CUSTOMER-ORIENTED COST CUTTING:

PROCESS MANAGEMENT AT VOLVO

by

Susanne Hertz

Stockholm School of Economics

P.O. Box 6501

S-113 83 Stockholm, Sweden

Fax 46-8-334-322

dsh@hhs.se

Johny K. Johansson

Georgetown University

School of Business

Washington, DC 20057

Telephone: (202) 687-3763

Fax: (202) 687-4031

johanssj@gunet.georgetown.edu

Flip de Jager

Order Fulfillment Process

New Cars

VOLVO Cars Europe Inc.

Gent, Belgium

July 1999

Susanne Hertz is an associate professor in the Distribution section at the Stockholm School of

Economics; Johny K. Johansson is the McCrane/Shaker Professor of International Business and

Marketing in the McDonough School of Business at the Georgetown University; Flip de Jager is

Coordinator of the Order Fulfilment Process at Volvo=s factory in Gent, Belgium. Thanks for

constructive comments are due to Ursula Alvarado, Northwestern University.

CUSTOMER-ORIENTED COST CUTTING:

PROCESS MANAGEMENT AT VOLVO

ABSTRACT

Drawing on an in-depth case study of the Volvo automobile company's strategy in the

early 1990s, before the Ford takeover in 1999, this paper demonstrates how policies designed to

reduce inventory costs and slim the distribution pipeline can affect a business' network of suppliers

and distributors in unexpected ways. It also shows how the implementation of cost reducing

reengineering projects naturally lead to sub-optimization and a need to consider higher-level

processes. In the Volvo illustration a manufacturer's reengineering of its distribution chain

evolved into a complete recasting of its order fulfillment process, and an adoption of a process

management structure. The paper traces the effects on the network of distributors and dealers,

and shows how Volvo's new structure curtails the distribution role of the foreign sales companies

and shifts their tasks towards market analysis, demand forecasting and customer service in foreign

markets. It also shows how a process management perspective impacts a firm=s value chain,

marketing function and organizational structure. In the end, AThe New Volvo Story@

demonstrates how a division can cut costs and still become more customer-oriented -- and in the

process become a more valuable asset for a diversified corporation.

Key words: order fulfillment, process management, distribution

INTRODUCTION

This paper is about the way Volvo, the Swedish car maker, in the early 1990s adapted its

production and distribution systems to deal with a triple threat: A demand decline in its major

markets, intensified global competition in the automobile industry, and a cost structure way out of

line when benchmarked against leading competitors. To top this off, Volvo's single ace-in-the-

hole, a planned merger with Renault, the French automaker, was called off at the last minute in

1994. Volvo became one of the "still surviving, but barely" small automakers until the Ford

takeover.

It is an interesting story, considering that Volvo today shows strength in revenues and

loyal market shares, plus decent return on assets. Our aim is not to tell the whole corporate story

in detail, in all its financial and managerial aspects. Rather, the aim is to map out the

organizational network and marketing effects of one of the key moves in the Volvo Car Company

(VCC), a radical strategic change by one major division of the Volvo corporation. The story tells

how VCC pushed a limited distribution reengineering project into an overhaul of its main value-

creating activities through a relentless process and customer focus. The paper explains how the

changeover was accomplished, and how the end result was an increased reliance on a network

structure with roving process managers, and a shift to a process management structure. "The

New Volvo story" shows how a relatively small car maker managed to stay alive and do well in an

increasingly globalized industry characterized by significant large-scale advantages.

To develop the story we started by interviewing VCC managers and affiliated firms

directly or indirectly part of the distribution network in Europe (primarily sales subsidiaries and

distributors, but also some dealers). As we learned more, our focus shifted from the distribution

chain alone to the larger order fulfillment process, including production and supplier

repercussions, and the changing role of the marketing function. Individuals in the production

plants, in purchasing at the Gothenberg headquarters, and several independent suppliers were

interviewed. In total about 40 personal interviews were conducted in the five year-period

between 1994 through 1999, although most of the story takes place in the years up through 1995

when the VCC rebuilding effort and the reorganization were basically completed.

THE STARTING POSITION

Volvo Car Company (VCC) designs and builds passenger automobiles. Before the Ford

takeover, the business unit was a division in the Volvo corporation which also includes a builder

of trucks, Volvo Truck Company, and Volvo Penta, a manufacturer of boat engines. During the

1980s, the corporation also entered several unrelated business areas, including food processing.

At the time, Volvo was the largest corporation in Scandinavia. Table 1 gives the basic financial

data for the 1986-1995 decade.

VCC is a small car maker in global terms, producing only slightly above 350,000

passenger cars annually, far below the million-plus scale of companies such as Toyota, GM or

Ford, and also smaller than competing BMW (600,000) and Mercedes (650,000). Its durable and

safe cars target a high end niche, just below the luxury class, and with a special focus on families

with small children. VCC's main assembly plant is located at Torslanda, outside of Gothenburg,

Sweden. The company also has manufacturing units in Gent, Belgium, and in the Netherlands, a

joint venture with Japanese automaker Mitsubishi.

As in most auto manufacturing firms, the production units of VCC can be viewed as nodes

in a large network of parts and components suppliers, transport companies, distribution units and

3

foreign sales companies, and automobile dealers in the various markets. The main organizations

in the network are depicted in Figure 1.

While the suppliers and the dealers are mainly independent entrepreneurs, Volvo owns

several of the sales companies and one transport company in the network. In addition, the

4

suppliers often rely on Volvo for most of their sales, and at least in Europe most of the dealers sell

only Volvos and possibly one other automobile make.

Our story begins about the mid-1980s. At that time, with strong demand in key markets,

production was, for all practical purposes, the main consideration of the VCC executives. The

Head Office and production units together put pressure on suppliers to keep prices low, deliver

on time, and provide high quality. The Volvo transport subsidiary organized and coordinated the

shipments of cars worldwide, negotiating rates and schedules with independent shippers and

truckers. The foreign sales companies, took orders from dealers, stocked and delivered autos to

dealers locally, and managed the dealer network. Although the majority of the sales companies

were wholly owned subsidiaries of VCC, there were some exceptions. For example, Volvo cars

in the U.K. were distributed by a British company called Volvo Concessionaires, controlled by the

Lex group which also owned several dealerships.

Based on forecasts from the various foreign sales companies, manufacturing planned

production well ahead of the sales. The cars were largely produced to inventory, whether at the

production site, in transit, at the sales companies, or at the dealers. Customer-ordered cars were

simply placed at the end of an ongoing production run. Local marketing efforts were usually joint

promotional campaign by dealers and the foreign sales companies, with limited corporate

advertising material, mainly product descriptions, available globally. Although the prevailing

buying process in Europe involved customer ordering, and a wait of about 6 weeks, the dealers

often sold cars "off-the-lot" by offering discounts on models in stock.

In the mid-1980s, the number of finished autos in the network at any point in time was

about 70,000 units and total annual sales worldwide reached around 280.000 cars

1

. The

5

company could sell from stock alone for more than 14 weeks. The hidden costs of finished goods

in inventory and in the channels were high and rising.

THE INITIAL DISTRIBUTION PROJECT

Around 1986, faced with these high costs, increasing competition and maturing markets in

its segments, VCC embarked on a pan-European program to simultaneously reduce distribution

costs ("slimming the pipeline" in the company vernacular) and increase its customer satisfaction

ratings. The program was entitled "Distribution '90" to signal the target year of its completion.

To reduce costs, inventories were to be lowered at various points in the distribution

channel, especially at the European sales subsidiaries. For example, sales companies were

directed to close down warehouses they deemed unnecessary, and assist in the shipping of cars

directly to at least the larger dealer organizations. The increased customer satisfaction was to

come from shortened order-to-delivery times. In the typical European system for higher-end cars,

new car buyers visit dealers to specify the model and the options desired, and wait up to six weeks

for an ordered car to be delivered. A simple way to increase satisfaction would be to deliver the

car ahead of the standard six weeks.

However, as implementation started, the Volvo executives faced several obstacles. The

most immediate threat was to job security of individuals in the various network organizations.

For example, bypassing the foreign sales subsidiaries' role as distributors of the vehicles in the

different countries met with considerable consternation and confusion. After all, asking foreign

sales subsidiaries to help direct cars directly to dealers seemed tantamount to a request for them

to assist in their own demise.

6

Another sticking point was the traditional strength of the existing network. Volvo had

long emphasized the longstanding and trusting network relationships between the company and its

suppliers and dealers. The new strategy implied major changes in many of these relationships, to

many participants pointlessly jeopardizing the company's traditional strength in committed dealers

and distributors.

The consequent lack of locally committed individuals was acerbated by general rather than

specific objectives. To encourage local initiatives and preserve individual motivation, the program

suggested the general ambition and some indications about implementation, but left the precise

actions up to the individual "on-the-spot." And the company avoided setting quantitative goals,

following a quite typical Swedish management style.

The upshot was that although valuable lessons were learned, and some progress was

made, the "Distribution '90" project did not meet expectations. Towards the end of the decade,

the project was an acknowledged failure in internal discussions.

THE SECOND PROJECT

In 1990 an ambitious three-year pan-European program building on the experiences of

"Distribution '90" -- this one without an advertised title -- was launched with three very specific

goals:

(1) Lead time reduction to 28 days -- the customers should not have to wait more than 4

weeks for the model ordered, anywhere in Europe. Based on marketing research findings, while a

six weeks wait was acceptable across the luxury car competitors, four weeks would give Volvo a

significant edge. This goal reiterated and made more specific one "Distribution '90" goal.

7

(2) Delivery precision at 95% -- the ordered cars should be delivered at the time

promised in at least 95% of the cases. Focus group research had shown that for many customers

delivery precision was more important than shorter leadtimes. The political vagaries of

continental shipments in Europe and the possibilities of truckers' strikes, shipping boycotts and

other unforeseeable events made 100% delivery precision a priori impossible, but the company

should aim for at least a 95% target.

(3) 100% customer based production -- no car would be built without a firm order from

a customer. This most dramatic step, inspired by successful implementations of such systems in

other industries, involved a major rethinking not only of distribution but also of production and

marketing. Basing production plans simply on received orders for models was deemed feasible on

the basis of the "Distribution '90" experience. To succeed with direct shipments from factory to

dealers, it had become necessary to establish direct communications lines between dealers and

factory. It seemed logical to follow through, by feeding customer specifications at the dealers

directly into the plants' production schedules.

The 28 days' lead time target was based on a rough calculation that suggested that four

weeks could be reached without extensive reengineering of existing processes and network

linkages in the European markets. This time the leadtime reduction specified explicitly how many

days in the order-to-delivery process would be allowed for each stage of the process. For the 28

days project the split between different stages was as follows:

28 days = / 1 day/ 2 days / 10 days / 3 days / 6 days / 6 days/

RS FK PP EOL FC CAD RD

8

The abbreviations refer to the various stages as follows:

RS= Retailer Sale, FK= Factory Knows, PP=Production Plan, EOL= End of Line, FC= Factory

Complete, CAD= Car Arrival to Dealer, RD= Retail Delivery.

These specifications and other detailed -- and quantitative -- objectives were presented in a

"White book '90-'91." The main purpose was to avoid making the same mistakes as in the

previous project, to motivate the individuals internally and in the network, and to simply

communicate more clearly and openly with the people affected. Top management visited local

organizations to present the project and to impress upon managers the need for a collective effort.

The goal was to develop a more positive attitude among the different managers involved and

counter the view that the project was simply another intervention in their business.

THE RENAULT MIS-ALLIANCE

With severe sales slumps in the whole European market in the early 1990s, the new project

gained a legitimacy among network members which "Distribution '90" never had enjoyed. The

credibility was further enhanced by the events connected with the planned Renault alliance.

In addition to the efforts to cut costs and increase customer satisfaction, Volvo top

executives had pursued large-scale advantages through joint agreements with other automakers,

including Japanese Mitsubishi and French Renault (a pursuit which actually continued even later,

before the Ford takeover, as the mid-1998 Volkswagen talks demonstrated). The Mitsubishi

alliance had already led to the production and marketing of a smaller size Volvo model, from a

plant in the Netherlands. The need for a wider product line also led Volvo to initiate talks about a

merger with Renault, France's largest auto maker. Volvo's upper end product line was well

9

complemented by Renault's main strength at the lower end. As the talks progressed, Volvo

started selling off unrelated businesses to focus on autos, engines, and related products. These

talks broke off suddenly in late 1993, when the Board of Directors of Volvo refused to proceed

with the merger, anticipating cultural clashes between French and Swedish managerial styles (less

of a concern with the Ford takeover because of Ford's strong record with British Jaguar). The

CEO of Volvo, well-respected Pehr Gyllenhammar, had staked his reputation on the merger, and

was forced to leave the company.

Having lost the chance to create a larger unit through a Renault merger, the company

could no longer count on the scale advantages in procurement, assembly and distribution that

came with size. Staying in a rarefied niche in the market would most likely mean downscaling and

huge layoffs. Top management led by new CEO Sören Gyll seemed caught between a rock and a

hard place. Not surprisingly, expert observers prophesied the demise of the company.

Now in late 1993, the second expanded project took on a "do or die" aura. The company

and its network members would be forced to survive through reengineering and faster innovation.

The cost reducing efforts already underway were intensified. Unnecessary stock was eliminated,

in-process inventories were lowered and manufacturing costs were reduced further. On the

customer side, loyalty and satisfaction were coupled with increased new product development

efforts. The customer-based production strategy, although a radical departure from tradition, was

defined as a key competitive advantage.

FROM FLOWS TO PROCESSES

10

As the implementation speed redoubled, company management soon realized the need to

integrate the work on the separate goals of the project. It was important, for example, that the

new push towards speed and delivery precision not compromise quality and that way jeopardize

satisfaction. While parts and components suppliers were held to tighter timetables, they were also

expected to maintain or even improve quality. Customer-based production was the first step in

the order fulfillment process and was therefore closely tied to changes within the lead time

project. While production planning became more complex, and the need to handle variety on the

assembly line increased, workers were expected to maintain performance levels and speed.

"100% totality" became a new watchword in the organization.

At the same time, the tracking of customer reactions showed that, as anticipated, lead-time

reduction was very important for the success of customer-based production. Consequently, when

lead time reduction progressed ahead of schedule and the actual leadtime approached 30 days,

management proclaimed another 50% reduction in lead time to 14 work days. The process from

retail sale to retail delivery was restructured by eliminating some steps as follows:

14 days= /1 day/ 7 days / 2 days/ 4 days /

RS PP EOL FC RD

With the increased pressures of going to 14 days, sub- processes were measured in terms of hours

rather than days.

The experiences and results emerging from the implementation of the project were

instrumental in widening the focus from lead time reduction to an integrated order fulfillment

process. The move towards a process management view was inspired especially by the

restructuring of the various materials and information flows involved.

11

The Order Flow

Major changes were introduced in the order flow for the European market. Figure 2

shows the before-and-after patterns.

Before 1990, dealers sent the orders to the local sales companies. The local sales

companies would consolidate the orders monthly before sending them to the head office. From

the head office they were forwarded to the production units. The head office would assign the

12

assembly unit, and upon receipt the factory would simply place the orders into the production

plan. This meant that at best the orders would fall at the end of the current batch of cars being

assembled. Since production planning aimed for smooth operation, the cars in the plan were built

according to forecast rather than on the basis of a firm customer order.

Ideas for how to reduce lead-times emerged naturally once the delays in such a process

had been identified. "Avoid the consolidation at the sales companies, and send the orders in

direct," was one example. Or, another idea that turned out to be critical for effective

implementation of customer-based production at the plant, "Simply insert the customer-ordered

cars first in the production schedule." As can be seen in the Figure, the new process is also

considerably simplified. Some units, in particular the sales companies and the head office, play no

longer any role in the order flow. The dealers send the customer orders directly to the production

units, using the computer terminals installed at the site. The customer can, in fact, almost talk

directly to the factory, as when a change in the specifications of a vehicle already ordered are

discussed.

The new ordering system was not quite as "lean" as the Figure suggests. For example, in

order to service the dealers effectively, the factories have had to establish new "service desks"

manned by 3-4 people where the orders and inquiries from dealers are handled. Furthermore,

although the sales companies and the head office had only limited distribution roles to play, they

were important for control and "troubleshooting" in special cases, and for setting the conditions

for the flow of orders and cars. And they have taken on a larger role in market analysis, joint

promotions, and customer service (see AThe Changing Role of the Sales Companies@ below).

Physical Distribution

13

The shipment of parts, components and assembled cars was also simplified considerably.

Figure 3 shows the main flows before and after the changes.

As can be seen in the Figure, the foreign sales subsidiaries were no longer part of the

distribution of cars. The assembled cars were to be shipped directly from the factory to the

dealers. The former national warehouses and storage areas were closed down. The warehouses

14

at the plants in Gothenburg and Gent were turned into terminals with modern shipment facilities.

With customer-ordered production and shorter lead times, few warehouses were needed.

The emphasis in physical distribution throughout the network was shifted from large

consolidated volumes to a focus on speed, reliability, and frequency of shipments. This affected

naturally suppliers considerably. Just-in-time deliveries became the norm, and quality levels of

parts and components had to be guaranteed by the supplier. With customer-based production, the

factories began operating with planning horizons less than a week, and only about five working

days' assembly could be scheduled in advance. The new requirements placed great demands on

the communication and distribution channels linking the suppliers to the factories. In fact,

problems with maintaining this tight schedule consistently later forced management to extend the

horizon from five to 8-10 days.

The overseas shipments from the factories to the various European markets were greatly

speeded up. Five more sailings a week to the European continent from Gothenburg were added,

for assembled cars as well as for parts and components. The shipments were concentrated

nightly, to accommodate end of work in Sweden and the next day start of work in Gent and

elsewhere. Terminals and shipping offices were open through the night. For emergency

shipments and when speed was of utmost importance, air and special trucking services were used.

In the early transition stage to 14 days delivery time, the air express company TNT even created

a special flight to service Volvo needs.

Support Processes

As throughout the network, communication channels were critical for reducing the time of

the physical distribution. A pre-advice system was created so that the dealers could get early

15

notification of what cars they could expect delivered the next day, so that they in turn could alert

the customer. And to maintain schedules and increase delivery reliability, dealers were asked to

maintain night hours so cars could be delivered at any time in a 24-hour period. In order to get the

suppliers and transport companies to perform according to the tight schedule VCC had to

renegotiate all contracts with regards to terms of delivery and transportation.

Other flows in the order fulfillment process were affected as well. Payments from

customers were still made at delivery, which meant that the buyer had to have funds available

earlier than before when lead times were longer. The dealers had to provide more convenient

credit support, leading the Volvo Finance subsidiary to become actively involved at a much earlier

stage. At the same time the financing of cars-in-process and in inventory became simplified,

with much lower volumes and less risk.

The ownership flow was simplified. Now HQ did not take the title to the finished cars

during distribution from factory to sales companies. Instead the sales companies owned the cars

pro forma during the transport to the dealers, while Volvo Transport was responsible only for

transportation. The sales companies invoiced the dealers. Supplier relations were still managed

by the factories and the head office jointly, while head office was responsible for negotiations

combining demands from different factories. However, the transport contracts were all

negotiated by Volvo Transport centrally.

The demand for closer coordination between units and the need for efficient

communication and sharing of information meant that an improved communication network

across independent network members became essential. The company continued the upgrading

its information system technology, and extended assistance to independent dealers and suppliers

who needed hardware, software and training in the use of the technology.

16

All units involved in a particular process, such as the physical shipment of the finished

cars, were able to access the same data base to ascertain the status of any one order. In

particular, with customer-based production Volvo found it absolutely necessary to create an

information system through which a dealer could locate where in the process a customer's ordered

car was and then input desired specification changes, as necessary. By 1995 the dealer-based

computer ordering system was up and working for all of Europe. Table 2 tracks the changes in

operating margins, return on capital, and number of employees in VCC over the 1986-1995

period.

THE CHANGING ROLE OF THE SALES COMPANIES

As we have seen, the process changes in the VCC network were reflected directly in the

roles and tasks assigned to the network units. Looking at the whole order fulfillment process, the

units gaining in importance were the dealers and the transport companies. The units losing out

were the head office and, in particular, the foreign sales companies. In fact, as the implementation

unfolded, the European sales organization went from 1500 to 600 people. In the Benelux sales

companies alone, the number of people shrank from 240 to 140. These and similar personnel

reductions in other sales companies and at the head office in Sweden involved mainly early

retirements, internal relocations, and voluntary exits.

Before the change in strategy, the foreign sales subsidiaries had occupied a very central

and powerful role in the Volvo network. They served as importers and distributors of the cars,

and maintained their own inventory of finished cars which they offered to dealers. As we have

seen, they also consolidated orders from dealers, and were pivotal in arranging shipments. Jointly

17

with the dealers, the sales companies were involved in pre-purchase delivery inspection and

reconditioning of cars, and also installed various options, a lucrative business.

Very little of this was now in the sales companies' domain. As before, however, the

companies were involved in forecasting demand in their local markets, and tracking dealer

performance in customer service. Actually, with the new strategy these tasks took on increased

importance. With a shorter planning horizon at the factories, it was necessary to reduce the

number of variations by introducing and promoting option packages, and to anticipate orders

more precisely. On both counts, the local market knowledge of the sales companies turned out to

be crucial elements. And dealer support and control became very critical.

In a sense paradoxically, demand forecasting became more important than before. Even

though in principle no production took place without a firm order, to cut leadtime customers

orders had to be anticipated and factory preparations made. Forecasts from the sales companies

now fed directly into the requirements planning process, the capacity planning process, and the

purchasing and procurement processes. In addition, since delivery precision was another major

goal, the forecasts had to be accurate.

To achieve greater forecasting accuracy, the new IT systems proved very beneficial. The

sales companies' extrapolation of previous sales, adjusted for expected customer order mix,

formed the base forecast. These figures were updated weekly with information about locally

ordered cars, with the order mix matched against the forecasts to develop a precision index for

tracking purposes. The forecasts were then adjusted by replacing the anticipated model sales with

actual orders to produce a revised forecast.

At the dealer level, the new strategy forced an upgrading of the individual units, and the

sales companies became major players in that effort. First, the dealerships' communication

18

technology needed upgrading, including the installation of computer terminals and training in their

use. Second, the dealers were asked to change their selling style. Instead of trying to persuade

the customers to buy what was available somewhere in the supply chain, the dealers' approach

became more consultative, helping the customer to find the model and options best for him or her.

Third, except for some demonstration models, there were no cars available on the lot (or at the

sales companies). This in turn meant that there was little discounting or haggling about prices.

Although Volvo provided financial assistance and the sales companies offered computer

and sales training, not all dealers were willing or able to make the necessary investments. As

some dealers exited the network, others took on larger roles, and new dealers signed up. In this

process of selection and recruiting, the sales companies' expertise and local knowhow became

very valuable. Over time, as the dealerships were upgraded and the customer-based production

system took hold, the role of the sales companies shifted further in this direction, and they

developed into a dealer support organization, troubleshooting and coaching the dealerships in

their new and more demanding tasks.

The revamped sales companies focused more on marketing activities. Apart from dealer

support and forecasting of demand for the product line models in their respective areas, they now

also did local market research under the direction of HQ and the Brussels office. They fed back

market data to product development and design teams at the head office and were more influential

in product planning than before, partly since the available options needed to be reduced and

standardized across markets. They also helped develop the pricing guidelines and limits

("corridors") which were necessary to prohibit trans-border shipments and gray markets within

Europe. As before, the sales companies also ran various promotions, not only in cooperation

with dealers, but now also standardized image campaigns in collaboration with local and pan-

19

European advertising agencies for the Volvo brand. They continued as profit centers, and their

selling effort involved allocating marketing budgets for promotion and service support between

dealers, national advertising and pan-regional campaigns.

VOLVO'S PATH TO PROCESSES

The basic changes taking place at VCC during the 1980s and 1990s described in this paper

can be summarized in the three different sextagons below (see figure 4).

Although the figure simplifies a complex development considerably, it also serves to

highlight the general transition that Volvo Car Company went through. In the mid-1980s, the

company was oriented towards the production side, emphasizing production technology,

"Swedish" product quality (durability, safety), and favorable labor conditions to increase

productivity. Cost pressures were minimal, production planning horizons were comfortably long,

20

and in distribution the focus was on reliable supplies from inventory to well established dealers.

In the transitional period starting with the "Distribution 90" project up through the

1993/94 years, the organizational focus shifted to a cost reduction emphasis. In the beginning the

effort was concentrated on the distribution side, aimed at lowering inventories and "slimming of

the pipelines." The cutting of lead times, and, in particular, the shift to customer-ordered

production, however, impacted the production side directly, with leaner production and process

reengineering. The planning horizon in the plants had to be drastically reduced, with greater

emphasis on anticipation and forecasting accuracy, and a reduction in the number of options made

available. The outsourcing of components and parts increased and the pressure on suppliers to

deliver quickly and in time paralleled the similar development in other firms. Focusing on cost

reductions, the company still tried to maintain and even increase customer loyalty by adopting

TQM principles, including customer satisfaction measures.

During this transitional time the VCC organization, while still functional at its base,

became a project-based organization, with a large number of employees occupied with special

cost-cutting projects. By comparison, the mid-1990s organization of VCC gradually became

more process-based. The basic organizational activities -- in particular the "order fulfillment

process", but also other activities such as the new product development and the after-sales

customer service -- were redefined in terms of processes and sub-processes. The focus was on

the whole network linking customer to the product. This network included the independent

suppliers, transport companies, distributors and dealers, financial companies, and, of course, the

loyal customers. Only a part of this network was under the direct control of VCC, and much of

the process management involved coordinating and motivating independent actors.

21

Although internally as well as for the network cost efficiency was still a major concern,

with the worst of the cost-cutting behind it, VCC turned to the revenue side. To maintain and

increase customer satisfaction and loyalty, new models with state-of-the-art technology as well as

an extended product line were needed. Consequently, the company shifted from a niche market

strategy with a limited product line to more of a differentiated strategy, with a greater variety of

models. This change, initially to be accomplished with the help of the Renault merger, was

implemented by an increasing reliance on network alliances, including an extended collaboration

with the Mitsubishi firm in the Netherlands. In addition, the VCC expanded its new product

development effort considerably.

CREATING THE PROCESS ORGANIZATION

In early 1994, immediately after the "mis-alliance" with Renault, Volvo organized a special

task force to work on an overall process map of the car company=s value chain. What emerged

initially was a map of seventeen major processes, for which managers and process champions

were responsible. However, soon after implementation, several of these newly appointed

managers were ignored in the ongoing daily operations.

There were three major problems. First, there was a lack of "buy-in" from the affected

managers. Line managers had not been given a clear picture of what the new process approach

involved, and questioned the authority of the process champions in the staff group. Second, the

processes were not very clearly defined and delimited, and thus accountability could not easily be

enforced. Third, the process responsibilities were not at a sufficiently high level in the

organization, and process results were not reported back into the senior management team. By

22

and large the process focus was dominated by the day-to-day operations and ignored in the more

strategic and tactical line decisions for the company.

To get clear ownership and accountability for the processes, the task force realized the necessity of

making the process performance measurable. But this required a more detailed process map where not

only the activities were identified but also the starting and ending points of the process were clearly

identified. Since processes cut across traditional organizational units and decision lines, a new process map

which showed the processes and sub-processes explicitly was needed.

To create such a new organizational chart, the task force came up with the "Refinement

23

Chain" concept shown in Figure 5.

The refinement chain graph shows how the global auto market of 35 million units annually gradually

cascades down into the approximately 200,000 loyal Volvo customers worldwide. The graph shows how the

activities undertaken by the company in the value chain from product development to after-sales service

means that potential customers are gradually lost. Thus, one overall measure of the effectiveness of the

activities involves the number of customers passed on to the next stage. This was a key advantage of the

process perspective: It placed the customer squarely in the focus of the organization. The refinement chain

24

concept helped identify key processes. The five main processes (or "mega" processes as they were called) in

Volvo are shown in Figure 6.

Through its product and market definition as a relatively high end car maker, Volvo

automatically eliminates in the order of 85% of the total car market.

2

This is where the basic process

involves Abusiness development.@ By extending its product line downward. Volvo can be attractive to a

larger segment of the car buying public. In the next stage, lack of distribution (as in Latin-America) and

a limited selection of models (no sports car, for example) again serve to eliminate perhaps 30% of the

remaining 5 million auto buyers. The two main processes at work here involve the development of

Anew products.@

The ensuing Amarketing and sales@ process is responsible for converting the 3.5 million potential

customers into actual Volvo buyers. This process loses perhaps 50% in marketing, and say 70% is

sales, because competition, mis-targeting, ineffective advertising, etc. In other words, the marketing &

sales process, responsible for getting the 3.5 million potential buyers converted looks quite inefficient

from a process perspective. The Aorder fulfillment@ process discussed earlier in this paper involves

getting customer orders filled efficiently. Retail cancellations of 3% can be due to financial problems,

but also to late delivery, long lead times, etc. An effective OFP keeps cancellations low and satisfaction

high. Finally, effective management of the process of Aafter-sales care@ of customer leads to a high

loyalty rate.

Apart from the main processes, there were also support processes, such as financial backing (see

Figure 6). In addition, within the main processes, several sub-processes or "work processes" can be

identified. The basic principles are given in Figure 7.

25

In order to create "buy-in" from management for the process perspective and establish

accountability at a high level, selected senior managers were assigned as process owners. The reduction

from seventeen to five main processes helped make it possible to get to a higher level in the

organization. These process owners/managers were then given the mandate to appoint sub-process

owners, and given assistance to implement the new process management structure, including the

development of performance indicators. In the order fulfillment process the performance indicators

included lead time in days, percent late deliveries, average number of days late, and customer

26

satisfaction scores. The process owners also set up sub-process teams to help identify new work

processes and the linkages between them.

To identify sub-processes, the sub-process teams looked for areas where synergies across

organizational units can be achieved. The key criteria used to identify a separate sub-process involved

the importance of the activity to the business, the amount of money involved, and whether the task is

repetitive. As one interviewee explained:

"For example, take the maintenance that is taking place at the dealers. It is very repetitious. It=s

very important to do a good job. It=s very important to have good customer satisfaction. So what do

we do as a company? We send service bulletins to all the dealers which say, this is the way you should

do it. It=s a perfect example of process management. We don=t say to each dealer, you find out how to

solve each and every problem yourself. No, we do it centrally and we pool skilled technicians

experienced with the task.@

The process managers maintained their regular duties in the line-staff structure of the

organization. The process management structure was "matrixed onto" the existing structure within the

Volvo company, with the process champions serving as "coaches" inside the organization and

"cheerleaders" in the larger network. Their senior line or staff positions served to give them the power

and status necessary for their suggestions to be heeded.

The new process organization at VCC is basically a network type of structure, with frequent

person-to-person interactions but without being a profit or cost center. These are still lodged with the

basic matrix structure of car models by country. Needless to say, the superimposed process network

requires skillful and personable process managers. As always with loose network structures, the

interpersonal skills and travel demands on the individual managers are greater than otherwise. The

addition of a process management perspective, with roving process manager without formal authority

27

adds further to the diplomatic pressures. If the success of the Volvo process model is to any extent due

to a cultural heritage from Sweden, it has probably more to do with Sweden's long tradition of foreign

neutrality than to its Viking past.

SUMMARY AND CONCLUSIONS

The "New Volvo Story" demonstrates how a company can use cost-cutting tools such as lean

distribution, reduced inventory, and staff reductions to move closer to its customers. The solution

hinges on an increased use of IT, the elimination of middlemen, introduction of customer-based

production, and a shift to process management. The results include lower inventory costs, shortened

lead times, increased delivery precision, and higher customer satisfaction.

As in most organizations, the new Volvo experience shows that the required organizational

changes do not get accomplished overnight. As we have seen, they require top management

involvement to gain legitimacy at lower levels, flexibility on the part of senior and middle management

whose traditional roles are questioned, an organizational culture which encourages experimentation and

forgives failures, and a willingness on the part of the firm's external network of suppliers and

distributors to accept new tasks while losing others.

These are steep requirements in the drive for any company trying to metamorphose itself into a

new business model. For better or worse, external forces reinforced Volvo's need for the makeover.

The increased competition from foreign cars in the marketplace, the high cost structure relative to

benchmarked competitors, and the denial of the scale advantages of a Renault merger were all factors

which underlined the legitimacy of the threat.

28

Before the Ford takeover, VCC moved to a transition mode, as implementation of the process

structure was completed for Europe and rolled out globally. Although the Ford takeover undoubtedly

will affect the

process of

transition, the

results so far have

been very

encouraging. Not

only is the car

company division

doing well in terms

of sales (see figure

8), market shares

and profitability,

but lead times are

down and delivery

precision is up, as

are customer

satisfaction scores.

These are of course moving targets: What was seen as "Excellent" a year ago will not necessarily be so

next year. This is not simply because automobile customers everywhere are fickle. It is the intense

competition between car makers which continually drives up the ante. Whether the new Ford-owned

29

Volvo car division can be competitive in that global arena remains to be s