3/2004 Engineered Products & High Tech
> Global footprint design
> The last mile – Launching new products
> A factory within a factory
"The aim of executive review is to present topical management
issues in a competent, concise, relevant way for decision makers
in the capital goods industry."
3/2004 Engineered Products & High Tech
2 | Contents
> Global footprint design –
Structuring the value chain 4
> Interview with Dr. Jürgen Olbrich, Chairman of the Board of The rules of the game of globalization
Management, Edelstahlwerke Witten-Krefeld GmbH – have changed radically. The growth
regions of East Asia and Eastern Europe
Optimizing capital employed 14 are increasingly becoming the center of
gravity for customers and sales markets
for industrial goods. High factor costs
are making Germany less attractive as
a venue for production. At the same
Methods time, more and more international
manufacturing sites are reaching
> Getting the most out of working capital – Western European levels of quality
Working capital management in mechanical engineering 18
> The last mile –
Launching new products in the capital goods industry 26
> A factory within a factory –
Breaking new ground in industry 32
> The Engineered Products & High Tech
Competence Center 38
Roland Berger Strategy Consultants GmbH
Arabellastr. 33, 81925 Munich
Corbis (p. 2, 4, 13, 14, 17, 18, 26, 32)
Typo Weber, Munich
Circulation : 1.400
No reprints without prior permission
of the publisher
executive review 3/2004 Editorial | 3
You have decisions to make. Your time planner is full to bursting. You probably have
very little time to wade through the daily ﬂood of trade journals and publications
looking for topics that could be important to your work as a manager. That is why
executive review seeks to provide decision-makers in the capital goods industry
with an expert treatment of management issues that is both practical and accessible.
This issue therefore contains another carefully prepared selection of concise
information, professional opinions and hands-on assistance covering a variety
In our interview with Dr. Jürgen Olbrich, Chairman of the Board of Management,
Edelstahlwerke Witten-Krefeld GmbH, he reports on how to reduce capital employed
and raise production and delivery performance at the same time.
In "The last mile", Dr. Ralf Hasler, Director Corporate Development at Weidmüller
Interface GmbH & Co, highlights ways for capital goods producers to make sure their
new products hit the ground running.
"Global footprint design", our leading article in this issue, discusses the ﬁndings
of our large-scale survey of global value creation and the key success factors of global
value chain optimization.
"Getting the most out of working capital" highlights ways of optimizing capital
Today, even industrial support processes can be outsourced. "A factory within a factory"
highlights the opportunities of outsourcing in the capital goods industry. It also presents
a structured process designed to help companies make the right outsourcing decisions.
If you have any suggestions or questions, please do not hesitate to contact us at
I hope you enjoy reading this issue of executive review.
Head of the Engineered Products & High Tech Competence Center
Spend a little time with us – Roland Berger Strategy Consultants.
4 | Global footprint design
executive review 3/2004 Global footprint design | 5
Structuring the value chain
> Global footprint design
The rules of the game of globalization have changed radically. The growth
regions of East Asia and Eastern Europe are increasingly becoming the
center of gravity for customers and sales markets for industrial goods.
High factor costs are making Germany less attractive as a venue for
production. At the same time, more and more international manufac-
turing sites are reaching Western European levels of quality and
productivity. To stay competitive in the long run, German industrial
companies must now redeﬁne their global value-creation footprint.
In this article, Dr. Reinhard Geissbauer, Partner, and Henning Arndt,
Junior Consultant, show how integrating company sites in a global value
chain can lay a ﬁrm foundation for lasting success.
Radical change to the rules of globalization
The need to globalize the value chain has been an issue at German
industrial companies for some considerable time. Recent years
have witnessed a fundamental shift in the rules that govern the
game of globalization, however. Key target markets for German
plant and machinery are now no longer found elsewhere in
Western Europe. More and more such products are being shipped
to the growth regions of East Asia, Eastern Europe and South
America. Factor costs in Germany are rising even as foreign
6 | Global footprint design
production sites improve the quality of their wares. New product
and process technologies used to be developed exclusively in
Europe. Now, they are being churned out by technology centers
spread around the world.
The Laboratory for Machine Tools and Operational Studies (WZL)
at the Technical University of Rhineland-Westphalia (RWTH) in
Aachen, Germany, collaborated with Roland Berger Strategy
Consultants to study 70 leading companies in the engineered
products, automotive component supply and electrical engineering
industries. Their ﬁndings: 90 percent of respondent companies are
planning to transfer links in the value chain to other countries and
to optimize their global footprint in the next ﬁve years. In the past,
one third of the companies surveyed attached no importance to
offshoring. Today, however, more intensive competition is forcing
them to sit up and take notice of this important issue.
High-quality production no longer necessarily means
"made in Germany"
Up to now, low wage and non-wage labor costs have generally
been decisive whenever German ﬁrms have elected to set up
production facilities abroad. These factor costs naturally still play
an important part. However, Germany is also losing the advantage
of what used to rank as its "unique selling proposition": high
quality manufacturing. In the study, two thirds of the respondent
companies stated that production quality at their own offshore
locations is already as good as or better than that of their
operations in Germany. The same is true of both materials
costs for primary products and delivery times.
Comparative assessment of foreign and German locations
Location factor Worse than Germany As good as or better than Germany
Wages and salaries 0% 100%
Cost of materials 6% 94%
Delivery times 19% 81%
Customs duties/other charges 26% 74%
Production quality 33% 67%
Offshore production discount 49% 51%
Productivity 69% 31%
Source: Roland Berger Strategy Consultants
executive review 3/2004 Global footprint design | 7
Offshoring all along the value chain More intense competition in the middle of the price range
Production sites outside Germany are constantly expanding their German industrial companies have traditionally been strong in the
capabilities. Mechanical production components or simple welded premium market segment, where sophisticated technology and top
parts are therefore no longer the only items that are being quality are in demand. Yet the number of customers at the top end
transferred abroad. Increasingly, the trend is also to offshore of virtually every industrial market is dwindling. As more and
complex, technology-intensive products or even entire assemblies. more links in the value chain – especially procurement, production
The spectrum ranges from placing and assembling electrical and assembly activities – migrate to low-wage countries, however,
components in the electrical engineering industry to assembling companies are ﬁnding that they can optimize their overall costs
entire drive systems and automation components in mechanical and begin to compete in the medium price range too. At the same
engineering. It is especially worthwhile to manufacture at low- time, the new EU member countries are also emerging as ever
wage locations when minimal product customization permits more attractive sales markets.
high-volume production. The ability to minimize location-speciﬁc currency risks naturally
presents an added advantage. Companies can do this by spreading
However, assembly and production are not the only core functions their value chain across multiple currency areas.
that respondent companies are examining as potential offshoring
candidates. Industrial ﬁrms are today transferring activities along Picking the right globalization strategy
the entire value chain – including research and development, To date, German industrial companies have pursued four distinct
design, procurement, services and administrative functions. globalization strategies to gain the desired market access and cost
Alternative globalization strategies
Global Global market conqueror Global footprint champion
Serves the world's key markets Selects the optimal location
from internal production and for each corporate function
sales hubs (on location) and uses resources efficiently
throughout the global network
Western European value creator Regional cost-cutter
Leverages the resources and Transfers labor-intensive production
strengths of Germany, using and assembly steps to low-wage
domestic facilities to serve local countries, using Eastern Europe
and global customers and East Asia as an extended
Focused Global Exploitation of
Source: Roland Berger Strategy Consultants
8 | Global footprint design
The "Western European value creator" strategy and production capacity is duplicated in different global markets.
This strategy leverages the strengths of a company's German There is also the danger that internal capacity may be under-used
and/or Western European development and production sites. if market shifts occur.
Domestic operations primarily serve Western European and
selected global customers. Many of these companies make The "global footprint champion" strategy
technology-intensive products and leverage Germany's strengths "Global footprint champions" examine factor costs and quality of
as an R&D hub and its capability to customize products and performance to determine the best location for each and every
systems. Modular production islands give them the beneﬁt of corporate function – from design through service. These
ﬂexible manufacturing processes, short decision channels and companies establish a global network or "footprint" to optimize
active dialog between R&D and production/assembly. On the the use of resources, local beneﬁts, knowledge and materials ﬂows
downside, these companies have higher factor costs, less ﬂexibility within the organization. Such a global presence boosts growth and
to adjust capacity and a lack of in-the-ﬁeld development and improves the company's position in key markets around the world.
service skills, for example. It also enables ﬁrms to leverage product and process expertise on
a global scale and optimize factor costs at each location. The
The "regional cost-cutter" strategy principal challenge is to manage this global value-added portfolio
Regional cost-cutters use Eastern Europe or East Asia as an efﬁciently and network all processes intelligently. Only then can
extended workbench for labor-intensive steps in the production local resources and knowledge leads be exploited to the full.
and assembly processes. Compensatory pricing along the value
chain allows these companies to sharpen their competitive edge. 28 percent of the industrial companies questioned already operate
The challenge lies in what can be very substantial startup value chain links in Western and Eastern Europe, Asia and the
investments and necessary learning curve effects as operations in Americas. They are therefore already well on the way to becoming
low-wage countries are ramped up. There is also the danger that global footprint champions. One third currently rank as global
important product and technology knowledge could be lost to market conqueror, having established development and production
rivals. capacity in key markets. One ﬁfth still focus on German locations,
while another ﬁfth use selected sites in Eastern Europe to cut costs
The "global market conqueror" strategy on a regional basis.
"Global market conquerors" serve the world's key markets from
their own local production and sales hubs. This kind of company The ﬁndings of the study clearly indicate that, in future, only the
has solid access to and is well accepted on the most important global footprint champions will stay up among the front-runners in
global markets. Typically, in-house development and production international competition. Automotive component suppliers have
or selective local acquisitions have given them a leading market already progressed far further down the road to globalization than
position. They have the capability to adapt products to regional ﬁrms in other industries. The least internationalized of all German
requirements and to respond nimbly – for example by shipping industries is currently mechanical engineering, which is largely
replacement parts. Challenges to these ﬁrms often include a made up of medium-sized companies.
suboptimal cost position and few synergies because development
executive review 3/2004 Global footprint design | 9
Designing a company's global footprint – seven success factors Success factor 2: Deﬁne core competencies, future product
for winners portfolios and target markets in advance
In the manufacturing industry, global footprint champions have Every move to plan a global footprint should begin by clearly
plotted widely differing courses in their attempts to optimize deﬁning those core competencies that will remain inside the
corporate functions. Still, most companies that have succeeded company in future.
follow a common set of success factors. Such planning requires a detailed forecast of projected revenues
from focal products sold to key customers in each geographic
Success factor 1: Optimize the entire value chain market. This data can be used to identify any necessary changes
Global footprint champions must screen their whole value chain to the focus of design and production activities.
and optimize it in the context of a worldwide network. In recent
years, manufacturing companies have largely concentrated on Success factor 3: Link global planning to local expertise
improving their production networks. Yet cost and efﬁciency gains Choosing the most suitable locations is one of the most important
can be tapped all along the value chain – especially in the areas aspects to ensure successful global expansion. Management must
of design, purchasing, production and assembly, service, and the start by looking at each function and examining which region can
outsourcing of administrative functions. handle it most efﬁciently. In Eastern Europe, Bulgaria and the
Czech Republic spring to mind for the transfer of automation
software engineering, for example, while India and Singapore
offer highly skilled labor forces in the East Asian region.
Locations should be screened and selected based on criteria
that each company must compile in line with their own speciﬁc
Criteria ("ﬁlters") for selecting the most suitable location
First filter Second filter Third filter Fourth filter
> Czech Republic
> Political > Selection e.g.
> Latvia > Attractiveness
stability > Regional criteria for Sidoxin
> Lithuania for production/
> Economic location factors the actual Industrial Park,
> Moldova assembly
attractiveness location Galati/Romania
Source: Roland Berger Strategy Consultants
10 | Global footprint design
Success factor 4: Use Eastern Europe in particular for
labor-intensive links in the value chain
For the companies surveyed, low factor costs and satisfactory
production quality make Eastern Europe the ideal venue above all
for labor-intensive production and assembly work, as well as for
outsourcing administrative functions.
In different Eastern European regions, industry clusters are
emerging that lure investors with the promise of special localized
advantages. One example is the automotive cluster around
Bratislava in Slovakia, where VW, Toyota, Peugeot and Hyundai
plan to invest over 2.5 billion euros by the year 2008. Similarly,
the beneﬁts of the greater Soﬁa region are currently causing IT
companies such as SAP and Siemens to move their software
engineering and IT support here.
Eastern European countries at a glance – hourly labor costs in the manufacturing industry [2002/2003]
Hourly labor costs in the manufacturing industry
Eastern Europe – new EU members and other countries 2002/2003 [in EUR]
Norway Ukraine 0.5
Latvia Romania 1.5
Poland Slovakia 2.3
Ukraine Estonia 2.7
Republic Hungary 3.2
Moldova Czech Republic 3.4
Switzerland Austria Hungary
Romania Poland 3.9
Italy Slovenia 6.7
Source: Roland Berger Strategy Consultants
executive review 3/2004 Global footprint design | 11
Success factor 5: Exploit market opportunities in China – The respondent companies take the view that ﬁrms should only
but use local content to do so commit to China if they also see this country as a local sales
German companies have Eastern Europe as an extended market that they wish to penetrate in future. Many industrial
workbench on their doorstep. Accordingly, they see the factor cost companies have failed to gain a foothold in China's high-volume
savings from production and assembly in China as too slight to medium price segment. Developing machines in Western Europe
justify the greater risk of commitments in this region. Moreover, and manufacturing them at low cost in China is just not easy.
China's rapid economic growth has caused raw materials and Price differentials of 50 to 80 percent of the designed cost between
primary products from local suppliers to become more scarce and Western European and Chinese plant of a comparable standard
signiﬁcantly more expensive. Production costs in the Middle cannot be offset by having machinery produced locally. In many
Kingdom are therefore now often higher than those in, say, cases, a small local development team is needed to develop a
Romania or the Ukraine. machine that will also be competitive in the medium price
segment of the Chinese market. Companies such as MPM and
Agie Charmilles have established a solid market position relative
to their competitors by developing and making machinery on site
in China. Indeed, many of them now also export these products to
other Asian countries. High volume production in China not only
helps keep local competitors on a tight rein: It also helps reduce
the marginal unit cost of new developments made in Germany.
According to the companies that took part in the study, Chinese
production quality and, in some cases, even its productivity are
certainly comparable with the results that German facilities can
12 | Global footprint design
Success factor 6: Analyze the risk/earnings proﬁle of global Success factor 7: Manage the transformation process efﬁciently
footprint scenarios A good third of German companies' foreign commitments either
Every move to offshore corporate functions is fraught with risks. fail outright or at least do not deliver the anticipated long-term
Established processes, organizational structures and supplier cost and efﬁciency beneﬁts. One reason is that many companies do
relationships are taken apart and then put back together at a new not have the necessary internal resources – experienced staff who
location. Heavy capital investment must be pumped into physical are willing to spend one to two years helping on site set up a
infrastructure (such as buildings, telecommunications and IT), foreign operation, for example. Another is that the volume of
recruiting and training new people and ramping up production investment and the time it will take to get a foreign site fully
at the new plant. operational are frequently underestimated. On average, the
companies surveyed needed two and a half to three years to
A total-cost-to-serve comparison of all the various scenarios can set up an offshore production facility.
reliably identify whether it really does make sense to go through
with a planned relocation. Risk sensitivity analysis must then work This startup time can be shortened by observing a number of
out how the overall cost structure of a given global footprint "rules". A global footprint has to be guided by and have the full
scenario will change if certain cost parameters deviate signiﬁcantly backing of top management. Right from the outset, it is important
from their assumed values. What will happen to total costs, for to clearly state what is to be achieved using what resources at the
example, if shipments from East Asia to Western Europe take 35 new location. It is equally critical to spell out which links in the
days instead of 25? The risks surrounding each scenario must be value chain are to remain with the German part of the company.
quantiﬁed and their inﬂuence on total costs must be calculated.
Professional support in the target country is a further imperative.
The next step is to perform a thorough ﬁnancial analysis of all This can, for example, be provided by a cooperation partner who
global footprint scenarios. IT-based simulation models are the most offers advice and assistance on everything from choosing a location
efﬁcient way to do this. The winning scenario should then be to recruiting suitable staff. Close contact with the authorities who
underpinned by a solid business plan. must approve the project and with local politicians and companies
is essential (above all in Eastern Europe and East Asia) to ensure
swift, non-bureaucratic solutions.
executive review 3/2004 Global footprint design | 13
Summary: Global footprint design is a top-priority job for senior
Three key principles shape the way successful industrial
companies design their global value chains:
> They bundle and optimize their entire value chain – from
design to after-sales service – and they give their company
a genuine global footprint.
> They critically assess the total costs and risks involved in every
change to their value chain structures. And they only bundle
resources where signiﬁcant efﬁciency gains can be achieved.
> They have understood that global footprint design is a job for
top management – a job that demands rigorous discipline and
sufﬁcient resources if it is to be completed successfully.
Copies of the exhaustive study, "Global footprint design – Mastering the
rules of international value creation", are available on request from
14 | Interview Edelstahlwerke Witten-Krefeld GmbH
Interview with Dr. Jürgen Olbrich, Chairman of the Board
of Management, Edelstahlwerke Witten-Krefeld GmbH
Optimizing capital employed
Edelstahlwerke Witten-Krefeld GmbH (EWK) is a ThyssenKrupp Steel AG
company. It occupies a leading global position in the production, sale
and machining of long stainless steel components. The company's
2,600 employees generated sales of around 570 million euros in ﬁscal
2002/03. Headquartered in Witten, Germany, EWK has ofﬁces
worldwide, including North and South America, China, Southeast Asia
and Africa. Its product focus is on tool steel, which is used in producing
plastic molds, for example. It also manufactures and sells structural
steel for the automotive industry (e.g. for axles, shafts and cylinders).
The company's product portfolio is rounded off by high-grade materials
such as Ferro-Titanit and other special-purpose materials which are
used in Formula 1 engine components (where they have to withstand
tremendous stresses and strains) and in dental substances.
Before EWK began its restructuring exercise, sales volumes, sales
revenues and earnings were all in decline. Lower sales volumes owing
to the gloomy economic situation were one reason. But there were also
internal problems in production, as well as the challenge of extremely
complex products and very high costs.
executive review 3/2004 Interview Edelstahlwerke Witten-Krefeld GmbH | 15
executive review: When restructuring began, how was EWK positioned
to respond to market demands?
J. Olbrich: Since EWK's customer portfolio is largely shaped by the
automotive industry, we face the same requirements as this sector. "Short delivery times and high
With the auto giants migrating to America – think of Mercedes-
Benz and BMW – or to Asia, as in the case of Volkswagen and delivery performance are key
Audi, tool steel is becoming more important as a "global product".
In the car industry as in other industries, short delivery times and success factors for the
high delivery performance are the key to successful long-term
collaboration between manufacturers, distributors, machine tool automotive industry as for
makers, component suppliers and car makers. But these
requirements cannot be met properly if – as was the case before other industries."
we restructured – you don't have your own global sales network,
you don't have optimized inventories, and you have neither
coherent software solutions nor mature interfaces between
production and business support. That is exactly how things were
like at EWK. And the situation was reﬂected in our ROCE, one of
the management ratios used at ThyssenKrupp Steel AG, which fell
short of its target of 12 percent. On top of that, operational issues
such as highly complex production procedures and processes were
necessary because of our very broad range of products. That left us
carrying a heavy cost burden owing to the size and structure of
our workforce, and also for energy and raw materials. So earnings
were dropping last ﬁscal.
executive review: What special requirements did you place on the
restructuring concept, and hence on the need to reduce net working
capital (NWC)? And what strategic objectives is EWK pursuing?
J. Olbrich: First and foremost, of course, we had to use the project
to cut costs and optimize NWC in order to improve our ROCE. "We set targets for inventory
We also made sure this focus became standard practice throughout
the company, besides setting targets for inventory turnover and turnover and delivery
We also set ourselves two strategic goals. One was to establish a
global footprint, i.e. to become a global provider of tool steel. And
the other was to develop made-to-measure packages of tool steel
products in line with customers' requirements. This means that,
in the future, we will work even more closely with our customers
to nail down speciﬁcations and target applications. As a result, we
will be able to deﬁne, set and guarantee optimal material
executive review: Restructuring, geographic expansion and inventory
optimization sounds like a lot to handle all at once. How did you tackle
J. Olbrich: Well, we began by thoroughly examining all the data.
To ensure that restructuring delivered sustainable results, we ﬁrst
had to make sure everyone in the company knew exactly where
we were starting from. We wanted to keep the process clear and
transparent and to recruit all our managers as "multipliers". So we
deﬁned who was responsible for what and set some ambitious
targets based on benchmarks for things such as inventories and
debtor and creditor days.
16 | Interview Edelstahlwerke Witten-Krefeld GmbH
Once we got past the conceptual phase of restructuring, we
"We wanted the best way of concentrated on integrating and optimizing the sales units we
wanted to acquire in Germany and outside Europe. We seized the
accessing customers in future opportunity to optimize the interface between Production and
Sales, and also to ﬁnd the best way of accessing customers in
growth markets such as Asia future growth markets such as Asia in general and China in
particular. Completing our value and supply chain in this way
and, in particular, China." gave us the chance to optimize capital employed. In addition,
an integrated software solution – covering everything from waste
and alloy scheduling to ﬁnal shipment to the customer (and in
some cases even to managing our customers' inventories) – helped
us improve delivery performance.
We set up warehouse hubs in South America and Asia to cut the
"All in all, we shaved around 20 number of warehouses maintained worldwide, the inventory
volume and our delivery times. At the same time, we raised our
percentage points off inventory inventory turnover factor from less than two to more than four.
All in all, we shaved around 20 percentage points off inventory
days during the restructuring days for both semi-ﬁnished and ﬁnished goods during the
restructuring exercise. And we did that despite also integrating
exercise." inventories held by the German sales company. Incidentally, we
achieved improvements of a similar magnitude in receivables and
debtor days. Consignment stores added the ﬁnishing touches to
our "inventory storage strategy", giving us greater local ﬂexibility
and improving our foreign exchange hedging, especially in Latin
executive review: How did you manage to organize and realize such
extensive change processes while continuing to run "business as
Indexed1) inventory and debtor days at EWK GmbH, October 2002 [%]
Trend in Initial ABS2)
receivables at Jan 1, 04 Integration of
at Jan 1, 04
Trend in fin./
10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4
2002 2003 2004
Trade receivables Finished/semi-finished goods
(base: 3-monthly average sales, in EUR) (base: 3-monthly average shipments, in tons)
1) Inventory/debtor days, Oct 02 ^ 100%
= 2) Asset backed securities
Source: EWK Controlling
executive review 3/2004 Interview Edelstahlwerke Witten-Krefeld GmbH | 17
J. Olbrich: We set ambitious goals in the early, conceptual phase.
And we put together mixed project teams containing people from
EWK alongside experienced external consultants. These teams
translated the deﬁned packages of actions into individual steps and
put numbers on every one of them. To optimize project
management and controlling, we made both the project managers
and team members report to the Managing Board's Steering
Committee every four weeks. This created a valuable forum to
present project progress, raise any issues that needed clarifying
and get decisions taken quickly.
To increase the long-term efﬁciency of both internal and external
processes, we also provided our managers with further training
and development based on analyses of potential and deﬁned plans
Within just a few weeks, we had identiﬁed over 80 percent of the
necessary improvement potential. The 100 percent mark was hit
in a matter of months. Today, a good year after restructuring
"Within just a few weeks, we had
began, around 50 percent of deﬁned actions have been put into
practice – and are already improving our earnings.
identiﬁed over 80 percent of the
executive review: One question in closing: What do you see as the key
reasons why restructuring was so successful and why NWC could be
reduced so signiﬁcantly?
J. Olbrich: I am convinced that that is due to the way all the
speciﬁed requirements and deﬁned actions ﬁtted together
perfectly. In addition, I would also stress the importance of
"All the deﬁned requirements and
the ambitious goals we set in the early phases of the project.
The main success factors were as follows:
actions ﬁtted together perfectly."
> We analyzed our position objectively and with brutal honesty
> Our people perceived restructuring as an opportunity rather
than a threat
> Our top management remained fully committed to the exercise
> We did not focus only on cutting costs but took a "big picture"
approach, which also involved investing selectively and taking
action to reduce capital employed
> We adopted a structured procedure involving external support
in mixed teams
> Finally, decisions were taken transparently, implemented rapidly
and backed by the dedicated endeavors of everyone concerned.
executive review: Dr. Olbrich, thank you!
Dr. Karsten Derks, Project Manager at the
Restructuring & Corporate Finance Competence
Center, conducted this interview on behalf of
18 | Working capital management
Working capital management in mechanical engineering
> Getting the most out of
executive review 3/2004 Working capital management | 19
It is becoming more and more difﬁcult to use debt to ﬁnance
mechanical engineering ﬁrms. Companies in this industry are therefore
forced to optimize their capital employed in order to become less
dependent on borrowed money. Reducing working capital is one fast and
sustainable way to lower the volume of ﬁnancial resources employed in
the company. In the article below, Thomas Ferchland, Project Manager
at the Engineered Products & High Tech Competence Center, discusses
some valuable ways to optimize working capital.
German companies tend to be low on equity compared to ﬁrms in It will have no choice but to focus more clearly on its core
other countries. So they need debt to ﬁnance both ﬁxed assets and competencies.
working capital. There are two reasons for this disparity. One is the
heavy taxes on incomes to which German companies are subject. It follows that the market for corporate borrowing will probably
This makes it harder to free up internal funding and effectively experience the following developments:
subsidizes the interest on borrowed funds. The second reason is
that interest on debt has been low in the past. 1. Corporate credit spreads will tend to rise in the medium term.
2. Lending policy will be more restrictive and will more
Trend in corporate borrowing accurately reﬂect companies' creditworthiness. In this context,
The public banks have hitherto exercised a very considerable creditworthiness means the credit risk to their business, i.e. the
inﬂuence on the German corporate borrowing market. As the (sales) volatility and proﬁtability of the business, plus aspects
government underwrites their liabilities, they have access to such as innovation risks. It should be noted, however, that the
favorable ﬁnancing terms. As a result, the ratio between the markets generally take a dim view of creditworthiness in the
interest rate imposed on corporate customers and the public mechanical engineering sector.
banks' credit risk was seldom appropriate. Over the past few years,
banks have thus been forced to adjust the value of their lending Many companies in this industry will quite simply have to
portfolios and, more recently, to restrict their lending to business. restructure their debt. Likewise, they will have no alternative but
The European Commission will remove government guarantees to optimize capital employed. So it is only logical that they will pay
for German public banks. This sector will therefore see its own considerable attention to working capital.
ﬁnancing costs – and pressure to consolidate – increase sharply.
20 | Working capital management
Tracking down working capital
Working capital is essentially the money used to ﬁnance a
company's day-to-day business. The most important items on the
assets side of working capital at mechanical engineering ﬁrms are
trade receivables, inventories (such as ﬁnished goods, work in
progress and raw materials and supplies) and payments on
The most important items on the liabilities side are trade payables
and advances from customers.
In the engineering sector, advances from customers are crucial to
ﬁnance operating business. On average, industrial systems ﬁrms
with long project runtimes (such as MAN Roland and Müller
Weingarten) manage to get as much as 40 percent of the value of
orders in hand paid as advances. Yet even mechanical engineering
ﬁrms with more standardized product ranges and shorter projects
(such as Heidelberger Druckmaschinen AG and Deckel Maho
Gildemeister) obtain advances of 10 percent on average.
Alongside payments on account and advances received, high- Calculating the optimal level of working capital
volume trade receivables and payables usually also play a critical The optimal level of working capital depends on the company's
role in the ﬁnancing of corporate activities. Trade payables are business system and payment habits and the habits of its end
especially important in light of the large proportion of work that customers.
is outsourced to third parties.
The absolute ﬁgure for working capital alone says very little. It can
The optimization of working capital frees up large amounts of only be usefully assessed and interpreted relative to other numbers
otherwise tied funding. High levels of advances and optimized on the balance sheet and income statement, such as in relation to
receivables/payables management can even enable industrial sales over the year (days working capital).
systems companies in particular (such as Technip) to carry negative
working capital. The money thus freed up can be put to good use Seriously reducing working capital can actually have a negative
to ﬁnance ﬁxed assets. impact on a company's earnings situation: Factoring, for instance,
costs an interest and handling margin. Higher advances can lead to
price discounts. And so on. It follows that optimizing working
capital does not necessarily mean minimizing it. Rather, it means
putting together a balanced package of intelligent measures that
will produce the best possible level of working capital given the
company's unique situation.
The best way to analyze the quality of a company's working capital
is to benchmark it, i.e. to compare key elements of working capital
with historic internal ratios and the ratios published by comparable
Comparing working capital
The ﬁrst step is to identify the most valuable benchmark against
which to deﬁne a ratio for each element of working capital. Our
experience has shown the following ratios to be singularly useful:
executive review 3/2004 Working capital management | 21
Trade receivables: Inventories – ﬁnished goods and work in progress:
Trade receivables Measuring sales revenues or production costs is the best way to
Debtor days = x 365
Sales compare the monetary value of ﬁnished goods and work in
This ratio does, however, create problems when comparing project
sales across different accounting systems (German HGB, for Finished goods and work in progress
Inventory days = x 365
instance, or percentage of completion under US-GAAP). Where Sales (or production costs)
sales are posted using the percentage of completion (POC)
method, some components of sales have not yet been invoiced The value of work in progress depends heavily on average project
and are therefore not carried as receivables. This makes it difﬁcult runtimes and is therefore hard to compare with the ﬁgures for
to compare different sets of receivables. To make the ﬁgures outside companies. It is thus best to draw on comparisons with
comparable with HGB data, companies that report in accordance historic internal numbers. Many industrial systems companies
with HGB can use total sales as their yardstick, with the difference are already under severe pressure from customers to shorten their
that POC (unlike total sales under HGB) also includes a proportion project runtimes. So most have already optimized the relevant
of proﬁts. As a rule, however, this residual error is minimal and ratios. Companies that manufacture goods for long-term storage
can be ignored. or replacement parts depots need to be examined separately.
Inventories – raw materials and supplies: Inventories – payments on account:
Raw materials and supplies (RMS) should be expressed as a ratio Payments on account can best be compared with the cost of
that reﬂects the value they add to the company. Quick and easy materials for a given period.
ratios can be arrived at by taking sales or production costs for a
given period, say. However, it would be more accurate to measure Payments on account
Payments on account [in %] =
their relationship to a company's gross proﬁt. This is because the Cost of materials
degree of vertical integration varies signiﬁcantly from company to
company in the mechanical engineering industry. Trade payables:
Raw materials and supplies Trade payables should be measured in relation to the cost of
RMS days = x 365
Gross profit materials.
Creditor days = x 365
Cost of materials
22 | Working capital management
Advances from customers/orders in hand [%] – benchmark
Industrial systems Mechanical engineering
30 33 27 30 28
30 29 29
20 24 20
16 16 10 10 9
10 12 10
9 9 8
Müller Dürr KBA IWKA Krones Metso
MAN IWKA Schuler W+D HDM DMG
Source: Roland Berger Strategy Consultants
Advances from customers:
Advances from customers should be set in relation to orders in Having assembled a construct of benchmark ratios, the next thing
hand. Here, HGB and US-GAAP ﬁgures are fully comparable: is to deﬁne the external and internal benchmarks themselves.
Where orders in hand are reduced by the realization of POC sales Direct competitors or companies with comparable value-adding
under the one system, advances from customers (for services not processes, vertical integration structures and business systems or
yet rendered) are reduced accordingly under the other system. similar customer structures are the best choice as external
benchmarks. In this way, a ﬁrm that makes paintshops for the
Advances from customers automotive industry, say, can be compared with companies such
Advances from customers [in %] =
Orders in hand as Müller Weingarten, Schuler and IWKA, which also supply
production plant to the car industry. KBA and MAN Roland lend
themselves to comparison as both have major strengths in large
offset roll projects. Conversely, they are less well suited to
comparison with HDM, which generates much of its sales with
smaller sheet-fed machines.
To identify internal benchmarks, data should be gathered at
business unit or individual company level. The front-runners
can thus be pinpointed and used as points of reference. Careful
comparison can then be used to derive detailed targets and target
ratios for the individual components of working capital and for
executive review 3/2004 Working capital management | 23
Optimizing working capital
each corporate unit (business unit, business line, subsidiary, etc.) Once internal and external benchmarking has revealed the ideal
in line with the management's philosophy. These targets must then target composition for a company's working capital, the actions
be validated in consultation with the line or unit managers. needed to reach this target must be deﬁned. Depending on the
Operational measures can then be deﬁned to optimize working particular element of working capital, both the corporate functions
capital. concerned and the nature of the operational actions will vary.
The deﬁned metrics should be reported as part of the normal
reporting cycle. Discussions of the trend in working capital should Trade receivables, for instance, must be optimized by Sales in
be included in controlling meetings. In addition, it is usually also collaboration with Corporate Finance and the company's
necessary to factor the targets deﬁned for working capital into commercial management. Besides taking steps such as shortening
management bonus agreements to boost motivation and focus payment targets and actively managing receivables outstanding,
executives on this issue. receivables can also be sold to ﬁnancial service providers using
factoring tools and thus taken off the balance sheet. Owing to the
Comprehensive controlling of working capital also simpliﬁes nature of their project business, however, it is far more difﬁcult for
the process of balance sheet planning for each business unit. industrial systems ﬁrms to use tools such as factoring than it is for
Furthermore, it sharply improves the quality of balance sheet mechanical engineering companies. Receivables from service
targets. Finally, continually comparing internal benchmark ratios business tend to be best suited to factoring at these ﬁrms. On the
with competitors' ﬁgures helps keep a company focused on any other hand, the cost of factoring and price pressure caused by
weaknesses that may persist. shorter payment targets can put the company at a disadvantage.
24 | Working capital management
Raw materials and supplies can be improved by optimizing
ordering practices and perfecting the art of inventory management.
Purchasing, Production and Inventory Management are the units
responsible for these improvements. However, reducing
inventories increases the risk that materials and supplies may not
be available on time.
Work in progress can be scaled back by optimizing the value chain
structure, order times and assembly times. Here again, this adds
to the risk of late completion, which could lead to contractual
penalties. These activities should be entrusted to Project
Management, Purchasing and Assembly/Production.
Payments on account to suppliers should be reduced following
suitable negotiations between Purchasing and those suppliers.
Companies that apply such measures may run the risk of losing
good suppliers or negatively impact procurement prices.
Days working capital – benchmark
Industrial systems Mechanical engineering
130 130 123
110 110 118
97 97 97 109
90 84 94 90 92 94
86 86 89
50 46 50
-10 -12 -10
-30 -26 -30
Technip SMS MAN IWKA W+D Metso Krones
Dürr Müller Schuler Techno- IWKA DMG
Source: Roland Berger Strategy Consultants
executive review 3/2004 Working capital management | 25
Purchasing is also responsible for optimizing trade payables. Advances from customers must be optimized by Sales in
Longer payment targets must be agreed with suppliers and existing collaboration with Corporate Finance and the company's
payment targets exploited in full. However, use should be made of commercial management. Again, though, too much pressure
cash discounts wherever these have been agreed. For example, for higher advances can result in price concessions that can
exploiting an extra 30 days' grace by waiving a two percent cash undermine the company's long-term proﬁtability.
discount is equivalent to an annual ﬁnancing rate of around 24
percent. It is generally easier for industrial systems companies to To sum up: It is reasonable to expect that many mechanical
manage the target period for trade payables because they can engineering and industrial systems companies will have to pay
negotiate advantageous terms of payment (e.g. back to back or more for debt in future. Accordingly, they will come under greater
better) with smaller suppliers who provide complete assemblies. pressure to thin out capital employed wherever possible. Since
Mechanical engineering ﬁrms tend rather to buy and process working capital is one of the main elements of capital employed,
components from volume manufacturers and therefore have less optimizing it is a challenge that cannot be avoided – but one that
room to maneuver. Also, focusing too strongly on payment terms can be mastered using the methods discussed above.
can cause purchasing prices to deteriorate.
26 | Capital goods industry
Launching new products in the capital goods industry
> The last mile
executive review 3/2004 Capital goods industry | 27
Your new product has been shown at the trade show. The marketing
materials are all present and correct. The road show is over. The only
problem is: Your sales engineers don't seem particularly excited – and
nor do your customers. Orders are trickling in but are well off target.
So what is going wrong? This article by Dr. Ralf Hasler, Director
Corporate Development at Weidmüller Interface GmbH & Co., and
Dr. Torsten Henzelmann, Partner at Roland Berger Strategy Consultants,
highlights typical pitfalls during the market launch phase. Better still,
it reveals how clearly structured processes can make sure a new product
hits the ground running.
Analyses of roll-outs that ﬂopped often ﬂatly state that they were
the "wrong products". However, we would contend that a large
number of failed or disappointing product launches are simply
the result of a lack of upstream coordination.
We estimate that around 40 percent of all new products in the
German capital goods industry are actually launched up to 24
months after the original planned date. And of those projects that
do make it through the target launch window, a mere 10 percent
(i.e. 6 percent of all projects!) live up to the sales forecasts
published when the project was initialized.
Component manufacturers in particular have to be able to literally
"deliver the goods" as soon as concrete demand is expressed.
However, this fact alone implies that a well coordinated market
launch is not the sole responsibility of Product Management.
Sales, Product Development, indeed the entire supply chain must
make a concerted, coordinated effort if an innovative product is to
successfully complete the last few yards of its race to market and
become a real winner.
28 | Capital goods industry
This interplay between different units can be prone to friction,
however. A number of weaknesses are typical:
Insufﬁcient localization in the marketing mix: Advertising messages
(and the way they are presented) must be adapted to the relevant
target culture. This is especially true of products that have sales
potential in Asia. It is not enough simply to translate advertising
copy one to one. Similarly, the product pricing strategy must make
allowance for the different ways in which discounts are treated
in different countries (This factor should naturally inﬂuence
recommended gross prices). Well before the product gets to
market, Corporate Marketing must do a lot of hard talking –
and listening! – to the company's marketing satellites in other
Quality or other problems when production is starting up, causing
delayed shipment: As innovation cycles grow ever shorter, products
and services often no longer have time to mature properly. The
software industry has long grown accustomed to beta versions,
where the product only gets its ﬁnal polish after the customer has
it installed. But this procedure is not usually feasible with
technical products. To prevent expensive recalls and warranty
claims, suppliers often have no choice but to go back on their
word and delay market launch.
Inaccurate sales forecasts and inadequate coordination between
Production, Product Management and Sales, impairing the company's
delivery capabilities: Ideally, a new product should already be in
stock when it goes on general sales release (For build-to-order
products, appropriate manufacturing capacity should be on stand-
by). Yet inventory managers (usually production or logistics bosses)
are often unwilling to accept the uncertainties surrounding the sale
of a product for which demand patterns are still an unknown
quantity. The same goes for sales intermediaries, such as industrial
and electrical goods wholesalers. Sizeable stocks are only
scheduled for products for which demand patterns can be forecast
reliably. By no means least, efforts to reduce working capital have
made this problem a lot worse throughout the industry.
Sales arguments that pay too little attention to customer beneﬁts:
Beneﬁts to the customer may have been the focus of the innovation
process. Initial prototypes may be running smoothly. And Product
Management may indeed have grasped the unique selling
proposition. Nevertheless, efforts to implant sales-clinching
arguments in the minds of the sales force frequently fail. The sales
team's ﬁrst encounter with a new product is typically restricted to
registering the technical details, understanding what room they
have to maneuver on price, glancing at the sales documentation
and making sure they order enough brochures.
executive review 3/2004 Capital goods industry | 29
It does not take long to sketch the solution to the entire problem. Many companies are actually charting new territory when they
The following elements are essential: seek to structure management responsibility within a project team.
It takes a lot of courage, a fresh mindset and adjustments to
1. An agile, effective project team with generous entrepreneurial traditional decision-making processes to grant entrepreneurial
freedoms, clearly deﬁned areas of responsibility and equally freedoms to such a team.
clear interfaces with other corporate functions
2. A transparent, end-to-end process which – and this is usually An intelligent mix of proven and innovative marketing tools helps
where the problems begin – often requires activities to run in create the necessary structural framework. This mix can include
parallel owing to time constraints marketing circulars for the sales companies, e-learning for the sales
3. A modern mix of marketing tools that takes full advantage of force and potential-based customer segmentation, for example.
the potential of new communication technologies and new
2. A transparent, end-to-end process:
Operational implementation is difﬁcult usually because it is not
1. An agile, effective project team: possible to concentrate responsibility in just one pair of hands.
The project team naturally plays an important part in successful The necessary processes always involve the participation of several
product launches. It should remain unchanged throughout the (or even many) departments. Similarly, measuring the performance
whole project (preferably from the moment when conceptual work of the product launch process often leaves plenty of room for
on the business strategy begins through to successful market individual discretion. Top management therefore has a hard time
launch). Innovation is a team game and can only succeed if it is managing, measuring and assessing the success of the process.
played as such. It therefore makes sense to agree targets and
incentives with the team as a whole, not with individual members. The ﬁgure below outlines a prototype process that covers the
The project team should retain management responsibility, majority of the requirements discussed above for the purposes
i.e. it should remain responsible for sales, costs and proﬁtability, of the capital goods industry.
for at least one to two years after market launch.
The core "market launch" process
1 Dress rehearsal 2 Preparation 3 Acceptance 4 Roll-out
> Review sales planning > Define team and areas > Verify necessary > Perform all actions
in an iterative process of responsibility approvals/authorizations according to plan
> Validate/complement > Plan accompanying > Ensure that logistics > Closely monitor
marketing mix promotional campaigns conditions are in place inquiries/new orders
> Define resources (e.g. mailshots, (inventories, master and adjust production
needed for market entry telephone marketing, data, etc.) accordingly
> Define marketing ads) > Conduct sales training
message or media mix > Prepare media (print, (road shows, e-learning,
> (Where appropriate) Internet, packaging, video conferences, etc.)
launch production or etc.)
keep production > Develop info materials
capacity available for Sales
4–40 weeks 3–6 weeks 1–2 weeks 2–4 weeks
Source: Roland Berger Strategy Consultants
30 | Capital goods industry
Phase 1 "Dress rehearsal": Before market launch begins in the
narrower sense of the word, it is useful to do a "dry run".
Does the product really meet all anticipated requirements?
Have technologies changed in the meantime? Have rivals launched
products to which we can or must respond? Are our sales plans
still accurate? Is it possible to acquire pilot customers or perform
advance tests? Have all industrial property right issues been fully
Phase 2 "Preparation": This is where preparation for market
launch begins in earnest. Editorial work commences for all
literature (ﬂyers, catalogues, user manuals, info CD-ROMs,
technical data sheets, etc.). Ideally, the content and appearance
of all these materials should be harmonized. The nature of
packaging should also be deﬁned now, if this has not already been
done. Trade show presentations must be adapted and prepared.
And the same goes for announcements in the media (editorial
content in publications, advertisements, etc.). At the same time,
all preparations for production and (where appropriate) the build-
up of inventories should be made now at the latest. The timing of
initial production runs should also be determined at this stage.
Phase 3 "Acceptance": Roll-out must now be announced to the
sales force resolutely and professionally. The same applies to
implementation of planned direct marketing campaigns. Sufﬁcient
quantities of samples must be available. And enough human
resources must be set aside to support the product during the
startup phase. Sales should validate forecasts. On this basis, sales
planning should be reviewed for the last time and coordinated
with Scheduling and Production.
Phase 4 "Roll-out": Especially in the more traditional areas of the
capital goods industry, it is common practice for new products
unveiled at trade shows only to be shipped several months later.
However, as innovation cycles continue to shrink, it is advisable
to systematically leverage the "emotional momentum" of potential
customers while the product is still a novelty to them. In other
words, when you announce a new product, you should be ready
to ship it. Long-term success likewise hinges on close monitoring
of sales performance in the ﬁrst few months after roll-out.
Adjustments may need to be made as a result. Were price targets
hit? How did the competition react? What complementary
marketing activities do we still need? Can we acquire reference
customers who will effectively multiply our advertising for the
executive review 3/2004 Capital goods industry | 31
3. A marketing mix that matches the needs of the product and The above list is just a small selection of the many tools that can
the company: help make product launches more efﬁcient and successful, but that
Alongside the project team and the process, the marketing mix is often attract too little attention or get overlooked completely.
the third critical factor for successful product launches. Product Other key factors are widely known and have become a regular
managers today have far more ways to beat the drum for their feature of product launch processes. For instance, most companies
products than they did only a few years ago. Here are just some rigorously control key performance indicators (KPIs) such as
of the available options: process milestones, time to cash, proﬁt contributions and market
share. Managers are also aware that their own personal
e-learning techniques to train the sales force: Companies live in commitment has a knock-on effect down through the ranks.
mortal fear of product-speciﬁc sales seminars. In effect, these Accordingly, they have to devote their full attention to every new
events drag the sales team in off the street, cost a lot of money innovation and strategy, and hence also to new product launches.
and are often not very efﬁcient. Professional e-learning modules
combine authentic knowledge transfer with the beneﬁts of To summarize: Besides careful controlling and the personal
mobility and independence: People can "attend classes" when commitment of top management, the complex process of
and where they choose. launching a new product in the capital goods industry requires
Potential-based customer segmentation: New products can often be
communicated to new customers in more ways than the existing > A team approach to the market launch – Development,
product range. True, it takes yet another tremendous effort to Production, Sales, Marketing, etc. must all work very closely
refocus sales on high-potential customers in the context of a new together
product launch. But the exercise opens up excellent opportunities
to win new customers in the high-potential bracket who have > Start-to-ﬁnish responsibility on the part of project teams – even
hitherto been served by competitor companies. beyond actual roll-out
Optimized timing of visit preparation: Thanks to mass broadband > Fast realization of innovations thanks to ﬂexible organizational
access to the Internet, it is now very easy to combine, say, structures.
a telephone call with a virtual product presentation or some form
of guided interaction with an electronic product catalogue. This
kind of sales pitch often wins contracts before the customer has
even put the phone down. Whatever the case, such preparatory
actions help sales engineers to sound out customer expectations.
Personal visits can then be prioritized on the basis of the
impressions thus gained.
32 | Industrial facility management
Breaking new ground in industry
> A factory within a factory
executive review 3/2004 Industrial facility management | 33
Reducing vertical integration is a hot topic in almost every enterprise.
Yet few ever seem to debate the pros and cons of outsourcing industrial
support processes. Dr. Torsten Henzelmann, Partner at Roland Berger
Strategy Consultants, discusses the beneﬁts that outsourcing can offer
ﬁrms in the capital goods industry and presents a structured process to
help make the right decision.
The capital goods industry evidently has no worries about
entrusting the running and ownership of production plant (such
as paintshops and process engineering systems) to professional
operators. A Roland Berger survey recently found that every tenth
mechanical engineering ﬁrm now offers to run the machines it
makes on behalf of its customers. Every ﬁfth maker of complex
systems does the same. Large customers in the automotive and
electrical engineering industries tend to choose this option
because of its impact on costs and balance sheets. Smaller
companies often do so because their in-house staff are
overstretched by the need to operate ever more complex
machinery. Either way, companies are so focused on these issues
that no time is left – or no specialist knowledge is available – to
optimize support processes. It is precisely this gap that industrial
facility management is ideally placed to ﬁll.
34 | Industrial facility management
Operator models for the capital goods industry
A pan-European survey conducted by Roland Berger Strategy
Consultants found that industrial companies see operator models
as the way forward, both for production plant and for auxiliary
> Support for conveyor systems, assembly and test beds,
telpher lines and tools
> Operation of lifting gear, cranes and power-driven doors
> Operation of internal logistics
> Power, heat, water and compressed air supply
> In-building and sanitary technology
Outsourcing affects facilities of all kinds
Proportion of services provided to industrial companies primarily or in full by external suppliers, 2002 and 2006 [% of responses]
Technical Secondary Primary
Facility building technical technical
infrastructure Buildings systems equipment equipment
+24% +19% +17% +17% +15%
63 64 60
43 43 42
25 25 27 26
Outsourced 20 21 24 21
2002 2006 2002 2006 2002 2006 2002 2006 2002 2006
Source: Roland Berger market study
These auxiliary processes are seldom regarded as core
competencies that can affect a company's competitive position.
On the contrary, many ﬁrms pay so little attention to such
supposedly unimportant issues that technological progress scarcely
ever ﬁnds its way into these processes. Efﬁciency therefore
remains well below standard. Accordingly, precisely these areas
afford facility management service providers the opportunity to
add substantial value for their customers. They can do so by
tendering operator models whose processes have been rigorously
executive review 3/2004 Industrial facility management | 35
This added value can even be contractually deﬁned. Contracting Four steps to identifying support processes and their outsourcing
models that effectively outsource a company's efforts to save potential
money are the ideal strategy. Essentially, this strategy assumes Step one is to decide which aspects of operation are to be
that, in its capacity as a customer, the facility manager assumes outsourced and to what extent. In addition, target operator models
responsibility for providing operating services (such as power and should be drawn up for these units and processes. Outsourcing (or
heat supply, transport services, etc.), but also for improving even insourcing) individual services is not an end in itself. It must
efﬁciency to a deﬁned extent. Part or all of the resources and always aim to improve the performance of the company's entire
capital employed by the facility manager are reimbursed out of value chain. At Rolls-Royce, for example, some production
revenues from its operating services, but also from the facilities have outsourced their materials provisioning. This
streamlining potential that it taps. The provider shoulders the practice has reduced the volume of capital employed and
opportunities and risks arising from over- or underachievement simultaneously improved both availability and internal logistics.
of contractually agreed savings. The calculation can take the form Successful companies prevent the loss of operating performance
of a bonus/penalty system. Alternatively, any savings above and by taking simple but fundamental decisions. They begin by
beyond the contractually agreed amount can be split between deciding which links in the value chain must remain in-house
supplier and customer based on a predeﬁned factor. because they are extremely important to operating performance
in the company's core business activities, and because they can
Necessary investments (such as the purchase of old systems, be performed economically. An impartial examination of the
investments to streamline operations, and metering and measuring remaining processes should then assess how outsourcing them
systems) are borne either by the facility manager itself, the to reliable, capable suppliers would impact costs.
customer (as in the past) or a leasing company. In many cases, the
provider has to take on some or all of the industrial company's Step two is to invite bids for functional or detailed operator
existing operating personnel. In other cases it is obliged to join models. Bids for functional models are advisable where providers
with the customer ﬁrm to launch a joint venture company, which are expected to develop innovative operator models.
then becomes a "factory within a factory". The level of ﬁnancial
commitment by the facility manager plays a major role in Most decisions for or against a particular bid are based primarily
determining the duration of operator contracts. Most contracts on cost issues. Frequently, companies do little more than compare
run for 24 or 36 months. the bottom line of solicited bids with their own marginal costs.
At ﬁrst glance, that may appear a sensible policy. It nevertheless
The operating services provided by the factory in the factory can says very little about whether a given model can thoroughly
be billed in the form of traditional hourly rates, etc. Alternatively, optimize support processes or how it might affect core processes.
payment can be linked to technical availability ("pay on
availability") and/or to units provided (kWh, kilometers, tonnage,
etc.). The latter option is known as the "pay on production" model.
36 | Industrial facility management
Many facility service providers offer knock-down prices simply Selecting suitable service providers is the main activity in
to get a foot in the door, so to speak. They hope that, once the step three. From the point of view of the industrial companies,
customer no longer has service capacity available in-house, they providers must satisfy four criteria:
will be able to dictate price levels or sell add-on services as well.
Other providers price themselves out of the market because their > Operating expertise: Obviously, the facility manager must have
bids take account of existing performance speciﬁcations but ignore sufﬁcient knowledge and expertise to cope with the targeted
the potential for optimization. Moreover, internal marginal costs level of technology and the planned volumes. As the sole
are utterly unsuitable as a benchmark parameter. When making provider, it must also be able to reduce complexity at each
long-term strategic decisions about whether to keep services in- location.
house or outsource them, it makes far more sense to focus on the
total cost of service provision. > Cost structures: More importantly – before a provider is even
Internal service providers who are not keen on outsourcing often invited to bid – the company must know whether the supplier's
emphasize the importance of support processes to the company's structural costs, logistics systems (i.e. its ability to deliver
core processes. But many do this to justify their own "operator punctually and reliably) and quality standards meet the
model". Opaque internal cost structures make it difﬁcult to customer's expectations.
compare costs, because people and resources from core areas also
have a hand in providing support services. People simply make use > Stability: It is usual for the customer to want to select one
of storage facilities, vehicles, tools or staff capacity that is actually supplier as the sole provider at a later stage. Accordingly, it is
intended for support processes. not a good idea to pick very poorly ﬁnanced companies with a
We are not advocating that people get into ﬁghts about who should substandard earnings position and well-resourced "parents" to
pay for what. What we are saying is that companies should take whom liability may possibly not be extended.
more trouble to understand what are often fundamental cost
differences between internal and external service providers. These > Loyalty: This criterion is met in most cases. Caution is advised,
differences concern factor costs, economies of scale, productivity however, where providers already have a large number of more
and redesigned processes. Seen from this angle, the results are attractive rivals in their customer portfolio.
usually so obviously in favor of external service providers that
no room is left for "turf wars". Once the decision has been taken, the fourth and ﬁnal step is
to plan the transitional phase as the new operator model is
implemented, and to deﬁne a suitable time period for this
migration. Actual implementation begins once all four steps
have been completed and validated.
executive review 3/2004 Industrial facility management | 37
The market for industrial facility management Can facility management be mapped onto an industrial setting?
A whole new ﬁeld of activity – a ﬁeld that promises rich potential Facility management has certainly proved its value in the context
– is opening up for providers of facility management services for of ofﬁce property. Technical, infrastructure and commercial facility
industrial support processes. In future, many industrial ﬁrms will services are bundled here in a way that yields measurable
outsource their support processes as rigorously as they have done synergies. Now, similar models are becoming increasingly popular
with their production systems in the past. They expect a lot of in an industrial setting too – especially at newly developed
their service providers. But precisely these processes harbor automotive sites. Where the principles of "lean factories" are
substantial streamlining potential – as much as 10 to 20 percent. applied, support processes are being outsourced so that companies
It is time for facility managers to tap into this potential. can focus rigorously on production and quality assurance.
At Porsche's new plant in Leipzig, for example, a facility manager
In the past, many attempts at outsourcing failed because service provides maintenance services for the entire location.
providers were unable to fully meet industrial-scale requirements.
This was mostly because they were too small and, for legacy Yet the idea of industrial facility management is equally valid for
reasons, too focused on providing infrastructures for traditional existing plant run by other kinds of manufacturing company.
trades. In the meantime, these companies have consolidated and In future, the success of such ventures will depend on the extent
become more professional and more international. The picture has, to which service providers convincingly deliver excellent beneﬁts
in other words, changed completely. to the customer. The way to do this is to combine production
maintenance and internal logistics methods and strategies with
Providers need to review their motives, the freedoms available the concept of facility management.
to them and the portfolio of services they wish to tailor to each
individual situation. They must think carefully and structure their
ideas logically. All the more so because, in this highly specialized
ﬁeld, few of them will have much experience to draw on. On the
other hand, industrial companies can already beneﬁt from their
experience of contract design, compensation structures and the
rules of collaboration with production system operators.
38 | Engineered Products & High Tech
> The Engineered Products &
High Tech Competence Center
Information is of pivotal importance. Only if you stay abreast of
current market trends and developments in your industry you
can take the decisions today that will guide your company to
success tomorrow. Sifting through technical publications and
trade journals is a time-consuming business, however, and the
information gleaned is often too abstract. Quite apart from
the problem of simply ﬁnding the time. In short: you need
information that is condensed, accessible, and practical.
This is the goal of the Roland Berger executive review for the
capital goods industry. Quarterly, the review provides you with
timely articles on topical issues: discussions and interpretations
of current developments and trends in the engineered products
sector (mechanical engineering, industrial systems, and electrical
engineering), in high tech and real estate – all with a strong
One of the principal aims of this publication is to foster in-depth
dialog between industry experts and consultants. At the same
time, we will seek to bring relevant issues from related industries
into your line of vision.
We trust that the executive review will give you food for thought
for your own corporate context, and would be glad to hear any
comments or suggestions you might have.
fax: +49 89 9230-8710
executive review 3/2004 Engineered Products & High Tech | 39
Roland Berger Strategy Consultants
Engineered products has traditionally been a strong focus of skills that empower them to help you and your people develop and
Roland Berger’s consulting activities. The more than 100 people implement the right innovative concepts.
who make up the Engineered Products Competence Center draw
on over three decades of consulting experience, especially in the In the capital goods industry alone, Roland Berger has completed
areas of industrial systems, mechanical engineering, electrical over 500 projects in the last ten years and accompanied countless
engineering, electronics, construction and corporate real estate implementations.
Our network of contacts to entrepreneurs around the world allows
As you would expect, our consultants all have excellent business us to tap a wealth of resources for innovative solutions to all kinds
and technical credentials. But their understanding of real-world of problems. Large corporations, market-leading SMEs and success-
business is also rooted in years of hands-on experience. In ful startups all number among our global reference customers.
addition, they possess the methodological and problem-solving
Business know-how Industry expertise Interpersonal skills
Strategy Automation Implementation skills
Growth Industrial systems Moderating skills
Marketing and sales operations Electrical engineering Integrational skills
Sourcing Mechanical engineering Flexibility
Global footprint Steel and mining Ability to cope with pressure
Efﬁciency Microelectronics Communication on all levels
Finance Construction Assertiveness
Mergers & acquisitions Construction supplier Dedication
Innovation and Aerospace International outlook
Pre- and post-merger integration
Corporate real estate management
40 | Engineered Products & High Tech
> International network of the Engineered Products &
High Tech Competence Center
Austria · Czech Rep. · Hungary · France
Romania · Croatia F-75008 Paris, 16, Avenue George V
A-1010 Vienna, Freyung 3/2/10
Dr. Manfred Reichl phone +33 1 53670-320
phone +43 1 53602-111 e-mail firstname.lastname@example.org
Rupert Petry Germany
phone +43 1 53602-339 D-81925 Munich, Arabellastraße 33
phone +49 89 9230-8324
Belgium e-mail email@example.com
B-1170 Brussels, 100, Boulevard du Souverain
Dirk Albrecht phone +49 89 9230-8571
phone +32 2 6790-170 e-mail firstname.lastname@example.org
Dr. Reinhard Geissbauer
Jean-Roger de Bandt phone +49 89 9230-8492
phone +32 2 66381-28 e-mail email@example.com
Dr. Torsten Henzelmann
phone +49 89 9230-8185
Brazil e-mail firstname.lastname@example.org
04543-906 Itaim Bibi / São Paulo / S.P. /
Avenida Presidente Juscelino Kubitschek, 510 Peter Schneidewind
phone +49 89 9230-8871
Guilherme Barretto Junqueira e-mail email@example.com
phone +55 11 30467111-7133
Fernando de Barros Barreto I-20129 Milan, Via Sirtori, 32
phone +55 11 30467111
e-mail firstname.lastname@example.org Marco Zurru
phone +39 02 29501-292
Shanghai 200040, P.R.C., 1515 Nanjing West Road,
23rd Floor Shanghai Kerry Center
Dr. Eugen von Keller
phone +86 21 52986677-866
phone +86 21 52986677-816
executive review 3/2004 Engineered Products & High Tech | 41
Minato-ku, Tokyo 107-6023, 1-12-32, Akasaka E-Madrid 28046, Paseo de la Castellana, 140, 3rd Floor
ARK Mori Building 23rd Floor
José Antonio Bueno Oliveros
Isao Endo phone +34 91 5647-361
phone +81 3 35876-660 e-mail email@example.com
Ken Mori Switzerland
phone +81 3 35876-724 CH-8008 Zurich, Neumünsterallee 12
phone +41 1 38481-74
Netherlands e-mail firstname.lastname@example.org
NL-1077 XX Amsterdam, Strawinskylaan 581
Benno van Dongen United Kingdom
phone +31 20 7960-600 GB-London W1J 6RB, Lansdowne House, Berkeley Square
phone +44 20 7290-4800
Portugal e-mail email@example.com
P-1050-120 Lisbon, Av. Fontes Pereira de Melo, 51-4° E
Antonio Bernardo Troy, MI 48084, 2401 West Big Beaver Road, Suite 500
phone +351 21 3567-601
e-mail firstname.lastname@example.org Wim van Acker
phone +1 248 729-5110
Russia · Ukraine · Latvia · Poland
125047 Moscow, 1st Tverskaya-Yamskaya ul., 23 Dr. Antonio Benecchi
phone +1 248 649-1794
Dr. Uwe Kumm e-mail email@example.com
phone +49 30 39927-534
phone +7 501 72119-51