Stable horizons

Automotive Logistics, November 2001

by Thomas Cullen

Despite is comparatively small production volumes, BMW Group is one of the world's most successful VM's with margins that the larger companies can only dream about. Here Automotive Logistics explores how the company's new KOVP process is set to build on this strength with project leader Johann Köppl.

Like most of its German rivals, BMW has rarely been faced with the problem of excess inventory and customers have proved themselves most willing to wait for delivery of its products. Despite this BMW has moved to develop its production activities toward a build-to-order model.

Why has BMW Group implemented the Customer-Orientated Sales and Production Process (KOVP)?

BMW Group has always used build-to-order in its production and KOVP is a further development of this process, it is a development designed to meet the challenging targets of modern production. With KOVP however, BMW Group improves the whole process from customer to customer - from purchase order to power on. Shortening lead times, increasing modification flexibility and meeting the promised day of delivery are core elements of the future process and to reach more customer satisfaction.

What stage are you at in the overall development of KOVP? Is there anything further to implement?

Since June of this year we have been working on the 7-series project, implementing the whole KOVP system for production planning. According to production planning in Germany, BMW Group will adapt the system step by step within the next two years on all projects at home and abroad.
In view of the sequencing of customer online ordering (a tool named Fuzzy Decision Desk form our partner FLS Fuzzy Logik Systeme Dortmund is used here for optimising the car sequence) and distribution we have to implement a time schedule because the replacement of one system with a completed new one cannot be done in one day. The essential criterion of this new productions system will take some time to fully accomplish.
We will also be applying the KOVP system to the Mini and, although it will differ in terms of the market, shorter processing times will again be crucial, as will flexibility

In Germany build-to-order has a different meaning than it does in the US or Japan in terms of production doctrine, not least because the markets are different. What effect will KOVP have on these different markets?

It is correct to say this [Germany] is a different type of market. In Germany the share of our customer vehicles has gone up and is higher here than in the US and Japan. That is why KOVP in Germany is designed for gaining experience of the production system.
The customer now is free to choose, for example, the color, engine and equipment within a body variant up to four days prior to the start of the assembly process. In the past this was not the case, there was a lot of competition and with the frozen horizon it was not possible for the customer to get an early order. It is important for BMW Group to have a working KOVP to provide the customer with greater opportunities.
BMW produces very individual cars. It was within the old 7 series, a theoretically possibility to have 1017 different cars because of the different combination possibilities. Therefore, it is not possible to produce cars in advance, to deliver them to the dealers and to meet exactly the customer's wish. Selling from stock in Germany, for example, is in most cases for spontaneous demand, for examples, after an accident. But it does not apply for the majority of our customers.
Though o BTO process we have an optimum utilization of our production resources in combination with the shortest possible lead times. Because we do not produce stock orders, customer orders are waiting in the order pipeline, Our breakthrough objectives of KOVP will get more customer satisfaction because of reduced process times, an increased modification flexibility in connection with a very high degree of punctual delivery and a higher volume of customer-related cars in every market and therefore also in our plants.

You are adjusting the production schedule within a shorter time period. What is that time period?

Our target is to put it together within six days from order scheduling freeze.

Is this a very demanding system to operate in terms of the whole supply chain environment and therefore, perhaps, very expensive?

It is not expensive if one considers the overall costs. We need to look at the process as a whole. It is OK to say that prices are going up because of 'demand spikes', but there are other processes that lead to reductions in cost, so the whole economic situation is better. One simple example is in the storage of finished cars. If we had a build-to-stock system, that would be more expensive than having special parts held in storage.

The strength of the Toyota production system is that they have a very stable production environment that enables them to use their capital investment on the supply chain. The utilization of capital assets has always been the central problem of the vehicle manufacturer, making it easier to stick to the traditional production model than to go toward build-to-order. Why is BMW challenging this?

With a customized approach to build-to-order we have customer assigned vehicles and Toyota doesn't compare to this in terms of quality. We design especially for the customer and in doing so we avoid difficulties in the pipeline, when sending to dealerships for example. With the old 7-series we had many different combinations exemplifying how BMW is unique in comparison with other car manufacturers. Again, in our plant at Dingolfing we produce 1,250 cars a day. No two cars are of the same combination and this unmatched accomplishment assures a stable customer base. From our current production philosophy we have changed from a push to a pull-principle in combination with a late order assignment.

Therefore, it is possible to shorten process times and to produce in-sequence by a high level of time quality. Through, it is possible to shorten process times and to fulfil the daily demand of production material on a JIT or JIS basis.

Is the waiting time from order-to-delivery between three to four months on average?

Depending on the degree of demand, this is what we aim at. With regard to seasonability , people are likely to order a convertible in the summer and the order part will be full, which could mean delays, but changes can be made to solve this. The customer is the one that triggers the production process because he assigns the schedule and the sequence.

The question of waiting time is important for the location of inventory. In logistics, inventory is often seen as a bad thing but, particularly in the US, it is seen as an important concern in marketing. A lot of inventory is located at the dealership because Americans like to go in and order their car very quickly. How do you overcome the problem of customer waiting time and the impulse buying aspect?

Generally speaking, the US has a more traditional inventory market than Germany. In the US, dealers do more leasing contracts and the possibilities to exchange the cars is greater. Once the contract is over the customer knows when they will get the new car and when the old one must be gotten rid of. In this way an American customer buys not so much on impulse. He can roughly plan what he is going to buy. If somebody goes into a dealership and says "by the middle of March I would like a BMW with these specifications", the dealership can help the customer to design his car by using an online ordering system on site and order it, as well as book a position for it on the assembly line. The program takes about a minute to verify and then the dealer can tell the customer whether the car can be built to the specifications and by when. You will still have the opportunity to make changes.

If you are in this production environment you must be generating and distributing more information of better quality both internally and for your suppliers. Has there been any change in information system dynamics or processes?

Yes there has. At the point of sale, we installed the Online Ordering System, in our production we have a new Production Control System and in distribution we also have a new system which will be implemented by the beginning of next year. This new distribution system had to be developed in order to cope with the increasing demand to link our international production facilities with our central systems. Also, we at BMW Group want to be able to transport an vehicle from our production network locations to any destination in the world. The new creation of a distribution system was therefore not purely a result of KOVP. However, this distribution system will allow us to increase flexibility on a large scale, for example, to prioritise or even change the route of cars in the transportation chain. The most important thing is to meet the customer's expectation. The next step to round off the KOVP process is the development and implementation of a Material Supply Chain Management System to get the transparency we need and to see as early as possible in a certain period of the demand of all our customers can be fulfilled or not. By showing the supplier the demand graph and establishing the frozen horizon, we can forecast with accuracy production demands. The earlier that the frozen horizon starts indicates the greater the accuracy available to the supplier in forecasting material requirements. This is better for both parties.

How will your component suppliers cope with the shorter lead times?

To elaborate the future situation for our suppliers: on the one hand they will have shorter lead times, but on the other hand a longer stability horizon. In the old production process with the push-principle the earliest call-off status point for JIT-materials was the start into assembly. From now on it is possible to give the suppliers the sequence-number with the daily packages, when the orders are getting frozen and no further changes are accepted from the customers. This is ideally four days before we start into the assembly. The supplier for exhaust systems at Dingolfing - Boysen - will have four days' notification for when exhaust systems have to be delivered. The advantage for Boysen in this case is that it participates in the planning process and can better manage its supply.

Implicit in this change is much greater integration in the relationship between production resources, inventory and transportation. What do you expect to happen to transportation spending and asset utilization as a consequence of this?

With KOVP it is important to discuss issues like the demand for quality in terms of distribution with the logistics provider. The delivery company has the opportunity to know well ahead of time about the volume and where to deliver it. which helps them adapt more easily and organize their transportation more efficiently. We are interested in fast transport to reduce the processing time but we are also interested in preventing the costs rocketing. That is why we are interested in saving time. If a particular customer wants his car more quickly then we address the issue. We have to pose a cost comparison but we want to take the customer into account and meet his needs.

What sort of cost/constraints-model have you create to calculate the trade-offs between the different cost drivers and capacity constraints on the supply chain?

To get the approval from the Board of KOVP it was necessary to look into the different sections of the whole process from customer to customer. It is right that the new production process will cost more money in the beginning. On the other hand, with a higher share of customer-related orders there will be less sales costs and higher revenue in total. To solve the constraint problems on the supply chain you need a good transparency about your bottlenecks and an alert system that recognizes problems very early. A very important concern however, is that finished and distributed cars standing in the courtyard of our dealers or on our distribution areas are more expensive than, for example, a higher stock of inventories at our Tier 1 or Tier 2 suppliers. In addition to that, we think that is also strategic, not only a cost issue.

Is this in accordance with the traditional relationship you have had with Logistic Service Providers (LSPs)?

We have reliable partners and in the interests of successful implementation our discussions with them are being pursued. Higher demands for time quality to reduce the production time are a priority and they have the advantage of early access to data as regards the frozen horizon. This comes as a consequence of these discussions. After implementing the new distribution system, we will be connected to them via internet and data links so they have all the scheduling information available to them, for instance, and communication is optimized.
Concerning the outbound distribution, BMW Group is striving for an implementation of special processes, which allow quicker deliveries if requested. The acceleration of vehicles will be supported by supplying pre-information to the carriers but also monitoring their on-time delivery performance. Though, special transport means such as airfreight will only be used in exceptional cases and for cross-continental transportation only. BMW's LSPs are working on an exceptional level of quality. Quality encompasses not only the quality of the transported good before and after transportation but also time quality. BMW's focus is very much on transportation lead times and ontime delivery.
KOVP's impact on the service providers will be that they have to be very close to what is going on at BMW Group and, BMW will have to keep their partners informed on transportation relevant issues.
Overall, we would say that KOVP should create an even closer relationship with their service providers on the operational side.

An example of the conflict between LSPs and VMs is the argument over the size, frequency and cost of car carrier shipping services. is BMW working on a solution to this?

What we ensure is that we deliver the cars on time when the ship is leaving. We don't have stock building up at the docks because the KOVP system will be applied worldwide and all markets are put in an equal position to meet demands. We know when the ships are departing. Of course, due to higher demands, there may be a small amount of stock that is an exception. From our perspective it is important to have a punctual completion of the vehicle production to guarantee delivery.

Ford's RFID Tagging is used to generate data on vehicle movements. What measures is BMW applying to track vehicle movements?

Car tracking has always been a part of BMW's system. We know where the order has been placed in a schedule and when it will be leaving the assembly line. We have always done this and ensured that our partners share in the information as part of the distribution system. It is an system priority to track the cat so that if there is a delay we can react in the interests of the customer. That is why we insist on transparency from the LSP.

Wrapping cars is an interesting practice that BMW Group has introduced. This solution seems symptomatic of the role of materials handling in high velocity supply chains. Is this a symptom that you recognize and are responding to with KOVP?

It is another contribution of KOVP system that it responds to packaging and conservation. When you have to deliver a car fast within a short time it is not necessary to package it. We are performing tests at the moment on sort distributions times in Germany where we don't consider packaging as necessary. However, if transportation is going overseas then, of course, we do package.
We have been wrapping the X5 as part of the tests to assess environmental impact among other things.

Otherwise, we continue to wax in the traditional manner. Finally, I would like to emphasize that KOVP is a step to a new dimension of quality, focused on the product and on time.