Nissan Renault and Carlos Ghosn: Optimizing Operations - Case Study Example

Submitted] Nissan Renault and Carlos Ghosn: Optimizing Operations 0 Introduction The storyof Renault-Nissan is one of courage and determination to overcome all obstacles in the pursuit of financial success. It was also one of desperation as Nissan was steadily spiralling into bankruptcy. And like most stories, it has its heroes and Nissan had Carlos Ghosn. Nissan, once a darling of the automotive world, with its cheap Datsun pickups and stylish, spunky Z roadsters, had, by the 1990s, fallen on hard times. Saddled with billions in debt, the company merged with Renault in 1999, and a Renault VP, Carlos Ghosn, was named Nissan's new CEO. Ghosn, who was born to Lebanese parents in Brazil, also had to overcome an entrenched Japanese business culture that at that time had seemed to stress perks, seniority and relationships over the bottom line. Given complete control over the company, Ghosn slashed costs and laid off employees, as was expected, but also instituted a sweeping reorganization of the entire company, announced an ambitious slate of new vehicles and promised that if Nissan was not profitable in 2000, he and his entire managerial staff would quit. Under the leadership of CEO Carlos Ghosn, Nissan is now the most profitable of the world's five biggest automakers in terms of sales with a 10 percent operating margin in the three months that ended in December 2004.That compares with 9.1 percent for Toyota Motor and 0.5 percent for General Motors, according to Merrill Lynch. Ghosn has promised more good news to Nissan investors. By 2008, he says, Nissan's dividend will have doubled to 40 per share, sales will have increased by 27 percent to 4.2 million vehicles and the company's operating margin and its 20 percent return on invested capital will have been maintained. ( BusinessWeek, 2004) The aim of this paper is to analyze and be able to appreciate the measures employed by Carlos Ghosn that enabled the optimization of its operations and ensuring profitability. 2.0 Nissan Revival Plan In October of 1999, Nissan Motor Company, Ltd. announced a far reaching recovery plan that is designed to achieve lasting and profitable growth for Nissan worldwide. The Nissan Revival Plan combines initiatives to grow Nissan's business and market presence and reduce costs by 1 trillion Yen and net debt from 1.4 trillion Yen to less than 700 billion Yen by FY2002. However, while cost cutting is central to the strategy, Nissan's chief operating officer Carlos Ghosn remarked that the company can not save its way to success. Emphasis must also be placed on product development and sales growth. In the following discussion, I will be delineating the measures employed by Nissin to meet the objectives that were set put in the Revival Plan. 2.1 Optimization of Production Capacity Nissan's manufacturing plants, including those in Japan, have become burdened by excess production capacity and high fixed costs. Nissan reduced capacity in Japan and simplified its production scheme which resulted to lean and flexible manufacturing base. As a consequence, Nissan implemented the following plant closures: car assembly plants: Murayama, Shatai Kyoto and Aichi Kikai Minato power train operations: Kurihama Plant and Kyushu Engine Shop. Before and during 1999, previous production of 1.28 million units annually represented 53 percent capacity utilization. Under the Revival Plan, capacity in Japan was reduced by 30 percent to 1.65 million vehicles, raising the utilization rate to 82 percent by FY 2002. Ghosn's rationale, which most operations analysts would agree, was that the plant closures will guarantee the future of the remaining plants by allowing them to be industry leaders, both in terms of productivity and cost effectiveness. Nissan took advantage of the reduction in the number of platforms to further simplify the manufacturing scheme. In 1999, Nissan's complex manufacturing structure in Japan includes 24 platforms for production at seven assembly plants. Under the new plan, Nissan had 15 platforms divided between four plants by 2002 and had 12 platforms divided between four plants in 2004 resulting to a cutback in costs and further optimization of production. 2.2 Reduction in Manpower Under the revival plan, worldwide headcount was reduced by 21,000. The 21,000 worldwide headcount reductions were achieved through natural attrition, an increase in part-time employment, spin-off of non-core businesses, and early retirement. In Japan, a performance-based career advancement program will be established. Nissan employed a performance-oriented compensation system for management in 2000. Bonuses and stock options were delineated as incentives to boost Nissan's profitability and growth. Not only was Nissan able to stimulate and inspire its workforce, it was also able to rationalize its expenses. With the more clearly defined incentives, general and administrative costs were reduced 20 percent. A 200 billion Yen provision was made to absorb the costs of the restructuring program. 2.3 Optimization in the Logistics Nissan reduced costs by rationalizing logistics. Reducing purchasing costs was a key component of the Plan's overall success. Purchasing policy was centralized and executed globally in contrast to the previous regional/country-by-country basis. Purchasing costs, which represented 60 percent of the company's total costs in 1999, was reduced by 20 percent over three years and the number of parts and materials suppliers was downsized to 600 by 2002 compared with 1145 groups in 1999. The significantly increased economies of scales for parts and materials benefited Nissan's "partnership suppliers" and were able to deliver substantial cost savings for the company. The Japanese dealer organization was also streamlined by closing 10 percent of the retail outlets. 2.4 Research and Development Ghosn instituted a program called "3,3,3" which stood for 3 partners (suppliers, purchasing and engineering), over 3 years, working in 3 regions( Asia, Americas, Europe/Middle East/Africa). Under this program, Nissan purchasing and engineering worked more closely with suppliers, sharing worldwide best practice and performance in technology, quality, cost and delivery. Nissan challenged its own specifications and standards while protecting its established reputation for quality and reliability. Research and Development was organized to give regions more responsibility for their entire product line while creating a globally integrated organization. While R&D focused on enhancing core technologies, specific R&D resources were dedicated to cost reduction activities with suppliers. Nissan increasingly relied upon suppliers to reduce development time and costs and closely integrated suppliers into the design and development process. With this, the company reduced the gap between a model's debut in Japan and its launch in overseas markets. Nissan also looked to its Alliance partner Renault sharing of research, advanced engineering projects and common platforms. The Clio/Twingo/March/Micra/Cube models were the first to share a common platform. These actions allowed Nissan to increase its technological strength and boost research and development output while minimizing the amount of additional resources necessary. 2.5 Focus on Core Business Ghosn stated that the aim of the plan was to grow the company and not to shrink it. To do this, resources from non-strategic, non-core assets must be freed and invested more in cars which is the core business of the company. Nissan, which has share holdings in 1,394 companies in 1999, realized assets by selling-off its interests on the basis of a cost/benefit analysis. In addition, Nissan disposed of land, securities and non-core assets and adopted an inventory reduction program that decreased by 30 percent its inventory-to-sales level by 2002. 2.6 Development of Hit Products and Synergy with Renault Ghosn said investing in new products is vital to restore Nissan's brand power and increase worldwide market share and profitability. In the U.S., Nissan expanded its model range by 2002, adding four new models including a Z sports car. The first shared Alliance platform was launched as the Micra and Cube in Japan in 2002. Nissan's European car range was completely replaced by 2003 with the launching of a small 4x4 model. In addition, Nissan immediately capitalized on new business opportunities through its alliance with Renault. Nissan managers were also instructed to sell 10 times as many vehicles in Japan as it has in the past by tapping into Nissan's sales network. Highlighting the growing links between the Alliance partners, the companies established in Europe common hubs and common back offices and common operational entities in a select number of European countries. In South America, Nissan increased its presence using the existing Renault organization and infrastructure. Renault Credit International established a Mexican sales finance company to support Nissan's sales and profit development. 3.0 Conclusion The logic behind Ghosn's Revival plan was simple. Without cost cuts and hit models, no profits would be realized. Without profits, there would be no company. Nevertheless, the measures were so radical and herculean that only someone very dedicated could employ the measures. References: Bremner, B. , Edmondson, G. in Paris, and Dawson & C. NISSAN'S BOSS (Oct 4, 2004). Business Week, Iss. 3902, pg. 50 BusinessWeek (2004). The Way of Carlos Ghosn. BusinessWeek Company Reports Hill, Arthur. V. (2007). Operations Management Whitepapers & Workbooks 2007 Edition. Clamshell Beach Press. Gogoi, P. (Jul 28, 2003) THINKING OUTSIDE THE CEREAL BOX General Mills' far-flung search for efficiency ideas. Business Week. New York, Iss. 3843; pg. 74 Nissan Online (1999). Nissan Revival Plan. Retrieved October 22, 2007 from http://www.nissan-global.com/GCC/NRP/SUPPORT/revival-e.pdf Read More