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International Supply Case Study BMW Slide 2 Outline BMW- The company Build-to-Order & BMW BMW Spartanburg Plant Products Sourcing Capacity Managing Supply Slide 3 BMW History Founded in 1917 Built engines for military aircraft 1940s WW2: repairs, manufactured spare parts, agricultural equipment and bicycles 1950s build motorcycles Then the cars 1970s: South Africa Plant 1992: US Plant 1994: Purchased Rover group (Rover, Land Rover, Mini, MG) 1998: Rolls Royce (2003) 2000: Sold Rover except Mini Slide 4 BMW Business Interests Automobiles BMW Mini Rolls Royce Motorcycles Financial services Slide 5 BMW The BMW Group is the only manufacturer of automobiles and motorcycles worldwide that concentrates entirely on premium standards and outstanding quality for all its brands and across all relevant segments. Premium sector of the international automobile market Slide 6 Z4 X5 X3 6 Series BMW Group. Brands and Models. Motorcycles 1 Series3 Series5 Series7 Series Source: Goudiano CSCMP 2005 Slide 7 BMW Group Development and Production Network Slide 8 Z8 Dingolfing Munich Leipzig Regensburg Spartanburg Rosslyn Graz (external production) Berlin Oxford Goodwood Shenyang Source: Goudiano CSCMP 2005 Slide 9 Production Volume Total: 1119.1 Slide 10 Production Volume Fords Worldwide vehicle unit sales of cars and trucks in 2004 (in thousands): The Americas 3,915 Ford Europe and PAG 2,476 Ford Asia Pacific and Africa 407 Total 6,798 Slide 11 Challenges Excess capacity => Price pressures Customer expectations Personalization Innovation Service Cost effective factories with flexible manufacturing abilities New technologies and material Regulations . Slide 12 Build to Order Convert orders to products No finished goods inventory Build-to-Order is the capability to quickly build standard or mass- customized products upon receipt of spontaneous orders without forecasts, inventory, or purchasing delays. (D.M. Anderson) Demand pulls production WHY BTO? Slide 13 Why BTO? LEAN!!! 'Lean production is aimed at the elimination of waste in every area of production including customer relations, product design, supplier networks and factory management. Its goal is to incorporate less human effort, less inventory, less time to develop products, and less space to become highly responsive to customer demand while producing top quality products in the most efficient and economical manner possible.' Slide 14 Why BTO? Other Alternatives Build to Stock/Forecast Assign to dealers Sell from available stock Slide 15 Built-to-OrderBuilt-to-Forecast Sale from stock Customized vehicle Built-to-Order vs. Built-to- Forecast higher level of customer satisfaction due to personalization better inventory management less sales incentives Customer StorageProduction Customer Slide 16 Increasing Product Complexity Product variety & Part complexity 10 32 possible combinations of products at BMW 10 17 possible combinations of BMW 7 series ~70 million configurations of the Ford Escape >2 40 configurations of Toyota Scion Slide 17 Ford Escape 5 models (XLS manual, XLS automatic, XLT automatic, XLT sport, Limited automatic) 2 drive options (Front-wheel drive or four-wheel drive) 2 engine sizes (2.3L or 3.0L) 9 exterior color options (Dark Shadow Grey, Titanium Green, Redfire, Blazing Copper, Sonic Blue, Dark Stone, Black, Silver, Oxford White) 3 interior colors (Black, Flint, Pebble) 2 transmission options (4-speed, 5-speed) 4 wheel options (15 aluminum, 15 styled, 16 aluminum, 16 Bright Machined aluminum 2 choices of tires (BSW or OWL) 4 options of electronics (AM/FM Single CD with clock, AM/FM 6-CD, AM/FM Single-CD Cassette, Audiophile 6-CD) 4 options of seats (Cloth, Premium cloth, leather trimmed, premium leather) 5 special package options (Cargo convenience, convenience, leather comfort, safety, towing) representing 32 different possibilities 4 different upgrades (Spare tire, moon roof, roof rack and side step) representing 16 further options. These options lead to 70 million ~ 5x2x2x9x3x2x4x2x4x4x32x16 Slide 18 BMW 7 Series 350 Model Versions... leading to e.g. 10 17 theoretical combinations only for the BMW 7 Series 175 Interior Equipment Options Source: Goudiano CSCMP 2005 500 Extra Equipment Options 90 Standard Exterior Colors Slide 19 Product Complexity A finite set of part numbers Infinitely many end products Slide 20 BTO & Product Complexity BTO makes it possible to Address tremendous product variety Face the challenges of managing the variability in component demand. Slide 21 Savings through BTO In the U.S. Potential savings through BTO~ $1500/car* Average incentives per car sold ~$1900 in 2002* *Miemczyk and Holweg J. Bus. Logistics, 2004 Slide 22 Obstacles/ Requirements Inability to supply customized vehicles within acceptable timeframes Avg. Leadtime for customized vehicles: 6-10 weeks!!! Short OTD Process/Product/Volume flexibility Flexibility from suppliers Flexibility from logistics operators Slide 23 Current BTO Levels 1999: % BTO Avg. New Vehicle stock in days U.S.: ~ 5%60-90 days U.K.: ~33%64 days Europe: ~48%55 days Japan (Toyota): ~60%20 days Source: Miemczyk and Holweg (2004) Slide 24 BTO & BMW BMW BMWs operations in SC Plant BMWs challenges in BTO Available levers for control Slide 25 BMW USA Slide 26 Z4 X5 Slide 27 BMW Every customer receives his/her personalized vehicle at a compulsory date at best at his/her preferred date 100% delivery punctuality Flexibility for order change Why offer flexibility? Slide 28 Equipment changes in % (accumulated) Flexibility % Source: Goudiano CSCMP 2005 Slide 29 BMW USA ~140,000 vehicles in 2004. KOVP (Customer-oriented production and sales) Over 6000 part numbers for X5 70% are option driven Flexibility for order change 40% of parts from Europe Slide 30 KOVP Process Monitoring and Target Control Distribution Process and Hand-over Sales Processes and Online Ordering Production- and Supply- Processes Dealer Sales System Production System Sales System Dealer Planning Dealer orderPurchasingLogisticsProductionDistributionHand-over Ordering Delivery Sales Processes and Online Ordering Optimize the whole process Slide 31 KOVP The Push-Pull Interface Production System before KOVP Start Order Assignment Sort Early Order Assignment Bodyshell workPaint shop Assembly Production System with KOVP Frozen Horizon Sort Late Order Assignment Start order assignment OSM Bodyshell workPaint shop Assembly Push Pull Slide 32 Flexibility for Order Change Reduction of Leadtime Ordering/SchedulingProduction/Distribution 15 WD 28-32 WD 13-17 WD Before KOVP: Order freeze Process Feasibility Supplier / Body shell work and Paint shop Change flexibility till 6 WD Distri- bution Assem -bly Hand-over to Sales 3 WD 10 WD 12 WD4 WD Breakthrough target KOVP : Slide 33 BMW USA ~140,000 vehicles in 2004. KOVP (Customer-oriented production and sales) Over 6000 part numbers for X5 70% are option driven Flexibility for order change 40% of parts from Europe Slide 34 Sourcing Why source from Europe Relationship with suppliers Tooling is already there Social responsibility issues Slide 35 Why serve global markets? Tooling Volume Slide 36 BMW Sourcing Wackersdorf Receive, Sort, Package Handles >14,000 part numbers from other BMW plants and over 500 European suppliers. Receives ~ 160 truckloads of parts per day Ships ~ 75- 80 containers per day to the BMW assembly plants in Rosslyn, South Africa, Spartanburg, South Carolina and Shenyang, China. Slide 37 BMW: Capacity Capacity is a major investment Labor is highly skilled/ organized Production set at takt time A vehicle every 50 seconds Capacity adjustments through adjustments to takt time, adding/reducing shifts, shutdowns Same number of cars/day Slide 38 Manage Capacity From day to day Mix of vehicles vary Usage of parts vary Slide 39 Manage Capacity Mix of vehicles Capacity oriented Production planning Seasonality Source: Goudiano CSCMP 2005 Slide 40 Manage Supply Over 6000 part numbers 70 % option driven Order changes 40% from Europe Slide 41 Usage Average Usage 32/day Standard Deviation in Usage 18/day SAME NUMBER OF CARS/DAY Slide 42 Managing Supply Forecast Shipments Arrive Decide Shipment Quantities Demand Day 1 Day 10 Day 40 Demand Prepare Shipments Slide 43 Challenge Huge number of parts: Complexity Order Flexibility: Variability Long LeadTimes: Variability Slide 44 Levers for managing uncertainty Capacity Capacity on Supply Production Capacity Inventory Time Order due date Infinite Constant Given/Strict Slide 45 Manage Inventory Infinitely many end products from finite number of parts Stochastic demand Variable long leadtimes No shortages allowed: Production in a predetermined sequence Expedite Slide 46 Demand Modeling Infinitely many end products Not enough data points to estimate distribution of product demand Instead: Components Slide 47 Challenge Huge number of parts: Complexity Order Flexibility: Variability Long LeadTimes: Variability No shortages allowed Slide 48 Some Tools & Mechanisms Safety Stock Forecast Accuracy Frequency Global Supply process Slide 49 Safety Stock Protection against variability Variability in demand and Variability in lead time Typically described as days of supply Should be described as standard deviations in lead time demand Slide 50 Traditional basics Time Stock on hand Reorder Point Order placed Lead Time Reorder Point Actual Lead Time Demand Order Quantity Actual Lead Time Demand Order-up-to level TL Slide 51 Safety Stock Basics Lead time demand N( , ) Safety stock levels Choose z from N(0,1) to get correct probability that lead time demand exceeds z, Safety stock is z Slide 52 Safety Stock in Periodic Review Probability of stock out is the probability demand in T+L exceed the order up to level, S Set a time unit, e.g., days T = Time between orders (fixed) L = Lead time, mean E[L], std dev L Demand per time unit has mean D, std dev D Assume demands in different periods are independent Let D denote the standard deviation in demand per unit time Let L denote the standard deviation in the lead time. Slide 53 Only Variability in Demand If Lead Times are reliable Average Lead Time Demand (T+L) * D Standard Deviation in lead time demand (T+L) D Slide 54 Lead Time Variability If Lead Times are variable D = Average (daily) demand D = Std. Dev. in (daily) demand L = Average lead time (days) L = Std. Dev. in lead time (days) Average lead time demand D(T+E[L]) Std. Dev. in lead time demand (T+E[L]) 2 D + D 2 2 L Remember: Std. Dev. in lead time demand drives safety stock Slide 55 Levers to Pull Std. dev in lead time demand (T+E[L]) 2 D + D 2 2 L Reduce Lead Time Reduce Variability in Lead Time Reduce Variability in Demand Reduce Time between orders Slide 56 Safety Stock Protection against variability Variability in demand and Variability in lead time Typically described as days of supply Should be described as standard deviations in lead time demand Example: BMW safety stock For axles only protects against lead time variability For option parts protects against usage variability too