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back to index backEUROtalk June,  2005

Volkswagen shifts its purchasing strategy

Bernhard contributes to focus on partnership and cost reduction

Wolfgang Bernhard (CEO for the Volkswagen brand and responsible for technical development at the group) and Francisco García Sanz (Group Director of supply) told a meeting of 150 suppliers at Volkswagen's supplier symposium in Hanover on Thursday 9th June that the Volkswagen group wants to shift away from his current focus on competitive bidding to work more earlier and more closely with suppliers on cost reduction ideas.

Since the Lopez era in the early 1990s Volkswagen has emphasised using the pull of its volumes to get competitive quotes in from a wide pool of potential suppliers as a key way to keep down costs.

Now, although the group will continue with its competitive bidding process, it is looking to work harder on cost reduction with selected suppliers, by optimising components and systems after supplier selection. The program includes Volkswagen working with its suppliers to look hard at the costs of existing models such as the Golf platform as well as work on future new model developments. The change involves working on an open book basis earlier and more closely with suppliers to target costs. Volkswagen wants to take a more active interest in the make up of the costs of the components it buys.

Volkswagen sees this as bringing its purchasing policy more into line with the practise at other car makers - and the approach has echoes of the work with suppliers done by Bernhard at Chrysler, which Volkswagen purchasing executives acknowledge, has been one of the inputs that has contributed to the new strategy.

Shift from competitive bidding to cost optimization

The change is a development of the PPO (partnership-based process cost optimisation) project launched at a similar supplier symposium two years ago, said García Sanz. That program had resulted in 2,500 ideas with a volume of €1 billion being submitted to identify and exploit cost optimisation potential, said García Sanz.

The group is starting with a closer look at the cost structures of high volume complex systems, says Garcia Sanz, and will extend the process to smaller volume models and components as the new approach becomes more established. Purchasing specialists for particular components and systems will spread the lessons learnt form the new approach across the complete model range, Garcia Sanz said.

The company is currently reorganising its purchasing organisation, according to a senior Volkswagen purchasing executive that spoke to SupplierBusiness.

The group is running a pilot program with around thirty suppliers to try out the new way of working together. The trial is as much to educate the Volkswagen purchasing teams as the suppliers, the purchasing executive said.

García Sanz said that Volkswagen and its suppliers expected to be able to make other cost savings in purchasing from the continued rollout of the group's module strategy and a reduction in the number of production stoppages and other ongoing processes.

García Sanz said that a small majority of the suppliers at the symposium had indicated that cost savings of between five and 15% were possible from a halving in the number of stoppages in Volkswagen's production process, some of which were caused by Volkswagen and some by suppliers, he said.

But García Sanz told SupplierBusiness that Volkswagen was not looking to the consolidation of suppliers as a way of reducing cost -- he said many Mittelstand (medium-sized privately owned) suppliers had successfully globalised through overseas investment and alliances.

New approaches to buying materials and more sourcing from China

García Sanz said that Volkswagen had set a target of cutting material costs by 10% -- or €1 billion, -- between 2006 and 2008 under a new cost-cutting program, Forum Material Costs”.

The savings are part of Volkswagen's extension of its ForMotion improvement program that will have saved the group €3.1 billion between 2003-2005.

García Sanz said that Volkswagen has agreed new pooling arrangements with its suppliers for raw material purchases. He refused to go into details, because he believes that it will be one of the key areas of competitive advantage in the next few years but said that Volkswagen's own steel supplies are 99% secured to the end of 2006.

Volkswagen has taken delivery of its first shipment of steel from China to Europe. The delivery is currently being processed García Sanz said.

He said that Volkswagen is looking to buy $1 billion worth of components from China in the next three years. China will increasingly be a source fro Europe as well as local production.

Russia and India are also areas of special interest to Volkswagen at present, a senior purchasing executive said.


2006 -2008 will see €4 billion in efficiency gains overall

In an interview with the Frankfurter Allgemeine newspaper earlier in the week, Volkswagen Group CEO Bernd Pischetsrieder said that he expects that in the budget to be agreed in November this year for the 2006 -- 2008 period, the group will achieve savings of another €4 billion.

Pischetsrieder says that because of the efficiency and cost saving programme the core Volkswagen brand will move out of its loss-making situation by the end of this year. Pischetsrieder is looking to savings of more than €1 billion on material costs, and another billion on labour costs. Volkswagen profits have been shrinking over the last three years and in the first quarter of 2005 Volkswagen only showed a small profit because of the contribution of the financial service division.

The core of Volkswagen brand should be profitable again by the end of the year, according to Pischetsrieder although there is no short-term prospect of the group achieving its target 9% return on capital in the short run.  In 2004 the group achieved a value-destroying 1.2% return on capital employed.

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