Supply Chain Risk in the Hyundai Motor Company

Introduction

Over the years, many companies have reduced their business cost and expanded their product lines through an aggressive supply chain strategy. Low cost-cost country sourcing, multi-tiered supplier networks and business process outsourcing are among supply chain initiatives that companies have employed. The benefits of these initiatives are apparent, companies are able to reduce cost of goods, develop new markets, and free up resources to focus on core value adding processes (PWC, 2010). However, these benefits are often accompanied by greater supply chain complexity and exposure to new risk. All supply chain are vulnerable to one type of risk or another (Snyder et al 2006).

Hyundai motor company (HMC)was established in 1967 to design ,assemble and manufacture cars for local consumption and export (Wright et al 2009). The company is South-Korea’s largest auto-maker contributing about 50% of their total automobile manufacturing output. It operates the world’s largest integrated automobile manufacturing facility in Ulsan, which has an annual production capacity of 1.6m units (Chung-Koo, 2010). It is the world’s sixth largest automaker by output and world largest automaker by profit (Hankooki, 2010). In 2009, Hyundai motor sold a total of 1.61m units world-wide (Hyundai.com,2010).

Hyundai Motor company has manufacturing and assembly plants in Europe, North America, Africa and Asia but mainly produces and supplies its main components from the Manufacturing plants in Ulsan, south-Korea.

The Hyundai manufacturing plants in South-Korea, made up of plants in Ulsan, Asan and Jenju, had a total work-force of 39,000 as at 2003 (Asia Pulse, 2003). Labor relation is always a confrontational issue between the top management and the union in Hyundai with workers constantly demanding for better working conditions, increased wages and union’s involvement in management decisions. The workers set up a labor union after the government’s declaration of June 29, 1987 that called for a relative relaxation of its tight, long-term suppression of labor activities. After a trade union was formed at the company in 1987,there has always been one trade dispute or the other in every year, leading to a partial or full strike except for 1994. Aggregate loss in output totaled 900,000 units, according to company statistics (Korea Herald, 2003).

This essay gives an insight on the supply chain disruption at HMC in 2003 caused by a 47-day labour strike in their South-Korean plants, which led to a US$1.1 billion in lost sales (Globalinsight, 2003), with emphasis on the disruption caused by the strike on their European operations.

Literature Review

Supply Chain Risk and Vulnerability

Risk can be defined as a chance of danger, damage, loss, injury or any other undesired consequence (Harland et al,2006). The royal society (1992) defined risk as the probability that a particular adverse event occurs during a stated period of time or result from a particular challenge.

There are two broad categories of risk affecting supply chain Network. The first risk arising from the problems of coordinating supply and demand, also risk arising from disruptions to normal activities. Generally, disruptions need not to be physical in nature to severely interrupt the flow of goods, information or funds throughout the supply chain. For example, work stoppages, slow-downs e.t.c can be disastrous to the business that rely on those services to manufacture and distribute their products. Disruptions in supply chains can be caused by conscious acts by a person or a group. Depending on the intention, these acts can be classified as terrorist or non-terrorist. Terrorist attacks are often intended to destroy while non-terrorist acts are not. Wilson (2007) defined disruption as an event that interrupts the material flows in the supply chain, resulting from an abrupt cessation of the movement of goods. It can be caused a natural disaster, labour disputes, dependence on a single supplier, supplier bankruptcy, terrorism, war and political instability. However, organisations can mitigate all these risks by becoming more resilient, a resilient enterprise is better able to endure the vagaries of global trading. In supply chain, resilience measures the ability to, and speed at which they can, return to their normal performance level (production, services, fill rate and so on) (Sheffi et al, 2005).

KOREAN AUTO INDUSTRY

The Korean automobile industry is currently the fourth largest in the world in terms of production volume and the sixth largest in terms of export volume. While its initial operations were merely the assembling of parts imported from Japan and the United States, Korea is today among the most advanced automobile-producing countries in the world. Annual domestic output exceeded one million units in 1988. In the 1990s, the industry manufactured numerous in-house models, demonstrating not only its capabilities in terms of design, performance, and technology, but also signaling its coming of age(KAMA, 2005).

Globalization

Korean auto manufacturers have been aggressive in recent years in expanding their overseas operations. Kia entered the Indonesian car market in a joint venture for a national car project, Hyundai advanced into the Indian market, and Daewoo’s local production plants in Poland, Uzbekistan, and Romania started full-scale operations. Korean automakers, with full intentions of becoming among the global top ten by early next century, are now entering a new phase where all efforts are based on global management. Each manufacturer is pursuing different strategies to advance overseas to build local production operations. Hyundai, among others, formulated its own comprehensive globalization strategy, and this plan is quite a departure from its past strategies which focused on KD kit assembly. Hyundai is planning to establish a comprehensive local production system parts and components manufacturing in countries with big markets and great potential. Hyundai intends to pursue this plan independently on its own (Lee, 1997).Hyundai Motor company (HMC) which is the sole survivor of three former major auto companies in Korea after the Asian financial crises caused by the over saturation of the domestic market which forced other auto makers into receivership, seeks to become a global manufacturer with assembly plants all over the world (KAMA,2005)

HYUNDAI GLOBAL OPERATIONS STRATEGIC ANALYSIS

The Hyundai Motor Company (HMC) began in 1968 as a complete knock down(CKD) assembler under an agreement with the Ford Motor Company. In 1972,HMC produced its first originally-designed model, the Pony, using a low cost strategy with more than 90 per cent of its parts being sourced locally (Wright et al 2009). HMC’s subsequent growth was largely due to exports, because of the then small size of the domestic market. The complete knock down (CKD) assembly of the Cortina was followed by the development of HMC’s own model in 1976 (Lansbury et al. 2006). Other new models followed and HMC entered the US market in 1986 with the competitively low-priced Excel.

During the late 1980s, however, the international auto industry experienced considerable restructuring due to oversupply, excessive production capacity and intense global competition (Womack et al, 1990). This gave rise to a number of strategic alliances between various auto companies via mergers and business partnerships. These were initiated to achieve economies of scale and to enhance the enlarged companies’ competitive positions in the international auto market.

In 1998, after a shake-up in the Korean auto industry caused by overambitious expansion and the Asian financial crisis, Hyundai acquired rival Kia Motors. Hyundai has invested in manufacturing plants in the North America, Europe, Asia, Africa as well as research and development centers in Europe, Asia, North America, and the Pacific Rim. In 2009,HMC had a total financial sales returns of $57.2billion in South Korea making it the country’s second largest corporation, or chaebol (Chung-Koo, 2010). An examination of the globalization of HMC reveals three themes: 1) its growth depends on the expansion of international sales; 2) it began to globalize its productions before it had developed significant competitive advantage; and 3) it built its competitive advantage on its experiences in international markets (Wright et al, 2009).

EUROPEAN OPERATIONS

European market is HMC’s biggest export market (Hyundai.com,2010). As at 2003,it had assembly plants in Turkey and Russia, the strategic objective was to profit from HMC’s success in Europe in the early 1980’s with the pony, when HMC became the largest auto importer into the continent. Sales to countries in Europe accounted for 30% of the company’s total production those years. By establishing manufacturing and assembly plants in Europe, HMC sought to boost its sales and avoid imposition of sales quotas which were basically involved in assembly of modules and distribution of Vehicles to various countries and distribution centres in Europe. The newly established manufacturing bases are expected to be enforcing its price competitiveness and enhance awareness of the company brand, thus enabling Hyundai to compete on an equal foothold with other European-based carmakers. With accumulated manufacturing experience in Korea, China, U.S., Turkey and India, HMC is building a manufacturing facility that will set the standards for efficiency and productivity in eastern Europe which is emerging market (Chung-Koo, 2010)

THE EVENT

In June 2003, following a fall-out with its Unionized worked force, a company-wide labour strike at the South-Korea based HMC, brought the automakers manufacturing and distributions operations to a grinding halt. Union workers put down their tools demanding wage increase, shorter working hours, fewer working days and its involvement in management decision making process. The labour strike/walk-out which lasted for 47 days cost the automaker about 1.26 trillion won ($1.1 billion) in lost production and sales, with another $630million in missed shipment (Korean Herald, 2003). The Automaker suffered a severe inventory shortages which led to a disruption in output, forcing the company to miss out on an upturn in domestic demand, which was revitalized following a cut in exercise duty by the South-Korean Government, earlier in the month (KoreanHerald,2003).

Shortages in production and inventory also led to a halting of operations in the automakers’ plants parts in Europe, Asia, Africa and North-America. Also, plants in parts of China, Turkey and India were forced to cut their production capacity by half making staffs redundant as their Korean Headquarters were unable to meet the demands for critical components needed for production (Globalinsight, 2003). A Korean government official Choi-Kyoung, said the labour strike also had a hard knock on the country’s national economy and undermined the country’s international ratings (Dowjones Factiva, 2003).

The European Market, which is of emphasis in this essay was terribly affected by the disruption caused by the labour strike. Apart from the total halting of operations in the automaker’s assembly plants in Russia and 50% reduction in production in Turkey which supplies all the major distributors and markets in Europe and parts of Africa, an originally planned test riding ceremony in Hungary as part of a Marketing campaign was also halted, leading to an unquantifiable loss in potential sales and growth in its European market.

Diagram showing steep in distribution and sales in Europe due to halting of operations at the Hyundai’s Russian CKD plant in Mid July and a 50% operational level an Hyundai CKD plant in Turkey due to cut off in supply of essential components form Korean Plants.

SUPPLY CHAIN RISK MANAGEMENT AND RESILIENCE FRAMEWORK

Moving Ahead, a supply chain risk management framework would be used to map out the risk and security issues faced by the Hyundai motor company in 2003, with emphasis on their European operations. The Framework is meant to

Map out the supply chain, identify and measure the risks inherent in the critical nodes of the network

Identify risk reduction mechanism by building in resilience in the network

Deploying specific actions to mitigate the risk at nodes

1. Map the supply chain and measure the risk of critical nodes in the Network

2. Identify Risk Reduction Mechanisms for high Risk Nodes

3c. invest in visibility

3a. Excess Resources

3d. Major supply chain redesign

Goal: Resilient supply chain with ongoing knowledge and risk mitigation.

3b. SC collaboration and planning

Handfield et al, 2006

The risk identified above include

Labour Strike at plants

Pilferage

Parts Damage

Ports closure

Dispatch errors

Changes in governments’ and European Union import & export policies

Transportation link disruptions

Distortion in information across the network (Bullwhip)

Fluctuations in demand at retail end

These are basically operational risk as identified by Kleindorfer et al (2005).

Using the Sheffi et al (2005)framework the risk above can be classified based on disruption probability and severity.

Port closure

Transportation linked disruptions

Flood

Workforce

Damage

System failures

Product tempering

Damages

Labour unrest

Loss of Key suppliers

Disruption Probability

Consequence

High

Severe

Light

Low

The vulnerability map categorizes he relative likelihood of potential threat to an organisation and its relative resilience to such disruptions. Such maps can then direct management attention and prioritize the planning (Sheffi and Rice, 2005)

The way ahead: Creating the resilient supply chain

Risk management involves two components: Prevention and recovery. The focus of prevention is on avoiding disruptions, and the avoidance methods depends on the type of disruption. Recovery and business continity are concerned with activities after the disruption has occurred , the question at that point is how resilient the organisation is-how quickly it can recover and get back to prior level of production (Richardson et al,2009)

Every organisation is a citizen of its supply chain, since it depends on the web of suppliers, labour force, logistic organisations, port operators and many others to get its parts to plants and distrubute producs to customers. Thus, avoiding a customer disruption can be thought of in terms of “shock absorbtion” between stages of its supply chain. An organisation’s resilience is a function of its competitive position and responsiveness of its supply chain (Sheffi and Rice, 2005)In competitive markets, fast responding Companies can gain gain market share, and slow responders risk losing it. Organisations with market power that respond quickly to disruptionshave the opportunity to solidify their leadership position.

Hamel and Valikangas (2003) stress that resilience is not just concerned with recovery, flexibility, or crisis preparedness , it is also a distinct source of sustainable competitive advantage. Contu (2002) indicates that resilience is a critical capability for success. Focusing on resilience as a distinctive organisational capability, Stolz (2004) stated that resilience is the key to developing a strategic plan that

is sustainable and capable of producing results that are better than less resilient competitors

.

Risk assessment and analysis

EVENT READINESS

EFFICIENT RESPONSE

RECOVERY

Sustainable competitive advantage

Supply Chain Resilience

Risk Re-assessment and organisational learning

Flexibility

Redundancy

Conceptual Framework of the relationship between Resilience and Competitive advantage.

Ponomarov and Holcomb (2009)

Fundamentally, Sheffi (2005) expresses that organisations can bolster their resilience by either building in redundancy in the supply chain or by flexibility.

REDUNDANCY

Redundancy is simply the concept of keeping some resources in reserve to be used in case of a disruption.The most common form of redundancy are safety stock,but it also includes the use of multiple suppliers even when such secondary suppliers have higher cost, and deliberate low capacity utilization rate (Sheffi and Rice,2003). In the case of Hyundai, the Indian plant unlike plants in parts of Europe was not affected by the disruption caused by the labour strike. The Hindu (2003) reported that company officials at the Hyundai indian plant expressed that they would not be affected by the labour strike at their parent company in Korea due to 90% indiginization levels achieved in supplies of components and also, due to the fact that they had adequate inventory of critical components supplied from Korea. This was also a source of competitive advantage, during the strike in Korea, the data released by the Society of Indian Automobile Manufacturers (SIAM,2003) showed that sales of Hyundai cars in india rose by as much as 40%, total sales were estimated at 11.941 units. Also Hyundai plants in Korea were able to recover quickly from the disruptions caused by the labour strike due to the fact that they had idle capacity, operating at 40% of installed capacity during normal operations. After the disruption,they ramped-up operations to 70% to meet current and outstanding demand (Jing Jang,2003).

Conventionally, surplus capacity and inventory have been ssen only as “waste” and are therefore not desireable. However,the strategic disposition of additional capacity and/or inventory at potential “Pinch Points” can be extremely beneficial in the creation of resilience within the supply chain (Christopher and Peck, (2004) . While this essay is not advocating for a return to the days of buffering every stage in the supply chain with safety stock or excess capacity, it do suggest that the strategic and selective use of “Slack” may be fundamental to supply chain resilience thus, leading to competitive advantage.

Opportunity to increase Market share

Danger of Regulations

Danger of losing market Share

Opportunity to cement Leadership

Responsiveness

Competitive

MARKET POWER

Market power

Low

High

Company position and responsiveness (Sheffi and Rice, 2003)

Conversely, organisations that are very responsive will have the opportunity to gain market share in competitive environments and solidify their leadership position in areas where they already dominate.

FLEXIBILITY

There is significantly more leverage in making supply chains flexible than there is adding redundancy. Flexibility amounts to building organic capabilities that can sense threats in the supply chain and respond to them quickly . Not only does this bolster the resilience of an organisation, it also creates competitive advantage in the market place (Sheffi and Rice, 2005). Flexibility can be achieved through the essential elements in the supply chain, the elements include:

Suppliers

Conversion Process

Distribution Channels

Control systems

Corporate culture

Firstly, material flows from supplier through the conversion process, then through distribution channels, it is controlled by various systems, all working in the context of a corporate culture. Each of these five elements offers a dimension of potential flexibility and a source of competititive advantage.

For HMC, flexibility can be introduced as Diagrammatically illustrated below.

SUGGESTED FRAMEWORK FOR HYUNDAI’ S SUPPLY CHAIN FLEXIBILITY

Adapted from: Sheffi & Rice (2005).

Control Systems

Supply

Conversion

Distribution

SUPPLY

Develop backup module supplies from other manufacturing sites (e.g. India and China)

Local supplier development capable of delivering modules

Standardize parts

CONVERSION

Distributed Manufacturing

Manufacturing flexibility

Standardize processes in all plants

CORPORATE CULTURE

Involve union in key managerial decisions.

Decentralize decision making across the various production plants

DISTRIBUTION

Re-route/reallocate the passenger cars based on urgency of demand

Distribution centres to manage/re-allocate modules inventory for CKD plants

CONTROL SYSTEMS

Investment in Visibility systems e.g. the use of RFID, CT-PAT e.t.c

Corporate Culture

Many companies have increased their security efforts and updated their business continuity plans. Some go as far as regularly conducting risk analysis exercise. Many business continuity plans are based on increasing redundancy in several facets of the supply chain. However, such investment only go a limited way towards reducing vulnerability, they present a cost to the company with a return on investment that can be realized only in case of a major disruption.

Increasing supply chain flexibility can help an organisation not only to withstand disruptions but also better respond to day-to-day vagaries of the market. To build in flexibility for resilience, companies must involve may facets in their supply chain design by:

Developing the ability to move operations among plants, use interchangeable and generic parts in many products, and cross train employees

Using concurrent processes of product development ramp up production and distribution.

Designing products and processes for maximum postponement of as many operations and decisions as possible in the supply chain

Aligning their procurement strategy with their supplier relationships (Sheffi and Rice, 2005)

The most important step organisations can take to increase their resilience fundamentally and efficiently is to increase their flexibility. Flexibility do not only increases resilience in times of disruption but also garners benefits and operational efficiencies in the normal course of business. As organisations moves to build flexibility in order to respond to market volatility, they are also building in resilience and vice-versa. Generally, although the results for increasing flexibility in the supply chain are difficult to measure with conventional accounting and risk management tools, investment in flexibility can be justified in terms of increases sales, reduced cost and increased competitive advantage that organisations can enjoy by developing flexible operations