{"id":22792,"date":"2017-11-14T20:18:26","date_gmt":"2017-11-15T01:18:26","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/bmws-supply-chain-in-the-face-of-isolationism\/"},"modified":"2017-11-14T20:18:26","modified_gmt":"2017-11-15T01:18:26","slug":"bmws-supply-chain-in-the-face-of-isolationism","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/bmws-supply-chain-in-the-face-of-isolationism\/","title":{"rendered":"BMW’s supply chain in the face of isolationism"},"content":{"rendered":"

\u201cI would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35 percent tax, then you can forget that. [\u2026] For every car that comes to the USA, you will pay 35 percent tax\u201d <\/i><\/em>– President Trump, January 2017[1]<\/a><\/p>\n

The threat of a protective tariff from the US is only the latest of many issues that BMW, the German manufacturer of premium cars, has been trying to solve in minimizing the risks in its global supply chain. BMW has relied on the benefits of globalization to drive down costs using low-cost suppliers and to expand its sales footprint into growth markets, specifically China and the United States.[2]<\/a> [3]<\/a><\/p>\n

More recently, however, currency risks and political movements towards more trade isolationism increased pressure on both top and bottom line and led BMW to reevaluate its supply chain strategy that relies heavily on sales in concentrated areas of the world and single-sourcing parts from critical suppliers.<\/p>\n

Managing these risks in the supply chain is a particularly important aspect for BMW as its smaller scale (2.4 mn vehicles in 2016 compared to 10+ mn for Toyota\/Volkswagen[4]<\/a>) leaves the leaves the company with fewer cost levers to pull than its competitors<\/p>\n

BMW\u2019s current supply chain strategies<\/b><\/strong><\/p>\n

Global production and supplier network<\/i><\/em><\/p>\n

BMW distributes its production across the world to minimize its total cost of serving customers, taking advantage of differences in local sourcing costs, labor rates, capital expenditures and distribution\/transportation costs. It employs an optimization model to plan out the allocation of production across all facilities over a 12-year horizon with a focus on demand and production flexibility.[5]<\/a><\/p>\n

The model takes into account tax rates, import tariffs and more sophisticated variables.[6]<\/a> \u00a0As a result, the company\u2019s production network includes over 20 factories, sourcing from 13,000 suppliers across 70 countries and producing 2.3 million vehicles annually.[7]<\/a> [8]<\/a> Production facilities for specific vehicle types are strategically located in regions that generate the most sales for these programs \u2013 e.g., the US plant in Spartanburg manufactures most major SUV programs (X3, X4, X5), and the Chinese plants produce vehicle types that are in demand locally(small SUVs and sedans).[9]<\/a> In fact, the Spartanburg plant is BMW\u2019s biggest plants worldwide (410,000 vehicles produced in 2016)[10]<\/a>, while capacity at the Chinese plants is expected to increase to 450,000 vehicles annually.[11]<\/a><\/p>\n

Employing a \u201clocal for local\u201d production strategy not only optimizes supply chain costs but also minimizes the risks of protectionist tariffs that might increase transportation\/distribution costs \u2013 something BMW has realized through localizing production in its major markets abroad \u2013 US and China (16% and 22% of global sales volume, respectively).[12]<\/a><\/p>\n

Currency hedging <\/i><\/em><\/p>\n

Another risk that arises from isolationism is an increase in currency risk. BMW employs two major levers to minimize its exposure to currency risk: It employs natural hedging, spending money using the revenue generated in the same country, and it has set up regional treasury centers that report and mitigate currency risks for the major currencies BMW operates in.[13]<\/a> This currency risk hedging is especially critical as BMW has plants in the United Kingdom, whose currency is exposed to major volatility due to the recent political developments (Brexit).<\/p>\n

Further proposed actions<\/b><\/strong><\/p>\n

Decrease dependency on single suppliers<\/i><\/em><\/p>\n

To leverage economies of scale and realize significant cost savings, BMW has historically depended on just-in-time single sourcing for critical parts. This strategy had the flipside of an increased production breakdown risk due to issues at just one single supplier. Just recently, breakdowns in the supply chain for both BMW and Volkswagen halted production at their main plants for several days, leading to millions of dollars in costs due to missed production. [14]<\/a> [15]<\/a> BMW should proactively diversify its supplier base, especially for critical components.<\/p>\n

Use more local sourcing<\/i><\/em><\/p>\n

As more production volume shifts from Europe to the US and China, BMW needs to decrease its reliance on European suppliers \u2013 55% of purchasing volume is still coming from Europe.[16]<\/a><\/p>\n

Open questions<\/b><\/strong><\/p>\n