At the very beginning of this year, I penned my Supply Chain Predictions for 2009. Prediction Four was that the year would bring a very changed offshore and near-shoring decision framework. I noted that outsourcing decisions would become much more analytical and differentiated, focusing more on the trade-off for market access and growth vs. outsourcing for pure direct labor cost advantage in a low-cost country. I also noted that the U.S. and Europe are very large markets, and although these markets may well experience declines in product demand during 2009, they still provide ample opportunity for near-shoring sourcing alternatives.

Last week there was a significant twist to an outsourcing decision.  Daimler AG announced that it will manufacture its popular C-Class vehicles at an existing plant in the U.S. vs. current manufacturing performed in Germany.  This move was described as strategic, allowing Daimler to move production closer to its major U.S. market along with reducing its exposure to foreign exchange pressures. According to the blog entry, this move would allow Daimler to save $2000 Euros per vehicle.

I must admit that when I penned the original prediction, I had not assumed that there would be an appreciable fall in the value of the U.S. dollar.  The fact that such a well-known German auto manufacturer, which prided itself in German manufacturing sourcing and competitiveness has made this move leads to wonder if other manufacturers will follow with more U.S. sourcing decisions.  While many foreign automotive brands have established some form of a U.S. manufacturing presence, other high-value industries have not. 

The question is whether this is a trend that will extend itself in 2010, if the U.S. dollar continues to fall, and inflation makes a sharp rise.

Bob Ferrari

A ran across a blog post on BNET penned by Jim Henry that stated that BMW is betting that Flexible manufacturing, not Lean is the next big thing in auto manufacturing.  The article quotes Rich Morris, a vice president at BMW’s U.S. operations as noting that “everyone has to become more flexible.“  Flexibility was defined as both the ability to shift production of different models among different plants as demand shifts among different global markets.  It can also manifest itself as building different models of autos within the same plant. This is somewhat different than designing overall manufacturing capability on the basis of pure Lean methodologies, where complete efficiency becomes the overriding goal. There is also a hybrid combination model, similar to Toyota that attempts to build and distribute vehicles in the leanest plants, but in the fastest cycle-time to customer orders.

This type of argument comes up frequently and can sometimes take many views, depending on a supply chain professional’s built-in bias or training.  In the case of BMW, the context is defined as the overall need of customers.   Morris indicates that “in 2008, 70 percent of (BMW) production was built to customer order.” The alternative, which many other auto manufacturers practice is to schedule production based on dealers’ orders, which is their best forecast as to what customers may buy, or I might add, which options can be the most profitable for dealers. The disadvantage is duly noted, that being that the customer has to often compromise his or her needs to what may be available for sale.

My view is similar to BMW in that any production or supply chain model has to have its first priority focused on the needs of the overall customer.  Because BMW is a premium brand that differentiates on performance and features of its vehicles, flexibility makes sense.  BMW vehicles are very expensive, hence having many unsold finished vehicles in inventory is not efficient.  Contrast this approach with the recent market introduction by Tata of the Nano automobile in India.  Here, the vehicle has been designed with very limited options and marketed to a very cost-sensitive, entry-level consumer. Tata elected to go with a highly lean and efficient manufacturing process focused on vehicle sub-assembles, which are shipped to actual dealers who assemble the final car configuration based on a consumer order. 

Ford Motor Company has recently rolled out a flexible manufacturing strategy for its newer U.S. operations, while Honda can build its Accord sedan in a existing truck plant with little interruption.

 Which model provides the most value?

I believe that if customer need and some degree of efficiency is the goal, Than BMW is correct, everyone has to become more flexible in production capability.

 Bob Ferrari