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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.

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

The main key cost driver in the assembly unit is the cost of the inputs. So as to come up with an end product that meets customer specific need high quality inputs are required which tends to inflate the overall operational cost for the firm. Other cost drivers include the transportation and ferrying costs for the raw material required for the assembling procedures.

Testing Quality Control

The various cost drivers that manifest themselves in the process of testing for quality control include the following: number of parts or batches to be checked since an increase will translate to higher cost. The number of tests to be performed is also a major cost driver in this area. Other cost drivers while performing the test for quality procedures include the number of staffs required to supply the needed labor and the labor hours spent for the whole process.

Products Inventory

The main key cost driver in the Products Inventory is number of products and amount of material.

product Inventory refers to the enterprises have completed the production process and acceptance of storage, standard specifications and technical conditions, in accordance with the conditions stipulated in the contract or order to the unit, can be used as a commodity sales and products purchased or commissioned by the processing of complete acceptance of storage for a variety of merchandise sales.

Sales & Market

Distribution

Dealer & Aftersales

The key cost drivers in dealer & aftersales are the location of the dealer and number and frequency of repairs made for each dealer. First, dealer should be located in near places to reduce the transportation cost. Second, the dealers should ensure the quality of vehicles , because they play an important role in providing after-sales services for car owners such as maintenance and repair, parts and accessories, and so on. These services would cost dealers much money if they have no ability to deal with the problems well.

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.

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

Intra firm linkages have occurred in various ways such as where the sub units used as inputs for the assembly department are supplied for other departments of the same organization. Other forms of linkages and interactions include between the assembly and the sales departments where the assembled products are transferred to the sale unit for further processes like revenue creation.

Testing Quality Control

In testing the quality of the end products the evident linkages include the supply of the required labor and required skills from the Human resource department. The remuneration for the staffs in the test for quality is done by the finance department creating another linkage.

Products Inventory

Sales & Market

Distribution

Fewer assemblies in the manufacturing department reduces number of vehicles parts to be transported to dealers. Secondly, effective assembling reduces the number of dealer support services and number of products returned to the firm because of quality problems. Good management of customer orders from the sales department reduces the cost distribution. Strategic location of the firm near its source of raw material (steel, aluminum) reduces the cost of material and cost distribution if the organization negotiate to transport material for its self.

Dealer & Aftersales

The linkage in the value chain of dealer & aftersales is the high quality of components production. By this I mean, the manufacturers should increase the quality of original parts and accessories of vehicles to reduce the damage rate after sales.  It can reduce the huge financial burden from repairing and maintenance. Moreover, in order to reduce the cost of accessories if the after-sales services cannot be avoided, the dealers can negotiate with suppliers to reduce the unit cost of accessories if they purchase all the accessories from them for maintenance.