(FORTUNE Magazine) – I run the oldest auto plant in the world. I also run the newest, most high-tech plant in this company." That's 49-year-old Edward Mercer. He's manager of DaimlerChrysler's three-plant manufacturing complex in Toledo, Ohio, where Jeeps have been built since the first ones rolled out in 1941 on their way to war. The oldest of Mercer's plants dates back to 1910, when it built bicycles. It still houses the body and paint shops for the Wrangler, the smallest modern Jeep, which is assembled in a second Toledo plant that's only a half-century old. Adjoining that one is Mercer's pride, a new high-tech, air-cooled, $700 million factory where DaimlerChrysler has brought together its best ideas and latest equipment to turn out a new Jeep, the Liberty. A sales success since it was launched in spring 2001, the Liberty has been outselling all other small SUVs.

Known as Toledo North Assembly Plant, or T-NAP, the 2.1 million-square-foot Liberty facility is the first car or light-truck plant built by Chrysler in North America in over a decade. It's also likely to be the last to be built for years in the U.S. or Canada by any of the Big Three automakers. All have more capacity than they need. But how the Jeep Liberty is being put together is how most cars and light trucks will be built in the future, new factory or old. It's not that DaimlerChrysler knows something that Ford and General Motors don't. There's nothing going on in Toledo that isn't going on one place or another in the industry. But at Toledo North, DaimlerChrysler has gathered it all under one roof. Among the gains: It takes fewer worker-hours to assemble a Liberty than any other Chrysler vehicle.

For the new plant the company bought equipment that had first been tried at Mercedes, including a pallet system that lifts and lowers the Jeep body from one assembly station to the next. From elsewhere in the Chrysler group it got, among other advances, the design of a paint shop first built for a truck plant in Delaware. And borrowing from itself and competitors, then going one step further, it has outsourced large pieces of the Liberty while intimately connecting suppliers with the vehicle's assembly line. Eight suppliers, including seven with plants newly built or leased for this purpose near Toledo, are delivering parts and subassemblies not only just in time but also exactly in production line sequence, with each item bearing the VIN (vehicle identification number) of the Jeep for which it was built. Half of those suppliers don't start building parts until they get electronic notification that the painted body of the Jeep for which they're intended is heading into the first assembly line workstation.

In PowerPoint presentations, a supply chain usually is a straight line of boxes: subsupplier to supplier to assembler to transporter to distributor and ultimately to buyer. But when the product is as complex as the Liberty--it's assembled out of 1,300 parts--the supply chain is more like a great river system: Thousands of springs give rise to hundreds of creeks that flow into scores of streams that form Missouris and Ohios that then become a Mississippi. Near its end the river divides again into separate channels--or in the case of the Liberty, into trains, ships, haul-away trucks, and the lots of over 2,800 dealers in the U.S. and Canada, plus a few thousand more in other countries.

Steel mills are headwaters. But the Liberty's first distinctive parts are formed by suppliers like Iroquois Industries, a privately held metal bender in the Detroit suburb of Warren, Mich. At Iroquois big presses engorge coils of steel, noisily stamping out 24 pieces of metal in different shapes that are then moved in batches across a parking lot to the company's welding plant. There, a succession of man-fed robot cells lay down nearly 17 feet of welds to fabricate what will be the Jeep's engine cradle--one version for the six-cylinder and another that serves for both the four-cylinder and an export model's diesel.

From Warren, the 69-pound cradles are trucked some 60 miles south down I-75 to a plant in northern Toledo built for this project by TRW Automotive, part of the TRW that is about to merge into Northrop Grumman. Here two versions become 11, outfitted with some 50 parts that are shipped to it by 15 suppliers, including axles, control arms, and, from another TRW plant, steering gear. Hung on a returnable rack, completed modules are trucked a few miles farther south to the new Liberty plant, where each mates with the engine and transmission for which it was built. After acquiring front disc brakes shipped separately from TRW, that package is then conveyored under a Jeep body, where it is lifted up and bolted into place by robots, one every 64.28 seconds.

With two ten-hour shifts a day plus breaks, meals, and shift change, Toledo North starts at 5:30 a.m. and doesn't quit until 3 A.M., five days a week and one Saturday a month. During those hours 420 trailer-loads of modules and parts arrive at the receiving docks. Most of what they discharge will be used within hours, if not minutes. There's practically no inventory of components, modules, or parts at any spot along the assembly line to serve as a buffer against delayed deliveries. Combine fender-benders on the adjacent interstates with a dead deer on an alternative local road, and the line would soon halt. Says Frank Zematis, procurement director for all Jeep models: "If there's a disruption in the supply base anywhere, the plant sees it in a hurry."

So far, all roads haven't closed at one time, but other glitches--among them a three-day United Auto Workers strike last June at Johnson Controls--have occasionally stalled production. Johnson Controls builds the Jeep's seats and its instrument panel. When it couldn't deliver, the Liberty plant closed for more than three shifts, during which it could have built over 1,300 Jeeps. Since suppliers are subject to a heavy penalty if they stop the line, TRW has twice hired a helicopter to pick up some much-needed bolts at a supplier in northern Michigan and land in a field adjacent to its Toledo plant. In a bizarre instance, white powder in a box of parts caused an anthrax scare at the Johnson Controls plant making instrument panels for the Liberty. Second-shift workers there and at the Jeep plant were sent home a couple of hours early. When the powder proved to be from a fire extinguisher used to put out a blaze at a Mexican factory, the Johnson Controls workers came back at 2 a.m. and caught up by the time the assembly line's first shift came in that morning.

Among the daily deliveries to the plant are 199 trailers from Johnson Controls, TRW, and six other suppliers that ship parts lined up in the order they'll be used. That's called "sequenced parts delivery," and it's even harder to do than it sounds. It's possible, even probable, that no two Liberties produced on any shift are the same. The vehicle, a completely new design, is the middle child in a product line that includes the smaller Wrangler and the bigger Grand Cherokee. DaimlerChrysler offers the Liberty in good, better, and best versions known as Sport, Limited, and Renegade, with sticker prices from around $18,000 to $27,000 or more. Adding complexity for suppliers, there are ten exterior and two interior colors, the three different engines, two- and four-wheel drive, manual and automatic transmission, left- and right-hand steering, a half-dozen sound systems, and a passel of other options. DaimlerChrysler won't even hazard a guess as to how many possible combinations it could build.

Everybody knows the factory's drumbeat: one Jeep every 64.28 seconds when the assembly line is running. Allowing for breaks and other interruptions, the recent daily production target has been 926 jeeps a day. Suppliers get a daily updated forecast of production that extends ten or more days. The forecast is fairly accurate and provides a reasonable idea of the model mix. But it can change. Moreover, the order in which any day's 926 Liberties are built is computer-determined during the production run. Every 64 seconds a painted Jeep body is moved out of a group held just outside the paint shop and directed into the first assembly workstation. At that point the Jeep's VIN and its specifications are "broadcast," or electronically transmitted, to suppliers. Only then do they know what part or parts are going to be needed for the vehicle.

To keep up, most sequenced-parts-delivery suppliers work in lock step with the assembly line--similar shifts, hours, breaks, and mealtimes--and turn out their subassemblies at the same speed that the factory turns out Jeeps (or for a bit of insurance, slightly faster). Exactly how much time the supplier has to build a part and get it to the line varies by where on the line it is installed. There are 239 workstations on the main line, plus others in a couple of subassembly lines perpendicular to the main flow. Without any downtime it takes about five hours from start to finish. A spring and shock-absorber package from TRW goes onto the painted body at one of the first stations. The radiator is installed near the end.

From broadcast to the workstation where the instrument panel from Johnson Controls is installed is around three hours. When Johnson Controls gets the broadcast, it assembles the required panels and carries out 300 quality-control tests on each one. However, instrument panels don't ship one at a time; they go in truckloads of 40 panels, a 48-minute supply for the assembly line. The load has to get to the plant and from the plant's dock to where the instrument panels are installed at least a minute or two before the Jeeps-in-process arrive. To help meet such a schedule, trucks carrying sequenced-delivery parts, all dispatched by DaimlerChrysler, get special treatment at the plant gates. Using lanes marked "SPD," they drive around other vehicles. But there are no SPD lanes on the interstate, so all calculations need wiggle room to allow for the possibility of bumper-to-bumper traffic. As we said, it's harder than it sounds.

Chrysler once considered building the Liberty someplace other than Toledo. It decided not to mainly because it wanted to hold on to a workforce experienced in building Jeeps. But the possibility of moving was most likely mentioned more than once in discussions with the United Auto Workers, which represents the Toledo plants and had to be persuaded to go along with the outsourcing of so much of the Liberty.

For automakers, outsourcing parts and subassemblies has many advantages. It taps suppliers' specialized expertise in procurement of parts, manufacturing, and quality control. Done right, it cuts cost by taking inventory out of the supply chain and off the plant floor. The assembly line is shorter, tighter, and more efficient. Toledo North's assembly line, one of the smallest in the Chrysler group, turns out about as many vehicles a day as other plants twice its size.

The UAW would contend that the principal reason for outsourcing is to move work to lower-wage, non-union plants. There's something to that. On the assembly line the average unskilled worker makes $24.38 an hour plus good benefits. Given the overtime and Saturdays in the Liberty schedule, yearly gross pay could easily top $70,000. A lot of Ohioans would work hard for less. It can, in fact, be argued that the union is more responsible than the employers for pushing work out of the assembly plants. Kace Logistics, the smallest of the Liberty's eight sequenced-parts suppliers, was originally the only one organized by the UAW, although wages at Kace are still well below the assembly line averages. But the union has recently been shifting from defense to offense, trying to organize Tier 1 suppliers throughout the motor vehicle industry. After that strike last June, it succeeded in doing just that at the Johnson Controls plant building the Liberty's instrument panel.

The union was more accommodating on the Liberty plant contract than might have been expected, given its tyrannosaurian reputation. In a special five-year deal, just renewed for a year to get in sync with the national auto industry agreement, the UAW went along not only with the outsourcing but also with the introduction of modern work practices, including assembly line teams and job rotation. It also went along with the hiring and later dismissal of some 600 temporary workers who helped keep up production

of the Liberty's predecessor, the Cherokee, while workers from its neighboring plant were trained to build the Liberty. But Chrysler paid a price. It now has about 250 more people than it needs at the three-plant Toledo complex and has to adjust for that with rolling two-week layoffs of workers whose wages are guaranteed.

Close ties between the assembly line and nearby module suppliers are not new in the motor vehicle business. Outside the U.S. the practice is common. In the U.S. every car and truck plant has just-in-time deliveries that usually replenish assembly plant inventories under some sort of pull, or kanban, arrangement. There's inventory on the floor, just not so much as in the past. Most U.S. assemblers also have some subassemblies, especially seats, delivered in sequence. The Liberty line difference is not only in the number of parts delivered in sequence but also in the degree of completion and complexity of some of those parts.

Take the Johnson Controls instrument panel, which is the most complete and complex subassembly. When each unit gets to the assembly line, it's maneuvered into place, wiring harnesses are plugged in, and that's it. Nothing remains to be done. (Even the brake and, when needed, clutch pedal are attached to the panel.) Theoretically there could be thousands of variations. In practice there are a couple hundred combinations of the parts: color, stereo systems, automatic or manual transmission, 14 different instrument clusters, and on and on. The dashboards of Liberty's left- and right-hand steering models are mirror images of each other, but switching the steering column and pedals from one side to the other requires 50 part changes. To mute the confusion, instead of designating every one of the 160 parts when it orders an instrument panel for a vehicle starting down the assembly line, the Jeep plant picks from 27 parts groups, each with two to 12 variations.

Working this way in North America was something new for all the suppliers. TRW Automotive delivers modules of one sort or another in Mexico for Volkswagen, in England for BMW's Rover, and in Thailand for General Motors. Modine Manufacturing, which builds the cooling modules (formerly known as radiators) for the Liberty, does the same for BMW in a plant in Wackersdorf, Germany; it brought over a manager from that plant to get its new one in Toledo up and running. But TRW and Modine had never built a module of any sort for sequenced delivery in the U.S. Johnson Controls had never built a fully stuffed, plug-and-play instrument panel for anybody anywhere. Recalls Dave Hartman, one of its technical managers: "We had a brand-new facility with brand-new people delivering a brand-new product to a brand-new facility for a brand-new vehicle."

Chosen largely on the basis of earlier relationships with Jeep or Chrysler, suppliers began designing parts and planning production for the Liberty as early as 1997, when it was only a code name. All worked so closely in joint supplier-Jeep teams that Johnson Controls says nobody can any longer say which company, customer, or supplier came up with what bright idea that solved which problem. Johnson Controls and DaimlerChrysler also worked in tandem on a specialized system of racks used to move both instrument panels and seats from Johnson Controls to the line. Equipment using the same pallet system was installed at two assembly line receiving docks and at both the seat plant in Rockwood, Mich., and the instrument plant just east of Toledo in Northwood, Ohio. Seats or instrument panels at the end of their own assembly lines automatically roll into bi-level truck trailers, which haul them to the Jeep plant, where they are automatically unloaded. The system then reloads the trucks with empty pallets for the trip back to the Johnson Controls plants.

Modine, a specialist in controlling the temperature of a motor vehicle's bodily fluids, says it designed the Jeep's ten different cooling modules after DaimlerChrysler provided it with performance requirements and space constraints. Today Modine assembles the modules in its Toledo plant largely from parts it trucks in from several of its other plants. However, instead of building to order as do TRW and Johnson Controls, it assembles a mix of the ten guided by what's been used on the assembly line in the past few days. These are then automatically stored in the stacked rows of a towering, computer-controlled automated storage and retrieval system that can hold the equivalent of two days of orders. When the specifications for the next Jeep are broadcast, a computer sends a picking device back and forth and up and down the stack to grab the needed unit and then take it to a conveyor line for labeling and shipment.

Some of the sequenced-parts plants do little more than organize parts out of a couple of days' inventory of components made elsewhere. Federal Mogul's Toledo facility puts together headlight packages from material made in its plant in Hampton, Va. Paced by the broadcasts, Lear locally assembles headliners, the overhead lining of the passenger compartment, but just sequences wire harnesses and carpets made in other Lear plants. Kace doesn't make anything. It puts parts made by others, including exhaust pipes and steering wheels, in the right order in racks. It also puts together kits of door parts at the same pace that Jeeps are built. The kits are compartmentalized boxes containing parts needed to assemble a Jeep door--ten parts for each front door, 12 for each rear one. Probably nobody in the supply chain hustles more than a Kace worker who scuttles about filling up a box, checking for accuracy with a hand-held scanner, then doing it all again.

For suppliers the process would be more manageable if Jeep engineers would just stop messing with the design. They have yet to do so. Says the Toledo complex manager, Ed Mercer: "The only constant around here is change." Almost all partsmakers had to deal with changes in design in preproduction runs prior to the launch of regular production on April 2, 2001. TRW says there were some 250 design changes on the engine cradle, including a major one that also affected Iroquois: a fairly late decision to mount the front axle to the cradle, not the frame. Since launch, a stream of small changes has been implemented to cut costs or refine the design. The cost of the cradle, for example, has been cut by more than 8%. In the new 2003 models the CD changer has been moved, and more important, all wheels, not just the front pair, now have disc brakes.

The Liberty was the first new vehicle launched after Dieter Zetsche flew in from Stuttgart to take command of the Chrysler group, so its introduction was accompanied by high-level scrutiny and midlevel anxiety. Zetsche put himself into the fast-feedback group, employees who drive the first production cars and immediately report glitches and rattles. The Liberty had some of each--a slight sag in the headliner, a rattle in the instrument panel that had to be quieted with a foam pad--but nothing serious. The biggest design change was made early this year when the Liberty's center of gravity was lowered. It's now about an inch closer to the ground. Some critics say that was because a magazine, AutoWeek, rolled a Liberty while zigzagging through a slalom course. DaimlerChrysler insists, a bit defensively, that the change was made to improve the street and highway ride, and that its own and other third-party tests confirmed that the vehicle was safe before and is safe now.

The overall quality level of the Liberty is, says the company, better than it could manage with the Cherokee after 18 years of production. Toledo North also builds vehicles faster than the rest of the Chrysler group. Last year assembling a Liberty took 26.11 production and control worker-hours. That's good for Chrysler, but Harbour & Associates, which has long tracked the industry's manufacturing efficiency, says it is not as good as some competitors. Ford built its small SUV, the Escape, in 22.54 worker-hours. Nissan required only 18.63 for its Xterra. But Mercer notes that was in 2001, the first year of production for the Liberty. He says the hours per car are now where the Escape was in 2001 and are falling. If so, what's been learned in Toledo should help a Chrysler-wide effort to reduce the hours spent on all its cars, vans, and light trucks.

Lessons learned at the Liberty plant will certainly be applied in the company's Windsor, Ontario, facility, which is about to launch its own completely new vehicle, the Pacifica, a cross between a station wagon and van. One is that it is possible to have too little work in process. Referring to a robot installing Liberty windshields and to a semiautomatic rear-axle-installation system, Mercer says, "We put highly complex automation right in the middle of a process assembly plant with absolutely no buffering." Highly automated machines are temperamental. Without a few vehicles paused in line on either side of them, the whole plant stalls whenever they act up. Mercer also says that on the Liberty lines, Chrysler is finally learning how to work with teams and other modern manufacturing techniques. He's now starting to adopt such practices elsewhere in the Toledo complex, where he admits to failures with similar efforts in the past. He says, "We did not adequately train and prep the workforce for the concept of lean manufacturing and the concept of team organization."

Throughout all of Daim-lerChrysler--and indeed, throughout the auto industry--there is bound to be more and more use of outsourcing and sequenced-parts delivery. Jeep and its suppliers pay plenty of lip service to the advantages of partnering in a common pursuit of lowering costs. But while costs are lowered, the question is, Who garners the gains? Says Robert Evans, chairman of the board of World Chain, which makes software to manage supply chain networks: "Partnering can be a polite word meaning 'We have more power than you have, and we'll inform you of what your role is.' " He adds, "The assemblers have a huge amount of purchasing leverage, and they've gotten very good at using it." Top auto executives send e-mails about treating suppliers better in the interest of everybody's success, but there's a gap between rhetoric and reality. The purchasing departments keep demanding annual or even more frequent price cuts.

Last August at an industry meeting, Tim Leuliette, CEO of Metaldyne Corp., shucked off the usual reluctance of sellers to bitch about buyers even though the Plymouth, Mich., company depends on the Big Three for most of its sales, including some engine and transmission parts for the Liberty. Leuliette contends that rather than take on the UAW or make a major effort to improve factory efficiency, Detroit's approach has been to push costs onto suppliers. He says the move of module assembly from the OEMs to Tier 1 suppliers "has been fraught with unrealistic cost models. The Big Three cannot return to their past glory by having the supply community financially subsidize their inability to address their own problems."

None of the principal Jeep suppliers is about to incur DaimlerChrysler's disapproval by standing and applauding Leuliette. And while it stands to reason that they're not going broke on the Liberty project, they wouldn't admit it if they weren't getting a decent return on their investment. But nobody's complaining. In the end, Toledo North's greatest contribution to automaking might just turn out to be a demonstration of how one of the Big Three can solve its own problems, build a successful vehicle, and not have to rely on beating up suppliers. At least, not all the time.

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