Mercedes Benz - All Activity Vehicle (AAV)
Problem Identification:
Mercedes-Benz (MB) always took advantage of its loyal customers and a good brand image until it faced its first financial loss in 1993 due to cost inefficiency, issues with material purchasing and the inability to adapt to market changes. Since the loss, MB has been trying to react to environmental changes by identifying new segments and developing a whole new range of products. MB’s most far reaching project was the All Activity Vehicle (a new sports utility vehicle model), which used target costing in its design and production. MB now realized that it needs to develop its strategy according to environmental changes.
Problem Diagnosis:
The AAV concept came into existence in 1992 with production commencing in 1997. MB moved its manufacturing facilities to United States to be in close proximity with the target market for sports utility vehicles. AAV’s manufacturing process relied on value added system suppliers. MB made sure that its suppliers were completely involved with the development process. MB asked its potential customers to rank various factors such as safety, comfort, economy and security that were important to them for such a car. The most important factors were categorized and given an importance weight which was converted into a relative percentage. Suppliers of various components were divided into function groups. For this model, the components were all going to be produced by the suppliers, who had to meet quality and delivery time requirements at the target costs set up. These target costs were set up for each function group at the beginning of the process. To better understand the manufacturing costs and process, MB purchased and tore down competitor’s vehicles. Suppliers’ knowledge was used to enhance the process of target costing. Suppliers’ full cooperation was very necessary since MB wanted to produce comparatively expensive vehicles which delivered a greater perceived value to customers. All this was done so that MB could remain profitable while meeting or even exceeding customers’ expectations.
Recommended Solution:
Mercedes Benz managed to consider possible future economic situations which could affect the long term success of a project like the AAV. MB succeeded in identifying its competitors’ weaknesses by dissecting their vehicles. Their heavy involvement of customer preferences towards different characteristics that might be important to them when they purchase a car helped MB to categorize them and compare them with the functional groups which serve these attributes. Target costing helped MB to cut unnecessary costs and make their production process even more efficient. Target cost was calculated for five functional groups and potential customers’ requirements were correlated to them. This helped MB identify how much the functional group’s costs are deviating from the target cost. A less than one Important Index meant that the perceived value was lesser than the cost of that particular function group. Such results helped the AAV project by recognizing opportunities for cost reduction, increased customer satisfaction, etc. MB rightly set up its target costs only after estimates were made about the existing costs. The process can be more cost effective by comparing target costs with the actual costs. MB could also use weekly or monthly costs reports to monitor their costs continuously. MB must consider ABC (Activity Based Costing) which will help them to realize exactly which activity (function group) is most productives and which activity needs to be checked more frequently or requires an alternative. MB should encourage everyone involved in the AAV project to focus on continuous improvement.