Operations ExcellenceSmart Solutions for Business Success
Roland Schwientek and Axel Schmidt
Edited by
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Operations Excellence
9780230_217805_01_prelims.3d 6/4/200816:42:58
THINK: ACT
‘think: act–Leadership Know-how’ is derived from the academic research
and the consulting experience of Roland Berger Strategy Consultants, one
of the world’s leading strategy consultancies. With 35 offices in 24
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markets. Roland Berger Strategy Consultants serve global players and
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HEIDI SYLVESTER
FLORIAN KAISER
9780230_217805_01_prelims.3d 6/4/200816:44:39
OperationsExcellence
Smart Solutions for BusinessSuccess
Edited by
Roland Schwientek
and
Axel Schmidt
9780230_217805_01_prelims.3d 6/4/200816:44:39
ª Roland Berger Strategy Consultants 2008
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9780230_217805_01_prelims.3d 6/4/200816:44:39
CONTENTS
List of Figures and Boxes viii
Notes on the Contributors xii
List of Abbreviations xix
Introduction 1
PART I: RESEARCH AND DEVELOPMENT
Introduction: what is successful product development? 6Thomas Rinn and Kai Bethlehem
Chapter 1 Changing business models and their impacton product development 9
Michael Zollenkop
Chapter 2 Innovate to win: how clever cost approachdesign can outsmart competition 24
Ralf Augustin and Kai Bethlehem
Chapter 3 Global development made successful:lessons learned by the automotive industry 45
Jochen Gleisberg and Kai Bethlehem
Chapter 4 Success factors and levers for best practicein innovation management 61
Stefan Potzl, Thomas Kohr and Michael Zollenkop
Chapter 5 Smart engineering processes: ‘made in Japan’ 79
Ken Mori and Satoshi Nagashima
v
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PART II: PURCHASING
Introduction: strategic trends and challengesfor purchasing 92Roland Schwientek
Chapter 6 Key trends in purchasing best practices andimpact on purchasing strategy 96
Michel Jacob and Gabriel-Assad Singaby
Chapter 7 Purchasing EmPowerment: the way toachieve world-class purchasing 114
Roland Schwientek
Chapter 8 Organizations drive strategy and performance:insights from two successful lead buying models 131
Tobias Franke
PART III: MANUFACTURING
Introduction: manufacturing in a global context 144Ralf Augustin
Chapter 9 How companies can optimize their globalmanufacturing footprint 147
Marco Zurru
Chapter 10 Leveraging manufacturing excellence inglobal production networks 162
Volker Heidtmann and Stephen Weisenstein
Chapter 11 From maintenance to quality control:effective support functions leveragemanaging performance 174
Thomas Kwasniok and Walter Pfeiffer
vi Contents
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PART IV: SUPPLY CHAIN MANAGEMENT
Introduction: supply chain management – morethan just logistics 198Robert Ohmayer and Steffen Kilimann
Chapter 12 Global supply chain management: a successfactor for global players 201
Robert Ohmayer and Steffen Kilimann
Chapter 13 Complexity management: the starting pointfor improving performance 216
Alexander Belderok and Thomas Hollmann
Chapter 14 Working capital excellence: how companiescan tap hidden cash reserves in the supply chain 232
Roland Schwientek and Christian Deckert
Chapter 15 Supply chain organization: a key enablerfor successful supply chain management 257
Ingo Schroter and Stephan M. Wagner
Index 270
Contents vii
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LIST OF FIGURES AND BOXES
Figures
I.1 Our approach – three levels to create operations excellence 2
I.2 Four fields of action to create operations excellence 3
1.1 Components of business models 10
1.2 Development of business models over time 13
1.3 Lifecycles of business model components 17
1.4 Indicators for business model attractiveness 18
2.1 Product costs are influenced by several surrounding
factors 26
2.2 The comprehensive cost reduction approach covers
the complete value chain 33
2.3 Value analysis – vehicle window lifters 35
2.4 Performance cost analysis – cost comparison by
most important function 36
2.5 Simultaneous product and process optimization
example car module – vehicle driver seat (EUR/vehicle) 38
2.6 Value chain maps help to identify critical branches
and to focus supplier development – passenger car
door panel example 39
2.7 Supplier manufacturing analysis: component assembly –
lamp manufacturer 40
2.8 The CCR phase for diagnosis and drafting an
action plan takes roughly 10–13 weeks 43
3.1 Trend towards integrated global networks 48
3.2 Allocation of core competencies in a global R&D network 49
3.3 Integration and competencies of local technical centers 50
3.4 Six key elements of the lead engineering concept 52
3.5 Three coordination options 53
4.1 Share of sales with original product innovation
in different industries 62
4.2 Innovation in the mechanical engineering industry –
failure reasons in commercialization 63
viii
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4.3 Innovation performance development in the
automotive industry 66
4.4 Roland Berger Innovation Toolbox 68
4.5 Performance measures for systematic innovation
management 70
4.6 Innovation portfolio management concept 74
5.1 Matrix organization 80
5.2 Product development lead time 86
5.3 Shortened product development lead time 87
6.1 Maturity steps at purchasing organizations 98
6.2 Challenges with which companies still struggle 99
6.3 Challenges that are reshaping purchasing 103
6.4 Some of the benefits of sourcing in CEE, the Middle
East, and North Africa 107
7.1 Each commodity/category is strategically assessed
in terms of business impact and supply market challenge 116
7.2 The right mix of levers is key to finding the
correct sourcing strategy for each strategic
commodity/category field 117
7.3 There are more than 50 sourcing levers for
improving operating cost performance 121
7.4 Companies need to focus on four areas to lower
process costs – processes, organization, information,
and know-how sharing 122
7.5 Success factors have been identified in three areas
of supply base management 126
8.1 Three basic models are used in procurement organizations 132
8.2 Only an integrated approach to procurement ensures
optimum impact on a company’s competitiveness 136
8.3 Global lead buying consists of three governance
models, ensuring global and regional savings 137
8.4 The newly defined governance models add the
regional focus 138
8.5 Purchasing is reorganized into four new purchasing
segments 140
8.6 Corporate lead buyers are responsible for group-wide
coordination of purchasing activities 141
9.1 Approach steps and focus 149
9.2 Different manufacturing network design
goals and relevant challenges 150
9.3 Payback and risk analysis 154
List of Figures and Boxes ix
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9.4 Selection of target countries 156
9.5 Site selection 158
10.1 Proven four-step process ensures that the project challenge
is tackled pragmatically and with a clear structure 164
10.2 A T-shaped logic ensures breadth and depth of the
analyses 165
10.3 A structured approach is used to analyze current
processes and define new operations strategies 167
10.4 The project organization is set up to keep track on the
progress of the project – regular communication is key 170
10.5 A regular communication process drives the sharing
of internal best practices 171
11.1 Costs of support functions and failure costs work
in opposite directions and have to be balanced 176
11.2 A benchmarking study of maintenance costs
and equipment availability shows the improvement
potential for different industries 178
11.3 Comprehensive maintenance management consists
of six building blocks 180
11.4 A maintenance excellence program needs clear target
setting and is structured in three project phases 187
11.5 Project example: major sites of a global player – specialty
chemicals 189
11.6 Providers have developed from general and
location-specific services into production support
functions independent of location 193
11.7 Two elements needed to create a high performance
refinery organization 194
11.8 A German refining site transforms itself into a flexible
refinery 196
IV.I.1 Our framework for end-to-end supply chain
management 200
12.1 World GDP, world exports, world FDI 202
12.2 Supply chain strategy, performance and enablers
fit seamlessly together 207
12.3 Initial situation and targets 209
12.4 Elimination of inter-company flows through direct
ordering 212
13.1 Complexity drivers 218
13.2 ‘Complexity tax’ often amounts to 11–22 percent of
total product costs 219
x List of Figures and Boxes
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13.3 Complexity’s impact differs from industry to industry 219
13.4 The overall approach aims to quantify and prioritize
different opportunities against each other 222
13.5 Detailed approach 224
14.1 Average working capital in different industries 234
14.2 ROCE drivers 236
14.3 Industry benchmark for debtor days 245
14.4 Current and targeted future status 246
14.5 Current use and future importance use of working
capital management levers by industry 248
14.6 Organizational forms conducive to inventory management 250
14.7 Untapped potential in each core process 253
14.8 Analysis of existing levers based on self-assessment
by study participants 255
15.1 Breakdown of companies interviewed in terms of size,
area of responsibility, and industry 259
15.2 Organizational talents have outstanding logistics
capabilities 260
15.3 External and internal factors to be analyzed prior
to designing organizations 267
Boxes
4.1 Airbus A380 65
4.2 Globalization of R&D – success factors 76
6.1 TCO approaches – underestimate at your own peril 112
13.1 Stock keeping unit (SKU) rationalization 221
List of Figures and Boxes xi
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NOTES ON THE CONTRIBUTORS
Ralf Augustin is a Principal in Roland Berger’s Stuttgart office. He has a
Master’s degree in mechanical engineering and business administration
from the TU Darmstadt, where he also gained his PhD in industrial
engineering. Before joining Roland Berger’s Operations Strategy
Competence Center in 2003, he was Engagement Manager at McKinsey
for five years and Section Head of Corporate Strategy at the Institute for
Production Management at the TU Darmstadt. He specializes in
comprehensive cost reduction programs, strategic sourcing, and complex-
ity management in the automotive, engineering products, and electronics
industries.
Alexander Belderok is a Principal in Roland Berger’s Amsterdam office.
He studies mechanical engineering at Twente University and gained a
degree from TSM Business School. Belderok has worked for Unilever and
was a Principal at A.T. Kearney for seven years before switching to
Roland Berger in 2006. His focus is on operations, marketing and sales,
organization and business re-engineering, and complexity management in
the consumer goods and retail sector, and the chemicals industry.
Kai Bethlehem is Head of Purchasing at Rothenberger Werkzeuge
(Tools). He has worked for Roland Berger as a Senior Consultant, at
Eurocopter as a Purchasing Manager and at Procter & Gamble in
Switzerland and Germany in purchasing. He gained his engineering
degree from the TU Darmstadt. He is an expert in strategic supplier
management, cost optimization, and process optimization for the airline,
automotive, and non-food consumer goods industries.
Christian Deckert studied at the Technical University Hamburg-
Harburg, where he gained a degree in industrial engineering and
economics. Since joining Roland Berger in 2001, Deckert has been
involved in working capital and cost management projects. He also
focuses on purchasing and production optimization, reorganization and
process management.
xii
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Tobias Franke has worked at Roland Berger’s Operations Strategy
Competence Center since 1999. In addition to completing a bank
traineeship, he gained a joint degree in European Business Administration
from the European School of Business in Reutlingen and Middlesex
University Business School in London. He specializes in procurement
organization and processes, and supplier and commodity management in
the airlines, automotive supplier, and utility industries.
Jochen Gleisberg is a Partner at Roland Berger. He gained his degree in
business from the University of Marburg and University of Gießen. Since
joining the company in 1998, Gleisberg has focused on purchasing and
engineering, optimizing organizational structures and globalized pro-
cesses, transformation management, and operations management in the
automotive and engineered product/high-tech sectors.
Volker Heidtmann gained a master’s degree in mechanical engineering
and business administration at TU Darmstadt before completing an MBA
at the State University of New York at Buffalo and a doctorate degree in
business studies from the Philipps-University Marburg. He joined Roland
Berger in 1999. His specialization is in production management,
organizational development, post-merger integration, and supply chain
management. He tends to work in the machinery, automotive, and utilities
industries.
Thomas Hollmann completed his business degree at the University of
Eichstatt-Ingolstadt before joining Roland Berger in 2005. He has worked
on complexity and inventory management, pre- and post-merger
integration, and logistics optimization projects in the healthcare, building,
and engineered products industries.
Michel Jacob is a Partner in Roland Berger’s Paris office. Prior to joining
Roland Berger in 2001, he was at A.T. Kearney for a decade, where he
was Vice-President in charge of strategic sourcing. Jacob also gained
industry experience working at Saint-Gobain, where he was an R&D and
production engineer in Germany and France. He has assisted clients on
numerous purchasing optimization and purchasing re-engineering pro-
jects. He also specializes in operational efficiency improvement projects.
Jacob has conducted projects in process-related industries like chemicals,
oil, paper, steel and building materials, manufacturing, as well as service
industries. He gained his MSc from the Ecole Centrale, Paris.
Notes on the Contributors xiii
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Steffen Kilimann gained a degree in industrial engineering and
management at the Technical University, Berlin, as well as a master’s
degree at the Ecole Superieure de Commerce, Toulouse. He also obtained
a PhD degree from Technical University, Dresden. Before joining Roland
Berger in 2006, he had management positions at Metro MGL Logistik and
Metro Cash & Carry. He has extensive experience in the retail/wholesale
and consumer goods sectors as well as in the automotive and transport
and logistics industries. His focus is on supply chain management,
reorganization of logistics and procurement systems, and the benchmark-
ing and optimization of production processes.
Thomas Kohr gained degrees at the University of Cooperative Education
in Mannheim and at the Leipzig Graduate School of Management. He
obtained his MBA degree from the EADA in Barcelona. Kohr joined
Roland Berger in 2005. He has worked on project controlling, process
re-engineering, innovation management and procurement optimization
projects in the electronics, engineering products, automotive, and DIY
industries.
Thomas Kwasniok is a Partner at Roland Berger with a focus on
operations in the process industries. He gained degrees in electrical
engineering and operations research as well as his engineering doctorate
in design tools for semiconductor circuits at the RWTH Aachen. He was
Principal at Management Engineers and Director of Logistics Division at
INFORM prior to joining Roland Berger. He has experience in the
chemicals, pharmaceuticals, consumer goods, transportation and informa-
tion technology sectors. His projects involve supply chain management,
manufacturing, product structure, purchasing and business process
reengineering.
Ken Mori is a Partner at Roland Berger’s Tokyo office. He gained a
degree in civil engineering at the University of Tokyo and his MBA at the
University of Chicago. Prior to joining Roland Berger in 2002, Mori
worked for the Kajima Corporation where he was Deputy Chief Engineer
and was Vice President and Co-Head of the Asian Automotive Practice at
A. T. Kearney in Tokyo. He has specialized in the automotive and
engineered products industries, where he worked on operations, strategy,
M&A, and post merger integration projects.
Satoshi Nagashima is a Partner in Roland Berger’s Tokyo office. He
gained his master’s degree and doctorate in engineering in material
xiv Notes on the Contributors
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science at Waseda University, Japan. He has worked for Roland Berger’s
Tokyo office since 1996. He has specialized in strategy development
(corporate, sales and marketing), R&D, logistics planning and branding.
Nagashima tends to work on projects in the automotive, electronics,
logistics, and pharmaceutical industries.
Robert Ohmayer is a Partner at Roland Berger. He joined the company in
1996 after completing a degree in industrial engineering and an MBA at
the University of Miami. Previously, he worked at MTU in Germany and
for Mack Trucks in the United States. Ohmayer has broad industry
experience. He has conducted projects in the automotive and supplier
industry as well as the machinery and plant sector, and spent one year
working in our South American office. He has also worked on projects in
the consumer goods, construction, and logistics industries. His functional
focus is on production, purchasing, supply chain management, R&D, and
corporate strategy.
Walter Pfeiffer is a Partner in Roland Berger’s Oils and Chemicals
Competence Center. He gained a degree in mechanical engineering and an
MBA from the TU Darmstadt. He joined Roland Berger in 2006 after
having worked at Arthur D. Little Strategy and Accenture in Germany,
Switzerland, Austria and the United States. His focus is on post-merger
integration, supply chain/margin optimization, strategy, reorganization,
and cost reduction in the downstream oil, petrochemicals, chemicals, and
biofuels industries.
Stefan Potzl gained his mechanical engineering degree with a specializa-
tion in production technology at the Technical University of Munich and he
completed the Bavarian Elite Academy in parallel. He wrote his diploma
these on logistics processes and cost while working at MAN Nutzfahrzeuge.
Since joining Roland Berger in 2003, he has concentrated on the
automotive, engineering/hi-tech and aerospace industries. He has assisted
clients throughout Europe on projects dealing with strategy, performance
improvement, procurement/cost reduction, R&D, innovation management,
product planning, and process optimization.
Thomas Rinn is a Partner in Roland Berger’s Stuttgart office. He studied
business administration at the Eberhard-Karls-Universitat in Tubingen
and received his MBA from Portland State University. He joined Roland
Berger in 1998 after working for many years in industry, both in Germany
and in the United States. He has been a member of HTH Haus und
Notes on the Contributors xv
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Technik AG’s supervisory board since 2006. Purchasing, product
development, and supply chain management are his specializations. He
has completed projects in many industries including transportation,
aviation, defense, logistics services, engineered products and construction
and trade. In addition, he supports private equity-owned companies in
performance improvement.
Axel Schmidt is a Partner at Roland Berger. He joined the strategy
consultancy in 1991 and became Global Head of Operations Strategy in
1997. Previously, he worked for Procter & Gamble in Paris and ACL
Engine Parts in Australia. He gained his degree in mechanical engineering
at the University of Stuttgart. Schmidt has conducted projects in various
industries ranging from consumer goods/retail, and pharmaceuticals
through to automotive, engineered products, financial, and security
services. He advises clients on the following types of project: supply chain
and asset optimization, global footprint optimization, distribution and
logistics strategy, turn-around programs, and global purchasing and
development organization redesign.
Ingo Schroter gained his degree in technical business studies at Stuttgart
University. Prior to joining Roland Berger’s Operations Strategy
Competence Center in 2001, he was a consultant at Arthur D. Little. He
is an expert for supply chain management and logistics. He has supported
clients on international projects on supply chain strategy, organization,
business process re-engineering, and cost cutting. He has worked in these
and in other functional fields in the process, aerospace and defense,
transportation, and retail and consumer goods industries.
Roland Schwientek is a Partner in Roland Berger’s Munich office. He
studied business administration at the Gerhard-Mercator University of
Duisburg. He joined Roland Berger in 1997 after working for several years
in various functions in the automotive and automotive supplier industry,
latterly as a purchasing manager at Bosch Automotive. Procurement/
purchasing, manufacturing footprint, supply chain management, and wor-
king capital optimization are some of his focus issues. He drives projects in
many different industries under the action title ‘Best practice transfer’:
what can we learn from leaders and leading industries? Schwientek is
author of a number of studies, including Purchasing Excellence and
Working Capital Excellence.
xvi Notes on the Contributors
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Gabriel-Assad Singaby is a manager in Paris with seven years’ consulting
experience. He gained his MBA at the University of North Carolina and a
degree in industrial engineering and operations research from the University
of North Carolina and Ecole des Mines de Paris. Singaby’s projects involve
lean organization implementation, re-engineering, and lean operations
improvement programs. He is also a 6-Sigma expert with a Master Black
Belt 6-Sigma diploma from GE. He specializes in the automotive,
aerospace, transportation, and chemical industries.
Stephan M. Wagner is a Professor at WHU–Otto Beisheim School of
Management, where he is Director of the Kuehne Center for Logistics
Management and holds the Kuehne Foundation Endowed Chair of
Logistics Management. He obtained an MBA degree from Washington
State University and a PhD and Habilitation degree from the University of
St Gallen in Switzerland. Prior to joining the faculty of WHU, he worked
as Director of Supply Chain Management for a Swiss-based technology
group and as Senior Manager for an international management consulting
firm. Wagner’s research interests include supply chain strategy, purchas-
ing and supply management, interfirm relationships in industrial market-
ing channels, innovation in supply chains, and the management of
logistics service firms.
Stephen Weisenstein works in Roland Berger’s Detroit office. He gained a
degree in economics at the University of Michigan and his MBA at the
University of Chicago. Prior to joining Roland Berger in 2004, he gained
extensive industry experience working at Thomson, Daimler and Toyota
Motor Manufacturing. He specializes in process improvement, procure-
ment, growth strategies, corporate restructuring, post merger integration,
and the Toyota Production System implementation in the automotive,
engineered products, and manufacturing industries.
Michael Zollenkop joined Roland Berger in 1999. He gained a degree
in business administration from the Friedrich-Alexander-University
Erlangen-Nurnberg, a master’s degree in economics from the Wayne
State University in Detroit and his doctorate in business studies from the
Otto Friedrich University in Bamberg. His focus is on product creation
strategies, product portfolio and business model optimization, and
procurement strategies in the automotive, machinery, IT/telecommunica-
tions and healthcare industries.
Notes on the Contributors xvii
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Marco Zurru is a Partner at Roland Berger’s Milan office. He advises
clients in the aerospace and automotive sectors, and in government and
public services on strategy, operations, sourcing, supply chain and
logistics, manufacturing, and business process re-engineering. Before
coming to Roland Berger in 2001, he worked for Booz Allen & Hamilton
and various industrial companies. He gained his MS in engineering and
his MBA from Politecnico in Milan.
Roland Berger Strategy Consultants are especially grateful to Florian
Kaiser and Heidi Sylvester for their work in the preparation of this volume.
xviii Notes on the Contributors
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LIST OF ABBREVIATIONS
ABS air-bearing surface
B2B business-to-business
B2C business-to-consumer/customer
CAD computer aided design
CAE computer aided engineering
CCR comprehensive cost reduction
CEE Central and Eastern Europe
CEO chief executive officer
CFO chief financial officer
CKD complete knock down
CMMS computerized maintenance management system
COO chief operating officer
CPL corporate procurement and logistics
DFMA design for manufacture and assembly
DRG diagnosis related groups
DtC design to cost
EADS European Aeronautic Defence and Space
EAI enterprise application integration
EBIT earnings before interest and taxes
EMEA Europe, Middle East and Africa
ERP Enterprise Resource Planning
F&A finance and administration
FDI foreign direct investment
FMEA failure mode and effect analysis
GAP good–average–poor
GCL global commodity leader
GDP gross domestic product
HSSEQ health, safety, security, environmental
and quality standards
HWPM heavyweight product managers
IPO international purchasing offices
IS information systems
KPI key performance indicator
xix
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LB local buyer
LCC low-cost country
LEG lead engineering group
M&As mergers and acquisitions
MbO management by objectives
MRO maintenance, repair and overhaul
OEM original equipment manufacturer
OPEX operational expenditure
P&L profit and loss
P2P peer-to-peer
PEP Purchasing EmPowerment
PM purchasing manager
PPC production planning and control
PPP public–private partnership
R&D research and development
RCL regional commodity leader
REACH registration, evaluation and authorization of chemicals
RFQ request for quotation
ROCE return on capital employed
SAP Systems Applications and Products in data processing
SC supply chain
SCM supply chain management
SFP site fitness programme
SKU stock keeping unit
SUVs sport utility vehicles
TCO total cost of ownership
UNSPSC United Nations Standard Product and Services Code
VDC vehicle development centres
WHU Wissenschaftliche Hochschule Fur
Unternehmensfuhrung
xx Abbreviations
9780230_217805_02_intro.3d 5/29/2008 09:56:55
INTRODUCTION
‘It’s not through inventions but through improvements that
fortunes are made.’
— Henry Ford
Achieving operative excellence is an important endeavor for all companies –
it is the golden path that leads to increased value over the long term.
By applying operative levers systematically and managing them
correctly, companies are doing everything in their power to ensure that
they follow their selected corporate strategy. It helps them answer some
critical questions: What value should my company create itself and what
should be achieved by external parties? Where are my company’s end
production sites located and which key technologies and products take
center stage? How does my company manage innovation and where is it
supported? Where is the company’s supplier base mainly located and how
can we steer the supply chain with maximum effect?
Operations Excellence takes up these questions. The authors provide
answers based on their extensive consulting experience, gained while
working with leading industrial sectors over many years. When answering
these questions, the authors keep two things in mind: What do leading
companies do? and What can be learnt from their approach? Bear in mind
that operations excellence, ultimately, is not a question of geniality – it is
more a question of an appropriate approach and fit to strategy, and of
continuous improvements as Henry Ford Snr knew very well.
At the beginning of the twentieth century, Henry Ford developed modern
assembly lines for the mass production of cars, which marked the beginn-
ing of a decisive and formative paradigm shift. These days the principle of
operations excellence has spread far beyond traditional manufacturing
industries and now shapes entirely new sectors. McDonald’s, for instance,
extended the main features of operations excellence and made them relevant
for the restaurant sector. Toyota, which is currently the No. 1 automotive
player in the world, broadened the scope of mass production and started
applying its expertise in this field to the housing market. With its Toyota
Home, the carmaker has created a completely new business. Thanks to
explosive growth rates for prefabricated and terraced houses, it has created
1
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for itself an additional growth motor. Even in traditional sectors, change is
seeping in. Machinery producers such as Trumpf, whose processes in the
past were often organized as stand-alone workshops rather than serial indu-
stries, are implementing industrial manufacturing processes, as mass produ-
cers have for quite some time.
Companies that have the correct operative strategy and are prepared to
make sometimes difficult changes in order to improve their business are
acknowledged as best-in-class. It is these that reach best practice status.
The best things come in threes
There are three levels to operations excellence, and this book provides
insights into groundbreaking developments in all three levels.
• The first level – that of strategy – provides companies with information
on how they should travel their own path to best practice and the
milestones they should see on their medium- and long-term horizons.
• The second level is that of performance improvement. It provides
answers to questions such as: Which service level must my company
reach in order to be competitive and leading edge? What requirements
should my company expect from asset productivity and what should be
the cap for our various cost types?
• The third level concerns enablers. This level answers questions about the
correct organizational form, best processes, most appropriate human
resources and key performance indicators, as well as infrastructure
excellence fields such as IT.
Operations strategies
… tackle the fundamental operational challenges of the future
Operations performance improvement
… transfer performance drivers such as cost structure and asset productivity into best practices
Operations enablers
… help to support, measure and control all operational enabler issues such as organization, processes, IT and KPIs with tangible values for companies
Strategy
Enablers
Performance improvement
Figure I.1 Our approach – three levels to create operations excellence
2 Introduction – Operations Excellence
9780230_217805_02_intro.3d 5/29/2008 09:56:55
Operations excellence – four fields of action
This book tackles four fields in some detail: research and development,
purchasing, manufacturing, and supply chain management. The authors are
experienced consultants, professors and practitioners from all major
industrial nations.
• In Part I approaches and cases from the area of R&D are introduced and
debated
• Part II is dedicated to trends and approaches in the area of sourcing and
purchasing
• Part III examines developments in the field of manufacturing
• Part IV deals with improving supply chain management; covering
aspects such as comprehensive process optimization, reducing com-
plexity and improving working capital.
We hope you enjoy reading this insightful book. Moreover, we hope you
stumble across many helpful suggestions that enable you to achieve
operations excellence within your own company.
ROLAND SCHWIENTEK
AXEL SCHMIDT
Research and development
… beginning of the value chain
Purchasing
… value chain element with external partners
Manufacturing… core competencies in production capabilities
Supply chain management
… logistics, order management and working capital issues
R&D Purchasing
Manufacturing SCM
Figure I.2 Four fields of action to create operations excellence
Introduction – Operations Excellence 3
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PART I
Research and Development
5
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Introduction
What is successful productdevelopment?
Thomas Rinn and Kai Bethlehem
No one would doubt today that markets are becoming progressively more
global. The rise of Eastern Europe, the upturn in Latin America and, of
course, the entrance of China et al. into the global marketplace have
significantly increased the numbers of suppliers for almost every kind of
product. With competition rising, it is more important than ever before for
companies to find and highlight their unique selling point, to offer some-
thing that singles out one company from the crowd.
‘Innovation’ is considered the magic word with which to rise to this
challenge. Companies wish to create products or processes that lead to
cheaper and better products, and innovation is the key to achieving this.
Yet, innovation does not happen by chance: it has to be planned. The
environment for excellence in innovation has to be actively established
and fostered.
These lessons are part of all undergraduate classes in business
administration or engineering. Yet, we continue to see many managers
struggle to put this knowledge into practice in a systematic fashion, even
though they are fully conversant in the theory of innovation.
The task is not an easy one. There is no one best, easy-to-apply strategy
for successful and efficient innovation. Indeed, the opposite is true: each
industry and segment requires a tailor-made approach to reach the best
possible results.
A recent Roland Berger study1 on the globalization of R&D
organizations shows that there are several clusters to which companies
and their R&D structures typically belong. Within each cluster, there are
many ways to be successful. While there is ‘no one single best way’ to be
continuously successful, product development is the area that is always
most in need of improvement in order for a company to flourish,
irrespective of the cluster or industry.
6
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But what exactly should be the target of such improvement? What is
successful product development?
This can be best answered by a comment by one of our clients, the head
of R&D with a global blue-chip company recognized as being an
innovation leader, during a workshop we moderated in early 2007. He
said: ‘When looking at the company from an external perspective,
successful product development means that the new product fulfills or
exceeds its targets concerning profitability, that it is different from other
products, creates value-added for customers, and meets any other target
that has been defined for this product. Looking from an internal perspec-
tive, however, things are different. Development is successful if R&D
fulfills all its initially set targets regarding timing, money spent, smooth-
ness of the process and quality of the result.’
In fact, this company sometimes had issues with developments and
products not running well, leading to sales levels significantly below
target and negative business results. This raised the question as to whether
the company correctly focused its resources and whether it took appro-
priate steps once developments got off track or circumstances changed.
The important underlying questions are: how can companies stop
projects that are clearly going to fail, and would a company be more
successful if it stopped projects bound for failure early on?
Based on our experience, the answer is yes. By stopping a project in a
timely fashion, resources, time and money can be channeled to other,
potentially more successful, projects that might bring a greater overall
benefit, as intellectual capital is allocated to developing products with the
best business case for the entire company.
Thus, stopping a probably unsuccessful project as early as possible is
central to improving overall innovation performance. According to our
study, those companies that have the courage to stop previously very
appealing product developments stand out from the crowd, and experience
greater success.
Courage is not enough. In order to stop product developments early on,
companies must have a clear strategy, fact-based performance measure-
ments, and rigid quality gates.
In Part I, which focuses on product development, we thus examine
different kinds of measures and methods to steer, control and optimize
a product development project. Looking at R&D strategy, Michael
Zollenkop explains how business model innovation is dependent on
product/service innovation and how this fosters excellence in product
development. Following this, Ralf Augustin and Kai Bethlehem reveal the
levers that can be applied during product development. Jochen Gleisberg
What is successful product development? 7
9780230_217805_03_ch01.3d 5/29/2008 09:56:14
and Kai Bethlehem complement this section with their thoughts on the
challenges of global development organizations. Then, Stefan P€otzl,
Thomas Kohr and Dr. Michael Zollenkop take a closer look at a couple of
enablers, starting with an innovation toolkit that has been proven to work
and easy to implement. Ken Mori and Satoshi Nagashima round off this
section by providing an example of a very successful Japanese approach
to setting up smart engineering processes within a global organization.
Note
1. Roland Berger Strategy Consultants (2007) ‘Globalization of R&D –
Drivers and Success Factors’. Study, ESB Research Institute,
Reutlingen University, June.
8 Thomas Rinn and Kai Bethlehem
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CHAPTER 1
Changing business models and theirimpact on product development
Michael Zollenkop
Introduction
This chapter will examine how changes in the business model – whether in
a company or an entire industry – can affect the process of product
development. First, I define the precise nature of a business model, and
how it should be used as a steering instrument for a company. Next, the
chapter explores how business models develop over time and how these
developments can be viewed as part of a lifecycle model. Following this,
the question is discussed as to how companies can initiate and manage
these innovations. Finally, a case study illustrates how generating
scenarios for future business models can help companies to see what
action they need to take now in terms of product development.
The business model – corporate strategy in action
A number of factors, both internal and external, can influence the type,
scope and direction of a company’s product development. Corporate
strategy determines the methods that a company employs. It also
determines the contents of a company’s innovation strategy. Corporate
strategy is thus responsible not only for the underlying competitive
strategy – for example, cost or quality leadership – but also for the overall
form of the company’s business model.
In simplified terms, the business model can be seen as the ‘day-to-day
living’ of the corporate strategy, or a description of a company’s activities.
The business model comprises three interrelated components, which are
shown in Figure 1.1.
9
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The first component is the product/market combination, which describes
the customers that the company aims to serve, its markets and its services.
Key elements here are the products and the scope of additional services the
company will offer, the type of transactional relationship (that is, B-2-B,
B-2-C or P-2-P) and the relevant market, defined according to functional,
demographic, regional and other criteria.
The second component of the business model is how the company’s
value chain is to be configured and applied. This describes the degree of
company internal value-added, the basic type of company configuration
and the design of functional strategies. In terms of the company’s
configuration, the company must choose between vertical integration,
specialization in particular functions, or coordination of the value chain.
The third component of the business model is the structure and relative
weighting of the company’s sources of revenue. Revenues can be transaction-
based or non-transaction-based, and might come directly from users of the
company’s primary service offering or indirectly from users of a secondary
service. Important elements here are customers’ willingness to pay and the
company’s pricing strategy.
A company’s business model lives or falls on the interdependence
between these three components. Achieving a good fit is a prerequisite for
generating superior customer value and, ultimately, competitive advan-
tage. The following example from the airline industry will make this clear.
CUSTOMER VALUEAND
COMPETITIVE ADVANTAGE
Product/market
combination
Revenuemechanism
Value chainconfiguration
Figure 1.1 Components of business models
10 Michael Zollenkop
9780230_217805_03_ch01.3d 5/29/2008 09:56:14
Example: The airline industry
Most scheduled airlines – such as Lufthansa, for example – pursue astrategy of quality leadership. They aim to provide the best possibleservice and comfort combined with a global flight network. By contrast,low-cost carriers – Ryanair, for instance – aim for cost leadership. Theyproclaim that flying is an integral part of people’s leisure activities andshould be affordable for all. According to their philosophy, flights are incompetition with other means of transport or other types of leisureactivity. In this way, low-cost carriers are responsible for what may becalled the commoditization of flying – a type of customer value thatdiffers fundamentally from that offered by traditional scheduled airlines.
These two contrasting business strategies find their reflection in twodiffering business models. Both business models are internallyconsistent and, therefore, successful.
Traditional scheduled airlines target a mixture of business travelers andtourists. They offer a wide range of regional and international routes –their product/market combination. They have a hub from which theyoperate intercontinental flights; short-haul flights between major citiesfunction as feeders for their intercontinental routes and are not generallydesigned for point-to-point transport (configuration of the value chain).Scheduled airlines’ revenue comes in the form of payment for thetransportation of passengers and cargo. A wide range of tariffs is availablefor tickets (the revenue mechanism). The business model is based onservice, customer loyalty, and offering an international flight network.
Low-cost carriers have a very different business model, one that isbased entirely on cost. Ryanair targets cost-sensitive tourists and onlyoffers flights within Europe, with no in-flight meals (product/marketcombination). To keep costs to a minimum, Ryanair uses remote airportsthat often owe their very existence to it. Consequently, the standing timesat these airports are very short, especially as flights are used for point-to-point transportation (value chain configuration). Low-cost carriers’ reve-nues come not only from the sale of tickets, but also from areas such ason-flight purchases, data mining and advertising. Ticket prices varyaccording to when they are booked and the number of seats remaining atthe time of purchase (revenue mechanism). All three components of thebusiness model are directed toward cost optimization.
In both business models, the individual components fit well together.Yet, a number of companies – the KLM subsidiary ‘Buzz’ and the BritishAirways subsidiary ‘Go’ for example – were unable to achieve this levelof consistency in their business models. They were the first victims in thelow-cost carrier market.
Changing business models 11
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In fact, even successful business models are subject to change. How this
happens forms the subject of the following section.
Change and innovation in the business model
Today, more than ever, competition between companies is driven by the
increasing speed of technological and market change. As the pace of
innovation steps up and market cycles shorten, more and more companies
are redefining the basis of their business fundamentally, repositioning
themselves as the providers of comprehensive solutions rather than as the
manufacturers of specific industrial or consumer goods. The same goes for
service providers. They, too, are expanding or adjusting the range of
services they offer on the basis of functional and other criteria in order to
exploit their own specific competitive advantages. The days are gone
when competition was restricted to the home industry and to traditional
competitors. Traditional boundaries between industries are rapidly dis-
solving, and companies are increasingly operating across a variety of
different markets and sectors.
The construction and plant engineering industry is a good example. The
industry is currently witnessing a shift in business models. Increasingly,
companies are achieving customer value and competitive advantage by
offering comprehensive solutions rather than specific products or
individual services.
The construction company Bilfinger Berger, for instance, has added the
Multi Service Group to its title. Industrial, power and facility services
generate around ⁄2.6 billion, or more than one third of the group’s total
revenues. Also, the services it provides extend well beyond the field of
construction – including, for example, the maintenance and hiring of pumps
to chemicals and pharmaceutical companies. Many plant construction
companies now sell services using an operator or pay-on-production model.
Linde, for instance, operates an air separation plant at the site of Finnish
steel producers Avesta, supplying them with oxygen, argon and nitrogen.
The German compressor manufacturer Kaeser currently generates only half
its revenues from the sale of compressors; the remainder comes from sales
of compressed air. In the automotive industry, Eisenmann, a manufacturer
of painting systems, generates revenue by painting car bodies for its client
Ford, while the KUKA Robot Group is paid for the number of auto bodies it
welds at one particular Chrysler plant.
According to a study published by the Fraunhofer Institute for Systems
and Innovations Research ISI,1 around one fifth of producers of industrial
12 Michael Zollenkop
9780230_217805_03_ch01.3d 5/29/2008 09:56:14
goods have brought their business model into line with the ‘complete
solution’ approach and now offer operator models: this pays off. Average
pre-tax operating margins for companies with operator models were
6.8 percent, compared with 5.9 percent for companies without.
In infrastructure projects where the cash-strapped public sector is
involved, companies are at a distinct competitive advantage if they are
able offer additional services, such as the management of buildings or
institutional facilities under a public–private partnership (PPP) model.
Bilfinger Berger, for example, expects a return on equity of between
12 and 13 percent from its respective service business.
While corporate strategy remains as relevant as ever, changes to a
company’s business activities such as those outlined above have a far-
reaching impact on its products, markets, value chains and revenue
mechanisms. Business models change and develop over time. Particularly
with the benefit of hindsight, it is possible to see quite different business
models in a single company or industry as time goes by (see Figure 1.2).
One sector that has recently experienced major changes to its business
model is the biotech and pharmaceutical industry. These changes are, for
instance, reflected in how the business model of the company Mologen has
developed over time. Mologen, originally a spin-off of the Free University
of Berlin in the field of bio-informatics, moved into the area of molecular
medicine. Its focus turned particularly to the research and development of
drugs based on DNA structures, which are used, for example, in the fight
against cancer. This area of activity, also known as ‘genetic immuniza-
tion’, represented Mologen’s product/market combination. Over time,
NUMBER OFINNOVATIONS
Product innovationBusiness model innovation
Process innovation
TARGET
Customer-oriented
Resource and financial market-oriented
BUSINESSMODEL
Specialist Network Vertically integrated enterprise
LEVEL Corporate Corporate Business unit
Figure 1.2 Development of business models over time
Changing business models 13
9780230_217805_03_ch01.3d 5/29/2008 09:56:14
Mologen gradually extended its area of activity from veterinary to human
medicine. In terms of the value chain, its original configuration when it was
still operating in the field of bio-informatics was that of an integrated
company. The side step into molecular medicine brought with it, first, a
specialization model and, later, building on this, a network coordination
model. In a number of cooperative projects, Mologen initially concentrated
on producing its own patented, DNA-based technology platforms. As time
progressed, however, the company took over the coordination of the value
chain in areas such as development and the functions of production,
marketing and distribution, depending on the line of business, in
cooperation with various partners. Today, the company enjoys even greater
vertical integration, especially in the areas of production and distribution.
Whereas its product/market combination and value chain configuration
have undergone a number of mutually-dependent transformations, the
revenue mechanism has remained transaction-based.
Changes in the business model such as those described above either come
about in a planned way – the product of decisions made by top management –
or they simply emerge as a result of actions taken by middle management.
The constant changes in the environment, plus the fact that business
models can readily be copied and imitated, make it important that
companies consciously engage in this process of business model
innovation, actively shaping the development of the company. Technolo-
gical innovation is a key component of rapidly changing environments.
Just as much as demographic change, new technology can change the basis
of a company’s operations, making existing business models obsolete. This
is particularly true when it comes to technological convergence, which
almost always brings in its wake a convergence of products and sectors.
Functionalities that were formerly independent start to merge and
previously distinct products draw closer in terms of their technology. As
a result, products’ value chains also become more and more similar. One
present-day example is the competition between consumer electronics and
the computer industry, with both areas battling it out over leadership in the
area of access to digital services.
Essentially, business models can be imitated wherever barriers to
market entry – such as physical resources that require building up over
time – are low or non-existent, and wherever the often complex quilt of
relationships between different components of the business model can be
disentangled and transferred to other companies, markets or businesses. In
the case of electronic commerce, for example, imitation is not difficult.
Moreover, the fact that the companies themselves all strive toward the
same benchmarks and best practice, and industries undergo consolidation
14 Michael Zollenkop
9780230_217805_03_ch01.3d 5/29/2008 09:56:14
following mergers and acquisitions, further contributes to the process of
imitation and, ultimately, the consolidation of business models. It is
exactly for these reasons that innovation and continuous product
development are necessary for those companies that intend to stay
‘removed from the crowd’, to be special, to enjoy a strong reputation and
lead in their respective market segment. With innovation and progress
lacking at a company, the field will soon have caught up and leveled any
kind of advantage that such company might have had a few years before.
Nike has long been regarded as a prime example of a company with a
successful business model, a benchmark of effective business management
in the sporting goods manufacturing industry. The company focuses its
value creation on product development and brand leadership, outsourcing
production to third-party providers. In terms of its product/market combi-
nation, Nike positions itself in the high-quality lifestyle/sporting goods
segment, where items carry high price tags. Nike has also opened up a
number of its own elaborately designed department stores – known as
Niketowns – where the purchase experience becomes a leisure activity in
itself. This model has been widely imitated throughout the industry. Today,
all the major players, including the German companies Adidas and Puma,
employ a similar business model. These two companies were in crisis at the
beginning of the 1990s as a result of excessive costs, a stale brand image
and an outdated product mix. Both managed to move themselves away from
the brink of disaster, largely by adopting the best practice modeled by Nike.
As the then Adidas CEO Robert Louis-Dreyfus himself admits, they did so
by engaging in ‘large-scale imitation’ of Nike’s successful model.2
Business model lifecycle – the basis for innovation
The question is now – how can companies recognize the need to
innovate in their business model and how may they determine when best
to do this?
As we have seen, business models change over time. Just as products,
technologies and industries do, business models pass through stages of
formation, growth, maturity and decline. Put simply, they have a lifecycle.
However, business models can be very complex. A large number of
different factors can influence them. So, rather than trying to grasp this
complexity in one attempt, it is often easier to look first at the lifecycles of
the three components that make up the business model – the product/market
combination, value chain configuration and revenue mechanism – and then
draw conclusions on the overall lifecycle of the business model.
Changing business models 15
9780230_217805_03_ch01.3d 5/29/2008 09:56:14
The indicators for different lifecycle stages are based on criteria and
appropriate models taken from the discipline of innovation management.
These indicators are different for each component of the business model.
For the product/market combination, there are dozens; we have to select
the right criteria from among those, bearing in mind the particular
business model in question. In general, criteria for assessing market
potential and penetration, innovation rate, degree of product or component
standardization, customer adoption, and satisfaction of customer expecta-
tion by the market are particularly relevant. For the value chain
configuration, criteria such as technological development, its influence
on company costs and performance, and factors determining the
development of the sector are important. The key criteria for the revenue
mechanism are purchase criteria, price elasticity of demand, and changes
in market participants’ willingness to pay.
By examining these criteria, we can develop a picture of the lifecycle of
each component of the business model, and how this influences the overall
lifecycle of the business model. The relationship between the different
components and how they interact with each other is also highly
significant. To a large degree, this determines how well the business
model fits together and, hence, how successful it is. The key question
therefore concerns what the consequences are for the overall business
model lifecycle if the indicators for each component show that they are in
different phases, or when one component enters a different lifecycle stage
(see Figure 1.3).
Accordingly, top management needs a tool for early recognition of the
need to take action or innovate in the business model, which will help
them to generate different options for change. This tool must provide top
management with enough information sufficiently early in the process
without deluging them with unnecessary data. Ideal, for this purpose, is a
combination of an early warning system that senses any alterations in the
indicators for the business model lifecycle and a system of what are
known as ‘weak signals’.
The indicators relate directly to the company’s competitive environment,
while the weak signals relate to the general environment in which the
company operates. The competitive environment determines the attractive-
ness of the industry or business model and refers to suppliers, customers,
relations with industry, rivalry between market players, newcomers to the
market, and substitute products. The general environment relates to
technological, macroeconomic, socio-cultural, ecological, political, and
legal factors. These factors are shown on Figure 1.4. An example will
elucidate the point.
16 Michael Zollenkop
9780230_217805_03_ch01.3
d5/2
9/2
008
09:5
6:1
4
Revenue mechanism
Value chain configuration
Product/market combination – potential lifecycle indicators
Indicators Formation Maturity Decline
Marketpotential
Unclear Insecure Can beassessed
Clear
Marketpenetration
Low Marketsaturationnot yetnoticeable
Marketwidelyexploited
Only re-placementneeds left
Innovation rate
High Shrinking Low Low
ProductStandard
None Nascent Exists Exists
Customer Innovators Firstfollower
Majority Latecomer
...
Revenue mechanism
Value chain configuration
Product/market combination – lifecycle position of a specificbusiness model
Formation Growth Maturity DeclineGrowth
Figure 1.3 Lifecycles of business model components
17
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Case study: The music industry
The music industry – comprising companies being involved in theproduction, marketing, and distribution of audio media – has produceda number of early warning systems for its business models in recentyears. The industry is vertically integrated to a large extent. Its productsare CDs and suchlike, containing a selection of titles by a particular artistor in a particular genre, and offered within a constant price spectrumacross the industry. In the past, four major labels formed an oligopolythat accounted for some 80 percent of worldwide sales. However,between 1997 and 2003 these four big players experienced revenuelosses of approximately one third. Initially, the reason was music-swapping services such as Napster and Kazaa; later on, legal onlineplatforms appeared such as iTunes, from which customers could buyindividual tracks as MP3 files rather than having to purchase whole CDs.
Indicators had appeared in both the industry and competitiveenvironments that the CD-based segment had reached its mature phaseand an innovative business model was on its way. In terms oftechnology, there were unmistakable signs of forthcoming change:digitalization, the emergence of the MP3 format, and the rapid spread ofInternet use with ever-faster transmission rates. In terms of socio-cultural change, the popularity of competing leisure activities (media
GENERALENVIRONMENT
Techno-logical factors
Politicaland legal
factors
Socio-culturalfactors
Ecologicalfactors
Macroeconomicfactors
Attractiveness of a business model
COMPETITIVEENVIRONMENT
Suppliers
Customers
Relations withindustry
Rivalry betweenmarket players
Newcomers tothe market
Substituteproducts
Figure 1.4 Indicators for business model attractiveness
18 Michael Zollenkop
9780230_217805_03_ch01.3d 5/29/2008 09:56:14
such as DVDs, computer games, PlayStations, and so on) among youngpeople – the key customer segment – was bringing about a significantshift in behavior. These factors in the overall environment led to anincrease in the power of performing artists in the competitiveenvironment. No longer were artists forced to work exclusively with alabel for the purposes of production and distribution. The changes alsoled to an increase in consumer power. Now, fans could buy theparticular track they wanted rather than a CD put together by the label.
Weak signals also appeared early on that changes were afoot in themusic industry. Back in the early 1990s, leading figures such as MITInternet guru Nicholas Negroponte and inventor of the MP3 formatKarlheinz Brandenburg were already talking about the threat ofdigitalization for the music industry. Indeed, the former head of Universalin Germany describes the situation as follows: ‘The early tremors of thedigital revolution could be felt in the music industry well over a decadebefore the earthquake hit – that is, if one wanted to feel them.’3
Yet, many companies that had traditional business models did notwant to feel the earth move. For many years, they failed to react eitherto the indicators and early warning signs or to the arrival of Internet file-sharing services. Instead of developing a consistent strategy, they triedto take legal action – first, against the file-sharing services and, later,against their users. Apple, an industry outsider, understood the signalsbetter. Its reaction was to launch iTunes, the first and, to date, mostsuccessful seller of tracks via the Internet.
Generating business model lifecycles in this way gives top management
an early warning system. When this system indicates that the business model
is entering into a period of decline, or shows that other, superior business
models are possible, top management knows that they must do something
about product development. What exactly it is that they should do – and how
scenarios can help them find out – forms the subject of the following section.
Product/service innovation – the prerequisite for innovationin the business model
The information that early warning systems generate forms the basis for
drawing up scenarios. Top management can then use these scenarios to
test potential business models for durability and robustness. The scenarios
themselves give a picture of what the complex systems of the future could
look like. They must be produced in a systematic fashion and be entirely
Changing business models 19
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plausible in nature. Their purpose is to create transparency over possible
future competitive conditions and different factors affecting the success of
business activities. The scenarios form a key component of a company’s
business planning and development, as well as serving to generate
potential future business models.
The process of drawing up scenarios consists of three stages: scenario
field analysis, projections, and scenario building. This process is prece-
ded by a stage of scenario preparation and followed by scenario transfer.
In the scenario field analysis stage, key factors are determined for the
entire system. In the projections stage – the core phase of scenario
management – appropriate projections are made for the key factors
determined in the initial phase. These projections are then bundled into
draft scenarios, visualized and described. Ideally, companies should draft
two or three scenarios with different constellations, so that the actual
development falls somewhere between the more extreme scenarios. In the
case of innovative business models, it can again be helpful to run this
procedure for each of the three components of the business model first,
and then combine the three to form appropriate scenarios. This ensures a
good fit in the future business model.
According to expert opinion in recent years, three main scenarios exist
for the future of the music industry. These scenarios are ‘equilibrium
between online and offline services’, ‘dominance of online distribution’
and ‘the end of the music industry’. In one extreme scenario, ‘equilibrium
between online and offline services’, the product/market combination will
consist of CDs and suchlike, accompanied by an attractive, legal
download service. Online and offline services will be offered as additional
services when customers buy CDs. The value chain configuration will
involve major labels gradually running down their vertical integration in
favor of cooperation with specialized players. The revenue mechanism for
this scenario will be a combination of various online and offline
components in the revenue stream. In the other extreme scenario, ‘the end
of the music industry’, music will simply become another type of digital
content. The convergence of contents and hardware will lead to sections of
the value chain – such as distribution and marketing – being taken over by
the companies formerly responsible for bundling and selling content or
producing hardware: these might be Internet portals, mobile telephone
companies or media firms, or hardware manufacturers such as Apple. In
this scenario, labels will become redundant.
Clearly, companies need to be prepared for the new conditions arising
in the competitive environment. They must be in a position to implement a
business model that can face these new conditions robustly. They need to
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9780230_217805_03_ch01.3d 5/29/2008 09:56:14
know what wheels they should set in motion in their product or service
development process, their value chain configuration and their revenue
mechanism. To do this, two activities are vital: companies must carry out a
gap analysis to determine what needs to be done, and they must determine
the correct timing for initiating action. It is essential that they manage the
transition from the old business model to the new one in a fluent manner.
The gap analysis should check what potential resources lie in the company
and whether these resources are sufficient to meet the needs of the future
product/market segment. This means that companies should examine what
technology they currently have, how this compares with what will be
required in future, and what new skills they need to develop. Companies
must ask themselves what their current capacity is, and how they should
prioritize their resources between the two goals of keeping up existing
product development (for example, supervising current series production)
within the framework of the present business model, and closing the
development gap with respect to the future business model. One possible
solution is for companies to buy in external know-how – finances permitting.
Google, Yahoo! and eBay are good examples of companies that
continually acquire start-ups with promising technological developments
or existing business models. Their aim is to shorten development times,
which are often more relevant than costs when it comes to competition
over innovation. At the same time, by buying up start-ups they guarantee
themselves an excellent starting position as fast followers or even first
movers. For instance, eBay bought up Skype, a service that makes it
possible to make free telephone calls via the Internet. Similarly, Yahoo!
acquired the photo management and sharing application Flickr, and even
made Flickr’s founder its own vice president.
Apple has taken a different approach. Heeding the early warning
signs, Apple looked at what it needed to do to build up the requisite
skills and designed an attractive spectrum of future services. Ultimately,
Apple was able to generate a new field of business for its iPod hardware
through its download service iTunes. The rumors that Apple’s hardware
business cross-subsidizes its software business persist. But, ultimately,
Apple’s success is enough to quell any criticism. The new business field
of iPod and iTunes now accounts for 49.5 percent of Apple’s revenues,
compared with just 6 percent in 2003. The company’s revenues were
up by 211 percent in 2006 compared with 2003, and profit was up by
2,780 percent.
Determining the correct timing for initiating action means making the
most of windows of opportunity before product standards, dominant
designs and business models have crystallized and established themselves.
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One key aspect of good timing is apparent in the strategy of graduated
reaction. As information becomes more concrete and the direction of
change clearer, companies’ preparations for the future should – indeed,
they must – become more and more committed. Companies must be
constantly looking at the latest information available from the early
warning systems and using it as a basis for initiating actions aimed at
closing the resource gap. This up-to-the-minute information can also serve
as the basis for drawing up technology and innovation roadmaps.
Outlook
Business models are a key component of corporate success. To a large
extent, they decide the type of service provided by the company, as well as
how it delivers this service. This, in turn, determines a significant portion
of the customer value generated by the company and the competitive
advantage to which it aspires. Innovative business models therefore play
an important role in stimulating product development. Consequently,
management information systems must be geared toward monitoring
indicators and weak signals, giving companies the chance to recognize the
need for action early on – whether in the form of risks to the current
business model or opportunities for future models.
Notes
1. Frankfurter Allgemeine Zeitung (2003) ‘Mit Betreibermodellen neue
M€arkte erschließen’, 21 July.
2. See comment made in Boldt, Klaus; Hirn, Wolfgang (1997) ‘Der
Spielf€uhrer’, ManagerMagazin, 12: 81. Spiegel Verlag.
3. Renner, Tim (2004) Kinder, der Tod ist gar nicht so schlimm! €Uber die
Zukunft der Musik- und Medienindustrie. Frankfurt am Main: Campus
Verlag: 9.
Further reading
Christensen, Clayton M. (1997) The Innovator’s Dilemma. When New
Technologies Cause Great Firms to Fail. Boston.
Knyphausen-Aufseß, Dodo zu; Meinhardt, Yves (2002) ‘Revisiting
Strategy: Ein Ansatz zur Systematisierung von Gesch€aftsmodellen’,
22 Michael Zollenkop
9780230_217805_03_ch01.3d 5/29/2008 09:56:14
in Bieger, Thomas; Bickhoff, Nils; Caspers, Rolf; Knyphausen-Aufseß,
Dodo zu; Reding, Kurt (eds), Zuk€unftige Gesch€aftsmodelle. Konzept
und Anwendung in der Netz€okonomie. Berlin: 63–89.
Knyphausen-Aufseß, Dodo zu; Zollenkop, Michael (2007) ‘Gesch€afts-
modelle’, in K€ohler, Richard; K€upper, Hans-Ulrich; Pfingsten,
Andreas. Handw€orterbuch der Betriebswirtschaft. Stuttgart, 6th edn,
cols 583–91.
Meier, Horst (ed.) (2004) Dienstleistungsorientierte Gesch€aftsmodelle im
Maschinen- und Anlagenbau. Vom Basisangebot bis zum Betreibermo-
dell. Berlin.
Meinhardt, Yves (2002) Ver€anderung von Gesch€aftsmodellen in dyna-
mischen Industrien. Fallstudien aus der Biotech-/Pharmaindustrie und
bei Business-to-Consumer-Portalen. Wiesbaden.
Zollenkop, Michael (2006) Gesch€aftsmodellinnovation. Initiierung eines
systematischen Innovationsmanagements f€ur Gesch€aftsmodelle auf
Basis lebenszyklus-orientierter Fr€uhaufkl€arung. Wiesbaden.
Changing business models 23
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CHAPTER 2
Innovate to win: how clever costapproach design can outsmartcompetition
Ralf Augustin and Kai Bethlehem
Introduction
Most of us know it, but few are willing to admit it freely: innovation and
progress in technical products hardly ever provide sufficient leeway to
increase prices to a considerable degree. The pressure from competing
products or alternatives on offer around the world is simply too high.
Innovation is something customers expect from well-known companies. It
is a given – not a sign of outstanding performance.
Innovation is not about the ability to raise prices but, rather, how to
avoid having to lower them. At the same time, innovation is a costly
matter requiring manpower, research, and certificates. Companies cannot
pin their hopes on price increases in order to finance innovation. Bearing
this in mind, it is valid to ask whether companies are at all wise to invest in
innovation and R&D. The truth is hard and simple: companies no longer
have a choice. If your company does not innovate, your competitor will;
and any profits your company might have made through saving on R&D
expenses will be hacked away as you become forced to sell ‘outdated’
products at a lower price.
History is a minefield of companies, industries, and even whole countries
that lost the battle for customers when their products fell below technical
standards. Income in hard currency in the former Soviet Union and all
affiliated countries dried up during the 1980s as their products became more
and more inferior and, thus, less attractive to western markets. The Eastern
Bloc’s substantial basic wealth of oil and mineral resources could not
prevent it from sliding into bankruptcy and political turmoil.
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This example might be heavily influenced by market-averse political
philosophies, but there are plenty of other examples to draw on. Think of
the once flourishing fabric industry in Great Britain, Germany’s consumer
electronic industry, or the 15 or so car manufacturers France had after the
war. As the balance between innovation and cost competitiveness became
unstable, all of these industries fell by the wayside.
The other side of the coin shows companies and countries that achieved
impressive turnarounds when they started to provide the right innovation
at the right price. Consider, for example, Japan’s automotive industry – or
Korea’s in its younger days for that matter, the Silicon Valley’s computer
industry, or current solar panel production in Germany. These examples
prove that innovation, when it fits perfectly with the right cost figures,
does pay off.
Offering innovation at competitive prices is the key to success. But how
can companies produce innovative products sufficiently cheaply to cover
their R&D cost and price them no higher than the predecessor model? The
answer is ‘design to cost’ (DtC). Combined with Roland Berger’s
‘comprehensive cost reduction’ approach (CCR), DtC covers more than
merely the four typical levers that are usually applied to tackle cost.
Setting the points: reducing cost is – above all – a mindset
Mindset is the first obstacle that needs to be overcome when trying to
implement any sort of DtC approach. This is as true for engineering as it is
for other professional fields. The word ‘engineer’ is derived from the word
‘genius’. Miraculous inventions and brilliant ideas spring to mind when
we think of genius. Down-to-earth aspects such as bookkeeping and
savings realizations tend not to enter the imagination in this context. It is
no surprise, then, that few of us actually think of making things cheaper
while wondering how we can make them better. But an engineer’s prestige
is not lowered when his new solution is cheaper, faster or more efficient to
produce. The opposite is true – it actually enhances his image. Improving
the cost situation is a sign of genius. Cost saving must be a conditio sine
qua non for any innovation undertaken.
All of this should be common sense. Unfortunately, many people both
within and outside R&D still believe that commercial aspects are best left
to the purchasing department (if not bookkeeping) once miraculous ideas
have materialized into products. Strangely, this thinking continues to be
widespread, even though 80 percent of a product’s cost is already
determined in the R&D phase.
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R&D alone, however, should not bear the sole blame should costs get
out of hand. There are at least six main areas that significantly increase the
cost of a product: positioning of the product, targeted quality, technology
and know-how applied, specification, manufacturing processes and
principles, and make-or-buy strategy.
Positioning of the product
This element depends on the image that a company has to maintain. In many
ways, every targeted market segment requires a product to offer a certain
number of features that might prohibit material savings. A high-end fountain
pen needs to have a certain weight to feel right and be accepted as a luxury
item. Similarly, expensive furniture may not be made out of artificial leather.
Targeted quality
The second area that increases the cost of a product is very similar to the
first aspect, with the exception that the difference between quality and
inferior materials is not just skin-deep. Here, we are referring to quality that
only makes itself apparent after years, such as jeans that retain their color
when others have long faded, or a chair that is still comfortable when others
have already started to squeak and fall apart. Developing and manufacturing
Productcost
Make-or-buystrategy
Positioning of theproduct/targeted customer group
Targetedquality/life
span
Manufacturingprocesses/principles
Factors that influence product cost
Specification/requirements
Technologyand know-how applied
Figure 2.1 Product costs are influenced by several surrounding factors
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products that are built to last is, in itself, an art. Making these sorts of
products does not give manufacturers a license to stop caring about cost but,
rather, a healthy dose of respect that certain things simply cost.
Technology and know-how applied
This third aspect affects a product’s cost. There are sometimes invisible
barriers that should not be crossed in a DtC approach. In many companies,
there are certain parameters that prescribe the use of certain solutions for
intellectual property reasons or owing to a certain image. Sometimes, it is
simply because someone important in the company invented something –
for example, the one-arm ‘hopping’ windscreen wiper of Mercedes cars
during the 1990s. Once the inventor retired, the ‘hopper’ went out of
action. In cases such as these, it is more productive to accept the barrier
and change it at a later date. It is important, however, to calculate and
communicate the cost of the ‘protected’ product.
Specification
The cost of a product is largely affected by specifications, which is our
fourth aspect. In ideal terms, a product specification simply means
quantifying the wish of a targeted customer. In reality, however, this is
rarely the case, especially since a customer’s wishes are strongly influenced
by the sales force, marketing gurus, product planners and such. There is
often a discrepancy between what customers think they want and what they
really want. Examples of products that have flopped on the market are
endless. Wishes might be misinterpreted, customers misguided. Thus, a
specification should never be accepted as being carved in stone. One of the
first steps in a DtC approach, therefore, should be close examination of the
reasons behind the need for specific costly solutions.
Manufacturing processes and principles
Manufacturing principles, too, can significantly shape the cost of a pro-
duct, especially when second thoughts arise during the R&D process.
Barring cases where expensive processes are deliberately chosen purely
for the sake of it, there is generally a great deal of interdependency
between product design and manufacturing principles. Certain technical
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solutions or specifications simply require certain manufacturing methods.
It is of utmost importance to keep the production process in mind when
designing a product. Whenever meticulous, time-consuming and error-
prone manual work is necessary, there is a high probability that the
product design has not been optimized for efficient production. The same
is true whenever production is hampered by bottlenecks.
Make-or-buy strategies
In this area, in particular, emotional aspects often color rational decisions.
Core competencies that should not be lost, the will to keep the workforce
employed, and doubts about whether the quality and flexibility can be
guaranteed once processes are outsourced are all factors. While such
decisions might involve less emotional energy in modern blue-chip
companies, emotional factors will probably play a considerable role in
traditional, family-owned enterprises, especially if the founder is still
deeply involved in the business.
We have chosen to illustrate these six general factors that affect product
cost right at the beginning because it cannot be stressed too much that the
engineering, purchasing or accounting functions alone are not responsible
for fully optimizing cost. Each function has to become involved. Only if
these and other departments participate actively is there a likelihood that a
product will meet its target cost.
Cost drivers in detail: the quartet that sets the stage
The cost of a product is influenced by more than the pure material or
production cost. There are overhead costs – which will not be dealt with in
this chapter – and there are value chain factors. A close inspection of
factors along the entire value chain reveals that the cost of a product is
largely influenced by the four following aspects: sourcing, manufacturing,
product design, and supply chain.
Sourcing
In addition to negotiations concerning certain materials and components,
sourcing encompasses aspects that need to be regarded during the product’s
design phase. For example, materials, components or modules that are easy
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to obtain; whether substitutes could be used to allow for sourcing from a
market with strong competition.
Overlap exists here with aspects of product specification. Consider, for
instance, certain technical parameters such as geometrics, strength and
weight that predefine whether companies must select from molded, stamped/
forged or machined parts; or whether plastics, metals or laminates could/
must be used. Clearly, there is less competition for injection-molded, fiber-
reinforced metals with an aerospace certificate (making it difficult to achieve
any competition in the supply base) than for simple, stamped, sheet-metal
parts (where setting up a sound supplier matrix would be comparatively
easy).
To deliver the best possible results, intelligent sourcing needs to start
with the design phase of a product. This targeted interaction between R&D
and the purchasing department can be achieved using one of two set-ups.
In an ‘institutionalized’ set-up there is a dedicated ‘upstream’ purchasing
group whose sole purpose is to accompany all relevant developments from
the sourcing point of view. In contrast, in a project-based set-up engineers
and ‘normal’ purchasing people meet in core teams to discuss and align
innovation and the sourcing strategy.
Irrespective of the set-up selected, a true DtC approach needs to take into
account potential suppliers, markets, duties, and certificates. Only if the
purchasing department is given sufficient freedom to activate its purchasing
and negotiation levers, can satisfying results be obtained.
Manufacturing
Of equal relevance to the sourcing aspects are the manufacturing aspects.
Again, the design of a product stipulates the kind of manufacturing that
will be necessary to produce a particular product. Involving manufactur-
ing experts early on will help ensure that manufacturing or production
processes are chosen that are well mastered by the company. This ensures,
in turn, that capacities and existing machines, or even tooling, can best be
utilized.
In many cases, engineers in R&D are largely unaware of the processes
and techniques in a company’s production line. This is especially true for
those companies in which R&D and production are not located at one site,
as is so often the case with huge companies or global firms. In these cases, it
is essential to include a representative of the manufacturing department in
the development process. Companies can thereby avoid preprogramming
production issues into the product. Examples of such issues include massive
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production limitations due to bottlenecks arising from new processes,
machines standing idle or lost flexibility following the outsourcing of
production steps.
A DtC approach that focuses on manufacturing and production aspects
always needs to zoom in on the balance of techniques, processes, and
materials mastered by the company. Production steps that cause obstacles due
to poor quality, bottlenecks or other negative factors need to be addressed.
Product design
The importance of the product design has already been touched upon. Its
importance should never be underestimated. About 80 percent of a
product’s cost are defined during the development phase of a product, and
‘errors’ committed here can rarely be rectified in later steps. Besides its
influence on purchasing and manufacturing, there are further cost factors
that are influenced by product design: the most important is the quality of
the product, which is decisive for recall expenditures, guarantee cost, and
cost to keep exchange parts in stock.
As legislation to protect the rights of customers becomes ever stronger,
recall expenditures and guarantee cases – especially in the automotive
industry – have risen significantly over the past decade. While debate
rages about the damage or improvement to a company’s image resulting
from a recall, the cost is a factor today that no company can omit when
calculating a business model for a new product.
The introduction of the first aluminum mass-market bicycles in Germany
forms a cautionary tale. The reputation of the bicycle producer HSK quickly
became sullied when its bicycle frames began to crack. Only by offering a
ten-year guarantee on its bicycles, could HSK make customers return to its
stores. The characteristics of the material used for the frames were
obviously not sufficiently known and did not align with the product design.
At the product design stage, it should have been clear that a better design or
reinforced aluminum tubes would be required. As a result of this mismatch
between design and material, HSK’s image was significantly harmed, as
was the business case of these revolutionary bicycles.
How easily a product can be scaled up is another aspect of cost influ-
enced by design. By this, we mean the potential to develop derivatives or a
whole product family from the initial starting product. The design of
platforms in the automotive industry is illustrative here. For instance, using
common platforms Volkswagen builds cars ranging from Seat to Skoda and
Volkswagen and to Audi.
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Yet another aspect of designing products to cost is the ability to use
externally available knowledge. This encompasses the tapping of external
R&D capabilities and know-how; it also means using certain modules or
functional groups that can be put into an article as a ready-made black
box rather than being produced anew. The Dolby function in home-
entertainment serves as an example. Only very few manufacturers (mostly
in the up-market segment) continue to braze the electronics using discrete
components. Most prefer to use the ready-made chips widely available on
the market that can simply be put onto the circuit board to perform the
required function.
Companies need to have certain rules in place that stipulate when external
know-how can be used. Areas regarded as core competencies should not be
outsourced. Considered from another angle, this means that companies need
to ensure that areas defined as core competencies are so competitive that it is
not possible to find an adequate replacement in the market.
Supply chain
The fourth aspect that DtC usually focuses on is the supply chain. Attention
is paid here to the physical handling of goods, both inward and outward
bound. Incoming inspection plays a major role in production efficiency, as
undetected gaps in quality might cause severe obstacles during production
or, worse, in customers’ hands. The management of warehouses and stock
is also important and, typically, the cost for warehousing, inventory, and
moving of goods is underestimated. Fully optimizing them can free up cash
quickly. Switching stock into consignment stock is another option, and
having suppliers that own, manage, and look after a warehouse adjacent to
the production line is the dream of every logistics manager.
Logistics clearly demonstrate how interlinked processes in modern
companies are. An engineer who intentionally selects parts from a best-
price supplier that offers consignment stock or even a warehouse close to
the production line would be a treasured member of any core DtC team.
The importance of pursuing DtC with a global view cannot be over-
stressed. Only when all factors are considered can the best possible result be
achieved. This is not an exercise that can be done piecemeal. Instead, it
should be institutionalized throughout a product’s entire lifecycle – from the
cradle to the grave, so to speak. In a project set-up, DtC can possibly fix some
aspects, but to exploit the entire savings potential, a fully-fledged approach
influencing the basic product design is better suited. How this can best be
achieved is illustrated in the following section.
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The comprehensive cost reduction approach –ten facets of a gem
Implementing DtC thinking in a company is no easy task. This is all the
more true if DtC has to be performed swiftly in order to help alleviate a
burning cost issue. In such challenging situations, a proven methodology
is required.
Roland Berger’s comprehensive cost reduction (CCR) approach has been
tested and refined on numerous occasions. Five key features ensure the
successful use of this tool: holistic perspective, fact-based neutrality,
complete coverage, openness to change, and inclusion of all stakeholders.
As the approach strives for a holistic perspective, the total cost of
ownership and production is investigated rather than only the purchasing
cost. All levels of a product are analyzed: parts, components, modules,
systems, and finished products. The fact-based neutrality of this approach
means that rather than relying on gut feeling, this method uses thorough
data analysis, employing tools such as bottom-up and top-down cost
calculations. With its complete coverage, not only are internal processes
covered, but also every step of the value chain, from suppliers to the pro-
duct’s customers. The approach’s openness to change means that the fact-
based analysis uncovers all optimizing potential, with disruptive changes
as well as incremental improvements being options that might be pursued.
Lastly, all stakeholders are included: not only purchasing and R&D, but
also sales, marketing, production, and logistics are involved in the process
when necessary.
At the very heart of the CCR is an analysis tool-matrix as shown in
Figure 2.2.
On the y-axis, the ten tools to be applied are listed. The checks to the
right indicate the departments and stakeholders that are typically involved
in each action. Further to the right, indications are given for typical
savings that could be achieved by professionally applying this tool under
normal circumstances. An indication of the effort usually required to
execute the tools is also provided.
Tool 1: Technical benchmarking/DFMA
This is basically the ‘disassembly’ of competitive products to analyze the
materials and manufacturing methods used. Given certain knowledge, it is
possible to calculate the cost for the competitor to build the product,
deduct his margin and, thus, understand his cost position. Following from
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2
10 Supplier manufacturing analysis
9 Activity based product costing
8 Value chain mapping
7 TCO analysis
6 Simultaneous product and process optimization
5 Innovation analysis
4 Performance cost analysis
3 Commonization (internal and supplier led)
2 Value analysis
1 Technical benchmarking/ DFMA
Savings potential %2
Manu-facturing
SupplychainSourcingProduct
designTool
Effort to use toolDepartments typically involved1
15–25
10–15
10–20
10–30
30–40
20–30
10–20
5–10
15–30
5–10
� �� �
Figure 2.2 The comprehensive cost reduction approach covers the complete value chainNotes:1 Indicative, pending adjustments for certain industries, company setups, etc.2 Savings for the system components addressed.
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this knowledge, it is possible for a company to generate ideas on how to
optimize its own design, manufacturing process and/or assembly. It is also
possible to gain profound knowledge about the competitors’ competencies.
Tool 2: Value analysis
This tool aims to define the cost of each functionality a finished product
offers. The goal is to single out the most expensive functionalities and find
ways to replace them with more attractive alternatives. This tool is also
excellent in the framework of market/consumer studies as it helps
companies to understand what a consumer would be ready to pay for a
certain functionality and, thus, to discover the ‘profitable’/unattractive
functions of a product. An example for the value analysis of a power
window module in a car is provided in Figure 2.3.
Tool 3: Commonization
The goal here is to use as many parts or components from existing products
as possible. This method is extremely valuable for articles that are utilized
or manufactured in limited numbers, and also with products that are similar
in general but different in detail. Here, it is helpful to imagine the merger of
two competitors who want to reduce costs by using as many common parts
as possible.
Tool 4: Performance cost analysis
This tool is based on the belief that cost and characteristics (performance,
power, weight, dimensions, and so on) of similar products are somewhat
linear. This means that it is possible to extrapolate target costs for a
product by knowing the cost of similar products. This approach requires
the availability of a series of products that serve as the basis for a ‘curve’
on which the respective product is placed (see Figure 2.4).
Tool 5: Innovation analysis
This tool aims at reducing cost by using the latest technologies, materials,
processes or solutions. Companies might use more powerful computer chips
34 Ralf Augustin and Kai Bethlehem
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2
PartMainfunction
Sub-function
Cost per function ( )
IdeaSavings( )Electrical
motor Frame Electronics Total
Window lifter
Generatepower
16 • Replace electrics by pneumatics
2
Transmitpower
21• Tooth belt instead of gears
7
Stabilizewindow
8
7
3 8 10
9 16
8 • Aluminum frame 4
Preventoxidation
5 5 • Powder coating instead of paint
2
10 21 19 50 15
Movewindow
Holdwindow
�30%
Figure 2.3 Value analysis – vehicle window lifters
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2
Desired performance
Competitor Y(D-1 comparable)
Number of product functions
0
10
20
30
40
50
60
70
80
90
2 4 6 8 10 12 14 16
Competitor X(C-1 comparable)
C-2
C-1
B-2
D-1
B-1
A-2
A-1
Step 3: Achieve new coststructure through redesign
Currentperformance
(/p
rodu
ct)
Step 2: Harmonize spec levelto in-house best in class
Step 1: Replace over-engineered components
Competitor Z(D-1 comparable)
Figure 2.4 Performance Cost Analysis – Cost comparison by most important functionNote: A-1... D-1 own products (different families).
36
9780230_217805_04_ch02.3d 5/29/2008 09:55:42
to allow functionalities to be integrated more tightly on a lesser number of
chips; they might produce concentrates, as do detergent makers to reduce
packaging, logistics and sales cost; or they might replace light bulbs with
LEDs. Revamping products, especially those that have been around for
some time, is often an excellent way to cost-optimize a product.
Tool 6: Simultaneous product and process optimization
This entails a systematic analysis of the product and process cost of both a
company’s own and competitive products. What is unique about this tool is
that it should be employed with several strategic or key suppliers. In fact,
the cost analysis and calculation will mostly be undertaken by the suppliers,
as they will have more expertise in calculating cost on component or part
level than companies themselves. Moreover, having several competitors
calculating the same range of products will create greater confidence in the
prices estimated. To use this method, companies require suppliers that can
be trusted and that are ready to become involved in the endeavor. This
creates a challenge for suppliers, because such an exercise might set the
target price for products they supply to the company.
Figure 2.5 illustrates the results of such an approach, with five suppliers
having calculated costs for five competing articles. Although the price
estimates vary, certain trends can be identified.
Tool 7: Total cost of ownership
Total cost of ownership (TCO) is already a ‘classic’ among DtC tools. The
goal of this lever is to quantify all costs of a product over its full lifecycle
(development, series production, and after sales). TCO strives for an
overall cost optimization. It is especially applicable in cases when
production machines, parts or components used in own products incur
further cost during their lifecycle. This tool is applicable mostly when
designing processes or services.
Tool 8: Mapping the complete value chain
This is one of the most comprehensive approaches with which to understand
and reduce cost. The individual aspects to be regarded in this approach are
shown in Figure 2.6.
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Com
pone
nt D
Com
pone
nt C
Com
pone
nt B
Com
pone
nt A
Total
124
124
132
126
–
–
OEM 1,Model A
119
135
–
138
146
OEM 2,Model B
119
–
142
116
167
157
OEM 3,Model C
116
Old model
136
109
121
112
129
–
OEM 4,Model D
109
136
�20%
Supplier A
Supplier B
Supplier C
Supplier D
Supplier E
15 32 28
Supplier A
Supplier B
Supplier C
Supplier D
23
15
21
17
39
32
36
33
28
38
38
31
27
34
23
23
121
112
129
109
98
�28%
98
Ideal
Supplier E – – – – –
36
Offers by five supplies for four different seats (competitor models) arerequested and compared with own current product designFirst benchmark reveals lowest cost design (model D), which is 20% lessexpensive than old design (module cost of 109)
Detailed analyses of model D cost structure for each supplier revealsfurther potential from process improvementsBest model D component proces cherry-picked form all suppliersreveals target cost of 98 (28% below current model)
Figure 2.5 Simultaneous product and process optimization example car module – vehicle driver seat (EUR/vehicle)
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Tier 7 Tier 6 Tier 5 Tier 4 Tier 3 Tier 2 Tier 1
Systemsupplier
Critical supplychain-Leatherfrom South Africa
Criticalsupplier
OEM
Typically, threemonths lead time
Starting point
• Unstable supplyof door panelsto OEM
• Re-worknecessary
• Missing parts
Results
• Problem identified
• Supplier development started
• Re-work cost reduced by 70%�
• No more missing parts, thus TCO reduced significantly
Tool application – understanding critical path
Figure 2.6 Value chain maps help to identify critical branches and to focus supplier development – passenger car doorpanel example
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3
• 6 workers plus packer, not fully loaded, long walking distances• Multiple handling, transport, and storage of parts and components• No visualization of performance indicators• No team work
• New balancing of work contents per station for 4 workers plus packer• Strong reduction of walking distances• One-piece flow of components on trays• Visualization of performance indicators
Original set-up After supplier manufacturing analysis
Packaging
Testing
Buffer
Part storage
4 3
Testing
2
Re-work
Packaging
1
5
67
4 3
5 2
1
Re-work Parts storage
Material flow Walking distance workers
Roller convery or
Productivity improvement: 30%�
Figure 2.7 Supplier manufacturing analysis: component assembly – lamp manufacturer
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This process requires the involvement and cooperation of all participants
in the value chain, from suppliers to retailers. Parties involved mostly
welcome this approach as it helps them to optimize their own products or
processes in a joint approach. In many cases, such ‘external’ pressure helps
the affected party to push through changes in a process that they would find
hard to achieve on their own. This approach is best performed with
experienced people from the companies involved. They should have an
educated eye and be able to spot possible bottlenecks, complicated work-
flows or costly processes at the supplier during a visit.
Tool 9: Activity based product costing
This lever is based on a ‘well-educated guess’ to define target cost. The trick is
to use the guessed cost to open up discussion with the supplier, and to encourage
him to prove that his costs are in fact different from the guess. This approach is
suitable for situations in which internal staff from R&D and the purchasing
departments meet with the staff from the supplier’s R&D, production, finance,
sales, and product departments. This lever should be pulled aggressively,
especially when previous discussions have come to a standstill.
Tool 10: Supplier manufacturing analysis
This tool builds on improving processes at the supplier, whether by
unblocking a production bottleneck, helping to lower investment cost,
supporting a DtC session on-site, or seeking to reduce the waste and zero-
quality level in production. Frequently, an external view will help suppliers
to detect outages in processes that were not previously apparent. Figure 2.7
shows how productivity could be significantly increased by readjusting the
load balance between workers on a manual assembly line at a supplier.
Case study: Comprehensive cost reduction in theautomotive industry
A project team helped one of the top global vehicle manufacturers whenits cost pressure became almost unbearable. The company faced adifficult situation in two of the three global regions where it was present.It was suffering in Asia, where competitors reduced prices after they had
Innovate to win 41
9780230_217805_04_ch02.3d 5/29/2008 09:55:43
implemented smart cost reduction programs; in the United States, a heftyprice war had dramatically eroded margins. The manufacturer hadalready executed a series of mainly commercially focused initiatives, yetlacked the final step to reach the desired cost level.
In this situation, a six-phase CCR process was conducted to addressthe situation and help the company to take steps to reduce costs.
The first phase, which involved forming a solid, factual database, set thefoundation for all later steps. Necessary data was collected and analyzed,calculation rules were agreed upon that were to be used for reportingsavings later on, and cross-functional core-teams were established.
In the second phase, ideas were generated, and processes and coststructures were detailed, based on the results of the initial data analysis.Creativity and fresh ideas ruled thinking at this stage. It was important,in this phase, to create a spirit of trust among the teams and to fosterbelief in the success of the project. Evaluation and censorship of ideasand thinking were banned.
In the third phase, those creative, fresh ideas were examined for theirfeasibility. In several cases, this led to mining and working downthrough details and issues, and finally to an excellent understanding ofthe limitations and opportunities of a certain production step.
The fourth phase was used to compute and analyze ideas‘mathematically’, and to build calculation and business models. Inshort, it quantified the ideas that had been generated in previousphases. By clearly separating idea creation from idea calculation, teammembers – depending on their mission – were able to keep theircreative spirit or their feel for numbers.
Phase five, although a separate stage, actually spanned the entire twelveweeks of the project. Project management was the task of this module.During this phase, it was essential to ensure ongoing communicationbetween all teams and to make sure that information was flowing freelybetween stakeholders and management. This module or phase also servedas an escalation path when issues appeared to be getting out of control. Itwas also a good means by which to obtain swift decisions. As people whowere not involved in the other areas undertook the work in this phase,political issues were kept apart from the financial and creative aspects.
In phase six of the project, action steps that had been created, calc-ulated, and verified were carefully planned and organized. A thoroughaction plan with responsibilities, target dates, and controlling tools tomonitor the savings implementation was created. Once carefullydocumented, the plan was put into action and steps that had beenspecifically agreed upon were implemented.
Looking at the time necessary to execute such comprehensive work,it may be said that a CCR project can be completed within ten to thirteen
42 Ralf Augustin and Kai Bethlehem
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Prioritize and plan actions• Qualify actions and savings potential
• Prioritize actions
• Prepare the implementation plan and identify quick hits (incl. change management requirements)
• Qualify resources needed for implementation
Change management• Communicate objectives and ensure mobilization of resources• Prepare a wider information/communication plan
1 week 4–6 weeks 2 weeks
5
6
Preparation• Agree on project objectives, approach, and timing
• Identify and inform CCR team members
• Collect data and key documents
• Interview all key stakeholders • Review past and ongoing cost reduction initiatives• Review contract status• Ask suppliers to cooperate
4–5 weeks
Generate cost reductionideas• Map cost structures
• Compare cost/functionality across BUs and against competition
• Identify most promising savings areas
• Conduct first workshops
Identify cost reduction ideas• Qualify potential dysfunctions and related root causes
• Evaluate gaps to best practices using RB tools
• Quantify savings potential
• Identify key improvement actions and create action plan
4Savings modeling
• Define savings calculation rules
• Assess savings potential for each component and lever
• Synthesize and extrapolate savings timeframe
• Define savings calculation methodology
2 31
Figure 2.8 The CCR phase for diagnosis and drafting an action plan takes roughly 10–13 weeks
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weeks, provided that a handful of people can commit 80–100 percentof their time to the project. The ability to complete the project withinthis period also requires strong support from top management. Thetimeframe is shown in Figure 2.8.
Looking at the work completed in each phase, the initial analysisphase is often seen as being lengthy and uncomfortable. In fact, thisphase can be accomplished relatively quickly, provided that therequired data (for instance, in an SAP system) can be retrieved. Usually,data always exists in modern companies. If accessing this data waspreviously unsuccessful, political reasons are to blame.
Discussion and perspective
The number of competitors is increasing as more and more companies and
suppliers enter the global market. This leads to relentless cost pressure.
Products are needed that are sufficiently innovative to attract customers
even at a certain price.
This chapter has illustrated how prices can be shaped during the R&D
phase, and how they can be trimmed, optimized or tuned at a later stage, if
necessary. By using a comprehensive DtC approach such as CCR,
experienced managers are given the tools with which to optimize products
and cost. The sooner managers become involved, the more that can be
achieved without harsh and disruptive consequences.
The main advantage of the CCR approach is that it examines processes
so carefully and in such detail that it will always detect a product’s hidden
cost drivers or bottlenecks in a production line. As the focus is quite wide,
important aspects at the very front or very end of the process are also
considered. Equipped with the right tools to optimize the cost side of a
product, team members can be confident that their efforts will pay off.
Further reading
Augustin, R. and Arndt, H. (2006) ‘Produktion 2020 – Globale Netzwerke
als Erfolgsfaktor’, Industrie Management, 22.
Augustin, R. (2007) ‘Not all roads lead to China’, Executive Review, 1,
ISSN 1617-4194.
Boutellier, R., Gassmann, O. and von Zedtwitz, M. (2000) Managing
Global Innovation: Uncovering the Secrets of Future Competitiveness,
2nd revd edn. Berlin.
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CHAPTER 3
Global development made successful:lessons learned by the automotiveindustry
Jochen Gleisberg and Kai Bethlehem
Introduction
We are living in a globalized world. This, of course, places each individual
as a buyer of goods in an advantageous position, yet it has also put enor-
mous pressure on all companies, worldwide. In response to ever-increasing
global competition, far-reaching change has taken place at many companies
over the past decade. Hierarchical organizational structures, once very
common throughout industry, have given place to decentralized leadership
concepts and global company networks.
Leadership concepts that are both efficient and tried-and-tested are sought
after as never before. The question as to whether or not to ‘go international’
has passed its use-by date. The issue today is, rather, how a global organi-
zation can best be managed.
During the first decades after World War II, internationalization rarely
meant anything more than opening sales channels in neighboring countries.
Today, globalization takes place on a much grander scale. Over the past
years, an increasing number of companies has moved entire departments to
locations abroad, or alternatively built up new departments in these locations.
Even core functions, such as R&D, have not been spared. Decentralized or
polycentric structures, worldwide cooperations between units, and strategic
alliances with external partners around the globe have become everyday
reality in many industries. This new environment poses significant chal-
lenges and is characterized by complexity and change.
As the automotive industry is at the forefront of this new environment, we
will use it as an example to evaluate the trends and reasons that lead to
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international engagement. We then look at how an international or
global R&D organization can best be managed in daily business. Lead
engineering – one of the best-practice organizational concepts used in the
running of global R&D activities – will then be presented, followed by a
section showing how lead engineering might be implemented in a company.
A real-life example for lead engineering implementation will also be given,
before perspectives and discussion bring the chapter to a close.
Global product development – status quo and trends
Customers of the automotive industry today are better informed and more
demanding than ever before. Their expectations are high. They seek inno-
vative, high-quality products that are ecological and individualized. At the
same time, they expect these products to come with an affordable price tag.
Delivering better and cheaper products is a major challenge for car manu-
facturers. Price and R&D capabilities are the keys to rising to this challenge.
While cost cutting has historically been the central focus of the
purchasing department, it has long been an open secret that R&D plays an
even greater role when it comes to lowering product cost. Decisions made
in R&D departments determine up to 80 percent of the cost for production,
quality and repair. This function also influences how much money is spent
on testing, tooling and guarantee cases.
Global customers have led to R&D processes that span the world, which
turns complexity up another notch. The potential advantages of a global
R&D organization – making use of ‘local’ knowledge, fulfilling local
content expectations, tapping low-cost workforces, and so forth – can be
undermined if organizations are not well structured. Clearly defined
workflows are essential.
Organization is what really matters in a global world
As a 2007 study by Roland Berger Strategy Consultants, entitled
‘Globalization of R&D – Drivers and Success Factors’, shows, around
190,000 employees at original equipment manufacturers (OEMs) work
on developing a rapidly increasing number of vehicle models. Today,
about 90 percent of these employees are still based in Europe, North
America or Japan. Yet, this number is expected to change, especially
because today’s fastest growing vehicle markets are located outside these
regions. Employees at manufacturers in the ‘old’ countries will soon
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welcome new colleagues from China, India or Eastern Europe into the
fold. As this happens, complexity increases even more.
The challenge will be organizing such complexity and properly
managing globally connected development departments.
Unfortunately, stagnating R&D budgets – a typical scenario at many
companies – do not help the situation. A company’s survival chances are
strengthened if it organizes its R&D in an optimal fashion and is able to use
best practice approaches to ensure the greatest efficiency of employees.
‘Doing more with less’ is just as important as being able to serve local
expectations with a globalized product.
The classic approaches used to reach these goals at present are:
• to bundle and standardize parts (a car, for example, can be considered as
the sum of standardized modules)
• to set up innovative, efficient workflows and processes in order to
increase output per employee
• to establish local development centers to offer ‘localized’ products that
respect the individual taste of regional consumers.
Tailoring global product development to ever evolvingcircumstances
The importance of the traditional home market is decreasing. A fully
integrated, global development network – consisting of various technical
centers, strategic alliances and fully linked in-lead suppliers – is appearing
on the horizon.
With R&D becoming global, companies also need to revisit other
departments. While global purchasing departments already exist, a global
production set-up is just on the verge of becoming widespread reality. In
such a set-up, standardized modules of a vehicle are produced in a few
plants – sometimes even in one plant alone – and then shipped to various
assembly plants around the world for use by either one manufacturer or an
alliance of manufacturers.
Although standardization is critical, regional differences should be
neither forgotten nor overlooked. Customers around the world continue to
have different tastes. Moreover, legal and geographical differences call for
products that are tailored to regional needs. Companies therefore need to
differentiate between those parts that can be standardized internationally
and those that need to be tailored according to regional requirements.
‘Individualized standardization’ is the term often used for this.
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Status quo:Coordinated, multinational development
Coming decade:Integrated, global development networks
Region A
Region B
Region X Region Y
Region A
Region B
Region X Region Y
Globalcommonization
• Low/medium, mostly selected components or platforms
• High, with global platforms, systems/modules, components and technologies
Globalspecialization
• Low, with lots of redundancies in the network
• Medium/high, specialized technical centers with specialized development focus
Globalcoordination
• Coordinated development activities, yet strong local autonomy
• Fully integrated lead concepts with little regional autonomy
Emergingmarkets
• Mostly ‘me-toos’ with limited development activities/capabilities
• At the same level in specialized technical areas
Figure 3.1 Trend towards integrated global networks
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Specialcompetenciesattributed tospecialtechnicalcenters
Vehicle category and derivative
• SUVs in the United States• Right hand drive versions in Japan, Great Britain and South Africa
Platform • Front wheel drive in Europe• Rear wheel drive in the United States
Components, systems/modules
• Low value components (trim, electronic components) in China
• Body modifications for demanding road conditions in South America
Technologies and materials• Magnesia-molding components in Brazil• Aluminum-molding components in South Africa
Business processes• Prototype manufacturing in Eastern Europe• Software programming in India
Examples
Figure 3.2 Allocation of core competencies in a global R&D network
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Ultimately, this will lead to regional technical centers that are responsible
for developing and manufacturing globally required modules. Yet, these very
same regional technical centers will also be in charge for making the adap-
tations necessary to sell a global product successfully in a regional market. In
many cases, the allocation of global core competencies is centered on certain
regional and ‘special’ requirements, as Figure 3.2 indicates.
There is no single perfect strategy for car manufacturers to follow when
it comes to splitting R&D activities among sites. The choice depends on
the targeted regional markets, the product portfolio, and the particular
history of each technical center. Depending on the ‘maturity’ of a local
technical center, various levels of responsibility might be allocated to the
regions. In regional offices that have only been established very recently
(often referred to at that stage as ‘local antennas’), the focus will initially
be on supporting sales activities, helping with technical issues or starting
some kind of local assembly.
The next level of maturity and growth for such local antennas is to
become a ‘local satellite’, with the key R&D responsibility still being held
with the manufacturer’s head office(s). The local satellite, however, might
already be in charge of designing and executing modifications necessary
to adjust a global product to local requirements. This kind of structure is
typical for manufacturers with strong R&D competencies in their home
Competencies of localtechnical development
centers
Integration andcooperation with localtechnical centers
Low
High
HighLow
Globallead center
Localsatellite
Localantenna
Globalcompanies and alliances
Home-countryfocusedcompanies
Integratednetwork hub
Figure 3.3 Integration and competencies of local technical centers
50 Jochen Gleisberg and Kai Bethlehem
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country – such as Porsche or BMW, both of whom still complete most of
their R&D work in Germany.
Companies with a more international set-up tend to be structured as
‘integrated network hubs’ or ‘global lead centers’. At an alliance such as
Renault–Nissan, only the basic concept or lead car is developed centrally.
Cars within respective family groups are finalized in individual regions.
Regional centers are even allowed, sometimes, to develop individual, local
derivates of the initial basic concept. Global lead centers, having reached
the most mature state of the ladder, are often highly specialized in their
areas of responsibility. They are also fully integrated within the global
network, allowing them to steer and make use of R&D capacities
worldwide. Modules for car systems are developed in these global lead
centers and tested by a global team of engineers located at various technical
centers around the world and managed by the respective global lead center.
When organizations have reached this state, there is typically no more
home country. On the contrary, core competencies, manpower, and testing
and development facilities are spread all over the world. The global lead
centers act as gravity centers to steer and maneuver all R&D activities
completed throughout the company. Through this combination of
‘thinking globally and acting locally’, it is possible for car manufacturers
to reach the highest levels of standardization on a global scale, and to
adapt universal products for regional markets when necessary.
There are numerous risks that need to be addressed in this kind of
international R&D set-up. Coordinating and harmonizing all parallel R&D
activities is essential. Only if all sub-systems, irrespective of where they are
developed, fit seamlessly together to make a great product, can this whole
set-up be as productive as initially expected. Knowledge management and
exchange of ideas, data and technical information are essential to reach that
goal. Creating the technical means to communicate is not, by itself,
sufficient: the mindset counts, too. Ultimately, it is people that do business.
So, the questions are: Can this whole process be managed successfully?
What is the best way to reach this goal? Lead engineering is probably the
best answer to this kind of question.
Lead engineering: the basic concept andhow to implement it
Lead engineering is a concept developed for companies that have split their
product development by regions or business areas, or for companies who
develop goods in a strategic alliance. In these cases, R&D departments are
Global development made successful 51
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not geographically united; this also applies to the people working on
assigned topics. This situation usually makes synergies hard to tap.
This is even truer in global R&D set-ups, where not only physical dis-
tance, but also language and time zone differences can create significant
communication barriers. This leads to two main questions: How can
synergies be created and savings be realized? How might the need for
standardization be reached, considering the urgency to develop individu-
alized solutions for regional customers?
Figure 3.4 highlights the six key elements of the lead engineering
concept.
Global strategies
With lead engineering, universal solutions are developed that utilize common
system architectures, components, and modular construction concepts. In
other words, one common product strategy exists across business areas,
alliance partners and regions. This point cannot be overemphasized. Without
such common ground, all further activities will lack orientation and failure
will be inevitable.
The creation of this one strategy is the central task of the nominated lead
engineer. He is responsible for defining the best possible structure to split up
all parts of a product and allocate them to individual work teams. It is his
responsibility to find the best balance between standardization and regional
or customer-related aspects. An overall strategy that acts as the backbone,
providing orientation for all R&D activities, is therefore required. Sound
Tools
Process
Organization
Strategy
Realizationand implementation of synergies
Integrated global organization Cross functional teams
Global IT systems
Standardized processesStandardized KPIs andperformance measures
6
4 5
2 3
Global strategies1
Figure 3.4 Six key elements of the lead engineering concept
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overall strategies address savings targets, lifecycle, facelifts, number of
variants, potential suppliers, and many other aspects from the very
beginning of a project.
The lead engineer can be considered as the intellectual leader of a
project. He mediates conflicting interests, and is the troubleshooter when
projects threaten to verge off track. Depending on the size of a project, the
lead engineer might be one very knowledgeable, well-recognized person,
or a team of people sharing this task.
Integrated global organization
One prerequisite for global development teams is a suitable integrated
structure across all centers. The composition of multi-national teams
should be so organized that hierarchical structures and areas of influence
are clearly delineated. Individual engineers are then clustered in ‘lead
engineering groups’ (LEGs): for example, they could be responsible for
exhaust systems or a vehicle’s braking concept. The early involvement of
departments such as purchasing ‘lead buyers’ in such LEG activities is
highly recommended.
For each individual LEG, the roles of leadership are then individually
defined. There are three levels of coordination: mandate, leadership, and
local execution.
Mandate approach One business area or technical center takes over full
responsibility for developing a certain component or module. In this case, all
BU 1 BU 2 Site 3 Site 4
Classic organization Roland Berger ‘lead concept’
R&
D
BU 1
R&
D
BU 2
R&
D
Site 3
R&
D
Site 4
Component 22
Component n3
Levels of coordinationfor components
Mandate1Full developmentdone at one BU or site
Local3High level ofindependency andautonomy of BU orsites
Component 11
Leadership2Leadership andresponsibility attributedto BU or site
Note : BU�Business Unit
Figure 3.5 Three coordination options
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9780230_217805_05_ch03.3d 5/29/2008 09:54:54
required know-how is bundled in one competence center, and the
involvement of people from other areas or regions is not required. This
kind of organization is typically chosen for components that do not require
any local adaptation, but can be used globally in one standardized execution.
Leadership approach One region takes over the lead for a LEG, but engi-
neers from other technical centers are fully integrated members who form
one team. Each regional engineer contributes specialized, local knowledge
and, possibly, takes on responsibility for defining localized executions of a
basic global standard. This kind of set-up is especially effective when it
mirrors a purchasing organization that also acts via lead and regional buyers.
Local execution approach Development exclusively addresses regional
needs for parts or variants with limited (or no) need for global standard-
ization. Local development is undertaken by regional technical centers that
exchange ideas with colleagues from other regions.
Cross-functional teams
To speed up the innovation and development process, it is important to work
on various aspects of a product development in parallel. This is true not only
for engineering and developmental activities, but also for areas such as
purchasing, production, marketing, and sales. Making sure representatives of
such functions are included very early on in the development process is
strongly recommended, as is their involvement in the work being done by the
LEGs.
To achieve this, the LEGs are given central support by the lead engineer.
He is linked to other departments (such as purchasing, production, and
sales) through cross-functional teams, reflecting the whole value creation
chain of a company. Ideally, the lead engineer assigns one representative
from each of the purchasing, production, and sales departments to each
LEG. For example, one lead buyer might be assigned to one or several
LEGs, ensuring that all developmental activities are backed up by a supply
base that will be able to support deliveries for a new vehicle on time.
Standardized processes
Common processes are a prerequisite for harmonizing component and
vehicle development, using efficient work plans and introducing quick
decision-making routines. Equally as important are well-defined escalation
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and mediation processes, together with change management procedures and
standardized data warehousing. The lead engineer is the driver of com-
munication for his LEG. He will coordinate and harmonize the different
activities within the group, and will make decisions wherever necessary.
While doing so, he will respect the input of his counterparts to make sure
that regional needs are well reflected in his decision and in the overall LEG
strategy.
The lead engineer also sets the pace for the LEG, and is responsible for
phasing the activities of his LEG into the overall development plan. To
ensure that there is a common pace for the overall development process
and to ensure that signals are well understood down to the most minor sub-
project, milestones and quality gates need to be standardized by the lead
engineer and reflected in each LEG’s work plan. The same is true for
technical specifications, whereby common definitions and wording are
required to make sure that parallel developments do not get out of control.
Standardized KPIs and performance measures
To implement and anchor the described processes and structures in the
organization, it is important to introduce common target setting and
management by objectives (MbO) measures. Defining globally applicable
key performance indicators (KPIs) has proven to be a very powerful tool
to ensure top performance across the organization.
Common targets and measures need to be implemented for lead and local
engineers and also, ideally, for their counterparts, lead and local buyers.
While defining measures, it is essential that companies set quantitative
targets (meeting of cost targets, deadlines, and so on) that can be easily
quantified at set times. Setting only qualitative targets (such as ‘adherence
to global processes’) is unsuitable for fostering trust and cooperation
between international colleagues. Only if a transparent system of targets,
KPIs, bonuses, and premiums is introduced, can companies expect people
from all regions to cooperate.
Global IT systems
Communication between global colleagues is of the utmost importance.
Yet, good language skills and company-wide telephone books alone do
not guarantee open communication channels. More important is the
implementation of linked IT tools that allow for seamless data exchange
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and transparency between all sites. Attention should be paid to the
compatibility of IT, unified groupware solutions and the sharing of
knowledge.
Compatibility of computer systems or data formats An example of
this is introducing SAP company-wide as the sourcing and bookkeeping
standard, or selecting one global CAD standard. Compromises might be
necessary. It will probably be more important to install a system that
enables barrier-free communication than to have a system that is the best
of its kind, yet lacks communication and data transfer capabilities.
Unified groupware solutions E-mail, e-conferencing, net meeting, data
warehousing, and workflow management systems need to be standardized
and harmonized in order to enable trouble-free, automated communica-
tion between all sites.
Sharing of knowledge The creation of a know-how database in a
central, unified format is recommended in order to make know-how
accessible company-wide. The tendency to ‘reinvent the wheel’ must be
avoided – but is, however, seen so often in large, international companies.
Since establishing a comprehensive data warehouse requires a significant
amount of manpower, topics to be stored in the data warehouse should be
screened, gathered and prioritized with care. IT solutions will never
completely replace personal interaction between colleagues from different
regions. One of the duties of lead engineers is to create the time for periodical
group reviews or meetings that address overall work progress and upcoming
challenges. Recognizing and rewarding success in a face-to-face context is a
duty, too.
Implementing the lead engineering concept
All six key elements of the lead engineering concept need to be individually
adapted when being implementing at a company, or in an alliance or R&D
network. To ease that adaptation, companies should discriminate between
the short, medium and longer-term steps that need to be taken.
In the short term, the logic of a product’s structure – separation into
modules, systems, sub-systems and parts – needs to be standardized. This
should always be the very first step. Only if the perimeter/separation of a
sub-system is commonly defined, is it possible to work in parallel on sub-
systems without interfering with the adjacent sub-systems. For example,
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does a car-radio include the connection wires to the loudspeakers or do
they belong to the dashboard or even the loudspeaker/amplifier/sound
system module? Based on this common understanding and structure of a
system, LEGs will be able to their work to maximum efficiency.
In the medium term, harmonizing business processes and the organi-
zation of departments should be the primary goal. Escalation paths need to
be defined to permit rapid decision-making when conflicts arise. The
introduction of standard targets and balanced scorecards is the best means
by which to support the harmonization process.
In the longer term, a vision should exist to harmonize all business
processes and to introduce standardized IT solutions. Departments such as
purchasing and sales also need to be reorganized to ensure that they reflect,
at least to some degree, the R&D organization’s common structures.
All of the above steps must be fully backed by the top management and
the HR department. Top management will need to take active steps to
steer, lead and communicate all changes, and to express clearly the goals
that will be reached because of the reorganization. In parallel with the
steps taken by the top management, the HR department should work out a
detailed personnel plan that includes educational aspects for all employ-
ees. Cultural training to help employees avoid culture clash is particularly
helpful in the early stages of a newly established international partnership
or alliance. Furthermore, rotation programs provide staff with a greater
understanding and deeper knowledge of their new partners. To ensure
productive and amicable interaction company-wide, KPIs, MbO pro-
grams, bonuses, and premiums need to be aligned.
There is a price to pay for implementing the lead engineering concept.
Accomplishing it will take time and effort. It cannot be tackled as a
secondary exercise. The concept cannot be implemented successfully
without detailed planning, sufficient budget and the full-scale involvement
of the top management. Political maneuverings can easily topple the lead
engineering concept, if the proper support is not given from the beginning.
Lead engineering in real life
Roland Berger designed, adapted and implemented the lead engineering
concept at one of the world’s major vehicle manufacturers, which has three
business units on three continents. Each of the three business units produces
similar products with their own individual R&D departments. The
expectations for savings through the introduction of a lead engineering
concept were high, as the vehicle manufacturer expected substantial
savings to occur by unifying and rationalizing the R&D workforce.
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Example: The automotive industry
In a first preparatory step, cross-functional ‘pilot’ project teams weredefined, including representatives from the engineering and purchasingfunctions. These teams were then asked to analyze the technicalsimilarities between the different products manufactured and to comparecost-per-function data for certain selected components. Saving potentialwas calculated and the implementation of changes commenced.
As the savings implementation in these areas was convincing, themanufacturer decided to move beyond the ‘pilot’ teams and to roll outthis kind of core-team structure through all of its R&D organizationsaround the globe, which proved to be a very ambitious task. Differentstrategies, concepts, technologies, materials, and philosophies had tobe compared, harmonized, and adapted before a lead engineeringconcept could be implemented. This was to be integrated with the leadbuying organization already in place.
The client agreed to a common product structure, which dividedvehicles into groups of functional systems and components. Each systemand component was assigned to a permanent core team of threeengineers, one from each business unit. One of the engineers acted as alead engineer and was responsible for defining the overall strategy,developing a modular construction system in line with the overall systemarchitectures. His task was also to control diversity, technical concepts,and the applications that were within his scope of responsibility.
To institutionalize the integrated approach between lead engineer-ing and lead buying, the lead buyer was made a permanent member ofthe lead engineering team. Experts from other functions (such as theproduct planning, sales, and legal departments) joined the teams asrequired.
Major savings could be achieved with the integrated lead buying andlead engineering approach. In addition to commercial savings, up to9 percent of purchasing volume could be reduced via technical modi-fications and standardization. Additionally, between 15 percent and40 percent of the number of parts per component or system couldbe eliminated, and the number of suppliers was finally reduced by30 percent.
The integrated lead engineering/lead buying approach convincedthe client of its efficacy. ‘The introduction of this integrated conceptwith the aligned organization provides us with a competitive edge thathas to date been unique in the history of our company’, he said.
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Outlook
In a world of multinational companies, cross-country alliances and strategic
partnerships between manufacturers from all regions of the world, the lead
engineering approach has proven to be a valuable concept. It enables
companies to channel communication, improve internal cooperation and
steer global development. In the hurly-burly of change, it provides
guidelines and orientation, helps companies tap synergies within global
R&D structures, and enables the rapid realization of savings.
While the lead engineering concept acts as a compass for companies to
navigate an ever-changing environment, the concept itself forces change
upon the organization. The previous authority of historically grown
structures, home turfs, and spheres of political influence are no longer
valid. The willingness to embrace this change is decisive for the success or
failure of the project.
Looking at the automotive industry, lead engineering will be a necessary
concept in the years to come. It is expected that up to 60 percent of value
created during the production of a vehicle will, in the future, be done at
OEMs, so these need to be increasingly linked and integrated within the
vehicle manufacturers. Borders between OEMs and suppliers will become
increasingly invisible, with competencies spread between the two. IT
systems will allow for seamless integration and barrier free communication.
Yet, these interactions need to be managed. Chaos and failure will result
when communication and processes are not managed properly. Lead
engineering has already proven its value in the automotive industry.
Without a doubt, other industries will benefit from the lessons that car
manufacturers have already learned.
Further reading
Aberdeen Group (ed.) (2005) ‘The Global Product Design Benchmark
Report: Managing Complexity as Product Design Goes Global’. Boston.
Fecht, N. (2005) ‘Global Footprint statt Nomadentum’, Automobil
Produktion, 7: 52–3.
J€urgens, U. (ed.) (2000) New Product Development and Production
Networks: Global Industrial Experience. Berlin.
Roland Berger Strategy Consultants (2007) ‘Solving the Powertrain
Challenge’. Stuttgart.
Global development made successful 59
9780230_217805_05_ch03.3d 5/29/2008 09:54:54
Roland Berger Strategy Consultants (2007) ‘Globalization of R&D –
Drivers and Success Factors’. Stuttgart.
Zetzl, R. (2004) ‘Engineering Collaboration in der Produktentstehung:
Mehr Wertsch€opfung aus besserer Zusammenarbeit’, ZWF – Zeitschrift
f€ur wirtschaftlichen Fabrikbetrieb 99, 12: 698–701.
60 Jochen Gleisberg and Kai Bethlehem
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CHAPTER 4
Success factors and levers for bestpractice in innovation management
Stefan P€otzl, Thomas Kohr andMichael Zollenkop
Introduction
Innovation is becoming increasingly important for companies in many
industries. Companies today are often so dependent on innovation that, if
they were to fail to bring products to market, they would risk losing
substantial market share at a rapid pace. Phonak, the Swiss producer of
hearing devices, considered a ‘hidden champion’, makes 65 percent of
its turnover with products it has brought to market in the last two years.
This philosophy applies in more traditional industries, too. For example,
Wittenstein, a German producer of gearboxes, generates 85 percent of its
turnover with products fewer than five years old. To survive global
competition, most companies simply have to innovate.
The question is whether it pays off. Are innovative companies really more
successful than others? The answer is ‘yes’. According to a sector report on
innovation published in 2006 by the Centre for European Economic
Research, ZEW, companies with a young product portfolio have a signif-
icantly higher return on sales. This trend is consistent across all industries.
The reason for this is clear: companies with many innovations either lead a
whole market segment or, at least, dominate their ‘niche’. This is more
profitable than the average me-too or mass markets, particularly where
companies can only rehash what other companies have already created.
Most companies have recognized this fact and have made ‘being innovative’
part of their strategy. Nevertheless, not all companies are equally successful
in turning their target into reality. Many innovations continue to fail.
This chapter puts the spotlight on the success factors for innovation and
shows how the best companies tackle them. We will also talk about an
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innovation toolbox developed by Roland Berger, which is a proven set of
tools and levers to be applied during the different phases of a development
project. We will also discuss a project during which this toolbox was
successfully used.
The challenge of innovation: how to manage it in a businesscontext
In most companies, idea creation is not a problem. Most employees have
excellent ideas. The problem is to distinguish between good and mediocre
ideas, and how to foster the one and shelve the other.
Based on our experience, the major challenges in innovation manage-
ment are:
• Prioritizing the right ideas and allocating the right level of resources
• Conducting the correct ‘make-or-buy’ decisions in innovation
• Meeting shrinking development budgets
• Realizing shorter development lead times
• Maintaining increasingly high quality standards
• Providing a more customized product portfolio with more variants
Automotive Electrical Mechanicalengineering
Medicine tech.,measuring andcontrol
Moreinnovativecompaniesshowconsistentlyhigher profit
7.7
10.3 10.3
4.7
9.0
22.9
5.2
10.3
8.0
3.6
5.97.8
Return on sales �0% Return on sales 0–4% Return on sales �4%Key :
Figure 4.1 Share of sales with original product innovation in differentindustries (%)Source: Center for European Economic Research (ZEW), SectorReport, ‘Innovation’, May 2006.
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• Successfully managing market launches
• Meeting customer requirements regarding function and price.
During the innovation process, focus on the customer is often lost.
While customer involvement is usually high in the early and late phases of
development projects – when defining the first specifications and launch-
ing the product – involvement dries up during the detailing phase and the
various change procedures.
A survey amongst R&D leaders in mechanical engineering conducted
recently by Roland Berger confirms this problem. When asked about the
major reasons for failed innovation, 38 percent ranked ‘missed market
requirements – the technically perfect solution’ in first position (see
Figure 4.2). Other answers, especially the ‘me-too product’ or ‘products
with competitive disadvantages’, also hint at missed customer needs.
Far too often, technical perfection has the upper hand, leading to over-
specification and overly expensive products.
The right approach would be to:
• undertake a clear analysis of the functions required by the customer
• define their value to the customer and their target cost
• design the product features accordingly.
Missed marketrequirements – thetechnically perfectsolution
38
19
13
7
5
18
The me-too product,facing a competition barrier
Products withcompetitivedisadvantages
Products facingweaknesses in
the marketenvironment
Products withtechnical
weaknesses
The price crash • Analyze necessary product functions
• Define value of functions for the customer and their target cost
• Design product features according to this information
• Objective: Avoid over- specification and over- engineering.
Value analysisin R&D projects
Figure 4.2 Innovation in the mechanical engineering industry – failurereasons in commercialization (% of answers)Source: Survey among R&D leaders in mechanical engineeringconducted by Cooper–Roland Berger.
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This process is called value analysis. Involving the customer is vital.
Examples of failed innovations are endless. One of the most spectacular
examples is the aircraft Airbus A380 whose market introduction was
delayed by almost two years. The financial damage to EADS, the parent
company of Airbus, was substantial. It suffered from significant market
capitalization loss, increased development cost, delayed and lost sales,
penalty payments and delayed break-even not only of the A380, but also
of other projects. The damage to reputation and customer trust is much
harder to quantify but most definitely not of minor importance.
Example: Airbus A380
The heart of the problem was a technical issue: construction errors inelectrical wiring. Different computer aided design (CAD) systems in theengineering sites in France, Germany and Spain are a probable reasonfor the wrong construction. Inadequately identified responsibilities inthe complex R&D network and limited competence to handle smallerproblems on a working level created the real problem. The internalcoordination process was extensive and time-consuming, and theexisting company culture led to many people not addressing issuesrather than dealing with them. Thus, the project leaders were often notinformed of a problem until very late in the product-creation process;the problem was left to escalate for too long and a solution was notdefined early enough.
Solving the technical issue was cumbersome, as engineering data hadto be manually converted between the different CAD systems, causing afurther delay of several weeks. Finally, production of the correctelectrical wires started much too late and production capacity could notbe increased sufficiently to make up for the delay. To put it in a nutshell:innovation management at Airbus failed, causing the companysignificant damage.
Another industry that is often in the media due to problems in the
innovation process is the automotive industry. Almost every original
equipment manufacturer (OEM) has had to conduct costly safety recalls,
which damage reputation. The reasons for this become clearer when one
looks more closely at how innovation performance requirements have
changed in the past years (see Figure 4.3). Model proliferation is tremen-
dous. Each year, increasing numbers of niche models, each bearing a long
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list of equipment options, are introduced on the market. At the same time,
development lead times – from concept approval to the commencement of
production– have shrunk. This has happened even though R&D capacity
is stable. Suppliers have become more involved in development as OEMs
focus on their core competencies, but also the efficiency of OEMs has
risen significantly. Intelligent product architectures, a clear development
organization with defined cross-functional processes, and application of
virtual engineering methods are just some of the issues OEMs have
tackled.
Despite these advancements, too many product launches continue to
fail. Mercedes also experienced this with its last E-class model. After the
launch of the new model in 2002, various technical problems occurred.
The most critical one affected an innovative electro-hydraulic braking
system. Some 1.3 million vehicles had to be recalled at a cost estimated at
⁄325 million. Sales for the E-class, the most profitable Mercedes model
for years, dropped drastically and did not recover for several years. The
company even considered renaming the new model in an attempt to avoid
long-term damage.
Textbox 4.1
Airbus A380
The Airbus A380 is one of the most prestigious industrial projects
ever – the largest commercial aircraft in the world, boosting the effi-
ciency of passenger transport. On January 18, 2005, Airbus introduced
the A380 to the public. The initial delivery date had been planned for
March 2006, to Singapore Airlines. Technical problems led to various
delays. The first aircraft was finally delivered in October 2007. After
announcing another major delay in October 2006, shares of EADS (the
parent company of Airbus) dropped short-term by 10 percent,
according to a report in the Swiss newspaper NZZ. Increased
development cost, penalty payments and lost orders were the
consequence. Overall, Airbus estimates the additional cost caused
by the delay at roughly ⁄5 billion. In addition, the development of the
A350 is significantly affected due to engineering capacities bound for
the A380. Today, the company is still struggling to recover from both
the financial impact and the damage to its image.
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1
Vehicle models marketed byEuropean manufacturers
Time from concept approval tostart of production
R&D budget development ofmajor OEMs1
Sales (%)
3
4
5
6
2000 2002 2004 2006
2
5075 75 75 75
75
75 88
138162
2000 2002 2004 2006 2008e
125
150163
213
238
15
20
25
30
35
2000 2002 2004 2006 2008e
MonthsNo. models
EuropeNorth America
JapanStandard modelsDerivates (e.g. soft-tops)
Key :
Figure 4.3 Innovation performance development in the automotive industryNotes: 1 Includes product development, corporate research.
2 Without financial services.
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Yet, the company reacted: Daimler is the first OEM to date to have
developed a series vehicle – its new Mercedes C-class – using a fully
integrated digital prototype. By simulating all major characteristics of the
vehicle, this prototype helps save development time, solves goal conflicts
and enables the company to test the overall vehicle concept in a virtual
stage. In the case of the C-class, not only crash safety and passenger pro-
tection have been simulated and tested with the digital prototype, but also
comfort (noise, vibration, roll-off ), operational stability, energy manage-
ment, air conditioning, and aerodynamics. These virtual methods have
existed, in theory, for several years. However, they were not systematically
applied in that integrated form until the C-class. IT systems performance is
still a critical aspect here.
Failed innovations, in most cases, are notched up to wrong decisions
and the behavior of individuals: this analysis is too easy. Individual
mistakes are made in all environments. It is the task of the innovation
management system to minimize mistakes, as far as possible, and to
make sure when something goes wrong that the issue is detected early –
guaranteeing that the problem can be solved in the most efficient way.
So, what distinguishes strong from weak innovation management? What
can companies learn from the best in innovation management? According to
our analysis and experience drawn from various projects, the following
criteria are important:
• Consistency – innovation strategy, performance targets, and the
necessary enablers need to be aligned
• Holistic approach – innovation organization, innovation process,
supporting systems/tools, and innovation culture need to be considered
• Cross-functional approach – innovation is not a pure R&D issue, all
functions need to be involved.
Roland Berger Innovation Toolbox
The Innovation Toolbox contains all the tools needed to ensure that the
criteria listed above can be fulfilled. It addresses all aspects of innovation
management with a specific set of levers and enablers that can be applied
flexibly according to the company and its specific business situation. The
toolbox consists of an integrated set of strategy, performance, and enabler
tools.
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I Innovation strategy
• Links innovation initiatives to corporate strategy and its targets
• Gives clear guidance on expectations and innovation performance targets
• Determines innovation effectiveness (doing the right things)
II Innovation performance
• Covers all aspects of value creation; that is revenue optimization, cost optimization, and time-to-market• Describes a comprehensive set of innovation levers• Determines innovation efficiency (doing things right)
III Innovation enablers
• Foster the sustainability of innovation optimization• Describe preconditions for innovation effectiveness and efficiency
Innovationstrategy
Revenueperformance
market
Costperformance
I
II
III
Innovationinfrastructureand systems
Innovationorganization
Innovationprocess
Innovationcontrolling
Timeto
Figure 4.4 Roland Berger Innovation Toolbox
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Innovation strategy
Innovation strategy should be viewed as the starting point for all innovation
activities. Ideally, it is derived from corporate strategy, thus ensuring a close
link with the intended corporate development. Corporate strategy sets the
scope of action by defining parameters such as future market positioning,
corporate growth targets or targeted future product portfolio. Innovation
strategy defines the targets and key guidelines for innovation activities,
including parameters for:
• The innovation project portfolio
• The innovation value-added
• The prioritization of projects with respect to financial and human
resources
• Key performance indicators (KPIs) for innovation activities.
Innovation strategy ensures that the focus is set on the right issues, direct-
ing all corporate innovation activities into the most effective areas.
Innovation performance
Innovation performance – the second tool for successful innovation
management – is crucial for making innovation activities efficient. The
Innovation Toolbox contains a comprehensive set of thirty levers with
which to optimize performance with regard to revenues, cost, and time-to-
market. In a development or innovation project, levers are selected based
on their ability to bring the right sort of change for a particular company.
First, the relevant levers are determined according to current weaknesses
in innovation management and the project target. Second, the optimal
portfolio of levers is selected based on the scope of changes and the
resources available to apply them.
Both the potential effect and the effort required to apply levers vary
widely. In general, the higher the effect and the lower the effort, the more
quickly the optimization measures should be tackled (quick wins). The
higher the effects and the effort of application, the more management
attention is required to select and implement the levers. For the ratio of
effect and effort, industry characteristics and company-specific circum-
stances need to be considered. A general overview is provided in Figure 4.5.
Revenue performance levers aim at creating higher rates of innovation
compared with a turnover increase reached via innovation. The most
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07 Regional adaptation08 Critical mass strategy09 Standard setting10 Network effect strategy11 Lead user integration12 Strategic pricing
13 Product modularization14 Value analysis15 Design-to-cost16 Target costing17 Cross-functional teams
Cost levers
Timing levers
High
29
Low
Application effort High
Effect onrevenue,cost, or
timing
1
Low
18
01 Creativity techniques02 Idea management03 Innovation portfolio mgt04 First to market strategy05 Complementary offering06 Low end disruption
Revenue levers
23 Technology roadmapping24 Product roadmapping25 Simultaneous engineering26 Development virtualization
18 Heavyweight project mgr19 Complexity mgt20 Benchmarking21 Supplier integration22 Continuous improvement
27 Patent licensing28 R&D partnership29 R&D outsourcing30 Market entry test
2
3
4
5
6
7
8
9
10
13
14
15
16
1724
25
2328
1112
19
20
21
22
26
27
30
Figure 4.5 Performance measures for systematic innovation management
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powerful levers include ‘innovation portfolio management’ and ‘first-to-
market strategy’. Balancing the project portfolio in terms of revenue
potential, cost, risks, and timing of market entry is vital for foreseeing
future cash flows and revenue development. This is the goal of the ‘inno-
vation portfolio management’ lever. The lever ‘first-to-market strategy’,
on the other hand, is crucial for winning early adopters of an innovation as
customers. This often creates the basis for market leadership in the long
term. Further important revenue performance levers include modifying
and tailoring the portfolio to additional markets (new regional markets,
low-end markets such as emerging or developing countries, or comple-
mentary products for existing markets) and measures for the diffusion
and adoption of innovation (for reaching critical mass rapidly, setting
standards, and creating external network effects).
Cost performance levers aim at generating innovation more cost
efficiently. Here, product modularization (with toolkits for product
modules) and complexity or product variant management play an important
role to ensure that companies avoid reinventing the wheel in product
development. All modules lacking the potential for differentiation, which is
appreciated by customers, need to be examined and evaluated carefully so
that development cost can be allocated to a higher number of products, thus
reducing the cost burden per unit. Moreover, methods such as value
analyses, design-to-cost, and target costing contribute to cost efficiency by
scrutinizing either the value to customers of certain product functions or by
challenging the intended technical solution for those functions.
Timing related levers form the third performance category. In innovation
management and product development, timing is crucial. On the one hand,
time-related issues are often more important than cost-related aspects since
timing – especially of market entry – largely determines the remaining
time within the product lifecycle for amortizing the incurred develop-
ment cost. Time saving technologies such as simultaneous engineering or
virtualization of development processes (virtual prototyping or testing,
for instance) might be decisive for the overall commercial success of an
innovation project. Levers – such as partnerships in R&D, or even outsour-
cing part of the development work – also need to be considered for time-
efficient product development. On the other hand, the right timing often
depends on external events. Windows of opportunity need to be grasped
for optimum success. Technological maturity, the development of market
requirements or competitor action need to be monitored in order to
determine the appropriate point for market launch, product differentiation
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or changes in pricing strategy. Technology and product roadmaps based
on weak signals external to the company and on company specific scenario
planning are important levers for the best possible preparation in terms
of timing.
Innovation enablers
Innovation enablers, the third category of tools, are a prerequisite to ensure
performance optimization is effective and sustainable in the long term. The
Innovation Toolbox examines issues and success factors in four dimensions:
• Innovation process – that is, a quality gate system, effective interface
descriptions and coordination between the concerned corporate
functions and departments in product development
• Structural organization – that is, level of (de-)centralization and business
unit specific activities, and the global footprint for product development
• Infrastructure and systems – that is, tools such as CAD, virtualization
techniques, and rapid prototyping
• Innovation controlling – that is, innovation KPIs, an innovation
scorecard, and project management tools for individual projects.
The toolbox is a treasure trove of levers, success factors, and cross industry
project experience that enables us to combine the appropriate actions for
any innovation-related challenge a company might face – whether it be
on corporate or on business unit level – and for all stages in product
development. We show how the toolbox works in the following case study.
Case study: ‘Innovation to cash’ at a leading Europeanutility company
Roland Berger has successfully applied the Innovation Toolbox in variousprojects. This approach was used recently when working with a leadingEuropean utility company. The company had already established theframework for successful innovation management. A Corporate Innova-tion unit had been installed that was responsible for managing anddriving innovation in the group. The internal collaboration with thethree business units had been roughly defined, an external network tosuppliers and universities had been structured in a dedicated forum, anda group-wide technology plan had been established.
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The questions, however, were:
• Are the current innovation efforts focused on value?
• What does the ‘ideal project portfolio’ look like?
• What is the ideal innovation process and innovation managementmethodology to capture the full value of innovation?
The core question was, in fact, how innovation could be used to a maxi-mum extent to reduce the company’s cash-out for the distribution business.
In the first phase, the project team carried out an audit of the existingsituation. The team examined the current innovation process andanalyzed the existing innovation portfolio, with a special focus onthe distribution business unit. External benchmarking, focusing on boththe innovation processes and portfolio, completed the diagnosis. In thesecond phase of redefinition, the Innovation Toolbox played a majorrole. Several levers were selected and customized to the client’ssituation, in order to establish and steer an entire innovation portfolioand manage innovation projects. Recommendations on how to adjustthe current innovation portfolio with regard to relevant technologiesand focus areas were worked out. The third and final project phasefocused on defining an implementation plan for the defined concept.
The results of the audit phase showed clear deficits in the innovationprocess:
• No clear trigger for idea evaluation and prioritization
• No formal project set-up; projects started by coincidence or by CEO’sorder
• No standard project planning and reporting, each project ‘reinventsthe wheel’
• Missing commercial focus of projects – for example, no business case
• Missing checkpoints and deliverables/KPIs along the innovationprocess
• No clear decision point for implementation/investment, despitedecisions about huge investment as a result of innovation projects
• No systematic review of project success and gathering of lessonslearned.
Overall, the company lacked a systematic way to manage andmaterialize on innovations.
Using the Innovation Toolbox, the project team defined a holisticconcept of innovation management, which is shown in Figure 4.6. Atthe heart of the concept is the quality gate method for managingprojects. A structure of six quality gates was introduced that clearlydefined the major decision points in an innovation project, including
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2
Strategy
• Overall innovation strategy and objectives
Realization
Objectives/framework
(e.g. budget,resources)
Portfolio management
Consoli-dationof projectreporting
Various analyses/views of theportfolio possible
• Overall budget/resource requirements• Risk portfolio• White-spot analysis
Overall portfolio planningand decision making
• Innovation launch plan• Long-term budget and resource planning• Initiation/cancellation of projects
Defined KPIs/deliverables atall stages
• Detailed project status• Financial KPIs• Resource requirements (budget, personal)• Probability of success• Etc.
Reporting
Innovationprojects
Decisions/actions
Project …Project 2
Project 1
QG4
09/07
QG5
03/08
QG6
05/08
QG3QG2QG1
Figure 4.6 Innovation portfolio management concept
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detailed deliverables. Standardized reporting templates were created thattoday form the basis for consolidated innovation portfolio reporting.These standardized inputs from the projects, which can be led either bythe Corporate Innovation unit or another business unit, form the basis fora portfolio management function. This should become one of the corefunctions of the Corporate Innovation unit. This function is responsiblenot only for portfolio reporting, but also for the active steering of thelaunch and cancellation of projects, and for regularly releasing thecorporate innovation launch plan – an item that is significantly importantfor shareholders.
For the analysis of the innovation portfolio itself, the first step was tomap the entire innovation portfolio in the company, analyze the align-ment of the innovation projects with the strategically set priorities, andcheck the impact of the projects in relation to the big cash-out blocks.
The results of the analysis were surprising to everyone. The runningprojects neither aligned with the strategic objectives, nor did theysystematically address the major spend blocks. Projects with the highestbudgets focused on very little optimization potential, whereas verysignificant fields of cash-out had not been addressed systematically atall. A missing portfolio management function was clearly responsible forthis situation.
Based on these results, a plan was introduced to shift the focus frompure asset-driven innovations to process items such as maintenance orbreakdown processes, which had not been considered before.
In the final phase of the project, a detailed implementation processwas defined. The quality gate structure to be implemented across allbusiness units was demonstrated in pilot projects. The adjustment ofthe current innovation portfolio in distribution was started immediately,focusing on the major innovation projects first.
Overall the project was a tremendous success. The Innovation Toolboxsupported the project team in the complete redefinition of innovationmanagement and the innovation portfolio of a major European utilitycompany in barely three months.
Outlook
The existence of many companies is closely linked to their ability to
manage innovation successfully. Companies are obliged to innovate, and
experience shows that there is a clear correlation between a company’s
innovation performance and its commercial success. Managing innova-
tion on a global scale is vital to remaining a first league player.
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Textbox 4.2
Globalization of R&D – success factors
Innovations play a key role in helping companies to remain
competitive and to grow in a globalized economy. To meet
customer requirements on a global scale and to harness all available
know-how and technologies, companies need to internationalize
their innovation process. This often involves globalizing R&D
activities.
Roland Berger Strategy Consultants conducted a study, together
with the ESB Research Institute, which examines the strategic
aspects of R&D relocation. Over 100 companies from six different
industries were surveyed and additional expert interviews of key
players in these industries were conducted. Five guiding questions
formed the basis of the survey:
1 What drives companies in globalizing their R&D?
2 How do companies pick their R&D locations?
3 How do companies organize their R&D network?
4 What tools do companies apply for managing the global R&D
process?
5 How do companies communicate and exchange know-how
globally?
Based on the degree of importance of access to the market and
technology, companies can be grouped into four clusters: globaliza-
tion leaders, global marketers, technology hunters, and opportunistic
players.
Globalization leaders view access to the market and to technology as
being of equally high importance. They create a network of central
research and local development centers. Activities are coordinated
throughout the entire global R&D network.
Global marketers view access to the market as being more
important than access to technology. They generate basic innova-
tions and product platforms in global research centers. These are
transformed into products for local markets in local development
centers.
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Technology hunters view access to technology as the main reason
for globalization. They focus R&D efforts on a small number of
global research centers that specialize in individual research areas.
Local customization of products is limited.
Opportunity players are not driven to globalize R&D system-
atically but, rather, base their globalization policy on specific and
individual business requirements. They drive their R&D efforts
mainly out of their home base. Global efforts are limited and
typically driven by individual client or product requirements.
Six success factors could be distilled from the information
gathered:
1 Start from corporate R&D strategy. Companies need to assess
whether it is technology, market access or opportunistic cost
reduction that drives the globalization of R&D.
2 Concentrate technological know-how as much as possible.
Leveraging global know-how is more effective when a critical
mass is reached in single places. Bundling of know-how in one
place is necessary.
3 Develop market know-how in decentralized units. Local know-
ledge requires a certain degree of autonomy to be an effective
innovation driver. Central units should provide basic research, the
overall strategy, and should monitor R&D activities.
4 Be pragmatic in applying R&D management methods. Tools
for managing R&D processes – such as stage gate or quality gate
processes, R&D cycles, project controlling or IT platforms – are
necessary in any global R&D, and have become standard in most
companies.
5 Manage burdens of historical growth. R&D networks need active
management. Historically, grown networks are seldom efficient if
the organizational structure is not planned or controlled according
to the corporate strategy. Clear directions and guidelines are
necessary.
6 Implement organizational changes carefully. Transition and
change processes need to be handled carefully to avoid losing key
personnel. Know-how is predominantly bound to people. Radical
changes can make it more difficult to retain experts and the
carriers of knowledge.
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Innovation clearly has to be on the agenda of every CEO. It has to
involve all areas of a company, not merely the R&D department. The
good news is that there is a proven set of tools – the Innovation Toolbox –
that might help to improve the efficiency of innovation projects.
Further reading
Heidtmann, Volker (2007) ‘Gewusst wo! Forschung und Entwicklung
passgenau globalisieren’, in Roland Berger Strategy Consultants,
Executive Review, 2: 18–23.
Kerka, Friedrich, Kriegesmann, Bernd, Schwering, Markus G. and
Happich, Jan (2006) ‘Big Ideas’ erkennen und Flops vermeiden –
dreistufige Bewertung von Innovationsideen. Institut fur angewandte
Innovationsforschung e.V. (iAi), Bochum.
Leysieffer, Hans (2005) Innovationsmanagement bei der Phonak AG.
Vortrag Swiss Innovation Kongress 2005, http://www.zpeportal.ethz.
ch/events/ swissinnovation/downloads.
Roland Berger Strategy Consultants (2006) ‘Innovation in Mechanical
Engineering – Failure Reasons in Commercialization’, Survey among
persons in charge of R&D in mechanical engineering.
Roland Berger Strategy Consultants (2007) ‘Globalization of R&D –
Drivers and Success Factors’. Study, ESB Research Institute, Reutlin-
gen University, June.
Zentrum fur Europaische Wirtschaftsforschung GmbH (ZEW) (2006)
ZEW Branchenreport Innovationen Elektroindustrie, Fahrzeugbau,
Medizin-/Mess-/ Steuertechnik, Optik, Maschinenbau. Jahrg 13, 2, May.
78 Stefan P€otzl, Thomas Kohr and Michael Zollenkop
9780230_217805_07_ch05.3d 5/29/2008 09:52:45
CHAPTER 5
Smart engineering processes: ‘madein Japan’
Ken Mori and Satoshi Nagashima
Introduction
When people hear ‘operations excellence in Japan’, manufacturing inno-
vations instantly spring to mind. This is not surprising considering the
revolutionary concepts ‘just in time’, ‘cell manufacturing’, and ‘total quality
control’, all of which bear a Japanese hallmark. Operations excellence in
Japan, however, is not limited to manufacturing but spreads into other areas,
such as cost control, supplier management, and product development too.
This article concentrates on tried-and-tested product development strategies
that originated in Japan, such as front loading, lead time reduction, and cost
planning. The focus is turned sharply on the automotive industry, the
birthplace of these groundbreaking R&D organizational processes.
To understand operations excellence in product development in Japan, we
have to take a short step back into history. In the early 1990s, two professors –
Dr Takahiro Fujimoto and Dr Kim Clark – analyzed the efficiency of product
development at various automotive manufacturers in Europe, North America
and Japan. They found that Japanese firms had significantly shorter lead
times, a lower defect level, and better manufacturability than their
competitors in these other regions. According to the professors, one of the
reasons for the high efficiency of Japanese firms was the process led by what
they called ‘heavy weight product managers’ (HWPM).
The product development organization of all automotive manufacturers
in Japan comprises functional departments such as design, body, chassis,
power train, electronics, and testing. The importance of the HWPM
becomes clear when one realizes that if those functional organizations are
considered as the vertical axis, then the HWPM is the horizontal axis. An
HWPM is completely responsible for a vehicle model and works closely
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with all of the functional organizations, even though he does not belong
to any of those functional departments. This is a version of what is known
as matrix organization, shown in Figure 5.1. By integrating different
functions such as design engineering, manufacturing engineering and
marketing, the HWPM facilitates the speedy completion of a project.
History of HWPM
It is generally accepted that Toyota was the first company to introduce the
concept of HWPM. An earlier form of these product manager heavy-
weights had existed at Toyota since 1949, when President Kiichiro
Toyoda appointed Kenya Nakamura to the position of Shusa (chief) after
having decided to develop a pure Japanese car. ‘A Shusa is the
representative of the President and has the ultimate responsibility for
developing a new vehicle,’ the President said as he inducted Kenya
Nakamura to this elevated position. From its very inception, the position
of HWPM has been synonymous with ultimate responsibility. Holders of
this position are granted enormous power from top management.
What Nakamura did once he was appointed as Shusa characterizes
product development in Japan to this day. He listened to potential users.
Since taxi companies were the typical customers of passenger cars in
1949, Nakamura visited them and spoke directly with the drivers to find
out their needs. This practice is still alive at Toyota and other automotive
firms in Japan. An HWPM always speaks with potential customers, and
sometimes even lives with them to gain a thorough understanding of their
real – but often hidden – needs and requirements.
Design Body Chassis Power-train
Electro-nics
Testing
HWPMModel 1
HWPMModel 2
HWPMModel 3
HWPMModel N
...
Figure 5.1 Matrix organization
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Toyota continued to use these special product managers to develop
other cars, and a matrix organization was created. Rather than having
the matrix organization designed by top management, organizational
specialists, or even management consultants, it was created naturally by
recreating Kenya Nakamura’s team in the functionally formed organiza-
tions. Learning from Toyota, the product development organizations at all
Japanese automotive manufacturers now have a similar set-up.
How can the HWPM be successful?
Although the shape of the organization resembles a matrix, the
organization concept underpinning Japanese automotive companies is a
little different from typical matrix organizations elsewhere. A member of
a matrix organization generally reports to two bosses. Yet, engineers at
Japanese automotive companies report officially to their functional
department heads only. They do not report to the HWPM.
The HWPM has his own small team, often consisting of about ten
engineers. The HWPM does not have authority over HR issues such as
performance evaluation or promotion decisions. Despite this, he still
needs to be able to lead the vehicle development program and manage
hundreds of engineers. How is this possible? There are four main factors.
Strong empowerment by top management The president of Toyota set
the standard when he bestowed immense power on his Shusa. All other
Japanese automotive companies followed that pattern. Many western
automotive firms, particularly American ones, later introduced the HWPM
concept. Unfortunately, they rarely attained their objective of improving
product development practices. Part of the reason for their failure rests
with power: HWPMs in the United States were not given sufficient clout
by top management. Without this, they could not reach the desired goals.
The HWPM has the ultimate responsibility for each program’s results,
and he is the ultimate authority on key decisions. An engineer who
officially reports to his functional head and wants the program to be
successful has no choice but to follow the HWPM’s directions. When he
develops technology that is specific to his own field, the engineer needs to
follow directions from his functional head. In the vehicle development
program, however, it is the HWPM’s voice to which he should listen.
Representative of customers Once the design has been agreed upon,
the engineering organizations of Japanese automotive companies stop
interacting with the market, with the exception of focus group interviews
and consumer clinics. The HWPM is the only voice they hear in their daily
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engineering work. He represents the customer. Since employees at
Japanese automotive manufacturers are trained to be customer focused,
they cannot neglect the voice of the HWPM, who speaks for the customer
and reflects his innermost needs.
This is in stark contrast to the beginning of product development, when
concept planners, designers, marketers, engineers, and the HWPM travel
through cities and towns in Japan and in other parts of the world to gain a
sense of the market and to understand the desires and requirements of users.
They do not rely on consumer trend data. Instead, they speak face-to-face
with consumers, and even stay with the target users for weeks in some cases.
Well-defined processes HWPM’s often cite well-defined processes for
their success. It is more the company’s well-defined process and less the
official human resource authority that helps them attain their goals. At
each design review, items to be discussed are clearly defined and HWPM
approval is required at each event.
We asked an engineer why he worked so hard for the HWPM who was not
his official boss. He answered: ‘Because I saw my predecessors (sen-pai)
work hard for their HWPMs’. This sense of tradition is alive at Japanese car
manufacturers. While all Japanese original equipment manufacturers
(OEMs) change their processes, especially to shorten development lead
time, the fundamental philosophy remains the same. The HWPM is the
driver of the process. He has ultimate responsibility and authority.
Capability of HWPM When asked for the reasons why their HWPMs
are so successful, Japanese engineers at automotive companies often refer
to their capability and personality. Put simply, only the tried-and-tested
have a chance of becoming a HWPM. These heavyweights have often
worked as a member of the HWPM team for 15 years or more before being
considered for the position. The skills, negotiation style, and personality
of potential HWPMs are scrutinized over years. The very existence of the
‘Ten Shusa Requirements’, a set of commandments of sorts, provides an
indication of how high Toyota’s expectations of a Shusa are.
Practices derived from the HWPM concept
An HWPM oversees the entire process of product development and all
related functions. Several practices were developed, based on the
initiatives of HWPMs, to improve product development efficiency and
effectiveness. These smart engineering processes include front loading,
lead time reduction, and cost planning.
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Front loading
Companies have much greater freedom during the early stages of product
development than in later stages. More than 80 percent of product costs
are determined in the concept development phase. Taking this knowledge
to heart, Japanese automotive manufacturers and their HWPMs have
made efforts to improve front loading, which means investing more
engineering resources in the earlier stages of the processes.
The ‘set-based process’ is a general practice followed in Japanese firms
for front loading. Some say that it is a Toyota practice: this is not quite
true. It is a practice that most Japanese manufacturers have followed for
decades. If a team develops a component, the simplest and most natural
procedure is to design the component, test it, identify problems, fix the
problems, and improve the product design. In this process, a single
product is improved continuously, which is why this process is called the
‘single design method’.
Japanese firms, in contrast, develop a set of several components with
different specifications; different levels of performance for some compo-
nents, and different shapes in other components. At the same time,
engineers responsible for adjacent components do the same. They also
develop several designs with different parameters. Together they evaluate
the ‘fit’ with adjacent components, assess the attainment of objectives, and
select the better options. They narrow the parameters. They then develop a
few designs with a narrower range of deviation in parameters. After a few
trials, they reach the final parameter. This method requires greater
resources allocation in the early stage, but allows savings later.
Translated for non-engineering experts, the difference between the two
processes can be explained using an analogy. Three busy businessmen are
trying to set a meeting. In the world of the ‘single design method’, Mr A
suggests a time slot, Mr B says ‘no’, then Mr A suggests the next one, Mr B
agrees, but Mr C rejects it. This is a protracted process. In the ‘set-based’
world, all three gentlemen put available time slots on the table, and select a
few slots. They then narrow down the selection – the earlier is perhaps the
better option, or perhaps the longer option is better, and so forth.
Another example of front loading is the willingness to stop listening to
customers after the concept has been chosen and following design freeze.
Considered from a different perspective, this means that while Japanese
automotive manufacturers invest more time when developing the concept
and during the design phase, they need less time for implementation.
Some companies start engineering work when the concept is still
undecided and then create numerous significant design changes due to
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modifications in the concept. To avoid this, successful Japanese firms
devote more time to developing the concept. This does not mean that
engineering work is not conducted in the concept and styling development
phase. A great deal of analysis, design, and testing are performed in order
to ensure that the concept and styling are realistic in terms of structure,
quality, manufacturability, cost, and so forth. Thanks to front-loading
activities, change requests that might affect product concept and styling
are extremely rare at Japanese automotive companies.
Computer aided engineering also contributed to the dominance of front
loading. Even in the styling phase, engineers can begin to conduct a
preliminary analysis of crash tests. Digital mock-ups require a great deal
of data creation work in the early stage but save extremely significant
amounts of time in the later phase. Japanese automotive manufacturers
were not necessarily the first to use digital tools but, once they started
working with these tools, they became adept at integrating them in
traditional human-based processes. They do not attempt to complete
everything in the virtual world. Instead, existing processes are
complemented with digital tools in order to further advance front loading.
Lead time reduction
In the 1990s, automotive manufacturers worldwide found that the
requirements and preferences of consumers were considerably more
diversified than in the past. There has been no slowdown or reversal of this
trend to date. Companies felt – and continue to feel – that they needed to
launch more products with greater variety to respond to this change. A
shorter lead time was desired, especially after the design freeze phase. To
satisfy diversified customer preferences, styling of the car became more
crucial than ever to win customers, especially since technology and
quality gaps among automotive manufacturers have become increasingly
smaller. Car styling is finalized at ‘design freeze’. If the design freeze
happens four years before the start of sales, planners and designers need to
predict consumer preference four years in advance. If the process is
shorter, say 18 months, prediction is easier and the probability of a ‘big
hit’ is higher. As a result, automotive companies started to compete with
each other in the 1990s to shorten product development lead time. The
Japanese won hands down. In the late 1990s, Japanese automotive
manufacturers attained 18 months process as standard, with 12 months for
‘hurry up’ models. Players in North America still required more than three
years.
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Figure 5.2 shows the typical process taken by Japanese automotive
manufacturers up until the middle of the 1990s. Typically, it took 24 to 36
months to put a car on the market, from design freeze to start of production.
Figure 5.3 shows the shortened version – 18 months in this example.
There were several enablers for the reduction in lead time. Here, we
outline the four most important:
Engineering tasks More engineering tasks were conducted before
design freeze than ever before. They performed underbody engineering
work such as power train and chassis as early on as possible. Regarding
upper body engineering, the basic body structure was designed and
validated before design freeze, thanks to extensive use of computer aided
engineering (CAE). Basic designs for dies and tools were also started
before design freeze.
Prototype evaluation The prototype evaluation process was dramati-
cally simplified to one step. Most Japanese car manufacturers used to have
a three-step approach to evaluate prototypes. The new process often has
only one step. This reduces lead time by four to five months.
Die manufacturing Die manufacturing was dramatically shortened.
Many Japanese companies now try to reduce manufacturing time further
by abolishing prototype dies. They aim to build prototypes by using dies
for mass manufacturing. By doing this, they do not need to spend time
developing mass production dies in the production preparation phase.
Trial production The number of trial production stages was also
reduced. At many firms, there used to be two stages now, they conduct
trial production in one stage. They use as many mass production dies as
possible for prototypes, thereby shifting workload during trial production
to an early stage. Another enabler was the use of simulation tools.
Cost planning
To control the cost of new products, Japanese automotive manufacturers
introduced a practice that is often translated as ‘target costing’. However,
‘cost planning’ – which is the direct translation from Japanese – seems to
express the practice more accurately.Manufacturers say that this practice
is not only about reducing costs; cost planning involves creating a
philosophy for a new cost structure.
During product planning, the cost planning department (the name of
this department varies from firm to firm) defines the total target cost by
Smart engineering processes: ‘made in Japan’ 85
9780230_217805_07_ch05.3
d5/2
9/2
008
09:5
2:4
5
Prior to workdesign freeze
Prototype evaluation
Die making
Initial engineering
�6 0 6 12 18 24Time(month)
Engineering change management
1st set of prototypes building 2nd set
Evaluation
Start of production
Designfreeze
• Major components evaluated• No work on upper body
3rd set
Welding and assembly preparation
Trial production 1
Trial production 2
Figure 5.2 Product development lead time
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d5/2
9/2
008
09:5
2:4
6
�6Time(month)
• Simulation• Underbody completed• Some tasks on upper body performed
Prior to workdesign freeze
Prototype evaluation
Die making
Initial engineering
0 6 12 18
Trial production
Evaluation
Engineering change management
Prototype building
Welding and assembly preparation
Start of production
Designfreeze
Figure 5.3 Shortened product development lead time
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analyzing target performance, price and performance of existing
products, potential rival products of competitors, and so forth. At the
same time, the cumulative costs of the new product are calculated by
estimating the cost of each component. Usually, the latter cost is higher
than the former, and the cost planning department allocates target costs
for each component so that the cumulative total cost does not exceed the
total target cost. Engineers design components that can satisfy
performance, weight, and cost targets. If a certain component will
exceed the target cost, then the cost planning department reallocates the
target cost by component after discussion with the HWPM and relevant
engineers.
In addition to complying rigorously with the cost planning process,
each firm has developed its own way to manage product costs. For
example, Toyota has been working on the construction of cost
competitiveness (CCC21) initiative. One of the particularities of CCC21
is the concept of ‘absolute cost’. Toyota has developed a database
consisting of global suppliers. In the database, the absolute cost for each
part is calculated by summing up the lowest material cost, the lowest
process cost, and the lowest overhead cost. The absolute cost is the
ultimate target for Toyota and its suppliers.
Initiatives for change in HWPM organizations
The HWPM system has been a very powerful and effective mechanism for
Japanese automotive firms. While processes have been improved,
organizations also have been modified. One big change at Toyota
occurred in 1993. Compared with the very early days of Kenya Nakamura
and his successors, the product development organization of Toyota had
expanded dramatically. The number of engineers and technicians had
risen to 12,000 in 1993. This put a heavy burden on HWPMs, since they
needed to spend considerably more time on coordination than their
predecessors. Toyota then divided its organization into four vehicle
development centers (VDCs). VDC1 is responsible for rear wheel drive
cars, VDC2 for front wheel drive cars, VDC3 for commercial vehicles,
and VDC4 for major components. The chief engineers at Toyota said that
their productivity improved significantly following the introduction of
this organizational change.
Two other interesting changes in the HWPM organizational structure
should also be mentioned: the concept planner of Toyota, and Nissan’s
team management.
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Toyota’s concept planner
At Toyota, a HWPM is assigned as soon as the top management decides
to start a new vehicle development program. The HWPM leads the
program from the development of the concept all the way through to the
start of production. He is involved in minor changes that take place over
the next few years, and even in the next full model change. Far-reaching
as this role already is, Toyota concluded that it was not enough.
To create truly innovative cars, Toyota thought capable engineers
should start concept planning from a much earlier stage. To fulfill this
requirement, the company created a position called the ‘concept
planner’. Concept planners develop concepts for ‘dream cars’, ‘super
eco cars’ and other future vehicles. They talk intensively with engineers
and researchers working at the Toyota Central Laboratories and other
research arms of the Toyota group, major universities, and researchers
in other industries, in order to come up with their ideas and visions.
They also discuss market trends with the Research Division and other
relevant organizations within Toyota. Following Toyota tradition, they
also travel worldwide to see, talk with, and grasp the needs of potential
customers. After successfully developing the concept, the concept
planner is assigned to the chief engineer (HWPM) of the vehicle.
Toyota expects the concept planner to bring unprecedented creative
ideas and concepts, which can later be directly developed and realized
by the same person without any gaps between the concept and the
product.
Nissan’s team management
Nissan used to have a similar management model as Toyota. At Nissan, a
HWPM was known as a Shukan, rather than a Shusa as at Toyota. After
forming an alliance with Renault, Nissan abolished the position of Shukan
and created teams that have ultimate responsibility for vehicles. A team
consists of five people: chief product specialist (product planning), chief
vehicle engineer (manufacturing), product chief designer (design), chief
marketing manager (sales and marketing), and program director (overall
coordination). This team has wider responsibility than a traditional
HWPM who, typically, does not have responsibility in sales. This team is
responsible for every factor determining the success of vehicle. The
success of Nissan in the early 2000s was largely attributed to this
management practice.
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Further challenges
Product development practices in Japan are still evolving. There can be no
stop to this activity, especially as companies face new challenges and hur-
dles. The shortage of engineers is a headache for most companies in Japan.
The number of engineers at Japanese automotive companies has not kept
pace with the speed with which new models are launched. The shortage is
especially severe in the electronics field. To respond to this situation, automo-
tive manufacturers are trying to utilize the engineering capabilities of their
suppliers. They have started to engage engineering service providers – mostly
European firms – that have not previously played a major role in Japan.
The globalization of product development is another challenge. To
satisfy local requirements, a certain amount of product development must
occur locally. Japanese firms have historically conducted product
development in Japan only. Striking the right balance between local and
Japanese organizations, and ensuring sufficient communication between
the two, is a big challenge.
Companies now manufacture some global products in different places
in the world at the same time. Manufacturing engineering, including trial
production, must be performed simultaneously all over the world. This
exacerbates resource problems. In the past, a group of manufacturing
engineers conducted work in Japan before moving on to the next country.
Companies now need those same people in different parts of the world at
the same time. One way to resolve this is by global development of talent
with the same capability; another way is to utilize IT tools to conduct
manufacturing engineering centrally from Japan. Each firm takes its own
approach to resolve this challenge.
Japanese automotive manufacturers will face many more challenges in
the future. Manufacturers in other industries and other regions would be
wise to watch and take note of their reactions carefully.
Further reading
Aoki, M. (2007) Toyota Seisan Kojo No Shikumi. Nihon Jitsugyou
Shuppansha. ISBN 978-4-534-04246-0.
Hino, S. (2002) Toyota Kiei System No Kenkyu. Diamond. ISBN 978-4-
478-38040-6.
Morgan, J. and Liker, J. (2007) The Toyota Product Development System.
Nikkei BP. ISBN 978-4-8222-4570-2.
Kato, Y. (1993) Genkakikaku, Nikkei. ISBN978-4-542-13048-4.
90 Ken Mori and Satoshi Nagashima
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PART II
Purchasing
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Introduction
Strategic trends and challenges forpurchasing
Roland Schwientek
The purchasing of material and services has undergone significant change
since the middle of the 1980s. There has been a complete switch from
purchasing being a traditional, reactive administrative function to becoming
active cost management. In many companies, purchasing has been res-
ponsible for cost awareness being established comprehensively throughout
whole organizations. Successful approaches such as reverse auctioning,
target costing, value creation or supply chain management – all of which
were considered innovative, in their time – were often initiated in pur-
chasing departments and first gained widespread acceptance there.
Particularly in times of upheaval or recession, purchasing activities
have contributed significantly to company results. However, irrespective
of whether the economy is facing an upturn or a downturn, the importance
of purchasing is not diminishing: it is, rather, extending.
The gradual reduction in vertical integration that has come about as
industries concentrate on core competencies and key technology in
order to position themselves strategically on the market drives this
development. The relative share of external procurement costs to total
internal costs in western Europe has increased by almost 1 percent
annually since 1990, despite a continual decline in prices in almost all
industries.
Although the pivotal role played by purchasing is widely understood, it
is deployed with varying intensity from industry to industry. Sectors that
have traditionally judged purchasing as being of secondary importance –
utilities, banks and insurance, and construction – are now viewing it more
favorably. Significant effort is being made by companies in these sectors
to latch onto the type of success enjoyed by early procurement supporters,
such as the automotive industry.
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For leading purchasing industries, optimizing pure material costs was
just the beginning. They had already started to improve their entire
purchasing process many years ago. Key suppliers are integrated into
company processes, from development to production. Laggards are now
haphazardly employing innovative approaches in an attempt to reach the
top. Seldom have they done enough homework to establish which
approach would suit them best.
A critical examination of these activities reveals that while these
innovative approaches are largely known in theory, they are applied in a
half-hearted fashion. Owing to inaccurate interpretation or the defense of
vested rights, applying these innovative approaches will, sometimes, even
lead to undesirable developments. Only those companies that can clearly
formulate their purchasing strategy, arrange the purchasing process to
function flexibly and realize bundling effects without falling into a
functional mindset or building up ‘purchasing empires’ will be able to
sustain the dynamic necessary to remain innovative in the long term.
Purchasing must capitalize on the significance it has already gained to
keep driving processes that span across functions.
Understanding and adapting quickly to changing environments –
whether customer expectations, competitive conditions, new technology
or general social or political change – is decisive for success. Current
trends that influence the strategic direction of purchasing include:
• The increasing globalization of industry and society
Rapid advancements in IT and communication technology give this
trend additional strength. Synergies that have been recognized but not
yet realized could spark the creation of international partnerships that
go beyond the purchasing function. By taking on a more cross-
divisional functional role, purchasing could contribute to greater
adhesion throughout the entire company.
• The increasing pressure to concentrate on core competencies, not only
in companies’ own competitive playing fields but also in those of
customers and suppliers too
As duties are handed over to external parties, it becomes even more
essential to have comprehensive outsourcing know-how in purchasing.
The closer suppliers become to core competencies, the more important
it is to capture favorable suppliers – those that bring their own value
into the entire process – before the competition does.
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• The necessity of strategic alliances along the value chain
The concentration on core competencies means that strategic alliances
will become even more important in the future. These are still viewed
skeptically today, especially by medium-sized companies. The optimal
orientation along the entire value chain will be important in order to
remain competitive in the future. This is true even for ‘virtual’
companies, in which many productive value-chain functions are taken
care of by external parties.
• The increasing pace of action, whether implementing innovations or
reacting to customers’ wishes
Changes in the competitive field and within companies will speed up.
Processes will face increasing demand and the production lifecycle will
become shorter. As vertical integration becomes lower, partnerships
with suppliers will become even more intense.
• The ability to use innovation as a competitive differentiation factor
Companies must bundle their own power for innovation with their
suppliers and use this combined power for their own benefit. The task is
to win the best and most innovative suppliers, to build up a joint
competitive position and to make sure that new ideas and developments
bring your company gains. This will safeguard your company from
competitors.
There is no singular one-fits-all approach that allows purchasing to gain
the upper hand over all these trends and make purchasing more
professional. Companies need to realize at what stage of development
they are, before embarking on an improvement strategy.
For this purpose, Roland Berger Strategy Consultants developed
Purchasing EmPowerment, a comprehensive approach that helps
purchasing reach performance excellence. Part II describes this approach.
In Chapter 6, Michel Jacob and Gabriel-Assad Singaby look at key trends
in purchasing best practices and examine the impact these have on
purchasing strategies. They go on to examine the strategic direction
purchasing is likely to take in the future and the role strategic partnerships
might play. Chapter 7 examines the different facets of the approach in its
entirety. It looks at the short and medium-term cost reductions that are
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possible in procurement values through systematic commodity manage-
ment, and how companies can optimize external direct or indirect spend
through appropriate innovative optimization levers and by managing
suppliers more effectively. In Chapter 8, Tobias Franke takes a closer look
at different organizational frameworks in order to find the one that works
best for mastering future challenges.
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CHAPTER 6
Key trends in purchasing bestpractices and impact on purchasingstrategy
Michel Jacob and Gabriel-Assad Singaby
Introduction
As competitive pressure intensifies in most industries, CEOs are
increasingly putting procurement at the top of their agendas. The
corporate world is dealing with an onslaught of modern challenges,
ranging from globalization, to the entry of new competitors, through to
rising material prices. Purchasing, which is viewed as a way to master
these challenges, is shaping up to develop even further into one of the
hottest corporate topics of the next decade.
The purchasing world, in its endeavor to adapt to this changed and
changing external environment, is reworking its own DNA. For a long time,
the major concern of purchasing departments was to buy goods and materials
at the lowest price possible. Faced by increasing globalization and business
volatility, companies these days are adopting a more holistic perspective, and
purchasing is being considered as part of the entire corporate strategy. Price
alone is no longer the unique key performance indicator, but one of many
aspects of sourcing excellence, along with anticipation, quality, total cost of
ownership (TCO), industrial footprint consistency, and sourcing security.
These key performance indicators generate a new complexity that
companies must address in order to gain, and then maintain, a competitive
edge. Although developing a powerful purchasing strategy is now a ‘must’
for companies that want to succeed, it is a complex and sophisticated exercise.
Experience gained from projects with clients shows that increasingly more
companies are designing purchasing plans that span several years, and which
attempt to anticipate major business moves and shifts.
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In this chapter, we outline how purchasing practices have evolved over
the past decades, and analyze the main challenges that companies are
confronted by in the new purchasing environment. We then look at the key
trends that are vital to achieving purchasing excellence, and show how
companies can build up a purchasing strategy that will let them achieve
that sort of excellence. These key factors have been distilled from
assignments Roland Berger has conducted for major global companies as
we assisted them to structure their three-to-five year purchasing plans. At
the end of the chapter, we discuss a real project in depth.
Where is purchasing today?
Based on experience working with companies from a large number of
industries, it is clear that purchasing organizations, especially those belonging
to large companies, go through three stages of maturity along their lifecycle.
In the first stage, companies are concerned primarily with negotiating
prices, and with developing professional buyers and a new, more structured
approach to purchasing. When companies focus on improving the purchasing
process during this phase, they focus almost exclusively on commercial
negotiations. This improvement typically generates a savings potential of
approximately 5 percent (percentage of annual spend – operational
expenditures + capital expenditures). One can safely say that companies in
all industries have advanced beyond this first stage.
In the second stage, which is based on bundling volumes, companies
centralize sourcing functions and geographically extend their sourcing.
Thanks to economies of scale, this lever yields a 5–10 percent cost improve-
ment from suppliers based on unit price. Volume concentration has become a
key lever for producers of manufactured goods. By and large, almost all
industries have now deployed this lever, and the most advanced companies
have been fully utilizing it for decades already. As a result of bundling
volume, strong purchasing organizations developed. These organizations
have a clear mandate and have carved their own niche at the corporate level.
The third stage involves far-reaching organizational change, as it
entirely redefines a company’s relationships with its suppliers. This stage
is much harder to complete and companies should consider it a medium-
term task. Although this phase calls for more effort, and might initially
push companies beyond their comfort zone, the benefits are immense. By
entering partnerships and alliances with suppliers, both company and
suppliers can improve their processes. When buyers together with internal
users of purchased goods and services become involved in product
Key trends in purchasing best practices 97
9780230_217805_08_ch06.3
d5/2
9/2
008
09:5
2:0
2
• Central sourcing functions• Focus on unit prices levers
• Set up a full TCO approach• Pro-activeness
• Develop professional buyers• Structured approach for purchasing
Pricenegotiation
Volumeconcentration
Relationshipredefinition and user
involvement
1 2 3
Potentialsavings(% of annualspend –Opex � Capex)
15–25%5–10%
6–10%
4–5%
Total
Figure 6.1 Maturity steps at purchasing organizations
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specifications, a full TCO approach has usually emerged. It is at this point
that the philosophy of purchasing changes radically. It shifts from being
reactive to proactive. Savings of between 5–10 percent are the norm. The
automotive and aerospace industries are typically leaders in this approach.
Challenges that still need to be addressed
Irrespective of what stage of development a company has reached, a
handful of challenges affect all purchasing organizations. The only
difference between purchasing late-comers and purchasing organizations
that perform strongly is that the latter have already dealt with several of
these challenges or have introduced long-term strategies to remedy them.
These challenges are discussed below and shown in Figure 6.2.
Centralized and centrally-led purchasing models are now commonplace,
but companies need to find ways to sustain these models. By centralizing
purchasing, organizations gain efficiency and effective processes. The
advantages of centralization are varied and well known: goods are pur-
chased using standardized criteria, buying is concentrated, best practices are
adopted between sites and regions, tasks are no longer duplicated, staff
generally become more professional. Yet, a specific sort of organizational
structure is required for centralized models to function properly. Another
form to benefit from the effects of centralization without losing contact with
the base is the lead buying model, as detailed in Chapter 8 by Tobias
Franke – organizations drive strategy and performance. Information
Greater effortrequired to address
these challenges
Balance between centralizationand decentralization• Companies still need to learn how to manage remote parts of their mega-networks while leveraging maximum synergies
Data management• Companies need to find ways to obtain reliable purchasing information at a lower cost and with less effort
TCO• Companies still do not recognize fully how TCO can improve purchasing spend optimization
Purchasing image• Companies need to close the gap that exists between the perceived and real skill set of purchasing employees
Figure 6.2 Challenges with which companies still struggle
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technology systems and information flows need to be designed with
precision, too. Without the correct structure and information flows,
problems arise. Companies might suffer from a lack of coordination, or
the purchasing department might fail to take adequate account of the needs
of local business units. Additionally, as companies become more global and
expand, the challenge of managing remote parts of ‘mega networks’ while
avoiding building central ‘ivory towers’ also increases.
A second challenge revolves around the perceived and real skill set of
purchasing employees. Over the past years, the career track within
purchasing and the skills and competencies of purchasing managers has
developed considerably. Top management is increasingly becoming
involved in purchasing, and it is attracting the attention of CEOs.
Unfortunately, many people in business remain blind to this reality. At
too many companies, the purchasing function is not viewed as a company’s
core business. The image of ‘tactical’ purchasing – focused on short-term
profitability improvements, which had been the dominant model for years –
is etched into minds. Unfortunately it overshadows the new reality of
‘strategic’ purchasing, which aims to secure competitiveness over time.
Finding a way to close the gap between reality and the image that persists
about purchasing professionals remains a pressing challenge for many
companies. While the job market has reached a low point for professionals
with tactical purchasing experience, there is a talent crunch for strategic
purchasing jobs. These jobs are being created faster than they can be filled.
With that said, many companies realize that some of their purchasing
staff do not have an adequate skill set to complete the work that is
demanded of them as the purchasing function develops. With a tailored
training program, this gap can be closed relatively quickly. In addition to
having staff with basic skills and soft skills, purchasing departments these
days also need purchasing employees with operative and strategic
purchasing skills. The sorts of operative skills required span interface
management – dealing with internal customers and international internal
customers and making cooperation between them work – over the
controlling of purchasing activities through to contract management. This
latter criterion increasingly demands international contract law knowl-
edge and expertise. Strategic purchasing skills include commodity
management, supplier management, project management and risk
management experience.
Total cost of ownership (TCO) is a third challenge. TCO helps
companies assess the direct and indirect costs of purchases for their entire
lifecycle. Many internal users and prescribers have not fully compre-
hended the consequences of the TCO-based purchasing revolution. As a
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result, they have not been able to adapt fully to the expectations of this
new world order. Too many companies have failed to consider how this
new paradigm fits into their organization and, consequently, do not give
users and prescribers incentives to contribute to improved purchased
product and service specifications. There is a lack of open discourse with
suppliers. But companies underestimate the importance of TCO at their
own peril. The higher the follow-up costs relative to the cost of
acquisition, the more important the TCO concept becomes. In the
engineered products industry, follow-up costs average out at more than
100 percent of the cost of buying a machine in the first place. In some
areas, these post-deployment costs actually exceed the initial purchase
price many times over.
There are good reasons why TCO remains a challenge for most
companies. Procurement departments focus on the purchasing budget. But
the purchasing budget is burdened only by the cost of acquisition. Follow-
up costs are charged for, and paid by, other cost centers. In many cases,
they are not even carried as a separate item. Since buyers are required to
optimize their budgets, the obvious thing for them to do is to minimize the
initial cost of acquisition. Little or no account is taken of any costs that
might be incurred once the good or service has been paid for. For TCO to
be successful, the purchasing organization has to rethink and re-engineer
its entire way of doing business. Additionally, a successful TCO approach
must draw heavily on non-purchasing resources (the prescriber–user–
buyer triangle). Companies tend to underestimate how many resources
will be necessary. This creates bottlenecks when the TCO approach is
deployed. (See Text box 6.1 for further information on the critical role of
TCO for purchasing.)
Companies have warmly embraced performance measurements. But
measuring and managing purchasing performance has become increasingly
sophisticated over the past years and remains a challenge. The multi-
plication of relevant indicators for purchasing performance, beyond pure
unit cost, creates additional complexity for companies. While unit price can
be relatively easy to measure, purchasing and general management have a
hard time identifying and implementing the measurement of new, more
qualitative or complex indicators such as the quality and durability of the
relationship with suppliers or the TCO. How should TCO be measured, for
instance, before the product lifetime is actually finished? Moreover, the
increasing volatility of prices, upward-oriented market trends, and the
increasing diversity of stakeholder needs make it increasingly difficult to
define an acceptable quantitative measure for purchasing performance. The
additional debate on actual profit-and-loss and balance sheet impact
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resulting from any purchasing effort is far from being solved. Companies
that want to keep up to speed with these developments in the long term have
their work cut out for them.
Information knowledge and storage presents a similar challenge. While
access to data has improved, companies must now learn how to obtain
acceptable and reliable purchasing information at a lower cost and with
less effort. They also need to find ways of storing complete, clean and
quality data, as well as gain a better understanding of suppliers’ costs and
margins. Necessary tools and the underlying data for them are becoming
increasingly complex as the number of parts and components increases.
This complexity switches to an even higher level as the number of regions
from which those parts and component can be sourced also increases.
Supplier data must be brought together in a way that allows companies to
minimize the time required for conducting supplier research and looking
for contact information.
Catalog consultation must also be made more accessible, in order to
reduce time and lower the risk of error. Economic data, whether it be
tactical (prices of goods, suppliers agreements) or strategic (suppliers’
costs and margins), must be tracked in a way that allows buyers to
concentrate on their jobs and not have their attention diverted elsewhere.
The massive deployment of ERP (Enterprise Resource Planning) systems
and e-enabled tools has assisted companies a great deal over the past few
years, but generally the investment has been massive. Worse still, current
systems still manage to cause frustration because of their inability to keep
up with the increasing speed and complexity of business life. They also
fail to provide sufficient reactivity and transparency.
New challenges
In addition to these current challenges, a number of new tests are also
emerging as the purchasing environment evolves. These especially affect
large multinational companies. When designing purchasing plans that
span several years, it is imperative for companies to anticipate major
business developments and calculate these in. Some of the trends or
challenges have been around for a while; the importance of other trends is
only just beginning to emerge. Figure 6.3 illustrates the top challenges that
will affect companies over the next decade.
Clearly, the recent acceleration of globalization has caused consider-
able change in the business landscape. Purchasing, as it expands its
strategic role within companies, bears the full brunt of this acceleration.
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Each of the new challenges or trends can be traced back to the growing
role globalization plays in the world economy. The challenge this creates
for purchasing will continue, and even become greater in the medium term
as the imbalance between EU-15 and emerging countries such as China
and India becomes increasingly less pronounced. Certainly, new
territories have appeared from which western companies can source.
These span mature emerging countries such as China, India, and Eastern
Europe, as well as countries in Africa. At the same time, ironically, world
trade is becoming more and more regional, and new trade barriers are
sprouting up between regions.
Globalization also affects the structure of supplier networks. Increasingly
more suppliers and sub-suppliers are involved in the value chain. A com-
plicated network of supplier relationships is commonplace these days.
Making the situation more complicated is the inter-dependent relationship
that has developed between suppliers and companies. Increasingly, compa-
nies are keen to involve suppliers, and this trend shows no signs of abating.
While managing supplier relationships is not a new issue, thinking about
how it will develop in coming years should preoccupy companies’ thoughts.
A further challenge that companies must address is the strain on natural
resources caused by rapid economic growth. As emerging countries
develop, and mature markets fail to curb their dependency on natural
resources, the cost of raw materials and energy explodes. In some cases,
Transportationcongestion
Stricter regulatoryenvironment
Strain on naturalresources/upwards pricetrends ofcommodities
Dominance oflow-cost countries
Complexity ofsupplier networks
Contemporaryand futurechallenges
Figure 6.3 Challenges that are reshaping purchasing
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shortages even occur. Although the direction of the price development is
fairly certain, it is unclear how strongly prices for natural resources will
develop in the medium term.
The business environment is regulated to a degree not previously seen.
Governments and inter-governmental agencies expect a degree of
accountability from companies that is certainly challenging. Companies
have to invest resources to ensure compliance, which contributes to price
and cost increases. Upcoming regulations such as REACH (Registration,
Evaluation and Authorization of Chemicals), a framework for the
regulation of chemicals in the European Union, create new constraints,
not to mention greenhouse-gas reduction.
Transport issues are a further challenge. While EU roads are becoming
less congested, sea transport has become easier thanks to containers, and
improvements are being made – albeit slowly – in rail transport, moving
goods from one place to another will continue to keep purchasing
departments on their toes. Transportation is a volatile industry riddled
with heavy competition, tight capacity, and soaring fuel prices. Choosing
transportation service providers requires an understanding of market
dynamics across multiple modes, services and across thousands of
domestic and international routes. It also offers companies an area of
opportunity for significant savings.
Spotlight on two major trends
We are now going to turn the lens slightly and focus on two trends or
challenges with which companies, currently, are especially preoccupied.
Companies very often turn to consultancies for help with dealing with
low-cost country sourcing, and to manage supplier relationships. Low-cost
country sourcing raises strategic issues and requires a deep understanding of
the competitiveness from sources in emerging countries and how compa-
nies can leverage them while mastering the challenges of remoteness and
consistency of quality. The second issue, supplier relationships, adds a new
complexity to purchasing as it moves beyond internal cross-functional work.
The main concern here is how companies can involve an external party that
probably has interests that do not perfectly dovetail with their own.
Low-cost country (LCC) sourcing took off in the 1990s and has grown
exponentially since then. While sourcing in LCCs makes the supply chain
longer and more complex, it is a business reality for most manufacturing
companies today. But generally there is more talk than action. Here, we
wish to pay attention to how companies can achieve LCC sourcing on a
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large scale and not merely pursue it as a fashionable accessory to their
sourcing strategy.
There are few symbols as powerful as China’s 2001 entry into the World
Trade Organization for the role LCC sourcing plays in today’s global
economy. China’s admission to the WTO provided many companies with
their first opportunity to test the LCC sourcing waters. Barriers to trade in
other countries in the region have also collapsed, releasing a wave of
procurement from these areas, too. GDP growth in most LCCs has
outstripped western countries, as it has soared at a double-digit pace over
the past 15 years.
China is the powerful new force of the LCC sourcing revolution.
Companies that dare not source from this country risk exposing themselves
to harsh criticism from financial analysts and other stakeholders. Although
companies are quick to advertise their expanding involvement in China,
most companies actually source only a small portion of purchasing
requirements from this LCC heavyweight. Sourcing is limited to compo-
nents with the least value-added. As economic pressure and competitive
dynamics increase, companies will progressively feel forced to do more
business there and in other LCCs, even if they are not entirely comfortable
with this development.
What is the best way for companies to tackle this large step? How can
they shift from their ‘keeping up with fashion’ sourcing strategy (less
than 5 percent of sourcing spend) to adopting large-scale operations in
LCCs? Given the immense pressure to source from China, companies
should take the time to consider whether China is the most suitable place
for their company to conduct this sort of business. Each LCC has its own
set of advantages and disadvantages. It is important for companies to
realize that significant differences exist in the various alternative
markets. Different countries will best suit the particular sourcing needs
of different companies.
Companies that choose to LCC source on a large-scale need to realize
that this is a different ball game from the one in which they might be used
to dabbling in these countries. Coordinating operations takes relatively
little effort and entails minimal risk when ‘only’ 5 percent of a company’s
spend is at stake. Gaining access to commodities that are labor and
material intensive – meaning those that require no sophisticated imported
machinery – is generally the top priority of companies involved in low-
intensity LCC sourcing. This makes it relatively easy for companies to
change suppliers if the objectives are not met.
Companies that want to jack up the intensity of their sourcing from
LCCs either have to purchase a larger number of commodities, or buy
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commodities that are module- or system-oriented or, alternatively, have
key modules/systems with complex know-how requirements. When such
complex components and parts are involved in LCC sourcing, their value
and contribution to the final product is higher, and quality becomes even
more critical. New, stronger organizations and processes are needed to
manage these operations and the supply chain. Forerunners in LCC
sourcing have noted that the local environment (legal, business, cultural)
and extended distances make it difficult to control the output of the
whole process. If quality control is not adequately addressed, sourcing
projects are almost guaranteed to fail. As recent legal cases attest, the
compulsory joint venture structure in China is not as risk free as people
would like to believe.
There are six success factors that companies should keep in mind when
embarking on their LCC sourcing adventure:
• They should ensure that top management is behind the global sourcing
initiative
• They should set up a clear sourcing process and a high-level cross-
functional team
• Companies need to focus on the most promising countries and
commodities
• It is important to ensure quick wins to keep momentum high during a
long process
• It is a good idea to set up and continuously enhance a regional sourcing
presence
• Companies need to ensure proactive development of a local supply base.
Considering the extra hurdles that arise when sourcing from China, it is
valid for companies to ask whether sourcing from China is the ideal
strategy. While China definitely has a great deal of potential – and quality,
reliability and price are likely to improve in leaps and bounds over the
coming years – its basic industrial system has to be overhauled completely
before it meets the requirements of manufacturers when it comes to large-
scale and complex-goods sourcing. It needs to be said, however, that
China’s infrastructure, aided by strong governmental support, is far more
advanced that some other low-cost countries in the region.
With so much attention paid to China, many other countries are
unfortunately overlooked. For companies brave enough to venture out in
their own direction, some of these other countries could potentially offer
much more attractive sourcing opportunities and yield greater spoils.
When drawing up a list of possible supply markets, companies must
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carefully analyze the benefits and risks of each region for a particular
sourcing commodity. The main pitfalls are well known. Some additional
important aspects that need to be considered are distance from plants
(transportation costs are often underestimated), bilateral trade agreements,
and the currencies involved in transactions.
Bearing these factors in mind, European companies would be wise to
give greater priority to three low-cost sourcing regions closer to home:
Central and Eastern Europe (CEE), the Middle East, and Africa. Near-
sourcing is experiencing a renaissance as companies attempt to keep costs
low by manufacturing and procuring goods and services close to their
consumer market. Familiarity with the regions is certainly one argument
for this renewal of interest, but another is the increased ability for
companies to link forecasting and production more effectively. Some of
the benefits of sourcing in CEE, the Middle East, and Africa are listed in
Figure 6.4.
CEE is emerging as an excellent alternative to China for LCC sourcing,
especially for European companies. Language barriers are lower and
century-long business and cultural ties, although being neglected for some
decades, have been relatively easy to re-establish. Austria was especially
quick off the mark to start reigniting old networks with countries in this
region. Many countries in CEE will become members of the Euro-zone
over the next couple of years, which means that currency risk will be non-
existent and there will be no need for spend to cover currency positions.
While labor rates in CEE might not be as low as in emerging Asian
markets, transportation distances to other European countries are much
shorter. CEE countries look back on a strong industrial tradition. They
Cost• Similar competitiveness on low wages to Asia• Reduces transportation costs
1
Service• Geographical proximity reduces delivery times and increases flexibility• Cultural fit greater than with Asia
2
3
Cost
ServiceQuality
1
23Quality• Consistency and reliability (especially in CEE) due to long industrial history• Proximity enables greater response and closes ‘loop-back’
Figure 6.4 Some of the benefits of sourcing in CEE, the Middle East, andNorth Africa
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also have a highly educated workforce that is fluent in various languages.
This makes it a good choice for higher value-added sourcing. China, by
contrast, is just beginning to enter this production territory and it will be
some years yet before it reaches a comparable level. Many car
manufacturers in Europe already source complex parts in the Czech
Republic, Slovakia or Romania. This makes sense, especially because
many have set up their own operations there. But Poland and Hungary
have also established themselves as successful choices. Companies, lured
by even lower labor costs, are beginning to look further afield into
Ukraine, Bulgaria and Russia.
Setting up operations or finding a supplier for value-added products in
Africa and the Middle East might be more difficult than in CEE, but cost
advantages might offset this issue. While the Middle East and Africa lack
the sort of industrial tradition that characterizes CEE, several countries in
those regions have a qualified workforce and are taking steps to
modernize their infrastructure. Production standards are improving
dramatically in Africa. And, while the level of infrastructure varies
significantly from region to region in this huge continent, advancements
are being seen. Many countries have entered a second industrial phase,
with a focus on value-added products in several industries. Whereas the
US$ dominates many regions in the world, the Euro is considered an
acceptable trade currency in the Middle East and Africa.
There is a compelling case for companies to consider the wider
outskirts of Europe for their large-scale sourcing. Countries that are
geographically nearer Europe are somewhat more costly than their Asian
counterparts, but also more reliable. Considering the shorter transporta-
tion distances, companies can respond more quickly to developments and
thus provide better service to the companies they serve. We recommend
that sourcing initiatives be restricted to a few markets only. That way,
companies can reach critical size while limiting complexity and overhead
costs.
Supplier relationships
Western companies can gain a strong competitive advantage by building
smarter relationships with their suppliers around the world. Collaboration
with suppliers is one of the hottest trends in purchasing to date.
Partnerships and alliances with suppliers can take two different forms,
depending on the technological intensity of the industry, and how critical
an issue quality is.
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A first kind of collaboration is the co-development of products. The
reason for engaging in this sort of relationship is to improve the innovation
process. Both parties seek to better leverage their respective technical,
human, and financial assets from the alliance. Many industrial companies –
such as car manufacturers (on interior trimming, for example) or aircraft
manufacturers (on instrumentation or engines) – engage their suppliers in
co-development relationships. These require the supplier to take full res-
ponsibility for the design, manufacture and warranty of their supplied parts.
By initiating a co-development project, a downstream company is able to
influence the characteristics of the equipment, and the timing of its market
entry. The upstream company benefits from the buyer’s engineering
capability. Its technological know-how also increases. As both partners
bring their knowledge and capabilities to a co-development project, growing
interdependence is a common sign of success in this relationship model.
A second kind of collaboration between upstream and downstream
companies is supplier development, which aims at improving the supplier’s
performance on cost, quality, and delivery timing and reliability. It is a win–
win relationship that benefits the two parties. Suppliers perform better and
companies get the quality and delivery times they want. Although measuring
supplier performance has been on the agenda for decades, studies continue
to show that companies only continue to measure the performance of
suppliers during the supplier selection phase and for special projects. This is
not a sustainable strategy and will not result in supplier improvement.
Companies and suppliers could gain much more from these sorts of
relationships. Companies should evaluate the performance of suppliers based
on clearly defined processes and formal feedback, or they might introduce a
quality certification program that leads to the number of inspections being
reduced. Another common practice among forerunners includes company
representatives visiting suppliers on site to help them improve their processes
or, alternatively, inviting suppliers to a client’s site in order to observe the use
of their products. Best-in-class companies also recognize strong supplier
performance by using an awards format or staff training.
Although the majority of OEMs have already implemented these sorts
of supplier development activities, fewer than 50 percent of supplier
development programs have achieved the targets initially agreed. Results
have been ‘at or below’ expectations, according to a benchmarking study
Roland Berger conducted among major car manufacturers and aerospace
companies.
How, then, can companies truly enhance purchasing performance with
supplier development programs? The steps taken by the best players in the
automotive industry, especially Japanese automotive manufacturers, are
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instructive. They share a long-term commitment with their suppliers to
improve each other’s capabilities: the objective of this commitment being to
lower costs and raise overall performance. The philosophy behind this
approach is based on cost transparency and deep technical cooperation, as well
as continuous improvement. For the car manufacturers, it results in acquisition
costs15 to30percent lowercomparedwith thoseofaclassicalbiddingprocess.
This is due to higher supplier productivity, less re-engineering of products
over their lifecycle, smaller purchasing structures for the car manufacturers,
and lower warranty costs. The relationship also brings benefits for suppliers.
The supplier earns a reasonable, fully agreed-on margin, as well as stable
volumes. This is no small thing considering the difficult situation in which
many parts suppliers have found themselves in recent years.
Such a close cooperation requires a joint process that is well coordinated.
Once the costs of the suppliers are known, the car manufacturers help
suppliers generate a manufacturing development plan, which aims at both
decreasing cost and improving quality. It varies in its scope and depth
depending on the supplier’s process maturity. Objectives and key perfor-
mance indicators (KPIs) are set based on industry benchmarks and the car
manufacturer’s experience of best practices.
Key success factors for this approach are long-term relationships (for
example, through cross-investment) and joint teams; qualitative data, and
a transparency pledge on breakdowns of cost; development and training of
staff at all levels of the organizations; and organization alignment on all
aspects. Although this approach is relevant for all industries that purchase
manufactured parts and components, for cultural reasons it might be hard
to implement. Cultural sensitivity is required, especially in companies
with supplier networks that span several companies. To retain employees,
companies should be particularly careful when designing objectives, and
compensation and performance indicators.
How it works in practice: examining trends to develop along-term plan
Increasingly, companies are turning to consultancy firms to design long-
term purchasing plans that span several years, in order to take into account
expected purchasing trends. Roland Berger recently assisted a major global
steel player to develop and formalize its five-year strategic purchasing plan.
The company was obviously concerned about rising energy and raw
material costs, but there was also a more general and unspecified unease
with the fast pace of changes occurring within the purchasing world.
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The project team developed a ‘white book’ that detailed the major
relevant economical, political, and environmental changes that could be
anticipated over the next ten years, and which could impact supplier
markets and purchasing strategies. This white book provided fact-based
insights on energy price trends, regulatory changes impacting future costs,
development trends of emerging countries (including their economical
potential), political stability, as well as potential capacity shortages on key
markets such as ore, transportation, and strategic production equipment.
The white book was used to stimulate discussion during the initial
brainstorming process. This process marked the moment when the
company started to develop a purchasing strategy.
In a second work module, the project team completed a comprehensive
benchmarking exercise of major corporations in various sectors. This helped
the team identify and document what leaders in the various industries
considered good purchasing practices. It also helped the company to see
what their peers were doing to tackle up-and-coming challenges and to
prepare for the future. In a next step, face-to-face interviews were held
between our client and these benchmarked companies. Information was
exchanged openly.
The project team also completely reviewed the needs of internal users
to anticipate changes in the specifications of future purchased goods and
services resulting from programmed production process and product
changes, but also from probable technology changes.
Structured workshops involving key internal users, prescribers, and
purchasing commodity managers were then organized. During these
workshops, formatted five-year purchasing plans were developed for each
commodity. By integrating experts into these discussions, the purchasing
plans were based on extremely thorough knowledge of supplier markets
and the forecast evolution of internal needs.
This various information was used to develop a five-year purchasing plan
that summarized all strategies. Based on optimizing the TCO of this
company’s purchased value, and a comprehensive risk management plan, a
substantiated and quantified target of several hundred million Euros was
agreed upon. This plan has become an integral part of the company strategy.
Purchasing can now be managed better, both in the short and long term.
Outlook
The days of simplistic purchasing strategies built on pure sourcing
exercises and volume leveraging are gone. But, far too often, companies
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Textbox 6.1
TCO approaches – underestimate at your own peril
Simply stated, TCO (total cost of ownership) is a methodology for
understanding the combined effects of first-time costs of equipment
acquisition (whether leased or purchased) and the lifecycle costs
(deployment, operation, support, and retirement) associated with
operating the equipment. It provides companies with the true cost of
doing business with a particular supplier for a particular good or service.
There is a real opportunity to further exploit TCO in all industries.
Getting this right is critical for long-term success. The benefits of
introducing the approach far outweigh the costs and difficulties.
Companies that make full use of TCO are showered with numerous
benefits which are closely related with and feed into one another,
creating synergistic effects. These include improved supplier
performance measurement, improved purchasing decision making,
improved internal and external communication, and better under-
standing of purchased goods and services.
The overarching benefit of TCO is that it becomes a reference point
for checking how matters are developing. It is an excellent tool for
benchmarking,and thusoffersasolid frameworkforevaluatingsuppliers
as well as a clear-cut means to measure quality improvement. It improves
purchasing as it forces staff to quantify trade-offs. Reliable data makes
decisions on supplier selection easier and more informed. TCO provides
data for trend analysis on costs, excellent data for comparing supplier
performance and for negotiations, and provides critical data for target
pricing. In addition, the long-term nature of TCO focuses the entire team
on the big picture and helps them recognize non-price factors.
Despite its advantages, relatively few companies use a TCO
approach. Special skills and a specific mandate are required for the
successful introduction of TCO into a company. It requires a major
change in purchasing resources, both quantitatively (in the sense of
resources), and qualitatively (the experience and educational level of
purchasing staff). The license to operate, by which we mean the
ability to enforce supplier or specification changes, also requires
significant reinforcement. Two last points need mentioning. No
company can rely on TCO alone – traditional levers need to be
applied in parallel. Finally, while collaborative approaches work,
these partnerships are never easy or comfortable.
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act immaturely when addressing the issue of purchasing strategy. They
embrace ‘trendy’ approaches, such as LCC sourcing, before thoroughly
assessing them and grossly underestimate, or even ignore, TCO
approaches. No company that lacks a fully-fledged purchasing plan
with a real strategic perspective can claim to have mastered purchasing.
Purchasing functions that claim otherwise can expect to have their role as
a main contributor to company strategy put in question. The challenges for
purchasing are real, and evolving at an unprecedented pace. Long-term
strategic plans that are flexible enough to adapt to these trends are a
prerequisite for purchasing excellence.
Further reading
Roland Berger Strategy Consultants (2006) ‘Best Practices in Low-cost
Country Sourcing’. Stuttgart.
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CHAPTER 7
Purchasing EmPowerment: the wayto achieve world-class purchasing
Roland Schwientek
Introduction
Purchasing has grown considerably in stature in past decades. Its
contribution to an organization’s long-term success and strategy is
increasingly well recognized. Increasingly more companies are aware of
the importance of permitting purchasing to move away from being a cost-
cutting function to becoming a strategic entity that helps companies
achieve the highest performance standards.
Roland Berger’s comprehensive approach, ‘Purchasing EmPowerment’
(PEP), helps purchasing to reach performance excellence. PEP moves
beyond cost cutting, which is usually short-term in nature and focuses on
specific actions or commodities within a distinct project, and hones in on
long-term sustainable improvements along the process chain. In this
strategic approach, the focus is on overall costs and company value.
Procurement influences more than 50 percent of a company’s total cash
cost: depending on the industry and project aims, PEP can achieve savings
up to 70 percent of important commodity or category groups.
For purchasing organizations to become first class, they need to estimate
their current performance carefully. Development potential should be based
on benchmarks to own and similar industries, competitors, and suppliers, as
well as from internal resources. Although the prospect can be daunting, this
enables a company to gauge its performance gaps. Only once this has been
accomplished can a company develop an individually tailored, step-by-step
plan for purchasing that charts out the optimal elements for reaching the
desired goal.
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Important steps along that path are the improvement of commodity
groups, structure and processes, and working with suppliers. When
assessing companies, project teams consider how much they spend on
commodities, suppliers, and resources. This assessment can be carried out
on a company, regional or divisional level. To gain a comprehensive view,
an external assessment covering internal customers, external suppliers,
competitor benchmarks, and additional stakeholders is conducted. This
knowledge provides clues about the opportunities available to companies’
purchasing departments, and their impact.
The initial step – managing commodities strategically – focuses on unit
costs. Here, purchasing levers are examined to see whether they can be used in
conjunction with a particular commodity for performance gains. The second
step – optimizing purchasing organization processes – deals with process
costs. It puts organizations in good stead by making processes leaner,
establishing purchasing as an organizational function, making information
transparent, and training as well as motivating staff. The final step – managing
suppliers – deals with the entire value chain. Strategic supplier management
improves the supply chain in both quantitative and qualitative terms.
Companies that work through all three steps tend to be more competitive
than their counterparts. This article examines all three phases in detail.
Project examples are given to illustrate how the changes can be implemented
in real-life business situations and the benefits those changes can bring.
Strategic commodity management – 6-lever approachto optimizing costs
Although the status of purchasing has increased in past years, all too often
other functions underestimate what it can achieve. If purchasing con-
sistently pushed through large cost-saving programs and communicated
its achievements in driving down the cost base, its standing would
improve. Numbers speak the clearest language in the business world.
One of the most successful ways purchasing can reduce costs is by properly
managing commodities. Strategic commodity management is simply about
finding the most relevant purchasing strategy for important goods. It is about
applying a tailored set of differentiated procurement levers to commodities in
the right sequence at the right time in order to reduce total cost.
To accomplish this, companies need to assess their sourcing behavior
by segmenting the vast array of commodity groups within the portfolio.
Each commodity or category is then assessed in terms of business impact
and supply market challenge, and is placed in a matrix. Business impact is
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determined by factors such as expenditure, and demands on product and
process quality. Supply market challenge is determined by factors such as
how many players are accessible, and what cost structures are encountered
via suppliers. Each quadrant in the matrix represents a distinct sourcing
strategy: leverage, manage, simplify, and secure. These are depicted in
Figure 7.1.
If a commodity or category is characterized by a restricted supplier
market but has a high acquisition volume – as would be the case for
electricity in the aluminum industry – the commodity falls into the
‘manage’ quadrant. A commodity group such as packaging material –
with its small acquisition volume, plentiful supply sources, and restricted
business risk – would probably be found in the ‘simplify’ quadrant. For
each strategy, there are six broad clusters of levers that can activate the
right developments. These levers, which are shown in Figure 7.2, are
clustered into price optimization, quantity leverage, process redesign,
technical improvement, supplier integration, and functional adjustment.
Price optimization
The potential for making significant savings when it comes to purchasing
goods and services is commonly underestimated. Companies make this
mistake at their own peril. Since improved procurement can bring savings
of up to 70 percent, purchasing plays a vastly important role in boosting
the bottom line. Purchasing has a number of commercial levers at its
HighLow
MANAGE
SIMPLIFY SECURE
LEVERAGE
• Available supplier base• Suppliers’ bargaining power• Buyers’ leverage
• Expenditure
• Impact on profitability and operations
• Impact on quality
• Impact on customer satisfaction
• Time sensitivity
• Collaboration requirements
• Etc.
HighBUSINESSIMPACT
SUPPLYMARKET
CHALLENGE
Low
Spend volume[EUR m]
• Raw material availability• Price development• Etc.
Figure 7.1 Each commodity/category is strategically assessed in terms ofbusiness impact and supply market challenge
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disposal. The trick is to use them optimally for specific commodities. All
levers in this cluster generate savings by focusing on price. It might be the
case that looking closely at company prices at different locations brings
about a moment of truth about best-price evaluation. Perhaps aggressively
pulling the fixed-price contracts lever will do the trick.
Low-cost country sourcing is another lever. Companies need to ask
themselves whether this much-lauded lever, which is also full of pitfalls
and hurdles, will really activate the cost savings they want. Companies
should have plenty of resources at their disposal – and patience – before
pulling this lever. One of Europe’s largest university clinics decided to
concentrate its efforts on global sourcing activities. Commodity groups
were assessed to see if reasonable sources existed in low-cost countries.
The long list of countries that emerged was shortened by checking them
against a series of criteria specific to clinics such as import regulations,
technical clearance, and so forth. From this short list, five suppliers were
selected, which were built up during a two-year development program.
The low-cost sourcing lever does not bring quick wins.
Quantity leverage
The second cluster of levers – quantity leverage – also plays an important
role in optimizing sourcing costs: scale effects can be generated by
increasing volumes by a certain amount in order to determine prices. This
6
PRICE OPTIMIZATION
STRATEGICLEVER
MIX SET-UP
PROCESS REDESIGNTECHNICAL IMPROVEMENT
FUNCTIONAL ADJUSTMENT
• Focus on process optimization/change management
• Focus on demand management
• Focus on price reduction
• Focus on value chain configuration
• Focus on specifications/ concept changes
4
1
2
3
QUANTITY LEVERAGESUPPLIERINTEGRATION• Focus on close collaboration with suppliers
5
Figure 7.2 The right mix of levers is key to finding the correct sourcingstrategy for each strategic commodity/category field
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lever can be used to ensure that a certain volume is ordered or taken up in
purchasing cooperations. Volume effects are not only achieved by pooling
suppliers, but also by compiling a systematic compendium of requirements.
Bundling volumes internally (for instance, subsidiaries within a group) and
beyond the company (purchasing cooperations from independent compa-
nies) can bring significant savings potential. This potential is rarely tapped.
When it is exploited, it is only undertaken in a half-hearted fashion.
Companies are missing out. With this lever alone, an international group
was able to attain savings of around 15 percent of the entire purchasing
volume through pooling global volumes.
A financial service company also activated this lever, and benefited
from doing so. In addition to establishing specific sourcing activities, the
company also decided to build up a third-party business. It opened up its
sourcing platform to other stand-alone financial service companies with
low sourcing volumes. These third parties obviously benefited from the
deal. For its part, the financial service company managed to gain significant
scale effects too, by expanding its purchasing volume.
Process redesign
Improving existing internal purchasing processes or redesigning them is not
the focus of these levers: redesigning the process structure of suppliers is.
Companies should ask themselves whether it makes sense to use a
middleman or trader who dents trade margins but possibly generates
volume effects that are almost unthinkable or closes attractive deals with
alternative suppliers. Or is the opposite strategy a better option? Companies
might find it preferable to have direct contacts and create internal structures
to manage them. Levers belonging to this cluster include second-tier
supplier sourcing, e-catalogs, e-sourcing, and the simplifying of accounts
by introducing automatic credit memo procedures, for instance. One
company achieved cost and quality improvements after it introduced
catalog-based sourcing for roughly 40 percent of its sourcing volume,
which was transaction-heavy but advisory weak. By pulling this lever, the
company significantly unburdened operative sourcing, improved sourcing
quality, and lifted the customer satisfaction rates of internal carriers.
Technical improvement
This cluster of levers focuses on tapping the hidden potential within
products by using consistent standardization and value-analysis programs.
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The levers cover everything from applying alternative materials, to
making finer specifications, through to purchasing modules and change
process engineering. For these levers to work, the functions, customer use
or customer value must be firmly in the foreground. Only in this way can
costs be reduced.
An automotive supplier made cost savings of more than 40 percent by
applying some of the levers in this cluster. Within the framework of a cost-
optimization project for ABS finishing, the automotive supplier put
various concepts and procedures under the microscope. Small changes
resulted in large cost effects. By adjusting the pole kernels from turning
part to beaten part, cost savings of 40 percent were achieved.
Supplier integration
Integrating suppliers starts with product development. Levers in this
cluster are aimed at enabling companies to unite the hidden creative
potential of suppliers with their own specific abilities. By joining forces,
companies can carve out a sustainable position for themselves. Concept
competitions – a truly innovative lever in this cluster – encourage
suppliers to find innovative product solutions. Companies can then use
their suppliers’ insights and knowledge to develop cutting-edge products
and solutions. Supplier financing, consignment warehousing, and vendor-
managed inventories are some of the levers found in this cluster.
A manufacturer of signal lights, for example, was able to develop a
completely new solution for commercial vehicles by using a concept
competition. One of its suppliers discovered that by using magnet valves,
vehicle roofs would no longer need to be sawed through using the old
cumbersome technology.
Functional adjustment
Companies also have a set of functional adjustment levers at their disposal.
These levers have more of a middle- to long-term impact, and usually
change a company’s value chain in some way. Make-or-buy options, in- and
outsourcing options, backward and forward integration of value chain steps,
and sale and lease back are some of the functional adjustments companies
can undertake.
A benchmarking exercise at a machinery maker, for instance, showed a
considerable tilt regarding manufacturing costs. A definite weakness was its
vertical integration at 80 percent. Following close analysis, the company
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decided to outsource the prefabrication areas of turning and punching
to specialists. Activating this lever resulted in a savings of 35 percent of
total costs.
In each of the six category fields, various levers exist to improve
operating cost performance. While some of these have been discussed, the
entire list is shown in Figure 7.3.
Specific sourcing lever categories differ on average in their profit-and-
loss (P&L) impact and implementation speed. The categories quantity
leverage, technical improvements, and functional adjustment have a high
impact on the P&L, but rank low on being quick to implement. The levers
price optimization, process redesign, and supplier integration levers rank
highly on both the implementation speed and P&L impact axis.
Optimizing purchasing organization and processes
The second step companies need to take to make purchasing reach
performance excellence is to optimize processes within the purchasing
organization and the organization itself. Roland Berger research shows
that most trading and service companies have still not properly embedded
purchasing in their organizational structures. Only a tiny share of
companies has a purchasing representative on the board or at general
management level. Equally disappointing, far too few companies have a
clear-cut organizational separation between strategic purchasing and
operational procurement.
Companies need to focus on four main areas in order to lower process
costs in a sustainable fashion: processes, organization, information, and
know-how. These four areas are depicted in Figure 7.4. Processes need to
be reshaped to make them more effective and leaner. Purchasing should be
turned into a well-functioning, cross-disciplinary, organizational function.
Information flows need to be made transparent, and employee know-how
needs to be nurtured by training and motivating staff.
Purchasing processes do not exist in isolation and are not all of equal
importance. Companies should give the highest priority to order-to-pay
processes. It is critical that these work efficiently. Companies would also
be wise to pay attention to processes that work in harmony with higher
business processes.
Positive results are almost immediate, when action is taken to improve
purchasing processes. For example, when purchasing redefines processes
between companies and sites, and clearly defines competencies and interfaces
between them, inefficiency and duplicated work is prevented. Similarly by
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d6/4
/2008
16:3
9:1
1
SUPPLIER INTEGRATION
5.1 Joint improvement program5.2 Supplier manufacturing analysis5.3 Consignment warehousing5.4 Vendor-managed inventory5.5 Supplier financing5.6 Early involvement/collaboration through product development5.7 Establish system supplier5.8 Concept competition
FUNCTIONAL ADJUSTMENT
6.1 Make option6.2 Buy option6.3 In-sourcing option6.4 Out-sourcing option6.5 Forward integration6.6 Backward integration6.7 Sale and lease back6.8 Deconstruction of the value chain
QUANTITY LEVERAGE
2.1 Volume bundling2.2 Bonus agreements2.3 Corporate supplier negotiation2.4 Multi-year contracts2.5 Lifecycle contracts2.6 Purchasing cooperation2.7 Demand management2.8 Order management (batch size)2.9 Transportation option (frequency)2.10 Working capital optimization (inventory)
TECHNICAL IMPROVEMENT
4.1 Change materials4.2 Commonization/standardization4.3 Redesign/change of specifications4.4 Value analysis/creation4.5 Technical benchmarking/DFMA4.6 Innovation analysis4.7 Modular sourcing4.8 Change process engineering
PROCESS REDESIGN
3.1 Value chain mapping3.2 Total cost of ownership3.3 Second tier sourcing3.4 Hedging3.5 Re-engineering the procurement process/reducing interfaces 3.6 Distributor3.7 Avoid middle-man3.8 e-catalogue3.9 Web EDI3.10 e-sourcing (tender, auction)
PRICE OPTIMIZATION
1.1 Best price evaluation1.2 Tendering/(re)negotiation1.3 Fixed-price contracts1.4 Cost breakdown/cost disclosure1.5 In-house costing/activity-based costing1.6 Best-of-benchmarking1.7 Linear performance pricing/Cost regression analysis1.8 Target pricing1.9 Global/LCC sourcing1.10 Payment terms (accounts payable)
1 2 3
4 5 6
Figure 7.3 There are more than 50 sourcing levers for improving operating cost performance
12
1
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defining the roles and competencies of lead buyers and decentralized buyers,
companies benefit from more efficient strategic and operative purchasing.
Companies will also notice that when the innovation process is reorganized,
purchasing is involved early on and has a say on costs. This is a far cry from
business environments in which purchasing works reactively.
It is not enough to reshape processes; the purchasing organization as a
whole needs to be remodeled. Developing an optimal purchasing organiza-
tion takes time and should be tackled in a clearly structured manner. First, the
purchasing organization should be analyzed by commodity. While the
criteria for analyzing commodities are handpicked to suit specific customers,
common criteria include global sourcing, organizational structure, buyer
skills, and performance measurement. The next step is to draw up
organizational options, keeping individual commodity requirements in
mind. The individual commodity options are used as the basis for finding the
optimal purchasing organization. Finally, an implementation plan needs to be
hammered out, then coordinated, and followed through.
Specific actions to improve how purchasing is organized bring instant
results. By introducing new group-wide lead buyers and clearly defining
their role within the organization, purchasing becomes more transparent,
and is capable of combining decentralized competencies and centralized
coordination. It also assists companies to fill purchasing and other
positions. Synergies are optimized in purchasing when the level of coor-
dination per commodity is made transparent. To improve its organiza-
tional structure, one of the world’s largest automotive groups redesigned
its entire procurement department to make sure that all of its brands have
identical structures and reporting lines.
Well trained and motivated Information totally transparent
New and lean Establish purchasing as function
Processes Organization
Staff/know-how sharing Information
Purchasingorganization and
process optimization
Figure 7.4 Companies need to focus on four areas to lower process costs –processes, organization, information, and know-how sharing
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Purchasing needs to keep abreast of technological and IT changes to
ensure that processes and the organization are well-managed and efficient.
Costs can explode if purchasing uses outdated or inappropriate information
systems. A common information platform integrates all market, supplier
commodity, sourcing, and controlling information in one source. Purchas-
ing departments lacking a group-wide IT platform or cross-business unit
procurement information system do themselves a disservice. Manually
identifying cross-business unit synergies for commodities is extremely
arduous work and is error prone. No transparency exists for optimizing the
supply base across business units. Today, purchasing has numerous IT
systems from which to choose. An effective e-procurement platform
connects authorized buyers, internal databases, and suitable suppliers.
It is essential for companies to introduce consistent commodity codes
and a supplier code structure across business units that are integrated in
the chosen IT system or systems. These must be designed in such a way
that new commodities can be easily integrated into the system. These
standardized structures enable companies to report purchasing activities
and track performance results more efficiently. Without these codes and
structures, a lack of data transparency ensues and identifying bundling
opportunities for common suppliers is almost impossible because the
manual effort required for data aggregation is significant and demotivates
staff. It is not enough to introduce these standardized codes and structures;
with the help of these instruments, companies need to control purchasing
throughout the entire group.
As the role of purchasing within companies evolves, the demands on
purchasing employees increase and change shape. Action to train staff and
retain know-how will become increasingly important. Simple factors,
such as increasing globalization, mean that sourcing is now done on an
international playing field. Unfortunately, members of purchasing staff
are often insufficiently qualified to complete their tasks adequately.
A lack of language skills is a considerable handicap that robs purchasing
staff of their ability to close the best deals. Companies such as IBM,
Siemens or Home Depot have reacted by setting up international
purchasing offices (IPOs). The main task of these IPOs is to give market
research input, helping them to find and select the appropriate suppliers in
target regions and manage the supplier base with locals.
Best-practice companies have endeavored, over the past years, to make
improvements in all four areas. Achieving sustainable lower process costs is
the reward of that proactive stance. Some characteristics are common to
almost all companies that have globally aligned procurement processes and
systems. They have common procurement processes, systems across
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business units and regions, and they have aligned procurement organiza-
tions globally where suitable. Keen to learn from the best – whether internal
or external – these companies also adopt best-in-class processes and
systems across business units and regions.
Then there are companies that have not only achieved this, but have also
aligned processes and systems with engineering and other global functions.
These companies have common interfaces between procurement, engineer-
ing, and R&D, as well as with other supply chain management functions.
These sorts of companies enjoy a minimized process throughput time and
cost. They, too, adopt good practices throughout their entire organization,
irrespective of region or business unit.
Renault and Nissan, following their hook-up, fall into this latter category.
A great deal could be achieved by moving away from the specific
platforms, procurement processes, and commodity structures that had been
successful at both car manufacturers to create a global, standardized
structure for their joint procurement organization. Together, they chose
global commodity classifications, global procurement processes, a global
supplier information pool, and aligned procurement interfaces.
Managing the supply base
The final step on the path to create best-practice purchasing is managing
the supplier base. Companies embark on this path with the aim of making
quantitative and qualitative improvements to the supply chain. Some
might wish to improve their time to market, or become more agile; or they
might want greater technology input or customer satisfaction; or they
might want to reduce lifecycle and process costs, and the amount of tied
capital and total cost of ownership.
The activities that a company should pursue to manage the supplier
base in such a way as to improve the entire supply chain depend on what it
has already achieved. Companies that have yet to deal with this issue
should aim to manage the supplier base more effectively. Managing the
supplier base is a continuous process of assessing and selecting suppliers.
Changes in the procurement market and in a company’s procurement
portfolio duly affect how companies should select their suppliers.
Once companies have started to manage their supplier base success-
fully, they can think about developing their suppliers and supplier base.
To develop suppliers, companies need to decide what their aims are, and
assess the feasibility of reaching those aims with their supplier base.
Developing suppliers depends heavily on a supplier’s current level of
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performance, and the strategic corporate goals of both the supplier and the
company. Strategic corporate goals are likely to be shaped by customers’
and stakeholders’ expectations, market requirement, and core competen-
cies. Performance levels can be measured using quality standards, technical
abilities, economic efficiency, and operative performance. Once goals have
been set for suppliers, they must be communicated and monitored. Compa-
nies that do this successfully are blessed with the ideal supplier fit.
The long-term goal is to integrate suppliers and share supply risk with them.
How suppliers are integrated, and the duration of that integration, depends on
their development responsibilities. Suppliers need to become part of the
development process and be integrated into ongoing business processes.
Ideally, they will play an active role in the management of the change.
Roland Berger recently completed an international study that surveyed
1,900 companies active in 14 industries. The study showed that, although
supplier management is highly important in strategic terms, it is not used
as much as it should be. Hardly any companies have created long-term
contracts with fixed cost-reduction scales. Few companies have designed
long-term purchasing plans or systematic demand consolidation. This is a
shame, especially since best-practice businesses in supplier management
have better financial and earnings ratios.
Based on the study results, and drawing on experience from working
on more than 200 procurement projects with medium-sized and large
multinational companies over the past five years, five development stages
can be identified in supplier management: ‘best practice’, ‘runner-up’,
‘base’, ‘starter’, and ‘low performer’. In the study, 9 percent of companies
were ranked as best practice, which means that they showed a consistently
high level in all three areas: managing supplier base, developing suppliers,
and integrating suppliers. Moreover, supplier integration was considered
increasingly important and was used by these companies. Runner-up
companies accounted for 25 percent – managing the supplier base was
given priority and its importance is expanding, but developing suppliers
was viewed as less important. Some 18 percent of all companies were
ranked as base, meaning that they reached a consistently moderate level in
all three areas. Companies that were ranked as starters – these accounted
for 34 percent of all companies surveyed – showed progress in managing
the supplier base and developing suppliers, but integrating suppliers
remained underdeveloped. The low performers (14 percent) achieved a
low level in all activities.
Clearly, many companies have only just started out on this journey.
Companies that are new to the supplier management path have started
to define a strategy, research the procurement market, find and audit
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suppliers, accredit suppliers and products, and update the database. These
activities are laudable, but they need to be based on a thought-through
strategy and be well coordinated. When companies manage the supplier
base in an uncoordinated fashion, they have a supplier base that lacks
strategic or volume-based prioritization, and they suffer from uncoordi-
nated supplier management functions. The opposite is true of companies
that manage the supply base well. To ensure that the supplier base is
coordinated and managed with finesse, these companies have introduced
and use supplier management, a supplier assessment system, basic tools,
and supplier communications. The success factors for each of these phases
are shown in Figure 7.5.
Companies that move beyond this phase start to develop suppliers in
addition to managing them. This calls for deriving individual performance
targets, conducting a GAP analysis, defining development action,
assisting in implementing action and controlling activities. Key instru-
ments required to develop suppliers are formal performance gap analysis,
basic tools, ad hoc performance gap analysis, and personnel and capital
transfer. A supplier development roadmap is useful for managing supplier
performance.
Companies with an integrated supplier management blur the lines
between company and supplier. These companies form long-term product
Supply base management
Manage thesupply base
Developsuppliers
Integratesuppliers
Suppliersystematics
Supplierassessment system
Basic tools
Suppliercommunication
Formal performancegap analysis
Basic tools
Ad hoc performancegap analysis
Personnel and capitaltransfer
Supplier link
Technology integration
Integrating serviceproviders/systemsuppliers/processes
Integration structures andproduct development
Figure 7.5 Success factors have been identified in three areas of supplybase management
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development and manufacturing processes in which their suppliers are
heavily integrated from the very beginning. To pull this off, supplier
strategies are needed that contain performance review and evaluation
procedures, as well as procurement volume goals. Instruments to attain
this goal include supplier link, technology integration, combining service
providers and system suppliers, linking structures, integrating product
development, and creating processes in tandem. Companies that develop
strategic vendors and partnerships have fully optimized their supplier
base. In these cases, vendor development and integration occurs within
product development and manufacturing processes. When this level is
reached, companies enjoy optimum supply leverage. Purchasing in these
companies fully uses and exploits supplier capabilities. It also optimizes
and combines own and supplier value chains.
Best-in-class on a global scale
Intensified global competition forces companies to make their procurement
organization as global as possible. But leading industrial manufacturers face
a number of challenges as they attempt to leverage their global volumes and
supply base to maximize benefits. The strategies the best-in-class
companies have chosen to combat these challenges are instructive for all
companies that wish to improve the performance of purchasing.
Communication
The first challenge is how to align communication. Best-in-class
companies achieve this by establishing common commodity coding,
introducing a common IT/information platform to support global
interaction between business units, and harmonizing worldwide organiza-
tional structures and responsibilities to leverage synergies. These are
flexible enough to allow for the addition of new commodities.
e-Procurement
The second challenge is how to reap the benefits of e-Procurement. Here,
leading companies establish e-Procurement platforms to optimize interac-
tion with key suppliers. They also unite selected alliance hubs and
exchanges to reduce commodity procurement process cost, and introduce
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web-based procurement processes to reduce throughput time and cost. Best-
in-class manufacturers utilize e-procurement efficiencies on three levels by:
• They unite hubs and exchanges. They achieve this by choosing
exchanges for immediate access to a large supplier base with a focus on
raw materials and maintenance, repair and overhaul (MRO). They also
join alliance hubs for industry-specific commodities and joint product
development.
• They implement a captive e-procurement platform. This enables them
to integrate sourcing from request for quotation (RFQ) to order
execution and to integrate all procurement data with Enterprise
Resource Planning ERP and other back-office functions.
• They introduce and globally align web-based procurement processes.
Here, they predefine procurement requirements and search preselected
online supplier catalogs, automate order execution and receive products at
point of use, and automate billing and controlling functions. Despite the
benefits, Internet and B-2-B solutions are only being introduced slowly.
Synergies
The third challenge is how to realize synergies. To achieve this companies
have introduced global lead functions for commodities or commodity
groups across all business units or divisions. They have clearly defined
locally and globally purchased products and have implemented a step-by-
step system. These actions help them to monitor and control savings.
Here, too, there are various levels of synergies that can be attained through
global commodity leadership:
• The bottom level of the rung is business autonomy with a periodic
coordination via commodity strategies
• The next level is global commodity leadership across all business units
for all commodities
• The final level is a globalization level that is individually designed per
commodity or commodity group.
At the world’s largest maker of earth-moving equipment, synergies are
realized by combining division specific and company-wide commodity
leadership. Europe’s biggest engineering company, on the other hand,
realizes commodity synergies through different levels of global commodity
leadership across business units or regions.
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Lean global decision-making processes
The fourth challenge is how to create global decision-making processes that
remain lean. This can be especially tricky as local procurement struggles
with central procurement. To ensure effective decision-making processes,
companies have installed global procurement committees on the executive
level. Executives from business units and different functions – such as R&D
and manufacturing – are integrated into those committees. The lens is
focused on strategic and high-level operational tasks. At one of the world’s
leading computer software companies, decision-making is handled by a
procurement council, which is chaired by a global procurement vice
president. Since the role of the procurement executive council is clearly
defined, a sense of fairness is established. They regularly review
commodity strategies developed by global commodity councils, and they
aggregate information from supplier strategies and technology roadmaps
developed by their support teams. Importantly, they take decisions on
sourcing and other procurement issues based on the recommendations of
commodity councils.
Aligning internal processes
The fifth major challenge is how to align processes internally and with
internal customers to ensure consistency during the entire lifecycle and
harmonized structures. The best companies introduce and implement
common procurement processes that achieve global coordination and
transparency. Additionally, they align procurement process interfaces
with various functions – such as engineering – to minimize throughput
time and cost. This is especially important when companies merge.
Global management of suppliers
The sixth challenge is how to manage suppliers globally. Although most
people in the business believe that global sourcing is ‘old hat’, the lion’s
share of all purchases is still made in the country where the company is
based, even in large companies. The massive savings potential offered by
global purchasing markets is tapped to a very limited extent. Global
sourcing is full of pitfalls and companies need to take care. The recent
spate of quality problems arising from suppliers from China shows how
important it is to manage suppliers, not only to ensure continued high
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brand perception, but also to make sure that a company’s pool of suppliers
is large enough in emergency situations. Companies with ideal strategic
supplier management select a preferred supplier base and initiate vendor
development and integration programs. They manage key suppliers
globally and optimize local interfaces, and they standardize supplier
management evaluation processes across business units and regions.
Outlook
As the dynamic of international business continues to increase, and global
networks are formed and expanded at breath-taking speed, purchasing is
left with no choice but to keep improving. Companies that adopted
purchasing early have long since mastered the basics and are now seeking
advanced instruments to achieve more long-lasting goals. Followers
slowly noticed the benefits and now attempt to find sourcing solutions for
their organizations. Irrespective of what a purchasing department might
have already achieved, it must constantly challenge the existing supplier
base and continually seek out innovative purchasing levers that help
improve results. Skilled workers are needed that are business savvy and
who have a deep understanding of engineering or other functional aspects.
They must also feel comfortable doing business in a global market.
Procurement departments have made huge strides. But they should not
rest on their laurels. Purchasing managers need to prove continually that
they are able to implement strategic approaches that are pro-active,
innovative, and cost-effective.
Further reading
Roland Berger Strategy Consultants (2008) ‘Purchasing Excellence –
International Benchmarking Study’. Stuttgart.
Schwientek, Roland and Franke, Tobias (2008) ‘Purchasing Excellence:
International Study of Performance Diversity in Purchasing and
Procurement’. Stuttgart: Roland Berger Strategy Consultants.
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CHAPTER 8
Organizations drive strategy andperformance: insights from twosuccessful lead buying models
Tobias Franke
Introduction
Procurement fads come and go. However, any thoughts that global
sourcing is just the latest in that growing string of purchasing fads are
misplaced. Within a short span of time, global sourcing has gained
worldwide acceptance and is now firmly implemented in most large-scale
corporations. Global sourcing is a direct response to the competitive pres-
sure experienced by companies today. It is developing into the favored
option for companies that need to reduce costs and to improve the quality
and responsiveness of their procurement. Buyers send their largest sup-
pliers to low-cost countries or set up small sourcing offices in these
regions, in the hope of gaining better access to material and labor resour-
ces or to tap the potential of a more economical market.
While this concept sounds simple in theory, putting it into practice
has often been hard. Global sourcing has placed enormous pressure on
all organizations. Companies with local and rigid hierarchical structures
have felt that pressure especially acutely. The biggest challenge for
many companies was, and remains, how to align the organizational
structure of their procurement division with the requirements of a
globalized world. In such an interconnected world, each subsidiary or
business unit needs to tap into many markets without building up
redundancies along the way.
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This tests the mettle of companies. Skilled and motivated employees
are not enough to accomplish this task. An appropriate leadership concept
is needed too. Companies increasingly introduce lead buying frameworks
that combine these two factors, in order to tap these markets in a cost-
efficient manner.
This chapter will start briefly by discussing centralized and decen-
tralized procurement organizations, the two most popular organizational
structures for many years. Following that, I discuss how lead buying
systems work. I will then discuss two companies, from different indus-
tries, that combined the advantages of both centralized and decentralized
structures to create a lead buying organization. Insights gained by these
companies – and our project team – during the project are shared here to
assist companies that might be contemplating changing their organiza-
tional structure. Project experience has shown, time and again, that this
framework puts companies in good stead in an increasingly global
business environment.
Different sorts of procurement organizations
Three basic models are used in procurement organizations: centralized
buying organizations, decentralized buying organizations, and lead buy-
ing organizations. The differences between the three models are outlined
in Figure 8.1. There are merits to all three organizational structures
and each has a role to play. All procurement departments are unique.
Companies need to consider various factors to determine which organi-
zational form best fits their needs. These factors include geographical
location, the size of company, the number of employees, the industry, and
the corporate philosophy. The three different procurement organizational
structures can be individualized to suit the specific needs of each
company.
Centralized buying
…
Cen
tral pu
rchasin
g
1
Division/ country/ site
Decentralized buying2
…
Lead buying/centrally led
A B
3
Cen
tral pu
rchasin
g
Figure 8.1 Three basic models are used in procurement organizations
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Centralized buying organizations
Centralized buying is the natural choice for every small company just
starting out, especially if it comprises only one business unit, division or
site. Some larger corporations might also have a centralized purchasing
function that is responsible for driving synergies. However, this function
is generally detached from day-to-day business on an operational level.
Putting exceptions aside, it is usually only small and medium-sized
companies that operate using this organizational model. These companies
generally centralize their purchasing in the hope of achieving synergies,
in terms of economies of scale but also with respect to improved admin-
istrative efficiency and the optimized use of resources. Sometimes com-
panies choose this model because they purchase only a few commodities
or categories of goods that seldom change.
Typically, operative tasks such as the processing of purchase requisition
and strategic tasks – such as developing systematic category strategies or
managing supplier relationships – are performed by one purchasing unit
without further specialization. As business units are mostly responsible for
budgets, the decision-making authority of centralized buying organiza-
tions is somewhat limited.
Decentralized buying organizations
When a company’s business units, divisions or sites at home or abroad
grow in number, many take the natural next step and switch from being a
centralized buying organization to becoming a decentralized one.
Decentralized buying organizations can typically be found in financial
holding companies with a low integration factor. This structure can
facilitate the purchasing or selling off of legal units. Other companies with
this structure tend to have distributed (global) sites/divisions whose
purchasing functions are at a low development stage. Here, the rationale
for switching structures is to gain full authority and independence in the
corporate units.
Decentralized buying organizations do not support decisions being
coordinated across divisions, countries or sites. This is why these sorts
of organizations often build up redundant functions. Although these
purchasing organizations often construct lean, relationship-driven, local
purchasing departments that put them close to internal customers, they
remain compartmentalized within divisions or business units. They also
do not come close to gaining the negotiation power enjoyed by centralized
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companies. They lack scale and a unified strategy, when it comes to
product and supplier selection, and negotiations.
Lead buying
Another organizational structure that is swiftly gaining in popularity is
lead buying. The basic lead buying concept has been developed for
corporations that need to coordinate spend categories, supplier strategy,
and markets without sacrificing the proximity to local requirements. For
many companies, lead buying combines the best of the centralized and
decentralized buying organizations. Typically, this organizational model
is found in companies that operate in different markets worldwide, with
different business units and many sites. When large-scale organizations
introduce the lead buying organizational framework, they are able to
strengthen their international procurement coordination and can negotiate
better prices. Instead of commodities being purchased by different people
within the company, in a lead buying organization one buyer – the lead
buyer – is designated for a defined category or commodity.
The lead buyer has the authority to conduct negotiations and to sign
contracts with suppliers. He has control over volumes that are bought from
different local suppliers. Such a buyer might be in charge of purchasing
raw materials company-wide, for instance, or for a certain product. This
sort of set-up makes it easier for suppliers too; because they have one
point of contact, they deal with one person who has clear negotiating
powers. With leadership comes accountability. The lead buyer also carries
responsibility for ensuring that he has selected the best purchasing
strategy available.
Transformation teething problems
Companies might face several barriers when they decide to make the
transition from a centralized or decentralized organization to that of lead
buying. In all transitional phases, employees experience feelings of
uncertainty, are quick to put leadership into question, and tend to harbor
uneasy feelings about how responsibility and accountability will be
redistributed. Companies can easily assuage employees’ concern by
compiling a list of questions that employees are likely to be concerned
about and directly answer them in a ready-to-distribute information sheet.
This should contain answers to the most frequently asked questions.
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Employees in decentralized organizations are accustomed to focusing
on developments at plant level, and might be dismissive of best practices
gained from other organizations. These companies should not be surprised
if their employees are not enthusiastic about introducing lead buying, and
are openly hostile to the idea of capturing cross-business synergies.
In these situations, companies need to use examples of early success to
boost acceptance of the new system, and win the support of influential
team members. To drive continuous support, compliance, and adoption of
the lead buying concept, companies should constantly communicate their
strategies, goals, and performance to the various business lines and
regions. Setting targets also indicates to employees that the change is non-
negotiable. Awarding strong performance can also be a strong motivator.
There are most definitely obstacles when setting up a lead buying
organization. However, the perseverance is well worth the effort. To show
how lead buying can help companies perform better and gain noticeable
bottom-line results, I will discuss two very different client success stories.
Lead buying in the automotive industry
The first success story stems from the automotive sector, which was one of
the first industries to adopt the lead buying concept. In the automotive
industry, original equipment manufacturers (OEMs) and their suppliers
are globalization pace setters – and they have to be. Customers in the
automotive industry are well informed, have high expectations, and can be
quite challenging: features seen in top of the range cars are also expected
to be found in entry level cars at entry level prices within one development
cycle. Finding ways to make cars both desirable and affordable is this
industry’s Holy Grail. Purchasing, in collaboration with R&D, plays a
major part in meeting this challenge.
Example: Leading buying in the automotive industry
One of the world’s largest automotive players wanted to optimize itsorganizational framework and processes, and adopt a fully integratedorganizational model. The Roland Berger team helped the company setup a lead buying purchasing organization, step-by-step, starting withsimple harmonization and increasing this gradually until purchasing asan entire entity had been transformed.
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A close look at the procurement organization and processes at theend of the 1990s revealed that synergies were not being realizedbetween business units, brands, and countries. Procurement wasdistributed throughout the organization and no overarching strategyexisted. Sites were bought without considering the scope or require-ments of other sites, and no alignment existed between various regions.The steps leading to an integrated procurement strategy are depicted inFigure 8.2.
Over time, and with increasingly more integration, the project teamwas convinced that global leverage, higher savings, efficiency andstandardization could be increased at this automotive heavyweight. Buthow could the company best achieve these goals? The project teamdecided that two things had to change immediately if the company wasto achieve its goals.
The company could no longer avoid setting up and implementing astandardized commodity code – basically, a common language fordifferent commodities. This company, one of the world’s largestautomotive players, had no consistent code structure in place acrossits multiple business units for either commodities or suppliers.It suffered from a lack of data transparency, which made it almost
Separated Harmonized Combined Integrated
Orga/ Skills
Process
SystemsKPIs
Procurement strategy
Procurement
performance
• Locations separated – no synergies
• First coordination – first synergies realized
• Launch and ramp up of organizational model – savings realization started • International locations only loosely linked
• Organization extended to international locations
Figure 8.2 Only an integrated approach to procurement ensuresoptimum impact on a company’s competitiveness
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impossible for purchasing staff to identify bundling opportunities or,even, to recognize common suppliers. The manual effort required toaggregate the data was significant and unnecessarily used up resources.
Introducing a governance model was also essential. Only by doingthis could the purchasing function assign tasks and responsibilities on acommodity level. This is a necessary first step on the path to becoming afully –integrated organizational set-up.
Establishing a common commodity code and introducing a govern-ance model are steps that are relatively easy to accomplish. There are anumber of standardized solutions for creating commodity codes and acommodity code architecture. UNSPSC and eCl@ss are just two of themany solutions on the market. Since all of these standardization systemshave their own set of advantages and drawbacks, the project teamneeded to evaluate them based on their own individual merits and fitwith the company’s specific needs as an automotive player. The systemthe project team chose to create a common language is capable ofdefining a reference system and code suppliers as well as spend data. Itis therefore sufficiently flexible to be used as the company continues todevelop. This should always be a prerequisite when selecting sucha solution.
Launching the governance model involved some preparatory work,but was relatively simple to introduce once the model was clearly laidout. First, three levels of leadership and three regions were defined forthe model, after considerable discussion with various key staff members.This matrix is depicted in Figure 8.3. The highest level of leadership and
Global commoditylead
Regional commodity lead
Local commodity autonomy
Global savings
Local savings
North America
Europe/ South America
Asia/ Pacific
I
II
III
Governancemodels
Regions
Regionalsavings
Figure 8.3 Global lead buying consists of three governance models,ensuring global and regional savings
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coordination is the global commodity lead. The commodities that fallunder the global commodity lead include robots and the IT of cuttingtools. Other commodities were assigned to a regional commodity lead –including, for example, motor test benches, elevators, and escalators.Regional commodity leads were created for the areas North America,Europe/South America, and Asia/Pacific. All commodities not assignedto either a global or regional commodity lead were assigned to ‘localcommodity autonomy’; these include such commodities as gardeningand waste disposal.
The responsibilities for the key purchasing processes in eachgovernance model were clearly defined. Moreover, it was essentialthat the roles of the global commodity leader (GCL), regionalcommodity leader (RCL) and local buyer (LB) were clearly allocated.Also, the manner in which they should interact with one another andthe individual responsibilities of each leader or buyer was strictlydefined. Sourcing decisions for commodities with global/regionalpotential are made on a global/regional basis, and approval from theGCL/RCL is required, for instance. Local buyers are responsible formanaging the interface to the internal customer and operativetransactions. The responsibilities of the leaders and buyer are shownin Figure 8.4.
I
II
III
Commodity strategy
Sourcingprocess
Transaction
Global commodity lead
Regional commodity lead
Local commodity autonomy
Responsibility of global commodity leader (GCL)
Responsibility of local buyer (LB)
Responsibility of regional commodity
leader (RCL)
Key purchasing processes
Governance models
Figure 8.4 The newly defined governance models add the regional focus
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Furthermore, the tasks and main responsibilities for the commodityleader/coordinator and local buyer were defined. In the governancemodel ‘global commodity lead’, for example, the leaders are responsiblefor developing, reviewing, and implementing global commoditystrategies. They are also responsible for approving all major sourcingdecisions, and are held accountable for commodity results. In thegovernance model designed for the automotive company, the localbuyers are responsible for contributing to global commodity strategies,and negotiating and finalizing contracts. They are also responsible forobtaining the approval of the commodity leader, if required, and tomanage the customer interface.
Lead buying in the utilities industry
The introduction of a lead buying concept can prove beneficial for utility
companies because stiff competition and strict regulatory requirements
force them to find new ways to drive down operational expenditure
(OPEX).
The second success story involves a utilities company. Utilities are not
generally thought of as companies that use lead buying to improve
purchasing departments. This is part of the reason for highlighting this
particular case.
Example: Lead buying in the utilities industry
Although all of the utility company’s business units and sites were locatedin one country, it suffered from similar problems to the automotivecompany in the previous example. Despite geographical proximity,business units and sites worked independently and – more troubling still –bought independently. Potential synergies were being squandered.
A slightly different approach to lead buying was necessary here. Theprimary focus of the project was to streamline structures and optimizeprocesses. To do that, the project team first had to differentiate betweenutility specific and non-utility specific purchasing. In a next step, purchas-ing segments or centers were defined, and four clusters emerged. Theseclusters comprised project/complex purchasing, utility purchasing, stan-dard purchasing, and catalog procurement. They are shown in Figure 8.5.
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The company was in need of criteria that would help it splice andsegment processes and purchasing structures into one of these fourdifferent purchasing clusters. A series of characteristics had to befulfilled before a purchasing item was distributed into a cluster.A purchasing item that was designated to project purchasing, forinstance, had to have either complex and innovative one-time processes(project purchasing) or repeat processes (complex purchasing), haveextensive interaction with customers on a highly technical level, andclearly identifiable customers. The construction of a combined cycle gasturbine (CCGT) plant is an example of project purchasing. Projectpurchasing has no direct category allocation.
All other purchasing segments were allocated a clear category.Processes and structures that have utility specific requirements thatcannot easily standardize materials/services belong to the category‘utility purchasing’. Another characteristic of utility purchasing is thatthere is low to average order frequency, and cataloging does not makegood business sense. Standardized purchasing encompasses allcategories that have identical requirements across companies, easilystandardized materials/services, and low order frequency. Here, too,cataloging is not appropriate. Catalog purchasing was introduced foritems that possess several characteristics, including considerable abilityto standardize materials/services, are easy to describe, have a high orderfrequency, and with no direct or active interaction with the customerbeing necessary.
Non-utilityspecific Utility-specific
Project and complex purchasing
Standard purchasing
Catalog procurement
Utility purchasing
1
3
4
2
Involvement in repeat (project) requirements affecting
multiple categories
Pooling requirements through standardizing
requirements
Procurement transactionvia catalog
Involvement in one-timeproject requirements affecting
multiple categories
Basic processes
Process optimization
Structural streamlining
Figure 8.5 Purchasing is reorganized into four new purchasing segments
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Based on this information, categories were allocated to specificpurchasing service centers. A lead buyer was placed in charge of each ofthese centers. These corporate lead buyers are now responsible forgroup-wide coordination of purchasing activities. This encompassesshared services, other group companies, second-tier subsidiaries, andfinancial holdings. This is illustrated in Figure 8.6.
Project/complex purchasing was assigned to a shared services unit,while all the other categories were assigned to the most appropriateorganizational unit. Appropriateness is defined by the most commonuse and direct knowledge. The category for high voltage cables, forinstance, is assigned to the distribution company even though somecables are used in generation too.
Overall conclusion and outlook
To reap the benefits of a lead buying organization considerable effort is
generally required. An overall vision for the transformation process is
essential. This enables companies to set, accomplish, and monitor targets
Corporate lead buyer Specialty buyerPurchasing manager
Cat
ego
ry m
anag
emen
t
Shared services
Second tier subsidiaries
Other group companies
Financial holdings
Group coordination committee
PM committee
Standard purchasing
Catalog procurement
Utility purchasing
Project/complexpurchasing
CEO
CPL
Service center
CPL
Key:
Figure 8.6 Corporate lead buyers are responsible for group-widecoordination of purchasing activities
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that are relevant from a management perspective. Such a vision also needs
to be communicated to all employees, irrespective of hierarchy. When
employees understand why the changes are necessary, the changes will be
easier to introduce. This is especially true of operational changes, such as
introducing a common coding language. It also encourages employees to
feel comfortable working in an organizational model in which solid lines
and category leadership can deviate.
It is not only the leadership concept that is critical for successful lead
buying – the right people are needed too. Lead buyers take on considerable
responsibility. Companies need to assign these positions with care, ensuring
that the people selected are respected throughout their divisions and various
regions. Lead buyers must also be capable of nurturing relationships
with suppliers. If they lack these soft skills, they put the whole model in
jeopardy.
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PART III
Manufacturing
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Introduction
Manufacturing in a global context
Ralf Augustin
When the South-east Asian ‘tiger’ states entered the international eco-
nomic arena two decades ago, there was a fundamental change to the
global manufacturing footprint of whole industries: western manufac-
turers were challenged by fierce competitors who had created favorable
cost structures and who were both eager and able to learn quickly. As a
result, European hi-fi and motorcycle manufacturers – to name only two
examples – were almost completely squeezed out of the market. The rules
of global competition are shifting once again, with the entrance of Central
and Eastern Europe, China, and India into the global economy. The
impact will be much broader this time, rippling through more industries
and putting greater pressure on many more companies.
Considering the magnitude of the risks that follow in globalization’s wake,
it is understandable that companies concentrate only on the threats. New
global manufacturing entrants, characterized by their low-cost base and lower
labor and environmental standards, are easy targets for distrust. These
manufacturing upstarts threaten the jobs of people in the Triad region who
carry out work that does not require high-value skills, shifting these jobs to
emerging markets. As more players collaborate to create and improve products
and services at increasing speeds, competitive pressure on companies in Japan,
western Europe, and North America will continue to increase. That pressure is
already too great for some companies, and insolvencies are on the rise.
The risks of globalization are real, but its advantages far outweigh the
perils. Consumers in North America, western Europe and Japan benefit
tremendously from the reduced cost of products manufactured in lower
cost regions. Everything – from computer chips to clothes, from toasters
to tires – has become less expensive since manufacturing was relocated to
cheaper locations.
Companies benefit twice over: not only can they produce goods more
cheaply for their Triad customers, they also enjoy the emergence of new
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markets bursting with an unfathomable number of consumers who crave
high-quality products and brands made by ‘old world’ manufacturers.
German and Japanese machinery manufacturers in particular benefit from
the interest of manufacturers in these emerging regions, keen to obtain
sophisticated, well-designed equipment.
When discussing the potential that is simmering in this region, the
numbers speak for themselves. India has 300 million middle-class people
(or 55 million households) and more than 60,000 millionaires measured
in US$. GNP in China and India is expected to grow by at least 5 percent
each year until 2020. Within the next decade, China will become the
second most important consumer goods market worldwide and India will
rank third. No company can afford to ignore this burgeoning market
segment.
Not only a shifting landscape, but also a different world
While, in the past, Triad companies succeeded in their global expansion
primarily through exports, today matters are different. Locally made
goods can be better tailored to local requirements because production is
often more flexible and less costly. In addition, a number of external
factors support globalization: lower barriers to international capital
transfer mean global production networks are easier to build, large pools
of engineers and managers are available in countries such India and China
to run local operations, modern logistics and continuously decreasing
tariffs lower the cost of global transport, and IT systems permit global
engineering collaboration and supply chain transparency.
Companies in Japan, North America and western European have the
opportunity to capitalize from this global transformation and use the low
costs to their advantage. However, they need to build global manufactur-
ing networks to reap the rewards. No aspect of global collaboration can be
left to chance: every aspect must be well defined and clearly commu-
nicated. Moreover, these networks must be monitored and reviewed at
regular periods to ensure that they are still valid and that they remain
sufficiently flexible to respond to sudden business changes.
Triad companies need to focus sharply on manufacturing high-tech
products: there is no sense in them concentrating on anything else. They
cannot compete with low-tech, low-cost products manufactured by
companies in newly emerged and emerging regions.
Developing, testing and ramping up innovative production technologies
is the only way forward, if companies in western markets want to develop
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and manage a global supply base. Only highly skilled, adaptable employees
who are willing to keep on improving their knowledge will thrive in this
globally oriented environment. Operations in emerging markets can serve
as manufacturing hubs for labor-intensive products. They can also form a
local base for fabricating ‘near-the-customer’ goods to be sold in these
markets. Operational excellence is a must in this scenario.
The traditional competitive advantages once enjoyed by Triad countries –
such as a highly educated workforce, excellent infrastructure, and polit-
ical and financial stability – are becoming relatively less important as
developing countries improve on these fronts. This is not to suggest that
Triad countries can afford to become complacent and let their high
standards slip: it means that these are no longer competitive advantages
but, rather, the base line that every country needs to meet. Operational
excellence thus becomes an even more important factor of differentiation.
Manufacturers have focused on improving the quality of their processes
as a means to achieve operational excellence for at least the past twenty
years. The process is ongoing. Wave after wave of new breakthroughs
keep companies busy as they learn to adapt and keep ahead. Lean manu-
facturing, which radically changed manufacturing practices, is helping
companies remain competitive. Adopting such practices is critical as the
pressure increases to be increasingly more flexible, faster and cost
effective without jeopardizing traditionally high product quality.
Part III is dedicated to showing companies how they can meet the
challenges of manufacturing in today’s increasingly globally oriented
world. For Triad countries, the nature of competition in manufacturing has
changed. High quality and highly customized goods are in unprecedented
demand. Global manufacturing networks are required to deliver these
goods. In Chapter 9, Marco Zurru describes the successful building and
continuous improvement of global manufacturing networks. Volker
Heidtmann and Stephen Weisenstein, in Chapter 10, show companies
how to achieve operational excellence with global manufacturing networks.
Then, in Chapter 11, Dr Thomas Kwasniok and Walter Pfeiffer explain
how to enable lean manufacturing through best-in-class management and
by setting up support functions.
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CHAPTER 9
How companies can optimize theirglobal manufacturing footprint
Marco Zurru
Introduction
Companies surfed the first wave of globalization largely to exploit
opportunities in low-cost countries. They wanted to find suppliers and
manufacturing locations that could help them decrease overall production
costs as they competed in traditional western markets. The current
competitive environment pushes them out into more challenging water,
but the spoils of riding the swell are greater. Companies these days are
searching for low-cost locations and suppliers, and they want to gain
access to the large markets that are opening up rapidly in emerging
economies. They also need to develop strategies to tackle the emergence
of an increasing number of players from emerging countries that are
quickly building capabilities to serve international clients.
To attend emerging markets, companies need to develop a new business
model that provides them with the ability to manufacture customized
products that are suitable for local needs. The business model also must be
flexible enough to let companies closely integrate local manufacturing
capacity with sales and distribution networks. That is critical if companies
are going to be able to compete with new players from emerging countries
that do battle on the same international markets but have lower costs.
Prompt action is required in terms of cost structure and innovation capa-
bilities, especially as increasingly more players from low-cost countries
swiftly reduce the technological gap, partly by acquiring western players.
In this evolving contest, companies will gain the upper hand by designing
a flexible manufacturing footprint that considers how increasing global
competition affects and impacts their strategic objectives. In this chapter,
I examine how companies can best design – or redesign – their global
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manufacturing network. First, I look at the differences in networks from
industry to industry. Next, I show a handful of factors that are critical for
optimizing a manufacturing footprint, irrespective of industry. These
factors form the foundation of an approach that Roland Berger Strategy
Consultants successfully uses when helping companies lower their
manufacturing costs and develop sustainable strategies to thrive in a
globalized environment. And finally, with the help of a case study, I show
how following this step-by-step approach can help companies address
manufacturing network design issues on a global scale.
Footprints differ in size and imprint
Various footprint models exist, depending on the reasons behind the
global manufacturing presence and industry specific concerns. Auto-
motive players aim to reach a global customer base, and their business is
driven by economies of scale. It is not surprising, then, that their footprint
is already fully global. Automotive suppliers – who mostly embark on an
international manufacturing journey to support their customers (auto-
motive original equipment manufacturers OEMs) – have a footprint
reflecting their clients’ global presence. The multinational footprint of
aerospace and defense companies, in contrast, is mostly driven by
international agreements and by offset requirements. Other companies
have a multi-local footprint but can leverage economies of scale for very
specific parts of their value chain – consider, for example, raw material
procurement or engineering.
The business environment is developing rapidly. What works for one
industry at a particular time is unlikely to yield good results for others,
and will probably require redesigning at a different point. No single
predefined solution exists for an optimally designed global manufacturing
footprint.
Each company has to design its own unique footprint. However, the
design should not be set in stone. It must be sufficiently flexible to adapt
to changes in the business environment. In my experience, a systematic
approach is needed to accomplish this. The design should be based on a
top-down understanding of the strategic drivers that force a company to
expand its manufacturing footprint globally. Also, it should assess the
feasibility of expanding the manufacturing network at the operational
level, paying close attention to cost structure and risks. The six-step
approach outlined in the next section of this chapter provides a compass
for decision makers. It should alert their attention to the tricky terrain that
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needs to be traversed when shaping, optimizing, and managing an
evolving global manufacturing footprint. The approach and focus points at
each step are illustrated in Figure 9.1.
Step 1: Understand the strategic drivers for your globalmanufacturing footprint
Each industry is shaped by different factors that determine its need for a
global manufacturing footprint. The same is true for individual companies.
Before any company can optimize its manufacturing footprint, it must
analyze the reasons why it is necessary to expand its global network and
the implications of these factors.
There are two overriding reasons why companies delocalize their
manufacturing activities: either they are lured by the attractiveness of
potential markets, or they want to lower costs. Companies should keep
these goals in mind when creating guidelines for their company’s
globalization strategy. The reasons for addressing manufacturing network
design issues, and the challenges to reach the two manufacturing goals,
are shown in Figure 9.2.
Improving cost performance is a common strategic imperative in most
industries. The business case for optimizing cost is straightforward and is
based on total cost of ownership. It leads to the offshoring of components
and manufacturing activities that have high labor content, and are
FocusSTEP
• Understand strategic drivers and implications
• Priorities: cost versus market penetration • Target markets and external constraints
• Derive the global manufacturing footprint model
• Industry cost structure and economies of scale • Alternative manufacturing processes • Logistics network structure and costs
• Segment product structure and define delocalization scenarios
• Product structure and relevant manufacturing activities • Business case for delocalization of activities • Risk evaluation
• Select target regions and countries
• Selection of potential countries • Short list of activity-specific target countries
• Fine-tune the model and finalize the footprint
• Manufacturing scenario analysis and sensitivity • Make/buy decisions
• Select site, suppliers and partners
• Partner/supplier identification and screening • Partner/supplier selection and final make/buy decision
Figure 9.1 Approach steps and focus
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characterized by relatively low technology and criticality. Local
manufacturing operations provide labor-intensive work, simple technol-
ogy, and low plant investments. While product design is not affected by
the decision to delocalize production, ensuring good quality and reliable
delivery are two pressing concerns once manufacturing is relocated for
cost optimizing reasons. No major risk of technology transfer exists
because the delocalized technology is relatively low. Companies that
offshore to reduce costs need to remember that their cost competitiveness
will erode over time, due to the progressive increase in local costs and cost
alignment from competition.
When companies build a global manufacturing footprint in order to
increase the customer base, the challenge is more complex, especially if
the focus is on fast growing emerging markets: complexity enters the
game as products need to be redesigned to fit the requirements of
potentially millions of local but highly heterogeneous customers. At the
same time, companies need to keep as many components and interfaces
standard in order to leverage economies of scale. Operations are required
locally, including final product assembly lines and test operations. In
addition, the risk of technology transfer is greater, as suppliers and the
local workforce gain access to more sophisticated technological processes.
A change of paradigm in the organizational culture is required when mov-
ing to a completely global footprint. The rapid growth of local competitors
Market approach
Global
Focused
Focused GlobalCost approach
Exploit global marketpresence• Risk of technology transfer
Enter global market• Sustainable competitive advantage• Price• Local requirements
Improve cost performance• Quality • Reliability • Progressive erosion of cost advantage
Leverage local presence• Cost structure versus local competitors • Local requirements
Build global fo
otprint
• Paradigm ch
ange in
organizatio
nal cultu
re
Figure 9.2 Different manufacturing network design goals and relevantchallenges
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is a threat that should be considered when building the business case. In
comparison with foreign players, local companies require no (or limited)
R&D investment, their management structure is cheaper, and they face
lower compliance costs.
In some cases, companies will need to delocalize their operations in order
to enter closed or regulated markets. This is true for companies in the
aerospace and defense market, for instance. The aim here is not strictly to
benefit from market proximity, or lower transportation and labor costs.
Delocalization, in these cases, is simply a precondition for gaining local
market share. Companies will need to adopt a different strategy, as business
activities will need to be redesigned to meet industrial agreements. In the
aerospace and defense industry, for example, extremely complex industrial
footprints are designed to comply with the sector’s pre-negotiated work-
sharing agreements, and technological fallout requirements. In my
experience, optimizing such a complex – and counter-intuitive – manu-
facturing footprint works only if partner companies are closely integrated
on an organizational level and already have excellent manufacturing
operations. The situation of component suppliers for the automotive
industry is slightly different. Suppliers require a local presence to match the
internationalization priorities of their OEMs. Here, the focus is on
minimizing risk exposure through long-term contracts with the OEM and
ensuring high quality and reliability of local operations.
Another reason for building a global manufacturing footprint is to
create a defense against low-cost competition stemming from new
economies. Competing purely on cost is not a sustainable strategy for any
western manufacturer. A different sort of business model is required. In
this situation, a company’s global manufacturing footprint strategy needs
to be totally integrated and aligned with that company’s overall business
strategy. Companies can reinforce their protective defense against low-cost
competitors only by creating a sustainable competitive advantage. This can
be achieved through clever product positioning or research and develop-
ment, or both. Globalizing without a sound diversification strategy could
prove useless.
Step 2: Derive the global manufacturing footprint model
Once companies have a clear understanding of the reasons for developing
a global manufacturing footprint, they can start defining the guidelines
that should shape that presence. General aspects companies need to
consider include the markets they wish to serve, local content, and cost
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priorities. More specific aspects that should be considered are labor
content, economies of scale in each phase of the manufacturing process,
alternative manufacturing processes, and transport costs. It is important to
keep the company’s manufacturing cost structure firmly in mind when
examining these aspects.
Centralized final manufacturing operations with offshoring of components
and sub-assemblies are typical in industries that demand large investments
and stringent quality requirements, and in which labor content and simpler
operations characterize the manufacture of components and sub-assembly.
Lower labor content is required for the final phases of the assembly process.
Complex mechanical systems in the aerospace and automotive industries are
exemplary here. They can leverage the low cost of forgings and castings
derived from emerging economies, as well as low labor costs for other simple-
to-manufacture parts against downstream activities that must be centrally
executed. These downstream activities require large investments for metal
cutting machines and surface treatments. High quality control standards and
advanced labor skills in final assembly operations are needed too.
Other industries, in contrast, are characterized by large economies of
scale in upstream operations and low value-added, and limited economies
of scale in final manufacturing operations, which are also burdened by high
transportation costs. This is true of the aluminum industry, in which a
typical global manufacturing configuration is based on a number of similar
small size local plants (for example, extrusion) that are served by regional
smelters, mostly located in countries where the cost of electric power is
relatively low; these, in turn, are served by proprietary aluminum ore mines.
In the construction material sector, transportation costs and local
requirements limit the market that could potentially be served by a single
plant. Large international players leverage technical competencies and
support services in order to ensure internal benchmarks, cross fertilization,
and best practices. Globally shared services provide low cost support for
the entire group.
The automotive industry has pushed the global manufacturing footprint
to an extreme because it can profit from large economies of scale in
engineering, manufacturing and procurement, leveraging the size of
global markets. An international network of in-house plants and suppliers
serves a global footprint of final assembly plants to produce diversified
and localized models based on standardized and modularized platforms
and modules. Engineering activity is shifting to decentralized centers of
excellence to react more quickly and attentively to local requirements and
locally designed components. For automotive suppliers, the one reason for
relocating business is better to serve OEMs.
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The aerospace and defense sector provides another model for a global
manufacturing footprint. International agreements and offsets, and defense
constraints and embargos are factors that need to be considered when
defining the footprint’s contour. An international military program could
comprise a complex set of work packages that include four different
assembly lines in four different countries, two sites for manufacturing
composite wings (one country produces the right wing for all partners,
another country produces the left wing), for instance. It is likely to work
with various other relatively inefficient solutions that ensure that know-
how and technology ownership is balanced between players and countries.
To configure the best manufacturing footprint, companies need to
consider their own strategy, as well as industry and product characteristics
such as economies of scale and cost structure. Cost components such as
labor, transportation and energy should not be left out of the equation. At
this stage, companies are also well advised to consider the availability of a
skilled and reliable workforce, as well as partners and external constraints.
Step 3: Segment product structure and define relocationscenarios
After a company has selected its overall manufacturing model based on
strategic drivers and a thorough understanding of operational factors, it
needs to conduct a detailed analysis to ensure that value chain activities
are allocated optimally. Product structure and manufacturing operations
should be analyzed in depth in order to identify the most suitable
components and activities for relocation. Two dimensions are important
here: economics and risk.
Economical variables are required to define the overall payback of
delocalizing a specific manufacturing process. The main areas of
investigation are:
• Manufacturing options (automation investments versus more labor
intensive manufacturing, traditional assembly plant versus CKD)
• Required investments for each manufacturing option
• Overall cost structure (labor, materials, depreciation, energy, transpor-
tation, services)
• Expected lifecycle and cost structure evolution.
A business case is then built to provide the expected payback for each
component and manufacturing activity analyzed.
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Risk is then defined based on variables such as technological
complexity, component criticality (the importance of reliability of
delivery), quality requirements, required labor skills, and technology
transfer. A risk indicator provides an assessment of the variance of the
expected payback over a certain period of time if the manufacturing
activity is delocalized. An illustration of a payback and risk analysis is
given in Figure 9.3.
Based on risk and payback, companies should test different
manufacturing scenarios. These should calculate total cost of ownership
and the relevant risk for each configuration. A sensitivity analysis
simulates the effect of changes in cost drivers to the total cost of
ownership for each scenario analyzed.
Before advancing to the next step, companies should have a thorough
understanding of the conditions necessary to relocate each manufacturing
phase in the most advantageous way possible. A checklist can help
companies ensure that they have considered the factor costs required to
meet the specific cost structure, labor skills, specific technological
capabilities, and shape of the competitive environment.
Risk of implementation
Surfacetreatments
Fuselagesection
Compositecomponents
Software
Basicengineering
Machined subassembly
Doorassembly
Fasteners Panels
Rivets ManufacturingengineeringAluminium castings
Aluminium forgings
TitaniumAluminum
Machinedparts
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4
Payback (years)� Absolute annual cost savings
Figure 9.3 Payback and risk analysis
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Step 4: Select target countries
There are a number of different ways companies can select target reloca-
tion countries, and these will depend on the global manufacturing foot-
print strategy the company wants to pursue. In some cases, the number of
countries considered will be restricted because the company knows it
wants to enter a specific market that has its own unique offsets or local
content requirements. In other cases, the list of countries is short because a
company is relocating to serve a specific client – for example, OEM
proximity for automotive suppliers, or because of very specific local content
requirements. Sometimes, there will be no preliminary restrictions on
potential countries that may belong to the manufacturing footprint.
The process of selecting countries for setting up manufacturing
operations should be addressed in two different ways. If shortlisted
countries are chosen because of strategic imperatives, companies need to
consider what activities and modules can best be produced locally,
considering the size of the target market and the amount of local content
required. These companies also need to screen potential supplier networks
and assess local technological capabilities to filter the components or
activities that are most suited for local production.
In the specific case of automotive component manufacturers, OEMs’
requirements and trends are a major part of the strategic decision and
should be investigated in depth.
Companies must understand clients’ expectations in relation to the
following dimensions:
• Restrictions on sub-suppliers and/or certification requirements for
second tier suppliers – aerospace and defense second tier suppliers need
to pass a strict certification process
• Local content requirements – OEMs sometimes require local content
from first tier suppliers to meet requirements in specific countries
• Outsourcing – OEMs often require first tier suppliers to dominate the
technology, or they require specific assemblies to be in full control of
the first tier supplier
• Constraints based on lifecycle phases and specific activities – OEMs
sometimes restrict low-cost country sourcing until the product reaches
maturity. They do this to reduce the risk of problems with first series.
Afterwards, they will turn to local engineering for support and technical
expertise
• General sourcing preferences – components versus modules, specific
regions for low-cost sourcing.
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If cost optimization is the main reason for creating a global manufac-
turing footprint, the approach is the opposite. A systematic screening of
potential locations has to be performed based on priority modules and
activities. The process of selecting a country starts with a long list of
potential countries that is gradually shortened as countries fail to meet
progressively stringent criteria. Lack of political stability and risk are two
of the first criteria that cause elimination, combined with external con-
straints such as embargos and final client vetoes.
A second filter aims at investigating the overall business situation and
economical attractiveness of the potential candidate countries. Companies
should check the availability and quality of infrastructure (transportation,
electricity, gas, water, and real estate), the legislative environment and
bureaucracy (time required to set up a business; availability of legal,
accounting, recruiting, and logistics services), financial conditions (corporate
tax, incentives) and manpower (skills, unemployment, wages, and attitude).
A third filter is then used to determine the impact a specific delocalized
activity or component would have on the company’s overall business
model. The sorts of aspects examined here include specific technological
skills, the existence of a relevant supplier base, the presence of
competitors, logistics capacity, and cost of labor over time.
Step 5: Fine-tune the model and finalize the footprint
Once a company has selected a shortlist of potential locations for a specific
manufacturing activity, it is time to simulate the impact of that delocalized
First filter Second filter Third filter
Specific economicalconditions
• Factors’ costs and evolution over time• Specific skills• Logistics• Supplier proximity
Business and economicalattractiveness • Infrastructure availability • Time to set up a business • Services availability • Workforce qualifications • Financial conditions
Politicalstability and risk
Figure 9.4 Selection of target countries
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manufacturing activity at each of the short-listed locations. This quan-
titative simulation provides companies with a handful of potential scenarios
for the selected manufacturing footprint model. The scenarios reflect each
manufacturing activity to be relocated in target countries.
Three main performance indicators are put under scrutiny for each
scenario: first, the expected value over the entire lifecycle; second, overall
risk; and third, flexibility (the ability to cope when environmental factors
change unexpectedly).
A simulation model is built to compare the economic performance of each
scenario, based on the expected evolution of external variables over time in
each country (sales volumes, costs, for example). The model provides the
required investment and expected return for each scenario. Companies
perform a ‘what if’ analysis to understand the best- and worst-case scenarios
for variables. Sales volumes, implementation timing, and costs are some of
variables that are included in the model. Risks such as currency movements,
supply interruption, political instability, and transportation delays should be
included in this analysis. The most attractive configurations are selected for a
final examination that measures the flexibility of each selected scenario.
The worst-case scenarios are also analyzed in order to understand and
calculate the potential cost of reconfiguring the footprint. A recovery plan
is built for selected scenarios, which are compared. Make-or-buy and
investments decisions are made to minimize risk and maximize flexibility.
Step 6: Select site, suppliers and partners
Selecting sites, suppliers, and partners is one of the most important tasks
companies need to undertake to ensure that strategic guidelines provide
tangible results. The selection of site, supplier, and partner should be
based on a structured process that starts from the identification of a long
list of potential suppliers and/or partner companies. These are then
screened to reach the best solution.
To select the most appropriate site, companies need to investigate four
areas: investment, infrastructure, legal environment, and HR availability
and skills. Figure 9.5 illustrates how different locations can be compared.
When choosing a supplier and partner, it makes sense, first, to undertake
desk analysis. During this phase, a long list of potential candidates will be
chosen based on the selection criteria: technology, size, manufacturing
capabilities, and client base. Desk research should be complemented by
interviews with industry experts to ensure completeness and to iron out any
misunderstandings or false assumptions.
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Depending on the size of the long list, telephone interviews or
questionnaires should be used to screen possible suppliers and partners.
Here, companies can detect whether the long list candidates are interested in
collaborating. It also gives companies the opportunity to complete and cross-
check information regarding technical capabilities, size, and client base.
Once a shortlist is defined, an on-site assessment with a team
comprising technical and financial experts is necessary to provide
comprehensive information about the quality of the management team
and employees, technical tools and capability, process quality, delivery
reliability, financial stability, and cost structure. A request for quotations
on pilot components and a business case should conclude the selection
process and launch the negotiation phase.
Global manufacturing footprint – a process without close
Companies need to monitor their manufacturing footprint periodically,
checking to see whether it is still relevant and to determine whether
HR
Investment
Legal
Infras
tructure
Region 1 Region 2 Region 3
Construction cost
Price of property
Business parks
Logistics
Utilities
Environment
Taxation
Bureaucracy
Labor legislation
Skills availability
Labor cost
Incentives
Key :
Figure 9.5 Site selection
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external factors make adjustments wise. What made economic sense a
few years ago might, in the meantime, have become a competitive disad-
vantage in the quickly evolving world of manufacturing. This is especially
true when it comes to footprints that are heavily reliant on technology or
low-cost country manufacturing. Technology, thanks to its very nature, is
programmed to become obsolete. The only uncertainty is how quickly it
will have to be replaced. Similarly, low-cost countries are developing so
fast that some lose their competitiveness within a few short years and are
superseded by other countries that are possibly located on the opposite
side of the globe. This is why it is so important for companies to consider
future trends and avoid focusing on existing conditions when designing a
global manufacturing footprint or redesigning an existing one.
Case study: How the approach works in real life
Our client, a multi-national industrial engineering company, pursues astrategy to increase its global presence with the aim of leveragingpotential new markets and to defend itself against the increasingonslaught of competitors from low-cost countries.
Its presence in emerging markets to date has been based onpartnerships with local players. Direct industrial activity has beenlimited. While this activity has led to significant sales in some businessareas, it has come at a heavy cost: namely, large technology transfer.Previous partners are now able to offer similar solutions not only in theirhome country, but also abroad, with an extremely competitive coststructure.
The project team was asked to define a new footprint model tomaximize the increasing volumes that can be captured in the Far Eastmarket and to make a dramatic reduction in the current cost structure.The footprint model had to include a strong industrial and procurementpresence in emerging countries to guarantee market access and costcompetitive vis-a-vis local players.
A detailed cost simulation revealed that the company could gainlarge cost advantages by serving global clients from China. To leveragethe global footprint fully, a new procurement organization wasdesigned and implemented that shifts local procurement to a singleglobal procurement responsibility for each business segment. Theproject team segmented the product structure in detail and mappedthe advantages and disadvantages of local capabilities compared with aglobal capability. As a result of this mapping exercise, activities were
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identified that can be relocated and sourced globally – including, forinstance, all steelworks, as well as basic and detailed engineering.
China was selected as the target country for extending the industrialpresence, based on consolidated presence, size of the market, and overallindustrial structure, including the supplier base. A detailed screening oftarget companies was performed (starting from a long list of more than300 state-owned and private companies, and design institutes, coveringall the relevant business areas) that identified potential players andtargets for acquisition. The project team whittled down this long list untilthe 20 most attractive and appropriate companies remained. Out of thisshortlist of 20 candidates, one company was targeted for acquisitionmainly due to its technical capabilities, size, and ownership structure. Ourclient was successful in its goal and, following the acquisition, a newmanufacturing model was introduced.
The new company now acts as the main manufacturing andengineering location to serve all of the Far East for a specific technology.Other selective regions will also be covered by this location in thefuture. It provides engineering services to a specific business area/technology, and the parent company aims to gradually extend itsengineering support to other technologies. It should act as the servicehub for low-cost procurement in the region, within the scope of the newglobal procurement model.
Taking this step represents a considerable change in the overallfootprint of the company. However, management considers it to be justan initial step, one that needs to be taken to cope with rapid market andtechnological change. The company is well aware that its manufactur-ing model and footprint will need to adapt continuously in order toremain competitive. A systematic approach that analyzes strategicoptions and defines concrete implementation solutions has proven tobe the key for this company, enabling it to continue doing businesssuccessfully in the global market.
Outlook
The manufacturing models and footprints of global companies will be
placed under increased pressure in the future. The speed of evolution in
newly emerging markets, the rate at which low-cost players are catching
up in terms of technological competence, and the rapid development of
cost components mean that companies need constantly to reassess their
footprints.
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To compete in the future, companies will need to master three skills.
First, they must show flexibility and be willing to adjust their footprint to
align with anticipated market changes. Manufacturing footprints have to
be sufficiently malleable to follow the continuous evolution of inter-
national markets. An optimal balance of internal and outsourced activities,
and a flexible supplier base and modular products are required to adapt
quickly, minimize investments and risk, and optimize results.
Second, they must be able to keep their core competencies while
outsourcing low-value skills. Finding the balance between in- and
outsourcing takes time and careful consideration. Companies are wise to
proceed here with caution. Greater education levels among the workforce
in emerging countries, weak copyright protection legislation, and the
increased ease with which information can be duplicated expose global
players to a great risk. Companies face a real threat of losing their
technological competitive advantage.
Third, companies must be capable of managing complex organiza-
tional structures with multiple reporting lines in different geographical
areas. A new generation of managers with dexterous management skills
that permit them to cope with organizational complexity is a must as
global footprints increase in size and become more complicated.
Managing multiple reporting lines, dealing with conflicting objectives,
and coping with an increased need for strategic control, while delegating
most operational decision making, will be some of the skills required for
managers in the future.
Further reading
Falb, R. (2006) ‘Global Footprint Design – Die Spielregeln in der
internationalen Wertsch€opfung beherrschen’. Roland Berger Strategy
Consultants. Stuttgart.
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CHAPTER 10
Leveraging manufacturing excellencein global production networks
Volker Heidtmann and Stephen Weisenstein
Introduction
Manufacturing excellence – lean manufacturing – the Toyota production
systems – regardless of the name that is applied, the elements that make up
a strong and efficient manufacturing system and process are well known.
Principles such as ‘just-in-time production and logistics’, ‘built in
quality’, and ‘continuous improvement’ are applicable across manufac-
turing industries and are applied in many ways. Business people have
toured the best plants and read the many books on the subject as they strive
to eliminate waste from their processes and achieve the greatest possible
cost and quality performance.
When managers question the competitiveness of a plant or operational
process, they try to conduct benchmarks to confirm or quash their doubts.
Benchmarking the industry leader has its advantages, and adopting
selected ideas from competitor plants definitely provides a great many
benefits: however, the two tasks are not always easy to undertake. In their
hurry to turn to the competition for ideas, many companies ignore the
obvious first step: share and leverage best practices within your own
organization and between your plants.
We frequently find varying levels of success in implementing world-
class manufacturing systems and processes, even within manufacturing
networks belonging to the same company. Why can one plant be so
successful and a sister plant be so poor? This chapter answers that question,
and provides direction to managers seeking to introduce manufacturing
excellence throughout all their operations. After outlining the steps that are
necessary to leverage manufacturing excellence in global production
networks, we show how this approach worked in a real-life business
setting, drawing on a project we completed in the automotive industry.
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Be your own benchmark
The benefits of turning a company’s gaze inwards are tremendous. First,
the benchmarking process is significantly easier because of improved
access to information and greater transparency. Similar products and
corporate culture make it easier to transfer best practices when they are
unearthed. This increases standardization between plants, which not only
drives efficiency but also flexibility.
Our approach to launching a manufacturing excellence effort starts with
a project structure and then transfers the task into the line organization. In
our experience, a four-step process ensures that the project challenge is
tackled pragmatically and with a clear structure, which is critical for
successful completion. Companies that follow this process work with
project teams to gain a deep understanding of the current status of their
processes and particular operation, develop an overall vision for the focus
area, become involved in making improvement plans that are feasible, and
ensure that implementation efforts are taken seriously. They achieve this
last step in part by communicating the reasons for change and highlighting
quick wins, which has the additional benefit of motivating staff. The
process is illustrated in Figure 10.1.
Preparation
To realize the benefits from optimizing a plant network, good preparation
is essential. Selecting the right plants for comparison and getting the
right people on board is important in order to find the most relevant
management practices and transfer them to other plants. It is also crucial
for acceptance of the necessary changes in all locations.
In most cases, a plant network cannot be analyzed entirely. Even in
networks with barely more than ten plants, looking into each plant
thoroughly is a formidable task. The endeavor would most probably be
doomed from the first day because freeing up the resources necessary to
conduct the project would be almost impossible.
A more practical approach is the so-called T-shaped project design,
which is shown in Figure 10.2.
During the T-shaped project approach, all plants are analyzed using a
standardized quick scan. This gives the project team a high-level overview
of processes, practices, and procedures. In-depth analysis (comprising
plant visits, interviews, and detailed data gathering) is started afterwards,
and focuses on a small number (typically, four to eight) of the most
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IBusiness systemanalysis:Understandprocesses
IIWorld class productionsystem: Develop vision forfocus areas
IIIImplementationplanning:Define roadmap andpriorities
IVImplementationstart:Communication ofresults
Keyelements
• Formal kick-off• Quick scan• Site clusters• Performance drivers• Chess board/KPIs• Best practices
• Best practice value chain• Virtual best practice site
• Quantified gaps and measures• KPI link• Operationalized vision
• Communication• Momentum building
Outcomes • Project targets• Transparency• Best practices• Gaps
• Blueprint for world class production system• Vision
• Prioritization of measures• Implementation organization
• First quick wins• Mobilization of organization
Results • Organizational buy-in to project• Improvement potential
• Commitment of management
• Decisions • Organizational buy-in to strategy• First bottom-line improvements
Figure 10.1 Proven four-step process ensures that the project challenge is tackled pragmatically and with a clear structure
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relevant plants. Plant selection depends on a plant’s technological and
economic profile. Plants should be selected in such a way that the core
technologies and production processes of the company are reflected. At the
same time, all economic conditions should be reflected as well. To gain a
good cross-section and a fair indication of economic conditions, both
high labor cost and low labor cost sites should be included. Similarly,
small and large plants should be examined, as should plants showing
good and less favorable economic results. Best practices are then
identified within the focus plants and are subsequently rolled out to the
entire plant network.
To arrive at project results that are meaningful, and also implementable,
it is crucial to have the right people on board. In our experience, a
combination of local plant experts and global production staff has proven
to be particularly successful. In this arrangement, local experts can
contribute their detailed knowledge about production and logistics
processes. This results in very specific actions being developed, which
factor in possible implementation problems already in the concept phase.
Global production staff functions can provide overall methodological
guidance and continuously align the project with the greater production
environment and, hence, prepare the subsequent rollout.
Implementation tends to run more smoothly when project members
who enjoy broad professional acceptance are selected. Ideally, they
should be opinion leaders in their field of expertise. This can mean the
power to make formal decisions in the case of divisional managers, but
also professional standing when well-respected functional experts are
involved. With this mixture of highly respected people, employees at
Analysis logic
Questionnaire:
• Products, financials, operations
Quick scanof all plants
GOALS
• Deepen understanding of operations• Analyze status quo• Develop and test improvement ideas
• Get transparency over product range/complexity and KPIs used• Understand plant performance• Get high-level overview of processes, practices, procedures
On-site analysis work:
• Shop-floor control• Production planning• Logistics• Overhead/support cost
Deep divein pilotplants
Figure 10.2 A T-shaped logic ensures breadth and depth of the analyses
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individual plants will find it easier to accept concepts already developed
and implemented at other sites.
Benchmarking
The actual project should begin with a quantitative analysis of all plants in the
network. Typically, common reporting figures are not sufficient. Depending
on the project focus, additional information will be necessary. For this
purpose, we recommend the development of a standardized questionnaire. Its
content should typically include basic profit and loss data; manufacturing-
specific cost details such as labor cost breakdowns, depreciation and
maintenance costs; and asset data for machinery, equipment, and inventories.
Non-financial information such as headcount, quality data, and logistics
performance should also be collected in the questionnaire. Whatever
information is gathered, all parties involved must have a common
understanding of the data if it is to be interpreted in a meaningful way. To
this end, a detailed description of the data is necessary. In our experience,
offering a central support to clarify open questions during the gathering of
data also supports consistency.
The results of the quick scan allow the project team to assess each plant
using quantitative information. The quick scan enables the project team to
distinguish strong from weak performers, both financially and operation-
ally. It lets the team identify specific performance profiles, too. One plant
may show poor financial performance, for example, but could have
excellent quality figures. Another plant may score highly on both criteria.
Based on these insights, the team can select the focus plants to be analyzed
in depth during the project. At the same time, the analysis already
provides a first indication of good and bad practices.
Identifying best manufacturing practices requires a much closer look at
a plant. This can be gained through a several-day ‘deep dive’ plant visit.
Typically, these visits will involve an investigation of product planning,
examination of forecasting, studying the information systems (IS
platform) and key performance indicators, as well as an analysis of the
shop floor. During the shop floor analysis, the teams will look at control
systems and batch sizes in addition to inventory management and
inventory levels. Once these aspects have been considered, the teams tend
to move on to logistics, examining the plant’s subcontractor management,
inter-company logistics and material management. The types of activities
that might take place during a five-day pilot plan visit are shown in
Figure 10.3.
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Five-day analysis of pilot plants
MORNING
AFTERNOON
• Review quick scan• General strengths/ weaknesses
Day 1
• Shop-floor analysis – Control system – Batch sizes
Day 2
• Shop-floor analysis (inventories)
Day 3
• Logistics – Intercompany logistics – Material management
Day 4
• First draft vision development
Day 5
• Production planning: – Forecasting – IS platform
• KPIs
• Shop-floor analysis (inventory management)
• Logistics – Subcontractor management
• Wrap-up – Strengths/ weaknesses – Best practices – KPIs – Vision elements
Figure 10.3 A structured approach is used to analyze current processes and define new operations strategies
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On-site discussions between the project team and plant experts provide
a detailed picture of a plant’s performance. The discussions serve to
identify approaches, methods, and systems that have been applied
successfully and which can be transferred to other places. As all relevant
data is available on-site, the findings can immediately be supported with
quantitative information.
Concept development
Developing a common manufacturing concept is the most difficult part of
the project. In this phase, the findings of the analysis phase have to be
combined. This often means finding solutions that reflect very different
plant environments. This phase is also tricky because of the human
element involved. The personal convictions of team members, which may
be reasonable when viewed from an individual perspective, often have to
be resolved as they are no longer sufficient if considered from a global
viewpoint. Open discussions and tact are paramount in this context.
As a vehicle to reach these results, workshop-style, full-day events have
proven to be particularly successful in our experience. They allow the project
team to step out of their daily business and focus fully on the project tasks.
To encourage target-oriented discussions, individual topics should be
prepared in advance in specialized sub-teams. Here, both local and global
experts should have extensive discussions on detailed approaches and
possible solutions. A basic agreement should be reached at this level, and
local plant requirements and experiences should be duly considered.
The results from the expert teams are eventually combined during the
global workshops. Here, agreement has to be reached among all responsible
decision makers. A project lives or dies by the ability to gain consensus at
this stage. Without it, the project is doomed to fail because people involved
in the implementation phase but who are unconvinced tend to sabotage
efforts or slow down progress. Ultimately, the concept has to be endorsed
by the entire leadership team of the company.
Roll-out
While identifying best practices and developing a common manufacturing
concept is the core of the improvement effort from a content point of view,
the implementation phase is the most critical phase when it comes to
achieving measurable results.
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Companies that do not gain the firm commitment and support of all
plants in the network will face difficulty when trying to implement a
common manufacturing concept. The responsible plant managers should
agree upon the developed concepts before the actual implementation
begins. Including manufacturing heavy-weights in the concept phase pays
off at this stage, because they will be able to defend the project results
against potential criticism from outside the team more easily than others.
At the same time, top management should express its support as well to
ensure the plants’ commitment lasts.
Once agreement on the new manufacturing concept has been reached,
the concept has to be individualized for each site. General rules have to be
translated into specific actions with dates and improvement targets.
People have to be assigned responsibility too. This, again, is a task that
should take place on-site, in discussion with local experts.
Making the transformation stick
One might think that clear action plans should be enough to guarantee a
successful implementation, but habits developed over many years are hard
to change. Implementing a new way of organizing manufacturing is prone
to fail if left unattended, so strong is the resistance to change. Only central
monitoring of the implementation process and regular reviews of the
implementation process by top management can ensure that the good
intentions and first positive steps are not lost. Individual plants should
receive central coaching support; it is not always unwillingness that
prevents change but sometimes simply the difficulties of putting change
into practice on-site.
With the start of the implementation phase, the responsibility for the
success of the implementation should be transferred to the line
organization. Plant managers and division heads are the personnel to
drive implementation. Otherwise, a lack of hierarchical support is likely to
smother implementation efforts in the face of operational needs.
Figure 10.4 shows an example of a real implementation structure in
which content team leaders adopt the coaching role while the line
organization, consisting of plant managers and operations directors,
ensures hierarchical support. The plant process owner has an ongoing
dialogue with the plant manager and a content team member, at least at the
beginning of the implementation phase, and input about implementation
content and progress from plant experts is exchanged. In the case shown
here, a content team member and the plant manager discussed results with
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Project reporting Steering committee
Project Director
Content team leaders
• Continuous communication of issues on project content and acute problems in the implementation
• Monthly meetings to exchange experiences
Core team
• Monthly phone call on implementation progress
Regional Directors
Content team member
• Ongoing exchange and input from plant experts on implementation content
• Ongoing exchange and input from plant experts on implementation progress
Plant manager/coordinator
• Monthly telco• Exchange of experiences
• Discussion on necessary changes and improvement
• Quarterly meetings • Progress reports
Plant process owner
Advice
Project Manager
• Monthly update ofproject controlling tool
Figure 10.4 The project organization is set up to keep track on the progress of the project – regular communication is key
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Best practice sharing process
Plant management
Divisionalmanagement
Corporatemanagement
Monthly
Quarterly
Annually
Reviewing frequency
Plant team
• Review of selected best practices and control of implementation process/improvement impact
• Enforcement of best practice implementation
• Regular review of plant-specific KPIs
• Driving best practice implementation process
• Quantitative measurement of improvements
• Monitoring and comparison of KPIs from all plants
• Identification and prioritization of best practices
• Consolidation and standardization of best practices
• Support sharing and implementation of best practices across plants and groups
• Tracking of implementation progress
• Suggestion of plant-specific best practices
• Detailed best practice documentation and reporting
• Realization of best practices from other plants
Best practices
Figure 10.5 A regular communication process drives the sharing of internal best practices
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content team leaders, regional directors, and project managers on a
monthly basis.
The final step in implementing a common manufacturing system is
to ensure that sharing best practices does not remain a one-off effort but,
rather, becomes part of a company’s day-to-day reality. In short, identifying
and sharing best practices has to be institutionalized. A multi-level process
that includes all parts of the manufacturing organization can provide an
effective structure for this. Each level has a role to play in identifying
internal best practices and ensuring that they are adopted. An example of
this type of structure is given in Figure 10.5.
Ideas are generated on a plant level through joint teams of operators and
functional experts. Practices that are relevant for sharing between plants
are communicated to a central operations excellence function, which owns
the common manufacturing system and develops it further. The function
also coordinates the sharing of ideas and practices across plants through
formal reports and personal meetings. Involving operators and functional
experts who have participated in the development of best practices on the
plant level can improve the acceptance of ideas and provide a
motivational boost to plant level activities. Involving top management
at the same time signals to the plants how important these efforts are.
So, how does this approach work in real life? We applied it at one of our
clients from the automotive supply industry.
Case study: Leveraging manufacturing excellence
The company is a global manufacturer of engine components withproduction sites spread around the globe. Each site had considerablefreedom in designing its production and business processes – acommon practice when managing spread-out production networks.The consequence was equally as typical: each of the plants had, overtime, developed a very specific set of production processes with verydifferent levels of operational performance. Specifically, inventory levelswere a problem. To align the operational performance of all plants on ahigher level, a project was initiated to develop and introduce a commonapproach to production logistics.
After the collection of key plant data from all sites, six were selectedas focus plants for closer analysis. During plant visits and through theanalysis of detailed performance data, six areas for action wereidentified: production planning, shop floor control, global logistics,
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production key performance indicators, production IT systems, andindirect functions. Each area was addressed by a team of expertsgathered from various sites around the globe. The results of each teamwere then refined in two global workshops. These two events were thecore of the project, the moments when all experts and key decision-makers met to approve the new concept.
To ensure a smooth and consistent implementation, detailed actionplans were worked out together with each plant’s management teamon-site. Responsibility for implementation was dedicated to one clearresponsible team member per plant, who supervised all local activitiesof the project. Local activities were accompanied by regular reviews bythe company’s top management.
Overall, the implementation of the new production system aimed at a50 percent reduction in inventory over five years. In addition, areduction in manufacturing cost of 8 percent was expected. The effectswere distributed over time, coming both from short-term actions, suchas the optimization of planning algorithms, and long-term actions, suchas changes in plant layout or reorganization of indirect functions.
Outlook
In the future, manufacturing excellence will be less about understanding
the ‘what’ of lean principles and efficiency techniques and, instead, will
be focused on the ‘how’. Understanding manufacturing excellence and
being able to lead an organization in achieving it are two very different
competencies. Techniques such as those we have outlined in this chapter
will be critical as companies fight to improve their competitiveness.
Continually improving manufacturing performance throughout their
global networks is central to that struggle.
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CHAPTER 11
From maintenance to quality control:effective support functions leveragemanufacturing performance
Thomas Kwasniok and Walter Pfeiffer
Introduction
‘We recently redesigned our factory layout and material flow, optimized
shop floor processes and implemented lean manufacturing principles in
production. However, the impact on overall manufacturing performance is
below expectations, because we keep suffering from frequent short-term
changes of our production schedule,’ a production site manager at a
modern and highly automated pharmaceutical plant in Germany
confessed. Erratic sales forecast figures were the reason he gave for the
plant’s poor supply performance.
Over the previous twelve months, market demand had grown by
50 percent in some of the company’s major markets. The average number
of items out of stock had risen from around 150 to more than 400 during
that period. International sales affiliates wanted shorter lead times to
capitalize on short-term opportunities in their respective national markets.
In spite of its manufacturing best practices, the German plant got the
blame for the company’s inability to keep up with market growth.
A detailed analysis of the situation revealed that the root cause was not
outside, but inside the plant. Lead times for quality control had increased
dramatically due to resource bottlenecks – the number of staff authorized
to release batches was not scaled up along with recent volume growth –
and poor planning in the quality control department. There was an
information disconnect from export order processing, and even from
production scheduling. Long and unpredictable lead times to affiliates
resulted in an extraordinarily high share of rush orders, making it almost
impossible for the plant to optimize production sequences. Capacity was
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lost on changeovers, and key performance indicators on delivery
performance were not met. Operational equipment efficiency – the
percentage of theoretical capacity of packaging lines that is actually used
for productive work – suffered, too.
‘We had focused on our main process: bulk manufacturing and packaging
of pharmaceutical products. We did not realize that at some point the
efficiency of our main process was limited by the effectiveness of a support
function – quality control, in our case,’ the site manager concluded.
What the site manager discovered about the quality control support
function in his plant holds true for most manufacturing support functions.
Whether equipment maintenance, factory logistics, utilities supply or wast-
ewater treatment, if the support function is not effective it cannot leverage
manufacturing performance. When the support function fails, costs can
balloon.
This chapter investigates how a support function can be designed, mostly
by using manufacturing equipment maintenance as an example. While some
of the details are specific to that case, the general approach to tailoring an
effective and efficient support function to meet the needs of the manufac-
turing process can be transferred to other support functions, too. This is
noticeable at the end of the chapter, when we discuss the steps a refinery
took to outsource support functions. In addition to detailing the building
blocks for managing maintenance comprehensively, the article also shows
how Roland Berger teams execute maintenance excellence programs.
Further project examples are provided to show how the steps can be applied
in real life in various settings, and the benefits the approach brings.
Impact of support functions on manufacturingperformance
Effectively managing support functions does not come cheaply: failure is
a costly alternative. Companies need to keep these two factors in balance.
A service level setting for a support function should aim at the lowest total
cost. When it comes to equipment maintenance, short inspection intervals
and comprehensive maintenance activities – such as analyzing the deep
root cause of malfunctions – reduce failure costs.
A high level of equipment reliability is usually expensive because of
personnel and training costs, and administrative overheads. However, it
translates into short downtime and few quality defects. Minimum
maintenance – ‘run to failure’, in the extreme case – can save maintenance
costs, but results in unscheduled downtime and production delays. Lost
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Balance between costs of supportfunction and failure costs PROJECT EXAMPLE: Maintenance
Lost sales
Repair costs
1 minuteproductionstandstill
1 minutemaintenance
= 1 : 10
MaintenancematerialMaintenancepersonnel
Cost ofsupport function
Failure costs
Lowestoverall costs
US$ 810US$ 8,255
Figure 11.1 Costs of support functions and failure costs work in opposite directions and have to be balanced
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orders are only one result of that failure. In addition, equipment defects
tend to be more severe than with regular maintenance, as there is a risk
of collateral damage to other units. When the cost of overly cautious
maintenance is weighed against the steep cost involved in negligent
maintenance, cautious maintenance is the cheaper option.
To illustrate that point, the average cost of equipment maintenance –
personnel plus material cost – at automotive suppliers is approximately
US$810 per hour. When production comes to a standstill, this causes
damages of US$8,255 in lost sales and equipment repair costs per minute.
Setting costs aside for the moment, effective support functions also
bring other benefits: product and service quality tend to increase, the more
effective a support function. Product quality defects become less frequent
when equipment maintenance is well managed. Service quality improves
as the availability of products becomes better. Production planning is
more reliable and customer lead times are shorter because fewer time
buffers are required.
Tailoring a supportive function: manufacturing equipmentmaintenance
A support function is designed, ideally, to meet the needs of the specific
manufacturing process using as little capital and at the lowest cost
possible. To achieve this, companies first need to understand the bare
minimum requirements necessary to ensure efficient maintenance. For
most companies, maintenance is efficient when equipment is available at a
level that is acceptable from a manufacturing point of view. Companies
also need to pay careful attention when designing processes, the
organization, and tool support.
The ideal balance between maintenance cost and equipment availability
differs vastly between industries, but also between different production
lines and technologies. The amount of equipment that can be purchased on
a specific maintenance budget also varies tremendously, depending on
whether best practices are applied.
A recent benchmarking study of engineered products, automotive
suppliers, and chemical companies conducted by Roland Berger Strategy
Consultants suggests that automotive suppliers – on industry average – have
the worst cost-to-availability ratio of all three sectors. The spread between
low performers and best practice is especially wide in the chemical industry.
The importance of the cost of failure is also pronounced to varying
degrees in different industries. In a workshop production environment, an
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Mai
nte
nan
ce c
ost
s [i
n%
of
asse
t va
lue]
Equipment availability
Engineered products
9085807570656055
Automotive suppliers
12.0
0.0
2.0
4.0
6.0
8.0
10.0
Industryaverage
95 100 908580757065605512.0
0.0
2.0
4.0
6.0
8.0
10.0
95 100
Chemical industry
Industryaverage
908580757065605512.0
0.0
2.0
4.0
6.0
8.0
10.0
95 100
Industryaverage
Best practice Low performer
Figure 11.2 A benchmarking study of maintenance costs and equipment availability shows the improvementpotential for different industriesSource: Empirical study by Martin Weiss.
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equipment failure affects only one production stage. Work-in-process
buffers the implication between stages. An assembly line is hit much
harder, because the entire line stands still if any single stage fails to
operate properly. In the process industries, the cost of failure might even
be a product loss, which is extremely costly because of rework or
complete disposal. One cross-industry trend is clear: as the share of
equipment cost to total production cost increases, the greater the impact of
maintenance management on overall production cost.
A comprehensive approach to managing equipment maintenance – and
manufacturing support functions – comprises six building blocks:
strategy, process, organization, personnel, IT systems, and control.
Managing spare parts is a special topic that appears in all six dimensions.
It is a support function to the support function of equipment maintenance.
Building block 1: Strategy
Companies can pursue three different maintenance strategies: breakdown,
predictive, and preventive. Breakdown maintenance (‘run to failure’) aims
at maximizing the useful life of all parts. Equipment is not serviced
regularly, but only when a failure occurs. Breakdowns cannot be predicted,
and this has implications for production planning. Predictive maintenance
is based on frequent checking and a proper understanding of equipment
wear and tear. Maintenance is performed when a certain level of wear and
tear has been reached. Preventive maintenance uses regular service
intervals. Parts get serviced and changed on a fixed schedule. Servicing
times, as well as cost and capacity, can be planned in advance.
Companies should choose what strategy to follow based on the
probability and impact of possible equipment failures. Roland Berger uses
a risk-based method to classify possible failures and to determine the most
appropriate maintenance strategy and parameters. This method is based on
a failure mode and effect analysis (FMEA). It assesses all the failure
modes that can be observed with a specific piece of equipment, and then
describes all possible causes for those failures. Statistical data is evaluated
to estimate the probability of each individual cause. The severity of each
failure mode represents the associated failure costs.
The ability to detect a failure mode or failure cause in advance is another
factor that should influence the choice of maintenance strategy. Probability,
severity and detection effectiveness can be aggregated into a risk priority
number. All three are used separately to determine what strategy is best for
dealing with each failure mode. A service plan can then be worked out for
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8MAINTENANCEMANAGEMENT
ORGANIZATION
Central Decentral Integrated
In house
Out sourced
IT SYSTEMS
• Maintenance planningand scheduling
• Order processing• Spare parts
management• Costing
STRATEGY
Run to failure
Predictive
Preventive
Options
Degree ofPlanningCONTROLLING
Ava
ilabi
lity
Plannedlosses Unplanned
losses
$ maintenancecost
OEE *
OEE * � Operating EquipmentEfficiency
PROCESS
CleanDismantleCheckTransportRepair
Operator Technician
...
PERSONNEL
Losses impacted byeffective maintenance
Example: Pump repair
3rd party
Figure 11.3 Comprehensive maintenance management consists of six building blocks
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each piece of equipment. Through the risk-based method, the selected
maintenance strategy is clearly influenced by the equipment lifecycle. After
a new piece of equipment is installed, early breakdowns are likely to occur
because of poor component quality, assembly errors or design faults.
Thereafter, breakdowns are seldom observed. When they occur, operator
errors, dirt or maintenance mistakes are generally responsible. Later in the
lifecycle, attrition breakdowns dominate. Since these are caused by
component wear and material fatigue, they can be predicted.
Building block 2: Process
Executing the selected maintenance strategy involves three levels of
planning.
• Strategic parameters have to be set. Parameters – such as fixed
maintenance intervals, number of operating hours, and level of wear
and tear – that trigger maintenance are defined per equipment type and
maintenance activity. These parameters help companies find a balance
between maintenance and failure cost.
• A detailed work plan per activity is required. This allows companies to
determine standard times and the spare parts and tools that will be
needed for operational planning purposes – in most cases, the technical
content of maintenance activities is specified by the equipment
supplier. However, companies might find it worthwhile to review the
activities with in-house technical experts and suppliers in order to
detect potential for improvement.
• Companies need to make plans regarding employees and outsourcing
partners. Production employees need to be involved in the coordination
of production planning, especially during downtimes caused by
maintenance.
Building block 3: Organization
Based on experience, on average, only 20 percent of maintenance jobs
actually require maintenance experts. Equipment operators can complete
many simple maintenance activities – such as cleaning, set-up, and
lubrication – after some training. This reduces costs and processing time
because no maintenance personnel have to be called in, and operators are
not idling time. Expert assistance would probably have to be brought in
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for more sophisticated tasks such as regular servicing or fixing minor
breakdowns. Heavy maintenance, general overhaul, and refurbishment
should remain the domain of dedicated maintenance personnel.
Integrated maintenance improves maintenance efficiency by minimiz-
ing the number of interfaces and handovers between single activities
comprising a maintenance task. Companies also enjoy greater respon-
siveness and highly motivated employees when first level maintenance is
integrated into production. However, investing in initial training and
ongoing coaching of operators, and encouraging knowledge sharing
between production lines and across sites is expensive. It is also difficult
to adjust capacity for maintenance when the operating crew of each line is
solely in charge of the majority of maintenance tasks.
Companies might also choose to have a dedicated pool of resources
for maintenance, either on plant (decentralized) or company (centralized)
level. With the decentralized option, companies profit from good knowl-
edge of the plant and short distances. The opposite side of the coin is the
need for greater resources, because a decentralized maintenance team’s
workload fluctuates. A centralized organization benefits from the sharing
of knowledge, and a more balanced workload; however, it also faces
long distances, lack of local knowledge, and difficulties motivating
employees.
There is a promise of efficiency gains when companies share resources
and balance workloads with maintenance, especially when engineering is
done in-house and machines are built on site. Both functions typically
struggle with workload fluctuations due to their limited internal cus-
tomer base. A well-rounded mix of all three concepts – centralized,
decentralized, and integrated – is essential to setting up an effective and
efficient maintenance program.
Companies that choose decentralized or central maintenance units also
need to decide between make-or-buy, in-house or outsourcing. It is now
common practice for virtually all services related to equipment
maintenance to be offered by equipment suppliers and third party service
providers. Specialized suppliers, which are often located close or even on-
site, are offering more and more production support services. The scope of
outsourcing can vary from selected operational maintenance tasks to
complete maintenance planning and execution. From a utilization point of
view, an internal team should be used to carry the base workload, while
demand peaks should be covered by scalable external resources. When
considering a plant’s ability to operate independently from external
providers, companies might wish to ensure that an internal team is at least
capable of maintaining the emergency mode operations of their
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production equipment. They should also be able to perform critical
maintenance tasks without external support.
The advantages of outsourcing are clear. Fixed maintenance costs
become variable, thus reducing utilization risk and bridging capacity
shortages. It creates more efficient cost control, eventually lowers
maintenance cost, and ensures better quality service. As well as gaining
access to the external competencies of specialized suppliers, the internal
service shop also gains free capacity for projects dependent on know-how.
The disadvantages are clear, too. Companies risk losing internal skills,
and the ability of internal resources to repair defects and operate product
equipment self-reliantly is undermined. Long process times, quality
issues, and delivery risks are also potential problems. Companies that
outsource maintenance tasks need to have rules in place to resolve process
issues. To control external maintenance providers, a clear description of
process interfaces and service levels is essential.
Building block 4: Personnel
When operators take on maintenance tasks, they must be trained and
coached appropriately. Depending on the type of maintenance job,
technical skills might be required. Operators must be equipped with
analysis and problem-solving techniques, and guidelines that enable them
to diagnose breakdowns efficiently and make decisions quickly.
Building block 5: IT systems
Computerized maintenance management systems (CMMSs) provide
support for equipment maintenance in four areas.
• Maintenance planningadvisescompanies whenmaintenance work is requ-
ired according to parameters set for each piece of equipment. It also helps
companies to schedule capacity planning and to staff maintenance tasks.
• Maintenance order processing creates work orders, facilitates commu-
nication between internal functions and external service providers, and
reserves and cancels spare parts and tools. It also triggers further
Enterprise Resource Planning (ERP) functions, provides traceable
documentation of machine history, and tracks relevant information such
as the cause of a problem, downtime involved and recommendations for
future action.
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• Spare parts management is responsible for controlling spare parts
inventories and procurement.
• The monitoring and reporting area is responsible for reporting
maintenance costs and service levels.
While work order processing and basic reporting are covered by
modern ERP systems, advanced planning can be improved by employing
specialized software solutions. Most of these are designed to work as
add-on solutions that link with ERP systems such as SAP R/3. Some
CMMS products focus on particular industry sectors – for example, the
maintenance of vehicle fleets or healthcare facilities. Others aim to be
more general.
Building block 6: Control
The purpose of maintenance control is to deliver information necessary
for steering maintenance activities. Maintenance control needs to measure
both maintenance and failure costs. A CMMS can assist companies to
book all maintenance activities to the right cost centers so as to distinguish
cost incurred to one production line from another, and to distinguish
between regular inspections and servicing, preventive repair work, and
defect repair. This becomes more challenging in an integrated mainte-
nance organization, where operators spend part of their time on mainte-
nance tasks.
Avoiding failure costs is the real value that effective maintenance
provides. Since avoided failures do not show up in accounts, equipment
downtime is widely used as a proxy to measure the effectiveness of
equipment maintenance. A measurement of operating equipment effec-
tiveness identifies planned and unplanned losses of equipment avail-
ability. Planned losses are times when planned maintenance jobs take
place; it also covers times when no orders are planned or operators are
unavailable. Unplanned losses are caused by equipment breakdowns, and
variances in set-up and cleaning times. Quality loss and operator breaks
and speed are found in this category too. An accurate assessment of
maintenance effectiveness distinguishes losses by their root cause.
The target for equipment downtime should be based on the availability
level defined for each piece or type of equipment in the strategy phase.
The target also reflects the probability and impact of failure drawn from
historical data stemming from the FMEA.
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A support for the support function
Although equipment maintenance is a supportive function, it also draws
on another level of support: spare parts management. Spare part logistics
is responsible for ensuring that spares are available at the right place when
they are needed. They are also in charge of keeping logistics cost and
capital employed under control. To set up spare parts management, the
same six dimensions (the building blocks) need to be considered.
Strategies for spare parts supply vary from locally held stock (which is
the most expensive but is always available), to central stock and call-off
on demand from one or multiple supplier(s). Parameters such as target
inventories have to be set in order to control the process of spare parts
procurement. The organizational set-up is likely to reflect the centralized
or decentralized strategy of stock keeping and reordering. Employees
have to be trained and be supported by an IT system that provides
inventory transparency, and triggers purchase orders according to the
respective replenishment strategy and parameters. Maintenance control
monitors the cost and capital employed in the spare parts inventory, and
compares it with availability and the lead time experienced by the internal
customer, the equipment maintenance function.
Executing a maintenance excellence program
When executing a maintenance excellence program, our project teams
adhere to an approach that comprises three phases: positioning, concept,
and implementation. While each phase has its specific objectives and
deliverables, in every step the consultants pay attention to each of the
building blocks previously outlined.
Before the first project phase begins, there is a preparatory phase during
which targets are set for the program. Companies might want to improve
maintenance in a variety of areas. Common targets are lowering
maintenance cost, reducing failure cost, improving product quality, and
raising service quality levels. Target setting needs to reflect the expec-
tations of internal customers and consider interdependencies with other
functional areas.
The equipment availability target of maintenance – and cost incurred –
is, to a large degree, determined by decisions made elsewhere in the
organization. These decisions also affect the equipment availability
necessary to satisfy external customers. For instance, manufacturing
technology chosen by R&D determines what manufacturing equipment is
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purchased. This impacts the options and requirements for maintenance.
Easily maintained machinery, for which spare parts are easily available at
low procurement costs, makes the job of equipment maintenance easier.
The job is also made easier with the use standard machinery that comes
with maintenance services from the equipment supplier or can be com-
pleted by a range of third-party providers. More elaborate equipment
developed by an in-house machine building function requires advanced
internal maintenance skills.
Decisions on production planning and scheduling narrow down the
options for corrective, predictive or preventive maintenance. The delivery
service levels promised to external customers by sales and supply chain
management functions significantly impact maintenance management
by setting standards for product availability and buffer inventories. Our
project approach to tailoring a support function emphasized intense
involvement among the respective functional interfaces in the client
organization.
Once the expectations are specified and agreements have been reached
between the equipment maintenance function, internal customers and
other stakeholders, the project is conducted in three steps: positioning,
concept, and implementation.
Positioning
In an exercise spanning two to four weeks (depending on the size and
complexity of production equipment being examined), consultants gather
and analyze production data from the shop floor and ERP systems.
Benchmarking maintenance costs and equipment availability with
industry peers provides an assessment of the initial situation. Depending
on the quality of data available, an FMEA is conducted to evaluate the
capability for probability, severity, and detection for typical equipment
defects.
Concept
Based on the findings of the positioning phase, the most adequate
maintenance strategy is chosen by equipment type through Roland
Berger’s risk driven approach based on FMEA results. Further concept
detailing deals with process design (including maintenance parameter
setting), make-or-buy decisions, organizational set-up, skills and
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TARGET SETTING Positioning Concept Implementation1 2 3
BE
TT
ER
QU
AL
ITY
• Better product quality
• Lower maintenance costs
• Better service quality
• Lower failure costs
PROJECTSTART
Plant data collection Maintenance strategy
• Change management
• Sharing knowledge
• Operational support
• Constant strategy revision process
Polymerisation Compounding…
FMEA Concept detailing Impact
• Processes• Make-or-buy• Organization• People• IT system• Controlling
Failure costsMaintenancecostsDescription
Probability
Severity
Detection
RPN
2–4 weeks 6 weeks Depends on work involved
MILESTONES
RPN � Risk priority number FMEA � Failure mode and effect analysis
LO
WE
R C
OS
TS
Run to failure
Predictive
Preventive
Options
Degree ofplanning
Req
uir
emen
tsS
pec
ific
atio
n
Figure 11.4 A Maintenance excellence program needs clear target setting and is structured in three project phases
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qualifications requirements, IT system selection, and a comprehensive
and consistent control system. This project phase typically takes six
weeks. At the end of the concept phase, an implementation plan has been
generated and is ready to be executed.
Implementation
Successful implementation involves more than simply installing the new
structures, processes and systems. Key success factors are change
management, and communication and knowledge sharing between
external consultants and client employees on all levels of the client
organization. Pragmatic operational support on the planning – and even
shop floor – level is frequently required during the initial phase, especially
when a company is transitioning towards an integrated maintenance
organization.
After initial implementation, the selected maintenance strategies need
to be constantly revised and improved, based on the findings from
maintenance control and in adjustment to a changing production
environment. From our experience, three principles need to be adhered
to if a project is to be successful:
• There needs to be close cooperation with the maintenance organization
• Teams need to develop a workable concept that all parties, including
interface functions, have agreed on
• Companies need to choose pragmatic solutions.
Maintenance in Europe’s chemical industry
Two examples from the chemical industry will elucidate what companies
have to gain by properly managing their maintenance support function.
Before embarking on a maintenance excellence program, many
companies first have to place their maintenance building blocks in
order. Because equipment downtime usually affects a whole series of
production steps, the cost of failure in the chemical industry is high. In
addition to lost output, there is also a significant risk of material loss. This
has to be reworked or even scrapped after an equipment breakdown.
Our first client is a global player in the specialty chemicals industry,
and our project focused on selected major sites in Europe.
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NEW organization (integrated)
11081
2004 2006
Maintenancecost
�29(�26%)
2004 2006
Additional output worth EUR 120 m
Equipment availability (average)
92% 94%
OLD organization (separate)
Production Plant engineering Central engineering
Operation
Fix breakdowns
Planned maintenance
Small projects
Large projects
Production Plant engineering Central engineering
• Plant manager• Production supervisor• Operators
• Engineers• Workshop• Technical office• Coordination engineers
• Civil engineering • Electrical engineering• Control engineering• Design/construction• Special workshops
• Plant manager• Production supervisor• Operators• Production engineers• Workshop• Control engineers
• Technical office• Coordination engineers
• Civil engineering • Control engineering• Design/construction• Special workshops
Operation
Fix breakdowns
Planned maintenance
Small projects
Large projects
Support
Support
Support
Moresignificantincrease forpreviouslycritical keyequipment
Maintenance costs ( m)
Figure 11.5 Project example: major sites of a global player – specialty chemicals
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Example: Availability of critical production lines
Equipment maintenance was organized on two organizational levels:plant engineering and central engineering. Despite increasing efforts toimprove maintenance, the client felt that the availability of some criticalproduction lines was insufficient, resulting in loss of sales.
The project team’s analysis revealed that the company had nodefined maintenance strategy. Maintenance control was budget-oriented only. Employees in the plant engineering departments were,on average, highly qualified, but their workload and utilizationfluctuated due to their high level of specialization. Operators hardlyparticipated in maintenance activities, which led to significant idleperiods as they waited for experts from plant engineering to arrive toperform tasks that were often simple. The participation rate of operatorswas 8 percent. Plant engineering performed 35 percent of allmaintenance jobs, 57 percent was contributed by central engineering,of which only 15 percent was undertaken by centrally coordinated thirdparties. The overall share of planned maintenance was at a low 28percent of all maintenance jobs.
The project team developed differentiated maintenance strategiesfor the client. An evaluation of the technical content of maintenancetasks led the team to conclude that operators could handle the majorityof tasks. The decision was made to move towards a decentralizedmaintenance organization that was integrated with production. Theplant engineering team was drastically reduced to a technical officewith a number of coordination engineers. The workshop – formerly runas part of plant engineering – was transferred into production. Theproduction function now deals with most planned maintenance jobsand small breakdowns, raising their share of maintenance work from8 percent to 28 percent. The number of interfaces and handoversbetween subsequent work steps of maintenance tasks has fallensignificantly. Processing times have also decreased.
Plant engineering and central engineering provide assistance onsmall projects, while large projects requiring specialized skills and toolsare still run by central maintenance. In order to increase utilization ofcentral maintenance staff and to gain access to external expertise, theoutsourced portion of maintenance hours was almost doubled, from 15to 27 percent. The headcount in central engineering was reduced by 38percent of its original size.
The investment in an extensive training program for operators andthe installation of a medium-range CMMS tool paid off after eightmonths of project work at a pilot plant and subsequent roll-out to all
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European sites. Annual maintenance costs were reduced by 26 percentfrom ⁄110 million to ⁄81 million. Equipment availability increased from92 percent to 94 percent, which represents additional output worth⁄120 million in sales revenues.
Besides compelling financial figures resulting from the project,another figure illustrates how much difference the program has made.The portion of planned maintenance grew from 28 percent to 70percent. Equipment maintenance, which used to be a fire-fightingexercise performed by a poorly motivated and underutilized team withlittle attachment to production goals, has been turned into a well-planned activity. As a bonus, the majority of operators perceive the workas enriching their jobs.
Shared support functions in the chemical industry
The second example demonstrating what can be gained by properly mana-
ging the maintenance support function shows how outsourcing production
support functions can save costs – provided that the third-party provider
operates on a more favorable cost basis. Outsourcing opportunities
have grown substantially over the past years in Europe’s chemical
industry. The restructuring of all but one of the big conglomerates during
the 1990s – BASF is the exception – has transformed former mono-sites
into open industrial parks.
Example: Outsourcing production support functions
The sizeable support functions of the parent companies had lost majorparts of their customer base. Splitting up the support functions betweenthe new production companies and business segments would havedestroyed synergies, even within major chemical sites of companiessuch as Bayer (split into Bayer and Lanxess) and Hoechst (partitionedfrom 1994 until the merger with Rhone-Poulenc in 1999). The solutionwas to split real estate, site infrastructure, and services from theproduction companies. Bayer Industry Services was founded to lookafter Bayer’s sites – the former Hoechst sites in Frankfurt; Infraservservice three other major locations.
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The restructuring not only fragmented large companies, it also forcedcapacity adjustment. Some European production units were downsizedor closed. Industrial areas and service capacities became available tothird parties interested in starting up business in the new chemicalparks. The result of this development is a wide range of supportiveservices advertised to chemical production companies: from generaland location specific (such as real estate and basic infrastructure, sitesecurity and utilities) to production related and location independent(such as engineering and equipment maintenance). Today, there aremore than 40 chemical parks in Germany alone.
New developments in refining organizations
It is not only the chemicals industry that has seen benefits when support
functions are redesigned to meet the needs of the manufacturing process, as
our next project example shows. The case we draw on involves a refinery.
Refineries currently enjoy favorable conditions. High overall economic
growth translates into healthy margins, and the demand outlook for the
near future is quite promising. But the oil business is subject to global
geopolitical forces and is strongly influenced by local catastrophes.
Following Hurricane Katrina – which had a devastating effect on oil
production and refining centers in the Gulf of Mexico, Louisiana and
Texas – refining margins reached a peak. Since the business is cyclical, it
is only a matter of time until the next major downturn hits.
Strong demand has led to new requirements. A workforce that has
experienced repeated waves of job reductions and has been taught to
follow a ‘break–fix’ maintenance philosophy struggles to run a plant at
100 percent over extended periods. Additionally, as refiners were reluctant
for many years to hire enough employees, workforce gaps are common in
this sector. Since it takes several years to train new personnel so that they
are able to contribute fully to successful operations, this gap cannot be
closed quickly. All too often this leads to management stretch. Too many
initiatives in too many areas – ranging from operations over capital
projects to service function management – have to be started at once. What
changes to the refinery organization can managers make to ensure that
their refineries are able to cope with the new challenges?
In our experience, a few key elements help prepare a refinery
organization to meet the requirements of today’s business landscape and
to secure long-term viability. One element is a site fitness program (SFP)
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Pro
xim
ity to
pro
duct
ion
Independent of locationLocation specific
Utilities
Sitesecurity
IT &Communications
Catering
Employeetraining
Stafftransportation
Raw materials
Equipmentmaintenance
Analytics
Engineering
Warehousing andtransportation
IT andCommunications
Waste disposal
Pipelinebridges
Procurement
Office services
Infrastructure /Real Estate
Data networks
Figure 11.6 Providers have developed from general and location-specific services into production supportfunctions independent of location
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for organizing the site. The goal of any SFP is to increase a refinery’s
flexibility. This program enables the refinery to undertake careful review
and documentation of all functions, after which core business functions
can be separated from support service functions. Core functions that are
strategically relevant for the site because of their impact on the business
and critical know-how include functions such as operations and operations
planning. Key functions, by contrast, are crucial to the site but have no
unique critical aspects. These functions are required by the core functions
and, in some cases, are enforced by legal regulations. Examples of such
functions are maintenance, fire services or HSSEQ. Materials manage-
ment and facility management are typical examples of support functions.
Example: Flexibility
In one project, we helped a German refining site transform itself into aflexible refinery by following a SFP. First, the refinery – with our help –reviewed its functions and identified the different groups of functionsthat needed to be optimized. The core functions were optimized formaximum performance. Next, the support functions were reviewed,with close attention paid to opportunities to optimize site services thatcould improve processes and release cash. These functions were viewedas candidates that could either be pooled together in a service centerwith other sites or outsourced to specialized third-party serviceproviders. The refinery decided to outsource its materials management.
A second element was the identification of value-added servicepartners for non-core activities. An outline of these two elements isprovided in Figure 11.7.
Total site fitness Program fororganization(SFP)
• Site fitness program: review of all functions in a refinery
• Identify core business activities
• Identify organizational alternatives for all other functions inside or outside the organization
Identification ofvalue-addedservice partners
• Identify non-core activities that can be provided by service partners
• Key: qualified partners consider the relevant function as core business
• This can include services, supplies, etc.
• Should also include financing of capital employed
Figure 11.7 Two elements needed to create a high performancerefinery organization
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In the implementation phase of the project, the management of therefinery decided to outsource one of its support functions – thematerials management of the refinery – to a value-added servicepartner. Some clear criteria separate a value-added service partner froma classic vendor. A value-added partner operates activities as a corebusiness, continuously strives to optimize the joint partnership, iscareful to stay in a neutral position, and complements the serviceoffering with other value-added partners to form a value network. Therole of vendors, in contrast, is typically restricted to selling parts anddistinct services.
Although the refinery had a clear idea of what it wanted to achieve,finding a partner turned out to be a challenge. The large list of candidatesquickly dwindled once the requirements of materials services for arefinery were explained in detail. The new partner had little time to get onboard and handle regular operations because the refinery had scheduledits next turnaround one year hence. A turnaround is a major undertakingin this business. The whole refinery is shut down and equipment ischecked for functionality and remaining lifetime, and replaced asappropriate. This has major implications for the supply of spare partsand materials. Several hundred purchasing requests must be processedwithin a short time frame.
Eventually, an appropriate partner was found and the wholematerials management function was transferred to this partner. Inagreement with the refinery, the new partner built a new warehouseimmediately outside the refinery and optimized all material flows. Thisalso allowed the refinery to offer the services to other prospective sitesin the region once the turnaround had taken place. The transfer wasexecuted successfully. Getting the partner on board brought significantimprovements. Management and the key refinery team can now focuson core business activities.
Overall, the SFP and the outsourcing of the refinery’s materialsmanagement resulted in a successful turnaround. Because of these twosteps, labor costs were reduced by around 20 percent and material costsby 2–3 percent over a period of three years. Specific key performanceindicators for the refinery were improved. These included totalemployees/refinery production, maintenance cost/refinery output, andreturn on capital employed. Finally, the headcount and cost base hasbecome more flexible, giving the management room to maneuver inresponse to shifts in the business climate.
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Outlook
The reasons for a production company to share support services with other
customers are synergy creation and a favorable cost base resulting from
economies of scale. As a future trend, chemical parks and location-
independent providers will extend the range of their service offerings
along the value chain of the chemical industry, from pure support
functions to closer to the production process. The same pattern is
discernible in other sectors too. While services become more sophisticated
and customer-specific, interdependencies between service providers and
customers increase. A key success factor will be a seamless and efficient
integration of all providers into the customer’s business process. This
helps maintain flexibility and variability of cost, which is the main reason
why organizations outsource respective functions and services.
Further reading
Roland Berger Strategy Consultants (2004) ‘Global Footprint Design’.
Stuttgart.
• Operations
• HSSEQ
• Engineering
• Operations planning
• Controlling
Core and key functionsremaining on site
3rd
part
y
Shared services
• Procurement
• Materials management
• Maintenance
• Strategy
Corporate functions
• Laboratory, R&D
• HR, Accounting
• Logistics• Facility management• Other services3r
d pa
rty
Externalparties
Site/globalfunctions
Functions withoutsourcingpotential
Externalparties
Functions withoutsourcingpotential
Core business focused site
Figure 11.8 A German refining site transforms itself into a flexible refinery
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PART IV
Supply Chain Management
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Introduction
Supply chain management – morethan just logistics
Robert Ohmayer and Steffen Kilimann
Supply chain management is not a fancy consulting term for familiar
functions such as logistics, transportation or warehousing. As the contours
of the business world have shifted radically during the past decades, the
demands on the supply chain have expanded. An integrating role, respon-
sible for linking major business functions and processes into a cohesive
and high-performing business model, has become necessary for business
success. In many companies, supply chain management has taken on this
central corporate role. The focus is no longer on how to move goods from
A to B or how to organize a warehouse. Supply chain management
sidesteps the function-based corporate organization and, instead, inte-
grates the core functions that create value in an end-to-end process.
Why is supply chain management so important?
Emerging economies provide new market opportunities and are shifting
the center of gravity for sales and operations. Western European markets
have become more mature and are highly competitive, which places the
customer in a strong position. Whether markets are mature or developing,
satisfaction and loyalty are essential to processes that serve the customer,
including the supply chain. To meet demand, companies need to focus
sharply on solutions and services. Relying on products is no longer
enough. The supply chain has to expand and be able to serve a multitude
of offerings.
The outsourcing of manufactured components is leading to increasingly
complex business processes that require special attention and close
monitoring. The scope of the supply chain is extending to manage this
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growing variety of interrelations. Productivity is taking on a new meaning:
it refers not only to cost efficiency, but also to asset and service efficiency.
Successful companies today strive for highest performance and lowest
costs in equal measure.
The importance of supply chain management in corporate strategy,
especially its direct impact on return on capital employed (ROCE), is
clear. Supply chain decisions directly influence the value drivers of asset
turnover and operating profit margin. Optimizing inventories throughout
the logistics chain boosts asset turnover, for example, as does streamlining
production and logistics networks. Reducing the complexity of both
product ranges and processes in the logistics chain lifts the operating
profit margin.
That is why supply chain management that aims to boost ROCE must be
closely aligned to upstream corporate decisions. But a ‘one-supply-chain-
fits-all’ mindset is not the right strategy. Successful companies tend to align
their supply chain to the requirements of the relevant business segment or
business unit. Customer and market requirements should be at the forefront
of all supply chain decisions. Finding the right segmentation is definitely the
key here. In highly competitive commodity markets, a cost-efficient supply
chain with short lead times is critical. By contrast, in markets with more
strongly customized products, a flexible and responsive supply chain is
paramount.
Supply chain structures should be rigorously adapted to fit the relevant
market requirements. This must be reflected in all structures, from supply
chain organization to monitoring systems, and from production and
logistics networks to processes and systems.
How can companies achieve supply chain excellence? Drawing on
insights and experience gained advising clients, Roland Berger Strategy
Consultants has created a framework for establishing end-to-end supply
chain management. It covers all areas of supply chain strategy, from
performance through to supply chain enablers.
In Part IV, we showcase our end-to-end framework, which is also
illustrated in Figure IV.1. We describe the various methods and
procedures for optimizing the supply chain at the level of strategy,
performance and enablers, and employ examples from past projects and
survey results to demonstrate the practical value of these methods and
procedures. Dr Steffen Kilimann and Robert Ohmayer, in Chapter 12, use
a case study from the electronic components industry to explain how
companies can align their supply chain to the demands of a global market.
In Chapter 13, Alexander Belderok and Thomas Hollmann show what
impact can be achieved when complexity is correctly identified and
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effectively managed. Using the results of a project from a healthcare
company, they highlight the key levers for reducing complexity. In
Chapter 14, drawing on a survey and case study examples, Roland
Schwientek and Christian Deckert demonstrate how companies can boost
their supply chain performance by achieving excellence in working
capital and, in Chapter 15, Ingo Schr€oter and Stephan M. Wagner present
best practices in establishing supply chain organizations.
I Supply chain strategy …
…links supply chain initiatives to business strategy and its requirements…expands strategic options and serves as a basis for new and powerful business strategies
II Supply chain performance …
…covers all aspects of value creation including sustainable top-line growth, sufficient operating margins, leading service levels, andefficient capital structure
III Supply chain enablers …
…encompass an end-to-end view considering all flow aspects from information to goods, services, funds, and total costs …are set up in an adaptive and responsive manner to allow for proactive changes of the market and/or strategy
Supply chain
strategy
Top-line growth, service
performance
Cost perfor- mance
I
II
III
NETWORKSPROCESSES AND SYSTEMS
CONTROLLINGORGANIZATION AND RESOURCES
Asset perfor- mance
V CHANGE MANAGEMENT
IV BEST-PRACTICE BENCHMARKING
Figure IV.1 Our framework for end-to-end supply chain management
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CHAPTER 12
Global supply chain management: asuccess factor for global players
Robert Ohmayer and Steffen Kilimann
Introduction
Supply chain management (SCM) is the nervous system of today’s global
economy. It has grown beyond its operational roots, when it was a way of
controlling the flow of goods and services, to take on a more strategic role.
As well as encompassing all operative core processes, it is now respon-
sible for managing costs, and also reducing complexity and redesigning
value chain structures. SCM directly influences the success of a company’s
key financials, such as return on capital employed (ROCE). Logistic
functions such as inventory management, transport and warehousing were
once purely functional and managed on a country-by-country basis only.
These days they are bundled together and managed by an SCM manager
who steers inventory and production capacity for an entire region or on a
global scale.
However, SCM is a highly complex undertaking. New trends are
emerging and, with them, a series of challenges. These have to be
addressed if companies are to have supply chain excellence. In our view,
companies require a strategic approach to master this complexity and to
move through these obstacles. For this purpose, we have developed an
end-to-end global supply chain management framework.
To illustrate how our approach works – and to highlight its tangible
benefits for companies – we discuss a real project in which we helped a
global producer of electronic components to achieve leaner production,
distribution, and customer service structures. Before discussing our
approach, we examine the trends and challenges in supply chains today.
We pay particular attention to the increasing importance of global value
chains; the division of labor in networked value chains; the growing
complexity of product portfolios; and the demand for higher levels of
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service, reliability and flexibility. Following this, we discuss how com-
panies can manage global supply chains.
Trends and challenges in supply chains
Supply chains are becoming more complex in terms of geographical
spread, functionality, and product portfolio. This is altering the way
supply chains need to be managed. One of the greatest challenges
companies face today is ensuring that the savings they realize by
manufacturing and sourcing in low-cost countries are not negated by
higher coordination and management costs.
Today’s companies are increasingly globalizing their value chains.
They do so mainly to secure cheaper supplies of products and services,
and to open up new markets. The volume of foreign direct investment
(FDI) is a clear indication of the extent to which value chains have become
globalized. Over the past 20 years, FDI has risen continuously by an
average of 10 percent per annum. No signs indicate that this trend will
slow down or reverse in the near future, as can be seen in Figure 12.1.
As companies assume a more global footprint, their supply chains
become more intricate, sometimes spanning several continents. Adidas,
for instance, manages only design, marketing and customer service from
its headquarters in Germany. Production has been almost completely
relocated to low-cost countries, while distribution and sales are organized
on a global level. This, in itself, presents new challenges in terms of
building up and managing supply chains. Suppliers, production networks,
and logistics networks located in different parts of the world must all pull
together.
10.9%
5.9%
2.5%
FDI
Exports
GDP
100
629
762
164156
312324
1985 1990 1995 2000 2005
CAGR
Figure 12.1 World GDP, world exports, world FDI
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Supply chains are also becoming more complex as the division of labor
in networked value chains changes shape. With the Internet as their
backbone, modern information and communication technologies cut
transaction costs. This helps companies to specialize and facilitates
effective networking. These technologies empower companies to reduce
vertical integration by outsourcing more materials and services. The
automotive industry has been a forerunner of this trend. According to a
study of the automotive supplier market that our company conducted in
2007, the share of value creation of original equipment manufacturers
(OEMs) will shrink to 25–30 percent by 2010. This means that suppliers
will take on even more responsibility for developing and producing cars,
leading to even more complex networks of product and information flows
between suppliers and OEMs.
The division of labor is also becoming more pronounced as the manage-
ment of supply chains transcends corporate borders. Both the automotive
and retail industries, for instance, are very advanced in integrating
logistics to ensure smooth product flows and to satisfy required service
levels. In addition, the more specialized services offered by logistics
providers allow many companies to outsource parts of their supply chain.
Smoothly integrating these providers is one of the key challenges facing
the discipline of supply chain management today.
The complexity of the supply chain is also turned up a notch as
companies vary their product portfolios to an ever-greater degree. Central
European companies, in particular, are trying to compensate for rising
costs at home by focusing on product innovation. They are offering a
broader range of customized, high-quality products accompanied by
excellent service. At the same time, they are seeking to diversify into new
market segments. Product differentiation has risen particularly dramati-
cally in the automotive sector, and premium OEMs and mass manufacturers
alike are embracing this trend. To counter increased competition, auto-
motive manufacturers are placing new product variants on the market and
launching model offensives at an unprecedented rate. By taking this action,
they aim to increase the total number of units sold – or, at least, to keep this
level stable. The number of models of cars and light commercial vehicles in
Germany rose from 140 to 335 between 1985 and 2005. If OEMs’ plans
pan out, the number will increase to more than 365 model types in 2010.
The number of models per brand mass manufacturers have offered rose
from three-and-a-half in the 1980s to more than eight today. Similarly, the
variety of car configurations has also swelled. For its Mini brand alone,
BMW offers customers the choice between 418 different paint and color
combinations.
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As a result of these changes, supply chain management is forced to
meet ever more intricate and involved requirements. The complexity of
development, finishing, and assembly processes increases. Different
market segments expect different service levels and are exposed to
varying levels of cost pressure. Companies must master a tricky balancing
act: They must keep a cap on their supply chain costs while still delivering
high-quality, made-to-measure customer services and broad product
portfolios.
As supply chains become more complex in terms of geographical
reach, functionality, and product offerings, the people who manage them
have to do more to ensure high service levels, rapid responsiveness, and
flexibility. The trade-off between product costs and supply chain costs
needs to be weighed up carefully. The more customized products and
services are, and the faster companies have to respond to market trends,
the more difficult it is to globalize production and sourcing policies.
Companies moving in this direction must modularize their products as
far as they can while introducing new variants as late as possible. They
must also keep stocks low and operate fast supply chain processes. One
way to do this is to implement cross-docking and merge-in-transit
procedures that allow customer-specific products and product ranges to be
merged and assembled from different sources without any need for
warehousing.
Supply chain processes must become extremely reliable, too –
especially in sectors with short product lifecycles, such as the PC, mobile
phone and fashion industries. Best practices developed in these industries
can be transferred to other sectors. If companies in these sectors fail to
learn, the costs can be horrendous. Companies in the retail sector, for
instance, have endeavored to improve their supply chain processes over
the past few years in order to increase their product availability. Since the
average out-of-stock rate of European retailers is between 7–10 percent,
retailers have a strong incentive to achieve high service levels and create
supply chains that function perfectly. Surveys show that if a product is not
available for customers, then 9 percent of them will not be tempted to
purchase an alternative product. This amounts to ⁄4 billion in lost sales in
Europe alone.
Optimizing global supply chains – a success story
Aligning the supply chain with global requirements is a strategic
management challenge. Optimizing individual functions in the chain
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tends to be counterproductive, as these typically pursue conflicting goals.
For example, establishing alternative sources of supply in low-wage
countries and/or relocating production facilities inevitably leads to higher
shipping costs, longer replenishment cycles, and higher working capital. It
is therefore necessary to take an overview and optimize all aspects in a
considered and coordinated manner.
Drawing on the extensive experience we have gained in building and
optimizing global supply chain management strategies for companies in a
wide range of industries, we have developed an end-to-end global supply
chain management framework. We wish to show how useful and practical
this framework is, and will draw on a project to do so. The project team
developed a holistic supply chain strategy for the region Europe, Middle
East and Africa (EMEA) for a global producer of electronic components.
The project was set up and implemented in several phases and
subsequently rolled out globally.
The globalized company suffered from severe supply chaindeficits
Our client is a fast-growing producer of electronic components; a
manufacturer of electronic connectors, switches and fiber optic products.
Its global revenues exceed ⁄5 billion, one third of which is generated in the
EMEA region. The product portfolio is highly complex, spanning over
500,000 different products and variants. Furthermore, the company serves a
broad range of industries, from automotive, engineering and aerospace
through to consumer products and communications. Each of these industries
places widely differing demands on the company in terms of product
specifications and service levels. The company serves 90,000 customers in
57 countries from 174 manufacturing and warehouse locations.
Example: Global supply chain management framework
In EMEA, the company was having a very hard time meeting requiredservice levels. The inevitable result: dissatisfied customers, lost revenues,and high costs for emergency shipments. The ‘ship-to-request’ servicelevel averaged just 79 percent. In other words, approximately every fifthorder was not delivered on time or was completed inaccurately, despitethe company’s steep supply chain costs.
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Historical development was part of the reason for the company’sunfortunate predicament. The company’s supply chains had evolvedover time. Sales growth had led the company to follow its customersand gradually expand in all core European markets. Warehouses andproduction facilities were set up piecemeal in the various countries. Insome cases, local manufacturers were acquired to penetrate thesemarkets. As the production network grew across Europe, complex inter-company supplier relationships involving multi-step ordering anddelivery processes emerged between different countries. In onecountry, for example, on average 30 percent of all products sold weremanufactured in a different country.
Another driver of complexity in the supply chain was the outsourcingof parts of production to external vendors, some of them in countrieswith low labor costs. Outsourcing had been engaged in to improveflexibility and reduce labor costs. Yet, information was far fromtransparent on a global level because of the many and varied supplierrelationships the company had. Exacerbating the problem, IT systemswere only networked across borders to a limited extent.
The broad product and customer portfolio caused even greatercomplexity, leading to a large number of unprofitable, low-volumeproducts and customers. In addition, responsibility was fragmentedwithin the supply chain. There was no one person responsible for supplychain management at a national or enterprise-wide level. Efforts tooptimize existing systems were limited to individual functions andcountries.
Holistic supply chain optimization is the key
To improve service levels and reduce supply chain managementcomplexity, the project team designed and implemented a holisticstrategic approach. The approach draws heavily on the Roland Bergersupply chain excellence framework.
It is our conviction that supply chain strategy, performance, andenablers must fit together seamlessly and dovetail perfectly with acompany’s specific goals if success is to be achieved. How strategy,performance, and enablers work together is shown in Figure 12.2. Thesupply chain strategy lays the strategic foundation for transforming thesupply chain, empowering the company to shift its focus away from acountry-by-country perspective in order to develop a global value chain.In the example of the global electronic components manufacturer, corelogistical functions were bundled in business units that served multiple
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countries. At the same time, corporate functions such as warehousingwere reorganized as shared service centers. These now serve all businessunits.
Supply chain performance links strategic company objectives tospecific supply chain targets. One example is to vary cost and servicelevel targets for different customer and product segments. Reconfigur-ing the supply chain is one of the most powerful levers to optimize theROCE. It can influence profitability by improving cost structures andservice levels, and an optimized network will have a significant impacton capital turnover.
Supply chain enablers refer to the conditions that must be put inplace to achieve defined performance goals. They include organiza-tional and resource sizing issues, monitoring and control, keyperformance indicators (KPIs), processes, system requirements, networkstructures, and material flows, for example.
Defining the strategy and target gets companies off to a good startThere will never be a one-size-fits-all supply chain. The requirementsthat different customers and markets place on availability, deliverytimes, and costs vary too widely for that to be possible. Each supplychain must be examined on its own merits and segmented in line withspecific market demands. For our client, defining different cost andservice level targets for its various business units was the necessary firststep. While the automotive industry insisted on service levels upward of99 percent, other sectors were happy with lower service levels.Considering the exorbitant expense involved when a car assemblyline grinds to a halt, the difference in service level expectation was
2 Define supply chain responsibility 3 Set up supply chain monitoring 4 Reduce supply chain complexity 5 Streamline supply chain processes 6 Consolidate the supply chain network
SUPPLY CHAIN
STRATEGY
1 Define strategy and performance targets
SUPPLY CHAIN PERFORMANCE
SUPPLY CHAIN ENABLER
Figure 12.2 Supply chain strategy, performance and enablers fitseamlessly together
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understandable. Customer-specific segments were also identified withinthe business units. In this way, preferential service – in the form ofspecial logistical processes such as direct shipment, for example – couldbe given to strategic key accounts as opposed, say, to small customers.The aim was to raise average service levels from 79 to 95 percent acrossall business units, albeit with considerable variations depending on thecustomer and industry.
Besides improving delivery performance, the company also wished toboost earnings before interest and taxes (EBIT) by five percentagepoints by reducing logistical and supply chain costs. One main way toachieve this goal was to establish a consistent, cross-border supplychain management system within business units, and to link this newsystem to a robust supply chain monitoring unit. Shipping andwarehousing functions across the business units were bundled toform shared service units and thereby tap further synergies. To ease thevast complexity of the product and customer portfolio, a distributorchannel was set up to serve small customers. This move alonestreamlined the product portfolio. Consolidating responsibility for thesupply chain at business unit level also created leaner processes byeliminating complex inter-company handling processes that had beenmade obsolete. The company’s traditional warehousing structures andproduction constellation no longer lined up with market requirementsand were consolidated throughout Europe. Figure 12.3 outlines themain elements of the company’s initial situation and targets.
Delegating supply chain responsibility ensures account ownershipPrevious over-emphasis on country organizations and functions hadprevented the company from optimizing the supply chain as a whole.For example, functions such as customer service and materialsmanagement, whose processes are closely intertwined, were keptseparate within the organization. Customer service was attached tomarketing/sales, while materials management belonged to production.Accordingly, it was impossible to assign responsibility for orderfulfillment from start to finish.
Typical target conflicts made matters worse. Production was largelymeasured in terms of capacity utilization and, naturally, preferred largeproduction batches. By contrast, materials management needed greaterflexibility to accommodate made-to-order parts. Each function wastrying to optimize its own activities, but there no one who wasoverseeing and taking responsibility for the supply chain as a whole.This had a negative impact on service levels and costs. To solve theseproblems, the company established one unit that was responsible for
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the entire supply chain in all countries within a given business unit. Allthe necessary core functions – including forecasting, customer service,materials management, and production and operational procurement –were subsumed under these supply chain management units.
Stronger customer orientation and process ownership are two of themain advantages of such integration. Understanding precisely whatcustomers need and want makes it easier to plan capacity andinventories. With this knowledge, the supply chain manager couldstrike a better balance between forecasts and current demand on theone hand, and machine and tool capacity – both internal andoutsourced – on the other.
All non-core supply chain functions – such as warehousing, shippingand strategic procurement – were bundled in shared service organiza-tions that serve all business units. These functions can be groupedtogether on a horizontal level because they have nothing to do withconsistent order management within the business units. One crucialbenefit of this strategy is that synergies can be tapped across multiplebusiness units. It is also easier to charge business units accurately andfairly for services rendered.
Monitoring the supply chain creates global transparency Tomaintain an unobscured view over the entire logistical chain, and tomanage it effectively in the long run, supply chain managers need aconsistent, hierarchically structured system of KPIs. These must link
ORDER PROCESSING PRODUCTION DISTRIBUTION
INITIALSITUATION
• Complex, country- oriented logistics network • Service level: 79%
100%
With 35% inter-company sales
Country-related customer serviceand inventory management
Small production units
(14)
National warehouses
(14)
TARGET
• EMEA-wide logistics structure with differentiated supply chains • Service level: 95%
25%
Centralized ordering call centerand inventory management
Consolidated EMEAmanufacturing plants
(4)
Direct shipment
(3–4)
PAN-EMEAdistribution centers
Distributor
65%
10%
Figure 12.3 Initial situation and targets
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specific enterprise- or business unit-wide ROCE targets to operationalsupply chain performance targets.
KPIs provide support for the two main drivers of ROCE: profitability(the return on sales) and asset turnover. For instance, the KPI ‘EmergencyShipment Cost to Total Shipment Cost’ tracks the long-term reduction ofunnecessary extra shipping charges. This has a direct positive impact onEBIT. At the same time, the KPI ‘Inventory Coverage’ plots the reductionin inventories, which in turn has a positive effect on asset turnover.A direct and consistent cause-and-effect correlation exists between anumber of operational supply chain KPIs and top-level ROCE targets.
At the electronic component manufacturer, the KPI tree was modeledacross the entire enterprise and also included suppliers and outsidevendors.
Reducing complexity and streamlining processes improvesprofitability Inherited structures had left the manufacturer’s supplychain extremely complex. Complexity was driven by large numbers ofsmall customers and by items with low production volumes. To someextent, fixed handling costs for order acceptance, and picking andshipment processes are independent of the size of an order. This meansthat small customers who order low volumes create disproportionatelyhigh process costs relative to the value of their orders. The result is anegative contribution to EBIT. This problem initially did not show up incosting calculations at our client because the same mark-up for orderhandling costs was used for every order and for every customer.In effect, large customers were subsidizing their smaller counterparts. Incontrast to their larger competitors, small customers were able to buy atlower costs, thus creating a situation that was actually increasing thenumber of unprofitable customers.
To rid the company of this situation, the project team encouraged itto set up a different distribution network. A distributor, however, canbundle orders on a completely different level. Distributors specialize in aparticular industry segment and can supply customers with productsfrom a wide range of vendors in a single consignment. This drives up thevalue of orders. Moreover, distributors can also bundle the demandexpressed by multiple customers, which has the effect of consolidatingorders. Distributors also specialize in the efficient handling of smallorders, such as parcel handling. Introducing a distributor streamlinesprocesses and thereby improves profitability. On the sales side, twopotentially contradictory effects can occur, however. As a rule,distributors can boost sales because they provide better care to smallcustomers. On the other hand, their specialized skills also enable themto deliver rival products, which can detract from sales.
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The transition from country-focused to business unit-focused supplychain management also let the company streamline the order handling,inventory management, and production planning processes. Segment-ing the supply chain by customer groups within each business unitfurther simplified the company’s processes. For example, customerservice units in each country had hitherto looked after order handlingissues for large automotive customers. Following realignment, EMEAcustomer service units were set up as ‘single points of contact’. Theseunits can now track order status and product availability throughoutEurope, and large customers see their orders fulfilled faster and moreflexibly. If an important product is not in stock at the usual regionalwarehouse, customer service staff can have it shipped directly fromanother regional warehouse. In extreme situations, the same staff caneven authorize direct shipment. Now that order handling has beencentralized for large accounts, both demand management andforecasting are more efficient. Customer demand data flows into asingle unit that caters to multiple countries.
Smaller customers that mainly operate on a ‘general business’ leveltend to want a local point of contact: creating ‘virtual’ customer serviceunits satisfied this requirement. Though physical units still exist invarious countries, they are linked together by a single, central system.
Inventory management and production planning activities havelikewise been centralized at EMEA level within the supply chainmanagement function in each business unit. As a result, all productioncapacity and parts inventories for a given business unit are nowmanaged by a single central unit. Similarly, the new materialsmanagement unit within the supply chain management organizationplans both inventories and the production capacity needed to replenishthem for the whole of Europe. Inter-company ordering processesbetween countries used to be very complicated. Since all that has beeneliminated, processes have been accelerated and are completed morereliably, which can be seen in Figure 12.4. Throughout the entire EMEAregion, production capacity and inventories can now be planned betteron the basis of demand data that is collated centrally by a singlecustomer service unit. Capacity utilization has improved and inventorieshave been reduced.
Centralizing the inventory and production planning processes alsoenabled the product portfolio to be reclassified into make-to-forecast,make-to-stock and make-to-order products. In the past, the detailedcriteria for these definitions had never been standardized at pan-European level. Nor did any uniform planning philosophy exist. Thepractice of harmonizing planning parameters and defining appropriate
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production strategies further lowered inventory levels while, again,improving deliverability.
These changes naturally placed new demands on the company’s ITsystems. The IT systems used previously in different countries werescarcely harmonized. Network links were rudimentary at best. Orderdata was the main item that was exchanged between systems. Tocentralize inventory and production planning, the various nationalsystems had to be linked using an enterprise application integration(EAI) platform. Once this had been done, transactions could be handledin real time across all the networked systems. In the long term, thecompany plans to integrate all sites and functions in a given businessunit into a single enterprise resource planning (ERP) system.
Consolidating production and distribution network saves time andmoney Legacy production and distribution structures reflected aninherited bias towards individual countries. Production capacity wastherefore comparatively small in most countries. Since there was noclear assignment of production capacity at a given plant to a particularbusiness unit, different business units often accessed the samemachines. This inevitably created conflicts over the use of capacity,added uncertainty to the planning equation, and ultimately causeddelays in delivery.
Owing to the traditional country focus at the company, plants inmany countries handled every step in the production process single-handed. Cross-border production networks existed only to a verylimited extent – between Germany, the Czech Republic and Switzerland,for example. The company was prevented from exploiting economies of
Materials Germany
BEFORE: Complex intercom processes AFTER: Streamlined centralized processes
ProductionGER
Warehouse GER
WarehouseGB
Production GB
ProductionGER
Central warehouseEMEA
ProductionGB
Materials GB
Interco export Germany
Interco export GB
Interco export Spain
Customer service Spain
Materials Germany
Materials GB
Interco export Spain
Figure 12.4 Elimination of inter-company flows through directordering
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scale and specialization in the EMEA region because of this largely‘autonomous’ production strategy. Utilization at some plants was belowcapacity. Also, too little use was also made of the labor cost advantagesof off-shoring labor-intensive steps in the production process to low-wage countries.
Realignment of the production network in Europe centered onradically consolidating production capacity. The number of thecompany’s plants was reduced from 14 to four main plants and twospecialty plants. Two plants in Central Europe were expanded to form anetworked facility for technology-intensive production. Two plants inEastern Europe were similarly networked to handle assembly-intensivesteps in the production process. In addition, two smaller plants thatmanufacture special purpose parts were retained. At each plant,production capacity was assigned to the business units and adjustedon the basis of strategic capacity planning. For each business unit,consolidation achieved the critical mass that was needed to enableappropriate specialization. Planning and production became far morereliable.
With production planning and control handled by the supply chainmanagement unit at each business unit, the plants provide productionand associated infrastructure on a shared service basis.
As with the production structure, distribution also had a heavilydecentralized structure in the past too. Each country had its ownproduction facility and/or distribution point, which drove up infra-structure and inventory costs for the entire group. The same products –including slow-moving items, in some cases – were kept in stock atseveral warehouses around Europe. Little was known about what was instock where at any given time.
Radical consolidation was the key to realigning this distributionstructure. The 14 existing warehouses were condensed into fourregional warehouses. C products were all stored at one specific regionalwarehouse. Each warehouse maintained the product range that wasneeded in its region. The warehouses also became organized as sharedservice units that could be used by all the business units. Products nowarrive here straight from the production plants – an arrangement thatkeeps local ex-works distribution to a minimum. As a result, productionfacilities themselves now only operate as a buffer function for directshipments. This function serves only for products with high to very highconsignment volumes that justify direct ex-works shipment tocustomers.
Warehouse consolidation created a single-step storage constellation.In the past, inter-company shipments had accounted for a large
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proportion of shipments, and always involved two steps: consignmentswere first dispatched from the warehouse in the country of origin to thewarehouse in the target country, and then to the customer. These twosteps extended delivery times, doubled the amount of handling andincreased inventory costs. The combination of one-step storage anddirect shipments has sharply reduced inventories while improving theservice level.
The regional warehouses needed to meet tight delivery deadlinesdemanded by customers. To enable them to do so, transport providerswere recruited who could exploit significant bundling synergies whileguaranteeing short delivery times in their catchment area. At the sametime, consignment stocks were set up on customers’ premises to handleextremely critical parts with extremely short delivery deadlines and strictavailability requirements.
The results speak for themselves
Realigning supply chain management created much leaner production,distribution, and customer service structures in the EMEA region at thisparticular manufacturer of electronic components. Multi-step inter-company processes were eliminated. Supply chain management wasestablished as a central organizational unit in each business unit. Anend-to-end cross-border supply chain management was introducedthroughout the company.
This enabled the company to meet its target and raise service levelsfrom 79 to 95 percent in all business units. Indeed, the automotivebusiness unit now comes close to a service level of 100 percent. Sinceprocesses and planning are now substantially more reliable, the hugeexpense of emergency shipments has declined significantly. Besidesimproving service levels, the new leaner structures also cut costssharply, leading to a 5 percentage points increase in the EBIT margin.
Success factors in global SCM implementation
Seen in its global context, supply chain management is far more than a
way of controlling the flow of goods and services. It is a pivotal tool in
reducing complexity and redesigning value chain structures. It is equally
vital in the drive to improve cost structures and service levels. Many
enterprises, however, still fail to grasp the significance of this discipline.
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To a large degree, they remain focused on individual functions and
countries. Such companies tend to see supply chain management as a
minor corporate function that concerns itself only with materials
management and shipping. One change is crucial if global supply chain
management is to be implemented successfully: companies must cultivate
an understanding for the need for transformation, for changing existing
structures and processes. The extent of the necessary changes and the
inherent potential must be spelled out.
Moves to establish global supply chain management must be initiated
by top management. Broad-based support must then be solicited in the
business units and country organizations. All supply chain functions in the
existing country organizations must be actively involved from the earliest
stages of conceptual development. It is no secret that internal power plays
are a significant and detrimental factor in many change processes. This
can be reduced when key activities are bundled in a business unit-wide
supply chain management function. A supply chain leader should be
appointed to drive the process of redesign and transformation. Ideally, this
should be the person who will subsequently spearhead the supply chain
management function. All parties involved must help design the strategic
roadmap and define unambiguous targets for the supply chain. Everyone
has to know exactly where the company is heading. Once this strategic
foundation has been laid, the work of realignment can commence.
To minimize the complexity of realignment, it is advisable to begin by
setting up a pilot supply chain management unit for just a few countries in
one region (such as EMEA). Global rollout can then take place in phase
two. Whatever the geographic scope, it is imperative to adopt a holistic
approach to realignment. No aspect should be left out. Distribution and
production structures, order handling, inventory and production planning,
organizational issues, and process definitions must all be remodeled in the
change process. Only then will a lean, agile supply chain structure emerge.
Moreover, a detailed implementation roadmap must be drawn up that
clearly plots the individual steps in the transformation process. Change
obviously has to take place while the company continues to go about its
normal business. Accordingly, it makes sense to model every step of the
transformation in a master plan and identify those actions that are critical.
For example, closing a warehouse in a particular country must not pose a
threat to compliance with defined service levels. As a rule, pilot projects
should be used to test and fine-tune the defined changes. Rollout can then
take place when new processes have proven their practicality.
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CHAPTER 13
Complexity management: the startingpoint for improving performance
Alexander Belderok and Thomas Hollmann
Introduction
Supply chains are becoming increasingly complex and more difficult to
manage. While globalization shoulders a large share of responsibility for
this rise in complexity, almost all aspects of the supply chain contribute to
this development. Whether extending operations to new regions,
launching new products and services, forming partnerships and alliances
or outsourcing functions, each of these activities can create value. If they
create value, these complexity-adding activities also create what we refer
to as ‘good and necessary’ complexity.
Negative or unnecessary complexity, on the other hand, adds no or little
value to either the consumer or the company. Companies’ unshakeable
belief in innovation being the answer to customers’ growing power and
unpredictability – and, therefore, the remedy for staying ahead of the
competition – is behind much of the unnecessary complexity found at
companies today. While innovative products with every sort of bell and
whistle imaginable might please buyers, they sometimes unnecessarily
complicate a company’s operations and lead to higher costs.
Learning to recognize when complexity is justified is vital for
sustainable, long-term growth. Clearly, driving negative complexity out
of a company’s operations can bring strategic benefits; there are, however,
times when managing complexity would bring greater advantages.
In this chapter, we will delve more deeply into complexity, and look at
how negative complexity affects businesses and organizations today.
Next, we examine the most common drivers of complexity. Following
this, we discuss the importance of managing complexity. Finally, we turn
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our attention to a case study that illustrates the benefits of managing and
reducing complexity in the healthcare sector.
What is complexity?
Complexity tends to sneak into organizational structures as companies
market a progressively larger portfolio of products, services, features,
and options. Encouraged by innovation and sales targets, plus an
eagerness to satisfy customers’ every need, companies unwittingly
welcome complexity into their operations. Production, engineering, and
logistics often further complicate existing operations as companies
attempt to manufacture every product in every batch size in every
throughput time.
With customer preference in constant flux, many businesses continue to
expand their portfolio, placing more goods or services on the market.
Responding in this manner can bring positive change to companies and
add value to customers. When a company’s portfolio of goods and
services is misaligned with market needs, however, the number of price
points, line extensions, and other goods and services stop creating value
for customers. They become barriers not benefits. This is complexity in
what we refer to as its ‘bad’ or ‘negative’ form.
Unless a company uses a mechanism to manage its entire portfolio,
complexity will become part and parcel of its processes and costs will rise.
Over time, the cost of complexity infiltrates all products. This is known as
a ‘complexity tax’. In the name of relentlessly pursuing customer demand,
company growth eventually suffocates under this burden. Managing
complexity can help companies break that pattern. By tackling the com-
plexity issue, companies are better positioned to weigh up the additional
costs required to add value, and to develop innovations more efficiently.
But identifying complexity is not always easy. In a product-based
company, the results of complexity can be highly visible. Think, for
example, of a large warehouse with many different parts or finished
goods. Complexity can be much harder to identify in a service
environment, where products are not physically present.
In our view, there are seven main complexity drivers: organizational,
process, suppliers, engineering, manufacturing, brand and channel, and
customer. These are shown in Figure 13.1. Some complexity drivers will
affect some companies more than others. Identifying what complexity
drivers are at play in your business is the first step to managing them.
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Why is complexity management important?
Complexity management is important because it dramatically affects a
company’s bottom line. In one project case, an industrial products company
built up a very complex product portfolio. Owing to the company’s non-
transparent processes and systems, it was unable to determine the true
profitability of its products. When the Roland Berger project team analyzed
the figures, it became clear that complexity-related costs were consuming
more than 7 percent of total revenues. This makes no business sense – and,
unfortunately, the cost can also be much higher. On a different project with
a manufacturing company, the project team calculated that a complexity
burden of 22 percent was added to total production costs. Typical costs are
shown in Figure 13.2. Complexity’s tax on resources, processes, and
systems is threefold:
• It adds costs that cannot be offset in the marketplace
• It distracts management
• It ties up resources that could otherwise be directed towards growth
opportunities.
By gaining transparency as to the sources of complexity, companies
can identify real cost-to-serve and, in a next step, allocate resources
more appropriately. As a consequence, a company can then increase the
added value of its products on the marketplace, which will help spur
growth. The impact of complexity differs from industry to industry, as
is shown in Figure 13.3. The extent of the impact is determined by the
Complexity
Customercomplexity
Brand andchannel
complexity
Manufacturingcomplexity
Suppliercomplexity
Engineeringcomplexity
Organizationalcomplexity
Processcomplexity
Figure 13.1 Complexity drivers
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High
Low
Long ShortLifecycle
Customization
Aerospace anddefense
Engineeredproducts
Consumergoods
Automotive
Telecommunications
High tech.Spec. Chem.
/Pharma.
Chemicals, oiland steel
Utilities
Key : Primary focus Extended focus
Figure 13.3 Complexity’s impact differs from industry to industry
3–10
50–60
10–30
5–25
11–22
Complexity tax (%)Product cost build up (% of total costs)
1–5
∑
Purchasing
F&A
Production
Distribution
Other
15
40
30
5
10
Figure 13.2 Complexity tax often amounts to 11–22 percent of totalproduct costs
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degree of customization needed to meet individual customer demands,
and the length of the subsequent product and technology lifecycles. The
number of brands, models, and distribution channels can also ramp up
the level of complexity’s impact.
Complexity is cross-functional
Companies that can truly distinguish between customer demand and
necessary growth opportunities are in a much better position to deal with
complexity than those companies that fail to understand this distinction.
Evaluating the trade-off between the cost and value of complexity is not
simple. This is not surprising, considering that complexity pays no heed to
functional, business, and geographical barriers. It spreads through them,
making it intrinsically difficult to manage. Companies that encourage strong
interaction between sales, product development, and operations tend to
manage complexity well. Indeed, the degree of interaction among various
functions is a telltale sign of how well a company will manage its complexity.
At far too many companies, however, information flows are insufficient
and are rarely connected across the different functions. In the flavor
industry, for instance, sales departments are generally willing to accept
less than ideal supply conditions if it means they will close a deal. The
product development function is focused on composing ‘totally new’
flavors rather than using a ‘modular’ approach, which is believed to limit
creativity. Both these tendencies add cost across the value chain in this
particular industry.
Complexity is cross-functional in nature. This is why managing
complexity requires strong leadership at the senior business level. All too
often, however, the attention of senior management is caught elsewhere.
Without someone at top management level who oversees complexity, it is
almost impossible for companies to evaluate the additional costs incurred
by the complexity to operations, and to weigh these against the actual
benefits for the product and the end-consumer.
Learning to manage complexity trade-offs effectively can be a slow
process. Most companies are under relentless pressure to deliver tangible
quick wins, which is why traditional efforts at complexity management
often concentrate on reducing the cost of complexity (for example,
through stock keeping unit (SKU) rationalization) rather than highlighting
its strategic value. By recognizing that complexity might be a good thing
in some circumstances, managers can decide when to reduce or add
complexity. The right level of complexity increases the competitive offer.
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How is complexity addressed?
Complexity is best addressed using an approach that takes both the value
and cost sides into account from the start. The insights gleaned from this
approach enable companies to reduce complexity and to prioritize, scope,
and prepare optimization efforts properly while providing the foundation
for managing complexity effectively and in a sustained fashion. Figure 13.4
outlines the overall approach and shows how different opportunities can be
quantified against each other.
Addressing complexity in its entirety creates more benefits and, perhaps
more importantly, will make savings more sustainable. It also gives
companies greater control over new product development. Challenges in
the flavor industry can be instructive in this context, too. In the flavor
industry, almost half of a company’s portfolio is renewed each year. Most
product additions add little or negative profitability. More is not necessarily
better. A holistic approach to portfolio development and a better
understanding of which additional product adds costs and which adds
value through transparent allocation of complexity costs would give
companies long-term growth without compromising their products.
Textbox 13.1
Stock keeping unit (SKU) rationalization
Although appealing in its simplicity, typical SKU reduction efforts
seldom guarantee lowered complexity costs. The roots of complex-
ity must be recognized. These generally include the complexity
drivers of products, the hidden cost of SKU proliferation, and the
costs that ultimately represent hidden taxes on customers or
consumers who end up paying more for a variety of products that
they neither need nor want. This is especially true for ‘innovative
supply industries’, in which a large part of the portfolio is renewed
each year. These are characterized by short product lifecycles and
numerous product introductions. More and more industries under-
stand the problems with this approach and are increasingly
addressing complexity across all businesses and functional areas
in the company. In order to make complexity manageable they
switch to a ‘modular’ approach, which lowers overall supply costs
and boosts innovation.
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1:2
5
SKU aslinkingelement
SKU/customerportfolioimpact
Process/network impact Spend impact
Organization impact
Technical complexityHigh number of sub-systems
and component familiesIncreased technology integration
Market driven complexityHigh number of market entries andexcessive variation within market
entries
Customercomplexity
Brand andchannel
complexity Manufacturingcomplexity
Suppliercomplexity
Engineeringcomplexity
Sell/market Make/deliver Design/buy
Organizationalcomplexity
Processcomplexity
Figure 13.4 The overall approach aims to quantify and prioritize different opportunities against each other
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In complexity management, it is important to distinguish between
complexity that is visible to the customer and complexity that is not.
Visible complexity is product and packaging standardization that
rationalizes product offering or changes customer-discernable attributes.
Invisible complexity encompasses the raw material: component and
packaging standardization that specifically targets efficiency improve-
ment without discernable customer changes. Typically, the invisible
complexity is easier to address, as it does not directly impact customer
satisfaction. With visible complexity, the gains are usually higher;
however, they are more difficult to reap as the impact of the changes needs
to be communicated to the customer. Often, the customer will demand a
share in the benefits.
A typical project aimed at making complexity more transparent follows
a three-step approach, which is outlined in Figure 13.5.
The important first step in complexity management is to develop a
thorough understanding of the complexity of a business, its value chain, and
the costs and values that are associated with each step of that value chain.
Understanding the entire process allows a company to identify the
discrepancies between production costs and incremental value to customers.
Bicycle manufacturers, for example, often install different types of alarm
bells on city bicycles. This results in high inventory, a complex supply chain,
and assembly differences. While an alarm bell adds, perhaps, 1 percent to
customer satisfaction, because it is installed during the last step of the
production process it amounts to more than 1 percent in additional costs.
Creating cost transparency can be difficult and depends on the level of
sophistication of the accounting systems. In most cases, detailed cost
information is not readily available. An unorthodox approach is required,
one which combines a bottom-up estimation of costs with a top-down
assessment of the value chain. Although detailing the cost of all products
is a time consuming job, it serves as the foundation for future analysis.
At this stage, it is important to gain critical insight into the demands of
the market. Formed from a needs-based segmentation of the market
(based on value drivers), questionnaires and interviews determine how
various customer segments perceive the value of the company’s products
and services, and whether they are willing to pay a premium for certain
added values. Customer added value can be measured with a conjoint
analysis test that forces customers to select their preferred product
offerings. It is important, here, to identify customer ‘threshold’. The
information gained from a detailed cost analysis, location in the value
chain, and the type of value-added provides clarity into the elasticity of the
various complexity drivers.
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Understandcomplexity
Re-designcomplexity
Manage and controlcomplexity
Actions
Deliverables • Target added value map of operational costs versus added value• Bottom up estimate of savings potential (feasible)• Pilot improvement project• Business case for change• Implementation plan
• Determine scope of project (product and customer groups)• Collect process and product information• Baseline cost to produce product properties/features• Determine added value of product properties/features (e.g. using conjoint analysis)
• Develop an overview of operational costs versus added value of product properties• Bottom up estimate of total complexity costs
• Define target features and operational costs• Assess costs and benefits of redesign• Start proof-of-concept pilot• Prioritize and plan improvements• Build business case for change
• Lower cost operations with less complex production processes
• Install complexity management task force (program officer)• Assign target and responsibilities for improvement initiatives• Monitor and control progress
Connect the cost andvalue of complexity
Balance the trade-off betweengood and bad complexity
Benefit from lower costand re-ignite growth
Objective
Figure 13.5 Detailed approach
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Matching these insights with a cost transparency model informs a
company about the trade-offs that must be made. Such a comparison not only
locates where profit is made, but it also pinpoints where changes to price and
improvement in value perception can be made. This is the second step, in
which complexity is redesigned. It is critical not to focus simply on the SKU
tail-end optimization, but also to identify non-value added complexity across
all SKUs, materials, and customers, or even a combination of the three. To
obtain the right level of transparency, it is necessary to build a detailed
complexity database. Along with profitability and value-added thresholds,
filters such as strategic or commercial arguments should be used to identify
SKUs, raw materials, or customers for rationalization. At this point, it is
recommended that a pilot project be started to test the effectiveness of the
concept. Based on improvement potential, investment levels, and potential
risks, improvements can be prioritized.
The final step of the project is the implementation phase. This is when
complexity must be managed and controlled. Implementing complexity
management is demanding and, while it affects most areas of the
organization, there is little to show at the beginning for the effort. In our
experience, it is best to minimize the impact of the transition by delegating
improvement targets and responsibilities to lower levels in the organization.
Crucial to the success of this approach is the presence of a coordination
entity, usually a specially established program officer, to monitor and steer
the process. In the longer term, this program officer also needs to prevent
complexity from arising again.
It is important at this stage to analyze the external processes with
several archetypal customers in order to build in immediate reality checks.
When closely examining customer interaction, it is also essential to
monitor internal processes. Based on a process gap analysis, a set of
recommendations can be developed that range from process changes to
governance improvements, or even organizational modifications.
It is important to anchor complexity management into a company’s
processes to prevent it from returning after the ‘clean-up’. By examining
the processes, governance, culture, incentives, and infrastructure of the
organization, a company can manage complexity on an ongoing basis.
Rewarding proliferating products – what many companies do, in their
quest for innovation – is likely to keep churning out complexity that does
not drive value creation. Finding the right balance is not a one-off event.
Understanding what keeps creating complexity in organizations is
necessary for striking that balance again and again. Tools should be
used that effectively manage trade-offs, and connect those parts of the
organization that respond negatively to complexity with those that seek it.
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With such tools in place, a company can compartmentalize its processes.
For instance, a snacks manufacturer can separate its scalable activities (or
example, peeling, cutting, pre-cooking potatoes), which tend not to
become complex, from its differentiating activities (for example, specific
seasoning to comply with local taste preferences), which lean toward
complexity. Other tools, such as incentive systems that foster transpar-
ency, are also vital. Managers should be willing to identify shared goals
and to manage complexity across departments and corporations.
Case study: Tackling complexity from the sourcing side
To illustrate how the approach works from beginning to end, wedescribe in the following segment a project we completed for a state-owned university hospital in Germany. This university hospital emergedfrom the merger of three state-owned university hospitals, all of whichhad comparable areas of expertise. Due to their similar fields of activity,the initial assumption was that synergies, especially in purchasing, couldeasily be realized. Yet, a quick and easy win proved difficult owing to thedifferent methods of treatment, which required different products,individual order codes for similar order items and different IT systems.Since, historically, there had been sufficient government and third-partyfunding, and freedom of medical research was valued more highly thaneconomics, there was no tight budget control and therefore no need foractive management of the post-merger integration and the realizationof synergies. This situation was not unique to hospitals in Germany but,rather, was a malaise affecting the healthcare sector throughout most ofEurope.
Hospitals, and the healthcare sector at large, started to face majorchanges, however, when politicians began tackling the problem ofthe ailing healthcare system. They were particularly concerned aboutthe growing imbalance between the rampant cost of healthcare and thestagnating number of payers. Funding from government was reducedsignificantly, and a lump sum compensation system was introduced.This meant that each hospital would receive the same amount of moneyfor a specified medical treatment, irrespective of the cost burden at anyspecific hospital. As a result of this system, inefficient hospitals would nolonger be rewarded for incurring additional cost and efficient hospitalswould gain a windfall.
Facing those altered circumstances, the newly combined state-owned university hospital decided to put into action a project aimed atleveraging purchase power in order to unleash substantial savings.
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Identifying the main drivers of complexity
Added complexity was almost programmed in from the moment thethree hospitals decided to merge. The hospitals simply lackedorganizations and processes that were sufficiently integrated to benefitfrom synergies. Whereas, in the past, this non-value adding complexitywould not be too problematic owing to a healthcare system thatencouraged wastage, those days were now gone. The hospitals couldno longer ignore the complexity issue.
In this case, the main complexity drivers were:
• Organizational complexity Although the three state-owned uni-versity hospitals shared similar areas of expertise, each had a verydifferent history and specific culture. This sometimes resulted in rivalrybetween the major opinion leaders. There was little transparency, andeven less motivation to integrate similar departments. What wasmissing was the desire to create a lean structured organization.
• Process complexity In many of the departments, the medicaltreatment process differed from hospital to hospital, mostly due tohistoric reasons. In most cases, these small differences meant thatmaterial and machines were used differently, creating additionalcomplexity throughout the organization.
Although common IT systems had recently been established, it wasstill impossible to gain transparency, especially regarding purchasingvolumes and cost. Material and supplier master data were notharmonized. These data need to be harmonized before proper analysiscan be completed and actions can be defined that will helporganizations to tackle complexity from the sourcing side.
• Supplier complexity Even though the number of sales representativesin German hospitals fell significantly in the past, the power of themedical and pharmaceutical industry is still of considerable importance.As many suppliers fund hospital research, there is often a strong biaswhen it comes to selecting suppliers. Other suppliers enter the hospitalmarket by leasing machines at aggressive prices. The ramifications ofthis behavior are considerable: hospitals deal with a large, diverse poolof suppliers. At the merged hospital under review, more than 4,500active vendors belonged to the supplier base. Worse still, the supplierbase was extremely fragmented, with approximately 3,500 vendorsallocated an annual sourcing volume of less than ⁄20,000.
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Addressing complexity
As the aim of the project was to unleash savings in purchasing, the focushad to be on reducing supplier, organizational, and process complexity.The project team did this by optimizing the purchasing organizationand purchasing processes.
The first step was to develop a thorough understanding of thecomplexity of the hospital business, and the cost and values associatedwith it. At the end of this step, it was clear where complexity wasartificially high and did not increase value for either the user or thecustomer. The project team performed an in-depth analysis of the valueand the associated cost for each medical procedure. The value of eachcase is the amount the hospital is given by the health care systemaccording to the logic of diagnosis related groups (DRGs). This is a fixedamount. When comparing the cost incurred by the respectivedepartments at each of the three hospitals, the gap between the bestdepartment and the others was significant, amounting sometimes to asmuch as 35 percent. To understand how much complexity in purchasingcontributed to this significant divide between the best and worstperformers among the departments, the project team clustered thepurchasing volume into coherent commodity groups and identifiedmajor differences in purchased products across the three hospitals.
The project team also identified huge variety among the number ofdifferent products ordered by the respective departments at each ofthe three hospitals. The best hospital could satisfy customers’ needswith fewer different products than the other two. Those hospitalsthat ordered a large number of different products tended constantlyto add new products to their existing order portfolio. Old productskept on being ordered simply because they already existed on someorder forms. In many cases, a strong relationship with the salesrepresentative also existed. New products were added to the orderforms when requested by patients, even when these very specificproducts only deviated slightly from standard products already on theinventory.
To identify non-value adding complexity and the products that couldbe removed from the inventory lists, the project team conductedinterviews with industry experts and held workshops with identified keyusers. These users were responsible for the major share of consumptionaccording to the quantitative analysis. The team filtered out unneces-sary products that could be eliminated easily by substituting theproduct or by adapting processes.
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After completing step one – understanding where complexity isartificially high – it was clear that standardizing purchasing throughoutthe merged hospital would be paramount to reducing complexity.
The first task was to standardize purchasing codes across the threehospitals in order to make equal or similar products readily visible.Accepted teams consisting of selected experts from each hospitalclustered the various products into item groups with comparablefunctionalities. For each category, a standard ‘must use’ product wasdefined for all users in the hospitals. This enabled the hospitals to poolsimilar products, thus ensuring a reduction in the total number ofdifferent products purchased. Using special electronic order forms andrequired authorization levels, correct implementation for orderingstandard and non-standard products was put in place and enforced.As a result of this action, the number of articles used was reducedsubstantially. Some 11 percent fewer articles were purchased incomplex commodity groups for very specific treatments. In areas thatcould be more easily standardized, the hospitals lowered the number ofarticles by 33 percent.
By bundling the products, the project team also helped the mergedhospital to increase its purchasing power and gain better rates.Introducing preferred suppliers per product group with standard‘must use’ products for all users meant that the market share of therespective suppliers also increased. These were granted around80 percent of the sourcing volume within a category. Substantial costsavings were realized and the average full year sourcing volume wasslashed by 25 percent.
The hospital was able to optimize its purchasing processes by furtherstandardizing the IT systems. This had the additional benefit of reducingcomplexity over the long term. Online internal market places wereestablished, limiting the non-standard order portfolio. In order toreduce the number of these non-standard orders, strict authorizationlevels were implemented and supported by top management.
Quick wins are great, but in order to build on these and install asustainable complexity management throughout the merged hospital,several institutional changes were necessary. In the third step of theproject – manage and control complexity – four changes were made:
• A systematic commodity management program was installed in thepurchasing organization. This allows the strategic sourcing organiza-tion constantly to monitor developments in internal demand and helpsthem to keep an eye on products purchased across all locations. It alsoenables them to watch how the supply markets develop.
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• Standardization councils were established, comprising representa-tives from all relevant locations and from different hierarchical levels.Quarterly reports that are submitted to the board of directors havebeen defined. The gained momentum of the project work is thusmaintained and complexity management becomes an integral part ofall business decisions.
• A powerful controlling system based on a dashboard of keyperformance indicators (KPIs) was defined. Goals for the differentareas were defined based on the status at the beginning and at theend of the project. These are to be monitored on a regular basis.
• Changes were made to contracts with various strategic suppliers inorder to push efforts to integrate suppliers more comprehensively.Preferred suppliers – which were granted large chunks of thehospital’s spending volume – agreed to submit proposals thatoutlined how they would further streamline their product portfolios.In addition, the power of sales representatives was substantiallyreduced in order to increase barriers preventing new samples andproducts being distributed among end-users. This was one of themain drivers of the ever-increasing product variety in the past.
As a result of the project, the state-owned university hospital saw anannual saving of ⁄20 million, which was attributable to complexitybeing reduced significantly. In addition to the savings, the hospital wasable to reduce the number of different products ordered, saw increasedtransparency, and now benefits from improved logistics processes andinventory management. To enumerate:
• Annual savings of EUR 20 million – based on relative savingscompared with the annual spending of between 8 and 29 percent
• The number of SKUs was reduced by 11–33 percent in the differentcommodity groups
• Inventory was cut down thanks to the significant reduction in thenumber of SKUs. Non-standard products were defined as non-stocking items, and minimum inventory levels for standard productscould be optimized
• Standardized rules concerning purchase price led to increasedtransparency in the purchased and used product portfolio. Costawareness increased substantially in an area that too seldom is drivenwith an eye on business
• Strategic purchasing decisions were made possible thanks to thenewly created transparency KPIs that tracked the relation betweenthe value of products and cost. In some cases, a broader productportfolio could be justified because of significantly higher earnings.
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Manage complexity before it suffocates growth
As described by the project example, as well as by the conceptual
framework above, complexity management techniques are strategic tools
with which corporations are able to maximize the margin generated from
their operations. In our experience, companies understand that complexity
is something that needs to be tackled by top management using a cross-
business overview. They are the people who want, and have, the skills to
connect the cost and value of complexity, manage the trade-off between
good and bad complexity, and reignite growth. Tackling complexity is not
a low-hanging fruit, but it always pays off for our clients.
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CHAPTER 14
Working capital excellence: howcompanies can tap hidden cashreserves in the supply chain
Roland Schwientek and Christian Deckert
Introduction
As supply chain management should take a holistic view not only on cost,
but also on assets and cash as well, in this chapter we will present and
discuss our current thinking on working capital management. Working
capital reflects the money invested in supply chain processes in the form
of accounts receivable, inventories, and accounts payable. Based on our
experience, optimizing working capital management can achieve amaz-
ing effects on the financial performance of an enterprise and its supply
chains.
There is never enough to go round: this is true of all scarce resources, and
it is certainly true of money, especially in the corporate sector. Companies’
thirst for cash is unquenchable. Some want to pursue growth strategies by
penetrating new markets, developing innovative products or acquiring other
firms. Others need to be turned around to get out of trouble. The common
denominator in all cases, however, is a considerable need for funding.
Meeting this need for funding in the most efficient way possible is one of
the central strategic challenges confronting top management. In this
chapter, we first look at the financing tools available to companies, and
illustrate just how important working capital is for supply chain excellence.
Next, we show Roland Berger’s approach to optimizing working capital.
Finally, we look at best practices today and those of tomorrow, drawing
from a working capital excellence survey we completed in 2005 and 2006.
In our experience, all three working capital items display optimization
potential.
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Making working capital work
Companies have an array of external and internal financing tools at hand.
In the case of external funding, companies draw on capital market
resources. These resources must be procured on the stock markets or from
banks, in the form of equity or debt. Today’s capital markets demand
profitable growth and a continual increase in the value of the company.
Enterprises constantly strive to qualify for external funding. They must
repeatedly prove that they are able to use capital efficiently and generate
adequate returns.
In the case of internal funding, financing needs are covered by cash flows
generated within the company. This cash usually derives from operating
income, financing activities or divestments. In other words, companies pay
their way out of their own pocket. Where necessary, they increase funding
by boosting sales or cutting costs. Very often, reserves can also be identified
and tapped in the supply chain. Improving cash flows from the supply chain
can reinforce a company’s ability to meet its own financing needs.
Seen from this angle, working capital takes on singular significance.
Working capital is the money that is tied up in the company’s supply chain
processes and which must be invested in order to generate sales revenues. It is
normally defined as the sum of inventories and receivables from customers
less the short-term or trade accounts payable. All the key functions in the
supply chain – purchasing, production, logistics, distribution, sales, and so
forth – use working capital and must be closely coordinated. Average
working capital in selected European industries is shown in Figure 14.1.
Depending on the industry, working capital can account for as much as 30
percent of total assets reported on the balance sheet. This item obviously ties
up a huge amount of resources. Equally obvious, however, is the realization
that proactively managing working capital can free up resources that are tied
up unnecessarily in the supply chain. Such working capital management
essentially operates in two ways: by reducing accounts receivable and
inventories while increasing accounts payable, and by reducing working
capital.
Receivables, inventories and payables
By reducing accounts receivable and inventories while increasing
accounts payable, the volume of liquidity tied up on the balance sheet
is immediately scaled back. Inventories are adjusted to customers’ needs
and service levels, receivables are collected earlier and with more
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� workingcapital
30
16
20
1618 17
13 9 11
8 79109131413
1725
771095
131511910
12
St Eng Ch/oil Autopts Elec Ph/H Con Auto Utils Tcoms
Accountsreceivable
Inventories
Accountspayable
28 18 17 17 17 10 10 3 1
Key :
St � SteelEng � EngineeringCh/oil � Chemicals and oilAutopts � Automotive parts
Elec � ElectronicsPh/H � Pharmaceuticals/healthcareCon � Consumer goods
Auto � Automotive OEMUtils � UtilitiesTcoms � Telecoms
Figure 14.1 Average working capital in different industries – total assets (%)
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stringency, and accounts payable are negotiated with longer payment terms
(which must be met so as not to wreck the relationship with the supplier).
Freeing up cash that was tied up but can now be invested strengthens the
company’s position and unburdens credit lines. Indirectly, this step also
impacts the income statement. Better service levels and deliverability along
the supply chain leave customers more satisfied, and can drive up sales. In
addition, there is less risk that inventories and receivables might have to be
written off. Cash flow increases again, further improving the company’s
ability to pay its own way.
Reducing working capital
Reducing working capital lowers the amount of capital tied up in the
company and thereby raises profitability. In other words, the return on
capital employed (ROCE) increases. Key ratios – such as ROCE or
company value, which capital market stakeholders monitor closely – reflect
this development. Improvements in operating earnings that can be
measured in terms of performance ratios make it easier for a company to
tap financial resources on the capital markets. These steps strengthen the
company’s external financing capabilities too. Figure 14.2 shows how
managing working capital can directly and indirectly influence ROCE.
We have empirically analyzed the impact of working capital manage-
ment on ROCE for Europe’s top 500 companies and have found a clear
positive correlation between excellent working capital management (based
on working capital productivity ¼ sales/working capital) and superior
ROCE. Companies that put working capital into their management focus
usually profit from better financial results.
Proactively managing working capital clearly emerges as a core element
in strategic supply chain management. Using this tool, top management can
tap potential that hitherto remained hidden in the supply chain. Internal
funds can therefore be used more efficiently to meet the company’s
financing needs: financial management overall can be optimized as a result.
Optimizing working capital – Roland Berger’s approach
Our approach to optimizing working capital can be divided into two
phases. After first realizing quick wins by tapping short-term cash flow
potential in the supply chain, we then place these gains on a sustainable
footing. This strategy helps companies to plug any immediate gaps in
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Operatingincome
Capitalemployed
Return oncapitalemployed(ROCE)
Salescontribution
Fixed assets
Inventories
Accountsreceivable
Accountspayable
Salesvolume INDIRECT
influenceof workingcapitalmanagement
Variablecosts
Sales price
Fixed costs
MaterialsWages and salaries
Other
Wages and salariesOther
DIRECTinfluenceof working capitalmanagement
Figure 14.2 ROCE drivers
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funding quickly and then maintain a more stable financial position in the
medium term.
All three structural levels of supply chain management – inventories,
accounts receivable, and accounts payable – are activated to achieve these
goals: the foundation is laid by defining a strategy and setting targets on the
basis of a comprehensive benchmarking exercise. This exercise spans
different business units and competitors, but also includes other (unrelated)
industries. Once targets have been set for the company, we examine
performance deficits in existing core processes (order-to-cash, purchase-
to-pay and forecast-to-fulfill). On this level, in order to improve the
financing situation, we identify suitable optimization levers that can reduce
inventories and accounts receivable while increasing accounts payable.
We have helped many companies improve how working capital is
managed within their organization. The benefits of taking on this challenge
are enormous. A global manufacturer of production systems for automotive
assembly, for example, wanted to reduce working capital in a sustainable
manner. We analyzed inventories, accounts receivable, and accounts
payable at all the company’s production locations worldwide. An extensive
benchmarking exercise compared companies in both this and other
industries, and identified possible areas of potential. The plan of action
that was then drawn up to optimize working capital allowed our client turn
working capital worth more than ⁄200 million into free cash flow.
Setting targets, examining performance deficits, and identifying optimi-
zation levers is the crux of our approach. To support implementation of
the specified actions, we also define and craft enablers (such as training to
help staff understand and optimize working capital, and development of
appropriate control and analysis mechanisms) to ensure that positive out-
comes are sustained in the long term.
Our strategy of optimizing inventories, accounts receivable and accounts
payable has proven its value in many projects. It is applied in the following
four steps:
Step 1: Achieve transparency
We begin by systematically gaining an overview of all ratios and the
underlying figures for the client’s key working capital items worldwide. We
are particularly interested in turnover ratios for inventories, receivables, and
payables that can be used both to compare performance across internal
business units and to benchmark the company against external competitors.
The important thing here is to ensure that the data analyzed is comparable
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across business units and with external data. In this phase, the main
challenges are usually posed by creating transparency from incompatible
master data sets, which must be harmonized across different systems.
Another issue is the consolidation of inter-company sales, which might
deteriorate the complete picture if not dealt with appropriately. Finally, an
enormous amount of data must be examined in minute detail – sometimes
every receipt should be checked for accounts receivable and payable
analyses. We also make inventories and analyze the three core processes in
the supply chain – order-to-cash, purchase-to-pay and forecast-to-fulfill – in
detail. This, of course, also includes customer, vendor, and competitor
analyses. This whole exercise constructs the framework from which to
assess working capital performance and define first hypotheses on key
weaknesses that prevent the company from realizing its full potential.
Step 2: Perform benchmarks and set targets
The second step is to identify other companies and industries that lend
themselves to benchmark tests on the basis of the defined ratios.
Benchmarking must encompass both quantitative data analysis and a
qualitative assessment of existing processes. This dual approach delivers a
reasonable perspective on the client’s current performance and identifies
key performance deficits. Fine-tuning the ratios used is a crucial success
factor. It helps companies avoid comparing apples with oranges, and
encourages acceptance of the findings. To fine-tune ratios, and thereby
obtain comparable data, it is necessary to analyze relevant structural factors
when comparing rival firms. Differences in factors such as sales channels,
customer structures, vertical integration, global sourcing, and supplier/
logistics structures must all be factored into the equation if the bench-
marking exercise is to deliver valid, usable results. We usually also analyze
the ‘balance of power’ from an industry and customer/vendor perspective in
order to understand the rules of the underlying business models, as well as
country specifics. For example, import and export regulations in Eastern
Europe, the Middle East or South America can have direct implications for
working capital management.
In the context of receivables and payables management, it is especially
important to take account of regional variations in ratios, processes, and
business practices. The way cash management is handled can sometimes
vary significantly from country to country. In Southern Europe, East Asia
and South America, for example, comparatively long payment targets are
commonplace and meet with broad acceptance. Other regions tend to
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prefer shorter targets, insist on punctual payment, and also make use of
cash discounts. When identifying ratios, attention must likewise be paid to
the various companies’ accounting policies. It is important to gain a full
understanding of the relevant items on the balance sheet, and to adjust
them where necessary. Once the benchmark analysis has been completed
and performance deficits have been isolated, top-down targets must be
defined for the identified turnover ratios and then agreed with the
appropriate managers.
For example, with a large client from the consumer goods industry,
we agreed to set an accounts payable target range that was based on the
industrial average payment periods of the main supply markets on the
lower end and adjusted competitor benchmarks from industry’s best
performers on the higher end. The client far exceeded the lower end goal
and committed himself to a bottom-up action plan that would close the
gap to his competitors as well as unleash a cash potential of more than
⁄300 million from his balance sheet.
Step 3: Define levers and actions
In collaboration with all project participants, the next step is to identify
suitable levers and actions to plug performance gaps in the three core
processes sustainably. Ambitious companies aim to set new standards in
their industry through such projects. Sample levers include:
• Inventory management: Modifying the depth of stocks, adjusting the
flow of materials (structural changes) and optimizing scheduling
parameters (process changes); planning, purchasing, production, and
logistics departments are mainly involved here
• Receivables management: Optimizing the dunning system and
receivables monitoring, and renegotiating payment terms with top
customers; sales and finance departments are mainly involved with this
• Payables management: Adjusting the payment process, renegotiating
terms with top suppliers, and conducting value-based negotiations on
the basis of suitable IT tools; purchasing and finance departments are
mainly involved in this area.
During bottom-up workshops, detailed planning takes place with
relevant managers, and commitment for the implementation is gained. We
usually initiate lever discussions based on existing levers and further
optimization measures that we have derived from our project experience
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on working capital issues, as well as our working capital studies (see
results below). The identified levers are fleshed out in detail and the
resulting financial effects – on cash flow, earnings before interest and
taxes (EBIT) or economic value-added – are calculated. Regarding
accounts receivable and payable, it is often possible to negotiate optimal
payment terms while also committing to price adjustments. Realizing
working capital effects without deteriorating the profit and loss statement
clearly should be the goal. Here, management needs to decide whether
EBIT or cash has priority, and whether improving cash may be negotiated
for price adjustments (buying cash). To determine the optimum from cash
and cost effects, we introduce simulation tools that show specific financial
consequences from different negotiation options. These can directly
support purchasing and sales in negotiations.
It is imperative for different corporate functions to work together in this
phase, as the core processes in question exist on a horizontal level in most
companies. The involvement of purchasing and finance staff is crucial, for
instance, when discussing strategies to optimize accounts payable. Both
functions are involved in the bottom-up planning phase and must closely
act together in order to achieve company best performance. Conducting
decentralist workshops with relevant managers from all necessary
corporate functions has proved very effective, and we believe that it is
a central success factor for working capital projects. For workshop
moderation, we usually staff team members that bring with them a
thorough understanding of the key corporate functions involved. For
instance, when talking about measures to optimize accounts receivable, it
is necessary to have a trained moderator with sales experience present, for
reasons of acceptance and commitment. Finally, priorities are defined for
the entire set of activities by calculating the anticipated effects and
evaluating the ease of realization. The outcome is a prioritized package of
recommended actions. At the end of this phase, we verify whether the
anticipated effects will, in fact, meet the defined targets, or whether
further adjustment is necessary.
In addition to concrete optimization levers for the generation of quick
cash, Roland Berger project teams also deal with what are referred to as
enablers. These are structural changes in the organization, processes, and
systems put in place to create and maintain the management environment
for successful working capital performance on a long-term basis. Usually,
one of the main enablers is the target setting and monitoring process used
to steer working capital performance. Work targets, which are derived
from the specific project, can be set for the organization involved. These
must be monitored closely to ensure realization. Targeted communication
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of project activities and measures to market project achievements also
belong to the enabler concept. Other enablers include training and quali-
fication measures that put people in a position to drive working capital
processes in the supply chain actively and on their own.
Step 4: Secure buy-in and implement measures
The defined activities are now condensed into a plan of action. People are
given ownership of certain actions and are held responsible for imple-
menting them within defined deadlines. The plan of action has to be
communicated to, and coordinated with, both the top and operational
management levels. It is vital that the project sponsors – and everyone else
involved – buy into the project. Once management commitment has been
secured for the project, communication takes place on a wider scale and
implementation can begin. Strict monitoring accompanies the entire
implementation phase to ensure that actions are taken swiftly and the
targeted effects realized in full. Reviews with the responsible managers
should be held regularly. During these sessions, the project status, obstacles
and possible counter-actions to ensure completion of project activities in
time should be discussed.
The crucial factor when improving the performance of working capital
is to identify the right optimization levers and create the necessary
implementation commitment from all involved managers. The following
three case studies demonstrate the benefits that can be realized when
companies focus on the right process and pull the correct optimization
levers:
Case study: Consumer goods industry
In this case, the client is a well-known maker of basic materials for theconsumer goods industry. Highly complex products and orders hadcaused the company to run up above average inventories at every linkin its core process chain. The project aimed to reduce inventory volumessharply. The project team focused its attention on production planningand order scheduling. In close collaboration with the client, sustainablereductions of more than 30 percent were made to inventories byoptimizing planning processes and streamlining the very broad productportfolio. At the same time, product availability improved significantly.
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Case study: Energy sector
While managing inventories was the right lever to be pulled at theconsumer goods manufacturer, managing accounts receivable was thekey focus of our work with a company in the energy sector. We werecommissioned to find ways to optimize accounts receivable andinventories at a water utility with operations all over Germany. Theclient wanted to free up financial resources for capital investmentpurposes. The team began by systematically examining the coreprocesses in the areas of order, performance, and receivables manage-ment. By adjusting its system of installments and advance payments,improving its dunning procedures, and introducing new IT, the clientwas able to recover ⁄150 million from the balance sheet in cash.
Case study: Media group
Managing accounts payable is the third classic lever that can beaggressively pulled. Our client, a media group, is run in accordance withvalue-based management principles. We used simulated calculations toshow the group how better use of cash discounts could positivelyimpact profits and company value-added. The client’s purchasingguidelines were adjusted accordingly. We supplied purchasing withtools that would permit that department to evaluate the impact of thedifferent prices, payment terms, and delivery terms offered by differentsuppliers while negotiations were still in progress. We also defined keyvalues for discounts and payment targets, and standardized theseworldwide. Although greater use of cash discounts initially increasedthe burden on working capital, it ultimately boosted profits andsignificantly increased the value of the company.
In our experience, plugging performance gaps in the three core working
capital processes is essential for a company’s long-term survival. Yet,
companies have a mind-boggling array of levers and actions at their
disposal. In our international study of working capital, we investigated
and evaluated an extensive set of common optimization levers. The
findings of this study are presented in the following section.
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Working capital excellence – learning from bestpractices today and tomorrow
During the period 2005–6, Roland Berger Strategy Consultants surveyed 500
large and medium-sized companies in Europe, North and South America,
and Asia in order to gain a coherent overview of best practices today, and to
understand what would be the motivating factors for tomorrow. The bulk of
the companies surveyed are active in the engineering, consumer goods,
automotive, and electronics industries. However, companies from the areas
of pharmaceuticals/healthcare, basic materials, chemicals and oil, utilities,
and transportation were also examined. Some 42 percent of companies had
sales of less than ⁄1 billion, 25 percent had sales ranging from ⁄1 to 5 billion,
and 33 percent reported sales of more than ⁄5 billion.
When surveying the companies, we honed in on three topical issues. We
were curious to know what was ‘state of the art’ and what best practices
existed in working capital management. We also wanted to know what the
key deficits were. We asked company representatives: what trends does the
future hold and how can companies prepare to face them? We were also
driven to find out the nature of success factors and how could companies
close the gap with the leading lights in their industry?
We would like to share some of these results, paying particular attention
to best practices, targets/strategies, organizational forms, and process
issues. By sharing this knowledge, companies might be able to see how
they can tap hidden cash reserves in their own supply chain.
Best-practice companies: 15 percent of participantsrank as stars
As far as the relevant balance sheet items are concerned, around 15 percent
of the companies that took part in the study can be regarded as best-practice
players in managing working capital. These companies achieve outstanding
economic performance relative to their working capital. They apply a broad
spectrum of proven and innovative management methods effectively and
efficiently.
Regarding the use they make of available financial potential and the
developmental status of the tools they use to manage inventories, accounts
receivable, and accounts payable, all the other companies fall short of the
industry leaders – in some cases, by a long way. We discovered that 60
percent of study participants have not quite reached the same excellence in
financial results and management methods as best practice companies but
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are on the right path. By contrast, 25 percent of all participants – the
stragglers – have a great deal of ground to make up.
Using a detailed benchmark analysis of the companies that took part in
the study, we examined financial performance on the basis of turnover
ratios for the three elements of working capital. Figure 14.3 shows an
example taken from the receivables management benchmark analysis.
In this benchmarking exercise, we rated potential. Companies that fall
below the 25 percent line are already excellently positioned and have little
potential to improve their overall financing situation. Companies that are
better than the industry average but do not belong to the best 25 percent
exhibit moderate potential. By contrast, all those companies that are
below average urgently need to take steps to improve.
The outcomes of the benchmarking study make it simple for companies
to compare their current financial position with that of the industry as a
whole. Companies can easily identify any discrepancies between their own
situation, the industry average, and the best-in-class performers. They can
assess the financial performance of their efforts to manage working capital,
before moving on to decide what corrective action must be taken.
Companies need to maximize their working capital management, the
importance of which will increase in the near future. This quick
benchmarking exercise is only the first step and needs to be broken down
further to meet company specific situations – for example, by factoring in
adjustments considering customer/vendor structures, the degree of vertical
integration, or any further business model and supply chain characteristics.
Working capital management and its importance in thenear future
The companies that took part in the study themselves assessed their current
use of levers to optimize working capital management and the importance
these levers will have in the near future. This input enabled us to plot the
developmental status in the management of inventories, accounts
receivable, and accounts payable for each company. The results identified:
• 48 inventory management levers
• 22 receivables management levers
• 12 payables management levers.
Having collated the results for all participants, the following picture
emerged for the three components of working capital.
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Mats Paper Auto Pharma Ch/oil Elec Eng Con Utils IT/Tcoms Trans-portation
3139
14
39
21
79
70
50 5143
60
49
60
72 73
84 8492
45 43
22
53
32
72
Average
25%cut-off
Max.days
Lowpotential
Moderatepotential
High potential
XX
Min.days
Improvementlever
51
22 2113
31
68
4956 55
70
103
115 115
135
150
58
3930
4046
Figure 14.3 Industry benchmark for debtor daysNote: Debtor days = Accounts receivable/sales�360 days
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Inventory management
6.7
5.0
Currentusage
Importancein fiveyears
�34%
Receivables management
6.6
5.0
Currentusage
Importancein fiveyears
�32%
Payables management
5.2
4.4
Currentusage
Importancein fiveyears
�18%
Figure 14.4 Current and targeted future statusNote: 0 = not in use/not important, 10 = extensive use/very important
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The study revealed that potential exists to improve the management of
inventories and accounts receivable by more than 30 percent in the near
future. In addition, the potential for improving the management of
accounts payable is put at nearly 20 percent, on average. Clearly, the
companies in the study are very keen to make significantly improvement
in the way they manage accounts receivable and inventories. By contrast,
the forecast for the management of accounts payable is more modest.
Considerable optimization potential for allthree working capital items
The greatest potential to improve inventory management practices exists
in electronics/IT, engineering, and the steel industry. On the other hand,
comparatively little potential for optimization remains in the automotive,
utility, and pharmaceuticals/healthcare industries.
As far as receivables management is concerned, the need for action is
greatest in pharmaceuticals/healthcare, electronics/IT, and utilities.
Potential for optimization is only slight, however, in the automotive,
chemicals/oil, and telecommunications industries.
Finally, the utility, pharmaceuticals/healthcare, and engineering indus-
tries have most to gain by optimizing the management of accounts payable.
The telecommunications, chemicals/oil, and electronics/IT have the least to
gain. The optimization potential for working capital items in different
industries is illustrated in Figure 14.5.
Generally speaking, there is still considerable potential for companies to
optimize the financial performance of their working capital by
applying specific methods and tools. Companies are strongly advised to
measure their working capital management practices systematically against
industry benchmarks. The tools already in use should be reviewed and
optimized on a regular basis in order to keep them effective and efficient.
When appropriate, new and innovative methods should also be introduced.
It is clear from the outcomes that the practice of managing working capital
has reached widely differing stages of development in different industries.
None of the industries investigated was found to have little potential for
optimization inall three itemsofworkingcapital. Inotherwords,every industry
still has work to do. Those industries with the greatest untapped potential can
learn a much from those that have reached a more advanced level. In practice, a
cross-industrycomparisonof the toolsandmethodsappliedcanbeveryhelpful.
Let us now take a closer look at the outcomes of the study with regard to
targets, strategies, organizations, and processes.
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9780230_217805_16_ch14.3d 5/29/2008 09:44:28
Top-down targets and strategies to manageworking capital
If it is to succeed, working capital management must be lived out from the top
down and throughout the company. It must filter down through every function.
If this is to happen, however, top management must first recognize the
importanceofthispracticeanddevotesufficientattention–andresources–toit.
Our study found that top managers actually do tend to rate working
capital management as fairly to very important – and the attention this
issue commands today is high. It is reasonable to assume that the
importance of working capital management as an aspect of strategic
management has, by and large, already been recognized. Nevertheless, top
management must sharpen its focus on this key issue in order to exploit
potential in the area of both internal and external financing more fully.
Consensus between companies was greatest regarding the objectives of
receivables management. Of companies surveyed, 82 percent stressed a clear
focus on optimizing liquidity, and 80 percent on reducing the risk of default
(in response to a multiple choice questionnaire). The substantial importance
attached to reducing default risks is laudable. Defaulting customers are, after
all, a common reason why companies run into financial trouble.
6.8Electronics
5.5 7.4Chemicals
7.4 8.5Utilities
6.5 7.7Automotive
5.2 6.9Consumer goods
4.1 5.9Engineered products
5.1 6.0Pharmaceuticals
4.4
8.2
7.9
6.6
6.3
6.3
6.5
5.13.2
3.5
4.8
4.9
5.6
5.8
7.4 6.6
5.9
6.2
4.7
4.9
5.3
4.5
4.1
4.1
5.4
6.1
4.4
4.0
4.2
Industry Inventory levers Accounts receivablelevers
Accounts payablelevers
Key : Current use Future importance
Figure 14.5 Current use and future importance use of working capitalmanagement levers by industryNote: 0 = No usage, 10 = Comprehensive usage of all levers
248 Roland Schwientek and Christian Deckert
9780230_217805_16_ch14.3d 5/29/2008 09:44:28
Similar unity prevails concerning the goals of inventory management.
Most customers see this as a way to comply with defined customer service
levels, to optimize tied up capital, and/or to run inventories down as far as
possible. The respondent companies disagree only on the purpose of efforts
to manage accounts payable. The three most frequently cited reasons were:
to take advantage of cash discounts, to optimize processes, and to optimize
liquidity. However, these goals were advocated by far fewer companies and
are inherently self-contradictory in some cases. The findings of the study
confirm that companies still pay too little attention to managing accounts
payable and have yet to realize how much potential lies dormant in this
area. As a rule, best-practice companies accept a trade-off between the use
of discounts and long payment targets. To some extent, these policies are
also aligned with standard practices in different regions.
Nearly 90 percent of companies already derive the goals of their
inventory management activities from corporate strategy. All identified
objectives are then institutionalized in target agreements for the units
affected. However, only best-practice companies tend to do this to the
same extent in relation to the management of accounts receivable and
accounts payable. Here again, companies still have their work cut out if
they want to close the gap on the best in their respective industries.
Another important issue that needs a solution is target conflicts between
working capital targets and other operational targets – for example, a high
service level in inventories contradicts the working capital target of low
capital binding. In such instances, top management has to present clear
rules for operational managers to ensure acceptance and fulfillment of
working capital targets.
Taking inventory management as our example, we would now like to
explore those factors that help and hinder the practice of working capital
management. Companies point to a lack of forecasting options for sales, a
lack of end-to-end transparency, and inordinately high customer service
levels as being the main obstacles. Conversely, they see the main success
factors as extensive transparency, optimized processes, and improved
sales forecasts. These factors confront companies with the need for action
both internally and externally. However, most current projects to optimize
inventory management focus largely on internal aspects such as optimized
inventory control, more efficient systems, and sustainable reorganization.
At the time of writing, only a small share of companies are making any
efforts to try to improve external aspects, such as sales forecasts and
interfaces to customers. A crucial weapon for companies seeking to bring
their inventory management activities into line with best practices will be
external management issues that transcend company boundaries. One
Working capital excellence 249
9780230_217805_16_ch14.3d 5/29/2008 09:44:28
example involves closer collaboration with customers in order to optimize
demand projections and customer service levels as a team effort.
Crafting an effective and efficient organization
Trying to find the most suitable organizational form is perhaps the most
delicate challenge in the context of working capital management.
Ultimately, almost every corporate function that plays a direct role in a
company’s value chain influences working capital. Three core process
chains must be coordinated effectively and efficiently with all these
functions, if optimal results are to be achieved. These three processes are:
• Forecast-to-fulfill (order management, purchasing, production, and
distribution) for the management of inventories
• Order-to-cash (sales, invoicing, monitoring, and closure) for the
management of accounts receivable
• Purchase-to-pay (purchasing, payment, and monitoring/closure) for the
management of accounts payable.
Our findings indicate that there is significant pent-up demand for organi-
zational change that will improve the management of working capital in
today’s companies.
The need for coordination is perhaps most complex in the context of
inventory management. Figure 14.6 presents organizational forms that are
conducive to successful inventory management.
Functions involved in the coreprocess chain
Departments involvedin top managementCore process chain
Ordermanagement
Purchasing
Production
Distribution
58 24
612 20
25 45
10
4 or morefunctions
1 function
2 functions
3 functions
4 or moredepartments
3 departments 2 departments
1 department
Figure 14.6 Organizational forms conducive to inventory management(study participants %)
250 Roland Schwientek and Christian Deckert
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At about 90 percent of companies, at least two top management depart-
ments and two operational management functions are involved in the relevant
core process. At 20 percent of companies, a minimum of four top management
departments are involved; and at 60 percent of companies, a minimum of four
operational management functions play a part. Coordination between so
many different functions and units can become extremely complex.
The number of interfaces and potential conflicts can be reduced and
coordination can be simplified by bundling responsibility in the hands of a
smaller number of functions and/or top decision makers. Organizations
become much more efficient and processes run more smoothly as a result.
At best-practice companies, it is not surprising to find that a chief operating
officer (COO) is often the one board member who is responsible for
coordinating the purchasing, production, and distribution functions. Ideally,
the COO only has to refer back to the sales director who is in charge of order
management. Other companies have set up working capital councils to
bring together relevant functions discussing working capital issues.
A similar pattern emerges in the management of accounts receivable, even
though only two functions – sales and finance/monitoring – generally have to
be coordinated. At no fewer than 30 percent of companies, at least two top
management departments share responsibility for accounts receivable.
Operational management is delegated to at least two different functions at
43 percent of companies. Here, too, these different units all have to be
coordinated. Since 42 percent of the respondent companies operate more
than one function that interfaces with the customer, the principle of one-face-
to-the-customer cannot be adhered to. Once again, responsibility should be
concentrated in fewer hands, and the tasks assigned to sales and finance/
monitoring should be defined more clearly to smooth the relevant process
flows. At best-practice companies, sales functions tend to have the most say
in shaping and driving processes. Accordingly, the activities of sales might
additionally be managed by a system of incentives and bonuses based on
ratios that measure receivables outstanding and/or receipt of payment.
At 94 percent of the companies in our study, the management of accounts
payable was assigned at top management level to one board member only –
normally the chief financial officer (CFO). On this score, responsibility is
assigned unambiguously. At 48 percent of companies, at least two functions
(usually purchasing and finance/monitoring) are in charge of operational
management. Again, best-practice companies clearly delimit the tasks
entrusted to each party. Purchasing, in particular, must possess sufficient
financial expertise to know which levers (such as negotiating cash discounts
in place of long payment targets) will have what impact on earnings and the
value of the company. Clear procedural instructions and staff training can
Working capital excellence 251
9780230_217805_16_ch14.3d 5/29/2008 09:44:28
be very useful on this score. At finance/monitoring, it is important to ensure
that process steps such as invoice verification and processing are handled
quickly and reliably to meet payment agreements.
Inventory management – a vast store ofuntapped process potential
In closing, let us turn our attention to the core processes in the practice of
working capital management. To each of these processes we have attached
specific optimization levers and methods, some of which are already
common practice while others are more innovative and have not completely
entered day-to-day business. We asked the participants in our study to
assess the usefulness of these levers and methods today and their future
importance. A summary of their responses for each core process and
process step is presented in Figure 14.7.
Armed with this information, companies can now identify those process
steps that will, in future, present the greatest optimization potential for
each aspect of working capital.
Potential in the management of inventories is more or less evenly spread
over the various process steps. Order management serves as a good example.
The companies we surveyed believe that rolling sales forecasts and effective
claims management will be the most important levers to optimize this aspect in
future. The greatest need for action is identified in the integration of customer
planning, the segmentation of orders and the reduction of complexity within
product portfolios. Here again, the study highlights the interface to the
customer as one key area in which inventory management can be optimized.
Best-practice companies are already facing up to these future challenges.
The greatest potential to optimize the management of accounts rece-
ivable is seen to be in sales. Three specific levers were predicted to be the
most important in future:
• The rules governing delivery moratoriums
• The monitoring of payment patterns
• The automated supply of customer information to sales.
The companies in our study saw the need to optimize internal sales incen-
tive systems, segment customers on the basis of their payment patterns, and
automate the supply of customer information to sales as the areas where
most work still needs to be undertaken. Once again, best-practice companies
are already using these levers to improve receivables management. Many of
252 Roland Schwientek and Christian Deckert
9780230_217805_16_ch14.3
d5/2
9/2
008
09:4
4:2
8
Usage today Importance in five years
Managementof accountsreceivable
Managementof accountspayable
5.0 6.8 4.9 6.44.1 5.6 4.8 6.6
Order management Purchasing Production Distribution
�37% �31% �35% �36%
�34%
Av. untappedpotential
�32%
�18%
4.56.8 5.1 6.3 7.35.7 4.73.2
Sales Invoicing Monitoring Closure
�51% �24% �28% �47%
7.56.43.83.3
6.04.5
Purchasing Payment Monitoring/closure
�17%�15% �33%
Managementof inventories
Key :
Figure 14.7 Untapped potential in each core processNote: 0 = not in use/not important, 10 = extensive use/very important
25
3
9780230_217805_16_ch14.3d 5/29/2008 09:44:28
the other companies lag the front-runners – and would do well to apply the
results of this study to close the gap.
What remains is the potential to improve the management of accounts
payable. As we have seen, the study participants tend to see this aspect as
less important than the other two elements of working capital. Across all
three of the process steps, the companies nevertheless identified the
coordination of payment terms with business planning, the standardization
of payment terms, and the use of direct debit facilities as the most important
levers for the future. The first of these three levers is also the one where most
improvement will be needed in the years ahead. Best-practice companies
draw on financial mathematics models to calculate the optimal balance
between price discounts and payment term targets. This is usually done
region by region, as payment term habits vary considerably. This having
been done, they then standardize and negotiate payment terms accordingly.
To keep the findings of our study as applicable and practical as possible,
we also analyzed which of the optimization levers named by the
participants harbor the greatest potential for improvement, and how much
they cost to apply. This analysis will help companies to select the methods
that will best help them take the next step toward best-practice status. As an
example the results for inventory management are shown in Figure 14.8.
High
Potential
Low
LowHigh Cost of implementation
1
2 3
4
5
7
8
9
10
11
12
13
14
15
16
17
1819
20
21
22
23
24
2527
26
2928
30
32
31
39
33 34
36
35
37
38
40
41
42
43
44
4546
4748
6
254 Roland Schwientek and Christian Deckert
9780230_217805_16_ch14.3d 5/29/2008 09:44:29
Order management
Sales planning1
Integration of customer planning2
Demand forecasts3
Order segmentation4
Clearance sales5
Portfolio adjustment6
Returns/claims7
Reduction in scheduling levels8
Production
Production segment20
PPC* optimization21
Large order planning22
Production layout23
Bottleneck analysis24
Kanban25
Just-in-time26
Production batch size27
Setup times28
Production moratoriums29
Vertical integration30
Production networks31
Production-smoothing32
Purchasing/procurement
Scheduling strategy9
Cust. order-spec. scheduling10
Order batch size11
Modular/system sourcing12
Standardization13
Resale14
Order moratoriums15
Quality control/returns16
Supplier base17
3rd party warehouse mgmt18
Supplierintegration
19
Distribution/warehousing
Inventory strategy33
Buffer stocks34
Inventory balancing35
Client sales/scrapping36
Distributors37
Cross-docking38
Direct shipments39
Continuous replenish.40
Warehouse structures41
Warehouse networks42
Supply chain differentiation43
Outsourcing44
Customerintegration
45
Cross-functional levers
46
47
Cross-function responsibility
PPC � Production planning and control
IT automation and integration
Cross-function monitoring48
Figure 14.8 Analysis of existing levers based on self-assessment by studyparticipants
Working capital excellence 255
9780230_217805_16_ch14.3d 5/29/2008 09:44:29
Bottom line – untapped potential persists in all industries
The study shows that managing working capital is already an established
practice in one form or another at many companies. At the same time, it also
reveals the considerable potential for improvement that exists in relation to
targets and strategies, organizational forms, and processes in all the industries
examined. Working capital is clearly an issue that belongs on top management
agendas and is one that should be reviewed and optimized on a regular basis.
So how does your company become a star? Essentially by doing two
things:
• Gain a transparent understanding of the individual items of working capital
• Analyze, (re)design and apply suitable management methods on an
ongoing basis.
Having benchmarked financial ratios and examined the levers of
optimization already in use in a range of industries, it is clear to us where
untapped potential lies. In relation to inventory management, for example,
we know that there is a real need to improve the interface to the customer.
However, optimization will only succeed if top management grasps the
potential impact that working capital can have on strategic management.
The entire enterprise must be made more sensitive to the possibilities that
will arise by proactive management of working capital. Suitable
knowledge can then be cultivated, allowing the company to define
appropriate targets. When such an open culture exists, the practice of
optimization can take root and grow throughout the organization.
Further reading
Schwientek, Roland and Deckert, Christian (2005) Working Capital
Excellence Study I – Managing accounts receivables and payables.
Stuttgart: Roland Berger.
Schwientek, Roland and Deckert, Christian (2006) Working Capital
Excellence Study II – Managing inventories. Stuttgart: Roland Berger.
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CHAPTER 15
Supply chain organization: a keyenabler for successful supply chainmanagement
Ingo Schr€oter and Stephan M. Wagner
Introduction
Well-functioning supply chains are reliable and responsive, and remain
cost efficient despite being flexible. As supply chains become more global
and complex, however, supply chain links become strained, and supply
and delivery glitches tend to increase. Companies are often robbed of their
ability to respond quickly because they are weighed down by overly
complex structures that have arisen, for instance, after embarking on a
quick session of mergers and takeovers. Other companies might be
burdened by conflicting operating styles and processes, and a lack of
standard procedures throughout the entire supply chain. This prevents
them from being best-in-class, especially in today’s highly competitive
business environment in which a smoothly run operation is paramount.
When companies manage to embed supply chain management into their
organization, use simple coordination tools such as setting goals for
divisions, and coordinate their external supply chain with precision, their
supply chains become extremely efficient and perform with fewer
hiccups. As a result, these companies manage to notch up remarkable
savings. In many ways, supply chain organization is the linchpin for
making sure that supply chains are cost efficient, reliable, and responsive.
These are the hallmarks of success in an increasingly competitive
environment.
A study recently conducted by a joint team of Roland Berger
consultants and researchers from WHU – Otto Beisheim School of
Management1 revealed that many companies realize that their supply
257
9780230_217805_17_ch15.3d 6/3/2008 14:49:06
chain organizations can still be improved. More than half of the 200
companies that were interviewed for that study said that there is
significant room for improvement in their supply chain organizations.
Companies recognize that while purchasing functions, for example, have
made huge leaps and bounds over the past years, supply chain
organization has not developed as quickly. Improvements can be made
in companies working in all industries.
Globalization and increased complexity are definitely the main forces
driving the necessity for enhanced supply chain organizations. Yet,
specific challenges push this trend in individual industries too. In the
automotive sector, there is a need for demand-driven logistics for flexible
production, and for greater supply reliability. Manufacturers of engi-
neered products must deal with continuous outsourcing and reduced lead
times. Pharmaceutical products and medical device producers must
integrate their distributors, and become more flexible and more efficient.
Food manufacturers have to negotiate with retailers that have gained
considerable clout and are increasingly demanding.
In this chapter, we describe the study findings, as they provide insights
about the elements necessary for creating and maintaining an effective and
efficient supply chain organization. We also demonstrate how companies
can transform themselves into a best-practice organization, by examining
how ‘organizational talents’ (that is, firms that exceed their peers in supply
chain performance) manage to achieve better performance.
Organizational talents master their supply chainorganizations
In the study, the project team asked supply chain and logistics decision
makers how they currently organize their supply chains. Most of the
managers interviewed were responsible for the logistics or supply chain
activities of their firms, while others were purchasing directors or general
managers. In terms of size, we surveyed companies across the board,
although our focus was on medium-size and larger players. Only 14
percent of companies examined had annual sales of less than ⁄100
million. More detailed information concerning the companies interviewed
can be gleaned from Figure 15.1.
While all participating companies show a marked trend toward greater
strategic alignment and comprehensive coordination of the supply chain,
only about 15 percent truly differentiate themselves from the competition.
These organizational talents provide a high logistics service with an
258 Ingo Schr€oter and Stephan M. Wagner
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/2008
14:4
9:0
7
Interviewees’ areas ofresponsibility
Industry breakdownCompany size by sales
51Logisticsmanagers
24SCMmanagers
Purchasingmanagers
CEOs5
Othermanagers
1114
4217
� €1,000 m� €100 m
€100–500 m€500–1,000 m
27 28
Automotivesuppliers
25Mechanicalengineering
24
Pharmaceuticals
23
Food industry
9
Figure 15.1 Breakdown of companies interviewed in terms of size, area of responsibility, and industry(%)
25
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9780230_217805_17_ch15.3d 6/3/2008 14:49:07
optimized cost structure. As well as securing low transport and low
inventory costs, they also enjoy on-time deliveries, good turnaround
times, supply flexibility, zero-defect processes, and high customer
satisfaction. Reducing costs, increasing reliability with supply partners,
and reducing lead times are the common goals underpinning the desire for
companies to improve their supply chains. Organizational talents reach
those goals. The spread between organizational talents and their weaker
competitors is shown in Figure 15.2.
Filtering out the information gained from the responses, three best
practice principles could be derived from the study results. Successful
companies:
• Implement a supply chain organization
• Implement coordination tools
• Coordinate their external supply chains.
Implement supply chain organization
Organizational talents have one thing in common: their supply chain man-
agement is thoroughly embedded within the organization. To accomplish
this, companies need their top management to participate actively and
support this strategy. This is a key success factor. When top management
focuses attentively on supply chain management, a clearly defined supply
chain strategy emerges. Frequently, companies set up divisions or func-
tions that are solely responsible for managing the supply chain throughout
Defining performance criteria
• Logistics performance
– On-time delivery
– Turnaround times
– Flexibility of supply
– Zero defect/error-prone logistics processes– Customer satisfaction
• Logistics costs
– Transport costs
– Inventory costs
Logisticsperformance
Very good
Very poor
High LowLogistics costs
85%Everyone else
15%Organizational
talents
Everyone else (149)Keys:
Organizational talents (27)
Figure 15.2 Organizational talents have outstanding logistics capabilities
260 Ingo Schr€oter and Stephan M. Wagner
9780230_217805_17_ch15.3d 6/3/2008 14:49:07
the entire company. This guarantees that the right people have the
necessary authority to make decisions that affect functional entities within
the organization.
More than 80 percent of organizational talents have established a
supply chain center that is responsible for coordinating purchasing, manu-
facturing, distribution, and reverse logistics. This helps them achieve the
best trade-off between service, cost, and capital employed.
Often they combine several elements:
• Temporary supply chain functions are usually set up to solve certain
specific problems or to develop concept improvements. They are
organized as a project for its duration and usually resource from
different functions across the company. Sometimes, they are the
starting point of company-wide supply chain functions.
• Strategic staff functions are typically responsible for supply chain
planning and coordination. They consolidate sales forecasts, and
production and purchasing plans, and assure the feasibility of internal
and external supply chains. Their role is to coordinate the supply chain;
they enjoy directive rights over different functions. Often, activities
controlling supply chain performance fall within their scope.
• Operative supply chain functions have clearly defined operational tasks
such as order processing or collaborative planning with suppliers.
Strategic and operative functions are horizontally and vertically aligned
and bundled within a supply chain responsibility. Furthermore, responsi-
bility for the supply chain is frequently assigned according to differentiated
supply chains – for example, by product segment or business units.
Implement coordination tools
Best practice companies deploy coordination tools, which effectively
work as the oil lubricating the supply chain to make sure that it operates
perfectly. Companies have an array of coordinating tools at their disposal
to enhance performance.
Organizational talents clearly formulate their strategic supply chain
goals, set clear targets with a careful selected set of key performance
indicators (KPIs), set clear targets for these KPIs, and monitor them
continuously. Such strategic supply chain goals pertain to individual
divisions that are oriented toward gaining improved performance over the
entire supply chain. Even better results are obtained when divisional goals
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are linked to variable compensation. This tool only makes sense when
performance-based compensation is the strategy followed throughout the
entire company. Coordinating divisional goals is not without its
difficulties. Consider planning. Whereas marketing and sales divisions
usually want to set ambitious goals in order to motivate sales staff,
production generally wants to be able to forecast volumes as accurately as
possible so that they can use capacity to the best advantage.
The round table was the most widely used coordinating tool among
companies in the survey. Organizational talents not only use round tables
more often than their weaker counterparts, they hold such meetings
regularly, carefully prepare for them, and follow strict agendas. This helps
them gain a comprehensive view on the current situation and objectives,
which are ideally based on quantitative KPIs such as budget, delta, and
action. Less organized companies tend to use round table discussions to
exchange ideas and focus on resolving operational problems as they arise.
They are firefighters, responding to problems reactively.
Exceptionally few companies use staff rotation to support supply chain
coordination. Managers and other employees still hold reservations,
believing that they will lose good staff and start-up time as employees
become familiar with their new environment. Small to medium-sized
companies, especially those that are owner-managed, are particularly
hesitant to use this coordination tool. Companies that deploy staff rotation
need to have a clear strategy to minimize start-up time losses. A good
starting point for companies is to apply staff rotation on new recruits and
trainees where blocking points apply to a lesser degree.
Coordinate external supply chain
The third key success factor common to organizational talents is simple:
they work more intensively on developing a better external supply chain.
Indeed, 67 percent of all organizational talents work with their major
suppliers to optimize the supply chain. They exchange sales forecasts,
on-time-delivery information, delivery flexibility, and general satisfaction
levels concerning overall performance on a regular basis. They also define
and monitor goals together with their suppliers and reward top performance.
The mutual trust that develops as a consequence of this action leads to
greater success with both operational and strategic topics. It also enables
organizational talents to state optimization targets clearly in their contracts.
Companies that work together with their suppliers to improve their
supply chain are more likely to achieve their targets than companies that
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take a more ‘go-it-alone’ approach. Interestingly, companies in the
automotive supply industry tend to work with suppliers more frequently
than do companies in the mechanical engineering industry, which engage
suppliers only now and then.
The interaction between a company’s employees and the employees of
the supplier is decisive for close and mutually beneficial buyer–supplier
relationships. As such, the survey revealed that a lack of staff with the
right capabilities on both sides was a key blocking point to efficient
supplier coordination. As one cannot always send multi-functional teams,
employees with a wide overview of both the company’s and the supplier’s
supply chain are needed to bring value.
How to achieve best practice? Food for thought
So, what are the insights we can glean from the study? Some companies
have a better grip than others on their supply chain organizations, and only
these companies can fully benefit from the size of this opportunity.
Companies wishing to get the upper hand on their supply chain organ-
ization would be wise to answer the following set of questions:
1. Does the current organization adequately reflect the importance of
supply chain management?
• Is this also reflected in accountability, especially with respect to
hierarchical levels?
• Can end-to-end supply chain management be embedded without
losing critical synergies on a functional level?
2. Are the correct decision-making mechanisms and coordination tools in
place?
• Does your company already have the right mechanisms or tools?
• Are they being applied correctly and effectively?
3. How should the company organize the external supply chain?
• How could your company’s relationships with suppliers become
more effective and efficient?
Roland Berger’s approach to supply chain organization
The operations strategy team at Roland Berger constantly works on
improving companies’ supply chain management. However, companies
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that approach us are not primarily concerned with enhancing their supply
chain organization. More often than not, they ask for advice because they
want to improve service levels, bring cost down or reduce working capital
and release cash. The experience shows that, for achieving these goals, it
is actually improved supply chain organization that enables these
companies to develop supply chains that work more effectively and
efficiently.
In our experience, companies need to take three steps before the supply
chain organization can truly be optimized:
1. Understand their own internal and external factors
2. Develop and assess organizational options
3. Agree on the target organization before defining steps for transformation.
As step three is usually part of an overall supply chain improvement
implementation program, we will focus here on the first and second steps
only.
Step 1: Understanding internal and external factors
The first step is to get a clear understanding of factors affecting your
company. It is important to understand right from the start that there is no
standard formula or best practice template for supply chain organizations.
Although best practice companies share many characteristics, the
environment in which each company operates is unique. External factors
such as market structure and client expectations are different for each
company.
For one of our clients, for example, we found across Europe two market
clusters relevant to the design of a supply chain organization:
• A highly mature cluster of Western and Central European countries,
where customer requirements were quite similar and competitive logistics
services were easily available – for these mature countries, the company
decided to centralize supply chain management functions in order to
focus on efficiency through cost synergies. At the same time, a central
supply chain control function was established to manage a comparable set
of key performance criteria, such as raw material inventory levels and
production capacity utilization, as well as service levels.
• A set of countries with highly differentiated customer requirements and
constantly changing demand situations – as a result, when designing the
264 Ingo Schr€oter and Stephan M. Wagner
9780230_217805_17_ch15.3d 6/3/2008 14:49:08
supply chain organization the decision was taken to establish supply
chain management functions such as material and capacity locally in
order to enable maximum flexibility to react to customer requirements.
Each company has its own set of internal requirements too, such as the
availability of IT systems, and people skills. Full analysis of such internal
and external factors is crucial for the design of a workable supply chain
organization.
One client company, for example, was just coming out of a major
restructuring phase during which the whole purchasing department was
focused only on one objective: reduce purchasing prices. A decision was
taken to reshuffle the organization in order to accelerate the transition to a
more collaborative approach towards purchasing. This was achieved by
allocating the purchasing function, together with the production function,
underneath a single global supply chain responsibility, and underpinning
this new structure with a reviewed collaboration-oriented KPI and
incentive system.
Small steps might need to be taken at first to set the groundwork for
cultural change, which might be necessary in order to create a best
practice organization.
Typical external factors that might be relevant for determining the
requirements of the organizational design are:
• Globalization (market entries, low-cost country sourcing, off-shoring
fragments of the supply chain)
• A need for flexibility, arising from M&As
• Deregulation
• High-maintenance partnerships
• Market requirements.
The latter factor comprises a mixed bag of local and global customer
requirements, tax regulations, labor laws, and so forth.
Typical internal factors are:
• Culture
• Capabilities
• Systems.
Effective supply chain management requires a company culture that
puts the supply chain above functional targets. Such a culture clearly does
not evolve overnight and management has to make considerable efforts to
Supply chain organization 265
9780230_217805_17_ch15.3d 6/3/2008 14:49:08
achieve systematic development at all levels of the company and in all
regions where it operates. A special skill set is required of supply chain
managers. They need to display specific capabilities.
The correct system is also critical. Even if an internationally optimized
supply chain makes sense, the company might not have the right sort of IT
infrastructure in place to enable it to operate. Organization transition has
to develop alongside IT capability. Typical internal and external factors
that might be relevant for determining the requirements of the
organizational design are shown in Figure 15.3.
Step 2: Develop and assess organizational options
Once a company has analyzed the external and internal factors, the results
must be translated into clear design requirements. This creates a checklist,
making it easier for companies to assess the organizational options open to
them. When defining options for organizations, it is a good idea to
perform a gap analysis that shows the cleft between the current
organization and how it should look in the future, based on the defined
requirements. This creates transparency, and it shows where adjustments
in the organization need to be made. With this knowledge, options can be
developed.
The description of options should then happen along a framework that
allows a relatively quick description of an option. This enables the
individual options to be assessed on a high level against the design
criteria. Detailing of the organization can then be limited to a few options,
or even only one – the preferred option. The relevant dimensions should
be considered when outlining the organizational option:
• Segmentation Companies should look at the way the supply chain
organization is segmented. Is it spliced according to product, customer,
market, order type or speed? The goal is to achieve a strong customer/
market orientation end-to-end.
• Centralization Companies should look at the level at which the
supply chain organization is centralized or decentralized with respect to
regions.
• Process-orientation The organization should ensure an end-to-end
process responsibility.
• Decision making Companies should look at the decision-making
process and structure. They should consider which entity has what
responsibility and autonomy, and what coordination tools are applied.
266 Ingo Schr€oter and Stephan M. Wagner
9780230_217805_17_ch15.3
d6/3
/2008
14:4
9:0
8
External factors
• Globalization: Trends such as marketentries, low-cost country sourcing, off-shoring fragments of the supply chain.The organization needs to provide theglue to hold the supply chain together.
• Flexibility: M&A, deregulation butalso partnerships in various elementsin the supply chain continuouslyrequire structural updates. Theorganization needs to be flexibleenough to handle those.
• Market requirements: Local andglobal customer requirements, taxregulations and labor laws need to beconsidered when designing the supplychain organization.
Internal factors
• Culture: Effective SCM requires acompany culture that puts the supplychain above functional targets. Sucha culture does not evolve overnight, ithas to be systematically developed.
• Capabilities: Supply chain managersrequire specific capabilities; even ifexternal hires can help, an internaldevelopment of people is requiredand this takes time.
• Systems: Even if an internationallyoptimized supply chain makes sense,the company might not have ITinfrastructure in place that enablesthis. Organization transition has to goalong with IT capability development.
Organizationaldesign
requirements
Figure 15.3 External and internal factors to be analyzed prior to designing organizations
26
7
9780230_217805_17_ch15.3d 6/3/2008 14:49:08
• Supplier integration Companies also need to investigate the way
their internal supply chain organization is linked to the comprehensive
supply chain, including suppliers.
Additionally, only functions that strongly impact the supply chain control
of differentiated product segments should be grouped into a segment
responsibility. Shared service functions – such as warehousing and
transportation – should be set up to realize cross-segment synergies.
Companies also benefit from conducting a ‘what-if’ scenario analysis,
which tests how flexible the organization is. Both external and internal
factors should be used for measuring the company’s flexibility. This helps
create a stable supply chain organization and promotes a culture of
sustainability.
Outlook
As the study and feedback from participants demonstrate, supply chain
organization is seen as a key success factor for companies across many
kinds of industries. Organizational talents are guides, showing how
companies can design an effective and efficient supply chain organization.
But companies must be aware that there is no single golden way. To define
the best option, each company needs to consider its own external and
internal factors. Internal factors need special consideration.
Any company working on its supply chain organization needs to
understand that supply chain management has more to do with company
culture than with company structure. Organizations today still tend to be
functionally designed, with responsibility limited to distinct functions.
End-to-end responsibility for the entire supply chain is rare. This needs to
change. A best-practice organizational structure helps companies thrive,
but this requires everyone in the organization to develop an end-to-end
mindset. Since supply chain management is probably the most cross-
functional of all core business disciplines, this cultural change clearly
must start with top management and filter downwards.
Note
1. Stephan Wagner, Axel Schmidt, Ingo Schr€oter, Sebastian Durst,
Eckhard Lindemann (2006) Roland Berger/WHU Otto-Beisheim
School of Management.
268 Ingo Schr€oter and Stephan M. Wagner
9780230_217805_17_ch15.3d 6/3/2008 14:49:08
Further reading
Durst, Sebastian M. et al. (2006) Getting to Grips with the Supply Chain.
How Organizational Stars Organize their Supply Chains. Stuttgart:
Roland Berger.
Supply chain organization 269
9780230_217805_18_Index.3d 6/3/2008 14:48:17
INDEX
ABS finishing 119
accountability 134, 263
accounting 28, 196f, 223, 239
accounts payable 121f, 232, 233–5, 236f,
237–8, 239, 240, 242b, 243, 244, 246f,
247–54
accounts receivable 232, 233–5, 236f, 237–8,
239, 240, 242b, 243–52, 253f
action plans 42, 43f
activity based product costing 33f, 41
‘adherence to global processes’ 55
Adidas 15, 22(n2), 202
aerospace xv–xviii, 29, 99, 109, 148, 151,
152, 153, 155, 205, 219f
Africa 103, 108
Airbus A350 65tb
Airbus A380 64, 64b, 65tb
aircraft manufacturers 109
airline industry xii, xiii, 10, 11
alliance hubs 127, 128
alliances 50f, 216
aluminium 30, 35f, 49f, 116, 152, 154f
amortization 71
Apple 19b, 20, 21
Asia 41b, 107f, 108, 243
emerging markets 107
Asia-Pacific 137f, 138
assembly lines 1, 50, 150, 152, 153, 179,
207–8
manual 40f, 41
asset performance/productivity xvi, 2, 3f 200f
asset turnover 199, 210
assets 233
assets 236f
Audi 30
Augustin, R. xii , 7
Australia xvi
Austria xv, 107
automotive companies/manufacturers 122,
124, 148
average working capital 234f
Japanese 82–5, 86–7f, 90, 109–10
western 81
automotive components manufacturers 155
average working capital 234f
automotive industry xii–xviii, 12, 25, 30, 92,
99, 151, 152, 162, 203, 205, 207, 214b,
219f, 237, 243, 258
CCR (case study) 41–4b
global development made successful 45–60
industry benchmark for debtor days 245f
Japan 79, 80–1
lead buying 135–9b
safety recalls 64–5
share of sales with original product inno-
vation 62f
speed with which new models are launched
90
working capital optimization 247, 248f
see also cars
automotive suppliers xiii, 119, 177, 259f, 263
leveraging manufacturing excellence
172–3b
maintenance costs 177, 178f
Avesta (steel producer) 12
B-2-B 10
B-2-C 10
backward and forward integration 119
balance of power 238
balance sheets 101–2, 233, 239, 242b, 243
balanced scorecards 57
Bamberg xvii
bankruptcy/insolvencies 24, 144
banks xiii, 92, 233
barriers to entry 14
BASF 191
batch systems 166, 167f
Bayer 191b
Bayer Industry Services 191b
270
9780230_217805_18_Index.3d 6/3/2008 14:48:17
benchmarking/benchmarks 14, 15, 38n, 70f,
110, 121f, 152
equipment maintenance cost-to-availability
ratio 177, 178f
external 73b
financial ratios 256
industry leader 162
machinery maker 119–20
maintenance costs 186
manufacturing excellence 163, 166–8
purchasing 111, 115
SCM 200f, 237
supplier development 109
TCO 112
technical 121f 237, 238–9
working capital 237, 238–9, 244
Berlin 13
best practice/best in class
equipment maintenance 177
institutionalization 171f, 171
lean manufacturing 146
manufacturing 162, 164f, 165, 166, 167f,
170–1, 174
miscellaneous xvi, 2, 3f, 14, 15, 36f, 47, 152
price discounts versus payment term targets
254
purchasing 94, 99, 123–4, 125, 127–30, 135
SCM 200f, 200, 204
sharing process 171f
success factors and levers in innovation
management 61–78
supply chain organization 258, 260–3, 264,
265, 268
working capital 232, 243–4, 249, 251, 252
see also optimization
best price evaluation 121f
Bilfinger Berger Multi Service
Group 12–13
bio-informatics 13–14
BMW [Bayerische Motoren Werke AG] 51,
203
board members 251
body (automotive) 79, 80f
bonuses 55, 121f, 251
book-keeping 56
bottlenecks 41, 101, 174, 254f, 255
Brandenburg, K. 19b
brands 15, 130, 136, 145, 220
Brazil 49f
British Airways 11
built-in quality 162
Bulgaria 108
bureaucracy 158f
business administration xiii, 6
business areas 51, 52
business divisions 133
business environment 59, 93, 106, 148, 156f,
156, 257, 264
changing 14
global 132
business functions 194
business impact 115–16, 116f
business model innovation 7, 13f
prerequisite 19–22
business models xvii, 42, 147, 151, 198, 238,
244
business models: impact on product devel-
opment (chapter one) 7, 9–23
airline industry 11b
attractiveness indicators 18f, 19b
change and innovation 12–15
components 9–10, 10f
corporate strategy in action 9–12
development over time 13f
formation, growth, maturity, decline 15, 17f
how and when to innovate 15
imitation 14, 15, 22(n2)
key question 16
lifecycle (basis for innovation) 15–22
music industry 18–19
outlook 22
‘emerging’ versus ‘planned’ changes 14
prerequisite for innovation 19–22
product/service innovation 19–22
business parks 158f
business planning 254
business processes xiv, xvi, xviii, 49f, 120,
172b, 198
harmonization 57
see also processes
business segments 159b, 191b, 199
business sites 133, 134, 136, 139b, 157
business strategy 200f
business system analysis 164f
business units (BUs) 13f, 43f, 53f, 72, 75b,
123, 124, 128–31, 133, 134, 136, 139b,
199, 206–9, 211–15, 261
central organizational units 214b
data comparability 237–8
local 100
Index 271
9780230_217805_18_Index.3d 6/3/2008 14:48:17
buyer-supplier relationships 263
buyers/leverage 116f
Buzz (KLM subsidiary) 11
call centres 209f
capital 177, 185, 194f, 261
international transfer 145
tied 124
capital binding 249
capital expenditures (capex) 97, 98f
capital markets 233, 235
capital projects 192
capital structure 200f
capital transfer 126, 126f
capital turnover 207
car manufacturers 25, 108, 109
best practices 110
R&D activities (splitting among sites) 50
supplier development 109
cars 1, 30, 81
‘hurry up’ models 84
innovative 89
models 203
pure Japanese 80
see also vehicles
cars: sections/attributes
body 85
chassis 79, 80f
crash tests 84
door panels 39f
front wheel drive 49f, 88
interior trimming 109
paint and colour combinations 203
power window module 34, 35f
radios 57
rear wheel drive 49f, 88
right-hand drive 49f
styling 84
under body 87
upper body 86–7f
case studies
CCR in automotive industry 41–4b
complexity tackled from sourcing side
(case study) 226–30b
global manufacturing footprint: optimiza-
tion (how the approach works in real
life) 159–60b
global supply chain management frame-
work (electronic components)
205–14b
healthcare sector 226–30b
‘innovation to cash’ at utility company
72–5b
lead buying in automotive industry 135–9b
lead buying in utilities industry 139–41b
manufacturing excellence (manufacturer of
engine components) 172–3b
SCM 200
university hospitals (tackling complexity
from sourcing side) 226–30b
working capital excellence: consumer
goods industry (case study) 241b
working capital excellence: energy sector
(case study) 242b
working capital excellence: media group
(case study) 242b
cash 240, 264
cash discounts 239, 242b, 249, 251
cash flow 233, 235, 237, 240
cash reserves
hidden in supply chain 232–56
cash-out 75b
catalogue purchasing 139b, 140f, 140b, 141f
cell manufacturing 79
Central and Eastern Europe 107f, 108, 144
‘Central Europe’ 203, 213, 264
‘Eastern Europe’ 6, 47, 49f, 103, 213, 238
central ivory towers 100
centralization 72, 122, 264
purchasing 99, 99f
sourcing functions 97, 98f
supply chain organization 266
Centre for European Economic Research
(ZEW) 61
change management 55, 117f, 187f, 188
change process engineering 119, 121f
chemical industry/chemicals xii–xv, xvii, 12,
191–2b, 219f, 243
benchmark for debtor days 245f
equipment maintenance 188–91
maintenance costs 177, 178f
shared support functions 191–2
working capital 234f, 247, 248f
chemical parks 192b, 196
chief executive officers (CEOs) 78, 96, 100,
141f, 259f
chief financial officer (CFO) 251
chief marketing manager (Nissan) 89
chief operating officer (COO) 251
chief product specialist (Nissan) 89
272 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
chief vehicle engineer (Nissan) 89
China 6, 47, 49f, 103, 106, 108, 129, 144,
145, 159–60b
entry into WTO 105
industrial system 106
sourcing hurdles 106
claims management 252
clearance sales 254f, 255
client base 157, 158
combined cycle gas turbine (CCGT) plant
140b
commercial vehicles 88, 119
commitment 169, 239
commodities 105–6, 107, 117, 122, 128, 134
module- or system-oriented 106
price trends 103f
commodity classification 124
commodity codes/coding 123, 127, 136, 137
commodity councils 129
commodity groups 115
commodity management xiii, 100, 229
commodity markets 199
commodity procurement process cost 127
commodity strategy 138f
commonization 33f, 34, 48f, 121f
communication/s 42, 55–6, 76, 90, 127, 135,
164f, 170–1f, 172, 173, 183, 193f, 205,
240–1
barrier-free 56, 59
compact discs (CDs) 18–19b
companies
advanced 97
best-in-class 109, 257
blue-chip 28
corporations 29, 131, 133, 134
downstream and upstream 109
European 90, 107
external versus internal funding 233
family-owned enterprises 28
global manufacturing footprint (optimiza-
tion) 147–61
global manufacturing footprint (unique-
ness) 148
industrial 109
international 56
international sales affiliates 174
Japanese (efficiency) 79
large 243, 258, 259f
lead-buying concept 134
long payment targets 249
major global 97
medium-sized 94, 125, 243, 258, 259f
multinational 59, 102, 125
partnerships and alliances with suppliers 108
product-based 217
reasons for de-localization 149–50
small 133
small and medium-sized enterprises
(SMEs) 133, 262
start-up 21, 133
survival chances 47
targeted for acquisition 160b
Triad region 145
Western 103, 108
see also suppliers
company size 132, 258, 259f
competence 54, 64b
competition 6, 21, 29, 104, 139, 144, 150,
162, 173, 203, 216
global 45, 61
low-cost (defence against) 151
outsmarting 24–44
competitive advantage 10f, 10, 22, 96, 108,
146, 151, 159, 173
comprehensive solutions 12–13
integrated lead engineering-lead buying
approach 58
technological 161
competitive environment 16, 18f, 18–19b, 93,
154
competitive pressure 96, 131, 257
competitive strategy 9
competitiveness 2, 31, 76, 93, 94, 104, 107f,
115, 136f, 159, 162, 173
three skills 161
competitors 44, 71, 114, 115, 150–1, 159b,
210, 237, 238, 239
competencies 34
cost positions 32
performance cost analysis 36f
products 37, 88
complete knock down (CKD) 153
complexity
addressed 221–6, 228–30
brand and channel 217, 218f, 222f
characterisation 217
cost versus value 220, 221, 224f
costs 217
cross-functional 220
customer 217, 218f, 222f
Index 273
9780230_217805_18_Index.3d 6/3/2008 14:48:17
complexity – continued
engineering 217, 218f, 222f
good versus bad 224f, 231
growth-suffocation 231
identification 217
main drivers (identification) 227
management and control 224f, 225–6,
229–30
manufacturing 217, 218f, 222f
market-driven 222f
miscellaneous 47, 199–200, 215, 258
necessary versus unnecessary 216, 217
non-value-adding 225, 227, 228
organizational 217, 218f, 222f, 227
processes 217, 218f, 222f, 227
re-designing 224f, 225, 229
right level 220
suppliers 217, 218f, 222f, 227
tackled from sourcing side (case study)
226–30b
technical 222f
transparency (three-step approach) 223–6,
228–30
understanding 223, 224f, 228–9
visible versus invisible 223
complexity costs 220, 221b, 221
bottom-up estimation 223, 224f
savings 228, 229, 230
complexity database 225
complexity drivers 217, 218f, 221tb, 223
complexity management/complexity reduc-
tion xii, xiii, 70f, 201, 229, 252
importance 218–20
improves profitability 210–12
‘not low-hanging fruit, but always pays off’
231
optimization 221
complexity management (starting point for
improving SCM performance) (chapter
thirteen) 199–200, 216–31
addressing complexity 221–6
case study (tackling complexity from
sourcing side) 226–30b
complexity drivers 218f
cross-functionality of complexity 220
importance of complexity management
218–20
manage complexity before it suffocates
growth 231
SKU rationalization 221tb
complexity tax 217, 219f
resources, processes, systems 218
component assembly 40f
component quality 181
components 28–9, 32, 37, 38f, 40n, 48f, 52,
53f, 54, 58, 102, 110, 149–52
cost 88
cost of keeping in stock 30
Japanese ‘sets’ 83
least value-added 105
low-value 49f
over-engineered 36f
performance 83
comprehensive cost reduction (CCR) xii, 25
analysis tool-matrix 32, 33f
automotive industry (case study) 41–4b
implementation 42, 43f
main advantage 44
six-phase 42
ten facets of a gem 32–41
compressors 12
computer chips 34, 37, 144
computer games 19b
computer industry 14, 25, 129
computer-aided design (CAD) 56, 64b, 72
computer-aided engineering (CAE) 84, 85
computerized maintenance management sys-
tems (CMMSs) 183–4
concept competitions 119, 121f
concept development (manufacturing
excellence) 168, 169
conjoint analysis 223, 224f
consensus 168
consignment stocks 31, 214b
consignment warehousing 119, 121f
consistency 67
construction errors 64b
construction industry xiii, 12, 152
construction of cost competitiveness (CCC21)
initiative 88
consultancy firms 110
see also Roland Berger Strategy Consultants
consumer electronics 14, 25
consumer goods xii, xiv–xvi, 145, 205, 219f,
239, 243
average working capital 234f
benchmark for debtor days 245f
working capital optimization 241b, 248f
consumer markets 107
consumers 145
274 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
‘diversified’ requirements 84
legislation to protect 30
regional 47
content teams 169–70, 170f
continuous improvement 70f, 162
contracts
fixed-price 121f
long-term 125
control systems 166, 167f
cooperation 55, 59, 100, 188
worldwide 45
coordination 64b, 88, 100, 122, 225, 241,
257, 263
global 48f, 129
Nissan 89
supply chain 258, 266
three levels 53
WCM 250–1
coordination costs 202
copyright protection 161
core competencies 3f, 28, 31, 49f, 50, 51, 65,
92, 94, 125, 161
pressure to concentrate on 93
core processes 237, 242b
core teams 58
corporate culture 64b, 150, 163, 225, 265–6,
267f, 268
corporate governance 225
corporate innovation launch plan 75b
corporate innovation units 72b, 75b
corporate philosophy 132
corporate strategy xv, 1, 9, 13, 69, 77, 96
‘being innovative’ 61
innovation initiatives linked to 68f
purchasing 111, 113
SCM 199
corporation tax 156
cost approach design 24–44
cost base 195, 196
cost competitiveness 25
cost drivers 44
cost efficiency 199
cost leadership 9, 11
cost levers
innovation management 70f, 71
cost performance 68f, 200f
cost planning 79, 82, 85, 88
cost pressure 204
cost savings/cost management xii, xv, xvi, 25,
31, 35f, 46, 57, 79, 92, 107f, 115–20,
131, 154f, 156, 173b, 191, 202, 212–14,
221, 226b, 233, 257, 264
deferred 83
global, regional, local 137f
idea calculation 42
idea creation 42, 43f
opportunistic 77
potential 43f, 58
purchasing 94–5, 98f, 99, 114, 136
reason for de-localization of manufacturing
149,150
targets 53, 55
transportation choice 104
see also CCR
cost simulation 159b
cost structure 3f, 42, 43f, 85, 148, 149–50f,
152, 153, 154, 158, 159b
new (through re-design) 36f
cost transparency 110, 223
cost types 2
cost-per-function data 58
costs 84, 109, 122, 123, 175, 216
bottom-up and top-down calculations 32
follow-up 101
post-deployment 101
trend analysis 112
variable versus fixed 236f
cost-to-serve 218
CPL 141f
CRA 121f
critical mass 70f, 77, 108, 213
cross-divisional functional role 93
cross-docking 204, 254f, 255
cross-functional approach 67
cross-functional responsibility 254f, 255
cross-functional teams 70f, 106
lead engineering 52f, 54
cross-investment 110
culture 57, 106, 107, 107f, 110
currency movements 157
currency risk 107
customer base 150, 191b
customer demand 217, 220
customer expectations 46, 93, 125
‘client expectations’ 264
customer groups 26f, 27
customer information
automated supply to sales department
252
customer integration 254f, 255
Index 275
9780230_217805_18_Index.3d 6/3/2008 14:48:17
customer interaction/interface 140b, 225, 251,
252, 256
customer orientation 13f, 209
customer planning (integration) 252, 254f,
255
customer portfolios 206, 208, 222f
customer representatives 81–2
customer requirements 76, 265, 267f
function and price 63
pace of action 94
customer satisfaction/loyalty 11, 116f, 118,
124, 198, 199, 202, 223, 235, 260, 262
customer segmentation 208, 252
customer service 11, 202, 204, 208, 209f,
209b, 211, 249–50
customer service structures 201, 214b
customer service unit 211
customer structures 238
customer value 10f, 10, 22, 119, 223
comprehensive solutions 12–13
customers
dissatisfied 205b
hidden needs 80
incremental value 223
individualized solutions 52
‘key-account’ versus ‘small’, 208, 210, 211
miscellaneous 17f, 18f, 31, 71, 93, 205,
207, 214b, 225, 239, 244, 251, 266
needs 89, 217
power and unpredictability 216
product-functions required 63, 63f
regional 52
tastes 47
time to stop listening to 83
unprofitable 210
wants (real and supposed) 27
willingness to pay 16
see also internal customers
customization 62, 73b, 146, 147, 203, 204,
219f, 220
local 77
Czech Republic 108, 212
Darmstadt xii, xiii, xv
data access 102
data analysis 32
data collection 43f, 163
data exchange 55–6
data formats 56
data management/purchasing 99f
data networks 193f
data quality 186
data transparency 123, 136
data warehousing 56
databases 42, 123, 126
global suppliers 88
know-how 56
debtor days 245f
decentralization 72, 99f
decentralized buyers 122, 135
decision-makers 148, 168, 172b, 251, 258
decision making 54, 55, 57, 74f, 133, 139b,
161, 183
lean global processes 129
supply chain organization 266
upstream 199
decision-making mechanisms 263
decision-making power 165
Deckert, C. xii , 200
default risk 248
defects 79, 260f, 260
defence sector xvi, 148, 151, 153, 155, 219f
delivery flexibility 262
delivery moratoriums 252
delivery on time 260f, 260, 262
delivery performance 208
delivery times 207, 214b
delivery timing 109
delocalization 151
demand
constantly changing situations 264
demand data
central collation 211
demand forecasts 254f, 255
demand management 117f, 211
deoxyribonucleic acid (DNA) 13–14
depreciation 153, 166
design 50, 84, 89, 109, 202, 222f
dominant 21
design to cost (DtC) 25, 27, 29–32, 37, 41, 44,
70f, 71
design engineering 79, 80f, 80, 82
design freeze 83, 84, 85, 86–7f
design for manufacture and assembly
(DFMA) 121f
technical benchmarking 32–4
design modifications 50
Detroit xvii
developing countries 71, 146
development budgets 62
276 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
development costs 64, 65tb, 71
development departments 47
development facilities 51
development gap 21
development lead times 82
development virtualization 70f
diagnosis related groups (DRGs) 228
die manufacturing 85
die-making 86–7f
digital versatile discs (DVDs) 19b
digitalization 14, 18–19b, 67, 84
direct debit 254
direct ordering
elimination of inter-company flows 212f
direct shipment/s 209f, 211, 213, 214b, 254f,
255
distribution xvi, 20, 208, 209f, 233, 250, 250f,
251, 253–4f, 255, 261
Adidas 202
complexity tax 219f
lean 201, 214
distribution business unit 73b
distribution network/channels 210, 212–14,
215, 220
diversification 12, 151, 203
‘doing more with less’ 47
Dolby function 31
downstream activities 109, 152
Duisburg xvi
dunning system 239, 242b
e-catalogues 118, 121f
e-conferencing 56
e-enabled tools 102
e-mail 56
e-procurement/e-sourcing 118, 121f, 123,
127–8
early adopters (of an innovation) 71
early warning signals/systems 16, 18–19b, 19,
21–2
earnings before interest and taxes (EBIT) 208,
210, 214b, 240
East Asia/Far East 159b, 160b, 238
Eastern Bloc 24
eBay 21
eCl@ss 137
ecological factors 18f
economic data/tactical and strategic 102
economic growth 103, 192
economic performance 243
economics xii, 153
economies of scale 97, 117–18, 133, 148, 150,
152, 153, 196, 212–13
education 161
efficiency 182, 223, 257, 258, 264
administrative 133
employees 47
operational equipment 175
Eisenmann (painting systems) 12
electric power 152
electrical industry xiv, 62f
electricity 116
electronic commerce 14
electronic components 199, 201, 205, 206,
210, 214b
electronics xii, xiv, xv, 31, 90, 243
automotive 79, 80f
average working capital 234f
benchmark for debtor days 245f
working capital optimization 247, 248f
emergency shipments 205b, 214b
emerging countries 71, 103, 104, 107, 111,
145, 161
emerging economies 147, 151, 152, 198
emerging markets 48f, 144, 146, 150,
159b, 160
employees 110, 134, 142, 158, 181–2, 185,
190, 195
interaction (company and supplier) 263
number of 132
skilled 146
enablers 8, 67
reduction in lead time 85
successful SCM 257–69
third level of operations excellence 2, 3f
WCM 237, 240–1
energy 103, 110–11, 153
WCM optimization levers 242b
engineered products xii–xiv, xvi–xvii, 101,
219f, 258
maintenance costs 177, 178f
working capital optimization 247, 248f
engineering xii–xviii, 6, 25, 28, 58, 83–4, 124,
129–30, 148, 152, 154f, 155, 160b, 182,
192b, 193f, 196f, 205, 217, 243
average working capital 234f
central 189f, 190
industry benchmark for debtor days 245f
initial 86–7f
smart processes (Japanese approach) 8
Index 277
9780230_217805_18_Index.3d 6/3/2008 14:48:17
engineering – continued
under body and upper body (automotive) 85
virtual 65, 71
engineering capacities 65tb
engineering change management 86–7f
engineering companies 128
engineering data 64b
engineering service providers 90
engineering services 160b
engineering tasks 85
engineers 29, 31, 81, 82, 83, 89, 145, 190
component-design 88
etymology 25
global teams 51
local 55
shortage 90
enterprise application integration (EAI)
platform 212
Enterprise Resource Planning (ERP) 102,
128, 183–4, 186, 212
equipment 111, 166
breakdowns/downtime 175, 176f, 181, 183,
184, 188, 189f
failure costs 179, 181, 184, 185, 187f, 188
first-time costs 112
life-cycle costs 112
maintenance cost-to-availability ratio 177,
178f
losses (planned versus unplanned) 180f,
184
equipment availability 185, 186,
189f, 191b
equipment defects 177, 186
equipment maintenance 175, 193f
‘breakdown’ strategy (run to failure)
179, 180f
centralized versus decentralized 190
corrective, predictive, preventive 186, 187f
order processing 180f, 183
planned 189f, 190–1b
planning 180f, 183
predictive strategy 179, 180f
preventive strategy 179, 180f
small projects 189f, 190
equipment maintenance: six building blocks
179–84
control 180f, 184
IT systems 180f, 183–4
organization 180f, 181–3
personnel 180f, 183
process 180f, 181
strategy 179–81
ESB Research Institute 76
escalation and mediation processes 54–5
escalation paths 57
euro (currency) 108
Euro-zone 107
Europe xv, 11, 46, 49f, 66f, 79, 107, 108, 117,
128, 137f, 138, 144, 192b, 204, 206, 208,
226b, 233, 243, 264
chemical industry (equipment mainte-
nance) 188–91
top five hundred companies (ROCE) 235
Europe, Middle East, and Africa (EMEA)
205, 205b, 209f, 211–15
European Aeronautic Defence and Space
Company (EADS) 64, 65tb
European Union (EU) 103, 104
experience 62, 67, 96, 97, 112, 125, 170f, 199,
231, 239–40, 242b
expertise 226b, 227
see also skills
experts 168, 172b, 181, 228
maintenance 190
technical and financial 158
exports 174, 202f
F&A 219f
face-to-face contact 56, 82, 111
‘personal interaction’ 56
facility management 194, 196f
fact-based neutrality 32
factor costs 156f
failure costs 176f
failure mode and effect analysis (FMEA)
179, 184, 186, 187f
fashion industry 204
fast followers 17f, 21
finance departments 41, 239
finance staff 240
financial holding companies 133
financial holdings 141f, 141b
financial performance 244
monitoring 251–2
financial resources 69
financial services 66f, 118
Finland 12
fire services 194
first-to-market strategy 70f, 71
first-movers 21
278 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
flexibility 28, 30, 113, 137, 145, 147, 148,
157, 161, 199, 202, 206, 208, 211, 258
delivery 62
refining organizations 194–6b
supply 260f, 260
supply chain 265, 267f, 268
Flickr 21
focus groups 81
follow-up costs 101
food industry 259f
food manufacturers 258
Ford (corporation) 1, 12
Ford, H., Snr 1
forecast-to-fulfil 237, 238, 250
forecasting 111, 166, 167f, 209
link with production 107
sales 174, 249
SCM efficiency 211
foreign direct investment (FDI)
202, 202f
forward and backward integration 121f
France xiii, 25, 64b
Franke, T. xiii, 95, 99
Frankfurt 191b
Fraunhofer Institute for Systems and Innova-
tions Research ISI 12, 22(n1)
Free University of Berlin 13
front loading 79, 82, 83–4
front wheel drive 49f, 88
fuel prices 103, 104
Fujimoto, T. 79
functional adjustment 117f, 119–20, 121f
functional department heads 81
functional departments 79–80
functional systems 58
gap analysis 21, 266
‘GAP analysis’ 126
gearboxes 61
genetic immunization 13
geographical location 132
geography 204
Germany xii–xvii, 12, 15, 19b, 25, 30, 51, 61,
64b, 145, 174, 192b, 194b, 202, 203,
212f, 212, 226b, 227, 242b
Gleisberg, J. xiii , 8
global commodity leader (GCL) 138, 138f,
139b
global development made successful (chapter
three) 7–8, 45–60
automotive industry 45–6, 58
global product development 46
global product development (tailored to
evolving circumstances) 47–51
global R&D network (allocation of core
competencies) 49f
interactions ‘need to be managed’ 59
issues/questions 45, 52, 59
lead engineering (concept and implementa-
tion) 51–8
local technical centres/integration and
competencies 50f
organization is what matters in global
world 46–7
status quo (coordinated multinational
development) 48f
trend towards integrated global networks
(coming decade) 48f
trends 45–6
global development network 47
global development organizations 8
global lead centres 50f, 51
global manufacturing footprint 144
global manufacturing footprint: optimization
(chapter nine) 146, 147–61
case study (how the approach works in real
life) 159–60b
economic performance of each scenario
157
monitoring 158–9
network design goals and challenges 150f
payback and risk analysis 154, 154f
process without close 158–9
simulation model 157
size and imprint 148–58
global manufacturing footprint: six-step
approach 148–58
step 1: understanding strategic drivers 149f,
149–51
step 2: derive model 149f, 151–3
step 3: segment product structure and
define delocalization scenarios 149f,
153–4
step 4: select target regions and countries
149f, 155–6
step 5: fine-tune the model and finalize the
footprint 149f, 156–7
step 6: select site, suppliers, partners 149f,
157–8
global marketers 76
Index 279
9780230_217805_18_Index.3d 6/3/2008 14:48:17
globalization xiii, 6, 45, 96, 147, 149, 258,
265
automotive industry 135
importance of organization 46–7
industry and society 93
manufacturing 144, 145
product development 90
production 204
purchasing 102–3, 123, 128, 130, 131
R&D: success factors 76–7tb
supply chain 216, 267f
value chains 202
globalization leaders 76
GNP (China and India) 145
Go (BA subsidiary) 11
goods
customized 146
‘near-the-customer’ 146
goods and services 97, 107, 111, 112, 116,
200f, 201, 214, 216, 217
Google 21
government funding 226b
governments 104, 106
Great Britain see United Kingdom
greenhouse gases 104
gross domestic product (GDP) 105, 202f
groupware 56
guarantees 30, 46
Gulf of Mexico 192
hardware 20, 21
head offices 50
health, safety, security, environmental, and
quality (HSSEQ) standards xix, 194,
196f
healthcare facilities 184
healthcare sector xiii, xvii, 200, 216, 243
average working capital 234f
case study 226–30b
working capital optimization 247, 248f
see also pharmaceuticals
heavy weight product managers (HWPM)
79–80, 80f
capability and personality 82
chief engineer 89
history 80–1
initiatives for change 88–9
matrix organization 80f, 80
practices 82–8
strong empowerment by top management 81
success factors 81–2
well-defined processes 82
hierarchy 45, 53, 142, 169, 209, 230, 263
high technology xiii, xv, 219f
high-maintenance partnerships 265
Hoechst 191b
holistic approach 32, 67
Hollmann, T. xiii, 199–200
home country 50f, 51
Home Depot 123
hospitals 226–30b
housing market 1–2
human medicine 14
human resources 2, 57, 81, 82, 157,
158f, 196f
prioritization 69
Hungary 108
Hurricane Katrina 192
IBM [International Business Machines] 123
idea evaluation 62, 73b
idea management 70f
image 26, 27, 30, 100
implementation 83
manufacturing excellence 164f
import regulations 117, 238
export regulations 238
improvements: source of fortunes (Ford) 1
incentives 158f, 225, 251
internal sales systems 252
India 47, 49f, 103, 144, 145
indirect functions 172b, 173b
individualized standardization 47
industrial engineering company
global manufacturing footprint (optimiza-
tion) 159–60b
industrial goods
‘complete solutions’ approach 12–13
industrial history 107, 107f
industrial structure 160b
industrial tradition 108
industry type 132
information 42, 161, 163, 174, 200f, 224f
information and communications technology
(ICT) 93, 203
information flows 100, 220
information systems (IS) platform 166, 167f
information technology (IT) xiv, xvii, 2, 3f,
99–100, 123, 138, 193f, 239, 242b
common platform 127
280 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
compatibility of computer systems/data
formats 56
global systems 55–6
industry benchmark for debtor days 245f
knowledge sharing 56
systems performance 67
unified groupware solutions 56
working capital optimization 247
information technology: miscellaneous
IT automation and integration 254f, 255
IT capability 267f
IT infrastructure 266
IT platforms 77
IT solutions 57
IT tools 90
information technology systems 59, 145,
172b, 185, 187f, 188, 206, 212, 226b,
227, 229, 265
equipment maintenance 180f, 183–4
global 52f, 55–6
lead engineering 52f, 55–6
Infraserv 191b
infrastructure 68f, 106, 108, 146, 156f, 156,
157, 158f, 193f, 213, 225
infrastructure excellence fields 2
infrastructure projects 13
infrastructure and systems (innovation enabler)
72
innovate to win (chapter two)
clever cost approach design 24–44
CCR approach (ten facets of a gem)
32–41
CCR in automotive industry (case study)
41–4b
competition 24–44
cost drivers (quartet that sets stage)
28–31
discussion and perspective 44
emotion versus rationalism 28
reducing cost ‘a mindset’ 25–8
innovation 15, 217, 221tb, 225
competitive differentiation factor 94
environment for excellence 6
failure 61, 63, 64, 65, 67
‘not having to lower prices’ 24
‘not sign of outstanding performance’ 24
optimization levers 95
pace of action 94
performance targets 68f
preconditions for effectiveness 68f
source of higher profits 62f
innovation analysis 33f, 34, 37, 121f
innovation budget 74f, 75b
‘innovation to cash’ 72–5b
innovation controlling (innovation enabler)
68f, 72
innovation enablers 67, 68f, 72
innovation management xv
correlation with commercial success 75
holistic concept 73b, 74f
re-definition 75b
innovation management: success factors and
levers for best practice (chapter four) 8,
61–78
Airbus A380 64b, 65tb
business context 62–7
case study: ‘innovation to cash’ at utility
company 72–5b
globalization of R&D: success factors
76–7tb
innovation performance 69–72
innovation strategy 69
major challenges 62–3
performance measures 70f
questions 73b, 76
Roland Berger Innovation Toolbox 67–78
strong versus weak 67
innovation performance 67, 68f, 69–72
innovation portfolio 70f, 71, 75b
innovation process 72, 76, 109
customer involvement 63
ideal 73b
innovation scorecard 72
innovation strategy 9, 67, 68f, 69, 74f
innovation theory 6
innovation toolkit 8
‘innovative supply industries’ 221tb
institutionalization 29
insurance sector 92
integrated global organization
lead engineering 52f, 53–4
leadership approach 53, 53f, 54
local execution approach 53, 53f, 54
mandate approach 53f, 53–4
integrated network hubs 50f, 51
intellectual capital 7
inter-governmental agencies 104
internal customers 115, 129, 133, 138,
185, 186
international 100
Index 281
9780230_217805_18_Index.3d 6/3/2008 14:48:17
international contract law 100
international purchasing offices (IPOs) 123
internet 18–19b, 20, 21, 203
interviews 76, 81, 111, 157, 158, 163, 223,
228, 258, 259f
inventories 31, 121f, 185, 199, 209, 210, 215,
232, 233–5, 236f, 243, 244, 246f, 247–56
‘buffer inventories’ 186
‘buffer stocks’ 254f, 255
centralized planning 212
optimization (four-step strategy) 237–42
inventory costs 173b, 213, 214b, 260f, 260
inventory management xiii, 166, 167f, 201,
209f, 211, 230, 254f, 255, 256
investment 41, 73b, 152, 153, 157, 158f, 161,
225, 242b
invoicing 252, 253f
iPod 21
iTunes 18–19b, 21
Japan xiv–xv, 8, 25, 46, 49f, 66f, 144, 145
smart engineering processes 79–90
jeans 26
joint partners 159b
joint venture structure 106
just-in-time production 79, 162, 254f, 255
Kaeser (compressor manufacturer) 12
kanban 255f
Kazaa 18b
key performance indicators (KPIs) 2, 3f, 57,
72, 74f, 110, 136f, 164f, 166, 167f, 171,
172b, 175, 195, 207, 209, 230, 264, 265
emergency shipment cost to total shipment
cost 210
innovation activities 69
inventory coverage 210
lead engineering 52f, 55
price 96
quantitative 262
standardized 52f, 55
supply chain 261
KLM 11
know-how 26f, 27, 106, 109, 153, 183, 194,
concentration 77
decentralized units 77
external 21
global 77
knowledge
externally-available 31
local 46, 54
knowledge management 51
knowledge sharing 56, 182, 187f, 188,
Korea 25
KUKA Robot Group 12
labels (music) 20
labour 105
labour content 149, 152
labour costs 108, 151, 153, 158f, 165, 166,
195, 213
labour legislation 158f, 265
labour rates 107
labour skills 152, 154
lamp manufacturer 40f
language barriers 52, 107
language skills 55, 108, 123
Lanxess 191b
large order planning 254f, 255
Latin America 6
law/legislation 30, 100, 106, 158f, 265
lead buyers 53, 54, 58, 141f, 141b
role 122
lead buying 58, 99, 131–42
automotive industry 135–9b
benefits 141–2
concept 134
governance models 137–9b
utilities industry 139–41b
lead car 51
lead engineer 52–3, 54, 55, 56, 58
lead engineering
concept and implementation 51–8
global strategies 52f, 52–3
price to pay 57
real life 57
six key elements 52f, 52–6
lead engineering groups (LEGs) 53, 54, 55, 57
lead times 39f, 62, 65, 174, 177, 185, 258
concept approval to start of production 66f
reduction 79, 82, 84–5, 86–7f
supply chain 199
lead-user integration 70f
leadership concepts 45, 131
lean manufacturing xvii, 146, 174
LEDs [light-emitting diodes] 37
legal departments 58
legal environment 157, 158f
leverage (sourcing strategy) 116f, 116
life-cycle 53, 153, 155, 157, 219f, 220
282 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
business model 15–22
equipment 181
life-cycle costs 124
life-cycle indicators 17f
light bulbs 37
Linde 12
liquidity 249
optimization 248
‘local antennas’ 50, 50f
local autonomy 48f
local buyer (LB) 138, 138f, 139b
local content 46, 151, 155
local expectations 47
local requirements 50, 90
‘local satellites’ 50, 50f
location 193f
logistics xiv–xviii, 3f, 31, 32, 37, 145, 149f,
156f, 156, 158f, 165f, 165, 166, 167f,
172b, 173, 175, 196f, 198, 199, 201–3,
206–9, 217, 230, 233, 238
competitive services 264
demand-driven 258
logistics capabilities 260f, 260
logistics costs 260f, 260
logistics managers 259f
logistics networks 202, 209f
London xiii
Louisiana 192
low-cost countries 113, 131, 144,
147, 159b
advantages and disadvantages 105
alternatives to China 106–7
dominance 103f
low-cost country (LCC) sourcing 104–8, 202,
206, 213, 265, 267f
manufacturing 117, 121f, 155, 159
success factors 106
‘trendy’ approach 113
Lufthansa 11
machinery xiii, 2, 29, 101, 119–20, 145, 152,
166, 186, 212
medical 227
magnet valves 119
maintenance 174–96
‘break-fix’ philosophy 192
cautious 177
centralized 180f, 182
decentralized 180f, 182
expert services required 181–2
integrated 180f, 182, 188
manufacturing equipment 175
regular 177
simple activities 181–2
maintenance control 180f, 184, 185, 187f,
188, 190
maintenance costs 166, 184, 185, 187f, 189f,
191b, 195
balance with equipment availability 177
balance with failure costs 181
maintenance excellence project (three-phase)
185–8
concept 185, 186–8
implementation 185, 186, 187f, 188
positioning 185, 186, 187f
preparatory phase (target-setting)
185, 187f
maintenance, repair, overhaul
(MORO) 128
make-or-buy decisions 26f, 28, 62, 119, 121f,
149f, 157, 182, 186, 187f
management 42, 142, 158, 160b, 171f, 241,
265–6
best-in-class 146
commitment 164f
distracted by complexity 218
strategic challenge 204–5
management attention 69
management by objectives (MbO) 55, 57
management information systems 22
management methods 243
management practices 163
management skills 161
management stretch 192
managers 145, 162, 226, 239, 258, 262
manpower 51
manufacturability 84
manufactured goods 97
manufacturers 59, 106
alliances 47
western 151
manufacturing
business set-up time 156f, 156
de-localization, 156–7
driver of product costs 29–30
global context 144–6
global footprint: optimization (chapter
nine) 146, 147–61
global networks 146
labour-intensive 153
Index 283
9780230_217805_18_Index.3d 6/3/2008 14:48:17
manufacturing – continued
leveraging manufacturing excellence in
global production networks (chapter
ten) 146, 162–73
miscellaneous xiii, xiv, xvii, xviii, 1, 107,
109, 129, 202, 261
network design 149
Nissan 89
not only shifting landscape, but also
shifting world 145–6
performance leveraged by support func-
tions (maintenance/quality control)
(chapter eleven) 146, 174–96
third ‘field of action’ 2, 3f, 143–96
see also global manufacturing footprint
manufacturing capabilities 157
manufacturing companies 104, 218
manufacturing department 33f
manufacturing engineering 80, 90
manufacturing equipment 185–6
manufacturing equipment maintenance
177–84
manufacturing excellence
first indication of good and bad practices
166
identifying best practices 166, 167f, 168,
171
implementation, 164f, 165–6, 168–9,
170–1, 172–3b
same as ‘lean manufacturing’ 162
manufacturing excellence: leveraged in glo-
bal production networks (chapter ten)
146, 162–73
benchmarking 163, 164f, 166–8
case study (manufacturer of engine
components) 172–3b
concept development 168
four-step process 163, 164f
introduction 162
making transformation stick 169–72
preparation 163, 165–9
question 162
roll-out 168–9
manufacturing hubs 146
manufacturing locations 147, 205
manufacturing methods 32
manufacturing options 153
manufacturing performance: leveraged by
support functions (maintenance/quality
control) (chapter eleven) 146, 174–96
chemical industry: shared support functions
191–2
costs of support functions and failure costs
176f
critical production lines 190–1b
flexibility 194–6b
impact of support functions 175–7
introduction 174–5
maintenance excellence programme:
execution 185–8
maintenance in Europe’s chemical industry
188–91
manufacturing equipment maintenance
177–84
outsourcing production support functions
191–2b
production-support functions independent
of location 193f
project example: major sites of a global
player (specialty chemicals) 189f
refining organizations (new developments)
192–4
six building blocks 179–84
support for support function 185
support function design 175
tailoring supportive function 177–84
manufacturing processes 127, 149f, 152,
153, 177
manufacturing processes/principles 26, 27–8
manufacturing scenario 149f, 154
mapping/procurement 159b
market access 76, 77, 147, 159b
market capitalization loss 64
market cycles 12
market demand 174, 223
market entry 71, 109, 267f
market entry test 70f
market environment 63f
market growth
inability to keep pace with 174
market know-how/decentralized units 77
market launch 71
market launches/successful management 63
market leadership 71
market opportunities 198
market penetration 17f
market positioning 9, 69
market potential 17f
market requirements 125, 265
missed 63, 63f
284 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
supply chain 267f
market research 123
market saturation 17f
market segmentation 199
market segments 15, 26, 61, 203, 204, 207
market share 61, 151, 229
market size 152, 155, 160b
market structure 264
market trends 89, 101
market/consumer studies 34
marketing xii, xv, 20, 27, 32, 54, 80, 82, 202,
208, 262
markets
attractiveness 149
global/international 6, 44, 76, 161, 199
home/local 47, 76
miscellaneous 29, 111, 131, 149f, 151, 206,
207, 266
national 174
new 144–5, 159b, 202, 232
regional 50, 51
western 24
mass manufacturing 85
mass markets 61
mass production 1–2
material costs/prices 88, 93, 96,
177, 195
materials 28–9, 30, 32, 34, 49f, 92, 105, 153,
212f, 225, 239, 243
industry benchmark for debtor days 245f
standardized 140b
materials management 166, 194, 194b, 208,
209, 211, 215
matrix organization 80f, 80, 81
mechanical engineering 259f, 263
R&D leaders 63
share of sales with original product
innovation 62f
media 20, 64b
WCM optimization levers 242b
medical procedures 228
medical research 226b, 227
medicine technology measuring and control/
share of sales with original product
innovation 62f
mega networks 99f, 100
Mercedes 27, 65, 67
merge-in-transit procedures 204
mergers and acquisitions (M&A) xiv, xvii, 15,
34, 129, 160b, 257, 265, 267f
me-too product 63, 63f
middle class 145
Middle East 107f, 108, 238
Milan xviii
mindset 51, 93
end-to-end 268
‘one-supply-chain-fits-all’ 199
reducing cost 25–8
mineral resources 24
Mini brand (BMW) 203
MIT 19b
mobile telephone companies 20
mobile telephones 204
model proliferation (automotive) 64, 66f
models 220
modular construction concepts 52
modular construction system 58
modular sourcing 121f, 254f, 255
module cost 38n
modules 28–9, 32, 48f, 53–4, 56
molecular medicine 13–14
Mologen 13–14
monitoring 141–2, 158–9, 207, 240, 253f
accounts receivable 239
business processes 198
commodity management 229
complexity management 224f, 225
cross-function 254f, 255
KPIs 230
maintenance control 185
maintenance costs 180f, 184
manufacturing excellence 169, 171f, 173
payment patterns 252
ROCE or company value 235
supply chain 199, 208, 261, 262
WCM 241
motivation 120, 122f, 132, 182, 262
motor-cycles 144
MP3 files 18b
multinational purchasing environment 102
multiple reporting lines 161
Munich xv, xvi
music industry 18–19b, 20, 22(n3)
Nagashima Satoshi xiv–xv, 8
Nakamura, K. 80, 81, 88
Napster 18b
natural resources 103f, 103–4
near-sourcing 107
negotiation power 133–4
Index 285
9780230_217805_18_Index.3d 6/3/2008 14:48:17
Negroponte, N. 19b
net meeting 56
network coordination model 14
network effect strategy 70f
networked systems 212
networks 13f, 51, 200f, 222f
new entrants 16, 18f, 96, 144
new product development 221
niche markets 61, 64–5
Nike/business model 15, 22(n2)
Niketowns 15
Nissan 124
Nissan/team management, 88, 89
non-price factors 112
North Africa 107f
North America 46, 66f, 79, 137f, 138, 144,
145, 243
North America/automotive manufacturers
(time-to-market) 84
NZZ (Swiss newspaper) 65tb
obsoletion 14
OEE 180f
office services 193f
offshoring 149–50, 152, 213, 265
oil xiii, 24, 192, 219f, 243
average working capital 234f
benchmark for debtor days 245f
working capital optimization 247
oligopoly 18b
one-face-to-customer principle 251
openness to changes 32
operating earnings 235, 236f
operating styles and processes 257
operational costs 224f
operational expenditures (opex) 97, 98f, 139
operational managers 249
operational support 187f, 188
operations excellence
factor of differentiation 146
four fields of action 2–3
global manufacturing networks 146
manufacturing (Part III) 143–96
purchasing (Part II) 91–142
research and development (Part I) 5–90
questions 1
supply chain management (Part IV)
197–269
three levels 2, 3f
operator models 13
opportunity players 77
optimization
assembly 34
complexity management 221
cost-savings 156
costs 37, 119
design 34
global manufacturing footprint 147–61
global supply chains 204–5
innovative levers 95
inventories 237–42
lead buying 139b
liquidity 248
manufacturing footprint 148,
manufacturing performance 174
manufacturing process 34
miscellaneous xii, 75b
plant network 162, 163
price 116–17, 117f
production sequences 174
products and costs 44
purchasing 99f, 140f, 228
purchasing organization and processes 120,
122–4
revenue, cost, time-to-market 68f, 69, 70f, 71
site services 194b
supplier base 127
supply chain 199, 204–5, 206–7, 208, 262,
264
use of resources 133
working capital 247, 248f, 252–5
working capital management 232, 237, 256
see also best practice
order batch size 254f, 255
order handling 210, 211, 215
order management 3f, 250–5
order moratoriums 254f, 255
order processing 180f, 209f, 261
order scheduling 241b
order segmentation 254f, 255
order type 266
order-to-cash 237, 238, 250
order-to-pay processes 120
ordering (inter company) 211
orders (lost) 65tb
organization 52f
effective and efficient WCM 250–2
equipment maintenance 180f 181–3
lean, structured 227
‘what really matters in global world’ 46–7
286 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
organization transition 266
organizational form 2
organizational options 266, 268
organizational set-up 186, 187f
organizational talents: supply chain
organizations 258–63, 268
organizations drive strategy and performance:
insights from lead buying models (chap-
ter eight) 95, 131–42
introduction 131–2
lead buying in automotive industry 135
lead buying in automotive industry (case
study) 135–9b
lead buying in utilities industry 139
lead buying in utilities industry (case study)
139–41b
procurement organizations: types 132–4
transformation teething problems 134–5
original equipment manufacturers (OEMs)
38f, 39f, 46, 59, 64, 67, 82, 109, 135, 148,
151, 152, 155, 203, 234f
core competencies 65
R&D budgets 66f
outlook
global development made successful 59
global manufacturing footprint: optimiza-
tion 160–1
innovation management 75, 78
manufacturing excellence 173
manufacturing performance 196
organizations drive strategy and perfor-
mance: insights from lead buying
141–2
purchasing: key trends in best practices and
impact on purchasing strategy 111–13
Purchasing EmPowerment 130
supply chain 268
output
additional (better equipment availability)
189f, 191b
per employee 47
losses 188
outsourcing 15, 30, 119–20, 121f, 155, 161,
175, 180f, 181, 182, 190, 209, 216, 254f,
255, 258
advantages and disadvantages (equipment
maintenance) 183
functions and services 196
manufactured components 198
materials management 194–6b
materials and services 203
production 206
production support functions 191, 191–2b
R&D 70f, 71
support functions 195
outsourcing know-how 93
over-engineering 63f
over-specification 63f
overhead costs 88, 108, 165f, 175
P-2-P 10
pace of action 94
packaging 37, 175, 40f, 223
packers 40n
paper industry xiii, 245f
Paris xiii, xvi, xvii
partners 157, 158
partnerships 71, 93, 97, 216
parts 32, 37, 56, 102, 109
missing 39f
standardized 47
parts storage 40f
patent licensing 70f
patients 228
pay-on-production 12
payback and risk analysis 154, 154f
payment 253f
long targets 251
payment terms (standardization) 254
penalty payments 64, 65tb
people 51, 52, 55, 142, 163, 165–6, 168, 187f,
267f
know-how predominantly bound to 77
performance 52f, 55, 88, 165f
fact-based measurement 7
performance cost analysis 33f, 34, 36f
performance deficits 238, 239
performance drivers 3f
performance gaps 126, 126f, 239, 242b
performance improvement xv, xvi
second level of operations excellence 2, 3f
performance targets 67
personal computer (PC) 204
personnel 126, 126f, 175, 177
equipment maintenance 180f, 183
pharmaceuticals xiv–xvi, 12, 13, 174–5, 219f,
227, 258, 259f
average working capital 234f
working capital optimization 247, 248f
see also healthcare sector
Index 287
9780230_217805_18_Index.3d 6/3/2008 14:48:17
Phonak 61
pilot projects 215
complexity cost-reduction 224f, 225
planning 239
bottom-up 240
plant data collection 186, 187f
plant engineering 12, 189f, 190
plant managers 169, 170f
plant networks 169
optimization 162, 163
quantitative analysis 166–8
plant performance 165f
plant selection 165
plant visits (‘deep dive’) 166, 167f
plants 150, 212, 213
consolidated 209f
differential quality (even within same
company) 162
on-site analysis 165f
PlayStations 19b
PM committee 141f
Poland 108
political instability/turmoil 24, 157
political stability 111, 156f, 156
political risk 156f, 156
Porsche 51
portfolio adjustment 254f, 255
portfolio development (holistic approach) 221
portfolio management 74f, 75b
portfolio planning 74f
portfolio reporting 75b
power plays 215
power train 79, 80f
PPC optimization 254f, 255
pragmatism 188
R&D management 77
premiums 55
prescriber-user-buyer triangle 101
price/s 15, 24, 37, 41b, 42, 44, 46, 92, 96, 101,
103–4, 106, 242b, 265
price adjustments 240
price crash 63f
price development 116f
price discounts 254
price elasticity of demand 16
price negotiations 97, 98f
price optimization 116–17, 117f, 120, 121f
pricing strategy 72
process chain 114
process costs 37, 88, 115, 120, 122f, 124
process design 186, 187f
process gap analysis 225
process improvements 38n, 41
process innovation 13f
process optimization xv, 3, 117f
process ownership 209
process quality 116
process re-design 117f, 118, 120, 121f
process responsibility
end-to-end 266
process-orientation
supply chain organization 266
process-streamlining
improves profitability 210–12
processes xii, 3f, 6, 30, 34, 42, 47, 52f, 106,
163, 165f, 239
best 2
complexity tax 218
development to production 93
equipment maintenance 180f, 181
internal alignment 129
qualitative assessment 238
well-defined 82
see also business processes
procurement xiii, xiv, 186, 193f, 196f
global responsibility 159b
production and operational 209
second ‘field of action’ 2, 91–142
see also purchasing
procurement councils 129
procurement organizations: types 132–4
centralized 132, 132f, 133
decentralized 132, 132f, 133–4
lead buying 132, 132f, 134
procurement processes 123–4
product availability 177, 186, 204, 241b
product chief designer (Nissan) 89
product costs
drivers 28–31
‘eighty per cent defined during develop-
ment phase’ 30, 46, 83
influencing factors 26f, 26–8
product departments 41
product design 27–8, 29, 31, 38n, 63, 63f, 83,
150
driver of product costs 30–1
‘errors’ 30
product design department 33f
product development xvi, 22, 66f, 79, 82,
126f, 126–7, 220
288 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
business areas 51
continuous 15
cost 37
factors 9
global (status quo and trends) 46
global (tailored to evolving circumstances)
47–51
global footprint 72
globalization 90
levers 7
regions 51
successful 6–8
product development function 220
product development organization 81, 88
functional departments (Japan) 79
product differentiation 71
product functions 36f, 63f
product innovation 7, 13f, 19–22, 203
product launches 65
product life-cycle 26f, 31, 37, 71, 101, 110,
204, 221tb
product loss 179
product modularization 71
product planning xv, 27, 58, 85, 89, 166
product portfolios xvii, 50, 69, 201–6, 208,
211, 217, 230, 241b
complexity 218
customized 62
leaner 228
young 61
product positioning 26f, 26
product quality 30, 46, 116, 146, 185, 187f
product range 165f
product repair 46
product road-mapping 70f, 72
product segments 21, 261, 268
product specification 29
requirements 26f, 27
product standards 17f, 21
product strategy 52
product structure 58, 149f
product testing 150
product/market combination 10f, 10, 11, 15,
16, 17f, 21
Mologen 13–14
music industry 20
Nike 15
production xiii, 165, 189f, 193f, 195, 199,
209f, 212f, 217, 233, 239, 250, 250f, 251,
253f, 265
Adidas 202
complexity tax 219f
de-localization 150
first ‘field of action’ 2, 5–90
flexibility 258
global networks 145
global 47
lean 201, 214b
link with forecasting 107
projects bound for failure (early stopping)
7, 22
start 85, 89
technology-intensive 213
world-class system 164f
production batch size 254f, 255
production bottlenecks 28, 29–30, 44
production capabilities 3f
production capacity 64b, 201, 211
utilization 264
production costs 147, 218, 223
share of equipment costs 179
production data 186
production departments 32, 41
production and distribution network
consolidation (saves time and money)
212–14
production efficiency 31
production layout 254f, 255
production life-cycle 94
production lines 29, 182, 184
critical 190–1b
production logistics 172b
production moratoriums 254f, 255
production networks 172b, 206, 254f, 255
Adidas 202
cross-border 212–13
global (leveraging manufacturing excel-
lence) 162–73
production planning 165f, 172b, 177, 186,
211, 215, 241b, 261
centralized 212
production processes 172b, 211
reduced complexity 224f
production segment 254f, 255
production sites 1
production standards 108
production strategies 212
production structures 215
production support functions (independent of
location) 193f, 196
Index 289
9780230_217805_18_Index.3d 6/3/2008 14:48:17
production system (world-class) 164f
production units 209f
production volumes 210
production-smoothing 254f, 255
productivity 40n, 41, 88, 199
products 1, 6, 58, 163, 266
built to last 26–7
co-development by companies and suppli-
ers 109
with competitive disadvantages 63, 63f
cutting-edge 119
ecological 46
high-technology, low-technology 145
industrial 218
joint development 128
labour-intensive 146
legal and geographical differences 47
‘localized’ 47
make-to-forecast versus make-to-stock 211
modular 161
non-standard versus standard 228, 229, 230
overly expensive 63
structure 56
target cost 63, 63f
technical weaknesses 63f
universal 51
unprofitable, low-volume 206
value-added 108
weaknesses in market environment 63f
professional buyers 97, 98f
profit and loss account 120, 166, 240
profit margin 199
profitability 7, 116f, 207, 221, 225, 235
importance of complexity management 218
improved by reducing complexity and
streamlining processes 210–12
return on sales 210
short-term improvements 100
profit-and-loss account 101
profits 21, 24, 242b
programme director (Nissan) 89
project cancellation 74f, 75b
project implementation 73b, 75b
project launch 74f, 75b
project management 42, 72, 100
project managers 170f, 170
project portfolio
balanced 71
ideal 73b
project/complex purchasing 139–41b
project-based set-up 29
projects
commercial focus or business case 73b
property prices 158f
prototype evaluation 85, 86–7f
prototype manufacturing 49f
prototyping 65, 71, 72
public sector 13
public-private partnership (PPP) 13
Puma 15
pump repair 180f
purchase-to-pay 237, 238, 250
purchasing
best practice 127–30, 135
best practices and impact on purchasing
strategy (chapter six) 94, 96–113
complexity tax 219f
cross-BU information system 123
global 128
group-wide coordination 141b
implementation plan 122
integrated strategy 136, 136f
internet and B-2-B solutions 128
introduction 92–5
leverage 136
long-term plans 110
miscellaneous xii–xiv, xvi, 8, 30, 54, 58,
226b, 233, 239, 250, 250f, 251, 253f,
261
no singular one-fits-all approach 94
optimization xiii, 228
order frequency 140b
organizational frameworks 95, 131–42
organizational structure 99
outsourcing know-how 93
pace of change 110
performance measurements 101
process optimization 140f
procurement 254f, 255
second ‘field of action’ 2, 3f, 91–142
simplistic strategies 111
sourcing solutions 130
standardization 229
‘strategic’ 100
strategic direction 93–4
strategic versus operational 120
strategic skills 100
strategy and performance (lead buying
models) (chapter eight) 95, 131–42
structured approach 97, 98f
290 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
‘tactical’ 100
world-class (chapter seven) 94–5, 114–30
see also procurement
purchasing: key trends in best practices and
impact on purchasing strategy (chapter
six) 94, 96–113
challenges (current) 99–102
challenges (new) 102–4
introduction 96–7
LCC sourcing 104–8
long-term plan 110–11
maturity steps at purchasing organizations
98f
purchasing today 97–9
supplier relationships 108–10
TCO approaches 112tb
purchasing budget 101
purchasing clusters 139b, 140f, 140b
purchasing codes 229
purchasing costs 32
‘procurement costs’ xv, 92, 186
external versus internal 92
savings xv, 97
purchasing departments 25, 29, 32, 41, 46, 57,
92, 96, 100, 101, 104, 122–3, 130, 132,
139, 239, 240, 242b, 265
global 47
purchasing empires 93
Purchasing EmPowerment (PEP) (Roland
Berger) (chapter seven) 94–5, 114–30
best-in-class (global) 127–30
introduction 114–15
managing the supply base 124–7
optimizing purchasing organization and
processes 120, 122–4
strategic commodity management (six-
lever approach to optimizing costs)
115–20, 121f
purchasing excellence xvi, 97, 113, 114
purchasing fads 131
purchasing functions 258
purchasing information 102, 120, 122f
purchasing know-how 120, 122f, 123
purchasing lifecycle 100
purchasing managers xvi, 141f, 259f
purchasing organization/s
life-cycle (three-stage) 97–9
maturity steps 98f
optimization 115, 120, 122–4
see also procurement organizations
purchasing performance 109–10
purchasing philosophy 98f, 99
purchasing power 226b, 229
purchasing processes: optimization 120, 122–4
purchasing professionals/staff 137
experience and educational level 112
skill gap 99f, 100
skilled 130, 132
purchasing strategy 94, 96–113
purchasing volumes 58
qualitative targets 55
quality 15, 28, 30, 84, 96, 101, 106–10,
112, 116f, 125, 129–30, 145, 150,
151, 154
consistency 104
processes 146
product and service 177
targeted 26f, 26–7
quality certification 109
quality control 174–96
returns 254f, 255
quality control department 174
quality gaps 31, 84
quality gates 7, 55, 72, 73b, 75b, 77
quality improvements 118
quality leadership 9, 11
quality standards 62
quantitative analysis 228, 238
quantity leverage 117f, 117–18, 120, 121f
questionnaires 158, 165f, 166, 223, 248
quick wins 69, 106, 117, 164f, 220,
229, 235
raw materials 103, 128, 193f, 225
availability 116f
costs 110
inventory 264
procurement 148
re-engineering 110
‘re-invention of wheel’ 56, 71, 73b
re-sale 254f, 255
re-work 39f, 40f
reactivity 102
real estate 191b, 192b, 193f
recall expenditures 30
recession 92
refineries 175
core functions versus support functions
194, 194–6b
Index 291
9780230_217805_18_Index.3d 6/3/2008 14:48:17
refinery organization
elements needed for high performance 194f
flexibility 194–6b
refining organizations/new developments
192–6
regional commodity leader (RCL) 138, 138f
regional directors 170f, 170
Registration, Evaluation, and Authorization
of Chemicals (REACH) 104
regulatory environment 103f, 104, 111
relationship re-definition and user-involve-
ment 97–9
reliability 106–9, 150, 158, 175, 177, 202,
214b
relocation scenarios 153–4
Renault 89, 124
Renault-Nissan 51
repair costs 176f, 177
reputation 15, 30, 64
request for quotation (RFQ) 128
research and development 5–90
automotive industry 45–60
business models: impact on product devel-
opment (chapter one) 7, 9–23
clever cost approach design 24–44
company clusters 6
corporate strategy 77
first ‘field of action’ 2, 3f, 5–90
global 47
global development made successful
(chapter three) 7–8, 45–60
global network (allocation of core
competencies) 49f
globalization: success factors 76–7tb
historical growth 77
innovate to win (chapter two) 7, 24–44
innovation management/success factors
and levers for best practice (chapter
four) 8, 61–78
organizational changes: careful
implementation 77
organizational practices 79
outsmarting competition 24–44
pragmatic management 77
product development (successful) 6–8
questions 7
retention of experts 77
smart engineering processes (chapter five) 8,
79–90
splitting among sites 50
research and development: miscellaneous xiii,
xv, 124, 129, 135, 185, 196f
R&D budgets 47
R&D capacity 65
R&D departments 46, 51, 78
R&D investment 151
R&D networks 56, 64b, 76, 77
R&D organizations 57, 58
R&D partnership 70f, 71
R&D projects (value analysis) 63f
R&D structures 59
R&D workforce (rationalization) 57
resistance to change 169
resource allocation 83, 218–19
resource gap 22
responsibility 53f, 80, 81, 82, 138–9b, 142,
169, 172b, 206, 225, 241, 251, 259f, 261,
265, 266
end-to-end 268
SCM 208–9
retail sector/retailers xii, xiv, xvi, 41, 203, 258
out-of-stock rate 204
return on capital employed (ROCE) 195, 199,
201, 207, 210
drivers 236f
Europe’s top five hundred companies 235
return on equity 13
return on sales 61, 62f
returns/claims 254f, 255
revenue levers/innovation management
69–71
revenue mechanism 10f, 10, 11, 13–16, 17f, 21
Mologen 14
music industry 20
transaction-based 14
revenue performance 68f, 71
revenues 21
non-transaction based 10
transaction-based 10
reverse auctioning 92
reverse logistics 261
Rhone-Poulenc 191b
risk 51, 71, 106, 144, 148, 150, 151, 153, 154,
157, 161, 225
equipment failure 179, 181
risk evaluation 149f
risk management 100, 111
risk portfolio 74f
risk priority number (RPN) 187f
roads 49f, 104
292 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
Roland Berger Innovation Toolbox 62, 67–78
levers, success factors, cross-industry
experience 72
Roland Berger Strategy Consultants
automotive industry (innovation
performance) 66f
best practice (working capital excellence) 243
complexity management 218, 226b, 231
complexity tax 219f
complexity-related costs 218
equipment maintenance 186
five-year purchasing plan devised for steel
corporation 110–11
global manufacturing footprint 148
globalization of R&D 46
lead buying (automotive industry) 135b
‘lead concept’ 53f
lead engineering concept 57
maintenance excellence 175
manufacturing equipment maintenance
177, 178f, 179
maturity steps at purchasing organizations
98f
miscellaneous iii, iv, xii–xviii, 6, 25, 32,
33n, 35–6n, 39n, 43n
operations strategy team 263
purchasing (embedding in corporate struc-
tures) 120
Purchasing EmPowerment 94, 114–30
purchasing plans 97
risk-based method 179, 181
risk-driven approach 186
SCM: end-to-end framework 199, 200f,
201, 205, 206, 214b
strategic aspects of R&D re-location 76–7tb
supplier development benchmarking
study 109
supplier-management survey 125
survey amongst R&D leaders in mechan-
ical engineering 63
tools 43f
WCM: crucial factor 241
WCM: optimization levers 241, 241–2b
working capital optimization 232, 235,
237–42, 248n
Roland Berger Strategy Consultants: supply
chain organization 257–8, 263–8,
268(n1)
step 1: understanding internal and external
factors 264–6 , 267f
step 2: develop and assess organizational
options 264, 266 , 268
step 3: agree on target organization before
defining steps for transformation 264
Roland Berger Strategy Consultants: working
capital management 237–42
step 1: achieve transparency 237–8
step 2: perform benchmarks and set targets
238–9
step 3: define levers and actions 239–41,
step 4: secure buy-in and implement
measures 241–2
roll-out/manufacturing excellence 168–9
Romania 108
round table 262
‘run to failure’ (minimum maintenance) 175
Ryanair 11
safety recalls (automotive industry) 64–5
sale and lease back 119, 121f
sales xii, xv, 7, 54, 66f, 84, 149, 186, 198, 202,
208, 210, 233, 235, 236f, 243, 245f, 251,
252, 253f, 262
annual 258, 259f
inter-company 238
lost 64, 175–7, 190, 204
sales activities 50
sales channels 45, 238
sales costs 37
sales departments 32, 41, 57, 58, 220,
239, 240
sales directors 251
sales and distribution networks 147
sales force 27
sales forecasts 252, 261
sales growth 206
sales and marketing (Nissan) 89
sales planning 254f, 255
sales representatives 228
power 230
sales staff 262
sales targets 217
sales volumes 157
savings potential 33f
scenarios 19–20
scheduling strategy 254f, 255
Schmidt, A. xvi
Schr€oter, I. xvi, 200
Schwientek, R. xvi, 200
sea transport 104
Index 293
9780230_217805_18_Index.3d 6/3/2008 14:48:17
Seat 30
segmentation
industrial 210
needs-based 223
product structure 153–4
supply chain organization 266
see also business segments
sen-pai (predecessors) 82
sensitivity analysis 154
series production 37
service innovation 7, 19–22
service levels 107f, 203, 208, 209f, 264
service providers 127, 182
service quality 185, 187f
services xiii, 37, 92, 153
shared 141f, 141b, 196f, 207, 208, 209,
213, 268
standardized 140b
set-based process 83
setup times 254f, 255
shareholders 75b
sheet metal 29
ship-to-request service 205b
shipments (inter-company) 213–14
shipping 209, 215
shipping charges/costs 205, 210
shipping functions 208
shop-floor control 172b
shortages 104, 111
Shukan (Nissan equivalent of HWPM) 89
Shusa (chief) 80, 82
Shusa/strong empowerment by top manage-
ment 81
Siemens 123
Silicon Valley 25
simplification: sourcing strategy 116f, 116
simulation 85, 87f, 240
simultaneous engineering 70f, 71
simultaneous product and process optimiza-
tion, 33f, 37, 36f
Singaby, G-A. xvii, 94
Singapore Airlines 65tb
single design method 83
site fitness programme (SFP) 192, 194,
194–5b
site infrastructure 191b
site managers 175
sites 53f
skills 112
availability 158f
internal 183, 186
specialized 181–2, 210
specific 156f, 156
see also expertise
Skoda 30
Skype 21
Slovakia 108
smart engineering processes (Japan) (chapter
five) 8, 79–90
challenges 90
history of HWPM 80–1
HWPM organizations: initiatives for
change 88–9
HWPM practices 82–8
HWPM: success factors 81–2
introduction 79–80
snacks manufacturer/‘scalable’ versus
‘differentiating’ activities 226
socio-cultural factors 18f
soft skills 100, 142
software 21, 49f, 154f, 184
sourcing xiii, 56
driver of product costs 28–9
global 121f, 122, 131, 238
large-scale 108
second ‘field of action’ 2, 91–142
value-added 108
sourcing department 33f
sourcing excellence 96
sourcing processes 106, 138f
sourcing security 96
sourcing strategies 116f, 116
‘keeping up with fashion’ 105
South Africa 39f, 49f
South America xv, 49f, 137f, 138, 238, 243
South-East Asia 144
Southern Europe 238
Soviet Union 24
Spain 64b, 212f
spare parts 179, 180f, 183–4, 185, 186, 195
special product managers 81
speciality buyer 141f
specialization xii–xviii, 10, 14, 20, 77,
190, 213
‘division of labour’ 201, 203
global 48f
speed 266
sporting goods 15
stability/financial 146
staff rotation 57, 262
294 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
stage gates 77
stakeholder expectations 125
stakeholder inclusion 32
stakeholder needs 101
stakeholders 42, 105, 115
standard procedures 257
standard purchasing 139b, 140f, 140b, 141f
standard-setting 70f
standardization 47, 56, 58, 118, 121f, 136,
137, 140b, 171f
global 51
product and packaging 223
purchasing/procurement 229, 254f, 255
targets 57
standardization councils 230
standardized data warehousing 55
standardized KPIs and performance mea-
sures/lead engineering 52f, 55
standardized processes
lead engineering 52f, 54–5
standards, labour and environmental 144
statistical data 179
steel xiii, 160b, 219f
average working capital 234f
working capital optimization 247
stock markets 233
stock-keeping
centralized versus de-centralized
strategy 185
stock-keeping units (SKUs) 222f, 225, 230
rationalization 220, 221tb
stocks 204
storage 40n
strategic alliances 45, 47, 51, 52, 57, 59, 94
strategic capacity planning 213
strategic commodity management/six-lever
approach to optimizing costs 115–20
strategic corporate goals/long-term 125
strategic partnerships/purchasing 94
strategic pricing 70f
strategy 7, 52f, 58
equipment maintenance 179–81
first level of operations excellence 2, 3f
revision 187f, 188
structural organization (innovation enabler)
72
Stuttgart xii, xv, xvi
sub-assembly 152
sub-contractor management 166, 167f
sub-suppliers 103, 155
sub-systems 56
subsidiary companies 131
second-tier 141f, 141b
substitute products 16, 18f, 29
supplier base 1, 116f, 123, 128, 160b, 161,
227, 254f, 255,
optimization 127
supplier base management 124–7
supplier code structure 123
supplier coordination/key blocking point 263
supplier data 102
supplier development 39f, 109
supplier financing 119, 121f
supplier integration 70f, 117f, 119, 120, 121f,
126–7, 254f, 255, 268
supplier management xiii, 79, 95, 100, 115
development stages 125
success factors 126, 126f
supplier manufacturing analysis 33f, 40f,
41, 121f
supplier markets 111
supplier matrix 29
supplier networks 155
complexity 103f
structure 103
supplier partnerships/‘never easy or
comfortable’ 112
supplier performance 109
supplier productivity 110
supplier proximity 156f, 156
supplier relationships 108–10, 133, 142
success factors 110
supplier selection 112
suppliers 6, 16, 18f, 38f, 41, 43f, 44, 53, 59,
65, 72b, 90, 93, 94, 97, 114,117f, 117,
123, 130, 135, 137, 142, 147–51, 157,
158, 185, 203, 210, 229, 230, 235, 239,
262, 263
Adidas 202
automotive 148
bargaining power 116f
best-price 31
collaborative planning 261
costs and margins 102
equipment 181, 182
external view 41
first-tier 155
global information pool 124
global management 129–30
in-lead 47
Index 295
9780230_217805_18_Index.3d 6/3/2008 14:48:17
suppliers – continued
inter-dependence (with companies being
supplied) 103
lack of open discourse with 101
performance measurement 112
pooling 118
reduced in number 58
second-tier 118, 121f
second-tier (certification requirements) 155
strategic or key 37
Toyota database 88
supply base 54, 123
global 146
proactive development 106
supply chain/s
central control function 264
complexity reduction 207f
delegation of responsibility (ensures
account ownership) 208–9
driver of product costs 31
external 261, 263
external coordination 262–3
global optimization 204–5
goals and targets 261
hidden cash reserves 232–56
internal 261
miscellaneous xviii, 1, 39f, 104, 106, 115,
233
‘one-size-fits-all never’ 207
operative functions 261
single global responsibility 265
strategic staff functions 261
temporary functions 261
trends and challenges 202–4
supply chain costs 204, 205b
supply chain deficits 205
supply chain department 33f
supply chain enablers 200f, 206, 207f
supply chain functions/non-core 209
supply chain leaders 215
supply chain management (SCM) 197–269
change-management 200f
complexity management (starting point for
improving performance) (chapter thir-
teen) 199–200, 216–31
control 200f
country-focused versus BU-focused 211
end-to-end 263
fourth ‘field of action’ 2, 3f, 3, 197–269
holistic re-alignment 215
holistic view 232
importance 198–200, 263
miscellaneous xiii–xvii, 92, 124, 186
‘more than just logistics’ 198–200
‘most cross-functional of core business
disciplines’ 268
networks 200f
optimization xvi, 208
organization and resources 200f
pilot units 215
processes and systems 200f
Roland Berger’s end-to-end framework
199, 200f, 201, 205, 206, 214b
supply chain organization (key enabler for
successful SCM) (chapter fifteen) 200,
257–69
trends 201
working capital excellence (chapter four-
teen) 200, 232–56
supply chain management: success factor for
global players (chapter twelve) 199,
201–15
case study: framework (electronic
components) 205–14b
consolidating production and distribution
network (saves time and money)
212–14b
definition of strategy and target 207–8b
delegating supply chain responsibility
(ensures account ownership) 208–9b
direct ordering (elimination of inter-
company flows) 212f
holistic supply chain optimization 206–7b
introduction 201–2
monitoring supply chain (creates global
transparency) 209–10b
optimizing global supply chains (a success
story) 204–5, 205–14b
reducing complexity and streamlining
processes (improves profitability)
210–12b
results (speak for themselves) 214b
success factors (implementation) 214–15
trends and challenges in supply chains
202–4
supply chain managers 209, 259f,
266, 267f
supply chain monitoring 207f
creates global transparency 209–10
supply chain network 207f
296 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
supply chain organization (key enabler for
successful SCM) (chapter fifteen) 200,
257–69
best practice (food for thought) 263
coordination of external supply chain 260,
262–3
coordination tools 260, 261–2
implementation 260–1
introduction 257–8
‘no single golden way’ 268
organizational talents master their supply
chain organizations 258–63
questions 263
Roland Berger’s approach 263–8
sustainability 268
‘what-if’ scenario analysis 268
supply chain performance 200f, 206, 207f
supply chain planning 261, 262
supply chain processes 207f
supply chain responsibility 207f
supply chain segmentation 211
supply chain strategy 200f, 206, 207f
definition 207–8, 209f
supply chain targets 207–8, 209f
supply chain transparency 145
supply conditions 220
supply costs 221tb
supply market challenge 115, 116f
support function/s
benefits 177
costs 176f
impact on manufacturing performance
175–7
manufacturing equipment maintenance
177–84
support for 185
support service functions 194
SUVs 49f
Switzerland xii, xv, 61, 65tb, 212
synergies 52f, 52, 59, 93, 112, 122–3, 127,
128, 136, 136f, 139b, 191b, 196, 208,
209, 214b, 226b, 227, 263, 264
cross-business 135
cross-segment 268
purchasing 99f, 133
system architecture 52
system suppliers 39f, 127
systematic commodity management 95
systems 32, 48f, 56, 265
complexity tax 218
supply chain 267f
Systems Applications and Products (SAP) xx,
44b, 56, 184
‘target costing’ 70f, 85, 92
see also ‘cost planning’
target-pricing 112, 121f
target-setting 55, 135, 240
WCM 237, 238–9
targets 169
resource and financial market-oriented 13f
standardized 57
top-down versus bottom-up 239
tariffs 145
tax regulations 265, 267f
taxation 158f
taxi companies 80
team work 40n
technical benchmarking (DFMA) 32–4
technical centres 50, 50f, 54
technical cooperation 110
technical improvement 117f, 118–19,
120, 121f
technical modifications 58
technical problems 65tb
technical solutions (perfect) 63, 63f
technical standards 24, 58
technological/technical capabilities 154,
155, 158
technological factors 18f
technological gap 147
technological innovation 14
technology 1, 26f, 27, 34, 49f, 76, 81, 92, 150,
153, 157, 159, 160b, 165, 222f
concentration 77
time-saving 71
technology hunters 77
technology life-cycle 220
technology plan 72b
technology road-maps 70f, 72
technology transfer 150, 154, 159b
telecommunications xvii, 219f
average working capital 234f
industry benchmark for debtor days 245f
working capital optimization 247
testing 40f, 46, 51, 71, 84
testing (automotive) 79, 80f
Texas 192
‘think globally, act locally’ 51
third-party warehouse management 254f, 255
Index 297
9780230_217805_18_Index.3d 6/3/2008 14:48:17
time 9, 13–14, 15, 28, 42, 44b, 56, 57, 64b, 67,
83–4, 88, 116f, 122, 124, 128, 150, 156,
157, 181, 183, 192, 195, 206, 267f
deadlines 54, 55, 205b, 214b, 241, 260f,
260
idle periods 190
start-up losses 262
supplier research 102
time to market 68f, 84–5, 124
time zones 52
time-saving 212–14
timing 21–2, 43f
graduated reaction strategy 22
market entry 109
timing levers (innovation management) 70,
71–2
Tokyo xiv
tools/tooling 46, 52f, 85
top management 16, 19, 44b, 57, 80, 89, 100,
169, 172, 173b, 215, 229, 231, 235, 240,
248–9, 251, 256, 260, 268
global sourcing 106
managing complexity 220
strong empowerment of Shusa 81
top-line growth, service performance 200f
total cost of ownership (TCO) 32, 33f, 37, 39f,
96, 98f, 99, 99f, 100–1, 111, 112, 113,
121f, 124, 149, 154
over-arching benefit 112
total quality control 79
Toyoda, K. 80
Toyota xvii
chief engineers 88
database of global suppliers 88
HWPM concept 80–2, 83
lean manufacturing 162
Toyota: Research Division 89
Toyota Central Laboratories 89
Toyota concept planner 88, 89
Toyota Home 1–2
trade agreements/bilateral 107
tradition 82
training 109, 110, 120, 122f, 123,
181, 182, 185, 192, 193f, 237, 241,
251–2, 262
maintenance tasks 190–1b
strategic purchasing professionals 100
training costs 175
transaction costs 203
transparency 55–6, 102, 110, 120, 129, 163,
164–5f, 185, 206, 218, 221, 226, 227,
249, 266
complexity (three-step approach) 223–6,
228–30
purchasing 122f, 122, 123
supply-chain monitoring 209–10
working capital 238, 256
transport/transportation xvi, xvii, 40n,
104, 111, 145, 157, 193f, 198, 201,
243, 268
congestion 103f
costs 107, 151–3, 260f, 260
distances 107, 107f, 108
Triad countries/region 144–6
trial production, 85, 86–7f, 90
Trumpf (machinery producer) 2
trust 37, 42, 55, 64, 144
T-shaped project design 163, 165f
turnaround times 260f, 260
turnover ratios 239, 244
Ukraine 108
uncertainty 134, 212
unemployment 156
‘job reductions’ 192
unique selling point 6
unit costs 101, 115
unit prices 97, 98f, 101
United Kingdom 25, 49f, 212f
United States of America xv, 42, 49f, 81
Universal [corporation] 19b
universities xii–xviii, 72b, 89
university clinics 117
university hospitals/state-owned (tackling
complexity from sourcing side) (case
study) 226–30b
UNSPSC 137
upstream operations 152
utilities xiii, 92, 158f, 175, 193f,
219f, 243
average working capital 234f
industry benchmark for debtor
days 245f
working capital optimization 247, 248f
utilities supply 175
utility ‘innovation to cash’ (case study)
72–5b
utility purchasing 139b, 140f, 140b, 141f
298 Index
9780230_217805_18_Index.3d 6/3/2008 14:48:17
value analysis 33f, 34, 35f, 63–4, 70f, 71, 74f,
118, 121f
R&D projects 63f
value chain 3f, 13, 14, 28, 33f, 94, 103, 115,
119, 127, 148, 153, 196, 220, 250
best-practice 164f
top-down assessment 223
global/globalization 201, 202
networked 201, 203
value chain configuration 10f, 10, 11, 15, 16,
17f, 21, 117f
Mologen 14
music industry 20
value chain deconstruction 121f
value chain mapping 33f, 37, 39f, 41, 121f
value chain structures 201, 214
value creation 1, 59, 68f, 92, 121f, 198, 200f,
216, 225
value focus 73b
value-added 7, 69, 105, 108, 152, 194–5b,
221, 223, 224f, 240
internal 10
thresholds 225
value-based management principles 242b
vehicle development 54, 89
vehicle development centres (VDCs) 88
vehicles 38f, 49f, 119, 184
braking concept 53
fastest-growing markets 46–7
see also automotive industry
vendor-managed inventories 119, 121f
vendors 210, 244
vertical integration 10, 13f, 14, 18b, 20, 92,
94, 119, 203, 238, 244, 254f, 255,
veterinary medicine 14
virtualization techniques 72
Volkswagen 30
volume bundling 118, 121f, 123, 137, 229
volume concentration 97, 98f
wages/salaries 107f, 156, 205, 236f
performance-based 262
warehouses/warehousing 31, 193f, 195,
198, 201, 205–9, 211–15, 217, 254f,
255, 268
consolidation 213–14
national 209f
regional 211, 213–14
warranty 109, 110
waste/wastage 41, 162, 175, 193f, 227
water utility 242b
weak signals 16, 19b, 22, 72
Web EDI 121f
Weisenstein, S. xvii, 146
Weiss, M. 178n
western countries/markets 105, 147
Western Europe 144, 145, 198, 264
procurement costs (external versus
internal) 92
white-spot analysis 74f
Wissenschaftliche Hochschule f€ur Unterneh-
mensf€uhrung (WHU): Otto Beisheim
School of Management 257, 268(n1)
Wittenstein 61
work (labour-intensive) 150
work duplication 120
work plans 54
work-sharing agreements 151
workers 40f, 40n, 41
workflows 41, 47, 56
workforce 28, 150, 153, 156f, 156, 161
educated 108, 146
gaps 192
low-cost 46
working capital 3f, 3, 200, 205, 264
learning from best practice 243
optimization xvi, 121f, 237
optimization levers 242b, 244, 256
productivity 235
reduction 235, 236f
working capital excellence: how companies
tap hidden cash reserves in supply
chain (chapter fourteen) xii, xvi, 200,
232–56
best-practice companies (fifteen per cent of
participants) 243–4, 245–6f
bottom line (untapped potential persists in
all industries) 256
consumer goods industry (case study) 241b
crafting effective organization 247, 250–2,
256
current and targeted future status 246f
energy sector (case study) 242b
industry benchmark for debtor days 245f
introduction 232
inventory management (vast store of
untapped process potential) 247,
252–5, 256
making working capital work 233–5, 236f
media group (case study) 242b
Index 299
9780230_217805_18_Index.3d 6/3/2008 14:48:17
working capital excellence – continued
optimization potential for all three working
capital items 247, 248f
optimizing working capital (Roland Ber-
ger’s approach) 235, 237–42
top-down targets and strategies to manage
working capital 247, 248–50, 256
working capital management (WCM)
best practice 232
direct and indirect influence 236f
importance in near future
244, 247
levers (current use and future importance,
by industry) 248f
workshops [meetings] 43f, 239, 240
world economy 103
World Trade Organization 105
Yahoo! 21
young people 19b
300 Index
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