Issue: Aug 2005

The challenges of customer choice

BMW and its suppliers have developed manufacturing and logistics systems that allow customers to change the equipment of a BMW 1 Series that has already been ordered up just eight days before the start of assembly.

by Nick Palmen

BMW and its suppliers have developed manufacturing and logistics systems that allow customers to change the equipment of a BMW 1 Series that has already been ordered up just eight days before the start of assembly. Options include paintwork options, upholstery and interior equipment lines, as well as a variety of equipment “unprecedented in the compact class,” according to the company.

This choice means that, in theory, the BMW plant will produce some 150 000 individual cars a year. Increasing choices means that motor manufacturers are faced with the challenge of finding economies of scale while allowing customisation of individual vehicles to meet the demands of customers, says Wilhelm Becker, Product Line Manager of the BMW Group.

“As the product programme should satisfy various needs and wishes, a complex product offer, including numerous derivatives and niche models, has to be developed. To keep the products and services ‘state of the art’, even when the programme is extended, there is a need for lean, efficient structures and agile, competitive time to-market and time-to-customer processes,” he says in a paper entitled “The future of purchasing – supply management as a key player and value-engineering task”.

For suppliers, the future lies in taking greater responsibility for complex operations. “It is possible that even strategic items (vehicle elements that are relevant to product and brand strategy) have to be obtained from the market,” he says.

Changes to the added-value structure
Against a background of growing complexity, increasing numbers of model versions and globalisation, BMW has defined its principal activities as vehicle conception and design, integration of assembly systems and vehicle testing, the development of engines, running gear and electronics, the building of engines and bodies in white, painting and final assembly – “although this latter activity can be carried out by third parties in certain areas,” he says.
Examples of strategic components being outsourced include complete interior assemblies and trim (cockpit, sets of seats, trim panels), door modules, steering and brake systems, vehicle electronics (communication, navigation, instruments) and a wide variety of safety systems. Outside suppliers are responding by developing aggregate assemblies for a particular function and are capable of manufacturing them as modules. “These companies pursue a systematic research and development (R&D) strategy, which is evident from their R&D quotas and the number of patents for which they apply. In addition to as much as two-thirds or more of the manufacturing effort, their contribution quite often amounts to more than half of the development work on an automobile, he says
Consequences for the process chain

The outsourcing of aggregated items with strategic product or brand relevance has consequences for the entire process chain, starting from the conception phase.

Added-value Management
Added-value management is a supplement to supplier-based sourcing management with elements such as technology-based or product group-based market and sourcing strategies, contract negotiating policy and supplier involvement in project work and control of logistic structures and supply security.

Concentration by the OEM on core competencies leads to an increase in demand for external innovations. Added-value management means, among other things, the accessing of these innovations from the supply market. Although innovations cannot be institutionalised, an innovative climate can be created with suitably controlled support in the form of monetary and personnel resources. BMW has set up an Innovation Control Unit that systematically explores the market for innovation areas and promotes worldwide co-operation with research establishments and universities of advanced education.
It is the task of the purchasing department to continuously monitor the supply market for promising new developments, in order to determine the most efficient market input for BMW, to incorporate the appropriate leading-edge technologies into the company and to initiate co-operation with the relevant suppliers. Implementation of this is assured by means of ‘mentor functions,’ for example, a specialist forward sourcing function (internal customer proximity) and purchasing offices in the markets where purchasing takes place (global market proximity).

Product and service structures
Within the context of added-value management, the products and services have to be structured in such a way that they can be optimally processed from the market, development and technical production points of view (for example, market availability, use of the group’s and suppliers’ standard modules and design for production). In addition, innovations are primarily of interest for functional reasons.

It is the task of the purchasing department to control and influence product structuring and module formation in a manner that takes market, product and function-related factors into account. At BMW, and in a similar manner at other OEMs, the modularisation approach was initially developed to permit niche models to be produced and is now being applied increasingly to volume models. In terms of value, the proportion of the modules in total outsourced parts volume can in this way exceed 50%.
A special form of modularisation is complete outside commissioning (development and/or production), which is restricted to derivatives or niche models and possibly to capacity bottlenecks occurring for limited periods. In such cases, the aim is to find suitable general contractors with core competencies that complement those of the OEM itself.

From the developmental viewpoint, the project structure of such complete commissions can be monitored relatively effectively. As well as the executive with overall responsibility on the BMW side, there are parts process managers who maintain contact with the general contractor in connection with certain assemblies, he says. For purchasing departments, the number of control relationships is considerably higher. In addition to the items to be supplied by the general contractor, those from in-house divisions need technical purchasing supervision, and there are also the activities of preceding added-value stages with a critical technological or value element. Topics such as choice of supplier, contract formulation, product and service structure, innovation control or cost management therefore need to be controlled on several levels, which increases the complexity of the tasks performed by the purchasing department considerably.

Benchmarking on in-house capabilities against the scope offered by the purchasing market in general creates an objective basis for make-or-buy decisions and for a corporate manufacturing structure that is competitive and suitable for future needs. Importing competition into the company in this way creates a regulatory factor for future investment decisions.

Sourcing Management
The development, manufacture and delivery of modules requires the supplier to possess fundamentally more resources than are needed for the processing of individual components. As a module is frequently a combination of several technologies (for example, metals, plastics and textiles or leather, plus electrics and electronics in a vehicle’s seats), know-how extending over several business or technological areas is needed, and this is normally possessed only by the larger companies, or mega suppliers. Since such companies normally pursue a market-share strategy themselves, they will tend to have little interest in supplying a customer exclusively for a lengthy period with an innovative technology if only small-to-moderate delivery volumes are involved. From the customer’s perspective there is a tendency for technical progress to be synchronised, which leads to consideration of alternative sourcing strategies for brand-relevant items,
for example, the promotion of co-operation.

Regardless of the wave of concentration that was experienced in the supply industries during the 1990s, there remain a large number of specialised, innovative companies with relatively low system/module competency, but with a leading position in a specialty area. In order to utilise the potential that they represent, the OEMs can promote virtual partnerships that combine the specific advantages of medium-sized core suppliers (including the exclusive character of a development already mentioned) with those of the mega suppliers (for example, complete, efficient supply from a single source) .

Even functions that were not typically associated with the automobile until now, particularly in the communication and safety areas, are being developed and realised with partners from the non-automotive areas of industry. This applies particularly to a large number of electronic functions. This process extends the circle of innovation and supply partners beyond the traditional limits of the automotive supply industry.

Project Control
The issue of contracts for modules and systems means sacrificing responsibilities, thus limiting direct access to elements that have a direct influence on results, for example quality, costs, compliance with deadlines and ability to deliver. To minimise the associated risks, BMW has developed methods and procedures that permit efficient project control.

Once the supplier has been chosen, BMW performs a risk estimate to make an initial determination of the intensity of supplier support required for the project. Repeated project-progress evaluation, followed by agreement on the necessary measures has the aim of ensuring that the agreed objectives are achieved. If the result is not up to the required standards, various tools are applied to an increasing degree.

Process Chain Management
BMW’s policy is not to buy in ‘black box’ products, but only transparent technology and components with the optimum economic structure. Items that are technologically critical or of high value are therefore not only controlled at the direct supplier but also along a complete added-value chain. To ensure that the process chain remains transparent, the purchasing department has developed the necessary tools, such as ‘parts-tree analysis’. This enables complex added-value chains to be broken apart and the structures of a module shown in a comprehensible way, for instance, in relation to cost-driving factors. This simplifies project navigation in purchasing considerably, namely costs, quality and time for complex items.

Optimising logistics
Modules are usually intensive in terms of the number of variants of high volume and critical in value terms; they must accordingly be manufactured near the assembly plant and just in time. As outsourced parts acquire an increasing element of modularisation, supply centres close to manufacturing plants are becoming more important. These centres permit variants to be created at a late stage, which has economic advantages, and also the delivery to the final assembly lines of the modules specified for successive orders in an accurate sequence without the need for complex intermediate storage, he says.
Against this, the economic advantages of global sourcing may have to be considered. The same applies to support tasks in connection with market accessing, for example, compliance with local content and compensation regulations and the reduction of currency exchange risks. Satisfying these conflicting objectives requires new logistic approaches and control techniques. For example, individual components that are not logistically critical will tend to be sourced globally as a package. In
contrast to this, larger modules with a greater number of variants tend to be pre-assembled close to the plant that needs them. In view of this, purchasing departments have developed a linked global concept that takes into consideration all the relevant factors such as economically viable batch sizes, factor costs and exchange-rate influences. Also taken into consideration are compensation and local content demands, and even political factors in a carefully balanced way to arrive at the optimum decision.

Supply management and the realignment of purchasing
Extended sourcing management and the more recent development of added-value management for outsourced parts with strategic product and brand relevance represent a major challenge for purchasing departments, says Becker. As additional tasks are transferred to the supply industry, planning, control and co-ordination work increases considerably. The resulting quantitative and qualitative increases in volume have to be catered for by functional enrichment and the build-up of capabilities in purchasing departments.

Modules that contain a cross-section of various technologies can only be controlled with a team oriented approach that takes all the associated technologies into account. This is an indication that the functional organisation of purchasing departments will have to be extended according to material groups and technologies.
Forward sourcing, project control and supplier development are among the main organisational units of supply management that assist the specialised operating departments of purchasing in their tasks. In project control, as a response to the trend towards the contracting out of systems, modules or complete projects, team and mentor-oriented methods have increasingly been adopted; these permit the complex use of suppliers’ modular solutions, the integration of suppliers into the process chain including the control of partnerships or feasibility analyses and cost engineering.

These tasks need to be performed with regard to coordination and as a key-player and value-engineering function. As a consequence, the personnel situation and the hierarchical arrangement of the forward sourcing function in the purchasing department and within the company as a whole has to be realigned to permit these new demands to be satisfied, he says.

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