23/05/2016

Value Chain

Innovation

Mercedes-Benz

Fei Yang (2326590), Houyang Zhang (2215403),

Jun An Lee (2218417), & Yuhao Xie (2218030)

IB72

FONTYS UNIVERSITY OF APPLIED SCIENCES

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Preface

The creation of this report about Value Chain Innovation of Mercedes-Benz is made possible by our

teacher Mr. Sakwe. We would like to thank our teacher and the indirect contributors that helped us to

gain knowledge so we could write this report. Our group consists of Fei Yang, Houyang Zhang, Jun An

Lee, and Yuhao Xie.

All team members of this group have a Chinese background with two members with a Dutch

nationality. Houyang has been living in the Netherlands since his eleventh and Jun An since his birth so

both know the Dutch and Chinese language/culture. Fei and Yuhao got to the Netherlands since 2013.

Although the whole team has a Chinese background we are still able to look at subjects from different

perspectives.

During the creation of this report we will apply the knowledge from other management courses of

Fontys University of Applied Sciences, especially from Mr. Sakwe’s Performance and lean

management, operations management, and supply chain management. We aim to learn more from

the Automotive Industry and get more insight in the direction of Value and Supply Chain.

We wish you a pleasant reading experience and hope you are also able to learn from our research.

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Table of Contents Preface ...................................................................................................................................................... i

1. – Introduction ...................................................................................................................................... 1

1.1. – Value Chain Innovation ............................................................................................................. 1

1.2. – Company Background ............................................................................................................... 1

2. – Value Chain Strategies ...................................................................................................................... 2

3. – Business Pyramid .............................................................................................................................. 3

3.1. – Business Intelligence ................................................................................................................. 3

3.1.1. – Political ............................................................................................................................... 3

3.1.2. – Economical.......................................................................................................................... 3

3.1.3. – Social ................................................................................................................................... 3

3.1.4. – Technological ...................................................................................................................... 4

3.2 – Competitive Intelligence ............................................................................................................ 4

3.2.1. – Brand .................................................................................................................................. 4

3.2.2. – Technology ......................................................................................................................... 4

3.2.3. – Market Overview ................................................................................................................ 5

3.2.4. – Supply Chain ....................................................................................................................... 5

3.3. – Competitor Analysis .................................................................................................................. 6

3.3.1. - BMW .................................................................................................................................... 6

3.3.2 – Audi ...................................................................................................................................... 6

3.3.3 – Lexus .................................................................................................................................... 7

3.4 – SWOT Analysis ............................................................................................................................ 7

4. – Maturity Level of Supply Chain ......................................................................................................... 8

5. – Value Chain Innovation..................................................................................................................... 9

6. – Recommendations .......................................................................................................................... 10

6.1. – 3D Printing Technology ........................................................................................................... 10

6.2. – Hubs-and-Spoke models ......................................................................................................... 10

7. – References ...................................................................................................................................... 11

8. – Appendices ..................................................................................................................................... 14

8.1 – Appendix I: Unit of Sales Mercedes-Benz Cars ........................................................................ 14

8.2 – Appendix II: Current Value Chain ............................................................................................. 15

8.3 – Appendix III: 14 Largest Original Equipment Manufacturers ................................................... 16

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1. – Introduction

This report is about the Value Chain Innovation of Mercedes-Benz which is in the automotive industry.

1.1. – Value Chain Innovation

The value chain is a series of activities including primary and support activities, that could add value to

products and services. It enables the company to gain marginal value for these products or services

and eventually competitive advantage (Porter, 1985). The supporting activities consists of categories

firm structure, HRM, technological development, and procurement, whereas the primary activities

consists of the inbound logistics, operations, outbound logistics, marketing and sales, and service.

Primary activities relate to the creation and distribution of the product, each of these activities create

value for the end product or service. Value activities are dependent on the organisational strategy and

also the importance of each generic category might differ per industry. The role of the supporting

activities are, however, to back up the primary activities (Eelants, 2015).

Innovation has significant effect on firms’ survival and growth in the market, especially in the longer

term. Innovation has been defined as “the development of new values through solutions that meet

new requirements, inarticulate needs or old customer and market needs in value adding new ways”.

1.2. – Company Background

Mercedes-Benz is a division part of Daimler Group, one of the biggest producers of premium cars and

one of most successful company word-wide (Daimler AG., n.d.). The company started as two separate

companies, Daimler-Moteren-Gesellschaft, also known as DMG, founded by Gottlieb Daimler and Benz

& Cie. founded by Carl Benz. They are the inventors of automobile in 1886 and merged in 1926 (Daimler

AG., n.d.).

Throughout the years Mercedes-Benz has grown significantly and is now distributed world-wide. It

focusses on the production of premium cars; however other than passenger cars it also sells camper

vans, transporters, trucks, and buses. In addition, it separated corporate and diplomatic sales. The

product line of Mercedes-Benz’s passenger cars consists of 25 series. The unique selling point of

Mercedes-Benz goes as following: “the best or nothing“. By comparing the sales of 2014 and 2015 it

can be seen that Mercedes-Benz is having sales growth in the most important markets such as the

United States, Japan, China, and West Europe. Some segments received negative changes such as the

Sport Cars (-4%), E-Class (-7%), and S-Class (-8%). A detailed overview of the sales is displayed at

Appendix I.

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2. – Value Chain Strategies

Originally Mercedes was a product focused company and now the company transformed its focus from

product leadership to customer intimacy. For the transition, Mercedes was required to improve

customer service and experience. Therefore, it started with the research on the customer journey map

and spread meaning and the best practice to stakeholders. Enhancing the customer service and

experience required an education program. In the past, a large number of Mercedes dealers never

drove a Mercedes-Benz themselves. This lead Mercedes to have every dealer to drive a Mercedes-

Benz themselves to experience what customers are experiencing. In addition, Mercedes was bad at

listening at customer feedback, these feedbacks were not processed. For this matter, the company

designed a software to serve or counter customers worries or problems immediately (Brouwer, 2016).

With a base on product leadership and improved customer intimacy Mercedes can only make further

improvement on the aspects of operational excellence. Appendix II displays a concise Value Chain.

Support Activities

Firm Infrastructure General management, finance accounting, legal

Human Resource Management

Recruitment, training design, contracting, safe working conditions, health care & compensation policies.

Technology development

Smart factory (networked value chain) natural energy, BlueTEC, BlueEFFICIENCY measures, Hybrid technology, BlueTec Hybrid, F-Cell

Procurement Purchasing, management supplier network, utilization of natural materials, supply chain management, funding, uses of particular input (e.g. sheep’s wool in new C-Class Saloon), renewable raw materials, natural gas, hydrogen energy

Primary Activities

Inbound Logistics Purchasing the raw material from all around the world with different supplier, maintain the relationship between the company and supplier, and applying the JIT approach for handling the raw material.

Operations 33 production locations world-wide, manufacturing: pioneering technologies (Hamburg, GE), assembling, dealership management, integrating logistics management system, IT and communications management.

Outbound Logistics Distribution channel, logistics system

Marketing & Sales Car exhibitions, (social) media (e.g. TV commercials, main stream magazines), marketing and production mix

Service After sales service, complaints handing

Source: Mercedes-Benz Group

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3. – Business Pyramid

3.1. – Business Intelligence

3.1.1. – Political

Taxation in the automotive industry is one of the important factors that affects the sales price of the

car. According to Uni Assignment Centre (2013), duties for each country differ based on the type of

car, CO2 emission, economic life span, and engine power. Due to protectionism for the import and

export of goods and services, tax has to be taken into consideration for the entire value chain process.

Moreover, based on the report by Kalmbach, Bernhart, Kleimann and Hoffmann (2011), it could be

said that behaviour of customers could also be affected by regulation, legislation, tax and rating

recommendations. The automakers have to adjust their production methods and manufacture

different models to adapt to the regulations in country where they sell their products (Audretsch,

Lehmann, Richardson, & Vismara, 2015).

3.1.2. – Economical

The automotive industry is one of the most important economic driver around the globe. It consumes

nearly half of world’s consumption of oil (Papatheodorou & Harris, 2007). This industry creates millions

of jobs in the world. The report by Hill, Menk, Cregger and Schultz (2015) stated in the US, automotive

industry creates 7 million jobs directly; one car production job creates 7 other jobs; each employment

in this industry can create 4 additional jobs in other industries. The automotive sector attracts foreign

direct investment which are valued to be 74 billion USD, it accounts for 3 percent of all FDI in America.

The automotive industry has provided the government a total of 206 billion USD in tax which includes

100 billion USD in state government tax revenue and 96 billion in federal government tax revenue.

In Europe, automotive sector provides 12 million jobs which consisted of 3 million jobs for

manufacturing, 4.3 million jobs for sales and maintenance, 4.8 million jobs for transport. This industry

accounts for 4 percent of European GDP (European Commission, 2016).

3.1.3. – Social

Nowadays, automobile culture is still one of the important cultures in American and European

countries. Until July, 2015, the USA has 257.9 million sedans, trucks and SUVs. It means that out of five

people, four own a vehicle. Meanwhile, the average age of a vehicle also increased from 9.8 years to

11.5 years (Young, 2015); however, in China, the car culture is different from the American one.

Chinese consumers do not care that much about the economic life of a car. This group more concerned

about new models, fashion and luxury of the vehicle. The main reason is due to ability of cars to show

the owner’s social status (Branigan, 2012). Gabardi, Huang and Sha (2013) stated that in 2016 China

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will become the largest market for luxury vehicles and in 2015, quarter 1 to 3, the sales volume of

premium car of Mercedes Benz increased 30 percent in Chinese market, twice than the growth rate in

worldwide market (Bekker, 2015).

3.1.4. – Technological

The engine occupies a crucial position in a car for which most companies put significant effort on

improving ability with numerical funding and talents. According to Crawford (2013), one of main trend

regarding the engine are focusing on the improvement of the engine efficiency and fuel economy

which include downspeeding, direct fuel injection, and boosting. Other engineering trends focus on

improving the performance of batteries system, such as new battery chemistries and subsystems

which were designed for expanding battery operating range and reduce costs. Another trend is

downsizing and turbocharging which in the end also improves the engine efficiency. Besides, the

vehicle electrification and hybridisation technology are comprehensive applying in automotive

industry.

3.2 – Competitive Intelligence

It is of importance that Mercedes-Benz identify the factors of success within the automotive industry

in order to stay competitive. Some of these factors identified are brands, technology, market overview,

and supply chain.

3.2.1. – Brand

The car brand is an essential factor when people consider to purchase a car. Due to the existing

knowledge about car brands by customers they will immediately have a preconceived view on a certain

brand. These view could easily be influenced by commercials, celebrities, peers, and occupation which

is related to the effects of emotions and rationality of the human being.

Nowadays, there are numerous brands of cars which were established by 14 large automotive OEMs

(Original Equipment Manufacturer) have driving the automotive industry (Simoudis, 2015). A detailed

overview of these OEMs can be found in Appendix III.

3.2.2. – Technology

Technology component is one of crucial success factors in the automotive industry which has

generated 80% growth from 2000 to 2007. In today’s marketplace, automakers are heavily relying on

the technology development to maintain their competitive positions. Such as powertrain

electrification, which has become significant trend in automotive industry aim to reduce the CO2

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levels. Kalmbach, Bernhart, Kleimann, and Hoffmann (2011, p. 55) state that “OEMs will need to

expand their technology portfolio and add electrification of the powertrain in all forms, including plug-

in hybrids and pure electric drive vehicles”. Both of them can produce fewer emissions than

conventional vehicles. In 2025, the share of Hybrid cars would increase to 40%, while electric car will

reach 20% shares. Furthermore, some of the latest automated vehicle technologies are designed to

supplement the human operator to improve driver performance. For example, anti-lock brakes and

electronic stability control.

3.2.3. – Market Overview

For a company within the automotive industry, the ability to read the dynamics of a market is of great

importance. Markets throughout the world change, whether positively or negatively, these should be

tracked and companies have to react to these. For example, the BRIC countries, which are largest

emerging countries, are highly potential markets since these are still growing while European countries

and the United States are recovering from the economic crisis (Hanna & Kuhnert, 2014).

3.2.4. – Supply Chain

One of the key success factors is also supply chain which is complex for car manufacturers. According

to Hanna and Kuhnert (2014), car manufacturers that already have a strong presence in growing

markets decide to create an efficient and flexible production strategy and to fulfil their motives to

grow, these companies will have to control their supply chain. Within the production process, flexibility

can be created with standards although it may sound controversial. However, factories with similar

shared standards can manufacture different models which decreases down-time.

Hanna and Kuhnert (2014) also argue that within a car or truck more than 60% of the value added

items are created by the research and products of suppliers; therefore, suppliers are essential partners

for the creation of innovative end-products. Suppliers deliver their products as parts, components or

even as systems. Research is driven by the higher expectation in the areas of safety, environment, and

fuel efficiency.

For car manufacturers to get a hold of innovative components developed by suppliers, relationships

have to be created. The study of Kalmbach et al. (2011) explains that R&D of car manufactures have to

create strong relationships with partners in the downstream section to access new technologies.

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3.3. – Competitor Analysis

3.3.1. - BMW

Bayerische Motoren Werke AG, usually known as BMW, is one of the most major competitors of

Mercedes-Benz. BMW is founded in 1916 as an aircraft-engine manufacturer and has become a

successful automaker in the automotive industry. It is now one of the most successful world leaders in

motorcycle production. The three most outstanding premium brand of BMW are Rolls-Royce, MINI,

and the BMW brand itself. These cars are manufactured with remarkably high standards in terms of

aesthetics, dynamics, technology and qualities. With the BMWi they designed something innovative

again. This series contains features such as electric drivetrain, revolutionary lightweight construction,

exceptional design, and new rage of mobility services. BMW follows a value-based approach which

means it is more towards product leadership (BMW Group, 2016).

World-wide, BMW has a large distribution consisting of around 140 Rolls-Royce, 1,550 MINI, and 3,310

BMW dealership. Its production locations are distributed world-wide into 30 locations in 14 countries.

An international production network helps BMW to balance the value added into the production chain;

however German production sites remains an important base for the continuation of developments.

Due to their strengths in innovation with digitalisation, modular concepts, and intelligent composite

manufacture it is leading the international production network (BMW Group, 2016).

Since 2005, BMW surpassed Mercedes becomes the sales leader of luxury vehicle (Stanley, 2014). In

2014, BMW maintained the title of most preferable premium car brand with 1,811,719 cars sold

(Vijayenthiran, 2015).

3.3.2 – Audi

AUDI AG is a German luxury vehicle producer, founded in 1909 and now is part of the Volkswagen

Group. The name “Audi” means “listen” in Latin. Since 2011, Audi ranked 2nd on world luxury cars’

market and becomes the market leader in European and Chinese markets. In 2014, Audi sold 790,945

units with only 7 months in these two markets (Stanley, 2014).

Technological innovations, modern design as well as high-calibre material and build quality are the

core values for Audi (Audi AG., n.d.).

The global network of the Audi family has already grown to expand across 136 countries. In 2014, there

are more than 1.74 million cars delivered by Audi, setting a new record for the unit sales. Their product

portfolio includes a series of models from the premium A4 Saloon, to the mid-range A4 Saloon, as well

as the R8 sports car (Audi AG., n.d.). In this content, Chairman Rupert Stadler (as cited in Pollard, 2014)

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revealed that the range proliferation of Audi will grow to 60 models by 2020. They are also investing

massively on areas like lightweight construction, vehicle networks and innovative driving technologies

(Audi AG., n.d.).

3.3.3 – Lexus

Lexus, the luxury class from Toyota is founded in the 1980s. It has three price categories for the models

that can be distinguished in low, medium and high price range. The low price category contains the CT

and IS models that approximately 20 to 50 thousand euros. The GS, RC, and NX series belong to the

medium price range which has a price tag from 50 to 70 thousand euros. And at last, the high class is

consisting of the LS and RX series which cost from 70 up to 120 thousand euros. The special feature

that Lexus added to each model is the four different lines that appeal to different segment of

customers. Each model has a standard line, on top of that it can be upgraded to Business Line, Sport

Line, Luxury Line, or President Line. Furthermore, the focus of the Lexus technology lies in the hybrid

innovations which resulted in the LS 600h L that consist of world’s first full hybrid V8 power train

(Toyota Motor Corporation, n.d.).

3.4 – SWOT Analysis

Strength Weakness

Strong brand image

Largely known for its safety and luxury

Incalculable goodwill

Innovation advantage

Strong authorised dealer network

33 production plants around the world

Advanced user experience design

High maintenance costs

Expensive Mercedes-Benz

Extremely high service costs

Speed and handling of the car

Complex and costly supply chain

Opportunities Threats

Trend of clean energy

Trend of Hybrid/Electric Cars

Increased purchasing power in

developing countries

Increasing price of petrol

Many dominant players in the market

Capital requirement

Governmental regulations

Increased tax for importing vehicles

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4. – Maturity Level of Supply Chain

Currently, the performance of Mercedes-Benz shows that they are at level 4 of the supply chain

evolution, which is called “Value Chain Collaboration”. It is positioned in level 4 because Mercedes is

heavily investing on the optimisation of the supply chain and especially focussing on the logistics

throughout the global production network. Since logistics plays an extremely important role in the

process of delivering value to the end customers. It ensures customers to get the right product, at the

right place, and at the right time. However, within the logistics operation of Mercedes, there are much

pressure coming from a large number of engine models and personal customisation options. By

reducing the cost of logistics per car could have a positive influence on Mercedes’ competitiveness,

since the logistics have a significant effect on their overall cost position. To this end, Mercedes

investing massively in the next few years to improve the efficiency and flexibility of supply chain, which

mainly focus on optimising logistics throughout the global production network. Especially in three

major Mercedes plants, China, the US and South Africa, will be operated by specialised local logistics

service providers. Moreover, a global supply chain management unit is integrated within the central

production organisation of Mercedes-Benz to have better control of these three regions (Donati,

2015).

Additionally, Mercedes-Benz is aiming to digitalise the whole organisation which combines products,

machines, and the entire work environment together. Digitalisation is required in order to create a

smart factory, which they call “Industry 4.0”. By transform the real world activities into a functional

digital world it will provide real-time representation of processes, systems and the entire production

process. They believe that digitalised integration will enable their products to be more individually

oriented, production even more flexible, and achieve a greater efficiency. The condition for a whole

connected and flexible production system is necessary that all components in the system have a

common language. As a result, Mercedes-Benz uses an integra control software from the bottom level

at an individual machine up to production control, and in the collaboration with suppliers and system

partners (Daimler Group, 2015).

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5. – Value Chain Innovation

This area looks at the possible changes that could be made to increase the value added in the value

chain activities.

Research & Development:

Recognising the desires and preferences of the driver and passenger.

Taking more pressure off the driver

Delivering even greater comfort and convenience

Predicting operating steps

Production:

Increasing the efficiency and flexibility of its supply chain.

Expanding the supplier network close to customers and markets.

Optimising logistics throughout global production networks

Reducing logistics costs per vehicle

Marketing & Sales:

Determining the social media channel, such as TV, main stream magazines

Organising the car shows event in core markets such as Paris, London, Las Vegas, New York to attract the attention of the mass

Sponsoring/supporting prestigious world events to enhance the luxurious position

Distribution:

Maintain a long term relationship with car dealer in order to guarantee a high level of service to all customers.

Carefully manage the emerging multi-channel distribution network

Customer service:

Establish a long lasting relationship with a customer by providing extended mobility services.

Together with customer and the car dealer evaluates the mobility needs of customers.

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6. – Recommendations

6.1. – 3D Printing Technology

3D printing within the automotive industry is nowadays only used for rapid prototyping. Mass

production with 3D printing technology has yet to be applied (Cassaignnau, 2016).

This technology is considered as a potentially economical viable solution, which can be applied in the

production of both exterior and interior car parts. Under this technology, Mercedes gains several value

added benefits. On one hand, they do not only reduce the cost of manufacturing, but also speed up

the overall production process. On the other hand, Mercedes is able to increase the capability to

provide more customised designs to customers, such as lightweight lattice structures and fancier

geometries (Bekiaris, 2015).

6.2. – Hubs-and-Spoke models

In a hub-and-spoke system, the distribution centers, which is the hub, serve as a purpose to transport

finished vehicles to the dealer, which are the spoke. When transporting parts, the part suppliers will

serve as hubs and dealers still stay spokes.

The issue in logistics regarding its cost can be improved by the hub-and-spoke models, which have

been success in the shipping and aviation industry. The notion of hub-and-spoke is to unite network

flows for the optimisation and utilisation of a variety of transportation resources and to lower the costs

through sharing equipment used in facilities (Ludwig, 2013). Mercedes is able to sell its premium cars

cheaper, which creates a competitive edge over BMW and Audi.

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Audretsch, D. B., Lehmann, E. E., Richardson, A., & Vismara, S. (Eds.). (2015). Globalization and public

policy: A European perspective.

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logistics-to-trim-costs

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Donati, M. (2015, July 31). Mercedes-Benz invests €90 million to rev up supply chain. Supply

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from Lexus: http://www.lexus.com/

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marketing-essay.php?cref=1

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sales. Motor Authority. Retrieved from http://www.motorauthority.com/news/1096204_bmw-is-

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Young, A. (2015, July 29). American car culture in high gear: US has a record four cars for every five

people. International Business Times. Retrieved from http://www.ibtimes.com/american-car-culture-

high-gear-us-has-record-four-cars-every-five-people-2030027

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8. – Appendices

8.1 – Appendix I: Unit of Sales Mercedes-Benz Cars

2015 2014 15/14

in thousands % change

Mercedes-Benz 1,880 1,630 15

thereof1: A-/B-Class (excluding GLA) 425 387 10

C-Class 470 342 38

E-Class 306 329 -7

S-Class 106 115 -8

SUVs (including GLA) 543 426 27

Sports cars 29 31 -4

smart 121 92 31

Mercedes-Benz Cars 2,001 1,723 16

thereof Western Europe 773 669 16

thereof Germany 296 272 9

NAFTA 412 391 5

thereof United States 359 344 4

China 400 293 37

Japan 69 61 13

Source: http://ar2015.daimler.com/divisions/mercedes-benz-cars

15

8.2 – Appendix II: Current Value Chain

Firm Infrastructure: general management, finance accounting, legal

Human Resource Management: Employment, contracting, training design, safe

Technology Development: Smart factory (SC), natural energy, car innovation (e.g. Hybrid)

Procurement: Purchasing, management supplier network, renewable raw material

Inbound Logistics:

- Inventory

management

- Manage material

flow (JIT)

Operations:

- Manufacturing

- Assembly

- Manage dealers

Outbound Logistics:

- Distribution

- Logistics system

Marketing & Sales:

- Car exhibitions

- (Social) Media

Service:

- After Sales

- Complaint

handling

Profit

Margin

16

8.3 – Appendix III: 14 Largest Original Equipment Manufacturers

Source: https://www.enterpriseirregulars.com/