Pushing the envelope: DCX's supplier co-located manufacturing project takes a big step forward in modular manufacturing

Automotive Industries, Oct, 2004 by John Peter

DaimlerChrysler seemed to have stunned the automotive community at this year's Traverse City Management Briefing Seminars announcing plans to renovate the Toledo, Ohio, Jeep plant by farming out three major processes, body, paint and rolling chassis to suppliers who will build and manage their own facilities adjacent to the new Jeep plant, supplying painted bodies and complete rolling chassis to the final assembly line.

But manufacturing experts saw it coming.

"It's an extension of the plant-in-a-plant operation," says Anthony Mascarin, managing partner, IBIS associates, "where someone comes in and runs the stamping facility, similar to the concept of the Smart plant in Germany. Chrysler has already outsourced large body sides to either Dana or Budd. It's an extension of what's going on. It's the scale that makes it seem unusual."

The supplier co-located manufacturing project in Toledo is an off-shoot of a similar plan that DCX tried to broker in Windsor, Ontario, Canada, to build a plant to manufacture a production version of the M80 small pickup concept shown at the 2002 Detroit Auto Show. The Kuka group, that will build a 250,000 sq.ft. body shop in Toledo and Hyundai Mobis, that will build rolling chassis in its 200,000 sq. ft. facility, were part of the initial group.

"I had spoken to Larry Drake from Kuka at that time," says Jay Baron director of the Auto Body Consortium at the Center for Automotive Research, "and they were very aggressively pursuing that program. But the big issue then was that Chrysler was looking for one entity to manage all of those operations. It was too big. So anybody, if they wanted to be one of the players, had to go out and find the other partners who would help them with the other areas. So, I think in some ways Chrysler may have taken on more that they could handle and they learned from that."

Mascarin says that it makes more sense for DaimlerChrysler to be doing this because the company is a lot further along on outsourcing and has a much better relationship with the union than either GM or Ford.

But a spokesperson for Karmann, who was a member of the M80 team, says that demands from both the Canadian Auto Workers union and Canadian government were instrumental in dissolving that project.

And DCX has already experienced problems with the Toledo project as well. Durr Industries, that was to build and operate a 400,000 sq.ft. paint shop, broke off negotiations last month, replaced by the Hayden International Group of Auburn Hills, one of the original bidders on the project.

While some industry scoffers saw this as a last-ditch-effort to save a dying Brown field plant, Mascarin has an interesting observation.

"My first impression is that it's a stock performance issue," he says. "It's going to affect the profit they make on transferring the initial cost of investment in the plant to the supply chain."

"Wrangler is a good established market that they can depend on for good volumes? (They'll build about 90,000 in 2004). "If they sell just as many Wranglers but only have to invest one third of what it normally costs to retool a plant, then the performance statistics will look a lot better on paper."

Chrysler's three partners will all share in the $900 million investment.

Baron says that there's an obvious reward in reducing your investment cost.

"Everybody wants to be able to introduce more products at low volumes and that's primarily a cash restraint, says Baron. "This is helping to achieve that strategy ... saving the funds for investing in other areas of the business."

It's no secret that Chrysler would like to expand the Jeep brand. There's plenty of room to move both upscale to compete with Hummer and look at the entry-level market as well.

"It's fair to say that you would anticipate or expect Jeep to try to leverage its investment.

"And it falls within the plans to grow the brand," says Mike Jackson, manager, North American Forecasting for CSM Worldwide.

An increase in volume in the plant would be good for all partners involved as more volume would equal a larger payback on the initial investment. But who will be reaping those rewards is one of the questions that hasn't been answered.

"I don't think anybody knows what the formulas are in terms of how those revenues are shared," Baron says. "I think some of that return is clearly going to have to be shared with these clients to compensate them for this risk."

Another unanswered question is the issue of warranty. With suppliers taking on more of the manufacturing responsibility, will they be saddled with a large chunk of the warranty costs as well?

"That's going to drive the motivation for improving quality," says Baron. "The model for assigning warranty costs, I suspect, will have some complexity to it."

Baron's model would take a significant proportion of the warranty cost, put it in escrow and then reward the system rather than the individuals.

"You want people to recognize a problem and think, "what is the lowest cost solution to that problem," Baron says. "Even if it's somebody else causing it and I can fix it cheaper than he can, you want them to be motivated to fix it. And that's not easy to do.