Pushing the Envelope

DaimlerChrysler seemed to have stunned the automotive community at this year’s Traverse City Management Briefing Seminars announcing plans to renovate the Toledo, Ohio, Jeep plant by farming out three major processes, body, paint and rolling chassis to suppliers who will build and manage their own facilities adjacent to the new Jeep plant, supplying painted bodies and complete rolling chassis to the final assembly line.

Jeep’s Toledo plant

But manufacturing experts saw it coming.

 “It’s an extension of the ‘plant-in-a-plant operation,” says Anthony Mascarin, managing partner, IBIS associates, “where someone comes in and runs the stamping facility, similar to the concept of the Smart plant in Germany. Chrysler has already outsourced large body sides to either Dana or Budd. It’s an extension of what’s going on. It’s the scale that makes it seem unusual.”

The supplier co-located manufacturing project in Toledo is an off-shoot of a similar plan that DCX tried to broker in Windsor, Ontario, Canada, to build a plant to manufacture a production version of the M80 small pickup concept shown at the 2002 Detroit Auto Show. The Kuka group, that will build a 250,000 sq.ft. body shop in Toledo and Hyundai Mobis, that will build rolling chassis in its 200,000 sq. ft. facility, were part of the initial group.

“I had spoken to Larry Drake from Kuka at that time,” says Jay Baron director of the Auto Body Consortium at the Center for Automotive Research, “and they were very aggressively pursuing that program. But the big issue then was that Chrysler was looking for one entity to manage all of those operations. It was too big. So anybody, if they wanted to be one of the players, had to go out and find the other partners who would help them with the other areas. So, I think in some ways Chrysler may have taken on more that they could handle and they learned from that.”

Mascarin says that it makes more sense for DaimlerChrysler to be doing this because the company is a lot further along on outsourcing and has a much better relationship with the union than either GM or Ford.

But a spokesperson for Karmann, who was a member of the M80 team, says that demands from both the Canadian Auto Workers union and Canadian government were instrumental in dissolving that project.

And DCX has already experienced problems with the Toledo project as well. Durr Industries, that was to build and operate a 400,000 sq.ft. paint shop, broke off negotiations last month, replaced by the Hayden International Group of Auburn Hills, one of the original bidders on the project.

While some industry scoffers saw this as a last-ditch-effort to save a dying Brown field plant, Mascarin has an interesting observation.

“My first impression is that it’s a stock performance issue,” he says. “It’s going to affect the profit they make on transferring the initial cost of investment in the plant to the supply chain.”

“Wrangler is a good established market that they can depend on for good volumes,” (They’ll build about 90,000 in 2004). “If they sell just as many Wranglers but only have to invest one third of what it normally costs to retool a plant, then the performance statistics will look a lot better on paper.”

Chrysler’s three partners will all share in the $900 million investment.

Baron says that there’s an obvious reward in reducing your investment cost.

Jeep’s Toledo plant will move to a supplier co-located manufacturing facility that will give DCX the finanaces and flexibility to expand the portfolio producing vehicles like the upscale Jeep Rescue concept (above).

“Everybody wants to be able to introduce more products at low volumes and that’s primarily a cash restraint,” says Baron. “This is helping to achieve that strategy … saving the funds for investing in other areas of the business.”

It’s no secret that Chrysler would like to expand the Jeep brand. There’s plenty of room to move both upscale to compete with Hummer and look at the entry-level market as well.

“It’s fair to say that you would anticipate or expect Jeep to try to leverage its investment.

“And it falls within the plans to grow the brand,” says Mike Jackson, manager, North American Forecasting for CSM Worldwide.

An increase in volume in the plant would be good for all partners involved as more volume would equal a larger payback on the initial investment. But who will be reaping those rewards is one of the questions that hasn’t been answered.

“I don’t think anybody knows what the formulas are in terms of how those revenues are shared,” Baron says. “I think some of that return is clearly going to have to be shared with these clients to compensate them for this risk.”

Another unanswered question is the issue of warranty. With suppliers taking on more of the manufacturing responsibility, will they be saddled with a large chunk of the warranty costs as well?

“That’s going to drive the motivation for improving quality,” says Baron. “The model for assigning warranty costs, I suspect, will have some complexity to it.”

Baron’s model would take a significant proportion of the warranty cost, put it in escrow and then reward the system rather than the individuals.

“You want people to recognize a problem and think, ‘what is the lowest cost solution to that problem,’” Baron says. “Even if it’s somebody else causing it and I can fix it cheaper than he can, you want them to be motivated to fix it. And that’s not easy to do.

“A real key here is how these people work together,” says Baron. “There is clearly the opportunity here to have great efficiencies, by reducing inventories, improving communications, simplifying logistics, everything. But that’s going to take some organizational cooperation and if Chrysler tries to approach it with a hammer saying that we’re going to hold all of these things over you, that going to probably fall apart sooner rather than later.”

Flexibility has become a key industry word as OEMs are looking at a segmented market that has put an end to the era of the highvolume vehicle. Plants that, in the past, built 120,000 to 150,000 copies of the same car or truck now need to be flexible enough to not only build several different types of vehicles in the same plant but have the capability to change, literally, on the fly.

Baron agrees that the model potentially gives Chrysler much more flexibility, allowing them to add more modules or more variations of vehicles. “The fact that they have shared the investment costs here allows them to make the decisions more readily,” Baron says. “So I think Chrysler will achieve more flexibility, potentially at the expense of the suppliers.”

Chrysler may also benefit by having the latest technologies at its disposal. OEMs often shy away from investing in new technologies like alternatives to painting and stamping because they’ve invested so much money in paint shops and stamping presses which have to amortize themselves over many years. These investments will now become the responsibility of the supply chain.

“These guys are going to be vulnerable,” Baron says. “Say a new technology comes along in five years and Chrysler doesn’t like what they’re doing in the body shop or paint shop. These guys are going to be vulnerable if they don’t keep those shops up-to-date. “It’s going to be a motivation for these shops to stay very current.”

When the Toledo project is up and running it could be model for all OEMs to follow. It has the potential to change the way all vehicles are built. It will help lower costs by reducing inventory, improve quality and allow manufacturers to build vehicles to order in smaller, more efficient assembly plants.

“I would think to get the optimal operation,” says Baron, “you’ll need something that approaches the Toyota Production System, you’ll need everybody to have a systems perspective and not just focus on their own product. I think they can actually get better quality and better throughput if they get everybody to work together as a team. But if they start finger pointing and separating their problems, it could go to hell fast.”