Global Suppliers, Global Organization - A case for ...€¦ · • Further improving quality to...

GLOBAL SUPPLIERS, GLOBAL ORGANIZATION A CASE FOR SUCCESSFUL TRANSFORMATION

Copyright © 2015 Oliver Wyman 2

The supplier industry overall is in good shape but faces challenges. Industry requirements are

tightening and organizational complexity is on the rise. While the degree of required change

differs, transformation is frequently required to raise organizational maturity. However, most

transformations fail. To achieve a successful transformation, a holistic, comprehensive approach

is needed. This entails a full review of the organizational architecture in which the company’s

processes, decision‑making, performance management and culture are clearly assessed.

A recent Oliver Wyman survey shows that two out of three companies undergo a

fundamental re-evaluation of their organizations every three years, and nine out of ten

reassess their businesses every five years.

Successful suppliers recognize this trend. That is why adapting the organizational model

is a top item on the executive team’s agenda more than ever before. This is not a matter of

just changing for change’s sake. Automotive suppliers are continuously reacting to industry

drivers such as:

• Further extending the offered product lines or segments to serve OEM customers adequately

• Increasing product variations while providing a range of standards from low-cost to advanced technology standards

• Cutting costs while simultaneously boosting innovation

• Shifting innovation and R&D to a “world-is-my-lab” mode

• Further improving quality to meet tougher global standards

• Shifting marketing and sales to make it a truly local setup

• Keeping pace with the ongoing globalization of OEMs, providing them localized sales, R&D and manufacturing in all key automotive regions

• Coping with rising supply chain complexity while increasing dependence on global Tier 2 partners.

Many suppliers already have adapted their structures in the past few years; however, the

challenges continue. For example, there is significant pressure on structural costs (Exhibit 1).

In the past, structural costs rose primarily because suppliers were expanding, investing

and taking over more value-added work from OEMs. This trend will continue, which will

force suppliers to work even harder to manage the projected growth. If structural cost is not

addressed properly it will continue to rise, putting additional pressure on margins. This only

increases the need for suppliers to undergo a strategic realignment.

9 out of 10companies

re-evaluate their

organization

every 5 years.


ExhIbIT 1: PRESSURE ON STRUCTURAL COST OF SUPPLIERS DUE TO ChANGING AUTOMOTIVE INDUSTRY

6

Automotive industrialstructure 2025

21

100

3

23

100

Transitionphase

5

Automotive industrialstructure today

20

100

2000

9

18

100

Structural cost(non-COGS1)

Operating result

COGS1

Pressure from change of automotive industry structure

AVERAGE SUPPLIER P&L; n=143 SUPPLIERS; IN PERCENT

1 Cost of goods sold

Successful growing suppliers find themselves facing a number of challenges. Developing

a more mature organization is one of the keys to ensuring future success. Doing so provides

the opportunity for suppliers to align their “internal engine” with the evolution of their

corporate culture and strategy. Oliver Wyman research shows that strategy alignment

is the No. 1 reason for starting an organizational transformation. but establishing a new

strategy is just one catalyst for transformation. In many cases, mergers and acquisitions,

performed to enhance the product portfolio or grow the global footprint, drive the decision

to fundamentally overhaul a corporate structure (Exhibit 2).

ExhIbIT 2: REASONS FOR STARTING AN ORGANIZATIONAL TRANSFORMATION

New strategy

45

New businessboundaries

13

Significantacquisition

11

Mergerof equals

11

Beyonda crisis

13

Goingglobal

13

Other

21

Not yet changedthe organization

5

IN PERCENT OF RESPONSES, MULTIPLE ANSWERS ALLOWED


ORGANIZE MULTIPLE bUSINESSES

Most suppliers were “born” by creating a single product or having a single business line.

As they grew organically or via M&A, they developed in several different domains by

expanding their portfolios and OEM applications, growing their client lists, moving from

low-end to high-tech products and going global. The trouble is that many of the suppliers are

slow to adapt their organizational model to tackle the new challenges (Exhibit 3). To perform

successfully, the organization’s architecture needs to be altered to comply with major

business and strategy shifts. The organization needs to become more mature.

ExhIbIT 3: DISCONNECT bETWEEN COMPLExITY AND ORGANIZATIONAL MATURITY

ILLUSTRATIVE

Target development

Development of underperforming suppliers

COMPLEXITY

<$1 BN1–2 business units

<$5 BN3–4 business units

<$10–35 BN5–10 business units

OR

GA

NIZ

ATI

ON

AL

MA

TUR

ITY

Typically, successful suppliers go through an evolution of organizational models. In a single

product case with one main region served, they start out in a purely functional structure.

If the customers and core markets stay the same, the basic structure usually remains the

same even if the product portfolio grows. With growing internationalization and rising sales,

suppliers often regionalize their structures by creating specific units in the new geographies

(e.g., European suppliers mostly for China and NAFTA). This tactic, however, requires

thorough re-evaluation because premature regionalization can make standardization goals

harder to achieve. When product lines grow and the international customer base expands

even further, structures become more sophisticated and more complex – matrix models

with a functional dimension and regional centers are common solutions. Large, truly global

suppliers (revenues of 5 billion euros and more) often start to develop a business unit

structure with individual functions and shared service centers.


Suppliers that adopt a business unit structure must decide on how to split up roles to

determine, for example, what gets done at corporate headquarters and what the business

units will handle. It needs to be defined whether the division of labor is based on regional,

technology or product drivers. This is the time to decide what is the best positioning for

the business’s core and secondary activities. As an example, the company might conclude

that headquarters should handle raw material purchasing and executive recruitments while

component purchasing and labor relations are more suited to the business unit. The key is to

clarify for the entire company “who does what” and who is responsible. This eliminates the

duplication of activities and improves the overall effectiveness of operations.

Secondly, there should be discussion on how to develop and implement shared service

centers to improve the efficiency of the organization as well as the services delivered.

Ultimately, the new organizational architecture, including shared service centers, also must

be flexible enough to seamlessly accommodate a significant change in overall business, such

as an acquisition/integration or a divestment (Exhibit 4).

ExhIbIT 4: CORPORATE CENTER SUPPORTING MULTIPLE bUSINESS UNITS

Headquarters

Corporate function

Regional centers and shared services

Shared processes/skills

BU 1 BU 2

FunctionFunction Function

(…)

CO

RP

OR

ATE

CEN

TER

BU

SIN

ESS

UN

ITS

(…)

ILLUSTRATIVE


REINFORCE CORPORATE PERFORMANCE

Through organizational transformation, suppliers need to preserve or regain performance

by addressing four main dimensions:

• Process

• Decision-making

• Performance measurement and reporting

• behavior and culture

RECONSIDER PROCESS WhEN GOING GLObAL

For small to midsize suppliers, processes are often more informal. Few are documented

as they are usually established and maintained by experienced key people within the

organization. because of growth and expansion, processes have to become more formalized.

Once a supplier grows large enough it has to rethink its process architecture, for example

the way things fit together to support the business. In addition, process governance must be

reshaped to define who is in charge of developing and maintaining each process. Another

key is to thoroughly describe key processes, especially how tasks need to be performed, to

ensure the business performs successfully. The latter point is extremely crucial for ensuring

that multiple business units achieve comparable high-performance measurements and that

best practices are identified, shared and implemented across the company.

REThINK DECISION-MAKING

Decision-making is pivotal. This includes preparing the decisions, deciding and executing.

After a period of business success and growth it is common for suppliers to struggle with

decisions that require more preparation time. Decision-making becomes less straight

forward. Execution slows. The recommended solution to this problem is to clarify roles,

assign responsibility, reinforce discipline and make sure that the right people are part of

decision-making committees.

These people must embrace the multi-dimensional complex problems that are inherent

when a company is growing and globalizing. A priority for success is for the company to build

up a pipeline of talented decision-makers who are in the right jobs and can act at the right

time. Achieving this goal requires discipline because it could take up to five years to attract

and develop the right people.

PERFORMANCE MANAGEMENT AT STAKE

The third component is measuring performance in two key ways: operationally and

financially. As the business expands and the number of entities to manage grows, control

mechanisms become crucial. This does not mean that company handbooks will get thicker.

They actually may get thinner because they will focus on what is relevant and what the key

value drivers are for each management level based on the roles and responsibilities defined

in the organization.


The other challenge for top executives is changing mindsets and tools. A manager of

a midsize family business can easily monitor performance and oversee risks, but that

advantage disappears quickly when the business grows in size and complexity. Top

executives struggle to keep a clear and consolidated view of what’s going on inside and

outside of the enlarged company. Not having this overview can frustrate managers, which

can be dangerous for the firm if major risks are not detected.

Consequently, the new setup requires a high level of global integration of IT networks and

applications, especially with respect to operational and financial controlling.

ChANGING bEhAVIOR AND CULTURE

A company’s culture and behavior also are subjected to change. An owner-run company

guided by paternalism and an entrepreneurial spirit must make major adjustments if it

wants to go global, especially if its business model is based on informal arrangements.

The reinvented company would require a set of guided behaviors, a risk management

culture, not to mention a higher sense of rigor and formalism.

There are two potential risks the small or midsize firm faces if it makes these changes:

• Losing the focus on the customer

• Diluting the culture that made the firm successful

Referring to the first item, the risk is that the changes caused by the growth will force

employees to spend less time with customers, who have come to expect a certain level of

service from the company. What’s possible is that the teams end up talking less about the

client and spend more time creating reports for the management teams. The reports are

very relevant inside the company, but irrelevant to the client. What is crucial is maintaining

focus on business deliverables and what the client is paying for.

With respect to the second risk item, because the company is growing it is taking on many

new resources. As new resources arrive, they need to be integrated. Failure to manage

this integration could mean that the legacy culture developed through years of hard work

might progressively be diluted, and/or be taken over by a new culture in an unguided

manner. before reaching this critical point, it is recommended that the executive team

conducts a full review of the company’s core values. That way it can keep its strengths intact

while updating and enhancing the culture so the same behaviors are expected across the

enlarged company.


CASE STUDY ORGANIZATIONAL DEVELOPMENT OF AN INTERNATIONAL AUTO SUPPLIER

A European champion of the supplier sector recently acknowledged that its corporate

culture was at risk because of rapid growth.

First of all, there was no doubt that the original culture was the foundation for the

company’s operational and financial success as well as its initial growth, which was rooted in

entrepreneurial spirit. The company evolved, however, so that growth primarily was achieved

by a significant number of new hires and through acquisitions from outside Europe that gave

the company exposure to cultures from around the world. As a result, the company’s original

culture was progressively diluted. The firm’s executive committee recognized the threat to

the company’s identity and the impact it could have on employee recruiting, integration and

performance, all of which would hurt corporate results and competitiveness.

Facing this reality, the management team undertook a complete rethink of its culture to

determine what would drive the organization’s identity and performance. This exercise

led to the creation of a simple, consistent and practical set of behaviors to help individual

managers – wherever they were located – understand what was expected of them on a

day-to-day basis. A tangible result of the work was a handbook issued to first-line managers

that answered questions on “how to behave if …” for 48 different situations, including

how to manage a poor performer and how to gauge client satisfaction. For each situation

a corresponding set of “do’s & don’ts” was created internally that properly reflected

the company’s corporate values. The handbook also covers “red lines” that should not

be crossed.

At the same time, the company looked to sustain its growth and its global expansion

by developing strict rules to ensure excellence in engineering and manufacturing. The

company considers this “excellence system” to be the foundation of its global operations.

The system is built around a common methodology and is continuously enriched. It strives

for “excellence in terms of quality, safety, delivery and operational efficiency for products

and programs in every location worldwide.”



ThE bENEFITS

Working thoroughly across the four dimensions that affect the organization can provide a

substantial potential to improve performance (Exhibit 5).

Aligning the entire organization with a clearly defined corporate strategy will allow for fast

decision-making, which will help the company conquer new markets efficiently while quickly

responding to customer trends. Those factors along with embedding a new “growth DNA”

within an organization will significantly drive revenue potential.

The reorganization process typically results in structural improvements that help

to significantly reduce fixed costs. This includes streamlining overhead functions to

best-practice benchmarks, optimizing management layers and creating smaller more agile

teams. Project experience shows that the changes typically result in sustainable structural

cost savings of 8 percent to 10 percent.

Clear organizational rules and responsibilities facilitate more transparent decision-making

and more effective follow-ups throughout the hierarchy, helping to reduce corporate risks.

Risk-mindful behaviors will be rewarded; unsuitable behaviors will be punished. The overall

risk profile can be reduced.

The optimal organizational model will balance control and autonomy between centralized

and decentralized entities. When discussing new organizational models, sales, R&D,

production and purchasing footprints also are evaluated. Organizational alignment

frequently helps identify the potential to increase asset productivity, which in turn boosts

the potential for cost reduction or increased output.

ExhIbIT 5: POTENTIAL bENEFITS FROM REORGANIZATION ACROSS FOUR CLUSTERS IN PERCENT

CLUSTER IMPROVEMENT POTENTIAL2

Increased revenues 5

Reduced operational costs 5–10

Reduced structural costs 8–15

Reduced risk profile 10–15

2 Oliver Wyman project experience

“For me, the most

visible effect of

the large-scale

organizational

change is the ability

of managers and

employees to work

together, to share

targets and to solve

problems in real

time that has led to a

20 percent reduction

in recurring cost

and significantly

improved lead

times.”

– COO


hOW TO START ThE TRANSFORMATION

Despite widespread acceptance that transformations are needed – and proof that many are

taking place – executives say that a large number of transformations fail. That leads to two

questions: First, why do so many companies fail to reach the required maturity level; and

secondly, why can’t companies achieve their objectives in this regard without significant

delay? Two-thirds of all major transformations fail for four reasons:

1. Lack of clear and commonly shared objectives for the transformation

2. Lack of a clearly defined future organizational target structure

3. Failure to engage stakeholders and to overcome resistance

4. Insufficient planning and managing for excellence in execution.

As a direct consequence of this analysis, the basic recommendation is that the top

management team and the board must be convinced of the merits before deciding to

undergo the transformation. Then comes the rollout of a five-step approach, all steps need

to be taken in sequence, with very clear objectives to be met (Exhibit 6).

ExhIbIT 6: TRANSFORMATION IN 5 STEPS

Confirm company strategy

Assess current organization and agree on limitations

Generate di�erentiating blueprints

Select and detail organizational model and governance

Develop and validate the implementation plan

1 2 3 4 5

The first step is to clearly define or at least confirm a business vision and strategy. It is pivotal

throughout the entire reorganization process to be able to outline the underlying strategic

targets as a “case for change.” Relating to this, parameters should be defined as the basis for

measuring the transformation’s success.

In the second step, current organizational structures and performance indicators should

be assessed. Limitations and shortcomings in roles, responsibilities and governance of the

current setup should be highlighted. In addition, the efficiency of the management layers

needs to be analyzed. This step could comprise “listening to the organization” via interviews

with key executives.

blueprint concepts and options for the future organizational setup should be determined

in the third step. The main guidelines to shape the future organization should be formalized

such as the decision-making processes as well as the role of the group and whether it should

be “centralized or decentralized.” In a preliminary exercise, resource allocation and deciding

on the size of blueprint structures need to be considered before assigning staff to specific

functional entities.

In step four, the final basic organizational model needs to be determined. Roles,

responsibilities, competencies and KPIs for all relevant functions and positions should

be described in a pragmatic and concise way. Potential adjustments in performance and

controlling systems need to be considered.

2 out of 3reorganization

projects fail due to

a lack of planning

and governance.


The final step is to prepare and then roll out the implementation plan. All relevant

stakeholders should be identified and involved in a targeted, comprehensive change that is

communicated thoroughly to ensure sustainable success of the new organization.

CONCLUSION

Most automotive suppliers are in good economic shape as revenue and employee numbers

have grown significantly since 2008. Their organizational systems, however, face two major

challenges: increasingly stringent industry requirements and growing internal complexity.

Maintaining the status quo is not an option. To avoid falling behind, strategic transformation

is needed. The degree of change that is required, however, differs. Ideally, suppliers will use

periods of strong economic performance to apply evolutionary changes that reduce the risk

of having to make radical changes when faced with a crisis.

While change is common across organizations, failure to take action is also common.

To increase the likelihood of a successful transformation, it is important to apply

a widespread overview of the business that includes processes, decision-making,

performance management as well as the company’s culture. Experience shows that the

crucial factors to achieving a successful transformation are strong leadership, good planning

and disciplined, decisive implementation.

>90%of reorganization

projects are of

“board priority.”

AbOUT OLIVER WYMAN

Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm’s 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC], a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With over 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Mercer, a global leader in talent, health, retirement and investment consulting.

For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.

CONTACTS

SEbASTIEN MAIRE LARS STOLZ

Partner, Organizational Effectiveness Partner, Automotive & Manufacturing Industries, head of Automotive Supplier Sector

[email protected] [email protected]

+33 1 70 75 01 81 +49 89 93949 434

DR. DANIEL KRONENWETT

Principal, Automotive & Manufacturing Industries

[email protected]

+49 89 93949 591

Copyright © 2015 Oliver WymanAll rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect.

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