Mercedes Benz AAV Case
1. What is the competitive environment faced by Mercedes?
- Competition includes luxury automotive manufacturers (ie. BMW, Lexus, Audi, Porsche, etc.) o Can also include other SUV manufacturers such as Jeep, Ford, and GM
- Due to the economic downturn in the early 1990s, they struggled with product development, cost efficiency, material purchasing, and problems in adapting to changing markets o Also a decrease in sales and market share, creating a loss for the first time in company’s history o Led to a search for new market share, segments and niches
2. How has Mercedes reacted to the changing world market for luxury automobiles?
- Introduced new product lines including the C-, E-, and A-class, sportster SLK, and the All Activity Vehicle (AAV) o AAV was manufactured in the USA because there was a larger market for SUVs o Streamlined the core business, reduced parts and system complexity, and established simultaneous engineering programs with suppliers
3. Consider two of the elements of target costing, i.e., the target selling price and required margin. How might Mercedes determine the values for these elements?
- Target selling price: o *****
4. Explain the process of developing a component-importance index. How can such an index guide managers in making cost reduction decisions?
5. How does Mercedes approach cost reduction to achieve target costs?
- Projected cash flows were analyzed over a 10-year period using Net Present Value (NPV) analysis to acquire project approval from the Board of Directors
- Regular customer clinics were held to view the prototype and explain the new vehicle concept
- The target costing process led by cost planners who were engineers, not accountants so they could make reasonable estimates of costs that suppliers would incur in providing various systems
- Approach to cost reduction to achieve target costs: o Existing cost for each function group was estimated o Components comprising each function group were identified
- Competition includes luxury automotive manufacturers (ie. BMW, Lexus, Audi, Porsche, etc.) o Can also include other SUV manufacturers such as Jeep, Ford, and GM
- Due to the economic downturn in the early 1990s, they struggled with product development, cost efficiency, material purchasing, and problems in adapting to changing markets o Also a decrease in sales and market share, creating a loss for the first time in company’s history o Led to a search for new market share, segments and niches
2. How has Mercedes reacted to the changing world market for luxury automobiles?
- Introduced new product lines including the C-, E-, and A-class, sportster SLK, and the All Activity Vehicle (AAV) o AAV was manufactured in the USA because there was a larger market for SUVs o Streamlined the core business, reduced parts and system complexity, and established simultaneous engineering programs with suppliers
3. Consider two of the elements of target costing, i.e., the target selling price and required margin. How might Mercedes determine the values for these elements?
- Target selling price: o *****
4. Explain the process of developing a component-importance index. How can such an index guide managers in making cost reduction decisions?
5. How does Mercedes approach cost reduction to achieve target costs?
- Projected cash flows were analyzed over a 10-year period using Net Present Value (NPV) analysis to acquire project approval from the Board of Directors
- Regular customer clinics were held to view the prototype and explain the new vehicle concept
- The target costing process led by cost planners who were engineers, not accountants so they could make reasonable estimates of costs that suppliers would incur in providing various systems
- Approach to cost reduction to achieve target costs: o Existing cost for each function group was estimated o Components comprising each function group were identified