Logistics implications of global production networks
in car manufacturing
Florian Klug
University of Applied Sciences Munich, Department of Business Administration,
Am Stadtpark 20, 81243 Munich, Germany,
florian.klug@hm.edu
Abstract
Car manufacturers operate more and more with geographically dispersed factories. This not
only involves external suppliers but also in-house production in international multi-plant
networks. The purpose of this paper is twofold. Firstly, to verify existing network capability
perspectives like the resource-based and more specifically the relational view to configure
and coordinate logistics processes in a multi-site production strategy. Secondly, to
characterise general logistics implications caused by the growing trend of car manufacturers
to split up production processes for a car over a number of production sites mainly spread
worldwide. The increasingly important role of logistics in the efficient and effective operation
of multi-site car manufacturing needs to develop a conceptual model of production that
explicitly recognises the emerging role of logistics.
Keywords: Global production networks, Car manufacturing, Automotive logistics, Multiplant manufacturing
1. Introduction
In today’s highly fragmented and competitive auto industry, car companies are increasingly
present in foreign markets. Car manufacturing in the traditional markets of North America,
Western Europe and Japan have been gradually replaced with an infrastructure that builds
vehicles locally, close to the customer. The result for the established markets has been a
capacity adjustment, and the closure of plants such as Luton, Dagenham and Longbridge in
the UK are likely to be followed by others in Western Europe (Holweg, 2008). One single
production site for all car models alone can no longer maintain the competence required to
service the market and meet competitive demands. In addition, a car manufacturer’s decision
to invest in production capacity is critical because installed capacity must be sufficient for the
whole lifecycle of the car (Fleischmann et al., 2006). The role of car manufacturers has
changed from supplying domestic markets with cars, via supplying international markets
through export, to supplying international markets through local manufacturing (Rudberg and
Olhager, 2003). Therefore, the automotive industry has tended to form flexible production
networks with external suppliers but also in-house production in international multi-plant
networks. Allocating cars to the global production sites has an effect on the global logistics,
not only the flow of materials from the suppliers to the plant and the flow of finished cars to
the markets, but also in-house inter-site material flows have to be taken into account.
Logistics serves as a mechanism to integrate and coordinate the activities across
geographically dispersed stages of car manufacturing. Logistics has to reconcile the efficiency
and flexibility concerns of manufacturing networks (Orton and Weick, 1990) while managing
the tension between specialisation and integration (Sydow et al., 1995). The approach
advocated in this paper should help contribute to the great demands on the interplay of
manufacturing and logistics operations that are so important for the total effectiveness of a
network organisation.
2. Exploring theoretical perspectives on logistics implications of in-house production
networks
The following theoretical approaches have to be taken into consideration in order to analyse
logistics implications of globalised in-house production networks. The main question here is
how the theoretical framework is able to explain the phenomenon of global production
networks according to its impact on logistics. Among the most common theoretical
approaches are the resource-based view and the relational view, which will be outlined in the
following sections.
2.1 Resource-based view
Today, manufacturing in car companies is carried out in multi-plant value networks (Rudberg
and Olhager, 2003). The resource-based view of the company (Barney, 1991; Penrose, 1995;
Prahalad and Hamel, 1990; Wernerfelt, 1984) suggest that the companies internal resources
and capabilities should be the foundation for the car manufacturers’ strategy as they are the
primary source of profit and provide a much more stable basis to define the companies
identity than the dynamic and often unpredictable external environment (Grant, 1991). These
resources and capabilities refer to unique skills, assets, technologies and various activities and
practices that serve as the basis for a sustained competitive advantage. The de-verticalisation
trend redefines core competencies and leads to a two-step decision model under the resourcebased view. It is not only a question whether car companies should have an in-house
manufacturing of components and modules, but also choices such as the number of in-house
plants, determination of the location and the level of competence and strategic role of each
plant (Vereecke and Van Dierdonck, 2002), and the nature and level of logistics coordination
across dispersed plants (Oliff et al., 1989). Skinner argues that instead of trying to do
everything, a manufacturing plant should be designed to focus on a coherent manufacturing
task, typically determined by products, markets, technologies, and volumes (Skinner, 1985).
The Schumpeterian perspective (Schumpeter, 1950) proposes rent creation by companies that
are more effective than their rivals to sustain the coordinated deployment of resources
(capability building). This organisational capability is delivered by the coordination and
operation of the logistics processes. Therefore, logistics network management can be seen as
capability matching the multi-site operation’s resources and capabilities to the requirements
of the market. Logistics enables manufacturing mobility, which guarantees delivering from
the closest or most efficient car plant and minimising risk in case of disruption. Multi-plant
networks spread the costs and risks of car manufacturing to multiple organisations by the
integration of resources and competences, which increases the car makers’ capability to
respond to market uncertainty. The total global capacity of the manufacturing network may be
utilised optimally by shifting production volumes to plants as local capacity utilisation or
currency exchange rates fluctuate (Colotla et al., 2003). According to Porter (1986)
competitive advantage is obtained if the configuration and/or coordination of the network
provide superior advantages towards their rivals. Configuration indicates the location of
facilities and the inter-facility allocation of resources along the value network. Coordination
refers to the question of how to link or integrate the production facilities in order to achieve
the firm’s strategic objectives. The coordination of decentralised resources is fundamental in
obtaining competitive advantages. These advantages derive more from how the company
manages the various resources than from where these are located (De Toni et al., 1992).
Therefore, the network-related capabilities, how to link globally dispersed resources and
activities gain importance – especially related to the successful management of logistics
processes (Hensel, 2007). Logistics can be seen as an enabler to mobilise, distribute and
reconfigure resources in multi-site networks.
2.2 Relational view
An enlargement of the resource-based view is the relational view, which focuses on the
exchange relations between plants as a strategic medium for achieving superior resourcebased performance (Duschek, 2004). Concentration on core competencies in combination
with local production generates a larger number of car plants being included in the valueadding activities, thus increasing the number of logistics interfaces. More interfaces require
coordination partially fulfilled by logistics operations. A company-wide logistics strategy is
characterised by the integration of logistics activities both within and between the
geographically dispersed plants according to the main competitive priorities cost, quality,
flexibility and delivery performance (Stock et al., 1998). There are two main concepts to
solve this coordination problem under a logistics management perspective. One approach can
be achieved by decoupling the activities performed by the network plants, which increases
buffers and inventory, or by standardising outputs and interfaces (Pfohl and Buse, 2000).
Logisticians have always viewed standards as solutions for improving operational
compatibility and interoperability, which makes multi-plant coordination easier (FabbeCostes et al., 2006). This standardisation process is mainly supported in the car industry by
the implementation of standardised logistics procedures (usually included in manufacturing
systems) and the company-wide use of platform strategies.
Standardised logistics activities, such as picking, sorting, dispatching and transporting, create
efficient processes. Routines and repetitive logistics processes raise the number of repetitions
and reduce costs according to learning curve effects. Standardised logistics processes
guarantee identity between an intra-logistics and inter-logistics process. A transportation
process, for example, will be processed in-plant in the same way as an in-house inter-plant
transport between two distant manufacturing sites. Only a standardised logistics operation
enables inter-plant process integration. But managing global production networks means also
managing the tension between integration and specialisation. A high degree of specialisation
of individual plants – usually in the sense of concentration on core competencies – requires
the critical task to find a balance between providing employees with rigid logistics procedures
to follow and providing the freedom to innovate and be creative to meet challenging targets
consistently (Liker, 2004).
A vehicle manufacturer can mitigate the negative impact of inter-plant activities on logistics
by using platforms. Platform strategies allow the OEM to build cars off the same architecture
in multiple plants. Platforms are common components, modules and systems (e.g., chassis,
body, powertrain), which are shared by more than one car model and often across brands at a
car group level. The platform strategy allows a flexible manufacturing at many locations
according to the inter-changeability of different car models on the same platform, which
balances capacity utilisation. Logistics processes, such as transporting, packaging or stocking,
can be simplified because of the reduced number of handled items, which eases logistics
operations. Packaging of platform volumes for example has a great scale potential. A high
number of platform containers with standardised measures, in low varieties, transported in
high frequency lead to smooth and stable processes in inter-plant material flows. This not
only reduces container investment and transport costs, but also simplifies tracking and tracing
of the multi-site logistics networks.
3. Methodology
This paper uses a literature review of research and practitioner articles to survey flexible
production networks in theory and practice. In addition, data is collected through a case-based
methodology that combines semi-structured interviews of key operations executives at
European vehicle manufacturers and site visits. Four different phenotypes of multi-site
manufacturing are distinguished, which will be discussed in the following section. The main
focus of research interest was on the combined production and parallel production type where
seven car models were investigated in depth (Table 1).
Table 1. Investigated operation models in car industry
Car
Model
Porsche
Cayenne
OEM
Operations
Type
Volkswagen
Network Plants
(Country)
Operations/
Output
VW Bratislava (Slovakia)
Painted Body
Porsche Leipzig (Germany)
Final Assembly
VW Mosel (Germany)
Painted Body
VW Dresden (Germany)
Final Assembly
Audi Ingolstadt (Germany)
Painted Body
AHM Györ (Hungary)
Final Assembly
Combined
Porsche
VW
Phaeton
Volkswagen
Audi TT
Audi
Porsche
Boxster
Porsche
Audi A4
Audi
Combined
Combined
Porsche Zuffenhausen (Germany)
Parallel
Valmet
Completely Built Up
Valmet Uusikaupunki (Finland)
Audi Ingolstadt (Germany)
Parallel
Completely Built Up
Audi Neckarsulm (Germany)
BMW München
BMW 3er
BMW
Parallel
BMW Regensburg
Completely Built Up
BMW Leipzig
VW Wolfsburg (Germany)
VW Golf
Volkswagen
Parallel
Completely Built Up
VW Mosel (Germany)
BMW X3
Magna
Steyr
Contract
Magna Steyr (Austria)
Completely Built Up
Skoda
Octavia
Skoda
Knocked down
Mladá Boleslav (Czech Republic)
CKD, MKD, SKD
4. Logistics implications of global production networks
4.1 Existing production phenotypes in the car industry
Before we will discuss logistics implications, existing manufacturing networks in the car
industry are defined. Therefore we use network phenotypes, which can be used to separate
and classify configuration and coordination principles in manufacturing networks and helps to
reach a better understanding of relationships and their logistics implications. Each phenotype
focuses on the production process of a single car model. The nine network types shown in
Figure 1 can be distinguished based on the number of cars produced and the importance of
local resources.
The number of cars produced of a specific model (e.g., Audi A3, Porsche Cayenne, etc.)
mainly depends on the positioning of the car in a low-, medium- or high-volume sector.
Whilst premium cars are normally built in lower volumes a standard car is produced in high
volumes. However, the average time a car stayed in the market has been consistently
decreasing over recent years. The increase in model range and the reduction in lifecycles has
significantly reduced the volume sold per model.
The importance of local resources used in this paper as separation criterion is linked to
Ferdows’ (1989) concept of the strategic role of a factory. He distinguishes three primary
location motives, namely:
• Access to low-cost input factors.
• Use of local technological resources.
• Proximity to the market (supplier and customer).
In his more recent work, (Ferdows, 1997) “site competence” places a further role. It is defined
as the extent to which certain competencies that go beyond simply manufacturing cars, are
present at the site, for example, process engineering and improvement, supplier integration or
decision making.
Figure 1. Manufacturing phenotypes in the car industry
Single-site central manufacturing
Here, all cars of a specific model are produced at only one central location for the entire world
market. The centralisation strategy is based on the maximisation of economies of scale in
production and economies of scope with R&D and support functions (Abele et al., 2008).
This centralisation of resources improves the availability of critical personnel and know-how,
allows greater specialisation, more intensive knowledge exchange, and shortens delivery
times between the car processing stages. This efficiency is often combined with higher cost
flexibility where different car models can be produced on the same assembly line with low
takt time. As customers continue to demand more distinctive models, car manufacturers put in
more flexible assembly lines which can process several different platforms and derivatives on
one assembly line.
Knocked down operations
A common reason for opening a local production abroad is the avoidance of high customsrelated expenses for the import of finished vehicles (Completely Built Up) imposed by
economically vulnerable countries. A disassembled vehicle is referred to completely-knocked
down (CKD), medium-knocked down (MKD) or semi-knocked down (SKD) depending on
the various degrees of assembly-readiness levels. Usually production and kitting of the
components and modules take part on a central manufacturing site. Often knocked down
assembly plants are used to develop emerging markets if the expected quality output level
there does not currently meet the requirements for a complete production site. Macroeconomic concerns, such as political stability and economic situation, can also play a major
part. But high-knocked down operation costs and the growing relocation of the car
manufacturing base – traditionally located in North America, Western Europe and Japan –
now justifies more and more full-scale assembly plants in emerging markets (Holweg, 2008).
The long-term goal for car manufacturers is not to produce the parts centrally and then export,
but rather to localise production more completely. Hence, knocked down operation can be
seen as a transition phenotype between a single central manufacturing and a multi-site
production.
Multi-site combined manufacturing
This phenotype is characterised by focusing on special manufacturing operations and
technologies (press shop, body shop, paint shop, assembly shop). Each factory performs one
phase of the production process, which is inherently connected for economic or technical
reasons. Sheet metal forming, for example, depends on economies of scale through high
investments of transfer press lines, which leads to the concentration of forming operations in
centralised press shops. Frequently, a broader production footprint enables the OEM to
participate in low-cost series production in a low-wage location (e.g., Porsche/Volkswagen in
Bratislava). To produce a car, multiple factories operate in sequence and are therefore
dependent upon one another for inputs or outputs. Very often the painted body is produced in
full-size manufacturing sites along with other volume models. Sequenced in line, these
painted bodies are delivered to a local assembly site for the final assembly of the car. The
painted bodies are transported in specialised trucks/wagons, which uses the same modes of
transport to carry finished vehicles, which are not picked up directly by customers, to a
distribution centre.
Multi-site parallel manufacturing
In a multi-site parallel production, multiple plants build the same car model. This dispersed
manufacturing concept achieves a high level of customer proximity with high market
flexibility and low delivery times. Locating production sites throughout the globe permits car
makers to benefit from the individual advantages of certain countries and regions, for example
investment incentives, lack of exchange rate uncertainty, lower cost and more flexible labour
or low level of union-orientation. Availability of local resources, such as social and industrial
structures, easy access to logistics and communication networks and skilled employees play
also a major part in location decisions. Another consideration in choosing a location is the
existence of automotive clusters. They enable proximity to an established supplier base as
well as design, engineering, operations and logistics know-how. In addition, greater flexibility
in capacity planning is achieved. Demand variations can be better compensated in, contrary to
a single-site production concept where demand fluctuations immediately lead to capacity
variations with negative employment effects. However, car allocation to plants is restricted
for technical reasons, by the personnel skills available at every location, and because of
general policy (Fleischmann et al., 2006).
Contract manufacturers
Contract manufacturers, such as Magna Steyr, Karmann Group, Bertone Group, Pininfarina or
Valmet Automotive (often called “Little OEM” or “Tier 0.5”) produce low-volume and
specialised car models for and under the brand name of the established car makers.
Traditionally, these companies developed from their engineering business to become niche
car manufacturers. Contract manufacturers not only fulfil design and development processes
but also take over manufacturing and logistics processes for low-volume vehicles (e.g.,
convertibles, roadsters and sport utility vehicles). As flexible and technology experts, contract
manufacturers manage niche vehicles and volume models in peak or decline phases of their
lifecycle, usually for several OEMs. Due to their flexibility and know-how they can
manufacture at this low level more cost-effectively than the OEMs themselves.
4.2 Logistics implications and logistics-relevant relocation factors
The research about logistics implications of global production networks in car manufacturing
directs first of all the attention to the concept of supply chain management, which also
emphasises cooperative relationships (Cooper and Ellram, 1993). This paper regards intrafirm networks of an OEM with a multi-site manufacturing network, whereas supply chain
theory is more related to inter-firm supply chains, where relationships between various firms
are in focus (Rudberg and Olhager, 2003). In view of this limitation it seems that the supply
chain concept in its traditional form does not sufficiently address all relevant aspects of the
organisation of logistics in production networks (Pfohl and Buse, 2000). Hence, it is useful to
concentrate on the above-described phenotypes of manufacturing networks. We assume that
the logistics implications are influenced by the configuration and the coordination of the
network itself (Shi and Gregory, 1998). Logistics is therefore contingent upon how the
network is configured in terms of the number, location, size and focus of sites. Multiple sites
that cooperate in sequence, or in parallel, need to be optimised to reach its true competitive
potential (Rudberg and Olhager, 2003). This potential is determined by different objectives
each manufacturing phenotype pursues (Figure 2). This network-specific objective is used to
discuss logistics implications of each phenotype. The main logistics-relevant objectives are
stated as follows:
Capacity optimisation through single-site central manufacturing
Under an in-house logistics perspective, this is the simplest case. All logistics operations are
concentrated on one single site, which have to be integrated in a customer-oriented, seamless
value chain. A crucial logistics goal is to optimise plant capacity. In the car industry, capacity
utilisation of a factory poses the greatest financial risk and the greatest operational challenge.
Running a car assembly plant at 50 percent capacity for one year costs on average 76 percent
of full-capacity operating costs, which explains the strong incentive not to reduce capacity use
to cover the fixed costs (Holweg and Pil, 2004). Logistics has therefore the main focus to
operate assembly lines on an optimal level so long as customer demand equals production
supply. So planning and controlling the material lineside supply, becomes a critical success
factor. The materials flow process is organised in accordance with the lineback principle.
Starting from the assembly line and point of use, all call-off, transport and turnover stages
right back to the supplier are planned and investigated with a view to achieving an effective
and harmonious flow of materials. In parallel, the transportation and packaging circulation is
looked at (Klug, 2006).
Figure 2. Logistics-relevant objectives of the manufacturing phenotypes
Decoupling through knocked down operations
Knocked down operations are characterised by material supply that comes from distant
locations. Long lead times due to long-distance and multi-modal transport with enormous
transport, waiting and customs times, combined with bottlenecks at the port terminals cannot
assure a stable supply process. Therefore, deliveries in knocked down operations (SKD,
MKD, CKD) require a decoupling of materials supply of the home manufacturing site to the
foreign assembly site. This decoupling process of long-term transport from the short-term
assembly supply is guaranteed by inventory level stored on the assembly site (Klug, 2006).
This buffer acts as safety inventory and should compensate for container delays. The
inventory levels are supplied by a customer demand-orientated schedule. In this system parts
and modules are produced and pushed through the value chain according to a pre-planned
production schedule. Schedule planning is a central function. It ensures that there is a reliable
planning procedure for production, packaging, container stuffing and shipping. Once at the
CKD/MKD/SKD-plant the delivered materials are generally stocked in containers and stored
in on-site or off-site container yards. Afterwards the plant calls-off demanded containers with
a pull system. This decoupling of push- and pull-driven material flows strikes a balance
between flexibility to market demands and still maintains high-capacity utilisation.
Synchronisation through multi-site combined manufacturing
The focus of each factory on special manufacturing operations and technologies (e.g.,
pressing, welding, painting, assembling) raises the dependency as they operate in sequence
and is therefore highly dependent upon one another. Hence, matching and synchronisation of
the value network is a key success factor for multi-site combined production. Managing a
synchronous manufacturing system is operationally and logistically difficult and demanding
(Bennett and O’Kane, 2006). All variations and mix requirements must be achieved by each
manufacturing site. A synchronous manufacturing process necessitates effective material flow
management and reliable communications systems and production technologies (Doran,
2001). Quality systems have to link into robust manufacturing systems because first-time
rates must be very high. This is due to immense expenses caused by a return transport of a
painted body from the assembly site, once a fault is detected too late. Generally there is no
inventory buffer between the different multi-site production stages.
A major question for relocation of production and logistics processes is the split between a
volume and premium manufacturer. For a premium manufacturer the production of premium
cars in new boom regions, such as Asia and Eastern Europe, could damage the image of the
vehicles, even if the customer base for premium cars is rapidly growing in such regions
(Güttner and Sommer-Dittrich, 2008). So Porsche, for example, decide to assemble the
Cayenne model in Leipzig (Germany) in spite of a joint production with Volkswagen of
painted bodies in Bratislava (Slovakia).
Levelling out through multi-site parallel manufacturing
The balancing between fragmented markets, with local manufacturing, and the cost savings to
be gained from economies of scale is one of the great challenges a stable low-cost logistics
has to manage. The match between total customer demand and individual factory capacity
utilisation is important. Flexibility in production plans by volume, mix and location of build
cars guarantees stability. In a multi-site parallel production environment, demand variations
can be better levelled out. In Western Europe, the capacity utilisation in the car industry
averages about 75%. Expensive over-capacity buffers are created, which can be reduced by a
more flexible multi-site planning (Güttner and Sommer-Dittrich, 2008). This can be delivered
for all regions and factories by a centralised car programme planning. Demand must be
calculated in advance. Customer orders are allocated to available production capacity and
slots. Sufficient cross-factory capacity must be available to meet the overall customer
demand. If it does not fit certain requirements, adjustment measures have to be applied. For
an efficient car split between different manufacturing sites, planners need to consider separate
capacity for different assembling bodies, which is dedicated to single products, and capacity
for the body, paint and assembly shop, which all products share (Fleischmann et al., 2006).
The position of a special car model can change dynamically according to its lifecycle
position. Whilst a car can start with a low-volume manufacturing type (e.g., contract
manufacturing) the operations model can transform to a middle- and high-volume phenotype.
This implies a flexible split of capacity demand on different production sites. By analogy to
McDonald’s (1986) idea of floating factories where plant locations are not inert fixed, so that
each plant can be relocated as the market situation changes, a multi-site parallel production
generates a capacity floating without the high relocation costs of floating factories.
Multi-site parallel production can be achieved by the OEM or in combination with a contract
manufacturer. The so-called “peak shaving” model allows the car manufacturer to transfer
demand peak to a contract manufacturer without building up extra in-house capacities (e.g.,
Porsche Boxster is produced by Porsche in Germany and Valmet in Finland) or to prevent the
in-house material flow from disturbance by extraordinary product configurations. This
concept generates a stable capacity utilisation in the own factory using external short-term
buffer capacity during production peaks and model phase-outs.
Flexibility through contract manufacturer
For the purpose of our research, product, mix and volume flexibility defined by Slack (1987)
is used. These flexibility notions are based on the abilities to introduce novel car models or to
modify existing ones (product flexibility), to change the range of car models made within a
given time period (mix flexibility) or to change the level of aggregated car output (volume
flexibility). These generic types of flexibility are all supported by the integration of contract
manufacturers in the value network of a vehicle manufacturer as discussed above. As a
consequence, OEM responsiveness increases according to the ability of the manufacturing
system to respond to customer requests in the marketplace (Holweg, 2005). Whereas this
higher flexibility is combined with simpler logistics processes for the OEM this production
type causes a number of logistics requirements for the contract manufacturer. Generally,
contract manufacturers have to deal with different vehicle manufacturers and high numbers of
different car models. They have to manage many suppliers, part numbers, containers and
packaging instructions, which leads to higher material flow complexity in inbound, in-house
and outbound processes. In addition, different car makers have different communication
systems. Each OEM therefore has his distinctive logistics management system with certain
needs, which must be fulfilled on a neutral basis. On the other hand, contract manufacturers
have to standardise logistics processes to cope with cost structures. The low volume of
inbound transport per OEM leads to a consolidation process to participate in lower freight
costs due to higher transport volume. Bundling in all material flows ensures cost efficiency.
5. Conclusions
Producing in a multi-site in-house manufacturing network automatically leads to higher
logistics costs according to globally dispersed factories. The logistics costs have a significant
influence on the locations and total network structure of car manufacturing (Abele et al.,
2008). In general, lower local manufacturing costs are added by higher logistics costs
according to the need to coordinate material flows over long distances in a multi-site context.
Although decreasing transport and communication costs are eradicating the natural barriers to
globalisation. The introduced concept to assess logistics implications based on the objectives
of different phenotypes of manufacturing networks has to be augmented by a suitable
evaluation approach. Full visibility of the total landed costs is one part of this evaluation
model. Further criteria, such as market development, low-cost sourcing, high-grade
knowledge and avoiding business risks, also have to be taken into account.
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