At this week’s Supply Chain World North America conference, Nick Little, Assistant Director, Executive Development at Michigan State University reminded the audience of the critical importance of any company to invest strategically in innovation and supply chain capability, even in the dark stages of a global recession. He reminded us that in July 2008, prior to the occurrence of the global financial crisis, Volkswagen decided to make a $1 billion commitment to U.S. resident manufacturing, and maintained that commitment even after the U.S. auto market collapsed in 2009/2010.

This week, Volkswagen conducted the grand opening of its new automobile assembly plant located in Chattanooga Tennessee, a plant which could employ 2000 workers and designed to produce upwards of 300,000 vehicles per year.  Volkswagen’s motivation to build a U.S. presence was to become more competitive in the North America market, and also buffer the current negative effect of currency fluctuations incurred by cars exported to the region.  The primary model for manufacture will be the Passat, and Volkswagen will aggressively price the new U.S. manufactured version of the Passat at roughly $7000 less than the current model.  The Passat was designed to compete head-to-head with the Toyota Camry and Honda Accord in the U.S.  As fate often plays out, both Toyota and Honda are struggling to recover from the March earthquake and tsunami that devastated northern Japan, and U.S. inventories of Camrys and Accords are at all time lows.

Volkswagen stands to benefit from more than $570 million in state and federal governmental incentives, and has designed the new plant for maximum efficiency. Up to 85 percent of parts will be source from nearby suppliers, eight of which are located on site to insure just-in-time delivery of parts.  The Wall Street Journal also noted that the average wage level estimated to be $27 per hour is the lowest of all current auto manufacturers with presence in the U.S.

Volkswagen is not the only company that maintained an investment in innovation supply chain capability during the past downturn.  We have previously noted on Supply Chain Matters how the specialized Mittelstand mid-market companies located throughout Germany utilized the recession to invest in more product innovation and production capability, and have been the first to benefit from the current boom of demand from emerging markets. These companies have a relentless focus on market niches, areas where bigger companies chose not to compete, and also in areas that demonstrate steady growth. German exports to China increased 45 percent in the first ten months of 2010, while other countries struggled.  While companies in the U.S. were quick to shed experienced workers, Germany’s industrial and legislative leaders pulled together to come up with innovate means to retain workers and prepare for the recovery.

Yesterday at a subsequent presentation at the conference, Alan D. Wilson, the CEO and President of McCormick & Company Inc., a global producer of spices and flavorings, proudly noted that during the recession, his company continued to invest in people and benefits, and that has paid off with a consistent track record of 4-6 percent sales growth and consistently exceeding Wall Street expectations.  McCormack continues to have a strong belief in continuous innovation and investment in supply chain capability.

Management books and business case studies often point to specific companies who were able to be best prepared to take advantage of a business upturn cycle, often disrupting existing industry participants.  It seems to us that a common trait was not so much growth by acquisition, but rather growth by consistency and follow-through in understanding customer needs, maintaining innovation and value-chain capability.

How many of today’s CEO and Wall Street players really understand this tenet?

Bob Ferrari