2098209

Completely-Knocked-Down Production
A Critical Analysis and Classification of Core Challenges of International Manufacturing Processes in the Automotive Industry
Lucas Mattheis
Lucas Mattheis
Completely-Knocked-Down Production A Critical Analysis and Classification of Core Challenges of International Manufacturing Processes in the Automotive Industry
Research Contributions to Strategic Management: Vol.29 Scientific Series Systems Management Ed. by Prof. Dr. Michael Hlsmann - Jacobs University Bremen Bremen 2012 ISBN(13): 978-3-938786-27-7 ISBN: 3-938786-27-2 ISSN: 1860-6628
TABLE OF CONTENTS
LIST OF FIGURES ................................................................ VII LIST OF TABLES ................................................................. VII LIST OF ABBREVIATIONS ................................................... IX 1 INTRODUCTION................................................................ 1
1.1 1.2 1.3 Problem definition ....................................................................................... 1 Aims of the thesis ........................................................................................ 1 Course of investigation ............................................................................... 2
2 CHALLENGES OF INTERNATIONAL MANUFACTURING IN THE AUTOMOTIVE INDUSTRY .................................... 4

2.1 2.2 2.3 Internationalization in the automotive industry ......................................... 4 The CKD process ........................................................................................ 7 Challenges along the supply chain of CKD production .......................... 10 2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.3.6 2.3.7 2.4 Packaging .................................................................. 11 Cultural differences .................................................... 12 Infrastructure of emerging countries ......................... 13 Damaged or missing parts ......................................... 14 Governmental requirements....................................... 15 Model variants and customization ............................. 17 Global production and supply chain planning .......... 17
The complexity of classification.......... .. 19
3 THE OPEN SYSTEM VIEW AS METHODOLOGICAL FRAMEWORK ................................................................. 21

3.1 3.2 3.3 3.4 Selection of the Open System View ......................................................... 21 The Open System View ............................................................................. 22 Interrelations within the Open System View ............................................ 26 The automobile industry and CKD production as open system ............ 27
4 CLASSIFICATION OF CHALLENGES ............................. 30

4.1
Allocation of challenges to system elements .......................................... 32 4.1.1 4.1.2 The transition phenotype of the strategic logic ........ 32 Planning and communication challenges of
management processes ............................................. 32 4.1.3 Limitation of resources as main challenge of
intangible and tangible assets ................................... 34 4.1.4 Inefficient offerings 4.1.5 High operations and deficits in product
.................................................................. 34 and influence of external
dependency
elements 4.2 4.3
.................................................................. 35
Interrelations of challenges in the context of system elements ...36 Discussion of key findings.39
5 CONCLUSION AND FUTURE OUTLOOK.. 41 APPENDIX ....................................................................... 43 BIBLIOGRAPHY..50
VI
List of figures
Figure 1: Market entry strategies adapted to the automobile industry ............. ...5 Figure 2: Automobile manufacturing process ..................................................... ...8 Figure 3: The CKD supply chain process ............................................................ ...9 Figure 4: Model of the firm as an open system (adapted from Sanchez and Heene 1996a) ......................................................................................... .25 Figure 5: CKD challenges in the context of the Open System View .................. .31
VII
List of tables
Table 1: Interrelation matrices of system elements39
VIII
List of abbreviations
CBU CBV CKD FDI JIT JV LC MBV OEM OSV RBV SCOR SKD TRIM Completely-build-up Competence-based View Completely-knocked-down Foreign Direct Investment Just-in-time Joint Venture Local Content Market-based View Originally Equipment Manufacturer Open System View Resource-based View Supply Chain Operations Reference Semi-knocked-down Trade-related investment measure
IX
1 Introduction
1.1 Problem definition
Globalization not only accounts for bringing people all over the planet closer together, but connects markets of different geographical location, size and demand patterns, thereby increasing the need for global production networks and international oriented supply chains 1. The internationalization process of manufacturers in the automotive industry is no exception. It creates new production methods and globalized supply chain networks to meet the requirements of international automobile manufacturing and enables manufacturers to supply their products to existing and newly developing markets. The completely-knocked-down (CKD) production method is specifically designed to enable access to such developing and mostly small, but nevertheless relevant, markets2. However, the global CKD production and special engineered supply chains bring with them a variety of challenges and obstacles. So far, research into this particular production method and the inherent problems is still limited. Even though literature describes the problems and challenges of CKD production, it has failed to apply a theoretical approach in order to investigate the root causes and interrelations. Therefore, this research addresses the question of how challenges, root causes and effects can be classified and to what extent does a classification support the understanding of their interrelations.
1.2 Aims of the thesis

The overriding research aim of this thesis is to extend previous research about the CKD production method and classify the occurring problems according to predefined categories. This will support a following analysis of the obstacles, which could be encountered. The underlying goal of this thesis is to observe the
1 CF. (ROBERTSON, WHITE 2007), P. 291FF. 2 CF. (ABRENICA 1998), P. 22.
newly discovered fundamental causes and investigate the existing interrelations and interconnections between them as well as the challenges. To accomplish the research aim, a descriptive analysis of the CKD process and its global supply chain is required. Only then can the descriptive part of this thesis be expanded to the specific challenges and their characterizations. The next objective is to analyze the challenges and root causes by putting them into a theoretical perspective. The application of a theoretical approach is necessary to bring the challenges into a descriptive and logical context. This enables an identification of cause-effect relationships of the challenges, which require further elaboration. Obtaining a clear structure of the challenges with their areas of influence supports the derivation of new implications about managerial behavior and process structures of CKD production. Consequentially, this research encompasses two distinctive benefits. First, through the application of a holistic framework the problems and root causes can be classified and their interrelations detected. This not only strengthens the applicability of the theoretical concept, but also enables a deepened insight into the theory of international production in the automotive industry. Secondly, the analysis presents new information on the complex cause-effect interrelations and might enable a differentiated perspective on necessary countermeasures. This research can consequently support future decision-making processes in the management and planning of global CKD production networks within the automotive industry.
1.3 Course of investigation

The research for this paper primarily focuses on qualitative data found in existing literature reviews of international production in the automotive industry. General methods and processes can be found in scientific books about international production and manufacturing; however, the specific concepts of CKD production are mostly found in research papers and journals. The methodological approach used in this paper for the identification of CKD challenges is the Open System View (OSV) 2
defined by the competence theory of SANCHEZ. This framework is going to be discussed in the context of the automobile industry as well as to how it can be applied for the CKD production. It then serves as a backbone, providing predefined elements for a successful classification of the challenges, and a theoretical foundation for explaining CKD phenomena. This paper is structured into five coherent parts. After the introduction follows a condensed descriptive analysis in chapter 2, comprising the key elements of international production in the automotive industry, CKD production processes and their broad spectrum of challenges. Problems of CKD production, which have not yet been written about, are not included in this research paper. To this date, literature and research focusing on specific CKD procedures is very limited. This impeded the investigation process and resulted in basing this part (on a limited number of resources. The OSV functions as a holistic approach and a thorough elaboration of its managerial components can be found in chapter 3 of this thesis. Chapter 4 combines the descriptive analysis and the theoretical framework. The CKD challenges are going to be classified and transformed into a comparable basis. The key finding and most substantial limitations are discussed afterwards. The last chapter concludes this work with a future outlook and further implications for practice as well as research.
Challenges of international
manufacturing in the automotive industry

2.1 Internationalization in the automotive industry
The operating environment of car manufacturers is rapidly changing due to the increasing impact of globalization, not only because of the improvement of information and communication technologies, but also the deregulation of worldwide trade regulations. Global sourcing and international supply chain and production networks enable access to new markets as well as an increase in competition. Customer requirements adapt quickly to these new conditions and become more time, quality, cost and response sensitive 3. At the same time increasing globalization and competition call for innovative, new strategies from the car manufacturers in order to adapt to these constant changes and new challenges. The strategic approaches range from differentiation strategies by enhancing the number of models and reducing the product life cycles, through individualization strategies by offering customer demanded configurations to simple product development by frequently providing new concepts, functions and materials 4. Due to the economic crises in 2008/2009, automobile manufacturers were more than skeptical about their future development and expected a decrease in newly registered cars between 15 and 20 percent in 2009 5. In fact, the traditional markets of North America, Europe and Japan stagnated, but the constantly rising demand in Asia, the BRIC states (Brazil, Russia, India, and China) and other emerging markets boosted the growth of the industry. The emerging markets and developing countries have become essential for investors and global manufacturers, since two thirds of global growth in 2010 can be assigned to them6. Car producers are now facing the challenge of optimizing and standardizing their production processes, and are designing globalized supply chains and international production
3 CF. (WILDEMANN 2003), P. 9. 4 CF. (FLEISCHMANN, FERBER & HENRICH 2006), P. 194. 5 CF. (VDA 2012), P. 25. 6 CF. (VDA 2011), P. 14.
networks in order to enter these emerging markets to improve their competitive position7. Current research suggests that three decisive factors influence a companys decision about its market entry strategy. The ownership advantage a firm gains from entering a new market refers to the degree of investment commitment into new resources, whereas the internationalization advantage focuses on the managerial control difficulties of global operations. The third factor is the location advantage, which refers to the market potential or investment risk 8. By determining the range of influence of these factors, the company can decide about its future strategy and entry mode, e.g. exporting, licensing, sole venture or joint venture 9. Figure 1 displays a simplified step-by-step internationalization process of production, stressing the differences of risk involvement and degree of control, but excluding different production methods and distribution functions.
Figure 1: Market entry strategies adapted to the automobile industry
Source: (Macharzina 2003, p. 863).
The first market entry strategy in the automobile industry is the export of completely-built-up (CBU) automobiles. CBU units are defined as being built within one factory comprising all production stages of the manufacturing process 10. The
7 CF. (NAG, BANERJEE & CHATTERJEE 2007), P. 8FF. 8 CF. (WOODCOCK, BEAMISH & MAKINO 1994), P. 256F. 9 CF. (AGARWAL, RAMASWAMI 1992), P. 5. 10 CF. (KUHN 2006), P. 1101.
export of CBU cars is preferred for low demand rates in the local market since the original equipment manufacturer (OEM) is able to avoid local production and capital expenditures and therefore minimize its risk involvement in foreign countries to the lowest possible extent11. But due to market protective measures of the local governments, and trade barriers in the form of high import taxes, import quotas or import bans are established, making local production more favorable in order to exploit the advantages of direct access to the market, clear price positioning, and higher sales volume12. In Figure 1, the partial shift of the value creating process is displayed in two variants an assembly plant as part of a joint venture project or an assembly plant completely company owned. The establishment of a joint venture company, often enforced by local authorities, is defined by an alliance of the OEM with one or more local partners, splitting up the capital invested and thereby the risks that could incur. In addition to risk minimization, the car producers favor other advantageous strategic factors like the inside-knowledge of local industry structures or reduced entry barriers by the partner company. However, conflict of interests and loss of technical know-how also illustrate a negative side of joint ventures, highlighting the possibility of another market entry13. The next step is to establish a company owned foreign subsidiary, which supervises the partial value-creation process in the specific market region. Whereas the degree of value creation and methods of production might be the same, the change of ownership structure compared to a joint venture features new strategic factors. Direct investment is usually greater and results in a substantial increase in risk, but derivative benefits include a maximization of control due to the absence of interest conflicts14. When rising demand and high turnover allow high-volume production at competitive prices, more technologies and hence value-creating processes can then be transferred to the foreign production site. The ultimate expansion state is a serial plant, comprising all technologies of the car production process 15. An analysis of the different phases of market entry activities gives a broad overview of possible globalization strategies of car producers. However no distinctions between the different production technologies and methods in an
11 CF. (MACHARZINA 2003), P. 856. 12 CF. (MUKHERJEE, SASTRY 1996), P. 77. 13 CF. (TUCHER 1999), P. 126FF. 14 CF. (MACHARZINA 2003), P. 864F. 15 CF. (KLUG 2006), P. 328FF.
assembly plant or serial plant have been made so far. Below, CKD operations are explained in detail to illustrate this specific type of international automobile production.
2.2
The CKD process
The CKD manufacturing process is highly specialized and adapted from the usual serial mass production, requiring great logistical effort in order to produce an automobile on an international value-creation scope. The complexity of the CKD process cannot be understood without first observing the most important technologies of the general mass production of cars, illustrated as a simplified process diagram in Figure 2. The process begins with the press shop, where metal coils are pressed into various shaped components of the body, e.g. inside and outside panels. The press shop is characterized by immense investments and therefore OEMs try to centralize this process by supplying pressed parts from one press shop to additional close-by production facilities16. The following process is the body shop, where the pre-shaped components from the press shop are either welded or glued together to form the body of a car. In the next stage of production, different layers of corrosion protection, paint and sealing are applied to create a full painted body. Again, a paint shop requires high investments due to the extensive degree of automation within the process. Then components like the motor, interior panels, seats or wheels are supplied just-in-time (JIT) to the final assembly line and fitted into the painted body. After extensive checks and quality measurements, the car is ready for sale17.
16 CF. (RAWLINSON, WELLS 1996), P. 197F. 17 CF. (IHME 2006), P. 11.
Figure 2: Automobile manufacturing process
Source: (Ihme 2006, p. 11)
In the previous section the need for a partial shift of the value-creation process through CKD production was established, since the import of CBU units becomes unprofitable or prohibited by market protective measurements. By shifting part of the production to a foreign country, the OEM has the opportunity to enter a new market but also creates the need to establish a new logistics infrastructure. CKD production is based on a logistical concept, where the components and parts of predefined assembly steps are combined into subsets or lots and then exported into the target country for local assembly. In detail, the body is disassembled into its single components and the parts are supplied as such. Therefore, the value-adding technologies body shop, paint shop and final assembly are present in a typical CKD plant18. In final assembly, the lots are then supplemented with locally sourced components. The percentage of local content (LC) usually depends on government regulations and the degree of value creation of the car manufacturer 19. Due to the presence of the different stages of production, the value creation of the CKD processes is higher than in semi-knocked-down (SKD) production. SKD is
18 CF. (TUCHER 1999), P. 174. 19 CF. (KLUG 2010), P. 328FF.
characterized by a lower degree of knocked-down. Here, only the doors, bumper and trunk are disassembled from the body. Depending on governmental legislation, the body might already be painted and then be imported into the target country. As a result, SKD production has a low degree of value creation within the foreign country, only containing final assembly as a minimum production stage requirement and in a few cases a paint shop20. The necessity of a new infrastructure scope is born, not only encompassing material transport and warehousing, but also high efforts in terms of logistics planning and control functions21. A typical CKD supply chain process is depicted in Figure 3.
Figure 3: The CKD supply chain process
Source: Adapted from (Laffert 2000, p. 141)
The start of the CKD process is marked by a call-off or order placement by either assembly plant or reseller. But due to the high discrepancy between the lead time and actual delivery on site, usually a result of the great distance and sea freight shipping, the complete supply chain is rather push-oriented22. The push-oriented principle suggests centralized material planning in the CKD supply chain with the challenge to determine kind, amount and the date of necessary parts and components. Through the order placement of material planning, components of external suppliers as well as internally manufactured parts are supplied to a
20 CF. (TUCHER 1999), P. 175. 21 CF. (LAFFERT 2000), P. 4F. 22 CF. (KLUG 2010), P. 330.
centralized logistics center23. The main purpose of such hubs is the consolidation of the various material flows from external suppliers and in-house production, the arrangement of lots and the application of suitable packaging in order to establish a stable and functional lot supply to the foreign assembly plants 24. A lot contains components and parts of a predefined number of units, which are consolidated and packed together. Volkswagen can serve as a typical example, having a lot size of 48. This means that every component is represented 48 times in one lot in order to manufacture 48 cars. The lot size might be optimized by the OEMs according to different foreign market conditions, production volume, degree of LC, part characteristics, part price, packaging requirements, and shipment frequency, resulting in non-standardized lot sizes between different manufacturers across the automotive industry. Independent of the size, a lot supply enhances simplified logistical control and lower processing effort and is therefore most suitable for application in developing countries with rather unstable processes in order to improve process reliability25. The standard mode of transportation of lots is sea freight, creating a necessity for containerization, which either takes place directly at the logistics center or through an external service provider at the port of departure 26. In addition to the standard sea shipping, special orders of single parts are handled via airfreight. These special orders are often characterized by time constraints and triggered by process failures like incorrect lots, breakdown of local suppliers or short-term changes, which could result in a production stop. Airfreight offers a much faster supply and can alleviate critical situations, but also incurs additional charges. After successful importation, the containers are brought to the local assembly plant and processed 27.
2.3
Challenges along the supply chain of CKD production
The general CKD processes and supply chain described in the previous section illustrate the additional effort concerning logistical methods and management planning that have to be made in order to realize a stable foreign production of automobiles. The advantages of an early market presence and the avoidance of high
23 CF. (KLUG 2010), P. 330. 24 CF. (TUCHER 1999), P. 178. 25 CF. (TUCHER 1999), P. 167F. 26 CF. (TUCHER 1999), P. 182. 27 CF. (KLUG 2010), P. 332.
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import taxes can be realized through CKD production. However, difficulties and challenges do arise along the complete supply chain and its management processes. KMPF and WIETS have identified various challenges, which are described and further elaborated in this chapter.
2.3.1
Packaging
The long distance shipping of material through various transportation modes into the local assembly country creates new requirements for packaging. It especially extends the need of the protection and distribution function 28. The parts and components have to be protected from various physical inner and outer stresses, created by an increase of movement resulting in greater impact, shock, and pressure or tearing forces. It should additionally support and optimize the storage, transport and transshipment/reloading processes by improving stackability and optimizing space utilization, while reducing the weight to a minimum. The standard packaging process consists of all activities necessary to package the components, including the supply of empty packaging, set up and filling of the package, marking and labeling 29. In the CKD supply chain, these processes are usually included into the task scope of the logistics center30, but now need to be extended due to further complications. Even though the attempt to conform to standardized load carriers, e.g. a European pool pallet with the dimension 800 times 1200 mm 31, is made, many components require a specially designed container or package in order to fit the dimensions or characteristics32. Engines for example are simply packed into standardized mediumsized containers and bear no further challenge. Body parts on the other hand are very sensitive to physical impacts and have specific dimensions, which is why they need specialized handling and require the development of new packaging solutions 33. Designing and producing specialized packaging solutions can heavily impact the overall cost of some pieces, which is why managers must consider the price on the one hand and supply chain integration on the other 34. The packaging function of the CKD supply chain processes prevents damage to parts and components of the CKD kits and has a significant effect on logistics
28 CF. (WIETS, KMPF 2007), P. 4F. 29 CF. (SCHNSLEBEN 2007), P. 781FF. 30 CF. (TUCHER 1999), P. 183. 31 CF. (SCHNSLEBEN 2007), P. 783. 32 CF. (WIETS, KMPF 2007), P. 4F. 33 CF. (CAMUFFO, VOLPATO 1999), P. 8. 34 CF. (BOWERSOX, CLOSS & COOPER 2007), P. 235FF.
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optimization if well performed. Through intelligent packaging, space utilization is increased, the quality of components is obtained and logistical costs are reduced to a minimum. It is, however, a process which is not required in serial plant manufacturing and the additional logistical effort and accrued expenses increase the overall cost immensely.
2.3.2
Cultural differences
The establishment of a global production network based on the CKD method requires the adaption of production processes to the lower production volume, the amount of capital invested and further local conditions 35. STURGEON suggests among other things that only very few assembly processes are actually machinespecific and can therefore be substituted by a skilled workforce. For example, welding can either be conducted by workers in open framing stations or by robotic machinery36. The lower degree of automation in CKD production stresses the importance of the local labor workforce and the surrounding cultural circumstances. The fact that an OEM sets worldwide standards for its product quality supports the non-tolerance policy for drawbacks in quality due to a higher instability of less automated production systems 37. Managers are now facing the difficulty of managing cross-cultural influence and knowledge transfer to the local workforce while retaining the manufacturers quality standards. KLUCKHOHN describes the core of culture as traditional ideas and attached values , which as a collective phenomenon is shared with members of a particular group39. Managers have to determine these norms and values of the local society due to high impact on the workforce and their production performance. Occurring obstacles of cultural impacts in less developed countries might be deficits in inherent housekeeping tendencies, lack of capability in tool making and quality measurement, which cannot be aligned with the OEMs standards. A culturally averse attitude toward assuming responsibility and error correction effort might be added to this list40. An anecdote of the experience an engineer made at a CKD plant, involving a local employee who received working clothes and safety footwear, illustrates the
38
35 CF. (TUCHER 1999), P. 148. 36 CF. (STURGEON 2000), P. 86. 37 CF. (TUCHER 1999), P. 149. 38 CF. (KLUCKHOHN CITED BY THOMAS 2008), P. 27. 39 CF. (THOMAS 2008), P. 28. 40 CF. (GRANT, GREGORY 1997), P. 996.
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situation. The next day the employee came to work barefoot having given away his shoes to relatives41. To oppose quality deficits and other cultural challenges, extensive training and educational programs for local personnel and management should be undertaken. Expatriate managers support local managers and help to cope with cultural challenges42. Nevertheless, however many expensive approaches are undertaken to resolve cultural difficulties, quality deficits or delays in production might still occur.
2.3.3
Infrastructure of emerging countries
Another challenge OEMs have to overcome in developing countries are poorly developed local infrastructure systems and the effect they have on supply chain activities. Infrastructure systems include power supply, telecommunication activities and road, railways, ports and airport networks. BRICENO-GARMENDIA, ESTACHE and SHAFIK state that developing countries, especially low-income countries, have severe deficits in supply and quantity of such key infrastructure elements. 43 The following paragraph focuses on the effects of a poor road network, having a great impact on CKD production. One of the most common principles in modern production in the automobile industry is the endeavor to become lean. The cornerstone of lean production is the fastest possible flow of goods and the elimination of wasting resources to the absolute minimum. In the practical context of an automotive manufacturer, this means having JIT delivery and therefore a reduction of inventory 44. The car manufacturers demand of a JIT supply requires the suppliers to make delivery on a tight schedule, possibly several times a day. While lots are usually imported via sea freight, which is characterized by long transport times and a high in-transit inventory and therefore does not conform to lean principles 45, managers try to implement the JIT supply for their locally sourced components. One common obstacle hereby is an insufficient road network of developing countries leading to poor transportation systems and therefore a slow movement of goods. Additional costs due to tied-up capital, a rise of damages on the road and a necessary increase of inventory held by
41 CF. (WIETS, KMPF 2007), P. 6. 42 CF. (STURGEON 2000), P. 60. 43 CF. (BRICENO-GARMENDIA, ESTACHE & SHAFIK 2004), P. 2. 44 CF. (SCHNSLEBEN 2007), P. 309F. 45 CF. (GULYANI 2001), P. 1166.
13
the assembly plant might occur46. The major problem caused by the infrastructure is not the longer transit time, but its unpredictability. If an assembly plant is based on JIT delivery, only a minimum of inventory is held in so-called buffers. An unpredicted delay of a few hours of one single delivery can therefore stop the whole production, which is why CKD manufacturers struggle to implement lean methods and keep its competitiveness47. Another infrastructure challenge might be a less dense supplier network with supplier plants spread out throughout the country, intensifying the effects of poor road systems48. In addition, the difficulty of a steady power supply has to be managed to guarantee continuous, non-stop production49.
2.3.4
Damaged or missing parts
As established earlier, the CKD supply chain processes were adopted to meet the new requirements of an international production network, but this also makes it more vulnerable to planning mistakes, processing errors or external forces during transportation. The risks of a supply chain in the international production of the automotive industry were identified by KUHN and linked to damage or loss in transport, customs processes, shipping and transportation delay 50. The pack check process at the assembly plant controls the incoming components and parts and differentiates and categorizes the errors according to damage, late arrival/delivery, wrong part or incorrect quantity of parts. Error detection can result in a special order request via expensive airfreight, due to the fact that the specific part is needed quickly and also to the long delivery distances 51. To bridge the time until the arrival of the special ordered part via airfreight and in order to avoid a production stop, an additional safety buffer is established, containing low-value lot parts with a high likelihood of damage. It facilitates the ability to replenish damaged or lost parts instantly without a high degree of capital commitment. If the necessary part is not represented in this particular buffer, a procedure called robbing is carried out. Identical parts with the same part number are taken from the following lot in order to continue the production. The missing parts
46 CF. (GULYANI 2001), P. 1157F. 47 CF. (GULYANI 2001), P. 1164. 48 CF. (GULYANI 2001), P. 1164FF. 49 CF. (WIETS, KMPF 2007), P. 7. 50 CF. (KUHN N.A.) P. 6. 51 CF. (GIESA, KOPFER 2000), P. 18.
14
should then arrive at the assembly plant right in time for the production of the rob lot. This process not only requires an additional buffer area for all the boxes and the rob lot, which is set aside, but also bears the risk of extensive abuse (since it is easy just to take a part from somewhere else) leaving behind a rob lot which needs great effort to be stocked to a fully adequate lot again 52. Painted body parts are especially sensitive to external forces and, if damaged, require an additional painting procedure. The necessary equipment is very capital intensive and established close to or within the assembly plant 53. The actions undertaken display the inflexibility in the case of incorrect material supply. The complexity and dimension of the supply chain with its increased risks intensify this effect. In any case additional costs arise, either through the expensive airfreight, paint shop for damaged surface parts or additional efforts to manage a stabilized line-supply through access to the safety storage or robbing.
2.3.5
Governmental requirements
In the 1990s, many governments of developing countries substantially reduced protective instruments like tariffs, quantitative restrictions and investment controls to support the global expansion strategies of the car manufacturers and stimulate the domestic industry at the same time. Through the maintenance of selected traderelated investment measures (TRIMs), such as local content requirements, investment incentives and duty drawback schemes, local governments promoted local production through a higher involvement of the OEMs 54. Special emphasis should be given to the local content requirement that challenged CKD production due to coordination difficulties of the value chain and the local suppliers. HUMPHREY describes three important features of coordinating a global value chain with local suppliers: Firstly, product design is in need of coordination due to the specific design requirements of the OEM to the supplier. The car manufacturer supplies a basic design and technology, but the request for various components for different vehicles calls for a necessary interface. Secondly, quality standards as well as the increasing awareness of safety, labor and environmental protection enhance the need for supplier coordination and control 55. Automakers
52 CF. (WIETS, KMPF 2007), P. 5F. 53 CF. (WIETS, KMPF 2007), P. 6. 54 CF. (HUMPHREY 2003), P. 127. 55 CF. (HUMPHREY 2003), P. 121.
15
require adherence to quality standards such as ISO9000 from all suppliers despite their location, but suppliers in developing countries have increasing difficulties to maintain such. Failure is often reasoned by inadequate control over process technology, lack of a skilled and well-educated workforce, or poor quality of domestic sourced inputs and raw materials 56. The third coordination difficulty of locally sourced components is focusing on logistical issues like the implementation of a smooth JIT supply, as discussed in chapter 2.3.3 Infrastructure of emerging countries. The OEMs are encouraging suppliers of their home country to apply a followstrategy and expand with a production facility in the same country in the vicinity of the assembly plant57. But the potential high risk and costs often hinder the suppliers from following the OEM, and LC sourcing becomes a matter of local suppliers and therefore quite challenging since the number of suppliers that fulfill the OEMs quality standards as well as possessing the required logistical skills is rather limited58. Another governmental requirement focuses on the form of the foreign direct investment (FDI) and the structure of ownership of the foreign assembly plant. As already mentioned in chapter 2.1. Internationalization in the automotive industry the arrangement of a Joint Venture (JV) in partnership with a local automaker company is one of the most common methods of exploiting the strategic purpose of gaining access to advanced skills and knowledge brought by the foreign manufacturer 59. The danger of know-how loss and therefore reduced competitiveness exists but is restricted because of the limited number of core competencies available and the absence of R&D functions at a typical CKD plant. The greatest challenge lies within the management of a JV, where three key factors have to be considered. Firstly, trust has to be created between the partners, considering the risk of opportunistic behavior on the one hand and leaving enough freedom for a fruitful partnership as the basis for success on the other. Secondly, the partners have to come to an agreement concerning information exchange, which should be dynamic and avoid the problem of an unwanted loss of know-how at the same time. The third decisive factor is the ability to deal with conflicts and interest differences. A willingness to cooperate on both sides and the readiness to cope with cultural differences and
56 CF. (POSTHUMA 2005), P. 45. 57 CF. (SANTUCCI 1997), P. 86. 58 CF. (SCHMID, GROSCHE 2008), P. 85F. 59 CF. (NAM 2011), P. 866.
16
language barriers are hereby essential. A failure of the management to deal with either challenge can result in expensive production stops and dissolution of the JV60.
2.3.6
Model variants and customization
The individualization trend is also capturing the automotive industry, creating a need for a customized car according to the exact requirements and wishes of the customer. OEMs have responded with a common platform strategy with interchangeable modules in order to create a diversified product range, while being flexible, adaptive to customer preferences and cost-effective at the same time61. CKD production, however, reveals a limited responsiveness to the individualization wishes and uncountable model variants. CKD follows the push-oriented principle, which concludes that the number of model variants, their specific characteristics as well as their production volume is based on market forecasts and projections, not on individualized customer orders62. The supply of CKD units is strictly limited to model variants and offers fewer variations than an export-based supply of CBU units. An increase in the number of variants might meet the heterogeneous market demands, but involves difficulties such as a rise in costs due to the intensified complexity of sales and production planning. Production is affected as well, since higher switching times have to be applied between the productions of two different variants and there is an increased risk of assembling the wrong parts. An immense increase of effort in consolidating and establishing lot-kits adds to the problem of a differentiated model strategy in CKD production63. It displays the constant trade-off between meeting the diversification wishes and reducing the complexity of production processes, the related planning difficulties as well as logistical efforts at the same time 64.
2.3.7
Global production and supply chain planning
With a shifting focus of increasing model variants, but lower product life cycles while enhancing configuration and customization possibilities 65, global production planning and the supply chain process are becoming increasingly complex. KUHN defines the underlying strategic network reasonability of CKD production as either
60 CF. (JAHNS, HARTMANN 2007), P. 136F. 61 CF. (VELOSO, KUMAR 2002), P. 7. 62 CF. (TUCHER 1999), P. 142FF. 63 CF. (SCHMIDT 2009), P. 49. 64 CF. (TUCHER 1999), P. 143. 65CF. (RINZA, BOPPERT 2007), P. 17FF.
17
being ethnocentric or polycentric. Ethnocentric oriented production networks focus on the OEMs home market and offer standardized products without modifications to the regional markets via CBU or CKD units. If minor changes are made according to regional market preferences and the focus is on CKD production, a polycentric type of strategy is used. The author furthermore describes the most suitable CKD plant configuration as implementer, which is restricted to a regional supply and limitedly equipped with know-how, technologies and financial methods66. The strategy of CKD-based production is therefore not intended to cope with the fast changes of the automotive industry, but merely offers a supply suitable for entering a new market. It is, however, still affected by it, challenging global production planning and logistics processes. Production planning and sales follow the build-to-stock principle and are based on the forecast of the heterogeneous markets of different regions 67. Since production planning is completed before production capacities are planned, a long planning horizon is needed to enable the development of a functional supply chain. Hereby comes a substantial threat triggered by the high uncertainty of market developments, concerning demand, price, cost factors and exchange rates, which might lead to inaccuracies in calculations and predicted numbers 68. The functionality of the supply chain and the related logistics processes are furthermore affected by production planning, where different capacities are allocated between CKD plants as well as the number and kind of model variants and their configurations. The production limitations discussed in chapter 2.3.6 Model variants and customization might abate the resulting planning challenges, nevertheless the coordination and composition of the CKD lots with the different configurations according to country, volume and model variants is a complex task for the planning department and logistic center69. To cope with the complex material flows in a cost-effective manner, the supply chain management depends on a reliable and extensive exchange of information the management of global logistics processes becomes a question of how well the company manages and processes information flow70. The importance of exact schedule planning and a decoupling process of materials supply from the domestic manufacturing site to the foreign assembly plant are stressed by KLUG. He explains
66 CF. (KUHN 2006), P. 164F. 67 CF. (ZERNECHEL, VOLKSWAGEN 2007), P. 369F. 68 CF. (FLEISCHMANN, FERBER & HENRICH 2006), P. 196FF. 69 CF. (TUCHER 1999), P. 166FF. 70 CF. (LABIB ET AL. 2009), P. 186.
18
that containers must be shipped through a push principle according to a prescheduled plan, but should then be decoupled and stored at the assembly site to guarantee a short-term assembly line supply71. CHRISTOPHER concludes that without access to information about the actual demand of the end-user, immediate response and replenishment measures are not guaranteed and the supply chain processes consequently depend on an increasingly high inventory72. An additional reason for high inventory and supply chain difficulties is the JIT paradigm of dispersed production capacities73. It describes the problem of JIT supply due to geographically dispersed locations of plants, based on longer lead times caused by high transshipment durations.
2.4 The complexity of classification

In the previous sections substantial challenges of the CKD manufacturing process have been identified and further elaborated in detail. Due to the complexity and variety of global production networks and processes in the automotive industry, depending on the strategic orientation and managerial procedures, the presented challenges have to be recognized as exemplary for CKD production. The most common challenges are listed in this chapter. The list does not, however, claim to be complete and additional problems can be found in literature and practice, but would simply go beyond the scope of this scientific research. The typical challenges occur throughout the widespread supply chain and are characterized by interrelations and complex behavior. Their range is not limited to production and supply processes, but is expanded to an overarching view to take economic, cultural and governmental perspectives into additional consideration 74. Because of this enhanced scope, the challenges have not been subscribed to predefined categories, which further complicate the application of a managerial perspective. This creates the need for newly established categories in order to classify the diverse challenges of CKD production. To achieve an all-encompassing classification, the categories need to fulfill the criteria of representing the company in a holistic view, containing a strategic and managerial perspective while embracing relevant resources, capabilities and processes. Through a holistic view not only system internal challenges are identified, but also interactions and dependencies with surrounding environmental elements are considered. It therefore represents a
71 CF. (KLUG 2010), P. 8. 72 CF. (CHRISTOPHER CITED BY LABIB ET AL. 2009), P. 186. 73 CF. (LABIB ET AL. 2009), P. 183. 74 CF. (WIETS, KMPF 2007)
19
company and its processes as an interactive and open system, which is characteristic for an automotive company75. Interrelations and interactions within the system and between the environments should be emphasized, recognizing the potential range of influence and engagement with other elements as possible characteristics of a challenge. Through the establishment of a suitable classification system, the exemplary challenges of CKD production can be put into context, enabling a clear allocation into the new categories and furthermore making them comparable. Then a challenge can be identified, including its impact within the system properties. The consecutive purpose becomes to investigate the interrelations and interdependencies between the system elements and their challenges. The preceding classification makes it easier to identify such, by putting them on comparable levels. By discovering the interrelations between various challenges on diverse system properties, the causeeffect relationships become visible. Challenges might be the cause of other challenges and by interacting with each other create new obstacles for CKD production. The degree of interdependency between the challenges themselves can thereby be exposed. The ultimate objective of classifying the challenges lies within the accomplishment of methodological and efficient problem management and enables the use of counteractive measures to combat undesired interrelation effects. The scope of this work is, however, limited to the application of an appropriate analytical tool to classify the challenges and create a detailed view of the existing interrelations and cause-effect relationships.
75 CF. (RICHTER, HARTIG 2007), P. 251F.
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The Open System View as methodological framework

3.1 Selection of the Open System View
The necessity for an analytical framework, that allows the supervision of internal process, material and decision flows of an organization and integrates external influences caused by the constantly changing environment, was explained in the preceding section. The relationships between acting components need to be explored within the boundaries of the analytical tool for a further understanding of the comprehensive interactions between different elements of a system. Literature covers a variety of widespread models focusing on quality and process management, i.e. EFQM model, TQM approaches or Business Process Reengineering. One potential framework fulfilling these requirements could be the Supply Chain Operations Reference (SCOR) model established by the Supply-Chain Council in 199676. This model encompasses a cross-functional view of the business processes incorporating all participants of the supply chain. The key components of SCOR are plan, source, make, deliver and return, which are intra-organizational functions of a firm. The focus lies within the description, measurement and evaluation of supply chain processes and their dependency on diverse configurations 77. While it might be suitable for observing the CKD supply chain processes, it still lacks a perspective on the organizational structure, managerial behavior within a firm and interrelations with external components other than suppliers and customers and therefore does not fulfill all criteria requirements mentioned in the previous chapter. Other popular theories are the Market-based View (MBV) and the Resourcebased View (RBV) as its corresponding counterpart. The MBV delivers an outside-in perspective and assesses the performance of the company purely from its environmental conditions78 and not its actual processes and capabilities and thus does not fulfill with the required criteria. The RBV on the other hand can serve as an observation tool with a focus on internal competence building. According to the RBV, the success and competitiveness of a firm are achieved by building competitive advantage through exploiting the companys physical, human and organizational
76 CF. (BOLSTORFF, ROSENBAUM 2007), P. 1F. 77 CF. (LI, SU & CHEN 2011), P. 34F. 78 CF. (BEA, HAAS 2005), P. 26.
21
resources in the most effective way79. The lack of external aspects, in other words consumer markets, industry competitors and the general business environment, can be recognized as drawbacks and make it inconvenient for classifying the various challenges of CKD production80. By using the OSV as an analytical tool, the obstacles of the approaches mentioned above could be overcome. A consensus with the RBV is achieved through a foundation of competence-based thinking, while the firms embededness in a competitive and constantly changing environment is acknowledged at the same time81. It provides a systematic approach with a holistic view and managerial perspective, while concentrating on the resources and capabilities used by the firm as well as the dynamic internal processes and external environmental aspects. To regard a global automotive manufacturer as an open system enables a clear classification of challenges of CKD production and allows an in-depth analysis of their interrelations and root causes.
3.2
The Open System View
The theoretical backbone of the OSV relies on the competence theory, which needs to be elaborated further in terms of the principles and assumptions used. Based on the RBV, the author BARNEY stated in 1991 that superior processes and competitive advantage are gained from the usage and control of a firms internal resources and capabilities. He extended his approach 10 years later in 2001 and identified innovative capability leveraging and fostering of international businesses and multinational corporations82. Literature by SANCHEZ and HEENE agrees with this theory and furthermore identifies four cornerstones of the extended competence theory, the first focusing on the dynamic environment in which an organization or firm acts. The dynamism of the environment is influenced by common interactions taking place between individuals within firms, firms and resource suppliers, companies and customers, and competing and cooperating firms 83. Through such interactions the environment is shaped by constant changes concerning technology, know-how, market demands and customer preferences, policies and regulations. The second principle strengthens the OSV framework by acknowledging an active organization not as an isolated institution, but as an open element embedded into a larger system
79 CF. (DAVID 2011), P. 128F. 80 CF. (FREILING 2008), P. 34. 81 CF. (FREILING 2008), P. 46F. 82 CF. (BARNEY, WRIGHT & KETCHEN 2001), P. 629. 83 CF. (SANCHEZ, HEENE 1997), P. 308.
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(the dynamic environment) and characterized by a constant exchange of resources and information. Due to the openness of the firm it might also experience stronger negative impacts strategic managers have to be able to adapt the firms competencies and strategies according to those dynamic and complex environment conditions84. This third cornerstone illustrates the strategic need for mangers to act cognitively with a clear incentive structure, a guiding strategy and precise goal formulation. The strategy formulation and management processes are additionally complicated by the imperfect information available as well as interpretation variances and ambiguity. Because all influences, strategic decisions and possibilities have to be considered, the competence theory suggests as the fourth and final cornerstone a holistic view of the managers with their firms. The strategic leaders have to structure the organization as an adaptive and open system to environmental changes and use internal and external resources accordingly85. After examining the underlying concepts of the competence theory, the subsequent step is a shift of focus to the behavior of a firm as an open-system organization. SANCHEZ and HEENE, 2004, define an organization as a system of interdependent actors who collectively share some goals for creating and realizing value through their interactions86. The OSV coincides with this definition and depicts the interdependent actors within a firm as higher- or lower-system elements, each comprising assets and capabilities to achieve the strategic goals through interorganizational interactions and cooperation with outside elements. The highest element of a firm is described as the strategic logic. It is the underlying strategic rationality behind every process and should determine the ultimate way of how to coordinate and use available assets to achieve the predefined aim of the organization. As the topmost element, it also defines the shape and structure of the management processes, the second-highest element in an open system. The management processes hereby refer to the direct use of the available assets and capabilities and the necessary process coordination in order to guarantee an effective and sufficient value-creation throughout the various elements 87. Its broad scope encompasses the gathering and interpretation of internal as well as environmental data and information, the strategic decision-making process and the according implementation of measures, actions and policies to allocate necessary resources and support the value-creation process88. The third high-level element is defined as
84 CF. (SANCHEZ 1997), P. 941. 85 CF. (SANCHEZ 1997), P. 942. 86 CF. (SANCHEZ, HEENE 2004), P. 2. 87 CF. (SANCHEZ, HEENE 1996), P. 40. 88 CF. (SANCHEZ, HEENE 2004), P. 4.
23
intangible assets consisting of capabilities, knowledge, reputation and relationships. The quality and quantity of those intangible assets is highly important, since they determine the direct usage of tangible assets, a lower-level element of the firm encompassing machines, buildings, trucks and similar physical resources. The example of a worker who needs specific knowledge about a machine in order to handle it properly and be able to produce particular goods, illustrates the interconnection between intangible and tangible assets. These two elements should be especially connected to the environment through various interactions between the firm and individuals, other firms, governments, etc. in order to constantly replenish and improve the assets for leveraging the capabilities and creating a superior strategic position of the organization89. The element operations describes the deployment of all assets and capabilities into core value-creating processes, in detail the developing, production and distribution of particular goods, which are then presented as output in the element product offerings 90. Since the OSV is regarded as a framework taking not only internal resources and processes, but also environmental factors into consideration, additional external elements are mentioned. The original OSV from 1996 by SANCHEZ and HEENE denotes the two factors product markets and firm addressable resources. Product markets establish the link between the products of organizations and the customer, where the offered goods should meet customer preferences and demands. Firm addressable resources might range from a simple interaction with resource suppliers to a formation of alliances with other firms to further develop capabilities and competencies and strengthen the strategic position of the firm. The author further developed the structure of the OSVs external environment in 1997 by introducing competing firms as an additional factor. It defines the subject of increasing competitive dynamics of the environment through the additional effort (and therefore increasing competition) of other companies to gain a share in product markets as well as access to the firm addressable resources91. Figure 4 illustrates the firm and its operating environment in the sense of the OSV. The internal system elements are structured and ordered hierarchically within the boundaries of the firm. Environmental elements are represented outside the boundary of the firm, but are interconnected through exchange of products, information or resources. An additional feature of the OSV is the consideration of the
89 CF. (SANCHEZ, HEENE 1997), P. 308. 90 CF. (SANCHEZ, HEENE 1996), P. 41. 91 CF. (SANCHEZ, HEENE 1997), P. 307.
24
interrelations and interdependencies between internal elements themselves, which are further discussed in the following section.
Figure 4: Model of the firm as an open system (adapted from Sanchez and Heene 1996a)
Source: (Sanchez & Heene 1997, p. 309)
25
3.3
Interrelations within the Open System View
In addition to the organization and structuring of system elements, the flows of information and interactive processes between the various elements are shown. Every lower element is directly interconnected with the management processes, which in turn are influenced by the strategic logic. Management processes receive additional information from environmental conditions either directly from product markets or indirectly through the interaction with lower-level elements (intangible assets, tangible assets, operations). The flow of information from the lower-level elements to the management processes can be seen as control loops, giving the managers of the firm the opportunity to adapt their strategy and take corrective measures by passing down revised instructions, rules, procedures and decisions. Such actions must be taken if the mangers detect (through the control loops) strategic gaps in a system element. Strategic gaps are defined as a variance between the perceived/actual and the desired state of an element92 and require further attention of the strategic managers. The countermeasures of such challenges are influenced by two additional system properties causal ambiguity and dynamic response times. Causal ambiguity stands for the different perception and interpretation of managers concerning the state of system elements and the present strategic gap. The concept increasing causal ambiguity from lower-level to higherlevel elements is supported by the competence theory and ultimately confronts strategic managers in their decision-making process. They have to overcome the danger of only closing strategic gaps on lower-level elements since () it is more difficult and time-consuming to change the ideas that organizations use than the things that organization use93. The second obstacle for closing strategic gaps is the time required for countermeasures to become effective, e.g. installing new machinery equipment (tangible assets) is a matter of a few hours, whereas enhancing the knowledge of the workforce requires time-consuming training and further education. Similar to causal ambiguity, the dynamic response time has a positive increase from low-level to high-level elements. While strategic gaps of low-level elements and intangible assets are detected via control loops and then reported to management processes, the determination of gaps in the strategic logic and managerial processes is more difficult to define with internal actions. Benchmarking, environmental scanning and the consultation of
92 CF. (SANCHEZ, HEENE 1996), P. 43. 93 CF. (SANCHEZ 1997), P. 942.
26
external managers (consultants) can help to identify the internal weakness of highlevel elements by giving an external perspective 94.
3.4 The automobile industry and CKD production as open system

The high-level element strategic logic of car manufacturers is aligned with the definition of an overall strategy to achieve the companys aims by operating in a cost effective manner95. It taps into the essence of strategic management in the automotive industry and questions the logic behind the internationalization process in emerging countries and the establishment of a globally dispersed production network. What are the incentives and influencing factors for managers to decide about building a CKD plant? This question can be answered relatively easily by looking at the market developments of emerging economies. The BRIC countries as well as other emerging markets give new impulses, stimulating the world economy with economic growth and rapidly increasing demand for consumer goods, especially automobiles96. Exploiting those rapidly growing consumer markets became a priority of automobile manufacturers in order to overcome stagnating or little growth in the home markets of developed countries and achieve a substantial increase in economies of scale. The desire to globalize manufacturing through CKD assembly plants was intensified by the growing competition of global automotive companies for pole position in the emerging markets97. By providing the overarching aim and framework of the CKD internationalization process, the decisions made by managers within the scope of strategic logic affect all subsequent elements of the OSV, especially the management processes. The management processes of a CKD supply chain encompass collecting and interpreting data from external as well as internal sources, deciding how to use scarce resources and communicating all decisions, rules and procedures to lowerlevel elements98. Production and supply chain planning, quality management, intercultural HR management or LC sourcing exemplify CKD specific management processes99. The challenges categorized within this element have a significant impact
94 CF. (FREILING 2008), P. 47. 95 CF. (SANCHEZ 2004), P. 519. 96 CF. (VDA 2011), P. 14FF. 97 CF. (HUMPHREY, MEMEDOVIC 2003), P. 2FF, AND (STURGEON, FLORIDA 2000), P. 44. 98 CF. (SANCHEZ, HEENE 1996), P. 47P. 99 CF. (TUCHER 1999), P. 138FF.
27
on the performance of the CKD production and supply chain and could hinder its execution. The success of a global production network with several partners and suppliers thus lies within its planning and managerial competencies 100. Hence, a superior management should not only strive for quality improvement of its resources and processes, but also an increasing cognitive flexibility of managers to enhance the possibilities of alternative management processes and decisions 101. The challenges of CKD production in the context of intangible assets can be assigned to the broad pillar of capability and knowledge sourcing. As already established in chapter 2.3.2 Cultural differences, an educated and qualified workforce is necessary to compensate for less automation within the CKD production process. While intangible assets are focused on the skills and capabilities within a firm, tangible assets comprise all physical resources, in detail machinery used in CKD production and the necessary logistical equipment along the supply chain. Plant building, assembly tools, packaging, forklifts, storage racks, paint shop and testing equipment exemplify the broad scope of physical resources within the CKD process102. The coordination of these tangible and intangible assets needs to fulfill the managerial criteria of being flexible and adaptable. The operations within the CKD process have a broad scope and are connected with the usage of existing tangible and intangible assets for value-creating processes, including logistic activities like transport or storage, and the actual production of the car103. Since the assembled automobiles from operations are presented within the system element product offerings, both entities are closely correlated. Product offerings are therefore often related to quality, amount of variants and coherence to production schedule 104. Literature supports the theory that challenges within the element operations are preferably tackled by managers, since it is ordinarily convenient and relatively simple to do so105. It is however rather a shortterm solution to treat only the symptoms of the underlying problems in higher-level elements. Mangers should therefore act on a high cognitive level with increasing flexibility not only tackling lower-level objects, but their own decision-making process and strategy while focusing on the leveraging and building of new capabilities and competencies.
100 CF. (JAHNS, HARTMANN 2007), P. 135. 101 CF. (SANCHEZ 2004), P. 524 P. 102 CF. (IHME 2006). 103 CF. (KUHN 2006), P. 1101F. 104 CF. (SCHMIDT 2009), P.64FF. 105 CF. (SANCHEZ, HEENE 1996), P. 43.
28
As the OSV suggests, many influencing factors of the CKD production process do not lie within the boundaries of the manufacturer, but the environmental surrounding it is acting in. A car company may rely on dynamic environmental exchange processes of intangible and tangible assets and therefore interacts with suppliers, financial institutions, governments, and other resource providers 106. The major challenges occurring through interactions with firm addressable resources can be further categorized and subdivided into four relations the sourcing from local content suppliers107, the dependency on regional infrastructure108, the access to the local labor market109 and the alliance of a JV partnership 110 (if applicable). Using the OSV as a classification tool emphasizes the interrelation behavior of an embedded CKD assembly plant with its environment.
106 CF. (SANCHEZ, HEENE 1997), P. 308. 107 CF. (STURGEON, VAN BIESEBROECK & GEREFFI 2008), P. 13F. 108 CF. (TYBOUT 2000), P. 15. 109 CF. (ARBACHE, DICKERSON & GREEN 2004), P. 74. 110 CF. (KALE, SINGH 2009), P. 47F.
29
4 Classification of challenges
After identifying major challenges of CKD production processes, introducing the OSV as the methodological framework and applying it on criteria of the automobile industry, the focus lies upon the merging of these two sections to obtain an eligible classification of the problems. To improve the understanding and support the clarity of the analysis, following terminology is used and defined: Each major challenge described in chapter 2 consists of one or several sub-challenges, which are referred to as problems. Challenge and problem are used interchangeably. Each problem consists of a cause-problem-effect construct. Root causes are seen as underlying causes, which give rise to particular phenomenon or conditions. If a condition is regarded as negative or harmful for CKD processes, it is defined as a problem. The result or consequence of the problem is considered as an effect 111. The used terminology is therefore aligned with OXFORD DICTIONARIES, which simplifies further usage. It additionally has to be clarified that a problem might have one or several effects, or gives rise to an additional problem. Each challenge discussed in chapter 2 was individually put into context with the OSV and illustrated with a diagram attached in the appendix 112. The analysis distinguishes between three main types of relationships aligned with the previously mentioned terminology to obtain a well-defined picture about existing interrelations the root causes and the resulting problems, the problems and their effects and thirdly, the creation of a new problem out of the identified effects and problems. Following the description of these interrelations, all challenges with their individual and interrelating causes, problems and effects are combined into one holistic open system framework, as illustrated in Figure 5. Each internal and external element with corresponding CKD causes, problems and effects is described in the following section to explain the applicability of the OSV in the context of the automotive industrys international manufacturing process in emerging markets. Each challenge from chapter 2.3 is then further discussed to discover common cause and effect relationships on basis of the OSV. In conclusion, contributions and limitations of the present analysis are discussed.
111 CF. (PEARSALL 2012). 112 APPENDIX FIGURE 17.
30
Figure 5: CKD challenges in the context of the Open System View
31
4.1
Allocation of challenges to system elements 4.1.1 The transition phenotype of the strategic logic
No specific challenges could be assigned to the highest system element, but nevertheless a strong influence became evident. The strategic rationale behind CKD production is as previously established a response to governmental requirements and higher import tariffs. Combined with an incentive to follow industry trends, the rational strategy of CKD obtains root causes and difficulties for all lower-level elements and might become debatable. By choosing ethnocentric or polycentric production strategies only little adjustments of the products for the regional markets are performed in order to keep investments at the lowest possible level and extend the economies of scale. These strategies are limited in their applicability, since they are not able to cope with recent industry trends, e.g. an increasing number of model variants with reduced product life cycles. The characteristics of a CKD assembly plant contradict these requirements, which is why global auto manufacturers recognize the potential of this emerging market but at the same time are willing to compromise in difficulties along the supply chain and additional efforts in the production. Hence, the strategic logic of CKD reflects a transition phenotype between single central manufacturing and a global, multi-site production network113.
4.1.2 Planning and communication challenges of management processes

Most of the identified CKD challenges are either classified as managerial problems or have their root cause within the resource allocation and decision-making process. Managers struggle particularly with capturing complete information about demand in markets with rapidly changing customer preferences 114 and experience additional difficulties with the interpretation of these data in order to develop a long-
113 CF. (KLUG 2010), P. 6. 114 CF. (TIAN 2011), P. 5PP.
32
horizon production plan which insures high capacity utilization 115. Further challenges are emphasized by the strong causal ambiguity between managers of a firm. The difficulties are extended to a cooperation drawback between two firms, given a JV partnership as market entry mode. Conflicts of interest may result, which impede the decision making process, hinder the establishment of clear objectives and proper ways of communication and have severe consequences for the use of resources and operations. A specific challenge is the actual resource distribution and design of the supply chain, including coordination processes at the logistic center, new packaging, the application of push-principles and the paradox of long-term transport (sea freight) of CKD-Lots and short-term material supply for the CKD plant116. Following partial contradiction of the strategic logic, those decisions become more complex and interrelated. Here, many decisions and managerial tasks can be identified as root causes and triggers for occurring problems in assets and operations. By creating new obstacles in lower-level elements, the complexity of managerial processes might experience a constant intensification since managers are only occupied with error recovery instead of closing strategic gaps within their managerial processes117. The focus after an uncoordinated robbing process might for example be on recomposing the rob lot instead of searching for more appropriate and successful ways of substituting missing or damaged parts. As erroneous decisions and resource allocations cause new challenges in other system elements, it affects the need for extensive communication and information exchange118. The control of the supply chain relies on increasing information exchange, as the success or failure of a JV might be decided on the quality and amount of communication between the partners and the local workforce, highlighting need for intercultural management in communicating decisions 119.
115 CF. (FLEISCHMANN, FERBER & HENRICH 2006), P. 194 AND (STURGEON, FLORIDA 2000), P. 54. 116 CF. (KLUG 2010), P. 8. 117 CF. (SANCHEZ, HEENE 1996), P. 43. 118 CF. (MOTUS, BOPPERT 2007), P. 387F. 119 CF. (TONG, REUER & PENG 2008), P. 1016.
33
4.1.3 Limitation of resources as main challenge of intangible and tangible assets

The main challenge of intangible assets addresses the lack of skills, capabilities and experience as well as negative influences of cultural habits. The labor market of developing countries is characterized by shortages of skilled and specialized workers, making the search for suitable employees, workers as managers, a time-intensive and difficult task120. The amount of tangible assets like equipment and machinery is strongly reduced due to a low degree of automation 121; they are however strongly affected by CKD problems, since they are the first element approached to initiate change. Low automation and limited technology might be one of the root causes for limitations in production volume, product models and customized variants and might increase the dependency on labor. Quality and quantity of logistical equipment does not bear the greatest challenge in the automotive industry, operating highly sophisticated, complex and global supply chain networks either through sea freight or, due to timeconstraints, via airfreight. Instead the focus is shifted to the new requirements of packaging in the CKD supply chain, which ask for newly developed, efficient and effective solutions to reduce the impact on overall costs 122. Another problem of global production systems concerning tangible assets is the high amount of required storage capacity and logistics areas123.
4.1.4 Inefficient operations and deficits in product offerings

The application of the OSV shows that many challenges are concentrated within the scope of CKD specific operations and are in addition highly responsive and susceptible to manipulation. There are four major challenges marking inefficient and problematic procedure within the CKD process, which could not be previously allocated to higher-system elements. The first obstacle is the supply process of the lot kits, which is characterized by long-lead times and can be described as inflexible
120 CF. (LOWELL, FINDLAY 2001), P. 11. 121 CF. (TUCHER 1999), P. 143. 122 CF. (CAMUFFO, VOLPATO 1999), P. 19. 123 CF. (STOCK, LAMBERT 2001), P. 559.
34
and inefficient. This is related to the second struggle, namely the operational procedure in case of missing or damaged parts. Robbing seems to be a suitable solution, but might lead to process failure and higher costs on the long run if executed poorly. The third challenge of operations is a deficit in quality. The cause for a lack of quality within the process might not lie within the same element, but refers to higher system elements. The fourth problem is the unreliable JIT supply of locally sourced parts, creating further inefficiencies in the production. In addition to major problems, many effects on operations can be analyzed, creating a tradeoff between the need for new processes or lowering the quality of products. Lower process efficiency due to inadequate packaging, increasing number of mistakes in production processes, additional rework and correction of defects and body protection processes exemplify such effects. The quality of operations can be noted in the lowest system element: product offerings. The produced car might obtain quality variances to similar products from series plants, based on additional supply processes and diverging production techniques. Especially affected by operational problems, the production might not be able to keep up the planning schedule 124. However, the greatest challenge should be ascribed to a limited number of possible car models with predefined variations. The product offering of a CKD plant becomes subject to the fundamental tradeoff between increased revenue by high model variety versus rising production costs through higher production complexity and therefore a loss of economies of scale125.
4.1.5 High dependency and influence of external elements

STOCK and LAMBERT define six uncontrollable elements of a global logistics and production environment political and legal structure, economic behavior, competition, technology, geography and social and cultural elements 126. Accordingly, a high dependency of CKD assembly structures from firm addressable resources becomes evident when looking at the various problems and root causes in this area. Policies and requirements set by the local government have particularly high effects on firm addressable resources. They form the root causes for upcoming challenges with local suppliers and joint venture partnerships by enforcing such. CKD assembly plants consequently struggle with typical procurement problems of localizing suitable
124 CF. (WIETS, KMPF 2007), P. 5F. 125 CF. (MACDUFFIE, SETHURAMAN & FISHER 1996), P. 352. 126 CF. (STOCK, LAMBERT 2001), P. 526.
35
component suppliers and developing reliable supplier relationships, an unreliable JIT supply or failing quality verification standards like ISO 9000 127. They might also experience cooperation problems with managers from the JV partner company or suffer from accidental know-how loss. These challenges and their close interdependence of environmental and organizational elements call for adaptable processes and a highly flexible management in order to guarantee the survival of the car manufacturer128. Another influential factor is the market itself. The target market provides feedback for the car manufacturer, which then needs to act correspondingly. Entering a new market through CKD production might facilitate the disadvantage of having no previous or little knowledge of local demand and preference, competition and market forces and developments. These factors might make long-term production plans disputable, by implying additional challenges for management processes and can therefore be seen as an influential root cause.129
4.2
Interrelations of challenges in the context of system elements
After classifying problems, root causes and effects to system elements of the OSV, the various interrelations have to be identified. Each challenge described in chapter 2.3 is analyzed in detail and its types and numbers of interrelations are presented in a matrix to further clarify the main focuses. It has to be noted that not all possible interrelations are detected nor mentioned, but concentrates on the most important as suggested by present research. The key challenge of packaging lies within the boundaries of tangible assets (no adequate packaging available/produced), but originates through new operations and a higher logistical effort. The bilateral effects extend into the element operations and can result in low process efficiencies and damaged parts. However, additional collection of new process data to determine new packaging necessities and functions may be required. Consequently, this requires new planning processes and also skills and capabilities for packaging.
127 CF. (BOWERSOX, CLOSS & COOPER 2007), P. 82FF AND (STOCK, LAMBERT 2001), P. 490F. 128 CF. (SANCHEZ 2004), P. 526. 129 CF. (DAVID 2011), P.365.
36
The complexity of challenges increases when observing cultural differences the first problem concerns the intangible assets, namely the capability of the local workforce, which might affect the management with the need for an intercultural communication as well as operations by evoking inadequate processes. While low technological CKD processes intensify the problem, the root cause lies within the local labor market. Combined with cultural diverse managers from a JV as an additional cause, it complicates the decision-making processes due to increasing causal ambiguity between expats and local managers. This could result in further inefficient production processes. Since the labor market also affects local supplier, a new problem through the possible supply of low-quality LC components is created within the boundaries of tangible assets. The major problems referring to domestic infrastructure are operational-based. The first problem is unreliable JIT supply, which can be due to an insufficient road network and geographically widespread suppliers. The second challenge is the possibility of unreliable lot supply because of inefficient customs procedures. Both challenges directly affect the management processes with higher planning efforts and tangible assets through greater storage capacities. A poor road network could cause damage to cars during their distribution transport. This challenge of product offerings might therefore distress operations with additional rework or have a negative impact on the companys reputation if the car is offered on the product market. The additional challenge of an insufficient energy power supply might also increase managerial efforts through additional backup strategies. The main challenge in case of damaged or missing parts is highly inflexible processes and operations. Two main sources are suggested; the first is the complex coordination and consolidation processes of lot kits (missing parts) within managerial processes and the second comprises infrastructure deficits like poor roads (damage parts). Inflexibility in case of missing parts does not only affects tangible assets through an increase in storage capacities and capital-intensive rework paint shop, but also creates the new operational challenge of handling the robbing process. This new challenge raises managerial effort for reconsolidating of the rob-lot, but also affects product offerings through possible delays and variances in the production sequence. Governmental requirements are potential primary causes for problems occurring within firm addressable resources. By determining the degree of LC and the ownership structure of a JV, governmental requirements form the root causes for problems with local suppliers and JV partner companies. Supplier difficulties like JIT delivery or quality verification further affect lower-level system elements. Challenges 37
addressing the alliance of a JV are for instance the unwilling loss of know-how, and managerial problems due to cooperation difficulties. This accommodates poor communication, resulting in operational deficits or could endanger the strategic logic behind a JV partnership (failure/dissolution). Governmental protection measures create the challenge of inaccessible product markets (through CBU units), which have a direct impact on the strategic logic of car manufactures and their global production network strategies. The problem of limited model variants and customization possibilities is recognized by the element product offerings, since the current product market is affected by individualization trends and directly motivates the strategic logic of car producers to enhance their current product portfolio. The restraints of CKD production in number of models and customization are triggered by management processes made in consensus with the strategic logic, i.e. the push principle according to market forecasts and complex planning and consolidation processes of lots as well as limited automation and equipment. Car producers can overstretch production capacity, which could have severe consequences on operations (rising complexity & increasing number of mistakes) and intangible assets (need for skills and experience). Challenges of global production and supply chain planning are focused in management processes. They capture the problematic situation of an imprecise long planning horizon coupled with complex production allocation of different CKD assembly plants and the management of complex supply chain processes. Substantial root causes might be either uncertain market developments or the general strategic rationale of a globalized production network. Inaccurate long planning horizon have a limited impact on the deciding and planning procedures, but problems concerning resource allocation and planning possible influence further communication and information exchange, intangible assets (higher storage capacities) or operations (long lead times, inefficient processes).
38
Table 1: Interrelation matrices of system elements
After closely analysing the interrelations between system elements for each challenge, Table 1 details more information about the amount of interrelations in each system element. Focusing on only the previously mentioned challenges, root causes, and their interrelations (which are exemplary and incomplete), a clear fragmentation of effects and interrelations in the context of system elements becomes notable. Management processes are with eighteen interrelations the most interconnected system element including five problems and three root causes. With seven effect relationships and three problems, operations are the second highest interrelated internal system element. This high number deflects the possibility of inefficient and highly dependent production and supply processes. The importance of external system elements, especially firm addressable resources and product markets, are verified by a total of sixteen interrelations. With 9 recognized root causes in environmental elements, it can be concluded that many problems of CKD production are caused by external conditions.
4.3
Discussion of key findings
This section determines the contribution made by the application of the OSV as methodological approach on the CKD production. It answers the question to what extent can the analysis fulfill the criteria established in chapter 2.4 the complexity of classification. It consequently discusses the boundaries and limitations of this research. Analyzing the broad challenges with the help of the OSV incorporates two major contributions to scientific research. Firstly, it enables a successful classification of challenges according to predefined categories, which fulfill the criteria of having a holistic view of a car company, offering a management perspective and including interactions with the environment. The problems, root causes and consequences are put into context within the boundaries of the OSV, providing a high level of clarity by 39
creating visual comparability. Secondly, the problems, root causes and effects are not only categorized according to the various system elements, but also their interrelations are shown. Cause-effect relationships are evident as well as impacts on other system elements. A high degree of interactions between management processes, operations and external elements calls for an enhanced adaption of management and manufacturing processes to local conditions and should be in the center of attention. GRANT and GREGORY suggest therefore to further measure the appropriateness and robustness of processes referring to the degree of local fit and ability to be transferred without adaption130. With an exact measurement of the appropriateness and robustness of the challenges underlying CKD processes, managers are able to identify the relevance and influence of each challenge and can further align their management strategy. This provides mangers of CKD operations a comprehensive overview of which problem has to be resolved in order to reduce negative effects on the short-term or which root cause has to be tackled in order to achieve sustainable change. The findings support the competence theory and suggest managers to increase their process flexibility and scope of ideas to coordinate and manage CKD activities131. At the same time major limitations and drawbacks of classifying CKD challenges were exposed. Though cause-problem-effect interrelations and dependencies with the scope of a single challenge of chapter 2.3 could be displayed and analyzed, the interactions with other challenges of that chapter are only indicated, i.e. specific effects of chapter 2.3.5 Governmental requirements on the problems in chapter 2.3.2 Cultural differences remain unexplored and suggest further research. An additional limitation is caused by the scope of presented and analyzed challenges. The list of challenges can only be count as partially complete. Therefore, many interrelations between challenges and their effect on system elements remain undetected. Furthermore, the accuracy of the cause-effect relationships has to be questioned. The increasing ambiguity of defining root causes, problems and effects might therefore be dependent on the individual interpretation of managers. Since the scopes of challenges are unspecific and broad, the gained insights and findings only represent a typical CKD production and supply chain. Neither country-specific information nor company-specific data input is used, which might be seen as limitation to this research, however this analysis provides a framework for further case specific research.
130 CF. (GRANT, GREGORY 1997), P. 996 131 CF. (SANCHEZ 2004), P. 524F.
40
5 Conclusion and future outlook
CKD production as a transitory production strategy incorporates new supply chain and production processes, bearing new challenges within the scope of international manufacturing of the automobile industry. The research questions included how those challenges and root causes could be classified in order to identify their inter-relational behavior. The key findings of this scientific work contain a thorough classification of major challenges and problems within the scope of the Open System View. The identification of interrelations between the various system elements helped to discover the higher-level element management processes as main driving factor for facilitating sustainable change for long-term success of CKD production. At the same time the lower-level element operations highly affected by various challenges within the boundaries of the OSV. Consequently, cause-effect relationships of system elements became evident. The result and scope of this work is limited regarding various aspects and should be accounted as a cornerstone for future CKD research concerning CKD production challenges. First of all are the results are purely based on qualitative data introducing quantitative was not within the scope of this work, but could bring new light and new country- and company-specific challenges into perspective. In addition, the used list of challenges is not complete and only exemplifies part of the given problem. Newly added challenges might change the result found within the scope of this work. Strategic decisions and management planning of future CKD operations can now be assisted with a holistic classification framework of possibly occurring challenges. Managers can identify their company-specific challenges and put them into context with already discussed problems. The illustration of ramified interrelations and their basic tendency of occurrences can support the elimination of existing challenges and ultimately aid the development of a more efficient and reliable CKD supply chain and production. Future research on this topic could be built upon the discoveries made with this research. By enhancing the scope of challenges and distinguishing between level of applicability and importance, a more critical examination of CKD specific operations and their implications can be achieved. Further researching the 41
connectivity and interrelations between challenges in the context of the OSV would extend the findings about cause-and-effect relationships explored in this work. Classifying and interpreting the drawbacks and challenges of CKD taps into the essence of successful strategic global production networks in the automobile industry. That is why this research can be seen as cornerstone of failure- and problem-specific analysis of CKD network production.
42
Appendix
Figure 1: Packaging in the context of the OSV
Strategic Logic
Root Cause Problem
Management Processes
Gathering and Interpre ng Data Effect: Informa on about new processes, necessary requirements and func ons of packaging Deciding Tasks and Resource Alloca on Effect: New planning of packaging is required; me extensive and new suppliers are needed. Packaging needs to fulfill the requirements collected through all processes
Problem Effect / Effect Effect Effect New Problem
Firm Addressable Resources Intangible Assets

Effect: New packaging capabili es necessary at logis c center Joint Venture Infrastructure Supplier
Tangible Assets
Problem: No suitable packaging available
Labor Market
Opera ons
Root Cause: New requirements because of new opera ons and logis cs transport. Focus on protec on and distribu on func on of packaging Effect: Inadequate packaging results to lower process efficiency and damage of parts
Product Offerings
Product Market Compe ng Firms
43
Figure 2: Cultural differences in the context of the OSV
44
Figure 3: Infrastructure of emerging countries in the context of the OSV
45
Figure 4: Damaged or missing parts in the context of the OSV
46
Figure 5: Governmental requirements in the context of the OSV
47
Figure 6: Model variants and customization in the context of the OSV
48
Figure 7: Global production and supply chain planning in the context of the OSV
49
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Completely-Knocked-Down Production

2 CHALLENGES OF INTERNATIONAL MANUFACTURING IN THE AUTOMOTIVE INDUSTRY .................................... 4

The complexity of classification.......... .. 19

3 THE OPEN SYSTEM VIEW AS METHODOLOGICAL FRAMEWORK ................................................................. 21

4 CLASSIFICATION OF CHALLENGES ............................. 30

management processes ............................................. 32 4.1.3 Limitation of resources as main challenge of

.................................................................. 34 and influence of external

elements 4.2 4.3

5 CONCLUSION AND FUTURE OUTLOOK.. 41 APPENDIX ....................................................................... 43 BIBLIOGRAPHY..50

1.2 Aims of the thesis

1.3 Course of investigation

manufacturing in the automotive industry

Source: (Macharzina 2003, p. 863).

The CKD process

16 CF. (RAWLINSON, WELLS 1996), P. 197F. 17 CF. (IHME 2006), P. 11.

Figure 2: Automobile manufacturing process

Source: (Ihme 2006, p. 11)

Source: Adapted from (Laffert 2000, p. 141)

Challenges along the supply chain of CKD production

Infrastructure of emerging countries

Damaged or missing parts

Model variants and customization

Global production and supply chain planning

2.4 The complexity of classification

75 CF. (RICHTER, HARTIG 2007), P. 251F.

The Open System View as methodological framework

The Open System View

Source: (Sanchez & Heene 1997, p. 309)

Interrelations within the Open System View

92 CF. (SANCHEZ, HEENE 1996), P. 43. 93 CF. (SANCHEZ 1997), P. 942.

3.4 The automobile industry and CKD production as open system

111 CF. (PEARSALL 2012). 112 APPENDIX FIGURE 17.

Figure 5: CKD challenges in the context of the Open System View

4.1.2 Planning and communication challenges of management processes

113 CF. (KLUG 2010), P. 6. 114 CF. (TIAN 2011), P. 5PP.

4.1.3 Limitation of resources as main challenge of intangible and tangible assets

4.1.4 Inefficient operations and deficits in product offerings

4.1.5 High dependency and influence of external elements

Interrelations of challenges in the context of system elements

Table 1: Interrelation matrices of system elements

Discussion of key findings

5 Conclusion and future outlook

Root Cause Problem

Problem Effect / Effect Effect Effect New Problem

Firm Addressable Resources Intangible Assets

Product Market Compe ng Firms

Figure 2: Cultural differences in the context of the OSV

Figure 3: Infrastructure of emerging countries in the context of the OSV

Figure 4: Damaged or missing parts in the context of the OSV

Figure 5: Governmental requirements in the context of the OSV

Figure 6: Model variants and customization in the context of the OSV

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