Developing Business Processes and Operations: Volkswagen Analysis

This report provides an in-depth analysis of Volkswagen's operational challenges, stemming primarily from the 2015 emission scandal. It details the company's history, current situation, and the financial repercussions of the scandal, including decreased operating margins and market share. The report explores potential solutions such as cost reduction, increased sales, and improved operational efficiency. It proposes a new procedure based on the 'Group Strategy 2025' to transform the core business, emphasizing electric vehicle production, innovation, digitalization, and vertical integration to improve sustainability. The report also includes financial data from 2015 and 2016, offering a comprehensive overview of the issues and proposed changes within Volkswagen.

Running head: DEVELOPING BUSINESS PROCESSES AND OPERATIONS
Developing Business Processes and Operations
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1DEVELOPING BUSINESS PROCESSES AND OPERATIONS
Executive Summary
This report is highlighting the current operational issues in Volkswagen, a German automobile
and identifying the possible solution. Volkswagen commenced on May 28th 1938, and German
labour Front operated it. The organisation has its headquarters in Wolfsburg, and initially, the
primary objective of the firm was mass production of fast and affordable vehicles. A company
named Ferdinand Porsches initially designed the cars and Hitler supported the design. The case
study has presented the current situation and possible changes in issues. The emission scandal
has caused the organization go through liquidity issues. Thus, due to this cash crunch, the
organization had to restructure the operational processes to improve their operating margin. The
organization needed to improve their profit margin to compensate for the heavy losses they have
incurred due to exposure of this scandal. The conclusion drawn from the study is that operation
management is an essential component for maintaining the sustainability of every organization.
However, different firms operate in different environments and so the operational plans will vary
depending on the type of issue a particular organization is facing. Thus, this case study has been
able to portray the operational issues and their solutions in an effective manner.

2DEVELOPING BUSINESS PROCESSES AND OPERATIONS
Table of Contents
Introduction......................................................................................................................................3
Current situation..............................................................................................................................4
Possible solutions.............................................................................................................................9
Proposal of new procedure............................................................................................................10
Description of new situation..........................................................................................................14
Justification of change...................................................................................................................19
Implementation plan......................................................................................................................19
Recommendation...........................................................................................................................23
Conclusion.....................................................................................................................................23
Reference.......................................................................................................................................25
Bibliography..................................................................................................................................26

3DEVELOPING BUSINESS PROCESSES AND OPERATIONS
Introduction
This report will highlight the current operational issues in Volkswagen, a German
automobile and identify the possible solution. Volkswagen commenced on may 28th 1938, and
German labour Front operated it (History.com 2018). The organisation has its headquarters in
Wolfsburg, and initially, the primary objective of the firm was mass production of fast and
affordable vehicles. A company named Ferdinand Porsches initially designed the cars and Hitler
supported the design. However, during the Second World War, the production of the vehicles
stopped, and after the war, British army took over the firm to start the manufacturing process.
British army returned the control of Volkswagen to Germany and organisation started gearing up
in 1950-1960. The cars made by Volkswagen had become outdated, and organisation started
expanded their product line in the early 70’s to 90’s of the 19th century (History.com 2018).
The company launched various new models during that period such as Golf, Coupe, Jetta
and Cabriolet (Volkswagenag.com 2018). Since then the firm had multiple models and
considered as one of the global giants in the worldwide automobile industry. Volkswagen
focused on operational management and implemented change management to improve their
operational efficiency. The organisation had expanded their business to all parts of the world and
established their factories (Volkswagenag.com 2018). Innovation and technology are
components used by the firm to improve the efficiency of their cars, and the organisation
experienced highest global sales for a couple of years. The emission scandal in 2015 reduced
their operating margin and they are still trying to recover from the effect. Toyota is the market
leader in this segment having an operating margin of 9-10 % (Rhodes 2016). The operating
margin of Volkswagen is 6% that is quite low when compared to its competitors.

4DEVELOPING BUSINESS PROCESSES AND OPERATIONS
Current situation
Volkswagen being a well-reputed organisation globally has been one of the primary
choices of the consumers in the premium segment. The company had exported millions of cars
all over the world. However, the company admitted to being involved in an emission scandal in
the fiscal year of 2015 (Atiyeh 2017). Volkswagen installed a defeat device, which would reduce
emission during testing of the cars. However, the emission from the cars was way above the
standard and benchmark of the industry. The statistics suggest that 482,000 diesel cars sold with
different models in the United States had the cheat device installed in it (Atiyeh 2017).
Moreover, 11 million vehicles sold worldwide contained this software and the consumers lost
theirs over a reputed brand (Forbes.com 2016). Volkswagen was fined billions of dollars;
criminal investigations were conducted, class action suits and degradation of reputation they
have generated. The consumers lost their trust in the organisation, and it was evident that it
would be difficult to maintain long-term sustainability if they were unable to change their
operational policies and overall structure of the company.
Volkswagen started restructuring of their processes as a measure of damage control. The
market share of the organisation was decreasing even before the scandal was exposed. This
meant that there were operational issues in the company yet before they were exposed. There has
been a steady decrease in organizational sales and it went down even further after exposure of
the scandal. Thus, restructuring of the corporate processes was essential for improving the
chances of sustainability in the global environment. Even before the scandal, stock prices of the

5DEVELOPING BUSINESS PROCESSES AND OPERATIONS
organisation fell below 13% in 2015 and Volkswagen was unable to acquire high profits during
the first and second quarter of the fiscal year in 2015 (Forbes.com 2016).
The operating margin of the organisation has remained a problem, and the operating margin of
the organisation is just over 6% on due to the luxury brands that are more profitable. However, it
is still much lower when compared to other competitors such as Toyota, which has been ranging
between 9-10%, Porsche industry is the leader with 15.75 and Audi is at 9.7% are responsible for
elevating their profitability (Forbes.com 2016). The operating margin of the original brand is
2.6%, which is dragging down the overall profitability of the whole organisation (Forbes.com
2016). Volkswagen brand was experiencing a lower amount of sales, and it affected the overall
profitability as 60% of the total sales volumes were contributed by this brand. Moreover, the
organisation had been investing in innovation, and research and development, which is affecting
the profitability of the firm even further.
Thus, after the exposure of the emission scandal, the organization aimed at increasing their
profit margin by increasing the production of electric vehicles and reducing the overall cost of
production. Cost cutting had been the biggest plan but the organization would face issues from
their workforce as labour has a powerful in the organization ((Painter and Martins 2017). Thus,
even though decreasing cost had been the prime objective of the organization, they would have
to face many constraints to apply this measure. Moreover, operating margin of Volkswagen
brand is low and other methods are required to improve the profit margin of the organisation.
million 2016 2015 2016 2015 2016 2015
Sales revenue 217,267 213,292 166,016 163,936 31,251 29,357

6DEVELOPING BUSINESS PROCESSES AND OPERATIONS
Cost of sales −176,27
0
−179,38
2
−150,86
0
−155,55
3
−25,41
0
−23,82
9
Gross profit 40,997 33,911 35,156 28,382 5,841 5,528
Distribution
expenses
−22,700 −23,515 −21,453 −22,281 −1,248 −1,234
Administrative
expenses
−7,336 −7,197 −5,730 −5,646 −1,606 −1,552
Net other
operating result
−3,858 −7,267 −3,306 −6,761 −552 −506
Operating result 7,103 −4,069 4,668 −6,305 2,435 2,236
Operating
return on sales
(%)
3.3 −1.9 2.5 −3.4 7.8 7.6
Share of profits
and losses of
equity-
accounted
investments
3,497 4,387 3,433 4,366 64 21
Finance costs
and Other
financial result
−3,308 −1,620 −3,217 −1,695 −91 75
Financial result 169 2,767 216 2,671 −27 97

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Earnings before
tax
7,292 −1,301 4,884 −3,634 2,408 2,333
Income tax
expense
−1,912 −59 −1,149 527 −763 −586
Earnings after
tax
5,379 −1,361 3,735 −3,107 1,645 1,747
Noncontrolling
interests
10 10 −81 −10 91 19
Earnings
attributable to
Volkswagen AG
hybrid capital
investors
225 212 225 212 – –
Earnings
attributable to
Volkswagen AG
shareholders
5,144 −1,582 3,591 −3,310 1,553 1,7
Table 1: Income Statement
(Source: volkswagenag.com 2016)

8DEVELOPING BUSINESS PROCESSES AND OPERATIONS
Figure 1: Brand Health
(Source: Shakespeare 2015)
Figure 2: Operating margin
(Source: Forbes.com 2016)

9DEVELOPING BUSINESS PROCESSES AND OPERATIONS
Possible solutions
The possible methods of increasing operating margin are a reduction in the cost of goods
sold, reduction in the labour and operational cost, increase in the sales revenue and audit of the
utilities and insurance. Volkswagen will have to review all their expenses related to production
cost, which will consist of manufacturing cost, supplier cost, labour cost and inventory purchase
prices. Thus, reduction of initial values is essential for reducing the cost of goods. The second
possible option is increasing the volume of sales, which is only possible by selling more products
(Zhou 2016). The organisation can also search to make improvements in managing utilities in a
better way. Volkswagen can use energy saving schemes to reduce the cost of energy
consumption in the factories. However, reduction in operational and labour price is the most
crucial factor.
Volkswagen will have to reduce the costs if they want to increase their operating margin.
The first measure of the company is establishing cost-cutting goals; this means that the
organisation will decide on the allocated budget and keep their spending within the chosen range.
The next measure is the re-evaluation of organisational suppliers; this is more relevant for
organisations that deal with a large number of suppliers. Thus, it is feasible for the firm to
identify the suppliers that are willing to provide inventory at lesser prices. Moreover, if the
currents supplier find out that Volkswagen is searching for a better option, then the suppliers are
likely to reduce the expenses.
The next possible solution is increasing the task efficiency of the employees. It has been
seen that the number of employees working in Volkswagen is twice of the employees in Toyota.
However, the amount of the manufactured product is same. Volkswagen employees 67000
employees in 27 factories all over the world and the gross total comes up to 610,000 workers

10DEVELOPING BUSINESS PROCESSES AND OPERATIONS
whereas Toyota has 344,000 workers and both produce the same number of vehicles (Ewing
2016). This shows that they can reduce the number of their workforce to improve their
operational efficiency. Thus, the organisation will have to understand the over-allocation of their
resources and reduce the number of workforces significantly if they want to maximise the
effectiveness of the employees. Volkswagen can reduce the number of benefits and rewards they
provide to the employees.
The organisation allocates budget for various parties and employee activities, curtailing
the cost of these events is a viable option for the company. Moreover, the firm can reduce the
allowances they are providing to the employees by minimising the excess cost. The last measure
that Volkswagen can implement is wastage of company resources. The organisation can
implement strict policies on use of office supplies and trips organised by Volkswagen. The
company can also install equipment, which will save energy consumption and increase the
efficiency of the organisation.
Proposal of new procedure
Volkswagen will implement group strategy 2025 to improve their operational
sustainability. This is a transformative measure where change management will be implemented.
The organization will transform the core business by grabbing the opportunity of gaining new
potential market segments. The organization should be focusing on development of new product
segment and selling electric based vehicles that are expected to generate 25% of the overall
revenue in upcoming years. Innovation, research, and development will be a key in making these
adaptations. Digitalization, technology and autonomous driving will be one of the milestones that
Volkswagen will have to reach. However, in order to achieve the organization will have to

11DEVELOPING BUSINESS PROCESSES AND OPERATIONS
realign the components in business. Thus, the organization will have to make changes to the
business model and focus on production of new type of vehicles. Thus, the organization should
be aiming to enter the new market by using new mobility solution they have come up with. The
organization should emphasize on optimizations and efficiency of portfolio. However, these
plans belong to the long-term category and will take time to achieve.
The possible solutions mentioned are crucial factors for attaining the desired goals of the
organization and Volkswagen will implement all the above-mentioned strategies to maintain
their sustainability in the global automobile environment. Vertical integration is a global
operation strategy that will be executed. The organization will be able to reduce the cost of their
operations. Volkswagen should be able to control their upstream and downstream suppliers;
forming partnership with one of the suppliers to handle manufacturing of some of their products
will reduce their cost significantly. The company will be able to achieve economies of scale if
they execute this strategy effectively. Congruence problem in market-manufacturer can be
reduced by eliminated by using process and product structure matrix. This matrix includes
process structure and process choice, which are the indicators of identifying the critical processes
and curtailing workforces in non-critical processes.
The organization will use midterm planning where the management will meet once a year
to set the goals of the next five years. The organization will aim to reach liquidity by setting bars
for both technical and economic fronts. The major problem the organization has faced before and
after the scandal is maintaining operating margin. Moreover, after the emission scandal the
organization will have to keep side billions of dollars for compensations and fines. Thus, the
company resources have become limited and they will have to invest properly to improve their
operating margin. The organization will have to let go of their workforce but it is not possible