International Supply Case

Study

BMW
 Outline
• BMW- The company
• Build-to-Order & BMW
• BMW Spartanburg Plant
– Products
– Sourcing
– Capacity
• Managing Supply
 BMW History
• Founded in 1917
• Built engines for military aircraft
• 1940’s WW2: repairs, manufactured spare parts, agricultural
equipment and bicycles
• 1950’s build motorcycles
• Then the cars…
• 1970’s: South Africa Plant
• 1992: US Plant
• 1994: Purchased Rover group (Rover, Land Rover, Mini, MG)
• 1998: Rolls Royce (2003)
• 2000: Sold Rover except Mini
 BMW Business Interests
• Automobiles
– BMW
– Mini
– Rolls Royce

• Motorcycles

• Financial services
 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
 BMW Group.
Brands and Models.

1 Series 3 Series 5 Series 7 Series

X5 6
Series

X3 Z4

Motorcycles

Source: Goudiano CSCMP 2005

BMW Group Development
and Production Network
 Berlin

Oxford

Spartanburg Leipzig

Goodwood
Regensburg

Munich

Graz Z8
(external production) Dingolfing

Rosslyn Shenyang

Source: Goudiano CSCMP 2005

Production Volume

Total:
1119.1
 Production Volume
Ford’s 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
 Challenges
• Excess capacity => Price pressures
• Customer expectations
– Personalization
– Innovation
– Service
• Cost effective factories with flexible
manufacturing abilities
• New technologies and material
• Regulations
• ….
 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?
 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.'
 Why BTO?
• Other Alternatives
– Build to Stock/Forecast
• Assign to dealers
• Sell from available stock
Built-to-Order vs. Built-to-
Forecast
Built-to-Forecast Built-to-Order
Sale from stock Customized vehicle

Production Storage Customer Customer Production Customer

– higher level of customer satisfaction due to personalization

– better inventory management
– less sales incentives
Increasing Product Complexity
• Product variety & Part complexity

– 1032 possible combinations of products at BMW

– 1017 possible combinations of BMW 7 series
– ~70 million configurations of the Ford Escape
– >240 configurations of Toyota Scion
 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

 BMW 7 Series

350 Model 175 Interior

Versions Equipment Options

500 Extra 90 Standard

Equipment Options Exterior Colors

... leading to e.g. 1017 theoretical combinations

only for the BMW 7 Series

Source: Goudiano CSCMP 2005

 Product Complexity

• A finite set of part numbers

• “Infinitely” many end products
 BTO & Product Complexity
• BTO makes it possible to
– Address tremendous product variety
– Face the challenges of managing the
variability in component demand.
 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

 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
 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)

 BTO & BMW
• BMW
• BMW’s operations in SC Plant
• BMW’s challenges in BTO
• Available levers for control
BMW USA
 BMW USA
• Z4

• X5
 BMW
• “Every customer receives his/her
personalized vehicle at a compulsory
date – at best at his/her preferred date”
Why offer
– 100% delivery punctuality flexibility?
– Flexibility for order change
 Flexibility
Equipment changes in % (accumulated)

2,5
Navigation systems
2,0

1,5 Xenon lights

1,0
Comfort seat
% adjustable electronically
0,5
Independent vehicle
0,0 heater

-0,5

-1,0
30 20 10 0
days before order freeze
Source: Goudiano CSCMP 2005
 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
 KOVP

Dealer Sales Production Sales Dealer

System System System
Optimize Planning
Ordering

Delivery
the whole Dealer orderPurchasingLogistics Production DistributionHand-over
process

Sales Processes and Production-

Sales Processes and Distribution Process
Online Ordering and Supply-
Online Ordering and Hand-over
Processes

Process Monitoring and Target Control

 KOVP
The Push-Pull Interface
Production System before KOVP
Early
Order Assignment
Start Order Assignment
Sort Sort

Bodyshell work Paint shop Assembly

Production System with KOVP

Frozen Push Late Pull
Horizon Order Assignment
Sort Start order assignment

OSM

Bodyshell work Paint shop Assembly

 Reduction of Leadtime
Flexibility for Order Change
Ordering/Scheduling Production/Distribution Process Feasibility

Before KOVP: Order freeze

13-17 WD 15 WD 28-32
WD
Hand-over to
Sales
Breakthrough target KOVP :
Supplier / Assem- Distri-
Body shell bly bution
work and
Paint shop
1 4 WD 2 WD 3 WD 10 WD

Change flexibility till 6 WD

 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
 Sourcing

• Why source from Europe

– Relationship with suppliers

– Tooling is already there
– Social responsibility issues
 Why serve global markets?
• Tooling
• Volume
• …
 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.
 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
 Manage Capacity
• From day to day

– Mix of vehicles vary

– Usage of parts vary
 Manage Capacity
• Mix of vehicles Capacity oriented
Seasonality Production planning

Source: Goudiano CSCMP 2005

 Manage Supply
• Over 6000 part numbers
• 70 % option driven
• Order changes
• 40% from Europe
 Usage
Standard
Deviation in
Average
90
Usage 18/day
Usage 32/day
60
Daily Usage

30

0
36

56
1

11
16

21

26

31

41

46

51

61

66
71

76

81

86

91

96

101

106
Day

SAME NUMBER OF CARS/DAY

 Managing Supply

Prepare
Decide Shipment Shipments
Forecast Shipments
Quantities Arrive

Demand

Demand Demand

Demand

Day 1 Day 10
Day 40
 Challenge

• Huge number of parts: Complexity

• Order Flexibility: Variability
• Long LeadTimes: Variability
Levers for managing uncertainty
• Capacity
– Capacity on Supply Infinite
– Production Capacity Constant

• Inventory
• Time
– Order due date Given/Strict
 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
 Demand Modeling
• Infinitely many end products
• Not enough data points to estimate
distribution of product demand
• Instead: Components
 Challenge

• Huge number of parts: Complexity

• Order Flexibility: Variability
• Long LeadTimes: Variability
• No shortages allowed
 Some Tools & Mechanisms
• Safety Stock
• Forecast Accuracy
• Frequency
• Global Supply process
• …
 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
Order-up-to level
Traditional basics
Reorder Point Reorder Point

Actual Lead Actual Lead

Stock on hand

Time Demand Time Demand

Order Quantity

Lead
Time

Order Actual Lead Actual Lead

placed Time Demand Time Demand

T L
Time
 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
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.
 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
 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])2D + D2 2L
• Remember: Std. Dev. in lead time demand drives safety stock
 Levers to Pull
• Std. dev in lead time demand
(T+E[L])2D + D2 2L

Reduce
Reduce Reduce Reduce Variability
Time Lead Variability in Lead
between Time in Demand Time
orders
 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