Audi's International Supply Chains
In Germany, automotive industry is a leader among other sectors of the economy, which is constantly updating its products, using advanced technologies and high quality standards. Globalization has caused a substantial increase in the number of companies in different market segments. The growth of new and traditional markets, in turn, has caused an increase in demand and interest in the processes of communication networks and production processes in the automotive industry.
The increased competition forces car manufacturers to quickly and accurately respond to the individual needs of the client and to maintain as long as possible the commitment of the client to this brand. To accurately respond to regional and individual requirements, there is a need in optimal highly organized system of equipment manufacturers, suppliers of systems and components, partners, and, of course, customers.
Audi AG Background
Audi AG is the German automobile company within Volkswagen Group, specializing in the production of cars under the Audi brand. Headquarters of the company is located in Ingolstadt (Germany). Chairman of the board of directors is Martin Winterkorn.
The company Audi was founded in 1909 by August Horch. Its roots go back to the now defunct, but not less famous company Horch that shone in the German skies during the Third Reich. In 1899, a talented inventor, August Horch founded the firm "Horch and Company" in Mannheim, which in 4 years moved to Zwickau. In 1909, he built a new very bad 6-cylinder engine, which had nearly brought the firm to the brink of bankruptcy. This resented his companions who decided to deal with a zealous inventor and expel him from his own company (Baldwin 1987).
However, Horch immediately founded another company, which, of course, also had the name "Horch". His former companions, feeling in the young company a strong competitor, filed to the court demanding to change the name of the company. August Horch was forced to change the company name and turned to its Latin equivalent (the word “horch” can be translated from German as “to listen”) and so the new company was given the name “Audi.” This was the beginning of the famous and powerful automobile company.
After the Second World War, Audi and other automotive partners were nationalized. In 1949, they were reformed through the involvement of the majority of Mercedes-Benz shares. In 1958, Daimler-Benz AG acquired the majority of Audi shares, but later sold them to Volkswagen. Shortly after this event, a new car with front wheel drive was released, and by the end of 1968 Audi returned to the market, having a good range of models and excellent sales figures.
Currently, Audi, which is a part of Volkswagen concern, is experiencing rapid growth. This success has been made possible due to the new developments of the company, including the Audi A8 model with a body worthy of the highest ratings.
Audi’s heart is in Ingolstadt. This is the largest of all company’s plants with assembly lines, which each year give more than half a million cars, including such Audi flagships as Audi A3, Audi A4, Audi Q5, and others (Jacoby 2009).
Now, this plant is one of the largest employers in the region, providing jobs for over 30,000 people. Its history began in 1949 when instead of the ancient fortress a plant was built, which initially began producing motorcycles and parts. Over time, this plant has become a major industrial center of the company, and in 1985 the company's headquarters moved here as well.
Supply Chains Management
A modern plant in Ingolstadt is a technically verified center, absolutely perfect in terms of production, equipped with cutting-edge technologies, and characterized by the highest efficiency. Ingolstadt plant includes production lines with its own stamping shops. In addition, there is a body shop, assembly lines, and paint shop. Efficiency and flexibility are the main principles of the production process.
Ingolstadt technical development department deals with the conceptual design of all cars, including design decisions, development of engines, electrical systems, body, and chassis. Here, all the systems and cars are tested. In addition, Audi has its own testing site in Neustadt, where all of the latest technical developments are thoroughly investigated.
In Ingolstadt, special attention is paid to logistics as the proper organization of this complex process guarantees the clarity of work of all other divisions. Since the mid-90s of the previous century, Audi has begun to search for the main suppliers of components in the vicinity of the company. As a result, the pre-assembled individual nodes arrive to the assembly line in the precisely designated time (Blanchard 2010).
Changes in the global automotive industry for the past 20 years have changed the world of car manufacturing. Change in the producer-consumer relationship, transition to car assembly by order demanded to change the business model. This has led to the results discussed above. The global automotive industry is experiencing the level of modernization unprecedented in the history of production. Along with other automotive companies, Audi undergoes a fundamental restructuring. There is a radical redistribution of roles and responsibilities of participants in the production process. Audi has created the supply system structured by levels, which allows suppliers and final assembly plants to concentrate their energy on the core competencies and deliver quality products on time and at a low cost. Currently, the imperative for the company is operating by "just in time" principle and working closely with its suppliers to improve the effectiveness.
What is the essence of changes? First, there is a fundamental change in the role of consumers in the market. Modern customer does not want to wait or to get into the box of "serial" product. He is ready to pay the money, but he also requires a quality, meeting the delivery dates, minimal delivery periods, and he needs the product he receives to comply with the specific requirements. Previously, only the buyers of luxury cars could expect the car to be made according to their personal requirements. Now, this has changed. Today, even the buyer of the Audi’s cheapest car can afford to complete a car for his own needs. That is impressive. You choose the type of engine, transmission, color, and many other parameters of the car and after a while get your car.
The model range is changing very quickly as well. A new model is released every five years, every year the fundamental restyling is performed. And what about the quality of the car? Any defect, even minor, leads to recalling vehicles. Classic automotive production, oriented to achieve the greatest depth of the assembly within the same company, could not cope with all the challenges of nowadays concerning the production of the maximum amount of components using its own facilities. All this has prompted the auto industry to the radical restructuring of the relationships. Its essence lies in the following. Conventionally, the automotive industry is divided into the car assembly plants (OEM – Original Equipment Manufacturer), oriented to a minimum depth of the assembly, and suppliers (Automotive Supplier) of several levels, from the first to the Nth (Tier 1, ..., Tier N). First-tier suppliers are focused on supplying automobile assembly plants with components and assemblies with the highest level of the assembly, the second-tier suppliers are focused on the deliveries to tier-one suppliers, the third-tier suppliers supply to the second-tier suppliers and so on (Mentzer et al. 2001). This creates a virtual chain (or Supply Chain) of producers oriented to the highly specialized types of products in terms of manufacturing operations. At that, for car assembly companies it is much easier to plan their activities since they operate on a limited set of standard parts that are bought from vendors for specific orders of the customers. In addition, the orientation of business to car assembling for orders leads to the fact that the assembly plant should move to production and procurement "just in time" strategy, minimizing inventories, which under the conditions of weakly predictable flow of customer orders and fast-changing model range can remain out of demand. The orientation of the multi-level model of the automotive industry operating in the "just in time" mode leads to the total minimization of reserves and reducing the risk for making illiquid stocks, which are distributed on the entire supply chain.
The need for such restructuring has led to the fact that on the market the layer of independent automotive parts producers has drastically increased, and the big automotive companies, such as Audi, Volkswagen, and others have begun giving their components manufacturing units the opportunity to work in a free market. Now, no one is surprised when the same company produces, for example, front racks for 10 different car brands, while having several competitors in the same market niche, which reasonably reduces the prices for these racks. Restructuring of the automotive industry has led to a sharp rise of competition in automotive parts market, which has caused a total reduction of costs for vehicle production.
However, apart from the positive results, such restructuring threatens with serious problems. After all, if earlier, the automaker company could easily keep everything under control, providing a direct relationship with all suppliers, now the result of its activity becomes directly dependent on the relations with second and third level suppliers, which are out of this company’s control. Therefore, now the information about the fact of components delivery disruption begins to appear in the best case when this failure has occurred at the level of tier-one suppliers. Of course, this is unacceptable for Audi, the company focused on the consumer market. To prevent possible negative consequences, Audi along with other huge automotive companies, started implementing the technology of supply chain management (Automotive Supply Chain), based on the widespread use of the systems of information resource management and electronic communication.
In the expanding global manufacturing environment, Audi is looking for ways to improve its operations and reduce costs through the use of supply chain management technology. With effective management, the use of minimizing inventory methods and "just in time" production can significantly reduce the cost. In the methodological approaches to supply chain management, primary task is to establish a close relationship with both customers and suppliers. The management of these relationships and their integration into Audi’s business practices are key requirements for a system that is designed to work in this environment.
Supply chain management is based on the widespread use of electronic data exchange to transfer information about purchase orders, sales orders, deviations occurred during the production process, and implementation of information systems for enterprise resource planning (ERP systems) across the entire supply chain (Cooper, Lambert & Pagh 1997).
In Audi AG, the ultimate objective of the chain operation is the organization of such a level of interaction between enterprises that would allow within a day after the car assembly plant to receive the order for assembly work, all the vendors involved into the production to receive their purchase orders, plan the deliveries, confirm the deadlines, or give corrections. Conversely, the assembly plant should always be aware that the first level supplier has a problem with the supply at a time when the problem occurs at the fourth level supplier. Only in this case, the company will be able to take necessary measures not to delay with the order fulfillment.
One of the key distinguishing features of the mechanism of supply chains management in Audi AG is the work with the specific delivery schedules. The fact is that, although the company assembles its cars according to customer’s order (dealer’s order), production planning is still done according to the production schedule, which describes only the model of the car, but the composition of the final assembly is defined at the level of operational planning. Respectively, all Audi’s suppliers are also oriented to work on the schedules with urgent orders processing mechanism.
Enterprise Reserves Planning systems in Audi AG
As noted earlier, one of the two main components of supply chain management technologies are information systems for Enterprise Reserves Planning (ERP systems). On the market, there are many models of such systems, however Audi AG along with other serious automotive companies impose certain restrictions on such systems (Haag, Cummings, McCubbrey, Pinsonneault & Donovan 2006). ERP systems applied in Audi AG provide the following:
- Changing the production strategy of automotive industry: from manufacturing to the warehouse to manufacturing for a specific order;
- supply chains for the needs of assembly plants;
- hierarchical planning structure;
- volume and calendar plan based on forecasts;
- planning of production resources;
- operative production planning;
- production with low stock levels;
- sales to car assembly plants and for retail distributors (spare parts);
- closed relationships with customers based on JIT technologies (“just in time” production), TQM (Total Quality Management), ISO9000 / QS 9000, E-Commerce;
- closed relationships with suppliers focused on: planning optimization; working with materials and components; stock management; financial settlements;
- key directions of development;
- reducing costs;
- reducing order fulfillment time;
- production flexibility increase.
Top managers of Audi AG realize that today without implementation of Enterprise Reserves Planning systems, the company cannot expect to integrate into the global supply chains of automotive industry.
New Challenges and New Approaches
AUDI AG is setting new standards in the field of freight transportation: car manufacturer uses renewable energy trains to transport its cars from Ingolstadt to cargo port of Emden in the North Sea and it is the first company in Germany, which uses green electricity for that purpose. This innovative solution in the field of freight transportation is a progressive step for the automobile industry and an important component of Audi’s strategy, designed to ensure sustainable production in all aspects. Railway line to the port on the North Sea – the center of the international freight transportation, is the most important transport site for the company. Every day three trains with Audi’s production follow this way, providing transportation of around 150,000 cars a year. Audi has long used energy saving technologies in freight traffic. Up to 70% of all cars sold under the sign of the four rings are delivered to the destination by rail freight transport. Transportation of large components of many companies of Volkswagen Group is performed by railway (Hines 2004).
Audi also uses the railways to implement large-scale transportations between facilities in Ingolstadt and Györ. Painted bodies and hinged parts of Audi TT are sent from Bavaria in closed two-storey freight cars for further assembly in the north-western Hungary. Then, finished automobiles are returned to Ingolstadt on the same rail line segment as well as engines assembled in Gy%u0151r for the entire range of Audi.
When the transportation by cargo motor transport is necessary, Audi organizes centralized transportations between the enterprises of the company through the so-called "cumulative centers,” which provides sending of only fully loaded car carriers (Ketchen & Hult 2006).
Logistics Center Company (GVZ) where numerous suppliers operate was founded in Ingolstadt in 1995. Here, the main suppliers produce their nodes and deliver them directly to the assembly line in accordance with “just-in-sequence” principle. Such close cooperation significantly reduces the distance of transportation (Simchi-Levi, Kaminsky & Simchi-Levi 2007).
The use of PackAssistant Software ensures optimum placement of the cargo in the package and container. The savings potential reaches 20% and allows avoiding excessive intensity of transportation between suppliers and the company.
Audi AG is the world leading automotive company and its logistics and sound supply chain management play an important role in its business success. The top management of the company admits that, in fact, logistics department is the connecting link between all the services of the enterprise, its so-called coordinating center. The reputation of the company largely depends on the coordinated activity of the suppliers of all levels as the failure of components delivery may lead to the loss of customers’ trust. That is why, Audi AG pays great attention to the work of its logistics specialist who are responsible for all the work in the company from the supply of components up to delivery of the finished cars to end customers.
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