Management

Relative Cost Analysis on Automobile Industry

•Cost-leadership strategy is difficult to employ. It helps the business achieve competitive advantage by lowering operation costs, and maintaining good quality simultaneously.

•Relative cost analysis help identify the “secret” of low cost leaders, and is critical for businesses pursuing this strategy.

•This analysis includes two stages:

1.identify the key cost driver (s) in each value chain activity.

2.identify the linkages across different stages in the value chain.

•Key points for relative cost analysis include:

•Focus on differences in individual activities, not just differences in total cost.

•A subset of all of a firm’s activities

•Thicker costs deserve deeper treatment in terms of cost drivers.

•Driver should vary across competitors.

•Cost analysis should not crowd out consideration of WtP.

•Based on the firm value chain provided in Slide 2:

1.Please identify the key cost driver (s) in each value chain activity.

Purchasing Parts

Contributing to almost half of the cost of a vehicle, raw materials are the biggest cost driver in the automobile industry. A typical vehicle is about 47% steel while other materials such as aluminum, iron, plastic, and glass range between 10 and 3%.  About 22% of operational costs depend heavily on steel.  Of course, any variation in the global price of steel will impact cost as well as profits.  Aluminum has a higher cost than steel, however, it is much lighter and has almost the same strength as steel. By reducing the weight in a vehicle, the miles per gallon (MPG) improves.

Parts Inventory

While it is safe to assume that once you pay for material and store it, the costs of maintaining it there no longer exist, that is not the case. Investing in inventory means that money has to be borrowed elsewhere. Some states also impose an inventory tax for any spare parts inventory. Spare parts inventory is taxed on total value. Items used in day to day operations are exempt. California does not enforce this tax. Along with other costs such as salaries and wages as well as buildings and utilities utilized to store parts inventory, costs can add up to over 20%. This is something that continues year after year as long as parts inventory continues to be an asset. As long as inventory is being turned over regularly, these costs will decrease.

Purchasing Parts - Yvette

Parts Inventory - Yvette

R&D Design

Investment in R&D structures: Research and development is focused on the long term profitability of a company. An R&D model that includes a department well-staffed with well-trained industrial scientists and researchers will require substantial capital in the onset but will prove to be a long-term profitable course for the company. A company may choose to have a less sophisticated R&D department or not even focus on R&D at all and thus save on the expenses incurred to undertake research and development, which boosts the overall profit in the shorter term.

Components Production

Manufacturing technologies Another key cost driver is production technology. Investing on manufacturing technologies and especially an easy to use manufacturing technology, which may be have relatively high market value, will be effective in enhancing component production. Training Well trained labor is a key cost driver as it will be vital in enhancing component production. a stuff which is competent is likely to work with ease, make fewer mistakes and conduct themselves professionally, thereby increasing component production at a shorter time.

Assembly -CHEN

Testing Quality Control - CHEN

Products Inventory -

Sales & Market -

Distribution -

Dealer & Aftersales -

2. Then please identify the linkages across different stages in the value chain.

(please note that I only give examples of some linkages, your team needs to continue this, identifying as many linkages as you could find)

Purchasing Parts

One of the linkages in the value chain involves purchasing parts and parts inventory. Ordering parts in bulk may lead to discounts, thus increasing parts inventory. Purchasing parts is also linked to products inventory because again, without the purchase, products inventory would not exist.

Parts Inventory

Parts inventory would not exist without the purchase of parts. Parts inventory can be linked to assembly in the sense that in order to assemble a vehicle, parts are necessary. Parts inventory is also linked to distribution because different assemblies need different parts, not all are the same, therefore distribution of these parts is essential. Parts inventory could also be linked to components production because the production of a vehicle would be possible without the necessary parts inventory.

Purchasing Parts - Yvette

Parts Inventory - Yvette

R&D Design

Some of the linkages across R&D design include: Intra-unit interrelationship where R&D departments operating with a local (unit) efficiency as their ultimate goal and network interrelationships where R&D departments operate with global (corporate) optimization in mind while adopting the linkage between a unit/firm and one or more outside (external) firms.

Components Production

Some of the linkages across components production include: Intra-firm interrelationship where the components production is provided by another unit in the same firm, intra-unit relationship where the components production in one unit’s value chain are performed by that one unit, eternal outsourcing where the components production is tendered to an external firm.

Assembly -CHEN

Testing Quality Control - CHEN

Products Inventory -

Sales & Market -

Distribution -

Dealer & Aftersales -