Frank Deiss heads the procurement unit for Mercedes-Benz Cars and Vans. Sam Ogle asked him some pertinent questions about purchasing strategy in a time of economic difficulty.
Sam Ogle - Describe the structure of the Mercedes-Benz procurement operation.
Frank Deiss - I am heading the Procurement Mercedes-Benz Cars & Vans unit, which is one of Daimler’s three operative purchasing units. In that capacity, I am responsible for the procurement of production material for our global passenger car and vans businesses. Reporting to me, I have seven units which are set up similar to a matrix organisation: they cover the complete product range of our passenger cars and vans, the different commodity groups and the modules derived from our modular strategy. The inherent complexity of that organisation requires intensive cross-functional networking, which is essential to the way we work. We are therefore able to achieve efficiencies in our processes as all relevant aspects are always handled by our various dedicated teams of experts.
SO - When you look around the automotive industry there are many companies, some of them very large corporations, which are in financial difficulty. Is somebody getting it seriously wrong, or is it all down to global conditions?
FD - There is no doubt that the global situation has had a significant effect on many companies – including OEMs who had to deal with lower demand in 2009, or suppliers that have consequently been affected by lower order volumes. However, it is also obvious that some suppliers have been steering through this crisis in a very robust manner, while others have been hit harder, sometimes even resulting in insolvencies, restructuring, and the like. Looking at the reasons, the picture is different in each individual case, so any generalisation would be wrong. In some cases, aggressive takeover or merger strategies of investors, little-differentiated customer portfolios or a large dependency on raw material prices caused the situation at companies to reach the tipping point. There have also been cases where basically healthy companies got into trouble when their credit lines were not extended or cut. As an OEM, we thus need to look at supplier issues in a very thorough manner, and that’s exactly what we are doing in our risk management.
SO - Are we going to see more suppliers go to the wall, or is the situation going to turn around?
FD - Any expert will currently tell you that the overall situation in the automotive industry remains challenging. Therefore, one can expect a further tendency of market-driven concentration in the supply base. However, there is just as much reason to believe companies which manage to steer through this crisis will emerge even stronger.
SO – Is price the determining factor in a purchasing decision or are there others?
FD - It’s more than just the price: we refer to four value drivers – not only in purchasing decisions, but also in measuring a supplier’s performance in our daily business. These value drivers are cost, quality, logistics and innovation, and they are equally important. All four of them need to go hand in hand, e.g. we would never sacrifice quality, innovation or logistics aspects for cost. I am convinced that it is a determining factor of a company’s success how well it is able to manage that balance. In addition, besides these value drivers, we also take into account how a supplier performs with respect to the principles of partnership – fairness, reliability and trust. All of these aspects are key elements of our new supplier cooperation model introduced in 2009 – the Daimler Supplier Network.
SO - In an era of ever-increasing costs of raw materials and transportation, how do you plan to mitigate these pressures without increasing the cost to the consumer in a period of global over-capacity?
FD -Today’s customers are probably more price-sensitive than ever, so there is indeed very limited room to pass these costs on to them. In procurement, for example, long-term contracts can help you to cope with temporary peaks and to manage risk. Overall, efficiencies are a key driver – most prominently in manufacturing and processes, but also throughout the entire organisation.
SO - Suppliers say that they cannot continue to cut their rates and that something has to give. Do they have a valid point and, if so, what can you do to help?
FD - We have a very transparent system in place, which we refer to as the Reference Calculation. With this, we are able to calculate the cost of a commodity against a perfect environment and to openly discuss with our suppliers where they stand compared to this and which steps they can take to improve, if necessary. Let me be very clear that we are not imposing unrealistic targets here – quite the contrary. We are also focusing on long-term relationships with our suppliers with various benefits for them, and we expect their clear commitment in return to work with us on constantly improving each position. That’s what the market demands, so we’re in this together.
SO - How are strategic suppliers defined, and what are Mercedes-Benz’ expectations of them?
FD - At Daimler, we have integrated our cooperation with suppliers under the roof of the Daimler Supplier Network and its slogan “commitment to excellence”. This cooperation model is based on the individual performance regarding the four value drivers of cost, quality, logistics and innovation. These aspects are complemented by the principles of partnership: fairness, reliability and trust. On this basis, we distinguish between the three segments Supply Base, Key Suppliers and the top-level group of our Strategic Partners, each of which is connected with differentiated expectations and commitments for us as well as for the respective suppliers. As an example, we are offering to our Strategic Partners a continuous strategic exchange on the top management level. They are also the ones with the highest expectations on our behalf. Of course, that segmentation is not static but is checked every year and adapted, if required.
SO - How are real costs established and how do you manage the gap between the quote and the most competitive cost for which the part or service can be purchased?
FD - As outlined before, our Reference Calculation is our tool of choice to know what something would cost in an ideal environment. We have built up significant internal expertise for some years now, so we are able to calculate this for the vast majority of what we are sourcing. This also puts us in position to immediately look at everything we are sourcing and to identify not only the cost gaps, but more importantly where they come from. We are sharing these findings with our suppliers in a totally transparent manner. This is the basis for further discussions, in which we jointly discuss the options how to close identified gaps or at least develop a certain plan for how to close those gaps in the near future.
SO - Are suppliers innovative enough? In what areas would you like to see improvement?
FD - Daimler, with Mercedes-Benz as the world’s strongest premium passenger car brand, regards innovation as a core element of its identity. Consequently, we expect the same dedication to innovation from our suppliers, which is reflected not only in the value drivers we use to evaluate and monitor our suppliers, but also in our Daimler Supplier Network cooperation model, which places special attention on innovative ability as a key element. As an example, new small or non-traditional suppliers which are leading innovators in a specific topic have the chance to join the group of our strategic partners very quickly, i.e. without having to work their way up through the ranks in a lengthy process. Overall, we have many excellent suppliers who have delivered outstanding performance in this respect for many years, but of course we welcome many more to follow their example. You can never have enough!
SO - How do you develop strategic suppliers and commodity strategies? Is there a targeted reduction in supplier numbers?
FD - In general, we develop our suppliers in the framework of our Daimler Supplier Network cooperation model. If required, this may be complemented for example by action plans for specific commodities, supplier sets etc. And, to the second part of your question: that’s a clear “no”- we do not have any targets to reduce the number of our suppliers.
SO - In an era of globalisation and sourcing from low cost countries, what are the factors driving sourcing decisions today?
FD - We base our sourcing decisions on the identical set of the four value drivers I mentioned before, no matter if we are sourcing in Western or Eastern Europe, in the NAFTA or in Asia: cost, quality, logistics and innovation. Finding the perfect balance between these factors is the challenge we are facing with every new sourcing decision.
SO - What are the critical elements of supply risk management in the global environment? How important is it to have international purchasing offices?
FD - Transparency is crucial for us in managing risks within our supply chain. To achieve that, we decided to set up dedicated organisational structures and processes for our risk management well before the current global crisis, a decision which has proven to be extremely valuable in the recent past. We are constantly monitoring our supply chains and are ready to decide very quickly when there is need for us to act and to take all actions which are appropriate and necessary to minimise potential risks for our business. All of this is happening in close cooperation with the respective suppliers’ management to make sure we have the same understanding of the situation and of what needs to be done. Our international purchasing offices play an important role here in their capacity as our local hubs which have close contact with our suppliers in their respective area.
SO - When sourcing from an emerging market there is frequently a lengthening of the supply chain. This can lead to a higher degree of risk, requiring extra inventory as buffer stock. Is this acceptable?
FD - It is obvious that chances of sourcing from emerging markets always need to be thoroughly balanced against potential risks arising for example from lengthened supply and logistics chains. Too many – often very specific - factors need to be considered in each individual case to provide a general answer here, but we’re of course using opportunities and will continue to intensely monitor further potential in these markets.
SO - Is this a good time to be a purchasing executive? How is the global economy affecting decisions and what is the prognosis for the future?
FD - The effects of the global financial crisis on the automotive industry are challenging for all corporate functions of OEMs, certainly not just for their procurement organisations. However, I don’t think that we are facing a different set of challenges, but rather some shifts in the weight of individual tasks. Most prominently, risk management has reached an unprecedented importance for OEMs and suppliers, not least due to the high degree of interconnectedness in our industry. The role of the procurement organisation as the interface towards the supply base has probably never been more important than today. And interesting challenges always contribute to making your job worthwhile.
SO - To what degree is the financial health of an organisation dependent on purchasing initiatives?
FD - I mentioned risk management in procurement before, which may often come first to people’s minds here. And of course it is true that these activities are vital as they contribute to ensure a company’s business is running. At the same time, the largest workloads in procurement and their contribution to the company’s bottom line may not receive the same kind of public attention but are just as vital: working with our suppliers to develop innovative, high-quality solutions which bring distinctive value to our customers - today and tomorrow.