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
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

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
Leipzig

Spartanburg
Goodwood

Regensburg

Munich
Graz

Z8

Dingolfing

(external production)

Rosslyn

Source: Goudiano CSCMP 2005

Shenyang

Production Volume
Total: 1119.1

Production Volume
Fords Worldwide vehicle unit sales of
cars and trucks in 2004 (in thousands):
The Americas
Ford Europe and PAG
Ford Asia Pacific and Africa
Total

3,915
2,476
407
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-toForecast

Built-to-Forecast
Sale from stock
Production

Storage Customer

Built-to-Order
Customized vehicle
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
Versions

500 Extra
Equipment Options

175 Interior
Equipment Options

90 Standard
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: 610 weeks!!!

Short OTD
Process/Product/Volume flexibility
Flexibility from suppliers
Flexibility from logistics operators

Current BTO Levels

1999:

% BTO

stock in
U.S.:
~ 5%
U.K.:
~33%
Europe:
~48%
Japan (Toyota): ~60%
Source: Miemczyk and Holweg (2004)

Avg. New
Vehicle
days
60-90 days
64 days
55 days
20 days

BTO & BMW

BMW
BMWs operations in SC Plant
BMWs 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
100% delivery punctuality
Flexibility for order change

Why offer
flexibility?

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
heater

0,0
-0,5
-1,0

30

20

10

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

Ordering

Optimize
the whole
process

Sales
System
Planning

Production
System

Sales
System

Dealer

Dealer orderPurchasingLogistics Production DistributionHand-over

Sales Processes and

Sales Processes and
Online Ordering
Online Ordering

Productionand SupplyProcesses

Distribution Process
and Hand-over

Process Monitoring and Target Control

Delivery

Dealer

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

Bodyshell work

Sort

Sort

Paint shop

Assembly

Production System with KOVP

Push

Frozen
Horizon

Sort

Late Pull
Order Assignment
Start order assignment

OSM
Bodyshell work

Paint shop

Assembly

Reduction of Leadtime
Flexibility for Order Change
Ordering/Schedulin
g
Before KOVP:
13-17 WD

Production/Distributi Process Feasibility

on
Order
freeze
28-32
15 WD
WD

Breakthrough target KOVP :

Supplier /
Body shell
work and
Paint shop
1

4 WD

Hand-over to
Sales
Asse
m-bly

2 WD

Distri
butio
n
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
Seasonality

Source: Goudiano CSCMP 2005

Capacity oriented
Production planning

Manage Supply

Over 6000 part numbers

70 % option driven
Order changes
40% from Europe

Usage

Standard
Deviation in
Usage 18/day

90
Average
Usage 32/day

Daily Usage

60

30

106

101

96

91

86

81

76

71

66

61

56

51

46

41

36

31

26

21

16

11

Da y

SAME NUMBER OF CARS/DAY

Managing Supply
Forecast

Decide Shipment
Quantities

Prepare
Shipments

Shipments
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
Production Capacity

Infinite
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

Traditional basics

Order-up-to level

Stock on hand

Reorder Point

Reorder Point
Actual Lead
Time Demand

Actual Lead
Time Demand

Actual Lead
Time Demand

Actual Lead
Time Demand

Order Quantity
Lead
Time
Order
placed

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 Ddenote the standard deviation in demand per unit
time
Let Ldenote 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
Time
between
orders

Reduce
Lead
Time

Reduce
Variability in
Demand

Reduce
Variability in
Lead Time

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