the plant did not have sufficient market and customer knowledge to prioritise the orders.
Dyeing
Interior JV had no dyeing equipment and used an external supplier to dye the yarn for making the fabric for sampling, usually a small quantity of between five and ten kilograms. The dyed yarn would be sent to the potential customer for comments, and it usually took several rounds of re-dyeing before the potential customer approved the colour. The whole process would take between one to two weeks. Dyeing suppliers in general did not welcome dyeing yarn for development purposes even if the customer was willing to pay a surcharge since the quantity for such orders was small and there was no guarantee that they would get a a production order in the end.
Internal Quality
Production runs were rarely perfect. Defects might be colour differences or defects in the weaving. Interior JV implemented the same quality control system as in Europe but had a defection rate of 3% for its production runs as compared with the Interior Group’s average of 1%. The difference was partially caused by its inexperienced workers. The market for auto seat covers in China was relatively small, and there was only a small pool of workers who were already skilled in producing seat covers. The 3% defection rate translated to a loss equivalent to 2% of Interior JV’s turnover, or Rmb 1,000,000.
Quality of Raw Materials
Interior JV could not control the quality of the raw materials it sourced from suppliers. The situation was further aggravated by the fact that Interior JV only had three yarn suppliers. Interior JV required only a small quantity of yarn for producing vehicle seat covers compared to, say, garment factories, and not many yarn suppliers were willing to supply such small quantities.
Training and Motivation
China only had a small pool of workers who were skilled in making auto seat covers. Most employees were new to the production of seat covers. Their sewing skills for seat covers were not up to standard, and their process and quality-control skills were weak. For example, to control the quality of the seat covers, operators must understand the whole production process to spot defects or catch problems that would affect the next production steps. As a result, their unfamiliarity with the seat covers also led them to be slow in detecting non-conforming products, which were supposed to be taken out of the production line for the quality control team to check. Finally, Interior JV did not have an evaluation system that tied workers’ performance to rewards or penalties.
Quality System
The Interior Group used an integrated management system that incorporated TSI 6949, OHSAS 18001 and ISO 40012 and that covered work processes, work instructions and working forms in all its manufacturing plants around the world. Interior JV had only implemented 40% of the system in its manufacturing plant.
On-time Delivery
On-time delivery was critical for automotive suppliers, as many automakers had adopted a just-intime (JIT) system in order to keep their inventory minimal; late deliveries from suppliers could seriously impact automakers’ production schedules. Automakers hence charged suppliers a hefty penalty for late deliveries. One automaker, for instance, charged Rmb 4,128 for each minute it had to shut down the production line, translating to Rmb 6,000,000 if the line was shut down for one day.
Logistics
Interior JV produced solely for automakers manufacturing in China, and controlling the delivering time was difficult as the country’s logistics industry was immature and many logistic companies had not yet achieved a reliable standard of service.. Numerous factors contributed to delayed transportation time:
The logistic company could not guarantee the delivery timeframe. A five-day journey from the Jiangsu province plant in eastern China to Chongqing in western China could stretch out to 15 days. The logistic company did not have a tracking system that would enable the head office to support truckers once they were on the road. In order to cut costs, the logistic company would not dispatch a truck until it was filled up. The logistic company was not resourceful in responding to external factors such as bad weather, road accidents or energy shortages, leading to major delays in the factory.
Market Forecasts
Automotive suppliers relied on market forecasts from automakers in order to respond to the demands of automakers quickly. Accurate forecasts were critical to the smooth operation of the JIT system. But Chinese automakers, unlike foreign ones, were poor at making market forecasts. Interior JV kept an inventory of yarns for the time-critical development process. It could take up to one or two weeks to order yarn from suppliers. In the absence of accurate forecasts, Interior JV could not prepare its inventory ahead of time, which in turn affected its development cycle target of 21 days. The situation was further aggravated by the fact that Interior JV was overall a low-volume buyer, leaving it with less bargaining power over its three yarn suppliers.
Conclusion
After struggling for its first few years, Interior JV was finally moving towards a breakeven point. Now that it had managed to build up a business relationship with automakers in China, it had to ensure that its operation could support the demands of its current and potential customers. What can Interior JV do to improve its operation, especially in the areas of internal quality, development time and on-time delivery?
Explanation / Answer
The Interior JV was established as a joint venture of European automotive supplier of Interior Group and China-based textile group in the year 2006. The purpose of the joint venture was to produce seat covers for the automotive industry in China.
1. The problems faced by the interior JV were 1. Defective output, 2. Delay in getting orders and late delivery of output, 3. Imperfect production, 4. The company’s dependence on external suppliers to dye the yarn and the lack of yarn suppliers, 5. Lack of skilled labour, 6. Lack of sufficient market and customer knowledge to priorities the orders, 7. Poor quality of raw materials, 8.lack of market net-work and absence of accurate market forecast.
a. Defective output.
Interior JV is a joint venture of European based Interior Group and China based textile groups. Both companies are unfamiliar with the manufacturing and marketing of the products. The European based interior Group was familiar with the weaving of men’s clothing, technical textiles and upholstery for automotive industry. The China Textile’s background was in home textiles and the industry was unfamiliar with automotive industry. Although the interior group was well-established in Europe it has no brand recognition in China. Both the parent companies did not have sufficient knowledge to run a joint venture. Thus the joint venture was a failure in manufacturing and marketing.
b. Delayed in getting orders and Delivery of output.
The only way of getting orders from automakers is to bid up when the automakers are developing a new car. It took an average of three years to develop a new model. This specific nature of auto-industry causes loss for the Interior JV for its first three years of operation. Along with slow start it took four or five years for the company to reach the company in breakeven point. The Interior JV has to submit three or four times sampling before the car designers approve the design. Thus the development process was slow in the company. The interior TV’s sales team was located in Shangai and its manufacturing plants were in Jiangsu. Each sales person has to submit the personally to the plant situated away and the plants have insufficient market and customer knowledge. Interior JV had no dyeing equipment and depends upon the external suppliers for dyeing. The dyed yarn would be sent to the customers for comments and it took several round of re-dyeing before the approval of the potential customers. Most of the automakers had adopted just-intime(JIT) system in order to keep their inventory minimum. The late delivery seriously affected the automakers production scheduled and they imposed penalty over the late delivery.
c. Imperfect production
The production was not perfect. Defects were found in colouring and weaving. This defect is primarily caused by the inexperienced workers. The market for auto seat cover in China was too small and it faces stiff competition.
d. Company’s dependence on external suppliers to dye the
yarn, Lack of yarn suppliers.
The company depends of on the external suppliers for dyeing the yarn and the company had only three yarns suppliers as its requirement for yarn is low. The company could not control the quality of yarn supplied.
e. Lack of skilled workers.
The availability of skilled workers for the production of seat cover in China was low. The sewing skills of the available workers were not up to standard.
f. Lack of sufficient market and customer knowledge to priorities the orders.
Interior JV produced only for the automakers within China and it had no marketing network outside the country.
g. Poor market forecast.
The automotive suppliers depend on market forecast from automakers. Accurate forecast is essential to the smooth functioning of JIT. The automakers were poor at making market forecast. In the absence of accurate forecast the company could not maintain sufficient inventory of yarn for production. This cause failure to completer orders in time.
Strategies.
1. The quality of output can be improved by changing the production method with new technological know-how according to the changing requirements of the market.
2. Two or three times sampling approval from the auto manufactures should be replaced to one time sampling. The distance from sales unit to the manufacturing units should be minimized. The manufacturing units must have a sales unit also.
3. The production must be free from defects in weaving and colouring. The skill and efficient workers should be replaced in place of inefficient workers. The production technology must be updated.
4. Supply of yarn must be improved with a tie-up with foreign suppliers.
5. The company must develop skill development strategy inside premises.
6. The company is depending internal market only and it must expand its market network abroad.
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