IS1105: Impact of Information Systems on the Automobile Industry

NATIONAL U NIVERSITY OF S INGAPORE S CHOOL OF C OMPUTING

IS1105 T ERM PAPER

Impact of Information Systems on the Automobile Industry Authors: T EH Chien Hui, Alvin (A0069232) G AN Soon Bing (A0073817Y) Y E Mei (A0078119) Z HU Shunpeng (A0077830)

Tutor: Y I Cheng

Tutorial Group 3 Team D Submitted in partial fulfillment towards credit for IS1105: Strategic IT Applications

Sunday, 13 March 2011 1

Contents 1 Introduction

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2 Changing the nature of competition in the automobile industry

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2.1

Strengthening brand differentiation . . . . . . . . . . . . . . . . . . . . .

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2.2

Enabling new business models . . . . . . . . . . . . . . . . . . . . . . .

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2.3

BTO enabling new avenues of interactions with customers . . . . . . . .

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3 IS improving Operations

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3.1

Improvement in Design and Manufacturing . . . . . . . . . . . . . . . .

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3.2

Managing and improving supplier quality in procurement . . . . . . . . .

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3.3

Improving Inventory management . . . . . . . . . . . . . . . . . . . . .

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4 Challenges to IS 4.1

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Fragmentation of Systems . . . . . . . . . . . . . . . . . . . . . . . . .

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5 Conclusion

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Bibliography

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Chapter 1

Introduction Information systems (IS) have created new opportunities and provided solutions for certain issues facing automobile companies. Companies have taken advantage of this to improve operations, enhance value to their products and to their customers, as well as enable new business models. In this paper, we explore the use of Information Systems in vehicles, the deployment of Information Systems to support business operations of manufacturers, and the impact of doing so on automobile companies.

Chapter 2

Changing the nature of competition in the automobile industry On-board systems inside vehicles have become a point of differentiation to discerning customers looking for cars with more than just the ability to transport people from one point to another. The introduction of information systems inside cars have enabled manufacturers to provide their customers with extra functionality, thereby improving the desirability of the product towards customers, and at the same time enable new business models through the provision of services to consumers. This changes the nature of competition in the industry.

2.1 Strengthening brand differentiation With rapid growth comes increased competition; similarities in products across manufacturers have reduced brand differentiation across the board. This problem is exacerbated 3

with the rise of copycat manufacturers, whom copy designs and specifications of vehicles, and proceed to undercut the original manufacturer’s profit margins. Thus, to improve their brand standing, individual manufacturers have resorted to the inclusion of exclusive features to heighten customers’ brand awareness. Information systems are extremely useful in this aspect, as the customised software-hardware combination is harder for competitors to duplicate. Each manufacturer has its unique approach to strengthening their in-vehicle information systems. For example, Ford’s Sync system allows drivers to do online search for their desired destination and then direct drivers to reach their destinations with the assistance of a GPS-guided direction system. BMW’s auto parking assistant system help drivers to park their car automatically. With the help of these information systems, these companies differentiate their products from the competition and improved their brand value (Colias 2010). According to Ford’s Vice-President of Product Derek Kuzak, a third of the company’s 14 percent increase in revenue, or about $1,000 per car, was due to application of newly available technology. As can be seen, technological improvements have enabled the companies to be more competitive in this traditional industry, and serve to accelerate the companies’ growth. This competition of value-added Information Systems may be characterised as intense. Many features once considered proprietary reach feature parity across manufacturers quickly. Information Systems that provide GPS navigation are now common in cars across manufacturers. This demonstrates that the use of IS in vehicles has become a core value-added area in the industry, and poses new challenges as well as opportunities for manufacturers in the industry.

2.2 Enabling new business models On-board information systems have allowed manufacturers to explore and invest in new business models, and thus create new streams of income for them. This was not possible before the existence of Information Technology, when much of their revenue came mostly from the sale of vehicles. OnStar, General Motors (GM)’s on board vehicle system, provides their customers with a set of safety, security, and convenience features such as Automatic Crash Response, Stolen Vehicle Assistant, and remote control smart-phone application MyLink and so on, all of which require customers to pay a monthly recurring subscription fee of US$28.90 per month. This presents a new stream of recurring income for General Motors. In fact, GM is planning to pursue this services market by providing the OnStar service for other non-GM vehicles on the retail market (Korzeniewski 2011). 4

2.3 BTO enabling new avenues of interactions with customers The fast changing demand and stiff competition into the automobile industry forces firms to seek new channels and ways to stay competitive. While some look into product and service differentiation, others look into the possibility of customisable Build-To-Order (BTO) cars. This approach stems from the idea of mass customisation, with promise of offering customers greater satisfaction and flexibility in their automobile purchase experience. BTO has garnered the interest of many automobile producers and a number of them have already embarked upon this production approach. Ford Motors and General Motors have already launched sites offering BTO cars, namely FordDirect.com and GMBuyPower.com (Agrawal, Kumaresh & Mercer 2001). Both of these sites offer consumers the opportunity to customise their automobile purchases from a list of available specifications ranging from vanity choices such as colour, to under-the-hood changes, such as engine specifications. This approach is complex and requires the intensive application of IS throughout the value chain. The use of IS begins even before the order is place, where engineers and design teams collaboratively design and agree on automobile designs with the use of collaborative CAD (Computer Aided Designs) software. These designs then appear on the e-commerce websites, where customers select their preferences and make orders. The placed order generates a list of material requirements, which are communicated to suppliers that are seamlessly linked via already established supply chain systems. IS is crucial in the success of the BTO approach; by minimising lead time, improving supplier agility and responsiveness to changes in demand. Through implementing the BTO system, automobile companies are able to offer greater value and satisfaction to the consumer in contrast to the dealership sales model. This change in how automobile companies interact with their customers boosts the companies’ competitiveness.

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Chapter 3

IS improving Operations While the incorporation of Information Systems in the innovation in products are part and parcel of automobile makers’ strategies, a majority of the IS use may be found within the direct operations of the manufacturer.

3.1 Improvement in Design and Manufacturing Designing new automobiles is a very long and complicated process traditionally involving multiple design iterations and corrections. In this aspect, CAD (Computer-aided Design) tools ease the design process by boosting the productivity of designers, enabling them to prepare their drawings and specifications online, where design revisions and error corrections may be made with less effort as compared to hand-drawn designs. Automobile companies have not stopped at this, however. Manufacturers have added collaboration capability to their CAD tools, outright transforming it into a full-blown tool capable of inter-departmental collaboration. With this, companies are able to create a more inclusive role for personnel across the engineering, design and manufacturing. Doing so has served to promote cross-departmental design collaboration. Lawrence (1998) quotes Gene Consolo, engineering director of North American Operations (NAO) Design & Engineering Operations at the General Motors Technical Center, who described the company’s CAD system as an all-inclusive system that covers everything from design, production, marketing, and service. Collaborative CAD systems have enabled the implementation of new design paradigms, such as concurrent engineering. Concurrent engineering refers to the involvement of manufacturing, marketing, and purchasing personnel in the early stages of designing a new product to co-develop the product with the engineering and marketing departments (Stevenson 2010). It gives these cross-functional departments a first-hand view of progress and problems, and enables these departments to plan their department’s processes with the new product in mind. Thus, it is not hard to see that CAD systems also enables the manufacturing personnel to plan the manufacturing process design, and as well as point out which areas are not feasible with current available manufacturing capability (Schroeder 2008); therefore ensuring the practicality of the product design, and reduces the time it takes to go from design to production. 6

In addition, CAD systems have broadened the reach of corporations, allowing them to harness talent from across the globe to provide input, and to design the specifications of new products, 24-hours a day; work is passed on from locations retiring for the current work-day to locations beginning a new work-day. This idea is also known as the Followthe-Sun philosophy, and dramatically cuts down the overall time required to design a new car. In General Motor’s case, the manufacturer managed to achieve a stunning saving in design time for the company’s Electric Volt vehicle from 36 months, down to 29 months, which sharpened the company’s competitive edge (McCafferty 2011). The process improvements, and greater participation of personnel enabled by information systems help to make design and manufacturing process smoother, and cut the design to production time for new products down, enabling companies to iterate more new products in the same time period as compared to design processes without such systems.

3.2 Managing and improving supplier quality in procurement Procurement plays a significant role in manufacturers’ business process. Time and manpower is wasted with manually checking and handling suppliers who either deliver late, or deliver incorrect shipments and services. Furthermore, it is not easy to determine whether a supplier should be dropped for poor reliability. To properly quantify the performance of their suppliers, automobile companies have deployed information systems that integrate the functions of purchasing with the ability to assess supplier performance. Such a system enables them to evaluate their supplier’s performance, quantify and rank them, so as to make informed decisions on which suppliers to continue sourcing products and services from. The BMW Procurement System handles the purchase of supplies and services for its plant operations (Avery 2008). BMW rates suppliers on a scoring system that is split between objective measurements of performance metrics such as on-time delivery or completion, fill rate, invoice accuracy; as well as direct assessments by the end-user within the company. The complete assessments are then provided to the suppliers to help them improve their performance. Managing feedback with the help of the system has been instrumental in assisting the company’s suppliers to meet performance targets: Avery (2008) cites a marked improvement in all rankings (53 green-rated suppliers to 63, etc.) In addition, the utilisation of such a feedback channel has enabled BMW to deepen working relationships with its suppliers to resolve performance issues, where previously the dominant resolution was by dropping or changing problematic suppliers (Helper & 7

MacDuffie 2001).

3.3 Improving Inventory management Holding parts inventory is an undesirable side-effect of automobile makers’ business process in order to produce vehicles, since they need to keep enough parts in a reasonably reachable location so that production may be uninterrupted; yet at the same time, too much inventory increases costs and risks related to storing the raw materials (e.g. cost of rental space, risk of obsolescence). Therefore, a desirable concept in the manufacturing process is Just-In-Time inventory handling. Just-In-Time inventory handling requires parts to be delivered by suppliers only at such a time that it is used almost as soon as it reaches the production facility. Such a process would require a lot of coordination by hand, and is thus a natural process to be automated through the use of an information system. Cami automobile is an example that enabled JIT inventory handling through the automation of its the part delivery system at its assembly line. Parts from suppliers are unloaded and injected into the production line with the help of automation systems. Information intelligence within these systems coordinate the flow of materials within the plant electronically. In contrast with the old system of eyeballing the various part levels at the production line, Cami was able to deliver parts for 190,000 vehicles in a year, which represents an almost 400% improvement over the previous figure of 50,000 vehicles (Trebilcock 2007). However, implementing an information systems for the management of inventory does not mean that manufacturers’ existing systems remain the same forever; the introduction of new technologies as they appear serve to encourage the evolution or replacement of their existing information systems. Hyundai Motors’ subsidary, Glovis, used to stick bar code labels to part boxes. While information about the parts may be tracked by scanning the bar codes, it is a manual process, and requires human intervention to scan the bar codes. After modernising the tracking system, the company can now track cardboard boxes of vehicle parts destined for Hyundai factories with Radio Frequency Identification (RFID) tags (Anonymous N.d.). These tags contain information related to the shipment, which are automatically tracked as each part passes through a special RFID interrogator gate. Workers can then verify the information in the tags against the actual order information, reducing the risk of human errors, and improved the traceability of the various parts in the plant.

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Chapter 4

Challenges to IS While Information Systems (IS) use has been beneficial to automobile companies, the proper implementation of such systems is important in order to reap the most benefit. A key consideration would be the potential fragmentation of systems, an undesirable situation where different departments utilise a non-uniform platform within a company’s deployment, as well as incompatible data formats with supplier systems.

4.1 Fragmentation of Systems Segregation of IS causes decreased efficiency in the value chain: the data and software incompatibility across heterogeneous systems break information flow, and decreases efficiency and flexibility (McAfee & Brynjolfsson 2008). This problem is present both within internally, between departments, and externally, between supplier and manufacturer. This lowers the overall efficiency of the value chain. Therefore, there is a need for a standardised system both internally and externally to allow the seamless flow of information. Internally, the challenges of implementing a standardised IS comes mainly from the resistance of departments. Moreover, there is a need to handle data redundancy within the IS; making information available where they are needed and hiding them where they are not needed. Necessary information enhances the workflow of value chain. For example, product designs from the design department could be made available to engineering, marketing and procurement department, such that production facilities could be configured, marketing plans could be drawn and materials could be procured concurrently. Conversely, making unnecessary information available where they are not needed leads to annoyance and decrease in productivity. Therefore, the design of the IS plays an pivotal role in handling these redundancy and eventually gaining user acceptance, but this is by no means an easy goal to achieve. Externally, there is a need to develop partnerships with suppliers and distributers, as opposed to adversarial relationships (Helper & MacDuffie 2001). To achieve this, automobile manufacturers have to come out with a value proposition and communicate to all parties within a value chain, and set clear goals for the supply chain. This goal encourages long-term partnership and collaboration between parties, versus an adversarial relationship where cost is the major determinant to procurement decisions. With security in partnership, the value of implementing a standardised system that aligns with the 9

automobile firm becomes obvious to the supplier.

Chapter 5

Conclusion In this paper, we have explored the application of Information Systems, and its impact in automobile manufacturer’s core business functions. It is evident that augmenting such systems in their operations have given the manufacturers improved efficiency, savings and flexibility within their business functions. Furthermore, the arrival of new technologies enable these manufacturers to consistently innovate new business models, and create new avenues for them to interact with their customers. From a marketing perspective, incorporating custom information systems in the manufacturer’s products create a distinct branding for companies, and is a main source of competitive edge for them. We also note the substantial savings achieved from singular applications of Information Systems. Stand-alone systems such as Cami’s JIT inventory handling system presents a huge reduction in inefficiencies. Thus, we estimate that an extension of such stand-alone systems to encompass more of the manufacturer’s operations would reap higher savings and efficiency improvements. However, an important key in realising such efficiency is to maintain an expansion of a standardised system that may be used uniformly throughout the enterprise’s operations.

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