Making a difference at Chrysler

Business Economics, July, 1998 by W.V. Bussman

For the past five to ten years, decisionmaking at Chrysler has become more and more decentralized. This change has coincided with a fundamental reorganization of the company's vehicle-making process. The old way of bringing new vehicles to market relied on individual functions, such as design, engineering, procurement and supply, suppliers, and manufacturing, to perform their individual tasks. Each function handed the results of its work to the next function in essentially a sequential process that was time-consuming, costly, and prone to errors. As a result, the quality of the vehicles brought to market was low, with an average of more than five defects per vehicle.

The current method, adapted from Japanese manufacturers and since imitated by others, is to assemble representatives from each of the key functions into platform teams. (A platform is a basic chassis from which several vehicles may be made.) Team members from the different functions work simultaneously and communicate frequently to assure, for instance, that the shape of a particular body part will accommodate adjacent components. In addition, a manufacturing representative may suggest that a minor change in the design of a component will facilitate more error-free assembly, or a supplier may suggest that a change will not only increase the reliability of a component but also save cost. Under the old, chimney-style way of producing vehicles, most of these suggestions would have virtually no chance of being adopted. With platform teams, most of them become reality. The result is a reduction of the time it takes to bring a new vehicle to market from about five years to less than half that in many instances. Commensurate savings are achieved in costs, and defects average about one per vehicle currently.

These changes have, fortuitously, enhanced the impact that the economics function has on decisionmaking at Chrysler by pushing decisionmaking down to the lowest appropriate level. Although no system is perfect, the effect on the economics function has been to increase the demand for economic analysis throughout the company.

WHAT WE DO

Forecasts

The economics function provides many services to various parts of the corporation. We provide the usual array of economic forecasts and analysis for economies throughout the world, with an emphasis on the United States. More importantly, we also have the responsibility for forecasting sales of new vehicles for the countries in which we do business. More than 90 percent of Chrysler's sales occurs in North America, although that percentage continues to drop as we expand more rapidly overseas than domestically. As a result, our forecasts of the North American market are more detailed and are made more frequently (monthly) than are our forecasts of overseas markets (twice a year or more often if needed). The short-term (two-year) forecasts are the starting point for the scheduling of production at plants, and the longer-term (five- and ten-year) forecasts form the basis of the product and business plans. Because our forecasts of the industry include a breakdown to seventeen segments and include estimates of the country of origin of sales, we are forced to understand the details of the market in ways similar to those who work in sales and marketing, product planning, design, and pricing.

Analysis

We also undertake in-depth analyses of various topics of importance, either to the industry or to Chrysler. For example, in the past few years we have studied the affordability of new vehicles, including the effects of changes in real incomes and the distribution of incomes. We also keep track of the manufacturing capacity of vehicles, both in total and by type of vehicle, as well as estimates of elasticities of demand and the determinants of residual (used-vehicle) values.

Other

Finally, we are part of a team that hedges our exposure to foreign currencies; we are members of the Investment Strategy Group, which manages asset allocations for the pension fund; and we participate in the analysis of public policy issues, mostly regulatory and environmental.

HOW WE DO IT

Economists at automobile companies are fortunate in that part of their job has already been done for them. No one has to convince anyone who works for an auto company of the importance of or linkages of the company to the overall market for new vehicles. This situation is in marked contrast to that of most companies for which explicit market data, i.e., data for sales of virtually the same products from competing companies, are not available. For instance, what is the market for consumer credit reports? What about the market for industrial fasteners? Yes, executives in the fastener industry know that they sell to, say, the auto industry, the machine tool industry, the medical equipment industry, and the industrial equipment industry. But suppose some of their customers' industries are expanding and others are contracting. How are they to estimate the effects on their own business? Economists can make a distinct and valuable contribution to companies with vaguely measured customer markets through judicious use of their statistical training. This, perhaps, is the subject of another article.