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Mercedes’ Finely-Tuned Supply C hain

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Mercedes’ Finely-Tuned Supply Chain
Kurt C. Hoffman | May 01, 1997

When Daimler-Benz decided to tap into the growing demand for
sport-utility vehicles with an all-new design, it relied on
innovative manufacturing and supply-chain efficiency to bring the
product to market at a reasonable cost.

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-
C lass 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 C EO 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. C onsider 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-C lass 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.

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-C lass will be
the most vehicle on the road for the money,” said Bob Birch, vice- “But when the vehicles leave the
president of logistics and purchasing for MBUSI. “It’s going to be paint plant to go to the assembly
priced in the mid-$30,000 range, but it is an absolutely unbelievable plant for the glass, radio, tires and
vehicle.” Production of the M-C lass takes place in a one-million- interior, then the line-up is frozen
square-foot plant on a 966-acre site in Vance, Ala., between the and will not change.”
cities of Tuscaloosa and Birmingham on what used to be a pine-tree — Bob Birch, vice president, MBUSI
farm. The site also hosts a training facility and visitors center.

According to Birch, MBUSI can price the M-C lass in the mid-$30,000s because of the extensive efforts the
company made to save money in the production process. Development of the M-C lass 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-C lass 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-C lass. 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-C lass by Delphi Packard Electric is an example of this modular
construction.

Delphi Packard is one of two current in-sequence suppliers for the M-C lass. “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-C lass 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-C lass, the only other in-sequence supplier is Johnson C ontrols, 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
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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.”

JC I 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.”

Requests for quotations were sent to those 49 carriers. MBUSI had a
total of 65 parts and component suppliers that would be channeling Incentives Payback
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
C ookeville, Tenn., and TL giant Schneider National, based in Green Bay, When Mercedes Benz U.S.
Wis., to serve as core carriers. Birch then looked at what the core International went site-shopping
carrier would charge for each route and compared that transportation three years ago for its new U.S.
cost to the transportation charge as set forth in the “FOB our dock” factory, Alabama decided it
quotes provided by the part and component suppliers, and took the would do whatever it took to win
lowest of the two. Since the plant keeps only one days’ supply of any the bid, certain that such a
component on hand, deliveries are on continuous replenishment cycles. victory would give the state
instant global visibility.
MBUSI also controls costs through use of foreign-trade-zone status. The
Alabama plant was designated a sub-zone of the Birmingham FTZ, The end result was a $253 million
which allows it to defer and reduce C ustoms duties on components and incentives package that included
assemblies imported into the U.S. site and infrastructure
improvements, tax incentives
In-Sequence Suppliers to Increase and training. The state spent
At the current stage, 23 vehicles a day roll off the production line and almost as much as Merdedes to
800 people work at the plant. A second shift will be added in get the plant in Vance, Ala., up
September, and the plant should be pushing out 270 M-C lass vehicles a and running.
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 The high price of luring the plant
starting out with two in-sequence suppliers. But as the vehicle becomes touched off a continuing debate
more complicated, we’ll expand that and probably will have 12 to 15 over the wisdom of such a large
Tier I in-sequence suppliers. We’re trying to make the vehicle as simply payout. But state development
as we can to get up to speed. Then we will add some of the other officials say the project has
options once we are up and running smoothly.” noticeably changed the world’s
perception of Alabama, making
Bumpers and outside molding are not being shipped in sequence the investment worth every
because all launch vehicles are equipped with gray bumpers. “But dime.
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 A recent study by Mac R.
only engine offered during the launch, next year’s plans call for a V-8, a Holmes, Troy State University
four-cylinder, and a diesel engine. “Now we’re talking about a whole research professor of business
different bunch of kinds of air cleaners to fit several different engines, and economics, supports that
where right now we only have to deal with one.” claim, according to a report in
Alabama Business magazine.
The same is true with the front and rear axles. When MBUSI begins to Holmes calculates that Alabama
export the M-class to Germany, England and Japan next year, these could receive $7.5 billion in
items also will require in-sequence delivery. payroll and tax benefits to state
“We don’t really have a warehouse here, just a very small facility,” and local governments from
noted Birch. “We keep one day’s worth of material in our facility here, 1,500 Mercedes jobs and another
and two hours’ worth alongside the line. The reason is our modular 13,500 jobs in supporting
construction and in-sequence just-in-time delivery. Our suppliers industries during the next 20
manage their own inventory in their own facilities, and most of them years.
have a just-in-time program at their own facilities.”
Holmes modeled his report after
The engines for the M-C lass currently are shipped from the Port of the national study method
Bremerhaven via Sea-Land or Hapag Lloyd to the Port of C harleston, “Inplan,” which was created by
where they are off-loaded and trucked to Alabama. The ship lines the U.S. Forestry Service and
arrange for the inland portion of this move. Transmissions and further developed for use on
alternators also are sourced from Germany. (See sidebar.) local levels by the University of
Minnesota. The Inplan method
“We went through a really extensive analysis on selecting a port, and relates businesses to potential
C harleston came out on top,” Birch recalled. “We looked at the distance suppliers and then estimates
from MBUSI, the transit time, the number of carriers that they deal with, possible earnings.
arrival frequencies of their current customers, their information
technology capability, ability to handle containers, and their current During the next five years alone,
volumes.” Several ports came out close in the evaluation process, he concluded, the investment
including Savannah and Jacksonville in addition to C harleston. impact will exceed $500 million.
More than 10,000 jobs will be
MBUSI does not export at this time. “We have one customer, Mercedes- created. During the next 10
Benz AG,” said Birch. “As the vehicles come off the production line, we years, a potential increase in
turn them over to Mercedes Benz North America, their sales division.” jobs of 15,000 to 17,000 may
MBNA eventually will handle the export process once vehicles begin well be obtainable. Potential
being shipped overseas next year. At full production, plans call for 50 increased retail trade because of
percent of the vehicles staying in the U.S., 35 percent going to Europe expenditures by Mercedes-Benz
and 15 percent to Japan and other markets. An annual quota of 8,000 and its suppliers is projected at
vehicles will be earmarked for Germany. Exports will be made primarily $39 million annually.
through the Bainbridge faciltiy at the Port of Savannah.
Moreover, he said, the plant will

Suppliers On Site strengthen the state’s industrial
Many of the M-C lass suppliers, including core carriers, have people on- base, improve opportunities for
site during the initial months of the launch. Delphi Packard has a full- additional economic growth and
time person that watches every cockpit arrival and installation. “What is enhance the state’s standing as a
really nice about our in-sequence delivery process and the involvement global trading partner.
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

“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 C ontrols 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 C orp, 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.” C urrent
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-C lass 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-C lass 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-C lass plant include former employees of General
Motors, Ford, C hrysler, 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-C lass 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-C lass 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 C onsolidation C enter. 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.

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