Modular manufacturing in the automobile industry: Dana leads the way.

Box, Thomas M. ; Watts, Larry R.

Dana Corporation, a worldwide manufacturer of components and subassemblies for trucks and cars, opened its 76,000 square foot Campo Largo plant in July 1998. The plant is something of a gamble, but probably a good one, based on the revolution going on in worldwide truck and car manufacturing and the explosive growth of the auto industry in Brazil since 1994. The rolling chassis concept attributes to Dana's long experience as a chassis supplier to Mack Truck and Chrysler's Extended Enterprise concept that began in the early 90s. It is the most advanced example of modular manufacturing in the automotive industry and has important implications for the entire structure of the industry in the next few years.

Modular manufacturing began, in the United States, at Kaiser Shipbuilding during World War II. Kaiser engineers and operations management personnel discovered that the production and launch of Liberty ships could be speeded up by pre-assembling "modules"--sections of the ships -and then welding them together in the final assembly phase. Kaiser engineers were very successful in this endeavor as exemplified by the lead time for final assembly of Liberty ships that got down to 4-5 days near the end of the war! Following the war, Japanese shipbuilders incorporated modular manufacturing in the construction of super tankers (for crude oil) and the cost savings allowed the Japanese to dominate this industry in a period of just a few years.

Modular manufacturing, in general, suggests that parts of the value chain may be economically "outsourced" to other firms. In many instances, the supplier firms provide prototype development, engineering, manufacturing and assembly of components and entire systems. The advantage to doing this is that the buyer is relieved of inventory management problems and costs, while the supplier firms benefit from application of their special expertise in selected parts of the value chain.

DANA CORPORATION

Dana is one of the world's largest independent suppliers to vehicle manufacturers and the aftermarket. Founded in 1904 and based in Toledo, Ohio, the company operates some 320 major facilities in 33 countries and employs more than 82,000 people. Dana reported sales of $13.2 billion in 1999. Operating profits were $678 million and Dana has not missed or reduced a dividend payment in 65 years and will pay its 249th consecutive dividend in March 2000 (Dana Corporation, 1999).

Much of Dana's recent success attributes to the Five-Point Plan that articulates the near term tactics necessary to achieve the strategic plan titled "Beyond 2000". The Five Point plan includes the following elements:

1. Grow while focusing on returns and maintaining financial discipline.

2. Seek strategic, "bolt-on" acquisitions at reasonable valuations.

3. Divest non-strategic and non-performing operations.

4. Repurchase stock as the company generates cash; and

5. Complete integration efforts and realize synergy savings.

Dana is organized into seven Strategic Business Units: Automotive Systems Group ($4.5 billion revenue in 1999), Heavy Truck Group ($1.9 Billion), Off-Highway Systems Group ($800 million), Automotive Aftermarket Group ($3.0 billion), Fluid Systems Group ($1.2 billion), Engine System group ($1.4 billion) and Dana Commercial Credit. The Automotive Systems Group (ASG) "houses" the Rolling Chassis plant at Campo Largo. ASG employs 26,000 people in 20 different countries. Key products, in addition to the Rolling Chassis, are axles, drive shafts, brakes, clutches steering and suspension components and systems. Their primary markets are passenger cars, light trucks, vans and SUVs. The top five customers are Daimler Chrysler, Ford, GM, Isuzu and Volkswagen.

Dana's financial performance over the last few years has been quite satisfactory; unfortunately, despite year-to-year growth in revenue and profit, the stock market has not rewarded the firm with stock price appreciation. The recent 52 week high was $45.88 and the low $20.31. The share price on July 24, 2000 was $23.56. Earnings per share in the last twelve months were $3.46 and the P/E ratio was a miserly 6.8. The Quick ratio is 0.6, The Current Ratio is 1.15 and LT Debt/Equity is 0.88. Dana ranks No. 127 On the Fortune 500 and No.340 on Fortune's Global 500.

Quality has been an important initiative throughout Dana's history. Woody Morcott (Chairman of the Board) is known as a "quality zealot". Under his leadership, Dana has earned numerous awards for quality and innovation. In 1992, Dana Commercial Credit received the Malcolm Baldrige National Quality Award. Dana has been named among the Top 10 manufacturing firms by Industry Week magazine and Fortune magazine selected Dana as one "America's Most Admired Companies." Dana ha also been a finalist every year since 1995 for Automotive News' PACE award for technology innovation. PC Week cited Dana as one of the "Fast Track 500" firms involved in e-business.

THE AUTOMOBILE INDUSTRY IN BRAZIL

In 1997, Brazil produced 1.9 million cars and light trucks (Seikman, 1999). In 1999, sales had dropped 26% to approximately 1.4 million vehicles. Despite this remarkable slump in demand, new assembly and parts plants are being constructed at a record pace in the largest country in South America. In mid-2000, General Motors will open the "Blue Macaw" plant at Rio Grande del Sul. This plant was built to allow GM to experiment with modular manufacturing techniques outside the purview of the United Auto Workers.

Ford Motor Company is spending $1.3 billion (including government subsidies) to construct a 250,000 vehicle per year assembly facility. Fiat, VW and Audi are also adding substantial capacity in Brazil. Honda opened a Sao Paulo plant in 1997 with a 30,000 car per year capacity. Toyota, despite having made trucks in Brazil for 41 years, has only recently opened a very small plant to build Corollas. All told, the Big Four are spending $6 billion to "spruce up" existing facilities and total capital spending for autos could be as much $25 billion since 19991.

The expansion of the auto industry in Brazil attributes to the effects of Mercosur, a regional trade alliance signed into law in 1994. The Treaty of Asuncion (MERCOSUR) strengthened the national markets of Argentina, Brazil, Paraguay and Uruguay by eliminating internal duties and tariffs and providing a common external tariff. One of the considerations under Mercosur is the necessity to maintain domestic content, specifically 60% in the automotive sector.

THE ROLLING CHASSIS

The auto industry in the United States has been involved in "gut wrenching" changes in the last twenty years (Womack, Jones & Roos, 1990). As a result of rapidly increasing foreign competition and the evolution of, primarily Japanese, transplants, American manufacturers have experienced a 25% loss of market share in passenger cars and light trucks. This has led most American manufacturers to move in the direction of "Lean Production". The fundamental principles of Lean Production are:

Teamwork
Communications
Efficient use of resources and elimination of waste
Continuous improvement

Chrysler, now Daimler Chrysler AG, has focused on lean production since the development of the LH series vehicles in 1989 (Raia, 1993). The LH cars (Dodge Intrepid, Eagle Vision and Chrysler Concorde) were produced from scratch in only 39 months. Chrysler's LH team included suppliers in prototype development and, indeed, delegated design responsibilities and component sourcing to a number of suppliers. The success of this effort came to be known as the Extended Enterprise Program and has resulted in $3.7 billion in cost savings for Chrysler between 1989 and 1997 (Anonymous, 1997).

The new Dana facility, 300 miles south of Sao Paulo, Brazil, looks like an oversized clubhouse rather than an outpost of global revolution in auto and truck manufacturing (Seikman, 1999). Inside the plant, two dozen workers assemble the largest module in the auto industry today at a rate of one every 14 minutes. The rolling chassis includes the frame, axles, drive shaft, suspension, steering system, brakes, wheels, tires (mounted) and electrical circuits. Dana manages 66 suppliers, including scheduling and purchasing and handles 320 part numbers.

The assembly line for the rolling chassis consists of 12 workstations with the truck frames loaded on stands on a powered conveyor. The frames move down the line transversely with all front-end components mounted from the left and rear end components mounted form the right. The frames go down the line upside down until near the end where they are flipped with a crane to add tires and wheels. Dana then aligns the front and rear end, loads three chassis on a semi trailer for the short trip to the Daimler Chrysler Dodge Dakota plant where they are rolled into the assembly building.

Workers in the plant earn about $6,000 per year and both Dana and Chrysler estimate that the savings attributable to the Rolling Frame concept are well over 10%.

THE FUTURE

The Rolling Chassis isn't Dana's only business in Brazil. They supply front corners (suspension, wheel and steering components) to Volkswagen at Curitiba. With the recent acquisition Eichlin, Dana has the opportunity it begin supplying elastomers and tubes to Chrysler and that would boost the 33% of the chassis that Dana has to nearly 50%.

The Rolling chassis concept is, obviously "portable." New auto plants are being built around the world to take advantage of attractive factor costs and growing markets in the second and third world countries. For example, in Brazil, alone, Ford, General Motors, Renault, Peugeot and Honda have all announced new facilities with the total investment to be nearly $25 billion.

Dana has made presentations to the Japanese manufacturers and although they haven't "signed up", there appears to be some interest. It is only in the United State where modular manufacturing is having a hard time getting off the starting blocks. The UAW and even General Motors are reluctant to adopt the new supply chain strategy. The reluctance of the UAW is obvious -feared loss of union jobs.

DISCUSSION QUESTIONS

1. What is the cycle time on the Dana line? What would need to be done to double the output?

2. How does the Rolling Chassis concept benefit Daimler Chrysler's Dodge Dakota plant in Brazil?

3. What are the implicit risks to Dana with the Brazil plant?

4. Why is General Motors reluctant to adopt modular manufacturing?

5. Would Dana be wise to build a facility like this to serve Toyota in Japan?

REFERENCES

Anonymous (1997, July7). Chrysler's extended enterprise. Industry Week 246(13), 62.

Dana Corporation (1999). Annual Report. Toledo, OH, 6-7.

Raia, E. (1993, March 4). The extended enterprise. Purchasing, 114(3), 48-52.

Siekman, P. (1999, September 6). Building 'em better in Brazil. Fortune, 141.

Womack, J.P., Jones, D.T. & Roos, D. (1990). The Machine that changed the World. New York: Harper Collins Publishers.

Thomas M. Box, Pittsburg State University Larry R. Watts, Stephen F. Austin State University