Mercedes' Finely-Tuned Supply Chain

After several years of standing on the sidelines and watching its competitors gobble up new vehicle sales with product offerings in the sport-utility sector, Daimler-Benz AG decided to do some gobbling of its own. It's plan for biting into this burgeoning market included an all-new design, a state-of-the-art U.S. plant, just-in-time inventory control, supplier integration and modular, in-sequence construction techniques. The end result - the Mercedes Benz M-Class All-Activity Vehicle - will hit dealer showrooms this fall.

"We are committed to developing and producing the very best sport-utility vehicle," said Andreas Renschler, president and CEO of Mercedes-Benz U.S. International. "We have a new plant, new people, a new product, and we have developed new production techniques, all with the primary emphasis on quality and safety."

This being said, the real challenge for MBUSI was how to bring such a vehicle to the market at a reasonable cost. Consider some aspects of the vehicle: gross weight in excess of two tons and a five-speed automatic transmission powered by a 2.3-liter, V-6 engine. In addition, the M-Class features new technology for traction control; four-wheel disc brakes; independent suspension; front- and side-impact air bags; front fenders designed to flare out instead of jamming into the doors in a high-speed frontal impact, so occupants can escape the vehicle without the "jaws of life" having to cut them free; and the Mercedes accordion design, engineered to make the engine collapse under the vehicle instead of back into the passenger compartment in a high-speed frontal collision.

	"But when the vehicles leave the paint plant to go to the assembly plant for the glass, radio, tires and interior, then the line-up is frozen and will not change." - Bob Birch, vice president, MBUSI

MBUSI's solution was a comprehensive re-working of the manufacturing process, supported by a finely-tuned supply chain. "We're trying to give value to our customer, and the M-Class will be the most vehicle on the road for the money," said Bob Birch, vice-president of logistics and purchasing for MBUSI. "It's going to be priced in the mid-$30,000 range, but it is an absolutely unbelievable vehicle." Production of the M-Class takes place in a one-million-square-foot plant on a 966-acre site in Vance, Ala., between the cities of Tuscaloosa and Birmingham on what used to be a pine-tree farm. The site also hosts a training facility and visitors center.

According to Birch, MBUSI can price the M-Class in the mid-$30,000s because of the extensive efforts the company made to save money in the production process. Development of the M-Class began in Stuttgart early in 1993 with a dedicated team using new production techniques and capitalizing on Mercedes' extensive research and development facilities. The design team's initial goal was to create an evolution of the sport-utility vehicle by combining true off-road capabilities with the passenger-car performance that buyers expect from Mercedes-Benz.

Fifteen cross-sectional design teams were created, each responsible for the development of a particular system or module within the vehicle. The teams were accountable for meeting cost, quality, development-time and weight targets. Suppliers then were added to the equation to provide expertise in the areas of component cost, quality, and the manufacturing of their particular systems.

Actual vehicle design and development followed, including the creation of rough concepts, then models, then finally prototype vehicles. At this point, the M-Class was divided into major systems, such as seating, cockpit, interior trim, and fuel system, with the intention of involving suppliers more intensely in the development process. Supplier functions repeatedly were benchmarked, then improved with suggestions from function-group members. Thirty-four months later came the launch.

In all, MBUSI selected approximately 65 major suppliers to work as its partners in the development and production of the M-Class. Selection criteria included quality, cost, delivery, development capability and management philosophy. Two-thirds of the vehicle's components are sourced from North American suppliers, primarily in the U.S. Engines and transmissions are provided from Daimler-Benz plants in Germany.

Modular Construction
In modular construction, a group of parts and/or components are sub-assembled by a supplier away from the plant and delivered to the production line, where they are installed as a complete unit or system. The driver's cockpit provided for the M-Class by Delphi Packard Electric is an example of this modular construction.

Delphi Packard is one of two current in-sequence suppliers for the M-Class. "We receive the cockpit as a module from Delphi Packard," explained Birch. "Each cockpit is custom-built in sequence and delivered in sequence to our production line." The cockpit is the whole dash assembly, including the heater, the air conditioning, the steering column, clutch and brake pedal, crash pad, and air bag. In all, 150 individual parts from 35 different suppliers go into the cockpits that Delphi assembles.

The way the plant works, each M-Class vehicle begins as a body in the body shop. The sequence is not yet fixed, as vehicles frequently are taken off-line at this stage. Similar sequencing shifts occur in the paint shop, as some units are routed back through the line to complete two-tone paint jobs or to make paint repairs.

"But when the vehicles leave the paint plant to go to the assembly plant for the glass, radio, tires and interior, then the line-up is frozen and will not change," explained Birch. "So at the end of the paint plant, we broadcast what the vehicle is to our in-sequence suppliers like Delphi." At this point in the launch of the M-Class, the only other in-sequence supplier is Johnson Controls, which makes the seats. Actually, the in-sequence data is broadcast via EDI to a mainframe system, and the in-sequence suppliers extract the data from the mainframe.

At that point, Delphi begins to build the cockpit assembly for the particular color of vehicle that is just leaving the paint plant. "Delphi has 169 minutes to build the cockpit, deliver it here, and get it to our line, because that is how long it will take that vehicle to get to the installation point," said Birch.

Delphi conveys the finished cockpits into an 18-wheeler with a specialized trailer that has a conveyor built inside it. The trailer is hauled three miles from Delphi's facility to the production line. "The driver pulls into our dock, connects up to our conveyor system, and the individual cockpits are conveyed out of the truck onto the line just in time and in sequence," said Birch. The trailer, operated by core carrier Averitt Express, then returns to Delphi for reloading.

These specially-equipped trailers hold a dozen cockpits and two of them circulate between the Delphi facility and the production line during the day. "The cockpit units are conveyed into the truck in reverse order, so when they come out of the truck at our plant, they come out in the right order," said Birch. "They really are untouched by human hands after they are built."

JCI and Delphi get weekly releases - a thumbprint of what is to happen in the coming week - and then they get the real-time broadcast. "Our non-sequence suppliers also get weekly releases, and our German suppliers get a release every 10 days," said Birch.

Transportation Costs
The minimization of transportation costs in the supply chain was critical in order to meet the vehicle's price target. "We quoted all our suppliers FOB their dock and FOB our dock, then broke out the transportation cost per part," said Birch. He also wanted to team up with a select group of transportation providers and involve those carriers with the same intensity as the part and component suppliers.

"We wanted to end up with two core carriers: a truckload carrier and a LTL carrier, along with some back-up carriers," Birch explained. In the course of the planning and development process, 128 motor carriers had contacted MBUSI regarding the logistics end of the operation. "During that period we maintained a data base of all suppliers that contacted us, so when we got to the point of carrier selection, we sent out questionnaires to all 128 carriers that had expressed an interest."

The questionnaires sought information regarding various aspects of the carriers' operations. "The questionnaires were very detailed with questions like whether they own their own equipment, how they communicate with drivers, those kinds of issues."

Eighty-six questionnaires were returned, and those were evaluated according to nine or 10 criteria. "We were looking for discriminating factors such as their use of information technology, whether they had satellite hookups, and if their drivers were equipped with cell phones. We reviewed those 86 responses and decided that 49 had potential."

Incentives Payback

When Mercedes Benz U.S. International went site-shopping three years ago for its new U.S. factory, Alabama decided it would do whatever it took to win the bid, certain that such a victory would give the state instant global visibility. The end result was a $253 million incentives package that included site and infrastructure improvements, tax incentives and training. The state spent almost as much as Merdedes to get the plant in Vance, Ala., up and running. The high price of luring the plant touched off a continuing debate over the wisdom of such a large payout. But state development officials say the project has noticeably changed the world's perception of Alabama, making the investment worth every dime. A recent study by Mac R. Holmes, Troy State University research professor of business and economics, supports that claim, according to a report in Alabama Business magazine. Holmes calculates that Alabama could receive $7.5 billion in payroll and tax benefits to state and local governments from 1,500 Mercedes jobs and another 13,500 jobs in supporting industries during the next 20 years. Holmes modeled his report after the national study method "Inplan," which was created by the U.S. Forestry Service and further developed for use on local levels by the University of Minnesota. The Inplan method relates businesses to potential suppliers and then estimates possible earnings. During the next five years alone, he concluded, the investment impact will exceed $500 million. More than 10,000 jobs will be created. During the next 10 years, a potential increase in jobs of 15,000 to 17,000 may well be obtainable. Potential increased retail trade because of expenditures by Mercedes-Benz and its suppliers is projected at $39 million annually. Moreover, he said, the plant will strengthen the state's industrial base, improve opportunities for additional economic growth and enhance the state's standing as a global trading partner.

Requests for quotations were sent to those 49 carriers. MBUSI had a total of 65 parts and component suppliers that would be channeling material to the plant, so Birch had the carriers quote all 65 routes. They evaluated the responses, narrowed the field down to 11 carriers, and eventually selected Averitt Express, a regional LTL carrier based in Cookeville, Tenn., and TL giant Schneider National, based in Green Bay, Wis., to serve as core carriers. Birch then looked at what the core carrier would charge for each route and compared that transportation cost to the transportation charge as set forth in the "FOB our dock" quotes provided by the part and component suppliers, and took the lowest of the two. Since the plant keeps only one days' supply of any component on hand, deliveries are on continuous replenishment cycles.

MBUSI also controls costs through use of foreign-trade-zone status. The Alabama plant was designated a sub-zone of the Birmingham FTZ, which allows it to defer and reduce Customs duties on components and assemblies imported into the U.S.

In-Sequence Suppliers to Increase
At the current stage, 23 vehicles a day roll off the production line and 800 people work at the plant. A second shift will be added in September, and the plant should be pushing out 270 M-Class vehicles a day at full production with 1,200 employees on board in the first quarter of 1998, Birch estimated. "We're in a launch mode right now and are starting out with two in-sequence suppliers. But as the vehicle becomes more complicated, we'll expand that and probably will have 12 to 15 Tier I in-sequence suppliers. We're trying to make the vehicle as simply as we can to get up to speed. Then we will add some of the other options once we are up and running smoothly."

Bumpers and outside molding are not being shipped in sequence because all launch vehicles are equipped with gray bumpers. "But eventually we will go to a body-color bumper, and those will have to come in sequence," said Birch. And while the 2.3-liter, V-6 engine is the only engine offered during the launch, next year's plans call for a V-8, a four-cylinder, and a diesel engine. "Now we're talking about a whole different bunch of kinds of air cleaners to fit several different engines, where right now we only have to deal with one."

The same is true with the front and rear axles. When MBUSI begins to export the M-class to Germany, England and Japan next year, these items also will require in-sequence delivery.
"We don't really have a warehouse here, just a very small facility," noted Birch. "We keep one day's worth of material in our facility here, and two hours' worth alongside the line. The reason is our modular construction and in-sequence just-in-time delivery. Our suppliers manage their own inventory in their own facilities, and most of them have a just-in-time program at their own facilities."

The engines for the M-Class currently are shipped from the Port of Bremerhaven via Sea-Land or Hapag Lloyd to the Port of Charleston, where they are off-loaded and trucked to Alabama. The ship lines arrange for the inland portion of this move. Transmissions and alternators also are sourced from Germany. (See sidebar.)

"We went through a really extensive analysis on selecting a port, and Charleston came out on top," Birch recalled. "We looked at the distance from MBUSI, the transit time, the number of carriers that they deal with, arrival frequencies of their current customers, their information technology capability, ability to handle containers, and their current volumes." Several ports came out close in the evaluation process, including Savannah and Jacksonville in addition to Charleston.

MBUSI does not export at this time. "We have one customer, Mercedes-Benz AG," said Birch. "As the vehicles come off the production line, we turn them over to Mercedes Benz North America, their sales division." MBNA eventually will handle the export process once vehicles begin being shipped overseas next year. At full production, plans call for 50 percent of the vehicles staying in the U.S., 35 percent going to Europe and 15 percent to Japan and other markets. An annual quota of 8,000 vehicles will be earmarked for Germany. Exports will be made primarily through the Bainbridge faciltiy at the Port of Savannah.

Suppliers On Site
Many of the M-Class suppliers, including core carriers, have people on-site during the initial months of the launch. Delphi Packard has a full-time person that watches every cockpit arrival and installation. "What is really nice about our in-sequence delivery process and the involvement of our suppliers is that for quality feedback, it's fantastic," said Birch.

For example, quite recently the operator that installs the heater hoses to the outlets in the firewall said that if those outlets were raised about a quarter of an inch, it would be a lot easier, said Birch. "The Delphi person on site called over to the plant three miles down the road and suggested that they raise the outlets as they are assembled. The next batch of cockpits came in with the higher outlets, and it really made it a lot easier on the production line." Delphi then contacted their tier-two supplier and had that supplier raise the outlets on all subsequent components, and the savings were immediate. The very next truckload from the tier-two supplier had the problem corrected.

"Now if we had a warehouse full of parts, we would have to go in there and rework all those parts," Birch noted. "The availability of on-site supplier personnel enables us to make quality corrections and improvements very fast because there is a very short pipeline." Also, there was no need for a time-consuming verification procedure because of the on-site person.

Delphi Packard was one of eight suppliers to locate in the immediate vicinity of the M-class plant. "We didn't tell any of our suppliers where to locate; it was a logical move for those who did," said Birch. "If you are going to deliver in sequence, you generally need to be within 60 miles, 80 miles at the very most. When you get over 80 miles, you cannot deliver in sequence. You can't build anything, get it on a vehicle and get it here on time. The suppliers that will provide in-sequence delivery to us either put in a warehouse or else they had to put a facility nearby."

Those suppliers include Delphi Packard Electric; Becker Group for interior trim parts; Johnson Controls for seats; ZF Industries for axles; Rehau for bumpers and exterior moldings; ORIS Automotive for spare tire carriers and trailer hitches; Tire and Wheel Assemblies; and Ogihara Corp, a Japanese company that provides all sheet metal stampings for components like fenders and hoods.

Another supplier, Dunlop Tire, already had a facility nearby. It supplies tires to Tire and Wheel Assemblies, which combines them with wheels from another tier-two supplier and flows the assembled product into the system as needed.

MBUSI has an eight-year contract with its suppliers. "We're trying to build long-term relationships with the suppliers, and as we change the design, we try to keep them involved as fully as possible." Current suppliers get first crack at providing additional or modified parts and components. For example, if a slight design were made in the steering wheel, "we would go out and show it to our current supplier and give them a new drawing and a target price," said Birch. "If they meet the target price, we don't even go out and quote it on the open market - they just get the contract." But if they don't meet the target price or design standard, MBUSI seeks quotations from other suppliers.

Strategic Use of Automation
Mercedes Benz also maintains a cost edge through the strategic use of automation as opposed to a broad-brush approach. For example, the body shops of most vehicle manufacturers are approximately 95 percent automated, but the M-Class plant body shop is only 27 percent automated.

"The reason for that is that our volume is so low," Birch explained. "If we automated the entire body shop and had to amortize that cost into the price of the product, it would cost a fortune." The M-Class plant at full production will yield 65,000 vehicles a year, where other manufacturing plants often have annual volumes in the 200,000-250,000-unit range.

"Try spreading that cost around our volume and it jacks your price way up," Birch added. "Remember, the vehicle has to pay all the overhead and facility costs that are here." However, the M-class production team does use automation on all safety welds and critical welds to ensure maximum safety and dimensional integrity in the vehicle. The remaining welds are performed manually.

The production, purchasing and logistics teams at the M-Class plant include former employees of General Motors, Ford, Chrysler, Honda, Toyota, Nissan, Diamond State, Saturn, NUMMI, Bosch, and BMW, Birch said. "We had to hit the ground running, so there was no time to train. We needed to hire people with experience, and we hired good people with a considerable amount of experience."

When each vehicle comes out of the paint shop and goes to assembly, it moves on a conveyor through the administration building. "It's glassed-in, of course, but everyone can see it. We want everyone to feel like they are part of what is going on here," said Birch. "It was blood, sweat and tears for three and a half years, and when the vehicles finally started moving on that conveyor, it was a pretty proud moment for everybody."

Birch measures the success of the logistics operation with a simple check: Are they keeping the production lines running? "We are single-sourced for every part, so if that supplier has a problem, we're in deep trouble. But you put all those things together ... it all creates value for the customer, which was our bottom line."

The M-Class vehicles will be commercially available in September.

Centralized Purchasing Reaps Dividends

The global operations of Daimler-Benz should reap some dividends from the logistics strategies embraced by Mercedes-Benz U.S. International in the production of the M-Class vehicle, particularly in the area of purchasing. "Mercedes has plants all over the world, and each plant on its own deals directly with suppliers in Germany," explained Bob Birch, vice-president of purchasing and logistics for MBUSI. For example, the same fastener supplier serves all Mercedes plants worldwide, and each plant issues its own purchase orders to this supplier, maintains its own inventory, and processes its own invoices. The same is true for other suppliers. While this approach does keep things neat and tidy at the plant level, there is a price for local independence: administrative costs are considerable, shipping becomes very expensive because the quantities are smaller, and the individual plants do not necessarily have adequate volumes to leverage more attractive pricing. While planning logistics operations at the Alabama plant, a solution was developed: the Mercedes-Benz Consolidation Center. Initially designed to serve the Alabama plant, the center eventually will serve Daimler-Benz's operations worldwide. "The consolidation center is the only customer we order from in Europe," said Birch. "They go out and work with the suppliers, order the parts and receive them; we send our RANs (release authorization numbers) to them, detailing what our requirements are, when the parts or components are needed, and in what quantities." The Mercedes plant in Brazil is the second facility to start ordering through the consolidation center, and others will follow. "That will really help pricing because we can capitalize on the economies of scale," said Birch. "We use a lot of bolts, and Brazil uses a lot of bolts, so if the consolidation center can combine our needs and issue one purchase order for the consolidation center, we can get better pricing." According to Birch, when you spread this purchasing approach across the broad range of parts and components needed by the various factories, several things happen, including more attractive unit pricing, larger volumes being shipped inbound from suppliers to the consolidation center, and the consolidation of shipments outbound from the center to the individual plants. "That way we are more likely to fill containers and are not shipping as much air," he said. There also is a considerable reduction of paperwork.