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ISSN 1940-204X IMA EDUCATIONAL CASE JOURNAL VOL. 1, NO. 1, ART. 2, MARCH 2008 1 Mercedes-Benz All Activity Vehicle (AAV) Tom Albright The University of Alabama INTRODUCTION During the recession beginning in the early 1990s, Mercedes-Benz struggled with product development, cost efﬁciency, material purchasing, and problems in adapting to changing markets. In 1993, these problems caused the worst sales slump in decades and the luxury carmaker lost money for the ﬁrst time in its history. Since then, Mercedes has streamlined the core business, reduced parts and system complexity, and established simultaneous engineering programs with suppliers. In its search for additional market share, new segments, and new niches, Mercedes started developing a range of new products. New product introductions included the C-class in 1993, the E-class in 1995, the new sportster SLK in 1996, and the A-class and the M-class in 1997. Perhaps the largest and most radical of Mercedes’s new projects was the All Activity Vehicle (AAV). In April 1993 Mercedes announced it would build its ﬁrst passenger-vehicle manufacturing facility in the United States. The decision emphasized the company’s globalization strategy and desire to move closer to its customers and markets. Mercedes-Benz United States International used function groups with representatives from every area of the company (marketing, development, engineering, purchasing, production, and controlling) to design the vehicle and production systems. A modular construction process was used to produce the AAV. First-tier suppliers provided systems, rather than individual parts or components, for production of approximately 65,000 vehicles annually. THE AAV PROJECT PHASES The AAV moved from concept to production in a relatively short period of time. The ﬁrst phase, or concept idea phase, was initiated in 1992. The concept phase resulted in a feasibility study that was approved by the board. Following board approval, the project realization phase began in 1993, with production commencing in 1997. Key elements of the various phases are described below. CONCEPT PHASE: 1992 – 1993 Team members compared the existing production line with various market segments to discover opportunities for new vehicle introductions. The analysis revealed opportunities in the rapidly expanding sports utility vehicle market that was dominated by Jeep, Ford, and GM. Market research was conducted to estimate potential worldwide sales opportunities for a high-end AAV possessing the characteristics of a Mercedes-Benz. A rough cost estimate was developed that included materials, labor, overhead, and one-time development and project costs. Projected cash ﬂows were analyzed over a 10-year period using Net Present Value (NPV) analysis to acquire project approval from the board of directors. The sensitivity of the NPV was analyzed by calculating “what- if” scenarios involving risks and opportunities. For example, risk factors included monetary exchange rate ﬂuctuations, different sales levels due to consumer substitution of the AAV for another Mercedes product, and product and manufacturing costs that differed from projections.
IMA EDUCATIONAL CASE JOURNAL VOL. 1, NO. 1, ART. 2, MARCH 2008 2 Based on the economic feasibility study of the concept phase, the board approved the project and initiated a search for potential manufacturing locations. Sites located in Germany, other European countries, and the United States were evaluated. Consistent with the company’s globalization strategy, the decisive factor that brought the plant to the U.S. was the desire to be close to the major market for sports utility vehicles. PROJECT REALIZATION PHASE: 1993 – 1996 Regular customer clinics were held to view the prototype and to explain the new vehicle concept. These clinics produced important information about how the proposed vehicle would be received by potential customers and the press. Customers were asked to rank the importance of various characteristics including safety, comfort, economy, and styling. Engineers organized in function groups designed systems to deliver these essential characteristics. However, Mercedes would not lower its internal standards for components, even if initial customer expectations might have been lower than the Mercedes standard. For example, many automotive experts believed the superior handling of Mercedes products resulted from manufacturing the best automobile chassis in the world. Thus, each class within the Mercedes line met strict standards for handling, even though these standards might have exceeded customer expectations for some classes. Mercedes did not use target costing to produce the lowest priced vehicle in an automotive class. The company’s strategic objective was to deliver products that were slightly more expensive than competitive models. However, the additional cost had to translate into greater perceived value on the part of their customer. Throughout the product realization phase, the vehicle (and vehicle target cost) remained alive because of changing dynamics. For example, the market moved toward the luxury end of the spectrum while the AAV was under development. In addition, crash test results were incorporated into the evolving AAV design. For these reasons, Mercedes found it beneﬁcial to place the design and testing team members in close physical proximity to other functions within the project to promote fast communication and decision-making. Sometimes new technical features, such as side airbags, were developed by Mercedes. The decision to include the new feature on all Mercedes lines was made at the corporate level because experience had shown that customers’ reactions to a vehicle class could affect the entire brand. PRODUCTION PHASE: 1997 The project was monitored by annual updates of the NPV analysis. Additionally, a three-year plan (including income statements) was prepared annually and reported to the headquarters in Germany. Monthly departmental meetings were held to discuss actual cost performance compared with standards developed during the cost estimation process. Thus, the accounting system served as a control mechanism to ensure actual production costs conformed to target (or standard) costs. TARGET COSTING AND THE AAV The process of achieving target cost for the AAV began with an estimate of the existing cost for each function group. Next, components comprising each function group were identiﬁed with their associated costs. Cost reduction targets were set by comparing the estimated existing cost with the target cost for each function group. These function groups included the following: doors, sidewall and roof, electrical system, bumpers, powertrain, seats, heating system, cockpit, and front end. Next, cost reduction targets were established for each component. As part of the competitive benchmark process, Mercedes bought and tore down competitors’ vehicles to help understand their costs and manufacturing processes. The AAV manufacturing process relied on high value- added systems suppliers. For example, the entire cockpit was purchased as a unit from a system supplier. Thus, system suppliers were part of the development process from the beginning of the project. Mercedes expected suppliers to meet established cost targets. To enhance function-group effectiveness, suppliers were brought into the discussion at an early stage in the process. Decisions had to be made quickly in the early stages of development. The target costing process was led by cost planners who were engineers, not accountants. Because the cost planners were engineers with manufacturing and design experience, they could make reasonable estimates of costs that suppliers would incur in providing various systems. Also, Mercedes owned much of the tooling used by suppliers to produce components, such as dies to form sheet metal. Tooling costs were a substantial part of the one-time costs in the project phase. INDEX DEVELOPMENT TO SUPPORT TARGET COSTING ACTIVITIES During the concept development phase Mercedes team members used various indexes to help them determine critical performance, design, and cost relationships for the AAV. To construct the indexes, various forms of information
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