Volvo Group Of Companies and the challenges it faces

1 Introduction

AB Volvo <www.volvo.com> is the mother company of the Volvo Group of companies with its head office in Gothenburg, Sweden. The company was formed in 1924, with the first Volvo truck rolling off the production line in Sweden in 1928. The Volvo Group is one of the worlds leading suppliers of transport solutions for commercial use, also providing complete solutions for finance and servicing. This mission statement for the company is ‘By creating value for our customers we create value for our shareholders. We use our expertise to create transport-related hard and soft products of the superior quality, safety and environmental care for demanding customers in selected segments. We work with energy, passion and respect for the individual’ (AB Volvo – Group Presentation 2011).

Volvo as a group is tremendously proud of the core corporate values of, Safety, Quality and Environment and has retained and lived by these values from the start of the organisation. These three values are evident in every aspect of the business. The Volvo Group has now grown to become the second largest manufacturer globally of heavy trucks, and as illustrated in Figure 1.1 incorporates many different brands.

As illustrated in Figure 1.2 , the Volvo Group is separated into business areas and business units. The business areas are responsible for generating revenues for the company and the business units are the recognised support units to support all business areas. Volvo Information Technology (Volvo IT) is the recognised support business unit for information technology strategy and systems support. Volvo IT does not confine their business to the Volvo Group, outsourcing their expertise to such organisations as the Ford motor company and the Stockholm Government. This ensures the Volvo IT is continually benchmarking the Volvo Group to other businesses in the open market to stay in the market forefront.

Volvo Group works with external interest groups to continue to develop and drive progress in the transportation industry, especially on projects that align with the corporate values of quality, safety and environmental care. An example project requiring the key involvement of Volvo IT is the Alternative Fuels project. This project is examining a viable replacement of fossil fuels for commercial applications (Alternative Fuels 2011). In the Alternative Fuels project, the Volvo Group is working with customers, suppliers and governments to investigate workable fossil free fuels, with all business areas and units working towards making this possible. Volvo IT is involved to introduce software changes for engine management systems to ensure clean burning of these fuels. The solution is to utilise a centralised and shared IT infrastructure, platform and software application serving content to authorised users over the web.

In this report we discuss the IT infrastructure issues and challenges for the Volvo Group and the business benefits and costs of a modern IT model called Cloud Computing. Recommendations are provided as to the adoption of Cloud Computing by the Volvo Group followed by concluding statements.

2 IT Infrastructure: issues and challenges

2.1 IT infrastructure challenges

Two of the major components {Laudon, 2010 #159}of an IT infrastructure that must be coordinated by a firm include computer hardware platforms and enterprise software applications ( Laudon & Laudon 2010, p. 203). These two essential components of an organisation’s IT infrastructure ecosystem ( Laudon & Laudon 2010, p. 203) are concentrated on in this report as they exhibit the most risk to the Volvo Group’s business, but they also provide the most opportunities for an information technology strategy to add business value to the Volvo Group.

An information system is defined by Laudon & Laudon ( 2010, p. 46) as ‘a set of interrelated components that collect (or retrieve), process, store, and distribute information to support decision making and control in an organisation’. In modern organisations, most information systems are implemented via IT infrastructure that includes computer hardware platforms and enterprise software applications. These systems are ‘typically the backbone of an organisation’s information flow and the main vehicle for consolidating business information’ ( Bisbal et al. 1999, p. 103) and their failure can have a significant impact on the business.

2.2 Legacy information systems

Information systems that have been in existence for a long time and continue to be resistant to modification and evolution due to a high replacement or redesign cost are called legacy information systems ( Brodie & Stonebraker 1995, p. 103; Laudon & Laudon 2010, p. 634). The evolution or appearance of legacy information systems in an organisation can also typically occur due to mergers and acquisitions ( Macknight 2005, p. 14).

As described by Bisbal ( 1999, p. 103), legacy information systems can cause an organisation a number of problems:

• Running on old or obsolete hardware.
• Expensive software maintenance.
• Inflexibility in extending the systems.
• Difficult to integrate with other systems.
• Long failure or disaster recovery times.

Old and obsolete hardware can be power hungry. Replacement can be expensive or sometimes impossible due to lack of skills or unavailable parts. Some organisations need to maintain spares holding and skills within their organisation to mitigate such risks. Similarly skills in software maintenance and fault-finding may be hard to out-source or outsourced service levels may not align with the needs of the business. The system may need to be flexible and able to integrate with other systems in order to respond to changing business requirements ( Bennett et al. 1999, p. 153)

2.3 The evolution of Volvo’s global information systems strategy

Volvo Group has seen an increase in their legacy information systems mainly due to the impact of company acquisitions over the years. Many areas in the IT infrastructure ecosystem ( Laudon & Laudon 2010, p. 203) required particular attention during acquisitions to ensure compliance through coordination of the many components of the ecosystem. Hardware platforms differed as did internet platforms. Data management and storage needed to be centralised. The need to change and centralise was evident.

Throughout these acquisitions, the focus of the information management strategy of the Volvo Group has been to ensure key enterprise systems are incorporated into the acquired organisations. The ERP system based on SAP is an example one of the key enterprise systems common throughout the entire Volvo Group. In contrast, supply chain systems have remained as point solutions unique to each business area and physically deployed on a geographically separated basis.

As specified by ( Ives & Jarvenpaa 1991, p. 34), a ‘global information technology application contributes to achieving a firm’s global business strategy by using information technology platforms to store, transmit and manipulate data across cultural environments’. With AB Volvo being a true global corporation experiencing ongoing growth through acquisition, challenges have presented themselves in most countries with legacy systems across the supply chain. Cultural diversity such as different languages utilised from regional area to regional area continue to discourage the upgrade of legacy supply chain systems. Also, the resultant point solutions all require local IT support.

Evidently, having multiple point solutions poses many challenges for the Volvo Group, but it also causes misalignment with their core corporate values. For example, the Volvo Group core value of environmental care leads to goals to reduce energy usage in efforts to reduce the company’s carbon footprint. With the multiple point solutions, and many of these being legacy systems, there would be a propensity for excessive energy usage due to the hardware platforms not complying with environmental requirements and other inefficiencies. There are better solutions available. Hospitals in the USA have started to use energy efficient, environmentally friendly hardware, as well as using cloud like technology for patient files access and program access ( ‘Does Green Really Pay Off? Ideas from Hospitals That Say ‘Yes!”  2009).

3 Cloud Computing and its business benefits and costs

3.1 Cloud computing explained

Cloud computing is referred to as a ‘model of computing’ by Laudon & Laudon ( 2010, p. 196) ‘where firms and individuals obtain computing power and software applications over the Internet, rather than purchasing their own hardware and software’. Typically ‘cloud computing infrastructure resides in a large data centre and is managed by a third party’ ( Jaeger et al. 2008, p. 270).

Gilbert ( 2010, p. 1) states that ‘Cloud computing has been recognised as one of the most important developments in information technology in the past 60 years’. Globally, organisations are implementing cloud computing solutions in order to reduce costs; be more responsive to market demands; to share information more readily and rapidly; ( Gilbert 2010, p. 1); to provide better customer service, and much more. Cloud computing has been enabled through technological drivers such as reducing communication costs, the internet and its growing speed, smaller footprints required for more processing power and data storage, advances in internet security, virtualisation and much more.

Figure 3.1 describes further characteristics of the cloud environment.

3.2 Cloud computing service models

Cloud computing services can be provided in three models ( Gilbert 2010, pp. 18-9) Infrastructure as a service (IaaS), Platform as a service (PaaS), and Software as a service (SaaS). These models are described in more detail in Figure 3.1.

For organisations such as Volvo, the cloud computing service models tend towards the use of IaaS and SaaS. The staff of Network World ( 2007, p. 28) quote eBay’s Paul Strong as stating ‘companies must decide what is core to their business and what can be commoditised as a utility served up by a SaaS (software as a service) provider’.

Cloud service providers are able to consolidate computing resources enabling cost reductions derived from centralised management and economies of scale, passing on these cost savings to the user of the cloud service who can utilise the service without the initial capital outlay and maintenance of a dedicated infrastructure ( Jaeger et al. 2008, p. 270).

3.3 Cloud computing delivery models

Cloud delivery models can be public, private, hybrid or community ( Gilbert 2010, p. 19). These are described in more detail in Figure 3.1.

For organisations, cloud computing ‘presents many major problems of information policy, including issues of privacy, security, reliability, access and regulation’ ( Jaeger et al. 2008, pp. 269-70) with legislation lagging commercial interest in this computing model. In evaluating their potential utilisation of a cloud computing service, organisations would need to consider a range of issues. Two typical issues revolve around trust in the integrity of the service provider. Organisations would need to trust in the ability of a cloud service provider to ensure the security of their valuable private information. There must also be trust in the business continuity of the service provider, along with the ability of the service provider to maintain their quoted service levels ensuring the appropriate access and reliability of the service.

Subsequently organisations are more likely to take up a private cloud delivery model for enterprise software applications and computer hardware platforms. For larger global organisations with multiple business units, such as Volvo, a hybrid model of a private cloud and community cloud delivery model would be more desirable. Such a model is illustrated in Figure 3.2

3.4 Cloud computing business benefits to Volvo

The Volvo Group can benefit greatly from the use of cloud computing. With the group having its own business unit that handles and manages IT requirements, Volvo Group has an opportunity to reduce costs from infrastructure and hardware duplications, have competitive advantage via speed to market of new services for customers and reducing the costs of good sold into markets via supply chains. Other benefits to the group include much lower cost of entry and capital expenditure, low and transparent cost of ownership, and tax advantages ( O’Sullivan 2009, p. 21).

The supply chain systems within the Volvo Group are characterised as legacy point solutions with regionally located and managed data centres housing multiple software applications and hardware platforms, each providing the same business function. These legacy supply chain information systems would appear to be prime candidates for replacement by a cloud computing solution. Indeed, supply chain systems are one of the types of systems that are quickly moving from their traditional platforms to the cloud computing model ( O’Sullivan 2009, p. 20).

4 Recommendation of cloud computing adoption/adaptation

4.1 Volvo’s five year strategy

The five year strategy from the Volvo Group is to continue to reduce their environmental impact, produce quality products in all areas of their business and continue to create value to customers and shareholders. A key aspect of the Volvo Group’s five year strategy is to continue to reduce the carbon output in all areas of the business (Volvo Truck Corporation Sweden 2011).

Laudon & Laudon ( 2010, p. 223) provide six factors that should be used to answer the question “How much should our firm spend on IT infrastructure?”. They are:

1. Market demand for Volvo’s services – These are ever increasing with more services being provided to Volvo Truck Customers through the complete life of the vehicle.

2. Volvo Business Strategy – The group will continue to develop services and vehicles that reduce CO2 footprint and lead to better ways of commercial transportation.

3. Volvo information technology strategy, infrastructure and cost – A cloud computing model should be considered for the replacement of supply chain information systems and considered for further system replacements and introductions.

4. Information Technology assessment – The adoption of a cloud computing model would not be considered to be lagging behind the technology curve, nor would adoption at this stage be considered early. A review of the risks associated with policy associated with the implementation of a cloud computing model should be undertaken before adopting the model.

5. Competitor firms services – Many other European competitors are experimenting with cloud computing.

6. Competitor firms IT Infrastructure investments – Mercedes Benz are also investing in future services for customers, showing a trend of high IT infrastructure investment for the global market (Daimler Trucks Germany 2011).

7. Investment can be sought into cloud computing on a business case basis, generating revenues for Volvo IT, and reducing costs for Volvo business areas on a user pays system.

Investment in IT infrastructure will give a competitive advantage to the Volvo Group. Investment can be sought into cloud computing on a business case basis, generating revenues for Volvo IT, and reducing costs for Volvo business areas on a user pays system.

4.2 Plan to consolidate of legacy supply chain information systems

For the replacement of legacy information systems, Volvo Group Australia has the option to upgrade the current local legacy systems and servers. This would result in high upfront and ongoing costs. Another option is to move to centralised systems hosted by Volvo IT with all storage, maintenance and upgrading performed centrally for considerably less cost. Supply chain system workflows typically extend beyond the internal organisation, typically to dealers (retailers). A cloud computing model can connect entire networks of suppliers and service providers providing efficiency and cost savings ( Ford 2010, pp. 57-8).

It is recommended that the Volvo IT department adopt a cloud computing model for the replacement of legacy supply chain systems. This model should be based on a global policy taking into account the issues surrounding cloud computing and its characteristic lag behind appropriate legislation and legal precedence. It is expected that the most appropriate model will be a SaaS service model delivered via a hybrid of a Private and Community model with the cloud service provider being Volvo IT. The cloud community members in this model would be the Volvo Group’s Business Areas.

The recommendation would be to identify all legacy supply chain information systems across the Volvo Group as candidates for replacement by a SaaS solution under the hybrid model. A business case aligning with the Volvo Group’s corporate values should be completed for the replacement of each system or groups of systems.

A pilot implementation of a cloud computing solution should be utilised as a proof of concept before a larger roll-out. The recommended pilot implementation is the TruckShop SaaS.

4.3 TruckShop SaaS Pilot

Volvo Group Australia has the requirement to upgrade an online catalogue purchasing supply chain information system called TruckShop that allows dealers (retailers) to purchase truck parts via suppliers of the Volvo Group.

The TruckShop SaaS model would represent the characteristics of Cloud computing, namely on demand service, internet accessibility, pooled resources, elastic capacity and usage based billing ( Goodburn & Hill 2010). The service developed for the TruckShop project will be able to be sold to other business areas in AB Volvo to provide similar solutions.

TruckShop is currently running on a legacy system platform with local servers in Sydney. Maintenance and upgrade costs are on the increase, with limitations also being evident on performance and capability to meet current user requirements. Energy consumption costs were noted as increasing due to more servers being required to store data. Whilst the costs of hardware had reduced in the last 10 years, the Volvo Group Australia wanted to capture more data to analyse business trends, something evident in most industries globally ( Tallon 2010). The legacy systems also are prone to downtime, costing thousands of dollars in lost revenue while not being available to the dealer network.

4.4 Post TruckShop pilot

Should the TruckShop pilot prove successful the system is recommended to be rolled out into other business areas. The continuing success of the TruckShop roll out is expected to result in high availability, high reliability, low entry cost and ongoing cost effectiveness for all users of the system.

All new supply chain enterprise system projects, and indeed other candidate enterprise systems within the group would be recommended to proceed with this cloud computing service and delivery model to ensure overall cost reductions, efficiency gains, centralising and amortising maintenance, upgrades and improvements across all business areas.

5 Conclusions

For cloud computing solutions, Volvo IT would generate their revenue by charging the Business Area departments based on the number of users. Users could apply for only the access to systems that they required. System updates and improvements would be performed centrally in Sweden, and users would not have to concern themselves with updates nor have to present their hardware to IT to update.

The pilot of TruckShop should prove to the company what cloud computing can achieve. Many other business areas in the Volvo Group can benefit from adopting cloud computing practices. With technology being built into Volvo Trucks, and the focus on providing business partnerships more online services will be developed into the future.