Mercedes Case Study

1. Competitive environment faced by Mercedes are:

1. Recession in 1990-1191 made Mercedes struggle to sell products since demand was down. The sales were worst and caused Mercedes lost money for the first time in its history. To get their consumers again, Mercedes had to produce cars with competitive quality and reasonable price. As we know Europe, especially Germany, is well known as producers of high quality cars (e.g. BMW, VW, Audi, etc) and off course it made market competition for car sales was very tight. To overcome this situation, Mercedes needed to solve problems related to product development, cost efficiency, material purchasing and problems in adapting to changing markets;
2. In expanding their sales, Mercedes need to search and find a new market share, new segments and new niches. One segment that Mercedes wanted to explore was sport utility vehicle segment. Many people started to love type of vehicle but unfortunately the biggest market was in US. Market for sports utility vehicles in US was dominated by Jeep, Ford and GM at that time and it made big challenge for Mercedes Benz.

1. Mercedes has reacted to the changing world market for luxury automobiles by:

1. Developing a range of new products such as the C-class, the E-class, the SLK, the A class and the M-class;
2. Streamlining the core business, reducing parts and system complexity;
3. Holding regular customer clinics to introduced and explained the new vehicle concept as early marketing, and also get important information about what customers wanted on the proposed vehicle;
4. Manufacturing AAV in US to get closer to customers and markets.

1. Mercedes Benz determine the value of two target costing elements by:

1. Target selling price

• Calculate the estimation of existing cost for each function group;
• Identify components comprising each function group with their associated costs.
• Determine the target cost and cost reduction target;
• Implement measurement to achieve the target cost;
• Sum total target cost + required margin = target selling price.

1. Required margin

• Forecast direct and indirect costs;
• Overhead;
• Required margin must be sufficient to cover the sum of these costs.

1. Process of developing a component-importance index:

There are several steps that taken by Mercedes in order to create a component importance index for AAV:

1. Indentify the catagory that customer will consider to buy this AAV, this category define by collect data from customer, suppliers and Mercedes own team design. The result from this indetifying process quantified in order to get the priority(from table 1), and the category are:  Safety(41%), Comfort (32%), Economy(18%), and Styling (9%).
2. The next step is to indentified function group together with the target cost estimates. The target cost computed for each funtion group than calculate how much each function group will effect on whole target cost, andthe result are (from table 2): Chassis (20%), Transmission (25%), Air conditioner (5%), Electrical system (7%), Other function group (43%).
3. The next steps is to meassure how much each function group contribute to catagory that require by the customer
4. The next step is to combine the category weigthing percentages from step 1 with the function group contribution on step 3 in order to measures the relatives importance of each function group accross all catagories by multiplying each funtion group value with the corresponding value from each category

1. Mercedes approaches cost reduction through:

1. Including suppliers from the beginning of the project;
2. Buying and tearing down competitors’ vehicles to help understand competitors’ cost and manufacturing processes as part of competitive benchmark process;
3. Enhancing function group effectiveness;
4. Target costing process was led by engineers as cost planners, not accountants. This is because engineers have experience on manufacturing and design to make reasonable estimates of costs. Also Mercedes owned much of tooling used by suppliers to produce components so that the engineers could keep watch the tools;
5. Providing Target Cost Index as guidance to manage costs.

1. Suppliers were involved in discussion at the early stage in the process because they were important in achieving established cost targets.

Suppliers were so critically important to the success of AAV because the AAV manufacturing process is held in US, home of SUV’s manufacturers. Mercedes had to produce luxurious SUV in competitive features and selling price. Besides of that, US is so far from Germany, where main company and the biggest manufacturing plant stands. Mercedes would need much more money to build complete manufacturing plant, to equip the plant, to hire more worker for plant, and it means high fixed cost. Furthermore, Mercedes would need big number of money for this infestation in which they might get by having new deep debt. So that to minimize total cost and to prevent much losses when the selling under expectation, it would be better for Mercedes to outsource most of the work to their suppliers.