Operations Excellence

Operations ExcellenceSmart Solutions for Business Success

Roland Schwientek and Axel Schmidt

Edited by

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Operations Excellence

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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

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OperationsExcellence

Smart Solutions for BusinessSuccess

Edited by

Roland Schwientek

and

Axel Schmidt

9780230_217805_01_prelims.3d 6/4/200816:44:39

ª Roland Berger Strategy Consultants 2008

All rights reserved. No reproduction, copy or transmission of this publication may bemade without written permission.

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First published 2008 byPALGRAVE MACMILLANHoundmills, Basingstoke, Hampshire RG21 6XS and175 Fifth Avenue, New York, N.Y. 10010Companies and representatives throughout the world

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CONTENTS

List of Figures and Boxes viii

Notes on the Contributors xii

List of Abbreviations xix

Introduction 1

PART I: RESEARCH AND DEVELOPMENT

Introduction: what is successful product development? 6Thomas Rinn and Kai Bethlehem

Chapter 1 Changing business models and their impacton product development 9

Michael Zollenkop

Chapter 2 Innovate to win: how clever cost approachdesign can outsmart competition 24

Ralf Augustin and Kai Bethlehem

Chapter 3 Global development made successful:lessons learned by the automotive industry 45

Jochen Gleisberg and Kai Bethlehem

Chapter 4 Success factors and levers for best practicein innovation management 61

Stefan Potzl, Thomas Kohr and Michael Zollenkop

Chapter 5 Smart engineering processes: ‘made in Japan’ 79

Ken Mori and Satoshi Nagashima

v

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PART II: PURCHASING

Introduction: strategic trends and challengesfor purchasing 92Roland Schwientek

Chapter 6 Key trends in purchasing best practices andimpact on purchasing strategy 96

Michel Jacob and Gabriel-Assad Singaby

Chapter 7 Purchasing EmPowerment: the way toachieve world-class purchasing 114

Roland Schwientek

Chapter 8 Organizations drive strategy and performance:insights from two successful lead buying models 131

Tobias Franke

PART III: MANUFACTURING

Introduction: manufacturing in a global context 144Ralf Augustin

Chapter 9 How companies can optimize their globalmanufacturing footprint 147

Marco Zurru

Chapter 10 Leveraging manufacturing excellence inglobal production networks 162

Volker Heidtmann and Stephen Weisenstein

Chapter 11 From maintenance to quality control:effective support functions leveragemanaging performance 174

Thomas Kwasniok and Walter Pfeiffer

vi Contents

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PART IV: SUPPLY CHAIN MANAGEMENT

Introduction: supply chain management – morethan just logistics 198Robert Ohmayer and Steffen Kilimann

Chapter 12 Global supply chain management: a successfactor for global players 201

Robert Ohmayer and Steffen Kilimann

Chapter 13 Complexity management: the starting pointfor improving performance 216

Alexander Belderok and Thomas Hollmann

Chapter 14 Working capital excellence: how companiescan tap hidden cash reserves in the supply chain 232

Roland Schwientek and Christian Deckert

Chapter 15 Supply chain organization: a key enablerfor successful supply chain management 257

Ingo Schroter and Stephan M. Wagner

Index 270

Contents vii

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LIST OF FIGURES AND BOXES

Figures

I.1 Our approach – three levels to create operations excellence 2

I.2 Four fields of action to create operations excellence 3

1.1 Components of business models 10

1.2 Development of business models over time 13

1.3 Lifecycles of business model components 17

1.4 Indicators for business model attractiveness 18

2.1 Product costs are influenced by several surrounding

factors 26

2.2 The comprehensive cost reduction approach covers

the complete value chain 33

2.3 Value analysis – vehicle window lifters 35

2.4 Performance cost analysis – cost comparison by

most important function 36

2.5 Simultaneous product and process optimization

example car module – vehicle driver seat (EUR/vehicle) 38

2.6 Value chain maps help to identify critical branches

and to focus supplier development – passenger car

door panel example 39

2.7 Supplier manufacturing analysis: component assembly –

lamp manufacturer 40

2.8 The CCR phase for diagnosis and drafting an

action plan takes roughly 10–13 weeks 43

3.1 Trend towards integrated global networks 48

3.2 Allocation of core competencies in a global R&D network 49

3.3 Integration and competencies of local technical centers 50

3.4 Six key elements of the lead engineering concept 52

3.5 Three coordination options 53

4.1 Share of sales with original product innovation

in different industries 62

4.2 Innovation in the mechanical engineering industry –

failure reasons in commercialization 63

viii

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4.3 Innovation performance development in the

automotive industry 66

4.4 Roland Berger Innovation Toolbox 68

4.5 Performance measures for systematic innovation

management 70

4.6 Innovation portfolio management concept 74

5.1 Matrix organization 80

5.2 Product development lead time 86

5.3 Shortened product development lead time 87

6.1 Maturity steps at purchasing organizations 98

6.2 Challenges with which companies still struggle 99

6.3 Challenges that are reshaping purchasing 103

6.4 Some of the benefits of sourcing in CEE, the Middle

East, and North Africa 107

7.1 Each commodity/category is strategically assessed

in terms of business impact and supply market challenge 116

7.2 The right mix of levers is key to finding the

correct sourcing strategy for each strategic

commodity/category field 117

7.3 There are more than 50 sourcing levers for

improving operating cost performance 121

7.4 Companies need to focus on four areas to lower

process costs – processes, organization, information,

and know-how sharing 122

7.5 Success factors have been identified in three areas

of supply base management 126

8.1 Three basic models are used in procurement organizations 132

8.2 Only an integrated approach to procurement ensures

optimum impact on a company’s competitiveness 136

8.3 Global lead buying consists of three governance

models, ensuring global and regional savings 137

8.4 The newly defined governance models add the

regional focus 138

8.5 Purchasing is reorganized into four new purchasing

segments 140

8.6 Corporate lead buyers are responsible for group-wide

coordination of purchasing activities 141

9.1 Approach steps and focus 149

9.2 Different manufacturing network design

goals and relevant challenges 150

9.3 Payback and risk analysis 154

List of Figures and Boxes ix

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9.4 Selection of target countries 156

9.5 Site selection 158

10.1 Proven four-step process ensures that the project challenge

is tackled pragmatically and with a clear structure 164

10.2 A T-shaped logic ensures breadth and depth of the

analyses 165

10.3 A structured approach is used to analyze current

processes and define new operations strategies 167

10.4 The project organization is set up to keep track on the

progress of the project – regular communication is key 170

10.5 A regular communication process drives the sharing

of internal best practices 171

11.1 Costs of support functions and failure costs work

in opposite directions and have to be balanced 176

11.2 A benchmarking study of maintenance costs

and equipment availability shows the improvement

potential for different industries 178

11.3 Comprehensive maintenance management consists

of six building blocks 180

11.4 A maintenance excellence program needs clear target

setting and is structured in three project phases 187

11.5 Project example: major sites of a global player – specialty

chemicals 189

11.6 Providers have developed from general and

location-specific services into production support

functions independent of location 193

11.7 Two elements needed to create a high performance

refinery organization 194

11.8 A German refining site transforms itself into a flexible

refinery 196

IV.I.1 Our framework for end-to-end supply chain

management 200

12.1 World GDP, world exports, world FDI 202

12.2 Supply chain strategy, performance and enablers

fit seamlessly together 207

12.3 Initial situation and targets 209

12.4 Elimination of inter-company flows through direct

ordering 212

13.1 Complexity drivers 218

13.2 ‘Complexity tax’ often amounts to 11–22 percent of

total product costs 219

x List of Figures and Boxes

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13.3 Complexity’s impact differs from industry to industry 219

13.4 The overall approach aims to quantify and prioritize

different opportunities against each other 222

13.5 Detailed approach 224

14.1 Average working capital in different industries 234

14.2 ROCE drivers 236

14.3 Industry benchmark for debtor days 245

14.4 Current and targeted future status 246

14.5 Current use and future importance use of working

capital management levers by industry 248

14.6 Organizational forms conducive to inventory management 250

14.7 Untapped potential in each core process 253

14.8 Analysis of existing levers based on self-assessment

by study participants 255

15.1 Breakdown of companies interviewed in terms of size,

area of responsibility, and industry 259

15.2 Organizational talents have outstanding logistics

capabilities 260

15.3 External and internal factors to be analyzed prior

to designing organizations 267

Boxes

4.1 Airbus A380 65

4.2 Globalization of R&D – success factors 76

6.1 TCO approaches – underestimate at your own peril 112

13.1 Stock keeping unit (SKU) rationalization 221

List of Figures and Boxes xi

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NOTES ON THE CONTRIBUTORS

Ralf Augustin is a Principal in Roland Berger’s Stuttgart office. He has a

Master’s degree in mechanical engineering and business administration

from the TU Darmstadt, where he also gained his PhD in industrial

engineering. Before joining Roland Berger’s Operations Strategy

Competence Center in 2003, he was Engagement Manager at McKinsey

for five years and Section Head of Corporate Strategy at the Institute for

Production Management at the TU Darmstadt. He specializes in

comprehensive cost reduction programs, strategic sourcing, and complex-

ity management in the automotive, engineering products, and electronics

industries.

Alexander Belderok is a Principal in Roland Berger’s Amsterdam office.

He studies mechanical engineering at Twente University and gained a

degree from TSM Business School. Belderok has worked for Unilever and

was a Principal at A.T. Kearney for seven years before switching to

Roland Berger in 2006. His focus is on operations, marketing and sales,

organization and business re-engineering, and complexity management in

the consumer goods and retail sector, and the chemicals industry.

Kai Bethlehem is Head of Purchasing at Rothenberger Werkzeuge

(Tools). He has worked for Roland Berger as a Senior Consultant, at

Eurocopter as a Purchasing Manager and at Procter & Gamble in

Switzerland and Germany in purchasing. He gained his engineering

degree from the TU Darmstadt. He is an expert in strategic supplier

management, cost optimization, and process optimization for the airline,

automotive, and non-food consumer goods industries.

Christian Deckert studied at the Technical University Hamburg-

Harburg, where he gained a degree in industrial engineering and

economics. Since joining Roland Berger in 2001, Deckert has been

involved in working capital and cost management projects. He also

focuses on purchasing and production optimization, reorganization and

process management.

xii

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Tobias Franke has worked at Roland Berger’s Operations Strategy

Competence Center since 1999. In addition to completing a bank

traineeship, he gained a joint degree in European Business Administration

from the European School of Business in Reutlingen and Middlesex

University Business School in London. He specializes in procurement

organization and processes, and supplier and commodity management in

the airlines, automotive supplier, and utility industries.

Jochen Gleisberg is a Partner at Roland Berger. He gained his degree in

business from the University of Marburg and University of Gießen. Since

joining the company in 1998, Gleisberg has focused on purchasing and

engineering, optimizing organizational structures and globalized pro-

cesses, transformation management, and operations management in the

automotive and engineered product/high-tech sectors.

Volker Heidtmann gained a master’s degree in mechanical engineering

and business administration at TU Darmstadt before completing an MBA

at the State University of New York at Buffalo and a doctorate degree in

business studies from the Philipps-University Marburg. He joined Roland

Berger in 1999. His specialization is in production management,

organizational development, post-merger integration, and supply chain

management. He tends to work in the machinery, automotive, and utilities

industries.

Thomas Hollmann completed his business degree at the University of

Eichstatt-Ingolstadt before joining Roland Berger in 2005. He has worked

on complexity and inventory management, pre- and post-merger

integration, and logistics optimization projects in the healthcare, building,

and engineered products industries.

Michel Jacob is a Partner in Roland Berger’s Paris office. Prior to joining

Roland Berger in 2001, he was at A.T. Kearney for a decade, where he

was Vice-President in charge of strategic sourcing. Jacob also gained

industry experience working at Saint-Gobain, where he was an R&D and

production engineer in Germany and France. He has assisted clients on

numerous purchasing optimization and purchasing re-engineering pro-

jects. He also specializes in operational efficiency improvement projects.

Jacob has conducted projects in process-related industries like chemicals,

oil, paper, steel and building materials, manufacturing, as well as service

industries. He gained his MSc from the Ecole Centrale, Paris.

Notes on the Contributors xiii

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Steffen Kilimann gained a degree in industrial engineering and

management at the Technical University, Berlin, as well as a master’s

degree at the Ecole Superieure de Commerce, Toulouse. He also obtained

a PhD degree from Technical University, Dresden. Before joining Roland

Berger in 2006, he had management positions at Metro MGL Logistik and

Metro Cash & Carry. He has extensive experience in the retail/wholesale

and consumer goods sectors as well as in the automotive and transport

and logistics industries. His focus is on supply chain management,

reorganization of logistics and procurement systems, and the benchmark-

ing and optimization of production processes.

Thomas Kohr gained degrees at the University of Cooperative Education

in Mannheim and at the Leipzig Graduate School of Management. He

obtained his MBA degree from the EADA in Barcelona. Kohr joined

Roland Berger in 2005. He has worked on project controlling, process

re-engineering, innovation management and procurement optimization

projects in the electronics, engineering products, automotive, and DIY

industries.

Thomas Kwasniok is a Partner at Roland Berger with a focus on

operations in the process industries. He gained degrees in electrical

engineering and operations research as well as his engineering doctorate

in design tools for semiconductor circuits at the RWTH Aachen. He was

Principal at Management Engineers and Director of Logistics Division at

INFORM prior to joining Roland Berger. He has experience in the

chemicals, pharmaceuticals, consumer goods, transportation and informa-

tion technology sectors. His projects involve supply chain management,

manufacturing, product structure, purchasing and business process

reengineering.

Ken Mori is a Partner at Roland Berger’s Tokyo office. He gained a

degree in civil engineering at the University of Tokyo and his MBA at the

University of Chicago. Prior to joining Roland Berger in 2002, Mori

worked for the Kajima Corporation where he was Deputy Chief Engineer

and was Vice President and Co-Head of the Asian Automotive Practice at

A. T. Kearney in Tokyo. He has specialized in the automotive and

engineered products industries, where he worked on operations, strategy,

M&A, and post merger integration projects.

Satoshi Nagashima is a Partner in Roland Berger’s Tokyo office. He

gained his master’s degree and doctorate in engineering in material

xiv Notes on the Contributors

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science at Waseda University, Japan. He has worked for Roland Berger’s

Tokyo office since 1996. He has specialized in strategy development

(corporate, sales and marketing), R&D, logistics planning and branding.

Nagashima tends to work on projects in the automotive, electronics,

logistics, and pharmaceutical industries.

Robert Ohmayer is a Partner at Roland Berger. He joined the company in

1996 after completing a degree in industrial engineering and an MBA at

the University of Miami. Previously, he worked at MTU in Germany and

for Mack Trucks in the United States. Ohmayer has broad industry

experience. He has conducted projects in the automotive and supplier

industry as well as the machinery and plant sector, and spent one year

working in our South American office. He has also worked on projects in

the consumer goods, construction, and logistics industries. His functional

focus is on production, purchasing, supply chain management, R&D, and

corporate strategy.

Walter Pfeiffer is a Partner in Roland Berger’s Oils and Chemicals

Competence Center. He gained a degree in mechanical engineering and an

MBA from the TU Darmstadt. He joined Roland Berger in 2006 after

having worked at Arthur D. Little Strategy and Accenture in Germany,

Switzerland, Austria and the United States. His focus is on post-merger

integration, supply chain/margin optimization, strategy, reorganization,

and cost reduction in the downstream oil, petrochemicals, chemicals, and

biofuels industries.

Stefan Potzl gained his mechanical engineering degree with a specializa-

tion in production technology at the Technical University of Munich and he

completed the Bavarian Elite Academy in parallel. He wrote his diploma

these on logistics processes and cost while working at MAN Nutzfahrzeuge.

Since joining Roland Berger in 2003, he has concentrated on the

automotive, engineering/hi-tech and aerospace industries. He has assisted

clients throughout Europe on projects dealing with strategy, performance

improvement, procurement/cost reduction, R&D, innovation management,

product planning, and process optimization.

Thomas Rinn is a Partner in Roland Berger’s Stuttgart office. He studied

business administration at the Eberhard-Karls-Universitat in Tubingen

and received his MBA from Portland State University. He joined Roland

Berger in 1998 after working for many years in industry, both in Germany

and in the United States. He has been a member of HTH Haus und

Notes on the Contributors xv

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Technik AG’s supervisory board since 2006. Purchasing, product

development, and supply chain management are his specializations. He

has completed projects in many industries including transportation,

aviation, defense, logistics services, engineered products and construction

and trade. In addition, he supports private equity-owned companies in

performance improvement.

Axel Schmidt is a Partner at Roland Berger. He joined the strategy

consultancy in 1991 and became Global Head of Operations Strategy in

1997. Previously, he worked for Procter & Gamble in Paris and ACL

Engine Parts in Australia. He gained his degree in mechanical engineering

at the University of Stuttgart. Schmidt has conducted projects in various

industries ranging from consumer goods/retail, and pharmaceuticals

through to automotive, engineered products, financial, and security

services. He advises clients on the following types of project: supply chain

and asset optimization, global footprint optimization, distribution and

logistics strategy, turn-around programs, and global purchasing and

development organization redesign.

Ingo Schroter gained his degree in technical business studies at Stuttgart

University. Prior to joining Roland Berger’s Operations Strategy

Competence Center in 2001, he was a consultant at Arthur D. Little. He

is an expert for supply chain management and logistics. He has supported

clients on international projects on supply chain strategy, organization,

business process re-engineering, and cost cutting. He has worked in these

and in other functional fields in the process, aerospace and defense,

transportation, and retail and consumer goods industries.

Roland Schwientek is a Partner in Roland Berger’s Munich office. He

studied business administration at the Gerhard-Mercator University of

Duisburg. He joined Roland Berger in 1997 after working for several years

in various functions in the automotive and automotive supplier industry,

latterly as a purchasing manager at Bosch Automotive. Procurement/

purchasing, manufacturing footprint, supply chain management, and wor-

king capital optimization are some of his focus issues. He drives projects in

many different industries under the action title ‘Best practice transfer’:

what can we learn from leaders and leading industries? Schwientek is

author of a number of studies, including Purchasing Excellence and

Working Capital Excellence.

xvi Notes on the Contributors

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Gabriel-Assad Singaby is a manager in Paris with seven years’ consulting

experience. He gained his MBA at the University of North Carolina and a

degree in industrial engineering and operations research from the University

of North Carolina and Ecole des Mines de Paris. Singaby’s projects involve

lean organization implementation, re-engineering, and lean operations

improvement programs. He is also a 6-Sigma expert with a Master Black

Belt 6-Sigma diploma from GE. He specializes in the automotive,

aerospace, transportation, and chemical industries.

Stephan M. Wagner is a Professor at WHU–Otto Beisheim School of

Management, where he is Director of the Kuehne Center for Logistics

Management and holds the Kuehne Foundation Endowed Chair of

Logistics Management. He obtained an MBA degree from Washington

State University and a PhD and Habilitation degree from the University of

St Gallen in Switzerland. Prior to joining the faculty of WHU, he worked

as Director of Supply Chain Management for a Swiss-based technology

group and as Senior Manager for an international management consulting

firm. Wagner’s research interests include supply chain strategy, purchas-

ing and supply management, interfirm relationships in industrial market-

ing channels, innovation in supply chains, and the management of

logistics service firms.

Stephen Weisenstein works in Roland Berger’s Detroit office. He gained a

degree in economics at the University of Michigan and his MBA at the

University of Chicago. Prior to joining Roland Berger in 2004, he gained

extensive industry experience working at Thomson, Daimler and Toyota

Motor Manufacturing. He specializes in process improvement, procure-

ment, growth strategies, corporate restructuring, post merger integration,

and the Toyota Production System implementation in the automotive,

engineered products, and manufacturing industries.

Michael Zollenkop joined Roland Berger in 1999. He gained a degree

in business administration from the Friedrich-Alexander-University

Erlangen-Nurnberg, a master’s degree in economics from the Wayne

State University in Detroit and his doctorate in business studies from the

Otto Friedrich University in Bamberg. His focus is on product creation

strategies, product portfolio and business model optimization, and

procurement strategies in the automotive, machinery, IT/telecommunica-

tions and healthcare industries.

Notes on the Contributors xvii

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Marco Zurru is a Partner at Roland Berger’s Milan office. He advises

clients in the aerospace and automotive sectors, and in government and

public services on strategy, operations, sourcing, supply chain and

logistics, manufacturing, and business process re-engineering. Before

coming to Roland Berger in 2001, he worked for Booz Allen & Hamilton

and various industrial companies. He gained his MS in engineering and

his MBA from Politecnico in Milan.

Roland Berger Strategy Consultants are especially grateful to Florian

Kaiser and Heidi Sylvester for their work in the preparation of this volume.

xviii Notes on the Contributors

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LIST OF ABBREVIATIONS

ABS air-bearing surface

B2B business-to-business

B2C business-to-consumer/customer

CAD computer aided design

CAE computer aided engineering

CCR comprehensive cost reduction

CEE Central and Eastern Europe

CEO chief executive officer

CFO chief financial officer

CKD complete knock down

CMMS computerized maintenance management system

COO chief operating officer

CPL corporate procurement and logistics

DFMA design for manufacture and assembly

DRG diagnosis related groups

DtC design to cost

EADS European Aeronautic Defence and Space

EAI enterprise application integration

EBIT earnings before interest and taxes

EMEA Europe, Middle East and Africa

ERP Enterprise Resource Planning

F&A finance and administration

FDI foreign direct investment

FMEA failure mode and effect analysis

GAP good–average–poor

GCL global commodity leader

GDP gross domestic product

HSSEQ health, safety, security, environmental

and quality standards

HWPM heavyweight product managers

IPO international purchasing offices

IS information systems

KPI key performance indicator

xix

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LB local buyer

LCC low-cost country

LEG lead engineering group

M&As mergers and acquisitions

MbO management by objectives

MRO maintenance, repair and overhaul

OEM original equipment manufacturer

OPEX operational expenditure

P&L profit and loss

P2P peer-to-peer

PEP Purchasing EmPowerment

PM purchasing manager

PPC production planning and control

PPP public–private partnership

R&D research and development

RCL regional commodity leader

REACH registration, evaluation and authorization of chemicals

RFQ request for quotation

ROCE return on capital employed

SAP Systems Applications and Products in data processing

SC supply chain

SCM supply chain management

SFP site fitness programme

SKU stock keeping unit

SUVs sport utility vehicles

TCO total cost of ownership

UNSPSC United Nations Standard Product and Services Code

VDC vehicle development centres

WHU Wissenschaftliche Hochschule Fur

Unternehmensfuhrung

xx Abbreviations

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INTRODUCTION

‘It’s not through inventions but through improvements that

fortunes are made.’

— Henry Ford

Achieving operative excellence is an important endeavor for all companies –

it is the golden path that leads to increased value over the long term.

By applying operative levers systematically and managing them

correctly, companies are doing everything in their power to ensure that

they follow their selected corporate strategy. It helps them answer some

critical questions: What value should my company create itself and what

should be achieved by external parties? Where are my company’s end

production sites located and which key technologies and products take

center stage? How does my company manage innovation and where is it

supported? Where is the company’s supplier base mainly located and how

can we steer the supply chain with maximum effect?

Operations Excellence takes up these questions. The authors provide

answers based on their extensive consulting experience, gained while

working with leading industrial sectors over many years. When answering

these questions, the authors keep two things in mind: What do leading

companies do? and What can be learnt from their approach? Bear in mind

that operations excellence, ultimately, is not a question of geniality – it is

more a question of an appropriate approach and fit to strategy, and of

continuous improvements as Henry Ford Snr knew very well.

At the beginning of the twentieth century, Henry Ford developed modern

assembly lines for the mass production of cars, which marked the beginn-

ing of a decisive and formative paradigm shift. These days the principle of

operations excellence has spread far beyond traditional manufacturing

industries and now shapes entirely new sectors. McDonald’s, for instance,

extended the main features of operations excellence and made them relevant

for the restaurant sector. Toyota, which is currently the No. 1 automotive

player in the world, broadened the scope of mass production and started

applying its expertise in this field to the housing market. With its Toyota

Home, the carmaker has created a completely new business. Thanks to

explosive growth rates for prefabricated and terraced houses, it has created

1

9780230_217805_02_intro.3d 5/29/2008 09:56:55

for itself an additional growth motor. Even in traditional sectors, change is

seeping in. Machinery producers such as Trumpf, whose processes in the

past were often organized as stand-alone workshops rather than serial indu-

stries, are implementing industrial manufacturing processes, as mass produ-

cers have for quite some time.

Companies that have the correct operative strategy and are prepared to

make sometimes difficult changes in order to improve their business are

acknowledged as best-in-class. It is these that reach best practice status.

The best things come in threes

There are three levels to operations excellence, and this book provides

insights into groundbreaking developments in all three levels.

• The first level – that of strategy – provides companies with information

on how they should travel their own path to best practice and the

milestones they should see on their medium- and long-term horizons.

• The second level is that of performance improvement. It provides

answers to questions such as: Which service level must my company

reach in order to be competitive and leading edge? What requirements

should my company expect from asset productivity and what should be

the cap for our various cost types?

• The third level concerns enablers. This level answers questions about the

correct organizational form, best processes, most appropriate human

resources and key performance indicators, as well as infrastructure

excellence fields such as IT.

Operations strategies

… tackle the fundamental operational challenges of the future

Operations performance improvement

… transfer performance drivers such as cost structure and asset productivity into best practices

Operations enablers

… help to support, measure and control all operational enabler issues such as organization, processes, IT and KPIs with tangible values for companies

Strategy

Enablers

Performance improvement

Figure I.1 Our approach – three levels to create operations excellence

2 Introduction – Operations Excellence

9780230_217805_02_intro.3d 5/29/2008 09:56:55

Operations excellence – four fields of action

This book tackles four fields in some detail: research and development,

purchasing, manufacturing, and supply chain management. The authors are

experienced consultants, professors and practitioners from all major

industrial nations.

• In Part I approaches and cases from the area of R&D are introduced and

debated

• Part II is dedicated to trends and approaches in the area of sourcing and

purchasing

• Part III examines developments in the field of manufacturing

• Part IV deals with improving supply chain management; covering

aspects such as comprehensive process optimization, reducing com-

plexity and improving working capital.

We hope you enjoy reading this insightful book. Moreover, we hope you

stumble across many helpful suggestions that enable you to achieve

operations excellence within your own company.

ROLAND SCHWIENTEK

AXEL SCHMIDT

Research and development

… beginning of the value chain

Purchasing

… value chain element with external partners

Manufacturing… core competencies in production capabilities

Supply chain management

… logistics, order management and working capital issues

R&D Purchasing

Manufacturing SCM

Figure I.2 Four fields of action to create operations excellence

Introduction – Operations Excellence 3

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9780230_217805_03_ch01.3d 5/29/2008 09:56:14

PART I

Research and Development

5

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Introduction

What is successful productdevelopment?

Thomas Rinn and Kai Bethlehem

No one would doubt today that markets are becoming progressively more

global. The rise of Eastern Europe, the upturn in Latin America and, of

course, the entrance of China et al. into the global marketplace have

significantly increased the numbers of suppliers for almost every kind of

product. With competition rising, it is more important than ever before for

companies to find and highlight their unique selling point, to offer some-

thing that singles out one company from the crowd.

‘Innovation’ is considered the magic word with which to rise to this

challenge. Companies wish to create products or processes that lead to

cheaper and better products, and innovation is the key to achieving this.

Yet, innovation does not happen by chance: it has to be planned. The

environment for excellence in innovation has to be actively established

and fostered.

These lessons are part of all undergraduate classes in business

administration or engineering. Yet, we continue to see many managers

struggle to put this knowledge into practice in a systematic fashion, even

though they are fully conversant in the theory of innovation.

The task is not an easy one. There is no one best, easy-to-apply strategy

for successful and efficient innovation. Indeed, the opposite is true: each

industry and segment requires a tailor-made approach to reach the best

possible results.

A recent Roland Berger study1 on the globalization of R&D

organizations shows that there are several clusters to which companies

and their R&D structures typically belong. Within each cluster, there are

many ways to be successful. While there is ‘no one single best way’ to be

continuously successful, product development is the area that is always

most in need of improvement in order for a company to flourish,

irrespective of the cluster or industry.

6

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But what exactly should be the target of such improvement? What is

successful product development?

This can be best answered by a comment by one of our clients, the head

of R&D with a global blue-chip company recognized as being an

innovation leader, during a workshop we moderated in early 2007. He

said: ‘When looking at the company from an external perspective,

successful product development means that the new product fulfills or

exceeds its targets concerning profitability, that it is different from other

products, creates value-added for customers, and meets any other target

that has been defined for this product. Looking from an internal perspec-

tive, however, things are different. Development is successful if R&D

fulfills all its initially set targets regarding timing, money spent, smooth-

ness of the process and quality of the result.’

In fact, this company sometimes had issues with developments and

products not running well, leading to sales levels significantly below

target and negative business results. This raised the question as to whether

the company correctly focused its resources and whether it took appro-

priate steps once developments got off track or circumstances changed.

The important underlying questions are: how can companies stop

projects that are clearly going to fail, and would a company be more

successful if it stopped projects bound for failure early on?

Based on our experience, the answer is yes. By stopping a project in a

timely fashion, resources, time and money can be channeled to other,

potentially more successful, projects that might bring a greater overall

benefit, as intellectual capital is allocated to developing products with the

best business case for the entire company.

Thus, stopping a probably unsuccessful project as early as possible is

central to improving overall innovation performance. According to our

study, those companies that have the courage to stop previously very

appealing product developments stand out from the crowd, and experience

greater success.

Courage is not enough. In order to stop product developments early on,

companies must have a clear strategy, fact-based performance measure-

ments, and rigid quality gates.

In Part I, which focuses on product development, we thus examine

different kinds of measures and methods to steer, control and optimize

a product development project. Looking at R&D strategy, Michael

Zollenkop explains how business model innovation is dependent on

product/service innovation and how this fosters excellence in product

development. Following this, Ralf Augustin and Kai Bethlehem reveal the

levers that can be applied during product development. Jochen Gleisberg

What is successful product development? 7

9780230_217805_03_ch01.3d 5/29/2008 09:56:14

and Kai Bethlehem complement this section with their thoughts on the

challenges of global development organizations. Then, Stefan P€otzl,

Thomas Kohr and Dr. Michael Zollenkop take a closer look at a couple of

enablers, starting with an innovation toolkit that has been proven to work

and easy to implement. Ken Mori and Satoshi Nagashima round off this

section by providing an example of a very successful Japanese approach

to setting up smart engineering processes within a global organization.

Note

1. Roland Berger Strategy Consultants (2007) ‘Globalization of R&D –

Drivers and Success Factors’. Study, ESB Research Institute,

Reutlingen University, June.

8 Thomas Rinn and Kai Bethlehem

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CHAPTER 1

Changing business models and theirimpact on product development

Michael Zollenkop

Introduction

This chapter will examine how changes in the business model – whether in

a company or an entire industry – can affect the process of product

development. First, I define the precise nature of a business model, and

how it should be used as a steering instrument for a company. Next, the

chapter explores how business models develop over time and how these

developments can be viewed as part of a lifecycle model. Following this,

the question is discussed as to how companies can initiate and manage

these innovations. Finally, a case study illustrates how generating

scenarios for future business models can help companies to see what

action they need to take now in terms of product development.

The business model – corporate strategy in action

A number of factors, both internal and external, can influence the type,

scope and direction of a company’s product development. Corporate

strategy determines the methods that a company employs. It also

determines the contents of a company’s innovation strategy. Corporate

strategy is thus responsible not only for the underlying competitive

strategy – for example, cost or quality leadership – but also for the overall

form of the company’s business model.

In simplified terms, the business model can be seen as the ‘day-to-day

living’ of the corporate strategy, or a description of a company’s activities.

The business model comprises three interrelated components, which are

shown in Figure 1.1.

9

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The first component is the product/market combination, which describes

the customers that the company aims to serve, its markets and its services.

Key elements here are the products and the scope of additional services the

company will offer, the type of transactional relationship (that is, B-2-B,

B-2-C or P-2-P) and the relevant market, defined according to functional,

demographic, regional and other criteria.

The second component of the business model is how the company’s

value chain is to be configured and applied. This describes the degree of

company internal value-added, the basic type of company configuration

and the design of functional strategies. In terms of the company’s

configuration, the company must choose between vertical integration,

specialization in particular functions, or coordination of the value chain.

The third component of the business model is the structure and relative

weighting of the company’s sources of revenue. Revenues can be transaction-

based or non-transaction-based, and might come directly from users of the

company’s primary service offering or indirectly from users of a secondary

service. Important elements here are customers’ willingness to pay and the

company’s pricing strategy.

A company’s business model lives or falls on the interdependence

between these three components. Achieving a good fit is a prerequisite for

generating superior customer value and, ultimately, competitive advan-

tage. The following example from the airline industry will make this clear.

CUSTOMER VALUEAND

COMPETITIVE ADVANTAGE

Product/market

combination

Revenuemechanism

Value chainconfiguration

Figure 1.1 Components of business models

10 Michael Zollenkop

9780230_217805_03_ch01.3d 5/29/2008 09:56:14

Example: The airline industry

Most scheduled airlines – such as Lufthansa, for example – pursue astrategy of quality leadership. They aim to provide the best possibleservice and comfort combined with a global flight network. By contrast,low-cost carriers – Ryanair, for instance – aim for cost leadership. Theyproclaim that flying is an integral part of people’s leisure activities andshould be affordable for all. According to their philosophy, flights are incompetition with other means of transport or other types of leisureactivity. In this way, low-cost carriers are responsible for what may becalled the commoditization of flying – a type of customer value thatdiffers fundamentally from that offered by traditional scheduled airlines.

These two contrasting business strategies find their reflection in twodiffering business models. Both business models are internallyconsistent and, therefore, successful.

Traditional scheduled airlines target a mixture of business travelers andtourists. They offer a wide range of regional and international routes –their product/market combination. They have a hub from which theyoperate intercontinental flights; short-haul flights between major citiesfunction as feeders for their intercontinental routes and are not generallydesigned for point-to-point transport (configuration of the value chain).Scheduled airlines’ revenue comes in the form of payment for thetransportation of passengers and cargo. A wide range of tariffs is availablefor tickets (the revenue mechanism). The business model is based onservice, customer loyalty, and offering an international flight network.

Low-cost carriers have a very different business model, one that isbased entirely on cost. Ryanair targets cost-sensitive tourists and onlyoffers flights within Europe, with no in-flight meals (product/marketcombination). To keep costs to a minimum, Ryanair uses remote airportsthat often owe their very existence to it. Consequently, the standing timesat these airports are very short, especially as flights are used for point-to-point transportation (value chain configuration). Low-cost carriers’ reve-nues come not only from the sale of tickets, but also from areas such ason-flight purchases, data mining and advertising. Ticket prices varyaccording to when they are booked and the number of seats remaining atthe time of purchase (revenue mechanism). All three components of thebusiness model are directed toward cost optimization.

In both business models, the individual components fit well together.Yet, a number of companies – the KLM subsidiary ‘Buzz’ and the BritishAirways subsidiary ‘Go’ for example – were unable to achieve this levelof consistency in their business models. They were the first victims in thelow-cost carrier market.

Changing business models 11

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In fact, even successful business models are subject to change. How this

happens forms the subject of the following section.

Change and innovation in the business model

Today, more than ever, competition between companies is driven by the

increasing speed of technological and market change. As the pace of

innovation steps up and market cycles shorten, more and more companies

are redefining the basis of their business fundamentally, repositioning

themselves as the providers of comprehensive solutions rather than as the

manufacturers of specific industrial or consumer goods. The same goes for

service providers. They, too, are expanding or adjusting the range of

services they offer on the basis of functional and other criteria in order to

exploit their own specific competitive advantages. The days are gone

when competition was restricted to the home industry and to traditional

competitors. Traditional boundaries between industries are rapidly dis-

solving, and companies are increasingly operating across a variety of

different markets and sectors.

The construction and plant engineering industry is a good example. The

industry is currently witnessing a shift in business models. Increasingly,

companies are achieving customer value and competitive advantage by

offering comprehensive solutions rather than specific products or

individual services.

The construction company Bilfinger Berger, for instance, has added the

Multi Service Group to its title. Industrial, power and facility services

generate around ⁄2.6 billion, or more than one third of the group’s total

revenues. Also, the services it provides extend well beyond the field of

construction – including, for example, the maintenance and hiring of pumps

to chemicals and pharmaceutical companies. Many plant construction

companies now sell services using an operator or pay-on-production model.

Linde, for instance, operates an air separation plant at the site of Finnish

steel producers Avesta, supplying them with oxygen, argon and nitrogen.

The German compressor manufacturer Kaeser currently generates only half

its revenues from the sale of compressors; the remainder comes from sales

of compressed air. In the automotive industry, Eisenmann, a manufacturer

of painting systems, generates revenue by painting car bodies for its client

Ford, while the KUKA Robot Group is paid for the number of auto bodies it

welds at one particular Chrysler plant.

According to a study published by the Fraunhofer Institute for Systems

and Innovations Research ISI,1 around one fifth of producers of industrial


9780230_217805_03_ch01.3d 5/29/2008 09:56:14

goods have brought their business model into line with the ‘complete

solution’ approach and now offer operator models: this pays off. Average

pre-tax operating margins for companies with operator models were

6.8 percent, compared with 5.9 percent for companies without.

In infrastructure projects where the cash-strapped public sector is

involved, companies are at a distinct competitive advantage if they are

able offer additional services, such as the management of buildings or

institutional facilities under a public–private partnership (PPP) model.

Bilfinger Berger, for example, expects a return on equity of between

12 and 13 percent from its respective service business.

While corporate strategy remains as relevant as ever, changes to a

company’s business activities such as those outlined above have a far-

reaching impact on its products, markets, value chains and revenue

mechanisms. Business models change and develop over time. Particularly

with the benefit of hindsight, it is possible to see quite different business

models in a single company or industry as time goes by (see Figure 1.2).

One sector that has recently experienced major changes to its business

model is the biotech and pharmaceutical industry. These changes are, for

instance, reflected in how the business model of the company Mologen has

developed over time. Mologen, originally a spin-off of the Free University

of Berlin in the field of bio-informatics, moved into the area of molecular

medicine. Its focus turned particularly to the research and development of

drugs based on DNA structures, which are used, for example, in the fight

against cancer. This area of activity, also known as ‘genetic immuniza-

tion’, represented Mologen’s product/market combination. Over time,

NUMBER OFINNOVATIONS

Product innovationBusiness model innovation

Process innovation

TARGET

Customer-oriented

Resource and financial market-oriented

BUSINESSMODEL

Specialist Network Vertically integrated enterprise

LEVEL Corporate Corporate Business unit

Figure 1.2 Development of business models over time


9780230_217805_03_ch01.3d 5/29/2008 09:56:14

Mologen gradually extended its area of activity from veterinary to human

medicine. In terms of the value chain, its original configuration when it was

still operating in the field of bio-informatics was that of an integrated

company. The side step into molecular medicine brought with it, first, a

specialization model and, later, building on this, a network coordination

model. In a number of cooperative projects, Mologen initially concentrated

on producing its own patented, DNA-based technology platforms. As time

progressed, however, the company took over the coordination of the value

chain in areas such as development and the functions of production,

marketing and distribution, depending on the line of business, in

cooperation with various partners. Today, the company enjoys even greater

vertical integration, especially in the areas of production and distribution.

Whereas its product/market combination and value chain configuration

have undergone a number of mutually-dependent transformations, the

revenue mechanism has remained transaction-based.

Changes in the business model such as those described above either come

about in a planned way – the product of decisions made by top management –

or they simply emerge as a result of actions taken by middle management.

The constant changes in the environment, plus the fact that business

models can readily be copied and imitated, make it important that

companies consciously engage in this process of business model

innovation, actively shaping the development of the company. Technolo-

gical innovation is a key component of rapidly changing environments.

Just as much as demographic change, new technology can change the basis

of a company’s operations, making existing business models obsolete. This

is particularly true when it comes to technological convergence, which

almost always brings in its wake a convergence of products and sectors.

Functionalities that were formerly independent start to merge and

previously distinct products draw closer in terms of their technology. As

a result, products’ value chains also become more and more similar. One

present-day example is the competition between consumer electronics and

the computer industry, with both areas battling it out over leadership in the

area of access to digital services.

Essentially, business models can be imitated wherever barriers to

market entry – such as physical resources that require building up over

time – are low or non-existent, and wherever the often complex quilt of

relationships between different components of the business model can be

disentangled and transferred to other companies, markets or businesses. In

the case of electronic commerce, for example, imitation is not difficult.

Moreover, the fact that the companies themselves all strive toward the

same benchmarks and best practice, and industries undergo consolidation


9780230_217805_03_ch01.3d 5/29/2008 09:56:14

following mergers and acquisitions, further contributes to the process of

imitation and, ultimately, the consolidation of business models. It is

exactly for these reasons that innovation and continuous product

development are necessary for those companies that intend to stay

‘removed from the crowd’, to be special, to enjoy a strong reputation and

lead in their respective market segment. With innovation and progress

lacking at a company, the field will soon have caught up and leveled any

kind of advantage that such company might have had a few years before.

Nike has long been regarded as a prime example of a company with a

successful business model, a benchmark of effective business management

in the sporting goods manufacturing industry. The company focuses its

value creation on product development and brand leadership, outsourcing

production to third-party providers. In terms of its product/market combi-

nation, Nike positions itself in the high-quality lifestyle/sporting goods

segment, where items carry high price tags. Nike has also opened up a

number of its own elaborately designed department stores – known as

Niketowns – where the purchase experience becomes a leisure activity in

itself. This model has been widely imitated throughout the industry. Today,

all the major players, including the German companies Adidas and Puma,

employ a similar business model. These two companies were in crisis at the

beginning of the 1990s as a result of excessive costs, a stale brand image

and an outdated product mix. Both managed to move themselves away from

the brink of disaster, largely by adopting the best practice modeled by Nike.

As the then Adidas CEO Robert Louis-Dreyfus himself admits, they did so

by engaging in ‘large-scale imitation’ of Nike’s successful model.2

Business model lifecycle – the basis for innovation

The question is now – how can companies recognize the need to

innovate in their business model and how may they determine when best

to do this?

As we have seen, business models change over time. Just as products,

technologies and industries do, business models pass through stages of

formation, growth, maturity and decline. Put simply, they have a lifecycle.

However, business models can be very complex. A large number of

different factors can influence them. So, rather than trying to grasp this

complexity in one attempt, it is often easier to look first at the lifecycles of

the three components that make up the business model – the product/market

combination, value chain configuration and revenue mechanism – and then

draw conclusions on the overall lifecycle of the business model.


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The indicators for different lifecycle stages are based on criteria and

appropriate models taken from the discipline of innovation management.

These indicators are different for each component of the business model.

For the product/market combination, there are dozens; we have to select

the right criteria from among those, bearing in mind the particular

business model in question. In general, criteria for assessing market

potential and penetration, innovation rate, degree of product or component

standardization, customer adoption, and satisfaction of customer expecta-

tion by the market are particularly relevant. For the value chain

configuration, criteria such as technological development, its influence

on company costs and performance, and factors determining the

development of the sector are important. The key criteria for the revenue

mechanism are purchase criteria, price elasticity of demand, and changes

in market participants’ willingness to pay.

By examining these criteria, we can develop a picture of the lifecycle of

each component of the business model, and how this influences the overall

lifecycle of the business model. The relationship between the different

components and how they interact with each other is also highly

significant. To a large degree, this determines how well the business

model fits together and, hence, how successful it is. The key question

therefore concerns what the consequences are for the overall business

model lifecycle if the indicators for each component show that they are in

different phases, or when one component enters a different lifecycle stage

(see Figure 1.3).

Accordingly, top management needs a tool for early recognition of the

need to take action or innovate in the business model, which will help

them to generate different options for change. This tool must provide top

management with enough information sufficiently early in the process

without deluging them with unnecessary data. Ideal, for this purpose, is a

combination of an early warning system that senses any alterations in the

indicators for the business model lifecycle and a system of what are

known as ‘weak signals’.

The indicators relate directly to the company’s competitive environment,

while the weak signals relate to the general environment in which the

company operates. The competitive environment determines the attractive-

ness of the industry or business model and refers to suppliers, customers,

relations with industry, rivalry between market players, newcomers to the

market, and substitute products. The general environment relates to

technological, macroeconomic, socio-cultural, ecological, political, and

legal factors. These factors are shown on Figure 1.4. An example will

elucidate the point.


9780230_217805_03_ch01.3

d5/2

9/2

008

09:5

6:1

4

Revenue mechanism

Value chain configuration

Product/market combination – potential lifecycle indicators

Indicators Formation Maturity Decline

Marketpotential

Unclear Insecure Can beassessed

Clear

Marketpenetration

Low Marketsaturationnot yetnoticeable

Marketwidelyexploited

Only re-placementneeds left

Innovation rate

High Shrinking Low Low

ProductStandard

None Nascent Exists Exists

Customer Innovators Firstfollower

Majority Latecomer

...

Revenue mechanism

Value chain configuration

Product/market combination – lifecycle position of a specificbusiness model

Formation Growth Maturity DeclineGrowth

Figure 1.3 Lifecycles of business model components

17

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Case study: The music industry

The music industry – comprising companies being involved in theproduction, marketing, and distribution of audio media – has produceda number of early warning systems for its business models in recentyears. The industry is vertically integrated to a large extent. Its productsare CDs and suchlike, containing a selection of titles by a particular artistor in a particular genre, and offered within a constant price spectrumacross the industry. In the past, four major labels formed an oligopolythat accounted for some 80 percent of worldwide sales. However,between 1997 and 2003 these four big players experienced revenuelosses of approximately one third. Initially, the reason was music-swapping services such as Napster and Kazaa; later on, legal onlineplatforms appeared such as iTunes, from which customers could buyindividual tracks as MP3 files rather than having to purchase whole CDs.

Indicators had appeared in both the industry and competitiveenvironments that the CD-based segment had reached its mature phaseand an innovative business model was on its way. In terms oftechnology, there were unmistakable signs of forthcoming change:digitalization, the emergence of the MP3 format, and the rapid spread ofInternet use with ever-faster transmission rates. In terms of socio-cultural change, the popularity of competing leisure activities (media

GENERALENVIRONMENT

Techno-logical factors

Politicaland legal

factors

Socio-culturalfactors

Ecologicalfactors

Macroeconomicfactors

Attractiveness of a business model

COMPETITIVEENVIRONMENT

Suppliers

Customers

Relations withindustry

Rivalry betweenmarket players

Newcomers tothe market

Substituteproducts

Figure 1.4 Indicators for business model attractiveness


9780230_217805_03_ch01.3d 5/29/2008 09:56:14

such as DVDs, computer games, PlayStations, and so on) among youngpeople – the key customer segment – was bringing about a significantshift in behavior. These factors in the overall environment led to anincrease in the power of performing artists in the competitiveenvironment. No longer were artists forced to work exclusively with alabel for the purposes of production and distribution. The changes alsoled to an increase in consumer power. Now, fans could buy theparticular track they wanted rather than a CD put together by the label.

Weak signals also appeared early on that changes were afoot in themusic industry. Back in the early 1990s, leading figures such as MITInternet guru Nicholas Negroponte and inventor of the MP3 formatKarlheinz Brandenburg were already talking about the threat ofdigitalization for the music industry. Indeed, the former head of Universalin Germany describes the situation as follows: ‘The early tremors of thedigital revolution could be felt in the music industry well over a decadebefore the earthquake hit – that is, if one wanted to feel them.’3

Yet, many companies that had traditional business models did notwant to feel the earth move. For many years, they failed to react eitherto the indicators and early warning signs or to the arrival of Internet file-sharing services. Instead of developing a consistent strategy, they triedto take legal action – first, against the file-sharing services and, later,against their users. Apple, an industry outsider, understood the signalsbetter. Its reaction was to launch iTunes, the first and, to date, mostsuccessful seller of tracks via the Internet.

Generating business model lifecycles in this way gives top management

an early warning system. When this system indicates that the business model

is entering into a period of decline, or shows that other, superior business

models are possible, top management knows that they must do something

about product development. What exactly it is that they should do – and how

scenarios can help them find out – forms the subject of the following section.

Product/service innovation – the prerequisite for innovationin the business model

The information that early warning systems generate forms the basis for

drawing up scenarios. Top management can then use these scenarios to

test potential business models for durability and robustness. The scenarios

themselves give a picture of what the complex systems of the future could

look like. They must be produced in a systematic fashion and be entirely


9780230_217805_03_ch01.3d 5/29/2008 09:56:14

plausible in nature. Their purpose is to create transparency over possible

future competitive conditions and different factors affecting the success of

business activities. The scenarios form a key component of a company’s

business planning and development, as well as serving to generate

potential future business models.

The process of drawing up scenarios consists of three stages: scenario

field analysis, projections, and scenario building. This process is prece-

ded by a stage of scenario preparation and followed by scenario transfer.

In the scenario field analysis stage, key factors are determined for the

entire system. In the projections stage – the core phase of scenario

management – appropriate projections are made for the key factors

determined in the initial phase. These projections are then bundled into

draft scenarios, visualized and described. Ideally, companies should draft

two or three scenarios with different constellations, so that the actual

development falls somewhere between the more extreme scenarios. In the

case of innovative business models, it can again be helpful to run this

procedure for each of the three components of the business model first,

and then combine the three to form appropriate scenarios. This ensures a

good fit in the future business model.

According to expert opinion in recent years, three main scenarios exist

for the future of the music industry. These scenarios are ‘equilibrium

between online and offline services’, ‘dominance of online distribution’

and ‘the end of the music industry’. In one extreme scenario, ‘equilibrium

between online and offline services’, the product/market combination will

consist of CDs and suchlike, accompanied by an attractive, legal

download service. Online and offline services will be offered as additional

services when customers buy CDs. The value chain configuration will

involve major labels gradually running down their vertical integration in

favor of cooperation with specialized players. The revenue mechanism for

this scenario will be a combination of various online and offline

components in the revenue stream. In the other extreme scenario, ‘the end

of the music industry’, music will simply become another type of digital

content. The convergence of contents and hardware will lead to sections of

the value chain – such as distribution and marketing – being taken over by

the companies formerly responsible for bundling and selling content or

producing hardware: these might be Internet portals, mobile telephone

companies or media firms, or hardware manufacturers such as Apple. In

this scenario, labels will become redundant.

Clearly, companies need to be prepared for the new conditions arising

in the competitive environment. They must be in a position to implement a

business model that can face these new conditions robustly. They need to


9780230_217805_03_ch01.3d 5/29/2008 09:56:14

know what wheels they should set in motion in their product or service

development process, their value chain configuration and their revenue

mechanism. To do this, two activities are vital: companies must carry out a

gap analysis to determine what needs to be done, and they must determine

the correct timing for initiating action. It is essential that they manage the

transition from the old business model to the new one in a fluent manner.

The gap analysis should check what potential resources lie in the company

and whether these resources are sufficient to meet the needs of the future

product/market segment. This means that companies should examine what

technology they currently have, how this compares with what will be

required in future, and what new skills they need to develop. Companies

must ask themselves what their current capacity is, and how they should

prioritize their resources between the two goals of keeping up existing

product development (for example, supervising current series production)

within the framework of the present business model, and closing the

development gap with respect to the future business model. One possible

solution is for companies to buy in external know-how – finances permitting.

Google, Yahoo! and eBay are good examples of companies that

continually acquire start-ups with promising technological developments

or existing business models. Their aim is to shorten development times,

which are often more relevant than costs when it comes to competition

over innovation. At the same time, by buying up start-ups they guarantee

themselves an excellent starting position as fast followers or even first

movers. For instance, eBay bought up Skype, a service that makes it

possible to make free telephone calls via the Internet. Similarly, Yahoo!

acquired the photo management and sharing application Flickr, and even

made Flickr’s founder its own vice president.

Apple has taken a different approach. Heeding the early warning

signs, Apple looked at what it needed to do to build up the requisite

skills and designed an attractive spectrum of future services. Ultimately,

Apple was able to generate a new field of business for its iPod hardware

through its download service iTunes. The rumors that Apple’s hardware

business cross-subsidizes its software business persist. But, ultimately,

Apple’s success is enough to quell any criticism. The new business field

of iPod and iTunes now accounts for 49.5 percent of Apple’s revenues,

compared with just 6 percent in 2003. The company’s revenues were

up by 211 percent in 2006 compared with 2003, and profit was up by

2,780 percent.

Determining the correct timing for initiating action means making the

most of windows of opportunity before product standards, dominant

designs and business models have crystallized and established themselves.


9780230_217805_03_ch01.3d 5/29/2008 09:56:14

One key aspect of good timing is apparent in the strategy of graduated

reaction. As information becomes more concrete and the direction of

change clearer, companies’ preparations for the future should – indeed,

they must – become more and more committed. Companies must be

constantly looking at the latest information available from the early

warning systems and using it as a basis for initiating actions aimed at

closing the resource gap. This up-to-the-minute information can also serve

as the basis for drawing up technology and innovation roadmaps.

Outlook

Business models are a key component of corporate success. To a large

extent, they decide the type of service provided by the company, as well as

how it delivers this service. This, in turn, determines a significant portion

of the customer value generated by the company and the competitive

advantage to which it aspires. Innovative business models therefore play

an important role in stimulating product development. Consequently,

management information systems must be geared toward monitoring

indicators and weak signals, giving companies the chance to recognize the

need for action early on – whether in the form of risks to the current

business model or opportunities for future models.

Notes

1. Frankfurter Allgemeine Zeitung (2003) ‘Mit Betreibermodellen neue

M€arkte erschließen’, 21 July.

2. See comment made in Boldt, Klaus; Hirn, Wolfgang (1997) ‘Der

Spielf€uhrer’, ManagerMagazin, 12: 81. Spiegel Verlag.

3. Renner, Tim (2004) Kinder, der Tod ist gar nicht so schlimm! €Uber die

Zukunft der Musik- und Medienindustrie. Frankfurt am Main: Campus

Verlag: 9.

Further reading

Christensen, Clayton M. (1997) The Innovator’s Dilemma. When New

Technologies Cause Great Firms to Fail. Boston.

Knyphausen-Aufseß, Dodo zu; Meinhardt, Yves (2002) ‘Revisiting

Strategy: Ein Ansatz zur Systematisierung von Gesch€aftsmodellen’,


9780230_217805_03_ch01.3d 5/29/2008 09:56:14

in Bieger, Thomas; Bickhoff, Nils; Caspers, Rolf; Knyphausen-Aufseß,

Dodo zu; Reding, Kurt (eds), Zuk€unftige Gesch€aftsmodelle. Konzept

und Anwendung in der Netz€okonomie. Berlin: 63–89.

Knyphausen-Aufseß, Dodo zu; Zollenkop, Michael (2007) ‘Gesch€afts-

modelle’, in K€ohler, Richard; K€upper, Hans-Ulrich; Pfingsten,

Andreas. Handw€orterbuch der Betriebswirtschaft. Stuttgart, 6th edn,

cols 583–91.

Meier, Horst (ed.) (2004) Dienstleistungsorientierte Gesch€aftsmodelle im

Maschinen- und Anlagenbau. Vom Basisangebot bis zum Betreibermo-

dell. Berlin.

Meinhardt, Yves (2002) Ver€anderung von Gesch€aftsmodellen in dyna-

mischen Industrien. Fallstudien aus der Biotech-/Pharmaindustrie und

bei Business-to-Consumer-Portalen. Wiesbaden.

Zollenkop, Michael (2006) Gesch€aftsmodellinnovation. Initiierung eines

systematischen Innovationsmanagements f€ur Gesch€aftsmodelle auf

Basis lebenszyklus-orientierter Fr€uhaufkl€arung. Wiesbaden.


9780230_217805_04_ch02.3d 5/29/2008 09:55:42

CHAPTER 2

Innovate to win: how clever costapproach design can outsmartcompetition

Ralf Augustin and Kai Bethlehem

Introduction

Most of us know it, but few are willing to admit it freely: innovation and

progress in technical products hardly ever provide sufficient leeway to

increase prices to a considerable degree. The pressure from competing

products or alternatives on offer around the world is simply too high.

Innovation is something customers expect from well-known companies. It

is a given – not a sign of outstanding performance.

Innovation is not about the ability to raise prices but, rather, how to

avoid having to lower them. At the same time, innovation is a costly

matter requiring manpower, research, and certificates. Companies cannot

pin their hopes on price increases in order to finance innovation. Bearing

this in mind, it is valid to ask whether companies are at all wise to invest in

innovation and R&D. The truth is hard and simple: companies no longer

have a choice. If your company does not innovate, your competitor will;

and any profits your company might have made through saving on R&D

expenses will be hacked away as you become forced to sell ‘outdated’

products at a lower price.

History is a minefield of companies, industries, and even whole countries

that lost the battle for customers when their products fell below technical

standards. Income in hard currency in the former Soviet Union and all

affiliated countries dried up during the 1980s as their products became more

and more inferior and, thus, less attractive to western markets. The Eastern

Bloc’s substantial basic wealth of oil and mineral resources could not

prevent it from sliding into bankruptcy and political turmoil.

24

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This example might be heavily influenced by market-averse political

philosophies, but there are plenty of other examples to draw on. Think of

the once flourishing fabric industry in Great Britain, Germany’s consumer

electronic industry, or the 15 or so car manufacturers France had after the

war. As the balance between innovation and cost competitiveness became

unstable, all of these industries fell by the wayside.

The other side of the coin shows companies and countries that achieved

impressive turnarounds when they started to provide the right innovation

at the right price. Consider, for example, Japan’s automotive industry – or

Korea’s in its younger days for that matter, the Silicon Valley’s computer

industry, or current solar panel production in Germany. These examples

prove that innovation, when it fits perfectly with the right cost figures,

does pay off.

Offering innovation at competitive prices is the key to success. But how

can companies produce innovative products sufficiently cheaply to cover

their R&D cost and price them no higher than the predecessor model? The

answer is ‘design to cost’ (DtC). Combined with Roland Berger’s

‘comprehensive cost reduction’ approach (CCR), DtC covers more than

merely the four typical levers that are usually applied to tackle cost.

Setting the points: reducing cost is – above all – a mindset

Mindset is the first obstacle that needs to be overcome when trying to

implement any sort of DtC approach. This is as true for engineering as it is

for other professional fields. The word ‘engineer’ is derived from the word

‘genius’. Miraculous inventions and brilliant ideas spring to mind when

we think of genius. Down-to-earth aspects such as bookkeeping and

savings realizations tend not to enter the imagination in this context. It is

no surprise, then, that few of us actually think of making things cheaper

while wondering how we can make them better. But an engineer’s prestige

is not lowered when his new solution is cheaper, faster or more efficient to

produce. The opposite is true – it actually enhances his image. Improving

the cost situation is a sign of genius. Cost saving must be a conditio sine

qua non for any innovation undertaken.

All of this should be common sense. Unfortunately, many people both

within and outside R&D still believe that commercial aspects are best left

to the purchasing department (if not bookkeeping) once miraculous ideas

have materialized into products. Strangely, this thinking continues to be

widespread, even though 80 percent of a product’s cost is already

determined in the R&D phase.

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R&D alone, however, should not bear the sole blame should costs get

out of hand. There are at least six main areas that significantly increase the

cost of a product: positioning of the product, targeted quality, technology

and know-how applied, specification, manufacturing processes and

principles, and make-or-buy strategy.

Positioning of the product

This element depends on the image that a company has to maintain. In many

ways, every targeted market segment requires a product to offer a certain

number of features that might prohibit material savings. A high-end fountain

pen needs to have a certain weight to feel right and be accepted as a luxury

item. Similarly, expensive furniture may not be made out of artificial leather.

Targeted quality

The second area that increases the cost of a product is very similar to the

first aspect, with the exception that the difference between quality and

inferior materials is not just skin-deep. Here, we are referring to quality that

only makes itself apparent after years, such as jeans that retain their color

when others have long faded, or a chair that is still comfortable when others

have already started to squeak and fall apart. Developing and manufacturing

Productcost

Make-or-buystrategy

Positioning of theproduct/targeted customer group

Targetedquality/life

span

Manufacturingprocesses/principles

Factors that influence product cost

Specification/requirements

Technologyand know-how applied

Figure 2.1 Product costs are influenced by several surrounding factors

26 Ralf Augustin and Kai Bethlehem

9780230_217805_04_ch02.3d 5/29/2008 09:55:42

products that are built to last is, in itself, an art. Making these sorts of

products does not give manufacturers a license to stop caring about cost but,

rather, a healthy dose of respect that certain things simply cost.

Technology and know-how applied

This third aspect affects a product’s cost. There are sometimes invisible

barriers that should not be crossed in a DtC approach. In many companies,

there are certain parameters that prescribe the use of certain solutions for

intellectual property reasons or owing to a certain image. Sometimes, it is

simply because someone important in the company invented something –

for example, the one-arm ‘hopping’ windscreen wiper of Mercedes cars

during the 1990s. Once the inventor retired, the ‘hopper’ went out of

action. In cases such as these, it is more productive to accept the barrier

and change it at a later date. It is important, however, to calculate and

communicate the cost of the ‘protected’ product.

Specification

The cost of a product is largely affected by specifications, which is our

fourth aspect. In ideal terms, a product specification simply means

quantifying the wish of a targeted customer. In reality, however, this is

rarely the case, especially since a customer’s wishes are strongly influenced

by the sales force, marketing gurus, product planners and such. There is

often a discrepancy between what customers think they want and what they

really want. Examples of products that have flopped on the market are

endless. Wishes might be misinterpreted, customers misguided. Thus, a

specification should never be accepted as being carved in stone. One of the

first steps in a DtC approach, therefore, should be close examination of the

reasons behind the need for specific costly solutions.

Manufacturing processes and principles

Manufacturing principles, too, can significantly shape the cost of a pro-

duct, especially when second thoughts arise during the R&D process.

Barring cases where expensive processes are deliberately chosen purely

for the sake of it, there is generally a great deal of interdependency

between product design and manufacturing principles. Certain technical

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solutions or specifications simply require certain manufacturing methods.

It is of utmost importance to keep the production process in mind when

designing a product. Whenever meticulous, time-consuming and error-

prone manual work is necessary, there is a high probability that the

product design has not been optimized for efficient production. The same

is true whenever production is hampered by bottlenecks.

Make-or-buy strategies

In this area, in particular, emotional aspects often color rational decisions.

Core competencies that should not be lost, the will to keep the workforce

employed, and doubts about whether the quality and flexibility can be

guaranteed once processes are outsourced are all factors. While such

decisions might involve less emotional energy in modern blue-chip

companies, emotional factors will probably play a considerable role in

traditional, family-owned enterprises, especially if the founder is still

deeply involved in the business.

We have chosen to illustrate these six general factors that affect product

cost right at the beginning because it cannot be stressed too much that the

engineering, purchasing or accounting functions alone are not responsible

for fully optimizing cost. Each function has to become involved. Only if

these and other departments participate actively is there a likelihood that a

product will meet its target cost.

Cost drivers in detail: the quartet that sets the stage

The cost of a product is influenced by more than the pure material or

production cost. There are overhead costs – which will not be dealt with in

this chapter – and there are value chain factors. A close inspection of

factors along the entire value chain reveals that the cost of a product is

largely influenced by the four following aspects: sourcing, manufacturing,

product design, and supply chain.

Sourcing

In addition to negotiations concerning certain materials and components,

sourcing encompasses aspects that need to be regarded during the product’s

design phase. For example, materials, components or modules that are easy


9780230_217805_04_ch02.3d 5/29/2008 09:55:42

to obtain; whether substitutes could be used to allow for sourcing from a

market with strong competition.

Overlap exists here with aspects of product specification. Consider, for

instance, certain technical parameters such as geometrics, strength and

weight that predefine whether companies must select from molded, stamped/

forged or machined parts; or whether plastics, metals or laminates could/

must be used. Clearly, there is less competition for injection-molded, fiber-

reinforced metals with an aerospace certificate (making it difficult to achieve

any competition in the supply base) than for simple, stamped, sheet-metal

parts (where setting up a sound supplier matrix would be comparatively

easy).

To deliver the best possible results, intelligent sourcing needs to start

with the design phase of a product. This targeted interaction between R&D

and the purchasing department can be achieved using one of two set-ups.

In an ‘institutionalized’ set-up there is a dedicated ‘upstream’ purchasing

group whose sole purpose is to accompany all relevant developments from

the sourcing point of view. In contrast, in a project-based set-up engineers

and ‘normal’ purchasing people meet in core teams to discuss and align

innovation and the sourcing strategy.

Irrespective of the set-up selected, a true DtC approach needs to take into

account potential suppliers, markets, duties, and certificates. Only if the

purchasing department is given sufficient freedom to activate its purchasing

and negotiation levers, can satisfying results be obtained.

Manufacturing

Of equal relevance to the sourcing aspects are the manufacturing aspects.

Again, the design of a product stipulates the kind of manufacturing that

will be necessary to produce a particular product. Involving manufactur-

ing experts early on will help ensure that manufacturing or production

processes are chosen that are well mastered by the company. This ensures,

in turn, that capacities and existing machines, or even tooling, can best be

utilized.

In many cases, engineers in R&D are largely unaware of the processes

and techniques in a company’s production line. This is especially true for

those companies in which R&D and production are not located at one site,

as is so often the case with huge companies or global firms. In these cases, it

is essential to include a representative of the manufacturing department in

the development process. Companies can thereby avoid preprogramming

production issues into the product. Examples of such issues include massive

Innovate to win 29

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production limitations due to bottlenecks arising from new processes,

machines standing idle or lost flexibility following the outsourcing of

production steps.

A DtC approach that focuses on manufacturing and production aspects

always needs to zoom in on the balance of techniques, processes, and

materials mastered by the company. Production steps that cause obstacles due

to poor quality, bottlenecks or other negative factors need to be addressed.

Product design

The importance of the product design has already been touched upon. Its

importance should never be underestimated. About 80 percent of a

product’s cost are defined during the development phase of a product, and

‘errors’ committed here can rarely be rectified in later steps. Besides its

influence on purchasing and manufacturing, there are further cost factors

that are influenced by product design: the most important is the quality of

the product, which is decisive for recall expenditures, guarantee cost, and

cost to keep exchange parts in stock.

As legislation to protect the rights of customers becomes ever stronger,

recall expenditures and guarantee cases – especially in the automotive

industry – have risen significantly over the past decade. While debate

rages about the damage or improvement to a company’s image resulting

from a recall, the cost is a factor today that no company can omit when

calculating a business model for a new product.

The introduction of the first aluminum mass-market bicycles in Germany

forms a cautionary tale. The reputation of the bicycle producer HSK quickly

became sullied when its bicycle frames began to crack. Only by offering a

ten-year guarantee on its bicycles, could HSK make customers return to its

stores. The characteristics of the material used for the frames were

obviously not sufficiently known and did not align with the product design.

At the product design stage, it should have been clear that a better design or

reinforced aluminum tubes would be required. As a result of this mismatch

between design and material, HSK’s image was significantly harmed, as

was the business case of these revolutionary bicycles.

How easily a product can be scaled up is another aspect of cost influ-

enced by design. By this, we mean the potential to develop derivatives or a

whole product family from the initial starting product. The design of

platforms in the automotive industry is illustrative here. For instance, using

common platforms Volkswagen builds cars ranging from Seat to Skoda and

Volkswagen and to Audi.


9780230_217805_04_ch02.3d 5/29/2008 09:55:42

Yet another aspect of designing products to cost is the ability to use

externally available knowledge. This encompasses the tapping of external

R&D capabilities and know-how; it also means using certain modules or

functional groups that can be put into an article as a ready-made black

box rather than being produced anew. The Dolby function in home-

entertainment serves as an example. Only very few manufacturers (mostly

in the up-market segment) continue to braze the electronics using discrete

components. Most prefer to use the ready-made chips widely available on

the market that can simply be put onto the circuit board to perform the

required function.

Companies need to have certain rules in place that stipulate when external

know-how can be used. Areas regarded as core competencies should not be

outsourced. Considered from another angle, this means that companies need

to ensure that areas defined as core competencies are so competitive that it is

not possible to find an adequate replacement in the market.

Supply chain

The fourth aspect that DtC usually focuses on is the supply chain. Attention

is paid here to the physical handling of goods, both inward and outward

bound. Incoming inspection plays a major role in production efficiency, as

undetected gaps in quality might cause severe obstacles during production

or, worse, in customers’ hands. The management of warehouses and stock

is also important and, typically, the cost for warehousing, inventory, and

moving of goods is underestimated. Fully optimizing them can free up cash

quickly. Switching stock into consignment stock is another option, and

having suppliers that own, manage, and look after a warehouse adjacent to

the production line is the dream of every logistics manager.

Logistics clearly demonstrate how interlinked processes in modern

companies are. An engineer who intentionally selects parts from a best-

price supplier that offers consignment stock or even a warehouse close to

the production line would be a treasured member of any core DtC team.

The importance of pursuing DtC with a global view cannot be over-

stressed. Only when all factors are considered can the best possible result be

achieved. This is not an exercise that can be done piecemeal. Instead, it

should be institutionalized throughout a product’s entire lifecycle – from the

cradle to the grave, so to speak. In a project set-up, DtC can possibly fix some

aspects, but to exploit the entire savings potential, a fully-fledged approach

influencing the basic product design is better suited. How this can best be

achieved is illustrated in the following section.

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The comprehensive cost reduction approach –ten facets of a gem

Implementing DtC thinking in a company is no easy task. This is all the

more true if DtC has to be performed swiftly in order to help alleviate a

burning cost issue. In such challenging situations, a proven methodology

is required.

Roland Berger’s comprehensive cost reduction (CCR) approach has been

tested and refined on numerous occasions. Five key features ensure the

successful use of this tool: holistic perspective, fact-based neutrality,

complete coverage, openness to change, and inclusion of all stakeholders.

As the approach strives for a holistic perspective, the total cost of

ownership and production is investigated rather than only the purchasing

cost. All levels of a product are analyzed: parts, components, modules,

systems, and finished products. The fact-based neutrality of this approach

means that rather than relying on gut feeling, this method uses thorough

data analysis, employing tools such as bottom-up and top-down cost

calculations. With its complete coverage, not only are internal processes

covered, but also every step of the value chain, from suppliers to the pro-

duct’s customers. The approach’s openness to change means that the fact-

based analysis uncovers all optimizing potential, with disruptive changes

as well as incremental improvements being options that might be pursued.

Lastly, all stakeholders are included: not only purchasing and R&D, but

also sales, marketing, production, and logistics are involved in the process

when necessary.

At the very heart of the CCR is an analysis tool-matrix as shown in

Figure 2.2.

On the y-axis, the ten tools to be applied are listed. The checks to the

right indicate the departments and stakeholders that are typically involved

in each action. Further to the right, indications are given for typical

savings that could be achieved by professionally applying this tool under

normal circumstances. An indication of the effort usually required to

execute the tools is also provided.

Tool 1: Technical benchmarking/DFMA

This is basically the ‘disassembly’ of competitive products to analyze the

materials and manufacturing methods used. Given certain knowledge, it is

possible to calculate the cost for the competitor to build the product,

deduct his margin and, thus, understand his cost position. Following from


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10 Supplier manufacturing analysis

9 Activity based product costing

8 Value chain mapping

7 TCO analysis

6 Simultaneous product and process optimization

5 Innovation analysis

4 Performance cost analysis

3 Commonization (internal and supplier led)

2 Value analysis

1 Technical benchmarking/ DFMA

Savings potential %2

Manu-facturing

SupplychainSourcingProduct

designTool

Effort to use toolDepartments typically involved1

15–25

10–15

10–20

10–30

30–40

20–30

10–20

5–10

15–30

5–10

� ��

Figure 2.2 The comprehensive cost reduction approach covers the complete value chainNotes:1 Indicative, pending adjustments for certain industries, company setups, etc.2 Savings for the system components addressed.

33

9780230_217805_04_ch02.3d 5/29/2008 09:55:42

this knowledge, it is possible for a company to generate ideas on how to

optimize its own design, manufacturing process and/or assembly. It is also

possible to gain profound knowledge about the competitors’ competencies.

Tool 2: Value analysis

This tool aims to define the cost of each functionality a finished product

offers. The goal is to single out the most expensive functionalities and find

ways to replace them with more attractive alternatives. This tool is also

excellent in the framework of market/consumer studies as it helps

companies to understand what a consumer would be ready to pay for a

certain functionality and, thus, to discover the ‘profitable’/unattractive

functions of a product. An example for the value analysis of a power

window module in a car is provided in Figure 2.3.

Tool 3: Commonization

The goal here is to use as many parts or components from existing products

as possible. This method is extremely valuable for articles that are utilized

or manufactured in limited numbers, and also with products that are similar

in general but different in detail. Here, it is helpful to imagine the merger of

two competitors who want to reduce costs by using as many common parts

as possible.

Tool 4: Performance cost analysis

This tool is based on the belief that cost and characteristics (performance,

power, weight, dimensions, and so on) of similar products are somewhat

linear. This means that it is possible to extrapolate target costs for a

product by knowing the cost of similar products. This approach requires

the availability of a series of products that serve as the basis for a ‘curve’

on which the respective product is placed (see Figure 2.4).

Tool 5: Innovation analysis

This tool aims at reducing cost by using the latest technologies, materials,

processes or solutions. Companies might use more powerful computer chips


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PartMainfunction

Sub-function

Cost per function ( )

IdeaSavings( )Electrical

motor Frame Electronics Total

Window lifter

Generatepower

16 • Replace electrics by pneumatics

2

Transmitpower

21• Tooth belt instead of gears

7

Stabilizewindow

8

7

3 8 10

9 16

8 • Aluminum frame 4

Preventoxidation

5 5 • Powder coating instead of paint

2

10 21 19 50 15

Movewindow

Holdwindow

�30%

Figure 2.3 Value analysis – vehicle window lifters

35

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2

Desired performance

Competitor Y(D-1 comparable)

Number of product functions

0

10

20

30

40

50

60

70

80

90

2 4 6 8 10 12 14 16

Competitor X(C-1 comparable)

C-2

C-1

B-2

D-1

B-1

A-2

A-1

Step 3: Achieve new coststructure through redesign

Currentperformance

(/p

rodu

ct)

Step 2: Harmonize spec levelto in-house best in class

Step 1: Replace over-engineered components

Competitor Z(D-1 comparable)

Figure 2.4 Performance Cost Analysis – Cost comparison by most important functionNote: A-1... D-1 own products (different families).

36

9780230_217805_04_ch02.3d 5/29/2008 09:55:42

to allow functionalities to be integrated more tightly on a lesser number of

chips; they might produce concentrates, as do detergent makers to reduce

packaging, logistics and sales cost; or they might replace light bulbs with

LEDs. Revamping products, especially those that have been around for

some time, is often an excellent way to cost-optimize a product.

Tool 6: Simultaneous product and process optimization

This entails a systematic analysis of the product and process cost of both a

company’s own and competitive products. What is unique about this tool is

that it should be employed with several strategic or key suppliers. In fact,

the cost analysis and calculation will mostly be undertaken by the suppliers,

as they will have more expertise in calculating cost on component or part

level than companies themselves. Moreover, having several competitors

calculating the same range of products will create greater confidence in the

prices estimated. To use this method, companies require suppliers that can

be trusted and that are ready to become involved in the endeavor. This

creates a challenge for suppliers, because such an exercise might set the

target price for products they supply to the company.

Figure 2.5 illustrates the results of such an approach, with five suppliers

having calculated costs for five competing articles. Although the price

estimates vary, certain trends can be identified.

Tool 7: Total cost of ownership

Total cost of ownership (TCO) is already a ‘classic’ among DtC tools. The

goal of this lever is to quantify all costs of a product over its full lifecycle

(development, series production, and after sales). TCO strives for an

overall cost optimization. It is especially applicable in cases when

production machines, parts or components used in own products incur

further cost during their lifecycle. This tool is applicable mostly when

designing processes or services.

Tool 8: Mapping the complete value chain

This is one of the most comprehensive approaches with which to understand

and reduce cost. The individual aspects to be regarded in this approach are

shown in Figure 2.6.

Innovate to win 37

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Com

pone

nt D

Com

pone

nt C

Com

pone

nt B

Com

pone

nt A

Total

124

124

132

126

–

–

OEM 1,Model A

119

135

–

138

146

OEM 2,Model B

119

–

142

116

167

157

OEM 3,Model C

116

Old model

136

109

121

112

129

–

OEM 4,Model D

109

136

�20%

Supplier A

Supplier B

Supplier C

Supplier D

Supplier E

15 32 28

Supplier A

Supplier B

Supplier C

Supplier D

23

15

21

17

39

32

36

33

28

38

38

31

27

34

23

23

121

112

129

109

98

�28%

98

Ideal

Supplier E – – – – –

36

Offers by five supplies for four different seats (competitor models) arerequested and compared with own current product designFirst benchmark reveals lowest cost design (model D), which is 20% lessexpensive than old design (module cost of 109)

Detailed analyses of model D cost structure for each supplier revealsfurther potential from process improvementsBest model D component proces cherry-picked form all suppliersreveals target cost of 98 (28% below current model)

Figure 2.5 Simultaneous product and process optimization example car module – vehicle driver seat (EUR/vehicle)

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Tier 7 Tier 6 Tier 5 Tier 4 Tier 3 Tier 2 Tier 1

Systemsupplier

Critical supplychain-Leatherfrom South Africa

Criticalsupplier

OEM

Typically, threemonths lead time

Starting point

• Unstable supplyof door panelsto OEM

• Re-worknecessary

• Missing parts

Results

• Problem identified

• Supplier development started

• Re-work cost reduced by 70%�

• No more missing parts, thus TCO reduced significantly

Tool application – understanding critical path

Figure 2.6 Value chain maps help to identify critical branches and to focus supplier development – passenger car doorpanel example

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3

• 6 workers plus packer, not fully loaded, long walking distances• Multiple handling, transport, and storage of parts and components• No visualization of performance indicators• No team work

• New balancing of work contents per station for 4 workers plus packer• Strong reduction of walking distances• One-piece flow of components on trays• Visualization of performance indicators

Original set-up After supplier manufacturing analysis

Packaging

Testing

Buffer

Part storage

4 3

Testing

2

Re-work

Packaging

1

5

67

4 3

5 2

1

Re-work Parts storage

Material flow Walking distance workers

Roller convery or

Productivity improvement: 30%�

Figure 2.7 Supplier manufacturing analysis: component assembly – lamp manufacturer

40

9780230_217805_04_ch02.3d 5/29/2008 09:55:43

This process requires the involvement and cooperation of all participants

in the value chain, from suppliers to retailers. Parties involved mostly

welcome this approach as it helps them to optimize their own products or

processes in a joint approach. In many cases, such ‘external’ pressure helps

the affected party to push through changes in a process that they would find

hard to achieve on their own. This approach is best performed with

experienced people from the companies involved. They should have an

educated eye and be able to spot possible bottlenecks, complicated work-

flows or costly processes at the supplier during a visit.

Tool 9: Activity based product costing

This lever is based on a ‘well-educated guess’ to define target cost. The trick is

to use the guessed cost to open up discussion with the supplier, and to encourage

him to prove that his costs are in fact different from the guess. This approach is

suitable for situations in which internal staff from R&D and the purchasing

departments meet with the staff from the supplier’s R&D, production, finance,

sales, and product departments. This lever should be pulled aggressively,

especially when previous discussions have come to a standstill.

Tool 10: Supplier manufacturing analysis

This tool builds on improving processes at the supplier, whether by

unblocking a production bottleneck, helping to lower investment cost,

supporting a DtC session on-site, or seeking to reduce the waste and zero-

quality level in production. Frequently, an external view will help suppliers

to detect outages in processes that were not previously apparent. Figure 2.7

shows how productivity could be significantly increased by readjusting the

load balance between workers on a manual assembly line at a supplier.

Case study: Comprehensive cost reduction in theautomotive industry

A project team helped one of the top global vehicle manufacturers whenits cost pressure became almost unbearable. The company faced adifficult situation in two of the three global regions where it was present.It was suffering in Asia, where competitors reduced prices after they had

Innovate to win 41

9780230_217805_04_ch02.3d 5/29/2008 09:55:43

implemented smart cost reduction programs; in the United States, a heftyprice war had dramatically eroded margins. The manufacturer hadalready executed a series of mainly commercially focused initiatives, yetlacked the final step to reach the desired cost level.

In this situation, a six-phase CCR process was conducted to addressthe situation and help the company to take steps to reduce costs.

The first phase, which involved forming a solid, factual database, set thefoundation for all later steps. Necessary data was collected and analyzed,calculation rules were agreed upon that were to be used for reportingsavings later on, and cross-functional core-teams were established.

In the second phase, ideas were generated, and processes and coststructures were detailed, based on the results of the initial data analysis.Creativity and fresh ideas ruled thinking at this stage. It was important,in this phase, to create a spirit of trust among the teams and to fosterbelief in the success of the project. Evaluation and censorship of ideasand thinking were banned.

In the third phase, those creative, fresh ideas were examined for theirfeasibility. In several cases, this led to mining and working downthrough details and issues, and finally to an excellent understanding ofthe limitations and opportunities of a certain production step.

The fourth phase was used to compute and analyze ideas‘mathematically’, and to build calculation and business models. Inshort, it quantified the ideas that had been generated in previousphases. By clearly separating idea creation from idea calculation, teammembers – depending on their mission – were able to keep theircreative spirit or their feel for numbers.

Phase five, although a separate stage, actually spanned the entire twelveweeks of the project. Project management was the task of this module.During this phase, it was essential to ensure ongoing communicationbetween all teams and to make sure that information was flowing freelybetween stakeholders and management. This module or phase also servedas an escalation path when issues appeared to be getting out of control. Itwas also a good means by which to obtain swift decisions. As people whowere not involved in the other areas undertook the work in this phase,political issues were kept apart from the financial and creative aspects.

In phase six of the project, action steps that had been created, calc-ulated, and verified were carefully planned and organized. A thoroughaction plan with responsibilities, target dates, and controlling tools tomonitor the savings implementation was created. Once carefullydocumented, the plan was put into action and steps that had beenspecifically agreed upon were implemented.

Looking at the time necessary to execute such comprehensive work,it may be said that a CCR project can be completed within ten to thirteen


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Prioritize and plan actions• Qualify actions and savings potential

• Prioritize actions

• Prepare the implementation plan and identify quick hits (incl. change management requirements)

• Qualify resources needed for implementation

Change management• Communicate objectives and ensure mobilization of resources• Prepare a wider information/communication plan

1 week 4–6 weeks 2 weeks

5

6

Preparation• Agree on project objectives, approach, and timing

• Identify and inform CCR team members

• Collect data and key documents

• Interview all key stakeholders • Review past and ongoing cost reduction initiatives• Review contract status• Ask suppliers to cooperate

4–5 weeks

Generate cost reductionideas• Map cost structures

• Compare cost/functionality across BUs and against competition

• Identify most promising savings areas

• Conduct first workshops

Identify cost reduction ideas• Qualify potential dysfunctions and related root causes

• Evaluate gaps to best practices using RB tools

• Quantify savings potential

• Identify key improvement actions and create action plan

4Savings modeling

• Define savings calculation rules

• Assess savings potential for each component and lever

• Synthesize and extrapolate savings timeframe

• Define savings calculation methodology

2 31

Figure 2.8 The CCR phase for diagnosis and drafting an action plan takes roughly 10–13 weeks

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weeks, provided that a handful of people can commit 80–100 percentof their time to the project. The ability to complete the project withinthis period also requires strong support from top management. Thetimeframe is shown in Figure 2.8.

Looking at the work completed in each phase, the initial analysisphase is often seen as being lengthy and uncomfortable. In fact, thisphase can be accomplished relatively quickly, provided that therequired data (for instance, in an SAP system) can be retrieved. Usually,data always exists in modern companies. If accessing this data waspreviously unsuccessful, political reasons are to blame.

Discussion and perspective

The number of competitors is increasing as more and more companies and

suppliers enter the global market. This leads to relentless cost pressure.

Products are needed that are sufficiently innovative to attract customers

even at a certain price.

This chapter has illustrated how prices can be shaped during the R&D

phase, and how they can be trimmed, optimized or tuned at a later stage, if

necessary. By using a comprehensive DtC approach such as CCR,

experienced managers are given the tools with which to optimize products

and cost. The sooner managers become involved, the more that can be

achieved without harsh and disruptive consequences.

The main advantage of the CCR approach is that it examines processes

so carefully and in such detail that it will always detect a product’s hidden

cost drivers or bottlenecks in a production line. As the focus is quite wide,

important aspects at the very front or very end of the process are also

considered. Equipped with the right tools to optimize the cost side of a

product, team members can be confident that their efforts will pay off.

Further reading

Augustin, R. and Arndt, H. (2006) ‘Produktion 2020 – Globale Netzwerke

als Erfolgsfaktor’, Industrie Management, 22.

Augustin, R. (2007) ‘Not all roads lead to China’, Executive Review, 1,

ISSN 1617-4194.

Boutellier, R., Gassmann, O. and von Zedtwitz, M. (2000) Managing

Global Innovation: Uncovering the Secrets of Future Competitiveness,

2nd revd edn. Berlin.


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CHAPTER 3

Global development made successful:lessons learned by the automotiveindustry

Jochen Gleisberg and Kai Bethlehem

Introduction

We are living in a globalized world. This, of course, places each individual

as a buyer of goods in an advantageous position, yet it has also put enor-

mous pressure on all companies, worldwide. In response to ever-increasing

global competition, far-reaching change has taken place at many companies

over the past decade. Hierarchical organizational structures, once very

common throughout industry, have given place to decentralized leadership

concepts and global company networks.

Leadership concepts that are both efficient and tried-and-tested are sought

after as never before. The question as to whether or not to ‘go international’

has passed its use-by date. The issue today is, rather, how a global organi-

zation can best be managed.

During the first decades after World War II, internationalization rarely

meant anything more than opening sales channels in neighboring countries.

Today, globalization takes place on a much grander scale. Over the past

years, an increasing number of companies has moved entire departments to

locations abroad, or alternatively built up new departments in these locations.

Even core functions, such as R&D, have not been spared. Decentralized or

polycentric structures, worldwide cooperations between units, and strategic

alliances with external partners around the globe have become everyday

reality in many industries. This new environment poses significant chal-

lenges and is characterized by complexity and change.

As the automotive industry is at the forefront of this new environment, we

will use it as an example to evaluate the trends and reasons that lead to

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international engagement. We then look at how an international or

global R&D organization can best be managed in daily business. Lead

engineering – one of the best-practice organizational concepts used in the

running of global R&D activities – will then be presented, followed by a

section showing how lead engineering might be implemented in a company.

A real-life example for lead engineering implementation will also be given,

before perspectives and discussion bring the chapter to a close.

Global product development – status quo and trends

Customers of the automotive industry today are better informed and more

demanding than ever before. Their expectations are high. They seek inno-

vative, high-quality products that are ecological and individualized. At the

same time, they expect these products to come with an affordable price tag.

Delivering better and cheaper products is a major challenge for car manu-

facturers. Price and R&D capabilities are the keys to rising to this challenge.

While cost cutting has historically been the central focus of the

purchasing department, it has long been an open secret that R&D plays an

even greater role when it comes to lowering product cost. Decisions made

in R&D departments determine up to 80 percent of the cost for production,

quality and repair. This function also influences how much money is spent

on testing, tooling and guarantee cases.

Global customers have led to R&D processes that span the world, which

turns complexity up another notch. The potential advantages of a global

R&D organization – making use of ‘local’ knowledge, fulfilling local

content expectations, tapping low-cost workforces, and so forth – can be

undermined if organizations are not well structured. Clearly defined

workflows are essential.

Organization is what really matters in a global world

As a 2007 study by Roland Berger Strategy Consultants, entitled

‘Globalization of R&D – Drivers and Success Factors’, shows, around

190,000 employees at original equipment manufacturers (OEMs) work

on developing a rapidly increasing number of vehicle models. Today,

about 90 percent of these employees are still based in Europe, North

America or Japan. Yet, this number is expected to change, especially

because today’s fastest growing vehicle markets are located outside these

regions. Employees at manufacturers in the ‘old’ countries will soon

46 Jochen Gleisberg and Kai Bethlehem

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welcome new colleagues from China, India or Eastern Europe into the

fold. As this happens, complexity increases even more.

The challenge will be organizing such complexity and properly

managing globally connected development departments.

Unfortunately, stagnating R&D budgets – a typical scenario at many

companies – do not help the situation. A company’s survival chances are

strengthened if it organizes its R&D in an optimal fashion and is able to use

best practice approaches to ensure the greatest efficiency of employees.

‘Doing more with less’ is just as important as being able to serve local

expectations with a globalized product.

The classic approaches used to reach these goals at present are:

• to bundle and standardize parts (a car, for example, can be considered as

the sum of standardized modules)

• to set up innovative, efficient workflows and processes in order to

increase output per employee

• to establish local development centers to offer ‘localized’ products that

respect the individual taste of regional consumers.

Tailoring global product development to ever evolvingcircumstances

The importance of the traditional home market is decreasing. A fully

integrated, global development network – consisting of various technical

centers, strategic alliances and fully linked in-lead suppliers – is appearing

on the horizon.

With R&D becoming global, companies also need to revisit other

departments. While global purchasing departments already exist, a global

production set-up is just on the verge of becoming widespread reality. In

such a set-up, standardized modules of a vehicle are produced in a few

plants – sometimes even in one plant alone – and then shipped to various

assembly plants around the world for use by either one manufacturer or an

alliance of manufacturers.

Although standardization is critical, regional differences should be

neither forgotten nor overlooked. Customers around the world continue to

have different tastes. Moreover, legal and geographical differences call for

products that are tailored to regional needs. Companies therefore need to

differentiate between those parts that can be standardized internationally

and those that need to be tailored according to regional requirements.

‘Individualized standardization’ is the term often used for this.

Global development made successful 47

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Status quo:Coordinated, multinational development

Coming decade:Integrated, global development networks

Region A

Region B

Region X Region Y

Region A

Region B

Region X Region Y

Globalcommonization

• Low/medium, mostly selected components or platforms

• High, with global platforms, systems/modules, components and technologies

Globalspecialization

• Low, with lots of redundancies in the network

• Medium/high, specialized technical centers with specialized development focus

Globalcoordination

• Coordinated development activities, yet strong local autonomy

• Fully integrated lead concepts with little regional autonomy

Emergingmarkets

• Mostly ‘me-toos’ with limited development activities/capabilities

• At the same level in specialized technical areas

Figure 3.1 Trend towards integrated global networks

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Specialcompetenciesattributed tospecialtechnicalcenters

Vehicle category and derivative

• SUVs in the United States• Right hand drive versions in Japan, Great Britain and South Africa

Platform • Front wheel drive in Europe• Rear wheel drive in the United States

Components, systems/modules

• Low value components (trim, electronic components) in China

• Body modifications for demanding road conditions in South America

Technologies and materials• Magnesia-molding components in Brazil• Aluminum-molding components in South Africa

Business processes• Prototype manufacturing in Eastern Europe• Software programming in India

Examples

Figure 3.2 Allocation of core competencies in a global R&D network

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Ultimately, this will lead to regional technical centers that are responsible

for developing and manufacturing globally required modules. Yet, these very

same regional technical centers will also be in charge for making the adap-

tations necessary to sell a global product successfully in a regional market. In

many cases, the allocation of global core competencies is centered on certain

regional and ‘special’ requirements, as Figure 3.2 indicates.

There is no single perfect strategy for car manufacturers to follow when

it comes to splitting R&D activities among sites. The choice depends on

the targeted regional markets, the product portfolio, and the particular

history of each technical center. Depending on the ‘maturity’ of a local

technical center, various levels of responsibility might be allocated to the

regions. In regional offices that have only been established very recently

(often referred to at that stage as ‘local antennas’), the focus will initially

be on supporting sales activities, helping with technical issues or starting

some kind of local assembly.

The next level of maturity and growth for such local antennas is to

become a ‘local satellite’, with the key R&D responsibility still being held

with the manufacturer’s head office(s). The local satellite, however, might

already be in charge of designing and executing modifications necessary

to adjust a global product to local requirements. This kind of structure is

typical for manufacturers with strong R&D competencies in their home

Competencies of localtechnical development

centers

Integration andcooperation with localtechnical centers

Low

High

HighLow

Globallead center

Localsatellite

Localantenna

Globalcompanies and alliances

Home-countryfocusedcompanies

Integratednetwork hub

Figure 3.3 Integration and competencies of local technical centers


9780230_217805_05_ch03.3d 5/29/2008 09:54:53

country – such as Porsche or BMW, both of whom still complete most of

their R&D work in Germany.

Companies with a more international set-up tend to be structured as

‘integrated network hubs’ or ‘global lead centers’. At an alliance such as

Renault–Nissan, only the basic concept or lead car is developed centrally.

Cars within respective family groups are finalized in individual regions.

Regional centers are even allowed, sometimes, to develop individual, local

derivates of the initial basic concept. Global lead centers, having reached

the most mature state of the ladder, are often highly specialized in their

areas of responsibility. They are also fully integrated within the global

network, allowing them to steer and make use of R&D capacities

worldwide. Modules for car systems are developed in these global lead

centers and tested by a global team of engineers located at various technical

centers around the world and managed by the respective global lead center.

When organizations have reached this state, there is typically no more

home country. On the contrary, core competencies, manpower, and testing

and development facilities are spread all over the world. The global lead

centers act as gravity centers to steer and maneuver all R&D activities

completed throughout the company. Through this combination of

‘thinking globally and acting locally’, it is possible for car manufacturers

to reach the highest levels of standardization on a global scale, and to

adapt universal products for regional markets when necessary.

There are numerous risks that need to be addressed in this kind of

international R&D set-up. Coordinating and harmonizing all parallel R&D

activities is essential. Only if all sub-systems, irrespective of where they are

developed, fit seamlessly together to make a great product, can this whole

set-up be as productive as initially expected. Knowledge management and

exchange of ideas, data and technical information are essential to reach that

goal. Creating the technical means to communicate is not, by itself,

sufficient: the mindset counts, too. Ultimately, it is people that do business.

So, the questions are: Can this whole process be managed successfully?

What is the best way to reach this goal? Lead engineering is probably the

best answer to this kind of question.

Lead engineering: the basic concept andhow to implement it

Lead engineering is a concept developed for companies that have split their

product development by regions or business areas, or for companies who

develop goods in a strategic alliance. In these cases, R&D departments are


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not geographically united; this also applies to the people working on

assigned topics. This situation usually makes synergies hard to tap.

This is even truer in global R&D set-ups, where not only physical dis-

tance, but also language and time zone differences can create significant

communication barriers. This leads to two main questions: How can

synergies be created and savings be realized? How might the need for

standardization be reached, considering the urgency to develop individu-

alized solutions for regional customers?

Figure 3.4 highlights the six key elements of the lead engineering

concept.

Global strategies

With lead engineering, universal solutions are developed that utilize common

system architectures, components, and modular construction concepts. In

other words, one common product strategy exists across business areas,

alliance partners and regions. This point cannot be overemphasized. Without

such common ground, all further activities will lack orientation and failure

will be inevitable.

The creation of this one strategy is the central task of the nominated lead

engineer. He is responsible for defining the best possible structure to split up

all parts of a product and allocate them to individual work teams. It is his

responsibility to find the best balance between standardization and regional

or customer-related aspects. An overall strategy that acts as the backbone,

providing orientation for all R&D activities, is therefore required. Sound

Tools

Process

Organization

Strategy

Realizationand implementation of synergies

Integrated global organization Cross functional teams

Global IT systems

Standardized processesStandardized KPIs andperformance measures

6

4 5

2 3

Global strategies1

Figure 3.4 Six key elements of the lead engineering concept


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overall strategies address savings targets, lifecycle, facelifts, number of

variants, potential suppliers, and many other aspects from the very

beginning of a project.

The lead engineer can be considered as the intellectual leader of a

project. He mediates conflicting interests, and is the troubleshooter when

projects threaten to verge off track. Depending on the size of a project, the

lead engineer might be one very knowledgeable, well-recognized person,

or a team of people sharing this task.

Integrated global organization

One prerequisite for global development teams is a suitable integrated

structure across all centers. The composition of multi-national teams

should be so organized that hierarchical structures and areas of influence

are clearly delineated. Individual engineers are then clustered in ‘lead

engineering groups’ (LEGs): for example, they could be responsible for

exhaust systems or a vehicle’s braking concept. The early involvement of

departments such as purchasing ‘lead buyers’ in such LEG activities is

highly recommended.

For each individual LEG, the roles of leadership are then individually

defined. There are three levels of coordination: mandate, leadership, and

local execution.

Mandate approach One business area or technical center takes over full

responsibility for developing a certain component or module. In this case, all

BU 1 BU 2 Site 3 Site 4

Classic organization Roland Berger ‘lead concept’

R&

D

BU 1

R&

D

BU 2

R&

D

Site 3

R&

D

Site 4

Component 22

Component n3

Levels of coordinationfor components

Mandate1Full developmentdone at one BU or site

Local3High level ofindependency andautonomy of BU orsites

Component 11

Leadership2Leadership andresponsibility attributedto BU or site

Note : BU�Business Unit

Figure 3.5 Three coordination options


9780230_217805_05_ch03.3d 5/29/2008 09:54:54

required know-how is bundled in one competence center, and the

involvement of people from other areas or regions is not required. This

kind of organization is typically chosen for components that do not require

any local adaptation, but can be used globally in one standardized execution.

Leadership approach One region takes over the lead for a LEG, but engi-

neers from other technical centers are fully integrated members who form

one team. Each regional engineer contributes specialized, local knowledge

and, possibly, takes on responsibility for defining localized executions of a

basic global standard. This kind of set-up is especially effective when it

mirrors a purchasing organization that also acts via lead and regional buyers.

Local execution approach Development exclusively addresses regional

needs for parts or variants with limited (or no) need for global standard-

ization. Local development is undertaken by regional technical centers that

exchange ideas with colleagues from other regions.

Cross-functional teams

To speed up the innovation and development process, it is important to work

on various aspects of a product development in parallel. This is true not only

for engineering and developmental activities, but also for areas such as

purchasing, production, marketing, and sales. Making sure representatives of

such functions are included very early on in the development process is

strongly recommended, as is their involvement in the work being done by the

LEGs.

To achieve this, the LEGs are given central support by the lead engineer.

He is linked to other departments (such as purchasing, production, and

sales) through cross-functional teams, reflecting the whole value creation

chain of a company. Ideally, the lead engineer assigns one representative

from each of the purchasing, production, and sales departments to each

LEG. For example, one lead buyer might be assigned to one or several

LEGs, ensuring that all developmental activities are backed up by a supply

base that will be able to support deliveries for a new vehicle on time.

Standardized processes

Common processes are a prerequisite for harmonizing component and

vehicle development, using efficient work plans and introducing quick

decision-making routines. Equally as important are well-defined escalation


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and mediation processes, together with change management procedures and

standardized data warehousing. The lead engineer is the driver of com-

munication for his LEG. He will coordinate and harmonize the different

activities within the group, and will make decisions wherever necessary.

While doing so, he will respect the input of his counterparts to make sure

that regional needs are well reflected in his decision and in the overall LEG

strategy.

The lead engineer also sets the pace for the LEG, and is responsible for

phasing the activities of his LEG into the overall development plan. To

ensure that there is a common pace for the overall development process

and to ensure that signals are well understood down to the most minor sub-

project, milestones and quality gates need to be standardized by the lead

engineer and reflected in each LEG’s work plan. The same is true for

technical specifications, whereby common definitions and wording are

required to make sure that parallel developments do not get out of control.

Standardized KPIs and performance measures

To implement and anchor the described processes and structures in the

organization, it is important to introduce common target setting and

management by objectives (MbO) measures. Defining globally applicable

key performance indicators (KPIs) has proven to be a very powerful tool

to ensure top performance across the organization.

Common targets and measures need to be implemented for lead and local

engineers and also, ideally, for their counterparts, lead and local buyers.

While defining measures, it is essential that companies set quantitative

targets (meeting of cost targets, deadlines, and so on) that can be easily

quantified at set times. Setting only qualitative targets (such as ‘adherence

to global processes’) is unsuitable for fostering trust and cooperation

between international colleagues. Only if a transparent system of targets,

KPIs, bonuses, and premiums is introduced, can companies expect people

from all regions to cooperate.

Global IT systems

Communication between global colleagues is of the utmost importance.

Yet, good language skills and company-wide telephone books alone do

not guarantee open communication channels. More important is the

implementation of linked IT tools that allow for seamless data exchange


9780230_217805_05_ch03.3d 5/29/2008 09:54:54

and transparency between all sites. Attention should be paid to the

compatibility of IT, unified groupware solutions and the sharing of

knowledge.

Compatibility of computer systems or data formats An example of

this is introducing SAP company-wide as the sourcing and bookkeeping

standard, or selecting one global CAD standard. Compromises might be

necessary. It will probably be more important to install a system that

enables barrier-free communication than to have a system that is the best

of its kind, yet lacks communication and data transfer capabilities.

Unified groupware solutions E-mail, e-conferencing, net meeting, data

warehousing, and workflow management systems need to be standardized

and harmonized in order to enable trouble-free, automated communica-

tion between all sites.

Sharing of knowledge The creation of a know-how database in a

central, unified format is recommended in order to make know-how

accessible company-wide. The tendency to ‘reinvent the wheel’ must be

avoided – but is, however, seen so often in large, international companies.

Since establishing a comprehensive data warehouse requires a significant

amount of manpower, topics to be stored in the data warehouse should be

screened, gathered and prioritized with care. IT solutions will never

completely replace personal interaction between colleagues from different

regions. One of the duties of lead engineers is to create the time for periodical

group reviews or meetings that address overall work progress and upcoming

challenges. Recognizing and rewarding success in a face-to-face context is a

duty, too.

Implementing the lead engineering concept

All six key elements of the lead engineering concept need to be individually

adapted when being implementing at a company, or in an alliance or R&D

network. To ease that adaptation, companies should discriminate between

the short, medium and longer-term steps that need to be taken.

In the short term, the logic of a product’s structure – separation into

modules, systems, sub-systems and parts – needs to be standardized. This

should always be the very first step. Only if the perimeter/separation of a

sub-system is commonly defined, is it possible to work in parallel on sub-

systems without interfering with the adjacent sub-systems. For example,


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does a car-radio include the connection wires to the loudspeakers or do

they belong to the dashboard or even the loudspeaker/amplifier/sound

system module? Based on this common understanding and structure of a

system, LEGs will be able to their work to maximum efficiency.

In the medium term, harmonizing business processes and the organi-

zation of departments should be the primary goal. Escalation paths need to

be defined to permit rapid decision-making when conflicts arise. The

introduction of standard targets and balanced scorecards is the best means

by which to support the harmonization process.

In the longer term, a vision should exist to harmonize all business

processes and to introduce standardized IT solutions. Departments such as

purchasing and sales also need to be reorganized to ensure that they reflect,

at least to some degree, the R&D organization’s common structures.

All of the above steps must be fully backed by the top management and

the HR department. Top management will need to take active steps to

steer, lead and communicate all changes, and to express clearly the goals

that will be reached because of the reorganization. In parallel with the

steps taken by the top management, the HR department should work out a

detailed personnel plan that includes educational aspects for all employ-

ees. Cultural training to help employees avoid culture clash is particularly

helpful in the early stages of a newly established international partnership

or alliance. Furthermore, rotation programs provide staff with a greater

understanding and deeper knowledge of their new partners. To ensure

productive and amicable interaction company-wide, KPIs, MbO pro-

grams, bonuses, and premiums need to be aligned.

There is a price to pay for implementing the lead engineering concept.

Accomplishing it will take time and effort. It cannot be tackled as a

secondary exercise. The concept cannot be implemented successfully

without detailed planning, sufficient budget and the full-scale involvement

of the top management. Political maneuverings can easily topple the lead

engineering concept, if the proper support is not given from the beginning.

Lead engineering in real life

Roland Berger designed, adapted and implemented the lead engineering

concept at one of the world’s major vehicle manufacturers, which has three

business units on three continents. Each of the three business units produces

similar products with their own individual R&D departments. The

expectations for savings through the introduction of a lead engineering

concept were high, as the vehicle manufacturer expected substantial

savings to occur by unifying and rationalizing the R&D workforce.


9780230_217805_05_ch03.3d 5/29/2008 09:54:54

Example: The automotive industry

In a first preparatory step, cross-functional ‘pilot’ project teams weredefined, including representatives from the engineering and purchasingfunctions. These teams were then asked to analyze the technicalsimilarities between the different products manufactured and to comparecost-per-function data for certain selected components. Saving potentialwas calculated and the implementation of changes commenced.

As the savings implementation in these areas was convincing, themanufacturer decided to move beyond the ‘pilot’ teams and to roll outthis kind of core-team structure through all of its R&D organizationsaround the globe, which proved to be a very ambitious task. Differentstrategies, concepts, technologies, materials, and philosophies had tobe compared, harmonized, and adapted before a lead engineeringconcept could be implemented. This was to be integrated with the leadbuying organization already in place.

The client agreed to a common product structure, which dividedvehicles into groups of functional systems and components. Each systemand component was assigned to a permanent core team of threeengineers, one from each business unit. One of the engineers acted as alead engineer and was responsible for defining the overall strategy,developing a modular construction system in line with the overall systemarchitectures. His task was also to control diversity, technical concepts,and the applications that were within his scope of responsibility.

To institutionalize the integrated approach between lead engineer-ing and lead buying, the lead buyer was made a permanent member ofthe lead engineering team. Experts from other functions (such as theproduct planning, sales, and legal departments) joined the teams asrequired.

Major savings could be achieved with the integrated lead buying andlead engineering approach. In addition to commercial savings, up to9 percent of purchasing volume could be reduced via technical modi-fications and standardization. Additionally, between 15 percent and40 percent of the number of parts per component or system couldbe eliminated, and the number of suppliers was finally reduced by30 percent.

The integrated lead engineering/lead buying approach convincedthe client of its efficacy. ‘The introduction of this integrated conceptwith the aligned organization provides us with a competitive edge thathas to date been unique in the history of our company’, he said.


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Outlook

In a world of multinational companies, cross-country alliances and strategic

partnerships between manufacturers from all regions of the world, the lead

engineering approach has proven to be a valuable concept. It enables

companies to channel communication, improve internal cooperation and

steer global development. In the hurly-burly of change, it provides

guidelines and orientation, helps companies tap synergies within global

R&D structures, and enables the rapid realization of savings.

While the lead engineering concept acts as a compass for companies to

navigate an ever-changing environment, the concept itself forces change

upon the organization. The previous authority of historically grown

structures, home turfs, and spheres of political influence are no longer

valid. The willingness to embrace this change is decisive for the success or

failure of the project.

Looking at the automotive industry, lead engineering will be a necessary

concept in the years to come. It is expected that up to 60 percent of value

created during the production of a vehicle will, in the future, be done at

OEMs, so these need to be increasingly linked and integrated within the

vehicle manufacturers. Borders between OEMs and suppliers will become

increasingly invisible, with competencies spread between the two. IT

systems will allow for seamless integration and barrier free communication.

Yet, these interactions need to be managed. Chaos and failure will result

when communication and processes are not managed properly. Lead

engineering has already proven its value in the automotive industry.

Without a doubt, other industries will benefit from the lessons that car

manufacturers have already learned.

Further reading

Aberdeen Group (ed.) (2005) ‘The Global Product Design Benchmark

Report: Managing Complexity as Product Design Goes Global’. Boston.

Fecht, N. (2005) ‘Global Footprint statt Nomadentum’, Automobil

Produktion, 7: 52–3.

J€urgens, U. (ed.) (2000) New Product Development and Production

Networks: Global Industrial Experience. Berlin.

Roland Berger Strategy Consultants (2007) ‘Solving the Powertrain

Challenge’. Stuttgart.


9780230_217805_05_ch03.3d 5/29/2008 09:54:54

Roland Berger Strategy Consultants (2007) ‘Globalization of R&D –

Drivers and Success Factors’. Stuttgart.

Zetzl, R. (2004) ‘Engineering Collaboration in der Produktentstehung:

Mehr Wertsch€opfung aus besserer Zusammenarbeit’, ZWF – Zeitschrift

f€ur wirtschaftlichen Fabrikbetrieb 99, 12: 698–701.


9780230_217805_06_ch04.3d 5/29/2008 09:53:40

CHAPTER 4

Success factors and levers for bestpractice in innovation management

Stefan P€otzl, Thomas Kohr andMichael Zollenkop

Introduction

Innovation is becoming increasingly important for companies in many

industries. Companies today are often so dependent on innovation that, if

they were to fail to bring products to market, they would risk losing

substantial market share at a rapid pace. Phonak, the Swiss producer of

hearing devices, considered a ‘hidden champion’, makes 65 percent of

its turnover with products it has brought to market in the last two years.

This philosophy applies in more traditional industries, too. For example,

Wittenstein, a German producer of gearboxes, generates 85 percent of its

turnover with products fewer than five years old. To survive global

competition, most companies simply have to innovate.

The question is whether it pays off. Are innovative companies really more

successful than others? The answer is ‘yes’. According to a sector report on

innovation published in 2006 by the Centre for European Economic

Research, ZEW, companies with a young product portfolio have a signif-

icantly higher return on sales. This trend is consistent across all industries.

The reason for this is clear: companies with many innovations either lead a

whole market segment or, at least, dominate their ‘niche’. This is more

profitable than the average me-too or mass markets, particularly where

companies can only rehash what other companies have already created.

Most companies have recognized this fact and have made ‘being innovative’

part of their strategy. Nevertheless, not all companies are equally successful

in turning their target into reality. Many innovations continue to fail.

This chapter puts the spotlight on the success factors for innovation and

shows how the best companies tackle them. We will also talk about an

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innovation toolbox developed by Roland Berger, which is a proven set of

tools and levers to be applied during the different phases of a development

project. We will also discuss a project during which this toolbox was

successfully used.

The challenge of innovation: how to manage it in a businesscontext

In most companies, idea creation is not a problem. Most employees have

excellent ideas. The problem is to distinguish between good and mediocre

ideas, and how to foster the one and shelve the other.

Based on our experience, the major challenges in innovation manage-

ment are:

• Prioritizing the right ideas and allocating the right level of resources

• Conducting the correct ‘make-or-buy’ decisions in innovation

• Meeting shrinking development budgets

• Realizing shorter development lead times

• Maintaining increasingly high quality standards

• Providing a more customized product portfolio with more variants

Automotive Electrical Mechanicalengineering

Medicine tech.,measuring andcontrol

Moreinnovativecompaniesshowconsistentlyhigher profit

7.7

10.3 10.3

4.7

9.0

22.9

5.2

10.3

8.0

3.6

5.97.8

Return on sales �0% Return on sales 0–4% Return on sales �4%Key :

Figure 4.1 Share of sales with original product innovation in differentindustries (%)Source: Center for European Economic Research (ZEW), SectorReport, ‘Innovation’, May 2006.

62 Stefan P€otzl, Thomas Kohr and Michael Zollenkop

9780230_217805_06_ch04.3d 5/29/2008 09:53:40

• Successfully managing market launches

• Meeting customer requirements regarding function and price.

During the innovation process, focus on the customer is often lost.

While customer involvement is usually high in the early and late phases of

development projects – when defining the first specifications and launch-

ing the product – involvement dries up during the detailing phase and the

various change procedures.

A survey amongst R&D leaders in mechanical engineering conducted

recently by Roland Berger confirms this problem. When asked about the

major reasons for failed innovation, 38 percent ranked ‘missed market

requirements – the technically perfect solution’ in first position (see

Figure 4.2). Other answers, especially the ‘me-too product’ or ‘products

with competitive disadvantages’, also hint at missed customer needs.

Far too often, technical perfection has the upper hand, leading to over-

specification and overly expensive products.

The right approach would be to:

• undertake a clear analysis of the functions required by the customer

• define their value to the customer and their target cost

• design the product features accordingly.

Missed marketrequirements – thetechnically perfectsolution

38

19

13

7

5

18

The me-too product,facing a competition barrier

Products withcompetitivedisadvantages

Products facingweaknesses in

the marketenvironment

Products withtechnical

weaknesses

The price crash • Analyze necessary product functions

• Define value of functions for the customer and their target cost

• Design product features according to this information

• Objective: Avoid over- specification and over- engineering.

Value analysisin R&D projects

Figure 4.2 Innovation in the mechanical engineering industry – failurereasons in commercialization (% of answers)Source: Survey among R&D leaders in mechanical engineeringconducted by Cooper–Roland Berger.

Best practice in innovation management 63

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This process is called value analysis. Involving the customer is vital.

Examples of failed innovations are endless. One of the most spectacular

examples is the aircraft Airbus A380 whose market introduction was

delayed by almost two years. The financial damage to EADS, the parent

company of Airbus, was substantial. It suffered from significant market

capitalization loss, increased development cost, delayed and lost sales,

penalty payments and delayed break-even not only of the A380, but also

of other projects. The damage to reputation and customer trust is much

harder to quantify but most definitely not of minor importance.

Example: Airbus A380

The heart of the problem was a technical issue: construction errors inelectrical wiring. Different computer aided design (CAD) systems in theengineering sites in France, Germany and Spain are a probable reasonfor the wrong construction. Inadequately identified responsibilities inthe complex R&D network and limited competence to handle smallerproblems on a working level created the real problem. The internalcoordination process was extensive and time-consuming, and theexisting company culture led to many people not addressing issuesrather than dealing with them. Thus, the project leaders were often notinformed of a problem until very late in the product-creation process;the problem was left to escalate for too long and a solution was notdefined early enough.

Solving the technical issue was cumbersome, as engineering data hadto be manually converted between the different CAD systems, causing afurther delay of several weeks. Finally, production of the correctelectrical wires started much too late and production capacity could notbe increased sufficiently to make up for the delay. To put it in a nutshell:innovation management at Airbus failed, causing the companysignificant damage.

Another industry that is often in the media due to problems in the

innovation process is the automotive industry. Almost every original

equipment manufacturer (OEM) has had to conduct costly safety recalls,

which damage reputation. The reasons for this become clearer when one

looks more closely at how innovation performance requirements have

changed in the past years (see Figure 4.3). Model proliferation is tremen-

dous. Each year, increasing numbers of niche models, each bearing a long


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list of equipment options, are introduced on the market. At the same time,

development lead times – from concept approval to the commencement of

production– have shrunk. This has happened even though R&D capacity

is stable. Suppliers have become more involved in development as OEMs

focus on their core competencies, but also the efficiency of OEMs has

risen significantly. Intelligent product architectures, a clear development

organization with defined cross-functional processes, and application of

virtual engineering methods are just some of the issues OEMs have

tackled.

Despite these advancements, too many product launches continue to

fail. Mercedes also experienced this with its last E-class model. After the

launch of the new model in 2002, various technical problems occurred.

The most critical one affected an innovative electro-hydraulic braking

system. Some 1.3 million vehicles had to be recalled at a cost estimated at

⁄325 million. Sales for the E-class, the most profitable Mercedes model

for years, dropped drastically and did not recover for several years. The

company even considered renaming the new model in an attempt to avoid

long-term damage.

Textbox 4.1

Airbus A380

The Airbus A380 is one of the most prestigious industrial projects

ever – the largest commercial aircraft in the world, boosting the effi-

ciency of passenger transport. On January 18, 2005, Airbus introduced

the A380 to the public. The initial delivery date had been planned for

March 2006, to Singapore Airlines. Technical problems led to various

delays. The first aircraft was finally delivered in October 2007. After

announcing another major delay in October 2006, shares of EADS (the

parent company of Airbus) dropped short-term by 10 percent,

according to a report in the Swiss newspaper NZZ. Increased

development cost, penalty payments and lost orders were the

consequence. Overall, Airbus estimates the additional cost caused

by the delay at roughly ⁄5 billion. In addition, the development of the

A350 is significantly affected due to engineering capacities bound for

the A380. Today, the company is still struggling to recover from both

the financial impact and the damage to its image.


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3:4

1

Vehicle models marketed byEuropean manufacturers

Time from concept approval tostart of production

R&D budget development ofmajor OEMs1

Sales (%)

3

4

5

6

2000 2002 2004 2006

2

5075 75 75 75

75

75 88

138162

2000 2002 2004 2006 2008e

125

150163

213

238

15

20

25

30

35

2000 2002 2004 2006 2008e

MonthsNo. models

EuropeNorth America

JapanStandard modelsDerivates (e.g. soft-tops)

Key :

Figure 4.3 Innovation performance development in the automotive industryNotes: 1 Includes product development, corporate research.

2 Without financial services.

66

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Yet, the company reacted: Daimler is the first OEM to date to have

developed a series vehicle – its new Mercedes C-class – using a fully

integrated digital prototype. By simulating all major characteristics of the

vehicle, this prototype helps save development time, solves goal conflicts

and enables the company to test the overall vehicle concept in a virtual

stage. In the case of the C-class, not only crash safety and passenger pro-

tection have been simulated and tested with the digital prototype, but also

comfort (noise, vibration, roll-off ), operational stability, energy manage-

ment, air conditioning, and aerodynamics. These virtual methods have

existed, in theory, for several years. However, they were not systematically

applied in that integrated form until the C-class. IT systems performance is

still a critical aspect here.

Failed innovations, in most cases, are notched up to wrong decisions

and the behavior of individuals: this analysis is too easy. Individual

mistakes are made in all environments. It is the task of the innovation

management system to minimize mistakes, as far as possible, and to

make sure when something goes wrong that the issue is detected early –

guaranteeing that the problem can be solved in the most efficient way.

So, what distinguishes strong from weak innovation management? What

can companies learn from the best in innovation management? According to

our analysis and experience drawn from various projects, the following

criteria are important:

• Consistency – innovation strategy, performance targets, and the

necessary enablers need to be aligned

• Holistic approach – innovation organization, innovation process,

supporting systems/tools, and innovation culture need to be considered

• Cross-functional approach – innovation is not a pure R&D issue, all

functions need to be involved.

Roland Berger Innovation Toolbox

The Innovation Toolbox contains all the tools needed to ensure that the

criteria listed above can be fulfilled. It addresses all aspects of innovation

management with a specific set of levers and enablers that can be applied

flexibly according to the company and its specific business situation. The

toolbox consists of an integrated set of strategy, performance, and enabler

tools.


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1

I Innovation strategy

• Links innovation initiatives to corporate strategy and its targets

• Gives clear guidance on expectations and innovation performance targets

• Determines innovation effectiveness (doing the right things)

II Innovation performance

• Covers all aspects of value creation; that is revenue optimization, cost optimization, and time-to-market• Describes a comprehensive set of innovation levers• Determines innovation efficiency (doing things right)

III Innovation enablers

• Foster the sustainability of innovation optimization• Describe preconditions for innovation effectiveness and efficiency

Innovationstrategy

Revenueperformance

market

Costperformance

I

II

III

Innovationinfrastructureand systems

Innovationorganization

Innovationprocess

Innovationcontrolling

Timeto

Figure 4.4 Roland Berger Innovation Toolbox

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Innovation strategy

Innovation strategy should be viewed as the starting point for all innovation

activities. Ideally, it is derived from corporate strategy, thus ensuring a close

link with the intended corporate development. Corporate strategy sets the

scope of action by defining parameters such as future market positioning,

corporate growth targets or targeted future product portfolio. Innovation

strategy defines the targets and key guidelines for innovation activities,

including parameters for:

• The innovation project portfolio

• The innovation value-added

• The prioritization of projects with respect to financial and human

resources

• Key performance indicators (KPIs) for innovation activities.

Innovation strategy ensures that the focus is set on the right issues, direct-

ing all corporate innovation activities into the most effective areas.

Innovation performance

Innovation performance – the second tool for successful innovation

management – is crucial for making innovation activities efficient. The

Innovation Toolbox contains a comprehensive set of thirty levers with

which to optimize performance with regard to revenues, cost, and time-to-

market. In a development or innovation project, levers are selected based

on their ability to bring the right sort of change for a particular company.

First, the relevant levers are determined according to current weaknesses

in innovation management and the project target. Second, the optimal

portfolio of levers is selected based on the scope of changes and the

resources available to apply them.

Both the potential effect and the effort required to apply levers vary

widely. In general, the higher the effect and the lower the effort, the more

quickly the optimization measures should be tackled (quick wins). The

higher the effects and the effort of application, the more management

attention is required to select and implement the levers. For the ratio of

effect and effort, industry characteristics and company-specific circum-

stances need to be considered. A general overview is provided in Figure 4.5.

Revenue performance levers aim at creating higher rates of innovation

compared with a turnover increase reached via innovation. The most


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07 Regional adaptation08 Critical mass strategy09 Standard setting10 Network effect strategy11 Lead user integration12 Strategic pricing

13 Product modularization14 Value analysis15 Design-to-cost16 Target costing17 Cross-functional teams

Cost levers

Timing levers

High

29

Low

Application effort High

Effect onrevenue,cost, or

timing

1

Low

18

01 Creativity techniques02 Idea management03 Innovation portfolio mgt04 First to market strategy05 Complementary offering06 Low end disruption

Revenue levers

23 Technology roadmapping24 Product roadmapping25 Simultaneous engineering26 Development virtualization

18 Heavyweight project mgr19 Complexity mgt20 Benchmarking21 Supplier integration22 Continuous improvement

27 Patent licensing28 R&D partnership29 R&D outsourcing30 Market entry test

2

3

4

5

6

7

8

9

10

13

14

15

16

1724

25

2328

1112

19

20

21

22

26

27

30

Figure 4.5 Performance measures for systematic innovation management

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powerful levers include ‘innovation portfolio management’ and ‘first-to-

market strategy’. Balancing the project portfolio in terms of revenue

potential, cost, risks, and timing of market entry is vital for foreseeing

future cash flows and revenue development. This is the goal of the ‘inno-

vation portfolio management’ lever. The lever ‘first-to-market strategy’,

on the other hand, is crucial for winning early adopters of an innovation as

customers. This often creates the basis for market leadership in the long

term. Further important revenue performance levers include modifying

and tailoring the portfolio to additional markets (new regional markets,

low-end markets such as emerging or developing countries, or comple-

mentary products for existing markets) and measures for the diffusion

and adoption of innovation (for reaching critical mass rapidly, setting

standards, and creating external network effects).

Cost performance levers aim at generating innovation more cost

efficiently. Here, product modularization (with toolkits for product

modules) and complexity or product variant management play an important

role to ensure that companies avoid reinventing the wheel in product

development. All modules lacking the potential for differentiation, which is

appreciated by customers, need to be examined and evaluated carefully so

that development cost can be allocated to a higher number of products, thus

reducing the cost burden per unit. Moreover, methods such as value

analyses, design-to-cost, and target costing contribute to cost efficiency by

scrutinizing either the value to customers of certain product functions or by

challenging the intended technical solution for those functions.

Timing related levers form the third performance category. In innovation

management and product development, timing is crucial. On the one hand,

time-related issues are often more important than cost-related aspects since

timing – especially of market entry – largely determines the remaining

time within the product lifecycle for amortizing the incurred develop-

ment cost. Time saving technologies such as simultaneous engineering or

virtualization of development processes (virtual prototyping or testing,

for instance) might be decisive for the overall commercial success of an

innovation project. Levers – such as partnerships in R&D, or even outsour-

cing part of the development work – also need to be considered for time-

efficient product development. On the other hand, the right timing often

depends on external events. Windows of opportunity need to be grasped

for optimum success. Technological maturity, the development of market

requirements or competitor action need to be monitored in order to

determine the appropriate point for market launch, product differentiation


9780230_217805_06_ch04.3d 5/29/2008 09:53:42

or changes in pricing strategy. Technology and product roadmaps based

on weak signals external to the company and on company specific scenario

planning are important levers for the best possible preparation in terms

of timing.

Innovation enablers

Innovation enablers, the third category of tools, are a prerequisite to ensure

performance optimization is effective and sustainable in the long term. The

Innovation Toolbox examines issues and success factors in four dimensions:

• Innovation process – that is, a quality gate system, effective interface

descriptions and coordination between the concerned corporate

functions and departments in product development

• Structural organization – that is, level of (de-)centralization and business

unit specific activities, and the global footprint for product development

• Infrastructure and systems – that is, tools such as CAD, virtualization

techniques, and rapid prototyping

• Innovation controlling – that is, innovation KPIs, an innovation

scorecard, and project management tools for individual projects.

The toolbox is a treasure trove of levers, success factors, and cross industry

project experience that enables us to combine the appropriate actions for

any innovation-related challenge a company might face – whether it be

on corporate or on business unit level – and for all stages in product

development. We show how the toolbox works in the following case study.

Case study: ‘Innovation to cash’ at a leading Europeanutility company

Roland Berger has successfully applied the Innovation Toolbox in variousprojects. This approach was used recently when working with a leadingEuropean utility company. The company had already established theframework for successful innovation management. A Corporate Innova-tion unit had been installed that was responsible for managing anddriving innovation in the group. The internal collaboration with thethree business units had been roughly defined, an external network tosuppliers and universities had been structured in a dedicated forum, anda group-wide technology plan had been established.


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The questions, however, were:

• Are the current innovation efforts focused on value?

• What does the ‘ideal project portfolio’ look like?

• What is the ideal innovation process and innovation managementmethodology to capture the full value of innovation?

The core question was, in fact, how innovation could be used to a maxi-mum extent to reduce the company’s cash-out for the distribution business.

In the first phase, the project team carried out an audit of the existingsituation. The team examined the current innovation process andanalyzed the existing innovation portfolio, with a special focus onthe distribution business unit. External benchmarking, focusing on boththe innovation processes and portfolio, completed the diagnosis. In thesecond phase of redefinition, the Innovation Toolbox played a majorrole. Several levers were selected and customized to the client’ssituation, in order to establish and steer an entire innovation portfolioand manage innovation projects. Recommendations on how to adjustthe current innovation portfolio with regard to relevant technologiesand focus areas were worked out. The third and final project phasefocused on defining an implementation plan for the defined concept.

The results of the audit phase showed clear deficits in the innovationprocess:

• No clear trigger for idea evaluation and prioritization

• No formal project set-up; projects started by coincidence or by CEO’sorder

• No standard project planning and reporting, each project ‘reinventsthe wheel’

• Missing commercial focus of projects – for example, no business case

• Missing checkpoints and deliverables/KPIs along the innovationprocess

• No clear decision point for implementation/investment, despitedecisions about huge investment as a result of innovation projects

• No systematic review of project success and gathering of lessonslearned.

Overall, the company lacked a systematic way to manage andmaterialize on innovations.

Using the Innovation Toolbox, the project team defined a holisticconcept of innovation management, which is shown in Figure 4.6. Atthe heart of the concept is the quality gate method for managingprojects. A structure of six quality gates was introduced that clearlydefined the major decision points in an innovation project, including


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Strategy

• Overall innovation strategy and objectives

Realization

Objectives/framework

(e.g. budget,resources)

Portfolio management

Consoli-dationof projectreporting

Various analyses/views of theportfolio possible

• Overall budget/resource requirements• Risk portfolio• White-spot analysis

Overall portfolio planningand decision making

• Innovation launch plan• Long-term budget and resource planning• Initiation/cancellation of projects

Defined KPIs/deliverables atall stages

• Detailed project status• Financial KPIs• Resource requirements (budget, personal)• Probability of success• Etc.

Reporting

Innovationprojects

Decisions/actions

Project …Project 2

Project 1

QG4

09/07

QG5

03/08

QG6

05/08

QG3QG2QG1

Figure 4.6 Innovation portfolio management concept

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detailed deliverables. Standardized reporting templates were created thattoday form the basis for consolidated innovation portfolio reporting.These standardized inputs from the projects, which can be led either bythe Corporate Innovation unit or another business unit, form the basis fora portfolio management function. This should become one of the corefunctions of the Corporate Innovation unit. This function is responsiblenot only for portfolio reporting, but also for the active steering of thelaunch and cancellation of projects, and for regularly releasing thecorporate innovation launch plan – an item that is significantly importantfor shareholders.

For the analysis of the innovation portfolio itself, the first step was tomap the entire innovation portfolio in the company, analyze the align-ment of the innovation projects with the strategically set priorities, andcheck the impact of the projects in relation to the big cash-out blocks.

The results of the analysis were surprising to everyone. The runningprojects neither aligned with the strategic objectives, nor did theysystematically address the major spend blocks. Projects with the highestbudgets focused on very little optimization potential, whereas verysignificant fields of cash-out had not been addressed systematically atall. A missing portfolio management function was clearly responsible forthis situation.

Based on these results, a plan was introduced to shift the focus frompure asset-driven innovations to process items such as maintenance orbreakdown processes, which had not been considered before.

In the final phase of the project, a detailed implementation processwas defined. The quality gate structure to be implemented across allbusiness units was demonstrated in pilot projects. The adjustment ofthe current innovation portfolio in distribution was started immediately,focusing on the major innovation projects first.

Overall the project was a tremendous success. The Innovation Toolboxsupported the project team in the complete redefinition of innovationmanagement and the innovation portfolio of a major European utilitycompany in barely three months.

Outlook

The existence of many companies is closely linked to their ability to

manage innovation successfully. Companies are obliged to innovate, and

experience shows that there is a clear correlation between a company’s

innovation performance and its commercial success. Managing innova-

tion on a global scale is vital to remaining a first league player.


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Textbox 4.2

Globalization of R&D – success factors

Innovations play a key role in helping companies to remain

competitive and to grow in a globalized economy. To meet

customer requirements on a global scale and to harness all available

know-how and technologies, companies need to internationalize

their innovation process. This often involves globalizing R&D

activities.

Roland Berger Strategy Consultants conducted a study, together

with the ESB Research Institute, which examines the strategic

aspects of R&D relocation. Over 100 companies from six different

industries were surveyed and additional expert interviews of key

players in these industries were conducted. Five guiding questions

formed the basis of the survey:

1 What drives companies in globalizing their R&D?

2 How do companies pick their R&D locations?

3 How do companies organize their R&D network?

4 What tools do companies apply for managing the global R&D

process?

5 How do companies communicate and exchange know-how

globally?

Based on the degree of importance of access to the market and

technology, companies can be grouped into four clusters: globaliza-

tion leaders, global marketers, technology hunters, and opportunistic

players.

Globalization leaders view access to the market and to technology as

being of equally high importance. They create a network of central

research and local development centers. Activities are coordinated

throughout the entire global R&D network.

Global marketers view access to the market as being more

important than access to technology. They generate basic innova-

tions and product platforms in global research centers. These are

transformed into products for local markets in local development

centers.


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Technology hunters view access to technology as the main reason

for globalization. They focus R&D efforts on a small number of

global research centers that specialize in individual research areas.

Local customization of products is limited.

Opportunity players are not driven to globalize R&D system-

atically but, rather, base their globalization policy on specific and

individual business requirements. They drive their R&D efforts

mainly out of their home base. Global efforts are limited and

typically driven by individual client or product requirements.

Six success factors could be distilled from the information

gathered:

1 Start from corporate R&D strategy. Companies need to assess

whether it is technology, market access or opportunistic cost

reduction that drives the globalization of R&D.

2 Concentrate technological know-how as much as possible.

Leveraging global know-how is more effective when a critical

mass is reached in single places. Bundling of know-how in one

place is necessary.

3 Develop market know-how in decentralized units. Local know-

ledge requires a certain degree of autonomy to be an effective

innovation driver. Central units should provide basic research, the

overall strategy, and should monitor R&D activities.

4 Be pragmatic in applying R&D management methods. Tools

for managing R&D processes – such as stage gate or quality gate

processes, R&D cycles, project controlling or IT platforms – are

necessary in any global R&D, and have become standard in most

companies.

5 Manage burdens of historical growth. R&D networks need active

management. Historically, grown networks are seldom efficient if

the organizational structure is not planned or controlled according

to the corporate strategy. Clear directions and guidelines are

necessary.

6 Implement organizational changes carefully. Transition and

change processes need to be handled carefully to avoid losing key

personnel. Know-how is predominantly bound to people. Radical

changes can make it more difficult to retain experts and the

carriers of knowledge.


9780230_217805_06_ch04.3d 5/29/2008 09:53:43

Innovation clearly has to be on the agenda of every CEO. It has to

involve all areas of a company, not merely the R&D department. The

good news is that there is a proven set of tools – the Innovation Toolbox –

that might help to improve the efficiency of innovation projects.

Further reading

Heidtmann, Volker (2007) ‘Gewusst wo! Forschung und Entwicklung

passgenau globalisieren’, in Roland Berger Strategy Consultants,

Executive Review, 2: 18–23.

Kerka, Friedrich, Kriegesmann, Bernd, Schwering, Markus G. and

Happich, Jan (2006) ‘Big Ideas’ erkennen und Flops vermeiden –

dreistufige Bewertung von Innovationsideen. Institut fur angewandte

Innovationsforschung e.V. (iAi), Bochum.

Leysieffer, Hans (2005) Innovationsmanagement bei der Phonak AG.

Vortrag Swiss Innovation Kongress 2005, http://www.zpeportal.ethz.

ch/events/ swissinnovation/downloads.

Roland Berger Strategy Consultants (2006) ‘Innovation in Mechanical

Engineering – Failure Reasons in Commercialization’, Survey among

persons in charge of R&D in mechanical engineering.

Roland Berger Strategy Consultants (2007) ‘Globalization of R&D –

Drivers and Success Factors’. Study, ESB Research Institute, Reutlin-

gen University, June.

Zentrum fur Europaische Wirtschaftsforschung GmbH (ZEW) (2006)

ZEW Branchenreport Innovationen Elektroindustrie, Fahrzeugbau,

Medizin-/Mess-/ Steuertechnik, Optik, Maschinenbau. Jahrg 13, 2, May.


9780230_217805_07_ch05.3d 5/29/2008 09:52:45

CHAPTER 5

Smart engineering processes: ‘madein Japan’

Ken Mori and Satoshi Nagashima

Introduction

When people hear ‘operations excellence in Japan’, manufacturing inno-

vations instantly spring to mind. This is not surprising considering the

revolutionary concepts ‘just in time’, ‘cell manufacturing’, and ‘total quality

control’, all of which bear a Japanese hallmark. Operations excellence in

Japan, however, is not limited to manufacturing but spreads into other areas,

such as cost control, supplier management, and product development too.

This article concentrates on tried-and-tested product development strategies

that originated in Japan, such as front loading, lead time reduction, and cost

planning. The focus is turned sharply on the automotive industry, the

birthplace of these groundbreaking R&D organizational processes.

To understand operations excellence in product development in Japan, we

have to take a short step back into history. In the early 1990s, two professors –

Dr Takahiro Fujimoto and Dr Kim Clark – analyzed the efficiency of product

development at various automotive manufacturers in Europe, North America

and Japan. They found that Japanese firms had significantly shorter lead

times, a lower defect level, and better manufacturability than their

competitors in these other regions. According to the professors, one of the

reasons for the high efficiency of Japanese firms was the process led by what

they called ‘heavy weight product managers’ (HWPM).

The product development organization of all automotive manufacturers

in Japan comprises functional departments such as design, body, chassis,

power train, electronics, and testing. The importance of the HWPM

becomes clear when one realizes that if those functional organizations are

considered as the vertical axis, then the HWPM is the horizontal axis. An

HWPM is completely responsible for a vehicle model and works closely

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with all of the functional organizations, even though he does not belong

to any of those functional departments. This is a version of what is known

as matrix organization, shown in Figure 5.1. By integrating different

functions such as design engineering, manufacturing engineering and

marketing, the HWPM facilitates the speedy completion of a project.

History of HWPM

It is generally accepted that Toyota was the first company to introduce the

concept of HWPM. An earlier form of these product manager heavy-

weights had existed at Toyota since 1949, when President Kiichiro

Toyoda appointed Kenya Nakamura to the position of Shusa (chief) after

having decided to develop a pure Japanese car. ‘A Shusa is the

representative of the President and has the ultimate responsibility for

developing a new vehicle,’ the President said as he inducted Kenya

Nakamura to this elevated position. From its very inception, the position

of HWPM has been synonymous with ultimate responsibility. Holders of

this position are granted enormous power from top management.

What Nakamura did once he was appointed as Shusa characterizes

product development in Japan to this day. He listened to potential users.

Since taxi companies were the typical customers of passenger cars in

1949, Nakamura visited them and spoke directly with the drivers to find

out their needs. This practice is still alive at Toyota and other automotive

firms in Japan. An HWPM always speaks with potential customers, and

sometimes even lives with them to gain a thorough understanding of their

real – but often hidden – needs and requirements.

Design Body Chassis Power-train

Electro-nics

Testing

HWPMModel 1

HWPMModel 2

HWPMModel 3

HWPMModel N

...

Figure 5.1 Matrix organization

80 Ken Mori and Satoshi Nagashima

9780230_217805_07_ch05.3d 5/29/2008 09:52:45

Toyota continued to use these special product managers to develop

other cars, and a matrix organization was created. Rather than having

the matrix organization designed by top management, organizational

specialists, or even management consultants, it was created naturally by

recreating Kenya Nakamura’s team in the functionally formed organiza-

tions. Learning from Toyota, the product development organizations at all

Japanese automotive manufacturers now have a similar set-up.

How can the HWPM be successful?

Although the shape of the organization resembles a matrix, the

organization concept underpinning Japanese automotive companies is a

little different from typical matrix organizations elsewhere. A member of

a matrix organization generally reports to two bosses. Yet, engineers at

Japanese automotive companies report officially to their functional

department heads only. They do not report to the HWPM.

The HWPM has his own small team, often consisting of about ten

engineers. The HWPM does not have authority over HR issues such as

performance evaluation or promotion decisions. Despite this, he still

needs to be able to lead the vehicle development program and manage

hundreds of engineers. How is this possible? There are four main factors.

Strong empowerment by top management The president of Toyota set

the standard when he bestowed immense power on his Shusa. All other

Japanese automotive companies followed that pattern. Many western

automotive firms, particularly American ones, later introduced the HWPM

concept. Unfortunately, they rarely attained their objective of improving

product development practices. Part of the reason for their failure rests

with power: HWPMs in the United States were not given sufficient clout

by top management. Without this, they could not reach the desired goals.

The HWPM has the ultimate responsibility for each program’s results,

and he is the ultimate authority on key decisions. An engineer who

officially reports to his functional head and wants the program to be

successful has no choice but to follow the HWPM’s directions. When he

develops technology that is specific to his own field, the engineer needs to

follow directions from his functional head. In the vehicle development

program, however, it is the HWPM’s voice to which he should listen.

Representative of customers Once the design has been agreed upon,

the engineering organizations of Japanese automotive companies stop

interacting with the market, with the exception of focus group interviews

and consumer clinics. The HWPM is the only voice they hear in their daily

Smart engineering processes: ‘made in Japan’ 81

9780230_217805_07_ch05.3d 5/29/2008 09:52:45

engineering work. He represents the customer. Since employees at

Japanese automotive manufacturers are trained to be customer focused,

they cannot neglect the voice of the HWPM, who speaks for the customer

and reflects his innermost needs.

This is in stark contrast to the beginning of product development, when

concept planners, designers, marketers, engineers, and the HWPM travel

through cities and towns in Japan and in other parts of the world to gain a

sense of the market and to understand the desires and requirements of users.

They do not rely on consumer trend data. Instead, they speak face-to-face

with consumers, and even stay with the target users for weeks in some cases.

Well-defined processes HWPM’s often cite well-defined processes for

their success. It is more the company’s well-defined process and less the

official human resource authority that helps them attain their goals. At

each design review, items to be discussed are clearly defined and HWPM

approval is required at each event.

We asked an engineer why he worked so hard for the HWPM who was not

his official boss. He answered: ‘Because I saw my predecessors (sen-pai)

work hard for their HWPMs’. This sense of tradition is alive at Japanese car

manufacturers. While all Japanese original equipment manufacturers

(OEMs) change their processes, especially to shorten development lead

time, the fundamental philosophy remains the same. The HWPM is the

driver of the process. He has ultimate responsibility and authority.

Capability of HWPM When asked for the reasons why their HWPMs

are so successful, Japanese engineers at automotive companies often refer

to their capability and personality. Put simply, only the tried-and-tested

have a chance of becoming a HWPM. These heavyweights have often

worked as a member of the HWPM team for 15 years or more before being

considered for the position. The skills, negotiation style, and personality

of potential HWPMs are scrutinized over years. The very existence of the

‘Ten Shusa Requirements’, a set of commandments of sorts, provides an

indication of how high Toyota’s expectations of a Shusa are.

Practices derived from the HWPM concept

An HWPM oversees the entire process of product development and all

related functions. Several practices were developed, based on the

initiatives of HWPMs, to improve product development efficiency and

effectiveness. These smart engineering processes include front loading,

lead time reduction, and cost planning.


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Front loading

Companies have much greater freedom during the early stages of product

development than in later stages. More than 80 percent of product costs

are determined in the concept development phase. Taking this knowledge

to heart, Japanese automotive manufacturers and their HWPMs have

made efforts to improve front loading, which means investing more

engineering resources in the earlier stages of the processes.

The ‘set-based process’ is a general practice followed in Japanese firms

for front loading. Some say that it is a Toyota practice: this is not quite

true. It is a practice that most Japanese manufacturers have followed for

decades. If a team develops a component, the simplest and most natural

procedure is to design the component, test it, identify problems, fix the

problems, and improve the product design. In this process, a single

product is improved continuously, which is why this process is called the

‘single design method’.

Japanese firms, in contrast, develop a set of several components with

different specifications; different levels of performance for some compo-

nents, and different shapes in other components. At the same time,

engineers responsible for adjacent components do the same. They also

develop several designs with different parameters. Together they evaluate

the ‘fit’ with adjacent components, assess the attainment of objectives, and

select the better options. They narrow the parameters. They then develop a

few designs with a narrower range of deviation in parameters. After a few

trials, they reach the final parameter. This method requires greater

resources allocation in the early stage, but allows savings later.

Translated for non-engineering experts, the difference between the two

processes can be explained using an analogy. Three busy businessmen are

trying to set a meeting. In the world of the ‘single design method’, Mr A

suggests a time slot, Mr B says ‘no’, then Mr A suggests the next one, Mr B

agrees, but Mr C rejects it. This is a protracted process. In the ‘set-based’

world, all three gentlemen put available time slots on the table, and select a

few slots. They then narrow down the selection – the earlier is perhaps the

better option, or perhaps the longer option is better, and so forth.

Another example of front loading is the willingness to stop listening to

customers after the concept has been chosen and following design freeze.

Considered from a different perspective, this means that while Japanese

automotive manufacturers invest more time when developing the concept

and during the design phase, they need less time for implementation.

Some companies start engineering work when the concept is still

undecided and then create numerous significant design changes due to


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modifications in the concept. To avoid this, successful Japanese firms

devote more time to developing the concept. This does not mean that

engineering work is not conducted in the concept and styling development

phase. A great deal of analysis, design, and testing are performed in order

to ensure that the concept and styling are realistic in terms of structure,

quality, manufacturability, cost, and so forth. Thanks to front-loading

activities, change requests that might affect product concept and styling

are extremely rare at Japanese automotive companies.

Computer aided engineering also contributed to the dominance of front

loading. Even in the styling phase, engineers can begin to conduct a

preliminary analysis of crash tests. Digital mock-ups require a great deal

of data creation work in the early stage but save extremely significant

amounts of time in the later phase. Japanese automotive manufacturers

were not necessarily the first to use digital tools but, once they started

working with these tools, they became adept at integrating them in

traditional human-based processes. They do not attempt to complete

everything in the virtual world. Instead, existing processes are

complemented with digital tools in order to further advance front loading.

Lead time reduction

In the 1990s, automotive manufacturers worldwide found that the

requirements and preferences of consumers were considerably more

diversified than in the past. There has been no slowdown or reversal of this

trend to date. Companies felt – and continue to feel – that they needed to

launch more products with greater variety to respond to this change. A

shorter lead time was desired, especially after the design freeze phase. To

satisfy diversified customer preferences, styling of the car became more

crucial than ever to win customers, especially since technology and

quality gaps among automotive manufacturers have become increasingly

smaller. Car styling is finalized at ‘design freeze’. If the design freeze

happens four years before the start of sales, planners and designers need to

predict consumer preference four years in advance. If the process is

shorter, say 18 months, prediction is easier and the probability of a ‘big

hit’ is higher. As a result, automotive companies started to compete with

each other in the 1990s to shorten product development lead time. The

Japanese won hands down. In the late 1990s, Japanese automotive

manufacturers attained 18 months process as standard, with 12 months for

‘hurry up’ models. Players in North America still required more than three

years.


9780230_217805_07_ch05.3d 5/29/2008 09:52:45

Figure 5.2 shows the typical process taken by Japanese automotive

manufacturers up until the middle of the 1990s. Typically, it took 24 to 36

months to put a car on the market, from design freeze to start of production.

Figure 5.3 shows the shortened version – 18 months in this example.

There were several enablers for the reduction in lead time. Here, we

outline the four most important:

Engineering tasks More engineering tasks were conducted before

design freeze than ever before. They performed underbody engineering

work such as power train and chassis as early on as possible. Regarding

upper body engineering, the basic body structure was designed and

validated before design freeze, thanks to extensive use of computer aided

engineering (CAE). Basic designs for dies and tools were also started

before design freeze.

Prototype evaluation The prototype evaluation process was dramati-

cally simplified to one step. Most Japanese car manufacturers used to have

a three-step approach to evaluate prototypes. The new process often has

only one step. This reduces lead time by four to five months.

Die manufacturing Die manufacturing was dramatically shortened.

Many Japanese companies now try to reduce manufacturing time further

by abolishing prototype dies. They aim to build prototypes by using dies

for mass manufacturing. By doing this, they do not need to spend time

developing mass production dies in the production preparation phase.

Trial production The number of trial production stages was also

reduced. At many firms, there used to be two stages now, they conduct

trial production in one stage. They use as many mass production dies as

possible for prototypes, thereby shifting workload during trial production

to an early stage. Another enabler was the use of simulation tools.

Cost planning

To control the cost of new products, Japanese automotive manufacturers

introduced a practice that is often translated as ‘target costing’. However,

‘cost planning’ – which is the direct translation from Japanese – seems to

express the practice more accurately.Manufacturers say that this practice

is not only about reducing costs; cost planning involves creating a

philosophy for a new cost structure.

During product planning, the cost planning department (the name of

this department varies from firm to firm) defines the total target cost by


9780230_217805_07_ch05.3

d5/2

9/2

008

09:5

2:4

5

Prior to workdesign freeze

Prototype evaluation

Die making

Initial engineering

�6 0 6 12 18 24Time(month)

Engineering change management

1st set of prototypes building 2nd set

Evaluation

Start of production

Designfreeze

• Major components evaluated• No work on upper body

3rd set

Welding and assembly preparation

Trial production 1

Trial production 2

Figure 5.2 Product development lead time

86

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d5/2

9/2

008

09:5

2:4

6

�6Time(month)

• Simulation• Underbody completed• Some tasks on upper body performed

Prior to workdesign freeze

Prototype evaluation

Die making

Initial engineering

0 6 12 18

Trial production

Evaluation

Engineering change management

Prototype building

Welding and assembly preparation

Start of production

Designfreeze

Figure 5.3 Shortened product development lead time

87

9780230_217805_07_ch05.3d 5/29/2008 09:52:46

analyzing target performance, price and performance of existing

products, potential rival products of competitors, and so forth. At the

same time, the cumulative costs of the new product are calculated by

estimating the cost of each component. Usually, the latter cost is higher

than the former, and the cost planning department allocates target costs

for each component so that the cumulative total cost does not exceed the

total target cost. Engineers design components that can satisfy

performance, weight, and cost targets. If a certain component will

exceed the target cost, then the cost planning department reallocates the

target cost by component after discussion with the HWPM and relevant

engineers.

In addition to complying rigorously with the cost planning process,

each firm has developed its own way to manage product costs. For

example, Toyota has been working on the construction of cost

competitiveness (CCC21) initiative. One of the particularities of CCC21

is the concept of ‘absolute cost’. Toyota has developed a database

consisting of global suppliers. In the database, the absolute cost for each

part is calculated by summing up the lowest material cost, the lowest

process cost, and the lowest overhead cost. The absolute cost is the

ultimate target for Toyota and its suppliers.

Initiatives for change in HWPM organizations

The HWPM system has been a very powerful and effective mechanism for

Japanese automotive firms. While processes have been improved,

organizations also have been modified. One big change at Toyota

occurred in 1993. Compared with the very early days of Kenya Nakamura

and his successors, the product development organization of Toyota had

expanded dramatically. The number of engineers and technicians had

risen to 12,000 in 1993. This put a heavy burden on HWPMs, since they

needed to spend considerably more time on coordination than their

predecessors. Toyota then divided its organization into four vehicle

development centers (VDCs). VDC1 is responsible for rear wheel drive

cars, VDC2 for front wheel drive cars, VDC3 for commercial vehicles,

and VDC4 for major components. The chief engineers at Toyota said that

their productivity improved significantly following the introduction of

this organizational change.

Two other interesting changes in the HWPM organizational structure

should also be mentioned: the concept planner of Toyota, and Nissan’s

team management.


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Toyota’s concept planner

At Toyota, a HWPM is assigned as soon as the top management decides

to start a new vehicle development program. The HWPM leads the

program from the development of the concept all the way through to the

start of production. He is involved in minor changes that take place over

the next few years, and even in the next full model change. Far-reaching

as this role already is, Toyota concluded that it was not enough.

To create truly innovative cars, Toyota thought capable engineers

should start concept planning from a much earlier stage. To fulfill this

requirement, the company created a position called the ‘concept

planner’. Concept planners develop concepts for ‘dream cars’, ‘super

eco cars’ and other future vehicles. They talk intensively with engineers

and researchers working at the Toyota Central Laboratories and other

research arms of the Toyota group, major universities, and researchers

in other industries, in order to come up with their ideas and visions.

They also discuss market trends with the Research Division and other

relevant organizations within Toyota. Following Toyota tradition, they

also travel worldwide to see, talk with, and grasp the needs of potential

customers. After successfully developing the concept, the concept

planner is assigned to the chief engineer (HWPM) of the vehicle.

Toyota expects the concept planner to bring unprecedented creative

ideas and concepts, which can later be directly developed and realized

by the same person without any gaps between the concept and the

product.

Nissan’s team management

Nissan used to have a similar management model as Toyota. At Nissan, a

HWPM was known as a Shukan, rather than a Shusa as at Toyota. After

forming an alliance with Renault, Nissan abolished the position of Shukan

and created teams that have ultimate responsibility for vehicles. A team

consists of five people: chief product specialist (product planning), chief

vehicle engineer (manufacturing), product chief designer (design), chief

marketing manager (sales and marketing), and program director (overall

coordination). This team has wider responsibility than a traditional

HWPM who, typically, does not have responsibility in sales. This team is

responsible for every factor determining the success of vehicle. The

success of Nissan in the early 2000s was largely attributed to this

management practice.


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Further challenges

Product development practices in Japan are still evolving. There can be no

stop to this activity, especially as companies face new challenges and hur-

dles. The shortage of engineers is a headache for most companies in Japan.

The number of engineers at Japanese automotive companies has not kept

pace with the speed with which new models are launched. The shortage is

especially severe in the electronics field. To respond to this situation, automo-

tive manufacturers are trying to utilize the engineering capabilities of their

suppliers. They have started to engage engineering service providers – mostly

European firms – that have not previously played a major role in Japan.

The globalization of product development is another challenge. To

satisfy local requirements, a certain amount of product development must

occur locally. Japanese firms have historically conducted product

development in Japan only. Striking the right balance between local and

Japanese organizations, and ensuring sufficient communication between

the two, is a big challenge.

Companies now manufacture some global products in different places

in the world at the same time. Manufacturing engineering, including trial

production, must be performed simultaneously all over the world. This

exacerbates resource problems. In the past, a group of manufacturing

engineers conducted work in Japan before moving on to the next country.

Companies now need those same people in different parts of the world at

the same time. One way to resolve this is by global development of talent

with the same capability; another way is to utilize IT tools to conduct

manufacturing engineering centrally from Japan. Each firm takes its own

approach to resolve this challenge.

Japanese automotive manufacturers will face many more challenges in

the future. Manufacturers in other industries and other regions would be

wise to watch and take note of their reactions carefully.

Further reading

Aoki, M. (2007) Toyota Seisan Kojo No Shikumi. Nihon Jitsugyou

Shuppansha. ISBN 978-4-534-04246-0.

Hino, S. (2002) Toyota Kiei System No Kenkyu. Diamond. ISBN 978-4-

478-38040-6.

Morgan, J. and Liker, J. (2007) The Toyota Product Development System.

Nikkei BP. ISBN 978-4-8222-4570-2.

Kato, Y. (1993) Genkakikaku, Nikkei. ISBN978-4-542-13048-4.


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PART II

Purchasing

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Introduction

Strategic trends and challenges forpurchasing

Roland Schwientek

The purchasing of material and services has undergone significant change

since the middle of the 1980s. There has been a complete switch from

purchasing being a traditional, reactive administrative function to becoming

active cost management. In many companies, purchasing has been res-

ponsible for cost awareness being established comprehensively throughout

whole organizations. Successful approaches such as reverse auctioning,

target costing, value creation or supply chain management – all of which

were considered innovative, in their time – were often initiated in pur-

chasing departments and first gained widespread acceptance there.

Particularly in times of upheaval or recession, purchasing activities

have contributed significantly to company results. However, irrespective

of whether the economy is facing an upturn or a downturn, the importance

of purchasing is not diminishing: it is, rather, extending.

The gradual reduction in vertical integration that has come about as

industries concentrate on core competencies and key technology in

order to position themselves strategically on the market drives this

development. The relative share of external procurement costs to total

internal costs in western Europe has increased by almost 1 percent

annually since 1990, despite a continual decline in prices in almost all

industries.

Although the pivotal role played by purchasing is widely understood, it

is deployed with varying intensity from industry to industry. Sectors that

have traditionally judged purchasing as being of secondary importance –

utilities, banks and insurance, and construction – are now viewing it more

favorably. Significant effort is being made by companies in these sectors

to latch onto the type of success enjoyed by early procurement supporters,

such as the automotive industry.

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For leading purchasing industries, optimizing pure material costs was

just the beginning. They had already started to improve their entire

purchasing process many years ago. Key suppliers are integrated into

company processes, from development to production. Laggards are now

haphazardly employing innovative approaches in an attempt to reach the

top. Seldom have they done enough homework to establish which

approach would suit them best.

A critical examination of these activities reveals that while these

innovative approaches are largely known in theory, they are applied in a

half-hearted fashion. Owing to inaccurate interpretation or the defense of

vested rights, applying these innovative approaches will, sometimes, even

lead to undesirable developments. Only those companies that can clearly

formulate their purchasing strategy, arrange the purchasing process to

function flexibly and realize bundling effects without falling into a

functional mindset or building up ‘purchasing empires’ will be able to

sustain the dynamic necessary to remain innovative in the long term.

Purchasing must capitalize on the significance it has already gained to

keep driving processes that span across functions.

Understanding and adapting quickly to changing environments –

whether customer expectations, competitive conditions, new technology

or general social or political change – is decisive for success. Current

trends that influence the strategic direction of purchasing include:

• The increasing globalization of industry and society

Rapid advancements in IT and communication technology give this

trend additional strength. Synergies that have been recognized but not

yet realized could spark the creation of international partnerships that

go beyond the purchasing function. By taking on a more cross-

divisional functional role, purchasing could contribute to greater

adhesion throughout the entire company.

• The increasing pressure to concentrate on core competencies, not only

in companies’ own competitive playing fields but also in those of

customers and suppliers too

As duties are handed over to external parties, it becomes even more

essential to have comprehensive outsourcing know-how in purchasing.

The closer suppliers become to core competencies, the more important

it is to capture favorable suppliers – those that bring their own value

into the entire process – before the competition does.

Strategic trends and challenges for purchasing 93

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• The necessity of strategic alliances along the value chain

The concentration on core competencies means that strategic alliances

will become even more important in the future. These are still viewed

skeptically today, especially by medium-sized companies. The optimal

orientation along the entire value chain will be important in order to

remain competitive in the future. This is true even for ‘virtual’

companies, in which many productive value-chain functions are taken

care of by external parties.

• The increasing pace of action, whether implementing innovations or

reacting to customers’ wishes

Changes in the competitive field and within companies will speed up.

Processes will face increasing demand and the production lifecycle will

become shorter. As vertical integration becomes lower, partnerships

with suppliers will become even more intense.

• The ability to use innovation as a competitive differentiation factor

Companies must bundle their own power for innovation with their

suppliers and use this combined power for their own benefit. The task is

to win the best and most innovative suppliers, to build up a joint

competitive position and to make sure that new ideas and developments

bring your company gains. This will safeguard your company from

competitors.

There is no singular one-fits-all approach that allows purchasing to gain

the upper hand over all these trends and make purchasing more

professional. Companies need to realize at what stage of development

they are, before embarking on an improvement strategy.

For this purpose, Roland Berger Strategy Consultants developed

Purchasing EmPowerment, a comprehensive approach that helps

purchasing reach performance excellence. Part II describes this approach.

In Chapter 6, Michel Jacob and Gabriel-Assad Singaby look at key trends

in purchasing best practices and examine the impact these have on

purchasing strategies. They go on to examine the strategic direction

purchasing is likely to take in the future and the role strategic partnerships

might play. Chapter 7 examines the different facets of the approach in its

entirety. It looks at the short and medium-term cost reductions that are

94 Roland Schwientek

9780230_217805_08_ch06.3d 5/29/2008 09:52:02

possible in procurement values through systematic commodity manage-

ment, and how companies can optimize external direct or indirect spend

through appropriate innovative optimization levers and by managing

suppliers more effectively. In Chapter 8, Tobias Franke takes a closer look

at different organizational frameworks in order to find the one that works

best for mastering future challenges.

Strategic trends and challenges for purchasing 95

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CHAPTER 6

Key trends in purchasing bestpractices and impact on purchasingstrategy

Michel Jacob and Gabriel-Assad Singaby

Introduction

As competitive pressure intensifies in most industries, CEOs are

increasingly putting procurement at the top of their agendas. The

corporate world is dealing with an onslaught of modern challenges,

ranging from globalization, to the entry of new competitors, through to

rising material prices. Purchasing, which is viewed as a way to master

these challenges, is shaping up to develop even further into one of the

hottest corporate topics of the next decade.

The purchasing world, in its endeavor to adapt to this changed and

changing external environment, is reworking its own DNA. For a long time,

the major concern of purchasing departments was to buy goods and materials

at the lowest price possible. Faced by increasing globalization and business

volatility, companies these days are adopting a more holistic perspective, and

purchasing is being considered as part of the entire corporate strategy. Price

alone is no longer the unique key performance indicator, but one of many

aspects of sourcing excellence, along with anticipation, quality, total cost of

ownership (TCO), industrial footprint consistency, and sourcing security.

These key performance indicators generate a new complexity that

companies must address in order to gain, and then maintain, a competitive

edge. Although developing a powerful purchasing strategy is now a ‘must’

for companies that want to succeed, it is a complex and sophisticated exercise.

Experience gained from projects with clients shows that increasingly more

companies are designing purchasing plans that span several years, and which

attempt to anticipate major business moves and shifts.

96

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In this chapter, we outline how purchasing practices have evolved over

the past decades, and analyze the main challenges that companies are

confronted by in the new purchasing environment. We then look at the key

trends that are vital to achieving purchasing excellence, and show how

companies can build up a purchasing strategy that will let them achieve

that sort of excellence. These key factors have been distilled from

assignments Roland Berger has conducted for major global companies as

we assisted them to structure their three-to-five year purchasing plans. At

the end of the chapter, we discuss a real project in depth.

Where is purchasing today?

Based on experience working with companies from a large number of

industries, it is clear that purchasing organizations, especially those belonging

to large companies, go through three stages of maturity along their lifecycle.

In the first stage, companies are concerned primarily with negotiating

prices, and with developing professional buyers and a new, more structured

approach to purchasing. When companies focus on improving the purchasing

process during this phase, they focus almost exclusively on commercial

negotiations. This improvement typically generates a savings potential of

approximately 5 percent (percentage of annual spend – operational

expenditures + capital expenditures). One can safely say that companies in

all industries have advanced beyond this first stage.

In the second stage, which is based on bundling volumes, companies

centralize sourcing functions and geographically extend their sourcing.

Thanks to economies of scale, this lever yields a 5–10 percent cost improve-

ment from suppliers based on unit price. Volume concentration has become a

key lever for producers of manufactured goods. By and large, almost all

industries have now deployed this lever, and the most advanced companies

have been fully utilizing it for decades already. As a result of bundling

volume, strong purchasing organizations developed. These organizations

have a clear mandate and have carved their own niche at the corporate level.

The third stage involves far-reaching organizational change, as it

entirely redefines a company’s relationships with its suppliers. This stage

is much harder to complete and companies should consider it a medium-

term task. Although this phase calls for more effort, and might initially

push companies beyond their comfort zone, the benefits are immense. By

entering partnerships and alliances with suppliers, both company and

suppliers can improve their processes. When buyers together with internal

users of purchased goods and services become involved in product

Key trends in purchasing best practices 97

9780230_217805_08_ch06.3

d5/2

9/2

008

09:5

2:0

2

• Central sourcing functions• Focus on unit prices levers

• Set up a full TCO approach• Pro-activeness

• Develop professional buyers• Structured approach for purchasing

Pricenegotiation

Volumeconcentration

Relationshipredefinition and user

involvement

1 2 3

Potentialsavings(% of annualspend –Opex � Capex)

15–25%5–10%

6–10%

4–5%

Total

Figure 6.1 Maturity steps at purchasing organizations

98

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specifications, a full TCO approach has usually emerged. It is at this point

that the philosophy of purchasing changes radically. It shifts from being

reactive to proactive. Savings of between 5–10 percent are the norm. The

automotive and aerospace industries are typically leaders in this approach.

Challenges that still need to be addressed

Irrespective of what stage of development a company has reached, a

handful of challenges affect all purchasing organizations. The only

difference between purchasing late-comers and purchasing organizations

that perform strongly is that the latter have already dealt with several of

these challenges or have introduced long-term strategies to remedy them.

These challenges are discussed below and shown in Figure 6.2.

Centralized and centrally-led purchasing models are now commonplace,

but companies need to find ways to sustain these models. By centralizing

purchasing, organizations gain efficiency and effective processes. The

advantages of centralization are varied and well known: goods are pur-

chased using standardized criteria, buying is concentrated, best practices are

adopted between sites and regions, tasks are no longer duplicated, staff

generally become more professional. Yet, a specific sort of organizational

structure is required for centralized models to function properly. Another

form to benefit from the effects of centralization without losing contact with

the base is the lead buying model, as detailed in Chapter 8 by Tobias

Franke – organizations drive strategy and performance. Information

Greater effortrequired to address

these challenges

Balance between centralizationand decentralization• Companies still need to learn how to manage remote parts of their mega-networks while leveraging maximum synergies

Data management• Companies need to find ways to obtain reliable purchasing information at a lower cost and with less effort

TCO• Companies still do not recognize fully how TCO can improve purchasing spend optimization

Purchasing image• Companies need to close the gap that exists between the perceived and real skill set of purchasing employees

Figure 6.2 Challenges with which companies still struggle


9780230_217805_08_ch06.3d 5/29/2008 09:52:03

technology systems and information flows need to be designed with

precision, too. Without the correct structure and information flows,

problems arise. Companies might suffer from a lack of coordination, or

the purchasing department might fail to take adequate account of the needs

of local business units. Additionally, as companies become more global and

expand, the challenge of managing remote parts of ‘mega networks’ while

avoiding building central ‘ivory towers’ also increases.

A second challenge revolves around the perceived and real skill set of

purchasing employees. Over the past years, the career track within

purchasing and the skills and competencies of purchasing managers has

developed considerably. Top management is increasingly becoming

involved in purchasing, and it is attracting the attention of CEOs.

Unfortunately, many people in business remain blind to this reality. At

too many companies, the purchasing function is not viewed as a company’s

core business. The image of ‘tactical’ purchasing – focused on short-term

profitability improvements, which had been the dominant model for years –

is etched into minds. Unfortunately it overshadows the new reality of

‘strategic’ purchasing, which aims to secure competitiveness over time.

Finding a way to close the gap between reality and the image that persists

about purchasing professionals remains a pressing challenge for many

companies. While the job market has reached a low point for professionals

with tactical purchasing experience, there is a talent crunch for strategic

purchasing jobs. These jobs are being created faster than they can be filled.

With that said, many companies realize that some of their purchasing

staff do not have an adequate skill set to complete the work that is

demanded of them as the purchasing function develops. With a tailored

training program, this gap can be closed relatively quickly. In addition to

having staff with basic skills and soft skills, purchasing departments these

days also need purchasing employees with operative and strategic

purchasing skills. The sorts of operative skills required span interface

management – dealing with internal customers and international internal

customers and making cooperation between them work – over the

controlling of purchasing activities through to contract management. This

latter criterion increasingly demands international contract law knowl-

edge and expertise. Strategic purchasing skills include commodity

management, supplier management, project management and risk

management experience.

Total cost of ownership (TCO) is a third challenge. TCO helps

companies assess the direct and indirect costs of purchases for their entire

lifecycle. Many internal users and prescribers have not fully compre-

hended the consequences of the TCO-based purchasing revolution. As a

100 Michel Jacob and Gabriel-Assad Singaby

9780230_217805_08_ch06.3d 5/29/2008 09:52:03

result, they have not been able to adapt fully to the expectations of this

new world order. Too many companies have failed to consider how this

new paradigm fits into their organization and, consequently, do not give

users and prescribers incentives to contribute to improved purchased

product and service specifications. There is a lack of open discourse with

suppliers. But companies underestimate the importance of TCO at their

own peril. The higher the follow-up costs relative to the cost of

acquisition, the more important the TCO concept becomes. In the

engineered products industry, follow-up costs average out at more than

100 percent of the cost of buying a machine in the first place. In some

areas, these post-deployment costs actually exceed the initial purchase

price many times over.

There are good reasons why TCO remains a challenge for most

companies. Procurement departments focus on the purchasing budget. But

the purchasing budget is burdened only by the cost of acquisition. Follow-

up costs are charged for, and paid by, other cost centers. In many cases,

they are not even carried as a separate item. Since buyers are required to

optimize their budgets, the obvious thing for them to do is to minimize the

initial cost of acquisition. Little or no account is taken of any costs that

might be incurred once the good or service has been paid for. For TCO to

be successful, the purchasing organization has to rethink and re-engineer

its entire way of doing business. Additionally, a successful TCO approach

must draw heavily on non-purchasing resources (the prescriber–user–

buyer triangle). Companies tend to underestimate how many resources

will be necessary. This creates bottlenecks when the TCO approach is

deployed. (See Text box 6.1 for further information on the critical role of

TCO for purchasing.)

Companies have warmly embraced performance measurements. But

measuring and managing purchasing performance has become increasingly

sophisticated over the past years and remains a challenge. The multi-

plication of relevant indicators for purchasing performance, beyond pure

unit cost, creates additional complexity for companies. While unit price can

be relatively easy to measure, purchasing and general management have a

hard time identifying and implementing the measurement of new, more

qualitative or complex indicators such as the quality and durability of the

relationship with suppliers or the TCO. How should TCO be measured, for

instance, before the product lifetime is actually finished? Moreover, the

increasing volatility of prices, upward-oriented market trends, and the

increasing diversity of stakeholder needs make it increasingly difficult to

define an acceptable quantitative measure for purchasing performance. The

additional debate on actual profit-and-loss and balance sheet impact


9780230_217805_08_ch06.3d 5/29/2008 09:52:03

resulting from any purchasing effort is far from being solved. Companies

that want to keep up to speed with these developments in the long term have

their work cut out for them.

Information knowledge and storage presents a similar challenge. While

access to data has improved, companies must now learn how to obtain

acceptable and reliable purchasing information at a lower cost and with

less effort. They also need to find ways of storing complete, clean and

quality data, as well as gain a better understanding of suppliers’ costs and

margins. Necessary tools and the underlying data for them are becoming

increasingly complex as the number of parts and components increases.

This complexity switches to an even higher level as the number of regions

from which those parts and component can be sourced also increases.

Supplier data must be brought together in a way that allows companies to

minimize the time required for conducting supplier research and looking

for contact information.

Catalog consultation must also be made more accessible, in order to

reduce time and lower the risk of error. Economic data, whether it be

tactical (prices of goods, suppliers agreements) or strategic (suppliers’

costs and margins), must be tracked in a way that allows buyers to

concentrate on their jobs and not have their attention diverted elsewhere.

The massive deployment of ERP (Enterprise Resource Planning) systems

and e-enabled tools has assisted companies a great deal over the past few

years, but generally the investment has been massive. Worse still, current

systems still manage to cause frustration because of their inability to keep

up with the increasing speed and complexity of business life. They also

fail to provide sufficient reactivity and transparency.

New challenges

In addition to these current challenges, a number of new tests are also

emerging as the purchasing environment evolves. These especially affect

large multinational companies. When designing purchasing plans that

span several years, it is imperative for companies to anticipate major

business developments and calculate these in. Some of the trends or

challenges have been around for a while; the importance of other trends is

only just beginning to emerge. Figure 6.3 illustrates the top challenges that

will affect companies over the next decade.

Clearly, the recent acceleration of globalization has caused consider-

able change in the business landscape. Purchasing, as it expands its

strategic role within companies, bears the full brunt of this acceleration.


9780230_217805_08_ch06.3d 5/29/2008 09:52:03

Each of the new challenges or trends can be traced back to the growing

role globalization plays in the world economy. The challenge this creates

for purchasing will continue, and even become greater in the medium term

as the imbalance between EU-15 and emerging countries such as China

and India becomes increasingly less pronounced. Certainly, new

territories have appeared from which western companies can source.

These span mature emerging countries such as China, India, and Eastern

Europe, as well as countries in Africa. At the same time, ironically, world

trade is becoming more and more regional, and new trade barriers are

sprouting up between regions.

Globalization also affects the structure of supplier networks. Increasingly

more suppliers and sub-suppliers are involved in the value chain. A com-

plicated network of supplier relationships is commonplace these days.

Making the situation more complicated is the inter-dependent relationship

that has developed between suppliers and companies. Increasingly, compa-

nies are keen to involve suppliers, and this trend shows no signs of abating.

While managing supplier relationships is not a new issue, thinking about

how it will develop in coming years should preoccupy companies’ thoughts.

A further challenge that companies must address is the strain on natural

resources caused by rapid economic growth. As emerging countries

develop, and mature markets fail to curb their dependency on natural

resources, the cost of raw materials and energy explodes. In some cases,

Transportationcongestion

Stricter regulatoryenvironment

Strain on naturalresources/upwards pricetrends ofcommodities

Dominance oflow-cost countries

Complexity ofsupplier networks

Contemporaryand futurechallenges

Figure 6.3 Challenges that are reshaping purchasing


9780230_217805_08_ch06.3d 5/29/2008 09:52:04

shortages even occur. Although the direction of the price development is

fairly certain, it is unclear how strongly prices for natural resources will

develop in the medium term.

The business environment is regulated to a degree not previously seen.

Governments and inter-governmental agencies expect a degree of

accountability from companies that is certainly challenging. Companies

have to invest resources to ensure compliance, which contributes to price

and cost increases. Upcoming regulations such as REACH (Registration,

Evaluation and Authorization of Chemicals), a framework for the

regulation of chemicals in the European Union, create new constraints,

not to mention greenhouse-gas reduction.

Transport issues are a further challenge. While EU roads are becoming

less congested, sea transport has become easier thanks to containers, and

improvements are being made – albeit slowly – in rail transport, moving

goods from one place to another will continue to keep purchasing

departments on their toes. Transportation is a volatile industry riddled

with heavy competition, tight capacity, and soaring fuel prices. Choosing

transportation service providers requires an understanding of market

dynamics across multiple modes, services and across thousands of

domestic and international routes. It also offers companies an area of

opportunity for significant savings.

Spotlight on two major trends

We are now going to turn the lens slightly and focus on two trends or

challenges with which companies, currently, are especially preoccupied.

Companies very often turn to consultancies for help with dealing with

low-cost country sourcing, and to manage supplier relationships. Low-cost

country sourcing raises strategic issues and requires a deep understanding of

the competitiveness from sources in emerging countries and how compa-

nies can leverage them while mastering the challenges of remoteness and

consistency of quality. The second issue, supplier relationships, adds a new

complexity to purchasing as it moves beyond internal cross-functional work.

The main concern here is how companies can involve an external party that

probably has interests that do not perfectly dovetail with their own.

Low-cost country (LCC) sourcing took off in the 1990s and has grown

exponentially since then. While sourcing in LCCs makes the supply chain

longer and more complex, it is a business reality for most manufacturing

companies today. But generally there is more talk than action. Here, we

wish to pay attention to how companies can achieve LCC sourcing on a


9780230_217805_08_ch06.3d 5/29/2008 09:52:04

large scale and not merely pursue it as a fashionable accessory to their

sourcing strategy.

There are few symbols as powerful as China’s 2001 entry into the World

Trade Organization for the role LCC sourcing plays in today’s global

economy. China’s admission to the WTO provided many companies with

their first opportunity to test the LCC sourcing waters. Barriers to trade in

other countries in the region have also collapsed, releasing a wave of

procurement from these areas, too. GDP growth in most LCCs has

outstripped western countries, as it has soared at a double-digit pace over

the past 15 years.

China is the powerful new force of the LCC sourcing revolution.

Companies that dare not source from this country risk exposing themselves

to harsh criticism from financial analysts and other stakeholders. Although

companies are quick to advertise their expanding involvement in China,

most companies actually source only a small portion of purchasing

requirements from this LCC heavyweight. Sourcing is limited to compo-

nents with the least value-added. As economic pressure and competitive

dynamics increase, companies will progressively feel forced to do more

business there and in other LCCs, even if they are not entirely comfortable

with this development.

What is the best way for companies to tackle this large step? How can

they shift from their ‘keeping up with fashion’ sourcing strategy (less

than 5 percent of sourcing spend) to adopting large-scale operations in

LCCs? Given the immense pressure to source from China, companies

should take the time to consider whether China is the most suitable place

for their company to conduct this sort of business. Each LCC has its own

set of advantages and disadvantages. It is important for companies to

realize that significant differences exist in the various alternative

markets. Different countries will best suit the particular sourcing needs

of different companies.

Companies that choose to LCC source on a large-scale need to realize

that this is a different ball game from the one in which they might be used

to dabbling in these countries. Coordinating operations takes relatively

little effort and entails minimal risk when ‘only’ 5 percent of a company’s

spend is at stake. Gaining access to commodities that are labor and

material intensive – meaning those that require no sophisticated imported

machinery – is generally the top priority of companies involved in low-

intensity LCC sourcing. This makes it relatively easy for companies to

change suppliers if the objectives are not met.

Companies that want to jack up the intensity of their sourcing from

LCCs either have to purchase a larger number of commodities, or buy


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commodities that are module- or system-oriented or, alternatively, have

key modules/systems with complex know-how requirements. When such

complex components and parts are involved in LCC sourcing, their value

and contribution to the final product is higher, and quality becomes even

more critical. New, stronger organizations and processes are needed to

manage these operations and the supply chain. Forerunners in LCC

sourcing have noted that the local environment (legal, business, cultural)

and extended distances make it difficult to control the output of the

whole process. If quality control is not adequately addressed, sourcing

projects are almost guaranteed to fail. As recent legal cases attest, the

compulsory joint venture structure in China is not as risk free as people

would like to believe.

There are six success factors that companies should keep in mind when

embarking on their LCC sourcing adventure:

• They should ensure that top management is behind the global sourcing

initiative

• They should set up a clear sourcing process and a high-level cross-

functional team

• Companies need to focus on the most promising countries and

commodities

• It is important to ensure quick wins to keep momentum high during a

long process

• It is a good idea to set up and continuously enhance a regional sourcing

presence

• Companies need to ensure proactive development of a local supply base.

Considering the extra hurdles that arise when sourcing from China, it is

valid for companies to ask whether sourcing from China is the ideal

strategy. While China definitely has a great deal of potential – and quality,

reliability and price are likely to improve in leaps and bounds over the

coming years – its basic industrial system has to be overhauled completely

before it meets the requirements of manufacturers when it comes to large-

scale and complex-goods sourcing. It needs to be said, however, that

China’s infrastructure, aided by strong governmental support, is far more

advanced that some other low-cost countries in the region.

With so much attention paid to China, many other countries are

unfortunately overlooked. For companies brave enough to venture out in

their own direction, some of these other countries could potentially offer

much more attractive sourcing opportunities and yield greater spoils.

When drawing up a list of possible supply markets, companies must


9780230_217805_08_ch06.3d 5/29/2008 09:52:04

carefully analyze the benefits and risks of each region for a particular

sourcing commodity. The main pitfalls are well known. Some additional

important aspects that need to be considered are distance from plants

(transportation costs are often underestimated), bilateral trade agreements,

and the currencies involved in transactions.

Bearing these factors in mind, European companies would be wise to

give greater priority to three low-cost sourcing regions closer to home:

Central and Eastern Europe (CEE), the Middle East, and Africa. Near-

sourcing is experiencing a renaissance as companies attempt to keep costs

low by manufacturing and procuring goods and services close to their

consumer market. Familiarity with the regions is certainly one argument

for this renewal of interest, but another is the increased ability for

companies to link forecasting and production more effectively. Some of

the benefits of sourcing in CEE, the Middle East, and Africa are listed in

Figure 6.4.

CEE is emerging as an excellent alternative to China for LCC sourcing,

especially for European companies. Language barriers are lower and

century-long business and cultural ties, although being neglected for some

decades, have been relatively easy to re-establish. Austria was especially

quick off the mark to start reigniting old networks with countries in this

region. Many countries in CEE will become members of the Euro-zone

over the next couple of years, which means that currency risk will be non-

existent and there will be no need for spend to cover currency positions.

While labor rates in CEE might not be as low as in emerging Asian

markets, transportation distances to other European countries are much

shorter. CEE countries look back on a strong industrial tradition. They

Cost• Similar competitiveness on low wages to Asia• Reduces transportation costs

1

Service• Geographical proximity reduces delivery times and increases flexibility• Cultural fit greater than with Asia

2

3

Cost

ServiceQuality

1

23Quality• Consistency and reliability (especially in CEE) due to long industrial history• Proximity enables greater response and closes ‘loop-back’

Figure 6.4 Some of the benefits of sourcing in CEE, the Middle East, andNorth Africa


9780230_217805_08_ch06.3d 5/29/2008 09:52:06

also have a highly educated workforce that is fluent in various languages.

This makes it a good choice for higher value-added sourcing. China, by

contrast, is just beginning to enter this production territory and it will be

some years yet before it reaches a comparable level. Many car

manufacturers in Europe already source complex parts in the Czech

Republic, Slovakia or Romania. This makes sense, especially because

many have set up their own operations there. But Poland and Hungary

have also established themselves as successful choices. Companies, lured

by even lower labor costs, are beginning to look further afield into

Ukraine, Bulgaria and Russia.

Setting up operations or finding a supplier for value-added products in

Africa and the Middle East might be more difficult than in CEE, but cost

advantages might offset this issue. While the Middle East and Africa lack

the sort of industrial tradition that characterizes CEE, several countries in

those regions have a qualified workforce and are taking steps to

modernize their infrastructure. Production standards are improving

dramatically in Africa. And, while the level of infrastructure varies

significantly from region to region in this huge continent, advancements

are being seen. Many countries have entered a second industrial phase,

with a focus on value-added products in several industries. Whereas the

US$ dominates many regions in the world, the Euro is considered an

acceptable trade currency in the Middle East and Africa.

There is a compelling case for companies to consider the wider

outskirts of Europe for their large-scale sourcing. Countries that are

geographically nearer Europe are somewhat more costly than their Asian

counterparts, but also more reliable. Considering the shorter transporta-

tion distances, companies can respond more quickly to developments and

thus provide better service to the companies they serve. We recommend

that sourcing initiatives be restricted to a few markets only. That way,

companies can reach critical size while limiting complexity and overhead

costs.

Supplier relationships

Western companies can gain a strong competitive advantage by building

smarter relationships with their suppliers around the world. Collaboration

with suppliers is one of the hottest trends in purchasing to date.

Partnerships and alliances with suppliers can take two different forms,

depending on the technological intensity of the industry, and how critical

an issue quality is.


9780230_217805_08_ch06.3d 5/29/2008 09:52:06

A first kind of collaboration is the co-development of products. The

reason for engaging in this sort of relationship is to improve the innovation

process. Both parties seek to better leverage their respective technical,

human, and financial assets from the alliance. Many industrial companies –

such as car manufacturers (on interior trimming, for example) or aircraft

manufacturers (on instrumentation or engines) – engage their suppliers in

co-development relationships. These require the supplier to take full res-

ponsibility for the design, manufacture and warranty of their supplied parts.

By initiating a co-development project, a downstream company is able to

influence the characteristics of the equipment, and the timing of its market

entry. The upstream company benefits from the buyer’s engineering

capability. Its technological know-how also increases. As both partners

bring their knowledge and capabilities to a co-development project, growing

interdependence is a common sign of success in this relationship model.

A second kind of collaboration between upstream and downstream

companies is supplier development, which aims at improving the supplier’s

performance on cost, quality, and delivery timing and reliability. It is a win–

win relationship that benefits the two parties. Suppliers perform better and

companies get the quality and delivery times they want. Although measuring

supplier performance has been on the agenda for decades, studies continue

to show that companies only continue to measure the performance of

suppliers during the supplier selection phase and for special projects. This is

not a sustainable strategy and will not result in supplier improvement.

Companies and suppliers could gain much more from these sorts of

relationships. Companies should evaluate the performance of suppliers based

on clearly defined processes and formal feedback, or they might introduce a

quality certification program that leads to the number of inspections being

reduced. Another common practice among forerunners includes company

representatives visiting suppliers on site to help them improve their processes

or, alternatively, inviting suppliers to a client’s site in order to observe the use

of their products. Best-in-class companies also recognize strong supplier

performance by using an awards format or staff training.

Although the majority of OEMs have already implemented these sorts

of supplier development activities, fewer than 50 percent of supplier

development programs have achieved the targets initially agreed. Results

have been ‘at or below’ expectations, according to a benchmarking study

Roland Berger conducted among major car manufacturers and aerospace

companies.

How, then, can companies truly enhance purchasing performance with

supplier development programs? The steps taken by the best players in the

automotive industry, especially Japanese automotive manufacturers, are


9780230_217805_08_ch06.3d 5/29/2008 09:52:06

instructive. They share a long-term commitment with their suppliers to

improve each other’s capabilities: the objective of this commitment being to

lower costs and raise overall performance. The philosophy behind this

approach is based on cost transparency and deep technical cooperation, as well

as continuous improvement. For the car manufacturers, it results in acquisition

costs15 to30percent lowercomparedwith thoseofaclassicalbiddingprocess.

This is due to higher supplier productivity, less re-engineering of products

over their lifecycle, smaller purchasing structures for the car manufacturers,

and lower warranty costs. The relationship also brings benefits for suppliers.

The supplier earns a reasonable, fully agreed-on margin, as well as stable

volumes. This is no small thing considering the difficult situation in which

many parts suppliers have found themselves in recent years.

Such a close cooperation requires a joint process that is well coordinated.

Once the costs of the suppliers are known, the car manufacturers help

suppliers generate a manufacturing development plan, which aims at both

decreasing cost and improving quality. It varies in its scope and depth

depending on the supplier’s process maturity. Objectives and key perfor-

mance indicators (KPIs) are set based on industry benchmarks and the car

manufacturer’s experience of best practices.

Key success factors for this approach are long-term relationships (for

example, through cross-investment) and joint teams; qualitative data, and

a transparency pledge on breakdowns of cost; development and training of

staff at all levels of the organizations; and organization alignment on all

aspects. Although this approach is relevant for all industries that purchase

manufactured parts and components, for cultural reasons it might be hard

to implement. Cultural sensitivity is required, especially in companies

with supplier networks that span several companies. To retain employees,

companies should be particularly careful when designing objectives, and

compensation and performance indicators.

How it works in practice: examining trends to develop along-term plan

Increasingly, companies are turning to consultancy firms to design long-

term purchasing plans that span several years, in order to take into account

expected purchasing trends. Roland Berger recently assisted a major global

steel player to develop and formalize its five-year strategic purchasing plan.

The company was obviously concerned about rising energy and raw

material costs, but there was also a more general and unspecified unease

with the fast pace of changes occurring within the purchasing world.


9780230_217805_08_ch06.3d 5/29/2008 09:52:06

The project team developed a ‘white book’ that detailed the major

relevant economical, political, and environmental changes that could be

anticipated over the next ten years, and which could impact supplier

markets and purchasing strategies. This white book provided fact-based

insights on energy price trends, regulatory changes impacting future costs,

development trends of emerging countries (including their economical

potential), political stability, as well as potential capacity shortages on key

markets such as ore, transportation, and strategic production equipment.

The white book was used to stimulate discussion during the initial

brainstorming process. This process marked the moment when the

company started to develop a purchasing strategy.

In a second work module, the project team completed a comprehensive

benchmarking exercise of major corporations in various sectors. This helped

the team identify and document what leaders in the various industries

considered good purchasing practices. It also helped the company to see

what their peers were doing to tackle up-and-coming challenges and to

prepare for the future. In a next step, face-to-face interviews were held

between our client and these benchmarked companies. Information was

exchanged openly.

The project team also completely reviewed the needs of internal users

to anticipate changes in the specifications of future purchased goods and

services resulting from programmed production process and product

changes, but also from probable technology changes.

Structured workshops involving key internal users, prescribers, and

purchasing commodity managers were then organized. During these

workshops, formatted five-year purchasing plans were developed for each

commodity. By integrating experts into these discussions, the purchasing

plans were based on extremely thorough knowledge of supplier markets

and the forecast evolution of internal needs.

This various information was used to develop a five-year purchasing plan

that summarized all strategies. Based on optimizing the TCO of this

company’s purchased value, and a comprehensive risk management plan, a

substantiated and quantified target of several hundred million Euros was

agreed upon. This plan has become an integral part of the company strategy.

Purchasing can now be managed better, both in the short and long term.

Outlook

The days of simplistic purchasing strategies built on pure sourcing

exercises and volume leveraging are gone. But, far too often, companies


9780230_217805_08_ch06.3d 5/29/2008 09:52:06

Textbox 6.1

TCO approaches – underestimate at your own peril

Simply stated, TCO (total cost of ownership) is a methodology for

understanding the combined effects of first-time costs of equipment

acquisition (whether leased or purchased) and the lifecycle costs

(deployment, operation, support, and retirement) associated with

operating the equipment. It provides companies with the true cost of

doing business with a particular supplier for a particular good or service.

There is a real opportunity to further exploit TCO in all industries.

Getting this right is critical for long-term success. The benefits of

introducing the approach far outweigh the costs and difficulties.

Companies that make full use of TCO are showered with numerous

benefits which are closely related with and feed into one another,

creating synergistic effects. These include improved supplier

performance measurement, improved purchasing decision making,

improved internal and external communication, and better under-

standing of purchased goods and services.

The overarching benefit of TCO is that it becomes a reference point

for checking how matters are developing. It is an excellent tool for

benchmarking,and thusoffersasolid frameworkforevaluatingsuppliers

as well as a clear-cut means to measure quality improvement. It improves

purchasing as it forces staff to quantify trade-offs. Reliable data makes

decisions on supplier selection easier and more informed. TCO provides

data for trend analysis on costs, excellent data for comparing supplier

performance and for negotiations, and provides critical data for target

pricing. In addition, the long-term nature of TCO focuses the entire team

on the big picture and helps them recognize non-price factors.

Despite its advantages, relatively few companies use a TCO

approach. Special skills and a specific mandate are required for the

successful introduction of TCO into a company. It requires a major

change in purchasing resources, both quantitatively (in the sense of

resources), and qualitatively (the experience and educational level of

purchasing staff). The license to operate, by which we mean the

ability to enforce supplier or specification changes, also requires

significant reinforcement. Two last points need mentioning. No

company can rely on TCO alone – traditional levers need to be

applied in parallel. Finally, while collaborative approaches work,

these partnerships are never easy or comfortable.


9780230_217805_08_ch06.3d 5/29/2008 09:52:06

act immaturely when addressing the issue of purchasing strategy. They

embrace ‘trendy’ approaches, such as LCC sourcing, before thoroughly

assessing them and grossly underestimate, or even ignore, TCO

approaches. No company that lacks a fully-fledged purchasing plan

with a real strategic perspective can claim to have mastered purchasing.

Purchasing functions that claim otherwise can expect to have their role as

a main contributor to company strategy put in question. The challenges for

purchasing are real, and evolving at an unprecedented pace. Long-term

strategic plans that are flexible enough to adapt to these trends are a

prerequisite for purchasing excellence.

Further reading

Roland Berger Strategy Consultants (2006) ‘Best Practices in Low-cost

Country Sourcing’. Stuttgart.


9780230_217805_09_ch07.3d 6/4/2008 16:39:10

CHAPTER 7

Purchasing EmPowerment: the wayto achieve world-class purchasing

Roland Schwientek

Introduction

Purchasing has grown considerably in stature in past decades. Its

contribution to an organization’s long-term success and strategy is

increasingly well recognized. Increasingly more companies are aware of

the importance of permitting purchasing to move away from being a cost-

cutting function to becoming a strategic entity that helps companies

achieve the highest performance standards.

Roland Berger’s comprehensive approach, ‘Purchasing EmPowerment’

(PEP), helps purchasing to reach performance excellence. PEP moves

beyond cost cutting, which is usually short-term in nature and focuses on

specific actions or commodities within a distinct project, and hones in on

long-term sustainable improvements along the process chain. In this

strategic approach, the focus is on overall costs and company value.

Procurement influences more than 50 percent of a company’s total cash

cost: depending on the industry and project aims, PEP can achieve savings

up to 70 percent of important commodity or category groups.

For purchasing organizations to become first class, they need to estimate

their current performance carefully. Development potential should be based

on benchmarks to own and similar industries, competitors, and suppliers, as

well as from internal resources. Although the prospect can be daunting, this

enables a company to gauge its performance gaps. Only once this has been

accomplished can a company develop an individually tailored, step-by-step

plan for purchasing that charts out the optimal elements for reaching the

desired goal.

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Important steps along that path are the improvement of commodity

groups, structure and processes, and working with suppliers. When

assessing companies, project teams consider how much they spend on

commodities, suppliers, and resources. This assessment can be carried out

on a company, regional or divisional level. To gain a comprehensive view,

an external assessment covering internal customers, external suppliers,

competitor benchmarks, and additional stakeholders is conducted. This

knowledge provides clues about the opportunities available to companies’

purchasing departments, and their impact.

The initial step – managing commodities strategically – focuses on unit

costs. Here, purchasing levers are examined to see whether they can be used in

conjunction with a particular commodity for performance gains. The second

step – optimizing purchasing organization processes – deals with process

costs. It puts organizations in good stead by making processes leaner,

establishing purchasing as an organizational function, making information

transparent, and training as well as motivating staff. The final step – managing

suppliers – deals with the entire value chain. Strategic supplier management

improves the supply chain in both quantitative and qualitative terms.

Companies that work through all three steps tend to be more competitive

than their counterparts. This article examines all three phases in detail.

Project examples are given to illustrate how the changes can be implemented

in real-life business situations and the benefits those changes can bring.

Strategic commodity management – 6-lever approachto optimizing costs

Although the status of purchasing has increased in past years, all too often

other functions underestimate what it can achieve. If purchasing con-

sistently pushed through large cost-saving programs and communicated

its achievements in driving down the cost base, its standing would

improve. Numbers speak the clearest language in the business world.

One of the most successful ways purchasing can reduce costs is by properly

managing commodities. Strategic commodity management is simply about

finding the most relevant purchasing strategy for important goods. It is about

applying a tailored set of differentiated procurement levers to commodities in

the right sequence at the right time in order to reduce total cost.

To accomplish this, companies need to assess their sourcing behavior

by segmenting the vast array of commodity groups within the portfolio.

Each commodity or category is then assessed in terms of business impact

and supply market challenge, and is placed in a matrix. Business impact is

Purchasing EmPowerment 115

9780230_217805_09_ch07.3d 6/4/2008 16:39:10

determined by factors such as expenditure, and demands on product and

process quality. Supply market challenge is determined by factors such as

how many players are accessible, and what cost structures are encountered

via suppliers. Each quadrant in the matrix represents a distinct sourcing

strategy: leverage, manage, simplify, and secure. These are depicted in

Figure 7.1.

If a commodity or category is characterized by a restricted supplier

market but has a high acquisition volume – as would be the case for

electricity in the aluminum industry – the commodity falls into the

‘manage’ quadrant. A commodity group such as packaging material –

with its small acquisition volume, plentiful supply sources, and restricted

business risk – would probably be found in the ‘simplify’ quadrant. For

each strategy, there are six broad clusters of levers that can activate the

right developments. These levers, which are shown in Figure 7.2, are

clustered into price optimization, quantity leverage, process redesign,

technical improvement, supplier integration, and functional adjustment.

Price optimization

The potential for making significant savings when it comes to purchasing

goods and services is commonly underestimated. Companies make this

mistake at their own peril. Since improved procurement can bring savings

of up to 70 percent, purchasing plays a vastly important role in boosting

the bottom line. Purchasing has a number of commercial levers at its

HighLow

MANAGE

SIMPLIFY SECURE

LEVERAGE

• Available supplier base• Suppliers’ bargaining power• Buyers’ leverage

• Expenditure

• Impact on profitability and operations

• Impact on quality

• Impact on customer satisfaction

• Time sensitivity

• Collaboration requirements

• Etc.

HighBUSINESSIMPACT

SUPPLYMARKET

CHALLENGE

Low

Spend volume[EUR m]

• Raw material availability• Price development• Etc.

Figure 7.1 Each commodity/category is strategically assessed in terms ofbusiness impact and supply market challenge


9780230_217805_09_ch07.3d 6/4/2008 16:39:11

disposal. The trick is to use them optimally for specific commodities. All

levers in this cluster generate savings by focusing on price. It might be the

case that looking closely at company prices at different locations brings

about a moment of truth about best-price evaluation. Perhaps aggressively

pulling the fixed-price contracts lever will do the trick.

Low-cost country sourcing is another lever. Companies need to ask

themselves whether this much-lauded lever, which is also full of pitfalls

and hurdles, will really activate the cost savings they want. Companies

should have plenty of resources at their disposal – and patience – before

pulling this lever. One of Europe’s largest university clinics decided to

concentrate its efforts on global sourcing activities. Commodity groups

were assessed to see if reasonable sources existed in low-cost countries.

The long list of countries that emerged was shortened by checking them

against a series of criteria specific to clinics such as import regulations,

technical clearance, and so forth. From this short list, five suppliers were

selected, which were built up during a two-year development program.

The low-cost sourcing lever does not bring quick wins.

Quantity leverage

The second cluster of levers – quantity leverage – also plays an important

role in optimizing sourcing costs: scale effects can be generated by

increasing volumes by a certain amount in order to determine prices. This

6

PRICE OPTIMIZATION

STRATEGICLEVER

MIX SET-UP

PROCESS REDESIGNTECHNICAL IMPROVEMENT

FUNCTIONAL ADJUSTMENT

• Focus on process optimization/change management

• Focus on demand management

• Focus on price reduction

• Focus on value chain configuration

• Focus on specifications/ concept changes

4

1

2

3

QUANTITY LEVERAGESUPPLIERINTEGRATION• Focus on close collaboration with suppliers

5

Figure 7.2 The right mix of levers is key to finding the correct sourcingstrategy for each strategic commodity/category field


9780230_217805_09_ch07.3d 6/4/2008 16:39:11

lever can be used to ensure that a certain volume is ordered or taken up in

purchasing cooperations. Volume effects are not only achieved by pooling

suppliers, but also by compiling a systematic compendium of requirements.

Bundling volumes internally (for instance, subsidiaries within a group) and

beyond the company (purchasing cooperations from independent compa-

nies) can bring significant savings potential. This potential is rarely tapped.

When it is exploited, it is only undertaken in a half-hearted fashion.

Companies are missing out. With this lever alone, an international group

was able to attain savings of around 15 percent of the entire purchasing

volume through pooling global volumes.

A financial service company also activated this lever, and benefited

from doing so. In addition to establishing specific sourcing activities, the

company also decided to build up a third-party business. It opened up its

sourcing platform to other stand-alone financial service companies with

low sourcing volumes. These third parties obviously benefited from the

deal. For its part, the financial service company managed to gain significant

scale effects too, by expanding its purchasing volume.

Process redesign

Improving existing internal purchasing processes or redesigning them is not

the focus of these levers: redesigning the process structure of suppliers is.

Companies should ask themselves whether it makes sense to use a

middleman or trader who dents trade margins but possibly generates

volume effects that are almost unthinkable or closes attractive deals with

alternative suppliers. Or is the opposite strategy a better option? Companies

might find it preferable to have direct contacts and create internal structures

to manage them. Levers belonging to this cluster include second-tier

supplier sourcing, e-catalogs, e-sourcing, and the simplifying of accounts

by introducing automatic credit memo procedures, for instance. One

company achieved cost and quality improvements after it introduced

catalog-based sourcing for roughly 40 percent of its sourcing volume,

which was transaction-heavy but advisory weak. By pulling this lever, the

company significantly unburdened operative sourcing, improved sourcing

quality, and lifted the customer satisfaction rates of internal carriers.

Technical improvement

This cluster of levers focuses on tapping the hidden potential within

products by using consistent standardization and value-analysis programs.


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The levers cover everything from applying alternative materials, to

making finer specifications, through to purchasing modules and change

process engineering. For these levers to work, the functions, customer use

or customer value must be firmly in the foreground. Only in this way can

costs be reduced.

An automotive supplier made cost savings of more than 40 percent by

applying some of the levers in this cluster. Within the framework of a cost-

optimization project for ABS finishing, the automotive supplier put

various concepts and procedures under the microscope. Small changes

resulted in large cost effects. By adjusting the pole kernels from turning

part to beaten part, cost savings of 40 percent were achieved.

Supplier integration

Integrating suppliers starts with product development. Levers in this

cluster are aimed at enabling companies to unite the hidden creative

potential of suppliers with their own specific abilities. By joining forces,

companies can carve out a sustainable position for themselves. Concept

competitions – a truly innovative lever in this cluster – encourage

suppliers to find innovative product solutions. Companies can then use

their suppliers’ insights and knowledge to develop cutting-edge products

and solutions. Supplier financing, consignment warehousing, and vendor-

managed inventories are some of the levers found in this cluster.

A manufacturer of signal lights, for example, was able to develop a

completely new solution for commercial vehicles by using a concept

competition. One of its suppliers discovered that by using magnet valves,

vehicle roofs would no longer need to be sawed through using the old

cumbersome technology.

Functional adjustment

Companies also have a set of functional adjustment levers at their disposal.

These levers have more of a middle- to long-term impact, and usually

change a company’s value chain in some way. Make-or-buy options, in- and

outsourcing options, backward and forward integration of value chain steps,

and sale and lease back are some of the functional adjustments companies

can undertake.

A benchmarking exercise at a machinery maker, for instance, showed a

considerable tilt regarding manufacturing costs. A definite weakness was its

vertical integration at 80 percent. Following close analysis, the company


9780230_217805_09_ch07.3d 6/4/2008 16:39:11

decided to outsource the prefabrication areas of turning and punching

to specialists. Activating this lever resulted in a savings of 35 percent of

total costs.

In each of the six category fields, various levers exist to improve

operating cost performance. While some of these have been discussed, the

entire list is shown in Figure 7.3.

Specific sourcing lever categories differ on average in their profit-and-

loss (P&L) impact and implementation speed. The categories quantity

leverage, technical improvements, and functional adjustment have a high

impact on the P&L, but rank low on being quick to implement. The levers

price optimization, process redesign, and supplier integration levers rank

highly on both the implementation speed and P&L impact axis.

Optimizing purchasing organization and processes

The second step companies need to take to make purchasing reach

performance excellence is to optimize processes within the purchasing

organization and the organization itself. Roland Berger research shows

that most trading and service companies have still not properly embedded

purchasing in their organizational structures. Only a tiny share of

companies has a purchasing representative on the board or at general

management level. Equally disappointing, far too few companies have a

clear-cut organizational separation between strategic purchasing and

operational procurement.

Companies need to focus on four main areas in order to lower process

costs in a sustainable fashion: processes, organization, information, and

know-how. These four areas are depicted in Figure 7.4. Processes need to

be reshaped to make them more effective and leaner. Purchasing should be

turned into a well-functioning, cross-disciplinary, organizational function.

Information flows need to be made transparent, and employee know-how

needs to be nurtured by training and motivating staff.

Purchasing processes do not exist in isolation and are not all of equal

importance. Companies should give the highest priority to order-to-pay

processes. It is critical that these work efficiently. Companies would also

be wise to pay attention to processes that work in harmony with higher

business processes.

Positive results are almost immediate, when action is taken to improve

purchasing processes. For example, when purchasing redefines processes

between companies and sites, and clearly defines competencies and interfaces

between them, inefficiency and duplicated work is prevented. Similarly by


9780230_217805_09_ch07.3

d6/4

/2008

16:3

9:1

1

SUPPLIER INTEGRATION

5.1 Joint improvement program5.2 Supplier manufacturing analysis5.3 Consignment warehousing5.4 Vendor-managed inventory5.5 Supplier financing5.6 Early involvement/collaboration through product development5.7 Establish system supplier5.8 Concept competition

FUNCTIONAL ADJUSTMENT

6.1 Make option6.2 Buy option6.3 In-sourcing option6.4 Out-sourcing option6.5 Forward integration6.6 Backward integration6.7 Sale and lease back6.8 Deconstruction of the value chain

QUANTITY LEVERAGE

2.1 Volume bundling2.2 Bonus agreements2.3 Corporate supplier negotiation2.4 Multi-year contracts2.5 Lifecycle contracts2.6 Purchasing cooperation2.7 Demand management2.8 Order management (batch size)2.9 Transportation option (frequency)2.10 Working capital optimization (inventory)

TECHNICAL IMPROVEMENT

4.1 Change materials4.2 Commonization/standardization4.3 Redesign/change of specifications4.4 Value analysis/creation4.5 Technical benchmarking/DFMA4.6 Innovation analysis4.7 Modular sourcing4.8 Change process engineering

PROCESS REDESIGN

3.1 Value chain mapping3.2 Total cost of ownership3.3 Second tier sourcing3.4 Hedging3.5 Re-engineering the procurement process/reducing interfaces 3.6 Distributor3.7 Avoid middle-man3.8 e-catalogue3.9 Web EDI3.10 e-sourcing (tender, auction)

PRICE OPTIMIZATION

1.1 Best price evaluation1.2 Tendering/(re)negotiation1.3 Fixed-price contracts1.4 Cost breakdown/cost disclosure1.5 In-house costing/activity-based costing1.6 Best-of-benchmarking1.7 Linear performance pricing/Cost regression analysis1.8 Target pricing1.9 Global/LCC sourcing1.10 Payment terms (accounts payable)

1 2 3

4 5 6

Figure 7.3 There are more than 50 sourcing levers for improving operating cost performance

12

1

9780230_217805_09_ch07.3d 6/4/2008 16:39:11

defining the roles and competencies of lead buyers and decentralized buyers,

companies benefit from more efficient strategic and operative purchasing.

Companies will also notice that when the innovation process is reorganized,

purchasing is involved early on and has a say on costs. This is a far cry from

business environments in which purchasing works reactively.

It is not enough to reshape processes; the purchasing organization as a

whole needs to be remodeled. Developing an optimal purchasing organiza-

tion takes time and should be tackled in a clearly structured manner. First, the

purchasing organization should be analyzed by commodity. While the

criteria for analyzing commodities are handpicked to suit specific customers,

common criteria include global sourcing, organizational structure, buyer

skills, and performance measurement. The next step is to draw up

organizational options, keeping individual commodity requirements in

mind. The individual commodity options are used as the basis for finding the

optimal purchasing organization. Finally, an implementation plan needs to be

hammered out, then coordinated, and followed through.

Specific actions to improve how purchasing is organized bring instant

results. By introducing new group-wide lead buyers and clearly defining

their role within the organization, purchasing becomes more transparent,

and is capable of combining decentralized competencies and centralized

coordination. It also assists companies to fill purchasing and other

positions. Synergies are optimized in purchasing when the level of coor-

dination per commodity is made transparent. To improve its organiza-

tional structure, one of the world’s largest automotive groups redesigned

its entire procurement department to make sure that all of its brands have

identical structures and reporting lines.

Well trained and motivated Information totally transparent

New and lean Establish purchasing as function

Processes Organization

Staff/know-how sharing Information

Purchasingorganization and

process optimization

Figure 7.4 Companies need to focus on four areas to lower process costs –processes, organization, information, and know-how sharing


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Purchasing needs to keep abreast of technological and IT changes to

ensure that processes and the organization are well-managed and efficient.

Costs can explode if purchasing uses outdated or inappropriate information

systems. A common information platform integrates all market, supplier

commodity, sourcing, and controlling information in one source. Purchas-

ing departments lacking a group-wide IT platform or cross-business unit

procurement information system do themselves a disservice. Manually

identifying cross-business unit synergies for commodities is extremely

arduous work and is error prone. No transparency exists for optimizing the

supply base across business units. Today, purchasing has numerous IT

systems from which to choose. An effective e-procurement platform

connects authorized buyers, internal databases, and suitable suppliers.

It is essential for companies to introduce consistent commodity codes

and a supplier code structure across business units that are integrated in

the chosen IT system or systems. These must be designed in such a way

that new commodities can be easily integrated into the system. These

standardized structures enable companies to report purchasing activities

and track performance results more efficiently. Without these codes and

structures, a lack of data transparency ensues and identifying bundling

opportunities for common suppliers is almost impossible because the

manual effort required for data aggregation is significant and demotivates

staff. It is not enough to introduce these standardized codes and structures;

with the help of these instruments, companies need to control purchasing

throughout the entire group.

As the role of purchasing within companies evolves, the demands on

purchasing employees increase and change shape. Action to train staff and

retain know-how will become increasingly important. Simple factors,

such as increasing globalization, mean that sourcing is now done on an

international playing field. Unfortunately, members of purchasing staff

are often insufficiently qualified to complete their tasks adequately.

A lack of language skills is a considerable handicap that robs purchasing

staff of their ability to close the best deals. Companies such as IBM,

Siemens or Home Depot have reacted by setting up international

purchasing offices (IPOs). The main task of these IPOs is to give market

research input, helping them to find and select the appropriate suppliers in

target regions and manage the supplier base with locals.

Best-practice companies have endeavored, over the past years, to make

improvements in all four areas. Achieving sustainable lower process costs is

the reward of that proactive stance. Some characteristics are common to

almost all companies that have globally aligned procurement processes and

systems. They have common procurement processes, systems across


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business units and regions, and they have aligned procurement organiza-

tions globally where suitable. Keen to learn from the best – whether internal

or external – these companies also adopt best-in-class processes and

systems across business units and regions.

Then there are companies that have not only achieved this, but have also

aligned processes and systems with engineering and other global functions.

These companies have common interfaces between procurement, engineer-

ing, and R&D, as well as with other supply chain management functions.

These sorts of companies enjoy a minimized process throughput time and

cost. They, too, adopt good practices throughout their entire organization,

irrespective of region or business unit.

Renault and Nissan, following their hook-up, fall into this latter category.

A great deal could be achieved by moving away from the specific

platforms, procurement processes, and commodity structures that had been

successful at both car manufacturers to create a global, standardized

structure for their joint procurement organization. Together, they chose

global commodity classifications, global procurement processes, a global

supplier information pool, and aligned procurement interfaces.

Managing the supply base

The final step on the path to create best-practice purchasing is managing

the supplier base. Companies embark on this path with the aim of making

quantitative and qualitative improvements to the supply chain. Some

might wish to improve their time to market, or become more agile; or they

might want greater technology input or customer satisfaction; or they

might want to reduce lifecycle and process costs, and the amount of tied

capital and total cost of ownership.

The activities that a company should pursue to manage the supplier

base in such a way as to improve the entire supply chain depend on what it

has already achieved. Companies that have yet to deal with this issue

should aim to manage the supplier base more effectively. Managing the

supplier base is a continuous process of assessing and selecting suppliers.

Changes in the procurement market and in a company’s procurement

portfolio duly affect how companies should select their suppliers.

Once companies have started to manage their supplier base success-

fully, they can think about developing their suppliers and supplier base.

To develop suppliers, companies need to decide what their aims are, and

assess the feasibility of reaching those aims with their supplier base.

Developing suppliers depends heavily on a supplier’s current level of


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performance, and the strategic corporate goals of both the supplier and the

company. Strategic corporate goals are likely to be shaped by customers’

and stakeholders’ expectations, market requirement, and core competen-

cies. Performance levels can be measured using quality standards, technical

abilities, economic efficiency, and operative performance. Once goals have

been set for suppliers, they must be communicated and monitored. Compa-

nies that do this successfully are blessed with the ideal supplier fit.

The long-term goal is to integrate suppliers and share supply risk with them.

How suppliers are integrated, and the duration of that integration, depends on

their development responsibilities. Suppliers need to become part of the

development process and be integrated into ongoing business processes.

Ideally, they will play an active role in the management of the change.

Roland Berger recently completed an international study that surveyed

1,900 companies active in 14 industries. The study showed that, although

supplier management is highly important in strategic terms, it is not used

as much as it should be. Hardly any companies have created long-term

contracts with fixed cost-reduction scales. Few companies have designed

long-term purchasing plans or systematic demand consolidation. This is a

shame, especially since best-practice businesses in supplier management

have better financial and earnings ratios.

Based on the study results, and drawing on experience from working

on more than 200 procurement projects with medium-sized and large

multinational companies over the past five years, five development stages

can be identified in supplier management: ‘best practice’, ‘runner-up’,

‘base’, ‘starter’, and ‘low performer’. In the study, 9 percent of companies

were ranked as best practice, which means that they showed a consistently

high level in all three areas: managing supplier base, developing suppliers,

and integrating suppliers. Moreover, supplier integration was considered

increasingly important and was used by these companies. Runner-up

companies accounted for 25 percent – managing the supplier base was

given priority and its importance is expanding, but developing suppliers

was viewed as less important. Some 18 percent of all companies were

ranked as base, meaning that they reached a consistently moderate level in

all three areas. Companies that were ranked as starters – these accounted

for 34 percent of all companies surveyed – showed progress in managing

the supplier base and developing suppliers, but integrating suppliers

remained underdeveloped. The low performers (14 percent) achieved a

low level in all activities.

Clearly, many companies have only just started out on this journey.

Companies that are new to the supplier management path have started

to define a strategy, research the procurement market, find and audit


9780230_217805_09_ch07.3d 6/4/2008 16:39:11

suppliers, accredit suppliers and products, and update the database. These

activities are laudable, but they need to be based on a thought-through

strategy and be well coordinated. When companies manage the supplier

base in an uncoordinated fashion, they have a supplier base that lacks

strategic or volume-based prioritization, and they suffer from uncoordi-

nated supplier management functions. The opposite is true of companies

that manage the supply base well. To ensure that the supplier base is

coordinated and managed with finesse, these companies have introduced

and use supplier management, a supplier assessment system, basic tools,

and supplier communications. The success factors for each of these phases

are shown in Figure 7.5.

Companies that move beyond this phase start to develop suppliers in

addition to managing them. This calls for deriving individual performance

targets, conducting a GAP analysis, defining development action,

assisting in implementing action and controlling activities. Key instru-

ments required to develop suppliers are formal performance gap analysis,

basic tools, ad hoc performance gap analysis, and personnel and capital

transfer. A supplier development roadmap is useful for managing supplier

performance.

Companies with an integrated supplier management blur the lines

between company and supplier. These companies form long-term product

Supply base management

Manage thesupply base

Developsuppliers

Integratesuppliers

Suppliersystematics

Supplierassessment system

Basic tools

Suppliercommunication

Formal performancegap analysis

Basic tools

Ad hoc performancegap analysis

Personnel and capitaltransfer

Supplier link

Technology integration

Integrating serviceproviders/systemsuppliers/processes

Integration structures andproduct development

Figure 7.5 Success factors have been identified in three areas of supplybase management


9780230_217805_09_ch07.3d 6/4/2008 16:39:11

development and manufacturing processes in which their suppliers are

heavily integrated from the very beginning. To pull this off, supplier

strategies are needed that contain performance review and evaluation

procedures, as well as procurement volume goals. Instruments to attain

this goal include supplier link, technology integration, combining service

providers and system suppliers, linking structures, integrating product

development, and creating processes in tandem. Companies that develop

strategic vendors and partnerships have fully optimized their supplier

base. In these cases, vendor development and integration occurs within

product development and manufacturing processes. When this level is

reached, companies enjoy optimum supply leverage. Purchasing in these

companies fully uses and exploits supplier capabilities. It also optimizes

and combines own and supplier value chains.

Best-in-class on a global scale

Intensified global competition forces companies to make their procurement

organization as global as possible. But leading industrial manufacturers face

a number of challenges as they attempt to leverage their global volumes and

supply base to maximize benefits. The strategies the best-in-class

companies have chosen to combat these challenges are instructive for all

companies that wish to improve the performance of purchasing.

Communication

The first challenge is how to align communication. Best-in-class

companies achieve this by establishing common commodity coding,

introducing a common IT/information platform to support global

interaction between business units, and harmonizing worldwide organiza-

tional structures and responsibilities to leverage synergies. These are

flexible enough to allow for the addition of new commodities.

e-Procurement

The second challenge is how to reap the benefits of e-Procurement. Here,

leading companies establish e-Procurement platforms to optimize interac-

tion with key suppliers. They also unite selected alliance hubs and

exchanges to reduce commodity procurement process cost, and introduce


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web-based procurement processes to reduce throughput time and cost. Best-

in-class manufacturers utilize e-procurement efficiencies on three levels by:

• They unite hubs and exchanges. They achieve this by choosing

exchanges for immediate access to a large supplier base with a focus on

raw materials and maintenance, repair and overhaul (MRO). They also

join alliance hubs for industry-specific commodities and joint product

development.

• They implement a captive e-procurement platform. This enables them

to integrate sourcing from request for quotation (RFQ) to order

execution and to integrate all procurement data with Enterprise

Resource Planning ERP and other back-office functions.

• They introduce and globally align web-based procurement processes.

Here, they predefine procurement requirements and search preselected

online supplier catalogs, automate order execution and receive products at

point of use, and automate billing and controlling functions. Despite the

benefits, Internet and B-2-B solutions are only being introduced slowly.

Synergies

The third challenge is how to realize synergies. To achieve this companies

have introduced global lead functions for commodities or commodity

groups across all business units or divisions. They have clearly defined

locally and globally purchased products and have implemented a step-by-

step system. These actions help them to monitor and control savings.

Here, too, there are various levels of synergies that can be attained through

global commodity leadership:

• The bottom level of the rung is business autonomy with a periodic

coordination via commodity strategies

• The next level is global commodity leadership across all business units

for all commodities

• The final level is a globalization level that is individually designed per

commodity or commodity group.

At the world’s largest maker of earth-moving equipment, synergies are

realized by combining division specific and company-wide commodity

leadership. Europe’s biggest engineering company, on the other hand,

realizes commodity synergies through different levels of global commodity

leadership across business units or regions.


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Lean global decision-making processes

The fourth challenge is how to create global decision-making processes that

remain lean. This can be especially tricky as local procurement struggles

with central procurement. To ensure effective decision-making processes,

companies have installed global procurement committees on the executive

level. Executives from business units and different functions – such as R&D

and manufacturing – are integrated into those committees. The lens is

focused on strategic and high-level operational tasks. At one of the world’s

leading computer software companies, decision-making is handled by a

procurement council, which is chaired by a global procurement vice

president. Since the role of the procurement executive council is clearly

defined, a sense of fairness is established. They regularly review

commodity strategies developed by global commodity councils, and they

aggregate information from supplier strategies and technology roadmaps

developed by their support teams. Importantly, they take decisions on

sourcing and other procurement issues based on the recommendations of

commodity councils.

Aligning internal processes

The fifth major challenge is how to align processes internally and with

internal customers to ensure consistency during the entire lifecycle and

harmonized structures. The best companies introduce and implement

common procurement processes that achieve global coordination and

transparency. Additionally, they align procurement process interfaces

with various functions – such as engineering – to minimize throughput

time and cost. This is especially important when companies merge.

Global management of suppliers

The sixth challenge is how to manage suppliers globally. Although most

people in the business believe that global sourcing is ‘old hat’, the lion’s

share of all purchases is still made in the country where the company is

based, even in large companies. The massive savings potential offered by

global purchasing markets is tapped to a very limited extent. Global

sourcing is full of pitfalls and companies need to take care. The recent

spate of quality problems arising from suppliers from China shows how

important it is to manage suppliers, not only to ensure continued high


9780230_217805_09_ch07.3d 6/4/2008 16:39:11

brand perception, but also to make sure that a company’s pool of suppliers

is large enough in emergency situations. Companies with ideal strategic

supplier management select a preferred supplier base and initiate vendor

development and integration programs. They manage key suppliers

globally and optimize local interfaces, and they standardize supplier

management evaluation processes across business units and regions.

Outlook

As the dynamic of international business continues to increase, and global

networks are formed and expanded at breath-taking speed, purchasing is

left with no choice but to keep improving. Companies that adopted

purchasing early have long since mastered the basics and are now seeking

advanced instruments to achieve more long-lasting goals. Followers

slowly noticed the benefits and now attempt to find sourcing solutions for

their organizations. Irrespective of what a purchasing department might

have already achieved, it must constantly challenge the existing supplier

base and continually seek out innovative purchasing levers that help

improve results. Skilled workers are needed that are business savvy and

who have a deep understanding of engineering or other functional aspects.

They must also feel comfortable doing business in a global market.

Procurement departments have made huge strides. But they should not

rest on their laurels. Purchasing managers need to prove continually that

they are able to implement strategic approaches that are pro-active,

innovative, and cost-effective.

Further reading

Roland Berger Strategy Consultants (2008) ‘Purchasing Excellence –

International Benchmarking Study’. Stuttgart.

Schwientek, Roland and Franke, Tobias (2008) ‘Purchasing Excellence:

International Study of Performance Diversity in Purchasing and

Procurement’. Stuttgart: Roland Berger Strategy Consultants.


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CHAPTER 8

Organizations drive strategy andperformance: insights from twosuccessful lead buying models

Tobias Franke

Introduction

Procurement fads come and go. However, any thoughts that global

sourcing is just the latest in that growing string of purchasing fads are

misplaced. Within a short span of time, global sourcing has gained

worldwide acceptance and is now firmly implemented in most large-scale

corporations. Global sourcing is a direct response to the competitive pres-

sure experienced by companies today. It is developing into the favored

option for companies that need to reduce costs and to improve the quality

and responsiveness of their procurement. Buyers send their largest sup-

pliers to low-cost countries or set up small sourcing offices in these

regions, in the hope of gaining better access to material and labor resour-

ces or to tap the potential of a more economical market.

While this concept sounds simple in theory, putting it into practice

has often been hard. Global sourcing has placed enormous pressure on

all organizations. Companies with local and rigid hierarchical structures

have felt that pressure especially acutely. The biggest challenge for

many companies was, and remains, how to align the organizational

structure of their procurement division with the requirements of a

globalized world. In such an interconnected world, each subsidiary or

business unit needs to tap into many markets without building up

redundancies along the way.

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This tests the mettle of companies. Skilled and motivated employees

are not enough to accomplish this task. An appropriate leadership concept

is needed too. Companies increasingly introduce lead buying frameworks

that combine these two factors, in order to tap these markets in a cost-

efficient manner.

This chapter will start briefly by discussing centralized and decen-

tralized procurement organizations, the two most popular organizational

structures for many years. Following that, I discuss how lead buying

systems work. I will then discuss two companies, from different indus-

tries, that combined the advantages of both centralized and decentralized

structures to create a lead buying organization. Insights gained by these

companies – and our project team – during the project are shared here to

assist companies that might be contemplating changing their organiza-

tional structure. Project experience has shown, time and again, that this

framework puts companies in good stead in an increasingly global

business environment.

Different sorts of procurement organizations

Three basic models are used in procurement organizations: centralized

buying organizations, decentralized buying organizations, and lead buy-

ing organizations. The differences between the three models are outlined

in Figure 8.1. There are merits to all three organizational structures

and each has a role to play. All procurement departments are unique.

Companies need to consider various factors to determine which organi-

zational form best fits their needs. These factors include geographical

location, the size of company, the number of employees, the industry, and

the corporate philosophy. The three different procurement organizational

structures can be individualized to suit the specific needs of each

company.

Centralized buying

…

Cen

tral pu

rchasin

g

1

Division/ country/ site

Decentralized buying2

…

Lead buying/centrally led

A B

3

Cen

tral pu

rchasin

g

Figure 8.1 Three basic models are used in procurement organizations

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Centralized buying organizations

Centralized buying is the natural choice for every small company just

starting out, especially if it comprises only one business unit, division or

site. Some larger corporations might also have a centralized purchasing

function that is responsible for driving synergies. However, this function

is generally detached from day-to-day business on an operational level.

Putting exceptions aside, it is usually only small and medium-sized

companies that operate using this organizational model. These companies

generally centralize their purchasing in the hope of achieving synergies,

in terms of economies of scale but also with respect to improved admin-

istrative efficiency and the optimized use of resources. Sometimes com-

panies choose this model because they purchase only a few commodities

or categories of goods that seldom change.

Typically, operative tasks such as the processing of purchase requisition

and strategic tasks – such as developing systematic category strategies or

managing supplier relationships – are performed by one purchasing unit

without further specialization. As business units are mostly responsible for

budgets, the decision-making authority of centralized buying organiza-

tions is somewhat limited.

Decentralized buying organizations

When a company’s business units, divisions or sites at home or abroad

grow in number, many take the natural next step and switch from being a

centralized buying organization to becoming a decentralized one.

Decentralized buying organizations can typically be found in financial

holding companies with a low integration factor. This structure can

facilitate the purchasing or selling off of legal units. Other companies with

this structure tend to have distributed (global) sites/divisions whose

purchasing functions are at a low development stage. Here, the rationale

for switching structures is to gain full authority and independence in the

corporate units.

Decentralized buying organizations do not support decisions being

coordinated across divisions, countries or sites. This is why these sorts

of organizations often build up redundant functions. Although these

purchasing organizations often construct lean, relationship-driven, local

purchasing departments that put them close to internal customers, they

remain compartmentalized within divisions or business units. They also

do not come close to gaining the negotiation power enjoyed by centralized

Organizations drive strategy and performance 133

9780230_217805_10_ch08.3d 5/29/2008 09:50:29

companies. They lack scale and a unified strategy, when it comes to

product and supplier selection, and negotiations.

Lead buying

Another organizational structure that is swiftly gaining in popularity is

lead buying. The basic lead buying concept has been developed for

corporations that need to coordinate spend categories, supplier strategy,

and markets without sacrificing the proximity to local requirements. For

many companies, lead buying combines the best of the centralized and

decentralized buying organizations. Typically, this organizational model

is found in companies that operate in different markets worldwide, with

different business units and many sites. When large-scale organizations

introduce the lead buying organizational framework, they are able to

strengthen their international procurement coordination and can negotiate

better prices. Instead of commodities being purchased by different people

within the company, in a lead buying organization one buyer – the lead

buyer – is designated for a defined category or commodity.

The lead buyer has the authority to conduct negotiations and to sign

contracts with suppliers. He has control over volumes that are bought from

different local suppliers. Such a buyer might be in charge of purchasing

raw materials company-wide, for instance, or for a certain product. This

sort of set-up makes it easier for suppliers too; because they have one

point of contact, they deal with one person who has clear negotiating

powers. With leadership comes accountability. The lead buyer also carries

responsibility for ensuring that he has selected the best purchasing

strategy available.

Transformation teething problems

Companies might face several barriers when they decide to make the

transition from a centralized or decentralized organization to that of lead

buying. In all transitional phases, employees experience feelings of

uncertainty, are quick to put leadership into question, and tend to harbor

uneasy feelings about how responsibility and accountability will be

redistributed. Companies can easily assuage employees’ concern by

compiling a list of questions that employees are likely to be concerned

about and directly answer them in a ready-to-distribute information sheet.

This should contain answers to the most frequently asked questions.

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Employees in decentralized organizations are accustomed to focusing

on developments at plant level, and might be dismissive of best practices

gained from other organizations. These companies should not be surprised

if their employees are not enthusiastic about introducing lead buying, and

are openly hostile to the idea of capturing cross-business synergies.

In these situations, companies need to use examples of early success to

boost acceptance of the new system, and win the support of influential

team members. To drive continuous support, compliance, and adoption of

the lead buying concept, companies should constantly communicate their

strategies, goals, and performance to the various business lines and

regions. Setting targets also indicates to employees that the change is non-

negotiable. Awarding strong performance can also be a strong motivator.

There are most definitely obstacles when setting up a lead buying

organization. However, the perseverance is well worth the effort. To show

how lead buying can help companies perform better and gain noticeable

bottom-line results, I will discuss two very different client success stories.

Lead buying in the automotive industry

The first success story stems from the automotive sector, which was one of

the first industries to adopt the lead buying concept. In the automotive

industry, original equipment manufacturers (OEMs) and their suppliers

are globalization pace setters – and they have to be. Customers in the

automotive industry are well informed, have high expectations, and can be

quite challenging: features seen in top of the range cars are also expected

to be found in entry level cars at entry level prices within one development

cycle. Finding ways to make cars both desirable and affordable is this

industry’s Holy Grail. Purchasing, in collaboration with R&D, plays a

major part in meeting this challenge.

Example: Leading buying in the automotive industry

One of the world’s largest automotive players wanted to optimize itsorganizational framework and processes, and adopt a fully integratedorganizational model. The Roland Berger team helped the company setup a lead buying purchasing organization, step-by-step, starting withsimple harmonization and increasing this gradually until purchasing asan entire entity had been transformed.


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A close look at the procurement organization and processes at theend of the 1990s revealed that synergies were not being realizedbetween business units, brands, and countries. Procurement wasdistributed throughout the organization and no overarching strategyexisted. Sites were bought without considering the scope or require-ments of other sites, and no alignment existed between various regions.The steps leading to an integrated procurement strategy are depicted inFigure 8.2.

Over time, and with increasingly more integration, the project teamwas convinced that global leverage, higher savings, efficiency andstandardization could be increased at this automotive heavyweight. Buthow could the company best achieve these goals? The project teamdecided that two things had to change immediately if the company wasto achieve its goals.

The company could no longer avoid setting up and implementing astandardized commodity code – basically, a common language fordifferent commodities. This company, one of the world’s largestautomotive players, had no consistent code structure in place acrossits multiple business units for either commodities or suppliers.It suffered from a lack of data transparency, which made it almost

Separated Harmonized Combined Integrated

Orga/ Skills

Process

SystemsKPIs

Procurement strategy

Procurement

performance

• Locations separated – no synergies

• First coordination – first synergies realized

• Launch and ramp up of organizational model – savings realization started • International locations only loosely linked

• Organization extended to international locations

Figure 8.2 Only an integrated approach to procurement ensuresoptimum impact on a company’s competitiveness

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impossible for purchasing staff to identify bundling opportunities or,even, to recognize common suppliers. The manual effort required toaggregate the data was significant and unnecessarily used up resources.

Introducing a governance model was also essential. Only by doingthis could the purchasing function assign tasks and responsibilities on acommodity level. This is a necessary first step on the path to becoming afully –integrated organizational set-up.

Establishing a common commodity code and introducing a govern-ance model are steps that are relatively easy to accomplish. There are anumber of standardized solutions for creating commodity codes and acommodity code architecture. UNSPSC and eCl@ss are just two of themany solutions on the market. Since all of these standardization systemshave their own set of advantages and drawbacks, the project teamneeded to evaluate them based on their own individual merits and fitwith the company’s specific needs as an automotive player. The systemthe project team chose to create a common language is capable ofdefining a reference system and code suppliers as well as spend data. Itis therefore sufficiently flexible to be used as the company continues todevelop. This should always be a prerequisite when selecting sucha solution.

Launching the governance model involved some preparatory work,but was relatively simple to introduce once the model was clearly laidout. First, three levels of leadership and three regions were defined forthe model, after considerable discussion with various key staff members.This matrix is depicted in Figure 8.3. The highest level of leadership and

Global commoditylead

Regional commodity lead

Local commodity autonomy

Global savings

Local savings

North America

Europe/ South America

Asia/ Pacific

I

II

III

Governancemodels

Regions

Regionalsavings

Figure 8.3 Global lead buying consists of three governance models,ensuring global and regional savings


9780230_217805_10_ch08.3d 5/29/2008 09:50:30

coordination is the global commodity lead. The commodities that fallunder the global commodity lead include robots and the IT of cuttingtools. Other commodities were assigned to a regional commodity lead –including, for example, motor test benches, elevators, and escalators.Regional commodity leads were created for the areas North America,Europe/South America, and Asia/Pacific. All commodities not assignedto either a global or regional commodity lead were assigned to ‘localcommodity autonomy’; these include such commodities as gardeningand waste disposal.

The responsibilities for the key purchasing processes in eachgovernance model were clearly defined. Moreover, it was essentialthat the roles of the global commodity leader (GCL), regionalcommodity leader (RCL) and local buyer (LB) were clearly allocated.Also, the manner in which they should interact with one another andthe individual responsibilities of each leader or buyer was strictlydefined. Sourcing decisions for commodities with global/regionalpotential are made on a global/regional basis, and approval from theGCL/RCL is required, for instance. Local buyers are responsible formanaging the interface to the internal customer and operativetransactions. The responsibilities of the leaders and buyer are shownin Figure 8.4.

I

II

III

Commodity strategy

Sourcingprocess

Transaction

Global commodity lead

Regional commodity lead

Local commodity autonomy

Responsibility of global commodity leader (GCL)

Responsibility of local buyer (LB)

Responsibility of regional commodity

leader (RCL)

Key purchasing processes

Governance models

Figure 8.4 The newly defined governance models add the regional focus

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Furthermore, the tasks and main responsibilities for the commodityleader/coordinator and local buyer were defined. In the governancemodel ‘global commodity lead’, for example, the leaders are responsiblefor developing, reviewing, and implementing global commoditystrategies. They are also responsible for approving all major sourcingdecisions, and are held accountable for commodity results. In thegovernance model designed for the automotive company, the localbuyers are responsible for contributing to global commodity strategies,and negotiating and finalizing contracts. They are also responsible forobtaining the approval of the commodity leader, if required, and tomanage the customer interface.

Lead buying in the utilities industry

The introduction of a lead buying concept can prove beneficial for utility

companies because stiff competition and strict regulatory requirements

force them to find new ways to drive down operational expenditure

(OPEX).

The second success story involves a utilities company. Utilities are not

generally thought of as companies that use lead buying to improve

purchasing departments. This is part of the reason for highlighting this

particular case.

Example: Lead buying in the utilities industry

Although all of the utility company’s business units and sites were locatedin one country, it suffered from similar problems to the automotivecompany in the previous example. Despite geographical proximity,business units and sites worked independently and – more troubling still –bought independently. Potential synergies were being squandered.

A slightly different approach to lead buying was necessary here. Theprimary focus of the project was to streamline structures and optimizeprocesses. To do that, the project team first had to differentiate betweenutility specific and non-utility specific purchasing. In a next step, purchas-ing segments or centers were defined, and four clusters emerged. Theseclusters comprised project/complex purchasing, utility purchasing, stan-dard purchasing, and catalog procurement. They are shown in Figure 8.5.


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The company was in need of criteria that would help it splice andsegment processes and purchasing structures into one of these fourdifferent purchasing clusters. A series of characteristics had to befulfilled before a purchasing item was distributed into a cluster.A purchasing item that was designated to project purchasing, forinstance, had to have either complex and innovative one-time processes(project purchasing) or repeat processes (complex purchasing), haveextensive interaction with customers on a highly technical level, andclearly identifiable customers. The construction of a combined cycle gasturbine (CCGT) plant is an example of project purchasing. Projectpurchasing has no direct category allocation.

All other purchasing segments were allocated a clear category.Processes and structures that have utility specific requirements thatcannot easily standardize materials/services belong to the category‘utility purchasing’. Another characteristic of utility purchasing is thatthere is low to average order frequency, and cataloging does not makegood business sense. Standardized purchasing encompasses allcategories that have identical requirements across companies, easilystandardized materials/services, and low order frequency. Here, too,cataloging is not appropriate. Catalog purchasing was introduced foritems that possess several characteristics, including considerable abilityto standardize materials/services, are easy to describe, have a high orderfrequency, and with no direct or active interaction with the customerbeing necessary.

Non-utilityspecific Utility-specific

Project and complex purchasing

Standard purchasing

Catalog procurement

Utility purchasing

1

3

4

2

Involvement in repeat (project) requirements affecting

multiple categories

Pooling requirements through standardizing

requirements

Procurement transactionvia catalog

Involvement in one-timeproject requirements affecting

multiple categories

Basic processes

Process optimization

Structural streamlining

Figure 8.5 Purchasing is reorganized into four new purchasing segments

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Based on this information, categories were allocated to specificpurchasing service centers. A lead buyer was placed in charge of each ofthese centers. These corporate lead buyers are now responsible forgroup-wide coordination of purchasing activities. This encompassesshared services, other group companies, second-tier subsidiaries, andfinancial holdings. This is illustrated in Figure 8.6.

Project/complex purchasing was assigned to a shared services unit,while all the other categories were assigned to the most appropriateorganizational unit. Appropriateness is defined by the most commonuse and direct knowledge. The category for high voltage cables, forinstance, is assigned to the distribution company even though somecables are used in generation too.

Overall conclusion and outlook

To reap the benefits of a lead buying organization considerable effort is

generally required. An overall vision for the transformation process is

essential. This enables companies to set, accomplish, and monitor targets

Corporate lead buyer Specialty buyerPurchasing manager

Cat

ego

ry m

anag

emen

t

Shared services

Second tier subsidiaries

Other group companies

Financial holdings

Group coordination committee

PM committee

Standard purchasing

Catalog procurement

Utility purchasing

Project/complexpurchasing

CEO

CPL

Service center

CPL

Key:

Figure 8.6 Corporate lead buyers are responsible for group-widecoordination of purchasing activities


9780230_217805_10_ch08.3d 5/29/2008 09:50:30

that are relevant from a management perspective. Such a vision also needs

to be communicated to all employees, irrespective of hierarchy. When

employees understand why the changes are necessary, the changes will be

easier to introduce. This is especially true of operational changes, such as

introducing a common coding language. It also encourages employees to

feel comfortable working in an organizational model in which solid lines

and category leadership can deviate.

It is not only the leadership concept that is critical for successful lead

buying – the right people are needed too. Lead buyers take on considerable

responsibility. Companies need to assign these positions with care, ensuring

that the people selected are respected throughout their divisions and various

regions. Lead buyers must also be capable of nurturing relationships

with suppliers. If they lack these soft skills, they put the whole model in

jeopardy.

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PART III

Manufacturing

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Introduction

Manufacturing in a global context

Ralf Augustin

When the South-east Asian ‘tiger’ states entered the international eco-

nomic arena two decades ago, there was a fundamental change to the

global manufacturing footprint of whole industries: western manufac-

turers were challenged by fierce competitors who had created favorable

cost structures and who were both eager and able to learn quickly. As a

result, European hi-fi and motorcycle manufacturers – to name only two

examples – were almost completely squeezed out of the market. The rules

of global competition are shifting once again, with the entrance of Central

and Eastern Europe, China, and India into the global economy. The

impact will be much broader this time, rippling through more industries

and putting greater pressure on many more companies.

Considering the magnitude of the risks that follow in globalization’s wake,

it is understandable that companies concentrate only on the threats. New

global manufacturing entrants, characterized by their low-cost base and lower

labor and environmental standards, are easy targets for distrust. These

manufacturing upstarts threaten the jobs of people in the Triad region who

carry out work that does not require high-value skills, shifting these jobs to

emerging markets. As more players collaborate to create and improve products

and services at increasing speeds, competitive pressure on companies in Japan,

western Europe, and North America will continue to increase. That pressure is

already too great for some companies, and insolvencies are on the rise.

The risks of globalization are real, but its advantages far outweigh the

perils. Consumers in North America, western Europe and Japan benefit

tremendously from the reduced cost of products manufactured in lower

cost regions. Everything – from computer chips to clothes, from toasters

to tires – has become less expensive since manufacturing was relocated to

cheaper locations.

Companies benefit twice over: not only can they produce goods more

cheaply for their Triad customers, they also enjoy the emergence of new

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markets bursting with an unfathomable number of consumers who crave

high-quality products and brands made by ‘old world’ manufacturers.

German and Japanese machinery manufacturers in particular benefit from

the interest of manufacturers in these emerging regions, keen to obtain

sophisticated, well-designed equipment.

When discussing the potential that is simmering in this region, the

numbers speak for themselves. India has 300 million middle-class people

(or 55 million households) and more than 60,000 millionaires measured

in US$. GNP in China and India is expected to grow by at least 5 percent

each year until 2020. Within the next decade, China will become the

second most important consumer goods market worldwide and India will

rank third. No company can afford to ignore this burgeoning market

segment.

Not only a shifting landscape, but also a different world

While, in the past, Triad companies succeeded in their global expansion

primarily through exports, today matters are different. Locally made

goods can be better tailored to local requirements because production is

often more flexible and less costly. In addition, a number of external

factors support globalization: lower barriers to international capital

transfer mean global production networks are easier to build, large pools

of engineers and managers are available in countries such India and China

to run local operations, modern logistics and continuously decreasing

tariffs lower the cost of global transport, and IT systems permit global

engineering collaboration and supply chain transparency.

Companies in Japan, North America and western European have the

opportunity to capitalize from this global transformation and use the low

costs to their advantage. However, they need to build global manufactur-

ing networks to reap the rewards. No aspect of global collaboration can be

left to chance: every aspect must be well defined and clearly commu-

nicated. Moreover, these networks must be monitored and reviewed at

regular periods to ensure that they are still valid and that they remain

sufficiently flexible to respond to sudden business changes.

Triad companies need to focus sharply on manufacturing high-tech

products: there is no sense in them concentrating on anything else. They

cannot compete with low-tech, low-cost products manufactured by

companies in newly emerged and emerging regions.

Developing, testing and ramping up innovative production technologies

is the only way forward, if companies in western markets want to develop

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and manage a global supply base. Only highly skilled, adaptable employees

who are willing to keep on improving their knowledge will thrive in this

globally oriented environment. Operations in emerging markets can serve

as manufacturing hubs for labor-intensive products. They can also form a

local base for fabricating ‘near-the-customer’ goods to be sold in these

markets. Operational excellence is a must in this scenario.

The traditional competitive advantages once enjoyed by Triad countries –

such as a highly educated workforce, excellent infrastructure, and polit-

ical and financial stability – are becoming relatively less important as

developing countries improve on these fronts. This is not to suggest that

Triad countries can afford to become complacent and let their high

standards slip: it means that these are no longer competitive advantages

but, rather, the base line that every country needs to meet. Operational

excellence thus becomes an even more important factor of differentiation.

Manufacturers have focused on improving the quality of their processes

as a means to achieve operational excellence for at least the past twenty

years. The process is ongoing. Wave after wave of new breakthroughs

keep companies busy as they learn to adapt and keep ahead. Lean manu-

facturing, which radically changed manufacturing practices, is helping

companies remain competitive. Adopting such practices is critical as the

pressure increases to be increasingly more flexible, faster and cost

effective without jeopardizing traditionally high product quality.

Part III is dedicated to showing companies how they can meet the

challenges of manufacturing in today’s increasingly globally oriented

world. For Triad countries, the nature of competition in manufacturing has

changed. High quality and highly customized goods are in unprecedented

demand. Global manufacturing networks are required to deliver these

goods. In Chapter 9, Marco Zurru describes the successful building and

continuous improvement of global manufacturing networks. Volker

Heidtmann and Stephen Weisenstein, in Chapter 10, show companies

how to achieve operational excellence with global manufacturing networks.

Then, in Chapter 11, Dr Thomas Kwasniok and Walter Pfeiffer explain

how to enable lean manufacturing through best-in-class management and

by setting up support functions.

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CHAPTER 9

How companies can optimize theirglobal manufacturing footprint

Marco Zurru

Introduction

Companies surfed the first wave of globalization largely to exploit

opportunities in low-cost countries. They wanted to find suppliers and

manufacturing locations that could help them decrease overall production

costs as they competed in traditional western markets. The current

competitive environment pushes them out into more challenging water,

but the spoils of riding the swell are greater. Companies these days are

searching for low-cost locations and suppliers, and they want to gain

access to the large markets that are opening up rapidly in emerging

economies. They also need to develop strategies to tackle the emergence

of an increasing number of players from emerging countries that are

quickly building capabilities to serve international clients.

To attend emerging markets, companies need to develop a new business

model that provides them with the ability to manufacture customized

products that are suitable for local needs. The business model also must be

flexible enough to let companies closely integrate local manufacturing

capacity with sales and distribution networks. That is critical if companies

are going to be able to compete with new players from emerging countries

that do battle on the same international markets but have lower costs.

Prompt action is required in terms of cost structure and innovation capa-

bilities, especially as increasingly more players from low-cost countries

swiftly reduce the technological gap, partly by acquiring western players.

In this evolving contest, companies will gain the upper hand by designing

a flexible manufacturing footprint that considers how increasing global

competition affects and impacts their strategic objectives. In this chapter,

I examine how companies can best design – or redesign – their global

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manufacturing network. First, I look at the differences in networks from

industry to industry. Next, I show a handful of factors that are critical for

optimizing a manufacturing footprint, irrespective of industry. These

factors form the foundation of an approach that Roland Berger Strategy

Consultants successfully uses when helping companies lower their

manufacturing costs and develop sustainable strategies to thrive in a

globalized environment. And finally, with the help of a case study, I show

how following this step-by-step approach can help companies address

manufacturing network design issues on a global scale.

Footprints differ in size and imprint

Various footprint models exist, depending on the reasons behind the

global manufacturing presence and industry specific concerns. Auto-

motive players aim to reach a global customer base, and their business is

driven by economies of scale. It is not surprising, then, that their footprint

is already fully global. Automotive suppliers – who mostly embark on an

international manufacturing journey to support their customers (auto-

motive original equipment manufacturers OEMs) – have a footprint

reflecting their clients’ global presence. The multinational footprint of

aerospace and defense companies, in contrast, is mostly driven by

international agreements and by offset requirements. Other companies

have a multi-local footprint but can leverage economies of scale for very

specific parts of their value chain – consider, for example, raw material

procurement or engineering.

The business environment is developing rapidly. What works for one

industry at a particular time is unlikely to yield good results for others,

and will probably require redesigning at a different point. No single

predefined solution exists for an optimally designed global manufacturing

footprint.

Each company has to design its own unique footprint. However, the

design should not be set in stone. It must be sufficiently flexible to adapt

to changes in the business environment. In my experience, a systematic

approach is needed to accomplish this. The design should be based on a

top-down understanding of the strategic drivers that force a company to

expand its manufacturing footprint globally. Also, it should assess the

feasibility of expanding the manufacturing network at the operational

level, paying close attention to cost structure and risks. The six-step

approach outlined in the next section of this chapter provides a compass

for decision makers. It should alert their attention to the tricky terrain that

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needs to be traversed when shaping, optimizing, and managing an

evolving global manufacturing footprint. The approach and focus points at

each step are illustrated in Figure 9.1.

Step 1: Understand the strategic drivers for your globalmanufacturing footprint

Each industry is shaped by different factors that determine its need for a

global manufacturing footprint. The same is true for individual companies.

Before any company can optimize its manufacturing footprint, it must

analyze the reasons why it is necessary to expand its global network and

the implications of these factors.

There are two overriding reasons why companies delocalize their

manufacturing activities: either they are lured by the attractiveness of

potential markets, or they want to lower costs. Companies should keep

these goals in mind when creating guidelines for their company’s

globalization strategy. The reasons for addressing manufacturing network

design issues, and the challenges to reach the two manufacturing goals,

are shown in Figure 9.2.

Improving cost performance is a common strategic imperative in most

industries. The business case for optimizing cost is straightforward and is

based on total cost of ownership. It leads to the offshoring of components

and manufacturing activities that have high labor content, and are

FocusSTEP

• Understand strategic drivers and implications

• Priorities: cost versus market penetration • Target markets and external constraints

• Derive the global manufacturing footprint model

• Industry cost structure and economies of scale • Alternative manufacturing processes • Logistics network structure and costs

• Segment product structure and define delocalization scenarios

• Product structure and relevant manufacturing activities • Business case for delocalization of activities • Risk evaluation

• Select target regions and countries

• Selection of potential countries • Short list of activity-specific target countries

• Fine-tune the model and finalize the footprint

• Manufacturing scenario analysis and sensitivity • Make/buy decisions

• Select site, suppliers and partners

• Partner/supplier identification and screening • Partner/supplier selection and final make/buy decision

Figure 9.1 Approach steps and focus

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characterized by relatively low technology and criticality. Local

manufacturing operations provide labor-intensive work, simple technol-

ogy, and low plant investments. While product design is not affected by

the decision to delocalize production, ensuring good quality and reliable

delivery are two pressing concerns once manufacturing is relocated for

cost optimizing reasons. No major risk of technology transfer exists

because the delocalized technology is relatively low. Companies that

offshore to reduce costs need to remember that their cost competitiveness

will erode over time, due to the progressive increase in local costs and cost

alignment from competition.

When companies build a global manufacturing footprint in order to

increase the customer base, the challenge is more complex, especially if

the focus is on fast growing emerging markets: complexity enters the

game as products need to be redesigned to fit the requirements of

potentially millions of local but highly heterogeneous customers. At the

same time, companies need to keep as many components and interfaces

standard in order to leverage economies of scale. Operations are required

locally, including final product assembly lines and test operations. In

addition, the risk of technology transfer is greater, as suppliers and the

local workforce gain access to more sophisticated technological processes.

A change of paradigm in the organizational culture is required when mov-

ing to a completely global footprint. The rapid growth of local competitors

Market approach

Global

Focused

Focused GlobalCost approach

Exploit global marketpresence• Risk of technology transfer

Enter global market• Sustainable competitive advantage• Price• Local requirements

Improve cost performance• Quality • Reliability • Progressive erosion of cost advantage

Leverage local presence• Cost structure versus local competitors • Local requirements

Build global fo

otprint

• Paradigm ch

ange in

organizatio

nal cultu

re

Figure 9.2 Different manufacturing network design goals and relevantchallenges

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is a threat that should be considered when building the business case. In

comparison with foreign players, local companies require no (or limited)

R&D investment, their management structure is cheaper, and they face

lower compliance costs.

In some cases, companies will need to delocalize their operations in order

to enter closed or regulated markets. This is true for companies in the

aerospace and defense market, for instance. The aim here is not strictly to

benefit from market proximity, or lower transportation and labor costs.

Delocalization, in these cases, is simply a precondition for gaining local

market share. Companies will need to adopt a different strategy, as business

activities will need to be redesigned to meet industrial agreements. In the

aerospace and defense industry, for example, extremely complex industrial

footprints are designed to comply with the sector’s pre-negotiated work-

sharing agreements, and technological fallout requirements. In my

experience, optimizing such a complex – and counter-intuitive – manu-

facturing footprint works only if partner companies are closely integrated

on an organizational level and already have excellent manufacturing

operations. The situation of component suppliers for the automotive

industry is slightly different. Suppliers require a local presence to match the

internationalization priorities of their OEMs. Here, the focus is on

minimizing risk exposure through long-term contracts with the OEM and

ensuring high quality and reliability of local operations.

Another reason for building a global manufacturing footprint is to

create a defense against low-cost competition stemming from new

economies. Competing purely on cost is not a sustainable strategy for any

western manufacturer. A different sort of business model is required. In

this situation, a company’s global manufacturing footprint strategy needs

to be totally integrated and aligned with that company’s overall business

strategy. Companies can reinforce their protective defense against low-cost

competitors only by creating a sustainable competitive advantage. This can

be achieved through clever product positioning or research and develop-

ment, or both. Globalizing without a sound diversification strategy could

prove useless.

Step 2: Derive the global manufacturing footprint model

Once companies have a clear understanding of the reasons for developing

a global manufacturing footprint, they can start defining the guidelines

that should shape that presence. General aspects companies need to

consider include the markets they wish to serve, local content, and cost


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priorities. More specific aspects that should be considered are labor

content, economies of scale in each phase of the manufacturing process,

alternative manufacturing processes, and transport costs. It is important to

keep the company’s manufacturing cost structure firmly in mind when

examining these aspects.

Centralized final manufacturing operations with offshoring of components

and sub-assemblies are typical in industries that demand large investments

and stringent quality requirements, and in which labor content and simpler

operations characterize the manufacture of components and sub-assembly.

Lower labor content is required for the final phases of the assembly process.

Complex mechanical systems in the aerospace and automotive industries are

exemplary here. They can leverage the low cost of forgings and castings

derived from emerging economies, as well as low labor costs for other simple-

to-manufacture parts against downstream activities that must be centrally

executed. These downstream activities require large investments for metal

cutting machines and surface treatments. High quality control standards and

advanced labor skills in final assembly operations are needed too.

Other industries, in contrast, are characterized by large economies of

scale in upstream operations and low value-added, and limited economies

of scale in final manufacturing operations, which are also burdened by high

transportation costs. This is true of the aluminum industry, in which a

typical global manufacturing configuration is based on a number of similar

small size local plants (for example, extrusion) that are served by regional

smelters, mostly located in countries where the cost of electric power is

relatively low; these, in turn, are served by proprietary aluminum ore mines.

In the construction material sector, transportation costs and local

requirements limit the market that could potentially be served by a single

plant. Large international players leverage technical competencies and

support services in order to ensure internal benchmarks, cross fertilization,

and best practices. Globally shared services provide low cost support for

the entire group.

The automotive industry has pushed the global manufacturing footprint

to an extreme because it can profit from large economies of scale in

engineering, manufacturing and procurement, leveraging the size of

global markets. An international network of in-house plants and suppliers

serves a global footprint of final assembly plants to produce diversified

and localized models based on standardized and modularized platforms

and modules. Engineering activity is shifting to decentralized centers of

excellence to react more quickly and attentively to local requirements and

locally designed components. For automotive suppliers, the one reason for

relocating business is better to serve OEMs.

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The aerospace and defense sector provides another model for a global

manufacturing footprint. International agreements and offsets, and defense

constraints and embargos are factors that need to be considered when

defining the footprint’s contour. An international military program could

comprise a complex set of work packages that include four different

assembly lines in four different countries, two sites for manufacturing

composite wings (one country produces the right wing for all partners,

another country produces the left wing), for instance. It is likely to work

with various other relatively inefficient solutions that ensure that know-

how and technology ownership is balanced between players and countries.

To configure the best manufacturing footprint, companies need to

consider their own strategy, as well as industry and product characteristics

such as economies of scale and cost structure. Cost components such as

labor, transportation and energy should not be left out of the equation. At

this stage, companies are also well advised to consider the availability of a

skilled and reliable workforce, as well as partners and external constraints.

Step 3: Segment product structure and define relocationscenarios

After a company has selected its overall manufacturing model based on

strategic drivers and a thorough understanding of operational factors, it

needs to conduct a detailed analysis to ensure that value chain activities

are allocated optimally. Product structure and manufacturing operations

should be analyzed in depth in order to identify the most suitable

components and activities for relocation. Two dimensions are important

here: economics and risk.

Economical variables are required to define the overall payback of

delocalizing a specific manufacturing process. The main areas of

investigation are:

• Manufacturing options (automation investments versus more labor

intensive manufacturing, traditional assembly plant versus CKD)

• Required investments for each manufacturing option

• Overall cost structure (labor, materials, depreciation, energy, transpor-

tation, services)

• Expected lifecycle and cost structure evolution.

A business case is then built to provide the expected payback for each

component and manufacturing activity analyzed.


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Risk is then defined based on variables such as technological

complexity, component criticality (the importance of reliability of

delivery), quality requirements, required labor skills, and technology

transfer. A risk indicator provides an assessment of the variance of the

expected payback over a certain period of time if the manufacturing

activity is delocalized. An illustration of a payback and risk analysis is

given in Figure 9.3.

Based on risk and payback, companies should test different

manufacturing scenarios. These should calculate total cost of ownership

and the relevant risk for each configuration. A sensitivity analysis

simulates the effect of changes in cost drivers to the total cost of

ownership for each scenario analyzed.

Before advancing to the next step, companies should have a thorough

understanding of the conditions necessary to relocate each manufacturing

phase in the most advantageous way possible. A checklist can help

companies ensure that they have considered the factor costs required to

meet the specific cost structure, labor skills, specific technological

capabilities, and shape of the competitive environment.

Risk of implementation

Surfacetreatments

Fuselagesection

Compositecomponents

Software

Basicengineering

Machined subassembly

Doorassembly

Fasteners Panels

Rivets ManufacturingengineeringAluminium castings

Aluminium forgings

TitaniumAluminum

Machinedparts

SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4

Payback (years)� Absolute annual cost savings

Figure 9.3 Payback and risk analysis

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Step 4: Select target countries

There are a number of different ways companies can select target reloca-

tion countries, and these will depend on the global manufacturing foot-

print strategy the company wants to pursue. In some cases, the number of

countries considered will be restricted because the company knows it

wants to enter a specific market that has its own unique offsets or local

content requirements. In other cases, the list of countries is short because a

company is relocating to serve a specific client – for example, OEM

proximity for automotive suppliers, or because of very specific local content

requirements. Sometimes, there will be no preliminary restrictions on

potential countries that may belong to the manufacturing footprint.

The process of selecting countries for setting up manufacturing

operations should be addressed in two different ways. If shortlisted

countries are chosen because of strategic imperatives, companies need to

consider what activities and modules can best be produced locally,

considering the size of the target market and the amount of local content

required. These companies also need to screen potential supplier networks

and assess local technological capabilities to filter the components or

activities that are most suited for local production.

In the specific case of automotive component manufacturers, OEMs’

requirements and trends are a major part of the strategic decision and

should be investigated in depth.

Companies must understand clients’ expectations in relation to the

following dimensions:

• Restrictions on sub-suppliers and/or certification requirements for

second tier suppliers – aerospace and defense second tier suppliers need

to pass a strict certification process

• Local content requirements – OEMs sometimes require local content

from first tier suppliers to meet requirements in specific countries

• Outsourcing – OEMs often require first tier suppliers to dominate the

technology, or they require specific assemblies to be in full control of

the first tier supplier

• Constraints based on lifecycle phases and specific activities – OEMs

sometimes restrict low-cost country sourcing until the product reaches

maturity. They do this to reduce the risk of problems with first series.

Afterwards, they will turn to local engineering for support and technical

expertise

• General sourcing preferences – components versus modules, specific

regions for low-cost sourcing.


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If cost optimization is the main reason for creating a global manufac-

turing footprint, the approach is the opposite. A systematic screening of

potential locations has to be performed based on priority modules and

activities. The process of selecting a country starts with a long list of

potential countries that is gradually shortened as countries fail to meet

progressively stringent criteria. Lack of political stability and risk are two

of the first criteria that cause elimination, combined with external con-

straints such as embargos and final client vetoes.

A second filter aims at investigating the overall business situation and

economical attractiveness of the potential candidate countries. Companies

should check the availability and quality of infrastructure (transportation,

electricity, gas, water, and real estate), the legislative environment and

bureaucracy (time required to set up a business; availability of legal,

accounting, recruiting, and logistics services), financial conditions (corporate

tax, incentives) and manpower (skills, unemployment, wages, and attitude).

A third filter is then used to determine the impact a specific delocalized

activity or component would have on the company’s overall business

model. The sorts of aspects examined here include specific technological

skills, the existence of a relevant supplier base, the presence of

competitors, logistics capacity, and cost of labor over time.

Step 5: Fine-tune the model and finalize the footprint

Once a company has selected a shortlist of potential locations for a specific

manufacturing activity, it is time to simulate the impact of that delocalized

First filter Second filter Third filter

Specific economicalconditions

• Factors’ costs and evolution over time• Specific skills• Logistics• Supplier proximity

Business and economicalattractiveness • Infrastructure availability • Time to set up a business • Services availability • Workforce qualifications • Financial conditions

Politicalstability and risk

Figure 9.4 Selection of target countries

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manufacturing activity at each of the short-listed locations. This quan-

titative simulation provides companies with a handful of potential scenarios

for the selected manufacturing footprint model. The scenarios reflect each

manufacturing activity to be relocated in target countries.

Three main performance indicators are put under scrutiny for each

scenario: first, the expected value over the entire lifecycle; second, overall

risk; and third, flexibility (the ability to cope when environmental factors

change unexpectedly).

A simulation model is built to compare the economic performance of each

scenario, based on the expected evolution of external variables over time in

each country (sales volumes, costs, for example). The model provides the

required investment and expected return for each scenario. Companies

perform a ‘what if’ analysis to understand the best- and worst-case scenarios

for variables. Sales volumes, implementation timing, and costs are some of

variables that are included in the model. Risks such as currency movements,

supply interruption, political instability, and transportation delays should be

included in this analysis. The most attractive configurations are selected for a

final examination that measures the flexibility of each selected scenario.

The worst-case scenarios are also analyzed in order to understand and

calculate the potential cost of reconfiguring the footprint. A recovery plan

is built for selected scenarios, which are compared. Make-or-buy and

investments decisions are made to minimize risk and maximize flexibility.

Step 6: Select site, suppliers and partners

Selecting sites, suppliers, and partners is one of the most important tasks

companies need to undertake to ensure that strategic guidelines provide

tangible results. The selection of site, supplier, and partner should be

based on a structured process that starts from the identification of a long

list of potential suppliers and/or partner companies. These are then

screened to reach the best solution.

To select the most appropriate site, companies need to investigate four

areas: investment, infrastructure, legal environment, and HR availability

and skills. Figure 9.5 illustrates how different locations can be compared.

When choosing a supplier and partner, it makes sense, first, to undertake

desk analysis. During this phase, a long list of potential candidates will be

chosen based on the selection criteria: technology, size, manufacturing

capabilities, and client base. Desk research should be complemented by

interviews with industry experts to ensure completeness and to iron out any

misunderstandings or false assumptions.


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Depending on the size of the long list, telephone interviews or

questionnaires should be used to screen possible suppliers and partners.

Here, companies can detect whether the long list candidates are interested in

collaborating. It also gives companies the opportunity to complete and cross-

check information regarding technical capabilities, size, and client base.

Once a shortlist is defined, an on-site assessment with a team

comprising technical and financial experts is necessary to provide

comprehensive information about the quality of the management team

and employees, technical tools and capability, process quality, delivery

reliability, financial stability, and cost structure. A request for quotations

on pilot components and a business case should conclude the selection

process and launch the negotiation phase.

Global manufacturing footprint – a process without close

Companies need to monitor their manufacturing footprint periodically,

checking to see whether it is still relevant and to determine whether

HR

Investment

Legal

Infras

tructure

Region 1 Region 2 Region 3

Construction cost

Price of property

Business parks

Logistics

Utilities

Environment

Taxation

Bureaucracy

Labor legislation

Skills availability

Labor cost

Incentives

Key :

Figure 9.5 Site selection

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external factors make adjustments wise. What made economic sense a

few years ago might, in the meantime, have become a competitive disad-

vantage in the quickly evolving world of manufacturing. This is especially

true when it comes to footprints that are heavily reliant on technology or

low-cost country manufacturing. Technology, thanks to its very nature, is

programmed to become obsolete. The only uncertainty is how quickly it

will have to be replaced. Similarly, low-cost countries are developing so

fast that some lose their competitiveness within a few short years and are

superseded by other countries that are possibly located on the opposite

side of the globe. This is why it is so important for companies to consider

future trends and avoid focusing on existing conditions when designing a

global manufacturing footprint or redesigning an existing one.

Case study: How the approach works in real life

Our client, a multi-national industrial engineering company, pursues astrategy to increase its global presence with the aim of leveragingpotential new markets and to defend itself against the increasingonslaught of competitors from low-cost countries.

Its presence in emerging markets to date has been based onpartnerships with local players. Direct industrial activity has beenlimited. While this activity has led to significant sales in some businessareas, it has come at a heavy cost: namely, large technology transfer.Previous partners are now able to offer similar solutions not only in theirhome country, but also abroad, with an extremely competitive coststructure.

The project team was asked to define a new footprint model tomaximize the increasing volumes that can be captured in the Far Eastmarket and to make a dramatic reduction in the current cost structure.The footprint model had to include a strong industrial and procurementpresence in emerging countries to guarantee market access and costcompetitive vis-a-vis local players.

A detailed cost simulation revealed that the company could gainlarge cost advantages by serving global clients from China. To leveragethe global footprint fully, a new procurement organization wasdesigned and implemented that shifts local procurement to a singleglobal procurement responsibility for each business segment. Theproject team segmented the product structure in detail and mappedthe advantages and disadvantages of local capabilities compared with aglobal capability. As a result of this mapping exercise, activities were


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identified that can be relocated and sourced globally – including, forinstance, all steelworks, as well as basic and detailed engineering.

China was selected as the target country for extending the industrialpresence, based on consolidated presence, size of the market, and overallindustrial structure, including the supplier base. A detailed screening oftarget companies was performed (starting from a long list of more than300 state-owned and private companies, and design institutes, coveringall the relevant business areas) that identified potential players andtargets for acquisition. The project team whittled down this long list untilthe 20 most attractive and appropriate companies remained. Out of thisshortlist of 20 candidates, one company was targeted for acquisitionmainly due to its technical capabilities, size, and ownership structure. Ourclient was successful in its goal and, following the acquisition, a newmanufacturing model was introduced.

The new company now acts as the main manufacturing andengineering location to serve all of the Far East for a specific technology.Other selective regions will also be covered by this location in thefuture. It provides engineering services to a specific business area/technology, and the parent company aims to gradually extend itsengineering support to other technologies. It should act as the servicehub for low-cost procurement in the region, within the scope of the newglobal procurement model.

Taking this step represents a considerable change in the overallfootprint of the company. However, management considers it to be justan initial step, one that needs to be taken to cope with rapid market andtechnological change. The company is well aware that its manufactur-ing model and footprint will need to adapt continuously in order toremain competitive. A systematic approach that analyzes strategicoptions and defines concrete implementation solutions has proven tobe the key for this company, enabling it to continue doing businesssuccessfully in the global market.

Outlook

The manufacturing models and footprints of global companies will be

placed under increased pressure in the future. The speed of evolution in

newly emerging markets, the rate at which low-cost players are catching

up in terms of technological competence, and the rapid development of

cost components mean that companies need constantly to reassess their

footprints.

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To compete in the future, companies will need to master three skills.

First, they must show flexibility and be willing to adjust their footprint to

align with anticipated market changes. Manufacturing footprints have to

be sufficiently malleable to follow the continuous evolution of inter-

national markets. An optimal balance of internal and outsourced activities,

and a flexible supplier base and modular products are required to adapt

quickly, minimize investments and risk, and optimize results.

Second, they must be able to keep their core competencies while

outsourcing low-value skills. Finding the balance between in- and

outsourcing takes time and careful consideration. Companies are wise to

proceed here with caution. Greater education levels among the workforce

in emerging countries, weak copyright protection legislation, and the

increased ease with which information can be duplicated expose global

players to a great risk. Companies face a real threat of losing their

technological competitive advantage.

Third, companies must be capable of managing complex organiza-

tional structures with multiple reporting lines in different geographical

areas. A new generation of managers with dexterous management skills

that permit them to cope with organizational complexity is a must as

global footprints increase in size and become more complicated.

Managing multiple reporting lines, dealing with conflicting objectives,

and coping with an increased need for strategic control, while delegating

most operational decision making, will be some of the skills required for

managers in the future.

Further reading

Falb, R. (2006) ‘Global Footprint Design – Die Spielregeln in der

internationalen Wertsch€opfung beherrschen’. Roland Berger Strategy

Consultants. Stuttgart.


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CHAPTER 10

Leveraging manufacturing excellencein global production networks

Volker Heidtmann and Stephen Weisenstein

Introduction

Manufacturing excellence – lean manufacturing – the Toyota production

systems – regardless of the name that is applied, the elements that make up

a strong and efficient manufacturing system and process are well known.

Principles such as ‘just-in-time production and logistics’, ‘built in

quality’, and ‘continuous improvement’ are applicable across manufac-

turing industries and are applied in many ways. Business people have

toured the best plants and read the many books on the subject as they strive

to eliminate waste from their processes and achieve the greatest possible

cost and quality performance.

When managers question the competitiveness of a plant or operational

process, they try to conduct benchmarks to confirm or quash their doubts.

Benchmarking the industry leader has its advantages, and adopting

selected ideas from competitor plants definitely provides a great many

benefits: however, the two tasks are not always easy to undertake. In their

hurry to turn to the competition for ideas, many companies ignore the

obvious first step: share and leverage best practices within your own

organization and between your plants.

We frequently find varying levels of success in implementing world-

class manufacturing systems and processes, even within manufacturing

networks belonging to the same company. Why can one plant be so

successful and a sister plant be so poor? This chapter answers that question,

and provides direction to managers seeking to introduce manufacturing

excellence throughout all their operations. After outlining the steps that are

necessary to leverage manufacturing excellence in global production

networks, we show how this approach worked in a real-life business

setting, drawing on a project we completed in the automotive industry.

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Be your own benchmark

The benefits of turning a company’s gaze inwards are tremendous. First,

the benchmarking process is significantly easier because of improved

access to information and greater transparency. Similar products and

corporate culture make it easier to transfer best practices when they are

unearthed. This increases standardization between plants, which not only

drives efficiency but also flexibility.

Our approach to launching a manufacturing excellence effort starts with

a project structure and then transfers the task into the line organization. In

our experience, a four-step process ensures that the project challenge is

tackled pragmatically and with a clear structure, which is critical for

successful completion. Companies that follow this process work with

project teams to gain a deep understanding of the current status of their

processes and particular operation, develop an overall vision for the focus

area, become involved in making improvement plans that are feasible, and

ensure that implementation efforts are taken seriously. They achieve this

last step in part by communicating the reasons for change and highlighting

quick wins, which has the additional benefit of motivating staff. The

process is illustrated in Figure 10.1.

Preparation

To realize the benefits from optimizing a plant network, good preparation

is essential. Selecting the right plants for comparison and getting the

right people on board is important in order to find the most relevant

management practices and transfer them to other plants. It is also crucial

for acceptance of the necessary changes in all locations.

In most cases, a plant network cannot be analyzed entirely. Even in

networks with barely more than ten plants, looking into each plant

thoroughly is a formidable task. The endeavor would most probably be

doomed from the first day because freeing up the resources necessary to

conduct the project would be almost impossible.

A more practical approach is the so-called T-shaped project design,

which is shown in Figure 10.2.

During the T-shaped project approach, all plants are analyzed using a

standardized quick scan. This gives the project team a high-level overview

of processes, practices, and procedures. In-depth analysis (comprising

plant visits, interviews, and detailed data gathering) is started afterwards,

and focuses on a small number (typically, four to eight) of the most

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IBusiness systemanalysis:Understandprocesses

IIWorld class productionsystem: Develop vision forfocus areas

IIIImplementationplanning:Define roadmap andpriorities

IVImplementationstart:Communication ofresults

Keyelements

• Formal kick-off• Quick scan• Site clusters• Performance drivers• Chess board/KPIs• Best practices

• Best practice value chain• Virtual best practice site

• Quantified gaps and measures• KPI link• Operationalized vision

• Communication• Momentum building

Outcomes • Project targets• Transparency• Best practices• Gaps

• Blueprint for world class production system• Vision

• Prioritization of measures• Implementation organization

• First quick wins• Mobilization of organization

Results • Organizational buy-in to project• Improvement potential

• Commitment of management

• Decisions • Organizational buy-in to strategy• First bottom-line improvements

Figure 10.1 Proven four-step process ensures that the project challenge is tackled pragmatically and with a clear structure

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relevant plants. Plant selection depends on a plant’s technological and

economic profile. Plants should be selected in such a way that the core

technologies and production processes of the company are reflected. At the

same time, all economic conditions should be reflected as well. To gain a

good cross-section and a fair indication of economic conditions, both

high labor cost and low labor cost sites should be included. Similarly,

small and large plants should be examined, as should plants showing

good and less favorable economic results. Best practices are then

identified within the focus plants and are subsequently rolled out to the

entire plant network.

To arrive at project results that are meaningful, and also implementable,

it is crucial to have the right people on board. In our experience, a

combination of local plant experts and global production staff has proven

to be particularly successful. In this arrangement, local experts can

contribute their detailed knowledge about production and logistics

processes. This results in very specific actions being developed, which

factor in possible implementation problems already in the concept phase.

Global production staff functions can provide overall methodological

guidance and continuously align the project with the greater production

environment and, hence, prepare the subsequent rollout.

Implementation tends to run more smoothly when project members

who enjoy broad professional acceptance are selected. Ideally, they

should be opinion leaders in their field of expertise. This can mean the

power to make formal decisions in the case of divisional managers, but

also professional standing when well-respected functional experts are

involved. With this mixture of highly respected people, employees at

Analysis logic

Questionnaire:

• Products, financials, operations

Quick scanof all plants

GOALS

• Deepen understanding of operations• Analyze status quo• Develop and test improvement ideas

• Get transparency over product range/complexity and KPIs used• Understand plant performance• Get high-level overview of processes, practices, procedures

On-site analysis work:

• Shop-floor control• Production planning• Logistics• Overhead/support cost

Deep divein pilotplants

Figure 10.2 A T-shaped logic ensures breadth and depth of the analyses


9780230_217805_12_ch10.3d 5/29/2008 09:49:41

individual plants will find it easier to accept concepts already developed

and implemented at other sites.

Benchmarking

The actual project should begin with a quantitative analysis of all plants in the

network. Typically, common reporting figures are not sufficient. Depending

on the project focus, additional information will be necessary. For this

purpose, we recommend the development of a standardized questionnaire. Its

content should typically include basic profit and loss data; manufacturing-

specific cost details such as labor cost breakdowns, depreciation and

maintenance costs; and asset data for machinery, equipment, and inventories.

Non-financial information such as headcount, quality data, and logistics

performance should also be collected in the questionnaire. Whatever

information is gathered, all parties involved must have a common

understanding of the data if it is to be interpreted in a meaningful way. To

this end, a detailed description of the data is necessary. In our experience,

offering a central support to clarify open questions during the gathering of

data also supports consistency.

The results of the quick scan allow the project team to assess each plant

using quantitative information. The quick scan enables the project team to

distinguish strong from weak performers, both financially and operation-

ally. It lets the team identify specific performance profiles, too. One plant

may show poor financial performance, for example, but could have

excellent quality figures. Another plant may score highly on both criteria.

Based on these insights, the team can select the focus plants to be analyzed

in depth during the project. At the same time, the analysis already

provides a first indication of good and bad practices.

Identifying best manufacturing practices requires a much closer look at

a plant. This can be gained through a several-day ‘deep dive’ plant visit.

Typically, these visits will involve an investigation of product planning,

examination of forecasting, studying the information systems (IS

platform) and key performance indicators, as well as an analysis of the

shop floor. During the shop floor analysis, the teams will look at control

systems and batch sizes in addition to inventory management and

inventory levels. Once these aspects have been considered, the teams tend

to move on to logistics, examining the plant’s subcontractor management,

inter-company logistics and material management. The types of activities

that might take place during a five-day pilot plan visit are shown in

Figure 10.3.

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Five-day analysis of pilot plants

MORNING

AFTERNOON

• Review quick scan• General strengths/ weaknesses

Day 1

• Shop-floor analysis – Control system – Batch sizes

Day 2

• Shop-floor analysis (inventories)

Day 3

• Logistics – Intercompany logistics – Material management

Day 4

• First draft vision development

Day 5

• Production planning: – Forecasting – IS platform

• KPIs

• Shop-floor analysis (inventory management)

• Logistics – Subcontractor management

• Wrap-up – Strengths/ weaknesses – Best practices – KPIs – Vision elements

Figure 10.3 A structured approach is used to analyze current processes and define new operations strategies

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On-site discussions between the project team and plant experts provide

a detailed picture of a plant’s performance. The discussions serve to

identify approaches, methods, and systems that have been applied

successfully and which can be transferred to other places. As all relevant

data is available on-site, the findings can immediately be supported with

quantitative information.

Concept development

Developing a common manufacturing concept is the most difficult part of

the project. In this phase, the findings of the analysis phase have to be

combined. This often means finding solutions that reflect very different

plant environments. This phase is also tricky because of the human

element involved. The personal convictions of team members, which may

be reasonable when viewed from an individual perspective, often have to

be resolved as they are no longer sufficient if considered from a global

viewpoint. Open discussions and tact are paramount in this context.

As a vehicle to reach these results, workshop-style, full-day events have

proven to be particularly successful in our experience. They allow the project

team to step out of their daily business and focus fully on the project tasks.

To encourage target-oriented discussions, individual topics should be

prepared in advance in specialized sub-teams. Here, both local and global

experts should have extensive discussions on detailed approaches and

possible solutions. A basic agreement should be reached at this level, and

local plant requirements and experiences should be duly considered.

The results from the expert teams are eventually combined during the

global workshops. Here, agreement has to be reached among all responsible

decision makers. A project lives or dies by the ability to gain consensus at

this stage. Without it, the project is doomed to fail because people involved

in the implementation phase but who are unconvinced tend to sabotage

efforts or slow down progress. Ultimately, the concept has to be endorsed

by the entire leadership team of the company.

Roll-out

While identifying best practices and developing a common manufacturing

concept is the core of the improvement effort from a content point of view,

the implementation phase is the most critical phase when it comes to

achieving measurable results.


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Companies that do not gain the firm commitment and support of all

plants in the network will face difficulty when trying to implement a

common manufacturing concept. The responsible plant managers should

agree upon the developed concepts before the actual implementation

begins. Including manufacturing heavy-weights in the concept phase pays

off at this stage, because they will be able to defend the project results

against potential criticism from outside the team more easily than others.

At the same time, top management should express its support as well to

ensure the plants’ commitment lasts.

Once agreement on the new manufacturing concept has been reached,

the concept has to be individualized for each site. General rules have to be

translated into specific actions with dates and improvement targets.

People have to be assigned responsibility too. This, again, is a task that

should take place on-site, in discussion with local experts.

Making the transformation stick

One might think that clear action plans should be enough to guarantee a

successful implementation, but habits developed over many years are hard

to change. Implementing a new way of organizing manufacturing is prone

to fail if left unattended, so strong is the resistance to change. Only central

monitoring of the implementation process and regular reviews of the

implementation process by top management can ensure that the good

intentions and first positive steps are not lost. Individual plants should

receive central coaching support; it is not always unwillingness that

prevents change but sometimes simply the difficulties of putting change

into practice on-site.

With the start of the implementation phase, the responsibility for the

success of the implementation should be transferred to the line

organization. Plant managers and division heads are the personnel to

drive implementation. Otherwise, a lack of hierarchical support is likely to

smother implementation efforts in the face of operational needs.

Figure 10.4 shows an example of a real implementation structure in

which content team leaders adopt the coaching role while the line

organization, consisting of plant managers and operations directors,

ensures hierarchical support. The plant process owner has an ongoing

dialogue with the plant manager and a content team member, at least at the

beginning of the implementation phase, and input about implementation

content and progress from plant experts is exchanged. In the case shown

here, a content team member and the plant manager discussed results with


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Project reporting Steering committee

Project Director

Content team leaders

• Continuous communication of issues on project content and acute problems in the implementation

• Monthly meetings to exchange experiences

Core team

• Monthly phone call on implementation progress

Regional Directors

Content team member

• Ongoing exchange and input from plant experts on implementation content

• Ongoing exchange and input from plant experts on implementation progress

Plant manager/coordinator

• Monthly telco• Exchange of experiences

• Discussion on necessary changes and improvement

• Quarterly meetings • Progress reports

Plant process owner

Advice

Project Manager

• Monthly update ofproject controlling tool

Figure 10.4 The project organization is set up to keep track on the progress of the project – regular communication is key

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Best practice sharing process

Plant management

Divisionalmanagement

Corporatemanagement

Monthly

Quarterly

Annually

Reviewing frequency

Plant team

• Review of selected best practices and control of implementation process/improvement impact

• Enforcement of best practice implementation

• Regular review of plant-specific KPIs

• Driving best practice implementation process

• Quantitative measurement of improvements

• Monitoring and comparison of KPIs from all plants

• Identification and prioritization of best practices

• Consolidation and standardization of best practices

• Support sharing and implementation of best practices across plants and groups

• Tracking of implementation progress

• Suggestion of plant-specific best practices

• Detailed best practice documentation and reporting

• Realization of best practices from other plants

Best practices

Figure 10.5 A regular communication process drives the sharing of internal best practices

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content team leaders, regional directors, and project managers on a

monthly basis.

The final step in implementing a common manufacturing system is

to ensure that sharing best practices does not remain a one-off effort but,

rather, becomes part of a company’s day-to-day reality. In short, identifying

and sharing best practices has to be institutionalized. A multi-level process

that includes all parts of the manufacturing organization can provide an

effective structure for this. Each level has a role to play in identifying

internal best practices and ensuring that they are adopted. An example of

this type of structure is given in Figure 10.5.

Ideas are generated on a plant level through joint teams of operators and

functional experts. Practices that are relevant for sharing between plants

are communicated to a central operations excellence function, which owns

the common manufacturing system and develops it further. The function

also coordinates the sharing of ideas and practices across plants through

formal reports and personal meetings. Involving operators and functional

experts who have participated in the development of best practices on the

plant level can improve the acceptance of ideas and provide a

motivational boost to plant level activities. Involving top management

at the same time signals to the plants how important these efforts are.

So, how does this approach work in real life? We applied it at one of our

clients from the automotive supply industry.

Case study: Leveraging manufacturing excellence

The company is a global manufacturer of engine components withproduction sites spread around the globe. Each site had considerablefreedom in designing its production and business processes – acommon practice when managing spread-out production networks.The consequence was equally as typical: each of the plants had, overtime, developed a very specific set of production processes with verydifferent levels of operational performance. Specifically, inventory levelswere a problem. To align the operational performance of all plants on ahigher level, a project was initiated to develop and introduce a commonapproach to production logistics.

After the collection of key plant data from all sites, six were selectedas focus plants for closer analysis. During plant visits and through theanalysis of detailed performance data, six areas for action wereidentified: production planning, shop floor control, global logistics,


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production key performance indicators, production IT systems, andindirect functions. Each area was addressed by a team of expertsgathered from various sites around the globe. The results of each teamwere then refined in two global workshops. These two events were thecore of the project, the moments when all experts and key decision-makers met to approve the new concept.

To ensure a smooth and consistent implementation, detailed actionplans were worked out together with each plant’s management teamon-site. Responsibility for implementation was dedicated to one clearresponsible team member per plant, who supervised all local activitiesof the project. Local activities were accompanied by regular reviews bythe company’s top management.

Overall, the implementation of the new production system aimed at a50 percent reduction in inventory over five years. In addition, areduction in manufacturing cost of 8 percent was expected. The effectswere distributed over time, coming both from short-term actions, suchas the optimization of planning algorithms, and long-term actions, suchas changes in plant layout or reorganization of indirect functions.

Outlook

In the future, manufacturing excellence will be less about understanding

the ‘what’ of lean principles and efficiency techniques and, instead, will

be focused on the ‘how’. Understanding manufacturing excellence and

being able to lead an organization in achieving it are two very different

competencies. Techniques such as those we have outlined in this chapter

will be critical as companies fight to improve their competitiveness.

Continually improving manufacturing performance throughout their

global networks is central to that struggle.


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CHAPTER 11

From maintenance to quality control:effective support functions leveragemanufacturing performance

Thomas Kwasniok and Walter Pfeiffer

Introduction

‘We recently redesigned our factory layout and material flow, optimized

shop floor processes and implemented lean manufacturing principles in

production. However, the impact on overall manufacturing performance is

below expectations, because we keep suffering from frequent short-term

changes of our production schedule,’ a production site manager at a

modern and highly automated pharmaceutical plant in Germany

confessed. Erratic sales forecast figures were the reason he gave for the

plant’s poor supply performance.

Over the previous twelve months, market demand had grown by

50 percent in some of the company’s major markets. The average number

of items out of stock had risen from around 150 to more than 400 during

that period. International sales affiliates wanted shorter lead times to

capitalize on short-term opportunities in their respective national markets.

In spite of its manufacturing best practices, the German plant got the

blame for the company’s inability to keep up with market growth.

A detailed analysis of the situation revealed that the root cause was not

outside, but inside the plant. Lead times for quality control had increased

dramatically due to resource bottlenecks – the number of staff authorized

to release batches was not scaled up along with recent volume growth –

and poor planning in the quality control department. There was an

information disconnect from export order processing, and even from

production scheduling. Long and unpredictable lead times to affiliates

resulted in an extraordinarily high share of rush orders, making it almost

impossible for the plant to optimize production sequences. Capacity was

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lost on changeovers, and key performance indicators on delivery

performance were not met. Operational equipment efficiency – the

percentage of theoretical capacity of packaging lines that is actually used

for productive work – suffered, too.

‘We had focused on our main process: bulk manufacturing and packaging

of pharmaceutical products. We did not realize that at some point the

efficiency of our main process was limited by the effectiveness of a support

function – quality control, in our case,’ the site manager concluded.

What the site manager discovered about the quality control support

function in his plant holds true for most manufacturing support functions.

Whether equipment maintenance, factory logistics, utilities supply or wast-

ewater treatment, if the support function is not effective it cannot leverage

manufacturing performance. When the support function fails, costs can

balloon.

This chapter investigates how a support function can be designed, mostly

by using manufacturing equipment maintenance as an example. While some

of the details are specific to that case, the general approach to tailoring an

effective and efficient support function to meet the needs of the manufac-

turing process can be transferred to other support functions, too. This is

noticeable at the end of the chapter, when we discuss the steps a refinery

took to outsource support functions. In addition to detailing the building

blocks for managing maintenance comprehensively, the article also shows

how Roland Berger teams execute maintenance excellence programs.

Further project examples are provided to show how the steps can be applied

in real life in various settings, and the benefits the approach brings.

Impact of support functions on manufacturingperformance

Effectively managing support functions does not come cheaply: failure is

a costly alternative. Companies need to keep these two factors in balance.

A service level setting for a support function should aim at the lowest total

cost. When it comes to equipment maintenance, short inspection intervals

and comprehensive maintenance activities – such as analyzing the deep

root cause of malfunctions – reduce failure costs.

A high level of equipment reliability is usually expensive because of

personnel and training costs, and administrative overheads. However, it

translates into short downtime and few quality defects. Minimum

maintenance – ‘run to failure’, in the extreme case – can save maintenance

costs, but results in unscheduled downtime and production delays. Lost

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Balance between costs of supportfunction and failure costs PROJECT EXAMPLE: Maintenance

Lost sales

Repair costs

1 minuteproductionstandstill

1 minutemaintenance

= 1 : 10

MaintenancematerialMaintenancepersonnel

Cost ofsupport function

Failure costs

Lowestoverall costs

US$ 810US$ 8,255

Figure 11.1 Costs of support functions and failure costs work in opposite directions and have to be balanced

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orders are only one result of that failure. In addition, equipment defects

tend to be more severe than with regular maintenance, as there is a risk

of collateral damage to other units. When the cost of overly cautious

maintenance is weighed against the steep cost involved in negligent

maintenance, cautious maintenance is the cheaper option.

To illustrate that point, the average cost of equipment maintenance –

personnel plus material cost – at automotive suppliers is approximately

US$810 per hour. When production comes to a standstill, this causes

damages of US$8,255 in lost sales and equipment repair costs per minute.

Setting costs aside for the moment, effective support functions also

bring other benefits: product and service quality tend to increase, the more

effective a support function. Product quality defects become less frequent

when equipment maintenance is well managed. Service quality improves

as the availability of products becomes better. Production planning is

more reliable and customer lead times are shorter because fewer time

buffers are required.

Tailoring a supportive function: manufacturing equipmentmaintenance

A support function is designed, ideally, to meet the needs of the specific

manufacturing process using as little capital and at the lowest cost

possible. To achieve this, companies first need to understand the bare

minimum requirements necessary to ensure efficient maintenance. For

most companies, maintenance is efficient when equipment is available at a

level that is acceptable from a manufacturing point of view. Companies

also need to pay careful attention when designing processes, the

organization, and tool support.

The ideal balance between maintenance cost and equipment availability

differs vastly between industries, but also between different production

lines and technologies. The amount of equipment that can be purchased on

a specific maintenance budget also varies tremendously, depending on

whether best practices are applied.

A recent benchmarking study of engineered products, automotive

suppliers, and chemical companies conducted by Roland Berger Strategy

Consultants suggests that automotive suppliers – on industry average – have

the worst cost-to-availability ratio of all three sectors. The spread between

low performers and best practice is especially wide in the chemical industry.

The importance of the cost of failure is also pronounced to varying

degrees in different industries. In a workshop production environment, an


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asse

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Equipment availability

Engineered products

9085807570656055

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12.0

0.0

2.0

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8.0

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Industryaverage

95 100 908580757065605512.0

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Industryaverage

908580757065605512.0

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Best practice Low performer

Figure 11.2 A benchmarking study of maintenance costs and equipment availability shows the improvementpotential for different industriesSource: Empirical study by Martin Weiss.

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equipment failure affects only one production stage. Work-in-process

buffers the implication between stages. An assembly line is hit much

harder, because the entire line stands still if any single stage fails to

operate properly. In the process industries, the cost of failure might even

be a product loss, which is extremely costly because of rework or

complete disposal. One cross-industry trend is clear: as the share of

equipment cost to total production cost increases, the greater the impact of

maintenance management on overall production cost.

A comprehensive approach to managing equipment maintenance – and

manufacturing support functions – comprises six building blocks:

strategy, process, organization, personnel, IT systems, and control.

Managing spare parts is a special topic that appears in all six dimensions.

It is a support function to the support function of equipment maintenance.

Building block 1: Strategy

Companies can pursue three different maintenance strategies: breakdown,

predictive, and preventive. Breakdown maintenance (‘run to failure’) aims

at maximizing the useful life of all parts. Equipment is not serviced

regularly, but only when a failure occurs. Breakdowns cannot be predicted,

and this has implications for production planning. Predictive maintenance

is based on frequent checking and a proper understanding of equipment

wear and tear. Maintenance is performed when a certain level of wear and

tear has been reached. Preventive maintenance uses regular service

intervals. Parts get serviced and changed on a fixed schedule. Servicing

times, as well as cost and capacity, can be planned in advance.

Companies should choose what strategy to follow based on the

probability and impact of possible equipment failures. Roland Berger uses

a risk-based method to classify possible failures and to determine the most

appropriate maintenance strategy and parameters. This method is based on

a failure mode and effect analysis (FMEA). It assesses all the failure

modes that can be observed with a specific piece of equipment, and then

describes all possible causes for those failures. Statistical data is evaluated

to estimate the probability of each individual cause. The severity of each

failure mode represents the associated failure costs.

The ability to detect a failure mode or failure cause in advance is another

factor that should influence the choice of maintenance strategy. Probability,

severity and detection effectiveness can be aggregated into a risk priority

number. All three are used separately to determine what strategy is best for

dealing with each failure mode. A service plan can then be worked out for


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8MAINTENANCEMANAGEMENT

ORGANIZATION

Central Decentral Integrated

In house

Out sourced

IT SYSTEMS

• Maintenance planningand scheduling

• Order processing• Spare parts

management• Costing

STRATEGY

Run to failure

Predictive

Preventive

Options

Degree ofPlanningCONTROLLING

Ava

ilabi

lity

Plannedlosses Unplanned

losses

$ maintenancecost

OEE *

OEE * � Operating EquipmentEfficiency

PROCESS

CleanDismantleCheckTransportRepair

Operator Technician

...

PERSONNEL

Losses impacted byeffective maintenance

Example: Pump repair

3rd party

Figure 11.3 Comprehensive maintenance management consists of six building blocks

18

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each piece of equipment. Through the risk-based method, the selected

maintenance strategy is clearly influenced by the equipment lifecycle. After

a new piece of equipment is installed, early breakdowns are likely to occur

because of poor component quality, assembly errors or design faults.

Thereafter, breakdowns are seldom observed. When they occur, operator

errors, dirt or maintenance mistakes are generally responsible. Later in the

lifecycle, attrition breakdowns dominate. Since these are caused by

component wear and material fatigue, they can be predicted.

Building block 2: Process

Executing the selected maintenance strategy involves three levels of

planning.

• Strategic parameters have to be set. Parameters – such as fixed

maintenance intervals, number of operating hours, and level of wear

and tear – that trigger maintenance are defined per equipment type and

maintenance activity. These parameters help companies find a balance

between maintenance and failure cost.

• A detailed work plan per activity is required. This allows companies to

determine standard times and the spare parts and tools that will be

needed for operational planning purposes – in most cases, the technical

content of maintenance activities is specified by the equipment

supplier. However, companies might find it worthwhile to review the

activities with in-house technical experts and suppliers in order to

detect potential for improvement.

• Companies need to make plans regarding employees and outsourcing

partners. Production employees need to be involved in the coordination

of production planning, especially during downtimes caused by

maintenance.

Building block 3: Organization

Based on experience, on average, only 20 percent of maintenance jobs

actually require maintenance experts. Equipment operators can complete

many simple maintenance activities – such as cleaning, set-up, and

lubrication – after some training. This reduces costs and processing time

because no maintenance personnel have to be called in, and operators are

not idling time. Expert assistance would probably have to be brought in


9780230_217805_13_ch11.3d 5/29/2008 09:48:38

for more sophisticated tasks such as regular servicing or fixing minor

breakdowns. Heavy maintenance, general overhaul, and refurbishment

should remain the domain of dedicated maintenance personnel.

Integrated maintenance improves maintenance efficiency by minimiz-

ing the number of interfaces and handovers between single activities

comprising a maintenance task. Companies also enjoy greater respon-

siveness and highly motivated employees when first level maintenance is

integrated into production. However, investing in initial training and

ongoing coaching of operators, and encouraging knowledge sharing

between production lines and across sites is expensive. It is also difficult

to adjust capacity for maintenance when the operating crew of each line is

solely in charge of the majority of maintenance tasks.

Companies might also choose to have a dedicated pool of resources

for maintenance, either on plant (decentralized) or company (centralized)

level. With the decentralized option, companies profit from good knowl-

edge of the plant and short distances. The opposite side of the coin is the

need for greater resources, because a decentralized maintenance team’s

workload fluctuates. A centralized organization benefits from the sharing

of knowledge, and a more balanced workload; however, it also faces

long distances, lack of local knowledge, and difficulties motivating

employees.

There is a promise of efficiency gains when companies share resources

and balance workloads with maintenance, especially when engineering is

done in-house and machines are built on site. Both functions typically

struggle with workload fluctuations due to their limited internal cus-

tomer base. A well-rounded mix of all three concepts – centralized,

decentralized, and integrated – is essential to setting up an effective and

efficient maintenance program.

Companies that choose decentralized or central maintenance units also

need to decide between make-or-buy, in-house or outsourcing. It is now

common practice for virtually all services related to equipment

maintenance to be offered by equipment suppliers and third party service

providers. Specialized suppliers, which are often located close or even on-

site, are offering more and more production support services. The scope of

outsourcing can vary from selected operational maintenance tasks to

complete maintenance planning and execution. From a utilization point of

view, an internal team should be used to carry the base workload, while

demand peaks should be covered by scalable external resources. When

considering a plant’s ability to operate independently from external

providers, companies might wish to ensure that an internal team is at least

capable of maintaining the emergency mode operations of their

182 Thomas Kwasniok and Walter Pfeiffer

9780230_217805_13_ch11.3d 5/29/2008 09:48:38

production equipment. They should also be able to perform critical

maintenance tasks without external support.

The advantages of outsourcing are clear. Fixed maintenance costs

become variable, thus reducing utilization risk and bridging capacity

shortages. It creates more efficient cost control, eventually lowers

maintenance cost, and ensures better quality service. As well as gaining

access to the external competencies of specialized suppliers, the internal

service shop also gains free capacity for projects dependent on know-how.

The disadvantages are clear, too. Companies risk losing internal skills,

and the ability of internal resources to repair defects and operate product

equipment self-reliantly is undermined. Long process times, quality

issues, and delivery risks are also potential problems. Companies that

outsource maintenance tasks need to have rules in place to resolve process

issues. To control external maintenance providers, a clear description of

process interfaces and service levels is essential.

Building block 4: Personnel

When operators take on maintenance tasks, they must be trained and

coached appropriately. Depending on the type of maintenance job,

technical skills might be required. Operators must be equipped with

analysis and problem-solving techniques, and guidelines that enable them

to diagnose breakdowns efficiently and make decisions quickly.

Building block 5: IT systems

Computerized maintenance management systems (CMMSs) provide

support for equipment maintenance in four areas.

• Maintenance planningadvisescompanies whenmaintenance work is requ-

ired according to parameters set for each piece of equipment. It also helps

companies to schedule capacity planning and to staff maintenance tasks.

• Maintenance order processing creates work orders, facilitates commu-

nication between internal functions and external service providers, and

reserves and cancels spare parts and tools. It also triggers further

Enterprise Resource Planning (ERP) functions, provides traceable

documentation of machine history, and tracks relevant information such

as the cause of a problem, downtime involved and recommendations for

future action.


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• Spare parts management is responsible for controlling spare parts

inventories and procurement.

• The monitoring and reporting area is responsible for reporting

maintenance costs and service levels.

While work order processing and basic reporting are covered by

modern ERP systems, advanced planning can be improved by employing

specialized software solutions. Most of these are designed to work as

add-on solutions that link with ERP systems such as SAP R/3. Some

CMMS products focus on particular industry sectors – for example, the

maintenance of vehicle fleets or healthcare facilities. Others aim to be

more general.

Building block 6: Control

The purpose of maintenance control is to deliver information necessary

for steering maintenance activities. Maintenance control needs to measure

both maintenance and failure costs. A CMMS can assist companies to

book all maintenance activities to the right cost centers so as to distinguish

cost incurred to one production line from another, and to distinguish

between regular inspections and servicing, preventive repair work, and

defect repair. This becomes more challenging in an integrated mainte-

nance organization, where operators spend part of their time on mainte-

nance tasks.

Avoiding failure costs is the real value that effective maintenance

provides. Since avoided failures do not show up in accounts, equipment

downtime is widely used as a proxy to measure the effectiveness of

equipment maintenance. A measurement of operating equipment effec-

tiveness identifies planned and unplanned losses of equipment avail-

ability. Planned losses are times when planned maintenance jobs take

place; it also covers times when no orders are planned or operators are

unavailable. Unplanned losses are caused by equipment breakdowns, and

variances in set-up and cleaning times. Quality loss and operator breaks

and speed are found in this category too. An accurate assessment of

maintenance effectiveness distinguishes losses by their root cause.

The target for equipment downtime should be based on the availability

level defined for each piece or type of equipment in the strategy phase.

The target also reflects the probability and impact of failure drawn from

historical data stemming from the FMEA.


9780230_217805_13_ch11.3d 5/29/2008 09:48:38

A support for the support function

Although equipment maintenance is a supportive function, it also draws

on another level of support: spare parts management. Spare part logistics

is responsible for ensuring that spares are available at the right place when

they are needed. They are also in charge of keeping logistics cost and

capital employed under control. To set up spare parts management, the

same six dimensions (the building blocks) need to be considered.

Strategies for spare parts supply vary from locally held stock (which is

the most expensive but is always available), to central stock and call-off

on demand from one or multiple supplier(s). Parameters such as target

inventories have to be set in order to control the process of spare parts

procurement. The organizational set-up is likely to reflect the centralized

or decentralized strategy of stock keeping and reordering. Employees

have to be trained and be supported by an IT system that provides

inventory transparency, and triggers purchase orders according to the

respective replenishment strategy and parameters. Maintenance control

monitors the cost and capital employed in the spare parts inventory, and

compares it with availability and the lead time experienced by the internal

customer, the equipment maintenance function.

Executing a maintenance excellence program

When executing a maintenance excellence program, our project teams

adhere to an approach that comprises three phases: positioning, concept,

and implementation. While each phase has its specific objectives and

deliverables, in every step the consultants pay attention to each of the

building blocks previously outlined.

Before the first project phase begins, there is a preparatory phase during

which targets are set for the program. Companies might want to improve

maintenance in a variety of areas. Common targets are lowering

maintenance cost, reducing failure cost, improving product quality, and

raising service quality levels. Target setting needs to reflect the expec-

tations of internal customers and consider interdependencies with other

functional areas.

The equipment availability target of maintenance – and cost incurred –

is, to a large degree, determined by decisions made elsewhere in the

organization. These decisions also affect the equipment availability

necessary to satisfy external customers. For instance, manufacturing

technology chosen by R&D determines what manufacturing equipment is


9780230_217805_13_ch11.3d 5/29/2008 09:48:38

purchased. This impacts the options and requirements for maintenance.

Easily maintained machinery, for which spare parts are easily available at

low procurement costs, makes the job of equipment maintenance easier.

The job is also made easier with the use standard machinery that comes

with maintenance services from the equipment supplier or can be com-

pleted by a range of third-party providers. More elaborate equipment

developed by an in-house machine building function requires advanced

internal maintenance skills.

Decisions on production planning and scheduling narrow down the

options for corrective, predictive or preventive maintenance. The delivery

service levels promised to external customers by sales and supply chain

management functions significantly impact maintenance management

by setting standards for product availability and buffer inventories. Our

project approach to tailoring a support function emphasized intense

involvement among the respective functional interfaces in the client

organization.

Once the expectations are specified and agreements have been reached

between the equipment maintenance function, internal customers and

other stakeholders, the project is conducted in three steps: positioning,

concept, and implementation.

Positioning

In an exercise spanning two to four weeks (depending on the size and

complexity of production equipment being examined), consultants gather

and analyze production data from the shop floor and ERP systems.

Benchmarking maintenance costs and equipment availability with

industry peers provides an assessment of the initial situation. Depending

on the quality of data available, an FMEA is conducted to evaluate the

capability for probability, severity, and detection for typical equipment

defects.

Concept

Based on the findings of the positioning phase, the most adequate

maintenance strategy is chosen by equipment type through Roland

Berger’s risk driven approach based on FMEA results. Further concept

detailing deals with process design (including maintenance parameter

setting), make-or-buy decisions, organizational set-up, skills and


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TARGET SETTING Positioning Concept Implementation1 2 3

BE

TT

ER

QU

AL

ITY

• Better product quality

• Lower maintenance costs

• Better service quality

• Lower failure costs

PROJECTSTART

Plant data collection Maintenance strategy

• Change management

• Sharing knowledge

• Operational support

• Constant strategy revision process

Polymerisation Compounding…

FMEA Concept detailing Impact

• Processes• Make-or-buy• Organization• People• IT system• Controlling

Failure costsMaintenancecostsDescription

Probability

Severity

Detection

RPN

2–4 weeks 6 weeks Depends on work involved

MILESTONES

RPN � Risk priority number FMEA � Failure mode and effect analysis

LO

WE

R C

OS

TS

Run to failure

Predictive

Preventive

Options

Degree ofplanning

Req

uir

emen

tsS

pec

ific

atio

n

Figure 11.4 A Maintenance excellence program needs clear target setting and is structured in three project phases

18

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qualifications requirements, IT system selection, and a comprehensive

and consistent control system. This project phase typically takes six

weeks. At the end of the concept phase, an implementation plan has been

generated and is ready to be executed.

Implementation

Successful implementation involves more than simply installing the new

structures, processes and systems. Key success factors are change

management, and communication and knowledge sharing between

external consultants and client employees on all levels of the client

organization. Pragmatic operational support on the planning – and even

shop floor – level is frequently required during the initial phase, especially

when a company is transitioning towards an integrated maintenance

organization.

After initial implementation, the selected maintenance strategies need

to be constantly revised and improved, based on the findings from

maintenance control and in adjustment to a changing production

environment. From our experience, three principles need to be adhered

to if a project is to be successful:

• There needs to be close cooperation with the maintenance organization

• Teams need to develop a workable concept that all parties, including

interface functions, have agreed on

• Companies need to choose pragmatic solutions.

Maintenance in Europe’s chemical industry

Two examples from the chemical industry will elucidate what companies

have to gain by properly managing their maintenance support function.

Before embarking on a maintenance excellence program, many

companies first have to place their maintenance building blocks in

order. Because equipment downtime usually affects a whole series of

production steps, the cost of failure in the chemical industry is high. In

addition to lost output, there is also a significant risk of material loss. This

has to be reworked or even scrapped after an equipment breakdown.

Our first client is a global player in the specialty chemicals industry,

and our project focused on selected major sites in Europe.


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NEW organization (integrated)

11081

2004 2006

Maintenancecost

�29(�26%)

2004 2006

Additional output worth EUR 120 m

Equipment availability (average)

92% 94%

OLD organization (separate)

Production Plant engineering Central engineering

Operation

Fix breakdowns

Planned maintenance

Small projects

Large projects

Production Plant engineering Central engineering

• Plant manager• Production supervisor• Operators

• Engineers• Workshop• Technical office• Coordination engineers

• Civil engineering • Electrical engineering• Control engineering• Design/construction• Special workshops

• Plant manager• Production supervisor• Operators• Production engineers• Workshop• Control engineers

• Technical office• Coordination engineers

• Civil engineering • Control engineering• Design/construction• Special workshops

Operation

Fix breakdowns

Planned maintenance

Small projects

Large projects

Support

Support

Support

Moresignificantincrease forpreviouslycritical keyequipment

Maintenance costs ( m)

Figure 11.5 Project example: major sites of a global player – specialty chemicals

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Example: Availability of critical production lines

Equipment maintenance was organized on two organizational levels:plant engineering and central engineering. Despite increasing efforts toimprove maintenance, the client felt that the availability of some criticalproduction lines was insufficient, resulting in loss of sales.

The project team’s analysis revealed that the company had nodefined maintenance strategy. Maintenance control was budget-oriented only. Employees in the plant engineering departments were,on average, highly qualified, but their workload and utilizationfluctuated due to their high level of specialization. Operators hardlyparticipated in maintenance activities, which led to significant idleperiods as they waited for experts from plant engineering to arrive toperform tasks that were often simple. The participation rate of operatorswas 8 percent. Plant engineering performed 35 percent of allmaintenance jobs, 57 percent was contributed by central engineering,of which only 15 percent was undertaken by centrally coordinated thirdparties. The overall share of planned maintenance was at a low 28percent of all maintenance jobs.

The project team developed differentiated maintenance strategiesfor the client. An evaluation of the technical content of maintenancetasks led the team to conclude that operators could handle the majorityof tasks. The decision was made to move towards a decentralizedmaintenance organization that was integrated with production. Theplant engineering team was drastically reduced to a technical officewith a number of coordination engineers. The workshop – formerly runas part of plant engineering – was transferred into production. Theproduction function now deals with most planned maintenance jobsand small breakdowns, raising their share of maintenance work from8 percent to 28 percent. The number of interfaces and handoversbetween subsequent work steps of maintenance tasks has fallensignificantly. Processing times have also decreased.

Plant engineering and central engineering provide assistance onsmall projects, while large projects requiring specialized skills and toolsare still run by central maintenance. In order to increase utilization ofcentral maintenance staff and to gain access to external expertise, theoutsourced portion of maintenance hours was almost doubled, from 15to 27 percent. The headcount in central engineering was reduced by 38percent of its original size.

The investment in an extensive training program for operators andthe installation of a medium-range CMMS tool paid off after eightmonths of project work at a pilot plant and subsequent roll-out to all


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European sites. Annual maintenance costs were reduced by 26 percentfrom ⁄110 million to ⁄81 million. Equipment availability increased from92 percent to 94 percent, which represents additional output worth⁄120 million in sales revenues.

Besides compelling financial figures resulting from the project,another figure illustrates how much difference the program has made.The portion of planned maintenance grew from 28 percent to 70percent. Equipment maintenance, which used to be a fire-fightingexercise performed by a poorly motivated and underutilized team withlittle attachment to production goals, has been turned into a well-planned activity. As a bonus, the majority of operators perceive the workas enriching their jobs.

Shared support functions in the chemical industry

The second example demonstrating what can be gained by properly mana-

ging the maintenance support function shows how outsourcing production

support functions can save costs – provided that the third-party provider

operates on a more favorable cost basis. Outsourcing opportunities

have grown substantially over the past years in Europe’s chemical

industry. The restructuring of all but one of the big conglomerates during

the 1990s – BASF is the exception – has transformed former mono-sites

into open industrial parks.

Example: Outsourcing production support functions

The sizeable support functions of the parent companies had lost majorparts of their customer base. Splitting up the support functions betweenthe new production companies and business segments would havedestroyed synergies, even within major chemical sites of companiessuch as Bayer (split into Bayer and Lanxess) and Hoechst (partitionedfrom 1994 until the merger with Rhone-Poulenc in 1999). The solutionwas to split real estate, site infrastructure, and services from theproduction companies. Bayer Industry Services was founded to lookafter Bayer’s sites – the former Hoechst sites in Frankfurt; Infraservservice three other major locations.


9780230_217805_13_ch11.3d 5/29/2008 09:48:38

The restructuring not only fragmented large companies, it also forcedcapacity adjustment. Some European production units were downsizedor closed. Industrial areas and service capacities became available tothird parties interested in starting up business in the new chemicalparks. The result of this development is a wide range of supportiveservices advertised to chemical production companies: from generaland location specific (such as real estate and basic infrastructure, sitesecurity and utilities) to production related and location independent(such as engineering and equipment maintenance). Today, there aremore than 40 chemical parks in Germany alone.

New developments in refining organizations

It is not only the chemicals industry that has seen benefits when support

functions are redesigned to meet the needs of the manufacturing process, as

our next project example shows. The case we draw on involves a refinery.

Refineries currently enjoy favorable conditions. High overall economic

growth translates into healthy margins, and the demand outlook for the

near future is quite promising. But the oil business is subject to global

geopolitical forces and is strongly influenced by local catastrophes.

Following Hurricane Katrina – which had a devastating effect on oil

production and refining centers in the Gulf of Mexico, Louisiana and

Texas – refining margins reached a peak. Since the business is cyclical, it

is only a matter of time until the next major downturn hits.

Strong demand has led to new requirements. A workforce that has

experienced repeated waves of job reductions and has been taught to

follow a ‘break–fix’ maintenance philosophy struggles to run a plant at

100 percent over extended periods. Additionally, as refiners were reluctant

for many years to hire enough employees, workforce gaps are common in

this sector. Since it takes several years to train new personnel so that they

are able to contribute fully to successful operations, this gap cannot be

closed quickly. All too often this leads to management stretch. Too many

initiatives in too many areas – ranging from operations over capital

projects to service function management – have to be started at once. What

changes to the refinery organization can managers make to ensure that

their refineries are able to cope with the new challenges?

In our experience, a few key elements help prepare a refinery

organization to meet the requirements of today’s business landscape and

to secure long-term viability. One element is a site fitness program (SFP)


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Pro

xim

ity to

pro

duct

ion

Independent of locationLocation specific

Utilities

Sitesecurity

IT &Communications

Catering

Employeetraining

Stafftransportation

Raw materials

Equipmentmaintenance

Analytics

Engineering

Warehousing andtransportation

IT andCommunications

Waste disposal

Pipelinebridges

Procurement

Office services

Infrastructure /Real Estate

Data networks

Figure 11.6 Providers have developed from general and location-specific services into production supportfunctions independent of location

19

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9780230_217805_13_ch11.3d 5/29/2008 09:48:38

for organizing the site. The goal of any SFP is to increase a refinery’s

flexibility. This program enables the refinery to undertake careful review

and documentation of all functions, after which core business functions

can be separated from support service functions. Core functions that are

strategically relevant for the site because of their impact on the business

and critical know-how include functions such as operations and operations

planning. Key functions, by contrast, are crucial to the site but have no

unique critical aspects. These functions are required by the core functions

and, in some cases, are enforced by legal regulations. Examples of such

functions are maintenance, fire services or HSSEQ. Materials manage-

ment and facility management are typical examples of support functions.

Example: Flexibility

In one project, we helped a German refining site transform itself into aflexible refinery by following a SFP. First, the refinery – with our help –reviewed its functions and identified the different groups of functionsthat needed to be optimized. The core functions were optimized formaximum performance. Next, the support functions were reviewed,with close attention paid to opportunities to optimize site services thatcould improve processes and release cash. These functions were viewedas candidates that could either be pooled together in a service centerwith other sites or outsourced to specialized third-party serviceproviders. The refinery decided to outsource its materials management.

A second element was the identification of value-added servicepartners for non-core activities. An outline of these two elements isprovided in Figure 11.7.

Total site fitness Program fororganization(SFP)

• Site fitness program: review of all functions in a refinery

• Identify core business activities

• Identify organizational alternatives for all other functions inside or outside the organization

Identification ofvalue-addedservice partners

• Identify non-core activities that can be provided by service partners

• Key: qualified partners consider the relevant function as core business

• This can include services, supplies, etc.

• Should also include financing of capital employed

Figure 11.7 Two elements needed to create a high performancerefinery organization


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In the implementation phase of the project, the management of therefinery decided to outsource one of its support functions – thematerials management of the refinery – to a value-added servicepartner. Some clear criteria separate a value-added service partner froma classic vendor. A value-added partner operates activities as a corebusiness, continuously strives to optimize the joint partnership, iscareful to stay in a neutral position, and complements the serviceoffering with other value-added partners to form a value network. Therole of vendors, in contrast, is typically restricted to selling parts anddistinct services.

Although the refinery had a clear idea of what it wanted to achieve,finding a partner turned out to be a challenge. The large list of candidatesquickly dwindled once the requirements of materials services for arefinery were explained in detail. The new partner had little time to get onboard and handle regular operations because the refinery had scheduledits next turnaround one year hence. A turnaround is a major undertakingin this business. The whole refinery is shut down and equipment ischecked for functionality and remaining lifetime, and replaced asappropriate. This has major implications for the supply of spare partsand materials. Several hundred purchasing requests must be processedwithin a short time frame.

Eventually, an appropriate partner was found and the wholematerials management function was transferred to this partner. Inagreement with the refinery, the new partner built a new warehouseimmediately outside the refinery and optimized all material flows. Thisalso allowed the refinery to offer the services to other prospective sitesin the region once the turnaround had taken place. The transfer wasexecuted successfully. Getting the partner on board brought significantimprovements. Management and the key refinery team can now focuson core business activities.

Overall, the SFP and the outsourcing of the refinery’s materialsmanagement resulted in a successful turnaround. Because of these twosteps, labor costs were reduced by around 20 percent and material costsby 2–3 percent over a period of three years. Specific key performanceindicators for the refinery were improved. These included totalemployees/refinery production, maintenance cost/refinery output, andreturn on capital employed. Finally, the headcount and cost base hasbecome more flexible, giving the management room to maneuver inresponse to shifts in the business climate.


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Outlook

The reasons for a production company to share support services with other

customers are synergy creation and a favorable cost base resulting from

economies of scale. As a future trend, chemical parks and location-

independent providers will extend the range of their service offerings

along the value chain of the chemical industry, from pure support

functions to closer to the production process. The same pattern is

discernible in other sectors too. While services become more sophisticated

and customer-specific, interdependencies between service providers and

customers increase. A key success factor will be a seamless and efficient

integration of all providers into the customer’s business process. This

helps maintain flexibility and variability of cost, which is the main reason

why organizations outsource respective functions and services.

Further reading

Roland Berger Strategy Consultants (2004) ‘Global Footprint Design’.

Stuttgart.

• Operations

• HSSEQ

• Engineering

• Operations planning

• Controlling

Core and key functionsremaining on site

3rd

part

y

Shared services

• Procurement

• Materials management

• Maintenance

• Strategy

Corporate functions

• Laboratory, R&D

• HR, Accounting

• Logistics• Facility management• Other services3r

d pa

rty

Externalparties

Site/globalfunctions

Functions withoutsourcingpotential

Externalparties

Functions withoutsourcingpotential

Core business focused site

Figure 11.8 A German refining site transforms itself into a flexible refinery


9780230_217805_14_ch12.3d 5/29/2008 09:47:57

PART IV

Supply Chain Management

197

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Introduction

Supply chain management – morethan just logistics


Supply chain management is not a fancy consulting term for familiar

functions such as logistics, transportation or warehousing. As the contours

of the business world have shifted radically during the past decades, the

demands on the supply chain have expanded. An integrating role, respon-

sible for linking major business functions and processes into a cohesive

and high-performing business model, has become necessary for business

success. In many companies, supply chain management has taken on this

central corporate role. The focus is no longer on how to move goods from

A to B or how to organize a warehouse. Supply chain management

sidesteps the function-based corporate organization and, instead, inte-

grates the core functions that create value in an end-to-end process.

Why is supply chain management so important?

Emerging economies provide new market opportunities and are shifting

the center of gravity for sales and operations. Western European markets

have become more mature and are highly competitive, which places the

customer in a strong position. Whether markets are mature or developing,

satisfaction and loyalty are essential to processes that serve the customer,

including the supply chain. To meet demand, companies need to focus

sharply on solutions and services. Relying on products is no longer

enough. The supply chain has to expand and be able to serve a multitude

of offerings.

The outsourcing of manufactured components is leading to increasingly

complex business processes that require special attention and close

monitoring. The scope of the supply chain is extending to manage this

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growing variety of interrelations. Productivity is taking on a new meaning:

it refers not only to cost efficiency, but also to asset and service efficiency.

Successful companies today strive for highest performance and lowest

costs in equal measure.

The importance of supply chain management in corporate strategy,

especially its direct impact on return on capital employed (ROCE), is

clear. Supply chain decisions directly influence the value drivers of asset

turnover and operating profit margin. Optimizing inventories throughout

the logistics chain boosts asset turnover, for example, as does streamlining

production and logistics networks. Reducing the complexity of both

product ranges and processes in the logistics chain lifts the operating

profit margin.

That is why supply chain management that aims to boost ROCE must be

closely aligned to upstream corporate decisions. But a ‘one-supply-chain-

fits-all’ mindset is not the right strategy. Successful companies tend to align

their supply chain to the requirements of the relevant business segment or

business unit. Customer and market requirements should be at the forefront

of all supply chain decisions. Finding the right segmentation is definitely the

key here. In highly competitive commodity markets, a cost-efficient supply

chain with short lead times is critical. By contrast, in markets with more

strongly customized products, a flexible and responsive supply chain is

paramount.

Supply chain structures should be rigorously adapted to fit the relevant

market requirements. This must be reflected in all structures, from supply

chain organization to monitoring systems, and from production and

logistics networks to processes and systems.

How can companies achieve supply chain excellence? Drawing on

insights and experience gained advising clients, Roland Berger Strategy

Consultants has created a framework for establishing end-to-end supply

chain management. It covers all areas of supply chain strategy, from

performance through to supply chain enablers.

In Part IV, we showcase our end-to-end framework, which is also

illustrated in Figure IV.1. We describe the various methods and

procedures for optimizing the supply chain at the level of strategy,

performance and enablers, and employ examples from past projects and

survey results to demonstrate the practical value of these methods and

procedures. Dr Steffen Kilimann and Robert Ohmayer, in Chapter 12, use

a case study from the electronic components industry to explain how

companies can align their supply chain to the demands of a global market.

In Chapter 13, Alexander Belderok and Thomas Hollmann show what

impact can be achieved when complexity is correctly identified and

Supply chain management – more than just logistics 199

9780230_217805_14_ch12.3d 5/29/2008 09:47:57

effectively managed. Using the results of a project from a healthcare

company, they highlight the key levers for reducing complexity. In

Chapter 14, drawing on a survey and case study examples, Roland

Schwientek and Christian Deckert demonstrate how companies can boost

their supply chain performance by achieving excellence in working

capital and, in Chapter 15, Ingo Schr€oter and Stephan M. Wagner present

best practices in establishing supply chain organizations.

I Supply chain strategy …

…links supply chain initiatives to business strategy and its requirements…expands strategic options and serves as a basis for new and powerful business strategies

II Supply chain performance …

…covers all aspects of value creation including sustainable top-line growth, sufficient operating margins, leading service levels, andefficient capital structure

III Supply chain enablers …

…encompass an end-to-end view considering all flow aspects from information to goods, services, funds, and total costs …are set up in an adaptive and responsive manner to allow for proactive changes of the market and/or strategy

Supply chain

strategy

Top-line growth, service

performance

Cost performance

I

II

III

NETWORKSPROCESSES AND SYSTEMS

CONTROLLINGORGANIZATION AND RESOURCES

Asset performance

V CHANGE MANAGEMENT

IV BEST-PRACTICE BENCHMARKING

Figure IV.1 Our framework for end-to-end supply chain management

200 Robert Ohmayer and Steffen Kilimann

9780230_217805_14_ch12.3d 5/29/2008 09:47:57

CHAPTER 12

Global supply chain management: asuccess factor for global players


Introduction

Supply chain management (SCM) is the nervous system of today’s global

economy. It has grown beyond its operational roots, when it was a way of

controlling the flow of goods and services, to take on a more strategic role.

As well as encompassing all operative core processes, it is now respon-

sible for managing costs, and also reducing complexity and redesigning

value chain structures. SCM directly influences the success of a company’s

key financials, such as return on capital employed (ROCE). Logistic

functions such as inventory management, transport and warehousing were

once purely functional and managed on a country-by-country basis only.

These days they are bundled together and managed by an SCM manager

who steers inventory and production capacity for an entire region or on a

global scale.

However, SCM is a highly complex undertaking. New trends are

emerging and, with them, a series of challenges. These have to be

addressed if companies are to have supply chain excellence. In our view,

companies require a strategic approach to master this complexity and to

move through these obstacles. For this purpose, we have developed an

end-to-end global supply chain management framework.

To illustrate how our approach works – and to highlight its tangible

benefits for companies – we discuss a real project in which we helped a

global producer of electronic components to achieve leaner production,

distribution, and customer service structures. Before discussing our

approach, we examine the trends and challenges in supply chains today.

We pay particular attention to the increasing importance of global value

chains; the division of labor in networked value chains; the growing

complexity of product portfolios; and the demand for higher levels of

201

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service, reliability and flexibility. Following this, we discuss how com-

panies can manage global supply chains.

Trends and challenges in supply chains

Supply chains are becoming more complex in terms of geographical

spread, functionality, and product portfolio. This is altering the way

supply chains need to be managed. One of the greatest challenges

companies face today is ensuring that the savings they realize by

manufacturing and sourcing in low-cost countries are not negated by

higher coordination and management costs.

Today’s companies are increasingly globalizing their value chains.

They do so mainly to secure cheaper supplies of products and services,

and to open up new markets. The volume of foreign direct investment

(FDI) is a clear indication of the extent to which value chains have become

globalized. Over the past 20 years, FDI has risen continuously by an

average of 10 percent per annum. No signs indicate that this trend will

slow down or reverse in the near future, as can be seen in Figure 12.1.

As companies assume a more global footprint, their supply chains

become more intricate, sometimes spanning several continents. Adidas,

for instance, manages only design, marketing and customer service from

its headquarters in Germany. Production has been almost completely

relocated to low-cost countries, while distribution and sales are organized

on a global level. This, in itself, presents new challenges in terms of

building up and managing supply chains. Suppliers, production networks,

and logistics networks located in different parts of the world must all pull

together.

10.9%

5.9%

2.5%

FDI

Exports

GDP

100

629

762

164156

312324

1985 1990 1995 2000 2005

CAGR

Figure 12.1 World GDP, world exports, world FDI


9780230_217805_14_ch12.3d 5/29/2008 09:47:57

Supply chains are also becoming more complex as the division of labor

in networked value chains changes shape. With the Internet as their

backbone, modern information and communication technologies cut

transaction costs. This helps companies to specialize and facilitates

effective networking. These technologies empower companies to reduce

vertical integration by outsourcing more materials and services. The

automotive industry has been a forerunner of this trend. According to a

study of the automotive supplier market that our company conducted in

2007, the share of value creation of original equipment manufacturers

(OEMs) will shrink to 25–30 percent by 2010. This means that suppliers

will take on even more responsibility for developing and producing cars,

leading to even more complex networks of product and information flows

between suppliers and OEMs.

The division of labor is also becoming more pronounced as the manage-

ment of supply chains transcends corporate borders. Both the automotive

and retail industries, for instance, are very advanced in integrating

logistics to ensure smooth product flows and to satisfy required service

levels. In addition, the more specialized services offered by logistics

providers allow many companies to outsource parts of their supply chain.

Smoothly integrating these providers is one of the key challenges facing

the discipline of supply chain management today.

The complexity of the supply chain is also turned up a notch as

companies vary their product portfolios to an ever-greater degree. Central

European companies, in particular, are trying to compensate for rising

costs at home by focusing on product innovation. They are offering a

broader range of customized, high-quality products accompanied by

excellent service. At the same time, they are seeking to diversify into new

market segments. Product differentiation has risen particularly dramati-

cally in the automotive sector, and premium OEMs and mass manufacturers

alike are embracing this trend. To counter increased competition, auto-

motive manufacturers are placing new product variants on the market and

launching model offensives at an unprecedented rate. By taking this action,

they aim to increase the total number of units sold – or, at least, to keep this

level stable. The number of models of cars and light commercial vehicles in

Germany rose from 140 to 335 between 1985 and 2005. If OEMs’ plans

pan out, the number will increase to more than 365 model types in 2010.

The number of models per brand mass manufacturers have offered rose

from three-and-a-half in the 1980s to more than eight today. Similarly, the

variety of car configurations has also swelled. For its Mini brand alone,

BMW offers customers the choice between 418 different paint and color

combinations.

Global supply chain management 203

9780230_217805_14_ch12.3d 5/29/2008 09:47:57

As a result of these changes, supply chain management is forced to

meet ever more intricate and involved requirements. The complexity of

development, finishing, and assembly processes increases. Different

market segments expect different service levels and are exposed to

varying levels of cost pressure. Companies must master a tricky balancing

act: They must keep a cap on their supply chain costs while still delivering

high-quality, made-to-measure customer services and broad product

portfolios.

As supply chains become more complex in terms of geographical

reach, functionality, and product offerings, the people who manage them

have to do more to ensure high service levels, rapid responsiveness, and

flexibility. The trade-off between product costs and supply chain costs

needs to be weighed up carefully. The more customized products and

services are, and the faster companies have to respond to market trends,

the more difficult it is to globalize production and sourcing policies.

Companies moving in this direction must modularize their products as

far as they can while introducing new variants as late as possible. They

must also keep stocks low and operate fast supply chain processes. One

way to do this is to implement cross-docking and merge-in-transit

procedures that allow customer-specific products and product ranges to be

merged and assembled from different sources without any need for

warehousing.

Supply chain processes must become extremely reliable, too –

especially in sectors with short product lifecycles, such as the PC, mobile

phone and fashion industries. Best practices developed in these industries

can be transferred to other sectors. If companies in these sectors fail to

learn, the costs can be horrendous. Companies in the retail sector, for

instance, have endeavored to improve their supply chain processes over

the past few years in order to increase their product availability. Since the

average out-of-stock rate of European retailers is between 7–10 percent,

retailers have a strong incentive to achieve high service levels and create

supply chains that function perfectly. Surveys show that if a product is not

available for customers, then 9 percent of them will not be tempted to

purchase an alternative product. This amounts to ⁄4 billion in lost sales in

Europe alone.

Optimizing global supply chains – a success story

Aligning the supply chain with global requirements is a strategic

management challenge. Optimizing individual functions in the chain


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tends to be counterproductive, as these typically pursue conflicting goals.

For example, establishing alternative sources of supply in low-wage

countries and/or relocating production facilities inevitably leads to higher

shipping costs, longer replenishment cycles, and higher working capital. It

is therefore necessary to take an overview and optimize all aspects in a

considered and coordinated manner.

Drawing on the extensive experience we have gained in building and

optimizing global supply chain management strategies for companies in a

wide range of industries, we have developed an end-to-end global supply

chain management framework. We wish to show how useful and practical

this framework is, and will draw on a project to do so. The project team

developed a holistic supply chain strategy for the region Europe, Middle

East and Africa (EMEA) for a global producer of electronic components.

The project was set up and implemented in several phases and

subsequently rolled out globally.

The globalized company suffered from severe supply chaindeficits

Our client is a fast-growing producer of electronic components; a

manufacturer of electronic connectors, switches and fiber optic products.

Its global revenues exceed ⁄5 billion, one third of which is generated in the

EMEA region. The product portfolio is highly complex, spanning over

500,000 different products and variants. Furthermore, the company serves a

broad range of industries, from automotive, engineering and aerospace

through to consumer products and communications. Each of these industries

places widely differing demands on the company in terms of product

specifications and service levels. The company serves 90,000 customers in

57 countries from 174 manufacturing and warehouse locations.

Example: Global supply chain management framework

In EMEA, the company was having a very hard time meeting requiredservice levels. The inevitable result: dissatisfied customers, lost revenues,and high costs for emergency shipments. The ‘ship-to-request’ servicelevel averaged just 79 percent. In other words, approximately every fifthorder was not delivered on time or was completed inaccurately, despitethe company’s steep supply chain costs.


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Historical development was part of the reason for the company’sunfortunate predicament. The company’s supply chains had evolvedover time. Sales growth had led the company to follow its customersand gradually expand in all core European markets. Warehouses andproduction facilities were set up piecemeal in the various countries. Insome cases, local manufacturers were acquired to penetrate thesemarkets. As the production network grew across Europe, complex inter-company supplier relationships involving multi-step ordering anddelivery processes emerged between different countries. In onecountry, for example, on average 30 percent of all products sold weremanufactured in a different country.

Another driver of complexity in the supply chain was the outsourcingof parts of production to external vendors, some of them in countrieswith low labor costs. Outsourcing had been engaged in to improveflexibility and reduce labor costs. Yet, information was far fromtransparent on a global level because of the many and varied supplierrelationships the company had. Exacerbating the problem, IT systemswere only networked across borders to a limited extent.

The broad product and customer portfolio caused even greatercomplexity, leading to a large number of unprofitable, low-volumeproducts and customers. In addition, responsibility was fragmentedwithin the supply chain. There was no one person responsible for supplychain management at a national or enterprise-wide level. Efforts tooptimize existing systems were limited to individual functions andcountries.

Holistic supply chain optimization is the key

To improve service levels and reduce supply chain managementcomplexity, the project team designed and implemented a holisticstrategic approach. The approach draws heavily on the Roland Bergersupply chain excellence framework.

It is our conviction that supply chain strategy, performance, andenablers must fit together seamlessly and dovetail perfectly with acompany’s specific goals if success is to be achieved. How strategy,performance, and enablers work together is shown in Figure 12.2. Thesupply chain strategy lays the strategic foundation for transforming thesupply chain, empowering the company to shift its focus away from acountry-by-country perspective in order to develop a global value chain.In the example of the global electronic components manufacturer, corelogistical functions were bundled in business units that served multiple


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countries. At the same time, corporate functions such as warehousingwere reorganized as shared service centers. These now serve all businessunits.

Supply chain performance links strategic company objectives tospecific supply chain targets. One example is to vary cost and servicelevel targets for different customer and product segments. Reconfigur-ing the supply chain is one of the most powerful levers to optimize theROCE. It can influence profitability by improving cost structures andservice levels, and an optimized network will have a significant impacton capital turnover.

Supply chain enablers refer to the conditions that must be put inplace to achieve defined performance goals. They include organiza-tional and resource sizing issues, monitoring and control, keyperformance indicators (KPIs), processes, system requirements, networkstructures, and material flows, for example.

Defining the strategy and target gets companies off to a good startThere will never be a one-size-fits-all supply chain. The requirementsthat different customers and markets place on availability, deliverytimes, and costs vary too widely for that to be possible. Each supplychain must be examined on its own merits and segmented in line withspecific market demands. For our client, defining different cost andservice level targets for its various business units was the necessary firststep. While the automotive industry insisted on service levels upward of99 percent, other sectors were happy with lower service levels.Considering the exorbitant expense involved when a car assemblyline grinds to a halt, the difference in service level expectation was

2 Define supply chain responsibility 3 Set up supply chain monitoring 4 Reduce supply chain complexity 5 Streamline supply chain processes 6 Consolidate the supply chain network

SUPPLY CHAIN

STRATEGY

1 Define strategy and performance targets

SUPPLY CHAIN PERFORMANCE

SUPPLY CHAIN ENABLER

Figure 12.2 Supply chain strategy, performance and enablers fitseamlessly together


9780230_217805_14_ch12.3d 5/29/2008 09:47:58

understandable. Customer-specific segments were also identified withinthe business units. In this way, preferential service – in the form ofspecial logistical processes such as direct shipment, for example – couldbe given to strategic key accounts as opposed, say, to small customers.The aim was to raise average service levels from 79 to 95 percent acrossall business units, albeit with considerable variations depending on thecustomer and industry.

Besides improving delivery performance, the company also wished toboost earnings before interest and taxes (EBIT) by five percentagepoints by reducing logistical and supply chain costs. One main way toachieve this goal was to establish a consistent, cross-border supplychain management system within business units, and to link this newsystem to a robust supply chain monitoring unit. Shipping andwarehousing functions across the business units were bundled toform shared service units and thereby tap further synergies. To ease thevast complexity of the product and customer portfolio, a distributorchannel was set up to serve small customers. This move alonestreamlined the product portfolio. Consolidating responsibility for thesupply chain at business unit level also created leaner processes byeliminating complex inter-company handling processes that had beenmade obsolete. The company’s traditional warehousing structures andproduction constellation no longer lined up with market requirementsand were consolidated throughout Europe. Figure 12.3 outlines themain elements of the company’s initial situation and targets.

Delegating supply chain responsibility ensures account ownershipPrevious over-emphasis on country organizations and functions hadprevented the company from optimizing the supply chain as a whole.For example, functions such as customer service and materialsmanagement, whose processes are closely intertwined, were keptseparate within the organization. Customer service was attached tomarketing/sales, while materials management belonged to production.Accordingly, it was impossible to assign responsibility for orderfulfillment from start to finish.

Typical target conflicts made matters worse. Production was largelymeasured in terms of capacity utilization and, naturally, preferred largeproduction batches. By contrast, materials management needed greaterflexibility to accommodate made-to-order parts. Each function wastrying to optimize its own activities, but there no one who wasoverseeing and taking responsibility for the supply chain as a whole.This had a negative impact on service levels and costs. To solve theseproblems, the company established one unit that was responsible for


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the entire supply chain in all countries within a given business unit. Allthe necessary core functions – including forecasting, customer service,materials management, and production and operational procurement –were subsumed under these supply chain management units.

Stronger customer orientation and process ownership are two of themain advantages of such integration. Understanding precisely whatcustomers need and want makes it easier to plan capacity andinventories. With this knowledge, the supply chain manager couldstrike a better balance between forecasts and current demand on theone hand, and machine and tool capacity – both internal andoutsourced – on the other.

All non-core supply chain functions – such as warehousing, shippingand strategic procurement – were bundled in shared service organiza-tions that serve all business units. These functions can be groupedtogether on a horizontal level because they have nothing to do withconsistent order management within the business units. One crucialbenefit of this strategy is that synergies can be tapped across multiplebusiness units. It is also easier to charge business units accurately andfairly for services rendered.

Monitoring the supply chain creates global transparency Tomaintain an unobscured view over the entire logistical chain, and tomanage it effectively in the long run, supply chain managers need aconsistent, hierarchically structured system of KPIs. These must link

ORDER PROCESSING PRODUCTION DISTRIBUTION

INITIALSITUATION

• Complex, country- oriented logistics network • Service level: 79%

100%

With 35% inter-company sales

Country-related customer serviceand inventory management

Small production units

(14)

National warehouses

(14)

TARGET

• EMEA-wide logistics structure with differentiated supply chains • Service level: 95%

25%

Centralized ordering call centerand inventory management

Consolidated EMEAmanufacturing plants

(4)

Direct shipment

(3–4)

PAN-EMEAdistribution centers

Distributor

65%

10%

Figure 12.3 Initial situation and targets


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specific enterprise- or business unit-wide ROCE targets to operationalsupply chain performance targets.

KPIs provide support for the two main drivers of ROCE: profitability(the return on sales) and asset turnover. For instance, the KPI ‘EmergencyShipment Cost to Total Shipment Cost’ tracks the long-term reduction ofunnecessary extra shipping charges. This has a direct positive impact onEBIT. At the same time, the KPI ‘Inventory Coverage’ plots the reductionin inventories, which in turn has a positive effect on asset turnover.A direct and consistent cause-and-effect correlation exists between anumber of operational supply chain KPIs and top-level ROCE targets.

At the electronic component manufacturer, the KPI tree was modeledacross the entire enterprise and also included suppliers and outsidevendors.

Reducing complexity and streamlining processes improvesprofitability Inherited structures had left the manufacturer’s supplychain extremely complex. Complexity was driven by large numbers ofsmall customers and by items with low production volumes. To someextent, fixed handling costs for order acceptance, and picking andshipment processes are independent of the size of an order. This meansthat small customers who order low volumes create disproportionatelyhigh process costs relative to the value of their orders. The result is anegative contribution to EBIT. This problem initially did not show up incosting calculations at our client because the same mark-up for orderhandling costs was used for every order and for every customer.In effect, large customers were subsidizing their smaller counterparts. Incontrast to their larger competitors, small customers were able to buy atlower costs, thus creating a situation that was actually increasing thenumber of unprofitable customers.

To rid the company of this situation, the project team encouraged itto set up a different distribution network. A distributor, however, canbundle orders on a completely different level. Distributors specialize in aparticular industry segment and can supply customers with productsfrom a wide range of vendors in a single consignment. This drives up thevalue of orders. Moreover, distributors can also bundle the demandexpressed by multiple customers, which has the effect of consolidatingorders. Distributors also specialize in the efficient handling of smallorders, such as parcel handling. Introducing a distributor streamlinesprocesses and thereby improves profitability. On the sales side, twopotentially contradictory effects can occur, however. As a rule,distributors can boost sales because they provide better care to smallcustomers. On the other hand, their specialized skills also enable themto deliver rival products, which can detract from sales.


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The transition from country-focused to business unit-focused supplychain management also let the company streamline the order handling,inventory management, and production planning processes. Segment-ing the supply chain by customer groups within each business unitfurther simplified the company’s processes. For example, customerservice units in each country had hitherto looked after order handlingissues for large automotive customers. Following realignment, EMEAcustomer service units were set up as ‘single points of contact’. Theseunits can now track order status and product availability throughoutEurope, and large customers see their orders fulfilled faster and moreflexibly. If an important product is not in stock at the usual regionalwarehouse, customer service staff can have it shipped directly fromanother regional warehouse. In extreme situations, the same staff caneven authorize direct shipment. Now that order handling has beencentralized for large accounts, both demand management andforecasting are more efficient. Customer demand data flows into asingle unit that caters to multiple countries.

Smaller customers that mainly operate on a ‘general business’ leveltend to want a local point of contact: creating ‘virtual’ customer serviceunits satisfied this requirement. Though physical units still exist invarious countries, they are linked together by a single, central system.

Inventory management and production planning activities havelikewise been centralized at EMEA level within the supply chainmanagement function in each business unit. As a result, all productioncapacity and parts inventories for a given business unit are nowmanaged by a single central unit. Similarly, the new materialsmanagement unit within the supply chain management organizationplans both inventories and the production capacity needed to replenishthem for the whole of Europe. Inter-company ordering processesbetween countries used to be very complicated. Since all that has beeneliminated, processes have been accelerated and are completed morereliably, which can be seen in Figure 12.4. Throughout the entire EMEAregion, production capacity and inventories can now be planned betteron the basis of demand data that is collated centrally by a singlecustomer service unit. Capacity utilization has improved and inventorieshave been reduced.

Centralizing the inventory and production planning processes alsoenabled the product portfolio to be reclassified into make-to-forecast,make-to-stock and make-to-order products. In the past, the detailedcriteria for these definitions had never been standardized at pan-European level. Nor did any uniform planning philosophy exist. Thepractice of harmonizing planning parameters and defining appropriate


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production strategies further lowered inventory levels while, again,improving deliverability.

These changes naturally placed new demands on the company’s ITsystems. The IT systems used previously in different countries werescarcely harmonized. Network links were rudimentary at best. Orderdata was the main item that was exchanged between systems. Tocentralize inventory and production planning, the various nationalsystems had to be linked using an enterprise application integration(EAI) platform. Once this had been done, transactions could be handledin real time across all the networked systems. In the long term, thecompany plans to integrate all sites and functions in a given businessunit into a single enterprise resource planning (ERP) system.

Consolidating production and distribution network saves time andmoney Legacy production and distribution structures reflected aninherited bias towards individual countries. Production capacity wastherefore comparatively small in most countries. Since there was noclear assignment of production capacity at a given plant to a particularbusiness unit, different business units often accessed the samemachines. This inevitably created conflicts over the use of capacity,added uncertainty to the planning equation, and ultimately causeddelays in delivery.

Owing to the traditional country focus at the company, plants inmany countries handled every step in the production process single-handed. Cross-border production networks existed only to a verylimited extent – between Germany, the Czech Republic and Switzerland,for example. The company was prevented from exploiting economies of

Materials Germany

BEFORE: Complex intercom processes AFTER: Streamlined centralized processes

ProductionGER

Warehouse GER

WarehouseGB

Production GB

ProductionGER

Central warehouseEMEA

ProductionGB

Materials GB

Interco export Germany

Interco export GB

Interco export Spain

Customer service Spain

Materials Germany

Materials GB

Interco export Spain

Figure 12.4 Elimination of inter-company flows through directordering


9780230_217805_14_ch12.3d 5/29/2008 09:47:58

scale and specialization in the EMEA region because of this largely‘autonomous’ production strategy. Utilization at some plants was belowcapacity. Also, too little use was also made of the labor cost advantagesof off-shoring labor-intensive steps in the production process to low-wage countries.

Realignment of the production network in Europe centered onradically consolidating production capacity. The number of thecompany’s plants was reduced from 14 to four main plants and twospecialty plants. Two plants in Central Europe were expanded to form anetworked facility for technology-intensive production. Two plants inEastern Europe were similarly networked to handle assembly-intensivesteps in the production process. In addition, two smaller plants thatmanufacture special purpose parts were retained. At each plant,production capacity was assigned to the business units and adjustedon the basis of strategic capacity planning. For each business unit,consolidation achieved the critical mass that was needed to enableappropriate specialization. Planning and production became far morereliable.

With production planning and control handled by the supply chainmanagement unit at each business unit, the plants provide productionand associated infrastructure on a shared service basis.

As with the production structure, distribution also had a heavilydecentralized structure in the past too. Each country had its ownproduction facility and/or distribution point, which drove up infra-structure and inventory costs for the entire group. The same products –including slow-moving items, in some cases – were kept in stock atseveral warehouses around Europe. Little was known about what was instock where at any given time.

Radical consolidation was the key to realigning this distributionstructure. The 14 existing warehouses were condensed into fourregional warehouses. C products were all stored at one specific regionalwarehouse. Each warehouse maintained the product range that wasneeded in its region. The warehouses also became organized as sharedservice units that could be used by all the business units. Products nowarrive here straight from the production plants – an arrangement thatkeeps local ex-works distribution to a minimum. As a result, productionfacilities themselves now only operate as a buffer function for directshipments. This function serves only for products with high to very highconsignment volumes that justify direct ex-works shipment tocustomers.

Warehouse consolidation created a single-step storage constellation.In the past, inter-company shipments had accounted for a large


9780230_217805_14_ch12.3d 5/29/2008 09:47:58

proportion of shipments, and always involved two steps: consignmentswere first dispatched from the warehouse in the country of origin to thewarehouse in the target country, and then to the customer. These twosteps extended delivery times, doubled the amount of handling andincreased inventory costs. The combination of one-step storage anddirect shipments has sharply reduced inventories while improving theservice level.

The regional warehouses needed to meet tight delivery deadlinesdemanded by customers. To enable them to do so, transport providerswere recruited who could exploit significant bundling synergies whileguaranteeing short delivery times in their catchment area. At the sametime, consignment stocks were set up on customers’ premises to handleextremely critical parts with extremely short delivery deadlines and strictavailability requirements.

The results speak for themselves

Realigning supply chain management created much leaner production,distribution, and customer service structures in the EMEA region at thisparticular manufacturer of electronic components. Multi-step inter-company processes were eliminated. Supply chain management wasestablished as a central organizational unit in each business unit. Anend-to-end cross-border supply chain management was introducedthroughout the company.

This enabled the company to meet its target and raise service levelsfrom 79 to 95 percent in all business units. Indeed, the automotivebusiness unit now comes close to a service level of 100 percent. Sinceprocesses and planning are now substantially more reliable, the hugeexpense of emergency shipments has declined significantly. Besidesimproving service levels, the new leaner structures also cut costssharply, leading to a 5 percentage points increase in the EBIT margin.

Success factors in global SCM implementation

Seen in its global context, supply chain management is far more than a

way of controlling the flow of goods and services. It is a pivotal tool in

reducing complexity and redesigning value chain structures. It is equally

vital in the drive to improve cost structures and service levels. Many

enterprises, however, still fail to grasp the significance of this discipline.


9780230_217805_14_ch12.3d 5/29/2008 09:47:58

To a large degree, they remain focused on individual functions and

countries. Such companies tend to see supply chain management as a

minor corporate function that concerns itself only with materials

management and shipping. One change is crucial if global supply chain

management is to be implemented successfully: companies must cultivate

an understanding for the need for transformation, for changing existing

structures and processes. The extent of the necessary changes and the

inherent potential must be spelled out.

Moves to establish global supply chain management must be initiated

by top management. Broad-based support must then be solicited in the

business units and country organizations. All supply chain functions in the

existing country organizations must be actively involved from the earliest

stages of conceptual development. It is no secret that internal power plays

are a significant and detrimental factor in many change processes. This

can be reduced when key activities are bundled in a business unit-wide

supply chain management function. A supply chain leader should be

appointed to drive the process of redesign and transformation. Ideally, this

should be the person who will subsequently spearhead the supply chain

management function. All parties involved must help design the strategic

roadmap and define unambiguous targets for the supply chain. Everyone

has to know exactly where the company is heading. Once this strategic

foundation has been laid, the work of realignment can commence.

To minimize the complexity of realignment, it is advisable to begin by

setting up a pilot supply chain management unit for just a few countries in

one region (such as EMEA). Global rollout can then take place in phase

two. Whatever the geographic scope, it is imperative to adopt a holistic

approach to realignment. No aspect should be left out. Distribution and

production structures, order handling, inventory and production planning,

organizational issues, and process definitions must all be remodeled in the

change process. Only then will a lean, agile supply chain structure emerge.

Moreover, a detailed implementation roadmap must be drawn up that

clearly plots the individual steps in the transformation process. Change

obviously has to take place while the company continues to go about its

normal business. Accordingly, it makes sense to model every step of the

transformation in a master plan and identify those actions that are critical.

For example, closing a warehouse in a particular country must not pose a

threat to compliance with defined service levels. As a rule, pilot projects

should be used to test and fine-tune the defined changes. Rollout can then

take place when new processes have proven their practicality.


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CHAPTER 13

Complexity management: the startingpoint for improving performance

Alexander Belderok and Thomas Hollmann

Introduction

Supply chains are becoming increasingly complex and more difficult to

manage. While globalization shoulders a large share of responsibility for

this rise in complexity, almost all aspects of the supply chain contribute to

this development. Whether extending operations to new regions,

launching new products and services, forming partnerships and alliances

or outsourcing functions, each of these activities can create value. If they

create value, these complexity-adding activities also create what we refer

to as ‘good and necessary’ complexity.

Negative or unnecessary complexity, on the other hand, adds no or little

value to either the consumer or the company. Companies’ unshakeable

belief in innovation being the answer to customers’ growing power and

unpredictability – and, therefore, the remedy for staying ahead of the

competition – is behind much of the unnecessary complexity found at

companies today. While innovative products with every sort of bell and

whistle imaginable might please buyers, they sometimes unnecessarily

complicate a company’s operations and lead to higher costs.

Learning to recognize when complexity is justified is vital for

sustainable, long-term growth. Clearly, driving negative complexity out

of a company’s operations can bring strategic benefits; there are, however,

times when managing complexity would bring greater advantages.

In this chapter, we will delve more deeply into complexity, and look at

how negative complexity affects businesses and organizations today.

Next, we examine the most common drivers of complexity. Following

this, we discuss the importance of managing complexity. Finally, we turn

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our attention to a case study that illustrates the benefits of managing and

reducing complexity in the healthcare sector.

What is complexity?

Complexity tends to sneak into organizational structures as companies

market a progressively larger portfolio of products, services, features,

and options. Encouraged by innovation and sales targets, plus an

eagerness to satisfy customers’ every need, companies unwittingly

welcome complexity into their operations. Production, engineering, and

logistics often further complicate existing operations as companies

attempt to manufacture every product in every batch size in every

throughput time.

With customer preference in constant flux, many businesses continue to

expand their portfolio, placing more goods or services on the market.

Responding in this manner can bring positive change to companies and

add value to customers. When a company’s portfolio of goods and

services is misaligned with market needs, however, the number of price

points, line extensions, and other goods and services stop creating value

for customers. They become barriers not benefits. This is complexity in

what we refer to as its ‘bad’ or ‘negative’ form.

Unless a company uses a mechanism to manage its entire portfolio,

complexity will become part and parcel of its processes and costs will rise.

Over time, the cost of complexity infiltrates all products. This is known as

a ‘complexity tax’. In the name of relentlessly pursuing customer demand,

company growth eventually suffocates under this burden. Managing

complexity can help companies break that pattern. By tackling the com-

plexity issue, companies are better positioned to weigh up the additional

costs required to add value, and to develop innovations more efficiently.

But identifying complexity is not always easy. In a product-based

company, the results of complexity can be highly visible. Think, for

example, of a large warehouse with many different parts or finished

goods. Complexity can be much harder to identify in a service

environment, where products are not physically present.

In our view, there are seven main complexity drivers: organizational,

process, suppliers, engineering, manufacturing, brand and channel, and

customer. These are shown in Figure 13.1. Some complexity drivers will

affect some companies more than others. Identifying what complexity

drivers are at play in your business is the first step to managing them.

Complexity management 217

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Why is complexity management important?

Complexity management is important because it dramatically affects a

company’s bottom line. In one project case, an industrial products company

built up a very complex product portfolio. Owing to the company’s non-

transparent processes and systems, it was unable to determine the true

profitability of its products. When the Roland Berger project team analyzed

the figures, it became clear that complexity-related costs were consuming

more than 7 percent of total revenues. This makes no business sense – and,

unfortunately, the cost can also be much higher. On a different project with

a manufacturing company, the project team calculated that a complexity

burden of 22 percent was added to total production costs. Typical costs are

shown in Figure 13.2. Complexity’s tax on resources, processes, and

systems is threefold:

• It adds costs that cannot be offset in the marketplace

• It distracts management

• It ties up resources that could otherwise be directed towards growth

opportunities.

By gaining transparency as to the sources of complexity, companies

can identify real cost-to-serve and, in a next step, allocate resources

more appropriately. As a consequence, a company can then increase the

added value of its products on the marketplace, which will help spur

growth. The impact of complexity differs from industry to industry, as

is shown in Figure 13.3. The extent of the impact is determined by the

Complexity

Customercomplexity

Brand andchannel

complexity

Manufacturingcomplexity

Suppliercomplexity

Engineeringcomplexity

Organizationalcomplexity

Processcomplexity

Figure 13.1 Complexity drivers

218 Alexander Belderok and Thomas Hollmann

9780230_217805_15_ch13.3d 6/4/2008 16:41:23

High

Low

Long ShortLifecycle

Customization

Aerospace anddefense

Engineeredproducts

Consumergoods

Automotive

Telecommunications

High tech.Spec. Chem.

/Pharma.

Chemicals, oiland steel

Utilities

Key : Primary focus Extended focus

Figure 13.3 Complexity’s impact differs from industry to industry

3–10

50–60

10–30

5–25

11–22

Complexity tax (%)Product cost build up (% of total costs)

1–5

∑

Purchasing

F&A

Production

Distribution

Other

15

40

30

5

10

Figure 13.2 Complexity tax often amounts to 11–22 percent of totalproduct costs


9780230_217805_15_ch13.3d 6/4/2008 16:41:23

degree of customization needed to meet individual customer demands,

and the length of the subsequent product and technology lifecycles. The

number of brands, models, and distribution channels can also ramp up

the level of complexity’s impact.

Complexity is cross-functional

Companies that can truly distinguish between customer demand and

necessary growth opportunities are in a much better position to deal with

complexity than those companies that fail to understand this distinction.

Evaluating the trade-off between the cost and value of complexity is not

simple. This is not surprising, considering that complexity pays no heed to

functional, business, and geographical barriers. It spreads through them,

making it intrinsically difficult to manage. Companies that encourage strong

interaction between sales, product development, and operations tend to

manage complexity well. Indeed, the degree of interaction among various

functions is a telltale sign of how well a company will manage its complexity.

At far too many companies, however, information flows are insufficient

and are rarely connected across the different functions. In the flavor

industry, for instance, sales departments are generally willing to accept

less than ideal supply conditions if it means they will close a deal. The

product development function is focused on composing ‘totally new’

flavors rather than using a ‘modular’ approach, which is believed to limit

creativity. Both these tendencies add cost across the value chain in this

particular industry.

Complexity is cross-functional in nature. This is why managing

complexity requires strong leadership at the senior business level. All too

often, however, the attention of senior management is caught elsewhere.

Without someone at top management level who oversees complexity, it is

almost impossible for companies to evaluate the additional costs incurred

by the complexity to operations, and to weigh these against the actual

benefits for the product and the end-consumer.

Learning to manage complexity trade-offs effectively can be a slow

process. Most companies are under relentless pressure to deliver tangible

quick wins, which is why traditional efforts at complexity management

often concentrate on reducing the cost of complexity (for example,

through stock keeping unit (SKU) rationalization) rather than highlighting

its strategic value. By recognizing that complexity might be a good thing

in some circumstances, managers can decide when to reduce or add

complexity. The right level of complexity increases the competitive offer.


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How is complexity addressed?

Complexity is best addressed using an approach that takes both the value

and cost sides into account from the start. The insights gleaned from this

approach enable companies to reduce complexity and to prioritize, scope,

and prepare optimization efforts properly while providing the foundation

for managing complexity effectively and in a sustained fashion. Figure 13.4

outlines the overall approach and shows how different opportunities can be

quantified against each other.

Addressing complexity in its entirety creates more benefits and, perhaps

more importantly, will make savings more sustainable. It also gives

companies greater control over new product development. Challenges in

the flavor industry can be instructive in this context, too. In the flavor

industry, almost half of a company’s portfolio is renewed each year. Most

product additions add little or negative profitability. More is not necessarily

better. A holistic approach to portfolio development and a better

understanding of which additional product adds costs and which adds

value through transparent allocation of complexity costs would give

companies long-term growth without compromising their products.

Textbox 13.1

Stock keeping unit (SKU) rationalization

Although appealing in its simplicity, typical SKU reduction efforts

seldom guarantee lowered complexity costs. The roots of complex-

ity must be recognized. These generally include the complexity

drivers of products, the hidden cost of SKU proliferation, and the

costs that ultimately represent hidden taxes on customers or

consumers who end up paying more for a variety of products that

they neither need nor want. This is especially true for ‘innovative

supply industries’, in which a large part of the portfolio is renewed

each year. These are characterized by short product lifecycles and

numerous product introductions. More and more industries under-

stand the problems with this approach and are increasingly

addressing complexity across all businesses and functional areas

in the company. In order to make complexity manageable they

switch to a ‘modular’ approach, which lowers overall supply costs

and boosts innovation.


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1:2

5

SKU aslinkingelement

SKU/customerportfolioimpact

Process/network impact Spend impact

Organization impact

Technical complexityHigh number of sub-systems

and component familiesIncreased technology integration

Market driven complexityHigh number of market entries andexcessive variation within market

entries

Customercomplexity

Brand andchannel

complexity Manufacturingcomplexity

Suppliercomplexity

Engineeringcomplexity

Sell/market Make/deliver Design/buy

Organizationalcomplexity

Processcomplexity

Figure 13.4 The overall approach aims to quantify and prioritize different opportunities against each other

22

2

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In complexity management, it is important to distinguish between

complexity that is visible to the customer and complexity that is not.

Visible complexity is product and packaging standardization that

rationalizes product offering or changes customer-discernable attributes.

Invisible complexity encompasses the raw material: component and

packaging standardization that specifically targets efficiency improve-

ment without discernable customer changes. Typically, the invisible

complexity is easier to address, as it does not directly impact customer

satisfaction. With visible complexity, the gains are usually higher;

however, they are more difficult to reap as the impact of the changes needs

to be communicated to the customer. Often, the customer will demand a

share in the benefits.

A typical project aimed at making complexity more transparent follows

a three-step approach, which is outlined in Figure 13.5.

The important first step in complexity management is to develop a

thorough understanding of the complexity of a business, its value chain, and

the costs and values that are associated with each step of that value chain.

Understanding the entire process allows a company to identify the

discrepancies between production costs and incremental value to customers.

Bicycle manufacturers, for example, often install different types of alarm

bells on city bicycles. This results in high inventory, a complex supply chain,

and assembly differences. While an alarm bell adds, perhaps, 1 percent to

customer satisfaction, because it is installed during the last step of the

production process it amounts to more than 1 percent in additional costs.

Creating cost transparency can be difficult and depends on the level of

sophistication of the accounting systems. In most cases, detailed cost

information is not readily available. An unorthodox approach is required,

one which combines a bottom-up estimation of costs with a top-down

assessment of the value chain. Although detailing the cost of all products

is a time consuming job, it serves as the foundation for future analysis.

At this stage, it is important to gain critical insight into the demands of

the market. Formed from a needs-based segmentation of the market

(based on value drivers), questionnaires and interviews determine how

various customer segments perceive the value of the company’s products

and services, and whether they are willing to pay a premium for certain

added values. Customer added value can be measured with a conjoint

analysis test that forces customers to select their preferred product

offerings. It is important, here, to identify customer ‘threshold’. The

information gained from a detailed cost analysis, location in the value

chain, and the type of value-added provides clarity into the elasticity of the

various complexity drivers.


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6

Understandcomplexity

Re-designcomplexity

Manage and controlcomplexity

Actions

Deliverables • Target added value map of operational costs versus added value• Bottom up estimate of savings potential (feasible)• Pilot improvement project• Business case for change• Implementation plan

• Determine scope of project (product and customer groups)• Collect process and product information• Baseline cost to produce product properties/features• Determine added value of product properties/features (e.g. using conjoint analysis)

• Develop an overview of operational costs versus added value of product properties• Bottom up estimate of total complexity costs

• Define target features and operational costs• Assess costs and benefits of redesign• Start proof-of-concept pilot• Prioritize and plan improvements• Build business case for change

• Lower cost operations with less complex production processes

• Install complexity management task force (program officer)• Assign target and responsibilities for improvement initiatives• Monitor and control progress

Connect the cost andvalue of complexity

Balance the trade-off betweengood and bad complexity

Benefit from lower costand re-ignite growth

Objective

Figure 13.5 Detailed approach

22

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Matching these insights with a cost transparency model informs a

company about the trade-offs that must be made. Such a comparison not only

locates where profit is made, but it also pinpoints where changes to price and

improvement in value perception can be made. This is the second step, in

which complexity is redesigned. It is critical not to focus simply on the SKU

tail-end optimization, but also to identify non-value added complexity across

all SKUs, materials, and customers, or even a combination of the three. To

obtain the right level of transparency, it is necessary to build a detailed

complexity database. Along with profitability and value-added thresholds,

filters such as strategic or commercial arguments should be used to identify

SKUs, raw materials, or customers for rationalization. At this point, it is

recommended that a pilot project be started to test the effectiveness of the

concept. Based on improvement potential, investment levels, and potential

risks, improvements can be prioritized.

The final step of the project is the implementation phase. This is when

complexity must be managed and controlled. Implementing complexity

management is demanding and, while it affects most areas of the

organization, there is little to show at the beginning for the effort. In our

experience, it is best to minimize the impact of the transition by delegating

improvement targets and responsibilities to lower levels in the organization.

Crucial to the success of this approach is the presence of a coordination

entity, usually a specially established program officer, to monitor and steer

the process. In the longer term, this program officer also needs to prevent

complexity from arising again.

It is important at this stage to analyze the external processes with

several archetypal customers in order to build in immediate reality checks.

When closely examining customer interaction, it is also essential to

monitor internal processes. Based on a process gap analysis, a set of

recommendations can be developed that range from process changes to

governance improvements, or even organizational modifications.

It is important to anchor complexity management into a company’s

processes to prevent it from returning after the ‘clean-up’. By examining

the processes, governance, culture, incentives, and infrastructure of the

organization, a company can manage complexity on an ongoing basis.

Rewarding proliferating products – what many companies do, in their

quest for innovation – is likely to keep churning out complexity that does

not drive value creation. Finding the right balance is not a one-off event.

Understanding what keeps creating complexity in organizations is

necessary for striking that balance again and again. Tools should be

used that effectively manage trade-offs, and connect those parts of the

organization that respond negatively to complexity with those that seek it.


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With such tools in place, a company can compartmentalize its processes.

For instance, a snacks manufacturer can separate its scalable activities (or

example, peeling, cutting, pre-cooking potatoes), which tend not to

become complex, from its differentiating activities (for example, specific

seasoning to comply with local taste preferences), which lean toward

complexity. Other tools, such as incentive systems that foster transpar-

ency, are also vital. Managers should be willing to identify shared goals

and to manage complexity across departments and corporations.

Case study: Tackling complexity from the sourcing side

To illustrate how the approach works from beginning to end, wedescribe in the following segment a project we completed for a state-owned university hospital in Germany. This university hospital emergedfrom the merger of three state-owned university hospitals, all of whichhad comparable areas of expertise. Due to their similar fields of activity,the initial assumption was that synergies, especially in purchasing, couldeasily be realized. Yet, a quick and easy win proved difficult owing to thedifferent methods of treatment, which required different products,individual order codes for similar order items and different IT systems.Since, historically, there had been sufficient government and third-partyfunding, and freedom of medical research was valued more highly thaneconomics, there was no tight budget control and therefore no need foractive management of the post-merger integration and the realizationof synergies. This situation was not unique to hospitals in Germany but,rather, was a malaise affecting the healthcare sector throughout most ofEurope.

Hospitals, and the healthcare sector at large, started to face majorchanges, however, when politicians began tackling the problem ofthe ailing healthcare system. They were particularly concerned aboutthe growing imbalance between the rampant cost of healthcare and thestagnating number of payers. Funding from government was reducedsignificantly, and a lump sum compensation system was introduced.This meant that each hospital would receive the same amount of moneyfor a specified medical treatment, irrespective of the cost burden at anyspecific hospital. As a result of this system, inefficient hospitals would nolonger be rewarded for incurring additional cost and efficient hospitalswould gain a windfall.

Facing those altered circumstances, the newly combined state-owned university hospital decided to put into action a project aimed atleveraging purchase power in order to unleash substantial savings.


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Identifying the main drivers of complexity

Added complexity was almost programmed in from the moment thethree hospitals decided to merge. The hospitals simply lackedorganizations and processes that were sufficiently integrated to benefitfrom synergies. Whereas, in the past, this non-value adding complexitywould not be too problematic owing to a healthcare system thatencouraged wastage, those days were now gone. The hospitals couldno longer ignore the complexity issue.

In this case, the main complexity drivers were:

• Organizational complexity Although the three state-owned uni-versity hospitals shared similar areas of expertise, each had a verydifferent history and specific culture. This sometimes resulted in rivalrybetween the major opinion leaders. There was little transparency, andeven less motivation to integrate similar departments. What wasmissing was the desire to create a lean structured organization.

• Process complexity In many of the departments, the medicaltreatment process differed from hospital to hospital, mostly due tohistoric reasons. In most cases, these small differences meant thatmaterial and machines were used differently, creating additionalcomplexity throughout the organization.

Although common IT systems had recently been established, it wasstill impossible to gain transparency, especially regarding purchasingvolumes and cost. Material and supplier master data were notharmonized. These data need to be harmonized before proper analysiscan be completed and actions can be defined that will helporganizations to tackle complexity from the sourcing side.

• Supplier complexity Even though the number of sales representativesin German hospitals fell significantly in the past, the power of themedical and pharmaceutical industry is still of considerable importance.As many suppliers fund hospital research, there is often a strong biaswhen it comes to selecting suppliers. Other suppliers enter the hospitalmarket by leasing machines at aggressive prices. The ramifications ofthis behavior are considerable: hospitals deal with a large, diverse poolof suppliers. At the merged hospital under review, more than 4,500active vendors belonged to the supplier base. Worse still, the supplierbase was extremely fragmented, with approximately 3,500 vendorsallocated an annual sourcing volume of less than ⁄20,000.


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Addressing complexity

As the aim of the project was to unleash savings in purchasing, the focushad to be on reducing supplier, organizational, and process complexity.The project team did this by optimizing the purchasing organizationand purchasing processes.

The first step was to develop a thorough understanding of thecomplexity of the hospital business, and the cost and values associatedwith it. At the end of this step, it was clear where complexity wasartificially high and did not increase value for either the user or thecustomer. The project team performed an in-depth analysis of the valueand the associated cost for each medical procedure. The value of eachcase is the amount the hospital is given by the health care systemaccording to the logic of diagnosis related groups (DRGs). This is a fixedamount. When comparing the cost incurred by the respectivedepartments at each of the three hospitals, the gap between the bestdepartment and the others was significant, amounting sometimes to asmuch as 35 percent. To understand how much complexity in purchasingcontributed to this significant divide between the best and worstperformers among the departments, the project team clustered thepurchasing volume into coherent commodity groups and identifiedmajor differences in purchased products across the three hospitals.

The project team also identified huge variety among the number ofdifferent products ordered by the respective departments at each ofthe three hospitals. The best hospital could satisfy customers’ needswith fewer different products than the other two. Those hospitalsthat ordered a large number of different products tended constantlyto add new products to their existing order portfolio. Old productskept on being ordered simply because they already existed on someorder forms. In many cases, a strong relationship with the salesrepresentative also existed. New products were added to the orderforms when requested by patients, even when these very specificproducts only deviated slightly from standard products already on theinventory.

To identify non-value adding complexity and the products that couldbe removed from the inventory lists, the project team conductedinterviews with industry experts and held workshops with identified keyusers. These users were responsible for the major share of consumptionaccording to the quantitative analysis. The team filtered out unneces-sary products that could be eliminated easily by substituting theproduct or by adapting processes.


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After completing step one – understanding where complexity isartificially high – it was clear that standardizing purchasing throughoutthe merged hospital would be paramount to reducing complexity.

The first task was to standardize purchasing codes across the threehospitals in order to make equal or similar products readily visible.Accepted teams consisting of selected experts from each hospitalclustered the various products into item groups with comparablefunctionalities. For each category, a standard ‘must use’ product wasdefined for all users in the hospitals. This enabled the hospitals to poolsimilar products, thus ensuring a reduction in the total number ofdifferent products purchased. Using special electronic order forms andrequired authorization levels, correct implementation for orderingstandard and non-standard products was put in place and enforced.As a result of this action, the number of articles used was reducedsubstantially. Some 11 percent fewer articles were purchased incomplex commodity groups for very specific treatments. In areas thatcould be more easily standardized, the hospitals lowered the number ofarticles by 33 percent.

By bundling the products, the project team also helped the mergedhospital to increase its purchasing power and gain better rates.Introducing preferred suppliers per product group with standard‘must use’ products for all users meant that the market share of therespective suppliers also increased. These were granted around80 percent of the sourcing volume within a category. Substantial costsavings were realized and the average full year sourcing volume wasslashed by 25 percent.

The hospital was able to optimize its purchasing processes by furtherstandardizing the IT systems. This had the additional benefit of reducingcomplexity over the long term. Online internal market places wereestablished, limiting the non-standard order portfolio. In order toreduce the number of these non-standard orders, strict authorizationlevels were implemented and supported by top management.

Quick wins are great, but in order to build on these and install asustainable complexity management throughout the merged hospital,several institutional changes were necessary. In the third step of theproject – manage and control complexity – four changes were made:

• A systematic commodity management program was installed in thepurchasing organization. This allows the strategic sourcing organiza-tion constantly to monitor developments in internal demand and helpsthem to keep an eye on products purchased across all locations. It alsoenables them to watch how the supply markets develop.


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• Standardization councils were established, comprising representa-tives from all relevant locations and from different hierarchical levels.Quarterly reports that are submitted to the board of directors havebeen defined. The gained momentum of the project work is thusmaintained and complexity management becomes an integral part ofall business decisions.

• A powerful controlling system based on a dashboard of keyperformance indicators (KPIs) was defined. Goals for the differentareas were defined based on the status at the beginning and at theend of the project. These are to be monitored on a regular basis.

• Changes were made to contracts with various strategic suppliers inorder to push efforts to integrate suppliers more comprehensively.Preferred suppliers – which were granted large chunks of thehospital’s spending volume – agreed to submit proposals thatoutlined how they would further streamline their product portfolios.In addition, the power of sales representatives was substantiallyreduced in order to increase barriers preventing new samples andproducts being distributed among end-users. This was one of themain drivers of the ever-increasing product variety in the past.

As a result of the project, the state-owned university hospital saw anannual saving of ⁄20 million, which was attributable to complexitybeing reduced significantly. In addition to the savings, the hospital wasable to reduce the number of different products ordered, saw increasedtransparency, and now benefits from improved logistics processes andinventory management. To enumerate:

• Annual savings of EUR 20 million – based on relative savingscompared with the annual spending of between 8 and 29 percent

• The number of SKUs was reduced by 11–33 percent in the differentcommodity groups

• Inventory was cut down thanks to the significant reduction in thenumber of SKUs. Non-standard products were defined as non-stocking items, and minimum inventory levels for standard productscould be optimized

• Standardized rules concerning purchase price led to increasedtransparency in the purchased and used product portfolio. Costawareness increased substantially in an area that too seldom is drivenwith an eye on business

• Strategic purchasing decisions were made possible thanks to thenewly created transparency KPIs that tracked the relation betweenthe value of products and cost. In some cases, a broader productportfolio could be justified because of significantly higher earnings.


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Manage complexity before it suffocates growth

As described by the project example, as well as by the conceptual

framework above, complexity management techniques are strategic tools

with which corporations are able to maximize the margin generated from

their operations. In our experience, companies understand that complexity

is something that needs to be tackled by top management using a cross-

business overview. They are the people who want, and have, the skills to

connect the cost and value of complexity, manage the trade-off between

good and bad complexity, and reignite growth. Tackling complexity is not

a low-hanging fruit, but it always pays off for our clients.


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CHAPTER 14

Working capital excellence: howcompanies can tap hidden cashreserves in the supply chain

Roland Schwientek and Christian Deckert

Introduction

As supply chain management should take a holistic view not only on cost,

but also on assets and cash as well, in this chapter we will present and

discuss our current thinking on working capital management. Working

capital reflects the money invested in supply chain processes in the form

of accounts receivable, inventories, and accounts payable. Based on our

experience, optimizing working capital management can achieve amaz-

ing effects on the financial performance of an enterprise and its supply

chains.

There is never enough to go round: this is true of all scarce resources, and

it is certainly true of money, especially in the corporate sector. Companies’

thirst for cash is unquenchable. Some want to pursue growth strategies by

penetrating new markets, developing innovative products or acquiring other

firms. Others need to be turned around to get out of trouble. The common

denominator in all cases, however, is a considerable need for funding.

Meeting this need for funding in the most efficient way possible is one of

the central strategic challenges confronting top management. In this

chapter, we first look at the financing tools available to companies, and

illustrate just how important working capital is for supply chain excellence.

Next, we show Roland Berger’s approach to optimizing working capital.

Finally, we look at best practices today and those of tomorrow, drawing

from a working capital excellence survey we completed in 2005 and 2006.

In our experience, all three working capital items display optimization

potential.

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Making working capital work

Companies have an array of external and internal financing tools at hand.

In the case of external funding, companies draw on capital market

resources. These resources must be procured on the stock markets or from

banks, in the form of equity or debt. Today’s capital markets demand

profitable growth and a continual increase in the value of the company.

Enterprises constantly strive to qualify for external funding. They must

repeatedly prove that they are able to use capital efficiently and generate

adequate returns.

In the case of internal funding, financing needs are covered by cash flows

generated within the company. This cash usually derives from operating

income, financing activities or divestments. In other words, companies pay

their way out of their own pocket. Where necessary, they increase funding

by boosting sales or cutting costs. Very often, reserves can also be identified

and tapped in the supply chain. Improving cash flows from the supply chain

can reinforce a company’s ability to meet its own financing needs.

Seen from this angle, working capital takes on singular significance.

Working capital is the money that is tied up in the company’s supply chain

processes and which must be invested in order to generate sales revenues. It is

normally defined as the sum of inventories and receivables from customers

less the short-term or trade accounts payable. All the key functions in the

supply chain – purchasing, production, logistics, distribution, sales, and so

forth – use working capital and must be closely coordinated. Average

working capital in selected European industries is shown in Figure 14.1.

Depending on the industry, working capital can account for as much as 30

percent of total assets reported on the balance sheet. This item obviously ties

up a huge amount of resources. Equally obvious, however, is the realization

that proactively managing working capital can free up resources that are tied

up unnecessarily in the supply chain. Such working capital management

essentially operates in two ways: by reducing accounts receivable and

inventories while increasing accounts payable, and by reducing working

capital.

Receivables, inventories and payables

By reducing accounts receivable and inventories while increasing

accounts payable, the volume of liquidity tied up on the balance sheet

is immediately scaled back. Inventories are adjusted to customers’ needs

and service levels, receivables are collected earlier and with more

Working capital excellence 233

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� workingcapital

30

16

20

1618 17

13 9 11

8 79109131413

1725

771095

131511910

12

St Eng Ch/oil Autopts Elec Ph/H Con Auto Utils Tcoms

Accountsreceivable

Inventories

Accountspayable

28 18 17 17 17 10 10 3 1

Key :

St � SteelEng � EngineeringCh/oil � Chemicals and oilAutopts � Automotive parts

Elec � ElectronicsPh/H � Pharmaceuticals/healthcareCon � Consumer goods

Auto � Automotive OEMUtils � UtilitiesTcoms � Telecoms

Figure 14.1 Average working capital in different industries – total assets (%)

23

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9780230_217805_16_ch14.3d 5/29/2008 09:44:26

stringency, and accounts payable are negotiated with longer payment terms

(which must be met so as not to wreck the relationship with the supplier).

Freeing up cash that was tied up but can now be invested strengthens the

company’s position and unburdens credit lines. Indirectly, this step also

impacts the income statement. Better service levels and deliverability along

the supply chain leave customers more satisfied, and can drive up sales. In

addition, there is less risk that inventories and receivables might have to be

written off. Cash flow increases again, further improving the company’s

ability to pay its own way.

Reducing working capital

Reducing working capital lowers the amount of capital tied up in the

company and thereby raises profitability. In other words, the return on

capital employed (ROCE) increases. Key ratios – such as ROCE or

company value, which capital market stakeholders monitor closely – reflect

this development. Improvements in operating earnings that can be

measured in terms of performance ratios make it easier for a company to

tap financial resources on the capital markets. These steps strengthen the

company’s external financing capabilities too. Figure 14.2 shows how

managing working capital can directly and indirectly influence ROCE.

We have empirically analyzed the impact of working capital manage-

ment on ROCE for Europe’s top 500 companies and have found a clear

positive correlation between excellent working capital management (based

on working capital productivity ¼ sales/working capital) and superior

ROCE. Companies that put working capital into their management focus

usually profit from better financial results.

Proactively managing working capital clearly emerges as a core element

in strategic supply chain management. Using this tool, top management can

tap potential that hitherto remained hidden in the supply chain. Internal

funds can therefore be used more efficiently to meet the company’s

financing needs: financial management overall can be optimized as a result.

Optimizing working capital – Roland Berger’s approach

Our approach to optimizing working capital can be divided into two

phases. After first realizing quick wins by tapping short-term cash flow

potential in the supply chain, we then place these gains on a sustainable

footing. This strategy helps companies to plug any immediate gaps in


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Operatingincome

Capitalemployed

Return oncapitalemployed(ROCE)

Salescontribution

Fixed assets

Inventories

Accountsreceivable

Accountspayable

Salesvolume INDIRECT

influenceof workingcapitalmanagement

Variablecosts

Sales price

Fixed costs

MaterialsWages and salaries

Other

Wages and salariesOther

DIRECTinfluenceof working capitalmanagement

Figure 14.2 ROCE drivers

23

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9780230_217805_16_ch14.3d 5/29/2008 09:44:27

funding quickly and then maintain a more stable financial position in the

medium term.

All three structural levels of supply chain management – inventories,

accounts receivable, and accounts payable – are activated to achieve these

goals: the foundation is laid by defining a strategy and setting targets on the

basis of a comprehensive benchmarking exercise. This exercise spans

different business units and competitors, but also includes other (unrelated)

industries. Once targets have been set for the company, we examine

performance deficits in existing core processes (order-to-cash, purchase-

to-pay and forecast-to-fulfill). On this level, in order to improve the

financing situation, we identify suitable optimization levers that can reduce

inventories and accounts receivable while increasing accounts payable.

We have helped many companies improve how working capital is

managed within their organization. The benefits of taking on this challenge

are enormous. A global manufacturer of production systems for automotive

assembly, for example, wanted to reduce working capital in a sustainable

manner. We analyzed inventories, accounts receivable, and accounts

payable at all the company’s production locations worldwide. An extensive

benchmarking exercise compared companies in both this and other

industries, and identified possible areas of potential. The plan of action

that was then drawn up to optimize working capital allowed our client turn

working capital worth more than ⁄200 million into free cash flow.

Setting targets, examining performance deficits, and identifying optimi-

zation levers is the crux of our approach. To support implementation of

the specified actions, we also define and craft enablers (such as training to

help staff understand and optimize working capital, and development of

appropriate control and analysis mechanisms) to ensure that positive out-

comes are sustained in the long term.

Our strategy of optimizing inventories, accounts receivable and accounts

payable has proven its value in many projects. It is applied in the following

four steps:

Step 1: Achieve transparency

We begin by systematically gaining an overview of all ratios and the

underlying figures for the client’s key working capital items worldwide. We

are particularly interested in turnover ratios for inventories, receivables, and

payables that can be used both to compare performance across internal

business units and to benchmark the company against external competitors.

The important thing here is to ensure that the data analyzed is comparable


9780230_217805_16_ch14.3d 5/29/2008 09:44:27

across business units and with external data. In this phase, the main

challenges are usually posed by creating transparency from incompatible

master data sets, which must be harmonized across different systems.

Another issue is the consolidation of inter-company sales, which might

deteriorate the complete picture if not dealt with appropriately. Finally, an

enormous amount of data must be examined in minute detail – sometimes

every receipt should be checked for accounts receivable and payable

analyses. We also make inventories and analyze the three core processes in

the supply chain – order-to-cash, purchase-to-pay and forecast-to-fulfill – in

detail. This, of course, also includes customer, vendor, and competitor

analyses. This whole exercise constructs the framework from which to

assess working capital performance and define first hypotheses on key

weaknesses that prevent the company from realizing its full potential.

Step 2: Perform benchmarks and set targets

The second step is to identify other companies and industries that lend

themselves to benchmark tests on the basis of the defined ratios.

Benchmarking must encompass both quantitative data analysis and a

qualitative assessment of existing processes. This dual approach delivers a

reasonable perspective on the client’s current performance and identifies

key performance deficits. Fine-tuning the ratios used is a crucial success

factor. It helps companies avoid comparing apples with oranges, and

encourages acceptance of the findings. To fine-tune ratios, and thereby

obtain comparable data, it is necessary to analyze relevant structural factors

when comparing rival firms. Differences in factors such as sales channels,

customer structures, vertical integration, global sourcing, and supplier/

logistics structures must all be factored into the equation if the bench-

marking exercise is to deliver valid, usable results. We usually also analyze

the ‘balance of power’ from an industry and customer/vendor perspective in

order to understand the rules of the underlying business models, as well as

country specifics. For example, import and export regulations in Eastern

Europe, the Middle East or South America can have direct implications for

working capital management.

In the context of receivables and payables management, it is especially

important to take account of regional variations in ratios, processes, and

business practices. The way cash management is handled can sometimes

vary significantly from country to country. In Southern Europe, East Asia

and South America, for example, comparatively long payment targets are

commonplace and meet with broad acceptance. Other regions tend to

238 Roland Schwientek and Christian Deckert

9780230_217805_16_ch14.3d 5/29/2008 09:44:27

prefer shorter targets, insist on punctual payment, and also make use of

cash discounts. When identifying ratios, attention must likewise be paid to

the various companies’ accounting policies. It is important to gain a full

understanding of the relevant items on the balance sheet, and to adjust

them where necessary. Once the benchmark analysis has been completed

and performance deficits have been isolated, top-down targets must be

defined for the identified turnover ratios and then agreed with the

appropriate managers.

For example, with a large client from the consumer goods industry,

we agreed to set an accounts payable target range that was based on the

industrial average payment periods of the main supply markets on the

lower end and adjusted competitor benchmarks from industry’s best

performers on the higher end. The client far exceeded the lower end goal

and committed himself to a bottom-up action plan that would close the

gap to his competitors as well as unleash a cash potential of more than

⁄300 million from his balance sheet.

Step 3: Define levers and actions

In collaboration with all project participants, the next step is to identify

suitable levers and actions to plug performance gaps in the three core

processes sustainably. Ambitious companies aim to set new standards in

their industry through such projects. Sample levers include:

• Inventory management: Modifying the depth of stocks, adjusting the

flow of materials (structural changes) and optimizing scheduling

parameters (process changes); planning, purchasing, production, and

logistics departments are mainly involved here

• Receivables management: Optimizing the dunning system and

receivables monitoring, and renegotiating payment terms with top

customers; sales and finance departments are mainly involved with this

• Payables management: Adjusting the payment process, renegotiating

terms with top suppliers, and conducting value-based negotiations on

the basis of suitable IT tools; purchasing and finance departments are

mainly involved in this area.

During bottom-up workshops, detailed planning takes place with

relevant managers, and commitment for the implementation is gained. We

usually initiate lever discussions based on existing levers and further

optimization measures that we have derived from our project experience


9780230_217805_16_ch14.3d 5/29/2008 09:44:27

on working capital issues, as well as our working capital studies (see

results below). The identified levers are fleshed out in detail and the

resulting financial effects – on cash flow, earnings before interest and

taxes (EBIT) or economic value-added – are calculated. Regarding

accounts receivable and payable, it is often possible to negotiate optimal

payment terms while also committing to price adjustments. Realizing

working capital effects without deteriorating the profit and loss statement

clearly should be the goal. Here, management needs to decide whether

EBIT or cash has priority, and whether improving cash may be negotiated

for price adjustments (buying cash). To determine the optimum from cash

and cost effects, we introduce simulation tools that show specific financial

consequences from different negotiation options. These can directly

support purchasing and sales in negotiations.

It is imperative for different corporate functions to work together in this

phase, as the core processes in question exist on a horizontal level in most

companies. The involvement of purchasing and finance staff is crucial, for

instance, when discussing strategies to optimize accounts payable. Both

functions are involved in the bottom-up planning phase and must closely

act together in order to achieve company best performance. Conducting

decentralist workshops with relevant managers from all necessary

corporate functions has proved very effective, and we believe that it is

a central success factor for working capital projects. For workshop

moderation, we usually staff team members that bring with them a

thorough understanding of the key corporate functions involved. For

instance, when talking about measures to optimize accounts receivable, it

is necessary to have a trained moderator with sales experience present, for

reasons of acceptance and commitment. Finally, priorities are defined for

the entire set of activities by calculating the anticipated effects and

evaluating the ease of realization. The outcome is a prioritized package of

recommended actions. At the end of this phase, we verify whether the

anticipated effects will, in fact, meet the defined targets, or whether

further adjustment is necessary.

In addition to concrete optimization levers for the generation of quick

cash, Roland Berger project teams also deal with what are referred to as

enablers. These are structural changes in the organization, processes, and

systems put in place to create and maintain the management environment

for successful working capital performance on a long-term basis. Usually,

one of the main enablers is the target setting and monitoring process used

to steer working capital performance. Work targets, which are derived

from the specific project, can be set for the organization involved. These

must be monitored closely to ensure realization. Targeted communication


9780230_217805_16_ch14.3d 5/29/2008 09:44:27

of project activities and measures to market project achievements also

belong to the enabler concept. Other enablers include training and quali-

fication measures that put people in a position to drive working capital

processes in the supply chain actively and on their own.

Step 4: Secure buy-in and implement measures

The defined activities are now condensed into a plan of action. People are

given ownership of certain actions and are held responsible for imple-

menting them within defined deadlines. The plan of action has to be

communicated to, and coordinated with, both the top and operational

management levels. It is vital that the project sponsors – and everyone else

involved – buy into the project. Once management commitment has been

secured for the project, communication takes place on a wider scale and

implementation can begin. Strict monitoring accompanies the entire

implementation phase to ensure that actions are taken swiftly and the

targeted effects realized in full. Reviews with the responsible managers

should be held regularly. During these sessions, the project status, obstacles

and possible counter-actions to ensure completion of project activities in

time should be discussed.

The crucial factor when improving the performance of working capital

is to identify the right optimization levers and create the necessary

implementation commitment from all involved managers. The following

three case studies demonstrate the benefits that can be realized when

companies focus on the right process and pull the correct optimization

levers:

Case study: Consumer goods industry

In this case, the client is a well-known maker of basic materials for theconsumer goods industry. Highly complex products and orders hadcaused the company to run up above average inventories at every linkin its core process chain. The project aimed to reduce inventory volumessharply. The project team focused its attention on production planningand order scheduling. In close collaboration with the client, sustainablereductions of more than 30 percent were made to inventories byoptimizing planning processes and streamlining the very broad productportfolio. At the same time, product availability improved significantly.


9780230_217805_16_ch14.3d 5/29/2008 09:44:27

Case study: Energy sector

While managing inventories was the right lever to be pulled at theconsumer goods manufacturer, managing accounts receivable was thekey focus of our work with a company in the energy sector. We werecommissioned to find ways to optimize accounts receivable andinventories at a water utility with operations all over Germany. Theclient wanted to free up financial resources for capital investmentpurposes. The team began by systematically examining the coreprocesses in the areas of order, performance, and receivables manage-ment. By adjusting its system of installments and advance payments,improving its dunning procedures, and introducing new IT, the clientwas able to recover ⁄150 million from the balance sheet in cash.

Case study: Media group

Managing accounts payable is the third classic lever that can beaggressively pulled. Our client, a media group, is run in accordance withvalue-based management principles. We used simulated calculations toshow the group how better use of cash discounts could positivelyimpact profits and company value-added. The client’s purchasingguidelines were adjusted accordingly. We supplied purchasing withtools that would permit that department to evaluate the impact of thedifferent prices, payment terms, and delivery terms offered by differentsuppliers while negotiations were still in progress. We also defined keyvalues for discounts and payment targets, and standardized theseworldwide. Although greater use of cash discounts initially increasedthe burden on working capital, it ultimately boosted profits andsignificantly increased the value of the company.

In our experience, plugging performance gaps in the three core working

capital processes is essential for a company’s long-term survival. Yet,

companies have a mind-boggling array of levers and actions at their

disposal. In our international study of working capital, we investigated

and evaluated an extensive set of common optimization levers. The

findings of this study are presented in the following section.


9780230_217805_16_ch14.3d 5/29/2008 09:44:27

Working capital excellence – learning from bestpractices today and tomorrow

During the period 2005–6, Roland Berger Strategy Consultants surveyed 500

large and medium-sized companies in Europe, North and South America,

and Asia in order to gain a coherent overview of best practices today, and to

understand what would be the motivating factors for tomorrow. The bulk of

the companies surveyed are active in the engineering, consumer goods,

automotive, and electronics industries. However, companies from the areas

of pharmaceuticals/healthcare, basic materials, chemicals and oil, utilities,

and transportation were also examined. Some 42 percent of companies had

sales of less than ⁄1 billion, 25 percent had sales ranging from ⁄1 to 5 billion,

and 33 percent reported sales of more than ⁄5 billion.

When surveying the companies, we honed in on three topical issues. We

were curious to know what was ‘state of the art’ and what best practices

existed in working capital management. We also wanted to know what the

key deficits were. We asked company representatives: what trends does the

future hold and how can companies prepare to face them? We were also

driven to find out the nature of success factors and how could companies

close the gap with the leading lights in their industry?

We would like to share some of these results, paying particular attention

to best practices, targets/strategies, organizational forms, and process

issues. By sharing this knowledge, companies might be able to see how

they can tap hidden cash reserves in their own supply chain.

Best-practice companies: 15 percent of participantsrank as stars

As far as the relevant balance sheet items are concerned, around 15 percent

of the companies that took part in the study can be regarded as best-practice

players in managing working capital. These companies achieve outstanding

economic performance relative to their working capital. They apply a broad

spectrum of proven and innovative management methods effectively and

efficiently.

Regarding the use they make of available financial potential and the

developmental status of the tools they use to manage inventories, accounts

receivable, and accounts payable, all the other companies fall short of the

industry leaders – in some cases, by a long way. We discovered that 60

percent of study participants have not quite reached the same excellence in

financial results and management methods as best practice companies but


9780230_217805_16_ch14.3d 5/29/2008 09:44:27

are on the right path. By contrast, 25 percent of all participants – the

stragglers – have a great deal of ground to make up.

Using a detailed benchmark analysis of the companies that took part in

the study, we examined financial performance on the basis of turnover

ratios for the three elements of working capital. Figure 14.3 shows an

example taken from the receivables management benchmark analysis.

In this benchmarking exercise, we rated potential. Companies that fall

below the 25 percent line are already excellently positioned and have little

potential to improve their overall financing situation. Companies that are

better than the industry average but do not belong to the best 25 percent

exhibit moderate potential. By contrast, all those companies that are

below average urgently need to take steps to improve.

The outcomes of the benchmarking study make it simple for companies

to compare their current financial position with that of the industry as a

whole. Companies can easily identify any discrepancies between their own

situation, the industry average, and the best-in-class performers. They can

assess the financial performance of their efforts to manage working capital,

before moving on to decide what corrective action must be taken.

Companies need to maximize their working capital management, the

importance of which will increase in the near future. This quick

benchmarking exercise is only the first step and needs to be broken down

further to meet company specific situations – for example, by factoring in

adjustments considering customer/vendor structures, the degree of vertical

integration, or any further business model and supply chain characteristics.

Working capital management and its importance in thenear future

The companies that took part in the study themselves assessed their current

use of levers to optimize working capital management and the importance

these levers will have in the near future. This input enabled us to plot the

developmental status in the management of inventories, accounts

receivable, and accounts payable for each company. The results identified:

• 48 inventory management levers

• 22 receivables management levers

• 12 payables management levers.

Having collated the results for all participants, the following picture

emerged for the three components of working capital.


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Mats Paper Auto Pharma Ch/oil Elec Eng Con Utils IT/Tcoms Trans-portation

3139

14

39

21

79

70

50 5143

60

49

60

72 73

84 8492

45 43

22

53

32

72

Average

25%cut-off

Max.days

Lowpotential

Moderatepotential

High potential

XX

Min.days

Improvementlever

51

22 2113

31

68

4956 55

70

103

115 115

135

150

58

3930

4046

Figure 14.3 Industry benchmark for debtor daysNote: Debtor days = Accounts receivable/sales�360 days

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Inventory management

6.7

5.0

Currentusage

Importancein fiveyears

�34%

Receivables management

6.6

5.0

Currentusage


�32%

Payables management

5.2

4.4

Currentusage


�18%

Figure 14.4 Current and targeted future statusNote: 0 = not in use/not important, 10 = extensive use/very important

24

6

9780230_217805_16_ch14.3d 5/29/2008 09:44:27

The study revealed that potential exists to improve the management of

inventories and accounts receivable by more than 30 percent in the near

future. In addition, the potential for improving the management of

accounts payable is put at nearly 20 percent, on average. Clearly, the

companies in the study are very keen to make significantly improvement

in the way they manage accounts receivable and inventories. By contrast,

the forecast for the management of accounts payable is more modest.

Considerable optimization potential for allthree working capital items

The greatest potential to improve inventory management practices exists

in electronics/IT, engineering, and the steel industry. On the other hand,

comparatively little potential for optimization remains in the automotive,

utility, and pharmaceuticals/healthcare industries.

As far as receivables management is concerned, the need for action is

greatest in pharmaceuticals/healthcare, electronics/IT, and utilities.

Potential for optimization is only slight, however, in the automotive,

chemicals/oil, and telecommunications industries.

Finally, the utility, pharmaceuticals/healthcare, and engineering indus-

tries have most to gain by optimizing the management of accounts payable.

The telecommunications, chemicals/oil, and electronics/IT have the least to

gain. The optimization potential for working capital items in different

industries is illustrated in Figure 14.5.

Generally speaking, there is still considerable potential for companies to

optimize the financial performance of their working capital by

applying specific methods and tools. Companies are strongly advised to

measure their working capital management practices systematically against

industry benchmarks. The tools already in use should be reviewed and

optimized on a regular basis in order to keep them effective and efficient.

When appropriate, new and innovative methods should also be introduced.

It is clear from the outcomes that the practice of managing working capital

has reached widely differing stages of development in different industries.

None of the industries investigated was found to have little potential for

optimization inall three itemsofworkingcapital. Inotherwords,every industry

still has work to do. Those industries with the greatest untapped potential can

learn a much from those that have reached a more advanced level. In practice, a

cross-industrycomparisonof the toolsandmethodsappliedcanbeveryhelpful.

Let us now take a closer look at the outcomes of the study with regard to

targets, strategies, organizations, and processes.


9780230_217805_16_ch14.3d 5/29/2008 09:44:28

Top-down targets and strategies to manageworking capital

If it is to succeed, working capital management must be lived out from the top

down and throughout the company. It must filter down through every function.

If this is to happen, however, top management must first recognize the

importanceofthispracticeanddevotesufficientattention–andresources–toit.

Our study found that top managers actually do tend to rate working

capital management as fairly to very important – and the attention this

issue commands today is high. It is reasonable to assume that the

importance of working capital management as an aspect of strategic

management has, by and large, already been recognized. Nevertheless, top

management must sharpen its focus on this key issue in order to exploit

potential in the area of both internal and external financing more fully.

Consensus between companies was greatest regarding the objectives of

receivables management. Of companies surveyed, 82 percent stressed a clear

focus on optimizing liquidity, and 80 percent on reducing the risk of default

(in response to a multiple choice questionnaire). The substantial importance

attached to reducing default risks is laudable. Defaulting customers are, after

all, a common reason why companies run into financial trouble.

6.8Electronics

5.5 7.4Chemicals

7.4 8.5Utilities

6.5 7.7Automotive

5.2 6.9Consumer goods

4.1 5.9Engineered products

5.1 6.0Pharmaceuticals

4.4

8.2

7.9

6.6

6.3

6.3

6.5

5.13.2

3.5

4.8

4.9

5.6

5.8

7.4 6.6

5.9

6.2

4.7

4.9

5.3

4.5

4.1

4.1

5.4

6.1

4.4

4.0

4.2

Industry Inventory levers Accounts receivablelevers

Accounts payablelevers

Key : Current use Future importance

Figure 14.5 Current use and future importance use of working capitalmanagement levers by industryNote: 0 = No usage, 10 = Comprehensive usage of all levers


9780230_217805_16_ch14.3d 5/29/2008 09:44:28

Similar unity prevails concerning the goals of inventory management.

Most customers see this as a way to comply with defined customer service

levels, to optimize tied up capital, and/or to run inventories down as far as

possible. The respondent companies disagree only on the purpose of efforts

to manage accounts payable. The three most frequently cited reasons were:

to take advantage of cash discounts, to optimize processes, and to optimize

liquidity. However, these goals were advocated by far fewer companies and

are inherently self-contradictory in some cases. The findings of the study

confirm that companies still pay too little attention to managing accounts

payable and have yet to realize how much potential lies dormant in this

area. As a rule, best-practice companies accept a trade-off between the use

of discounts and long payment targets. To some extent, these policies are

also aligned with standard practices in different regions.

Nearly 90 percent of companies already derive the goals of their

inventory management activities from corporate strategy. All identified

objectives are then institutionalized in target agreements for the units

affected. However, only best-practice companies tend to do this to the

same extent in relation to the management of accounts receivable and

accounts payable. Here again, companies still have their work cut out if

they want to close the gap on the best in their respective industries.

Another important issue that needs a solution is target conflicts between

working capital targets and other operational targets – for example, a high

service level in inventories contradicts the working capital target of low

capital binding. In such instances, top management has to present clear

rules for operational managers to ensure acceptance and fulfillment of

working capital targets.

Taking inventory management as our example, we would now like to

explore those factors that help and hinder the practice of working capital

management. Companies point to a lack of forecasting options for sales, a

lack of end-to-end transparency, and inordinately high customer service

levels as being the main obstacles. Conversely, they see the main success

factors as extensive transparency, optimized processes, and improved

sales forecasts. These factors confront companies with the need for action

both internally and externally. However, most current projects to optimize

inventory management focus largely on internal aspects such as optimized

inventory control, more efficient systems, and sustainable reorganization.

At the time of writing, only a small share of companies are making any

efforts to try to improve external aspects, such as sales forecasts and

interfaces to customers. A crucial weapon for companies seeking to bring

their inventory management activities into line with best practices will be

external management issues that transcend company boundaries. One


9780230_217805_16_ch14.3d 5/29/2008 09:44:28

example involves closer collaboration with customers in order to optimize

demand projections and customer service levels as a team effort.

Crafting an effective and efficient organization

Trying to find the most suitable organizational form is perhaps the most

delicate challenge in the context of working capital management.

Ultimately, almost every corporate function that plays a direct role in a

company’s value chain influences working capital. Three core process

chains must be coordinated effectively and efficiently with all these

functions, if optimal results are to be achieved. These three processes are:

• Forecast-to-fulfill (order management, purchasing, production, and

distribution) for the management of inventories

• Order-to-cash (sales, invoicing, monitoring, and closure) for the

management of accounts receivable

• Purchase-to-pay (purchasing, payment, and monitoring/closure) for the

management of accounts payable.

Our findings indicate that there is significant pent-up demand for organi-

zational change that will improve the management of working capital in

today’s companies.

The need for coordination is perhaps most complex in the context of

inventory management. Figure 14.6 presents organizational forms that are

conducive to successful inventory management.

Functions involved in the coreprocess chain

Departments involvedin top managementCore process chain

Ordermanagement

Purchasing

Production

Distribution

58 24

612 20

25 45

10

4 or morefunctions

1 function

2 functions

3 functions

4 or moredepartments

3 departments 2 departments

1 department

Figure 14.6 Organizational forms conducive to inventory management(study participants %)


9780230_217805_16_ch14.3d 5/29/2008 09:44:28

At about 90 percent of companies, at least two top management depart-

ments and two operational management functions are involved in the relevant

core process. At 20 percent of companies, a minimum of four top management

departments are involved; and at 60 percent of companies, a minimum of four

operational management functions play a part. Coordination between so

many different functions and units can become extremely complex.

The number of interfaces and potential conflicts can be reduced and

coordination can be simplified by bundling responsibility in the hands of a

smaller number of functions and/or top decision makers. Organizations

become much more efficient and processes run more smoothly as a result.

At best-practice companies, it is not surprising to find that a chief operating

officer (COO) is often the one board member who is responsible for

coordinating the purchasing, production, and distribution functions. Ideally,

the COO only has to refer back to the sales director who is in charge of order

management. Other companies have set up working capital councils to

bring together relevant functions discussing working capital issues.

A similar pattern emerges in the management of accounts receivable, even

though only two functions – sales and finance/monitoring – generally have to

be coordinated. At no fewer than 30 percent of companies, at least two top

management departments share responsibility for accounts receivable.

Operational management is delegated to at least two different functions at

43 percent of companies. Here, too, these different units all have to be

coordinated. Since 42 percent of the respondent companies operate more

than one function that interfaces with the customer, the principle of one-face-

to-the-customer cannot be adhered to. Once again, responsibility should be

concentrated in fewer hands, and the tasks assigned to sales and finance/

monitoring should be defined more clearly to smooth the relevant process

flows. At best-practice companies, sales functions tend to have the most say

in shaping and driving processes. Accordingly, the activities of sales might

additionally be managed by a system of incentives and bonuses based on

ratios that measure receivables outstanding and/or receipt of payment.

At 94 percent of the companies in our study, the management of accounts

payable was assigned at top management level to one board member only –

normally the chief financial officer (CFO). On this score, responsibility is

assigned unambiguously. At 48 percent of companies, at least two functions

(usually purchasing and finance/monitoring) are in charge of operational

management. Again, best-practice companies clearly delimit the tasks

entrusted to each party. Purchasing, in particular, must possess sufficient

financial expertise to know which levers (such as negotiating cash discounts

in place of long payment targets) will have what impact on earnings and the

value of the company. Clear procedural instructions and staff training can


9780230_217805_16_ch14.3d 5/29/2008 09:44:28

be very useful on this score. At finance/monitoring, it is important to ensure

that process steps such as invoice verification and processing are handled

quickly and reliably to meet payment agreements.

Inventory management – a vast store ofuntapped process potential

In closing, let us turn our attention to the core processes in the practice of

working capital management. To each of these processes we have attached

specific optimization levers and methods, some of which are already

common practice while others are more innovative and have not completely

entered day-to-day business. We asked the participants in our study to

assess the usefulness of these levers and methods today and their future

importance. A summary of their responses for each core process and

process step is presented in Figure 14.7.

Armed with this information, companies can now identify those process

steps that will, in future, present the greatest optimization potential for

each aspect of working capital.

Potential in the management of inventories is more or less evenly spread

over the various process steps. Order management serves as a good example.

The companies we surveyed believe that rolling sales forecasts and effective

claims management will be the most important levers to optimize this aspect in

future. The greatest need for action is identified in the integration of customer

planning, the segmentation of orders and the reduction of complexity within

product portfolios. Here again, the study highlights the interface to the

customer as one key area in which inventory management can be optimized.

Best-practice companies are already facing up to these future challenges.

The greatest potential to optimize the management of accounts rece-

ivable is seen to be in sales. Three specific levers were predicted to be the

most important in future:

• The rules governing delivery moratoriums

• The monitoring of payment patterns

• The automated supply of customer information to sales.

The companies in our study saw the need to optimize internal sales incen-

tive systems, segment customers on the basis of their payment patterns, and

automate the supply of customer information to sales as the areas where

most work still needs to be undertaken. Once again, best-practice companies

are already using these levers to improve receivables management. Many of


9780230_217805_16_ch14.3

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9/2

008

09:4

4:2

8

Usage today Importance in five years

Managementof accountsreceivable

Managementof accountspayable

5.0 6.8 4.9 6.44.1 5.6 4.8 6.6

Order management Purchasing Production Distribution

�37% �31% �35% �36%

�34%

Av. untappedpotential

�32%

�18%

4.56.8 5.1 6.3 7.35.7 4.73.2

Sales Invoicing Monitoring Closure

�51% �24% �28% �47%

7.56.43.83.3

6.04.5

Purchasing Payment Monitoring/closure

�17%�15% �33%

Managementof inventories

Key :

Figure 14.7 Untapped potential in each core processNote: 0 = not in use/not important, 10 = extensive use/very important

25

3

9780230_217805_16_ch14.3d 5/29/2008 09:44:28

the other companies lag the front-runners – and would do well to apply the

results of this study to close the gap.

What remains is the potential to improve the management of accounts

payable. As we have seen, the study participants tend to see this aspect as

less important than the other two elements of working capital. Across all

three of the process steps, the companies nevertheless identified the

coordination of payment terms with business planning, the standardization

of payment terms, and the use of direct debit facilities as the most important

levers for the future. The first of these three levers is also the one where most

improvement will be needed in the years ahead. Best-practice companies

draw on financial mathematics models to calculate the optimal balance

between price discounts and payment term targets. This is usually done

region by region, as payment term habits vary considerably. This having

been done, they then standardize and negotiate payment terms accordingly.

To keep the findings of our study as applicable and practical as possible,

we also analyzed which of the optimization levers named by the

participants harbor the greatest potential for improvement, and how much

they cost to apply. This analysis will help companies to select the methods

that will best help them take the next step toward best-practice status. As an

example the results for inventory management are shown in Figure 14.8.

High

Potential

Low

LowHigh Cost of implementation

1

2 3

4

5

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2527

26

2928

30

32

31

39

33 34

36

35

37

38

40

41

42

43

44

4546

4748

6


9780230_217805_16_ch14.3d 5/29/2008 09:44:29

Order management

Sales planning1

Integration of customer planning2

Demand forecasts3

Order segmentation4

Clearance sales5

Portfolio adjustment6

Returns/claims7

Reduction in scheduling levels8

Production

Production segment20

PPC* optimization21

Large order planning22

Production layout23

Bottleneck analysis24

Kanban25

Just-in-time26

Production batch size27

Setup times28

Production moratoriums29

Vertical integration30

Production networks31

Production-smoothing32

Purchasing/procurement

Scheduling strategy9

Cust. order-spec. scheduling10

Order batch size11

Modular/system sourcing12

Standardization13

Resale14

Order moratoriums15

Quality control/returns16

Supplier base17

3rd party warehouse mgmt18

Supplierintegration

19

Distribution/warehousing

Inventory strategy33

Buffer stocks34

Inventory balancing35

Client sales/scrapping36

Distributors37

Cross-docking38

Direct shipments39

Continuous replenish.40

Warehouse structures41

Warehouse networks42

Supply chain differentiation43

Outsourcing44

Customerintegration

45

Cross-functional levers

46

47

Cross-function responsibility

PPC � Production planning and control

IT automation and integration

Cross-function monitoring48

Figure 14.8 Analysis of existing levers based on self-assessment by studyparticipants


9780230_217805_16_ch14.3d 5/29/2008 09:44:29

Bottom line – untapped potential persists in all industries

The study shows that managing working capital is already an established

practice in one form or another at many companies. At the same time, it also

reveals the considerable potential for improvement that exists in relation to

targets and strategies, organizational forms, and processes in all the industries

examined. Working capital is clearly an issue that belongs on top management

agendas and is one that should be reviewed and optimized on a regular basis.

So how does your company become a star? Essentially by doing two

things:

• Gain a transparent understanding of the individual items of working capital

• Analyze, (re)design and apply suitable management methods on an

ongoing basis.

Having benchmarked financial ratios and examined the levers of

optimization already in use in a range of industries, it is clear to us where

untapped potential lies. In relation to inventory management, for example,

we know that there is a real need to improve the interface to the customer.

However, optimization will only succeed if top management grasps the

potential impact that working capital can have on strategic management.

The entire enterprise must be made more sensitive to the possibilities that

will arise by proactive management of working capital. Suitable

knowledge can then be cultivated, allowing the company to define

appropriate targets. When such an open culture exists, the practice of

optimization can take root and grow throughout the organization.

Further reading

Schwientek, Roland and Deckert, Christian (2005) Working Capital

Excellence Study I – Managing accounts receivables and payables.

Stuttgart: Roland Berger.

Schwientek, Roland and Deckert, Christian (2006) Working Capital

Excellence Study II – Managing inventories. Stuttgart: Roland Berger.


9780230_217805_17_ch15.3d 6/3/2008 14:49:06

CHAPTER 15

Supply chain organization: a keyenabler for successful supply chainmanagement

Ingo Schr€oter and Stephan M. Wagner

Introduction

Well-functioning supply chains are reliable and responsive, and remain

cost efficient despite being flexible. As supply chains become more global

and complex, however, supply chain links become strained, and supply

and delivery glitches tend to increase. Companies are often robbed of their

ability to respond quickly because they are weighed down by overly

complex structures that have arisen, for instance, after embarking on a

quick session of mergers and takeovers. Other companies might be

burdened by conflicting operating styles and processes, and a lack of

standard procedures throughout the entire supply chain. This prevents

them from being best-in-class, especially in today’s highly competitive

business environment in which a smoothly run operation is paramount.

When companies manage to embed supply chain management into their

organization, use simple coordination tools such as setting goals for

divisions, and coordinate their external supply chain with precision, their

supply chains become extremely efficient and perform with fewer

hiccups. As a result, these companies manage to notch up remarkable

savings. In many ways, supply chain organization is the linchpin for

making sure that supply chains are cost efficient, reliable, and responsive.

These are the hallmarks of success in an increasingly competitive

environment.

A study recently conducted by a joint team of Roland Berger

consultants and researchers from WHU – Otto Beisheim School of

Management1 revealed that many companies realize that their supply

257

9780230_217805_17_ch15.3d 6/3/2008 14:49:06

chain organizations can still be improved. More than half of the 200

companies that were interviewed for that study said that there is

significant room for improvement in their supply chain organizations.

Companies recognize that while purchasing functions, for example, have

made huge leaps and bounds over the past years, supply chain

organization has not developed as quickly. Improvements can be made

in companies working in all industries.

Globalization and increased complexity are definitely the main forces

driving the necessity for enhanced supply chain organizations. Yet,

specific challenges push this trend in individual industries too. In the

automotive sector, there is a need for demand-driven logistics for flexible

production, and for greater supply reliability. Manufacturers of engi-

neered products must deal with continuous outsourcing and reduced lead

times. Pharmaceutical products and medical device producers must

integrate their distributors, and become more flexible and more efficient.

Food manufacturers have to negotiate with retailers that have gained

considerable clout and are increasingly demanding.

In this chapter, we describe the study findings, as they provide insights

about the elements necessary for creating and maintaining an effective and

efficient supply chain organization. We also demonstrate how companies

can transform themselves into a best-practice organization, by examining

how ‘organizational talents’ (that is, firms that exceed their peers in supply

chain performance) manage to achieve better performance.

Organizational talents master their supply chainorganizations

In the study, the project team asked supply chain and logistics decision

makers how they currently organize their supply chains. Most of the

managers interviewed were responsible for the logistics or supply chain

activities of their firms, while others were purchasing directors or general

managers. In terms of size, we surveyed companies across the board,

although our focus was on medium-size and larger players. Only 14

percent of companies examined had annual sales of less than ⁄100

million. More detailed information concerning the companies interviewed

can be gleaned from Figure 15.1.

While all participating companies show a marked trend toward greater

strategic alignment and comprehensive coordination of the supply chain,

only about 15 percent truly differentiate themselves from the competition.

These organizational talents provide a high logistics service with an

258 Ingo Schr€oter and Stephan M. Wagner

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7

Interviewees’ areas ofresponsibility

Industry breakdownCompany size by sales

51Logisticsmanagers

24SCMmanagers

Purchasingmanagers

CEOs5

Othermanagers

1114

4217

� €1,000 m� €100 m

€100–500 m€500–1,000 m

27 28

Automotivesuppliers

25Mechanicalengineering

24

Pharmaceuticals

23

Food industry

9

Figure 15.1 Breakdown of companies interviewed in terms of size, area of responsibility, and industry(%)

25

9

9780230_217805_17_ch15.3d 6/3/2008 14:49:07

optimized cost structure. As well as securing low transport and low

inventory costs, they also enjoy on-time deliveries, good turnaround

times, supply flexibility, zero-defect processes, and high customer

satisfaction. Reducing costs, increasing reliability with supply partners,

and reducing lead times are the common goals underpinning the desire for

companies to improve their supply chains. Organizational talents reach

those goals. The spread between organizational talents and their weaker

competitors is shown in Figure 15.2.

Filtering out the information gained from the responses, three best

practice principles could be derived from the study results. Successful

companies:

• Implement a supply chain organization

• Implement coordination tools

• Coordinate their external supply chains.

Implement supply chain organization

Organizational talents have one thing in common: their supply chain man-

agement is thoroughly embedded within the organization. To accomplish

this, companies need their top management to participate actively and

support this strategy. This is a key success factor. When top management

focuses attentively on supply chain management, a clearly defined supply

chain strategy emerges. Frequently, companies set up divisions or func-

tions that are solely responsible for managing the supply chain throughout

Defining performance criteria

• Logistics performance

– On-time delivery

– Turnaround times

– Flexibility of supply

– Zero defect/error-prone logistics processes– Customer satisfaction

• Logistics costs

– Transport costs

– Inventory costs

Logisticsperformance

Very good

Very poor

High LowLogistics costs

85%Everyone else

15%Organizational

talents

Everyone else (149)Keys:

Organizational talents (27)

Figure 15.2 Organizational talents have outstanding logistics capabilities


9780230_217805_17_ch15.3d 6/3/2008 14:49:07

the entire company. This guarantees that the right people have the

necessary authority to make decisions that affect functional entities within

the organization.

More than 80 percent of organizational talents have established a

supply chain center that is responsible for coordinating purchasing, manu-

facturing, distribution, and reverse logistics. This helps them achieve the

best trade-off between service, cost, and capital employed.

Often they combine several elements:

• Temporary supply chain functions are usually set up to solve certain

specific problems or to develop concept improvements. They are

organized as a project for its duration and usually resource from

different functions across the company. Sometimes, they are the

starting point of company-wide supply chain functions.

• Strategic staff functions are typically responsible for supply chain

planning and coordination. They consolidate sales forecasts, and

production and purchasing plans, and assure the feasibility of internal

and external supply chains. Their role is to coordinate the supply chain;

they enjoy directive rights over different functions. Often, activities

controlling supply chain performance fall within their scope.

• Operative supply chain functions have clearly defined operational tasks

such as order processing or collaborative planning with suppliers.

Strategic and operative functions are horizontally and vertically aligned

and bundled within a supply chain responsibility. Furthermore, responsi-

bility for the supply chain is frequently assigned according to differentiated

supply chains – for example, by product segment or business units.

Implement coordination tools

Best practice companies deploy coordination tools, which effectively

work as the oil lubricating the supply chain to make sure that it operates

perfectly. Companies have an array of coordinating tools at their disposal

to enhance performance.

Organizational talents clearly formulate their strategic supply chain

goals, set clear targets with a careful selected set of key performance

indicators (KPIs), set clear targets for these KPIs, and monitor them

continuously. Such strategic supply chain goals pertain to individual

divisions that are oriented toward gaining improved performance over the

entire supply chain. Even better results are obtained when divisional goals

Supply chain organization 261

9780230_217805_17_ch15.3d 6/3/2008 14:49:07

are linked to variable compensation. This tool only makes sense when

performance-based compensation is the strategy followed throughout the

entire company. Coordinating divisional goals is not without its

difficulties. Consider planning. Whereas marketing and sales divisions

usually want to set ambitious goals in order to motivate sales staff,

production generally wants to be able to forecast volumes as accurately as

possible so that they can use capacity to the best advantage.

The round table was the most widely used coordinating tool among

companies in the survey. Organizational talents not only use round tables

more often than their weaker counterparts, they hold such meetings

regularly, carefully prepare for them, and follow strict agendas. This helps

them gain a comprehensive view on the current situation and objectives,

which are ideally based on quantitative KPIs such as budget, delta, and

action. Less organized companies tend to use round table discussions to

exchange ideas and focus on resolving operational problems as they arise.

They are firefighters, responding to problems reactively.

Exceptionally few companies use staff rotation to support supply chain

coordination. Managers and other employees still hold reservations,

believing that they will lose good staff and start-up time as employees

become familiar with their new environment. Small to medium-sized

companies, especially those that are owner-managed, are particularly

hesitant to use this coordination tool. Companies that deploy staff rotation

need to have a clear strategy to minimize start-up time losses. A good

starting point for companies is to apply staff rotation on new recruits and

trainees where blocking points apply to a lesser degree.

Coordinate external supply chain

The third key success factor common to organizational talents is simple:

they work more intensively on developing a better external supply chain.

Indeed, 67 percent of all organizational talents work with their major

suppliers to optimize the supply chain. They exchange sales forecasts,

on-time-delivery information, delivery flexibility, and general satisfaction

levels concerning overall performance on a regular basis. They also define

and monitor goals together with their suppliers and reward top performance.

The mutual trust that develops as a consequence of this action leads to

greater success with both operational and strategic topics. It also enables

organizational talents to state optimization targets clearly in their contracts.

Companies that work together with their suppliers to improve their

supply chain are more likely to achieve their targets than companies that


9780230_217805_17_ch15.3d 6/3/2008 14:49:07

take a more ‘go-it-alone’ approach. Interestingly, companies in the

automotive supply industry tend to work with suppliers more frequently

than do companies in the mechanical engineering industry, which engage

suppliers only now and then.

The interaction between a company’s employees and the employees of

the supplier is decisive for close and mutually beneficial buyer–supplier

relationships. As such, the survey revealed that a lack of staff with the

right capabilities on both sides was a key blocking point to efficient

supplier coordination. As one cannot always send multi-functional teams,

employees with a wide overview of both the company’s and the supplier’s

supply chain are needed to bring value.

How to achieve best practice? Food for thought

So, what are the insights we can glean from the study? Some companies

have a better grip than others on their supply chain organizations, and only

these companies can fully benefit from the size of this opportunity.

Companies wishing to get the upper hand on their supply chain organ-

ization would be wise to answer the following set of questions:

1. Does the current organization adequately reflect the importance of

supply chain management?

• Is this also reflected in accountability, especially with respect to

hierarchical levels?

• Can end-to-end supply chain management be embedded without

losing critical synergies on a functional level?

2. Are the correct decision-making mechanisms and coordination tools in

place?

• Does your company already have the right mechanisms or tools?

• Are they being applied correctly and effectively?

3. How should the company organize the external supply chain?

• How could your company’s relationships with suppliers become

more effective and efficient?

Roland Berger’s approach to supply chain organization

The operations strategy team at Roland Berger constantly works on

improving companies’ supply chain management. However, companies


9780230_217805_17_ch15.3d 6/3/2008 14:49:08

that approach us are not primarily concerned with enhancing their supply

chain organization. More often than not, they ask for advice because they

want to improve service levels, bring cost down or reduce working capital

and release cash. The experience shows that, for achieving these goals, it

is actually improved supply chain organization that enables these

companies to develop supply chains that work more effectively and

efficiently.

In our experience, companies need to take three steps before the supply

chain organization can truly be optimized:

1. Understand their own internal and external factors

2. Develop and assess organizational options

3. Agree on the target organization before defining steps for transformation.

As step three is usually part of an overall supply chain improvement

implementation program, we will focus here on the first and second steps

only.

Step 1: Understanding internal and external factors

The first step is to get a clear understanding of factors affecting your

company. It is important to understand right from the start that there is no

standard formula or best practice template for supply chain organizations.

Although best practice companies share many characteristics, the

environment in which each company operates is unique. External factors

such as market structure and client expectations are different for each

company.

For one of our clients, for example, we found across Europe two market

clusters relevant to the design of a supply chain organization:

• A highly mature cluster of Western and Central European countries,

where customer requirements were quite similar and competitive logistics

services were easily available – for these mature countries, the company

decided to centralize supply chain management functions in order to

focus on efficiency through cost synergies. At the same time, a central

supply chain control function was established to manage a comparable set

of key performance criteria, such as raw material inventory levels and

production capacity utilization, as well as service levels.

• A set of countries with highly differentiated customer requirements and

constantly changing demand situations – as a result, when designing the


9780230_217805_17_ch15.3d 6/3/2008 14:49:08

supply chain organization the decision was taken to establish supply

chain management functions such as material and capacity locally in

order to enable maximum flexibility to react to customer requirements.

Each company has its own set of internal requirements too, such as the

availability of IT systems, and people skills. Full analysis of such internal

and external factors is crucial for the design of a workable supply chain

organization.

One client company, for example, was just coming out of a major

restructuring phase during which the whole purchasing department was

focused only on one objective: reduce purchasing prices. A decision was

taken to reshuffle the organization in order to accelerate the transition to a

more collaborative approach towards purchasing. This was achieved by

allocating the purchasing function, together with the production function,

underneath a single global supply chain responsibility, and underpinning

this new structure with a reviewed collaboration-oriented KPI and

incentive system.

Small steps might need to be taken at first to set the groundwork for

cultural change, which might be necessary in order to create a best

practice organization.

Typical external factors that might be relevant for determining the

requirements of the organizational design are:

• Globalization (market entries, low-cost country sourcing, off-shoring

fragments of the supply chain)

• A need for flexibility, arising from M&As

• Deregulation

• High-maintenance partnerships

• Market requirements.

The latter factor comprises a mixed bag of local and global customer

requirements, tax regulations, labor laws, and so forth.

Typical internal factors are:

• Culture

• Capabilities

• Systems.

Effective supply chain management requires a company culture that

puts the supply chain above functional targets. Such a culture clearly does

not evolve overnight and management has to make considerable efforts to


9780230_217805_17_ch15.3d 6/3/2008 14:49:08

achieve systematic development at all levels of the company and in all

regions where it operates. A special skill set is required of supply chain

managers. They need to display specific capabilities.

The correct system is also critical. Even if an internationally optimized

supply chain makes sense, the company might not have the right sort of IT

infrastructure in place to enable it to operate. Organization transition has

to develop alongside IT capability. Typical internal and external factors

that might be relevant for determining the requirements of the

organizational design are shown in Figure 15.3.

Step 2: Develop and assess organizational options

Once a company has analyzed the external and internal factors, the results

must be translated into clear design requirements. This creates a checklist,

making it easier for companies to assess the organizational options open to

them. When defining options for organizations, it is a good idea to

perform a gap analysis that shows the cleft between the current

organization and how it should look in the future, based on the defined

requirements. This creates transparency, and it shows where adjustments

in the organization need to be made. With this knowledge, options can be

developed.

The description of options should then happen along a framework that

allows a relatively quick description of an option. This enables the

individual options to be assessed on a high level against the design

criteria. Detailing of the organization can then be limited to a few options,

or even only one – the preferred option. The relevant dimensions should

be considered when outlining the organizational option:

• Segmentation Companies should look at the way the supply chain

organization is segmented. Is it spliced according to product, customer,

market, order type or speed? The goal is to achieve a strong customer/

market orientation end-to-end.

• Centralization Companies should look at the level at which the

supply chain organization is centralized or decentralized with respect to

regions.

• Process-orientation The organization should ensure an end-to-end

process responsibility.

• Decision making Companies should look at the decision-making

process and structure. They should consider which entity has what

responsibility and autonomy, and what coordination tools are applied.


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External factors

• Globalization: Trends such as marketentries, low-cost country sourcing, off-shoring fragments of the supply chain.The organization needs to provide theglue to hold the supply chain together.

• Flexibility: M&A, deregulation butalso partnerships in various elementsin the supply chain continuouslyrequire structural updates. Theorganization needs to be flexibleenough to handle those.

• Market requirements: Local andglobal customer requirements, taxregulations and labor laws need to beconsidered when designing the supplychain organization.

Internal factors

• Culture: Effective SCM requires acompany culture that puts the supplychain above functional targets. Sucha culture does not evolve overnight, ithas to be systematically developed.

• Capabilities: Supply chain managersrequire specific capabilities; even ifexternal hires can help, an internaldevelopment of people is requiredand this takes time.

• Systems: Even if an internationallyoptimized supply chain makes sense,the company might not have ITinfrastructure in place that enablesthis. Organization transition has to goalong with IT capability development.

Organizationaldesign

requirements

Figure 15.3 External and internal factors to be analyzed prior to designing organizations

26

7

9780230_217805_17_ch15.3d 6/3/2008 14:49:08

• Supplier integration Companies also need to investigate the way

their internal supply chain organization is linked to the comprehensive

supply chain, including suppliers.

Additionally, only functions that strongly impact the supply chain control

of differentiated product segments should be grouped into a segment

responsibility. Shared service functions – such as warehousing and

transportation – should be set up to realize cross-segment synergies.

Companies also benefit from conducting a ‘what-if’ scenario analysis,

which tests how flexible the organization is. Both external and internal

factors should be used for measuring the company’s flexibility. This helps

create a stable supply chain organization and promotes a culture of

sustainability.

Outlook

As the study and feedback from participants demonstrate, supply chain

organization is seen as a key success factor for companies across many

kinds of industries. Organizational talents are guides, showing how

companies can design an effective and efficient supply chain organization.

But companies must be aware that there is no single golden way. To define

the best option, each company needs to consider its own external and

internal factors. Internal factors need special consideration.

Any company working on its supply chain organization needs to

understand that supply chain management has more to do with company

culture than with company structure. Organizations today still tend to be

functionally designed, with responsibility limited to distinct functions.

End-to-end responsibility for the entire supply chain is rare. This needs to

change. A best-practice organizational structure helps companies thrive,

but this requires everyone in the organization to develop an end-to-end

mindset. Since supply chain management is probably the most cross-

functional of all core business disciplines, this cultural change clearly

must start with top management and filter downwards.

Note

1. Stephan Wagner, Axel Schmidt, Ingo Schr€oter, Sebastian Durst,

Eckhard Lindemann (2006) Roland Berger/WHU Otto-Beisheim

School of Management.


9780230_217805_17_ch15.3d 6/3/2008 14:49:08

Further reading

Durst, Sebastian M. et al. (2006) Getting to Grips with the Supply Chain.

How Organizational Stars Organize their Supply Chains. Stuttgart:

Roland Berger.


9780230_217805_18_Index.3d 6/3/2008 14:48:17

INDEX

ABS finishing 119

accountability 134, 263

accounting 28, 196f, 223, 239

accounts payable 121f, 232, 233–5, 236f,

237–8, 239, 240, 242b, 243, 244, 246f,

247–54

accounts receivable 232, 233–5, 236f, 237–8,

239, 240, 242b, 243–52, 253f

action plans 42, 43f

activity based product costing 33f, 41

‘adherence to global processes’ 55

Adidas 15, 22(n2), 202

aerospace xv–xviii, 29, 99, 109, 148, 151,

152, 153, 155, 205, 219f

Africa 103, 108

Airbus A350 65tb

Airbus A380 64, 64b, 65tb

aircraft manufacturers 109

airline industry xii, xiii, 10, 11

alliance hubs 127, 128

alliances 50f, 216

aluminium 30, 35f, 49f, 116, 152, 154f

amortization 71

Apple 19b, 20, 21

Asia 41b, 107f, 108, 243

emerging markets 107

Asia-Pacific 137f, 138

assembly lines 1, 50, 150, 152, 153, 179,

207–8

manual 40f, 41

asset performance/productivity xvi, 2, 3f 200f

asset turnover 199, 210

assets 233

assets 236f

Audi 30

Augustin, R. xii , 7

Australia xvi

Austria xv, 107

automotive companies/manufacturers 122,

124, 148

average working capital 234f

Japanese 82–5, 86–7f, 90, 109–10

western 81

automotive components manufacturers 155


automotive industry xii–xviii, 12, 25, 30, 92,

99, 151, 152, 162, 203, 205, 207, 214b,

219f, 237, 243, 258

CCR (case study) 41–4b

global development made successful 45–60

industry benchmark for debtor days 245f

Japan 79, 80–1

lead buying 135–9b

safety recalls 64–5

share of sales with original product inno-

vation 62f

speed with which new models are launched

90

working capital optimization 247, 248f

see also cars

automotive suppliers xiii, 119, 177, 259f, 263

leveraging manufacturing excellence

172–3b

maintenance costs 177, 178f

Avesta (steel producer) 12

B-2-B 10

B-2-C 10

backward and forward integration 119

balance of power 238

balance sheets 101–2, 233, 239, 242b, 243

balanced scorecards 57

Bamberg xvii

bankruptcy/insolvencies 24, 144

banks xiii, 92, 233

barriers to entry 14

BASF 191

batch systems 166, 167f

Bayer 191b

Bayer Industry Services 191b

270

9780230_217805_18_Index.3d 6/3/2008 14:48:17

benchmarking/benchmarks 14, 15, 38n, 70f,

110, 121f, 152

equipment maintenance cost-to-availability

ratio 177, 178f

external 73b

financial ratios 256

industry leader 162

machinery maker 119–20

maintenance costs 186

manufacturing excellence 163, 166–8

purchasing 111, 115

SCM 200f, 237

supplier development 109

TCO 112

technical 121f 237, 238–9

working capital 237, 238–9, 244

Berlin 13

best practice/best in class

equipment maintenance 177

institutionalization 171f, 171

lean manufacturing 146

manufacturing 162, 164f, 165, 166, 167f,

170–1, 174

miscellaneous xvi, 2, 3f, 14, 15, 36f, 47, 152

price discounts versus payment term targets

254

purchasing 94, 99, 123–4, 125, 127–30, 135

SCM 200f, 200, 204

sharing process 171f

success factors and levers in innovation

management 61–78

supply chain organization 258, 260–3, 264,

265, 268

working capital 232, 243–4, 249, 251, 252

see also optimization

best price evaluation 121f

Bilfinger Berger Multi Service

Group 12–13

bio-informatics 13–14

BMW [Bayerische Motoren Werke AG] 51,

203

board members 251

body (automotive) 79, 80f

bonuses 55, 121f, 251

book-keeping 56

bottlenecks 41, 101, 174, 254f, 255

Brandenburg, K. 19b

brands 15, 130, 136, 145, 220

Brazil 49f

British Airways 11

built-in quality 162

Bulgaria 108

bureaucracy 158f

business administration xiii, 6

business areas 51, 52

business divisions 133

business environment 59, 93, 106, 148, 156f,

156, 257, 264

changing 14

global 132

business functions 194

business impact 115–16, 116f

business model innovation 7, 13f

prerequisite 19–22

business models xvii, 42, 147, 151, 198, 238,

244

business models: impact on product devel-

opment (chapter one) 7, 9–23

airline industry 11b

attractiveness indicators 18f, 19b

change and innovation 12–15

components 9–10, 10f

corporate strategy in action 9–12

development over time 13f

formation, growth, maturity, decline 15, 17f

how and when to innovate 15

imitation 14, 15, 22(n2)

key question 16

lifecycle (basis for innovation) 15–22

music industry 18–19

outlook 22

‘emerging’ versus ‘planned’ changes 14

prerequisite for innovation 19–22

product/service innovation 19–22

business parks 158f

business planning 254

business processes xiv, xvi, xviii, 49f, 120,

172b, 198

harmonization 57

see also processes

business segments 159b, 191b, 199

business sites 133, 134, 136, 139b, 157

business strategy 200f

business system analysis 164f

business units (BUs) 13f, 43f, 53f, 72, 75b,

123, 124, 128–31, 133, 134, 136, 139b,

199, 206–9, 211–15, 261

central organizational units 214b

data comparability 237–8

local 100

Index 271

9780230_217805_18_Index.3d 6/3/2008 14:48:17

buyer-supplier relationships 263

buyers/leverage 116f

Buzz (KLM subsidiary) 11

call centres 209f

capital 177, 185, 194f, 261

international transfer 145

tied 124

capital binding 249

capital expenditures (capex) 97, 98f

capital markets 233, 235

capital projects 192

capital structure 200f

capital transfer 126, 126f

capital turnover 207

car manufacturers 25, 108, 109

best practices 110

R&D activities (splitting among sites) 50

supplier development 109

cars 1, 30, 81

‘hurry up’ models 84

innovative 89

models 203

pure Japanese 80

see also vehicles

cars: sections/attributes

body 85

chassis 79, 80f

crash tests 84

door panels 39f

front wheel drive 49f, 88

interior trimming 109

paint and colour combinations 203

power window module 34, 35f

radios 57

rear wheel drive 49f, 88

right-hand drive 49f

styling 84

under body 87

upper body 86–7f

case studies

CCR in automotive industry 41–4b

complexity tackled from sourcing side

(case study) 226–30b

global manufacturing footprint: optimiza-

tion (how the approach works in real

life) 159–60b

global supply chain management frame-

work (electronic components)

205–14b

healthcare sector 226–30b

‘innovation to cash’ at utility company

72–5b

lead buying in automotive industry 135–9b

lead buying in utilities industry 139–41b

manufacturing excellence (manufacturer of

engine components) 172–3b

SCM 200

university hospitals (tackling complexity

from sourcing side) 226–30b

working capital excellence: consumer

goods industry (case study) 241b

working capital excellence: energy sector

(case study) 242b

working capital excellence: media group

(case study) 242b

cash 240, 264

cash discounts 239, 242b, 249, 251

cash flow 233, 235, 237, 240

cash reserves

hidden in supply chain 232–56

cash-out 75b

catalogue purchasing 139b, 140f, 140b, 141f

cell manufacturing 79

Central and Eastern Europe 107f, 108, 144

‘Central Europe’ 203, 213, 264

‘Eastern Europe’ 6, 47, 49f, 103, 213, 238

central ivory towers 100

centralization 72, 122, 264

purchasing 99, 99f

sourcing functions 97, 98f

supply chain organization 266

Centre for European Economic Research

(ZEW) 61

change management 55, 117f, 187f, 188

change process engineering 119, 121f

chemical industry/chemicals xii–xv, xvii, 12,

191–2b, 219f, 243

benchmark for debtor days 245f

equipment maintenance 188–91


shared support functions 191–2

working capital 234f, 247, 248f

chemical parks 192b, 196

chief executive officers (CEOs) 78, 96, 100,

141f, 259f

chief financial officer (CFO) 251

chief marketing manager (Nissan) 89

chief operating officer (COO) 251

chief product specialist (Nissan) 89

272 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

chief vehicle engineer (Nissan) 89

China 6, 47, 49f, 103, 106, 108, 129, 144,

145, 159–60b

entry into WTO 105

industrial system 106

sourcing hurdles 106

claims management 252

clearance sales 254f, 255

client base 157, 158

combined cycle gas turbine (CCGT) plant

140b

commercial vehicles 88, 119

commitment 169, 239

commodities 105–6, 107, 117, 122, 128, 134

module- or system-oriented 106

price trends 103f

commodity classification 124

commodity codes/coding 123, 127, 136, 137

commodity councils 129

commodity groups 115

commodity management xiii, 100, 229

commodity markets 199

commodity procurement process cost 127

commodity strategy 138f

commonization 33f, 34, 48f, 121f

communication/s 42, 55–6, 76, 90, 127, 135,

164f, 170–1f, 172, 173, 183, 193f, 205,

240–1

barrier-free 56, 59

compact discs (CDs) 18–19b

companies

advanced 97

best-in-class 109, 257

blue-chip 28

corporations 29, 131, 133, 134

downstream and upstream 109

European 90, 107

external versus internal funding 233

family-owned enterprises 28

global manufacturing footprint (optimiza-

tion) 147–61

global manufacturing footprint (unique-

ness) 148

industrial 109

international 56

international sales affiliates 174

Japanese (efficiency) 79

large 243, 258, 259f

lead-buying concept 134

long payment targets 249

major global 97

medium-sized 94, 125, 243, 258, 259f

multinational 59, 102, 125

partnerships and alliances with suppliers 108

product-based 217

reasons for de-localization 149–50

small 133

small and medium-sized enterprises

(SMEs) 133, 262

start-up 21, 133

survival chances 47

targeted for acquisition 160b

Triad region 145

Western 103, 108

see also suppliers

company size 132, 258, 259f

competence 54, 64b

competition 6, 21, 29, 104, 139, 144, 150,

162, 173, 203, 216

global 45, 61

low-cost (defence against) 151

outsmarting 24–44

competitive advantage 10f, 10, 22, 96, 108,

146, 151, 159, 173

comprehensive solutions 12–13

integrated lead engineering-lead buying

approach 58

technological 161

competitive environment 16, 18f, 18–19b, 93,

154

competitive pressure 96, 131, 257

competitive strategy 9

competitiveness 2, 31, 76, 93, 94, 104, 107f,

115, 136f, 159, 162, 173

three skills 161

competitors 44, 71, 114, 115, 150–1, 159b,

210, 237, 238, 239

competencies 34

cost positions 32

performance cost analysis 36f

products 37, 88

complete knock down (CKD) 153

complexity

addressed 221–6, 228–30

brand and channel 217, 218f, 222f

characterisation 217

cost versus value 220, 221, 224f

costs 217

cross-functional 220

customer 217, 218f, 222f

Index 273

9780230_217805_18_Index.3d 6/3/2008 14:48:17

complexity – continued

engineering 217, 218f, 222f

good versus bad 224f, 231

growth-suffocation 231

identification 217

main drivers (identification) 227

management and control 224f, 225–6,

229–30

manufacturing 217, 218f, 222f

market-driven 222f

miscellaneous 47, 199–200, 215, 258

necessary versus unnecessary 216, 217

non-value-adding 225, 227, 228

organizational 217, 218f, 222f, 227

processes 217, 218f, 222f, 227

re-designing 224f, 225, 229

right level 220

suppliers 217, 218f, 222f, 227

tackled from sourcing side (case study)

226–30b

technical 222f

transparency (three-step approach) 223–6,

228–30

understanding 223, 224f, 228–9

visible versus invisible 223

complexity costs 220, 221b, 221

bottom-up estimation 223, 224f

savings 228, 229, 230

complexity database 225

complexity drivers 217, 218f, 221tb, 223

complexity management/complexity reduc-

tion xii, xiii, 70f, 201, 229, 252

importance 218–20

improves profitability 210–12

‘not low-hanging fruit, but always pays off’

231

optimization 221

complexity management (starting point for

improving SCM performance) (chapter

thirteen) 199–200, 216–31

addressing complexity 221–6

case study (tackling complexity from

sourcing side) 226–30b

complexity drivers 218f

cross-functionality of complexity 220

importance of complexity management

218–20

manage complexity before it suffocates

growth 231

SKU rationalization 221tb

complexity tax 217, 219f

resources, processes, systems 218

component assembly 40f

component quality 181

components 28–9, 32, 37, 38f, 40n, 48f, 52,

53f, 54, 58, 102, 110, 149–52

cost 88

cost of keeping in stock 30

Japanese ‘sets’ 83

least value-added 105

low-value 49f

over-engineered 36f

performance 83

comprehensive cost reduction (CCR) xii, 25

analysis tool-matrix 32, 33f

automotive industry (case study) 41–4b

implementation 42, 43f

main advantage 44

six-phase 42

ten facets of a gem 32–41

compressors 12

computer chips 34, 37, 144

computer games 19b

computer industry 14, 25, 129

computer-aided design (CAD) 56, 64b, 72

computer-aided engineering (CAE) 84, 85

computerized maintenance management sys-

tems (CMMSs) 183–4

concept competitions 119, 121f

concept development (manufacturing

excellence) 168, 169

conjoint analysis 223, 224f

consensus 168

consignment stocks 31, 214b

consignment warehousing 119, 121f

consistency 67

construction errors 64b

construction industry xiii, 12, 152

construction of cost competitiveness (CCC21)

initiative 88

consultancy firms 110

see also Roland Berger Strategy Consultants

consumer electronics 14, 25

consumer goods xii, xiv–xvi, 145, 205, 219f,

239, 243



working capital optimization 241b, 248f

consumer markets 107

consumers 145

274 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

‘diversified’ requirements 84

legislation to protect 30

regional 47

content teams 169–70, 170f

continuous improvement 70f, 162

contracts

fixed-price 121f

long-term 125

control systems 166, 167f

cooperation 55, 59, 100, 188

worldwide 45

coordination 64b, 88, 100, 122, 225, 241,

257, 263

global 48f, 129

Nissan 89

supply chain 258, 266

three levels 53

WCM 250–1

coordination costs 202

copyright protection 161

core competencies 3f, 28, 31, 49f, 50, 51, 65,

92, 94, 125, 161

pressure to concentrate on 93

core processes 237, 242b

core teams 58

corporate culture 64b, 150, 163, 225, 265–6,

267f, 268

corporate governance 225

corporate innovation launch plan 75b

corporate innovation units 72b, 75b

corporate philosophy 132

corporate strategy xv, 1, 9, 13, 69, 77, 96

‘being innovative’ 61

innovation initiatives linked to 68f

purchasing 111, 113

SCM 199

corporation tax 156

cost approach design 24–44

cost base 195, 196

cost competitiveness 25

cost drivers 44

cost efficiency 199

cost leadership 9, 11

cost levers

innovation management 70f, 71

cost performance 68f, 200f

cost planning 79, 82, 85, 88

cost pressure 204

cost savings/cost management xii, xv, xvi, 25,

31, 35f, 46, 57, 79, 92, 107f, 115–20,

131, 154f, 156, 173b, 191, 202, 212–14,

221, 226b, 233, 257, 264

deferred 83

global, regional, local 137f

idea calculation 42

idea creation 42, 43f

opportunistic 77

potential 43f, 58

purchasing 94–5, 98f, 99, 114, 136

reason for de-localization of manufacturing

149,150

targets 53, 55

transportation choice 104

see also CCR

cost simulation 159b

cost structure 3f, 42, 43f, 85, 148, 149–50f,

152, 153, 154, 158, 159b

new (through re-design) 36f

cost transparency 110, 223

cost types 2

cost-per-function data 58

costs 84, 109, 122, 123, 175, 216

bottom-up and top-down calculations 32

follow-up 101

post-deployment 101

trend analysis 112

variable versus fixed 236f

cost-to-serve 218

CPL 141f

CRA 121f

critical mass 70f, 77, 108, 213

cross-divisional functional role 93

cross-docking 204, 254f, 255

cross-functional approach 67

cross-functional responsibility 254f, 255

cross-functional teams 70f, 106

lead engineering 52f, 54

cross-investment 110

culture 57, 106, 107, 107f, 110

currency movements 157

currency risk 107

customer base 150, 191b

customer demand 217, 220

customer expectations 46, 93, 125

‘client expectations’ 264

customer groups 26f, 27

customer information

automated supply to sales department

252

customer integration 254f, 255

Index 275

9780230_217805_18_Index.3d 6/3/2008 14:48:17

customer interaction/interface 140b, 225, 251,

252, 256

customer orientation 13f, 209

customer planning (integration) 252, 254f,

255

customer portfolios 206, 208, 222f

customer representatives 81–2

customer requirements 76, 265, 267f

function and price 63

pace of action 94

customer satisfaction/loyalty 11, 116f, 118,

124, 198, 199, 202, 223, 235, 260, 262

customer segmentation 208, 252

customer service 11, 202, 204, 208, 209f,

209b, 211, 249–50

customer service structures 201, 214b

customer service unit 211

customer structures 238

customer value 10f, 10, 22, 119, 223

comprehensive solutions 12–13

customers

dissatisfied 205b

hidden needs 80

incremental value 223

individualized solutions 52

‘key-account’ versus ‘small’, 208, 210, 211

miscellaneous 17f, 18f, 31, 71, 93, 205,

207, 214b, 225, 239, 244, 251, 266

needs 89, 217

power and unpredictability 216

product-functions required 63, 63f

regional 52

tastes 47

time to stop listening to 83

unprofitable 210

wants (real and supposed) 27

willingness to pay 16

see also internal customers

customization 62, 73b, 146, 147, 203, 204,

219f, 220

local 77

Czech Republic 108, 212

Darmstadt xii, xiii, xv

data access 102

data analysis 32

data collection 43f, 163

data exchange 55–6

data formats 56

data management/purchasing 99f

data networks 193f

data quality 186

data transparency 123, 136

data warehousing 56

databases 42, 123, 126

global suppliers 88

know-how 56

debtor days 245f

decentralization 72, 99f

decentralized buyers 122, 135

decision-makers 148, 168, 172b, 251, 258

decision making 54, 55, 57, 74f, 133, 139b,

161, 183

lean global processes 129


upstream 199

decision-making mechanisms 263

decision-making power 165

Deckert, C. xii , 200

default risk 248

defects 79, 260f, 260

defence sector xvi, 148, 151, 153, 155, 219f

delivery flexibility 262

delivery moratoriums 252

delivery on time 260f, 260, 262

delivery performance 208

delivery times 207, 214b

delivery timing 109

delocalization 151

demand

constantly changing situations 264

demand data

central collation 211

demand forecasts 254f, 255

demand management 117f, 211

deoxyribonucleic acid (DNA) 13–14

depreciation 153, 166

design 50, 84, 89, 109, 202, 222f

dominant 21

design to cost (DtC) 25, 27, 29–32, 37, 41, 44,

70f, 71

design engineering 79, 80f, 80, 82

design freeze 83, 84, 85, 86–7f

design for manufacture and assembly

(DFMA) 121f

technical benchmarking 32–4

design modifications 50

Detroit xvii

developing countries 71, 146

development budgets 62

276 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

development costs 64, 65tb, 71

development departments 47

development facilities 51

development gap 21

development lead times 82

development virtualization 70f

diagnosis related groups (DRGs) 228

die manufacturing 85

die-making 86–7f

digital versatile discs (DVDs) 19b

digitalization 14, 18–19b, 67, 84

direct debit 254

direct ordering

elimination of inter-company flows 212f

direct shipment/s 209f, 211, 213, 214b, 254f,

255

distribution xvi, 20, 208, 209f, 233, 250, 250f,

251, 253–4f, 255, 261

Adidas 202

complexity tax 219f

lean 201, 214

distribution business unit 73b

distribution network/channels 210, 212–14,

215, 220

diversification 12, 151, 203

‘doing more with less’ 47

Dolby function 31

downstream activities 109, 152

Duisburg xvi

dunning system 239, 242b

e-catalogues 118, 121f

e-conferencing 56

e-enabled tools 102

e-mail 56

e-procurement/e-sourcing 118, 121f, 123,

127–8

early adopters (of an innovation) 71

early warning signals/systems 16, 18–19b, 19,

21–2

earnings before interest and taxes (EBIT) 208,

210, 214b, 240

East Asia/Far East 159b, 160b, 238

Eastern Bloc 24

eBay 21

eCl@ss 137

ecological factors 18f

economic data/tactical and strategic 102

economic growth 103, 192

economic performance 243

economics xii, 153

economies of scale 97, 117–18, 133, 148, 150,

152, 153, 196, 212–13

education 161

efficiency 182, 223, 257, 258, 264

administrative 133

employees 47

operational equipment 175

Eisenmann (painting systems) 12

electric power 152

electrical industry xiv, 62f

electricity 116

electronic commerce 14

electronic components 199, 201, 205, 206,

210, 214b

electronics xii, xiv, xv, 31, 90, 243

automotive 79, 80f




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



engineering xii–xviii, 6, 25, 28, 58, 83–4, 124,

129–30, 148, 152, 154f, 155, 160b, 182,

192b, 193f, 196f, 205, 217, 243


central 189f, 190


initial 86–7f

smart processes (Japanese approach) 8

Index 277

9780230_217805_18_Index.3d 6/3/2008 14:48:17

engineering – continued

under body and upper body (automotive) 85

virtual 65, 71

engineering capacities 65tb

engineering change management 86–7f

engineering companies 128

engineering data 64b

engineering service providers 90

engineering services 160b

engineering tasks 85

engineers 29, 31, 81, 82, 83, 89, 145, 190

component-design 88

etymology 25

global teams 51

local 55

shortage 90

enterprise application integration (EAI)

platform 212

Enterprise Resource Planning (ERP) 102,

128, 183–4, 186, 212

equipment 111, 166

breakdowns/downtime 175, 176f, 181, 183,

184, 188, 189f

failure costs 179, 181, 184, 185, 187f, 188

first-time costs 112

life-cycle costs 112

maintenance cost-to-availability ratio 177,

178f

losses (planned versus unplanned) 180f,

184

equipment availability 185, 186,

189f, 191b

equipment defects 177, 186

equipment maintenance 175, 193f

‘breakdown’ strategy (run to failure)

179, 180f

centralized versus decentralized 190

corrective, predictive, preventive 186, 187f

order processing 180f, 183

planned 189f, 190–1b

planning 180f, 183

predictive strategy 179, 180f

preventive strategy 179, 180f

small projects 189f, 190

equipment maintenance: six building blocks

179–84

control 180f, 184

IT systems 180f, 183–4

organization 180f, 181–3

personnel 180f, 183

process 180f, 181

strategy 179–81

ESB Research Institute 76

escalation and mediation processes 54–5

escalation paths 57

euro (currency) 108

Euro-zone 107

Europe xv, 11, 46, 49f, 66f, 79, 107, 108, 117,

128, 137f, 138, 144, 192b, 204, 206, 208,

226b, 233, 243, 264

chemical industry (equipment mainte-

nance) 188–91

top five hundred companies (ROCE) 235

Europe, Middle East, and Africa (EMEA)

205, 205b, 209f, 211–15

European Aeronautic Defence and Space

Company (EADS) 64, 65tb

European Union (EU) 103, 104

experience 62, 67, 96, 97, 112, 125, 170f, 199,

231, 239–40, 242b

expertise 226b, 227

see also skills

experts 168, 172b, 181, 228

maintenance 190

technical and financial 158

exports 174, 202f

F&A 219f

face-to-face contact 56, 82, 111

‘personal interaction’ 56

facility management 194, 196f

fact-based neutrality 32

factor costs 156f

failure costs 176f

failure mode and effect analysis (FMEA)

179, 184, 186, 187f

fashion industry 204

fast followers 17f, 21

finance departments 41, 239

finance staff 240

financial holding companies 133

financial holdings 141f, 141b

financial performance 244

monitoring 251–2

financial resources 69

financial services 66f, 118

Finland 12

fire services 194

first-to-market strategy 70f, 71

first-movers 21

278 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

flexibility 28, 30, 113, 137, 145, 147, 148,

157, 161, 199, 202, 206, 208, 211, 258

delivery 62

refining organizations 194–6b

supply 260f, 260

supply chain 265, 267f, 268

Flickr 21

focus groups 81

follow-up costs 101

food industry 259f

food manufacturers 258

Ford (corporation) 1, 12

Ford, H., Snr 1

forecast-to-fulfil 237, 238, 250

forecasting 111, 166, 167f, 209

link with production 107

sales 174, 249

SCM efficiency 211

foreign direct investment (FDI)

202, 202f

forward and backward integration 121f

France xiii, 25, 64b

Franke, T. xiii, 95, 99

Frankfurt 191b

Fraunhofer Institute for Systems and Innova-

tions Research ISI 12, 22(n1)

Free University of Berlin 13

front loading 79, 82, 83–4

front wheel drive 49f, 88

fuel prices 103, 104

Fujimoto, T. 79

functional adjustment 117f, 119–20, 121f

functional department heads 81

functional departments 79–80

functional systems 58

gap analysis 21, 266

‘GAP analysis’ 126

gearboxes 61

genetic immunization 13

geographical location 132

geography 204

Germany xii–xvii, 12, 15, 19b, 25, 30, 51, 61,

64b, 145, 174, 192b, 194b, 202, 203,

212f, 212, 226b, 227, 242b

Gleisberg, J. xiii , 8

global commodity leader (GCL) 138, 138f,

139b

global development made successful (chapter

three) 7–8, 45–60

automotive industry 45–6, 58

global product development 46

global product development (tailored to

evolving circumstances) 47–51

global R&D network (allocation of core

competencies) 49f

interactions ‘need to be managed’ 59

issues/questions 45, 52, 59

lead engineering (concept and implementa-

tion) 51–8

local technical centres/integration and

competencies 50f

organization is what matters in global

world 46–7

status quo (coordinated multinational

development) 48f

trend towards integrated global networks

(coming decade) 48f

trends 45–6

global development network 47

global development organizations 8

global lead centres 50f, 51

global manufacturing footprint 144

global manufacturing footprint: optimization

(chapter nine) 146, 147–61

case study (how the approach works in real

life) 159–60b

economic performance of each scenario

157

monitoring 158–9

network design goals and challenges 150f

payback and risk analysis 154, 154f

process without close 158–9

simulation model 157

size and imprint 148–58

global manufacturing footprint: six-step

approach 148–58

step 1: understanding strategic drivers 149f,

149–51

step 2: derive model 149f, 151–3

step 3: segment product structure and

define delocalization scenarios 149f,

153–4

step 4: select target regions and countries

149f, 155–6

step 5: fine-tune the model and finalize the

footprint 149f, 156–7

step 6: select site, suppliers, partners 149f,

157–8

global marketers 76

Index 279

9780230_217805_18_Index.3d 6/3/2008 14:48:17

globalization xiii, 6, 45, 96, 147, 149, 258,

265

automotive industry 135

importance of organization 46–7

industry and society 93

manufacturing 144, 145

product development 90

production 204

purchasing 102–3, 123, 128, 130, 131

R&D: success factors 76–7tb

supply chain 216, 267f

value chains 202

globalization leaders 76

GNP (China and India) 145

Go (BA subsidiary) 11

goods

customized 146

‘near-the-customer’ 146

goods and services 97, 107, 111, 112, 116,

200f, 201, 214, 216, 217

Google 21

government funding 226b

governments 104, 106

Great Britain see United Kingdom

greenhouse gases 104

gross domestic product (GDP) 105, 202f

groupware 56

guarantees 30, 46

Gulf of Mexico 192

hardware 20, 21

head offices 50

health, safety, security, environmental, and

quality (HSSEQ) standards xix, 194,

196f

healthcare facilities 184

healthcare sector xiii, xvii, 200, 216, 243


case study 226–30b


see also pharmaceuticals

heavy weight product managers (HWPM)

79–80, 80f

capability and personality 82

chief engineer 89

history 80–1

initiatives for change 88–9

matrix organization 80f, 80

practices 82–8

strong empowerment by top management 81

success factors 81–2

well-defined processes 82

hierarchy 45, 53, 142, 169, 209, 230, 263

high technology xiii, xv, 219f

high-maintenance partnerships 265

Hoechst 191b

holistic approach 32, 67

Hollmann, T. xiii, 199–200

home country 50f, 51

Home Depot 123

hospitals 226–30b

housing market 1–2

human medicine 14

human resources 2, 57, 81, 82, 157,

158f, 196f

prioritization 69

Hungary 108

Hurricane Katrina 192

IBM [International Business Machines] 123

idea evaluation 62, 73b

idea management 70f

image 26, 27, 30, 100

implementation 83

manufacturing excellence 164f

import regulations 117, 238

export regulations 238

improvements: source of fortunes (Ford) 1

incentives 158f, 225, 251

internal sales systems 252

India 47, 49f, 103, 144, 145

indirect functions 172b, 173b

individualized standardization 47

industrial engineering company

global manufacturing footprint (optimiza-

tion) 159–60b

industrial goods

‘complete solutions’ approach 12–13

industrial history 107, 107f

industrial structure 160b

industrial tradition 108

industry type 132

information 42, 161, 163, 174, 200f, 224f

information and communications technology

(ICT) 93, 203

information flows 100, 220

information systems (IS) platform 166, 167f

information technology (IT) xiv, xvii, 2, 3f,

99–100, 123, 138, 193f, 239, 242b

common platform 127

280 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

compatibility of computer systems/data

formats 56

global systems 55–6


knowledge sharing 56

systems performance 67

unified groupware solutions 56

working capital optimization 247

information technology: miscellaneous

IT automation and integration 254f, 255

IT capability 267f

IT infrastructure 266

IT platforms 77

IT solutions 57

IT tools 90

information technology systems 59, 145,

172b, 185, 187f, 188, 206, 212, 226b,

227, 229, 265

equipment maintenance 180f, 183–4

global 52f, 55–6

lead engineering 52f, 55–6

Infraserv 191b

infrastructure 68f, 106, 108, 146, 156f, 156,

157, 158f, 193f, 213, 225

infrastructure excellence fields 2

infrastructure projects 13

infrastructure and systems (innovation enabler)

72

innovate to win (chapter two)

clever cost approach design 24–44

CCR approach (ten facets of a gem)

32–41

CCR in automotive industry (case study)

41–4b

competition 24–44

cost drivers (quartet that sets stage)

28–31

discussion and perspective 44

emotion versus rationalism 28

reducing cost ‘a mindset’ 25–8

innovation 15, 217, 221tb, 225

competitive differentiation factor 94

environment for excellence 6

failure 61, 63, 64, 65, 67

‘not having to lower prices’ 24

‘not sign of outstanding performance’ 24

optimization levers 95

pace of action 94

performance targets 68f

preconditions for effectiveness 68f

source of higher profits 62f

innovation analysis 33f, 34, 37, 121f

innovation budget 74f, 75b

‘innovation to cash’ 72–5b

innovation controlling (innovation enabler)

68f, 72

innovation enablers 67, 68f, 72

innovation management xv

correlation with commercial success 75

holistic concept 73b, 74f

re-definition 75b

innovation management: success factors and

levers for best practice (chapter four) 8,

61–78

Airbus A380 64b, 65tb

business context 62–7

case study: ‘innovation to cash’ at utility

company 72–5b

globalization of R&D: success factors

76–7tb

innovation performance 69–72

innovation strategy 69

major challenges 62–3

performance measures 70f

questions 73b, 76

Roland Berger Innovation Toolbox 67–78

strong versus weak 67

innovation performance 67, 68f, 69–72

innovation portfolio 70f, 71, 75b

innovation process 72, 76, 109

customer involvement 63

ideal 73b

innovation scorecard 72

innovation strategy 9, 67, 68f, 69, 74f

innovation theory 6

innovation toolkit 8

‘innovative supply industries’ 221tb

institutionalization 29

insurance sector 92

integrated global organization


leadership approach 53, 53f, 54

local execution approach 53, 53f, 54

mandate approach 53f, 53–4

integrated network hubs 50f, 51

intellectual capital 7

inter-governmental agencies 104

internal customers 115, 129, 133, 138,

185, 186

international 100

Index 281

9780230_217805_18_Index.3d 6/3/2008 14:48:17

international contract law 100

international purchasing offices (IPOs) 123

internet 18–19b, 20, 21, 203

interviews 76, 81, 111, 157, 158, 163, 223,

228, 258, 259f

inventories 31, 121f, 185, 199, 209, 210, 215,

232, 233–5, 236f, 243, 244, 246f, 247–56

‘buffer inventories’ 186

‘buffer stocks’ 254f, 255

centralized planning 212

optimization (four-step strategy) 237–42

inventory costs 173b, 213, 214b, 260f, 260

inventory management xiii, 166, 167f, 201,

209f, 211, 230, 254f, 255, 256

investment 41, 73b, 152, 153, 157, 158f, 161,

225, 242b

invoicing 252, 253f

iPod 21

iTunes 18–19b, 21

Japan xiv–xv, 8, 25, 46, 49f, 66f, 144, 145

smart engineering processes 79–90

jeans 26

joint partners 159b

joint venture structure 106

just-in-time production 79, 162, 254f, 255

Kaeser (compressor manufacturer) 12

kanban 255f

Kazaa 18b

key performance indicators (KPIs) 2, 3f, 57,

72, 74f, 110, 136f, 164f, 166, 167f, 171,

172b, 175, 195, 207, 209, 230, 264, 265

emergency shipment cost to total shipment

cost 210

innovation activities 69

inventory coverage 210

lead engineering 52f, 55

price 96

quantitative 262

standardized 52f, 55

supply chain 261

KLM 11

know-how 26f, 27, 106, 109, 153, 183, 194,

concentration 77

decentralized units 77

external 21

global 77

knowledge

externally-available 31

local 46, 54

knowledge management 51

knowledge sharing 56, 182, 187f, 188,

Korea 25

KUKA Robot Group 12

labels (music) 20

labour 105

labour content 149, 152

labour costs 108, 151, 153, 158f, 165, 166,

195, 213

labour legislation 158f, 265

labour rates 107

labour skills 152, 154

lamp manufacturer 40f

language barriers 52, 107

language skills 55, 108, 123

Lanxess 191b

large order planning 254f, 255

Latin America 6

law/legislation 30, 100, 106, 158f, 265

lead buyers 53, 54, 58, 141f, 141b

role 122

lead buying 58, 99, 131–42

automotive industry 135–9b

benefits 141–2

concept 134

governance models 137–9b

utilities industry 139–41b

lead car 51

lead engineer 52–3, 54, 55, 56, 58

lead engineering

concept and implementation 51–8

global strategies 52f, 52–3

price to pay 57

real life 57

six key elements 52f, 52–6

lead engineering groups (LEGs) 53, 54, 55, 57

lead times 39f, 62, 65, 174, 177, 185, 258

concept approval to start of production 66f

reduction 79, 82, 84–5, 86–7f

supply chain 199

lead-user integration 70f

leadership concepts 45, 131

lean manufacturing xvii, 146, 174

LEDs [light-emitting diodes] 37

legal departments 58

legal environment 157, 158f

leverage (sourcing strategy) 116f, 116

life-cycle 53, 153, 155, 157, 219f, 220

282 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

business model 15–22

equipment 181

life-cycle costs 124

life-cycle indicators 17f

light bulbs 37

Linde 12

liquidity 249

optimization 248

‘local antennas’ 50, 50f

local autonomy 48f

local buyer (LB) 138, 138f, 139b

local content 46, 151, 155

local expectations 47

local requirements 50, 90

‘local satellites’ 50, 50f

location 193f

logistics xiv–xviii, 3f, 31, 32, 37, 145, 149f,

156f, 156, 158f, 165f, 165, 166, 167f,

172b, 173, 175, 196f, 198, 199, 201–3,

206–9, 217, 230, 233, 238

competitive services 264

demand-driven 258

logistics capabilities 260f, 260

logistics costs 260f, 260

logistics managers 259f

logistics networks 202, 209f

London xiii

Louisiana 192

low-cost countries 113, 131, 144,

147, 159b

advantages and disadvantages 105

alternatives to China 106–7

dominance 103f

low-cost country (LCC) sourcing 104–8, 202,

206, 213, 265, 267f

manufacturing 117, 121f, 155, 159

success factors 106

‘trendy’ approach 113

Lufthansa 11

machinery xiii, 2, 29, 101, 119–20, 145, 152,

166, 186, 212

medical 227

magnet valves 119

maintenance 174–96

‘break-fix’ philosophy 192

cautious 177

centralized 180f, 182

decentralized 180f, 182

expert services required 181–2

integrated 180f, 182, 188

manufacturing equipment 175

regular 177

simple activities 181–2

maintenance control 180f, 184, 185, 187f,

188, 190

maintenance costs 166, 184, 185, 187f, 189f,

191b, 195

balance with equipment availability 177

balance with failure costs 181

maintenance excellence project (three-phase)

185–8

concept 185, 186–8

implementation 185, 186, 187f, 188

positioning 185, 186, 187f

preparatory phase (target-setting)

185, 187f

maintenance, repair, overhaul

(MORO) 128

make-or-buy decisions 26f, 28, 62, 119, 121f,

149f, 157, 182, 186, 187f

management 42, 142, 158, 160b, 171f, 241,

265–6

best-in-class 146

commitment 164f

distracted by complexity 218

strategic challenge 204–5

management attention 69

management by objectives (MbO) 55, 57

management information systems 22

management methods 243

management practices 163

management skills 161

management stretch 192

managers 145, 162, 226, 239, 258, 262

manpower 51

manufacturability 84

manufactured goods 97

manufacturers 59, 106

alliances 47

western 151

manufacturing

business set-up time 156f, 156

de-localization, 156–7

driver of product costs 29–30

global context 144–6

global footprint: optimization (chapter

nine) 146, 147–61

global networks 146

labour-intensive 153

Index 283

9780230_217805_18_Index.3d 6/3/2008 14:48:17

manufacturing – continued

leveraging manufacturing excellence in

global production networks (chapter

ten) 146, 162–73

miscellaneous xiii, xiv, xvii, xviii, 1, 107,

109, 129, 202, 261

network design 149

Nissan 89

not only shifting landscape, but also

shifting world 145–6

performance leveraged by support func-

tions (maintenance/quality control)

(chapter eleven) 146, 174–96

third ‘field of action’ 2, 3f, 143–96

see also global manufacturing footprint

manufacturing capabilities 157

manufacturing companies 104, 218

manufacturing department 33f

manufacturing engineering 80, 90

manufacturing equipment 185–6

manufacturing equipment maintenance

177–84

manufacturing excellence

first indication of good and bad practices

166

identifying best practices 166, 167f, 168,

171

implementation, 164f, 165–6, 168–9,

170–1, 172–3b

same as ‘lean manufacturing’ 162

manufacturing excellence: leveraged in glo-

bal production networks (chapter ten)

146, 162–73

benchmarking 163, 164f, 166–8

case study (manufacturer of engine

components) 172–3b

concept development 168

four-step process 163, 164f

introduction 162

making transformation stick 169–72

preparation 163, 165–9

question 162

roll-out 168–9

manufacturing hubs 146

manufacturing locations 147, 205

manufacturing methods 32

manufacturing options 153

manufacturing performance: leveraged by

support functions (maintenance/quality

control) (chapter eleven) 146, 174–96

chemical industry: shared support functions

191–2

costs of support functions and failure costs

176f

critical production lines 190–1b

flexibility 194–6b

impact of support functions 175–7

introduction 174–5

maintenance excellence programme:

execution 185–8

maintenance in Europe’s chemical industry

188–91


177–84

outsourcing production support functions

191–2b

production-support functions independent

of location 193f

project example: major sites of a global

player (specialty chemicals) 189f

refining organizations (new developments)

192–4

six building blocks 179–84

support for support function 185

support function design 175

tailoring supportive function 177–84

manufacturing processes 127, 149f, 152,

153, 177

manufacturing processes/principles 26, 27–8

manufacturing scenario 149f, 154

mapping/procurement 159b

market access 76, 77, 147, 159b

market capitalization loss 64

market cycles 12

market demand 174, 223

market entry 71, 109, 267f

market entry test 70f

market environment 63f

market growth

inability to keep pace with 174

market know-how/decentralized units 77

market launch 71

market launches/successful management 63

market leadership 71

market opportunities 198

market penetration 17f

market positioning 9, 69

market potential 17f

market requirements 125, 265

missed 63, 63f

284 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

supply chain 267f

market research 123

market saturation 17f

market segmentation 199

market segments 15, 26, 61, 203, 204, 207

market share 61, 151, 229

market size 152, 155, 160b

market structure 264

market trends 89, 101

market/consumer studies 34

marketing xii, xv, 20, 27, 32, 54, 80, 82, 202,

208, 262

markets

attractiveness 149

global/international 6, 44, 76, 161, 199

home/local 47, 76

miscellaneous 29, 111, 131, 149f, 151, 206,

207, 266

national 174

new 144–5, 159b, 202, 232

regional 50, 51

western 24

mass manufacturing 85

mass markets 61

mass production 1–2

material costs/prices 88, 93, 96,

177, 195

materials 28–9, 30, 32, 34, 49f, 92, 105, 153,

212f, 225, 239, 243


standardized 140b

materials management 166, 194, 194b, 208,

209, 211, 215

matrix organization 80f, 80, 81

mechanical engineering 259f, 263

R&D leaders 63

share of sales with original product

innovation 62f

media 20, 64b

WCM optimization levers 242b

medical procedures 228

medical research 226b, 227

medicine technology measuring and control/

share of sales with original product

innovation 62f

mega networks 99f, 100

Mercedes 27, 65, 67

merge-in-transit procedures 204

mergers and acquisitions (M&A) xiv, xvii, 15,

34, 129, 160b, 257, 265, 267f

me-too product 63, 63f

middle class 145

Middle East 107f, 108, 238

Milan xviii

mindset 51, 93

end-to-end 268

‘one-supply-chain-fits-all’ 199

reducing cost 25–8

mineral resources 24

Mini brand (BMW) 203

MIT 19b

mobile telephone companies 20

mobile telephones 204

model proliferation (automotive) 64, 66f

models 220

modular construction concepts 52

modular construction system 58

modular sourcing 121f, 254f, 255

module cost 38n

modules 28–9, 32, 48f, 53–4, 56

molecular medicine 13–14

Mologen 13–14

monitoring 141–2, 158–9, 207, 240, 253f

accounts receivable 239

business processes 198

commodity management 229

complexity management 224f, 225

cross-function 254f, 255

KPIs 230

maintenance control 185

maintenance costs 180f, 184

manufacturing excellence 169, 171f, 173

payment patterns 252

ROCE or company value 235

supply chain 199, 208, 261, 262

WCM 241

motivation 120, 122f, 132, 182, 262

motor-cycles 144

MP3 files 18b

multinational purchasing environment 102

multiple reporting lines 161

Munich xv, xvi

music industry 18–19b, 20, 22(n3)

Nagashima Satoshi xiv–xv, 8

Nakamura, K. 80, 81, 88

Napster 18b

natural resources 103f, 103–4

near-sourcing 107

negotiation power 133–4

Index 285

9780230_217805_18_Index.3d 6/3/2008 14:48:17

Negroponte, N. 19b

net meeting 56

network coordination model 14

network effect strategy 70f

networked systems 212

networks 13f, 51, 200f, 222f

new entrants 16, 18f, 96, 144

new product development 221

niche markets 61, 64–5

Nike/business model 15, 22(n2)

Niketowns 15

Nissan 124

Nissan/team management, 88, 89

non-price factors 112

North Africa 107f

North America 46, 66f, 79, 137f, 138, 144,

145, 243

North America/automotive manufacturers

(time-to-market) 84

NZZ (Swiss newspaper) 65tb

obsoletion 14

OEE 180f

office services 193f

offshoring 149–50, 152, 213, 265

oil xiii, 24, 192, 219f, 243




oligopoly 18b

one-face-to-customer principle 251

openness to changes 32

operating earnings 235, 236f

operating styles and processes 257

operational costs 224f

operational expenditures (opex) 97, 98f, 139

operational managers 249

operational support 187f, 188

operations excellence

factor of differentiation 146

four fields of action 2–3

global manufacturing networks 146

manufacturing (Part III) 143–96

purchasing (Part II) 91–142

research and development (Part I) 5–90

questions 1

supply chain management (Part IV)

197–269

three levels 2, 3f

operator models 13

opportunity players 77

optimization

assembly 34

complexity management 221

cost-savings 156

costs 37, 119

design 34

global manufacturing footprint 147–61

global supply chains 204–5

innovative levers 95

inventories 237–42

lead buying 139b

liquidity 248

manufacturing footprint 148,

manufacturing performance 174

manufacturing process 34

miscellaneous xii, 75b

plant network 162, 163

price 116–17, 117f

production sequences 174

products and costs 44

purchasing 99f, 140f, 228

purchasing organization and processes 120,

122–4

revenue, cost, time-to-market 68f, 69, 70f, 71

site services 194b

supplier base 127

supply chain 199, 204–5, 206–7, 208, 262,

264

use of resources 133

working capital 247, 248f, 252–5

working capital management 232, 237, 256

see also best practice

order batch size 254f, 255

order handling 210, 211, 215

order management 3f, 250–5

order moratoriums 254f, 255

order processing 180f, 209f, 261

order scheduling 241b

order segmentation 254f, 255

order type 266

order-to-cash 237, 238, 250

order-to-pay processes 120

ordering (inter company) 211

orders (lost) 65tb

organization 52f

effective and efficient WCM 250–2

equipment maintenance 180f 181–3

lean, structured 227

‘what really matters in global world’ 46–7

286 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

organization transition 266

organizational form 2

organizational options 266, 268

organizational set-up 186, 187f

organizational talents: supply chain

organizations 258–63, 268

organizations drive strategy and performance:

insights from lead buying models (chap-

ter eight) 95, 131–42


lead buying in automotive industry 135

lead buying in automotive industry (case

study) 135–9b

lead buying in utilities industry 139

lead buying in utilities industry (case study)

139–41b

procurement organizations: types 132–4

transformation teething problems 134–5

original equipment manufacturers (OEMs)

38f, 39f, 46, 59, 64, 67, 82, 109, 135, 148,

151, 152, 155, 203, 234f

core competencies 65

R&D budgets 66f

outlook

global development made successful 59

global manufacturing footprint: optimiza-

tion 160–1

innovation management 75, 78

manufacturing excellence 173

manufacturing performance 196

organizations drive strategy and perfor-

mance: insights from lead buying

141–2

purchasing: key trends in best practices and

impact on purchasing strategy 111–13


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



see also healthcare sector

Index 287

9780230_217805_18_Index.3d 6/3/2008 14:48:17

Phonak 61

pilot projects 215

complexity cost-reduction 224f, 225

planning 239

bottom-up 240

plant data collection 186, 187f

plant engineering 12, 189f, 190

plant managers 169, 170f

plant networks 169

optimization 162, 163

quantitative analysis 166–8

plant performance 165f

plant selection 165

plant visits (‘deep dive’) 166, 167f

plants 150, 212, 213

consolidated 209f

differential quality (even within same

company) 162

on-site analysis 165f

PlayStations 19b

PM committee 141f

Poland 108

political instability/turmoil 24, 157

political stability 111, 156f, 156

political risk 156f, 156

Porsche 51

portfolio adjustment 254f, 255

portfolio development (holistic approach) 221

portfolio management 74f, 75b

portfolio planning 74f

portfolio reporting 75b

power plays 215

power train 79, 80f

PPC optimization 254f, 255

pragmatism 188

R&D management 77

premiums 55

prescriber-user-buyer triangle 101

price/s 15, 24, 37, 41b, 42, 44, 46, 92, 96, 101,

103–4, 106, 242b, 265

price adjustments 240

price crash 63f

price development 116f

price discounts 254

price elasticity of demand 16

price negotiations 97, 98f

price optimization 116–17, 117f, 120, 121f

pricing strategy 72

process chain 114

process costs 37, 88, 115, 120, 122f, 124

process design 186, 187f

process gap analysis 225

process improvements 38n, 41

process innovation 13f

process optimization xv, 3, 117f

process ownership 209

process quality 116

process re-design 117f, 118, 120, 121f

process responsibility

end-to-end 266

process-orientation


process-streamlining

improves profitability 210–12

processes xii, 3f, 6, 30, 34, 42, 47, 52f, 106,

163, 165f, 239

best 2

complexity tax 218

development to production 93

equipment maintenance 180f, 181

internal alignment 129

qualitative assessment 238

well-defined 82

see also business processes

procurement xiii, xiv, 186, 193f, 196f

global responsibility 159b

production and operational 209

second ‘field of action’ 2, 91–142

see also purchasing

procurement councils 129

procurement organizations: types 132–4

centralized 132, 132f, 133

decentralized 132, 132f, 133–4

lead buying 132, 132f, 134

procurement processes 123–4

product availability 177, 186, 204, 241b

product chief designer (Nissan) 89

product costs

drivers 28–31

‘eighty per cent defined during develop-

ment phase’ 30, 46, 83

influencing factors 26f, 26–8

product departments 41

product design 27–8, 29, 31, 38n, 63, 63f, 83,

150


‘errors’ 30

product design department 33f

product development xvi, 22, 66f, 79, 82,

126f, 126–7, 220

288 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

business areas 51

continuous 15

cost 37

factors 9

global (status quo and trends) 46

global (tailored to evolving circumstances)

47–51

global footprint 72

globalization 90

levers 7

regions 51

successful 6–8

product development function 220

product development organization 81, 88

functional departments (Japan) 79

product differentiation 71

product functions 36f, 63f

product innovation 7, 13f, 19–22, 203

product launches 65

product life-cycle 26f, 31, 37, 71, 101, 110,

204, 221tb

product loss 179

product modularization 71

product planning xv, 27, 58, 85, 89, 166

product portfolios xvii, 50, 69, 201–6, 208,

211, 217, 230, 241b

complexity 218

customized 62

leaner 228

young 61

product positioning 26f, 26

product quality 30, 46, 116, 146, 185, 187f

product range 165f

product repair 46

product road-mapping 70f, 72

product segments 21, 261, 268

product specification 29

requirements 26f, 27

product standards 17f, 21

product strategy 52

product structure 58, 149f

product testing 150

product/market combination 10f, 10, 11, 15,

16, 17f, 21

Mologen 13–14

music industry 20

Nike 15

production xiii, 165, 189f, 193f, 195, 199,

209f, 212f, 217, 233, 239, 250, 250f, 251,

253f, 265

Adidas 202

complexity tax 219f

de-localization 150

first ‘field of action’ 2, 5–90

flexibility 258

global networks 145

global 47

lean 201, 214b

link with forecasting 107

projects bound for failure (early stopping)

7, 22

start 85, 89

technology-intensive 213

world-class system 164f

production batch size 254f, 255

production bottlenecks 28, 29–30, 44

production capabilities 3f

production capacity 64b, 201, 211

utilization 264

production costs 147, 218, 223

share of equipment costs 179

production data 186

production departments 32, 41

production and distribution network

consolidation (saves time and money)

212–14

production efficiency 31

production layout 254f, 255

production life-cycle 94

production lines 29, 182, 184

critical 190–1b

production logistics 172b

production moratoriums 254f, 255

production networks 172b, 206, 254f, 255

Adidas 202

cross-border 212–13

global (leveraging manufacturing excel-

lence) 162–73

production planning 165f, 172b, 177, 186,

211, 215, 241b, 261

centralized 212

production processes 172b, 211

reduced complexity 224f

production segment 254f, 255

production sites 1

production standards 108

production strategies 212

production structures 215

production support functions (independent of

location) 193f, 196

Index 289

9780230_217805_18_Index.3d 6/3/2008 14:48:17

production system (world-class) 164f

production units 209f

production volumes 210

production-smoothing 254f, 255

productivity 40n, 41, 88, 199

products 1, 6, 58, 163, 266

built to last 26–7

co-development by companies and suppli-

ers 109

with competitive disadvantages 63, 63f

cutting-edge 119

ecological 46

high-technology, low-technology 145

industrial 218

joint development 128

labour-intensive 146

legal and geographical differences 47

‘localized’ 47

make-to-forecast versus make-to-stock 211

modular 161

non-standard versus standard 228, 229, 230

overly expensive 63

structure 56

target cost 63, 63f

technical weaknesses 63f

universal 51

unprofitable, low-volume 206

value-added 108

weaknesses in market environment 63f

professional buyers 97, 98f

profit and loss account 120, 166, 240

profit margin 199

profitability 7, 116f, 207, 221, 225, 235

importance of complexity management 218

improved by reducing complexity and

streamlining processes 210–12

return on sales 210

short-term improvements 100

profit-and-loss account 101

profits 21, 24, 242b

programme director (Nissan) 89

project cancellation 74f, 75b

project implementation 73b, 75b

project launch 74f, 75b

project management 42, 72, 100

project managers 170f, 170

project portfolio

balanced 71

ideal 73b

project/complex purchasing 139–41b

project-based set-up 29

projects

commercial focus or business case 73b

property prices 158f

prototype evaluation 85, 86–7f

prototype manufacturing 49f

prototyping 65, 71, 72

public sector 13

public-private partnership (PPP) 13

Puma 15

pump repair 180f

purchase-to-pay 237, 238, 250

purchasing

best practice 127–30, 135

best practices and impact on purchasing

strategy (chapter six) 94, 96–113

complexity tax 219f

cross-BU information system 123

global 128

group-wide coordination 141b

implementation plan 122

integrated strategy 136, 136f

internet and B-2-B solutions 128

introduction 92–5

leverage 136

long-term plans 110

miscellaneous xii–xiv, xvi, 8, 30, 54, 58,

226b, 233, 239, 250, 250f, 251, 253f,

261

no singular one-fits-all approach 94

optimization xiii, 228

order frequency 140b

organizational frameworks 95, 131–42

organizational structure 99

outsourcing know-how 93

pace of change 110

performance measurements 101

process optimization 140f

procurement 254f, 255

second ‘field of action’ 2, 3f, 91–142

simplistic strategies 111

sourcing solutions 130

standardization 229

‘strategic’ 100

strategic direction 93–4

strategic versus operational 120

strategic skills 100

strategy and performance (lead buying

models) (chapter eight) 95, 131–42

structured approach 97, 98f

290 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

‘tactical’ 100

world-class (chapter seven) 94–5, 114–30

see also procurement

purchasing: key trends in best practices and

impact on purchasing strategy (chapter

six) 94, 96–113

challenges (current) 99–102

challenges (new) 102–4

introduction 96–7

LCC sourcing 104–8

long-term plan 110–11

maturity steps at purchasing organizations

98f

purchasing today 97–9

supplier relationships 108–10

TCO approaches 112tb

purchasing budget 101

purchasing clusters 139b, 140f, 140b

purchasing codes 229

purchasing costs 32

‘procurement costs’ xv, 92, 186

external versus internal 92

savings xv, 97

purchasing departments 25, 29, 32, 41, 46, 57,

92, 96, 100, 101, 104, 122–3, 130, 132,

139, 239, 240, 242b, 265

global 47

purchasing empires 93

Purchasing EmPowerment (PEP) (Roland

Berger) (chapter seven) 94–5, 114–30

best-in-class (global) 127–30


managing the supply base 124–7

optimizing purchasing organization and

processes 120, 122–4

strategic commodity management (six-

lever approach to optimizing costs)

115–20, 121f

purchasing excellence xvi, 97, 113, 114

purchasing fads 131

purchasing functions 258

purchasing information 102, 120, 122f

purchasing know-how 120, 122f, 123

purchasing lifecycle 100

purchasing managers xvi, 141f, 259f

purchasing organization/s

life-cycle (three-stage) 97–9

maturity steps 98f

optimization 115, 120, 122–4

see also procurement organizations

purchasing performance 109–10

purchasing philosophy 98f, 99

purchasing power 226b, 229

purchasing processes: optimization 120, 122–4

purchasing professionals/staff 137

experience and educational level 112

skill gap 99f, 100

skilled 130, 132

purchasing strategy 94, 96–113

purchasing volumes 58

qualitative targets 55

quality 15, 28, 30, 84, 96, 101, 106–10,

112, 116f, 125, 129–30, 145, 150,

151, 154

consistency 104

processes 146

product and service 177

targeted 26f, 26–7

quality certification 109

quality control 174–96

returns 254f, 255

quality control department 174

quality gaps 31, 84

quality gates 7, 55, 72, 73b, 75b, 77

quality improvements 118

quality leadership 9, 11

quality standards 62

quantitative analysis 228, 238

quantity leverage 117f, 117–18, 120, 121f

questionnaires 158, 165f, 166, 223, 248

quick wins 69, 106, 117, 164f, 220,

229, 235

raw materials 103, 128, 193f, 225

availability 116f

costs 110

inventory 264

procurement 148

re-engineering 110

‘re-invention of wheel’ 56, 71, 73b

re-sale 254f, 255

re-work 39f, 40f

reactivity 102

real estate 191b, 192b, 193f

recall expenditures 30

recession 92

refineries 175

core functions versus support functions

194, 194–6b

Index 291

9780230_217805_18_Index.3d 6/3/2008 14:48:17

refinery organization

elements needed for high performance 194f

flexibility 194–6b

refining organizations/new developments

192–6

regional commodity leader (RCL) 138, 138f

regional directors 170f, 170

Registration, Evaluation, and Authorization

of Chemicals (REACH) 104

regulatory environment 103f, 104, 111

relationship re-definition and user-involve-

ment 97–9

reliability 106–9, 150, 158, 175, 177, 202,

214b

relocation scenarios 153–4

Renault 89, 124

Renault-Nissan 51

repair costs 176f, 177

reputation 15, 30, 64

request for quotation (RFQ) 128

research and development 5–90

automotive industry 45–60

business models: impact on product devel-

opment (chapter one) 7, 9–23

clever cost approach design 24–44

company clusters 6

corporate strategy 77

first ‘field of action’ 2, 3f, 5–90

global 47

global development made successful

(chapter three) 7–8, 45–60

global network (allocation of core

competencies) 49f

globalization: success factors 76–7tb

historical growth 77

innovate to win (chapter two) 7, 24–44

innovation management/success factors

and levers for best practice (chapter

four) 8, 61–78

organizational changes: careful

implementation 77

organizational practices 79

outsmarting competition 24–44

pragmatic management 77

product development (successful) 6–8

questions 7

retention of experts 77

smart engineering processes (chapter five) 8,

79–90

splitting among sites 50

research and development: miscellaneous xiii,

xv, 124, 129, 135, 185, 196f

R&D budgets 47

R&D capacity 65

R&D departments 46, 51, 78

R&D investment 151

R&D networks 56, 64b, 76, 77

R&D organizations 57, 58

R&D partnership 70f, 71

R&D projects (value analysis) 63f

R&D structures 59

R&D workforce (rationalization) 57

resistance to change 169

resource allocation 83, 218–19

resource gap 22

responsibility 53f, 80, 81, 82, 138–9b, 142,

169, 172b, 206, 225, 241, 251, 259f, 261,

265, 266

end-to-end 268

SCM 208–9

retail sector/retailers xii, xiv, xvi, 41, 203, 258

out-of-stock rate 204

return on capital employed (ROCE) 195, 199,

201, 207, 210

drivers 236f

Europe’s top five hundred companies 235

return on equity 13

return on sales 61, 62f

returns/claims 254f, 255

revenue levers/innovation management

69–71

revenue mechanism 10f, 10, 11, 13–16, 17f, 21

Mologen 14

music industry 20

transaction-based 14

revenue performance 68f, 71

revenues 21

non-transaction based 10

transaction-based 10

reverse auctioning 92

reverse logistics 261

Rhone-Poulenc 191b

risk 51, 71, 106, 144, 148, 150, 151, 153, 154,

157, 161, 225

equipment failure 179, 181

risk evaluation 149f

risk management 100, 111

risk portfolio 74f

risk priority number (RPN) 187f

roads 49f, 104

292 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

Roland Berger Innovation Toolbox 62, 67–78

levers, success factors, cross-industry

experience 72

Roland Berger Strategy Consultants

automotive industry (innovation

performance) 66f

best practice (working capital excellence) 243

complexity management 218, 226b, 231

complexity tax 219f

complexity-related costs 218

equipment maintenance 186

five-year purchasing plan devised for steel

corporation 110–11

global manufacturing footprint 148

globalization of R&D 46

lead buying (automotive industry) 135b

‘lead concept’ 53f

lead engineering concept 57

maintenance excellence 175


177, 178f, 179

maturity steps at purchasing organizations

98f

miscellaneous iii, iv, xii–xviii, 6, 25, 32,

33n, 35–6n, 39n, 43n

operations strategy team 263

purchasing (embedding in corporate struc-

tures) 120

Purchasing EmPowerment 94, 114–30

purchasing plans 97

risk-based method 179, 181

risk-driven approach 186

SCM: end-to-end framework 199, 200f,

201, 205, 206, 214b

strategic aspects of R&D re-location 76–7tb

supplier development benchmarking

study 109

supplier-management survey 125

survey amongst R&D leaders in mechan-

ical engineering 63

tools 43f

WCM: crucial factor 241

WCM: optimization levers 241, 241–2b

working capital optimization 232, 235,

237–42, 248n

Roland Berger Strategy Consultants: supply

chain organization 257–8, 263–8,

268(n1)

step 1: understanding internal and external

factors 264–6 , 267f

step 2: develop and assess organizational

options 264, 266 , 268

step 3: agree on target organization before

defining steps for transformation 264

Roland Berger Strategy Consultants: working

capital management 237–42

step 1: achieve transparency 237–8

step 2: perform benchmarks and set targets

238–9

step 3: define levers and actions 239–41,

step 4: secure buy-in and implement

measures 241–2

roll-out/manufacturing excellence 168–9

Romania 108

round table 262

‘run to failure’ (minimum maintenance) 175

Ryanair 11

safety recalls (automotive industry) 64–5

sale and lease back 119, 121f

sales xii, xv, 7, 54, 66f, 84, 149, 186, 198, 202,

208, 210, 233, 235, 236f, 243, 245f, 251,

252, 253f, 262

annual 258, 259f

inter-company 238

lost 64, 175–7, 190, 204

sales activities 50

sales channels 45, 238

sales costs 37

sales departments 32, 41, 57, 58, 220,

239, 240

sales directors 251

sales and distribution networks 147

sales force 27

sales forecasts 252, 261

sales growth 206

sales and marketing (Nissan) 89

sales planning 254f, 255

sales representatives 228

power 230

sales staff 262

sales targets 217

sales volumes 157

savings potential 33f

scenarios 19–20

scheduling strategy 254f, 255

Schmidt, A. xvi

Schr€oter, I. xvi, 200

Schwientek, R. xvi, 200

sea transport 104

Index 293

9780230_217805_18_Index.3d 6/3/2008 14:48:17

Seat 30

segmentation

industrial 210

needs-based 223

product structure 153–4


see also business segments

sen-pai (predecessors) 82

sensitivity analysis 154

series production 37

service innovation 7, 19–22

service levels 107f, 203, 208, 209f, 264

service providers 127, 182

service quality 185, 187f

services xiii, 37, 92, 153

shared 141f, 141b, 196f, 207, 208, 209,

213, 268

standardized 140b

set-based process 83

setup times 254f, 255

shareholders 75b

sheet metal 29

ship-to-request service 205b

shipments (inter-company) 213–14

shipping 209, 215

shipping charges/costs 205, 210

shipping functions 208

shop-floor control 172b

shortages 104, 111

Shukan (Nissan equivalent of HWPM) 89

Shusa (chief) 80, 82

Shusa/strong empowerment by top manage-

ment 81

Siemens 123

Silicon Valley 25

simplification: sourcing strategy 116f, 116

simulation 85, 87f, 240

simultaneous engineering 70f, 71

simultaneous product and process optimiza-

tion, 33f, 37, 36f

Singaby, G-A. xvii, 94

Singapore Airlines 65tb

single design method 83

site fitness programme (SFP) 192, 194,

194–5b

site infrastructure 191b

site managers 175

sites 53f

skills 112

availability 158f

internal 183, 186

specialized 181–2, 210

specific 156f, 156

see also expertise

Skoda 30

Skype 21

Slovakia 108

smart engineering processes (Japan) (chapter

five) 8, 79–90

challenges 90

history of HWPM 80–1

HWPM organizations: initiatives for

change 88–9

HWPM practices 82–8

HWPM: success factors 81–2


snacks manufacturer/‘scalable’ versus

‘differentiating’ activities 226

socio-cultural factors 18f

soft skills 100, 142

software 21, 49f, 154f, 184

sourcing xiii, 56


global 121f, 122, 131, 238

large-scale 108

second ‘field of action’ 2, 91–142

value-added 108

sourcing department 33f

sourcing excellence 96

sourcing processes 106, 138f

sourcing security 96

sourcing strategies 116f, 116

‘keeping up with fashion’ 105

South Africa 39f, 49f

South America xv, 49f, 137f, 138, 238, 243

South-East Asia 144

Southern Europe 238

Soviet Union 24

Spain 64b, 212f

spare parts 179, 180f, 183–4, 185, 186, 195

special product managers 81

speciality buyer 141f

specialization xii–xviii, 10, 14, 20, 77,

190, 213

‘division of labour’ 201, 203

global 48f

speed 266

sporting goods 15

stability/financial 146

staff rotation 57, 262

294 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

stage gates 77

stakeholder expectations 125

stakeholder inclusion 32

stakeholder needs 101

stakeholders 42, 105, 115

standard procedures 257

standard purchasing 139b, 140f, 140b, 141f

standard-setting 70f

standardization 47, 56, 58, 118, 121f, 136,

137, 140b, 171f

global 51

product and packaging 223

purchasing/procurement 229, 254f, 255

targets 57

standardization councils 230

standardized data warehousing 55

standardized KPIs and performance mea-

sures/lead engineering 52f, 55

standardized processes


standards, labour and environmental 144

statistical data 179

steel xiii, 160b, 219f



stock markets 233

stock-keeping

centralized versus de-centralized

strategy 185

stock-keeping units (SKUs) 222f, 225, 230

rationalization 220, 221tb

stocks 204

storage 40n

strategic alliances 45, 47, 51, 52, 57, 59, 94

strategic capacity planning 213

strategic commodity management/six-lever

approach to optimizing costs 115–20

strategic corporate goals/long-term 125

strategic partnerships/purchasing 94

strategic pricing 70f

strategy 7, 52f, 58

equipment maintenance 179–81

first level of operations excellence 2, 3f

revision 187f, 188

structural organization (innovation enabler)

72

Stuttgart xii, xv, xvi

sub-assembly 152

sub-contractor management 166, 167f

sub-suppliers 103, 155

sub-systems 56

subsidiary companies 131

second-tier 141f, 141b

substitute products 16, 18f, 29

supplier base 1, 116f, 123, 128, 160b, 161,

227, 254f, 255,

optimization 127

supplier base management 124–7

supplier code structure 123

supplier coordination/key blocking point 263

supplier data 102

supplier development 39f, 109

supplier financing 119, 121f

supplier integration 70f, 117f, 119, 120, 121f,

126–7, 254f, 255, 268

supplier management xiii, 79, 95, 100, 115

development stages 125

success factors 126, 126f

supplier manufacturing analysis 33f, 40f,

41, 121f

supplier markets 111

supplier matrix 29

supplier networks 155

complexity 103f

structure 103

supplier partnerships/‘never easy or

comfortable’ 112

supplier performance 109

supplier productivity 110

supplier proximity 156f, 156

supplier relationships 108–10, 133, 142

success factors 110

supplier selection 112

suppliers 6, 16, 18f, 38f, 41, 43f, 44, 53, 59,

65, 72b, 90, 93, 94, 97, 114,117f, 117,

123, 130, 135, 137, 142, 147–51, 157,

158, 185, 203, 210, 229, 230, 235, 239,

262, 263

Adidas 202

automotive 148

bargaining power 116f

best-price 31

collaborative planning 261

costs and margins 102

equipment 181, 182

external view 41

first-tier 155

global information pool 124

global management 129–30

in-lead 47

Index 295

9780230_217805_18_Index.3d 6/3/2008 14:48:17

suppliers – continued

inter-dependence (with companies being

supplied) 103

lack of open discourse with 101

performance measurement 112

pooling 118

reduced in number 58

second-tier 118, 121f

second-tier (certification requirements) 155

strategic or key 37

Toyota database 88

supply base 54, 123

global 146

proactive development 106

supply chain/s

central control function 264

complexity reduction 207f

delegation of responsibility (ensures

account ownership) 208–9

driver of product costs 31

external 261, 263

external coordination 262–3

global optimization 204–5

goals and targets 261

hidden cash reserves 232–56

internal 261

miscellaneous xviii, 1, 39f, 104, 106, 115,

233

‘one-size-fits-all never’ 207

operative functions 261

single global responsibility 265

strategic staff functions 261

temporary functions 261

trends and challenges 202–4

supply chain costs 204, 205b

supply chain deficits 205

supply chain department 33f

supply chain enablers 200f, 206, 207f

supply chain functions/non-core 209

supply chain leaders 215

supply chain management (SCM) 197–269

change-management 200f

complexity management (starting point for

improving performance) (chapter thir-

teen) 199–200, 216–31

control 200f

country-focused versus BU-focused 211

end-to-end 263

fourth ‘field of action’ 2, 3f, 3, 197–269

holistic re-alignment 215

holistic view 232

importance 198–200, 263

miscellaneous xiii–xvii, 92, 124, 186

‘more than just logistics’ 198–200

‘most cross-functional of core business

disciplines’ 268

networks 200f

optimization xvi, 208

organization and resources 200f

pilot units 215

processes and systems 200f

Roland Berger’s end-to-end framework

199, 200f, 201, 205, 206, 214b

supply chain organization (key enabler for

successful SCM) (chapter fifteen) 200,

257–69

trends 201

working capital excellence (chapter four-

teen) 200, 232–56

supply chain management: success factor for

global players (chapter twelve) 199,

201–15

case study: framework (electronic

components) 205–14b

consolidating production and distribution

network (saves time and money)

212–14b

definition of strategy and target 207–8b

delegating supply chain responsibility

(ensures account ownership) 208–9b

direct ordering (elimination of inter-

company flows) 212f

holistic supply chain optimization 206–7b


monitoring supply chain (creates global

transparency) 209–10b

optimizing global supply chains (a success

story) 204–5, 205–14b

reducing complexity and streamlining

processes (improves profitability)

210–12b

results (speak for themselves) 214b

success factors (implementation) 214–15

trends and challenges in supply chains

202–4

supply chain managers 209, 259f,

266, 267f

supply chain monitoring 207f

creates global transparency 209–10

supply chain network 207f

296 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

supply chain organization (key enabler for

successful SCM) (chapter fifteen) 200,

257–69

best practice (food for thought) 263

coordination of external supply chain 260,

262–3

coordination tools 260, 261–2

implementation 260–1


‘no single golden way’ 268

organizational talents master their supply

chain organizations 258–63

questions 263

Roland Berger’s approach 263–8

sustainability 268

‘what-if’ scenario analysis 268

supply chain performance 200f, 206, 207f

supply chain planning 261, 262

supply chain processes 207f

supply chain responsibility 207f

supply chain segmentation 211

supply chain strategy 200f, 206, 207f

definition 207–8, 209f

supply chain targets 207–8, 209f

supply chain transparency 145

supply conditions 220

supply costs 221tb

supply market challenge 115, 116f

support function/s

benefits 177

costs 176f

impact on manufacturing performance

175–7


177–84

support for 185

support service functions 194

SUVs 49f

Switzerland xii, xv, 61, 65tb, 212

synergies 52f, 52, 59, 93, 112, 122–3, 127,

128, 136, 136f, 139b, 191b, 196, 208,

209, 214b, 226b, 227, 263, 264

cross-business 135

cross-segment 268

purchasing 99f, 133

system architecture 52

system suppliers 39f, 127

systematic commodity management 95

systems 32, 48f, 56, 265

complexity tax 218

supply chain 267f

Systems Applications and Products (SAP) xx,

44b, 56, 184

‘target costing’ 70f, 85, 92

see also ‘cost planning’

target-pricing 112, 121f

target-setting 55, 135, 240

WCM 237, 238–9

targets 169

resource and financial market-oriented 13f

standardized 57

top-down versus bottom-up 239

tariffs 145

tax regulations 265, 267f

taxation 158f

taxi companies 80

team work 40n

technical benchmarking (DFMA) 32–4

technical centres 50, 50f, 54

technical cooperation 110

technical improvement 117f, 118–19,

120, 121f

technical modifications 58

technical problems 65tb

technical solutions (perfect) 63, 63f

technical standards 24, 58

technological/technical capabilities 154,

155, 158

technological factors 18f

technological gap 147

technological innovation 14

technology 1, 26f, 27, 34, 49f, 76, 81, 92, 150,

153, 157, 159, 160b, 165, 222f

concentration 77

time-saving 71

technology hunters 77

technology life-cycle 220

technology plan 72b

technology road-maps 70f, 72

technology transfer 150, 154, 159b

telecommunications xvii, 219f




testing 40f, 46, 51, 71, 84

testing (automotive) 79, 80f

Texas 192

‘think globally, act locally’ 51

third-party warehouse management 254f, 255

Index 297

9780230_217805_18_Index.3d 6/3/2008 14:48:17

time 9, 13–14, 15, 28, 42, 44b, 56, 57, 64b, 67,

83–4, 88, 116f, 122, 124, 128, 150, 156,

157, 181, 183, 192, 195, 206, 267f

deadlines 54, 55, 205b, 214b, 241, 260f,

260

idle periods 190

start-up losses 262

supplier research 102

time to market 68f, 84–5, 124

time zones 52

time-saving 212–14

timing 21–2, 43f

graduated reaction strategy 22

market entry 109

timing levers (innovation management) 70,

71–2

Tokyo xiv

tools/tooling 46, 52f, 85

top management 16, 19, 44b, 57, 80, 89, 100,

169, 172, 173b, 215, 229, 231, 235, 240,

248–9, 251, 256, 260, 268

global sourcing 106

managing complexity 220

strong empowerment of Shusa 81

top-line growth, service performance 200f

total cost of ownership (TCO) 32, 33f, 37, 39f,

96, 98f, 99, 99f, 100–1, 111, 112, 113,

121f, 124, 149, 154

over-arching benefit 112

total quality control 79

Toyoda, K. 80

Toyota xvii

chief engineers 88

database of global suppliers 88

HWPM concept 80–2, 83

lean manufacturing 162

Toyota: Research Division 89

Toyota Central Laboratories 89

Toyota concept planner 88, 89

Toyota Home 1–2

trade agreements/bilateral 107

tradition 82

training 109, 110, 120, 122f, 123,

181, 182, 185, 192, 193f, 237, 241,

251–2, 262

maintenance tasks 190–1b

strategic purchasing professionals 100

training costs 175

transaction costs 203

transparency 55–6, 102, 110, 120, 129, 163,

164–5f, 185, 206, 218, 221, 226, 227,

249, 266

complexity (three-step approach) 223–6,

228–30

purchasing 122f, 122, 123

supply-chain monitoring 209–10

working capital 238, 256

transport/transportation xvi, xvii, 40n,

104, 111, 145, 157, 193f, 198, 201,

243, 268

congestion 103f

costs 107, 151–3, 260f, 260

distances 107, 107f, 108

Triad countries/region 144–6

trial production, 85, 86–7f, 90

Trumpf (machinery producer) 2

trust 37, 42, 55, 64, 144

T-shaped project design 163, 165f

turnaround times 260f, 260

turnover ratios 239, 244

Ukraine 108

uncertainty 134, 212

unemployment 156

‘job reductions’ 192

unique selling point 6

unit costs 101, 115

unit prices 97, 98f, 101

United Kingdom 25, 49f, 212f

United States of America xv, 42, 49f, 81

Universal [corporation] 19b

universities xii–xviii, 72b, 89

university clinics 117

university hospitals/state-owned (tackling

complexity from sourcing side) (case

study) 226–30b

UNSPSC 137

upstream operations 152

utilities xiii, 92, 158f, 175, 193f,

219f, 243


industry benchmark for debtor

days 245f


utilities supply 175

utility ‘innovation to cash’ (case study)

72–5b

utility purchasing 139b, 140f, 140b, 141f

298 Index

9780230_217805_18_Index.3d 6/3/2008 14:48:17

value analysis 33f, 34, 35f, 63–4, 70f, 71, 74f,

118, 121f

R&D projects 63f

value chain 3f, 13, 14, 28, 33f, 94, 103, 115,

119, 127, 148, 153, 196, 220, 250

best-practice 164f

top-down assessment 223

global/globalization 201, 202

networked 201, 203

value chain configuration 10f, 10, 11, 15, 16,

17f, 21, 117f

Mologen 14

music industry 20

value chain deconstruction 121f

value chain mapping 33f, 37, 39f, 41, 121f

value chain structures 201, 214

value creation 1, 59, 68f, 92, 121f, 198, 200f,

216, 225

value focus 73b

value-added 7, 69, 105, 108, 152, 194–5b,

221, 223, 224f, 240

internal 10

thresholds 225

value-based management principles 242b

vehicle development 54, 89

vehicle development centres (VDCs) 88

vehicles 38f, 49f, 119, 184

braking concept 53

fastest-growing markets 46–7

see also automotive industry

vendor-managed inventories 119, 121f

vendors 210, 244

vertical integration 10, 13f, 14, 18b, 20, 92,

94, 119, 203, 238, 244, 254f, 255,

veterinary medicine 14

virtualization techniques 72

Volkswagen 30

volume bundling 118, 121f, 123, 137, 229

volume concentration 97, 98f

wages/salaries 107f, 156, 205, 236f

performance-based 262

warehouses/warehousing 31, 193f, 195,

198, 201, 205–9, 211–15, 217, 254f,

255, 268

consolidation 213–14

national 209f

regional 211, 213–14

warranty 109, 110

waste/wastage 41, 162, 175, 193f, 227

water utility 242b

weak signals 16, 19b, 22, 72

Web EDI 121f

Weisenstein, S. xvii, 146

Weiss, M. 178n

western countries/markets 105, 147

Western Europe 144, 145, 198, 264

procurement costs (external versus

internal) 92

white-spot analysis 74f

Wissenschaftliche Hochschule f€ur Unterneh-

mensf€uhrung (WHU): Otto Beisheim

School of Management 257, 268(n1)

Wittenstein 61

work (labour-intensive) 150

work duplication 120

work plans 54

work-sharing agreements 151

workers 40f, 40n, 41

workflows 41, 47, 56

workforce 28, 150, 153, 156f, 156, 161

educated 108, 146

gaps 192

low-cost 46

working capital 3f, 3, 200, 205, 264

learning from best practice 243

optimization xvi, 121f, 237

optimization levers 242b, 244, 256

productivity 235

reduction 235, 236f

working capital excellence: how companies

tap hidden cash reserves in supply

chain (chapter fourteen) xii, xvi, 200,

232–56

best-practice companies (fifteen per cent of

participants) 243–4, 245–6f

bottom line (untapped potential persists in

all industries) 256

consumer goods industry (case study) 241b

crafting effective organization 247, 250–2,

256

current and targeted future status 246f

energy sector (case study) 242b


introduction 232

inventory management (vast store of

untapped process potential) 247,

252–5, 256

making working capital work 233–5, 236f

media group (case study) 242b

Index 299

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working capital excellence – continued

optimization potential for all three working

capital items 247, 248f

optimizing working capital (Roland Ber-

ger’s approach) 235, 237–42

top-down targets and strategies to manage

working capital 247, 248–50, 256

working capital management (WCM)

best practice 232

direct and indirect influence 236f

importance in near future

244, 247

levers (current use and future importance,

by industry) 248f

workshops [meetings] 43f, 239, 240

world economy 103

World Trade Organization 105

Yahoo! 21

young people 19b

300 Index

Operations Excellence

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