Risk Management in Global Dispersed Supply Chains - The Case of Obvio!

Bachelor Thesis 2007 53 Pages

Business economics - Business Management, Corporate Governance


Table of Content

Table of Figures

List of Abbreviations

l. Introduction
l.l The Change of Supply Chains (SC)
l.2 Competitive Advantage of Supply Chains
l.3 Current US Market Environment
l.4 U.S. Industry Profile
l.5 U.S. Market Trends and Outlook
l.6 U.S. Hybrid Market Historical Sales

2. Obvio! Automotoveiculos S.A.
2.l Business Description
2.2 Product Portfolio
2.3 Suppliers – Module Consortium
2.4 Strengths, Weaknesses, Opportunities, Threats
2.5 Top Competitors

3. Outsourcing of the Supply Chain
3.l Managing the Value Chain
3.2 Pull-System
3.3 Obvio! Technology for “l00% Outsourcing”
3.4 Disadvantages of a Completely Outsourced SC

4. Supply Chain Risks
4.l Risk Categorization
4.2 Risk Identification
4.3 Analysis of Supply Chain Risk
4.4 Risk Management in Supply Chains
4.5 Risk Mitigation Techniques
4.5.l Supplier’s Selection Process
4.5.2 Supplier’s Development
4.5.3 Communication Barrier
4.5.4 Total Quality Management (TQM)

5. Summary



Internet Sources

List of Figures

Figure l: U.S. Hybrid Market Historical Sales (l999 - 2006)

Figure 2: Structure of the Smart Production Facilities (Hambach)

Figure 3: The Automotive Value Chain: When push comes to pull

Figure 4: Obvio! Technology for “l00 Outsourcing”

Figure 5: Solution Process for SCRM

Figure 6: Sources of Risk within a Supply Chain

Figure 7: Model of SCRM

Figure 8: Purchasing and the Value Chain

List of Abbreviations

illustration not visible in this excerpt

1. Introduction

“Obvio! Automotoveiculos S.A.” is a new automobile developer and manufacturer of high-safety and high-perform ance c ars in Ri o de Janeiro, Brazil. The particularity of this young com pany is the way to m anage the supply chain. It has succeeded in assembling a network of strong suppliers to inco rporate th e latest advan ces in automotive engineering. The purpos e of this the sis is to sc rutinize th is unique supp ly chain and to point out specific risk m anagement aspects. Through its globally and virtually dispersed character, this SC m odel - while also bearing risks - opens up new opportunities for the automotive industry.

1.1 The Change of Supply Chains (SC)

“The supply chain is the set of inter- and intracompany processes that produces and delivers goods and services to custom ers. It includes a ctivities suc h as m aterials sourcing, production scheduling, and the physi cal distribution system, backed up by the necessary information flows. Procurem ent, manufacturing, inventory m anagement, and transportation are typically considered part of the supply chain organization”.1

Todays SC’s are no longer country-based; in creasingly they are spreading across and among regions. Design and management of extended supply chains require involvement from all SC partners : m aterial suppliers, manufacturers, distributors, retailers, and service companies. They have to work together to ensure the creation of an efficient and effective global SC, which meets customer demands. Therefore logistics2 are the key to successful SCM.

To design, im plement, and m anage a global SC, that delivers goods at the lowest possible co sts and m eets custom ers‘ need s, requires integration across business functions, country borders, and SC partners. The key to econom ic benefit 3 is total SC performance, rather than i ndividual plants and warehouses, as in the past. In today’s world, SCs compete by transforming their business through logistic management.4

1.2 Competitive Advantage of Supply Chains

Efficient managem ent of global s ourcing risk crea tes a c ompetitive advantage 5 and reduces the probability and im pact of detr imental ev ents. Suppliers such as North American carm akers are under pressure to improve quality, and to reduce costs and product developm ent tim e. These factors ha ve a direct im pact on costs, quality, technology, and on the time for marketing new products.

Global SCs do not only have to deliver the goods but also to achieve the level of service required by customers, and that at the lowest possible delivery costs.

An important part of any global S C strategy is asset deploym ent. The strategic use of assets, such as customer base, suppliers, plants, warehouses, and distribution centers has to be ensured. Thus, econom ic benefits only come from looking at the perform ance of the whole SC, rather than the performance of individual plants.

The current key trends in the logistic sector are:6

- Active managed costing to assess direct product & account profitability
- Demand to drive inventories out of the supply chain
- Efficient product development
- Globalization and increase of competition
- Increasing numbers of distribution channels
- Individualization of consumers
- Internationalization of partners within the supply chain
- Manufacturing rationalization and reallocation
- Requirement for increased service levels

And following additional trends are especially found in the North American SC sector:

- Changes in logistics’ reporting relationships
- Formation of new collaborative supply -chain relationships between vendors and retailers
- Increased use of information technology and third party logistics providers

The main production facilities of Obvio! S.A. are based at Xerém indu strial district in Duque de C axias city, near Rio de Janeiro, where the autom obiles are finalized. It is a new type of environm ental frie ndly vehicle, a hybrid automobile 7, that is associated with “state-of-the-art composite technologies, materials and features for urban cars that are fun and efficient“8, in the media.

The first autom obiles will be offered in th e USA and Canada at dealerships in 2008. Negotiations with European and Asian d ealers are also taking place. The North American hybrid automobile sector however is, of special importance for the com pany, as this has already been contracted.

1.3 Current US Market Environment

Broad restructuring program s, de signed to reduce production costs, currently characterize the US autom otive industry. The Big Three (Chrysler, Ford & GM) have been streamlining their busin esses, announcing m ajor plant closures and job cuts to remain profitable. Moreover fuel thirsty light trucks and sp ort utility v ehicles (SUVs) that brought profits in the 80s and 90s are fa lling out of favor in the face of increasing oil prices.

1.4 U.S. Industry Profile

In 2005 the U.S. automotive industry built ll. 98 million vehicles and is therefore the largest producer and consum er of motor vehicles in the w orld. Toyota sold 747,300 units in North America in Q2 2006, which is l6% increase when compared to the same period in the preceding year. In addition to this, the Big Three’s share of the US m arket dropped to 56.8% in 2005, from 6l.5% in 2002, reflecting the greater a ttraction of foreign brands with niche offerings at a ffordable prices (Source: Departm ent of Commerce).9

1.5 U.S. Market Trends and Outlook

Most of the car producers are increasingl y reaching out to younger consum ers through online m ultimedia m arketing, which are disenc hanted with traditional media m ethods such as television advertisi ng. Moreover the dem and for sa tellite radio has softened, making iPod connectivity a norm in most brands and upcoming new models.

Vehicle recalls have become more frequent in the US with the tightening of government regulations. Furthermore hybrid vehicles have been selling rapidly in the US due to the current emphasis on fuel economy.

Hybrid sales grew from 9,350 in 2000 up to 205,749 in 2005. Sales of hybrids in the U.S. reached a record high in July 2005, with 25,626 vehicles sold. This is a 32% y ear- on-year increase. Hybrid vehicles accounted for 3% of the total vehicles sold in the first seven months of the year. The Toyota Prius controlled 4l.6% of the total hybrid market, with 59,270 units sold. According to the m arket research com pany ABI Research & Automotive Technology Research Group 10, the US hybrid m arket is projected to account for 5% of the o verall US car m arket by the end of the decad e, as m ore buyers look beyond conventional gasoline-pow ered engines (according to AIADA ll and Hybridcars.com12).

The outlook for the US autom otive industry in 2007 is less optimistic due to a combination of various pressures including rising oil prices, higher interest rates , slowing job growth and stagnating wages.

1.6 U.S. Hybrid Market Historical Sales

The following figure shows the increase in hybrid sales since l999. E specially since 2004 the market has experienced a significant rise due to the oil price development. The most accepted hybrid model has been the Toyota Prius.

Figure 1: U.S. Hybrid Market Historical Sales (1999 - 2006)13

illustration not visible in this excerpt

2. Obvio! Automotoveiculos S.A.

The following chapter gives som e detailed information about the com pany. The firm is analyzed under the aspect of its business model and its operating business environment. Furthermore, the adopted procedures are cl arified by examples th at take a look o n competitors’ techniques.

2.1 Business Description

The project Obvio!, founded in Rio de Janeiro in 2001, is a quite young com pany among the present automobile manufacturers. The first id ea of its concept appeared more than twenty years ago, e.g. the model 828 is based on a blueprint drawn by Anisios Campos, a famous car designer, in l982. In Decem ber 2005 the company changed the corporate structure into a So ciedade Anonima (Obvio! Autom otoveiculos S.A.) which m akes it a joint stock c ompany and enables suppliers to p articipate in a s shareholders. E.g. ZAP, the main distributor in the U.S. bought 20 % of the shares.

Obvio!’s target is to produce urban vehicl es which are “desirab le" for consum ers, combining high added value, and the right pr ice with high saf ety standards, ecological conscience, perfect quality and serious performance”.14

The company defines itself not as a small-car factory but more as a “brand company”.15 The reason for this is, that Obvio! not onl y defines the product but also m anages the assembly line operations. The whole production process is outsourced to key suppliers, like PES - Porsche Engineering Services, Lotus Engineering Services, EDAG, IVM- Edscha but this huge SC is only getting active when the client demands it. This system is called pull-system or BTO (build to order). 16 The client s igns first th e contract and after this Obvio! will start to produ ce the car and delivery will be in “twenty to thirty days”.17 With this unique production system it is possible to establis h a lean production with low co sts and the possibility o f f ast changes, sim ilar to Dell Inc. An engineer consultant asserts: “85 % of the parts are immediately available on th e shelves of the Brazilian suppliers”.18 The advantag e is that cars are produced which are already sold. That lowers the risk an d increases revenue s because no special di scounts have to be given. In addition to this th e Brazilian gove rnment supp orts this project with a tax benefit program (process number E28/ 000.l58/05) which is also granted to com panies like Peugeot-Citroen (PSA) or VW in this region.19

The l.000.000 m 2 FNM complex at the Xerém industrial district in Duque de Caxias (greater Rio de Janeiro regi on) was bought from Fiat do Braz il and is ab le to p lace all assembly facilities, green projects, suppliers and machineries.

2.2 Product Portfolio

Obvio! will enter the mark et with two m odels, the 828 20 and the 0l2 21, which should appeal to different custom ers. The cars look very exotic and have a lot of new features like special leathers, special bags by Boblbee 22 and scissors doors. The integrated iMobile carputer shows vehicle diagnostic a nd maintenance tools, voice assisted turn- by-turn navigation, an organizer with m obile device sync ability, web connectivity, emergency services and safety features such as rear view camera. The iMobile carputer runs on Windows XP wi th 60 GB HD and 2 GB RAM and includes, for instan ce GPD, DVD, MP3 sound, e-mail, Internet, Bluetooth, WLAN,… .

Very special is that up to three adult passengers can take a seat aside in a bench.

In addition to this passengers should not worry about their safety due to the "Niess elliptical survival ring"23 which enables the chass is to work like survivor cell in case of a crash. Furtherm ore the cars exceed the high safety standards of the USA, European community and Japan.

The most important feature of the m odels is the “green” 24 engine that burns anything from bio-ethanol to pure ethyl alcohol to conventi onal petrol or natu ral gas. The cars run better w ith ethano l and natu ral gas than with gasoline b ecause ethanol carries its own oxygen. Adding oxygen to fuels results in m ore complete fuel com bustion and reduces harmful tailpipe em issions. Another be nefit of bio-ethanol is that it is l0 0% renewable from corn, s ugar beet, etc., burns efficiently and e mits 35% less CO2 than petrol.25

Natural gas has the advantage that it pr oduces lower emissions than gasoline and reduces NOx, carbon monoxide and dioxide em issions. That is why it is an alternative to reduce air pollution from vehicles and to support the Kyoto protocol.

An electric version of the engine is planned as well. This electric version would have a range of 200 to 240 m iles with acceleration fr om 0 to 60 mph in less th an 4.5 seconds and a top speed of l20 m ph. A ful l norm al rech arge will take five hours and a quick charge of 30 minutes would provide a twenty to fifty mile range.26

The aim of Obvio! and ZAP, its m ain U.S. distributor is to reduce carbon dioxide (greenhouse gases) and thus harmful tailpipe emissions.

ZAP is planning to offer the 828 27 model at the beginning of 2008 in the USA and Canada for US$ l4,000 and the 0l2 28 model at the end of 2008 for US$ 28,000. The price for th e electric version will b e higher that is the 828E will cos t US$ 49,000 and the 0l2E U S$ 59,000. The U.S. com pany ZAP has already signed a contract with Obvio! about a yearly delivery volume of 50,000 cars consisting of both models.

2.3 The Suppliers – A Module Consortium

As m entioned before suppliers produce all parts for the vehicles. On their website, Obvio! provides a list 29 of 73 suppliers that produce pa rts or rather whole system s, which are later, integr ated in the car. Most of them have their production facilities at FNM and form therefore a “module consortium”.30

José Ignacio López de Arriortúa a for mer CEO of General Motors was one of the first persons who defined the basic idea of a m odule consortium. The idea is that suppliers are directly involved in the production process. Their produc tion facilities are placed near, alternatively at the assembly line, so that the installation of the car is immediately possible. In this c oncept the em ployees who are invol ved in the production process are paid by the suppliers and not by the car producer itself.

This system has the following benefits: The challenges of day-to-day process problems are managed by suppliers, which is why Obvio! is able to focus on planning and quality control. Secondly, the whole production can ea sily be controlled because all processes are made at FNM facilities. As a third aspe ct, a module consortium lowers the risk and the liability of the com pany instead of the supplier, who would usually participate in investments and product development costs.31

The next drawing 32 is to illus trate how suppliers can be placed around the production facility. As there is no information available about Obvio!’s supplier arrangement that is why the example of smart GmbH at Hambach/ Germany is shown as an illus tration on the next page.

The exam ple of sm art Gm bH points out the interdependence between com ponents suppliers and the company. A complex like this could be easily es tablished on a “green field” that is on new pre mises. The i nvestment volume in this case was € 200 Million whereas Daim ler-Chrysler financed 75% and 25% the supplying companies. This modular consortium results finally in a vertical range of manufacture of l0%.33

illustration not visible in this excerpt

Figure 2: Structure of the Smart Production Facilities (Hambach) 34

This concept makes great demands on logistics and assembling:

First, the direct delivery of the com ponents to the assem bly line could cause complications due to a high supplier fre quency in the production. Moreover, traffic around the buildings should be optim ized and the transportation w ithin the buildings should be minimized. In addition, docking stations should be flexible enough to vary the assembly steps. Finally, the building com plex should be expandable without change of the basic logistic concept35.

To meet these guidelines it is necessary th at the production line form ed like a cross is split in four areas. As a resu lt suppliers have a distance to the assembly line of less than ten meters. The four areas are m ainly independent but the free float makes sure that the production will not s top after interferences of less th an ten m inutes. Most of the parts are produced directly in “smartville”36 or anywhere else and are later integrated into the final assembly. Mistakes are directly accused to the supplier in order to increase quality. The parts are only paid after the installation into the car (pay on demand).37

The FNM production facilities in Duque de Caxias are similar organized. Som e main suppliers are for exam ple: Lotus Engineering for automotive engineering development, Tritec for the engine developm ent, ZAP for the m ain distribution on the N orth American market, etc.38

2.4 Strengths, Weaknesses, Opportunities and Threats

Obvio! S.A. is a new project in the auto mobile industry and has therefore not yet a strong reputation, brand or im age. The e xperience of its key personnel is one competitive advantage of the company. Howe ver, Obvio!’s challenge are ris ing raw material prices, which could raise production costs and reduce profitability.

Key staff: CEO Ricard o Mach ado, Technical Director: Se rgio Raposo, Chief design partner: Anisio Cam pos. Remaining crew: Celso Santos, Marcus Valpassos, Jo rge Junior, Edson Galves, Jorge Moraes and Jorge Rocha, et al.

The strength of the com pany is its lean m anagement hierarchy due to the new corporation. l00% of its activities are outsourced that only a small amount of people are directly inv olved in the business. This f lat hierarchy enables fast, uncom plicated an d efficient decisions.

In addition to this Obvio! can take an a dvantage of their suppliers’ know-how such as engineering capabilities, technology or design. For example, the engineering process is mainly influenced by L otus Engineering, the design by R io 2l Design and the power trains by T ritec Moto rs. Tritec Mo tors Lt da. is a joint venture between BMW a nd Chrysler, established in l996 in Brazil. The objective was to m anufacture sm all displacement engines with low fuel consumption and high quality.39

Due to the current public discussion on air pollution, its environmental friendly products are another outstanding strengt h. Obvio! offers an eco-fri endly product for a reliable price that is powerful, econom ical and fun to drive. Because of their design and technique, the 828 and 0l2 are completely diffe rent from other automobiles available at the market. Finally key employees are already experienced in the production and design of urban cars. Anisio Campos, for exam ple did design the Mini-Dacon 828 in l982 and moreover has some specific knowledge of car races.

The weakness is that th e project Obvio! is a new Brazilian attem pt to produce a m ass- production car in a niche market. This company does neither possess a reputation nor an established brand. The main challenge however, will be the risk management of the SC. As several of the suppliers are holding key roles in the production process, Obvio cannot control all core activities itself.

Moreover Obvio! has only one distribution channel in th e U.S. region, this being supported by the company ZAP. Such exclu sivity could constitute a weak point for the distribution in such a wide m arket. For this reason Obvio! has attem pted to establish contracts with European and Asian dist ributors, which, however have rem ained unsuccessful up to date.

The high price for the electric versions could be another problem as well. A price from US$ 49.000 up to US$ 59.000 for a small electr ic car m ay not attract a m ultitude of consumers. Therefore positive sales figures for the e-version could be less realistic.

On the other hand there are lots of opportunities for Obvio!. Demand for hybrid vehicles is inc reasing worldwide owing to string ent emission standards, higher fuel prices, growing environmental awareness and the poli tical pressure on the industry to produce less harm ful autom obiles a ccommodates th e idea of Obvio! autom obiles. The worldwide demand for light hyb rid electric vehicles is estim ated to reach 4.5 m illion units in 20l3. The US i s expected to experience the highest level of dem and for HEVs, estimated at two million units in 20l3.40 This development could mean rising sales and aid packages from governmental and ”green” institutions.


l Mercer Management Consulting Inc.

2 In t his con text lo gistics is th e art an d science of st rategically managing an d c ontrolling t he fl ow of goods, energy, information and other resources like products, services, and people, from the source of production to the marketplace.

3 According to this text economic benefit implies the positive contribution to gross national product from an economic activity or project.

4 In t his context the meaning of Logistics management i s characterized by that part of the SCMP that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements.

5 Accord ing to this th esis, competitive ad vantage is an abn ormal positive ren t du e to the un ique value- crating production processes. The source is mainly the distinctive core com petence, which is difficult to replicate.

6 Th ome, R ainer a nd B öhnlein, C laus-Burhard (2006): “Supply C hain M anagement i n de r Praxis”, Lehrstuhl für BWL und Wirtschaftsinformatik, Universität Würzburg, p.9-l5

7 In this context a hybrid automobile is a vehicle that uses two or more distinct power sources. The most commonly prod uced sy stems at t he moment are pa rallel hy brids, which have both a n i nternal combustion e ngine a nd an el ectric motor connected to a mechanical transmission. O bvio!’s e ngine uses three sources of energy: gasoline, ethanol and natural gas.

8 Wall Street Journal Online: “Obvio! Opens Bidding for Automotive Engineering Services for Ethanol and El ectric M icrosport C ars from B razil”, R io de Ja neiro/ B razil (Jul y 27 th, 20 06), http://www.obvio.ind.br/obviona/news%20009.htm (accessed February l2th, 2007)

9 Office of Aerospace and Automotive Industries, International Trade Administration, U.S. Depa rtment of Commerce: “The Road Ahead for the U.S. Auto Industry” (April 2006)

10 ABI Research : “Co mmercial Hybrid Veh icles” (3Q 20 06), h ttp://www.abiresearch.com/products/ market_research/Commercial_Hybrid_Electric_Vehicles (accessed February 7th, 2007)

11 American International Automobile Dealers: “Sales of Hybrids Continue to Climb in May, But Not At April” http://www.aiada.org/newsroom/firstupIssue.asp?id=622005-l8 (accessed February l8th, 2007)

12 Hybridcars.com: Archive of Hybrid Market Dashboards, http://www.hybridcars.com/ marketdashboard.html (accessed February l7th, 2007)

13 Hybrid cars.com: “Jan uary 2007 US Sales”, h ttp://www.hybridcars.com/market-dashboard/jan07-us- sales.html (accessed February l9th, 2007)

14 Ob vio! S.A.: “Th e Obvio! co mpany: Less is b etter”, h ttp://www.obvio.ind.br/obviona/history.htm (accessed February l9th, 2007)

15 According to this text a “bra nd company” is a co mpany whose customer asso ciate products with i ts name, logo, slogan, and design scheme. The brand is the symbolic embodiment of al l the information connected to a company.

16 Arndt, Holger (2005): “Supply Chain Management”, 2nd Edition, Gabler Verlag, Wiesbaden, p.l60 f. l7 Obvio! S.A.: The Obvio! rules: "Customer Driven Design", "Build to Order" and "Full Outsourcing",

http://www.obvio.ind.br/obviona/history.htm (accessed February l8th, 2007)

18 Wall St reet Journal O nline: “OB VIO! Opens B idding f or Automotive En gineering Ser vices for Ethanol a nd Electric M icrosport C ars f rom B razil”, R io de Ja neiro/ B razil ( July 27 th, 2 006), http://www.obvio.ind.br/obviona/news%20009.htm (accessed February l2th, 2007)

19 Obvio! S.A.: “Obvio! and Xerém District at Duque de Caxias City: The right choice at the right time.”, http://www.obvio.ind.br/obviona/history.htm (accessed February l8th, 2007)

20 Appendix no. l 2l Appendix no. 2

22 Boblbee is a company for sports and recreational equipment, specialized on backpacks. It is owned by Global Act AB holding company.

24 In this context “green” is a term that describes what is thought to be environmental friendly source of power and energy. It refers to renewable and non-polluting energy sources.

25 Ob vio! S.A.: “Ben efits of Natural Gas as Fu el”, h ttp://www.obvio.ind.br/obviona/history.htm (accessed February 7th, 2007)

26 Ob vio! S .A.: “0 l2E – El ectric Pl ug-in Version – prel iminary speci fications”, http://www.obvio.ind.br/obviona/history.htm (accessed February 7th, 2007)

27 Appendix no. l

28 Appendix no. 2

29 Appendix no. 4

30 Ihme, Joachim (2006): “Logistik im Automobilbau”, Carl Hanser Verlag, Munich, p. 307

3l Thaler, Klaus (2003): Supply Chain Management”, 4th Edition, Fortis Verlag, Troisdorf, p. 28

32 According to plant drawing: Agiplan AG

33 Sydow, Jörg (2006): “Management von Netzwerkorganisationen”, 4th Edition, Gabler Verlag, p.2

34 According to plant drawing: Agiplan AG

35 In th is con text a lo gistic co ncept reflects the art an d science of strateg ically managed and con trolled flow of goods, energy, information and other resources l ike products, services, and people, from the source of production to the marketplace.

36 According to this text “smartville” implies the production facility for smart au tomobiles at Ha mbach/ Germany

37 Ihme, Joachim 2006: “Logistik im Automobilbau”, Carl Hanser Verlag, Munich, p. 306

38 Appendix no. 4

39 Tritec Motors Ltda.: “Who is Tritec”, http://www.tritecmotors.com.br/english/tritec/whois.htm (accessed March 2nd, 2007)

40 Freedonia Industry Study December 2004: “World Light Hybrid Electric vehicles”, Study l868 www.freedoniagroup.com/pdf/l868smwe.pdf (accessed March 9th, 2007)


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University of Paderborn
Risk Management Global Dispersed Supply Chains Case Obvio



Title: Risk Management in Global Dispersed Supply Chains - The Case of Obvio!