OPIM Case study

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W12772 WAREHOUSING STRATEGY AT VOLKSWAGEN GROUP CANADA INC. (VGCA)

Adam Bortolussi wrote this case under the supervision of P. Fraser Johnson solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e- mail [email protected]. Copyright © 2012, Richard Ivey School of Business Foundation Version: 2012-03-05

It was Tuesday, January 18, 2011, and Kym Meisner, director of warehousing and logistics at Volkswagen Group Canada Inc. (VGCA), was reviewing a presentation by the sales and marketing team regarding the five-year growth plan for both the Volkswagen and Audi vehicle brands in Canada. In her 20 years working for VGCA, Kym had never seen such aggressive growth targets attributed to new car launches, product facelifts and expected increases in year-over-year vehicle sales volume. She had already heard concerns from Dave Cook, the warehouse manager of VGCA’s parts distribution centre in Toronto, Ontario, regarding the limited space available in the warehouse. She wondered to herself how they could possibly make room for the inventory of additional new parts needed to supply the growing network of dealerships across the country. Kym had scheduled a meeting with Dave and the other members of the warehouse team the following afternoon to work on a plan for the distribution centre. She was particularly interested in the changes, if any, that would be needed to the size and layout of the warehouse to accommodate the company’s growth plans. Kym decided to do some quick analysis to prepare for the meeting on Wednesday. VOLKSWAGEN GROUP1 The Volkswagen Group, headquartered in Wolfsburg, Germany, was one of the world’s leading automobile manufacturers and the largest carmaker in Europe. The company represented nine brands from seven European countries: Volkswagen, Audi, SEAT, Skoda, Volkswagen Commercial Vehicles, Bentley, Bugatti, Lamborghini and Scania. Each brand had its own character and operated as an independent entity on the market. The product range extended from low-consumption small cars to luxury-class vehicles. In the commercial vehicle sector, the product offering spanned pickups, buses and heavy trucks.

1 Source: Volkswagen Group Website. http://www.volkswagenag.com/content/vwcorp/content/en/the_group.html.

December 27, 2011.

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This document is authorized for use only by Rawan Bahassan in OPM 511-F21-Dr. Salim Aljazzar taught by Dr. Salim Aljazzar, University of Business and Technology (UBT) from Nov 2021 to May 2022.

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The Volkswagen Group was a global brand that sold and distributed vehicles in 153 countries, supported by 62 production plants in 15 European countries and a further seven countries in the Americas, Asia and Africa. Around the world, nearly 400,000 employees produced approximately 30,000 vehicles per day or were involved in other vehicle-related services. With its nine brands, the Volkswagen Group had a presence in all important automotive markets around the world. Key sales markets included western Europe, China, Brazil, the United States, Russia and Mexico. The company had been able to increase its market share in 2010 despite a tough economic climate and competitive marketplace. In fiscal year 2010, the Volkswagen Group delivered 7,205,094 vehicles to customers worldwide, an increase of approximately 15 per cent from 2009, thus achieving a new record for the company. The delivery figures in each of the 12 months of the reporting period were higher than in the corresponding prior-year periods, when sales had, in some cases, been negatively affected by the consequences of the financial and economic crisis. Demand for Volkswagen Group models exceeded the previous year’s demand in all models and in almost all markets. Exhibit 1 provides an overview of the deliveries to customers by market and of the respective passenger-car market shares of the Volkswagen Group in fiscal year 2010. Growth Strategy2 Much of Volkswagen’s current and future expected growth was attributed to what was termed “Strategy 2016,” which was a global strategy that had originated at the corporate level and was pushed down to each group at the country level. The key element of Volkswagen’s Strategy 2016 was to position the Volkswagen Group as a global, economic and environmental leader among automobile manufacturers. The company expected to achieve this objective by using intelligent product innovations and technologies; paying particular attention to an environmentally friendly orientation; and by promoting a continuous focus on improving productivity, quality and customer satisfaction. The Volkswagen Group’s aim was to be the most successful and fascinating automaker in the world by 2016. Deliveries in North America3 Although the growth in the passenger car market in the United States had slowed somewhat in the second half of 2010, the Volkswagen Group’s sales figures had increased by 21 per cent in 2010 from 2009 as a whole. The car models that had recorded the highest growth rates were the new Beetle, Golf, Tiguan, Passat CC, Audi A5, Audi A6, Audi A5 Coupe and Audi Q5 models (see Exhibit 2). In Canada, deliveries to customers had increased by 16 per cent year-over-year. Particularly strong demand was recorded for the Golf, Tiguan, Audi 4 and Audi Q5 models. VOLKSWAGEN GROUP CANADA INC.4 Parts Distribution Network VGCA operated one Parts Distribution Centre (PDC) located in Toronto, Ontario. The PDC was also part

2Source: Internal documents, March 30, 2011. 3Source: Volkswagen Group Website, Annual Report 2010. http://www.volkswagenag.com/content/vwcorp/info_center/en/themes/2011/03/Annual_Report_2010.html, December 27, 2011. 4 Source: Internal documents, March 30, 2011.

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of a larger North American distribution network that included seven large PDCs situated across different regions of the United States. The PDCs were responsible for storing the inventory of spare parts for distribution to dealerships across the country. These parts were used for general maintenance and repair for vehicles owned by Volkswagen customers. The PDC was not responsible for the storage and distribution of new vehicles, which were transported directly to dealerships from the Port of Halifax. Of the seven U.S. PDCs, the largest was located in Newark, New Jersey, where all parts for North American markets were received from the German manufacturers. The Newark PDC was the only PDC referred to as a slow-moving PDC, which stocked 100 per cent of Volkswagen parts. The fast-moving PDCs, such as the one in Toronto, carried 60 to 80 per cent of the most commonly ordered stock-keeping units (SKUs). Parts not stored at the Toronto PDC could be acquired by placing a special order to the Newark PDC, for shipment first to Toronto and subsequently to the dealer. VGCA 2016 Growth Plans In the previous year, VGCA sold approximately 69,000 vehicles in Canada across both the Volkswagen and Audi brands. The sale of spare parts shipped out of the Toronto PDC to Canadian dealerships amounted to $200 million in revenue. VGCA had aggressive plans to grow the volume of new car sales annually by 10 per cent per year over the next five years. The growth of spare parts sold to dealerships was expected to increase at this same rate. This increase included the ability to service the demand of an additional 17 new dealerships scheduled to open in new markets across the country during this period, primarily in Ontario and British Columbia. New Vehicle Launch and Facelifts VGCA’s plan included four new vehicle model launches and four new facelifts to existing models each year for the next three years for a total of 12 new vehicles and 12 facelifts (see Exhibit 3). Approximately 75 per cent of all SKUs would be kept in inventory at the fast-moving Toronto PDC. Each new vehicle model would add 3,000 new SKUs, and each new facelift would add 1,000 new SKUs. The Toronto PDC already housed more than 80,000 total active SKUs. TORONTO PDC5 Warehouse Size The Toronto PDC was a 160,000-square-foot facility that was 400 feet in length and 400 feet in width with a 30-foot ceiling (see Exhibit 4). Typically, 20 per cent of the warehouse space was occupied by racking that was stacked to the ceiling. Wide aisles enabled staff to pick product throughout the facility. The warehouse had an additional 40,000 cubic feet of unused space in the warehouse that could be installed with new racking to store more parts. The Toronto PDC supplied parts to 122 Volkswagen and Audi car dealerships across Canada and, at any one time, held, on average, $20 million in inventory. VGCA had a master service level agreement with the Canadian dealerships that committed the Toronto PDC to deliver parts within 24 hours of order receipt.

5 Internal documents, March 30, 2011.

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This document is authorized for use only by Rawan Bahassan in OPM 511-F21-Dr. Salim Aljazzar taught by Dr. Salim Aljazzar, University of Business and Technology (UBT) from Nov 2021 to May 2022.

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The internal service level for filling orders accurately and within 24 hours was targeted at 95 per cent. Current service levels were at 93 per cent. Bin Storage Requirements The racking used for storing parts in the warehouse was made up of two bin sizes. Small bins, which represented 25 per cent of the total, had a capacity of 10 cubic feet, while the large bins had a capacity of 100 cubic feet. Typically, one bin was sufficient to store as many parts as were needed for each type of SKU. The warehouse had 80,000 total bins available, of which 64,000 bins were utilized. Kym estimated that the warehouse had capacity for an additional 16,000 SKUs to fill the remaining empty bins, but was concerned that the warehouse might not be sufficient to handle the expected SKU growth over the next five years (see Exhibit 5). THE DECISION As a starting point for the meeting on Wednesday, Kym wanted to first identify the capacity constraints on the Toronto PDC using a five-year time horizon and then evaluate the possible options. Expecting that expansion would be likely, Kym identified three alternatives: Expanding the existing warehouse, building and leasing a new warehouse in a different location and outsourcing all or part of the warehouse to a third party. Each option had advantages and disadvantages that needed to be weighed carefully (see Exhibit 6). During the meeting the following day regarding alternatives for expansion, Kym wanted to consider at least four factors. First, timing was a consideration. Kym was concerned that a long delay would compromise the Toronto PDC’s service levels. Second, any expansion would need to minimize disruptions to the existing facility. Current service levels were slightly below target, and Kym did not want to negatively affect warehouse performance in this area. Third, the Toronto PDC serviced a vast geographic region, and Kym recognized that setting up a warehouse in Western Canada might provide opportunities to improve customer service. She was concerned, however, that opening a new PDC might lead to higher inventory levels. Lastly, the final decision needed to be cost-effective. The automotive industry globally was still in a difficult period, which meant that every capital expenditure would be thoroughly scrutinized.

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This document is authorized for use only by Rawan Bahassan in OPM 511-F21-Dr. Salim Aljazzar taught by Dr. Salim Aljazzar, University of Business and Technology (UBT) from Nov 2021 to May 2022.

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Exhibit 1

VOLKSWAGEN DELIVERIES TO CUSTOMERS, BY MARKET, 2009–2010

Deliveries (Units) Share of Passenger Car Market (%) Territory 2010 2009 Change (%) 2010 2009

Europe/Remaining Markets 3,599,951 3,492,438 3.1% Western Europe 2,902,948 2,917,888 -0.5% 21.0% 20.9% Germany 1,038,596 1,246,571 -16.7% 35.1% 34.2% United Kingdom 381,175 341,888 11.5% 17.2% 16.1% France 270,527 260,799 3.7% 11.2% 11.3% Spain 246,125 224,692 9.5% 23.8% 23.2% Italy 242,732 237,760 2.1% 11.5% 10.1%

Central and Eastern Europe 429,485 385,320 11.5% 13.4% 13.4% Russia 133,503 95,208 40.2% 7.1% 6.5% Czech Republic 81,932 77,952 5.1% 45.6% 43.7% Poland 81,639 79,120 3.2% 22.8% 22.4%

Remaining Markets 267,518 189,230 41.4% Turkey 87,434 49,094 78.1% 11.9% 10.3% South Africa 72,279 52,758 37.0% 19.9% 19.3%

North America 549,578 467,769 17.5% 3.9% 3.7% USA 360,287 297,973 20.9% 3.1% 2.9% Mexico 129,548 118,391 9.4% 15.7% 15.6% Canada 59,743 51,405 16.2% 3.8% 3.5%

South America 907,778 825,851 9.9% 19.6% 21.7% Brazil 727,790 697,279 4.4% 22.9% 25.4% Argentina 135,628 103,445 31.1% 24.2% 26.9%

Asia-Pacific 2,145,787 1,550,261 38.5% 9.6% 8.6% China 1,924,649 1,400,514 37.4% 16.8% 16.5% Japan 63,998 53,904 18.7% 1.5% 1.4% India 53,555 19,002 181.8% 2.5% 1.1%

Worldwide 7,203,094 6,336,319 13.7% 11.4% 11.2% VW Passenger Vehicles 4,502,827 3,954,551 13.9% Audi 1,092,411 949,729 15.0% Skoda 762,600 684,226 11.5% SEAT 339,501 336,683 0.8% Bentley 5,117 4,616 10.9% Lamborghini 1,302 1,515 -14.1% VW Commercial Vehicles 435,584 361,506 20.5% Scanta 63,712 43,443 46.7% Bugatti 40 50 -20.0%

Source: Volkswagen Group Website, Annual Report 2010. http://www.volkswagenag.com/content/vwcorp/info_center/en/publications/2011/03/Volkswagen_AG_Geschaeftsbericht_201 0.-bin.acq/qual-BinaryStorageItem.Single.File/GB_2010_e.pdf. December 27, 2011.

For the exclusive use of R. Bahassan, 2021.

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Exhibit 2

2011 VOLKSWAGEN AND AUDI VEHICLE MODELS IN CANADA

Source: Volkswagen Canada Website. http://www.vw.ca/en/models.html. December 27, 2011. Source: Audi Canada Website. http://www.audi.ca/ca/brand/en/models.html. December 27, 2011.

For the exclusive use of R. Bahassan, 2021.

This document is authorized for use only by Rawan Bahassan in OPM 511-F21-Dr. Salim Aljazzar taught by Dr. Salim Aljazzar, University of Business and Technology (UBT) from Nov 2021 to May 2022.

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Exhibit 3 NUMBER OF THE VOLKSWAGEN GROUPS’ NEW MODEL LAUNCHES AND FACELIFTS FOR THE

NEXT FIVE YEARS Year 1 Year 2 Year 3 Year 4 Year 5 New Model Launches 4 4 4 0 0 Facelifts 4 4 4 0 0 Source: Internal documents, March 30, 2011.

Exhibit 4

LAYOUT OF VOLKSWAGEN GROUP CANADA’S TORONTO PARTS DISTRIBUTION CENTRE

Source: Internal documents, March 30, 2011.

DM

> > > >

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AA AB AC AH AJ AK AL AM DC DD DECA CB CC DA DB EG EH FAEC ED EE EFEBDF DG DH DK DL

Large Bin Racking

Loading Dock

Staging Area

Production Office

Width: 400 feet

Le n g th

: 4 0 0 f ee

t

Height: 30 feet

Maintenance Room

Small Bin Racking

Misc. Storage

Small Bin Racking

For the exclusive use of R. Bahassan, 2021.

This document is authorized for use only by Rawan Bahassan in OPM 511-F21-Dr. Salim Aljazzar taught by Dr. Salim Aljazzar, University of Business and Technology (UBT) from Nov 2021 to May 2022.

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Exhibit 5

VOLKSWAGEN GROUP CANADA’S CURRENT BIN INVENTORY

Occupied Empty Total Size Large Bins 16,000 4,000 20,000 100 ft

3

Small Bins 48,000 12,000 60,000 10 ft 3

* 1 Bin = 1 SKU Type Source: Internal documents, March 30, 2011.

Exhibit 6

TIME AND COSTS ASSOCIATED WITH EXPANSION OPTIONS FOR VOLKSWAGEN GROUP CANADA’S TORONTO PARTS DISTRIBUTION CENTRE

Expanding the

Existing Warehouse

Leasing a New Warehouse

Outsourcing all/part of the Warehouse to

a 3rd Party Cost $80 per square foot $120 per square

foot $120 per square foot

Time 6–8 months 2 years Immediate Lease Terms 10-Year Extension 20-Year Lease 10-Year Contract

Management Control High High Low

Source: Internal documents, March 30, 2011.

For the exclusive use of R. Bahassan, 2021.

This document is authorized for use only by Rawan Bahassan in OPM 511-F21-Dr. Salim Aljazzar taught by Dr. Salim Aljazzar, University of Business and Technology (UBT) from Nov 2021 to May 2022.