By Sean McAlinden and Brett C. Smith
PART 1 of 6
The World Class Vehicle Launch series of articles will investigate the launch performance and apparent launch strategies of five leading vehicle assembly firms operating in North America. The companies reviewed in our analysis include Chrysler, Ford, General Motors, Toyota and Honda. We have collected monthly production data on vehicles (30 launches) launched by these companies in North America since 1992. Although there were more than 30 launches during this period, our initial investigation will focus on single-product, single-plant launches. Future discussions will include an examination of the success of vehicle launches at facilities that produce more than one product. Our six-part series will carefully review the performance of these firms and attempt to explain the surprisingly wide differences in effectiveness. In the course of our analysis, we will assess both internal (e.g., manufacturing capability) factors, and external forces, such as market position and operating systems, that could influence the relative launch performance of these firms over time. Our final article will present some solid—we hope—conclusions on what we think are the critical determinants of successful vehicle launch strategy.
The Marginal Costs of Vehicle Launch
It is well known that several companies have recently improved their performance in product development time, or the time needed to design and engineer a new vehicle model. This has allowed these vehicle firms to reduce their average product life cycles—advancing their ability to match changes in the evolving consumer market. However, with product development times now reduced to as low as two years, and product cycles to four years or less, an increasingly significant performance criteria is the vehicle manufacturing launch itself. A one month delay in production can now equal 2% of total life cycle capacity. A six month delay can cost 12% of the total return on the new model's investment.
Clearly, an economic approach is a natural beginning to our investigation of vehicle launch performance. We assume that each vehicle firm has explicitly or implicitly defined its manufacturing cost schedule for vehicle launch times. We also assume that the companies must make strategic decisions with regard to capital allocations. These decisions will cause a company to move along their launch cost curve, but only through a change in technology or process can a company shift their cost curve.
Our marginal cost model of launch performance assumes that the manufacturing cost of launching a new vehicle generally falls with the amount of time devoted to the launch. This may seem counter-intuitive when one considers the mounting cost of an idle work force and unused facility capacity. However, it appears to be true that it is generally more expensive to shorten equipment installation periods and solve many "warm up," "hardening," and delivery issues in shorter periods of time. We also assume that companies face fixed schedules for launch costs and that there are differences across companies.
For example, in Diagram 1, company A has a lower launch cost schedule (La) than companies B (Lb) and C (Lc).
Finally, we assume that vehicle firms are different in their changeover efficiency, and that each company is continually attempting to improve their capital efficiency in terms of launch times, or in terms of shifting their launch cost schedules to the left in Diagram 1.
Automotive Product Launch Comparison
We analyzed monthly production data for each vehicle launch in the United States and Canada since 1992. This data was gathered from Ward's Automotive Reports. For each launch, a start of production was determined, and monthly data was collected for the previous 12-month period, and the following 12 months. To facilitate direct comparison between plants of differing capacities, we compared this data to the annual capacity estimates produced by both Harbour and Associates and Automotive News. These estimates were divided by 12 to give a monthly capacity estimate for each plant. They were then divided by actual production to give a monthly performance to capacity measure. Each plant's monthly capacity performance was then further compared to the capacity utilization rate for the industry as published by the American Automobile Manufacturers Association (AAMA). This was done to offer insight into non-plant/product factors, such as industry cycles. We feel the data presents a powerful look at the manufacturing effectiveness of the domestic manufacturers and their Japanese counterparts.
A review of the vehicle launches presented several variables that must be considered when using the data to assess the overall performance of each company. These variables are:
1. Major Face-lift-Same Product: Changeovers that include major changes to the product would be a most common type of change. This would be the least complex of the changeovers analyzed, and would likely include relatively minor production disruptions.
2. New Platform-Same Vehicle: Included in this category would be facilities at which the product has undergone significant redesign. This may or may not include a change in vehicle hardpoints.
3. Product Age: It is likely that a facility producing an older platform will need significantly more investment and associated downtime than a facility producing a much newer platform.
4. Car to Truck Changeover: Several facilities switched from car production to light truck production. These facilities were often closed for up to two years before production returned to full capacity.
5. Cost of investment may also be a variable to investigate; however, this may be entirely a function of product age, and type of changeover.
6. Operating System Paradigm Shift: Several companies were in the process of significant shifts in their operating systems. These shifts will likely lead to substantial decreases in launch time for future programs.
There are many potential bottlenecks in the execution of a vehicle launch. However, the body shop may present the greatest barrier to fast and cost-effective changeovers. The ability to design vehicles that use the same hardpoints, locating pins and assembly sequence as the previous models greatly reduces the need for body shop investment, and the concomitant expense. Taken even further, the ability to make a new vehicle with few changes to hard tooling, relying on only changes in software, may present even larger savings.
Industry Launch Performance
Figure 1 presents the average performance, based on Harbour and Associates estimated capacities, of vehicle launches in the United States and Canada between 1992 and 1996. As a group, the facilities operated at approximately 85% of capacity before the changeover. It took four months from the start of production to return to that level. It is also interesting to note that the month proceeding launch also included a reduction in output.
Figure 2 shows the average launch performance of Chrysler, Ford, General Motors, Honda and Toyota. From the figure, it is apparent there are three patterns. Honda is the quickest among all of the companies in returning to full volume. They also experience, on average, a far smaller production spike in the month of changeover. Ford and Toyota appear to fill in the next level, with steep drops in production the month of the changeover, but an equally rapid return to production the following month. Finally, Chrysler and General Motors have the most severe drop at changeover, and they also have the longest ramp-up performance. An important caveat is that the averages for Chrysler, General Motors, and to a must lesser extent, Ford, have been lowered because several of the changeovers during this period have required significant capital investment. This investment was due to the need to replace a significantly aging vehicle, or conversely, a significantly aging facility/operating system. These issues will be expanded upon in future articles.