Logistics the Case of Porsche

Logistics

The case of Porsche and its logistical challenges

Background information on moving and storing specific materials and products.

Projecting Modern Logistics Thinking

Description of current methods in the industry

Trends in the industry and how these might affect the organisation

Challenges and issues with moving and storage

Modern logistics is about much more than bringing the product from one manufacturer to another, or to the retail outlet or the customer. Logistics has grown in importance as companies have tried to reduce their inventories, increase their efficiency and improve cycle time.

This paper discusses a particularly important example of how proper logistics planning saved an icon of the automotive industry, Porsche Automobiles. The company's willingness to adopt Toyota's "kanban" system reduced its overall manufacturing time and halved man-hours to produce its automobiles.

Porsche now faces challenges related to its continued growth and success. Once again, a rethinking of its logistics systems will allow Porsche to reconfigure its manufacturing and continue to improve efficiencies.

Introduction:

This paper discusses logistics at Porsche in 1992, at the accession of Wendelin Wiedeking, who continues as Porsche's chairman to this day. At the time of his accession from his position as Manufacturing Manager, Wiedeking inherited a company that was failing. His ability to use logistics to improve Porsche's profitability and quality offers lessons for the entire auto industry, and has propelled him to become one of the best-respected managers in Germany.

Porsche's stunning success depended on logistics within its plant and in its relationships with its parts suppliers. Porsche's current challenges are how to meet with the growth in its production as logistics will be complicated by the introduction of very different auto platforms, and dealing with the space constraints in their existing central manufacturing facility in Zuffenhausen.

Background information on moving and storing specific materials and products.

Porsche built quality automobiles in a suburb of Stuttgart since 1931. After the Second World War, Porsche developed the 356 automobile with most parts taken from the Volkswagen. Only in 1963 did Porsche have the resources to develop its own in-house vehicle, the 911. Porsche remained a small manufacturer of automobiles, with the 911 as the continuing mainstay of Porsche's sales and profits.

Attempts to add more product lines only succeeded in losing money, focus, and alienating Porsche's hard-core 911 fans. Thus the 912, 914 and 924 (later the 944), which were manufactured by Volkswagen, did not achieve the popularity of the iconic 911.

Logistics prior to 1992

Porsche had made little progress on manufacturing efficiencies. Through the 1980's, Porsche prided itself on quality, but saw a rising cost disadvantage compared to Japanese manufacturers. By 1992, it took 120 man-hours to build a 911, substantially more than any other auto manufacturer. The main problem was parts -- parts were scattered throughout the warehouse and manufacturing floor.

Wiedeking brought in the Shin-Giujutsu group, a consulting firm comprised of former Toyota manufacturing managers (Nash 1996). One of the Shin-Giujutsu consultants, on studying Porsche's manufacturing in 1993, said "this is not a factory, it is a warehouse."

Projecting Modern Logistics Thinking

This paper will analyse what needed to be done using what is now common currency in logistics thinking, rather than recounting what actually happened at Porsche. A modern consultant, steeped in the current thinking on logistics, would have noticed three major flaws in Porsche's logistical arrangements:

Inventory far in excess of what was needed. In fact, Porsche had a 30-day inventory of parts on hand, with a resultant high inventory sunk cost and a very complex warehousing arrangement.

A dependence on in-house subassembly and creation of parts. Rather than buying subassemblies and guarding final assembly at its Zuffenhausen plant, Porsche managers had accepted a large number of single parts, which were then assembled off-line, and installed on the vehicle in the final assembly operation.

The need for those on the manufacturing line to find the parts in the warehouse. The assembly line resembled a job shop rather than a continuously-flowing operation, as workers were many times required to leave the assembly line to find parts which were missing.

Description of current methods in the industry

Currently, the auto industry has completely revamped its methods of manufacturing. In previous years, smaller manufacturers, such as Chrysler and BMW, were forced to rely on their parts suppliers for R&D and the supply of completed subassemblies to the manufacturing line. That is because these companies could not afford the investment in vertical integration undertaken by Ford, GM and Mercedes, among others.

From a cost disadvantage, Chrysler and BMW created a flexibility advantage. Their reliance on parts suppliers meant that they could develop new models more quickly, and keep down costs for changeovers.

Part of the change has come from new computer tools. With each automobile order today, Porsche is able to pick parts in advance of the chassis moving down the assembly line, and ensure that the parts arrive at the time that they are needed. Such precise control may not have been possible prior to the 1990's. This kind of program goes by many names, but IBM calls it "Dynamic Inventory Optimization System." This has allowed auto manufacturers to reduce inventory by 30-60% where it has been implemented (IBM 2007). The results, as seen at Porsche, bring several benefits:

reduction in inventory, which reduces cash needs and increases return on assets

"just-in-time" delivery of the parts to the place that they are needed, which reduces "search and find" time in the factory.

The second logistical change in the industry is the "focused factory" approach, which uses logistics to combine tightly-intertwined subassembly suppliers with final-assembly auto manufacturers. The result has been that de-focusing manufacturing, such as steering racks, exhaust assemblies and even entire engine assemblies has been bid out to focused factories (Skinner 1974). Although the concept of "focused factory" was developed in 1974, the onset of modern logistics has made such focus possible across a broad set of geographies.

Trends in the industry and how these might affect the organisation

There are a series of dangers inherent to the rise of subassemblies and focused factories. The primary concerns are (1) dilution of the brand image, (2) dependence on logistics to maintain production volume, and (3) lack of "surge capacity" to meet unexpected growth needs.

The first concern -- brand image -- is becoming a greater issue as parts manufacturers grow in size and image. A Mercedes, a BMW and an Audi may have different marques on their bonnet, but they may carry the same ESC, ESP and other braking technologies from the same supplier, Bosch, under the sheet metal. Particularly for smaller manufacturers like Porsche, which may lack the resources to develop differentiated products, there is a risk of brand homogenization.

As we can see from the following graph, the parts industry is growing significantly faster than the automobile assembly industry. That means that its clout enables the industry to command higher prices as final assemblers' experience.

The second concern is that smooth running of the assembly line requires flawless logistics in order to maintain production. The recent example of Nippon Denso's inability to furnish fuel injection systems in Japan offers a cautionary tale. Its supply difficulties stopped Toyota's manufacturing lines in several Japanese cities in 2006, forcing Toyota to lend engineers and production managers to its supplier to solve the problem (Shirouzu 2006).

A third problem is the lack of surge capacity. Particularly at the outset of a new model introduction, the lack of key parts can hinder production. The most recent delay of the Boeing 787 was due primarily to a lack of adequate supply of connectors and fasteners (Lunsford 2007). The entire problem cannot be laid at the feet of Boeing's supplier -- a series of late design changes forced an unanticipated need for more fasteners of a different design type than previously needed. Nevertheless, Boeing's lack of control of a critical component will cost the entire project a significant delay.

Challenges and issues with moving and storage

The key challenges of moving and storage involve cost, inventory levels and distance. With increased distance, there is a greater likelihood that disruptions can occur. At the same time, increasing inventories at the target Porsche plan can increase the overall balance sheet burden and reduce return on investment. Given the relatively small storage areas available at Porsche's main plant in Zuffenhausen, a significant "buffer stock" to reduce the shock of interrupted supplies could result in additional logistical problems on-site. Porsche's suppliers are relatively close by for many major components: Bosch is headquartered in the same city, and the state of Baden-Wuerttemburg is a centre for automobile parts manufacturing.

A second danger is that model proliferation risks increasing the logistical complexity. For the moment, Porsche has chosen to offload its Cayenne manufacturing operation to Leipzig and Bratislava, which simplifies its logistical problems in its limited space in Zuffenhausen. The new introduction of the 4-door Porsche in 2010 will add a third major product to the main plant's line-up. Since there are relatively few parts in common, the logistical issues will nearly double the manufacturing complexity in the existing plant.

Recommendations

In the past decade, new auto plants have pursued a different strategy to increase line efficiency and reduce logistical problems: have the major parts suppliers build their plants next door to the main auto assembly plant. This was pioneered at Opel's Eisenach (Clarke 2005), Jeep's Toledo (Clanton 2004), and Smart's Hambach (France) plants (Lewis 2004). In each case, the suppliers shared in the investment in product development, the capital cost of the plant, and the risk of new model introductions. In return, the suppliers received a long-term contract at a rate that guaranteed that they would make money -- as long as the autos were a success.