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On Strategy: Six Recommendations for Purchasing Strategy

Increasing demands to cut costs while delivering innovation are putting enormous pressure on automotive purchasing departments.

Increasing demands to cut costs while delivering innovation are putting enormous pressure on automotive purchasing departments. OEMs have taken the lead in mastering this complex balancing act. A close analysis of their success stories has revealed six key strategies:

1. Source from low-cost countries
Purchasing in low-cost countries is an important lever for cost savings. Manufacturers should first become familiar with local suppliers by assigning them orders for production in emerging markets. Orders can then be given for exporting parts to developed markets. To build up a qualified supplier base as quickly as possible, manufacturers should encourage existing suppliers to produce in low-cost countries. We also recommend supporting local suppliers in their development. Renault, for example, assisted its suppliers in Romania in areas such as engineering, quality, finance and even management.

2. Create a global supplier footprint
To minimize currency risks, avoid supplier bottlenecks, and ensure favorable purchasing conditions, manufacturers should develop a global supplier footprint strategy with a decision-making framework for Purchasing. The framework could stipulate, for example, purchasing volumes in certain currency regions. VW has developed guidelines that require increasing purchasing volumes in U.S, dollar-based economies. That is why more than half of the purchasing volume for the new Jetta/Bora is from Mexico or other U.S. dollar countries.

3. Ensure access to technological innovations
Manufacturers should build up their relationships with suppliers to ensure continuing access to new technologies, while also strengthening their own innovation process. BMW, for example, fuels its innovation process by collecting ideas from suppliers through an online platform. These ideas are then evaluated and put into practice, where appropriate.

4. Reduce costs together with suppliers
Along with technical levers like standardization, manufacturers should increasingly integrate with suppliers to accelerate cost reduction efforts. In 2005, Volkswagen kicked off two new cross-functional initiatives for future and current program sourcing. Due to these initiatives, Purchasing and Engineering have joint responsibilities, and suppliers are heavily involved. Toyota has gone one step further, creating a division responsible only for advising suppliers and implementing cost reduction measures.

5. Standardize
Manufacturers should continue to move toward standardized modules and components. Furthermore, they should frontload their development efforts to increase product reliability and durability. Engineering departments should be arranged globally, with decision-making authority on a global level. Here, too, Toyota leads the field, as it has separated module development from vehicle development. By doing this, modules are developed independently from vehicles and can be used in multiple vehicle platforms. This creates economies of scale and dramatically reduces quality problems.

6. Globalize structures and decision making
While manufacturers are beginning to reap the benefits of globalization strategies, they can not rest on their laurels. They must continue to align their structures to the international market. To this end, global Purchasing should be organized by product group. The organization should have common regional structures and be able to make global decisions. The interface with Engineering must especially be improved. GM did this by implementing joint target agreements for its Engineering and Purchasing board members. At BMW, one board member even holds both Engineering and Purchasing responsibility to facilitate cross-functional decision making.

Characteristics of successful companies
Well positioned companies are mindful of three decisive factors when it comes to optimizing Purchasing: strategic fit, comprehen-siveness and application. To ensure strategic fit, business decisions in Purchasing must complement other functional areas. The intro-duced steps must also be comprehensive enough to generate a substantial impact such as improving the cost position over the long-term. Finally, the measures taken must be stringently applied and constantly monitored to ensure their success. 

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