Current Operational Issues in Volkswagen

Discuss about the Developing Business Processes and Operations.

This report will highlight the current operational issues in Volkswagen, a German automobile and identify the possible solution. Volkswagen commenced on may 28th 1938, and German labour Front operated it (History.com 2018). The organisation has its headquarters in Wolfsburg, and initially, the primary objective of the firm was mass production of fast and affordable vehicles. A company named Ferdinand Porsches initially designed the cars and Hitler supported the design. However, during the Second World War, the production of the vehicles stopped, and after the war, British army took over the firm to start the manufacturing process. British army returned the control of Volkswagen to Germany and organisation started gearing up in 1950-1960. The cars made by Volkswagen had become outdated, and organisation started expanded their product line in the early 70’s to 90’s of the 19th century (History.com 2018).

The company launched various new models during that period such as Golf, Coupe, Jetta and Cabriolet (Volkswagenag.com 2018). Since then the firm had multiple models and considered as one of the global giants in the worldwide automobile industry. Volkswagen focused on operational management and implemented change management to improve their operational efficiency. The organisation had expanded their business to all parts of the world and established their factories (Volkswagenag.com 2018). Innovation and technology are components used by the firm to improve the efficiency of their cars, and the organisation experienced highest global sales for a couple of years. The emission scandal in 2015 reduced their operating margin and they are still trying to recover from the effect. Toyota is the market leader in this segment having an operating margin of 9-10 % (Rhodes 2016). The operating margin of Volkswagen is 6% that is quite low when compared to its competitors.

Volkswagen being a well-reputed organisation globally has been one of the primary choices of the consumers in the premium segment. The company had exported millions of cars all over the world. However, the company admitted to being involved in an emission scandal in the fiscal year of 2015 (Atiyeh 2017). Volkswagen installed a defeat device, which would reduce emission during testing of the cars. However, the emission from the cars was way above the standard and benchmark of the industry. The statistics suggest that 482,000 diesel cars sold with different models in the United States had the cheat device installed in it (Atiyeh 2017). Moreover, 11 million vehicles sold worldwide contained this software and the consumers lost theirs over a reputed brand (Forbes.com 2016).  Volkswagen was fined billions of dollars; criminal investigations were conducted, class action suits and degradation of reputation they have generated. The consumers lost their trust in the organisation, and it was evident that it would be difficult to maintain long-term sustainability if they were unable to change their operational policies and overall structure of the company.

Impact of Emission Scandal on Volkswagen

Volkswagen started restructuring of their processes as a measure of damage control. The market share of the organisation was decreasing even before the scandal was exposed. This meant that there were operational issues in the company yet before they were exposed. There has been a steady decrease in organizational sales and it went down even further after exposure of the scandal. Thus, restructuring of the corporate processes was essential for improving the chances of sustainability in the global environment. Even before the scandal, stock prices of the organisation fell below 13% in 2015 and Volkswagen was unable to acquire high profits during the first and second quarter of the fiscal year in 2015 (Forbes.com 2016).

The operating margin of the organisation has remained a problem, and the operating margin of the organisation is just over 6% on due to the luxury brands that are more profitable. However, it is still much lower when compared to other competitors such as Toyota, which has been ranging between 9-10%, Porsche industry is the leader with 15.75 and Audi is at 9.7% are responsible for elevating their profitability (Forbes.com 2016). The operating margin of the original brand is 2.6%, which is dragging down the overall profitability of the whole organisation (Forbes.com 2016). Volkswagen brand was experiencing a lower amount of sales, and it affected the overall profitability as 60% of the total sales volumes were contributed by this brand.  Moreover, the organisation had been investing in innovation, and research and development, which is affecting the profitability of the firm even further.

Thus, after the exposure of the emission scandal, the organization aimed at increasing their profit margin by increasing the production of electric vehicles and reducing the overall cost of production. Cost cutting had been the biggest plan but the organization would face issues from their workforce as labour has a powerful in the organization ((Painter and Martins 2017). Thus, even though decreasing cost had been the prime objective of the organization, they would have to face many constraints to apply this measure. Moreover, operating margin of Volkswagen brand is low and other methods are required to improve the profit margin of the organisation.

million	2016	2015	2016	2015	2016	2015
Sales revenue	217,267	213,292	166,016	163,936	31,251	29,357
Cost of sales	−176,270	−179,382	−150,860	−155,553	−25,410	−23,829
Gross profit	40,997	33,911	35,156	28,382	5,841	5,528
Distribution expenses	−22,700	−23,515	−21,453	−22,281	−1,248	−1,234
Administrative expenses	−7,336	−7,197	−5,730	−5,646	−1,606	−1,552
Net other operating result	−3,858	−7,267	−3,306	−6,761	−552	−506
Operating result	7,103	−4,069	4,668	−6,305	2,435	2,236
Operating return on sales (%)	3.3	−1.9	2.5	−3.4	7.8	7.6
Share of profits and losses of equity-accounted investments	3,497	4,387	3,433	4,366	64	21
Finance costs and Other financial result	−3,308	−1,620	−3,217	−1,695	−91	75
Financial result	169	2,767	216	2,671	−27	97
Earnings before tax	7,292	−1,301	4,884	−3,634	2,408	2,333
Income tax expense	−1,912	−59	−1,149	527	−763	−586
Earnings after tax	5,379	−1,361	3,735	−3,107	1,645	1,747
Noncontrolling interests	10	10	−81	−10	91	19
Earnings attributable to Volkswagen AG hybrid capital investors	225	212	225	212	–	–
Earnings attributable to Volkswagen AG shareholders	5,144	−1,582	3,591	−3,310	1,553	1,7

Table 1: Income Statement

(Source: volkswagenag.com 2016)

The possible methods of increasing operating margin are a reduction in the cost of goods sold, reduction in the labour and operational cost, increase in the sales revenue and audit of the utilities and insurance. Volkswagen will have to review all their expenses related to production cost, which will consist of manufacturing cost, supplier cost, labour cost and inventory purchase prices. Thus, reduction of initial values is essential for reducing the cost of goods. The second possible option is increasing the volume of sales, which is only possible by selling more products (Zhou 2016). The organisation can also search to make improvements in managing utilities in a better way. Volkswagen can use energy saving schemes to reduce the cost of energy consumption in the factories. However, reduction in operational and labour price is the most crucial factor.

Restructuring of Processes at Volkswagen

Volkswagen will have to reduce the costs if they want to increase their operating margin. The first measure of the company is establishing cost-cutting goals; this means that the organisation will decide on the allocated budget and keep their spending within the chosen range. The next measure is the re-evaluation of organisational suppliers; this is more relevant for organisations that deal with a large number of suppliers. Thus, it is feasible for the firm to identify the suppliers that are willing to provide inventory at lesser prices. Moreover, if the currents supplier find out that Volkswagen is searching for a better option, then the suppliers are likely to reduce the expenses.

The next possible solution is increasing the task efficiency of the employees. It has been seen that the number of employees working in Volkswagen is twice of the employees in Toyota. However, the amount of the manufactured product is same. Volkswagen employees 67000 employees in 27 factories all over the world and the gross total comes up to 610,000 workers whereas Toyota has 344,000 workers and both produce the same number of vehicles (Ewing 2016). This shows that they can reduce the number of their workforce to improve their operational efficiency. Thus, the organisation will have to understand the over-allocation of their resources and reduce the number of workforces significantly if they want to maximise the effectiveness of the employees. Volkswagen can reduce the number of benefits and rewards they provide to the employees.

 The organisation allocates budget for various parties and employee activities, curtailing the cost of these events is a viable option for the company. Moreover, the firm can reduce the allowances they are providing to the employees by minimising the excess cost.  The last measure that Volkswagen can implement is wastage of company resources. The organisation can implement strict policies on use of office supplies and trips organised by Volkswagen. The company can also install equipment, which will save energy consumption and increase the efficiency of the organisation.

Volkswagen will implement group strategy 2025 to improve their operational sustainability.  This is a transformative measure where change management will be implemented. The organization will transform the core business by grabbing the opportunity of gaining new potential market segments. The organization should be focusing on development of new product segment and selling electric based vehicles that are expected to generate 25% of the overall revenue in upcoming years. Innovation, research, and development will be a key in making these adaptations. Digitalization, technology and autonomous driving will be one of the milestones that Volkswagen will have to reach. However, in order to achieve the organization will have to realign the components in business. Thus, the organization will have to make changes to the business model and focus on production of new type of vehicles. Thus, the organization should be aiming to enter the new market by using new mobility solution they have come up with. The organization should emphasize on optimizations and efficiency of portfolio. However, these plans belong to the long-term category and will take time to achieve.

Possible Solutions to Increase Operating Margin

The possible solutions mentioned are crucial factors for attaining the desired goals of the organization and Volkswagen will implement all the above-mentioned strategies to maintain their sustainability in the global automobile environment. Vertical integration is a global operation strategy that will be executed. The organization will be able to reduce the cost of their operations. Volkswagen should be able to control their upstream and downstream suppliers; forming partnership with one of the suppliers to handle manufacturing of some of their products will reduce their cost significantly. The company will be able to achieve economies of scale if they execute this strategy effectively. Congruence problem in market-manufacturer can be reduced by eliminated by using process and product structure matrix. This matrix includes process structure and process choice, which are the indicators of identifying the critical processes and curtailing workforces in non-critical processes.

The organization will use midterm planning where the management will meet once a year to set the goals of the next five years. The organization will aim to reach liquidity by setting bars for both technical and economic fronts. The major problem the organization has faced before and after the scandal is maintaining operating margin. Moreover, after the emission scandal the organization will have to keep side billions of dollars for compensations and fines. Thus, the company resources have become limited and they will have to invest properly to improve their operating margin. The organization will have to let go of their workforce but it is not possible because the workforce a considerable amount of control due to its structure and culture. The boards of directors comprise of 10 employee representatives, which is half of the total board (Ewing 2016). Thus, letting go of their huge workforce will be tough as reaching majority during decision-making will be tough. Thus, the company will have to put their operations in to one single division, which will reduce the labour cost. The organization will have to reduce their cost structure as they make negligible profit from their main brand due to this factor. Thus, reducing their cost structure and improving task efficiency are the major factors, which should be implemented.

Proper execution of these strategies will completely change the market scenario of the organization. The organization will be able to increase their operating margin by reducing their operational cost. The figures in the table shows that implementation of the strategies will increase the revenue generated in the year of 2015.

€ million	2016	2015
Sales revenue	150,343	149,716
Gross profit	29,660	23,023
Operating result	4,167	−7,013
Operating return on sales (%)	2.8	−4.7

Table 2: Operations in passenger car business

€ million	2016	2015
Sales revenue	32,080	30,445
Gross profit	4,899	4,589
Operating result	716	586
Operating return on sales (%)	2.2	1.

Table 3: Operations in commercial car business    

(Source: volkswagenag.com 2016)

€ million	2016	2015
Sales revenue	3,593	3,775
Gross profit	597	770
Operating result	−217	123
Operating return on sales (%)	−6.0	3.

Table 4: Operations in power engine business area          

(Source: volkswagenag.com 2016)

Sales revenue	177,815	32,080	3,593	31,251	244,739	−27,472	217,267
Segment profit or loss (operating result)	5,235	716	−217	2,435	8,171	−1,068	7,103
as a percentage of sales revenue	2.9	2.2	−6.0	7.8			3.3
Capex, including capitalized development costs	15,891	2,433	194	357	16,875	27	16,902

Table 5: Projected figures

(Source: volkswagenag.com 2016)

The projected scenario states that there will be increase in operating in most of the segments but as the impact of the scandal on some segment is more it will take time. The operating margin will not grow significantly in a year but in five years, the organization will be able to improve on their cost structure. The organization is generating maximum operating margin from passenger car segment and commercial car segment. However, the power engine segment will need time to improve its operational efficiency and the organization will have to spend more of research and development. The organization will have to monitor continuously the processes so that significant improvement can be made in that business processes.

The organization has been facing this issue for a long tome due to the organizational structure and setting.  This has been a big constraint for the organization but they have been able to bear it because of their profitability and sales volumes in the global context. However, the as the organization is facing liquidity crisis reducing the amount of workforce and curtailing cost in the operational processes is essential. Accumulations of operations in to a single unit will reduce the number of labours and this is essential in cost reduction. Moreover, it can be seen that some of the segments are suffering losses due to this high cost structure of Volkswagen. The organization if follows the footstep of the market leader will be able to produce more volumes of products even by reducing the amount of workforce significantly. The probable solutions to Volkswagen’s problems are all linked; reducing the workforce and making improvements in the cost structure will fulfil other factors in the study.

Task Name	Duration	Start	Finish
Implementation plan	123 days	Thu 1/4/18	Mon 6/25/18
cost cutting	17 days	Thu 1/4/18	Fri 1/26/18
identify cost cutting areas	3 days	Thu 1/4/18	Mon 1/8/18
evaluating cost cutting areas	4 days	Tue 1/9/18	Fri 1/12/18
implementing cost cutting measures	10 days	Mon 1/15/18	Fri 1/26/18
milestone 1	0 days	Fri 1/26/18	Fri 1/26/18
Re-evaluation of suppliers	35 days	Mon 1/29/18	Fri 3/16/18
identify better suppliers	20 days	Mon 1/29/18	Fri 2/23/18
negotiate with new and old suppliers	10 days	Mon 2/26/18	Fri 3/9/18
accept the best offer	5 days	Mon 3/12/18	Fri 3/16/18
milestone 2	0 days	Fri 3/16/18	Fri 3/16/18
increasing task efficiency	13 days	Mon 3/19/18	Wed 4/4/18
identifying over allocation	5 days	Mon 3/19/18	Fri 3/23/18
evaluating improvement areas	4 days	Mon 3/26/18	Thu 3/29/18
implementing plan	4 days	Fri 3/30/18	Wed 4/4/18
milestone 3	0 days	Wed 4/4/18	Wed 4/4/18
curtailing employee benefits	23 days	Thu 4/5/18	Mon 5/7/18
identify the areas of reduction	10 days	Thu 4/5/18	Wed 4/18/18
consulting with management	3 days	Thu 4/19/18	Mon 4/23/18
implementing plan	10 days	Tue 4/24/18	Mon 5/7/18
milestone 4	0 days	Mon 5/7/18	Mon 5/7/18
eliminating waste	35 days	Tue 5/8/18	Mon 6/25/18
identify waste areas	10 days	Tue 5/8/18	Mon 5/21/18
evaluate possible measures	15 days	Tue 5/22/18	Mon 6/11/18
implement the measures	10 days	Tue 6/12/18	Mon 6/25/18
milestone 5	0 days	Mon 6/25/18	Mon 6/25/18

Table 6: Project schedule and Implementation plan

(Source: As created by author)

The implementation plan consists of all the five factors, which will have to be implemented for making improvement in the operating margin. In order to implement the plan a schedule has been decided and it says that 123 days is required for completing the overall process. The milestones have been set and achieving each of the milestones will be mean a successful implementation of the operational plan. The commencement of each of the processes is dependent on its previous process and thus, execution of each of the processes is crucial. The Gantt chart is showing how each of the tasks is related to the previous task.

The organization will have to win back the trust of the consumers, which they have lost due to the emission scandal. The consumers will not buy products from Volkswagen due to the steady decrease in their brand value and thus, the organization will have to restructure their organization in order to survive under this brand name. Restructuring of the organization will comprise of cost reduction and workforce reduction. This is only possible by merging various processes within the organization and finding effective ways of implementing it.  Thus, the organization will have to focus on other segments where the revenue generation is still consistent to support other segments that are lagging.

Conclusion

This case study presents the case of Volkswagen that has faced issues in managing their operations for a long time. The organization headquarters in Germany and due to their macro environmental limitations, board of directors in every organization will comprise of employee representative. Volkswagen has not been able to generate too much profit margin due to its huge structure and workforce. The case study has provided relevant data, which shows that the organization has been issues with their operating margin for along time. However, the emission scandal was the point when they realized the fact that it is essential to improve their operating margin if they want to sustain in the global automobile industry. The organization lost its liquidity, as they had to pay huge number of fines for using cheat devices in over million cars worldwide. Thus, due to this cash crunch, the organization had to restructure the operational processes to improve their operating margin. The organization needed to improve their profit margin to compensate for the heavy losses they have incurred due to exposure of this scandal. Thus, the conclusion than can be drawn form the study is that operation management is an essential component for maintaining the sustainability of every organization. However, different firms operate in different environments and so the operational plans will vary depending on the type of issue a particular organization is facing. Thus, this case study has been able to portray the operational issues and their solutions in an effective manner.

References

Atiyeh, C., 2017. Everything You Need to Know about the VW Diesel-Emissions Scandal. [online] Blog.caranddriver.com. Available at: <https://blog.caranddriver.com/everything-you-need-to-know-about-the-vw-diesel-emissions-scandal/> [Accessed 4 Jan. 2018].

Ewing, J., 2016. Volkswagen Looks to Deal With Cost Problems, but Faces Constraints. [online] Nytimes.com. Available at: <https://www.nytimes.com/2016/06/17/business/international/volkswagen-diesel-germany-muller-electric.html> [Accessed 4 Jan. 2018].

Forbes.com, 2016. Forbes Welcome. [online] Forbes.com. Available at: <https://www.forbes.com/sites/greatspeculations/2016/06/01/volkswagens-q1-profit-falls-as-namesake-brand-continues-to-struggle/#5a962a935bf4> [Accessed 4 Jan. 2018].

History.com, V. (2018). Volkswagen is founded – May 28, 1937 – HISTORY.com. [online] HISTORY.com. Available at: https://www.history.com/this-day-in-history/volkswagen-is-founded [Accessed 5 Jan. 2018].Heizer, J., 2016. Operations Management, 11/e. Pearson Education India.

Painter, C. and Martins, J.T., 2017. Organisational communication management during the Volkswagen diesel emissions scandal: A hermeneutic study in attribution, crisis management, and information orientation. Knowledge and Process Management.

Rhodes, C., 2016. Democratic business ethics: Volkswagen’s emissions scandal and the disruption of corporate sovereignty. Organization Studies, 37(10), pp.1501-1518.

Shakespeare, S. 2015. Volkswagen’s reputation has been driven off cliff. [online] Cityam.com. Available at: https://www.cityam.com/225480/volkswagen-s-reputation-has-been-driven-cliff [Accessed 4 Jan. 2018].

Volkswagenag.com, 2018. History. [online] Volkswagenag.com. Available at: <https://www.volkswagenag.com/en/group/history.html> [Accessed 4 Jan. 2018].

volkswagenag.com, 2018. Volkswagen Konzern – AR 2016 – Results of Operations. [online] Annualreport2016.volkswagenag.com. Available at: <https://annualreport2016.volkswagenag.com/group-management-report/results-of-operations.html> [Accessed 4 Jan. 2018].

Zhou, A., 2016. Analysis of the Volkswagen Scandal Possible Solutions for Recovery.

Bellin, J., Weiss, N., Breuel, M., Kurrat, M. and Stamprath, C., 2014. Predictive Optimization of the Operating Strategy in Future Volkswagen Vehicles. In Advanced Microsystems for Automotive Applications 2014 (pp. 133-142). Springer, Cham.

Burki, T.K., 2015. Diesel cars and health: the Volkswagen emissions scandal. The Lancet Respiratory Medicine, 3(11), pp.838-839.

Csizmazia, R.A., 2014. Reconfiguration of Supply Chain at Volkswagen Group to Develop Global. International Journal of Academic Research in Business and Social Sciences, 4(12), p.294.

Tse, Y.K., Zhang, M., Doherty, B., Chappell, P., Moore, S.R. and Keefe, T., 2017. Exploring the hidden pattern from tweets: Investigation into Volkswagen emissions scandal. In Supply Chain Management in the Big Data Era (pp. 172-198). IGI Global.