What the Volkswagen Scandal Teaches About the Value of Compliance Management

For years industry analysts and software developers have affirmed the value of tracking compliance as a product design data element, but there is nothing like a big international scandal to change the discussion. Volkswagen was recently caught cheating on emissions tests on diesel engines sold in the US, and has set aside €6.5 billion ($7.3 billion) to deal with the aftermath. International bank Credit Suisse thinks the damage will more likely cost VW €78 billion ($87 billion) over time, in the indirect form of lost sales from its damaged reputation as well as the direct form of fines, legal fees, and possible sales bans.

The idea behind tracking compliance is simple. In this day and age products must conform to rules set by governments as well as those set by international engineering associations. There are four basic elements of compliance:

  • Materials must come from legal sources and conform to standards regarding toxicity and other safety issues;
  • Products must meet safety performance standards in operation;
  • Products must meet or exceed energy consumption and emissions standards;
  • Products must have an end-of-life strategy for recycling and avoidance of toxicity.

Compliance issues vary wildly with the nature of the product. A maker of garbage cans faces a lower regulatory burden than the manufacturer of an insulin pump. Complex systems like automobiles and jet aircraft must meet or exceed thousands of compliance directives.

The largest manufacturers started to include compliance as part of their product data management years ago, but smaller businesses have for the most part not made compliance a PDM or PLM element. As the Volkswagen case points out, the cost of lackadaisical compliance monitoring can be expensive. If VW was using its PLM system to track compliance management, then somebody in the organization was feeding the system false data at some point, and a lack of transparency—possibly combined with intentionally overlooking the problem—led to the false reporting software being installed in millions of cars.

The Ponemon Institute (PI) did a study on compliance costs in 2011 that is more relevant today than ever. PI concluded any cost associated with tracking compliance was more than recouped when compared to the costs associated with non-compliance or sloppy record keeping. “If companies spent more on compliance in areas such as audits, enabling technologies, training, expert staffing and more, they would recoup those expenditures and possibly more through a reduction in non-compliance cost.”

Non-compliance costs impact businesses because employees must deal with the issues of non-compliance instead of their regular duties. PI found the average incident cost of non-compliance in a manufacturing business to be over $8 million dollars, broken into four categories:

  • Business disruption (average cost $3.2 million)
  • Productivity loss (average cost $2.4 million)
  • Revenue loss (average cost $2.1 million)
  • Fines, penalties and related costs (average cost $1.4 million)

The PI report does not take malfeasance into consideration, and we hope you have no need to either. With systems available today from companies like Synergis Software, there is no excuse for not having a right-sized system in place for guiding and guaranteeing compliance throughout the design and manufacturing workflow. Using the Ponemon Institute numbers as a guide, avoiding just one incident of non-compliance would more than pay for any investment in compliance management automation.

For Volkswagen, the cost of non-compliance is becoming obvious, but what about in your company? How do you track the various rules you must follow in designing and manufacturing your products? Is there an automated audit trail? Are all relevant records, design documents, and approvals easily retrievable? Are your compliance procedures transparent? Who makes sure regulations are consistently followed, and made an integral part of the design process? If you don’t have straightforward answers to these questions, and an automated digital solution in place to manage it, you need to take action.

Randall S. Newton is the principal analyst and managing director at Consilia Vektor, a consulting firm serving the engineering software industry. He has been directly involved in engineering software in a number of roles since 1985. More information is available at https://www.linkedin.com/in/randallnewton.

6 thoughts on “What the Volkswagen Scandal Teaches About the Value of Compliance Management

  1. The real villain here is the EPA. They have designed the pollution requirements to make cars unnecessarily complex and expensive. Nor are they “fair”. Most people think all passenger vehicles that meet the EPA requirements emit the same amount of pollution. But it is not true. The requirement is in PPM of CO2, NO2, CO, etc. in the exhaust stream. Think of that as a PERCENTAGE. Large, powerful vehicles have much larger exhaust streams (in cubic feet per minute) than a small vehicle. So even though the percentage of pollutants in the exhaust stream my be the same for a large vehicle, the total emitted pollutants will always be proportional to the size of the exhaust stream, and effectively, the size of the engine.

    Volkswagen doesn’t make large trucks or gas guzzling sports cars for the consumer market. So they are generating much less pollution than companies like Ford or GM, who DO make large, powerful vehicles.

    Knowing how software is developed, I doubt anyone in management deliberately defrauded the EPA. This was probably some code that a low level software engineer designed to test the car, and it inadvertently got left in the production cars.

    1. Hi Jim:
      Thanks for your thoughtful observations. The blog post is more to educate people on the importance of compliance in the manufacturing (and other) industries and to offer up a way to more easily stay compliant by automating processes with a PDM/EDM system.
      All the best,
      Martha Lubow
      Synergis Software

      1. It appears to me that the article and your comment confuse design for compliance and compliance tracking: planning, auditing, and so forth. VW’s case has to do with a deliberate effort to circumvent a design that failed compliance requirements and not failure to document and track an out-of-compliance design.

        To Jim. VW does make large trucks. It owns MAN Trucks that are manufactured and sold under the Volkswagen Commercial Vehicles badge. More recently VW acquired Scania trucks and will eventually merge the two lines.

        1. I was talking about their consumer line. Volkswagen does not make gas guzzling full size pickup trucks, and to my knowledge 7 passenger wagons and SUV’s. At least not for sale in the US.

  2. Yes! We could probably add a couple of people here, to our five person operation, just to stay on top of compliance issues. The rest of us will deal with customer requirements.

    1. Thanks Dave for the comment. I wonder if you automated your processes with a document management system you could get the audit trail you need to stay compliant? Might it be more cost effective than hiring more people? Just a thought.
      All the best,
      Martha Lubow
      Synergis Software

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