Modular purchasing at Mercedes-Benz

Automotive Industries, Spring, 2008 by Nick Palmen

Mercedes-Benz has established what it calls a "modular shelf" across all Mercedes-Benz vehicles as a core element of the company's purchasing strategy.

To find out more about what this means for component suppliers, Automotive Industries interviewed Frank W. Deiss, Vice President Procurement Mercedes-Benz Cars and Vans.

AI: What part does modularization and standardization play in determining your purchasing strategy?

Deiss: It enables us to reduce Mercedes-Benz' overall material costs while enhancing product quality and maturity. To give you an idea: Mercedes will implement around 100 newly defined modules over the next few years as we roll out new models. Establishing modules that can be standardized, thus reaching scale effects is a process which hasn't come to an end yet. We will begin full implementation with the next generation E-Class to be launched in 2009 and continue our efforts over the next few years.

There are always possibilities for further standardization--where our customer don't perceive but rather benefit from it--for example in air conditioning systems or sunroof mechanism devices.

AI: How do you see the role of the suppliers in terms of innovation and technology in relation to purchasing?

Deiss: The innovative ideas of suppliers have historically always been extremely important to Mercedes-Benz.

Many of the most significant automotive innovations have been developed between Mercedes-Benz and its suppliers. ESP or the airbag come to mind.

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What is important is that we take all supplier ideas seriously and test these promptly for their feasibility. Together with the colleagues from the development department, we monitor the market and regularly hold top-level discussions with our top suppliers about new technologies and innovative ideas. For example, we held an innovation day for the S-Class and asked suppliers to present the state-of-the-art innovations which they would like to see in the future vehicle.

There is a second field of innovations I would like to address--it is innovations in processes. We are always looking for new materials and innovative production processes to substitute common materials and gain, for example, a reduction in weight, which contributes to our CO2 reduction efforts, or to reach a better efficiency in processes.

AI: Mercedes is no longer together with Chrysler but you still have your key value drivers, quality, technology, cost and supply. What do you expect from the suppliers in these areas?

Deiss: We expect a top quality and benchmark performance. Each supplier is assessed along the mentioned value drivers with the benchmark supplier within its commodity group. This is how we define our performance-based sourcing set. A supplier with a top performance will more likely get a follow-up order while a supplier who lags far behind the benchmark performance won't be taken into account for new contracts.

AI: How long does it take to start sourcing from a supplier in a low-cost country?

Deiss: We operate international purchasing offices in Beijing, Singapore, Pune (India), East London (South Africa), and South America. Our presence on-site allows us to ensure compliance with the value drivers quality, cost, technology, and logistic. All sourcing activities--no matter the sourcing location--are evaluated according to these value drivers before a decision is made. Based on this performance, traditional and non-traditional suppliers have ah equal chance to participate in the Daimler supply base. Today, two of our key markets in the low cost sector are Eastern Europe and Mexico due to their geographical closeness to our production facilities in Germany and the U.S.

There are huge potentials in low cost countries which we need to further unlock.

AI: What are the biggest challenges about sourcing from countries like China and India?

Deiss: Let me stick to China to give you a more concrete idea about our sourcing activities there. We operate a production plant in Beijing where we currently produce the E-Class and have just started to produce the C-Class. There are local content regulations set by the Chinese government which determine a large part of our purchasing activities for the Chinese production site. One of the main strategies we use is the "follow the source" principle which means we try to get existing suppliers to supply us with the needed local content via their Chinese manufacturing sites.

For some components there are already some very strong Chinese suppliers, for example, we source CD changers from China.

We always have to balance the advantages of factor costs with logistic costs when making the decision to source in China, India or other low cost countries. Looking at China in general, we have to further steer the quality of Chinese suppliers.

AI: Is there room for improvement in your risk management system?

Deiss: Over the last several years, we significantly improved our risk management to make it a central controlling instrument in Purchasing, just as it is in the financial services industry. We are keeping a very close eye on developments in the suppliers' economic situation; so that in the event of any supplier getting financially distressed, we can take prompt measures to safeguard production and supply on our side. Improvement is always necessary and possible, that applies to our risk management as well.