How could Volvo Construction Equipment transition from a purely transactional relationship to a strategic relationship when interacting with its suppliers?

Details

Supervisors

Semal, Pierre

Faculty

Louvain School of Management

Degree label

Master [120] en Ingénieur de gestion

Abstract

CONTEXT One can observe changes in the nature of the relationship manufacturing companies have with their suppliers. From a purely transactional relationship, one sees more complex forms of business relationships emerge where the manufacturer transfers a broader set of responsibilities to its suppliers who eventually take on new roles. Companies have understood that what was originally reflected in the behaviour of a few visionary Japanese entities is now becoming a condition to comply with if the company wants to remain competitive in ruthless markets. This is the reason why companies decide to involve some suppliers to a larger extent in the development of strategic projects, and share with them knowledge and knowhow that was previously kept secret. In this context, Volvo Construction Equipment, facing some troubles regarding the margin of the products launched, and aware of the non-exhaustive list of benefits a new relationship with some of its suppliers could bring, asked what kind of savings the company could achieve by adopting a new form of business relationship with relevant suppliers to collaborate with. In addition, an underlying question was what processes and measures would be necessary to implement in order to realise the associated cost improvements. The main hypothesis that will drive our research assumes that this transition of relationship in the framework of early supplier involvement in the development of new projects would allow the company to avoid significant costs beforehand, rather than working hard after the project’s delivery to take them down. In order to provide the company with consistent answers, the “L110-120H project” that Volvo recently completed has been taken as support of our research to concretely illustrate how promising and necessary is the change towards stronger business relationships. CASE STUDY 1. Weaknesses in VCE’s current suppliers management tools and processes The first step consists of understanding the different processes and assessments the company uses to select and shape its supplier base. After a thorough screening of VCE’s supplier management tools, we noticed that some aspects were to be improved: First, Volvo does keep track of the right supplier-related information but does not make a sufficient nor effective use of them. Indeed, whereas some very relevant criteria determining whether or not a candidate supplier has the right product development skills and the right mentality are assessed, none of Volvo’s tools specifically focuses on the supplier’s fit in the framework of a collaborative product development. As a consequence, all the valuable information regarding the suppliers’ expertise to be built on are diluted in diverse tools and KPIs, which does not enable the company to leverage the full potential of the information it already possesses. Second, the different metrics Volvo uses to determine the best relationship to be adopted towards a specific supplier are linear and lack some nuances. They do not involve any weight or minimum thresholds suppliers would have to compulsory meet if they want to be considered as potential supplier. 2. Which supplier should Volvo have worked closer with? Methodology In order to provide the Swedish company with an effective supplier selection procedure as well as with a workable set of key suppliers it should have closer worked with on the development of an eco friendly wheel-loader (L110-120H), we designed a two-stage selection approach. The first stage consists of applying a hybrid form of Kraljic’s matrix (1983) to a list of 497 new parts entering into the machine’s manufacturing. For the sake of our research we decided to consider Kraljic’s “business impact” dimension as the contribution of the part to a specific function of the machine. This dimension breaks down in strategic, operational and support parts, depending on the impact a failure of the part would have on the machine. The second Kraljic’s segmentation dimension, namely supply risk, is kept unchanged and considers quality, technology, logistic and price risks. After this first step one gets a 2x2 matrix depicting the 497 references according their associated business impact and supply risk. Nevertheless, it makes sense for VCE to only engage in collaborative product development with entities supplying strategic or very risky parts. But the first step does not refine enough the list of parts, and comes up with a too large pool of strategic parts. Therefore one needs to apply a second analysis, which will cut on the broad set of strategic candidate references. The method used in order to shorten the pool of suppliers to consider is a functional approach, which can be called “Functional Value Analysis”. This analysis introduces the notion of functional premium. The functional premium is meant to shade some nuances between strategic parts. Indeed, all strategic parts are crucial from a function fulfilment perspective, but not all machine’s functions have the same importance. This is the reason why we give a stronger weight to parts that directly contribute to the two main functions the project has been developed for, namely reduced gas emissions and improved electronic performances. We defined the functional value as follow: 〖Functional Value Part〗_i=((〖Business Impact Part〗_i+〖Functional Premium〗_i)/(1-〖Relative Business Size Part〗_i )) It is possible for VCE to differently select the suppliers and parts to work on. The reason why we recommend Volvo to adopt our procedure is easy to grasp: Given that we apply our segmentation and selection methods after the launch of the project (backward induction), we were looking for a procedure that would lead to the same conclusions as if we had applied these analyses before the beginning of the project. Indeed, the strength of this method is that it builds on information that is available in the first steps of the product development, whereas other methods would have leaned on information only available afterwards. Results This two-stage approach, in addition to provide Volvo with a nuanced selection procedure, highlights a set of 5 suppliers accounting for 30,8% of the total purchasing budget. These suppliers should have been deeper involved in the development of the L110-120H project because of their respective product development skills and expertise. 3. How much savings could the company have achieved if it had better leveraged its supplier base embedded skills and knowledge? Methodology Based on the project development cost breakdown, we attempted to estimate for each cost line, under certain hypotheses, which responsibilities could have been transferred to best in class suppliers and depending on the nature of the parts, which of them could have been concerned by a shift of responsibilities (i.e. design, engineering, prototyping, testing). From this information we tried to figure out the associated savings Volvo could have achieved. In order to objectify our results, we developed three scenarios per latent cost improvement depending on the likelihood of these savings to be realised. In addition to the nature of the parts, the establishment of the scenarios is also the result of key people’s experience and includes relevant information directly drawn from suppliers’ corporate websites, from documents provided by Volvo, as well as from the literature and from manufacturing industry-related studies. Results If one sums up all the potential cost improvements, taking into account their relative weight within the technology cost, that Volvo could have realised if the company had given more responsibility to its top focus suppliers, one gets the following savings: Pessimistic Scenario Neutral Scenario Optimistic Scenario 6.618.709,72SEK 23.115.731,27SEK 38.830.844,90SEK 2,59% 9,03% 15,17% These results are consistent with the 10% technology-related savings defended in the literature. 4. Recommendations What one recommends through our research is for VCE to fully leverage and use the information it collects for the different supplier management and segmentation tools, and to aggregate them into a balanced indicator that would only focus on the supplier’s fit, and highlight the parts that would be worth to be subjected to collaborative development. At the end of the paper, we suggest Volvo to use a specific tool whose properties would allow it to easily and effectively manage its suppliers in the framework of new product development.

Citations

• APA

Ruelle, T. (2015). How could Volvo Construction Equipment transition from a purely transactional relationship to a strategic relationship when interacting with its suppliers?