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1 III/2013 AVIATION Content In focus: AVIATION FORUM Hamburg 2013 Global Aerospace Supply Chains: China Europe USA Conference information, profiles of speakers and experts List of partners, sponsors and exhibitors Total Cost of Global Sourcing in China Prof. Dr. Michael Eßig, Dr. Andreas H. Glas, Karl J. Grajczyk, Bundeswehr University Munich Enhancement of a Static Performance Optimization Tool Omar Abdul Rahman, Benjamin Kuch, Fraunhofer-Institute for Manufacturing Engineering and Automation IPA Quo vadis A&D Industry 2013? Pockets of Turbulence Eric Bernardini, Alain Guillot, Stefan Ohl, AlixPartners Global purchasing organization the next evolutionary phase Dr. Marcus Schüller, Dr. Lars Immerthal, KPMG AG Wirtschaftsprüfungsgesellschaft SPACE An initiative of aerospace prime contractors Dr.-Ing. Anfried Sauerborn, EADS, Christophe Cabaret, Norbert Schröder, SPACE TM AVIATION FORUM 2013

2 Many routes can be taken, but only one route is the quickest. The choice is yours. Whether by land, through water or in the air, intelligent supply chain management takes all matters of transport and procurement into consideration. Development within the aviation industry has brought about a great number of opportunities, as well as planning tasks. Our specialists can support and advise you regarding cross-border challenges anywhere in the world. Call us now. C M Y CM Your contact Dr. Gerhard Dauner Head of Industrial Manufacturing Europe, Middle East and Africa T gdauner@kpmg.com MY CY CMY K 2013 KPMG AG Wirtschaftsprüfungsgesellschaft. All rights reserved.

3 Editorial TM AVIATION This issue of SUPPLY CHAIN MANAGEMENT TM focuses on the 3 rd AVIATION FORUM Hamburg 2013, the established academic communication and networking platform in the aerospace industry. The title of this international conference and exhibition is Global Aerospace Supply Chains: China Europe USA. Special topics are the Airbus production FALs in Tianjin Free Trade Zone (China) and Mobile, Alabama (USA). Furthermore, the following key issues will be discussed: Globalized Supply Chains: Risk or opportunity for aerospace?, MRO A global business in transition, Open Innovation: How to integrate suppliers in the innovation process and Managing Growth. Fundamental articles analyze the total cost of global sourcing in China and Europe and discuss the enhancement of a Static Performance Tool by a pre-analysis for adjusted capacity data. Practical topics present the global purchasing organization as the next evolutionary phase, focus on the economic situation of the A&D industry in 2013 and introduce SPACE TM, an initiative of European aerospace prime contracters to improve the industrial performance and competitiveness of aerospace supply chains. We wish you an interesting and informative reading! Prof. Dr. Johannes Walther CEO, Institute for Production Management Editor Dr. Klaus Richter EVP Airbus Procurement Co-Editor s u p p l y chain management I II/

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5 Content Fundamental topics Total Cost of Global Sourcing in China Prof. Dr. Michael Eßig, Dr. Andreas H. Glas, Karl J. Grajczyk, Bundeswehr University Munich 7 Enhancement of a Static Performance Optimization Tool Omar Abdul Rahman, Benjamin Kuch, Fraunhofer-Institute for Manufacturing Engineering and Automation IPA 17 Practical topics Quo vadis A&D Industry 2013? Pockets of Turbulence Eric Bernardini, Alain Guillot, Stefan Ohl, AlixPartners 23 Global purchasing organization the next evolutionary phase Dr. Marcus Schüller, Dr. Lars Immerthal, KPMG AG Wirtschaftsprüfungsgesellschaft 29 SPACE An initiative of aerospace prime contractors Dr.-Ing. Anfried Sauerborn, EADS, Christophe Cabaret, Norbert Schröder, SPACE TM 33 AVIATION FORUM 2013 Global Aerospace Supply Chains: China Europe USA 37 Greeting 38 Partners and Sponsors 39 Exhibitors 40 Exhibition plan 42 Program: 4 th of December Program: 5 th of December Speakers and Experts Index 48 Speakers and Experts Profiles 50 Book review 122 Editorial 3 Register of authors 14 Event Calendar List of advertisers 52 Total Cost of Global Sourcing in China Prof. Dr. Michael Eßig, Dr. Andreas H. Glas, Karl J. Grajczyk, Bundeswehr University Munich Global supply chains in the automotive industry use the Asian and particularly Chinese as efficiency levers on the supply side. The workbench of the world China is developing increasingly from a low-cost alternative to a more and more quality oriented source. In contrast to cost-efficient unit sourcing, procurement of complex modules and sub-systems from China increases the complexity of the buyer-supplier relationship and as a consequence the relevance of coordination costs. The analysis focuses on the total cost of global sourcing on a category level. The results of the survey enable comparing the total cost of sourcing of similar product categories in Europe and in China. Page 7 Enhancement of a Static Performance Optimization Tool Omar Abdul Rahman, Benjamin Kuch, Fraunhofer-Institute for Manufacturing Engineering and Automation IPA In order to preserve competitiveness in today s markets, companies have to carefully plan their factories performance and investments. As product complexity and the number of required variants are continuously increasing, size and complexity of the production network grow just as fast. Hence, a critical success factor concerns the distribution of the value-added among the existing production network. To meet those requirements Fraunhofer-Institute for Manufacturing Engineering and Automation (IPA) has developed a combined approach considering various optimization dimensions synchronously while allowing dynamic and scenario-based analyses. Page 17 Global purchasing organization the next evolutionary phase Dr. Marcus Schüller, Dr. Lars Immerthal, KPMG AG Wirtschaftsprüfungsgesellschaft Most international companies now have efficient purchasing organizations across China, Brazil, USA and Eastern Europe the purchasing and SCM departments have really received a huge efficiency boost over the last few years. However, when it comes to developing an integrated global organization, which has a high level of maturity and supports the long-term success of the company as a strategic growth driver, there is still significant potential that can be tapped in purchasing. The problems that most often occur are the lack of strategic processes and product group strategies with long-term cost optimization approaches being prevented. Page 29 SPACE An initiative of aerospace prime contractors Dr.-Ing. Anfried Sauerborn, EADS, Christophe Cabaret, Norbert Schröder, SPACE TM SPACE TM stands for Supply Chain Progress towards Aeronautical Community Excellence and is a nonprofit aerospace association founded in June 2007 by aeronautical primes to support the development of their Supply Chain. The association aims to provide and implement services to improve industrial performance and competitiveness of supply chains by increasing the efficiency of subcontractors and the relationship with their major aerospace manufacturers. The mission of SPACE is to conduct industrial improvement projects at supplier s sites by pooling the resources of major aerospace actors. Since 2011, SPACE gets engaged in regional and national government supported projects. Page 33 s u p p l y chain management I II/

6 For those who see their information vanish into thin air frequently, there is now Doxis4. Managing suppliers throughout the aerospace supply chain remains a major challenge for the industry. This is a documentintensive process, beginning with selection of suppliers and ending with accounts payable. It is a key target for cost reduction and improvement in operational efficiency. And public demand for safety and reliability drives the need for product quality to approach near perfection. Enter SER Software Solutions. Our integrated Enterprise Content Management Doxis4 can be particularly beneficial in four areas of the supply chain: contract lifecycle management, ERP transactions, accounts payable, and quality management. Doxis4 iecm-suite SER Solutions Deutschland GmbH Joseph-Schumpeter-Allee 19 D Bonn info@ser.de

7 Global Sourcing Total Cost of Global Sourcing in China Prof. Dr. Michael Eßig, Dr. Andreas H. Glas, Karl J. Grajczyk, Bundeswehr University Munich Summary Global supply chains strongly focus on the Asian and particularly Chinese sales markets, but also use those regions as efficiency levers on the supply side. From that perspective, the workbench of the world China is developing increasingly from a low-cost alternative to a more and more quality oriented source. In contrast to cost-efficient unit sourcing, procurement of complex modules and sub-systems from China increases the complexity of the buyer-supplier relationship and as a consequence the relevance of coordination costs. This contribution addresses that point and aims at establishing a better understanding of the Chinese-German supplier relationships. The analysis focuses on the total cost of global sourcing on a category level. In a quantitative survey an expert sample of 60 European procurement managers was chosen, who have insights not only in product categories sourced in China but also in similar categories sourced in Europe. The results of the survey enable comparing the total cost of sourcing of similar product categories in Europe and in China. Empirical findings uncover the 10 most effective management initiatives to reduce the total cost of sourcing in China. The importance of Global Sourcing Costing Concentrating on core competencies is a strategy that companies have been pursuing for the reason of strengthening competitiveness. Suppliers in the manufacturing industry do not only provide direct materials like raw material and operational supplements but offer components, modules and systems incurring many value-adding stages. Whereas companies built up local supplier networks in the past, they recently tend to search for global sources, oftentimes located at the workbench of the world China. The most important drivers for China sourcing are besides strategic aspects like the entry into international markets or access to highly innovative products and technology [Schumacher et al. 2008, Trent/Monczka 2003] expected cost savings compared to local suppliers due to lower factor costs like wages or currency influences [Bremen et al. 2010]. However, even if production costs are lower, China sourcing can still be costly. At least the expected cost savings may not be as great as expected [Gilley/Rasheed, 2000]. In order to calculate the real costs, the consideration of all expenses involved is necessary [Bergman 2006, Ting 2004]. Recently, systematic cost measurement approaches have been proposed to investigate all sourcing costs through case study analysis [Platts/Song 2010]. On this basis, this study evaluates the total cost of sourcing in China, as well as comparing cost drivers and the effectiveness of global sourcing management initiatives on Chinese and European supply markets. For this purpose, this paper applies a quantitative Geographical distance between China and Europe increases transportation costs and complicates decisions that diminish the effectiveness of processes. survey methodology on the purchasing category level. Subsequently, the applied total cost of sourcing framework is described, followed by the presentation of the survey findings. Total Cost of Global Sourcing Framework Substantial geographical distance between China and Europe does not only increase transportation costs, but complicates decisions because of inventory cost tradeoffs, different cultures, languages, and practices, that diminish the effectiveness of business processes such as demand forecasting and material planning. Cost transparency in China sourcing is a challenging task, as the initial production price of a sourced product contrasts with numerous hidden costs for supplier relations, information, intercultural competencies, and supplier relationship management. All those difficulties inhibit the degree to which a global supply chain can represent a competitive advantage [Meixell/Gargeya 2005]. Already in the late 1990s several studies address potential negative profit implications of global sourcing in general [e.g. Arnold 1999, Smith 1999, Herbig/ O`Hara 1996]. Most studies focused on sourcing from China examine only single cost aspects, such as quality issues [e.g. Ting 2004, Eberhardt et al. 2004], corruption [Wilkinson et al. 2005], intercultural supplier relationship management [e.g. Salmi 2006, Millington et al. 2005], or guanxi [Nassimbeni/ Sartor 2006]. Especially the latter topic has gained widespread research interest. Guanxi constitutes a special type of personal business relationship that bonds exchange partners through reciprocal obligations and favors. Business in China is particularly challenging for Western companies s u p p l y chain management II I/

8 Global Sourcing because of the peculiarities of its conduct. Recent studies indicate that guanxi is still flourishing in existing business relationships in China [Chen et. al. 2011]. Guanxi and other hidden cost aspects have long been underestimated in practice, which calls for an integration of all expenses into a holistic total cost of global sourcing framework. In addition, a holistic view on the problem seems to be underdeveloped in research, even if Platts and Song [2010] presented a cost framework integrating a multitude of different expense aspects. The aforementioned total cost model is in line with the study s idea to apply a total cost of ownership perspective also for procurement decisions [Ellram 1995] and provides the basis for the conceptualization and operationalization of the underlying total cost of global sourcing framework (Fig.1). Although all applied constructs in the framework are based on literature, measuring the total cost of China sourcing is challenging, as even firms themselves struggle to calculate the financial effects of their sourcing operations [Cokins 2001]. The use of comparative contextual factors instead of comparative respondent groups allows a comparison of cost drivers and cost-savings management initiatives in global sourcing. The proposed total cost of global sourcing framework classifies cost drivers into four main groups: acquisition price related costs, logistics costs, coordination costs and sustainability costs. Every group contains several homogenous cost indicators which have been derived from literature and are presented in the findings section of this paper (Fig.6). Traditional cost drivers were supplemented by one additional cost driver group, representing expenses related to the dimension of social and ecological sustainability. Further, the total cost of global sourcing framework differentiates between several contextual factors, firstly distinguishing the industry context (e.g. manufacturing), second the country context (China or Europe), and thirdly the category context (units, components, or trade goods). This enables a cost comparison between the country contexts and provides insights into the effectiveness of Industry context Chinese supply market context Category context Cost driver groups Acquisi(on price related costs Logis(cs costs Coordina(on costs Sustainability costs Measures (Management ini(a(ves which aim at influencing sourcing costs) Total Cost of Global Sourcing Framework management initiatives which aim at improving sourcing performance. Research Methodology European supply market context Category context Cost driver groups Acquisi(on price related costs Logis(cs costs Coordina(on costs Sustainability costs Measures (Management ini(a(ves which aim at influencing sourcing costs) Total cost comparison: China- Sourcing vs. Europe- Sourcing (total sourcing cost & acquisiion cost savings comparison) Figure 1: Total cost of global sourcing framework of this work 2% 2% 2% 2% 2% 7% 5% Based on the previously conceptualized total cost of global sourcing framework, a questionnaire was developed to empirically identify and compare total sourcing costs between China and Europe. The survey took place in 2013 and utilized the purchasing category level as the main unit of analysis. Global sourcing experts were asked to provide insights into global sourcing activities and related costs, and to report measures (management initiatives) which positively influence sourcing success in China and Europe. All cost drivers and management initiatives used in the questionnaire were derived from the literature review applying established scales with a 3% 4% Manufacturing (incl. Automo9ve & Mechanical Engineering) Electricity, gas, steam and air condi9oning supply Wholesale and retail trade 71% Figure 2: Distribution of respondents by industry sector Transporta9on and storage Accommoda9on and food service ac9vi9es Financial and insurance ac9vi9es Professional, scien9fic and technical ac9vi9es Administra9ve and support service ac9vi9es Human health and social work ac9vi9es Arts, entertainment and recrea9on 8 s u p p l y chain management II I/ 2013

9 Global Sourcing strong measurement record. Pretests involving purchasing practitioners and academics were conducted to guarantee high levels of face validity of scales and quality of the research framework. The requirement of respondents to possess experience in sourcing goods from China and Europe simultaneously was prescribed to reduce bias as there is no established comparative group of respondents. However, this also reduced the overall available sample s quantity, as many procurement executives are only responsible for either global or local sourcing activities. A sample of 250 experts from procurement related functions who satisfy the aforementioned experience requirement was contacted and 60 responses were received. The majority of respondents (45%) were purchasing directors, followed by purchasing managers with a share of 20%. Chief purchasing officers, buyers and respondents with miscellaneous job titles (e.g. consultants, sourcing advisers) altogether hold a share of 35%. Assessing the distribution of respondents by industry sector illustrates that 71% of answers constitute expert responses from the manufacturing sector, including automotive and mechanical engineering companies (Fig.2). Sourcing from China is of very high importance for the questioned organizations as more Acquisi-on price related costs than 75% of companies in the sample report to procure more than 50% of their total purchasing spent in China. Global sourcing cost drivers: Comparison of China and Europe Logis-cs costs Coordina-on costs Sustainabilty costs Cost drivers and their importance in China and Europe Purchase price Taxes Cash refunds, bonuses or rebates Currency risks Transporta-on Insurance Customs Charges for port, terminal, handling Packaging Documenta-on Capital commitment of inventory and transport Loss or damage of inventory Insufficient supplier reliability Procurement market research Evalua-on of suppliers Communica-on expenditures - supplier selec-on Travel expenses for supplier selec-on Nego-a-on and rela-onship building IT- integra-on with the supplier Design adjustments of the product Communica-on with authori-es Commission for intermediaries Cost of an own representa-ve Quality management Reworking faulty products and discarding rejects Returns, exchanges and replacement Keeping up the supplier rela-onship Risk of loss of exper-se and know- how Renego-a-ons Performance measurement - supplier rela-onship Risk of loss of reputa-on Risk of delivery shorhalls Poli-cal / legal support (compliance) Risk management Audits of working condi-ons at suppliers Informa-on costs - regulatory changes Management of social aspects Evalua-on of environmental standards extremely 1 low 2 quite 3 quite 4 high 5 extremely 6 low low high high Europe Cost Driver Importance China Cost Driver Importance Figure 3: Cost drivers and their importance in China and Europe Global sourcing experts were asked to assess the importance of 38 individual global sourcing cost drivers on a six-point likert scale ranging from extremely low (1) to extremely high (6). They can be classified into four expense groups of the total cost of global souring framework. The findings indicate that not very surprising purchasing acquisition cost is of highest importance for sourcing decisions on both markets. This is in line with foregoing studies, which found that on average around 80% of all sourcing costs are related to that cost driver [Platts/Song 2010]. As expected, German procurmenent managers normally aim to reduce cost through China sourcing, while sources in Europe are expected to be more expensive. Therefore purchasing prices and cash refunds, bonuses, or rebates are of high relevance for both markets, but slightly more important for Europe. Contrary to these two cost drivers, all other cost aspects have a significantly higher importance for the Chinese supply market (Fig.3). In comparsion to Europe, the biggest differences in cost driver importance (defined by a difference of >1.0 scale s u p p l y chain management II I/

10 Global Sourcing points in the Europe-China comparison) can be identified for aspects which reflect specialties of global sourcing. Not unexptectedly, the relvance differs mostly in the following areas: customs (1.79), currency risks (1.72), risk of know-how loss (1.33), expenditure for own representatives (1.31), port or terminal handling fees (1.27), transport (1.09), risk of reputation loss (1.07), compliance costs (1.05), and capital commitment for inventory (1.01). Surprisingly, the next cost drivers with the biggest differences between China and Europe are all related to sustainability, e.g. management of social aspects (0.94), information costs regulatory changes (0.92), audits of working conditions (0.90), and management of environmental standards (0.87). Apparently, the relevance of those cost drivers depends on the supply market, while other cost drivers, e.g. quality management (0.85) differs not that much, mostly due to the fact that this aspect is also of high importance for European sources. In total, the expert sample of procurement managers evaluated the importance of most cost drivers much higher for the Chinese supply market. This is a striking result, as this supports the assumption, that the benefits of lower production costs in China (Asia) are at least partly equalized by higher transaction costs. This poses the question, if China sourcing is really worth its efforts. Is China sourcing really worth its efforts? much lower slightly lower slightly higher much higher What is your savings success of your chosen category that is sourced from China for the last three years - in comparison to Europe? The differences in cost drivers relevance again poses the question whether sourcing from China can be justified by its potential cost savings when taking into consideration total cost. To answer this question, global sourcing experts were asked to evaluate the overall cost savings success in China during the past three years in comparison to sourcing this category from European suppliers. More than 70% of respondents report higher cost savings success in sourcing goods from China. Differentiating between purchasing categories, indicates that the highest perceived savings success can be generated for finished and trade goods (Fig.4). Fifty percent of respondents indicate much or extremely higher savings in China compared to European sourcing. This contrasts to a share of only 29% for component supplies and 13% for units and parts. The share of experts reporting a lower savings success in China compared to sourcing goods from European suppliers was highest for units and parts (35%), followed by finished or trade goods (30%) and component supplies (21%). The overall assessment indicates clear total cost advantages for sourcing goods in China, which significantly differ by category groups. 0% 10% 20% 30% 40% 50% 60% Unit / part Component & supply Finished good / trade good Figure 4: Cost savings success on category level To gain a complete picture, experts were also asked to assess total sourcing costs for the same purchasing category for which they had previously reported cost savings. Overall, 62% of respondents estimate that sourcing from China leads to lower total sourcing costs compared to Europe. Still, a substantial share of 38% of respondents considers total sourcing cost from China higher than in Europe. Taking into account the type of category purchased (Fig.5), it becomes evident that 64% of component supplies sourced from China induce higher total cost compared to Europe. Although, 79% of respondents reported substantial savings in component supplies sourced from China, the results provide an indication that these positive effects might be negated by additional costs which cannot easily be accounted for in the purchasing price. Potentially, higher degrees of technological complexity of component supplies compared to finished goods and units/ parts induce higher total cost e.g. for identifying suitable suppliers and make to order manufacturers, assuring quality and safeguarding technological proprietary know-how [Tibben-Lembke 1998]. For the purchasing group units and parts, 82% of respondents regard sourcing in China more favorable to sourcing goods in Europe comparing total cost of sourcing over a time period of three years. Forty-three percent estimate total cost being more than 10% lower for procuring these items 10 s u p p l y chain management II I/ 2013

11 Global Sourcing >10% higher 0-10% higher 10-0% lower >10% lower What are the total sourcing costs for your chosen category sourced in China - in comparison to Europe? 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Unit / part Component & supply Finished good / trade good Figure 5: Total sourcing costs on category level in China. On the one hand, this might be due to the longterm experience and established China sourcing practices for routine items. On the other hand units and parts rather possess lower levels of technological complexity leading to a reduction in search costs and uncertainty [Ramanathan 2007]. For the finished and trade goods category an even share of respondents estimates total sourcing costs being higher, while the other half reports negative total sourcing cost effects for sourcing goods from China. At a first glance, the findings indicate that sourcing from China can induce significant cost savings in comparison to sourcing in Europe if only the acquisition price of goods is considered. However, these cost advantages significantly differ by category group and are easily negated by taking a total cost perspective. The total cost perspective especially includes the aforementioned hidden expenses outside of purchasing acquisition cost field. As a result, sourcing managers should conduct a thorough total cost analysis incorporating a broad range of cost drivers and potential scenarios prior to making a final sourcing decision. Reducing total cost in global sourcing: Which practices should be applied? The aforementioned findings suggest that sourcing managers are confronted with a broad array of differentiated cost drivers in global sourcing. Besides accounting for these factors while evaluating prospective sourcing alternatives, a multitude of measures is available which can proactively be applied to influence procurement success in global sourcing. Derived from an in-depth review of purchasing literature, a set of 31 measures and tactics was identified that can be applied to optimize global sourcing arrangements. Subsequently, global sourcing experts were asked to evaluate the influence of these activities on procurement success for sourcing goods from China and Europe. Results indicate that the effectiveness of measures severely differs between China and Europe (Fig.6). Evaluating the top 10 management initiatives shows that success of China sourcing is highly influenced by bridging the aforementioned cultural gap in supplier relations. While for China sourcing an investment in cross-cultural trainings, negotiation tactics and language courses for purchasing personnel stands at the top of the agenda, it represents an almost negligible role for European sourcing activities. This underlines previous research [e.g. Chen et. al. 2011] that mastering cultural peculiarities of Guanxi in business relationships is paramount to achieving sourcing success in China. With regard to the organizational setting, international purchasing offices are estimated to have a higher impact on purchasing success than cooperative purchasing and joint ventures in China sourcing. Surprisingly, although ecological and social sustainability costs represent highly relevant cost drivers for China sourcing, measures for training and developing suppliers with regard to these aspects are considered less important. In Europe sourcing, the focus is predominantly on measures for the development of established suppliers: Long-term contracts, collaborative capacity management and the integration of suppliers in joint R&D projects represent the most effective management initiatives. Sourcing from European suppliers is largely undertaken from the subsidiary s home location only randomly pursuing cooperative purchasing with business partners. These findings indicate fundamentally different levers for reducing total cost in sourcing between the two regions. Global sourcing initiatives for the Chinese market mostly aim at reducing uncertainty related cost drivers, while European measures target an enhancement of the cost/ value ratio of procured items by improving efficiency, quality and innovation. Similarities in the importance of measures between China and Europe sourcing exist with regard to classical demand-related optimization factors like supply item standardization, demand aggregation and internal purchasing process optimization. The findings also indicate that global sourcing managers should possess high proficiency in benchmarking and target costing approaches enabling profound assessments of geographic sourcing decisions that take into account a broad range of total cost. s u p p l y chain management II I/

12 Global Sourcing cess? cess? extremely extremely high high 6 What is the influence of the following measures on procurement success? With What regard is the influence to the of question if savings advantages the following measure What is the influence of the extremely following measures low quite on procurement quite high success? extremely What is the influence of the following extremely measure low extremely extremely low low quite quite high extremely low low high high low low 1 2 low 3 high 4 5 high 6 of China sourcing make it a 1 low 2 favorable sourcing destina- Cross- cultural training tion, the study Long- term produces contracts ambivalent management results: Although, with suppliers the Cross- cultural training Long- term contracts Interna=onal purchasing offices Capacity Interna=onal purchasing offices Capacity overall management assessment with shows suppliers that Nego=a=on tac=cs 62% of purchasing Nego=a=on experts tac=cs see Nego=a=on tac=cs Nego=a=on tac=cs Evalua=on of suppliers Integra=on clear total of suppliers cost in advantages development Evalua=on of suppliers Integra=on of suppliers in development for sourcing goods in China, Language training Benchmarking / Target Cos=ng Language training these Benchmarking cost advantages Target Cos=ng sig- Aggrega=ng demand nificantly differ Process by op=miza=on category Aggrega=ng demand Process op=miza=on Benchmarking / Target Cos=ng groups. While Evalua=on for finished of suppliers Benchmarking Target Cos=ng goods and Evalua=on units/parts of suppliers a Process op=miza=on majority of experts Aggrega=ng sees demand clear Process op=miza=on Aggrega=ng demand Capacity management with suppliers total Formaliza=on cost advantages of the procurement in China, European sources are re- Capacity management with suppliers Formaliza=on of the procurement Standardiza=on Standardiza=on Standardiza=on garded as a better Standardiza=on choice for Top 10 measures China sourcing components. This may Top alert 10 measures Europe Top 10 measures China sourcing management to thoroughly Top 10 measures Europe What is the influence of the following measures on procurement success? examine alternatives before What is the influence of the following extremely measures low quite on procurement quite high success? extremely engaging in risky low-wagecountry sourcing activities. low low high high extremely low low quite quite low high high extremely high Moreover, a range of management initiatives is iden- Long- term contracts Long- term contracts tified which helps sourcing Capacity management with suppliers Capacity management with suppliers managers developing specific Nego=a=on tac=cs capabilities for respective global sourcing projects. Finally, it Nego=a=on tac=cs Integra=on of suppliers in development Integra=on of suppliers in development must be acknowledged that Benchmarking Target Cos=ng Benchmarking / Target Cos=ng due to the majority of survey Process op=miza=on respondents backgrounds being rooted in the manufactur- Process op=miza=on Evalua=on of suppliers Evalua=on of suppliers ing sector, the results have Aggrega=ng demand limited validity for other prominent industry sectors such Aggrega=ng demand Formaliza=on of the procurement Formaliza=on of the procurement as retail trade and chemicals. Standardiza=on Standardiza=on Future research might employ structural equation modelling Top 10 measures Europe sourcing Top 10 measures Europe sourcing techniques to statistically validate the path relationships in Figure 6: Top 10 management initiatives to influence sourcing costs in China the total cost of global sourcing and Europe framework. Conclusions This research paper analyzed total cost of global sourcing in a comparison between China and Europe. Being in line with previous studies [e.g. Horn et al. 2013], the results suggest that sourcing managers are required to go beyond the pure assessment of acquisition costs. It is striking that experts evaluate the influence of all major cost drivers for sourcing goods from China significantly higher than for sourcing the same purchase category from European suppliers. This underlines that China sourcing still represents a black box for most purchasers and the influence of hidden costs outside of the tangible purchasing price is not negligible. References n Arnold, U., Organization of global sourcing: ways towards and optimal degree of centralization, in: European Journal of Purchasing and Supply Management, Vol. 5 (3-4), (1999), pp n Bergman, I., Is China the promised land? (Risk management), in: IET Engineering Management, June/July, (2006) pp n Bremen, P., A Total Cost of Ownership Model for Global Sourcing, in: CUNNINGHAM, P. & CUNNINGHAM, M. (Eds.) Collaboration and the Knowledge Economy: Issues, Applications, Case Studies. Amsterdam, IOS Press, s u p p l y chain management II I/ 2013

13 Global Sourcing n Bremen, P., Alard, R., Total Cost of ownership: Gesamtkostenanalyse bei der Beschaffung in China, in: Beschaffungsmanagement Revue de làcheteuer, 3, (2008), S n Bremen, P., Oehmen, J., Alard, R., Cost-transparent sourcing in China applying Total Cost of Ownership, Proceedings of the 2007 IEEE, 13th IEEE International Conference on Industrial Engineering and Engineering Management, (2007), Singapore. n Bremen, P., Oehmen, J., Alard, R., Schönsleben, P., Transaction Costs in Global Supply Chains of Manufacturing Companies, in: Journal of Systemics, Cybernetics and Informatics, 8 (1), (2010), S n Chen, Z., Huang, Y., Sternquist, B., Guanxi practice in Chinese buyer-supplier relationships: The buyer s perspective, in: Industrial Marketing Management, 40, (2011), 4, pp n Cokins, G., Activity-Based Cost Management: An Executive s Guide, John Wiley & Sons, Burr Ridge, Illinois, n Eberhardt, M., McLaren, J., Millington, A., Wilkinson, B., Multiple forces in component localization in China, in: European Management Journal, Vol. 22 No. 3, (2004), pp n Ellram, L.M., Total cost of ownership: an analysis approach for purchasing, in: International Journal of Physical Distribution & Logistics Management, 25(8), (1995), pp n Gilley, K.M., Rasheed, A., Making more by doing less: an analysis of outsourcing and its effects on firm performance, in: Journal of Management, 26 (4), (2000), pp n Herbig, P., O Hara, B., International procurement practices: a matter of relationships, in: Management Decision, 34 (4), (1996), pp n Horn, P., Schiele, H., Werner, W., The ugly twins : Failed low-wage-country sourcing projects and their expensive replacements, in: Journal of purchasing and supply management, 19(1), (2012), pp n Meixell, M.J., Gargeya, V.B., Global supply chain design: a literature review and critique, in: Transportation Research Part E, 41, (2005), pp n Millington, A., Eberhardt, M., Wilkinson, B., Gift giving, Guanxi and illicit payments in buyer-supplier relations in China: analysing the experience of UK companies, in: Journal of Business Ethics, Vol. 57 No. 3, (2005), pp n Nassimbeni, G., Sartor, M., International purchasing offices in China, in: Production Planning and Control, Vol. 17 No. 5, (2006), pp n Pratts, K.W., Song, N., Overseas sourcing decisions - the total cost of sourcing from china, in: Supply Chain Management: An International Journal, 15 (4), (2010), pp n Ramanathan, R., Supplier selection problem: integrating DEA with the approaches of total cost of ownership and AHP, in: Supply Chain Management: An International Journal, 12 (4), (2007), pp n Salmi, A., Organizing international supplier relations: an exploratory study of Western purchasing in China, in: Journal of Purchasing and Supply Management, Vol. 12 (4), (2006), pp n Schumacher, S., Contzen, M., Schiele, H., Zachau, T., The Three Factors of Purchasing: Strategic Positioning of Purchasing and Suppliers, Wiley VCH, Weinheim, n Smith, J.M., Item selection for global purchasing, in: European Journal of Purchasing and Supply Management, 5 (3), (1999) pp n Tibben-Lembke, R. S., The impact of reverse logistics on the total cost of ownership, in: Journal of Marketing Theory and Practice, 10 (4), (1998), pp n Ting, A., Outsourcing in China, in: Industrial Engineer, 36 (12), (2004), pp n Trent, R.J., Monczka, R.M., Understanding integrated global sourcing, in: International Journal of Physical Distribution & Logistics Management, 33, (2003), pp n Wilkinson, B., Eberhardt, M., McLaren, J., Millington, A., Human resource barriers to partnership sourcing in China, in: International Journal of Human Resource Management, 16 (10), (2005), pp Zusammenfassung Global agierende Supply Chains der Automobilindustrie beziehen den Absatz- aber auch den Beschaffungsmarkt China stark in ihre Wertschöpfung mit ein. Die verlängerte Werkbank China entwickelt sich zunehmend von einem rein auf niedrige Preise ausgerichteten Markt hin zu einer verstärkt auch qualitätsorientierten Quelle für anspruchsvollere Produkte. Im Gegensatz zur rein kosteneffizienten Beschaffung von Bauteilen erhöht die Bedarfsdeckung von Modulen und Subsystemen aus China die Komplexität der interkulturellen Beschaffungsentscheidung und damit die Relevanz von Koordinationskosten. An dieser Stelle setzt der vorliegende Beitrag an und verfolgt das Ziel ein besseres Verständnis der Beziehungskosten in chinesisch-deutschen Lieferbeziehungen zu schaffen. Hierzu werden auf der Ebene der Warengruppe die Totalkosten der Beschaffung aus China mit Hilfe einer quantitativen Studie erhoben. Insgesamt wurde eine Expertengruppe von 60 Beschaffungsmanagern befragt, welche sowohl Beschaffungsvorgänge in China als auch in Europa beurteilen können. Die Ergebnisse der Studie erlauben den Vergleich der Totalkosten und zeigen zudem für jeden Markt die zehn wichtigsten kostenbeeinflussenden Maßnahmen auf. Authors PROF. DR. MICHAEL EßIG, born 1968, holds the Chair of Materials Management & Distribution at Bundeswehr University Munich, conducting research in Industrial-, Public- und Defence Supply Management. DR. ANDREAS H. GLAS, born 1977, is Project Manager and Researcher at the Chair of Materials Management & Distribution at Bundeswehr University Munich, conducting research in Performance-Based Contracting and Supply Management of Service or Defence Industries. KARL J. GRAJCZYK, born 1985, is Research Fellow at the Chair of Materials Management & Distribution at Bundeswehr University Munich, conducting research in Industrial-, Public- und Defence Supply Management. s u p p l y chain management II I/

14 Register of Authors Register of Authors Eric Bernardini AlixPartners Tel Christophe Cabaret SPACE Tel Prof. Dr. Michael Eßig Bundeswehr University Munich Tel Dr. Andreas H. Glas Bundeswehr University Munich Tel Karl J. Grajczyk Bundeswehr University Munich Tel Alain Guillot AlixPartners Tel aguillot@alixpartners.com Benjamin Kuch Fraunhofer IPA Tel omar.abdul-rahman@ipa.fraunhofer.de Dr. Stefan Ohl AlixPartners Tel sohl@alixpartners.com Omar Abdul Rahman Fraunhofer IPA Tel omar.abdul-rahman@ipa.fraunhofer.de Dr.-Ing. Anfried Sauerborn EADS Tel anfreid.sauerborn@eads.com Norbert Schröder SPACE Tel norbert.schroeder@space-aero.org Dr. Marcus Schüller KPMG AG Wirtschaftsprüfungsgesellschaft Tel mschueller@kpmg.com Dr. Lars Immerthal KPMG AG Wirtschaftsprüfungsgesellschaft Tel limmerthal@kpmg.com TM AVIATION 14 s u p p l y chain management I II/ 2013

15 Excellent Collaboration with Suppliers AIRBUS Perfect Fine Tuning of Delivery Dates and Quantities with SupplyOn s AirSupply Solution AirSupply perfectly supports the collaborative supply chain management processes with suppliers in the aerospace industry. Join this central aerospace SCM platform and benefit from proven processes that enable advanced capacity planning, interactive fine tuning of delivery quantities and dates as well as order status tracking. The development of AirSupply is rooted in an initiative to standardize processes and data formats within the European aerospace industry. To this end, Airbus, Dassault Aviation, EADS, Safran and Thales have founded the company BoostAeroSpace. The aim of this joint venture is to communicate with suppliers in future across several levels via a central aerospace SCM platform. info@supplyon.com

16 Simultaneous English translation of all main presentations provided! 16. INDUSTRIE FORUM WOLFSBURG 2014 Automotive Globalization and Innovation Potentials Concepts Methods 25 th and 26 th of June 2014 Conference and Exhibition Hot Topics Future Markets of the Automotive Industry Innovation in the Supplier Networks EU Emission Goals 2020 as an Innovation Trigger Patron Dr. Francisco J. Garcia Sanz Member of the Board of Directors of the Volkswagen AG Competence Partner IPM GmbH Institut für Produktionsmanagement Donarweg 6 D Hannover Fon Fax kontakt@ ipm-scm.com Organized by

17 Production competitiveness Enhancement of a Static Performance Optimization Tool Omar Abdul Rahman, Benjamin Kuch, Fraunhofer-Institute for Manufacturing Engineering and Automation IPA Summary In order to preserve competitiveness in today s markets, companies have to carefully plan their factories performance and investments. As product complexity and the number of required variants are continuously increasing, size and complexity of the production network grow just as fast. Hence, a critical success factor concerns the distribution of the valueadded among the existing production network. To meet those requirements Fraunhofer-Institute for Manufacturing Engineering and Automation (IPA) has developed a combined approach considering various optimization dimensions synchronously while allowing dynamic and scenario-based analyses. Rahman et al. have presented an approach to provide this dynamic analysis with particular input parameters derived from a static optimization analysis considering multiple sites and value-added steps within a production network [Rahman et al. 2013]. This paper presents an approach for a pre-analysis, as an extension of the static optimization of Rahman et al. in order to improve this approach regarding the accuracy of the capacity data when multiple products are to be produced parallel within the network whereas only one focal product exists for the static optimization consideration. Introduction Over the last decades enterprises have been confronted with rapidly increasing challenges in almost all markets [Rahman et al. 2013]. This is on the one hand due to individualization of markets, an immense increase in different product variants and therefore a decreasing frequency of repeated manufacturing, on the other hand because of declining product life cycles and hence shorter time spans for innovative product development [Neumann et al. 2012, Behrendt 2009]. Furthermore companies will prospectively have to enter more markets and built production sites with their own capacities there in order to exploit market opportunities and hedge against business threats [Rahman et al. 2012]. However, these developments result in an increasing complexity of a company s production and value-added network which has to be strategically planned and operated. This gives great importance to the management of the value-added distribution among the production network of a company [Rahman et al. 2013]. To master this challenge successfully Fraunhofer-Institute for Manufacturing Engineering and Automation (IPA) developed a combined approach to synchronously utilize two reference methods and engineering tools, one of which is supporting companies to find an ideal distribution of the value-added [Rahman et al. forthcoming, Contantinescu et al. 2012]. With these engineering tools, a dynamic simulation model can be built, subsequently being computed and evaluated against predefined target values of several key performance indicators. Although this kind of planning and optimization system is taking into account variable parameters, different aspects of uncertainty and risk as well as sundry scales of the production system, the parameterization is still widely experience-based. Therefore Rahman et al. presented a concept for a static performance optimization within an These developments give great importance to the management of the value-added distribution among the production network of a company. existing production network which aims to identify the value-added distribution leading to maximum profit under given static input parameters like process cost for each site and value-added step [Rahman et al. 2013]. Another challenge that has to be dealt with regarding today s market requirements is caused by the highly volatile and turbulent markets, uncertainties in demand as well as in supply and the customers requirement of quick delivery and therefore short lead times. To meet all requirements companies have to respond quickly to changes in customer needs. Hence, supply chain flexibility and agility will be key success factors for companies to remain competitive [Contantinescu et al. 2012]. Supply chain flexibility means the ability to adapt the range of products and services, to deepen service levels, to hedge against market risks and exploit new opportunities, whereas the agility of a supply chain is based on its flexibility but emphasizes the velocity with which changes in market requirements can be responded to [Spath et al. 2008, Swafford et al. 2008]. To allow for non-monetary key performance indicators in the evaluation and planning of value-added networks, Rahman et al. also defined and implemented a straightforward workflow to quantify for instance flexibility levels of each production site to subsequently be considered by the data analysis and be evaluated against predefined budgets [Rahman et al. 2013]. The static optimization tool present- s u p p l y chain management I II/

18 Production competitiveness The static optimization tool helps to manage complexity caused by the rising number of sites and value-added steps that combine into the production network. Real business cases, however, often require the management of multiple products as well, driving production network complexity even further. As the approach delivered by Rahman et al. has one focal product there occurs a problem if the capacities of the production network should serve different products or variants at a time [Rahmann et al. 2013]. The current paper tries to improve the static optimization tool while adjusting the gathered capacity data with respect to a particular product. The basic tool provides a four step approach to conslidate the data, perform an optimization analysis, store the results and present selective data in a Power-Point slide deck. The four steps to progress in order to accomplish the approach are: n Input of Raw Data n Analysis n Evaluation of Scenarios n Presentation The tool consideres aggregated capacity data from each production site that may be dedicated to multiple products. For the approach targets one product at a time those site capacities should be adapted prior to the actual analysis. Figure 2 shows the chronological process of the tool and the contribution of the current paper to the approach. After the raw data has been inputted to the tool, the preanalysis can be performed in order to estimate an optimal production program considering multiple products. The goal of the pre-analysis is to estimate a capacity distribution among the entire product range. This seems to be necessary because site managers presumably are going to deliver capacity values that account for an overall considered by [Rahman et al. 2013], however, focuses on a single product while collecting general site data. Especially the site capacities could just as well serve or be reserved for other products to some extent. Therefore, this paper presents an enhancement of the static optimization tool by a pre-analysis module to be able to consider only fair capacity proportions for the selected product. Static Optimization Tool to Support the existing Approach: Prior art As described above, Fraunhofer-Institute for Manufacturing Engineering and Automation has developed a synchronous reference method and engineering tool for the strategic factory planning. Although it considers crucial key performance indicators in multiple scenario simulations and hereby addressing strategic factory planning with respect to performance, investment and optimal value-added distribution, the mathematical space and the number of parameters to be inputted is large. Hence a preceding static analysis and optimization is of essence to deliver values for the input parameters being located in a good or near-tooptimal area within the mathematical space. Relation between the Combined Approach and the Static Optimization Tool A static optimization tool was developed by Rahman et al. to serve the existing combined approach for the strategic factory planning with concrete values for the parameters to be inputted in the dynamic simulation model [Rahman et al. 2013]. As depicted in Figure 1 the relation between the static optimization tool and the combined approach is characterized by an output-input-connection. On the one hand the results of the static optimization serve as parameters for the dynamic simulation, on the other hand the results of the simulation can likewise be used to further adjust the static tool. Pre-Analysis Module as an enhancement of the Basic Optimization Tool Dynamic environmental conditions P 3 Engineering DB -Tool Output Data regarding the value added distribution: What added value at which site/location How much of this added value at which site/location Input Data vpronet Simulation Consideration of risks, uncertainity and trends Fraunhofer IPA Legend P 1 : Raw Data Analysis P 2 : Analysis P 3 : Evaluation P 4 : Presentation M: Module Figure 1: General relation between the Static Optimization Tool and vpronet [Rahman et al. 2013] 18 s u p p l y chain management I II/ 2013

19 Production competitiveness Tool for Sta*c Op*miza*on Input Raw Data Pre- Analysis Analysis Evaluate Scenarios Presenta*on Extension of the scope of the former Tool for Sta*c Op*miza*on Mul*ple Products can be considered with respect to their capacity consump*on Pre- Analysis establishes an op*mal alloca*on of global capaci*es regarding the value- added steps Figure 2: Method and Process of the Tool ation. Since various products might have to be produced on the same sites, there should be an estimation of what average portion of the capacity of a particular value-added step on the site should be allocated to a certain product. Having this information, the actual analysis can take place with adequate (product-individual) capacity data. Figure 3 depicts the basic structure of the calculation sheet to perform the pre-analysis that is based on MS-Excel`s Solver [FronlineSolvers 2013]. The solver engine estimates the optimal production program by maximizing the overall contribution margin, while remaining compliant with all constraints. Data to be inputted is product and value-added step related. This means that one data record accommodates information about a particular product (such as product-id and contribution margin per unit) and about the consumption rates of this product regarding each value-added step. For instance, product P1 could be consuming one entity of the value-added step V-AS1, which meant that, in order to finish P1, the value-added step V-AS1 must be performed once. Of course P1 could additionally require the production to perform several other value-added steps as well. The variables of the analysis are the n-tuple consisting of the planned production quantities of either products. It can be inferred that the solver engine performing the optimization analysis will be strategically changing the values of the planned production in order to maximize the total contribution margin. Therefore, each data record also includes the planned production that accounts for the amount of units of a particular product. If, during the analysis, a special planned production value is increased, this raises total contribution margin as well as the total consumption of all valueadded steps the particular product needs in order to be finished. Finally, the solver engine estimates the optimal production program by maximizing overall contribution margin while remaining compliant with all constraints that arise from the total consumption of either value-added steps and the existing technical or economical limits (maximum utilization of a certain value-added step). Because either product consumes a certain amount of each value-added step the calculated planned production of the products leads to a particular percentage of the total capacity for each value-added step that should be dedicated to a certain product in order to meet the results of the pre-analysis. Those percentages form a pre-analysis scenario that subsequently can be selected while performing the actual analysis. Total CM Total Capacity V- AS Total Consump5on V- AS V- A S Data Data 1- n V- AS= Value- Added Steps PP = Planned Produc5on CM= Contribu5on Margin Products Consump5on of V- AS per Product PP per Product * CM per Product 1- n Data Data Data Key: Framework Cells ready for Input Calculated Cells * Variables for Solver Fraunhofer IPA Figure 3: Structure of Pre-Analysis s u p p l y chain management I II/

20 Production competitiveness Doing so, the capacity of the value added modules on each site will be adjusted accordingly. Conclusion In order to support the approach for value-added ideal production network planing vpronet, developed by IPA, with input parameters, Rahman et al. developed a static optimization tool that analyses the value-added distribution through a non-linear programming problem that is fed with aggregated general capacity data [Rahmann et al. 2013]. Because the tool focuses on one product at a time and capacities of particular value-added steps might have to serve multiple products, there occurs the need of a pre-analysis that adjusts the collected data according to the selected and focal product. The current paper presents such an approach to enhance the existing static optimization tool by delivering the adjusted capacity data. References n Rahman, O., Schatz, A., Kuch, B., Wertschöpfungsverteilung in globalen Produktionsnetzwerken, in: ZWF Fachbeitrag, 108 (2013) 9, S n Neumann, M., Constantinescu, C., Westkämper, E., Method for Multi-Scale Modeling and Simulation of Assembly Systems, in: Procedia CIRP, Volume 7 (2013), pp n Behrendt, A., Entwicklung eines Modells zur Fertigungssystemplanung in der spanenden Fertigung, Darmstadt n Rahman, O.A., Kluth, A., Schatz, A., Configuration and evaluation of production networks using a maturity model based approach, Cambridge n Rahman, O.A., Jaeger, J., Constantinescu, C., Synchronous Method and Engineering Tool for the Strategic Factory Planning, forthcoming. n Spath, D., Hirsch-Kreinsen, H., Kinkel, S. (Hrsg.), Organisatorische Wandlungsfähigkeit produzierender Unternehmen, Stuttgart n Swafford, P.M., Ghosh, S., Murthy, N., Achieving supply chain agility through IT integration and flexibility, in: International Journal of Production Economics 116 (2008) 2, pp n FrontlineSolvers 2013, in: Stand: Zusammenfassung Um in heutigen Märkten wettbewerbsfähig zu bleiben, müssen Unternehmen die Leistungen und Investitionen ihrer Produktionsstandorte detailliert planen. Aufgrund der stetig steigenden Produktkomplexität sowie der Anzahl der erforderlichen Varianten steigen auch die Größe und Komplexität der Produktionsnetzwerke in ähnlicher Geschwindigkeit. Dies macht die ideale Verteilung der Wertschöpfung in globalen Produktionsnetzwerken zu einem entscheidenden Erfolgsfaktor. Um diesen Anforderungen gerecht zu werden, hat das Fraunhofer-Institut für Produktionstechnik und Automatisierung einen kombinierten Ansatz entwickelt, welcher mehrere Optimierungsdimensionen parallel betrachtet und dynamische Analysen mithilfe der Simulation zulässt. Rahman et al. haben einen Ansatz präsentiert, welcher diese dynamischen Analysen gezielt mit Inputparametern unterstützt, die durch eine statische Optimierungsanalyse auf der Basis eines Produktionsnetzwerkes mit mehreren Standorten und Wertschöpfungsstufen ermittelt werden [Rahman et al. 2013]. Das vorliegende Paper liefert einen Beitrag für eine Voranalyse, als Erweiterung der statischen Optimierungsanalyse von Rahman et al., um die Akkuratesse dieses Ansatzes bzgl. seiner Kapazitätsdaten zu erhöhen, wenn verschiedene Produkte parallel im Netzwerk gefertigt werden, wohingegen die statische Optimierungsanalyse lediglich ein fokales Produkt kennt. Authors OMAR ABDUL RAHMAN, born 1982, is working as a research fellow in the department of Order Management and Value Networks. His research mainly focuses on the field of supply chain management. BENJAMIN KUCH, born 1988, is a graduate student at the Fraunhofer IPA, Order Management and Value Networks department s u p p l y chain management I II/ 2013