Operations Excellence

Smart Solutions for Business Success

Edited by

Roland Schwientek and Axel Schmidt

Operations Excellence

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 countries, the company has successful operations in all major international markets. Roland Berger Strategy Consultants serve global players and innovative companies as well as public institutions and governments. In 2007, our services generated more than €600 million in revenues with 2,000 employees. The strategy consultancy is an independent partnership exclusively owned by about 160 Partners. This series of management books is based on the success of our international business magazine think: act that covers all aspects of leadership challenges and is published in Chinese, Russian, English, German and Polish. HEIDI SYLVESTER FLORIAN KAISER

Operations Excellence
Smart Solutions for Business Success

Edited by Roland Schwientek and Axel Schmidt

ª Roland Berger Strategy Consultants 2008 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2008 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan1 is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–0–230–21780–5 ISBN-10: 0–230–21780–X This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 17 16 15 14 13 12 11 10 09 08 Printed and bound in Great Britain by Cromwell Press Ltd, Trowbridge, Wiltshire

CONTENTS

List of Figures and Boxes Notes on the Contributors List of Abbreviations

viii xii xix

Introduction PART I: RESEARCH AND DEVELOPMENT

1

Introduction: what is successful product development? Thomas Rinn and Kai Bethlehem
Chapter 1 Changing business models and their impact on product development Michael Zollenkop Innovate to win: how clever cost approach design can outsmart competition Ralf Augustin and Kai Bethlehem Global development made successful: lessons learned by the automotive industry Jochen Gleisberg and Kai Bethlehem Success factors and levers for best practice in innovation management ¨tzl, Stefan Po Thomas Kohr and Michael Zollenkop Smart engineering processes: ‘made in Japan’ Ken Mori and Satoshi Nagashima

6

9

Chapter 2

24

Chapter 3

45

Chapter 4

61

Chapter 5

79

v

vi Contents PART II: PURCHASING Introduction: strategic trends and challenges for purchasing Roland Schwientek Chapter 6 Key trends in purchasing best practices and impact on purchasing strategy Michel Jacob and Gabriel-Assad Singaby Purchasing EmPowerment: the way to achieve world-class purchasing Roland Schwientek Organizations drive strategy and performance: insights from two successful lead buying models Tobias Franke 92 96 Chapter 7 114 Chapter 8 131 PART III: MANUFACTURING 144 Introduction: manufacturing in a global context Ralf Augustin Chapter 9 How companies can optimize their global manufacturing footprint Marco Zurru 147 Chapter 10 Leveraging manufacturing excellence in global production networks Volker Heidtmann and Stephen Weisenstein Chapter 11 From maintenance to quality control: effective support functions leverage managing performance Thomas Kwasniok and Walter Pfeiffer 162 174 .

Contents PART IV: SUPPLY CHAIN MANAGEMENT vii Introduction: supply chain management – more than just logistics Robert Ohmayer and Steffen Kilimann Chapter 12 Global supply chain management: a success factor for global players Robert Ohmayer and Steffen Kilimann Chapter 13 Complexity management: the starting point for improving performance Alexander Belderok and Thomas Hollmann Chapter 14 Working capital excellence: how companies can tap hidden cash reserves in the supply chain Roland Schwientek and Christian Deckert Chapter 15 Supply chain organization: a key enabler for successful supply chain management ¨ter Ingo Schro and Stephan M. Wagner 198 201 216 232 257 Index 270 .

2 Four fields of action to create operations excellence 1.5 Simultaneous product and process optimization example car module – vehicle driver seat (EUR/vehicle) 2.1 Share of sales with original product innovation in different industries 4.5 Three coordination options 4.3 Integration and competencies of local technical centers 3.1 Our approach – three levels to create operations excellence I.6 Value chain maps help to identify critical branches and to focus supplier development – passenger car door panel example 2.3 Lifecycles of business model components 1.8 The CCR phase for diagnosis and drafting an action plan takes roughly 10–13 weeks 3.4 Performance cost analysis – cost comparison by most important function 2.2 Allocation of core competencies in a global R&D network 3.1 Components of business models 1.3 Value analysis – vehicle window lifters 2.2 Innovation in the mechanical engineering industry – failure reasons in commercialization viii 2 3 10 13 17 18 26 33 35 36 38 39 40 43 48 49 50 52 53 62 63 .4 Indicators for business model attractiveness 2.1 Trend towards integrated global networks 3.7 Supplier manufacturing analysis: component assembly – lamp manufacturer 2.1 Product costs are influenced by several surrounding factors 2.4 Six key elements of the lead engineering concept 3.2 Development of business models over time 1.LIST OF FIGURES AND BOXES Figures I.2 The comprehensive cost reduction approach covers the complete value chain 2.

4 7.1 7.5 4. organization.2 8. information.6 9.4 8. and North Africa Each commodity/category is strategically assessed in terms of business impact and supply market challenge The right mix of levers is key to finding the correct sourcing strategy for each strategic commodity/category field There are more than 50 sourcing levers for improving operating cost performance Companies need to focus on four areas to lower process costs – processes.2 5.4 4.3 8.6 5. the Middle East.3 4.1 9.4 122 126 132 136 137 138 140 141 149 150 154 7.2 Innovation performance development in the automotive industry Roland Berger Innovation Toolbox Performance measures for systematic innovation management Innovation portfolio management concept Matrix organization Product development lead time Shortened product development lead time Maturity steps at purchasing organizations Challenges with which companies still struggle Challenges that are reshaping purchasing Some of the benefits of sourcing in CEE.3 7.1 5. and know-how sharing Success factors have been identified in three areas of supply base management Three basic models are used in procurement organizations Only an integrated approach to procurement ensures optimum impact on a company’s competitiveness Global lead buying consists of three governance models. ensuring global and regional savings The newly defined governance models add the regional focus Purchasing is reorganized into four new purchasing segments Corporate lead buyers are responsible for group-wide coordination of purchasing activities Approach steps and focus Different manufacturing network design goals and relevant challenges Payback and risk analysis ix 66 68 70 74 80 86 87 98 99 103 107 116 117 121 7.5 8.3 6.1 8.5 8.1 6.List of Figures and Boxes 4.2 9.3 6.2 6.3 .

3 Initial situation and targets 12. performance and enablers fit seamlessly together 12.4 Elimination of inter-company flows through direct ordering 13.2 A benchmarking study of maintenance costs and equipment availability shows the improvement potential for different industries 11.1 Costs of support functions and failure costs work in opposite directions and have to be balanced 11.8 A German refining site transforms itself into a flexible refinery IV. world FDI 12.6 Providers have developed from general and location-specific services into production support functions independent of location 11.1 World GDP.2 ‘Complexity tax’ often amounts to 11–22 percent of total product costs 156 158 164 165 167 170 171 176 178 180 187 189 193 194 196 200 202 207 209 212 218 219 .5 Project example: major sites of a global player – specialty chemicals 11.4 A maintenance excellence program needs clear target setting and is structured in three project phases 11.2 Supply chain strategy.2 A T-shaped logic ensures breadth and depth of the analyses 10.x List of Figures and Boxes 9.7 Two elements needed to create a high performance refinery organization 11.4 The project organization is set up to keep track on the progress of the project – regular communication is key 10.3 Comprehensive maintenance management consists of six building blocks 11.3 A structured approach is used to analyze current processes and define new operations strategies 10.1 Our framework for end-to-end supply chain management 12.1 Complexity drivers 13.4 Selection of target countries 9.1 Proven four-step process ensures that the project challenge is tackled pragmatically and with a clear structure 10.5 Site selection 10.5 A regular communication process drives the sharing of internal best practices 11.I. world exports.

2 ROCE drivers 14.5 Detailed approach 14.3 External and internal factors to be analyzed prior to designing organizations Boxes 4.3 Industry benchmark for debtor days 14.1 Airbus A380 Globalization of R&D – success factors TCO approaches – underestimate at your own peril Stock keeping unit (SKU) rationalization 65 76 112 221 219 222 224 234 236 245 246 248 250 253 255 259 260 267 xi .List of Figures and Boxes 13.5 Current use and future importance use of working capital management levers by industry 14.8 Analysis of existing levers based on self-assessment by study participants 15.1 Breakdown of companies interviewed in terms of size. area of responsibility.7 Untapped potential in each core process 14.2 Organizational talents have outstanding logistics capabilities 15.1 Average working capital in different industries 14. and industry 15.1 4.4 Current and targeted future status 14.1 13.2 6.3 Complexity’s impact differs from industry to industry 13.4 The overall approach aims to quantify and prioritize different opportunities against each other 13.6 Organizational forms conducive to inventory management 14.

Before joining Roland Berger’s Operations Strategy Competence Center in 2003. He also focuses on purchasing and production optimization. where he also gained his PhD in industrial engineering. organization and business re-engineering.NOTES ON THE CONTRIBUTORS Ralf Augustin is a Principal in Roland Berger’s Stuttgart office. Belderok has worked for Unilever and was a Principal at A. Kai Bethlehem is Head of Purchasing at Rothenberger Werkzeuge (Tools). Kearney for seven years before switching to Roland Berger in 2006. engineering products. reorganization and process management. automotive. and process optimization for the airline. where he gained a degree in industrial engineering and economics. Deckert has been involved in working capital and cost management projects. Christian Deckert studied at the Technical University HamburgHarburg. His focus is on operations. at Eurocopter as a Purchasing Manager and at Procter & Gamble in Switzerland and Germany in purchasing. Alexander Belderok is a Principal in Roland Berger’s Amsterdam office. He gained his engineering degree from the TU Darmstadt. and electronics industries.T. and non-food consumer goods industries. He studies mechanical engineering at Twente University and gained a degree from TSM Business School. He has worked for Roland Berger as a Senior Consultant. and complexity management in the consumer goods and retail sector. cost optimization. xii . 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. and the chemicals industry. marketing and sales. and complexity management in the automotive. He has a Master’s degree in mechanical engineering and business administration from the TU Darmstadt. strategic sourcing. Since joining Roland Berger in 2001. He specializes in comprehensive cost reduction programs. He is an expert in strategic supplier management.

and supply chain management. automotive. organizational development. he gained a joint degree in European Business Administration from the European School of Business in Reutlingen and Middlesex University Business School in London. Prior to joining Roland Berger in 2001. He gained his MSc from the Ecole Centrale. He specializes in procurement organization and processes. Gleisberg has focused on purchasing and engineering. Thomas Hollmann completed his business degree at the University of ¨ Eichstatt-Ingolstadt before joining Roland Berger in 2005. He gained his degree in business from the University of Marburg and University of Gießen. His specialization is in production management. oil. he was at A. automotive supplier. pre. and supplier and commodity management in the airlines. In addition to completing a bank traineeship. and operations management in the automotive and engineered product/high-tech sectors. Jacob has conducted projects in process-related industries like chemicals. Kearney for a decade. He has assisted clients on numerous purchasing optimization and purchasing re-engineering projects. Paris. He joined Roland Berger in 1999. Since joining the company in 1998. where he was Vice-President in charge of strategic sourcing. Michel Jacob is a Partner in Roland Berger’s Paris office. and engineered products industries. transformation management. Jochen Gleisberg is a Partner at Roland Berger. xiii . He has worked on complexity and inventory management. building.and post-merger integration.Notes on the Contributors Tobias Franke has worked at Roland Berger’s Operations Strategy Competence Center since 1999. He also specializes in operational efficiency improvement projects. where he was an R&D and production engineer in Germany and France. post-merger integration. as well as service industries. Jacob also gained industry experience working at Saint-Gobain. and utility industries. manufacturing. steel and building materials. He tends to work in the machinery. and utilities industries.T. 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. paper. optimizing organizational structures and globalized processes. and logistics optimization projects in the healthcare.

consumer goods. Satoshi Nagashima is a Partner in Roland Berger’s Tokyo office. Kohr joined Roland Berger in 2005. He gained a degree in civil engineering at the University of Tokyo and his MBA at the University of Chicago. process re-engineering. pharmaceuticals. strategy. 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. Dresden. Berlin. transportation and information technology sectors. His projects involve supply chain management. as well as a master’s ´ degree at the Ecole Superieure de Commerce. He has experience in the chemicals. purchasing and business process reengineering. His focus is on supply chain management. and the benchmarking and optimization of production processes. He has specialized in the automotive and engineered products industries. Before joining Roland Berger in 2006. He also obtained a PhD degree from Technical University. He was Principal at Management Engineers and Director of Logistics Division at INFORM prior to joining Roland Berger. Thomas Kwasniok is a Partner at Roland Berger with a focus on operations in the process industries. He gained his master’s degree and doctorate in engineering in material . reorganization of logistics and procurement systems.xiv Notes on the Contributors Steffen Kilimann gained a degree in industrial engineering and management at the Technical University. engineering products. and DIY industries. M&A. He has worked on project controlling. he had management positions at Metro MGL Logistik and Metro Cash & Carry. Toulouse. manufacturing. T. and post merger integration projects. Thomas Kohr gained degrees at the University of Cooperative Education in Mannheim and at the Leipzig Graduate School of Management. Kearney in Tokyo. where he worked on operations. He has extensive experience in the retail/wholesale and consumer goods sectors as well as in the automotive and transport and logistics industries. Ken Mori is a Partner at Roland Berger’s Tokyo office. He obtained his MBA degree from the EADA in Barcelona. 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. product structure. innovation management and procurement optimization projects in the electronics. automotive.

supply chain management. supply chain/margin optimization. He has also worked on projects in the consumer goods. Nagashima tends to work on projects in the automotive. logistics. He studied ¨ ¨ business administration at the Eberhard-Karls-Universitat in Tubingen and received his MBA from Portland State University. and process optimization. Thomas Rinn is a Partner in Roland Berger’s Stuttgart office. logistics planning and branding. engineering/hi-tech and aerospace industries. He has specialized in strategy development (corporate. Since joining Roland Berger in 2003. reorganization. Japan. He wrote his diploma these on logistics processes and cost while working at MAN Nutzfahrzeuge. chemicals. he worked at MTU in Germany and for Mack Trucks in the United States. petrochemicals. performance improvement. Walter Pfeiffer is a Partner in Roland Berger’s Oils and Chemicals Competence Center. He joined the company in 1996 after completing a degree in industrial engineering and an MBA at the University of Miami. and logistics industries. Robert Ohmayer is a Partner at Roland Berger. R&D. both in Germany and in the United States. and spent one year working in our South American office.Notes on the Contributors science at Waseda University. and pharmaceutical industries. He has assisted clients throughout Europe on projects dealing with strategy. ¨ Stefan Potzl gained his mechanical engineering degree with a specialization in production technology at the Technical University of Munich and he completed the Bavarian Elite Academy in parallel. and corporate strategy. Previously. Little Strategy and Accenture in Germany. sales and marketing). and cost reduction in the downstream oil. His focus is on post-merger integration. innovation management. electronics. and biofuels industries. He joined Roland Berger in 2006 after having worked at Arthur D. purchasing. Austria and the United States. He has conducted projects in the automotive and supplier industry as well as the machinery and plant sector. Switzerland. He has been a member of HTH Haus und xv . His functional focus is on production. product planning. procurement/cost reduction. He joined Roland Berger in 1998 after working for many years in industry. strategy. Ohmayer has broad industry experience. He has worked for Roland Berger’s Tokyo office since 1996. construction. he has concentrated on the automotive. R&D. R&D. He gained a degree in mechanical engineering and an MBA from the TU Darmstadt.

He joined the strategy consultancy in 1991 and became Global Head of Operations Strategy in 1997. He studied business administration at the Gerhard-Mercator University of Duisburg. and pharmaceuticals through to automotive. . He has completed projects in many industries including transportation. he was a consultant at Arthur D. In addition. aerospace and defense. organization. He gained his degree in mechanical engineering at the University of Stuttgart. and cost cutting. and supply chain management are his specializations. supply chain management.xvi Notes on the Contributors Technik AG’s supervisory board since 2006. and global purchasing and development organization redesign. global footprint optimization. ¨ Ingo Schroter gained his degree in technical business studies at Stuttgart University. product development. including Purchasing Excellence and Working Capital Excellence. he worked for Procter & Gamble in Paris and ACL Engine Parts in Australia. Procurement/ purchasing. business process re-engineering. engineered products. he supports private equity-owned companies in performance improvement. turn-around programs. Schmidt has conducted projects in various industries ranging from consumer goods/retail. transportation. He has supported clients on international projects on supply chain strategy. aviation. Axel Schmidt is a Partner at Roland Berger. Purchasing. latterly as a purchasing manager at Bosch Automotive. engineered products and construction and trade. He joined Roland Berger in 1997 after working for several years in various functions in the automotive and automotive supplier industry. defense. and working capital optimization are some of his focus issues. and security services. Previously. distribution and logistics strategy. logistics services. He has worked in these and in other functional fields in the process. financial. He advises clients on the following types of project: supply chain and asset optimization. Roland Schwientek is a Partner in Roland Berger’s Munich office. Prior to joining Roland Berger’s Operations Strategy Competence Center in 2001. 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. manufacturing footprint. He is an expert for supply chain management and logistics. and retail and consumer goods industries. Little.

engineered products. His focus is on product creation strategies. Daimler and Toyota Motor Manufacturing. Prior to joining the faculty of WHU. Wagner’s research interests include supply chain strategy. xvii . 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. Stephen Weisenstein works in Roland Berger’s Detroit office. machinery. Prior to joining Roland Berger in 2004. and the Toyota Production System implementation in the automotive. interfirm relationships in industrial marketing channels. Singaby’s projects involve lean organization implementation.Notes on the Contributors Gabriel-Assad Singaby is a manager in Paris with seven years’ consulting experience. and procurement strategies in the automotive. Stephan M. He obtained an MBA degree from Washington State University and a PhD and Habilitation degree from the University of St Gallen in Switzerland. and manufacturing industries. purchasing and supply management. He specializes in process improvement. he worked as Director of Supply Chain Management for a Swiss-based technology group and as Senior Manager for an international management consulting firm. He is also a 6-Sigma expert with a Master Black Belt 6-Sigma diploma from GE. post merger integration. where he is Director of the Kuehne Center for Logistics Management and holds the Kuehne Foundation Endowed Chair of Logistics Management. transportation. procurement. Michael Zollenkop joined Roland Berger in 1999. and chemical industries. and lean operations improvement programs. product portfolio and business model optimization. innovation in supply chains. corporate restructuring. and the management of logistics service firms. He gained a degree in business administration from the Friedrich-Alexander-University ¨ Erlangen-Nurnberg. He specializes in the automotive. Wagner is a Professor at WHU–Otto Beisheim School of Management. He gained a degree in economics at the University of Michigan and his MBA at the University of Chicago. he gained extensive industry experience working at Thomson. aerospace. re-engineering. growth strategies. 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. IT/telecommunications and healthcare industries.

. He advises clients in the aerospace and automotive sectors. and business process re-engineering. sourcing. and in government and public services on strategy. He gained his MS in engineering and his MBA from Politecnico in Milan. manufacturing. he worked for Booz Allen & Hamilton and various industrial companies. operations. supply chain and logistics. Roland Berger Strategy Consultants are especially grateful to Florian Kaiser and Heidi Sylvester for their work in the preparation of this volume. Before coming to Roland Berger in 2001.xviii Notes on the Contributors Marco Zurru is a Partner at Roland Berger’s Milan office.

security. safety.LIST OF ABBREVIATIONS ABS B2B B2C CAD CAE CCR CEE CEO CFO CKD CMMS COO CPL DFMA DRG DtC EADS EAI EBIT EMEA ERP F&A FDI FMEA GAP GCL GDP HSSEQ HWPM IPO IS KPI air-bearing surface business-to-business business-to-consumer/customer computer aided design computer aided engineering comprehensive cost reduction Central and Eastern Europe chief executive officer chief financial officer complete knock down computerized maintenance management system chief operating officer corporate procurement and logistics design for manufacture and assembly diagnosis related groups design to cost European Aeronautic Defence and Space enterprise application integration earnings before interest and taxes Europe. Middle East and Africa Enterprise Resource Planning finance and administration foreign direct investment failure mode and effect analysis good–average–poor global commodity leader gross domestic product health. environmental and quality standards heavyweight product managers international purchasing offices information systems key performance indicator xix .

xx Abbreviations LB LCC LEG M&As MbO MRO OEM OPEX P&L P2P PEP PM PPC PPP R&D RCL REACH RFQ ROCE SAP SC SCM SFP SKU SUVs TCO UNSPSC VDC WHU local buyer low-cost country lead engineering group mergers and acquisitions management by objectives maintenance. repair and overhaul original equipment manufacturer operational expenditure profit and loss peer-to-peer Purchasing EmPowerment purchasing manager production planning and control public–private partnership research and development regional commodity leader registration. evaluation and authorization of chemicals request for quotation return on capital employed Systems Applications and Products in data processing supply chain supply chain management site fitness programme stock keeping unit sport utility vehicles total cost of ownership United Nations Standard Product and Services Code vehicle development centres ¨ Wissenschaftliche Hochschule Fur ¨ Unternehmensfuhrung .

When answering these questions. These days the principle of operations excellence has spread far beyond traditional manufacturing industries and now shapes entirely new sectors. is not a question of geniality – it is more a question of an appropriate approach and fit to strategy. 1 automotive player in the world.’ — 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.INTRODUCTION ‘It’s not through inventions but through improvements that fortunes are made. Toyota. At the beginning of the twentieth century. Henry Ford developed modern assembly lines for the mass production of cars. The authors provide answers based on their extensive consulting experience. the carmaker has created a completely new business. ultimately. 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. and of continuous improvements as Henry Ford Snr knew very well. which marked the beginning of a decisive and formative paradigm shift. By applying operative levers systematically and managing them correctly. With its Toyota Home. Thanks to explosive growth rates for prefabricated and terraced houses. 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. companies are doing everything in their power to ensure that they follow their selected corporate strategy. which is currently the No. broadened the scope of mass production and started applying its expertise in this field to the housing market. for instance. McDonald’s. gained while working with leading industrial sectors over many years. extended the main features of operations excellence and made them relevant for the restaurant sector. it has created 1 .

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.2 Introduction – Operations Excellence for itself an additional growth motor. Operations strategies … tackle the fundamental operational challenges of the future Operations performance improvement Strategy … transfer performance drivers such as cost structure and asset productivity into best practices Operations enablers Performance improvement Enablers … help to support. The best things come in threes There are three levels to operations excellence. 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 and KPIs with tangible values for companies Figure I.1 Our approach – three levels to create operations excellence . • • • 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. The second level is that of performance improvement. whose processes in the past were often organized as stand-alone workshops rather than serial industries. and this book provides insights into groundbreaking developments in all three levels. Machinery producers such as Trumpf. are implementing industrial manufacturing processes. It is these that reach best practice status. best processes. This level answers questions about the correct organizational form. processes. as mass producers have for quite some time. as well as infrastructure excellence fields such as IT.and long-term horizons. most appropriate human resources and key performance indicators. Even in traditional sectors. measure and control all operational enabler issues such as organization. change is seeping in.

professors and practitioners from all major industrial nations. reducing complexity and improving working capital. manufacturing. The authors are experienced consultants. order management and working capital issues Manufacturing SCM Figure I. covering aspects such as comprehensive process optimization.Introduction – Operations Excellence Research and development … beginning of the value chain R&D Purchasing 3 Purchasing … value chain element with external partners Manufacturing … core competencies in production capabilities Supply chain management … logistics. ROLAND SCHWIENTEK AXEL SCHMIDT .2 Four fields of action to create operations excellence Operations excellence – four fields of action This book tackles four fields in some detail: research and development. we hope you stumble across many helpful suggestions that enable you to achieve operations excellence within your own company. Moreover. purchasing. and supply chain management. We hope you enjoy reading this insightful book. • • • • 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.

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PART I Research and Development 5 .

into the global marketplace have significantly increased the numbers of suppliers for almost every kind of product. innovation does not happen by chance: it has to be planned. we continue to see many managers struggle to put this knowledge into practice in a systematic fashion. easy-to-apply strategy for successful and efficient innovation. While there is ‘no one single best way’ to be continuously successful. 6 . to offer something that singles out one company from the crowd. it is more important than ever before for companies to find and highlight their unique selling point. Within each cluster. Companies wish to create products or processes that lead to cheaper and better products. the upturn in Latin America and. of course. irrespective of the cluster or industry. With competition rising. even though they are fully conversant in the theory of innovation.Introduction What is successful product development? Thomas Rinn and Kai Bethlehem No one would doubt today that markets are becoming progressively more global. The environment for excellence in innovation has to be actively established and fostered. the opposite is true: each industry and segment requires a tailor-made approach to reach the best possible results. the entrance of China et al. The rise of Eastern Europe. There is no one best. These lessons are part of all undergraduate classes in business administration or engineering. Yet. and innovation is the key to achieving this. ‘Innovation’ is considered the magic word with which to rise to this challenge. product development is the area that is always most in need of improvement in order for a company to flourish. Yet. 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. there are many ways to be successful. Indeed. The task is not an easy one.

Ralf Augustin and Kai Bethlehem reveal the levers that can be applied during product development. fact-based performance measurements. the head of R&D with a global blue-chip company recognized as being an innovation leader. In Part I. successful product development means that the new product fulfills or exceeds its targets concerning profitability. that it is different from other products. Development is successful if R&D fulfills all its initially set targets regarding timing. Courage is not enough. we thus examine different kinds of measures and methods to steer. money spent. control and optimize a product development project. which focuses on product development. potentially more successful. things are different. Jochen Gleisberg 7 . however. as intellectual capital is allocated to developing products with the best business case for the entire company. companies must have a clear strategy. resources. and rigid quality gates. time and money can be channeled to other. stopping a probably unsuccessful project as early as possible is central to improving overall innovation performance. Michael Zollenkop explains how business model innovation is dependent on product/service innovation and how this fosters excellence in product development. Looking at R&D strategy. projects that might bring a greater overall benefit. smoothness of the process and quality of the result. and would a company be more successful if it stopped projects bound for failure early on? Based on our experience. Thus. this company sometimes had issues with developments and products not running well.’ In fact. and meets any other target that has been defined for this product. According to our study. Looking from an internal perspective. the answer is yes. creates value-added for customers. leading to sales levels significantly below target and negative business results. and experience greater success.What is successful product development? 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. during a workshop we moderated in early 2007. those companies that have the courage to stop previously very appealing product developments stand out from the crowd. In order to stop product developments early on. By stopping a project in a timely fashion. The important underlying questions are: how can companies stop projects that are clearly going to fail. This raised the question as to whether the company correctly focused its resources and whether it took appropriate steps once developments got off track or circumstances changed. He said: ‘When looking at the company from an external perspective. Following this.

Roland Berger Strategy Consultants (2007) ‘Globalization of R&D – Drivers and Success Factors’. starting with an innovation toolkit that has been proven to work and easy to implement. Reutlingen University. Stefan P€tzl. Study.8 Thomas Rinn and Kai Bethlehem and Kai Bethlehem complement this section with their thoughts on the challenges of global development organizations. Note 1. 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. o Thomas Kohr and Dr. Then. June. . Michael Zollenkop take a closer look at a couple of enablers. ESB Research Institute.

It also determines the contents of a company’s innovation strategy. I define the precise nature of a business model. or a description of a company’s activities. Finally. The business model comprises three interrelated components. which are shown in Figure 1. cost or quality leadership – but also for the overall form of the company’s business model. First. Following this. and how it should be used as a steering instrument for a company. the question is discussed as to how companies can initiate and manage these innovations. scope and direction of a company’s product development.CHAPTER 1 Changing business models and their impact 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. Next. the business model can be seen as the ‘day-to-day living’ of the corporate strategy. Corporate strategy is thus responsible not only for the underlying competitive strategy – for example. 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. Corporate strategy determines the methods that a company employs. can influence the type. In simplified terms.1. The business model – corporate strategy in action A number of factors. 9 . both internal and external. the chapter explores how business models develop over time and how these developments can be viewed as part of a lifecycle model.

10 Michael Zollenkop Product/ market combination CUSTOMER VALUE AND COMPETITIVE ADVANTAGE Revenue mechanism Value chain configuration Figure 1. or coordination of the value chain. specialization in particular functions. . demographic. the company must choose between vertical integration. regional and other criteria. This describes the degree of company internal value-added. B-2-B.1 Components of business models The first component is the product/market combination. the basic type of company configuration and the design of functional strategies. In terms of the company’s configuration. defined according to functional. Important elements here are customers’ willingness to pay and the company’s pricing strategy. its markets and its services. competitive advantage. and might come directly from users of the company’s primary service offering or indirectly from users of a secondary service. Revenues can be transactionbased or non-transaction-based. B-2-C or P-2-P) and the relevant market. the type of transactional relationship (that is. ultimately. A company’s business model lives or falls on the interdependence between these three components. Key elements here are the products and the scope of additional services the company will offer. The following example from the airline industry will make this clear. The third component of the business model is the structure and relative weighting of the company’s sources of revenue. Achieving a good fit is a prerequisite for generating superior customer value and. The second component of the business model is how the company’s value chain is to be configured and applied. which describes the customers that the company aims to serve.

but also from areas such as on-flight purchases. therefore. They offer a wide range of regional and international routes – their product/market combination. They have a hub from which they operate intercontinental flights. All three components of the business model are directed toward cost optimization. a number of companies – the KLM subsidiary ‘Buzz’ and the British Airways subsidiary ‘Go’ for example – were unable to achieve this level of consistency in their business models. Yet. especially as flights are used for point-topoint transportation (value chain configuration). Ryanair targets cost-sensitive tourists and only offers flights within Europe. and offering an international flight network. for instance – aim for cost leadership. data mining and advertising. To keep costs to a minimum. In this way. The business model is based on service. for example – pursue a strategy of quality leadership. Low-cost carriers’ revenues come not only from the sale of tickets. Ryanair uses remote airports that often owe their very existence to it. They aim to provide the best possible service and comfort combined with a global flight network. A wide range of tariffs is available for tickets (the revenue mechanism). the individual components fit well together. low-cost carriers are responsible for what may be called the commoditization of flying – a type of customer value that differs fundamentally from that offered by traditional scheduled airlines. low-cost carriers – Ryanair. one that is based entirely on cost. the standing times at these airports are very short.Changing business models 11 Example: The airline industry Most scheduled airlines – such as Lufthansa. with no in-flight meals (product/market combination). They proclaim that flying is an integral part of people’s leisure activities and should be affordable for all. Both business models are internally consistent and. successful. short-haul flights between major cities function as feeders for their intercontinental routes and are not generally designed for point-to-point transport (configuration of the value chain). Scheduled airlines’ revenue comes in the form of payment for the transportation of passengers and cargo. flights are in competition with other means of transport or other types of leisure activity. Low-cost carriers have a very different business model. In both business models. By contrast. According to their philosophy. . customer loyalty. Consequently. They were the first victims in the low-cost carrier market. These two contrasting business strategies find their reflection in two differing business models. Ticket prices vary according to when they are booked and the number of seats remaining at the time of purchase (revenue mechanism). Traditional scheduled airlines target a mixture of business travelers and tourists.

12

Michael Zollenkop
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 dissolving, 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

Changing business models
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 farreaching 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 immunization’, represented Mologen’s product/market combination. Over time,

13

NUMBER OF INNOVATIONS

Process innovation Business model innovation Product innovation

TARGET Resource and financial market-oriented Customer-oriented BUSINESS MODEL LEVEL Specialist Network Vertically integrated enterprise Business unit

Corporate

Corporate

Figure 1.2

Development of business models over time

14

Michael Zollenkop
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. Technological 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

Changing business models
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 combination, 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

15

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.

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Michael Zollenkop
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 expectation 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 attractiveness 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.

Revenue mechanism Value chain configuration Product/market combination – potential lifecycle indicators

Revenue mechanism Value chain configuration Product/market combination – lifecycle position of a specific business model

Indicators Market potential Market penetration

Formation Unclear

Growth Insecure

Maturity Can be assessed Market widely exploited

Decline Clear

Formation

Growth

Maturity

Decline

Low

Market saturation not yet noticeable Shrinking

Only replacement needs left

Innovation rate Product Standard Customer

High

Low

Low

None

Nascent

Exists

Exists

Innovators

First follower

Majority

Latecomer

...

Figure 1.3

Lifecycles of business model components

17

marketing. the popularity of competing leisure activities (media .4 Indicators for business model attractiveness Case study: The music industry The music industry – comprising companies being involved in the production. there were unmistakable signs of forthcoming change: digitalization. from which customers could buy individual tracks as MP3 files rather than having to purchase whole CDs. the reason was musicswapping services such as Napster and Kazaa. Indicators had appeared in both the industry and competitive environments that the CD-based segment had reached its mature phase and an innovative business model was on its way. and distribution of audio media – has produced a number of early warning systems for its business models in recent years.18 Michael Zollenkop GENERAL ENVIRONMENT Socio-cultural factors Relations with industry Rivalry between market players Attractiveness of a business model Customers Substitute products Macroeconomic factors Newcomers to the market Political and legal factors Ecological factors COMPETITIVE ENVIRONMENT Suppliers Technological factors Figure 1. In terms of technology. In the past. Initially. the emergence of the MP3 format. four major labels formed an oligopoly that accounted for some 80 percent of worldwide sales. However. legal online platforms appeared such as iTunes. and the rapid spread of Internet use with ever-faster transmission rates. later on. and offered within a constant price spectrum across the industry. In terms of sociocultural change. between 1997 and 2003 these four big players experienced revenue losses of approximately one third. The industry is vertically integrated to a large extent. containing a selection of titles by a particular artist or in a particular genre. Its products are CDs and suchlike.

fans could buy the particular track they wanted rather than a CD put together by the label. Apple. No longer were artists forced to work exclusively with a label for the purposes of production and distribution. Indeed. When this system indicates that the business model is entering into a period of decline. The scenarios themselves give a picture of what the complex systems of the future could look like. Its reaction was to launch iTunes. the first and. superior business models are possible. PlayStations. understood the signals better. 19 Generating business model lifecycles in this way gives top management an early warning system. Instead of developing a consistent strategy. to date. For many years. Product/service innovation – the prerequisite for innovation in the business model The information that early warning systems generate forms the basis for drawing up scenarios. top management knows that they must do something about product development. most successful seller of tracks via the Internet. Back in the early 1990s. or shows that other. computer games. What exactly it is that they should do – and how scenarios can help them find out – forms the subject of the following section. an industry outsider. The changes also led to an increase in consumer power. against the file-sharing services and. later. Weak signals also appeared early on that changes were afoot in the music industry. Now. they failed to react either to the indicators and early warning signs or to the arrival of Internet filesharing services. leading figures such as MIT Internet guru Nicholas Negroponte and inventor of the MP3 format Karlheinz Brandenburg were already talking about the threat of digitalization for the music industry. These factors in the overall environment led to an increase in the power of performing artists in the competitive environment. many companies that had traditional business models did not want to feel the earth move. They must be produced in a systematic fashion and be entirely . against their users. and so on) among young people – the key customer segment – was bringing about a significant shift in behavior. Top management can then use these scenarios to test potential business models for durability and robustness. they tried to take legal action – first. if one wanted to feel them.’3 Yet. the former head of Universal in Germany describes the situation as follows: ‘The early tremors of the digital revolution could be felt in the music industry well over a decade before the earthquake hit – that is.Changing business models such as DVDs.

projections. The revenue mechanism for this scenario will be a combination of various online and offline components in the revenue stream. visualized and described. as well as serving to generate potential future business models. labels will become redundant. According to expert opinion in recent years. The process of drawing up scenarios consists of three stages: scenario field analysis. and then combine the three to form appropriate scenarios. and scenario building. ‘dominance of online distribution’ and ‘the end of the music industry’. companies need to be prepared for the new conditions arising in the competitive environment. This ensures a good fit in the future business model. These projections are then bundled into draft scenarios. In the other extreme scenario. In the case of innovative business models. This process is preceded by a stage of scenario preparation and followed by scenario transfer. music will simply become another type of digital content. They must be in a position to implement a business model that can face these new conditions robustly. so that the actual development falls somewhere between the more extreme scenarios. Their purpose is to create transparency over possible future competitive conditions and different factors affecting the success of business activities. ‘the end of the music industry’. These scenarios are ‘equilibrium between online and offline services’. In the projections stage – the core phase of scenario management – appropriate projections are made for the key factors determined in the initial phase. three main scenarios exist for the future of the music industry. the product/market combination will consist of CDs and suchlike. Clearly. They need to . companies should draft two or three scenarios with different constellations. In this scenario. ‘equilibrium between online and offline services’. or hardware manufacturers such as Apple. Online and offline services will be offered as additional services when customers buy CDs. The scenarios form a key component of a company’s business planning and development. legal download service. In the scenario field analysis stage. The value chain configuration will involve major labels gradually running down their vertical integration in favor of cooperation with specialized players. In one extreme scenario.20 Michael Zollenkop plausible in nature. mobile telephone companies or media firms. key factors are determined for the entire system. it can again be helpful to run this procedure for each of the three components of the business model first. 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. Ideally. accompanied by an attractive.

Apple’s success is enough to quell any criticism. how this compares with what will be required in future. and how they should prioritize their resources between the two goals of keeping up existing product development (for example. Apple was able to generate a new field of business for its iPod hardware through its download service iTunes. Yahoo! and eBay are good examples of companies that continually acquire start-ups with promising technological developments or existing business models. Apple looked at what it needed to do to build up the requisite skills and designed an attractive spectrum of future services. 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. supervising current series production) within the framework of the present business model. compared with just 6 percent in 2003. The company’s revenues were up by 211 percent in 2006 compared with 2003. ultimately. and they must determine the correct timing for initiating action. Their aim is to shorten development times. and even made Flickr’s founder its own vice president. Determining the correct timing for initiating action means making the most of windows of opportunity before product standards. a service that makes it possible to make free telephone calls via the Internet. Similarly. Heeding the early warning signs. by buying up start-ups they guarantee themselves an excellent starting position as fast followers or even first movers. which are often more relevant than costs when it comes to competition over innovation. Google. At the same time.Changing business models know what wheels they should set in motion in their product or service development process. dominant designs and business models have crystallized and established themselves. Apple has taken a different approach. Companies must ask themselves what their current capacity is. eBay bought up Skype. Ultimately. and profit was up by 2. For instance. two activities are vital: companies must carry out a gap analysis to determine what needs to be done. and closing the development gap with respect to the future business model. their value chain configuration and their revenue mechanism. and what new skills they need to develop. The rumors that Apple’s hardware business cross-subsidizes its software business persist. It is essential that they manage the transition from the old business model to the new one in a fluent manner. To do this. The new business field of iPod and iTunes now accounts for 49.5 percent of Apple’s revenues. 21 . This means that companies should examine what technology they currently have. But. Yahoo! acquired the photo management and sharing application Flickr.780 percent. One possible solution is for companies to buy in external know-how – finances permitting.

When New Technologies Cause Great Firms to Fail. determines a significant portion of the customer value generated by the company and the competitive advantage to which it aspires. (1997) The Innovator’s Dilemma. in turn. 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. Spiegel Verlag. Clayton M. der Tod ist gar nicht so schlimm! Uber die Zukunft der Musik. Hirn. Yves (2002) ‘Revisiting Strategy: Ein Ansatz zur Systematisierung von Gesch€ftsmodellen’. they must – become more and more committed. Meinhardt. Consequently. companies’ preparations for the future should – indeed. management information systems must be geared toward monitoring indicators and weak signals. u € 3. 21 July. This. Renner. Frankfurter Allgemeine Zeitung (2003) ‘Mit Betreibermodellen neue M€rkte erschließen’. Innovative business models therefore play an important role in stimulating product development. a 2. Further reading Christensen. Tim (2004) Kinder. a . ManagerMagazin. Boston. they decide the type of service provided by the company. as well as how it delivers this service. 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. Notes 1. Frankfurt am Main: Campus Verlag: 9.22 Michael Zollenkop One key aspect of good timing is apparent in the strategy of graduated reaction. Knyphausen-Aufseß. Outlook Business models are a key component of corporate success. As information becomes more concrete and the direction of change clearer. Dodo zu. See comment made in Boldt. 12: 81. To a large extent. Wolfgang (1997) ‘Der Spielf€hrer’.und Medienindustrie. Klaus.

Reding. Fallstudien aus der Biotech-/Pharmaindustrie und bei Business-to-Consumer-Portalen. Handw€rterbuch der Betriebswirtschaft. Zuk€nftige Gesch€ftsmodelle. Horst (ed. Caspers. o cols 583–91. Meinhardt. o Knyphausen-Aufseß.und Anlagenbau. Berlin: 63–89. Richard. Berlin. Kurt (eds). Wiesbaden. in K€hler. Vom Basisangebot bis zum Betreibermodell. Michael (2006) Gesch€ftsmodellinnovation.Changing business models in Bieger. Initiierung eines a systematischen Innovationsmanagements f€r Gesch€ftsmodelle auf u a Basis lebenszyklus-orientierter Fr€haufkl€rung. 6th edn. K€pper. Yves (2002) Ver€nderung von Gesch€ftsmodellen in dynaa a mischen Industrien. Hans-Ulrich. Dodo zu. Dodo zu.) (2004) Dienstleistungsorientierte Gesch€ftsmodelle im a Maschinen. Bickhoff. Thomas. Meier. Pfingsten. Wiesbaden. Konzept u a und Anwendung in der Netz€konomie. Knyphausen-Aufseß. Rolf. o u Andreas. u a 23 . Nils. Zollenkop. Michael (2007) ‘Gesch€ftsa modelle’. Zollenkop. Stuttgart.

Innovation is something customers expect from well-known companies. 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. If your company does not innovate. your competitor will. The truth is hard and simple: companies no longer have a choice. less attractive to western markets. innovation is a costly matter requiring manpower. 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. how to avoid having to lower them. and even whole countries that lost the battle for customers when their products fell below technical standards. Bearing this in mind. thus. it is valid to ask whether companies are at all wise to invest in innovation and R&D. rather. Companies cannot pin their hopes on price increases in order to finance innovation. research. 24 . Innovation is not about the ability to raise prices but.CHAPTER 2 Innovate to win: how clever cost approach design can outsmart competition Ralf Augustin and Kai Bethlehem Introduction Most of us know it. The pressure from competing products or alternatives on offer around the world is simply too high. It is a given – not a sign of outstanding performance. At the same time. The Eastern Bloc’s substantial basic wealth of oil and mineral resources could not prevent it from sliding into bankruptcy and political turmoil. industries. 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. and certificates.

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). all of these industries fell by the wayside. 25 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. Germany’s consumer electronic industry. Consider. for example. 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. but there are plenty of other examples to draw on. Offering innovation at competitive prices is the key to success. or the 15 or so car manufacturers France had after the war. Miraculous inventions and brilliant ideas spring to mind when we think of genius. Strangely. Combined with Roland Berger’s ‘comprehensive cost reduction’ approach (CCR). The opposite is true – it actually enhances his image. or current solar panel production in Germany. that few of us actually think of making things cheaper while wondering how we can make them better. The word ‘engineer’ is derived from the word ‘genius’. DtC covers more than merely the four typical levers that are usually applied to tackle cost. does pay off. the Silicon Valley’s computer industry. Japan’s automotive industry – or Korea’s in its younger days for that matter. But an engineer’s prestige is not lowered when his new solution is cheaper. All of this should be common sense. Think of the once flourishing fabric industry in Great Britain. faster or more efficient to produce. These examples prove that innovation. Unfortunately. even though 80 percent of a product’s cost is already determined in the R&D phase. Down-to-earth aspects such as bookkeeping and savings realizations tend not to enter the imagination in this context. when it fits perfectly with the right cost figures. 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. . Cost saving must be a conditio sine qua non for any innovation undertaken. Improving the cost situation is a sign of genius. This is as true for engineering as it is for other professional fields. As the balance between innovation and cost competitiveness became unstable. It is no surprise. then.Innovate to win This example might be heavily influenced by market-averse political philosophies. this thinking continues to be widespread.

Positioning of the product This element depends on the image that a company has to maintain. however. technology and know-how applied. with the exception that the difference between quality and inferior materials is not just skin-deep. A high-end fountain pen needs to have a certain weight to feel right and be accepted as a luxury item. expensive furniture may not be made out of artificial leather. or a chair that is still comfortable when others have already started to squeak and fall apart. should not bear the sole blame should costs get out of hand. Similarly. targeted quality. In many ways. and make-or-buy strategy. There are at least six main areas that significantly increase the cost of a product: positioning of the product. every targeted market segment requires a product to offer a certain number of features that might prohibit material savings. Targeted quality The second area that increases the cost of a product is very similar to the first aspect.26 Ralf Augustin and Kai Bethlehem Factors that influence product cost Make-or-buy strategy Positioning of the product/targeted customer group Product cost Specification/requirements Technology and know-how applied Targeted quality/life span Manufacturing processes/principles Figure 2. Developing and manufacturing . such as jeans that retain their color when others have long faded. specification. we are referring to quality that only makes itself apparent after years. Here. manufacturing processes and principles.1 Product costs are influenced by several surrounding factors R&D alone.

in itself. should be close examination of the reasons behind the need for specific costly solutions. Manufacturing processes and principles Manufacturing principles. which is our fourth aspect. customers misguided. there is generally a great deal of interdependency between product design and manufacturing principles. a specification should never be accepted as being carved in stone. this is rarely the case. the one-arm ‘hopping’ windscreen wiper of Mercedes cars during the 1990s. therefore. a healthy dose of respect that certain things simply cost. Once the inventor retired. There is often a discrepancy between what customers think they want and what they really want. In ideal terms. there are certain parameters that prescribe the use of certain solutions for intellectual property reasons or owing to a certain image. the ‘hopper’ went out of action. to calculate and communicate the cost of the ‘protected’ product. Thus. Certain technical . an art. Examples of products that have flopped on the market are endless. Sometimes. it is simply because someone important in the company invented something – for example. can significantly shape the cost of a product. a product specification simply means quantifying the wish of a targeted customer. 27 Technology and know-how applied This third aspect affects a product’s cost. In reality. however. One of the first steps in a DtC approach. too. In many companies.Innovate to win products that are built to last is. Barring cases where expensive processes are deliberately chosen purely for the sake of it. however. Wishes might be misinterpreted. especially since a customer’s wishes are strongly influenced by the sales force. especially when second thoughts arise during the R&D process. it is more productive to accept the barrier and change it at a later date. There are sometimes invisible barriers that should not be crossed in a DtC approach. It is important. marketing gurus. rather. In cases such as these. Specification The cost of a product is largely affected by specifications. Making these sorts of products does not give manufacturers a license to stop caring about cost but. product planners and such.

There are overhead costs – which will not be dealt with in this chapter – and there are value chain factors. For example. emotional aspects often color rational decisions. the will to keep the workforce employed. Core competencies that should not be lost. Each function has to become involved. Sourcing In addition to negotiations concerning certain materials and components. time-consuming and errorprone manual work is necessary. emotional factors will probably play a considerable role in traditional. 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. and supply chain. materials. product design. The same is true whenever production is hampered by bottlenecks. family-owned enterprises. 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. While such decisions might involve less emotional energy in modern blue-chip companies. components or modules that are easy . manufacturing. Make-or-buy strategies In this area. sourcing encompasses aspects that need to be regarded during the product’s design phase. especially if the founder is still deeply involved in the business. in particular. It is of utmost importance to keep the production process in mind when designing a product. 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. Whenever meticulous.28 Ralf Augustin and Kai Bethlehem solutions or specifications simply require certain manufacturing methods. purchasing or accounting functions alone are not responsible for fully optimizing cost. there is a high probability that the product design has not been optimized for efficient production. Only if these and other departments participate actively is there a likelihood that a product will meet its target cost. and doubts about whether the quality and flexibility can be guaranteed once processes are outsourced are all factors.

stamped. This targeted interaction between R&D and the purchasing department can be achieved using one of two set-ups. Examples of such issues include massive . certain technical parameters such as geometrics. can best be utilized. or even tooling. Only if the purchasing department is given sufficient freedom to activate its purchasing and negotiation levers. it is essential to include a representative of the manufacturing department in the development process. 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. or whether plastics. Clearly. in a project-based set-up engineers and ‘normal’ purchasing people meet in core teams to discuss and align innovation and the sourcing strategy. Involving manufacturing experts early on will help ensure that manufacturing or production processes are chosen that are well mastered by the company. the design of a product stipulates the kind of manufacturing that will be necessary to produce a particular product. This is especially true for those companies in which R&D and production are not located at one site. there is less competition for injection-molded. for instance. To deliver the best possible results. and certificates. In these cases. a true DtC approach needs to take into account potential suppliers. intelligent sourcing needs to start with the design phase of a product. as is so often the case with huge companies or global firms. in turn. sheet-metal parts (where setting up a sound supplier matrix would be comparatively easy). In contrast. Irrespective of the set-up selected. metals or laminates could/ must be used. engineers in R&D are largely unaware of the processes and techniques in a company’s production line. can satisfying results be obtained. strength and weight that predefine whether companies must select from molded. stamped/ forged or machined parts. whether substitutes could be used to allow for sourcing from a market with strong competition. that capacities and existing machines. duties. 29 Manufacturing Of equal relevance to the sourcing aspects are the manufacturing aspects.Innovate to win to obtain. Consider. Again. fiberreinforced metals with an aerospace certificate (making it difficult to achieve any competition in the supply base) than for simple. markets. This ensures. Overlap exists here with aspects of product specification. Companies can thereby avoid preprogramming production issues into the product. In many cases.

Product design The importance of the product design has already been touched upon. we mean the potential to develop derivatives or a whole product family from the initial starting product. HSK’s image was significantly harmed. How easily a product can be scaled up is another aspect of cost influenced by design. which is decisive for recall expenditures. guarantee cost. using common platforms Volkswagen builds cars ranging from Seat to Skoda and Volkswagen and to Audi. could HSK make customers return to its stores. For instance. While debate rages about the damage or improvement to a company’s image resulting from a recall. Its importance should never be underestimated. recall expenditures and guarantee cases – especially in the automotive industry – have risen significantly over the past decade. as was the business case of these revolutionary bicycles. processes. The introduction of the first aluminum mass-market bicycles in Germany forms a cautionary tale. The design of platforms in the automotive industry is illustrative here. there are further cost factors that are influenced by product design: the most important is the quality of the product. The characteristics of the material used for the frames were obviously not sufficiently known and did not align with the product design. As a result of this mismatch between design and material. The reputation of the bicycle producer HSK quickly became sullied when its bicycle frames began to crack. and ‘errors’ committed here can rarely be rectified in later steps. machines standing idle or lost flexibility following the outsourcing of production steps. About 80 percent of a product’s cost are defined during the development phase of a product. bottlenecks or other negative factors need to be addressed. it should have been clear that a better design or reinforced aluminum tubes would be required. By this. As legislation to protect the rights of customers becomes ever stronger. and materials mastered by the company. Production steps that cause obstacles due to poor quality.30 Ralf Augustin and Kai Bethlehem production limitations due to bottlenecks arising from new processes. At the product design stage. the cost is a factor today that no company can omit when calculating a business model for a new product. A DtC approach that focuses on manufacturing and production aspects always needs to zoom in on the balance of techniques. . Only by offering a ten-year guarantee on its bicycles. Besides its influence on purchasing and manufacturing. and cost to keep exchange parts in stock.

This encompasses the tapping of external R&D capabilities and know-how.Innovate to win Yet another aspect of designing products to cost is the ability to use externally available knowledge. Companies need to have certain rules in place that stipulate when external know-how can be used. This is not an exercise that can be done piecemeal. a fully-fledged approach influencing the basic product design is better suited. In a project set-up. The importance of pursuing DtC with a global view cannot be overstressed. inventory. Logistics clearly demonstrate how interlinked processes in modern companies are. it should be institutionalized throughout a product’s entire lifecycle – from the cradle to the grave. so to speak. manage. typically. 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. and moving of goods is underestimated. Incoming inspection plays a major role in production efficiency. both inward and outward bound. and look after a warehouse adjacent to the production line is the dream of every logistics manager. the cost for warehousing. 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. Switching stock into consignment stock is another option. Areas regarded as core competencies should not be outsourced. The management of warehouses and stock is also important and. in customers’ hands. worse. An engineer who intentionally selects parts from a bestprice supplier that offers consignment stock or even a warehouse close to the production line would be a treasured member of any core DtC team. Attention is paid here to the physical handling of goods. Considered from another angle. . How this can best be achieved is illustrated in the following section. but to exploit the entire savings potential. DtC can possibly fix some aspects. 31 Supply chain The fourth aspect that DtC usually focuses on is the supply chain. Instead. Only very few manufacturers (mostly in the up-market segment) continue to braze the electronics using discrete components. as undetected gaps in quality might cause severe obstacles during production or. The Dolby function in homeentertainment serves as an example. 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. Fully optimizing them can free up cash quickly. Only when all factors are considered can the best possible result be achieved. and having suppliers that own.

The fact-based neutrality of this approach means that rather than relying on gut feeling. An indication of the effort usually required to execute the tools is also provided. fact-based neutrality. it is possible to calculate the cost for the competitor to build the product. the total cost of ownership and production is investigated rather than only the purchasing cost. With its complete coverage. Following from .2. and inclusion of all stakeholders. All levels of a product are analyzed: parts. understand his cost position. Given certain knowledge. a proven methodology is required. production. not only are internal processes covered. At the very heart of the CCR is an analysis tool-matrix as shown in Figure 2. indications are given for typical savings that could be achieved by professionally applying this tool under normal circumstances. from suppliers to the product’s customers. complete coverage.32 Ralf Augustin and Kai Bethlehem The comprehensive cost reduction approach – ten facets of a gem Implementing DtC thinking in a company is no easy task. Tool 1: Technical benchmarking/DFMA This is basically the ‘disassembly’ of competitive products to analyze the materials and manufacturing methods used. systems. The approach’s openness to change means that the factbased analysis uncovers all optimizing potential. this method uses thorough data analysis. On the y-axis. modules. Five key features ensure the successful use of this tool: holistic perspective. Roland Berger’s comprehensive cost reduction (CCR) approach has been tested and refined on numerous occasions. and logistics are involved in the process when necessary. employing tools such as bottom-up and top-down cost calculations. marketing. Further to the right. all stakeholders are included: not only purchasing and R&D. Lastly. 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. the ten tools to be applied are listed. thus. but also sales. components. and finished products. The checks to the right indicate the departments and stakeholders that are typically involved in each action. As the approach strives for a holistic perspective. deduct his margin and. but also every step of the value chain. openness to change. with disruptive changes as well as incremental improvements being options that might be pursued.

33 .Departments typically involved1 Tool 1 2 3 4 5 6 7 8 9 Technical benchmarking/ DFMA Value analysis Commonization (internal and supplier led) Performance cost analysis Innovation analysis Simultaneous product and process optimization TCO analysis Value chain mapping Activity based product costing Product design Sourcing Supply chain Manufacturing Savings potential %2 Effort to use tool 15–25 10–15 10–20 10–30 30–40 20–30 10–20 5–10 15–30 5–10 10 Supplier manufacturing analysis Figure 2. pending adjustments for certain industries. company setups. 2 Savings for the system components addressed. etc.2 The comprehensive cost reduction approach covers the complete value chain Notes: 1 Indicative.

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. and so on) of similar products are somewhat linear. An example for the value analysis of a power window module in a car is provided in Figure 2. thus. and also with products that are similar in general but different in detail. Tool 3: Commonization The goal here is to use as many parts or components from existing products as possible. The goal is to single out the most expensive functionalities and find ways to replace them with more attractive alternatives. dimensions. processes or solutions. Tool 4: Performance cost analysis This tool is based on the belief that cost and characteristics (performance. Tool 5: Innovation analysis This tool aims at reducing cost by using the latest technologies. manufacturing process and/or assembly. power. Companies might use more powerful computer chips . to discover the ‘profitable’/unattractive functions of a product. It is also possible to gain profound knowledge about the competitors’ competencies. weight.4). This method is extremely valuable for articles that are utilized or manufactured in limited numbers. This means that it is possible to extrapolate target costs for a product by knowing the cost of similar products. it is helpful to imagine the merger of two competitors who want to reduce costs by using as many common parts as possible. 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. materials. it is possible for a company to generate ideas on how to optimize its own design. Here.34 Ralf Augustin and Kai Bethlehem this knowledge.3. Tool 2: Value analysis This tool aims to define the cost of each functionality a finished product offers.

3 Value analysis – vehicle window lifters 35 .Part Main function Subfunction Generate power Transmit power Stabilize window Prevent oxidation Cost per function ( ) Electrical Frame Electronics motor 7 3 8 8 5 10 21 19 9 10 Total 16 21 8 5 50 30% Idea • Replace electrics by pneumatics • Tooth belt instead of gears • Aluminum frame • Powder coating instead of paint Savings ( ) 2 7 4 2 15 Window lifter Move window Hold window Figure 2.

. D-1 own products (different families).36 90 80 70 D-1 60 ( /product) B-2 50 40 30 A-2 20 A-1 10 0 Competitor X (C-1 comparable) Competitor Y (D-1 comparable) Competitor Z (D-1 comparable) C-1 B-1 Step 3: Achieve new cost structure through redesign Desired performance Step 2: Harmonize spec level to in-house best in class Step 1: Replace overengineered components C-2 Current performance 2 4 6 8 10 Number of product functions 12 14 16 Figure 2. ..4 Performance Cost Analysis – Cost comparison by most important function Note: A-1.

Tool 7: Total cost of ownership Total cost of ownership (TCO) is already a ‘classic’ among DtC tools. series production. the cost analysis and calculation will mostly be undertaken by the suppliers. with five suppliers having calculated costs for five competing articles. Moreover. TCO strives for an overall cost optimization. It is especially applicable in cases when production machines. . and after sales). To use this method. Tool 8: Mapping the complete value chain This is one of the most comprehensive approaches with which to understand and reduce cost. certain trends can be identified. 37 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.5 illustrates the results of such an approach. is often an excellent way to cost-optimize a product. In fact. as do detergent makers to reduce packaging. logistics and sales cost. What is unique about this tool is that it should be employed with several strategic or key suppliers. or they might replace light bulbs with LEDs. Revamping products. having several competitors calculating the same range of products will create greater confidence in the prices estimated. companies require suppliers that can be trusted and that are ready to become involved in the endeavor. as they will have more expertise in calculating cost on component or part level than companies themselves. The individual aspects to be regarded in this approach are shown in Figure 2.Innovate to win to allow functionalities to be integrated more tightly on a lesser number of chips. parts or components used in own products incur further cost during their lifecycle. Although the price estimates vary. they might produce concentrates. especially those that have been around for some time. This tool is applicable mostly when designing processes or services. Figure 2. because such an exercise might set the target price for products they supply to the company. This creates a challenge for suppliers. The goal of this lever is to quantify all costs of a product over its full lifecycle (development.6.

Model D Supplier A Supplier B Supplier C Supplier D Supplier E Ideal Total 17 23 15 21 – 15 33 39 32 36 – 32 36 28 38 38 – 28 23 31 27 34 – 23 109 121 112 129 – 98 Offers by five supplies for four different seats (competitor models) are requested and compared with own current product design First benchmark reveals lowest cost design (model D). Model C OEM 4.5 Simultaneous product and process optimization example car module – vehicle driver seat (EUR/vehicle) . Model B OEM 3. Model A OEM 2. which is 20% less expensive than old design (module cost of 109) Detailed analyses of model D cost structure for each supplier reveals further potential from process improvements Best model D component proces cherry-picked form all suppliers reveals target cost of 98 (28% below current model) Figure 2.38 20% 136 124 119 116 109 28% 98 one one nt C one one Co mp nt D nt A nt B mp mp Co Co Supplier A Supplier B Supplier C Supplier D Supplier E 136 124 132 126 – – 119 135 – 138 146 – 142 116 167 157 109 121 112 129 – Co mp Old model OEM 1.

6 Value chain maps help to identify critical branches and to focus supplier development – passenger car door panel example 39 . thus TCO reduced significantly Critical supplier Critical supply chain-Leather from South Africa System supplier OEM Typically.Starting point • Unstable supply of door panels to OEM • Re-work necessary • Missing parts Tool application – understanding critical path Tier 7 Tier 6 Tier 5 Tier 4 Tier 3 Tier 2 Tier 1 Results • Problem identified • Supplier development started • Re-work cost reduced by 70% • No more missing parts. three months lead time Figure 2.

40 Original set-up Packaging After supplier manufacturing analysis Part storage Buffer 6 5 1 2 4 3 2 1 Packaging 4 3 Parts storage Material flow Testing Walking distance workers • 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 Productivity improvement: 30% 5 Re-work 7 Testing Roller convery or Re-work • 6 workers plus packer. not fully loaded. and storage of parts and components • No visualization of performance indicators • No team work Figure 2. transport.7 Supplier manufacturing analysis: component assembly – lamp manufacturer . long walking distances • Multiple handling.

finance. Case study: Comprehensive cost reduction in the automotive industry A project team helped one of the top global vehicle manufacturers when its cost pressure became almost unbearable. such ‘external’ pressure helps the affected party to push through changes in a process that they would find hard to achieve on their own. In many cases.Innovate to win This process requires the involvement and cooperation of all participants in the value chain. This lever should be pulled aggressively. from suppliers to retailers. sales. supporting a DtC session on-site. helping to lower investment cost. It was suffering in Asia. and to encourage him to prove that his costs are in fact different from the guess. especially when previous discussions have come to a standstill. Figure 2. and product departments. or seeking to reduce the waste and zeroquality level in production. Parties involved mostly welcome this approach as it helps them to optimize their own products or processes in a joint approach. 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. 41 Tool 9: Activity based product costing This lever is based on a ‘well-educated guess’ to define target cost. whether by unblocking a production bottleneck. complicated workflows or costly processes at the supplier during a visit. Tool 10: Supplier manufacturing analysis This tool builds on improving processes at the supplier. This approach is best performed with experienced people from the companies involved. where competitors reduced prices after they had . The company faced a difficult situation in two of the three global regions where it was present. Frequently. They should have an educated eye and be able to spot possible bottlenecks. production. an external view will help suppliers to detect outages in processes that were not previously apparent.7 shows how productivity could be significantly increased by readjusting the load balance between workers on a manual assembly line at a supplier. The trick is to use the guessed cost to open up discussion with the supplier.

The first phase. In the second phase. A thorough action plan with responsibilities. to create a spirit of trust among the teams and to foster belief in the success of the project. calculation rules were agreed upon that were to be used for reporting savings later on. Project management was the task of this module. and controlling tools to monitor the savings implementation was created. although a separate stage. set the foundation for all later steps. In several cases. fresh ideas were examined for their feasibility. Creativity and fresh ideas ruled thinking at this stage. factual database.42 Ralf Augustin and Kai Bethlehem implemented smart cost reduction programs. It was important. Necessary data was collected and analyzed. and cross-functional core-teams were established. those creative. which involved forming a solid. yet lacked the final step to reach the desired cost level. and processes and cost structures were detailed. calculated. target dates. In this situation. This module or phase also served as an escalation path when issues appeared to be getting out of control. in this phase. Phase five. ideas were generated. and finally to an excellent understanding of the limitations and opportunities of a certain production step. it was essential to ensure ongoing communication between all teams and to make sure that information was flowing freely between stakeholders and management. and to build calculation and business models. Evaluation and censorship of ideas and thinking were banned. In short. this led to mining and working down through details and issues. In the third phase. Once carefully documented. a hefty price war had dramatically eroded margins. in the United States. it may be said that a CCR project can be completed within ten to thirteen . The fourth phase was used to compute and analyze ideas ‘mathematically’. a six-phase CCR process was conducted to address the situation and help the company to take steps to reduce costs. the plan was put into action and steps that had been specifically agreed upon were implemented. based on the results of the initial data analysis. and verified were carefully planned and organized. actually spanned the entire twelve weeks of the project. it quantified the ideas that had been generated in previous phases. action steps that had been created. In phase six of the project. During this phase. political issues were kept apart from the financial and creative aspects. Looking at the time necessary to execute such comprehensive work. By clearly separating idea creation from idea calculation. It was also a good means by which to obtain swift decisions. As people who were not involved in the other areas undertook the work in this phase. The manufacturer had already executed a series of mainly commercially focused initiatives. team members – depending on their mission – were able to keep their creative spirit or their feel for numbers.

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 5 2 Generate cost reduction ideas • Map cost structures • Compare cost/functionality across BUs and against competition • Identify most promising savings areas • Conduct first workshops 4 Savings modeling 3 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 6 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 • Define savings calculation rules • Assess savings potential for each component and lever • Synthesize and extrapolate savings timeframe • Define savings calculation methodology Change management • Communicate objectives and ensure mobilization of resources • Prepare a wider information/communication plan 1 week 4–5 weeks 4–6 weeks 2 weeks Figure 2. approach.1 Preparation • Agree on project objectives.8 The CCR phase for diagnosis and drafting an action plan takes roughly 10–13 weeks 43 .

the initial analysis phase is often seen as being lengthy and uncomfortable.. As the focus is quite wide. team members can be confident that their efforts will pay off. . R. Usually. The sooner managers become involved. This leads to relentless cost pressure. (2000) Managing Global Innovation: Uncovering the Secrets of Future Competitiveness. Gassmann. In fact. This chapter has illustrated how prices can be shaped during the R&D phase. Executive Review. O. (2006) ‘Produktion 2020 – Globale Netzwerke als Erfolgsfaktor’. and how they can be trimmed. By using a comprehensive DtC approach such as CCR. ISSN 1617-4194. R. Berlin. political reasons are to blame. and von Zedtwitz. the more that can be achieved without harsh and disruptive consequences. The timeframe is shown in Figure 2. provided that a handful of people can commit 80–100 percent of their time to the project. Discussion and perspective The number of competitors is increasing as more and more companies and suppliers enter the global market. data always exists in modern companies. and Arndt. important aspects at the very front or very end of the process are also considered. Industrie Management. 1. 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. The ability to complete the project within this period also requires strong support from top management. provided that the required data (for instance.8. optimized or tuned at a later stage. 2nd revd edn. R. Further reading Augustin. Augustin. Equipped with the right tools to optimize the cost side of a product. H. Products are needed that are sufficiently innovative to attract customers even at a certain price. M. if necessary. Looking at the work completed in each phase. in an SAP system) can be retrieved.44 Ralf Augustin and Kai Bethlehem weeks. this phase can be accomplished relatively quickly. experienced managers are given the tools with which to optimize products and cost. (2007) ‘Not all roads lead to China’. If accessing this data was previously unsuccessful. 22. Boutellier.

how a global organization can best be managed. far-reaching change has taken place at many companies over the past decade. an increasing number of companies has moved entire departments to locations abroad. Decentralized or polycentric structures. such as R&D. or alternatively built up new departments in these locations. worldwide. In response to ever-increasing global competition.CHAPTER 3 Global development made successful: lessons learned by the automotive industry Jochen Gleisberg and Kai Bethlehem Introduction We are living in a globalized world. globalization takes place on a much grander scale. once very common throughout industry. of course. Over the past years. Leadership concepts that are both efficient and tried-and-tested are sought after as never before. have given place to decentralized leadership concepts and global company networks. internationalization rarely meant anything more than opening sales channels in neighboring countries. This new environment poses significant challenges and is characterized by complexity and change. This. During the first decades after World War II. Hierarchical organizational structures. Today. places each individual as a buyer of goods in an advantageous position. and strategic alliances with external partners around the globe have become everyday reality in many industries. we will use it as an example to evaluate the trends and reasons that lead to 45 . have not been spared. The question as to whether or not to ‘go international’ has passed its use-by date. yet it has also put enormous pressure on all companies. The issue today is. worldwide cooperations between units. rather. As the automotive industry is at the forefront of this new environment. Even core functions.

While cost cutting has historically been the central focus of the purchasing department. followed by a section showing how lead engineering might be implemented in a company. Clearly defined workflows are essential. Delivering better and cheaper products is a major challenge for car manufacturers. tapping low-cost workforces.000 employees at original equipment manufacturers (OEMs) work on developing a rapidly increasing number of vehicle models. this number is expected to change. which turns complexity up another notch. The potential advantages of a global R&D organization – making use of ‘local’ knowledge. they expect these products to come with an affordable price tag. and so forth – can be undermined if organizations are not well structured. tooling and guarantee cases. entitled ‘Globalization of R&D – Drivers and Success Factors’. Yet. around 190. A real-life example for lead engineering implementation will also be given. At the same time. Global customers have led to R&D processes that span the world. Price and R&D capabilities are the keys to rising to this challenge.46 Jochen Gleisberg and Kai Bethlehem international engagement. especially because today’s fastest growing vehicle markets are located outside these regions. before perspectives and discussion bring the chapter to a close. Their expectations are high. shows. fulfilling local content expectations. high-quality products that are ecological and individualized. North America or Japan. We then look at how an international or global R&D organization can best be managed in daily business. This function also influences how much money is spent on testing. about 90 percent of these employees are still based in Europe. They seek innovative. Employees at manufacturers in the ‘old’ countries will soon . quality and repair. Decisions made in R&D departments determine up to 80 percent of the cost for production. Organization is what really matters in a global world As a 2007 study by Roland Berger Strategy Consultants. Today. Lead engineering – one of the best-practice organizational concepts used in the running of global R&D activities – will then be presented. it has long been an open secret that R&D plays an even greater role when it comes to lowering product cost. Global product development – status quo and trends Customers of the automotive industry today are better informed and more demanding than ever before.

Tailoring global product development to ever evolving circumstances The importance of the traditional home market is decreasing. Although standardization is critical. . 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. companies also need to revisit other departments. regional differences should be neither forgotten nor overlooked. In such a set-up. strategic alliances and fully linked in-lead suppliers – is appearing on the horizon. Customers around the world continue to have different tastes. As this happens. global development network – consisting of various technical centers. complexity increases even more. With R&D becoming global. 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. for example. stagnating R&D budgets – a typical scenario at many companies – do not help the situation. ‘Doing more with less’ is just as important as being able to serve local expectations with a globalized product. can be considered as the sum of standardized modules) to set up innovative.Global development made successful welcome new colleagues from China. a global production set-up is just on the verge of becoming widespread reality. The challenge will be organizing such complexity and properly managing globally connected development departments. While global purchasing departments already exist. legal and geographical differences call for products that are tailored to regional needs. ‘Individualized standardization’ is the term often used for this. Companies therefore need to differentiate between those parts that can be standardized internationally and those that need to be tailored according to regional requirements. The classic approaches used to reach these goals at present are: 47 • • • to bundle and standardize parts (a car. 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. A fully integrated. India or Eastern Europe into the fold. Unfortunately. Moreover.

1 Trend towards integrated global networks . mostly selected components or platforms • Low.48 Status quo: Coordinated. components and technologies • Medium/high. multinational development Coming decade: Integrated. systems/modules. with global platforms. global development networks Region A Region B Region A Region B Region X Region Y Region X Region Y Global commonization Global specialization Global coordination Emerging markets • Low/medium. specialized technical centers with specialized development focus • Fully integrated lead concepts with little regional autonomy • At the same level in specialized technical areas Figure 3. yet strong local autonomy • Mostly ‘me-toos’ with limited development activities/capabilities • High. with lots of redundancies in the network • Coordinated development activities.

Great Britain and South Africa Vehicle category and derivative Platform • Front wheel drive in Europe • Rear wheel drive in the United States • Low value components (trim. electronic components) in China • Body modifications for demanding road conditions in South America • Magnesia-molding components in Brazil • Aluminum-molding components in South Africa • Prototype manufacturing in Eastern Europe • Software programming in India Components.2 Allocation of core competencies in a global R&D network 49 . systems/modules Technologies and materials Business processes Figure 3.Examples Special competencies attributed to special technical centers • SUVs in the United States • Right hand drive versions in Japan.

2 indicates. various levels of responsibility might be allocated to the regions. There is no single perfect strategy for car manufacturers to follow when it comes to splitting R&D activities among sites. This kind of structure is typical for manufacturers with strong R&D competencies in their home High Global companies and alliances Global lead center Integration and cooperation with local technical centers Integrated network hub Home-country focused companies Local satellite Local antenna Low Low Competencies of local technical development centers High Figure 3. The choice depends on the targeted regional markets. The next level of maturity and growth for such local antennas is to become a ‘local satellite’. Depending on the ‘maturity’ of a local technical center. and the particular history of each technical center. In many cases. with the key R&D responsibility still being held with the manufacturer’s head office(s). the product portfolio. as Figure 3. the focus will initially be on supporting sales activities. this will lead to regional technical centers that are responsible for developing and manufacturing globally required modules.3 Integration and competencies of local technical centers .50 Jochen Gleisberg and Kai Bethlehem Ultimately. the allocation of global core competencies is centered on certain regional and ‘special’ requirements. The local satellite. might already be in charge of designing and executing modifications necessary to adjust a global product to local requirements. these very same regional technical centers will also be in charge for making the adaptations necessary to sell a global product successfully in a regional market. however. Yet. In regional offices that have only been established very recently (often referred to at that stage as ‘local antennas’). helping with technical issues or starting some kind of local assembly.

Coordinating and harmonizing all parallel R&D activities is essential. sufficient: the mindset counts. only the basic concept or lead car is developed centrally. are often highly specialized in their areas of responsibility. there is typically no more home country. by itself. Companies with a more international set-up tend to be structured as ‘integrated network hubs’ or ‘global lead centers’. data and technical information are essential to reach that goal. R&D departments are . Ultimately. Through this combination of ‘thinking globally and acting locally’. Regional centers are even allowed. core competencies. it is possible for car manufacturers to reach the highest levels of standardization on a global scale. to develop individual. They are also fully integrated within the global network. allowing them to steer and make use of R&D capacities worldwide. irrespective of where they are developed. In these cases. and to adapt universal products for regional markets when necessary. local derivates of the initial basic concept. So. too. both of whom still complete most of their R&D work in Germany. and testing and development facilities are spread all over the world. sometimes. When organizations have reached this state. Cars within respective family groups are finalized in individual regions. it is people that do business. 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. or for companies who develop goods in a strategic alliance. 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. 51 Lead engineering: the basic concept and how to implement it Lead engineering is a concept developed for companies that have split their product development by regions or business areas. Creating the technical means to communicate is not. Global lead centers. Knowledge management and exchange of ideas. Only if all sub-systems. There are numerous risks that need to be addressed in this kind of international R&D set-up. On the contrary. fit seamlessly together to make a great product. can this whole set-up be as productive as initially expected. At an alliance such as Renault–Nissan.Global development made successful country – such as Porsche or BMW. The global lead centers act as gravity centers to steer and maneuver all R&D activities completed throughout the company. manpower. having reached the most mature state of the ladder.

This situation usually makes synergies hard to tap. one common product strategy exists across business areas. He is responsible for defining the best possible structure to split up all parts of a product and allocate them to individual work teams. This leads to two main questions: How can synergies be created and savings be realized? How might the need for standardization be reached. This point cannot be overemphasized. providing orientation for all R&D activities.4 highlights the six key elements of the lead engineering concept. where not only physical distance. alliance partners and regions. all further activities will lack orientation and failure will be inevitable. Global strategies With lead engineering. components.52 Jochen Gleisberg and Kai Bethlehem Realization and implementation of synergies 6 Global IT systems 4 Standardized processes 2 Integrated global organization 1 Global strategies 3 Cross functional teams 5 Tools Standardized KPIs and performance measures Process Organization Strategy Figure 3. is therefore required. universal solutions are developed that utilize common system architectures. In other words. This is even truer in global R&D set-ups. considering the urgency to develop individualized solutions for regional customers? Figure 3. Without such common ground. and modular construction concepts. but also language and time zone differences can create significant communication barriers. Sound .4 Six key elements of the lead engineering concept not geographically united. this also applies to the people working on assigned topics. The creation of this one strategy is the central task of the nominated lead engineer. 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.

Depending on the size of a project. and many other aspects from the very beginning of a project. the lead engineer might be one very knowledgeable. Mandate approach One business area or technical center takes over full responsibility for developing a certain component or module. number of variants. There are three levels of coordination: mandate. leadership.Global development made successful overall strategies address savings targets. potential suppliers. In this case. 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. and local execution. 53 Integrated global organization One prerequisite for global development teams is a suitable integrated structure across all centers. The early involvement of departments such as purchasing ‘lead buyers’ in such LEG activities is highly recommended.5 Three coordination options . He mediates conflicting interests. The lead engineer can be considered as the intellectual leader of a project. For each individual LEG. all Classic organization Roland Berger ‘lead concept’ Levels of coordination for components 1 Mandate Full development done at one BU or site 2 Leadership Leadership and responsibility attributed to BU or site 3 Local High level of independency and autonomy of BU or sites BU 1 BU 2 Site 3 Site 4 BU 1 BU 2 Site 3 Site 4 1 R&D R&D R&D R&D Component 1 2 Component 2 3 Component n Note : BU Business Unit Figure 3. or a team of people sharing this task. well-recognized person. lifecycle. the roles of leadership are then individually defined. they could be responsible for exhaust systems or a vehicle’s braking concept. facelifts. and is the troubleshooter when projects threaten to verge off track.

local knowledge and. production. This kind of organization is typically chosen for components that do not require any local adaptation. and the involvement of people from other areas or regions is not required. 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 standardization. and sales) through cross-functional teams. production. To achieve this. Cross-functional teams To speed up the innovation and development process. using efficient work plans and introducing quick decision-making routines. Ideally. marketing. production. it is important to work on various aspects of a product development in parallel. Making sure representatives of such functions are included very early on in the development process is strongly recommended. but engineers from other technical centers are fully integrated members who form one team. but can be used globally in one standardized execution. possibly. the LEGs are given central support by the lead engineer. and sales departments to each LEG. For example.54 Jochen Gleisberg and Kai Bethlehem required know-how is bundled in one competence center. one lead buyer might be assigned to one or several LEGs. takes on responsibility for defining localized executions of a basic global standard. Standardized processes Common processes are a prerequisite for harmonizing component and vehicle development. Equally as important are well-defined escalation . and sales. the lead engineer assigns one representative from each of the purchasing. but also for areas such as purchasing. reflecting the whole value creation chain of a company. He is linked to other departments (such as purchasing. 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. Each regional engineer contributes specialized. as is their involvement in the work being done by the LEGs. Leadership approach One region takes over the lead for a LEG. Local development is undertaken by regional technical centers that exchange ideas with colleagues from other regions. This is true not only for engineering and developmental activities.

The lead engineer is the driver of communication for his LEG. good language skills and company-wide telephone books alone do not guarantee open communication channels. it is essential that companies set quantitative targets (meeting of cost targets. and premiums is introduced. whereby common definitions and wording are required to make sure that parallel developments do not get out of control. for their counterparts. Yet. While defining measures. it is important to introduce common target setting and management by objectives (MbO) measures. The same is true for technical specifications. Only if a transparent system of targets. bonuses. Setting only qualitative targets (such as ‘adherence to global processes’) is unsuitable for fostering trust and cooperation between international colleagues. Global IT systems Communication between global colleagues is of the utmost importance. and is responsible for phasing the activities of his LEG into the overall development plan. Common targets and measures need to be implemented for lead and local engineers and also. and will make decisions wherever necessary. ideally. 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. While doing so. can companies expect people from all regions to cooperate. 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 subproject. 55 Standardized KPIs and performance measures To implement and anchor the described processes and structures in the organization. He will coordinate and harmonize the different activities within the group. and so on) that can be easily quantified at set times. deadlines. Defining globally applicable key performance indicators (KPIs) has proven to be a very powerful tool to ensure top performance across the organization. lead and local buyers. KPIs. The lead engineer also sets the pace for the LEG. milestones and quality gates need to be standardized by the lead engineer and reflected in each LEG’s work plan. More important is the implementation of linked IT tools that allow for seamless data exchange .Global development made successful and mediation processes. together with change management procedures and standardized data warehousing.

Attention should be paid to the compatibility of IT. systems. or selecting one global CAD standard. too. Compatibility of computer systems or data formats An example of this is introducing SAP company-wide as the sourcing and bookkeeping standard. seen so often in large. 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.56 Jochen Gleisberg and Kai Bethlehem and transparency between all sites. In the short term. For example. unified groupware solutions and the sharing of knowledge. e-conferencing. The tendency to ‘reinvent the wheel’ must be avoided – but is. or in an alliance or R&D network. Since establishing a comprehensive data warehouse requires a significant amount of manpower. international companies. sub-systems and parts – needs to be standardized. medium and longer-term steps that need to be taken. To ease that adaptation. 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. automated communication between all sites. . Recognizing and rewarding success in a face-to-face context is a duty. data warehousing. topics to be stored in the data warehouse should be screened. the logic of a product’s structure – separation into modules. however. gathered and prioritized with care. unified format is recommended in order to make know-how accessible company-wide. is it possible to work in parallel on subsystems without interfering with the adjacent sub-systems. This should always be the very first step. Only if the perimeter/separation of a sub-system is commonly defined. Compromises might be necessary. and workflow management systems need to be standardized and harmonized in order to enable trouble-free. IT solutions will never completely replace personal interaction between colleagues from different regions. 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. yet lacks communication and data transfer capabilities. net meeting. Unified groupware solutions E-mail. companies should discriminate between the short. Sharing of knowledge The creation of a know-how database in a central.

Departments such as purchasing and sales also need to be reorganized to ensure that they reflect. lead and communicate all changes. if the proper support is not given from the beginning. In the medium term. The expectations for savings through the introduction of a lead engineering concept were high. All of the above steps must be fully backed by the top management and the HR department. The concept cannot be implemented successfully without detailed planning. the R&D organization’s common structures. LEGs will be able to their work to maximum efficiency. 57 Lead engineering in real life Roland Berger designed. at least to some degree. harmonizing business processes and the organization of departments should be the primary goal. There is a price to pay for implementing the lead engineering concept. It cannot be tackled as a secondary exercise. Top management will need to take active steps to steer. the HR department should work out a detailed personnel plan that includes educational aspects for all employees.Global development made successful 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. adapted and implemented the lead engineering concept at one of the world’s major vehicle manufacturers. . bonuses. and premiums need to be aligned. The introduction of standard targets and balanced scorecards is the best means by which to support the harmonization process. In the longer term. KPIs. Furthermore. as the vehicle manufacturer expected substantial savings to occur by unifying and rationalizing the R&D workforce. Escalation paths need to be defined to permit rapid decision-making when conflicts arise. rotation programs provide staff with a greater understanding and deeper knowledge of their new partners. which has three business units on three continents. sufficient budget and the full-scale involvement of the top management. Cultural training to help employees avoid culture clash is particularly helpful in the early stages of a newly established international partnership or alliance. MbO programs. a vision should exist to harmonize all business processes and to introduce standardized IT solutions. To ensure productive and amicable interaction company-wide. and to express clearly the goals that will be reached because of the reorganization. Accomplishing it will take time and effort. Political maneuverings can easily topple the lead engineering concept. In parallel with the steps taken by the top management. Each of the three business units produces similar products with their own individual R&D departments.

and the number of suppliers was finally reduced by 30 percent. materials. sales. technologies. This was to be integrated with the lead buying organization already in place. . and adapted before a lead engineering concept could be implemented. ‘The introduction of this integrated concept with the aligned organization provides us with a competitive edge that has to date been unique in the history of our company’. he said. Experts from other functions (such as the product planning. cross-functional ‘pilot’ project teams were defined. These teams were then asked to analyze the technical similarities between the different products manufactured and to compare cost-per-function data for certain selected components. which proved to be a very ambitious task. To institutionalize the integrated approach between lead engineering and lead buying. concepts. including representatives from the engineering and purchasing functions. Major savings could be achieved with the integrated lead buying and lead engineering approach. and legal departments) joined the teams as required. Different strategies. and the applications that were within his scope of responsibility.58 Jochen Gleisberg and Kai Bethlehem Example: The automotive industry In a first preparatory step. up to 9 percent of purchasing volume could be reduced via technical modifications and standardization. In addition to commercial savings. harmonized. the manufacturer decided to move beyond the ‘pilot’ teams and to roll out this kind of core-team structure through all of its R&D organizations around the globe. the lead buyer was made a permanent member of the lead engineering team. which divided vehicles into groups of functional systems and components. Saving potential was calculated and the implementation of changes commenced. technical concepts. Additionally. Each system and component was assigned to a permanent core team of three engineers. The client agreed to a common product structure. one from each business unit. The integrated lead engineering/lead buying approach convinced the client of its efficacy. As the savings implementation in these areas was convincing. His task was also to control diversity. One of the engineers acted as a lead engineer and was responsible for defining the overall strategy. and philosophies had to be compared. developing a modular construction system in line with the overall system architectures. between 15 percent and 40 percent of the number of parts per component or system could be eliminated.

It enables companies to channel communication. Berlin. .Global development made successful Outlook In a world of multinational companies. In the hurly-burly of change. Lead engineering has already proven its value in the automotive industry. Chaos and failure will result when communication and processes are not managed properly. home turfs. The willingness to embrace this change is decisive for the success or failure of the project. Boston. Stuttgart. (2005) ‘Global Footprint statt Nomadentum’. 7: 52–3. cross-country alliances and strategic partnerships between manufacturers from all regions of the world. 59 Further reading Aberdeen Group (ed. J€rgens. the lead engineering approach has proven to be a valuable concept. Without a doubt. U. be done at OEMs. Automobil Produktion. these interactions need to be managed.) (2005) ‘The Global Product Design Benchmark Report: Managing Complexity as Product Design Goes Global’. The previous authority of historically grown structures. with competencies spread between the two. helps companies tap synergies within global R&D structures. Roland Berger Strategy Consultants (2007) ‘Solving the Powertrain Challenge’. Borders between OEMs and suppliers will become increasingly invisible. Yet.) (2000) New Product Development and Production u Networks: Global Industrial Experience. (ed. While the lead engineering concept acts as a compass for companies to navigate an ever-changing environment. it provides guidelines and orientation. lead engineering will be a necessary concept in the years to come. and enables the rapid realization of savings. IT systems will allow for seamless integration and barrier free communication. the concept itself forces change upon the organization. N. so these need to be increasingly linked and integrated within the vehicle manufacturers. Looking at the automotive industry. It is expected that up to 60 percent of value created during the production of a vehicle will. and spheres of political influence are no longer valid. other industries will benefit from the lessons that car manufacturers have already learned. improve internal cooperation and steer global development. in the future. Fecht.

R. ZWF – Zeitschrift o f€r wirtschaftlichen Fabrikbetrieb 99. u . Zetzl. 12: 698–701.60 Jochen Gleisberg and Kai Bethlehem Roland Berger Strategy Consultants (2007) ‘Globalization of R&D – Drivers and Success Factors’. (2004) ‘Engineering Collaboration in der Produktentstehung: Mehr Wertsch€pfung aus besserer Zusammenarbeit’. Stuttgart.

dominate their ‘niche’. Wittenstein. This is more profitable than the average me-too or mass markets. at least. Many innovations continue to fail. they would risk losing substantial market share at a rapid pace. Phonak. generates 85 percent of its turnover with products fewer than five years old. We will also talk about an 61 . This trend is consistent across all industries. Are innovative companies really more successful than others? The answer is ‘yes’. most companies simply have to innovate. too. Most companies have recognized this fact and have made ‘being innovative’ part of their strategy. not all companies are equally successful in turning their target into reality. Companies today are often so dependent on innovation that. According to a sector report on innovation published in 2006 by the Centre for European Economic Research. Thomas Kohr and Michael Zollenkop Introduction Innovation is becoming increasingly important for companies in many industries. the Swiss producer of hearing devices. Nevertheless.CHAPTER 4 Success factors and levers for best practice in innovation management € Stefan Potzl. This chapter puts the spotlight on the success factors for innovation and shows how the best companies tackle them. particularly where companies can only rehash what other companies have already created. This philosophy applies in more traditional industries. To survive global competition. The question is whether it pays off. a German producer of gearboxes. considered a ‘hidden champion’. makes 65 percent of its turnover with products it has brought to market in the last two years. ZEW. The reason for this is clear: companies with many innovations either lead a whole market segment or. For example. companies with a young product portfolio have a significantly higher return on sales. if they were to fail to bring products to market.

Thomas Kohr and Michael Zollenkop 22. ‘Innovation’.0 5.9 3. Based on our experience. innovation toolbox developed by Roland Berger.7 9.3 7.7 4.0 5. Sector Report. The problem is to distinguish between good and mediocre ideas.1 Share of sales with original product innovation in different industries (%) Source: Center for European Economic Research (ZEW).3 8.2 10. the major challenges in innovation management 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 . and how to foster the one and shelve the other.9 10. May 2006. measuring and control Return on sales 4% Key : Return on sales 0% Return on sales 0–4% Figure 4.3 10. which is a proven set of tools and levers to be applied during the different phases of a development project.8 More innovative companies show consistently higher profit Automotive Electrical Mechanical engineering Medicine tech.62 € Stefan Potzl.. The challenge of innovation: how to manage it in a business context In most companies. idea creation is not a problem.6 7. We will also discuss a project during which this toolbox was successfully used. Most employees have excellent ideas.

. leading to overspecification and overly expensive products. During the innovation process. A survey amongst R&D leaders in mechanical engineering conducted recently by Roland Berger confirms this problem. Products with competitive disadvantages Figure 4. Far too often. When asked about the major reasons for failed innovation. facing a competition barrier 38 Missed market requirements – the technically perfect solution • Analyze necessary product functions • Define value of functions for the customer and their target cost • Design product features according to this information • Objective: Avoid overspecification and overengineering. technical perfection has the upper hand.Best practice in innovation management 63 • • Successfully managing market launches Meeting customer requirements regarding function and price.2). especially the ‘me-too product’ or ‘products with competitive disadvantages’. 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. While customer involvement is usually high in the early and late phases of development projects – when defining the first specifications and launching the product – involvement dries up during the detailing phase and the various change procedures. focus on the customer is often lost. Other answers. Value analysis in R&D projects The price crash Products with technical weaknesses Products facing weaknesses in the market environment 18 5 7 13 19 The me-too product. 38 percent ranked ‘missed market requirements – the technically perfect solution’ in first position (see Figure 4.2 Innovation in the mechanical engineering industry – failure reasons in commercialization (% of answers) Source: Survey among R&D leaders in mechanical engineering conducted by Cooper–Roland Berger. also hint at missed customer needs.

causing a further delay of several weeks. but also of other projects. It suffered from significant market capitalization loss. and the existing company culture led to many people not addressing issues rather than dealing with them. causing the company significant damage. Different computer aided design (CAD) systems in the engineering sites in France. each bearing a long . the project leaders were often not informed of a problem until very late in the product-creation process. Thus. 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. Involving the customer is vital. Inadequately identified responsibilities in the complex R&D network and limited competence to handle smaller problems on a working level created the real problem. as engineering data had to be manually converted between the different CAD systems. increased development cost. penalty payments and delayed break-even not only of the A380. Each year. Almost every original equipment manufacturer (OEM) has had to conduct costly safety recalls. To put it in a nutshell: innovation management at Airbus failed. Example: Airbus A380 The heart of the problem was a technical issue: construction errors in electrical wiring. Solving the technical issue was cumbersome. Another industry that is often in the media due to problems in the innovation process is the automotive industry. production of the correct electrical wires started much too late and production capacity could not be increased sufficiently to make up for the delay. Thomas Kohr and Michael Zollenkop This process is called value analysis. One of the most spectacular examples is the aircraft Airbus A380 whose market introduction was delayed by almost two years. Finally. Model proliferation is tremendous. The internal coordination process was extensive and time-consuming. The damage to reputation and customer trust is much harder to quantify but most definitely not of minor importance. increasing numbers of niche models. Germany and Spain are a probable reason for the wrong construction. The financial damage to EADS. was substantial. Examples of failed innovations are endless. the problem was left to escalate for too long and a solution was not defined early enough. which damage reputation. delayed and lost sales.64 € Stefan Potzl.3). the parent company of Airbus.

The company even considered renaming the new model in an attempt to avoid long-term damage. Today. The first aircraft was finally delivered in October 2007. In addition. Overall. Increased development cost. This has happened even though R&D capacity is stable. too many product launches continue to fail. Technical problems led to various delays. On January 18. . Mercedes also experienced this with its last E-class model. the company is still struggling to recover from both the financial impact and the damage to its image. Airbus estimates the additional cost caused by the delay at roughly ⁄5 billion. After the launch of the new model in 2002. Suppliers have become more involved in development as OEMs focus on their core competencies. At the same time. 2005. the most profitable Mercedes model for years. list of equipment options. dropped drastically and did not recover for several years. Sales for the E-class. and application of virtual engineering methods are just some of the issues OEMs have tackled.3 million vehicles had to be recalled at a cost estimated at ⁄325 million. Airbus introduced the A380 to the public. according to a report in the Swiss newspaper NZZ. but also the efficiency of OEMs has risen significantly. The most critical one affected an innovative electro-hydraulic braking system. a clear development organization with defined cross-functional processes.Best practice in innovation management 65 Textbox 4. the development of the A350 is significantly affected due to engineering capacities bound for the A380. The initial delivery date had been planned for March 2006. are introduced on the market. penalty payments and lost orders were the consequence. Some 1. various technical problems occurred. Despite these advancements. development lead times – from concept approval to the commencement of production– have shrunk. to Singapore Airlines. After announcing another major delay in October 2006. Intelligent product architectures. shares of EADS (the parent company of Airbus) dropped short-term by 10 percent. boosting the efficiency of passenger transport.1 Airbus A380 The Airbus A380 is one of the most prestigious industrial projects ever – the largest commercial aircraft in the world.

. corporate research.g. models 213 Time from concept approval to start of production Months R&D budget development of major OEMs1 Sales (%) 238 35 163 150 125 75 75 88 138 25 162 30 6 5 2 4 20 75 50 75 75 75 15 3 2000 2002 2004 2006 2008e 2000 2002 2004 2006 2000 Key : 2002 2004 2006 2008e Standard models Derivates (e. 2 Without financial services.3 Innovation performance development in the automotive industry Notes: 1 Includes product development. soft-tops) Europe Japan North America Figure 4.66 Vehicle models marketed by European manufacturers No.

It is the task of the innovation management system to minimize mistakes. for several years. These virtual methods have existed. innovation process. the following criteria are important: 67 • • • Consistency – innovation strategy. Individual mistakes are made in all environments. supporting systems/tools.Best practice in innovation management Yet. 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. are notched up to wrong decisions and the behavior of individuals: this analysis is too easy. in theory. roll-off ). all functions need to be involved. this prototype helps save development time. In the case of the C-class. IT systems performance is still a critical aspect here. The toolbox consists of an integrated set of strategy. and the necessary enablers need to be aligned Holistic approach – innovation organization. solves goal conflicts and enables the company to test the overall vehicle concept in a virtual stage. vibration. 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. and aerodynamics. Failed innovations. performance. However. and enabler tools. in most cases. performance targets. but also comfort (noise. air conditioning. Roland Berger Innovation Toolbox The Innovation Toolbox contains all the tools needed to ensure that the criteria listed above can be fulfilled. operational stability. energy management. 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. 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. they were not systematically applied in that integrated form until the C-class. . as far as possible. So. By simulating all major characteristics of the vehicle. and innovation culture need to be considered Cross-functional approach – innovation is not a pure R&D issue. not only crash safety and passenger protection have been simulated and tested with the digital prototype.

that is revenue optimization. and time-to-market • Describes a comprehensive set of innovation levers • Determines innovation efficiency (doing things right) Innovation infrastructure and systems Cost performance Innovation organization III Innovation enablers • Foster the sustainability of innovation optimization • Describe preconditions for innovation effectiveness and efficiency Figure 4.68 I III Innovation strategy Innovation controlling Time to market II Innovation process Revenue performance • 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 I Innovation strategy • Covers all aspects of value creation.4 Roland Berger Innovation Toolbox . cost optimization.

including parameters for: 69 • • • • 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. industry characteristics and company-specific circumstances need to be considered. the optimal portfolio of levers is selected based on the scope of changes and the resources available to apply them. corporate growth targets or targeted future product portfolio. the more quickly the optimization measures should be tackled (quick wins). The Innovation Toolbox contains a comprehensive set of thirty levers with which to optimize performance with regard to revenues. The most . For the ratio of effect and effort. Revenue performance levers aim at creating higher rates of innovation compared with a turnover increase reached via innovation. thus ensuring a close link with the intended corporate development. levers are selected based on their ability to bring the right sort of change for a particular company. The higher the effects and the effort of application. Corporate strategy sets the scope of action by defining parameters such as future market positioning. In general.Best practice in innovation management Innovation strategy Innovation strategy should be viewed as the starting point for all innovation activities. the more management attention is required to select and implement the levers. Both the potential effect and the effort required to apply levers vary widely. Innovation strategy ensures that the focus is set on the right issues. In a development or innovation project. cost. it is derived from corporate strategy.5. directing all corporate innovation activities into the most effective areas. the higher the effect and the lower the effort. Second. and time-tomarket. A general overview is provided in Figure 4. the relevant levers are determined according to current weaknesses in innovation management and the project target. Innovation performance Innovation performance – the second tool for successful innovation management – is crucial for making innovation activities efficient. Innovation strategy defines the targets and key guidelines for innovation activities. Ideally. First.

cost. or timing 27 19 8 26 20 18 1 30 Low Low Application effort High 17 23 22 25 24 28 6 16 21 12 2 11 10 5 7 15 14 01 Creativity techniques 02 Idea management 03 Innovation portfolio mgt 04 First to market strategy 05 Complementary offering 06 Low end disruption Cost levers 13 Product modularization 14 Value analysis 15 Design-to-cost 16 Target costing 17 Cross-functional teams Timing levers 23 Technology roadmapping 27 Patent licensing 24 Product roadmapping 28 R&D partnership 25 Simultaneous engineering 29 R&D outsourcing 26 Development virtualization 30 Market entry test 18 Heavyweight project mgr 19 Complexity mgt 20 Benchmarking 21 Supplier integration 22 Continuous improvement 07 Regional adaptation 08 Critical mass strategy 09 Standard setting 10 Network effect strategy 11 Lead user integration 12 Strategic pricing Figure 4.70 Revenue levers High 9 13 4 29 3 Effect on revenue.5 Performance measures for systematic innovation management .

cost. Moreover. On the other hand. Cost performance levers aim at generating innovation more cost efficiently. the right timing often depends on external events. setting standards. methods such as value analyses. 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. design-to-cost. The lever ‘first-to-market strategy’. 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 development cost. thus reducing the cost burden per unit. Timing related levers form the third performance category. on the other hand. Windows of opportunity need to be grasped for optimum success. risks. is crucial for winning early adopters of an innovation as customers. or complementary products for existing markets) and measures for the diffusion and adoption of innovation (for reaching critical mass rapidly. and timing of market entry is vital for foreseeing future cash flows and revenue development. need to be examined and evaluated carefully so that development cost can be allocated to a higher number of products. 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. This often creates the basis for market leadership in the long term. In innovation management and product development. which is appreciated by customers. and creating external network effects). This is the goal of the ‘innovation portfolio management’ lever.Best practice in innovation management powerful levers include ‘innovation portfolio management’ and ‘first-tomarket strategy’. for instance) might be decisive for the overall commercial success of an innovation project. All modules lacking the potential for differentiation. Further important revenue performance levers include modifying and tailoring the portfolio to additional markets (new regional markets. Technological maturity. Levers – such as partnerships in R&D. low-end markets such as emerging or developing countries. the development of market requirements or competitor action need to be monitored in order to determine the appropriate point for market launch. timing is crucial. or even outsourcing part of the development work – also need to be considered for timeefficient product development. Here. Time saving technologies such as simultaneous engineering or virtualization of development processes (virtual prototyping or testing. Balancing the project portfolio in terms of revenue potential. On the one hand. product differentiation 71 .

A Corporate Innovation unit had been installed that was responsible for managing and driving innovation in the group. . innovation KPIs. an innovation scorecard. and the global footprint for product development Infrastructure and systems – that is. The company had already established the framework for successful innovation management. and project management tools for individual projects. effective interface descriptions and coordination between the concerned corporate functions and departments in product development Structural organization – that is. an external network to suppliers and universities had been structured in a dedicated forum. Case study: ‘Innovation to cash’ at a leading European utility company Roland Berger has successfully applied the Innovation Toolbox in various projects. The toolbox is a treasure trove of levers.72 € Stefan Potzl. and rapid prototyping Innovation controlling – that is. virtualization techniques. This approach was used recently when working with a leading European utility company. Innovation enablers Innovation enablers. are a prerequisite to ensure performance optimization is effective and sustainable in the long term. level of (de-)centralization and business unit specific activities. 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. tools such as CAD. The internal collaboration with the three business units had been roughly defined. a quality gate system. 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. the third category of tools. success factors. Thomas Kohr and Michael Zollenkop or changes in pricing strategy. and a group-wide technology plan had been established. We show how the toolbox works in the following case study. The Innovation Toolbox examines issues and success factors in four dimensions: • • • • Innovation process – that is.

however. each project ‘reinvents the wheel’ Missing commercial focus of projects – for example. The third and final project phase focused on defining an implementation plan for the defined concept. in order to establish and steer an entire innovation portfolio and manage innovation projects. A structure of six quality gates was introduced that clearly defined the major decision points in an innovation project. were: 73 • • • Are the current innovation efforts focused on value? What does the ‘ideal project portfolio’ look like? What is the ideal innovation process and innovation management methodology to capture the full value of innovation? The core question was.Best practice in innovation management The questions. no business case Missing checkpoints and deliverables/KPIs along the innovation process No clear decision point for implementation/investment. completed the diagnosis. the project team defined a holistic concept of innovation management. Recommendations on how to adjust the current innovation portfolio with regard to relevant technologies and focus areas were worked out. The results of the audit phase showed clear deficits in the innovation process: • • • • • • • No clear trigger for idea evaluation and prioritization No formal project set-up. The team examined the current innovation process and analyzed the existing innovation portfolio.6. in fact. how innovation could be used to a maximum extent to reduce the company’s cash-out for the distribution business. Overall. Several levers were selected and customized to the client’s situation. In the first phase. focusing on both the innovation processes and portfolio. Using the Innovation Toolbox. the Innovation Toolbox played a major role. including . the company lacked a systematic way to manage and materialize on innovations. External benchmarking. the project team carried out an audit of the existing situation. projects started by coincidence or by CEO’s order No standard project planning and reporting. which is shown in Figure 4. despite decisions about huge investment as a result of innovation projects No systematic review of project success and gathering of lessons learned. At the heart of the concept is the quality gate method for managing projects. In the second phase of redefinition. with a special focus on the distribution business unit.

Various analyses/views of the resources) portfolio possible Consolidation of project reporting • Overall budget/resource requirements • Risk portfolio • White-spot analysis Overall portfolio planning and decision making • Innovation launch plan • Long-term budget and resource planning • Initiation/cancellation of projects Realization Reporting Defined KPIs/ deliverables at all stages • Detailed project status • Financial KPIs • Resource requirements (budget. budget.74 Strategy • Overall innovation strategy and objectives Objectives/ Portfolio management framework (e. Decisions/ actions Innovation projects Project … Project 2 Project 1 QG1 QG2 QG3 QG4 QG5 QG6 09/07 03/08 05/08 Figure 4.g.6 Innovation portfolio management concept . personal) • Probability of success • Etc.

In the final phase of the project. a detailed implementation process was defined. and for regularly releasing the corporate innovation launch plan – an item that is significantly important for shareholders.Best practice in innovation management detailed deliverables. The running projects neither aligned with the strategic objectives. Companies are obliged to innovate. which can be led either by the Corporate Innovation unit or another business unit. Based on these results. analyze the alignment of the innovation projects with the strategically set priorities. nor did they systematically address the major spend blocks. and check the impact of the projects in relation to the big cash-out blocks. Projects with the highest budgets focused on very little optimization potential. form the basis for a portfolio management function. The quality gate structure to be implemented across all business units was demonstrated in pilot projects. For the analysis of the innovation portfolio itself. Managing innovation on a global scale is vital to remaining a first league player. This should become one of the core functions of the Corporate Innovation unit. and experience shows that there is a clear correlation between a company’s innovation performance and its commercial success. whereas very significant fields of cash-out had not been addressed systematically at all. The adjustment of the current innovation portfolio in distribution was started immediately. These standardized inputs from the projects. The results of the analysis were surprising to everyone. Standardized reporting templates were created that today form the basis for consolidated innovation portfolio reporting. the first step was to map the entire innovation portfolio in the company. A missing portfolio management function was clearly responsible for this situation. focusing on the major innovation projects first. but also for the active steering of the launch and cancellation of projects. which had not been considered before. This function is responsible not only for portfolio reporting. Overall the project was a tremendous success. . The Innovation Toolbox supported the project team in the complete redefinition of innovation management and the innovation portfolio of a major European utility company in barely three months. 75 Outlook The existence of many companies is closely linked to their ability to manage innovation successfully. a plan was introduced to shift the focus from pure asset-driven innovations to process items such as maintenance or breakdown processes.

This often involves globalizing R&D activities. To meet customer requirements on a global scale and to harness all available know-how and technologies. Five guiding questions formed the basis of the survey: 1 2 3 4 What drives companies in globalizing their R&D? How do companies pick their R&D locations? How do companies organize their R&D network? 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. global marketers. technology hunters. Activities are coordinated throughout the entire global R&D network. 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. together with the ESB Research Institute. Global marketers view access to the market as being more important than access to technology. These are transformed into products for local markets in local development centers. Roland Berger Strategy Consultants conducted a study. . and opportunistic players. companies need to internationalize their innovation process. They generate basic innovations and product platforms in global research centers. Over 100 companies from six different industries were surveyed and additional expert interviews of key players in these industries were conducted.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.76 € Stefan Potzl. companies can be grouped into four clusters: globalization leaders. Thomas Kohr and Michael Zollenkop Textbox 4. which examines the strategic aspects of R&D relocation.

rather. Know-how is predominantly bound to people. 2 Concentrate technological know-how as much as possible. market access or opportunistic cost reduction that drives the globalization of R&D. and have become standard in most companies. They focus R&D efforts on a small number of global research centers that specialize in individual research areas. Leveraging global know-how is more effective when a critical mass is reached in single places. 4 Be pragmatic in applying R&D management methods. Local knowledge requires a certain degree of autonomy to be an effective innovation driver. Central units should provide basic research.Best practice in innovation management Technology hunters view access to technology as the main reason for globalization. 6 Implement organizational changes carefully. grown networks are seldom efficient if the organizational structure is not planned or controlled according to the corporate strategy. Radical changes can make it more difficult to retain experts and the carriers of knowledge. They drive their R&D efforts mainly out of their home base. Opportunity players are not driven to globalize R&D systematically but. base their globalization policy on specific and individual business requirements. Historically. 5 Manage burdens of historical growth. Bundling of know-how in one place is necessary. 77 . Companies need to assess whether it is technology. and should monitor R&D activities. Transition and change processes need to be handled carefully to avoid losing key personnel. R&D cycles. Six success factors could be distilled from the information gathered: 1 Start from corporate R&D strategy. 3 Develop market know-how in decentralized units. Global efforts are limited and typically driven by individual client or product requirements. R&D networks need active management. Tools for managing R&D processes – such as stage gate or quality gate processes. the overall strategy. Clear directions and guidelines are necessary. project controlling or IT platforms – are necessary in any global R&D. Local customization of products is limited.

Volker (2007) ‘Gewusst wo! Forschung und Entwicklung passgenau globalisieren’. Survey among persons in charge of R&D in mechanical engineering. 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. Institut fur angewandte Innovationsforschung e. May. Reutlingen University. Fahrzeugbau. ch/events/ swissinnovation/downloads. Thomas Kohr and Michael Zollenkop Innovation clearly has to be on the agenda of every CEO. Kriegesmann. ¨ ¨ Zentrum fur Europaische Wirtschaftsforschung GmbH (ZEW) (2006) ZEW Branchenreport Innovationen Elektroindustrie. Medizin-/Mess-/ Steuertechnik. Schwering. Jan (2006) ‘Big Ideas’ erkennen und Flops vermeiden – ¨ dreistufige Bewertung von Innovationsideen. Markus G. Bernd. Hans (2005) Innovationsmanagement bei der Phonak AG.ethz. Roland Berger Strategy Consultants (2006) ‘Innovation in Mechanical Engineering – Failure Reasons in Commercialization’. Study.zpeportal. and Happich. Vortrag Swiss Innovation Kongress 2005. http://www. ESB Research Institute. in Roland Berger Strategy Consultants. 2. It has to involve all areas of a company. Jahrg 13. . (iAi).V. Executive Review. 2: 18–23. Bochum. Optik. Further reading Heidtmann. Maschinenbau. June. not merely the R&D department.78 € Stefan Potzl. Roland Berger Strategy Consultants (2007) ‘Globalization of R&D – Drivers and Success Factors’. Kerka. Leysieffer. Friedrich.

such as front loading. and ‘total quality control’. North America and Japan. An HWPM is completely responsible for a vehicle model and works closely 79 . The focus is turned sharply on the automotive industry. such as cost control. The importance of the HWPM becomes clear when one realizes that if those functional organizations are considered as the vertical axis. however. To understand operations excellence in product development in Japan. and product development too. Operations excellence in Japan. body. then the HWPM is the horizontal axis. They found that Japanese firms had significantly shorter lead times. all of which bear a Japanese hallmark.CHAPTER 5 Smart engineering processes: ‘made in Japan’ Ken Mori and Satoshi Nagashima Introduction When people hear ‘operations excellence in Japan’. This is not surprising considering the revolutionary concepts ‘just in time’. is not limited to manufacturing but spreads into other areas. In the early 1990s. lead time reduction. a lower defect level. This article concentrates on tried-and-tested product development strategies that originated in Japan. manufacturing innovations instantly spring to mind. supplier management. power train. one of the reasons for the high efficiency of Japanese firms was the process led by what they called ‘heavy weight product managers’ (HWPM). two professors – Dr Takahiro Fujimoto and Dr Kim Clark – analyzed the efficiency of product development at various automotive manufacturers in Europe. and cost planning. ‘cell manufacturing’. electronics. chassis. the birthplace of these groundbreaking R&D organizational processes. The product development organization of all automotive manufacturers in Japan comprises functional departments such as design. According to the professors. we have to take a short step back into history. and better manufacturability than their competitors in these other regions. and testing.

From its very inception. when President Kiichiro Toyoda appointed Kenya Nakamura to the position of Shusa (chief) after having decided to develop a pure Japanese car. An earlier form of these product manager heavyweights had existed at Toyota since 1949. and sometimes even lives with them to gain a thorough understanding of their real – but often hidden – needs and requirements. shown in Figure 5.’ the President said as he inducted Kenya Nakamura to this elevated position. Holders of this position are granted enormous power from top management.. even though he does not belong to any of those functional departments. What Nakamura did once he was appointed as Shusa characterizes product development in Japan to this day. HWPM Model N Body Chassis Powertrain Electronics Testing Figure 5. This practice is still alive at Toyota and other automotive firms in Japan. An HWPM always speaks with potential customers. the position of HWPM has been synonymous with ultimate responsibility.1. the HWPM facilitates the speedy completion of a project. manufacturing engineering and marketing. History of HWPM It is generally accepted that Toyota was the first company to introduce the concept of HWPM. Nakamura visited them and spoke directly with the drivers to find out their needs.1 Matrix organization with all of the functional organizations. .. Since taxi companies were the typical customers of passenger cars in 1949.80 Ken Mori and Satoshi Nagashima Design HWPM Model 1 HWPM Model 2 HWPM Model 3 . He listened to potential users. ‘A Shusa is the representative of the President and has the ultimate responsibility for developing a new vehicle. This is a version of what is known as matrix organization. By integrating different functions such as design engineering.

Unfortunately. engineers at Japanese automotive companies report officially to their functional department heads only. How is this possible? There are four main factors. Part of the reason for their failure rests with power: HWPMs in the United States were not given sufficient clout by top management. Despite this. the engineer needs to follow directions from his functional head. particularly American ones. 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. it is the HWPM’s voice to which he should listen. the organization concept underpinning Japanese automotive companies is a little different from typical matrix organizations elsewhere. often consisting of about ten engineers. The HWPM is the only voice they hear in their daily . he still needs to be able to lead the vehicle development program and manage hundreds of engineers. The HWPM has the ultimate responsibility for each program’s results. The HWPM has his own small team. with the exception of focus group interviews and consumer clinics. the product development organizations at all Japanese automotive manufacturers now have a similar set-up. All other Japanese automotive companies followed that pattern. Many western automotive firms. Rather than having the matrix organization designed by top management. Learning from Toyota. it was created naturally by recreating Kenya Nakamura’s team in the functionally formed organizations. Yet.Smart engineering processes: ‘made in Japan’ Toyota continued to use these special product managers to develop other cars. organizational specialists. and he is the ultimate authority on key decisions. Without this. they could not reach the desired goals. In the vehicle development program. The HWPM does not have authority over HR issues such as performance evaluation or promotion decisions. When he develops technology that is specific to his own field. or even management consultants. Strong empowerment by top management The president of Toyota set the standard when he bestowed immense power on his Shusa. They do not report to the HWPM. Representative of customers Once the design has been agreed upon. later introduced the HWPM concept. however. the engineering organizations of Japanese automotive companies stop interacting with the market. 81 How can the HWPM be successful? Although the shape of the organization resembles a matrix. A member of a matrix organization generally reports to two bosses. they rarely attained their objective of improving product development practices. and a matrix organization was created.

The very existence of the ‘Ten Shusa Requirements’. based on the initiatives of HWPMs.82 Ken Mori and Satoshi Nagashima engineering work. and cost planning. marketers. and personality of potential HWPMs are scrutinized over years. lead time reduction. Capability of HWPM When asked for the reasons why their HWPMs are so successful. These smart engineering processes include front loading. Japanese engineers at automotive companies often refer to their capability and personality. items to be discussed are clearly defined and HWPM approval is required at each event. These heavyweights have often worked as a member of the HWPM team for 15 years or more before being considered for the position. This is in stark contrast to the beginning of product development. especially to shorten development lead time. designers. He represents the customer. The skills. It is more the company’s well-defined process and less the official human resource authority that helps them attain their goals. Since employees at Japanese automotive manufacturers are trained to be customer focused. provides an indication of how high Toyota’s expectations of a Shusa are. We asked an engineer why he worked so hard for the HWPM who was not his official boss. The HWPM is the driver of the process. They do not rely on consumer trend data. they speak face-to-face with consumers. Well-defined processes HWPM’s often cite well-defined processes for their success. . to improve product development efficiency and effectiveness. Practices derived from the HWPM concept An HWPM oversees the entire process of product development and all related functions. negotiation style. engineers. only the tried-and-tested have a chance of becoming a HWPM. While all Japanese original equipment manufacturers (OEMs) change their processes. At each design review. who speaks for the customer and reflects his innermost needs. Several practices were developed. Instead. This sense of tradition is alive at Japanese car manufacturers. Put simply. He has ultimate responsibility and authority. He answered: ‘Because I saw my predecessors (sen-pai) work hard for their HWPMs’. 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. when concept planners. they cannot neglect the voice of the HWPM. the fundamental philosophy remains the same. and even stay with the target users for weeks in some cases. a set of commandments of sorts.

which means investing more engineering resources in the earlier stages of the processes. They then develop a few designs with a narrower range of deviation in parameters. They narrow the parameters. More than 80 percent of product costs are determined in the concept development phase. and select the better options. the difference between the two processes can be explained using an analogy. After a few trials. Another example of front loading is the willingness to stop listening to customers after the concept has been chosen and following design freeze. in contrast. Japanese automotive manufacturers and their HWPMs have made efforts to improve front loading. At the same time. Translated for non-engineering experts. Mr A suggests a time slot. The ‘set-based process’ is a general practice followed in Japanese firms for front loading. Mr B agrees. In the ‘set-based’ world. they need less time for implementation. Mr B says ‘no’. they reach the final parameter. Considered from a different perspective. fix the problems. the simplest and most natural procedure is to design the component. Taking this knowledge to heart. then Mr A suggests the next one. If a team develops a component. This method requires greater resources allocation in the early stage. This is a protracted process. this means that while Japanese automotive manufacturers invest more time when developing the concept and during the design phase. In the world of the ‘single design method’. and select a few slots. It is a practice that most Japanese manufacturers have followed for decades. a single product is improved continuously. Some companies start engineering work when the concept is still undecided and then create numerous significant design changes due to 83 . develop a set of several components with different specifications. different levels of performance for some components. identify problems. They also develop several designs with different parameters. and so forth. and improve the product design. and different shapes in other components. Together they evaluate the ‘fit’ with adjacent components. They then narrow down the selection – the earlier is perhaps the better option. Some say that it is a Toyota practice: this is not quite true. engineers responsible for adjacent components do the same. Japanese firms. test it. or perhaps the longer option is better. but Mr C rejects it. assess the attainment of objectives. all three gentlemen put available time slots on the table. but allows savings later. Three busy businessmen are trying to set a meeting.Smart engineering processes: ‘made in Japan’ Front loading Companies have much greater freedom during the early stages of product development than in later stages. which is why this process is called the ‘single design method’. In this process.

Computer aided engineering also contributed to the dominance of front loading. successful Japanese firms devote more time to developing the concept. A shorter lead time was desired. If the process is shorter. Japanese automotive manufacturers attained 18 months process as standard. planners and designers need to predict consumer preference four years in advance. with 12 months for ‘hurry up’ models. automotive companies started to compete with each other in the 1990s to shorten product development lead time. If the design freeze happens four years before the start of sales. Japanese automotive manufacturers were not necessarily the first to use digital tools but. and so forth. once they started working with these tools. Thanks to front-loading activities. Players in North America still required more than three years. There has been no slowdown or reversal of this trend to date. The Japanese won hands down. A great deal of analysis. especially after the design freeze phase. engineers can begin to conduct a preliminary analysis of crash tests. To avoid this. In the late 1990s. prediction is easier and the probability of a ‘big hit’ is higher. They do not attempt to complete everything in the virtual world. This does not mean that engineering work is not conducted in the concept and styling development phase. Companies felt – and continue to feel – that they needed to launch more products with greater variety to respond to this change. quality. say 18 months. design. To satisfy diversified customer preferences. 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. change requests that might affect product concept and styling are extremely rare at Japanese automotive companies. Instead. they became adept at integrating them in traditional human-based processes. cost. Car styling is finalized at ‘design freeze’. manufacturability. . especially since technology and quality gaps among automotive manufacturers have become increasingly smaller. Lead time reduction In the 1990s. styling of the car became more crucial than ever to win customers. As a result.84 Ken Mori and Satoshi Nagashima modifications in the concept. Even in the styling phase. automotive manufacturers worldwide found that the requirements and preferences of consumers were considerably more diversified than in the past. and testing are performed in order to ensure that the concept and styling are realistic in terms of structure. existing processes are complemented with digital tools in order to further advance front loading.

we outline the four most important: Engineering tasks More engineering tasks were conducted before design freeze than ever before. from design freeze to start of production. thanks to extensive use of computer aided engineering (CAE). there used to be two stages now. cost planning involves creating a philosophy for a new cost structure. thereby shifting workload during trial production to an early stage. Most Japanese car manufacturers used to have a three-step approach to evaluate prototypes. the basic body structure was designed and validated before design freeze. This reduces lead time by four to five months. Die manufacturing Die manufacturing was dramatically shortened. Here. it took 24 to 36 months to put a car on the market. 85 Cost planning To control the cost of new products. Trial production The number of trial production stages was also reduced. Many Japanese companies now try to reduce manufacturing time further by abolishing prototype dies. Typically. Regarding upper body engineering. they do not need to spend time developing mass production dies in the production preparation phase. The new process often has only one step. At many firms. During product planning. Another enabler was the use of simulation tools. However. By doing this.2 shows the typical process taken by Japanese automotive manufacturers up until the middle of the 1990s. Japanese automotive manufacturers introduced a practice that is often translated as ‘target costing’. Figure 5. ‘cost planning’ – which is the direct translation from Japanese – seems to express the practice more accurately. Basic designs for dies and tools were also started before design freeze.Smart engineering processes: ‘made in Japan’ Figure 5.Manufacturers say that this practice is not only about reducing costs. They aim to build prototypes by using dies for mass manufacturing. Prototype evaluation The prototype evaluation process was dramatically simplified to one step. They performed underbody engineering work such as power train and chassis as early on as possible.3 shows the shortened version – 18 months in this example. They use as many mass production dies as possible for prototypes. they conduct trial production in one stage. the cost planning department (the name of this department varies from firm to firm) defines the total target cost by . There were several enablers for the reduction in lead time.

86 Time (month) 6 0 Design freeze Prior to work design freeze 6 12 18 24 Initial engineering Engineering change management 2nd set 3rd set • Major components evaluated • No work on upper body 1st set of prototypes building Prototype evaluation Die making Welding and assembly preparation Trial production 1 Trial production 2 Evaluation Start of production Figure 5.2 Product development lead time .

Time (month) 6 0 Design freeze 6 12 18 Prior to work design freeze • Simulation • Underbody completed • Some tasks on upper body performed Initial engineering Engineering change management Prototype building Prototype evaluation Die making Welding and assembly preparation Trial production Evaluation Start of production Figure 5.3 Shortened product development lead time 87 .

the product development organization of Toyota had expanded dramatically. Toyota has been working on the construction of cost competitiveness (CCC21) initiative. In addition to complying rigorously with the cost planning process. If a certain component will exceed the target cost. since they needed to spend considerably more time on coordination than their predecessors. potential rival products of competitors. One big change at Toyota occurred in 1993. then the cost planning department reallocates the target cost by component after discussion with the HWPM and relevant engineers. One of the particularities of CCC21 is the concept of ‘absolute cost’. While processes have been improved. and cost targets. At the same time.000 in 1993. price and performance of existing products. and the lowest overhead cost. Two other interesting changes in the HWPM organizational structure should also be mentioned: the concept planner of Toyota. the cumulative costs of the new product are calculated by estimating the cost of each component. each firm has developed its own way to manage product costs. Compared with the very early days of Kenya Nakamura and his successors. the absolute cost for each part is calculated by summing up the lowest material cost. and VDC4 for major components. Initiatives for change in HWPM organizations The HWPM system has been a very powerful and effective mechanism for Japanese automotive firms. For example. The absolute cost is the ultimate target for Toyota and its suppliers. the latter cost is higher than the former. Toyota then divided its organization into four vehicle development centers (VDCs). organizations also have been modified. . weight. VDC1 is responsible for rear wheel drive cars. The chief engineers at Toyota said that their productivity improved significantly following the introduction of this organizational change. and the cost planning department allocates target costs for each component so that the cumulative total cost does not exceed the total target cost. This put a heavy burden on HWPMs. Usually. The number of engineers and technicians had risen to 12. and so forth. and Nissan’s team management.88 Ken Mori and Satoshi Nagashima analyzing target performance. Engineers design components that can satisfy performance. the lowest process cost. VDC2 for front wheel drive cars. In the database. VDC3 for commercial vehicles. Toyota has developed a database consisting of global suppliers.

and grasp the needs of potential customers. rather than a Shusa as at Toyota. a HWPM was known as a Shukan. They also discuss market trends with the Research Division and other relevant organizations within Toyota. At Nissan. ‘super eco cars’ and other future vehicles. To fulfill this requirement. major universities. and researchers in other industries. . product chief designer (design). A team consists of five people: chief product specialist (product planning). talk with. which can later be directly developed and realized by the same person without any gaps between the concept and the product. Toyota concluded that it was not enough. Toyota thought capable engineers should start concept planning from a much earlier stage. The success of Nissan in the early 2000s was largely attributed to this management practice.Smart engineering processes: ‘made in Japan’ Toyota’s concept planner At Toyota. 89 Nissan’s team management Nissan used to have a similar management model as Toyota. does not have responsibility in sales. After forming an alliance with Renault. The HWPM leads the program from the development of the concept all the way through to the start of production. This team has wider responsibility than a traditional HWPM who. After successfully developing the concept. typically. and even in the next full model change. This team is responsible for every factor determining the success of vehicle. a HWPM is assigned as soon as the top management decides to start a new vehicle development program. They talk intensively with engineers and researchers working at the Toyota Central Laboratories and other research arms of the Toyota group. chief vehicle engineer (manufacturing). they also travel worldwide to see. and program director (overall coordination). Nissan abolished the position of Shukan and created teams that have ultimate responsibility for vehicles. Far-reaching as this role already is. He is involved in minor changes that take place over the next few years. in order to come up with their ideas and visions. Toyota expects the concept planner to bring unprecedented creative ideas and concepts. the concept planner is assigned to the chief engineer (HWPM) of the vehicle. Following Toyota tradition. the company created a position called the ‘concept planner’. chief marketing manager (sales and marketing). Concept planners develop concepts for ‘dream cars’. To create truly innovative cars.

Japanese automotive manufacturers will face many more challenges in the future. (1993) Genkakikaku. Manufacturing engineering. a group of manufacturing engineers conducted work in Japan before moving on to the next country. Morgan. J. Nihon Jitsugyou Shuppansha. Hino. ISBN 978-4-534-04246-0. ISBN978-4-542-13048-4. M. The globalization of product development is another challenge. In the past. The shortage of engineers is a headache for most companies in Japan. There can be no stop to this activity. Further reading Aoki. (2002) Toyota Kiei System No Kenkyu. Nikkei BP. Companies now need those same people in different parts of the world at the same time. automotive manufacturers are trying to utilize the engineering capabilities of their suppliers. To respond to this situation. Y. To satisfy local requirements. (2007) The Toyota Product Development System. is a big challenge. especially as companies face new challenges and hurdles. Kato.90 Ken Mori and Satoshi Nagashima Further challenges Product development practices in Japan are still evolving. One way to resolve this is by global development of talent with the same capability. Each firm takes its own approach to resolve this challenge. and Liker. The shortage is especially severe in the electronics field. Diamond. S. Striking the right balance between local and Japanese organizations. Japanese firms have historically conducted product development in Japan only. must be performed simultaneously all over the world. Nikkei. ISBN 978-4478-38040-6. (2007) Toyota Seisan Kojo No Shikumi. including trial production. They have started to engage engineering service providers – mostly European firms – that have not previously played a major role in Japan. ISBN 978-4-8222-4570-2. J. and ensuring sufficient communication between the two. another way is to utilize IT tools to conduct manufacturing engineering centrally from Japan. The number of engineers at Japanese automotive companies has not kept pace with the speed with which new models are launched. . Companies now manufacture some global products in different places in the world at the same time. a certain amount of product development must occur locally. Manufacturers in other industries and other regions would be wise to watch and take note of their reactions carefully. This exacerbates resource problems.

PART II Purchasing 91 .

such as the automotive industry. banks and insurance. Sectors that have traditionally judged purchasing as being of secondary importance – utilities. Particularly in times of upheaval or recession. In many companies. despite a continual decline in prices in almost all industries. value creation or supply chain management – all of which were considered innovative. in their time – were often initiated in purchasing departments and first gained widespread acceptance there.Introduction Strategic trends and challenges for purchasing Roland Schwientek The purchasing of material and services has undergone significant change since the middle of the 1980s. Significant effort is being made by companies in these sectors to latch onto the type of success enjoyed by early procurement supporters. the importance of purchasing is not diminishing: it is. The relative share of external procurement costs to total internal costs in western Europe has increased by almost 1 percent annually since 1990. reactive administrative function to becoming active cost management. extending. rather. There has been a complete switch from purchasing being a traditional. Although the pivotal role played by purchasing is widely understood. However. target costing. 92 . Successful approaches such as reverse auctioning. purchasing activities have contributed significantly to company results. and construction – are now viewing it more favorably. irrespective of whether the economy is facing an upturn or a downturn. 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. purchasing has been responsible for cost awareness being established comprehensively throughout whole organizations. it is deployed with varying intensity from industry to industry.

they are applied in a half-hearted fashion. competitive conditions.Strategic trends and challenges for purchasing For leading purchasing industries. They had already started to improve their entire purchasing process many years ago. Current trends that influence the strategic direction of purchasing include: 93 • The increasing globalization of industry and society Rapid advancements in IT and communication technology give this trend additional strength. the more important it is to capture favorable suppliers – those that bring their own value into the entire process – before the competition does. Laggards are now haphazardly employing innovative approaches in an attempt to reach the top. • The increasing pressure to concentrate on core competencies. . By taking on a more crossdivisional functional role. Seldom have they done enough homework to establish which approach would suit them best. Synergies that have been recognized but not yet realized could spark the creation of international partnerships that go beyond the purchasing function. Key suppliers are integrated into company processes. it becomes even more essential to have comprehensive outsourcing know-how in purchasing. from development to production. new technology or general social or political change – is decisive for success. optimizing pure material costs was just the beginning. 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. sometimes. 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. The closer suppliers become to core competencies. A critical examination of these activities reveals that while these innovative approaches are largely known in theory. purchasing could contribute to greater adhesion throughout the entire company. 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. Owing to inaccurate interpretation or the defense of vested rights. even lead to undesirable developments. applying these innovative approaches will. Only those companies that can clearly formulate their purchasing strategy.

The optimal orientation along the entire value chain will be important in order to remain competitive in the future. a comprehensive approach that helps purchasing reach performance excellence. in which many productive value-chain functions are taken care of by external parties. before embarking on an improvement strategy. 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. This is true even for ‘virtual’ companies. It looks at the short and medium-term cost reductions that are . • The increasing pace of action. Companies need to realize at what stage of development they are. • 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. These are still viewed skeptically today. Chapter 7 examines the different facets of the approach in its entirety. They go on to examine the strategic direction purchasing is likely to take in the future and the role strategic partnerships might play. The task is to win the best and most innovative suppliers. This will safeguard your company from competitors. partnerships with suppliers will become even more intense. For this purpose. Part II describes this approach.94 Roland Schwientek • 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. to build up a joint competitive position and to make sure that new ideas and developments bring your company gains. In Chapter 6. Roland Berger Strategy Consultants developed Purchasing EmPowerment. Michel Jacob and Gabriel-Assad Singaby look at key trends in purchasing best practices and examine the impact these have on purchasing strategies. Processes will face increasing demand and the production lifecycle will become shorter. whether implementing innovations or reacting to customers’ wishes Changes in the competitive field and within companies will speed up. As vertical integration becomes lower. especially by medium-sized companies.

Strategic trends and challenges for purchasing possible in procurement values through systematic commodity management. Tobias Franke takes a closer look at different organizational frameworks in order to find the one that works best for mastering future challenges. In Chapter 8. and how companies can optimize external direct or indirect spend through appropriate innovative optimization levers and by managing suppliers more effectively. 95 .

Although developing a powerful purchasing strategy is now a ‘must’ for companies that want to succeed. and purchasing is being considered as part of the entire corporate strategy. The purchasing world. total cost of ownership (TCO). CEOs are increasingly putting procurement at the top of their agendas. Purchasing. and sourcing security. and then maintain. quality. Experience gained from projects with clients shows that increasingly more companies are designing purchasing plans that span several years. Faced by increasing globalization and business volatility. Price alone is no longer the unique key performance indicator. the major concern of purchasing departments was to buy goods and materials at the lowest price possible. a competitive edge.CHAPTER 6 Key trends in purchasing best practices and impact on purchasing strategy Michel Jacob and Gabriel-Assad Singaby Introduction As competitive pressure intensifies in most industries. companies these days are adopting a more holistic perspective. in its endeavor to adapt to this changed and changing external environment. and which attempt to anticipate major business moves and shifts. is shaping up to develop even further into one of the hottest corporate topics of the next decade. through to rising material prices. but one of many aspects of sourcing excellence. These key performance indicators generate a new complexity that companies must address in order to gain. 96 . is reworking its own DNA. to the entry of new competitors. along with anticipation. ranging from globalization. which is viewed as a way to master these challenges. The corporate world is dealing with an onslaught of modern challenges. it is a complex and sophisticated exercise. For a long time. industrial footprint consistency.

and with developing professional buyers and a new. and might initially push companies beyond their comfort zone. This stage is much harder to complete and companies should consider it a mediumterm task. more structured approach to purchasing. this lever yields a 5–10 percent cost improvement from suppliers based on unit price. almost all industries have now deployed this lever. and the most advanced companies have been fully utilizing it for decades already. 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. In the first stage. we outline how purchasing practices have evolved over the past decades. When companies focus on improving the purchasing process during this phase. they focus almost exclusively on commercial negotiations. When buyers together with internal users of purchased goods and services become involved in product . we discuss a real project in depth. which is based on bundling volumes. The third stage involves far-reaching organizational change. Although this phase calls for more effort. it is clear that purchasing organizations. and show how companies can build up a purchasing strategy that will let them achieve that sort of excellence.Key trends in purchasing best practices In this chapter. especially those belonging to large companies. and analyze the main challenges that companies are confronted by in the new purchasing environment. go through three stages of maturity along their lifecycle. As a result of bundling volume. This improvement typically generates a savings potential of approximately 5 percent (percentage of annual spend – operational expenditures + capital expenditures). Volume concentration has become a key lever for producers of manufactured goods. By and large. companies are concerned primarily with negotiating prices. companies centralize sourcing functions and geographically extend their sourcing. We then look at the key trends that are vital to achieving purchasing excellence. as it entirely redefines a company’s relationships with its suppliers. One can safely say that companies in all industries have advanced beyond this first stage. both company and suppliers can improve their processes. In the second stage. 97 Where is purchasing today? Based on experience working with companies from a large number of industries. By entering partnerships and alliances with suppliers. At the end of the chapter. the benefits are immense. These organizations have a clear mandate and have carved their own niche at the corporate level. strong purchasing organizations developed. Thanks to economies of scale.

98 Potential savings (% of annual spend – Opex Capex) 5–10% 6–10% 15–25% 4–5% 1 Price negotiation 2 Volume concentration 3 Relationship redefinition and user involvement Total • Develop professional buyers • Structured approach for purchasing • Central sourcing functions • Focus on unit prices levers • Set up a full TCO approach • Pro-activeness Figure 6.1 Maturity steps at 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. Another form to benefit from the effects of centralization without losing contact with the base is the lead buying model. Information Balance between centralization and decentralization • Companies still need to learn how to manage remote parts of their mega-networks while leveraging maximum synergies Purchasing image • Companies need to close the gap that exists between the perceived and real skill set of purchasing employees Greater effort required to address these challenges 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 Figure 6.2. but companies need to find ways to sustain these models. Centralized and centrally-led purchasing models are now commonplace. It shifts from being reactive to proactive. staff generally become more professional. tasks are no longer duplicated. The advantages of centralization are varied and well known: goods are purchased using standardized criteria.Key trends in purchasing best practices specifications.2 Challenges with which companies still struggle . a specific sort of organizational structure is required for centralized models to function properly. a handful of challenges affect all purchasing organizations. buying is concentrated. organizations gain efficiency and effective processes. It is at this point that the philosophy of purchasing changes radically. best practices are adopted between sites and regions. a full TCO approach has usually emerged. as detailed in Chapter 8 by Tobias Franke – organizations drive strategy and performance. Savings of between 5–10 percent are the norm. Yet. 99 Challenges that still need to be addressed Irrespective of what stage of development a company has reached. The automotive and aerospace industries are typically leaders in this approach. These challenges are discussed below and shown in Figure 6. By centralizing purchasing.

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. 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. While the job market has reached a low point for professionals with tactical purchasing experience. 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. Over the past years. Unfortunately. or the purchasing department might fail to take adequate account of the needs of local business units. TCO helps companies assess the direct and indirect costs of purchases for their entire lifecycle. The image of ‘tactical’ purchasing – focused on short-term profitability improvements. As a . Additionally. Total cost of ownership (TCO) is a third challenge. problems arise. supplier management. Top management is increasingly becoming involved in purchasing. this gap can be closed relatively quickly. the purchasing function is not viewed as a company’s core business. too. Finding a way to close the gap between reality and the image that persists about purchasing professionals remains a pressing challenge for many companies. project management and risk management experience. At too many companies.100 Michel Jacob and Gabriel-Assad Singaby technology systems and information flows need to be designed with precision. which had been the dominant model for years – is etched into minds. Many internal users and prescribers have not fully comprehended the consequences of the TCO-based purchasing revolution. Companies might suffer from a lack of coordination. With a tailored training program. Strategic purchasing skills include commodity management. many people in business remain blind to this reality. which aims to secure competitiveness over time. Without the correct structure and information flows. Unfortunately it overshadows the new reality of ‘strategic’ purchasing. as companies become more global and expand. the career track within purchasing and the skills and competencies of purchasing managers has developed considerably. A second challenge revolves around the perceived and real skill set of purchasing employees. and it is attracting the attention of CEOs. This latter criterion increasingly demands international contract law knowledge and expertise. the challenge of managing remote parts of ‘mega networks’ while avoiding building central ‘ivory towers’ also increases. With that said. there is a talent crunch for strategic purchasing jobs. These jobs are being created faster than they can be filled.

and the increasing diversity of stakeholder needs make it increasingly difficult to define an acceptable quantitative measure for purchasing performance. and paid by. Procurement departments focus on the purchasing budget. In the engineered products industry. the obvious thing for them to do is to minimize the initial cost of acquisition. the increasing volatility of prices. (See Text box 6. In some areas. a successful TCO approach must draw heavily on non-purchasing resources (the prescriber–user– buyer triangle). the purchasing organization has to rethink and re-engineer its entire way of doing business. they have not been able to adapt fully to the expectations of this new world order. they are not even carried as a separate item.Key trends in purchasing best practices result. for instance. Followup costs are charged for. In many cases. The additional debate on actual profit-and-loss and balance sheet impact 101 . But measuring and managing purchasing performance has become increasingly sophisticated over the past years and remains a challenge. these post-deployment costs actually exceed the initial purchase price many times over. For TCO to be successful. There are good reasons why TCO remains a challenge for most companies. the more important the TCO concept becomes. before the product lifetime is actually finished? Moreover. Too many companies have failed to consider how this new paradigm fits into their organization and. But the purchasing budget is burdened only by the cost of acquisition. How should TCO be measured. other cost centers. Little or no account is taken of any costs that might be incurred once the good or service has been paid for. The multiplication of relevant indicators for purchasing performance. But companies underestimate the importance of TCO at their own peril. upward-oriented market trends. more qualitative or complex indicators such as the quality and durability of the relationship with suppliers or the TCO. This creates bottlenecks when the TCO approach is deployed. While unit price can be relatively easy to measure. purchasing and general management have a hard time identifying and implementing the measurement of new. The higher the follow-up costs relative to the cost of acquisition. beyond pure unit cost.) Companies have warmly embraced performance measurements. follow-up costs average out at more than 100 percent of the cost of buying a machine in the first place. creates additional complexity for companies. consequently. Additionally. Since buyers are required to optimize their budgets.1 for further information on the critical role of TCO for purchasing. Companies tend to underestimate how many resources will be necessary. There is a lack of open discourse with suppliers. do not give users and prescribers incentives to contribute to improved purchased product and service specifications.

Companies that want to keep up to speed with these developments in the long term have their work cut out for them. They also fail to provide sufficient reactivity and transparency. The massive deployment of ERP (Enterprise Resource Planning) systems and e-enabled tools has assisted companies a great deal over the past few years. as well as gain a better understanding of suppliers’ costs and margins. When designing purchasing plans that span several years. Information knowledge and storage presents a similar challenge. 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. but generally the investment has been massive. the recent acceleration of globalization has caused considerable change in the business landscape. Figure 6.3 illustrates the top challenges that will affect companies over the next decade. a number of new tests are also emerging as the purchasing environment evolves. New challenges In addition to these current challenges. While access to data has improved.102 Michel Jacob and Gabriel-Assad Singaby resulting from any purchasing effort is far from being solved. This complexity switches to an even higher level as the number of regions from which those parts and component can be sourced also increases. as it expands its strategic role within companies. These especially affect large multinational companies. clean and quality data. in order to reduce time and lower the risk of error. Worse still. Clearly. Necessary tools and the underlying data for them are becoming increasingly complex as the number of parts and components increases. suppliers agreements) or strategic (suppliers’ costs and margins). Economic data. 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 need to find ways of storing complete. bears the full brunt of this acceleration. whether it be tactical (prices of goods. Purchasing. Catalog consultation must also be made more accessible. 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. companies must now learn how to obtain acceptable and reliable purchasing information at a lower cost and with less effort. must be tracked in a way that allows buyers to concentrate on their jobs and not have their attention diverted elsewhere. the importance of other trends is only just beginning to emerge.

In some cases. A further challenge that companies must address is the strain on natural resources caused by rapid economic growth.Key trends in purchasing best practices 103 Transportation congestion Dominance of low-cost countries Stricter regulatory environment Contemporary and future challenges Complexity of supplier networks Strain on natural resources/ upwards price trends of commodities Figure 6. These span mature emerging countries such as China. as well as countries in Africa. companies are keen to involve suppliers. The challenge this creates for purchasing will continue. and mature markets fail to curb their dependency on natural resources. world trade is becoming more and more regional. and this trend shows no signs of abating. ironically.3 Challenges that are reshaping purchasing Each of the new challenges or trends can be traced back to the growing role globalization plays in the world economy. India. Certainly. While managing supplier relationships is not a new issue. Globalization also affects the structure of supplier networks. . Increasingly more suppliers and sub-suppliers are involved in the value chain. the cost of raw materials and energy explodes. As emerging countries develop. Making the situation more complicated is the inter-dependent relationship that has developed between suppliers and companies. and Eastern Europe. and new trade barriers are sprouting up between regions. Increasingly. A complicated network of supplier relationships is commonplace these days. thinking about how it will develop in coming years should preoccupy companies’ thoughts. At the same time. new territories have appeared from which western companies can source. 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.

it is unclear how strongly prices for natural resources will develop in the medium term. currently. moving goods from one place to another will continue to keep purchasing departments on their toes. The second issue. But generally there is more talk than action. Although the direction of the price development is fairly certain. Evaluation and Authorization of Chemicals). are especially preoccupied. Low-cost country (LCC) sourcing took off in the 1990s and has grown exponentially since then. create new constraints. tight capacity. not to mention greenhouse-gas reduction. Companies very often turn to consultancies for help with dealing with low-cost country sourcing. Governments and inter-governmental agencies expect a degree of accountability from companies that is certainly challenging. and to manage supplier relationships. Here. Upcoming regulations such as REACH (Registration. While sourcing in LCCs makes the supply chain longer and more complex. The business environment is regulated to a degree not previously seen. sea transport has become easier thanks to containers. adds a new complexity to purchasing as it moves beyond internal cross-functional work. While EU roads are becoming less congested. Transport issues are a further challenge. which contributes to price and cost increases. we wish to pay attention to how companies can achieve LCC sourcing on a . 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 sourcing raises strategic issues and requires a deep understanding of the competitiveness from sources in emerging countries and how companies can leverage them while mastering the challenges of remoteness and consistency of quality. supplier relationships. Transportation is a volatile industry riddled with heavy competition.104 Michel Jacob and Gabriel-Assad Singaby shortages even occur. Companies have to invest resources to ensure compliance. a framework for the regulation of chemicals in the European Union. it is a business reality for most manufacturing companies today. Choosing transportation service providers requires an understanding of market dynamics across multiple modes. It also offers companies an area of opportunity for significant savings. and soaring fuel prices. services and across thousands of domestic and international routes. and improvements are being made – albeit slowly – in rail transport. Spotlight on two major trends We are now going to turn the lens slightly and focus on two trends or challenges with which companies.

companies will progressively feel forced to do more business there and in other LCCs. It is important for companies to realize that significant differences exist in the various alternative markets. 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. Different countries will best suit the particular sourcing needs of different companies. Sourcing is limited to components with the least value-added. GDP growth in most LCCs has outstripped western countries. even if they are not entirely comfortable with this development. Companies that want to jack up the intensity of their sourcing from LCCs either have to purchase a larger number of commodities. or buy 105 . most companies actually source only a small portion of purchasing requirements from this LCC heavyweight. 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. 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. too. Although companies are quick to advertise their expanding involvement in China. Barriers to trade in other countries in the region have also collapsed. releasing a wave of procurement from these areas. China’s admission to the WTO provided many companies with their first opportunity to test the LCC sourcing waters. Each LCC has its own set of advantages and disadvantages. 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. 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 lowintensity LCC sourcing. As economic pressure and competitive dynamics increase.Key trends in purchasing best practices large scale and not merely pursue it as a fashionable accessory to their sourcing strategy. This makes it relatively easy for companies to change suppliers if the objectives are not met.

and quality becomes even more critical. 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 largescale and complex-goods sourcing. is far more advanced that some other low-cost countries in the region. many other countries are unfortunately overlooked. aided by strong governmental support. sourcing projects are almost guaranteed to fail. 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 crossfunctional 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. When drawing up a list of possible supply markets. cultural) and extended distances make it difficult to control the output of the whole process. the compulsory joint venture structure in China is not as risk free as people would like to believe. business.106 Michel Jacob and Gabriel-Assad Singaby commodities that are module. it is valid for companies to ask whether sourcing from China is the ideal strategy. however. that China’s infrastructure. companies must . their value and contribution to the final product is higher. With so much attention paid to China. some of these other countries could potentially offer much more attractive sourcing opportunities and yield greater spoils. If quality control is not adequately addressed. When such complex components and parts are involved in LCC sourcing. stronger organizations and processes are needed to manage these operations and the supply chain. For companies brave enough to venture out in their own direction.or system-oriented or. New. As recent legal cases attest. Forerunners in LCC sourcing have noted that the local environment (legal. alternatively. It needs to be said. While China definitely has a great deal of potential – and quality. have key modules/systems with complex know-how requirements.

European companies would be wise to give greater priority to three low-cost sourcing regions closer to home: Central and Eastern Europe (CEE). especially for European companies. CEE is emerging as an excellent alternative to China for LCC sourcing. although being neglected for some decades. but another is the increased ability for companies to link forecasting and production more effectively.4 Some of the benefits of sourcing in CEE. Austria was especially quick off the mark to start reigniting old networks with countries in this region. Nearsourcing is experiencing a renaissance as companies attempt to keep costs low by manufacturing and procuring goods and services close to their consumer market. the Middle East. the Middle East. and Africa. Many countries in CEE will become members of the Euro-zone over the next couple of years. They 107 1 1 Cost • Similar competitiveness on low wages to Asia • Reduces transportation costs 2 Service • Geographical proximity reduces delivery times and increases flexibility • Cultural fit greater than with Asia 2 Service 3 Quality • Consistency and reliability (especially in CEE) due to long industrial history • Proximity enables greater response and closes ‘loop-back’ Cost 3 Quality Figure 6. Familiarity with the regions is certainly one argument for this renewal of interest. transportation distances to other European countries are much shorter. the Middle East. and the currencies involved in transactions. and Africa are listed in Figure 6. and North Africa . which means that currency risk will be nonexistent and there will be no need for spend to cover currency positions. Some additional important aspects that need to be considered are distance from plants (transportation costs are often underestimated).Key trends in purchasing best practices carefully analyze the benefits and risks of each region for a particular sourcing commodity. Language barriers are lower and century-long business and cultural ties.4. bilateral trade agreements. While labor rates in CEE might not be as low as in emerging Asian markets. have been relatively easy to re-establish. Bearing these factors in mind. The main pitfalls are well known. Some of the benefits of sourcing in CEE. CEE countries look back on a strong industrial tradition.

Considering the shorter transportation distances. Many car manufacturers in Europe already source complex parts in the Czech Republic. are beginning to look further afield into Ukraine. advancements are being seen. Partnerships and alliances with suppliers can take two different forms. but also more reliable. And.108 Michel Jacob and Gabriel-Assad Singaby also have a highly educated workforce that is fluent in various languages. lured by even lower labor costs. several countries in those regions have a qualified workforce and are taking steps to modernize their infrastructure. But Poland and Hungary have also established themselves as successful choices. This makes sense. Bulgaria and Russia. by contrast. while the level of infrastructure varies significantly from region to region in this huge continent. and how critical an issue quality is. This makes it a good choice for higher value-added sourcing. There is a compelling case for companies to consider the wider outskirts of Europe for their large-scale sourcing. Companies. Production standards are improving dramatically in Africa. with a focus on value-added products in several industries. companies can reach critical size while limiting complexity and overhead costs. Slovakia or Romania. especially because many have set up their own operations there. the Euro is considered an acceptable trade currency in the Middle East and Africa. China. Many countries have entered a second industrial phase. We recommend that sourcing initiatives be restricted to a few markets only. Whereas the US$ dominates many regions in the world. Setting up operations or finding a supplier for value-added products in Africa and the Middle East might be more difficult than in CEE. 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. While the Middle East and Africa lack the sort of industrial tradition that characterizes CEE. Countries that are geographically nearer Europe are somewhat more costly than their Asian counterparts. . depending on the technological intensity of the industry. is just beginning to enter this production territory and it will be some years yet before it reaches a comparable level. That way. companies can respond more quickly to developments and thus provide better service to the companies they serve. but cost advantages might offset this issue.

and the timing of its market entry. human. Companies and suppliers could gain much more from these sorts of relationships. A second kind of collaboration between upstream and downstream companies is supplier development. Many industrial companies – such as car manufacturers (on interior trimming. This is not a sustainable strategy and will not result in supplier improvement. The reason for engaging in this sort of relationship is to improve the innovation process. Its technological know-how also increases. which aims at improving the supplier’s performance on cost. according to a benchmarking study Roland Berger conducted among major car manufacturers and aerospace companies. Companies should evaluate the performance of suppliers based on clearly defined processes and formal feedback. and delivery timing and reliability. Another common practice among forerunners includes company representatives visiting suppliers on site to help them improve their processes or. studies continue to show that companies only continue to measure the performance of suppliers during the supplier selection phase and for special projects. can companies truly enhance purchasing performance with supplier development programs? The steps taken by the best players in the automotive industry. Suppliers perform better and companies get the quality and delivery times they want. By initiating a co-development project. especially Japanese automotive manufacturers. Results have been ‘at or below’ expectations. Although the majority of OEMs have already implemented these sorts of supplier development activities. It is a win– win relationship that benefits the two parties. quality. a downstream company is able to influence the characteristics of the equipment. or they might introduce a quality certification program that leads to the number of inspections being reduced. growing interdependence is a common sign of success in this relationship model. Best-in-class companies also recognize strong supplier performance by using an awards format or staff training. fewer than 50 percent of supplier development programs have achieved the targets initially agreed. then.Key trends in purchasing best practices A first kind of collaboration is the co-development of products. manufacture and warranty of their supplied parts. Both parties seek to better leverage their respective technical. for example) or aircraft manufacturers (on instrumentation or engines) – engage their suppliers in co-development relationships. These require the supplier to take full responsibility for the design. alternatively. Although measuring supplier performance has been on the agenda for decades. The upstream company benefits from the buyer’s engineering capability. are 109 . and financial assets from the alliance. How. inviting suppliers to a client’s site in order to observe the use of their products. As both partners bring their knowledge and capabilities to a co-development project.

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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 costs 15 to 30 percent lower compared with those of a classical bidding process. 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 performance 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 a long-term plan
Increasingly, companies are turning to consultancy firms to design longterm 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.

Key trends in purchasing best practices
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.

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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 understanding 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 thus offers a solid framework for evaluating suppliers 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.

Key trends in purchasing best practices
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.

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Further reading
Roland Berger Strategy Consultants (2006) ‘Best Practices in Low-cost Country Sourcing’. Stuttgart.

CHAPTER 7

Purchasing EmPowerment: the way to 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 costcutting 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.

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Strategic commodity management – 6-lever approach to optimizing costs
Although the status of purchasing has increased in past years, all too often other functions underestimate what it can achieve. If purchasing consistently 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

Since improved procurement can bring savings of up to 70 percent.116 Roland Schwientek BUSINESS IMPACT • Expenditure • Impact on profitability and operations • Impact on quality • Impact on customer satisfaction • Time sensitivity • Collaboration requirements • Etc. and demands on product and process quality. simplify. Price optimization The potential for making significant savings when it comes to purchasing goods and services is commonly underestimated. These are depicted in Figure 7. Purchasing has a number of commercial levers at its . supplier integration. purchasing plays a vastly important role in boosting the bottom line. plentiful supply sources. A commodity group such as packaging material – with its small acquisition volume. These levers.1 Each commodity/category is strategically assessed in terms of business impact and supply market challenge determined by factors such as expenditure. quantity leverage. and functional adjustment. 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. process redesign.1. and secure. technical improvement. are clustered into price optimization. manage. For each strategy. SECURE High High LEVERAGE MANAGE Figure 7. and restricted business risk – would probably be found in the ‘simplify’ quadrant. Companies make this mistake at their own peril. Supply market challenge is determined by factors such as how many players are accessible. and what cost structures are encountered via suppliers. Low SIMPLIFY Low SUPPLY MARKET CHALLENGE Spend volume[EUR m] • Available supplier base • Suppliers’ bargaining power • Buyers’ leverage • Raw material availability • Price development • Etc. there are six broad clusters of levers that can activate the right developments. which are shown in Figure 7. Each quadrant in the matrix represents a distinct sourcing strategy: leverage.2.

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.Purchasing EmPowerment 6 FUNCTIONAL ADJUSTMENT • Focus on value chain configuration 1 PRICE OPTIMIZATION • Focus on price reduction 117 5 SUPPLIER INTEGRATION • Focus on close collaboration with suppliers 4 STRATEGIC LEVER MIX SET-UP 2 QUANTITY LEVERAGE • Focus on demand management 3 PROCESS REDESIGN • Focus on process optimization/change management TECHNICAL IMPROVEMENT • Focus on specifications/ concept changes Figure 7. Perhaps aggressively pulling the fixed-price contracts lever will do the trick. The trick is to use them optimally for specific commodities. which is also full of pitfalls and hurdles. Low-cost country sourcing is another lever. The long list of countries that emerged was shortened by checking them against a series of criteria specific to clinics such as import regulations.2 The right mix of levers is key to finding the correct sourcing strategy for each strategic commodity/category field disposal. All levers in this cluster generate savings by focusing on price. From this short list. Commodity groups were assessed to see if reasonable sources existed in low-cost countries. and so forth. Companies should have plenty of resources at their disposal – and patience – before pulling this lever. will really activate the cost savings they want. One of Europe’s largest university clinics decided to concentrate its efforts on global sourcing activities. This . which were built up during a two-year development program. Companies need to ask themselves whether this much-lauded lever. five suppliers were selected. The low-cost sourcing lever does not bring quick wins. technical clearance. It might be the case that looking closely at company prices at different locations brings about a moment of truth about best-price evaluation.

improved sourcing quality. 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. These third parties obviously benefited from the deal. With this lever alone. Volume effects are not only achieved by pooling suppliers. an international group was able to attain savings of around 15 percent of the entire purchasing volume through pooling global volumes. For its part. A financial service company also activated this lever. the company also decided to build up a third-party business. subsidiaries within a group) and beyond the company (purchasing cooperations from independent companies) can bring significant savings potential. it is only undertaken in a half-hearted fashion. Technical improvement This cluster of levers focuses on tapping the hidden potential within products by using consistent standardization and value-analysis programs. By pulling this lever. by expanding its purchasing volume. the company significantly unburdened operative sourcing. Companies are missing out. the financial service company managed to gain significant scale effects too. for instance. When it is exploited. Bundling volumes internally (for instance. Or is the opposite strategy a better option? Companies might find it preferable to have direct contacts and create internal structures to manage them. One company achieved cost and quality improvements after it introduced catalog-based sourcing for roughly 40 percent of its sourcing volume. e-sourcing. . and lifted the customer satisfaction rates of internal carriers.118 Roland Schwientek lever can be used to ensure that a certain volume is ordered or taken up in purchasing cooperations. It opened up its sourcing platform to other stand-alone financial service companies with low sourcing volumes. but also by compiling a systematic compendium of requirements. Process redesign Improving existing internal purchasing processes or redesigning them is not the focus of these levers: redesigning the process structure of suppliers is. In addition to establishing specific sourcing activities. e-catalogs. and the simplifying of accounts by introducing automatic credit memo procedures. and benefited from doing so. This potential is rarely tapped. which was transaction-heavy but advisory weak. Levers belonging to this cluster include second-tier supplier sourcing.

Following close analysis. consignment warehousing. the company . backward and forward integration of value chain steps. Only in this way can costs be reduced. A benchmarking exercise at a machinery maker.to long-term impact. vehicle roofs would no longer need to be sawed through using the old cumbersome technology. was able to develop a completely new solution for commercial vehicles by using a concept competition. for example. the automotive supplier put various concepts and procedures under the microscope. companies can carve out a sustainable position for themselves.Purchasing EmPowerment The levers cover everything from applying alternative materials. Concept competitions – a truly innovative lever in this cluster – encourage suppliers to find innovative product solutions. By adjusting the pole kernels from turning part to beaten part. cost savings of 40 percent were achieved. By joining forces. and usually change a company’s value chain in some way. Levers in this cluster are aimed at enabling companies to unite the hidden creative potential of suppliers with their own specific abilities. Small changes resulted in large cost effects. and vendormanaged inventories are some of the levers found in this cluster. These levers have more of a middle. showed a considerable tilt regarding manufacturing costs. to making finer specifications. A manufacturer of signal lights. Within the framework of a costoptimization project for ABS finishing. in. An automotive supplier made cost savings of more than 40 percent by applying some of the levers in this cluster. through to purchasing modules and change process engineering. Supplier financing. Make-or-buy options. Functional adjustment Companies also have a set of functional adjustment levers at their disposal. the functions. 119 Supplier integration Integrating suppliers starts with product development. and sale and lease back are some of the functional adjustments companies can undertake. For these levers to work. A definite weakness was its vertical integration at 80 percent.and outsourcing options. Companies can then use their suppliers’ insights and knowledge to develop cutting-edge products and solutions. customer use or customer value must be firmly in the foreground. for instance. One of its suppliers discovered that by using magnet valves.

Information flows need to be made transparent.3. Similarly by . and supplier integration levers rank highly on both the implementation speed and P&L impact axis. In each of the six category fields. While some of these have been discussed. Equally disappointing. Positive results are almost immediate. Specific sourcing lever categories differ on average in their profit-andloss (P&L) impact and implementation speed. Companies need to focus on four main areas in order to lower process costs in a sustainable fashion: processes.120 Roland Schwientek decided to outsource the prefabrication areas of turning and punching to specialists. The categories quantity leverage. when action is taken to improve purchasing processes. Companies would also be wise to pay attention to processes that work in harmony with higher business processes. and employee know-how needs to be nurtured by training and motivating staff. Companies should give the highest priority to order-to-pay processes. far too few companies have a clear-cut organizational separation between strategic purchasing and operational procurement. 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. technical improvements. when purchasing redefines processes between companies and sites. Purchasing processes do not exist in isolation and are not all of equal importance. various levers exist to improve operating cost performance. but rank low on being quick to implement. Only a tiny share of companies has a purchasing representative on the board or at general management level. and know-how. the entire list is shown in Figure 7.4. For example. and clearly defines competencies and interfaces between them. Activating this lever resulted in a savings of 35 percent of total costs. process redesign. Processes need to be reshaped to make them more effective and leaner. organization. cross-disciplinary. information. These four areas are depicted in Figure 7. Purchasing should be turned into a well-functioning. and functional adjustment have a high impact on the P&L. Roland Berger research shows that most trading and service companies have still not properly embedded purchasing in their organizational structures. inefficiency and duplicated work is prevented. organizational function. The levers price optimization. It is critical that these work efficiently.

3 There are more than 50 sourcing levers for improving operating cost performance 121 .6 Distributor 3.5 1.4 5.2 4.8 1.8 SUPPLIER INTEGRATION Joint improvement program Supplier manufacturing analysis Consignment warehousing Vendor-managed inventory Supplier financing Early involvement/collaboration through product development Establish system supplier Concept competition 6 6.7 Avoid middle-man 3.10 4 4.5 5.6 1.7 4.1 5.4 4.1 1.6 5. auction) TECHNICAL IMPROVEMENT Change materials Commonization/standardization Redesign/change of specifications Value analysis/creation Technical benchmarking/DFMA Innovation analysis Modular sourcing Change process engineering 5 5.6 4.2 3.4 2.2 1.1 6.5 PROCESS REDESIGN 1.4 1.1 3.3 6.3 3.8 2.3 2.7 2.2 2.1 2.4 6.10 e-sourcing (tender.7 PRICE OPTIMIZATION Best price evaluation Tendering/(re)negotiation Fixed-price contracts Cost breakdown/cost disclosure In-house costing/activity-based costing Best-of-benchmarking Linear performance pricing/Cost regression analysis Target pricing Global/LCC sourcing Payment terms (accounts payable) 2 2.1 4.8 Value chain mapping Total cost of ownership Second tier sourcing Hedging Re-engineering the procurement process/reducing interfaces 3.2 6.1 1.5 4.10 QUANTITY LEVERAGE Volume bundling Bonus agreements Corporate supplier negotiation Multi-year contracts Lifecycle contracts Purchasing cooperation Demand management Order management (batch size) Transportation option (frequency) Working capital optimization (inventory) 3 3.2 5.9 Web EDI 3.6 6.5 2.8 e-catalogue 3.7 5.6 2.7 6.9 2.8 FUNCTIONAL ADJUSTMENT Make option Buy option In-sourcing option Out-sourcing option Forward integration Backward integration Sale and lease back Deconstruction of the value chain Figure 7.3 1.3 4.4 3.9 1.3 5.5 6.

keeping individual commodity requirements in mind. purchasing becomes more transparent. information. the purchasing organization as a whole needs to be remodeled.122 Roland Schwientek Processes Organization New and lean Well trained and motivated Purchasing organization and process optimization Establish purchasing as function Information totally transparent Staff/know-how sharing Information Figure 7. an implementation plan needs to be hammered out. organizational structure. Synergies are optimized in purchasing when the level of coordination per commodity is made transparent. and know-how sharing defining the roles and competencies of lead buyers and decentralized buyers. Companies will also notice that when the innovation process is reorganized. To improve its organizational structure. While the criteria for analyzing commodities are handpicked to suit specific customers. It also assists companies to fill purchasing and other positions. the purchasing organization should be analyzed by commodity. The individual commodity options are used as the basis for finding the optimal purchasing organization. organization. then coordinated. and followed through. This is a far cry from business environments in which purchasing works reactively.4 Companies need to focus on four areas to lower process costs – processes. 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. purchasing is involved early on and has a say on costs. By introducing new group-wide lead buyers and clearly defining their role within the organization. common criteria include global sourcing. companies benefit from more efficient strategic and operative purchasing. The next step is to draw up organizational options. It is not enough to reshape processes. buyer skills. and performance measurement. Developing an optimal purchasing organization takes time and should be tackled in a clearly structured manner. Specific actions to improve how purchasing is organized bring instant results. First. . and is capable of combining decentralized competencies and centralized coordination. Finally.

Purchasing departments lacking a group-wide IT platform or cross-business unit procurement information system do themselves a disservice. They have common procurement processes. The main task of these IPOs is to give market research input. 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. such as increasing globalization. mean that sourcing is now done on an international playing field. A common information platform integrates all market. helping them to find and select the appropriate suppliers in target regions and manage the supplier base with locals. A lack of language skills is a considerable handicap that robs purchasing staff of their ability to close the best deals. These must be designed in such a way that new commodities can be easily integrated into the system. Unfortunately. members of purchasing staff are often insufficiently qualified to complete their tasks adequately. These standardized structures enable companies to report purchasing activities and track performance results more efficiently. systems across 123 . Simple factors. to make improvements in all four areas. Best-practice companies have endeavored. with the help of these instruments. supplier commodity. Costs can explode if purchasing uses outdated or inappropriate information systems. companies need to control purchasing throughout the entire group. 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. Companies such as IBM. and suitable suppliers. the demands on purchasing employees increase and change shape. and controlling information in one source. internal databases. Achieving sustainable lower process costs is the reward of that proactive stance.Purchasing EmPowerment Purchasing needs to keep abreast of technological and IT changes to ensure that processes and the organization are well-managed and efficient. Today. An effective e-procurement platform connects authorized buyers. No transparency exists for optimizing the supply base across business units. It is not enough to introduce these standardized codes and structures. Manually identifying cross-business unit synergies for commodities is extremely arduous work and is error prone. Without these codes and structures. Some characteristics are common to almost all companies that have globally aligned procurement processes and systems. sourcing. purchasing has numerous IT systems from which to choose. over the past years. Siemens or Home Depot have reacted by setting up international purchasing offices (IPOs). Action to train staff and retain know-how will become increasingly important. As the role of purchasing within companies evolves.

and aligned procurement interfaces. 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. too. Renault and Nissan. procurement processes. To develop suppliers. Then there are companies that have not only achieved this. Developing suppliers depends heavily on a supplier’s current level of . global procurement processes. and assess the feasibility of reaching those aims with their supplier base. adopt good practices throughout their entire organization.124 Roland Schwientek business units and regions. as well as with other supply chain management functions. These sorts of companies enjoy a minimized process throughput time and cost. 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. Companies embark on this path with the aim of making quantitative and qualitative improvements to the supply chain. following their hook-up. companies need to decide what their aims are. fall into this latter category. but have also aligned processes and systems with engineering and other global functions. standardized structure for their joint procurement organization. They. and R&D. Managing the supplier base is a continuous process of assessing and selecting suppliers. or they might want to reduce lifecycle and process costs. A great deal could be achieved by moving away from the specific platforms. and the amount of tied capital and total cost of ownership. Some might wish to improve their time to market. or they might want greater technology input or customer satisfaction. Changes in the procurement market and in a company’s procurement portfolio duly affect how companies should select their suppliers. Companies that have yet to deal with this issue should aim to manage the supplier base more effectively. and they have aligned procurement organizations globally where suitable. and commodity structures that had been successful at both car manufacturers to create a global. Managing the supply base The final step on the path to create best-practice purchasing is managing the supplier base. or become more agile. irrespective of region or business unit. Together. Once companies have started to manage their supplier base successfully. engineering. they can think about developing their suppliers and supplier base. These companies have common interfaces between procurement. they chose global commodity classifications. a global supplier information pool.

meaning that they reached a consistently moderate level in all three areas. and drawing on experience from working on more than 200 procurement projects with medium-sized and large multinational companies over the past five years. and the duration of that integration. supplier integration was considered increasingly important and was used by these companies. Clearly. Performance levels can be measured using quality standards. Few companies have designed long-term purchasing plans or systematic demand consolidation. economic efficiency. Ideally. Hardly any companies have created long-term contracts with fixed cost-reduction scales. depends on their development responsibilities. especially since best-practice businesses in supplier management have better financial and earnings ratios. Companies that are new to the supplier management path have started to define a strategy. Suppliers need to become part of the development process and be integrated into ongoing business processes. market requirement. Runner-up companies accounted for 25 percent – managing the supplier base was given priority and its importance is expanding. Once goals have been set for suppliers. and integrating suppliers. The low performers (14 percent) achieved a low level in all activities. Some 18 percent of all companies were ranked as base. developing suppliers. research the procurement market. Companies that do this successfully are blessed with the ideal supplier fit. Moreover. which means that they showed a consistently high level in all three areas: managing supplier base.Purchasing EmPowerment performance. they must be communicated and monitored. ‘starter’. ‘base’. This is a shame. 9 percent of companies were ranked as best practice. ‘runner-up’. 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. and operative performance. The long-term goal is to integrate suppliers and share supply risk with them. find and audit 125 . five development stages can be identified in supplier management: ‘best practice’. Strategic corporate goals are likely to be shaped by customers’ and stakeholders’ expectations. although supplier management is highly important in strategic terms. it is not used as much as it should be. they will play an active role in the management of the change. but integrating suppliers remained underdeveloped. Based on the study results. How suppliers are integrated. and the strategic corporate goals of both the supplier and the company. but developing suppliers was viewed as less important. Roland Berger recently completed an international study that surveyed 1. many companies have only just started out on this journey. and core competencies. In the study. and ‘low performer’. The study showed that.900 companies active in 14 industries. technical abilities.

This calls for deriving individual performance targets.5 Success factors have been identified in three areas of supply base management . basic tools. defining development action. A supplier development roadmap is useful for managing supplier performance. they have a supplier base that lacks strategic or volume-based prioritization. accredit suppliers and products. these companies have introduced and use supplier management. These companies form long-term product Supply base management Manage the supply base Supplier systematics Supplier assessment system Basic tools Supplier communication Develop suppliers Formal performance gap analysis Basic tools Ad hoc performance gap analysis Personnel and capital transfer Integrate suppliers Supplier link Technology integration Integrating service providers/system suppliers/processes Integration structures and product development Figure 7. These activities are laudable. The opposite is true of companies that manage the supply base well. and they suffer from uncoordinated supplier management functions. and update the database. ad hoc performance gap analysis. Companies that move beyond this phase start to develop suppliers in addition to managing them.5. and supplier communications. conducting a GAP analysis. assisting in implementing action and controlling activities. To ensure that the supplier base is coordinated and managed with finesse. but they need to be based on a thought-through strategy and be well coordinated.126 Roland Schwientek suppliers. and personnel and capital transfer. Companies with an integrated supplier management blur the lines between company and supplier. The success factors for each of these phases are shown in Figure 7. basic tools. a supplier assessment system. When companies manage the supplier base in an uncoordinated fashion. Key instruments required to develop suppliers are formal performance gap analysis.

linking structures. In these cases. To pull this off. Purchasing in these companies fully uses and exploits supplier capabilities. vendor development and integration occurs within product development and manufacturing processes. These are flexible enough to allow for the addition of new commodities. and creating processes in tandem. They also unite selected alliance hubs and exchanges to reduce commodity procurement process cost. Instruments to attain this goal include supplier link. combining service providers and system suppliers. Communication The first challenge is how to align communication. and harmonizing worldwide organizational structures and responsibilities to leverage synergies. and introduce . as well as procurement volume goals. 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. It also optimizes and combines own and supplier value chains. e-Procurement The second challenge is how to reap the benefits of e-Procurement. Best-in-class companies achieve this by establishing common commodity coding. But leading industrial manufacturers face a number of challenges as they attempt to leverage their global volumes and supply base to maximize benefits. When this level is reached. Companies that develop strategic vendors and partnerships have fully optimized their supplier base. 127 Best-in-class on a global scale Intensified global competition forces companies to make their procurement organization as global as possible. technology integration.Purchasing EmPowerment development and manufacturing processes in which their suppliers are heavily integrated from the very beginning. integrating product development. companies enjoy optimum supply leverage. supplier strategies are needed that contain performance review and evaluation procedures. Here. leading companies establish e-Procurement platforms to optimize interaction with key suppliers. introducing a common IT/information platform to support global interaction between business units.

To achieve this companies have introduced global lead functions for commodities or commodity groups across all business units or divisions. too. Europe’s biggest engineering company. realizes commodity synergies through different levels of global commodity leadership across business units or regions. Despite the benefits. they predefine procurement requirements and search preselected online supplier catalogs. and automate billing and controlling functions. They achieve this by choosing exchanges for immediate access to a large supplier base with a focus on raw materials and maintenance. 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. on the other hand. .128 Roland Schwientek web-based procurement processes to reduce throughput time and cost. Internet and B-2-B solutions are only being introduced slowly. They introduce and globally align web-based procurement processes. These actions help them to monitor and control savings. 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. Here. Bestin-class manufacturers utilize e-procurement efficiencies on three levels by: • • • They unite hubs and exchanges. Here. They have clearly defined locally and globally purchased products and have implemented a step-bystep system. Synergies The third challenge is how to realize synergies. synergies are realized by combining division specific and company-wide commodity leadership. automate order execution and receive products at point of use. repair and overhaul (MRO). They implement a captive e-procurement platform. They also join alliance hubs for industry-specific commodities and joint product development.

Since the role of the procurement executive council is clearly defined. Although most people in the business believe that global sourcing is ‘old hat’. a sense of fairness is established. This can be especially tricky as local procurement struggles with central procurement. which is chaired by a global procurement vice president. 129 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. Additionally. Global management of suppliers The sixth challenge is how to manage suppliers globally. The lens is focused on strategic and high-level operational tasks. Global sourcing is full of pitfalls and companies need to take care. To ensure effective decision-making processes. Executives from business units and different functions – such as R&D and manufacturing – are integrated into those committees. not only to ensure continued high . The massive savings potential offered by global purchasing markets is tapped to a very limited extent. and they aggregate information from supplier strategies and technology roadmaps developed by their support teams. The recent spate of quality problems arising from suppliers from China shows how important it is to manage suppliers. companies have installed global procurement committees on the executive level. even in large companies. At one of the world’s leading computer software companies. Importantly. They regularly review commodity strategies developed by global commodity councils. The best companies introduce and implement common procurement processes that achieve global coordination and transparency. they align procurement process interfaces with various functions – such as engineering – to minimize throughput time and cost. decision-making is handled by a procurement council. the lion’s share of all purchases is still made in the country where the company is based.Purchasing EmPowerment Lean global decision-making processes The fourth challenge is how to create global decision-making processes that remain lean. This is especially important when companies merge. they take decisions on sourcing and other procurement issues based on the recommendations of commodity councils.

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. They manage key suppliers globally and optimize local interfaces. But they should not rest on their laurels. Irrespective of what a purchasing department might have already achieved. Procurement departments have made huge strides. Companies with ideal strategic supplier management select a preferred supplier base and initiate vendor development and integration programs. Purchasing managers need to prove continually that they are able to implement strategic approaches that are pro-active. and cost-effective. innovative. it must constantly challenge the existing supplier base and continually seek out innovative purchasing levers that help improve results. They must also feel comfortable doing business in a global market.130 Roland Schwientek brand perception. Tobias (2008) ‘Purchasing Excellence: International Study of Performance Diversity in Purchasing and Procurement’. Further reading Roland Berger Strategy Consultants (2008) ‘Purchasing Excellence – International Benchmarking Study’. Stuttgart: Roland Berger Strategy Consultants. purchasing is left with no choice but to keep improving. Schwientek. and global networks are formed and expanded at breath-taking speed. but also to make sure that a company’s pool of suppliers is large enough in emergency situations. . Stuttgart. Skilled workers are needed that are business savvy and who have a deep understanding of engineering or other functional aspects. Outlook As the dynamic of international business continues to increase. Roland and Franke. and they standardize supplier management evaluation processes across business units and regions.

Within a short span of time. putting it into practice has often been hard. and remains. However. Global sourcing is a direct response to the competitive pressure experienced by companies today. Companies with local and rigid hierarchical structures have felt that pressure especially acutely. any thoughts that global sourcing is just the latest in that growing string of purchasing fads are misplaced. global sourcing has gained worldwide acceptance and is now firmly implemented in most large-scale corporations. Buyers send their largest suppliers to low-cost countries or set up small sourcing offices in these regions. each subsidiary or business unit needs to tap into many markets without building up redundancies along the way. Global sourcing has placed enormous pressure on all organizations. how to align the organizational structure of their procurement division with the requirements of a globalized world. While this concept sounds simple in theory. in the hope of gaining better access to material and labor resources or to tap the potential of a more economical market.CHAPTER 8 Organizations drive strategy and performance: insights from two successful lead buying models Tobias Franke Introduction Procurement fads come and go. It is developing into the favored option for companies that need to reduce costs and to improve the quality and responsiveness of their procurement. In such an interconnected world. 131 . The biggest challenge for many companies was.

An appropriate leadership concept is needed too. the number of employees. Skilled and motivated employees are not enough to accomplish this task. Insights gained by these companies – and our project team – during the project are shared here to assist companies that might be contemplating changing their organizational structure. These factors include geographical location. from different industries. Different sorts of procurement organizations Three basic models are used in procurement organizations: centralized buying organizations. This chapter will start briefly by discussing centralized and decentralized procurement organizations. The three different procurement organizational structures can be individualized to suit the specific needs of each company.1 Three basic models are used in procurement organizations . The differences between the three models are outlined in Figure 8. and lead buying organizations. All procurement departments are unique. the size of company. time and again. that combined the advantages of both centralized and decentralized structures to create a lead buying organization. the two most popular organizational structures for many years.1. that this framework puts companies in good stead in an increasingly global business environment. There are merits to all three organizational structures and each has a role to play. and the corporate philosophy. Companies increasingly introduce lead buying frameworks that combine these two factors. Companies need to consider various factors to determine which organizational form best fits their needs. in order to tap these markets in a costefficient manner. the industry. I discuss how lead buying systems work. I will then discuss two companies. 1 Centralized buying 2 Decentralized buying 3 Lead buying/centrally led Division/ country/ site Central purchasing Central purchasing … … A B Figure 8. Following that.132 Tobias Franke This tests the mettle of companies. decentralized buying organizations. Project experience has shown.

However. especially if it comprises only one business unit. Other companies with this structure tend to have distributed (global) sites/divisions whose purchasing functions are at a low development stage. Decentralized buying organizations do not support decisions being coordinated across divisions. in terms of economies of scale but also with respect to improved administrative efficiency and the optimized use of resources. Although these purchasing organizations often construct lean. division or site. local purchasing departments that put them close to internal customers. this function is generally detached from day-to-day business on an operational level. These companies generally centralize their purchasing in the hope of achieving synergies. Sometimes companies choose this model because they purchase only a few commodities or categories of goods that seldom change. the decision-making authority of centralized buying organizations is somewhat limited. countries or sites. This is why these sorts of organizations often build up redundant functions. it is usually only small and medium-sized companies that operate using this organizational model. Here. 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.Organizations drive strategy and performance Centralized buying organizations Centralized buying is the natural choice for every small company just starting out. many take the natural next step and switch from being a centralized buying organization to becoming a decentralized one. divisions or sites at home or abroad grow in number. Typically. Decentralized buying organizations can typically be found in financial holding companies with a low integration factor. They also do not come close to gaining the negotiation power enjoyed by centralized . This structure can facilitate the purchasing or selling off of legal units. 133 Decentralized buying organizations When a company’s business units. Putting exceptions aside. they remain compartmentalized within divisions or business units. the rationale for switching structures is to gain full authority and independence in the corporate units. Some larger corporations might also have a centralized purchasing function that is responsible for driving synergies. As business units are mostly responsible for budgets. relationship-driven.

because they have one point of contact. This should contain answers to the most frequently asked questions. are quick to put leadership into question. The basic lead buying concept has been developed for corporations that need to coordinate spend categories. supplier strategy. 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. with different business units and many sites. Instead of commodities being purchased by different people within the company. With leadership comes accountability.134 Tobias Franke companies. . in a lead buying organization one buyer – the lead buyer – is designated for a defined category or commodity. They lack scale and a unified strategy. Such a buyer might be in charge of purchasing raw materials company-wide. In all transitional phases. This sort of set-up makes it easier for suppliers too. or for a certain product. for instance. The lead buyer also carries responsibility for ensuring that he has selected the best purchasing strategy available. and negotiations. When large-scale organizations introduce the lead buying organizational framework. and markets without sacrificing the proximity to local requirements. employees experience feelings of uncertainty. and tend to harbor uneasy feelings about how responsibility and accountability will be redistributed. they are able to strengthen their international procurement coordination and can negotiate better prices. they deal with one person who has clear negotiating powers. He has control over volumes that are bought from different local suppliers. Typically. Lead buying Another organizational structure that is swiftly gaining in popularity is lead buying. 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. when it comes to product and supplier selection. For many companies. lead buying combines the best of the centralized and decentralized buying organizations. this organizational model is found in companies that operate in different markets worldwide. The lead buyer has the authority to conduct negotiations and to sign contracts with suppliers.

step-by-step. . in collaboration with R&D. which was one of the first industries to adopt the lead buying concept. However. and adoption of the lead buying concept. 135 Lead buying in the automotive industry The first success story stems from the automotive sector. and might be dismissive of best practices gained from other organizations. and win the support of influential team members. To drive continuous support. Setting targets also indicates to employees that the change is nonnegotiable. I will discuss two very different client success stories. goals. There are most definitely obstacles when setting up a lead buying organization. original equipment manufacturers (OEMs) and their suppliers are globalization pace setters – and they have to be. Finding ways to make cars both desirable and affordable is this industry’s Holy Grail. Example: Leading buying in the automotive industry One of the world’s largest automotive players wanted to optimize its organizational framework and processes. In these situations. To show how lead buying can help companies perform better and gain noticeable bottom-line results. and are openly hostile to the idea of capturing cross-business synergies. and performance to the various business lines and regions. 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. Awarding strong performance can also be a strong motivator. have high expectations. companies should constantly communicate their strategies. In the automotive industry. These companies should not be surprised if their employees are not enthusiastic about introducing lead buying. Customers in the automotive industry are well informed. plays a major part in meeting this challenge.Organizations drive strategy and performance Employees in decentralized organizations are accustomed to focusing on developments at plant level. the perseverance is well worth the effort. compliance. The Roland Berger team helped the company set up a lead buying purchasing organization. Purchasing. and adopt a fully integrated organizational model. companies need to use examples of early success to boost acceptance of the new system. starting with simple harmonization and increasing this gradually until purchasing as an entire entity had been transformed.

The company could no longer avoid setting up and implementing a standardized commodity code – basically. and with increasingly more integration. The steps leading to an integrated procurement strategy are depicted in Figure 8. had no consistent code structure in place across its multiple business units for either commodities or suppliers.2. Procurement was distributed throughout the organization and no overarching strategy existed. and no alignment existed between various regions. This company. a common language for different commodities. But how could the company best achieve these goals? The project team decided that two things had to change immediately if the company was to achieve its goals. It suffered from a lack of data transparency. and countries.136 Tobias Franke A close look at the procurement organization and processes at the end of the 1990s revealed that synergies were not being realized between business units. efficiency and standardization could be increased at this automotive heavyweight. which made it almost Procurement strategy Orga/ Skills Pr oc es s Systems KPIs t remen Procu ance rm perfo Separated • Locations separated – no synergies Harmonized • First coordination – first synergies realized Combined • Launch and ramp up of organizational model – savings realization started • International locations only loosely linked Integrated • Organization extended to international locations Figure 8. brands. one of the world’s largest automotive players.2 Only an integrated approach to procurement ensures optimum impact on a company’s competitiveness . the project team was convinced that global leverage. Sites were bought without considering the scope or requirements of other sites. Over time. higher savings.

Launching the governance model involved some preparatory work. The system the project team chose to create a common language is capable of defining a reference system and code suppliers as well as spend data. The manual effort required to aggregate the data was significant and unnecessarily used up resources. This should always be a prerequisite when selecting such a solution. but was relatively simple to introduce once the model was clearly laid out. First. The highest level of leadership and 137 Governance models I Regions North America Europe/ South America Asia/ Pacific Global commodity lead II Global savings Regional commodity lead III Regional savings Local commodity autonomy Local savings Figure 8. Since all of these standardization systems have their own set of advantages and drawbacks. ensuring global and regional savings . Only by doing this could the purchasing function assign tasks and responsibilities on a commodity level. to recognize common suppliers. It is therefore sufficiently flexible to be used as the company continues to develop. UNSPSC and eCl@ss are just two of the many solutions on the market. There are a number of standardized solutions for creating commodity codes and a commodity code architecture. This is a necessary first step on the path to becoming a fully –integrated organizational set-up.Organizations drive strategy and performance impossible for purchasing staff to identify bundling opportunities or. the project team needed to evaluate them based on their own individual merits and fit with the company’s specific needs as an automotive player. three levels of leadership and three regions were defined for the model. Establishing a common commodity code and introducing a governance model are steps that are relatively easy to accomplish. This matrix is depicted in Figure 8.3. even. Introducing a governance model was also essential. after considerable discussion with various key staff members.3 Global lead buying consists of three governance models.

The commodities that fall under the global commodity lead include robots and the IT of cutting tools.138 Tobias Franke coordination is the global commodity lead. Sourcing decisions for commodities with global/regional potential are made on a global/regional basis. The responsibilities for the key purchasing processes in each governance model were clearly defined. elevators. the manner in which they should interact with one another and the individual responsibilities of each leader or buyer was strictly defined. motor test benches. Regional commodity leads were created for the areas North America. for example. and escalators. Also. it was essential that the roles of the global commodity leader (GCL).4. Local buyers are responsible for managing the interface to the internal customer and operative transactions. All commodities not assigned to either a global or regional commodity lead were assigned to ‘local commodity autonomy’. regional commodity leader (RCL) and local buyer (LB) were clearly allocated. Europe/South America. Key purchasing processes Commodity strategy I Global commodity lead II Governance models Regional commodity lead Responsibility of regional commodity leader (RCL) Responsibility of global commodity leader (GCL) Sourcing process Transaction III Local commodity autonomy Responsibility of local buyer (LB) Figure 8. Moreover. these include such commodities as gardening and waste disposal. and Asia/Pacific. for instance. and approval from the GCL/RCL is required. Other commodities were assigned to a regional commodity lead – including. The responsibilities of the leaders and buyer are shown in Figure 8.4 The newly defined governance models add the regional focus .

A slightly different approach to lead buying was necessary here. 139 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). utility purchasing.Organizations drive strategy and performance Furthermore. Potential synergies were being squandered. They are shown in Figure 8. Despite geographical proximity. and are held accountable for commodity results. In the governance model designed for the automotive company. To do that. it suffered from similar problems to the automotive company in the previous example. reviewing. These clusters comprised project/complex purchasing. They are also responsible for obtaining the approval of the commodity leader. They are also responsible for approving all major sourcing decisions. for example. if required. the leaders are responsible for developing. the local buyers are responsible for contributing to global commodity strategies. .5. Example: Lead buying in the utilities industry Although all of the utility company’s business units and sites were located in one country. the project team first had to differentiate between utility specific and non-utility specific purchasing. and to manage the customer interface. standard purchasing. This is part of the reason for highlighting this particular case. and negotiating and finalizing contracts. and implementing global commodity strategies. The second success story involves a utilities company. purchasing segments or centers were defined. In the governance model ‘global commodity lead’. and catalog procurement. and four clusters emerged. In a next step. Utilities are not generally thought of as companies that use lead buying to improve purchasing departments. business units and sites worked independently and – more troubling still – bought independently. The primary focus of the project was to streamline structures and optimize processes. the tasks and main responsibilities for the commodity leader/coordinator and local buyer were defined.

The construction of a combined cycle gas turbine (CCGT) plant is an example of project purchasing.5 Purchasing is reorganized into four new purchasing segments The company was in need of criteria that would help it splice and segment processes and purchasing structures into one of these four different purchasing clusters. and cataloging does not make good business sense.140 Tobias Franke Non-utility specific Utility-specific Involvement in one-time project requirements affecting multiple categories 1 Project and complex purchasing Involvement in repeat (project) requirements affecting multiple categories Basic processes Pooling requirements through standardizing requirements 3 Standard purchasing 4 Procurement transaction via catalog 2 Utility purchasing Process optimization Catalog procurement Structural streamlining Figure 8. Another characteristic of utility purchasing is that there is low to average order frequency. too. including considerable ability to standardize materials/services. A purchasing item that was designated to project purchasing. Processes and structures that have utility specific requirements that cannot easily standardize materials/services belong to the category ‘utility purchasing’. had to have either complex and innovative one-time processes (project purchasing) or repeat processes (complex purchasing). All other purchasing segments were allocated a clear category. have extensive interaction with customers on a highly technical level. Here. Standardized purchasing encompasses all categories that have identical requirements across companies. and low order frequency. cataloging is not appropriate. easily standardized materials/services. for instance. and clearly identifiable customers. A series of characteristics had to be fulfilled before a purchasing item was distributed into a cluster. Project purchasing has no direct category allocation. . and with no direct or active interaction with the customer being necessary. Catalog purchasing was introduced for items that possess several characteristics. have a high order frequency. are easy to describe.

Overall conclusion and outlook To reap the benefits of a lead buying organization considerable effort is generally required. This enables companies to set. Appropriateness is defined by the most common use and direct knowledge. accomplish. and financial holdings. is assigned to the distribution company even though some cables are used in generation too.Organizations drive strategy and performance Shared services Other group companies Second tier subsidiaries Financial holdings 141 CEO CPL CPL Group coordination committee PM committee Service center Utility purchasing Standard purchasing Catalog procurement Key: Purchasing manager Category management Project/complex purchasing Corporate lead buyer Specialty buyer Figure 8. second-tier subsidiaries. An overall vision for the transformation process is essential. while all the other categories were assigned to the most appropriate organizational unit. This encompasses shared services.6. and monitor targets . categories were allocated to specific purchasing service centers. The category for high voltage cables. Project/complex purchasing was assigned to a shared services unit. other group companies.6 Corporate lead buyers are responsible for group-wide coordination of purchasing activities Based on this information. These corporate lead buyers are now responsible for group-wide coordination of purchasing activities. A lead buyer was placed in charge of each of these centers. for instance. This is illustrated in Figure 8.

If they lack these soft skills. ensuring that the people selected are respected throughout their divisions and various regions. Lead buyers must also be capable of nurturing relationships with suppliers. they put the whole model in jeopardy. Such a vision also needs to be communicated to all employees. It also encourages employees to feel comfortable working in an organizational model in which solid lines and category leadership can deviate. Lead buyers take on considerable responsibility. . Companies need to assign these positions with care.142 Tobias Franke that are relevant from a management perspective. This is especially true of operational changes. It is not only the leadership concept that is critical for successful lead buying – the right people are needed too. When employees understand why the changes are necessary. irrespective of hierarchy. the changes will be easier to introduce. such as introducing a common coding language.

PART III Manufacturing 143 .

western Europe. That pressure is already too great for some companies. New global manufacturing entrants. European hi-fi and motorcycle manufacturers – to name only two examples – were almost completely squeezed out of the market. Consumers in North America. and North America will continue to increase. there was a fundamental change to the global manufacturing footprint of whole industries: western manufacturers were challenged by fierce competitors who had created favorable cost structures and who were both eager and able to learn quickly. Everything – from computer chips to clothes. from toasters to tires – has become less expensive since manufacturing was relocated to cheaper locations. As more players collaborate to create and improve products and services at increasing speeds. with the entrance of Central and Eastern Europe. These manufacturing upstarts threaten the jobs of people in the Triad region who carry out work that does not require high-value skills. Considering the magnitude of the risks that follow in globalization’s wake. characterized by their low-cost base and lower labor and environmental standards. and India into the global economy.Introduction Manufacturing in a global context Ralf Augustin When the South-east Asian ‘tiger’ states entered the international economic arena two decades ago. western Europe and Japan benefit tremendously from the reduced cost of products manufactured in lower cost regions. The rules of global competition are shifting once again. The risks of globalization are real. are easy targets for distrust. As a result. shifting these jobs to emerging markets. but its advantages far outweigh the perils. Companies benefit twice over: not only can they produce goods more cheaply for their Triad customers. it is understandable that companies concentrate only on the threats. China. they also enjoy the emergence of new 144 . and insolvencies are on the rise. The impact will be much broader this time. rippling through more industries and putting greater pressure on many more companies. competitive pressure on companies in Japan.

a number of external factors support globalization: lower barriers to international capital transfer mean global production networks are easier to build. Moreover. German and Japanese machinery manufacturers in particular benefit from the interest of manufacturers in these emerging regions. Developing. 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. keen to obtain sophisticated. When discussing the potential that is simmering in this region. China will become the second most important consumer goods market worldwide and India will rank third. No aspect of global collaboration can be left to chance: every aspect must be well defined and clearly communicated.Manufacturing in a global context markets bursting with an unfathomable number of consumers who crave high-quality products and brands made by ‘old world’ manufacturers. the numbers speak for themselves. Companies in Japan. In addition. in the past. India has 300 million middle-class people (or 55 million households) and more than 60. Locally made goods can be better tailored to local requirements because production is often more flexible and less costly. GNP in China and India is expected to grow by at least 5 percent each year until 2020. They cannot compete with low-tech. well-designed equipment. No company can afford to ignore this burgeoning market segment. they need to build global manufacturing networks to reap the rewards. Triad companies need to focus sharply on manufacturing high-tech products: there is no sense in them concentrating on anything else. Triad companies succeeded in their global expansion primarily through exports. if companies in western markets want to develop . 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. North America and western European have the opportunity to capitalize from this global transformation and use the low costs to their advantage. However. 145 Not only a shifting landscape.000 millionaires measured in US$. low-cost products manufactured by companies in newly emerged and emerging regions. and IT systems permit global engineering collaboration and supply chain transparency. but also a different world While. Within the next decade. testing and ramping up innovative production technologies is the only way forward. today matters are different.

Then. Operational excellence is a must in this scenario. High quality and highly customized goods are in unprecedented demand. show companies how to achieve operational excellence with global manufacturing networks. Operational excellence thus becomes an even more important factor of differentiation. faster and cost effective without jeopardizing traditionally high product quality. The traditional competitive advantages once enjoyed by Triad countries – such as a highly educated workforce. adaptable employees who are willing to keep on improving their knowledge will thrive in this globally oriented environment. Wave after wave of new breakthroughs keep companies busy as they learn to adapt and keep ahead. Dr Thomas Kwasniok and Walter Pfeiffer explain how to enable lean manufacturing through best-in-class management and by setting up support functions. Adopting such practices is critical as the pressure increases to be increasingly more flexible. The process is ongoing. Part III is dedicated to showing companies how they can meet the challenges of manufacturing in today’s increasingly globally oriented world. and political and financial stability – are becoming relatively less important as developing countries improve on these fronts. They can also form a local base for fabricating ‘near-the-customer’ goods to be sold in these markets. Global manufacturing networks are required to deliver these goods. excellent infrastructure. which radically changed manufacturing practices. . Volker Heidtmann and Stephen Weisenstein. Marco Zurru describes the successful building and continuous improvement of global manufacturing networks. in Chapter 11. Operations in emerging markets can serve as manufacturing hubs for labor-intensive products.146 Ralf Augustin and manage a global supply base. Only highly skilled. the base line that every country needs to meet. in Chapter 10. is helping companies remain competitive. 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. For Triad countries. Manufacturers have focused on improving the quality of their processes as a means to achieve operational excellence for at least the past twenty years. Lean manufacturing. rather. In Chapter 9. the nature of competition in manufacturing has changed.

especially as increasingly more players from low-cost countries swiftly reduce the technological gap. but the spoils of riding the swell are greater. They wanted to find suppliers and manufacturing locations that could help them decrease overall production costs as they competed in traditional western markets. To attend emerging markets. Companies these days are searching for low-cost locations and suppliers. In this evolving contest. partly by acquiring western players. 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 current competitive environment pushes them out into more challenging water. Prompt action is required in terms of cost structure and innovation capabilities. 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. In this chapter. and they want to gain access to the large markets that are opening up rapidly in emerging economies. companies will gain the upper hand by designing a flexible manufacturing footprint that considers how increasing global competition affects and impacts their strategic objectives. 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. I examine how companies can best design – or redesign – their global 147 .CHAPTER 9 How companies can optimize their global manufacturing footprint Marco Zurru Introduction Companies surfed the first wave of globalization largely to exploit opportunities in low-cost countries.

in contrast.148 Marco Zurru manufacturing network. then. and their business is driven by economies of scale. What works for one industry at a particular time is unlikely to yield good results for others. No single predefined solution exists for an optimally designed global manufacturing footprint. 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. I show how following this step-by-step approach can help companies address manufacturing network design issues on a global scale. However. for example. And finally. paying close attention to cost structure and risks. The business environment is developing rapidly. Automotive players aim to reach a global customer base. depending on the reasons behind the global manufacturing presence and industry specific concerns. raw material procurement or engineering. It must be sufficiently flexible to adapt to changes in the business environment. The six-step approach outlined in the next section of this chapter provides a compass for decision makers. Other companies have a multi-local footprint but can leverage economies of scale for very specific parts of their value chain – consider. the design should not be set in stone. Each company has to design its own unique footprint. I look at the differences in networks from industry to industry. Next. It is not surprising. it should assess the feasibility of expanding the manufacturing network at the operational level. irrespective of industry. a systematic approach is needed to accomplish this. and will probably require redesigning at a different point. In my experience. The design should be based on a top-down understanding of the strategic drivers that force a company to expand its manufacturing footprint globally. It should alert their attention to the tricky terrain that . is mostly driven by international agreements and by offset requirements. Footprints differ in size and imprint Various footprint models exist. First. I show a handful of factors that are critical for optimizing a manufacturing footprint. that their footprint is already fully global. Automotive suppliers – who mostly embark on an international manufacturing journey to support their customers (automotive original equipment manufacturers OEMs) – have a footprint reflecting their clients’ global presence. The multinational footprint of aerospace and defense companies. Also. with the help of a case study.

optimizing. suppliers and partners Focus • Priorities: cost versus market penetration • Target markets and external constraints • Industry cost structure and economies of scale • Alternative manufacturing processes • Logistics network structure and costs • Product structure and relevant manufacturing activities • Business case for delocalization of activities • Risk evaluation • Selection of potential countries • Short list of activity-specific target countries • Manufacturing scenario analysis and sensitivity • Make/buy decisions • Partner/supplier identification and screening • Partner/supplier selection and final make/buy decision 149 Figure 9. The business case for optimizing cost is straightforward and is based on total cost of ownership. Step 1: Understand the strategic drivers for your global manufacturing footprint Each industry is shaped by different factors that determine its need for a global manufacturing footprint. It leads to the offshoring of components and manufacturing activities that have high labor content. it must analyze the reasons why it is necessary to expand its global network and the implications of these factors.1 Approach steps and focus needs to be traversed when shaping. and managing an evolving global manufacturing footprint. and are . The same is true for individual companies. Companies should keep these goals in mind when creating guidelines for their company’s globalization strategy.1. Before any company can optimize its manufacturing footprint.2. The reasons for addressing manufacturing network design issues. There are two overriding reasons why companies delocalize their manufacturing activities: either they are lured by the attractiveness of potential markets.Optimizing the global manufacturing footprint STEP • Understand strategic drivers and implications • Derive the global manufacturing footprint model • Segment product structure and define delocalization scenarios • Select target regions and countries • Fine-tune the model and finalize the footprint • Select site. are shown in Figure 9. or they want to lower costs. The approach and focus points at each step are illustrated in Figure 9. Improving cost performance is a common strategic imperative in most industries. and the challenges to reach the two manufacturing goals.

including final product assembly lines and test operations.150 Marco Zurru Global Exploit global market presence • Risk of technology transfer Market approach Enter global market • Sustainable competitive advantage • Price • Local requirements t in pr in ot fo nge ture al a ul ob ch c gl m nal ild adig atio Bu Par niz • orga Leverage local presence • Cost structure versus local competitors • Local requirements Focused Focused Improve cost performance • Quality • Reliability • Progressive erosion of cost advantage Cost approach Global Figure 9. The rapid growth of local competitors .2 Different manufacturing network design goals and relevant challenges characterized by relatively low technology and criticality. While product design is not affected by the decision to delocalize production. as suppliers and the local workforce gain access to more sophisticated technological processes. At the same time. Local manufacturing operations provide labor-intensive work. No major risk of technology transfer exists because the delocalized technology is relatively low. the risk of technology transfer is greater. due to the progressive increase in local costs and cost alignment from competition. the challenge is more complex. and low plant investments. A change of paradigm in the organizational culture is required when moving to a completely global footprint. simple technology. In addition. Companies that offshore to reduce costs need to remember that their cost competitiveness will erode over time. companies need to keep as many components and interfaces standard in order to leverage economies of scale. When companies build a global manufacturing footprint in order to increase the customer base. ensuring good quality and reliable delivery are two pressing concerns once manufacturing is relocated for cost optimizing reasons. Operations are required locally. 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.

In the aerospace and defense industry. companies will need to delocalize their operations in order to enter closed or regulated markets. and cost . optimizing such a complex – and counter-intuitive – manufacturing footprint works only if partner companies are closely integrated on an organizational level and already have excellent manufacturing operations. the focus is on minimizing risk exposure through long-term contracts with the OEM and ensuring high quality and reliability of local operations. is simply a precondition for gaining local market share. extremely complex industrial footprints are designed to comply with the sector’s pre-negotiated worksharing agreements. In some cases. This can be achieved through clever product positioning or research and development. Another reason for building a global manufacturing footprint is to create a defense against low-cost competition stemming from new economies. as business activities will need to be redesigned to meet industrial agreements. Companies will need to adopt a different strategy. In my experience. General aspects companies need to consider include the markets they wish to serve. or both. local companies require no (or limited) R&D investment. for instance. The situation of component suppliers for the automotive industry is slightly different. they can start defining the guidelines that should shape that presence. Delocalization. Globalizing without a sound diversification strategy could prove useless. for example. Companies can reinforce their protective defense against low-cost competitors only by creating a sustainable competitive advantage. and technological fallout requirements. The aim here is not strictly to benefit from market proximity. In this situation. 151 Step 2: Derive the global manufacturing footprint model Once companies have a clear understanding of the reasons for developing a global manufacturing footprint. This is true for companies in the aerospace and defense market. a company’s global manufacturing footprint strategy needs to be totally integrated and aligned with that company’s overall business strategy. Here. In comparison with foreign players. their management structure is cheaper. local content.Optimizing the global manufacturing footprint is a threat that should be considered when building the business case. Competing purely on cost is not a sustainable strategy for any western manufacturer. in these cases. Suppliers require a local presence to match the internationalization priorities of their OEMs. and they face lower compliance costs. or lower transportation and labor costs. A different sort of business model is required.

manufacturing and procurement. the one reason for relocating business is better to serve OEMs. Centralized final manufacturing operations with offshoring of components and sub-assemblies are typical in industries that demand large investments and stringent quality requirements. as well as low labor costs for other simpleto-manufacture parts against downstream activities that must be centrally executed. are characterized by large economies of scale in upstream operations and low value-added. and best practices. extrusion) that are served by regional smelters. and limited economies of scale in final manufacturing operations. More specific aspects that should be considered are labor content. alternative manufacturing processes. and transport costs. . Engineering activity is shifting to decentralized centers of excellence to react more quickly and attentively to local requirements and locally designed components. Lower labor content is required for the final phases of the assembly process. these. in turn. This is true of the aluminum industry. are served by proprietary aluminum ore mines. Other industries. In the construction material sector. transportation costs and local requirements limit the market that could potentially be served by a single plant. It is important to keep the company’s manufacturing cost structure firmly in mind when examining these aspects. economies of scale in each phase of the manufacturing process. and in which labor content and simpler operations characterize the manufacture of components and sub-assembly. Complex mechanical systems in the aerospace and automotive industries are exemplary here. These downstream activities require large investments for metal cutting machines and surface treatments. in contrast.152 Marco Zurru priorities. The automotive industry has pushed the global manufacturing footprint to an extreme because it can profit from large economies of scale in engineering. in which a typical global manufacturing configuration is based on a number of similar small size local plants (for example. High quality control standards and advanced labor skills in final assembly operations are needed too. 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. cross fertilization. mostly located in countries where the cost of electric power is relatively low. Globally shared services provide low cost support for the entire group. For automotive suppliers. Large international players leverage technical competencies and support services in order to ensure internal benchmarks. leveraging the size of global markets. which are also burdened by high transportation costs. They can leverage the low cost of forgings and castings derived from emerging economies.

At this stage. for instance. . two sites for manufacturing composite wings (one country produces the right wing for all partners. as well as industry and product characteristics such as economies of scale and cost structure. another country produces the left wing). as well as partners and external constraints. Two dimensions are important here: economics and risk. International agreements and offsets. depreciation. transportation and energy should not be left out of the equation. transportation. companies are also well advised to consider the availability of a skilled and reliable workforce. A business case is then built to provide the expected payback for each component and manufacturing activity analyzed. Product structure and manufacturing operations should be analyzed in depth in order to identify the most suitable components and activities for relocation. it needs to conduct a detailed analysis to ensure that value chain activities are allocated optimally. Economical variables are required to define the overall payback of delocalizing a specific manufacturing process. companies need to consider their own strategy. Cost components such as labor. 153 Step 3: Segment product structure and define relocation scenarios After a company has selected its overall manufacturing model based on strategic drivers and a thorough understanding of operational factors.Optimizing the global manufacturing footprint The aerospace and defense sector provides another model for a global manufacturing footprint. services) Expected lifecycle and cost structure evolution. It is likely to work with various other relatively inefficient solutions that ensure that knowhow and technology ownership is balanced between players and countries. materials. traditional assembly plant versus CKD) Required investments for each manufacturing option Overall cost structure (labor. An international military program could comprise a complex set of work packages that include four different assembly lines in four different countries. The main areas of investigation are: • • • • Manufacturing options (automation investments versus more labor intensive manufacturing. and defense constraints and embargos are factors that need to be considered when defining the footprint’s contour. To configure the best manufacturing footprint. energy.

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.3 Payback and risk analysis . companies should have a thorough understanding of the conditions necessary to relocate each manufacturing phase in the most advantageous way possible. required labor skills. These should calculate total cost of ownership and the relevant risk for each configuration. A checklist can help companies ensure that they have considered the factor costs required to meet the specific cost structure.3. quality requirements. and technology transfer. and shape of the competitive environment. A sensitivity analysis simulates the effect of changes in cost drivers to the total cost of ownership for each scenario analyzed. specific technological capabilities. An illustration of a payback and risk analysis is given in Figure 9.154 Marco Zurru Risk is then defined based on variables such as technological complexity. Risk of implementation Surface treatments Machined sub assembly Fuselage section Composite components Software Door assembly Panels Rivets Manufacturing engineering Fasteners Aluminium castings Basic engineering Aluminium forgings Machined parts Aluminum SCENARIO 2 SCENARIO 3 SCENARIO 4 Payback (years) Titanium SCENARIO 1 Absolute annual cost savings Figure 9. Before advancing to the next step. companies should test different manufacturing scenarios. component criticality (the importance of reliability of delivery). Based on risk and payback. labor skills.

companies need to consider what activities and modules can best be produced locally. OEMs’ requirements and trends are a major part of the strategic decision and should be investigated in depth. and these will depend on the global manufacturing footprint strategy the company wants to pursue. 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. the list of countries is short because a company is relocating to serve a specific client – for example. or because of very specific local content requirements. Afterwards. In other cases. In some cases. . 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. The process of selecting countries for setting up manufacturing operations should be addressed in two different ways. OEM proximity for automotive suppliers. Sometimes. Companies must understand clients’ expectations in relation to the following dimensions: 155 • • • • • 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.Optimizing the global manufacturing footprint Step 4: Select target countries There are a number of different ways companies can select target relocation countries. specific regions for low-cost sourcing. If shortlisted countries are chosen because of strategic imperatives. 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. there will be no preliminary restrictions on potential countries that may belong to the manufacturing footprint. In the specific case of automotive component manufacturers. They do this to reduce the risk of problems with first series. they will turn to local engineering for support and technical expertise General sourcing preferences – components versus modules.

water.156 Marco Zurru First filter Second filter Third filter Political stability and risk Business and economical attractiveness • Infrastructure availability • Time to set up a business • Services availability • Workforce qualifications • Financial conditions Specific economical conditions • Factors’ costs and evolution over time • Specific skills • Logistics • Supplier proximity Figure 9. The sorts of aspects examined here include specific technological skills. 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.4 Selection of target countries If cost optimization is the main reason for creating a global manufacturing footprint. logistics capacity. 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. incentives) and manpower (skills. the existence of a relevant supplier base. recruiting. Lack of political stability and risk are two of the first criteria that cause elimination. the presence of competitors. accounting. and logistics services). electricity. 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. wages. unemployment. the approach is the opposite. Companies should check the availability and quality of infrastructure (transportation. financial conditions (corporate tax. gas. A systematic screening of potential locations has to be performed based on priority modules and activities. combined with external constraints 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. the legislative environment and bureaucracy (time required to set up a business. availability of legal. and attitude). and real estate). it is time to simulate the impact of that delocalized . and cost of labor over time.

and worst-case scenarios for variables. manufacturing capabilities. based on the expected evolution of external variables over time in each country (sales volumes. costs.5 illustrates how different locations can be compared. The most attractive configurations are selected for a final examination that measures the flexibility of each selected scenario. and third. Figure 9. and transportation delays should be included in this analysis. which are compared. suppliers. legal environment. for example). The scenarios reflect each manufacturing activity to be relocated in target countries. This quantitative simulation provides companies with a handful of potential scenarios for the selected manufacturing footprint model. suppliers and partners Selecting sites. The selection of site. . Three main performance indicators are put under scrutiny for each scenario: first. 157 Step 6: Select site. Companies perform a ‘what if’ analysis to understand the best. Sales volumes. Make-or-buy and investments decisions are made to minimize risk and maximize flexibility. A recovery plan is built for selected scenarios. implementation timing. During this phase. first. a long list of potential candidates will be chosen based on the selection criteria: technology. companies need to investigate four areas: investment. and HR availability and skills. Desk research should be complemented by interviews with industry experts to ensure completeness and to iron out any misunderstandings or false assumptions. 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. size. flexibility (the ability to cope when environmental factors change unexpectedly). overall risk. and partners is one of the most important tasks companies need to undertake to ensure that strategic guidelines provide tangible results. When choosing a supplier and partner. supplier. supply interruption. second. These are then screened to reach the best solution. political instability. To select the most appropriate site. The model provides the required investment and expected return for each scenario. infrastructure. The worst-case scenarios are also analyzed in order to understand and calculate the potential cost of reconfiguring the footprint. and client base. and costs are some of variables that are included in the model. the expected value over the entire lifecycle. A simulation model is built to compare the economic performance of each scenario. it makes sense. to undertake desk analysis. Risks such as currency movements.Optimizing the global manufacturing footprint manufacturing activity at each of the short-listed locations.

A request for quotations on pilot components and a business case should conclude the selection process and launch the negotiation phase. 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. and client base. size. Once a shortlist is defined.158 Marco Zurru Investment Construction cost Incentives Price of property Labor cost Business parks Skills availability Logistics Labor legislation Utilities Bureaucracy Taxation Environment Legal Key : Region 1 Region 2 Region 3 Figure 9. It also gives companies the opportunity to complete and crosscheck information regarding technical capabilities. technical tools and capability. financial stability. process quality. delivery reliability. telephone interviews or questionnaires should be used to screen possible suppliers and partners. companies can detect whether the long list candidates are interested in collaborating. checking to see whether it is still relevant and to determine whether Infrastructure HR . Global manufacturing footprint – a process without close Companies need to monitor their manufacturing footprint periodically. Here. and cost structure.5 Site selection Depending on the size of the long list.

have become a competitive disadvantage in the quickly evolving world of manufacturing. 159 Case study: How the approach works in real life Our client. is programmed to become obsolete. Previous partners are now able to offer similar solutions not only in their home country. 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. 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. The project team was asked to define a new footprint model to maximize the increasing volumes that can be captured in the Far East market and to make a dramatic reduction in the current cost structure. Its presence in emerging markets to date has been based on partnerships with local players. large technology transfer. Technology. As a result of this mapping exercise. a new procurement organization was designed and implemented that shifts local procurement to a single global procurement responsibility for each business segment. activities were . This is especially true when it comes to footprints that are heavily reliant on technology or low-cost country manufacturing. it has come at a heavy cost: namely. The footprint model had to include a strong industrial and procurement presence in emerging countries to guarantee market access and cost `-vis local players. To leverage the global footprint fully. thanks to its very nature. with an extremely competitive cost structure. in the meantime. While this activity has led to significant sales in some business areas. What made economic sense a few years ago might.Optimizing the global manufacturing footprint external factors make adjustments wise. a multi-national industrial engineering company. Similarly. Direct industrial activity has been limited. The project team segmented the product structure in detail and mapped the advantages and disadvantages of local capabilities compared with a global capability. The only uncertainty is how quickly it will have to be replaced. competitive vis-a A detailed cost simulation revealed that the company could gain large cost advantages by serving global clients from China. but also abroad. pursues a strategy to increase its global presence with the aim of leveraging potential new markets and to defend itself against the increasing onslaught of competitors from low-cost countries.

The company is well aware that its manufacturing model and footprint will need to adapt continuously in order to remain competitive.160 Marco Zurru identified that can be relocated and sourced globally – including. Our client was successful in its goal and. and overall industrial structure. The project team whittled down this long list until the 20 most attractive and appropriate companies remained. The new company now acts as the main manufacturing and engineering location to serve all of the Far East for a specific technology. . However. for instance. including the supplier base. and the rapid development of cost components mean that companies need constantly to reassess their footprints. and design institutes. The speed of evolution in newly emerging markets. all steelworks. Taking this step represents a considerable change in the overall footprint of the company. covering all the relevant business areas) that identified potential players and targets for acquisition. management considers it to be just an initial step. A systematic approach that analyzes strategic options and defines concrete implementation solutions has proven to be the key for this company. Outlook The manufacturing models and footprints of global companies will be placed under increased pressure in the future. following the acquisition. as well as basic and detailed engineering. Out of this shortlist of 20 candidates. size. one that needs to be taken to cope with rapid market and technological change. the rate at which low-cost players are catching up in terms of technological competence. and ownership structure. China was selected as the target country for extending the industrial presence. size of the market. enabling it to continue doing business successfully in the global market. and the parent company aims to gradually extend its engineering support to other technologies. It provides engineering services to a specific business area/ technology. based on consolidated presence. Other selective regions will also be covered by this location in the future. a new manufacturing model was introduced. It should act as the service hub for low-cost procurement in the region. within the scope of the new global procurement model. A detailed screening of target companies was performed (starting from a long list of more than 300 state-owned and private companies. one company was targeted for acquisition mainly due to its technical capabilities.

Third. Manufacturing footprints have to be sufficiently malleable to follow the continuous evolution of international markets. 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. An optimal balance of internal and outsourced activities. dealing with conflicting objectives. they must show flexibility and be willing to adjust their footprint to align with anticipated market changes. R. weak copyright protection legislation. Stuttgart. Roland Berger Strategy o Consultants. while delegating most operational decision making. Companies are wise to proceed here with caution. companies will need to master three skills. Second. and coping with an increased need for strategic control. Greater education levels among the workforce in emerging countries. Managing multiple reporting lines. First. companies must be capable of managing complex organizational structures with multiple reporting lines in different geographical areas.and outsourcing takes time and careful consideration. minimize investments and risk. Companies face a real threat of losing their technological competitive advantage. (2006) ‘Global Footprint Design – Die Spielregeln in der internationalen Wertsch€pfung beherrschen’. and a flexible supplier base and modular products are required to adapt quickly.Optimizing the global manufacturing footprint To compete in the future. Finding the balance between in. . will be some of the skills required for managers in the future. and the increased ease with which information can be duplicated expose global players to a great risk. and optimize results. they must be able to keep their core competencies while outsourcing low-value skills. 161 Further reading Falb.

162 .CHAPTER 10 Leveraging manufacturing excellence in global production networks Volker Heidtmann and Stephen Weisenstein Introduction Manufacturing excellence – lean manufacturing – the Toyota production systems – regardless of the name that is applied. 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. We frequently find varying levels of success in implementing worldclass manufacturing systems and processes. Principles such as ‘just-in-time production and logistics’. and provides direction to managers seeking to introduce manufacturing excellence throughout all their operations. and ‘continuous improvement’ are applicable across manufacturing industries and are applied in many ways. drawing on a project we completed in the automotive industry. we show how this approach worked in a real-life business setting. After outlining the steps that are necessary to leverage manufacturing excellence in global production networks. ‘built in quality’. they try to conduct benchmarks to confirm or quash their doubts. Why can one plant be so successful and a sister plant be so poor? This chapter answers that question. even within manufacturing networks belonging to the same company. the two tasks are not always easy to undertake. many companies ignore the obvious first step: share and leverage best practices within your own organization and between your plants. the elements that make up a strong and efficient manufacturing system and process are well known. Benchmarking the industry leader has its advantages. In their hurry to turn to the competition for ideas. When managers question the competitiveness of a plant or operational process. and adopting selected ideas from competitor plants definitely provides a great many benefits: however.

Our approach to launching a manufacturing excellence effort starts with a project structure and then transfers the task into the line organization. This increases standardization between plants. and detailed data gathering) is started afterwards. 163 Preparation To realize the benefits from optimizing a plant network.2. 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. and ensure that implementation efforts are taken seriously. develop an overall vision for the focus area. interviews. It is also crucial for acceptance of the necessary changes in all locations. In most cases. Even in networks with barely more than ten plants. and focuses on a small number (typically. looking into each plant thoroughly is a formidable task. and procedures. a four-step process ensures that the project challenge is tackled pragmatically and with a clear structure. a plant network cannot be analyzed entirely. A more practical approach is the so-called T-shaped project design. which is shown in Figure 10. which is critical for successful completion. practices. Similar products and corporate culture make it easier to transfer best practices when they are unearthed. which has the additional benefit of motivating staff. They achieve this last step in part by communicating the reasons for change and highlighting quick wins. good preparation is essential.Leveraging manufacturing excellence Be your own benchmark The benefits of turning a company’s gaze inwards are tremendous. all plants are analyzed using a standardized quick scan. the benchmarking process is significantly easier because of improved access to information and greater transparency. First. become involved in making improvement plans that are feasible. This gives the project team a high-level overview of processes. which not only drives efficiency but also flexibility. During the T-shaped project approach. In-depth analysis (comprising plant visits. In our experience.1. Companies that follow this process work with project teams to gain a deep understanding of the current status of their processes and particular operation. four to eight) of the most . The process is illustrated in Figure 10. 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.

164 I Business system analysis: Understand processes Key elements • • • • • • • • • • Formal kick-off Quick scan Site clusters Performance drivers Chess board/KPIs Best practices Project targets Transparency Best practices Gaps II World class production system: Develop vision for focus areas • Best practice value chain • Virtual best practice site III Implementation planning: Define roadmap and priorities • Quantified gaps and measures • KPI link • Operationalized vision IV Implementation start: Communication of results • Communication • Momentum building Outcomes • Blueprint for world class production system • Vision • Commitment of management • Prioritization of measures • Implementation organization • First quick wins • Mobilization of organization Results • Organizational buy-in to project • Improvement potential • 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 .

practices. With this mixture of highly respected people. This results in very specific actions being developed. Best practices are then identified within the focus plants and are subsequently rolled out to the entire plant network. Similarly. Ideally. all economic conditions should be reflected as well. Global production staff functions can provide overall methodological guidance and continuously align the project with the greater production environment and. Implementation tends to run more smoothly when project members who enjoy broad professional acceptance are selected. employees at . financials. both high labor cost and low labor cost sites should be included. as should plants showing good and less favorable economic results.Leveraging manufacturing excellence Analysis logic Quick scan of all plants Questionnaire: • Products. procedures 165 Deep dive in pilot plants On-site analysis work: • • • • Shop-floor control Production planning Logistics Overhead/support cost • Deepen understanding of operations • Analyze status quo • Develop and test improvement ideas Figure 10. hence. At the same time. To gain a good cross-section and a fair indication of economic conditions. it is crucial to have the right people on board. Plant selection depends on a plant’s technological and economic profile. a combination of local plant experts and global production staff has proven to be particularly successful. This can mean the power to make formal decisions in the case of divisional managers. which factor in possible implementation problems already in the concept phase. In our experience. Plants should be selected in such a way that the core technologies and production processes of the company are reflected. To arrive at project results that are meaningful. local experts can contribute their detailed knowledge about production and logistics processes. operations GOALS • Get transparency over product range/complexity and KPIs used • Understand plant performance • Get high-level overview of processes. prepare the subsequent rollout. and also implementable.2 A T-shaped logic ensures breadth and depth of the analyses relevant plants. In this arrangement. but also professional standing when well-respected functional experts are involved. they should be opinion leaders in their field of expertise. small and large plants should be examined.

these visits will involve an investigation of product planning. and logistics performance should also be collected in the questionnaire. Depending on the project focus. the teams tend to move on to logistics. For this purpose. examining the plant’s subcontractor management. Typically.166 Volker Heidtmann and Stephen Weisenstein individual plants will find it easier to accept concepts already developed and implemented at other sites. During the shop floor analysis. the teams will look at control systems and batch sizes in addition to inventory management and inventory levels. both financially and operationally. equipment. At the same time. Its content should typically include basic profit and loss data. Another plant may score highly on both criteria. Benchmarking The actual project should begin with a quantitative analysis of all plants in the network. the team can select the focus plants to be analyzed in depth during the project. Identifying best manufacturing practices requires a much closer look at a plant. the analysis already provides a first indication of good and bad practices. and inventories. offering a central support to clarify open questions during the gathering of data also supports consistency. common reporting figures are not sufficient. as well as an analysis of the shop floor. but could have excellent quality figures. a detailed description of the data is necessary. manufacturingspecific cost details such as labor cost breakdowns. quality data. additional information will be necessary.3. studying the information systems (IS platform) and key performance indicators. One plant may show poor financial performance. This can be gained through a several-day ‘deep dive’ plant visit. Once these aspects have been considered. It lets the team identify specific performance profiles. Non-financial information such as headcount. The types of activities that might take place during a five-day pilot plan visit are shown in Figure 10. too. depreciation and maintenance costs. and asset data for machinery. The quick scan enables the project team to distinguish strong from weak performers. In our experience. . Whatever information is gathered. Typically. To this end. for example. Based on these insights. inter-company logistics and material management. The results of the quick scan allow the project team to assess each plant using quantitative information. all parties involved must have a common understanding of the data if it is to be interpreted in a meaningful way. we recommend the development of a standardized questionnaire. examination of forecasting.

Five-day analysis of pilot plants Day 1 MORNING • Review quick scan • General strengths/ weaknesses Day 2 • Shop-floor analysis – Control system – Batch sizes Day 3 • Shop-floor analysis (inventories) Day 4 • Logistics – Intercompany logistics – Material management Day 5 • First draft vision development AFTERNOON • 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 167 .

individual topics should be prepared in advance in specialized sub-teams. This often means finding solutions that reflect very different plant environments. Ultimately. the concept has to be endorsed by the entire leadership team of the company. the findings of the analysis phase have to be combined. As all relevant data is available on-site. . often have to be resolved as they are no longer sufficient if considered from a global viewpoint. and local plant requirements and experiences should be duly considered. They allow the project team to step out of their daily business and focus fully on the project tasks. 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. Open discussions and tact are paramount in this context. 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. To encourage target-oriented discussions. which may be reasonable when viewed from an individual perspective. Here. Concept development Developing a common manufacturing concept is the most difficult part of the project. The results from the expert teams are eventually combined during the global workshops. A basic agreement should be reached at this level. the findings can immediately be supported with quantitative information. A project lives or dies by the ability to gain consensus at this stage. Here. agreement has to be reached among all responsible decision makers. workshop-style. Without it. the implementation phase is the most critical phase when it comes to achieving measurable results.168 Volker Heidtmann and Stephen Weisenstein On-site discussions between the project team and plant experts provide a detailed picture of a plant’s performance. both local and global experts should have extensive discussions on detailed approaches and possible solutions. methods. As a vehicle to reach these results. In this phase. and systems that have been applied successfully and which can be transferred to other places. full-day events have proven to be particularly successful in our experience. The discussions serve to identify approaches. The personal convictions of team members. This phase is also tricky because of the human element involved.

again. People have to be assigned responsibility too. The plant process owner has an ongoing dialogue with the plant manager and a content team member. the concept has to be individualized for each site. top management should express its support as well to ensure the plants’ commitment lasts.Leveraging manufacturing excellence 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. Figure 10. Plant managers and division heads are the personnel to drive implementation. 169 Making the transformation stick One might think that clear action plans should be enough to guarantee a successful implementation. 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. With the start of the implementation phase. a content team member and the plant manager discussed results with . a lack of hierarchical support is likely to smother implementation efforts in the face of operational needs. At the same time. Individual plants should receive central coaching support. This. but habits developed over many years are hard to change. Implementing a new way of organizing manufacturing is prone to fail if left unattended. in discussion with local experts. at least at the beginning of the implementation phase. because they will be able to defend the project results against potential criticism from outside the team more easily than others. Once agreement on the new manufacturing concept has been reached. is a task that should take place on-site. consisting of plant managers and operations directors. Otherwise. Including manufacturing heavy-weights in the concept phase pays off at this stage. the responsibility for the success of the implementation should be transferred to the line organization. The responsible plant managers should agree upon the developed concepts before the actual implementation begins.4 shows an example of a real implementation structure in which content team leaders adopt the coaching role while the line organization. General rules have to be translated into specific actions with dates and improvement targets. it is not always unwillingness that prevents change but sometimes simply the difficulties of putting change into practice on-site. ensures hierarchical support. so strong is the resistance to change. and input about implementation content and progress from plant experts is exchanged. In the case shown here.

170 Project reporting Steering committee • Quarterly meetings • Progress reports Core team • Monthly telco • Exchange of experiences Content team leaders • Discussion on necessary changes and improvement Project Director Project Manager Regional Directors • Continuous communication of issues on project content and acute problems in the implementation • Monthly meetings to exchange experiences Content team member Advice • Ongoing exchange and input from plant experts on implementation content Plant process owner • Monthly phone call on implementation progress • Monthly update of project controlling tool Plant manager/coordinator • Ongoing exchange and input from plant experts on implementation progress Figure 10.4 The project organization is set up to keep track on the progress of the project – regular communication is key .

5 A regular communication process drives the sharing of internal best practices 171 .Best practice sharing process Reviewing frequency Annually Corporate management • Review of selected best practices and control of implementation process/improvement impact • Enforcement of best practice implementation • Monitoring and comparison of KPIs from all plants Best practices Quarterly Divisional management • 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 Monthly Plant management • Regular review of plant-specific KPIs • Driving best practice implementation process • Quantitative measurement of improvements • Suggestion of plant-specific best practices Plant team • Detailed best practice documentation and reporting • Realization of best practices from other plants Figure 10.

a project was initiated to develop and introduce a common approach to production logistics. A multi-level process that includes all parts of the manufacturing organization can provide an effective structure for this. An example of this type of structure is given in Figure 10. During plant visits and through the analysis of detailed performance data. over time. Ideas are generated on a plant level through joint teams of operators and functional experts. . identifying and sharing best practices has to be institutionalized. Specifically. Each site had considerable freedom in designing its production and business processes – a common practice when managing spread-out production networks.5. how does this approach work in real life? We applied it at one of our clients from the automotive supply industry. which owns the common manufacturing system and develops it further. and project managers on a monthly basis. So. regional directors. Involving top management at the same time signals to the plants how important these efforts are. Each level has a role to play in identifying internal best practices and ensuring that they are adopted. The consequence was equally as typical: each of the plants had. To align the operational performance of all plants on a higher level. six were selected as focus plants for closer analysis. shop floor control. six areas for action were identified: production planning. The function also coordinates the sharing of ideas and practices across plants through formal reports and personal meetings. After the collection of key plant data from all sites. 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. In short. The final step in implementing a common manufacturing system is to ensure that sharing best practices does not remain a one-off effort but.172 Volker Heidtmann and Stephen Weisenstein content team leaders. Practices that are relevant for sharing between plants are communicated to a central operations excellence function. developed a very specific set of production processes with very different levels of operational performance. becomes part of a company’s day-to-day reality. Case study: Leveraging manufacturing excellence The company is a global manufacturer of engine components with production sites spread around the globe. rather. global logistics. inventory levels were a problem.

detailed action plans were worked out together with each plant’s management team on-site. Overall. the moments when all experts and key decisionmakers met to approve the new concept. who supervised all local activities of the project. such as the optimization of planning algorithms. Techniques such as those we have outlined in this chapter will be critical as companies fight to improve their competitiveness. and indirect functions. instead. 173 Outlook In the future. To ensure a smooth and consistent implementation. will be focused on the ‘how’. . Each area was addressed by a team of experts gathered from various sites around the globe. Continually improving manufacturing performance throughout their global networks is central to that struggle. such as changes in plant layout or reorganization of indirect functions.Leveraging manufacturing excellence production key performance indicators. In addition. Local activities were accompanied by regular reviews by the company’s top management. The results of each team were then refined in two global workshops. coming both from short-term actions. The effects were distributed over time. These two events were the core of the project. manufacturing excellence will be less about understanding the ‘what’ of lean principles and efficiency techniques and. production IT systems. the implementation of the new production system aimed at a 50 percent reduction in inventory over five years. Understanding manufacturing excellence and being able to lead an organization in achieving it are two very different competencies. a reduction in manufacturing cost of 8 percent was expected. and long-term actions. Responsibility for implementation was dedicated to one clear responsible team member per plant.

International sales affiliates wanted shorter lead times to capitalize on short-term opportunities in their respective national markets.’ a production site manager at a modern and highly automated pharmaceutical plant in Germany confessed. Long and unpredictable lead times to affiliates resulted in an extraordinarily high share of rush orders. the German plant got the blame for the company’s inability to keep up with market growth. There was an information disconnect from export order processing. but inside the plant. The average number of items out of stock had risen from around 150 to more than 400 during that period.CHAPTER 11 From maintenance to quality control: effective support functions leverage manufacturing performance Thomas Kwasniok and Walter Pfeiffer Introduction ‘We recently redesigned our factory layout and material flow. In spite of its manufacturing best practices. Capacity was 174 . Erratic sales forecast figures were the reason he gave for the plant’s poor supply performance. the impact on overall manufacturing performance is below expectations. optimized shop floor processes and implemented lean manufacturing principles in production. 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. and even from production scheduling. because we keep suffering from frequent short-term changes of our production schedule. making it almost impossible for the plant to optimize production sequences. A detailed analysis of the situation revealed that the root cause was not outside. market demand had grown by 50 percent in some of the company’s major markets. Over the previous twelve months. However.

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.From maintenance to quality control lost on changeovers. When it comes to equipment maintenance. Whether equipment maintenance. A high level of equipment reliability is usually expensive because of personnel and training costs. if the support function is not effective it cannot leverage manufacturing performance. when we discuss the steps a refinery took to outsource support functions. and key performance indicators on delivery performance were not met. Further project examples are provided to show how the steps can be applied in real life in various settings. and administrative overheads. What the site manager discovered about the quality control support function in his plant holds true for most manufacturing support functions. in the extreme case – can save maintenance costs.’ the site manager concluded. factory logistics. 175 Impact of support functions on manufacturing performance Effectively managing support functions does not come cheaply: failure is a costly alternative. and the benefits the approach brings. in our case. costs can balloon. short inspection intervals and comprehensive maintenance activities – such as analyzing the deep root cause of malfunctions – reduce failure costs. the article also shows how Roland Berger teams execute maintenance excellence programs. Minimum maintenance – ‘run to failure’. In addition to detailing the building blocks for managing maintenance comprehensively. but results in unscheduled downtime and production delays. Lost . utilities supply or wastewater treatment. A service level setting for a support function should aim at the lowest total cost. the general approach to tailoring an effective and efficient support function to meet the needs of the manufacturing process can be transferred to other support functions. mostly by using manufacturing equipment maintenance as an example. too. too. However. ‘We had focused on our main process: bulk manufacturing and packaging of pharmaceutical products. This is noticeable at the end of the chapter. When the support function fails. While some of the details are specific to that case. Companies need to keep these two factors in balance. This chapter investigates how a support function can be designed. Operational equipment efficiency – the percentage of theoretical capacity of packaging lines that is actually used for productive work – suffered. it translates into short downtime and few quality defects.

176 Balance between costs of support function and failure costs PROJECT EXAMPLE: Maintenance US$ 810 Maintenance material Maintenance personnel US$ 8.255 Repair costs Lost sales Lowest overall costs 1 minute maintenance 1 minute production standstill Cost of support function = 1 : 10 Failure costs Figure 11.1 Costs of support functions and failure costs work in opposite directions and have to be balanced .

From maintenance to quality control orders are only one result of that failure. The spread between low performers and best practice is especially wide in the chemical industry. and tool support. When production comes to a standstill. the more effective a support function. In a workshop production environment. the organization. To achieve this. cautious maintenance is the cheaper option. maintenance is efficient when equipment is available at a level that is acceptable from a manufacturing point of view. effective support functions also bring other benefits: product and service quality tend to increase. this causes damages of US$8. 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 amount of equipment that can be purchased on a specific maintenance budget also varies tremendously. To illustrate that point. an . The importance of the cost of failure is also pronounced to varying degrees in different industries. the average cost of equipment maintenance – personnel plus material cost – at automotive suppliers is approximately US$810 per hour. When the cost of overly cautious maintenance is weighed against the steep cost involved in negligent maintenance. A recent benchmarking study of engineered products. Service quality improves as the availability of products becomes better. The ideal balance between maintenance cost and equipment availability differs vastly between industries. Production planning is more reliable and customer lead times are shorter because fewer time buffers are required. In addition. 177 Tailoring a supportive function: manufacturing equipment maintenance A support function is designed. For most companies. equipment defects tend to be more severe than with regular maintenance. to meet the needs of the specific manufacturing process using as little capital and at the lowest cost possible.255 in lost sales and equipment repair costs per minute. automotive suppliers. Setting costs aside for the moment. depending on whether best practices are applied. but also between different production lines and technologies. ideally. Product quality defects become less frequent when equipment maintenance is well managed. as there is a risk of collateral damage to other units. companies first need to understand the bare minimum requirements necessary to ensure efficient maintenance. Companies also need to pay careful attention when designing processes.

0 8.0 Industry average 10.0 10.0 55 60 65 70 75 80 85 90 95 100 12.0 6.0 Chemical industry Industry average 60 65 70 75 80 85 90 95 100 12.0 6.178 Engineered products 0.0 Maintenance costs [in% of asset value] 4.0 4.0 8.0 2.0 8.2 A benchmarking study of maintenance costs and equipment availability shows the improvement potential for different industries Source: Empirical study by Martin Weiss.0 4.0 55 Industry average 0.0 6.0 2.0 Automotive suppliers 0.0 55 60 65 70 75 80 85 90 95 100 Equipment availability Best practice Low performer Figure 11.0 10. .0 12.0 2.

process. the cost of failure might even be a product loss. A comprehensive approach to managing equipment maintenance – and manufacturing support functions – comprises six building blocks: strategy. Equipment is not serviced regularly. predictive. and this has implications for production planning. Preventive maintenance uses regular service intervals. Maintenance is performed when a certain level of wear and tear has been reached. It assesses all the failure modes that can be observed with a specific piece of equipment. because the entire line stands still if any single stage fails to operate properly. the greater the impact of maintenance management on overall production cost. An assembly line is hit much harder. and then describes all possible causes for those failures. The ability to detect a failure mode or failure cause in advance is another factor that should influence the choice of maintenance strategy. In the process industries. It is a support function to the support function of equipment maintenance. This method is based on a failure mode and effect analysis (FMEA). Breakdown maintenance (‘run to failure’) aims at maximizing the useful life of all parts. and control. A service plan can then be worked out for . Roland Berger uses a risk-based method to classify possible failures and to determine the most appropriate maintenance strategy and parameters. Probability. Work-in-process buffers the implication between stages. which is extremely costly because of rework or complete disposal. but only when a failure occurs. as well as cost and capacity. Servicing times. Predictive maintenance is based on frequent checking and a proper understanding of equipment wear and tear. IT systems. Companies should choose what strategy to follow based on the probability and impact of possible equipment failures. All three are used separately to determine what strategy is best for dealing with each failure mode. and preventive.From maintenance to quality control equipment failure affects only one production stage. 179 Building block 1: Strategy Companies can pursue three different maintenance strategies: breakdown. severity and detection effectiveness can be aggregated into a risk priority number. personnel. can be planned in advance. organization. Parts get serviced and changed on a fixed schedule. One cross-industry trend is clear: as the share of equipment cost to total production cost increases. Statistical data is evaluated to estimate the probability of each individual cause. Managing spare parts is a special topic that appears in all six dimensions. The severity of each failure mode represents the associated failure costs. Breakdowns cannot be predicted.

3 Comprehensive maintenance management consists of six building blocks .180 STRATEGY CONTROLLING $ maintenance cost Planned losses Availability Unplanned losses OEE * Degree of Planning Preventive Predictive Run to failure Options Clean Dismantle Check Transport Repair ... Example: Pump repair Operator Technician 3rd party PROCESS Losses impacted by effective maintenance IT SYSTEMS • Maintenance planning and scheduling • Order processing • Spare parts management • Costing MAINTENANCE MANAGEMENT ORGANIZATION Central PERSONNEL In house Out sourced Decentral Integrated OEE * Operating Equipment Efficiency Figure 11.

and operators are not idling time. Production employees need to be involved in the coordination of production planning. the selected maintenance strategy is clearly influenced by the equipment lifecycle. operator errors. This reduces costs and processing time because no maintenance personnel have to be called in. assembly errors or design faults. Equipment operators can complete many simple maintenance activities – such as cleaning. early breakdowns are likely to occur because of poor component quality. set-up. Building block 3: Organization Based on experience. When they occur. Later in the lifecycle. number of operating hours. the technical content of maintenance activities is specified by the equipment supplier. only 20 percent of maintenance jobs actually require maintenance experts. Since these are caused by component wear and material fatigue. and lubrication – after some training. and level of wear and tear – that trigger maintenance are defined per equipment type and maintenance activity. Expert assistance would probably have to be brought in . After a new piece of equipment is installed. Through the risk-based method. dirt or maintenance mistakes are generally responsible. especially during downtimes caused by maintenance. on average. These parameters help companies find a balance between maintenance and failure cost. Companies need to make plans regarding employees and outsourcing partners. However. breakdowns are seldom observed. • • • Strategic parameters have to be set. Thereafter. A detailed work plan per activity is required. Parameters – such as fixed maintenance intervals.From maintenance to quality control each piece of equipment. This allows companies to determine standard times and the spare parts and tools that will be needed for operational planning purposes – in most cases. they can be predicted. companies might find it worthwhile to review the activities with in-house technical experts and suppliers in order to detect potential for improvement. 181 Building block 2: Process Executing the selected maintenance strategy involves three levels of planning. attrition breakdowns dominate.

and a more balanced workload. general overhaul. There is a promise of efficiency gains when companies share resources and balance workloads with maintenance. which are often located close or even onsite. because a decentralized maintenance team’s workload fluctuates. With the decentralized option. Both functions typically struggle with workload fluctuations due to their limited internal customer base. while demand peaks should be covered by scalable external resources. The opposite side of the coin is the need for greater resources. Companies also enjoy greater responsiveness and highly motivated employees when first level maintenance is integrated into production. investing in initial training and ongoing coaching of operators. It is now common practice for virtually all services related to equipment maintenance to be offered by equipment suppliers and third party service providers. either on plant (decentralized) or company (centralized) level. however. companies might wish to ensure that an internal team is at least capable of maintaining the emergency mode operations of their . in-house or outsourcing. and difficulties motivating employees. However. especially when engineering is done in-house and machines are built on site. are offering more and more production support services. companies profit from good knowledge of the plant and short distances. decentralized. The scope of outsourcing can vary from selected operational maintenance tasks to complete maintenance planning and execution. and encouraging knowledge sharing between production lines and across sites is expensive. Companies might also choose to have a dedicated pool of resources for maintenance. lack of local knowledge. Companies that choose decentralized or central maintenance units also need to decide between make-or-buy. A centralized organization benefits from the sharing of knowledge. Integrated maintenance improves maintenance efficiency by minimizing the number of interfaces and handovers between single activities comprising a maintenance task. When considering a plant’s ability to operate independently from external providers. and integrated – is essential to setting up an effective and efficient maintenance program. From a utilization point of view. and refurbishment should remain the domain of dedicated maintenance personnel.182 Thomas Kwasniok and Walter Pfeiffer for more sophisticated tasks such as regular servicing or fixing minor breakdowns. 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. A well-rounded mix of all three concepts – centralized. it also faces long distances. an internal team should be used to carry the base workload. Specialized suppliers. Heavy maintenance.

• • Maintenance planning advises companies when maintenance work is required according to parameters set for each piece of equipment. Companies that outsource maintenance tasks need to have rules in place to resolve process issues. thus reducing utilization risk and bridging capacity shortages. and tracks relevant information such as the cause of a problem. the internal service shop also gains free capacity for projects dependent on know-how. provides traceable documentation of machine history. 183 Building block 4: Personnel When operators take on maintenance tasks. As well as gaining access to the external competencies of specialized suppliers.From maintenance to quality control production equipment. and ensures better quality service. It creates more efficient cost control. technical skills might be required. Maintenance order processing creates work orders. To control external maintenance providers. . It also triggers further Enterprise Resource Planning (ERP) functions. and guidelines that enable them to diagnose breakdowns efficiently and make decisions quickly. Fixed maintenance costs become variable. Long process times. quality issues. and delivery risks are also potential problems. too. they must be trained and coached appropriately. Operators must be equipped with analysis and problem-solving techniques. The advantages of outsourcing are clear. Depending on the type of maintenance job. and the ability of internal resources to repair defects and operate product equipment self-reliantly is undermined. a clear description of process interfaces and service levels is essential. It also helps companies to schedule capacity planning and to staff maintenance tasks. and reserves and cancels spare parts and tools. They should also be able to perform critical maintenance tasks without external support. Building block 5: IT systems Computerized maintenance management systems (CMMSs) provide support for equipment maintenance in four areas. eventually lowers maintenance cost. The disadvantages are clear. downtime involved and recommendations for future action. Companies risk losing internal skills. facilitates communication between internal functions and external service providers.

Since avoided failures do not show up in accounts. An accurate assessment of maintenance effectiveness distinguishes losses by their root cause.184 Thomas Kwasniok and Walter Pfeiffer • • Spare parts management is responsible for controlling spare parts inventories and procurement. the maintenance of vehicle fleets or healthcare facilities. equipment downtime is widely used as a proxy to measure the effectiveness of equipment maintenance. 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. where operators spend part of their time on maintenance tasks. Planned losses are times when planned maintenance jobs take place. preventive repair work. Maintenance control needs to measure both maintenance and failure costs. advanced planning can be improved by employing specialized software solutions. Building block 6: Control The purpose of maintenance control is to deliver information necessary for steering maintenance activities. Most of these are designed to work as add-on solutions that link with ERP systems such as SAP R/3. The target for equipment downtime should be based on the availability level defined for each piece or type of equipment in the strategy phase. and variances in set-up and cleaning times. The monitoring and reporting area is responsible for reporting maintenance costs and service levels. Unplanned losses are caused by equipment breakdowns. Some CMMS products focus on particular industry sectors – for example. This becomes more challenging in an integrated maintenance organization. and defect repair. A measurement of operating equipment effectiveness identifies planned and unplanned losses of equipment availability. . Others aim to be more general. it also covers times when no orders are planned or operators are unavailable. The target also reflects the probability and impact of failure drawn from historical data stemming from the FMEA. While work order processing and basic reporting are covered by modern ERP systems. Quality loss and operator breaks and speed are found in this category too. and to distinguish between regular inspections and servicing. Avoiding failure costs is the real value that effective maintenance provides.

Common targets are lowering maintenance cost. our project teams adhere to an approach that comprises three phases: positioning. The organizational set-up is likely to reflect the centralized or decentralized strategy of stock keeping and reordering. While each phase has its specific objectives and deliverables. in every step the consultants pay attention to each of the building blocks previously outlined. and raising service quality levels. to central stock and call-off on demand from one or multiple supplier(s). concept. Spare part logistics is responsible for ensuring that spares are available at the right place when they are needed. and triggers purchase orders according to the respective replenishment strategy and parameters. Strategies for spare parts supply vary from locally held stock (which is the most expensive but is always available). to a large degree. To set up spare parts management. improving product quality. and implementation. For instance. The equipment availability target of maintenance – and cost incurred – is. These decisions also affect the equipment availability necessary to satisfy external customers. manufacturing technology chosen by R&D determines what manufacturing equipment is . reducing failure cost. and compares it with availability and the lead time experienced by the internal customer. They are also in charge of keeping logistics cost and capital employed under control. 185 Executing a maintenance excellence program When executing a maintenance excellence program. Companies might want to improve maintenance in a variety of areas. Before the first project phase begins. the same six dimensions (the building blocks) need to be considered. Maintenance control monitors the cost and capital employed in the spare parts inventory. Target setting needs to reflect the expectations of internal customers and consider interdependencies with other functional areas. the equipment maintenance function. there is a preparatory phase during which targets are set for the program. Employees have to be trained and be supported by an IT system that provides inventory transparency. Parameters such as target inventories have to be set in order to control the process of spare parts procurement.From maintenance to quality control A support for the support function Although equipment maintenance is a supportive function. determined by decisions made elsewhere in the organization. it also draws on another level of support: spare parts management.

Once the expectations are specified and agreements have been reached between the equipment maintenance function. predictive or preventive maintenance. Easily maintained machinery. Benchmarking maintenance costs and equipment availability with industry peers provides an assessment of the initial situation. Decisions on production planning and scheduling narrow down the options for corrective. Our project approach to tailoring a support function emphasized intense involvement among the respective functional interfaces in the client organization. the project is conducted in three steps: positioning. internal customers and other stakeholders. 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. and implementation. Depending on the quality of data available. severity. 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. makes the job of equipment maintenance easier. the most adequate maintenance strategy is chosen by equipment type through Roland Berger’s risk driven approach based on FMEA results. This impacts the options and requirements for maintenance. an FMEA is conducted to evaluate the capability for probability. make-or-buy decisions. and detection for typical equipment defects. Further concept detailing deals with process design (including maintenance parameter setting). for which spare parts are easily available at low procurement costs. The job is also made easier with the use standard machinery that comes with maintenance services from the equipment supplier or can be completed by a range of third-party providers. concept. organizational set-up.186 Thomas Kwasniok and Walter Pfeiffer purchased. More elaborate equipment developed by an in-house machine building function requires advanced internal maintenance skills. Concept Based on the findings of the positioning phase. skills and .

PROJECT START TARGET SETTING • Better product quality • Lower maintenance costs 1 Positioning 2 Concept 3 Implementation Plant data collection Polymerisation Maintenance strategy Degree of planning • Change management Preventive Predictive • Sharing knowledge • Operational support • Constant strategy revision process Options … Compounding Run to failure BETTER QUALITY Requirements Specification LOWER COSTS FMEA RPN Description Concept detailing • • • • • • Processes Make-or-buy Organization People IT system Controlling Impact Failure costs Maintenance costs Detection Severity Probability 2–4 weeks • Better service quality RPN • Lower failure costs FMEA Failure mode and effect analysis 6 weeks Depends on work involved MILESTONES Risk priority number Figure 11.4 A Maintenance excellence program needs clear target setting and is structured in three project phases 187 .

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. Our first client is a global player in the specialty chemicals industry. Because equipment downtime usually affects a whole series of production steps. the selected maintenance strategies need to be constantly revised and improved. Key success factors are change management. In addition to lost output. Implementation Successful implementation involves more than simply installing the new structures. This project phase typically takes six weeks. and our project focused on selected major sites in Europe. and communication and knowledge sharing between external consultants and client employees on all levels of the client organization. based on the findings from maintenance control and in adjustment to a changing production environment. From our experience. At the end of the concept phase. This has to be reworked or even scrapped after an equipment breakdown. many companies first have to place their maintenance building blocks in order.188 Thomas Kwasniok and Walter Pfeiffer qualifications requirements. have agreed on Companies need to choose pragmatic solutions. Before embarking on a maintenance excellence program. especially when a company is transitioning towards an integrated maintenance organization. there is also a significant risk of material loss. processes and systems. and a comprehensive and consistent control system. Pragmatic operational support on the planning – and even shop floor – level is frequently required during the initial phase. an implementation plan has been generated and is ready to be executed. IT system selection. the cost of failure in the chemical industry is high. including interface functions. After initial implementation. . 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.

OLD organization (separate) Production • Plant manager • Production supervisor • Operators Plant engineering • Engineers • Workshop • Technical office • Coordination engineers Central engineering • Civil engineering • Electrical engineering • Control engineering • Design/construction • Special workshops NEW organization (integrated) Production • Plant manager • Production supervisor • Operators • Production engineers • Workshop • Control engineers Operation Plant engineering • Technical office • Coordination engineers Central engineering • Civil engineering • Control engineering • Design/construction • Special workshops Operation Fix breakdowns Planned maintenance Small projects Large projects Fix breakdowns Planned maintenance Small projects Support Support Support Large projects Maintenance costs ( m) 29 ( 26%) Equipment availability (average) Maintenance cost 110 81 More significant increase for previously critical key equipment 92% 94% Additional output worth EUR 120 m 2004 2006 2004 2006 Figure 11.5 Project example: major sites of a global player – specialty chemicals 189 .

which led to significant idle periods as they waited for experts from plant engineering to arrive to perform tasks that were often simple. of which only 15 percent was undertaken by centrally coordinated third parties. Plant engineering and central engineering provide assistance on small projects. An evaluation of the technical content of maintenance tasks led the team to conclude that operators could handle the majority of tasks. 57 percent was contributed by central engineering. The participation rate of operators was 8 percent. The headcount in central engineering was reduced by 38 percent of its original size. The plant engineering team was drastically reduced to a technical office with a number of coordination engineers. while large projects requiring specialized skills and tools are still run by central maintenance. the client felt that the availability of some critical production lines was insufficient. The project team’s analysis revealed that the company had no defined maintenance strategy. The overall share of planned maintenance was at a low 28 percent of all maintenance jobs. In order to increase utilization of central maintenance staff and to gain access to external expertise. The project team developed differentiated maintenance strategies for the client.190 Thomas Kwasniok and Walter Pfeiffer Example: Availability of critical production lines Equipment maintenance was organized on two organizational levels: plant engineering and central engineering. the outsourced portion of maintenance hours was almost doubled. from 15 to 27 percent. resulting in loss of sales. The investment in an extensive training program for operators and the installation of a medium-range CMMS tool paid off after eight months of project work at a pilot plant and subsequent roll-out to all . The workshop – formerly run as part of plant engineering – was transferred into production. The number of interfaces and handovers between subsequent work steps of maintenance tasks has fallen significantly. Plant engineering performed 35 percent of all maintenance jobs. raising their share of maintenance work from 8 percent to 28 percent. highly qualified. Processing times have also decreased. but their workload and utilization fluctuated due to their high level of specialization. The decision was made to move towards a decentralized maintenance organization that was integrated with production. on average. Operators hardly participated in maintenance activities. The production function now deals with most planned maintenance jobs and small breakdowns. Maintenance control was budgetoriented only. Despite increasing efforts to improve maintenance. Employees in the plant engineering departments were.

191 Shared support functions in the chemical industry The second example demonstrating what can be gained by properly managing 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. .From maintenance to quality control European sites. Equipment availability increased from 92 percent to 94 percent. which represents additional output worth ⁄120 million in sales revenues. The solution o was to split real estate. Annual maintenance costs were reduced by 26 percent from ⁄110 million to ⁄81 million. Bayer Industry Services was founded to look after Bayer’s sites – the former Hoechst sites in Frankfurt. another figure illustrates how much difference the program has made. which used to be a fire-fighting exercise performed by a poorly motivated and underutilized team with little attachment to production goals. 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. and services from the production companies. The portion of planned maintenance grew from 28 percent to 70 percent. site infrastructure. Splitting up the support functions between the new production companies and business segments would have destroyed synergies. has been turned into a wellplanned activity. Infraserv service three other major locations. Equipment maintenance. As a bonus. even within major chemical sites of companies such as Bayer (split into Bayer and Lanxess) and Hoechst (partitioned from 1994 until the merger with Rh^ne-Poulenc in 1999). the majority of operators perceive the work as enriching their jobs. Outsourcing opportunities have grown substantially over the past years in Europe’s chemical industry. Example: Outsourcing production support functions The sizeable support functions of the parent companies had lost major parts of their customer base. Besides compelling financial figures resulting from the project.

One element is a site fitness program (SFP) . High overall economic growth translates into healthy margins. workforce gaps are common in this sector. as our next project example shows. and the demand outlook for the near future is quite promising. site security and utilities) to production related and location independent (such as engineering and equipment maintenance). there are more than 40 chemical parks in Germany alone. The result of this development is a wide range of supportive services advertised to chemical production companies: from general and location specific (such as real estate and basic infrastructure. as refiners were reluctant for many years to hire enough employees. The case we draw on involves a refinery. Refineries currently enjoy favorable conditions. Industrial areas and service capacities became available to third parties interested in starting up business in the new chemical parks. a few key elements help prepare a refinery organization to meet the requirements of today’s business landscape and to secure long-term viability. Some European production units were downsized or closed. Additionally. Louisiana and Texas – refining margins reached a peak. Today. Too many initiatives in too many areas – ranging from operations over capital projects to service function management – have to be started at once. Since the business is cyclical. 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. Since it takes several years to train new personnel so that they are able to contribute fully to successful operations. Following Hurricane Katrina – which had a devastating effect on oil production and refining centers in the Gulf of Mexico.192 Thomas Kwasniok and Walter Pfeiffer The restructuring not only fragmented large companies. 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. But the oil business is subject to global geopolitical forces and is strongly influenced by local catastrophes. this gap cannot be closed quickly. 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. All too often this leads to management stretch. it is only a matter of time until the next major downturn hits. it also forced capacity adjustment. Strong demand has led to new requirements.

6 Providers have developed from general and location-specific services into production support functions independent of location 193 .Equipment maintenance Pipeline bridges Proximity to production Analytics Warehousing and transportation Waste disposal Data networks Utilities Staff transportation Infrastructure / Real Estate Location specific Site security IT & Office services Communications Catering IT and Communications Engineering Raw materials Employee training Procurement Independent of location Figure 11.

These functions are required by the core functions and. fire services or HSSEQ. Key functions.7 Two elements needed to create a high performance refinery organization . etc.194 Thomas Kwasniok and Walter Pfeiffer for organizing the site. Examples of such functions are maintenance. This program enables the refinery to undertake careful review and documentation of all functions. The refinery decided to outsource its materials management. supplies. after which core business functions can be separated from support service functions. are crucial to the site but have no unique critical aspects. Example: Flexibility In one project. A second element was the identification of value-added service partners for non-core activities. Next. by contrast. with close attention paid to opportunities to optimize site services that could improve processes and release cash. Total site fitness Program for organization (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 • Identify non-core activities that can be provided by service partners Identification of value-added service partners • Key: qualified partners consider the relevant function as core business • This can include services.7. we helped a German refining site transform itself into a flexible refinery by following a SFP. are enforced by legal regulations. • Should also include financing of capital employed Figure 11. An outline of these two elements is provided in Figure 11. The goal of any SFP is to increase a refinery’s flexibility. the refinery – with our help – reviewed its functions and identified the different groups of functions that needed to be optimized. These functions were viewed as candidates that could either be pooled together in a service center with other sites or outsourced to specialized third-party service providers. the support functions were reviewed. in some cases. The core functions were optimized for maximum performance. 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. Materials management and facility management are typical examples of support functions. First.

and complements the service offering with other value-added partners to form a value network. The role of vendors. the new partner built a new warehouse immediately outside the refinery and optimized all material flows. is typically restricted to selling parts and distinct services. A turnaround is a major undertaking in this business. continuously strives to optimize the joint partnership. These included total employees/refinery production. finding a partner turned out to be a challenge. The transfer was executed successfully. Overall. The whole refinery is shut down and equipment is checked for functionality and remaining lifetime. labor costs were reduced by around 20 percent and material costs by 2–3 percent over a period of three years. Some clear criteria separate a value-added service partner from a classic vendor. This has major implications for the supply of spare parts and materials. the headcount and cost base has become more flexible. Finally. an appropriate partner was found and the whole materials management function was transferred to this partner. Because of these two steps. maintenance cost/refinery output. Eventually. Although the refinery had a clear idea of what it wanted to achieve. giving the management room to maneuver in response to shifts in the business climate. Specific key performance indicators for the refinery were improved. The large list of candidates quickly dwindled once the requirements of materials services for a refinery were explained in detail. 195 . in contrast. A value-added partner operates activities as a core business. the management of the refinery decided to outsource one of its support functions – the materials management of the refinery – to a value-added service partner. The new partner had little time to get on board and handle regular operations because the refinery had scheduled its next turnaround one year hence.From maintenance to quality control In the implementation phase of the project. and return on capital employed. This also allowed the refinery to offer the services to other prospective sites in the region once the turnaround had taken place. the SFP and the outsourcing of the refinery’s materials management resulted in a successful turnaround. In agreement with the refinery. Several hundred purchasing requests must be processed within a short time frame. and replaced as appropriate. Management and the key refinery team can now focus on core business activities. Getting the partner on board brought significant improvements. is careful to stay in a neutral position.

This helps maintain flexibility and variability of cost. 3rd party . R&D 3rd party Shared services Figure 11. A key success factor will be a seamless and efficient integration of all providers into the customer’s business process. from pure support functions to closer to the production process. interdependencies between service providers and customers increase. which is the main reason why organizations outsource respective functions and services. Further reading Roland Berger Strategy Consultants (2004) ‘Global Footprint Design’. The same pattern is discernible in other sectors too. Accounting • Logistics • Facility management • Other services • Procurement • Laboratory. While services become more sophisticated and customer-specific. Stuttgart. chemical parks and locationindependent providers will extend the range of their service offerings along the value chain of the chemical industry. As a future trend.196 Thomas Kwasniok and Walter Pfeiffer Core business focused site External parties Functions with outsourcing potential Site/global functions Functions with outsourcing potential External parties Corporate functions • Strategy Core and key functions remaining on site • Operations • Materials management • HSSEQ • Engineering • Operations planning • Controlling • Maintenance • HR.8 A German refining site transforms itself into a flexible refinery 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.

PART IV Supply Chain Management 197 .

transportation or warehousing. Why is supply chain management so important? Emerging economies provide new market opportunities and are shifting the center of gravity for sales and operations. As the contours of the business world have shifted radically during the past decades. Relying on products is no longer enough. An integrating role. satisfaction and loyalty are essential to processes that serve the customer.Introduction Supply chain management – more than just logistics Robert Ohmayer and Steffen Kilimann Supply chain management is not a fancy consulting term for familiar functions such as logistics. has become necessary for business success. the demands on the supply chain have expanded. which places the customer in a strong position. Whether markets are mature or developing. The scope of the supply chain is extending to manage this 198 . Supply chain management sidesteps the function-based corporate organization and. In many companies. responsible for linking major business functions and processes into a cohesive and high-performing business model. supply chain management has taken on this central corporate role. companies need to focus sharply on solutions and services. integrates the core functions that create value in an end-to-end process. instead. The outsourcing of manufactured components is leading to increasingly complex business processes that require special attention and close monitoring. The supply chain has to expand and be able to serve a multitude of offerings. To meet demand. including the supply chain. Western European markets have become more mature and are highly competitive. The focus is no longer on how to move goods from A to B or how to organize a warehouse.

a cost-efficient supply chain with short lead times is critical. How can companies achieve supply chain excellence? Drawing on insights and experience gained advising clients. from performance through to supply chain enablers. It covers all areas of supply chain strategy. Supply chain decisions directly influence the value drivers of asset turnover and operating profit margin. Successful companies today strive for highest performance and lowest costs in equal measure. which is also illustrated in Figure IV. This must be reflected in all structures. Supply chain structures should be rigorously adapted to fit the relevant market requirements.1. we showcase our end-to-end framework. Dr Steffen Kilimann and Robert Ohmayer. performance and enablers. for example. That is why supply chain management that aims to boost ROCE must be closely aligned to upstream corporate decisions. Roland Berger Strategy Consultants has created a framework for establishing end-to-end supply chain management. but also to asset and service efficiency. Reducing the complexity of both product ranges and processes in the logistics chain lifts the operating profit margin. as does streamlining production and logistics networks. But a ‘one-supply-chainfits-all’ mindset is not the right strategy. We describe the various methods and procedures for optimizing the supply chain at the level of strategy. Productivity is taking on a new meaning: it refers not only to cost efficiency. The importance of supply chain management in corporate strategy. and from production and logistics networks to processes and systems. In highly competitive commodity markets. Customer and market requirements should be at the forefront of all supply chain decisions. 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 Part IV. In Chapter 13. By contrast. Finding the right segmentation is definitely the key here. from supply chain organization to monitoring systems. in markets with more strongly customized products. in Chapter 12. Optimizing inventories throughout the logistics chain boosts asset turnover. Alexander Belderok and Thomas Hollmann show what impact can be achieved when complexity is correctly identified and 199 .Supply chain management – more than just logistics growing variety of interrelations. Successful companies tend to align their supply chain to the requirements of the relevant business segment or business unit. and employ examples from past projects and survey results to demonstrate the practical value of these methods and procedures. a flexible and responsive supply chain is paramount. is clear. especially its direct impact on return on capital employed (ROCE).

Wagner present o best practices in establishing supply chain organizations.1 Our framework for end-to-end supply chain management effectively managed. sufficient operating margins. and total costs …are set up in an adaptive and responsive manner to allow for proactive changes of the market and/or strategy CHANGE MANAGEMENT Figure IV.200 Robert Ohmayer and Steffen Kilimann IV BEST-PRACTICE BENCHMARKING III I Supply chain strategy … ORGANIZATION AND RESOURCES CONTROLLING …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 Cost performance I Asset performance II Supply chain performance … Supply chain strategy …covers all aspects of value creation including sustainable top-line growth. service performance III Supply chain enablers … PROCESSES AND SYSTEMS V NETWORKS …encompass an end-to-end view considering all flow aspects from information to goods. Roland Schwientek and Christian Deckert demonstrate how companies can boost their supply chain performance by achieving excellence in working capital and. services. in Chapter 15. Using the results of a project from a healthcare company. Ingo Schr€ter and Stephan M. In Chapter 14. . and efficient capital structure Top-line growth. leading service levels. drawing on a survey and case study examples. funds. they highlight the key levers for reducing complexity.

For this purpose. and customer service structures. a series of challenges. we have developed an end-to-end global supply chain management framework. We pay particular attention to the increasing importance of global value chains. However. 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. It has grown beyond its operational roots. 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. the division of labor in networked value chains.CHAPTER 12 Global supply chain management: a success factor for global players Robert Ohmayer and Steffen Kilimann Introduction Supply chain management (SCM) is the nervous system of today’s global economy. As well as encompassing all operative core processes. with them. such as return on capital employed (ROCE). when it was a way of controlling the flow of goods and services. the growing complexity of product portfolios. SCM is a highly complex undertaking. and the demand for higher levels of 201 . In our view. transport and warehousing were once purely functional and managed on a country-by-country basis only. companies require a strategic approach to master this complexity and to move through these obstacles. These have to be addressed if companies are to have supply chain excellence. it is now responsible for managing costs. SCM directly influences the success of a company’s key financials. distribution. Before discussing our approach. New trends are emerging and. and also reducing complexity and redesigning value chain structures. to take on a more strategic role. we examine the trends and challenges in supply chains today. Logistic functions such as inventory management.

in itself. As companies assume a more global footprint. CAGR 762 629 FDI 10. Following this.5% Figure 12. world exports. and logistics networks located in different parts of the world must all pull together. while distribution and sales are organized on a global level. manages only design. Production has been almost completely relocated to low-cost countries. production networks. FDI has risen continuously by an average of 10 percent per annum.1.1 World GDP. presents new challenges in terms of building up and managing supply chains. marketing and customer service from its headquarters in Germany. Over the past 20 years. for instance. their supply chains become more intricate. functionality.9% 164 2005 GDP 2. Suppliers. reliability and flexibility. world FDI .202 Robert Ohmayer and Steffen Kilimann service. This. Trends and challenges in supply chains Supply chains are becoming more complex in terms of geographical spread. The volume of foreign direct investment (FDI) is a clear indication of the extent to which value chains have become globalized. we discuss how companies can manage global supply chains. This is altering the way supply chains need to be managed. as can be seen in Figure 12. sometimes spanning several continents. 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. Adidas.9% 324 100 156 1985 1990 1995 2000 312 Exports 5. and to open up new markets. and product portfolio. No signs indicate that this trend will slow down or reverse in the near future. Today’s companies are increasingly globalizing their value chains. They do so mainly to secure cheaper supplies of products and services.

they are seeking to diversify into new market segments. high-quality products accompanied by excellent service. the number will increase to more than 365 model types in 2010. Central European companies. modern information and communication technologies cut transaction costs. the variety of car configurations has also swelled. For its Mini brand alone. they aim to increase the total number of units sold – or. are trying to compensate for rising costs at home by focusing on product innovation. Similarly. Product differentiation has risen particularly dramatically in the automotive sector. Both the automotive and retail industries. 203 . in particular. The complexity of the supply chain is also turned up a notch as companies vary their product portfolios to an ever-greater degree. the share of value creation of original equipment manufacturers (OEMs) will shrink to 25–30 percent by 2010. These technologies empower companies to reduce vertical integration by outsourcing more materials and services. leading to even more complex networks of product and information flows between suppliers and OEMs. to keep this level stable. The division of labor is also becoming more pronounced as the management of supply chains transcends corporate borders. The number of models per brand mass manufacturers have offered rose from three-and-a-half in the 1980s to more than eight today. BMW offers customers the choice between 418 different paint and color combinations. By taking this action. In addition. At the same time. Smoothly integrating these providers is one of the key challenges facing the discipline of supply chain management today.Global supply chain management Supply chains are also becoming more complex as the division of labor in networked value chains changes shape. The number of models of cars and light commercial vehicles in Germany rose from 140 to 335 between 1985 and 2005. According to a study of the automotive supplier market that our company conducted in 2007. the more specialized services offered by logistics providers allow many companies to outsource parts of their supply chain. With the Internet as their backbone. This helps companies to specialize and facilitates effective networking. They are offering a broader range of customized. If OEMs’ plans pan out. are very advanced in integrating logistics to ensure smooth product flows and to satisfy required service levels. The automotive industry has been a forerunner of this trend. and premium OEMs and mass manufacturers alike are embracing this trend. This means that suppliers will take on even more responsibility for developing and producing cars. for instance. automotive manufacturers are placing new product variants on the market and launching model offensives at an unprecedented rate. at least. To counter increased competition.

204 Robert Ohmayer and Steffen Kilimann As a result of these changes. If companies in these sectors fail to learn. have endeavored to improve their supply chain processes over the past few years in order to increase their product availability. and flexibility. Best practices developed in these industries can be transferred to other sectors. Supply chain processes must become extremely reliable. made-to-measure customer services and broad product portfolios. Companies in the retail sector. Optimizing global supply chains – a success story Aligning the supply chain with global requirements is a strategic management challenge. rapid responsiveness. the people who manage them have to do more to ensure high service levels. 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. and assembly processes increases. mobile phone and fashion industries. too – especially in sectors with short product lifecycles. The complexity of development. Since the average out-of-stock rate of European retailers is between 7–10 percent. supply chain management is forced to meet ever more intricate and involved requirements. The trade-off between product costs and supply chain costs needs to be weighed up carefully. for instance. and product offerings. retailers have a strong incentive to achieve high service levels and create supply chains that function perfectly. Optimizing individual functions in the chain . then 9 percent of them will not be tempted to purchase an alternative product. As supply chains become more complex in terms of geographical reach. finishing. 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. the costs can be horrendous. and the faster companies have to respond to market trends. This amounts to ⁄4 billion in lost sales in Europe alone. Surveys show that if a product is not available for customers. functionality. Companies must master a tricky balancing act: They must keep a cap on their supply chain costs while still delivering high-quality. the more difficult it is to globalize production and sourcing policies. Different market segments expect different service levels and are exposed to varying levels of cost pressure. The more customized products and services are. such as the PC.

The project team developed a holistic supply chain strategy for the region Europe.000 customers in 57 countries from 174 manufacturing and warehouse locations. the company serves a broad range of industries. lost revenues. and higher working capital.000 different products and variants. one third of which is generated in the EMEA region. from automotive. We wish to show how useful and practical this framework is. engineering and aerospace through to consumer products and communications. approximately every fifth order was not delivered on time or was completed inaccurately. spanning over 500. 205 The globalized company suffered from severe supply chain deficits Our client is a fast-growing producer of electronic components. The product portfolio is highly complex. In other words. Each of these industries places widely differing demands on the company in terms of product specifications and service levels. despite the company’s steep supply chain costs. Furthermore. For example. switches and fiber optic products. Its global revenues exceed ⁄5 billion. .Global supply chain management tends to be counterproductive. a manufacturer of electronic connectors. The inevitable result: dissatisfied customers. and high costs for emergency shipments. It is therefore necessary to take an overview and optimize all aspects in a considered and coordinated manner. the company was having a very hard time meeting required service levels. The ‘ship-to-request’ service level averaged just 79 percent. and will draw on a project to do so. The project was set up and implemented in several phases and subsequently rolled out globally. Example: Global supply chain management framework In EMEA. as these typically pursue conflicting goals. we have developed an end-to-end global supply chain management framework. The company serves 90. longer replenishment cycles. establishing alternative sources of supply in low-wage countries and/or relocating production facilities inevitably leads to higher shipping costs. Middle East and Africa (EMEA) for a global producer of electronic components. 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.

How strategy. local manufacturers were acquired to penetrate these markets. The company’s supply chains had evolved over time. information was far from transparent on a global level because of the many and varied supplier relationships the company had. Exacerbating the problem. and enablers must fit together seamlessly and dovetail perfectly with a company’s specific goals if success is to be achieved.2. In one country. empowering the company to shift its focus away from a country-by-country perspective in order to develop a global value chain. IT systems were only networked across borders to a limited extent. complex intercompany supplier relationships involving multi-step ordering and delivery processes emerged between different countries. Holistic supply chain optimization is the key To improve service levels and reduce supply chain management complexity. The supply chain strategy lays the strategic foundation for transforming the supply chain. In some cases. Sales growth had led the company to follow its customers and gradually expand in all core European markets. In the example of the global electronic components manufacturer. some of them in countries with low labor costs. Warehouses and production facilities were set up piecemeal in the various countries.206 Robert Ohmayer and Steffen Kilimann Historical development was part of the reason for the company’s unfortunate predicament. Outsourcing had been engaged in to improve flexibility and reduce labor costs. performance. Efforts to optimize existing systems were limited to individual functions and countries. There was no one person responsible for supply chain management at a national or enterprise-wide level. low-volume products and customers. The approach draws heavily on the Roland Berger supply chain excellence framework. on average 30 percent of all products sold were manufactured in a different country. The broad product and customer portfolio caused even greater complexity. In addition. Yet. As the production network grew across Europe. Another driver of complexity in the supply chain was the outsourcing of parts of production to external vendors. for example. responsibility was fragmented within the supply chain. the project team designed and implemented a holistic strategic approach. and enablers work together is shown in Figure 12. leading to a large number of unprofitable. performance. core logistical functions were bundled in business units that served multiple . It is our conviction that supply chain strategy.

defining different cost and service level targets for its various business units was the necessary first step. the difference in service level expectation was . performance and enablers fit seamlessly together countries. processes. key performance indicators (KPIs). Each supply chain must be examined on its own merits and segmented in line with specific market demands. system requirements. Supply chain enablers refer to the conditions that must be put in place to achieve defined performance goals. monitoring and control. other sectors were happy with lower service levels.2 Supply chain strategy. and material flows. For our client. delivery times. At the same time. One example is to vary cost and service level targets for different customer and product segments. Considering the exorbitant expense involved when a car assembly line grinds to a halt. and costs vary too widely for that to be possible. Reconfiguring the supply chain is one of the most powerful levers to optimize the ROCE. These now serve all business units. While the automotive industry insisted on service levels upward of 99 percent. Defining the strategy and target gets companies off to a good start There will never be a one-size-fits-all supply chain. It can influence profitability by improving cost structures and service levels. The requirements that different customers and markets place on availability. and an optimized network will have a significant impact on capital turnover.Global supply chain management 207 SUPPLY CHAIN ENABLER 1 Define strategy and performance targets SUPPLY CHAIN PERFORMANCE SUPPLY CHAIN STRATEGY 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 Figure 12. for example. They include organizational and resource sizing issues. network structures. corporate functions such as warehousing were reorganized as shared service centers. Supply chain performance links strategic company objectives to specific supply chain targets.

For example. This had a negative impact on service levels and costs. Customer service was attached to marketing/sales. preferential service – in the form of special logistical processes such as direct shipment. cross-border supply chain management system within business units. naturally. to small customers. The company’s traditional warehousing structures and production constellation no longer lined up with market requirements and were consolidated throughout Europe. whose processes are closely intertwined. Figure 12. By contrast. say. while materials management belonged to production. Accordingly. were kept separate within the organization.3 outlines the main elements of the company’s initial situation and targets. but there no one who was overseeing and taking responsibility for the supply chain as a whole. To solve these problems. Each function was trying to optimize its own activities. Delegating supply chain responsibility ensures account ownership Previous over-emphasis on country organizations and functions had prevented the company from optimizing the supply chain as a whole. Customer-specific segments were also identified within the business units. Consolidating responsibility for the supply chain at business unit level also created leaner processes by eliminating complex inter-company handling processes that had been made obsolete. functions such as customer service and materials management. One main way to achieve this goal was to establish a consistent. for example – could be given to strategic key accounts as opposed. This move alone streamlined the product portfolio. Typical target conflicts made matters worse.208 Robert Ohmayer and Steffen Kilimann understandable. it was impossible to assign responsibility for order fulfillment from start to finish. materials management needed greater flexibility to accommodate made-to-order parts. Besides improving delivery performance. Production was largely measured in terms of capacity utilization and. preferred large production batches. Shipping and warehousing functions across the business units were bundled to form shared service units and thereby tap further synergies. To ease the vast complexity of the product and customer portfolio. and to link this new system to a robust supply chain monitoring unit. In this way. a distributor channel was set up to serve small customers. the company also wished to boost earnings before interest and taxes (EBIT) by five percentage points by reducing logistical and supply chain costs. The aim was to raise average service levels from 79 to 95 percent across all business units. albeit with considerable variations depending on the customer and industry. the company established one unit that was responsible for .

the supply chain manager could strike a better balance between forecasts and current demand on the one hand. hierarchically structured system of KPIs. materials management. customer service.3 Initial situation and targets the entire supply chain in all countries within a given business unit. shipping and strategic procurement – were bundled in shared service organizations that serve all business units. and to manage it effectively in the long run. All the necessary core functions – including forecasting. and production and operational procurement – were subsumed under these supply chain management units. Monitoring the supply chain creates global transparency To maintain an unobscured view over the entire logistical chain. One crucial benefit of this strategy is that synergies can be tapped across multiple business units.Global supply chain management 209 ORDER PROCESSING Country-related customer service and inventory management PRODUCTION Small production units (14) DISTRIBUTION National warehouses (14) INITIAL SITUATION 100% • Complex. countryoriented logistics network • Service level: 79% With 35% inter-company sales Centralized ordering call center and inventory management Consolidated EMEA manufacturing plants (4) Direct shipment 25% TARGET PAN-EMEA distribution centers (3–4) 65% Distributor • EMEA-wide logistics structure with differentiated supply chains • Service level: 95% 10% Figure 12. With this knowledge. It is also easier to charge business units accurately and fairly for services rendered. Understanding precisely what customers need and want makes it easier to plan capacity and inventories. All non-core supply chain functions – such as warehousing. Stronger customer orientation and process ownership are two of the main advantages of such integration. These must link . and machine and tool capacity – both internal and outsourced – on the other. supply chain managers need a consistent. These functions can be grouped together on a horizontal level because they have nothing to do with consistent order management within the business units.

As a rule. however. Distributors specialize in a particular industry segment and can supply customers with products from a wide range of vendors in a single consignment. such as parcel handling. Reducing complexity and streamlining processes improves profitability Inherited structures had left the manufacturer’s supply chain extremely complex.210 Robert Ohmayer and Steffen Kilimann specific enterprise. the KPI tree was modeled across the entire enterprise and also included suppliers and outside vendors. The result is a negative contribution to EBIT. Moreover. At the same time. At the electronic component manufacturer. the project team encouraged it to set up a different distribution network. This has a direct positive impact on EBIT. fixed handling costs for order acceptance. can bundle orders on a completely different level. To some extent. For instance. Distributors also specialize in the efficient handling of small orders. In effect. KPIs provide support for the two main drivers of ROCE: profitability (the return on sales) and asset turnover. This problem initially did not show up in costing calculations at our client because the same mark-up for order handling costs was used for every order and for every customer.or business unit-wide ROCE targets to operational supply chain performance targets. distributors can boost sales because they provide better care to small customers. On the other hand. the KPI ‘Emergency Shipment Cost to Total Shipment Cost’ tracks the long-term reduction of unnecessary extra shipping charges. which has the effect of consolidating orders. . A direct and consistent cause-and-effect correlation exists between a number of operational supply chain KPIs and top-level ROCE targets. large customers were subsidizing their smaller counterparts. the KPI ‘Inventory Coverage’ plots the reduction in inventories. their specialized skills also enable them to deliver rival products. In contrast to their larger competitors. On the sales side. This means that small customers who order low volumes create disproportionately high process costs relative to the value of their orders. two potentially contradictory effects can occur. Complexity was driven by large numbers of small customers and by items with low production volumes. small customers were able to buy at lower costs. To rid the company of this situation. This drives up the value of orders. which in turn has a positive effect on asset turnover. and picking and shipment processes are independent of the size of an order. Introducing a distributor streamlines processes and thereby improves profitability. however. A distributor. which can detract from sales. distributors can also bundle the demand expressed by multiple customers. thus creating a situation that was actually increasing the number of unprofitable customers.

inventory management. Though physical units still exist in various countries. Now that order handling has been centralized for large accounts. Throughout the entire EMEA region. and production planning processes. production capacity and inventories can now be planned better on the basis of demand data that is collated centrally by a single customer service unit. If an important product is not in stock at the usual regional warehouse. both demand management and forecasting are more efficient. EMEA customer service units were set up as ‘single points of contact’. In the past.4. Nor did any uniform planning philosophy exist. As a result. customer service staff can have it shipped directly from another regional warehouse. In extreme situations. Segmenting the supply chain by customer groups within each business unit further simplified the company’s processes. the detailed criteria for these definitions had never been standardized at panEuropean level. The practice of harmonizing planning parameters and defining appropriate 211 . For example. Centralizing the inventory and production planning processes also enabled the product portfolio to be reclassified into make-to-forecast. These units can now track order status and product availability throughout Europe. the same staff can even authorize direct shipment. all production capacity and parts inventories for a given business unit are now managed by a single central unit. the new materials management unit within the supply chain management organization plans both inventories and the production capacity needed to replenish them for the whole of Europe.Global supply chain management The transition from country-focused to business unit-focused supply chain management also let the company streamline the order handling. Following realignment. Similarly. Customer demand data flows into a single unit that caters to multiple countries. processes have been accelerated and are completed more reliably. customer service units in each country had hitherto looked after order handling issues for large automotive customers. which can be seen in Figure 12. they are linked together by a single. Inventory management and production planning activities have likewise been centralized at EMEA level within the supply chain management function in each business unit. Inter-company ordering processes between countries used to be very complicated. Capacity utilization has improved and inventories have been reduced. Smaller customers that mainly operate on a ‘general business’ level tend to want a local point of contact: creating ‘virtual’ customer service units satisfied this requirement. make-to-stock and make-to-order products. Since all that has been eliminated. central system. and large customers see their orders fulfilled faster and more flexibly.

Network links were rudimentary at best. Production capacity was therefore comparatively small in most countries. for example.212 Robert Ohmayer and Steffen Kilimann BEFORE: Complex intercom processes AFTER: Streamlined centralized processes Production GER Warehouse GER Warehouse GB Production GB Production GER Materials Germany Central warehouse EMEA Production GB Materials GB Materials Germany Interco export Germany Materials GB Interco export GB Interco export Spain Customer service Spain Interco export Spain Figure 12. Owing to the traditional country focus at the company. These changes naturally placed new demands on the company’s IT systems. transactions could be handled in real time across all the networked systems.4 Elimination of inter-company flows through direct ordering production strategies further lowered inventory levels while. the Czech Republic and Switzerland. Since there was no clear assignment of production capacity at a given plant to a particular business unit. again. Order data was the main item that was exchanged between systems. The company was prevented from exploiting economies of . plants in many countries handled every step in the production process singlehanded. and ultimately caused delays in delivery. the various national systems had to be linked using an enterprise application integration (EAI) platform. Once this had been done. In the long term. The IT systems used previously in different countries were scarcely harmonized. different business units often accessed the same machines. Cross-border production networks existed only to a very limited extent – between Germany. To centralize inventory and production planning. added uncertainty to the planning equation. Consolidating production and distribution network saves time and money Legacy production and distribution structures reflected an inherited bias towards individual countries. improving deliverability. This inevitably created conflicts over the use of capacity. the company plans to integrate all sites and functions in a given business unit into a single enterprise resource planning (ERP) system.

Radical consolidation was the key to realigning this distribution structure. This function serves only for products with high to very high consignment volumes that justify direct ex-works shipment to customers. C products were all stored at one specific regional warehouse. the plants provide production and associated infrastructure on a shared service basis. inter-company shipments had accounted for a large 213 . too little use was also made of the labor cost advantages of off-shoring labor-intensive steps in the production process to lowwage countries. Products now arrive here straight from the production plants – an arrangement that keeps local ex-works distribution to a minimum. two smaller plants that manufacture special purpose parts were retained. Two plants in Central Europe were expanded to form a networked facility for technology-intensive production. production capacity was assigned to the business units and adjusted on the basis of strategic capacity planning. As with the production structure. The number of the company’s plants was reduced from 14 to four main plants and two specialty plants. As a result. Warehouse consolidation created a single-step storage constellation. For each business unit. At each plant. consolidation achieved the critical mass that was needed to enable appropriate specialization. Each warehouse maintained the product range that was needed in its region. Each country had its own production facility and/or distribution point. With production planning and control handled by the supply chain management unit at each business unit. Little was known about what was in stock where at any given time. which drove up infrastructure and inventory costs for the entire group. In the past. The 14 existing warehouses were condensed into four regional warehouses. distribution also had a heavily decentralized structure in the past too. Utilization at some plants was below capacity.Global supply chain management scale and specialization in the EMEA region because of this largely ‘autonomous’ production strategy. in some cases – were kept in stock at several warehouses around Europe. Realignment of the production network in Europe centered on radically consolidating production capacity. The same products – including slow-moving items. The warehouses also became organized as shared service units that could be used by all the business units. In addition. production facilities themselves now only operate as a buffer function for direct shipments. Planning and production became far more reliable. Two plants in Eastern Europe were similarly networked to handle assembly-intensive steps in the production process. Also.

Supply chain management was established as a central organizational unit in each business unit. To enable them to do so. the automotive business unit now comes close to a service level of 100 percent. transport providers were recruited who could exploit significant bundling synergies while guaranteeing short delivery times in their catchment area. distribution. Since processes and planning are now substantially more reliable. Besides improving service levels. This enabled the company to meet its target and raise service levels from 79 to 95 percent in all business units. The combination of one-step storage and direct shipments has sharply reduced inventories while improving the service level. the huge expense of emergency shipments has declined significantly. Success factors in global SCM implementation Seen in its global context. consignment stocks were set up on customers’ premises to handle extremely critical parts with extremely short delivery deadlines and strict availability requirements. The regional warehouses needed to meet tight delivery deadlines demanded by customers. An end-to-end cross-border supply chain management was introduced throughout the company. . At the same time. doubled the amount of handling and increased inventory costs. These two steps extended delivery times. Many enterprises. It is a pivotal tool in reducing complexity and redesigning value chain structures. however. Indeed. It is equally vital in the drive to improve cost structures and service levels. The results speak for themselves Realigning supply chain management created much leaner production.214 Robert Ohmayer and Steffen Kilimann proportion of shipments. still fail to grasp the significance of this discipline. leading to a 5 percentage points increase in the EBIT margin. the new leaner structures also cut costs sharply. supply chain management is far more than a way of controlling the flow of goods and services. and customer service structures in the EMEA region at this particular manufacturer of electronic components. and always involved two steps: consignments were first dispatched from the warehouse in the country of origin to the warehouse in the target country. and then to the customer. Multi-step intercompany processes were eliminated.

pilot projects should be used to test and fine-tune the defined changes. No aspect should be left out. Moves to establish global supply chain management must be initiated by top management. Ideally. they remain focused on individual functions and countries. All supply chain functions in the existing country organizations must be actively involved from the earliest stages of conceptual development. closing a warehouse in a particular country must not pose a threat to compliance with defined service levels. it is imperative to adopt a holistic approach to realignment. the work of realignment can commence. Global rollout can then take place in phase two. this should be the person who will subsequently spearhead the supply chain management function. for changing existing structures and processes.Global supply chain management To a large degree. Distribution and production structures. 215 . order handling. Rollout can then take place when new processes have proven their practicality. The extent of the necessary changes and the inherent potential must be spelled out. To minimize the complexity of realignment. Change obviously has to take place while the company continues to go about its normal business. For example. Broad-based support must then be solicited in the business units and country organizations. Everyone has to know exactly where the company is heading. Whatever the geographic scope. 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. One change is crucial if global supply chain management is to be implemented successfully: companies must cultivate an understanding for the need for transformation. 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). Moreover. a detailed implementation roadmap must be drawn up that clearly plots the individual steps in the transformation process. Once this strategic foundation has been laid. As a rule. it makes sense to model every step of the transformation in a master plan and identify those actions that are critical. Such companies tend to see supply chain management as a minor corporate function that concerns itself only with materials management and shipping. All parties involved must help design the strategic roadmap and define unambiguous targets for the supply chain. and process definitions must all be remodeled in the change process. organizational issues. agile supply chain structure emerge. inventory and production planning. A supply chain leader should be appointed to drive the process of redesign and transformation. Only then will a lean. Accordingly.

long-term growth. Finally. there are. we will delve more deeply into complexity. almost all aspects of the supply chain contribute to this development. While globalization shoulders a large share of responsibility for this rise in complexity. these complexity-adding activities also create what we refer to as ‘good and necessary’ complexity. we examine the most common drivers of complexity. therefore. they sometimes unnecessarily complicate a company’s operations and lead to higher costs. we turn 216 . Clearly. forming partnerships and alliances or outsourcing functions.CHAPTER 13 Complexity management: the starting point for improving performance Alexander Belderok and Thomas Hollmann Introduction Supply chains are becoming increasingly complex and more difficult to manage. on the other hand. the remedy for staying ahead of the competition – is behind much of the unnecessary complexity found at companies today. however. we discuss the importance of managing complexity. Whether extending operations to new regions. times when managing complexity would bring greater advantages. Learning to recognize when complexity is justified is vital for sustainable. and look at how negative complexity affects businesses and organizations today. Companies’ unshakeable belief in innovation being the answer to customers’ growing power and unpredictability – and. Negative or unnecessary complexity. In this chapter. launching new products and services. If they create value. each of these activities can create value. driving negative complexity out of a company’s operations can bring strategic benefits. Following this. adds no or little value to either the consumer or the company. While innovative products with every sort of bell and whistle imaginable might please buyers. Next.

Some complexity drivers will affect some companies more than others. process.1. In a product-based company. the results of complexity can be highly visible. Production.Complexity management our attention to a case study that illustrates the benefits of managing and reducing complexity in the healthcare sector. where products are not physically present. however. and to develop innovations more efficiently. plus an eagerness to satisfy customers’ every need. company growth eventually suffocates under this burden. Unless a company uses a mechanism to manage its entire portfolio. Think. Over time. the cost of complexity infiltrates all products. They become barriers not benefits. of a large warehouse with many different parts or finished goods. the number of price points. and logistics often further complicate existing operations as companies attempt to manufacture every product in every batch size in every throughput time. Managing complexity can help companies break that pattern. complexity will become part and parcel of its processes and costs will rise. features. services. companies are better positioned to weigh up the additional costs required to add value. This is complexity in what we refer to as its ‘bad’ or ‘negative’ form. for example. many businesses continue to expand their portfolio. engineering. placing more goods or services on the market. engineering. These are shown in Figure 13. manufacturing. When a company’s portfolio of goods and services is misaligned with market needs. But identifying complexity is not always easy. Responding in this manner can bring positive change to companies and add value to customers. there are seven main complexity drivers: organizational. This is known as a ‘complexity tax’. Identifying what complexity drivers are at play in your business is the first step to managing them. and options. 217 What is complexity? Complexity tends to sneak into organizational structures as companies market a progressively larger portfolio of products. and customer. With customer preference in constant flux. In the name of relentlessly pursuing customer demand. Complexity can be much harder to identify in a service environment. Encouraged by innovation and sales targets. suppliers. By tackling the complexity issue. line extensions. In our view. . and other goods and services stop creating value for customers. companies unwittingly welcome complexity into their operations. brand and channel.

2. an industrial products company built up a very complex product portfolio. The impact of complexity differs from industry to industry. in a next step. the cost can also be much higher. On a different project with a manufacturing company. When the Roland Berger project team analyzed the figures. This makes no business sense – and. the project team calculated that a complexity burden of 22 percent was added to total production costs.218 Alexander Belderok and Thomas Hollmann Organizational complexity Customer complexity Process complexity Complexity Brand and channel complexity Supplier complexity Manufacturing complexity Engineering complexity Figure 13. Owing to the company’s nontransparent processes and systems. By gaining transparency as to the sources of complexity. companies can identify real cost-to-serve and. The extent of the impact is determined by the . a company can then increase the added value of its products on the marketplace. as is shown in Figure 13. As a consequence. processes. it became clear that complexity-related costs were consuming more than 7 percent of total revenues. which will help spur growth. Typical costs are shown in Figure 13. unfortunately.3. In one project case.1 Complexity drivers Why is complexity management important? Complexity management is important because it dramatically affects a company’s bottom line. it was unable to determine the true profitability of its products. allocate resources more appropriately. 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. Complexity’s tax on resources.

Chem. oil and steel Low Utilities Lifecycle Long Key : Primary focus Extended focus Short Figure 13.Complexity management Product cost build up (% of total costs) Purchasing F&A Production Distribution Other 5 40 10 15 30 Complexity tax (%) 3–10 50–60 10–30 5–25 1–5 ∑ 11–22 219 Figure 13. Telecommunications Spec. /Pharma.3 Complexity’s impact differs from industry to industry .2 Complexity tax often amounts to 11–22 percent of total product costs Customization Consumer goods High Engineered products Aerospace and defense Automotive High tech. Chemicals.

The number of brands. Both these tendencies add cost across the value chain in this particular industry. the degree of interaction among various functions is a telltale sign of how well a company will manage its complexity. Companies that encourage strong interaction between sales. and to weigh these against the actual benefits for the product and the end-consumer. This is why managing complexity requires strong leadership at the senior business level. In the flavor industry. Indeed. managers can decide when to reduce or add complexity. and the length of the subsequent product and technology lifecycles. The right level of complexity increases the competitive offer. The product development function is focused on composing ‘totally new’ flavors rather than using a ‘modular’ approach. Most companies are under relentless pressure to deliver tangible quick wins. however. At far too many companies. This is not surprising.220 Alexander Belderok and Thomas Hollmann degree of customization needed to meet individual customer demands. Without someone at top management level who oversees complexity. sales departments are generally willing to accept less than ideal supply conditions if it means they will close a deal. product development. Learning to manage complexity trade-offs effectively can be a slow process. which is believed to limit creativity. which is why traditional efforts at complexity management often concentrate on reducing the cost of complexity (for example. however. and distribution channels can also ramp up the level of complexity’s impact. . the attention of senior management is caught elsewhere. and geographical barriers. 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. Complexity is cross-functional in nature. models. business. it is almost impossible for companies to evaluate the additional costs incurred by the complexity to operations. and operations tend to manage complexity well. By recognizing that complexity might be a good thing in some circumstances. for instance. All too often. Evaluating the trade-off between the cost and value of complexity is not simple. making it intrinsically difficult to manage. It spreads through them. information flows are insufficient and are rarely connected across the different functions. through stock keeping unit (SKU) rationalization) rather than highlighting its strategic value. considering that complexity pays no heed to functional.

typical SKU reduction efforts seldom guarantee lowered complexity costs. and prepare optimization efforts properly while providing the foundation for managing complexity effectively and in a sustained fashion. Most product additions add little or negative profitability. too. It also gives companies greater control over new product development.1 Stock keeping unit (SKU) rationalization Although appealing in its simplicity. These are characterized by short product lifecycles and numerous product introductions. This is especially true for ‘innovative supply industries’.Complexity management 221 Textbox 13. In the flavor industry. perhaps more importantly. scope. Figure 13. almost half of a company’s portfolio is renewed each year. The roots of complexity must be recognized. . More and more industries understand the problems with this approach and are increasingly addressing complexity across all businesses and functional areas in the company. which lowers overall supply costs and boosts innovation. the hidden cost of SKU proliferation. How is complexity addressed? Complexity is best addressed using an approach that takes both the value and cost sides into account from the start. More is not necessarily better. will make savings more sustainable. 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. Challenges in the flavor industry can be instructive in this context.4 outlines the overall approach and shows how different opportunities can be quantified against each other. in which a large part of the portfolio is renewed each year. In order to make complexity manageable they switch to a ‘modular’ approach. 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. Addressing complexity in its entirety creates more benefits and. These generally include the complexity drivers of products. The insights gleaned from this approach enable companies to reduce complexity and to prioritize.

4 The overall approach aims to quantify and prioritize different opportunities against each other .222 Organization impact Customer complexity SKU/ customer portfolio impact Brand and channel complexity Organizational complexity Sell/market Process complexity Make/deliver Design/buy Market driven complexity High number of market entries and excessive variation within market entries Technical complexity High number of sub-systems and component families Increased technology integration SKU as linking element Manufacturing complexity Engineering complexity Supplier complexity Process/network impact Spend impact Figure 13.

With visible complexity. often install different types of alarm bells on city bicycles. It is important. 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. to identify customer ‘threshold’. Often. its value chain. and the costs and values that are associated with each step of that value chain. In most cases. Formed from a needs-based segmentation of the market (based on value drivers). Bicycle manufacturers. At this stage. Although detailing the cost of all products is a time consuming job. however. which is outlined in Figure 13. Typically. This results in high inventory.5. 223 . it is important to distinguish between complexity that is visible to the customer and complexity that is not. 1 percent to customer satisfaction. and the type of value-added provides clarity into the elasticity of the various complexity drivers. detailed cost information is not readily available. and assembly differences. A typical project aimed at making complexity more transparent follows a three-step approach. it is important to gain critical insight into the demands of the market. one which combines a bottom-up estimation of costs with a top-down assessment of the value chain. While an alarm bell adds. here. Customer added value can be measured with a conjoint analysis test that forces customers to select their preferred product offerings. questionnaires and interviews determine how various customer segments perceive the value of the company’s products and services. The information gained from a detailed cost analysis. Visible complexity is product and packaging standardization that rationalizes product offering or changes customer-discernable attributes. and whether they are willing to pay a premium for certain added values. The important first step in complexity management is to develop a thorough understanding of the complexity of a business. a complex supply chain. the invisible complexity is easier to address. the gains are usually higher. Understanding the entire process allows a company to identify the discrepancies between production costs and incremental value to customers. as it does not directly impact customer satisfaction.Complexity management In complexity management. it serves as the foundation for future analysis. Invisible complexity encompasses the raw material: component and packaging standardization that specifically targets efficiency improvement without discernable customer changes. the customer will demand a share in the benefits. location in the value chain. for example. perhaps. An unorthodox approach is required. they are more difficult to reap as the impact of the changes needs to be communicated to the customer.

g. using conjoint analysis) • Develop an overview of operational costs versus added value of product properties • Bottom up estimate of total complexity costs 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 • Lower cost operations with less complex production processes Figure 13.5 Detailed approach .224 Understand complexity Objective Connect the cost and value of complexity Re-design complexity Balance the trade-off between good and bad complexity • 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 Manage and control complexity Benefit from lower cost and re-ignite growth • Install complexity management task force (program officer) • Assign target and responsibilities for improvement initiatives • Monitor and control progress Actions • 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.

Crucial to the success of this approach is the presence of a coordination entity. To obtain the right level of transparency. usually a specially established program officer. and potential risks. This is the second step. or even organizational modifications. and customers. It is important at this stage to analyze the external processes with several archetypal customers in order to build in immediate reality checks. Implementing complexity management is demanding and. In the longer term. Rewarding proliferating products – what many companies do. Along with profitability and value-added thresholds. a company can manage complexity on an ongoing basis. or even a combination of the three. The final step of the project is the implementation phase. but it also pinpoints where changes to price and improvement in value perception can be made. At this point. there is little to show at the beginning for the effort. investment levels. or customers for rationalization. In our experience. in which complexity is redesigned. it is best to minimize the impact of the transition by delegating improvement targets and responsibilities to lower levels in the organization. Based on improvement potential. and infrastructure of the organization. raw materials.Complexity management Matching these insights with a cost transparency model informs a company about the trade-offs that must be made. governance. it is also essential to monitor internal processes. Based on a process gap analysis. By examining the processes. culture. and connect those parts of the organization that respond negatively to complexity with those that seek it. to monitor and steer the process. incentives. Such a comparison not only locates where profit is made. while it affects most areas of the organization. it is necessary to build a detailed complexity database. It is important to anchor complexity management into a company’s processes to prevent it from returning after the ‘clean-up’. Finding the right balance is not a one-off event. When closely examining customer interaction. filters such as strategic or commercial arguments should be used to identify SKUs. This is when complexity must be managed and controlled. but also to identify non-value added complexity across all SKUs. a set of recommendations can be developed that range from process changes to governance improvements. Tools should be used that effectively manage trade-offs. in their quest for innovation – is likely to keep churning out complexity that does not drive value creation. Understanding what keeps creating complexity in organizations is necessary for striking that balance again and again. materials. this program officer also needs to prevent complexity from arising again. improvements can be prioritized. It is critical not to focus simply on the SKU tail-end optimization. it is recommended that a pilot project be started to test the effectiveness of the concept. 225 .

when politicians began tackling the problem of the ailing healthcare system. we describe in the following segment a project we completed for a stateowned university hospital in Germany. especially in purchasing. cutting. the initial assumption was that synergies. Facing those altered circumstances. As a result of this system. a snacks manufacturer can separate its scalable activities (or example. pre-cooking potatoes). Since. rather. peeling. . Funding from government was reduced significantly.226 Alexander Belderok and Thomas Hollmann With such tools in place. This university hospital emerged from the merger of three state-owned university hospitals. This situation was not unique to hospitals in Germany but. from its differentiating activities (for example. individual order codes for similar order items and different IT systems. was a malaise affecting the healthcare sector throughout most of Europe. a company can compartmentalize its processes. a quick and easy win proved difficult owing to the different methods of treatment. such as incentive systems that foster transparency. historically. Yet. and freedom of medical research was valued more highly than economics. and the healthcare sector at large. the newly combined stateowned university hospital decided to put into action a project aimed at leveraging purchase power in order to unleash substantial savings. irrespective of the cost burden at any specific hospital. which tend not to become complex. Managers should be willing to identify shared goals and to manage complexity across departments and corporations. For instance. could easily be realized. They were particularly concerned about the growing imbalance between the rampant cost of healthcare and the stagnating number of payers. all of which had comparable areas of expertise. Hospitals. Due to their similar fields of activity. This meant that each hospital would receive the same amount of money for a specified medical treatment. Other tools. are also vital. and a lump sum compensation system was introduced. which lean toward complexity. specific seasoning to comply with local taste preferences). however. started to face major changes. there was no tight budget control and therefore no need for active management of the post-merger integration and the realization of synergies. Case study: Tackling complexity from the sourcing side To illustrate how the approach works from beginning to end. which required different products. inefficient hospitals would no longer be rewarded for incurring additional cost and efficient hospitals would gain a windfall. there had been sufficient government and third-party funding.

Whereas. Worse still. the power of the medical and pharmaceutical industry is still of considerable importance. it was still impossible to gain transparency. The ramifications of this behavior are considerable: hospitals deal with a large. there is often a strong bias when it comes to selecting suppliers. these small differences meant that material and machines were used differently. more than 4. In most cases. The hospitals could no longer ignore the complexity issue. creating additional complexity throughout the organization. These data need to be harmonized before proper analysis can be completed and actions can be defined that will help organizations to tackle complexity from the sourcing side. in the past.000. Other suppliers enter the hospital market by leasing machines at aggressive prices. Although common IT systems had recently been established. Material and supplier master data were not harmonized. the medical treatment process differed from hospital to hospital. diverse pool of suppliers. There was little transparency. each had a very different history and specific culture. the main complexity drivers were: • • Organizational complexity Although the three state-owned university hospitals shared similar areas of expertise. Process complexity In many of the departments. The hospitals simply lacked organizations and processes that were sufficiently integrated to benefit from synergies. At the merged hospital under review. As many suppliers fund hospital research. with approximately 3. • Supplier complexity Even though the number of sales representatives in German hospitals fell significantly in the past. especially regarding purchasing volumes and cost. What was missing was the desire to create a lean structured organization. .Complexity management 227 Identifying the main drivers of complexity Added complexity was almost programmed in from the moment the three hospitals decided to merge. this non-value adding complexity would not be too problematic owing to a healthcare system that encouraged wastage. This sometimes resulted in rivalry between the major opinion leaders. those days were now gone.500 vendors allocated an annual sourcing volume of less than ⁄20. mostly due to historic reasons.500 active vendors belonged to the supplier base. and even less motivation to integrate similar departments. In this case. the supplier base was extremely fragmented.

To understand how much complexity in purchasing contributed to this significant divide between the best and worst performers among the departments. the focus had to be on reducing supplier. the gap between the best department and the others was significant. The team filtered out unnecessary products that could be eliminated easily by substituting the product or by adapting processes. organizational. Those hospitals that ordered a large number of different products tended constantly to add new products to their existing order portfolio. a strong relationship with the sales representative also existed. When comparing the cost incurred by the respective departments at each of the three hospitals. New products were added to the order forms when requested by patients.228 Alexander Belderok and Thomas Hollmann Addressing complexity As the aim of the project was to unleash savings in purchasing. . The project team also identified huge variety among the number of different products ordered by the respective departments at each of the three hospitals. Old products kept on being ordered simply because they already existed on some order forms. At the end of this step. The project team did this by optimizing the purchasing organization and purchasing processes. it was clear where complexity was artificially high and did not increase value for either the user or the customer. These users were responsible for the major share of consumption according to the quantitative analysis. the project team conducted interviews with industry experts and held workshops with identified key users. This is a fixed amount. The value of each case is the amount the hospital is given by the health care system according to the logic of diagnosis related groups (DRGs). In many cases. To identify non-value adding complexity and the products that could be removed from the inventory lists. amounting sometimes to as much as 35 percent. and the cost and values associated with it. and process complexity. even when these very specific products only deviated slightly from standard products already on the inventory. The project team performed an in-depth analysis of the value and the associated cost for each medical procedure. the project team clustered the purchasing volume into coherent commodity groups and identified major differences in purchased products across the three hospitals. The best hospital could satisfy customers’ needs with fewer different products than the other two. The first step was to develop a thorough understanding of the complexity of the hospital business.

Introducing preferred suppliers per product group with standard ‘must use’ products for all users meant that the market share of the respective suppliers also increased. This allows the strategic sourcing organization constantly to monitor developments in internal demand and helps them to keep an eye on products purchased across all locations. . The first task was to standardize purchasing codes across the three hospitals in order to make equal or similar products readily visible. Using special electronic order forms and required authorization levels. several institutional changes were necessary. Accepted teams consisting of selected experts from each hospital clustered the various products into item groups with comparable functionalities. As a result of this action. These were granted around 80 percent of the sourcing volume within a category. The hospital was able to optimize its purchasing processes by further standardizing the IT systems. Substantial cost savings were realized and the average full year sourcing volume was slashed by 25 percent. In order to reduce the number of these non-standard orders. a standard ‘must use’ product was defined for all users in the hospitals. the number of articles used was reduced substantially. correct implementation for ordering standard and non-standard products was put in place and enforced. thus ensuring a reduction in the total number of different products purchased. Quick wins are great. In the third step of the project – manage and control complexity – four changes were made: 229 • A systematic commodity management program was installed in the purchasing organization. For each category. In areas that could be more easily standardized. Online internal market places were established. By bundling the products. strict authorization levels were implemented and supported by top management. the project team also helped the merged hospital to increase its purchasing power and gain better rates.Complexity management After completing step one – understanding where complexity is artificially high – it was clear that standardizing purchasing throughout the merged hospital would be paramount to reducing complexity. Some 11 percent fewer articles were purchased in complex commodity groups for very specific treatments. the hospitals lowered the number of articles by 33 percent. This had the additional benefit of reducing complexity over the long term. limiting the non-standard order portfolio. It also enables them to watch how the supply markets develop. This enabled the hospitals to pool similar products. but in order to build on these and install a sustainable complexity management throughout the merged hospital.

Quarterly reports that are submitted to the board of directors have been defined. Changes were made to contracts with various strategic suppliers in order to push efforts to integrate suppliers more comprehensively. A powerful controlling system based on a dashboard of key performance indicators (KPIs) was defined. The gained momentum of the project work is thus maintained and complexity management becomes an integral part of all business decisions. the state-owned university hospital saw an annual saving of ⁄20 million. Preferred suppliers – which were granted large chunks of the hospital’s spending volume – agreed to submit proposals that outlined how they would further streamline their product portfolios. a broader product portfolio could be justified because of significantly higher earnings. the hospital was able to reduce the number of different products ordered. Non-standard products were defined as nonstocking items. In addition to the savings. saw increased transparency. comprising representatives from all relevant locations and from different hierarchical levels. In some cases. This was one of the main drivers of the ever-increasing product variety in the past. As a result of the project. To enumerate: • • • • • Annual savings of EUR 20 million – based on relative savings compared with the annual spending of between 8 and 29 percent The number of SKUs was reduced by 11–33 percent in the different commodity groups Inventory was cut down thanks to the significant reduction in the number of SKUs. Cost awareness increased substantially in an area that too seldom is driven with an eye on business Strategic purchasing decisions were made possible thanks to the newly created transparency KPIs that tracked the relation between the value of products and cost. and now benefits from improved logistics processes and inventory management. In addition.230 Alexander Belderok and Thomas Hollmann • • • Standardization councils were established. . These are to be monitored on a regular basis. Goals for the different areas were defined based on the status at the beginning and at the end of the project. which was attributable to complexity being reduced significantly. and minimum inventory levels for standard products could be optimized Standardized rules concerning purchase price led to increased transparency in the purchased and used product portfolio. the power of sales representatives was substantially reduced in order to increase barriers preventing new samples and products being distributed among end-users.

companies understand that complexity is something that needs to be tackled by top management using a crossbusiness overview.Complexity management Manage complexity before it suffocates growth As described by the project example. They are the people who want. the skills to connect the cost and value of complexity. as well as by the conceptual framework above. In our experience. complexity management techniques are strategic tools with which corporations are able to maximize the margin generated from their operations. manage the trade-off between good and bad complexity. and reignite growth. and have. but it always pays off for our clients. 231 . Tackling complexity is not a low-hanging fruit.

optimizing working capital management can achieve amazing effects on the financial performance of an enterprise and its supply chains. Some want to pursue growth strategies by penetrating new markets. and accounts payable. and it is certainly true of money. In this chapter. There is never enough to go round: this is true of all scarce resources. Next. Based on our experience. we first look at the financing tools available to companies. especially in the corporate sector. The common denominator in all cases. all three working capital items display optimization potential. Meeting this need for funding in the most efficient way possible is one of the central strategic challenges confronting top management. drawing from a working capital excellence survey we completed in 2005 and 2006. inventories. Companies’ thirst for cash is unquenchable. developing innovative products or acquiring other firms. 232 . we look at best practices today and those of tomorrow. in this chapter we will present and discuss our current thinking on working capital management. In our experience. Others need to be turned around to get out of trouble.CHAPTER 14 Working capital excellence: how companies can tap hidden cash reserves in the supply chain Roland Schwientek and Christian Deckert Introduction As supply chain management should take a holistic view not only on cost. is a considerable need for funding. Working capital reflects the money invested in supply chain processes in the form of accounts receivable. and illustrate just how important working capital is for supply chain excellence. but also on assets and cash as well. we show Roland Berger’s approach to optimizing working capital. Finally. however.

233 Receivables. This cash usually derives from operating income. in the form of equity or debt. Improving cash flows from the supply chain can reinforce a company’s ability to meet its own financing needs. Depending on the industry. sales. All the key functions in the supply chain – purchasing. These resources must be procured on the stock markets or from banks. Very often. receivables are collected earlier and with more . working capital can account for as much as 30 percent of total assets reported on the balance sheet. It is normally defined as the sum of inventories and receivables from customers less the short-term or trade accounts payable. financing activities or divestments. the volume of liquidity tied up on the balance sheet is immediately scaled back. In other words. financing needs are covered by cash flows generated within the company. working capital takes on singular significance.1. They must repeatedly prove that they are able to use capital efficiently and generate adequate returns. companies pay their way out of their own pocket. In the case of external funding. distribution. Enterprises constantly strive to qualify for external funding. and by reducing working capital. Where necessary. is the realization that proactively managing working capital can free up resources that are tied up unnecessarily in the supply chain.Working capital excellence Making working capital work Companies have an array of external and internal financing tools at hand. 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. they increase funding by boosting sales or cutting costs. companies draw on capital market resources. Equally obvious. production. Inventories are adjusted to customers’ needs and service levels. inventories and payables By reducing accounts receivable and inventories while increasing accounts payable. Today’s capital markets demand profitable growth and a continual increase in the value of the company. reserves can also be identified and tapped in the supply chain. Average working capital in selected European industries is shown in Figure 14. logistics. Such working capital management essentially operates in two ways: by reducing accounts receivable and inventories while increasing accounts payable. and so forth – use working capital and must be closely coordinated. This item obviously ties up a huge amount of resources. Seen from this angle. In the case of internal funding. however.

234 working capital 30 28 18 17 17 17 10 10 3 1 Accounts receivable 16 20 16 18 17 13 9 10 9 11 9 10 8 2 7 7 1 7 Inventories 25 17 13 14 13 9 5 11 15 13 Accounts payable 10 9 St Key : St Eng Ch/oil Autopts Eng Ch/oil Autopts Elec Ph/H Con Auto Utils Tcoms Steel Engineering Chemicals and oil Automotive parts Elec Ph/H Con Electronics Pharmaceuticals/healthcare Consumer goods Auto Utils Tcoms Automotive OEM Utilities Telecoms Figure 14.1 Average working capital in different industries – total assets (%) .

Freeing up cash that was tied up but can now be invested strengthens the company’s position and unburdens credit lines. and can drive up sales. We have empirically analyzed the impact of working capital management 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. Proactively managing working capital clearly emerges as a core element in strategic supply chain management. 235 Reducing working capital Reducing working capital lowers the amount of capital tied up in the company and thereby raises profitability.2 shows how managing working capital can directly and indirectly influence ROCE. Key ratios – such as ROCE or company value. this step also impacts the income statement. we then place these gains on a sustainable footing. the return on capital employed (ROCE) increases. which capital market stakeholders monitor closely – reflect this development. This strategy helps companies to plug any immediate gaps in . Indirectly. 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. Optimizing working capital – Roland Berger’s approach Our approach to optimizing working capital can be divided into two phases. Figure 14. Internal funds can therefore be used more efficiently to meet the company’s financing needs: financial management overall can be optimized as a result. top management can tap potential that hitherto remained hidden in the supply chain. In addition. Using this tool. These steps strengthen the company’s external financing capabilities too. there is less risk that inventories and receivables might have to be written off.Working capital excellence stringency. further improving the company’s ability to pay its own way. After first realizing quick wins by tapping short-term cash flow potential in the supply chain. Cash flow increases again. Better service levels and deliverability along the supply chain leave customers more satisfied. In other words. Companies that put working capital into their management focus usually profit from better financial results. and accounts payable are negotiated with longer payment terms (which must be met so as not to wreck the relationship with the supplier).

2 ROCE drivers .236 Sales contribution Operating income Sales volume Sales price Variable costs Fixed costs Materials Wages and salaries Other Wages and salaries Other Return on capital employed (ROCE) Capital employed INDIRECT influence of working capital management Fixed assets Inventories Accounts receivable Accounts payable DIRECT influence of working capital management Figure 14.

An extensive benchmarking exercise compared companies in both this and other industries. To support implementation of the specified actions. accounts receivable.Working capital excellence funding quickly and then maintain a more stable financial position in the medium term. We have helped many companies improve how working capital is managed within their organization. purchaseto-pay and forecast-to-fulfill). Once targets have been set for the company. 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. A global manufacturer of production systems for automotive assembly. and identified possible areas of potential. On this level. This exercise spans different business units and competitors. we examine performance deficits in existing core processes (order-to-cash. We analyzed inventories. and development of appropriate control and analysis mechanisms) to ensure that positive outcomes are sustained in the long term. and payables that can be used both to compare performance across internal business units and to benchmark the company against external competitors. wanted to reduce working capital in a sustainable manner. It is applied in the following four steps: 237 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. accounts receivable. examining performance deficits. but also includes other (unrelated) industries. We are particularly interested in turnover ratios for inventories. receivables. in order to improve the financing situation. we identify suitable optimization levers that can reduce inventories and accounts receivable while increasing accounts payable. Setting targets. Our strategy of optimizing inventories. and accounts payable at all the company’s production locations worldwide. All three structural levels of supply chain management – inventories. The benefits of taking on this challenge are enormous. for example. The important thing here is to ensure that the data analyzed is comparable . 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. we also define and craft enablers (such as training to help staff understand and optimize working capital. and identifying optimization levers is the crux of our approach. accounts receivable and accounts payable has proven its value in many projects.

and competitor analyses. vendor. customer structures. 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. import and export regulations in Eastern Europe. Differences in factors such as sales channels. the main challenges are usually posed by creating transparency from incompatible master data sets. global sourcing. processes. purchase-to-pay and forecast-to-fulfill – in detail. Finally. Other regions tend to . for example. This. To fine-tune ratios. the Middle East or South America can have direct implications for working capital management. It helps companies avoid comparing apples with oranges. 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. and supplier/ logistics structures must all be factored into the equation if the benchmarking exercise is to deliver valid. In the context of receivables and payables management. it is necessary to analyze relevant structural factors when comparing rival firms. comparatively long payment targets are commonplace and meet with broad acceptance. and encourages acceptance of the findings. and business practices. Fine-tuning the ratios used is a crucial success factor. The way cash management is handled can sometimes vary significantly from country to country. We also make inventories and analyze the three core processes in the supply chain – order-to-cash. as well as country specifics. East Asia and South America. For example. and thereby obtain comparable data.238 Roland Schwientek and Christian Deckert across business units and with external data. it is especially important to take account of regional variations in ratios. of course. an enormous amount of data must be examined in minute detail – sometimes every receipt should be checked for accounts receivable and payable analyses. 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. Another issue is the consolidation of inter-company sales. also includes customer. vertical integration. usable results. In Southern Europe. 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. which must be harmonized across different systems. In this phase. which might deteriorate the complete picture if not dealt with appropriately.

and also make use of cash discounts. adjusting the flow of materials (structural changes) and optimizing scheduling parameters (process changes). the next step is to identify suitable levers and actions to plug performance gaps in the three core processes sustainably. We usually initiate lever discussions based on existing levers and further optimization measures that we have derived from our project experience . It is important to gain a full understanding of the relevant items on the balance sheet. and logistics departments are mainly involved here Receivables management: Optimizing the dunning system and receivables monitoring. 239 Step 3: Define levers and actions In collaboration with all project participants. and conducting value-based negotiations on the basis of suitable IT tools. Sample levers include: • • • Inventory management: Modifying the depth of stocks.Working capital excellence prefer shorter targets. purchasing. Once the benchmark analysis has been completed and performance deficits have been isolated. For example. 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. purchasing and finance departments are mainly involved in this area. production. detailed planning takes place with relevant managers. and renegotiating payment terms with top customers. Ambitious companies aim to set new standards in their industry through such projects. During bottom-up workshops. attention must likewise be paid to the various companies’ accounting policies. When identifying ratios. and commitment for the implementation is gained. and to adjust them where necessary. 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. renegotiating terms with top suppliers. insist on punctual payment. with a large client from the consumer goods industry. planning. sales and finance departments are mainly involved with this Payables management: Adjusting the payment process. top-down targets must be defined for the identified turnover ratios and then agreed with the appropriate managers.

or whether further adjustment is necessary. processes. Realizing working capital effects without deteriorating the profit and loss statement clearly should be the goal. as the core processes in question exist on a horizontal level in most companies. we introduce simulation tools that show specific financial consequences from different negotiation options. for instance. For workshop moderation. The identified levers are fleshed out in detail and the resulting financial effects – on cash flow. and whether improving cash may be negotiated for price adjustments (buying cash). can be set for the organization involved. for reasons of acceptance and commitment. For instance. These can directly support purchasing and sales in negotiations. meet the defined targets. Usually. Conducting decentralist workshops with relevant managers from all necessary corporate functions has proved very effective. as well as our working capital studies (see results below). The outcome is a prioritized package of recommended actions. it is often possible to negotiate optimal payment terms while also committing to price adjustments. These are structural changes in the organization.240 Roland Schwientek and Christian Deckert on working capital issues. Work targets. when discussing strategies to optimize accounts payable. we verify whether the anticipated effects will. it is necessary to have a trained moderator with sales experience present. At the end of this phase. Roland Berger project teams also deal with what are referred to as enablers. Finally. which are derived from the specific project. priorities are defined for the entire set of activities by calculating the anticipated effects and evaluating the ease of realization. Targeted communication . when talking about measures to optimize accounts receivable. Regarding accounts receivable and payable. Here. It is imperative for different corporate functions to work together in this phase. earnings before interest and taxes (EBIT) or economic value-added – are calculated. Both functions are involved in the bottom-up planning phase and must closely act together in order to achieve company best performance. In addition to concrete optimization levers for the generation of quick cash. The involvement of purchasing and finance staff is crucial. and we believe that it is a central success factor for working capital projects. we usually staff team members that bring with them a thorough understanding of the key corporate functions involved. one of the main enablers is the target setting and monitoring process used to steer working capital performance. and systems put in place to create and maintain the management environment for successful working capital performance on a long-term basis. in fact. These must be monitored closely to ensure realization. To determine the optimum from cash and cost effects. management needs to decide whether EBIT or cash has priority.

Once management commitment has been secured for the project. the project status. . Strict monitoring accompanies the entire implementation phase to ensure that actions are taken swiftly and the targeted effects realized in full. the client is a well-known maker of basic materials for the consumer goods industry. product availability improved significantly. Other enablers include training and qualification measures that put people in a position to drive working capital processes in the supply chain actively and on their own. It is vital that the project sponsors – and everyone else involved – buy into the project. 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. Highly complex products and orders had caused the company to run up above average inventories at every link in its core process chain. sustainable reductions of more than 30 percent were made to inventories by optimizing planning processes and streamlining the very broad product portfolio. Reviews with the responsible managers should be held regularly. 241 Step 4: Secure buy-in and implement measures The defined activities are now condensed into a plan of action. In close collaboration with the client. During these sessions. communication takes place on a wider scale and implementation can begin. The project team focused its attention on production planning and order scheduling. 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. and coordinated with. both the top and operational management levels. obstacles and possible counter-actions to ensure completion of project activities in time should be discussed. The plan of action has to be communicated to. People are given ownership of certain actions and are held responsible for implementing them within defined deadlines. The project aimed to reduce inventory volumes sharply. At the same time.Working capital excellence of project activities and measures to market project achievements also belong to the enabler concept.

Yet. companies have a mind-boggling array of levers and actions at their disposal. the client was able to recover ⁄150 million from the balance sheet in cash. it ultimately boosted profits and significantly increased the value of the company. Case study: Media group Managing accounts payable is the third classic lever that can be aggressively pulled. payment terms. is run in accordance with value-based management principles. . By adjusting its system of installments and advance payments. We also defined key values for discounts and payment targets. In our international study of working capital. We used simulated calculations to show the group how better use of cash discounts could positively impact profits and company value-added.242 Roland Schwientek and Christian Deckert Case study: Energy sector While managing inventories was the right lever to be pulled at the consumer goods manufacturer. and standardized these worldwide. We were commissioned to find ways to optimize accounts receivable and inventories at a water utility with operations all over Germany. we investigated and evaluated an extensive set of common optimization levers. In our experience. The client’s purchasing guidelines were adjusted accordingly. and delivery terms offered by different suppliers while negotiations were still in progress. a media group. and introducing new IT. The client wanted to free up financial resources for capital investment purposes. The team began by systematically examining the core processes in the areas of order. Although greater use of cash discounts initially increased the burden on working capital. plugging performance gaps in the three core working capital processes is essential for a company’s long-term survival. The findings of this study are presented in the following section. performance. Our client. improving its dunning procedures. managing accounts receivable was the key focus of our work with a company in the energy sector. and receivables management. We supplied purchasing with tools that would permit that department to evaluate the impact of the different prices.

utilities. North and South America. We also wanted to know what the key deficits were. consumer goods. and Asia in order to gain a coherent overview of best practices today. and electronics industries. 25 percent had sales ranging from ⁄1 to 5 billion.Working capital excellence Working capital excellence – learning from best practices today and tomorrow During the period 2005–6. Roland Berger Strategy Consultants surveyed 500 large and medium-sized companies in Europe. companies might be able to see how they can tap hidden cash reserves in their own supply chain. and transportation were also examined. Some 42 percent of companies had sales of less than ⁄1 billion. 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. chemicals and oil. paying particular attention to best practices. When surveying the companies. By sharing this knowledge. 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. 243 Best-practice companies: 15 percent of participants rank 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. and process issues. and to understand what would be the motivating factors for tomorrow. These companies achieve outstanding economic performance relative to their working capital. We were curious to know what was ‘state of the art’ and what best practices existed in working capital management. 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 . organizational forms. companies from the areas of pharmaceuticals/healthcare. accounts receivable. all the other companies fall short of the industry leaders – in some cases. The bulk of the companies surveyed are active in the engineering. basic materials. automotive. and 33 percent reported sales of more than ⁄5 billion. However. we honed in on three topical issues. targets/strategies. and accounts payable. by a long way.

By contrast.3 shows an example taken from the receivables management benchmark analysis. In this benchmarking exercise. the industry average. Companies need to maximize their working capital management. we rated potential. Having collated the results for all participants. They can assess the financial performance of their efforts to manage working capital. accounts receivable. By contrast. the following picture emerged for the three components of working capital. before moving on to decide what corrective action must be taken. all those companies that are below average urgently need to take steps to improve. and accounts payable for each company. . we examined financial performance on the basis of turnover ratios for the three elements of working capital. Figure 14. Companies that fall below the 25 percent line are already excellently positioned and have little potential to improve their overall financing situation. Working capital management and its importance in the near 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. Using a detailed benchmark analysis of the companies that took part in the study. 25 percent of all participants – the stragglers – have a great deal of ground to make up. or any further business model and supply chain characteristics. and the best-in-class performers. The results identified: • • • 48 inventory management levers 22 receivables management levers 12 payables management levers. This quick benchmarking exercise is only the first step and needs to be broken down further to meet company specific situations – for example. 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 that are better than the industry average but do not belong to the best 25 percent exhibit moderate potential. by factoring in adjustments considering customer/vendor structures. Companies can easily identify any discrepancies between their own situation. This input enabled us to plot the developmental status in the management of inventories. the degree of vertical integration. the importance of which will increase in the near future.244 Roland Schwientek and Christian Deckert are on the right path.

days Figure 14.Max.3 Industry benchmark for debtor days Note: Debtor days = Accounts receivable/salesÂ360 days 245 . days 150 XX Improvement lever High potential 92 84 Moderate potential 72 60 50 45 Low potential 31 51 43 39 43 22 14 Mats Paper Auto 73 60 53 39 84 79 72 70 49 32 21 22 68 58 51 115 103 70 115 135 Average 25% cut-off 56 49 39 30 21 55 40 46 31 13 Pharma Ch/oil Elec Eng Con Utils IT/Tcoms Transportation Min.

0 32% 6.4 Current and targeted future status Note: 0 = not in use/not important.7 5.2 4.246 Inventory management Receivables management Payables management 34% 6.0 5.6 18% 5. 10 = extensive use/very important .4 Current usage Importance in five years Current usage Importance in five years Current usage Importance in five years Figure 14.

In practice. however. new and innovative methods should also be introduced. the potential for improving the management of accounts payable is put at nearly 20 percent. Those industries with the greatest untapped potential can learn a much from those that have reached a more advanced level. and utilities. and processes. By contrast. The optimization potential for working capital items in different industries is illustrated in Figure 14. comparatively little potential for optimization remains in the automotive. . Potential for optimization is only slight. chemicals/oil.Working capital excellence The study revealed that potential exists to improve the management of inventories and accounts receivable by more than 30 percent in the near future. and electronics/IT have the least to gain. engineering. and engineering industries have most to gain by optimizing the management of accounts payable. The tools already in use should be reviewed and optimized on a regular basis in order to keep them effective and efficient. Clearly. As far as receivables management is concerned. the utility. strategies. In addition. in the automotive.5. chemicals/oil. pharmaceuticals/healthcare. and pharmaceuticals/healthcare industries. Generally speaking. every industry still has work to do. electronics/IT. and the steel industry. Companies are strongly advised to measure their working capital management practices systematically against industry benchmarks. In other words. there is still considerable potential for companies to optimize the financial performance of their working capital by applying specific methods and tools. organizations. None of the industries investigated was found to have little potential for optimization in all three items of working capital. on average. 247 Considerable optimization potential for all three working capital items The greatest potential to improve inventory management practices exists in electronics/IT. On the other hand. It is clear from the outcomes that the practice of managing working capital has reached widely differing stages of development in different industries. When appropriate. the companies in the study are very keen to make significantly improvement in the way they manage accounts receivable and inventories. Finally. Let us now take a closer look at the outcomes of the study with regard to targets. the need for action is greatest in pharmaceuticals/healthcare. utility. the forecast for the management of accounts payable is more modest. The telecommunications. and telecommunications industries. a cross-industry comparison of the tools and methods applied can be very helpful.

after all.7 4.5 5.9 5.8 Key : Current use Future importance Figure 14. Consensus between companies was greatest regarding the objectives of receivables management.1 4. 82 percent stressed a clear focus on optimizing liquidity.0 4.6 4. Nevertheless.8 3. It must filter down through every function. already been recognized. by and large.4 5.9 5.4 4.9 4.9 6. If this is to happen. 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.9 6.4 5.1 Accounts payable levers 6.4 7.3 4.4 6.1 4.0 6. Defaulting customers are.5 7. 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.1 5. It is reasonable to assume that the importance of working capital management as an aspect of strategic management has.2 Chemicals Utilities Automotive Consumer goods Engineered products Pharmaceuticals Electronics 5.2 7. top management must first recognize the importance of this practice and devote sufficient attention – and resources – to it. .9 6. 10 = Comprehensive usage of all levers Top-down targets and strategies to manage working capital If it is to succeed.7 6.3 6.8 5.6 6.2 4. Of companies surveyed. The substantial importance attached to reducing default risks is laudable.1 4.2 4.248 Roland Schwientek and Christian Deckert Industry Inventory levers Accounts receivable levers 7.5 5.6 5. working capital management must be lived out from the top down and throughout the company.5 3.2 8.3 6.5 Current use and future importance use of working capital management levers by industry Note: 0 = No usage.5 7.5 6. and 80 percent on reducing the risk of default (in response to a multiple choice questionnaire).4 8. a common reason why companies run into financial trouble.1 4. however.

All identified objectives are then institutionalized in target agreements for the units affected. and sustainable reorganization. a high service level in inventories contradicts the working capital target of low capital binding. top management has to present clear rules for operational managers to ensure acceptance and fulfillment of working capital targets. to optimize tied up capital. and to optimize liquidity. Companies point to a lack of forecasting options for sales. more efficient systems. Conversely. However. However. to optimize processes. Here again. optimized processes. The three most frequently cited reasons were: to take advantage of cash discounts. To some extent. 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. companies still have their work cut out if they want to close the gap on the best in their respective industries. One 249 . we would now like to explore those factors that help and hinder the practice of working capital management. they see the main success factors as extensive transparency. Another important issue that needs a solution is target conflicts between working capital targets and other operational targets – for example. best-practice companies accept a trade-off between the use of discounts and long payment targets. Nearly 90 percent of companies already derive the goals of their inventory management activities from corporate strategy. In such instances. 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. However. Taking inventory management as our example. only a small share of companies are making any efforts to try to improve external aspects.Working capital excellence Similar unity prevails concerning the goals of inventory management. At the time of writing. these goals were advocated by far fewer companies and are inherently self-contradictory in some cases. and inordinately high customer service levels as being the main obstacles. Most customers see this as a way to comply with defined customer service levels. These factors confront companies with the need for action both internally and externally. The respondent companies disagree only on the purpose of efforts to manage accounts payable. a lack of end-to-end transparency. most current projects to optimize inventory management focus largely on internal aspects such as optimized inventory control. such as sales forecasts and interfaces to customers. and/or to run inventories down as far as possible. only best-practice companies tend to do this to the same extent in relation to the management of accounts receivable and accounts payable. and improved sales forecasts. these policies are also aligned with standard practices in different regions.

and monitoring/closure) for the management of accounts payable. and distribution) for the management of inventories Order-to-cash (sales. Functions involved in the core process chain Departments involved in top management Core process chain Order management 1 function Purchasing 12 6 Production 4 or more functions Distribution 58 24 3 functions 2 functions 4 or more departments 20 1 department 10 25 3 departments 45 2 departments Figure 14.6 Organizational forms conducive to inventory management (study participants %) . invoicing. Three core process chains must be coordinated effectively and efficiently with all these functions.6 presents organizational forms that are conducive to successful inventory management. purchasing. Our findings indicate that there is significant pent-up demand for organizational change that will improve the management of working capital in today’s companies. and closure) for the management of accounts receivable Purchase-to-pay (purchasing.250 Roland Schwientek and Christian Deckert example involves closer collaboration with customers in order to optimize demand projections and customer service levels as a team effort. production. monitoring. almost every corporate function that plays a direct role in a company’s value chain influences working capital. These three processes are: • • • Forecast-to-fulfill (order management. 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. if optimal results are to be achieved. The need for coordination is perhaps most complex in the context of inventory management. Figure 14. Ultimately. payment.

the management of accounts payable was assigned at top management level to one board member only – normally the chief financial officer (CFO). sales functions tend to have the most say in shaping and driving processes. the COO only has to refer back to the sales director who is in charge of order management. too. a minimum of four operational management functions play a part. 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. At best-practice companies. A similar pattern emerges in the management of accounts receivable. Accordingly. Operational management is delegated to at least two different functions at 43 percent of companies. the principle of one-faceto-the-customer cannot be adhered to. responsibility is assigned unambiguously. Since 42 percent of the respondent companies operate more than one function that interfaces with the customer. Other companies have set up working capital councils to bring together relevant functions discussing working capital issues. 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.Working capital excellence At about 90 percent of companies. and the tasks assigned to sales and finance/ monitoring should be defined more clearly to smooth the relevant process flows. At 20 percent of companies. at least two top management departments share responsibility for accounts receivable. even though only two functions – sales and finance/monitoring – generally have to be coordinated. production. at least two top management departments and two operational management functions are involved in the relevant core process. At 48 percent of companies. At no fewer than 30 percent of companies. and distribution functions. and at 60 percent of companies. At 94 percent of the companies in our study. 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. Here. Ideally. Again. 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. in particular. Organizations become much more efficient and processes run more smoothly as a result. at least two functions (usually purchasing and finance/monitoring) are in charge of operational management. At best-practice companies. best-practice companies clearly delimit the tasks entrusted to each party. Clear procedural instructions and staff training can 251 . a minimum of four top management departments are involved. Once again. Purchasing. these different units all have to be coordinated. Coordination between so many different functions and units can become extremely complex. responsibility should be concentrated in fewer hands. On this score.

let us turn our attention to the core processes in the practice of working capital management. Potential in the management of inventories is more or less evenly spread over the various process steps. Armed with this information. Inventory management – a vast store of untapped process potential In closing. Best-practice companies are already facing up to these future challenges. companies can now identify those process steps that will. the segmentation of orders and the reduction of complexity within product portfolios. We asked the participants in our study to assess the usefulness of these levers and methods today and their future importance. Here again. 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.7. The companies in our study saw the need to optimize internal sales incentive systems.252 Roland Schwientek and Christian Deckert be very useful on this score. A summary of their responses for each core process and process step is presented in Figure 14. it is important to ensure that process steps such as invoice verification and processing are handled quickly and reliably to meet payment agreements. Many of . Once again. To each of these processes we have attached specific optimization levers and methods. in future. best-practice companies are already using these levers to improve receivables management. present the greatest optimization potential for each aspect of working capital. 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. some of which are already common practice while others are more innovative and have not completely entered day-to-day business. and automate the supply of customer information to sales as the areas where most work still needs to be undertaken. segment customers on the basis of their payment patterns. At finance/monitoring. The greatest need for action is identified in the integration of customer planning. Order management serves as a good example. The greatest potential to optimize the management of accounts receivable is seen to be in sales. the study highlights the interface to the customer as one key area in which inventory management can be optimized.

0 18% Purchasing Key : Usage today Payment Monitoring/closure Importance in five years Figure 14.2 4.7 7.6 36% 4. 10 = extensive use/very important 253 .8 24% 5.5 15% 3.5 6.9 6.Management of inventories 37% 5.7 32% Sales Invoicing Monitoring Closure Management of accounts payable 17% 6.7 Untapped potential in each core process Note: 0 = not in use/not important.3 28% 5.8 31% 4.3 47% 3.3 3.8 6.8 33% 4.4 35% 4. untapped potential 34% Order management Purchasing Production Distribution Management of accounts receivable 51% 4.0 6.5 6.4 7.6 Av.1 5.1 6.

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. This is usually done region by region. and the use of direct debit facilities as the most important levers for the future. High 6 1 2 42 19 33 34 3 24 18 9 11 17 41 46 43 45 31 16 36 26 30 35 40 12 32 44 38 23 37 Low High Cost of implementation 22 14 Low 27 25 15 39 20 13 28 29 21 7 4 47 8 Potential 48 10 5 .254 Roland Schwientek and Christian Deckert the other companies lag the front-runners – and would do well to apply the results of this study to close the gap. As an example the results for inventory management are shown in Figure 14. 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. the standardization of payment terms. we also analyzed which of the optimization levers named by the participants harbor the greatest potential for improvement. What remains is the potential to improve the management of accounts payable. as payment term habits vary considerably. they then standardize and negotiate payment terms accordingly. As we have seen. 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 having been done. the companies nevertheless identified the coordination of payment terms with business planning.8. To keep the findings of our study as applicable and practical as possible.

scheduling 11 Order batch size 12 Modular/system sourcing 13 Standardization 14 Resale 15 Order moratoriums 16 Quality control/returns 17 Supplier base 18 3rd party warehouse mgmt 19 Supplier integration Production 20 Production segment 21 PPC* optimization 22 Large order planning 23 Production layout 24 Bottleneck analysis 25 Kanban 26 Just-in-time 30 Vertical integration 31 Production networks 27 Production batch size 32 Production-smoothing 28 Setup times 29 Production moratoriums Distribution/warehousing 33 Inventory strategy 34 Buffer stocks 35 Inventory balancing 36 Client sales/scrapping 37 Distributors 38 Cross-docking 39 Direct shipments 40 Continuous replenish. 41 Warehouse structures 42 Warehouse networks 43 Supply chain differentiation 44 Outsourcing 45 Customer integration Cross-functional levers 46 Cross-function responsibility 47 IT automation and integration 48 Cross-function monitoring PPC Production planning and control Figure 14.8 Analysis of existing levers based on self-assessment by study participants . order-spec.Working capital excellence Order management 1 2 3 4 Sales planning Integration of customer planning Demand forecasts Order segmentation 5 6 7 8 Clearance sales Portfolio adjustment Returns/claims Reduction in scheduling levels 255 Purchasing/procurement 9 Scheduling strategy 10 Cust.

Schwientek. it also reveals the considerable potential for improvement that exists in relation to targets and strategies. (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. we know that there is a real need to improve the interface to the customer. optimization will only succeed if top management grasps the potential impact that working capital can have on strategic management. for example. However. and processes in all the industries examined. In relation to inventory management. Roland and Deckert. The entire enterprise must be made more sensitive to the possibilities that will arise by proactive management of working capital. . Stuttgart: Roland Berger. When such an open culture exists. At the same time.256 Roland Schwientek and Christian Deckert 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. Further reading Schwientek. Roland and Deckert. allowing the company to define appropriate targets. Christian (2005) Working Capital Excellence Study I – Managing accounts receivables and payables. Stuttgart: Roland Berger. the practice of optimization can take root and grow throughout the organization. organizational forms. it is clear to us where untapped potential lies. Suitable knowledge can then be cultivated. Christian (2006) Working Capital Excellence Study II – Managing inventories. 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. 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.

CHAPTER 15 Supply chain organization: a key enabler for successful supply chain management € Ingo Schroter and Stephan M. 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 . As supply chains become more global and complex. When companies manage to embed supply chain management into their organization. supply chain links become strained. and responsive. In many ways. As a result. and coordinate their external supply chain with precision. supply chain organization is the linchpin for making sure that supply chains are cost efficient. their supply chains become extremely efficient and perform with fewer hiccups. for instance. use simple coordination tools such as setting goals for divisions. and a lack of standard procedures throughout the entire supply chain. Other companies might be burdened by conflicting operating styles and processes. however. and supply and delivery glitches tend to increase. and remain cost efficient despite being flexible. especially in today’s highly competitive business environment in which a smoothly run operation is paramount. These are the hallmarks of success in an increasingly competitive environment. reliable. these companies manage to notch up remarkable savings. Wagner Introduction Well-functioning supply chains are reliable and responsive. This prevents them from being best-in-class. Companies are often robbed of their ability to respond quickly because they are weighed down by overly complex structures that have arisen. after embarking on a quick session of mergers and takeovers.

In terms of size. Manufacturers of engineered products must deal with continuous outsourcing and reduced lead times. while others were purchasing directors or general managers. Globalization and increased complexity are definitely the main forces driving the necessity for enhanced supply chain organizations. Yet. as they provide insights about the elements necessary for creating and maintaining an effective and efficient supply chain organization. the project team asked supply chain and logistics decision makers how they currently organize their supply chains. and become more flexible and more efficient. and for greater supply reliability. 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. there is a need for demand-driven logistics for flexible production. These organizational talents provide a high logistics service with an . we surveyed companies across the board. Wagner chain organizations can still be improved. for example. Pharmaceutical products and medical device producers must integrate their distributors. More detailed information concerning the companies interviewed can be gleaned from Figure 15. In this chapter. While all participating companies show a marked trend toward greater strategic alignment and comprehensive coordination of the supply chain.258 € Ingo Schroter and Stephan M. In the automotive sector. supply chain organization has not developed as quickly. we describe the study findings. although our focus was on medium-size and larger players.1. Food manufacturers have to negotiate with retailers that have gained considerable clout and are increasingly demanding. Improvements can be made in companies working in all industries. specific challenges push this trend in individual industries too. Only 14 percent of companies examined had annual sales of less than ⁄100 million. only about 15 percent truly differentiate themselves from the competition. have made huge leaps and bounds over the past years. Most of the managers interviewed were responsible for the logistics or supply chain activities of their firms. firms that exceed their peers in supply chain performance) manage to achieve better performance. by examining how ‘organizational talents’ (that is. Organizational talents master their supply chain organizations In the study. Companies recognize that while purchasing functions. We also demonstrate how companies can transform themselves into a best-practice organization.

area of responsibility.Company size by sales Interviewees’ areas of responsibility Industry breakdown €1.000 m 42 €100–500 m 24 SCM managers 24 25 Pharmaceuticals Mechanical engineering Figure 15.1 Breakdown of companies interviewed in terms of size.000 m 27 €100 m 14 CEOs Other managers 11 5 Purchasing managers 9 51 Logistics managers Food industry 23 28 Automotive suppliers 17 €500–1. and industry(%) 259 .

260 € Ingo Schroter and Stephan M. zero-defect processes. Wagner Very good Defining performance criteria 15% Organizational talents • Logistics performance – – – – On-time delivery Turnaround times Flexibility of supply Zero defect/error-prone logistics processes – Customer satisfaction • Logistics costs Low – Transport costs – Inventory costs Logistics performance Very poor 85% Everyone else High Logistics costs Keys: Everyone else (149) Organizational talents (27) Figure 15. This is a key success factor. companies need their top management to participate actively and support this strategy. and high customer satisfaction. The spread between organizational talents and their weaker competitors is shown in Figure 15. a clearly defined supply chain strategy emerges. good turnaround times. and reducing lead times are the common goals underpinning the desire for companies to improve their supply chains. companies set up divisions or functions that are solely responsible for managing the supply chain throughout . As well as securing low transport and low inventory costs. they also enjoy on-time deliveries. Reducing costs. Filtering out the information gained from the responses.2. Implement supply chain organization Organizational talents have one thing in common: their supply chain management is thoroughly embedded within the organization. increasing reliability with supply partners. When top management focuses attentively on supply chain management.2 Organizational talents have outstanding logistics capabilities optimized cost structure. supply flexibility. To accomplish this. Successful companies: • • • Implement a supply chain organization Implement coordination tools Coordinate their external supply chains. Organizational talents reach those goals. three best practice principles could be derived from the study results. Frequently.

This guarantees that the right people have the necessary authority to make decisions that affect functional entities within the organization. Their role is to coordinate the supply chain. Implement coordination tools Best practice companies deploy coordination tools. They consolidate sales forecasts. and reverse logistics. Often they combine several elements: 261 • • • Temporary supply chain functions are usually set up to solve certain specific problems or to develop concept improvements. cost. distribution. Furthermore. by product segment or business units. Strategic staff functions are typically responsible for supply chain planning and coordination. they enjoy directive rights over different functions. set clear targets for these KPIs. Such strategic supply chain goals pertain to individual divisions that are oriented toward gaining improved performance over the entire supply chain. and capital employed. This helps them achieve the best trade-off between service. Organizational talents clearly formulate their strategic supply chain goals. responsibility for the supply chain is frequently assigned according to differentiated supply chains – for example. Sometimes.Supply chain organization the entire company. Companies have an array of coordinating tools at their disposal to enhance performance. activities controlling supply chain performance fall within their scope. set clear targets with a careful selected set of key performance indicators (KPIs). which effectively work as the oil lubricating the supply chain to make sure that it operates perfectly. manufacturing. Operative supply chain functions have clearly defined operational tasks such as order processing or collaborative planning with suppliers. Often. and monitor them continuously. and assure the feasibility of internal and external supply chains. Even better results are obtained when divisional goals . Strategic and operative functions are horizontally and vertically aligned and bundled within a supply chain responsibility. They are organized as a project for its duration and usually resource from different functions across the company. More than 80 percent of organizational talents have established a supply chain center that is responsible for coordinating purchasing. and production and purchasing plans. they are the starting point of company-wide supply chain functions.

responding to problems reactively.262 € Ingo Schroter and Stephan M. It also enables organizational talents to state optimization targets clearly in their contracts. This tool only makes sense when performance-based compensation is the strategy followed throughout the entire company. and general satisfaction levels concerning overall performance on a regular basis. Organizational talents not only use round tables more often than their weaker counterparts. A good starting point for companies is to apply staff rotation on new recruits and trainees where blocking points apply to a lesser degree. delta. Less organized companies tend to use round table discussions to exchange ideas and focus on resolving operational problems as they arise. Coordinating divisional goals is not without its difficulties. The round table was the most widely used coordinating tool among companies in the survey. especially those that are owner-managed. 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. which are ideally based on quantitative KPIs such as budget. Consider planning. believing that they will lose good staff and start-up time as employees become familiar with their new environment. Indeed. production generally wants to be able to forecast volumes as accurately as possible so that they can use capacity to the best advantage. This helps them gain a comprehensive view on the current situation and objectives. and follow strict agendas. Exceptionally few companies use staff rotation to support supply chain coordination. 67 percent of all organizational talents work with their major suppliers to optimize the supply chain. they hold such meetings regularly. They also define and monitor goals together with their suppliers and reward top performance. and action. The mutual trust that develops as a consequence of this action leads to greater success with both operational and strategic topics. Companies that work together with their suppliers to improve their supply chain are more likely to achieve their targets than companies that . They exchange sales forecasts. Wagner are linked to variable compensation. delivery flexibility. on-time-delivery information. carefully prepare for them. They are firefighters. Whereas marketing and sales divisions usually want to set ambitious goals in order to motivate sales staff. Managers and other employees still hold reservations. 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. Small to medium-sized companies.

Supply chain organization take a more ‘go-it-alone’ approach. employees with a wide overview of both the company’s and the supplier’s supply chain are needed to bring value. The interaction between a company’s employees and the employees of the supplier is decisive for close and mutually beneficial buyer–supplier relationships. 263 How to achieve best practice? Food for thought So. Companies wishing to get the upper hand on their supply chain organization 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. which engage suppliers only now and then. As one cannot always send multi-functional teams. what are the insights we can glean from the study? Some companies have a better grip than others on their supply chain organizations. companies . companies in the automotive supply industry tend to work with suppliers more frequently than do companies in the mechanical engineering industry. Interestingly. 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. the survey revealed that a lack of staff with the right capabilities on both sides was a key blocking point to efficient supplier coordination. especially with respect to hierarchical levels? • Can end-to-end supply chain management be embedded without losing critical synergies on a functional level? 2. However. 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. As such. and only these companies can fully benefit from the size of this opportunity.

Wagner that approach us are not primarily concerned with enhancing their supply chain organization. they ask for advice because they want to improve service levels. In our experience. the company decided to centralize supply chain management functions in order to focus on efficiency through cost synergies. as well as service levels. It is important to understand right from the start that there is no standard formula or best practice template for supply chain organizations. For one of our clients. 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.264 € Ingo Schroter and Stephan M. when designing the . where customer requirements were quite similar and competitive logistics services were easily available – for these mature countries. Although best practice companies share many characteristics. such as raw material inventory levels and production capacity utilization. bring cost down or reduce working capital and release cash. companies need to take three steps before the supply chain organization can truly be optimized: 1. External factors such as market structure and client expectations are different for each company. for achieving these goals. Step 1: Understanding internal and external factors The first step is to get a clear understanding of factors affecting your company. Develop and assess organizational options 3. At the same time. A set of countries with highly differentiated customer requirements and constantly changing demand situations – as a result. for example. The experience shows that. More often than not. it is actually improved supply chain organization that enables these companies to develop supply chains that work more effectively and efficiently. Agree on the target organization before defining steps for transformation. the environment in which each company operates is unique. a central supply chain control function was established to manage a comparable set of key performance criteria. 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. Understand their own internal and external factors 2.

arising from M&As Deregulation High-maintenance partnerships Market requirements. tax regulations. Effective supply chain management requires a company culture that puts the supply chain above functional targets. and so forth.Supply chain organization 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. A decision was taken to reshuffle the organization in order to accelerate the transition to a more collaborative approach towards purchasing. labor laws. was just coming out of a major restructuring phase during which the whole purchasing department was focused only on one objective: reduce purchasing prices. The latter factor comprises a mixed bag of local and global customer requirements. One client company. This was achieved by allocating the purchasing function. together with the production function. and underpinning this new structure with a reviewed collaboration-oriented KPI and incentive system. Such a culture clearly does not evolve overnight and management has to make considerable efforts to . which might be necessary in order to create a best practice organization. Small steps might need to be taken at first to set the groundwork for cultural change. low-cost country sourcing. Typical external factors that might be relevant for determining the requirements of the organizational design are: 265 • • • • • Globalization (market entries. and people skills. such as the availability of IT systems. underneath a single global supply chain responsibility. off-shoring fragments of the supply chain) A need for flexibility. Full analysis of such internal and external factors is crucial for the design of a workable supply chain organization. Typical internal factors are: • • • Culture Capabilities Systems. for example. Each company has its own set of internal requirements too.

and it shows where adjustments in the organization need to be made. The description of options should then happen along a framework that allows a relatively quick description of an option. the results must be translated into clear design requirements. They should consider which entity has what responsibility and autonomy. Step 2: Develop and assess organizational options Once a company has analyzed the external and internal factors. . Decision making Companies should look at the decision-making process and structure. The correct system is also critical. the company might not have the right sort of IT infrastructure in place to enable it to operate. Detailing of the organization can then be limited to a few options. Typical internal and external factors that might be relevant for determining the requirements of the organizational design are shown in Figure 15. making it easier for companies to assess the organizational options open to them. This creates transparency. Organization transition has to develop alongside IT capability. Process-orientation The organization should ensure an end-to-end process responsibility. Even if an internationally optimized supply chain makes sense. or even only one – the preferred option. When defining options for organizations. and what coordination tools are applied. options can be developed. A special skill set is required of supply chain managers. 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. Centralization Companies should look at the level at which the supply chain organization is centralized or decentralized with respect to regions.3. They need to display specific capabilities. Is it spliced according to product. Wagner achieve systematic development at all levels of the company and in all regions where it operates. This creates a checklist. This enables the individual options to be assessed on a high level against the design criteria. With this knowledge. order type or speed? The goal is to achieve a strong customer/ market orientation end-to-end. based on the defined requirements. market. customer. The relevant dimensions should be considered when outlining the organizational option: • • • • Segmentation Companies should look at the way the supply chain organization is segmented.266 € Ingo Schroter and Stephan M.

Such a culture does not evolve overnight. • Capabilities: Supply chain managers require specific capabilities. Organization transition has to go along with IT capability development. the company might not have IT infrastructure in place that enables this. • Market requirements: Local and global customer requirements. • Systems: Even if an internationally optimized supply chain makes sense. Organizational design requirements Figure 15. deregulation but also partnerships in various elements in the supply chain continuously require structural updates. The organization needs to provide the glue to hold the supply chain together.External factors • Globalization: Trends such as market entries. tax regulations and labor laws need to be considered when designing the supply chain organization. even if external hires can help. low-cost country sourcing.3 External and internal factors to be analyzed prior to designing organizations 267 . • Flexibility: M&A. it has to be systematically developed. offshoring fragments of the supply chain. Internal factors • Culture: Effective SCM requires a company culture that puts the supply chain above functional targets. The organization needs to be flexible enough to handle those. an internal development of people is required and this takes time.

Shared service functions – such as warehousing and transportation – should be set up to realize cross-segment synergies. Internal factors need special consideration. Organizational talents are guides. Ingo Schr€ter. To define the best option. Note 1. Sebastian Durst. Since supply chain management is probably the most crossfunctional of all core business disciplines. Companies also benefit from conducting a ‘what-if’ scenario analysis. Both external and internal factors should be used for measuring the company’s flexibility. this cultural change clearly must start with top management and filter downwards. only functions that strongly impact the supply chain control of differentiated product segments should be grouped into a segment responsibility.268 € Ingo Schroter and Stephan M. including suppliers. This helps create a stable supply chain organization and promotes a culture of sustainability. which tests how flexible the organization is. Additionally. Axel Schmidt. o Eckhard Lindemann (2006) Roland Berger/WHU Otto-Beisheim School of Management. but this requires everyone in the organization to develop an end-to-end mindset. . Outlook As the study and feedback from participants demonstrate. Organizations today still tend to be functionally designed. But companies must be aware that there is no single golden way. supply chain organization is seen as a key success factor for companies across many kinds of industries. each company needs to consider its own external and internal factors. with responsibility limited to distinct functions. Wagner • Supplier integration Companies also need to investigate the way their internal supply chain organization is linked to the comprehensive supply chain. Stephan Wagner. A best-practice organizational structure helps companies thrive. 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. showing how companies can design an effective and efficient supply chain organization. End-to-end responsibility for the entire supply chain is rare. This needs to change.

(2006) Getting to Grips with the Supply Chain. et al.Supply chain organization Further reading Durst. Sebastian M. Stuttgart: Roland Berger. How Organizational Stars Organize their Supply Chains. 269 .

243. 233–5. 248f see also cars automotive suppliers xiii. 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. 109. 246f. 151. 109–10 western 81 automotive components manufacturers 155 average working capital 234f automotive industry xii–xviii. 239. 148 average working capital 234f Japanese 82–5. 138 assembly lines 1. 25. 148. 237. 50. 10. 162. 153. 242b. 177. 150. 7 Australia xvi Austria xv. 196f. 153. 99. 12. 152. 239 accounts payable 121f. 20. 205. 128 alliances 50f. 243. 3f 200f asset turnover 199. 43f activity based product costing 33f. 90. 239. 240. 205. 202 aerospace xv–xviii. 263 accounting 28. 108. R. 152. 179. 99. 263 leveraging manufacturing excellence 172–3b maintenance costs 177. 86–7f. 239. 243 balanced scorecards 57 Bamberg xvii bankruptcy/insolvencies 24. 124. 214b. 64b. 22(n2). 243 emerging markets 107 Asia-Pacific 137f. 167f Bayer 191b Bayer Industry Services 191b 270 . 11 alliance hubs 127. 35f. 244. 236f. 247–54 accounts receivable 232. 154f amortization 71 Apple 19b. 80–1 lead buying 135–9b safety recalls 64–5 share of sales with original product innovation 62f speed with which new models are launched 90 working capital optimization 247. 152. 29. 92. 223. 240. 236f. 210 assets 233 assets 236f Audi 30 Augustin. 233. 152. 107 automotive companies/manufacturers 122. 259f. 119.INDEX ABS finishing 119 accountability 134. 253f action plans 42. 242b. 49f. 41 asset performance/productivity xvi. 108 Airbus A350 65tb Airbus A380 64. 30. 107f. xii . 92. 233–5. 151. 203. 207. 237–8. 116. 155. xiii. 242b. 233 barriers to entry 14 BASF 191 batch systems 166. 216 aluminium 30. 21 Asia 41b. 2. 232. 219f Africa 103. 144 banks xiii. 41 ‘adherence to global processes’ 55 Adidas 15. 258 CCR (case study) 41–4b global development made successful 45–60 industry benchmark for debtor days 245f Japan 79. 207–8 manual 40f. 237–8. 219f. 65tb aircraft manufacturers 109 airline industry xii. 243–52.

115 SCM 200f. 124. 101. 36f. 264 changing 14 global 132 business functions 194 business impact 115–16. 121f. 156f. xvi. 3f. 255 Brandenburg. 164f. 204 sharing process 171f success factors and levers in innovation management 61–78 supply chain organization 258. 15. 152 price discounts versus payment term targets 254 purchasing 94. 260–3. 139b. 123–4. 6 business areas 51. 123. 172b. 198. 135 SCM 200f. 244 business models: impact on product development (chapter one) 7. 178f external 73b financial ratios 256 industry leader 162 machinery maker 119–20 maintenance costs 186 manufacturing excellence 163. 128–31. 251. 121f. 49f. 125. 134. xviii. 238–9. 136. 203 board members 251 body (automotive) 79. 10f corporate strategy in action 9–12 development over time 13f formation. 127–30. 19b change and innovation 12–15 components 9–10. 171 lean manufacturing 146 manufacturing 162. 268 working capital 232. 243–4. 170–1. 152 equipment maintenance cost-to-availability ratio 177. 99. 106. 52 business divisions 133 business environment 59. 70f. 110. 134. 13f prerequisite 19–22 business models xvii. 72. 151. 265. 199. 145. 75b. 2. 136. 139b. 120. 211–15. 244 Berlin 13 best practice/best in class equipment maintenance 177 institutionalization 171f. 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. 254f. 136. 191b. 174. K. 133. 147. 47. 165. 19b brands 15. 130. 148. 116f business model innovation 7. 167f. 220 Brazil 49f British Airways 11 built-in quality 162 Bulgaria 108 bureaucracy 158f business administration xiii. 38n. 80f bonuses 55. 15. 166. 200. maturity. 261 central organizational units 214b data comparability 237–8 local 100 271 . 166–8 purchasing 111. 43f. 17f how and when to innovate 15 imitation 14. 53f. 238. 14. 237 supplier development 109 TCO 112 technical 121f 237. 257. 156. 249. 157 business strategy 200f business system analysis 164f business units (BUs) 13f. growth. 238–9 working capital 237. 264. decline 15. 42. 9–23 airline industry 11b attractiveness indicators 18f. 198 harmonization 57 see also processes business segments 159b. 93. 251 book-keeping 56 bottlenecks 41. 15. 174 miscellaneous xvi. 199 business sites 133. 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.Index benchmarking/benchmarks 14. 206–9.

261 international transfer 145 tied 124 capital binding 249 capital expenditures (capex) 97. 194f. 109 best practices 110 R&D activities (splitting among sites) 50 supplier development 109 cars 1. 191–2b. 219f. 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: optimization (how the approach works in real life) 159–60b global supply chain management framework (electronic components) 205–14b . 213. 264 cash discounts 239. 259f chief financial officer (CFO) 251 chief marketing manager (Nissan) 89 chief operating officer (COO) 251 chief product specialist (Nissan) 89 call centres 209f capital 177. 141f. 88 interior trimming 109 paint and colour combinations 203 power window module 34.272 buyer-supplier relationships 263 buyers/leverage 116f Buzz (KLM subsidiary) 11 Index 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. 100. 108. 235 capital projects 192 capital structure 200f capital transfer 126. 98f supply chain organization 266 Centre for European Economic Research (ZEW) 61 change management 55. 12. 140f. xvii. 99f sourcing functions 97. 30. 81 ‘hurry up’ models 84 innovative 89 models 203 pure Japanese 80 see also vehicles cars: sections/attributes body 85 chassis 79. 249. 238 central ivory towers 100 centralization 72. 264 purchasing 99. 247. 141f cell manufacturing 79 Central and Eastern Europe 107f. 243 benchmark for debtor days 245f equipment maintenance 188–91 maintenance costs 177. 96. 240 cash reserves hidden in supply chain 232–56 cash-out 75b catalogue purchasing 139b. 122. 213. 47. 121f chemical industry/chemicals xii–xv. 185. 196 chief executive officers (CEOs) 78. 80f crash tests 84 door panels 39f front wheel drive 49f. 35f radios 57 rear wheel drive 49f. 117f. 248f chemical parks 192b. 140b. 98f capital markets 233. 126f capital turnover 207 car manufacturers 25. 144 ‘Central Europe’ 203. 264 ‘Eastern Europe’ 6. 242b. 187f. 178f shared support functions 191–2 working capital 234f. 108. 188 change process engineering 119. 235. 251 cash flow 233. 237. 49f. 103.

Index
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 (optimization) 147–61 global manufacturing footprint (uniqueness) 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

273

274

Index
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 reduction 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 systems (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

Index
‘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

275

276

Index
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

Index
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

277

278

Index
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 maintenance) 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

202f forward and backward integration 121f France xiii. 249 SCM efficiency 211 foreign direct investment (FDI) 202. 119–20. 148. 206. 45–60 automotive industry 45–6. 51. 267f. 22(n1) Free University of Berlin 13 front loading 79. 202.Index flexibility 28. 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. 153–4 step 4: select target regions and countries 149f. 260 supply chain 265. 238. 59 lead engineering (concept and implementation) 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. 226b. 138f. 95. 30. 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. 82. 12 Ford. 113. 266 ‘GAP analysis’ 126 gearboxes 61 genetic immunization 13 geographical location 132 geography 204 Germany xii–xvii. 8 global commodity leader (GCL) 138. 194b. 121f functional department heads 81 functional departments 79–80 functional systems 58 gap analysis 21. 79 functional adjustment 117f. 202. T. Snr 1 forecast-to-fulfil 237. 88 fuel prices 103. 242b Gleisberg. 149–51 step 2: derive model 149f. 258 delivery 62 refining organizations 194–6b supply 260f. 64b Franke. 104 Fujimoto. 139b global development made successful (chapter three) 7–8. 147. 99 Frankfurt 191b Fraunhofer Institute for Systems and Innovations Research ISI 12. 12. 15.. 250 forecasting 111. 174. H. 161. suppliers. 19b. 199. 51 global manufacturing footprint 144 global manufacturing footprint: optimization (chapter nine) 146. 30. T. 157–8 global marketers 76 279 . 167f. 209 link with production 107 sales 174. 157. partners 149f. 166. 52. 192b. 208. 268 Flickr 21 focus groups 81 follow-up costs 101 food industry 259f food manufacturers 258 Ford (corporation) 1. J. 212. 212f. 25. 64b. xiii. 155–6 step 5: fine-tune the model and finalize the footprint 149f. xiii . 211. 156–7 step 6: select site. 151–3 step 3: segment product structure and define delocalization scenarios 149f. 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. 227. 83–4 front wheel drive 49f. 137. 203. 25. 145. 145. 61.

251 internal sales systems 252 India 47. 248f see also pharmaceuticals heavy weight product managers (HWPM) 79–80. 142. 196f healthcare facilities 184 healthcare sector xiii. 217 Google 21 government funding 226b governments 104. 167f information technology (IT) xiv. 130. 161. 220 information systems (IS) platform 166. 138. 82. 265 automotive industry 135 importance of organization 46–7 industry and society 93 manufacturing 144. 128. 103. 169. xv. 149. 200f. 81. 216. safety. 224f information and communications technology (ICT) 93. 45. 106 Great Britain see United Kingdom greenhouse gases 104 gross domestic product (GDP) 105. 57. 202f groupware 56 guarantees 30. 49f. 194. 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. 173b individualized standardization 47 industrial engineering company global manufacturing footprint (optimization) 159–60b industrial goods ‘complete solutions’ approach 12–13 industrial history 107. 80 practices 82–8 strong empowerment by top management 81 success factors 81–2 well-defined processes 82 hierarchy 45.280 Index globalization xiii. 107. 174. 196f prioritization 69 Hungary 108 Hurricane Katrina 192 IBM [International Business Machines] 123 idea evaluation 62. 199–200 home country 50f. environmental. 100 implementation 83 manufacturing excellence 164f import regulations 117. 123. 230. xiii. 263 high technology xiii. 239. 51 Home Depot 123 hospitals 226–30b housing market 1–2 human medicine 14 human resources 2. and quality (HSSEQ) standards xix. 46 Gulf of Mexico 192 hardware 20. 214. xvii. 258. security. 123. 67 Hollmann. 242b common platform 127 . 116. 99–100. 216. 3f. 219f high-maintenance partnerships 265 Hoechst 191b holistic approach 32. 147. 131 R&D: success factors 76–7tb supply chain 216. 203 information flows 100. 111. 209. 144. 145 product development 90 production 204 purchasing 102–3. 80f capability and personality 82 chief engineer 89 history 80–1 initiatives for change 88–9 matrix organization 80f. 145 indirect functions 172b. 200. 200f. xvii. 27. 53. 201. 73b idea management 70f image 26. 107f industrial structure 160b industrial tradition 108 industry type 132 information 42. 112. 2. 238 export regulations 238 improvements: source of fortunes (Ford) 1 incentives 158f. 30. 158f. 6. 163. T. 193f. 225. 21 head offices 50 health. 157. 96. 243 average working capital 234f case study 226–30b working capital optimization 247.

53–4 integrated network hubs 50f. 129. 76. 65. 53–4 leadership approach 53. 186 international 100 281 . 55–6 lead engineering 52f. 229. 145. 212. 72 innovation enablers 67. 133. 138. 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.Index 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. 75b ‘innovation to cash’ 72–5b innovation controlling (innovation enabler) 68f. 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. 187f. 225 competitive differentiation factor 94 environment for excellence 6 failure 61. 121f innovation budget 74f. 183–4 global 52f. 185. 72 innovation management xv correlation with commercial success 75 holistic concept 73b. 69. 68f. 156. 64. 69–72 innovation portfolio 70f. 217. 74f re-definition 75b innovation management: success factors and levers for best practice (chapter four) 8. 71. 76 Roland Berger Innovation Toolbox 67–78 strong versus weak 67 innovation performance 67. 54 mandate approach 53f. 75b innovation process 72. 63. 158f. 54 local execution approach 53. 213. 108. 146. 67. 68f. 265 equipment maintenance 180f. 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. 172b. 109 customer involvement 63 ideal 73b innovation scorecard 72 innovation strategy 9. 255 IT capability 267f IT infrastructure 266 IT platforms 77 IT solutions 57 IT tools 90 information technology systems 59. 227. 188. 185. 61–78 Airbus A380 64b. 157. 51 intellectual capital 7 inter-governmental agencies 104 internal customers 115. 34. 106. 74f innovation theory 6 innovation toolkit 8 ‘innovative supply industries’ 221tb institutionalization 29 insurance sector 92 integrated global organization lead engineering 52f. 221tb. 206. 193f. 53f. 53f. 226b. 37. 55–6 Infraserv 191b infrastructure 68f. 156f. 68f.

52–3 price to pay 57 real life 57 six key elements 52f. 8. 72. 3f. 54 knowledge management 51 knowledge sharing 56. 21 Japan xiv–xv. 27. 165. 167f. 209. 223. 108. 55 price 96 quantitative 262 standardized 52f. 158f. 194. 228. 153. 236f. 153. 244. 265 lead buyers 53. 211. 62. 152 labour costs 108. 161. 219f. 106. 155. 157. 260f. 243. 214b. 157. 111. 201. 86–7f supply chain 199 lead-user integration 70f leadership concepts 45. 258. 247–56 ‘buffer inventories’ 186 ‘buffer stocks’ 254f. 56. 136f. 74f. 21. 55 supply chain 261 KLM 11 know-how 26f. 210. 174. 167f. 121f. 258 concept approval to start of production 66f reduction 79. 82. 58 lead engineering concept and implementation 51–8 global strategies 52f. 158f. 166. 49f. 158. 177. 260 inventory management xiii. 54. 55. 220 . 230. 195. 153. 152. 259f inventories 31. 255 Kaeser (compressor manufacturer) 12 kanban 255f Kazaa 18b key performance indicators (KPIs) 2. 99. 151. 209. 58. 66f. 175. 185. 57 lead times 39f. 158f leverage (sourcing strategy) 116f. 255 Latin America 6 law/legislation 30. 84–5. 73b. 57. 246f. Korea 25 KUKA Robot Group 12 labels (music) 20 labour 105 labour content 149. 185. 157. 225. 81. 116 life-cycle 53. 232. 100. 265 emergency shipment cost to total shipment cost 210 innovation activities 69 inventory coverage 210 lead engineering 52f.282 Index international contract law 100 international purchasing offices (IPOs) 123 internet 18–19b. 199. 54. 46. 215. 183. 254f. 255. 172b. 123 Lanxess 191b large order planning 254f. 203 interviews 76. 52–6 lead engineering groups (LEGs) 53. 107 language skills 55. 141f. 54. 131 lean manufacturing xvii. 264. 242b invoicing 252. 255 centralized planning 212 optimization (four-step strategy) 237–42 inventory costs 173b. 171. concentration 77 decentralized units 77 external 21 global 77 knowledge externally-available 31 local 46. 182. 213 labour legislation 158f. 25. 265 labour rates 107 labour skills 152. 154 lamp manufacturer 40f language barriers 52. 109. 145 smart engineering processes 79–90 jeans 26 joint partners 159b joint venture structure 106 just-in-time production 79. 166. 20. 144. 141b role 122 lead buying 58. 146. 253f iPod 21 iTunes 18–19b. 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. 207. 230. 158f. 187f. 162. 233–5. 55. 213. 164f. 174 LEDs [light-emitting diodes] 37 legal departments 58 legal environment 157. 256 investment 41. 254f. 166. 110. 153. 106. 163. 195. 65. 209f. 188.

Index
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

283

284

Index
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 functions (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 global 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

Index
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

285

286

Index
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

Index
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 (chapter 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: optimization 160–1 innovation management 75, 78 manufacturing excellence 173 manufacturing performance 196 organizations drive strategy and performance: 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

287

288

Index
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 development 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

27. 71. 21 Mologen 13–14 music industry 20 Nike 15 production xiii. 261 centralized 212 production processes 172b. 251. 212f. 166 product portfolios xvii. 89 technology-intensive 213 world-class system 164f production batch size 254f. 201. 187f product range 165f product repair 46 product road-mapping 70f. 110. 85. 241b. 13f. 29–30. 209f. 255 production sites 1 production standards 108 production strategies 212 production structures 215 production support functions (independent of location) 193f. 255 production life-cycle 94 production lines 29. 250f. 182. 15. 195. 254f. 221tb product loss 179 product modularization 71 product planning xv. 37. 218. 211. 206. 21 product strategy 52 product structure 58. 239. 44 production capabilities 3f production capacity 64b.Index 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. 233. 203 product launches 65 product life-cycle 26f. 255 production bottlenecks 28. 146. 101. 211. 261. 201–6. 217. 217. 186. 58. 149f product testing 150 product/market combination 10f. 208. 72 product segments 21. 230. 184 critical 190–1b production logistics 172b production moratoriums 254f. 196 289 . 253f. 89. 165. 17f. 199. 26 product quality 30. 250. 22 start 85. 16. 204. 27 product standards 17f. 50. 185. 10. 31. 177. 19–22. 189f. 211 utilization 264 production costs 147. 46. 214b link with forecasting 107 projects bound for failure (early stopping) 7. 241b complexity 218 customized 62 leaner 228 young 61 product positioning 26f. 88 functional departments (Japan) 79 product differentiation 71 product functions 36f. 265 Adidas 202 complexity tax 219f de-localization 150 first ‘field of action’ 2. 172b. 69. 11. 116. 268 product specification 29 requirements 26f. 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. 5–90 flexibility 258 global networks 145 global 47 lean 201. 193f. 211 reduced complexity 224f production segment 254f. 255 Adidas 202 cross-border 212–13 global (leveraging manufacturing excellence) 162–73 production planning 165f. 255 production networks 172b. 63f product innovation 7. 215.

225. 8. 3f. 63f technical weaknesses 63f universal 51 unprofitable. 240 profit margin 199 profitability 7. 54. 72. 41. 96–113 complexity tax 219f cross-BU information system 123 global 128 group-wide coordination 141b implementation plan 122 integrated strategy 136. 250. 229. 233. 75b project launch 74f. 86–7f prototype manufacturing 49f prototyping 65. 63f cutting-edge 119 ecological 46 high-technology. 250f. 58. 228 order frequency 140b organizational frameworks 95.290 Index production system (world-class) 164f production units 209f production volumes 210 production-smoothing 254f. 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. 242b programme director (Nissan) 89 project cancellation 74f. 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. 166. 6. 226b. 255 second ‘field of action’ 2. 116f. 98f profit and loss account 120. 207. 251. 72 public sector 13 public-private partnership (PPP) 13 Puma 15 pump repair 180f purchase-to-pay 237. 131–42 structured approach 97. 230 overly expensive 63 structure 56 target cost 63. 131–42 organizational structure 99 outsourcing know-how 93 pace of change 110 performance measurements 101 process optimization 140f procurement 254f. 135 best practices and impact on purchasing strategy (chapter six) 94. 24. 221. 266 built to last 26–7 co-development by companies and suppliers 109 with competitive disadvantages 63. 238. 250 purchasing best practice 127–30. 30. 163. 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. 199 products 1. 75b project management 42. xvi. 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. 100 project managers 170f. 136f internet and B-2-B solutions 128 introduction 92–5 leverage 136 long-term plans 110 miscellaneous xii–xiv. 88. 261 no singular one-fits-all approach 94 optimization xiii. 255 productivity 40n. 98f . low-volume 206 value-added 108 weaknesses in market environment 63f professional buyers 97. 239. 58. 253f. 71. 75b project implementation 73b.

154 consistency 104 processes 146 product and service 177 targeted 26f. 151. 139.Index ‘tactical’ 100 world-class (chapter seven) 94–5. 29. 122–3. 117. 239. 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 purchasing professionals/staff 137 experience and educational level 112 skill gap 99f. 30. 240. 46. 235 raw materials 103. 114 purchasing fads 131 purchasing functions 258 purchasing information 102. 140f. 259f purchasing organization/s life-cycle (three-stage) 97–9 maturity steps 98f optimization 115. 57. 116f. 55. 99 purchasing power 226b. 223. 113. 122–4 see also procurement organizations purchasing performance 109–10 purchasing philosophy 98f. 84. 166. 77 quality improvements 118 quality leadership 9. 193f. 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. 194–6b 291 . 71. 125. 96. 114–30 see also procurement purchasing: key trends in best practices and impact on purchasing strategy (chapter six) 94. 100. 121f questionnaires 158. 72. 106. 192b. 117–18. 229 purchasing processes: optimization 120. 130. 97 purchasing departments 25. 41. 101. 193f recall expenditures 30 recession 92 refineries 175 core functions versus support functions 194. 73b. 229. 255 re-work 39f. 265 global 47 purchasing empires 93 Purchasing EmPowerment (PEP) (Roland Berger) (chapter seven) 94–5. 120. 145. 122–4 strategic commodity management (sixlever approach to optimizing costs) 115–20. 96–113 purchasing volumes 58 qualitative targets 55 quality 15. 96. 255 quality control department 174 quality gaps 31. 122f purchasing know-how 120. 128. 120. 121f purchasing excellence xvi. 132. 40f reactivity 102 real estate 191b. 92. 97. 141f. 164f. 92. 11 quality standards 62 quantitative analysis 228. 150. 104. 75b. 120. 242b. 28. 238 quantity leverage 117f. 100 skilled 130. 165f. 129–30. 140b purchasing codes 229 purchasing costs 32 ‘procurement costs’ xv. 132 purchasing strategy 94. 122f. 186 external versus internal 92 savings xv. 106–10. 73b re-sale 254f. 112. 26–7 quality certification 109 quality control 174–96 returns 254f. 225 availability 116f costs 110 inventory 264 procurement 148 re-engineering 110 ‘re-invention of wheel’ 56. 101. 32. 248 quick wins 69. 84 quality gates 7. 220. 123 purchasing lifecycle 100 purchasing managers xvi.

41. 129. 10. 104. 172b. 161. xiv. 138f regional directors 170f. 148. 207. 258 out-of-stock rate 204 return on capital employed (ROCE) 195. 150. 30. 9–23 clever cost approach design 24–44 company clusters 6 corporate strategy 77 first ‘field of action’ 2. 210 drivers 236f Europe’s top five hundred companies 235 return on equity 13 return on sales 61. 154. 51. 104 . 261. 241. 82. 124 Renault-Nissan 51 repair costs 176f. 142. 181 risk evaluation 149f risk management 100. 138–9b. 157. 255 revenue levers/innovation management 69–71 revenue mechanism 10f. Evaluation. xv. 202. 203. 225. 265. 175. 81. 13–16. 206. 71 revenues 21 non-transaction based 10 transaction-based 10 reverse auctioning 92 reverse logistics 261 ˆ Rhone-Poulenc 191b risk 51. 266 end-to-end 268 SCM 208–9 retail sector/retailers xii. 24–44 innovation management/success factors and levers for best practice (chapter four) 8. 76. 17f. 64b. 177 reputation 15. 79–90 splitting among sites 50 research and development: miscellaneous xiii.292 Index refinery organization elements needed for high performance 194f flexibility 194–6b refining organizations/new developments 192–6 regional commodity leader (RCL) 138. 144. 225 equipment failure 179. 201. xvi. 64 request for quotation (RFQ) 128 research and development 5–90 automotive industry 45–60 business models: impact on product development (chapter one) 7. 196f R&D budgets 47 R&D capacity 65 R&D departments 46. 185. 199. 158. 77 R&D organizations 57. 71 R&D projects (value analysis) 63f R&D structures 59 R&D workforce (rationalization) 57 resistance to change 169 resource allocation 83. 170 Registration. 218–19 resource gap 22 responsibility 53f. and Authorization of Chemicals (REACH) 104 regulatory environment 103f. 111 risk portfolio 74f risk priority number (RPN) 187f roads 49f. 111 relationship re-definition and user-involvement 97–9 reliability 106–9. 135. 124. 5–90 global 47 global development made successful (chapter three) 7–8. 21 Mologen 14 music industry 20 transaction-based 14 revenue performance 68f. 259f. 151. 177. 169. 80. 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. 71. 251. 58 R&D partnership 70f. 153. 62f returns/claims 254f. 11. 106. 45–60 global network (allocation of core competencies) 49f globalization: success factors 76–7tb historical growth 77 innovate to win (chapter two) 7. 150. 3f. 214b relocation scenarios 153–4 Renault 89. 78 R&D investment 151 R&D networks 56.

255 sales representatives 228 power 230 sales staff 262 sales targets 217 sales volumes 157 savings potential 33f scenarios 19–20 scheduling strategy 254f. 252. 175–7. cross-industry experience 72 Roland Berger Strategy Consultants automotive industry (innovation performance) 66f best practice (working capital excellence) 243 complexity management 218. 67–78 levers. 178f. 202. 54. 226b. xii–xviii. 251. 204 sales activities 50 sales channels 45. 243. 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. 238 sales costs 37 sales departments 32. 84. 149. 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 mechanical engineering 63 tools 43f WCM: crucial factor 241 WCM: optimization levers 241. 7. 121f sales xii. 57. 208. 263–8. R. 186. 255 Schmidt. 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. 6. 261 sales growth 206 sales and marketing (Nissan) 89 sales planning 254f. 41. 259f inter-company 238 lost 64. xvi. xv. 179 maturity steps at purchasing organizations 98f miscellaneous iii. 200 o Schwientek. 233. 241–2b working capital optimization 232. 200f. 248n Roland Berger Strategy Consultants: supply chain organization 257–8. 198. 39n. 267f step 2: develop and assess organizational options 264. 253f. 200 sea transport 104 293 . 32. 181 risk-driven approach 186 SCM: end-to-end framework 199. 33n. 220. 240 sales directors 251 sales and distribution networks 147 sales force 27 sales forecasts 252. 58. I. 266 . xvi.Index Roland Berger Innovation Toolbox 62. 205. 262 annual 258. iv. 210. 235. 239. 236f. success factors. 66f. 25. 43n operations strategy team 263 purchasing (embedding in corporate structures) 120 Purchasing EmPowerment 94. 268(n1) step 1: understanding internal and external factors 264–6 . 245f. xvi Schr€ter. 35–6n. 201. 114–30 purchasing plans 97 risk-based method 179. A. 235. 190. 237–42. 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. 206.

213. 240 simultaneous engineering 70f. 182 service quality 185. 210 specific 156f. 156 see also expertise Skoda 30 Skype 21 Slovakia 108 smart engineering processes (Japan) (chapter five) 8. 154f. 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. 185. 194–5b site infrastructure 191b site managers 175 sites 53f skills 112 availability 158f internal 183. 122. 49f. 196f. 20. 203. 131. 195 special product managers 81 speciality buyer 141f specialization xii–xviii. 215 shipping charges/costs 205. 33f. 207. 14. 91–142 value-added 108 sourcing department 33f sourcing excellence 96 sourcing processes 106. 255 shareholders 75b sheet metal 29 ship-to-request service 205b shipments (inter-company) 213–14 shipping 209. 37. 209. 208. 187f services xiii. 203 global 48f speed 266 sporting goods 15 stability/financial 146 staff rotation 57. 142 software 21. 186 specialized 181–2. 37. 19–22 service levels 107f. xvii. 212f spare parts 179. 36f Singaby. 194. 153 shared 141f. 116 simulation 85. 262 . 208. 71 simultaneous product and process optimization. 49f. 180f. 184 sourcing xiii. 111 Shukan (Nissan equivalent of HWPM) 89 Shusa (chief) 80. 238. 137f. G-A. 238 large-scale 108 second ‘field of action’ 2. 49f South America xv.294 Index 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. 210 shipping functions 208 shop-floor control 172b shortages 104. 209f. 138. 82 Shusa/strong empowerment by top management 81 Siemens 123 Silicon Valley 25 simplification: sourcing strategy 116f. 10. 116 ‘keeping up with fashion’ 105 South Africa 39f. 183–4. 141b. 190. 77. 213 ‘division of labour’ 201. 186. 92. 94 Singapore Airlines 65tb single design method 83 site fitness programme (SFP) 192. 56 driver of product costs 28–9 global 121f. 87f. 243 South-East Asia 144 Southern Europe 238 Soviet Union 24 Spain 64b. 138f sourcing security 96 sourcing strategies 116f. 268 standardized 140b set-based process 83 setup times 254f. 264 service providers 127.

227. 58 equipment maintenance 179–81 first level of operations excellence 2. 115 standard procedures 257 standard purchasing 139b. 51. 158. 59. 128. 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. 230 rationalization 220. 155 sub-systems 56 subsidiary companies 131 second-tier 141f. 239. 38f. 136. 255 targets 57 standardization councils 230 standardized data warehousing 55 standardized KPIs and performance measures/lead engineering 52f. 65. 41. 137. 44. 156 supplier relationships 108–10. xv. 142. optimization 127 supplier base management 124–7 supplier code structure 123 supplier coordination/key blocking point 263 supplier data 102 supplier development 39f. 130. 133. 147–51. 54–5 standards. 123. xvi sub-assembly 152 sub-contractor management 166. 56. 95. 255. 126–7. 254f. 58. 117. 254f. 140b. 141b substitute products 16. 137. 262. 53. 52f. 210. 135. 115 development stages 125 success factors 126. 171f global 51 product and packaging 223 purchasing/procurement 229. 182 external view 41 first-tier 155 global information pool 124 global management 129–30 in-lead 47 295 .117f. 120. 94. 225. 100. 116f. 121f. 41. 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. 160b. 229.Index stage gates 77 stakeholder expectations 125 stakeholder inclusion 32 stakeholder needs 101 stakeholders 42. 123. 105. 160b. 29 supplier base 1. 255. labour and environmental 144 statistical data 179 steel xiii. 97. 203. 79. 126f supplier manufacturing analysis 33f. 263 Adidas 202 automotive 148 bargaining power 116f best-price 31 collaborative planning 261 costs and margins 102 equipment 181. 52. 16. 59. 118. 57. 40f. 161. 119. 157. 254f. 18f. 72b. 90. 221tb stocks 204 storage 40n strategic alliances 45. 109 supplier financing 119. 114. 167f sub-suppliers 103. 121f supplier integration 70f. 268 supplier management xiii. 43f. 121f. 140f. 117f. 185. 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. 93. 141f standard-setting 70f standardization 47. 3f revision 187f. 140b. 55 standardized processes lead engineering 52f. 230. 235. 142 success factors 110 supplier selection 112 suppliers 6. 47. 18f. 188 structural organization (innovation enabler) 72 Stuttgart xii.

104. 200f. 267f supply chain monitoring 207f creates global transparency 209–10 supply chain network 207f . 263 external coordination 262–3 global optimization 204–5 goals and targets 261 hidden cash reserves 232–56 internal 261 miscellaneous xviii. 106. 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 thirteen) 199–200. 1. 121f second-tier (certification requirements) 155 strategic or key 37 Toyota database 88 supply base 54. 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 intercompany 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. 39f. 205b supply chain deficits 205 supply chain department 33f supply chain enablers 200f. 216–31 control 200f country-focused versus BU-focused 211 end-to-end 263 fourth ‘field of action’ 2. 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. 186 ‘more than just logistics’ 198–200 ‘most cross-functional of core business disciplines’ 268 networks 200f optimization xvi. 214b supply chain organization (key enabler for successful SCM) (chapter fifteen) 200. 263 miscellaneous xiii–xvii. 232–56 supply chain management: success factor for global players (chapter twelve) 199. 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. 197–269 holistic re-alignment 215 holistic view 232 importance 198–200. 92. 208 organization and resources 200f pilot units 215 processes and systems 200f Roland Berger’s end-to-end framework 199. 259f. 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. 206. 124. 206. 115.296 Index 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. 205. 257–69 trends 201 working capital excellence (chapter fourteen) 200. 3f. 3. 266. 201.

61. 92 see also ‘cost planning’ target-pricing 112. 206. 212 synergies 52f. 80f Texas 192 ‘think globally. 76. 121f target-setting 55. 85. 133 system architecture 52 system suppliers 39f. 165. 52. 63f technical standards 24. 154. 209f supply chain transparency 145 supply conditions 220 supply costs 221tb supply market challenge 115. 46. 153. 262–3 coordination tools 260. 93. 255 297 . 34. 226b. 65tb. 158 technological factors 18f technological gap 147 technological innovation 14 technology 1. 159. 265 complexity tax 218 supply chain 267f Systems Applications and Products (SAP) xx. 128. 112. 136. 160b. 26f. 262 supply chain processes 207f supply chain responsibility 207f supply chain segmentation 211 supply chain strategy 200f. 72 technology transfer 150. 214b. 209. 27. 51. 71. 238–9 targets 169 resource and financial market-oriented 13f standardized 57 top-down versus bottom-up 239 tariffs 145 tax regulations 265. 207f supply chain planning 261. 150. 118–19. 49f. 222f concentration 77 time-saving 71 technology hunters 77 technology life-cycle 220 technology plan 72b technology road-maps 70f. 127 systematic commodity management 95 systems 32. 81. 263. 240 WCM 237. 127. xv. 139b. act locally’ 51 third-party warehouse management 254f. 84 testing (automotive) 79. 264 cross-business 135 cross-segment 268 purchasing 99f. 92. 48f. 59. 219f average working capital 234f industry benchmark for debtor days 245f working capital optimization 247 testing 40f. 44b. 56. 209f supply chain targets 207–8. 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. 207f definition 207–8. 184 ‘target costing’ 70f. 122–3. 227. 54 technical cooperation 110 technical improvement 117f. 157. 56. 50f.Index supply chain organization (key enabler for successful SCM) (chapter fifteen) 200. 136f. 121f technical modifications 58 technical problems 65tb technical solutions (perfect) 63. 257–69 best practice (food for thought) 263 coordination of external supply chain 260. 196. 191b. 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. 120. 206. 159b telecommunications xvii. 155. 208. 267f taxation 158f taxi companies 80 team work 40n technical benchmarking (DFMA) 32–4 technical centres 50. 58 technological/technical capabilities 154. 135.

49f.298 Index time 9. 237. 89 university clinics 117 university hospitals/state-owned (tackling complexity from sourcing side) (case study) 226–30b UNSPSC 137 upstream operations 152 utilities xiii. 67. 182. 72b. 64b. 248f utilities supply 175 utility ‘innovation to cash’ (case study) 72–5b utility purchasing 139b. 33f. 123 supply-chain monitoring 209–10 working capital 238. 101 United Kingdom 25. 83–4. 260 idle periods 190 start-up losses 262 supplier research 102 time to market 68f. 192. 19. 268 global sourcing 106 managing complexity 220 strong empowerment of Shusa 81 top-line growth. 99. 98f. 110. 205b. 140f. 212 unemployment 156 ‘job reductions’ 192 unique selling point 6 unit costs 101. 157. 44b. 56. 154 over-arching benefit 112 total quality control 79 Toyoda. 229. 248–9. 122f. 80. 251. 120. 81 Universal [corporation] 19b universities xii–xviii. 108 Triad countries/region 144–6 trial production. 86–7f. 244 Ukraine 108 uncertainty 134. 116f. 107f. 120. 85. 206. 84–5. 240. 156. 145. 150. 71–2 Tokyo xiv tools/tooling 46. 128. 88. 219f. 212f United States of America xv. 243. 218. 37. 251–2. 206. 44b. 89. 122. 83 lean manufacturing 162 Toyota: Research Division 89 Toyota Central Laboratories 89 Toyota concept planner 88. 52f. 221. 151–3. 262 maintenance tasks 190–1b strategic purchasing professionals 100 training costs 175 transaction costs 203 transparency 55–6. 260f. 112. 158f. 227. 39f. 90 Trumpf (machinery producer) 2 trust 37. K. 104. 113. 228–30 purchasing 122f. 260 turnover ratios 239. 13–14. 124. 193f. 185. 201. 267f deadlines 54. 64. 173b. 165f turnaround times 260f. 149. 192. 28. 266 complexity (three-step approach) 223–6. 241. 42. 121f. 43f graduated reaction strategy 22 market entry 109 timing levers (innovation management) 70. 256. service performance 200f total cost of ownership (TCO) 32. 175. 260. 100–1. 123. xvii. 214b. 111. 110. 144 T-shaped project design 163. 231. 49f. 193f. 98f. 198. 172. 241. 226. 124. 268 congestion 103f costs 107. 85 top management 16. 260 distances 107. 195. 256 transport/transportation xvi. 140b. 129. 183. 193f. 185. 215. 181. 42. 55. 260f. 169. 42. 249. 57. 111. 40n. 102. 100. 235. 181. 57. 96. 163. 15. 243 average working capital 234f industry benchmark for debtor days 245f working capital optimization 247. 89 Toyota Home 1–2 trade agreements/bilateral 107 tradition 82 training 109. 115 unit prices 97. 164–5f. 92. 99f. 80 Toyota xvii chief engineers 88 database of global suppliers 88 HWPM concept 80–2. 124 time zones 52 time-saving 212–14 timing 21–2. 122. 141f . 55. 157.

115. 200f. 35f. 152. 156. xvi. 68f. 121f vendors 210. 17f. 14. 11. 156. 119. 200. 198. 56 workforce 28. 198. 194–5b. 161 educated 108. 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. 193f. 70f. 21. 105. 195. 252–5. 198. 92. 205–9. 127. 254f. 205. 156f. 153. 146 gaps 192 low-cost 46 working capital 3f. 264 procurement costs (external versus internal) 92 white-spot analysis 74f Wissenschaftliche Hochschule f€r Unternehu mensf€hrung (WHU): Otto Beisheim u School of Management 257. 15. 254f. 145. xvii. 196. 237 optimization levers 242b. 19b. 148. 268 consolidation 213–14 national 209f regional 211. 236f working capital excellence: how companies tap hidden cash reserves in supply chain (chapter fourteen) xii. 13. 20. 121f. 89 vehicle development centres (VDCs) 88 vehicles 38f. 49f. 205. 41. 47. 184 braking concept 53 fastest-growing markets 46–7 see also automotive industry vendor-managed inventories 119. 203 value chain configuration 10f. 16. 178n western countries/markets 105. 244. 37. 220. 3. 217. 18b. 201. 236f performance-based 262 warehouses/warehousing 31. 59. 225 value focus 73b value-added 7. 98f wages/salaries 107f. 193f. 117f Mologen 14 music industry 20 value chain deconstruction 121f value chain mapping 33f. 213–14 warranty 109. 200. M. 268(n1) Wittenstein 61 work (labour-intensive) 150 work duplication 120 work plans 54 work-sharing agreements 151 workers 40f. 108. 232–56 best-practice companies (fifteen per cent of participants) 243–4. 214 value creation 1. 203. veterinary medicine 14 virtualization techniques 72 Volkswagen 30 volume bundling 118. 250 best-practice 164f top-down assessment 223 global/globalization 201. 238. 255. 236f media group (case study) 242b 299 . 223. 123. 103. 264 learning from best practice 243 optimization xvi. 146 Weiss. 244 vertical integration 10. 74f. 153. 28. 227 water utility 242b weak signals 16. 229 volume concentration 97. 118. 121f. 162. 121f. 221. 211–15. 119. 256 productivity 235 reduction 235. 119. 34. 14. 92. 216. S. 121f value chain structures 201. 40n. 13f. 150. 41 workflows 41. 240 internal 10 thresholds 225 value-based management principles 242b vehicle development 54. 72 Web EDI 121f Weisenstein. 137. 147 Western Europe 144. 202 networked 201. 245–6f bottom line (untapped potential persists in all industries) 256 consumer goods industry (case study) 241b crafting effective organization 247. 69. 33f. 63–4. 110 waste/wastage 41. 255. 39f. 10. 175.Index value analysis 33f. 224f. 256 making working capital work 233–5. 71. 250–2. 121f R&D projects 63f value chain 3f. 94. 22. 94. 244.

247 levers (current use and future importance. 248f optimizing working capital (Roland Berger’s approach) 235. by industry) 248f workshops [meetings] 43f. 240 world economy 103 World Trade Organization 105 Yahoo! 21 young people 19b . 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. 239.300 Index working capital excellence – continued optimization potential for all three working capital items 247.

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