A Stronger Chain of Command

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Last updated: June 7, 2019

A stronger chain of command By Daniel Schafer in Frankfurt Published: October 11 2010 23:09 | Last updated: October 11 2010 23:09 | | |Engineering change: Siemens has made supply chains a priority | When Barbara Kux arrived at Siemens in late 2008 to head the German engineering group’s newly created supply chain management organisation, she soon discovered how badly her appointment had been needed.On evaluating Siemens’ supplier base, she was astonished to discover that Europe’s largest engineering company listed some of its 113,000 suppliers several times in its purchasing databases. EDITOR’S CHOICE Siemens’ unsackable German staff – Sep-29 Editorial Comment: Safe at Siemens – Sep-23 Siemens promises workers jobs for life – Sep-22 Nokia and Siemens consider private equity talks – Aug-29 Gloom starts to lift for Nokia Siemens Networks – Aug-29 Siemens boosted by jump in new orders – Jul-29 The discovery laid bare the lack of transparency and the inefficiencies in the group’s decentralised purchasing system.Ms Kux’s experience will be familiar to many large and medium-sized industrial companies with gargantuan but cost-saving potential hidden in dispersed purchasing departments. While last year’s economic crisis forced companies to concentrate on short-term working capital reductions such as bringing down inventory levels, the recovery is prompting many to implement broader improvements in the supply chain. A recent global study by Capgemini, the consultancy, revealed that improvement of customer service and supply chain processes have replaced the economic downturn at the top of supply chain managers’ agenda.

Martin Raab, head of supply chain management at Capgemini, says: “A lot of companies are currently thinking about ways to make their supply chains more transparent and flexible by further centralising them and digitalising the relevant information … as purchasing often adds up to 60 to 80 per cent of overall costs, this is something where you can save very much, very fast. ” Unlike the many plant closures or restructuring programmes initiated during the economic crisis, improvements in the supply chain do not take years to make a difference to profits. “Such savings have a direct effect on margins and the bottom line,” says Ms Kux.

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Her appointment to the board is unusual in a country where responsibility for supply chains is seldom represented at such senior level. Siemens’ approach is seen as a good example of supply chain reform. “They are absolutely doing the right things here,” says Martin Prozesky, analyst at Bernstein Research. Mr Raab says such organisational re forms can improve operating profit margins by up to 10 percentage points.

“In extreme examples, a company can see its Ebit [earnings before interest and taxes] margin quadruple from 3 per cent to 13 per cent. ” Supply chain vulnerabilitiesWhen the economic crisis triggered a slew of insolvencies among cash-strapped suppliers over the past few years, managers became aware what damage a hiatus in the global supply chain can cause. It has prompted a new phrase to be added to managers’ vocabulary: “disruption risk”. “The financial crisis and a number of other large events that have happened in the past five years have definitely prompted companies to start looking at the true costs of supply chain disruption risks,“says Paul Kleindorfer, professor for sustainable development at Insead, the French business school.A number of large companies such as General Electric, Toyota and Siemens have set up teams that map risks to the supplier base – a long list that can stretch from financial problems to regulatory risks and global warming.

The teams also highlight particularly vulnerable areas of the supply chain base. Cisco Systems, the US maker of networking equipment, goes one step further. Its supply chain “war room” has not only set up detailed scenarios about the risks to Cisco’s supplier base – but it has also modelled possible responses to these threats and sketched out the costs that would come with it. Cisco couples the knowledge about risks with war room response capability,” says Prof Kleindorfer.“They are at the forefront in terms of disruption risk management Based on a methodology used by McKinsey, the consultancy, where Ms Kux worked early on in her career, and which was used during her time as chief procurement officer at Philips, she based the supply chain initiative on three main pillars. We have communicated the numbers 60, 25, 20 – these are our key performance indicators: a 60 per cent increase in pooling of our spending, an increase of sourcing in emerging countries to 25 per cent and a 20 per cent reduction of the supply base,” says Ms Kux. The first lever is to bundle a bigger amount of purchasing volume. “Many companies are moving from local profit centres to global operating models where the local units are being steered with key performance indicators such as productivity,” says Mr Raab.

The biggest and fastest synergies can be reaped by centralising purchasing of “indirect materials” that are not directly used for making products. Siemens spends €11bn ($15bn) each year on such materials – from pencils to fork lifts – and it has recently appointed a senior executive responsible for centralising these purchases. When it comes to direct materials, however, the process is much slower and more difficult.

At the start, Siemens defined 20 material groups, such as plastics, cables, copper, castings, metal and mechanical parts, and it is now simplifying and harmonising specifications for centralised purchasing. I think it will take them two or three years,” Mr Prozesky says. In essence, this is a balancing act between the drive to centralise and the recognition that the scattered purchasing teams are close to markets and product development.“We want to combine the strength of an elephant with the speed of a mouse,” Ms Kux says. Bringing purchasing closer to Siemens’ markets is also an element of the second lever: a further push into low-cost sourcing by increasing the purchasing value from emerging markets by 5 percentage points to 25 per cent in the medium term. We don’t call this low-cost sourcing but global value sourcing, because this is not only about costs but also about quality. There is a lot of value to be gained in places like China and India,” Ms Kux says. But to achieve this, Siemens is not only working closely with local suppliers from emerging markets.

It also offers partnerships to some of its smaller German suppliers to help them gain a foothold in China, since many of them lack the resources to do so on their own.German castings producer Bartz-Werke, for instance, took Siemens’ advice when it set up a joint venture in the Jiangsu province. “This has advantages both for the supplier and for us because these are suppliers that we already know and the suppliers know our quality re quirements and products,” Ms Kux says. While some suppliers receive such support, others have been dropped in an effort to streamline the supply chain. Ms Kux’s teams have been combing through Siemens’ supplier accounts in the past two years with the aim of reducing the number from 113,000 to about 90,000.The engineering group has also identified key suppliers for the future, with which it will work closely. “The future will not be Siemens against other companies but the best networks competing against each other. The company that will have the closest relationships with the best partners will have an immense and sustainable competitive advantage,” Ms Kux says.

Because Europe’s biggest engineering group launched its initiative in the middle of the economic crisis, it can reap the rewards now the global economy has regained some traction.Analysts estimate that the company can achieve net savings, which include reinvestments into better pricing, of €1. 2bn and €1. 8bn each year. The benefits are such that Ms Kux says she has been contacted by an array of companies, some of which have no business ties at all with Siemens.

“A number of large companies from different sectors come to us and ask us how we are doing this,” she says. Copyright The Financial Times Limited 2010. You may share using our article tools. Please don’t cut articles from FT. com and redistribute by email or post to the web.

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