executive review Roland Berger by renata.vivien

VIEWS: 84 PAGES: 44

									3/2004   Engineered Products & High Tech




         executive review


         > 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."
Felix Hess
3/2004   Engineered Products & High Tech




         executive review
2   |   Contents




        Cover story

        > Global footprint design –
          Structuring the value chain                                 4

        Interview

        > 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
                                                                           and productivity.
          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




                                                                           Published by:
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                                                                           Felix Hess
                                                                           Christian Androschin
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                                                                           Marion Kofler
                                                                           Isabel Rincón
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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
of industries.

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
employed.

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
executive_review@rolandberger.com

I hope you enjoy reading this issue of executive review.




Felix Hess
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
                                                                       efficiencies.




Alternative globalization strategies


Market access

        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
                                                             workbench
      Focused


                      Focused                                                                  Global   Exploitation of
                                                                                                        cost efficiencies
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
                                                                                requirements.




Criteria ("filters") for selecting the most suitable location

                             First filter        Second filter       Third filter          Fourth filter

Countries:
> Belarus
> Bulgaria
> Czech Republic
> Estonia
> Hungary
                              > 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
> Poland
> Romania
> Russia
> Slovakia
> Ukraine


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]



                                                       Finland
                      Norway                                                              Ukraine          0.5
                                                                                          Bulgaria          1.0
                               Sweden                     Estonia
                                                                                 Russia
                                                                                          Russia            1.0
                                                           Latvia                         Romania            1.5
                                                        Lithuania
                                                                                          Latvia                  2.1
                                                                    Belarus
                                                                                          Lithuania               2.1
                                              Poland                                      Slovakia                 2.3
                    Germany
                                                                               Ukraine    Estonia                   2.7
                                   Czech
                                   Republic                                               Hungary                        3.2
                                                Slovakia
                                                                         Moldova          Czech Republic                 3.4
               Switzerland     Austria        Hungary
                                                                 Romania                  Poland                           3.9
                                   Slovenia
                      Italy                                                               Slovenia                               6.7

                                                                                          Germany                                      24.5
                                                                    Bulgaria




         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
                                                                     deliver.
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
management

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
executive_review@rolandberger.com.
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
delivery performance.
                                                                           performance."
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
properties.

executive review: Restructuring, geographic expansion and inventory
optimization sounds like a lot to handle all at once. How did you tackle
this challenge?

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
                                                                                                       America.

                                                                                                       executive review: How did you manage to organize and realize such
                                                                                                       extensive change processes while continuing to run "business as
                                                                                                       usual"?




          Indexed1) inventory and debtor days at EWK GmbH, October 2002 [%]

                        Trend in                                                          Initial ABS2)
                        receivables                                                       at Jan 1, 04               Integration of
                                                                                                                     a subsidiary
                                                                                                                     at Jan 1, 04

         100


                          Trend in fin./
                          semi-fin. goods
                                                                                                                                  77.8
                                                                                                                                  79.4




           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
of action.

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
                                                                        necessary improvement
reasons why restructuring was so successful and why NWC could be
reduced so significantly?
                                                                        potential."
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
  throughout
> 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
                     executive review.
18   |   Working capital management




         Working capital management in mechanical engineering


         > Getting the most out of
         working capital
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
         account.
         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
                                                                               external competitors.

                                                                               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
                                                                       progress.
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.

                                                                                          Trade payables
                                                                       Creditor days =                      x 365
                                                                                          Cost of materials
22   |   Working capital management




         Advances from customers/orders in hand [%] – benchmark

         Industrial systems                                                 Mechanical engineering

         60                                                                 60

         50                                                                 50
                     42
                            40
         40                                                                 40
                                      33                                              33
                                            31        30
         30          33                                      27             30              28
                            30        29                                              29
                                                                                            25       20
         20                                                  24             20
                                                      16                                             16   10     10      9
         10                                 12                              10
                                                                                                           9      9      8
          0                                                                  0

                         Müller            Dürr              KBA                    IWKA         Krones         Metso
                       Weingarten
                   MAN             IWKA            Schuler                                 W+D            HDM           DMG
                  Roland

         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
                                                              114                                                    115
         110                                                                  110                                            118
                                                                        97              97                    97     109
                                                                                               92
         90                                             84              94     90                      92     94
                                                               86                       86     89
                                               67
         70                                                                    70

                                               60       62
         50                   46                                               50
                                      36

         30                                                                    30
                                      31
                              20
         10                                                                    10

         -10        -12                                                       -10

         -30        -26                                                       -30

                 Technip           SMS               MAN               IWKA            W+D          Metso           Krones
         -50                                                                  -50
                                                    Roland
                           Dürr              Müller          Schuler                         Techno-         IWKA            DMG
                                           Weingarten                                         trans

         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
         countries.

         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
   media.
                                                                        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
         cleared up?

         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
                                                                                new product?
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
                                                                     three things:
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
         industrial processes:

         > Support for conveyor systems, assembly and test beds,
           telpher lines and tools
         > Operation of lifting gear, cranes and power-driven doors
           and gates
         > 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%

                                                                                        75                       77
                                                                                                                                           69
                                      67                                                             66
                                                             63            64                                                  60
                          54                     53
                                                                                        50                       50
                                      42                                                                                                   43
                                                             43            43                        42
           Primarily                                                                                                           39
                          34
         outsourced                              40


                                      25                                                25                       27                        26
         Outsourced       20                                               21                        24                        21
                                                 13          20

                         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
         optimized.
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
                                           executive review
                                           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
                                           practical focus.

                                           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.


                                           e-mail: executive_review@rolandberger.com
                                           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.
management.
                                                                       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
        knowledge management
                                                          Defense
          Change management

    Pre- and post-merger integration

              Restructuring

                Turnaround

            Shareholder value

  Corporate real estate management
40   |   Engineered Products & High Tech




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