Benchmarking supply strategies in the automotive and the power tool industry

EUROPEAN BUSINESS SCHOOL
International University Schloß Reichartshausen am Rhein

Diploma Thesis

at the SVI-Stiftungslehrstuhl für Einkauf, Logistik und Supply Chain Management
in cooperation with the Hilti Corporation Liechtenstein

Benchmarking Supply Strategies
in the Automotive and the Power Tool Industries

Name: 

Andreas Christoph Weth

Date: February 24, 2006

Table of Contents

List of Figures ...  II
Acronyms  ...  IV

1 Introduction  ...  - 2 -
1.1 Problem Definition and Scope of the Diploma Thesis  ...  - 4 -
1.2 The Hilti Corporation: Introduction and Background Information  ...  - 6 -
1.3 Structure of the Diploma Thesis  ...  - 9 -

2 Definitions and Classifications  ...  - 9 -
2.1 Supply Management Definitions  ...  - 10 -
2.2 Classification of a Supply Strategy  ...  - 12 -
2.3 Introduction to Supply and Sourcing Strategy Concepts  ...  - 15 -
2.4 The Sourcing Strategy Triangle  ...  - 19 -
2.4.1 Global Sourcing versus Local Sourcing  ...  - 20 -
2.4.2 Supplier Management  ...  - 23 -
2.4.3 Commodity Management  ...  - 26 -

3 Benchmarking the Sourcing Strategy Triangle in the Automotive and the Power Tool Industry  ...  - 30 -
3.1 Applied Benchmarking Methodology  ...  - 30 -
3.2 Benchmarking Analysis of the Sourcing Strategy Triangle  ...  - 31 -
3.2.1 Benchmarking Global Sourcing versus Local Sourcing  ...  - 31 -
3.2.2 Benchmarking Supplier Management  ...  - 39 -
3.2.3 Benchmarking Commodity Management  ...  - 46 -

4 Supply Strategy Recommendations for Power Tool Companies focusing on the Hilti Corporation  ...  - 53 -

5 Conclusion and Future Aspects  ...  - 57 -

References  ...  60

“To produce the best products worldwide, you need more than ideas, designs and specifications. You need to choose the very best suppliers…”¹

1 Introduction 

In many business administration and engineering concepts, the automotive industry serves as a best practice example for other industries. Almost every manufacturing company is trying to imitate the Toyota Production System (TPS) which is one of the most popular examples for the best practice transfer from the automotive industry to other businesses.² The same accounts for the field of supply management in the automotive industry.³ Particular aspects in the field of supply and sourcing strategies in the automotive industry - especially the degree of vertical integration and supplier management - were already researched and analyzed by the following researchers: Wildemann (2000), Van Weele (2002), Jahns (2005), Verespej (2005) and Dobler and Burt (1996).⁴ Only one publication of a supply strategy benchmarking approach between the automotive and other industries could be identified: Schuh, Pfeifer, Klotzbach and Knoche’s (2005) supply management benchmarking.⁵ However, in this benchmarking approach, no detailed recommendations for a particular industry were published by Schuh et al (2005) which shows the importance of the approach in this diploma thesis; a number of aspects can be learned from the automotive industry in the field of supply management strategies but these findings need to be transferred into recommendations to provide a basis for the implementation of these ideas.

Before the problem definition and the scope of this diploma thesis are further explained in section 1.1, practical examples from the automotive and the power tool industry are now provided to show that supply and sourcing strategies in these two industries can be benchmarked and the same basic supply structures can be observed. First, it needs to be stated that supply management is in most industries among the value creating activities which are transferred by large international corporations to East Asia, according to Geissbauer and Schuh (2004).⁶ This can be seen in the following figure 1.

Fig. 1: Trends in Transferring Value Creating Activities to East Asia

[...]

In the automotive as well as in the power tool industry, Original Equipment Manufacturers (OEM) are installing satellite supply management offices, international procurement offices (IPO) or even whole supply organizations to coordinate supply management activities near local plants or important markets.⁷ “Plan global, act local” is the principle which currently characterizes supply management strategies for most OEMs in the automotive and the power tool industry.⁸

Besides East Asia, also Eastern Europe is becoming more and more important in the automotive and the power tool industry as a market for selling products or services but even more as a sourcing region for services, finished products, modules as well as parts and components.⁹ In addition to that, suppliers in both industries tend to vertically integrate their business models in order to develop towards system or even tier-1 suppliers: the number of independent and specialized suppliers which are only able to supply simple parts or components is shrinking and vertically integrated system suppliers with an increased supplier bargaining power such as Metabo and Bosch are taking over more and more business in the automotive as well as in the power tool industry.¹⁰ Trent (2005) therefore states that the bargaining power in OEM-Supplier relationships is in the process of change: “power has begun to shift from the buyer to the seller” which means that the traditional approach of demanding price cuts yearafter- year for the reduction of purchasing expenses is no longer successful in most industries.¹¹ Furthermore, make or buy decisions are more and more answered with supply and sourcing strategies based on contract manufacturing: popular examples in the automotive industry are premium specialty cars.¹² The power tool industry follows this trend: Bosch and other power tool OEMs sourced the manufacturing of entry level power tools such as drills or jigsaws out to contract manufacturers.¹³

Therefore, as illustrated, the automotive and the power tool industry offer relevant aspects for a benchmarking analysis in the field of supply strategies. To illustrate the scope and the structure of this benchmarking analysis in the diploma thesis, the next sections 1.1 to 1.3 illustrate the problem definition and the scope of the diploma thesis in subsection 1.1, give a brief overview over the Hilti Corporation in section 1.2 and explain the structure of the diploma thesis in section 1.3.

[....]

1 Quotation from the Xerox Commodity Teams in 1986, referenced in Dobler and Burt (1996), p. 211.

2 Related to the TPS are other management and engineering trends which were mainly introduced by the automotive industry and were also transferred to other industries such as Kanban, Kaizen, Total Productivity Management (TPM), Total Quality Management (TQM), Reverse Engineering and Simultaneous Engineering. See Liker (2004), p. 27 for further details.

3 The automotive industry was one of the first industries actively pursuing early purchasing involvement (EPI) industry wide which was then copied by other industries. See Womack, Jones and Ross (1990), p. 118 for further details.

4 See Wildemann (2000), pp. 14 and 15, Van Weele (2002), p. 161, Jahns (2005), pp. 3 - 4, Verespej (2005), pp. 38 - 39 and Dobler and Burt (1996), pp. 214 and 221.

5 See Schuh, Pfeifer, Klotzbach and Knoche (2005), p. 32, Unknown Author (2004), pp. 40 and 41 and Kuhn (2004), p. 18.

6 See Geissbauer and Schuh (2004), p. 10.

7 See Byrne (2005b), p. 28.

8 See Schuh, Pfeifer, Klotzbach and Knoche (2005), p. 36.

9 See Geissbauer and Schuh (2004), p. 3.

10 Anderson and Narus (2000) believe that it is easier for suppliers to increase sales with present customers; therefore they believe this is one of the reasons why a number of suppliers are increasing their degree of vertical integration. See Anderson and Narus (2000), p. 42.

11 See Trent (2005), p. 53.

12 The Porsche Boxter, the Boxter S and Porsche Cayman S (which are manufactured by Valmet Automotive in Uusikaupunki / Finland) as well as the Chrysler 300C, the Jeep Commander and the BMX X3 (which were partly developed but are completely assembled by Magna Steyer in Graz / Austria) are examples for contract manufacturing.

13 Hilti internal document.