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Running Head: Strategic analysis on BMW in 2004

Strategic analysis on BMW in 2004

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Bayerische Motoren Werke (better known as BMW) is one of Europe's top automakers. BMW models include the 1 Series, the 3 Series (coupe, sedan, convertible, and compact) 5 Series (sedan and touring), 6 Series (coupe and convertible), and 7 Series sedan. Other models include the M3 coupe and convertible; the X3 and X5 sport utilities; and the Z4 roadster. In addition to its BMW automobiles, the company's operations include motorcycles (K 1200 GT, R 1200 CL, and R 1150 R models, among others), the MINI automotive brand, Rolls-Royce Motor Cars, and software (softlab GmbH). BMW's motorcycle division also offers a line of motorcycling apparel such as leather suits, gloves, and boots. BMW was founded by Karl Friedrich Rapp in October 1913, originally as an aircraft engine manufacturer, Bayerische Flugzeug-Werke. The Milbertshofen district of Munich location was chosen because it was close to the Gustav Otto Flugmaschinenfabrik site, a German aircraft manufacturer. The blue-and-white circular logo BMW still uses is a stylized spinning aircraft propeller, and dates from this period in the company's history. The design also alludes to the blue and white checkered flag of Bavaria.

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Carmakers are shedding more and more activities to cut their costs. Outsourcing in Europe is confined to external supplier parks for sub-contractors. In Vorst in Belgium, for example, Volkswagen intends to use this construction to continue offering employment to four hundred supernumerary workers. Manufacturers in the United States go much further. At the BMW plant in Spartanburg, South Carolina, the sub-contractor actually works on the shop floor. This saves "tens of millions of dollars" in costs, says BMW.

German carmaker BMW makes all its Z4 and X5 models for the whole world in the village of Spartanburg in South Carolina in the United States. Spartanburg is BMW’s only American plant. The Z4 roadster is the successor to the Z3 sports model, which was also built in Spartanburg. The X5, promoted in the US as a "sports activity vehicle", is the larger 4x4 model and is also very popular in Europe.

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The plant, which cost $2 billion, is a success story according to management. BMW set up shop at this site ten years ago with the production of its 318i sedans. The Z3 followed in 1995. Today, 410 X5s and 140 Z4s roll of the production line every day. Plans originally called for the factory to have around 2000 workers after ten years and to be turning out 250 vehicles every day. At year-end 2004, the factory has 4700 employees, or "associates", and assembles X5s in two ten-hour shifts and Z4s in one eight-hour shift.
As the American-built BMWs go to all parts of the world, almost every vehicle is different. "Over the past six months, no two vehicles that have come off the production line have been the same," says BMW spokesperson Greg Bunner. "This is because of the large number of options and also because of the different legal requirements and regulations worldwide". The average production time of the BMWs produced in Spartanburg is 3.5 days. Bunner: "This includes inspections and waiting times, but we can push the process to 24 to 30 hours if we want".

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BMW is a Public Limited Company (PLC) in the Private Sector and their main objective is to make profit and cover their costs. A board of directors undertakes the day-to-day running of BMW. Being in the private sector they raise most of their capital though the sale of shares and of courses their cars. The performance of a number of European markets fell short of expectations. In Germany in particular, the on-going political debate created a mood of uncertainty for consumers, with a consequent negative impact on demand. The global car market is facing decline in 2003, led by market falls in North America and Western Europe. However, other regions of the world - led by East Asia - are seeing further car market expansion this year. In 2004, projections for livelier economic growth underpin the resumption of car market growth in Western Europe and North America. A car manufacturer's decisions on investing in production capacity are critical. A great part of the capacity is product specific, for example, the assembly lines for bodies. The installed capacity must be sufficient for the whole life cycle of the product, six to eight years, because expanding capacity later is very expensive. On the other hand, low utilization of capacity threatens the profitability of the product. Although the time to market for new products has dropped remarkably, it still takes several years from the investment decision to start serial production. Thus, a firm's decisions on very large capital investments affect its competitiveness for the next 10 years.

A car manufacturer's situation for strategic planning is complicated by market trends, currently the market's increasing dynamics and globalization of the supply chain, including sales markets, production sites, and suppliers. Competition forces car manufacturers to launch new car models frequently to provide new functions for customers, new concepts, such as sports activity vehicles, new materials, such as aluminum, and future electronic components, such as dynamic stability control (DSC) or BMW's integrated driving system, I-Drive. Customers want individual configuration, particularly for premium cars. Besides the classical markets in Europe, North America, and Japan, new markets are emerging, such as Eastern Europe and China. The product life cycles in these new markets are likely to be different from those in the established markets. Possibly, manufacturers can sell discontinued models in new markets. Locating production sites throughout the globe brings production closer to such markets, permitting firms to benefit from the individual advantages of certain countries, for example, investment incentives and low costs for labor.

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The BMW Group, with its head office in Munich, Germany, manufactures and sells BMW, MINI, and Rolls Royce cars. Its products cover the full range of size classes and car types but consist exclusively of premium-class cars. In 2004, it sold 1.25 million cars. Currently, BMW produces cars in eight plants in Germany, the United Kingdom, the United States, and South Africa, and its external partner, Magna Steyr, has a plant in Austria. Moreover, it manufactures engines at four further sites, and completely knocked down (CKD) assembly takes place at six sites. The product program is expanding steadily.

In the last three years (2001 to 2004), nine new models have been launched, among them the 6 series with a coupe and a convertible, the X3, a sports activity vehicle, the Mini convertible and, most recently, the 1 series. This dynamic development will certainly continue in the future.

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For BMW, long-term strategic planning of products and production is a fundamental task. BMW had a well-elaborated strategic-planning process when we started our project in 2000. In this planning process, the horizon extends to 12 years, divided into yearly periods, so that it contains the full life cycle of the products starting in the next five years. Planners aggregate the products to the level of the derivatives of the product series, for example, sedan, coupe, touring car, or convertible. They revise the 12-year plans several times a year, and the board of directors must approve of the results.  Naturally, within the planning process, BMW plans its products and sales before planning production capacities. In these two initial steps, which we do not consider in detail, the firm decides on the set of future products and, for each existing or future product, the year or even the month of start-up and shutdown, and estimated sales figures during its life cycle, for different geographical markets. The results of these steps and the flexibility reserves the firm considers necessary based on its experience are available as data for the third step, plant loading, in which planners allocate the products to the plants and determine the required production capacities. We focus on this third planning step.

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Originally, planners performed this step manually using Excel sheets that expressed the load and the capacity per plant as the number of cars produced per day and the number producible per day summed up over all products.

Planners' allocation of products to plants was restricted for technical reasons, by the personnel skills available at every location, and because of general policy. For only a few products were there alternative production locations, from which planners either made an appropriate choice or tried each one. They had a further degree of freedom for "split products," those produced at two or more plants, for which they decided the volume to be produced at each plant, usually to utilize the plants properly.

BMW's traditional load planning approach had deficiencies:

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(1) The mainly manual planning procedure required a great deal of effort, limiting the comparison of different strategies and the performance of sensitivity analyses with varying data.

(2) A one-dimensional calculation of capacity at each plant was not adequate. Planners needed to consider separately capacity for assembling bodies, which is dedicated to single products, and capacity for the paint shop and final assembly line, which all products share. Each of these stages is a potential bottleneck.

(3) In allocating products to the global production sites, planners did not consider the effects on the global supply chain, in particular the flow of materials from the suppliers to the plant and the flow of finished cars to the markets. Even the BMW engine plants were not included in the load planning but were planned afterwards in a separate department starting from the results for the car plants. For this process, planners often need iterations with coordination between the departments.

(4) Planners had no clear objective for free decisions, in particular for allocating the production volume of split products, and hence they did no optimization. They also had to evaluate the economics of load plans in an additional separate step.

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When BMW realized the deficiencies of its planning process, in particular the effort it required, it initiated a project to improve its strategic load planning. BMW employees who were PhD students worked on the project in cooperation with faculty members of the department of production and logistics of the University of Augsburg. In a first phase, studies show the interfaces between the load planning and the overall strategic planning and the implications for a quantitative model within this planning process. He developed a mixed-integer programming (MIP) model and implemented it in a commercial software system. In a second phase, Sonja Ferber (2005) extended the model to include investment decisions and their impact on plant capacities and the financial variables.

References

TOM FLEMING (2000) BMW plans to earn big money from small car Birmingham Post; Aug 4.

Dyer, Ezra (2007) Too crazy, too sexy: how BMW's Z4 is like Angelina Jolie.(CARS)(Product/service evaluation) Esquire; Sep 1.

Morley, Chris (2000) Car buyers snub BMW; BMW HIT BY THREAT TO UK SALES AS ROVER DECISION BEGINS TO HIT JOBS ACROSS MIDLANDS. Birmingham Evening Mail (England); Mar 25.

Fleming, Tom (2000) BMW plans to earn big money from small car. The Birmingham Post (England); Aug 4.

AN JEDLICKA (1999) BMW 328 blazed the way for future sports cars Chicago Sun-Times; Jun 6.

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