Mercedes Benz AAV Project

1. Q. What is the competitive environment faced by MB?
Ans; Mercedes Benz is a world know Luxury car brand. Their main competitors are BMW, Lexus, Acura, Audi etc. At that time, not many of their luxury brand competitors were into AAV cars, companies who had AAVs in the market were GM, ford Jeep etc. But this was a rapidly growing market.

2. Q. How has MB reacted to the changing world for luxury automobiles?
Ans: Luxury Car makers were hit hard by the recession the early 1990s. The car sales plunged and companies were showing losses. Mercedes Benz struggled with product development, cost efficiency, material purchasing, and problems in adapting to changing markets to face the tough market conditions Mercedes made several changes within its business. Mercedes streamlined the core business, reduced parts and system complexity, established simultaneous engineering programs with suppliers. In search of additional market share and new segments, MB started developing new range of products. New products introduced were the C-Class in 1993, the E-class in 1995, the new sportster SLK in 1996, and A class and M class all-activity vehicle (AAV) in 1997. In addition, MB moved its manufacturing facilities closer to the market that is the USA. Most, importantly it became more customer oriented and used customer opinions for developing almost every part of the car

3. Q. Using Cooper’s cost, quality and functionality chart, discuss the factors on which MB competes with other automobile producers such as Jeep, Ford, and GM.
Ans. MB competes with other automobile producers such as Jeep, Ford, and GM in the AAV range. Also MB competes with Lexus, BMW, Audi etc. in the luxury cars segment. MB tries to develop its product along with these function groups by meeting the categories of safety, comfort, economy and styling. In other words, MB is using the 'function groups' which is comprised of experts from various deartments, to meet the concerns of the customers. MB was trying to differentiate its higher priced product by positioning itself as better in terms of safety, comfort, economy and styling. Cost: MB did not use the target costing to produce the lowest priced vehicle in an automotive class, The company’s strategic objective was to deliver products that were slightly expensive than the competitive models. Mercedes offers most of its products at a price similar to other luxury car models, with the exception of a few specialty high-priced products within each of their platforms. Quality: Mercedes offers high quality products. MB does not lower the internal standards for the components even if the customer expectations might be lower than the MB standards. Functionality Mercedes offers high range functionalities in its cars. They offered the latest styles and accessories available.

4. How does the AAV project link with MB strategy in terms of market coverage?
Ans : At the time AAV project was launched MB’s direct competitors ie the luxury car brands like BMW, Audi, lexus were not in the AAV market. The AAV market was mainly captured by GM ford and jeep. MB’s strategy was to enter the market as a luxury AAV maker. MB strategy was already trying to capture additional market share, new segments. MB started developing a new set of products like the C-class, E-class, SLK, A-class and M-class. In accordance with the MB strategy, AAV is expected to get additional market share with the help of AAV, it expects to enter a new segment that is sports utility vehicle segment through AAV and it expects to capture a niche for itself by launching a premium AAV using the brand equity of MB

5. Explain the process of developing an importance index for a function group or component. How can such an index guide managers in making cost reduction decisions.
Ans: The index measures the relative importance of each function group across all categories. For this calculation, the customers, suppliers and designers were consulted. For example the customers in MB case, weighted the categories of safety, comfort, economy and styling as 0.41, 0.32, 0.18 and 0.09. After identifying the different function groups’ contribution to customer requirements, MB has established an importance index of its various function groups, for example: Each category was given an importance weight that was converted into a relative percentage. The target cost was calculated by first creating five functional groups that is Chassis, transmission, air conditioner, electric system and other function group. Each was allotted a percentage of target cost. For example, the chassis was allotted 20% of the target cost. Again potential customers were used to correlate the degree to which each function group correlated to customer requirements. A percentage was allotted to each category. For, example chassis contributed to 50% of the safety requirements. Finally, these percentages were multiplied by the relative percentage allotted to each category by the customer and results were added across each function groups. For, example when the chassis functional group was multiplied by each relative percentage allotted and the sum was added the sum was 0.33. This is the importance index of chassis. Finally target cost index is calculated by dividing the importance by the target cost percentage by function group. indexes can guide managers during the concept design phase to understand the relationship of importance of function group to the target cost of function group. After setting up cost reduction target, specific reengineering process is to be conducted. There are basically two approaches to achieve the target cost: to improve product design and process efficiency. Product design is very important for target costing, because nearly 70% to 80% of costs are committed in this stage. Process efficiency can also reduce the cost substantially.

6. How does MB approach cost reduction to achieve target costs?
Ans: 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

7. How do suppliers factor into the target costing process? Why are they so critically important to the success of the MB AAV
Ans: The AAV manufacturing process relied on high-value-added systems suppliers. For example the entire cockpit was purchased as a unit for a systems supplier. MB expects suppliers to meet established cost target and bring them into discussion at the early stage in the process. Suppliers are a critical component of the target costing system; they have to agree to supply the products at an agreed upon price and that should meet certain standards. Mercedes wanted to maintain a certain standard to their product despite the high price, that is a very important thing for the suppliers and ultimately for the MB AAV project.

8. What role does the accounting department play in the target costing process?
Ans: Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price. MB held monthly departmental meetings 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 that actual production costs would conform to target(or standard) cost. The accounting department may also provide the design team with a mandated gross margin that the proposed product must earn. By subtracting the mandated gross margin from the projected product price, the team can easily determine the maximum target cost that the product must achieve before it can be allowed into production.