First there was Toyota City. Then there was Buick City. Now there is Mercedes-Benz U.S. International Inc. (MBUSI), a grand experiment in a small rural town near Tuscaloosa, AL, that might as well be called "Systems City."

The goal is to build a well-equipped $35,000 luxury sport/utility vehicle (SUV) that is worthy of the Mercedes-Benz label, yet can be considered a good value compared with top-line Ford Explorer, Jeep Grand Cherokee and other high-end SUVs throughout the world.

That's a tough order for an automaker criticized for having some of the highest manufacturing costs in the world, so Mercedes-Benz AG is taking drastic action on several fronts. Beyond forming MBUSI, a new manufacturing company separate from the German parent and dedicated to building the new All-Activity Vehicle (AAV) in a U.S. plant--the first outside Germany--Mercedes has developed a manufacturing approach that stresses maximum supplier involvement and minimizes;; its capital investment.

Located in Vance (Tuscaloosa County), AL, the company will build the vehicle at a new $330 million plant. About 67,000 AAVs will be produced annually--half for the U.S., the rest for export. One reason the plant is relatively small is because so much assembly work is being done by outside suppliers, company officials say.

MBUSI started production trials in early May and will continue testing tooling and equipment until year's end.

Suppliers are taking on a high--and in some cases unprecedented--level of responsibility in the AAV's development and production.

Dozens of component manufacturing facilities aren't grouped next to the assembly plant, as once was envisioned for Buick City, but 60 or so suppliers are enjoying an opportunity to develop and produce some of the most complete vehicle systems they've ever sold.

TRW Vehicle Safety Systems Inc., for instance, recently announced that a new MBUSI contract makes it the world's first to supply a complete occupant-restraint system for a mass-produced vehicle. Under the five-year contract, it will supply driver- and passenger-side and side-impact air bags, as well as seat belts and front- and side-impact sensors. TRW also will be responsible for complete system testing and coordination with other suppliers such as seat, steering, instrument panel and door trim manufacturers.

Other major suppliers also say they are pushing the envelope in the areas of modular component design and globalized engineering. Johnson Controls Inc. (JCI), says its headliner (it's also supplying the seats for the AAV) sets new company benchmarks in the way it combines modular construction and global product development with sequenced, just-in-time delivery.

The design and engineering for the headliner was coordinated among three technical centers in three countries. Initial work was done by Roth Freres, JCI's European partner, in Strasbourg, France. Further engineering and coordination with Mercedes was handled by JCI's tech center in Germany. Then sourcing and manufacturing issues were ironed out at its headquarters in Plymouth, MI.

The result is one of the first modular headliners in the U.S. that will be delivered just-in-time, in sequence with the assembly line.

"Every hour, we'll be delivering 15 fully assembled headliners in the exact order in which they will be installed," says Lou Senunas, JCI general manager of Interior Systems. "We don't have any room for glitches because the headliner is one of the first trim components put on the vehicle during the assembly process."

JCI and its suppliers on the headliner program also have developed new retaining and fastening systems to simplify assembly and service of the headliner. It can be installed or removed as a single component.

Although officials are reluctant to give details, Delphi Automotive Systems also is breaking new ground with its modular instrument panel, console and wire harnesses. Delphi insiders make it clear that no Tier 1 supplier wants to be considered a company that simply screws assemblies together with lower-wage workers. They want total design and engineering responsibility, and they want to be able to pick Tier 2 suppliers that not only have the lowest cost, but also are skilled in integrating their sub-assemblies with others.

Despite the progress being made at MBUSI, however, true modular cockpit modules won't likely appear--on any vehicle--for four or five years, cautions Paul B. Palovich, business manager for Delphi Automotive Systems' modular cockpit application team.

But even the supplier of the $100 million paint shop, Durr Industries Inc., says its ability to provide a complete facility and control all elements of the construction and painting process was what finally won it the business in Alabama. "our ability to supply an integrated system was key when they looked at us. We design, build, handle the training and provide a complete turnkey facility," says David L. Meynell, vice president of sales and marketing at Durr.

In all, about 80% of the value of the AAV will be outsourced to suppliers.

In comparison, Chrysler Corp., which is the least vertically integrated U.S. automaker, outsources about 64%. General Motors Corp., the most vertically integrated automaker, outsources about 55%, based on the latest estimates by the Industrial Technology Institute in Ann Arbor, MI.

A handful of companies, including the Becker Group, Delphi Automotive, JCI, Ogihara Corp., and ZF Industries will be locating just-in-time manufacturing and delivery facilities in nearby industrial parks. Most major parts--with the exception of the engines and transmissions--will be sourced in North America.

"It's always dangerous to put so much work with suppliers," admits MBUSI President Andreas Renschler. "If they make a mistake, you can't build the car. But normally we're working with 1,000 suppliers, instead of the 60 or so that we have here."

Mercedes is working closely with suppliers to ensure they meet cost, quality and delivery targets, Mr. Renschler says. The automaker's "Tandem" program, which helped it cut costs up to 50%, or a total of $2.5 billion, in some 800 projects in Europe during the past three years, is being transplanted to the U.S. as a result of the Alabama project. "We've been willing to hand over responsibility to suppliers," Mr. Renschler says.

That often includes allowing key Tier I companies to pick their suppliers on the second and third tiers. "Mercedes is aware of who we're working with, but it is our call," says a spokesman for JCI, whose headliner sub-suppliers include Donnelly Corp., which makes the headliner visors, grab handles and other key assemblies.

Tier 1 companies, however, aren't allowed to select all major subsystems, emphasizes Robert J. Birch, MBUSI's vice president of purchasing and logistics. For instance, he says interior system suppliers didn't specify who would supply items such as the air conditioning unit or stereo.

Even so, it's a relationship many suppliers can only dream of. Many have won long term "life-of-vehicle" contracts that run for eight years, and will simply roll over with the next-generation vehicle unless there is a major problem. And if a supplier can meet pricing targets for a new part or redesign, it's not even sent out for bids.

Such a non-adversarial relationship already is yielding numerous benefits, says Mr. Birch. For instance, MBUSI suppliers are cutting transportation and warehousing costs by agreeing to share delivery trucks. If all suppliers insisted on filling up their own trucks, in some cases it would mean sending two weeks or more of inventory to Alabama at a time.

That would mean more warehousing space would have to be provided near the factory to allow for just-in-time delivery to the assembly line.

Instead, Mr. Birch says, many suppliers have been able to work out a more efficient plan under which several suppliers share the same delivery truck and send only enough inventory to keep production running. That way each supplier has to store less near the Alabama plant. "That means smaller warehouses and less investment in inventory," Mr. Birch says.

Juergen Hubbert, managing director in charge of Mercedes' passenger car unit, says he expects the U.S. location and new manufacturing methods to cut costs by 30% for the AAV compared to what it would have cost in Germany.

A company spokesman says there will be three separate production trials this year. About 17 vehicles will be built during the first run, 30 the next, and 25 during the last. Regular production is expected to begin in the first quarter of 1997, and the vehicle is scheduled to go on sale in fall 1997.

Some 270 vehicles are slated to be built per day on two, nine-hour shifts, five days per week. Total employment will reach approximately 1,500, with the second shift scheduled to come on line just at the time the vehicle goes on sale.