BMW plans to put more pressure on its suppliers to cut prices – a significant change for a company that mainly picks its partners based on their technology leadership.
Purchasing head Gerhard Schuff says BMW can no longer afford to overlook the pricing pressure being exerted on suppliers by other carmakers.

The German carmaker has traditionally earned higher margins because its customers pay more for the brand. But some of that advantage has been eroded because other OEMs squeeze suppliers harder.

Reducing costs by 1% a year is not enough, says Schuff. Over the life cycle of a product he says that can leave a carmaker behind its competitors.

Schuff spoke at the Automobil Produktion conference in Stuttgart last week.
By eliminating €1,000 in costs, BMW can add back that much in new technologies, he says.

Schuff also says BMW needs its keiretsu-style supplier “network” as it carries out its current product offensive.

BMW last year launched the X3, 5 Series sedan, 6 Series coupe and Rolls-Royce Phantom. This year, the 1 Series, 5 Series station wagon, M5 and 6 Series Cabriolet will debut.

Using the network approach, BMW has standardized electrical/electronic systems and successfully developed cockpits and an active steering system, Schuff says.

Suppliers are doing more than ever for BMW. The carmaker has reduced its share of the new product development process from 70% in the mid 1980s to 45% in 2004 — and it aims to reduce that to 30%. Value-added in assembly has fallen from 40% to 30% with the move to module suppliers, co-development with suppliers and system partners.

Long-term partnerships

Schuff says BMW has done well with its collaborative approach, but he is not satisfied. In addition to the network approach (described in the BMW issue of monthly of November 2003), Schuff wants a closer alignment of methods between BMW and its suppliers. The purchasing process is not about suppliers or carmakers trying to push costs off on to each other, but about the minimization of the total cost in the chain, says Schuff.

“Strict hierarchic structures shaped by target agreements, supervision, pressure with rigid division of labour” between suppliers and OEMs are “no longer appropriate,” he says.

“Long-term strategic partnership is only possible with a partner pursuing the same objectives with the same values,” says Schuff. “Networking is not enough. The cultural fit must also be right.”

Schuff says networking is particularly important for its Mittelstand [medium sized, privately-owned] suppliers.

“We want to strengthen the Mittelstand,” he says.
BMW wants to work more closely with suppliers in the early development phase of models — 54 months before start of production — and in some cases commit to a technological partner before development starts.

Schuff says that will help reduce re-work and last minute changes. That is necessary for BMW to achieve its target of a three-month ramp-up to full production in the future.

“Partnership for us means a long-term business relationship with a focus on a win-win strategy,” says Schuff.

Schuff says BMW still wants to attract suppliers who are technology leaders. He says BMW is happy with the installation rate for technologies such as its active steering launched on the 5 Series and now on the 6 Series. It is also pleased with the long term, exclusive agreements arranged for those technologies.

More outsourcing

BMW has been outsourcing more responsibility to suppliers, particularly for its lower-end models and niche vehicles. The X3 SUV was co-developed and assembled by Magna Steyr.

But Schuff wants to reduce the disadvantage BMW faces by being a relatively small carmaker. He believes partnerships such as the AUTOSAR open system architecture standard are needed to support future in-car applications.

AUTOSAR was established in 2003 by Siemens VDO, Volkswagen, Bosch, Continental and DaimlerChrysler to define an open electrical/electronic architecture standard for the automotive industry. Other core members include Ford, PSA Peugeot Citroen and Toyota. Delphi recently joined the group.