SMART (car) and smart logistics

A case study in designing and managing an innovative de-integrated supply chain

Authors:

Prof. dr. Remko I. van Hoek, Cranfield School of Management, UK. University of Ghent, Belgium, and
Erasmus University Rotterdam, the Netherlands

Drs. Harm A.M. Weken, Erasmus University Rotterdam, the Netherlands


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SMART (car) and smart logistics

A case study in designing and managing an innovative de-integrated supply chain


Authors:

Prof. dr. Remko I. van Hoek, Cranfield School of Management, UK. University of Ghent, Belgium, and
Erasmus University Rotterdam, the Netherlands

Drs. Harm A.M. Weken, Erasmus University Rotterdam, the Netherlands






This case study is based on research carried out by FIER since 1997. FIER is a research institute of the
Erasmus University Rotterdam. Both authors belong to the board of directors of this institute.

By means of in-depth interviews with management of MCC (purchasing department, logistics department
and sales organisations) and desk-research of company data as well as public information, the organisation
and processes of MCC have been described. As the systems introduced by MCC are new to the automotive
industry, the evolution of the Smart Supply Chain since the initial planning has been followed, as well as its
limitations, its successes and the options for further improvement. It has been agreed with MCC, that FIER
will continue this study with MCC on a long-term basis, in order to analyse the evolution of this highly
interesting pilot-project on mass-customisation. The lessons that can be learned from this pilot will be
relevant to automotive industry and beyond.

Correspondence:
E-mail: fier@holding.eur.nl
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ABSTRACT

This case study presents the situation of a new car introduced to the European market. The car design
and the brand name (Smart, a two-seater smaller than FIAT 500), the company (MCC owned by Daimler-
Benz) and the supply chain are completely new in the market and go beyond such existing practices as
supplier involvement, outsourcing and modular production in the industry. Modules such as complete front
or rear ends are pre-assembled on site and suppliers are involved in design and final assembly through co-
ownership of the site, co-design and some major share in the manufacturing activities. Given the
untraditional approach, MCC executives face some fundamental challenges including how to manage and
control a supply chain in which MCC only adds some 15% of the operational value added. MCC can be seen
as a pilot for implementing mass-customisation in an automotive supply chain. The case study is therefore of
relevance to academics and (automotive) practitioners.


INTRODUCTION

At the beginning of October 1998 most of the parking places in downtown Amsterdam were filled
with one or two cars. The variety in colours and the remarkable design of the two-seater car attracted great
attention. The message was clear: Smart has come to town and it is here to revolutionise the concept of car
production, logistics and marketing.

Micro Compact Car AG (MCC), a wholly owned subsidiary of Daimler-Benz (formerly a joint
venture of Daimler-Benz and Swatch), is the company behind Smart. Together these manufacturers have
developed what they call a new mobility concept that relieves the heavy environmental pressure caused by
present traffic while still ensuring continuous individual mobility. Overlooking the period preceding the
introduction of the car, MCC management could look back on many peaks: a completely new brand had
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been developed; pilot marketing of brand and product concept had raised high levels of customer awareness
and interest in European markets; a production site of 68 ha. had been developed and constructed from
scratch, a dealer and marketing organisation had been developed and was ready for product launch.
Moreover, the supply-chain concept developed went beyond existing practices in the automotive industry on
a number of points: Customers can contribute to the configuration of products; lead-times for cars are
counted in weeks; suppliers have co-invested in the production location and have taken over shares of
primary assembly beyond existing levels; the added value of MCC during production is approximately only a
remaining 10% of the production cost-price; and suppliers and MCC are integrated in a sense that the
premises of the suppliers adjoin the assembly hall of MCC. Overlooking the development and installation of
the supply chain, all of which had been done since the first feasibility study of Mercedes in 1993 and the
foundation of MCC in 1994, the management team realised it was facing a new set of challenges. How to
manage, co-ordinate control and further develop such a supply chain when operational? This question is not
only of relevance to MCC but to the Daimler-Benz Corporation as a whole, which has earmarked Smart as a
strategic learning project. Moreover, the concept being brought to practice by MCC is generally accepted by
leading car-manufacturers as of key importance to future industry developments. Manufacturers and
suppliers therefore monitor the successes and failures of MCC, as the results will by and large mark the
future organisation of their companies and of the supply chain.


THE CAR

Reduce to the max: Size, environmental impact and product complexity
Increase to the max: Perceived customer choice

The Smart City Coupe is a two-seater car measuring 2.5 metres in length, 1 metre 51 in width and 1
metre 53 in height, mainly developed for in-city use. A safe and environment friendly car that despite its
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minimum size combines driver comfort, safety and customer choice. According to MCC the car is an answer
to the mobility problems in urban areas. To minimise the burden on the environment caused by individual
mobility was a key target of MCC. By using exchangeable body parts the life cycle of the car can be
extended and its dismantling creates less pollution. Moreover the car and its components are fully recyclable
after use. Its size also makes it friendly to the environment, as it needs a relatively small and fuel-efficient
engine and can be parked two to one slot.

At present MCC and its supply chain and dealer network are completely concentrated on this one
model. The Smart is based on a rigid integral body frame / safety cell (called TRIDION) to which such
flexible body panels as doors, the front and rear panels and (the optional glass) roof are attached. The final
buyer can customise the product by combining two colours of the frame (black and silver) with the various
colours of the body panels. This way the customer is given the impression of a high level of customisation,
although product variation in the production is kept to a minimum. For the future, more body variants (such
as a convertible) and even other models are foreseen.

By the same token, one basic 600cc, 3-cylinder engine is available in two tuning levels (45 and 55
horsepower). In the near future a diesel version is to be added to the programme. The engines can be
combined with either a half-automatic transmission (needing no clutching) or a full-automatic transmission,
both based on the same six-speed sequential gearbox. Herewith combining product standardisation and
customisation.

The same principle holds for the three variants made available to the client (Smart & Pure, Smart &
Pulse and a Smart & Passion). The variations differ in interior trim, body colours, comfort features and
engine power. The modular product layout enables MCC to supply customer choice with minimum product-
complexity. As most of the features are easy to add, both at the assembly line and during the life span of the
car, variation in customer demand hardly interferes with production processes. For example, the interior trim
(fabric and colour) consists of exchangeable panels, easy to mount at the assembly line and even easy to be
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exchanged by the owner afterwards. Moreover, features that might disturb production (such as ABS, electric
windows etc), if made optional, are integrated as standards in the car. The after sales extras include a wide
range of easy to attach peripherals such as stereo, children's seats (replacing, ski carrier, music etc).

On top of the above-mentioned customisation, the modular concept enables the customer completely
to renew and upgrade the product during its lifetime. Product features can be added and body parts (colours!)
can be changed in the Smart-centre. Moreover, the modular concept makes it possible for the designers and
engineers of MCC and its suppliers quickly to develop and implement minor and major product redesigns.
For example, within six months after the introduction of the car, the first extension of the product offering
was already introduced. Two additional colours (on top of the various basic ones) were introduced. The
gimmick here is that a form of cubic printing is used. This technique uses not only a basic colour but adds a
colour film on top of it (orange and green in this case) in a random pattern (like the spots on a cow), making
each panel unique. That introduction is an important indicator of future policies. The input of Swatch, the
Swiss watchmaker, in the concept development is clearly present here. Within the existing product
architecture of easy-to-assemble products, new options and features are introduced at a rapid pace. This adds
to the fashionable character of the product: constant change and improvement.

In the more distant future, the modular concept permits engineers to renew the car completely or
extend the product line within limited time span, by changing the form of body panels and interior
components while keeping the basis of the car (the Tridion safety cell) unchanged. In sum, through smart
product development, the engineers of MCC have achieved (the perceived) customisation, while at the same
time, limiting product variation and production complexity.







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SELLING THE CONCEPT

Reduce to the max: sales and distribution layers, cost and lead-time

The Smart is launched into an automotive market, which at least in the European target markets is
stagnating, and where competition in existing channels is rapidly intensifying. To lend leverage to the
remarkable design of the product, the marketing organisation is geared not only to market the car as a new
car-concept but also to create new markets, using unconventional channels and sales processes.

The unique selling points of the car are technology, design, customisation, channels, safety, space
(small size large interior) and environment. Technology relates to such features as the tip-touch gearbox,
features that differentiate the product from the smaller cars of other brands that are positioned as basic and
low-cost. Design (form and colours) reveal the Swatch input in the concept development and give the car a
trendy and different look. Customisation is actively included in the sales process by making sales-channels
establish a dialogue with customers and selling on a consultative rather than a move-the-metal basis. In
addition to the initial customisation, the product's adjustment during its life cycle strengthens the relation
with the customer. While customisation is not new in the automotive market, the combination with a two to
three week lead time (VW now has a lead time of up to six months for some models), which is based on
production flexibility (based on postponement) and direct distribution, as opposed to multi-layer distribution,
certainly is. Space relates to the smallness of the car, allowing it to reduce congestion on roads and in
parking areas. Environment, furthermore, refers to recycling and lower emission rates of the car.

After the launch of the product, the target segment of dinkies turned out to be too narrow, as the
Smart proved attractive to senior citizens and students too. The target markets were redefined to include
customers that are young or young in mind and fashion-conscious. The car has been launched first in the
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European markets of Austria, Belgium, France, Germany, Italy, Luxembourg, the Netherlands, Spain and
Switzerland. The sales network in these countries consists of a total of 110 Smart centres, presented as life-
style centres (to which selected Mercedes dealers will be added). They are located in highly frequented
places in urbanised areas such as shopping centres on the outskirts of cities. In addition to the Smart centres,
satellites are used. The function of the satellites is to increase product exposure and market penetration by
adding a sub-channel. Satellites display one or two cars. Sales advisors in the satellites do not take orders;
they do prepare product proposals but their main function is to attract prospective customers to the nearest
Smart centre. In Germany a satellite centre is located in a McDonalds restaurant and in future, satellites may
also work through supermarkets, department stores and as shops-in-shops.

Almost all the sales outlets will have a distinctive Smart Tower: a multi-level building serving as
showroom and storage facility. In such a tower each dealer has up to 27 cars in stock to show the product to
the customer and sell cars from stock. The loading and unloading as well as the exchange of stock in these
Smart Centres are fully automated. The height of the Smart tower, the multi-level storage and its glass
exterior make the Smart centre and its products highly visible to people passing by. Moreover, it makes
efficient use of the scarce available square metres in urban areas.

Cars are mainly built to the customers' orders, which the plant in Hambach receives from the Smart
Centres. For the purpose of display, test rides, promotion and for take-away sales, Smart Centres do have
cars in stock. And if needed the car can be customised at the centre according to the client's specification, by
the exchange of such components as body parts. Some further final assembling tasks, like adding special
features or light final assembly, can be performed at the centres. Production postponement is thus a major
element in customising the product to client's needs in the centres, but also in the factory.

The centres do get strong support from the Smart organisation, in a formula similar to franchise
organisations. The single-stage sales concept allows the Smart centres to procure their cars - via the sales
logistics department - directly from the production plant in Hambach instead of through a dealer or import
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organisations. This concept differs much from the tiered sales structure in the traditional automotive industry
in which national sales organisations and importers add another layer between the outlets and the
manufacturer. Through this concept Smart aims at minimising ordering and delivery time and reducing cost.
The dealer organisations use multi-media systems to enable clients to engineer their car in the showroom
and for forwarding orders directly to the MCC headquarters. This allows production planning to be based on
point-of-sale (POS) data. The centres are connected to Hambach by satellite.

Furthermore, MCC is experimenting with having customers specify the desired car design with the
help of an interactive car-configuration tool, available at the centres, the satellite dealers and on the Internet.
Entering the centre, the customer triggers the electronic eye of the tool, which starts a presentation; in future
he can also visit the MCCs homepage to that effect. The customer is invited to answer 15 simple questions
(such as, do you prefer luxury, do you value music in your car) on the touch-screen and the computer
develops a product proposal based upon these questions. At the next step, the customer can alter the product
with options, advised by a sales advisor and if interested enter his personal particulars to start the ordering
process. For the near future it is foreseen that in going through this process the customer really specifies a
bill of materials (BOM) at the module level. This BOM could (eventually) be used directly for production
planning and for ordering from suppliers once the sale is made.

The sales advisor can also use the interaction or dialogue (instead of a one-way sales pitch!) to
collect further information on the prospective client to be stored in the centre's customer database. The
database includes standard fields for degree of interest in the product, as well as, social and demographic
items such as occupation and hobbies. Open fields in the database can be used to enter information beyond
traditional marketing variables such as personal remarks, feedback, questions etc. By integrating databases
from the various centres, MCC can data-mine to gain insight into markets and customer preferences. Even
more importantly, insight into customer preferences within the existing product range, questions and
enquiries beyond existing products enable MCC to make use of the information in product innovation and
product-line extension.
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To attract the target segment, the centres use glossy sales brochures to sell the concept of
responsiveness, environmental awareness and a trendy life-style. The idea is to feed the customers'
perception of buying a product tailored to his specific needs, a design to fit. An automobile bought not as a
fixed capital investment, but a car fun to buy, fun to have and fun to drive.


Smart-VILLE

Reduce to the max: Investment and start-up time, production process time

At the launch of the product in eight selected European markets, a total of DEM 830 million had
been invested in developing and building a factory. The full capacity of the plant is 200,000 vehicles a year,
or 750 a day, a volume that is targeted for the year 2000. The factory located in Hambach, France, covers 68
hectares with 20 production buildings. A test site was built in an 18-month period. The facility is referred to
as the Smart-ville. Suppliers and partners of MCC occupy a number of the on-site buildings and in fact the
investment in the factory development was shared with suppliers. MCC invested approximately DEM 445
million, its suppliers and partners about DEM 385 million. Suppliers in machinery and facilities in the
proximity of the Hambach location invested a further DEM 300 million. Employment at the factory started
with 1,500 (only 650 of which are on MCCs payroll) and is expected to rise to 2,200 over the first years. On
top of the investment in the factory, MCC invested DEM 700 million in the development of the car and in
machinery and DEM 550 million in establishing a dealer and distribution organisation. Total investment
before the launch of the car reached DEM 2.4 billion.

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Right at the start of the production, the management of MCC took up the question how to expand
capacity in the near future. The whole concept has been developed to enable MCC to expand capacity by
replicating the site, its layout and its supply structure anywhere in the world, wherever the market is.

Flexibility, just-in-time operation and short supply lead-times were goals for the production and
plant layout. According to MCC, this has resulted in a reduction of transport and logistic cost to the absolute
minimum. Moreover, the final assembly of the car takes just 4 hours, which is far less than in any other
factory in the world. It is impressive is to see how easy the modules and parts can be combined to a car.
Design for assembly has been taken beyond existing levels. The high performance levels of the final
assembly facilities could only be attained through innovative outsourcing concepts to be described in the
next section.


THE SUPPLY CHAIN STRUCTURE

Reduce to the max: Inflexibility, cost and lead-time
Increase to the max: Responsiveness, innovativeness and quality

Before the supply chain is detailed, it is important to understand the product structure of MCC and
how the product is divided into different (outsourced) modules. It is impressive to see how MCC has
succeeded in limiting the number of components supplied by direct suppliers. The modular concept, as well
as, technological innovations has enabled MCC to produce a car from no more than 40 to 50 modules and
parts. The table below (table 1) specifies these modules and parts in terms of integrated (in-house) and non-
integrated supplies.


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Table 1: Modules and parts sourced by MCC

Components sourced out by MCC
Non integrated suppliers Integrated direct
suppliers Ordered according to
production plan
Parts and components on-the-
shelve (TuF)
After sales parts,
available at
Smart Centre
Front Module Seats (including
optional side
airbags)
Rear Axle Seat belts Brake System Cassette-, CD-
Box
Body panels Wheel system Front Axle Locking System Drive shaft Cup holder

Paint & Body
protection
Exhaust-system Under shield Carpet ABS cable
system
RPM Revolution
Counter
Rear module drive-
line (incl. engine)
Transmission Cooling
system
Rear Light Relays box Audio system

Safety body cell Head lights Side Direction
Indicator
Driver pedal
module
Dashboard/ cockpit
including airbags
Engine Sunshade for
Glass roof
Fuel tank flap
Doors Front window

Aerial (antenna) Fog lights
Cubic Printing Glass roof Upper Interior
trim
Rear window
Roof-module SE-Drive Unit
Fuel Tanks
Centre Console;
Luggage box
Wheel arch
and sill
panels
Crash
Management
System
10- 15 other
components not
specified
Etceteras

The Smart is based on an integral body-frame (called TRIDION) to which modules are attached.
Apart from the body, the car consists of several main modules, namely: the rear module including the
driveline, the doors and the cockpit, each containing sub-modules and components. The modules are
supplied in sequence for final assembly, by a small number of first tier suppliers, of who seven are fully
integrated in the final assembly site. Modules are bought by the MCC only as they are needed in the final
assembly process. For example, a complete rear module, including among other things: rear axles,
transmission, suspension and engine, is pre-assembled by one supplier who starts assembling the module
only upon demand by MCC and not earlier than one and half hour before the module is needed on the final
assembly line. The same is true of the doors (3 hours lead-time) and the dashboard system (1-hour lead-
time).

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To ensure a smooth flow of goods within the plant, the car is moved along the work stations of the
assembly line, which is laid out in the form of a cross (see figure 1).


Arguments for this plant layout were to permit high-frequency deliveries at a large number of off-
loading ramps, while keeping transport to a minimum. Sub-sections can also work independently to avoid
system disruptions in case of malfunction at one particular point along the assembly line. Furthermore
integrated suppliers are able to supply their finished products directly to the final assembly line or on a
conveyor system.

In the Smart-ville the manufacturing process starts with Magna assembling the body (TRIDION)
in white. This process is highly automated and standardised; Magna employs 130 robots. In fact, this is one
of the very few automated process steps. Operators mostly perform subsequent steps. The finished body in
white is then passed on to the next partner in the adjoining, connected facility. In that step Surtema (an
Eisenmann subsidiary) primes and paints the body using paint tunnels for each of the two colours (black and
silver/grey). The process is based at powder-coating; it has been developed especially for Smart and is
environment friendly. After painting, the body is transferred by conveyor belt to the beginning of the cross-
shaped assembly line. Starting at the top of the cross, VDO assembles cockpits and mounts them to the body.
Figure 1: MCC basic plant lay-out
Supplier 1 Supplier 2
Supplier 3 Supplier 4
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In the three other sections of the cross MCC goes on assembling the car, starting with the mechanics and
chassis, followed by external and internal trim assembly, inspection and testing. The rear module (including
the drive train) is pre-assembled by Krupp Hoesch and undergoes several additional assembly tasks by
workers of MCC on a small island adjacent to the cross. Following assembly, the rear module is brought to
the line on a telescopic carrier that raises it to shoulder height, enabling operators to guide it into the car.

During the assembly process, modules and components are delivered line-side (within 10 metres
from the workstation) on a just-in-time basis. For example, complete front-end and rear-end modules are
delivered by Bosch and Krupp, respectively. Dynamit Nobel delivers the plastic outer body panels moulded
on site. The door panels are delivered to Magna Door Systems who pre-assembles the panels to complete
doors, before delivering them line-side. The seven integrated suppliers are responsible for the supply of
70-80% of the volume and 30-40% of the value of the finished product. In addition, 16 non-integrated
suppliers deliver sub-modules and parts to both MCC and the integrated suppliers. These non-integrated
suppliers add about another 20% of the volume to the car. Their supplies include seats, wheels, windows, etc.
and are delivered to the relevant docking station of the assembly line, at a maximum distance of 10 metres.
The remaining 10% of the volume consist of standard and small parts not linked to a particular module,
which are stored in an on-site warehouse, operated by a third party.

MCC has selected suppliers to integrate at the site and suppliers that could supply from a distant
location by a straightforward process. Logistic management of MCC made a calculation based on the
frequency at which a module was used, and its size. The outcome of this exercise showed the volume of the
various flows of components. Apart from special cases in which the characteristics of the manufacturing
process did not allow on-site assembly (as with engines); the components causing the largest transport flows
were integrated in the premises of MCC. Table 2 lists the integrated and non-integrated suppliers of MCC.



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Table 2: Selection of MCC suppliers

Integrated module suppliers
1 Bosch Front module and head-lights
2 Dynamit Nobel Synthetic body-panels / Wheel arch and sill panels
3 Surtema Paint and surface protection
4 Cubic Cubic Printing
5 Krupp Hoesch Rear module (Rear wheel suspension, integration of engine etc.)
6 Magna / Magna Doors System Safety body cell / doors
7 VDO Dashboard/cockpit, battery and wiring harnesses
Non integrated main-suppliers
1 Behr Cooling system
2 Bertrand Faure Seats
3 Continental Tyres
4 Eberspcher Exhaust-system
5 Getrag Transmission
6 Magneti Marelli Dynamo/starter/relays
7 DaimlerChrysler Engine / front & rear axles / Drive shaft
8 Splintex Windows & glass roof
9 Meritor Roof-module, sun shade for glass roof
10 Bosch Control-/stability system
11 Solvay Fuel tanks
12 Stankiewicz Carpet
13 Simoldes Centre console; Luggage boxes
14 Rieter Under-shield
15 Johnson Controls Interiors Upper interior trim
16 Lemfrder SE-drive unit
(17*) Dynamit Nobel Crash Management System
(18*) Bosch Head lights / Brake systems
TuF suppliers = Non-integrated suppliers of off the shelve products
10 (16*) Various suppliers Ranging from among others heater-airco systems, driver pedal
systems, side airbag to fog-lights
(Suppliers marked with * supply in multiple supply chain setting; they are for example active both as integrated and as
non-integrated supplier.)



The system also differs from traditional supply chains with respect to the activities that are
outsourced. Even activities, traditionally considered core activities of the OEM, such as the pressing of body
parts and painting and even the co-ordination of internal logistics, are no longer performed by MCC. Not
only do suppliers closely participate in the final assembly of the car, they are also deeply involved in the
development, and planning of the product. What can be said about the outsourcing of components and
modules manufacturing is equally true of supporting services. The whole information system supporting the
processes of MCC in manufacturing, logistics and distribution is outsourced to third party service provider,
who owns and exploits the hardware and the software, as a facility-management arrangement. Panopa
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controls lorry traffic on site, which is important because a hundred lorry deliveries will be made during each
shift once full capacity is reached. TNT logistics manages a spare part facility and Rhenus operates a storage
facility for small standard components and parts. These parts are replenished to the line by a kanban pull
system, operated by Rhenus. MTL finally, ships finished cars to the dealers.


MANUFACTURING & SUPPLY CHAIN LOGISTICS

Reduce to the max: Order delivery lead-time, redundancy in stock
Increase to the max: Flexibility



To understand the production planning process of MCC, it is needed to learn about the role of
transportation planning, as it fulfils a major role in the production sequence. The concept rests on three main
elements: a) production output is augmented to be shipped instantly to the dealers; b) apart from one or two
exemptions - the factory ships cars directly to the Smart-centres rather than through importers or central
dealer organisations; and c) shipments are (preferably) full lorry loads per dealer, so that production
proceeds in a sequence of batches of planned dealer shipments. As shipments are thus consolidated by
individual Smart-centre, lorries do not get underway until 12 cars have been produced and loaded. A short
delay in physical distribution may ensue, and bureaucratic procedures such as the compulsory and time-
consuming car registration add some slack to the time delay, but on the other hand postponement and direct-
distribution techniques speed up the delivery process significantly. Summarised: Dealer orders are
combined to plan production, a procedure that lowers costs in the marketing channel and reduces lead-time
as well as costs.

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Despite the close partner relations and the application of postponement (about which more in the
next sections), the supply chain is not without stocks. As pointed out, there are stocks of standard
components and parts. Integrated suppliers also carry stocks; Magna, for example, maintains a stock of on
average 400 body frames. The obligation of MCC to buy modules from the three-month projection can also
lead to storage. Furthermore, MCC does not use the practice of on-sequence supply generally accepted in the
automotive industry. Many OEMs generate not only daily orders but also orders modules a couple of hours
before actual delivery is needed. Suppliers assemble modules within that broadcasting-horizon and supply
on sequence.


SUPPLIER RELATIONS

Reduce to the max: Transactional behaviour and waste in interaction
Increase to the max: Trust, motivation and sharing of responsibilities

The plant in Hambach is in every sense a greenfield. The car was novel, supplier relations were non-
existent, the plant is completely new and even the organisation and its staff had been built from scratch.
Therefore, the building of supplier relations was not troubled with existent relations. Following the first
crude drawings of the car and its modules, several suppliers were invited to send in competitive bids for
product concepts. The concept competition (Konzept-Wettbewerb) resulted in proposals of suppliers with
respect to, among other things, a) the modules in terms of functions, materials, lay-out, design etc., b)
suggested production technologies, processes and location as well as logistic systems, and c) target cost.

In developing the supply chain, a detailed supply-chain map was developed including descriptions of
(sub-) processes involved, and establishing which company is solely, partially or informally responsible for
each of the 140 assembly activities in the process. To develop the modules, project teams consisting of MCC
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and selected suppliers worked together and reported to an MCC team coach. The supplier involvement in
design was structured within the general product architecture specified by MCC.

Contracts with suppliers are intended to last the entire life cycle of the product and are based upon
single sourced modules from one supplier only. In line with that principle, until now only with one supplier
was the contract ended because it could not meet quality standards over a period of time. To track the
performance of a supplier, MCC recently implemented a system for performance measurement, reporting on
a monthly basis. On the basis of the outcome of this measurement the supplier can achieve an A to C status
(Comparable to VDA-standards). Even though the status does not have financial consequence, it does give
the suppliers an incentive.

How much stress is put on mutual dependency between MCC and its suppliers and on the sharing of
goals is visible even in the procedures of financial compensation. Except for inexpensive and standard parts,
MCC pays its supplies only when a car is complete with the module built in. This means that a working stock
and scrap are part of the suppliers' working capital. Suppliers who have co-invested in Smart-ville charge
MCC for supplies and machine write-offs. At the end of the contract/life cycle, MCC will formally own the
machinery. Should the contract be terminated then MCC will compensate the supplier in one go. If the
production volume agreed upon is not met, the suppliers are compensated as well; moreover, if the plan is
exceeded, the price of the goods bought will be lowered.

The initial rationale for involving suppliers was in fact a financial one. At the time the project was
proposed to the Daimler board, the automotive industry had reached the stage of saturation and a (temporary)
stagnating demand, and many automotive companies busy restructuring their programmes (Daimler merged
with Chrysler shortly after). The go-ahead sign for the project was based on the relatively low investment
costs for Daimler, given the large share of investment contributed by suppliers.

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To facilitate communication and the exchange of idea among staff and partners during operation, a
central area of the factory is designed as a meeting room. Its function as market place is reinforced by its
use for the open discussion of shortcomings or problems and for quality-management and quality-
improvement meetings. Furthermore, standardised performance measures for each sub-section of the process
are displayed electronically at the market place, for everyone to see. Measures include assembly-line
stoppage time, on-time delivery, product reclamation and scrap, productivity targets and trends, as well as
qualifications of teams/sections along the line. The open architecture of the factory makes quality problems
and line-stops clearly visible to clerical employees as well as to assembly workers. Cars that need to be fixed
because of quality problems or missing components are parked at the market place.


GEOGRAPHIC SOURCING STRATEGY

Reduce to the max: Waste through avoiding traditional nationalistic purchasing behaviour

The analysis of 45 of MCCs suppliers clearly indicates that, although MCC still leans heavily on
supplies from Germany, MCC has tried to put into practice the recent lessons with respect to geographic
sourcing, that is, to have the goods produced at geographic locations with optimum conditions in terms of,
available expertise and experience, quality levels and total cost (including labour cost, transport etc). The
traditional automotive industry in the major automotive producing countries such like France, Germany and
the UK, still depend for eight to nine tenths of its supplies, on national suppliers. About half of MCCs basic
suppliers (see figure 3) are located in Germany. One third are located in France, of whom several are
transplants of foreign suppliers located at the facilities in Hambach. The others are dispersed across Europe,
ranging from Portugal to the Czech Republic.



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Figure 3: Geographic sourcing behaviour


In terms of geographic distance (see figure 4) of suppliers to Hambach, the approach of MCC with
respect to doorstep plants clearly differs from that of other car-manufacturers. While other car-manufacturers
make use of doorstep plants of module suppliers located at distances between 5 and 50 km, MCC has a
relative large share of suppliers located at the premises of Hambach (0 km). Only a few of MCCs suppliers
are situated in a range of 1 to 100 km. Of course it also sources parts from distant suppliers such as for of the
shelve parts.

Figure 4: Geographic distance


Geographic distance of suppliers relative to Hambach
0
2
4
6
8
10
12
14
0 km 1-100km 101-250km 251-500km >500km
Geographic sourcing behaviour
Relative number of suppliers per country
France
34%
Germany
53%
Swiss
2%
Italy
2%
Czech Rep.
7%
Portugal
2%
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WHAT HAS BEEN ACHIEVED

The supply-chain format of the Smart has a number of clear benefits, these include:
! Product variety can be supplied without additional costs;
! The concept of modular production and postponement permits cost-efficient variety; the
commonality of modules and the generic nature of production processes allows a low level of stock
and fast cycle times;
! The involvement of suppliers and dealers is high due to the large share of value added they create
and the input that they have in product/process development;
! The fast cycle times translate into short lead times while modular production and postponement
allow for a dialogue with customers;
! The marketing concept in itself challenges traditional car marketing by establishing new channels
(including internet sites), outlets (centres and supermarkets), retail formats and customer
involvement in designing a customised product;
! Additionally, the car fits within a mobility-concept for urban movement that includes a deal with a
rent-a-car company for reduced rental fees for hiring a Smart in foreign cities, and other cars, such as
four wheel drives, whenever the customer needs a different mobility than that provided by a Smart;
! In summary, all makes it possible to create new markets within a saturating market.


DEFINITION OF THE CASE PROBLEM

MANAGING AND CONTROLLING IN A DESINTEGRATED ENVIRONMENT


The Smart case shows how modular production can be innovatively applied in a supply chain setting.
The modularity of the product is used to respond optimally to customers and to integrate (service) suppliers
extensively in the operations. This supply chain format raises questions about the role of the manufacturer in
the supply chain. Not only are the suppliers taking over an increasing share of added value and the physical
21
flow of goods by integrating forwards, but distributors also take over added value by integrating backwards
in the supply chain. The role of the manufacturer in the flow of goods and operations is limited almost
entirely to the flow of cash and information. Figure 5 illustrates how the manufacturer is squeezed out of
the physical value-adding process.



The des-integration of the supply chain among a number of companies and around a number of
modules is a first-level phenomenon. The examples indicate that re-integration takes place at a second level:
that of the info chain. Whereas MCC performs fewer of the activities in the flow of goods, its grip on the
flow of information in both the inbound and the outbound flow of goods increases. For example, by
involving distributors in the final customisation, MCC gains a hold on actual sales data and data on customer
preferences.

A critical consideration however is expressed in the adage: Can you control what you do not
make? Rayport and Sviokla (1995) suggested that control of the information flow, or virtual value chain,
can be based only on a synergetic effect with the physical flow of goods. Will MCC be able to assure this
effect when leaving the physical flow of goods to its suppliers or distributors?
Figure 5: The decreasing role of the manufacturer/OEM in supply chain operations
Stage: Purchasing/ Primary manufacturing Final manufacturing Distribution
In progress: Inputs Modules Outputs
Supply chain
Inputs/
modules/
products
in
progress
Distributors Suppliers OEM
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MCC has succeeded in developing an innovative supply chain format, using modular production,
extreme supplier involvement and interactive marketing as operating principles in integrating a chain that is
only partly under the direct control of the manufacturer. Modular production is based on product platforms
and a product architecture that produces differentiated final products using a variety of modules, while
maintaining commonality and inter-changeability of components. According to Pine (1993, p.196)
modularising products contributes to economies of scale in component manufacturing and to economies of
scope in using modular components over and over again in a wide variety of products.

Modular production can be applied at three levels:

1. At product level,
2. At product group level and
3. At process level.

The first level, based on the modularity of products, has a strong logistics aspect attached to it, that
of design for logistics. It can generate savings on stock costs (storage space and interest costs),
transportation cost, costs associated with work in progress can be lowered by modularising the product, and
product customisation can be increased. Figure 6 displays work in progress in a hypothetical flow of goods,
from purchase/input through transformation to assembly and delivery. The number of parts/products in
progress may decrease through transformation and increase through assembly and distribution (including the
assignment of products to specific markets in the distribution process). To design products and processes to
lower the number of parts in progress as soon as possible while concerting them into outputs as late as
possible, is logistics-friendly. Modular production can achieve just that by transforming inputs and
materials into parts with a high commonality and assembling them into a wide variety of products. The
commonality index C from Collier (1982) is often used to assess commonality at product level. C is calculated
as the number of components by product multiplied by the number of products and divided by the total number
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of components. The higher C, the higher the stock savings that can be realised with modular production
(Collier, 1982).


Figure 6: Design for logistics
Stage: Purchasing/ Primary manufacturing Final manufacturing Distribution
Inputs Modules Outputs
Supply chain
More product
customization
Less work
in progress
Postponed
variety
Product
numbers
in progress
and
volume
Normal situation
Modular production




The advantages of design for logistics can be expanded by using modular production at the second
level, that of modularity in product-groups. Ford and Mazda for example apply this in sharing a car-platform.
Sheu and Wacker (1997) state that in addition to the C-index, a consideration can be the difference in the effect
of commonality among and within products. The effect of commonality at a product-group level may differ
from that on a product level.

The reasoning behind modularisation as outlined above, can be traced back to Starr (1965), who
already pointed to the growing customer demand for maximum product variety that can be achieved by
modular production. This is achieved based upon the capacity to combine parts in numerous ways as well as
the compatible (process-)managerial abilities. With increasing customer demand for variety, conventional
mass production facilities became unable to generate as many variants as demanded. Starr (1965) attributes
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this to a lack of technological capability and managerial ability to control the production of diverse outputs.
The system of mass production transforms various inputs and raw materials into standardised outputs by the
use of standardised processes. Marketing may create some variety based on marketing activities such as
place, promotion and price differences (see figure 7A). Starr (1965) reasoned that variety based on marketing
alone is not enough in demanding markets, and that real variety requires a production involvement. Modular
production separates the production process into (1) a primary transformation process of inputs and raw
materials into generic modules and components, and (2) a secondary assembly process that combines generic
parts in a maximum number of ways into finished goods (see figure 7B). In that manner a wide assortment of
products can be created, in response to demands for variety.


Figure 7: Modular production
7A. Mass production system
Process
Production
Output
Mass production requires the
control of variabilities in
input and process to produce a
stream of identical units of output
(logic of aggregation)
Marketing management supplies
customers with apparent variety
even though the production output
is homogeneous
Outputs Inputs
7B. Modular production
Inputs
Primary process
Assembly process
combinations
Production process
Management designs, develops, and
produces those parts which can be combined
in the maximum number of ways
Source: Starr, 1965
Marketing management
can still supply
additional variety

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In summary, the application of modular production may be driven not only by logistics-costs
considerations but also by lead time (Sheu and Wacker, 1997) and customisation considerations (Starr,
1965). The implementation of modular production at the levels mentioned above requires:

the modularisation of products to contribute to the commonality of components in products and product-
groups,
the integration of various functions inside the company; the input from R&D to
(re-)design products in order to achieve efficiency based on design for logistics; the input from
manufacturing to contribute to the responsiveness of marketing based on product variety and
customisation etc.

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CASE QUESTIONS

Despite the innovative achievements, MCC management was facing a number of immediate and longer-
term issues, centring on how to manage and control the supply chain when in operation.

1) Why should MCC assemble cars itself when suppliers are integrated in the site? VW for example, at its
truck plant in Latin America, involves suppliers in assembly, thus further lowering the financial
commitment of the OEM. In line with the question whether carmakers should assemble cars at all, or
should leave this to suppliers, an interesting topic is how to assure a lead over suppliers when these
perform most of the value-adding activities and how to maintain an integrated environment. One might
reason that suppliers are becoming too smart and might (in a consortium or stand-alone) by-pass MCC
and gain the lead over the supply chain. The LEAR Corporation, for example, is a consortium of
suppliers that used to supply car-interior parts to manufacturers and is now beginning to supply entire car
interiors and becoming increasingly dominant in the relation with manufacturers.

2) Another problem was how to control and assure performance in the supply chain, not on the basis of
ownership but through co-operation with suppliers. MCC is heavily focused on integrating the flow of
information between players and levels in the chain, but how to measure and assure the performance of
partners?

3) A safety test of the previous version of the car had resulted in technical redesign (assuring road stability
of the car), causing design alterations. These alterations were made after contracts with suppliers were
signed. The question was how to alter the product within running the risk of having to renegotiate
contracts or facing price increases? Is MCC to push suppliers into it based on the argument that their
capital involvement in the facility will represent a strong desire to maintain involvement and a
willingness to accept changes? Or is MCC to team up with suppliers and discuss necessary changes? If
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so, how? As another example of problem solving in a partnership, the relation with the supplier of doors
was terminated after lasting quality problems. Should MCC, in case of disturbances, take over the
operation and regain control, or should it stick to its policy of supplier involvement? If so, how to select
a supplier shortly before the product launch?

4) On the principle that at MCC cars are produced to customer order, the order-delivery lead-time can be
seen as world-class and ahead of other manufacturers. However taking into account that a) it is by now
possible to have order specific modules, for example dashboards, produced at two-hour notice; and b)
the final assembly time of a Smart is less than 5 hours, one could question why a client order-delivery
lead time of two to three weeks is a challenge for MCC, and why the company does not strive for shorter
lead times.

5) The modular product concept of MCC permits customisation of the product in the dealer-channel
through production postponement. However, at present the final assembly is done at the plant in
Hambach. What is the rationale behind that decision?

6) An important consideration is how to cope with possible extensions of the Smart product concept in the
future; how can short cycle and lead times be maintained as product variety and complexity increase?