Veltri Motors Case Study

Veltri Motors is one of the largest automobile manufacturers in Italy. And in this case analysis, I want to focus on some of the problems existed in the outsourcing procession of the firm and discribe my own

ideas on them.

In view of the usually higher prices charged Veltri by the “stampers” for supply of component parts, I don’t think Veltri should reduce its level of outsourcing and in-source some parts instead. I think it will better to explain the reason through analyzing the advantages and disadvantages of outsourcing in manufacturing industries. Outsourcing is the process of seeking goods or services from another supplier rather than undertaking the work internally, it is an extension of the purchasing function. Nowadays, more and more firms in manufacturing industry choose outsourcing parts of their components to the third suppliers considering a lot of good points of doing that. The most attractive advantage of outsourcing is that it can result in lower costs of the firm. It can firstly reduce the logistics activity cost and total logistics costs. The firm as the Veltri Motors in our case will not have to purchase the raw materials and organize the production process themselves, they can save large amounts of money as well as a plenty of time. Secondly, it can reduce the capital and maintenance costs of plant and equipment. The firm needn’t pay much money in order to have the equipment to support the manufacturing process or maintain the equipment. But they can also offer the suppliers of their component parts special tools to have their specialized needs on the components while they still maintain the ownership of the tooling throughout the life of the job, even though the supplier maintains possession. Thirdly, the firm can reduce the cost of re-equipment and operator training costs. They don’t have to pay for the expenditure for re-equipment if the machines are old or running out of order. Since their components are 80% outsourcing, much cost in training the skillful staff can be saved.

Outsourcing as a way to reduce costs of the firms and making the various activities in space separatedly. But in time, it can proceed. For example, at the same time when the firm is doing researches and developing the new products, the partners who supply the components are likely to complete parts of the scale of production of components actively. This parallel operation mode raises the speed of reaction. Implementation of “outsourcing” of the enterprise information networks and the use of different resources, these enterprises have different advantages and the associated electronic components on the operating entity, the business of transmitting information among members parallel distribution and business operations are mainly from information network to provide technical support using network resources in the intangible tangible resources. Outsourcing can reduce costs, this will not be good in the hands of some of our own professional organizations, because there are experienced and professional organizations and external competition, lower prices, the cost-saving growing their core competitiveness, profitability and good growth potential. Therefore, the purpose of outsourcing is to consolidate and expand the enterprise’s core competitiveness.

Another competitive advantage of outsourcing is labour flexibility. Through outsourcing, the employee level of the firm can be reduced efficiently and the firm will have greater flexibility than with permanent staff. There will be less need for extra staff to replace absent employees or those in training and less ‘fill-in’ work for employees in cyclic activities. And also institutionalized and unproductive work practices may be eliminated. These factors are becoming more and more important and attractive to the manufacturers now.
Anyway, just as every coin has two sides. There also exist some disadvantages of outsourcing in front of the manufacturers that need to be overcome. First, too much outsourcing may result in the loss of employee skills. There will be re-equipping, re-employing and retraining if reversed. Second, quality of outsourced products/services may be lower. Since the firm will have less control of the outsourced products or services, it’s more difficult for the firm to monitor the process of production and insure the quality. But if the firm can be more serious in choosing the suppliers and set higher criteria, the problem can be effectively prevented. Third, it will bring costs in preparing, letting and administering contracts when the firm choose outsourcing. But I think these costs will be much less than the costs increased by insourcing the components inside the firm.

Comparing the advantages and disadvantages of outsourcing, I think Veltri Motors can obtain more benefits and core competence from the advantages than disadvantages, so I recommend Veltri Motors keep outsourcing its component parts to gain their competitive advantages.

Although outsourcing is a better choice for Veltri Motors than insourcing in order to reduce cost and gain more profits. We still can find several problems existed in the outsourcing system of the firm. The first key point is the number of the stampers—the suppliers of the component parts of Veltri Motors. In this case, we know that more than 100 stamper companies are currently shipping parts to Veltri Motors. Most are small operations that have less than $40 million in sales each year, and Veltri represents the greatest portion of their business. I think Veltri chose too many stampers for outsourcing and a reduction in the supply base accomplishment may contribute to the reduction of the component parts’ prices. If Veltri Motors reduce the number of its stampers, the chosen stampers will get larger portion, and they’ll rely more heavily on the Veltri Motors, then the bargaining power of Veltri Motors will become stronger than its stampers, this will help Veltri to have more control on the price of its outsourced components. Besides this point, we can also find another good result by decreasing the number of stampers. We noticed that all the stampers are small operations, so it’s almost impossible for them to reach the scale economy. But if they can get much bigger portion of Veltri Motors, this also means they can gain more support from Veltri to have the opportunity to realize the scale economy to relatively reduce the manufacturing cost. And if this happens, Veltri can also get benefits from the prices that stampers offer.

There is also a big problem Veltre should face. That is Veltri’s second stage suppliers—the raw material suppliers of the stampers. These suppliers fall into two categories, first, are the large, integrated steel and aluminum mills which produce high volumes of steel and aluminium in highly capital-intensive operations. But a buyer must order a minimum of twenty tons per month and accept a sixteen-week minimum lead time. Second, is the Service Center which purchase steel and aluminium from the large mills and process them in accordance with relatively small orders from the customers. They have no minimum tonnage, and lead time are often by the hour but the significantly higher prices. Since the stampers of Veltri are small operations, they do not have the scale economy, it’s hard for them to purchase the raw materials from the steel mills. Then they have to turn to the Service Center and receive the higher prices. And stampers pass this higher cost on to Veltri in the part’s piece price, and Veltri ultimately passes this cost on to the consumer, through higher vehicle prices. But, we know, if the customers think the prices are higher than they have expected and are unwillingly to take the price, they can refuse buying the cars, then Veltri will finally undertake the loss. In order to avoid this situation happening, Veltri had better take backwards integration. This means Veltri could take responsibility for steel and aluminum purchases for its suppliers and consolidate small tonnages in larger orders to take advantage of mill prices. By integrating backwards, the original trade flow will be changed. The purchasing procession of Veltri will be changed. Veltri should first of all purchase the raw materials from the steel mill with much higher volume and cheaper prices, and then distributing the raw materials to every different stampers for their production. After they finish producing the components, Veltri will purchase the finished goods to do the assembling work. In this procession, there also exist several necessary organizational changes. The first change is that in the purchasing department, in the division of production purchasing, there should be certain persons to take charge of the new jobs of purchasing raw materials from steel mills. This division should have new staff or just let some old staff who once was responsible for the purchasing of 20% insourcing materials and these employees will take the new jobs to connect with the steel mill to buy the raw material for stampers. The second change is that in the division of transportation, there should be some employees being arranged to be in charge of distributing the purchased raw materials to every different stampers. They should be very familiar with the operating conditions of each stamper, and transport correct volume of raw materials to the stampers. This is also a new job existing in the purchasing department. So, Veltri should arrange some certain old staff or employ some new staff to be responsible for the two kinds of new jobs. I think these are the necessary changes in the organization if Veltri take backwards integration. So, the above contents are the analysis I made for this case of Veltri Motors.

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