BMW was one of the major players in the luxury car market (retail price above $20,000) having

a market
share of 10%. Companies in this market segment competed on both tangible and intangible product
characteristics. BMW’s focus was on R&D, both in the engineering and styling of its cars, and had built a
reputation for high performance engineering. Its launch quality had always been on par or better than
that of its major competitors. However, since the late 1980s, the entry of Japanese competition
(Honda’s Acura and Toyota Lexus) had set higher standards of conformance in this industry.

1. What are the causes and consequences of BMW’s quality problems with newly launched
products? What should be done to improve launch quality?

One of the primary reasons for BMW’s quality issues was its strategy of using different tools and
materials in the prototyping process when compared to the production runs.BMW supported such a
‘dual’ development process to provide flexibility to its prototyping craftsmen to make changes to the
design quickly. For instance, the prototype shop was able to make new parts within a week of being
intimated of a design change. In contrast, the lead time for procuring pre-production tools from
suppliers was 6 months. Providing such flexibility though had a flip side to it - something which worked
in the prototyping phase may not work in the production phase. This meant that potential problems in
the design could be identified very late in the development process. People in pilot production spent a
lot of their time identifying and solving the big problems leaving them little or no time for minor
problems and fine tuning. Thus there were chances of minor issues creeping into actual production
resulting in customer complaints after sales.

Another reason which contributed towards BMW’s quality issues was its mixed-model ramp up strategy.
In order to utilize the high fixed costs involved BMW adopted a mixed model ramp up strategy. While
this permitted better utilization of fixed assets, it caused greater confusion among the workers and
made the logistics more complex. This problem was compounded due to the fact that not all problems
were discovered or solved in the pilot production phase. This in turn affected the quality of the cars
being produced. At the same time frequent changes to the production schedule resulted in escalation of
costs as well.

The above reasons might have played a significant role in BMW losing out to Japanese competitors in
the rankings on customer satisfaction and quality. Its market share in the US remained constant but the
share of Japanese manufacturers had increased by more than 10%. Its warranty expenses were
increasing and increase in design issues identified at the end of development process would only
increases the chances of a delay in the launch.

One of the ways in which BMW can improve its launch quality is to minimize the gap between prototype
and production process in terms of tools and materials used. The closer the prototype is to the actual
production output, the sooner in the development process can the design problems be identified. This
would require BMW to involve suppliers and use pre-production tools in the prototype phase itself. The
flip side to this strategy is that after every prototype cycle if there are any design changes, a new set of
pre-production tools needs to be ordered. We need to consider the following in this context:-
  Cost of pre-production tools - Each set is estimated to cost DM 50 million (to manufacture all
parts of the car). In the worst case, every prototype cycle would lead to design changes and
hence a new set of tools would be needed at the start of each cycle. Assuming 5 iterations, the
additional cost would be DM 250 million. This would be partially offset by savings of DM 100
million from reductions in excess direct and indirect labour, reductions in tool replacement costs
from pilot stage onwards and lower warranty expenses.
 Lead time to procure pre-production tools - The lead time is 6 months which is significantly
higher than the 1 week time span to procure hand-made tools in the current prototyping
process. If we consider 5 iterations, then an additional 30 monthswould be needed in the
prototyping phase thus increasing its span from 30 months currently to 60 months. Though this
increase in prototyping duration would be partially offset by fewer delays in the pilot production
since the design would be closer to production quality, it would definitely increase the overall
‘concept to launch’ lead time.

2. What are your recommendations to Carl-Peter Forster concerning 7-series prototypes? What
should he do regarding future development projects?

The 7 series luxury sedan had 32 months until the scheduled start of production. Over the coming
months prototypes had to be built and tested so that one last round of design revisions could be made.
The 7 series project was important to BMW also because the redesigned 7 series was a flagship product
and its success or failure would greatly affect BMWs image and market share in the competitive luxury
car market.

Carl-Peter Forster had two options to evaluate concerning the 7-series prototypes:

1) Continue with the existing prototype process wherein prototypes were developed in an in-
house prototype shop and involved skilled craftsmen.
2) Use pre-production tools in the prototype process in order to automate the process. The
assembling of the components would be done on a pilot assembly line.

Under the current proposal Carl had the option to alter the process for prototyping for the next and final
batch of the 7 series prototype.

The use of pre-production tools would have significant benefits in terms of improved product quality
and should be incorporated into the prototyping phase for all future development projects as discussed
above. However, in case of the 7 series project other issues need to be addressed:

 The Research and Engineering team were getting ready for the final cycle of prototyping. The
use of pre-production tools would require a design lead time of 6 months and an order lead time
of another 6 months. This could delay the prototype phase which in turn could affect the ‘time
to launch’ of the 7 series project.
 Moreover, the 7 series cockpit design was not yet frozen and changes to the design would
require a whole new set of pre-production tools which would take another 6 months to arrive.
This would result in further delays and new investments in pre-production tools (with earlier
 investments written off) and in the end considering the time constraint the final generation of
prototype cockpits would end up having to be made by hand.

Thus in case of the 7 series prototype, taking into consideration the time constraints, we would
recommend Carl Peter to continue with the existing prototype process. However for future
development projects pre-production tools should be used in the prototype phase.

3. What changes would you recommend in the way BMW develops new models? What
attributes of newly launched models would you expect to improve as a result of these
recommendations? What attributes might deteriorate?

-> Use of pre-production tools in prototype. In which phase of prototyping are these tools to be used
depends on how flexible that component is to design changes.(TODO??)

-> Involving suppliers in design. Is in line with BMW’s strategy to outsource the design and manufacture
of components to suppliers. Use of a single supplier in prototype , pilot and maufacture(TODO??)

-> Different Strategy for 20-40k and 100k segments as described below (TODO??)

Attributes which might improve: quality, help in faster ramp up of full production (6mth to 4 mth), cost
savings as mentioned in terms of DL, indirect labour. (TODO??)

Attributes which might deteriorate: If u use pre production in initial stage of prototyping for all
components then significant costs involved in each cycle which could escalate costs. Flexibility greatly
reduced as designs have to be frozen and components ordered before time – so no last minute changes
can be made. Eg : suspension changes in mid 80s 7 series (TODO??)

4. What recommendations would you make to Chairman von Kuenheim regarding BMW’s
strategy to compete against Japanese entrants into luxury car market?

An important question to address here is how are the Japanese manufacturers delivering high quality at
low cost and is there something that BMW can learn from them. The Japanese car makers have a launch
strategy of rolling out small incremental changes in quick succession. For example, Lexus and Infinity
were expected to introduce five new models in 2 years. Since the changes were only incremental, it is
possible to reuse pre-production tools across models. For instance, if some of the parts of the Lexus ES
250 were unchanged in the ES 300 (launched a year later), then the production / pre-production tools
used for the older model could be reused for the next model. This strategy brings down the prototyping
cost per new model launched but still maintains high quality by using near production quality tools and
materials early in the development process.

At the higher end of the luxury car market, customers are price insensitive. Here brand image and
perceived value are key considerations for a customer. Hence, in this segment, BMW can charge higher
prices to compensate for the increase in cost from the use of pre-production tools in prototyping. The 7-
series models would fall into this category. However, in the $20,000 - $40,000 segment, where it faces
price competition from low cost Japanese car makers, BMW cannot afford to increase prices and lose
market share. Thus BMW needs to have a different strategy for this segment. One strategy could be to
offer low variety in this segment but make incremental changes and roll out new models in quick
succession just like Toyota or Honda. This would ensure fewer changes to pre-production tools and
hence savings from the reduction in tool replacement costs.For the high end segment (7-series and
above), BMW can afford to offer high variety and completely replace pre-production tools for every
prototype if needed.

If the above dual approach strategy is used, then the cost would increase for the high end segment and
variety will decrease for the low end segment. Quality, however, will increase across the board as the
development process for the prototypes will be closer to the actual production process in terms of tools
and materials used.

Having addressed the cost issue, we need to now consider the high prototyping lead time issue. In order
to achieve a trade-off between time to launch and launch quality, BMW can intersperse automated
prototyping cycles with the existing manual prototyping cycles or use hand crafted tools for the initial
cycles and pre-production tools and materials for the last few cycles. But the fundamental question is
why it takes 6 months to procure the tools from a supplier when the same can be made in house within
a week. This can be avoided if suppliers are kept in the loop right from the design / styling stage. They
could start manufacturing the tools and parts when the design is nearly complete and not waiting for it
to be frozen. Further they can be closely involved in the prototyping iterations so that any changes
required in the tools and materials can be worked upon incrementally than having to wait till the
prototype is completely evaluated. Such steps can help in bringing down the lead time to procure the
prototype parts.