Ulrich Näher, Wolfgang Neubert, Arno AntlitzProduct Development in the Automotive Industry: Strategies to Circumvent the Complexity ChallengeJanuary 31, 20020
Number of models is increasing and product life cycles are decreasing19872000Models per brandNumber121110 +25 %98765Product -30 %Source:Press clippings1
OUTSIDE-IN ANALYSISTime-to-market is reduced dramaticallyMONTH FROM DESIGN FREEZE TO SOP*Golf III / IVC-classMondeo1991/961995/20001993/2000Reduction driven by implemen-tation of simulation Reduction 60technologiesdriven by implementa-tion of stringent quality gates4060%3816%28%322924*Start of productionSource:Automobile production, AN, MID2
In addition, urgency towards innovation drives vehicle complexityType of innovation in electronicsVehicle complexity –examplePercentBMW Z22100%Radical 30innovation43•BMW Z22 carries 70 major innovations Individual and 61 patents 20innovation•Objective is to ensure new technology concepts for 2005 and beyond27•Approx. 70 -80% of innovations are in the field of electronics:Incremental –X-by-wire–Integrated starter/50modification–Car PCalternator–Center monitor–Curvelight30–Fingerprint –Speech controlrecognition–Cameras for rear –Head-up displayview2010Today–TelematicsIntegration challengeSource:Automobil Entwicklung, survey results, McKinsey/ika3
Key levers to address complexity challengeClear and precise customer knowledge 1and orientationEfficient product architecture –from 2identity to similarityValue chain adaptation towards 3competence based structuresImproved development processes 4leveraging IT opportunitiesStringent quality processes along 5entire development processProject organization combining high 6functional and integration capabilitiesSource:McKinsey4
Increase in product variety and model change rate is driving passenger car market fragmentationSHARE OF TOP-10 SELLING MODELS WESTERN EUROPE, 1980 -2000Percentage of total sales :Schwacke 1998, Marketing Systems, EIU, Automobil revue, press clippings, McKinsey5
CONCEPTUALIn mature and highly fragmented markets two strategies are possible: Targeting average vs. tailored market segmentDimen-Coverage of sion 1Market sizeAmany promi-1Anent market Market segmentsB2Dimen-segmentsCompeting vehiclesOEM'ssion 2DmodelA, B, C, DC43Dimen-Tailoring ofsion 1BDimen-sion 1models to spe-1cific customerAABsegments2Dimen-Bsion 2DDimen-CCsion 243OEM'smodelMarket creationMarket maturationTimeSource:McKinsey6
To understandwhat customers really want is keyCustomer want and state it Customer want but don't state it Customer state though really don't want people Support is Derived importance like megood valueShowroom dominated by experience attributes positiveFun to driveAttractiveProud to Delivers what externallyAttractive show promisesinternallyI feel attractiveCost is good valuethis offMost highly regardedA leaderWon't break downComfortableSuperior AgileExclusiveSafe to driveI look Stands outWon't let you spaceSportyFor people ExcitingValueEfficient fuel usageAcceptablein the knowElegantRunning cocustomsts erresaleInnovativeAn in Information 20 yearseasyManlyEnvironmentally importance dominated by ImportanceOut of 10Source:Automotive branding survey, May 20017Derived Importance
Key levers to address complexity challengeClear and precise customer knowledge 1and orientationEfficient product architecture –from 2identity to similarityValue chain adaptation towards 3competence based structuresImproved development processes 4leveraging IT opportunitiesStringent quality processes along 5entire development processProject organization combining high 6functional and integration capabilitiesSource:McKinsey8
Efficient architectures have to be optimized on vehicle and component levelVehicle designComponent design (macroarchitecture)(microarchitecture)Foot controls exampleInterior dimensions, Organization interior packagingFoot Foot of engine controls controls componentsfor vehicle for vehicle type Atype BArchitecture redesignJoint component Cable for vehicle familyharness•Define packaging zones•Design components•Determine organization of components•Systematically optimize number of variants•Define levels of freedom for microarchitectureEnsure compatibility of macroarchitecture in Increase share of Focus of a family concepts standardized parts in standard-(., electronics vehicle familyized parts architecture)strategySource:McKinsey9
Existing product architectures are redesigned with highest shareof identical parts possible while maintaining sufficient differentiationProduct architectureParts/module architectureIdentityFunction 100%Identical •100% identical separationparts/modulesparts•Same variants Function across vehicle integrationtypes•Building block modulesFunction eliminationFoot controls exampleAdapted •Existing parts/ Variant parts/modulesmodules with combinationadjustmentsFoot Foot Principle or •Related functions controls controls for Restructuringconcept or geometries for vehicle vehicle parts/modules("pantograph")type Atype BSolitary •Parts/modules Combination parts/modulesspecific to vehicle reduction0%typesSource:McKinsey10
For deriving communality potentials four cost levers have to be understoodPotential Fixed-cost Technology Flexibility reserves Complexityleversdilutionleapsreductioncost reductionUnitsBR A & BR BPP400,000BR A200,000400,000800,000400,000800,000200520102015Descrip-•Payback on •Reduction of •Reduction of Increase in •Lower flexibility tioninvestments across variable costs by variety costspotential requirements due to large numbers of changing dependent higher share of unitsproduction concepton ongoing core •Blocking operationstype•Blocking Examples•Much lower •Increase in level of •Increased •Reduction of leveldevelopment costs automationproduction on process costs at for vehicle type B•Optimization of highly specialized, supplier: •Higher utilization of production site constantly running Purchasing, sales, machineryconceptlines (fewer production variants on one planning, line)administration, logistics, :McKinsey11
EXAMPLEHigh impactCost types are impacted differently by cost leversPartial impactLow impactFixed-costTechnologyFlexibilityComplexityImpact at dilutionleapsreserves reduction100% com-reductionmunalityCost typePercentBought-in materials7 -9Manufacturing 9 -10costsResearch and 10developmentWarranty and 10goodwillAdministration and 5sales costsImpact depends upon level of similarity/identitySource:McKinsey12
Key levers to address complexity challengeClear and precise customer knowledge 1and orientationEfficient product architecture –from 2identity to similarityValue chain adaptation towards 3competence based structuresImproved development processes 4leveraging IT opportunitiesStringent quality processes along 5entire development processProject organization combining high 6functional and integration capabilitiesSource:McKinsey13Source:McKinsey
Price increases above the inflation rate cannot be enforced despite new technologiesAdditional charge potential for new technologies –example brake-by-wireHistorical price developmentList price VW Golf base model*Not inflation-adjustedAverage EUR5,000 end Inflation-adjustedadditional customers ~ 300costs for surveyedbrake-by-wire15,000Luxury car ~ 1,000**segmentLarge car40010,000segmentCAGR %Additional charge Medium car 300potentsegmential5,000Golf IIIGolf IVCompact car 250segment0Small car 199319941995199619971998199920002001200segment*Incl. value added tax **Statistically not significantSource:HAWK project team14
Cost due to additional features have to be compensated by optimizing the value chainPRODUCTION COSTS COMPACT CAR, NOT INFLATION-ADJUSTEDEUR/~ 20% cost CAGReffect through %best practice value chain architecture and CIPElectronics Electronics share 20%share 40%Car todayAdditional Car 2015 Synergy and Car 2015 costs through (with old enhancement best practice new tech-industry processesvalue chain nologiesstructures)architectureSource:HAWK project team15
EXAMPLE: CHASSISFunctional value chain architecture will give way to one that isknow-how-drivenINDUSTRY STRUCTURETodayIn the futureBrakeSteering SuspenBrake Steering Suspen- -systemsystemsionsystemsystemsionAxlesAxlesSystem OEMdevelop-Brake mentsystem Lenk-inte-system-gra-Mechanical OEMSystem integra-Brake torintegratorintegrationtorsystem integra-torSpring X-by-wire integratorElec-Steer-and tronicsing Mecha-shock tronics system absor-Mechan-Mechan-specialistmanu-Mechani-ber spe-ical ical facturerMechanical Mechanical calcialistspecialistspecialistspecialistspecialistDivision mainly by function (system) or Division mainly by know-how because ofspatial placement (module)•Economies of scale•Development synergies•ComplexityFunctionality-/position-drivenKnow-how-drivenSource:Expert interviews, HAWK project team16
EXAMPLE CHASSISSpecific competencies are required to capture new synergiesNEW SYNERGY POTENTIAL IN CHASSIS SEGMENTUSD per vehicleSynergiesRequired competenciesX-by-wire-integrator199•Centralization of ECUs •System integration (., and basis softwareECU centralization)•Scale effects and •Innovative creativity optimization of interfaces (., ECU and Software between new electronic design)components•Development efficiency •Economics of scope in in electronics (., 130production of sensors and sensors)actuators•Operational excellence (., actuators, sensors)Mechanical specialists•Economics of •Operational excellence38specialization for •Ability to capture scale 31mechanical componentseffects•Factor cost efficiencyOEM•Avoidance of interfaces •Transaction cost Synergy Synergy Synergy Synergy through centralized efficiencypotential potential potential for potential chassis control via •Understanding of through for x-by-mechanical for OEMsoftwarecustomer needsvalue chain wire specialistsoptimizationintegratorSource:Team HAWK17
EXAMPLE: CHASSISDetailed analysis of competency gaps helps to derive specific activitiesCOST REDUCTION POTENTIAL FOR FUTURE STEERING SYSTEM INTEGRATORPercentSample companyBest-practiceCompetencies06companyCompetency gapMechanical development efficiencyElectronics development •Competency building is efficiencyneeded, particularly in the Innovative driveareas of development efficiency for electronics Module/system integrationand innovative driveRealizing operational excel-•Competency gap could be lence/economies of scaleclosed by means of cooperating with an Factor cost efficiencyinnovative electronics specialistPurchasing efficiencyOverhead/transaction cost efficiencyUnderstanding of endcustomerSource:HAWK project team18
Key levers to address complexity challengeClear and precise customer knowledge 1and orientationEfficient product architecture –from 2identity to similarityValue chain adaptation towards 3competence based structuresImproved development processes 4leveraging IT opportunitiesStringent quality processes along 5entire development processProject organization combining high 6functional and integration capabilitiesSource:McKinsey19
The 2005 target requires a reduction of development times by 50%AVERAGE DEVELOPMENT TIMES, PROJECT DECISION TO SOP Month8060 months(1988)6042 months 40 months (1991)35 months*(1994)(1999)40-50%Target 2030 months or less019851990199520002005*Concept-freeze to SOPSource:Publications on vehicle development times (70 vehicles worldwide) between 1988 and 2000, McKinsey-Research20
A near future development process is characterized by virtual techniques and only 1 prototype cycle30 MONTH DEVELOPMENT PROCESSMonth-35-30-23-50ProjectConceptRamp-StepsSeries development/-preparationplanningdevelopmentupStart of ConceptProductionStart ofGatewaysprojectdecisiontest seriesproductionPackagePackagePackagePackagedefinitionfreeze (-19)(-23)Exterior/Interior DesignStylingDesign freeze(-23)Design cyclesEngineering/Virtual steps/process developmentCAEOne prototype CAD 100% cycle for critical vali-Optimized test (-17)Massivedation tests onlystrategy driving cross use of virtualPrototypesPrototype cyclefunctional vehicle simulationperspectivePre-seriesIndustriali-TestingtestszationIntegration testsValidationEnduranceComponent teststestsSource:Harvard Business Review21
AUTOMOTIVE EXAMPLEProduct testing must be optimized along different dimensionsEffective conceptEfficient execution 12Complete •Test planningproduct–Risk prioritization–Optimization of utilization–Cross-functional use of Systemprototypes•Execution of tests–AutomationCompo-–Up-Speeding nentSimu-Labo-Field lationratorytestImpact•Specific parameters can be tested •Early test of highly critical very earlycriteria/properties•Test of more variants/options due •Cost reduction to faster test cycles•Significant reduction of effort Source:McKinsey22
Key levers to address complexity challengeClear and precise customer knowledge 1and orientationEfficient product architecture –from 2identity to similarityValue chain adaptation towards 3competence based structuresImproved development processes 4leveraging IT opportunitiesStringent quality processes along 5entire development processProject organization combining high 6functional and integration capabilitiesSource:McKinsey23
Maturity problems at ramp-up/SOP have significant impact on profitabilityPossible SOP problems Opportunity potential*(assumptions)USD millions**Late market launchMarket launch 6 months late~750Forgone sales15 percent migration of ~1,250Customer migrationformer customersReduced production Full production reached 6 Reduced ~500capacitymonths lateprofitability through potential Target production 10 percent over target ~2,000problems at cost exceededproduction costramp-up/ SOP Target development 15 percent over target ~190cost exceededdevelopment costIncreased Resources used for 50 percent over target ~125costramp-up/SOPSOP costWarranty and Long-term quality problems ~1,400goodwill costØ USD 400/vehicleChanges to body pressing C~250ost of changes tools 6 months before SOP*Profit contribution from profits or cost differences over life cycle, assuming: 500,000 units ., USD 5,000 profit contribution/vehicle, production time 7 years **Over total production timeSource:McKinsey24
Software maturity is becoming a critical factor in automotive product deve-relatedelopmenSoftwartSource of quality problemsShare of electronics and software problemsFailures per 1000 vehiclesthereof caused by electronics and SWMalfunction in Percent55% and body Alfa44%% system20Fiat45% (w/o injection)1246% systems644% problemsare reasons for recallof more than in 2002Source:McKinsey, Business Week, ADAC-AutoMarxX (3-5 year old car failures 1998-2001), cars in Germany only25
Automotive software development adds a new layer of complexity compared to hardware•High number of tacit requirementsMore•Heavy software and hardware interaction for embedded systemstl Fundamental complexity•Project complexity growing steeply with product sizeiff:differences:i ifi Find specific Less •Intangible product, hard visualization and performance trackingltisolutiontrans-•General mismatch between scope and available resources -parencyprojects always seem to be "nearly" complete•Inherent tendency to over-engineeringLess •Seemingly low cost of changesdiscipline•Invariant resource under-estimation •Irrational developer preferencesill i Will disappear More it •High degree of change in underlying complex technologiesas industry technolo-•No widely accepted platform standardst:matures:•Immature tool landscapegical risk f Learn from hardware•Fast-moving (and in many cases immature) marketsMore •Customer value hard to assessbusiness •Lack of experience translating customer requirements into riskfunctionalitySource:Brooks: The Mythical Man-Month, McKinsey26
Operational improvement can be achieved in a three step approach•Restructuring of development organization for Developmentspecific needs of SW projectsis necessaryorganization•Building of specific skills in SW development and SW project managementis neededProcess •Complex software projects are only feasible with standardized, repeatable processesefficiency•Development effort depends heavily on process maturity-efficiency potentials of up to 90% are possibleProduct•Modular, feature specific productdesign is key to reduce complexity and enable concurrent engineeringarchitecture•Platformingand maximal degree of reuse is neces-sary to overcome complexity challenge and ensure software qualitySource:McKinsey27
Process maturity is key for product qualityContinuously improving processPredictable Standard processconsistent Disciplined OptimizingprocessprocessManagedDefined•Process change Repeatable management •Quantitative Initial•Defect goals for product •Standard pro-prevention and processcess owned by processes •Process owned •Tracking of goals organization •Technology by project by metrics and •Process-specific charge •Undefined pro-managerstatistical tailoring of the management cesses, ad hoc •Disciplined analysisstandard processworking methods project •Success de-managementpends on few •Process varies specialists from project to •Schedule, quality Aircraftprojectand cost unfore-industryseeable Automotive !industry targetAutomotive industrySource:McKinsey28CharacteristicsCMM level
Key levers to address complexity challengeClear and precise customer knowledge 1and orientationEfficient product architecture –from 2identity to similarityValue chain adaptation towards 3competence based structuresImproved development processes 4leveraging IT opportunitiesStringent quality processes along 5entire development processProject organization combining high 6functional and integration capabilitiesSource:McKinsey29
QUALITATIVELYSignificant issues after reorganizations CHANGES IN ORGANISATIONAL ORIENTATIONCritical issuesDivisionalChrysler (reorg. since 1989)organization•"Empire strikes back" –change not sustainable–Project management Toyota (reorg. since 1992)Projectwithout real powerBMW (reorg. since 1995)organization–Support from top Mercedes (reorg. since 1997)management and organization too weakVW/Audi (reorg. since 1993) •Organization unable to Functional accept shared organizationresponsibilitiesTime~1990~2000Source:Interviews, press clippings30
CONCEPTUALProject organizations must combine high integration and functional development capabilitiesEVALUATION OF DEVELOPMENT CAPABILITIESHighHighDivisional competenceorganizationProject organizationIntegration capabilities•Development timeProject •Target costsorganization•Known customer requirements"•Platform conceptsFunctional Limited organizationcompetenceLowLowHighFunctional capabilities•Commercialized innovations•Quality of vehicle features•Efficiency of functionSource:McKinsey31
Structure and roles within project organization defined to ensure high competencyCEORolesProgram managerHeavy weightFunctional managers Develop-Procure-Control-Functional know-how ment mentlingand integration SalesProductionSingle-project Project managersorientation Limou-CoupéConver-sinetibleModule managersModule orientationManu-BodyElectro-ChassisPower-facturing/nicstrainEngineer-ingCross-functional teamsSource:McKinsey32
Organizational setup of line functions based on individual functionTypes of line R&D Other line organizationsdepartments*functionsCEOLine function segmentation•MarketingProgram management•ControllingABC•Vehicle integration•Body•Manufacturing Partial BodyElectro-ChassisPower-Manu-•ChassisEngineeringnicstrainfacturing/ segmentationenginee-ringABC•Quality Cross-functional teamsassurance•Electronics•Powertrain•Purchasing*FunctionalABC•Design •Concept developmentA, B, C programs*Best organized along modulesSource:McKinsey33
The necessary change process must be driven by top management and requires a long term change in people's mindsetsClear and precise customer knowledge 1and orientationEfficient product architecture –from 2identity to similarityCharacteristics of change processValue chain adaptation towards •Top management topic3competence based structures•Change management Improved development processes approach required4leveraging IT opportunities•Long term processStringent quality processes along Act now forward 5entire development processinstead of reactingafterwardsProject organization combining high 6functional and integration capabilitiesSource:McKinsey34
